How The Wolf Got Into The Henhouse At Square D: Busted Deal, Limited OptionsJames E. Ellis
Some takeover battles erupt without warning. Others break out after friendly talks go nowhere. Case in point: Schneider's Mar. 4 hostile tender offer for electrical-equipment maker Square D Co. Now, the chief executives of both companies feel baffled and misunderstood. BUSINESS WEEK correspondents visited both men and filed these reports.
When Jerre L. Stead took over as chief executive of Square D Co. in January, 1989, he was determined to transform the stodgy power-equipment manufacturer into a nimble global player. "Worldwide, our industry is going through a period of consolidation," Stead warned in his first letter to shareholders. He was quick to add: "Square D will come out a winner."
Stead may have spoken too soon. In an effort to tap faster-growing foreign markets, Stead held secret talks with France's Schneider for almost two years in hopes of forming an international alliance that would give each access to the other's markets--but with Square D remaining independent. Now, Stead's global strategy seems to have backfired. Schneider, armed with a big war chest and a knowledge of Square D exceeded only by corporate insiders, has launched a $1.8 billion hostile tender offer for the Palatine (Ill.) company. And Stead's hopes for global cooperation have turned into fears of conquest.
COURTSHIP. It wasn't supposed to happen this way. Soon after jumping to Square D following a 21-year stint at Honeywell Inc., Stead hammered out a tough new set of financial goals. A manufacturing overhaul brought just-in-time inventory management, freeing up working capital and extra manufacturing space in factories. And newly formed "corrective-action teams" of workers drew up changes that have meant big savings at Square D plants. "After wasting a lot of years of not letting workers show what we could do, they've turned us loose," says Jack Mullins, a tool-room supervisor at Square D's Middletown (Ohio) plant.
Square D's fortunes have begun to show signs of revival. The company's 1990 return on equity was 19.3%, up from 16.9% in 1988. And it has become more productive: Sales per employee have grown 35% since 1986. Although earnings and margin growth have been uneven because of the recession in construction, a major Square D market, "results have held up surprisingly well considering what's happening in their markets," says PaineWebber Inc. analyst Mark D. Altman.
Stead grouses that Schneider Chairman Didier Pineau-Valencienne is using investor concern over construction-dependent businesses to pick up a fast-improving Square D on the cheap. But the Frenchman's interest should have come as no surprise to Stead, who, for two years beginning in September, 1988, actively courted him as a partner.
So intense did the secret talks become that five different market-area teams were set up to explore manufacturing alliances and licensing agreements. "Each time those happened, we ran into a wall--and the wall was Schneider's desire to have a significant equity exchange," recalls Stead.
SURPRISE? Talks broke off in summer, 1989, but a year later, claims Stead, Valencienne offered to sell him Schneider's big electrical company, Merlin Gerin, in exchange for a stake in Square D. The deal fell apart because the two "never came close to an agreeable percentage of Square D stock," says Stead.
Surprisingly, Pineau-Valencienne was still a welcome guest at a dinner with Square D directors in Chicago last September. Even in late 1990, when takeover rumors sent Square D's stock soaring and Pineau-Valencienne offered Schneider as a white knight, Stead still didn't fully realize that the companies' relationship had fundamentally changed. "Didier would start every conversation by saying that he didn't own a single share of Square D stock and wouldn't take any action without the approval of our board," explains Stead. "I'm a man of my word, and when people tell me they're going to do something, I believe them."
But when Pineau-Valencienne telephoned Stead on Feb. 18 to inform him of a friendly proposal to be delivered the next day, the Square D executive immediately knew he was in trouble. "I'm a trusting person," he says, "but I'm not naive." Outsiders disagree. "I can't see how it was such a surprise for Square D, given the kind of company they were dealing with," says George P. Fraise, an electrical-equipment analyst at Smith Barney, Harris Upham & Co.
Now, Square D's options seem limited in the face of an all-cash, fully financed offer. Its best defense is probably its lawsuit, which charges Schneider with using confidential information from the joint-venture talks in preparing its takeover bid. But prospects for the suit are uncertain at best. Stead's vision of closer international ties for Square D may come true sooner than he would like.
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