John Weir Close tells the inside story of the development of the mergers and acquisitions movement in the 1980s — a phenomenon that has ruled global commerce ever since. Photo courtesy of Flickr user Dan Nguyen.
Paul Solman: “Since 1975, the US economy has been transformed in ways that are not yet well understood,” wrote economics journalist David Warsh recently in his weekly Economic Principals column.
“As it happens,” Warsh continued, “I have been reading a book about one of the major engines of that transformation, the merger and acquisitions movement of the last thirty years. Not since Barbarians at the Gate and The Predators Ball have I enjoyed a book about Wall Street as much as A Giant Cow-Tipping by Savages: The Boom, Bust, and Boom Culture of M&A, by John Weir Close. (The title derives from a line attributed to Ted Turner to describe the merger of AOL and Time Warner).” Being a great admirer of Warsh, whose column I have long touted on this page and read devotedly, I contacted author John Close, book unseen, and asked him if he would adapt from his book something about the merger and acquisition movement for the Making Sense Business Desk. He was gracious enough to oblige us.
John Weir Close: “This isn’t giving me an erection.”
Joe Flom tossed the brief back across his desk with a scowl at his 20-something associate Stuart Shapiro.
“I’m not surprised at your age,” Shapiro said without missing a beat. Flom often used the erection remark to shock, intimidate and galvanize, but no one had ever answered him in quite the same way. “I just figured if the guy’s going to be a bully, I can do it back. We got along well after that,” Shapiro says 40-odd years later, noting with a smile that Flom was then around 50, the better part of two decades younger than Shapiro is now.
They call themselves the Lucky Sperm Club. It is the 1980s and Shapiro is soon to be a member of the set of young lawyers at the rising firm of Skadden, Arps, Slate, Meagher & Flom who are fortunate enough to sit at the feet of Joe Flom, the guru of a generation, a gruff and slightly hunch-backed, recently obese, small man with both pitiable social insecurities and serene confidence in his prodigious intellect.
Flom and his arch-rival and co-conspirator, Marty Lipton, are inventing modern mergers and acquisitions, or M&A, which, because of these two men, will soon become both a craft with a name all its own and a phenomenon that has ruled global commerce ever since.
At Lipton’s firm — Wachtell, Lipton, Rosen & Katz — a similar if unnamed group of young men is also ascending rapidly to top positions and growing ever richer, working directly and often virtually singled-handedly with powerful clients, with Lipton’s genius always accessible. In all but name, the Lucky Sperm Club is rapidly spawning new chapters at other firms and banks around Manhattan and beyond as the emerging specialty gathers shape.
M&A has a deceptively mundane definition. It means taking control of a company, with or without the consent of the executives running it. Since it is expensive to build a business from nothing, it is often seen as more profitable to take over what has already been built by others. In one stroke, you expand your business and eliminate a competitor. If you’re purely an investor, you can keep the company or sell it off for profit. To gain control of a corporation in the modern era, you either offer to buy the stock from the existing shareholders or ask them to vote their shares in favor of your nominees for the board of directors, who, if elected, turn over the company to you.
That’s basically it. It sounds simple, and it is, but variations proliferate as fast as the human mind can invent them. M&A has grown rampantly in power and complexity to reach a global value of around $4.7 trillion at its recent highest point, more than the GDP of Germany, the fifth largest economy in the world. M&A has revolutionized corporate Earth and enriched the members of the guild as perhaps none of them ever imagined.
As explored in my recent book, “A Giant Cow-Tipping By Savages,” modern M&A has not been driven by Scottish immigrants in Pittsburgh or French Huguenots in the Hudson Valley capturing entire swathes of the nation’s resources in the absence of government regulation. To the contrary, in the late 20th century, M&A was driven by two Jews, Marty Lipton and Joe Flom, who had simultaneous epiphanies about how to take advantage of new government regulation — in other words, how to turn the rules into an instruction manual for transforming the buying and selling of companies into a profession in itself. But rather than seek to buy, sell or keep companies themselves, they became the Sherpas, interpreting regulatory maps and making up new law as they went along.
As recently as the 1970s, Jews and all others not of the white Anglo-Saxon Protestant ascendancy were still excluded from any position of real power at the bar, on the bench, at banks and in boardrooms. America was still an agglomeration of ghettos: Italians knew Italians, Jews knew Jews, Poles knew Poles, Irish knew Irish, WASPs barely knew any of them existed and the Cabots spoke only to God.
“When I came to New York in the ’70s, the WASP aristocracy still reigned,” the Lucky Sperm Club’s Shapiro recalls. “You didn’t see an Asian face above Canal Street. You didn’t see a black face in a law firm unless it was the mailroom. You certainly didn’t see an Hispanic face. Swarthy Italians and Jews? They were not people you dealt with.”
Yet again, as happened so often in their history, the Jews somehow found their own methods to carry them past such barriers, and once those blockades were destroyed, other demographics followed.
But it was primarily Jews who first became expert in taking over companies against the will of their existing executives. The white-shoe law firms and elite investment banks found this simultaneously distasteful and tantalizing in the same way medieval merchants viewed the lending of money at interest. Both groups were discouraged from joining in one of the most profitable enterprises of their day: the old merchants by, among other things, an ecclesiastical ban on the practice of usury; the new lawyers, by the establishment’s social codes of behavior. Again, the Jews found themselves in control of an industry that then perpetuated the stereotype: the omnipotent, venal Machiavellian, hands sullied by the unsavory. But the business of takeovers paid the rent. And then some.
Yes, they were making money. And yes, that got the attention of the rest of Wall Street. But the takeover gang was also having fun. They were running through the streets wielding megaphones and announcing the revolution. They changed everything. Like West Indian slave revolts in the 1800s, which disrupted the fortunes of the likes of Jane Austen’s Sir Thomas Bertram, the new M&A industry transformed public corporations — the establishment’s repositories of power and wealth — into very public, very visible and very vulnerable sugar plantations open to all with the will, the intelligence, and sometimes, the personality disorders needed to gain entry.
M&A quickly divided itself into two separate but equally important gangs: the corporate acquirers who do the buying and the M&A advisers who show them how it’s done. The former are the collectors. Like bower birds, who attract female mates with the colorful trinkets they gather to decorate their nests, these men began to collect compulsively: houses, wives, antique carriages, acres, books-by-the-yard, furniture, airplanes, companies. Dominant members of the species included Sir James Goldsmith, a British mogul with a secret terror of rubber bands who was reportedly the model for Sir Larry Wildman in the 1987 movie “Wall Street”; John Kluge, at one time the richest man in America after his breakup of Metromedia, who became infamous for his grisly pheasant shoot in Virginia; and Robert Campeau, known for bankrupting a swathe of North American department stores while fending off his own aging with the injection of fetal lamb brain cells.
The M&A advisers — the lawyers and bankers who actually do the work — are like vervet monkeys, more highly evolved than bower birds. Clever and quick social animals with a strict hierarchy, they have a special alarm for each species of corporate raider or, depending on the kind of deal, each potential target. Flom and Lipton and the lesser members of their respective monkey troops were the instant, and only, experts to whom judges and fellow lawyers would come on bended knee for explication of their alarm calls, the takeover assault weapons and the defenses against raiders that they were creating on the backs of menus at the hottest restaurants in town.
Skadden’s Lucky Sperm Club adopted the Quilted Giraffe as its clubhouse — at the time, the most celebrity-stuffed establishment in Manhattan. With sex in the bathroom and cocaine in the lost and found, the restaurant happened to track the same arc as early M&A from 1979 to 1990. And at Second Avenue and 50th Street, the Quilted Giraffe was also just six blocks from the offices of Skadden on Third Avenue. Along with the house red, Petrus and the Montrachet, the specialty was the “beggar’s purse,” an innocuous but seductive little crêpe confection bulging with beluga and crème fraîche, pulled into symmetrical creases by a drawstring of chives and topped with a gold leaf. It was the Proustian madeleine of the 1980s, typically $50 for each little morsel.
One autumn night in 1985, three of the Lucky Sperms, Stu Shapiro, Morris Kramer, Don Drapkin, and their progenitor, Joe Flom, could be found at their usual table, enjoying Havana’s finest, smuggled in from Geneva in white plastic boxes, each with its telltale gold-foil ring removed. By this time, our hitherto ostracized takeover lawyers had taken their rightful place among the clout merchants of the day. Mick Jagger and Jerry Hall were at table eight near the door. Ivan Boesky and Mike Milken had just left. Henry Kissinger had lumbered into his limo after a long drinking session. Woody Allen had dibs on table seven, as on other nights did Mia Farrow, Diane Keaton and Adnan Khashoggi. Warren Beatty was, as usual, at table six. There was Jacqueline Kennedy in her blue Chanel suit with Jayne Wrightsman. You could see Donald Sutherland, Annette Reed and Brooke Astor. You could never see Bernie Madoff, who always ordered in and always at lunch.
Among the Lucky Sperm stars that night there was a certain air of schadenfreude. They were embroiled in their campaign to conquer Revlon for their client Ron Perelman and his company, known as Pantry Pride. Perelman at the time was an unknown adventurer and a serial acquirer.
In 1985, M&A was exploding into maturity in the courts and boardrooms, and the Revlon war epitomized this sudden transformation of both commerce and culture. Few American corporations in the mid-1980s embodied glamour and power more thoroughly and with more fanfare than Revlon, a global brand brought to full flower by its former leader, the self-aggrandizing and self-tortured Charles Revson and then by Revson’s hand-picked successor, Michel Bergerac, who ensured that the company was the commercial and cultural lodestar of the establishment.
Bergerac created his own splendid court at Revlon’s headquarters in the General Motors building, one of the most prestigious office addresses in the city. On the 49th floor, the Revlon rooms were done à l’Afrique. The walls were hung with heads of greater kudu and steenbok and the masks of the Urhobo, Bozo and Yoruba. The floors were covered with zebra and impala skins and dotted with elephants’-foot stools. It was a palace of the masters of all living things, the lords of all creation.
“There was this sense that we are the nobility. And who is this — you should excuse the expression — Jew from Philadelphia …Who is he to interrupt our garden party in our Fourth-Floor-of-Abercrombie-&-Fitch-decorated headquarters in the city’s fanciest building with the best views of Central Park in New York?” says Stu Shapiro about the predominant attitude within the Revlon kingdom they were trying to acquire.
“This Jew” — Shapiro’s client — was Ronald Owen Perelman, salivating on his cigar, blurting out his ungrammatical fragments, daring to attack august Revlon, with its $2.3 billion in assets, from his perch atop a small, recently bankrupt Florida food chain with assets of barely $400 million. Perhaps most galling of all was the silly name of the upstart’s company: Pantry Pride. The Revlon grandees called it “Pant-y Pride”; Ronnie was “Peril-man,” pointedly pronounced in the French way by CEO Michel Bergerac so that it sounded like the name of a comic book super-villain.
Ronald Perelman, with the omnipresent cigar, in his townhouse two years after shocking the business elite with his coup at Revlon. Photo courtesy of Rob Kinmouth/Getty Images.
Revlon certainly had reason to feel impregnable, not only because of its size, but also because it had hired an army of the best New York M&A specialists who felt the same way: Arthur Liman leading a platoon from Paul Weiss, Marty Lipton of Wachtell and Felix Rohatyn in charge of a team from Lazard Frères. These advisers assured their client that they would never let Pantry Pride get its hands on Revlon. It was a lesson in how contempt and entitlement can fuel an arrogance that guarantees defeat.
At first, only one member of the board of directors saw “Peril-man” for what he was — a Drexel-fueled, Skadden-led, adrenalin-stoked existential threat to the Revlon status quo. That Revlon board member was Ezra Zilkha, the scion of an ancient Baghdadi-Jewish banking family. Zilkha understood that Mike Milken, who turned his team at the investment banking gadfly Drexel Burnham into a West Coast Wall Street from his X-shaped throne at Wilshire Boulevard and Rodeo Drive in Beverly Hills, was funneling borrowed money from bond buyers into Pant-y Pride, charging the borrower (Perelman) atmospheric interest rates but undamming an unstoppable surge of cash from investors looking for fat returns.
Zilkha at first found allies on the board only in Lewis Glucksman, the legendary head of Lehman Brothers, and Aileen Mehle, the celebrated columnist who wrote under the name Suzy Knickerbocker. It would not be long before the entire Revlon board and management, and indeed, the wider establishment itself, became increasingly appalled at the savages about to slay their first mastodon.
The fight had started with a knock at the door at Bergerac’s townhouse by Ron Perelman on the night of June 14, 1985. He was soon shown the door. Bergerac would later say to an associate, “Can you imagine this guy, saying he’s going to make me a rich man?” It may have been presumptuous, but it turned out to be true — true, at least, that Perelman would make Bergerac a much richer man than he was already.
Revlon wasted no time. It quickly put in a poison pill, an amendment to the corporate by-laws which would make it more expensive for any bidder to get more than a modest percentage of Revlon’s shares, and it began buying back as many as 10 million of those shares to keep them out of a predator’s grasp, using notes or debt instruments in exchange for the stock. Unbeknownst to Ron Perelman, Revlon also opened secret talks with Teddy Forstmann of Forstmann Little, which provided money to managements in return for partial ownership, about dividing up Revlon between them, which would leave nothing left for Perelman to buy.
Again, Ezra Zilkha foresaw the future. He argued that the courts would see this arrangement as nothing more than a way to protect their own interests — a new fence to keep the cow-tippers out of the milk-and-honeyed land of Revlon.
When the Revlon board met on Oct. 3, 1985, to approve its deal with Forstmann, which would leave the incumbents largely still in charge, Zilkha was in Jerusalem at the King David Hotel, joining in the discussions by phone and urging Bergerac to kill the plan before it was too late. The calls were agonizingly long, four to five hours at a stretch, exacerbated by a rabbi telephoning Ezra in the midst of it all to press him for a donation to a worthy cause. “The rabbi would have the operator interrupt my New York connection so he could talk to me instead,” Zilkha recalls with a smile. “As you know, rabbis can be very persistent.”
So can corporate raiders. On Oct. 9, after the board had joined hands with Forstmann, Arthur Liman of Paul Weiss convinced the three sides — Teddy Forstmann, Ron Perelman and Michel Bergerac — to come together to see if they could make peace. At around midnight, Perelman and his attendants were admitted to the Revlon sanctum, where they were seen as the revolting peasants. “I’ll never forget those 20 or 30 guys coming off the elevators,” Bergerac would later tell the writer Connie Bruck. “All short, bald, with big cigars! It was incredible! If central casting had had to produce 30 guys like that, they couldn’t do it. They looked like they were in a grade-D movie that took place in Mississippi or Louisiana, about guys fixing elections in the back.” Liman agreed: “What a scene. All the Drexels were in one room — these guys with their feet up on Michel’s tables, spilling their cigar ash on his rugs.”
Worse even than their manners, it would soon emerge, was their new bargaining tactic, which Perelman announced that night. He was simply not going to do anything but win.
“We were sitting around in Perelman’s office,” one member of the team recalls, “which was in his townhouse in the 60s, filled with incredible art — Modiglianis and Giacomettis, just unbelievable stuff — and the deal was just kind of plunking along. Donny Engle and Leon Black [of Drexel] and [Skadden’s] Don Drapkin and me. We were all talking strategy, and Drapkin suddenly had an idea. ‘We’ll raise them a quarter every time they bid,’ Drapkin says. ‘They won’t be able to not sell to us because we’ll raise them by the same amount every time. We won’t care what it costs.'”
Of course, a quarter was not just a quarter. It was an increase of 25 cents for every share Revlon had outstanding, around $30 million for each increase of two dozen-and-one pennies. It was not only intensely irritating for Revlon, this “nickel-diming” racket, as target advisers called it, but it was also a shrewd and raw unsheathed show of financial power, backed as Perelman was, implicitly, by Milken’s return-hungry investors.
And then Revlon sullied its own hands. As the Friday before the Columbus Day holiday approached, Revlon came before Justice Walsh, then a judge on Delaware’s Court of Chancery. Its Forstmann alliance was under scrutiny. Would a Revlon deal with a leveraged buyout firm, in return for partial ownership of the company, be legal? The company assured the court that before any decision, no monies would change hands. Over the long weekend, the status quo would remain intact so that the judge could safely delay his ruling on the case until after the break. The judge, on Revlon’s word of honor, agreed to postpone his decision until the Tuesday after Columbus Day.
But over the weekend, Revlon removed from the corporate treasury not only a tranche of Revlon stock but also $25 million in cash — all earmarked for Forstmann to compensate him if his deal with Revlon were to fall through. There was no reason to have done this other than to remove the assets from the reach of the court’s orders.
There is a little-used courtroom, more like an anteroom, off the Delaware Supreme Court chambers in Wilmington. The bench is large enough to seat all five judges, but the room is very small and very dark, and often very cold. It was to this place that then-Vice Chancellor Joseph Walsh, soon to move to the state’s high court, summoned the two sides to the bar on Tuesday, Oct. 16, 1985. It was left to a Revlon adviser who had known nothing of his client’s perfidy to face the cold ire of the judge who, learning of Revlon’s removal of assets, quickly dismissed all of the company’s pleas for succor.
The coup de grace in Delaware’s Supreme Court was triggered by Skadden’s Stu Shapiro. He argued that the Revlon directors had decided to protect themselves by giving away even more to protect themselves — in this case, money to the owners of Revlon’s traditional debt (its bonds and notes). These debt owners were angry at Revlon’s plans to borrow additional money to finance their defense against Perelman’s takeover since this new debt would jeopardize the company, and therefore, its bondholders.
Shapiro argued that the board members, facing not just bondholder anger but threats of lawsuits aimed at their own personal fortunes, had blinded them to their duty to get the best deal for the company’s shareholders, the actual owners of Revlon. And, as they bought more and more Revlon stock, the owners were increasingly Ronald Perelman and associates — investors whose loyalty was not to management or employees or the community, but to “maximizing shareholder value.” It has been the maxim of corporate America ever since.
When the court stripped away Revlon’s defenses, such as the deal with Forstmann, there was nothing for Revlon to do but turn over the keys to the kingdom to the dreaded Perelman for $1.8 billion. The consolation prize was that $1.8 billion was, at the time, an astonishing fortune. Bergerac and friends would be rich after all, as Perelman had promised.
After his oral argument triumph, Stu and his father (and fellow Skadden partner) Irving Shapiro were having a drink at the Rodney Square Club in Wilmington, co-founded by the elder Shapiro at a time in the not-so-distant past when Jews were not welcome in the city’s other exclusive clubs. Renowned Delaware attorney A. Gilchrist Sparks III, Revlon’s advocate, came over to their table to congratulate Stu on his performance. At that point, the court had not yet ruled, but Sparks knew it was to be Shapiro’s day. It was fitting that a luminary in M&A, with an initial as a first name and a Roman numeral after his surname, would tip his hat to a Jewish lawyer at this club founded in response to discrimination after an M&A victory against an established elite.
A devastated Michel Bergerac came to see Ezra Zilkha at 30 Rock just two hours after the Revlon board met for the last time before Ron Perelman and his team took over.
“What has happened?” Bergerac said as he let himself down into a chair. “You have just made yourself $35 million with your golden parachute and the sale of your stock, Zilkha told his friend. It’s November, Zilkha went on quickly. With me, you can talk any time, but it is almost tax season. I will call my Peat Marwick people for you. Go now and see how you can defer your taxes. “And that,” Ezra recalls, “is exactly what Michel did.”
Revlon was a triumph for Stu Shapiro, who won one of the most important court victories in the history of mergers and acquisitions. For Drexel, it was one of the first and most successful junk bond takeovers of a major corporation. For Shapiro’s mentor and adviser throughout the Revlon saga, Joe Flom, it was sweet vindication. A brilliant Harvard law student and a law review editor, now the leader of fearsome Skadden, the young Flom had been routinely turned down by the law firm mandarins of the day, sometimes even told that his “background” was the “problem.”
These old-line firms, among sundry other gatekeepers, from co-op board members to restaurant maîtres d’hôtel, could no longer stop Flom and his confreres, furious to succeed. “In the early ’60s,” Flom once remembered, “we were supposed to do an underwriting for a client, but when the client called his investment banker, he was told there were only seven [law] firms — all old Wall Street firms — qualified to do underwritings for the bank. So I figure… we’ve got to show the bastards that you don’t have to be born into it.”
And that’s just what they did. The control of corporate America was arguably democratized in the process. And shareholders, regardless of identity or motives, gained an upper hand they have yet to relinquish, almost three decades later.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions