The Corporation: Strategies
RON LaBOW'S STEELY RESOLVE
Investment banker Ronald LaBow is not one to walk away from a challenge. In the late 1980s, the little-known financier battled Goldman, Sachs & Co. and Oppenheimer & Co. for control of bankrupt Wheeling-Pittsburgh Steel Corp. LaBow became chairman when the company emerged from Chapter 11 in 1991--and it's now one of the most profitable steelmakers around.
So when news came early in January that the board at conglomerate Teledyne Inc. had adopted a poison pill to defend against a takeover by WHX Corp., Wheeling-Pitt's recently formed holding company, LaBow was undaunted. An avid mountain climber--one whose tenacity in negotiations and eye for hidden value have made him one of Wall Street's leading "vulture" investors--LaBow clearly is not going away.
GOBBLING UP. Far from it: On Jan. 13, WHX got antitrust clearance to raise its 1.8% stake in Teledyne to 15%--and on the following Tuesday, volume in Teledyne shares soared. WHX won't confirm it's buying. But sources close to LaBow, 59, say he's intent on gobbling up the $2.49 billion conglomerate. His advisers say he's considering launching a proxy fight. LaBow's target is Teledyne's overfunded $1.9 billion pension plan: Huge layoffs left it with $860 million in surplus assets. Teledyne's $634 million specialty-metals business could be another juicy morsel.
So far, Teledyne's board refuses to negotiate with WHX, in part because it doesn't believe LaBow is playing straight. In November, LaBow tried to talk to Teledyne founder Henry E. Singleton. Together with allies, Singleton controls 22% of Teledyne's stock, and he sits on the board. Leon Cooperman, a former Goldman Sachs partner and a Singleton confidant, says LaBow asked him to set up a meeting with Singleton. Cooperman claims LaBow assured him he would go away if the talks went nowhere. But after Singleton passed word to LaBow to send a proposal to the board--and Teledyne rejected LaBow's $1.2 billion bid--LaBow turned hostile. "He assured me this would be friendly and quiet," says Cooperman. "This is not a man to be trusted." La-Bow declined BUSINESS WEEK's request for an interview. Teledyne hit back with a poison pill letting stockholders buy shares at a 50% discount if anyone buys more than 15% without board approval.
LaBow's lowball bid also rankled. Although the $22-a-share bid was 28% above Teledyne's November share price, analysts say Teledyne's value is closer to $28 a share. Last July, investment bank Donaldson, Lufkin & Jenrette Inc.--since hired to advise LaBow--estimated that an acquisitor would retain roughly $500 million of Teledyne's pension surplus. So LaBow is bidding just $700 million for the rest of the company.
MISHMASH. Teledyne's rejection leaves him contemplating the chances of success in a proxy fight. "Our mission now is to change the board's mind," says a source close to LaBow. "Or change the board." LaBow is counting heavily on shareholder discontent. The company's mishmash of unrelated businesses--and its stock price--have performed poorly for years. Under strong shareholder pressure, CEO William P. Rutledge has spent two years streamlining and says Teledyne "is about to see improved results." LaBow's advisers claim they've seen "a huge indication" that shareholders want the company sold. Gerald B. Cramer, whose money-management firm, Cramer Rosenthal McGwynn Inc., holds 1.5% of Teledyne's stock, agrees. "It has a lot of businesses that would be better off owned by other people," he says.
WHX has reason to covet Teledyne. Wheeling-Pitt could use the surplus pension assets to offer its own workers a richer retirement package--in exchange for concessions in upcoming negotiations with the United Steelworkers. Analysts say Wheeling-Pitt also wants to cut its workforce. The easiest route: an early-retirement package for aging workers, funded by Teledyne.
Sources close to WHX say Teledyne's specialty-metals businesses also fit into LaBow's plans. Since 1993, LaBow has diversified away from commodity hot-rolled steel products with a series of acquisitions and joint ventures with niche producers and high-margin downstream steel users. Adding Teledyne's specialty-metals unit, with products such as tungsten and titanium, would help. "It would solve LaBow's strategic objectives of upgrading his product mix," says Aldo J. Mazzaferro Jr., steel analyst at C.J. Lawrence & Co. LaBow would likely sell Teledyne's aviation, electronics, and consumer-products units.
Wall Street has so far shown little confidence that LaBow will succeed. Investors fear he underestimates the complexity of dislodging the closely regulated pension funds. "It comes down to: `Whose money is this?"' says Jon Kutler, head of Los Angeles' Quarterdeck Investments. "It's not all Teledyne's, and the government isn't going to stand by and let an outsider get at it."
LaBow is no stranger to financial maneuvering. A bankruptcy specialist at New York investment bank Neuberger & Berman, he left in 1989 to form a partnership that bought up the secured bank debt of bankrupt Wheeling-Pitt. With an estimated investment of $140 million--much of it borrowed--he gained control. "LaBow can spot an undervalued asset," says one former Neuberger associate. "He's usually several steps ahead of most people." But if he's a top-flight financier and negotiator, the intensely private LaBow has won few friends. "He can be intimidating. He makes people feel like they're in a courtroom," says D. Leonard Wise, a former Wheeling-Pitt CEO and now chairman of North Carolina Steel. "He's not a people person."
BULGING WAR CHEST. After Wheeling-Pitt emerged from Chapter 11, LaBow promoted its chief operating officer, James L. Wareham, to chief executive. Wareham negotiated more flexible work rules and spent $69 million modernizing Wheeling-Pitt's plants. That cut costs sharply, just as steel prices rose. Now, operating profits per ton, at $39, are the third-highest in the industry. Analyst Mazzaferro says operating income has risen sixfold since 1991, to an estimated $84 million in 1994, on sales of $1.13 billion, an 18% increase.
Such performance has allowed LaBow to raise $400 million in three stock offerings since 1993 and to cut debt 23%, to $270 million. With cash flow soaring--to $140 million in 1994, up from $18 million two years earlier--LaBow has built up a $440 million war chest for acquisitions. Along the way, he also cashed in. By 1992, LaBow held 45% of Wheeling-Pitt. Now he holds 15%--worth $57 million--and he's made an estimated $56 million through equity sales.
There are still doubts about LaBow's strategy. WHX has also bought five radio stations--and a dog-racing track in West Virginia. Questions over where LaBow is headed--along with the prospect of a lengthy proxy fight--have unnerved WHX stockholders: Shares now trade around 14, well below their 1994 high of 21. "I don't think the Teledyne deal helped," says G. Kenneth Heebner, portfolio manager at Capital Growth Management, which holds 1.7 million shares. "People don't understand his plans."
A successful bid for Teledyne would mean sharply higher debt--and if La-Bow can't sell off Teledyne's lackluster assets quickly, WHX may fall back onto the corporate sick list. As LaBow contemplates the climb up Mt. Teledyne, it's not clear that his shareholders will go along.
LaBOW'S TURNAROUND AT WHEELING-PITTSBURGH
1987-91 After beating Goldman Sachs in a fight for steelmaker Wheeling-Pitt, investment banker Ron LaBow is named chairman when W-P emerges from Chapter 11 in 1991. LaBow and partners control 55% of W-P shares.
1991-93 LaBow cuts workforce by 7%, slashes expenses, and spends $69 million modernizing plants. As steel demand improves, operating earnings soar from $13 million in 1991 to an estimated $84 million in 1994.
1993-94 LaBow raises $400 million in three equity offerings, cuts debt from $350 million to $270 million, and builds a war chest of $440 million. Also diversifies, buying downstream steel users to boost margins.
LATE 1994 LaBow sets his sights on Teledyne for its $860 million in surplus pension assets and specialty-metals operations. Teledyne rejected LaBow's $1.2 billion bid: He's now studying a proxy fight.By Keith L. Alexander in Pittsburgh and Eric Schine in Los Angeles