Reckoning

by David Halberstam

  The first of the hostile mergers took place in 1974. The timing was significant. The tremors that followed the first oil shock had sent the Dow Jones down; the good times of the go-go years were over. While a number of companies, beneficiaries of a changing world economy, found themselves with more cash than they had expected, other solid companies were, through no fault of their own, significantly undervalued and had depressed stock listings. At a number of large Wall Street investment and banking houses, business was lagging, and high executives of these houses, looking for new opportunities, were beginning to consider what they would not have dreamed of only a few years earlier: representing hostile raiders. In the past, a merger had been a voluntary act between two consenting companies. Now rich companies were willing to swallow dissenting organizations, and they were abetted by Wall Street investment houses badly in need of the business.

  At Morgan Stanley, a bright young man named Bob Greenhill was told to start a mergers-and-acquisitions department. By the standards of Wall Street, Greenhill was considered unusually tough and aggressive. He had gone into the navy after finishing Yale, and years later, when he started his series of hostile offers, he went at them with combat ferocity. “Bob,” said a friend, “regards these battles as miniature Okinawas.” At the time, Morgan Stanley, like other companies on the street, had a vague policy against aiding hostile offers; it was not something the company had done before, and no one seemed, in theory at least, to like the idea. A hostile merger was an ungentlemanly thing to do. Greenhill promptly set about changing the way the merger section was run. In the past there was a finder’s fee for someone who came up with the idea for a merger that was consummated—which was too much like the world of ambulance chasers, Greenhill thought. From now on, he decided, the firm would operate on retainer; a company looking for a merger would pay Morgan Stanley for the time it spent searching for a deal. This step professionalized the process. It also meant that the investment houses, because they would now be handsomely paid, could afford to put their best young staff people on the merger cases. The era of the gentlemen’s agreement, in which one company did not raid another, was about to end.

  In 1974, representatives of International Nickel walked into Greenhill’s office and said they wanted to buy a battery company, ESB (Philadelphia Electric Storage Battery). Inco was a blue-chip firm, highly respectable, with a board made up of some of the country’s leading business statesmen. Its business was unusually cyclical, which made its managers want to diversify, and its scientists believed they had come up with a technological breakthrough that might be used in the battery business. The Inco people also felt that the battery business was a cartel, that there was no way for an outsider to get in because the other companies controlled distribution; they were a tight little group, successfully excluding any newcomers. So Inco had decided to buy one of the existing companies, ESB. Its managers were quite sure that ESB would not permit a voluntary merger. So when Inco’s people came to Morgan Stanley, they wanted to know if Morgan would go along with a hostile merger. This was an important moment, for Morgan Stanley represented the ultimate in probity. But this was a new era, and the investment houses were persuading themselves that they would have to respond to their customers’ needs. After a certain amount of debate the Morgan Stanley partners voted to do an unfriendly merger. Joe Flom, one of its lawyers, who later came to specialize in this kind of business, advised the partners that there was no legal reason not to go ahead.

  Greenhill called Fred Port, the head of ESB, and suggested a meeting. Port, about to go on a trip to Africa, tried to put him off, but Greenhill was insistent. Port reluctantly agreed. Greenhill had a sense that Port believed he was merely some young Wall Street hustler who wanted to sell him some stock. Along with Chuck Baird, the chief financial officer of Inco, Greenhill went to Philadelphia to meet with Port. At first the meeting was friendly. Then Baird said that he wanted to make an offer for ESB.

  “We’d like to do it in a friendly manner,” Baird said, “but we’re quite prepared to take it to the shareholders.”

  Port was startled. This sort of thing wasn’t done. “Whether I agree or not?” he asked.

  Baird and Greenhill nodded their assent. Then they left. Port was stunned. At first he simply couldn’t believe that someone was trying to take his company away. What he wanted to do at first was to issue a series of outraged statements to the board members of Inco, saying that if they realized what was going on, they would know this was an indecorous way to behave. His own investment bankers had to try to calm him down and explain that emotions like that were futile, it was past all that, and that he could not win by waging a war of public relations. You are, said Steve Friedman of Goldman Sachs, who was defending ESB, summoning a past that no longer exists. Port, he said, could either try to argue that the deal should not go through for anti-trust reasons, or he could find a white knight, a third firm that was willing to pay an even higher price for the stock and thus rescue ESB. The advantage of the white-knight approach, Friedman explained, was that it meant a higher price and also that the merged company might be headed by a less hateful chief executive. Port went to Harry Gray of United Aircraft as his white knight. (Gray, ironically, soon emerged as one of the most ferocious corporate raiders in America.) Back and forth Gray and Inco went. The first offer was at $18. Soon it was $38. Inco went to $41, and United Aircraft dropped out. Inco won but it lost. ESB never turned out to be a viable part of its operation, and a few years later Inco wrote it off. But the deed was done. No company was ever that safe again. The merger business began to boom.

  In fact, the merger business soon began to create a culture of its own. It appealed to the ego as few other aspects of business life did. Mergers had captured the fancy of the media—for there was drama, with winners and losers—to a degree that running a sound industrial company had not. Photos of the chief executives involved began to appear in the New York Times and Fortune and Forbes, and there were often small sketches of them in the Wall Street Journal. The chief executive who had pulled off a hostile merger became a figure to watch and in an odd way to respect. No one was to tangle with him. This world was about deals, and deals were fun and exciting. It became a world within a world, one where limousines always waited, and “power breakfasts” were held at Manhattan’s Regency Hotel; there was light gamesmanship over the quality of Cuban cigars, medium gamesmanship over the location of summer homes, and heavier gamesmanship about private jets; at one meeting a famed chief executive went on at great length because his corporate jet had soup that came out of a faucet. It was not necessarily a world of corporate statesmanship, but it had an irresistible attraction; it made ordinary business seem pedestrian. There was to the process, once it began, a kind of frenzy, a sense on the part of the participants that they were involved in a miniature war game. There was almost a macho quality to it; manhood was at stake. The attacker’s competitive juices would begin to run, and those around him, the lawyers and the investment bankers, and the media, egged him on. The appeal was not just the acquisition but the act of acquisition, the hunt.

  The Street, having helped created this world, was soon affected by it. The mergers-and-acquisitions sections of the investment banking houses became larger and more important. In the process, a new class of investment bankers was created. Because the world of mergers was so frantic, the risks and therefore the stress so great, those drawn to it were hungry, driven, and above all young. The burnout rate was extraordinary. A young man would rise as a star in M/A (mergers and acquisitions), his reputation would expand enormously, and for about five or at most ten years, he would be in demand; and then, because the pace was so demanding, the merger star at the venerable age of thirty-eight or forty would move aside into a more dignified position in his company. But in the beginning they were brash and quick, usually the brightest and most facile young men and women in the houses. All the best young people wanted to be in M/A. That was where reputations could be made. Most of them were the fi
rst members of their families to work on the Street, and, though well educated, they were in no way tied to the past; indeed, they were openly contemptuous of those who had gone before them. They boasted that they could work for either side, and when a big deal hit the papers, those firms that were on the outside openly peddled themselves to participants already engaged and to others contemplating entering. The self-promotion, in contrast with the customary staidness of the Street, was shameless. They wanted to make sure that no one thought of them or their occupation as stodgy, and there was little danger of that. Some of them liked to speak about their days as antiwar activists or Nader’s Raiders, though roles of social conscience seemed well behind them. Almost no one, as far as they were concerned, was as smart as they were. The only people they seemed to respect were their opponents, people exactly like themselves in rival houses, the best of the best, and perhaps a handful of managers able and willing to pull off a big deal.

  They spoke a brittle shorthand with each other, a language that seemed to reek of contempt for the world of business. Everyone, in their argot, was trying to “screw” everyone else anyway, and the only good people were those shrewd and tough enough to be “winners.” Most companies were “garbage.” They were located in “shitbird little towns.” Most of what they built was “junk.” Most managers were “schmucks.” Defenders fighting off predatory assailants could use “shark repellant,” swallow “poison pills,” or go to a “doomsday defense” (which would destroy, if not the world, at least both companies). Attackers could feint at a company and opt instead for “greenmail”; that is, they could be bought out by the defenders, their vast number of shares greatly sweetened.

  The Street soon became highly creative in devising ways to finance these deals. Junk bonds, for instance, were just another triumph of the new Wall Street, a manipulator’s paradise. Less and less was the impulse to bring two companies together a desire to make both more efficient and productive. Now the impulse came more and more from those for whom the fast gain was an end in itself, the raiders and, in due course, the arbs (for arbitrageurs), who were the new superrich of American finance. The arbs played the Street the way other men longed to play Las Vegas, making millions and millions on the right call of a merger.

  The most brilliant of the arbs was a man named Ivan Boesky. No one was better at the modern game of betting on mergers than Boesky. Sometimes he would invest as much as $200 million on the roll of a merger; he had made as much as $50 million in a single day. His success—and his willingness to back his decisions with far greater amounts of money than most of his colleagues—did not make him popular on the Street, where his nickname was Piggy. Boesky typified the new winners on Wall Street in the age of mergers. He was all nerve ends, sleeping at the most two or three hours a night. He scarcely ate but it was said instead drank coffee throughout the day—it was, he said, his plasma. In his office was a phone system with 160 lines. He did not come to his job with a pedigree; he was from Detroit, the son of Russian immigrants, had attended Wayne State, and had a law degree from Detroit College of Law. What set him apart from the others who practiced the same trade was the relentless way he and his staff pursued information—he was, said one colleague, the best reporter Wall Street had ever known—and the audacity with which he was willing to back up his decisions. Others might hedge, Boesky did not. For a few minutes of work on a small deal, he often made what the manager of a relatively successful industrial company earned in a year.

  If the era was a paradise for those leveraging these deals, then the opposite was true for those trying to run companies, and there was a growing split, indeed chasm, between what was good for Wall Street and what was good, in the long run, for productivity. The effect of all this was immensely negative on those poor managers trying to produce something. They were just entering a new international economy, against formidable competitors who because of their relationships with banks enjoyed considerable advantages in terms of long-range planning. Yet now Americans were under pressure not to run their companies well, or to produce a better product, but to maximize their stock and make the books look better. If they did not drive their stock up, the company was considered undervalued—the stock a bargain—and it became a likely plum for a hungry raider. All of this, of course, meant an emphasis on short-range managerial methods that maximized the stock. Some of this pressure had always been there. Now there was an additional pressure, that unless they maximized the stock and drove it up, often at the expense of thoughtful business procedures, their own companies might be taken away from them. The new threat created an even more predatory environment. Increasingly, American business leaned away from fields that emphasized productivity and toward those areas in which bright young men and women could exercise their talents ever more quickly and share in larger and earlier rewards. The deans of America’s business schools complained privately that their best students—often as large a percentage as half the class—wanted to go to work immediately in investment houses or, failing that, consulting firms. None of the best students wanted to take jobs in large corporations, let alone in manufacturing. What was taking place, said one dean, was a brain drain of massive proportions.

  If the American manufacturers were bothered by the hostile takeovers, then their counterparts in Japan were merely bewildered by it. In November 1981, Walter Mondale, the former Vice-President, and one of his advisers, Richard Holbrooke, a former assistant secretary of state for Far Eastern affairs, were touring Japan and visited a new Kawasaki steel plant. Mondale, Holbrooke could tell, was amazed by the visit, by the sight of a steel plant far more modern and efficient than anything in America yet driven by machinery largely designed by Americans. The Kawasaki people were very gracious that day, acknowledging a great debt to Republic Steel, which had helped them, but the trip was troubling for both Americans. At one point Holbrooke asked the Japanese what they thought of U.S. Steel, which had just acquired Marathon Oil in a giant merger. At first his hosts were polite, and therefore evasive, but Holbrooke pressed them. Finally one Japanese said: “Look, we respect U.S. Steel very much. It is the father of our industry. But we do not understand why a company that is supposed to make steel spends so much money to buy an oil company.” What they were really saying in as polite a way as possible, Holbrooke decided later, was: We have different purposes in life. We are steel men, and they are businessmen.

  48. OPEC UNRAVELS

  THE FALL OF THE Shah in 1979 and the consequent surge in the price of oil did not surprise Charley Maxwell, the oil industry analyst on Wall Street who, by dint of being prescient and connected to a suddenly hot field, had become something of a celebrity in his field. One of the things he later liked to point out in describing the feverish events of 1978-82, when the price of oil seemed out of control, was that the price set by OPEC never went above the spot (or market) price. It was not OPEC that was pushing the price up, Maxwell realized, but the consumer nations themselves, caught up in hysteria as the unthinkable took place. It was not a shortage of oil so much as fear of a shortage that caused the crazy escalation of prices. The OPEC ministers might believe they were the engineers of it, and in a minor way they were, but essentially it was a panic born of Western terror and Western lack of conservation. Having exploited the Middle East for years, having long taken out so much oil for so little and having feared in their darkest visions that something like this might happen one day, they now believed the apocalypse had arrived. Unprepared for what had occurred, each nation was consumed by greed as it tried to ensure its precious share. Maxwell was intrigued as the price continued to soar, for he was sure he was observing a psychological rather than an economic phenomenon. Normally solid conservative businessmen who had not panicked would go to lunch with colleagues who had and lose their perspective as well. It was contagious.

  The OPEC nations, Maxwell believed, were initially as surprised as the West by the sudden price jump but soon began to believe that they had accomplished it through shrewd political maneuvering
and that the resulting riches were rightfully theirs. Just as the consuming nations had thought a few years earlier that the artificially low price was real and final, so OPEC now took the current rate for the just and permanent one. Maxwell noted, somewhat wryly, that one does not view one’s involvement with the fates too clearly. Bad luck is seen as whimsically inflicted by perverse gods, but good luck is hard-earned. OPEC, following the tradition, became greedy. As if there were a kind of historical transference at work, the avarice and cockiness that had for so long been the mark of the consuming nations was assumed by the producing nations. Of the major producers only the Saudis, while pleased, were nervous about the surge. They were rich enough, under normal circumstances, to have the luxury of worrying about the effect of the sudden price escalation on their fragile political base. Their nervousness was that of a conservative regime suddenly confronting the unknown. The market as they knew it was being changed, and they feared not only a depression in the West but the unknown into which they and their colleagues were now sailing. Within OPEC meetings they argued strenuously and vainly to keep some sort of a lid on the price. Losing those struggles, they repeatedly told the other OPEC nations that what was happening was madness.