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Executive Summary

Gillette's subpoenas of six investment houses in its suit to block Revlon's takeover attempt highlight the shaver's strategy to exploit the Wall Street insider trading scandal as one front of its defensive maneuvering. While no connection has yet been established between Revlon Chairman Ronald Perelman and the admitted inside trader Ivan Boesky, Gillette has subpoenaed the records of Boesky's firm as well as five others to give credence to allegations that Perelman violated securities laws by passing non-public information to "market players" like Boesky. The other subpoenaed firms include Drexel Burnham Lambert, Bear Stearns & Co., Ernst & Co., Gruss & Co., all based in New York, and the Los Angeles firm Jefferies & Co. "In his bid for Gillette, Perelman has moved to a higher level of sophistication and deviousness, using tactics of market manipulation and deception in flagrant violation of applicable state and federal securities laws," Gillette charged in a suit filed Nov. 17 in Boston Federal Court. "The scheme required maintenance of secrecy from the investing public and communication of material non-public information to market players." The Boesky revelations could be a godsend to Gillette, rallying outside public opinion and perhaps Capitol Hill support for its takeover defense. However, the jump in Gillette's historic stock price and the importance of the deal to the credibility of some of the major brokerage houses will continue to make Gillette's defense difficult. The battle for control of Gillette, for example, may hinge on the market confidence in Drexel and its ability to raise acquisition funding through high-yield "junk" bonds. With Gillette pressing Drexel, the investment house may have to make the deal a "must" to maintain its reputation. Gillette may be backing Drexel into a corner. Drexel Burnham is a linchpin to Perelman. It has served as advisor and financier to Perelman in his acquisitions of Pantry Pride, Revlon, and Max Factor. Perelman has agreed to pay Drexel $22.5 mil. for successful completion of the Gillette deal. With the attention of Wall Street focused intently on the Boesky scandal, Drexel Burnham is effectively in a position where its reputation as a leading takeover specialist depends upon: (1) the placement of $3.9 bil. in junk bonds to finance Perelman's tender offer and (2) the subsequent acquisition of Gillette by Revlon. A key factor in the future of the Gillette deal may be the degree involvement of Drexel's top figure in junk bonds, Michael Milken, in the insider allegations. Follwing Gillette's suit, Perelman reiterated assurances by Drexel Burnham that the firm was "highly confident" that it could obtain commitments for the purchase of "up to $3.9 bil." of securities. Revlon is putting up $1 bil. of its own funds. However, the market was watching carefully at the end of last week. After climbing to a high of 68-7/8 after Revlon announced the $65 a share tender offer, Gillette stock closed at 56-5/8 on Nov. 21, indicating a temporary caution by investors in the deal and speculation on subsequent offers. The Gillette complaint alleges that Revlon, which owns 9.2 mil. shares or 13.9% of Gillette, caused "the movement of an estimated additional 15% of the outstanding shares of Gillette common stock into the hands of market players, as planned and intended, thereby setting the stage for the Perelman/Orange Group's further takeover moves and jeopardizing the investment of Gillette stockholders." Orange Acquisition Corp. is the vehicle for Perelman's acquisition of Gillette. The suit continues: "The massive, non-public purchases by the Perelman/Orange group and the market players to whom it had communicated material, non-public information were not merely an effort to acquire shares otherwise available in the ordinary course on the market, but instead were effected with the purpose and intent of 'hyping' the market and inducing Gillette stockholders to sell their shares." Revlon's legal strategy to defeat the defenses of Massachusetts-based Gillette centers around a two-pronged plan of attack. On the one hand, Revlon is challenging the constitutionality of the Massachusetts Take-Over Act, under which Gillette is seeking relief. Revlon maintains that the act interferes with the federal statutory scheme by containing provisions that contradict sections of the Williams Act and by imposing greater restrictions on tender offers than are imposed by federal law. In addition, Revlon is claiming that a Gillette "poison pill" share purchase rights plan, adopted by the company in 1985, violates the laws of Delaware, the state in which Gillette is chartered. Like other poison pills, the Gillette share rights plan becomes effective only when an individual acquires 20% of the company's common stock. "The purchaser [Revlon] believes that the rights violate applicable law and, in the event that the purchaser waives the rights condition and acquires control of the company [Gillette], it does not intend to permit the company to honor the rights unless required to do so by a final, non-appealable order of a court of competent jurisdiction," Revlon said in the tender offer. The company also noted that it had commenced class action litigation in Brooklyn Federal Court seeking to have the plan declared invalid.

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