Harvard Breaks New Ground With Purchase of White River

Harvard left the ivory tower of academia for the street fighting world of Wall Street takeovers and won. Two weeks ago, Harvard finally outbid its competitor for White River Corporation in what is believed to be the largest acquisition ever by a nonprofit institution.

The stakes involved--$442 million of Harvard's money--may be small compared to the multibillion dollar mergers of telephone giants like WorldCom and MCI or financial behemoths Citicorp and Travelers.

But that $442 million is 6 percent of Harvard's $11 billion endowment.

In the Harvard spirit, the University is carving a new path for investing endowment funds. According to analysts, universities do not typically use endowments to buy companies, but with Harvard's colossal donations, they say, anything is possible.

"This is not something we've heard of before," says Joe P. Beare, an analyst with Moody's Investors Services, a New York investment firm that works closely with Harvard.

"If this were another university, I would worry, but it's not something unusual for Harvard, given the sheer magnitude of Harvard's endowment," he adds.

Despite the ground-breaking nature and large financial stakes of the acquisition, high ranking finance officials in the University administration expressed little or no knowledge about the acquisition. They say the Harvard Private Group Incorporated (HPG), a subsidiary of Harvard Management Company (HMC), ran the show from beginning to end.

HMC is a wholly-owned subsidiary of the University and manages the investment of Harvard's endowment.

Elizabeth C. "Beppie" Huidekoper, Harvard's vice president for finance, says she did not participate in discussions about the takeover but trusts HMC's decisions.

"They must expect it to be a very good positive return," Huidekoper says.

Provost Harvey V. Fineberg '67 denies any knowledge of the deal, saying he has never heard the name White River.

The acquisition is still contingent on the approval of White River's shareholders. The corporation's board of directors announced April 7 its decision to recommend the takeover to its shareholders, a step which Harvard administrators described as a formality.

If White River does not go through with the deal, it will pay Harvard a $13.5 million break-up fee and $1.5 million for expenses.

White River, located in White Plains, New York, is publicly traded on the NASD Exchange and, based on current financial reports, is financially healthy.

The corporation is a diversified holding company, meaning it has a wide variety of different types of investments. White River owns 36 percent of CCC Information Services Group, Inc., holds stock in Cross Timbers Oil Company and has other small holdings. Its stocks value about $90 million.

Harvard is paying $90.67 per share for White River.

White River has a cash value of $235 million, meaning that 60 percent of its value is in liquid assets like stocks and cash, which it will sell to Harvard.

It serves insurance and automobile companies through vehicle valuation and accident estimation and by providing software. It also works in the sale, design and distribution of fashion accessories.

John S. Griswald, senior vice president of Common Fund, a cooperative that manages the endowments of several hundred universities and independent schools, says this diversity is not uncommon in holding companies.

"There are companies which are diverse and are very successful," Griswald says.

White River has a 328.9 percent revenue growth rate over the past three years.

Despite the apparent financial strength of White River, skepticism about HMC's decision looms large.

Some wonder why Harvard needs an entire company, as opposed to simply owning diverse investments in a variety of companies. Will the acquisition be profitable, they ask?

Others wonder why Harvard paid so much for a company with total assets worth only $345.5 million and with a $4.4 million net income in 1996.

Albert F. Gordon '59, a retired investment banker and HMC observer, estimates the market price of White River at $80 million, based on its assets and income.

"Harvard is paying a premium," he said at the time of the purchase.

HMC, however, has a strong record of investment in the past. Last year, it achieved 25.8 percent returns on its investment, 5.3 percent above the national average for university endowments.

Harvard does have at least one connection with White River: the company's chief financial officer, Michael E.B. Spicer, is a 1979 graduate of the Business School.

Jack R. Meyer, president of HMC, refused to comment on the details of this particular acquisition or general trends in Harvard's investments.

Tami E. Mason, vice president of HPG, says this reflects a trend in HPG toward "making fewer and larger investments."

Beare says the purchase of White River is probably more of a long-term investment, aimed toward future financial development.

Griswald concurs, saying, "the purpose of an endowment is to create a permanent capital for an institution. A university adopts any strategy that can further these aims."

But, despite some reservations, analysts do not doubt HMC's ability to play the financial market.

"Harvard is probably unusually capable of judging," Griswald says. "It depends on the company. Acquiring a company is not intrinsically taking a risk."

He adds, "They have been extremely successful. This is probably as well researched as anything done in this area."

A relatively new company, White River was a subsidiary of Fund American Enterprises Holdings Incorporated until 1993. Currently, Fund American is the largest shareholder in White River.

Fund American was Harvard's competitor in a bidding war for White River this spring, but Harvard's lofty endowment finally gave it the upper hand.

"We certainly would have liked to have earned it at $85 to $90 per share," says Michael S. Paquette, controller of Fund American. "But we can't go much higher than this."

Paquette says there is a "slim to none" chance that Fund American will make another bid to top Harvard's $90 per share.

Harvard previously had a small investment in White River, owning 21,959 shares in 1997. Fund America owned one million shares in 1997, about five times Harvard's investment.

Then last December, Harvard offered to buy White River at $82 a share, bringing the overall price to $400 million, which Harvard agreed to pay in cash, according to the report on the Securities and Exchange Commission (SEC). The board approved the deal.

But Paquette says, for Fund American, as the largest stockholder, buying the remaining shares in White River was financially preferable to accepting payment for the shares from Harvard at $82 a share.

"We didn't think that the first deal was all that exciting," Paquette says.

The contract could be terminated if the board recommends another transaction over Harvard's acquisition.

On March 11, Fund American offered to pay $85 per share, compared to Harvard's $82.

Harvard revised its offer. Then on March 30, Fund American again increased its offer to $90. Harvard countered with an offer of $90.67 a share on April 2.

Paquette attributes Harvard's ability to continue upping its offer to its status as a nonprofit organization, which exempts it from paying taxes on its earnings--including profits from White River.

Paquette says White River has highly appreciated stocks with large tax liability, making it a good investment for Harvard.

With Harvard's deep pockets, similar investments are certainly possible in the future. But whether Harvard will continue this practice will probably depend on the success or failure of the White River acquisition.