Special Report: Raiders on The Run

By John Greenwald

I was a big man yesterday but boy, you oughta see me now.

For the corporate raiders who amassed fabulous fortunes in the 1980s, that sad song has begun to seem painfully true. Armed chiefly with bravado and borrowed cash, such buccaneers as T. Boone Pickens, Paul Bilzerian and Canada's Robert Campeau once made boardrooms tremble and the stock market dance. No longer. More jeered than feared, many raiders are mired in debt, saddled with bankrupt companies or deprived of their clout. Others who profited from the buyout binge face public obloquy or even years in jail.

The raiders have often been victims of their success. Fancying themselves managers as well as marauders, they built huge but shaky empires that rested on debt. Result: their vast borrowings at sky-high interest rates left companies ranging from TWA to Allied department stores awash in red ink. "Many of the raiders' problems are self-inflicted," says Stuart Bruchey, a professor of economic history at the Columbia University Business School. "They jump into businesses that they don't understand, and expect to jump out with a quick profit. But they end up getting badly bogged down."

The raiders' troubles have hit Wall Street like a line of falling dominoes. Defaults by overburdened borrowers have crippled the junk-bond market, which finances many takeover deals. Only $11 billion of junk bonds were issued for mergers and acquisitions in the first nine months of 1989, in contrast to $26 billion during the same period a year ago. "Investors are becoming more sophisticated and cynical," says Kingman Penniman, a Vermont-based investment adviser. "They are no longer willing to finance every buyer's fantasy of using somebody else's money to leverage and strip a company and get rich. The days of the free ride are over."

That is bad news for Wall Street, where buyouts have propped up stock prices and brought in fat advisory fees. Faced with a drop in the number of mergers and acquisitions, which fell 29% during the July-September quarter compared with 1988's third period, major investment firms have announced the layoffs of nearly 2,000 employees in recent months. Particularly sharp cutbacks have come at Shearson Lehman Hutton, which is dismissing 800 of its nearly 37,000 workers and said last week it would reshuffle its top management.

Yet the biggest chill has come over raiders who once promised to run companies more efficiently than did the bosses they ousted. Largely self-made men who flaunted their contempt for corporate America, many raiders have had a rude comeuppance. Some have suffered much greater setbacks than others, but few are flying as high as they did in their heydays. Among the consequences of their deals:

The Toronto Tycoon. A former shop foreman who became one of Canada's top real estate developers, Robert Campeau in 1986 went on a U.S. shopping spree. Campeau, 66, paid $3.6 billion for Allied Stores and won Federated Department Stores for $6.6 billion in a celebrated 1988 battle with R.H. Macy & Co. But the takeovers left Campeau, who had little experience in U.S. retailing, sorely overextended. His attempt to raise cash by selling off several chain stores brought disappointing proceeds, and then the women's apparel trade went into a slump.

With his empire near bankruptcy, Campeau put Bloomingdale's -- the jewel in Federated's crown -- up for sale in September and surrendered virtual control of his companies to Canada's Olympia & York developers for $250 million in desperately needed cash. Last week Bloomie's chairman Marvin Traub sought Japanese support for a reported $1.3 billion management bid to acquire the tony 17-store chain from Campeau Corp. Said Traub: "We think our chance of success is good."

An Enigma Wrapped in a Raider. "From early youth I had the urge to achieve perfection," Carl Icahn once declared. Icahn, 53, has pursued that goal in adulthood by enriching himself mightily while stalking major companies, from American Can to Uniroyal. He completed the $1.2 billion takeover of TWA last year, a deal that silenced skeptics who had charged that Icahn never really wanted to purchase a company and was interested only in selling his holdings for huge profits. But while Icahn showed some initial signs of managerial aptitude, TWA expects a record loss this year.

Now, frustrated, he is attempting to go back to his old game. As he reportedly searched for a TWA buyer last week, Icahn asked federal approval to raise his 13.3% stake in USX -- formerly U.S. Steel -- to more than 25%. Icahn could presumably use cash from a TWA sale to purchase the USX stock and then make a run at the rest of the Pittsburgh-based company. But Wall Street analysts were skeptical, noting that Icahn filed for permission to boost his USX holdings in 1987 and 1988 and did not raise his stake to the amount requested in either year.

Master of the Game Shows. First came I've Got a Lovely Bunch of Cocoanuts. Then Merv Griffin, its singer, became a talk-show host and created the hit programs Jeopardy! and Wheel of Fortune. Craving more action, the centimillionaire Griffin last year outbid billionaire Donald Trump in a battle for Resorts International, which owns casino hotels in Atlantic City and the Bahamas.

But aging Resorts turned out to be worth far less than the $925 million of debt that Griffin, 64, assumed when he acquired the company for about $365 million. "It has become clear that Resorts is a much bigger challenge than we anticipated," the entertainer wrote last summer to bondholders. They were not amused. After threatening to put the company into bankruptcy, the creditors tentatively agreed in October to swap their Resorts bonds for $400 million of new notes and 78% of the company's stock, leaving Griffin with a minority stake in the company.

The Florida Felon. A high school dropout who graduated from Harvard Business School, Paul Bilzerian, 39, had the knack for getting what he wanted. But when the Florida real estate market proved too small for his ambitions, Bilzerian tried, and failed, to take over four different companies. Undaunted, Bilzerian acquired Singer Co., the defense contractor and former sewing-machine maker, for $1.1 billion after the 1987 crash drove down its stock price.

Since then one reversal after another has hit Bilzerian and the company. Sentenced in August to four years in prison for violating tax and securities laws in previous raids, Bilzerian is appealing that conviction. Singer, renamed Bicoastal after Bilzerian sold eight of twelve divisions to meet $120 million in annual interest payments, sought refuge from creditors last month by entering bankruptcy court. But management is no longer his concern: he resigned as Bicoastal chairman last summer after his criminal conviction.

Prince of the Panhandle. T. Boone Pickens has few regrets about his raiding career. "Our motives were sincere," says the Amarillo, Texas, oilman. "We believed we could run those companies better than they were being run." Pickens, 61, never managed to acquire such energy giants as Gulf Oil, Phillips Petroleum and Unocal, all of which he attacked in the mid-'80s. Yet he enriched himself by acquiring stock in the companies and then selling the shares at a profit, making nearly $400 million on his Gulf raid alone.

Since those heady days, a battle-weary Pickens has abandoned the U.S. takeover field and gone hunting in Japan. But he has been stymied in a drive to win four seats on the board of Koito Manufacturing, a Tokyo auto-parts maker in which he controls a 20% share. Pickens says Koito has hired Wall Street consultants to advise the company on how to keep him at bay. Meanwhile, a federal appeals court in Philadelphia last August reinstated a class-action suit that Phillips Petroleum shareholders brought against Pickens in 1984. The plaintiffs claim that the value of their stock collapsed when Pickens abruptly abandoned his Phillips takeover bid.

An Antipodal Acquisitor. In 1983, in the midst of his glory days, Alan Bond's sloop Australia II captured the America's Cup. In the same determined manner, Bond, 51, has run up more than $3 billion of debt in recent years while capturing a global empire of properties ranging from half of Chile's telephone system to Wisconsin-based G. Heileman Brewing. To lighten his crushing debt load, Bond is now shedding properties almost as fast as he acquired them.

Textile Titan. Many skeptical eyes are turned on William Farley, the physical-fitness buff who acquired Northwest Industries, the maker of Fruit of the Loom products, for $1 billion in 1985. Last February Farley took over textile giant West Point-Pepperell in a $3 billion raid that included $1.6 billion of junk-bond financing. A fellow raider calls Farley's debt a "time bomb." While Farley once joked that "we're doing fine, except that the banks expect us to pay them back," he now refuses to discuss his finances or the subject of raiding. Says he: "I'm staying 180 degrees away from that topic."

Financial woes are not the raiders' only big headache. Their past attacks have led U.S. companies to fortify anti-takeover defenses, making it harder for new raids to succeed. And the long Wall Street bull market has raised stock prices, leaving fewer targets for bargain-hunting buccaneers.

As the Roaring Eighties reach an end, the verdict on raiding is becoming clear. Defenders of the practice insist that raiders have made U.S. industry more competitive by forcing bloated companies to slim down and shape up. Yet the towering debt loads piled up during the raider era -- by both the attackers and the managers seeking to repel them -- have made many companies less flexible and far more vulnerable to an economic slump. While the merger- / and-acquisition game will no doubt carry on in the 1990s, such deals are apt to be less grandiose and more carefully wrought than the quick-buck transactions that are currently coming to grief. Says J. Ira Harris, a Chicago-based senior partner of Lazard Freres: "These are only midterm grades. The real grades arrive when you have an old-fashioned recession and see who survives." When that report card is in, more raiders are likely to flunk the game they touted so highly: survival of the fittest.

With reporting by Thomas McCarroll/New York and William McWhirter/Chicago