COVER

A FAMILY’S WAYTO WEALTH

PREDICTING THE FUTURE IS CRITICAL

ANN WALMSLEY October 24 1988
COVER

A FAMILY’S WAYTO WEALTH

PREDICTING THE FUTURE IS CRITICAL

ANN WALMSLEY October 24 1988

A FAMILY’S WAYTO WEALTH

PREDICTING THE FUTURE IS CRITICAL

COVER

Their personal lives are enigmatic. But when it comes to their business techniques, there is no secret to the Reichmann success. As real

estate developers, they are fast, quality builders who emphasize sensitivity to community concerns in an industry more often known for callousness. As investors in control of some of Canada’s largest companies, they are hands-off owners who allow management to operate independently. And their astonishing success is mainly inspired by one person: the relentless Paul Reichmann, Olympia & York Developments Ltd.’s intuitive 58-year-old strategist. Said Andrew Sarlos, a prominent Toronto investment dealer and family friend: “For Paul, it is like being a gambler, like being a heroin addict. He cannot stop.” Values: The Reichmann way combines Old World and New World values. In an attempt to create a continuing source of wealth for future Reichmann generations, the family has diversified from real estate into major oiland-gas, forest products and financial services companies that are publicly traded. They own Gulf Canada Resources Ltd., Abitibi-Price Inc. and GW Utilities Ltd. And they have recently bought into non-Canadian com-

panies including Santa Fe Southern Pacific Corp. Friends and business associates say that their logical approach to business problems is, in part, a result of the discipline learned through their study of the Jewish religious laws contained in the Talmud. And

they are willing to invest millions of dollars using only a handshake to seal the deal. But their taste is for bold and speculative operations—such as their $312-million underwriting of Robert Campeau’s daring purchase of Federated Stores in the United States last

spring. And Paul Reichmann envisions future megaprojects abroad on the scale of his 24building Canary Wharf development in London. Said Marshall (Mickey) Cohen, Olympia & York’s executive in charge of the family’s equity investments: “We are risk-takers. We are not intimidated by size.”

From the beginning, the brothers have had a genius for anticipating business opportunities. Ralph Reichmann opened a tile-importing business in Toronto in the late 1950s at a time when demand for marble and tile bathrooms had suddenly bloomed. And the brothers quickly demonstrated their real estate flair when they shaved $25,000 from the cost of building a warehouse for the tile store by acting as their own contractors.

Spectacular: The Reichmanns emerged in the spotlight for the first time in 1965, when they purchased a package of land next to Toronto’s Don Valley Parkway for $25 million and cleverly paid for it by selling off parcels that they did not intend to develop. Paul Reichmann’s appetite for increasingly spectacular deals led to the erection of First Canadian Place, Canada’s largest bank tower at the time, and the purchase of some New York City office buildings in 1977, several of which were located on Park Avenue.

The move into New York City was inspired. At the time, Manhattan property values were depressed, and other developers predicted a real estate bust. But when the market rebounded more quickly than anyone anticipated and rents doubled, the Reichmanns’ shrewd insight stunned their colleagues. That reputation was enhanced when they won the deal to develop the commercial and office portion of New York City’s Battery Park into the $ 1.5-billion World Financial Centre. Said one employee: “When Paul sees an opportunity, boom, he is onto it.”

Initially, however, Paul Reichmann said that even he found the huge Canary Wharf project daunting. Canary Wharf is a $7-billion development that will convert 71 acres of derelict docklands into London’s third corporate and financial centre. When complete, the

project will be twice the size of the Reichmanns’ newly opened World Financial Centre in New York City and its available office space will dwarf all five bank complexes in downtown Toronto. The U.S. consortium that initiated the project backed out in July, 1987, concerned that it would be impossible to find enough tenants to fill it. Indeed, when a Londonbased Citibank executive, Charles Young, first tried to persuade Paul Reichmann to visit the site in February, 1986, Reichmann brushed him off. Recalled Reichmann: “Charles arranged to give me a tour. But I

refused to go because I thought it would be a waste of my time.”

But after some reflection, Reichmann concluded that the development could be a success if it were upgraded to attract corporate head offices instead of secondary office space

as originally planned. Reichmann argued that the strategy had worked for the World Financial Centre in New York City. He predicted an increasingly dynamic economic climate in London when inter-European free trade began in 1992. “I saw in it an extraordinary opportunity to create a new business centre for London, the dominant city of the new single Europe of 1992,” said Reichmann.

“The centre of London could not provide that. The business area is hemmed in and the facilities are about 70-per-cent outmoded, outdated. I think Canary Wharf will be something like uptown New York. And that was the exciting part that I could not resist.” Passion: Reichmann becomes involved in even the minor details of the family’s large undertakings. And Canary Wharf has clearly become an all-consuming passion. He now spends a large portion of his time overseeing

the project. Last week, while some other members of the family attended a gala opening for their World Financial Centre, Reichmann remained at the London construction site to discuss the layout of Canary Wharf’s parks and plazas with staff.

The Reichmanns usually demand a conservative design for their projects—one that they claim appeals to major corporate ten-

ants. At Canary Wharf, Paul and Albert were originally concerned about the exterior cladding of the 50-storey obelisk-shaped tower designed by New Haven, Conn.-based architect Cesar Pelli. “Both Albert and Paul like stone and dislike far-out design,” recalled Pelli. “But I proposed stainless steel because it would be London’s first skyscraper and should be of the 21st century. It took Paul a while to imagine it.”

The brothers had also resisted Pelli’s ad-

vanced design for the World Financial Centre—four towers, each topped by a different geometric shape. They had wanted something closer to the simple rectangular, whitemarble block design of their landmark First Canadian Place in Toronto. But Ron Soskolne, vice-president of design for Olympia & York, helped persuade the brothers that Pelli’s “timeless” concept better meshed with New York City’s architecture.

Indeed, the New York City buildings have attracted such prominent tenants as Merrill Lynch & Co., Dow Jones & Co. and American Express Co. And at the gala opening last week, the buildings received considerable praise. Said John Kluge, a billionaire from Charlottesville, Va., who owns cellular-telephone operations, a film production company and the Ponderosa restaurant chain: “The centre reminded me of Egypt and the pyramids. The design arrests your eye.”

Prestige: Typically, the Reichmanns spared no expense to enhance their latest buildings’ prestige. The focal point of the World Financial Centre is a $50-million winter garden with a grove of palm trees. Paul Reichmann, in fact, ignored several suggestions to make it less grandiose.

Philip Reichmann, Albert’s blue-eyed son who is in his early 30s, seems to have the same instincts as the older generation. In charge of retail leasing for the new World Financial Centre, Philip said that only top fashion retailers, not chains, should have space in the shopping concourses. Indeed, he succeeded in attracting Barneys, one of New York City’s top fashion clothiers, for the centre.

Unlike many real estate developers, the Reichmanns also spend time and money on polishing their image. In 1978, the mayor of Boston offered to help smooth the way for the Reichmanns to design a large modem office tower by personally handling the outcry from historical preservation groups that were opposed to the project. Instead, the brothers chose to redesign the building, agreeing to local demands to leave a large historic L-shaped block intact. “Most developers would go with what the politicians wanted,” said Soskolne, who was extensively involved with the project. “But the Reichmanns considered how they wanted to enter Boston—as developers out to rape the city or as developers who have sensitivity.”

Lustre: To add some lustre to their public image in London, the Reichmanns recruited Charles Young from Citibank. Moreover, the company has also helped establish a centre to train unemployed people from the dockland area in construction trades. And it has also pledged to provide 2,000 jobs within the local community. Indeed, if Olympia & York fails to fulfil that job quota, it has pledged to pay $15,400 for every job under the 2,000 promised.

But, while generous with communities, the Reichmanns are tightfisted at the negotiating table. Discussions with American Express about leasing a World Financial Centre

THE BROTHERS COMBINE OLD WORLD AND NEW WORLD VALUES

tower lasted 15 months. And Sanford Weill, president of American Express at the time, said that he marvelled at Paul Reichmann’s capacity to remember everything discussed at previous bargaining sessions without notes. Said Weill to Maclean’s: “He is very tough and very, very smart.”

Olympia & York is a lean organization in which even junior employees have access to the Reichmann brothers—even though the family ultimately makes all the decisions. Michael Dennis, a former Toronto city housing official who joined the company in 1979, claims that a new executive’s main task during the first three months is to absorb the Reichmann values. Said Dennis: “Both Paul and Albert are teachers. Paul would ask how I would deal with a problem, we would debate it back and forth.

That way they inculcate their philosophy and approach.” But after that indoctrination, employees are expected to operate as efficiently as the Reichmanns themselves and to be capable of handling a myriad of different business problems

at the same time. “Paul

does not understand if you have not done something in the time that he expects,” said Camille Douglas, a senior vice-president for corporate financing. “He calls you up every day and asks you if it is done. And if not, why not.” Added Charles Young: “Paul says that he has no problem with executives who make mistakes. But he has problems with executives who do not learn from their mistakes.” Demanding: But while the Reichmanns seem to be demanding employers, Douglas and others claim that the brothers inspire them to do their best work. Said Douglas: “Paul sets an intellectual challenge. He once asked me whether a real estate loan involving hundreds of millions of dollars could have its principal repayment in yen to save interest. It turned out to be a great idea and it worked.” That challenging environment is perhaps partly responsible for the Reichmanns’ proven ability to recruit top-notch corporate talent. The equity investment staff, headed by Mickey Cohen, consists mainly of accountants, sometimes lured from the public sector. Over the years, that team, along with investment bankers in Toronto and New York City and Davies Ward & Beck, Olympia

& York’s Toronto-based merger and acquisition lawyers, has masterminded a series of brilliant corporate manoeuvres that have helped to fuel Olympia & York’s growth. One of the most notable: the complex 1987 reorganization of Gulf Canada into several entities, which subsequently increased the

share value of the assets to $30 from $15.

But the Reichmanns have also made miscalculations. Toronto investment manager Andrew Sarlos said that Olympia & York at the time paid too much to acquire both Gulf Canada Ltd. and Abitibi-Price Inc. Continuing low commodity prices have depressed the cash flow of resource-based companies. And some analysts have said that the plunge in crude-oil prices to below $15.27 a barrel in

the past month has made

the Reichmanns’ Gulf investment increasingly questionable. He added: “Lesser people would have gone broke.

But they have the holding power to allow time to prove the value of their purchases.”

Targets: Equally troublesome has been their failure to fully communicate with the management of potential takeover targets. Paul Reichmann acknowledged publicly that that was the reason the attempted friendly takeover of Hiram Walker

Resources Ltd. in 1986 went seriously astray. Said Reichmann: “My brother and I goofed somewhere along the line. A misunderstanding developed.” A critical mistake was the Reichmanns’ failure to quash reports throughout the financial community that they might sell the prize of the Hiram Walker empire—its lucrative distillery—to Seagrams Distillers Ltd. once Olympia & York controlled the company. The Hiram Walker management, in a clear attempt to prevent the business from falling into the hands of a key rival, sold the distillery to the British firm Allied-Lyons PLC. In the end, Olympia &

York succeeded in holding on to 49 per cent of the distillery through a joint venture with Allied, but only after a long series of strongly fought court battles. Said Paul Reichmann at the time: “Had we known it would be unfriendly, we would not have gone near it. It is not our style.”

Hostile: Indeed, Garfield Emerson, the Reichmanns’ chief merger and acquisition lawyer at Davies Ward & Beck, claims that the family’s reputation as hostile corporate aggressors, as a result of the Hiram Walker battle, is undeserved. Emerson said that the Reichmanns were highly reluctant to pursue legal action against Hiram Walker management and that they agreed to only on his advice. Emerson told Maclean’s: “They are not bust-up artists nor corporate raiders. I

do not know if you can find better partners to be in business with.”

Although the Reichmanns’ business ventures are flamboyant, they abhor the idea of flaunting personal wealth. Fortune magazine once described them as “so colorless that they are colorful.” The family even resisted buying a corporate jet until six months ago, when the Canary Wharf project necessitated its purchase. Their devout Orthodox Jewish

faith also continues to set

them apart from the rest of the business establishment. They eat only kosher business meals and they stop all work on Jewish holidays and on the Jewish sabbath, which begins at sundown on Friday. The Reichmanns continue to do things their own way, which means they are likely growing richer by the minute.

ANN WALMSLEY

with

D’ARCY JENISH

in New York

City