Scandal Causes Dow to Plummet : Congress’ Talk on Takeovers Turns Tough

WASHINGTON —  Wall Street’s massive insider trading scandal is causing major tremors on Capitol Hill, where members of Congress suddenly are talking tough about the wave of corporate mergers and takeovers.

Ivan F. Boesky, who has admitted giving bribes for secret stock tips and has paid a record $100-million penalty, made his fortune dealing in the shares of companies involved in takeover fights.

“Boesky is a symptom of a much larger problem, a chaotic process of takeovers,” a spokesman for Rep. Edward J. Markey (D-Mass.) said Tuesday. Markey is expected to lead one of several investigations when the 100th Congress convenes in January.

Change in Policy Seen

Members of Congress are traditionally reluctant to get involved in the arena of high finance on Wall Street, an arcane world of technical jargon and big bucks. But the Boesky issue, with its admission of payoffs in return for stock secrets, is easy to understand--and gives Congress a chance to express its anger in direct terms about the merger blizzard.

A hearing Tuesday on a British financier’s bid for Goodyear Tire & Rubber Co., for example, suddenly turned into a major news event, partly because of the awareness of the Boesky fallout.

“The television cameras were all over the place,” said Rep. Don Edwards (D-San Jose), a member of the House Judiciary monopoly subcommittee.

Edwards said that it should be more difficult to get financing to acquire big companies and proposed a waiting period so that an acquisition “doesn’t happen in five or six weeks.”

“A lot of this hanky-panky wouldn’t go on if there was a time lag,” he said.

Boesky and other Wall Street investors are being investigated for making illegal payments for information on companies that are takeover targets. Someone who buys the stock, knowing that a bid will be made, can reap enormous profits when the value of the shares rises after the takeover bid is made public.

Many of the takeovers are financed with funds from the sale of so-called “junk bonds,” which carry risks as high as their yields. The new owners of the company often sell off parts of the firm to repay the loans.

Huge Debt Results

And companies trying to fight off a takeover may spend billions of dollars buying back their own shares to keep them from the other side. No matter who wins the war, the target company amasses a huge debt. Critics fear that this weakens American enterprises just at a time when they face massive competitive battles with foreign firms.

“While there is still time for our nation, I urge you to put some reasonable curbs on the activity that is sapping more and more of America’s industrial strength,” Robert Mercer, chairman of Goodyear, told the House subcommittee hearing.

Mercer said that he believes Boesky owns 326,000 shares of Goodyear. But Sir James Goldsmith, the British financier who has offered $4.7 billion to buy control of Goodyear, said that he had not been in contact with Boesky.

Company Moves Assailed

Goldsmith accused Goodyear management of moving “into industries about which it knew nothing, jeopardizing the very heart of Goodyear’s business and the security of all those associated with it.” Goodyear blundered with investments in oil and gas, he said, and management “lost its way” by putting money into the energy business.

His remarks drew an angry response from committee members.

“Who the hell are you?” demanded Rep. John F. Seiberling (D-Ohio), grandson of one of Goodyear’s founders.

“I am an active investor,” replied Goldsmith, who owns 11.5% of Goodyear’s stock.

Congress has long expressed muted concern about the impact of corporate takeovers on jobs. But the Boesky scandal, Democratic members believe, can provide a new impetus for action.

Called ‘Industrial Piracy’

Corporate takeovers often are “industrial piracy” in which “the asset that is most frequently discarded is the employee,” Rep. Barbara A. Mikulski (D-Md.) said at Tuesday’s hearing. Mikulski was just elected to the Senate and is expected to push for legislation restricting hostile takeovers.

But any move by the Democratic majorities in the House and Senate will bring Congress into a partisan confrontation with the Administration, which contends that mergers and the threat of them keep management alert and efficient.