The Predators’ Ball (31 page)

Over the next four and a half years, Perelman set out on a wholly leveraged, though relatively small-time, acquisition trail. He tried and failed to acquire the Richardson Company and the Milton Bradley toy and game company, but he made money in both transactions. He succeeded in buying, for a total of about $360 million, Technicolor, Inc., the film processor; Video Corporation of America, a major manufacturer of home videocassettes; the film-processing assets of Movie Labs; Consolidated Cigar; and a controlling interest in Pantry Pride.

Roughly $140 million of this money came from Drexel junk-bond offerings, the rest from banks—and all built on that original (borrowed) $1.9 million, back in 1978. Perelman chose companies that were strong cash-flow generators and that had problem assets that could be sold off—quickly paying down much of the high-interest debt—leaving the pared-down, profitable core business.

B
EFORE
R
EVLON
, Perelman's greatest acquisition success story was Technicolor, the film-processing company which he bought in early 1983 for about $105 million (and an additional $20 million of assumed debt). Technicolor was a dominant force in the film-processing industry, but it had made an unsuccessful diversification effort into a chain of one-hour photo-processing stores. Its stock had plummeted from $28 per share in the second quarter of 1981 to $8–10 per share in the second quarter of 1982. Perelman's price, $23 per share, looked rich. He sold off the processing stores and four other divisions for about $30 million (plus notes, receivables and warrants with a value of more than $20 million), as well as some of its California real estate for about $6.4 million, reducing his debt substantially.

In 1983, Technicolor's earnings skyrocketed, and within two years the company had paid for itself. Declares Drapkin, Perelman's close friend and adviser, “Technicolor was the classic Perelman transaction. He paid full price for the company, seeing values no one else saw, sold off pieces and put money back into the core business, and earnings have gone up dramatically.”

But if allegations in a suit filed in the Delaware Chancery Court against Perelman, Technicolor, its previous directors and MacAndrews and Forbes are found to have merit, Perelman may yet have to pay substantial damages and his greatest success story pre-Revlon will have a rather smarmy postscript. The complaint, filed by Cinerama, which was a stockholder of Technicolor, started out as an appraisal action (claiming that Perelman had not paid a fair price for Technicolor) and then—because of facts learned in discovery—was amended in January 1986 to include claims of fraud and breach of fiduciary duty.

According to the complaint, in September 1982 a banker from Bear, Stearns asked Fred Sullivan, the early Icahn investor and a Technicolor director, to meet with Perelman to discuss Technicolor. Sullivan agreed; a meeting was scheduled in one week's time; and before the meeting Sullivan purchased one thousand shares of Technicolor
stock at about $9.50 a share. (As a result of a subsequent insider-trading investigation by the SEC, Sullivan agreed to disgorge all profits made by that stock purchase.)

Sullivan then met with Perelman and became his ombudsman. He arranged for Perelman to meet the Technicolor chairman, Morton Kamerman, and, it is alleged, was the only Technicolor director from whom Kamerman sought advice. The complaint also alleges that Sullivan was retained by Perelman to lobby for the transaction, in return for a fee of $150,000. None of the other directors, it is alleged, knew that Sullivan, who was voting for the transaction, was retained to do so.

The complaint alleges that Perelman sweetened the deal for Technicolor's chairman, Kamerman, by granting an enhancement of his employment contract and a structure for the transaction which would allow Kamerman to receive the best tax treatment for the sale of certain option shares of Technicolor he owned. It further alleges that these sweeteners were negotiated, and the price of $22–23 per share was agreed on, before Kamerman consulted with any disinterested member of the board or with Goldman, Sachs, which later rendered the fairness opinion. Kamerman, however, testified that he did not solicit Perelman's approval of the amendment which was passed by the board.

Furthermore, the complaint charges that a director named Arthur Ryan, who was then president and chief operating officer and has since become chairman of Technicolor, was induced to vote for the transaction by the private promise—told to no other director—that if he did so he would be granted the opportunity to run the company. Ryan, a former Paramount Pictures Corporation executive who had a bitter running feud with Kamerman, it is alleged, was being kept apprised of the deal's progress by Martin Davis, then a senior executive of Gulf + Western who would later become its chairman. Davis is a friend of Perelman and had been Ryan's boss at Paramount, a division of Gulf + Western. Davis allegedly told Perelman that Ryan would be crucial to the company's success, and then relayed the message to Ryan that, under Perelman's aegis, he would manage the company. Within little more than a month after the transaction, Perelman terminated Kamerman and—as he had allegedly promised—made Ryan chairman. Both Perelman and Ryan have denied in depositions that any promises were made.

Taken as a whole, the complaint paints a picture in which
Perelman allegedly used deceit and secret deals—money here, position there, whatever it took—to buy off the necessary people and get the company.

In early 1983, with Technicolor under his belt, Perelman began to move to take MacAndrews and Forbes private. According to close associates, he was influenced by two factors.

The first was that his marriage to Faith Golding was ending in what he knew would be a very messy, publicized divorce, and he did not want the added glare of a public company's spotlight upon him. Perelman had had an affair, as his wife's detectives had been able to document. Moreover, his wife would allege, as part of her divorce action, that he had misused money that came from her family, and she would claim in a filing with the SEC that she owned part of her husband's claimed one-third interest in MacAndrews.

In his divorce, Perelman was represented by his longtime friend Roy Cohn. Cohn told
The Wall Street Journal
that the Perelman divorce-settlement talks almost broke down at the last minute because Perelman disputed one eighth of a percentage point of interest that he was to pay his ex-wife. But the action was settled in 1983, with terms that included Perelman's paying Golding $3.8 million in cash.

The other reason Perelman wanted to take MacAndrews and Forbes private, one associate said, was that he wanted “to do some things which might be criticized in a public company—have his own plane, have his artwork in his office. He wanted to have [MacAndrews and Forbes] as his nest egg—and then he wanted to acquire some other public company, for presenting his face to the financial world.”

In March 1984 Perelman took the company private, with Drexel raising the $95 million that the deal required. Then, the next fall, he became enamored of the huge tax-loss carryforward, or net operating loss, in Pantry Pride. He reasoned that this NOL not only could be put to good use in sheltering the income of any company he might acquire, but would give him a substantial advantage in a bidding war. Postbankrupt situations, moreover, were a specialty of Milken, who had made much of his fortune analyzing the securities of bankrupt companies. And by this time, in the fall of 1984, Perelman was being positioned as one of the Drexel players, along with Icahn and Peltz and William Farley, all of them being provided their war chests.

Drexel investment banker Paul Abecassis, who started working on Perelman financings in the early eighties, said Perelman was a logical choice. “Ronnie in his own little way was already doing it. He was acquisition-oriented, using leverage to go after companies and then using the cash flow to pay down the debt. Also, his personality was right—he was extremely ambitious, willing to take risks. It was a natural.”

There were obstacles, however, between Perelman and Pantry Pride. The idea had been brought to Perelman in late '84 by Patrick Rooney, a co-founder of the brokerage house of Rooney, Pace Group Inc. (since closed down), which specialized in initial public offerings of small, risky companies—and which had one of the worst reputations on Wall Street. It also had a close relationship with Drexel.

In the summer of 1984 Rooney, Pace had done a $25 million junk-bond offering, at an interest rate of nearly 18 percent, which according to the prospectus was underwritten by Rooney, Pace but which in fact was placed by Milken. One associate of Patrick Rooney said that Milken thus extended himself because “the plan was to have Rooney, Pace pick up the smaller or riskier junk business.” A buyer of the Rooney, Pace paper also confirmed that it was sold by Milken.

In late '84, Rooney was about to wage a proxy fight for Pantry Pride. According to one insider, Perelman did not want to join Rooney in that fight for fear that he would be tarred by the Rooney, Pace brush. According to another associate, Perelman also felt that—given the allegations made by his former wife during their divorce—he would suffer in the mudslinging of a proxy contest. And his final problem with joining Rooney was that Drexel was representing Pantry Pride.

“We made Ronnie sit on the sidelines, because we didn't want one client going after another,” said investment banker Stephen Weinroth of Drexel (describing the policy that would be invoked less than six months later when Icahn went after TWA).

In Perelman's stead, Philadelphia lawyer Howard Gittis joined the Rooney team (though Gittis claims he was acting independently). Perelman continued to hold a large block of stock. Then, when Gittis and Rooney lost the proxy vote in early 1985, Perelman stepped in. And with the advent of Perelman, Grant Gentry, the chairman of Pantry Pride, who had fought bitterly during the proxy fight, became malleable.

With Drexel representing both sides in the negotiations, MacAndrews and Forbes acquired control of 37.6 percent of Pantry Pride, for $60 million. And Gentry received a payment—some of which was structured to be paid out over his lifetime—of about $3 million with additional payments of $150,000 for the rest of his life, in lieu of a pension.

Now, having had his way with Technicolor and with Pantry Pride, Perelman moved on to Revlon.

I
N THE
junk-bond-takeover war, which began in earnest in early 1985 with Icahn's raid on Phillips, Revlon was the crucial campaign. That was where the most impassioned corporate defenders were united against Milken's onslaught; where they unloaded everything in the takeover defense arsenal; and where they fought down to the wire, committed to evading Perelman at all costs to the very last moment. What they lost sight of—particularly as Perelman, by the good grace of Milken, kept upping his all-cash bid—was that Perelman's money was as good for the shareholders as anyone else's. In the end, they sought so desperately to escape his clutches that they undid themselves.

To Bergerac and his advisers, and to the rest of the corporate establishment that watched with fear and trembling, the fight for Revlon was a rude introduction to a new world. All the brainpower, clout and class connections that Revlon summoned were no match for the raw financial might of Drexel. Michael Milken had become the great equalizer.

At the outset, it seemed to Revlon's advisers, and to much of Wall Street, preposterous that Pantry Pride would prevail. For all the furor in Congress over Drexel and its junk-bond-financed takeovers, the facts were that by mid-1985 few had succeeded. In the most highly visible and emotion-charged bids—Icahn's for Phillips and Pickens' for Unocal—the companies had fended off the raiders. Triangle's bid for National Can had succeeded, but that had not exactly started out hostile (National Can was in the midst of trying to do its own LBO, and its directors had said they would consider any higher price by another bidder).

Before Perelman made his bid for Revlon in August 1985, the single instance of a Drexel-backed deal that had started hostile and gone to completion was Coastal Corporation's takeover of American Natural Resources Company (ANR), which had turned friendly after two weeks' bitter struggle in April 1985. And ANR, an Oklahoma
pipeline-manufacturing company, was not Revlon. As one Pantry Pride strategist recalled, “The attitude on the Street was, How could a major institution like Revlon be taken over by someone like this, a complete unknown—someone who'd made his wealth in cigars and licorice, not to mention with his wife's money?”

Dennis Levine, the Drexel investment banker who represented Pantry Pride in the Revlon battle, recalled Martin Lipton's attitude when the fight was just about to begin, in mid-August. Levine was in Lipton's office at Wachtell, Lipton on another matter. Lipton had just been retained to represent Revlon, and Levine had mentioned that he would be advising Pantry Pride. “ ‘Don't waste your time,' Marty said. ‘Pantry Pride will
never
get Revlon.' ”

Lipton brought more than the usual defense lawyer's fervor to this deal. Over the course of the preceding year, Lipton—who had built his firm and his wealth on a takeover practice—had emerged as one of the most outspoken and vehement enemies of what he called the “two-tiered, bust-up junk-bond takeover.” “Two-tiered” referred to the fact that bids had featured a front end which paid cash to tendering shareholders and a back end which paid debt securities, thus pressuring shareholders to tender speedily so as not to be left in the second group. But now that Milken appeared able to raise almost any sum of money through the sale of junk bonds, Drexel had moved to the all-cash bid—which would be much harder to defeat in court. “Bust-up” referred to the plan, in most of these deals, to pay down the debt by selling off pieces—if not the entirety—of the company.

During the course of the Revlon battle, Lipton would be moved to new heights, firing off to his corporate clients a memo entitled “Rape and Pillage in the Corporate Takeover Jungle”: “This year has witnessed the demise of the few remaining restraints on corporate raiders. They have been let loose to take over and bust up American corporations at will. . . .”