by Connie Bruck
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.
IN 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. . . .”
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 inter
est, 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.
