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MARCH 11-17, 2013
CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
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Mayors: Jackson says proposed tax changes are ‘getting bolder’ continued from PAGE 1
It’s a bill that is uniting communities such as Cleveland, Lakewood and Shaker Heights with North Royalton, Richmond Heights and Mayor Anderson’s Willoughby — and creating similar coalitions in the Dayton area and around the state. The mayors are rallying for two reasons: They see HB 5 as the latest assault by the Legislature and the Ohio Supreme Court on local selfgovernment rights, and they are tired of the continued dominance of state government by rural interests. On the latter point, the mayors maintain that even though the majority of Ohioans now live in and around the big cities from which most of the state’s economic activity and tax payments come, state government is controlled by public officials in Columbus who lopsidedly represent rural and exurban areas.
“It’s a struggle to get them to understand” urban problems, Mayor Anderson said. “There are some downstate legislators that don’t have large cities in their district and hence don’t understand the difficulties.” Mayor Georgine Welo of South Euclid said a statewide campaign is building to reverse that thinking. “This is us mounting an Ohio campaign,” she said at the press conference.
Upset downstaters, too A few days later, on March 5, mayors and city managers from 33 communities in the Dayton area held a similar press conference, pledging to lobby their state legislators to remove the revenue-robbing sections from the muny tax reform bill. Jack Jensen, executive director of the Dayton First Suburbs Consortium, which brought 14 communi-
Takeover: Low rates play part continued from PAGE 3
If a company has set sail on a strategic plan to acquire companies but one or more of its targets are scooped up by another party, there’s a probability the company will bid on other targets, even hostilely, observed Mike Keresman, CEO of CardinalCommerce Corp. of Mentor, a private company that provides infrastructure for virtual payments. Plus, interest rates are “artificially low,” said Mr. Keresman, who previously served as chief financial officer for Steris Corp. in Mentor. “Those rates make acquisitions easier because money is cheaper,” he said. “So in normal environments, Company A couldn’t afford Company B, but with cheap money, it now can be done.”
Value propositions Also contributing to what some call a more predatory M&A environment is the inability of some companies to turn the corner following the recession. Those companies remain undervalued, which makes them attractive targets. The hedge fund investors in Ferro that have been critical of the company for months — and call themselves The Shareholder Committee for the Future of Ferro — said in a news release last week that they do not believe A. Schulman’s offer fully values Ferro. But, the manner in which Ferro’s board shut the door to further negotiations reveals that shareholders’ best interests are not the board’s priority, wrote the group led by FrontFour Capital Group LLC and Quinpario Partners LLC. “The committee supports the company fully exploring the potential sale of Ferro at a price that fully and fairly values the company, whether to A. Schulman or any other potential acquirer,” their open letter stated. Ohio-chartered companies that find themselves the targets of hostile bids enjoy an Ohio law that is “extremely protective” and affords anti-takeover protections to boards that other states do not, said John J. Jenkins, an attorney with Calfee, Halter & Griswold LLP who advises clients on mergers and acquisitions. If hostile takeover attempts increase, it likely will involve slowgrowing and asset-rich businesses, local executives speculated. “Places where the assets go down the elevator every night are not good hostile takeover targets because the people don’t have to stay, and in those instances, the people are what you’re buying,” said Mr. Morgen-
stern, founder and managing partner for Blue Mesa Partners, a private investment firm dual-headquartered in Cleveland and San Francisco. Mr. Morgenstern cited retail as one likely sector to experience more consolidation — both friendly and otherwise — as it “generally is overstored,” and many are “having a hard time adapting to the online universe.” Technology could see an increase in hostile bids, given that “the haves are sitting on literally mountains of cash,” Mr. Morgenstern said, as might manufacturing, in which historically good companies have been less profitable in post-recessionary years.
It’s easier to be friendly Just because more hostile takeovers are attempted doesn’t mean more takeovers will happen: Such attempts rarely work, observers say. The number of mergers and acquisitions involving U.S. companies completed or pending since Dec. 31, 2006, is 45,175, according to FactSet, a financial data and analytics company out of Norwalk, Conn. Of those, 33 are characterized as hostile. One reason cited for their rarity is friendly, or “white knight,” bidders that move in and purchase the target instead. Plus, hostile bids are a lot more expensive, time-consuming and risky than friendly deals, Calfee’s Mr. Jenkins said. Nevertheless, Mr. Jenkins said, “There are very few strategic buyers who won’t undertake a hostile takeover if the target or transaction rationale is compelling enough. There are also hedge funds, (which) take positions in companies with the objective of causing a transaction.” Those hostile bids that do result in deals can be positive if the acquirer puts assets that were underused or poorly managed into the hands of better management, veteran dealmaker Mr. Morgenstern said. But, “If it’s a company that has 500 jobs in the community and somebody buys the company and ships those jobs elsewhere, the local people don’t really care about the macro consequences,” he noted. While deals done because money is cheap are inherently good for an acquirer, CardinalCommerce’s Mr. Keresman argues it tends to be a net negative. “Any acquisition due to artificially low interest rates is probably not good for all of us,” he said. “You’re taking out competition. You’re not letting the free market work as it should. It creates a situation where the rich get richer. You have fewer people who own.” ■
ties to the Dayton press conference, said he sees this issue bringing urban areas together in Columbus, which has not happened in the past. “On this particular issue, you’re seeing everybody across the state unite,” he said. HB 5, the measure that has engendered this rare show of bipartisan and city-and-suburban unity, ostensibly is designed to make it easier for businesses to manage their local income tax filings. The legislation, which is pushed by the Ohio Society of Certified Public Accountants and other business groups, would create uniform tax forms and filing requirements for the 600 communities that levy an income tax would be required to use. The groups argue it has become onerous for companies to file different forms for each community where their employees live and where they have operations. The mayors don’t object to that streamlining. However, they do object to sections of the bill that would define for all cities what income is taxed and how it’s taxed. The changes, they say, would reduce overall the income they tax and the revenue they receive from their income tax. They also aren’t happy about what they believe is the latest intrusion on century-old self-govern-
ment rights bestowed on cities by the Ohio Constitution.
Hubbub over home rule During an hour-long interview last Tuesday, March 5, in his office down the hall from the Red Room, Cleveland Mayor Frank Jackson ticked off some of the measures that Cleveland and other cities have passed during the last decade that have been overruled by the Legislature or the Supreme Court. The measures include residency restrictions on city employees, an effort to rein in predatory lending, gun control, and regulation of oil and gas drilling. Mayor Jackson also cites actions by Gov. John Kasich and the Legislature to eliminate the estate taxes and the personal property tax. Most of the revenue from those taxes went to local communities. He also mentioned the loss of the Local Government Fund, a long-established state revenue-sharing program. “And now they are getting bolder,” he said of the proposed municipal tax changes. “There’s a clear policy of picking winners and losers in the tax policy,” Mayor Jackson said, making it clear that urban areas were the losers. The mayors say these changes violate the spirit of municipal home rule, which became part of the state Constitution in 1912 and gave char-
ter municipalities broad, but not absolute, powers of self-government, including the right to levy taxes.
Urban vs. rural State Rep. Mike Foley, a Democrat from Cleveland, said the problem has been that, until now, urban issues have been viewed as solely Democratic issues. Even though cities account for much of the state’s population, Republicans representing rural areas have set legislative district boundary lines in their favor, either packing urban populations into compact districts or breaking up urban populations into small pieces of largely rural districts. “The problem is, we are just without clout; we’ve got a legislature that’s got an anti-urban bias,” Rep. Foley said. “They’re not coming from dense urban areas where there’s lot of people with lots of problems. It’s a different mindset, and those are the people who have power in the General Assembly at the present time.” But state Rep. Nan Baker, a Westlake Republican, said she thinks legislators such as her, who represent suburban cities that more and more see themselves are part of an urban population, can chip away at those preconceived notions. She also maintains the urban mayors should raise their profile in Columbus. ■