orporate Raiders Train Their Sights on
Allied Research
By Jerry Knight
Washington Post Staff Writer
Monday, May 31, 1999; Page F07
Donald Zilkha and John Rigas make Colt pistols, Army rifles and lots of
money.
J.R. Sculley and William Glenn Yarborough Jr. make tank ammunition,
industrial security systems and not much money.
The two teams of executives have been exchanging volleys in Securities
and Exchange Commission filings for weeks and now are arming for a
showdown June 9 at the annual stockholders meeting of Allied Research
Corp. of Vienna.
Sculley is chairman and Yarborough is president of Allied Research. The
company's executive offices are in Northern Vienna, but its principal
business is a munitions factory in Belgium that supplies shells for the armies
of Saudi Arabia and a handful of other small countries.
Zilkha and Rigas are co-managers of Zilkha Capital Partners, a New York
buyout firm that is one of Allied's largest stockholders and also own's
Colt's Manufacturing Co.
Dissatisfied with the performance of Allied's stock, which has managed to
miss the entire bull market, they want to take over Allied's board of
directors, then oust Sculley and Yarborough so they can set a new
corporate course for the company.
If they succeed in electing themselves to the board of Allied Research,
Rigas said last week, "we would manage it properly. We would fix the
capital structure. We would bring in some more clients."
And they would probably sell the company or at least part of it. Both the
munitions industry and Allied's secondary business, industrial security, are
consolidating, Rigas said. "In these times of consolidation, if you have a
decent asset, you could make a good play," he said.
Yarborough's response is, "Allied is not for sale." Company executives
have taken the complaints raised by Zilkha seriously from the very
beginning, he said. "Any time an investor talks, whether they have 200,000
shares or 10, we want to listen."
But he said Allied's management is aggressively resisting the raiders who he
believes have targeted the company because they "saw an opportunity to
get a good firm cheap."
Zilkha Capital first tried to buy its way in last year by offering to make a $9
million investment in Allied. After months of talks -- but never a meeting
with Sculley or the board, Rigas laments -- the offer was rejected last
month.
That's when Zilkha and Rigas launched a proxy fight to replace Allied
Research's five-member board of directors with their own slate. In addition
to Zilkha and Rigas, the insurgent candidates are retired Marine Corps
general William M. Keys; John R. Torrell II, former president of
Manufacturers Hanover Corp.; and Jean-Claude Roch, a Swiss business
executive.
Proxy fights are rare to begin with and the one at Allied is rarer still
because there appears to be a chance that the challengers can win.
The odds always favor the incumbents in corporate elections because, like
political incumbents, they can use the power of their office to get
themselves reelected.
Usually the incumbents also go into a proxy fight with the goodwill of the
stockholders on their side. But it's hard to imagine that shareholders hold
any great affection for Allied Research's management, considering the
performance of the company's stock.
If you invested $100 in Allied Research in 1993, you would have had
stock worth $98.52 at the end of last year, according to a stock
performance chart in the proxy notice sent to shareholders in preparation
for the annual meeting. The SEC requires companies to remind
shareholders how their investment has done over the last five years and to
show some benchmarks for comparison.
A $100 investment in a Standard & Poor's 500-stock index mutual fund in
1993 would have tripled by the end of last year. And $100 invested in the
stocks of five other government contractors that Allied considers its peers
would have grown to $216.90.
The long-term investment performance is particularly disappointing
because in the summer of 1997 the stock broke out of its $7- to
$9-a-share doldrums and hit $15. At the time, the company's military
business was booming and its diversification into civilian work looked to be
paying off.
But after floating at less than $15 a share for about a year, the stock began
drifting down last summer and sank to almost $6 earlier this year. Since the
takeover fight began, it has perked up a little bit. It closed Friday at $7.06
1/4.
In Allied's latest shareholders appeal, which was circulated last week,
Sculley stressed that Allied's revenue grew 20 percent a year from 1994 to
1998 -- $69.8 million to $143.5 million -- and the company jumped to a
$9.1 million profit last year from a $10.9 million annual loss in 1994.
But the business turned down sharply in the first quarter of this year.
Revenue dropped to $27.5 million from $35.8 million and profit shrank to
$1.3 million (27 cents a share) from $2.3 million (48 cents). Allied still has
an unusually strong balance sheet, with $22.8 million in cash. That's
equivalent to almost $5 a share for a stock that's selling for only a couple
dollars more.
The Allied's financial performance has weakened because it is heavily
dependent on orders from the Saudi government, which is cutting back
military spending because of depressed oil prices. Allied does not sell
ammunition to the Pentagon, which by law buys only from American
factories.
Yarborough said the company has been doing exactly what Rigas suggests
-- developing new customers, including Canada. Allied is "a gnat's eye
away" from landing major new contracts, said the retired Army officer.
Regardless of the company's financial position, fending off the attack will
be difficult because Allied is short of the ammunition used in corporate
takeover fights -- voting shares.
Managements of small companies such as Allied usually also have the
advantage of owning a lot more stock than outsiders, but Allied's officers
and directors hold only about 5.7 percent of Allied or 285,000 shares.
Zilkha Capital has 206,000 shares, a little less than 5 percent.
A couple of mutual funds have similar-size stakes and Rigas has been
aggressively recruiting other investors as allies. He came to Washington last
week to seek the support of Institutional Shareholder Services, a Rockville
firm that advises professional investors on how to vote in contested
corporate elections. So far Institutional Shareholder Services, which can
be highly influential, has not taken a position on the Allied Research proxy
fight.
Rigas said he and Zilkha became involved with Allied at the suggestion of
some unhappy institutional investors. "They had been in the stock for some
time, had supported management in the past and had become somewhat
frustrated in management because no results were coming through."
Rigas complains that Allied "has no sales or marketing effort and has a
CEO who never goes to Europe where the clients are. Why the chairman
sits in the U.S., I don't know."
To Yarborough, the emphasis on Europe suggests Zilkha has a secondary
agenda in seeking control of Allied: bolstering Colt's operations on the
continent. Zilkha brought the most famous name in six guns after Colt's
went bankrupt in 1994, paying $27 million for 85 percent of its stock.
Two years ago, the Connecticut-based gun maker tried to buy FN Herstal
of Belgium, its chief competitor in the military small arms business. Herstal
owns the Winchester and Browning brands and has plants in both the
United States and Europe. The takeover floundered because of opposition
from the Belgian government.
Allied's ammo-making operations, known as MECAR, are in Belgium.
Yarborough said he believes Zilkha hopes to exploit MECAR's long
relationship with the Belgian government to win political support for
purchasing Herstal. Rigas replies that the Herstal merger is dead and has
nothing to do with Zilkha's interest in Allied.
Yarborough doesn't buy that. There is no potential synergy at all between
Colt's pistol and rifle business and Allied's ammunition manufacturing.
Allied doesn't make bullets, he noted, only larger mortar and artillery shells.
But if Zilkha could use Allied's Belgian connections to acquire FN Herstal,
he would become the world's largest maker of military small arms. Then he
could unload Allied's industrial security operations for a few million dollars
and pocket the $22.8 million cash in Allied's bank accounts.
A Look at
Allied Research Corp.
Business: The defense and electronic security firm develops and produces
ammunitions and weapons systems.
Headquarters: Vienna
Founded: 1962
Chairman, chief executive:
J.R. Sculley
President: William Glenn Yarborough Jr.
Ticker symbol: ALR on the American Stock Exchange
Employees: 431
Local employees: Six
Allied Research stock price, monthly closes
SOURCE: Company reports
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