by Connie Bruck
With all these hefty surcharges, therefore, Icahn did not want to raise the entire $4 billion—and with the vote on management’s recapitalization plan just a week away, it was unlikely, anyhow, that Milken could raise the $4 billion in time. According to Black, Milken was pressing Icahn to let him raise $2 billion, but Icahn drew the line at $1.5 billion. In forty-eight hours, it was done.
Sorte commented, “Lots of the buyers now were the same ones that we’d lined up one year before in Mesa-Gulf [when they obtained $2.2 billion in oral commitments]. And we kept a lot of our powder dry. For example, we didn’t put in the S&Ls, even though we had lots of them. We realized that if we started having lots of S&Ls in hostile deals, we would jeopardize their ability to be in any [because of the growing concern in Congress about junk bonds and thrifts’ investments in them]. And a lot of our big buyers weren’t there. Executive Life wasn’t there. Columbia S&L wasn’t there. Carl Lindner wasn’t there. We wanted people to think we were not stretched.”
Some of the faithful, of course, were there. Meshulam Riklis (Schenley Industries) came in for $25 million; Nelson Peltz (Triangle Industries), $20 million; David Solomon (Solomon Asset Management), $50 million; and Steve Wynn (Golden Nugget), $40 million. The biggest pieces were taken by the Belzbergs, Charles Knapp and Atlantic Capital.
The Belzbergs, through three of the entities they controlled—First City Properties, First City Financial and Far West Financial Services—weighed in for $287.5 million.
Knapp, through Trafalgar Holdings, signed up for $100 million. Since Milken had not raised that mythical $1 billion for Trafalgar, it seems highly unlikely that Knapp had $100 million to contribute to anything at this point. More likely, this was a way for his Air Fund to earn a commitment fee of $375,000. Two months later, Knapp would commit $15 million to the Peltz and May Triangle–National Can deal—and then back out.
And, finally, Atlantic Capital, which appeared on the list submitted to the SEC under a disguised name, Worldwide Trading Services, came in for $100 million—taking $50 million in preferred stock, which was the biggest chunk of preferred by far.
It seems unlikely that Icahn intended to take the company. One of his advisers recalled the night when Icahn was told that the proxy solicitation was going well and that he might well win the company. “His attitude was, Holy shit! And we sat him down and started to tell him about an oil company. You know, holes in the ground that are called wells. Carl is a very smart man—but he didn’t know a helluva lot about the oil business.”
In the end, Icahn won his proxy contest. Phillips had instituted a poison pill—the defense mechanism created by takeover lawyer Martin Lipton, which is triggered by a would-be acquirer’s buying a certain percentage of the target’s stock and gives shareholders such extravagant rights that the company is rendered far less desirable—designed to protect the company from being taken over by Icahn or any other bidder, so the recapitalization plan would seem to have been the shareholders’ most attractive option. But in a dramatic display of new shareholder activism, shareholders voted down the recap plan. Then the company sweetened the plan—and Icahn decided to sell his stock and move on. He had invested about $175 million in Phillips stock, mainly with his war-chest money from Drexel’s refinancing of ACF. And now his trading profits on the ten-week deal were $52.5 million—more than twice what he had ever made in a deal before.
Icahn did not retreat from the field of battle without a long night of haggling, however. He had declared publicly that he would not take greenmail. But “expenses” were something else. Phillips was prepared to pay him $25 million. Icahn insisted that his expenses were $27 million. One adviser in this deal insisted that even the $25 million was a profit-making, not break-even, deal for Icahn. Hours went by. The other side did not budge.
“In the end he gave in because the Phillips people dug in their heels,” said Anthony James, of Donaldson, Lufkin and Jenrette. “The Phillips board had authorized a maximum of $25 million, and they weren’t going to meet again. So it was take it or leave it. That’s the only way to deal with Carl. You have to cut off your avenues of retreat. Otherwise, he’ll just keep nibbling away at you. Carl will fight endlessly for the last million, the last half million. He will fight for the last penny.”
While Icahn prides himself, as he so often says, on being “a man of my word,” James—who has also been opposite Icahn in deals—counters that Icahn is a man of his word “in a sense. With Carl, the deal’s never over till it’s over, till you have negotiated every possible last detail. We have corporate clients who, once you’ve agreed with them on the major piece of a deal, will bend over backwards to be fair, to drive the other ten unnegotiated pieces together so that the deal happens. Carl would take every one of those ten things and use them to negotiate every last advantage.”
Icahn, said James, is different from most people who “care about how they appear, and therefore feel certain restrictions on their conduct. Carl is not impeded that way. He is guided only by what is in his economic interest—and so he’s been a lot more successful than most.”
PHILLIPS WAS Drexel’s gala coming-out, the $1.5 billion bash that proclaimed to corporate America and its investment bankers that Drexel had come of age. For Icahn, the feted raider, who heretofore had made his idiosyncratic ascent in measured, self-propelled steps, it was a giant—almost magical—step up.
After Phillips, however, Icahn went his own way. Unlike Peltz, who, once Milken had enthroned him at National Can, made no meaningful move in the M&A world that was not orchestrated by his benefactor, Icahn continued to do what he had always done—choose his targets with Kingsley, move against them on his own. But by mid-1985 Drexel had become so ubiquitous in the M&A world that wherever Icahn turned, Drexel showed up, too.
Sometimes Icahn and Drexel, although independent, seemed to complement each other. For example, in April 1985, Icahn, who had accumulated a 10 percent position in Uniroyal, threatened a takeover; the company’s management then took it private in a leveraged buyout—financed by Drexel. And Peltz, with Milken’s help, would later acquire the core chemical business of Uniroyal.
But in TWA, Icahn and Drexel found themselves at odds. TWA was a Drexel client, albeit a far more prosaic and less important one than Icahn; Drexel had raised $100 million in financing for the airline in 1984. When TWA executives learned in mid-April that Icahn was accumulating the company’s stock, therefore, the first thing they did was seek Drexel’s protection, exhorting Fred Joseph to persuade Icahn to retreat. It was in fact Drexel’s policy—known as the “Joseph doctrine”—never to assist an aggressor client in depredations against another client, but to go to the defense of the victim.
The necessity for that policy is self-evident, according to Leon Black. Drexel’s client list is a roster of raiders. “How could any corporate client open up to us if they thought we would help one of our clients take them over?” Another Drexel executive added that the policy was sometimes phrased more bluntly to prospective clients: “Pay us, become our clients, and we’ll protect you.”
Adding to the TWA executives’ indignation was the fact that their chief financial officer, Robert Peiser, had made a presentation on the airline at the Predators’ Ball two weeks earlier. After Peiser’s talk, Icahn had introduced himself and engaged him in conversation for about fifteen minutes. “They were casual questions, kind of bantering, but Carl’s got a way of asking probing casual questions,” Peiser recalled. “And afterwards, a number of people who had been standing around, listening to us, came up to warn me that he was really interested in the cash flow of the company.” Now Peiser and others at TWA felt badly used, as though they had been offered on a menu to Drexel’s party-goers.
“I really tried to dissuade Carl,” said Joseph. “I told him that we couldn’t support him. Most important, though, I said I didn’t think it was a good business for him.” Joseph raised a number of disadvantages: “It’s capital intensive. It’s in the midst of deregulation, so it’s
a free-for-all, but still regulated enough that you can’t do lots of things. There’s a history of adversarial labor relations. It’s dependent on a volatile commodity—jet fuel. Pricing is a complicated chess game—so if somebody else in the industry makes a mistake, you can get hurt.
“I kept going through this litany,” Joseph said, “and Carl kept saying, ‘Stop, stop, I’m going to throw up, stop.’ ”
Moreover, from a political standpoint, Joseph thought Icahn’s timing could not have been worse. “I told him I’d just been down in Washington, getting screamed at by Senator [Thomas F.] Eagleton.” Joseph had recently testified before the Senate Subcommittee on Securities headed by Senator Alfonse D’Amato. The raids on Phillips Petroleum (first by T. Boone Pickens and then by Icahn) and Unocal (by Pickens) had created a backlash, and a lot of antitakeover legislation was being introduced. A raid which might result in the dismemberment of an airline as symbolic as TWA would add fury to the storm.
Icahn was aware of the trouble in Washington. Just two months earlier—in the midst of his Drexel-backed raid on Phillips Petroleum—he had testified before a House subcommittee. He had lectured the Congressmen on the ineptitude of American corporate management, regaling them with a couple of his usual routines—slightly tempered for this crowd—on his misadventures in a corporate world where, to hear him tell it, he alone had the gumption to declare that the emperor wore no clothes.
Leon Black thought Drexel’s warnings just whetted Icahn’s appetite. And Drexel was caught in the middle: they had sworn they would not represent the aggressor but were rejected by the victim because they were so close to the aggressor. At the start, the firm acted as intermediary, hosting several meetings between Icahn’s and TWA’s representatives. Meanwhile, Icahn continued to buy stock. On April 29 he crossed the 5 percent threshold, and when he filed his first 13D with the Securities and Exchange Commission, ten days later, he owned not 8 or 9 percent of TWA’s stock, as its management had feared, but 20 percent.
IN THE BEGINNING, the directors, managers and rank-and-file employees of TWA viewed Icahn much as his other targets had—as a pariah. TWA filed the usual battery of lawsuits, seeking an injunction against Icahn’s buying any more TWA stock or commencing a tender offer or a proxy fight. The airline petitioned the U.S. Department of Transportation to investigate whether Icahn was fit to run an air carrier. It encouraged the unions to mobilize against Icahn; employees lobbied legislators and wore “Stop Carl Icahn” buttons. TWA solicited help from Congress. And in a congressional hearing in early June, one month after Icahn had surfaced with 20 percent of the company, the president of TWA, C. E. Meyer, Jr., called him “one of the greediest men on earth.”
Icahn also testified at that hearing, and he revealed a fine appreciation of his own abilities, a confidence perhaps born of the fact that to this time he had suffered no major loss. Asked by one member of the congressional panel why he had chosen TWA as a target, Icahn responded, “Do you ask Willie Mays why he jumped a certain way for a ball? Or do you ask McEnroe why he holds the racket a certain way?”
In fact Icahn and Kingsley had been lured to the airline in large measure by what they read as its ample cash flow—the raider’s lodestone. TWA was basically breaking even, but it had—according to Icahn’s calculations—about $200 million in depreciation.
In the Drexel-hosted meetings with Meyer, CFO Robert Peiser and other TWA executives, Icahn had talked a great deal about the airline’s cash flow. Meyer had argued that it was unpredictable, because in the crisis-ridden airline business, vulnerable to strikes and to terrorist attacks which halted tourism, it could disappear overnight. Icahn was unimpressed.
But on another point he was persuaded. He had had a tentative plan to partially liquidate the airline (discontinuing domestic routes and selling planes), but in the course of these meetings the TWA officials convinced him that that liquidation plan was not viable.
In an evidentiary hearing before U.S. District Judge John Cannella, Icahn testified to having been so persuaded. “I go by instinct,” he said, explaining this sudden sea change in the middle of a deal in which he had reportedly already invested over $100 million. He emphasized that, in fact, he preferred a course that did not require selling off major assets. “I was never in love with liquidating a lot of planes,” he testified. “. . . I don’t want to get the image of a liquidator.”
So the plan changed, but the newly image-conscious Icahn was seemingly undeterred. Judge Cannella found him credible and denied TWA’s request for a temporary restraining order against Icahn, which would have stymied him. He continued to accumulate stock. After Cannella’s decision, the directors of TWA decided that the company had to be put up for sale. Though Resorts International showed some interest, in the end the only clearly committed white knight was Frank Lorenzo of Texas Air.
FRANK LORENZO, who had started his career as a financial analyst at TWA, had boot-strapped himself into the aviation business by taking over the ailing Texas International Airlines in 1972. He had long harbored an ambition to own TWA. If he added TWA to Continental and New York Air (both owned by Texas Air), the market share of those three carriers would be second only to United Airlines.
Lorenzo was represented by Drexel. TWA had hired Salomon Brothers, not Drexel, because the TWA directors did not trust Drexel. And while Kidder, Peabody had been Texas Air’s traditional investment banker, in this transaction—which would be essentially a leveraged buyout, with the financing of about $750 million raised largely from the sale of junk bonds—only Drexel could place the debt.
The Drexel investment banker working for Lorenzo was Leon Black. Black and Icahn had become such good friends during the course of their ACF refinancing negotiations and then the Phillips campaign that, from the start of this transaction, Lorenzo and some TWA advisers were uneasy about the relationship.
One night in mid-June, Icahn, Black and other Lorenzo advisers, and a host of lawyers and investment bankers for TWA held an all-night meeting to structure a three-way peace. Icahn would sell his stock into the Texas Air–TWA merger, making a profit of roughly $79 million, and would also receive an additional package of about $16 million. This was not to be greenmail. Icahn did not want greenmail anymore, but he did want money, so this was a package of “expenses” and other benefits.
Had Lorenzo paid Icahn his price, TWA would have gone down in the annals of corporate raids as a vintage Icahn deal, in which he was a buyer at one price but a seller at another and his advances forced the company to sell to a third bidder. All that would have differentiated this deal from its predecessors would be his profit—at $95 million, his biggest yet.
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 othe
r 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.
