All in the Family? At Bergen Brunswig, There's a Ruling Class
October 31, 1988
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,
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
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
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
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!
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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