COVER

THE RAIDERS ON THE DEFENSIVE

HUGE DEBTS GROUND THE HIGHFLYERS

JOHN DeMONT January 29 1990
COVER

THE RAIDERS ON THE DEFENSIVE

HUGE DEBTS GROUND THE HIGHFLYERS

JOHN DeMONT January 29 1990

THE RAIDERS ON THE DEFENSIVE

HUGE DEBTS GROUND THE HIGHFLYERS

The mere mention of the name Robert Campeau, Canada’s bold, brash and supremely confident tycoon, was once enough to send waves of fear through North American corporate boardrooms. Now, with most of his influence dissipated and his retail empire under Chapter 11 of the U.S. Bankruptcy Code, the Toronto businessman’s dramatic fall may serve as a chilling epitaph to the financial excesses of the 1980s.

Throughout that decade, corporate raiders, speculators and financiers strode through the corridors of the financial world voraciously hunting for acquisitions. To finance their massive buy-outs, they borrowed billions of dollars. Their audacious deal-making earned the titans of takeover vast personal fortunes and, in the process, they became international celebrities.

But last week, as Campeau fought to retain what was left of his shattered empire, many businessmen and analysts predicted that the era of the hostile takeover is now dead.

Boom: In fact, most of the forces that fuelled the mergers and acquisitions boom have faltered. The number of companies ripe for picking as a result of undervalued stock prices has dwindled. Pressure on management to quickly turn in dramatic growth and profits to satisfy directors and shareholders has slowed. As well, the wave of defaults by overburdened tycoons such as Campeau and U.S. entertainer and financier Merv Griffin has destroyed the market among professional in-

vestors and institutions for the high-risk, highyield, so-called junk bonds, which provided most of the takeover financing over the past decade. Concluded Harry Raímala, a corporate real estate analyst with Toronto investment house McLean McCarthy Ltd.: “Investors have woken up to the realities of junk bonds. They forgot that a 14to 15-per-cent rate of

return implies a horrible degree of risk.” Now, many of the once-feared tycoons who were capable of quickly raising billions of dollars for takeovers are in severe financial difficulty. With corporate greed no longer so easily or safely satisfied, the takeover artists and their investment bankers are more often reviled than lionized. Many, such as Australia’s buccaneering Alan Bond, have already watched their empires collapse after a decade in which they easily accumulated diverse assets and charged headlong into businesses that they knew little about. And many who survived, like Chicago takeover artist William Farley, are struggling to meet the huge debts they incurred to finance their billion-dollar purchases. Even powerful businessmen and corporations that emerged from the 1980s relatively unscathed, such as U.S. raiders T. Boone Pickens and Carl Icahn, have been hobbled by reluctant lenders and investors.

Fuelled: The mergers and acquisition explosion was fuelled by one man: Michael Milken, the investment genius at the New York City investment firm Drexel Burnham Lambert Inc. Milken, who is now facing a 98count federal investment fraud indictment, developed the process of harnessing junk bonds to finance corporate takeovers. The bonds are issued by corporations with low credit ratings but offer interest-rate yields that are much higher than for normal bonds. Generally, junk bonds have been slow to have an impact in the smaller Canadian capital markets, where only an estimated 100 junk bond issues have been launched since 1986, mainly by U.S. lenders. But in the United States, they were instantly popus lar with sophisticated prog fessional and institutional g investors, who, gambling that a high return was worth the risk, suddenly provided a new and almost-bottomless pool of financing. The ensuing greedy stampede for profits in the United States propelled a wave of corporate mergers and takeovers, whose value before the decade ended soared to $1.5 trillion, much of it financed with junk bonds.

Milken’s revolutionary methods made it possible for even a small raider like T. Boone

Pickens, the maverick chairman and chief executive of Texas-based Mesa Petroleum, to mount a once-inconceivable attempt to buy the mighty Pittsburgh Gulf Oil Co. in 1984 with $2.2 billion in junk bond financing. By the time Gulf finally repelled Pickens by buying back the Gulf shares that he had purchased with the bonds, its share price had been driven up substantially, and Pickens made a profit of $464 million. His audacious action—forcing a large firm to buy out his shares at an inflated price—became known as “greenmail.”

But the leveraged buy-out, or LBO practitioners, soon elbowed out the greenmailers. They too used junk bonds as the favored method of borrowing heavily to buy control of a company, swiftly selling off assets, usually subsidiary firms, to pay off the debts— often at a huge profit.

As the LBOs spread, no company seemed large enough to fend off a buy-out. Even RJR Nabisco Ltd. of Atlantic City,

N.J., one of the largest companies in the United States with $16.2 billion in sales in 1988, could not escape. In 1989, New York investment adviser Kohlberg, Kravis, Roberts & Co. bought the multinational for $30 billion, financed largely by junk bond sales, making it the largest LBO in history. Said Janet Mangano, director of research at New York’s Josepthal

& Co. Inc.: “The credo became ‘Let’s do the deal at any cost.’ The deal itself didn’t matter.” As the corporate raids and LBOs increased, many corporations that felt threatened by possible takeover bids themselves turned to junk bonds for protection. They sold them to raise cash to buy back their own shares and keep them out of the reach of acquisitors such as Campeau. Another popular technique to ward off unwelcome raiders was the issuing of extraordinary dividends to prevent shareholders from revolting.

The aggressive strategies on both sides of the corporate takeover wars led to a dramatic rise in corporate debt during the 1980s. And, as Campeau’s desperate battle illustrated, analysts say that both raiders and the companies they acquired, or tried to acquire, are now dangerously vulnerable to everything from an economic downturn to rising interest rates because of the increased debt loads. Explained Michael Iscove, president of Creative Fusion Ltd., a Toronto-based mergers and acquisitions firm: “A lot of companies that tried to do deals should be looking back and heaving a sigh of relief that they did not get caught up in what was going on.”

Indeed, the Campeau debacle seems to mark the end of the era of rapid acquisitions. In

fact, a string of complex, high-profile takeovers, including the $2.8-billion takeover of building materials company Jim Walter Corp. by Hillsborough Holdings Corp., a leveraged buy-out company set up by Kohlberg, Kravis, Roberts & Co., has run into serious financial problems in the United States in the past six months, leaving lenders holding more than $8 billion in now nearly worthless junk bonds.

Default: Moreover, analysts say that, with Campeau in Chapter 11 bankruptcy proceedings and with other companies threatening to default, businessmen launching takeovers in the future will have great difficulty raising money with junk bonds. All told, $11 billion in new junk bonds were sold to finance takeovers in the first nine months of 1989, compared with $26 billion worth during the same period in 1988. Said Alfred Powis, chairman of Torontobased Noranda Inc., whose company last summer acquired Toronto-based Falconbridge Ltd.: “Anyone making a major acquisition is going to be treated with a certain amount of caution from now on.”

Along with Campeau, some of the biggest setbacks have been incurred by a number of the most celebrated corporate raiders of the past decade. Icahn, for one, the enigmatic New York businessman who made millions by greenmailing large share positions in such giants as Bartlesville, Okla.-based Phillips Petroleum Co. and Uniroyal Chemical Co. Inc. of Painesville, Ohio, appears to have been forced out of the takeover contest altogether by a serious miscalculation last year. After spending

$1.2 billion in 1989 to buy Trans World Airlines Inc.

(TWA), the synagogue cantor’s son from Queens, N.Y., has been tied down by management and financial problems at the airline.

Meanwhile, Pickens declared last year that he was leaving the U.S. takeover field permanently. Following his announcement, in which he said “our motives were sincere” about his takeover forays, he shifted his corporate focus across the Pacific to Japan. There, he is entangled in what appears to be a doomed attempt to gain control of a Japanese auto-parts maker,

Koito Manufacturing, whose

shareholders have so far defeated his bids.

Other well-known businessmen who used junk bonds to finance their takeovers have also been stranded by the collapse in junk bond prices. For one, Chicago underwear tycoon

William Farley, who for $1.4 billion in 1985 acquired U.S.based Northwest Industries, the maker of Fruit of the Loom products, has been unable to complete the financing of his $3.6 billion 1989 raid on textile giant West Point-Pepperell Inc. of West Point, Ga. And if investors and bankers refuse to come to his aid with permanent financing and bridge loans by March, he will face large losses.

Casualty: Another highprofile casualty, and relative newcomer to the world of corporate wars, is Merv Griffin. The portly entertainment tycoon has made a fortune by creating such hit television programs as Wheel of Fortune, hosted by celebrities Pat Sajak and Vanna White, and Jeopardy. Two years ago,

Griffin entered the world of high finance when he outbid fellow millionaire developer Donald Trump in a battle for control of Resorts International Inc., a Miami-based casino and hotel operator. But last October, when it became clear that Griffin would be unable to generate enough profit to pay for the $1-billion debt that he had accumulated in his takeover fight, he was forced to turn over control of the company to his major creditors.

Like their U.S. counter-

parts, several major Canadian businessmen who participated in the 1980s takeover wave were also scarred by the experience. Last year, Toronto-based Unicorp Canada Corp., which set new Canadian standards for corporate ag-

gression with its 1985 takeover of Union Enterprises Ltd., failed to take control of both Randolph, Mass.-based Dunkin’ Donuts Inc., the world’s biggest doughnut chain, as well as the Quebec-based grocery chain Steinberg Inc.

And while Nova Corp. of Alberta, led by its scholarly chairman, Robert Blair, was more successful than Unicorp, Blair is still trying to turn a recent celebrated acquisition into a financial success. After using $2.3 billion in borrowed money to acquire the Toronto-based petrochemical company Polysar Energy & Chemical Corp. in 1988, Nova Corp. is now selling off $500 million in assets to cut its debt. Still, Nova president James Butler said that he has no reservations about the Polysar deal. He added, “We felt we could do it, and we can.”

Raiders: Even in Europe, where the takeover game remains hot as companies prepare to compete in the single-market economy,

which begins in 1992, corporate raiders are facing difficulties. Last year, celebrated AngloFrench financier Sir James Goldsmith used junk bonds to finance a mammoth $24.4-billion takeover attempt of British American Tobacco (BAT) Industries Inc., one of the world’s largest companies. But Goldsmith’s bold bid has encountered serious legal problems.

As well, Australian Alan Bond, who became a national hero in that country after he won the America’s Cup yachting trophy from the United States in 1983, once owned an empire that included such diverse assets as Chile’s telephone system and New York’s posh St. Moritz Hotel. But the flamboyant Australian amassed $6.5 billion in debt while building his empire, and now, faced with the prospect of complete bankruptcy, he has placed his company in a controlled liquidation. At the same time, he has been selling assets, including his yachts, his Sydney mansion and Vincent Van Gogh’s spectacular Irises, which he bought last November for $65 million in mostly borrowed money.

While the surviving corporate celebrities of the 1980s battle to remain profitable, Milken appeared to formally signal the end of the takeover era when he recently began advising companies to avoid junk bonds and, instead, to use the traditional means of issuing common stock to finance expansion. And Ivan Boesky, another celebrated financier who made millions using inside information to profit from corporate takeovers, is following a more spiritual course, far removed from Wall Street. Boesky, who is finishing a three-year prison sentence in California, has grown an extremely long, white beard, and instead of money, he is now pursuing a newfound fascination with his Jewish religious roots.

For the rest of the corporate world, most of which views the raiders’ distress with quiet satisfaction, the main issue now is whether the former marauders can ever recover from the huge debts of the decade-long takeover binge. If not, they too could follow in Robert Campeau’s lonely footsteps.

JOHN DeMONT

MICHAEL ROSE

PETER LEWIS

LENNY GLYNN