The Predators’ Ball (32 page)

Lipton was drawing a line between the kinds of hostile takeovers he had helped to engineer in the seventies and the Drexel-type wave launched by what he called “takeover entrepreneurs.” He drew this distinction in testimony before Congress in the spring of 1985, when about thirty bills to curb hostile takeovers or junk bonds or both were being debated.

Soundly financed acquisitions by successful operating companies seeking to diversify or expand have been an integral part of this
country's economic development, and they should not be restricted, Lipton testified. But the bust-up takeovers by takeover entrepreneurs move assets into hands that profit by reducing expenditures for research and development and capital improvements—while a very high percentage of the revenues produced by the acquired assets are diverted to paying the debt incurred by their acquisition. The result is enormous profits for the takeover entrepreneur in the short term—and badly weakened companies, both financially and operationally, in the longer term.

“What we face today,” Lipton warned, “is not different in substance from what happened in 1928 and 1929.” Privately, Lipton expressed another concern, one shared by many of the businessmen and lawyers who were part of the Jewish establishment in New York, and by some of the Drexel contingent as well. They feared that the common strain among these nouveau entrepreneurs and their nouveau bankers at Drexel—an overwhelming majority were Jews—would unleash a backlash of virulent anti-Semitism. Lipton and other corporate defenders had already felt its undercurrent in the executive suites of the Fortune 500 corporations that had come under Milken's gun. Should the kind of economic disaster that Lipton and others were prophesying take place, they feared that Jews would be scapegoated.

As one Drexel client who shared Lipton's concern put it, “It used to be that the Jews would go into Manny Hanny, or Morgan Guaranty, and they'd
beg
for money, and they'd be rejected, while the Gentiles would come in and they'd all go to lunch and smoke cigars. Now it's a shift of power to the Jews. Drexel is making these huge sums of money, and the banks comparatively little. The problem is,
all
the entrepreneurs are Jews with the exception of Pickens and Lindner—and Lindner, a longtime supporter of Israel, is the most Jewish non-Jew I've ever known.”

Lipton had been practicing what he was preaching on the public podium. He had refused business from takeover raiders, including former client Sir James Goldsmith. More significantly, he had turned down Fred Joseph's repeated offers to split Drexel's legal work three ways: among its longtime firm, Cahill, Gordon and Reindel; Skadden, Arps; and Wachtell, Lipton.

In fact Lipton
had
represented Drexel in one vital matter in the spring of 1984, but that was before Milken's takeover machine had really gotten into gear (Milken's only effort, at that point, had been
Mesa-Gulf). Lipton had been invited to speak on a panel at the 1984 Drexel High Yield Bond Conference. While he was there, Drexel executives learned of a planned coup d'état by their 35 percent shareholder, Groupe Bruxelles Lambert S.A. GBL was unhappy, among other things, about the fact that Drexel was reaping so many millions but paying no dividends on its stock.

Lipton organized a defensive maneuver whereby the rest of Drexel shareholders voted to change the firm's charter in such a way as to hamstring their Belgian partners. In the end, a compromise was reached. GBL got its desired dividend in return for lowering its holdings from 35 percent to 28.5 percent. They exchanged common shares for preferred. Since they did that, the value of the common had skyrocketed.

That was the only time Lipton had agreed to represent Drexel. How Lipton had gone from hired gun, who with his friend and rival Joe Flom virtually had created the takeover business in the seventies, to crusader—even turning down business in the name of his cause—bemused many who knew him. Some questioned whether the impassioned polemics sprang at least in part from a shrewd business judgment, to curry greater favor with his beleaguered corporate defense clients and thereby enlarge his franchise—something which Goldman, Sachs had done in the early seventies, when it announced it would not represent aggressors in a hostile deal. Or it may be that Lipton, like certain regents of the takeover world, felt proprietary about it, responsible for it—and abhorred the ways in which the newcomers, Drexel's parvenus, were changing it.

Another outspoken and high-powered foe of the junk-bond takeover by the spring of 1985 was Lazard's Felix Rohatyn, who was now brought in to represent Revlon. Like Lipton, Rohatyn had testified before Congress, and, like Lipton, he had sought to differentiate between those hostile takeovers which were “fair” and “soundly financed” (in which he as adviser, like Lipton, had made much of his money) and the current junk-bond variety.

The risk in financing these megadeals with junk paper is twofold, Rohatyn had testified. First, the paper is not secure; in order to service the high rate of interest, companies have to either improve operating performance significantly or—what is much more often the case—make asset divestitures, which may not be desirable. Rohatyn remarked, “It is an approach that also completely fails to take into account the fact that a large corporation is an
entity with responsibilities to employees, customers and communities, which cannot always be torn apart like an Erector set.” The second risk, he had continued, lies in the illiquidity of the paper, since in most cases it is issued not as registered public securities but as a private placement, ultimately making its way through private transactions into financial institutions such as savings banks, insurance companies and pension funds. These institutions—many of them under considerable financial pressure—end up holding securities for which no large-scale liquid, public market exists.

On the issue of fairness, Rohatyn had pointed to the market speculation that seemed to go hand in hand with these raids, as arbitrageurs often bid up the price of a stock before any public announcement of a bid, making it appear an insiders' game. Public confidence in the capital markets, he had averred, is thus destroyed. He had pointed out that arbitrageurs manage enormous pools of money, some of them financed by junk bonds. Raiders also have huge pools, similarly financed. This creates a “symbiotic set of relationships . . . with the appearance, if not the reality, of professional traders with inside information, in collaboration with raiders, deliberately driving companies to merge or liquidate.”

Also on the Revlon team—though not publicly committed to repelling the junk-bond invaders—was Arthur Liman, one of the best-known securities litigators in the country. His firm, Paul, Weiss, had a conflict of interest, as it had been counsel to both Perelman and Revlon. Liman decided that it would nonetheless be appropriate for him to work on the corporate defense for Revlon (one of the firm's largest clients for over twenty years), but not on its litigation. Liman brought in Wachtell, Lipton to head the litigation.

Capping the Revlon lineup was Simon Rifkind, a former federal judge and Liman's senior partner. He was a crucial player. He was a very influential director on the Revlon board, and the Revlon lawyers were able to wave his mantle before the court. When Perelman made his hostile tender offer, Rifkind, distressed at having vouched for Perelman to Bergerac and encouraged their initial meeting, resigned from the MacAndrews board and remained on Revlon's.

A day or two before Perelman made his offer, he had asked to meet with Rifkind. “The judge tried hard to dissuade him,” said Liman, who attended the meeting. “He told him there were greener
pastures elsewhere; he said that Ronald would never be perceived the same again after mounting a hostile raid. He said he wouldn't be following the path of Larry Tisch. But he didn't ask Ronald, for his sake, not to do it.

“As for Ronald,” Liman continues, “he obviously cared a lot about what the judge thought of him. He wanted the benediction of Abraham.”

The only
éminence gris
that Perelman had in his comer was Joe Flom, a senior partner of Skadden, Arps, who had expanded it from its core takeover business to become a full-service firm and a national powerhouse. Flom is a consummate strategist. Here he played his most significant role at the beginning and at the end. The day-to-day handling of the deal he turned over to Donald Drapkin, the then thirty-seven-year-old Skadden partner who had vaulted over many of his more senior colleagues to become Flom's protégé. He had become Perelman's close friend and lawyer three years earlier during Perelman's failed attempt to acquire Richardson.

In line with the Drexel tenet that people work best when they have an ownership stake, Perelman had made Drapkin a principal in this deal. In June '85, the board of Pantry Pride had loaned Drapkin money to buy Pantry Pride convertible debentures. For a lawyer to become a principal in a deal with a client was a first at Skadden and a practice not followed at any other major New York law firm. It enraged some of Drapkin's partners, but it was a measure of his new clout.

From Drexel, Perelman's senior investment banker was Dennis Levine, a rising star in the firm's corporate-finance department, recently arrived from Shearson Lehman Brothers. Since coming to Drexel, Levine had worked on Phillips, Coastal and Crown Zellerbach Corporation deals.

Perelman also had his longtime sidekick, Donald Engel, who had first brought Perelman to Drexel. Engel had been a Drexel managing director until he resigned in 1984 to become a consultant—but he continued to be involved in Drexel deals and continued to be Milken's trusted aide for entertainment at the Predators' Ball. After his resignation, Engel moved his office into the top floor of the opulent town house owned by MacAndrews and Forbes in which Perelman lived and worked, on East Sixty-third Street in Manhattan.

Finally, and surprisingly, Perelman had on his team Eric
Gleacher, head of mergers and acquisitions at Morgan Stanley, most white-shoe of all Wall Street investment-banking firms. Gleacher had moved to Morgan from Lehman Brothers about a year earlier. He was familiar with Revlon from his days at Lehman, where Revlon was a client; and, according to Perelman, the idea of acquiring Revlon was brought to him by Gleacher, in February 1985. Gleacher, moreover, is said to have mounted a vigorous campaign, against heated opposition from partners in his firm, for their representing Pantry Pride. He is said to have won only on the conditions that Morgan Stanley not be listed as “dealer manager” on the tender offer (which Drexel badly wanted them to do, so as to lend their credibility and also share the heat) and assume a distinctly secondary role to Drexel's—something Rohatyn refers to as “Morgan's back-street arrangement.”

Gleacher's partners may have looked askance at representing Perelman's Pantry Pride against a company as august as Revlon, but they had been increasingly tantalized, of late, by the fees in the junk market. In fact, since the fall of 1984 the venerable Morgan Stanley—along with many other investment banking firms on the Street—had been struggling to break Drexel's stranglehold on the junk market. By mid-1985, however, Morgan's record was an embarrassment. One of its inaugural junk underwritings, a $25 million issue for a Houston oil and natural-gas company, Oxoco—a deal which Drexel had declined to underwrite—went into default after about six months. According to
Forbes,
the biggest loser on that deal was Morgan Stanley, which, when it couldn't sell the $25 million offering, took $18.2 million itself (and, after default, with the bonds worth about 35 percent of face value, suffered a loss of over $10 million). Drexel came to the rescue with one of its famed 3(a)9s.

It was one thing to try to break into a market, however déclassé that market was. But it was quite another to join Drexel in one of its most daring assaults on the corporate establishment, and to assume a subordinate role. That Morgan Stanley would play handmaiden to this renegade firm was shocking to the rest of Wall Street and a measure of just how much of a force Drexel had become. William Loomis, a general partner at Lazard Frères, who worked on this deal with Rohatyn, said, “Three things made this deal a departure for Morgan Stanley: that they acted jointly with Drexel; that they acted secondarily to any other investment bank, let alone
Drexel; and that they would go out and attempt to sell things [that their client] didn't own—that is
really
un-Morgan Stanley.”

Morgan Stanley was in charge of divestitures in this deal. And the divestitures, of course, were what made it all possible. Perelman's plan, at least at the start, was to do here what he had done on a much smaller scale in his earlier acquisitions, with Technicolor perhaps the best example: acquire the company with virtually all debt and then sell off the pieces he didn't want, using the proceeds from their sales to pay down the debt and getting the remaining business virtually for free.

Perelman made this plan explicit in his tender-offer document, stating that Pantry Pride believed it might be able to realize up to $1.9 billion—the total of his offer, at the starting $47.50 per-share price—from the sale of substantially all the assets of Revlon, excepting the beauty business. And it was, obviously, necessary to firm up these divestiture prices as much as possible, for Perelman—and, more to the point, Drexel—to know just how much they could afford to bid.

One of Revlon's first defensive moves was to try to shame Morgan Stanley out of the deal. “Marty Lipton called them up and said, ‘How can you guys be getting in bed with Drexel?' ” claimed Dennis Levine.

Bergerac called Robert Greenhill, a managing director of Morgan Stanley, with whom he had gone hunting on big-game safaris. “I said, ‘Bob, what are you doing with these clowns?' There was silence. And then I said, ‘I understand you are out getting prices for pieces of Revlon, selling a company you don't even own. You know, horse thieves used to be hanged.' ” None of these calls to honor met with any success.