Seventeen years after that somewhat quaint description of M&A bankers, it seemed the supposedly press-shy Goldman partners were willing to make an exception for writer Tim Metz’s 1982 page-one story, which portrayed the firm—virtually alone on Wall Street—as unwilling to represent a corporate raider in an unfriendly, hostile deal for a company. Whether intentional or not, in one fell swoop, Goldman had whitewashed a meaningful chunk of Levy’s role in the 1950s and 1960s on behalf of raiders—such as the Murchison brothers and Norton Simon—in mounting hostile takeover attempts. The Journal’s story would not only prove invaluable in marketing Goldman’s M&A business but would also ratify what Levy had told Institutional Investor, in December 1973, that the firm would not work for corporate raiders on hostile deals. Indeed, the story’s headline said it all: “The Pacifist: Goldman Sachs Avoids Bitter Takeover Fights but Leads in Mergers.”
Metz’s story explained how Goldman opted out of one of the most contentious hostile takeovers ever, then just finishing up on Wall Street: the 1982 fight for Bendix among Martin Marietta, Allied Corporation, and United Technologies. Bendix, led by its charismatic CEO, William Agee, took the offensive by launching a hostile offer for Martin Marietta, another aerospace company. Martin Marietta then partnered with United Technologies and countered with its own bid for Bendix. Ultimately, though, Allied won Bendix, but not before Bendix had acquired 70 percent of the public equity of Martin Marietta and Martin Marietta had acquired 50 percent of the public equity of Bendix. Allied ended up with Bendix and 38 percent of Martin Marietta. The two-month battle during the summer of 1982 played into the media’s fascination with takeovers. There were the high-profile bankers, of course, but this mess had four huge corporations fighting a public war on multiple battlefields. There were more fronts than World War II. There was even the additional spice of the revealed affair between Agee and Mary Cunningham, one of his executives.
Goldman wanted no part of it. Indeed, it had been asked to represent at least one of the four combatants but declined because of “potential conflicts of interest,” the paper reported. “Thank God we didn’t have to get involved,” Whitehead told Metz. Instead, during the summer of 1982 Goldman was busy advising each party in two separate mergers—the $4 billion merger between Connecticut General Corp. and INA Corp. (to create CIGNA, the global insurer) and the near $550 million merger of Morton-Norwich Products, Inc., and Thiokol Corp. to create Morton Thiokol Inc.—four fee-paying clients in all, a highly unusual turn of events fraught with potential conflicts. But Goldman was only too happy to crow about how it was able to manage the conflicts satisfactorily. The executives at the four companies “told us they couldn’t think of anyone else they trusted as much as us,” Geoffrey Boisi, Goldman’s head of M&A, told the paper, which noted that Goldman ended up with only a $5 million fee in the CIGNA deal, despite representing both sides, while First Boston received $7 million representing Bendix, even though that merger was half the size of the CIGNA deal. (Left unsaid by Metz was that in the mid-1970s, Goldman got itself into a pack of trouble with one client—Booth Newspapers, Inc., in Michigan—when it greased media mogul Samuel I. Newhouse’s purchase of big blocks of Booth’s stock against the wishes of the Booth management. Newhouse’s Advance Communications eventually bought Booth for $305 million in 1976.)
As was often the case in such articles, the Journal made sure to include a few arrows from Goldman’s competitors. The firm’s “pacifist stance” was “intensely irritating” to others on Wall Street, who claimed to dislike Goldman’s “sanctimonious airs” and found its M&A advice to be of a “cookie-cutter fashion.” There were also digs aimed at Goldman’s hard-to-fathom tactic of not playing one bidder off against another in the selling of a company. Competitors claimed Goldman did its clients a disservice by not getting the highest possible price and gave the example of Goldman’s sale of Marshall Field for $330 million to B.A.T. Industries, a British conglomerate. “The price they got for Marshall Field wasn’t exactly mind-boggling,” one of them said. But Boisi defended the practice. “If you know that you’ll very probably have one chance and one chance only to put your bid in, then you are going to think long and hard about keeping any extra money in your pocket when you make that bid,” he said. (Despite Boisi’s explanation, it seems highly improbable that Goldman’s M&A bankers would not have played one bidder off against another.)
Whitehead claimed to have originated the idea not to represent acquirers in a hostile situation. When he suggested it to the Management Committee, “I had a lot of opposition to that.” There was concern about what Goldman would do if a “very good investment banking client” asked the firm to represent it in a hostile acquisition. Would Goldman have to say no? “Yes, that’s what I mean,” Whitehead told the Management Committee. “We have to try to dissuade them from going forward with this and explain to them why our experience showed that it would be unlikely that this unfriendly tender offer would turn out to be successful for them a few years later.” Goldman did lose business, though, as a result. Just the price of leadership, Whitehead explained. “If you’re the senior partner, your view has to prevail,” he said. “Some people agreed and quite a few people did not.”
Metz noted that at other leading investment banks, the M&A departments were run by “stars”—among them, Bruce Wasserstein and Joe Perella at First Boston, Felix Rohatyn at Lazard Frères & Co., and Bob Greenhill at Morgan Stanley—who “attract new business with their reputations as brilliant field marshals of past successful takeover battles.” Wasserstein and Perella at First Boston, Metz noted, had raked in “well over $100 million” in M&A fees in the previous two years; before 1978, First Boston’s M&A business had been “negligible.” At Goldman, by design, the M&A bankers were anonymous executors of transactions, just as Whitehead had planned. “When you have superstars, you are going to have some clients disappointed when their projects aren’t assigned to one of them,” he explained to Metz. “When a client hires us, he gets the firm, not an individual.”
And besides, the Journal explained, “[p]ersonal publicity of this sort is abhorrent to the reserved, somewhat austere men who run” Goldman’s M&A group. Notwithstanding the observation, Metz, with Goldman’s cooperation, did go out of his way to feature one those “austere” men: Steve Friedman, one of the founders of Goldman’s M&A group and the architect of many of its business practices. Born in Brooklyn, Friedman grew up in Rockville Centre, on Long Island. His father and his uncle, together, had their own insurance brokerage, Friedman & Friedman, first in New York City and then on Long Island. Steve attended Oceanside High School, where he was a champion wrestler in the 157-pound weight class. “I was interested in girls and athletics,” he said.
Indeed, Friedman was in the bottom half of his class academically in high school, after having flunked French. “Now at Oceanside High School, that was no mean achievement,” he said. “I mean, we’re not talking about a Groton here.” He would sit in the back of his classes and read about Doak Walker, an All-American football player at Southern Methodist University. Such was Friedman’s indifference to his studies that he didn’t even realize he was performing so poorly until he went for an admissions interview at Yale, where he was finally informed about where he stood academically. The admissions officer thought he tested well and was an underachiever. He made Friedman a deal: he would get into Yale—he was a gifted high-school wrestler after all—if he could somehow average grades of 90 or better for the first semester of his senior year at Oceanside. His competitive juices unleashed (and with the help of a tutor), Friedman rose to the challenge. In the end, he said he was accepted at Harvard, Yale, and Cornell, among others, and decided to go to Cornell after a visit to the upstate New York campus and the promise from the university that he would have a chance to wrestle competitively on the collegiate level. (The $3.5 million Friedman Wrestling Center, at Cornell, the nation’s first stand-alone building devoted to wrestling, is testament to Friedman’s love of the sport.) He thinks
he was the first person from Oceanside High School accepted at either Harvard or Yale.
After graduating from Cornell in 1959, as did his wife, Barbara Benioff—they had their honeymoon in Miami Beach; total cost: $129—Friedman went to Columbia Law School. There was no longer any ambiguity about his academic performance. Law school “was a great intellectual awakening,” he said. “In law school you knew precisely where you stood. And if you were on the law review it was a great, great discipline. A time-consuming, detail-oriented pain in the ass, but it was a great discipline. It taught you a lot about precision with facts and being careful to double-check things and thinking things through.” After graduating, he clerked for a judge and then headed to a midsize New York law firm, Root Barrett Cohen Knapp & Smith, where he practiced tax law.
But, after reading Joseph Wechsberg’s The Merchant Bankers (published in January 1966), he wanted to go to Wall Street. He sent out a bunch of letters to investment banking firms but heard nothing back from any of them. This was not the kind of response the can-do Friedman expected. Around that time, he was visiting with one of his roommates from Cornell—“I’m mixing martinis and more loquacious than usual,” he said—and he confided he wanted to leave the law for investment banking, if he could. His friend said, “Well, you really ought to meet my friend L. Jay Tenenbaum at Goldman Sachs. L. Jay is a terrific guy.” Friedman told his roommate he was not interested in Goldman. “I hear it is very stuffy,” Friedman said. But his friend persisted. “If nothing else you’ll get good advice,” he said. Friedman had lunch with Tenenbaum, setting in motion a process that resulted in Goldman hiring Friedman in 1966 to work with Corbin Day in building up an M&A department at Goldman.
One of Friedman’s first assignments defending a company under attack from a hostile aggressor came in July 1974 when Friedman and his new colleague Robert Hurst, who had recently joined Goldman from Merrill Lynch, were hired by Electric Storage Battery Company, or ESB, in Philadelphia, to attempt to fend off the unwanted advance of International Nickel Company, which announced a $28-per-share cash bid and put ESB firmly in play.
Friedman and Hurst camped out in Philadelphia—buying new shirts and underwear at Brooks Brothers—hoping to devise a strategy to keep ESB, the maker of car batteries as well as the owner of Rayovac and Duracell consumer batteries, out of the hands of International Nickel. Friedman and Hurst contacted Harry Gray, the CEO of United Aircraft, and Gray started a bidding war for ESB. In the end, International Nickel offered $41 a share for ESB and bested Gray and United Aircraft. Although Goldman could not keep ESB from being sold, “our client won a major improvement in price,” Friedman told Ellis, “and we got great press coverage for all the good work we’d done, plus a nice fee. And smart people in the marketplace got the crucial message: Goldman Sachs is a good firm to have in your corner when the going gets really tough,” especially when wearing a white hat could also lead to a big fee.
They certainly did. By the time of Metz’s article, Friedman had created an industry leader, and a much-envied juggernaut. He has been described as containing the “energy of a tightly coiled spring,” a reflection of his cobralike reflexes derived from years of grappling. Goldman had even devised a rare advertising campaign based on just that notion of hiring their firm in the event of a hostile corporate takeover. “Who do you want in your corner?” the ad asked. Companies signed up “in droves,” Whitehead said, paying a $50,000 annual retainer to have Goldman in its corner in case of a hostile attack. Friedman told the Journal that Goldman’s refusal to represent “corporate raiders” actually enhanced the firm’s “credibility” and “effectiveness,” since Goldman would not even show a potential acquisition to a buyer unless the buyer agreed, in advance, that a hostile approach would not later be made. “That lets us approach just about anyone at any time and talk openly with them,” he said. “You would be surprised at how frank they are with us, too, knowing that we won’t be back later uninvited.” (Of course, if the company was public that pledge would be a hollow one, since almost every public company can be bought if the price is high enough and appeals to shareholders, who ultimately have the final say about whether to sell their company; at a private company, the matter is moot.)
Friedman also pointed Metz to statistics that showed that “most often,” in the end, a raider loses out to a third-party “white knight” that showed up to offer a higher price, in a friendlier way, to the company under assault. “Since [banking] fees are structured to reward success rather than failure, the investment bank loses out when its raider client loses out …,” he said. “If you are willing to turn down money and keep your ego in control, you can save yourself a lot of heartache in this business.” (Of course, if the raider won—as happened more often than Friedman preferred to admit—the fees to the bankers were enormous, since fees for financing the deal plus the M&A advice were also included.) In any event, Friedman’s M&A group was making plenty of money, about a third of Goldman’s $250 million in pretax profit in 1982. Since Friedman had put the M&A group on a higher trajectory, it had raked in more than one-quarter of a billion dollars in fees. Goldman, meanwhile, was continuing to hit on all cylinders, posting, in 1982, its eighth consecutive year of higher revenues and pretax profits.
Despite the Journal’s article, which appeared to deify Goldman, others on Wall Street had also pursued the strategy of refusing to work with raiders and other hostile acquirers. One other who did was Marty Siegel, a Harvard Business School graduate who joined Kidder, Peabody & Co. in 1971, turning down Goldman in the process. After working on a few hostile takeovers at Kidder—for the raider—Siegel apparently found religion (or a more lucrative business plan) and started pushing companies to hire him and Kidder on the defense. At one point, he had 250 clients, each paying him around $100,000 a year. He became known as the “Secretary of Defense.”
One of the secrets to Goldman’s ability to increase revenues and profits year after year—according to Whitehead—was to get his partners to do a little bit of annual budgeting. Such behavior, a central part of life throughout corporate America, was anathema to bankers and traders on Wall Street and smacked too much of “management” for their entrepreneurial tastes. In most Wall Street firms at that time, there was no budget planning whatsoever. Once a fiscal year ended, the pretax profits—should there be any—were paid out to the partners based on a predetermined split. At Lazard, for instance, the partners divvied up 90 percent of the pretax profits in a given year, with the balance staying in their capital accounts at the firm. Come January, the cycle would begin anew, as would bankers’ fears about whether they would ever again make any money.
At Goldman, not only were all the pretax profits kept within the firm and divided among the partners’ capital accounts—with withdrawals possible only with Doty’s approval, for instance—but Whitehead also insisted the partners do some annual planning. He had started the practice when he was running investment banking at the firm and then implemented it across the company. “It was even harder for the traders to forecast profits than it had been for investment bankers,” he observed. Projecting expenses was easy; Whitehead wanted the Goldman partners to think hard about what revenue for the coming year would be and where it would be found. “When a department head accepted a higher goal, he worked harder and smarter to achieve success,” he explained. “This was another way that accounting can change perception”—referring to his decision to net losses from international expansion into domestic profits—“[and] the move boosted revenues and margins substantially.” (As with Whitehead’s innovation to have bankers call on clients instead of waiting for the phone to ring, Wall Street firms nowadays routinely make annual forecasts by business line.)
Whitehead scheduled the budget sessions with the Management Committee on two successive weekends in January of each year. But by January 1984, Whitehead started to lose interest. “[F]or the first time,” he recalled, “I could remember … feeling bored and tired.” He was listening to a presentatio
n from the head of Goldman’s Detroit office, “whose annual revenues amounted to less than a tenth of one percent of the firm’s total,” and found himself becoming “uncharacteristically snappish.” He thought to himself, “By God, I don’t think I can do this one more time.” That’s when he first contemplated retiring from Goldman. At sixty-two, after thirty-seven years at the firm, he concluded, “I loved the work, but it was hard and intense, and it took every ounce of energy I had, and I was getting worn down. I’d also found myself saying no to people more often than ever before, and I sensed that my decision-making had turned cautious and conservative, and I didn’t want to hold the firm back.”
For the time being, he shared his thoughts with no one at Goldman. Indeed, in a comprehensive January 1984 cover story about the firm in Institutional Investor, Whitehead was front and center. Naturally, he and Weinberg were pictured sitting together at a highly polished, round conference table—“no one sits at the head, because there isn’t any,” a symbol of their “collegial, laissez-faire management style”—but Whitehead seemed to be the one doing most of the talking. The previous November, he had given out copies of the mega-bestseller In Search of Excellence to his seventy-five partners. “In many ways, it describes what we are trying to do at Goldman Sachs,” he told the magazine. “There are some things about Goldman as an institution that make it unique: its team spirit, the pride in what we do, the high standard of professionalism, the service orientation. And in all modesty I like to think it is a well-managed organization. That’s the essence of Goldman Sachs culture, the things that have made us what we are. And I would say the culture has been the key to our success.”
Money and Power Page 32
