Chicago Tribune,
October 2, 1988:
Van Gorkom in 1980
was consumed with many thoughts. Trans Union had enjoyed a 20 percent
return on its equity, but Congress was contemplating an increase in the
depreciation rates for rail cars. Trans Union already had more
depreciation available for tax purposes than it could use. In addition,
that depreciation eliminated the firm's income-tax liability and
prevented it from using the investment tax credit because that credit
could only be used to offset income-tax liabilities.
Some of Trans
Union's new competitors were able to use all of the depreciation and
tax credits available as well as the new tax shelters being contemplated
by Congress.
Trans Union had
already made a number of acquisitions to increase its taxable income and
enable it to use all of its depreciation and the investment tax credit,
but they weren't enough. To completely solve the problem, the
acquisition of a company with $100 million in taxable income would be
required. Such a substantial acquisition, Van Gorkom believed, would
almost certainly result in a material dilution of earnings per share. It
would also change the character to the company in the eyes of the
investors, which could adversely affect the market price of its common
stock.
The other alternative
was to sell the company to someone who had adequate taxable income to
use all the depreciation and the investment tax credit. Van Gorkom
reasoned that Trans Union would probably be worth more to a private
owner than to a publicly held company because a private owner would
value the company on the basis of cash flow, rather than earnings per
share. Trans Union's cash flow per share was almost three times its
earnings per share.
Van Gorkom turned to
his friend, skiing companion and School Finance Authority board member
Jay Pritzker, the man he once called one of the finest financial minds
in the country.
"I wasn't even sure
that a company like Trans Union would even be interesting to private
buyers, so I decided to talk to Jay on the general idea of the company's
appeal to a buyer such as the Pritzkers," Van Gorkom says.
To Van Gorkom's utter
surprise, one week later, Pritzker offered to buy the company for $55 in
cash per share or $690 million. The stock was then selling on the New
York Stock Exchange for $37.
"I mean," Van Gorkom
says, "how many people do you know who, without looking at anything,
practically, would offer you $700 million for a company?"
Pritzker wanted to
move fast. His original conversation with Van Gorkom was on a
Saturday-Sept. 13, 1980. By the following Friday he decided to make an
all-cash offer for the company. Then he requested that the board of
directors vote on whether they would recommend the offer to the
shareholders before Monday morning when the London stock market opened
and public announcement of his offer would be made. It gave the
directors less than 39 hours on a weekend to accept or reject the offer.
"Pritzker said to me,
'I believe that I have lost more good deals by being slow than I've made
bad deals by being fast."'
In that meeting, the
Trans Union board of directors voted to accept the offer and assure the
shareholders of $55 a share if they wanted it. It would take 90 days
before the shareholders would vote on the offer.
But the Supreme Court
of Delaware took issue with that meeting's outcome and said, in effect,
that the board had not entertained other potential suitors or obtained
valuation information to make an informed business judgment.
"If the offer was good
for 30 days, we would have hired people to go make analyses (of the
offer)," Van Gorkom says. "But we didn't have time. So we all decided
that $55 was a very good price. All of the members of the board knew our
basic problem with the investment tax credit and the depreciation. They
knew what a threat it was to our earnings in the future. They had
watched the stock for years. They knew it had never sold anywhere near
$55. We were afraid, frankly, that if the stockholders knew we let the
offer expire, they would sue us for not letting them make that decision.
I'd have been madder than the devil (if the opportunity had lapsed) and
I was one of the biggest shareholders."
In the interim, a
management uprising ensued, headed by some of the company's senior
members, who preferred a leveraged buyout to the merger. Van Gorkom was
against the leveraged buyout because he believed there were conflicts of
interest in management becoming potential buyers. "People frequently
say, 'Well, there will be conflicts of interest, but we'll handle that.'
Meaning, 'We'll be objective and honest,' but that's not the answer.
Conflicts of interest should never be allowed to occur." Others within
the higher echelons of the company feared for their jobs; some resented
the secrecy that surrounded the negotiations.
More than one
prominent legal scholar called the ensuing court ruling "the worst
decision in the history of corporate law."
The court ignored,
says Van Gorkom, "the fact that in that meeting the board did not decide
to sell the company at $55. We couldn't sell the company. The
shareholders make the ultimate decision. We voted to recommend the offer
to the shareholders."
In addition, Van
Gorkom had hired Salomon Brothers Inc., an investment banking firm, to
look for other bidders. They were offered a fee of more than $2.5
million if they were successful. Salomon searched for four months, and
although they turned up interested parties, there were no takers. "When
the stockholders voted on Feb. 10 of 1981 to accept the Pritzker offer,
they knew that Salomon Brothers had been beating the bushes for four
months and could never get a better offer," Van Gorkom says moodily.
"That fact to us is overwhelming. The fact that the court says you
should have somebody make an analysis doesn't mean anything. If you've
got 20 analyses, they don't mean a thing if nobody in the market will
pay it. The value of anything is what somebody will pay for it. What
good is the analysis? So it was incomprehensible.
"You know, if somebody
makes an error in logic, you try to correct it. But when somebody,
especially a court of that kind of standing, displays such abysmal
ignorance of the way the real world functions and does something that is
utterly incomprehensible, you hardly know where to start."
Many say Van Gorkom
was pained by the decision, but if he grieved, he did so privately. "He
doesn't let the emotional disappointment surface," Chelberg says. "I
would say he represses it."
"This thing has
seared Jerry badly," says Pritzker. "I don't think he can forget it. He
becomes very strident on it. And believe me, he's not wrong. The only
difference is, he can't forget it. It sticks in his craw."
At the time the
lawsuit was filed, Pritzker says, he was willing to settle it. "But
Jerry wouldn't let me settle. Again, being very principled, he felt
there was no merit to the case. I agreed with him. It's just that, with
my experience, the fact that there's no merit doesn't necessarily mean
you're going to win the case."
In the wake of the
court decision, Van Gorkom sat down and wrote a treatise on his view of
the decision that he later distributed to friends. He wanted them to
understand every detail.
In the course of the
takeover there were painful incidents that only the passing of years
could soften. The Marmon Group instituted extensive terminations. A mass
exodus of three top vice presidents and one division head was highly
publicized. On Sept. 11, 1981, Trans Union's Lincolnshire headquarters
closed, and offices were consolidated downtown. Many were bitter. The
Pritzkers' philosophy of running operations involved frugality and an
aversion to top-heavy management. There were stories of orders that the
lights be shut off during lunch hour.
Jerome W. Van Gorkom
THEN: First Chair, Chicago School Finance Authority.
NOW: Died March 17, 1998, in Lake Forest, where he
had lived for 40 years; he was 80.
