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A Giant Cow-Tipping by Savages
The Boom, Bust, and Boom Culture of M&A
By John Weir Close
Palgrave MacmillanCopyright © 2013 John Weir Close
All rights reserved.
THE TEMPLE OF DENDUR
All of First Boston knows. His lawyers at Cravath, Swaine & Moore are well aware of it. New York society, which he thought he was impressing, is in on the secret. So is his actual audience. But Robert Campeau has no clue. He is the mergers and acquisitions (M&A) raider writ large: driven, volatile, charming, seductive, grounded in poverty, a collector of assets and houses, companion to beautiful women, desperate for respect. "When I was growing up, I thought every house with indoor plumbing was a palace, and I hated the people who lived there," he once said. On this night, he has immersed himself among those he has envied and despised for so long.
A vast assemblage has gathered at the Temple of Dendur, a gift from the government of Egypt in the 1960s in thanks for the $16 million the United States contributed to the rescue of Nubian antiquities from the lake created by the Aswan High Dam. Thomas Hoving, then director of the Metropolitan Museum of New York, won what became known as the Dendur Derby among American cities by offering to build the temple a glass palace all its own. There it now sits on Fifth Avenue, as forlorn as a reluctant takeover target, a favorite place for New York parties for decades. At the Campeau coming-out party in the 1980s, the guest of honor oddly replicates the temple's own deracination and godlessness.
On Halloween 1986, a few months earlier, Bob had pulled off the unlikeliest of deals and taken over Allied Stores, which included Brooks Brothers, Ann Taylor, Jordan Marsh, Garfinckel's, and Bonwit Teller, for $3.6 billion in borrowed money. Later, on April Fool's Day 1988, he would conquer Federated for another $6.5 billion in loaned cash, mostly because he wanted to be king of Bloomingdale's. Knowing no one on Wall Street, he was "a guy over at the Waldorf Hotel who thinks he's going to buy Allied Stores," as Joe Perella put it to his First Boston colleague Mike Rothfeld at the start of the whole fiasco. Eighteen months and over $10 billion later, this real estate developer, who made his first fortune on postwar tract houses that were once called an excuse for a nuclear bombardment, with no experience in retail whatsoever, owned virtually every department store of note across the United States except Macy's. He learned fast. He had arrived in New York just as Ron Perelman was conquering Revlon and had watched as an unknown from a perennially overlooked city, dismissed as little more than a traveling salesman with a rich wife, took over one of the greatest houses of glamour in the world. If a Jew from Philadelphia could do it, why not a French Canadian from the provinces who had pulled himself up from nothing, stiff-armed by English Canada but now feeling wholly at home in New York?
The Anglo moguls of Toronto looked on Campeau (pronounced: Com-poh) with contempt, and he built a massive tower, Scotia Plaza, in the heart of Toronto that functioned as his own middle finger to the establishment. Resentful, driven to prove himself, eager for adulation, he could also win bankers, employees, and women to his side. He had two families and two sets of children, each long unknown to the other, with the strain of such a double life, if not the truth, all too obvious for decades. He would alternate between states of depression that resembled mammalian hibernation and periods of febrile activity inflamed by a sense of his own invincibility and perceived genius. Sam Butler of Cravath, who gave Campeau his first taste of acceptance in Manhattan when Sam agreed to take him on as a client, puts it simply: "Campeau was a nut case."
Everything about Bob Campeau was more extreme, and disturbed, than it appeared. He was a great chest thumper and screamer, but layered, with prejudices and bitterness; he was a frightened man, prone to sudden and rather cringe-making admissions of doubt. He was vain, but it was only a symptom of his fear of aging and death. He should have been in treatment, but instead, during his many absences at the climaxes of his deals, he sought the help of cosmeticians, nutritionists, tanning salons, and plastic surgeons, as well as "a toupee and then hair transplants; capped teeth; face lifts ... Rolfing rituals; health-food diets; the daily swim in his specially purified pool; all of which produced a vigorous and dashing figure, slim and deeply tanned, with bright, prominent uppers and a healthy crop of medically harvested gray hair." He called it all "physical rejuvenation." Bob was reportedly also enamored of a rather unusual anti-aging treatment: injections of fetal lamb brain cells. For this he got a secret nickname. Rob Kindler, then a partner at Cravath who came to know his client well, rechristened him "B-a-a-a-bCampeau."
At the Temple of Dendur, B-a-a-a-b is feeling expansive after his triumph over Allied, this foreigner born to poverty and ostracism, still an alien in both the United States and his own land. He feels he is at last getting the respect he has worked so inexhaustibly to attract. But he is fooling no one but himself. He stands at the podium and, at first, lectures the audience "unintelligibly," according to one guest, about currency rates, and then in orotund phrases of oleaginous sycophancy, he tells the black-tied and ball-gowned ensemble in front of him how gratified he is to be among them in the heart of Manhattan, what a feeling it is to be a Canadian taking over US companies instead of watching it happen to Canadian targets, how much it has meant to him and his wife to be so welcome in the greatest city in North America, how he plans to make New York his home, how he feels that he is among friends.
But the truth, as always for Bob, is impenetrably camouflaged. Aside from the cardinal of Toronto and Pierre Trudeau, the former prime minister of Canada, what Bob sees is New York's aristocracy at his feet. But many of those applauding are not even from New York, nor are most of them particularly elite, although all of them are rich. History is blessed to have the recollections of one of Bob's advisers, the irrepressible Kim Fennebresque, then of First Boston, to pull back the curtain. "Basically, it was every teenager's worst dream about their party," says Fennebresque. "No one wanted to come. We got reject after reject." Something had to be done. There was a big place to fill, what Fennebresque calls "the artistic equivalent of the Astrodome which could hold hundreds and hundreds and hundreds of [Campeau's] newfound fans," and a big ego to satisfy. Bruce Wasserstein, the rising M&A sorcerer at First Boston, solved the crisis. He simply ordered his colleagues from New York and regional offices such as Dallas and Houston to come to the temple. That was an invitation no one could refuse. "It was either that," says Fennebresque, "or call Central Casting for people who looked like investment bankers to fill up the room."
That night in Manhattan, Robert Campeau was euphoric. Yet in a matter of months, he would lead no fewer than 250 formerly profitable and iconic department stores in a death march to the abattoir of bankruptcy. Thousands of people would lose their jobs, and millions of dollars would remain forever unpaid to a stunning list of financial houses around the globe. With the disaster still in the future and his history of mental breakdowns, secret wives, and hidden children still relatively unknown, dressed in his immaculate dinner jacket, beaming from the podium in sublime ignorance at his new best friends, he appeared to have come such a long way. And, in his own way, he had.
So, too, had M&A itself.CHAPTER 2
WASPS, JEWS, AND M&A
It was an odd coincidence that Bob Campeau got his first job at International Nickel Company, the mining giant that launched the modern takeover era. He was in the eighth grade, an urchin with a single mother and seven siblings in the blighted town of Sudbury, Ontario. He swept floors for 50 cents an hour. Later, he graduated to truck mechanic, helping to maintain the fleet that carried the asteroid-sized blocks of ore from the steam-shoveled pits to the crushing mill and finally to the smelter. It was a life of noise, of 300 polluted lakes in a blasted lunar landscape surrounded by blackened hills, inhabited by a poisoned, downtrodden people.
Contemporary mergers and acquisitions (M&A) is often said to have sprung forth in 1974, when Morgan Stanley became the first established financial house to represent a hostile bidder, International Nickel, in its successful takeover of Philadelphia's old-line ESB Inc. There was a stunned silence, followed by a collective lupine grin, as Morgan Stanley's Robert Greenhill and his team hauled in a cool $14 million from that one deal. Greenhill had passed over his bank's longtime counsel at Davis, Polk & Wardwell in favor of Joe Flom at Skadden, Arps, Slate, Meagher & Flom. "I hired Joe," Greenhill said, "because I wanted to build an M&A business here, and I knew he could help me do it." A fever began to spread with the realization that corporations, many of which were conglomerates with abnormally low stock prices, were possessed of virtually undefended riches. If they could be taken over, they could then be broken up, their various divisions sold separately for far more than the sum of all the parts, or subsumed by a rival on the hunt for more market share, more assets, and fewer competitors.
M&A has a deceptively mundane definition. It means taking control of a company, with or without the consent of the executives running it. Since it is expensive to build a business from nothing, it is often seen as more profitable to take over what has already been built by others. In one stroke, you expand your business and eliminate a competitor. If you're purely an investor, you can keep the company or sell it off for profit. To gain control of a corporation in the modern era, you either offer to buy the stock from the existing shareholders or ask them to vote their shares in favor of your nominees for the board of directors, who, if elected, turn over the company to you. That's basically it. It sounds simple, and it is, but variations proliferate as fast as the human mind can invent them, and M&A has grown rampantly in power and complexity. It has revolutionized corporate Earth and enriched the members of the guild as perhaps none of them ever imagined.
Fights for control of corporations are not new. In fact, in earlier times, they could come close to actual war — for example, the nineteenth-century fight between Cornelius Vanderbilt and the Erie Gang (also known as Jay Gould, Daniel Drew, and James Fisk) for control of the New York & Erie Railroad. This takeover three years after the Civil War, as Professor Steven M. Davidoff writes in his Gods at War, roiled the country with the raising of rival militias, the secret escapes across rivers, as well as bribed police and corrupt lawmakers. At one point the target was even abruptly reincorporated as a New Jersey company, to the shocked horror of New Yorkers who were forced to see their beloved railroad metamorphose into "a denizen of the kingdom of Camden and Amboy," as Charles Francis Adams Jr. put it in his classic contemporaneous account, published under the title Chapters of Erie with his brother Henry's essay on the New York gold conspiracy. This early takeover is the story of "a knot of adventurers, men of broken fortune, without character and without fortune who come to control an essential artery of commerce," Charles Adams writes, that touches "very nearly the foundations of common truth and honesty without which that healthy public opinion cannot exist which is the life's breath of our whole political system." Words that hold true today.
The Erie Gang had long been busily plundering the railroad and stealing its profits until the company was anorexic and no longer strong enough to pay its debts. Vanderbilt wanted it badly. If he could get his hands on it, his rails would run from the center of Manhattan to the Erie Canal and ensure him virtually complete control of all rail traffic in and out of New York City. In 1867, Vanderbilt tried to gain control of a majority of the stock. The Erie Gang quickly issued bonds convertible into stock to water down Vanderbilt's holdings while soaking up his funds as he bought their fake stock with alacrity. When Vanderbilt realized he was being duped, he had one of his pet judges issue an injunction banning the threesome from continuing their chicanery. They responded with their own judge, who issued an injunction banning Vanderbilt's machinations. The commodore then had arrest warrants issued for the Erie Gang. The gang's allies fled.
"[A]stonished police saw a throng of panic-striken railway directors — looking more like a frightened gang of thieves, disturbed in the division of their plunder — than like the wealthy representatives of a great corporation — rush headlong from the doors of the Erie office, and dash off in the direction of the Jersey ferry," Charles Francis Adams writes. Other members of the Erie Gang later crossed "in open boats concealed by the darkness and a March fog." One member of the board "bore away with him in a hackney-coach bales containing six millions of dollars in greenbacks." They took a total of fully $7 million of Erie's money. Vanderbilt dispatched an armed posse to attack the Erie Gang, whose own henchmen fought back, repelling the advance. Cannons were installed on the ramparts of Erie's redoubt in New Jersey. The gang then bought the votes of legislators in Albany to side with them and approve their moves. Vanderbilt, uncharacteristically, backed down and left them to it, nursing the loss of a fortune said to be as much as $1 million.
Modern M&A has not been driven by Scottish immigrants in Pittsburgh or French Huguenots in the Hudson Valley capturing entire swaths of the nation's resources in the absence of any government regulation whatsoever. In the late twentieth century, it was driven by two Jews with a simultaneous epiphany about how to take advantage of new government regulation, how to turn the rules into an instruction manual for transforming the buying and selling of companies into a profession in itself. Rather than seek to buy, sell, or keep anything themselves, they became the Sherpas, interpreting regulatory maps and making up new law as they went along.
Jews and all others not of the white Anglo-Saxon Protestant (WASP) ascendancy were at the time excluded from any position of real power at the bar, on the bench, at banks, and in boardrooms. America was still an agglomeration of ghettos: Italians knew Italians, Jews knew Jews, Poles knew Poles, Irish knew Irish, WASPs barely knew any of them existed at all, and the Cabots spoke only to God. "When I came to New York in the seventies, the WASP aristocracy still reigned," recalls former Skadden partner Stu Shapiro. "You didn't see an Asian face above Canal Street. You didn't see a black face in a law firm unless it was the mailroom. You certainly didn't see a Hispanic face. Swarthy Italians and Jews? They were not people you dealt with."
Yet again, as happened so often in their history, the Jews somehow found their own methods to carry them past such barriers. They became expert in taking over companies against the will of their existing executives. The white-shoe law firms and elite investment banks found this simultaneously distasteful and tantalizing as medieval burghers viewed the lending of money at interest. Both groups were barred from joining in one of the most profitable enterprises of their day, the former by the establishment's social codes of behavior and the latter by an ecclesiastical ban on the practice of usury. Again, the Jews found themselves in control of a monopoly that perpetuated their own stereotype, that of the omnipotent, conniving Machiavellian with hands sullied by the unsavory. But the business of takeovers paid the rent. And then some.
Until the cusp of the 1980s, Joe Flom and his archrival Marty Lipton were largely unknown to the country. Then in 1976, Steve Brill, a young writer fresh out of Yale Law School, wrote an article for New York magazine about "two tough lawyers in the tender offer game," as the headline announced. "It was absolutely the first time that Joe and Marty were written about," Steve says. "I showed two lawyers whom no one had ever heard of and predicted that they would have two of the most successful law firms of all time. All of which turned out to be true." Here is the first information the public ever read about the Lipton and Flom phenomenon:
At eight o'clock Tuesday morning, November 18, of last year , a black limousine rolled down Fifth Avenue. ... So squat that he looked lost in the limousine's back seat, the 52-year-old [Joseph] Flom wore scuffed shoes, a dull tie on a dark-colored shirt, and a rumpled suit. He was everything it takes to be the opposite of flamboyant. Still, that morning he was directing a major corporate war. Within eight days, his client, Colt Industries, would successfully fight and take over Garlock Inc., a $151-million gasket-maker.
Excerpted from A Giant Cow-Tipping by Savages by John Weir Close. Copyright © 2013 John Weir Close. Excerpted by permission of Palgrave Macmillan.
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