A New Champ Of Takeover

By $3 per share, to $49.

McDermott wins the big ones

There is still money to be made in the stock market--by accident, anyway.

The 28,345 stockholders of Babcock & Wilcox, a big but ho-hum company that makes boilers and piping, have seen the value of their shares jump 69% since January, though profits are down from 1976 Two cash-rich companies, United Technologies Corp. of Hartford and J. Ray McDermott & Co., Inc. of New Orleans, have been bidding for B & W shares as feverishly as well-heeled Texas art fanciers at a Sotheby's auction. The bidding started at $42 per share offered by United in March, and spiraled up until last week United was offering $58.50 and McDermott $62.50. At that point, United Chairman Harry Gray, a shrewd takeover dealer, decided "it wasn't in the interest of our shareholders to pay any higher fare for the bus ride." His pullout left the little-known McDermott (it makes offshore drilling rigs) the winner of the takeover battle of the year.

B & W Chairman George Zipf originally rejected both suitors but came to believe that it was better for the company to merge with McDermott, a somewhat smaller firm, than to be swallowed by United. McDermott* was able to bid high because its enormously profitable offshore drilling operations gave it $533 million in cash at the end of 1976. In the heat of the struggle, professional arbitragers --speculators who like to gamble on takeovers--picked up an estimated quarter of B & W's shares. To persuade them to sell to McDermott rather than United, B & W arranged a tasty lagniappe: a special dividend of $2.50 per share on top of the regular 37 1/2-c- dividend, which will be passed back to present B&W stockholders by McDermott in October. (Harry Gray refused to do that.) That brought McDermott's effective offer to $65 per share.

McDermott is paying about 15 times earnings for Babcock & Wilcox shares, a valuation usually accorded only to such blue chips as Coca-Cola or IBM. B & W's spotty earnings record suggests that it is not worth that much. Over the past decade the company's sales have leaped 170%, to $1.7 billion, but earnings have gone up only 60%, to $53 million.

Why was McDermott willing to go so high? Chairman Charles Graves, 61, is not talking. But Wall Streeters speculate that Graves was practically forced into diversification by his own successful management. Cashing in on the worldwide boom in offshore oil drilling, the company in the past ten years has pushed revenues from $199 million to $1.2 billion, and profits from $25 million to $192 million. With half a billion in cash, McDermott began looking like a tempting takeover target itself; even United's Harry Gray cast an eye its way. What Graves wanted was a willing partner in a compatible business. Investors are not so sure that the marriage with B&W will work. After the victory announcement McDermott's stock dropped by $3 per share, to $49.

*The company was founded in 1946 by R. Thomas McDermott, now dead, and named after his father.

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