The Predators’ Ball (28 page)

Steiner says that Paine Webber asked him to place some of the junk bonds in Europe, and he asked Icahn whether he should. “Carl said, ‘They are not going to get the deal done. It is a waste of time. Forget it,' ” Steiner recalled.

Now Black returned to the scene, telling Icahn that Milken not
only would raise the $750 million with PARS out of the company, but would raise another $500 million war chest, or “blind pool,” in the company in which PARS would be placed. Bond buyers who liked the airline could buy its debt; those who were enamored of PARS could buy that company's debt; others could mix the two. The company that would be formed to receive PARS—and the $500 million—would be called Mandrake (as in the magician).

About Paine Webber's failure, Mark Shenkman of Shenkman Capital Management, Inc., one of Milken's early converts to the junk fold, said, “They just didn't have the placement power to do it. David Brown could know the right names and know those people, but you've got to really have their confidence to come in for such a super-high-risk deal. He doesn't have the relationships Mike does. He can't call the Belzbergs, Perelman and the rest and basically call in a chit.”

Many in the junk market suggested that Paine Webber's difficulty was exacerbated by Milken's and his crew's bad-mouthing and sabotaging. It was, they say, Milken's public humiliation of his former acolyte, Brown, for having dared to compete. Others had left Milken, but they had generally gone with his assistance to spots where they were, if anything, more useful to him than when they worked for him.

The humiliation was not Paine Webber's only loss. Icahn took the $1 million that the firm had placed in escrow. “They [bankers at Paine Webber] never believed Carl would take the million,” said Adams. “When he did, they were just shocked. But Carl said, ‘Hey, that was the deal.' ” Paine Webber did win its fight to stay in the deal and be listed as a co-manager. But—as was nearly always the case when another firm tried to co-manage a deal with Milken's crew—it was co-manager in name only, and it received a pittance compared to Drexel.

During November and December the numbers at TWA deteriorated rapidly. In November, TWA revised the forecast of its losses for the year from $70 million to $110 million. In early December—the night before Milken was to unleash his sales force to sell this deal—TWA got a reading on its November results, which indicated that losses for the year were going to be $150 million. Milken called off his troops.

Icahn's agreement with TWA gave him two outs: if the airline suffered a “material adverse change” or if he could not arrange
financing. Both were available to him. Either he was going to change the terms of his deal, paying less cash and more paper, or he would terminate it and sell his position.

But who would take him out? The only buyer whose interest in TWA appeared undying was Lorenzo. The unions were violently opposed to Icahn's selling out to Lorenzo. One adviser in the deal said Icahn told him that he was dying to sell out to Lorenzo, except that he was afraid the machinists would kidnap his children. Publicly, however, Icahn declared that he felt he had a “moral commitment” to the unions not to sell to Lorenzo.

Then, on December 20, came the terrorist bombings in the airports in Rome and Vienna, which killed several people at TWA ticket counters. Peiser, the TWA chief financial officer, said the bombings “really shook Carl. We had a long conversation about how we could stop the terrorism. We concluded, of course, that we couldn't. It really shook him, that there were these events outside of even
his
control that affected the company. He realized he was not in control of terrorists in Rome.

“He wanted out,” Peiser said. “We talked about management's buying him out, and he was interested in that. But we couldn't keep the labor concessions, and we didn't have a lot of time to raise the money. If we could have come up with a proposal to take him out whole, I'm sure he would have taken it then.”

Icahn was trapped. His investors too were losing money—he had bought TWA stock at an average price of about $19, and the stock was trading at about $16. He decided to pass up the leveraged buyout. He already had control of the company. He negotiated a new deal with TWA, whereby minority shareholders would have an option to exchange part of their shares for preferred stock. And Drexel said that it would raise $750 million for the deal (with the magical $500 million for Mandrake a thing of the past), but that Icahn could not get more than $100 million of his money out. He decided to leave in the company the $750 million that Drexel was raising. And PARS as well.

An indication of the extent to which Icahn may have felt beholden to Drexel at this point is that he committed $200 million to GAF's bid for Union Carbide, for which Milken was raising $5 billion. Since GAF later dropped its bid, Icahn walked away with a healthy commitment fee. According to Icahn, this is the only Drexel megadeal for which he signed up.

The TWA deal changed one last time when Drexel raised the money, not $750 million but $660 million. The reason Drexel gave for coming up short (in the face of a “highly confident” letter it had given) was that conditions at TWA were so disastrous by early February that many expected the company to go bankrupt.

The list of bondholders submitted to the SEC months later, when the time came for these privately placed bonds to be registered, is not a typical Drexel megadeal list. The most substantial pieces were taken by Fred Carr (adding all his companies together, $72,500,000) and Tom Spiegel (through Liberty Service Corporation, a subsidiary of Columbia S&L, $64,825,000). Ron Perelman, through Revlon, Inc., bought $38,175,000. There were a few other tranches of $30 million and $20 million, but the rest was composed of relatively small purchases. Some buyers came in for as little as $75,000 and quite a few between $100,000 and $500,000. There were executives from Columbia Savings and Loan, a teachers' retirement association, an investment from Middlebury College (one of Milken's protégés, Dort Cameron, is a Middlebury graduate and invests money for the college).

The list
looks
as though it was something of a struggle to create. And that, indeed, was what Icahn told TWA when he announced that Drexel was having so much trouble that they could raise only $660 million, not $750 million, and that therefore he wanted to exercise his option to change the terms one more time. He now wanted to lessen the dividend on the preferred that he was offering to minority shareholders.

Freund, TWA's adviser, called Fred Joseph to ask whether the company was being “jerked around” or whether there really was trouble. “Fred called me back and said we weren't being jerked around,” Freund recalled.

A source at Drexel maintained, however, that while raising the $750 million was indeed difficult, it was by no means impossible (“Michael would just have had to make a couple of calls”). But, according to this source, Icahn asked that Drexel claim it was impossible to raise the $750 million, so that he could then have an excuse to change the terms of his deal with TWA. Icahn denies this allegation.

By the time Drexel held its annual Predators' Ball in the first week of April 1986, the TWA financing was completed and the terms of Icahn's acquisition of the airline were, finally, fluid no longer. But events had continued their downward spiral.

Just three weeks earlier, the flight attendants had started a long-threatened strike. While Icahn had prepared for it, training fifteen hundred new hires, the strike had caused enormous disruption and loss of revenue in its first few weeks. The flight attendants were at the Drexel conference, parading with their picket signs around the Beverly Hills Hotel, where so many of the most favored guests, including Icahn, were staying.

On the evening of the first day they took up their post outside Don Engel's famous Bungalow 8, where a cocktail party for the big-hitters was being held, and then followed these guests to Chasen's, the swank Beverly Hills restaurant which hosts a gala dinner at the Predators' Ball each year. By midnight, however, a few of the flight attendants had put aside their signs and joined the Drexel merrymakers at Engel's table in the Polo Lounge. Fred McCarthy, Nelson Peltz's main investment banker at Drexel, remembered, “I said, when we were at Chasen's, ‘What a waste of good-looking women, why don't we bring them in here?' ”

Icahn was not in the Polo Lounge. He had arrived at the conference earlier in the day, and then came a news broadcast that a terrorist bomb had exploded aboard a TWA flight from Rome to Athens. Icahn turned and headed back to New York. He may well have been remembering his visit to the Predators' Ball one year before. Then, he had had no major company to run. Then, he had had his money in no situation that he could not control. Then, he had been fresh from his Phillips grand slam, where he had played his game and made $52.5 million in ten weeks. And then, he had stopped in at Peiser's presentation.

B
Y
O
CTOBER
1986, six months after Icahn had departed hastily from the Predators' Ball, he had subdued—at least for the short term—his demons at TWA. The staggering losses of the first half of the year—$275.6 million—had been stanched. TWA reported third-quarter earnings of $65.2 million, which looked remarkable not only in comparison to the first two quarters, but to the same period one year earlier, when the airline suffered a loss of $13.5 million. (And TWA's operating earnings for 1987, $240 million, would be the best in the airline's history; the second best was $95 million, in 1965.)

There were several factors in the turnaround, and a couple of them—as had been true from the start—were beyond Icahn's control. But now they were going with him instead of against him. Terrorism had subsided; therefore, by the late summer of '86 trans
atlantic travel was just beginning to return to normal levels. And the price of oil went down, enabling TWA to cut its annual fuel bill by $100 million.

Other factors, however, were Icahn-wrought:

He had taken on the flight attendants, replacing them with newly trained hires, so that while the strike was disruptive the airline was not brought to a halt. The new hires who replaced the veteran workers started at $12,000 a year and abided by tough new work rules. If the flight attendants' union succeeds in its ongoing court battle with Icahn, the airline could be liable for over $400 million in back pay, and it could also be forced to reinstate the former flight attendants. But, for the moment, Icahn was the victor in that contest—and he claimed savings of $120 million a year.

He had negotiated the sale of a half interest in TWA's PARS reservation system to Northwest Airlines, giving the airline an infusion of about $200 million.

And he had negotiated the $242 million acquisition by TWA of Ozark Airlines—an acquisition that the previous management of TWA had been trying, unsuccessfully, to effect for some time. Ozark had been TWA's principal domestic competitor in vying for traffic to and from St. Louis. Now TWA would control over 80 percent of that traffic, giving a large boost to its domestic profitability.

The acquisition of Ozark was an important move to expand and strengthen TWA, but by far the most dramatic results Icahn achieved sprang from his cost-cutting. He had won the early concessions from the pilots and the machinists. He had eliminated layers of bureaucracy at TWA. He had taken on the flight attendants' strike. He had decided not to renew leases for some planes. Thanks to the drop in oil prices and Icahn's talent for chiseling, TWA would see a savings of $600 million for the year.

The praise on Wall Street was not universal. In the view of some analysts, Icahn was running TWA like a classic short-term play—making moves that would translate into quick profits with no long-range perspective. He was not investing in new aircraft, and TWA's fleet was aged. Morale at the company was terrible, with some employees leaving because they were convinced Icahn was only waiting for the opportunity to sell it. Still, TWA was now profitable, making in operating profits about $250,000 a day. It was hard to argue with success.

And with the corner turned at TWA, Icahn emerged in early
October with his most audacious bid since the one he had made for Phillips Petroleum: an $8 billion tender offer for all shares of the mammoth USX, the nation's largest steel producer and a force in the energy business, with about $21 billion in assets. With about $650 million from his usual investor partnerships and TWA (which contributed about one third), Icahn had begun buying USX stock in June and now owned 11.4 percent of the company. And Drexel said it was “highly confident” that it could raise $7 billion.

Icahn's absorption in TWA had not been complete. He had found time and energy in the spring of 1986 to amass a large stake in Viacom International, the broadcasting, cable television and entertainment concern, and to negotiate with that company's management a thinly disguised greenmail package which afforded him and his major investor, Jeffrey Steiner, a profit of about $100 million. But that had been the old greenmailer Icahn, just keeping his hand in, turning a profit.

As a major Drexel player, one of those few with appetites and ambition gigantic enough to be, as Meshulam Riklis had put it, Milken's “monsters,” Icahn had been sidelined ever since he took over TWA. For a time, it had seemed that he might be the first of Drexel's kingpins to topple. But he had prevailed, and now he was back with an appetite as insatiable as ever.

Icahn's triumph, of course, was also Drexel's. It meant that they had chosen wisely when they decided to give him a war chest, back in 1984. Nothing Icahn had done, up until that point, proved that Icahn would be able to run a large company. He was running ACF successfully, but that was different.

As Black pointed out, “Carl saw the value in ACF. There were a few things that obfuscated its value to the rest of the public. It had a few nonperforming dogs, which it turned out you could sell for real money. And then there was the railcar-leasing company, which was a gem, a cash cow. So Carl sold off the dogs, and was left with a stable cash cow.” Indeed, the takeover of ACF cost Icahn $410 million, but he then raised $400 million by selling off pieces.