The Predators’ Ball (27 page)

But because Lorenzo was unwilling to pay Icahn his $16 million
greenmail alternative, what should have been the close of the deal became its opening curtain. Lorenzo was not present at that nightlong session, and when Black—who had been negotiating with what he and everyone else in that conference room believed was authority from Lorenzo—called him at dawn to say that the deal had been struck, Lorenzo rejected it. Instead of the $16 million, he made a counteroffer to Icahn of $8–9 million, which Icahn refused.

According to former employees of Lorenzo, this is his modus operandi: always to be absent from the negotiating session, so that he is free to say the negotiator had no authority, and then to scrap the deal. For Lorenzo, these former employees say, the moment he sees that a deal in which he is the buyer can be struck at x, that says to him that it could have been done at x minus 3 or x minus 2.

“I argued with Lorenzo. I lost,” said Black. “And then
he
lost.”

Icahn kept his 35 percent of TWA as the company and Lorenzo proceeded with the deal to have Lorenzo buy the airline—or so they all thought.

“In a vacuum, Lorenzo was right,” Black said. “Once he had a merger agreement with TWA, he felt, why should he buy out Carl? Carl didn't know the airline industry. You had to conceive of Carl galvanizing the unions and taking it away. And at that moment no one could have. On the other hand, my feeling was that we weren't talking about a lot of money [the $16 million package]. When you have a 35 percent holder who has proven in the past to be a dangerous adversary, why not take out an insurance policy?”

Of Lorenzo's actions in this deal, Black declared, “If ever defeat was snatched out of the jaws of victory, this was it.”

What unfolded over the course of the next two and a half months, at the end of which TWA's board finally voted to accept Icahn's bid and reject Lorenzo's slightly higher one, was a humiliation for Lorenzo and a triumph for Icahn. Lorenzo's poor business judgment was there for all the world to see as he continued to offer higher and higher (though never quite high enough) amounts to buy Icahn out, and as Icahn maneuvered himself into ever more favorable positions. Having refused to spend an extra $16 million to secure the airline, Lorenzo ultimately offered $100 million—to no avail.

And while Lorenzo reneged on a handshake deal and breached
an unwritten agreement, Icahn conducted himself so that he was able to proclaim later that he had been a “man of my word,” and everyone in this particular deal, at least, concurred.

Icahn's transformation from hated pariah to a kind of secondary white knight (offering the unions an escape from Lorenzo, after Lorenzo had given TWA an escape from him) was made possible by virtue of one fact. To the unions, Lorenzo was evil incarnate. In 1983 he had sought protection under Chapter 11 for Continental Airlines, abrogated its union contracts and cut wages in half. Then he had proceeded to turn the airline into a money-maker.

Next to Frank Lorenzo, Carl Icahn suddenly looked good. After TWA struck its deal with Lorenzo, and Lorenzo left Icahn free with his 35 percent holding, the unions approached Icahn. TWA's labor costs were dramatically higher than competing airlines', and the TWA management had been readying itself for a strike as its labor contracts came due for negotiation. Now, as they were about to fall into the clutches of Lorenzo, the unions signaled that they would be less intransigent than TWA had feared.

Labor negotiators are known for their stamina in the typically marathon sessions that sometimes seem to exhaust their management adversaries. But, for Icahn—a veteran of hundreds of nightlong negotiations who, some have suspected, deliberately prolongs these sessions because he is having such a good time—this situation with the unions was tailor-made. Unlike most managements, which use labor experts to deal with the unions, Icahn dealt with them directly.

Negotiating is probably the thing Icahn does best in life. He brings to it his considerable talents as a poker player, bluffing masterfully, so his opponents never know whether he is going to play or fold. He sketches so many options, and so many variations—or hedgings—on those options, that his adversaries often feel they are lost in a maze. The positions he takes are in such flux that for his adversary to try to challenge or attack them is, as one recalls, like “wrestling with a ghost.” And he keeps constant vigil over his own vulnerability. As one individual who has dealt with Icahn says, he is “so paranoid, always looking over his shoulder and behind every door, constantly thinking everyone is screwing him. As a result, Carl gets few surprises.”

By early August, Icahn had exploited his talents as a negotiator and the unions' distrust of Lorenzo to reach an agreement with not
only the pilots' union but also the union representing the machinists—a tough, headstrong and volatile group, who were lower paid than the pilots and thus had less to give away. It amazed TWA management and their advisers that Icahn had been able to extract his desired concessions out of the machinists. But there it was: in return for profit-sharing and stock ownership, Icahn had wrung concessions from the two unions (though not from the flight attendants)—concessions that would eventually turn the airline from breaking even to $300 million in profits.

Having made his deal with the unions, Icahn could now top Lorenzo's bid. Lorenzo, aware that the airline was slipping from his grasp, raised his bid, and also brought in Martin Siegel of Kidder, Peabody to advise him. Kidder had been his traditional investment banking firm, and he had worked with Siegel before. In the last five years, moreover, the bright, flashily good-looking Siegel had become one of the stars of the takeover field.

According to two Lorenzo advisers, Lorenzo turned to Siegel as his distrust of Drexel, particularly of Black, became overwhelming. He would keep Drexel in the picture as his money-raiser (he had no choice), but in the ninth inning he was desperate for Drexel-free advice.

By this time, in the late summer of 1985, it was not easy to escape the Drexel presence. Unbeknownst to Lorenzo, Siegel had, since June, been deep in discussions with Fred Joseph about moving to Drexel. Siegel, of course, was the recruitment “assignment” Joseph had taken after the Cavas Gobhai session three years earlier. It was only in the last six months, since Drexel entered and transformed the M&A world, that that long-ago goal had become something more than a pipe dream.

Siegel had been in another deal with Drexel recently. In the Storer Communications buyout, he had represented Kohlberg Kravis Roberts (KKR), the premier LBO firm. And now he was in TWA. As Siegel said later, he had watched as his peers at Drexel made five times what he was making in these deals, and he was not used to being the margarine spread.

Moreover, in Storer, KKR had beaten out a rival bidder because Milken could raise $1.466 billion in two days. Black was the Drexel investment banker on that deal, and he had courted Siegel assiduously. It made Siegel think more seriously about what it would mean to work for a firm with that kind of muscle.

He was tempted. He knew he could multiply his income if he went to Drexel. His father had gone bankrupt at forty-five, and Siegel believed that this had planted in him a powerful longing for utter financial independence—what he thought of as “fuck you” money. But he was still not sure that the Drexel lucre was worth the taint. Henry Kravis, of Kohlberg Kravis, one of his best friends, had advised him against doing it, for that reason. But he was thinking about it.

In TWA, Siegel was able to do no better for Lorenzo than Black had done. Even though Lorenzo had made a bid higher than Icahn's, once Icahn reached his agreements with the unions he held all the tickets. With those agreements in hand, Icahn could offer TWA labor peace and a financially viable airline. Had the board sided with Lorenzo, on the other hand, they would have had to utilize an anti-takeover maneuver to block Icahn which he would certainly have challenged in court. And if the deal with Lorenzo did survive court challenge, it guaranteed labor havoc. The pilots were promising wildcat strikes, and the machinists let it be known that they might vent their frustration by destroying planes.

So Icahn emerged the unlikely hero. “We got ourselves an airline!”
The New York Times
reported he shouted, donning a pilot's jacket and dancing around his office, when he heard that the TWA board had decided in his favor. The union representatives and their advisers were jubilant, too. Despite the fact that their deal with Icahn prohibited him from giving Lorenzo a standstill (promising to buy no more stock), they had always been fearful that the wily investor was merely toying with them, intent on using their concessions to get a higher price from Lorenzo.

There was certainly an economic rationale for what Icahn had done. Initially, before all the union drama, he had been a willing buyer of the airline at $18 a share, or about $600 million. When Lorenzo offered $23, Icahn had been a seller (except that Lorenzo had balked at the extra $16 million, which had killed the deal). With the $300 million of union concessions in hand, Icahn became a buyer at $24. And he stuck at $24, even though Lorenzo came in at $26, and even though the unions and the TWA advisers begged him to go to $25 in order to make the directors' decision to side with him a little easier. In Icahn's judgment, he didn't have to give that extra dollar, and, true to form, he cut the price to the hair's breadth.

But there was more than economics at work here. By mid-1985,
Icahn was carving out for himself a public image far grander than the one he had had for years as a hard-nosed greenmailer. Some who know him well agree that Icahn's decision to buy TWA was influenced by more than the numbers, which heretofore had been his only touchstone. “Carl got as much of a kick out of being a savior to the unions, a champion of labor, as he did out of owning an airline—maybe more,” Black said. “Because it was a nice counter-punch to all the things he'd been being accused of in Washington. He did care about his image. And don't forget, it would have potential, too, for whatever he would want to do in the future.”

I
N EARLY
S
EPTEMBER
'85, Icahn chose Paine Webber to raise $750 million for his buyout of TWA. Lorenzo, typically, had made a deal for Icahn's purchase of his stock, then unmade it, and then rampaged around for another week or so before finally settling. The explanation offered by both Drexel and Icahn for Icahn's choice of Paine Webber is that in early September Drexel could not obtain a release from Lorenzo, whom they were still representing.

However, one adviser in the deal said that he told Icahn that he thought he could obtain a release from Lorenzo for Drexel, and that Icahn said not to bother. Steiner's opinion was that “Carl chose Paine Webber because they offered to do the deal for a quarter or a half point less than Drexel would have charged.” It no doubt suited Icahn too, because it enabled him to be independent of Drexel in a junk-bond financing and have a good excuse for it, so that it would not jeopardize his dealings with Milken.

Joseph Stewart, the Paine Webber investment banker who approached Icahn, thinks he got the deal because he offered to do it for less than Drexel. Robert Peiser, then TWA's chief financial officer, said, “Carl doesn't want to say that he went to Paine Webber because they were cheaper. But he is a great believer in getting service the cheapest he can, and forget the quality.”

This was an unusually large junk deal for Paine Webber. But the head of its junk-bond department was David Brown, who had been one of Milken's early hires back in the seventies. In 1984 Brown became the first of Milken's followers who was said to have challenged Milken for a greater share of profits and then to have left with acrimony. At least in theory, Brown knew the Milken network and could distribute to it.

Icahn, of course, is no one's fool. In an apparently unprecedented
arrangement—and the terms were to be kept secret—Paine Webber placed $1 million in escrow, to be forfeited if they were unable to do the deal on the agreed-upon terms. The way the deal was structured, the $750 million would enable Icahn to buy out all the shareholders and also take out his investment of about $300 million in TWA stock. In addition to getting all his money out, he planned to take out TWA's computerized reservation system, PARS. It would be given to the Icahn Group as a dividend, and Icahn planned to lease PARS back to TWA for ten years for an amount that would have given Icahn an annual profit of $25 million.

Under this plan, Icahn would have had little more than his pride at risk. He would have recouped his $300 million, he would own the lucrative PARS. And in the worst of all worlds, if the airline went bust, it would be the bondholders, not Icahn, who would lose.

The investment bankers and bond salesmen at Paine Webber wanted to feature Icahn at their road shows. But since Icahn wanted to travel as little as possible, they staged an enormous road show at the Waldorf. In a rare move for an underwriter, Paine Webber paid for prospective buyers to fly in from as far away as California and Japan. According to Joseph Adams, who would later work on the Icahn offering at Drexel, “It was a mistake to feature Icahn—you use the operating guy, that's whom the debtholders want to hear from. And you keep it to relatively small groups. Otherwise, if one person has a valid concern and stands up and voices it, all of a sudden two hundred fifty people who never would have thought of it are worried.

“That wasn't a road show, it was a media event,” Adams scoffed. “Icahn at the Waldorf.”

Worse, it did not sell. Icahn, apparently carried away by his enthusiasm for PARS, went on at such length about its value that the prospective bond buyers began to wonder why PARS (as well as all Icahn's money) had to come out of the company. In October, Stewart told Icahn that he had placed about $660 million of the $750 million of debt, but in order to place the rest PARS would have to be left in TWA.