The Predators’ Ball (20 page)

Here, Knapp presumably had the $15 million he committed to invest—but he nevertheless backed out of the deal at the last minute, when it was time to fund the deal. “We couldn't find anyone to replace him on such short notice,” Malanowski said, “and we couldn't let the deal crater. So Drexel came in for the preferred, just to save the deal. It was done so fast that there wasn't even time for it to go through the UAC [Underwriting Assistance Committee, which is supposed to approve all financings the firm does].” Drexel bought $10 million of the preferred, and the other $5 million of Knapp's portion was bought by Atalanta/Sosnoff Capital Corporation,
a money-management firm which has over $5 billion under management and is run by veteran investor Martin Sosnoff.

According to documents filed with the SEC, Carl Lindner (through American Financial) not only bought the biggest piece of the preferred but also assumed the lead in the debt portion of the deal, committing to buy $50 million of senior notes. The next-largest commitment was made by Sallis Securities Company—which was Fred Carr, of First Executive, using a “Street name,” or pseudonym—coming in for $33 million. After that came more heavy chunks, of $20–25 million, by more disguised buyers: 338 Rodeo Corporation, which is Thomas Spiegel's Columbia Savings and Loan; and Worldwide Trading Services, which is Atlantic Capital. By early 1985, Atlantic Capital—a private investment company just across the street from Milken's Beverly Hills headquarters, its investment portfolio run by a former Drexel employee named Guy Dove III—had amassed about $3–4 billion of mainly municipal funds to invest. Over the next year or so, this secretive organization would probably be Milken's single largest source in the hostile megadeals—his private pool in the woods.

After these classic high-rollers came an assortment of corporations, insurance companies, thrifts, mutual funds, a couple of individual investors, a bank trust account. One of these buyers, experienced in the junk market, said that he bought because of what he had heard about Posner's actions. “Victor was in no condition, half dead, but he was still bidding,” says this buyer. “He let it [National Can] go with his last gasp. He obviously thought it was a gem—and the guy's not stupid.”

There was Ronald Perelman (MacAndrews and Forbes), paying his dues before his mega-blind-pool offering three months hence, committing $7.5 million. And faithful Meshulam Riklis (Schenley Industries), coming in for $10 million. Riklis said, “I didn't know anything about Peltz, anything about the company. I bought the ten million dollars of bonds because Mike was offering them.”

Knapp was apparently not the only buyer to appear on the commitment list submitted by Drexel to the SEC who was replaced by different buyers by the time the offer was funded, several weeks later, according to a source at National Can. Investment banker Alan Brumberger of Drexel says substitution happens fairly often in the hostile deals, when speed is of the essence. “Someone will say, ‘I'll come in for fifty [million], but I'd like to get down to twenty-five
[million].' And then they're replaced.” They still make the commitment fee, for having signed on.

According to one SEC attorney, it is lawful for substitution to occur as long as amendments to the original 14D document (which lists the buyers, the type of securities and the amount) are filed so as to keep disclosure current. At least in this deal, no such amendments were filed.

Probably more serious, in terms of noncompliance with SEC rules, is the way these bonds changed hands after they were bought. Though the debt in the big hostiles was raised through private placements, the bonds were issued with registration rights and were supposed to be registered with the SEC within a timely period, generally three to six months. Then they would become public securities and could be traded freely. Until that time, the underwriter could sell the bonds only to sophisticated investors who stated that they were buying the bonds for investment purposes, not with an eye to reselling them. The purpose of this regulation is to prevent a widespread distribution of the bonds, which would effectively circumvent the registration requirement.

Here, the securities were not registered for about fourteen months. “There was so much else going on, we just didn't get around to it,” May said. This delay did not seem to impose any undue hardship on his bondholders who may have wanted to trade out of the bonds, however, since they did that anyway.

By the time the securities were registered, only one of those who had originally committed to buy the senior notes was among the fifteen holders of those notes (although three of the fifteen holders were Lindner-affiliated insurance companies, holding about $38 million, which might have been part of his original $50 million). Of the seventeen senior subordinated note holders at registration time, only four were members of the original group. And of the nineteen subordinated bondholders, only three belonged to the original group.

In sum, at least four fifths of the bonds in Triangle–National Can had changed hands at least once by the time they were registered. According to one former Drexel employee, this was no anomaly but paradigmatic, and fundamental to the smooth functioning of Milken's machine. “The way the game works, the first people to get the deal are the friendly, docile, captive accounts,” this man says. “Then they'd move into a second tier, obviously at a higher
price. So the first group got the premium, for being less shy. The docile ones served as warehouses [until Drexel was ready to move them to the next tier]. Everybody knew that Carr's account, for example, did. They [Milken's salesmen] would call Fred up and say, ‘We're buying [whatever] today,' and he'd say, ‘OK, what are you paying?' ”

In this deal, many of the bonds had moved out from the first-tier buyers into the portfolios of insurance companies big and small (from Prudential Insurance Company of America, with assets of about $134 billion, to Guarantee Security Life, a company with assets of about $370 million), bank trust accounts, thrifts and even a few blue-chip companies like Conoco and Atlantic Richfield.

Seen in the larger context of Milken's machine, this mass movement of privately placed bonds was sublimely purposeful. It meant that the first-tier high-rollers, the most crucial players, were kept happy not only with the commitment fees but with the profits upon trading. It meant that they were also quickly freed, to go on to the next megadeal. It meant that the more risk-averse, who didn't want to go through the exposure and aggravation of being publicly identified as financing junk-bond takeovers and subpoenaed for depositions by the target's lawyers, were still enabled to play the game—although they paid a price for their reticence. It meant that there really was liquidity, for anyone who wanted to get out before the bonds were registered. And it meant that Drexel had a virtual monopoly on the secondary trading, since no rival had enough information about the bonds or their whereabouts to compete effectively.

Those were the advantages. The only disadvantage was that it may have been illegal—or at least pushed the outer limits of the regulations. While four fifths of the bonds changing hands as they did in Triangle–National Can is suggestive of the kind of widespread distribution the rules were designed to prohibit, as long as those investors were sophisticated and would testify that they had not bought the bonds with an eye to reselling them, but had later changed their minds, no illegality would be established. To prove illegality, the government would at least have to show by a pattern of repeated instances of such movement—as appeared to have been institutionalized at Drexel, from the first-tier to second-tier buyers—that it was deliberate and predetermined, and that the investors were indeed buying with an eye to reselling.

This mass movement of privately placed bonds was not unlike Drexel's 3(a)9 deals. Both were brilliant adaptations that made Milken's machine, an engineering marvel of synchronous and complementary forces, function more efficiently, more powerfully. Both were the kind of innovation that in Drexel's heyday its boosters might have pointed to as an example of the firm's creativity. And both showed Drexel's apparent willingness to treat the law as if it were a stultifying system of rules and regulations meant for the world's less able.

A
S SPEEDY AS
Milken was in raising the commitments from his obliging first-tier buyers, the Triangle offer was just under the wire. “I came in with twenty-four hours to go [before the deadline for tendering shares into National Can's own offer]. It would have been
his
company,” Peltz declares, referring to Considine. With the offer about to be announced, Peltz, hopeful that a friendly deal could be negotiated, went to Chicago to see Considine. The CEO was noncommittal. The board would consider the proposal, he said. In fact, as Peltz feared, Considine was attempting to obtain financing to top Triangle's bid.

Just a week later, on March 27, Peltz and May arrived at the 1985 Predators' Ball. Peltz, too inconsequential, had not been asked to give a presentation. He wandered around, buttonholing anybody who he thought might know something. He asked Donald Drapkin, a Skadden, Arps lawyer, who had come to the conference with his friend and key client Ronald Perelman, and whose partners, led by James Freund, were representing the management of National Can. “What have you heard?” Peltz demanded. “What are they doing? Can you call someone?”

“I was a nervous wreck,” Peltz recalled. “Everybody kept coming up and congratulating me, but I was a total basket case.”

At Don Engel's celebrated party in Bungalow 8, Engel introduced Peltz to Gerry Tsai, then vice-chairman of American Can; and Peltz, the wistful can magnate, made his first overtures. Also at that party was William Farley, who had recently joined the growing group of Drexel takeover entrepreneurs. (In May he would launch a successful raid on Northwest Industries, in Chicago.) “Farley told me that he knew Considine, and that Considine felt more rapport with me than Nelson because at least I'd gone to the University of Chicago,” May remembered. Later, in the Polo Lounge of
the Beverly Hills Hotel, Drapkin taunted Peltz, saying, “Considine doesn't like you, Nelson. He likes Peter.”

“I'm sure the truth was that he didn't like either one of us,” May said. “Frank is a real gentleman, and he plays everything very close to the vest, so he's never said. But I'm sure that he thought of us as two Jewish guys from New York he'd never heard of, and we were the last thing he wanted.”

L
ESS THAN TWO
weeks later, on the night of April 4, the merger agreement was ready. Peltz had gone to $42 on his own and outraged his Drexel bankers. Then—unable because of Milken to go up another dollar—he had come up with the idea of a $4 million bonus pool for the employees (“I said to Considine, ‘I don't need my bankers' approval for this, because it will come out of earnings . . .' ” he recalled). And after some further negotiations, in which Peltz agreed to stipulate that National Can would stay in Chicago and he would not strip off assets, all that remained was the signing.

Peltz was nervous and exhilarated that night. “I was sitting in the National Can offices with May and Lovado [chief financial officer of Triangle], and I said, ‘You guys excited?' Lovado said, ‘Don't ask me. I'm just a bean-counter.' ”

For Considine, the experience was also intense. He had had a heart attack a couple of years earlier, and that night, as the documents were being finalized, he recognized recurrent symptoms. He went home, leaving his chief financial officer, Walter Stelzel, to sign the agreement.

Considine, who had hoped to do the management buyout, topping Triangle's offer, said that Citicorp had indicated that they had the financing all but ready. But at the last moment, with Triangle's offer only a couple of days from expiration, Citicorp had backed out. “We wasted four or five days that might have made the difference with someone else,” he said ruefully.

Then, referring to the ease with which Drexel had raised the money, virtually overnight, he added, “We weren't in the network. If we had been, we could have done the deal ourselves.”

B
Y THE FALL
of 1986, it was clear that the paper miracle of Triangle–National Can had assumed proportions that exceeded any of its architects' expectations. All the elements that make for success in this kind of superleveraged transaction converged. In the general
economic environment, interest rates dropped dramatically and the stock market went up; at National Can, earnings rose, its stock price quadrupled—and management, which was excellent, stayed.

In the familiar catch-22 of Wall Street, however, the feat, once so demonstrably successful, could not be replicated, though it was much imitated. In October 1986 Drexel's David Kay commented, “Today you couldn't do a National Can. Then hardly anyone had beaten out a management LBO, no one knew how it would work. Now there's a feeding frenzy the minute one of these deals is announced, like Warnaco [where in the spring of 1986 management announced it was taking the company private, and a bidding war ensued that drove the price up to a point where Drexel's bidder finally stopped].

“There's too much money chasing too few deals,” Kay lamented.

In the spring of 1985 Drexel had raised a total of $595 million for the acquisition of National Can—$395 million for the acquisition itself, and another $200 million for the payment of its bank debt. By September 1986, thanks to falling interest rates, the rising stock market, and the company's performance, only about $80 million of that original debt remained outstanding. The rest had been retired with money from a new bank line, and from an offering of convertible debentures and convertible preferred, which were later converted into common equity. Some of the original debt, then, had been turned into common equity, and the bulk of what remained had been refinanced at 8–9 percent instead of 14–16 percent. These refinancings brought Triangle's annual interest charges down from about $85 million to about $35 million.