by John Brooks
The computer business was booming, I.B.M. continued charging high rates for cancellable leases, and Leasco’s assets leaped from $8 million in 1965 to $21 million in 1966, while profits in 1967 were more than eight times those for 1966. Meanwhile, the stock, traded first over the counter and later on the Amex, soared upward. Leasco began to be talked about in Wall Street as one of those interesting little situations. As might be expected of a young company with ambition, a voracious need for cash, and a high price-to-earnings multiple, Leasco became acquisition-minded. In 1966, Steinberg hired Michael A. Gibbs, a young whiz from the management-consulting firm of Booz, Allen and Hamilton, as vice president for corporate planning, and gave him the specific assignment of hunting up candidates for merger. In 1966 and 1967, Leasco increased its corporate muscle by buying several small companies in fields more or less related to computers or to leasing: Carter Auto Transport and Service Corporation; Documentation, Inc.; and Fox Computer Services. These acquisitions left the company with $74 million in assets, more than eight hundred employees, larger new headquarters in Great Neck, Long Island, and a vast appetite for further growth through mergers.
The events leading to the merger that put Leasco firmly on the national corporate map, and that made the Goliaths of industry begin to take notice of a Brooklyn David with an air of supreme confidence, began in August 1967, when Edward Netter, of the deal-making brokerage firm of Carter, Berlind and Weill, came out with a report entitled “Financial Services Holding Company,” in which he set forth the rosy possibilities available to both sides in mergers between companies engaged in financial services, such as Leasco, and fire-and-casualty insurance companies. The nub of Netter’s argument was that the ultraconservative financial policies of the fire-and-casualty companies had in many cases resulted in cash-heavy reserves far in excess of those required by law to cover policy risks. To these excess reserves, Netter gave the picturesque names “redundant capital” or “surplus surplus.” State regulations restricted the free use of such reserves so long as they belonged to a fire-and-casualty company; but, Netter pointed out, the regulations could be circumvented, and the redundant capital freed for other uses, if the insurance company were to merge with an unregulated holding company. By implication Netter was pointing out—in the hope of earning finder’s fees and brokerage commissions for his own firm—that ambitious diversified companies were missing a chance to better their circumstances by marrying fire-and-casualty companies for their redundant capital—or, more bluntly, for their money. Many diversified companies were to acquire insurance companies over the following years, the greatest such merger (and indeed, the greatest merger in corporate history) being the celebrated and controversial wedding between International Telephone and Telegraph and Hartford Fire in 1970.
One of the numerous desks the Netter report crossed, not by chance, was in the offices of Leasco, and near the end of 1967, Netter met with Gibbs to discuss the views expressed in it. Netter evidently got an enthusiastic reception, because, early in January 1968, Gibbs sent a memo to Steinberg setting forth in detail the considerable advantages to Leasco of acquiring a fire-and-casualty company—no specific company was mentioned—and the same day Arthur Carter of Carter, Berlind and Weill wrote to Leasco setting forth the brokerage firm’s terms for handling the acquisition of such a company (still not named) through a tender offer to the insurance company’s stockholders. The terms stated included a finder’s fee to Carter, Berlind of $750,000, making abundantly clear why Carter, Berlind was going to so much trouble to serve as marriage broker.
It subsequently became equally clear that the unnamed firm Carter, Berlind had in mind was Reliance Insurance Company, a staid old Philadelphia-based fire-and-casualty underwriter with more than five thousand employees, almost $350 million in annual revenues, and a fund of more than $100 million in redundant capital. At the time, though, there was an urgent need for secrecy, to avoid disturbing Reliance’s stock price and thereby stimulating its management to take defensive measures. To preserve this secrecy—and, just possibly, to enjoy some of the fun of cloak-and-dagger proceedings—Leasco men in their interoffice correspondence began referring to Reliance under the code name “Raquel.” (The code name, Steinberg later told a Congressional committee, had been borrowed from the actress Raquel Welch).
In March 1968, preserving security by trading through a numbered bank account at the First National Bank of Jersey City, Leasco began buying Reliance stock on the open market in daily quantities of anywhere from one hundred to more than seven thousand shares. By early April, Leasco held 132,600 Reliance shares, or about 3 percent of all shares outstanding, and had completed Phase One of the takeover. Phase Two consisted of preparing a tender offer to Reliance shareholders, and contriving to overcome any resistance that the Reliance management might mount. In May, Leasco prepared a registration statement for its tender offer—a move that brought matters out into the open: since the statement was necessarily a public document, the public, and Reliance management, now knew at last what Leasco had in mind. Reliance’s first action was to announce that the company was engaged in merger talks with another computer-leasing firm, Data Processing Financial and General—this presumably to let Leasco know that it had competition, and thus induce it either to desist from its takeover attempt or to make a better offer. On June 13, Steinberg and A. Addison Roberts, president of Reliance, met for the first time, and Roberts stated in the clearest possible terms that Reliance would be unreceptive to a Leasco takeover attempt. Nevertheless, on June 21 Leasco went ahead with its tender offer, writing Reliance stockholders and offering them Leasco convertible debentures and warrants—a classic bundle of those often dubious securities that we have heard derogated as “corporate underwear,” but still a bundle that, because of the high price of all Leasco securities, had a current market value well above the current price per share of unswinging Reliance—in exchange for their Reliance stock. Three days later, Roberts, still defiant, wrote to Reliance stockholders strongly urging them “to take no hasty action with respect to your stock,” and a month later he capped that action by filing a lawsuit (later withdrawn) against Leasco and its brokers, charging them with violations of the securities laws.
On the surface, it looked to be total corporate war. In retrospect, however, it appears that Roberts, for all his crustiness toward Leasco, was never entirely averse to a merger, and that what passed for furious self-defense was really something more akin to hard bargaining. Roberts, like Netter and Leasco, seems to have fully grasped the advantages of releasing all that redundant capital from the bondage of legal restrictions through a merger. Indeed, he had met with Netter to discuss that very subject as far back as December 1967, just about the time Netter was making his first contact with Leasco. Then, Netter had informed Roberts that he believed he could get him $45 a share in securities exchange for Reliance stock, which was selling at about $30, through a merger with some other firm—with a conglomerate, perhaps, like Gulf and Western. (Leasco was not mentioned specifically at that meeting.) Despite the tempting 1967 valuation, Roberts was unenthusiastic about the prospect of seeing his solid old company engulfed by some corporate upstart. It was not, then, that he was flatly against any merger; it was just that he thought Reliance ought to be the acquirer rather than the acquired.
Now, with Leasco apparently ready to make a takeover attempt whether its intended partner was willing or not, Roberts realized that the stock market’s overwhelming preference for Leasco’s shares as opposed to Reliance’s made his desire to be the acquirer an idle dream. As to whether or not to be hostile, all through July he wavered. Reliance stockholders who wondered whether or not to accept the Leasco offer got little enough advice from him. Then, on August 1, Roberts declared himself. Leasco, he wrote the stockholders (whose heads must have been spinning by now), had sweetened the terms of its offer greatly, and Reliance management had “agreed to discontinue taking any action to impede.” It was a surrender to force majeure; a majority of Reli
ance stockholders were in the act of accepting the tender offer anyway, and Leasco was going to gain control of Reliance whatever management decided. By mid-September Leasco had over 80 percent of Reliance; by mid-November it had over 96 percent. The takeover was complete.
Truly—to change the metaphor—it was a case of the minnow swallowing the whale; Reliance was nearly ten times Leasco’s size, and Leasco, as the surviving company, found itself suddenly more than 80 percent in the insurance business and less than 20 percent in the computer-leasing business. Nor did the whale seem to have been hurt by the ingestion; indeed, at first glance everyone concerned seemed to be decidedly better off. Roberts, still boss of Reliance although now under Leasco’s control, came out with a fresh five-year employment contract at his old salary of $80,000 for the first four years and a raise to $100,000 in the fifth, plus a generous portion of potentially lucrative Leasco stock options. Saul Steinberg came out a multimillionaire at twenty-nine, said by Forbes magazine to have made more money on his own—over $50 million, on paper—than any other U.S. citizen under thirty. His father and original backer, Julius, and his uncle, Meyer, were themselves worth millions from their Leasco stockholdings, as was his twenty-six-year-old brother Robert, the company’s secretary. Carter, Berlind and Weill, in addition to its $750,000 finder’s fee, had brokerage fees of almost $50,000 on the purchase of Reliance shares for Leasco, and dealer’s fees of $230,000 on the tender offer, for a total of more than a million dollars on the whole go-round. The Reliance stockholders had their Leasco corporate underwear, which, provided they divested themselves of it immediately, left them (however naked in a corporate-securities sense) well clothed financially. As for Leasco, as a result of its extraordinary feat it suddenly had assets of $400 million instead of $74 million, net annual income of $27 million instead of $1.4 million, and 8,500 employees doing business in fifty countries instead of 800 doing business in only one. In stock-market terms, as of December 31, 1968, the price of Leasco stock had, over the five years preceding, appreciated by 5,410 percent, making it the greatest percentage gainer of all the five hundred largest publicly owned companies during that period: in sum, the undisputed king of all the go-go stocks. But our tale of financial derring-do is not yet ended; rather, it is only begun. Adventurous Leasco was now poised for the decade’s greatest, and to defenders of the status quo most disturbing, venture in corporate conquest.
3
As early as December 1967, Leasco began looking into the possibility of acquiring a large bank. The stocks of banks, like those of insurance companies, often sold at low price-to-earnings multiples, giving a stock-market high-flyer like Leasco the leverage it needed to take over companies larger than itself. Moreover, Steinberg felt, as a business principle, that it would be advantageous to anchor Leasco’s diversified financial services to a New York money-center bank with international connections. It appears that during 1968, at the very time when the Reliance takeover was in process, Gibbs’s corporate planning department at Leasco was picking out a banking target as carefully as a bomber command draws a bead on any enemy ammunition dump. Nor was any particular diffidence being shown about the size and strength of targets. Bankers Trust, Irving Trust, Chase Manhattan, Manufacturers Hanover, Morgan Guaranty—the whole array of national banking power seems to have come under Leasco’s impudent, although secret, scrutiny as possible candidates for assimilation.
By the fall, when the Reliance acquisition was all but wrapped up, the gaze at Great Neck had come to light on Renchard’s $9-billion Chemical Bank. As with Reliance, a code name was assigned for inter-office use—in this case, “Faye,” as in Faye Dunaway. As a first step in Leasco’s campaign, an elaborate dossier on the history and operations of the prospective target was prepared: “Faye was originally the banking arm of New York Faye Manufacturing Company,” and so on. (Any outsider who might have seen the memo and who knew anything about banking could easily have deduced from the context that “Faye” was Chemical—again suggesting that the code names Leasco used in its corporate assaults were at least as much for brio as for concealment.) Who’s Who entries of “Faye” directors were reproduced for ready reference, along with annotations. Among those directors were such eminences of American business as H. I. Romnes, chairman of American Telephone and Telegraph; Lammot du Pont Copeland, president of E.I. du Pont de Nemours; Robert C. Tyson, finance chairman of United States Steel; Augustus C. Long, director and member of the executive committee of Texaco, Inc.; T. Vincent Learson, president of I.B.M.; and Keith Funston, former president of the New York Stock Exchange. It was convenient for Leasco—and it tells something about the two firms—that practically all of Faye’s directors had long entries in Who’s Who, while no directors of Leasco at the time were listed there at all. In a kind of unintended irony, the standard checklist of the American ruling class was proving useful as a kind of sighting device to a band of outside insurgents.
The scenario that had been so effective in the case of Reliance was followed as closely as possible. In November, Leasco began buying Chemical stock—again, through the First Jersey National. Within a few days, 50,000 shares were quietly bought at a cost of more than $3.5 million, without giving rise to untoward rumors or market disruptions. Meanwhile, Reliance, now a Leasco subsidiary, held more than 100,000 additional shares, giving Leasco control of well over 1 percent of all Chemical shares outstanding. In January 1969—still maintaining strict security, and still, of course, with no contact established between the executives of Leasco and those at Chemical—Leasco proceeded to prepare a hypothetical tender offer to Chemical stockholders. As with Reliance, it involved offering warrants and convertible debentures worth at then-current prices substantially more than the market for Chemical stock. What had worked once would, presumably, work again. Still, Leasco had not yet decided to go ahead with the offer when, on the last day of January, Chemical through its regular intelligence channels finally got firm word that Leasco was preparing a takeover attempt.
The news did not catch Renchard completely by surprise. As early as December 1967, Chemical had begun following Leasco’s acquisition activities in a wary, if desultory, way, and the following autumn Renchard had begun to hear rumors that “a leasing company” was interested in acquiring the bank. Rather astonishingly, the November purchases of Chemical stock went entirely unnoticed, no one at Chemical caught so much as a whisper of the code name “Faye,” and the rumors seem to have died down. However, on getting the first firm information on January 31, Renchard was in no doubt as to Chemical’s response. He and his bank were going to fight Leasco with all their strength. True enough, a merger, as in the Reliance case, would result in immediate financial benefit to the stockholders of both companies. But it seemed to Renchard and his colleagues that more than immediate stockholder profit was involved. The century-and-a-half-old Chemical Bank a mere division of an unseasoned upstart called Leasco? H. I. Romnes, Lammot du Pont Copeland, Robert C. Tyson, Augustus C. Long, T. Vincent Learson, and Keith Funston as members of a board of directors headed by twenty-nine-year-old Saul P. Steinberg? In established banking circles the thought bordered on sacrilege, and Renchard, on getting the word, reacted predictably by calling a fellow banker, the one most likely to be able to enlighten him further: Thomas J. Stanton, Jr., who besides being president of the First Jersey National was a director of Leasco. What was going on? Renchard wanted to know. “I’ll call you back,” Stanton replied. Presumably he then cleared with Steinberg as to what he should tell Renchard. When he called back, it was to inform the Chemical’s boss, not too cryptically, that one of the items Leasco had on the agenda for its next board meeting, to precede the company’s annual stockholders’ meeting on Febuary 11, was discussion of the possible acquisition of “a major commercial bank.”
Thus alerted, Renchard went into vigorous if belated action. He set up an eleven-man task force to devise strategy for fighting off any such takeover attempt, under the direction of the Chemical’s chief loan officer, J. A. McFad
den—“a bright fellow, good at figures,” as Renchard described him later, “not exactly a tough guy, but no pushover, either.” He assigned another bank officer, Robert I. Lipp, to prepare a memo outlining all of the possible defensive strategies available to Chemical, and on February 3 Lipp came through with a list of seven different courses of action. (Out in Great Neck, almost at the same moment, Leasco was putting the finishing touches on its proposed tender offer, and was making further extensive purchases of Chemical stock—to be precise, 19,700 more shares at a cost of $1,422,207.) Renchard said long afterward, “At that time we didn’t know how much of our stock they had, or what kind of a package of wallpaper they were going to throw at our stockholders in their tender offer. We were guessing that they would offer stuff with a market value of around $110 for each share of our stock, which was then selling at 72. So we knew well enough it would be tough going persuading our stockholders not to accept.”
On February 5, Renchard made his move, and a drastic and risky one it was. He decided to force Leasco out into the open by leaking a story to the press. That afternoon, H. Erich Heinemann, banking specialist on The New York Times’ financial reporting staff, telephoned him to say that he had heard rumors of an impending takeover attempt and to inquire whether there was anything in them. Rather than make the routine denial that he would have made under ordinary circumstances, Renchard replied that there was, indeed, something in the rumors. He went on to give a few details and some pointed comments, and the following morning the Times carried a piece, under the by-line of Heinemann’s colleague Robert Metz, that read in part as follows:
Can a Johnny-come-lately on the business scene move in on the Establishment and knock off one of the biggest prizes in sight?
