When Bat Masterson and Doc Holliday sat down to a hand of poker, faro or vingt-et-un, the deal of the deck determined who won. When Sam Giancana and Lefty Rosenthal grappled in Las Vegas, the winner was more likely to prevail by the cold steel of a pistol barrel. When high rollers Steve Bollenbach and Rand Araskog faced off, the stakes were higher than ever. But neither luck nor brute force decided the winner. The name of the game was ‘shareholder value’, and it was shareholders who wound up holding the cards – proxy cards, that is.
The battle between hotel and casino giants Hilton Hotels and ITT Corporation ended up as the largest proxy fight of 1997, with enough bamboozles to dazzle any sharp. The contest pitted two corporate legends against each other: Hilton’s Bollenbach, former Disney chief financial officer and one-time financial wizard for Donald Trump; and ITT’s Araskog, a takeover titan himself.
Bollenbach, for his part, joined Hilton in early 1996 with plans to prey on more hotel and gaming properties. So with the purchase of Bally Entertainment that summer as an appetizer, he was primed for the main course when he announced a $6.5 bn hostile tender offer for ITT Corp last January. But as pointed out by Marc Grossman, Hilton’s senior vice president of corporate affairs, you only have to read Araskog’s 1984 book, The ITT Wars, to realize he would never topple without a fight.
‘There were very few surprises,’ Grossman says. ‘We knew ITT would put up a very strong defense, we knew it would drag on for most of the year, and we plotted our strategy accordingly.’
Or, as Hilton adviser Daniel Burch of MacKenzie Partners puts it: ‘Clearly Araskog wasn’t going to let go. And he was going to go to the very, very end, until he was about to fall off the cliff, before he would agree to a deal.’
Indeed ITT was resolute, and Anne Tarbell, vice president and director of IR, immediately got busy ‘stabilizing people’s emotions’. She says a few shareholders thought it would be appropriate to sell out at Hilton’s $55 bid. Some thought the company should wait. ‘Others just wanted to know what was going on. So getting our message out at the beginning – that we were committed to shareholder value – and assuring shareholders that they had access to the company, was extremely important.’
‘Hilton was very aggressive in its efforts to win the support of ITT shareholders,’ recalls Bill Crane, CEO of ITT’s longtime IR counsel and proxy solicitor, Georgeson & Co. ‘But shareholders considered it a low price.’
With Hilton expected to up the ante, ITT rejected the suitor and set about heading off the bid, raising its stock price by selling non-core assets like its 5 percent stake in France’s Alcatel Alsthom and 50 percent in Madison Square Garden. Meanwhile, Hilton nominated a slate of directors for ITT’s board, even though the annual meeting had not been scheduled – a meeting that wasn’t legally required until November.
By the summer, with several letters and dozens of phone calls from Hilton left unanswered by ITT, and more assets sold off, major shareholders like Franklin Mutual Advisors’ Michael Price were getting restless. George Soros was also rumored to be irked by ITT’s scorched earth tactics.
Three-card monte
Then, in July, ITT announced it would split the company up into three parts and buy back some $2.1 bn worth of stock in a $70-a-share self tender. Tarbell calls it ‘a counter-offensive, a legitimate plan for independence and value creation,’ and recalls that it was well received by the Street and shareholders – especially in light of ITT’s last value-creating split-up in 1995.
‘That was a critical juncture, involving a lot of phone work, conference calls and meetings,’ she says. ‘It was also important to provide our shareholders access to senior management so they could test their assumptions. And any time Hilton put out misinformation, it was very important for us to be on the phone with shareholders to debunk it.’
But as Bollenbach told the New York Financial Writers’ Association in September, ITT’s so-called ‘comprehensive’ plan could as well be a ‘burn-down-the-village-to-save-it’ plan. The way he described it, it was an elaborate game of three-card monte.
‘Basically, they take 95 percent of the assets, put them in a subsidiary, and spin it out,’ Bollenbach explained. ‘That’s a problem for us, because those are the assets we want, and that’s where the shareholder meeting is. The notion that you can take the same board and virtually all the assets, shuffle some paper and say you don’t need a shareholder vote [is] laughable.’ Moreover, while ITT promised the split-up would be a tax-free distribution, Bollenbach was convinced it might actually result in billions of dollars worth of tax liability – perhaps destroying the company.
So Hilton rushed to court in Nevada, where ITT is incorporated, and demanded the plan be submitted to a shareholder vote. In the meantime it sweetened its bid to $70 per share – an offer that ITT rejected, prompting more blasts from Michael Price and – surprisingly – Sunbeam’s ‘Chainsaw’ Al Dunlap.
As the end-of-September court date drew nearer, several major public funds, including pension giants TIAA-Cref and Calpers, rallied behind Hilton and filed ‘amicus’ court briefs. In the end, the judge argued that ITT’s split-up was so fundamental that shareholders must be allowed to vote: ‘It interferes with the balance of power with respect to governance of the corporation.’
Down to business
Both sides had their hands full. ITT Corp immediately dropped the staggered board part of its comprehensive plan – the part some institutional investors really didn’t like – and began soliciting votes against Hilton’s slate of directors at the November 12 annual meeting.
‘We were confident that our shareholders were behind us, despite what was being written in the press,’ says Tarbell, who was becoming involved at the highest levels: ‘The IR person has to be viewed internally as the advocate for the shareholder. So senior management took my role very seriously. I was fortunate to be in the inner circle. Management and the board wanted to hear news and they wanted to hear it unadulterated. I had to make sure I was talking to the right people both internally and externally and communicating back and forth,’ she explains.
As Hilton confidently embarked on a roadshow to sell its side of the story, making its task easier was the fact that around one third of ITT’s shares were held by some ten large institutions – ‘a pretty concentrated investor base,’ remarks Grossman.
With the names of other possible ITT suitors like Golden Nugget and KKR bandied about since the summer, Hilton was looking for competing bidders even while ostensibly campaigning against ITT’s breakup plan. ‘We were convinced that ITT would have to do something to have any chance of winning the contest,’ says Burch. ‘While we were campaigning against the retrenchment plan that was on the table, we had to nevertheless campaign against something ITT was likely to adopt in the future – raising some doubts and skepticism with shareholders ahead of time.’
Georgeson’s Crane says ITT’s investor relations task was also a difficult one. ‘The company was unable to communicate all that was really happening at the senior level with prospective plans being explored. All they could say was that they were exploring every alternative out there. They not only said that to the press, but they went out and met with the institutions, talked to the arbs, and called all the top shareholders.’
Tarbell notes that arbitrageurs had rapidly built up a 20-25 percent position in ITT soon after Hilton’s initial bid back in the winter. ‘Our objective was to keep that percentage low relative to our long-term shareholders, who historically tend to be more sympathetic to management. They know the fundamentals and the management of the company and aren’t out for a quick kill.’
Midnight oil
Late one Friday afternoon in mid-October, the phone rang in Burson-Marsteller’s office with a call from a fast growing but little known real estate investment trust (Reit) that was about to rock Wall Street. From midnight Friday until late Sunday night, through tense negotiations between the boards of ITT and the Reit, Burson labored away on a communications strategy. On Monday morning the announcement came: ITT had reached a friendly deal with Starwood Hotels & Resorts Trust valued at $9.8 bn.
‘The first objective was surprise, which meant no leaks,’ recalls Michael Claes, executive vice president at Burson-Marsteller. ‘And we achieved it. Hilton never saw it coming.’
Another challenge was to explain Starwood’s unique paired-share Reit structure, which Hilton was quick to characterize as a tax dodge and – playing on Starwood’s trading symbol HOT – as hot stock.Ã¥ ‘The other objective was to keep the stock price from falling,’ Claes continues. ‘That was critical to convincing everyone that this was a workable deal.’
Georgeson’s Crane points out that while most professional investors were familiar with Starwood (ITT and Starwood had a lot of big shareholders in common), retail investors had to be rapidly educated about the implications of the deal. And they were not insignificant in the upcoming shareholder vote, accounting for 20-22 percent of ITT’s shares. ‘Every share becomes very important in a battle of that magnitude, and retail holders played a key role.’
Despite concerns of overkill, Starwood’s energetic and charismatic CEO, Barry Sternlicht, would order up a conference call with analysts any time he read something new in the paper or heard something on the Street – sometimes at a few minutes notice. Reporters were amazed to find they could call Sternlicht up and get him on the phone, and they enthusiastically took up the Starwood side. The strategy worked, and Starwood’s stock kept rising.
After the previous two months of telling everyone it wouldn’t raise its bid again, Hilton appeared to fold. Then, a week before ITT’s annual meeting, it sweetened the offer to a value of $9.3 bn and sued ITT to open talks – thus opening a bidding war. ITT changed course again, and strongly reminded shareholders that it was conducting an impartial ‘auction process’. The two arch enemies approached the negotiating table, only to break it off immediately – ‘it was a charade. They only talked to us because they had to,’ avers Grossman.
Turning tide According to some observers, that’s where the tide turned for Hilton. Shareholders were incensed that Bollenbach had twice said he was standing pat, and twice raised his bid price. On conference calls, they were downright hostile.
Then Starwood came back with an offer valued at $10.2 bn, which included an incentive for cash-hungry arbs to jump on board: ITT shareholders could choose to receive stock or cash, with the cash amount varying according to how many opted for it. The arbs were so thrilled that they were calling up saying, ‘Thanks for talking to us like human beings, rather than kicking us around like usual.’
Claes suggests that advertising was a major factor, with ITT, Starwood and Hilton all running fight ads daily. Remarkably, Starwood was running double page spreads, which Claes says were designed to be more informal and instructional than traditional fight ads. Some were even targeted specifically at the arbs. ‘It was such an investor- oriented fight, extending right down to the trading floor, that if I were to do it all over again, I would put TV ads on CNN and CNBC – a first for a proxy fight,’ Claes says.
Burch says it’s no wonder ITT rolled out ads in a big way: ‘Having had their head in the sand for seven months, they had to make sure everybody was aware of their change of position.’
In another boost for ITT, Institutional Shareholder Services, the Bethesda, Maryland-based proxy advisory service, came out with its support a few days before the vote. Hilton’s Grossman finds the ISS conclusion ‘puzzling’: ‘They spent 25 pages condemning ITT’s board and management, then came out with the recommendation that the shareholders vote for the incumbent board. We found that inconsistent.’ With the tension mounting, virtually all of ITT’s institutional shareholders waited until the last possible moment to cast their votes, with Hilton, ITT and their advisors actively soliciting up until the eve of the meeting. ‘Watching the vote come in was close,’ recalls Crane, ‘and it was tough. It was a hard fought proxy battle right up to the end, and it was late into the evening before either side could be confident it won.’
Unusually, Fidelity, one of ITT’s two largest shareholders, split its vote by allowing different portfolio managers to vote their own way. According to one insider, that move by Fidelity, along with the switched allegiance of ITT’s other top shareholder, Alliance Capital, were the deciding factors that finally tipped the balance.
As dawn arrived, and hundreds of expectant investors headed for the St Regis hotel in Manhattan for ITT’s long-anticipated annual meeting, ITT and Georgeson continued counting proxy votes. The result: ITT carried the day with over 70 percent of the vote with a high 82-84 percent of outstanding shares having been voted.
So after one of the most heated proxy fights of the 1990s, it’s back to business for ITT, Starwood and Hilton, with Bollenbach vowing not to return to the table. In investor relations terms, that’s ‘about as exciting as it gets,’ notes Tarbell.
Hilton’s Grossman doesn’t look back and second-guess a single move made by his ‘general’, Steve Bollenbach. ‘One thing we’re very proud of is that we were able to get ITT shareholders the right to vote,’ he says, concluding, ‘Ultimately, the shareholders hold the cards.’
* In February, as ITT and Starwood prepared for shareholders to vote on their deal, they again faced a challenge. President Clinton’s new tax plan may call Starwood’s paired-share Reit structure into question. But observers agree the deal itself isn’t at risk.
Inner Circles – M&A team rosters
(other advisors may work in other capacities)
- Hilton
- Proxy solicitor/information agent:
- MacKenzie Partners
- PR consultant: Abernathy MacGregor Frank
- Investment bank: Donaldson Lufkin & Jenrette
- Lawyers: Wachtell Lipton Rosen & Katz
- ITT Corp
- Proxy solicitor/IR counsel: Georgeson & Co
- PR consultant: Sard Verbinnen & Co
- Investment banks: Goldman Sachs, Lazard Fr res
- Lawyers: Cravath Swaine & Moore
- Starwood
- Proxy solicitor: DF King
- IR counsel: Burson-Marsteller
- Stockwatch: CDA Equity Intelligence
- Investment bank: Bear Stearns
- Lawyers: Sidley & Austin
