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All in the Family? At Bergen Brunswig, There's a Ruling Class

October 31, 1988

WHAT price democracy? Shareholders of Bergen Brunswig Corp., in effect, will answer that question with their votes at their annual meeting Dec. 1. And Emil Martini, the company's chairman, and his brother Robert, its president, are certainly hoping that the answer will be high, very high.

With the announced intention of turning Bergen Brunswig into a "one share-one vote" operation, its directors have approved a recapitalization plan to buy out all of the company's 388,309 Class B shares. Holders of these shares-unlike the folks who own the more than 18 million shares of Class A that are outstanding-are entitled to elect a majority of Bergen Brunswig's directors. In all other respects, the two classes of stock are equal.

Just how much is control of the board-and thus of the company-worth? Plenty, in the view of the Martinis. With their families, they own only 1 ½% of the Class A stock, but, more importantly, hold 377,591 shares -- 97.24% -- of the Class B. Based on current prices, the recapitalization would give them shares worth $81.1 million-close to 10 times the $8.3 million at which their Class B stock is currently valued by the market. At the same time, the proposal would drastically dilute the typical Class A shareholder's equity interest in Bergen Brunswig.

The corporation was founded by the Martinis in 1955, went public in 1963, and has grown from within, as well as through numerous acquisitions. Today, it's the nation's second largest distributor of pharmaceutical, health-care, medical and surgical products. A share that sold for $1.12 (adjusted for splits and dividends) at the initial offering 25 years ago is now worth about $22, which works out to a compounded annual return of more than 12.5%. Growth in sales and earnings has been more dramatic. In 1963, Bergen netted $350,000 on a little under $20 million in sales. In fiscal 1988, ended August, it earned $34.7 million on $3.5 billion in revenues.

Over the long haul, under Emil Martini's stewardship, shareholders thus have done nicely. But Martini himself hasn't done badly, either. He controls more than 188,000 Class B shares, along with 76,777 Class A shares (including 65,225 subject to stock options). In addition, his $438,000 annual salary last year was boosted by $300,000 under the company's incentive bonus plan (even though earnings had declined from 1984 to 1987). To further provide Martini with an incentive to remain in its employ, the company lent him $1.5 million without interest and granted him options to purchase 24,676 shares of Class A stock. Robert Martini receives a similar compensation package, and controls the same number of Class B shares as Emil. Robert and his family also own 205,967 Class A shares.

A skeptic might dub the plan to retire the Class B shares "reverse greenmail." Greenmail traditionally occurs, of course, when management pays a premium to purchase the stock of an unwanted corporate suitor. In Brunswig's case, management (the Martinis) is seeking to receive a giant "control premium" by virtue of their Class B stock's supervoting rights, even though these shares represent only 2% of the company's total equity. Supposedly, outside offers have been made for their stock, but in April of this year, the Martini brothers said they'd like to sell it back to the company.

The plan that has been approved by the board and will be voted upon by shareholders is simple: The Martinis will exchange their 377,591 Class B shares for the same number of new Class C supervoting shares, as well as 3,311,691 new Class A shares. When a holder dies-or after five years-his Class C would convert into Class A. A company press release-the proxy itself hadn't been sent to shareholders as of late last week, even though the plan was disclosed in August-says there will be restrictions on "the ability of the controlling shareholders to sell and to vote the Class A common stock, which they will receive upon completion of the recapitalization." Once the deal is consummated, the company will then have achieved one-share, one-vote status. (Originally, the Martinis asked for cash and, when that didn't fly, for 300,000 more shares than they are ultimately to receive.)

If the shareholders just say yes on Dec. 1, the Martinis will get:

  • Over 3.3 million shares of Class A stock, which, at its recent price of $22, has a value of $72.8 million.
  • 377,591 Class C shares, ultimately convertible to Class A. Again at $22, their value would be $8.3 million.
  • Ownership of around 18% of Bergen Brunswig, rather than the 3 ½% or so they now enjoy (based on their current combined Class A and B holdings). This, in turn, means that the percentage of the company owned by the other current Class A holders would drop from 96.5% to 82% (and earnings per share would be diluted, too).

In other words, the Martinis will have taken $8.3 million-the approximate market value of their Class B shares today-and turned it into a package worth $81.1 million.

An important point: normally, when a company issues a lot of new stock, the per-share price slips somewhat to reflect the dilution. Some, then, may argue that the Martinis actually would receive less than $81.1 million for their holdings. If there is any slippage, however, it is quite likely to evaporate later, because the plan could make the company a more likely takeover candidate than it now is. That, in turn, would push up the stock price, maybe substantially above $22.

And, while padding their personal wealth, the Martinis still will own the key block of Brunswig stock. If the company were taken over someday, 18% ownership would translate into many, many more millions for the brothers.

All of this raises some intriguing questions.

At one time, the courts leaned to the view that controlling shareholders had a fiduciary responsibility to minority shareholders. "Control" was considered a corporate asset that belonged to all shareholders. In recent years, though, the concept of a "control premium" has been widely accepted, much to the detriment of minority shareholders. Still, control premiums tend to be 20%-30% above the prevailing market price, not the almost 900% being offered to the Martinis.

Does the brothers' de facto control of Bergen Brunswig justify their taking such a huge slice of the other shareholders' pie?

One wonders how the recapitalization has won the blessing of Bergen Brunswig's board of directors and its independent legal and financial advisers, Lazard Freres and Cleary, Gottlieb, Steen & Hamilton.

Brunswig has 12 directors, seven of whom come from outside. (Remember, of course, that the Martinis, through their Class B shares, have the right to elect a majority of this board.) According to George Reinhardt, who is both the company's chief financial officer and a director, a special committee of the outside directors unanimously approved the proposal to pay the hefty control premium.

Three of those outside directors, it should be noted, are also on the eight-member board of the company's 80%-owned subsidiary, Commtron Corp., a distributor of video cassettes and consumer electronic products. Three of Commtron's five other directors are Emil Martini, Robert Martini and Reinhardt.

With six of Commtron's eight directors also serving on Bergen Brunswig's board, the two boards would appear to be interlocking.

In July 1986, Bergen Brunswig sold the public a 20% interest in Commtron, all in the form of low-voting Class A shares. A perusal of Bergen's 1987 proxy statement shows that the Martinis have been granted options to purchase 80,000 Class B shares of Commtron, almost a 1% interest. As in the case of the parent, the Class B shares-does this sound familiar? -- have the power to elect a majority of Commtron's board.

The incentive stock option plan approved by the board states: "Unless the Committee determines otherwise, the fair market value of one share of Class B Common Stock is deemed under the plan to be equal to the fair market value of one share of the Class A Common Stock."

In other words, when the Martinis receive options to purchase Class B shares from Commtron, these shares are valued by the board at the same price as the Class A. When the Martinis want to sell or exchange Class B Bergen Brunswig shares, the board claims the shares are worth almost 10 times more than the Class A shares!

The interlocking boards appear to be applying rather inconsistent standards, in all but one regard: Their decisions, on both the Brunswig recapitalization and the Commtron option plan, consistently benefit the Martinis at the expense of most other shareholders.

So, it will be interesting to see how those other shareowners-especially the institutions that own about 50% of the Brunswig Class A shares-vote on Dec. 1. One way or the other, this year's annual meeting promises to be one that the Martinis won't soon forget.

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