Good Deal: Hanson Trust's acquisition of SCM Corp. (1986)
Good Deal, Bad Deal

Even with the worthless 40-percent ownership in Smith Corona, this deal ranks as one of the savviest bust-ups of the era.

What Went Right:
SCM was a jumble of different businesses: paint, foods, paper, office equipment, chemicals, and several others. The principals of Hanson Trust had to make numerous smart deals to get a good price for each asset. They succeeded to such an extent that even when one of the "trophy" assets, the office equipment division, went bankrupt, Hanson Trust still made $750 million from SCM.

Hanson Trust is a British Conglomerate, founded and operated until recent years by Lord Gordon White and Lord James Hanson. It owned several U.S. companies, but made its biggest (and best) deal in 1986 when it acquired SCM Corp. for $930 million. Hanson Trust, led in this deal by Lord White, executed a nearly flawless exit strategy. Even though one of the main assets of SCM later went bankrupt, Hanson Trust made more than $1 billion on the deal, mostly within three years.

SCM was an old-fashioned industrial conglomerate. Started a century earlier as Smith Corona and still a famous brand name in typewriters, it also owned interests in paper, office supplies and equipment, paints, chemicals, food, and flavors and fragrances.

In defense against a $60-per-share off by Hanson in August 1985, SCM agreed to be acquired in a Merrill Lynch-led management buyout for $70 per share. In the midst of a bidding war between Merrill and Hanson, SCM agreed to a $74-per-share offer from Merrill that included an auction-ending lockup option for Merrill to buy two of SCM's best divisions, Durkee Foods and Glidden Paints, at bargain prices if SCM accepted a higher offer.

Hanson made a higher offer, premised on invalidating the lockup. The U.S. District Court ruled in favor of the Merrill Lynch offer, but the Second Circuit reversed the decision. One day after the appellate decision in January 1986, Hanson completed this $75-per-share ($930 million) tender offer.

Hanson began immediate, aggressive asset sales. Within a year, the entire acquisition price hand been recouped. Glidden Paint sold for $624 million. The two Durkee foods divisions sold for $185 million and $140 million. Allied Paper sold for $160 million. Along with other asset sales, Hanson earned $1.25 billion, giving it a profit of $300 million. It still owned the office equipment division (SmithCorona), a metal division (SCM Metals), two chemical companies (SCM Chemicals and Glidco), and a flavors-and-fragrances company (Baltimore Spice).

Each asset was disposed of in a favorable manner. Baltimore Spice sold in 1990 for $24 million. SCM Metals became part of a spin-off of certain U.S. assets of Hanson in 1995 to Hanson Shareholders, into a company called U.S. Industries. U.S. Industries sold SCM Metals in 1996 for $122 million. The two chemical companies were packaged with Quantum Chemicals into another part of hte 1995 spin-off, given to shareholders as publicly traded Millennium Chemicals. Of its initial $1.4 billion market capitalization, approximately 30 percent of the operating income came from the former SCM divisions.

Hanson even made money from Smith Corona, and it was practically the only one to do so. It was the maturing of Smith Corona's market that originally led it to conglomerize, but Hanson was able to package the computer, office equipment, and typewriter assets into a separate company, Smith Corona Corporation, in which it sold a 52-percent interest to the public in 1989. The IPO (initial public offering) led to Hanson receiving a special dividend of $428 million.

It still held nearly half of Smith Corona, valued at the IPO price at approximately $400 million. That value was never realized, however, as Smith Corona began reporting disappointing operating results as soon as the offering was completed. The stock soon dropped from its IPO price of $21 per share to $5 per share. From there, it began a long, sow slide into bankruptcy in 1995. Although Hanson had to give back about $20 million to shareholders to settle a class action in 1992, it was a wonder they were able to get as much as they did from a dying asset.

Even with the worthless 40-percent ownership in Smith Corona, this deal ranks as one of the savviest bust-ups of the era. Hanson Trust made back its purchase price in less than a year, and cash profit of $750 million in less than three years. In addition, Hanson's shareholders later received stock that derived at least a half-billion dollars of its value from later asset sales or assets contributed from the SCM acquisition.

Michael Craig

4/26/07

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