GOLDSMITH VERSUS CROWN ZELLERBACH CORPORATION

Crown Zellerbach was a San Francisco–based forest products company with substantial holdings of
forest-related assets. Sir James Goldsmith saw great value in Crown Zellerbach’s assets at a time when
the market failed to reflect its worth. ‘‘I do believe in forests. I do believe in forest lands. Everybody says
they are a disaster. But they’re still making profits. And forest lands will one day be as valuable as they
were.’’a Crown Zellerbach’s chairman, William T. Creason, who was concerned about the company’s
weakness to takeover from a raider such as Goldsmith, adopted an elaborate set of antitakeover defenses
designed to maintain the company’s independence. These measureswere as follows (use of antitakeover
measures other than poison pills are described later in this chapter): Formation of a defensive team.
Crown Zellerbach formed a well-rounded defensive team that included the prestigious investment bank
Salomon Brothers and attorney Martin Lipton. Crown Zellerbach also included the publicist
GershonKekst, whose involvement highlights the important role public relations may play in takeover
contests. Updating of the stockholders list. The corporation updated its stockholders list so that if a
takeover battle ensued, it would be in a position to quickly contact important institutional and individual
investors. Staggering the board of directors. The board of directors’ elections were staggered to make it
more difficult to take control of the board.
Enactment of the anti greenmail amendment. An anti greenmail amendment was enacted in Crown
Zellerbach’s corporate charter to preempt the possibility that a raider would make a bid in the hope of
attracting greenmail compensation. Addition of a supermajority provision. This alteration of the
corporate charter required a two-thirds majority vote on future bylaw changes. Issuance of a poison pill.
Crown Zellerbach’s poison pill allowed stockholders to buy $200 worth of stock in the merged concern
for $100. This significant discount for current Crown Zellerbach stockholders would make the company
less valuable. As noted previously, the pill was issued in the form of rights that were activated when
either an acquirer bought 20% of Crown Zellerbach’s stock or an acquirer made a tender offer for 30% of
Crown Zellerbach’s stock.
The rights became exercisable after a bidder bought 100% of the company’s stock. The rights were
thought to be such a formidable obstacle to a raider that no bidder would trigger them. Because of the
large financial incentives involved, however, the market developed a means of evading the effects of the
defenses. This innovative tactic was first developed by the team representing
SirJamesGoldsmith.DesignedtoenableCrowntostillmakeadealwithafavoredsuitor,therights, trading
independently of the shares, could be redeemed or canceled by the board by buying them back from
shareholders for 50 cents each. But once a raider had acquired 20% of Crown’s stock, the rights could no
longer be redeemed and would not expire for ten years.
The pill’s consequences were so devastating, it was hoped Goldsmith would hold short of the 20%
threshold. But what if he kept buying? Would the pill be any defense against his gaining control on
theopenmarket?Liptonwarned:‘‘Theplanwouldn’tpreventtakeovers;itwouldhavenoeffectona raider who
was willing to acquire control and not obtain 100% ownership until after the rights expired.’’b
Goldsmith’s tactic entailed buying just over 50% of Crown Zellerbach stock. He bought this stock
gradually but stopped purchasing once he had a controlling interest in the company. The rights were
issued when Goldsmith bought more than 20%, but they never became exercisable because he did not buy
100%.
The ironic part of this takeover was that Goldsmith used Crown Zellerbach’s poison pill against Crown
Zellerbach. After the rights were issued, the company found it more difficult to pursue other options such
as a friendly bidder, sometimes referred to as a white knight. The fact that these wealth-reducing rights
were outstanding lowered the interest of potential white knights. This actually made Crown Zellerbach
more vulnerable. Crown Zellerbach’s management, after a protracted but futile struggle, was forced to
agree to a takeover by Goldsmith in 1985.
After the takeover Goldsmith then sold off most of Crown Zellerbach’s assets, including the Camus
Mill,to the james River Corporation.In1997JamesRiverandFortHowardCorporationsmergedtoform the
Fort James Corporation which then became the largest tissue producer intheU.S. In 2000 the Camus Mill
was sold to Georgia Pacific Corp.
ORACLE HELD AT BAY BY PEOPLESOFT’S POISON PILL
In June 2003, the second-largest U.S. software maker (behind Microsoft), Oracle Corp., initiated a $7.7
billion hostile bid for rival and third-largest, PeopleSoft, Inc. Both firms market ‘‘back-office’’ software
that is used for supply management as well as other accounting functions. Lawrence Ellison, Oracle’s
very aggressive chief executive officer (CEO), doggedly pursued PeopleSoft, which brandished its
powerful poison pill defense to keep Ellison at bay. The takeover battle went on for approximately a year
and a half; all the while PeopleSoft was able to prevent Oracle from completing its takeover due to the
strength of its poison pill.
PeopleSoft’s board rejected Oracle’s offer as inadequate and refused to remove the poison pill. Oracle
then pursued litigation in Delaware to force PeopleSoft to dismantle this defense. Over the course of the
takeover contest Oracle increased its offer from an initial share offer price of $19 to $26 and then lowered
it to $21 and then back up to $24. PeopleSoft also used a novel defense when it offered its customers, in
the event of a hostile takeover by Oracle, a rebate of up to five times the license fee they paid for their
PeopleSoft software. PeopleSoft defended this defense by saying that the hostile bid made it difficult for
PeopleSoft to generate sales: Customers were worried that if they purchased PeopleSoft software it would
be discontinued by Oracle in the event of a takeover, as Oracle had its own competing products and no
incentive to continue the rival software. Ironically, Oracle really wanted PeopleSoft’s customer base, not
its products or even many of its employees.
The takeover contest became very hostile with the management of the companies launching personal
attacks against each other. PeopleSoft’s management called Ellison the ‘‘Darth Vader’’ of the industry.
PeopleSoft’s own board eventually got so fed up with this way of handling the contest that it asked the
company’s CEO, Craig Conway, to step down.
The battle went on for approximately a year and a half but eventually PeopleSoft succumbed in January
2005. One week later Oracle began sending payoff notices to thousands of PeopleSoft’s employees.
While the poison pill did not help these employees directly, PeopleSoft’s shareholders benefited by the
higher $10.3 billion takeover price. Employees indirectly benefited as the prolonged contest allowed
many of them to make alternative employment plans. This takeover contest featured an effective use of a
poison pill defense and also showed just how useful it can be in increasing shareholder value. However,
while it underscored the effectiveness of poison pills, it also showed that even a poison pill will not
necessarily hold offa determined bidder who is willing to pay higher and higher prices.
ICAHN VERSUS HAMMERMILL PAPER CORPORATION
One classic example of greenmail occurred following Carl Icahn’s announcement that he owned more
than 10% of Hammermill Paper Corporation’s common stock. Hammermill was a high-quality
manufacturer of paper products for more than 80 years.aDuring late 1979, Hammermill stock was valued
at approximately $25 per share, a low valuation because the stock’s book value was approximately $37
per share. Analysts thought that even this valuation was too low inasmuch as many of Hammermill’s
assets, such as its timberlands, were carried on the firm’s books below their actual value. Icahn suggested
that Hammermill be liquidated because its per-share liquidation value would exceed the cost of a share of
stock. Hammermill’s management, busily engaged in rejuvenating the company, vehemently opposed
liquidation. Both parties ultimately filed suits against each other while they pursued a proxy contest. Icahn
lost the proxy battle and Hammermill eventually paid Icahn $36 per share for each of his 865,000 shares.
Icahn was reported to have made a $9 million profit on an investment of $20 million.bThe payment of
greenmail raises certain ethical issues regarding the fiduciary responsibilities of management and
directors, both of whom are charged with maximizing the value of stockholder wealth. Management
critics, however, state that managers use tools such as greenmail to pursue their own goals, which may
conflict with the goal of maximizing stockholder wealth