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Ncr's `Nancy Reagan Defense' May Not Work Much Longer

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Subtle it wasn't. When American Telephone & Telegraph Co. opened its booth at a trade show in Houston on Mar. 19, it prominently displayed an automated teller machine made by NCR Corp., the unwilling target of its $6.1 billion takeover offer. And it wasn't just any teller machine: AT&T had souped it up with a video monitor and camera so that customers--say, loan applicants--could communicate face-to-face with bank officers back at the home office. The display was AT&T's way of showing it could collaborate with NCR--and driving home the point that it considers its acquisition of the Dayton-based computer maker an accomplished fact.

After four months of avoiding the communications giant, NCR is running out of escape routes. While NCR Chairman Charles E. Exley Jr. continues to vow that his company will retain its independence, investors and arbitrageurs say its bristling array of defenses won't stand up in the long run against AT&T. The only questions remaining are when the deal will get done and at what price.

AT&T Chairman Robert E. Allen keeps stepping up the pressure. On Mar. 19, Exley took a direct hit when a federal judge in Dayton declared NCR's newly created employee stock ownership plan (ESOP) invalid, saying it was primarily intended to entrench current management. The ESOP, representing 8% of NCR's voting power, was set up to ensure that nearly the entire block would be voted against AT&T. That same day, AT&T said it would raise its offer to $100 a share--or about $6.8 billion--but only if shareholders vote to oust all of NCR's directors at a special meeting on Mar. 28. In wiping the slate clean, AT&T would put in its own directors, dismantle NCR's defenses, and complete the deal.

Exley's options aren't attractive. He appealed the ESOP ruling. But even if AT&T can't muster the 80% vote needed to oust all of NCR's directors, it should be able to get four nominees on the 12-person board. It could then presumably complete the deal in another year, when more directors come up for election.

Exley is gambling that his new computer strategy, built on standard software and microprocessor-based machines, will be so successful that NCR shareholders will side with him against AT&T in next year's board elections. It might happen. But that would mean living for a year with four alien directors who are committed to the AT&T deal. And while Exley hopes to neutralize them by having them agree--in writing--not to share NCR's secrets with AT&T, they might refuse, triggering a distracting legal battle. AT&T declines to say what its directors would do.

POOL POWER. Exley hasn't damaged NCR's balance sheet to fight AT&T by, say, borrowing big for a stock buyback. But according to a tax and accounting expert, one NCR maneuver could end up harming shareholders by hiking their tax liabilities and reducing the amount AT&T would be willing to spend for the company. Robert Willens of Lehman Brothers Inc. says a special $1-a-share dividend paid by NCR on Mar. 20 might disqualify AT&T from acquiring NCR with AT&T stock in a so-called pooling of interests. Such a merger of equals would be tax-free to shareholders and would relieve AT&T of having to write off several billion dollars in goodwill--the amount by which the purchase price exceeds NCR's tangible net worth.

It's no small issue. Privately, AT&T executives say that they would pay $5 a share more if they could qualify for pooling and thus escape the earnings dilution of a write-off. And they say there's still a chance to qualify. Outside observers say it's not clear whether NCR and its advisers were trying to sabotage a pooling with the dollar dividend or simply weren't aware of the problem. NCR says it was just trying to do something nice for its shareholders.

Some investors believe that Exley will cut a deal with AT&T just before or after the Mar. 28 meeting. Michael Barron, an attorney for the Gubelman family, which owns 650,000 NCR shares, says Exley may conclude that he can't continue with the "Nancy Reagan defense," which consists of just saying no. "We are assuming that a company of the size and stature of AT&T is not just going to go away and say: `Sorry, just kidding.' " The price? From $100 to $110 a share, predicts Coleman M. Brandt, vice-chairman of Lehman Ark Management Co., another NCR holder.

Many NCR investors are ready to cash out: 70% tendered shares at the $90 level in an earlier round. Salomon Brothers Inc. analyst Steven Milunovich says he's impressed by NCR's computer strategy but doesn't think it would generate enough earnings to put the stock much above $70 a share by the end of 1992 in the absence of AT&T's bid. Few investors are as optimistic as Labe, Simpson & Co. President Peter Labe, who thinks NCR's stock could be trading at $120 by the end of `92 and that tendering at $90 a share, or even $100, would be "stupid."

That's about where Exley stands, too. But as his defenses crumble, he's finding himself in a shrinking minority.Peter Coy in New York

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