What Siegel actually thought he deserved was a chunk of Kidder, Peabody stock, but that isn’t what he told DeNunzio, whose 7% stake made him the firm’s single largest shareholder apart from Al Gordon. DeNunzio determined who was required to sell and buy stock; this control over the firm’s ownership structure was the ultimate source of his power. DeNunzio had been stingy about awarding Siegel stock, preferring less competent but loyal, older allies. So to figure out what he thought was fair compensation, Siegel looked at the firm’s results and his own contributions. Then he calculated the rise in value of DeNunzio’s shares and asked for the same amount.
In 1981 the figure came to $526,000, and DeNunzio gave it to him, no questions asked. It made Siegel the highest-paid officer in the firm. He was the only one given his own dial-a-cab account, with access to a car and driver whenever he wanted it.
Still Siegel was increasingly anxious. Besides his worries about the M&A business and Kidder, Peabody’s decline, his expenses seemed to be soaring. The land and house in Connecticut had set him back almost $750,000. Now Jane Day needed full-time help with the baby, and the family required a larger Manhattan apartment. He and Jane Day had looked at three- and four-bedroom apartments in the neighborhoods consistent with DeNunzio’s image of Kidder, Peabody—Fifth Avenue, Park Avenue, or Sutton Place. It was clear that an appropriate apartment was going to cost another $1 million. Suddenly he felt like he was having trouble making ends meet on more than half a million dollars a year—even though, in fact, his income was more than adequate.
He was also feeling the pressure of his work. The intense, high-stakes combat of a hostile takeover pumped him up with adrenaline, he’d be putting in hundred-hour weeks, then it would end. Suddenly he’d feel despondent and lethargic. He’d go to bed by 9 or 10 P.M. He suffered from mild allergies, and began taking Nyquil cold medicine in steadily increasing doses. Some nights, he downed 7 to 10 ounces of the remedy. At the end of every deal, he grew more nervous, wondering if it was the last.
This was how he was feeling when Boesky called with his invitation.
The Harvard Club of New York City, a distinguished landmark on West 44th Street designed by McKim Mead & White, is independent of Harvard University, though it admits only Harvard graduates and faculty members, and holders of faculty-level appointments. Boesky had gained admission through the most arcane route imaginable: he donated heavily to Harvard’s least-known graduate school, the School of Public Health, and had been named to the school’s board of overseers, a “faculty-level” appointment. He had bought his way into the club.
And he was enormously proud of his Harvard affiliation. The Harvard Club, with its dark paneling, somber portraits, Oriental carpets, and crimson drapes, offered the establishment respectability he craved. It made little impression, however, on Siegel as he pushed through the double doors leading to the popular grill room.
Siegel, who almost missed Boesky’s table in a murky corner of the room, ordered a beer; he had a low tolerance for alcohol. Boesky chatted aimlessly, talking about his squash game, encouraging Siegel to take up the sport. They could play together at the Harvard Club. Then, gradually, Boesky segued to Siegel’s financial pressures. He encouraged him to talk, as he had before, about his anxieties, about the M&A business, about the stodginess at Kidder, Peabody, and about his mounting expenses. Boesky renewed his job offer, but Siegel begged off. “I could make some investments for you, maybe do something to help your father,” Boesky went on.
“I’ve been almost a consultant to you,” Siegel responded. “Clients pay a lot for that kind of advice.” He could see himself supplementing his income by becoming some kind of off-the-books consultant for Boesky, while continuing his work at Kidder, Peabody. It would be simple. He had, in fact, given Boesky all kinds of insights into the strategies of M&A deals, his own and others. Boesky agreed that Siegel’s insights had considerable value and that he’d be willing to pay. Then he took the conversation one fatal step forward:
“If you put me in situations with plenty of lead time, I’d pay for that, too,” Boesky said.
On a certain level, Siegel could think of this as an innocent suggestion. He could identify likely takeover targets based on his experience and expertise at what qualities made companies vulnerable. On the other hand, there could be no doubt that they were crossing a line. Plainly Boesky was asking for inside information. They even discussed the fact that Boesky’s trading on Siegel’s tips too close to an actual bid might attract suspicion; he would have to be tipped off well in advance. “I’d, like, negotiate a bonus at the end of the year,” Siegel said. Boesky nodded.
Nothing more was said. There was no more talk of money, or how Boesky would pay Siegel. The conversation drifted into other matters. They finished their drinks, shook hands outside on 44th Street, and parted in the warm summer night.
The more Siegel thought about it, the more an arrangement with Boesky made sense. His advice really was worth a lot of money. And Boesky’s tips and favors were important for his own clients, too. He often needed Boesky to take positions, to get some buying pressure into a stock, to get a price moving, even to put a company in play, softening it up for a raid by one of Siegel’s clients. He needed an edge if he was going to be able to compete with the likes of Morgan Stanley and First Boston.
And the venture seemed risk-free. Siegel wouldn’t ever do any trading; no records could be traced to him. And Boesky himself couldn’t be caught. He was the biggest, most successful arbitrageur in town. He traded everything—whatever Siegel gave him would blend in. The government would never be able to prove that a professional arbitrageur was trading on inside information, and certainly not Boesky. Boesky was too smart to run any risks.
Siegel didn’t act immediately on Boesky’s invitation. On August 26, 1982, just days after the meeting at the Harvard Club, Bendix Corporation, led by the mercurial William Agee, launched a $1.5 billion hostile takeover bid for Martin Marietta, the big defense contractor. Siegel was retained to lead Martin Marietta’s defense.
The Bendix attack attracted a great deal of media attention. Agee was a household name after his highly publicized intra-office affair with and marriage to Mary Cunningham. But even more important, the contest quickly became the most freewheeling, hard-fought takeover battle ever, in large part because of the bold strategy for saving Martin Marietta adopted by Siegel. In the process, Siegel was hailed as a genius, both by the press and within the takeover community. Any slippage in his status within the M&A club was reversed. Kidder, Peabody suddenly ascended to the top of Lipton’s and Flom’s recommended lists.
Siegel’s innovative defense technique is now known as the most audacious of defense strategies, the “PacMan” defense, named after the once-popular video game. In the PacMan defense, the target turns on its attacker and tries to devour it. Siegel didn’t actually invent the PacMan concept, but few in or around Wall Street had heard of it before this, and it had never been tried on such a scale.
Siegel warned Agee that unless the bid were withdrawn, Martin Marietta would retaliate by moving to take over Bendix. Siegel knew that for the ploy to work, he had to demonstrate to Agee and the world at large that the threat was credible.
One afternoon, preparing his counterattack, he thought suddenly of the conversation with Boesky at the Harvard Club. This was the perfect opportunity! He needed Boesky now, as much as he ever had. Ordinarily, the stock of the acquiring company in a takeover bid drops, due to the anticipated costs and drain on earnings, while that of the target rises sharply. So any rise in Bendix’s stock would send a powerful message that something unusual was afoot. Siegel wanted some buying action to push up the price and volume of Bendix stock. Nothing would make the threat credible to Agee faster than word that arbitrageurs—Boesky especially—were amassing unfriendly positions. At the same time, Siegel could do something for Boesky.
Siegel called Boesky. He cleared his throat, then said in a hushed tone, “My view is, we’re going to do thi
s PacMan defense. Buy Bendix stock.” He had a moment of anxiety—he shouldn’t risk leaking that kind of information by telephone; what if Boesky’s phones were tapped?—but he was quickly consumed by the excitement of the battle. As he watched the tape, he saw instant signs of Bendix buying, and the price rose just as he had expected. Soon Wall Street and the media were rife with speculation that Martin Marietta was about to counterattack with a credible bid.
Just about everyone was persuaded but Agee. He didn’t back down, forcing Martin Marietta to make good on its threat with its own $1.5 billion bid, and forcing the price of Bendix stock higher. The competing bids seriously weakened both companies. Bendix, wounded, triggered a bidding war between Allied Corporation and United Technologies, ultimately won by Allied. To the extent there were any victors, a financially weakened Martin Marietta was hailed as the winner. It had maintained its independence against considerable odds. For that, thanks and public praise were given to Siegel.
Boesky earned $120,000 in profit on the Bendix position he took at Siegel’s behest. In the scale of Boesky’s trading, it was a trivial sum. But it was satisfying on a far more fundamental level: it had proven to be a risk-free return.
When Siegel called at the end of the year, asking for $150,000 as his “bonus,” Boesky was willing. Siegel had calculated that his out-of-pocket cash expenses—the baby’s nanny, housekeepers, and the like—were running at a clip of $85,000 a year. He hadn’t given Boesky any inside information after Bendix, nor did he know just how much Boesky had made on his Bendix position. But he thought his contributions for the year, including all the legitimate advice he’d given Boesky, were worth $150,000. He felt just as if he were negotiating his bonus with DeNunzio.
“How do you want it?” Boesky asked.
“Cash,” Siegel replied.
“That’s something of a problem,” Boesky said. “Isn’t there another way? Can’t I invest this for you, maybe in real estate?”
Siegel insisted that the payment be in cash. He didn’t want any hassles, and he didn’t want anything that could be traced.
Boesky reluctantly agreed. “Give me some time to work this out.”
Several weeks later, after the Christmas holidays, Siegel jumped out of a cab and went through the revolving door on the east side of the Plaza Hotel. It was a midafternoon in January 1983. As instructed by Boesky, Siegel waited in the ornate belle epoque lobby of the hotel, not venturing into the adjacent Palm Court, where a string quartet would soon be playing salon music for ladies having tea. Siegel looked about, then felt a chill as he spotted the man he was certain was the courier.
He was almost a parody of a character out of a spy novel. He had dark skin and a powerful, muscular build. Boesky had said he knew the courier from his days in Iran; Boesky had also said he was a CIA agent. Could Siegel trust him?
The lobby wasn’t crowded, and the courier easily identified Siegel. He approached him with some deliberation.
“Red light,” the courier murmured as he approached Siegel.
“Green light,” Siegel replied, as Boesky had instructed. The man handed Siegel the briefcase.
Siegel went straight to his apartment on East 72nd Street. He closed the door, put down the briefcase, and quickly undid the clasps. There, in neat stacks of $100 bills tied with Caesar’s Palace casino ribbons, was the money.
Siegel stared at it. Everything had gone without a hitch. It was his money now; he’d earned it. He ought to feel great! Instead, he felt ill. He sat down and put his head in his hands, waiting for the nausea to pass.
4.
“Give me Milken,” the familiar voice demanded of Milken’s secretary. Sue Cochran replied that Milken was busy. “Quit lying to me,” the caller practically shouted. “Don’t give me that bullshit. Tell him to pick up the goddamn phone.”
It was Boesky again, yelling and cursing. Cochran and her colleague Janet Chung hated answering his calls. He accused them of lying when he didn’t get through immediately. If Milken were busy, which he usually was, Boesky would call every two or three minutes, working himself into a frenzy. When the secretaries wilted under the abuse, Warren Trepp or someone else might try to help. But Boesky would talk only to Milken.
By late 1983 Boesky and Milken were talking by phone two or three times a day. Their schedules meshed perfectly. When Boesky got to his New York office at 7 A.M., Milken was arriving in Beverly Hills at 4 A.M. They were in the habit of calling each other first thing, and they seemed to derive satisfaction from knowing that they were busy strategizing while most of their rivals were still in bed. Each boasted to the other that he slept no more than three or four hours a night. Milken encouraged Boesky’s grandiose dreams, dreams that might be realized with Milken’s money.
Like many of Boesky’s close relationships, this one had begun on the telephone. Boesky had met Milken through Stephen J. Conway, a former investment banker at Drexel in New York. In 1981, a headhunter had called Conway at Drexel, saying he’d been retained by a major arbitrageur who wanted to hire an investment banker. “Who’s the arb?” Conway asked. The headhunter said he couldn’t reveal his identity. “If it’s Ivan Boesky, maybe I’m interested,” Conway said. “If not, forget it.”
Numerous meetings between Boesky and Conway ensued. “I’ve already succeeded as an arb,” Boesky explained. “The big opportunities are going to be in leveraged buyouts and strategic positions.” Boesky had already had access to some of those opportunities: he was a major investor in the LBO fund run by Theodore Forstmann, and Forstmann was an investor in Boesky Corporation. He was also close to Henry Kravis, the driving force behind Kohlberg Kravis Roberts, then in its infancy as an LBO firm. Doing LBOs, he explained, would help him “diversify,” so “I wouldn’t have all my eggs in one basket.”
Boesky saw himself becoming a “merchant banker”—a British term for an investment banker who acquires stakes in companies; he thought the term conferred respectability. Boesky claimed he had no interest in the unsavory practice of “greenmail,” in which a large, hostile stake is accumulated in a company hoping to scare management into buying out the raider at a premium price.
Conway signed on; he was intrigued at the thought of working for someone who might turn into the next Boone Pickens or Carl Icahn. His colleagues at Drexel were pleased: Conway could be counted on to steer business to his former employer.
Indeed, to put his ambitious plans into effect, Boesky needed much more capital—and Drexel seemed the perfect source for it. The capital base in his arbitrage operation, always smaller than he had hoped for, had been decimated by the Cities Service crisis; he wasn’t even financing his routine arbitrage activity on the scale he had wanted. Conway talked to David Kay, head of M&A at Drexel, who put him and Boesky in touch with Stephen Weinroth, in corporate finance, who in turn consulted with Milken in Beverly Hills. Boesky was dazzled by the fact that Drexel could get him $100 million, more than twice what he had been able to raise to launch Boesky Corporation.
When Boesky made his pilgrimage to Drexel’s Beverly Hills office, he stayed in his usual splendor at the Beverly Hills Hotel. Boesky kept his own suite on the first floor and maintained his tan by the pool, where he had use of a private cabana. From this secluded vantage, he could gaze past the sparkling water, the gardens and palms, to the broad sweep of the pink hotel. This was his domain. He and Seema owned a controlling interest in the hotel.
Like so much in his life, the Beverly Hills Hotel had come to Boesky through his wife’s family. His father-in-law, Ben Silberstein, had died in 1979, leaving large portions of his real estate fortune in equal parts to Seema and her sister, Muriel Slatkin. One of the crown jewels in the Silberstein empire was the Beverly Hills, acquired in 1954.
The Beverly Hills Hotel was no ordinary real estate property. Built in the thirties, it soon became a Hollywood nerve center, with stars around the pool and agents and producers in the nearby Polo lounge. Katharine Hepburn swam here, fully clothed, after a tennis game. Norma Sheare
r “discovered” Robert Evans here. Fernando Lamas was a regular; more recently, Eddie Murphy did flips off the board.
After Silberstein’s death, ownership of the hotel was divided equally between Seema and Muriel, with a crucial 5% stake in the hands of other relatives. Boesky went after the small controlling stake, recognizing that a comparatively small additional investment would give him and Seema a controlling interest tantamount to outright ownership. In 1981, Boesky succeeded in snapping up the minority shares in Vagabond, the Silberstein corporation that owned the hotel, forever alienating the unwitting Muriel, who learned too late that her sister and brother-in-law had gained absolute majority control at her expense.
Vagabond didn’t have impressive earnings, but it had valuable assets, cash flow, and a conservative balance sheet. It was the kind of vehicle that—with Milken’s aid—Boesky could use to vault beyond the ranks of arbitrageurs into the world of corporate chieftains. Vagabond, later renamed the Northview Corporation, would be the vehicle through which the money would be raised. Some of the proceeds would also be allocated to Boesky’s arbitrage activities.
Boesky was so immediately dazzled by Milken and Drexel that, in Lance Lessman’s view at least, he refused to focus on the terms of Drexel’s huge cash infusion. There was, to begin, Drexel’s typically large cut of the proceeds. This was understandable, given that no one else on Wall Street was competing for the business. But then there was the interest rate—a whopping 17%. Moreover, Drexel, as it often did in such cases, extracted warrants giving it the right to buy an equity stake in Vagabond/Northview. Lessman worried that the high interest rate would put enormous pressure on the operation to earn huge arbitrage returns to make the interest payments. And the equity stake could give Drexel enormous influence over fundamental decisions affecting the business.
There was also the risk inherent in having an investment banker with a financial interest in an arbitrageur—an incentive to leak confidential information. This went unmentioned by Lessman, who knew better than even to raise the subject. But he did air his other reservations to Boesky, who brushed them aside impatiently. After all, now that he had Siegel as a “consultant,” he didn’t worry about earning large arbitrage profits; indeed, the Siegel arrangement fueled his hunger for additional capital. “Who else could we go to?” Boesky responded to Lessman. “We don’t have any choice.”
Den of Thieves Page 12
