After Siegel’s presentation, Lipton stayed behind to compliment him. After this, the two talked frequently about M&A tactics and exchanged gossip. They made an unlikely pair; the glamorous Siegel and the portly Lipton with his thinning hair and heavy dark-framed glasses. But Siegel recognized Lipton’s mastery of the field and became an eager student.
Lipton and Flom had developed a new and lucrative retainer arrangement with their clients. Companies who wanted to ensure the firm’s availability in the event they became the target of a hostile bid paid the lawyers a substantial retainer fee each year. In the event that they were attacked by another client of either Lipton or Flom, the attacking client agreed in advance to waive any conflict of interest, with the understanding that the lawyers would defend the target company.
Scores of major corporations eventually signed on with Lipton and Flom, even as some established bar members cringed. These lawyers billed strictly by the hour, eschewing even contingency fees. The Lipton and Flom retainers, since they didn’t necessarily require work, were more like an insurance policy. The establishment viewed the advance waiver of conflicts with distaste. Yet clients themselves seemed unfazed, a measure of the clout Lipton and Flom could wield.
Siegel began to think Kidder, Peabody should begin to make similar deals. By the time of the panel discussion in 1976, he had become convinced that the merger wave was going to continue, even grow. Bigger rivals, such as Morgan Stanley, Salomon, and First Boston, were already developing reputations for their M&A offensive capabilities. Siegel thought Kidder, Peabody could carve out a niche on the defensive side.
He began to visit potential corporate clients, selling what he called the “Kidder, Peabody tender defense product.” He argued that, with only seven days—as provided by the Williams Act—in which to react to a hostile takeover bid, companies had to be prepared in advance with carefully thought-out defensive strategies. This meant retaining Kidder, Peabody—and paying a lucrative retainer like those paid to Lipton and Flom—to ensure preparedness and the firm’s availability. Lipton introduced Siegel to leading figures in the close-knit M&A community, and lent his prestige to Siegel’s plan.
Siegel’s real boost came in May 1977, when Business Week hailed him as the leading takeover defense expert. After describing his success in several large deals, the article also mentioned in passing that he was so good-looking he was considered a “Greta Garbo heartthrob.” The article included a photograph, and suddenly Siegel was deluged with requests from women seeking dates. Siegel was amazed that the story, which wasn’t given major play in the magazine, conferred such instant status and legitimacy. Kidder, Peabody’s copiers went into high gear, sending out copies to prospective clients.
From 1977 on, Siegel called personally on 200 to 300 clients a year. His targets were midsize companies (typically those doing from $100 to $300 million a year in sales) that weren’t being adequately serviced by the bigger investment banks. These were the companies most vulnerable to a hostile offer from a larger company. Siegel’s product sold. He eventually had 250 corporations paying Kidder, Peabody an annual six-figure retainer.
His main competition came from Goldman, Sachs, the much larger, more powerful firm that had also decided to stake out takeover defense work as its special preserve, albeit for somewhat different reasons. At the time, Goldman had made it a policy to eschew the representation of hostile bidders. With the most enviable roster of large corporate clients on Wall Street, Goldman didn’t want to risk alienating them by representing anyone who might be construed as a raider. Traditional investment banking services for these established clients were the bread and butter of its lucrative business.
Siegel loved beating Goldman out of a client. In 1977, Peter Sachs, then head of M&A at Goldman, flew out to the West Coast to meet with Steve Sato, the chairman of Ivac Corporation, a medical equipment manufacturer that had just become the target of a hostile attack by Colgate Palmolive. Sachs, according to the chairman, boasted of the “Goldman prowess.” When Siegel went to see Sato, he spent most of the time listening to Sato’s goals for the company. The chairman was of Japanese descent. Although Siegel had never eaten raw fish in his life, he joined Sato at his home for sushi. In awarding him the business, Sato told Siegel, “I can’t believe that you actually listen. All Goldman told me was how great Goldman is.”
Siegel found that his most effective tactic was to let Goldman make its presentation, which typically emphasized that Goldman could get the best price if the target company were sold. Then Siegel would step in. “Hire me,” he’d urge. “I’ll do my best to keep you independent. I want you as a future client.” In fact, most of the companies ended up being sold, given the weak positions of most takeover targets, and Siegel’s pitch often couldn’t compete with Goldman’s size, dominance, and reputation for quality. But Siegel’s message frequently convinced the targets’ managements that he had their interests at heart—instead of the investment banking fees to be reaped if the company had to be sold.
In 1977, Siegel invented a brilliant but controversial tactic that also endeared him to scores of corporate managers—the golden parachute. The golden parachute, essentially a lucrative employment contract for top corporate officers, provided exorbitant severance payments for the officers in the event of a takeover. Supposedly, the contracts were intended to deter hostile takeovers by making them more expensive. In practice, they tended to make the officers very rich.
DeNunzio was thrilled by Siegel’s success, even though Siegel was working so hard and traveling so much that he rarely saw him. DeNunzio ran Kidder, Peabody in the paternalistic way he had learned from Gordon, usually setting salaries and bonuses single-handedly. In 1976 Siegel earned over $100,000, then considered a princely sum, especially for someone only 28. In 1977, Siegel was made a director of Kidder, Peabody, the youngest in the firm’s history with the exception of Al Gordon, who had owned the firm.
Soon after, DeNunzio called Siegel into his office. “Marty, you’re a bachelor,” he said. DeNunzio paused, and Siegel didn’t know what was coming. “You’ve got an Alfa-Romeo convertible and you’ve got a house on Fire Island. It’s too much.” What was he getting at? Siegel assumed DeNunzio meant that his style was too racy for some of Kidder, Peabody’s clients, or perhaps the other directors, but DeNunzio wasn’t more explicit and Siegel couldn’t be sure.
“There’s a nice house for sale across the street from me in Greenwich,” DeNunzio continued. Greenwich was the WASPiest, whitest, most exclusive suburb in Connecticut, a bastion of country clubs and conventional respectability. It was also filled with some of the dullest, most straitlaced people Siegel knew. In addition, he couldn’t see living right under DeNunzio’s watchful eyes.
But Siegel went out to look at the house. Afterward he got into the offending sports car and drove on Interstate 95 for exactly one-half hour. He found himself in Westport, and called a realtor from a pay phone. He’d been thinking of selling the Fire Island house anyway. The realtor took him to an old house on a small river north of town, and Siegel loved it. He bought it, and spent his weekends fixing the place up.
Siegel told DeNunzio that he was heeding his advice and buying a house in Connecticut. It was in slightly bohemian Westport, not in Greenwich. “A half hour from you is about as close as I can take,” Siegel joked.
Later, when he moved to a far more lavish home right on the coast, Siegel sold the Westport house to CBS News anchor Dan Rather.
One day, not long after he had bought the house in Connecticut, Siegel’s secretary told him he had a call from an Ivan Boesky. He knew Boesky only as another arbitrageur, one of the many who were calling him now that he was developing a reputation in the M&A crowd. But Siegel also knew that Boesky was a trading client of Kidder, Peabody. He took his call.
Siegel was impressed with Boesky’s market acumen, his knowledge of takeover tactics and stock accumulation strategies. They became friends though they didn’t actually meet for some time. In the peculiar wo
rld of Wall Street, close friendships can develop entirely on the telephone. Gradually Siegel began to see Boesky as someone he could discuss strategy with, bounce ideas off of, gossip with. He needed this information since he had no Kidder, Peabody arbitrageur to turn to. The firm had traditionally shunned arbitrage, and had no department. DeNunzio and Gordon believed arbitrageurs were unsavory, tried to get inside information, and gave rise to conflicts of interest within the firm.
Yet arbitrageurs like Boesky were becoming increasingly important to any investment banker involved in M&A. Historically arbitrageurs had traded to take advantage of price discrepancies on different markets, such as London and New York. It was conservative, nearly risk-free trading yielding small profits. But they had become progressively more daring, first buying heavily stocks that were the subjects of announced takeover bids, betting the deals would go through; eventually they started buying stocks they only suspected would be the targets of takeover bids. When they guessed right, the profits were huge.
Evaluating the effects of these massive purchases of rumored or real takeover stocks had become a crucial part of Siegel’s job. Arbitrageurs were also fonts of information, from clues to the other side’s tactics, to rumors of impending bids that could be used to attract defense clients.
Arbitrageurs tended to be crass, excitable, street-smart, aggressive, and driven almost solely by the pursuit of quick profits. Their days were defined by the high-pressure periods between the opening and closing bells of the stock exchange, during which they screamed orders into phones, punched stock symbols into their electronic terminals, scanned elaborate screens of constantly shifting data, and placed phone calls to every potential source of information they could imagine. After work, they tended to blow off steam by carousing in bars like Harry’s, just across Hanover Square from Kidder, Peabody, or, if they’d had a good day, in expensive Manhattan restaurants.
One day in 1979, Siegel confided to Boesky that he’d fallen in love. The affair was threatening to become a minor scandal at Kidder, Peabody.
In the late seventies, the first wave of women business school graduates reached Wall Street’s shores. Jane Day Stuart turned heads at Kidder, Peabody on the day she first swept through the corporate finance offices. A Columbia Business School graduate, she was smart, blonde, thin, personable, stylish, and married.
Kidder, Peabody had long maintained an unspoken policy against office affairs. A fling with a summer employee had damaged another investment banker’s career. But in late 1978, Stuart and her husband were divorced. Shortly after, Siegel and Stuart played tennis. By August 1979, they were living together. When colleagues tried to warn Siegel, he brushed them aside, saying he wasn’t interested in firm politics and didn’t care whether he ever ran the firm.
When Henry Keller, head of corporate finance, learned of the affair, he went to DeNunzio, prompting speculation that DeNunzio would bring the relationship to an abrupt halt. DeNunzio did nothing. Unknown to many, DeNunzio’s son, David, was also having an affair at the firm. DeNunzio’s tolerance was interpreted as a sign of the times and a measure of Siegel’s clout. DeNunzio also seemed relieved that Siegel’s bachelor days appeared to be numbered.
Some of Stuart’s friends and relatives in Baltimore warned her against marriage to someone Jewish, even someone as nonreligious as Siegel. But she was headstrong and in love, even though some of her male colleagues speculated unkindly that she was using her business acumen to trade up the marriage ladder. She and Siegel were quietly married in May 1981 and began drawing up plans for a new, larger house in Westport.
Soon after their marriage, Boesky called to invite Siegel and Jane Day to his house in Westchester County for dinner. It was Boesky’s first social invitation to the Siegels, a small dinner for three couples: Boesky and his wife Seema; financier Theodore Forstmann, who numbered Boesky among the investors in his partnership, and his date; and the Siegels. Siegel decided to bring along a copy of his house plans to show the Boeskys.
Following Boesky’s directions, the Siegels drove north from Manhattan for about 45 minutes, through the exclusive towns of Bedford and Mount Kisco. The area is one of large estates, wooded rolling hills, and some pre-Revolutionary houses. Few of the large houses are visible from public roads, and the Boesky house is set so far back in its 200 acres of property that visitors sometimes got lost winding through the maze of driveways and service roads leading from the entrance gates.
The Siegels pulled into the drive between large pillars and a gatehouse and stopped as a security guard parked in a pickup truck waved them to a halt. Siegel went over to the guard, introduced himself, and was cleared for entry—but not before he was startled to see the blue-black steel of a large pistol in a holster strapped to the guard.
As they approached the house, the Siegels were awed. Behind a cobblestone courtyard rose a massive, red-brick Georgian-style mansion. The estate had previously been owned by Revlon founder Charles Revson. In the distance, past formal gardens studded with Greek statuary, was a large pool house. On one side was a large pool, on the other a sunken indoor squash court, and at the side, a tennis court with a bubble that could be inflated in winter for indoor play.
The Siegels were greeted at the entrance by Seema Boesky, an attractive, talkative brunette who immediately struck them as warm and friendly. She led them through rooms decorated in traditional style with beautiful wallpaper, elaborate moldings, rare Aubusson carpets, and expensive antique furniture. The walls featured what looked to Siegel’s untrained eye like serious art; Seema, it turned out, was an enthusiastic collector of American paintings and antiques. They continued through the gardens and pool house, where the carpeting was embossed with a large, intertwined monogram, IFB.
Boesky was a gracious host, dressed impeccably as always in a black three-piece suit and white shirt that complemented his year-round tan. Asked why he wore the same suit every day, Boesky once replied, “I have enough decisions in my life already.” Boesky’s silver-blond hair was clipped and neatly parted. His prominent cheekbones and piercing eyes could make him look driven, even gaunt, but he was relaxed and affable as a dinner host, tending constantly to his guests and eating little himself.
Jane Day mentioned their house plans, and Seema exclaimed, “You’ve got to have a big kitchen. I’ll show you mine.” The Boesky kitchen was larger than the Siegels’ entire Manhattan apartment. Siegel was impressed by the signs of wealth. Boesky must have been far more successful at arbitrage than even Siegel had realized. Siegel decided that he wouldn’t show the house plans he’d brought along. They now seemed embarrassingly modest.
Later, after dinner, Siegel took Boesky aside and mentioned that he’d noticed that the guard at the estate entrance carried a pistol. “It’s loaded,” Boesky replied. “In my business, you need security.”
Lance Lessman peered across the desks of the small research department in Ivan F. Boesky Co.’s offices in Manhattan’s financial district. Inside Boesky’s own glass-enclosed corner office, he could see his boss’s eyes roving, first toward the trading floor where his buy and sell orders were executed, then toward Lessman’s research area. Suddenly Boesky’s eyes locked on his.
The intercom on Lessman’s desk crackled to life. “Who’s buying,” Boesky barked.
Lessman frantically scanned his computer screen, looking for big price and volume movements in individual stocks in order to figure out what had caught his master’s interest.
“Who’s buying?” Boesky practically screamed. “Why the fuck don’t you know?”
Now intercoms sprang to life all over the office. Every desk had a speaker connected to a central control panel manned by Boesky himself. He could activate individual speakers or throw open the system for office-wide announcements. Now he had everyone on line.
“I want service. I want service,” he repeated in ever louder and more demanding tones. “Who’s buying? I want it now. Who’s buying?”
Lately Boesky had been even more testy than usual
. A few weeks earlier that year, 1981, Boesky had shocked the office with an abrupt announcement: He was liquidating Ivan F. Boesky Co., taking out all of his profits.
The Hunt silver panic and resulting stock market plunge had hit Boesky hard, and he had decided to cash out with his remaining profits. He wanted to take advantage of the favorable long-term capital-gains tax rates available to partners liquidating their interest. But, to get the rates, he needed someone to keep the firm going. His recent efforts to force his top lieutenants to take over the remains of the partnership and assume all its liabilities had led to screaming matches. When they balked, he fired them. During a short period that year, Boesky had lost his two top strategists, his head trader, and his head of research.
Few people really expected Boesky to be out of arbitrage for long. Despite the Hunt setbacks, he had been a phenomenal success. Ivan F. Boesky Co. had opened in 1975 with $700,000 from Boesky’s mother-in-law and her husband. Now the firm’s capital had grown to nearly $90 million. Arbitrage was Boesky’s life. His earnings had brought him the estate in Westchester and a Manhattan townhouse. A chauffeured limousine drove him into town every morning. His efforts had also finally brought him the grudging respect of a father-in-law who had believed his daughter had married beneath her.
Boesky seemed to share his father-in-law’s disdain for his own family and background. He constantly tried to burnish his résumé and family connections in conversations with New York colleagues. He often implied that he had graduated from Cranbrook, a prestigious prep school outside of his native Detroit, and the University of Michigan. Others assumed he had attended Harvard, since Boesky made so much of his Harvard Club membership. He said his father ran a chain of delicatessens in Detroit.
During Boesky’s childhood, his family lived in a spacious Tudor-style house in what was then considered a nice, upper-middle-class neighborhood. Ivan’s father, William, had emigrated from Russia in 1912, and owned a chain of several bars, called the Brass Rail, rather than delicatessens (his uncle’s business). To boost profits, the Brass Rails introduced topless dancing and strip shows. In the eyes of many, the bars hastened the decline of their neighborhoods.
Den of Thieves Page 3
