Six Months Later, Goodyear and Goldsmith Still Dueling
JAMES F. PELTZ
May. 24, 1987
NEW YORK (AP) _ Last fall, Goodyear Tire & Rubber Co. and financier Sir James Goldsmith waged one of the most publicized and acrimonious takeover battles of 1986.
Six months later, the two are still feuding - this time over which side deserves credit for a marked improvement in Goodyear's performance and stock price since the takeover fight.
Goodyear Chairman Robert E. Mercer contends Akron, Ohio-based Goodyear is reaping the benefits of its own investment, modernization and cost-cutting efforts over the past few years, and he rejected any suggestion that Goldsmith deserved credit.
''It's all pre-Goldsmith that's been paying off,'' Mercer said in an interview. ''The unfortunate thing is there are people who will assume we were raided in October, and the first quarter (of 1987) looked good, so raids therefore are healthy for business and should happen more often. Nothing could be further from the truth.''
Goldsmith vigorously disagrees, saying his actions provided Goodyear's stockholders with nearly $3 billion and led to the subsequent increase in the price of the remaining stock.
''And most important of all, the company was forced to concentrate on its own business (tires) and to spend its time and capital on getting that business competitive worldwide,'' Goldsmith said in a separate interview.
Goodyear, the world's largest tire manufacturer, avoided Goldsmith's grasp in November when it bought back Goldsmith's 11.5 percent stake for $49.50 a share, or $619 million.
The company then launched a tender offer of $50 a share to buy an additional 40.4 million shares from the rest of its stockholders. Goodyear had about 108 million shares outstanding at the time.
The partial stock buyback was a defensive measure frequently used by takeover targets to thwart hostile bids and give shareholders an alternative offer. And, as is also common in such cases, Goodyear borrowed heavily to pay for the stock and sold major assets to reduce the debt.
The company concentrated on shedding mostly non-tire assets. It already has sold its aerospace and wheel-making lines, and is in the process of selling its Celeron Corp. energy subsidiary. Together, the divestitures should raise nearly $3 billion.
In addition, Goodyear plans to close three plants, affecting about 4,000 workers. It also has cut corporate staff and offered early retirement incentives to hundreds of other employees. Goodyear's total employment has dropped to about 116,000 from 134,100 at the end of 1985.
On April 27, Goodyear reported its first-quarter 1987 results - the first full quarter since the post-Goldsmith restructuring began - and the figures showed a strong improvement in Goodyear's business relative to a year ago.
The company's pre-tax earnings from continuing operations, which exclude proceeds from the asset sales or any other special gains, totaled $137 million and compared with a year-earlier loss of $140 million.
Net income, which does include gains from discontinued lines, totaled $284.2 million, against a year-earlier loss of $53.4 million. Revenue rose 12 percent to $2.3 billion from $2.06 billion.
Meanwhile, Goodyear's stock has soared nearly 50 percent since year-end 1986 and recently traded in the mid-60s.
The stock also is up about 30 percent from what Goodyear paid for each of Goldsmith's shares - which netted him an estimated $80 million profit - and the price the company paid for the shares bought under the restructuring plan.
Goodyear and industry analysts acknowledge that part of the stock's rally reflects the market's overall advance, as well as the sharp drop in the number of Goodyear shares outstanding.
But the stock price also reflects investor bullishness about the earnings prospects of the slimmed-down Goodyear, analysts said.
''You'd have to argue that the market would have been very impressed with the operating results anyway,'' said Donald F. DeScenza, who tracks the company for Nomura Securities Inc. in New York.
Goodyear currently is enjoying strong demand for its tires, particularly from overseas. Pre-tax operating profit of the company's tire business more than doubled in the latest quarter, to $193.7 million, on an 11 percent sales gain to $1.96 billion.
Mercer emphasized, however, that Goodyear still has big problems.
The restructuring bloated Goodyear's total debt to nearly $5 billion from $2.8 billion a year ago. The company currently spends $1 million every day simply to service its debt, which now accounts for nearly 80 percent of its total capitalization, up from 40.5 percent a year ago.
''Our performance has more than overcome that burden,'' Mercer said. But he added, ''We need a continuing strong economy in order to maintain our growing pace. If we get a bad downturn, we just don't have the reserve to handle it because of the (Goldsmith) raid.''
Moreover, Mercer clearly remains angry that Goodyear was forced to curb its diversification effort and to sell healthy operations.
It was Mercer who, after becoming chief executive in 1982, spearheaded Goodyear's drive to expand beyond tires, principally into oil and gas with the Celeron purchase in 1983.
Celeron was subsequently hobbled by the plunge in energy prices and costs related to its construction of a 1,750-mile oil pipeline from California to Texas that is due to start up later this year. But analysts have said Celeron's future earnings potential looks favorable.
Mercer said Celeron and the other divisions being sold ''are tough things to lose, and every one was a profit maker. It's difficult to see how this enhances shareholder value.''
Goldsmith counters that between 1982 and 1986, when the stock market enjoyed one of its strongest rallies in history, Goodyear's stock drifted down to the low-30s from the mid-30s, and was trading at about $30 when the financier began buying the stock.
At the time, Goodyear had a total market value of roughly $3.2 billion. Goldsmith said that three months later, after his raid pushed the stock higher, Goodyear paid him and its other stockholders $3 billion to buy back less than half of those shares.
''The result of my intervening is, first, shareholders got back nearly the whole market value (of three months earlier) and, second, they're left with a company where the sares are no longer $30 but in the mid-60s,'' Goldsmith said.
Goldsmith also discounted Goodyear's concern about the size of its debt. He contended that once Goodyear finishes its restructuring it will have raised enough money to pare its debt to about $2.5 billion - where it stood when he launched his offer for the company.
But Mercer is much less sanguine about Goldsmith's impact.
''The fortuitous thing is the interruption occurred after we made our investments,'' Mercer said. ''If we had been hit three years ago, there were investments that would never have been made that were important to the leadership position of Goodyear.''
End Adv Sunday May 24