Corporate raiding just ain’t what it used to be.
The swashbuckling firebrands who stole the show in the 1980s, turning corporate America on its collective ear, are cast in cameo roles for the 1990s. Financial, regulatory and legislative roadblocks have stopped raiders in their tracks.
Without deals to do, some takeover artists are busy managing — with varying degrees of success — the companies they bought; others are fighting on. But without the easy credit that fueled earlier raids, they have changed their tactics and adopted more traditional means to snare their targets. Others are headed for infamy, tainted by the insider trading scandal.
* Sir James Goldsmith recently walked away from his 9-month-long, $21 billion hostile bid for British tobacco and retail giant B.A.T Industries — the second-biggest deal ever attempted. Before packing his bags, he lashed out at heavy-handed regulators for killing his deal.
* Carl Icahn has his hands full managing an ailing Trans World Airlines, which he bought after a 1985 bidding war with raider Frank Lorenzo. While he’s remained an extremely aggressive investor, he’s not made a hostile takeover run at a company since offering to buy Phillips Petroleum in 1985. Like other raiders, Icahn is resorting to a less ferocious tactic — the proxy battle — to get his way with management at industrial giant USX. His lost the first battle earlier this month.
* Ronald Perelman, whose bid-’em-up, bust-’em-up tactics have made him one of America’s wealthiest men, has turned corporate statesman. Since winning Revlon in a $1.8 billion hostile deal, he’s generally getting high marks as an operator, and he’s abandoned raiding in favor of friendly acquisitions.
* T. Boone Pickens Jr., who in 1984 demonstrated the might of the Michael Milken-backed raiders with his then-unprecedented attempted takeover of giant Gulf Oil and put fear into the hearts of oil company executives, no longer is taken seriously as a takeover artist. His oil and gas company, Mesa Limited Partnership, has hit hard times and is trading at one-third its all-time high. Pickens must wait for a rebound in natural gas prices to put Mesa back on firm financial ground.
* William Farley, the controversial chairman of Farley Industries who just 14 months ago wrested control of textile maker West Point Pepperell after a bitter battle with management, defaulted on $1.5 billion in debt in March. Now, his empire teeters on the edge of a bankruptcy-law filing.
* Paul Bilzerian, who won control of Singer Corp. in a hostile deal 2-1/2 years ago, was convicted of securities fraud last year and sentenced to four years in prison. He’s out on bail pending a federal appeals court ruling.
All this is a far cry from the heyday, when at any given moment each man was involved in several real and rumored corporate runs. Today, the simple fact is the raiders just can’t raise money.
“The junk bond market has substantially disappeared as a financing mechanism, and bank credit has gotten correspondingly more difficult to get,” says Arthur Fleischer Jr., a partner at Fried, Frank, Harris, Shriver and Jacobs, a leading mergers and acquisitions law firm. “So the major prompting for the decline is the reaction against the use of excessive leverage.”
Drexel Burnham Lambert, the investment firm that bankrolled many of the raiders by raising money in junk bond offerings, now is defunct. Milken, who built Drexel into a junk bond powerhouse, has pleaded guilty to six crimes and been tossed out of the securities industry.
“There’s no Milken and no Drexel, and nobody can pick up all the pieces of the fragmented junk bond industry,” says Michael Lamb, editor of Wealth Monitors, a newsletter that tracks raiders and other heavy hitters.
“Interest rates are higher than they were in the mid-’80s, bankruptcies are occurring more frequently and people don’t want to see a lot of debt on balance sheets,” adds Kiril Sokoloff, president of 13-D Research, which tracks raider activity. “Debt is considered bad.”
In addition to the battered junk bond market, raiders are deterred by stock prices that have risen dramatically since the mid-’80s peak in takeover activity. There are far fewer undervalued companies to go after.
But apart from financial obstacles, raiders face new roadblocks erected by the courts, legislatures and regulatory bodies at the both the state and federal levels.
For instance, when Goldsmith withdrew his B.A.T bid April 23, a spokesman for his group cited “the time, cost and uncertainty of going through the U.S. regulatory hoops.”
Goldsmith was smarting because he had battled furiously for control of London-based B.A.T, which owns such diverse but well-known American franchises as Saks Fifth Avenue, Hardees, and Kool cigarettes. He was turned back by the California Insurance Department, which ruled that his planned $4.5 billion sale of B.A.T.’s insurance unit, Farmers Group Inc., to a French insurer would leave Farmers too highly leveraged.
As the fight dragged on, B.A.T officials sought to neutralize their attacker by selling many assets Goldsmith planned to unload if his bid had succeeded.
Legislators also have become more willing to enact laws preventing takeovers. In 1986, New York, one of the first states to react to the raiders, passed one of the toughest anti-takeover statutes in the nation. Pennsylvania and Massachusetts have enacted anti-takeover statutes considered among the toughest in the country, and Delaware, the nation’s corporate capital, toughened its anti-takeover statutes in 1988.
On the federal level, investment banker Michael Biondi of the firm Wasserstein Perella & Co. says 1986’s tax reform closed loopholes to raiders, making it costlier to sell assets after a takeover.
The Federal Reserve Bank also has tightened up on borrowing rules for heavily leveraged deals.
At the same time, Biondi says, regulators at the Federal Trade Commission have closed loopholes in the Hart Scott Rodino Act, legislation requiring investors to disclose any stock investments exceeding $15 million.
Now, with raiding at a virtual standstill, some takeover artists are resorting to proxy fights to get their way with management.
Ray Lewis of the proxy solicitation firm Georgeson & Co. says his firm already has handled more proxy contests this year than it did in all of 1989.
Shareholders in USX, the huge steel and energy company, this month voted on Icahn’s proposal to spin off 80 percent of the company’s $5.7 billion steel operation to shareholders. USX, which is trading at about $34 a share, would be worth $48 a share if the two operations were split up, says Icahn. He and management each have spent millions on ads to get institutional investors behind them, and Icahn is not expected to win.
Icahn’s proxy fight illustrates the weakened position of raiders. “It’s not a bare-knuckles fight,” says Lamb. “In the heyday of raiding, Icahn would hit you with every possible punch. Now, he’s not trying to change management, he’s trying to force them to change their minds.”
Why is Icahn twisting arms rather than breaking them? Partly because his investments lately are in much larger companies, such as Texaco. Even with his huge war chest, he lacks the financial wherewithal to pose a real threat.
Icahn also is preoccupied with managing troubled TWA, which is laboring under a $2.6 billion debt load, a shriveling cash flow and worsening losses. In making the transition from raider to manager, Icahn has had so many headaches that he is reported to be considering the sale of TWA’s domestic operations to America West, the Phoenix-based airline.
Raider Farley is in much worse shape. To many, the 48-year-old former door-to-door encyclopedia salesman personifies the ills of raiding. Starting in 1976 by parlaying $25,000 to acquire a $1.7 million citrus processing company, he learned the use of leverage and began building what would become a $4 billion empire.
In 1985, with financing provided by Drexel, he bought Northwest Industries, a troubled industrial giant with aerospace, apparel, chemical and defense holdings, for about $1.4 billion. He sold many of its assets to pay the debt incurred on buying the company and focused on Northwest’s Fruit of the Loom division.
In February 1989, Farley agreed to buy West Point Pepperell, the nation’s biggest textile and apparel maker, for $2.5 billion in one of the most acrimonious hostile deals of the decade. But he was unable to buy the last 5 percent of the company’s shares after the junk bond market collapsed beneath him.
Without 100 percent ownership, Farley cannot sell assets to raise the $83 million he needs to buy the last million shares, and he is trying to work out a debt-restructuring deal with junk bond holders to avoid bankruptcy court.
At the other end of the spectrum is Ronald Perelman. Perelman, the 47-year-old son of a Philadelphia conglomerateur, stepped out from under his father’s shadow in 1977 by borrowing $1.9 million from a bank to buy an unprofitable chain of jewelry stores.
In 1980, he became one of the first raiders to be bankrolled by Drexel and used a $35 million junk bond offering to pay for the $50 million purchase of licorice and chocolate maker MacAndrews & Forbes. In 1982, Perelman bought Technicolor Inc., a movie processor, for $135 million and collected a $780 million profit when he sold it six years later.
With Drexel’s help, he raised $761 million and made his first big-time run — a hostile offer for Revlon in August 1985. After a bitter battle with Revlon’s chairman, Michel Bergerac, Perelman paid $1.8 billion for the cosmetics maker.
Since then, Perelman has settled down, marrying TV gossip Claudia Cohen and giving up the love-’em, leave-’em life of a raider to become a Revlon devotee. He has stripped away unwanted assets, such as a health care business — and operating income at Revlon has surged.
