Stealth fallout

January 11, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features 1991

The future of McDonnell Douglas, the giant St. Louis-based defense contractor, appears to be growing bleaker every day, and stockholders are bailing. The question now appears to be not whether the stock can go much lower, but how much lower will it go?

This week alone it has already skidded more than 30 percent in the wake of news that the Pentagon has canceled its A-12 stealth attack-plane contract and is seeking $1.9 billion from McDonnell Douglas and its joint contractor, General Dynamics, for alleged over-billing.

The most recent events make shortsellers, who bet a stock will fall, more zealous than ever in their argument that the company is in a strangling cash squeeze. In recent days many have been shorting more stock.

"It's a cash-flow story, just as all of the great shorts are," says short-seller Bob Holmes of Gilford Securities in Chicago, who doubts that the company can maintain its credit lines.

"The banks are under pressure, and from their point of view this is a dramatically different company today from what it was yesterday."

Not only does a significant event such as the A-12 debacle put the company's credit lines at risk -- the banks recently made $750 million available -- but it also has sparked speculation about whether McDonnell Douglas will be forced to take a large write-off at the end of its recently completed fourth quarter -- possibly putting it in violation of certain loan agreements.

When such agreements are violated, banks can make demands on companies, and one demand the bears believe the bankers would be sure to make would be to force the company to suspend its $2.82 per share annual dividend.

That would be a blow to insiders and the company's employee-savings thrift plan, which together control 48 percent of McDonnell Douglas stock.

A spokesman declined to comment on whether a write-off is in the works, and he downplayed the A-12 troubles by saying that they won't have a material impact on the company's financial condition. He also noted that the company and General Dynamics intend to sue the Pentagon for $1.6 billion in unpaid A-12 bills.

But the busted A-12 program is only one of several problems on which the bears have built their case, leading short-seller Tom Barton of Palo Alto, CA-based Feshbach Brothers to conclude: "McDonnell Douglas is a better short now than it was when it was 50" -- which it was less than two months ago.

The Pentagon's seeking millions from the company suggests that the government won't necessarily ride to McDonnell Douglas's rescue should its financial condition deteriorate much further.

Barton forecasts that the stock will eventually fall an additional 50 percent or more if fundamentals deteriorate, and his scenario doesn't rule out the chance of a bankruptcy reorganization.

DOUBLE STANDARD: The issue of selective disclosure -- companies giving information only to certain investors -- is becoming increasingly controversial. Earlier this week, at Hambrecht & Quist Life Sciences Conference in San Francisco, reporters were "respectfully requested" by an H&Q official to leave a presentation by Malvern, Pa.-based Centocor Inc., a biotech company in the midst of a $100 million debt offering. Those who did not choose to leave were asked not to report what they heard -- supposedly to conform with Securities and Exchange Commission requirements.

But the investors in attendance were presumably free to go out and buy or sell -- giving them a jump on investors who weren't there and couldn't get the news from their favorite journals.

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