The Predators’ Ball (43 page)

“So,” Milken summed up, “the opportunities are there. The question is—who sees the value?” A rhetorical question if ever there was one.

Milken heralded the return of the owner-manager, back in American corporate life after an absence of thirty or forty years. This had been Milken and Joseph's tenet, from the time they started raising debt for their junk issuers back in 1977. They had wanted those clients to have significant stakes in their companies. In 1980–81, three key Drexel clients, Meshulam Riklis, Carl Lindner and Saul Steinberg, had each taken their companies private, in the ultimate extension of the owner-manager philosophy. And then the mammoth LBOs of the mideighties—largely financed by Drexel—had further amplified the trend.

On another occasion, in 1986, Milken pointed to the Beatrice buyout as an example of the efficiencies that can be wrought by owner-management. “Why is this company worth fifty dollars a share three months after the company decided to sell stock at thirty-two? This company spent hundreds of millions of dollars on things an owner-manager might not spend money on. The company spent as much as seventy million dollars a year sponsoring races. Elimination of seventy million dollars a year in cash outflow increases your value by half a billion dollars a year.

“The company spent thirty to fifty million dollars on corporate-image advertising, so that people would know what a Beatrice was. Maybe as an owner you feel it is not important to know what a Beatrice is. You think knowing what Tropicana orange juice and Samsonite luggage [Beatrice products] is is good enough. And so there you can add another three to four hundred million a year.
Corporate-home-office overhead was two hundred twenty million–plus a year to run a twelve-billion-dollar business. Esmark [purchaser of Beatrice] ran a six-billion-dollar business on a twenty-three-million-dollar corporate-overhead level.”

Milken speaks extemporaneously. He usually scribbles a few notes on his way to his speeches, but he only glances at them. He never gropes for a number; the facts and figures pour forth, as effortlessly as though on a computer printout. The set of his jaw is as taut as his delivery. While he strives occasionally for some humorous one-liner, he is most himself when he is serious, hammering home one purposeful point after another. But at his February 1986 speech in Boston, to a group of high-yield-fund money managers whom he first had courted back in the late seventies, he did make one remark, lighter than the rest, that seemed to engage his fancy.

“There are at least five hundred people in this country worth one billion dollars,” Milken said intently. Skip a beat. “That gives us all something to shoot for,” he added, with a smile of pleasure that told his listeners he was already over the mark.

I
N THE FALL OF
1986, the Street was filled with Milken imitators. They underwrote junk bonds, cutting the once-secure 3–4 percent fees, and sometimes to Milken's fury they beat him out on a deal. Now they were offering bridge loans in an attempt to cut into his buyout and takeover business. But try as they might, what they could not do was
be
Michael Milken.

They did not have the storehouse of knowledge about this market that he had built since his earliest infatuation with it in the sixties. Much of that knowledge he had fed into his computer system which, as he liked to say, “shows who owns securities, when they bought them, where every security might be in the Western world.” They did not have Drexel's portfolio of about $5 billion in junk, more than ten times larger than any of theirs. And, most important, they could not sit out in Beverly Hills at Milken's NASA-like console of direct phone lines to buyers whom he had cultivated, enriched, in many instances created—buyers whose commonality was that they owed him—and parcel out billions of dollars of bonds among them in pieces of $25 million, $50 million, $100 million, more. In that, he was inimitable.

In December 1985, Drexel had backed the bid of GAF, a chemical and building-materials company controlled by its chairman, Samuel Heyman, for Union Carbide, a chemical giant more than ten times the size of GAF. Drexel had said it was “highly confident” that it could raise $3.5 billion—the largest “highly confident” claim up to that time.

Ultimately, GAF chairman Samuel Heyman decided to stop
raising his bid and to sell into Union Carbide's defensive counteroffer (made to all shareholders), thereby reaping a profit of $250 million for GAF. He stopped, he would later say, because he thought the price had simply gotten too high to make good business sense. Milken and Drexel had wanted him to go higher, and had assured him that the firm would raise the additional financing required to top the Union Carbide recapitalization offer.

Heyman recalled going out to see Milken in early December 1985, a few days before GAF announced its offer. “I wanted to look him in the eye in order to take the measure of his confidence level in getting the job done. He gave me his personal assurance that he would be able to raise the financing, and he reviewed with me a list of individual and institutional investors who had customarily participated in similar Drexel transactions, and indicated which ones he thought would be likely purchasers of the Carbide issue. Within three weeks of that meeting, Mike had delivered to me on New Year's Eve signed commitments for three and a half billion dollars from substantially the same list of buyers he had earlier predicted would be interested in the deal.

“Considering the mammoth size of the financing, that it was a complicated hostile transaction, and that it was accomplished in three weeks over Christmas vacation, it was a herculean effort,” Heyman concluded.

C
APITAL, AS
M
ILKEN LOVED
to say and to prove to the world, time and time again, is not a scarce resource, indeed. But there had never been quite so much at his fingertips as there was by the fall of '86. This was a tribute to his money machine, which had of course flowed most copiously at its fount but had also spread its abundance, increasingly, through all its parts.

First Executive and Columbia Savings, both of which Milken had an equity stake in, as well as pride of authorship, had flourished and continued to gorge on the junk bonds that had transfigured them. By the fall of 1986, Thomas Spiegel was investing at least $3 billion of Columbia's $10.2 billion in assets in junk. And that was conservative compared to Fred Carr, who was investing in junk about $7 billion, roughly 60 percent of First Executive's assets. In a sense—considering the enormity of their investments and their closeness to Milken—these institutions functioned as his merchant-banking arms. (Some who understood this relationship found it
amusing that a branch office of Columbia Savings should be on the second floor of Milken's building—which was locked, and could not be entered except with clearance.)

On a smaller scale, others in this game had also prospered. Money managers who had started in the late seventies with $50 million or $200 million to invest in Milken's junk bonds were now managing portfolios of $1–2 billion. James Caywood, for example, who had been managing money for American General when Milken visited him in Houston in 1978, was now running his own fund, Caywood-Christian, which had about $1.5 billion of mainly S&L money. Howard Marks, who had been managing money at Citibank in New York when he came out to visit Milken in Century City and concluded that Milken's shop should be a Harvard Business School case study, was now managing about $1 billion (some of it First Executive's) at Trust Company of the West. And David Solomon, who had started out at First Investors when it was a fledgling in junk and then had become by 1978 the giant of the high-yield-fund buyers, with about $500 million to invest, was, by 1986, running his own fund, Solomon Asset Management, and investing about $2 billion.

Then there was the Milken placement service. “Michael is known for placing people who lose jobs, or who want to change jobs,” commented one rival. “That way, he gets the reputation for loyalty, and he also has all these different pots to draw upon. It's a double whammy.”

Mark Shenkman, who had first met Milken in 1977 when he was an equity-portfolio manager at the Fidelity Fund in Boston, became the portfolio manager at First Investors after David Solomon's abrupt departure in 1983. Shenkman left First Investors in the spring of 1985. For a brief interim period of a couple of months he advised Ronald Perelman on how to invest (mainly with Drexel) the money Drexel had raised for him in its blind pool. Then, in the early fall of 1985, he opened up Shenkman Capital Management—with Albert Fuss, of Drexel in London, as his 24 percent partner. By the fall of 1986, Shenkman Capital Management had about $500 million to invest.

Shenkman also was now investment adviser for two Drexel offshore funds for foreign investors—Finsbury and Winchester Recovery. Finsbury was a general high-yield fund; Winchester Recovery invested only in bankrupt securities (Milken's specialty, from the
early seventies). Shenkman and David Solomon each were managing 50 percent of Finsbury. By having ostensibly independent managers, Drexel avoided the conflict-of-interest problem it would have had if it had put its own new issues into these funds.

And for Drexelites who wanted to leave the firm (and were doing so on friendly terms) Milken often found or created new situations. Thomas Sydorick, whose brother, David Sydorick, was one of Milken's troops in Beverly Hills, worked briefly at Drexel in New York and then decided he wanted something different. He became the manager of a $300 million junk portfolio at Coastal, a thrift in L.A. “No one ever really has to leave Drexel, that's what is so great about it,” Thomas Sydorick declared. “If you say you're tired, you want a change of pace, they say, ‘Fine—we can put you over here.' ”

Joan Conan had moved out from New York to join the Milken group but never made the adjustment to California and wanted to return home. Milken is said to have helped her find a job at the Equitable, where she was now, in '86, running a $2 billion fund, investing mainly in buyouts.

Another of the old-timers, Dort Cameron III, who had been with Milken from the Drexel Firestone days, left Drexel in 1984 to join the Bass Investment Limited Partnership, subsequently renamed Investment Limited Partnership, in Greenwich, Connecticut. He did it with Milken's blessing and some of his money. Cameron's partners there were Drexel, the Bass family and Richard Rainwater, who was the Basses' chief deal-maker until he went independent in 1985. By 1986, Cameron had at least $2 billion to invest, mainly for LBOs.

Gary Winnick, who had joined Milken's group in 1978 and had become one of his key salesmen, followed in Cameron's footsteps. In 1985 Winnick moved across the street from Milken's Beverly Hills office to open Pacific Asset Holdings. Winnick invested about $30 million, a Drexel Burnham group put in $40 million, and the Bass family and related entities put in $45 million. With that equity base, slightly less than $500 million of junk debt raised by Drexel, and bank borrowings, Pacific Asset had over $1 billion.

Both Pacific Asset and ILP are structured in ways that ostensibly limit Milken's and Drexel's role in decision-making. At Pacific Asset, for example, the two general partners are Winnick and Richard Sandler, Milken's ubiquitous lawyer and his brother's boyhood friend, who appears in so many Milken partnerships. Winnick needs
the approval of Sandler, his general partner, for certain transactions. The strived-for illusion here, of course, is that Sandler is something other than Milken's proxy.

It is no different from Belvedere, the firm in which Milken owned the majority interest but was only a limited partner—and thus when asked about it in an SEC deposition could profess general ignorance about its operations, pointing to his limited-partner status. This was, in fact, the position he took in a 1985 SEC deposition with regard to all the limited partnerships in which he was an investor. “I don't have, you know, investment authority for any of these accounts,” Milken testified. Questioned again on this point, Milken testified, “I would not make the investment decisions, correct.” The idea of Milken allowing his control over his investments to be so usurped, however, is simply not believable. Indeed, Otter Creek, that early investment partnership for his group, had a revolving investment committee of three Milken group members who theoretically made all investment decisions. Said one former member of Milken's group who served on that investment committee, “I never made one decision. It was all Mike.”

Cameron and Winnick had done their hard time with Milken, accumulated many millions, and then moved out to augment their fortunes as Drexel adjuncts. But probably no one else joined Drexel, was relocated in a satellite group, and made his fortune, in as short order as did Guy Dove III.

Dove had worked at Drexel Firestone in the early seventies. He had left Drexel and bounced through four other firms. When, in 1982, he was rehired at Drexel in Washington, D.C.—where he did some selling for Milken—Dove had just signed a consent agreement with the SEC. The SEC alleged that he had sold stock short on inside information for a profit of $22,906.25, which he was made to disgorge.

Dove had been an institutional salesman at Schroder Capital Management when he did the trades that were the subject of the consent decree. After signing it, he realized—according to Schroder's then senior vice-president Howard Cuozzi—that he would neither move ahead nor make more money at Schroder. So he went to Drexel. Cuozzi recalled, “Guy was always really aggressive in his own account—not like the rest of us money managers. We might have tried to enhance our personal wealth now and then, but he was
really
aggressive.”

In 1984 Dove moved to California and went across the street
from Drexel to be chief investment officer at Atlantic Capital. This was the Atlantic Capital that committed to buy bonds in Icahn's bid for Phillips, in Peltz's and May's for National Can, in Perelman's for Revlon. In the $725 million that Milken raised for Revlon, Atlantic Capital (through its various subsidiaries) committed to buy $130 million of the bonds. In the $3.5 billion of commitments that Milken had collected for Heyman in his Union Carbide bid, Atlantic Capital had come in for $155 million. This was the ubiquitous Atlantic Capital. In the Drexel megadeals of 1985, it was among the biggest buyers, if not
the
biggest.