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When KMPG Consulting Inc. was spun off from its parent, KPMG, in February, it had so many bells and whistles in the form of hostile takeover defenses that you could have mistaken it for a battle-scarred veteran of earlier mergers and acquisitions wars. After all, the new issuer’s law firm, Sidley Austin Brown & Wood, wrote eight major hostile-takeover protections — the full menu — into KPMG Consulting’s charter before its $2.02 billion initial public offering. About six months later the company’s board added a poison-pill defense to its litany of shields. Such countermeasures are increasingly common for newly public companies such as KPMG Consulting. Last year’s batch of IPOs have more and stronger defenses than the companies that came public in 2000, according to a study by TrueCourse Inc., a New York-based provider of statistics about hostile takeovers. TrueCourse measured the defenses in its so-called “bullet-proof rating” and assigned numbers based on a scale of 1 to 10, with 10 indicating the strongest relative takeover defense. In 2001, the new IPOs showed an average bullet-proof rating of 4.75, up from the 4.63 average of 2000, TrueCourse noted. Although hostile takeover defenses have been fairly standard for most companies for at least two decades, “What’s new is the proportion of companies that adopt poison pills right from the beginning,” said Tom Quinn, chief operating officer of TrueCourse. Usually companies wait to adopt poison-pill protection when they face a hostile takeover threat or prices are down. Now, boards of directors are instituting them earlier to stave off potential threats. “People are considering their takeover defenses right from the start,” Quinn said. The reason? “There’s a knowledge out there that if you don’t have these provisions when you go public, it’s virtually impossible to get them voted in later,” said Patrick McGurn, a vice president and director of corporate programs at Institutional Shareholder Services. Poison pills among newly public companies, in particular, have rocketed as the defense of choice. Last year, 27.1 percent of IPO-bound companies adopted a poison pill within a year, compared to only 21.3 percent of newly public companies in 2000, the TrueCourse study noted. “You’re just about never beyond takeover these days,” said Harvey Goldschmid, a Columbia University law professor and former general counsel for the Securities and Exchange Commission. “Falling stock prices make companies more vulnerable,” he added. “Managers feel less secure in general, even when they own a meaningful part of the company.” But takeover defenses aren’t merely about avoiding hostile bids. They are also about calling the shots once such a bid does surface. A poison pill gives “the board the ability to negotiate an offer,” said David Berger, a partner with Palo Alto, Calif.-based law firm Wilson Sonsini Goodrich & Rosati. Negotiating with a strong hand is certainly preferable to being vulnerable. A dearth of defenses can cause a company to scramble for options. That’s a lesson that Aramark Worldwide Corp. learned the hard way and wasn’t intent on repeating when it went public for a second time in December. The food services company originally made its debut on the public markets without takeover defenses in 1960 as Ara Services. But that left it a tempting target for years. Finally, in July 1984, a $720 million hostile bid came from an investor group led by former company executive William Siegel. Caught by surprise, Aramark found itself flailing around for a way out. The company considered a poison pill, but discarded it as too little, too late. Instead, Aramark decided the only way to beat back similar bids was to retreat back to private ownership that year through a $1.2 billion management buyout. Finally, in December, Aramark returned to the public markets in a $690 million IPO. Assisted by New York law firm Simpson Thacher & Bartlett, Aramark restructured its shares before its debut. As a defensive measure it created a new class of stock that went only to insiders, rather than outside investors who could launch a hostile bid. That strategy, coupled with other defenses, led TrueCourse to give Aramark a bullet-proof rating of 9.25, making it the IPO with the fifth-strongest hostile-takeover defenses in 2001. Despite their appeal, takeover defenses are not universally adored. Strangely, the lawyers for leveraged buyout firms that were once their biggest boosters of hostile takeovers are now the ones closing the gates on those acquisitions when it comes to their portfolio companies. Of the 15 companies with the strongest bullet-proof ratings, about one-third are private-equity backed. Furthermore, all of the companies with the strongest bullet-proof ratings in 2001 — those earning an 8 or above — are all either spinoffs, demutualizations or backed by private equity dollars. That list counts some of the biggest IPOs of the year, including Prudential Financial Inc., Agere Systems Inc., Instinet Group Inc. and Weight Watchers International Inc. Still, not all of the big IPOs this year jumped on the takeover-defense bandwagon. Food and beverages behemoth Kraft Foods Inc., for instance, had only nominal defenses, earning the company a bullet-proof rating of 2. In the case of the $8.68 billion Kraft, those limited defenses reflected the fact that its former parent, Philip Morris Co., owns 49.5 percent of Kraft’s common stock and retains 97.7 percent of the spinoff’s voting power. And often, it all boils down to who controls the company at the time of the IPO, according to Gary Weinstein, a managing director and co-head of the healthcare banking group of Lehman Brothers Inc. “Most people think that [hostile-takeover defenses] aren’t relevant if the former parent has a lot of control,” Weinstein said. Consider the case of Agere which sells integrated circuits and optoelectronic components. It is a stand-alone concern with many takeover defenses since being carved out of Lucent Technologies Inc. in a $3.6 billion IPO in March. Lucent is unlikely to buy back its stake in its former microelectronics unit. “If what you’re planning to do is a complete separation, the decision is to put in place the full panoply of protections,” said Richard Hall, a partner with New York’s Cravath Swaine & Moore. In contrast, few or no defenses often means the parent company may well want to buy back the unit it spun off, as UtiliCorp United Inc. did with its Aquila Inc. energy trading unit. UtiliCorp carved out a 20 percent stake in Aquila in a $420 million IPO in April. Three days ago, the parent company, in a short-form merger, regained 100 percent ownership of Aquila. Under those circumstances, Hall said, lawyers for both the parent company and spinoff, working together, will insure that the new company will have “no takeover defenses at all.” Copyright (c)2002 TDD, LLC. All rights reserved.

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