The Predators’ Ball

by Connie Bruck

  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.”

  IN EARLY SEPTEMBER ’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 l
eft 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.

  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, i
s 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?’ ”