NEWS OF THE WEEK
MERGERS: Merrill Lynch to buy Borg-Warner Merrill Lynch Capital Partners apparently has come to the rescue of Borg-Warner, Chicago-based automotive parts and chemicals producer. The move is intended to pre-empt an earlier bid for BorgWarner by GAF Corp. (C&EN, April 6, page 5). Merrill Lynch, through a newly formed corporation called AV Holdings Corp., has reached a definitive agreement with Borg-Warner to acquire the firm in a leveraged buyout. Under terms of the merger agreement, a unit of AV Holdings will begin a cash tender offer for up to 77.6 million shares of Borg-Warner common stock for $48V2 per share. This represents about 89% of its outstanding common shares on a fully diluted basis. This offer will be followed by a merger in which each of the remaining shares will be converted into $19.75 cash and $54.25 principal amount of AV junior subordinated debentures. As a result of the merger, Borg-Warner will become a wholly owned subsidiary of AV Holdings. The deal, which the Borg-Warner board of directors has recommended that stockholders accept, is worth about $4.23 billion. The deal with Merrill shuts out the earlier bid by GAF, which was for $46 per share, all in cash. However, the battle may not be over. GAF and its chairman, Samuel J. Heyman, following the $46-pershare bid, sweetened the deal earlier this month to $48 per share. This deal, worth about $4.19 million, was again all in cash. At the time, this matched the first offer made by Merrill Lynch. Merrill Lynch then increased its offer to $48V2 per share, which it says is its last and best offer. Last week after Borg-Warner and Merrill Lynch had announced their deal, Heyman asked for the same information, including confidential 4
April 20, 1987 C&EN
data that had been given to Merrill Lynch to help it make its decision on the buyout. Borg-Warner acceded to the request, and now GAF lawyers and investment advisers are studying the data to help determine whether to pursue the acquisition. Wall Street apparently is convinced that the fight will go on. Borg-Warner's stock, at press time, was still trading at $49V8 per share, 62V2 cents above the offer price by Merrill Lynch. Security analysts and arbitrageurs seem to be convinced that the company eventually will be bought out at about $50 per share. Even if GAF does not pursue the acquisition, it stands to make a tidy profit on its 19.9% investment in Borg-Warner. Estimates of the company's gain, before expenses, are about $200 million from the deal. This only adds to GAF's war chest. Thus, it may be only a matter of time before GAF finally will be able to achieve its apparent goal of buying operations to expand its chemical business. The profit that GAF could get, however, might cause it problems in the long run, making it a more attractive takeover target itself. The company, with a highly profitable specialty chemical operation, for some time has been a potential merger candidate, but the profit that it gained on its abortive takeover attempt of Union Carbide has made it even more so. Cash that it would acquire as a result of tendering its stock to Merrill Lynch would only add to its hoard. As of the end of 1986, GAF had cash, short-term investments, and marketable securities worth almost $865 million, more than double what its assets had been at the end of 1985. The value for 1986 includes the company's investments in Borg-Warner, Union Carbide, and CBI Industries. It also has
a quite manageable debt-to-equity ratio of 44.4%, down from 45.5% at the end of 1985 in spite of a 93% increase in debt during 1986. Thus, the company, with its rather high profit margin of 10.7% before extraordinaries, could become an attractive takeover target. But, analysts say, the cash that the company has could also be seen as a good defense. If a potential acquiring company were to make a tender offer, GAF could use its cash to make a counter offer for the acquiring company. This is the same defense that Martin Marietta used when Bendix Corp. tried to acquire it. The result was that Martin Marietta was left independent, but weakened, and that Bendix eventually ended up as part of Allied-Signal. The Borg-Warner deal with Merrill Lynch is somewhat unusual in that the agreement makes no provision for retaining current management, although insiders say there is little doubt the executives will stay on. This was done, according to insiders, to avoid any charges of conflict of interest in the board of directors' recommendation for stockholders to accept the deal. The future employment of Borg-Warner top management was one of the points of negotiation in the original GAF proposal. In a prepared statement, BorgWarner president and chief executive officer, Clarence E. Johnson, said: "We are extremely happy to be able to offer this transaction to Borg-Warner stockholders. Merrill Lynch has made an extraordinary commitment to the transaction, and we look forward to working with them in the future and bringing the transaction to a successful conclusion. The transaction represents an extremely favorable deal for our stockholders." G
