One day in 1976, Charles Allen called to ask me if I was familiar with the Irvine Ranch. He wanted me to go take a look at it because he thought we had an opportunity to buy it.
The Irvine Ranch—77,000 acres of prized property in Southern California’s Orange County—was one of the most beautiful master-planned communities in the nation, and it had a storied past.
James Irvine, born in Belfast, Ireland, in 1827, came to America in 1846. He worked for a couple of years in a New York paper mill before heading to California in search of gold. Instead, he found riches in land. James became a successful produce merchant in San Francisco and began investing in real estate. By 1864, he had done well enough to join with two partners in purchasing three huge Mexican and Spanish land grants—Rancho San Joaquin, Rancho Lomas de Santiago, and a portion of Rancho Santiago de Santa Ana—which at the time covered 120,000 acres along the Pacific Ocean south of Los Angeles. James gradually bought out his partners and used the land primarily for sheep grazing. Irvine’s holdings gained in value as the Southern Pacific and Santa Fe railroads were completed to Los Angeles in the 1870s and 1880s. He died in 1886, just as new residents began flocking to Southern California to start new lives.
The provisions of his will gave control of the ranch to his son, James Irvine II, when he turned twenty-five, in 1893. (It is reported that the young man, known as J.I., first traveled at age eighteen from San Francisco to San Diego on a high-wheeled bicycle to see his father’s holdings.) J.I. shifted the business focus of the ranch from sheep and cattle raising to agriculture, making land available for tenant farming (mostly hay and grain). In 1894, he incorporated his holdings as the Irvine Company under the laws of West Virginia, one of only a few states that allowed corporations at the time.
When sophisticated irrigation systems were developed throughout the first decades of the new century, J.I. turned his attention to the very profitable citrus industry. The same speedy, dependable rail lines delivering settlers to Southern California made it possible to ship fresh produce affordably across the continent. The land was soon covered with walnut, orange, and lemon trees, with vegetable fields, and irrigation systems.
Under the direction of J.I.’s son, James Irvine III, the ranch became one of the largest landholdings under cultivation in the United States, boasting the finest asparagus crop and Valencia orange groves in the world.
For estate planning purposes and to fund educational and charitable projects in Orange County and San Francisco, J.I. in 1937 established the James Irvine Foundation, which held his controlling interest in the Irvine Company. Upon his death, in 1947 (he apparently drowned while fishing in a stream on a Montana cattle ranch owned by the Irvine Company), his stock passed to the foundation as trustee on behalf of the people of California. J.I.’s only living son, Myford Irvine, served as president of the Irvine Company until his mysterious death in 1959. Apparently, Myford was not very well liked. He was found dead in the basement of his home with multiple gunshot wounds (two in the stomach from a 16-gauge shotgun and one in the head from a .22-caliber revolver). The official cause of death was determined to be “suicide.”
Throughout the decade that followed, Joan Irvine Smith, J.I.’s granddaughter, acted as a much-needed watchdog for the family, as foundation trustees sought to benefit personally from the rich resources of the ranch. Joan also pushed for innovative land-use planning and donated 1,000 acres for the development of the University of California, Irvine, campus. Thanks in large measure to Joan’s personal lobbying, federal and state laws were amended in 1969 to limit the percentage of ownership a foundation may hold in a corporation to just 20 percent. The new regulations gave foundations twenty years to meet this restriction. But rather than sell off portions of their stock over time, the trustees of the James Irvine Foundation pursued a sale of all their holdings in the ranch. Trustee Simon Fluor—whose company had an active relationship with Mobil Oil—brokered a sale of the foundation’s controlling interest in the ranch to Mobil. When she learned of the pending transaction by accident, Joan Irvine Smith in December 1974 filed suit in California to stop the deal. The California state attorney general, agreeing that the offer was too low and the sale procedure was flawed, joined Mrs. Smith in her action. Intense legal wrangling ensued for the next two years.
In August 1976, I got the fateful call from my partner Charles Allen Jr.
He suggested that I go down to Beverly Hills to meet with a Colonel Gotleib, a lifelong friend of Allen’s, who would introduce me to Joan Irvine Smith, the largest Irvine Company shareholder other than the foundation, and Keith Gaede, the husband of Joan’s cousin. At the time I certainly was aware of the Irvine Ranch, which covered about 22 percent of the land area of booming Orange County (at the time home to about 1.5 million people), stretching more than twenty miles inland from the coast. I had also long admired Irvine’s state-of-the-art master plan, and had been following Mobil’s battle to acquire the company. I flew into Orange County Airport the next day.
I was impressed with Joan Smith the minute I met her. You could sense her determination and love for the ranch. It was also clear that she was one tough woman. I later learned that she had divorced her first husband after discovering that he was having an affair. The story goes that when Joan learned of her unfaithful husband’s rendezvous with his girlfriend at Joan’s horse ranch in Virginia, she had the place surrounded by security personnel and demanded he leave or face the consequences.
But before I could endorse a bid higher than Mobil’s $24-per-share offer, I needed to make the proper appraisal and evaluation. That could take weeks, even on a fast track. Smith assured me that the company’s records would be open for our review, and promised that management would be available to answer our questions. We put together a team of Taubman Company personnel headed by Bob Schout, our head of market research, assembled our outside consultants, and went to work.
When we completed our initial appraisal in late September, it was clear to us that Mobil was trying to buy the company on the cheap. Now, it may have seemed the height of folly for a guy from Detroit to start a bidding war against a huge multinational oil company. But I sensed that our team had an advantage. By nature and temperament, we could look at this asset—and its potential—in a fundamentally different light. Where we saw it as a real estate deal, Mobil, an industrial company, was going to operate the ranch as an industrial business. I also was sure they were assessing the value of the company using their conventional corporate earnings-per-share basis. After all, they had acquired other companies based on this type of analysis.
Here’s how Mobil probably saw it. The Irvine Company had earned approximately $10.9 million after taxes in fiscal 1974–75; it was not out of line to offer nineteen to twenty times earnings, or about $218 million for the 8.4 million shares outstanding. Their offer on the table when we got interested was $24 per share, or $192 million. The Irvine Company’s earnings had been growing at about 10–12 percent annually, which gave Mobil confidence that the deal would contribute to their own financial results. Clearly, they had room to go higher.
But how high were we willing to go? We looked beyond earnings per share and appraised the value of the opportunity on the basis of land value and real estate development upside, which led to a significantly higher present-day valuation: at least $400 million. If we played our cards right, we could outbid Mobil and still get the ranch at a huge discount to its value. We opened our bidding at $27 per share, $3 more than Mobil’s offer. The courts recognized our offer and opened the bidding.
This deal got started because of prior relationships, and it moved forward because of them, too. Wells Fargo had been our lead bank on the West Coast for nineteen years, and we had developed an excellent relationship. I thought they would be the perfect catalyst to bring together a consortium of banks to finance what would be one of the largest real estate transactions in history. In October, Wells Fargo committed to be our lead bank. In November, I added my good friend Ben Lambert of Eas
tdil Realty to the team to assist with the structuring of a preliminary business plan and land absorption projections to present to the banks. I also brought on Kenneth Leventhal to handle accounting matters after Ken and his associate, Stan Ross, came all the way from Los Angeles to my office in Detroit and made an impressive presentation and an impassioned plea for the business. In concluding his pitch, Ken remarked, “Mr. Taubman, if we don’t get the assignment to work with you on the Irvine Ranch, I intend to slit my wrists!” That’s dedication.
In the meantime, the bidding intensified when the Canadian real estate firm, Cadillac Fairview Corporation, offered $265 million in the form of cash and notes—notes guaranteed by the pledging of Irvine Ranch ground leases.
Determining that the Irvine Company on a present-value basis was worth at least $50 per share, we upped our offer to $31.81 per share. Charles Allen and I also felt it would be wise to bring in additional partners.
The first person I called was Max Fisher, my dear friend from Detroit whose financial resources were matched by his extraordinary business judgment. My next calls were to other close friends: Henry Ford II, chairman of the Ford Motor Company, and Howard Marguleas, a nationally known agriculturist with many years of farming experience throughout California. I had developed a close personal relationship with Henry in Detroit, and Max and I had worked with Howard as fellow members of the United Brands board of directors. We also included Milton Petrie and were joined by Joan Irvine Smith. To round out the group, we included Donald Bren, one of the leading land developers in California. Don had constructed thousands of housing units in the state, many of which were developed on the Irvine Ranch. Each of these partners brought much-needed expertise as well as financial resources to our team. We also liked and trusted one another.
While Cadillac Fairview and our new Taubman-Allen-Irvine team continued the bidding process, we conducted personal meetings with the eight additional banks selected to round out our consortium. In addition to Wells Fargo, we were joined by Chase Manhattan Bank of New York, First National Bank of Boston, the Bank of New York, Security Pacific, Seattle First National, Citibank of New York, Bank of America, and Manufacturers National Bank of Detroit. (I was now a board member of the bank that had provided my $5,000 loan in 1950 to start the Taubman Company.)
Cadillac Fairview dropped out of the bidding in April 1977, which allowed us to focus exclusively on Mobil. Under court supervision, the bidding continued on a day-to-day basis. Each party was allowed just twenty-four hours to outbid the opposition. All bids were to be cash or its equivalent only. On May 2, Mobil opened with a bid of $36.50 per share.
My partners had granted me the authority to bid up to $400 million on behalf of the shareholders, who had agreed to capitalize Taubman-Allen-Irvine personally for not less than $100 million. We would borrow the remaining $300 million.
It is important to note that our analysis of a present-value purchase of $400 million was based on future-value assets in excess of $600 million. Unlike bureaucratic Mobil Oil, we evaluated the Irvine Company as a real estate investment, based on real estate assets. We also recognized the value of the more than $100 million in road and utility infrastructure already in the ground, waiting for development.
In addition, the hundreds of residential ground leases held by such millionaire homeowners as advertising guru David Ogilvy represented a large asset. The ability to raise these lease payments substantially over time would boost revenue, and we predicted that most residents would opt to purchase the land under their homes rather than pay the escalating rents. My good friends Claude Ballard of Goldman Sachs and Shire Rothbart of the Taubman Company were heavily involved in assessing and ultimately following through on this extraordinary refinancing opportunity.
In negotiating anything, it is essential that you clearly establish your own objectives and point of view. It also helps to understand just where the other party is coming from. The Irvine Company’s reported corporate earnings were incidental to our basic evaluation model. But they were critical to Mobil. We predicted, based on Irvine Company 1976 year-end earnings of $17.9 million, that the maximum bidding authority granted by Mobil’s board would be approximately nineteen times earnings, or $340 million. We were betting Mobil would quit before reaching that ceiling.
On May 9 we outbid Mobil by $0.25, bringing our offer to $309.25 million.
Mobil countered on May 10 at $37.60 per share, or $316.4 million.
The next day we returned the compliment at $37.75, or $317.66 million.
They countered on May 12 at $38.25, or $321.87 million.
We came back with $38.35 per share on the thirteenth for $322.7 million.
I will always remember fondly the daily phone calls with my sons, Bobby and Billy, during this manic, high-stakes bidding war. They would always want me to counter Mobil’s offer, and would encourage me with a spirited mix of well-thought-out rationale and youthful optimism (Bobby was twenty-four, Billy just nineteen). Their competitive juices were flowing, and so were mine.
After a tense weekend, Mobil bid $38.75 per share, or $326.1 million.
We came right back the next day at $39 per share, or $328.185 million.
Mobil’s president, who was handling the bidding personally, gave us his full and last shot on May 18 at $40 per share, or $336.6 million.
My small bump of $0.10 to $40.10, or $337.44, ended the bidding on May 19. We were notified the next day that Mobil had withdrawn—just $3 million below the ceiling I predicted.
By the aggressive terms of our offering agreement, we had only two months to complete this massive deal. So after a full-court press by all our banks and associates, we met in the Los Angeles offices of Wells Fargo for the closing on July 22, 1977. I had never seen so many lawyers, bankers, and boxes of documents in one room in my life. Unfortunately, the champagne would have to wait.
Charlie Johnson of Wells Fargo pulled me into a small private room and informed me that there was an unexpected snag. Some years earlier, Don Bren had sold his company to International Paper, which had wanted a presence in the Southern California real estate industry. Things didn’t go as anticipated, so Don bought back his company, granting International Paper certain warrants to buy back in if they wished.
Don was a partner in Taubman-Allen-Irvine as an individual. But the clever folks at IP wanted Bren’s company, in which they still had the right to 50 percent ownership, to hold the interest in the ranch, thus setting up the opportunity for IP to get into the deal. They were holding up the assets Bren had pledged for our deal without their blessing.
While we waited in that crowded board room in Los Angeles, Wells Fargo representatives in New York were frantically trying to work something out with International Paper and Bren’s lender, Bank of America, to no avail. Sensing that we were at an impasse, Charlie proposed plan B. Wells Fargo would extend me the credit for Don Bren’s portion of the equity. That would allow us to close on schedule. It would be up to me to collect from Don and let him back into the deal or hang onto the larger ownership stake myself. I agreed to plan B. At the very last minute, Bren worked out a $5 million payment to IP, and we began the hours-long process of signing documents and shaking hands. The closing then went forward without a hitch.
Despite these annoyances, things worked out very well for us. Without selling any assets, we paid off the banks in fifty-one weeks! I served as the chairman of the Irvine Company, which we incorporated as a Michigan company, for six years. The company’s performance exceeded our most ambitious expectations, paying out 20 percent dividends to the shareholders annually.
Delighted with our returns and recognizing that intense local management was required to sustain this success, my partners and I (not including the Irvine family members) decided to sell our interests in the company in 1983 to Don Bren. The transaction was based on a valuation of $1 billion. Don continues to ably run the company to this day.
A billion dollars was a lot of money in 1983. And who wouldn’t be happy wi
th a tenfold profit in six years, on top of the 20 percent annual dividends we paid out? I certainly can’t complain, but I have to be honest. I really didn’t want to sell the ranch.
In 1983, I was still in my fifties and running my businesses with more focus and energy than ever. I also saw continued upside potential for the Irvine Company. On the other hand, my close friends and partners Henry Ford II, Max Fisher, and Milton Petrie were in their late sixties and seventies, and for the most part had retired from active business lives. From their point of view, cashing out made all the sense in the world. One very important aspect of being a good partner is respecting the wishes of your fellow partners, even if they are not perfectly aligned with yours.
So we sold the ranch and almost never looked back. And as I continued to build centers and develop projects, I also pursued other investment opportunities.
SEVEN
A Frosted Mug of Root Beer
If you are younger than forty, you probably can’t remember a time in America before interstate highways. So you surely never experienced the joy of crowding into your family’s unreliable, unair-conditioned car to bump along secondary roads to a vacation destination or relative’s home. There was one aspect of these long-forgotten journeys that I always looked forward to. Often, in the most unpredictable places, you came upon a family-owned diner that offered classic American culinary delights: delicious hash browns, hamburgers, hot dogs, homemade pies, and milk shakes. The food was so good, you didn’t even notice the filthy washrooms, surly waitresses, sticky counters, and busted jukeboxes. Then again, you could be equally disappointed with a restaurant chosen entirely by the persuasiveness of faded billboards or the cycles of grandma’s bladder. And those unfortunate stops kept on disappointing for miles and miles, often requiring a number of urgent unplanned visits to the nasty restrooms of gas stations down the road.
Threshold Resistance Page 6
