BUSINESS, Page 74Special Report: Raiders on The RunThe Big ComeuppanceOnce the scourge of boardrooms, marauders no longer get muchrespectBy 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
