TIME: Almanac 1993/TIME Almanac 1993.iso/time/121189/12118900.025

Text File | 1992-09-23 | 10.6 KB | 207 lines

                                                                                BUSINESS, Page 74

Special Report: Raiders on The Run

The Big Comeuppance


Once the scourge of boardrooms, marauders no longer get much
respect

By John Greenwald


    I was a big man yesterday but boy, you oughta see me now.

    For the corporate raiders who amassed fabulous fortunes in
the 1980s, that sad song has begun to seem painfully true.
Armed chiefly with bravado and borrowed cash, such buccaneers
as T. Boone Pickens, Paul Bilzerian and Canada's Robert Campeau
once made boardrooms tremble and the stock market dance. No
longer. More jeered than feared, many raiders are mired in debt,
saddled with bankrupt companies or deprived of their clout.
Others who profited from the buyout binge face public obloquy
or even years in jail.

    The raiders have often been victims of their success.
Fancying themselves managers as well as marauders, they built
huge but shaky empires that rested on debt. Result: their vast
borrowings at sky-high interest rates left companies ranging
from TWA to Allied department stores awash in red ink. "Many of
the raiders' problems are self-inflicted," says Stuart Bruchey,
a professor of economic history at the Columbia University
Business School. "They jump into businesses that they don't
understand, and expect to jump out with a quick profit. But they
end up getting badly bogged down."

    The raiders' troubles have hit Wall Street like a line of
falling dominoes. Defaults by overburdened borrowers have
crippled the junk-bond market, which finances many takeover
deals. Only $11 billion of junk bonds were issued for mergers
and acquisitions in the first nine months of 1989, in contrast
to $26 billion during the same period a year ago. "Investors are
becoming more sophisticated and cynical," says Kingman Penniman,
a Vermont-based investment adviser. "They are no longer willing
to finance every buyer's fantasy of using somebody else's money
to leverage and strip a company and get rich. The days of the
free ride are over."

    That is bad news for Wall Street, where buyouts have
propped up stock prices and brought in fat advisory fees. Faced
with a drop in the number of mergers and acquisitions, which
fell 29% during the July-September quarter compared with 1988's
third period, major investment firms have announced the layoffs
of nearly 2,000 employees in recent months. Particularly sharp
cutbacks have come at Shearson Lehman Hutton, which is
dismissing 800 of its nearly 37,000 workers and said last week
it would reshuffle its top management.

    Yet the biggest chill has come over raiders who once
promised to run companies more efficiently than did the bosses
they ousted. Largely self-made men who flaunted their contempt
for corporate America, many raiders have had a rude comeuppance.
Some have suffered much greater setbacks than others, but few
are flying as high as they did in their heydays. Among the
consequences of their deals:

    The Toronto Tycoon. A former shop foreman who became one of
Canada's top real estate developers, Robert Campeau in 1986
went on a U.S. shopping spree. Campeau, 66, paid $3.6 billion
for Allied Stores and won Federated Department Stores for $6.6
billion in a celebrated 1988 battle with R.H. Macy & Co. But the
takeovers left Campeau, who had little experience in U.S.
retailing, sorely overextended. His attempt to raise cash by
selling off several chain stores brought disappointing proceeds,
and then the women's apparel trade went into a slump.

    With his empire near bankruptcy, Campeau put Bloomingdale's
-- the jewel in Federated's crown -- up for sale in September
and surrendered virtual control of his companies to Canada's
Olympia & York developers for $250 million in desperately needed
cash. Last week Bloomie's chairman Marvin Traub sought Japanese
support for a reported $1.3 billion management bid to acquire
the tony 17-store chain from Campeau Corp. Said Traub: "We think
our chance of success is good."

    An Enigma Wrapped in a Raider. "From early youth I had the
urge to achieve perfection," Carl Icahn once declared. Icahn,
53, has pursued that goal in adulthood by enriching himself
mightily while stalking major companies, from American Can to
Uniroyal. He completed the $1.2 billion takeover of TWA last
year, a deal that silenced skeptics who had charged that Icahn
never really wanted to purchase a company and was interested
only in selling his holdings for huge profits. But while Icahn
showed some initial signs of managerial aptitude, TWA expects
a record loss this year.

    Now, frustrated, he is attempting to go back to his old
game. As he reportedly searched for a TWA buyer last week, Icahn
asked federal approval to raise his 13.3% stake in USX --
formerly U.S. Steel -- to more than 25%. Icahn could presumably
use cash from a TWA sale to purchase the USX stock and then make
a run at the rest of the Pittsburgh-based company. But Wall
Street analysts were skeptical, noting that Icahn filed for
permission to boost his USX holdings in 1987 and 1988 and did
not raise his stake to the amount requested in either year.

    Master of the Game Shows. First came I've Got a Lovely
Bunch of Cocoanuts. Then Merv Griffin, its singer, became a
talk-show host and created the hit programs Jeopardy! and Wheel
of Fortune. Craving more action, the centimillionaire Griffin
last year outbid billionaire Donald Trump in a battle for
Resorts International, which owns casino hotels in Atlantic City
and the Bahamas.

    But aging Resorts turned out to be worth far less than the
$925 million of debt that Griffin, 64, assumed when he acquired
the company for about $365 million. "It has become clear that
Resorts is a much bigger challenge than we anticipated," the
entertainer wrote last summer to bondholders. They were not
amused. After threatening to put the company into bankruptcy,
the creditors tentatively agreed in October to swap their
Resorts bonds for $400 million of new notes and 78% of the
company's stock, leaving Griffin with a minority stake in the
company. The Florida Felon. A high school dropout who graduated
from Harvard Business School, Paul Bilzerian, 39, had the knack
for getting what he wanted. But when the Florida real estate
market proved too small for his ambitions, Bilzerian tried, and
failed, to take over four different companies. Undaunted,
Bilzerian acquired Singer Co., the defense contractor and former
sewing-machine maker, for $1.1 billion after the 1987 crash
drove down its stock price.

    Since then one reversal after another has hit Bilzerian and
the company. Sentenced in August to four years in prison for
violating tax and securities laws in previous raids, Bilzerian
is appealing that conviction. Singer, renamed Bicoastal after
Bilzerian sold eight of twelve divisions to meet $120 million
in annual interest payments, sought refuge from creditors last
month by entering bankruptcy court. But management is no longer
his concern: he resigned as Bicoastal chairman last summer after
his criminal conviction.

    Prince of the Panhandle. T. Boone Pickens has few regrets
about his raiding career. "Our motives were sincere," says the
Amarillo, Texas, oilman. "We believed we could run those
companies better than they were being run." Pickens, 61, never
managed to acquire such energy giants as Gulf Oil, Phillips
Petroleum and Unocal, all of which he attacked in the mid-'80s.
Yet he enriched himself by acquiring stock in the companies and
then selling the shares at a profit, making nearly $400 million
on his Gulf raid alone.

    Since those heady days, a battle-weary Pickens has
abandoned the U.S. takeover field and gone hunting in Japan. But
he has been stymied in a drive to win four seats on the board
of Koito Manufacturing, a Tokyo auto-parts maker in which he
controls a 20% share. Pickens says Koito has hired Wall Street
consultants to advise the company on how to keep him at bay.
Meanwhile, a federal appeals court in Philadelphia last August
reinstated a class-action suit that Phillips Petroleum
shareholders brought against Pickens in 1984. The plaintiffs
claim that the value of their stock collapsed when Pickens
abruptly abandoned his Phillips takeover bid.

    An Antipodal Acquisitor. In 1983, in the midst of his glory
days, Alan Bond's sloop Australia II captured the America's
Cup. In the same determined manner, Bond, 51, has run up more
than $3 billion of debt in recent years while capturing a global
empire of properties ranging from half of Chile's telephone
system to Wisconsin-based G. Heileman Brewing. To lighten his
crushing debt load, Bond is now shedding properties almost as
fast as he acquired them.

    Textile Titan. Many skeptical eyes are turned on William
Farley, the physical-fitness buff who acquired Northwest
Industries, the maker of Fruit of the Loom products, for $1
billion in 1985. Last February Farley took over textile giant
West Point-Pepperell in a $3 billion raid that included $1.6
billion of junk-bond financing. A fellow raider calls Farley's
debt a "time bomb." While Farley once joked that "we're doing
fine, except that the banks expect us to pay them back," he now
refuses to discuss his finances or the subject of raiding. Says
he: "I'm staying 180 degrees away from that topic."

    Financial woes are not the raiders' only big headache.
Their past attacks have led U.S. companies to fortify
anti-takeover defenses, making it harder for new raids to
succeed. And the long Wall Street bull market has raised stock
prices, leaving fewer targets for bargain-hunting buccaneers.

    As the Roaring Eighties reach an end, the verdict on
raiding is becoming clear. Defenders of the practice insist that
raiders have made U.S. industry more competitive by forcing
bloated companies to slim down and shape up. Yet the towering
debt loads piled up during the raider era -- by both the
attackers and the managers seeking to repel them -- have made
many companies less flexible and far more vulnerable to an
economic slump. While the merger-and-acquisition game will no
doubt carry on in the 1990s, such deals are apt to be less
grandiose and more carefully wrought than the quick-buck
transactions that are currently coming to grief. Says J. Ira
Harris, a Chicago-based senior partner of Lazard Freres: "These
are only midterm grades. The real grades arrive when you have
an old-fashioned recession and see who survives." When that
report card is in, more raiders are likely to flunk the game
they touted so highly: survival of the fittest.


-- Thomas McCarroll/New York and William McWhirter/Chicago