Oh, the glory years.
Back in the mid-to-late eighties, it was virtually impossible to pick up a newspaper without coming across a headline proclaiming yet another billion-dollar leveraged buyout. With the advent of high-yield finance — thanks mostly to Michael Milken and his corporate finance group at Drexel Burnham Lambert — junk-funded, billon-dollar takeovers were almost commonplace during the Reagan decade. Many of the acquisitions were not particularly welcome (RJR Nabisco by Kohlberg Kravis Roberts, Pacific Lumber by Maxxam Corp.), some were less threatening (Parker Brothers by Tonka).
But the formula for the deals was almost always the same: borrow billions to finance the purchase, make the deal, then sell off the acquired company’s assets to service the debt.
Hostile takeovers became so prevalent in the eighties — and so feared in corporate boardrooms — that some acquisition targets paid raiders go-away money (greenmail) to get them to, well, go away.
And in the Clinton era, the raiders obliged. In fact, it’s been years since the now-legendary buyout specialists have dominated the financial headlines. Really, when was the last time you saw a front-page story proclaiming a hostile takeover masterminded by T. Boone Pickens, Carl Icahn, Henry Kravis, Charles Hurwitz, or Irwin Jacobs?
So what happened? First off, raiders put such a scare in corporate directors that most enacted stringent anti-takeover provisions. The poison pills make it real tough to pull off an unwanted acquisition.
Moreover, the economic argument for hostile takeovers lost a lot of its punch in the nineties. Raiders like Pickens and Icahn defended their lucrative deals by claiming such acquisitions shook up management and maximized shareholder value. But a number of post-deal studies in the nineties questioned whether these LBOs pumped up shareholder value — or merely the wallets of the raiders and the investment bankers doing the deals.
Moreover, many mergers and acquisitions were funded through the junk-bond market, and that market has hit hard times of late. Indeed, over the past decade, the best returns have generally come from equity investments, particularly venture capital investments. What’s more, it made little sense for investors to pour money into high-risk instruments — with their relatively low coupons — when they could net a greater return by simply putting capital into the S&P 500 index.
This doesn’t mean that all the great raiders of the eighties have vanished from the face of the earth. Actually, one has: sadly, the irrepressible Sir James Goldsmith, a staunch champion of LBOs and engineer of the $21 billion takeover of BAT, died of pancreatic cancer in 1997. But Pickens and Icahn are still actively following the money trail — which these days, means anything but leveraged buyouts.
After losing his flagship Mesa Petroleum in the mid-1990s, Pickens went back to the energy business, founding ENGR, a company that markets natural gas as a substitute for gasoline. He also operates a successful commodities fund that speculates in natural gas futures. Recently, the Texas raider has been flying lazy circles over Penn Central Corp., a small energy company that, he claims in classic Pickens style, is undervalued (he said the same thing in 1984 when he launched a bid for Gulf Oil). Pickens also has concocted an elaborate plan to sell water from underneath his 150,000 acre Texas ranch to parched cities like Dallas and San Antonio. Oh yes, one recent article suggested that Pickens has made more money in the nineties than he ever did trying to take over oil giants like Gulf or Philips or Unocal.
Meanwhile, Icahn’s still got plenty of irons in the fire. The one-time owner of TransWorld Air (which went Chapter 11 during his watch), Icahn rarely borrows money to finance his plays these days. Reportedly, he makes his money now off businesses in decline, assuming the debt of distressed companies on the cheap — particularly telecom companies. He also apparently made a killing during the Internet frenzy by shorting new economy companies like AOL Time Warner and Priceline.com.
Another character from the glory days of the LBO, “Irv the Liquidator” Jacobs, is said to prefer rod and reel to the art of the deal these days. Still, Jacobs predicts that there’s a new surge of takeovers just over the horizon. There are just “so many businesses out there that just don’t work,” he told Reuters in November. And given the recent spate of corporate scandals, maybe corporate managers could stand a bit of cage-rattling.