The Predators’ Ball

by Connie Bruck

  The interest on the majority of the securities Pantry Pride had issued was slightly more than 14 percent. So, assuming for the moment the bank rate, which was 8 percent, Perelman had a negative carrying charge of about $40 million a year. And it was, of course, not a case of just losing that $40 million. How was Perelman to pay back the $750 million, which even in the never-never land that Drexel had created must come due someday? If Perelman did not get Revlon, he had to get something else. Fast. And it had to be a good and reasonably priced acquisition—something that was increasingly hard to find. And if such an acquisition was hostile, then—after more months of fees and carrying costs—it too might not work. And Perelman would be no longer just a tilter at windmills, but a loser.

  There was also the time and money already invested in the Revlon deal. Perelman owed roughly $20 million in lawyers’ and investment bankers’ fees. And he had just incurred the commitment fees of over $5 million for the $350 million he had taken down in the private placement.

  Beyond these practical considerations that impelled Perelman, his advisers say, was his urgent desire to do the deal. Echoing other Perelman associates, Fred Sullivan referred to Perelman’s “incredible tenacity. He was like a dog with a bone. He would not stop. I think if he’d had to bid ninety dollars he would have done it.”

  Drexel’s Abecassis added, “I don’t know when Ronnie would have stopped. We were getting nervous. It was getting very thin.”

  On the Revlon–Forstmann Little side, Loomis was not alone in his assessment of Perelman’s position. In just a week, Loomis and others had gone from believing that they had buried Perelman to seeing him as someone whom no bid would stop. Bergerac said, “We really were tempted to go to sixty or sixty-five, just to watch him do himself in—but then what would we have done if by some chance he let us have it?”

  Swept along in the maelstrom, the Revlon advisers and directors had gone from their initial and justifiable position of fighting Perelman’s lowball bid of $47.50 to seeking a way to thwart his making an ever higher bid. The dynamics of the deal had changed, but their animus for Perelman stayed constant and blinded them.

  One other element had been added to the scenario in this last week. When the board approved the buyout with Forstmann, Revlon had had to undo all the defensive measures it had instituted to ward off Pantry Pride. It had redeemed the poison pill and waived the debt covenants (imposed in the exchange offer) to allow Forstmann to leverage the transaction by borrowing on Revlon’s assets.

  Now the price of the exchange offer notes, which had been issued August 26 and were intended to trade at par (face value), plummeted in reaction to the announced leveraged buyout. (The notes would no longer be as secure, since Revlon’s capital structure would be laden with debt.) According to an affidavit filed by Rifkind, “Since our meeting of October 3, the notes had dropped to as low as $87—a decline of about $60 million below par. I was deluged with telephone calls from irate holders who had exchanged shares for 11.75 percent notes which they believed would be worth par, and who now saw a 13 percent erosion in the value of their notes.”

  And on October 10 an article in The Wall Street Journal, entitled “Some Revlon Investors Say Company’s Moves Could Cost Them Millions of Dollars in Losses,” stated that some angry bondholders were considering legal action.

  What Pantry Pride offered to do about the noteholders is not clear. Gittis wrote Revlon a letter on October 11 stating that Pantry Pride would pay the interest and the principal on the notes—in other words, nothing extra. But Drapkin filed an affidavit in which he stated that he had told Lipton, in a phone conversation on October 10, that they “were willing to satisfy Revlon’s concern for the noteholders and that the issue should not block the deal.”

  What was clear was what Forstmann Little was willing to do for the noteholders: it promised to exchange the old notes for new ones that would trade at par. It also agreed to raise its bid to $57.25—one dollar higher than Perelman’s. In exchange, it demanded a lock-up option, something that would in essence preclude a bid for Revlon by anyone else. If another acquirer obtained 40 percent of the stock, that would automatically trigger the right of Forstmann Little to buy two divisions, Vision Care and National Health Laboratories, for $525 million. That price, according to Lazard, was below fair market value. And in this new version of the Forstmann buyout, management would drop out as equity partners. Lipton and Liman both advised Bergerac that, with the lock-up option given to Forstmann, he was placed in a position of intolerable conflict.

  On October 12, after Drapkin had made repeated unsuccessful attempts to reach Revlon advisers by telephone the previous day in order to reopen negotiations, the Revlon board approved the new, revised Forstmann Little deal, with the essential lock-ups. These were essential not just to Forstmann Little, which wanted to halt the dance with the inexhaustible Perelman, but to the Revlon board and its advisers, who wanted the same thing. As the board minutes—which, in line with Lipton’s regular policy, were taken in elaborate detail—say, “The effect of the lock-up option, Mr. Lipton stated, was to deter a bid at a higher price than $57.25 . . .”

  At the decisive meeting, Forstmann addressed the board. He made it plain that he and the Revlon directors had united to defeat a common enemy, the worst sort of parvenu.

  . . . Mr. Forstmann noted that before this transaction had begun he had never heard of Ronald Perelman [say the minutes]. He stated that . . . Mr. Perelman had proposed to Mr. Forstmann that they chop up the company between them. Mr. Forstmann stated that in Mr. Perelman’s proposals the word “employees” was never in his mouth. . . . A director inquired of Mr. Forstmann what his ultimate point of dispute with Pantry Pride preventing an agreement was. Mr. Forstmann stated that basically the chemistry just wasn’t right. He stated that he had not entered into this transaction in order to make a deal with Mr. Perelman. Mr. Forstmann stated that he was interested in the transaction not only for the profit he could make but for other reasons as well and that the other reasons would be violated if he had entered into a deal with Pantry Pride.

  WITHIN TWO WEEKS of Revlon’s having granted Forstmann Little the lock-ups, they were undone by Justice Joseph Walsh of the Delaware Chancery Court. (The disclosure and margin requirements, whose alleged violation was the subject of the earlier litigation, were federal laws; but the issue that the battle now hinged upon, whether the Revlon board had failed in its fiduciary duty to shareholders by granting the lock-ups, was a question of state law.)

  The court found that the Revlon board had indeed “failed in its fiduciary duty to shareholders,” having breached the “duty of loyalty.” While it found the Revlon board’s early defensive measures—the poison pill and the exchange offer—appropriate, it opined that once it became clear that there would be a breakup of the company, the directors’ role changed from one trying to thwart a hostile acquirer to “an auctioneer attempting to secure the highest price for the pieces of the Revlon enterprise.”

  At that point, the court was saying, the board should have been essentially blind, or indifferent, to the identity of the bidders. Instead, it acted out of favoritism, seeming to “want Forstmann Little in the picture at all costs.” The reason for this, the court decided, appeared to be the directors’ concern over their personal liability to the noteholders; but their sole responsibility as directors was not to the noteholders but to the shareholders. And it was their “self-interest,” the court found, that led them to make the concessions to Forstmann Little that excluded Pantry Pride.

  The directors had not contented themselves with giving Forstmann Little the lock-ups, but had further maneuvered to, in effect, lock up the lock-ups. The court mentioned that Revlon, after the final board meeting, had transferred into escrow the assets of the two divisions which were part of the lock-up agreement, and that the court—in response to a protest from Pantry Pride—had issued an order prohibiting any further transfer of assets until the pending motion had been decided. In Joe Flom’s view, tha
t transfer of assets was “their biggest mistake. It colored the whole proceeding.”

  On Thursday, two days before the final Revlon board meeting which Forstmann had addressed, Justice Walsh had seen lawyers for Revlon and Pantry Pride in his chambers. The Pantry Pride lawyers were pressing for an expedited hearing on their motion for a preliminary injunction to stop the Revlon-Forstmann leveraged buyout (which the Revlon board had voted to accept) and the Revlon lawyers said there was no reason the hearing could not be held after the weekend, during the following week, since no action was planned. The Revlon board held its meeting on Saturday and granted the lock-ups. The following Monday, a bank holiday, Revlon and Forstmann Little managed to get the assets and the $25 million breakup fee transferred from Manufacturers Hanover to Morgan Guaranty. When the outraged Pantry Pride lawyers appeared before the judge the next day, the judge, clearly angered, issued an order preventing any further transfer of assets.

  On November 1 the Delaware Supreme Court affirmed the lower-court ruling, and the battle that had begun in August was finally over. The court commented:

  . . . Forstmann was given every negotiating advantage that Pantry Pride had been denied: cooperation from management, access to financial data, and the exclusive opportunity to present merger proposals directly to the board of directors. Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter’s offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties [a reference to the court decision in Unocal, where directors were given wide discretionary scope] by playing favorites with contending factions.

  The court also commented that after that initial June meeting between Perelman and Bergerac “all subsequent Pantry Pride overtures were rebuffed, perhaps in part based on Mr. Bergerac’s strong personal antipathy to Mr. Perelman.”

  That, of course, was the key—the overriding animus that Bergerac and the rest felt for Perelman and “Panty Pride” and “the Drexels.” It was not simply that the Revlon directors and advisers feared that Pantry Pride would not take care of the noteholders and so had turned to Forstmann Little; it was that they feared, more than anything, that Perelman would come back, offering more and more, with his limitless piles of lucre, and there would be no escape.

  THE CONQUEST of Revlon signaled the end of an era. Those who defended it were struggling to perpetuate a way of corporate life—plush, congenial and secure, unmenaced by anyone but perhaps another corporate giant—that had lost its capacity to prevail in the economic world. The junk-bond marauders had won here, and if they had won here they could win anywhere. It had all happened so quickly that Revlon’s advisers, when they spoke later about the company, sounded faintly archaic, unmistakably out of step with the times. Milken had not singlehandedly created a new age, but he had done more to shape it than any other individual.

  Months later Rifkind returned to the MacAndrews and Forbes board, but he did not rejoin Revlon’s newly constituted board. “I’d been a Revlon director since the fifties,” Rifkind mused. “I had watched Revson build the company. The board was like a family. We’d known each other for years. It was collegial.”

  Rifkind gazed out his office window toward the dome of St. Bartholomew’s Church on Park Avenue. “If somebody could prove to you that the bricks of that cathedral [sic] could fetch a higher price in the market, would you dismantle it? I know, I know, today it is put ’em together, break ’em up—no cement anywhere.”

  In the final days and the aftermath of the battle, Bergerac was pilloried in the press and ridiculed by Perelman and his followers, who painted him as the kind of corporate executive from whom shareholders need deliverance. When Perelman was asked by a New York Times reporter about Bergerac’s claim that he had offered to improve Bergerac’s lifestyle, he responded, “I don’t think that could ever be improved upon.”

  With his enormous parachute and his elegant, European lifestyle—much of it supported by company perks—Bergerac had made an easy target. From the time the Forstmann Little-management buyout was announced, he had received a working-over in the press. At the outset of the battle he had announced that Revlon was worth $65 a share, and he had derided Perelman as a “bust-up artist.” Then he helped to engineer—with his roughly $35 million severance package—his own bust-up of the company, at a price that was $9 below what he had first said the company was worth.

  For this, Bergerac was portrayed as a self-interested hypocrite. But what this attack ignores is that $56 was a good price for the company, and that Bergerac had fought hard to bring it up from Perelman’s $47.50 (and then $42, when he factored in the cost of Revlon’s exchange offer). He had done well for his shareholders. It is true that he was attempting to do the very thing he had accused Perelman of—busting up the company. But there was no white knight to take the company whole. Was Bergerac to do nothing and let Perelman bust it up for $53? In his own bust-up, he would have been able to take care of his people, something his advisers concur was a foremost concern throughout this battle. Had Bergerac been solely self-interested, he could have accepted Perelman’s lavish inducements.

  Of his defeat Bergerac said, “It was a terrible experience. I would hope to never go through something like that again. At the final board meeting, people were bawling, I cried. . . . You must understand, people had a love for this company. It was like a woman’s being raped.”

  Revlon was a public company. It did not belong to Bergerac or to the others on the board who wept for it. But shareholder ownership is an abstraction, compared to the tangible reality of a company, its directors, its employees who come to work every day, its customers and its community. It is the dislocation or destruction of that tangible reality that makes hostile takeovers so fraught with emotion.

  Felix Rohatyn contrasted Revlon—which he calls his “virginal experience” in defending against a bust-up, junk-bond raid—with other hostile raids in which he has been a defender. “People on the other side are usually a company interested in a product, in business strategy, and the emphasis is on how do you put two companies together and make them grow, where do we go from here to make them bigger and better.

  “Here the overriding issue was, what can we sell for how much, to be left with a small piece for nothing, or virtually nothing. On the other side was a group of people tearing at a carcass—a group of people interested in numbers on pieces of paper, and nothing having to do with people, customers, quality, is this good, bad, or indifferent.”

  This world had changed. And it had not changed for the better. It was not simply a matter of the old members of the club not liking the style of these shrewd, dollars-and-cents-driven parvenus, who had started their own club and were now running things—though that, certainly, was a part of it. It was also that these newcomers, in their desperation to break in, seemed to flout not only social values, but the law. Revlon’s defenders had alleged and then failed to prove violations of the law, but they remained convinced that it was true.

  As one participant declared, “In the seventies, among the people I dealt with . . . there were some I liked and some I detested but they were all bright, decent people. The arbs were Bob Rubin [of Goldman, Sachs] and Bunny Lasker [of Lasker, Stone and Stern], and they were honest, and if they thought they had inside information they’d call and ask, and if we said yes, then they’d freeze their position. And the clients were people like Larry Tisch going after CNA—or big companies going after other big companies, because they believed they could run them better.

  “Now it’s the Icahns and the Jacobses and the Pickenses and the Peltzes and the Perelmans.

  “And,” this participant continued, displaying the paranoid-sounding mind-set that the junk-bond wars had induced, “we have to have detectives in to make sure our rooms aren’t bugged and our phone lines aren’t tapped, and that they aren’t sending electronic beams into our offices
, and we have to look for hidden cameras when we go into and out of meetings. They have ruined my life. You feel like you’re in the gutter, like they’re piling shit on you and you have to keep struggling to get up from it. And it’s all been made possible by Drexel. Without Drexel, none of it could have happened.”

  WHILE REVLON’S defenders mourned, the “blue team” celebrated. When the deal closed in early November, Perelman hosted a dinner for thirty aides, lawyers and investment bankers at Le Club, an exclusive Manhattan nightspot. Perelman’s favorite champagne, Cristal, flowed freely, and some of the key players put on a skit which—in the continuing color-war motif—was referred to as the “songfest.”

  It opened with the first Perelman-Bergerac encounter, in June ’85. Dennis Levine played Bergerac, dressed as a big-game hunter, mimicking his French accent, calling Perelman an “upstart” and a “Jew from Philadelphia.” Engel played Perelman. Wearing Gucci loafers and one of his $3,000 Fiorentino custom-tailored suits, he fondled and puffed a fat Macanudo cigar and dropped its ashes on Bergerac’s rugs. When Bergerac (Levine) offered Perelman (Engel) some Château Lafite, Perelman asked for vodka. “Peasant!” snorted Bergerac.

  There was plenty to celebrate for those on hand that night. Perelman had gotten the company of his dreams—though not for free, as he had originally planned. Its real cost would not become clear for some time, until the divestitures were completed. But for most of these merrymakers, particularly the lawyers and the investment bankers, the bust-up of Revlon had already spouted geysers of gold. Fees paid to lawyers and investment bankers in this deal came to over $100 million—making it the most lucrative takeover yet. Even the $13.4 billion acquisition of Gulf Oil Corporation by Standard Oil (instigated by Pickens) threw off only $60 million in fees.

  Revlon’s legal bill, from Wachtell, Lipton and Paul, Weiss, is estimated at about $10 million, while Pantry Pride’s from Skadden, Arps is estimated at $7–8 million. Fried, Frank, Harris and Shriver, representing Forstmann Little, was paid at least $1 million.