Read The Very, Very Rich and How They Got That Way Online
Authors: Max Gunther
It was a gorgeous example of the clever use of OPM. Ling had obtained something for nothing. The whole dazzling deal cost him hardly anything beyond the purely clerical and procedural expense involved in the stock issues.
Many another man would have stopped right there. Ling personally owned hundreds of thousands of LTV Inc., shares, plus thousands upon thousands of warrants to buy more shares at prices below the market price. With LTV’s stock price skipping upward so joyfully, he was growing richer by the day. In some weeks he found he was more than a million dollars richer at the close of trading on Friday than he had been when he woke up on Monday. Many another man would have rested.
But it seems to be characteristic of the very, very rich that money alone doesn’t make them happy. Ling, in the middle 1960s, was quite wealthy enough to retire to some peaceful Eden of his choosing. He had no real need to do any more work ever again.
“But anybody who thought he’d quit,” says one of his financial publicity men, “didn’t know the man. To Ling money is only the way you keep score. What he likes is the game itself. He’s 200 pounds of pure aggression. If he were ever forced to retire, he’d shrivel up like flowers in November.”
Instead of retiring, Ling went after Wilson and Company.
Wilson was a huge old company, a sort of conglomerate in its own conservative way, with about a billion dollars in annual sales derived from three main businesses: meat-packing, sporting goods and drugs. In terms of sales it was twice LTV’s size. The irrepressible Jim Ling determined to acquire it.
How on each? By using OPM, of course.
Wilson was what Wall Streeters call undervalued – meaning that in relation to its earnings and in relation to other companies in similar lines of business, its stock was trading at a low price. The reasons were manifold, but notable among them was the fact that Wilson had always been a quiet company. It didn’t ballyhoo itself or its stock as much as did most of its competitors. Investors weren’t paying much attention to it.
Wilson’s stock price was low enough so that Ling figured he could buy a controlling interest for only $80 million. (
Only
is a relative term, of course.) Where would he get the $80 million? By borrowing, using LTV’s own soaring stock to back up his credit.
He borrowed, bought some of the Wilson stock on the open market, got the rest through a tender offer to existing shareholders. Wilson thus became part of LTV. But LTV was now in debt to the tune of $80 million, and Ling’s next problem was to get out from under that burden. His approach to the problem took Wall Street’s breath away. It was perhaps the cleverest of all Ling’s clever uses of OPM.
He transferred the major portion of the debt into Wilson’s books. That is, he engineered the situation so that, technically speaking, the money was owed by Wilson rather than by the parent company. Then, as he had done before with LTV itself, he split Wilson into three separate corporations along the company’s natural product lines – Wilson and Company Meat Processors, Wilson Sporting Goods and Wilson Pharmaceuticals. (Wall Street promptly dubbed these three companies Meatball, Golfball and Goofball.) Each of the three new companies was authorized to issue its own stock. The bulk of the new stock became the property of the parent company, LTV, Inc., and the rest was sold to the public. The money brought in by the public sale was enough to pay off almost all the debt that had originally been transferred to Wilson’s books.
Wall Street was stunned by the brilliance of the maneuver. Ling had managed to acquire a giant company without using, in the end, more than a few spoonfuls of his own company’s money.
But the best was yet to come. Investors bid up the prices of Meatball, Golfball and Goofball stock, motivated partly by the knowledge that Ling was at the helm. LTV, Inc., held more than three-fourths of the three Wilson companies’ shares, and as the stock prices went up, so did the companies’ value as entered in the parent’s financial statements. In the end LTV’s holdings in the three companies, in terms of market price, were worth nearly twice what the old Wilson and Company had been worth before the takeover. And once again, of course, the trading price of LTV shot up.
Jim Ling, the onetime teenage bum, was a Wall Street legend in his mid-40s. Around the stock exchanges and in the bankers’ clubs they were predicting he would next try to buy Bell Telephone. He planned to split it into several separate companies, so the story went. The first would be called Ting-a-Ling, the second Ting-a-Ling-a-Ling. . .
That story wasn’t accurate, but Ling was preparing other moves that were nearly as stunning. Throughout the late 1960s, using OPM as cleverly as before, he took one company after another into the amazing LTV family. One was Greatameria Corporation, which in turn owned Braniff Airways, National Car Rental and a string of insurance companies. Another was Jones and Laughlin Steel.
And then came 1969 and 1970, the years of the bear. It was almost to be expected that a company such as LTV, built on a complex framework of equity financing, would experience trouble when the equity markets turned sour. LTV did more than experience trouble. It nearly collapsed.
Ling was in the midst of various new gambits when the markets crashed. Stock prices of the parent company and all its children fell like winged ducks. Ling-style moves that depended on high stock prices had to be abandoned. Debts that were to be paid off through these moves could no longer be paid. Interest costs mounted. Meanwhile, the day-to-day operating earnings of the subsidiary companies were dwindling in the general business slowdown. Braniff fell into a pit of black despair along with most other airlines. Wilson Sporting Goods watched its customers vanish in droves. The structure Ling had built was crumpling beneath him.
LTV’s stock price had reached the dizzy height of $135 in the glorious days of 1968. Now it went down, down, down as though it would never stop. Finally, in 1971, it crunched to a shuddering halt at a fraction above $9. As this book goes to press, it is wavering about in the general area of $10 to $20. Nobody seems to want it anymore. It almost never makes the “most active” list and on many days could compete successfully for inclusion among the least active. In the opinion of some it is a dog.
The ride is over.
For the time being, at least.
About 20 years ago a writer named Thomas Ewing Dabney completed a biography of hotel magnate Conrad Hilton. Since Hilton was then 60 years old, Dabney had every right to guess he had pinned down his subject at or near the end of the story. After all, reasoned Dabney, a man who reaches his 60s with millions of dollars in his bank account can be expected to slow down and coast toward retirement, right?
Wrong. The title Dabney originally picked for his biography was
The Man Who Bought the Plaza
, referring to New York’s Plaza Hotel, one of the world’s leading society hangouts. The book was all ready to go to press when Hilton pulled off a still bigger coup, the biggest in his career up to then: He bought New York’s Waldorf-Astoria Hotel. If the Plaza was a queen among hotels, the Waldorf was the empress. Dabney and his publisher hastily pulled their book off the press, added a new chapter and changed the title to
The Man Who Bought the Waldorf
.
Not long after the book was published, Conrad Hilton obsoleted his harried biographer again. This time he bought the entire Statler chain of hotels. He paid $110 million. As far as anybody knew, it was the biggest single real-estate transaction in history.
Conrad Hilton, today past 80, still doesn’t seem ready to retire as this book goes to press. He may yet obsolete us as he did Dabney.
Hilton is a man who obviously loves his work. Like others we’ve met and are to meet in this gallery, he is not attracted by the idea of idle luxury. He long ago accumulated more money than he could conceivably spend. He could have retired in the 1940s and lived ever after in kingly comfort, never again stirring from poolside or armchair. But he couldn’t stay out of the game.
His game was real estate – specifically hotels. He bought them, built them, ran them, tinkered with them, sold them, manipulated them like gigantic chess pieces. He did all this mainly through the clever use of other people’s money – a technique we studied in the two previous chapters.
The story that follows doesn’t say where he came from or how he got his start; so we’ll sketch his seedling period briefly here. Conrad Nicholson (“Connie”) Hilton was born in New Mexico on Christmas Day 1887. His father ran a variety of small-town businesses, including a rickety little hotel. These businesses had their ups and downs. They were on the downward leg of a cycle when the senior Hilton died, and young Conrad’s inheritance was a couple of thousand dollars. Putting this inheritance together with a small wad of cash he’d gathered on his own, the young man set out to seek his fortune with about $5000 to his name.
He was interested in small-town banks. He and his father had been fellow stockholders in a tiny bank (capitalization: $30,000) that they had organized in their own town. Having a thorough knowledge of banking and an acquaintanceship with several old New Mexico bankers, young Hilton knew he could make his little bundle of seed capital go a long way. He could use it as a basis for borrowing. If he found a business property he wanted to buy, he could offer his $5000 as a down payment and go to the banks for tens of thousands more.
And so he went out looking for a small bank to buy. As it turned out, he didn’t buy a bank. He bought a hotel.
The folksy tones that follow are those of Hilton himself, recalling his career for a
Nation’s Business
interviewer.
When the Puerto Rican government wrote a half-dozen hotel executives back in the Forties asking if they were interested in building a hotel in San Juan, Conrad Hilton began his reply, “
Mi estimado amigo.
” He enthusiastically outlined his conditions in the language spoken on the island.
Writing in Spanish struck just the right note and helped persuade the Puerto Rican agency that he should operate the hotel. He also shrewdly laid down terms that would set the pattern for what is now a richly rewarding international hotel network.
Conrad N. Hilton is a dreamer who makes his dreams come true. In 1919, with his limited funds pinned inside his coat, he went to Texas and made his first hotel purchase.
Today . . . Mr. Hilton is chairman of Hilton Hotels Corporation and president and chairman of Hilton International Company. Some 67 hotels, from Trinidad to Tel Aviv, currently fly the Hilton flag. He now has more hotels abroad than in the United States. Domestic operations grossed $187 million last year, while the International Company took in $94 million.
Conrad Hilton had been known as the man who bought the Waldorf – the ultimate symbol of the stature of a hotel-man. Then, in 1954, he acquired the Statler hotels in a dazzling real-estate deal that cost seven times the price of the Louisiana Purchase.
An example of his ingenuity in making the best use of his assets was his creation of the 9000-square-foot Williford Room in the huge Conrad Hilton Hotel in Chicago. He got the room by dividing another room in half – horizontally. By building a new floor halfway between the original floor and the extra-high ceiling, he produced another badly needed room literally out of thin air.
Still the tall, erect, gracious host, Conrad Hilton reviewed his remarkable success saga in an interview with
Nation’s Business
in his elegant office in Beverly Hills. Here is his story:
Your first experience in the hotel business goes back to when your father had a boardinghouse-type hotel in the New Mexico Territory, doesn’t it?
That was a rather limited experience. There were eight children in the family, and my father kept adding on rooms as the family grew. Then, as we went off to school, he found some rooms on hand and established this hotel. But the first hotel that I had was in Cisco, Texas – the Mobley Hotel.
My father was a pioneer settler in this little town of San Antonio, New Mexico. I think when he started off, his merchandise consisted of a jug of whiskey. Maybe he had a bolt of calico to go with it. Anyway, he was a very industrious man, and with what he earned, he grubstaked this fellow who hit coal.
So he had this coal mine, and gradually, in this little community, my father was giving employment to virtually everybody: people in the coal mines, people to haul the coal. He bought the farmers’ produce, he had the store, he had the post office, and eventually we had a little bank and this little hotel.
I personally established the bank. That was my idea.
This was one of your first dreams – to be a banker – is that right?
Yes, but after the First World War was over, my father had died, and I didn’t know what I wanted to do.
An old friend, Emmett Vaughey, was very ill in Albuquerque, and I went up to see him. I remember his words very well. He said, “I am not long for this world. The good Lord is going to take me soon, but if you will go to Texas, you will make your fortune.”
Now, this advice – almost an order – from a man about to die so impressed me, I decided to do it.
So I did – still not knowing what I wanted to do, whether I wanted to go into banking or what. I stopped off first at Wichita Falls, Texas, and I went in to see a bank and the owner said, “I wouldn’t sell you this bank at any price.”
Now, when I speak about buying a bank, it had to be a small bank, you see. I didn’t have a lot of money; in fact, I had about $5000. But I had credit.
The fellow in Wichita Falls said, “Why don’t you go down to these southern oil fields? There is a booming town there, and I think you could find a bank down there.”
So I landed in Cisco, Texas, in the midst of an oil boom, and I found a bank for sale for $75,000.
So I thought, “Well, this is just about my size.” I checked with a banker over there that I had known before. He was in El Paso, and I did most of my banking with him.
He said, “You damn fool! Go ahead and buy the bank. That is a good deal. Draw on me for all the money you haven’t got.”
So I went back to Cisco, and I sent this fellow a telegram: “WILL TAKE BANK.” I was dreaming big. This would be the cornerstone on a banking empire in Texas. I was even too impatient to bargain; He sent me back a telegram: “PRICE RAISED. WILL NOT ACCEPT LESS THAN $80,000.” I was furious. Here, against all my instinct and years of experience haggling and trading when working for my father, I had met his asking price, and he had raised it.
That night I went over to this little hotel – the Mobley Hotel – and what a lot of bustle: everything busy and people waiting to get a bed for eight hours. They’d turn over three times in 24 hours. I introduced myself to the owner of it, and I said, “You seem to be doing a good business.”
He said, “I am doing a fine business, but I could make more money out in the oil fields.”
I said, “Would you sell this hotel?” trying not to appear too anxious. He said, “I might sell it a little bit later.”
So I said to myself, I am going to buy this hotel. And I did.
Now, that is how I started.
So it was a bustling town, they were turning over those beds pretty fast, and you looked at the books and decided this was good proposition, right?
I saw that it was much better than banking. I hadn’t taken over the hotel 24 hours before I decided, This is what I am going to do. This is my life.
It was set right there?
Right there I made up my mind I didn’t want anything else. That was in 1919. Certainly, the banker raising the price $5000 steered me off banking. But what really did it was going over there and seeing the bustle, having the owner tell me about all the business that he was doing, how the trains were coming in there at night and the money that he was making. When he showed me his books, I figured that I could get all of my money back in one year.
We didn’t have any income tax then; so what a deal that was!
Imagine getting our money back today in a year. Today you have to figure on getting it back in 20 years. That is what it takes us with taxes and labor costs. So the hotel business is not as lucrative today as it was in those days.
I hit on a couple of major principles for operating hotels at the old Mobley.
What were they?
I saw, around the hotel, we were not getting what we should out of the space. So I changed it, and I have kept that as rule throughout my life, to find out what is the best use I could make of space. You see, you can either lose your money or you can make it, depending upon whether you know what the public wants. You have to know that and give them the most in the space available.
I figured out that customers at the Mobley could get food someplace else and that they didn’t need the hotel dining room. So we put beds in there. We were making no money on the food, and the rooms were in terrific demand. Today you might find that the best use of space is in a restaurant.
Another thing was building
esprit de corps
among the help. We got all the employees together and told them that they were largely responsible for whether the guests of the hotel were pleased and would ever come back. I have done that throughout my life.
What do you feel is your greatest accomplishment in your career? Getting the Waldorf?
Well, I would say that the important things that I did in my life, insofar as the hotel business is concerned, were the purchase of the Waldorf and Statler hotels and the inauguration of the international hotels. I felt, from the knowledge I had, that we had certain advantages in the international field that we did not have here. For instance, we had lower labor costs than we have here, as you know.
Then, there was a great demand. For instance, in Paris we just built the Paris Hilton, the first hotel built in Paris in 33 years. Figure that, a city that size and it has not had a new hotel in 33 years.
Why had nobody else built a hotel?
The hotel people in Paris didn’t want another hotel; they liked it as it was. And it is not easy to build a hotel today, what with high taxes and high labor. But what we have wanted to do was to build hotels in the principal cities of the world.
We believe that we are helping out world peace by having these hotels. We have found out that although people may be mad at each other, once they come into our hotel, they are no longer mad.
Mr. Hilton, owning the Waldorf was one of your big dreams for many years. But the Hilton Corporation directors were pretty uncertain about it, weren’t they?
That is right.
Why was the Waldorf, in your mind, such a huge target?
I saw it as the greatest hotel in the world. Its elegant rooms had housed the royalty of the world. When someone would call up asking for “the king,” the telephone operator at the Waldorf would have to ask, “Which king, please?” But the hotel had gone broke. I remember one director who was very much opposed to it. I had bought bonds on the Waldorf in 1942 for four and a half cents on the dollar. That is how bad it was. Now it was 1949.
This director even called me up on the phone from Los Angeles to tell me of a warning. He said, “I just had a call from so-and-so. He said, ‘For God’s sake, don’t let Connie buy the Waldorf.’ ”
But that didn‘t stop you?
It didn’t stop me at all, because I knew the intrinsic and great value and prestige it would give our company to have a hotel like that.
This director, when the meeting came, said, “I will never vote against you when the voting starts, but I am against your doing this.”
So my board of directors couldn’t share my enthusiasm. And as president of the Hilton Hotels Corporation I couldn’t buy without their approval.
But as Connie Hilton I could do as I had done 30 years before in Cisco, Texas. I could buy it myself and raise the money by selling the idea to backers who could see it as I did.
So I set things in motion in the old familiar way I had done in years past. I had leased old hotels in Texas. Then I had built that hotel in Dallas – and raised my first million dollars doing it. And I had bought hotels cheaply after the depression and nursed them back to health. Now I called the man I considered the leader of the Wall Street crowd that held the Waldorf stock. I had been flirting with “The Queen” long enough.