A Package Deal

Different strokes for different folks. That's as true in corporate restructurings as it is in sex. Companies, including those involved in the same deals, often have different priorities in handling acquisitions and divestitures.

So it was in the case of Mobil Corp's $1.27 bn sale of its plastics division to Tenneco. While Tenneco focused on 'selling' the deal to its big investors and sell-side analysts, Mobil's primary concern was to ensure that the unit did not lose value or key people during the selling process itself.

The two approaches may reflect each company's standing in the eyes of the investment community: Mobil is favourably well-entrenched in investors' minds; Tenneco, whose fortunes have risen with its current management, still has work to do to convince the sceptics. So, for example, Standard & Poor's gives Mobil's unsecured debt a lofty AA rating, while it rates Tenneco's senior debt double-B minus, though with a favourable credit outlook. That means Tenneco has to make more effort than Mobil to reassure its investors.

Indeed, the giant Mobil, the world's 26th largest corporation by market value, takes a pretty laid-back attitude to its IR. Michael Kimmitt, PR manager at Mobil, says that whenever the oil behemoth divests or acquires a unit, it merely sends out press releases. It holds conference calls, he says, only after earnings releases.

Indeed, although its stock does extremely well, Mobil seems to break many laws of IR. It says publicly that it wants to concentrate on its core businesses, yet it never clearly defines what that is. And in terms of the plastics division, 'it was more a case of identifying what wasn't its core business,' said a company spokesman. Packaging - which is the business the plastics division engages in - was not among those described as core.

Despite its easy-going approach in the plastics division deal, Mobil's stock performed better than Tenneco's over the week in which the transaction was made public. Between September 29, 1995 and October 6 - the deal was announced on October 2 - Tenneco's stock fell 1.6 per cent, from $46.25 to $45.50. During the same period, The Williams Company, also in the pipeline business, remained basically unchanged, down a tad to $38.875 from $39. Meanwhile, Mobil's stock rose 2.2 per cent, from $99.625 to $101.875. Over the same period competitor Texaco's stock rose a bit more, 2.8 per cent, from $64.50 to $66.325.

As is its wont, once the deal was done Mobil's IR effort involved merely issuing a press release explaining the transaction. Considering that Mobil walked away with a cool $500 mn profit and a $900 mn increase in its cash position, that was probably all that was necessary.

But this was not a one-sided deal. The transaction fits snugly into both companies' long-term strategies, which involve streamlining their operations by shedding activities outside their 'core' businesses. For Mobil, notwithstanding its coyness about defining core business, that more-or-less includes its oil, gas and petrochemical activities. It has been divesting other companies acquired in the 1970s, such as retailer Montgomery Ward, over the last decade.

Similarly, Tenneco has been selling units that are not closely related to its packaging and gas transmission businesses, raising $2.4 bn over the past two years by divesting non-strategic assets. In this deal, Tenneco acquired Mobil's Hefty brand waste bags, tableware and food storage products, as well as its specialty packaging applications, which complement and broaden Tenneco's other packaging activities.

Mobil's chief concern was to keep it quiet that the plastics division was up for sale; and if it did become known, to control any fallout. This was particularly difficult given that Mobil chairman Lucio A Noto had been making speeches saying that the division was not part of Mobil's core strategy.

On the advice of its investment bankers, Goldman Sachs & Co, Mobil hired public relations firm Ogilvy Adams & Rinehart to organise the necessary information campaign. That was in June, shortly after Mobil decided to try to sell the division. 'Our job was to protect the viability and integrity of the division, to make sure the workers stayed productive, that their morale stayed high, that the company didn't lose customers, that the communities continued to feel Mobil was committed to them, and to do everything to assure that the transaction went smoothly,' explains Hollis Rafkin-Sax, the New York-based Ogilvy Adams account executive who was in charge of the mission.

The situation was especially touchy because the division had been through a reorganisation not long before leading to a significant reduction in staff numbers. That exercise was designed to turn the plastics division into a highly profitable unit which could be sold or, failing that, stand profitably on its own. A sale was the preferred course, but Mobil feared that many key people would leave if rumours got out that the plant was on the block. The restructuring 'shook up employees and communities,' says Rafkin-Sax, which is why her firm was brought in to help. Mobil also 'wanted to avoid undue union activity,' she said.

The complexity of holding the unit intact was compounded by the fact that it consisted of eight plants spanning several time zones: Bakersfield in California; Covington in Georgia; Frankfort and Jacksonville in Illinois; Canandaigua and Macedon in New York; Temple in Texas; and Belleville in Oregon. Some of the plants - in Temple, for example - provided the backbone of their towns' economies. In other cases, such as Bakersfield, the local ties were not so great.

Most of the plants had no communications personnel so the PR firm sent 'swat' teams to train managers at each of them, survey the local press and determine the 'hot buttons' in each community. Efforts were made to ferret out any rumours and to convey any that were floating around one community to the managers of plants elsewhere, informing them of what to prepare for.

Amazingly, although officials from several potential buyers were walking through the plants on a regular basis, at no stage did news of the sale leak.

On the Tenneco side, the IR game plan was more aggressive and moved much more quickly. That was mainly because Tenneco did not know it had won the bid until Friday, September 29; the deal was signed, sealed and delivered by Sunday October 1.

That meant Tenneco had only the weekend to prepare the investment community. 'This was a very important deal, it was the largest acquisition by Tenneco since the new management arrived,' says Jack Lascar, who heads Tenneco's IR department.

That new management was hired - to fix what most analysts had agreed had been a poorly managed company - in 1991; and turn-around expert Michael H Walsh was named CEO in August of the same year. Walsh died of cancer in 1994 but two years earlier, in February 1992, he had hired Dan G Mead to clean up the company's troubled construction and farm equipment unit, Case Corp. Case had recorded operating losses of $900 mn in the two-year period 1991-1992, but within a year Mead had Case operating in the black. By 1993, it was producing net income of $195 mn. Not surprisingly, when Walsh died, Mead was named chairman and CEO of Tenneco.

For the new management at Tenneco the purchase of Mobil Plastics was highly strategic according to Lascar, it was designed to achieve several goals. First, it created the fourth largest packaging company in the US, with annual sales of more than $4 bn, trailing only Stone Container, American Can and Crown, Cork and Seal.

Secondly, the deal made it easier for sell-side analysts to view Tenneco as largely a packaging company. Indeed, packaging now accounts for almost 40 per cent of the group's business, against about 24 per cent for its automotive activities; 16 per cent for its Newport News Shipbuilding unit; and about 22 per cent for Tenneco Energy. To help underline this point, the plastics division's name has been changed from Packaging Corp of America to Tenneco Packaging. 'We wanted the investment community to define us more easily,' Lascar says. But he acknowledges that there's 'still some confusion' despite the divestiture of four or five large businesses in recent years. Tenneco has now also begun selling off Case; and analysts expect Tenneco to divest other units, making packaging even more prominent.

Thirdly, the acquisition diversifies Tenneco's packaging business by adding consumer goods - Hefty trash bags, Biggies food bags and One Zip bags - to Tenneco's containerboard, paperboard, aluminium and plastic packaging products. The effect should be to even out the unit's earnings, making it less dependent on the economic cycle.

Tenneco was determined to ensure that the investment community understand these goals. As soon as Mobil told Tenneco it had won the bid, Stacey Dick, Tenneco's senior vice president in charge of strategy (now promoted to executive VP), decided that big investors and sell-side analysts should be invited to a meeting early Monday morning, the day after the deal was completed.

Dick summoned Lascar and a handful of others to a meeting to map out the IR battle plans. This group, located at Tenneco's Houston headquarters, phoned Sarilee Norton, who was in charge of strategy at the Evanston, Ilinois-based packaging unit and together they worked on the presentation of the deal to be made at the Monday meeting. Keeping the deal secret was still crucial: disclosure rules meant the group could not allow word of the acquisition to leak out before it was announced to the wire services on Monday October 2.

Early Sunday afternoon, the Houston team - including Mead - boarded a corporate Gulfstream II jet and flew to New York. There they ensconced themselves at the plush St Regis Hotel, where the meeting was to be held the next morning. Armed with a list of about 100 key investors and analysts, Lascar and his aide, Becca Followill, manager of investor relations, began calling them at their homes, inviting them to the pending meeting. Those who couldn't make it were invited to participate through a conference call. About 60 people did attend in person; a further 60 or 70 by phone.

Mead's message to the group: The Mobil Plastics acquisition 'will be accretive from day one.' It will add $1.1 bn in annual revenues and $100 mn in operating income.'

Ultimately, Tenneco's IR produced the desired results. At the end of January, four months after the deal was completed, Tenneco's stock was selling at $51.375, up 13 per cent from $45.50 just before it acquired Mobil's plastic unit. And that 13 per cent rise was considerably higher than the 8.2 per cent rise in the S&P 500 during the same period. Mobil did okay, too. Its increase, at 7.8 per cent, was just a bit under the percentage rise of the S&P.