The following is a series of articles set in a world where Kurt Cobain doesn't commit suicide (he also never even tried heroin), and finds himself in a series of surprising developments in both his personal life and his career. For example, just to make things a bit clearer; Nirvana continues as a recording and touring act well into the 21st century, Kurt divorces Courtney and remarries, to actress Charlize Theron, and they also create a bold new venture together. This certainly also leads to a number of divergences in politics, sports, and popular culture, though of course, "the more things change, the more they stay the same." Some of these articles reflect things that also occurred IOTL, other articles have more divergences. For more information and context about what is being talked about here, see the thread "Cobain Continues Redone: A Kurt Cobain Survives Timeline" on AlternateHistory .com before you read this particular story here on this site (we are currently working on making a version with further edits, feel to join us!) and the so called Springbok Wiki on Fandom. All websites are represented by separating the dot from the website type because of writing guidelines for URLs on this site.

This was all based on meticulous research on my own time, reading dozens of books and hundreds of newspaper/magazine articles spanning decades, as well as watching many hundreds of hours of news footage and documentaries, all spanning decades of time and a variety of subjects, notably looking into politics, economics, cinema, television, music, Broadway, video games, comic books, anime, technology and sports; as well as constant discussions with my teammates on the original TL thread. This is why articles are used; a great number of them appear as they are IOTL, others have some degree of minor tweaks to reflect divergences, and other articles are just invented out of thin air and completely only for this TL. It also shows and represents dozens of different threads in history that span decades, with multiple twists and turns and continuous intersecting with each. Everything and everyone that is brought up once has a payoff and resolution. Something always comes up again, even if it takes the space of years to do so.

All articles, reports and interviews utilized from our reality are property of their respective owners, utilized under Fair Use. Any tweaks to preexisting articles to reflect TTL as well as any created from whole cloth are owned by me. Attempts are made to standardize and match syntax, grammar, spelling and format, and may not fully respect the verbatim transcript as captured by different and various sources.


This entire timeline is dedicated to the memory of Jim Steinman and Meat Loaf; and to the loving memory of my beloved uncle, Dr. John M. Ortiz, who influenced and understood me in ways too numerous to describe.


Ch. 1: 1985-1995 (with some pre-1985 articles simply to provide context)


"Coke Expected To Acquire Columbia Pictures," by Thomas C. Hayes, The New York Times, January 19, 1982

The Coca-Cola Company, seeking greater diversification, is expected to announce Tuesday that it has reached an agreement to acquire Columbia Pictures Industries in a $750 million transaction, industry sources said today.

The acquisition of the profitable film company would be Coca-Cola's first major purchase under Roberto O. Goizueta, who became chairman and chief executive officer last March and indicated that he would diversify Coke into new fields.

''Coke is very enthusiastic about being in the movie business,'' a source close to the negotiations said. In previous years, as the American market for soft drinks has leveled off, Coke has diversified into such fields as ocean farming and orange groves, but this would be its first big venture into entertainment.

The offer, which has reportedly been received favorably by Columbia officials, calls for a payment of $74 a share in cash and stock - nearly twice the current value of the stock - for Columbia's 10.7 million shares outstanding, one source said. The cash portion would be less than 50 percent of the total payment, sources said.

Industry specialists said they expect Coke's $74 a share offer to be too attractive for Columbia's half-dozen or so principal shareholders to reject, despite the company's recent profitability.

Trading in Columbia shares was halted today on the New York Stock Exchange, with the stock at 41 3/4, its closing level Friday. Asked for an explanation, Francis T. Vincent, Columbia's president, said an announcement was planned for tomorrow that would be ''of substantial benefit'' to Columbia stockholders.

Mr. Goizueta, in an interview last year, made clear that he hoped to put his personal stamp on Coca-Cola by expanding into other fields, such as entertainment, leisure time and flavors and fragrances. He spoke of spending an amount equal to 10 percent of the company's annual revenue for a major acquisition - about $600 million, based on last year's sales of $6 billion. Purchase of Columbia would meet that criterion. Columbia, which came close to liquidation in 1973 when its stock sold for as little as $1.62 a share, has been among the more successful motion picture companies in recent years, especially since the release in the late 1970s of Close Encounters of the Third Kind, a hugely successful movie. The company's more prominent recent feature films have included Kramer vs. Kramer, Stir Crazy, Only When I Laugh, Stripes and The Blue Lagoon.

Later this year, it is scheduled to release a $40 million Hollywood production of the long-running Broadway play Annie. One analyst speculated that Coca-Cola, anticipating great success for the film, timed the offer for Columbia to capitalize on the anticipated popular appeal of the film.

Coca-Cola stock closed Monday at 34 1/4, down 1/8. Columbia also has what some analysts regard as a sleeper with considerable profit potential in its Gottlieb division, a maker of pinball machines and video arcade games. The division, no longer losing money, could grow more rapidly with heavy investments that have been beyond the reach of Columbia but that Coca-Cola, with its ''financial muscle,'' could provide, one executive at Columbia said.

David Londoner, an entertainment analyst with Wertheim & Company, a Manhattan-based brokerage firm, said: ''Columbia is a well-run film company that has had impressive successes in the last few years. Frank Vincent has done a very good job.''

Mr. Vincent, a former Washington lawyer and member of the Securities and Exchange Commission, was brought to Columbia in 1978 to replace Alan Hirschfield, who had been under criticism for his handling of the dismissal of David Begelman from the presidency of Columbia's picture division for forging studio checks. Mr. Begelman is now chief executive of United Artists, acquired in 1981 by the Metro-Goldwyn-Mayer Film Company, while Mr. Hirschfield is president of the 20th Century-Fox Film Company, bought last year by Marvin Davis, a Denver oil millionaire.

In addition to films, the expanding field of home entertainment, including pay television and videocassettes, has markedly enhanced the value of Columbia's library of more than 3000 movies and 10,000 television programs.

Columbia had more than $155 million in licensing contracts with pay-TV, networks and local television stations (for syndication of such television programs as Fantasy Island) at the end of its 1981 fiscal year.

Agreement With HBO

Home Box Office, a subsidiary of Time Inc., agreed late last year to acquire exclusive rights to Columbia films produced between January 1, 1981, and April 1984.

The agreement means that HBO effectively pays an estimated 30 percent of Columbia's feature film production costs during the period, which could range between $100 million and $180 million, according to estimates by industry analysts.

Columbia had a good year with new feature films in 1981, but its performance was not remarkable. Warner Bros., owned by Warner Communications, ranked first among major studios in 1981, capturing an 18 percent share of theater revenues, according to a study published Friday by Daily Variety, a motion picture trade paper. Gulf and Western's Paramount was second, with 15 percent. In third place was MCA's Universal, with 14 percent. Columbia and 20th Century-Fox Film were tied in fourth place with 13 percent.

In its 1981 fiscal year, ended last June, Columbia earned $44.3 million, or $4.43 a shares, on revenues of $686.6 million. For the first quarter, completed last September, net income fell 38.3 percent, to $10.3 million, or $1.20 a share, from $16.7 million, or $1.64 a share, in the same period a year earlier. Revenues fell 8.1 percent, to $171.1 million from $186.2 million.

Principal Shareholders

Columbia's principal shareholders include Allen & Company Inc., a closely held investment concern whose chairman, Herbert A. Allen, is Columbia's chairman, with 6.2 percent of the stock. Mr. Allen acquired his stock at an average cost of $4 a share, or $3 million, a Columbia source said. The Coke offer would mean a profit of $50 million.

Other major stockholders include the American Financial Corporation, the financial holding company that was turned private last year by Carl H. Lindner, its chairman, with slightly less than 5 percent of Columbia; the General Cinema Corporation, which has 5.4 percent, and the Redstone family, which controls General Cinema and recently acquired 9.3 percent of Columbia. General Cinema is the nation's largest owner of movie theaters.


"ABC Unit to Buy Stake in ESPN," The New York Times, January 4, 1984

ABC Video Enterprises plans to acquire 15 percent of ESPN, the entertainment and sports network, from the Getty Oil Company for between $25-30 million, sources close to the deal said.

ESPN is a cable channel that offers sports and other programming to more than 23 million households.

In August 1982, ABC, a unit of the American Broadcasting Companies, agreed to supply programming to the cable network and received an option to purchase up to 49 percent of ESPN. The 1982 agreement required ABC to purchase at least 10 percent of ESPN by last Monday or lose the option to buy more later. ABC's purchase will reduce Getty's share of the network to 70 percent. Getty invested $10 million in ESPN when it was established in 1979. Since then the network has operated in the red, although its management refuses to release precise figures on losses.


"ABC To Acquire ESPN As Texaco Sells Its 72% Stake," by N.R. Kleinfield, The New York Times, May 1, 1984

Texaco Inc. announced yesterday that it had reached a definitive agreement to sell its controlling stake in the Entertainment and Sports Programming Network, the country's biggest cable television service in number of subscribers, to the American Broadcasting Companies.

Under the terms of the agreement, ABC will pay $188 million in cash for the 85 percent interest in ESPN that it does not already own, plus $14 million for the sports network's satellite broadcasting facilities. The channel will officially become part of ABC Video Enterprises Inc., which purchased 15 percent of ESPN at the beginning of the year for about $30 million.

Texaco owns about 72 percent of the channel. Another 13 percent is held by William Rasmussen, the network's founder, and his family, who will also share in the proceeds from the sale. Texaco acquired its stake in ESPN earlier this year when it took over the Getty Oil Company, but it has since stated that it was interested in selling Getty's non-energy holdings.

ESPN has attracted the interest of, among others, the Turner Broadcasting System, which operates the 24-hour Cable News Network. ABC, however, had the inside track on buying the sports channel because it held the right of first refusal should Getty decide to sell its cable business. It also had an option until January 1986 to buy up to an additional 34 percent of ESPN at a price reported to be $2 million per percentage point.

At least one competing party appeared to be disgruntled with the way in which Texaco handled the sale. Ted Turner, the head of Turner Broadcasting, said in a statement that the agreement was reached ''while we and a number of other parties were awaiting financial information on ESPN necessary to prepare a bid.''

''The sale of ESPN was completed without the solicitation of bids from any parties other than ABC,'' he added.

Texaco acknowledged that it was preparing a brochure on ESPN to be submitted to prospective bidders, but said ABC made an offer that it ''couldn't turn down.''

ABC, which is expected to take control of ESPN early in May, said it was too early to discuss possible changes in the programming or the operations of the channel, although it added that it did not expect any significant changes.

The acquisition of ESPN by ABC has been viewed by industry analysts as a logical fit, given ABC's considerable interest and success in sports broadcasting. It would also allow ABC to bargain with sports organizations for all television rights to their events, from conventional broadcast rights to cable and pay-per-view rights.

Started in 1979

With about 30.2 million subscribers, ESPN is considered to be one of the more promising ventures in the cable business. Begun in 1979, it broadcasts sports programming 22 hours a day, ranging from billiards to games of the National Collegiate Athletic Association. It has another two hours of business material. The network is financed by advertising and fees paid by cable operators, rather than by subscriber charges.

Although it has lost about $100 million since its inception and has yet to turn a profit, ESPN has said it expected to break even in the fourth quarter of this year and to make money next year. Advertising revenues are projected to climb to $55 million this year, from $40 million in 1983.


"Briton Buys The Mirror Chain," The New York Times, July 14, 1984

The publisher Robert Maxwell completed negotiations today to buy the Mirror Group of newspapers from Reed International Ltd. for $148 million.

The Mirror Group comprises The Daily Mirror, one of Britain's largest circulation tabloids, as well as The Sunday Mirror, The Sunday People, The Sporting Life, The Scottish Daily Record and Sunday Mail, and a 5.8 percent share in Reuters. Mr. Maxwell has been trying for 15 years to buy a major national newspaper.

At a news conference, Mr. Maxwell said that he wanted Mirror editors to be ''free to produce the news without interference.'' But he then added that the papers must ''fight for the return of a Labour government.''

The transaction drew protests from editors and union officials at The Daily Mirror who supported Reed's earlier intention not to sell the group to an individual. Union officials had expressed fears that members' jobs would be lost if Mr. Maxwell won control of the papers.

Clive Thornton, who became chairman of the Mirror Group six months ago, resigned this morning, telling reporters, ''I have no intention of working for Mr. Maxwell.''

Mr. Maxwell, a 61-year-old native of Czechoslovakia, made a fortune through Pergamon Press, the educational and scientific publishing company he founded in 1951.


"Nabisco Buys Interest In ESPN TV Channel," United Press International, September 11, 1984

Nabisco Brands, Inc. has purchased a 20 percent interest in American Broadcasting Cos. Inc.'s ESPN cable TV sports network for $60 million, the two companies announced Tuesday.

Entertainment & Sports Programming Network reaches 32.7 million homes through 8400 cable TV systems.

The channel broadcasts 24 hours a day, showing sports for all but two hours in the morning when a business news program is carried. ABC had acquired 15 percent of ESPN from Getty Oil Co. earlier this year and bought the rest after Getty was taken over by Texaco Inc. ABC spent about $230 million for the two-step acquisition of ESPN.

The announcement said Don Ohlmeyer, chairman of Ohlmeyer Communications Cos., a Nabisco joint venture, will represent Nabisco on the ESPN board of directors. Ohlmeyer was a sports producer at ABC-TV for 10 years and produced sports for NBC-TV for five years.

John Martin, president of Ohlmeyer Communications and before that a 15-year veteran of ABC Sports, will also join the ESPN board.

Ohlmeyer Communications will serve as an adviser to ESPN, helping develop new revenue sources, and program, marketing and sales concepts.

Melvin J. Grayson, a spokemsan for Nabisco, said ESPN is projected to become profitable by the end of 1985 and to show a profit for all of 1986.

Ohlmeyer Communications is involved in tv production, advertising and sports marketing.

Nabisco is a major food processor with a $750 million annual budget for advertising and promotion.


"The Walt Disney Company Changes Name of Distribution Arm," Internal memo, January 4, 1985

Effective today, The Walt Disney Company will institute a stylistic name change of its distribution arm. While the legal name remains Buena Vista Theatrical Pictures, each film will bear the name of Walt Disney Studios Motion Pictures, the name of our motion pictures group, to represent well and truly that Disney distributes and owns its own films. The films will now end with "Distrubuted by Walt Disney Studios Motion Pictures, a division of Buena Vista Theatrical Pictures." Furthermore, home video releases of all films prior to 1985 will have that message added to them, along with keeping distribution notes of "Distributed by RKO Radio Pictures" and "Distributed by Buena Vista" intact, adding the new addendum only at the very end. Disney will fully keep the Buena Vista name for its home video division, under the Buena Vista Home Video umbrella.


"ABC Is Being Sold for $3.5 Billion; 1st Network Sale," by N.R. Kleinfeld, The New York Times, March 19, 1985

The American Broadcasting Companies agreed yesterday to be sold to Capital Cities Communications Inc. for more than $3.5 billion.

The surprise deal represents the first time that ownership of any of the nation's three major networks has changed hands. It also represents the biggest acquisition outside the oil industry in corporate history.

ABC, with 214 affiliated stations, has been a major cultural force in the nation, broadcasting such popular programs as Dynasty and Hotel and capturing a wide audience with its Olympics programming last summer. Capital Cities, a little-known but ambitious stalker of broadcast and publishing properties, owns television and cable TV systems, the Fairchild Publications business newspaper group and several daily newspapers.

"It Was a Natural Fit"

Thomas S. Murphy, the 59-year-old cost-conscious chairman and chief executive of Capital Cities, and Leonard Goldenson, the strong-willed 79-year-old chairman and chief executive of ABC, said they had been talking on and off since early December, though the deal was essentially patched together over the last two weekends.

''We just thought it was a natural fit between the two companies,'' Mr. Murphy said in an interview yesterday, ''and we thought we'd have an opportunity to handle the new possibilities coming up in the electronics fields better together.''

But the agreement, approved by both companies' boards of directors, means the twilight of the long reign of Mr. Goldenson, the chief builder who put ABC together. Once the merger is completed, he will be reduced to chairman of the consolidated company's executive committee.

"That's Important to Me"

''That is my wish,'' Mr. Goldenson said. ''I feel that the company I built from scratch is in good hands and that it will be carried on, and that's important to me.''

Mr. Murphy will become chairman and chief executive officer of the merged company, to be called Capital Cities/ABC Inc.

To get ABC, a company four times its size, Capital Cities is offering to pay ABC's stockholders a hefty $118 a share in cash plus warrants to buy Capital Cities stock at a set price. ABC's stock rose $31.375 yesterday, closing at $105.375. As a result of this sizable outlay, however, Capital Cities will gain entry to the glamorous and powerful world of network broadcasting.

Mr. Murphy said Capital Cities would gather the money to buy ABC from three sources.

Most of the sum, he said, will come from bank financing.

More than $517 million will come from the proceeds of a separate agreement Capital Cities struck with Berkshire Hathaway Inc., a diversified holding company headed by Warren E. Buffett, who has other interests in communications companies. In return for his company's financing, Mr. Buffett will be named a director of Capital Cities/ABC.

Additional money will be raised by the sale of an unspecified number of television and radio stations. This action is required to stay within the bounds of the Federal Communication Commission's rules on concentration of ownership of broadcast properties.

Under FCC rules that take effect April 1, for instance, a company may own 12 TV stations reaching no more than 25 percent of the nation's households. Capital Cities and ABC together would have 12 stations reaching more than 28 percent of the country.

In Washington, an assistant to Mark S. Fowler, chairman of the FCC, said Mr. Fowler had a brief three-way telephone conversation yesterday afternoon with Mr. Goldenson and Mr. Murphy. Mr. Fowler did not comment on what was said because formal documents have not yet been filed with the commission.

''There are certainly cross-ownership questions,'' said James McKinney, chief of the FCC's mass media bureau, the division with responsibility for broadcasting oversight. ''I would guess they will come in with a plan fairly shortly.''

ABC has been a topic of takeover gossip for some months. Capital Cities' move to acquire such a vast television holding continues a spurt of takeover interest that has recently jolted the broadcast business, one of the most lucrative and profitable industries in America.

Among recent acquisitions in the broadcast industry, the Taft Broadcasting Company bought the Gulf Broadcasting Company, and Multimedia Inc. was acquired by its own top executives.

Elsewhere, Ted Turner, the owner of Turner Broadcasting System Inc., is reported to be considering a bid for the CBS network. Meanwhile, a conservative group, with the backing of Senator Jesse Helms, Republican of North Carolina, was put together to raise cash to buy CBS stock as a way of challenging what the group calls the liberal bias of CBS News.

NBC, the third network, is part of the RCA Corporation, which is occasionally mentioned as a potential target for corporate hunters.

CBS said it had no comment on the ABC-Capital Cities agreement. NBC said only that it wished both companies well.

Last year Capital Cities had revenues of $949.7 million and a profit of $135.2 million. ABC had revenues of $3.71 billion and a profit of $195.3 million. But the combined Capital Cities/ABC Inc. will still rank third among the networks in terms of revenues of the parent companies.

Wall Street's View of Deal

The deal between ABC and Capital Cities drew mixed views from Wall Street. It will fuse together two companies rather disparate in culture. Capital Cities, one of the most profitable companies in the communications industry, with television, radio, newspaper and trade publications operations, is a lean, low-risk company that keeps an unwavering eye on how many coins are in the till.

ABC, on the other hand, is a sprawling enterprise that derives the bulk of its income from the risky and fickle game of television programming. Its heyday as the No. 1 network is a dusty memory, and it has been shaken by dwindling audience ratings that have dropped it back to No. 3.

''There really is no logical reason to put these two companies together,'' said Edward Atorino, a securities analyst at Smith Barney Harris Upham & Company. ''You come down to power, I guess. From ABC's perspective, maybe it's 'Let's get off a sinking ship.' They've got serious ratings problems that could damage their operating results this year and next. So maybe it's turn it over to a new gang of people who think they can do no wrong and give them the challenge of taking a No. 3 network and making it king again.''

''I think it's attractive for the ABC shareholder,'' said Mark Riely, an analyst with F. Eberstadt & Company. ''For Capital Cities, they bit off a lot to chew at a pretty hefty price. They have quite a task in front of them.''

The combination sets the stage for some potential personality clashes, since it establishes a hierarchy involving corporate chieftains unfamiliar with taking orders from others.

In addition to the positions to be occupied by Mr. Murphy and Mr. Goldenson, Daniel Burke, Capital Cities' president and chief operating officer, will continue in the same role for the combined company.

New Executive Alignment

Frederick Pierce, ABC's president, will become vice chairman of Capital Cities/ABC and chairman and chief executive officer of the ABC network. Though he no longer will report to Mr. Goldenson, he will have two new bosses in Mr. Burke, to whom he will directly report, and Mr. Murphy.

''The question is who's really going to run ABC once all the smoke clears,'' said Mr. Atorino. ''Pierce, I would think, is not going to want to take a backseat. He's had a backseat most of his life and was in a position to take the front seat. Murphy is certainly not going to take a backseat. He's never had a backseat in his life. But Murphy has never done any programming, and ABC's ratings are in dreadful shape.''

''I don't think there will be any less autonomy,'' Mr. Pierce said. ''The reporting mechanism is just something on a chart.''

Capital Cities owns seven television stations, including top-ranked TV stations in Philadelphia and Houston. Four of the stations are ABC affiliates. The company also has 12 radio stations, 10 daily newspapers and more than 30 trade publications and other communications-related ventures.

Its publishing division includes Fairchild Publications, which issues such trade journals as Women's Wear Daily. Among its newspaper properties are The Kansas City Star and The Fort Worth Star-Telegram.

ABC owns television stations in New York, Chicago, Los Angeles, San Francisco and Detroit as well as 12 radio stations and an array of magazines, and it is involved in various cable services.


"Murdoch Is Buying 50% Of Fox," by Richard W. Stevenson, The New York Times, March 21, 1985

Rupert Murdoch, the Australian publisher who has bought up numerous American newspapers and magazines, entered the motion picture business yesterday with an agreement to buy 50 percent of the 20th Century-Fox Film Corporation.

Fox, now privately owned by Marvin Davis, a wealthy oilman, is one of Hollywood's best-known movie studios, but one that has suffered financial difficulties from a string of box office disappointments.

''They need the capital to get back on track with production,'' said Harold Vogel, an analyst at Merrill Lynch. ''It's been a rough period for them for the past one and a half or two years.''

The purchase surprised the Hollywood community, and raised questions about what effect it might have on the kind of films the studio produces.

It was not immediately apparent if Mr. Murdoch's stake would give him firm control of Fox. But analysts said Mr. Murdoch would undoubtedly have a major say in studio operations.

Mr. Vogel predicted that ''some people will be delighted and some people will be incensed'' at Mr. Murdoch's move into the film industry.

In a joint statement with Mr. Davis, Mr. Murdoch said he would buy the 50 percent interest for $162 million, and would also advance $88 million to the studio's parent company to help pay debt and provide needed capital.

Mr. Davis and a partner, Marc Rich, bought a controlling interest in 20th Century-Fox in 1981 for $722 million. Mr. Davis bought out Mr. Rich's half of the company last summer for a reported $116 million, after Mr. Rich was indicted for tax evasion and other charges in connection with his worldwide commodities operations.

The purchase is the second announced change in ownership in the media and entertainment industry this week. On Monday, Capital Cities Communications Inc. agreed to acquire the American Broadcasting Companies for $3.5 billion.

Among his holdings, Mr. Murdoch, through his News Corporation Ltd., owns The New York Post, The Village Voice and The Star, a national tabloid. He has often bought the weakest newspaper in a market and tried to strengthen it, sometimes by using screaming headlines and stories that emphasize crime and scandal, and he has been criticized for that. But he also owns highly respected newspapers, including The Times of London and The Chicago Sun-Times.

He also owns television, cable and satellite operations in the United States, Britain and Australia. Analysts said Mr. Murdoch has expressed interest in film and television studios for some time, in part because he hopes to provide programming to his broadcast operations.

''He likes the idea of having a film library and a production arm,'' said Lee S. Isgur, an analyst at PaineWebber Inc. ''If he can have 20th Century-Fox's film library and distribution rights, that's not bad. He's also got an ego, and he wants to get into the business.''

Last year Mr. Murdoch tried to gain control of Warner Communications Inc., the parent of studio Warner Bros. He failed in that bid, but earned an estimated $40 million by selling his stake in Warner back to the company at a premium.

A Series of Disasters

Fox's last major hit was Romancing the Stone, more than a year ago. Since then, it has had a string of disasters, including Rhinestone, starring Sylvester Stallone and Dolly Parton; Blame It on Rio, with Michael Caine, and Unfaithfully Yours, with Dudley Moore.

The studio distributed the three Star Wars movies, but they were produced and owned by George Lucas, the director.

Fox's television production company has also stumbled.

Last September, Mr. Davis lured Barry Diller, who had been chairman and chief executive of the Paramount Pictures Corporation, to Fox, in the same capacity. Mr. Diller reportedly received an equity stake in Fox at that time.

Mr. Murdoch could not be reached for comment yesterday, but, in a prepared statement, he said: ''20th Century-Fox is one of the world's few great film and television companies, and with its new management, under the outstanding leadership of Barry Diller, is positioning itself for significant growth.''

Studio Lost $85 Million

The studio lost $85 million in the fiscal year ended August 25 and another $12.4 million in this fiscal year's first quarter, which ended November 24.

The movie industry has enjoyed record admissions and box office receipts in the past several years, but profit margins have been down lately, as a record number of films has competed for audiences.

Analysts said the investment by Mr. Murdoch should allow the studio to increase its production budget and pay off some of its sizable debt.

At the end of its first quarter, the company's bank debt was $414 million, up from $363 million at the end of the previous quarter.

Two weeks ago Fox had said it was restructuring a revolving credit line of $400 million, and that it had arranged for a capital infusion of $170 million, including $50 million from Mr. Davis.

Of the total of $250 million paid by Mr. Murdoch's News Corporation to TCF Holdings, which is the parent of the Fox studio, $132 million will be invested in the studio and the rest used to pay down the bank debt, according to Mr. Murdoch and Mr. Davis.

The companies said the deal should be completed in about a month.

Since Mr. Davis bought into 20th Century-Fox in 1981, the studio has been plagued by management turnover.

In the last several years, Sherry Lansing, the first woman president of a major studio; Alan J. Hirschfield, who preceded Mr. Diller as chief executive, and Joe Wizan, the head of production, all left the company.

Since he acquired the company, Mr. Davis has spun off Fox's extensive real estate holdings.


"An Open Letter From Trans World Airlines to Carl C. Icahn," The New York Times, May 20, 1985

If you thought we'd just stand by and do nothing while you try and take over our company...THINK AGAIN!

You secretly accumulated our stock for several weeks. Finally, you disclosed that you have bought 1/4th of our shares. You have also been, as usual, vague about what your real intentions are-and characteristic of your past actions, you have threatened to take over our company.

Well, Mr. Icahn, we have no intention of standing by and doing nothing while you play your Wall Street games with us. TWA is a vital part of our nations well-being. And because we view that role seriously, we are going to take whatever steps necessary to protect the constituencies and communities we serve. In case you're unaware who relies on us, let us elaborate:

-The other owners of nearly 24 million shares of TWA common stock, as well as the holders of our preferred and preference stock;

-the more than 27,000 TWA employees worldwide;

-the more than 60 U.S. cities we provide with dependable air service;

-the numerous cities and countries abroad which benefit from our acclaimed international flag service;

-the literally hundreds of vendors-from the aircraft manufacturers to the smallest stationery suppliers-who count on us for providing them with jobs;

-finally-and of paramount importance-the more than 18 million passengers who fly 28 billion miles each year on TWA.

You see, Mr. Icahn, running a major airline is a big job, one that we don't take likely. It's not like speculating with paper on Wall Street. You have to be proven "fit" to operate an airline-"fit" to manage; "fit" to raise the vast sums of money needed to maintain equipment safely and invest in new, modern aircraft; "fit" to comply with the many important rules and regulations that the various federal, state, municipal and international agencies demand of an air carrier. In fact, we think you are so unfit we are asking our government's Department of Transportation to rule on your fitness to control an air carrier and we are suing in you in state and federal courts.

So, Mr. Icahn, if you thought we'd just stand aside and do nothing while you try to take over our company-think again! Running one of the world's most respected airlines is a heavy responsibility. We think it's a commitment you just can't handle.

Ed Meyer-President and CEO, TWA

Dick Pearson-Executive VP and COO, TWA


"CapCities + ABC," Broadcasting, March 23, 1985

A bold $3.5 billion media marriage electrifies industry and nation

The old order changed last week. One of the Fifth Estate's big three, American Broadcasting Companies Inc., accepted the $3.5 billion blandishment of Capital Cities Communications Inc., another prominent media company but-until last Monday (March 18), one of conspicuously less eminence. At 1:16 PM that day, a new media giant was announced to the world.

The deal-which came as a shock to most in media, financial and political circles-was announced as a "merger for cash," "Leonard Goldenson's retirement," "a friendly takeover," and "the minnow swallowing the whale." It was the first merger/acquisition of a television or radio network since Goldenson, the current ABC chairman and CEO, took over that same network 32 years ago and combined it with United Paramount Theaters. The American Broadcasting/Paramount Theaters merger was valued at $25 million.

At separate Monday meetings, the boards of CapCities and ABC approved a plan whereby CapCities would pay a minimum of $118 cash and 1/10th warrant for each share of ABC. The per-share package has a minimum value of $121, which could increase to over $130, depending on how long it takes to complete the deal and how the stock market reacts.

In the new company, to be called Capital Cities/ABC Inc. (CC/ABC), Thomas S. Murphy, CapCities' chairman and CEO, and Daniel Burke, CapCities' president and COO, will keep their respective titles. ABC will become a subsidiary of CC/ABC, and Fred Pierce, ABC's chairman and COO, will report to Burke. His title will be executive vice chairman of the board of CC/ABC and chairman and CEO of ABC Inc. Goldenson will be chairman of the board's executive committee. CC/ABC will have a 19-member board of directors composed of the current 12-member CapCities board and seven from ABC's current 15-member board. In addition to Goldenson and Pierce, five outside directors will also serve with the new company.

The financing for CapCities' purchase of ABC's stock is expected to come primarily from loans made by a consortium of banks led by Chemical Bank. CapCities will also issue additional stock, both to service the warrants that are exercised and to obtain $517.5 million-3 million shares at $172.50 each-from Berkshire Hathaway Inc., an Omaha-based company headed by Warren Buffett. Other funds will be raised from the sale of properties the companies has to divest to comply with FCC regulations, upwards of $1 billion.

Monday's midday announcement of the ABC sale served notice once again to the stock market that there is a wide discrepancy between Fifth Estate stock prices and what buyers are willing to pay for the companies, either in whole or in part. The price CapCities agreed to pay was nearly double the price what ABC stock had been trading before the deal was made. Individuals profited proportionately. Goldenson's ABC stock, if still held in the quantity reported in the company's latest proxy statement, is worth nearly $20 million under the proposed transfer. Pierce, who told Broadcasting that his ABC stock holdings are the same as previously listed, should receive nearly $2.5 million from his new employer. Berkshire Hathaway certainly comes away a winner. In five days, it had already realized $103.5 million in potential profits (the jump in CapCities' price over what Buffett agreed to pay for his 3 million shares) and obtained close to a controlling interest in the new company, and Buffett earned a seat on the board-all of that without having yet to put up any cash. Said Jeff Epstein*, an associate at First Boston (ABC's financial adviser in the transaction), "Today in the United States, there is $1.5 billion more of wealth because of this deal." And this is in anticipation of a company which, because of spinoffs, will be smaller.

A sale might not have been Goldenson's first choice. According to one source who is close to Goldenson, the 79-year-old chairman and CEO of ABC was under pressure to find a successor, and Pierce was not seen as the person to pick up the reins. "That is no slight on Fred," said the source. "If he had three or four more years, he might have grown into the job, but there was still a question as to whether he ever would have. It's one thing to come out of research and sales and run a broadcast division, and another thing to be CEO of a $3.5 billion corporation, fighting hostile takeovers and the rest of it. At CBS, Bill Paley also went outside the company, after several tries with people inside."

Both Murphy and Goldenson denied that their agreement stemmed from threats of hostile takeovers of ABC. There had been rumors that somebody, variously Gulf + Western, the Bass brothers or others, was getting ready to make a move for the company's shares. Pierce told Broadcasting that last year, there had been "feelers" put out to the company. Several years ago, ABC put on retainer the premiere takeover defense specialist: Skadden Arps Slate Meagher & Flom, New York.

Murphy said he made his first approach to Goldenson early last December when it became evident the FCC would adopt its final version of the rule raising multiple station ownership limits from seven per service to 12. The first bid made by Murphy was for $90 per share, according to some present at negotiations, but that was unacceptable to Goldenson. Murphy unsuccessfully tried to get some assurance that CapCities would emerge with at least one piece of ABC, perhaps a television station, if the initial bid were surpassed by a third party, or the deal ran into regulatory problems. Taft has such a "lockup" deal with Gulf Broadcasting-an option to purchase KTSP-TV Phoenix. Another point of dispute was how much "action" ABC shareholders would have in the new company. Murphy was trying to keep the issuance of new stock and warrants to a minimum. Theoretically, the number of warrants settled on would create 2.9 million shares, or 15% of the CC/ABC stock.

The more intense negotiations took place in the 10 days preceding last Monday's (March 18) announcement. Besides Goldenson and Pierce, only two others at ABC reportedly knew what was going on: Michael P. Mallardi, executive vice president and CFO, and Everett H. Erlick, executive vice president and general counsel. Burke said the same number were at the table for CapCities, with Joseph P. Dougherty, executive vice president and president of the broadcasting division, and Ronald Doerfler, senior vice president and CFO, accompanying Murphy and Burke. On Friday, March 15, "We finally knew we had a deal," said one of those present at the negotiations. Goldenson and Murphy began to worry about the implications and the board meetings. The lawyers and investment bankers worked over the weekend on the final agreement. Helping CapCities in the negotiations were Buffett and the law firm of Wachtell Lipton Rosen & Katz. Burke agreed with a suggestion that Murphy's visits to the ABC building may have started rumors just before the weekend. Even before then, there were several high-volume trading days and a steady rise in the stock price of ABC in comparison to the other two network parent companies.

Burke said the first time other CapCities executives found out about the deal was on Friday, after the stock exchange had closed. "There was still a chance of some activity on the West Coast, but these were senior officials." At ABC, the word did not spread until Sunday, when some broadcast group executives were flown in from the West Coast for a briefing. Murphy first called together the CapCities directors on Sunday night, St. Patrick's Day, at company headquarters at Madison Avenue and 51st Street in New York (coincidentally, opposite St. Patrick's Cathedral). According to Burke, the executives spent four hours reviewing the deal. The vote, however, was not taken until another two-hour meeting that started at nine the next morning. After the acquisition was approved, the directors waited for their counterparts at ABC to finish. One of those present at the ABC board meeting said that contracts and contract summaries were first distributed to the directors on Friday after the close of the exchange. Not all the directors could attend, so some of them participated via a conference call during the three hours the deal was discussed. A vote was taken, first by the outside directors, ostensibly because they had less to gain by the rejection or approval of the proposal. Then a combined vote was taken. At 12:30 PM, the board members of CapCities left their offices and walked to ABC headquarters four blocks away to shake hands on the deal.

In the many interviews that Murphy and Burke gave in the days that followed, they said there were no immediate plans for major changes in the way ABC does business. Officials at ABC were trying to present it as a merger. "As merger goes, this is as good as it can be," Pierce told Broadcasting. The offer being made by CapCities is simple: $118 cash out of a minimum $121 to each ABC shareholder. The $3 extra is the price CapCities would pay to buy back each 1/10th warrant, following approval. Those warrants would allow their holder to purchase shares in CC/ABC at $250 at any time during 2 ½ years following the merger. Because shares of CapCities were already trading at $200 at the close of last week, there's a good chance the market in those warrants will price them higher than $3. Another financially relevant footnote: If the closing of the deal is delayed beyond January 6, 1986, the purchase price per share will increase at least 6% (minus dividends), and perhaps more. Yet another feature of the package encouraging current shareholders to sit out the deal is the right of ABC to purchase up to $1.1 billion in stock-about a third of the outstanding shares-at current prices. Any profit that ABC would get from buying shares below the $118 price would be added to the kitty distributed to shareholders, as would extra warrants the company would pick up.

Despite these extra possibilities, there were clearly many people who wanted to cash in last week. After closing at 74 ½ on Friday, March 15, trading in ABC shares was delayed Monday pending the midday announcement (as was trading in CapCities). When trading began in the afternoon, ABC rose to 115 and finished the day at 105 7/8, where it remained, giver or take a point, for the rest of the week. The trading was up to 10 times higher than usual and the impression was that the professional investors were buying to wait out the deal, a $15 spread (the minimum $121 offer minus the current trading price of $106) over nine months works out to 19% on an annualized basis-not bad for those who were willing to take the chance that the deal might run into trouble. On the other hand, they would be the ones who would benefit if a counteroffer were made. No signs of such a possibility had surfaced by the end of last week.

Roots of a Merger: A history of CapCities and ABC

Capital Cities Communications and ABC Inc. both got their starts in essentially the same way that they are now getting together: via the acquisition route. CapCities' history dates to the purchase of the Hudson Valley Broadcasting Company in October 1954 by the late newsman Lowell Thomas, his business manager, Frank M. Smith, and a group of their associates. Hudson Valley owned two stations, WROW-AM-TV Albany, New York. The company has been expanding ever since, primarily by acquisitions. Thomas S. Murphy, chairman and chief executive, has been there from the beginning, having joined the new owners October 7, 1954, as vice president and general manager of WROW-AM-TV. He named president of the company exactly 10 years later and has headed it ever since.

The first acquisition was WTVD(TV) Raleigh-Durham, North Carolina, in 1957. In that year, the company also changed its name to Capital Cities Broadcasting, Albany and Raleigh being the capitals of their states. Over the next 10 years, it acquired (in order) WPRO-AM-FM-TV Providence, Rhode Island; WPAT-AM-FM Patterson, New Jersey; WJR-AM-FM Detroit; WSAZ-TV Huntington, West Virginia; KPOL-AM-FM Los Angeles and KTRK-TV Houston (in a swap for WPRO-TV and cash).

By 1968 it was approaching the limits the FCC then had on multiple-station ownerships. So it redirected its expansion into the print media, starting off with a big chunk by acquiring Fairchild Publications, publisher of Women's Wear Daily and seven other business publications. In the ensuing years, its many purchases in the newspaper and business magazine field included such majors as Carter Publications, publisher of the Fort Worth Star-Telegram and two radio stations, and the Kansas City Star Co., publisher of the Kansas City (Missouri) Times and Kansas City Star. But the company's expansion program, though concentrating primarily on acquiring and starting newspapers and business magazines in the 1968-80 period, did not lose sight of broadcasting. In 1971, CapCities acquired Triangle Publications' WPVI-TV Philadelphia; WTNH-TV New Haven, Connecticut; and KFSN-TV Fresno, California, in a $110 million deal (and sold its Albany and Huntington television stations).

In 1980, CapCities moved into the cable television business-modestly at first, through the acquisition of seven companies with unbuilt franchises in six states, and a year later in real seriousness, buying RKO General's Cablecom General, operator of 43 systems in 12 states, for $139 million. In the years since, it has continued to grow, picking up a property here, starting another one there, disposing of one or two but steadily growing. Along the way, in recognition of its multimedia role, it changed its name to the present one, Capital Cities Communications.

The company that is now ABC is a year older than the one that is now CapCities, having been formed in 1953. It started life as American Broadcasting-Paramount Theaters (AB-PT), created when United Paramount Theaters, a new company put together by Leonard H. Goldenson when Paramount Pictures was forced by government decree to get rid of its theater ownership, acquired ABC in a $25 million merger. ABC itself had been formed 10 years earlier by Edward J. Noble out of the old Blue network when NBC, which had been operating both the Blue and Red networks, was forced by the FCC to dispose of one of them. AB-PT started out with five AM, five FM, and five TV stations, a radio network with 355 affiliates, and a TV network with 14 primary affiliates, all of which formed the ABC division of AB-PT, and a chain of approximately 650 theaters whose number had to be reduced under government orders. Over the years, the company has done its share of diversifying-into publishing, leisure time facilities, film production and cable broadcasting services-but close to 90% of its revenues still come from broadcasting.

Necessity as well as a talent for invention played a big part in the ABC division's early growth. In 1954, AB-PT agreed to invest in an amusement park that would be called Disneyland, and out of it also came a television series known for years as Walt Disney Presents (and later, the much-watched Mickey Mouse Club, Zorro and Davy Crockett). AB-PT also made a deal with Warner Bros., getting exclusive rights to Warners' TV output. On ABC, Warners' Cheyenne and Maverick started a stampede of Westerns that kept all the networks busy for years. ABC moved into daytime television in a real way in 1958 with "Operation Daybreak," a project worked out with the Young & Rubicam advertising agency where several Y&R clients helped underwrite three hours of new midday programming per day, which helped push the network to be a major player in daytime soap operas like General Hospital. In 1959, it plunged deeply into sports coverage with extensive contracts in college and professional football and basketball, golf, bowling and boxing. In 1961, it began expanding its news operations, and hired James C. Hagerty, White House press secretary, to head the department and build it.

In 1962, color came to ABC-in a limited number of programs. But converting to color cost money, and largely for that reason, ABC and International Telephone & Telegraph Corp. worked out a merger plan that was announced in December 1965. (That was also the year that corporate name was changed back from AB-PT to American Broadcasting Companies Inc.) The ITT merger plan would've meant more than $406 million to ABC stockholders on the day the FCC first approved it, but it was opposed by the Justice Department and canceled two years later. In the interim, ITT had lent ABC $25 million, and the conversion to color went on. The ITT merger had hardly been scuttled when billionaire Howard Hughes attempted to gain control of ABC through a tender offer for 43% of its stock; about 2 million shares at $74.25 each, or nearly $16 more than the market price. ABC management fought bitterly, but lost in court. When about 1.6 million shares were tendered, however, Hughes turned them down-some thought because he feared that if the FCC held hearings on the station transfers, he would be compelled to appear. It was in 1968, too, that ABC introduced its four-network concept to radio, though it was not until 1972 that the concept turned a profit. The ABC-TV network also turned a profit in 1972, for the first time in a decade.

ABC has historically oriented its TV programming toward the young adult audience-and was the first network to do so. Other "firsts" among its many television credits include the slow-motion instant replay (1961), the miniseries QB VII (1974), and Monday night football (1970). ABC was a laggard, usually in third place, in the primetime ratings for most of its years until 1975-76, when it soared into first place. It remained there until the 1979-80 season, when it dropped to second. Lately, it has been running third. During ABC's years as what was sometimes known as "the third network in a two-and-a-half network economy," its affiliate lineup had grown, but largely through additions in medium-sized markets. The lineup had also been subject to cherry-picking by other networks-so much so that ABC had turned to the FCC for protection from raids against its affiliates. The FCC refused, and years later, when its own ratings were flying high, ABC was able to return the compliment and did so with gusto, picking off a number of important affiliates from its rivals, particularly NBC.

A keystone of the deal: Warren Buffett

Recently, Warren Buffett gave a speech at Columbia University, commemorating the 50th anniversary of a book published by two professors who taught him at that university's graduate school of business in 1951. The speech was reprinted in Barron's and widely discussed. Buffett is well known among investors for having followed the advice of his professors, and he made a fortune for himself and his partners. Simply put, that advice is: look for a company with assets, which for some reason have been undervalued by the stock market. Over time those assets will increase in value and the stock market will have to keep pace.

Two lesser-known aspects of the Nebraska-bred Buffett are that he has put that theory to use in the stocks of media companies, and that, as was discovered last week, he is a dealmaker. He helped advise Thomas Murphy, chairman and CEO of Capital Cities Communications, in the latter's negotiations to buy ABC Inc. Murphy told Broadcasting that a friend told him 15 years ago that Buffett was a source of good advice, and he confirmed that appraisal after flying out to Buffett's Berkshire Hathaway offices in Omaha. (Buffett owns 41% of Berkshire Hathaway Inc.) Murphy asked Buffett, now 54 years old, to serve on CapCities' board, and although Buffett had previously declined, last week agreed to join the CapCities/ABC board as part of the deal. If the sale goes through, he will purchase 3 million shares of the newly issued company at $172.50 per share, close to the pre-announcement trading price of CapCities stock, giving CapCities an additional $517.5 million to make the purchase.

Buffett is reported to be a modest, easygoing person with a good sense of humor who thrives on soft drinks and ice cream. He also takes an active interest in public affairs. At present, two of his philanthropic concerns are population control and the nuclear arms race. Some of his personality shows up in Berkshire Hathaway's annual report, which Howard Simons, curator of Harvard University's Nieman Foundation and a Buffett acquaintance, called "the best written, most intelligent and funniest annual report in the United States."

Berkshire Hathaway and Buffett would additionally benefit from the sale of ABC through the 3% of ABC stock it reportedly owns, which could be worth a minimum $105 million. Other media-related holdings reported to be held by the Omaha-based company include 4.6% of Interpublic Group of Companies; 13% of The Washington Post Company, where Buffett is currently a director; 4.3% of Ogilvy & Mather; 8% of Affiliated Publications, and 4% of Time Inc. Some of the holdings have been reduced in recent months. As an example, Berkshire Hathaway had a 15% interest in Interpublic until recently.

*Not THE Epstein. He never worked at First Boston/Credit Suisse First Boston, and never was a stock analyst.


"R.J. Reynolds Makes $4.9 Billion Offer To Buy Nabisco Brands," Los Angeles Times, June 3, 1985

R.J. Reynolds Industries Inc. announced on Sunday that it will merge with Nabisco Brands Inc., forming the largest U.S.-based consumer products company.

The merger, which is subject to approval by Nabisco shareholders, brings together the second-largest tobacco company in the country and the nation's No. 4 food company. The deal, estimated to be worth $4.9 billion, would be the largest non-oil merger in U.S. history.

The combined firms will have annual sales of more than $19 billion, displacing Cincinnati-based Procter & Gamble Co., with $12.9 billion in annual sales, as the nation's largest consumer products company, according to Peter Allan, a Reynolds spokesman.

Under terms of the agreement, R.J. Reynolds, based in Winston-Salem, said it plans Tuesday to offer to buy up to 51% of Nabisco's common stock at $85 per share in cash.

The company's remaining common stock will be exchanged for $42.50 in new senior debt securities of Reynolds and $42.50 stated value of a new preferred RJR stock, company officials said. The debt securities and preferred stock are designed to have an aggregate value of $85.

The price was in line with recent Wall Street speculation that has sent Nabisco shares rising by over $20 per share in the month of May. On the New York Stock Exchange, Nabisco shares closed Friday at $82.675 a share, up $2.875. Reynolds stock on Friday closed at $74.375 a share, up $1.125.

Likely Takeover Candidate

Wall Street analysts have said for many months that Nabisco was a likely takeover candidate as it sought an infusion of friendly funds for advertising and promotion in the hotly contested food market.

The merger agreement was announced in a joint news release by J. Tylee Wilson, chairman and chief executive Reynolds, and F. Ross Johnson, Nabisco's vice chairman and chief executive. The agreement was worked out late Saturday, Allan said.

As part of the agreement, Nabisco has granted Reynolds an option to purchase about 10.6 million shares of Nabisco stock at $85 per share and an option to buy Nabisco's U.S. biscuit division for $1.65 billion, the officials said.

"We are extremely pleased to make this agreement with Nabisco Brands," Wilson said. "Nabisco's premium quality brands and its strong management team offer the ideal addition to the RJR portfolio."

Johnson added that "we're in businesses we both understand, using much the same distribution channels, with many of our brands enjoying leading shares of their market segments. This is a positive, progressive move and will enhance the future of Nabisco worldwide. The combination of leading brand names and the variety of items gives us a line of consumer products and unequalled around the world."

Wilson, 53, will head the combined company, while Johnson, 53, will become president and chief operating officer of Reynolds Industries. Edward Horrigan, Jr., 55, Reynolds president and chief operating officer, will be named RJR's vice chairman.

The three men will make up the newly formed office of the chairman of Reynolds Industries.

Expanded Board

At Nabisco, which is based in Parsippany, New Jersey, Robert M. Schaeberle, 62, will continue as chairman, while James O. Welch, 53, president and chief operating officer, will be named president and chief executive.

Under the plan, RJR will also increase its board of directors to 21 members. Added to the board will be Johnson, Schaeberle, Welch, Charles E. Hugel, 56, president and chief executive of Combustion Engineering, and Andrew G.C. Sage II, 59, managing director of Shearson Lehman Hutton.

All five men sit on the Nabisco board of directors.

Nabisco Brands, which earned $308 million on sales of $6.25 billion in 1984, is a food processor known for its cookies, crackers, nuts and snacks. Its brands include Premium Saltines, Ritz crackers, Oreo cookies, Planters nuts, Baby Ruth, Life Savers candy and Nabisco Shredded Wheat cereal.

R.J. Reynolds earned $1.2 billion on sales of $11.9 billion last year.

Reynolds is an international consumer goods and services corporation with interests in domestic and international tobacco, canned and frozen foods, beverages and quick service restaurant services. RJR's brand names include Winston, Salem and Camel cigarettes, Del Monte foods, A1 Steak Sauce, Canada Dry mixers and soft drinks, Hawaiian Punch, Kentucky Fried Chicken, Smirnoff vodka and Inglenook and Beaulieu wines.

The announcement said the transaction has been approved by both companies' boards and is subject to approval of the shareholders of Nabisco Brands, certain regulatory clearances and other "customary conditions."


"TWA Unions Hang Tough Against Lorenzo," by Harry Bernstein, Los Angeles Times, June 26, 1985

Francisco (Frank) Lorenzo's success at busting Continental Airlines' unions has brought about a rare spirit of cooperation among unions at Trans World Airlines, which Continental's parent, Texas Air Corp., is planning to buy for $793.5 million.

When Lorenzo abrogated all union contracts at Continental in October 1983, after filing for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, he laid off a substantial portion of Continental workers and cut wages of the remaining workers almost in half.

The fear of equally harsh treatment has brought unity to the TWA unions representing pilots, mechanics, flight attendants, clerks and other employees-unions that have had a long history of non-cooperation.

In the recently concluded monthlong strike by pilots against United Airlines, for example, members of the International Association of Machinists continued to work even though almost all of that company's flight attendants respected the picket lines.

In an effort to block Lorenzo's takeover plans, the unions have hired consultant Brian Freeman and the investment firm of Lazard Freres & Co. to help them plan actions that could range from an employee buyout to a hurried search for another bidder.

The unions say they plan today to picket the Beverly Hills offices of Drexel Burnham Lambert, which is seeking buyers on behalf of Texas Air for about $550 million in what are called "junk bonds," or debt securities with less than investment-grade ratings. The proceeds would be used to help finance the TWA purchase.

"We want to tell investors that labor will do everything in its power to stop Lorenzo from taking over TWA," said Vickie Frankovich, president of the International Federation of Flight Attendants.

David Venz, a TWA spokesman, said the airline is "fully committed to implementing our board of directors' decision to make TWA a subsidiary of Texas Air" and would, therefore, fight a buyout by employees.

The TWA unions, all of which are having serious trouble negotiating contracts with TWA's current management, represent about 20,000 of 28,000 employees.

TWA's flight attendants voted last week to strike if no new agreement is reached, and several sources say privately that Lorenzo has already been involved behind the scenes in discussing deadlocked negotiations. However, spokesman Venz said he knows of no such contacts between Lorenzo and TWA officials.

He added that it was "particularly unfortunate" that the attendants announced the result of their strike vote last week when TWA was so preoccupied with the terrorist hijacking of TWA Flight 847. Frankovich responded that the unions are "deeply concerned" about the hostages but added that the company is pursuing its business, including a merger discussion, and that that should include negotiations with its unions.

As to the prospect of a takeover, she said, "we believe that our differences with TWA now, even though serious, are minor compared to the treatment we must expect at the hands of Lorenzo, based on his actions at Continental."

The attendants have been in negotiations for more than a year and have offered to make some concessions-but not enough as far as management is concerned.

TWA wants a three-year wage freeze, work-rule changes aimed at boosting productivity and a two-tier wage structure under which the wages of employees hired after the contract goes into effect would start out lower than those of employees already on the payroll, merging in the seventh year.

The attendants offered to accept a two-tier wage structure, but one that would start new employees at 30% less instead of as much as 68% less, as the company is demanding. The company also wants to make the two-tier structure retroactive to January 1985, something that the union finds unacceptable.

Meanwhile, the attendants are seeking a job security clause, which they feel would be essential if they fail to stop a takeover by Lorenzo.

"We don't want to make concessions with no job security protection with Lorenzo hovering in the background," Frankovich said.

A strike is not expected for at least six weeks. By that time, the machinists would also be in a position to call their own strike. Furthermore, the pilots have started exchanging contract proposals with TWA management.

Adding to the unions' interest in the proposed Texas Air/TWA deal is the ironic fact that, while Texas Air is pursuing a sizable merger, its Continental subsidiary is continuing to operate while protected from creditors under Chapter 11.

Since Continental filed to reorganize in September 1983, and let go most of its pilots, the pilots union has been trying to get Texas Air to accept responsibility for its members' lost income.

"We are going to arbitration and are in the courts with cases that involve in excess of $2 billion in liabilities against Continental and its parent, Texas Air," said John Mazor, a spokesman for the Airline Pilots Association.

Boosting the pilots' confidence was a ruling by a bankruptcy court in Biloxi, Mississippi, last week. The judge lifted a stay against a creditors' lawsuit, basically clearing the way for the creditors to proceed with efforts to have Texas Air made responsible for Continental's debts. Mazor contends that, once potential investors in the Texas Air takeover of TWA realize that the company might face sizable liabilities, the unions will have better luck stopping the merger.

Officials of Continental and Texas Air would not comment on the lawsuit or the potential effect of the planned takeover of TWA.


"TWA Pilots In Pact With Icahn On Concessions," The New York Times, July 3, 1985

The Airline Pilots Association said yesterday that it had entered into an agreement with the New York investor Carl C. Icahn under which the union would give pay and benefit reductions of up to 20 percent if he acquired control of Trans World Airlines.

Robert J. Joedicke, the airline analyst for Shearson Lehman Brothers Inc., said in an interview that the agreement puts Mr. Icahn in a strong position to make an alternative offer for TWA. To escape an earlier attempt by Mr. Icahn to buy the airline for $18 a share, TWA agreed on June 14 to be acquired by the Texas Air Corporation, parent of Continental Airlines and New York Air, in a cash-and-stock transaction valued at $925 million, or $23 a share.

''This makes it attractive for Icahn to make another bid but it will have to be something better than the Texas Air bid,'' Mr. Joedicke added.

The Texas Air deal has run into opposition from TWA's three major unions, which have banded together to search for alternatives.

Stock Option Cited

It would be difficult, however, for Mr. Icahn to stop the Texas Air bid from proceeding even if he did make a better offer.

As part of the agreement, Texas Air was given an option to acquire 6,425,000 TWA shares at $19.625 each, a provision designed to ward off another bidder.

The statement by the pilots' union said that Mr. Icahn was seeking to complete agreements with the carrier's two other major unions, the flight attendants and the machinists.

Vicki Frankovich, president of the Independent Federation of Flight Attendants, confirmed that her union had been in negotiations with Mr. Icahn but had ''problems'' with his proposal. She said that an agreement could still be reached but that it would not be an easy process and that her union was talking with other investors.

She added, however, that the pilots' agreement had the approval of the two other unions.

In return for the proposed concessions, the pilots would get profit sharing and common stock if Mr. Icahn were successful in gaining control.

Tactics Criticized

The unions have said that they were concerned about the tactics used by Frank A. Lorenzo, president of Texas Air, at Continental.

After being unable to get concessions from the unions there, Mr. Lorenzo had Continental file for protection under Chapter 11 of the Federal Bankruptcy Code in September 1983.

He repudiated existing union contracts, a move that was upheld by the bankruptcy judge, and hired former and new employees at half pay. He also imposed new work rules.

The airline, which lost more than $536.1 million from 1981 to 1984 and remains under the bankruptcy court's protection, has become profitable.

Pilots Still on Strike

The changes in salary scales and work rules caused much bitter feeling among the unions, particularly the Airline Pilots Association, which protested with a strike against Continental that has yet to be resolved.

There is fear that Mr. Lorenzo would push for similar concessions at TWA.

Jerry Cosley, vice president of corporate communications for TWA, read a statement yesterday saying that ''TWA has a definitive agreement with Texas Air Corporation and our board intends to honor that commitment.''

A spokesman for Continental said that the company would have no comment. A spokesman for Mr. Icahn said that he would make an announcement probably by today.

In trading yesterday on the New York Stock Exchange, TWA gained 37.5 cents, to $19.25.


"Turner Acquiring MGM Movie Empire," by Geraldine Fabrikant, The New York Times, August 8, 1985

The MGM/UA Entertainment Company yesterday accepted a $1.5 billion takeover bid from Ted Turner, the Atlanta broadcasting entrepreneur.

The acquisition will put Mr. Turner at the head of one of the most highly diversified empires in the entertainment industry, adding movies to a business that already encompasses sports teams, the satellite station WTBS-TV and cable news services.

The definitive merger agreement, approved by the directors of both MGM/UA and Turner Broadcasting Systems Inc., comes just after Mr. Turner's bruising defeat in his battle to take over CBS Inc.

Because of that, analysts said yesterday, the success of the MGM/UA deal is vitally important to his credibility.

The acquisition will give Mr. Turner, whose main asset now is WTBS-TV, a 2200-film library that includes such standbys as Gone With the Wind, The Wizard of Oz and Singin' in the Rain.

In addition he will gain a film studio, which could provide important new movies and series for WTBS-TV.

The deal will also separate two Hollywood institutions - Metro-Goldwyn-Mayer and United Artists - that had their origins in the heyday of moviemaking and were combined in 1981. Although Mr. Turner will buy the whole company, under the complex terms of the deal he will sell the UA portion back to the financier who now controls it, Kirk Kerkorian, reducing Mr. Turner's own cost to $1 billion. Metro-Goldwyn-Mayer was the dominant company in the early days of the film industry, claiming ''more stars than there are in the heavens.'' Among those who worked for the studio were Clark Gable, Judy Garland and Elizabeth Taylor.

United Artists was started by Mary Pickford, Charlie Chaplin, Douglas Fairbanks and D.W. Griffith as a distribution company owned by artists. In 1951 it was bought by Arthur Krim and Robert Benjamin, who were responsible for the James Bond series, the Rocky series and the Pink Panther series. All are now part of the United Artists film library, which will continue to be controlled by Mr. Kerkorian.

Mr. Turner has built a reputation as an iconoclastic entrepreneur in the media business. He bought WTBS-TV, an Atlanta television station, in 1970 and turned it into a so-called superstation in 1976 by distributing its programming by satellite, which made it available to viewers across the country.

In 1980 he started CNN, his 24-hour-a-day cable news service. Many industry experts doubted that Mr. Turner could make a 24-hour service work. He refused to give up, however, and his cable operations showed a profit for the first time in this year's first quarter.

Not all of his cable programming strategies have paid off. Last year he started a cable music service to compete with MTV, but cable operators failed to respond.

Mr. Turner's acquisition of MGM/UA, which still requires the approval by stockholders of both companies, will not drastically alter the balance of power in Hollywood or in the broadcasting business, as Mr. Turner's bid for CBS Inc. would have done had he succeeded. MGM is one of the weaker studios, and while Turner Broadcasting has been an innovative force in the industry, it owns only one television station.

However, the deal underscores the growing trend among TV station companies to seek a guaranteed supply of programming at a time when the increased number of media outlets has sent the costs of old TV shows and old movies skyrocketing, said Harold Vogel, a vice president and media analyst at Merrill Lynch Capital Markets.

Just two months ago Rupert Murdoch, the Australian entrepreneur who had bought 50 percent of the 20th Century-Fox Film Corporation, also bought Metromedia Inc., a broadcast company that owns seven television stations. Other TV station companies are increasing their own production of original programming.

The MGM/UA deal also reflects the high premium that media properties are now able to command. Mr. Turner is paying $29 a share, or $5 a share more than most analysts say the company is worth. In yesterday's trading, MGM/UA stock closed at $24.25, up 25 cents.

Mr. Turner will be paying cash for the company, in contrast to the high-risk securities he offered for CBS. The money needed for the purchase, he said, will be raised by Drexel Burnham Lambert Inc., the Wall Street firm that specializes in so-called junk bond financing.

In Wall Street jargon, junk bonds are bonds that carry relatively high interest rates because the companies issuing them have received credit ratings that are less than those of blue-chip corporations. Such bonds have become a frequent form of takeover financing because they enable an acquiring company to raise money at a fixed rate of interest for a longer period of time than banks are typically willing to extend.

For Mr. Turner, the acquisition provides a number of synergies. Foremost is the value of the film library for his superstation when both independent stations and pay-TV services are aggressively bidding for programming. But the synergy goes beyond simply putting old films on WTBS-TV. One industry expert pointed out that MGM owns the rights to a number of old movies such as The Fountainhead, which could be used as the basis of made-for-television remakes.

A source close to Mr. Turner added, ''We are buying a distribution operation, and TBS has a number of products it is trying to distribute.'' It has recently been trying to distribute its CNN service abroad. It has also been producing original programming for WTBS-TV. Frequently, companies sell TV series to foreign television as a way of recouping their production costs. The MGM operation would facilitate overseas sales of both CNN and original programming.

Mr. Turner, who is on a fishing trip in Alaska, could not be reached for comment.

MGM/UA's chairman, Frank Rothman, said the negotiations began in earnest last Friday. He said he had met with Mr. Turner the previous week when he made a visit to the MGM/UA lot and expressed some interest in the studio.

Mr. Rothman said he was not surprised by the offer. ''I have been a friend of Turner's for years,'' he said, ''and we have talked on and off. We never got into any specifics. But his people came out from time to time.''

Mr. Rothman said he had not discussed with Mr. Turner how the studio would be run. Whether Mr. Rothman himself would stay on was also not clear. ''I have committed to stay through the transition period to get Turner's people up to speed on what is involved,'' he said. ''Then we would see. I have no commitment beyond it. I could go over to UA with Mr. Kerkorian, I could practice law again.''

Mr. Rothman said Mr. Turner had said he planned to keep current management. Alan Ladd, Jr. is head of production and has a five-year contract, of which about nine months have gone by.

The junk bonds that Drexel Burnham will sell, most likely to private investors, are expected to be backed by the assets of MGM. While their sale will enable Mr. Turner to pay cash, it could will leave MGM with an annual interest expense of $150 million or more.

MGM's cash flow is insufficient to make such payments, but sources close to the negotiations noted that MGM has several hundred million dollars in accounts receivable that could be sold to a group of banks. Additionally, MGM could negotiate a sale and lease back of the film studio lot, the sources said.


"Icahn Acquires Majority Of TWA Stock," by Robert E. Dallos, Los Angeles Times, August 24, 1985

Carl C. Icahn, the New York financier who began moving nearly a year ago to win control of Trans World Airlines, announced late Friday that he had acquired a majority of the airline's stock.

An aide to the businessman said that Icahn and his associates had bought an additional 1.14 million common shares of TWA, giving them 17.5 million shares of the about 34.5 million shares outstanding. That brought his stake to 50.3%, up from the 47% that he reported Thursday.

"It's his airline now," said one person-who asked not to be identified-involved in the takeover struggle that erupted when Icahn made known his intentions last May.

The news came after the close of business Friday. Icahn, reached at his home, refused to discuss his plans but said he hopes to reach an agreement soon with TWA's board to formally support his bid for the remaining stock. Icahn has offered shareholders $24 for the TWA stock that he doesn't control.

No TWA officials were available for comment, and Texas Air spokesman Bruce Hicks said his company had no comment to make.

Intentions Not Clear

Icahn has not made clear his next move or his intentions for TWA. There have been reports that he plans to fire the current TWA board of directors and replace it with his own choices. There have also been reports that he plans to sell the airline quickly or merge it with another company, perhaps even Texas Air.

In June, in an effort to thwart an Icahn takeover, TWA directors agreed to a merger with Texas Air. That agreement, which includes Texas Air's offer of $26 per share, is still to be voted upon by TWA's shareholders.

Since Icahn now controls more than half of the shares, however, there is no question about the outcome of such a vote.

Most observers, however, predict that Francisco Lorenzo, the chairman of Texas Air, will now negotiate with TWA and with Icahn to nullify the agreement. Sources say that Icahn and Lorenzo, who had been holding talks toward a negotiated settlement, are close to an agreement.


"TWA Canceling Merger Deal With Texas Air," Los Angeles Times, August 27, 1985

Trans World Airlines, now more than 50% owned by financier Carl C. Icahn, is working on dissolving an earlier merger agreement with Texas Air, a spokeswoman said Monday.

Icahn, who had support from airline unions and is offering $24 a share for the TWA stock that he does not yet own, disclosed Friday that he had raised his stake in the company to a controlling 50.3% and said that he hoped to complete an agreement soon with TWA's directors to support his bid.

But first, TWA and Texas Air must end an earlier pact, under which Texas Air had agreed to buy the airline for $26 a share.

The agreement would have had to pass a stockholder vote.

"The company is working toward dissolving the agreement the company has with Texas Air," said Lori Feinberg, a TWA spokeswoman. She said she did not know what, if any, progress had been made.

Texas Air's Stake

Bruce Hicks, a spokesman at Texas Air's offices in Houston, said he did not know the current status of the talks.

Texas Air will not be a complete loser in its bid for TWA, however.

It owns 2.2 million shares of the company's stock, which was purchased for about $20 a share, and has an option to buy an additional 6.4 million shares for $19.625 a share.

That stock would be sold back to Icahn at $24 a share.

In addition, the merger agreement provided for TWA to pay Texas Air an $18 million fee if the pact was broken.

TWA closed Monday at $22.375 a share, unchanged from Friday, in New York Stock Exchange composite trading.

Texas Air, listed on the American Stock Exchange, closed at $18.25 a share, up 50 cents.


"Carl C. Icahn Reported Buying More TWA Stock," Los Angeles Times, September 4, 1985

Icahn, the New York corporate raider who won control of Trans World Airlines last month, continued to build up his stake in the airline, documents filed with the Securities and Exchange Commission showed. He now holds 18.27 million shares, or 52.52% of TWA, after buying 776,900 shares for between $22 and $22.25 a share late last week. After a long struggle to outbid Texas Air, Icahn gained a 50.3% controlling interest in TWA a week earlier.


"Murdoch Will Buy Out Davis's Holdings In Fox," by Thomas C. Hayes, The New York Times, September 24, 1985

Marvin Davis, the wealthy Denver oilman, officially bid farewell to the entertainment industry today by agreeing to sell his 50 percent stake in the 20th Century-Fox Film Corporation to Rupert Murdoch for $325 million in cash.

The transaction will give Mr. Murdoch, whose News America Corporation publishes The New York Post and other newspapers and magazines, sole control of one of Hollywood's major film and television production studios within months of his acquisition of six independent television stations from Metromedia Inc.

With this latest purchase, Mr. Murdoch's News Corporation Ltd., with assets of more than $2 billion at the end of 1984, will have spent $1.6 billion in the last 12 months to acquire 12 trade publications from Ziff-Davis, total ownership of Fox and the six Metromedia stations.

A Wall Street source close to the Australian-born Mr. Murdoch, who asked not to be named, said News Corporation would finance the purchase of Mr. Davis's share of Fox through bank credit lines and cash generated by existing operations.

Hits Were Rare

The sale marks an end to Mr. Davis's four years as a studio head and one of the entertainment industry's most powerful figures. The hugely successful oilman, however, failed to transfer his winner's touch from the oil fields to the silver screen.

Fox lost money in two of the last three years, continually running close to last among the major studios in the annual race for box office receipts. Its rare successes, such as Romancing the Stone, Cocoon and Porky's, were overshadowed by a string of poor showings.

Mr. Davis gained sole control of Fox a year ago after paying a reported $116 million to buy out a half-interest held by Marc Rich, the fugitive oil trader. Mr. Davis and Mr. Rich acquired Fox, then publicly held, for $725 million in 1981.

Despite Fox's box office failures, Mr. Davis apparently will have made several million dollars from his ownership of the studio after the sale to Mr. Murdoch is completed. His original cash investment was $75 million, plus unspecified millions to acquire Mr. Rich's share.

'Good Business Sense'

''Our Fox investment was an extremely successful one,'' Mr. Davis, who is 60 years old, said in a prepared statement. ''While it was not our intention to sell the balance of our interest at this time, we concluded that it made good business sense to accept Rupert Murdoch's offer.''

Harold Vogel, a motion picture industry analyst with Merrill Lynch, said he believed that Mr. Davis would have preferred a longer tenure at Fox, in part because he appeared to enjoy the glitter of Hollywood.

''This might not have been a good deal for him, as little as six months ago,'' Mr. Vogel said. ''But the integration of media empires has changed the nature of the broadcasting and movie connections,'' making the movie companies more valuable, he added.

An investment banker close to Mr. Murdoch said discussions about his purchase of Mr. Davis's half of Fox began after Mr. Davis decided not to participate with Mr. Murdoch last July in his purchase of the Metromedia stations.

''It's been a continuing discussion, but it intensified during the last two weeks,'' he said.

Valuable Real Estate

An industry source, who asked not to be named, said Mr. Davis may have concluded a year ago, when Fox was in financial trouble, that he could not master the movie business.

Yet, the source continued, Mr. Davis set out to improve Fox's fortunes and improve his investment by recruiting Barry Diller, then chairman of Paramount Pictures, to run Fox. As part of his agreement with Mr. Diller, Mr. Davis yielded his involvement in production decisions, and he eventually decided to sell out, the source said.

Mr. Davis's son, John Davis, will continue his ties with Fox. The younger Mr. Davis, who is 30, will become an independent feature film producer, retaining offices at Fox's headquarters in West Los Angeles.

In addition to the cash from Mr. Murdoch, Marvin Davis will retain valuable real estate in Pebble Beach, California; Aspen, Colorado, and 2.7 acres adjacent to the Fox studios in Century City, west of Los Angeles.

A joint venture between Fox and Mr. Davis's real estate interests that is building a Century City office tower will remain as structured. The studio property, covering about 54 acres, will be acquired by Mr. Murdoch, according to the joint statement.


"Philip Morris To Buy General Foods For $5.8 Billion," by Robert J. Cole, The New York Times, September 28, 1985

The Philip Morris Companies, the nation's biggest cigarette maker, has agreed to buy the General Foods Corporation, one of the country's biggest food producers, the two companies announced yesterday.

Philip Morris will pay General Foods' stockholders almost $5.8 billion in cash, making the merger the costliest in history outside the oil business.

The combination is the latest in a succession of food company acquisitions: The lure, as consumers become increasingly eager for convenience foods, is established brand names. General Foods, for example, makes Jell-O, Entenmann's pastries, Oscar Mayer hot dogs, Maxwell House coffee, Kool-Aid and Birds Eye frozen foods.

The trend also reflects the desire of tobacco companies to diversify into other consumer products because of the pressures that health questions are putting on their cigarette business.

The Philip Morris-General Foods merger will create the nation's largest consumer product company, displacing a similar combination formed only last summer when R.J. Reynolds agreed to buy Nabisco Brands. Previously, Procter & Gamble had occupied the top spot.

Other big mergers involving household brands were Nestle's acquisition of Carnation last year and the Beatrice Companies' purchase of Esmark Inc.

Under yesterday's agreement, General Foods will become a subsidiary of Philip Morris, whose name will not change to reflect its new business. Each, however, will operate much as it does do now; the impact on consumers will be negligible.

Hamish Maxwell, chairman and chief executive of Philip Morris, said in a telephone interview yesterday: ''I don't think they'll notice any difference. We're not going to put Philip Morris's name on their products and they're not going to be putting their name on ours.''

James L. Ferguson, chairman and chief executive of General Foods, said in a separate telephone interview: ''They want us to run General Foods as we have been, so I don't see any change in either how we do things or how they do things. There shouldn't be any impact on the consumer.''

Asked whether the Government might raise any antitrust objections, the General Foods chief said, ''I don't think there's any problem.''

The money for the deal will come from more than $6 billion in credits raised by Citibank in this country, Europe and Japan.

General Foods shareholders will receive $120 a share. Some analysts found that price high, considering that 28 percent of General Foods' business is in coffee and 14 percent is in meats, both commodity-related. Commodities tend to be volatile in price and supply.

General Foods' stock rose $6.25, to $117, yesterday on the Midwest Stock Exchange. There was no trading on the New York Stock Exchange because of Hurricane Gloria.

The agreement between the two companies is still subject to approval of both boards at meetings set for Monday.

Would Be 13th Largest

Based on Philip Morris's $13.8 billion in sales last year and General Foods' $9 billion volume, the combined company would have total sales of nearly $23 billion, making it the 13th-largest industrial producer in the United States.

None of the parties would comment on how the deal came about, but insiders said events were set in motion on Monday when Philip Morris's directors authorized Mr. Maxwell to telephone Mr. Ferguson.

The message he was to deliver would be that Philip Morris was determined to buy General Foods -on a friendly basis, if possible.

Mr. Maxwell was authorized, moreover, to pay up to $115 a share.

In what Wall Street often calls a bear hug, Mr. Maxwell delivered the message to Mr. Ferguson by phone on Tuesday. He limited his offer, however, to $110 or $111 a share to give himself room to raise it.

Putting pressure on General Foods to move quickly, the Philip Morris executive told Mr. Ferguson that if General Foods refused, he also had authorization to take the Philip Morris offer to stockholders right then.

General Foods asked for time to consult its own directors and Mr. Maxwell agreed. The two also agreed to meet on Wednesday at the Carlyle Hotel, where General Foods maintains a suite, so that Mr. Maxwell could tell Mr. Ferguson why he wanted the company so badly.

Thinking Outlined

As Mr. Maxwell outlined his thinking in a brief phone interview, Philip Morris generated a lot of cash for many years but used it to build new factories and rebuild old ones. With cash still piling up, he said, ''We've gone about as far as we can go and there's no call for capital spending programs.''

He said that, while Philip Morris had been moving into other areas - it produces Miller beer and 7-Up, for example - it was almost entirely dependent on its cigarette business.

''We want to be seen as a premier grocery store consumer package goods business - like General Foods or Procter & Gamble,'' Mr. Maxwell said. With General Foods, he said, ''the opportunity presented itself to make a major acquisition to broaden our base of earnings and to go for a very large, first-rate, top-notch company, with a recognizable line of products.''

The insiders said that shortly after the two had met, Mr. Maxwell phoned back to the Carlyle to say Philip Morris would pay $115 a share - and that if General Foods did not take it, Philip Morris would run an ad in yesterday's papers, making an offer to General Foods stockholders. The implication was that the offer to stockholders would not be so generous.

General Foods, meanwhile, swiftly began looking for other companies that might be interested and to develop a list of its other options if it decided to fight Philip Morris.

Its advisers, Goldman Sachs & Company and Shearson Lehman Brothers, are said to have approached roughly a dozen potential suitors, eventually centering on at least six that might pay as much as Philip Morris. None of the names were made public but, according to the insiders, the group included Kohlberg Kravis Roberts & Company of New York, the management buyout specialists; Unilever NV, the Dutch-British combine; Pepsico, the bottling company, and Ralston-Purina, the pet food producer.

Problems Develop

The problem, however, insiders said, was that some, such as Unilever, might not be able to move quickly. Others such as Kohlberg, Kravis and Ralston, financial sources close to the deal said, might have to sell off considerable parts of General Foods to pay off the cost. Ralston, meanwhile, said it was invited to bid but was ''not a suitor at all.''

Philip Morris had a big head start. It had the money all lined up and it had no antitrust problem. Moreover, unlike other potential bidders, it would not have to dismiss anyone and would not close any businesses - big arguments in its favor.

General Foods' board meeting convened Thursday morning to hear its advisers. Although Goldman Sachs and Shearson Lehman Brothers had held an informal auction, only one firm offer was brought to directors: a friendly deal at $115 a share from Philip Morris. And if that was not accepted, Philip Morris planned to go ahead on its own with an unfriendly offer.

The board went through its other options, among them a plan whereby General Foods would buy back a block of its own stock and pay stock for another company. Added to a nearly 9 percent block in the hands of Warren Buffett, the Omaha investor, this position would have been big enough to block Philip Morris.

But the board rejected this idea, partly because stockholders would have received less than under the takeover.

General Foods instructed its advisers to tell Mr. Maxwell that it would make a deal, but asked for more than $120 a share. Mr. Maxwell, after repeated consultations with his adviser, the First Boston Corporation, said that $120 was as high as he would go. General Foods executives, while not entirely pleased, accepted. To scare off competition, General Foods also gave Philip Morris the right to buy 8.5 million shares at the same price.


"Lorimar, Telepictures Agree In Principle To Stock-Swap Merger," by Al Delugach, Los Angeles Times, October 8, 1985

Television producer Lorimar and syndicated TV show distributor Telepictures Corp., two prosperous and acquisition-minded entertainment firms, agreed in principle Monday to merge and operate as Lorimar-Telepictures.

Lorimar shareholders would receive 2.2 shares of Telepictures common stock for each Lorimar share that they now own. At the current market price of Telepictures stock, the total value of the shares being exchanged for those of Lorimar would be $277.4 million.

Based in Culver City, Lorimar is best known for such network series as Dallas, Knots Landing and Falcon Crest.

New York-based Telepictures has five shows on television networks and independent stations this fall: The People's Court, Let's Make a Deal, Love Connection, Catch Phrase and the new animated children's program Thundercats.

Telepictures also is a partner with Rolling Stone Publications in US magazine and owns four television stations plus an interest in a fifth.

Bid for Multimedia

Lorimar made an unsuccessful bid to become a TV station owner early this year. Its $1 billion bid to buy Greenville, South Carolina-based Multimedia, which owns five TV stations as well as radio and newspaper properties, was rejected.

Entertainment analyst Lee Isgur said Monday that the strengths of Lorimar and Telepictures, both of which have expanded into new areas and increased revenues greatly in the last two years, appear to make them a "good fit."

The companies said Merv Adelson, currently Lorimar's chairman and chief executive, would hold the same titles in the combined firms. The announcement also said Telepictures Chief Executive Michael Jay Solomon would join Lorimar President Lee Rich and three other Telepictures officers in an office of the president to be formed to manage the merged operations.

About 47% of Lorimar's stock is held by Adelson, Rich, cofounder Irwin Molasky and Rich's ex-wife, according to recent financial reports. Reports also show that 21% of Telepictures is owned by its officers and directors.

Analyst Isgur of PaineWebber said Lorimar (with $260 million in revenue last year, compared to Telepictures' $107 million) is likely to be the dominant partner. But, Isgur added, the setup could be viewed as "sort of like Congress and the President."

Approval by Directors, Holders

The announcement said the completion of the deal was subject to execution of a definitive merger agreement and approval by each company's directors and shareholders, as well as certain regulatory approvals.

Representatives of both Lorimar and Telepictures said they could not go beyond the terse announcement to answer questions, pending presentation of the proposed merger to their respective boards today.

Lorimar's stock rose $2.125 a share Monday on the American Stock Exchange, closing at $33.75. In over-the-counter trading, Telepictures stock dropped $1.75 to close at $16.375.

Both firms have reported both increased earnings and revenue thus far in fiscal 1985.

Lorimar, whose revenue grew to $260 million in fiscal 1984 from $174 million a year earlier, reported $302.2 million in revenue for its first nine months ended last April 27. It has earned $27.4 million for the nine-month period reported to date. The syndication of Dallas reruns has been credited with a major part of its increased revenue.

Telepictures, whose revenue jumped to $107 million in the year ended December 31 from $71 million a year earlier, has reported that six-month revenue as of June 30 already has reached $64.6 million. Its profit for the period was up 67% to $3.85 million. The number of its shows being aired and its acquisitions have contributed to its rising revenue.

No one would say Monday how long ago the parties began talking merger. Lorimar announced September 20 that it was streamlining and restructuring its management operation "to handle its expansion, diversification and recent acquisitions."

In that restructuring, the vacant office of chief operating officer was eliminated and its responsibilities redistributed to Adelson, Rich and others. Earlier last month, Lorimar announced that Russell Goldsmith had resigned as chief operating officer to head an investment group.

Lorimar's recent acquisitions have included Bozell & Jacobs, a New York-based advertising agency, and Karl Video, a producer, distributor and marketer of original video programming.

Telepictures, which greatly increased its television production activities in 1983 by acquiring Rankin/Bass Productions, expanded its broadcasting holdings earlier this year by acquiring KSPR-TV in Springfield, Missouri, and an interest in the new KCPM-TV in the Chico-Redding area of Southern California. It also owns KMID-TV in the Midland-Odessa area of Texas and two TV stations in Puerto Rico.

Telepictures has produced movies and miniseries for television, including Ellis Island and Surviving. It distributes syndicated shows in both the domestic and international markets.

LORIMAR'S EXPANSION EFFORTS

March 1983 - Buys Kenyon & Eckhardt, an international advertising agency, for $21 million and other compensation, with plans to produce both entertainment and advertising for TV shows.

October 1983 - Discusses possible joint venture with MCA to operate a Florida theme park; plans are later tabled.

August 1984 - Acquires Karl Video, a Newport Beach producer and marketer of programming on videocassettes, for an undisclosed sum.

April 1985 - Offers $1 billion for Multimedia, a Greenville, South Carolina, newspaper and broadcasting concern, as part of Lorimar's plan to own TV stations; bid is rejected.

June 1985 - Acquires Bozell & Jacobs, a New York advertising agency, for $40 million, and merges it with Kenyon & Eckhardt.

August 1985 - Announces plans to buy up to 15% of Warner Communications for "investment purposes."

October 1985 - Agrees to merge with Telepictures, a fast-growing syndicator of TV programs.


"'Obsessed' Teenage Entrepreneur Cleans Up With His Carpet Business," by Daniel Akst, Los Angeles Times, October 29, 1985

19-year-old Barry Minkow's life seems a kind of parody at first, an elaborate spoof of society's obsession with success.

At 10, he carried water at the carpet cleaning business his mother managed. Later he worked Saturdays and summers at the same trade, by then actually cleaning carpets, drapes and upholstery himself.

At 15, against his parents' wishes, he started his own carpet cleaning business. They finally agreed to let him use their Reseda garage, but for $150-a-month rent. Still in high school, Minkow hired a crew to do the work while he sat in algebra class, worrying how he would make the week's payroll. He wasn't even old enough to drive.

But both Reseda-based ZZZZ Best Co. and its founder have grown fast. The company has four offices now, with a fifth to open soon. Minkow said his business grossed $1.3 million last year and should reach $2 million this year.

Drives Ferrari Now

With profit margins that Minkow says are at least 20% after taxes, he tools around in a new Ferrari nowadays, or in his year-old Nissan 300-ZX Turbo. He said he is also about to close on a $750,000 house in a gated development in Woodland Hills. His parents' skepticism has been curtailed.

"They work for me," he said matter-of-factly.

Barry Minkow is basically rich. He is also driven. Once a skinny, hyperactive kid who was bullied at military school, Minkow transformed himself through assiduous bodybuilding into a competitive weightlifter with a shape like a fireplug.

He appears to have built his business with the same determination. He said he ignored advisers who urged against expansion, and surmounted dishonest employees, the unsavory reputation of the carpet cleaning business and the worries of suppliers and customers who thought he was too young.

To get business, he would send crews out in the middle of the night, if that's when a customer found it convenient. To get a driver's license early, he said, he made a special plea to the state Department of Motor Vehicles.

Chairman, Sole Owner

Now, as chairman and sole owner of ZZZZ Best, he presides over 108 employees. And as if to affirm his precocious success, he has acquired a pair of bleeding ulcers along the way. People in his business call him Mr. Minkow.

He also acknowledges a host of resentments against those he feels tried to hold him back, or failed to support him in his climb to success. Bankers come in for particular ire. Minkow still gets turned down for loans, he said, and, for a while, he couldn't even get a bank account.

"The jealousy comes out, because he's 42 years old, he's getting a salary of about $30,000 or $40,000 a year out of the bank," Minkow said. "Do you think he wants to help me earn more than him?"

His parents, he acknowledged, are among those he resents-he feels they didn't back him sufficiently-although they say there is no animosity. Indeed, Carol, his mother, is now a senior vice president and helps run the business. His father, Robert, is a salesman. The company's president is Vera Hojecki, 54, a woman with years of experience in rug cleaning.

'Edge of Competition'

"As a young child Barry always wanted to compete with me," said Robert Minkow. "That edge of competition stayed with him."

ZZZZ Best has offices in Anaheim, Reseda, Thousand Oaks and San Diego. Another, in Santa Barbara, is in the works, and franchises are planned.

What motivates all this? How does a kid with $5000 in savings build such a business, and why does he vow to keep building until it becomes "the General Motors of carpet cleaning?"

Minkow answers frankly: "I'm obsessed."

Addressing a group at California State University, Northridge, Minkow is charismatic, funny and unpretentious. He gives such common sense advice as "plan ahead," and stresses such old-fashioned business values as delivering quality. He knew the business from top to bottom, he points out.

Promoting Book

"I don't give anybody any reason to think of me as a kid," he said later.

But his visit isn't merely informational. The barrel-chested young entrepreneur-Minkow resembles a college rugby player-has traveled to campuses throughout Southern California and the Southwest to drum up interest in his book, which he hasn't taken to a publisher yet because, he said, he figures he'll get a better deal on the manuscript after more publicity as a wunderkind.

The industry in which Minkow made his mark is a fiercely competitive one, with a reputation that has been tarnished by some bad business practices. David Tuck, immediate past president of the Carpet Cleaning Institute, a Los Angeles-based trade association, said there are about 2000 companies in the business in Los Angeles and Orange County, and many more practitioners who do the work part time.

There are no figures on how much carpeting there is in the Southland, but the area is carpet-rich, mainly because so many homes are built on concrete slab surfaces without hardwood floors, according to Murray Hall, director of the West Covina-based Carpet Manufacturers Association of the West. Tuck estimated that 80% of the carpeting has never been professionally cleaned.

'Major Complaint Area'

"Carpet cleaning is a major complaint area," said Timothy Bissell, chief investigator for the Los Angeles County Department of Consumer Affairs.

"It's a morass," said Guy Wirsig, director of operations for the Los Angeles-Orange County Better Business Bureau.

The main problem, they said, are bait-and-switch techniques in which an absurdly low price is advertised, a price that in many cases turns out to exclude much of what needs to be done to clean a carpet. Then the cleaners attempt to sell the consumer costlier services.

Bissell and Wirsig said they have had no complaints against ZZZZ Best, which Minkow said discloses prices up front, provides a written contract and guarantee, and "does good work."

ZZZZ Best gets most of its business by selling itself over the phone through cold calls, although Minkow said his customers tend to come back. The average customer spends about $90 for the service, which entails sending a crew to customer's home to do the work, Minkow said.

Despite his precociousness, Minkow is old-fashioned in some ways. His largely inspirational book Making It in America, for example, reveals little about himself, but stresses the need for hard work and knowledge. It scorns those who hope for easy, overnight success.

Even his company's name has traditional overtones. He said he picked it because "I want four kids. So I have four Zs."


"High-Stakes Drama At Revlon," by Robert J. Cole, The New York Times, November 11, 1985

One of the pivotal corporate battles of modern times opened quietly last March when a little-known businessman riffled through a stack of papers from Wall Street investment bankers looking for ideas about companies to take over.

One page that caught his eye was about Revlon Inc., the cosmetics and health care giant. Ten days ago, in a $2.7 billion takeover, the businessman won control of Revlon.

How Ronald O. Perelman accomplished this feat demonstrates that, in this era of the corporate raider, virtually no company is safe from takeover - regardless of the array of legal and financial roadblocks that it may erect.

Stock Was Cheap

Revlon, like hundreds of other publicly owned companies these days, was a sitting duck because its stock was cheap in comparison with the company's earning power or its worth if broken up and resold. With that kind of vulnerability, all that an enterprising financier or corporate prowler needs is access to a pool of funds that will enable him to make shareholders an offer they will find hard to refuse.

What makes the takeover of this billon-dollar giant even more remarkable and frightening to other major corporations, though, is that Mr. Perelman could raise all the money he needed even though the supermarket chain he headed, Pantry Pride Inc., is much smaller than Revlon.

The 42-year-old executive was able to become a threat because a new breed of bond investors are willing to take on greater risk. They back aggressive corporate executives such as Mr. Perelman by buying high-yield securities, known as ''junk bonds,'' a controversial financing tool that has become increasingly common in hostile takeovers. At the same time, Wall Street investment bankers, encouraged by higher and higher fees, are fueling the takeover game by sleuthing for possible candidates and arranging financing. The take for Pantry Pride's investment bankers on the Revlon deal, more than $70 million, appears to have set a new high-water mark.

Acting as a supporting cast in such high-stakes dramas are Wall Street's professional arbitragers, who have billions of dollars at their disposal to invest in potential takeover situations. Once they catch a whiff of a target company, they amass holdings in its shares and are then itchy to make a profit and move on to the next deal.

But the Revlon deal might never have taken place if not for a judge in the Delaware Chancery Court named Joseph T. Walsh, who cleared the way for Mr. Perelman. The judge, now a justice on the Delaware Supreme Court, ruled that Revlon did not act in the best interests of its shareholders when, as a defensive maneuver, it worked out a deal with another company to sell it two key divisions, no matter what happened. In effect, Revlon was trying to discourage Pantry Pride by locking up certain key assets to prevent them from falling into Pantry Pride's hands.

That decision has sent dozens of executives rushing to lawyers for new ways to defend themselves, because, from now on, in the view of many legal experts, if they go too far in erecting defenses, they must treat all potential acquirers equally. The tide, many lawyers believe, has shifted in favor of the hostile bidders.

One of the great success stories of modern times, Revlon began in a backroom on the West Side in the harsh Depression year of 1932 on a $600 stake. It was the brainchild of the legendary Charles Revson, his older brother Joseph and a chemist named Charles R. Lachman, who is best remembered for the ''l'' in Revlon.

Revlon today sells more than $1 billion worth of cosmetics in 130 countries, along with $1 billion of healthcare products.

Cast of Characters In the Takeover

The cast of characters in this emotionally charged battle included:

*Dennis Levine of Drexel Burnham Lambert Inc., the world's leading seller of junk bonds and adviser to Mr. Perelman.

*Eric Gleacher of Morgan Stanley, another adviser to Mr. Perelman. It was his firm that first suggested Mr. Perelman buy Revlon.

*Felix Rohatyn, senior partner of Lazard Freres, who flew back from a vacation in Austria - and canceled another to Venice - to help defend Revlon.

*Theodore Forstmann; his lawyer, Stephen Fraidin, and his investment banker, Goldman Sachs, who thought Mr. Forstmann's investment firm had bought Revlon, only to find that Justice Walsh had taken it away.

*Donald Drapkin, a partner at Skadden Arps Slate Meagher & Flom, which served as the law firm for Pantry Pride.

*Martin Lipton, the takeover defense lawyer who served as Revlon's strategist. A senior partner at Wachtell Lipton Rosen & Katz, he and 100 other lawyers toiled around the clock for days at a time, many so exhausted they curled up on the floor where they were, and slept.

*And, of course, there was Michel C. Bergerac, the man who got a $1.5 million bonus in 1974 just to join Revlon. At that time, Revlon's sales stood at less than $500 million. They now approach $2.5 billion, largely because Mr. Bergerac moved Revlon into the healthcare field.

As a result of the takeover by Pantry Pride, the 53-year-old executive has resigned from Revlon. Among other things, he has also lost the use of a lavishly outfitted Boeing 727, with kitchen, bedroom, living room, backgammon board and, for big-game hunting, gun rack. By year-end he will lose a chauffeur-driven limousine, his office at Revlon, his private dining room, his butler and two secretaries. But his departure is undoubtedly softened by some $36 million in stock options and severance pay.

Revlon came to Mr. Perelman's attention as one of 25 companies he thought of buying to replace supermarkets he planned on selling. Over the past eight years, Mr. Perelman has built up a successful mini-conglomerate, MacAndrews & Forbes Holdings Inc., by selling off divisions of companies he acquired in order to enable him to buy yet more companies. The Revlon deal, however, was his first hostile takeover.

Mr. Perelman used Pantry Pride, which is part of his interests, as the corporate vehicle for the takeover. He narrowed the list of candidates to 10, including Revlon, and began an intensive study of them. In order to prevent outsiders from finding out who the target was, the Pantry Pride team of lawyers and investment bankers used a code word for the Revlon project. It was ''Nicole,'' the name of the 17-month-old daughter of Mr. Drapkin.

By mid-June, Mr. Perelman called Mr. Bergerac. As the Revlon chief remembered it, Mr. Perelman proposed buying Revlon in a friendly deal for far less than the $58 a share he eventually paid, and said that ''if I supported him, he'd greatly improve my life style.'' Mr. Bergerac's response was chilly.

By mid-August, Wall Street heard that Pantry Pride might take its offer to Revlon shareholders. In a few days, Pantry Pride went public with its bid, offering $47.50 a share. Revlon is ''not for sale,'' Mr. Bergerac said defiantly, accusing Pantry Pride in a lawsuit of raising $700 million in junk bonds without saying the proceeds would be used to buy the cosmetics company.

Revlon built its defenses. It created a poison pill, a device to make a takeover more expensive. Such legal maneuvers often require buyers to purchase additional securities that did not previously exist or that are priced so high as to create enormous additional costs.

To further discourage an unwanted suitor, Revlon bought back 10 million shares in exchange for $575 million of securities, thus saddling a potential acquirer with an added debt burden. In response, Pantry Pride clipped its offer in mid-September to $42, Within two weeks, Pantry Pride reversed its strategy and raised its bid to $50 and then to $53, after it concluding that Revlon was close to a deal with someone else.

Revlon Constructs Some Roadblocks

Until Pantry Pride raised its bid, Revlon had little difficulty justifying its opposition: The company was worth far more. But when the bidding topped $50, Revlon's advisers recognized that the company had became vulnerable.

The company quickly decided to seek a buyer. The problem, however, was that Revlon had six days to do so before Pantry Pride's offer would end. At that point Mr. Perelman would be free to buy the company, and likely to pick up much of Revlon's stock from waiting arbitragers.

Unlike some other recent target companies, such as Richardson-Vicks Inc., which are easily sold to one company, Revlon is a cosmetics company and a healthcare company, and no friendly buyer could be found. The task became to sell the two halves to different parties. It was a job that fell to Mr. Rohatyn of Lazard Freres as Revlon's adviser.

Despite considerable skepticism that there was enough time to find buyers and to complete the paperwork, the following pieces fell into place: A small Manhattan investment house known as Adler & Shaykin agreed to buy the cosmetics business for $900 million; Mr. Forstmann's leading New York management buyout organization, Forstmann Little & Company, agreed to take the rest for about $1.4 billion; and lenders for both agreed to put up the money, all before the deadline.

At that point, Revlon seemed to have won. It had worked out its own deal and appeared to have set up the roadblocks that would make it difficult for anyone else to swoop in.

The Forstmann Little portion involved a management buyout of the healthcare interests, with Mr. Bergerac investing some of his severance benefits in the company and becoming its chief. Shareholders, moreover, would get $56 a share. Before long, however, Mr. Bergerac withdrew from the deal after he was criticized for precipitating his golden parachute, as such severance payments are known, and then wanting to use the money to help buy the company.

A confident Mr. Perelman told Mr. Bergerac that whatever Forstmann Little offered, he would raise by 25 cents a share. Four days after Forstmann Little offered $56, he offered $56.25. Because of the high cost of money, Mr. Perelman argued that his $56.25, paid immediately, was worth much more than Forstmann's $56, paid out in perhaps 60 days.

Revlon's directors, meanwhile, were meeting repeatedly to develop a strategy to fight off Mr. Perelman.

One directors' meeting turned comical as directors in New York met by speakerphone with directors on business elsewhere. Ezra Zilkha, head of his own investment company, listened from Jerusalem, but a telephone operator there kept interrupting, with a strong Brooklyn accent to tell Mr. Zilkha that he had another call waiting.

At another point, all of the phone lines went dead and what had been funny was now frustrating for tired directors.

A few days later, now mid-October, Forstmann Little raised the bidding another $1, to $57.25. In return for sweetening the bid, it got the right to buy two key operations. Court papers showed, however, that the $525 million sale price was at least $75 million less than fair value. Justice Walsh stressed this point in his historic decision that raises questions whether companies can set bargain prices for friendly suitors.

Undeterred, Mr. Perelman bumped the price by another 75 cents, to $58.

For his own protection, the offer was dependent on eliminating the sales contract. The poison pill, which might also have been a stumbling block, had already been eliminated when Revlon knocked it out for all bids over $57.25.

To lighten the tension in the Revlon office, Roger Shelley, the company's spokesman printed up T-shirts reading, ''It ain't over 'til the fat lady sings.'' He soon discovered that lawyers on the other side adopted the same slogan.

Legal Bombshell Lands in Delaware

Then the bombshell struck. It was October 23. Justice Walsh, named less than a month before at the age of 55 to become a Delaware Supreme Court justice but working off a backlog of Chancery Court cases, ruled that Revlon's directors had breached their fiduciary duty by giving Forstmann Little the right to buy the two key operations.

The decision is important because it established that while it may be perfectly legal to set up certain roadblocks, such as poison pills, to give directors more time to bargain, it appears to be illegal for directors to construct too many roadblocks and to chill bidding rather than make bidding possible.

The ruling was a setback for Mr. Lipton, Revlon's chief strategist, and Arthur L. Liman, a partner at Paul Weiss Rifkind Wharton & Garrison, the company's outside counsel.

Justice Walsh stopped the sale to Forstmann Little in a preliminary injunction and Mr. Perelman's friends, smelling victory, broke out the champagne that had been stocked, in anticipation of the decision, by Sue Strachan, Mr. Perelman's executive assistant. The champagne flowed again at the Perelman home on November 1 when the Delaware Supreme Court upheld the lower court.

Forstmann Little, however, still has the right to a trial. It is particularly incensed that the court refused to let it collect a $25 million fee it thought it would get from Revlon if the deal collapsed.

Revlon, however, recognizing defeat, immediately announced that this was ''the end of the battle'' and that it would do nothing to impede Pantry Pride from taking over. One of the Revlon directors was Judge Simon H. Rifkind, still a power in the legal world at the age of 83, who in the final board meeting lamented ''the demise of this enterprise, as we knew it.''

By last Tuesday, November 5, Mr. Bergerac and his slate of directors were out and Mr. Perelman was in as new chairman and chief executive, with a slate he now controlled.

For his part, Mr. Bergerac is bitter about the system that made the takeover possible. In a broad condemnation of the battle that led to his ouster, he said: ''The whole thing was crazy. Here we built a great American corporation. Then through this process the stock ended up in the hands of the arbitragers, who forced the sale of the company. And junk bond financing made it all possible.''

Despite his $36 million settlement, $30 million of which he described as stock and stock options he had accumulated, he remarked, ''You're getting a story of a guy who didn't feather his own nest at the expense of the stockholders.'' The stockholders, he contended, got a very good deal because he persisted, rather than opting for Pantry Pride's friendly offer at a lower price that would have saved his job.

Working in a dark blue cardigan in Mr. Bergerac's old sitting room at Revlon, a big cigar between his teeth, the 140-pound, 5-foot, 8-inch Mr. Perelman denied he had told Mr. Bergerac that he would improve his standing of living.

''I don't think that could ever be improved on,'' Mr. Perelman remarked. Mr. Bergerac's salary and bonus last year amounted to $1.3 million.

''Sure, I went in to sell him,'' the balding Mr. Perelman said. ''I told him he'd get everything he's entitled to.''

Besides turning over control of Revlon, Justice Walsh's decision will change the shape of board rooms and generate vast new business for lawyers.

For one thing, it reduces the latitude that directors have had to find friendly buyers to save them or to fight off takeovers in which bidders pay cash for all the stock. For another, it means that directors act at their peril in searching for unusual ways to fight takeovers. It will mean that companies that create poison pills and then sell their crown jewels almost assuredly will find that they have to negotiate with all bidders, even unwelcome ones.

Besides Mr. Perelman, the winners in the contest undoubtedly are the lawyers and most of the investment bankers who advised both sides. Total advisory fees are expected to exceed $100 million. Drexel Burnham Lambert's share as fundraiser may reach $50 million of the total. Lazard Freres collected $11.5 million as adviser to Revlon. Morgan Stanley will get an estimated $25 million for helping Pantry Pride. Revlon's lawyers and accountants get $13 million. Goldman Sachs, as adviser to Forstmann Little, got $3 million. Adler & Shaykin, for agreeing to buy Revlon's cosmetics, got $2 million for expenses. The only fee still pending is Forstmann Little's. So far the courts have refused to approve its $25 million consolation fee for losing to Mr. Perelman.


"ABC Names Stoddard," by Tom Shales, The Washington Post, November 13, 1985

Brandon Stoddard, who brought such miniseries classics as Roots, Winds of War and The Thorn Birds to television, has been named president of ABC Entertainment and will immediately take charge of programming the struggling third-place network.

Frederick S. Pierce, president and chief operating officer of ABC Inc., announced Stoddard's promotion yesterday and also announced that Lewis H. Erlicht, president of ABC Entertainment since 1983, would become president of ABC Circle Films, the network's in-house production unit, which produces the series Moonlighting, one of ABC's few current hits.

Stoddard will be, among other things, Erlicht's boss.

Immediate reaction in Hollywood, where Stoddard is widely admired, was "ecstatic," according to a spokesman for one of the major production houses. One reason ABC has slid to third place in primetime, industry sources have said, is that the network had poor relations with the producers who make its shows. ABC executives had earned a reputation for meddling and interference.

"Brandon Stoddard has a lot of class, and he has great relationships with the creative community," said producer David L. Wolper, whose miniseries North and South just earned huge ratings for the network. "I believe very strongly he's the right man at the right time for ABC," Wolper said from his Los Angeles office. "It will be very hard to find anyone to say anything bad about Brandon."

Wolper, who was also executive producer of Roots and produced the much acclaimed pageantry of the 1984 Los Angeles Olympics, compared the promotion of Stoddard at ABC to the arrival at NBC of Grant A. Tinker as chairman and chief executive officer in 1981. "I think he'll bring the same kind of tone and talent to ABC that Grant brought to NBC," Wolper said.

One studio executive said a chief difference between Erlicht's and Stoddard's approaches to programming is that "Erlicht was always most concerned with the commerciality of a project, while Brandon thinks first about quality - although his projects always end up being commercial anyway." Viewers will probably notice an upgrading in the quality of ABC programs once Stoddard takes over, the source speculated.

The announcement yesterday followed Monday's news that Anthony D. Thomopoulos had resigned as president of the ABC Broadcast Group. The changes are part of a realignment of the company as it awaits the arrival of a new owner, Capital Cities Communications. CapCities will take over in January once its acquisition of ABC is approved by the FCC, which is expected to rule favorably tomorrow. An ABC spokeswoman said CapCities did not play a role in the newly announced executive shifts.

Stoddard had been offered the job of ABC Entertainment president several times before and turned it down, the spokeswoman confirmed. He accepted it this time, it was said, partly because ABC recently announced it was getting out of theatrical motion picture production, thereby narrowing the purview of his old job. One industry source said a highly decisive factor this time was that retiring ABC Chairman Leonard H. Goldenson took Stoddard aside and personally talked him into taking the job.

An ABC Entertainment spokesman said Stoddard was unavailable for comment.

Stoddard joined ABC in 1970 as director of daytime programming. Later, as a senior vice president, he helped develop such series as The Love Boat, Hart to Hart and Eight Is Enough. In a statement, Pierce hailed Stoddard as "one of the most experienced and talented executives in the entertainment business" and said he had made "enormous contributions to the quality of programming in our medium."

In various executive positions at ABC Entertainment over the past decade, Stoddard shepherded to the air not only high-rated miniseries like the record-breaking Roots, but also such TV movies as The Day After and Something About Amelia, which ABC says are the highest-rated TV movies ever aired. Stoddard, 48, is married to Mary Ann Dolan, a Los Angeles-based journalist who is an occasional panelist on the ABC News program This Week With David Brinkley.

Stoddard's miniseries and prestigious, if sometimes controversial, movies were often said to be oases of taste and showmanship in an ABC primetime schedule generally of less luster and quality than its competitors, even before the network's ratings slumped.

Although North and South pushed ABC to a rare win in last week's primetime Nielsens, the network also dominated the bottom of the ratings, with five of the week's 10 lowest-rated shows, including Diff'rent Strokes, Benson, Hollywood Beat, and Our Family Honor.

For the record, the promotion of Stoddard increases to two the number of men named Brandon who head network programming divisions. The president of NBC Entertainment is Brandon Tartikoff.


"Beatrice To Be Acquired By Kohlberg Kravis Roberts: $6 Billion Leveraged Buyout Accord Is Biggest In History," by Nancy Yoshihara, Los Angeles Times, November 15, 1985

Beatrice Cos. agreed on Thursday to be acquired by the investment firm of Kohlberg Kravis Roberts & Co. in a deal valued at $6 billion-the largest leveraged buyout in history.

The Chicago-based food and consumer products company entered a definitive agreement after New York-based KKR sweetened its offer, raising it to $50 a share-$43 in cash and $7 in preferred stock-from its previous offer of $47 a share in cash and securities.

The offer, based on Beatrice's 109 million shares outstanding, is worth $5.45 billion. However, if KKR purchased all outstanding Beatrice preferred stock, warrants and options-the equivalent of 11 million shares-it would push the price up to $6 billion.

The deal included so-called lockup options designed to discourage competing offers for the company. The options give the investment firm the right to buy the "crown jewels" of Beatrice's diverse operations in case the deal is not consummated.

No Suitor Expected

Analysts doubted, however, that after so long a time another bidder would surface to jeopardize the buy-out.

"The chances are very good that this deal will go through," said Marvin B. Roffman, an analyst with Janney Montgomery Scott in Philadelphia. "Shareholders will be happy with the price . . . and management also has put its kiss of approval on it."

William W. Granger Jr., chairman and chief executive of Beatrice, said in a statement: "I believe this is an excellent transaction for our shareholders. At the same time, we are mindful of KKR's intentions to keep Beatrice as a major and growing enterprise headquartered in Chicago."

Beatrice's current management, however, will be changed. Henry Kravis, managing partner of KKR, told the Associated Press in a telephone interview that Donald P. Kelly, former chairman of Esmark (which was acquired by Beatrice last year), would be named chairman and chief executive.

Kelly, in his first public statement since being identified with the KKR group, told AP that he intended to keep Beatrice in its present form. He also said his management team would include three former Esmark managers: Frederick B. Rentschler, who will run the general food and beverage divisions; Joel Smilow, head of general non-food operations, and Roger T. Briggs, in charge of finances.

Beatrice observers, however, believe the new KKR company that will own Beatrice will begin selling off such major non-food businesses as Playtex to help reduce its high debt level.

Since Beatrice acquired Esmark for $2.7 billion in August, 1984, it has been shedding some of its less profitable non-food operations. In early October, it disclosed plans to put four more on the block, including it Avis and Danskin units.

The leveraged buyout, in which investors purchase a company by borrowing heavily against the target company's assets as collateral, adds yet another layer of debt to the company's structure.

Observers have believed it was unlikely that Beatrice could remain independent once takeover rumors began inflating its stock. KKR first made a $45-a-share offer in mid-October that Beatrice's board rejected as "inadequate." Since July, Beatrice's stock has risen about 50%, and KKR's initial offer, although spurned, put pressure on Beatrice management to obtain a more attractive alternative.

Beatrice stock closed Thursday on the New York Stock Exchange at $46.25 a share, up 75 cents, and was the most active issue with a volume of 3.9 million shares.

KKR's lock-up options would allow it, under certain conditions, to purchase either Beatrice's grocery group and Tropicana subsidiary for $2.391 billion or Beatrice's Tropicana, meat, soft drink and bottled water subsidiaries for $2.412 billion.

These businesses, which are considered among Beatrice's most desirable, include Hunt-Wesson Foods, Swift meats, Tropicana fruit juices, La Choy Chinese foods, Coca-Cola bottlers and Arrowhead bottled water.

The lockup options, however, are clouded by the Delaware Supreme Court's recent ruling against Revlon's use of a similar defensive tactic to thwart a takeover by Pantry Pride.

Revlon had granted the investment firm of Forstmann Little & Co. an option to buy two major Revlon divisions if an unwelcome suitor acquired 40% of Revlon's stock. The option, which Pantry Pride challenged, was designed to protect Forstmann's agreement to acquire all of Revlon's stock. After the court ruling, Revlon succumbed to the Pantry Pride takeover.

But analysts said KKR isn't likely to have competition for Beatrice, which has had only one other nibble, that from Dart Group Corp. of Landover, Maryland.


"General Electric Co. In Largest Non-Oil Merger In History...," United Press International, December 11, 1985

General Electric Co., in the largest non-oil merger in U.S. corporate history, will takeover RCA Corp. in a cash deal valued at $6.28 billion, or $66.50 a share of RCA common stock.

The merger, which will create a company with combined sales of roughly $35.8 billion, was announced late Wednesday by John F. Welch, Jr., chairman and chief executive of GE; Thornton F. Bradshaw, chairman of RCA; and Robert R. Frederick, RCA president and chief executive.

In a joint statement, the three executives said the merger is "an excellent strategic opportunity for both companies that will help America's competitiveness in world markets.

"We are creating a company that will successfully compete with anyone, anywhere in every market we serve."

The announcement followed a flurry of activity surrounding RCA stock on the New York Stock Exchange. RCA was the second most active issue and the session's biggest winner, jumping $10.75 to $63.50 on rumors that a major announcement was pending. GE was up 25 cents to $67.875.

The boards of directors of both companies have approved the merger agreement that will require approval by stockholders of RCA and a review by various regulatory agencies, including the Federal Communications Commission.

Both companies expect the deal to be closed sometime in 1986.

The marriage of GE and RCA will bring together two of the nation's leading consumer products companies. They both also are major defense contractors and observers said some potential overlap could bring consolidation.

RCA designs and engineers a variety of military and space electronics systems, that includes work for NASA. GE is one of the nation's largest defense contractors and aerospace manufacturers, including jet engines.

GE, with earnings of $2.28 billion, or $5.03 a share in 1984, on sales of $26.8 billion, is ranked ninth in the Fortune 500 largest U.S. industrial companies.

RCA, with revenues of $8.98 billion in 1984, has been divesting itself of various assets since Bradshaw assumed the chairmanship of the then-troubled company in 1981.

NBC, its broadcast subsidiary, which owns five television stations as well as AM and FM radio stations, has been doing well. RCA's electronics division makes color and black-and-white television receivers, videocassette recorders and cameras. Since GE got out of the television business, RCA is the dominant U.S. firm in this area.

GE has been doing some divesting of its own. Among recent actions, it sold its small consumer appliance division to Black & Decker, although it remains in the major appliance field that it dominates.

As part of Bradshaw's divestment program for RCA it sold Hertz Corp., the rental car firm, to UAL Inc., the parent company of United Airlines, for $575 million earlier this year.

Two years ago, Manufacturers Hanover Trust paid RCA $1.5 billion for its CIT Financial Services subsidiary.


"MCA To Buy 33% Interest In Cineplex Theater Chain," by Kathryn Harris, Los Angeles Times, January 16, 1986

MCA said Wednesday that it has agreed to purchase nearly one-third of Cineplex Odeon, one of the largest motion picture exhibitors in North America, for $106 million in Canadian currency, or about $75 million at present exchange rates.

The deal marks MCA's entry into the exhibition business and underscores its top executives' determination to expand in areas related to MCA's core business of producing and distributing movies and TV programs via its subsidiary, Universal Studios.

For Toronto-based Cineplex, the deal appears to offer financial security from an investor that is barred, under Canadian law, from increasing its voting shares to one-third or more.

Under the terms of the deal announced Wednesday, however, MCA will have the option of purchasing an additional block of nonvoting shares for $106 million (Canadian) within 42 months, increasing MCA's stake to 50%.

Cineplex said it would use some of the proceeds to buy out its 50% partner in the Plitt theater circuit, acquired just two months ago. In a telephone interview, Cineplex President and Chief Executive Garth Drabinsky said Cineplex will pay $17 million in U.S. currency to its partner, Odyssey Plitt Associates. That will represent a profit of about $8 million for that New York-based group, which includes the investment firm of Furman Selz Mager Dietz & Birney.

Founded just eight years ago, Cineplex has had a rollercoaster ride to the top ranks of its industry. The company nearly went belly-up in late 1982, Drabinsky said, when Canada's strongest exhibitors kept Cineplex from gaining access to not just first-run but second-run movies as well.

To stave off its main lender, Cineplex sold its 14-screen Beverly Center complex in Los Angeles and challenged its Canadian competitors on antitrust grounds, eventually prevailing. During that troubled era, Cineplex also granted 20th Century Fox Film an option to acquire 7% of its stock, but Fox terminated the option in the spring of 1984. Since then, the company has gained a market value of more than $400 million, up from $30 million, Drabinsky said, adding that, "In retrospect, (former Fox owner Marvin Davis) probably made the wrong move."

Cineplex attracted other sizable investors, however, and Drabinsky said Wednesday that a 22% stake is still held by Canada's Bronfman family, which controls Seagram Co.

In 1984, Cineplex acquired Canadian Odeon, the second-largest circuit in Canada, and repurchased its Beverly Center theater complex from a partnership controlled by Detroit developer Alfred Taubman.

In 1985, Cineplex orchestrated the Plitt acquisition, and it reached an agreement with MCA to build a 17-screen complex on its Universal City property.

It was after the MCA deal in December, Drabinsky said, that he was "tipped off that MCA had some interest in greater involvement in the theater exhibition business," and he broached the subject with Sidney Sheinberg, MCA's president and chief operating officer, and MCA Chairman Lew Wasserman.

Several motion picture companies are barred by antitrust consent decrees from owning motion picture theaters, but Universal Studios, Paramount and Columbia Pictures are not among those.

Nevertheless, MCA's investment in Cineplex will be submitted to federal antitrust agencies for review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, according to Sheinberg.

In a telephone interview, Sheinberg affirmed MCA management's interest in expanding beyond its core production and distribution business, which he has characterized in past interviews as "relatively mature."

Eight months ago, MCA entered the toy business by buying a company that specializes in toys based on characters in popular movies, TV shows, games and personalities.

Under the terms of the MCA deal, Cineplex plans to expand its board to 15 seats, with four designated for MCA nominees. Drabinsky said he anticipates no change in the appointment two months ago of Norman Levy, a former vice chairman of 20th Century Fox, as a Cineplex director.

For the nine months ended September 26, 1985, Cineplex reported net income of $9.78 million on revenue of $127.46 million. Those figures do not include the Plitt operation, which Cineplex said had a net loss of about $1 million for the 12 months ended October 3, 1985.

As a result of the Plitt purchase, Cineplex operates 1100 screens in North America, making it second to General Cinema in the number of screens but first in number of locations, Drabinsky said.


"ZZZZ Best Taken Public By 19-Year-Old Founder," Los Angeles Times, January 21, 1986

ZZZZ Best, the Reseda-based carpet cleaning business founded by youthful entrepreneur Barry Minkow, has gone public by taking over a dormant oil-and-gas exploration business that has publicly traded stock.

To complete the merger, Minkow traded all of his ZZZZ Best stock for 80% of Morningstar Investments, a Utah shell company, said Harold Fischman, Minkow's lawyer. The merged company will be named ZZZZ Best Co. Inc., and will be reincorporated in Nevada with Minkow as chairman and president.

The business in Reseda has become a wholly owned subsidiary of the merged company, Fischman said.

Brokers in Salt Lake City who trade the stock said Morningstar shares are trading at bid prices of as low as $1 and at an asked price of $1.50, a high for the stock. They said the stock hit its all-time low, around 5 cents, last year.

Minkow, 19, started his business from his home four years ago. It now has four offices and claims 1985 sales of about $2 million. He said going public will enable ZZZZ Best to grow faster.


"MCA Acquires 50% Interest In Cineplex," by Kathryn Harris, Los Angeles Times, May 13, 1986

MCA said Monday that it has acquired 50% of Cineplex Odeon Corp. in a stock transaction worth about $159 million. MCA, which had agreed last January to acquire 33% of the Toronto-based motion picture exhibitor, said it decided to accelerate the deal's closing and also to exercise its option to acquire up to 50%.

The Los Angeles-based entertainment company also disclosed that, in a separate transaction, it had agreed to issue 308,847 shares of MCA stock to its record division chief, Irving Azoff, to acquire his interests in three entertainment-related firms. The stock would be worth $15.67 million based on Monday's closing price of $50.75 for MCA shares on the New York Stock Exchange.

In addition to Azoff, four other individuals will receive a total of 176,922 MCA shares for their ownership interests in Front Line Management, Full Moon Records or Facilities Merchandising Inc. Including the stock being paid to Azoff, MCA is issuing a total of 485,769 shares worth about $24.7 million for the companies.

MCA announced last week that it would acquire all of the stock of the three companies, but it declined to disclose the price. The information surfaced Monday in a document filed at the Securities and Exchange Commission.

In the Cineplex deal, MCA agreed to issue a total of 3.13 million shares in exchange for a 50% stake in the theater chain. Cineplex, in turn, sold 1.54 million of the MCA shares to an underwriting group, raising $106.65 million.

With that cash infusion, Cineplex Odeon said it intends to pursue new acquisitions. The 8-year-old company has been moving aggressively to snap up regional theater chains around the United States.

On Monday, for example, Cineplex said it completed the purchase of 13 theaters in the Chicago area from Essaness Theatres Corp. for $14.35 million.

Although MCA owns a 50% interest in Cineplex, its voting rights are restricted by Canadian law to slightly less than one-third of all issued Cineplex shares.

In a prepared statement, MCA President Sidney J. Sheinberg said he believes that the investment in Cineplex "will have a positive impact on MCA's earnings per share," and predicted that the exhibitor will see a "significant increase in its earnings as well."


"Greed on Wall Street," by Susan Detzner, Newsweek, May 26, 1986

A sardonic joke snaked its way along Wall Street's grapevine last week: investment banker Dennis Levine had lost his job because in 54 deals he had earned only $12.6 million. Like most gallows humor, it was the financial community's way of coping with intense shock. In reality, Dennis Levine, 33, was a well-paid mergers-and-acquisitions specialist near the top of the Wall Street pyramid. But last week the Securities and Exchange Commission charged that he had illegally used advance knowledge of 54 impending mergers and other deals to rack up multimillion-dollar profits from trading stocks and options.

More than any other recent insider trading case, the revelations about Levine sent a shiver through Wall Street. Outwardly, he had seemed a kind of Horatio Alger of high finance; a middle-class boy from Queens, New York, he had gone to work for some of the nation's premier investment banking firms, eventually rising to managing director at Drexel Burnham Lambert. Along the way he had acquired the trappings of a modern merchant prince: a million-dollar-a-year compensation package, an expensive apartment on upper Park Avenue, a rented house in fashionable Southampton and even a new red Ferrari. Now the SEC was charging that many of Levine's profits had come by breaking the rules of the game. He stood accused of concocting an elaborate scheme to carry out his trades from offshore, making day trips to the Bahamas and using pay phones to relay his instructions. And an attempt to cover up his trades as the SEC closed in on him led to criminal charges of obstructing justice. Arraigned on those charges last week, he was handcuffed and spent the night in jail.

Levine's case, at least in part, was a cautionary tale for Wall Street. With the wave of huge corporate mergers and the continuing bull market in stocks, the financial community is practically minting money these days — and it is attracting a new breed of gunslingers anxious to get rich quick. The Street is hardly awash in illicit activity. But in the overheated atmosphere, where personal fortunes can be made with one deal, the temptation to cheat has apparently become irresistible to a few of the players. Mounting a merger or acquisition campaign demands careful, secret plans of battle, but the rules of engagement are clear: the securities markets are supposed to operate openly, with all investors having equal access to important information about companies. At an investment banking house, which both arranges mergers and trades stock, using "material nonpublic information" as Levine is alleged to have done is a double violation of trust.

Perhaps most troubling, about 30 of Levine's alleged 54 trades — including the first one — involved stocks of companies that became enmeshed in takeovers or other deals, but in which neither Levine nor the firms he worked for were involved. That suggests Levine may have plugged into a network of financial community tipsters, possibly stock arbitrageurs — traders who seek to make legal profits on the shares of companies involved in mergers or other deals — or other sources with such access to material nonpublic information.

New developments?

Charles Carberry, the Assistant U.S. Attorney handling the criminal charges against Levine, hints that there may be important new developments in the case this week. In the meantime, Levine, who has been relieved of his duties at least until the case is resolved, has denied the charges against him through a high-powered battery of attorneys hired to mount his defense. If he is ultimately found guilty of civil and criminal charges, Levine would be forced to give back the $12.6 million in profits, pay up to $22.8 million in penalties and face a jail term of up to five years. Given that prospect, he may well opt to plea bargain with prosecutors, swapping information about possible accomplices — perhaps arbitrageurs or others in the investment business — for a lesser sentence.

According to the SEC, which has carried out the bulk of the investigation under enforcement chief Gary Lynch, Levine's illicit trading began six years ago when he entered the investment banking business. Among the hotshot Ivy Leaguers and MBAs who populate the top investment banking firms, Levine was no particular standout. But his MBA thesis from New York's Baruch College may have suggested an early preoccupation. Its title: "Determination of Underwriting Compensation" — an analysis of what investment bankers earn from floating new stock or bond issues. Following graduation, Levine did a stint in commercial banking at Citibank, then moved into an entry level job in the mergers and acquisitions (M&A) department of Smith Barney Harris Upham & Co.

Early on he demonstrated traits that were to become his trademark. He showed little interest in — or talent for — the nuts-and-bolts financial analysis at the core of dealmaking. But he had a great flair for marketing, rubbing shoulders with clients — and gathering information. One former associate recalls that Levine spent a lot of time "sniffing for rumors," hanging around the offices of arbitrageurs. In one instance, the snooping Levine so annoyed an "arb" that the trader "threw him out," the associate says.

After a slow start, Levine buckled down and began climbing the ladder at Smith Barney. But when he failed to get a sought-for promotion, he jumped to Lehman Brothers and then to a senior position in the M&A department at Drexel Burnham. All the while the genial Levine amazed former colleagues with his apparent success. He wasn't the most ostentatious of investment bankers — but in everything from expensive style of dress to the new Ferrari, "the more money he made, the flashier he got," a former associate says.

Hitting the jackpot

According to the SEC, Levine's illegal trading began long before he hit legitimate financial success on Wall Street. In June 1980 he allegedly made a profit of about $4000 by buying — and then selling after the price climbed — 1500 shares of Dart Industries, Inc., one day before the public announcement of a merger offer by Kraft Inc. (a deal that wasn't handled by Levine or Smith Barney). He then raised the stakes and hit the jackpot over and over again.

Levine may have outdone the typical insider in cloaking his trades. The SEC alleges that he set up two dummy Panamanian corporations to place trades through an offshore Bahamian bank, Bank Leu International Ltd., a unit of Switzerland-based Bank Leu. Somewhere along the way, an alleged coconspirator, Bernhard Meier, who was then a Bank Leu portfolio manager, entered the scheme; he is charged with making about $152,000 from illegal trades (he declined to comment last week). By making only day trips to the Bahamas, Levine managed to keep his activities a secret from his employers, his wife and young child. His orders were then placed by the bank through brokerage firms headquartered in New York.

Levine's alleged dealings came to the attention of investigators through a confidential tip, says U.S. Attorney Rudolph Giuliani. After that the SEC pieced together the case with the help of Wall Street's high-tech gumshoes. In recent years the nation's stock exchanges have beefed up their surveillance capability: the New York Stock Exchange, the American Stock Exchange and the over-the-counter NASDAQ system now have comprehensive computer systems to monitor unusual stock trading, and last year the NYSE instituted an audit trail allowing it to track the buyers and sellers involved in each trade. These systems apparently helped lead the SEC to the Bank Leu. The commission alleges that Levine then concocted phony cover stories for Meier in an effort to allow him to explain away the trades.

SEC investigators kept on the trial, however, and two weeks ago learned that Levine was trying to transfer about $10 million from the Bank Leu through one offshore bank to another in the Cayman Islands. To halt the transfer, they quickly filed charges against Levine and Meier. Now the commission will rely on statutes, including the Insider Trading Sanctions Act of 1984, as well as a growing body of insider trading case law, to press for judgments against Levine and Meier. In instances where Levine allegedly used information from deals he or his employers were working on, he could be found guilty of "misappropriating" material nonpublic information for his own financial gain. And in instances where he got wind of other deals, the commission may argue that Levine had reason to know the information he traded on came from someone with a "fiduciary" responsibility to keep it quiet.

Offshore crackdown

The biggest triumph of the Levine case may be clamping down on insider trading transacted through offshore shell companies and banks. In contrast to the United States, investors who trade through offshore banks in places like the Bahamas and Cayman Islands needn't reveal their social security numbers for tax purposes — making it tough to track them down if they make suspicious trades. But following a recent trend toward international cooperation in such investigations, the Swiss-based Bank Leu actually identified Levine. The SEC now hopes that the case will demonstrate to prospective insider traders that "you can wade in the waters off Miami, but it's not necessarily going to protect you to be offshore anymore," an SEC official says.

It may be weeks before the Levine case recedes on Wall Street, especially if investigators can turn up evidence of an insider trading ring. If the allegations against Levine are true, says Fred Joseph, chief executive officer of Drexel Burnham, "it's horrible . . . It's a total violation of our rules and is destructive to the business." Still, Drexel's clients appeared to be taking the news calmly, viewing it as an isolated instance of crime and greed. The case of Dennis Levine, it seemed, would go down as the pathetic tale of a man who made big bucks on Wall Street but somehow found that it wasn't quite enough.


"Levine Guilty of Fraud, Perjury and Tax Evasion: Investment Banker Agrees to Give Up $11.5 Million of Illicit Insider Profits," by Michael A. Hiltzik, Los Angeles Times, June 6, 1986

Investment banker Dennis B. Levine settled the largest insider trading case in history Thursday by agreeing to give up more than $11.5 million of his illicit profits and by pleading guilty in federal court here to tax evasion, perjury and securities fraud.

The 33-year-old former managing director of the investment firm Drexel Burnham Lambert faces a maximum of 20 years in jail and fines of $610,000 on his felony convictions.

He also owes more than $2 million in back taxes from 1983 and 1984. The tax assessment will be paid out of the $11.5 million sum, according to Levine's lawyer, Martin Flumenbaum.

That figure is the largest amount given up, or "disgorged," by a single insider trading defendant in Securities and Exchange Commission history.

Levine's plea came on the same day that four young professionals indicted last month in an unrelated insider trading scheme pleaded guilty to having used secret takeover information allegedly stolen by a fifth, Michael David, from the law firm where he worked. David himself pleaded innocent to similar charges at his arraignment Thursday.

Say They Told Bosses

Two of the defendants said they had passed on the tips to superiors at their brokerages who knew they were receiving illegal inside information. Spokesmen for the firms denied that, however, and no one else has been charged.

The SEC charged Levine on May 12 with having made $12.6 million over six years by trading on confidential information that he gleaned as an investment banker at three firms in succession: Smith Barney Harris Upham & Co.; Shearson Lehman Brothers, and Drexel.

The SEC's original complaint listed 54 takeover deals in which Levine traded, but later court proceedings focused on nine in which Levine played a direct role by advising a company involved in the deal.

He was arrested the night of May 12 and charged with criminal obstruction of justice for having ordered executives of a Swiss bank through whose Bahamian office he traded to destroy documents linking him to the secret accounts. He was later released on $5 million bail.

The case shook Wall Street not only because of Levine's prominence in the mergers and acquisitions community but because of the prospect that he might give testimony incriminating other brokers or traders.

Levine said in a written statement that he has agreed to cooperate with the SEC and with federal prosecutors in further investigations. Although in his civil settlement with the SEC he consented to an injunction against fraud without admitting or denying the charges, in his written statement he said: "To contest the charges against me on technical grounds would serve only to prolong the suffering of my family. It would also convey the wrong message. I have violated the law, and I have remorse for my conduct, not excuses."

In its original complaint against Levine, the SEC sought penalties of more than $20 million. Although Levine will end up disgorging just over half that amount, U.S. Attorney Rudolph Giuliani of Manhattan said Levine's plea is not "anything you could remotely describe as a bargain."

The jail term of up to 20 years faced by the defendant, who is to be sentenced July 9, well exceeds the longest jail term so far imposed by any judge in an insider trading case-the four-year sentence last year of former LTV Corp. Chairman W. Paul Thayer, who passed on tips about several companies to a circle of friends and who committed perjury.

$1.2 Million Profit

In his guilty pleas before U.S. District Judge Gerhard Goettel, Levine admitted to trading illegally in the stock of Jewel Cos. in March and April 1984, when it was the takeover target of American Stores, a client of Shearson Lehman Brothers, Levine's employer at the time. Levine made a $1.2 million profit.

Asked why the plea focused on the Jewel transaction, which was not one of the nine that the SEC focused on, Assistant U.S. Attorney Charles Carberry noted that it had produced one of Levine's biggest scores. "It was a matter of prosecutorial discretion," he said.

Levine's guilty plea to evading $2 million in federal income taxes involved profits parked in his Bahamian accounts. Levine understated his personal income by $1.9 million in 1983 and by more than $2.1 million in 1984, the government charged.

Finally, he pleaded guilty to lying to the SEC in November 1984, when he testified in an agency proceeding that he had bought stock in Textron, the Rhode Island conglomerate, after overhearing a casual conversation between "two gentlemen" in the reception area of Drexel's offices. (He worked for Shearson at the time.)

Levine's civil settlement with the SEC requires Levine to transfer to the United States $10.6 million in illicit profits held by the Bahamian branch of Bank Leu, his Swiss bank, and to give up about $1 million more in assets, including his partnership shares in the Drexel firm, a Ferrari automobile and his pension benefits.

The funds will be placed in the care of a receiver and used-after the tax bill is paid-to settle claims from those who may have sold stock to Levine, unaware that he was using superior information.

Levine will be permitted to keep the Park Avenue cooperative apartment where he and his wife and son live, as well its furnishings and a personal bank account that held about $500,000 two weeks ago.

Guilty Pleas

In the unrelated criminal case heard Thursday, federal prosecutors extracted guilty pleas from four men who confessed to receiving illicit trading tips from David when he was a junior associate at the prominent law firm of Paul Weiss Rifkind Wharton & Garrison.

The four are Andrew Solomon, 27, a former research analyst at the brokerage of Marcus Schloss & Co.; Robert Salsbury, 27, a former analyst at the Drexel firm; Morton Shapiro, 27, a former brokerage trainee at Moseley Hallgarten Estabrook & Weeden, and Daniel Silverman, 23, a friend and customer of Shapiro's.

According to their testimony, David stole confidential information from his firm and used it to trade in a joint brokerage account with Shapiro and Silverman, his childhood friends from Cranston, Rhode Island. He also passed tips to Salsbury and Solomon, who were neighbors.

Solomon said in court that when he passed David's tips on to "principals" at Marcus Schloss, they knew they were getting inside information. Irwin Schloss, the president of Marcus Schloss, said later that "I have talked to all of our people, and no one here ever knew of any insider information and never traded on any inside information."

Challenged by Firm

Salsbury similarly contended that his Drexel superiors knew he was providing them with illegal tips. Drexel issued a statement saying that "we are not aware of and have no reason to believe that Mr. Salsbury's conduct was known or condoned by any official of this firm."

Solomon, Salsbury, Shapiro and Silverman pleaded guilty to felony fraud counts and face up to five years in prison and $250,000 fines on those charges. Salsbury, who coached Solomon to lie about his trading to SEC investigators, also pleaded guilty to a count of obstructing justice, and Solomon to perjury. They will be sentenced July 18.


"Turner Sells Fabled MGM But Keeps A Lion's Share," by Al Delugach, Los Angeles Times, June 7, 1986

The familiar Metro-Goldwyn-Mayer signs will come down from the historic Culver City studio that was an integral part of the MGM image and Hollywood itself.

And broadcast entrepreneur-sportsman Ted Turner, who acquired MGM less than three months ago, will not become a major movie mogul after all-but he will end up with its movie library of 2200 pictures.

Those are the results of a $490 million pair of "agreements in principle" announced Friday that mean another major change in the face of Hollywood.

Details of Breakup

The breakup of the studio, where The Wizard of Oz and a host of other cherished pictures were filmed, involves the following:

-The 44-acre MGM studio property, along with its film processing laboratory, will be bought for $190 million by Lorimar-Telepictures Corp., a major television firm that presently occupies rented quarters on the lot.

-The famous MGM name and Leo the Lion logo will go with its motion picture and television production and distribution and home video businesses for $300 million to United Artists Corp. UA, which until March was the other half of MGM/UA Entertainment Co., said MGM will continue as a separate "production group." A spokesman for UA controlling shareholder Kirk Kerkorian said it has "not been decided" whether to incorporate MGM again into the corporation's name.

-Turner Broadcasting Co., controlled by Turner, will keep the fabled MGM film library, primarily as a source of programming for its Atlanta superstation WTBS. Turner would end up spending $1.2 billion for the library, apparently a record outlay for that type of "product," as it is called in the entertainment business.

Although the cachet of MGM's movies in recent decades has not been able to live up to its pre-1960s image, some movie buffs were already mourning the prospective dispersal of a major chunk of glamour in the industry.

The old MGM has lived on chiefly in its movie library. One of its best-known classics, Gone With the Wind, actually was produced by Selznick International with one of the film's top stars, Clark Gable, borrowed from MGM. MGM distributed the film and later bought it.

Along with the array of MGM musicals and other hits, the library includes many old Warner Bros. and RKO pictures.

MGM Bought March 25

Turner, who has owned MGM only since March 25, had said many times that his primary objective in buying MGM was to acquire its library.

He also said repeatedly that his firm was negotiating to sell any and all of the remaining assets to cope with the mountainous debt it took on to acquire MGM.

Even so, Turner confessed to having been smitten at least somewhat by the moviemaker syndrome and insisted on a condition that the buyers would distribute three movies that he might produce in the future.

Lorimar-Telepictures Chairman Merv Adelson confirmed Friday that his firm did agree to do so "as long as he pays the costs involved." Turner indicated in a speech here earlier this week that he is interested in a strong anti-nuclear picture and other "pro-social" subjects. UA spokesman Andy Fogelson said he did not know if UA made a similar commitment.

"The theatrical motion picture business is not really a sound financial business," Turner told a gathering of television critics shortly before making the MGM sale. "It's like baseball or basketball. They're hobby businesses. We can't play that game anymore."

But Turner added, somewhat wistfully, "How can you not like the movie business?

"We would have attempted some hopefully outstanding, pro-social films along the lines of Gandhi, Chariots of Fire and E.T., " had he retained MGM, he said.

Within hours of meeting with the critics, Turner signed tentative agreements to sell MGM, which officially became his less than three months ago.

But he'll retain the coveted library of MGM films, which will be used to further his grand goals.

"We've got enough programming right now to do a 24-hour global network," he said, adding that he has no immediate plans for such a network.

Library Cost $1.2 Billion

A source at Drexel Burnham Lambert, Turner's investment banker, said Turner's total cost before selling the assets was about $1.7 billion, which included the MGM debt acquired with the company in March. Friday's announcement means that the library cost Turner $1.2 billion. The source said Turner is getting a good return on that outlay since the MGM library brings in about $100 million every year.

The Culver City lot in the future will bear the name of Lorimar-Telepictures only, and MGM is expected only to rent soundstages for future productions, according to Adelson.

Acquisition of the property will give Lorimar-Telepictures a good return on its investment while allowing the company to consolidate its scattered facilities under one roof, he said.

New UA Chairman Lee Rich said both UA and MGM production groups will "remain separate and active" and will "supply product to one central marketing and distribution facility."

Stephen Silbert, a spokesman for UA controlling shareholder Kerkorian, noted that the company is acquiring a picture production company with movies in the pipeline, including the current hit Poltergeist II, as well as Fame and other television properties and two "incredible" assets: the MGM logo and its prosperous home video business.

Entertainment analyst Harold Vogel of Merrill Lynch said he sees no reason for surprise at the deal, observing that, to a large extent, Kerkorian "is buying back what he owned before."

Turner Broadcasting has "more breathing room" on its debt, Vogel said, while Kerkorian "made a healthy profit, I'm sure."

Friday's long-awaited announcement on just what Turner would sell came after interest was expressed by many potential buyers, the Drexel Burnham source said. Among the first formal bids was that of financier Charles Knapp's Trafalgar Holdings. Trafalgar spokesman Don Reynolds said Friday that it bid slightly less than $400 million for all the MGM assets except the library.


"Company News; Trump Stake In Holiday," The New York Times, September 5, 1986

The Holiday Corporation, operator of the Holiday Inn chain, said that Donald Trump, the New York real estate developer, had acquired between 2 percent and 5 percent of the company's stock.

The company said it had been advised that the shares were acquired for investment purposes. A spokesman for Mr. Trump could not confirm the purchase.

Robert L. Brannon, a spokesman for Holiday, said there was no sign that Mr. Trump intended to begin a takeover of the Memphis-based concern. In May, Holiday sold its 50 percent share in the Trump Casino Hotel in Atlantic City to Mr. Trump for $76 million in cash and notes.


"Viacom International Gets $2.7 Billion Proposal For Management-Led Buyout," by Paul Richter, Los Angeles Times, September 17, 1986

A management-led investor group on Tuesday proposed a $2.7 billion leveraged buyout of Viacom International, the cable, broadcast and entertainment firm that has spent more than a year dodging real and rumored takeover threats.

The investor group is led by Terrence A. Elkes, Viacom's president and chief executive, and also includes Equitable Life Assurance Society and the investment banking firms First Boston, Drexel Burnham Lambert and Donaldson Lufkin & Jenrette Securities. They valued their offer at $40.50 a share, including $37 a share in cash and a fractional share of preferred stock that the group valued at $3.50.

A source close to Viacom said the move was "really forced by the continuing threat of a takeover" to the company. "These threats have become such a distraction that management just can't keep their attention on running the show."

Decision in Two Weeks

The investor group's offer will be considered by a committee made up of Viacom's eight outside directors; the group is expected to reach a decision within two weeks.

In heavy trading of 3.36 million shares on Tuesday, Viacom stock rose to $40.375, up $5.125.

The investor group declined to disclose the names of other executives involved in the deal or what stake in the new company the managers and companies will have. In a leveraged buyout, a purchasing group buys a company from its shareholders by pledging its assets as collateral, intending to repay borrowings with future operating income.

Viacom, the 10th-largest operator of cable systems in the United States, owns five television and eight radio stations, TV programming services including the rock video channel MTV and Showtime/The Movie Channel, and the syndication rights for television properties including the top-rated The Cosby Show and the classic series The Honeymooners.

The company's assets have gained increasing luster as broadcast and cable properties have generally grown in value over the past two years. And as its stock price has failed to keep up with that increasing value, the threat of a takeover has also grown.

Regarded as Greenmail

Last June, Viacom paid about $260 million to repurchase a 17% stake held by raider Carl C. Icahn in a buyout that was widely considered greenmail. A Boston-area investor group led by National Amusement Corp. of Dedham, Massachusetts, a moviehouse chain that has been accumulating stock since last June, disclosed last Friday that it had increased its stake to 8.57%.

Sumner M. Redstone, National Amusement's chairman, was unavailable for comment on Tuesday.

The investor group's bid for all 39.75 million shares outstanding opened the possibility that another bidder might be flushed out, some analysts said. But others were skeptical, noting that the investor group already included some of the heavy-hitting investment banks that other bidders might have wanted to retain to raise money for a counteroffer.

"They've been clever here in tying up all the desirable dance partners," said Mark Riely, analyst with the F. Eberstadt investment firm in New York.

And while Viacom has been discussed as a merger target for companies owning movie studios, several of those firms have business ties with Viacom that they would presumably be reluctant to disrupt with an unfriendly offer, said Mara Balsbaugh, analyst with Smith Barney Harris Upham.

Warner Communications, for example, uses Viacom's Showtime/Movie Channel pay-TV programming services on its cable systems, while Walt Disney's pay TV service is carried on most Viacom cable operations, she said.

Some analysts said the investors' price is not overly generous in light of what many analysts think the company will be earning in the next several years. They expect Viacom's profits to get a sharp boost from the expected growth in their broadcast stations' revenues, expected growth in pay-TV revenue and the syndication rights for The Cosby Show.

Some analysts have predicted that The Cosby Show alone will add about $300 million to Viacom revenue over the next several years when syndication rights are sold.

Kenneth Berents, analyst with Legg Mason Wood Walker in Baltimore, said the group was wise to propose a buyout at a time when a generally depressed market would make the offer appear generous.

Warner Communications, which holds about 4.5 million Viacom warrants, would receive about $19 million if the leveraged buyout occurs, Warner Communications Chairman Steven J. Ross told shareholders Tuesday.

In a brief interview following Warner's annual meeting in Beverly Hills, Ross said Warner would reap a $10 million profit from those warrants if the Viacom buyout takes place.

The $2.7 billion price includes the cost of refinancing Viacom's outstanding debt, the investors said in a statement. They have arranged for a $1.5 billion revolving bank credit line, and expect to receive another $825 million from Donaldson Lufkin Jenrette, First Boston and Drexel Burnham Lambert.

The three investment houses said they are "highly confident" that they can raise the money through the sale of debt and equity securities.


"Fox's Barry Diller Gambles On A Fourth TV Network," by Aljean Harmetz, The New York Times, October 5, 1986

It is late on a Monday afternoon at the 20th Century Fox movie studio, and Barry Diller, Fox Inc.'s 44-year-old, $3 million-a-year chairman, is overseeing his third staff meeting of the day. Although his current obsession is creating a television network to compete each evening with NBC, CBS and ABC - a high-stakes gamble of more than $150 million that may well fail -Mr. Diller does not share power easily. All the strings from Fox movies, television and real estate are curled under his fingers.

In each meeting, the pattern has been the same: He has listened with an almost tactile intensity, made diffident suggestions and then lectured, in a gentlemanly fashion, as a way of digesting information for himself as well as for the other executives of the new Fox Broadcasting Company, which is owned - as is Fox Inc. - by Rupert Murdoch. FBC will be launched Thursday at 11 PM on a nightly hourlong talk show starring Joan Rivers. Next March, FBC will have primetime programs on Saturday and Sunday nights.

Mr. Diller - who became chairman of Paramount Pictures at the age of 31, ran the studio for a decade and built it into Hollywood's most consistently successful movie studio before he lost a power struggle and moved across town to Fox in 1984, has the hubris to think he can create the first television network since Leonard Goldenson launched ABC in 1951.

''To the risk-taker, as always, comes the spoils,'' he says.

Taking risks is built into his personality. ''Barry will take big chances looking for a big win and will stay in a hand longer than he should, hoping to buy a card,'' says the producer Daniel Melnick, with whom Mr. Diller plays high-stakes poker every Friday night. ''He's fearless, and you can't bluff him out.'' Poised in the center of an office he designed himself that seems all banks of flowers and beveled glass, Mr. Diller has a studied elegance that is broken only by a gap between his front teeth and an unexpected taste for junk food. The plates served under silver domes on Fox's corporate jet contain hot dogs or cheeseburgers and French fries drowned in ketchup.

Even Mr. Diller's enemies - and he has many - consider him a brilliant businessman. To make Fox profitable, he reorganized every department at the studio and ruthlessly lopped 400 people off the studio payroll. But 20 of his former top executives at Paramount voted against him with their feet. Mr. Diller went to Fox at the same time that Michael Eisner, his second-in-command at Paramount, became chairman of Disney. Almost every executive followed the warm and easygoing Eisner to Disney, partly because they considered him the ''creative'' half of the team and the man more likely to succeed at making movies.

Mr. Diller's enemies admire his intelligence and grudgingly concede his integrity. But the word most often used to describe him is ''intimidating.'' Says Michael Fuchs, chairman of Home Box Office and for years Mr. Diller's archenemy in the fight over pay cable, ''Barry's most valuable asset is his fearlessness in confronting. He's like a hot knife through butter. That's powerful if you face someone who doesn't like confrontation.''

Right now, Mr. Diller is confronting Frank Mancuso, the man who replaced him as Paramount's chairman, on the telephone. In almost any situation, Mr. Diller's instinct is to make the most theatrical choice, and he wants to create a new Star Trek program for his broadcasting network. For two months, Paramount has hemmed and hawed. For the past hour-and-a-half, Mr. Diller has pushed and maneuvered.

''Can we play or can't we? Tell us how to get a conversation going. Tell me, 'Hey, you can't play, you're Jewish and my club doesn't allow Jews' and I'll go away. But I believe in this show. I think this show will be better on us than on CBS or NBC or ABC because it's more dramatic. And drama is what's needed here. This show smells hot. We'll do anything short of insanity to make Star Trek.''

Like an expert fisherman, he casts out, reels in. How much of his exasperation and hyperbole is playacting? He is a droll man and, in another context, he has admitted, ''Many of my conversations are rhetoric.''

Whether Mr. Diller succeeds or fails, Fox Broadcasting Company is a symbol of changes in television that would have seemed unbelievable even five years ago: The striking loss of audience by the networks; the growth of independent stations and their purchase of hundreds of millions of dollars' worth of original programs; the sale of ABC and NBC and the de facto change in ownership at CBS; the use of television sets to see Hollywood's movies on videocassettes and cable.

Media analyst Paul Kagan describes what is now happening as ''an historic shift of power'' from television networks to movie studios. In 1983, Mr. Diller tried to persuade Gulf & Western, Paramount's corporate parent, to buy the six Metromedia stations that Mr. Murdoch eventually purchased to form the basis of the Fox network. Mr. Murdoch, who owns the European Sky Channel and one of Australia's major television networks, would like to assemble a worldwide broadcasting empire. ''Television is today's new mass communication media. It's taking over the role of newspapers,'' says Mr. Murdoch.

In 1948, the movie industry could have controlled television. Instead, it deliberately turned its back on the new medium. Nine years ago, the studios were not clever enough to see the opportunity in pay cable and lost out to Home Box Office. Now, in a new attempt to control the distribution of their movies and television series, studios have gone on a spree of buying television stations. For a net $1.65 billion, Fox purchased Metromedia, the largest independent station group in the country. MCA, Inc., the parent company of Universal Pictures, bought WOR-TV in New York City for $387 million; Lorimar-Telepictures paid $1.85 billion for seven Storer and Wometco stations that stretch from Miami to San Diego.

The emphasis of the movie companies is, more and more, toward making programming for television. A hit movie is a nice bonus, but a successful television series is more important because it can generate money year after year; that money can carry a studio through the lean years when its theatrical movies are unsuccessful. It is probable that The Cosby Show will earn $400 million when it is sold to independent television stations after four or five years on NBC, bringing in more money than all but the most powerful blockbusters like an E.T. or a Star Wars.

But it is movies that still supply glamour and status and the excitement that Hollywood calls ''heat.'' And it was with his movie division that Barry Diller was struggling at one midsummer meeting.

''This script is still a mess,'' he tells his vice president of production. ''It's manufactured. It's all a cheat.''

The last meeting of the day is with the men who market Fox's movies, and the news is not good. Later in the summer, Fox will have a box office hit in Aliens and The Fly. For now, Big Trouble in Little China, which cost $20 million, is a box office disaster. In addition, both of the summer movies that Fox marketed for other companies - SpaceCamp and The Manhattan Project -have been box office failures. ''There's plenty of money out there, but these films are not competitive. Period!'' Mr. Diller says impatiently. ''We thought that SpaceCamp would be, and we were wrong.''

One of Mr. Diller's strong points is that he always learns from his mistakes. Before the meeting is over, Project X, which stars Matthew Broderick and a chimpanzee, has been pulled from the theaters in which it was booked for this coming Christmas. Even if the suspense drama about a top-secret military project is a good movie, it has no built-in box office clout, and Fox is not going to make the mistake of, in Mr. Diller's words, ''seeking its death'' by scheduling it against the heavy holiday competition.

''I wouldn't recommend that anybody go into the movie business tomorrow,'' he says, his fingers belying his iron control as he plays incessantly with a strip of film, pushing it from one hand to the other. ''In the shooting gallery of theatrical motion pictures, you can still make a great deal of money if you can dodge the bullets, but there's no growth in the movie business. Costs both of production and marketing are wildly out of control, unhandleable, and there's more product than the business can stand.

''But, if you can link together production and distribution in the television business, you can face enormous growth. If you have one good idea -Family Ties or Who's the Boss -and you cause it to be produced and it goes on your own stations as well as other stations, you take a profit, because you make the program and you get adjacent advertising revenue on your own stations and, as a distributor, you get a profit from its success. That's pure vertical integration. If our networking works, our owned-and-operated stations will be worth three or four times what they are worth today.''

Although half a dozen previous attempts to create a fourth network have failed, analysts are surprisingly positive about Fox Broadcasting Company. ''The losses will be far less than the wilder-eyed estimates,'' says John Reidy of Drexel Burnham Lambert. ''Murdoch is well-financed. He can last three years, not three weeks. He has time to wait for the public to find his network. There's only one problem: Will the public watch his programs? If the public doesn't like them, he's going to die,'' says Edward Atarino of Smith Barney. ''They are not a full-fledged network yet. Their key challenge in the coming 12 months is to promote and sell the idea,'' says Rich MacDonald of First Boston, ''but I think they have a good chance.''

The six television stations owned by Fox - WNYW in New York, KTTV in Los Angeles, WTTG in Washington, WFLD in Chicago, KDAF in Dallas and KRIV in Houston - cover 22 percent of the country. (The purchase of WXNE in Boston has been agreed on but has not yet been approved by the Federal Communications Commission.) Jamie Kellner, the president of FBC, has added enough independent stations so that FBC can be picked up in 80 percent of America's cities and towns. Recalls Leonard Goldenson, ''When I started ABC in 1951, it covered only 35 percent of the country, including our own five stations.''

Programs will be delivered by satellite. In addition to the $110 million to be spent on programming during the first year, another $40 million will go toward promotion and overhead.

For the moment, Fox Broadcasting Company intends to make the same situation comedies, detective stories and made-for-TV movies that the established networks find so profitable. Next March, FBC will launch two nights of primetime programming, Saturday from 8 to 10 PM and Sunday from 7 to 10 PM. The programs will include a half-hour situation comedy based on the Disney movie Down and Out in Beverly Hills; a situation comedy from the creator of Family Ties about a family that doesn't get along; a comedy series about the romance between an older woman and younger man that will probably star Stockard Channing, and an hourlong action-adventure series, from the creator of The A Team, which will play at 7 on Sunday evenings, a time period when the three networks are limited to news or children's programs. If FBC is successful, another night will be added each season.

During the 1980s, four things have happened to break the seemingly eternal grip of the three networks and to make a fourth network look like a reasonable gamble. Independent television stations exploded from 98 to 328. They became attractive to advertisers because they began to make or buy original programs, from The Wheel of Fortune to situation comedies, using a new technique of bartering advertising time instead of paying cash for such programs.

Under the Reagan Administration, the FCC let down the barriers and the carefully protected airwaves became just another business, to be bought and sold like companies that manufactured washing machines. The FCC's open season on television properties coincided with a new way that hostile bidders without much cash could tackle the networks: junk bonds, high-risk bonds that carry extremely high interest rates.

''Suddenly the historical permanence of the television networks was going to be no more,'' says Mr. Diller. ''It became clear pre-Capital Cities' buying ABC that these companies could no longer maintain the independence that was a permanent state of mind.''

Someone once said that the key to Barry Diller is that he was born to be a boss. HBO's Michael Fuchs is convinced there is at least one baby picture ''with a cigar in his mouth and a gavel in his hand.''

Raised in Beverly Hills, the son of a successful real estate developer who laced southern California with streets named ''Barryvale'' and ''Barrydale,'' Mr. Diller is almost entirely self-educated. At Beverly Hills High School, he says he never went to school on Mondays or Fridays and rarely on Wednesdays. He dropped out of UCLA almost before attending a class, choosing instead to work in the mailroom of the William Morris talent agency. Michael Eisner met Diller when they were both young executives at ABC. Mr. Eisner recalls mentioning Ethan Frome and being greeted with a blank stare. ''That was Wednesday,'' says Mr. Eisner. ''We were 25 years old. On Friday, I met him at the elevator and he had 12 Edith Wharton books under his arm.''

At the age of 25, already prematurely bald and a minor ABC executive, Mr. Diller revolutionized television programming by creating the ''Movie of the Week,'' 90-minute original motion pictures made for television. Three years later, he pioneered the miniseries with QB VII.

In his early days at ABC, his job was to buy packages of movies from important men several decades older than he was. ''I used to hear the screams coming out of his office and see these chairmen who had their limousines waiting downstairs -Lew Wasserman, Charlie Bluhdorn, Joe Levine - eating egg salad sandwiches at his small desk and fighting with him,'' says Leonard Goldberg, the vice president of programming at ABC who hired Mr. Diller. ''Here was this rough, tough kid who wasn't afraid of them and who had class and style.''

It was Bluhdorn who took Mr. Diller to Paramount. Mr. Diller's reign extended from Saturday Night Fever, Grease and Airplane to Flashdance, Raiders of the Lost Ark, Ordinary People and Terms of Endearment.

Although Mr. Diller has now placed himself in the same mentor-protege relationship to another tough man, there is a difference. This time, armored by his record at Paramount, he doesn't have to prove himself. When Bluhdorn died and Mr. Diller's control was threatened, he simply moved across town to Fox in September 1984, and got a 25 percent equity from the studio's owner, Marvin Davis. He says that his contract required that he speak to Marvin Davis only twice a year and that Mr. Davis was not allowed to talk to other Fox executives. There is, of course, no such arrangement with the 55-year-old Murdoch, who has just bought a seven-acre estate in Beverly Hills and will spend one week a month looking over Mr. Diller's shoulder at the studio.

Mr. Diller, who has never married, rarely socializes with the people with whom he works. He tends toward an isolation that is both self-imposed and forced upon him by a painful shyness. In the winter, he escapes on weekends to Deer Valley, Utah, where his skiing style is to bash headlong downhill.

After a vacation in Europe when he walked out of a hotel without paying his bill because it had been years since he had had to pay a bill himself, he bought a yacht that was small enough to handle without captain or crew. It was a way of forcing himself to be alone and to deal with the minor problems most people never escape.

''Barry is distant,'' Mr. Eisner says, ''and therefore many people think he's cold, but he is not cold. His bark is 20 times worse than his bite. He can be abrupt and impatient, but nobody is more honest, and, in 16 years, he never once undermined me or changed directions on me in midstream.''

In the weekly poker games - the players include Chevy Chase, Neil Simon and Johnny Carson - Mr. Diller is self-effacing. Despite his reputation, ''When he's got a lock on a hand, he never pushes the last bet,'' says Mr. Melnick. ''Instead of being ruthless, he likes the beau geste.''

But despite Mr. Diller's personal style and no matter how diligently FBC signs up stations, if its programs are no good, the network will fail. ''If the Fox shows don't measure up,'' warns Leonard Goldenson, ''the stations will preempt them.''

''You can't fake it, hide from it or run away,'' Mr. Diller agrees. ''In the movie and television business, everything depends on the programming.''


"Viacom Accepts Higher Bid," by Leonard Sloan, The New York Times, October 18, 1986

Viacom International Inc., a major communications and entertainment company, announced late yesterday that it had accepted a $2.9 billion leveraged buyout offer from an investment group led by several of its senior managers.

Viacom, which had rejected two previous buyout proposals from the same group since September 15, said in a statement issued last night that the new, sweetened offer would give its stockholders $44 a share in cash and stock, plus 20 percent of the new corporation that will be formed to operate the business. The previous proposals did not include a provision for the current shareholders to retain any equity after the deal was completed.

Under the new proposal, shareowners will also receive more cash than they would have in the $44-a-share offer made last week. The new deal calls for payment of $37 in cash and a fraction of a share of exchangeable preferred stock that the company said would have a market value of $7. The former offer was for $35 in cash and exchangeable preferred stock said to be worth $9.

The latest buyout offer was approved unanimously by the eight outside directors, as well as by the four management representatives on the board.

In trading on the New York Stock Exchange, Viacom closed yesterday at $43.875, down 12.5 cents.

The buyout group includes its three financial advisers - the Donaldson Lufkin & Jenrette Securities Corporation, Drexel Burnham Lambert Inc. and the First Boston Corporation - the Equitable Life Assurance Society of the United States and certain other investors. Viacom declined to identify the management participants in the buyout, other than its president, Terrence A. Elkes, or the other investors.

A source close to the group said, however, that Sumner M. Redstone, president of National Amusements Inc., was not involved in the buyout. Mr. Redstone who has invested in a number of entertainment companies over the years, recently increased his ownership of Viacom to 18 percent from 9.9 percent.

There was no answer at Mr. Redstone's Boston office last night after the Viacom announcement was made. A message left on an answering machine at his home had not been returned by late last night.

David R. Fluhrer, a spokesman for Viacom, said that the financing commitments for the buyout were essentially the same as the arrangements for last week's offer. Among the elements are around $1.5 billion of revolving bank credit and $825 million in high-yield, high-risk securities, or ''junk bonds.'' The buyers will also assume about $550 million of Viacom's existing debt.

Viacom said it had received ''highly confident letters'' from its three financial advisers regarding significant portions of the necessary financing. Such letters are a way by which investment banking firms indicate that the financing required to complete a merger or acquisition has been assured.

Viacom's Holdings

The New-York based entertainment corporation owns cable systems serving some 840,000 subscribers, as well as cable programming, such as Showtime/The Movie Channel and MTV Networks. It also has distribution rights for the hit television program The Cosby Show and operates five television stations and eight radio stations, including WLTW-FM in New York.

Earlier this year, Viacom bought out Carl C. Icahn, the New York investor, who had acquired almost 17 percent of its shares. Mr. Icahn received last May an adjusted $31 a share in cash for about 7 million shares, warrants to buy 5 million Viacom common shares and, in an unusual twist, $10 million worth of commercial airtime on Viacom television and radio stations.

As a result of this repurchase, the company took a $28 million charge against earnings in the second quarter and wound up with a loss for the quarter of $18.1 million. On Thursday, Viacom reported a $10.5 million loss for the first nine months of 1986, in contrast to a $28.7 million profit in the corresponding period of 1985, and said that it had little chance of ending the year in the black.


"Large Viacom Stockholder Mulling Bid," by Paul Richter, Los Angeles Times, October 21, 1986

The largest shareholder of Viacom International said Monday that it is considering a possible offer to purchase the entertainment and communications firm, even though Viacom's board last Friday accepted a $2.9 billion buyout offer from a management-led investor group.

National Amusements, which holds 18.3% of Viacom shares, said in a filing with the Securities and Exchange Commission that it is "exploring several alternatives," including such a buyout. The Dedham, Massachusetts-based theater concern said National Amusements Chairman Sumner Redstone has been approached in recent weeks by "several third parties" interested in joining a buyout group or purchasing specific assets of the company.

However, the company added that it didn't try to reach an agreement on the proposals. National Amusements said it would prefer that the company remain public.

Redstone has previously said he was considering his options regarding Viacom's ownership.

The filing with the SEC caused some analysts to speculate that he was trying to put pressure on the management-led investor group to raise its bid yet again. The investor group has raised its bid twice already. Several Wall Street professionals said Monday that the filing simply made official Redstone's earlier statement.

"It's an official maybe," said Neil R. Feldman, vice president at Argus Research in Manhattan. "He might do something, and he might not." Redstone could not be reached for comment.

Viacom's board agreed last Friday to accept a $2.9 billion bid that would give each shareholder $44 in cash plus convertible preferred shares and a small equity stake in the company.


"Holiday Corp. Plans Restructuring: Would Limit Power Of Big Shareholders, Reorganize Debt," Los Angeles Times, November 13, 1986

Holiday Corp.'s board proposed a $2.8 billion plan Wednesday to restructure the company's debt and limit the power that a single stockholder can wield in corporate affairs.

Under the plan, shareholders would receive a $65-a-share dividend, but the company said in a statement that the value of each share of stock would likely decline after the recapitalization goes into effect.

The company operates the original Holiday Inn chain and has four other hotel chains serving separate hotel markets.

James Fingeroth, a company spokesman, said payment of the dividend would make up for the decline in stock value and would cost the company about $1.6 billion. Other expenses, including the refinancing, would amount to about $1.2 billion, he added.

Stockholders are expected to vote on the plan early next year.

On the New York Stock Exchange, shares of Holiday Corp. closed Wednesday in composite trading at $76.50, up 62.5 cents per share.

New York real estate developer Donald Trump recently filed documents in Nevada indicating that he has purchased 4.8% of Holiday Corp.'s stock.

Michael Esposito, an analyst with the New York securities firm Oppenheimer & Co., said the company may be trying to prevent a takeover.

Dispute With Trump

"It's reasonable to assume that maybe this action occurred because they were worried about that," he said.

"We're not commenting on Donald Trump," said Robert Brannon, Holiday Corp.'s public relations chief in Memphis.

Trump was a partner with Holiday Corp. earlier this year in a casino hotel project along the Boardwalk in Atlantic City, New Jersey.

But after a dispute over design and management, Trump paid $73 million in cash and notes and assumed a $15 -million mortgage in May to buy out Holiday Corp.'s share of the property, known as Trump Plaza.

Under the refinancing plan, a stockholder with up to 10% of Holiday Corp. stock would get one vote per share in deciding company business. But for a shareholder with additional stock, each share above 10% would return 100th of a vote. No stockholder would be allowed to hold more than 15% of the total voting power of the shareholders, according to the plan. Voting limits would expire in five years or when any stockholder obtained 75% of the outstanding shares, under terms of the plan.

Financing for the venture would come from bank loans and the sale of securities, the company said.

The plan would also provide new stock issues to corporate executives as an incentive for good work.

"It will result in management owning about 10% of the company shares. The company now has about 24 million shares outstanding," Fingeroth said in an interview from his New York office.


"Once-Burned Entrepreneur Shifts to Stock Market," by Daniel Akst, Los Angeles Times, November 18, 1986

Barry Minkow, a whiz kid entrepreneur who built a small carpet cleaning business into a multimillion-dollar enterprise, needed money desperately last year.

So he turned for help to 56-year-old Jack M. Catain, Jr. Their relationship, however, turned into extortion, in the words of a federal prosecutor. In fact, law enforcement authorities have long speculated that Catain is a major organized crime figure, and on November 7, he was convicted in a counterfeiting scheme.

Now Minkow, 20, wants to raise money in the stock market. His Reseda-based ZZZZ Best Co. hopes to gross $11 million to $13 million in a securities offering next month that is supposed to remedy the fast-growing firm's chronic cash shortage-and allow for more expansion.

Raising money in the stock market is likely to be a lot cheaper than working with Catain, if Minkow's assertions in court papers are true. Minkow contends that Catain arranged loans for him at interest rates of 2% to 5% a week and also was to get a share of the profits for jobs he helped finance.

"My company was in desperate need of financial assistance," Minkow says in court papers by way of explanation.

Suits Disclose Deals

Minkow's dealings with Catain were disclosed in lawsuits filed by Catain, who claimed that Minkow owed him money for arranging financing for ZZZZ Best. Catain denies being a mobster or an extortionist, and also denies collecting any interest from Minkow.

Minkow is the much-publicized chairman, president and founder of ZZZZ Best, which he started five years ago. He has since gained national exposure for turning his carpet-cleaning business into a public company with millions in sales.

He gives lectures on business, has written a book about his life, and in March 1985, even received a commendation from Mayor Tom Bradley, who said Minkow "has set a fine entrepreneurial example of obtaining the status of a millionaire at the age of 18. . . ." His publicity agent churns out press releases about Minkow's gifts to charity, his decision to impose drug testing on his employees and other activities.

Prospectus Portrait

ZZZZ Best's preliminary prospectus, along with mentioning the dealings between Minkow and Catain, portrays a company that has grown fast and is extremely profitable. For its first quarter ended July 31, it earned $896,000 on sales of $5.4 million. A year earlier, it made $131,000 on sales of $638,000.

For the year ended April 30, earnings were $946,000 as sales rose fourfold, to $4.8 million.

Minkow was paid $300,000, plus $20,000 worth of company-owned car use, for the fiscal year ended April 30. The prospectus also says that in May, ZZZZ Best signed a three-year agreement worth $520,000 with a financial consultant, whose duties were not disclosed. Minkow's securities lawyer, Mark Moskowitz, said the consultant is Richard Charbit of Beverly Hills, and that he will get $220,000 in cash and the rest in stock.

Meanwhile, ZZZZ Best has taken on a lot of debt. The October 23 offering document said the company had $6.2 million in short-term debt and $933,000 in long-term debt, compared to $3.1 million in shareholders' equity.

And the preliminary prospectus notes that Minkow's company got 86% of its business from a single source during the first quarter ended July 31, contrasted with 45% during the preceding year. The company says that this big customer, a Van Nuys-based independent insurance appraiser called Interstate Appraisal Services, is not obligated in any way to keep the work coming.

ZZZZ Best, however, apparently would rather take that risk than turn away Interstate Appraisal.

"You got to get into business somehow," said Robert Grossman, director of West Coast research for Rooney Pace Inc. of New York, which is underwriting ZZZZ Best's securities offering. Grossman added that, after the offering, ZZZZ Best "will be in a very attractive situation."

The offering will not be affected by sanctions imposed on Rooney Pace last week by the Securities and Exchange Commission in connection with charges that the investment banking firm defrauded customers in a 1981 underwriting. The sanctions were stayed pending appeal, and the ZZZZ Best offering would not be blocked in any case, an SEC lawyer said.

ZZZZ Best went public in January by merging with a Utah shell corporation, and now has 7.8 million shares outstanding. Minkow owns 77%, according to the prospectus, and will own 55% after the offering of 1 million units. Each unit consists of 3 common shares and one warrant. The stock is traded over the counter.

In response to allegations in Catain's suits, Minkow says in court records that he met Catain around June 1985, and that he agreed to pay Catain a percentage of the profits for jobs that Catain helped finance as well as make interest payments on the loans. Minkow's statement does not say what percentage of the profits Catain was to receive, but Catain says in court papers that it was half.

Mob Reputation

Minkow's lawyers said he did not know about Catain's mob reputation when he agreed to work with him. In court papers, however, Minkow says he continued dealing with Catain even after he learned Catain was under indictment. Minkow also accuses Catain of usury, and says Catain kept most of the interest payments.

One Minkow lawyer, Arthur Barens, said his client severed all ties to Catain in late June, after paying him several hundred thousand dollars. Minkow contends in court papers that Catain got all he was due.

"He is essentially a loan shark," charged Barens. "He tried to intimidate and threaten this young man and extort money out of him."

But Catain's lawyers say otherwise. One of them, Lawrence Brown, said his client knew nothing about the interest payments and never got any. Brown said Catain received only a share of the profits for arranging loans.

Catain, according to Brown, never got all he was owed. So last December he sued Minkow and ZZZZ Best for breach of contract and fraud, contending that Minkow reneged on their agreement.

He dropped the suit in January when Minkow agreed to pay $670,000 plus interest over the course of the year. Catain sued again in July, when Minkow stopped paying, but the case was voided after Catain's lawyer's $99 check for the filing fees bounced.

Catain said in court papers that last year, from roughly June 24 to November 15, he arranged loans, credit lines and investments of more than $400,000 for ZZZZ Best. His July suit asked for actual damages of $540,000, interest, court costs and punitive damages of $1 million.

Barens said Minkow testified before a federal grand jury probing Catain's activities. Justice Department lawyer Edwin Gale, who heads the Organized Crime Strike Force in Los Angeles, would not comment on that. But, in court, Gale characterized the relationship between Minkow and Catain as "extortion."

Conspiracy Conviction

Catain was convicted on federal charges of conspiring to sell part of a $3.3 million cache of counterfeit bills, and of actually selling $50,000 worth. His attorney, James A. Twitty, said an appeal is planned. Catain is free on bail.

Never before convicted, Catain has been the subject of much law enforcement and regulatory attention. Law enforcement authorities have said they suspect he has been involved in money laundering, extortion and trading in stolen securities.

In 1971, when he was head of Rusco Industries, the SEC forced him to pay an $800,000 judgment because of questionable loan transactions. In 1975, federal authorities said they suspected-but never proved-that he and an associate tried to set up a gambling operation in London for Angelo Bruno, then head of the Philadelphia Mafia.

The New York Times reported that, in 1976, a court-authorized wiretap intercepted conversations between Catain and Frank Sindone, identified by authorities as the No. 3 man in the Bruno crime family, on the subject of money laundering.

Sindone, described by The Wall Street Journal as Philadelphia's leading loan shark, and Bruno were both killed in a mob war.

Federal investigators also compiled allegations that Catain associated with Mafiosi from Detroit and New York.

Catain resigned from Rusco in 1980 to settle civil fraud charges brought by the SEC after a court-authorized probe found that he ran the publicly held firm like a private company, and that he owed it $2.7 million for insider transactions.


"Cadence Selling Comic Book, Animation Unit; New World Pictures To Acquire Marvel," by Bruce Keppel, Los Angeles Times, November 21, 1986

New World Pictures-a maker and distributor of low-budget but high-profit films ranging from Godzilla 1985 to the current Soul Man-agreed Thursday to buy Marvel Entertainment Group in a move that will extend the Los Angeles-based firm into comics publishing and TV animation.

Terms of the acquisition from Cadence Industries Corp., a holding company rapidly liquidating its assets, were undisclosed, but the price was understood to be between $40 million and $50 million. The deal is expected to be completed before year-end.

Marvel Entertainment includes New York-based Marvel Comics Group, Marvel Comics Ltd. in Britain and Marvel Productions, which makes animated features at studios in Van Nuys.

Though it is the third-largest producer of TV animation, Marvel is probably best known for its comic book characters, who include Spider-Man, the Incredible Hulk and the X Men-described as do-gooder teenage mutants.

"What Marvel really is to us is an idea factory," said Harry Evans Sloan, who is co-chairman with Lawrence L. Kuppin of New World. "The opportunity to exploit those ideas with New World's existing motion picture and theatrical operations is very exciting.

"These characters are well known among the youth of the world," he said.

In addition, Sloan said, Marvel's Van Nuys operation will complete New World's "television profile," which includes offerings on both primetime and weekday TV, by putting its animated programs on Saturday morning schedules. New World's current TV productions include the continuing daytime soap opera Santa Barbara as well as the primetime series Sledge Hammer and Monte Carlo, a miniseries featuring actress Joan Collins.

Sloan and Kuppin, law partners specializing in the entertainment industry, bought New World Pictures in February 1983, from Roger Corman, who founded the company in the 1970s. New World went public in October 1985.

After a $4.8 million loss in 1983, the company reported successive profits of $366,000 in 1984, $5.1 million in 1985 and nearly $6 million for the first nine months of 1986.

Marvel reported revenue of $73 million last year.


"Company News; Donald Trump Gets 9.6% Of Bally Corp.," by Lisa Belkin, The New York Times, November 21, 1986

Donald Trump, the New York real estate developer, said yesterday that he had bought 9.6 percent of the Bally Manufacturing Corporation, the world's largest maker of electronic games and an operator of casinos and health clubs.

Mr. Trump has significant holdings in the hotel-casino industry, and the announcement that he had purchased 2.96 million Bally shares led to speculation that he might try to take over the Chicago-based company.

In an interview, Mr. Trump did not rule out a bid. He said only, ''I have a large stake in the company, but I am looking at it at this moment for investment reasons.''

Analysts said Bally could be an attractive acquisition. ''Bally has a very good cash flow and three large, very attractive casinos, two of which are in Nevada, which is an area he has always wanted to get into,'' said Daniel R. Lee, an analyst for Drexel Burnham Lambert.

But Mr. Lee and other analysts also said that Mr. Trump might simply be seeking to capitalize on speculation about his intentions, which would raise the value of the shares he already owns.

Earlier this year, he bought 1 million shares of the Holiday Corporation. After he disclosed his stake, the stock price rose, and he sold his shares for an estimated profit of $30 million.

Bally's stock closed at $21.625 yesterday, up 87.5 cents, with nearly 900,000 shares changing hands. Analysts said an acquisition would cost about $30 a share, or a total of about $900 million.


"Company News: Trump To Acquire 20% Of Alexander's," by Lisa Belkin, The New York Times, November 22, 1986

Donald J. Trump, the real estate developer, will acquire 20 percent of the stock of Alexander's Inc., the retail store chain with valuable real estate holdings.

The company said it was advised yesterday by ALX Limited Partnership, which owns 20 percent of Alexander's 4.5 million shares outstanding, that it had agreed to sell those shares to Mr. Trump. The sale includes common stock and shares convertible to common stock. A spokesman for Alexander's said the deal was expected to close next Wednesday.

The price was not disclosed, but Alexander's stock closed yesterday at $45 a share on the New York Stock Exchange, up 75 cents. That would give the stake a value of about $40 million.

Mr. Trump said he looks forward ''to a very long and successful future for the organization.''

Analysts agreed that Mr. Trump was interested in Alexander's for its real estate holdings rather than its retail operations.

Real estate issues have been primary concerns of late for Alexander's. The company announced last year that in 1988 it would close its flagship New York store and develop the block between Lexington and Third Avenues and East 58th and 59th Streets for housing.

At the same time, the company said it intended to expand its retail business as it developed its real estate, with the first project being a $150 million, 12-acre shopping mall in Rego Park, Queens.

ALX is owned by Robert M. Bass of Fort Worth. Interstate Properties, which owns 21.5 percent of Alexander's, is also a real estate developer with retail holdings. Steven Roth, head of Interstate Properties, is a longtime friend of Mr. Trump.

Mr. Trump said that the announcement of his purchase would be filed with the Securities and Exchange Commission within a week.

The announcement comes one day after he disclosed the purchase of a 9.6 percent stake in the Bally Manufacturing Corporation, the Chicago-based maker of electronic games, which also has holdings in casinos and health clubs. That purchase led to speculation that he might try to take over the company.


"Trump Ends His Struggle To Gain Control Of Bally," by Donald Janson, The New York Times, February 23, 1987

The developer Donald J. Trump, ending a four-month battle to gain control of a rival casino operator in Atlantic City, the Bally Manufacturing Corporation, will sell back to the company his 9.9 percent interest in it, sources close to the deal said.

They said yesterday that the New York developer received $68.6 million from Bally over the weekend and was guaranteed $15.1 million more, for a $31.7 million profit on his holdings.

The deal would put an end to lawsuits Mr. Trump and Bally had filed against each other and would allow Bally to complete a deal to buy the Golden Nugget casino and hotel in Atlantic City for $440 million. This would give Bally, which is based in Chicago, two Atlantic City casinos and would make it the largest gaming corporation in the country, with revenues of about $1 billion.

Until now, only the Trump Organization owned two casinos in Atlantic City.

Bally also owns two large casinos in Nevada that had made it attractive to the Trump Organization, which has no casino in that state. Bally bought the MGM Grand in Reno and the MGM Grand in Las Vegas for $573 million in April and changed their names to Bally Grand.

A 'Poison Pill'

Mr. Trump acquired 9.9 percent of Bally's stock beginning in November, making him the company's largest shareholder. Shortly after acquiring the first shares, he told Bally that he planned to buy more than 25 percent of its outstanding shares.

To prevent a hostile takeover, Bally adopted a shareholder rights plan on December 4, which lawyers for Mr. Trump described as an ''illegal poison pill'' intended to increase the price of Bally and make it unattractive for a takeover.

On December 5 Bally sought a ruling in Federal District Court in Camden, New Jersey, that would have declared the shareholder plan valid and enjoined Mr. Trump from buying more Bally stock.

Mr. Trump countersued on December 16 for damages and a ban on the rights plan. Two days later Bally announced an agreement to buy the Golden Nugget's Atlantic City casino.

$24 a Share for Bally

That purchase would have created a new problem for any attempted takeover of Bally by Mr. Trump. New Jersey law permits a company a maximum of three casino licenses. Mr. Trump holds licenses for Trump's Castle and the Trump Plaza and would have needed licenses for Bally's Park Place and the Golden Nugget if he acquired Bally without immediately selling one of the four properties.

Mr. Trump filed a motion in the Camden court to enjoin Bally from making the announced purchase. The next day Mr. Trump and Bally agreed that Bally would not acquire the casino and Mr. Trump would buy no more Bally shares pending a hearing, scheduled for tomorrow. With the buyout of Mr. Trump's Bally stock, the litigation will be dropped.

Sources close to the Trump Organization said that under the agreement Mr. Trump would sell 2.6 million Bally shares to Bally for $62.4 million, or $24 a share, and would receive an additional $6.2 million for litigation and other expenses immediately. Mr. Trump has said that he paid an average of $17 a share for the Bally stock.

He would retain 457,000 shares, which Bally would be required to buy a year from now at $33 a share, for a total of $15.1 million, unless the market price rises sufficiently or Mr. Trump decides to sell sooner. Bally's shares closed on the New York Stock Exchange Friday at $19.62.

The Holiday Sale

Last September Mr. Trump bought a 4.9 percent stake in the Holiday Corporation, which operates casinos in Atlantic City and Nevada. He sold the stake at a $35 million profit in November and bought into Bally.

Mr. Trump recently applied for a Nevada casino license, but Paul Bible, chairman of the Nevada Gaming Commission at the time, said that Nevada regulators would look askance at any ''greenmailer'' who hurts casino companies operating in Nevada by acquiring large quantities of stock in order to sell the stake back to the company at a premium.

Mr. Trump's sale of the Holiday shares was on the open market, after takeover rumors boosted the market price. In court papers filed for the Camden hearing, Mr. Trump's lawyers denied that their client had invested in Bally for the purpose of selling to the company at a premium.

''Mr. Trump has never been, and is not presently, a greenmailer or corporate raider,'' his counterclaim said.


"National Amusements Hikes Offer To Buy Viacom," by Paul Richter, Los Angeles Times, February 24, 1987

A movie theater chain seeking to wrest Viacom International from a management-led buyout group has sweetened its offer for the cable and entertainment firm, increasing pressure on the management group to improve its 4-month-old bid.

Some analysts valued the latest offer by the Arsenal Holdings unit of National Amusements Inc. at $51 a share, compared to what they said was an earlier Arsenal Holdings offer of $49.25 a share and a $47-a-share offer from the management-led group. Arsenal Holdings' offer was made Sunday to a special committee of Viacom directors, who disclosed it without comment Monday.

The development was the latest in a bitter takeover contest that has raged since last fall over what analysts have considered some of the most valuable properties in the entertainment industry. Viacom owns Showtime-the Movie Channel, MTV Networks, five television and eight radio stations and a huge library of such classic programs as I Love Lucy and All in the Family.

"Clearly, this is the higher bid," said one analyst, Dennis McAlpine of Oppenheimer & Co. in New York. "The board's going to have a hard time throwing this one out."

The Arsenal Holdings offer increases the cash portion to $40.50 a share from an earlier $37.50 a share. To counter criticism that the National Amusements offer is inferior because it would take an additional six months to complete, the firm offered to pay interest if the deal is not completed by April 30. Interest would take the form of dividends on the preferred stock, and cash at an 8% rate on the cash portion of the bid. It would continue to accrue until the deal was completed.

"I think we've diffused the time issue with this," said Sumner M. Redstone, National Amusements chairman. "I'd be shocked if they don't accept the offer."

Both offers would give shareholders a 20% stake in a company that would be set up to acquire Viacom. National Amusements' offer expires at noon Wednesday, adding to the pressure on the Viacom board.

Viacom's stock rose sharply in response to the news, gaining $1.875 a share to $47.325. "The stock price says it all," said John Tinker, analyst with Bear Stearns & Co. in New York. "It's a confident market."

Tinker said he had changed his earlier opinion that Redstone did not want control of Viacom but was simply trying to force Viacom to offer him a premium for him to drop his takeover effort. "This is a for-real offer," Tinker said.


"Trump Buys 73% Stake In Resorts For $79 Million," by John Crudele, The New York Times, March 10, 1987

Donald J. Trump, the New York developer, has agreed to acquire a 73 percent voting stake in Resorts International Inc. for $79 million, the casino and real estate company announced yesterday.

Mr. Trump will pay $135 a share for the 585,000 shares of class B stock owned by the estate of James M. Crosby, the chairman of Resorts who died last April, and by other members of the Crosby family. Mr. Trump said he might make a tender offer of $135 a share, or $22.5 million, for the other 167,000 class B shares. The class B shares represent 93 percent of the voting power.

The Resorts deal, signed by Mr. Trump late Sunday night, appears to end the bidding process for the company that opened the first casino in Atlantic City in 1978, after gambling was legalized in 1976. Mr. Trump had long been rumored to be interested in Resorts.

Similar Bid by Pratt

Several companies have made offers for Resorts. Mr. Trump's offer, which quickly won the approval of the Crosby family, appears to beat out a comparable bid made last year by the Pratt Hotel Corporation, a casino operator based in Dallas.

Mr. Crosby, who ran Resorts almost singlehandedly, acquired a vast amount of prime real estate in Atlantic City. According to sources familiar with the deal, the property is what most attracted Mr. Trump.

Less important, the sources said, is Resorts I, the casino already in operation in Atlantic City. Mr. Trump was said to be very interested in the Taj Mahal, a second casino being built by Resorts in Atlantic City.

Pan Am Stake an Issue

Mr. Trump's control of Resorts also throws into question the future of Pan American World Airways Inc., a company in which Resorts owns a 9 percent stake.

Pan Am, the financially troubled airline in which Resorts invested because of Mr. Crosby's fascination with aviation, is likely to attract other bidders. Wall Street sources said a handful of interested parties had already contacted Mr. Trump about the stake, currently worth about $56 million.

According to the sources, Mr. Trump will, in time, probably sell the Pan Am stock, either to another airline looking for a merger or to a party seeking control of Pan Am's attractive service operation.

In the last few months, at least one other airline company, AMR Inc., the parent of American Airlines, has expressed an interest in Pan Am, but merger talks were unsuccessful. The least likely outcome, airline analysts believe, would be for the hard-pressed Pan Am to repurchase the stock itself.

'Family Was Scared'

Mr. Trump's ability to complete the deal may reflect his reputation for bringing construction projects to a successful conclusion without excessive costs. The construction problems on Resorts' Taj Mahal casino in Atlantic City have greatly concerned the Crosby heirs.

''The family was scared,'' said one source close to the deal. ''They never built anything.''

When the Taj Mahal project is completed, Resorts will have two casinos in the resort community. Mr. Trump already owns two casinos in Atlantic City, Trump's and Trump's Castle. By law a single owner may own no more than three casinos.

Wall Street analysts have speculated that Resorts I's casino would be closed, while it continued to operate as a hotel.

Mr. Trump's deal includes the 340,783 class B shares held by the estate of Mr. Crosby and 244,200 shares owned by other members of the family. The class B shares hold 100 times the voting power of the class A shares, which Mr. Trump is said to have no interest in acquiring.

In trading yesterday on the American Stock Exchange, Resorts class B shares rose $7, to $130. The class A stock closed at $56.25, up 25 cents.


"His Toughest Challenge Yet," by Geraldine Fabrikant, The New York Times, March 15, 1987

When Sumner M. Redstone made his regular trip to Los Angeles late last year, he ran into his old pal Larry Tisch in the lobby of the Beverly Hills Hotel. Mr. Redstone wondered what the new boss of CBS thought about his idea of putting together a group to make a bid for Viacom International, already the object of a management buyout.

''Get the company first - don't take in any partners,'' Mr. Tisch advised him. ''It's a unique company.''

But even if Mr. Redstone's pals had advised him against buying the company, and some did, it would have been too late. Mr. Redstone had already become so infatuated with Viacom - and the prospect of owning a company that he says is ''on the cutting edge of the entertainment business'' - that a takeover battle was inevitable.

Even now, with many financial analysts saying he bid too much for the company, Mr. Redstone seems almost naively excited about his $3.4 billion agreement to buy Viacom.

Like Mr. Tisch at CBS and Carl C. Icahn at TWA, Mr. Redstone is clearly invigorated by the challenge of owning a company with businesses in areas where he has no management experience. And Viacom gives him plenty to learn: Its holdings run the gamut from Showtime and The Movie Channel, two large pay-television services, to The Cosby Show and MTV (Music Television), not to mention cable systems and several television and radio stations.

The 63-year-old Mr. Redstone has no broadcast background, but he knows a lot about the entertainment business from having built a major movie theater empire - and he is skeptical about the future of movie theaters. So Viacom offers an attractive mix of businesses: not too close and not too far from the areas he knows, and a good hedge against the day when the new array of television programming makes moviegoing drop off.

Still, Sumner Redstone's $400 million investment in Viacom will undoubtedly be the toughest challenge of his career. Mr. Redstone first bought Viacom stock two years ago, almost unnoticed. Since he had often invested in entertainment companies - and still owns 2.5 million shares of Mr. Tisch's Loews Corporation - his stake in Viacom looked like just another passive investment.

But Viacom was being buffeted by takeover threats. In 1986 it paid corporate raider Carl Icahn $230 million to go away. Ivan F. Boesky was a rumored buyer; Coniston Partners had a stake, and the word soon spread that Mr. Redstone, one of the richest men in the country, was more than a passive investor. So on September 17, Viacom's feisty president, Terrence A. Elkes, worried about losing control of his company, put together a $40.50-a-share management offer to buy Viacom. It was to be the first of six unsuccessful management bids.

By several accounts, Mr. Elkes's offer to take the company private disturbed two key players: a special committee of outside board members who were surprised to learn of management's plan, and Mr. Redstone.

The committee was finally won over. On October 16, the board actually accepted a sweetened management bid valued at about $44 a share - contingent on regulatory approvals. But Mr. Redstone, the largest shareholder, opposed the plan.

''I met with representatives of the special committee and strongly urged that they keep the company independent,'' Mr. Redstone recalled last week. ''I certainly didn't expect the deal to be made that night. And hours, literally hours, after our meeting we learned that a deal had been made. It was then, for the first time, that I began thinking of alternatives, including the acquisition of Viacom.''

The proposed management buyout would not be quick, since it would take several months to get cable franchise and broadcast license transfers, and Security and Exchange Commission approval.

Meanwhile, Mr. Redstone, with 18.3 percent of the stock, was exploring other options for Viacom - and as he did, the company's allure for him grew. Mr. Redstone began spending most of his weeks in New York, ensconced at the Carlyle Hotel or The Ritz Carlton, meeting with possible partners.

He talked to such cable industry executives as Charles F. Dolan, who was interested in Viacom's cable operations. ''He was very unclear about where he was headed,'' Mr. Dolan said. ''He was still exploring.''

Mr. Redstone began to see interesting parallels between the theater business and Showtime, the pay-television service whose strategy had been to acquire exclusive rights to many theatrical films. Mr. Redstone believed that, just as it is valuable for a movie theater to win the exclusive run of a popular film, pay-television would do well by buying exclusive rights to films. As the meetings continued, Mr. Redstone grew increasingly enthusiastic about Viacom - and increasingly disinclined to seek partners for his bid. But raising the enormous chunk of money needed to get control of Viacom was no easy task.

For Viacom's management had tied up three major investment banks, including Drexel Burnham Lambert. Then, too, Mr. Redstone wanted to stay away from ''junk bond'' financing: ''We wanted to cover the entire area that would be normally covered by junk bond financing by commercial bank financing at typical commercial, and rather modest, interest rates,'' he recalled.

That took time, and Wall Street was left to wonder about Mr. Redstone's plans for months. He did not make his first bid until February 2. ''I spent that time trying to arrange financing,'' he said. ''I was breaking my back negotiating with two major banks to get the kind of financing that I had been told was impossible to get. It was like war. We were going 28 hours a day.''

At the same time, Viacom management was reportedly offering Mr. Redstone minority interests in the company. He refused: ''I did not want to be a minority shareholder in a private company.''

Viacom's management team dug in its heels. Mr. Elkes, who has been around almost since Viacom was first spun off from CBS in 1971, would not give up, and the bidding contest escalated - ratcheting the price up bit by bit - until early March.

By mid-February, Mr. Redstone won access to the company's internal financial data. Sources familiar with the talks say that Mr. Redstone's cash flow projections were less optimistic than those of the management.

Still, by the time the board approved his final bid, the price had jumped from the initial management offer of $40.50 to an estimated $53.50. And while some Wall Street analysts had criticized the initial management offer as too low, Mr. Redstone's bid is widely seen as extremely high.

In fact, Mr. Redstone's purchase could use up a substantial part of the fortune - estimated at $450 million by Forbes magazine - that he has amassed since 1957, when he took over his father's movie theater business, National Amusements. Mr. Redstone is still very active in the Dedham, Massachusetts-based company, which owns about 400 East Coast screens. Even during the takeover, he checked his theater's grosses early every morning.

Mr. Redstone's father began the company by buying drive-ins and the land underneath them, and the strategy worked well for the family. When drive-ins went bad, they still owned real estate. So when Mr. Redstone joined the business, he kept buying the land for theaters, rather than simply leasing space in shopping malls. ''We don't want to sign a lease for the right to gamble in the motion picture business,'' he said. ''I think I prefer investing $2 million in a hard asset to assuming a rent of $200,000.''

Mr. Redstone does not believe in chopping old theaters into small multiplexes. Instead, to help distinguish moviegoing from television viewing, he builds luxury theaters with state-of-the-art equipment.

Still, he has long been concerned about the future of movie theaters, given the inroads of videocassette recorders and pay television. So he began investing in entertainment companies, starting with the Loews Corporation in the late 1970's. At times, he has owned as much as 5 percent of the company, and the 2.5 million shares he holds today are worth roughly $187 million.

Mr. Redstone bought 5 percent of 20th Century-Fox Film before it was sold to Marvin Davis - earning more than $20 million when Mr. Davis took it private. He also owned a 9.7 percent stake in Columbia Pictures Industries, earning $25 million when Coca-Cola bought it.

Several years ago, when Kirk Kerkorian spun off 15 percent of the MGM/UA Home Entertainment Company, Mr. Redstone acquired 7.5 percent of those shares. The two had a prior relationship, since Mr. Kerkorian supplied some of the movies shown in Mr. Redstone's theaters. Still, when Mr. Kerkorian tried to buy back the shares at a price Mr. Redstone deemed inadequate, Mr. Redstone sued and won, giving shareholders $28 a share, instead of the proposed $20.

''We sued a supplier,'' said Mr. Redstone. ''That was a tough decision. But in the end we were right.''

Despite all this investment activity, Mr. Redstone, a Harvard Law School graduate who practiced law only briefly, was restless. In 1982 he began teaching a course in entertainment law at Boston University Law School. ''It has been one of the most popular courses we have,'' said the dean, William Schwartz.

Mr. Redstone has a special reason for being determined to live life so fully: in 1979, he was caught in a fire at the Copley Plaza Hotel in Boston. He was nearly burned to death and lived through 30 hours of surgery. And though he was warned that he might never be able to live a normal life, eight years later he is fit enough to insist on playing tennis nearly every day.

Buying Viacom may not be quite such a grueling test of Mr. Redstone's mettle, but many analysts say it will be tough going. It will cost about $2 billion to buy the 47 million shares of Viacom Mr. Redstone does not already own, and in acquiring the company he assumes another $900 million of Viacom's own debt.

So Mr. Redstone is raising nearly $3 billion: $2.29 billion from the banks, $175 million in deferred-interest debentures from Merrill Lynch, $130 million of his own cash and $400 million from the exercise of warrants and options. Interest costs on the borrowed money will be about $180 million a year.

Viacom seems to be in a position to handle that: The company generated $198 million in operating cash flow last year, and that number could rise to as much as $235 million next year, according to Paul Kagan, a media industry expert.

The big question is how Viacom will ultimately pay off its bank loans -another new experience for Mr. Redstone, who had almost no debt at National Amusements. ''To me, borrowing $20,000 would be a lot of money,'' said Mr. Redstone, who has two grown children and lives in Boston. ''When you talk about $500 million, I am inclined to say $500 because I don't even think in those terms.''

Mr. Redstone does not want to sell off major portions of Viacom's assets - except for the radio operations. And even if he were willing to sell off Viacom's assets, several analysts question whether they would justify the purchase price. Viacom's two pay-television services, Showtime and The Movie Channel, are doing poorly.

With so many different operations to tend to, Mr. Redstone may ultimately choose to leave Mr. Elkes in charge at Viacom. Mr. Redstone and Mr. Elkes have issued a joint release saying that they will work together to build Viacom, and Mr. Elkes says he is ''more than prepared'' to stay on.

Whether or not that works out, Mr. Redstone now has so many different operations that he will have to give up the day-to-day control. ''I am going to have to change my management style now,'' he concedes.

DIVIDING THE SPOILS

When the Viacom International tale finally comes to an end, and the $3.4 billion sale of the company goes through, small shareholders will do just fine - but the multimillion-dollar windfalls will be reserved for Carl C. Icahn, Warner Communications, and a few Viacom executives.

Mr. Icahn, the corporate raider who acquired 17 percent of Viacom International between 1985 and 1986, will be the biggest beneficiary. He bought his stake for about $230 million, first disclosing the acquisition last May. Although Mr. Icahn talked of offering $75 a share to buy the company, few Wall Street analysts took his bid seriously, for the assumption was that Mr. Icahn was more interested in greenmail than in actual control.

Terrence A. Elkes, the president of Viacom, and his board avoided giving Mr. Icahn the kind of large premium over market value that would prompt public complaints about greenmail. But they gave him roughly $210 million in cash and $10 million in advertising time - presumably to run advertisements for Trans World Airlines - plus 5 million warrants exercisable at $31 a share. At the current market price of $51, the warrants alone are now worth about $100 million. And if the deal is worth about $53 a share, as Wall Street says, Mr. Icahn will make $10 million more.

Warner Communications, too, will make a large profit. When its chairman, Steven J. Ross, sells Warner assets, he usually insists on receiving cash and stock in the acquiring company. And when Warner sold its stakes in Showtime, The Movie Channel, and MTV (Music Television) to Viacom, it received 1.25 million warrants to buy stock at $37.50 and 3.25 million warrants to buy stock at $35. So Warner stands to make $70 million or more.

Mr. Elkes has stock and options worth about $23 million. Ken Gorman, the executive vice president, has stock and options worth about $12 million, and Ronald Lightstone, the senior vice president, has nearly $5 million worth.


"Not Ready For Primetime?" by Geraldine Fabrikant, The New York Times, April 12, 1987

The tall, athletic-looking executive drops into a wing chair in his elegant, antique-filled office at Capital Cities/ABC headquarters on East 51st Street in Manhattan. Then, turning to a guest, Thomas S. Murphy, the 61-year-old chairman of the media conglomerate, eagerly begins to recite the previous night's ratings from memory.

''Ruth, bring me the sheets,'' he calls to his secretary. She quickly hands him the printout of the overnight figures. Triumphantly, he runs his finger down the numbers, as if to prove not only the strength of his memory, but also his fascination with the network television business.

After 15 months of running ABC, Tom Murphy is clearly infatuated with the challenge. ''75 percent of the people you know are spending one-third of their time watching what you are delivering on television,'' he says. ''There is nothing as exciting as this business.''

But Murphy also is extremely frustrated. The ABC network, the most visible piece of Capital Cities/ABC's operations (which also include television stations, cable television programming services, newspapers and magazines), is in disastrous shape. After generating profits of $100 million in 1985, ABC suffered a $70 million loss last year. Its primetime ratings are the lowest since 1957. Amerika, its $30 million miniseries about a Soviet occupation of the United States, was a flop. It is faltering in daytime; even the ratings for Good Morning America, its popular morning show, are down.

Murphy's disappointment with ABC's performance is evident. ''We have been spoiled over the years,'' he says of Capital Cities. With ABC, ''I have been losing more than I have been winning. But,'' he adds, ''I am still swinging.''

An enormously successful businessman, Murphy is accustomed to winning, to dealing with waste by cutting it out, to installing qualified executives at the helms of Capital Cities' businesses. That was how he helped to build Capital Cities - which he joined in 1954, as a station manager - into a billion-dollar company.

That strategy has paid off at Capital Cities/ABC's eight television stations, which contributed an estimated $315 million to the company's operating profits last year - about half the total. R. Joseph Fuchs, a media analyst at Kidder Peabody & Company, believes that the new management improved the profitability of the acquired stations by as much as 10 percentage points. Capital Cities' performance has not been ignored by Wall Street; the company's stock has shot up 50 percent since the merger, to a recent high of $355.

Now, Murphy is trying to apply his strategy to the network, wherever possible. As at CBS, there have been staff cuts-approximately 1200 people at each network. There is widespread talk in the industry-that Murphy denies-that he and Laurence A. Tisch, the new president of CBS and another businessman with a reputation as a cost-cutter, frequently discuss ways to pare budgets, and privately applaud each other's attempts to do so.

However, Murphy has not attracted the animosity that has fallen on Tisch. Even though nearly half of CBS's staff cuts predate his taking control of the company, Tisch brought in outside consultants to advise on the cutbacks; Murphy has entrusted that to the network's managers. And where Tisch has publicly changed his stance on such issues as the sale of CBS's publishing division and staff reductions at CBS News, Murphy has been upfront and consistent about his policies.

Nevertheless, the network business is proving more painful than Tom Murphy ever expected. Every move is scrutinized by the press and the public. And what would be deemed wasteful in any other business is standard operating procedure at a network, where millions of dollars are thrown at programs that may bomb in the ratings.

All three commercial television networks are now doing business not only under new ownership (NBC was acquired last year by General Electric) but in a changed environment. Advertiser spending has slowed, and competition for viewers has increased as new sources of programming have proliferated. All this has brought into question the very future of the networks themselves. Murphy, who grew up in broadcasting, has an instinctive sensitivity to the industry's culture, and he is betting that networks will remain the leading delivery system for video programming. But he must walk a fine line between his desire to cut costs and the need to maintain the razzle-dazzle of the network. Never has the challenge been tougher.

Shortly after Capital Cities Communications bought American Broadcasting Companies Inc. for $3.5 billion in January 1986, Tom Murphy and Daniel B. Burke, the company's president, flew west to meet with the people responsible for picking ABC's programming.

''I warned them that people out here don't wear coats and ties,'' recalls Brandon Stoddard, 50, the president of ABC Entertainment, which is based in Los Angeles. ''I said they would probably find themselves referred to as 'the suits.'''

Murphy and Burke arrived at about 10 AM at Stoddard's office, which is decorated, as he puts it, ''to give the feel of a living room.'' Despite the bright California sunlight, tiny lamps glow from a wall of bookcases in an attempt to create a cozy atmosphere.

The soft decor could not dispel the anxiety Stoddard's team felt. Ten vice presidents filed in, invariably dressed in a manner most Easterners would associate with an afternoon of tennis. They sat, politely and nervously, legs tucked under their chairs. To each one, Murphy said: ''How do you do? Tell us about yourself.'' At day's end, Murphy and Burke left for the airport.

''Half an hour later,'' recalls Stoddard, ''this huge horseshoe of roses arrived, with a card that read: 'Thanks for the day - The Suits.''' ABC executives on the West Coast attributed the self-mocking signature to an eagerness on the part of the new bosses to learn their language and let them go about their business.

Capital Cities has long had a reputation for hands off management. It started out in 1954 as a small broadcasting company founded by eight investors, including the newscaster Lowell Thomas. From their first station on, they built the company by acquisition.

Capital Cities kept upgrading its acquired stations, giving station managers an unusual degree of autonomy. In the late 1960s, it began to buy newspapers and trade magazines. The largest acquisition was Fairchild Publications, a group of trade papers that included Women's Wear Daily, which Capital Cities bought in 1968.

But the television station business, which accounted for one-fourth of CapCities' 1985 revenue of $1 billion and almost 50 percent of its profits, has always been the company's most highly regarded component. The stations' 50 percent profit margins are among the industry's highest.

Murphy, a Brooklyn-born Cornell graduate, came to Capital Cities from Lever Brothers in 1954, to manage its first station, in Albany. Ten years later, he became president, and by 1966, Murphy-who finished near the top of his Harvard Business School class-was chairman.

Murphy's style is breezy and relaxed. His language is sprinkled with ''kiddos'' and ''you betcha's.'' Ironically - given his straitlaced image - he seems more at ease with his jacket off.

Capital Cities other force is its president, Daniel Burke, 58. Murphy brought Burke-whose brother is James Burke, the chairman of Johnson & Johnson-to Capital Cities from General Foods's Jell-O division in 1961, naming him president in 1972. Their relationship is very close; nevertheless, although Murphy calls him ''my partner,'' Burke is clearly the No. 2 man at the company, albeit a powerful No. 2.

Both Murphy and Burke are known as ambitious men and tough negotiators. ''They have a certain self-confident manner,'' says an investment banker who did a television station deal with them. ''When Tom says, 'That is all I will pay,' you get the feeling he means it,'' says the banker. ''They're very direct. There is no hidden agenda.'' What the banker calls direct, the Omaha-based investor Warren Buffett, who put $517 million into Capital Cities at the time of the ABC purchase, describes as ''rational.''

''He has none of those complexities of character that screw other people up and make for irrational behavior,'' says Buffett of Murphy, whom he first met in 1968. ''I have been around businesses where the boss is very smart but irrational. And people start talking gibberish after a while.''

In his two decades at the top of Capital Cities, Murphy has made the hands-off management style a hallmark of the company. He rarely visits individual television stations, preferring to let station managers run their own shops. Instead, Murphy applies his expertise to dealmaking. ''It never occurred to me in my lifetime to own a network,'' he says now. ''I always had on my desk a sheet of the people I would like to make deals with. I went and saw them all. That's how we built the company.''

Neither Murphy nor Burke thought of building the company through a single, enormous deal. But when the opportunity to buy ABC presented itself, it proved irresistible.

Murphy had known Leonard Goldenson for years when he called on the then 79-year-old ABC chairman in late 1984 to express interest in buying the network. But Murphy did not really want the network; as Warren Buffett says, ''The network business is no lollapalooza.''

What Murphy wanted were ABC's five television stations. ''The network business is not a great business, it is true,'' he says. ''But I could not have bought the stations without the network.''

Individual stations are cash cows; they receive most of their programming from the networks, so their staffing needs and expenses are relatively low. When the Federal Communications Commission, in the deregulatory spirit of the times, issued a decision in 1984 allowing companies to own more than five television stations, a buying frenzy began.

When Murphy began negotiating with Goldenson, ABC's problems did not seem severe. After limping along in third place, by the 1976-77 season it had, for the first time, become dominant in the ratings with such shows as Laverne and Shirley and Happy Days.

But the salad days were short-lived. By the time of the merger, ABC's ratings had spiraled down, and it was again running a poor third. There was one other ominous omen: advertiser spending was plummeting.

Murphy understood that the network offered as many risks as the stations did opportunities. ''Running television stations does not require huge capital investments or creative decisions,'' he says. Yet even with the massive expenditures, the actual control exercised by the network over programming is limited, because networks don't actually produce it; they buy it, mostly from outside producers.

Nevertheless, Murphy-as well as many Wall Street analysts-clearly believed that, despite the risks, the company could be made stronger. The network was bloated with staff and slovenly in budgetary matters. Cutting costs, he thought, would surely enhance profitability.

That cost-cutting philosophy is not unique to Murphy; it is shared by the new breed of network-owning businessmen. But it is a new phenomenon at the television networks, which are accustomed to spending their way out of problems and unaccustomed to the tremendous pressures of competition they now face.

''The three television networks get paid for the number of eyeballs they deliver,'' says Gordon Crawford, a senior vice president and media analyst at Capital Guardian Research Company in Los Angeles. ''The networks are attempting to make cuts at a time when cable and VCR programming is creating better and better product. So far, they appear to be cutting away a lot of fat. The risk is that too much cutting will dilute their impact, accelerating the ratings slide.''

The Capital Cities approach is already evident in a variety of programming decisions made at the network. Philip Beuth, the executive in charge of Good Morning America, who previously managed the Capital Cities television station in Buffalo, decided not to renew the $2 million contract of David Hartman, the show's host. Industry sources say that Beuth suggested to Jeffrey Ruhe, formerly a sports producer at ABC, that he try anchoring the morning show for a couple of days because he was bright and attractive. (Beuth said the idea was ''only lightly discussed.'' Ruhe declined to comment.)

''That kind of spending goes against Capital Cities' grain,'' says one television industry source, explaining the Hartman contract decision. Capital Cities' managers are convinced, says the source, that much of the industry has a somewhat childlike infatuation with stars, who are, in fact, replaceable at discount prices.

The most controversial target for cuts is ABC News. Says Roone Arledge, the president of the network's news division: ''Cost-cutting is virtually all everyone at Capital Cities talks about.'' His new bosses, Arledge says, ''are bottom-line oriented, and they are putting pressure on us to cut costs.''

Arledge was once the personification of profligate spending at the network. As head of ABC Sports, he made the costly 1982 National Football League deal for ABC, in which the networks paid a total of $2.1 billion to televise the games-four times what they had paid four years earlier. Because Arledge's spendthrift reputation is at odds with Capital Cities' lean approach, there have been constant rumors that his days at the network are numbered.

Murphy disputes the rumors. Recently, he and Burke held a question-and-answer session for the company's New York employees via closed-circuit television. In answering one question about ABC News, Murphy did not include the name of Roone Arledge in his praise. ''Word got out that we were about to fire Roone,'' says Murphy. ''I called him up and said: 'Roone, this is crazy. If you were doing something we didn't like, I would tell you.'''

Arledge supports the network's new theme. At a meeting at the Lowell Hotel in New York in January, he told staff that he expected ABC News would have to cut back on its hard newsgathering operations and leave more responsibilities to the local stations.

Still, the tension between old and new regimes is inescapable. When, in February, Av Westin, ABC's vice president of programming, circulated a report inside the news division critical of overspending by the division and ''days of affluence'' under its previous ownership, it was widely viewed as a slap at Arledge and an attempt to curry favor with the management of Capital Cities. And when World News Tonight with Peter Jennings was moved to 6:30 PM in the New York market from 7 PM-the traditional time slot for the national news on all three of the networks-Arledge resisted the decision. (The popular game show Jeopardy! took the place of the newscast at 7 PM and now is in first place in the ratings.) ''It makes a statement that pure audience is more important than the sanctity of the news,'' Arledge says. ''It says news will be subject to financial scrutiny.''

More extensive cuts in the news operation are coming. ABC plans to shrink the size of some of its foreign bureaus, and all three networks have discussed pooling their staffs for the coverage of some news events.

Arledge appears concerned about the future of network broadcasting:

''It's just that the people running all three networks are not broadcasters - they are businessmen. Bill Paley was a broadcaster, and he wanted to build a monument to broadcasting. You look for approval from your peers. These men are looking for approval from other businessmen.''

The heart and soul of the network is still primetime. It was the key factor in the network's 1986 losses, when the news operation was marginally profitable but primetime programming actually lost money. ABC's success today hinges almost entirely on its ability to turn primetime around. Consistent with Tom Murphy's history of delegating authority, he has placed the responsibility firmly on the shoulders of Brandon Stoddard.

Stoddard was the logical-arguably the only-choice for head of ABC programming a little more than a year ago. He was president of ABC's film division when he was appointed to his present position. Although his appointment predated Capital Cities' actual takeover, Murphy and Burke fought to keep him: Stoddard's experience spans almost every aspect of network programming, and he is highly regarded in Hollywood - a key ingredient for a lagging network that needs to bring back talented writers and producers.

But it remains to be seen whether Stoddard has the killer instinct that has typified many successful primetime programmers. His office is not cluttered with the ratings and programming schedule blackboard that hang in other executives' offices. Stoddard himself admits that he is different.

''I do not look at ratings on the weekend,'' he says. ''I am probably the only executive in television who tries, when I go home on Friday night, not to get the ratings on Saturday morning. I try to recharge batteries. I read scripts and do gardening and play some tennis.''

Despite Stoddard's reputation, ABC's primetime schedule has come unraveled, and the downward trend looks to continue unabated. After Amerika attracted only 29 percent of the television audience, Stoddard, who had energetically pursued the program, says he felt ''kind of battered up. The experience on Amerika was very rough.''

A second Stoddard project, War and Remembrance, a $100 million saga, is now in production. The 30-hour miniseries, based on Herman Wouk's novel, was already in development when Capital Cities bought ABC. CapCities apparently wanted Stoddard badly enough to let him have his costly pair of miniseries.

Miniseries demand more concentrated audience attention than once-a-week shows, and more loyalty than most viewers are willing to give, and so are falling out of fashion. What's more, their high costs may render them a rare species of programming. John B. Sias, the former Capital Cities publishing executive who is now president of the ABC Television Network Group and Stoddard's boss, says: ''We will not do more miniseries because the economics are against them. And we are trying to do fewer specials.'' Sias also believes that the networks have ''tended to over-order the programs we buy for each season. If you over-order, you pay for a program you can't run.''

Stoddard's strategy for bringing ABC back to first place sounds surprisingly like that used by Grant Tinker and Brandon Tartikoff, who, as chairman and president of entertainment at NBC, turned that network around in the early 1980's. ''We are going to be more character-oriented than plot-oriented,'' Stoddard says.

For example, Mariah, a series that debuted April 1, is ''about people in and around a prison, but it is really about the prison within yourself,'' says Stoddard. ''It is about maintaining the balance between the logic of life and emotions,''

A great deal of Stoddard's time is spent working on scripts. He has put together a very young team-several members are in their early 30s-to oversee dramatic development and comedy. But he does not show up on sets when shows are being shot. ''I don't want to be clouded by anything to do with how a show gets up on the screen,'' he says. ''Because I am the last bastion here, folks. After me, it's the United States.''

Picking shows is only one part of the agenda. Deciding when to run them is almost as crucial, and the performance of Stoddard and his team has won few kudos in Hollywood. Recently, for example, television executives wondered why ABC chose to run The Betty Ford Story against the second night of the CBS miniseries I'll Take Manhattan, which was expected to have a strong carryover audience from the first segment. ''They were going after the same female audience,'' says one critic. ''By the second night, it was already lost to CBS.''

Perhaps nothing reflects ABC's dilemma more dramatically than Thursday evenings at 8:00. Because it seemed virtually impossible to compete against The Cosby Show on NBC, Capital Cities chose to put on Our World, a cheap news show with Linda Ellerbee and Ray Gandolf. At a 6.6 rating, Our World is the lowest rated of the 97 shows on primetime television this season.

''It didn't seem to make a lot of sense to put on a show that we halfheartedly believed in on Thursday, to get 2 more share points than we were going to get with Our World, '' explains Stoddard. ''But it doesn't say Our World is going to be there forever.''

Our World appears to have contributed to a ratings decline for The Colbys, the program that follows it. Those ratings dropped from a 16 last season to a low of 11 this season. Nevertheless, for the time being, the performance of Our World does not seem to bother Capital Cities' executives. ''It hasn't set the world on fire, but it hasn't done worse than what we did before,'' John Sias says. ''And its impact financially at a time when we need help was very positive for us.''

Stoddard's approach contrasts vividly with the way NBC attacked a similar problem. Three years ago, the 8 PM time slot at NBC was a disaster; the network did not know what to run against CBS's hit, Magnum P.I. But rather than putting on a cheap show and forfeiting the slot, NBC scheduled The Cosby Show. Ultimately, Cosby reversed NBC's fortunes. ''By putting on an 8 PM show that has little chance of even making it to second place, ABC is making its own comeback even tougher,'' says a former programming executive.

Stoddard's programming decisions have, according to one well-placed industry source, caused Murphy to ''rethink'' his chief programmer's role at the network. But the Capital Cities chairman hotly denies it. ''I think he is terrific,'' says Murphy.

Certainly nothing reflects the new era at ABC more pointedly than Tom Murphy's decision to name as head of the ABC network group-and as Stoddard's direct supervisor-John Sias, 58, a man with no network experience whatsoever.

While Sias did a good job as head of Capital Cities' publishing businesses, his ascension to the most important management job at the network is virtually unprecedented. Traditionally at the networks, top programming executives like Stoddard have had alter egos who shared their extensive experience in programming. But Sias now is still learning the language of network television.

Sias brings to the job a reputation as an irrepressible practical joker who relishes curious gags. Sias has been known to blast the Capital Cities/ABC headquarters with a whoopee whistle that he carries in his pocket.

Industry sources believe that the choice of Sias was one sign that Capital Cities did not understand how complex the network business is. Grant Tinker and Brandon Tartikoff were both programming veterans when they oversaw the resurrection of NBC, taking the network to first place, where it remains. When Robert A. Daly was president of CBS Entertainment, he orchestrated that network's comeback with Bud Grant as vice president of programs and Harvey Shephard as vice president of program administration, both seasoned network hands.

Most remarkably for a network head, Sias claims not to be a big fan of network television. ''I find it is a real chore'' to watch, he says. ''My attention span just can't take too much of it.'' His favorite shows, he says, ''are the National Geographic specials.'' But, referring to ABC's hit series, he concedes: ''I like Moonlighting very much.''

Murphy, who has always shown complete confidence in his managers, appears to have no problem with Sias's attitude or lack of experience. ''We have a real freshman football team,'' Murphy admits. ''But we spent our lives betting on brains. It will take some time. We will make some mistakes. But we will fix the network. It didn't break in one year and it will take three or four years to fix it.''


"Behind 'Whiz Kid' Is a Trail of False Credit Card Billings," by Daniel Akst, Los Angeles Times, May 22, 1987

James D. Richman said he charged $100 worth of carpet cleaning while living in Santa Monica, but he got billed for $1790 on his Visa card statement. Barbara Lee of Westminster paid by check but wrote her Visa number on top. Sure enough, she said, her Visa card was billed for more than $1600.

Then there was Lucille Frost of Santa Ana. She was slapped with $1389.50 in Visa charges and $1710.57 in MasterCard charges-all for $75 worth of carpet cleaning.

What do these people have in common? Their credit card numbers fell into the hands of Reseda-based ZZZZ Best Co., the fast-growing carpet cleaning business started and run by whiz kid entrepreneur Barry Minkow. Now just 21, Minkow is becoming a household name in Southern California, thanks to his remarkable success and his frequent television commercials.

Through ZZZZ Best's lawyer, Mark R. Moskowitz, Minkow acknowledged to The Times this week that ZZZZ Best rang up $72,000 in false charges from November 1984, to March 1985. In an earlier interview, Minkow himself had said there were $150,000 to $200,000 in false charges. Moskowitz later called this account mistaken.

In any case, Minkow said ZZZZ Best made good on all the bogus charges by April 1986, and he blamed 12 unscrupulous carpet cleaning subcontractors whom the company had been paying an immediate 50% commission on every ZZZZ Best sale. Minkow said the subcontractors were caught and fired, but he refused to identify any of them.

But the same thing happened again in early 1986, according to a credit card security official, at Floral Fantasies, a Canoga Park flower shop that was owned by Charles B. Arrington III. Arrington, 26, is chief operating officer of ZZZZ Best.

Floral Fantasies submitted $91,000 in false charges in early 1986, said Gil Lopez, branch investigations manager at First Data Resources in Santa Ana, a unit of American Express that does credit card processing for banks. Lopez said he had talked to Minkow 10 or 15 times to resolve the problem, because Minkow told him he was the owner. Minkow denies ever speaking to Lopez but admits that he reimbursed the money.

"I was getting ready to submit the case . . . and go for prosecution on the entire $91,000 of fraud," said Lopez, an ex-Army intelligence officer. "Out of the blue, Mr. Barry Minkow calls up the bank and calls me up and says, 'I will pay the entire amount back.' "

Minkow said through his attorney that he was just bailing out Arrington, who inherited the situation from a previous owner. But city tax records say Arrington acquired the store on October 1, 1985, before the false charges occurred. Arrington said he sold Floral Fantasies last June, but he couldn't be reached for comment on the charge problems. The store is still in business.

Lopez added that while Floral Fantasies' account at California Overseas Bank was opened by Arrington, Lopez never spoke to him.

Lopez said it took Minkow until June or July last year to repay all the money, and that meanwhile the store had use of it interest-free.

"Again, he (Minkow) claimed it was an employee (who made the charges)," Lopez said. But because the money from the charges was paid into a Floral Fantasies corporate account, Lopez said, it seems unlikely that an employee could have benefited.

The phony charges were racked up by using Visa or MasterCard numbers to generate credit card slips for nonexistent or inflated sales. The slips were filled out as telephone orders, which don't require a card imprint, and then presented for payment to the company's bank, which routinely paid cash for them.

Cardholders who noticed the phony charges didn't have to pay them. But not all of them notified their banks of the phony charges in time.

Robin H. Swanson of La Canada said she charged $23.95 worth of Floral Fantasies flowers on her Visa card January 15, 1986, but was billed for $625.06 because she didn't report it to her bank within 60 days.

Won Judgment

She said that when she demanded a refund, store employees told her that Minkow was the owner, and she got a judgment in small claims court against him last October 21, a judgment that she said Minkow eventually paid. Through another lawyer, Minkow denied any knowledge of the Swanson case.

Minkow's meteoric rise began at an early age. Raised in Southern California, he began working at age 10 for the carpet cleaning business his mother managed.

At 15, against his parents' wishes, he started ZZZZ Best, his own carpet cleaning business, in their Reseda garage, which they rented to him at $150 a month. Now, he says, both parents work for him.

Minkow took ZZZZ Best public in January 1986, and after a December 1986, public stock offering now retains about 52%, or 5.9 million shares. That would give him a fortune worth $90 million at the current market price.

He's been featured in major newspapers, appeared on The Oprah Winfrey Show and received a special commendation from Mayor Tom Bradley, which said Minkow had "set a fine entrepreneurial example."

ZZZZ Best stockholders have also fared well. Since its public offering on December 9, ZZZZ Best shares have soared from $4 each to a closing over-the-counter price of $15.375 Thursday.

For the nine months ended January 31, ZZZZ Best earned $3.4 million on revenue of $33.4 million. Last month, the company agreed to pay $25 million for Flagship Services of Newtown Square, Pennsylvania, whose KeyServ Group subsidiary does carpet cleaning under contract to Sears Roebuck.

Dogged by Controversy

But for all ZZZZ Best's growth, both the company and its young entrepreneur have been dogged by controversy and lawsuits.

In 1985, Minkow was so desperate for cash that he turned to the late Jack M. Catain, Jr., a Los Angeles-area reputed mobster, according to court papers. In the same papers, Minkow also said Catain arranged loans for him at 2-5% interest per week.

ZZZZ Best has been rejected for membership by the Better Business Bureau of Los Angeles and Orange counties. The reason? A credit card complaint filed in March 1985, by James D. Richman. Bureau President William Fritz said ZZZZ Best never responded to the bureau's inquiries about that complaint.

Richman, now a Tarzana resident, says he never paid the questionable charge, and his bank took care of it.

Lopez said he first became aware of credit card problems at ZZZZ Best in late 1984 or early 1985, when disputed ZZZZ Best credit card charges started pouring in.

"I contacted Barry Minkow at that time, and his story was that he had an employee working in one of his shops that was generating credit card sales," Lopez said.

But since ZZZZ Best's bank at the time was not a customer of First Data Resources, Lopez merely returned the drafts unpaid for the company's bank to deal with. In early 1986, according to Lopez, phony charges began turning up from Floral Fantasies. Lopez said that when he confronted the store manager, she referred him to Minkow.

Lopez said that even though most cardholders who suffered phony ZZZZ Best or Floral Fantasies charges lost no money, those who failed to examine their monthly credit card statements carefully might never have noticed and simply paid the bill.


"Fallen Star: How Whiz Kid Chief of ZZZZ Best Had, and Lost, It All," by Daniel Akst, The Wall Street Journal, July 9, 1987

Wealthy entrepreneurs can point to all kinds of secrets for success. Young Barry J. Minkow's secret allegedly was fraud.

By the time Mr. Minkow turned 21 years old last March, the tiny carpet cleaning business he started at 15 had grown into a public company with a peak market valuation exceeding $211 million, giving the flamboyant young entrepreneur a paper fortune of around $109 million.

The subject of adoring publicity in a society as obsessed with success as he was, Mr. Minkow (rhymes with ginkgo) talked of building his ZZZZ Best Co. into the General Motors of carpet cleaning - and then running for president of the U.S. He was the subject of countless flattering articles and appeared on The Oprah Winfrey Show. He bought a Ferrari, acquired an expensive home in nearby Woodland Hills, California, and generally spent money as if there was no tomorrow.

There wasn't. Mr. Minkow's company was an elaborate construction of lies and deceit, kept afloat by sheer audacity. While much of the press was busy with his apotheosis, Mr. Minkow was taking advice from a former convict and obtaining financing from a reputed mobster. His company was submitting phony credit card charges, and his second in command owned a flower shop that did likewise. And ZZZZ Best stock was soaring on press releases touting millions of dollars in contracts, now allegedly bogus.

The company and its whiz kid former chairman are now at the center of wide-ranging investigations by the Securities and Exchange Commission and other law enforcement agencies; those agencies include the Los Angeles Police Department, which said yesterday it suspects ZZZZ Best may have been used for laundering organized crime narcotics money.

The police department investigation is ironic in light of Mr. Minkow's almost fanatical crusading against drug abuse. He has made small contributions to drug treatment programs, required drug tests of his workers and adopted the motto, "My act's clean, how's yours?"

In a civil suit filed in state court in Los Angeles, the company accuses Mr. Minkow of fraudulently removing more than $3 million from ZZZZ Best bank accounts last month alone. The suit also says the company, under Mr. Minkow's stewardship, paid out more than $18 million to perform nonexistent "insurance restoration" work (restoring building interiors damaged by water or fire).

Attempts to reach Mr. Minkow for comment have been unsuccessful; but his lawyer, Arthur Barens, says, "I categorically deny that Mr. Minkow was involved in or aware of any wrongdoing or fraud."

Mr. Minkow, citing health reasons, resigned his posts at the company last Thursday, and ZZZZ Best filed yesterday for protection under Chapter 11 of the federal Bankruptcy Code.

(Bruce Andersen, the company's interim president, says ZZZZ Best still has most of its offices open; he says there were 21 before last week.)

Despite the Chapter 11 filing, ZZZZ Best seems to have little remaining for the bankruptcy system to protect. The company says it suffered "misappropriation of significant assets" that are needed to run the business.

"The company is going to evaporate shortly," says one investigator. "It's going to vaporize."

ZZZZ Best stock has already plummeted from a high of $18.375 a share three months ago to close at $1.0625 a share, up 12 1/2 cents, yesterday in over-the-counter trading. Volume in the past two weeks has been enormous. On Monday alone, nearly 5.3 million of the company's 11.5 million outstanding shares changed hands.

While ZZZZ Best started out cleaning carpets, federal authorities now suspect that laundering money may have taken precedence lately. "There are tons and tons of cashier's checks and checks cashed for paper money" that figure in the investigation, says a member of one law enforcement agency.

The SEC is also investigating the possibility of phony receivables, bogus financial results, organized crime connections, and various securities law violations by the company and its present and former executives. The agency reportedly wants an independent trustee put in charge of the company.

Investors are flabbergasted. One lost $7 million on ZZZZ Best. Another, Leonard Weinstein from Miami, complains that he recently bought 500 shares of ZZZZ Best at $8.25 and 500 warrants at $5. He says he is considering joining a class action suit against the company (ZZZZ Best is already faced with at least two). He adds: "I'd probably want to commit suicide if I was a big shareholder."

Yet another shareholder, explaining his gullibility, says the irregularities at ZZZZ Best are so far beyond run-of-the-mill finagling that he couldn't have dreamed they were possible.

However extraordinary, the rise and fall of Barry Minkow had its roots in the ordinary - in Main Street rather than on Wall Street. In a 1985 interview, Mr. Minkow said his career began at the age of 10, when he carried water at a carpet cleaning business managed by his mother. Later, he worked Saturdays and summers cleaning carpets, drapes and upholstery.

At 15, he started his own business in the Minkow family garage in this working-class section of Los Angeles's sun-baked San Fernando Valley. Mr. Minkow said his family made him pay $150 a month rent for the building, but his father, Robert Minkow, insists rent was charged only after the business started to thrive. Barry Minkow subsequently maintained, bitterly, that his parents initially discouraged his venture. His father denies that. Mr. Minkow's mother, Carol, couldn't be reached for comment.

Still in high school and too young to drive, Barry Minkow hired a crew to clean carpets while he sat in class fretting over each week's payroll. He boasted that despite the carpet cleaning industry's bait-and-switch reputation, he insisted on high business ethics.

Mr. Minkow, who hasn't much formal education beyond high school, was particularly proud that his parents became his employees. He made his mother senior vice president. He made his father a salesman.

He made himself over. Formerly a skinny, hyperactive youth who was bullied in military school, he built himself up with weights. On the job, he worked punishing hours with singleminded dedication. "I'm obsessed," he acknowledged in the earlier interview.

The hard work paid off. In the 1985 interview, Mr. Minkow said the business took in $1.3 million in 1984. By contrast, for the first quarter ended July 31, 1986, ZZZZ Best reported earnings of $896,000 on sales of $5.4 million. The number of ZZZZ Best outlets was expanding as well.

"The bullies couldn't kick sand in his face anymore," says one former ZZZZ Best executive. "Now he could kick sand in theirs."

Scott Dear, ZZZZ Best's controller for five months last year, says Mr. Minkow could be a tyrant in the workplace. "My way or the highway" was a favorite Minkow expression, and around the office he insisted that he be called Mr. Minkow.

According to Mr. Dear, Mr. Minkow was so intense that he regularly chewed pens into crushed and twisted twigs. "Barry's incredibly aggressive, real hardnosed," Mr. Dear says. But he adds: "He really knew his business. He really knew carpet cleaning."

Outsiders were also impressed. In February of this year, the Association of Collegiate Entrepreneurs and the Young Entrepreneurs' Organization placed Mr. Minkow on their list of the 100 top young entrepreneurs in America. Mr. Minkow even won a commendation from Los Angeles Mayor Tom Bradley, who said the young executive had "set a fine entrepreneurial example of obtaining the status of a millionaire at the age of 18."

But the company's impressive growth wasn't nearly fast enough for the impatient Mr. Minkow, and that's where Jack M. Catain, Jr. came in. Mr. Catain, who died this past February, was a mobster and loan shark whose attorney says had offices in the same building as ZZZZ Best.

Around June 1985, "in desperate need of financial assistance" for ZZZZ Best, Mr. Minkow borrowed money from Mr. Catain at interest rates of 2% to 5% a week, Mr. Minkow said in a sworn court declaration; the declaration was in response to a civil suit brought by Mr. Catain in state court in Los Angeles, claiming Mr. Catain wasn't paid all he was due. Mr. Minkow's lawyer later said his client paid Mr. Catain several hundred thousand dollars, and that all debts to Mr. Catain were paid.

Mr. Minkow's declaration also said he agreed to share with Mr. Catain any profits from jobs the latter helped finance. Mr. Catain said his share was to be 50%.

But Mr. Catain's role went further, according to his former lawyer, James A. Twitty, who says Mr. Catain also helped "organize" the company.

In the past, Mr. Catain had frequently run afoul of law enforcement authorities, who suspected him of extortion and trading stolen goods. The Federal Bureau of Investigation also looked into charges that a company Mr. Catain headed, Rusco Industries Inc., an American Stock Exchange-listed maker of aluminum building products, was a front for laundering organized crime money. Mr. Catain resigned as Rusco's chairman and chief executive in 1980 as part of the settlement of an SEC suit charging him with undisclosed insider transactions. Mr. Catain was convicted last November 7 on counterfeiting charges but died prior to sentencing.

Mr. Minkow's lawyers have said he didn't know of Mr. Catain's mob ties; but in court papers, Mr. Minkow says he continued dealing with Mr. Catain even after he learned that Mr. Catain was under indictment.

ZZZZ Best went public in January 1986 by acquiring Morningstar Investments Inc., a Utah shell corporation, in exchange for stock. Last December, ZZZZ Best had a public offering of one million units consisting of three shares of common stock and one warrant each.

But the company disclosed in its offering statement that the nature of its business had changed. Rather than carpet cleaning, 86% of revenue was coming from insurance restoration activities.

The offering statement also showed enormous debt, some $6.2 million short-term and $933,000 long-term, compared with $3.1 million in shareholders' equity. Because Mr. Catain had sued the company and its chairman, Mr. Catain's dealings with ZZZZ Best were also disclosed.

Nevertheless, the offering sold out, bringing in about $13 million, and ZZZZ Best was off and running. In a telephone interview in May, Mr. Minkow said the company had about 1300 employees at locations throughout California as well as in Arizona and Nevada.

Somewhere along the line - it isn't clear where - Mr. Minkow also hooked up with a former convict and securities specialist named Maurice Rind.

"Rind was more or less touted as a finance expert," says Mr. Dear, the former controller. "He was around the office once or twice a week."

A knowledgeable member of a law enforcement agency says Mr. Rind was also a large ZZZZ Best shareholder through one of his companies, B&M Investments Inc.

Mr. Rind, who couldn't be reached for comment, was sentenced in 1976 to 18 months in prison and fined $10,000 for conspiracy to violate federal securities laws, mail fraud, interstate transportation of forged securities and other violations.

Records filed with the California secretary of state's office indicate that Mr. Minkow is also the agent for a similarly named company, B&M Insurance Services Inc., whose owner and president is Robert Victor, according to ZZZZ Best SEC filings.

Police say Mr. Victor is also known as Robert Viggiano, 51, from Brooklyn.

Joseph Valiquette, a spokesman for the Federal Bureau of Investigation in New York, says that Mr. Viggiano was indicted in December 1968 by a federal grand jury in Brooklyn on a charge of extortionate credit transactions in an alleged loan sharking scheme, but the charges were dismissed in January 1972.

In 1973, Robert Viggiano got five years' probation after pleading guilty to attempted grand larceny in connection with the 1968 theft of $750,000 in jewels from the Long Island Diamond & Jewelry Exchange in Garden City, New York.

Also arrested in that robbery was the late Joseph Colombo, Sr., described by law enforcement authorities as the head of one of New York's Mafia families. Charges of conspiracy and grand larceny against Mr. Colombo, Sr. in connection with the jewelry robbery were dismissed in February 1975.

In 1985, according to a registration statement filed with the SEC, Messrs. Minkow and Victor signed joint venture agreements for B&M Insurance to finance two separate restoration jobs, including one for $2.3 million in an eight-story building in Arroyo Grande, California.

But local officials say Arroyo Grande is a town of 13,000 souls, five traffic lights - and no buildings over three stories. Mr. Victor couldn't be reached for comment.

ZZZZ Best also claimed in an SEC filing that it had a $7 million refurbishing contract in Sacramento, California. But city and county officials there haven't issued permits for any such job and find the whole idea inconceivable.

"Sacramento was false-first, last and always," says ZZZZ Best Vice President Mark Morze. Mr. Morze has also been sued by the company, which claims that missing corporate funds went to Marbil Management Co.; Marbil, the suit says, was the "alter ego" of Mr. Morze.

Mr. Morze insists he doesn't own Marbil but won't comment further, pending consultation with his attorney.

ZZZZ Best also claimed a $2.8 million restoration job in San Diego awarded by a unit of Travelers Corp., based in Hartford, Connecticut. But David L. Tengberg, the claims manager for the area, says that "Travelers has nothing to do" with any such job.

As recently as May 18, ZZZZ Best claimed it won a $13.8 million restoration job in Dallas. But "there hasn't been any kind of job like that in Dallas," says Kurt Blackmon, president of Blackmon-Mooring Steamatic Catastrophe Inc., a 40-year-old restoration concern in Fort Worth, Texas. "We monitor that day and night. That's our business."

Most of the apparently phony ZZZZ Best insurance jobs came through Interstate Appraisal Services, based in Van Nuys, California. Interstate is owned and run by Thomas Padgett, who used to work for Travelers as an auto damage appraiser, according to Mr. Tengberg.

The California Department of Insurance says neither Mr. Padgett nor his company is a licensed insurance adjuster, although it isn't clear whether either did work requiring a license. Both Interstate and Mr. Padgett are also defendants in the fraud lawsuit filed in state court in Los Angeles by ZZZZ Best against Mr. Minkow.

The suit charges Interstate, Marbil, and Messrs. Padgett, Minkow and Morze with breach of fiduciary duty, fraud and conversion, contending that the company suffered damages exceeding $25 million, including $18 million that the company claims it paid Marbil.

Last week, a man identifying himself on the phone as Mr. Padgett vowed to prove to a reporter that the refurbishing contracts were legitimate but never showed up for an appointment and hasn't been reachable since. Yesterday, Los Angeles Police Chief Daryl F. Gates alleged that the refurbishing contracts were fake, and were instead a vehicle for laundering illegal narcotics profits.

ZZZZ Best's hard assets also are apparently questionable. The SEC is reportedly looking into whether a group of secondhand generators the company said it bought last year for $1.1 million and 435,000 shares is worth anywhere near that.

According to the company's SEC filings, the generators were purchased from Generator Corp., a Cayman Islands entity that couldn't be located for comment.

Mr. Minkow's empire began collapsing May 22, when the Los Angeles Times reported that ZZZZ Best used customers' credit card numbers to run up at least $72,000 in inflated charges.

Mr. Minkow said the scam, which occurred in 1984 and 1985, was the fault of unscrupulous former subcontractors who were caught and fired. Yet the company said in its public offering statement that "the company hires no subcontractors for any of its residential or commercial carpet cleaning jobs."

In early 1986, the same thing happened again, this time for at least $91,000, at Floral Fantasies, a Canoga Park, California, flower shop then owned by Charles B. Arrington III. Mr. Arrington, 27, is ZZZZ Best's chief operating officer.

Mr. Minkow, who made restitution in both cases, blamed the flower shop charges on a prior owner, but city tax records show that Mr. Arrington bought the shop before the bogus bills were processed. Neither Mr. Arrington nor the store's current owners, listed in city tax records as Robert Victor and Rosalie Victor, could be reached for comment.

ZZZZ Best's public offering last December had been handled by Rooney Pace Inc., a unit of New York-based Rooney Pace Group Inc., at the equivalent of $4 a share; the price later more than quadrupled on a positive earnings report. The Rooney Pace unit went out of business in January after a series of problems unrelated to ZZZZ Best.

The stock had been touted by another brokerage house, Ladenburg Thalmann & Co., based in New York. Just last week, Robert Grossmann, a securities analyst in the firm's Los Angeles office, was quoted in BusinessWeek magazine as saying, "Barry Minkow is a great manager."

Mr. Grossmann now says that "a lot of us wish we hadn't said a lot of things." Still, he recalls Mr. Minkow's charisma. Recently, he says, "At the Century Plaza Hotel, Barry had a big show . . . and he was magical, he was mesmerizing. He won everybody over."

Ladenburg Chairman Ronald B. Koenig was among those who suffered losses on ZZZZ Best Stock. The company's shares, which had closed at $15.375 May 21, fell $3.50 on the first trading day after the Los Angeles Times article.

ZZZZ Best was soon beset by hordes of short sellers, who sell borrowed shares with the hope of rebuying them at a lower price if the stock falls as they expect. On June 15, the stock was short more than 1.5 million shares, out of about 5.5 million shares in public hands. The rest of ZZZZ Best's roughly 11.5 million shares are controlled by Mr. Minkow and are for the most part restricted.

Six days after the credit card fraud was disclosed, Mr. Minkow buoyed ZZZZ Best stock by announcing that the company would report that earnings for the year ended April 30 had exceeded $5 million, or 50 cents a share, on revenue of more than $50 million. That would be a huge increase from the prior year, when ZZZZ Best reported earnings of $900,000, or 12 cents a share, on revenue of $4.8 million. But law enforcement and company sources say the higher figures probably are inflated.

On June 2, Ernst & Whinney quit as the company's independent auditors. ZZZZ Best says the resignation wasn't over accounting differences, but Ernst & Whinney won't comment. The company hired Price Waterhouse & Co., which also declines comment.

Those who know Mr. Minkow call him dynamic, smart and utterly singleminded. He is also extremely persuasive, having gained the trust of many savvy investors and institutions.

These include the two major accounting firms; the investment banker, Drexel Burnham Lambert Inc.; and the prestigious law firm of Hughes Hubbard & Reed, based in New York.

ZZZZ Best's offering statements and SEC filings were handled by Mark R. Moskowitz in Hughes Hubbard's Los Angeles office. Mr. Moskowitz couldn't be reached, and the firm says it isn't appropriate to comment since it remains ZZZZ Best's counsel.

Drexel executives also declined comment. Earlier this year, Drexel agreed to raise $25 million in debt financing for ZZZZ Best to complete a pivotal acquisition, that of Flagship Cleaning Services Inc., a unit of London-based Northern Foods PLC, which holds a home cleaning license from Sears Roebuck & Co. But Drexel backed out late last month, and the acquisition appears doomed.

The ZZZZ Best corporate headquarters in Reseda, a two-story cement block structure, has been locked for days and has a uniformed guard posted outside. The blinds are drawn, and the phones are constantly ringing. A frustrated receptionist says at one point, "I'm just going to leave this on hold."

On Monday a few employees pounded at the door demanding to be paid.

ZZZZ Best directors, meanwhile, are trying frantically to sort out the mess left by Mr. Minkow's departure, and they are discovering that major contracts aren't the only things that appear to be ghostly at the company. One company director says nervously that nobody can find the insurance policy that is supposed to protect directors and officers from personal liability.


"Donald Trump: What's Behind The Hype?" by James R. Norman and Marc Frons, BusinessWeek, July 20, 1987

He's young, brash, super-rich, and a dealmaker extraordinaire. But can he make himself a power on a national-or international-scale?

Donald J. Trump was flying above New York City recently in one of his five helicopters, taking in the view. There in midtown Manhattan was his luxury condominium and commercial complex, Trump Tower. A few blocks away was another lavish development, Trump Plaza. And in the distance was his latest condo creation, Trump Parc. As the helicopter zipped south along the Hudson River, Trump ordered his pilot to circle back for one more look at the brush-covered old Penn Central railroad yard and a few rotting docks sitting amidst the buildings below. There, said the 41-year-old real estate tycoon and casino baron, is where he'll build the world's tallest skyscraper.

Mere hype? Perhaps. But with Donald Trump, it's difficult to tell. He has boasted so often about the grand things he intends to do-and then gone out and done them-that even his critics at times must shake their heads in grudging admiration. And if they are unwilling to recognize his accomplishments, Trump, in his brash fashion, is there to remind them. "Nobody in the United States has done what I've done" at such a young age, he declares. He has a point. In barely a decade he has transformed himself from a local landlord to one of the preeminent real estate moguls of his generation. The total value of his holdings is more than $3 billion. And when he completes his $101 million purchase of 93% of Resorts International Inc.'s Class B stock, he will become the country's largest casino operator as well.

'VERY HOT PLACE.'

Yet Trump is not content to remain a regional developer, albeit a major one. His aspirations seem as lofty as the buildings he wishes to build: He dreams of becoming a businessman of international stature, one who can make deals with heads of state as well as heads of corporations. He's already taking a step in that direction. In early July, Trump flew to Moscow to meet with Soviet leader Mikhail S. Gorbachev. The subject was the possible development by Trump of luxury hotels in Russia. But the Soviets invited him partly because of his views on nuclear disarmament. "The Russians are not the ones to fear," says Trump. "It's Third World oil countries that will have the (nuclear) technology soon. Then the world will be a very hot place."

While Trump is preaching peace in Moscow, he is reveling in his role as a Wall Street warrior. He has rapidly made a name for himself as a greenmailer to be reckoned with. In less than a year, he has reaped at least $122 million in profits from his stakes in Allegis Corp. and casino rivals Holiday Corp. and Bally Mfg. Co. Holiday launched a defensive recapitalization to boost its stock price, and Bally bought Trump's 9.9% block at a premium. His stock buying helped put Allegis in play, triggering the avalanche that brought down CEO Richard J. Ferris: Trump bought a 4.8% stake last March, then sold out at a $55 million profit when the price ran up. The ideas for his stock plays come from gut instincts, Trump says, patting himself on the belly. The $90 million Bally decision, he testified in one deposition, took all of "a couple of minutes." He recently told one developer: "It's sure a lot easier than real estate."

The companies Trump targets have good reason to be concerned. By his own estimate, he is sitting on a cash hoard of $550 million. Trump appears to have at least $1 billion worth of real estate equity he could mortgage. The cash flow from his two big Atlantic City gambling houses is expected to top $100 million this year, even after $55 million in interest payments. With that kind of financial clout, few companies would be safe should Trump decide to make the leap from speculator to corporate raider. Now Trump is on the prowl again. Wall Street sources say he may have taken positions in Golden Nugget Inc. and Pan Am Corp. His intentions toward Pan Am bear watching, since he will also get a 12% stake in the airline that was accumulated by Resorts. Sources expect Trump to sell those shares to pay down Resorts' debt, but at the moment he seems to be a buyer. That kind of behavior keeps companies guessing. Trump says his stock buys are "for investment purposes only," though backers say he could be much more of an activist. Alan "Ace" Greenberg, Trump's investment banker and head of Bear Stearns & Co., insists that Trump is "not just a speculator, he's an operator," prepared to take over his target companies.

Still, Trump seems to be dabbling. That may be for the best, since his real estate and casino empire is demanding more of his attention. In his singleminded quest to out-Trump himself, his deals are becoming bigger, more complex, and more controversial. This comes at a time when New York's real estate market may have peaked, with several major companies relocating out of Manhattan-and many new buildings going up. Trump is trying to keep NBC Inc. from moving to New Jersey, partly to help him win tax breaks and zoning changes for his $5 billion plan for the Penn Central railway yards. But the project, known as Television City, may never happen because New York City Mayor Edward I. Koch has refused to support massive tax abatements. Now Trump has become embroiled in a bitter feud with Koch, a potentially destructive mood for a developer of even Trump's power. "Anytime you call the mayor a moron, it's a terrible mistake," says one close associate. "It won't help him at all."

The sands may be shifting underneath Trump in Atlantic City as well. The gambling industry has been stagnant of late-just as Trump is set to purchase Resorts International and its disastrously mismanaged casino construction project, the Taj Mahal. Originally set to cost $200 million and open last year, the still unfinished hotel-casino is now expected to cost more than $800 million is at least a year away from opening. At 46 stories, it is the tallest building in New Jersey. Its 120,000-square-foot casino is twice the size of any of the other 11 in Atlantic City. "It's a runaway train," says Pratt Hotels Corp. Chairman John Pratt, Sr., who bid against Trump. "At a cost of $600 million for the Taj, Resorts was still a fair acquisition. Above that, all the benefits go down the tube."

HUMILIATING.

Even when the casino is completed, Trump must face the New Jersey Casino Commission, which reviews the licenses on his Atlantic City casinos every year. Industry observers say the commission is demanding, humiliating, and even capricious. The likes of Hilton Hotels, Playboy, Penthouse publisher Bob Guccione, and the Bass Brothers have gone up against the commission and failed. Perhaps Trump's biggest obstacle in becoming a businessman of international-or even national-stature is himself. Associates his detail-oriented management style will limit his ability to grow. He personally oversees virtually every decision down to the color of the carpeting in his casinos. "In my opinion, Donald shouldn't be so involved in operations," says a good friend and a CEO of a major corporation. "He's an entrepreneur and a dealmaker caught in a quagmire. He gets into stuff that takes too much of his time. He'll grow out of it. But he's got to make that quantum leap while he's hot."

Trump doesn't consider any of these things major problems, least of all his management style. Associates insist that far from spreading himself too thin, Trump is cautious both as a developer and an investor. "He's much more conservative than people think. He's cool, street smart, and suspicious," says Greenberg. "I'll give a trophy to the guy who puts one over on him." Yet Trump admits he may have more projects in the works than even he can handle. Besides the protracted negotiations over the TV City project, he is due to start demolition early next year for another luxury condo in Manhattan. In 1984, he bought New York's St. Moritz Hotel, at a bargain $31 million from Harry Helmsley. Trump is expected to turn that into posh condos. Last November, amid his other stock deals, he bought a 21.4% stake in land-rich New York retailer Alexander's Inc. from the Bass Brothers for $50 million-and he may tender for the rest of the company. His goal: to build more luxury condos on Alexander's prime midtown store site.

Trump has actually shed at least one project. In early 1986, he picked up a lien on foreclosed land in Aspen, Colorado, for $17 million. He had plans to develop a huge ski hotel. But he has let Arab investors acquire the property rather than proceed with the project. "Donald is a very hands-on manager," says Harvey I. Freeman, senior vice president of the Trump Organization. "His attitude is that when you're too busy to handle the details, it's time to close the store." Trump adopted that philosophy from his father Fred, a New York developer, who, at 81, still goes to work almost every morning at his Brooklyn office. Young Donald and his four brothers and sisters grew up in a 23-room house in Queens. After graduating military school and the Wharton School, Donald plunged into the family business.

But rather than tend his father's rent-controlled apartments in Brooklyn and Queens, Donald set his sights on Manhattan. In 1975, when he was 28 years old, he proposed an ambitious scheme to remake the aging Commodore Hotel above Grand Central Station into the luxury Grand Hyatt, aided by hefty tax breaks. With New York on the brink of bankruptcy, it was a courageous proposal-and one the city warmly embraced. Since then, he has ridden New York's real estate boom to impressive heights, erecting his luxury condo projects at a rate of about one a year. Trump has always courted publicity and controversy, often with an eye for the grand gesture. In the 1970s, he offered to build what is now the Jacob Javits Convention Center in New York for $170 million if the city would name the building after his father. The city declined. A few years later, while dickering to build a domed stadium in Queens, he bought the New Jersey Generals of the now defunct United States Football League, and waged a futile antitrust suit against the NFL.

'LIKE A COBRA.'

Trump's high-profile business image is only matched by his conspicuous consumption. When William Bricker was forced out as the imperial CEO of Diamond Shamrock Corp., Trump bought his lavishly equipped 727 jet. For R&R, Trump retreats to his 118-room mansion in West Palm Beach, Florida, or his 15-bedroom Georgian manor in Greenwich, Connecticut. During the week, he and his wife, Ivana, and their three children live in a $10 million triplex penthouse atop Trump Tower. Does he enjoy it? No doubt. But Trump sees the parade of glamour and wealth as not only a way of life but also a marketing ploy. His name, he insists, has become synonymous with money, power, and prestige. He says that's one reason he's been able to fetch an astonishing $1700 per square foot for some of his New York condos. Says Trump: "I can't afford for things not to be the best."

But glitz wasn't Trump's only road to success. The real key has been his ability to get the choicest land parcels for ridiculously low prices, often before others knew they were on the market. That lets him reap phenomenal profits, while much bigger developers struggle to break even on office rents of $45 per square foot. The secret, says Trump, is that contrary to his image as a loner (he doesn't belong to real estate or developer groups), he has managed to cement long-term relationships with sellers. Then, at the instant when he senses they are ready to sell: "Boom. Like a cobra," he motions with a flick of his hand. That was how he got the Grand Hyatt site from Penn Central Corp. That was how he got the Trump Tower site from Genesco. And that was how he miraculously regained the Television City site after having let his cheap option for it expire 10 years ago so he could pursue the Grand Hyatt project. The railyard was then bought by Argentine businessman Francisco Macri, who won a long zoning battle for his Lincoln West development only to run out of financing. Heartbroken, he sold out to his friend Trump for $95 million. "It was a steal," says a source close to the deal.

Getting Television City built, even with city tax breaks, will be tough. NBC refuses to make a commitment while it considers other options, including staying at 30 Rockefeller Center or a move to New Jersey. Trump admits the 150-story office tower he plans will be woefully uneconomical-a loss leader-but he says it would make up for that by highlighting the overall site. Community groups are up in arms over the proposed density: 7600 condos and perhaps the world's largest shopping center.

Trump faces more immediate worries with the Taj Mahal in Atlantic City. "It's like a giant Wollman Rink," he laments, referring to the problem-plagued skating rink in Central Park he successfully rebuilt for New York last year. Others simply consider it an albatross. With growth in the number of gamblers visiting Atlantic City slowing, and casino profit margins being shaved by everything from heavily subsidizes bus-in programs to easier odds at the crap tables, critics say the last thing the town needs is another casino-especially one on the outsized scale of the Taj Mahal. "I tend to think the market may have difficulty absorbing this capacity," says casino analyst Harold Vogel of Merrill Lynch Pierce Fenner & Smith Inc. Donald Trump, he says, "just might be in over his head." Nonsense, says Trump. He sees the Taj as the premier gambling facility in Atlantic City, one that will draw crowds from the competition. He is convinced that within a year of opening, its cash flows will not only be covering debt costs but also delivering a tidy surplus. "There is no other business with this kind of cash flow," Trump says.

LOUD AND CLEAR.

That message comes in loud and clear during a stroll with Trump through his casinos-Trump Plaza and Trump's Castle. On a recent Saturday night at the Plaza, awed patrons flocked around Trump, foisting on him business cards, asking for autographs, or just shouting their admiration: "Hey, Donald, you're king of the castle…You've got my vote for mayor." The real payoff came about 2 AM when an exhausted casino manager, Stephen F. Hyde, gave Trump the day's tally: $5 million in "drop" (bets) and a "hold" (casino winnings) of almost $1 million. It takes $450,000 to break even, before depreciation and taxes are figured in.

Analysts criticized Trump last year for overpaying for a casino property when he bought the Castle from Hilton Hotels Corp. for the then-princely sum of $320 million in cash. He immediately refinanced the purchase with uncollateralized junk bonds-as he did with Trump Plaza. Like most real estate manager, Trump uses plenty of leverage. But most of his debt is unsecured, and he maintains a huge hoard of cash. As for the gambling commission, Trump is confident he can meet its rigorous standards. Having fought countless zoning wars in New York, he knows how to deal with red tape. He submits all contracts for advance approval to avoid accidentally hiring any contractors with ties to organized crime. "If you stay clean, your destiny is in your own hands," says Trump aide Freeman.

Trump always insists on having his fate in his hands. That's something a few of his ex-partners have learned the hard way. Trump gained control of Trump Plaza after a bitter feud with Holiday, whose Harrah's unit had bought its way into partnership with him while the casino was still under construction in 1983. Trump claims Holiday was running the place badly-perhaps with an eye on buying him out cheaply. So he sued, charging mismanagement. He won, bought out Harrah's, and later staged his raid on Holiday. "People think of Trump as being difficult to work with," says Donald. "I'm not…except with people I don't respect." With Holiday, "I went after them good. I did not dig them."

HUNDREDS OF CHECKS.

Trump can be easily tough on his contractors. Going over pans for a marina expansion at Trump's Castle at a Sunday morning staff meeting, Trump ended the debate over which mechanical contractor to use by picking the lowest bid, trimming it 10%, adding more work, and banning any "extras" for cost overruns. "They'll do it for $150,000, or we'll use somebody else," Trump ruled. Details tend to consume Trump. Every day he signs hundreds of checks. "It's almost like I'm there" watching the work get done, he says. Adds Blanche J. Sprague, executive vice president at Trump Park: "No matter what time I get to the office, he's been there and left a list of things to do. His name is on the building, and he takes it personal." Trump staffers admit much of the nitpicking is trivial-a game to keep them on their toes. Says Trump: "I like people to know I watch them closely."

His wife, an ex-Olympic skier, plays the game, too. Two days a week, Ivana swoops into Trump's Castle, where she is CEO ("I pay her $1 a year and all the dresses she can wear," says Donald.). A whirlwind of energy, she sends the Castle's keepers scurrying with orders. "Then they spend the rest of the week cleaning up the mess," jokes one Trump official. Despite the hassles, Trump's managers zealously try to attain Trump's singular standard. He hires the best, pays well, and has little turnover. There is that elan of playing for a winner. "I'd rather die than let him down," swears Sprague. That Trump can command such loyalty is impressive. But as his empire expands, loyalty alone will not be enough. The details will get sticker, and the risks will mount. When he bought his Bally's stake from Bear Stearns, for instance, it touched off an SEC review. Trump came out clean, but one slip-up these days in stock trading, with potential criminal penalties, could put his casino empire in peril. Even if that happened, Trump would shed few tears. He loves casinos only for their cash flow and could sell out at a huge profit.

So the question remains: What's next for Donald Trump? He refuses to be pinned down. He could easily take over a public company, but would be bored running it. He could, as aides speculate, go into politics-but as a New York landlord, he'd have a tough time winning. He's even publishing a book: Trump: The Art of the Deal. Don't expect any revelations. "To tell you the truth," he confesses, "I don't even know how I do it." That's where Trump's future lies. Whatever else he does, he will do what he has always done best: make deals.

THE PILLARS OF THE TRUMP EMPIRE.

No outsider can know for certain the size of Trump's fortune. His holdings are largely private, and many are in New York real estate-where values are hard to peg. Here are BusinessWeek's estimates of his net assets, confirmed by Trump's organization.

-Cash: $550 million

New York

-TV City Site (Undeveloped): $700 million

-Trump Management (24,000 apartments): $400 million

-Trump Tower (Retail and condos): $280 million

-Grand Hyatt (Hotel): $175 million

-Trump Enterprises (Services): $130 million

-Trump Parc (Condos): $120 million

-St. Moritz-On-The-Park (Hotel): $75 million

-Other undeveloped sites: $100 million

Atlantic City

-Trump Plaza (Casino-Hotel): $200 million

-Trump's Castle (Casino): $200 million

Florida

-Trump Plaza of the Palm Beaches (Condos): $100 million

TOTAL: $3.03 billion

LEARNING THE WAYS OF WALL STREET.

To investors, Trump looks more like a raider than real estate developer. He is investing more than $100 million to buy voting control of Resorts International. Profits from three other forays, however, were more than enough to finance that deal.

-Holiday: 4.8% bought 9/86, $70 million cost, sold 11/86, $37 million profit

-Bally: 9.9% bought 11/86, $60 million cost, sold 2/87, $30 million profit

-Allegis: 4.9% bought 3/87, $130 million cost, sold 4/87, $55 million profit.

What's next? Trump isn't talking. But he still has a big position in Alexander's which owns choice Manhattan real estate. Trump paid $50 million for 21.4% of its stock last year. Wall Street sources say Trump may have acquired stakes in Golden Nugget and Pan Am.


"Coke Unit, TriStar To Join Operations," by Geraldine Fabrikant, The New York Times, September 2, 1987

In a deal that would strengthen its presence in the entertainment industry and benefit its shareholders, the Coca-Cola Company said yesterday that it would merge its movie and television operations with TriStar Pictures Inc.

Through the complex transaction, TriStar would become a substantially larger entertainment company, with all the attributes of a major film studio. TriStar, an independent motion picture company that produces theatrical films and owns movie theaters, was originally financed by Coke, CBS Inc. and Home Box Office.

Coke to Hold 49%

Under the deal, Coca-Cola would end up with a 49 percent stake in TriStar. At the same time, the results and financial flexibility of its core soft drink business would be shielded from the uncertainties and high debt of the entertainment operations.

Recently, for example, its Columbia Pictures unit has dragged down Coke's entertainment sector, which also includes two television operations, Merv Griffin Enterprises and Embassy Communications. For the second quarter, the group reported a loss, after setting aside a $25 million reserve to cover losses on Ishtar. The film, which starred Warren Beatty and Dustin Hoffman, was rumored to have cost more than $40 million, and it did poorly at the box office.

After the transaction, Donald R. Keough, president of the Coca-Cola Company, will become chairman of TriStar Pictures, and Victor A. Kaufman, currently chairman and chief executive of TriStar, will become president and chief executive of the combined entity, which will eventually be named Columbia Pictures Entertainment Inc.

Francis T. Vincent, Jr., an executive vice president of Coca-Cola who had headed the company's entertainment operations, will assume the responsibility of monitoring Coke's equity investments in its bottling properties in the United States and around the world.

The move was generally greeted positively on Wall Street. TriStar's shares climbed $2.50, to $13.50, in heavy over-the-counter trading, while Coca-Cola's shares slipped 12.5 cents, to $50.50, on the Big Board in a session in which stocks were broadly lower.

Harold Vogel, an entertainment analyst at Merrill Lynch Capital Markets, said he believed TriStar would benefit by becoming a leading studio presence in both theatrical films and television.

By producing more feature films, TriStar will increase its chances of coming up with box office hits and bolster its leverage with theater owners, while reducing administrative and distribution costs. Nevertheless, Mr. Kaufman pointed out that TriStar and Columbia Pictures would continue to maintain separate production and marketing operations.

And like the rest of the leading studios, TriStar will become a major producer of shows for network television. Steady revenues from the sale of rerun rights to successful hit television shows help to counteract the volatility of film operations.

After the addition of the Coke units, the company will have a net worth of $1 billion and total debt of about $600 million, thereby giving it ample room for additional borrowing.

The restructuring plan is reminiscent of Coca-Cola's acquisition of several bottlers last year and the subsequent spinoff of its bottling unit as Coca-Cola Enterprises. Coke now holds a 49 percent stake in that company, while the balance is owned by the public.

74 Million New Shares

Under Coca-Cola's proposal, its entertainment assets would be exchanged for 74 million newly issued shares in TriStar, which now has about 34 million shares outstanding. Thus, Coca-Cola's total stake in TriStar would increase to 80 percent, from around 37 percent currently.

Coca-Cola would then reduce its interest in TriStar to 49 percent by distributing about 33 million shares to Coke's shareholders as a special one-time dividend.

Roy Burry, a beverage analyst at Kidder Peabody, pointed out that the deal should be very attractive for Coke's shareholders and that Coke would own 49 percent of an entertainment entity whose opportunity for growth will have improved. Because of TriStar's expanded size, it will have greater access to financial resources, he noted.

In turn, Coke's borrowing capacity will increase because it will be able to remove $403 million in interest-bearing debt from its own balance sheet. As of July 31, Coca-Cola Entertainment had total assets of about $2.3 billion and liabilities of $1.6 billion. Under the deal, those assets and liabilities will be transferred to TriStar's balance sheet.

The Coke entertainment unit's first-run network television programs include Who's the Boss? and Designing Women. Its syndicated programming includes the game shows Wheel of Fortune and Jeopardy. Columbia Pictures' recent successes include The Karate Kid Part II and La Bamba.

Accounting for Coke's Stake

Because Coke's ownership of TriStar will ultimately be below 50 percent, it will report its share of TriStar's earnings on an equity basis. Thus, Coke will take 49 percent of TriStar's net earnings or losses on its own income statement.

TriStar, which was created in 1982, earned $13.7 million on sales of $254 million last year. The entertainment subsidiaries of Coke reported revenue of about $1.3 billion last year and operating profit of about $230 million.

While Coke has increased its holdings in TriStar since the company's creation, CBS has sold its whole stake and HBO owns only 10 percent. TriStar's successful films have included Rambo and The Natural.


"Minkow Empire; ZZZZ Best: the House of Cards Falls," by Barry Stavro and Alan C. Miller, Los Angeles Times, September 6, 1987

On a crisp Sunday last November, an official of the ZZZZ Best carpet cleaning company took the firm's lawyer and accountant on a tour of an office building in Sacramento, a final inspection before they gave their go-ahead for a public stock sale that would bring the company into the Wall Street limelight.

The lawyer and accountant were there to see how ZZZZ Best's most profitable line of business worked. Although the Reseda company founded by Barry Minkow was best known for its service to homeowners-it would clean two rooms of carpeting for $39.95-its ledger books showed that 86% of its revenue was from insurance jobs, repairing buildings damaged by fire or water.

The books listed a series of multimillion-dollar insurance contracts. But the crown jewel was a $7 million job in Sacramento, supposedly sprucing up a building damaged when a water main burst and its sprinkler system went off.

Looking Good

And so Mark Morze, 36, a former UCLA linebacker in charge of ZZZZ Best's insurance projects, showed off the office tower to Larry D. Gray, a partner with the Big Eight accounting firm of Ernst & Whinney, and Mark R. Moskowitz, an attorney from Hughes Hubbard & Reed, a New York-based firm with an office in Los Angeles.

Gray and Moskowitz toured several floors of the 18-story building, Morze recalled. Although there were no workers around on a Sunday, anyone could see what a good job ZZZZ Best had done: new carpeting had been laid, wiring and ceiling tiles were ready to be installed and trash and paint cans were ready to be carted away. It was almost like there had never been any water damage.

In fact, there hadn't been any damage, Morze said recently. ZZZZ Best had nothing to do with the office building. It was simply a new high-rise with space for lease that ZZZZ Best used as a prop in an expensive ruse.

Called a Charade

ZZZZ Best did not have a multimillion-dollar insurance job in Sacramento-or anywhere else, for that matter, Morze said. The insurance business was, in effect, a charade and the Sacramento trip was the grand performance.

"I couldn't believe it would work. I was expecting catastrophe," Morze said. He said he was thinking, "These are smart guys, they'll catch on."

But they didn't. After the tour, the attorneys and accountants gave their blessing and two weeks later ZZZZ Best sold $13 million worth of stock. Within months, the company was a hot pick on Wall Street. Its stock quadrupled, creating paper fortunes for many, including the 21-year-old Minkow, whose holdings grew to $100 million.

Since then, ZZZZ Best has collapsed like the house of cards it was. Minkow resigned, the company entered Chapter 11 bankruptcy proceedings and the firm's board of directors is suing Minkow, Morze and others for $25 million, alleging fraud and theft.

Los Angeles Police Chief Daryl F. Gates has announced that Minkow and ZZZZ Best are under investigation for allegedly being part of a money laundering conspiracy linked to organized crime.

While police are investigating what crimes may have been committed, ZZZZ Best investors are asking another question: How were the professionals fooled?

Asking Why

The accountants, attorneys, stock brokerage firms and ZZZZ Best's board of directors were all supposed to provide checks and balances before the public financing.

"I screamed at my broker and cried hysterically, 'How could you allow this to happen?' " said Jenny Raphael, who owns a fabric firm in New York. She bought ZZZZ Best stock at the urging of her broker when it was $16 a share, then sold at $1 a share, losing $50,000.

She is among a group of investors eager to join class action lawsuits-some already filed in U.S. District Court in Los Angeles-against the company. Lawyers in those cases said they expect to sue ZZZZ Best's accountants, attorneys and its board of directors as well.

Asked Raphael: "What kind of checking did they do?"

SEC Requirements

Before a company sells stock to the public, the Securities and Exchange Commission requires "full disclosure." It is a lengthy process and a team effort, led by the stock brokerage firm that will actually sell the stock. In ZZZZ Best's case that was Rooney Pace, a New York firm with a history of run-ins with the SEC. Rooney Pace went out of business in January due to financial problems unrelated to ZZZZ Best.

Over several months, three accounting firms, including Ernst & Whinney, checked ZZZZ Best's numbers. Hughes Hubbard & Reed, ZZZZ Best's law firm, made sure the necessary documents were filed with the SEC. The brokers, accountants and lawyers all helped write the 48-page stock prospectus that went to potential investors.

James C. Van Horne, professor of finance at Stanford Business School, said the investing public has a right to expect "that the numbers are accurate, and the underwriters and accountants have dug a little more deeply."

Now that ZZZZ Best has collapsed, Van Horne said, "The question is how deeply did they probe in this case, and could reasonable people have detected a problem in advance?"

Based on what he has heard about ZZZZ Best, he said, "I think the answer there is yes."

Most Aren't Talking

Most of the professionals who worked for ZZZZ Best are not talking. Ernst & Whinney and Gray-who works out of the accounting firm's Woodland Hills office-would not comment. Nor would Moskowitz, although a spokeswoman for his firm confirmed that the lawyer and accountant were escorted to Sacramento, where they toured an office building "represented to be in the final stages" of restoration.

Two former officials of Rooney Pace, the defunct underwriting firm, agreed to talk about ZZZZ Best on condition that their names not be used. They said their fact-checking in this case was, if anything, more thorough than usual. Only after ZZZZ Best collapsed did their oversights became apparent, they said.

Said one of the former Rooney Pace officials: "When I go back over the files and think of the level of deception and the extent of the fraud and cover up, it makes my skin crawl."

There were plenty of potential red flags, including Minkow's receipt of loans through a reputed Los Angeles mobster, a faked letter from a major insurance company, grossly exaggerated sales, and the staged Sacramento tour.

To this day, Morze is surprised that no one caught on. "This couldn't take close scrutiny," he said. "All they had to do was scratch below the surface."

Almost Made It

And yet ZZZZ Best almost became a national force in carpet cleaning. Even as things neared collapse, the company was negotiating to land a contract with the country's biggest retailer, Sears Roebuck. Under the deal, ZZZZ Best would have cleaned carpets and upholstery for Sears customers in 34 states.

How could ZZZZ Best have gotten so far? Part of the answer is that Barry Minkow's story was a compelling one. He was almost a caricature of the American entrepreneur. Chosen as both "most likely to succeed" and "class clown" in high school, he started ZZZZ Best in 1981 at age 15 in his parents' Reseda garage and, by the time he left his teens, was parking his Ferrari in a gated compound of mansions.

Minkow was a young workaholic who spoke in a torrent of words. A tireless self-promoter, he built up his accomplishments much as he built up his body through hours of weightlifting. By 18, he had hired a ghostwriter to produce his self-published autobiography, Making It in America. He donated $20,000 to the YMCA in Reseda and $60,000 to drug treatment and education programs; he had a public relations firm alert the media to his generosity.

Heavy Hitters

Minkow ingratiated himself with older men, including Harold Lipman, the 59-year-old father of his girlfriend. Lipman joined the company's board of directors last year, lending it credibility because he was the respected associate superintendent of the Simi Valley Unified School District. Neal Dem, 34, owner of a prosperous Chatsworth stationery business, agreed to be a director as well.

Minkow also invited the San Fernando Valley's most prominent whiz kid businessman to join the board. But real estate dealer Mike Glickman, 27, whose company dominates the Valley market, quit ZZZZ Best's board after one meeting last year. "I didn't like the idea of young people calling him, 'Mr. Minkow,' " Glickman recalled. "Everybody was just agreeing with everything he had to say."

Despite Minkow's prosperous image, ZZZZ Best had a history of money troubles.

In late 1984 and early 1985, ZZZZ Best overbilled customers by $72,000 by inflating their credit card charges. Minkow later admitted the problem, but blamed it on rug cleaning subcontractors.

Money Order Case

Minkow was sued in November 1984, for allegedly stealing and then forging about $13,000 worth of money orders from a Reseda liquor store to pay company bills. The case was settled out of court, without any admission of wrongdoing. In 1985, the IRS sued ZZZZ Best for $5000 in back taxes.

In the spring of 1985, Minkow met Jack M. Catain, Jr., whom Los Angeles law enforcement officials had long described as one of the area's major organized crime figures. Catain was convicted in a counterfeiting case the next year, but died before he could serve time in prison.

Catain offered to help arrange loans for ZZZZ Best. Minkow later said that he was charged 2% to 5% interest a week.

The relationship became public record when the two men had a falling out and Catain sued Minkow in December 1985, alleging that he was owed $1.3 million. The suit dragged on until Catain's death.

In an interview earlier this year, Minkow said he was unaware of Catain's reputation, explaining: "I was clearly fooled . . . that he was a legitimate guy and a nice guy and wanted to help."

Minkow's attorney, Arthur H. Barens, suggested that Minkow had been naive and fell prey to a crook.

"He is essentially a loan shark," Barens said of Catain. "He tried to intimidate and threaten this young man and extort money out of him."

'Sharks' Move In

Police believe that once Catain hooked the young entrepreneur, other mob figures were attracted to Minkow "like sharks circling a bloody fish," one investigator said.

In legal papers, both Minkow and Catain said the loans were to be used to help a growing part of ZZZZ Best's business, insurance restoration work.

Soon after Catain and Minkow got together, according to documents later filed with the SEC, ZZZZ Best signed a joint venture agreement with a firm called B&M Insurance Services to work on two projects worth $5 million, including a job in San Diego from Travelers Insurance.

Listed as the sole owner of B&M was Robert Victor, 51, of Woodland Hills. Minkow told friends that he had met Victor when he was a teenager and the older man helped him buy a car.

Gates' Allegations

At a press conference in July, Police Chief Gates listed Victor, also known as Robert Viggiano, as among the "organized crime subjects or associates of organized crime subjects" involved in the money laundering scheme. In 1971, Victor was indicted with the late Joseph A. Colombo, Sr., reputed head of one of the New York Mafia families, in a $750,000 jewelry robbery.

Victor, who pleaded guilty to attempted grand larceny in the New York case, will not comment on Gates' allegations.

Even if the lawyers, accountants and stock underwriters had no reason to question Victor's background, they could have been tipped off that something was wrong by a letter filed in the Catain lawsuit. Dated August 19, 1985, on Travelers Insurance stationery and addressed, "To Whom It May Concern," it confirmed that the insurance company had awarded ZZZZ Best a $1.5 million repair job in San Diego. The letter was signed by Travelers employee Thomas Padgett on the letterhead of his boss, David L. Tengberg, manager of the claims department.

His Own Company

Padgett, who said he met Minkow years before while working out at a San Fernando Valley gym, later left Travelers to work full-time for his own company, Interstate Appraisal Services of Van Nuys and Culver City. It was Padgett's company, according to SEC filings, that awarded ZZZZ Best millions of dollars worth of restoration contracts.

One of the Rooney Pace officials said that a member of the underwriting team did call the insurance company to check Padgett's background, but that Tengberg was on vacation. No one called him back.

Tengberg could have told the stock underwriters that the letter was a fabrication, and that Padgett was hardly in a position at Travelers to award multimillion-dollar contracts. Tengberg said in a recent interview that Padgett worked as a Travelers automobile appraiser. He inspected dented cars.

Padgett has refused comment.

In January 1986, ZZZZ Best became a public company, making its stock available for purchase, by merging with an inactive but publicly held Utah mineral exploration firm called Morningstar Investments.

'Confidant' Identified

Scott Dear, who worked as ZZZZ Best's controller for part of last year, said he was told that the move was directed by Maurice Rind of Encino, who served as Minkow's "confidant." Rind often came by in the late afternoon, Dear recalled, to talk with Minkow in his office.

Rind, twice convicted of stock fraud in the 1970s, was described by Chief Gates at his press conference as having organized crime associations.

"It was part of the mystery of Barry's world how he ever met these guys," Dear said.

Rind also helped the company qualify for a listing on the computerized over-the-counter stock market. One requirement is that a company have $2 million in assets. Dear said Rind helped line up a deal to pay stock and cash for $2 million worth of power generators from a Cayman Islands firm.

Rind denied any wrongdoing, saying he and a partner "don't do anything illegal."

By spring, ZZZZ Best wanted to raise some money and contacted Rooney Pace. The underwriters took one peek at the growth and profits of the small carpet cleaning company and suggested a stock sale.

Terrific Numbers

ZZZZ Best's numbers for the fiscal year that ended April 30, 1986, were terrific. Fueled by the insurance restoration projects, which supposedly brought in about half the business, ZZZZ Best's sales nearly quadrupled from the year before to $4.8 million, and its profits nearly tripled to $946,000.

Now that ZZZZ Best was a public company, somebody had to do a full audit on its numbers. George Greenspan, a New Jersey accountant, came out to Los Angeles to inspect the books and gave his OK, ZZZZ Best officials said. Greenspan declined to be interviewed.

Even better figures were coming. For the three months that ended July 1986, ZZZZ Best reported $5.4 million in sales, more than it had in the entire previous year. Profits were nearly $900,000 for the quarter.

Minkow was fond of saying that he would build ZZZZ Best into "the General Motors of carpet cleaning." Indeed, according to the ledger books, his company was earning about 17 cents for every $1 in sales. The real General Motors does well to earn 5 cents on the dollar.

'Interim Review'

But Rooney Pace said that to make the stock sale work, it wanted a larger accounting firm's name on the books, so ZZZZ Best hired Ernst & Whinney. The Big Eight firm was not asked to do a complete audit on the fabulous July 1986 results. Instead, it did "an interim financial review," which does not involve independent verification of the company's numbers.

On the surface, everything seemed fine.

Beneath the surface, however, things were frantic at ZZZZ Best, according to Morze. The company was juggling debts to several local banks and private investors, and the stock offering-which would bring an infusion of cash-was taking longer than expected.

The idea behind the insurance charade, Morze said, was to keep up appearances at least until the stock sale, then pump the money into the small, but legitimate, carpet cleaning business to help it grow.

To build the illusion of a thriving business, when ZZZZ Best got its hands on funds from a bank or private investor, "the money would go in a loop," Morze said. "It would go into the company or take a circuitous route so it would look like income."

Financial Loop

He said the loop began with Padgett's Interstate Appraisal Services-named by Gates as one of the "front" companies under investigation-which supposedly handed the insurance jobs to ZZZZ Best.

ZZZZ Best then supposedly hired a subcontractor-often Morze's own Agoura bookkeeping firm, Marbil Management-to supply labor and materials for the repair work.

In the 18 months before ZZZZ Best collapsed it paid Marbil $18 million but never received any services, according to the lawsuit filed by ZZZZ Best's directors against Minkow, Morze and Padgett.

In fact, Morze said, the money stayed in Marbil's bank account "for 20 seconds" before beginning the loop again.

Minkow refused to comment on Morze's portrayal, but his attorney branded the allegations of fraud "incredible" and suggested that Morze may have been acting on his own.

In any case, the professionals missed the ruse, although they did make a series of inquiries about ZZZZ Best and Minkow. The stock underwriters discovered the Catain lawsuit and insisted-against Minkow's wishes, they said-that it be mentioned in the stock prospectus. The prospectus even reported that Catain was under investigation by a grand jury.

Legitimate Job

Rooney Pace also checked out ZZZZ Best contracts for $200,000 in repair work for Crawford & Co., an Atlanta insurance adjusting firm with nationwide offices. It was legitimate work.

In late fall, however, Rooney Pace said there would be no stock offering unless somebody outside ZZZZ Best went to Sacramento to examine the biggest insurance project. Actually eyeballing a project-as opposed to making some phone calls to check-was unusual for them, the underwriters said. But then, 86% of ZZZZ Best's business now was coming from the one type of work.

Another ZZZZ Best associate found a new office building that could be used for the inspection tour, Morze said. "It was in the process of being leased out," he recalled. "There were a few floors not finished."

The associate told the building's rental agent "we might want to lease some space," Morze said, and asked if a group could inspect the building on their own over the weekend.

On November 23, Morze escorted the accountant and attorney to Sacramento. The law firm's spokeswoman said they saw photographs and blueprints of the project, then the building.

There Were Clues

Even if they were tricked into thinking the Sacramento building was part of a ZZZZ Best project, members of the underwriting team might have been tipped off by the elephantine $7 million price tag.

By contrast, Blackmon Mooring Steamatic, a Fort Worth firm that has been in the insurance restoration business for 40 years, was paid $2.1 million for its work after the Las Vegas Hilton fire a few years ago, company President Kurt Blackmon said.

Commenting on a later ZZZZ Best claim that it had won a $13.8 million contract to repair two buildings in Dallas, Blackmon said, "A $14 million contract in fire restoration would be the biggest contract ever to be let."

After the stock sale, the public began to hear more about this remarkable young salesman named Minkow. He appeared on TV shows, pumping iron for the camera and showing off his $698,000 Woodland Hills home and his Ferrari. The television show Eye on L.A. called him "the Rocky of rug cleaning."

Minkow joined other successful young entrepreneurs on The Oprah Winfrey Show. When another executive mentioned the difficulty of selling seasonal products like frozen yogurt or soft drinks, Minkow boasted, "I could sell frozen yogurt in a blizzard."

Glowing Report

Last March, Bob Grossmann, an analyst with the New York stock brokerage firm of Ladenburg Thalmann, wrote a glowing report likening ZZZZ Best to McDonald's and 7-Eleven. He predicted fast growth "under . . . its 20-year-old master entrepreneur, Barry Minkow."

In fact, ZZZZ Best's carpet cleaning business was growing-the company expanded from 374 employees and 13 offices around California at the time of the stock sale to 1030 employees and 21 offices in three states by spring.

A $2 million television ad campaign that aired from February through June brought in new business. Actors portrayed rival carpet cleaning salesmen as buffoons who tried to trick homeowners into paying too much for poor service. Then Minkow came on to confidently promise that ZZZZ Best was one carpet cleaning firm that people could trust.

In April, Minkow announced the deal that would take his firm big time: ZZZZ Best planned to buy KeyServ Group, a company that did $80 million a year in carpet cleaning for Sears customers. Drexel Burnham Lambert, a noted investment banking firm, was set to raise $25 million to finance the deal.

'Make It Look Real'

With the Sears business in the works, Morze recalled, Minkow told him, "Just somehow hold the insurance restoration together. Make it look real."

In May, as Ernst & Whinney was about to do its year-end audit, Morze took the accountant and ZZZZ Best's new controller-who also did not know of the ruse-on another building tour, this one to San Diego. Unlike the situation in Sacramento, Morze said, there actually was a little work being done by a ZZZZ Best subcontractor, putting in some acoustical tiles and wallboard, although the job wasn't worth anything like the $7 million the company claimed it was getting.

It all began to fall apart on May 22 when The Times reported on ZZZZ Best's past credit card problems. To calm investors, Minkow issued a press release the next week saying the company would report record sales and profits.

The professionals, however, apparently began to take a closer look.

Firms Bail Out

Four days later, Drexel Burnham Lambert quit the ZZZZ Best account without public comment. On June 2, so did Ernst & Whinney, which later attributed its move to information that some of the insurance work was phony.

By now, ZZZZ Best's board of directors had hired another Los Angeles law firm, Kadison Pfaelzer Woodard, to check out the newspaper reports. It tracked down Tengberg at Travelers and asked him about the Padgett letter.

Minkow was busy during this period. On June 24, according to real estate records, he got a $1 million loan from Michael L. Malamut, a ZZZZ Best board member, who took as collateral a third trust deed on Minkow's home. Late in June, he got a $2 million loan from his personal line of credit at Prudential-Bache, using some of his ZZZZ Best stock as collateral.

On the following Monday, June 29, Minkow was in Chicago to meet with Sears executives to try to keep the KeyServ deal alive.

Minkow Resigns

But three days later, Minkow suddenly resigned as ZZZZ Best's chairman and the succession of lawsuits and bankruptcy actions began.

Investigators are still trying to trace where all the money went. ZZZZ Best got about $12 million from its stock sale, another $7 million from a Union Bank loan and nearly $2 million from First Interstate. There was also a $10 million loan from European investors that a local businessman helped arrange.

The suit filed by ZZZZ Best after Minkow's departure alleges that he "drained" $3 million from the company during June by signing company checks made out to cash or cashier's checks that, among other things, supposedly paid for supplies for insurance jobs.

Law enforcement officials say they are investigating the apparent "laundering" of 30 checks from ZZZZ Best, each for $9500, over a two-day period shortly before the firm filed for bankruptcy protection. The checks allegedly were taken to Las Vegas-investigators won't say by whom-and used to buy chips at two casinos. Then the chips were cashed in and the money hauled back to California in brown paper bags, they said.

Hunting the Money

By the time ZZZZ Best's bankruptcy trustee started poking through the company's bank accounts, only about $30,000 was left.

Minkow's attorneys say that he doesn't have the money, that it went back into the business. He filed for personal bankruptcy on August 7.

Although Minkow declined to be interviewed, Barens, one of a quartet of lawyers now representing him, said that Minkow never visited any of the major insurance job sites. Minkow relied on Morze to run that end of the business, Barens said, adding: "Mr. Morze may be aware of things based on his own activities that Mr. Minkow is not aware of."

A private investigator working with the legal team also suggested that Minkow was victimized by others.

'He's Still 21'

"He's still 21 years old," said the San Francisco investigator, Jack Palladino. "He was out there at the point (representing) the company and having a good time selling this company. Meanwhile, more experienced people like Mark Morze are taking care of the business and keeping the accounts on the (insurance) reconstruction work."

Palladino said Morze is now cooperating with police, hoping "to do very little time and do it in a little prison camp. And he doesn't expect to lose his assets."

Morze confirmed that has helped lead investigators through the paper trail. He said he is talking because too many people know what happened and "the damage has been done."

Morze insists that Minkow knew what was going on. "Barry was the field general, the chief of state," he said. "I worked for Barry. He's the guy who called the shots."

Although Morze readily admits he was a central figure in wrongdoing, he said he had hoped that ZZZZ Best would become a legitimate, profitable carpet cleaning company.

The Sears deal could have been "the cure," Morze said, allowing ZZZZ Best to "get rid of this bogus restoration business. . . .

"It could've worked where there would have been no victims. We came unbelievably close."


"Shaking Billions From Beatrice," by James Sterngold, The New York Times, September 6, 1987

Henry Kravis was in the middle of a safari in the Kenyan bush two years ago when he decided to call his office in New York. Once he got through, he received news of a far more interesting hunt: His partner, George Roberts, told him that the board of the Beatrice Companies had just forced out the chairman, James L. Dutt.

''In a dream I had thought, maybe, sometime, we could buy Beatrice and we'd talk about it from time to time,'' said Mr. Kravis, a partner in Kohlberg Kravis Roberts & Company, the big New York buyout firm. ''But when I heard George, I said, 'That's it. There must be real confusion there. We've got to do it.'''

What began as a crackly intercontinental conversation has turned into probably the most lucrative leveraged buyout ever - a deal that surpassed the expectations even of those involved. KKR and its partners bought an ailing conglomerate for $6.2 billion, using relatively little of their own money. After only 16 months, they are completing the liquidation of the company and it appears that their profits will exceed $3 billion. Others have done transactions like this, but few have turned them over this fast, and none have churned out such profits.

''We knew it was a good deal, but there's no question we didn't anticipate it would turn out quite this well,'' Mr. Kravis said.

Now, the last leaves are being shaken from the Beatrice money tree. Last week, the remaining assets of the company were put on the block. And it seems fitting that the last portion of Beatrice to be auctioned off is its domestic food operations - the core business that began as a dairy concern in Beatrice, Nebraska, in 1894 and grew into one of the world's largest food and consumer goods producers. At its height, Beatrice sold everything from Playtex lingerie and Samsonite suitcases to La Choy chow mein, Hunt's ketchup and Tropicana orange juice - a behemoth created in a previous era when Wall Street generally equated size with profitability. With the final sale, however, Beatrice will have been reduced from a sprawling conglomerate into a pile of profits remarkable even by Wall Street's oversized standards.

But the Beatrice story goes beyond immense legal profits, into the darker realm of illegal trading that has been exposed in the past year. It was an occasion when some investment bankers suspected, and tried to handle, the problem of insider trading, when people privy to a deal leak secret details to others who profit illegally from the information. At one point during the Beatrice deal, some principals feared their banker was telling others, and tried, unsuccessfully to hide information from him.

The Beatrice transaction also illustrates the role that personal motivations can play in shaping corporate destinies. In this case it is a tale of the fall of Mr. Dutt, Beatrice's former chairman, and the comeback of Donald P. Kelly, the crosstown Chicago rival Mr. Dutt thought he had bested. Mr. Kelly lost the conglomerate he had run, Esmark Inc., to Mr. Dutt in a Beatrice acquisition in 1984.

With the Beatrice deal, Mr. Kelly returned to steal back the prize: He participated in the buyout and presided over Beatrice's liquidation. And he has also spun off a new concern made up of several Beatrice divisions that he will head. It is called E-II Holdings - an odd name that, of course, stands for Esmark II. Its stated aim: to buy and sell more companies.

Corporate restructurings have stirred sharp criticism from people who claim such deals just capture short-term profits and do not create any jobs. Jim Hightower, Texas' commissioner of agriculture, complained in a recent essay that Kohlberg Kravis now controlled the nation's largest food conglomerate but ''couldn't make a biscuit if someone kneaded the dough.''

Kohlberg Kravis' reply is that it takes inefficient giants and puts them in the hands of managers who own part of the company, and thus work harder to make them more competitive. The units of Beatrice, the firm says, are functioning smoother and more profitably in private hands.

''What these buyouts do is just accelerate what would have happened anyway,'' said Marshall E. Blume, professor of finance at the Wharton School of Business.

The Dollars

For a privileged handful of participants, the financial rewards from the Beatrice buyout have been stratospheric. For starters, the original deal generated more than $250 million in fees and payments to various players.

KKR, which has done more than 30 buyouts since it was founded 11 years ago, earned a $45 million fee from BCI Holdings, the holding company formed to acquire Beatrice. Drexel Burnham Lambert, the securities firm that has shaken the investment world by pioneering the use of high-yielding, low-quality ''junk'' bonds to finance takeovers, was paid $86 million for raising $2.5 billion in junk bonds for the deal. Kidder Peabody & Company, another investment bank, collected $15 million for advising KKR.

Mr. Kelly was paid $6.75 million at the time of the buyout for his work in planning it. He received an additional $13 million one year after the deal for directing the strategy that broke Beatrice into 10 parts - on top of his $1.3 million annual salary. More fees were generated by the sale of the divisions.

Then there were the ''golden parachutes'' granted to Beatrice's top six executives to assure that they would agree to the deal. William W. Granger, Jr., Beatrice's chairman at the time of its buyout, only committed to approving the deal after Kohlberg Kravis agreed to pay him, and the others, more than $22 million.

That, however, is loose change compared to the profits earned by the equity investors in BCI Holdings. While the final deal remains to be done, the money already collected from the sale of the other pieces already exceeds $6.4 billion. If the domestic food operations now on the block fetch the expected price, $2 billion to $4 billion, plus the assumption of $2 billion in debt, the investors will earn nearly $5 for every $1 invested. And that payoff will have come after less than two years, a remarkably short period of time. The typical turnover for leveraged buyouts is nearly five years.

Other leveraged buyouts have produced a higher percentage return on the equity invested, but the absolute figures for Beatrice are believed to be the largest ever.

''It's frightening,'' conceded one of the participants in the buyout.

Assuming a final sale near the high end of the range, Kohlberg Kravis, which holds 63.5 percent of the fully diluted equity, will have turned a profit of about $2.4 billion on an initial investment of $400 million. That sum will be shared with institutions that invested in its buyout fund, which put up most of the capital. Drexel's stake of about 20 percent has risen by more than $800 million. (Sources close to the firm say most of that stake is owned by Michael Milken, the head of Drexel junk bond operations.) Mr. Kelly's 7.5 percent share has grown to about $277 million. The rest of the stock is owned by some executives who run the company.

The acquisition was, however, extraordinarily risky because less than 10 percent of Beatrice's original purchase price - about $417 million out of $6.2 billion - was paid for with equity. Most of the capital was borrowed. It was exceptionally difficult to raise the financing. ''We were sort of crawling when we crossed the goal line,'' Mr. Kravis said. A slide in the stock market, which would have made it tougher to sell Beatrice operations, or a jump in interest rates, could have turned the deal into a disaster. But the strongest bull market in decades and a steep slide in rates turned it into a grand slam. ''Let's face it,'' said Jeffrey P. Beck, an investment banker at Drexel Burnham who worked on the transaction. ''This has been perhaps the best market for selling assets in the history of finance.''

''Brother, they took some big risk,'' said Goff Smith, the retired chairman of Amsted Industries and a member of Beatrice's board before the buyout. ''When you take a big risk like that, you're entitled to a big profit.''

Added Mr. Dutt, now a consultant in Chicago: ''I'm not sure they did maximize the return because of all the fees. But you can't take anything away from KKR. They did realize some of the values in that company.''

For his part, Mr. Kravis defended the fees because of the enormous risks involved and the unprecedented size of the deal. ''I don't think the fees were excessive given the new ground we were breaking,'' he commented.

The tale of the Beatrice buyout began in 1984, when Mr. Kelly decided to sell Esmark, the company he had built from the Swift & Company meat processor through acquisitions.

Esmark's stock had risen smartly in the preceding years, but Mr. Kelly had decided that it was time to cash in on its value. (Mr. Kelly was unavailable to comment for this story, according to a Beatrice spokesman.) Mr. Kelly, however, wanted to keep running a major corporation. He first came close to a merger with Nabisco Brands, now RJR Nabisco, according to several people involved. But the deal was called off, in part because of a dispute over who would run the new concern, according to the sources.

At that point Mr. Kelly turned to KKR, which was considered Wall Street's premier leveraged buyout firm. He negotiated a buyout of Esmark at $55 a share that would have left him in charge. Suddenly, Beatrice entered the fray. It offered $56 a share. Esmark's investment bankers hinted that they would take some evasive action to thwart Beatrice and spoke to Beatrice's advisers of bringing in another bidder to top their offer - a ploy to attract a higher price.

The gambit worked far better than expected, investment bankers admitted later. Mr. Dutt, Beatrice's chairman, was so eager to buy Esmark - in spite of his having initiated a program to slim Beatrice - that he topped his own bid. Beatrice offered $60 a share, or $2.8 billion.

''We were floored,'' Mr. Kravis said. Added a Beatrice board member: ''The reality is that Dutt trumped his own ace.''

Mr. Kelly was out of a job. But he took his golden parachute, worth nearly $18 million, and began to shop for buyout opportunities of his own.

Mr. Dutt had acquired Esmark to strengthen Beatrice, but his pursuit of Esmark helped turn some of his own directors against him and alerted some investment bankers to Beatrice's vulnerability.

It soon became clear that the parts of Beatrice, if valued separately, were worth more than the whole, as reflected in stock price. And analysts circulated reports that the company was ill-managed and inefficient.

Gathering Steam

One banker who saw an opportunity was Mr. Beck, who then worked at Oppenheimer & Company and had advised Mr. Kelly. Mr. Beck tried to convince Kohlberg Kravis and Mr. Kelly that they ought to take on Beatrice together.

While he had been ignored at first, by April 1985 he had ammunition. There were reports from Beatrice that Mr. Dutt had been acting strangely. He had forced out key executives, he was isolating himself and was out of touch for long periods of time, Beatrice officials said.

''I felt a deal was a growing possibility because of the reports that Dutt was acting irrationally,'' Mr. Beck said recently. ''As Dutt started to blow some of his senior people away, I thought that not only did the numbers make sense, but the company was going to be leaderless soon.''

Outside members of Beatrice's board were worried by his behavior and about some major expenses he was taking on, several said. They were particularly concerned by a commitment to spend about $80 million to support an auto racing team, led by race car driver Mario Andretti and intended as a promotion.

Finally, the company's outside directors met secretly in New York in the summer of 1985, and a consensus was reached that Mr. Dutt had to go. Their fears had been fanned by an ultimatum from several senior executives that they would leave if Mr. Dutt stayed. The matter came to a head at a special board meeting in Chicago on August 3. By the end of it, Mr. Dutt had resigned.

But the board had thought more about getting rid of Mr. Dutt than about replacing him, some of its members now admit. Instead of promoting one of the company's executives, or bringing in a new person to become chairman, they brought in Mr. Granger, who had retired as vice chairman earlier. Wall Street perceived a growing vacuum at the top.

A KKR associate, Kevin A. Bousquette, had been assigned just days before Mr. Dutt's departure to begin doing calculations of Beatrice's financial status and prospects. Mr. Bousquette also came up with the deal's code name: Andretti.

The first problem KKR faced was gaining good information about what was happening to company operations, which it felt were quickly spinning out of control. The solution: Turn to the executives Mr. Dutt had forced out.

But as KKR was sizing up Beatrice's operations, word of a takeover was spreading to arbitragers. Beatrice was ''in play,'' a deceptively light phrase that refers to the practice of arbitragers buying up large amounts of a company's stock in hopes it will be acquired. This can become a self-fulfilling prophecy because the presence of these short-term investors means that a large amount of a company's stock would be sold quickly if a bidder surfaced - and is thus an invitation to potential bidders.

The First Boston Corporation fanned the fears at the company by suddenly canceling a meeting with Beatrice officials and telling them that it believed Beatrice was being targeted for a raid, a source close to First Boston said. He added that First Boston's arbitrage department bought Beatrice stock heavily.

''All of a sudden, I started getting calls from arbs,'' said Murray L. Weidenbaum, a professor at Washington University and former head of President Reagan's Council of Economic Advisers who sat on Beatrice's board.

Enter Marty Siegel

By early September, Kohlberg Kravis and Mr. Kelly had engaged investment bankers and lawyers. Drexel Burnham was hired to raise several billion dollars through junk bonds, the most difficult part of the financing for a buyout. Kidder, Peabody was retained and its merger star, Martin A. Siegel, was assigned to the job.

All of this was supposed to be taking place in secrecy but the market was reacting. Beatrice's stock price rose about $10 a share, to more than $40, in the month preceding Kohlberg Kravis' first announcement of an offer on October 16, 1985.

Some at KKR were suspicious of the price rise, and the concern was focused on Mr. Siegel, according to sources at the firm. He was regarded as being too close to some arbitragers. And this concern over Mr. Siegel's reliability would grow. He was kept from a key meeting in January at which an important revision of the buyout was discussed, sources at the firm said. But he later gained access to the information.

The run-up in Beatrice stock was no accident. Ivan F. Boesky, Wall Street's largest arbitrager, who later settled the biggest insider trading case ever, was a heavy buyer when the planning was supposed to be secret, sources with knowledge of the investigation said. He got information from Mr. Siegel, they said.

Mr. Boesky settled his insider trading charges in November 1986, and Mr. Siegel followed last February. The government charged Mr. Siegel with selling insider tips to Mr. Boesky and with swapping tips with Robert Freeman, head of arbitrage at Goldman Sachs & Company. The government has also said that the last time Mr. Siegel discussed with Mr. Boesky payment for his tips was late 1985 - during the Beatrice negotiations.

Sources close to the investigation said Mr. Siegel also claimed to have given inside information about Beatrice to Mr. Freeman. Goldman, sources said, was a heavy seller of Beatrice stock in January 1986, when KKR was negotiating a change in the deal's terms that decreased its value.

An indictment against Mr. Freeman on insider trading charges was dismissed. But the United States Attorney has said Mr. Freeman will be reindicted on broader charges. Beatrice was not mentioned on the earlier indictment, but sources have said that it is one of the stocks under investigation for the expected new indictment. Beatrice is on the list of stocks being investigated, legal sources say. Mr. Freeman's lawyers have said he will fight any charges. Drexel, too, is the subject of a government investigation, but has not been charged and has denied wrongdoing. Beatrice is not believed to be among the deals for which Drexel is being scrutinized.

By early October 1985, the arrangements for the buyout were all but completed. A syndicate of banks, led by the Bankers Trust Company, was willing to lend $4.1 billion.

One of the last steps in preparing the takeover was a meeting on October 7 at Mr. Milken's Beverly Hills office. Some participants said they had left it uneasy, feeling that Mr. Milken had too much on his mind. Drexel officials, however, say it was vintage Milken. ''To understand Mike, you have to talk like him,'' said Leon Black, head of Drexel's merger unit. And the deal was on.

Ironically, at the same time, Mr. Siegel was having meetings of another kind: Drexel was trying to recruit him. Drexel felt it needed a high-profile investment banker to add more visibility. In February, Mr. Siegel switched firms - one year before he pleaded guilty to two felony counts in the insider trading scandal.

On October 16, 1985, the first step in the Beatrice buyout was taken. Mr. Siegel telephoned Salomon Brothers, which represented Beatrice, and said KKR was making a formal buyout bid. The initial offer was for $4.9 billion and it sparked confusion at Beatrice. ''It was frenetic,'' said Mr. Weidenbaum.

Many executives and board members felt strongly that the company ought to stay independent. But, without the board's knowledge, David E. Lipson and Richard Piggot, two executive vice presidents, began trying to arrange a competing leveraged buyout. They asked Goldman Sachs to evaluate the possibility.

While it was intended as a foil, this turned out to be a key to KKR's success. It made clear to others inside and outside Beatrice that the company's senior management was in disarray and that most had abandoned the idea of staying independent.

Goldman's role was brief, though. On October 18, Goldman officials telephoned Mr. Kravis and said Beatrice's executives would be willing to consider a buyout, but only if Mr. Kelly were excluded. The offer was rejected. The deal, Mr. Kravis said, could be financed only if the banks were certain that KKR would bring in competent management to straighten out the company, and Mr. Kelly was the key to that.

But the real message was that Beatrice was for sale. ''What that told me is that it was just a matter of price,'' Mr. Kravis said.

Salomon Brothers and Lazard Freres worked to put together alternatives for Beatrice, but there were few. ''You can't fight when the board is not a fighter,'' said one investment banker in the talks.

''It had been a great company once and had the assets to become a great company again with good management,'' added Louis Perlmutter, a partner at Lazard who had advised Beatrice for years. ''But it couldn't realize the potential without the right management, and we had to play with the cards in our hands at that point.''

On November 14, 1985, the Beatrice board entered into an agreement - one modified in January 1986, when Kohlberg Kravis raised questions about a series of tax issues. Terms were reached on February 2, for an acquisition consisting of $40 in cash and $10 worth of securities for each Beatrice share. The deal closed in April.

Major institutions had been investing in leveraged buyouts for a decade, but the success of the Beatrice deal has helped release a torrent of capital to finance more.

But the Beatrice story is not over. In its announcement last week that the domestic food operations were for sale, BCI said that it was reviving the Beatrice name, which had not been used since the buyout closed. Now there is an Esmark II and there is a new Beatrice. And both stand poised to be shaped by whatever forces Wall Street decides to unleash next.


"King Of The Silver Screen," by Brian D. Johnson, Maclean's, September 28, 1987

In the office of a Hollywood studio executive, a screenwriter pitches his newest script idea:

WRITER: It's a movie about an entertainment lawyer who starts out with nothing and ends up with everything. Sort of a cross between Rocky and Citizen Kane.

EXECUTIVE: Sounds awful.

WRITER: Wait, here's the hook. The guy is a Canadian. He's crippled by polio as a child. But he fights back. He's a born contender. When he grows up, he starts producing films, but that's a bit of a dead-end street, because this is Canada, right? So he starts building these little movie theaters in shopping malls. People think he's crazy, and he almost goes bankrupt. But five years later this guy who could barely pay the rent is in charge of a company with assets of $1 billion—about $18 million of it in his own name. And he's only 38. The company owns movie screens all over North America. It's a popcorn kingdom gilded with real butter. The guy wants desperately to be a class act: he collects art like it's going out of style. But his ambition knows no bounds. One day he's busting cartels. Then he teams up with the biggest entertainment conglomerate on the planet. The next thing you know, it looks like he's about to take over Hollywood itself.

EXECUTIVE: I like it. But let 's get rid of the Canadian angle.

The story of Garth Drabinsky's meteoric rise is the stuff of legend. And if he ever did become the subject of a movie, Drabinsky's own burgeoning empire would have the resources to produce, promote, distribute and exhibit it on a grand scale. The brash chairman and chief executive officer of the Toronto-based Cineplex Odeon Corp. has become the classic example of a Canadian entrepreneur beating Americans at their own game. By building stylish new cinemas and restoring old ones, Drabinsky has almost singlehandedly rejuvenated the stagnating art of moviegoing. Art deco design, Italian marble, wool carpets and cappuccino bars have become Drabinsky trademarks in theatre lobbies from Edmonton to Manhattan. At last count, Cineplex owned 1511 screens in more than 465 locations across the continent. But Drabinsky is not content to be a mere merchant. In fact, he has begun to act more like a statesman— Canada's Hollywood connection.

At Toronto's Festival of Festivals last week Drabinsky's influence was on full display. At his bidding, Paul Newman arrived to provide the festival with a glamorous finale. The actor appeared with Drabinsky at a gala weekend screening of The Glass Menagerie— a movie version of the Tennessee Williams play that Newman directed and Drabinsky financed. Drabinsky also opened the Toronto festival's trade forum with a speech that Cineplex billed as "a major policy statement" dealing with free trade and government film legislation. Major policy statements usually come from cabinet ministers, not entrepreneurs. But to some observers, Drabinsky holds more influence over Canada's movie industry than anyone in Ottawa. Said one federal department of communications official: "He's the biggest player in Canadian film. He's very powerful."

Rivals: The size of Drabinsky's game board took a quantum leap last year when MCA/Universal, Hollywood's largest studio conglomerate, became Cineplex's major shareholder. MCA Inc. now owns 48 percent of Cineplex. Last June on MCA's Universal lot in Los Angeles, Cineplex opened the world's largest cinema, a two-acre complex with 18 screens. In another co-venture, Cineplex and MCA are building a 414-acre studio and theme park to compete with Disney World in Orlando, Florida, with, you guessed it, a Cineplex theater—a prototype for an international chain that Drabinsky predicts will be a multibillion-dollar business by the year 2000.

With his Napoleonic drive and aggressive style, Drabinsky is not universally liked. There has been a high turnover among new Cineplex executives unable to adjust to a boss who has been known to phone them at 2 AM to talk business. Pushing competition to extremes, he has earned the nickname Garth Vader—and other derogatory epithets. Twice he has finessed his rivals at the Famous Players Theatres chain with deals that whisked cinema properties out from under their feet. And last month his takeover of New York's Regency Theatre, a venerable home of repertory cinema, made him the target of a protest led by stars Woody Allen and Tony Randall.

Ferocity: Generally, however, Drabinsky draws high praise from the film industry. Said Newman, in an interview with Maclean's: "His personality, at first look, appears to be somewhat abrasive, but underneath that is a guy with incredible taste and aspiration and charity." Referring to The Glass Menagerie, Newman added, "He's husbanded this film with a kind of ferocity that's really fresh." Another star, Warren Beatty, has hailed Drabinsky as "the most astute person in exhibition that I have spoken to."

And now, by integrating exhibition with production and distribution, Drabinsky has helped realign Hollywood's power structure. "He's seen as a tremendous shot in the arm for the industry," said David Puttnam, who last week resigned as president of Columbia Pictures. "In our industry, as in most, vertical integration is the way to go." Puttnam, who discussed future plans with Drabinsky last week in Toronto, noted that Hollywood's "perceptions of Garth have shifted. 18 months ago, he was seen as a transient force. Now he's a very important figure."

But unlike his Hollywood colleagues, Drabinsky faces a special dilemma. On the one hand, he loudly champions the cause of independent Canadian film production. On the other, he has strong and binding loyalties to Hollywood's major studios, which have a virtual monopoly over the nation's movie distribution. Communications Minister Flora MacDonald recently proposed legislation that would force the major studios to allot a larger share of film and video distribution to Canadian companies. The idea excited local producers, but aroused outright hostility in Hollywood. And in the heat of free trade talks, the legislation has been indefinitely delayed. "It's like D-Day," said an aide to MacDonald. "The troops are in the boats, and we're all waiting to see if the weather is clear enough for us to hit the beaches. But the matter is out of our hands."

If Drabinsky's view prevails, the boats may never set sail. In his speech to 500 delegates at the Toronto trade forum, he bluntly rejected MacDonald's proposal as "too draconian." Then, to sweeten the medicine of his message, Drabinsky painstakingly detailed a new tax deduction system for Canadian film producers. Drabinsky had already discussed it with Communications and Finance ministry officials in Ottawa, where he claims "it was very well received." As Toronto festival director Helga Stephenson has observed: "Garth has always worked with the government. And the government has always come up with policies that helped him." Drabinsky promotes himself and his ideas with Olympian self-confidence. Last month Montreal's World Film Festival presented him with a special "Renaissance Man of Film Award" at a $50-a-plate luncheon organized by Drabinsky's own staff. About 600 industry insiders dutifully paid homage to a man acutely conscious of his place in history. In accepting his award, Drabinsky declared that he stood "in direct line with the remarkable designers and builders" of ancient Greek amphitheatres. Regrettably, he added, "the great impresarios" have not been remembered along with the playwrights whose works they staged, Sophocles and Euripedes.

Gruff: The phalanx of head table guests testifying to Drabinsky's accomplishments was impressive. Among them: Columbia's Puttnam, MCA president Sidney Sheinberg and Donald Kehoe, CEO of Coca-Cola Ltd.—which owns 2 percent of Cineplex and controls Columbia—as well as actor Michael Caine, director Norman Jewison and former prime minister Pierre Trudeau. "It was not a typical Hollywood gathering," Drabinsky observed later. "It was peppered with erudite individuals. Even the Hollywood people there were men of substance." Sitting next to Trudeau at the head table, Drabinsky urged him to make a political comeback: "It would be like Ivanhoe returning triumphant on a white horse. I told him, 'You've got to use my expression, carpe diem—seize the day.'"

Currently, Drabinsky seems to enjoy the occasional dash of Latin. He used it when he took the podium at the Toronto festival, opening his remarks to the industry with the gruff challenge "Quo vadis?" (Where are you going?) But the ancient maxim sounded more colloquial than classical in Drabinsky's tough guy accent. It is the diction of a carnivorous dealmaker who bites off his words and chews them thoroughly before spitting them out—of a man who has fought his way to the top.

Garth Howard Drabinsky was born in Toronto in 1948, the eldest of three sons. His father, a professional engineer, ran a modest air conditioning installation business. Both his parents are still alive and were proudly snapping pictures of their son at the Montreal tribute. At age 4, polio dramatically changed Garth's life. He was placed in a hospital quarantine ward for two months. "There were about 150 kids," he recalled, "three-quarters of them in iron lungs. And each day some would be wheeled off as they died." Drabinsky spent his childhood checking in and out of operating rooms. "The pain I was subjected to in surgery was indescribable," he recalled. "I remember screaming at nurses, screaming for morphine. They had to wean me off the stuff. It was embarrassing, because whatever self-pride you had, you're reduced to a shriveling idiot. The ordeal," Drabinsky added, "is probably the reason I'm so intolerant of people complaining over menial matters."

Champion: He underwent corrective surgery for five summers, returning to school each fall in a cast. Finally, he was able to walk without a brace, although he still has a pronounced limp. He compensated for his disability by becoming a hardworking competitor in high school. "I wasn't winning any dance contests," he said—but he was getting outstanding class marks, and acquiring a reputation as a debater and, generally, as a student leader. Later he studied commerce and finance at the University of Toronto, where he also met his wife, Pearl. Taking the direct approach, he simply walked up to her in the cafeteria one day and asked if she liked the music of Charles Aznavour. "I thought he was exceptionally mature," recalls Pearl. "He was tremendously interested in securities and the stock market." They married in 1971.

Nausea: At Pearl's urging, Drabinsky entered law school after two years as an undergraduate. There, he launched Impact, a national monthly cinema magazine, and later published a biweekly movie trade paper The Canadian Film Digest. After his call to the bar, Drabinsky set up a successful entertainment law practice and authored a 1976 textbook titled Motion Pictures and the Arts in Canada: The Business and the Law, which still serves as a standard reference.

Next, putting his theories to the test, Drabinsky plunged into the heady world of Canadian film production and made an auspicious mark on a fledgling industry. He produced six movies, including The Silent Partner (1977), with Christopher Plummer; The Changeling (1979), starring George C. Scott; and Tribute, for which Jack Lemmon received an Oscar nomination in 1981.

He also made a less successful stab at conquering Broadway. In 1978 he coproduced A Broadway Musical, a $1 million venture which New York critics panned. Deciding to pull the plug after only one night, Drabinsky took a long walk along rain-soaked streets from the theater back to his hotel. "I had this tremendous nausea," he recalled, "but the experience made me that much more determined that one day I would come back to New York—city of cultural consequence." And he has: he now owns 19 movie houses in Manhattan, including the small but prestigious Carnegie Cinema.

Bankruptcy: Launching his silver screen empire in 1979, Drabinsky cofounded Cineplex with veteran exhibitor Nathan Taylor. Together they pioneered the concept of multiscreen cinemas in Canada, starting with an 18-screen complex in Toronto's Eaton Centre. Within two years the company had 111 screens across Canada. But exclusive deals between the major studios and the two dominant exhibitors—Famous Players Ltd. and Odeon Theatres—froze Cineplex out of the picture. That, combined with economic recession, drove the company to the brink of bankruptcy.

Putting his political instincts to work, Drabinsky mobilized a crusade against his competition. In 1983 he instigated a crackdown on the studios by the federal Combines Investigation Branch, forcing them to allow competitive bidding for movie exhibition rights for the first time in three decades. "Drabinsky was willing to risk all," said Lawson Hunter, then director of investigation for the branch. "By coming forward with documents and testimony, he did something that no one else in the industry was able or willing to do."

Despite that breakthrough, Cineplex was still financially troubled. Drabinsky and his partner Myron Gottlieb (now the firm's chief administrative officer) obtained $2.5 million from Cemp Investments Ltd., which is controlled by Seagram's Bronfman family. At one point during preliminary discussions, Drabinsky asked Senator Leo Kolber, then vice chairman of Cemp, what he expected him to do. "I expect you to build the biggest entertainment corporation in the world," Kolber said. Replied Drabinsky: "No small mandate."

Edge: The injection of Bronfman gold financed Cineplex's expansion, a remarkable corporate success story. Meanwhile, Drabinsky pursued his competitors with a vengeance. In a 1986 real estate deal, Cineplex paid $4.5 million to capture half of Famous Players' Imperial Theatre in Toronto.

Because Drabinsky controlled the access to their theaters, Famous Players was forced to shut down its half.

Last month Cineplex moved again, buying a $40 million property on Toronto's fashionable Bloor St. that includes Famous Players' old University Theatre. Although a contract clause forbids him to operate a cinema on that site, Drabinsky plans to open a large six-theater complex that would serve as a new home for Toronto's film festival—next door. Famous Players president Walter Senior questions the wisdom of such acquisitions. "It's not healthy competition," Senior said. "We all learn in school that when you set out to destroy someone, it becomes a weakness." But Drabinsky says such maneuvering "keeps us alert; it gives us our edge—and there's nothing wrong with that." Drabinsky continues to acquire new properties, often in marathon negotiations behind locked doors. "I try whenever possible to live honor-bound to my commitments," he says. "But the level of integrity at the table is very low. I go into a real estate negotiation and feel like I have to take a shower at the end of the meeting."

He has become the new godfather of movie exhibition, a bold spoiler in an old boys' game. He conducts the expansion of the Cineplex empire like a military campaign, commanding a staff of 13,500 that includes close to 100 theater architects. And some of his veteran cohorts express an almost messianic level of loyalty.

Cineplex's first employee was Lynda Friendly, who has known Drabinsky since they attended synagogue together as teenagers. Now 37, Friendly is senior vice president of marketing and communications, a lone female executive in a male-run industry. Style-conscious, expensively dressed, she serves as Drabinsky's ambassador and organizer— the first lady of Cineplex Odeon. She sits in on all of Drabinsky's interviews. And she organizes Cineplex's splashy theatre openings, often flying to them with Drabinsky on the company jet.

Cult-like: Friendly says her boss sets a grueling pace. If they arrive in a city after midnight to open a theater the next day, he insists on visiting the theatre before checking into the hotel. "Garth is so bloody energetic," she adds, "I don't know how he does it. It's mind over matter. He stretches people to their absolute limit. He is a teacher, a mentor—a leader." Friendly's corporate 3 loyalty is an easy target for cynicism. When Senator Kolber introduced Drabinsky at the Montreal tribute, he said that she made notes about her boss that "sounded like a description of the great man of Nazareth." But Friendly displays equal enthusiasm in showing off carpet swatches for theater lobbies. The devotion reflects an almost cult-like philosophy at Cineplex. In Drabinsky's words: "This corporation has its own culture. When I interview a new employee," he adds, "I make it clear: 'This is a different company than you've ever been exposed to.'"

Drabinsky's office in Cineplex Odeon's Toronto headquarters is a sprawling suite dominated by the fruits of his patronage. A sculpture by Saskatchewan artist Joe Fafard of the painter Vincent van Gogh—his ear lopped off and a palette in his hand— leers madly toward Drabinsky's black granite desk. On the walls are large, vivid canvases, most of them abstract and all of them Canadian: Drabinsky owns one of the country's largest private collections of Canadian contemporary art, his paintings lining the corridors of Cineplex's entire executive wing.

Imperial: Drabinsky has also commissioned almost $1 million worth of paintings for Cineplex theater lobbies throughout North America, and a pair of massive canvases by Toronto's Harold Town adorn the new Universal City complex in Los Angeles. "In all the old movie palaces," said Drabinsky, "there were always important works of art, murals and frescoes."

Decor is the icing on the cake of his renaissance in theatrical real estate. Drabinsky takes a keen interest in the design of his cinemas. In choosing colors for the Cineplex logo, he decided on a combination of imperial purple and fuchsia. "I felt this would be more of a bravado kind of statement," he said. "I don't think anyone was ready for that." And the corporate logo itself hearkens back to the curved bowl of the Greek amphitheatre, "a logo," he added, "that will last for years."

How long Drabinsky can sustain his relentless pace is another question. Commuting by jet to business meetings, theatre openings and speeches, he spends more time on the road than at home. "I never totally unwind," he says. "I've come close a couple of times in the past 10 years. But I've never spoken to a successful businessman who has made it from a zero-base position without sacrifices along the way."

Drabinsky's wife, Pearl, a 40-year-old former French teacher, sips coffee in the living room of their Toronto home. The brick house—which her husband rarely has time to enjoy—is a renovated paradise with a gallery of art on the walls, cathedral ceilings, curved balustrades and a rear window that overlooks a swimming pool and a ravine. Gracious and charming, Pearl seems to have none of her husband's aggressive edge. "When one person is so immersed," she says, "the other can't be like that. Somebody has to take over home and hearth."

Legend: Pearl says that her husband is a devoted father—and protective of the privacy of their two children, aged 12 and 9. But his absences mean she often serves as both mother and father. Their marriage, she acknowledges, "is not a picnic, but after 16 years our relationship hasn't changed." However, her husband's image as a callous entrepreneur bothers her. "He has taken a lot of flak for being successful," she says.

Meanwhile, Drabinsky shows no signs of slowing down. In fact, he is sometimes touted as a candidate for Sheinberg's job as MCA president, if and when Sheinberg replaces the conglomerate's ailing chairman, Lew Wasserman. Drabinsky disclaims any such ambition, but Columbia's Puttnam said, "I would assume at the end of the day that he would find it irresistible."

Unapologetic ambition finds more favor in the United States than Canada. And Drabinsky acknowledges that his style "is un-Canadian in many ways— the philosophy that we're going to make it happen today, not tomorrow." Carpe diem remains the key to his legend—a legend that few appreciate more fully than Drabinsky himself. "It's a fascinating story," he says, reflecting on his life with a sense of genuine wonder—as if it too were a theatrical property that he might eventually project on the big screen.


"Company News; Alexander's Again Is A Trump Target," by Kurt Eichenwald, The New York Times, October 2, 1987

Donald J. Trump, the New York developer, has quickly shifted his attention back toward Alexander's Inc., a chain of 14 department stores in the New York City area.

In a filing with the Securities and Exchange Commission, Mr. Trump asked for Government clearance to buy ''an unlimited number of Alexander's shares,'' in hopes of gaining a controlling stake in the company.

Mr. Trump bought 20 percent of Alexander's in November from ALX Limited Partnership, a company owned by Robert M. Bass of Fort Worth. On Monday, however, Mr. Trump ended talks with Interstate Properties, a New Jersey development company, on a possible joint acquisition of Alexander's for $47 a share, or about $127 million.

Mr. Trump was reported then to have been concerned about rising interest rates, a factor making the deal less attractive for him.

Steven Roth, head of Interstate Properties, also controls 20 percent of the stock. Mr. Roth was out of his office and unavailable to comment, a secretary said. Mr. Trump was also unavailable.

When discussions broke off, Mr. Trump and Mr. Roth said that they would continue to assess their investment in Alexander's ''from time to time'' and that they might later begin discussions about making an ''extraordinary corporate transaction'' involving Alexander's.

Alexander's has had an erratic earnings record during the last decade. Its real estate has been its main attraction for major investors.

In his report, filed on Wednesday and disclosed yesterday, Mr. Trump said that additional stock purchases of Alexander's could be made through the open market or through private purchases, a merger, a tender offer or otherwise.

When Mr. Trump and Mr. Roth announced that they were abandoning discussions, Alexander's stock fell $1.25. It has continued to weaken this week until yesterday, when it rose 75 cents, to $45.


"Sony Buys CBS Record Division for $2 Billion After Months Of Talks," by Paul Richter and William K. Knoedelseder, Jr., Los Angeles Times, November 19, 1987

Ending months of on-again, off-again negotiations and widespread Wall Street speculation, CBS Inc. announced late Wednesday afternoon that it has reached an agreement to sell its record division to Sony Corp.

"The Sony board in Tokyo and CBS board in New York approved the sale of the record division for $2 billion in cash. It was unanimous," said CBS President and Chief Executive Laurence A. Tisch as he left CBS' New York headquarters Wednesday evening following a special board meeting called to vote on the sale.

In a statement released minutes after the board meeting ended, CBS said that while it has signed a "definitive agreement to sell our worldwide record operations," the company doesn't expect the deal to be finalized until early 1988, "after receipt of required government approval."

"After long discussion and very careful review, our board concluded that this is a very attractive offer in terms of value to the shareholders, while it also provides an important source of capital and allows us to focus all of our energies and resources on our core business of broadcasting," Tisch said in the CBS statement.

CBS Chairman William S. Paley-who reportedly had previously resisted the idea of selling the record division-was quoted in the CBS statement as saying the deal was "clearly in the best interest of the corporation and its shareholders."

Before the announcement, CBS stock closed at $176 a share on the New York Stock Exchange on Wednesday, up $8.625 from Tuesday's close. Sony also rose, gaining $2.75 a share to $35.625.

CBS Records Group spokesman Bob Altshuler said Wednesday that the name of the company will be changed to CBS Records Inc., that it will continue to operate from CBS' headquarters in New York and that "senior management will remain in place."

For its $2 billion, Sony Corp. gets the world's largest and most successful record company. With about 6000 employees worldwide, CBS Records deploys the most powerful-and the most widely emulated-armada of manufacturing, distribution, marketing and artist acquisition operations in the industry.

The company's three labels-Columbia Records, Portrait Records and Epic Records-boast an artist roster that is the envy of competitors, both for its size and the wealth of talent. Bruce Springsteen, Michael Jackson, Billy Joel, Bob Dylan, Barbra Streisand, Willie Nelson, James Taylor and Placido Domingo are just a few of the more than 200 performers under contract.

Last year, CBS Records reported operating profits of $162.1 million-an all-time record industry high-on revenue of $1.49 billion, accounting for 37% of CBS' total operating profit and 31% of its revenue. This year, the company is expected to report profits of about $200 million.


"Reasons Emerge For Liquidation Of Compact Video," by Gregory Couch, Los Angeles Times, December 22, 1987

In a December 3 Securities and Exchange Commission filing, Compact Video, the diversified Burbank video production firm controlled by closemouthed New York investor Ronald O. Perelman, said it planned to liquidate its assets. Perelman was mum on the reasons for a garage sale, but he has been busy ever since.

Two weeks ago, Perelman accepted an offer for Compact Video's Brooks Drug store chain, based in Pawtucket, Rhode Island. Hook-SupeRx, a Cincinnati drugstore chain, agreed to give Compact Video $81.5 million in cash for Brooks' 360 stores in the Northeast. Brooks accounted for 73%, or $114 million, of Compact Video's revenue in 1986.

Brooks originally belonged to one of Perelman's other companies before he sold it to Compact Video just 15 months ago for $91.2 million. "It had been far from the best-managed company in the drug industry," said Daniel Offen, an analyst with Gruntal & Co. in New York. Because Hook-SupeRx is paying cash, Offen thinks Perelman will break even on the deal.

Then last week Compact Video sold three of its entertainment divisions for $43 million in cash and $7 million in notes. Two of the divisions offer postproduction services to the film and video industry, and the other makes audio equipment for studios and mobile broadcasting facilities.

The buyer was SIR Acquisition Corp., a New York holding company established December 11 to acquire some of Compact Video's holdings. SIR is owned by Daniel Sullivan, another New York investor. William Laverty, director of acquisitions for Sullivan, said Sullivan thinks he can turn a profit where Perelman couldn't. "The plans are to expand the operations to what extent we are able," he said.

Sullivan's only other known holding is the Rocky Mountain division of Lucky Stores, which he acquired in February for $50 million.

Compact Video is now down to two subsidiaries: VidAmerica, headquartered in New York, which has an extensive video library; and Four Star International in Los Angeles, which owns roughly 600 low-budget movies and distributes television shows.

VidAmerica and Four Star also may be for sale. One analyst, who asked not to be named, said Compact will have $153 million in cash and $105 million in debt after it finalizes the sales already announced. That breaks down to a per share value of roughly $7. As analyst Offen pointed out, "It's worth more than the $2.50 its selling at."

Although for the first six months ended June 30, Compact Video reported a loss of $8.4 million, or $1.28 cents a share, on revenue of $211 million, the company's losses are not big enough to force it out of business.

Perelman's motivation behind all these moves, one analyst said, was to turn Compact Video into a shell company to make acquisitions. Compact Video has $10 million to $12 million in tax credits, plus a growing cash position.

After the October 19 stock market crash, Offen believes that Perelman and his executives "probably came to the conclusion that with the market decline, there are a lot of good values around, and their money could be more sensibly employed than it was."

Perelman controls Compact Video through his investment firm, MacAndrews & Forbes, which is Compact Video's largest stockholder with just over 40% of its shares.

Compact Video officials declined comment, and Perelman would not return phone calls.

Perelman, 44, is an ace paper shuffler who has leveraged a $1.9 million investment in a jewelry store operation in 1978 into a multibillion-dollar sales empire that includes the Revlon Group in New York, which he recently took private.

Perelman first got interested in Compact Video in 1983, when it bought a postproduction subsidiary in which MacAndrews & Forbes owned a stake. As a result, MacAndrews & Forbes received 640,000 shares in Compact Video.

Over the next four years, MacAndrews & Forbes increased its stake in Compact Video, and then Perelman started merging unprofitable operations from his other businesses into Compact Video.

By June 1987, Compact Video had gone from a video company with $29 million in sales to a mini-conglomerate with six subsidiaries and more than $400 million in sales. "Compact was a company made up of other companies that Perelman never wanted," said an analyst.

Bigger definitely wasn't better for shareholders. Under Perelman's direction the company has lost approximately $10 million since 1983. Meanwhile, in the last three years, the price of Compact Video's stock has slid from $8.37 to just $2.25 Monday.

Nevertheless, MacAndrews & Forbes recently bought an additional 100,000 shares of Compact Video. Perelman "obviously feels it is worth a lot more than that price," Offen said.

Perelman is a mystery that analysts enjoy trying to second-guess. Some other corporate raiders are loud-mouthed, self-promoters, but even though Perelman is married to a gossip reporter, he rarely talks to the press.

Compact Video is Perelman's last publicly held investment. He has taken all of the rest of his acquisitions private.

Two years ago, Perelman bought a controlling interest in Pantry Pride, a Florida-based chain of supermarkets. He quickly sold off the company's only business-grocery stores-and then used Pantry Pride's $400 million of tax credits to shelter the income of Revlon.


"DIC, Computer Memories Plan Merger: Cartoon Maker Seeks Easy Way To Go Public," by James Bates, Los Angeles Times, December 29, 1987

DIC, a Burbank company that in six years rose from a two-man operation to become the nation's largest television cartoon maker, disclosed Monday that it plans to go public by merging with a largely liquidated computer parts company in Chatsworth.

Under the agreement, DIC would in effect absorb Computer Memories, which was one of the nation's largest makers of disk drive data storage devices for personal computers until it was dumped in 1985 by its primary customer, IBM.

The deal follows the recent collapse of a similar agreement Computer Memories had with Hemdale Film, a Hollywood company that financed the Academy Award-winning movie Platoon. Computer Memories' directors scrapped that merger because of Hemdale's ongoing legal problems with Vestron Inc. over the videocassette rights to Platoon.

Shareholders of Computer Memories, which sold most of its assets and became a shell company last year, are expected to receive about one-third of the stock of the merged firm. The new company's overall value was placed at $75 million.

"It looks like they are a very nice moneymaking, cash-generating company," Computer Memories Chairman Irwin Rubin said of DIC. "It also is in a business that goes on and on and on because children go on and on and on."

Animating Alf, Heathcliff

After the deal is completed, DIC will be the surviving entity and gain access to the $25 million in cash that Computer Memories holds. The merger also gives DIC a cheap, easy way to go public because it will take on Computer Memories' status as a publicly held company. Merging with a public shell company generally requires fewer government filings and lower investment banking fees than selling stock through an initial public offering.

DIC President Andy Heyward and other company executives were on vacation Monday and could not be reached for comment.

DIC (pronounced DEEK ) has produced or co-produced six weekly half-hours of programming now airing on Saturday mornings on the three major networks. It has 50 more half-hours of programming distributed through syndication.

The company's programs feature such characters as Alf, Dennis the Menace and Heathcliff. DIC also has produced such shows as Inspector Gadget and The Real Ghostbusters. The company has said it expects revenue of about $90 million this year.

In an interview earlier this month, Heyward, 38, who said he controls DIC with a 52% stake, said that he wanted to take the company public in part to help him raise money to finance an ambitious list of plans. Those plans, he said, include developing primetime family shows, an indoor theme park somewhere in Southern California and a line of boutiques featuring characters from DIC-produced cartoons and toys.

He also acknowledged that the company has considerable debt resulting from the $65 million leveraged buyout he led in December 1986, with financial help from the Bear Stearns & Co. brokerage firm and Prudential Insurance.

Former Story Writer

At that time, Heyward and his partners bought the stakes of company founder Jean Chalopin, a French businessman, and Radio-Television Luxembourg, a European firm that backed Chalopin when he started the firm in 1976. Heyward, a former story writer for the Hanna-Barbera cartoon factory, started DIC's U.S. operations in April 1982, and built it into an animation powerhouse virtually from scratch, largely by forming alliances with toymakers and greeting card companies.

Beginning at his mother's kitchen and working with Chalopin, Heyward soon was producing shows based on characters that toy makers could turn into toys. This often made it easier for Heyward to sell his programs to the networks because sponsors were already lined up. And toymakers or greeting card companies often financed DIC shows in exchange for ad time or a share of the profits.

The merger must be approved by Computer Memories shareholders and DIC's owners.

Computer Memories' troubles began in August 1985, when IBM, which accounted for about 80% of the company's sales at the time, disclosed it was dropping the company as a supplier of hard disk drives for its IBM-PC AT computer. Within a year, its directors voted to liquidate.


"Businesspeople; For Maker of Cartoons, A Chance to Go Public," by Andrea Adelson, The New York Times, December 30, 1987

Sitting at his mother's kitchen table near Los Angeles in 1982, Andy Heyward and a French businessman, Jean Chalopin, developed the idea for a television cartoon series on a crime-solving handyman. After drawing a few sketches, Inspector Gadget was born. The men have since built a powerhouse in television animation.

Their company, DIC Animation City Inc., expects revenues of about $100 million in 1987 and this week made plans to go public by merging with a defunct computer equipment maker.

If the stock deal, worth about $75 million, is approved by shareholders, Computer Memories Inc. will no longer exist and DIC, based in Burbank, California, will absorb the company's $25 million in cash. The computer company's stockholders will receive a one-third interest in DIC (pronounced DEEK), which is now more than 50 percent owned by Mr. Heyward, its president.

''It was a very small operation, and it has grown overnight,'' said Mr. Heyward, 38, who worked as a story writer on such programs by Hanna-Barbara Productions Inc. as The Flintstones and Yogi Bear.

DIC began as television's craving for animated shows was growing. In the early 1980s, four hours of animated shows aired weekly, compared with nearly 12 hours of cartoons on television today. Six of the 30-minute programs on Saturday mornings are DIC projects, including Alf, The Real Ghostbusters and Dennis the Menace.

The company also licenses its characters and has recently begun developing toys. Mr. Heyward said his 3-year-old son, Robert, was the inspiration for a talking toy line based on the song ''Old MacDonald.'' A licensing deal is under way, he said.

Mr. Heyward's plans to diversify led to a $70 million leveraged buyout of DIC last December. He and his financial advisers have bought Mr. Chalopin's interest and that of the company's European parent, RadioTelevision Luxembourg.

DIC is the industry's only non-union company, and a 1984 organizing attempt failed. Like most animation houses, DIC's concepts, sketches and designs are homegrown. But the inking, painting and photographing of animation cels are done overseas.


"Weak Links In A Chain," by Brian D. Johnson and Larry Black, Maclean's, January 18, 1988

Garth Drabinsky, chairman of the Toronto-based Cineplex Odeon Corp., has a reputation for overcoming obstacles. His ascent in the past five years has been as slick as the butter greasing the popcorn in his 1644-screen chain of North American theatres. But recently the floor has begun to get sticky under Drabinsky's feet. His relentless drive to expand his $640 million empire has begun to generate a backlash. Last week New York City's flamboyant Mayor Ed Koch called for a boycott to protest Cineplex's recent move to increase ticket prices to $7 U.S. ($9 Can.) from $6 at its Manhattan theatres. Meanwhile, Cineplex's controversial new policy of showing commercials before movies has prompted boos and catcalls from U.S. and Canadian audiences. More damaging, however, is a dispute between Cineplex and Hollywood's Columbia Pictures and TriStar studios, which recently merged to form Columbia Pictures Entertainment, a property of Coca-Cola Ltd. Columbia has now switched its allegiance to Drabinsky's archrival in Canada, the Famous Players Inc. theatre chain.

Drabinsky's ambitious campaign to build and renovate theatres has drawn widespread praise. But his art deco dream has a bottom line. And Koch's campaign is the latest example of fallout from Cineplex's New York expansion. Last September such actors as Tony Randall and Dianne Wiest joined a protest over Cineplex's conversion of Manhattan's Regency repertory theatre into an outlet for first-run movies. Soon after, Cineplex provoked new criticism by raising ticket prices at its 20 Manhattan outlets. A week later, the Loews chain followed suit at its 16 New York screens. And last week Koch refueled the controversy by leading a picket of two dozen protesters outside the chain's Baronet and Coronet theatres.

Chanting "Save a buck," the demonstrators tried to dissuade moviegoers from entering the two cinemas, where Broadcast News and Nuts were playing. Koch said that he plans to lead a picket at a different theatre each Monday night. "I like Drabinsky," he told Maclean's. "He's doing good things. But he's also ripping off the consumer." Drabinsky, however, insists that the price increase and the commercials are necessary to fund theatre renovations.

So far, Koch's campaign does not seem to have harmed Drabinsky's business. In fact, according to a Cineplex official, the night that Koch picketed Broadcast News at the Coronet, the box office did unusually well. But although Drabinsky appears unaffected by controversy in New York, he seems to have suffered a more serious setback in Hollywood. Last month he became embroiled in a dispute with a major studio boss—Victor Kaufman, the executive now at the helm of Columbia.

According to industry officials, Drabinsky had been planning to widely exhibit Bernardo Bertolucci's oriental epic, The Last Emperor, during the Christmas period. But Columbia decided on a staggered release so that the movie could reap publicity from anticipated Oscar nominations in February. When Drabinsky did not get his way, he refused to exhibit Columbia's Leonard Part 6, starring Bill Cosby. Kaufman retaliated by cutting Cineplex off from all new Columbia films. Last week that studio began exhibiting in Canada through Famous Players, a move that the theatre chain's chairman, Walter Senior, describes as "the beginning of an ongoing relationship."

That realignment could tip the balance in the bitter feud between Famous Players and Cineplex. It leaves Cineplex aligned with only three Hollywood studios in Canada—Orion, 20th Century Fox and MCA-Universal—while Famous is linked to five, including the box office giant Paramount. Famous also publicly embarrassed Cineplex last month by persuading the fire marshal's office to shut down its gala opening of the Pantages theatre in Toronto on the grounds that fire exits were still under construction.

Despite such obstacles, the Cineplex empire continues to expand: it recently acquired 80 screens in the Washington, D.C., area and now plans to extend its chain overseas to Europe. Still, it has been a rocky new year for Drabinsky, who was unavailable for comment because of yet another setback, one that added injury to insult: he was in hospital last week with a broken left arm which he suffered in a fall during a Caribbean vacation.


"Barry Minkow-His Dream Born in a Garage Turns Sour," by Alan C. Miller, Los Angeles Times, January 19, 1988

"I am expanding to the hilt, and I have no shame." -From Barry Minkow's Making It in America.

Even as his financial empire was collapsing last summer, Barry Minkow planned to host a television show designed to counter the negative image of America's younger generation. A brochure for Class of Tomorrow, which was being marketed by two producers to various networks, hailed the 21-year-old Wunderkind as nothing less than "what tomorrow's youth is all about."

After all, Minkow's exploits had been widely chronicled: He had founded the ZZZZ Best carpet cleaning company in his parents' Reseda garage at 15, built it into one of Wall Street's hottest firms and donated more than $110,000 to anti-drug and other civic ventures. He seemed too good to be true.

And he was.

The glowing descriptions of Minkow as the embodiment of the American dream-"the Rocky of rug cleaning"-have taken on darkly ironic overtones in the wake of the company's demise, accusations by Los Angeles police and last week's federal indictment of the former carpet cleaning king and 10 associates on 54 counts of racketeering, fraud and money laundering.

Minkow remains in custody with his bail set at $2 million, facing a maximum sentence of 350 years in prison and a $13.5 million fine if he is convicted on all counts.

His rapid rise from rugs to riches is a saga of personal and corporate deception of stunning proportions, according to prosecutors and former associates. The indictment alleges that Minkow masterminded an intricate scheme that used phony businesses, sham invoices and other ruses to secure millions of dollars from stock sales and bank loans by convincing lawyers, accountants and investors that vastly inflated revenues claimed for ZZZZ Best were bona fide.

One thing no one seems to dispute at this point: ZZZZ Best's major source of income, a business that purportedly restored office buildings damaged by flood or fire for insurance companies, was almost entirely fabricated. The legal finger-pointing concerns fixing responsibility.

"Minkow was, in substance, charged not only with participating in (the scheme) but with orchestrating it," U.S. Attorney Robert C. Bonner said. He estimated that losses to banks and investors exceed $50 million.

In his defense, attorney Arthur H. Barens argued that Minkow relied on older, more sophisticated business partners and was unaware of any illegal activities. Barens said these same businessmen are cooperating with the government "to exercise some damage control in their future by pointing the finger at some 19-year-old."

A jury likely will have to decide the question: Was Minkow, in essence, taken in by unscrupulous associates who called the shots, or is his defense yet another attempt at deception?

The characterization of Minkow as someone who was not in control would surprise many people who worked closely with the young tycoon. When ZZZZ Best launched a $2 million television advertising campaign in early 1987, for instance, Minkow insisted that he be featured on camera in the commercials depicting his company as the Mr. Clean of an often dishonest industry.

"He wanted to be the star," said David Marchese, a partner at the advertising firm that produced the ZZZZ Best spots. "That's his modus operandi. He felt he knew more about it than anybody else and it was his commercial and his company."

Minkow displayed that same confident demeanor Friday during his first appearance in court as a defendant. His muscular frame clad in baggy sweats and athletic shoes, he proffered advice to his attorneys, joked with other defendants awaiting arraignment and winked at a spectator.

At one point, he browsed through drawings of himself by television artists. "Don't like that one," he said. "The nose is too small."

In a television interview shortly before the sealed indictment was made public, Minkow averred that he was a victim of his own immaturity and arrogance.

"I'm not mature enough to handle a company with 1400 people," he said. "I wasn't then, and at least I have the ability without the ego and the pride to admit it now."

Barry Jay Minkow's story reads like a 1980s version of F. Scott Fitzgerald's Jay Gatsby-a working-class youth driven to amass great wealth; a vain man who surrounded himself with fancy cars, glitzy parties and attractive women; a high-profile multimillionaire who is said to have quietly consorted with mobsters.

At a press conference in July, Police Chief Daryl F. Gates alleged that Minkow and ZZZZ Best were part of a conspiracy to launder narcotics profits for East Coast organized crime families. No arrests have been made in connection with the allegation, but police said last week that the investigation is continuing.

Born March 22, 1966, in Inglewood, Barry Minkow was the youngest of three children of Robert I. and Carole Minkow. The family moved to a small stucco home in Reseda when Barry was 4.

Called a Nuisance

"He was a nuisance, a Dennis-the-Menace type," said neighbor Donald Miller. "I'd hear them yelling at him."

The hyperactive Minkow spent two years at the Ridgewood Military Academy where, he recalled, he gained the drive to acquire wealth. He also said classmates broke his nose eight times.

Minkow's image of his parents was taking a beating, too. He later recalled in an interview that he was ashamed when the family's telephone was cut off because they couldn't pay the bill.

Robert Minkow, a cheerful man always ready with a joke, at one point worked as a real estate broker and night foreman, his son said. Carole Minkow, a serious-minded person, worked for a carpet cleaning company.

Minkow says he was 9 when his mother got him a summer job as a telephone solicitor in the rug cleaning company because she couldn't afford a babysitter. Later, he grew so confident of his salesmanship, he boasted on national television: "I could sell frozen yogurt in a blizzard."

At 15, Minkow recalled, having familiarized himself with the business, he started ZZZZ Best in his garage with three employees, four phones and $6200, saved from his carpet cleaning work evenings and summers.

Minkow joined a fragmented field of carpet cleaning operators without any dominant firms. In the San Fernando Valley area alone, there are about 150 different companies, most of them mom-and-pop operations.

The industry is marred by widespread consumer complaints, state and local officials report. The major problem is the bait-and-switch game-firms advertise a ridiculously low price to get in the door, then announce that the price doesn't include much of what needs to be done.

Company Guarantee

Minkow sought to counter this practice by guaranteeing that his firm would clean two rooms of carpets for $39.95-without extra charges. Ironically, there were few, if any, complaints about the work of Minkow's small firm.

Videotapes of the company's early days show Minkow, his dark hair extending over his collar, seated at a card table earnestly calling prospective customers. Too young to drive, he hired an older friend to chauffeur him. After moving the operation to a Reseda office, he recalled, "I was a kid who had a ticket into the adult world."

He said he picked the name ZZZZ Best (pronounced "Zee Best") so there was one "Z" for each of the four children he planned to sire.

Minkow hired his mother, and later put his father to work, too, as a salesman in ZZZZ Best's commercial division. In a rap music videotape that employees made for Barry's 21st birthday, Robert Minkow rapped: "I'm your pop, better known as Bob RM/Now I know I raised me a gem/Happy Birthday, son, you're 21/And all the fun has just begun."

Though he had to worry about cash flow as well as calculus, Minkow graduated from Grover Cleveland High School in June 1984. He received the unlikely twin plaudits of Most Likely to Succeed and Class Clown.

By the time he graduated, ZZZZ Best had 80 employees in three offices.

A savvy self-promoter, Minkow hired a ghostwriter to do his 136-page Making It in America-18 Years Old and a Million Dollars, and published it himself.

Eye for Publicity

He also hired a public relations firm to tout his accomplishments. Entrepreneur magazine headlined an article on him: "18-Year-Old Cleaning Mogul Makes the Rules and Plays by Them," and he won a 1985 commendation from Los Angeles Mayor Tom Bradley.

Despite the growth of his businesses, Minkow expressed bitterness about being sold short by bankers who denied him credit and other adults who refused to take him seriously. What law enforcement authorities now describe as his preference for cash transactions thus may have begun as necessity.

"People told us, 'You couldn't do it,' and we did it," Minkow said during an appearance on The Oprah Winfrey Show last April. "Success is the best revenge."

Minkow, meanwhile, was also growing physically. Angered by the bullying he had absorbed at the military academy, he began rigorous weight training.

"Weightlifting gave me the confidence to look in your eye and say, 'You're fired,' " Minkow told a television interviewer. " 'Cause not everyone was bigger than I was."

But it appears that Minkow may have inflated his weightlifting accomplishments.

In recent years, when he worked out in the early mornings, he was able to bench press 275 pounds or more, impressive for a 5-foot, 10-inch, 175 pounder, fellow weightlifters said.

Minkow, however, said in promotional materials that he bench pressed 400 pounds daily, which experts say would make him one of the top 100 weightlifters nationwide. Further, he wrote in his book that he won several events "competing against the best lifters in the state of California."

But Mike Lambert, editor and publisher of the Camarillo-based Powerlifting USA, the nation's most authoritative source on powerlifting competitions, said Minkow's name never appeared in the magazine's list of winners. "We didn't find anything," Lambert said.

Money Problems

Despite his bravura, Minkow was dogged by money problems.

"We had to watch every penny," said Elenora Madrinan, a high school friend of Minkow's who was ZZZZ Best's advertising coordinator. "Six months after I started with the company, we started having problems with the payroll."

During this period, Minkow was accused in a Superior Court lawsuit of stealing and forging about $13,000 in money orders from a neighborhood liquor store to invest in ZZZZ Best. He denied the accusation and the case was settled out of court without an admission of wrongdoing.

In late 1984 and early 1985, ZZZZ Best used customers' credit card numbers to ring up $72,000 in false charges. Minkow said unscrupulous former subcontractors were at fault and had been fired. He repaid the money.

Minkow wrote in his book: "There are no magic formulas" to business success. "It doesn't take rich uncles lurking in the background. Just hard work."

But he apparently had his own version of a "rich uncle."

Minkow said he got involved in 1985 with the late Jack M. Catain, Jr.-long described by police as a major Los Angeles organized crime figure with links to Mafia families in Chicago and Philadelphia-when ZZZZ Best "was in desperate need of financial assistance."

In a civil suit that followed a falling out between the two men, the ailing Catain said he obtained loans for Minkow in return for about 50% interest in the business, but that Minkow refused to pay him his share of the profits. Minkow's lawyer said Catain was paid what he was owed and the loans were usurious, with interest rates of 2% to 5% a week.

Minkow's lawyer said his client didn't know of Catain's alleged mob ties. In court papers, however, Minkow acknowledged that he continued the relationship after learning of Catain's indictment on counterfeiting charges. Catain was convicted November 7, 1986, but died in February 1987, before sentencing and resolution of the Minkow lawsuit.

Called Source of Problems

Madrinan, Minkow's friend and employee, now says, "I'm sure that's where Barry went wrong. "He got involved with this person and didn't realize who he was until it was too late," Madrinan said. "Jack helped him out with the money. Once you're in, you're never out."

Los Angeles police also believe that after Catain hooked the young entrepreneur, other mob figures were attracted to Minkow "like sharks circling a bloody fish," one investigator said.

At his July news conference, Gates announced that his officers had searched the homes and offices of more than a dozen businesses and individuals suspected of "laundering" narcotics proceeds, including five people who were "organized crime subjects or associates of organized crime subjects." None of those were among the group indicted last week.

One of those that Gates named was Maurice Rind of Encino, who was twice convicted of stock fraud in the 1970s and who served as Minkow's "confidant," according to Scott Dear, who worked as ZZZZ Best controller for part of 1986. Rind helped Minkow acquire the $2 million in assets needed for ZZZZ Best to qualify for a listing on the computerized over-the-counter stock market, Dear said.

"It was part of the mystery of Barry's world how he ever met these guys," Dear said.

Rind says he didn't "do anything illegal" and has challenged police to find any evidence against him. "They can investigate us now until the world comes to an end and they wouldn't come up with nothing," he said after Gates' public accusations.

A confidential source who told of being in the company of Minkow and some of the alleged organized crime figures said: "They didn't treat Barry very well. . . . They would always talk about the (ZZZZ Best) stock. They would say, 'Do better, Barry.' Barry backed down to them a lot."

Minkow began to reap the benefits of his growing wealth in late 1985. That November, he paid $698,000 for a large Mediterranean-style home with a red stucco roof in a gated community in Woodland Hills. A huge black Z was emblazoned on the bottom of the pool. He wasn't ready for a Gatsby-type mansion, but he was on his way.

Minkow drove a white BMW and a bright red 1985 Ferrari with "ZZZZ BST" license plates. He sported a gold ring and gold chains.

For the 19th birthday of his girlfriend, Joyce Lipman, an attractive, 5'8", hazel-eyed blonde, Minkow bought her a black Porsche.

It was through Lipman that Minkow met her father, Harold Lipman, 59, the associate superintendent of the Simi Valley Unified School District. Lipman, a silver-haired man with a doctorate in education and a sterling reputation among colleagues, added credibility to ZZZZ Best when he joined its board in February 1986.

"I was asked to give Mr. Minkow a hand by my daughter," said Lipman, who has since retired from the school district and says he was shocked to learn of ZZZZ Best's alleged fraudulent activities.

On January 20, 1986, ZZZZ Best went public, making its stock available for purchase, by merging with Morningstar Investments, an inactive Utah shell corporation. ZZZZ Best had four offices at that point and reported sales of $2 million in 1985.

As a corporate executive, Minkow was "a constant contradiction," in the words of an ex-associate. A whirl of nervous energy, he was a quick study and a consummate salesman, but he was also a rough-hewn kid in a grown-up world-showing off by taking sensitive long distance calls on his speaker phone during business meetings, for instance. He preferred sweats to suits and ties, but also demanded that employees, including his mother, call him "Mr. Minkow."

Sudden Appearances

Minkow could be a tough boss: "My way or the highway" was a favorite expression. Anxious to know what was happening in every department, he would poke his head into various offices without warning, former employees say.

But by all accounts there was an esprit de corps among the largely youthful staff. Minkow himself, often at his desk before 7 AM and still there in the evening, was an inspiration.

"We all believed in Barry," said Madrinan, a three-year ZZZZ Best veteran.

Minkow showed his appreciation. In June 1986, he threw a luxurious company party for 350 at the Beverly Hilton Hotel. Forgoing his exercise uniform for a white tuxedo and black bow tie, Minkow presented awards to key aides, including his mother.

Minkow also threw a Christmas black tie bash that year at the Westin Bonaventure Hotel. ZZZZ Best had gone public in a big way on December 9, selling $13.2 million worth of stock and warrants to the public, an offering that prosecutors now allege was based on fraudulent claims about the company's revenues.

Minkow's parties were noted for their sobriety. He never drank liquor and insisted that no one else under 21 imbibe. He also required ZZZZ Best employees to submit to a drug test.

His anti-drug crusade included posters of him plastered throughout ZZZZ Best offices stating, "My Act is Clean. How's Yours?"

With his public relations firm trumpeting his generosity, Minkow contributed $20,000 each to Narcanon, a national drug treatment program, and Narcanon International for school drug education. He helped pay for a public service announcement for the Los Angeles Mothers Against Drunk Driving, gave $20,000 to the West Valley YMCA and spent $30,000 to landscape a girls softball league field.

One place that Minkow rubbed elbows with his business associates and met others was at the gym. Among those with whom he pumped iron were Mark L. Morze, Thomas G. Padgett and Daniel B. Krowpman, all of whom were named with him in the federal indictment unsealed Friday.

In the house of cards that ZZZZ Best became, according to the indictment, Padgett played the role of the insurance executive who handed out jobs to the cleaning company. To an outside investor or auditor, it looked like his firm, Interstate Appraisal Services of Culver City, was awarding million-dollar contracts to ZZZZ Best to repair fire or water damage to large buildings.

Krowpman's firm, Cornwell Tools, created paper work "that gave the false impression" that it provided millions of dollars in equipment for ZZZZ Best's jobs, the indictment said. And Morze, an accountant and former UCLA football linebacker, was in charge of the insurance projects. Morze has since said he was cooperating with authorities.

For Barry Minkow, 1987 proved the best of times, and the worst of times.

Early in the year, he vowed, "I'll be President in the next 20 years." By year's end, he faced the prospect of serving a term in the penitentiary rather than the White House.

By March, Minkow's face was becoming familiar to Los Angeles television viewers. ZZZZ Best's $2 million advertising campaign ridiculed competitors-showing their salesmen as buffoons who ruined customers' carpets while upping the price-and closed with Minkow making a pitch for ZZZZ Best. Chest out, he looked into the camera and declared: "I'll guarantee the work and price in writing."

To the surprise of the advertising professionals, Minkow shot the commercials in a single take, advertising executive Marchese said, an impressive display of poise.

University Rejection

With his business booming, Minkow sought to bolster his academic credentials. Marchese, who teaches part time at Pepperdine University, said Minkow asked for his help to get him into the graduate school of business. But the university turned down Minkow's proposal that he be awarded undergraduate credit for his business experience.

Although the small, legitimate rug cleaning business was prospering, the largely bogus restoration jobs accounted for the vast majority of the revenues claimed on ZZZZ Best's ledgers. ZZZZ Best announced one $13.8 million Dallas job that insurance restoration experts say would have been the largest ever let.

The stock took off. It opened 1987 at $4 a share and reached a high of over $18. Shortly after Minkow's 21st birthday, his 51% of the company's stock was valued at $103 million.

On April 16, ZZZZ Best announced that it was going to spend $25 million to buy the KeyServ Group, a nationwide firm that had taken in $80 million the previous year by cleaning carpets for Sears customers. ZZZZ Best, which had 21 offices and 1030 employees in California, Nevada and Arizona, was acquiring a firm with 50 locations and 2300 employees in 34 states.

According to Morze, the purchase was to be the "cure" that would allow ZZZZ Best to stick with legitimate carpet cleaning and "get rid of this bogus restoration business."

Minkow talked boldly of plans "to expand into England" and build a billion-dollar company.

On April 27, Minkow joined several other highly successful young entrepreneurs on The Oprah Winfrey Show where he fidgeted, interrupted others and demeaned his fellow guests.

Offers Cliches

"Tough times pass. And tough people last," he counseled. "Face the fear. The fear will disappear."

When another guest said viewers might want some non-cliche advice, Minkow retorted: "Your sales were $17 million. Mine were $50 million. End of story."

The end of ZZZZ Best's story was fast approaching. But first there was a last hurrah.

In early May, at a cost of hundreds of thousands of dollars, Minkow flew in 600 KeyServ employees and their wives from around the country for a high-spirited three-day conference with several hundred ZZZZ Best employees at the Century Plaza Hotel. The event was called "The Sky's the Limit," and employees of both companies gave Minkow a standing ovation when it ended.

The rug began to slip out from under ZZZZ Best on May 22, when The Times published an article describing the credit card problems of 1984 and 1985. The company's stock plunged $4.25 that day.

"It really humbled him," Minkow's friend Elenora Madrinan said. "He really changed. He got to be a lot more quiet. He made more of a point to go and talk to people in the corporate office. He was trying to reassure them that everything would be OK."

It was too late. On June 1, ZZZZ Best's investment banker, Drexel Burnham Lambert, resigned, jeopardizing the KeyServ deal. The next day Ernst & Whinney, ZZZZ Best's auditor, followed suit.

Minkow soon was busily accumulating cash. He got a $1 million loan from a ZZZZ Best board member, through a third trust deed on his home. On June 26, according to court papers, he got a $2 million loan from Prudential-Bache Finance Ltd., using his ZZZZ Best stock as collateral.

Assistant U.S. Attorney James R. Asperger said there is evidence that Minkow had developed "a close personal relationship" with a woman who worked at Prudential-Bache, who subsequently processed a postdated check for him-giving him traveler's checks, which were then cashed in Las Vegas. "He told her he loved her, that he would give her a postdated check . . . and that ZZZZ Best would cover it," the prosecutor said.

Missing Money Alleged

At Minkow's bond hearing Friday, prosecutors also alleged that he removed as much as $816,000 from ZZZZ Best's treasury in the company's waning days and may have millions stashed away in overseas bank accounts. Herb Wolas, the bankruptcy trustee assigned to help process creditors' claims, said there is "between $23 million and $30 million not accounted for."

Even with his empire crumbling, Minkow made a last-ditch bid to save the KeyServ deal, jetting to Chicago in late June with Hal Lipman to meet with Sears executives. Lipman said Minkow explained the credit card problems, apparently to the satisfaction of the Sears brass. The Sears executives planned to fly to Los Angeles within two weeks to finalize the deal.

They never made it. Minkow unexpectedly resigned July 2, citing a pair of bleeding ulcers. ZZZZ Best filed for bankruptcy six days later, and shortly thereafter the company's board sued Minkow and others for $25 million, alleging fraud and theft. On August 7, Minkow declared personal bankruptcy.

Fitzgerald's Gatsby ended up face down in his swimming pool, shot after a mysterious automobile accident that subjected him to the rage of two jealous husbands.

Minkow also had his shooting incident. Five weeks after Gates alleged that he was involved with organized crime families, Minkow reported to police that four shots were fired at him from a white Lincoln Continental as he drove a friend's pickup truck along an isolated San Fernando Valley road. No arrests have been made.

In the six months after ZZZZ Best's demise, Minkow kept a low profile as he waited for the indictment that seemed inevitable. He was seen by neighbors working out with weights in his garage and by friends hanging around a San Fernando Valley pest control business owned by a friend. His attorney said he also was "out on a daily basis on his hands and knees, cleaning carpets."

Disputing the suggestions that Minkow has a fortune stashed away, attorney Barens commented: "If there were hoards of millions of dollars offshore, I doubt very much that Mr. Minkow would be sitting around Reseda preparing his defense."

In a rare interview, Minkow told a television reporter last week, "The Lord is my defense and my deliverance and I'll take it as it goes, one day at a time."

One thing Barry Minkow can certainly say in his own defense: From his meteoric rise as a multimillionaire Wall Street whiz kid to his equally breathtaking descent, he has been true to one part of his personal credo.

"I'm motivated," he once wrote, "by the idea of astounding other people."


"Donald Trump Tells MCA Of Plan To Buy Up Stock," by Kathryn Harris, Los Angeles Times, February 13, 1988

MCA, the giant entertainment company that has enjoyed the longest continuous management in Hollywood's history, disclosed Friday that New York real estate magnate Donald Trump has put the company on notice that he might buy as much as 24.9% of MCA's shares.

The price of MCA stock leaped $5.25 a share on the news, and some prominent Wall Street analysts immediately predicted that Trump's action would trigger a chain of events leading to the sale or possible breakup of the company. MCA assets include Universal Studios with its tour and amphitheater, a major record company, publishing and broadcasting operations, a toy company and 50% of a large movie theater chain.

No analysts or industry sources interpreted Trump's move as friendly. But outwardly, at least, MCA reacted calmly, calling no summit meeting of its top executives for the holiday weekend. The Universal City-based company shored up its antitakeover defenses last summer and has a borrowing capacity with its banks exceeding $1.7 billion.

MCA Chairman Lew R. Wasserman has long vowed that he would never pay "greenmail"-or a premium over the market price-to rid the company of an unwanted investor. On Friday, Wasserman was unavailable for comment, but MCA President and Chief Operating Officer Sidney J. Sheinberg said, "If he said it in 1984, I assure you he means that in 1988."

Wasserman was said to be at his weekend house in Palm Springs, while the company's longtime investment banker and company director, Felix G. Rohatyn of Lazard Freres & Co., was reportedly in Paris.

Sheinberg, reached at his weekend home in Malibu, declined to discuss the Trump move other than to say that MCA disclosed the development within hours of Trump's notification to the company.

According to MCA's terse announcement, Trump said he has filed with federal antitrust agencies in order to comply with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which requires companies contemplating mergers of a certain size to notify the Justice Department or Federal Trade Commission at least 30 days before closing a deal. Until Trump clears the regulatory hurdle, he would appear to be barred from acquiring more MCA shares.

While some entertainment and investment community sources immediately predicted that Trump seeks MCA's substantial real estate holdings in Southern California and Florida, others expressed skepticism about the sincerity of Trump's interest. Citing other instances when Trump has helped drive up the price of a stock before selling, one analyst said he found "general skepticism among the arbs," alluding to the arbitragers, or traders who speculate in takeover stocks.

Holdings Appear Small

Indeed, Trump's current holdings in MCA stock would appear small. According to MCA, the New York entrepreneur owns 375,000 shares, or less than 1% of the company's 73 million shares outstanding. At last week's prices, Trump's investment would appear to be slightly less than $15 million.

By contrast, the 74-year-old Wasserman owns about 7% of the company and wields some control over an additional 8%. He has served as the company's chief executive for 42 years-an unprecedented term for Hollywood, if not most American corporations.

Until last summer, Wasserman's stature in business and political circles and his MCA stock holdings appeared sufficient to ward off unsolicited bids. But a three-week hospitalization triggered rumors of ill health and wild speculation in the stock last July. The company's lackluster performance in its motion picture business has hurt morale within the company and prompted criticism anew on Wall Street.

'A Substantial Gap'

"The time is ripe for a change," declared Alan Kassan, an analyst at Shearson Lehman Hutton Inc. "MCA is rich in quality assets, and the company has not been able to translate them into earnings because of (disappointments) in the theatrical business. . . . There's a substantial gap between the stock price and the value of the assets."

By Kassan's estimate, MCA shares could be worth as much as $65 to $68 apiece. On Friday, the company's stock closed at $45, up $5.25 in composite trading on the New York Stock Exchange.

"Trump could help develop the real estate," Kassan said. "I think he'll end up with the real estate. I don't think he'll wind up with the whole company."

Trump "is serious," in the view of David Londoner, an analyst with the brokerage firm Wertheim & Co. in New York. "Clearly this is not a friendly (move). It pressures Wasserman and Sheinberg even harder to find a deal. I don't think it's greenmail. I think he's put the company in play" as a takeover candidate, the analyst said.

Business Folk Hero

Trump, once known only as a builder of designer label buildings-Manhattan's Trump Tower and Trump Plaza encompass some of the city's most expensive condominiums-has become something of a business folk hero lately. He has been glorified on magazine covers and in his own bestselling autobiography and is recognized as a plunger in the takeover market. He has parlayed large stakes in such companies as Holiday Corp. and Bally's into multimillion-dollar profits, bailing out after word of his own interest helps send the price flying.

In only two cases did his interest mature into substantial continuing ownership of the target: Alexander's, a New York department store chain, and Resorts International. Alexander's was strictly a real estate play for Trump, who coveted the chain's parcels in midtown Manhattan and in the retail district of outlying boroughs. He and Interstate Properties, a second large owner of Alexander's stock, made a takeover bid last year but abandoned it in September. At year-end, however, both still owned about 20% each of Alexander's stock.

Interest in Casino Firm

Trump's interest in Resorts grew out of the big casino company's inability to finance completion of its so-called Taj Mahal. This $900 million-plus building was designed to be the largest casino-hotel in Atlantic City, New Jersey, where Trump already owns two casinos.

After months of stock accumulation and sparring with Resorts Management, Trump early this month reached agreement to buy up all outstanding stock, take the company private and finance completion of the vast casino.


"Judge Won't Stop Bally Repurchase Of Shares From Trump," United Press International, February 13, 1988

A federal judge has refused to block Bally Manufacturing Corp. from buying back nearly 500,000 of its own shares at a premium from developer and casino rival Donald Trump.

Some Bally shareholders had tried to head off the sale, saying the Chicago-based casino and recreation company's repurchase of the stock at $33 a share, nearly twice the market price, constitutes greenmail.

U.S. District Judge John F. Gerry refused Wednesday to consider that claim immediately, although he also refused to dismiss outright the shareholders' claims against Bally's corporate directors.

Greenmail is a tactic in which a company's potential buyer accepts a premium price for his stock in return for calling off his takeover bid.

Trump, like Bally an owner of casinos in Atlantic City, had purchased nearly 10 percent of Bally before agreeing last year to sell back for $24 a share 2.6 million shares he reportedly bought for between $18 and $20.75 a share. The sale, which Gerry also refused to block, cleared the way for Bally to complete its $440 million purchase of the Golden Nugget Casino Hotel in Atlantic City.

Bally will now buy Trump's remaining Bally stock for $33 a share, nearly double the current market price. After the earlier transaction, Trump had retained 457,000 shares of Bally stock under an arrangement that provided for the $33-a-share repurchase if the market price of the stock did not reach that level within 12 months.

The stock closed at $17 Wednesday and was unchanged at that price Thursday morning on the New York Stock Exchange.

Trump also agreed not to buy additional Bally shares for 10 years.

Bally owns two casinos in Atlantic City, Bally's Park Place and Bally's Grand, the former Golden Nugget.

Trump owns Trump Plaza and Trump's Castle. He also holds a controlling interest in and is seeking 100 percent ownership of Resorts International Inc., the owner of both the Resorts International casino and the incomplete Taj Mahal casino project.


"Trump Says Resorts Decision Strictly Business," by J. Craig Shearman, United Press International, February 23, 1988

Donald Trump Tuesday denied he had used New Jersey Casino Control Commission proceedings to drive down Resorts International Inc.'s stock price and reduce the cost of his bid to take the company private.

Trump told the commission that his takeover bid is the result of a straightforward business decision prompted largely by his desire to complete the Taj Mahal, the company's unfinished 1250-room, $930 million hotel-casino in Atlantic City.

"I bought this company primarily because the Taj Mahal was a very fine building and I wanted to see it built," said Trump, who purchased majority control of the company along with a small equity interest last year.

Full equity ownership of the company has become a key to obtaining the financing needed to complete the Taj Mahal, Trump said.

The commission plans to vote Wednesday afternoon on Resorts' application for a two-year renewal of its license to operate the Resorts International Casino Hotel.

The license expires Friday and the vote was originally scheduled last Thursday. It was postponed when two of the five commissioners questioned Trump's actions since purchasing his controlling interest in Resorts.

The votes of at least four of the five commissioners are necessary to renew a casino license.

Commissioner Valerie Armstrong suggested last week that Trump's actions since taking control of Resorts could be interpreted as an attempt to drive down the price of Resorts stock to make it cheaper for him to take the company private.

She cited Trump's failure to mention last summer, when his purchase of a controlling interest was approved by the commission, any plans to seek a $20 million-a-year contract for his organization to manage Resorts.

Shortly after that contract was approved by the commission late last year, Trump announced a $15-a-share bid to buy out all other stockholders and take the company private, Armstrong said.

That offer has since been raised to $22 a share and would - if completed - make the management contract meaningless.

Resorts Class A stock has traded as high as $66 a share and has dipped to $11.375 over the past 52 weeks.

Trump's lawyer asked him before the commission Tuesday whether he had attempted to manipulate the stock price through the various proceedings.

"Absolutely not," Trump responded.

Trump said he is attempting to take the company private because it has been unable to obtain the financing necessary to complete the overbudget Taj Mahal without his sole ownership.

"I can borrow money at a very prime rate and borrow it personally, but it would be inappropriate for me to borrow money for a company I own only 10 percent of," said Trump, whose equity interest in the company has been reported between 10 and 12 percent.

"It was a combination of falling stocks and rising interest rates for Resorts that led me to believe it was in the best interests of everybody if I bought the company and raised the money," he said.

Trump said he was planning to take Resorts to the bond market to borrow about $300 million when the stock market fell October 19. Interest rates for Resorts' existing bond issues soared to 20 percent and Resorts stock was being dumped so quickly that its trading was temporarily suspended December 7.

At that point, Trump said, he decided bond financing would be too expensive for profitable completion of the Taj Mahal.

Even with that decision made, Trump said it has been difficult to obtain financing for the project because bankers have questioned who will have control over the company.


"Huge Debt Keeps Pressure On DIC To Keep Turning Out Animated TV Hits: Cartoon Firm Deals Way To Top," by James Bates, Los Angeles Times, March 8, 1988

Dennis the Menace, the all-American brat, is part Canadian.

Last year, DIC Enterprises in Burbank produced 13 half-hour cartoon episodes starring the mischievous 5-year-old that are now airing Saturday mornings on CBS.

Canada gives tax breaks to investors in television shows and movies if the programs are at least partly made there. So DIC got about $3 million in U.S. dollars from Canadians to finance the shows and qualified them for the write-offs by having an Ottawa animation company do drawing, voices and editing, according to Canadian executives and former DIC officials.

Exotic deals are nothing new to DIC (pronounced "deek") and its president, Andy Heyward. A former writer for rival cartoon factories Hanna-Barbera and Filmation, Heyward, 39, has used his dealmaking prowess to take DIC from a business he operated six years ago on his mother's kitchen table to television's biggest cartoon supplier with about 60 half-hours of children's programming on the air a week. The privately held company has nearly $90 million in annual revenue.

Each Saturday morning, Heyward and DIC have six half-hours of shows on all three major networks, including CBS' Dennis the Menace, NBC's ALF, and ABC's The Real Ghostbusters. On local stations, more than 50 half-hours of DIC shows air each week, including a block of episodes of The Real Ghostbusters to premiere in first-run syndication, and original series Beverly Hills Teens and The Adventures of Teddy Ruxpin.

Yet for all of DIC's growth, competitors and business associates predict that DIC will be under increasing pressure to churn out hits, while the television market is softening, because DIC must service its debt growing out of a two-step, $70 million buyout Heyward led in late 1986 and 1987.

Last fall, with Prudential Insurance and the Bear Stearns investment company as partners, Heyward finished buying out DIC's previous owners, French businessman Jean Chalopin and Radio-Television Luxembourg. That left Heyward with about 52% of the company and a debt that probably costs the company from $5 million to $8 million a year to service, executives familiar with DIC say.

"Andy has no choice but to succeed," Chalopin said. "He has a heavy burden on his back."

If Heyward is worried, he doesn't show it. "We are a growing company in an industry that is in a downcycle right now," he said.

DIC maintains that it is profitable, but doesn't release figures. People familiar with the firm estimate pretax profit before debt payments at $12 million to $15 million.

Some suggest that if the hits don't keep coming, Heyward may have to sell a chunk of the company. Indeed, Heyward and his partners nearly sold one-third of DIC when they unsuccessfully tried to take it public by merging with Computer Memories, a publicly held shell company in Chatsworth that has $25 million in cash. The deal was scuttled last month when a dissident Computer Memories shareholder opposed it.

Michael Garstin, a managing director with Bear Stearns, dismisses any idea that DIC must go public soon, or that it may need a cash infusion. "We recognize that there is some softness in the animation business, but we don't see that at DIC," he said.

Still, television industry executives note that all animation companies, including DIC, face problems on several fronts.

Children are watching tapes on VCRs more. And new television ratings based on handheld "people meters" reveal that fewer children watch TV programs than was previously thought, which could hurt advertising revenue. Toy makers that buy ad time on children's shows also are suffering from an industry slump.

But the more serious problem is the glut of children's shows, splintering ratings and advertising revenue. In some cities, 25 or more separate cartoon shows air on local stations, most of them daily. Add to that the 20 or so kid shows that the networks air Saturday mornings and children's programs on cable channels like The Disney Channel and Nickelodeon.

"There is a tremendous shakeout going on. The market melted down because of an oversupply of cartoons," said Melvyn Smith, vice president of programming for Tribune Broadcasting in Chicago.

Characteristically, Heyward sees the current shakeout as an opportunity for DIC to emerge as an even stronger player. "Things are moving rapidly. There is a changing of the guard," he said.

Another problem is the sharp rise in production costs. Industry executives say a half-hour cartoon can cost from $150,000 to nearly $400,000 an episode. Although DIC, the industry's only major non-union company, and most others subcontract much of the animation work to the Far East, where production is cheaper, Japanese animation executives say work there costs as much as 40% more than it was two years ago because of the stronger yen.

So Heyward and other animators are moving more work to Korea and Taiwan, a trend that worries some executives because it may mean problems meeting deadlines, as well as inconsistency in the quality in the drawings.

"DIC has had a big problem with quality control and consistency because they have been so spread out all over the Far East. They bend over backwards to fix it, but usually the problem is time," said Phyllis Tucker Vinson, NBC's vice president of children's and family programs.

Heyward grew up in the television business. His father, Louis M. (Deke) Heyward, is a former Hanna-Barbera executive. In the early 1980s, Andy Heyward met Chalopin, who had founded DIC ("Diffusion Information Communication" in French) in the early 1970s. The two set up the company's modest American operation in Los Angeles in 1982, where they first worked on Heyward's mother's kitchen table.

They immediately sold Inspector Gadget to local stations and The Littles to ABC, making their operation profitable by contracting the work out to animators in the Far East.

Heyward would rather talk about his cartoons than his deals and how they will be affected by industry problems. Heyward, who calls his methods "trade secrets," frequently swears people he does business with to secrecy, associates say.

His family and friends say he is obsessed by work and success to the point that he often calls associates at midnight to talk about work. "He's the kind who wants the name on top of the building. Prestige is very important to him and success is very important to him," Chalopin said.

One reason for Heyward's success has been his skill in convincing toymakers to participate in new shows either by committing to buy national advertising spots in advance, especially when they plan to develop products based on the show's characters, or directly funding a show. This method, however, has become more difficult recently because of the toy industry's financial woes.

Heyward also takes risks to get a show on the air. He now is selling a show to local stations called Camp Malibu, about California beach kids, that requires stations to commit to taking the show for only one year. Usually, producers require a two-year commitment to lock in a profit.

To cut its risk, DIC is producing only 40 shows instead of the usual 65 in syndication, with a promise to make more shows if it does well. But animators and distributors note that DIC is taking a risk because fewer shows produced mean more reruns, which could hurt ratings.

Heyward has also been extremely flexible when it comes to production services. For example, DIC co-produced a live action show called Zoobilee Zoo, starring entertainer Ben Vereen. DIC's role, however, was basically putting the deal together, for 25% of any profits. Hallmark financed the program while Binder Entertainment of Los Angeles produced it.

"Andy Heyward brought me in as co-executive producer. He made the deal and that's the last I saw of him or DIC," producer Steve Binder said.

DIC also sometimes does work for hire, as it did with the hit cartoon shows The Real Ghostbusters and ALF. Heyward argues that there is money to be made by simply producing. But industry executives note that even if such shows are hits, DIC loses out on future profits because it doesn't own the characters.

Three months ago, Heyward moved to Burbank, where, from his sixth-floor office, he can look a mile to the east and see the studios of The Walt Disney Company, founded by and named for American's greatest animator.

Heyward often talks of Disney-like projects in the future, such as a DIC theme park, DIC boutiques and DIC primetime family shows. And, he yearns for DIC to have the same kind of name recognition with its cartoon stars as Disney has with Mickey Mouse and Donald Duck.

"Walt Disney has been his idol, and he subconsciously has emulated him," said Heyward's father, Deke. "I think it's the direction he wants to go toward, whether he wants to admit it or not."

Heyward scoffs at suggestions that his goals are Disney-like, calling such talk pretentious. Still, Heyward's plans are ambitious. And, industry executives say, it will take deft maneuvering by Heyward the next two years to bring those plans to reality.


"Seagram To Buy Tropicana Products," by Robert J. Cole, The New York Times, March 11, 1988

Faced with a steady cooling in America's love affair with Scotch whisky and other so-called brown goods, the Seagram Company Ltd. said yesterday that it would buy Tropicana Products Inc., makers of Tropicana orange juice, for $1.2 billion from the Beatrice Company.

Liquid fruit juice - particularly orange juice - is regarded as the one promising consumer item in the beverage industry. Practically everything else in that sector is viewed as ''mature,'' with sales unlikely to grow substantially.

The purchase will give Seagram enormous opportunities to sell orange juice outside the country, where it already has sales connections from West Germany to Japan, and west of the Mississippi, where the Tropicana brand is not as widely known. Ninety percent of Tropicana's sales are east of the Mississippi.

Edgar M. Bronfman, chairman and chief executive of Seagram, said Tropicana was ''both a diversification and an expansion of Seagram's existing beverage business.''

''Today's consumers choose from a wide variety of beverages,'' he said. ''We have already broadened our base with Seagram's coolers, and Tropicana is another step in this direction.''

Tropicana's Big Market Share

With sales of $750 million last year, according to trade estimates, Tropicana controls more than half the ready-to-serve orange juice market in New York City, 40 percent of the market in New England and an equal amount in Miami.

Florida, Tropicana's home base, is expected to be especially important. Seagram already makes wine coolers, a wine-based fruit drink that is extremely popular with Floridians.

The deal stands to make Seagram the nation's No. 1 seller of ready-to-serve orange juice, with nearly 30 percent of the $1.4 billion market, and the third-largest seller of frozen orange juice, with 8 percent of the market.

Minute Maid, which is owned by The Coca-Cola Company, is the leader in the sale of frozen juice, with 27 percent. Citrus Hill, produced by the Procter & Gamble Company, is second in that category, with 12 percent.

Except for its 23 percent stake in the DuPont Company, the oil and chemicals giant, Seagram has limited its expansion largely to the beverages business. It is currently in the process of buying Martell & Cie., the French cognac producer, for about $900 million, representing Seagram's first serious entry in the cognac market. Two years ago, Seagram moved into wine coolers, where it is now the market leader, and into spirits coolers - made with vodka and gin - which are moving up steadily with Canadian consumers.

Tale of Winners and Losers

The deal also involves a tale of winners and losers on Wall Street and of extreme difficulty in selling an entire company - only to be resolved by selling the pieces.

Kohlberg Kravis Roberts & Company, which owns Beatrice, tried to sell the company last year through the First Boston Corporation, where Bruce Wasserstein and Joseph Perella were then the investment house's two leading merger makers.

First Boston soon discovered, however, that Beatrice was too diverse to interest any one bidder at a price high enough to satisfy all parties. But in the process First Boston discovered that several companies, including Seagram, were interested in individual pieces, with Seagram showing interest in Tropicana.

Circumstances changed dramatically last month when the two First Boston merger makers abruptly left the firm and formed an advisory concern, Wasserstein Perella & Company, landing KKR as one of its clients and the assignment to sell Tropicana.

Ten days ago, according to one version of the story, Seagram approached KKR. The deal called for Seagram to get first crack at Tropicana.

There were to be no negotiations on the price; if the Seagram bid had not been accepted, the deal would have been thrown open in an auction sale. By Monday, Seagram offered $1.2 billion - and KKR accepted.

Loss Seen for First Boston

As part of Wall Street lore, Wasserstein Perella's victory will be viewed as First Boston's loss, but one that may be repeated often because of the two men's close ties with many of the biggest corporations in the world.

The Tropicana deal is the first Wasserstein Perella has completed.

It is expected to get a fee of at least $5 million in its first month in business - giving the firm considerable comfort plus the money to pay for overhead. The firm is also helping the Campeau Corporation of Canada in its bid for Federated Department Stores and Carlo de Benedetti of Italy in his bid for Societe Generale de Belgique.

But is Tropicana a good deal for Seagram?

In Toronto, Ian Osler, who follows Seagram for Prudential-Bache Securities, seemed of two minds: ''At an estimated 20 times earnings, it was expensive,'' he said. ''But there is room to increase market share and, therefore, revenues and earnings.''

The company, to be purchased by Joseph E. Seagram & Sons, Seagram's United States subsidiary, will be completed next month. The money will come initially from bank loans and short-term borrowings.

The next step for Beatrice will be to sell its Hunt-Wesson operations, which include vegetable oils, ketchup and La Choy chinese food. The job might have gone to First Boston if Mr. Wasserstein and Mr. Perella were still there.


"Griffin Wins Resorts In Deal With Trump," by Richard W. Stevenson, The New York Times, April 15, 1988

Donald J. Trump, under pressure to accede to a deal that would benefit other shareholders of Resorts International Inc., dropped his opposition and agreed to sell his controlling interest in the Atlantic City hotel-casino company to Merv Griffin, the two men said today.

Mr. Trump, however, would retain ownership of the Resorts' Taj Mahal casino, under construction in Atlantic City, other real estate and Resorts' fleet of helicopters. One executive close to Mr. Trump said the terms of the deal should allow Mr. Trump to claim a profit of as much as $400 million on his Resorts investment.

If completed, the agreement would bring to an end an often bitter battle between two of the world's richest men and would establish Mr. Griffin, the former talk show host, as a major force in both the hotel and gaming business and the takeover arena.

It would also bring to an inconclusive finish a test of takeover defenses based on classes of stock with different voting power. Because of that issue, other corporations with similar capital structures have been closely watching the battle for Resorts.

Mr. Trump, the New York developer, holds 94.7 percent of Resorts' class B shares, giving him 88 percent voting control. He had been trying to turn Resorts into a private company by acquiring its 5.7 million class A shares at $22 each.

Griffin's Move

Mr. Griffin derailed that plan last month by offering $36 a share for the class A shares. Mr. Trump, in turn, had stymied Mr. Griffin by declaring that he would not sell his controlling stake ''under any circumstances,'' effectively making Mr. Griffin's offer moot.

Mr. Griffin then sought to neutralize Mr. Trump's voting control by putting pressure on Resorts' outside directors to issue additional class B shares. He argued that the outside directors had a legal responsibility to allow all shareholders a chance to sell their stock for the higher price he was offering, a chance they would not have while Mr. Trump remained unwilling to sell his class B shares.

Ultimately, the negotiated settlement headed off a court test of the dual stock issue, and advisers to Mr. Trump and Mr. Griffin differed on what role it had played in their negotiations.

The two men and their advisers hammered out a preliminary agreement during a series of meetings in New York on Wednesday. It calls for Mr. Griffin's Los Angeles-based Griffin Company to pay $207 million, or $36 a share, for the Resorts stock held by the public, including all of the 5.7 million class A shares and the 5.3 percent of the class B shares not owned by Mr. Trump.

Mr. Griffin would also acquire Mr. Trump's class B shares and sell the Taj Mahal back to Mr. Trump. The two sides declined to release further details until a final agreement is reached, probably next week.

Trump Gains Cited

But Mr. Trump's camp sought to dispel any talk that he had backed down or that he could be branded the loser. His advisers said the developer had been mainly interested in keeping the Taj Mahal property all along and that it would be sold back to him at a very attractive price. Moreover, they said, Mr. Trump's class B shares would be acquired by Mr. Griffin at a substantial premium over the $135 a share that Mr. Trump paid.

''I'm very happy with the deal and look forward to having Merv as a neighbor in Atlantic City for many years to come,'' Mr. Trump said in an interview.

David S. Leibowitz, an analyst at American Securities, said the deal is one ''where all sides can claim a victory.''

The Resorts deal marks Mr. Griffin's first foray into the world of takeovers and is especially impressive given that analysts initially thought he had little chance of succeeding. ''No one can doubt his motivations or his abilities any more,'' Mr. Leibowitz said. ''From this point forward, Mr. Griffin is going to be a force to be reckoned with'' in takeovers.

Griffin Sees Regulators

Mr. Griffin, who met today with New Jersey casino regulators, declined through a spokesman to be interviewed. He acquired the Beverly Hilton hotel in Beverly Hills, California, in December, and also owns radio stations and real estate. He sold his television production company, which makes the highly successful Wheel of Fortune game show to the television division of Columbia Pictures, owned by The Coca-Cola Company, for $250 million two years ago.

Class A shareholders seemed to have mixed emotions about the transaction. William Klein II, a lawyer for a group of shareholders that was considering a lawsuit to allow a bid higher than Mr. Trump's, said that most holders had been hoping for more than $36 a share., The stock had been trading as high as $65.375 in the last year, he noted. ''On balance, though, this is the kind of deal that they think they should just take and walk away with,'' he said.

The class A shares rose today by $3.125, closing at $31.375 on the American Stock Exchange.

A lawyer for Mr. Griffin, Thomas E. Gallagher, said Resorts' outside directors had not played any direct role in the negotiations. He said Mr. Griffin was confident that he could have won a legal test of the dual-stock class issue.

'A Warning Signal'

While not attributing Mr. Trump's change of heart directly to Mr. Griffin's challenge to the stock classes, Mr. Gallagher said the fact that Mr. Trump eventually agreed to a deal ''is a warning signal about what assumptions it is wise to make about that kind of stock structure.''

The executive close to Mr. Trump disagreed, arguing that the price Mr. Griffin is to pay Mr. Trump for his holdings suggests that Mr. Griffin was not confident of winning a legal challenge. ''If they even thought they had a chance, they never would have paid such a profit,'' he said.

A clearer test of the dual-stock issue may come in a lawsuit filed by holders of Media General Corporation class A shares, which asserts that concentrating control in the class B shares held by members of the Bryan family is unfair. Media General is the object of an unsolicited takeover offer from Burt Sugarman, a Los Angeles entrepreneur and film producer.

THE COMPLEX SALE OF RESORTS INTERNATIONAL: The deal between Merv Griffin and Donald J. Trump.

1. Mr. Griffin agrees to buy 5.7 million shares of Resorts' Class A stock for $36 a share. He also purchases 5.3 percent, or 40,000, of Class B shares not owned by Mr. Trump, for the same price. Total price: $207 million.

2. Mr. Griffin also acquires the remaining 94.7 percent of the Class B shares from Mr. Trump for an undisclosed amount, expected to exceed the $135 a share paid by Mr. Trump for the shares.

3. Mr. Griffin gains control of the Resorts casino in Atlantic City and other properties.

4. Mr. Griffin simultaneously sells the Taj Mahal casino, Resorts' fleet of helicopters and other real estate back to Mr. Trump for an undisclosed amount.

5. Sources close to Mr. Trump say his total investment in Resorts could yield a profit of $400 million, although some see him as having backed down.


"Icahn Renews Bid To Take TWA Private," by John C. Given, The Washington Post, April 23, 1988

Financier Carl C. Icahn offered today to buy the 23 percent of Trans World Airlines Inc. stock he does not control, resurrecting his proposal to take the company private.

Icahn, who is TWA's chairman, dropped a similar proposal after the stock market crashed October 19.

Under the new plan, stockholders would receive for each of their shares a combination of $20 in cash and $29 in face amount of notes paying 12 percent interest due in 2008. The company has 30 million common shares outstanding, of which Icahn controls 77 percent.

The announcement sent TWA's stock up sharply. It rose $7 a share to close at $35.12 1/2 on the New York Stock Exchange.

Louis A. Marckesano, airline analyst for the securities firm Janney Montgomery Scott Inc. in Philadelphia, called the offer "a good deal for shareholders ... generous in price."

"The difficulty is putting a discounted value on the paper," he said. "We'd put it at a {combined} value in the low 40s," he said.

That would make the offer worth at least $276 million, at $40 per share for the 6.9 million shares Icahn does not control.

Icahn's previous offer was $20 in cash and $25 in face amount of the bonds per share.

A statement released by TWA said the new offer was conditioned on approval by a majority of the TWA shareholders not affiliated with Icahn, and the satisfaction of appropriate regulatory requirements. In addition, it said Icahn reserved the right to change the terms, if TWA's stake in Texaco - about 20.6 million shares, or 8.5 percent of the oil giant's stock - should change substantially in value.

Once consummated, employee stock ownership plans would be established to give the airline's employees about 10 percent ownership in the newly merged company, a statement issued by TWA said.

Separately, TWA announced it lost $55.5 million in the first quarter, slightly less than the $54.8 million it lost in the same period last year.

"These results reflect substantially greater interest charges during the first quarter of 1988 than existed in the first quarter of 1987 and do not include unrealized gains of approximately $340 million ... ," a statement said.


"Buyout Kings," by Carol J. Loomis, Fortune, July 4, 1988

Rulers of a vast empire, victors in an internal struggle, KKR's George Roberts and Henry Kravis are set to buy $40 billion of corporate America.

The name is still Kohlberg Kravis Roberts & Co. and the game still leveraged buyouts. The evidence of success remains visible as well. The firm's managing partners are fabulously rich, having for years fed on a feast of fat LBO fees and profits. They are sweepingly influential, controlling a string of companies, including Safeway, Beatrice, and Owens-Illinois, that taken together make KKR the second-largest U.S. conglomerate, just a touch behind General Electric in annual revenues. In Wall Street's mergers and acquisitions departments the partners are kings, their firm known as the biggest customer bar none. But stop there, because Kohlberg Kravis Roberts is otherwise radically changed. The cast of characters is different and the plot as well. The firm's founder, 62-year-old Jerome Kohlberg, Jr. - the spiritual father of the entire LBO industry - has been gone a year, a casualty of a tense management struggle over the firm's future. Now in total command of KKR are the two younger men who left Bear Stearns with him 12 years ago to start this firm, his longtime friends, followers, and partners, Henry R. Kravis, 44, and George R. Roberts, 45. The battle among the three was mostly about force: whether or not KKR should use it in trying to make buyouts.

Traditionally, though not with complete consistency, KKR had sought to be friendly, playing no role more aggressive than white knight to a company in play. Kohlberg yearned to keep things that way, avoiding hostile deals at all costs. Kravis and Roberts, ambitious, driven, and young enough to have long careers ahead, contended that KKR and the deal market had outgrown such niceties. In the end they won. This is not just one of those intramural Wall Street scraps, mildly interesting to read about, but of little relevance to the real world. This is KKR, powerful beyond most people's understanding even before this quarrel, now prepared to haul out the artillery when necessary. At the firm's disposal is a bankroll of unprecedented size: a $5.6 billion LBO fund that it lined up last summer from institutional investors - pension funds, banks, insurance companies. This money is slated to be equity, the base onto which at least $35 billion of bank and subordinated debt can be piled. It all adds up to a blockbuster total of $40 billion - enough to buy, say, all ten FORTUNE 500 companies headquartered in Minneapolis, including General Mills, Pillsbury, and Honeywell. Or the $40 billion war chest could buy two Texacos, a notion less fanciful.

In March, KKR announced that it had amassed a 4.9% position in Texaco and might move up to 15%. The stake is the first hard evidence of what the partners were fighting about. It is what KKR calls a ''toehold'' position, a raiderlike grip that Kravis and Roberts wished to take selectively and Kohlberg did not. In the sales literature that KKR used last year to raise its new fund, the firm said toeholds would be secured to speed the progress and lower the cost of ''potential management buyouts.'' In other words, KKR has designs on all, or at least part, of Texaco. This quest may fail. Carl Icahn, holder of a 14.8% Texaco stake, wants the company for himself, and Texaco wants devoutly to stay free of both. But if it isn't Texaco that KKR buys, it will ultimately be one or more somebodies of size, and when that happens statistical fireworks could light up the sky. KKR is an empire cloaked in disguise, one commonly identified only in terms of its pieces - all those companies it has taken private through leveraged buyouts and that it controls. Ask people to guess the combined revenues of all the companies in KKR's grip, and even the sophisticated will almost surely underestimate. The total in 1987: about $38 billion. A billion above is GE, sixth-biggest company on the 500 list.

As it goes about its everyday affairs, KKR acts and is treated like a huge company. The accounting firm of Deloitte Haskins & Sells, for example, handles this conglomerate-in-disguise like any large corporation, assigning a lead partner to oversee an array of KKR companies. Just as any giant might, KKR has time after time used a favorite executive recruiter to rustle up managers for its businesses. And in the executive suites, Kravis and Roberts have all the power of, say, Jack Welch, CEO of GE. Like Welch, Kravis and Roberts can hire and fire the operating executives below them, change the strategic direction of any unit they control, and buy and sell the businesses that constitute their holdings. It is the buying and selling, in fact, that makes KKR so extraordinary. GE unloads a division now and then (Utah International, for example) and picks up others (RCA). But it does not preside over its operations with the intention of getting rid of them in time. KKR does. Nothing that KKR controls is regarded as a permanent holding; everything is an investment, in due course to be sold, privately or publicly.

It is the firm's modus operandi to hold on to a company for only a few years, long enough to shape up its operations and, in all probability, shed some assets. In the U.S., there are about 15 companies - Amstar and Wometco, for instance - that used to be KKR properties and are not anymore. This is a conglomerate always in flux. A conglomerate ever growing as well. KKR's dynamics call to mind a troop of hoofers like the Rockettes, in circular march. On one side of the circle, imagine, a Rockette peels off and disappears into the wings, followed seriatim by others. On the other side, new Rockettes join, one by one, preserving the circle and in fact gradually enlarging it, until the stage seems almost to fill. The character of the dancers changes too. The Rockettes coming on are each taller, leggier, more statuesque, and more glamorous than those peeling off. My God, will the next be an Amazon? So it might be - that big, strapping rangerette named Texaco.

Add Texaco to all that KKR controls now, and its revenues would exceed $70 billion, whip it past IBM in size, virtually tie it with Ford, and leave it trailing only General Motors and Exxon. The men now in charge of this powerhouse, Henry Kravis and George Roberts, permitted FORTUNE to take the photograph on the cover, but declined to be interviewed. Jerry Kohlberg likewise declined. There is no shortage, however, of people who have known the three men as clients, dealmakers, and friends, and who are willing to discuss them, sometimes for quotation, sometimes not. Among these people are a few who know the reasons why the three are no longer working together, a story never before told publicly. Kravis and Roberts are cousins, the sons of a sister and brother. To a degree, they have led remarkably parallel lives. They both grew up in the Oil Patch - Kravis in Tulsa, Roberts in Houston - and both went on to Claremont Men's College in California, where they majored in economics. Kravis captained the Claremont golf team as a junior; Roberts was a soccer star. Some summers they worked at Bear Stearns, whose senior partner then, Salim ''Cy'' Lewis, was a friend of Kravis's father, the owner of a well-known geologic survey firm. After graduation, the lives of the cousins diverged a bit: Roberts got a law degree from the University of California at San Francisco, Kravis a Columbia MBA. But by 1969 they were both working at Bear Stearns, though in a bicoastal way that has remained their wont: Kravis in New York, Roberts in San Francisco.

Physically, the two men are almost identical: short, slight, athletically trim. Some people see a facial resemblance. But Roberts is definitely quieter and less outgoing; he has a softer, steadier look about him. Married soon after college and the father of three children, Roberts is a suburban family man who keeps a low profile in San Francisco and essentially no profile in New York, which he dislikes. Business friends call Roberts creative, conceptual, and a whiz at assessing the values in a deal. Richard Arnold, executive vice president of Charles Schwab & Co., got to see these skills when Roberts helped his friend Chuck Schwab buy Schwab's brokerage company back from BankAmerica. Says Arnold: ''George doesn't talk a lot. But when he does say something, it cuts right to the core of the issue. He's sensible, practical, knowledgeable, deliberate.'' Plus, says John Canning of First Chicago Venture Capital, a longtime KKR investor, ''outstandingly smart.'' No one thinks Kravis got slighted in intelligence either. He is more kinetic than Roberts and harder edged, showing some steel in his eyes. He can charm as well. A New Yorker who once waited in KKR's elegant New York offices to see Jerry Kohlberg remembers getting his first glimpse of Kravis: ''Suddenly this man swept into the reception room, perfectly attired in a Savile Row suit, and said to this gangly Texan who'd been waiting there too, 'Hello, I'm Henry Kravis.' He was urbane, he was brisk, he was just right.''

Kravis is divorced from his first wife, but is close to their three teenage children. He is married now to Carolyne Roehm, the dress designer. They are flashily prominent in New York society: Her publicist appears to work overtime keeping them in the columns, which is believed to suit Kravis just fine. A recent tidbit from Vogue: Guests at their Connecticut pre-Revolutionary house wake up to the smell of brewing coffee and baking croissants that has been piped into their rooms. Later in the day, the vents advertise brownies. The Kravises are conspicuous spenders - a matter that seems to have bugged Jerry Kohlberg no end - and conspicuous givers also. With his art collection, composed of Monets, Renoirs, Sargents, and much more, Kravis seems to have a display space problem. Some of his paintings have gone to decorate KKR's antique-filled, mahogany-paneled offices, which overlook Central Park and may be, says one New York businesswoman, ''the nicest spread in the city.'' According to still another Vogue item, Kravis is eyeing space on the floor above his $5.5 million Park Avenue apartment for a private museum to house the rest of the overflow. At the real museum nearby, the Metropolitan, work is under way on a new Henry R. Kravis wing, partially underwritten by HRK's $10 million gift. New York's Mount Sinai Medical Center received $10 million from him recently as well. In politics, Kravis's favorite cause is George Bush, whom he has backed enthusiastically. It could be, a business friend speculated recently, that Kravis is interested in a Washington job. But nothing about what Kravis says, nor Roberts, nor their friends, suggests that this pair is anything but fascinated by what they do. Says a close friend: ''These are Type A people. The fact that they've made a lot of money doesn't matter. Each deal is a new challenge. Each time they go to meet with the management of a company, it's a challenge to convince them KKR should do the transaction. This kind of thing is what drives all Type As. These are just very active, driven people.''

One thing is sure: They are not working for the love of restructuring corporate America. Chuck Schwab once spoke admiringly to Roberts of all KKR had done, as Schwab saw it, to improve U.S. business, taking companies out of the hands of uncaring boards and putting them in the hands of entrepreneurial owner-managers. Roberts looked at Schwab sideways and said, ''That's not why we do it, Chuck.'' In confidence and ability, Kravis and Roberts are obviously eons away from the days when they first began working with Jerry Kohlberg at Bear Stearns. Kohlberg, then co-head of corporate finance there, was athletically trim himself (he is a tennis nut), more reserved than Roberts ever thought of being, but well known and respected on Wall Street. He was also successfully, if in a limited way, using Bear Stearns's capital to do what were then called bootstrap, or management, acquisitions. The deals, however, always had the look, and later got the name, of leveraged buyouts: Acquire a company or a division with a package of money containing a sliver of equity - say 10% or less of the price - and a slab of debt; shape up the company with the help of managers whose hearts and minds you've captured by giving them a share of the ownership; sell it off later. Most important, coin money. The potential for doing that - or not doing it - was in the leverage. The debt had to be repaid and serviced out of the company's cash flow and there was always the possibility it couldn't be, which might mean a wipeout of the equity. But if things went well, any profits and any value added belonged to the gang putting up the sliver, turning it into silver - or gold. Kohlberg played this game expertly for years at Bear Stearns, but grew restless because its appetite for such deals was less than his. So in 1976, pulling Kravis and Roberts from the ranks and collecting some seed capital from a few friendly investors, he set up KKR in what was clearly a gutsy move. KKR went on to a series of triumphs: the first LBO of a major New York Stock Exchange firm (Houdaille, in 1979); the first $1 billion buyout (Wometco, in 1984); the first large buyout done by a public tender offer instead of through a drawn-out merger process (Malone & Hyde, in 1984); the largest buyout in history (Beatrice, for $8.2 billion, in 1986).

In its frontier days, KKR often had to struggle to raise the debt financing it needed. At first the firm was dependent on insurance companies, which wanted a share of the equity for putting their money on the line. Later the banks signed on, forgoing the equity; today KKR is particularly close to Bankers Trust. Still later junk bond financing, often scads of it, became essential to KKR's deals. Though it spreads its merger and acquisition fees around the Street with finesse, KKR has leaned on the junk bond juggernaut of Drexel Burnham Lambert's Michael Milken repeatedly. Recalling KKR's history of foraging for money, a man who in the 1970s made investment decisions for a large Eastern insurance company remembers seeing Kravis often, Kohlberg only now and then. Once, he says, Kravis came to him and practically begged for funds. ''I always thought,'' says that man, ''that Henry got the doggiest jobs and got powerful doing them.'' Perhaps, but for years the locus of power in the firm was totally clear: ''We'll have to check this with Jerry,'' Kravis and Roberts would say as they did the legwork. ''He was an absolute father figure to those two guys,'' says one man who dealt with KKR then. He was also the man who applied the brakes to some of the younger partners' more ambitious plans for adding staff and stepping up the pace of acquisitions. The KKR partnership structure called for unanimous agreement to do a deal, and around the firm, Kohlberg got the nickname ''Dr. No.''

Then, in early 1984, Kohlberg became ill. He was found to have a brain tumor. While it turned out not to be malignant, the surgery he underwent was severe, leaving him with intense headaches for several months and reducing his working hours for a time. During this period, naturally, Kravis and Roberts ran the firm. ''And they liked it,'' says a man then a friend of all three. Kravis and Roberts, he says, began to have thoughts of holding on to more authority after Kohlberg returned. The friend believes that under most circumstances Kohlberg would have readily acceded to that change, accepting the chance to free up some time for his outside interests, among them his alma mater, Swarthmore; Columbia University, where he got a law degree; and tennis. But Kohlberg, the friend says, did not want to reduce his role when there were disagreements about policy, which there certainly were beginning to be. The LBO business had changed dramatically. Kohlberg's original negotiating style, says still another friend, had been ''to sit down and get to know management, to schmooze with them, to spend six months or longer talking in what was a very friendly sort of joint process.'' But by the mid-1980s the competition for deals was feverish and the time for schmoozing had disappeared. A whole industry of LBO firms was crawling around the woodwork of corporate America, looking for deals and trying to replicate KKR's success. Bidding wars began to erupt, typically because a raider had initiated hostilities and paved the way for firms like KKR to step in as white knights. KKR played that role again and again, but the problems of staying gentlemanly - as Kravis and Roberts were forever reminding Kohlberg and as he did not want to hear - were intensifying. The pressures got more insistent in late 1985, when KKR loaded up its acquisition guns by raising its fifth LBO fund, a $1.8 billion giant.

It was at this point that the friendliness of KKR's deals first dropped a notch. In the Beatrice acquisition, negotiated in the fall of that year and completed the next spring, there was no raider on whose heels KKR, as white knight, moved in. KKR moved in, period. It was accompanied by Donald P. Kelly, a man with an iconoclastic image, who took over as chairman of Beatrice and has been busy ever since busting it up. Beatrice had grown vulnerable because of management troubles: The board had forced out one chief executive, James L. Dutt, and replaced him with a retired executive, William W. Granger, Jr., who didn't look like a permanent solution. You can argue that the management upheaval put Beatrice in play and guaranteed that somebody was going to take the company over - so why not KKR? Among those making this case at the time were Kravis and Roberts, who, as Beatrice's board stalled over what to do, went so far as to propose to Kohlberg that KKR launch a hostile tender offer. But Kohlberg was camped at the opposite pole, wanting to call off the pursuit entirely. In the end, by way of a compromise, KKR just kept pressuring Beatrice's board, urging offers upon it, until it capitulated and accepted a deal. In the takeover community, the episode was called a ''bear hug,'' meaning on the border of hostile. The internal debate at KKR went on from there, through endless discussions.

Late in 1986, KKR did a large white knight deal, rescuing Safeway from the Hafts, Herbert and Robert. Then the KKR bear went rambling again, this time in the Owens-Illinois acquisition, signed in early 1987. Here, there were rumors of a raider, but one never emerged. KKR meanwhile came around to talk and found O-I's management ready to do a buyout. In opposition, though, were some of O-I's outside directors, who wanted to see the company remain independent and who fought KKR bitterly. In the end KKR raised its bid by about 10%, made it all cash, and prevailed. Six weeks after this deal was completed, Jerry Kohlberg gave up his role as a general partner of KKR and left. Says an insider in the situation: ''It sort of evolved to the point where Jerry was saying, 'Well, look, maybe it's better if I leave. Maybe this isn't the right place for me.' And George and Henry were saying, 'Yeah, maybe it's better that you do.' '' But it wasn't as simple as that makes it sound. Continues the insider: ''It was an incredibly emotional experience. Very difficult for everybody. It was painful.'' To the public, the partners revealed little. Kohlberg announced that he would start his own LBO firm, Kohlberg & Co., and spoke vaguely of ''philosophical differences'' within KKR, providing no details. Said Kohlberg, as reported in the New York Times: ''I guess you could say I'm too old to not do things my way.'' Roberts indicated that Kohlberg may have felt KKR's deals were getting too big. Kohlberg's comment about his new firm: ''I won't restrict myself to small transactions, but I'll stick with deals where reason prevails.''

A big question remaining in this tale is whether Kohlberg also disputed with his younger partners the fees KKR was commanding. In Kohlberg's eyes, were they so much as to be unfair to other participants in the deals? Answering the question requires an understanding of the various ways in which an LBO firm makes money. Sometimes it seems as if these add up to 57 varieties of compensation, but the three that count most are the management fee, transaction fees, and ''the carry.'' Basically, the management fee rewards an LBO sponsor - a KKR, say - for figuring out how to invest its fund; the transaction fees for actually doing the buying; and the carry for doing it well. Call these the triple-dip. FOR KKR, the management fee is essentially 1.5% annually on the fund most recently raised, which right now is that $5.6 billion lined up last summer. These billions are not in KKR's hands; the firm's investors have simply promised to deliver the money as it is needed for deals. The management fee, however, becomes payable immediately. Seasoned investors with KKR get a partial break on this fee for a couple of years. But as of next summer the grace period will end, and the firm will start earning the fee on the full amount. The take will be a glorious $84 million a year, a charge continuing through 1992 or until the fund is fully invested, whichever comes first.

Next come the transaction fees, paid not only to KKR but also to commercial bankers, investment bankers, and lawyers for their work in making a deal happen. Technically, these fees are borne by the company being taken over. But since KKR's investors end up being the principal owners of that company, it is they who pay the freight. We are talking big money here: In the three megadeals that were sewn up in the year before Kohlberg pulled out of the partnership - Beatrice, Safeway, and Owens-Illinois - KKR's fees were $45 million, $60 million, and $60 million again. In retrospect the Beatrice fee looks almost small, since it was only 0.73% of the $6.2 billion purchase price (not including the $2 billion of debt assumed). On the Owens-Illinois acquisition, the fee was up to 1.36%. Finally, consider the carry, which is 20% of all profits from an LBO deal. Take, as an example, KKR's acquisition of sugar refiner Amstar in 1984, done with funds that KKR had lined up from investors in 1982. In this case, as always, KKR formed a special limited partnership to make the acquisition. The money needed was $52 million of equity to finance a $465 million purchase. KKR, as general partner, put up about 1.6%, or $830,000. Its institutional investors put up the remainder: $51.2 million. Things moved fast and well after that. KKR sold Amstar off in less than three years (to a Merrill Lynch LBO partnership), at a profit of $232 million, producing a compounded annual rate of return on the equity of 81.5%. Of the profit, the institutional investors who were limited partners (including, for example, the state retirement funds of Oregon, Washington, and Michigan) got 80%. The remaining 20%, or more than $46 million, went to KKR. That is to say it mainly went to the four men then general partners of that firm, Jerry Kohlberg, Henry Kravis, George Roberts, and Robert MacDonnell, Roberts's brother-in-law.

As KKR transactions go, Amstar was a standout, producing much better returns, faster, than has been generally the case for the firm's deals. Even so, the KKR record has so far been good enough to keep the customers coming. Most of the firm's completed deals have their roots in the period from 1976 to 1982, when KKR raised three different funds and, by its figuring, put $543 million of equity into 20 different deals. In the selling literature that KKR used last summer, the firm stated that compounded annual returns on these three funds over their life - after the carry - were 31%, 32%, and 44%. These returns translate into realized profits of just over $1.5 billion, of which KKR's share would have been $300 million. The 1976-82 period also included a deal that was backed by only some of KKR's investors, was not part of a fund, and therefore is not mentioned in KKR's literature: the $425 million acquisition, in 1981, of American Forest Products, a division of Bendix. This transaction was a bummer. KKR's equity investors apparently not only lost the entire $93 million they put up, but also were required to contribute some additional funds to pay the subordinated lenders. The firm tends to speak of this deal as ''tax-oriented,'' implying it is different from others. ''That's a bunch of horse manure,'' says one man who was lending KKR money when this transaction was done. ''They're just trying to make their record look better. It's only in hindsight that they have treated this deal as different.'' KKR's performance on transactions done with its fourth fund, raised in 1984, and its fifth, raised as 1985 was ending and 1986 beginning, has not yet been determined: Many of the Rockettes financed with those funds are still doing their stuff on KKR's stage. Last summer, though, KKR was estimating - conservatively, it said - that the rate of return on the 1984 fund, which led to $1 billion in equity investments and includes such uncompleted deals as Union Texas Petroleum and Motel 6, would be 36%.

The 1986 fund financed four biggies: Beatrice, Safeway, Owens-Illinois, and Jim Walter Corp. These deals were negotiated before the crash, when the market was all but throwing money at LBOs. Consequently, they required very little equity: only about $900 million for transactions in which the prices paid and the debt assumed totaled $22 billion. Of these deals, Beatrice, which accounted for $8.2 billion of that total, is a sure winner, though how much of one remains uncertain. KKR's investors got most of their $402 million in equity back when the company spun off E-II Holdings last year and took it public. Having sold off much of the rest of Beatrice, Chairman Don Kelly is now sitting with about $3 billion in debt, most of it junk bond variety; $2 billion in cash; a big food business, including Hunt-Wesson, Swift-Eckrich, and a cheese processor; and a major question as to how to make this investment liquid. Once, says KKR investor Canning, of First Chicago, Beatrice looked like ''a triple grand slam.'' But the food business has proved harder to sell than Kelly and KKR expected. Now, Canning is forecasting a single grand slam, which he defines as perhaps four times your money. Canning, who talks to Henry Kravis a lot and considers him a close friend, has some thoughts about KKR's other big deals as well. Safeway: ''Working out very well. They've done a super job.'' Owens-Illinois: ''Too early to tell, but the signs are positive.'' Jim Walter: ''Too early'' also, ''but I think it's going okay.''

The outcomes on these deals will matter not only to KKR and its investors, but also to Jerry Kohlberg, who as part of his financial settlement with Kravis and Roberts stayed a limited partner in the firm. But how, in the meantime, did he feel about the richness of KKR's diet, the triple-dip? His friends say he worried that the rewards were out of proportion: too much for KKR, too little for the investors. Kohlberg argued within the firm, so the friends say, for a structure that would allow the investors, since they had put up the money, to share in the transaction fees and any other special fees. Ridiculous, responds a close friend of Kravis and Roberts, arguing that the dispute just didn't happen. Says he: ''Jerry never had any complaints about the fees. Not when they were going to him.'' The evidence on this conflict is conflicting itself. Jerry Kohlberg went along with the fees set while he was at KKR and took his share of them home. On the other hand, when Kohlberg & Co. went out to raise a fund from investors, it proffered a whole new arrangement: This fund, said Kohlberg's selling literature, ''will share all transaction fees with its investors.'' The split is to be 50-50, vs. 100-0 at KKR. To that, the Kravis-Roberts camp also has an answer: It claims that the new fee structure was forced on Kohlberg, and on other recently formed funds as well, by a market grown angry about fees and determined to break the KKR pattern.

Certainly Kohlberg's fund cannot be said even then to have been a hot seller - to have whistled out the window, as they say on the Street. Planning originally to raise $500 million, Kohlberg ran into a difficulty called October 19, and settled instead for a smaller amount. Reports say he got $280 million; a friend of his says ''more than that.'' In any case, Kohlberg definitely stirred up the air as he went about selling his fund. When he was pressed for explanations of the ''philosophical differences'' that had caused him to leave KKR, he apparently said little. But his selling literature spoke volumes, promising investors not only a share of the fees but also the friendliest of styles: no toeholds, no hostiles. By implication, the spiritual leader of the industry was saying, ''This is the right way to behave. KKR's is the wrong way.'' When this news reached KKR, says a friend of Kohlberg's, Henry and George were not pleased. Kohlberg's fund is now up and running out of twin offices in Manhattan and suburban Mt. Kisco, near his home. His organization of seven other professionals includes his older son, James, 30, who formerly worked for KKR, and George Peck, 56, long a principal in a small LBO fund and also a former Canny Bowen executive recruiter who for many years helped KKR with the people and issues that arose in its businesses. In June, Kohlberg & Co. announced its first deal: a $330 million buyout of Alco Health Services of Valley Forge, Pennsylvania. The deal, said a Kohlberg spokesman pointedly, is ''totally friendly.'' Among Kohlberg's investors are a couple who reportedly refused to sign up for KKR's 1987 fund because they regarded the idea of toehold investments as getting unpalatably close to hostile deals. It is also possible to find institutions that once invested with KKR and have stopped doing so because they grew to hate the fact that fees were not shared. ''I had bitter discussions about this with them a couple of years ago,'' says one investor who jumped ship.

But no case could possibly be made that KKR's investors are broadly dissatisfied. You can't get $5.6 billion from a bunch of malcontents. In truth, many KKR backers leap to give testimonials. First Chicago's Canning, for example, committed $300 million to KKR's 1987 fund and exudes enthusiasm for the firm. Never mind, he says, that some other LBO funds produce better returns than KKR: As he sees it, KKR's strength is that it is performing admirably with extremely large amounts of money. ''They're in a league by themselves,'' he says. The Texaco toehold reinforces the point; smaller LBO funds couldn't even consider going after the oil giant. The biggest KKR fan club is located in Oregon, whose state retirement fund hooked on to KKR in 1981. James George, the state's investment manager, says he can't really quantify the profits made since, but knows it's been ''a tremendous success.'' George committed $600 million to KKR's 1987 pool, a walloping amount considering that the retirement fund has assets at market value of only $8.3 billion. George calls KKR's toehold investments ''an evolution'' to be watched: ''We'll see how it works out.'' Some Wall Streeters wonder what would happen if KKR opened up fire on a company located in Oregon or some other state whose pension money it handles. That could also be something to watch.

One of KKR's more pressing concerns right now would seem to be the possibility of a recession, which could cause some of the firm's debt-laden lovelies to languish. At the least, a recession might impede KKR's plans to take a number of its companies public, among these Safeway. At the most, one or more KKR operations might go really sour. But there would be no domino effect here. Because each deal is set up solo, it lives or dies on its own. Long range, the problem for KKR and every other buyout firm is returns. Recent changes in the tax law have hurt the economics of bust-up deals and put LBO funds - ''financial buyers,'' as the term goes - at something of a disadvantage in competing with corporate buyers who simply want to run what they buy. Nonetheless, the financial buyers are everywhere, carting money that they are burning to use. KKR's $5 billion is matched in the market by at least $10 billion that has been entrusted to other LBO funds. When a possible acquisition surfaces, everybody jumps. For example, all manner of buyers scrambled for Kraft's battery division, Duracell, when it went on the block recently. The winner: KKR, which probably hopes to take Duracell public one day. Some dealmakers were stunned by the price KKR agreed to: $1.8 billion for a company that last year had pretax profits of only $135 million. ''Crazy,'' said one bidder who dropped out more than a half-billion below. An alternative thought: So far only a pittance of the $5.6 billion raised in the 1987 fund has been committed to deals, leaving a full $5 billion still to be spent. Another loser in the bidding contest regards the $1.8 billion price as irrefutable evidence that KKR is feeling tremendous pressure to get that $5 billion to work. More evidence of that may lie in the fact that KKR has been looking recently at buyout prospects overseas, certainly in Britain and maybe elsewhere. It's a whole different, more difficult world beyond the big water. The market isn't used to the leverage that Americans employ, nor well set up to provide the quantities of subordinated debt that a KKR would require. Still, the firm is not leaving this stone unturned.

In the end, KKR's investment of its $5.6 billion, or whatever chunk of that it can actually find a place for, should produce an eye-popping realignment of giant companies, and perhaps a reworking of corporate power. If hostilities occur, they will heighten the drama; if KKR manages a peaceful occupation instead, broad stretches of business countryside will still be overridden. Generals Kravis and Roberts, in any case, should do nicely: Over the next few years, KKR seems likely to take in close to $1 billion in fees as it works the money it has now into place. The term for that might be conspicuous consumption.

BOX: THE KKR COMPANIES

They number at least 23 today, in which KKR, through its partnerships, controls 13% to 98%. KKR shares control of Union Texas with Allied Corp. The Duracell buy is pending, as are the sales of Storer and Malone & Hyde, neither one listed.

Beatrice 88%; DAW Forest Products 98%; Dillingham 75%; Duracell 88%; L.B. Foster 13% IDEX 56%; M&T 98%; Marley 26%; Fred Meyer 67%; Fred Meyer Real Estate 90%; Motel 6 88%; Owens-Illinois 90%; PacTrust 88%; Printing Finance 80%; Red Lion Inns 75%; Safeway 85%; SCI Television 45%; Seaman Furniture 80%; Stop & Shop 92%; Union Texas Petroleum 39%; U.S. Natural Resources 49%; Jim Walter 83%; W-I Forest Products 44%

BOX: KKR'S INVESTORS INCLUDE SOME BELL-RINGERS

Every KKR acquisition is made through one or more limited partnerships formed just for that deal. In 1984 these investors put up $189 million of equity to buy $1.6 billion of properties subsequently christened Pace Industries. While lists for later partnerships aren't publicly available, many of these investors are known to have re-upped.

GENERAL PARTNER: KKR Associates 1.1% LIMITED PARTNERS: 10% each State of Oregon retirement fund, State of Washington investment board 6.8% First Chicago Investment 5% each Equitable Life, GTE Service pension fund, Metropolitan Life, New York State retirement fund, Security Pacific Capital 3.5% each Aeneas Venture (Harvard), State of Michigan pension funds 2.5% each BankAmerica Capital, Bank of New York, Bankers Trust New York, Continental Illinois Equity, First Interstate Equities, Hillman/Wilmington, Hughes Aircraft retirement plan, Minnesota board of investment, U.S. Bancorp 2% Government of Singapore Investment 1.5% First Bank System 1% each Alcoa master trust, British Gas pension scheme, Henry Crown & Co., First Bank System pension fund, H.J. Heinz retirement fund, Rowney Inc., Tektronix retirement trust, United System master trust, Water Authorities superannuation fund (London), Yale 0.8% Madison Dearborn Partners 0.7% Salvation Army 0.5% each Carnegie Mellon, Electra Investment Trust (London), John Hancock Mutual Life, London Mortgage Trust (Samuel Montagu), Sun Life Assurance Society (London) 0.3% Massachusetts Institute of Technology


"Clouds Over Cineplex," by John DeMont, Maclean's, July 11, 1988

For Cineplex Odeon Corp. and its chairman, Garth Drabinsky, it was business as usual. On June 29, the Toronto-based movie giant opened a new art deco cinema in a restored trolley barn in Salt Lake City. And the same day, it launched a refurbished theatre complex in Tucson, Arizona. Both investors and competitors expect that sort of breakneck expansion from Drabinsky, who pulled Cineplex back from the brink of bankruptcy in 1982 and who has since transformed the company into North America's second-largest movie theatre empire, with more than 1700 screens in 500 locations in North America and the United Kingdom. But attention is now focusing on whether 39-year-old Drabinsky may be trying to go too far in his relentless drive to grow.

Drabinsky's push to expand has already forced the company to take on a new partner—MCA Inc., the parent of Universal Pictures, which acquired nearly half of Cineplex's stock in 1986. And only two months ago, Drabinsky and vice chairman Myron Gottlieb slashed their interest in the company to less than 4 percent each by selling 1.2 million Cineplex common shares apiece—partly to pay off bank debts they had incurred to raise their stake in the company. Buying most of these shares was a group headed by Charles Bronfman of Montreal, which has emerged as the second-biggest Cineplex investor, with 12.2 percent of the shares once all stock options are exercised. Meanwhile, Drabinsky's spending spree has raised Cineplex's long-term debt to more than $645 million. But some stock analysts question whether there will be enough cash flow from Cineplex's theatres to comfortably cover the huge debt loads and to compensate for declining sales of redundant movie theatres. And analysts, including Marianne Godwin of Merrill Lynch Canada Inc., also contend that Cineplex's 1987 earnings—a profit of $34.6 million— would have been lower if the company had not changed its accounting methods by reporting earnings in U.S. dollars rather than Canadian dollars for the first time, as well as making changes to its depreciation expenses. Cineplex says that it made the switch because almost 70 percent of its earnings are generated in the United States.

But all those questions have apparently prompted investor caution. After reaching a high of $22 per share in March 1987, Cineplex shares dropped to $9% in May, before recovering to $11 last week on a market rally. Still, many analysts and investors continue to show confidence in Cineplex's future. Toronto-based Slater Industries Ltd. bought heavily when Drabinsky and Gottlieb sold their shares. And analysts say that the furor over accounting practices has obscured Cineplex's fiscal soundness. For his part, Drabinsky said that his expansion strategy is "right on schedule." But for now, Drabinsky's biggest challenge may be convincing investors that his vision can become reality.


"The Tough Cookie At RJR Nabisco," by Bill Saporito and Charles A. Riley II, Fortune, July 18, 1988

In two mergers, Ross Johnson went through the revolving door last and came out first. An enemy of the quiet life, he introduces chaos to turn managers into winners.

Gee whiz, you say to yourself: Just how hard is it to run one of those big FORTUNE 500 companies? Let's ask F. Ross Johnson, 58, the boss at RJR Nabisco Inc., the multibillion-dollar food and cigarette behemoth that ranks 19th among the 500. Given the strength of the company's brands - Oreo cookies, Ritz crackers, and Winston cigarettes - says Ross, ''you could put your crazy old aunt in and run it for a while.'' To some the company may look as if Auntie is already in charge. Johnson reorganizes RJR Nabisco so often that businesses ricochet around the company like billiard balls. He specializes in taking break shots at neatly racked old cultures and replacing them with an organizational mix of turbulence, vigilance, and guts. In three overhauls, he sent 2650 corpocrats back to line jobs or out into the wilderness. The saying among the survivors: Nobody has a job at RJR, only a current assignment. Surprisingly enough, RJR executives seem to love it. Not so much for the money, though they get plenty of that, as for the sting of battle.

So far, at least, they have been following a winner. Johnson, for example, reduced legendary Procter & Gamble to a whining loser in the Great Cookie War of 1983-86, teaching lessons to marketers everywhere. This accountant from Winnipeg also has ideas of his own about the always crucial matter of deploying corporate assets. RJR's fat cash cow is the cigarette business. & Johnson is milking her hard, but he is also giving her a big bucket of oats. He is introducing a new product that may cost him a billion. Risky? Sure, he says: ''It's a lot goddamn harder to launch a new cigarette than to go borrow at the bank and buy what somebody made 20 years ago. But what the hell. That's what we're here for.'' If all his gambles succeed, he may be known not just as America's toughest marketing man, but also as its best.

In eight years of corporate Pac-Man, Johnson's companies were swallowed twice by bigger players, but each time he emerged to run them. Top executives of acquired companies tend to get the boot, or an offer they cannot refuse. Johnson is the striking exception. He merged Standard Brands into Nabisco in 1981 and was in charge of the combined Nabisco Brands when he sold it to R.J. Reynolds in 1985 for $4.9 billion. That was followed by what is now a signature event: his stunning grab of the CEO spot at RJR Nabisco, which he followed by spiriting the shorn corporate staff - he reduced their numbers from 1000 to about 350 - out of tobacco town Winston-Salem, North Carolina, to neutral Atlanta. The move capped Johnson's reputation as an ultimate corporate master blaster. The desired result of Johnson's frenzy is a simplified management process, a worthy goal. He figures that with fewer people and procedures to gum up the works, a company can make the most of its powerful brands. Instead of investing in corporate staff, Johnson prefers to spend money making his products the lowest-cost producers, tuning their distribution systems until they hum, inventing products, advertising their message, and chewing up the competition.

At RJR Nabisco, Johnson, after turmoil only somewhat less memorable than the first battle of Atlanta, has combined two consumer companies' weirdly unmatched businesses and vastly different management philosophies. At the time of the merger, the two companies were running more than 50 businesses and paying nearly 4300 corporate staff people to keep track of things. Since then, RJR Nabisco has sold more than 30 operations that logged $2.5 billion in sales; the treasury deployed the proceeds to reel in the $1.6 billion in preferred stock that financed the merger, plus another 25 million common shares, maneuvers that boosted return on equity to an enviable 20%.

In May, RJR Nabisco reorganized Del Monte Corp. for the fourth time, reuniting two major businesses, fresh fruit and canned goods, that were last separated in 1986. Says Robert J. Carbonell, 61, chief of Del Monte and vice chairman of RJR Nabisco: ''If something isn't working, we're prepared to move 180 degrees in a hurry.'' The company broke Nabisco Brands into four operating divisions in June, and will force 1600 employees with staff positions to pay their way in one of the operations or beat it. Says H. John Greeniaus, 43, head of Nabisco Brands Inc.: ''The idea really stems from Ross's philosophy that businesses should be legitimate freestanding units.''

Change has done RJR Nabisco good. It stands as a stripped-down marketing machine with a phalanx of bulletproof brands such as Oreo, Ritz, Del Monte, Planters, Life Savers, Camel, Winston, and Salem. Analysts forecast 20% to 25% earnings per share growth for RJR Nabisco this year and about 18% to 20% annually for the next three; earnings should reach $1.4 billion in 1988, while sales will increase $1 billion to $16.7 billion. That's about an 8% increase, none too shabby considering that the tobacco market is declining and the biscuit trade is flat as a cracker.

The old cookie monster, now called Nabisco Biscuit, is setting market share records monthly in biscuits and crackers. Nabisco Foods' basket of products is sort of a you-must-remember-this course in American social history. The names include Fleischmann's margarine and Royal gelatin from the Standard Brands days, A1 steak sauce from R.J. Reynolds, and Shredded Wheat and Milk-Bone dog biscuits from Nabisco. Though few products are stars, most are big players in small niches - dog snacks for instance - that pump out gross profit margins above 50%. Overall, RJR Nabisco's food business earns almost 10%, pretax, vs. 6% to 8% for the rest of the industry. For all its profitability, the food company is not nearly the money spinner that tobacco is. RJR's pretax profit margin on its domestic cigarette business is 29%. But the food business gives Johnson a highly profitable place to put the tobacco cash. He goes out of his way to point out that on an after-tax basis, food represents 40% of the company's earnings. In fact, analysts hailed the union of Reynolds and Nabisco as a perfect fit - each sold consumer packaged goods, but had no overlapping products. Their operating strategies were polar opposites, however. Nabisco thought hard about strategy questions such as competitive advantage: its buying clout as the industry's biggest flour customer, for example, or the distribution efficiencies of a full line of cookies, and the plump margins commanded by a proprietary product such as cholesterol-free Egg Beaters. RJR ran like a conglomerate. In addition to the tobacco business, the company controlled operations as disparate as Heublein's liquor, Kentucky Fried Chicken, mail-order fruit sellers Harry & David Inc., and Canada Dry Beverages. Reynolds also owned Del Monte Corp., whose properties included Hawaiian Punch, Grey Poupon Dijon mustard, and the Patio and Morton frozen food lines. The Reynolds businesses had little in common with each other in manufacturing, sales, or distribution. The union of R.J. Reynolds and Nabisco also presented a spectacular clash of corporate cultures: RJR's staff-oriented, conglomerate-style management warring with Nabisco's freewheeling, decentralized model. At RJR, Southern gentility was the style. Meetings invariably started with talk of family or fishing. ''That takes 20 minutes in Winston-Salem,'' says a former executive. ''The Nabisco people didn't have 20 minutes for the whole meeting.'' RJR's small-town, take-care-of-the-people roots fostered a large staff, which made life difficult for line managers. ''The element of control was stifling. You spent more time reporting to a system,'' says Carbonell, now at Del Monte and one of Johnson's old friends from Standard Brands. RJR had elaborate procedures for decision-making that required signoffs for everything on the high-cost side of changing a light bulb. The personnel department had 87 policies, vs. ten guidelines today. The culture that emerged from the combination obviously wasn't Reynolds's, but it isn't Nabisco's either. It comes from Standard Brands.

Johnson joined Standard Brands' Canadian subsidiary as an executive vice president in 1971. A graduate of the University of Manitoba, where he studied accounting, he had learned marketing at Canadian GE and retailer T. Eaton Co. He moved to Standard Brands' New York City headquarters in 1973 as senior vice president responsible for international operations. His keen prairie eye for gopher holes on a balance sheet moved him ahead fast. In 1975 he became president. That year Standard Brands had $2 billion in revenues and $121 million in pretax earnings, half of which came from a high-fructose corn sweetener business.

In the first months after Johnson took over as chief executive in 1976, the price of sugar dropped from 61 cents to 13 cents, wiping out the high-fructose corn syrup market and most of his company's profit. Earnings estimates dropped from more than $4 a share to $2.40, and Johnson, frantic, held a press conference to talk about a turnaround. ''The boy wonder arrives, and we go down to nothing,'' he says. ''If earnings had dropped to $2.35, I would have been gone.'' Profits ended up at $2.42, but he eventually dumped the sweetener business anyway. Johnson has demonstrated an uncanny ability to get the top hand on the bat. First, at Standard Brands, the board kicked CEO Henry Weigl upstairs to pave the way for Johnson. After merging Standard Brands into Nabisco to form Nabisco Brands in 1981, Johnson took over the CEO's job from Robert Schaeberle, who was 61 and had planned to retire at 65.

When Johnson and company descended on Nabisco, it was as if Hell's Angels merged with the Rotary Club. The Standard Brands organization was a risk-driven, no-guts-no-glory outfit that had to scramble for every dime given its ragtag lineup of mediocre liquor brands and fourth-rate grocery items. As one observer described it, all the Standard Branders seemed to be divorced guys who wore loafers, while the Nabisco crew were family types in lace-up shoes and suits. Johnson says the image of an overly ambitious underling is exaggerated. At Nabisco he reported to Schaeberle for three years, and by most accounts the two were a great team and remain good friends. Following the Nabisco Brands-RJR merger in July, Johnson took the No. 2 spot behind CEO J. Tylee Wilson, but says he was in charge by August. Eight months later Wilson was fishing and Johnson was preparing to move the company he was now running to Atlanta. Johnson says he never made a grab for Wilson's job: ''I was ready to move on. I wanted the RJR-Nabisco deal to be the best merger, and it was,'' says Johnson. ''I told Ty the day I became a pain in the ass, goodbye and no hard feelings. I did not nefariously plot to bump Ty out. He and I never had a problem. Frankly, the board said, 'Hey, Ross . . .' '' Old RJR hands say it was more complicated than that. Wilson had few friends on the board. When the opportunity arrived to dump him, the board did. ''Well, they got me,'' Wilson said, after the meeting.

Johnson believed fervently that each Reynolds company needed to get big or get lost. That's why he quickly peddled Kentucky Fried Chicken to PepsiCo, owner of two other food chains, Pizza Hut and Taco Bell. Canada Dry got the gate because it was hopelessly behind Coke and Pepsi. In 1987, Johnson stunned Wall Street by selling Heublein to Grand Metropolitan, the British spirits, food, and hotel conglomerate, just ten days after buying Almaden Vineyards. Both deals fit the Johnson logic. He had acquired the California wine company to enlarge Heublein. But he recognized that a liquor company without a major Scotch brand was like a baseball team without a shortstop. The cost of filling this gap was likely to be huge, so he jumped at the $1.2 billion that Grand Met dangled. According to an observer, he presented the offer to the board on a single sheet of paper. The first thing Johnson peddled at Del Monte was a new lease in San Francisco on quarters for a 1200-person staff. Although Del Monte was profitable overall, earnings were illusory in such businesses as frozen food because the costs of some acquisitions were not reflected in the overhead. When these costs were fully accounted for, the putative earnings turned into a $20 million loss. Johnson launched the frozen entrees ''like a rocket'' to ConAgra, big in that business and ready to buy. Says Johnson, who thinks both buyer and seller were right: ''Every frozen foods business I ever got I sold.''

If Johnson is a predator, he is an amusing one. Outrageously candid, he angered some city fathers in Atlanta by advising them not to mistake RJR Nabisco for a major corporate benefactor. Says he: ''I told them I can't support every organization from the United Way to the Seven Jolly Girls Athletic Club Beanbag competition. If it pisses them off, I can't help that.'' Johnson once directed that the occupants of two of the company's New Jersey buildings switch offices, fully aware that one building was much bigger than the other. Needless to say, neither group got too comfortable in their new digs. Last year he stunned the managers at the Planters-Life Savers division by packing them off from New Jersey to Winston-Salem to become part of the tobacco group. Even some senior managers wish Johnson would stop shuffling his management deck so often. Insiders call the plush 21st floor of RJR Nabisco's headquarters in Atlanta the fraternity house. It's where Johnson and about 25 advisers meet to direct strategy. Many are members of the so-called Standard Brands Mafia, including Carbonell and Edward J. Robinson, the chief financial officer. Only four come from Reynolds. Although the office accommodations are formal, Johnson's style is casual: popping into Carbonell's office to discuss buying back stock, taking quick phone calls from the operating chiefs, or throwing ideas around over the communal lunch table in the executive dining room.

Johnson values managers who can respond as quickly as he does, and pays them accordingly. Last year the average pay of his top 30 executives was about $435,000, which includes bonuses. Says Andrew Barrett, vice president for personnel: ''If he told me tomorrow, 'I want you to do this,' I would not get high brownie marks if I said I'd like a week to think about it.'' Greeniaus and Peter N. Rogers, now head of the biscuit group, have swapped jobs twice. William B. McKnight just switched jobs with Ellen R. Marram, who was running the grocery operation. McKnight will find the territory familiar; he ran the division from 1982 to 1986, before switching with Rogers. At the corporate level Carbonell recently moved for the third time in a year. He explains: ''Ross and I hadn't seen each other for a week. We were on our way to California, and he said, 'I've been thinking. We've done the job in Atlanta, we restructured the corporate staff, we're well established. I don't need you anymore.' '' Startled, Carbonell cut Johnson off. ''Are you firing me or asking me to resign?'' he asked. ''Shut up and listen,'' said Johnson. ''I want you to pull Del Monte together.'' By the time the plane landed, the fruit company, which had undergone three reorganizations since the merger, was about to undergo another. So far, Del Monte has moved headquarters from San Francisco to Miami and cut its 1200-person staff in half. The tobacco business was particularly top heavy. ''People went from the operations to quote corporate, but they took their jobs with them,'' says Edward A. Horrigan, Jr., head of the tobacco subsidiary. In the reorganization, Johnson sent 400 members of the corporate staff down to the operating company to fend for themselves. Then he pulled the company out of Winston-Salem. The operating people were so glad to see him go, Johnson says, ''they would have paid our way to Atlanta.'' The new chief of Reynolds Tobacco USA, Dolph Von Arx, 53, further unbundled the bureaucracy. He shocked his minions by eliminating weekly status reports and staff meetings. Says he: ''Some of them continued to report to me weekly for several months. Now everyone's fallen into line, and we simply have more time for things that are going to benefit the business.''

For all its call-it-as-you-see-it style, RJR Nabisco is run literally by the book when it comes to financial controls. Each of 173 unit managers prepares a monthly report that is forwarded up the chain. Division presidents like Von Arx get a green book with information on his area; the board of directors a blue one with a corporate summary; and Johnson a more detailed red one that outlines the problem areas in each reporting unit. The reports, developed by Johnson at Standard Brands, are used to track such balance sheet items as receivables, inventories, and cash flow - critical indicators on the state of the business. Newcomers welcome the books about as much as a tax audit. ''Initially people didn't like the report,'' says Robinson cheerfully. ''It says nothing nice about anyone.'' Though the after-the-fact reports are grueling, the planning process follows Johnson's dictum: ''flexible and fleet of foot.'' Says Greeniaus, chief of Nabisco: ''If I want to move $10 million around in advertising expenditures today, I don't need approval.'' Nabisco's senior executives do not formally sign off on each unit's business plan. They won't even look at next year's programs until this fall and won't present them to corporate until next January - essentially too late to change them for the first quarter. ''We run the business on a continuum,'' says Rogers, of the biscuit company. ''We don't have an annual, formalized, fill-in-the-forms, put-things-in-boxes session, which is soul-destroying and numbing.''

Nabisco now runs by firehouse management: Not much seems to happen, but when someone smells smoke, all hands come running. The alarm clanged recently when Kellogg invaded the part of the adult cereal market dominated by Nabisco's Shredded Wheat brand. Although Shredded Wheat's market share is only 5% of the total, it is, thanks to aging baby boomers, both lucrative and growing. When Kellogg launched its major assault, replete with coupons worth 75 cents, half the price of its new entry, NutriGrain Biscuits, Nabisco counterattacked with coupons of its own. Nabisco has temporarily shredded Shredded Wheat's profits, but is holding its share. When P&G launched the cookie war - introducing its Duncan Hines brand of ''soft'' cookies that were meant to feel and taste as if they were home-baked - the combination of Standard Brands' aggressiveness and Nabisco's business execution synchronized perfectly. ''We became much more of a marketing company,'' says James O. Welch, vice chairman of RJR Nabisco. Within days of P&G's launch, Nabisco lowered earnings projections by $50 million, unthinkable in the past, and put the extra money into advertising and promoting its Almost Home soft cookie brand. ''We wanted to mass overwhelming firepower from the word one. We weren't out to stop them, we were out to crush them,'' he says. P&G is claiming in court that Nabisco used illegal weapons in the battle, that its agents hornswoggled the cookie recipe from a subcontractor. The case is tied up in pretrial maneuvering. Meanwhile, soft cookie sales are falling, and P&G is the biggest loser. The Cincinnati company wrote off nearly $500 million in assets last year, and its market share is a crummy 1%. Says McKnight: ''I believe to this day that had it not been for that merger, the cookie wars may very well have come out in a much different way.'' Nabisco, with nearly half the market in cookies and crackers and at least twice the profitability of its nearest competitor, has never been in a stronger position. The company's top managers say that the sales force is too good to let them screw up the business. Nabisco's cookies are store door items: delivered directly to supermarkets and other outlets by combination driver-salespersons who make sure that Nabisco gets every inch of shelf space it can. Last summer the company launched 18 new products in a single promotional blitz. For the year, sales of Nabisco's cookies increased nearly 7%, while total cookie sales shrank 1%; crackers increased 11% in a flat market. The horses pulling that wagon have such familiar names as Oreo and Ritz. Nabisco's use of line extensions rather than new products has earned it a reputation for being unimaginative. The company denies the charge, naturally. ''You will not see us do frivolous line extensions,'' says Greeniaus. ''We've had internal debates as to what an Oreo is. We have a very clear idea.'' It is not, it was decided, a chocolate milk.

Greeniaus explains that Nabisco prefers to think of its new creations as franchise extensions rather than line extensions. The typical line extension, he says, gives consumers an either-or choice - Coke or Cherry Coke - but doesn't add much to a company's incremental sales. Nabisco's franchise extensions go after additional sales by trying to match eating patterns. For example, the original Oreo, two fudge wafers held together by a cream center, is an eat-at-home cookie, while Big Stuff, an oversize version, is positioned as a snack, munched on the go. The individually wrapped single-serve product is sold in convenience stores and vending machines, where packaged cookies haven't done as well. The latest version, fudge-covered Oreos, are designed to entice grownups with a sinfully rich treat. The company says adult women (go on, admit it) are the biggest candy consumers. The sales growth of all varieties of Oreos came to nearly $163 million over the past three years, more than P&G's entire soft cookie business.

Nabisco's newest extension is something called Ritz Bits. A mini version of the original, the coin-size wafer is described by executives as a hand-to-mouth snack cracker, as opposed to regular Ritz, whose mission is to act as a platform for pate and other toppers. The semantics sound awfully silly, but the company this year is going to sell nearly $100 million worth of the little buggers without putting off the Ritz. RJR Nabisco plans $4 billion in capital spending over the next several years, mostly to reinforce its position as a low-cost cookie producer. The company already has that honor by virtue of its buying power in commodities. ''We are going to go from art to science,'' says Carbonell, a biochemist. Most huge commercial cookie companies must rely on actual bakers. Quaint as that may sound, old-fashioned techniques make for greater variation in quality and less efficiency in production. In a new $600 million bakery now under construction, computerized process controllers will guarantee that the recipes are followed precisely, while sensors along the production line will make continuous adjustments in oven temperatures and line speeds to ensure nearly 100% consistency and quality. ''We're going to make Xerox copies,'' says Carbonell. Each baking line in the new plant will produce one product. Only Nabisco has so much volume that it can dedicate one line to Premium Crackers, for instance, 24 hours a day, seven days a week. In most process industries, changing from one product line to another is the most time-consuming, least efficient part of production. Nabisco's one-line, one-product setup will knock at least 15% off production costs.

While the food business is stable, the tobacco business is under a cloud. Powerful anti-smoking groups and the U.S. Surgeon General have turned smokers into pariahs, relegated to their own sections of restaurants, forbidden their pleasures on airline flights of two hours or less. After a string of victories in the courts, the tobacco industry lost its first case in June, when a federal jury in New Jersey awarded Antonio Cipollone $400,000 in damages associated with his wife's death from lung cancer. The jury found that the Liggett Group wrongly implied cigarettes were safe in advertising before 1966, the year warning labels were required by law. The landmark case is likely to encourage more suits, but the tobacco companies doubt these claims will interfere with their profitability. The size of the Cipollone award was small, and the court dismissed charges that tobacco companies had conspired to suppress evidence that smoking was dangerous. Even if the decision leads to more federal legislation - a total ban on airline smoking, for example, or the end of cigarette advertising in print media - the tobacco industry is sanguine. Smokers would light up after a flight, and an end to magazine and newspaper advertising would mean lower costs and hence more profit.

Johnson is taking a a super-aggressive, highly innovative stand against the cigarette censors. Later this year RJR will introduce a nearly smokeless cigarette, which goes by the code name Spa. (The company has not announced the official brand name, and rival Lorillard owns the trademark for cigarettes called Spa.) A smoker lights RJR's new cigarette just like any other. But a carbon heat source at the tip of the cigarette, not the tobacco, burns. The heat generates warm air that passes through the tobacco and then through a capsule that contains tobacco extract, glycerin, water, and flavorings. RJR says that the smoke looks and tastes like ordinary cigarette smoke as it is inhaled. But since it is a vapor, it disappears into the air as it is exhaled. Spa produces almost no sidestream smoke to offend - some say endanger - nonsmokers nearby. The new cigarette has about the same levels of tar and nicotine (0.8 milligrams) as a Winston Light. R.J. Reynolds Tobacco Co., as the cigarette unit is now called, burns with intensity over the Spa project. The smokeless wonder promises to be the biggest cigarette launch ever. The company developed a new manufacturing process to roll the weed and invested $125 million for development and equipment. Advertising, promotion, inventory, and distribution costs will easily treble that figure. Johnson sounds optimistic: ''It's a risk, but we look at it as a contained risk. So you've got a billion dollars. And let's say it's an Armageddon, and aside from the article saying Johnson is an asshole, we can say, 'Okay, by '92 if it hits what we think it's going to hit, we really will have semi-revolutionized the business.''' The target of the revolution is Philip Morris, which controls 38% of the domestic tobacco market, vs. Reynolds's 33%. RJR hopes Spa will keep the Marlboro man, who represents the world's best-selling cigarette, from galloping away with more business. ''If we didn't introduce Spa, Marlboro would keep going up, and we'd be in a more difficult No. 2 position,'' says Johnson. For instance, its dominant position allows Marlboro to outspend Winston, RJR's top gun, $93 million to $38 million on U.S. advertising. Although RJR is cagey about its goals, Johnson has visions of Spa gaining a five-point market share in a business where a new product is considered a success with one point. Each point is worth over $100 million in revenues. The hope is that lots of curious smokers, nonsmokers, and more significantly ex-smokers will try the product. But how many will use it more than once? Says Johnson: ''If I had nine people who hated it and one that loved it, we're dancing, eh?''

Tobacco's many foes contend that RJR's introduction of a ''safe'' or ''safer'' cigarette is a de facto admission that cigarettes are unsafe. The company's general counsel Harold L. Henderson dismisses the idea: ''This product wasn't something that somebody said, 'Gee, there's something we could have done 30 years ago and now we're going to do it.' '' Taking a novel line of attack, the American Medical Association has petitioned the Food and Drug Administration to declare RJR's new product a drug. The FDA will probably not rule for six months or so, but an agency spokesman points out that the FDA by law has no authority over tobacco products unless manufacturers make health claims. In its traditional cigarette businesses, RJR is turning its marketing guns toward young, blue-collar adult smokers. Now six of ten new smokers try Marlboro first, a figure RJR would like to alter, and only half of them switch later to a different brand. RJR wants to rope in the strays with new images. The Winston version is ''real people'': painters and telephone linemen, who are portrayed in dramatic closeups. Camel's 75-year-old symbol, a dromedary known as Old Joe, is being rejuvenated into a hip cartoon character for such magazines as Rolling Stone. To keep smokers loyal to RJR brands, the company - is running a million-dollar sweepstakes that gives buyers a better chance of winning with each pack of Winston, Salem, or Camel they buy. The sweeps have brought in over 150,000 entries a week, twice the predicted number. Even though the U.S. market seems to be in terminal decline, RJR can continue to earn tons of money from cigarettes. The company's $2 billion investment in its newest facility in Tobaccoville, North Carolina, and a renovation of older plants in North Carolina will make it the lowest-cost manufacturer in the world. In Tobaccoville, for instance, productivity has picked up 45% to 50% over the older plants, and rejects have decreased 20%. With cigarette sales in the U.S. cooling, both RJR and Philip Morris have been moving abroad, gaining sales at the expense of such multinationals as BAT Industries. Last year RJR increased unit sales 10% internationally, and it expects to do the same this year. In Asia, the fastest-growing tobacco market, menthol cigarettes are popular, and RJR's Salem brand shot up 40% last year, making it the world's best-selling menthol. With the drop in the dollar, the company is exporting like mad. Last year the international business turned in the highest operating profits in the company. Can any chief executive be in a more difficult position than one whose company sells a product considered to be deadly to persons possessing lungs and hearts? ''I've been through a lot of pressure in my life. That's what you're paid to take,'' says Johnson. He deflected some of the pressure in April when he fired Saatchi & Saatchi DFS, a Nabisco advertising agency, for creating antismoking ads for Northwest Airlines. In handling the smoking issue, Johnson says, ''I think we really have come to the best conclusion that we could come to on Spa.'' Reynolds's chief Horrigan, a battle-weary tobacco warrior, is grateful for the help: ''The biggest cheerleader we have for this new product is Ross Johnson, and I need him as a cheerleader if we're going to invest in this brand the way we are planning.''

So here comes Manitoba's most famous export, Ross Johnson. Along with a few other food industry executives, notably Anthony O'Reilly of H.J. Heinz, who happens to hail from Ireland, he has been shoving the noses of his managers up against the window of the future. In the process these executives are learning to advertise, distribute, manufacture, promote, and extend ancient brands in a way that turns nostalgia into an advanced weapon. This is an industry where growth isn't available for the asking. Maintaining the status quo gets you zilch, but not maintaining it gets you killed. A dedicated food man like Ross Johnson might one day sell the tobacco business. But only after he has used its fantastic profits to build an even mightier food giant. In the short term most financial analysts expect a big acquisition. The company has looked over Tropicana and other Beatrice companies, but passed them up because Johnson refuses to pay the high prices food companies now command. Of course, in this company that could change quickly. ''How quickly?'' a reporter asked an executive at the beginning of an interview. ''You got two hours?'' came the reply.


"Trump Buys 0.4% Stake In Pillsbury," by Robert J. Cole, The New York Times, August 2, 1988

Donald J. Trump, the multimillionaire real estate developer, said yesterday that he had bought 400,000 shares of the Pillsbury Company as an investment.

The amount represents four-tenths of 1 percent of Pillsbury's shares outstanding, but Mr. Trump said he was seeking government antitrust clearance to buy nearly 25 percent of the company, the nation's fourth-largest food producer.

'It's Got Potential'

''I think it's got potential,'' Mr. Trump said of his investment in Pillsbury.

He declined to discuss his plans but is not expected to try to take over the company.

Mr. Trump, who has a record of buying huge blocks of stock in anticipation of major takeovers, said he had bought $15 million worth of Pillsbury stock over the last week, when nearly 2.5 million shares changed hands. It was the maximum he was able to buy under antitrust regulations.

Cost of a Takeover

At present market prices, it would cost more than $3 billion to buy Pillsbury. But a hostile bidder might be willing to pay at least $50 a share, a figure that would raise the cost to at least $4.3 billion.

Pillsbury, which is determined to remain independent, has been regarded for months as a prime takeover target. In February its stock traded as low as $31 but within a month it had soared to $45 as rumors spread that someone might bid for the company. The stock has gradually come back down since then and by yesterday stood at $36.75, down 12.5 cents.

Distracted by recent takeover rumors, Pillsbury has suffered a spate of operational and management problems at its biggest unit, Burger King, and has lost market share to its competitors in several key brands. As a result, the company's stock price has lagged behind those of other major food companies.

Burger King is not Pillsbury's only problem. Comparable-store sales fell about 3 percent at the Bennigan's restaurants and about 9 percent at the Steak & Ale restaurants this year. A failed effort to reposition the company's Totino brand of pizza cost it an estimated $30 million in fiscal 1988, and intense competition hurt margins in Pillsbury's frozen fish and cake mix brands.

A Letter to Pillsbury

Mr. Trump said he had sent a letter to Pillsbury by registered mail early yesterday, telling the company of his purchases and his plans to buy more.

He said he had addressed the letter to William H. Spoor, who stepped down yesterday as Pillsbury's chairman, and to Philip L. Smith, the new chairman. Mr. Spoor came out of retirement a few months ago to run the company until a new chairman was found, after John M. Stafford resigned under pressure. Pillsbury last week chose Mr. Smith, who had been chairman of the General Foods Corporation.

A $6.2 Billion Company

The appointment followed months of uncertainty at Pillsbury, a $6.2 billion company based in Minneapolis whose brands include Green Giant vegetables, Haagen-Dazs ice cream and Van de Kamp's fish.

Mr. Spoor and Mr. Smith were said to be in meetings with Pillsbury's chief administrative officer and general counsel, Edward C. Stringer, until late in the day yesterday but are understood to have dealt with matters unrelated to the Trump move.

Mr. Trump did not disclose the full contents of his letter to the company, but it did not appear that he had given Pillsbury any information about his plans. He has, however, been extremely successful in sizing up approaching takeover battles.

He is estimated to have made $80 million last year in the Allegis Corporation's takeover skirmish and about $100 million earlier this year on an investment in Federated Department Stores Inc. His investment came two weeks before the Campeau Corporation began its hostile takeover of the huge store chain.

Mr. Trump said he had bought the Pillsbury stock through Bear Stearns & Company, the big Wall Street investment house with which he has often worked. Bear Stearns also bought the Allegis block, he recalled. The Federated block was placed for him through Merrill Lynch & Company, he noted.

Wall Street houses regularly call on wealthy individuals with investment ideas like these and are rewarded generally by being allowed to place the order. On particularly lucrative deals, the investment houses often share in the rewards.


"Buying A $780 Million Property With Little Risk," by James Warren, Chicago Tribune, August 18, 1988

Once upon a time, people trying to borrow big chunks of money from banks or insurance companies had to have either enough cash flow to cover interest payments or substantial personal investments at stake.

As the August 22 Forbes makes clear, those days seem prehistoric, at least for the capitalist elite. Perfect examples of a new age of largesse for plutocrats with the right contacts are Donald Trump and Merv Griffin. Yes, that Merv Griffin.

Earlier this year Trump and Griffin, the grade-B talk show host transformed into a grade-A mogul by producing shows such as Jeopardy! and Wheel of Fortune, made business page headlines in a billion-dollar battle over Resorts International. Griffin gained control of stock Trump once held, while Trump wound up with the Taj Mahal in Atlantic City, a still-to-be-completed casino slated to be the world's largest.

''This deal,'' writes Allan Sloan, ''set records,'' and Forbes claims new details on how it was actually financed. For those who have to fork over real money to finance a home, car, boat, child's schooling or remodeling the garage, this tale of the free market run amok vividly underlines that life ain't fair.

It was almost exclusively financed by junk bonds, high-yield vehicles that are rated below investment grade and quite the rage in corporate takeovers. Griffin used $325 million worth of them, Trump a tidy $670 million. And if things work out right-are you ready?-Trump ''will own a $780 million property without having a penny of his own tied up.''

Forget about bothersome details with which the proletariat must be consumed, like collateral and interest coverage. Here's what Forbes says about just Trump's side of the deal.

Trump, who owned most of Resorts' key voting stock (there were two types of shares), sold those shares to Griffin for Trump's original cost, $96 million, which repaid the loans Trump needed originally to get the same stock. Griffin then paid Trump $63.7 million just to buy out a fat management contract Trump got from Resorts. Trump then spent $261 million, all borrowed, to buy the Taj Mahal from Resorts, which had spent $500 million on the casino ''but botched the job.''

The money with which Trump will complete this gambling den belongs to others, says Forbes. Through Merrill Lynch, he formed a partnership to raise $675 million. ''The partnership buys the Taj from Trump at his cost,'' informs Sloan. ''Any equity capital in the partnership? Yes, $75 million thrown in by Trump. But from where comes that equity? Mostly from the $63.7 million Griffin will pay to buy out Trump's management contract.''

Trump appears to be borrowing more than he needs. He'll have $493 million to finish the casino and can likely do it for much less, thus making a quick profit. If there's money left in the till when the Taj is finished, he gets a $10 million fee and the first $25 million of leftover cash, too. Moreover, he'll take a management fee estimated at $7 million a year.

If the Taj goes down the tubes? Well, ''Trump has no personal liability. The bondholders' only recourse is foreclosing on the Taj.''

And Merv? He should fare pretty well, too, even if Trump's clan is suggesting that he's ''a Hollywood airhead who was taken to the cleaners by Trump.''


"Company News; Holders Support Plan Taking TWA Private," by Robert J. Cole, The New York Times, September 8, 1988

Carl C. Icahn, the chairman of Trans World Airlines Inc., won investor support yesterday to convert TWA into a private company.

As part of the deal, Mr. Icahn, who owns 77 percent of the airline, will recover his $440 million investment, will control 90 percent of TWA's stock and will take over a company with $1 billion in cash and $2.3 billion in debt. The airline's employees will own the remaining 10 percent.

At the start of a 45-minute special meeting in New York, a group representing TWA's pilots handed the 53-year-old Mr. Icahn legal documents stemming from a lawsuit filed in New York State Supreme Court seeking ''to prevent him from looting TWA.''

The suit is thought to have been engineered by Capt. Thomas Ashwood, a TWA pilot who is the chairman of the Master Executive Council of the pilots' union. It contends that Mr. Icahn will ''strip TWA of $665 million and put it in his own pocket through the simple tactic of forcing TWA to borrow to the hilt on its assets in order to pay Icahn.''

Captain Ashwood said in a statement accompanying the documents, ''We won't stand idly by while Carl Icahn strips our airline of assets and keeps it from growing financially stronger, from buying airplanes and from improving service to our passengers because of heavy debt.''

During the meeting, Mr. Icahn told the shareholders that nearly three years ago, when TWA was near collapse, its pilots asked him to take the company private to prevent a takeover by the Texas Air Corporation.

''When they needed me,'' Mr. Icahn said, ''I left my $440 million in and turned down a $170 million profit to do it. They broke trust with me, and I'm deeply disturbed.''

He said he had bought stock at around $8 a share when he was approached. Under an agreement allowing him to take TWA private, Mr. Icahn said, ''I could take the airline private whenever I wanted to, and they couldn't tell us what to do.''

Under the terms of the merger vote, each share of TWA's stock other than Mr. Icahn's will be exchanged for $20 in cash and $30 in 12 percent debentures, in a package that analysts valued at $40 a share. Mr. Icahn will receive $20 in cash, or its equivalent, plus an unspecified amount of TWA preferred and common shares.

The deal will give Mr. Icahn $469 million in cash, $196 million in preferred stock and the remaining shares of TWA.

The airline said it had paid Drexel Burnham Lambert Inc., its financier, $17.2 million for raising $800 million for the deal early last year and will pay it another $15 million to refinance an estimated $500 million in temporary financing. The new financing, the pilots' group said, will require TWA to ''inherit a $2.8 billion debt load and at least $466 million annually in interest costs.''

TWA said that the stockholders unaffiliated with Mr. Icahn had voted 3.7 million shares to approve the deal. Mr. Icahn's stock raised the total in favor to 27.16 million. Holders owning 146,061 shares disapproved, the airline said.


"British Concern Agrees To Buy Technicolor Inc.: Carlton To Pay $780 Million For The Movie-Film Processor," by Al Delugach, Los Angeles Times, September 10, 1988

A British firm, Carlton Communications, took a giant leap into movie-film processing by agreeing Friday to pay about $780 million for the world leader, Los Angeles-based Technicolor Holdings Inc.

Financier Ronald O. Perelman, who has a reputation as a corporate raider and whose holdings include Revlon Group, is on the selling side of the deal. Perelman controls Technicolor, a private company, through its parent, MacAndrews & Forbes, which bought it about six years ago from public shareholders for $105 million.

Carlton, which bills as itself the largest independent supplier of television services in Britain, said it will finance most of the purchase price by selling $618 million of new stock and $200 million of notes to the public.

Longtime Leader

The deal must be approved by Carlton's shareholders at a meeting scheduled for October 3. If approved, the sale would be completed shortly afterward, the company said.

Technicolor, which was founded in 1915 and pioneered the development of color film technology, has never yielded leadership in the field to newer competitors. Among its major customers for film processing are Warner Bros., Paramount and TriStar.

In the burgeoning field of videocassette duplication, Technicolor also is a leader, with exclusive contracts with Warner, The Walt Disney Company, Lorimar Telepictures, HBO and CBS/Fox.

Noting the rapid growth in European markets for the products of major U.S. film studios, Carlton said it believes that maintaining a major presence on both sides of the Atlantic will maximize its business opportunities.

The company said its acquisition represents "a unique opportunity for Carlton to establish itself as the largest provider of services to the growing television and film market in the USA and in Europe."

Perelman, who completed his acquisition of Technicolor in January 1983, reversed field and started getting out of the entertainment industry about nine months ago. That's when he started selling off the assets of Burbank-based Compact Video.

"He was infatuated by the entertainment business (when) he got into Technicolor," notes Kent Baum, an analyst in the San Francisco office of the Baltimore securities firm Alex. Brown & Sons.

Observers have been watching since last spring for some major new acquisition move by the Perelman forces but no moves have surfaced publicly. Companies that have figured in the rumor mill as potential Perelman targets have included two industrial giants, American Cyanamid and Kimberly-Clark.

Perelman's Technicolor bought a major Hollywood competitor, Metrocolor, from Lorimar two years ago, but the U.S. Justice Department filed an antitrust suit, which resulted in cancellation of the deal.

Carlton said Technicolor's proficiency in film processing was illustrated by the fact that the simultaneous summer releases of two big films, Crocodile Dundee II and Rambo III, required the company to duplicate and deliver more than 4500 prints in seven days at its North Hollywood plant.

Technicolor entered the videocassette duplication business in 1981. In 1987, it expanded its operations beyond its Newberry Park plant by opening a new high-speed duplication facility in Livonia, Michigan. In recent months, it acquired the CBS/Fox and TapeTech duplication plants in London.

Carlton got into the video duplication business last March, when it bought Philadelphia-based Modern Video for about $83 million.

Friday's announcement said Technicolor posted operating profits of $46.9 million last year on $288.9 million in sales. Carlton credited the effects of Technicolor's new video duplication customers in late 1987 for an increase in operating profits to $33.9 million on $184.6 million in sales for the first six months of 1988, compared to $19.3 million in operating profits on $128.1 million in sales a year earlier.

Carlton said its own operating profits rose 59% to about $36 million in the first six months of fiscal 1988 and estimated its pretax profit to be at least $81.6 million for the year ending September 30.


"Maxwell Lifts Macmillan Takeover Bid to $86.80 A Share," by Geraldine Fabrikant, The New York Times, September 16, 1988

In a surprise move, Robert Maxwell, the British entrepreneur, raised his takeover bid for Macmillan Inc. yesterday to $86.80 a share in cash, or about $2.4 billion.

The new offer for the New York-based publishing and information concern exceeds the $84-a-share offer that Mr. Maxwell made last Friday and an $85-a-share leveraged buyout bid announced on Monday by Macmillan and Kohlberg Kravis Roberts & Company, the investment and leveraged buyout firm.

The latest Maxwell bid has few contingencies and will be made directly to shareholders as a tender offer beginning today and ending September 29, eliminating the need for the approval of Macmillan's board. Macmillan and KKR declined to comment on the new Maxwell move.

Offer for Information Units

Mr. Maxwell said Macmillan shareholders would be allowed to keep the 20 cent-a-share quarterly dividend that has just been declared, thus bringing the total value of the bid to $87 a share.

Mr. Maxwell also indicated that as an alternative he was still ready to buy Macmillan's information businesses for $1.4 billion, an offer he has consistently made without raising the price.

Mr. Maxwell was not reachable for comment yesterday. But his statement said the bid was contingent only on the removal of the company's ''poison pill'' antitakeover plan.

The latest bid reiterated Mr. Maxwell's appetite for the company and his desire to establish a strong presence in American publishing. Previously, he had said that if Macmillan received a bid better than $84 a share he would drop his takeover efforts. Last year, Mr. Maxwell ended a takeover bid for Harcourt Brace Jovanovich Inc. after the company undertook a costly recapitalization plan.

Indeed, many arbitragers and analysts had speculated that the four-month-old bidding war for Macmillan had ended with the leveraged buyout plan, which includes a tender offer that begins today. Macmillan's stock, which had traded at about $84.50 since the buyout announcement, rose $2 yesterday, to $86.50, on the New York Stock Exchange.

Higher Bid Predicted

With Mr. Maxwell back in the picture, at least one arbitrager predicted a higher bid from Macmillan and KKR, whose current offer is for $80 in cash and $5 in securities.

''Their bid was only $1 higher than Mr. Maxwell's,'' he said, referring to Mr. Maxwell's $84-a-share offer. ''They probably have something left in their pocket.''

But an investment banker familiar with the battle questioned whether a higher buyout bid would be forthcoming. He said that it was the Maxwell bid of $84 that probably pushed KKR to raise the buyout bid to $85 at the last minute.

One arbitrager was quick to note that at current prices the leveraged buyout bid was unusually high as a multiple of cash flow. The arbitrager said that KKR was paying more than 10 times cash flow, or earnings before interest taxes and depreciation.

''In recent deals the peak has been about eight times cash flow,'' he said, ''That means KKR is taking a very large risk in betting on a certain set of projections. It makes the entire deal heavily dependent on asset sales.''

Macmillan has publicly estimated that in 1989 it should earn cash flow, or earnings, of $234.5 million before interest, taxes and depreciation. After interest and taxes, and depreciation it would earn $190.5 million.

As to the leveraged buyout, Bankers Trust and Drexel Burnham Lambert would arrange the financing. KKR agreed to put up $250 million in equity financing and $230 million in a bridge loan.

The banks, led by Bankers Trust, will provide $1.98 billion in a combination of $700 million of bridge financing that would be taken out by subordinated debt and $1.28 billion of tender offer facility that will be replaced with senior term bank debt. If Macmillan is sold to another party, KKR will get $29.3 million.

The bidding was begun by the Robert M. Bass Group of Texas, which has apparently decided against any further move.


"Grand Met Bids To Buy Pillsbury," by Daniel F. Cuff, The New York Times, October 4, 1988

Grand Metropolitan PLC, the large British conglomerate, has offered to buy the Pillsbury Company for $60 a share in cash, or a total of $5.12 billion.

That offer is $21 above yesterday's closing price for Pillsbury's common stock.

Grand Metropolitan, in an advertisement today on page D19 of The New York Times, said it planned to make the offer through Wendell Investments Ltd., a wholly owned subsidiary. Pillsbury has 85.4 million shares outstanding.

Johnny Thompson, a spokesman for Pillsbury, said the company had received nothing from Grand Met and could make no comment last night. Grand Met spokesmen could not be reached immediately.

'A Very Fair Offer'

''$60 is a very fair offer,'' said L. Craig Carver, an analyst with Dain Bosworth Inc. in Minneapolis, where Pillsbury has its headquarters. ''My estimated breakup value for the company has been roughly in the $50-$54 range.'' The breakup value is what a company might fetch if all its parts are sold.

''It's interesting to see what might develop in terms of other offers,'' Mr. Carver said, ''but I would find it hard to believe that too many folks could realistically justify a higher offer.''

''This is an extremely high initial bid,'' said another analyst, James J. Murren of C.J. Lawrence. ''It's an aggressive strike by Grand Met.'' The Grand Met ad said its offer would expire November 1 unless extended. Company Has Struggled Pillsbury has been floundering for the last year and has been the subject of takeover talk. This summer, it hired Phillip L. Smith, chairman of the General Foods Corporation, as its new president and chief executive. Last month it sold its Godfather's Pizza chain for $100 million to an investment group led by the chain's management.

Pillsbury owns the Burger King Corporation, which has lagged in the battle for fast food market share. Its products include prepared doughs, Haagen-Dazs ice cream, Green Giant vegetables and Van de Kamp's fish.

Grand Metropolitan, the largest distilled spirits company in the world, is flush with cash. On Friday it sold its InterContinental Hotel chain to a Japanese company for $2.27 billion; it said its after-tax profit on the deal would be $850 million.

Ian A. Martin, Grand Met's manager in the United States, said during that summer that a big acquisition in the food business was imminent. London-based Grand Met, which makes J&B Scotch and Smirnoff vodka, also owns Almaden wine, Alpo pet food, Pearle eyecare centers and British Express Foods.

Britain's 12th-largest company, Grand Met owns a brewery and runs 5000 pubs, along with home milk delivery services and marketing operations for foods like yogurt and cheese. It also operates gambling casinos in London.

Stock Has Sagged

Pillsbury, which has $6.2 billion in annual sales, has gone through uncertain times, with morale reportedly low as it tried to work out of its problems. Its stock has lagged except for spurts on takeover rumors. In March it reached a post-crash high of $45, then sank again.

Among the investors who felt that Pillsbury was a good buy was Donald J. Trump, the real estate developer, who in August bought 400,000 shares, or four-tenths of 1 percent of Pillsbury. It is not known whether Mr. Trump still owns the shares.

Mr. Smith, Pillsbury's new chairman, replaced William H. Spoor, who had acted as Pillsbury's interim chairman since February, when John M. Stafford resigned.

Analysts had suggested that Mr. Smith's main job would be to keep Pillsbury independent.

Speculation on Offer

Mr. Carver, the analyst, said there had been speculation in Minneapolis last week that Grand Met might make an offer for Pillsbury. Pillsbury's stock ''has been pretty active'' in the last week, he said. The shares closed yesterday at $39, up $1.125, on the New York Stock Exchange.

Mr. Carver said a successful suitor could probably sell the Burger King chain for $1 billion to $1.2 billion.

''This is probably going to wake management up and at least force them to really examine what its businesses are worth,'' Mr. Carver said.


"Man In The News: F. Ross Johnson; A Chief Willing To Gamble," by Doron P. Levin, The New York Times, October 21, 1988

In the world of corporate takeovers, many chief executives resist having their company acquired. Not F. Ross Johnson, chief executive of RJR Nabisco.

Twice Mr. Johnson has found himself at the head of a company that became a takeover target. In each case, he actively supported the takeover, willing to take his chances that both he and his shareholders would come out on top. In both takeovers, he lost out in the bid for the top job at the newly created company, but eventually ascended to the top.

Although RJR Nabisco is not currently the target of a takeover, the food and tobacco industry is in the midst of significant takeover activity. Mr. Johnson is displaying the same willingness to take a big gamble, but this time with a twist.

He and some other executives of the tobacco and consumer products giant are proposing to borrow $15 billion and take RJR Nabisco private in a plan they announced yesterday. That act put RJR into play as a prime takeover candidate, raising the possibility that should Mr. Johnson's leveraged buyout attempt fail, he will see his company taken over. And he could be out.

''You won't see him blocking a restructuring to protect his own job like at some other companies I could mention,'' said Emanuel Goldman, an analyst for PaineWebber.

Comeback at Nabisco

As chief executive of Standard Brands, Mr. Johnson might have seemed headed out the door in 1981 when the company merged with Nabisco and he did not get the top spot. But three years later he took over from Nabisco's chief executive, Robert Schaeberle, who retired early.

When R.J. Reynolds took over Nabisco in 1985 for $4.9 billion, Mr. Johnson was again No. 2, this time behind J. Tylee Wilson. But less than a year later the RJR board dumped Mr. Wilson and gave Mr. Johnson the top job.

Such risk taking is typical of his aggressive style, those who know him say. Mr. Johnson is known as a decisive expert in marketing who can quickly shuffle divisions, staffs and product brands as well as buy and sell companies.

Mr. Johnson will need all those skills in the coming weeks as he attempts one of the biggest private borrowings of all time to accomplish the leveraged buyout.

Comment on Rising on Debt

Just four months ago the RJR Nabisco chief executive spoke in a magazine interview of the dangers of loading up on debt to ''do a lot of short-term stuff to hype things.''

In an interview published in Fortune magazine, he said, ''If you get some down times the only thing that is going to hold you, preserve you, is the integrity of the balance sheet.''

But recent moves in the food industry - Grand Metropolitan's bid for Pillsbury and Philip Morris's bid for Kraft - have indicated a willingness by large food and tobacco companies to pay huge premiums to acquire consumer brands.

So Mr. Johnson, ever agile, appears to be readying a strong move himself, which would entail loading up on debt to accomplish. If he remains committed to his belief about maintaining a strong balance sheet, he will almost certainly be forced to sell parts of RJR Nabisco to pay back some of the debt incurred by the buyout.

No Aversion to Change

In his three years at the top of RJR Nabisco, Mr. Johnson has specialized in movement. Workers have moved from one building to another and back again. The Del Monte unit, best known for its canned foods, has been reorganized four times and its headquarters has been moved to Coral Gables, Florida, from San Francisco. (Analysts now think the unit may be sold to pay for the leveraged buyout.) Mr. Johnson shocked oldtimers when he moved RJR's longtime headquarters from Winston-Salem, North Carolina, where it was the corporate pillar of the community, to Atlanta.

All this movement has given rise to grumbling by some RJR Nabisco workers, and admiration from many associates.

Stanley Katz, chairman of FCB/Leber Katz Partners, which handles some of Nabisco's advertising, described him as ''incredibly intuitive,'' a quality he noted when Mr. Johnson decided to move Nabisco's Planters nuts and Life Savers businesses to Winston-Salem from New Jersey to take advantage of R.J. Reynolds's powerful selling and distribution network.

Working 'From the Gut'

''He operates from the gut and makes some large decisions from the gut,'' Mr. Katz said. ''A lot of other executives demand lots and lots of research.''

As head of one of the nation's biggest advertising sponsors, Mr. Johnson enjoys entree to numerous celebrity and sports events, which colleagues say he relishes. Celebrities often show up at charity dinners Mr. Johnson organizes.

A native of Winnipeg, Manitoba, Mr. Johnson, who is 56 years old, was born on December 13, 1931. He is married, with two children. He played basketball at the University of Manitoba and retains his love of the sporting life. Sports has been an important feature of his company's product marketing through sponsorship of events like the annual Nabisco Dinah Shore Invitational golf tournament.

Mr. Johnson started his career with the Canadian General Electric Company as an accountant and became the company's youngest marketing manager. He moved to an appliance company and then to Standard Brands' Canadian subsidiary before coming to the parent company in New York in 1973. Three years later, after a boardroom struggle, he became Standard Brands' youngest chairman and chief executive.


"TWA Goes Private Despite Efforts To Fight Icahn Move," by Robert E. Dallos, Los Angeles Times, October 25, 1988

Financier Carl C. Icahn took Trans World Airlines private Monday despite protests by some shareholders and unions that he was looting the carrier for personal enrichment.

In the transaction, TWA bought the shares of all stockholders, a move that will remove the stock from trading on public exchanges. Icahn will end up owning 90% of the company and the remaining 10% will be held by TWA workers through an employee stock option plan.

Icahn consummated the transaction after a ruling late Friday by the Delaware Chancery Court cleared the way. The court denied a request by a group of stockholders, who have sued the airline, for a preliminary injunction to at least delay the going-private transaction.

The class action suit, which seeks damages, is pending, and at least two other efforts to reverse the privatization are still alive.

Pilots Are Opposed

Icahn, who is TWA's chairman, won approval for the privatization at a special shareholders meeting last month at which more than 97% of the shareholders voting approved the transaction. The rules of the election kept Icahn, who already owns 77% of the airline's 30.5 million outstanding shares of common stock, from voting.

TWA's pilots have also filed suit in New York State Supreme Court in an effort to prevent the privatization. According to Mark Buckstein, TWA's general counsel, a request for a preliminary injunction was withdrawn by the pilots last week, but the case is expected to go to trial in December. At the trial, the pilots will attempt to undo Monday's deal.

Also, the TWA flight attendants' union has petitioned the U.S. Department of Transportation asking that the privatization plan be disallowed. The attendants seek a test of TWA's financial fitness, charging that Icahn has not left enough money in the airline's treasury.

However, TWA announced Monday that an Icahn-affiliated company had bought for cash the 20.6 million shares of Texaco common stock that TWA owned. The announcement said TWA will make a profit of about $222 million on the sale before taxes.

Altogether, Buckstein said, the sale will infuse about $900 million into the TWA treasury. "We have plenty of money now," he added.

Stockholders fighting the privatization maintain that they are not getting enough cash for their shares. Under the deal's terms, each outstanding share of TWA stock will be exchanged for $20 in cash and $30 face value worth of 12% bonds that will mature in 20 years. The stock closed Monday at $36.625, up 25 cents on the New York Stock Exchange. The bonds are currently trading at about $18.

Like other common shareholders, Icahn received $20 cash for each share. As he owned about 23 million shares, that amounts to about $469 million.


"A Corporate Milestone; RJR Nabisco Bid Gives New Respectability To Giant Deals Financed With Huge Debt," by Sarah Bartlett, The New York Times, October 26, 1988

The proposal to turn RJR Nabisco into a privately owned company represents a milestone in the brief history of the financial tool known as the leveraged buyout.

RJR Nabisco is not only the largest but also the most prominent member of the corporate Establishment ever to be the object of such a deal.

And with RJR Nabisco showing the way, other large, well-known companies may find themselves on the same path. That means they will be financing their operations primarily by borrowing money, rather than by selling stock to the public, and thus will be carrying much higher levels of debt than has traditionally been considered prudent.

Two Sources of Money

In a leveraged buyout, a small group of investors uses borrowed money and some of its own to buy a company's stock from its public shareholders.

F. Ross Johnson, chairman of RJR Nabisco, last week proposed taking the company private in a $17 billion leveraged buyout. Kohlberg Kravis Roberts & Company, the firm of leveraged buyout specialists, made a $20.3 billion counteroffer on Monday.

''There's a difference between a National Can or a Wickes doing a leveraged buyout and an RJR Nabisco doing one,'' said Charles M. Nathan, co-head of mergers and acquisitions at Salomon Brothers. ''It's an imprimatur. Money-good names are saying that leveraged deals are OK.'' RJR Nabisco is the nation's 19th largest industrial company.

Many investment bankers report that their blue-chip corporate clients have been calling to say that they want to take a harder look at the idea of going private.

In many cases the executives believe their companies are worth more than the stock market says they are.

'An Offensive Technique'

''Increasingly frustrated by the stock market's undervaluation of their companies, managements of some of the largest U.S. companies are evaluating leveraged buyouts as an offensive technique to generate shareholder value,'' said J. Tomilson Hill, head of the mergers department at Shearson Lehman Hutton, which is teaming up with the RJR Nabisco executives who are proposing the buyout.

The mere existence of a leveraged buyout offer for RJR Nabisco is a sign of how far corporate thinking on this issue has come.

''Some people used to hold their noses and ask, 'Is this un-American?,' '' said Thomas A. Saunders III, a managing director at Morgan Stanley & Company. ''Taking a company private today is an acceptable alternative, and that is a sea change in the mindset of the managements of major U.S. corporations.'' Mr. Saunders manages Morgan Stanley's $2 billion leveraged buyout fund. The bid for RJR Nabisco, along with Philip Morris's $11.5 billion bid for Kraft, has also revised sharply upward the size of companies thought to be vulnerable to a leveraged buyout or hostile takeover.

''There's been a quantum leap in the last few weeks,'' said Martin Lipton, one of Wall Street's leading takeover defense lawyers. ''People figured if they were bigger than $10 billion they were safe. Now they figure they have to be $20 billion.'' At last count there were only nine American companies that large in terms of their stock market valuation.

Mr. Nathan of Salomon said: ''Size will not protect you. We've been telling our corporate clients that for the last year, but companies didn't believe it. They will now.''

Until fairly recently, leveraged buyouts were considered the province of lesser-known companies that were willing to accept the stigma of the unusually high debt that such transactions entail. Some companies threatened by a hostile takeover also turned to buyouts as a last-ditch defense maneuver.

Yet Mr. Johnson was under no known compulsion to take RJR Nabisco private. Instead, he apparently chose that alternative because he believed the stock market was putting too low a value on his company-largely because of the perceived liabilities associated with tobacco. The company's stock was trading around $56 a share before he made his $75-a-share buyout proposal.

A Shift in Equity Holdings

When a high-quality industrial company goes private in a leveraged buyout, it typically reduces the proportion of equity represented by its public stockholders from about 75 percent of its capital structure to less than 10 percent. The rest of its capital structure is then made up of bank debt (50 to 65 percent) and subordinated debt, or high-yield ''junk bonds,'' which are sold to investors.

Critics have asserted that leveraged buyouts saddle companies with heavy debt loads.

''I believe in public corporations, and I think they have been responsible for growth in America,'' said Rand V. Araskog, chief executive of the ITT Corporation. ''I do not believe in pouring debt on corporations' balance sheets.''

But proponents of leveraged buyouts maintain that companies operate better when freed from the pressure to produce improved quarterly earnings. At the same time, debt imposes a healthy discipline on managers, forcing them to trim fat. And because managers end up owning larger stakes in the newly private companies, they are rewarded more handsomely if they make the company more efficient.

Lots of Financing Available

Leveraged buyouts have become increasingly acceptable partly because there is plenty of money available to finance them. Leveraged buyout funds have been blossoming on Wall Street. Today there is close to $25 billion standing ready to finance the equity component of such deals. At a typical ratio of $10 of debt for each dollar of equity, that would enable Wall Street to finance $250 billion of leveraged buyouts.

Equally important is the widespread availability of bank loans.

''People are getting in line to provide senior bank debt for high-quality assets,'' said Mr. Saunders of Morgan Stanley. Often so many banks are angling to sign up for a big chunk of a loan that a transaction could be financed two or three times over.

That reflects, in part, the dearth of other good lending opportunities for banks. But it is also a function of a change in the way banks make corporate loans.

''A year ago we couldn't have done a $10 billion deal,'' said a senior banker who is active in financing leveraged buyouts. Bankers now estimate that they could provide as much as $20 billion in bank debt for a single deal.

How Banks Have Operated

Traditionally a bank made a loan and kept it on its books. But now it is more common for several banks to commit themselves to a multibillion-dollar loan and then turn around and sell most of it in smaller pieces to other financial institutions. By doing so, they get most of the financing fees without the burden of keeping all of the loan-and its incumbent risk-on their balance sheets. The process is akin to the way Wall Street underwrites and distributes corporate securities.

Last year about 9 percent of all United States bank loans to corporate customers were tied to leveraged buyouts. In the past two years banks have made commitments for an estimated $150 billion of all types of acquisition financing.

Banks also have expanded their networks of loan buyers - usually regional and foreign banks. In the last year Japanese banks have become especially active, taking as much as 30 percent of loans, up from about 10 percent in 1987, according to industry experts. And banks are extending their networks even more by beginning to sell their loans to pension funds, insurance companies and even corporations.

''United States loan sellers are becoming more and more sophisticated,'' said Christopher L. Snyder, Jr., president of the Loan Pricing Corporation, a New York company that has built a loan database. ''They are building a big, deep, powerful distribution force.''

Limits for Junk Bonds Found

Even now, however, investment bankers believe there is still some undefinable limit on the size of deals that can be financed. The remaining constraint, they maintain, is the junk bond market, which still does not have a broad enough array of buyers to absorb the amount of bonds necessary to finance more than two or three mega-deals.

But even in the junk bond market there has been considerable evolution. Not long ago junk bonds were primarily the domain of Drexel Burnham Lambert Inc. But now firms like Morgan Stanley, the First Boston Corporation and Merrill Lynch & Company have pushed into that lucrative market. Drexel's market share has dropped from about 68 percent in 1984 to about 50 percent today, according to IDD Information Services.

''An increasing number of investment banks have expressed an interest in building up their presence in high-yield bonds,'' said Barry S. Friedberg, division director of investment banking at Merrill Lynch. This increased participation has helped the market grow from an estimated $130 billion last year to more than $150 billion this year, measured by total issues outstanding. And if the latest proposed deals are completed, some believe the market could approach $200 billion by the end of the year.


"Kraft Being Sold to Philip Morris for $13.1 Billion," by Robert J. Cole, The New York Times, October 31, 1988

In one of the biggest takeovers to date, two of the nation's best-known makers of consumer goods, Philip Morris Companies and Kraft Inc., yesterday agreed to merge in a deal valued at $13.1 billion in cash.

Kraft's stockholders will get $106 a share, $9.50 higher than the shares closed on Friday and $40.875 higher than they were trading for before the offer was made on October 17.

The combined company would knock Unilever, the British-Dutch company, out of first place as the world's largest producer of consumer goods.

An even bigger deal, the $20.3 billion offer made by Kohlberg Kravis Roberts & Company for RJR Nabisco, is under negotiation. The biggest deal to date is the Chevron Corporation's $13.3 billion takeover of the Gulf Corporation in 1984.

'An Excellent Complement'

In making the announcement late yesterday with Kraft, Hamish Maxwell, chairman and chief executive of Philip Morris, said: ''As we have stated from the outset, we believe the combination of Philip Morris and Kraft will create a U.S.-based food company that will compete more effectively in world food markets. Kraft's products provide an excellent complement to our existing product lines and position us to capitalize on marketing opportunities worldwide.''

John M. Richman, chairman and chief executive of Kraft, said, ''Our shareholders are receiving full value, and this merger is the best possible outcome for our employees, customers and the communities in which we operate.''

Philip Morris is the maker of Marlboro cigarettes, Miller beer, Maxwell House coffee and Ronzoni spaghetti, among other products. In addition to Kraft cheeses, including Philadelphia and Velveeta, Philip Morris will now add such other well-known Kraft brand names as Sealtest ice cream, Parkay margarine, Light n' Lively yogurt and Miracle Whip salad dressing.

High Two-Week Profit

Stockholders who have owned Kraft shares for as little as two weeks will profit greatly from their investment; Kraft stood at $60.125 a share when Philip Morris first offered to buy the company on October 17. After trading on the New York Stock Exchange was closed for the day, Philip Morris offered to pay $90 a share, or $11.5 billion in cash. Kraft has 123.8 million shares.

Kraft executives and employees may not see much change in the combined company, except for the new ownership. Mr. Richman will remain Kraft's chairman and also become a Philip Morris vice chairman. Michael A. Miles, Kraft's president and chief operating officer, will remain president of Kraft but take on the additional title of chief executive officer, continuing to report to Mr. Richman. Philip Morris and Kraft have also agreed that Kraft's headquarters will remain in Glenview, Illinois, for at least two years.

Kraft's enormously valuable name will survive as a subsidiary of Philip Morris while the Philip Morris parent company will continue to operate as it did before.

Philip Morris touched off a major Wall Street rush to buy shares in food companies with its initial $11.5 billion bid. But within a week Kraft's directors rejected the $90-a-share offer and proposed instead to give stockholders a complex dividend package that it valued at $110 a share.

Shares Would Have Been Kept

The package called for investors to get $84 in cash plus $14 in high-yield securities known as junk bonds. Stockholders would also have kept their shares, which Kraft maintained would have sold on the New York Stock Exchange for around $12.

The three pieces together consequently were valued at $110, Kraft contended. Wall Street professionals, who bought the stock all the way up to $102.875, watched the price in amazement last Tuesday as it ended the session at $102 - up $10 for the day. Clearly, they thought, Philip Morris would bid far more.

But instead of continuing to bid, Mr. Maxwell attacked the ''feasibility'' and ''the real value'' of Kraft's dividend package.

Replying in kind, Mr. Richman said Kraft ''will not be pressured'' and called Mr. Maxwell's remarks ''totally consistent with Philip Morris's pressure tactics to buy Kraft on the cheap.''

As relations between the two seemed to cool, at least from a public perspective, Mr. Maxwell studiously gave no hint as to what his next step might be; no price increase seemed to be in the cards and traders seemed disheartened. Some arbitragers complained that Philip Morris was trying to ''talk the stock down.'' Speculation advanced by the Philip Morris camp implied that, if Kraft continued to resist, Philip Morris might begin looking at other food companies. By last Thursday, Kraft's stock had fallen by $3, to $94.50, with more than 5 million shares changing hands.

Kraft's stock jumped $2, to $96.50, on Friday with traders expecting some development, since merger deals have often been worked out during a weekend. Philip Morris's directors had voted unanimously last Wednesday to authorize Mr. Maxwell to negotiate with Kraft.

Shortly after the close of the stock exchange on Friday, Bruce Wasserstein, Philip Morris's chief financial adviser, phoned Willard J. Overlock, Jr., Kraft's main Wall Street adviser, setting the deal in motion. Almost simultaneously, Arthur Fleischer, Jr., a leading Philip Morris lawyer, conferred with Martin Lipton, a leading Kraft lawyer.

Prepared to Make Offer

Philip Morris said it was prepared to make an offer for Kraft that was at least as good as the current value of Kraft's complex $110 ''package.''

No numbers were mentioned, people close to the situation said. But both sides felt secure enough for Mr. Maxwell to order his private plane flown to Chicago's O'Hare Airport for secret negotiations with Mr. Richman in Mr. Lipton's suite at the Westin O'Hare Hotel.

They talked for three hours, with no one else present. Apparently keenly aware that harsh words had been exchanged between them, each told the other in almost identical phrases that he understood what the other was doing to protect his company and that they should ''start fresh,'' with no animosity or resentment. 'Got Along Very Well'

People familiar with the situation described both negotiators as ''very relaxed,'' maintaining they ''got along very well.''

Serious negotiations began around 10 PM. Mr. Maxwell's first real offer, according to those at the scene, was $104; Mr. Richman said he thought that $106 was ''more like it.'' Mr. Maxwell said $104.50; Mr. Richman stuck to $106. Mr. Maxwell came up $1, to $105.50.

On the basis of Kraft's 123.8 million shares on a fully diluted basis, even 50 cents would cost Philip Morris nearly $62 million.

Mr. Richman held out for the other 50 cents and by 1 AM. Mr. Maxwell, smiling broadly, stuck out his hand to shake on the deal and said $106.

Definitive Agreement Approved

Mr. Richman then flew to New York for a Kraft board meeting of four and a half hours. With two directors absent, the board approved a definitive merger agreement.

Under terms of the deal as previously envisioned, Philip Morris would have used $1.5 billion of its own money, with $12 billion to come from a group of banks. Mr. Maxwell said in an interview yesterday that, in addition to the $12 billion bank credit, Philip Morris's cash horde will have grown to more than $2 billion by the time the deal is completed next month. He added that the additional money was coming from strong European and Asian cigarette sales.

He noted that, while Philip Morris's non-tobacco sales would rise from less than half of total sales at present to about 60 percent after the Kraft merger, the deal would also make a ''substantial difference'' in Philip Morris's operating income.

He said that income from operations other than tobacco, now only 25 percent of the total, would climb to 37 percent of total operating income. Little Advertising Change

In another significant area, Mr. Maxwell said that the deal ''won't do very much'' to change either company's advertising agencies. He said that each used Young & Rubicam Inc., the Leo Burnett Company and the J. Walter Thompson Company and that there would be no changes at a result of the merger. He said he also understood that Kraft used Foote Cone & Belding Advertising Inc. and McCann-Erickson Worldwide and that no changes were expected there.

Kraft has 47,000 employees. It had a net income of $1.05 billion in the first nine months of the year on sales of $8.27 billion.

Philip Morris, based in New York, has 113,000 employees. It had a profit of $1.77 billion in the first nine months of the year on sales of $22.6 billion.

While Philip Morris has taken great pains to assure Kraft's employees, its headquarters city of Glenview and even Wall Street investors that the deal would have relatively little impact on their individual concerns, Mr. Maxwell saw savings ahead through synergy and the elimination of duplicate operations.

$8 Billion a Year Spent

He noted that the two companies together spend $8 billion a year on their marketing and sales operations and that the two ''ought to be able to save a lot by not increasing this as much as we might.''

He said he expected ''very strong earnings growth'' next year over 1988 but that paying off a $12 billion debt would cut into that. The Philip Morris chief estimated that earnings this year might soar 30 percent but that next year might see a rise of only 15 percent. ''That's pretty darn good by other company standards,'' he said.

Asked whether Kraft's chairman, Mr. Richman, would remain very long with Philip Morris, where the 61-year-old executive will serve as vice chairman, Mr. Maxwell said, ''My expectation is he'll be around until our mandatory retirement age of 65.''

He said Mr. Richman would be in charge of ''getting the benefits of putting our food businesses together.'' He will also become a Philip Morris director along with two other, as yet unidentified, Kraft officials. William Murray, Philip Morris's other vice chairman, is in charge of its tobacco business. November Payment Expected

Stockholders are expected to get their money for Kraft shares around the middle of November, when the $106-a-share tender offer expires. Three Wall Street advisers will share $45.5 million, with $30 million going to Goldman Sachs & Company, $12 million to Wasserstein Perella & Company and $3.5 million to Lazard Freres & Company for advising Kraft's directors that the final price was fair to shareholders.

Asked in an interview if he had any more takeover deals in mind, Mr. Maxwell said with a chuckle, ''No, this is enough for this year.''


"The Media Business; Marvel Comic Book Unit Being Sold for $82.5 Million," by Jonathan P. Hicks, The New York Times, November 8, 1988

New World Entertainment Ltd., the publisher of Marvel comic books, said yesterday that it expected to sell the comic book, children's books and licensing and merchandising operation of its Marvel Entertainment group to the Andrews Group for $82.5 million.

New World said the Andrews Group, a Los Angeles-based concern operated by Ronald O. Perelman, chairman of Revlon, planned to take control of Marvel Comics in January. New World, which is based in Los Angeles, said it would retain its Marvel Productions unit, which produces television programs for children.

Spokesmen for New World and the Andrews Group said they were not certain when the final agreement would be signed.

According to Maggie Thompson, co-editor of the Comics Buyer's Guide, an Iola, Wisconsin, trade publication, Marvel commands about a 40 percent share of the $300 million comics market.

The company's publications unit, which is based in New York, produces about 50 comic book titles a month under the Marvel name, with a circulation of 7.4 million, according to the Audit Bureau of Circulation. Marvel's interests include a merchandising operation that licenses products based on the characters in its comic books: Spider-Man tennis shoes and Captain America T-shirts, for example.

In 1986, Marvel was sold to New World for $46 million as part of the liquidation of Cadence Industries of West Caldwell, New Jersey. Marvel's publishing operations, including children's books, had sales of $70 million in 1987, and the company has been consistently profitable since 1975.

New World, which had planned for Marvel to be the source of story ideas that could be used in television shows and movies, had turned away previous inquiries for the business. However, New World has been hard-pressed for cash in recent months.

The company is being sold just as New World begins to take some of the hundreds of Marvel comic characters and make them into the stars of cartoon adventures.

The Marvel cartoon operation has been merged with New World's television and movie business and is excluded from the pending sale.


"King Henry," by Christopher Farrell, Gary Weiss, David Zigas, Mark Vamos and Scott Ticer, BusinessWeek, November 14, 1988

Why KKR's Kravis may be headed for a fall-even if he wins RJR Nabisco

The conference on October 25 lasted only one hour. Henry R. Kravis and George R. Roberts tried to persuade RJR Nabisco chairman F. Ross Johnson and his Shearson Lehman Hutton backers to drop their $17.5 billion buyout proposal in favor of KKR's $20.6 billion bid. The RJR people were immediately put off when Roberts asked them not to smoke. The kingpins of the nation's most powerful leveraged buyout firm, Kohlberg Kravis Roberts & Co., were told to get lost. But Kravis and Roberts refused to go away quietly. The promptly began a skirmish for control that borders on a full hostile raid. They lobbied RJR's board of directors to support their higher-priced deal. Kravis also started courting former RJR chairman J. Tylee Wilson and some other executives forced out in recent years by Johnson. "Henry Kravis considers this his game," says one RJR executive. "He's not going to let you play in his sandbox."

RAIDER REPELLENT

Kravis' sandbox is the big LBO. KKR rose out of obscurity by rescuing large publicly held companies from corporate raiders. Its business was engineering deals in which managements, in partnership with cash rich KKR, could go private. Kravis has spent more than $38 billion acquiring some 35 companies over the past decade. His investors, mostly pension funds, pocketed returns of some 40% a year. Not surprisingly, such funds are his biggest boosters.

But King Henry could be headed for a fall-even if he beats Shearson in the battle for RJR. For one thing, Kravis is facing intense competition for megadeals. Other Wall Street firms, including Shearson, have raised enough money for LBO deals worth $150 billion. This frenzy is raising prices and cutting returns. And Kravis' willingness to move closer to a hostile takeover to beat back the competition is making some of his investors nervous. ITT Corp., for example, believes that Kravis may be violating verbal assurances that he will only do friendly LBOs. The company realizes that it probably cannot back out of its current $30 million capital investment in KKR, but it is evaluating any further commitments. KKR's public pension investors are also fretting. Michigan state treasurer Robert Bowman says he would not put public money in an investment fund involved in hostile deals-even if it guaranteed 40% returns. A KKR spokesman says: "The offer is friendly. It is conditioned on the approval of RJR's board of directors." Kravis' aggressive move on RJR Nabisco is also damaging KKR's image among corporate executives who saw the firm as a friend of management. By being "uninvited if not hostile right now," KKR could hurt its business, says John Canning of First Chicago Venture Capital, a longtime KKR investor. If the firm becomes a hostile raider, that "has to limit the number of CEOs willing to sit down and talk" with it, he says.

Even when it is able to eke out deals in this new unfriendly era, KKR will earn a lot less than a 40% return. Already, LBO players are on average paying a 37% premium over a target company's stock market price, compared with a 29% premium only three years ago. Returns were shrinking before the RJR battle. For example, KKR beat out several other premier LBO firms with a stunning $1.8 billion offer for Kraft Inc.'s Duracell battery business-because it was willing to pay a price that amounted to a steep 13 times last year's pretax operating profits and an almost unbelievable nine times the company's cash flow. The risk of even pricier deals, and thus lower returns, increases as Kravis bids for companies without management's backing. His offer for RJR is more than three times the size of KKR's record-setting LBO for Beatrice Cos., and he took the plunge without even taking a peek at the books. "If you have a hostile or semi-hostile environment, you don't have the atmosphere for doing a comprehensive financial investigation," warns Merril M. Halpern, chairman of Charterhouse Group International Inc., a New York LBO house.

At best, Kravis' RJR foray is dangerous. The company's breakup value is $97 a share, according to Drexel Burnham Lambert Inc. analyst Kurt A. Feuerman. That doesn't leave a lot of room for error. KKR has declared it would buy RJR with a mere $2 billion in equity and fund the rest of the purchase with bank debt, including a syndicated loan and junk bonds. So the new RJR would owe nearly $24 billion, including its current $5.1 billion debt load. The interest bill alone could cost the company close to $2.8 billion a year, assuming an average interest rate of 12%. RJR's 1988 cash flow is $2.1 billion, according to Feuerman-not quite enough to cover the bill. So that means Kravis must sell off a huge chunk of assets within the first year. "The single most important factor driving LBOs is the perception that the parts are worth more than the whole," says Arthur H. Rosenbloom, chairman of MMG Patricoff & Co. In RJR's case, these parts include such valuable brands as Oreo cookies and Life Savers. But there are some $40 billion in food company takeovers going on right now. Many of these deals will also require quick asset sales. A glut of brand-name companies on the market could drive prices down sharply. And highly leveraged companies are always vulnerable to an interest rate spike or a downturn in the economy. As one investor has summed up the RJR bid: "You don't do a $20 billion deal to protect a franchise. It doesn't make sense." The deal can work, but only if Lady Luck smiles on King Henry.

KKR's new aggressiveness reflects a change in leadership. Although his name is still on the door, the 62-year-old Jerome Kohlberg, Jr. left the firm he founded 12 years ago in May of this year to form another LBO firm, Kohlberg & Co. He had become uncomfortable with KKR's evolution from management partner to aggressive financial heavyweight. At the time he said of his former partners: "They deserve their chance. They earned it. There were some philosophical differences." Now it's Kravis, 44, and his cousin Roberts, 45, who are in charge. Kravis lives an opulent lifestyle and enjoys the trappings of power that money can buy. Divorced, with three children from his earlier marriage, Kravis was remarried to fashion designer Carolyne Roehm. They have homes in Colorado, Connecticut, Long Island, and a duplex apartment in Manhattan. The two have become a staple on New York's active social and philanthropic circuit. Kravis just donated $10 million to the Metropolitan Museum of Art for a wing to be named after him. He's also given $10 million to the Mount Sinai Medical Center for the Kravis Women's & Children's Center. But he rarely talks to the press, and declined to be interviewed for this story.

A Republican, Kravis is an active backer of Presidential candidate George Bush. According to the Vice President's campaign, Kravis has personally given $100,000 to the candidate and other Republican Party election efforts. And he held a fundraiser at New York's Vista Hotel in December of last year that raised $600,000 for candidate Bush. On the other hand, George Roberts, who runs the firm's San Francisco office, is a publicity-shy financier who does not flaunt his wealth. Instead, he spends most of his free time in the company of his wife and three children.

PROTO-LBOs

KKR is on an unprecedented buying spree. In addition to its $20.6 billion bid for RJR, the firm is offering some $2.5 billion for publisher Macmillan Inc. (to combat the offer of British media baron Robert Maxwell, owner of England's Daily Mirror tabloid) and has invested $73.3 million for a 9.9% stake in Kroger Co.-after the supermarket chain rejected its $5 billion bid. The talk on Wall Street is that KKR is trying to push management to accept its offer, even after they did a financial restructuring to offer shareholders a dividend of $40 in cash and $8 in notes and securities for every share. If KKR adds RJR and Macmillan to its holdings, the firm would wind up controlling a corporate empire with combined revenues topping $50 billion-about the same as IBM's. And that's not the end of it, either. Because investors have been pouring money into KKR's coffers, the firm could still spend an estimated $10 billion more on debt-powered deals.

Kravis' financial savvy is not to be underestimated. His firm excels in constantly slicing, dicing and reshuffling the many companies that make up its debt-laden empire. Again and again, critics have predicted the demise of KKR. But it has thrived on the highwire finance act. KKR's maneuvers have made its partners fabulously wealthy. Its investors have made triple what they would've gotten by investing in the stock market. And some top-name corporate executives are satisfied customers. "KKR has enormous credibility in the marketplace," says Duracell president C. Robert Kidder. "They run a first-class show."

KKR's roots go back more than two decades. Jerry Kohlberg, co-head of finance at Bear Stearns & Co., did his first LBO back in 1965-for $14 million. Of course, these deals weren't called LBOs back then-they were "bootstrap" financings. The deceptively simple idea hasn't changed, though. Borrow lots of money, take an equity slice along with management, and watch management work hard to pay off that debt by boosting cash flow and peddling assets. Payday comes when the company is sold. Kohlberg was a champ at profiting from this new way of buying companies. But being conservative by nature, he always played a highly disciplined game. In 1976, ambitious to build a bigger business, Kohlberg left Bear Stearns with colleagues Henry Kravis and George Roberts. Two typical 1977 KKR deals were A.J. Industries Inc., a brake drum manufacturer bought for about $23 million, and L.B. Foster, an oil services equipment manufacturer purchased for $106 million. By 1979, KKR was beginning to take LBOs out of the shadows and into the offices of the corporate establishment. It acquired for $355 million the large machine tool maker Houdaille Industries Inc. It wasn't until 1982 that the three partners were able to raise from institutional investors a blind pool fund that now seems a mere pittance-$30 million.

NATURAL MATCH

KKR's power grew rapidly. The firm stunned Wall Street in 1984 when it proposed a more than $12 billion management buyout of Gulf Oil Co. The petroleum company was fighting off corporate raider T. Boone Pickens. The buyout fell through after Chevron Corp. topped that bid and paid $13.2 billion for Gulf. KKR linked up with Drexel Burnham Lambert Inc.'s Michael R. Milken. LBOs were ideally suited to Milken's junk bond financing machine. An LBO typically carries $10 of debt for every $1 of equity-no investment-grade rating there. For LBO players, the attraction of tapping the public debt markets is that the terms are far less onerous than those set by an insurance company, the other major source for long-term borrowings. The big money center banks soon became eager short-term lenders for KKR.

Drexel raised $2.5 billion in junk bond financings for KKR's record $6.2 billion LBO of Beatrice in 1986. Clearly the biggest and riskiest LBO with its slim $417 million in equity, the success of the deal hinged on master salesman Donald P. Kelly. At one point, if looked as if Beatrice's investors were going to make more than seven times their initial investment. Then came the October 19 crash, which slowed down the auction of the company's assets. The problems were compounded when Beatrice couldn't attract high enough prices for its remaining food businesses. The investors could still make more than four times their investment, but some analysts think it'll be a lot less. The Beatrice deal was significant not only because of its size. It gave a hint of the future. KKR did not strike a deal with incumbent management. The Beatrice board had fired chairman James L. Dutt after his $2.7 billion acquisition of Esmark Inc. dragged down earnings and a number of prized executives left. Former chairman William Granger took his old job back. But management turmoil made Beatrice vulnerable to a takeover. KKR struck first. It lined up its own management team, led by former Esmark head Kelly. After a series of tense negotiations, the board acquiesced to KKR's "bear hug."

After Beatrice, KKR went on a tear. To name just a few of its better-known deals, the firm bought Safeway Stores for $4.1 billion, Owens-Illinois for $3.7 billion, Jim Walter for $2.4 billion, and Stop & Shop for $1.2 billion. The firm became "to the leveraged buyout business what Kleenex is to the tissue business," says J. Ira Harris, managing director at Lazard Freres & Co.

STORM WARNING

The firm makes its money from leveraged buyouts in three ways. It takes a 1.5% management fee from each of the funds it runs. For example, KKR could pocket up to $84 million a year for putting together its latest $5.6 billion LBO fund until it invests all the cash. The firm also gets a transaction fee. That's similar to an investment banking fee for arranging a deal. KKR got $60 million on the Safeway LBO. Finally, there's 20% of all the profits generated by any buyout. The take home pay of Kravis and Roberts is estimated at $70 million a year each.

Beneath KKR's public success was a quiet struggle for control and direction, however. The dynamic duo of Kravis and Roberts wanted to wield ever more power in the market for corporate control. In the new competitive world of LBOs, "when you see a company that's a good investment, you move," says one competitor. "Yesterday you would wait until management came to you." Kravis and Roberts were willing to move without management's invite. Kravis and Roberts are now running one of the largest privately held corporate empires in history. And their immense personal and business fortune all rests on a hunk of debt that is borne by some of America's best-known companies and held by huge financial institutions. The firm crafted its reputation on its financial discipline and by turning management into its allies. By abandoning its traditions in order to stave off competition, KKR has greatly accelerated the risk that the LBO binge will end in a bust. The battle for RJR that Henry Kravis started in October 1988 may well turn out to have a greater impact on Corporate America than the crash of October 1987.

AS MONEY POURS IN…

-1982 investment pool: $200 million

-1984 investment pool: $500 million

-1986 investment pool: $3 billion

-1987 investment pool: $8.7 billion

…KKR'S DEBT BURDEN GROWS

-RJR Nabisco, acquisition pending, $20.6 billion purchase price (to date), $18.6 billion borrowed (to date)

-Beatrice, October 1985, $6.2 billion purchase price, $5.8 billion borrowed

-Safeway Stores, July 1986, $4.1 billion purchase price, $3.7 billion borrowed

-Owens-Illinois, December 1986, $3.7 billion purchase price, $3.5 billion borrowed

-Macmillan, acquisition pending, $2.5 billion purchase price (to date), $2.3 billion borrowed (to date)

-Jim Walter, July 1987, $2.4 billion purchase price, $2.3 billion borrowed

-Storer Communications, April 1985, $2.4 billion purchase price, $2.2 billion borrowed

-Union Texas Petroleum, April 1985, $2.2 billion purchase price, $2 billion borrowed

-Duracell, June 1988, $1.8 billion purchase price, $1.5 billion borrowed

-Pace Industries, June 1984, $1.6 billion purchase price, $1.4 billion borrowed

-Stop & Shop, March 1988, $1.2 billion purchase price, $1.1 billion borrowed

-Wometco Enterprises, March 1984, $1 billion purchase price, $900 million borrowed


"Will Donald Trump Own The World?" by Monci Jo Williams and David J. Morrow, Fortune, November 21, 1988

No, but he's trying-and an inside look at his operations reveals how. Key elements include shrewd use of copious debt and quite astonishing chutzpah.

Consider the novel concept that Donald Trump may only appear to be a self- entered, breast-beating egomaniac. Perhaps he is really just a victim of what pop psychologists call the ''impostor syndrome'': He is successful, but he doesn't really believe he could have done it. Should he? Despite all the publicity, the breast-beating, and even the bestselling book, the story of how Trump really makes all that money has until now never been told. Looking into it reveals not only a no-fooling billionaire, but also an investor with a keen eye for cash flow and asset values, a smart marketer, and a cunning wheeler-dealer given to tough guy tactics. Yes, Donald, you should believe (presuming you actually have any doubts).

Trump's life is a media event, and lately he has kept the press hopping. In October he announced plans to buy the Eastern Shuttle for $365 million and to sell Manhattan's St. Moritz Hotel to Australian beer baron Alan Bond for $180 million. Other press accounts reported that Trump, 42, was angling to sell the West Side rail yards, the undeveloped plot of 78 acres bordering Manhattan's Hudson River on which he had hoped to erect the world's tallest building. His brother, Robert, an executive vice president of the Trump Organization, won't confirm the rumors (''We may sell it, we may not''), but Donald says that if he does, he could get as much as $800 million.

Real estate experts say he is more likely to get $500 million to $600 million. Mingled with all this Trump news have been regular progress reports on his plan to divide up Resorts International, the casino company he controls, with Merv Griffin. After several postponements, the deal was scheduled to close in late October, but rumors had it falling through. The speculation: Griffin couldn't come up with the $365 million he had promised, or Trump couldn't come up with his $275 million, or both. Each side denies any problem with financing, but if there were a hangup, it would seem unlikely to be with Trump. His net worth is tough to nail down because it is impossible to determine the debt on his personal holdings - the 20-acre Palm Beach estate Mar-a-Lago, the three-floor condominium with gold-accented ceilings in Trump Tower, the 300-foot yacht, the 727 jet, and more.

But it is possible to estimate the value of Trump's business holdings, the amount of debt attached to them, and their likely cash flow. This can be gleaned from information available through public documents, business associates, competitors, security analysts, and other experts. By FORTUNE's estimate, Trump's two Atlantic City casinos, his commercial real estate in New York and Palm Beach, his hotels, his stock, and his other business holdings are worth $1.575 billion net of debt). That figure includes his ownership of the St. Moritz Hotel, which he has agreed to sell, and also includes the Eastern Shuttle, which he has agreed to buy. It includes stocks Trump owns, but does not include cash, since the figures are not confirmable. Trump will not divulge the amount of cash he holds. To do so, he says in an uncharacteristic fit of modesty, would be ''too braggadocious.''

But a source very close to Trump claims the man is sitting on $550 million of cash not included in FORTUNE's calculations. If that is true, Trump's business holdings would be worth $2.125 billion. The press usually identifies Trump as a real estate developer, but that description is as narrowly accurate as calling Ronald Reagan a former actor. While real estate was and is the foundation of Trump's fortune, the steadiest gush of cash to the privately held Trump Organization flows from Atlantic City. His two casino-hotels, Trump Plaza and Trump's Castle, will generate about $100 million in operating profits this year. In addition, stock speculation has apparently been a rewarding sideline for Trump. Counting only activity that he has publicly reported, he has earned about $137 million on stock in six companies since 1986 and today has paper profits of $300 million in four others. Trump claims to have bailed out of the stock market before last year's crash. (''Other people are schmucks. I am not a schmuck.'')

He has certainly been extraordinarily lucky at times, less so at others. He bought about $14.8 million of shares in Federated Department Stores just two weeks before Canadian real estate developer Robert Campeau made his bid for the company last January. Thanks in great part to the bidding war for the company that erupted between Campeau and Macy's, Trump made at least $22 million on the investment (he says the figure is higher, but won't say how much). He bought into another takeover target, Gillette, after Coniston Partners had launched its raid, and made only about $2 million on an investment of some $14.9 million.

Real estate developments, particularly the luxury condominiums in Manhattan, have been far more lucrative for Trump than most people realize. By FORTUNE's estimate, roughly $100 million has rolled into the Trump Organization from Trump Tower, the Fifth Avenue complex of condos, offices, and shops that opened in 1982 and that made Trump's name. Trump's partner in the deal was the Equitable Life Assurance Society. Wally Antoniewicz, senior vice president of Equitable Real Estate Investment Management, says that Equitable realized a gross profit of about $90 million and that Trump's gross profit was about $100 million, a figure with which Trump agrees. But while Trump and Equitable sold off most off the condominiums in the building, Trump kept a big chunk of the office and shopping space for himself. As a result, Trump Tower continues to pay him a handsome annuity. Besides a three-floor condominium, which serves as one of his homes, he bought five floors of condos to rent. He also bought 180,000 square feet of office space and about 150,000 square feet of retail space, which he leases to Bonwit Teller and other merchants in the rose-marbled shopping atrium. Trump paid $45 million for all this space, and it pays him about $30 million a year.

When a man grows rich as quickly as Trump has, especially in real estate, he is inevitably rumored to be in debt up to his eyeballs. Trump has certainly borrowed a lot of money, yet he seems to be a more conservative borrower than one might expect. He usually makes sure that the cash flow from a property he buys will be enough to service his debt with a considerable safety margin. Even when he builds condominiums, Trump rarely dips into cash from other investments to finance the project. For Trump Parc, a luxury condominium on Manhattan's Central Park South that Trump began in 1986, he took out a $40 million mortgage to buy the land and another $50 million to finance construction, development - and carrying costs. Like a Latin American country, he uses some of his loan to pay the interest on itself. Last year, with only about 30% of the units sold, he paid off the debt with part of the proceeds.

A rare exception to Trump's rule that each deal pay for itself is the Plaza Hotel, which he bought in August from Robert Bass and Aoki Corp., a Japanese construction company, for $400 million, all borrowed. Trump has since reduced the debt to $325 million, but the Plaza will still lose about $5 million this year. Hotel analysts say he overpaid, but Trump contends he can reduce his cost by converting part of the property into condos and selling them. Besides, there's an extra consideration with the Plaza. As Trump says, ''For me this is like owning the Mona Lisa. It's not just an investment, it's a work of art.''

To keep the ferocious deal machine running, Trump leans heavily on a few other people. Younger brother Robert, 40, is an executive vice president who keeps an eye on Atlantic City operations. Harvey Freeman, 50, a precise, dry-humored fellow, is a former real estate lawyer and developer who analyzes the financial fundamentals of Trump deals. Alan ''Ace'' Greenberg, chairman of Bear Stearns, is the closest thing Trump has to an investment banker. But like most successful people, Trump is obsessive about work and cannot help sticking his fingers into everything. He recently considered 52 types of doorknobs for a condominium before making his choice. Blanche Sprague, the whirlwind in charge of developing and selling Trump condominiums, recalls the time he called her to check on the details of a building. She could hear water thundering in the background. ''Where are you, under a waterfall?'' asked Sprague. ''No,'' replied the always working developer, ''I'm in the bathtub with ((son)) Donny.''

Trump has acquired a reputation for tough guy tactics in business dealings with contractors, lawyers, architects, competitors, and even state and local regulators. He has been known to refuse to pay all or part of a bill if he is unhappy with the work provided, and he will take the matter to court rather than negotiate a settlement. A standard Trump negotiating stance is, ''You need me more than I need you.'' He will bargain suppliers down to prices that a Trump aide says are ''fair but not overly generous'' by telling them that plenty of people are lining up to work for Donald Trump for free. Apparently some are; among decorators, for example, to have worked on a Trump building can be a valuable credential. He is often impolitic. Trump says he has not met with the New York community group that has opposed his plan to build the world's tallest building on the West Side rail yards site. Why not? ''What they think doesn't matter. They have no power.''

Trump has also run afoul of various regulators. In April he agreed to pay a fine of $750,000 levied by the Justice Department for failing to report ownership of stock in Holiday Corp. and Bally Manufacturing that he bought through Bear Stearns in 1986; he had accumulated enough to require reporting under Securities and Exchange Commission rules. The violations, says Trump, resulted from a ''technical misunderstanding.'' (The government also fined First City Financial Corp., controlled by Canada's Belzberg family, another Bear Stearns client, for a similar infraction.)

The master promoter says that any accounting of his net worth should assign a value to the Trump name. That may sound like more of the familiar braggadocio, but the man has a point. There is undeniably a Trump mystique. Some people love him, others despise him, but everybody talks about him. He has become a cult hero for many people around the world, who seem to regard this flamboyant billionaire as the most heartening example of the American dream come true since Ross Perot. Trump wasn't born poor. He was born rich. His father, Fred, 82, is a tough, self-made man who amassed about $20 million by building and running rent-controlled apartments in the New York City boroughs of Brooklyn and Queens. (Donald started out assisting his father but went off on his own in his 20s; he says little about the extent to which his father helped him get going.) Socially, however, Trump sprouted from decidedly unglitzy roots. Bad enough that dear old dad was a New York landlord. Trump grew up in Queens, and snobbish Manhattanites dismiss the unfortunates who hail from the Bronx, Brooklyn, and Queens as lowly BBQs.

Like those snobs at the center of the universe, Trump saw Manhattan as the be-all and end-all, the only place to want to be. He is in some ways the ultimate wannabe, and that is a key ingredient in his success, for one of Trump's chief appeals is to people who wanna be too. He speaks simply, colloquially, and with much profanity. He seems to have little sense of humor, particularly about himself, but he does enjoy his money and fame. Squealing ''Oooh, you're bad,'' he will let a reporter tug on his hair to test the rumor that he wears a rug. (He doesn't seem to; he does use hair spray.) When Trump appeared at a Palm Beach bookstore to promote his book, Trump: The Art of the Deal, so many autograph seekers showed up that the session stretched from a scheduled one hour to six. At one point the crowd pressed forward with such force that the security guards panicked and rang down the steel gates that protect the store windows at night. The people cared not, and shoved hands and arms through the gates to try to touch the author.

He is not merely a self-promoter in the style of P.T. Barnum. He is an instinctive marketer. Prime example: Trump Tower. Little known when he began the project in 1979, Trump picked a site next door to Tiffany on Manhattan's Fifth Avenue, where important people and wannabes from all over the world flock to shop till they drop. Wealthy people in France, South America, and Japan might not have heard of Donald Trump, but Fifth Avenue and Tiffany they knew. The condos not only sold - to those buyers and others - they blew the ceiling off the market. High-end apartments and condominiums in Manhattan (of which there were then relatively few) were going for about $350 per square foot. Trump's condos, in an ultraluxurious building at one of the world's great locations, fetched an average of $700 per square foot. The enormous success of Trump Tower enabled Trump to introduce a brand name to a class of products that previously had no brands, a textbook marketing strategy. That name indisputably adds value. Blanche Sprague says that the standard question from prospective buyers - even the rich and famous - is, ''So tell me, is Trump around here a lot?''

Though brother Robert says real estate will always be a primary business of the Trump Organization, Trump has been casting his eye on other horizons. He says he is ''getting ready to do something very big in the corporate area'' and claims to be hoarding cash so that he can finance his deals if interest rates rise. But whether he is hankering to bite off just a morsel, as he did with the Eastern Shuttle, or to gobble up a whole company, he will not say. If Trump does buy a company, it will be a first. He has taken positions that range from 0.4% of a corporation's shares (in Pillsbury) to 88.1% (Resorts International). He usually buys stock in companies because they own a hard asset - a hotel, a casino, a piece of real estate - that he might like to own. Sometimes, as with Pillsbury, he invests in corporations that are rumored takeover targets. The management of the company in which Trump invests, not to mention the stock market, usually reacts as if Trump is a big, bad raider who will huff and puff till he blows the house down, adopting poison pill defenses and occasionally paying greenmail.

But Trump has yet to swallow a company whole. Trump's largest and newest gamble centers on Atlantic City. If his deal to split Resorts International with Merv Griffin falls through, Trump could resume his earlier plan to take Resorts private. If the deal closes, Trump will get as his share a half-finished casino-hotel called the Taj Mahal. Trump's interest in the Taj seems curious, since it has been a sinkhole for Resorts' management. Resorts had poured $467 million into land and construction of the Taj when Trump took control of the company in 1987, and Trump has filed a junk bond offering through Merrill Lynch to raise another $675 million to get it up and running.

What Trump will have when the Taj is completed is the tallest building in New Jersey (42 stories) and by far the biggest gambling den in Atlantic City, with a casino bigger than two football fields. Competitors worry that if Trump can't fill the huge casino and turn a profit, he could default on his bonds, making it harder for other Atlantic City casino operators to raise money at reasonable rates. But where they see danger, Trump, the cash flow investor, sees opportunity. He believes he can make the Taj profitable by applying Nevada's success formula: Reel in the high rollers and bring on the conventioneers. The Taj would be the first casino hotel in Atlantic City with enough rooms and meeting space to be a convention host. Robert Trump says it will serve as a magnet for regional conventioneers; Trump's two other casino-hotels can handle the spillover. Air service to Atlantic City is still spotty, but the Eastern Shuttle - to be renamed the Trump Shuttle if the deal goes through - could ferry conventioneers from up and down the East Coast.

As for the high-rollers, Trump has been wooing them for a while, with some success. He flies them down from New York City on helicopters labeled Trump Air. And because fans of boxing also tend to be big gamblers, he has added to his crowded resume the role of fight promoter. When Trump staged the heavyweight championship fight between Mike Tyson and Michael Spinks at the Atlantic City Convention Center, conveniently situated next to Trump Plaza, betting at the casino that weekend increased 250%. Since the sale of tickets at up to $1500 a pop covered the $11 million Trump had put up to stage the fight, the casino's winnings on all that extra betting were pure, incremental profit - a $15 million bonus, Trump says.

No appraisal of Trump's moneymaking abilities would be complete without noting the man's quite astonishing chutzpah. Consider the case of a management contract that plays a seemingly small role in the Resorts deal. Soon after Trump won control of the company, he persuaded the board to award him a management contract that would pay him $100 million over five years to run the company and oversee completion of the Taj. Since completing the Taj was ostensibly his principal goal in buying Resorts, it isn't clear why he would need a $100 million inducement. But the board nevertheless acquiesced. Then, when Merv Griffin came along and topped Trump's offer to take Resorts private, he agreed to pay Trump $63 million to buy out the management contract. If the deal with Griffin goes through, Trump in effect will receive $63 million for an agreement he cooked up as an incentive to himself to do something he wanted to do anyway. Trump professes to be amazed at how easy it is for him to make money sometimes. As he says, ''I will be getting $63 million for a piece of paper that didn't exist six weeks earlier. Just say I'm very happy with the deal Merv made with me.'' A gaming executive sums up his competitor nicely: ''Donald Trump can pull a rabbit out of a hat when the hat doesn't exist.'' Now if only Trump believed it, we could all get some peace.


"Larger Than Life: Robert Maxwell," by Martha Smiglis, Time, November 28, 1988

Britain's billionaire publishing baron Robert Maxwell is known for his acquisitiveness as well as his considerable size, and now he has added the U.S. to his hit list

The telephone console resting on a gargantuan round table boasts 90 buttons, and the man seated before it seems bent on using all of them at once. His plump fingers, the nails freshly manicured with clear polish, poke impatiently at the instrument. Visitors flow into the office in a steady stream, yet all the while the man continues a separate dialogue with the console. "He wouldn't be a bureaucrat unless he was in a meeting," he booms into the speaker in a British-accented baritone that is powerful yet velvety. "I want the man, not the message." Poke. A button away, he barks in German, "Cease offers. It is 400 million locked up for the duration." Poke. In French, he issues a command for his son Ian, 31, in Paris: "Call him at the restaurant. Tell him to get on the Concorde." Poke. Now, in English, he asks another son Kevin, 29, a workaholic like his father and heir apparent to the empire, "How is the market?"

Despite the world map branded with a giant M, the London headquarters of Robert Maxwell's communications empire is conservative by U.S. corporate standards. Yet there is nothing modest about the man at the round table, his command central. "Captain Bob" coined by the press - is a boulder of a man: easily 250 pounds, and 6'2". His ruddy face is a cross between Leonid Brezhnev's and Robert Mitchum's. His abundant hair, dyed black, is slicked back '30s style to counterpoint bushy black eyebrows that can appear deceptively clownish.

At 65, Robert Maxwell is a whirling dervish whose hyperkinetic activity seems designed to distract and confuse. In seconds, he can switch from a jaunty Brit to a ruthless schoolyard bully and back again. He is said to be worth $1.4 billion. Yet despite the colossal Mont Blanc gold pen he wields like a fat cigar, the enormously expensive Lord & Stewart suit, the butter-soft cashmere overcoat, the private jet, the helicopter, the yacht with a crew of 14, the personal chef, the Rolls-Royces, the thing Maxwell really values most is time. Whether dealing with family, managers or minions, Maxwell is constantly ordering, pushing, scolding and hectoring, much like a nagging parent.

Five managers from his newspaper, the Daily Mirror, a working-class tabloid housed in the adjoining Mirror Group building, surround him at the table. Though they are accustomed to the constant interruptions, the lightning shifts in ideas, deals, languages, Maxwell knows they are growing impatient and holds them in check with his translucent amber eyes, which he uses like headlights to paralyze his prey. Punching a button on the console, Maxwell purrs, "You are up, good. It is 5 AM. Find out how much they want for the National Enquirer." The citizens of Maxwell's empire know no time zones. Finally he is off the phone just long enough to address a problem with the Mirror's presses. "Fight, negotiate," Maxwell tells one manager. "I observe the master," the manager quips in response, noting that Captain Bob's spirits are high this morning.

Soaring mightily, in fact. Already he has built an empire that includes scientific journals, printing plants, newspapers, data bases, magazines, books, satellite communications and even two soccer teams. His company spans 28 countries and has nearly 40,000 employees, 15,000 of them in the U.S. For the past two years, Maxwell has been on a U.S. buying binge that culminated this month in the purchase of Macmillan Inc. for $2.7 billion.

The acquisition followed a long, hard battle and came in the wake of last year's attempt to take over another U.S. publisher, Harcourt Brace Jovanovich. William Jovanovich restructured the company to thwart Maxwell's anticipated $2 billion bid. "Jovanovich killed the company. He's a dumb Croat coal miner. Had I met him, I would have told him so," Maxwell snarls with characteristic restraint. Some American publishers insist that he overpaid by as much as $1 billion for Macmillan. Not so, says Maxwell. "Information is growing at 20% a year," he explains in patient, professorial tones. "Communications is where oil was ten years ago. There will be seven to ten great global communications corporations. My ambition is to be one of them. You can't have a world communications enterprise without the U.S., which has 80% of the software and half the scientific information." So exactly how will Macmillan be integrated into his operations? "Synergy," he stonewalls, with a cat-that-swallowed-the-canary smile. "It fits like a glove."

Peter Jay, former British Ambassador to the U.S. and now Maxwell's chief of staff, enters with a load of letters. Maxwell pays the tall, handsome aristocrat something like a quarter of a million dollars a year to add a touch of class to his kingdom. Jay arranges meetings, meals and galas with foreign dignitaries and fields charity requests. "I am not the Salvation Army," bellows Maxwell, as he signs checks for needy causes. But Jay's real challenge is simply to keep the emperor's attention. After the first few letters, Maxwell's mind ticks elsewhere. He can drill to the core of any issue, but his attention span is that of a gnat.

With a wave, he dismisses Jay and greets two Israelis who have come to enlist his aid in a bond drive. Seated at the table, they wait. And wait. First Maxwell wraps a deal for a Moroccan satellite channel. Next his personal secretary, Andrea Martin, 25, a pale blond, appears with a message. Maxwell reads it and thunders, "He is as keen on this idea as if he was bitten by a rattler on the anus." Accustomed to such eruptions, Martin slips away as another button lights. "Latrine rumors!" he shouts into the speaker. "We are going to sue." Suddenly, he tells the Israelis he will aid the bond drive. "I always say yes. If I were a woman, I would always be pregnant," he says with a grin.

Trapped inside this billionaire publishing baron are a multitude of people: a peasant haggler, stage director, domineering patriarch, sophisticated currency trader, military commander, politician, Hollywood mogul and unabashed publicity man. Following his train of thought is like listening to ten tape recorders, constantly switching on and off, constantly interrupting one another.

Born Ludvik Hoch, Maxwell was the third of nine children of dirt-poor Hasidic Jews living in the eastern slice of Czechoslovakia known as Ruthenia. During World War II, he lost his parents and four siblings in Auschwitz; he escaped by joining the French underground. He had only three years of schooling but was a genius with languages - he could speak eight by the time he was grown - and figures. He joined the British forces and in two years transformed himself from a Czech ruffian into a British army officer who was awarded the Military Cross for bravery in charging a German machine gun position in a Dutch village in January 1945.

Maxwell was put in charge of allocating paper and printing supplies in the British zone of Berlin. He soon went to London to found Pergamon Press, a publisher of scientific journals. His business and reputation grew rapidly; by 1964 he was elected to the House of Commons as a Labor MP. But in 1971 the Department of Trade and Industry concluded that he was guilty of misrepresenting his company's financial position. He came close to losing Pergamon. Questions were raised about mysterious family trusts held in Liechtenstein.

Characteristically, Maxwell still shrugs off the questions and says with exaggerated humility, "My dream in life was to own a cow." Now he owns a whole herd of cash cows to sustain an increasing debt necessary to finance his global expansion. With his military training, he does best with a clear enemy, and currently that is Rupert Murdoch. In their Hertz-Avis relationship, Murdoch is several long steps ahead. His News Group Newspapers, Ltd., is worth $13 billion, with a $6 billion debt, whereas Maxwell Communication Corp. runs at around $5 billion, with roughly $2 billion in debt. Murdoch's tabloid, the Sun, sells 4.2 million copies a day to 3.2 million for Maxwell's Daily Mirror. "What Murdoch has achieved is stupendous," concedes Maxwell, but he jabs at his foe for becoming a U.S. citizen so he could acquire American TV stations. "I chose Britain for better or for ill," says Maxwell. "I love the British. They kept Hitler at bay."

Whether the Brits love Maxwell back is debatable, but certainly a favorite English sport is watching the "bouncing Czech." The business community is both appalled by Maxwell's publicity-mad megalomania and envious of his fiscal ingenuity. Just about everybody is curious about him. Moments after being introduced to Maxwell, Prince Charles turned to one of the publisher's staffers and asked, "But what is he like to work for?"

Above all, working for Maxwell is an exercise in survival. His eight-member personal staff, plus two pilots and two chauffeurs, operates like a team of air traffic controllers. All carry beepers and many have walkie-talkies and cellular phones to track the "Black Hurricane," as some call him. "He plays the fox and rabbit with people," says an employee. "If he smells a rabbit, he goes for it." Not that Maxwell spares himself. The tenets of Maxwellian management call for living over the shop, working 24 hours a day, hiring and firing often, trusting only family members and centralizing all power.

Hidden staircases connect his London offices to an opulent penthouse overhead. The official entry is a peach marble vestibule decorated with backlighted Grecian columns that open into a large rotunda of tawny-veined marble that casts a rose glow. But the stage setting vanishes into reasonably sized living quarters, exquisitely decorated by Elisabeth Maxwell, his wife of 44 years and the mother of his seven children. She also presides over their country home, Headington Hall, a Gatsbyesque mansion in Oxford that serves as headquarters for Pergamon Press.

Maxwell commutes between London and the Continent aboard a French twin engine Ecureuil helicopter adorned with a roaring lion half-circled by MGN (Mirror Group Newspapers), a logo playfully designed to be confused with MGM's. From Heathrow Airport, his Gulfstream zips him to Paris, New York, Moscow.

Maxwell averages three interviews a week, dispensing a litany of packaged aphorisms like a vending machine: "My wife is the better half." "For exercise, I wind my watch." "Maxwell's Law: Murphy was an optimist." "Happiness can only be had through hard work." Tough fiscal questions produce slippery answers. If the press gets nasty, Maxwell fights back legally.

The Mirror has given Maxwell the voice he lost in the House of Commons when he was defeated in the 1970 election. No matter where he is, the tabloid's editorials are faxed to him for approval. "Without Mrs. Thatcher, I couldn't have done what I've done," he admits. "But I don't agree with her vision. I'm a capitalist with a socialist conscience." But not too confining a conscience. Since buying the Mirror, he has cut its staff by nearly half and brought the unions to heel. But he has energized the paper's layouts by adding color and increased its profits enormously.

Maxwell does not collect art or attend concerts and rarely reads a book or sees a movie. Despite his willpower in most areas, he is a compulsive eater. He sleeps only four hours a night. More than 30 years ago, he had one lung removed because of a mistaken diagnosis. "But we in Britain, unlike you in the U.S., don't sue," crows London's most litigious citizen. Though his wealth could mean a life of ease, he values working. "Most rich people just shop," he says with disdain. He has no personal friends: "I don't have the kind of time one needs to give to friendship."

Just as he drives his staff, he drives his children. He says he will not leave them his fortune because "money that you haven't earned is not good for you. Ian and Kevin will only take over the company if they are capable." Late one Friday night, flying home from Paris, a keyed-up Maxwell glanced over at his son Ian, stretched out on the lounge, exhausted. "This generation, they flake out," he said with a sigh. "Hey, Pops," protested Ian, "I've put in a 14-hour day." Maxwell frowned and said, "That's what I mean."


"Is RJR Worth $25 Billion?" by Sarah Bartlett, The New York Times, December 2, 1988

Few Wall Street dramas have generated as much debate as the strenuous bidding for RJR Nabisco Inc., which culminated late Wednesday in a deal to sell the company to Kohlberg Kravis Roberts & Company for $25 billion.

What does it say about the country's financial markets when a company that was worth $55 a share in the stock market one day is valued at $75 by its top management the next day and is sold at auction six weeks later for $109?

It was not, after all, a Picasso painting that was the subject of a breathless bidding war. It was RJR Nabisco, a company made up of assets that are eminently real and quantifiable. What could be so mysterious about placing a value on Fig Newtons?

Answers Easy and Hard

Easy answers to these questions are so plentiful they are almost ricocheting off Wall Street's canyons. Among the most popular: the public markets are incapable of understanding the true value of corporate assets; management was trying to steal the company from underneath the noses of its shareholders; Wall Street, steeped in greed and ego, ran amok and overbid for the company.

Each of these competing theories probably contains some element of truth. But in trying to explain the RJR Nabisco phenomenon, Wall Street deal makers maintain that those reasons, and others, are necessary to understand fully how and why this additional ''value'' was created. Some of the answers are specific to this deal; some are indicative of the state of the markets.

Much of the explanation lies in the starkly different ways companies are measured and run when they are private as opposed to when they are public entities.

The story begins with the public stock market, where many stocks have been depressed in value since the crash of October 1987. Add the fear of lawsuits tied to tobacco, which could result in huge liabilities for RJR Nabisco, and that helps to explain why the company's stock was recently trading in the 40s, down from the high 60s before the crash.

But RJR Nabisco as a public company had two other counts against it. It was considered too big to be taken over. So, unlike many other companies, its price had not risen in anticipation of a takeover bid.

Its stock also suffered because the company was a medley of businesses in an era when investors prefer concentration in a single area.

''The market penalizes conglomerates,'' said Thomas A. Saunders III, a managing director at Morgan Stanley & Company. A portfolio manager ''wants management to stay focused on its core business,'' he said.

Enter F. Ross Johnson, the RJR Nabisco chief executive frustrated by his inability to raise the stock price of his company and in a good position to judge the company's potential value. On October 20 he bid $75 a share to take the company private. His plan was for Shearson Lehman Hutton and a group of RJR Nabisco senior managers to buy out the public shareholders' position in the company, largely with borrowed money - a leveraged buyout.

A Crucial Question on Buyouts

That raises a question: since under Mr. Johnson's plan the same managers who ran RJR Nabisco as a public company would still be in charge, why would they suddenly be able to make the company so much more valuable?

Mr. Johnson could afford to offer $75 in part because the government would help defray the costs of doing business. Running a private company heavily financed with debt, Mr. Johnson could take advantage of the fact that interest is tax deductible, while dividends paid to public stockholders are not.

What is more, with the debt loads under which many buyout companies operate, they have little choice but to become extremely efficient. And senior managers in leveraged buyouts almost always have equity stakes in their newly constituted companies, which has a way of concentrating executives' minds far more than perquisites like corporate jets and country club memberships.

Lest the managers become distracted, their backers are always close at hand to make sure that their will is being carried out. Managers of public companies rarely hear directly from their owners; disgruntled shareholders just sell their stock.

In addition, freed from the pressure to please the stock market with predictable quarterly growth, some managers say they can operate far more efficiently.

Is That Enough?

But can those managers be $12 billion more efficient, that figure representing the difference between the company's valuation before and after the deal?

A critical source of value in leveraged buyouts is generated by the sale of assets. When conglomerates are broken into their diverse pieces, they can often be worth more to other buyers. The sponsor of a leveraged buyout usually knows that, and may even have tentative commitments from some buyers before it takes a company private.

''The value of a company has a lot to do with the particular blueprint a buyer brings to a company,'' said Brian Wruble, president of Equitable Capital Management, which manages $32 billion in assets.

A company entirely devoted to cookies, for instance, might be willing to pay top dollar for Fig Newtons because it could increase cookie sales without necessarily incurring all of RJR Nabisco's distribution costs. The value this represents is likely to be more than that placed on those cookie-producing assets by faceless stockholders who view Fig Newtons as one piece of a corporate morass whose quarterly profit is not doing as nicely as that of, say, Chrysler.

''Certain parts are worth more to some parties than to the general market,'' said Paul K. Kelly, president of Peers & Company, a New York merchant bank.

Analogy to Home Buying

Mr. Kelly offered an analogy: a house on a 10-acre lot is for sale. Someone who wanted to live in the house and keep the land might be willing to pay $500,000 for it. But to someone who wanted to divide the lot and sell it in two-acre parcels, the house and land might be worth $1 million.

But even assuming that RJR Nabisco is worth more to a group of private investors than to public ones, why did the bidding for the company as a private entity still seem so arbitrary, ultimately rising from $75 to $109 a share?

Most experts close to the deal view the initial bid of Mr. Johnson's group as extremely low.

The management bid opened the door to Kohlberg Kravis Roberts, which has long reigned in the world of large leveraged buyouts.

The buyout firm's entrance unleashed a three-week bidding war that had few, if any, constraints on it. The money was available to finance ever-larger bids, and the intermediaries had almost everything to gain and little to lose by stoking the fires.

Shearson, for instance, had recently amassed a $1.5 billion war chest with which to do leveraged buyouts. A late comer to the business, following firms like Merrill Lynch and Morgan Stanley, Shearson could make quite a statement by doing the largest leveraged buyout ever, and would earn substantial fees.

''The pressures to do this deal were staggering,'' one investment banker said. ''This is next year's bonus pool.''

After the RJR Nabisco board announced that a full-fledged auction would be conducted, other parties, including Forstmann Little & Company and the First Boston Corporation, examined the financial records of the company with an eye to making a bid. Although Forstmann Little declined, without giving a reason, the other bids that came in hovered in the low 90s a share.

A Price Seen as Realistic

Looking back on the process, most investment bankers close to the situation view that price range as coming closest to RJR Nabisco's true value as a private company. That is, that is what the buyout sponsors could afford to pay in making realistic assumptions about the prices they could get for selling certain assets, and the cash they could generate by running the company differently, with more motivated management.

The difference between the low 90s and the eventual $109 price is the portion ascribed to ego. By the end of the intense bidding war, both the Shearson-Johnson group and that of Mr. Kravis were determined to be the victor.

By raising their bids, they have lowered the ultimate return to their investors, many investment bankers think. (It is mainly large investors - pension funds, insurance companies and the like - whose money is being used to buy RJR Nabisco.) And they have narrowed their margin for error. If they have trouble selling some of the company's assets at prices they are counting on, it could strain the company and jeopardize the success of the deal.


"KKR Only Using $15 Million Of Its Own In Nabisco Buyout," by Jerry Knight, The Washington Post, December 2, 1988

Kohlberg Kravis Roberts & Co. plans to put only a little more than $15 million of its own money into the $25 billion purchase of RJR Nabisco Inc., according to sources familiar with the way the takeover firm is financing the biggest acquisition ever of a U.S. company.

Based on the financing techniques it has used in the past, the firm, known as KKR, will leverage its tiny down payment by borrowing more than $18 billion, using about $1.5 billion in cash put up by a select group of investors, and giving RJR Nabisco shareholders securities for the rest of the $25 billion.

By outbidding two other potential buyers of the giant RJR Nabisco food and tobacco empire in hectic negotiations that ended late Wednesday night, KKR preserved its reputation as the preeminent firm specializing in what Wall Street calls "leveraged buyouts."

The principle of leveraged buyouts is to borrow money to buy a company. The business itself is used as collateral, and the loans are paid off with the company's future profits or by reselling some of its operations.

The "leverage" means that the buyer puts up as little of its own cash as possible and uses it as a lever to gain control of a much larger amount of assets.

KKR's plans for financing the purchase of RJR Nabisco shows just how much leverage can be obtained.

The company's own cash investment will be just 1/1666 - or .06 percent - of the amount that is to be paid for RJR Nabisco's family of familiar brands, which include Camel, Winston and Salem cigarettes, Life Savers, Baby Ruth and Butterfinger candy, Planters peanuts, Animal Crackers, Ritz, Triscuits, Sugar Honey Grahams, Shredded Wheat, Oreo and Chips Ahoy cookies and Del Monte foods.

KKR has previously used the leveraged buyout technique to purchase Safeway - after an unsuccessful bid by the Haft family of Washington - for $4.2 billion; Beatrice Cos. Inc. for $6.1 billion, Owens-Illinois Inc. for $3.7 billion, Stop & Shop (parent of Bradlees) for $1.2 billion, Duracell for $1.8 billion, and half a dozen other major businesses.

To finance its purchases, KKR last year raised a $5 billion pool of capital from a limited partnership of institutional investors that include several public and private pension funds, college endowments and insurance companies.

KKR itself contributed only $54.2 million to the $5 billion pool, or a little more than one percent, but as the general partner in charge of the investment has complete authority to use the money, according to confidential documents given to potential partnership investors. In the documents, KKR said it had previously earned profits of 59 percent a year on its investments.

From that $5 billion pool, KKR will put $1.5 billion into the purchase of RJR Nabisco, say sources familiar with terms of the purchase. The purchase will be made through RJR Acquisition Corp. and RJR Holdings Corp., two new Delaware corporations formed specifically for the transaction.

Another $5 billion will be borrowed from the Wall Street investment firms of Merrill Lynch & Co. and Drexel Burnham Lambert Inc., officials of the two firms confirmed yesterday. The $5 billion is meant to be a short-term "bridge loan" that will be repaid by issuing high-interest bonds through Merrill Lynch and Drexel, probably next year.

The bulk of the money to pay for RJR Nabisco - more than $13 billion - will be borrowed from a group of banks that have not yet been publicly identified. Because the loans are so big, dozens of banks are expected to participate in the loans, including most of the nation's major banks.

In addition to the more than $18 billion to be borrowed from the banks and investment firms, KKR will have to assume more than $4.5 billion in debts that RJR Nabisco has previously taken on, which will boost the total debt to about $22.8 billion.

In documents filed yesterday with the Securities and Exchange Commission, KKR said it will pay RJR Nabisco stockholders $109 for each share of common stock. Only $81 of that will be cash, provided by the KKR partnership pool, the banks and the bridge loans. Shareholders will also receive a new issue of preferred stock valued at $18 per share and other securities valued at $10 a share, which will be convertible into stock of RJR Holdings.

No cash will be involved in either the preferred stock or other securities, although stockholders will be able to sell them, just as any other securities.

The board of RJR Nabisco accepted the KKR offer late Wednesday night, but the transaction theoretically could still founder if stockholders refuse to accept the $109 a share offer. The stock was selling for only $56 a share six weeks ago, when the possible sale of the company was first raised.

RJR Nabisco went up for bids largely because its president, F. Ross Johnson, believed the stock price was being held down by public concerns about smoking and the future of the cigarette business, the company's most profitable line.

Johnson decided to organize his own leveraged buyout and offered $75 a share for the stock, which had never before gone above $71. As soon as Johnson's bid was made, several other firms started bidding and the offers quickly jumped to $80 and then $100 a share.

KKR founder Henry Kravis was one of the first to bid, saying he wanted to protect his firm's reputation as the leader in the leveraged buyout business. Johnson brought in Shearson Lehman Hutton Inc., the investment firm owned by American Express, to finance his offer, and the investment banking firm First Boston Co. also joined in the bidding.

When the bids were opened, KKR came up several dollars a share ahead of Johnson - how much depends on how the bids are evaluated - and the First Boston offer was rejected because of contingencies. While KKR was negotiating an agreement with the RJR board, Johnson came back with a new offer, and then the board gave KKR another chance to raise its bid.


"Where's The Limit? Ross Johnson and the RJR Nabisco Battle," by John Greenwald, Time, December 5, 1988

The biggest takeover battle in history raises questions about greed, debt and the well-being of American industry.

The date was portentous: on October 19, precisely one year after the stock market crashed, the chief executive of RJR Nabisco was the host of a lavish meal at Atlanta's Waverly Hotel. Ross Johnson's guests had come to expect such treatment. A brash and hard-driving manager with a fondness for fine living, he liked to treat RJR Nabisco's board members to an elegant evening out before the next day's regular meeting.

On this night, however, Johnson's purpose was not just to be convivial. Declaring that he had tried everything he could during the past two years to boost RJR Nabisco's stock price, Johnson said he had found a solution: he and his fellow top managers would take complete control of the company in a leveraged buyout (LBO). Johnson would then sell off some of the company's food brands and run the remaining divisions as a private company. Surprised that a chief executive would initiate a raid on his own company, the directors nonetheless allowed him to mount what would be the largest takeover ever.

But the directors - and much of the public as well - were soon shocked to read news accounts reporting that Johnson's plan would enrich him and seven of his top executives beyond the dreams of Midas. In exchange for $20 million they would put up for an 8.5% stake in the new company, Johnson and the seven other executives would see the value of their investment jump to $200 million when the sale was completed. That was only the beginning. By doing some simple arithmetic, critics of the plan calculated that the eight men's holdings, which were scheduled to grow to 18.5%, could be worth $2.6 billion within five years if they turned RJR Nabisco into a leaner and more profitable enterprise. Johnson's share alone would have been worth $1 billion.

Swamped by a wave of resentment, Johnson rushed last week to reassure the RJR board that he had intended all along to share the newly created wealth with the 15,000 employees who would remain after the breakup. "I wasn't going to take 18% of this company for seven people," Johnson told TIME in his first interview since the buyout offer. "If I'd known it was going to be in the newspapers, I would have said, 'Look, there's going to be 15,000.' "

Even as Johnson backed away from his huge initial stake, rival bidders rushed in to get theirs. The competing offers turned the fight for RJR Nabisco, whose brands range from Animals Crackers to Winston cigarettes, into the brassiest and potentially most damaging brawl in Wall Street history. By last week three groups were locked in a titanic struggle for the company (1987 revenues: $15.8 billion), and the offering price has climbed above $26 billion - more than the gross national product of Peru or Portugal and twice the sum that Chevron paid for Gulf Oil in 1984 in the largest previous merger. The ordeal turned into a feeding frenzy for hangers-on as well: hundreds of lawyers and investment bankers involved in the bidding stand to earn a total of as much as $1 billion for their expertise.

The sums are so vast, and so apparently out of line with any foreseeable benefits that the deal might bring to American industry, that they raise deep and disturbing doubts about the direction of U.S. business at a time when many firms lag badly in foreign competition. Seldom since the age of the 19th century robber barons has corporate behavior been so open to question. The battle for RJR Nabisco seems to have crossed an invisible line that separates reasonable conduct from anarchy.

Except for its scale, the proposed RJR breakup was like many of the fruitless paper-shuffling deals that have proliferated in the past decade. The management group is planning to take apart a merger, between RJR and Nabisco, that they hailed only three years ago as a brilliant strategic move. "What is being done threatens the very basis of our capitalist system," said John Creedon, president of Metropolitan Life Insurance company, which is suing RJR because the potential buyout has undermined the value of all bonds that the food and tobacco company sold before the announcement. Not everyone was alarmed. Said Harry D'Angelo, a finance professor at the University of Michigan: "I don't see any major social dangers. The real challenges have been to the conventional wisdom that large numbers of shareholders provided the best means of financing industry."

The RJR battle has brought several U.S. business trends of the past decade under greater scrutiny in Washington. Among the political concerns:

- The relentless focus on dealmaking rather than on long-term investment.

- The apparent disregard for company employees and the communities in which firms are located.

- The rapid pileup of debt that has alarmed everyone from small investors to Federal Reserve chairman Alan Greenspan, who recently called for measures to curb borrowing.

- The cost to American taxpayers, who wind up underwriting the buyouts to the tune of billions of dollars because interest payments on the giant borrowings are deductible as a business expense.

The RJR buyout aroused anxieties even in the investment community, where some executives feared that the Johnson-initiated scramble would swallow up too much of the available money for deals and, moreover, give mergers and LBOs a bad name. "This is the sort of excess that investment bankers have worried about for years," said economist Robert Reich of Harvard's John F. Kennedy School of Government, "because it so clearly exposes the greed and rapaciousness of so many of these takeovers." Martin Weinstein, managing director of Kubera, a Wall Street arbitrage firm, concurred: "Do I sense fear? Yes. At some point there is going to be a rebellion against greed."

The first sign of revolt, interestingly, came from the outside directors who had come to dinner at the Waverly Hotel. Appalled by the gall shown by Johnson, whom one director called a "raider from the inside," a committee of five directors three weeks ago opened the bidding to all comers. First to accept the invitation were the most aggressive LBO artists of all, the Wall Street firm of Kohlberg Kravis Roberts. Headed by Henry Kravis, 44, and George Roberts, 45, KKR pioneered the leveraged buyout in the 1970s and nurtured it into one of the best-paying financial arrangements of the decade.

Many Wall Street insiders thought the KKR bid was as self-serving and hasty as Johnson's offer had been. "They broke the golden rule by injecting their egos into a business decision," said one financier who knows KKR well. "They went after RJR Nabisco to protect their franchise as the largest dealmaker."

The directors' invitation attracted a third and scrappy new bidder who helped turn the fight into a virtual Who's Who of finance and industry. Assembled by the First Boston investment firm, the group of newcomers included Jay Pritzker, the Chicago-based chairman of Hyatt Corp., his wealthy family and Philip Anschutz, a Denver oil billionaire. First Boston also wooed Harry Gray, the retired chairman of United Technologies, and several other high-rolling investors. The group came into the bidding with a showstopping but tentative offer of cash and securities worth up to $26.8 billion, or $118 a share, for RJR stock that traded for $56 a share in mid-October.

That bid, quickly dubbed a "Chicago submarine" because it would torpedo the competition, easily surpassed both rival offers. The Johnson team had bid $23 billion, or $100 a share, while KKR had proposed a package worth $21.6 billion, or $94 a share. Board members extended the deadline until Tuesday, November 29, to take any counteroffers and allow time to study each proposal. If none is accepted, the directors could supervise an RJR restructuring themselves.

The donnybrook was only the most colossal of the deals that persisted last week in rearranging the U.S. corporate landscape. Hospital Corporation of America, the nation's largest hospital chain, ended more than a month of dickering and agreed to be acquired for $3.6 billion in an LBO put together by the company's management. Triangle Industries, which just two years ago acquired the packaging division of American Can in an LBO, agreed to be bought for $1.3 billion by Pechiney, the state-owned French metals firm.

Leveraged buyouts seemed like a small-time, unglamorous financial gimmick when KKR began hawking them on Wall Street in the mid-1970s. But the arrangements were an immediate hit with managers who saw the wisdom of taking their companies private to escape corporate raiders. LBOs were also a boon to promising firms that wanted to grow outside Wall Street's harsh spotlight.

Perhaps the most attractive feature of LBOs is that they give managers a sizable chunk of equity in newly structured companies. By using borrowed money to buy out the stockholders, executives can cash in their old shares at a profit even as they become owners of their firms. The managers are then free to sell parts of the business at a handsome profit. The ultimate payoff comes when they put their companies back on the market. The sale of well-run corporations can return up to 100 times the amount of a manager's original investment. With investors lured by such prospects, the value of completed LBOs soared from just $13.4 billion in 1984 to $76.8 billion so far this year. Since 1985, four of the ten largest LBO acquisitions have been made by KKR.

Some deals have fallen short of their fanfare. KKR hailed the purchase of Beatrice as the "deal of the century," but wound up getting stuck with businesses that have not yet found buyers. "Beatrice was over-advertised as a spectacular deal when it was really just a good one," said one investor. "Everybody's making money; they're just not making as much money as they thought they would, or as fast as they could."

At RJR Nabisco, the benefits of LBOs were hardly lost on Johnson. Born in Winnipeg, Manitoba, he had parlayed a keen eye for a deal and the nerves of a gunslinger into the top job at three major corporations. He was president of Standard Brands, the producer of Planters nuts and Baby Ruth candy bars, when it merged with Nabisco in 1981. Four years later, as Nabisco's president, Johnson sold out to RJR Reynolds for $4.9 billion and soon became president of the merged company. After adding the title of chief executive officer in 1987, he swiftly moved RJR Nabisco headquarters from Winston-Salem to Atlanta, sold the Heublein liquor business and slashed the corporate staff from 1000 to 400. The dapper Johnson, a friend of such sports figures as hockey star Bobby Orr and broadcaster Frank Gifford, is described as a "charmer" by one associate. Another warned that when the boss was displeased, "swift as a sword, he would chop your head off."

Amid the brawl for his company, Johnson has remained aloof from most outsiders and workers at RJR Nabisco headquarters in the elegant Galleria complex north of Atlanta. "We don't know what is going on," says an employee. "Some of us are going to lose our jobs, but we don't know who, or where." Feelings of helplessness were hardly confined to the South. Said a 15-year employee at an RJR Nabisco cookie plant in Fair Lawn, New Jersey: "When you're at the bottom of the ladder and you got money men at the top, you take it one day at a time."

Whoever wins the grab for RJR, a highly leveraged takeover could add more debt to the U.S. economy than any previous business deal. All told, corporate debt has climbed from some $965 billion in 1982 to $1.8 trillion this year, a rise from 32% to 37% of U.S. gross national product. LBOs can be especially worrisome of borrowing, because they replace virtually all of a company's equity with IOUs that must be repaid. A sudden downturn can thus put a firm heavily in hock out of business. "High leverage is unsafe, not just for a company but for the entire economy," says MIT economist Franco Modigliani, a Nobel laureate. Modigliani adds that while the debt mountain has not yet grown perilously high, "LBOs are reducing the safety. Management loses the power to do many things. It has no margin for error and less margin for additional risk."

A company mired in debt can ill afford to build new plants or develop new products, since most of its earnings go to pay off borrowings. The shortage of investment can then dampen U.S. growth and damage the ability of American firms to compete abroad. In a slump, the impact can be dramatic. A study by the Washington-based Brookings Institution, a liberal think tank, estimated that a new recession could jolt 10% of major U.S. companies into bankruptcy.

Bankers, too, are taking a harder look at the risks, and some junk bond buyers are becoming picky. While cash has poured in from such staid investors as the Harvard and Yale endowment funds and many state pension plans, other money managers are refusing to play. Says New York City comptroller Harrison Goldin, who oversees the investment of some $30 billion in pension funds: "I cannot condone activities that divert so much time and energy from investments that create new jobs and opportunities to those that reshuffle chairs. Pension fund managers are supposed to invest in the American economy."

While that may be true, even the U.S. tax code is a strong ally of LBO artists. Since the interest on junk bonds and bank loans is tax deductible, companies like RJR Nabisco can borrow at Government expense. Some - but not all - of the Treasury's loss can be recouped from capital gains taxes on the profits of shareholders who sell their stock.

The way the tax code treats stock profits is another plus for LBOs. Corporate earnings are taxed twice: they are first paid to stockholders out of a company's after-tax profits, and the shareholder then pays taxes on the dividends. "There is no question that our tax laws have a bias toward debt that must be rectified," says a top congressional aide.

The buyout binge produces some big-time losers as well, particularly investors who owned a company's top-quality bonds when the same firm's junk bonds hit the market. Since the new IOUs would saddle the company with a riskier load of debt, the old bonds get clobbered. No sooner had Johnson disclosed that he wanted to buy RJR Nabisco, for example, than the company's $5 billion of outstanding bonds lost 20% of their value. Furious bondholders, including Metropolitan Life and ITT, immediately sued for damages. Declared Metropolitan Life chairman Creedon: "No one in his right mind wants to invest in corporate bonds anymore." In fact, the LBO binge has created a financial innovation called the "poison put," which guarantees bondholders against the risk of buyouts and other unexpected deals that might depress their holdings.

Shareholders can lose out in LBOs even when they sell their stock for a profit. That is because stockholders usually receive far less than executives make when they break up a company and then put it back on the market. LBO critics argue that managers who fatten their wallets in this way are really profiting at the expense of other stockholders. So far, shareholders have brought eleven class action suits against RJR Nabisco charging executives with acts ranging from "unfair self-dealing" to "not acting in the best interests of the stockholders."

The RJR deal also raises the salary competition among executives to absurd levels. Says John Swearingen, former chairman of Standard Oil of Indiana: "There is a limit to what managers ought to be paid for managing other people's money." Adds a top executive involved in a current takeover: "The yardstick for compensation has just gotten twelve inches longer. The chief executive who's doing a first-class job running a major U.S. corporation for $890,000 a year is going to start thinking he's some kind of a fool."

Washington lawmakers readily recognize the populist sentiments aroused by the spectacle. "What's going on is corporate cannibalism," says Congressman Edward Markey. "We have to ask whether it is in the national interest to allow companies to go so heavily into debt." As chairman of a House subcommittee that covers finance, the Massachusetts Democrat will play a key role in drafting any legislation to curb LBO excesses when Congress reconvenes next year. But lawmakers are uncertain how to limit buyouts, or even if they should.

Washington's reformers concede that the stock market is still edgy after its collapse. Wall Street showed just how nervous it was when stocks dropped nearly 79 points in the week that George Bush was elected President. "Nobody wants to be blamed for setting off another stock market crash," says a brokerage house lobbyist. Legislators are still haunted by charges that proposals to restrain takeovers last year helped cause Black Monday. Many Wall Street insiders are now convinced that buyouts and mergers are among the market's few remaining props.

Yet Congress cannot ignore growing public fears that greed, debt and buyouts are all spiraling out of control. "The dealmakers have gone too far," says Samuel Hayes, professor of finance at Harvard Business School. "They have defied that tolerance that allowed them their freedom." Federal Reserve chairman Greenspan urged the Senate in October to consider tax law changes to curb the debt buildup. Said he: "The laws still provide substantial incentives to borrow."

House Speaker Jim Wright last week urged steps to slow the pace of buyouts, which he said were having a damaging "psychological and economic impact." Meanwhile, members of the Senate Finance Committee have been quietly pondering measures that would reduce the tax loopholes for interest payments and give a break to dividends. To cushion the Wall Street impact of such provisions, they might be included as part of a general tax bill that would seek to narrow the budget deficit.

LBOs do have some strong defenders, and not just among the executives who grow rich from them. Some financiers and economists argue that increased leverage can be a benefit to companies, especially those in mature industries like tobacco. Reason: these businesses produce a lot of cash but call for relatively little research or development. For them, one efficient way to distribute profits to shareholders is simply by buying up stock.

Proponents say many companies have become stronger than ever after being taken over and reorganized. The point is driven home in a study by Abbie Smith, a University of Chicago economist who surveyed 58 acquired companies - among them, R.H. Macy, Mary Kay Cosmetics and Uniroyal - most of which had been bought out since 1984. The findings indicated that the firms were generally more profitable and productive after they were bought.

Even so, the results underscored a common criticism of the motives for buyouts. Richard Thevenet, vice president of Stern Stewart & Co., a Manhattan- based management efficiency consultant, put it bluntly: "Managers have an incentive to underperform before a buyout. Records of dramatic turnarounds after an LBO raise a troubling question. Why were these managers unable to accomplish these feats before the LBO? Shareholders bear all the costs, but not the rewards of the turnaround."

American business is built on a rock of lawfulness and trust between companies and those who hold a stake in them. But when avarice grows out of proportion, cracks start to appear in the foundation. "Greed can be good," says MIT's Modigliani, when it spurs profitable and productive growth. "But it can also be bad," he warns, when it outpaces all other considerations.

In the fight for RJR Nabisco, that seems to have happened in spectacular fashion. No matter how the battle turns out, the unseemly scramble for riches has, for the moment at least, given overreaching a bad name. In the end, the RJR brouhaha may turn out to be a useful testing of the limits: of greed, of debt, of dealmaking. The resulting outcry may prove an effective regulating device. "In its own way, the deal has been typically American, where nothing is in moderation, including the enormous selfishness of management," notes James Bere, chairman of Borg-Warner. "It's touched a nerve. Sometimes we have to do things in extremes before we can put the total in perspective." Without that perspective, the wages of greed may be a less productive and ever more debt-ridden economy.


"A Heap of Woe for the Junkman," by Barbara Rudolph, Time, December 5, 1988

Bond whiz Milken prepares for criminal charges

The battle to control RJR Nabisco has pitted some of Wall Street's most powerful investment houses against one another, but the financial muscle behind the bidding is really the legacy of one man: Michael Milken. It is not just that Milken's firm, Drexel Burnham Lambert, is bankrolling the Kohlberg Kravis Roberts bid to the tune of $5 billion. Milken's role is much grander and far more controversial. The boyish moneyman with the tousled toupee and the obsessive work habits has almost singlehandedly sparked the frenzy of takeovers and buyouts that has given the Roaring Eighties their name. And his tactics along the way may put him behind bars as a result.

It is Milken who created and has dominated the market for junk bonds, the high-octane financial fuel that powers many of today's most daring Wall Street deals. The volume of these bonds has zoomed from less than $1 billion in 1981 to more than $175 billion today. In the process, Milken, 42, has amassed a fortune of at least $500 million and a reputation as the most influential financier since J.P. Morgan.

The RJR Nabisco showdown may prove to be one of Milken's final moments of glory. He and Drexel are expected to be slapped any day now with criminal indictments accusing them of racketeering, mail fraud and other crimes. The charges would stem from two years of federal investigations that prompted the Securities and Exchange Commission to file a civil suit against Milken and Drexel in September, accusing them of 18 transactions including stock manipulation and other securities law violations. Says a close associate of the embattled dealmaker: "Two years ago, Milken was on top of the world. Now it has crashed down upon him."

The expected criminal charges could heavily damage Drexel, the fifth largest U.S. investment firm and the fastest-growing powerhouse on Wall Street. Rudolph Giuliani, the U.S. Attorney for the Southern District of New York, is likely to follow the SEC in accusing Drexel and Milken of collaborating with convicted arbitrager Ivan Boesky to defraud the firm's clients, trade on insider information and conceal the true ownership of stocks - all, presumably, in the pursuit of greater profits and power. Milken's lawyers, for their part, accuse the government of a vindictive campaign based solely on self-serving testimony by Boesky. The potential racketeering charges against Drexel could hit the firm even harder than the civil suit, because federal law - the Racketeering-Influenced and Corrupt Organizations Act, or RICO - would enable prosecutors to freeze a major portion of Drexel's assets.

The charges have triggered a vigorous debate over Milken's role in 1980s finance. Is he a megalomaniac who has built a tottering tower of corporate debt? Or is he a financial genius whose funding of unsung, mid-size industries greatly overshadows his role as a takeover player? He has many defenders among buyers and users of his junk bonds. Says MCI chairman William McGowan, whom Drexel helped raise $2.4 billion for building long-distance telephone lines: "When we first went to Milken, we were not even qualified for junk bonds, but he was able to help us. People went to him because the rest of the financial establishment was turning away companies like ours."

The son of an accountant, Milken grew up in California's San Fernando Valley, only about a dozen or so miles from his current headquarters. In high school, after he was benched as a member of the varsity basketball team, he became head cheerleader instead. Reflecting on those years during a recent interview with TIME, Milken mused, "When things look their worst, you always have the seed of great improvements." At Berkeley during the mid-'60s, Milken concentrated on math and business courses rather than on protest. It was there that he first considered the far-reaching idea upon which he built his empire. Milken came across a study showing that junk bonds, which at the time were often called fallen angels because they were the downgraded debt of ailing companies, actually represented a lucrative investment for those who bought them.

As a graduate business student at Pennsylvania's Wharton School, Milken made junk bonds a focus of his scholarship. Despite their reputation for high risk, he found that the securities showed a history of few defaults. Milken believed the securities' relatively high yields, typically 3% to 5% more than an investment grade corporate bond, were more than enough compensation for that slightly increased risk.

Milken never put his big idea or his ambition aside. As a trader for the old-line Philadelphia firm of Drexel Firestone in the mid-'70s, he scorned colleagues who hewed to tradition and "spent from 11:00 to 2:00 at the racquet club." The dogged Milken soon discovered that junk bonds could provide much needed capital for medium-size companies that were unable, because of their size, to issue investment grade debt. Other firms, notably Shearson Lehman Hutton, had already tried minting bonds that were high yield from the outset. But Milken was the first to build a market for the bonds by finding hungry customers among institutional money managers, who must constantly search for higher returns on their investments.

Milken's junk bonds remained innocuous until the mid-'80s, when he began using the securities to raise mountains of money for hostile takeovers. In fact, the preferred opening salvo of corporate raiders became the dreaded letter from Drexel in which the firm stated it was "highly confident" of coming up with the necessary cash. In some cases, like T. Boone Pickens' failed bid in 1984 for Gulf Oil, Drexel charged a hefty fee for lining up money that it never had to deliver. But in many other raids, including Ronald Perelman's 1985 takeover of Revlon, Milken raised billions through his network of buyers. Before long, Milken's annual junk bond conference became known as the Predator's Ball.

Milken's junk bond department, which he moved from Manhattan to Beverly Hills not long after he formed it a decade ago, quickly became the engine of the Wall Street firm's furious growth. One reason is that junk bonds earn hefty fees: Drexel charges 3% to 4% of an offering's total value, compared with a fee of less than 1% for a higher-grade issue. Milken's web of buyers and sellers for the bonds has given him a virtual lock on the market, though the entry of such competitors as Morgan Stanley and First Boston has whittled Drexel's market share from a monopoly in the late 1970s to about 50% today. For his huge contribution to Drexel's bottom line, Milken has pocketed bonuses of as much as $200 million in a year and accumulated the largest individual stake in Drexel: a 6% share consisting of stocks and warrants worth $90 million.

Though Milken's title is only senior executive vice president, he has set Drexel's tone and direction during the past decade, according to many who deal with the firm. But his yen for control and lack of regard for convention, which served him so well in staking out his new financial realm, may have been what led him to allegedly illegal tactics. Says journalist Connie Bruck, author of the 1988 book on Drexel titled The Predator's Ball: "For years he's been a law unto himself. He has disdain for the way the world works. He figures he's waging a holy war."

Milken now spends nearly a third of his time working on his legal defense but otherwise maintains his characteristic workaholic schedule. After arriving at his office at 9560 Wilshire Boulevard by 4:30 AM each day in a chauffeur-driven Mercedes, Milken holds forth in a trading room the size of a basketball court. He has no private office, preferring to sit at one of three huge, X-shaped desks, where 30 bond traders and other workers shout into telephones and scramble to execute the orders that he barks out or scrawls on yellow legal pads. On the computer terminal next to his, a coworker has posted a sign reading MENTAL ILLNESS IS ESSENTIAL TO SUCCESS.

The barrage of negative publicity during the past two years, starting when the Boesky case broke in 1986, has been tough on Milken's family. "The Michael Milken portrayed in the press is not the man I know and live with," said his wife Lori. Milken and Lori, who was his high school sweetheart, live quietly with their three children (Greg, 15, Lance, 12, Bari, 7) in Encino. Their five-bedroom house, which might sell for $3 million, was once occupied by Clark Gable and Carole Lombard. It is a suburban idyll trimmed by red and white Impatiens, finished inside with dark oak paneling and filled with photographs of the children.

Once extremely private, Milken has sought to improve his public image by appearing at charitable functions on both coasts and bidding reporters to "call me Mike." Last year Milken and his wife donated $198.1 million to the family's three charitable foundations, more than a sixfold increase from the previous year. Less than $15 million of these funds was actually disbursed, going to some 200 organizations. The remainder was invested by the foundations. That is perfectly legal, but the California Attorney General's office began this month to investigate the Milken foundations' activities for possible irregularities.

If Milken is indicted on the racketeering charges, his workdays may become devoted to legal defense. Drexel could ask him to resign or take a leave of absence, while the investment firm would pay a fine to settle its own charges. The company has set aside more than $500 million for legal costs, and could spare $1 billion without dipping into its bare minimum of capital. Under racketeering charges, the government could freeze so much of Drexel's assets that the company would be paralyzed, but prosecutors may want to avoid a punishment that would cost innocent workers their jobs. Drexel is taking no chances: the firm already has 115 lawyers assigned to its case, compared with a total of about 35 at the SEC and the U.S. Attorney's office.

The investment firm may also be contemplating major changes in its executive suites. Drexel officials have approached former Senator and White House chief of staff Howard Baker with the idea that he become Drexel's chairman. According to one rumored scenario, Baker would take over after both Milken and Drexel chief executive Fred Joseph stepped aside.

Milken's legacy will take years to come fully into focus. "Behind every great fortune there is a great crime," Balzac once said. "Great fortunes are made by solving problems" is the way Milken has preferred to see it. The government's view should be known in a few weeks. The true value of junk bonds will take longer to determine.


"Trump's Interest In Caesars Sparks Confusion," by Rick Sandoval, United Press International, December 14, 1988

Investor Donald Trump's mysterious interest in buying a large stake in Caesars World Inc. was met with increased trading on the New York Stock Exchange Wednesday but also sparked some confusion.

A source close to the Trump Organization in New York said in a telephone interview that all the excitement may be premature because Trump is not likely to pursue controlling interest in Caesars World.

'The letter was standard language,' the source said, adding that Trump's request with federal regulators to buy 15 percent of the gaming company was done merely as an investment move.

Caesars World Inc., which owns hotel and casino resorts in Nevada, Atlantic City and New York, was the center of attention among investors Wednesday. Late afternoon trading was heavy - more than 1.3 million shares - and the share price had risen more than $4.50 to just over $29 a share.

Tuesday night Trump notified Caesars World and the Securities and Exchange Commission that he not only intended to buy a stake in the Los Angeles company, but, "in addition, it is possible that the acquiring person may decide to seek control."

Caesars World officials in Los Angeles would not comment on the letter, which they said was confusing.

"We're actually just waiting for Mr. Trump now," said Roger Lee, Caesars World chief financial officer. "His intentions certainly are not clear right now."

Industry analysts have said Trump is interested in entering the Nevada casino scene. But the fact that Caesars also owns an Atlantic City casino is a roadblock.

According to New Jersey Casino Control Commission rules, no one can own more than three gaming resorts, and Trump already owns two and has announced plans for a third. He would have to sell one in order to own Caesars World's Atlantic City casino, which was the top revenue winner on the Boardwalk last month at $24.9 million. Trump Plaza was second at $23.5 million. Furthermore, Trump received warnings from the CCC after he made takeover feints at Holiday Inn and Bally's by buying stock, then both companies bought out his stakes at a premium after certain restructuring to ward off potential takeover, which had the appearance of greenmail; the Caesars run looks quite similar to those.

Wednesday's pressure on Caesars World stock is a new surge in what has been a positive upswing in the company's stock value. Industry analysts believe it would cost more than $1 billion to buy up Caesars, at roughly $43 a share.

Caesars directors also see their company as a good investment. Last week they authorized the repurchase of up to 3 million shares of its common stock, which at the time was going for $24.50 a share.

Caesars World's Lee said the repurchase is not an attempt to ward off any takeover attempt.

"We had no pre-knowledge of any moves by anyone toward us," Lee said. "That repurchase was approved strictly because the company directors believed the stock price was right and was a good investment."


"Company News; Trump Plans To Build Caesars World Stake," by Robert J. Cole, The New York Times, December 15, 1988

Donald J. Trump owns a substantial amount of stock in both Caesars World Inc. and MCA Inc. but is unlikely to try to take over either company, people close to the New York real estate developer said yesterday.

A friend of Mr. Trump added that the developer has ''a couple of other investments'' and that ''these might be the ones he goes after.'' One company is ''in the publishing industry'' and the other is ''very real estate oriented,'' he said, but refused to identify the companies by name.

Mr. Trump's purchases of Caesars stock, believed to total around 600,000 shares, became known Tuesday night after the casino operator announced that it had received notification from Mr. Trump that he was seeking government antitrust clearance to buy more than 15 percent of the company.

After the disclosure, Caesars stock soared $4.125 yesterday, to $29.375, on the New York Stock Exchange.

Mr. Trump's stake in MCA, thought to be as much as 1 or 2 percent of the company, has been known since at least February, when the developer said he might seek as much as 25 percent of the entertainment company. MCA, a perennial takeover target, slid 75 cents, to $45.625.

People close to Mr. Trump said he had accumulated more than $1 billion in cash from his casino and real estate interests and was putting some of the money into stocks because he regarded them as good investments.

His holdings are not public, but Mr. Trump is thought to have bought his MCA shares over the last year in the high 30s. His Caesar block is understood to have cost around $21.50 a share, or about $13 million, giving him a paper profit on the stock at this point of nearly $5 million.

In its announcement of the Trump move, Caesars said Mr. Trump had notified the company that he ''has the good faith intention'' to buy more than 15 percent of its outstanding stock and might buy 50 percent or more.

Caesars operates a casino in Las Vegas, Nevada, another in Lake Tahoe, Nevada, and a third in Atlantic City. Mr. Trump has two casinos in Atlantic City, and by 1990, when his Taj Mahal is completed, he will have three.


"Minkow Is Convicted On All Charges: Jury Decides That ZZZZ Best Founder Masterminded Fraud," by Kim Murphy and Ronald L. Soble, Los Angeles Times, December 15, 1988

Barry Minkow, who became a teenage millionaire after he launched a carpet cleaning company in his parents' garage, was convicted Wednesday of 57 fraud counts for masterminding a sophisticated securities swindle that propelled his firm into a hot Wall Street commodity.

A federal court jury found Minkow, 22, guilty of all charges in an indictment that alleged that the ZZZZ Best carpet cleaning company bilked investors-including some of the most prestigious financial institutions in the country-out of more than $26 million in loans and stock offerings by bolstering its books with phantom earnings.

Prosecutors alleged that the charismatic, fast-talking young salesman engineered a classic sting operation-complete with faked documents, staged phone calls and even rented office space hastily outfitted as job sites-to persuade investors that ZZZZ Best was making $43 million a year restoring buildings that had been damaged by fire or flood.

Most Jobs Didn't Exist

In fact, Minkow himself later admitted, 90% of the restoration jobs never existed. But Minkow said he was forced to go along with the scam by organized crime figures who had infiltrated ZZZZ Best.

The verdicts interrupted a last-minute round of plea negotiations, launched Wednesday morning at Minkow's request over the objections of his attorney. Minkow reportedly had been talking from prison over the last several days with a "spiritual counselor" and had become determined to plead guilty, despite his lawyer's belief that he might prevail, perhaps on appeal.

Minkow, who now faces up to 403 years in prison, sat quietly as the 57 guilty verdicts were read over a period of more than 20 minutes Wednesday afternoon, and apologized to reporters when his attorney would not let him speak afterward.

Throughout the nearly four-month trial, Minkow admitted his role in the ZZZZ Best fraud but claimed that he had no choice because various mobsters beat him and threatened him into cooperating in their criminal ventures once he began borrowing money from them.

"I was just a puppet," he testified at one point, describing how several of the men held his head in a sink full of water and beat him until he vomited blood. "I was a frontman for the mob."

Even Minkow's attorney admitted that the defense was a risky attempt to persuade jurors that Minkow had committed numerous crimes in fear of his life or the lives of his family over a period of several years. In order to acquit him, jurors would have had to conclude that he had no opportunity to escape from the men he said were threatening him from the time the fraud began in March 1985, until ZZZZ Best folded more than two years later.

Ultimate Sales Job

For Minkow, the defense was perhaps the ultimate sales job, an attempt during nearly 10 days of testimony to persuade jurors that after three years of lies and double-dealing at the helm of ZZZZ Best, he was at last telling the truth.

"It's easy to convince people of a lie, but to convince people you're telling the truth is difficult," he testified at one point.

Minkow's past shadowed him throughout the trial, as prosecutors presented constant images-via videotapes, photographs and testimony-of the life style financed by the schemes he claimed were forced on him.

One witness testified about an elaborate, poolside doghouse with vaulted ceilings he built on Minkow's instructions. Another told of thousands of dollars Minkow spent hiring spectators to cheer on the women's softball team he sponsored. A former New York financial officer related how she lost her job when she approved a loan for Minkow after he flew her to California and took her out to a romantic, seaside dinner.

Prosecutors played a videotape of Minkow's televised anti-drug campaign-"My Act Is Clean. How's Yours?"-then introduced evidence that Minkow had used cocaine himself and supplied money for employees to buy the drug; they also showed that his bodybuilding physique was clearly enhanced by anabolic steroids.

The defense also was stung by a series of rulings from U.S. District Judge Dickran Tevrizian, who refused to allow evidence that one of the alleged organized crime figures Minkow claimed had engineered the fraud, Encino financier Maurice Rind, had been convicted of stock fraud in the past.

Tevrizian also barred the defense from presenting any evidence about previous racketeering and extortion convictions of many of those involved at ZZZZ Best, as well as evidence that they had threatened other ZZZZ Best employees. The result, defense lawyer David Kenner said, was that jurors never had a fair chance to evaluate whether Minkow's fear of his associates was reasonable.

"I think the court had to wrestle with some very difficult legal principles, and I think these principles will be reviewed (on appeal)," Kenner said, adding that neither he nor Minkow were surprised by the verdicts.

"I think Barry was realistically aware of the fact that the nature of the duress defense made an acquittal unlikely, given the state of the evidence" permitted by the court, he said.

But he said the jurors' verdict against Minkow on all 57 counts "means they listened to the argument. I told the jury that Barry was either guilty of everything, or not guilty of anything."

Prosecutors belittled the duress defense, indicating that they were armed with nearly a dozen former ZZZZ Best employees and associates who were ready to testify that Minkow was calling the shots and enjoyed relatively friendly relations with many of the men he claimed to fear, regularly sitting around in his underwear with one of them, smoking cigars.

During closing arguments, the prosecution characterized Minkow as a "natural predator" and a "pathological liar" whose motivation was not survival but power, prestige and money.

"I think what we can rely on is what the jury said 57 times: no duress," Assistant U.S. Attorney Gordon Greenberg said after the verdicts.

The co-prosecutor in the case, Assistant U.S. Attorney James R. Asperger, said the government was pleased with the verdict and plans to seek a "substantial" jail term for Minkow at his sentencing February 21.

After the verdict, jurors continued deliberating on a second defendant in the case, Marina del Rey accountant Norman Rothberg, 52, accused of accepting a $25,000 bribe for recanting information about the ZZZZ Best fraud that he had given to the company's outside accountants.

Besides Minkow and Rothberg, 10 others were charged by a federal grand jury with assisting in the fraud at ZZZZ Best. All 10 pleaded guilty.

Minkow had appeared to be a classic American success story. He was widely portrayed in print and on television as a working-class youth who built a carpet cleaning empire from scratch through determination and hard work, the "Rocky of Rugs."

At 15, he started ZZZZ Best in his family's Reseda garage with three employees, four phones and $6,200 saved from evening and summer jobs. He said he picked the name "ZZZZ Best" so there was one "Z" for each of the four children he ultimately planned to have.

As his business grew, so did Minkow-literally. Angered by the bullying he had to endure as a young man, Minkow said, he became a serious body builder, working out at the San Fernando Valley gymnasium where he eventually met two of the men who would later go on to participate in the ZZZZ Best fraud.

He was portrayed by associates as a vain, self-conscious young man who surrounded himself with expensive cars and beautiful women, and insisted that all employees-even his mother-call him "Mr. Minkow." He promoted his success story through a self-published autobiography, a public relations firm, large contributions to charity and participation in anti-drug campaigns. He also became something of a public figure by starring in his company's television ads-promoting ZZZZ Best as a "clean" alternative to dishonest carpet cleaners.

In late 1985, Minkow began to display his growing wealth. He paid $698,000 for a large Mediterranean-style home in a gated community in Woodland Hills and drove a red Ferrari.

In January 1986, ZZZZ Best became a public company and in early 1987, with its reported revenue soaring, the firm's stock rose from $4 a share to more than $18. Its rapid rise created paper fortunes for many, including its founder. Minkow's holdings alone were valued at more than $103 million by the time he reached the age of 21.

The company grew to have 21 offices and 1030 employees in California, Nevada and Arizona.

But banks and others who had loaned ZZZZ Best money began scrutinizing the company after The Times disclosed in May 1987, that it had overbilled customers by $772,000 by inflating their credit card charges.

Minkow resigned, ZZZZ Best entered Chapter 11 bankruptcy proceedings in July 1987, and the remaining board of directors sued Minkow and some of his associates, alleging fraud and theft.

That same month, Los Angeles Police Chief Daryl F. Gates told a news conference Minkow's company was under investigation for laundering drug profits for East Coast organized crime families. None of the ZZZZ Best defendants in the federal indictment were charged with this, however.

Federal and local authorities have said that they are continuing what they call the organized crime phase of the ZZZZ Best case.


"The Media Business: Advertising; Warner Merges With Lorimar," The New York Times, January 12, 1989

Warner Communications Inc. said yesterday that it had completed its long-delayed $1.2 billion merger with the Lorimar-Telepictures Corporation in the wake of the sale by Lorimar of its last television station.

The merger of the two entertainment concerns had been delayed since last fall because of a court ruling that prohibited Warner from proceeding with the deal until Lorimar sold its television stations. On Tuesday Lorimar completed the sale of the last of its stations, WPGH in Pittsburgh.

Under terms of the merger agreement, Lorimar becomes a wholly owned subsidiary of Warner and each share of Lorimar stock has been converted into the right to receive 0.3675 share of Warner stock.

Lorimar has about 46 million common shares outstanding, and these can be converted into about 17 million Warner shares. At Warner's current stock price of $37.50, the swap is worth about $635 million.

In addition, Warner will assume Lorimar's debt of about $600 million. Lorimar, based in Culver City, California, is a major producer of television programming including the shows Dallas and Alf. Warner, based in New York, is a leading producer of movies, television shows and recorded music.


"Warner Completes Merger With Lorimar-Telepictures," by Al Delugach, Los Angeles Times, January 12, 1989

It was, as they say, the end of an era. Lorimar-Telepictures Corp. at last was merged Wednesday into the entertainment mammoth Warner Communications Inc.

Lorimar, which made its reputation producing Dallas and other television series, will survive as a Culver City subsidiary doing what it has always done best: TV.

What it has done with notable lack of success-making movies, especially-has been wound down during the many months that the merger has been impending.

The final impediment to the merger was eliminated Tuesday with the closing of the sale of Lorimar's last television station, WPGH in Pittsburgh. The sale of Lorimar's stations had been forced by the terms of a previous agreement between Warner and its largest shareholder, Chris-Craft Industries.

Red Ink From Movie Losses

Many Lorimar employees whose functions became redundant under the merger have long since departed or given notice, and the distribution arms of both companies have been merged, Warner spokesman Geoffrey Holmes noted. In coming months, corporate staffs will be consolidated, but he did not estimate how many more layoffs would result.

Merv Adelson, chairman, chief executive and a founder of Lorimar, is expected to be elected a Warner director and vice chairman at the New York company's next board meeting.

Part of Lorimar's legacy will be the copious red ink from movie losses, with a cumulative writedown of about $254 million on the value of film inventories, according to a regulatory filing by the firm.

Although Warner is known for being one of the industry's most conservative companies in movie accounting, the magnitude of the inventory reductions has startled some observers.

Because of the massive writedowns, securities analyst Lisbeth Barron of McKinley Allsopp Securities in New York said, a major financial effect of the merger will be a near-term reduction of the combined company's operating income from filmed entertainment.

Ancillary Markets

However, she said, the writedowns will enable future income from ancillary markets for both movies and TV series to go "directly to the bottom line." As a result, Barron expects Lorimar to stop diluting Warner's earnings after this year and to contribute "substantially" to its 1990 earnings.

Ancillary markets for films include foreign theatrical, home video, basic and pay cable, and local and network TV. Those for TV series include rerun syndication on local stations and basic cable networks.

Under the merger, each Lorimar share is to be swapped for 0.3675 share of Warner-a $13.64 value, based on Warner's closing price Tuesday of $37.125. Lorimar's last trade that day was $13.375.


"Time Inc. and Warner to Merge, Creating Largest Media Company," by Floyd Norris, The New York Times, March 5, 1989

Time Inc. and Warner Communications Inc. announced yesterday that they plan to merge, creating the largest media and entertainment conglomerate in the world.

Time's chairman, J. Richard Munro, said the new company would seek to grow even larger by acquiring other businesses.

Time is a leading book and magazine publisher with extensive cable television holdings, and Warner is a major producer of movies and records and has a large cable television operation. The merger would create a new company, Time Warner Inc., with a stock market value of $15.2 billion and revenue of $10 billion a year.

A Place in 1990s

The merger would insure Time Warner a place in the 1990s as one of a handful of global media giants able to produce and distribute information in virtually any medium. The companies said the deal would help the United States compete against major European and Asian companies.

''Only strong American companies will survive after the formation of a unified European market in 1992,'' said Steven J. Ross, chairman of Warner.

The merger, involving an exchange of stock in which no cash would change hands, was billed as a merger of equals in which Mr. Munro and Mr. Ross would have the same power as co-chairmen and co-chief executive officers, but of which Time's president, N.J. Nicholas, Jr., would eventually take control.

Time Warner would replace Bertelsmann AG, a privately held German publisher known primarily for its book division, as the world's largest communications company in terms of revenue. Bertelsmann's 1987 revenue was more than $6 billion.

The merger was unanimously approved by the Time board, but there was one abstention on the Warner board. A Warner official said Herbert J. Siegel, chairman of Chris-Craft Industries, who is a frequent critic of Mr. Ross, was the holdout. Mr. Siegel could not be reached for comment.

The agreement is subject to approval by shareholders and by government regulatory agencies.

A Difficult Takeover Target

The merger would unify two huge media companies that have felt the pressure of demands for performance and have long been the subjects of takeover rumors on Wall Street. The much larger merged company would be a more difficult takeover target.

''Neither of these companies was forced into doing anything,'' Mr. Munro said. ''We both could have survived alone. But this gives us a very strong balance sheet. We won't have to fire anybody, we don't have to sell anything and we don't have to borrow to accomplish this. It gives us a very large treasury - and we have plans to use it.'' The company would have long-term debt of less than $3 billion, leaving ample borrowing capacity for possible acquisitions.

An analyst for Drexel Burnham Lambert Inc., John Reidy, called the deal ''mind-boggling.''

''What you've got is a company that will be the largest magazine publisher in the country, the world's most profitable record company, a cable television entity with more than 5.5 million cable subscribers, one of the world's largest book publishing operations and the country's largest supplier of pay-cable programming,'' he said.

Time's properties include Time, People, Money and Sports Illustrated, as well as Home Box Office, the pay-television operator; Time-Life Books, and Book-of-the-Month Club.

Warner owns Warner Bros., a major film producer, and a large record company, a major paperback book publisher and cable television systems.

Time Board Members Applaud

One person who attended the Time board meeting said that after a day of reviewing financial data, board members applauded when shown a video of Warner programming, including excerpts from its new Batman movie.

People affiliated with both companies said Time and Warner had been discussing a combination for more than two years, ever since Mr. Ross first raised the possibility of a joint venture in cable television. Last year those talks turned to the idea of a merger, but the discussions were broken off in August for reasons that were not disclosed. Geoffrey Holmes, a senior vice president of Warner, said talks were renewed in January after Warner acquired the Lorimar-Telepictures Corporation.

Broadcasters say the merging of one of the nation's premiere producers of programming with the owner of an important cable television system underscores the networks' vulnerability to competition.

''If this merger goes through,'' said George F. Schweitzer, senior vice president for communications at CBS Inc., ''it's another example of how all our competitors can build very powerful communications complexes, while the networks are held back by 20-year-old regulations, which are now increasingly unfair and outmoded.'' The networks are not allowed to own cable television systems.

The proposed company could create television programming, distribute it over its own cable system and syndicate it around the world.

''This is an example of how software suppliers and cable distributors can do things the networks cannot,'' Mr. Schweitzer said.

Companies With Different Styles

Time has long been known for a staid corporate style, while Warner under Mr. Ross has been known as more freewheeling.

But Mr. Holmes discounted the possibility of conflicts between the two organizations.

''People perceive the corporate cultures to be very different, but they aren't,'' he said. ''Both we and the Time management have always believed very strongly in decentralized management. Both companies have a limited corporate staff.''

In 1983, Warner was a takeover target of the News Corporation, the media giant based in Australia and controlled by Rupert Murdoch. To escape that bid, it reached a deal with Chris-Craft giving that company a large stake in Warner. That stake now amounts to 11 percent of the stock and 17 percent of the vote. But the friendly arrangement has soured, with Mr. Siegel opposing a large pay package for Mr. Ross and going to court in an unsuccessful effort to stop Warner's takeover of Lorimar.

The merger was discussed at a Time board meeting Friday and at a Warner board meeting that began Thursday and continued Friday. The announcement was made yesterday in part because a report of the deal appeared Saturday in The Los Angeles Times.

Under the proposal, each share of Warner Communications would be exchanged for 0.465 share of Time, with an indicated market value of $50.74, based on Time's closing stock price of $109.125 a share on Friday. Warner shares were very active in New York Stock Exchange trading Thursday and Friday, rising $2.875 in the two sessions, to $45.875.

The companies said Mr. Nicholas would become president of Time Warner and replace Mr. Munro as co-chief executive when he retires in about two years. When Mr. Ross retires, which is expected in about five years, Mr. Nicholas would become the chief executive.


"Stoddard Quits ABC To Head Special Unit," Los Angeles Times, March 21, 1989

Brandon Stoddard has resigned as president of ABC Entertainment to form a new in-house production venture for Capital Cities/ABC, it was announced today.

Stoddard will head an as-yet unnamed unit that will supply the network with series, movies and miniseries.

NBC already has a similar unit, NBC Productions, headed by Brandon Tartikoff, who also is president of NBC Entertainment. At CBS, Vice President Norman Powell heads CBS Entertainment Productions and reports to Kim LeMasters, president of CBS Entertainment.

Stoddard has headed the entertainment division since 1985; among the current primetime shows that have gone on the air during his tenure are Roseanne, Perfect Strangers, Head of the Class, Full House, The Wonder Years, China Beach, Hooperman and thirtysomething.

Stoddard said he had taken over as head of entertainment reluctantly and promised ABC's then-President Fred Pierce that he would see the network through War and Remembrance, the final segments of which air in May.


"Brandon Stoddard Resigns As Head Of ABC Entertainment: 'It's Just No Fun Anymore,'" by Nikki Finke, Los Angeles Times, March 22, 1989

In a move that caught the television industry by surprise, Brandon Stoddard resigned Tuesday as president of ABC Entertainment, saying "it's just no fun anymore."

Always the reluctant administrator since taking over the top programming position on November 12, 1985, Stoddard will stay on until his successor is named "in a couple of days."

Then he will become president of an as-yet-untitled and much broadened in-house production division at ABC that will supply the network with series, movies and miniseries-a job nearly identical to the one he had before taking over responsibility for the development, production and scheduling of ABC's entertainment programs.

"I guess what this really is about is returning to fun for myself," Stoddard said in an interview. "Many people know that I haven't been the happiest guy in the world in the (entertainment president's) job. I always perceived before taking it, and I'm very aware now, that it's an awful lot of frustration and not a lot of laughs."

Stoddard's resignation came at an awkward time for ABC.

While Stoddard certainly leaves the network in better shape than it was in when he took over, in terms of quality and ratings, ABC is locked in a desperate battle for second-place status with CBS and seems to have lost some of the ratings momentum with which it began the TV season. Some financial analysts predicted that Stoddard's leaving was the first step in an overall ABC executive "housecleaning" because of the entertainment division's mixed performance.

The timing was also deemed curious by the TV production industry, since the networks are currently engaged in the delicate process of selecting and scheduling shows for the fall season.

Meanwhile, some producers who had been brought into the ABC fold by Stoddard expressed dismay about the secrecy surrounding Stoddard's leaving and concern about the future of their projects under a new programming chief.

Even Steven Bochco, whom Stoddard in 1987 had signed to an exclusive six-year, seven-series deal in hopes of having him duplicate the success of Hill Street Blues and L.A. Law, had not known in advance about Stoddard's resignation. The producer-writer had been working closely with Stoddard on the pilot for a proposed show for the fall season.

"I'm stunned and I'm sad. I had a really good relationship with him," said Bochco, who received a phone call from Stoddard two hours after the official announcement was made. "I'd always heard he wasn't 100% happy in that job. But it's his life, and he doesn't owe me anything compared to the overwhelming responsibility he has to himself to feel good about the person he looks at in the mirror.

"Physical stature notwithstanding, his are going to be very big shoes to fill."

Though Ted Harbert, 33-year-old Wunderkind and senior vice president for programming, had been considered Stoddard's handpicked successor, sources inside and outside the network said that the replacement probably will likely come from the business affairs side of the network.

The top contender for the job, several sources told The Times, is Bob Iger, who has been executive vice president of the ABC Television Network Group since August and who made a name for himself as the chief negotiator for most of the network's major sports acquisitions in the mid-1980s. ABC/Capital Cities management was so high on Iger that he was selected for the television group position "without even being interviewed," one source said.

Though Iger, who is based in New York, is not well-known in the Hollywood creative community, ABC sources maintained that he has had considerable programming experience in sports over the years and in daytime entertainment over the last six months.

Stoddard would not comment on the possibility of Iger being selected. But he seemed to indicate that he would not have a large say in choosing his successor.

"That's their call, and they're going to go with the guy they believe in," he said.

Stuart Bloomberg, vice president of comedy development, also was said to be in the running because, as one ABC executive said, "you just have to look at our track record for comedy of late." But sources said Bloomberg instead will be promoted to take charge of series programming while Harbert will move sideways to run current programming and scheduling.

While Stoddard has ordered all the primetime pilots for the fall season-many of them are already in production-he said he is leaving the actual selection of new shows to his successor.

"I felt that the new guy, whoever he is, should have his chance to make his mark on the schedule," Stoddard said. "If I'm invited, then I'll be involved. But I'm really going off to another area. I've even got to find out where the men's room is."

Broadcast analyst Ed Atorino, vice president of stock research at Salomon Brothers, agreed that Stoddard's announcement was timed to "allow whoever is going to replace him to get in place, talk to Hollywood and look at what's in the pipeline and on the drawing board and take responsibility for what's going on next fall. If Stoddard had stayed on till June, he would have had to put together the fall strategy and then walk away."

Stoddard acknowledged that the challenges his successor will face have never been greater for ABC. And he said they're the main reason he decided to quit.

"The network side of the job has been increasingly more difficult and more frustrating, given the changes in network environment and network economy," Stoddard said. "Frankly, it's like swimming faster and faster in a pond that's getting smaller and smaller.

"Since the networks have less audience than they used to, it's more difficult for new shows to get off the ground. And now that the economics of the networks have changed, the fact that NBC is making a lot of money and the two others aren't making much at all is an added pressure."

John S. Reidy, a broadcast analyst at Drexel Burnham Lambert, estimated Tuesday that the ABC-TV network will earn about $100 million this year, compared to nearly $300 million for NBC and $50 million for CBS.

Despite the handicaps, however, Stoddard managed during his three-year tenure to accomplish the objectives he set out when he took over as entertainment chief.

Once derided as the "Almost Broadcasting Company" because of its demoralizing inability to score in the Nielsen ratings or to create quality programming, ABC became a solid No. 2 in the network pecking order under Stoddard's lead. In last November's ratings sweeps, for instance, the Nielsen numbers showed ABC as the only one of the Big Three to gain viewers over the same ratings period the year before.

CBS caught up in the February sweeps with its hit miniseries Lonesome Dove, and the two networks are now running dead even in the season-to-date ratings, well behind NBC. ABC has a decided edge, however, because it has more successful series than CBS.

More important than the raw numbers, however, Stoddard has strengthened ABC's primetime schedule to the point where the network is winning many of its time periods on Tuesday, Wednesday and Friday nights. And he did so with a mixture of comedy-most noticeably Roseanne, the nation's top-rated TV show for the past two weeks-and quality, such as thirtysomething and The Wonder Years, which captured the Emmy Awards last year as best drama series and best comedy series, respectively.

Even Stoddard, a master of understatement, began to exult that "I think we've made a little headway. I think people are talking a little more positively about ABC than they were a year ago and two years ago. So I feel relatively happy about our movement."

Specifically, Stoddard guided his selected series so they would rely more on characterization and realistic storylines than on stereotypes and gimmicks. He widened the circle of producers contributing creatively to ABC and reduced Aaron Spelling's lopsided influence at the network. And he pursued his own shyly seductive style of leadership, which "stressed listening over lecturing and nurturing over nagging," in the words of veteran primetime producer Tom Miller of Perfect Strangers and Full House.

Stoddard himself boasted Tuesday that "There is a very good structure to the schedule now, which makes me very satisfied and confident about leaving. It's what I wanted to do. And I'm very confident that the network is going to have a strong year next year, since there's a foundation of programs from which to build, and the replacements don't have to be wholesale."

Irwin Gottlieb, senior vice president and director of national broadcast and programming for the New York advertising firm of D'Arcy Masius Benton & Bowles, said, "ABC has moved into No. 2 not because they did anything spectacular but because the network has had a consistent strategy since Brandon Stoddard took over."

Analyst Reidy agreed that Stoddard has "done a pretty good job. The notion that Stoddard leaves the network in good shape is a fair one. He inherited a problem, and now ABC has become a solid, decent competitor with NBC. There are a number of new shows that work."

Stoddard also had his detractors. Many in the Hollywood production community were critical of his decision to push producer-writer Glenn Gordon Caron off his creation Moonlighting-with the result that ratings have dipped drastically this season-and to allow Roseanne Barr virtual carte blanche on her show Roseanne.

Meanwhile, some producers complained that Stoddard never would pick up a phone to pat them on the back if their overnight ratings were sensational. Others claimed Stoddard would leave even hit shows hanging without telling them if they were being picked up for a new season.

But, more than anything else, some thought Stoddard's personality simply wasn't cut out for the job. Known for being cerebral in a business that's not, Stoddard was more stuffy than showy, especially when compared to his chief rival at NBC, Brandon Tartikoff.

For instance, the "other Brandon," as Stoddard quickly became known, always made a point of never going to lunch with creative people or studio heads or producers, let alone joining the see-and-be-seen crowd at Spago or Morton's, out of fear he would be "compromised."

Now that he's bid goodbye as programming chief, however, some of that may change. Tuesday was laughing and lighthearted-in his words, "almost giddy now that the daily rating reporting card won't be following me every week."

He might even start to have fun. As Stoddard told one friend Tuesday when describing the advantages of his new job: "Well, I can finally start having lunch with all the guys again."


"ABC Names Iger Program Chief: NY Business Executive Wins Top Hollywood Post," by Nikki Finke, Los Angeles Times, March 24, 1989

Breaking with the networks' standard practice of promoting from within the programming ranks, Capital Cities/ABC Inc. on Thursday named Robert A. Iger from its business affairs side as president of the entertainment division.

The 38-year-old former executive vice president of the ABC Television Network Group immediately declared, "I do not come in with a program strategy."

In an interview from his New York office, the onetime manager of ABC's Wide World of Sports acknowledged that while his expertise lies in the "day-to-day workings of the network," he is "an obvious newcomer" to the process of primetime programming.

"I come to this job clearly with a great degree of inexperience in the entertainment field," he said. "I have a lot to learn."

Iger disputed speculation that Capital Cities/ABC management was stressing bottom-line considerations over creative experience and working relationships with the Hollywood community in its top programming executive.

"I do not come in with any game plan having to be handed to me by the management of the company," he stressed.

And he indicated that his unfamiliarity with entertainment programming would help give him a sense of independence in his new position. "If there's one thing that I bring to this job, in terms of my point of view, it's that I'm my own person. And if people are wise, they'll wait to judge me when they see me."

Iger said he has asked his predecessor, Brandon Stoddard, who stepped down Tuesday to become president of ABC's in-house production division, to stay on through the process of choosing the fall schedule "so he can bring into it his knowledge and experience," Iger declared. "It's a very delicate time. And the important thing to emphasize is I will not disrupt the process one bit. Of course, there's a natural disruption caused by the change. But I'm going to do whatever I can to reduce that."

But Iger also made it clear that he, and not Stoddard, would be mapping out the new season's lineup. Asked if Stoddard would bear the responsibility for the schedule, Iger replied curtly: "I did not say that."

Marcy Carsey, executive producer of ABC's hit show Roseanne, predicted that Stoddard would be working closely with Iger in coming weeks. "I just know that if I were (Capital Cities/ABC executives) John Sias or Tom Murphy or Daniel Burke, I would be at Brandon's house seeking his advice. I can't believe they won't," she said.

Meanwhile, ABC executives confirmed Thursday that Stuart Bloomberg, now vice president of comedy development, will be given expanded responsibilities and put in charge of series programming. Bloomberg has been credited with developing the highly rated half-hour sitcoms-Roseanne, Who's the Boss, Growing Pains and the new Anything But Love-which have been the network's only real primetime successes in recent years.

Iger said that Bloomberg's promotion will help the company "use the talents he has demonstrated towards other areas."

"Bob will be working very closely with Stu," one ABC executive added. "What you want here is a combination of someone who has a broad overview of the business and someone with creative operating experience."

The fact that much of Stoddard's management team, including Bloomberg and senior vice president for programming Ted Harbert, will remain intact under Iger helped ease some of the concern within the Hollywood creative community about the change of leadership.

"I don't feel particularly nervous because the people who were there are still there," noted Carsey. "But I'm sure some people will feel uneasy."

Iger's career at ABC has been nothing short of meteoric. After joining ABC-TV in July 1974 as a studio supervisor, the Ithaca College graduate moved to ABC Sports two years later and then became manager and director of ABC's Wide World of Sports.

In January 1985, he was named vice president of program planning and development for ABC Sports, where he was in charge of scheduling and rights acquisitions. Iger was actively involved in three Olympic telecasts and was responsible for the scheduling of the 1988 Calgary Winter Games.

ABC executives say it was Iger's unusual combination of management experience and creative instincts that led Capital Cities/ABC to select him last August as executive vice president of the ABC Television Network Group without even a formal interview. In that role, Iger was responsible for the East and West Coast business affairs departments. He also worked closely with daytime programming.

In addition, Iger described himself as "playing traffic cop to the network's news, sports and entertainment divisions to make sure they don't collide in the middle of an intersection in their push for programming."

John Sias, president of the ABC Television Network Group, said Thursday that Iger's experience at the network has left him able to "understand a great deal about the network processes, mentalities and audiences. He has worked very successfully with a wide range of people in the network, including people in programming, and wears very well."

Sias also pointed out that Iger's "taste level" in terms of television programming is "very compatible" with Stoddard's.

And Iger stressed Thursday that he intends to "maintain Brandon's legacy in terms of quality programming. He has left us a very solid rapport with the Hollywood community and a very, very solid programming schedule. If I can do all those things, I'll walk out with my head high."

But Iger also acknowledged that in terms of personality, he's "very different" from Stoddard. One immediate change is that he doesn't intend to imitate Stoddard's publicity-shy ways and noted that he always has been accessible to the press.

Still, he admitted that the public attention that will be showered on him is daunting after "having toiled in relative obscurity in the past."

He got his first taste of it when, even before his appointment was official, he received a flood of calls this week from Los Angeles real estate brokers. "I have to applaud them for their extraordinary business tactics," he laughed. "I hope I can match that."


"Like the 3 Stooges: ZZZZ Best-How the Bubble Burst," by Kim Murphy, Los Angles Times, March 30, 1989

To look at them, nobody would have thought they could do it: An insurance adjuster who couldn't seem to hold down a job. A family man who ran a small janitorial business. A former UCLA linebacker who taught himself accounting. And the kid with the big mouth and an overdose of charm.

But together they pulled off one of the biggest swindles in Southern California history, a $100 million con that convinced wealthy investors, a Big Eight accounting firm and Wall Street bankers that Barry Minkow's ZZZZ Best carpet cleaning company was making a fortune repairing office buildings damaged by flood or fire.

Even today, after a 3 1/2-month trial that laid bare the charade, investigators are having a hard time figuring out how such a bunch of seeming ne'er-do-wells managed to pull it off. But then, so are the guys who did it.

Doctoring the Books

"It was literally like the Three Stooges, practically," said Mark L. Morze, the former football player who stayed up nights with a small word processor and a bottle of White Out doctoring the books. "We used to just sit there and look at each other every day, saying, 'I can't believe it's still going along, that people still believe this stuff.' "

By the time it was over, Minkow was found guilty of 57 counts of fraud and conspiracy, and 11 associates of the company he had vowed to turn into "the General Motors of the carpet cleaning industry" stood convicted of various fraud charges.

Minkow, scamming to the end, claimed throughout his trial that he had been manipulated by shadowy organized crime figures into carrying out the fraud.

But at his sentencing this week, when a federal judge handed down a 25-year prison term, the now-23-year-old Minkow admitted that the Mafia story was just that-another story. And the truth, it turned out, was even stranger: ZZZZ Best really was, all along, the tale of a kid who started a company in his parents' garage, brought in some buddies from the gym, cut a few deals with reputed mobsters, dabbled in the netherworld of junk bonds and stock splits-and wound up with an empire worth $200 million on Wall Street.

An Unbelievable Script

"If you wrote a movie script with this cast of characters, no one would believe it," said Assistant U.S. Attorney James Asperger, who tried the case with co-prosecutor Gordon Greenberg. "It was like The Dirty Dozen, only they were out to commit evil."

Although most of the ZZZZ Best principals still face civil suits filed by investors, stockholders and banks that were duped, the initial wave of criminal prosecutions concluded with Minkow's sentencing on Monday.

As they prepared to go off to prison, three of Minkow's top lieutenants spoke at length for the first time about how they pulled it off.

They admit that they deserve to be punished. All profess stinging regret for the people who got left holding the bag when the swindle collapsed. But there is in all of them still a hint of carefully shrouded pride about the entire mad, brazen, larcenous affair, an infectious enthusiasm that allows them to plunge into the story and get caught up in it again, and talk about how they came that close-four days away, they figure-to making ZZZZ Best a legitimate, multimillion-dollar corporation.

"If everything had worked out," Morze said dreamily, "everyone makes out like a bandit. The stockholders make money, the income tax people collect taxes, three or four thousand people get jobs, America gets its carpets cleaned, the investment bankers get paid back, I become wealthy, Barry becomes wealthy, everybody makes out."

Even Morze couldn't resist the next line: "But noooo . . . ."

Minkow's story, by now, everybody knows. How he started the business with a few rug shampooing machines and went on to self-publish his own book about becoming a teenage millionaire. How he started driving a $130,000 Ferrari, bought a mansion with a huge Z on the bottom of the swimming pool and hired fans, at $100 apiece, for the softball team he managed.

Less prominent have been the stories of the men he took with him to short-lived glory, the men, many of them approaching middle age, who suddenly saw the answer to their dreams in the visage of a wisecracking teenager.

Minkow was only 14 when Tom Padgett ran into him in a San Fernando Valley gym. Padgett was a Vietnam vet who could bench press more than 300 pounds, who didn't want to hear from the kid who kept lurking around, nagging about how he wanted to train with him.

Padgett was 30 then and had a decent job as a claims adjuster with Allstate Insurance, but it was starting to get to him; his life wasn't going anywhere. He took up boxing and, by his third fight, got hammered so badly he had to wear dark glasses the next day.

'You Forget to Duck?'

"Everyone at the gym is getting a big charge out of it," he recalled. "They're saying, 'What's the matter, punchy? You forget to duck?'"

The Minkow kid told them all to shut up. "At least Tom had the guts to go in the ring, and that's more than you guys," Padgett recalled him saying. "It shut everyone up-and it really drew me to him."

They got to hanging around in the Valley, and when Minkow, at 15, decided he wanted to start a carpet cleaning company, he got $1500 from one of the weightlifters and another $4500 from Padgett, who took out a loan for him.

It wasn't a bad idea. Minkow had learned telephone sales from working with his mother, and soon ZZZZ Best's vans were parking in front of houses around Los Angeles, promising to clean two rooms for $39.95-without extra charges.

Having Padgett at Allstate was a big boost for the fledgling carpet company. Padgett was able to steer an occasional insurance job ZZZZ Best's way, contracts to repair homeowners' floors after the bathroom flooded or someone dropped a burning frying pan in the kitchen.

But Minkow was having money troubles even from the start, trouble paying back the money he had borrowed to get the company going. Padgett got a notice from the bank that Minkow had missed several payments on the loan Padgett had obtained. Then, his bosses at Allstate called him in and asked him about someone named Minkow who apparently had stolen and cashed some Allstate warrants-similar to blank checks-after finding them in Padgett's car.

When Allstate found out they were friends, and that Padgett had been referring jobs to Minkow, he was out of a job.

Things started looking up a few weeks later, though, when Padgett got hired as an auto appraiser at the Travelers insurance company.

He only had to go out on four jobs a day, leaving plenty of time to make it home by noon to watch Twilight Zone reruns. He met his best friend's cousin, Debbie, and fell in love. He might have cut Minkow off, what with the problems the teenager caused, but he was looking for ways to make Debbie notice him, and Minkow told him, "You want that girl, you got to get the money." Minkow, as always, had a way.

Minkow told Padgett he was taking on some larger insurance restoration jobs on the side, fixing up whole buildings that had been burned or flooded. But to keep his bankers happy, he needed to show that he wasn't getting all his work from one place. Could Padgett borrow some stationery from Travelers, "just for our internal books," to make it look like Padgett was sending him some of the jobs?

Began to Suspect

Padgett agreed, even though he began to suspect that Minkow did not have as many restoration jobs as he claimed-that maybe some of the jobs he made up. It worked for a while, until one loan officer dropped by Travelers to ask about a supposed deal, ran into Padgett's boss and found out that he was not a big-time broker handing out building repair contracts, but an appraiser checking out bent fenders.

Padgett was out of a job again. But at least no one had called the cops.

Not to worry anyway, Minkow said. He would set up Padgett in his own insurance appraisal business. He could hire Debbie as his secretary. And maybe, Minkow said, Padgett could refer ZZZZ Best some work.

The idea was to find legitimate jobs, of course. But in the meantime Padgett would earn most of his keep posing as the wealthy, successful president of Interstate Appraisal Services who was supposedly responsible for sending ZZZZ Best contracts that kept getting larger and larger-contracts that Minkow knew, and Padgett knew, didn't exist.

The phantom jobs paid off indirectly. They were listed as revenue on ZZZZ Best's books, which then could be shown to banks or individual investors to encourage them to lend the company money-money that could be used not only to pay the salaries of Minkow and his friends, but also fuel expansion of the company's legitimate business, the part where ZZZZ Best workers actually went out and cleaned carpets.

That enterprise was taking off. Over the years, the garage turned into five locations, then 21 offices in three states, employing more than 1000 people.

Enter Jack Polevoi. A self-employed businessman, he suddenly found himself at the helm of ZZZZ Best's carpet cleaning operation as it was reaching its peak.

Polevoi, 41, hadn't really needed a job. The sale of his commercial maintenance business gave him enough to live on and build a luxurious house near Minkow's in Westchester County Estates, a new gated community of mansions in Woodland Hills. Nevertheless, Polevoi was impressed with the kind of money being thrown around by this neighbor of his. And when ZZZZ Best commercials blitzed the airwaves-featuring Minkow promising clean carpets and no hidden charges-it was a kick to have such a celebrity around.

"You know, I was proud to introduce him to my friends. . . . He was a star, and a lot of people stopped me and asked, 'Hey, what's it like to have Barry Minkow as a friend?'"

So when Minkow told him he needed him to get the carpet cleaning operations in shape, Polevoi agreed. He brought in his brother, Jerry, to help.

"After the first week I was there, I got caught up in it. It was a great company! I mean, something I'd never seen in my life. Charisma. Everybody couldn't wait to go to work. But after I was there a week, I went into Barry's office, and I said, 'Barry, I been in this business a long time, you're not making any money.' I said, 'You got an overload of people, there's no accountability, the place is like Disneyland here.'"

Managers at outlying offices were hiring limousines on a whim, Polevoi recalled. "The Coke machine in the corporate office, all you had to do was push a button and soda came out."

Polevoi started cleaning house, firing the guys who were sitting around the offices and spending money, setting up interviews to land big corporate carpet cleaning accounts. But even when he landed major contracts to clean hotel carpets, Minkow didn't seem to care.

"I flew back to Phoenix and met the guy (from) the Ramada Inn. He came back with me and closed the deal. We got the Marriott. . . . It just never impressed him. I said, 'This is a national operation.' He said, 'OK, just do your job, Jack.' "

Polevoi was the only man Minkow seemed to trust with his own money, and he stashed thousands of dollars of pocket money for the boss in his desk drawer. When Minkow's girls' softball team had its championship games, the money to hire a cheering section came from there. When Minkow wanted money to buy a Mercedes for his girlfriend when she caught him in bed with another woman, Polevoi went to the drawer.

They Act as Waiters

Minkow was having a new girl over for a candlelight dinner. Would Polevoi and his brother dress up in tuxedos and act as waiters? Jack didn't know where to put the forks and spoons, so he called his wife over to help.

"I became so involved, so obsessed with this whole thing, I wasn't me anymore. I was someone else. I was obsessed with Barry. Barry would come over and say he wanted to go away for the weekend, go out for dinner, I went. And left all my friends behind. Because they didn't want to be with him anymore. My friends were all very successful guys, young, in their 30s, did well. But they were never up to Barry's expectations, because Barry always made megadollars."

Long before Minkow was earning megadollars, Mark Morze, the onetime linebacker, had his own bookkeeping business, preparing tax returns and profit-and-loss statements for dozens of small businesses. He tried opening his own enterprise-a health club at the Sherman Oaks Galleria-but it lost $80,000 the first year, and he was back looking for clients when a loan broker introduced him to Minkow.

Morze, then 35, went to work for ZZZZ Best in late 1985 as a part-time consultant, shopping around Southern California for bank loans to help boost the company's expansion. In the early days, Minkow had turned mainly to private investors: an elderly lady who ran the cigarette concession at a Las Vegas hotel, the wife of singer Tony Orlando, even a reputed local crime figure who delivered $25,000 cash in a brown paper bag. Some of the loans were negotiated at outrageous rates of interest. Most trickled in only fast enough to pay off earlier loans.

To help qualify for major bank loans, Minkow produced more and more contracts for insurance restoration work, most of it forwarded to ZZZZ Best from a guy Morze did not know, Tom Padgett. Morze said he figured the jobs were legit.

As Morze tells it, he began to learn the truth in 1986, when Minkow showed him a document from Interstate Appraisal Services indicating that ZZZZ Best had just completed work on a $2 million project in San Diego. An even bigger job was under way in Arroyo Grande, a tiny beach community south of San Luis Obispo, Minkow told him. Now a company that had loaned ZZZZ Best several hundred thousand dollars wanted to see how it was progressing.

"'Mark,'" Morze said Minkow confessed, "'the San Diego job is such a success that I invented the Arroyo Grande job to buy time, until we get the money from the San Diego job.'" Would Morze drive to Arroyo Grande and photograph any building that could pass as a restoration site?

He found the only three-story building in town, lying on the ground to photograph it so it looked bigger. But the ploy didn't work. The lending company had beaten Morze to Arroyo Grande and quickly learned that ZZZZ Best did not have any contracts there. By the time Morze got back, Minkow was immersed in a tense meeting with officers of the lending company, trying to talk his way out of it.

Morze compared Minkow's protestations to a small boy trying to hide an elephant behind his back. "'What elephant?' he says." The company was reassuring on one point, Morze said, the matter would not be reported to authorities. But they would make no more loans to ZZZZ Best, thank you.

That was when Minkow confessed to him that the Arroyo Grande job wasn't the only one that was fake, Morze said. All of the restoration jobs were. But don't worry, Minkow said.

By this time, Minkow had hooked up with a guy from Encino, Maurice Rind-a convicted stock swindler, it so happened, but also a man with a reputation as a financial wizard-who was helping him merge with a publicly held Utah shell corporation. The move would eventually allow the sale of ZZZZ Best stock to the public. The Wall Street firm of Rooney Pace Inc. agreed to underwrite a public offering, a bonanza that would net ZZZZ Best an initial $11.5 million-enough to pay off the loans that were by now breeding at an alarming rate, enough so they would not have to fake any more restoration jobs.

"We gotta last 60 days, and we're set," Morze recalled Minkow telling him. "Mark, all you gotta do, if anybody asks you about the restorations, you gotta just say, 'Yeah, they're real, and they're making money, and they're moving along.' And I said, 'OK, I'll do it.' That was my start as a co-conspirator."

The 60 days stretched into four, then five months. New loans had to be obtained to carry the company through. New restoration jobs had to be invented to show enough revenue to qualify for the loans. Morze, whose earlier bookkeeping work involved only rudimentary accounting, had to learn new tricks.

"A lot of people think I'm the genius behind the throne that made it all happen," he said. "But I'd never seen a balance sheet in my life. I didn't know what one looked like. The accountants would say, 'Mark, we're going to need your worksheets.' I had to go to an encyclopedia and look it up, I didn't know what a worksheet was. Then they said we need a performance bond. I ran to the business library and looked it up."

Morze jotted down notes on every insurance job ZZZZ Best supposedly did. He cut and pasted checks together-taking the name of a bank from one, a signature from another-then smoothed out the edges with liberal blobs of White Out and a copying machine. "If you saw me at the end of the night making checks, I'd look in the mirror and I'd have little white dots all over me," he said.

The finished copies made it look as though ZZZZ Best was paying carpet and lumber suppliers for restoration materials. He drew up phony invoices to coincide with the checks and drafted two years' worth of detailed bank statements-which IRS investigators later described as nearly perfect-that made the checks add up.

A Hitch Develops

But just before the stock sale came through, there was a hitch. To everyone's horror, Ernst & Whinney, the accounting firm hired to help with the underwriting, wanted to inspect ZZZZ Best's latest restoration job-touted as a $7 million project in Sacramento to restore an office building damaged by a massive water leak.

For months, Minkow, Morze and Padgett had been able to keep investors and their accountants away from the supposed job sites by saying that the insurance companies involved-who were paying for the work-were worried about being sued if anyone was injured.

When one determined loan officer insisted on coming to Padgett's office, he was at his desk, and by prearrangement, his phone was ringing off the hook.

"And so every two minutes, I'd say, well, the reason you can't go to the job sites, like I explained to you before"- ring!- "Yeah, hi Jim. You at the Anaheim job site? Right, OK, are the plumbers there? Oh, they're not there? Fire 'em. OK, let me spell it out: F-I-R-E T-H-E-M. OK? Sign my name on it. Do I have to fire everyone and get ZZZZ Best there? Cause I'm going to do that. OK." Then: "Anyway, the reason you can't go to the job site is a couple months ago somebody broke a kneecap"- ring! They bought the whole thing."

Ernst & Whinney was more persistent. So Padgett and a colleague flew to Sacramento, found an office building where some construction work was under way, and set up a masquerade. They slipped $50 to the security guard so he would greet "Mr. Morze" when he showed up with some special guests that weekend. They took down contractors' signs and replaced them with ZZZZ Best signs.

Morze flew up Saturday morning with an accountant from Ernst & Whinney and a lawyer from the prestigious law firm of Hughes Hubbard & Reed. Padgett waited nervously in a nearby hotel room, at one point calling Minkow in Los Angeles.

"It's like third down and we're on the 25-yard line and there's three seconds left on the clock," Minkow told him. "We gotta kick a field goal. . . . It's all come down to this."'

The security guard gave Morze the appropriate greeting and Morze led the way to the elevator.

"I have never done a construction job in my life," Morze recalled. "I don't know anything about plumbing, I know nothing about electricity, I know nothing about carpeting. I'm sitting there going, 'Please don't ask me any questions. Please don't ask me any questions.'

"And sure enough, these big experts that are here to sign off on a multimillion-dollar underwriting go, 'Well, you guys seem to be doing a good job. Let's go back to the airport and have a few beers.' Back to the airport. On the airplane. Fly home. Call Barry. We did it!"

Later, the ZZZZ Best crew went to work again when the accounting firm demanded a tour of a supposed San Diego job site. This time, they actually signed a $2 million, seven-year lease to get a building and had a construction company work day and night to fix it up, putting in the last nail only hours before the inspectors arrived-for a 20-minute visit. Afterwards, Morze said, Minkow sat back at his desk and laughed: "We spent $100,000 a minute for that inspection."

The public stock offering finally came through in December of 1986, bringing money that would allow them to pay off all the "hooks," as Morze called the loans, and put a little bit in the bank to help the legitimate carpet cleaning business. No more phony insurance jobs. No more lies.

"But now," Morze said, "Barry confesses to me how many hooks there really are. And out of the $11 million we got, the first day, $8 million went out immediately. I say, 'You owed $8 million?' He says, 'Yeah.' I'm sitting there, oh my God, we only got $3 million left." And there were more loans coming due in January and February. At that point, Morze said, Minkow just looked at him. "It's not enough," he said.

Padgett was still desperately in love with Debbie, but she had taken up with another guy and didn't want anything to do with him. He was driving himself crazy with jealousy. "Finally, I figure I'm going to kill this guy, I mean, there's no question in my mind, I'm going to kill him, I mean, don't even talk about it. And Barry's going, 'No, no, no, there's other women.'" Padgett, the supposed source of insurance restoration jobs, took to drinking most of the day and going out at night with a gun, "just looking for trouble." "Imagine," he said gleefully, "how Barry's losing sleep nights, imagine that, you know, here's 86% of his business running around Santa Monica drunk at 3 in the morning with a loaded gun-three loaded guns, as a matter of fact."

The crisis ended when Minkow reminded his friend about the waterfront house in Newport Beach that he had wanted ever since hearing Debbie describe her dream home. It seems that one of ZZZZ Best's investors had such a place he wanted to sell. What if Minkow bought it and let Padgett live there?

"I said, 'Barry, it can't be, I mean, things like that don't happen to me.' He says, 'No, we got this line of credit from First Interstate that will be a big help.'" All Padgett had to do was put on his $800 suit, his Rolex watch, and show up at the bank and convince loan officers that a new batch of insurance jobs were real.

By now, in the spring of 1987, what Morze calls the big "cure" was coming. Drexel Burnham Lambert was talking about underwriting a $40 million private placement of junk bonds with which ZZZZ Best could acquire KeyServ, a nationwide carpet cleaning chain that got its business through the country's premier retailer-Sears Roebuck. With respected ties like that, they would never again have to fake any restoration jobs, Padgett and Morze figured.

They dreamed of making a success with KeyServ, then using $700 million in junk bonds to finance a hostile takeover of a $1.3 billion international corporation.

"It's the only thing that keeps you going in your brain," Morze said. "We get KeyServ, the world is ours. We get KeyServ, the world is ours."

Padgett was comfortably ensconced in the oceanfront house in Newport Beach. With ZZZZ Best stock soaring, Minkow was launching discussions to buy the Seattle Mariners baseball team. Everything was on track.

Then two things happened. First, an article appeared in The Times about some problems at ZZZZ Best a few years earlier, when dozens of customers had complained that large overcharges had been rung up on their credit cards. Minkow quickly threw the blame off on former employees, but the report sent shivers through Wall Street and the stock plummeted.

Then, Norman Rothberg, a thin, bespectacled accountant who rented office space from Interstate Appraisal, went to Ernst & Whinney and confided that the Sacramento restoration job was not real. Ernst & Whinney got on the phone to Minkow. Minkow quickly got Padgett on the phone. "You better figure out what the hell this man has done," Minkow declared.

Rothberg was cornered in a meeting with Padgett and another ZZZZ Best associate, who he said began toying with a gun. After the meeting, he took $15,000 to go back to Ernst & Whinney and say he had made up the story.

Hire Investigators

But the damage was done. The accounting firm hired a team of investigators. Shortly thereafter, Ernst & Whinney and Drexel Burnham Lambert pulled out of the KeyServ deal. It had been only four days-at the most seven-away from closing.

Padgett was on the San Diego Freeway, on his way home to Newport Beach, when the phone rang in his Lincoln Town Car. Minkow needed to talk to him right away. More news stories would be running soon exposing the fraudulent insurance jobs, the boss said.

"He said, 'Tom, it's over.' And he was so tired in his voice. You see, Barry never sounds tired. This time, he was so tired, he said, 'It's over, man, it's all over.' I said, 'We got to fight on.' He says, 'We can't fight on, they've been to Sacramento. They know there aren't any building permits. They've been to San Diego. We're finished. We're caught.'"

Minkow told him he would have to move out of the Newport Beach house right away. "I said, 'Barry, I've only been in there three months, I've waited all my life for a house like this.' He said, 'Tom, they're coming, man, there's gonna be all kinds of charges.'"

Padgett hung up and drove home. Debbie's cousin was there. To surprise him, she had gone out and bought new bedroom furniture. The books were no longer stacked on the floor, they were neatly arranged in a new bookcase.

"She says, 'You'll never believe this, but Debbie called. She wants to come down this weekend,'" Padgett recalled. "And that's the first time I cried."

On July 2, 1987, Morze watched on the evening news as Barry Minkow's attorney announced that the young entrepreneur had resigned from ZZZZ Best.

Their caper may have been over, but Morze had not come away empty handed. Investigators later estimated that he had made nearly as much as the $3 million they believed Minkow took out of the company-Morze admits only about $1 million in income on his tax return for 1987-and it enabled him to buy one new house for his parents, and help his girlfriend buy another.

But days before the end, Morze said, he had emptied his bank accounts and given his last cash to Minkow, who begged him for money to make the ZZZZ Best payroll. Now, on television, angry employees were complaining that they had not received their last paychecks.

"I guess I fell for Barry, too," Morze concluded, "and I think it's probably fitting punishment, and ironic, that I got cleaned out by the same guy that cleaned out everybody else."

Trip to Las Vegas

In those last frantic days, Polevoi and his brother were dispatched to Las Vegas with $700,000 Minkow scrounged up from corporate accounts. Minkow handed over a pile of cashiers' checks and instructed them to gamble the checks at various casinos and come home with cash. Both Polevoi brothers wound up pleading guilty to money laundering charges for that escapade.

After it was all over, Padgett went into his office at Interstate Appraisal and found out that a major insurance company wanted to open a legitimate account with him. "That's the second time I cried," he said. "You can make an argument, maybe I deserve to go to jail, maybe I deserve 20 years, but I don't think I deserved coming that close and getting knocked down."

He got eight years in prison, the same as Morze. Polevoi is looking at 18 months. From having owned his dream house outright when he met Minkow, Polevoi now owes $1 million against it in taxes, stock losses and legal fees.

"What I was hoping through all of this is that the judge would understand how a guy like me got caught up," Polevoi said. "I said, what I did was wrong, no question about it. I want to plead guilty. But have an open mind to what was going through my head." Minkow, he said, "could've made a legitimate company out of ZZZZ Best."

Morze agreed: "We tried it. It coulda worked. It shoulda worked."

But it didn't, and all of the would-be millionaires will be behind bars by mid-April. Minkow, unable to make bail, has already been in prison for nearly a year and a half. He has telephoned Polevoi occasionally to chat and report that it's not all that bad inside.

"I'll tell you exactly what he said," Polevoi recounted. "He said, 'If this is all they can do to you, it's a piece of cake.' They can't torture him. They can't electrocute him. I said to myself, 'this guy is totally invincible.'"


"Australian Firm To Buy MGM/UA For $1 Billion: Qintex Group To Acquire 4000 Films; Kerkorian To Retain Some Assets," Los Angeles Times, April 1, 1989

The United Artists movie studio, maker of Oscar-winning Rain Man, will be sold to an Australian entertainment company for $1 billion under an agreement announced late Friday.

The deal would give Qintex Group, one of the makers of the recent CBS miniseries Lonesome Dove, most of the assets of MGM/UA Communications Co., including rights to Rain Man. Also included would be a library of 4000 movies, among them the James Bond and Pink Panther series, the video library and movie and television production and distribution facilities.

MGM/UA's majority shareholder, Kirk Kerkorian, would retain control of the MGM name and TV and movie studios, as well as 34 MGM movies, including Moonstruck and A Fish Called Wanda.

The agreement between Qintex and Kirk Kerkorian is subject to unspecified government, shareholder and "third-party" approvals, according to a joint announcement by the two companies.

MGM/UA officials refused to elaborate on a news release, which said the deal was expected to be complete in late summer.

How Deal Would Work

It is the second time this year Kerkorian has agreed to sell part of the company he assembled out of the former United Artists and Metro-Goldwyn-Mayer studios. In addition to a collapsed deal to sell an interest in the MGM name to fellow Hollywood investor Burt Sugarman in July, Kerkorian has been publicly shopping all or part of MGM/UA for months.

Kerkorian, who owns 82% of MGM/UA through his Tracinda Corp., pumped $180 million of his own funds into the money-losing company in January. MGM-UA lost $39.5 million in the first quarter of 1989 and $48.7 million in 1988.

Under the complicated agreement with Qintex, Kerkorian will hang onto rights to the MGM name and roaring lion logo as well as movie and TV production units. Also remaining with MGM are 34 movies made since June 1986, including Moonstruck, A Fish Called Wanda, and Willow; 1750 hours of TV programming including the ongoing shows thirtysomething and In the Heat of the Night; and the MGM headquarters building here.

The deal is to work this way: Kerkorian sells 100% of MGM/UA to Qintex for $20 a share, or about $1 billion. Then the company is split, and Kerkorian buys back what will be the new MGM-the MGM movie and TV studios plus the 34 movies in the MGM film and video libraries-for $250 million.

Further intertwining the now independent MGM and UA, Kerkorian is to invest $75 million in Qintex, and the companies sign various distribution agreements.


"New World Buyout Set," The New York Times, April 11, 1989

New World Entertainment Inc., a small production company that makes The Wonder Years for television, agreed today to a buyout offer from Revlon Inc.'s chairman, Ronald O. Perelman, worth at least $120 million.

Mr. Perelman outbid the Italian financier Giancarlo Parretti, who had sought to add New World to Pathe Entertainment Inc., an independent film company he is trying to build by adding to the former Cannon movie studio.

In January, Mr. Perelman acquired another part of New World, Marvel Entertainment Group Inc., the comic book company that produces Spider-Man and the Incredible Hulk, for $82.5 million.

New World said it had agreed to be bought by the Perelman-controlled Andrews Group Inc. for $8.95 a share in cash. In doing so, New World terminated an agreement to be bought by Pathe for $8.20 a share in cash and promissory notes, the company said.


"How Ross Johnson Blew The Buyout," by Bill Saporito, Cynthia Hutton and Rosalind Klein Berlin, Fortune, April 24, 1989

The untold story of how his own naivete, a disastrously flawed strategy, and Wall Street's towering egos combined to doom a CEO's bid for glory in the biggest deal of all time.

The air at the Castle Pines golf club, about 25 miles south of Denver, is so thin even a smallish CEO can smack a ball halfway into the next quarter. Which is exactly what a group of friends and customers of RJR Nabisco boss F. Ross Johnson were trying to do late last August. Johnson had more on his mind than his long game, though. Market tests of Premier, the smokeless cigarette that was supposed to puff up RJR's stock on Wall Street, were not promising. A man who prefers gut instinct over research, Johnson sought some straight dope on the product from trusted clients on the course. Those who lit up confirmed what the market researchers had told him: Premier tasted like a smoldering Hefty Bag. That revelation crystallized Johnson's decision to embark on a leveraged buyout of RJR Nabisco - a deal that ultimately led to the largest, looniest auction in the history of capitalism. Johnson judged his own record by RJR's stock price, and he figured that with Premier flagging, an LBO was now his best chance of increasing shareholder value.

If you think you have read all you want to read about what happened from there on out in this thoroughly chronicled saga, think again - you may have missed something. Did you know, for instance, that before Johnson strolled down LBO lane, he tried to negotiate a merger of RJR's Nabisco food business with that of archrival Philip Morris? Or that in the heat of the bidding contest, Johnson came within an eyelash of reaching an agreement with a new archrival - the leveraged buyout firm of Kohlberg Kravis Roberts - under which the two could have bought RJR Nabisco together for $4 billion less than KKR ultimately paid for it? In the end, of course, Ross Johnson blew his big chance. But how? And why?

Though the RJR buyout played in the press like a two-reel cliffhanger, the critical issues that shaped the outcome have been overlooked. A sometimes pathetic tale, it is full of insight about how business really works when good intentions struggle with pride, ambition, and a thousand other human frailties in the red-hot crucible of competition. The lessons for management begin with the dangers of faulty assumptions. Johnson went into the LBO with the deluded notion that it was his deal, and that all his investment bankers had to do was find the money to finance it. He thought that RJR's directors would give him the deference due a chief executive, never realizing that the board would have no choice legally or morally but to treat him like an outsider.

The execution of the buyout strategy was as flawed as the assumptions that went into it. Johnson's primary partner in the deal, the investment banking firm of Shearson Lehman Hutton, suggested an offering price of $75 a share. This lowball bid made Johnson and his management group seem a bunch of quick-buck artists trying to grab the company cheap. Had either Johnson or his bankers rummaged through RJR's files - as the investment banking advisers to the board of directors later did - they would have found some analyses that could justify the directors in rejecting as insufficient any bid less than $100. This was just one piece of evidence that led the board to wonder whether Johnson had something more than the shareholders' interests at heart. The greed issue grew even more obvious in the contract Johnson negotiated with his partners at Shearson Lehman. The bankers knew that the management contract was incendiary, and they told him so. Unfortunately for him and for them, they did not tell him no. The management group was originally going to put up a mere $20 million for 8.5% of the company. Its members stood to make $100 million in five years and come away with 18.5% of the equity, potentially worth billions if they could meet an ambitious set of operating targets.

But who was the management group? Though Johnson insisted that the 8.5% in equity would be divided among some 15,000 RJR workers - and that insistence is consistent with his past practice - only six names emerged besides his own: Edward A. Horrigan, Jr., the head of R.J. Reynolds Tobacco; James O. Welch, Jr., chairman of Nabisco Brands; Edward Robinson, the parent company's chief financial officer; Harold Henderson, chief counsel; John Martin, an executive VP; and Andrew Sage II, a former investment banker and an outside director. Too much for too few, it seemed to the shocked directors. The biggest deal attracted egos to match. Peter Cohen, 42, the chairman of Shearson, had a $1 billion LBO fund to play with and the drive to plant Shearson's name at the top of the merchant banking heap. He was working under the watchful eye of his boss, American Express Chairman James D. Robinson III, 53, a friend of Johnson's who frequently advised the RJR chief about strategy. Competitiveness contributed to Cohen's failure to reach an agreement with his chief rivals, KKR principals Henry Kravis, 45, and his cousin George Roberts, also 45, to pursue the LBO jointly. One of the sticking points was the reluctance of Salomon Brothers, the powerful bond house that was allied with Cohen, to work with KKR's bankers, the scandal-racked junk bond firm of Drexel Burnham Lambert. Although the competing sides were friends, they did not trust one another when it came to business. Conflict between the bidding groups left the buyers in disarray and the sellers with the whip hand. The dynamics of distrust sent the ultimate price spiraling ever higher - in an auction where a single dollar per share added about $225 million to the final price. Ultimately there was barely a nickel to choose between the final bids, leaving a special committee of RJR directors ample discretion to pick a winner. If, by the end of the process, Johnson had any friends among the directors - a group he had taken pains to treat royally - they did nothing to help him. Says a member of the special committee, Gulf & Western Chairman Martin S. Davis: ''You either play with the managers or you play with the shareholders. We chose to play for the shareholders.'' Out of this tumultuous fray RJR Nabisco's stockholders emerged as the only unambiguous winners.

A SELLER, NOT A BUYER

It would be hard to think of any chief executive less temperamentally attuned to orchestrating and running a leveraged buyout than F. Ross Johnson, 57. For one thing, his whole career was built on being a seller of companies, not a buyer. In that capacity he always seemed to come out on top. As CEO, he peddled Standard Brands to Nabisco in 1981; then he later took over the top job from Nabisco's Robert Schaeberle. He merged Nabisco with R.J. Reynolds in 1985, and the board obligingly anointed him successor to CEO J. Tylee Wilson. An accountant by training who hails from Winnipeg in Manitoba, Canada, Johnson abhorred debt. He didn't come across to his investment bankers as a free spender either.

Says a Shearson executive: ''Ross told us categorically that there was a price at which he didn't want to own RJR.'' Johnson didn't say what that price was, but his Shearson friends pegged it in the low-80s per share. That fiscal prudence is at odds with his public image as a corporate jetsetter who runs with a pack of sports and celebrity buddies. A stylish dresser who towers well over six feet, Johnson has a golf handicap of nine, which underscores his belief that there's no sense in running a business if you can't have fun. He did all he could to make sure RJR executives joined the party; they had generous expense accounts and referred to the company as ''first-class.'' Johnson's plan for RJR would have allowed him to preserve that odd combination of hard-eyed number crunching and flamboyant style. He planned to sell the food companies quickly to pay down the debt and avoid making about $2 billion in capital expenditures over the next three years. The average Nabisco bakery is 30 to 35 years old. The tobacco company that he would hold on to was already highly automated, but he planned to spend $900 million on development, principally for Premier, which he wanted to continue despite the discouraging reviews.

Unfortunately for Johnson, the board of directors of RJR Nabisco has not always been a group of happy campers. His predecessor, J. Tylee Wilson, had built a rocky relationship with the board and was barely on speaking terms with some members by the time he was ousted. Johnson alienated old Reynolds hands by moving the headquarters to Atlanta from tradition-steeped Winston-Salem, North Carolina, where it is still the leading employer and has thrived for more than 100 years. As his ambassador to the board, Johnson recruited his friend Charles Hugel, 60, chief executive of Combustion Engineering, and placed him in the curious role of ''nonexecutive'' chairman in the fall of 1987. As both men understood it, Hugel's role was to run the board meetings and work with Johnson and the board. In the best of times this could not have been an easy role to perform diligently while running your own $3.5-billion-a-year corporation.

STIRRINGS OF AN LBO

The idea of a leveraged buyout had been brought to Johnson many times. For example, Donald Kelly, who had done a highly successful leveraged buyout of Beatrice Foods with Henry Kravis, urged Johnson to meet with Kravis. The two had dinner at Kravis's East Side Manhattan apartment in September 1987. Kravis explained why an LBO would make sense for RJR, but with RJR's stock near $70 in the pre-crash market, Johnson didn't believe there would be a big enough premium to stockholders to justify the deal. Kravis didn't give up. A number of investment banking firms approached Johnson on his behalf, to no avail. RJR retained a consultant named Frank A. Benevento II in November 1986 to investigate a variety of capital structures and reorganizations for the company. Drexel Burnham Lambert also made a number of proposals that were kept in a file code named Sadim, or Midas spelled backwards. Johnson was working on something much more ambitious to raise the stock price: the joint venture with Philip Morris. In the summer of 1988, he tried to entice his rival chief executive, Hamish Maxwell, into marrying Philip Morris's limping General Foods division to RJR's muscular Nabisco Brands and Del Monte. The two tobacco companies would each own 40% of the new entity, which would have revenues of $18 billion, and the remainder would be sold to the public in a stock offering. In this way, Johnson reasoned, RJR shareholders would benefit from the P/E multiple that attaches to food companies, which runs about half again as high as the tobacco multiple. True to form, Johnson volunteered to head the combined concern. Maxwell wasn't about to be enticed. He doubted that a joint venture of such magnitude could succeed, and he was not wholly convinced that Philip Morris's stock price would benefit. Johnson then floated preliminary proposals past Pillsbury and Quaker Oats, but got no nibbles.

PUTTING RJR IN PLAY

Coming on top of these refusals, Johnson's disappointment with Premier convinced him that RJR Nabisco's stock would remain irretrievably undervalued unless an LBO freed it to soar. But his plans to embark on that course were derailed by terrible news: His son Bruce, 26, had sustained severe head injuries when his car drove off the road in Westchester County, New York, on September 7. Johnson spent two weeks in New York until his son's condition stabilized and then flew back to Atlanta to rededicate himself to making a decision. (Bruce Johnson later lapsed into what doctors describe as an irreversible coma.) On October 7, Shearson Chairman Peter Cohen and J. Tomilson Hill, the mergers and acquisitions chief, made a full presentation on an LBO to Johnson and other members of the management group. Johnson asked that Hill and some of his colleagues join him at a dinner in Atlanta with the directors on October 19, the night before the scheduled board meeting.

At this dinner Johnson planned to discuss his idea for an LBO. A week before the dinner Johnson advised Hugel to put together a special committee of outside directors to consider the LBO question. Hugel tapped Davis of Gulf & Western; John Macomber, the former CEO of Celanese, who had sold his company to West Germany's Hoechst AG in 1987; William Anderson, the recently retired chairman of the executive committee of NCR Corp.; and Albert L. Butler, Jr., who owns a real estate company called Arista in Winston-Salem. Hugel also phoned Peter Atkins, 45, a poker-faced partner at the law firm of Skadden Arps Slate Meagher & Flom, who had just piloted the Fort Howard paper company through a litigious LBO. Atkins agreed to become the legal adviser to the special committee.

When the fateful night of October 19 arrived, the outside directors along with Horrigan and Johnson gathered at the Stouffer Waverly Hotel close by corporate headquarters. During dinner Johnson talked about his various schemes to enhance shareholder value and why they hadn't worked. Dividend hikes, outstanding earnings growth, and stock buybacks failed to get the stock moving. In his estimation the only road was a leveraged buyout. As the directors digested their dinner and his words, he added, ''If you don't want to go ahead with this, just say so - and no hard feelings.'' Somewhat disbelievingly, one director said, ''You're putting this company into play.'' Replied Johnson: ''It should be in play.'' Several members of the special committee were shocked at the way things unfolded. They had expected to discuss the LBO concept generally - and had no idea Johnson would come loaded for bear, with a lawyer and an investment banker in tow. Says one of the committee members: ''There's no substitute for trust and no excuse for surprises between management and the board.'' Johnson was surprised too. Neither he nor Shearson was prepared to put the company in play that night. But soon he and the other directors, who were now potential buyers, were asked to leave the room.

The remaining directors immediately focused their attention on what price the company could command. After about 45 minutes Johnson was called back. ''We want to make sure that the number you were thinking about was not frivolous,'' Hugel said. ''Define 'frivolous' for me,'' said Johnson. Hugel told him that anything short of the highest price at which the stock had ever traded - $71 a share - was unacceptable. Johnson left the room to confer with his advisers under the impression that he needed to name a price. ''It was not our intention to generate a number,'' says Peter Cohen. Tom Hill, on hand for Shearson, told Johnson the firm was comfortable with $75 a share in cash, about 35% more than the stock was selling for that day. Cohen still contends that $75 was a logical place to start. Shearson predicated its work on buying the company entirely for cash, and based on conversations with commercial bankers a week before, Cohen felt certain he could find $75 a share - a total of $17 billion. When he reentered the room, Johnson told the board his group was prepared to put up a minimum of $75 a share, but that he couldn't say exactly what price they would offer. One director, civil rights leader Vernon E. Jordan, Jr., a partner in the law firm Akin Gump Strauss Hauer & Feld, raised the possibility of a higher bidder. ''Suppose it goes to $82 or $84?'' he asked. ''So be it,'' Johnson replied. ''It proves what I've been saying.''

''All the criteria indicated it was a responsible price,'' says lawyer Peter Atkins. Perhaps. But it was remarkably cheap in light of the mushrooming amounts commanded by food companies in the fall of 1988. Shearson's $75 a share was tied to selling the Nabisco businesses for $13 billion, a figure that turned out to be low compared with the market rate for food companies. Grand Metropolitan's offer for Pillsbury on October 4 came to $60 a share, or 27 times earnings, and should have sent Shearson a message. And Philip Morris's astonishing initial bid of $11 billion for Kraft, 22 times earnings, occurred on the eve of the RJR board meeting. That night Johnson lost control of his destiny forever, essentially becoming a junior partner in the latest Wall Street deal rather than the dealmaker himself. From there on he played a diminishing role in the negotiations. The board chose to announce the next morning that the company was entertaining the idea of a management buyout at the suggested retail price of $75 a share. Enough information had been discussed to compel the board to make the announcement.

HIT FROM BEHIND WITH A BASEBALL BAT

Henry Kravis had been discussing other deals with Shearson and was upset to discover that Shearson was not cutting his firm in on the huge new buyout. That Friday, October 21, Tom Hill, Shearson's mergers and acquisitions chief, called and asked for a meeting to discuss deals that the two were already involved in. Kravis did not disguise his annoyance. ''I see you guys are now our competitors,'' he told Hill. Hill called him back later, asking for a meeting to talk about RJR. That evening Kravis, Hill, and Cohen convened at Kravis's office. The Shearson bankers wanted to know whether Kravis had plans regarding RJR. Kravis said he hadn't made up his mind, adding, ''All I can tell you is that I'd be surprised if you buy this company for $75.''

The press has reported that Kravis demanded to be let into the deal, alluding to the LBO business as his ''franchise.'' He gets testy about that: ''There was no franchise discussion. I never said I've got to be in this deal.'' But RJR was one of 20 or so names KKR kept tabs on as potential targets even after Johnson had rebuffed them. Late Sunday night the phone rang at Jim and Linda Robinson's New York apartment. Both Robinson, the American Express chairman, and his wife, a public relations strategist, were advising Johnson. As it happens, Linda Robinson is also a good friend of Henry Kravis and his wife, Carolyne Roehm, a fashion designer. The caller, a reporter, told Mrs. Robinson that KKR was going to launch a $90-a-share bid in the morning. Did she want to comment? No, she didn't. She was staggered. She called Peter Cohen. It's a bluff, he told her. A bid didn't make any sense to Cohen. He had planned to meet with Kravis the next day, although Kravis says there was nothing in his appointment book. Neither Cohen nor the Robinsons called him.

Cohen woke up that Monday, October 24, to find a $90 offer, $78 of it cash, the rest in securities, on the table from KKR. Kravis had just hit him from behind with a baseball bat. What made Henry jump? He was afraid that Shearson was about to beat him to the punch with the first official offer. Over the weekend he had tried unsuccessfully to reach one of his bankers and learned he was tied up in discussions with Shearson. He also discovered that Shearson had a board meeting scheduled for Tuesday, followed by the parent American Express Co.'s meeting. The boards were ready, he thought, to approve the offer. ''I know what you were doing,'' he yelled at Cohen over the phone on Monday. Cohen told Kravis that the board meetings had been scheduled for months. The two agreed to meet again, but trust had been shattered. Although Cohen met with Kravis on Tuesday, October 25, to discuss the possibility of a joint offer, the friction between the two was increasing.

Later, Kravis offered Shearson a 10% cut in the equity and up to $125 million to go away and let KKR pursue the buyout alone. The proposal turned the atmosphere from chilly to frigid. But Cohen nonetheless told Johnson that Shearson would step aside if he wanted it to. Johnson said no. Argues Cohen: ''If management's game was to max out for themselves, they had a number of ways to do it. This was one.'' Around midnight Cohen called Kravis at his home and told - not asked, told - him to come to RJR's Manhattan offices on the 48th floor of 9 West 57th Street, the building where KKR happens to be headquartered. Why now? Kravis asked him. ''Because if we want to work something out, now is the time,'' Cohen snapped. Kravis, with his partner George Roberts and KKR's outside counsel Richard Beattie, met with Cohen, Hill, Johnson, Jim Robinson, and Steven Goldstone, a lawyer who was representing Johnson.

While Shearson and KKR continued their dance, every house on Wall Street was looking for some way to cut in. Salomon Brothers figured RJR was worth $100 a share and within two days lined up a major European company as a partner. When KKR announced its $90 bid, however, the Europeans vanished. Salomon Brothers' President Thomas Strauss, 46, realized that Shearson would need to raise more money if it were going to match KKR's bid. So he called Cohen, a friend and safari partner, and told him: Peter, you've got a problem. Salomon was the solution Cohen was looking for. With Salomon's banking and bond-selling ability, he could make a fully financed offer for more than $90, without slicing the pie with KKR.

AN AGREEMENT BLOWS UP

By the week of October 31, Shearson and the management group were ready to strike back with their first firm offer: $92 a share, $2 better and richer in cash than KKR's $90 bid. Although Kravis had blindsided him a week earlier, one-upmanship didn't seem a smart idea to Cohen now. He called Kravis to see if he was still interested in talking. ''I think we should meet again,'' said Kravis. Cohen held back on the bid. The second, critical set of meetings between the Johnson and KKR factions began at around six on the evening of November 2 in a deluxe suite at the Plaza Hotel. What started on a premise of compromise ended some 15 hours later in a virtual spitting match. The players were deeply suspicious of one another, and no leader emerged to knock heads together. Even today neither side can agree on what they were really disagreeing about.

The meeting began with just Kravis and Roberts for KKR, Cohen and Jim Robinson for Shearson, and Johnson. The five met from 6 to 7 PM and made enough progress so that the group decided to bring in the lawyers. They resumed talks, minus Johnson, around 9 PM, joined by KKR lawyers Beattie and Casey Cogut; Jack Nusbaum, Shearson's outside counsel; Goldstone; and Salomon's Tom Strauss and his firm's outside counsel Peter Darrow. Some major issues, such as control of the board and ownership of the equity, were broadly resolved fairly early on. Beattie began to draft an agreement that KKR and the Shearson group would pursue RJR jointly as equal partners in the deal. This was a major concession from KKR. The management contract that Johnson had cooked up with Shearson was also aired. KKR had no quarrel with Johnson and his management team receiving 8.5% of the equity in the new company - as long as it didn't come out of KKR's pocket. Shearson agreed to include Johnson's piece in its half of the equity. The group broke up at 11 PM so each side could huddle and then reconvene at RJR's offices around the corner on West 57th Street. Alas, this was a vastly different scene from the plush, quiet surroundings of the Plaza. Lawyers, bankers, advisers, principals, and assorted staff, as many as 50 wheeler-dealers of various pin stripe, swam through the 48th floor office overlooking Central Park.

Kravis and Cohen tussled over who would manage the junk bond underwriting that would provide the financing: Drexel Burnham, KKR's longtime investment banker, or Cohen's partners at Salomon. The quarrel had that noxious mixture of money - some $200 million in fees were at stake - and turf. Drexel was the object of a criminal investigation and needed the prestige of leading the deal. Salomon had clashed repeatedly with its upstart competitor as Drexel's junk bond business flourished in the '80s. Salomon and Shearson thought the financing that KKR proposed required more junk securities than was prudent and wanted more bank debt. Tom Strauss insisted that Salomon, along with Shearson, play a significant role in the financing. Gradually the distrust that pervaded earlier meetings resurfaced. Kravis had spotted John Gutfreund, Salomon's chairman, wandering around, but Gutfreund was not at the meetings. At times Strauss disappeared, leaving Cohen to carry on alone. Says Kravis: ''We had no idea who was running the show. One minute there's John Gutfreund, then there's Tom Strauss, then we didn't see either of them anymore and Peter Cohen is going back and forth talking on their behalf.''

Exasperated, Kravis and Roberts asked to talk to Gutfreund. He was strolling along 57th Street when Johnson found him. Cohen was having a hard time keeping his aggression holstered. But he hammered away at Salomon all night and finally persuaded Strauss to soften his position - co-management with Drexel was possible. But Cohen, too, was disturbed by men who weren't there, notably Leon Black, Drexel's mergers and acquisitions chief, and Peter Ackerman, one of its leading dealmakers. He had the same doubts Kravis did. Just who was calling the shots? At 5 AM, with each side confused about who was saying what for whom, the group stopped talking. For the next several hours various emissaries tried to reconcile differences, but finally around 9 AM Jim Robinson and Shearson lawyer Jack Nusbaum took the elevator six floors down to KKR's offices. ''We've made a good-faith effort and we came a long way, but we just can't agree,'' Robinson told Kravis. ''We are announcing a bid of $92 for the company.''

THE ROBBER BARON

It had taken plenty of cajoling before Steven Goldstone, Johnson's lawyer, was willing to show KKR the management group's contract. The document was complicated and still not specific as to whom it covered. Beattie, KKR's lawyer, argued that his client needed to see it, and Goldstone finally relented. Before he handed it over, he said to Beattie: ''I must have your word that you won't reveal any of this or make any copies.'' Beattie agreed, but KKR's staff learned some of the details. Then three days later, on Saturday, November 5, the contents of the contract appeared on the lead business page in The New York Times under the headline ''Nabisco Executives to Take Huge Gains in Their Buyouts.'' The course of business history was about to change. Beattie denies discussing the contract with the Times. However the newspaper got the scoop, Johnson became the biggest symbol of corporate greed since the robber barons. Charles Hugel, the chairman of RJR's special directors committee, couldn't quite believe what he was reading when he picked up his Times that Saturday morning. The board did not know that the contract existed. As the day wore on, directors kept calling Hugel. All were concerned and some were angry: Was Johnson trying to make fools of them? Hugel telephoned Johnson. Why wasn't the board aware of the contract? he demanded. Johnson explained that the agreement had never been finished and that he didn't have a complete version to give to the board. He also denied trying to walk away with $100 million for himself and he promised to send a letter to Hugel immediately to clarify the details.

THE AUCTION BEGINS

The contract controversy obscured the momentous benefit that the fight between KKR and Shearson was bestowing on RJR Nabisco's shareholders. The auction that was now under way would be a true one, no collusion, no holds barred. On November 7, the committee sent all bidders a letter outlining the rules. In particular, the committee asked prospective purchasers to provide ''a substantial common stock-related interest'' in their offers for current shareholders. The committee's advisers, the investment banking firms of Lazard Freres and Dillon Read, believed that the RJR shareholders should have an opportunity to reap what could be considerable long-term gain down the line, so they recommended that the board solicit offers that combined cash and securities that could be converted to stock at a future date. The rules also said that the committee could change the rules. The investment bankers at Shearson plotted their strategy around three words: Cash is king. By this they meant that they believed the special committee analyzing the bids would consider cash a superior form of payment than securities.

To Johnson, historically a seller, the three little words made a lot of sense. And he heard them from none other than Charlie Hugel, chairman of the special committee. Hugel confirms taking this position with Johnson, but points out that he did so before the committee promulgated the bidding rules. Unfortunately, Johnson served as the only link between Shearson and the committee, and he kept missing the importance of ''continuing equity.'' The bids were due at 5 PM, Friday, November 18, in the law offices of Skadden Arps Slate Meagher & Flom on Third Avenue. Shearson and Johnson were going to put their best foot forward. The management group, believing that it had been hurt by security leaks, deputized Duncan Stewart, an outside lawyer, as its messenger. What Stewart delivered to Skadden Arps was a bid of $100 a share - $90 in cash, $6 in preferred stock, and $4 in preferreds convertible to 15% of the new company.

The bid topped KKR's $94 offer - $75 in cash and $19 in securities convertible to 25% of the company. But there were two important differences: KKR had more ''continuing equity.'' And KKR said that it would keep as many of the food businesses as it could. Shearson and the management group planned to sell them all off and so became tagged as bust-up artists. By this time another noted merchant banker, First Boston Corp., had also joined the fray, adding a twist of its own. First Boston was teamed with Resource Holdings, a merchant banking outfit headquartered in New York City and partially bankrolled by the Pritzker family of Chicago and Philip Anschutz, a Denver businessman. The First Boston plan had one catch. It depended on a tax loophole that was closing at the end of the year. Both KKR and Shearson were aware that a bid from Resource Holdings and First Boston was likely to come in. Earlier in the week the First Boston group tantalized the special committee of the board by asserting that its offer could be as much as $118 a share. But, unhappily, the financing was incomplete.

Hugel was worried about extending the auction deadline to accommodate the third bidder, fearing that KKR might drop out. For KKR there was always the next deal. But for Hugel, KKR's exit would leave only the management bid on the table and the iffy proposition from First Boston. Directors Davis and Macomber wanted an extension, convinced that a board-led restructuring might produce even higher values, or at least force a better price. The directors still had no firm idea of the breakup value of the company and were afraid of selling it too cheaply. Says Macomber: ''I pushed hard on the restructuring issue. It had to be considered. We had to be ready to move.'' Atkins informed the committee on Sunday that prudence dictated an extension to consider the First Boston bid fully. Then the special committee got a jolt from KKR: a letter, written by lawyer Beattie, that said the information the firm was receiving from RJR managers was inaccurate and misleading. Based on that information, KKR said, it may have underbid.

Throughout the previous week KKR had been reviewing RJR's businesses with the operating executives. The food company managers, furious with Johnson for selling them down the river so he could keep the tobacco works, were open with his opponents. The alleged information shortage centered on the tobacco business. Digging in behind their boss, Edward Horrigan, a member of the management group, tobacco executives gave KKR the cold shoulder. Says a KKR source: ''We were meeting with some people who seemed to have amnesia. They remembered their names and their positions.'' Initially Kravis and Roberts decided to say nothing to the committee about their difficulties. But on Saturday, November 19, after discussing their bid with one of the committee's investment advisers, KKR got the ''distinct impression,'' says a participant, that it was behind in the bidding. That's when it lobbed in the letter.

The committee voted to extend the auction ten days. The management group and Shearson believe the special committee's investment bankers used the First Boston bid as a stalking horse to set up the second, more expensive round of bidding. Their ire centered on one of the committee's financial advisers, J. Ira Harris, 51, a partner at Lazard Freres and a onetime Salomon Brothers executive who allegedly left that firm on bad terms with John Gutfreund. They believe he had a hand in bringing in the Pritzker family. Jay Pritzker, the top financier of the clan, denies the allegation, as do First Boston and Harris. He also denied leaving on bad terms with Gutfreund. Harris told FORTUNE: ''It's ludicrous. This is a flagrant attempt by the management group and its advisers to cover up the consistent mistakes they made in handling this transaction.''

As the high bidder in the first round, the Shearson-Johnson team was in a serious bind going into the second. First Boston, deciding it couldn't get the deal done fast enough to take advantage of the tax loophole, folded its tent. The management group did not want to bid against itself in the event KKR decided to drop out. Furthermore, the group was still committed to pushing the cash part of the deal as high as it could. Shearson's Tom Hill thought this maneuver would thrust the sword at his rival's weakness: ''We knew KKR could not make a deal having a huge cash level and keep the food companies.''

Besides, Johnson still believed the committee would find cash more compelling than junk. Having received KKR's letter of complaint, the special committee directed the offending RJR executives to be more voluble. KKR immediately set out to put the pedal to the metal, challenging its staff to find a price it could go to the wire with - one that would let KKR keep the food assets and still satisfy the lenders that the firm would have the ability to service its debt. The staff debated the price tag in interminable meetings on Tuesday and Wednesday. Kravis wanted the management group to think KKR was less than serious, so he went skiing in Vail, Colorado. Johnson went to Hell, media version. From the day he put his company in play, he had refused to talk to the press. Even after the management contract hit the papers, he kept his mouth shut. But a few days before Thanksgiving, Time magazine (owned by Time Inc., the publisher of FORTUNE) persuaded Johnson to be interviewed for a cover story on the buyout. Although he was coached before the interview, Johnson at once reverted to form: glib and outrageously candid, a reporter's dream and a publicist's nightmare. The interview made him look only slightly less sensitive to the welfare of his employees than Vlad the Impaler. Discussing potential layoffs in the Atlanta headquarters, he said with seeming nonchalance that those workers had ''portable'' jobs and could find employment elsewhere.

THE FINAL ROUND

While Johnson was wiping the egg off his face, KKR was hatching ideas. On Tuesday, November 29, the day the new bids were to be submitted, KKR's staff gathered for a final meeting: Kravis and Roberts went around the room of associates asking each for a price. The agreed-upon figure: $106 a share, $80 in cash. KKR had already told the committee that if its bid were accepted, it would dump Johnson. No hard feelings, just one of those things. Says Kravis: ''It became clear he was going his way, and we said fine. We'll go our way, but if we end up buying this company, the best thing to do is to find a new CEO.''

The Shearson-Johnson team assumed, with catastrophic consequences, that it did not have to be the highest bidder in the second round. Since the special committee changed the rules the first time, the Shearson bankers reasoned, it might do so again, and they didn't want to lead with their chins. Says Tom Hill: ''We just wanted a place at the table.'' Peter Cohen played safe, raising his price one dollar to $101 share, and sending a message to the committee that his group was willing to negotiate ''any and all'' provisions of its bid. The bids were submitted again at Skadden Arps at 5 PM and the Shearson-Johnson contingent retreated to Nusbaum's office at Willkie Farr & Gallagher at Manhattan's Citicorp Center. There they waited for an opportunity to negotiate their price. And wait they did.

At 8 PM Johnson left for dinner, telling his colleagues they were losers ''no matter what we do.'' He believed the board was a captive of its investment banker advisers, and that his group's bid would have to win by a wide margin before the committee would award him the deal. Cohen went home to celebrate his 20th wedding anniversary. Around 10 PM Nusbaum found out from a reporter that the committee's advisers were negotiating with KKR. ''We were really astounded,'' he says. He sent a letter to the committee demanding to see KKR's bid and insisting on the right to negotiate. Johnson called Hugel, who told him ''it wasn't close,'' but Hugel wouldn't tell him the difference. Cohen came tearing back from dinner and initiated a series of computer runs to evaluate the variety of combinations of cash and debt he could offer to raise the nominal value of Shearson's bid.

Johnson showed up at Skadden Arps's offices the next day, November 30, wanting to address the committee. By now the special committee was reviewing with its investment bankers the KKR offer as it had been completed the night before. The committee also asked KKR to discuss its plans for running the company should it acquire RJR. Hugel, aware that the management group wanted to make another bid, then asked George Roberts to extend the 1 PM deadline he had put on the offer the night before. Roberts said no. Cohen reached Johnson and Nusbaum as they cooled their heels. Full of vinegar, he had a new number to play, $108 a share, and a new way to play it. ''We'll use a stick,'' he told Nusbaum. ''We just called the bid in to Dow Jones.'' It was noon. The committee now had a new $108 offer from management and a $106 offer from KKR that was ticking away. Says Hugel: ''We felt KKR was serious about the deadline, but we had a fully negotiated agreement with them. You don't dismiss that out of hand.'' Hugel went back to KKR and asked again for an extension. Roberts relented. He would delay one hour, but at a price: 20 cents a share reimbursement for expenses the firm figured it would incur during the contest. Hugel agreed. For 60 minutes the special committee had KKR in hand, but it was uncertain about the Shearson-Johnson group: Was it still playing the game and willing to bid higher?

Around 1:30 PM Atkins, the committee's lawyer, told the management group to ''sharpen your pencils and put your best bid on the table.'' Cohen was ready. He offered $112: It broke down into $84 in cash; $24 in payment-in-kind (PIK) securities, which accrue interest but don't pay cash for a period of years. The additional $4 was in preferred stock. Atkins appeared in the KKR caucus room and tried to buy more time. He asked if the firm would enter into a merger agreement at $106 a share under the condition that if the offer was topped within seven days KKR would receive a $1-a-share kill fee. Kravis said no, but surprised Hugel with a new bid of $108, upping the PIK securities in his package. No fuse was attached to this offer because Kravis believed there would be no more bidding and that the committee was beginning its final deliberations.

With KKR on ice, the committee had the leisure of spending the rest of the afternoon with the Shearson crew, negotiating the terms of the securities included in its bid. Some five hours later Hugel approached Kravis and Roberts and asked if the firm would like to make its ''best and final'' offer. Kravis and Roberts agreed to up the ante by $1 in cash to $109. But Roberts didn't make the same mistake twice. Thirty minutes, he told Hugel, or KKR was voting with its feet. ''Every time we went into that room we could see George clench,'' Hugel recalls. ''We had to get out before we froze to death.'' With the score standing at $112 a share to $109, the committee had to make a choice. It was easy: $109.

In the end KKR bested its rival because the firm was more flexible in negotiating with the special committee than were its opponents. At the committee's request, for example, KKR changed the conversion provision of the debentures in its package. At first it offered to convert the debentures into RJR equity after two years, but the committee talked KKR up to four years. The longer conversion period ensures shareholders a greater possibility of future bounty. Lazard Freres and Dillon Read, the advisers to the committee, figured the convertibles would trade at par or above it. If the securities trade at par they are as good as cash. The king was dead. The management group refused to entertain modifications the committee's investment bankers wanted - or at least the investment bankers felt that way.

The committee's advisers discounted the management group's securities more heavily. Including discounts, KKR's bid was calculated to be worth $108 to $108.50 a share, and management's $108.50 to $109. The committee's investment bankers threw their hands up, declaring the bids ''substantially equivalent.'' It was now the special committee's turn. After 12 hours of deliberating the committee called the board to order. After another 15 minutes of discussion, Martin Davis of Gulf & Western made a motion to sell the company to KKR. The oft-pronounced verdict on the directors' decision is that they awarded KKR the company to avoid charges of inside dealings with a management group that would reap a fortune in the buyout. But by then Johnson's management contract was a shadow of its original. In the last-gasp effort to make their offer more attractive, Shearson and Johnson agreed to slice the management equity down to less than half its initial size. ''If this goes on any longer,'' Johnson joked with Cohen, ''I'm going to be paying you guys.'' Of his committee's deliberations, Hugel says sternly: ''Nobody said, 'Let's screw Ross Johnson.' ''

Ultimately the directors bet on the come. The returns from the surviving food and tobacco company - if the various projections are correct - might create an enormous profit for shareholders who hold on to their convertible securities. Hugel, for one, says he is hanging on to his. For a fellow $22 billion in debt, Henry Kravis is sanguine. He is confident that the 3-to-1 debt-to-equity level he structured for RJR has quite a margin of safety to it, even if the tobacco business doesn't. To replace Ross Johnson and call the shots at RJR, Kravis has hired - no small irony - Louis V. Gerstner, Jr., the president of Shearson's parent, American Express, and Jim Robinson's right-hand man. His reported $2.3 million starting salary and $10 million to $15 million signing bonus makes Johnson, who was earning $1.8 million, look underpaid. At Shearson, Peter Cohen is not talking like a loser. The RJR contest, he says, demonstrated his firm's ability to raise huge amounts of cash and has led directly to three or four other big deals. As for Ross Johnson, he watched horrified - as if numbed - as the numbers kept going up and up and up. At the end, he admits: ''I was a spectator at a tennis match.'' But don't feel too sorry for him - he floated away on a golden parachute of at least $23 million. And don't expect any regrets either. Johnson says he would do it again: ''The thing that makes me so comfortable is that I did what I was paid to do - get value for shareholders.'' The shareholders of RJR Nabisco are the ones who really made out like bandits.


"Showdown At Cineplex," by John DeMont and John Daly, Maclean's, May 8, 1989

GARTH DRABINSKY IS LOCKED IN A HEATED BATTLE TO REGAIN CONTROL OF THE COMPANY THAT HE CREATED

The guest list was striking testimony to his influence in the glittering world of Hollywood. Shirley MacLaine, Paul Newman and Steven Spielberg were among show business celebrities who accepted invitations to see Garth Drabinsky, the chairman of Toronto-based Cineplex Odeon Corp.—North America's second-largest movie theatre chain—receive B'nai Brith International's Distinguished Service Award on May 7 at New York City's posh Hotel Pierre. But even in that atmosphere of adulation there was bound to be an element of tension. One of the event's scheduled co-chairmen was Sidney Sheinberg, president of U.S. entertainment giant MCA Inc.—Cineplex's biggest shareholder. But last week, Sheinberg's office said that he had decided not to attend the ceremony. MCA, in fact, is embroiled in a vigorous fight over Drabinsky's ambitious plan to regain control of Cineplex, the company that he founded.

The feud between MCA and Cineplex was building last week into a tense drama. The angry rift surfaced on April 8, when Drabinsky, Cineplex vice chairman Myron Gottlieb and a group of their backers tried to take effective control of Cineplex by privately buying a 30 percent shareholding from a consortium led by Cineplex's second-largest shareholder, Montreal businessman Charles Bronfman, to go with the Drabinsky group's own 9 percent stake. By increasing their total Cineplex holdings to 39 percent, Drabinsky and his group would have a larger controlling interest than MCA, which owns half of the company's common shares but has slightly less than 33 percent of the voting shares, in accordance with Canadian restrictions on foreign ownership.

But last week, the Quebec Securities Commission dealt a severe blow to Drabinsky's ambitious takeover strategy by ruling that his group's ambitious offer to buy Bronfman's holdings privately—without making an offer to all shareholders—broke provincial securities law. Then MCA threatened to sue Drabinsky, Gottlieb and five other members of the Cineplex board. But following a crucial Toronto board meeting last Thursday, they agreed to drop the actions. And at week's end, Drabinsky and his allies were trying to put together a multimillion-dollar proposal to buy out both MCA and the Bronfman group, as well as the other Cineplex shares they do not already own. Said Ronald Rolls, a lawyer representing Drabinsky: "All sides are considering their positions at the moment."

Analysts said that the Montreal group is anxious to sell its shares, which have fluctuated sharply over the past two years, falling from a high of $19.37 to a low of $9.62 and closing at $16.75 last Friday. According to court documents, both MCA and the Bronfman consortium have apparently grown concerned about Cineplex management. Moreover, Cineplex has recently faced severe criticism from a U.S. accounting firm over its accounting methods. But analysts said that the Bronfman group is reluctant to simply dump its stock on the open market because such a move would send prices down further. They added that Bronfman and his supporters could have another option if a new offer for the shares does not materialize. In that case, they said, Bronfman could join forces with MCA, and they could effectively force Drabinsky out of the company in order to maintain the value of their shares.

For their parts, both Drabinsky and Gottlieb declined to respond to Maclean's requests for an interview.

But whatever happened, Drabinsky appeared to be in for one of the toughest fights of his controversial career. After he launched his chain of movie theatres in 1979 in Toronto, rapid expansion pushed his company to the brink of bankruptcy only three years later. But he battled back—largely with the help of an infusion of money from Cemp Investments Ltd., controlled by Charles Bronfman. Drabinsky has built an empire of futuristic movie theatres with a total of 1825 screens across North America—second only to New York City-based United Artists Theatre Circuit with 2670 screens—and Britain.

Drabinsky's big breakthrough came in the spring of 1986 when MCA paid $219 million for 50 percent of Cineplex. The arrangement was mutually profitable. Patrick Slattery, a Toronto analyst with the brokerage firm Maison Placements Canada Inc., said that MCA, which owns the Universal Pictures movie studio in Hollywood, received assured access to Cineplex's theatre screens in the important U.S. markets. And Drabinsky, in turn, used MCA's financial backing to help fund his aggressive expansion plan into state-of-the-art, multiscreen movie theatres, which pushed his company to the forefront of the movie theatre business. But Drabinsky's rapid growth carried a steep price tag: the company's long-term debt had ballooned to $816 million by the end of last year, against assets of $1.5 billion and a profit of $49.7 million.

That debt may be at the heart of Drabinsky's current battle with MCA. Sensing that the company could have trouble servicing the huge debt load, stock market speculators known as short sellers have been showing a growing interest in Cineplex shares for the past year. Their tactic is to borrow shares from stockbrokers, then sell the shares on the market. They hope to repurchase them at a lower price than they originally paid, thereby earning a solid profit. Last week, some short sellers, who ref" 'ed to be named, told Maclean's they were speculating that the Drabinsky group—which includes Toronto real estate developers Rudolph Bratty and John Daniels, investor Andrew Sarlos and secretive investment dealer Gordon Capital Inc.—would not be able to put together an offer for all of the shares, which would push Cineplex share prices even lower.

Drabinsky has cut Cineplex's debt by selling off assets. But this may also have helped sour Drabinsky's relations with MCA. Initially, that partnership was a cooperative one—Drabinsky was even touted as a possible heir to the scrappy Sheinberg as MCA's president. But documents filed with the Supreme Court of Ontario in Toronto show that the relationship between the two men became strained, particularly after March 22 when Cineplex announced it was selling its 50 percent interest in Universal Studios Florida—an amusement park in Orlando scheduled to open in 1990, which Cineplex had built with MCA. Cineplex sold it to London-based Rank Organization PLC—a hotel and entertainment consortium— for $180 million. Cineplex said that it wanted to use the proceeds from the sale to reduce debt. In an Ontario affidavit filed on April 20 during an earlier injunction against Drabinsky's move on MCA, MCA vice president Charles Paul stated that the MCA and Bronfman-nominated members of the Cineplex board of directors had criticized Cineplex's financial reporting practices on several occasions. Said Paul: "It was apparent that the two largest shareholders of Cineplex were entertaining very serious questions as to the quality of management that was being provided by Cineplex."

As Drabinsky planned his next move last week, he also faced a barrage of criticism from Kellogg Associates, an independent Los Angeles-based accounting firm, which issued a strongly worded three-page report stating that Cineplex's accounting was the "most aggressive [it] had encountered" and questioned its conclusions. Kellogg investigates the validity of earnings reported by companies in order to provide its subscribers with early indications that a company's profitability could decline. The firm, which based its Cineplex findings only on corporate documents filed with securities regulators in the United States, concluded that Cineplex's 1988 financial statements contain "incorrect reporting." And it speculated that the company's financial reporting could spark an investigation by U.S. securities regulators and lawsuits by Cineplex investors. David Taylor, a partner with Cineplex's auditor Thorne Ernst & Whinney of Toronto, said that the company "strongly stands behind its opinion" and sees no reason to change or qualify its approval of Cineplex's financial statements. Still, for Drabinsky, the tussle with Kellogg was clearly just a diversion from his main challenge—putting together a deal for control of the company that he founded.


"5 RJR Units Sold For $2.5 Billion," by Steven Goldstone, The New York Times, June 7, 1989

RJR Nabisco Inc. today announced the sale of five of its European food businesses to BSN, France's largest food company, for $2.5 billion.

RJR Nabisco, which was taken private in a huge $24.53 billion buyout in February, said the sale of these cookie and snack businesses was part of a plan it had agreed upon with its banks to cut its debt by $5.5 billion.

For BSN, whose products include Dannon yogurt, Evian mineral water and Kronenbourg beer, the purchase is part of its aggressive strategy to become a giant in Europe's food and beverage market to compete better when Europe's internal trade barriers fall in 1992.

Over 20 Companies Acquired

Today's move was the biggest acquisition to date by Paris-based BSN, whose main rivals in Europe are Unilever NV and the Nestle SA, and would make it Europe's top cookie producer. In the last two years, it has acquired more than 20 companies with sales totaling more than $3 billion.

The operations sold by RJR Nabisco, which is moving its headquarters to New York from Atlanta, had operating income of $137 million on sales of $1.2 billion last year. The five operations are the Belin Group, a French cookie and pastry producer; Saiwa, a cookie and snack business in Italy; the British business operations of Nabisco Brands, and two other British companies, Walker's Crisps and Smith's Crisps, which make potato chips.

Louis V. Gerstner, Jr., RJR Nabisco's chairman and chief executive, said, ''The sale represents an important step toward achieving our goal of reducing the company's overall debt.''

RJR officials said they put the five businesses on the auction block three weeks ago and were planning to receive offers on Wednesday, June 7. They instead announced the BSN deal today. Mr. Gerstner said other companies had expressed interest but no other formal bids had been made.

''BSN made a preemptive bid,'' Mr. Gerstner said in a telephone interview. ''What made us willing to go ahead was they were willing to bid for all the businesses, they were willing to close the transaction so quickly and they came within our price range.''

Mr. Gerstner said this was the first phase of a plan to reduce his company's $25 billion in debt by $5.5 billion by July 1990. He said his company had not yet decided on the next businesses it would sell.

''This gets us off to a real fine start on this process,'' he said.

In 1988, BSN had net income of $326.7 million on revenues of $6.3 billion. BSN is the world leader in dairy products because of its strength in the yogurt business, and is also one of Europe's largest beer companies and pasta makers. With its Evian and Badoit brands, it is neck and neck with Perrier to be No. 1 worldwide in mineral water. It is France's No. 3 champagne company, with its Pommery and Lanson brands.

BSN was formed in 1966 when two small bottle makers merged. In the next two decades, it diversified into food as a logical complement to its bottle and jar production.

Concentration in Europe

''BSN has been pursuing a strategy of concentrating on Europe in preparation for the integrated European market,'' of 1992, said Erick Boutchnei, an analyst with Patrick du Bouzet SA, a Paris-based stockbrokerage. ''These acquisitions help them expand into markets where they are not as strong as they would like.''

Pierre Benaich, an investor relations official at BSN, said his company was eager to buy the RJR operations because BSN, which is strong in cookies, has long wanted to expand into the cracker market.

''This also furthers our goal of strengthening our position in Great Britain,'' Mr. Benaich said. ''The British are the world's biggest biscuit eaters.''

Industry analysts said BSN should be able to use its strong distribution network in Europe to expand sales onto the Continent of some RJR Nabisco cookies and crackers that had been largely limited to Britain.

''BSN has a handicap in terms of size compared to its two big competitors, Unilever and Nestle,'' said Mr. Boutchnei, the analyst. ''That is why it has to be so agressive on the acquisition front.''

Under the acquisition campaign of its 70-year-old chairman, Antoine Riboud, BSN has recently bought Lea & Perrins in the United States, the maker of Worcestershire sauce; the Saratoga mineral water company in the United States, and Scharffenberger Cellars, a California producer of sparkling wines. Last year, it also merged its Kronenbourg brewery operation with the Maes Group, one of Belgium's leading brewers.

Antitrust Problems Possible

BSN officials said today's acquisitions would make it Europe's top cookie producer, in front of United Biscuits. Analysts said, however, that BSN could run into antitrust problems in France with the acquisitions because it has about one-third of France's cookie market. The acquisition of Belin from RJR Nabisco could push BSN's market share to near 50 percent, analysts said.

Mr. Gerstner of RJR said that today's sale did not mean his company was abandoning Europe. He said RJR Nabisco was still strong in the cigarette market, was maintaining its Del Monte operations in Europe and still had cookie operations in Spain and Sweden.

Analysts said Allied-Lyons and United Biscuits, both of Britain, and Bahlsen of West Germany, had also been expected to be bidders for the RJR Nabisco operations.


"Paramount, Pressing Warner, Bids $10.7 Billion For Time Inc.," by Robert J. Cole, The New York Times, June 7, 1989

In a move expected to set off a nasty battle involving some of the nation's most visible media and entertainment companies, Paramount Communications Inc. - known until Monday as Gulf and Western Inc. - offered last night to pay $175 a share, or $10.7 billion in cash, for Time Inc.

The offer, rumored for weeks, came only two weeks before the proposed merger of Time and Warner Communications Inc. was to be completed.

Time and Warner agreed in March to merge their operations, creating what would be the world's largest communications company.

'Up to the Shareholders'

Asked about the chances of his offer breaking up the proposed merger, Martin S. Davis, chairman and chief executive of Paramount, said in an interview: ''It'll be up to the shareholders. They can take all cash from us or no cash at all and end up with a piece of paper. Whatever the shareholders decide is the decision we'll abide by.'' Time stock closed at $126 yesterday, up $2.75. Time and Warner are known to have made elaborate plans for the possibility of a hostile offer.

J. Richard Munro, chairman of Time, received news of the hostile bid late last night in a telephone call from Mr. Davis. Mr. Munro was said to have expressed surprise, because he believed he had received assurances from Mr. Davis that he would not make a bid.

Through a spokesman, Mr. Munro declined to comment on the bid. But in a terse statement, Time said, ''Mr. Davis's proposal will be reviewed by Time's board, as required by law.''

The statement added that for now the company was advising its shareholders not to do anything until a decision was reached by the board.

A spokeswoman for Warner said the company would have no immediate comment. She also said that Steven J. Ross, chairman of Warner, who was instrumental in setting up the Time-Warner deal, would not be available for comment. Shareholders are scheduled to vote on the Time-Warner merger on June 23. Paramount said it would not try to block that vote, but would ''immediately withdraw its offer if Time Inc.'s shareholders approve the Warner transaction.''

When asked how he saw the fit between Time and Paramount, Mr. Davis replied: ''It's the same fit as with Warner. It'd be a premier communications company about the same size. If it happens, it'll be the biggest.''

Like Warner, Paramount has a movie studio and a television production operation. It also owns Simon & Schuster, the big publishing house. It is selling its only noncommunications unit, Associates, a financial services business.

Warner owns the nation's most successful record company and is a leading operator of cable television systems.

In addition to its roster of magazines, including Time, Life, Fortune, Money and Sports Illustrated, Time controls American Television and Communications, the nation's second-largest cable company; HBO and Cinemax, the cable movie channels, and a huge stable of book companies, including Time-Life Books and the Book-of-the-Month Club, and 14 percent of Turner Broadcasting.

The merger of Time and Warner would not only allow the two companies to produce programming but also to distribute it in movie theaters, in which they now have an interest, as well as on home video and on cable television.

Raised 'Several Times'

Mr. Davis noted in a statement that over the years he had raised the possibility of a merger ''several times'' with Mr. Munro, 58 years old, and Nicholas J. Nicholas, Jr., 49, president and chief operating officer of Time.

He went on in the statement to say that he would have ''much preferred to renew these discussions before launching our offer.'' Referring to the deal between Warner and Time that prevented talks with others, however, he noted that ''the blackout provision in Time's agreement with Warner Communications precluded this option.''

He said that as soon as Time was ''legally free'' to talk, he asked to meet with executives to work out a deal. He asked that his offer be considered ''in the light of our previous discussions and the fact that the proposed Time-Warner deal is actually a sale of Time Inc. to Warner - because Warner shareholders would control 60 percent of the equity and voting power of the combined company.''

He said that a letter sent to Mr. Munro offered to ''negotiate all aspects of our proposal,'' a remark often interpreted as meaning that the bidder is prepared to increase the offer.

Wide Conjecture

The hostile bid, made in a tender offer to stockholders today, had been the subject of widespread conjecture among Wall Street traders, speculators and ordinary investors. The bid was endorsed at a Paramount board meeting yesterday. Paramount's financial adviser is Morgan Stanley. Traders on the New York Stock Exchange, going more by the feel of the market than on real information, pushed up the price of Time stock yesterday. Nearly a million shares changed hands. Paramount advanced $1, to $54, in heavy trading.

Many on Wall Street believed that someone could offer Time shareholders more than they would be getting in the Time-Warner merger, which involves an exchange of stock. But no one seemed willing to challenge the deal.

'Blessed by Congress'

John Reidy, a media analyst at Drexel Burnham Lambert, said: ''People saw this as a friendly deal that created a powerhouse media company that appeared to be blessed by Congress.''

Even Warner and Time had difficulty trying to figure out whether the 61-year-old Paramount chief, largely responsible for making the company into an entertainment and publishing success, would go on the attack.

Other Bidders Possible

Paramount's move could encourage other bidders to step forward, but it was not clear if any would.

Many professionals had speculated that after a hostile offer, a friendly bidder would enter the drama to rescue Time. In fact, that was the role many envisioned for Paramount -the white knight, not the aggressor.

Among the more widely rumored suitors, possibly working as a group, are Jerry Perenchio, the West Coast movie executive; Al Taubman, the Detroit real estate developer, and Charles Dolan, chairman of Cablevision, the big cable company. They are believed to have been trying to raise money for a bid, particularly with the close help of the General Electric Capital Corporation.

Time and Warner are said to have heard of the discussions and to have warned GE, which owns NBC, that they would complain to the Federal Communications Commission about any GE involvement in a bid that threatened the merger.

The Time-Warner argument would be that GE is already so deeply involved in broadcasting that to lend money to anyone to bid for Time would be a serious violation of Federal broadcasting law.

$18 Billion Exchange

Although the Time-Warner merger deal involves an exchange of securities amounting to $18 billion, and is therefore not exactly comparable to Paramount's $175-a-share cash offer, a rough comparison suggests that Time stockholders would be getting $113 a share in the Time-Warner deal, or $6.4 billion. The dollar value is not higher because Time shareholders will get only 38 percent of the stock of the combined company if the two merge; Warner shareholders will get the remaining 62 percent.

''Time Inc. and Paramount Communications are a superb business fit,'' Mr. Davis said in a statement. ''The acquisition of Time Inc. represents the culmination of a six-year strategic transformation of our company into a leader in publishing and entertainment, a focus reflected by our new name. Together we will be the foremost American communications company, capable of competing on a global scale against foreign media giants.''

Mr. Davis is understood to have approached Mr. Munro and other senior Time executives early last year, well before Warner officials began conferring with Time. The talks, described as just preliminary discussions, apparently ended because of no real interest from Time.

Mr. Davis, sounding a little tired, declined to say how long yesterday's board meeting lasted but said the decision to make a tender offer for Time was by unanimous vote of Paramount's 14-member board.


"Paramount Lifts Offer For Time To $200 A Share," by Paul Richter, Los Angeles Times, June 24, 1989

Playing to its Wall Street and courthouse audiences, Paramount Communications on Friday raised its hostile bid for Time Inc. to $200 per share, or 14% more than the $175-per-share offer spurned by Time directors a week ago.

The offer is conditioned on several factors, and Paramount has publicly admitted that it won't be able to actually purchase Time's shares by July 7, the day the new offer is set to expire.

But in one bold stroke, Paramount increased the pressure on Time's 12-member board and the Delaware judge who will decide whether Time's antitakeover defenses are legal-including Time's recent decision to acquire Warner Communications for $14 billion.

Paramount intends to use the new offer as a "referendum" to urge Time shareholders to send in their shares by July 7 so that Paramount lawyers can argue at a crucial Delaware hearing on July 11 that most Time shareholders favor the cash offer on the table.

That strategy-anticipated by professional Wall Street traders and confirmed by a member of the Paramount team-won't hurt Time shareholders, because federal securities law allows shareholders to withdraw any shares they have tendered at any time before the offer expires. Even though Paramount is setting a "cutoff" date, it expects to extend the solicitation to allow time for the Delaware court ruling.

At the same time, Paramount's sweetened offer is meant to erode Time Inc.'s argument that the earlier Paramount bid was "inadequate."

The Time board deeply angered some investors one week ago by spurning Paramount's cash offer yet substituting no plan that would deliver some cash to its own shareholders.

Instead, the Time board elected to pursue a 4-month-old plan to merge with Warner but changed the terms of the deal to avoid a shareholder vote. No longer would Time and Warner exchange shares in a tax-free deal: Now Time is committed to shouldering massive debt to acquire half of Warner's shares for $70 each, with the remainder to be acquired for a combination of cash, stock or debt equities valued at $70.

The tender offer for Warner is set to expire July 17.

When asked about possible consequences for Warner of Paramount's new offer, company spokesman Geoffrey W. Holmes said: "This is a matter for the Time board of directors to deal with. We have a firm agreement with Time to which we remain committed."

Paramount's increased bid received a quick but inconclusive response from Time, which advised its shareholders not to act until they hear more from the company. A spokesman for the media giant said its board will consider the new Paramount offer but he declined to say when the board will convene.

Stock Price Jumps

Although Paramount's announcement came after the close of New York Stock Exchange trading, shares of Time rose $10.50 to $165.875 on speculative trading pegged to a Page 1 story in USA Today, which reported that Paramount would soon raise its bid to "around $200 a share." Paramount closed at $58, down 50 cents, with more than 1.1 million shares changing hands, while Warner closed at $58.625, down 50 cents.

Even though the new bid would increase Paramount's costs by $1.44 billion, a Paramount spokesman insisted that the company intends to hold on to all pieces of Time and Paramount, rather than sell off assets to ease the debt burden.

But some analysts were skeptical. Lisa Donneson, analyst with County NatWest USA, said the sweetened bid will put Paramount's debt at about $12 billion in 1990, or about 8.5 times its annual cash flow from operations.

That debt burden is higher than the load carried by many entertainment or publishing companies; it is even higher than the debt load of many cable operators, which tend to be heavily leveraged, she noted. "To me that seems very high," she said. "That could mean asset sales."


"Time Inc. Rejects Sweetened Offer From Paramount," by Kathryn Harris, Los Angeles Times, June 27, 1989

Time Inc.'s board of directors moved swiftly Monday to reject as "inadequate" the sweetened $12.2-billion bid for Time that Paramount Communications made only last Friday. The reaction was widely expected.

Time also attacked the new Paramount bid in federal court, only to be slapped in turn with a surprise Delaware lawsuit filed by a powerful group of investors who-until Monday-had refused to confirm their stakes in Time.

Among other things, the latest Delaware suit seeks to force Time to negotiate with Paramount. It was filed by the Robert M. Bass group, Hollywood entrepreneur A. Jerrold Perenchio and Cablevision Media Partners, which is believed to be controlled by New York cable TV executive Charles F. Dolan. According to the suit, the Bass group owns over 600,000 shares of Time stock, while Perenchio and Dolan together control about 1.2 million shares. The three groups together hold less than 5% of Time shares.

In the suit, the Bass group is asking a Delaware judge to delay Time's shareholder meeting Friday because the company has not recirculated proxy materials since Paramount made its surprise bid three weeks ago.

The lawsuit also contends that shareholders should be granted more time to nominate an opposing slate of directors to the four incumbents-including three Time executives-who are standing for election.

In a telephone interview, however, Time Vice Chairman Gerald M. Levin said at least three letters have gone out to Time shareholders to keep them informed of recent events. He insisted that most of the matters before the shareholders remain unchanged.

One major difference, however, is that Time will no longer ask its shareholders to vote on a stock-swap merger with Warner Communications Inc., because Time's board decided to acquire Warner for $14 billion after Paramount mounted its hostile offer. Time's directors-empowered to acquire companies without the approval of shareholders-decided not to risk a shareholder vote on the Warner purchase, which has enraged some investors because the company will take on billions of dollars in debt without paying any cash to Time shareholders.

After Monday's four-hour board meeting, Time's directors said their investment bankers had reaffirmed their earlier assessment of the Warner acquisition and advised directors against accepting the $200-a-share Paramount bid, increased from the earlier $175-a-share offer. They also contended that Paramount has not yet met its own conditions for the offer by arranging takeover financing, completing the transfer of Time's cable licenses and rescinding the antitakeover stock swap with Warner Communications.

New Challenges

Paramount said the rejection would not end its 3-week-old takeover effort. "We will continue to pursue our acquisition of Time in a calm, studied, and deliberate manner," Paramount said in a statement.

Meanwhile, in a federal court in Manhattan, Time filed new legal challenges to the sweetened Paramount bid, attacking it as misleading because Paramount allegedly fails to tell shareholders that it cannot purchase Time shares by the July 7 expiration date advertised. A hearing on the issue is scheduled late tomorrow afternoon before U.S. District Court Judge Robert W. Sweet.

No Comment

On Wall Street, Time shares fell $1.875 to $164 on volume of 1.8 million shares, as the Time board's reaction was widely anticipated. Paramount's stock, fueled by new rumors that the hostile bidder may itself be a takeover target, advanced $2.375 to $60.375 on heavy volume of 2.4 million shares, making it the most actively traded issue. Warner edged up 25 cents to $58.875 on volume of 1.9 million shares.

Time's Levin refused to comment on a published report that the company's investment bankers have valued Time at $250 a share. "The banks have given a value of the company, and what we've said is that $200 is not within that zone," Levin said, declining to elaborate.

Time said in a letter to Paramount Chairman Martin S. Davis that Time last year had considered acquiring Paramount but had rejected the move "as a less desirable means of achieving" the goals it hopes to meet with the Warner acquisition.

Time's letter said the media giant had taken a new, detailed look at its decision to buy Warner "that completely reconfirms our judgment that acquiring Warner is the optimum means to implement our long-term strategy."

Time's rejection "was anything but a surprise," said Peter P. Appert, analyst with the C.J. Lawrence Morgan Grenfell investment firm in New York. "No matter what they're doing today, it's all going to come down to the what the courts in Delaware say."


"Time Buys Warner For $14 Billion," by Steven Mufson, The Washington Post, July 25, 1989

Time Inc. bought Warner Communications Inc. today after the Delaware Supreme Court removed the last barrier to the $14 billion acquisition that creates the world's biggest media and entertainment conglomerate. The court ruling, rebuffing a suit by Paramount Communications Inc., ended a fierce, seven-week-long takeover battle in which Paramount had offered $12.2 billion for Time. Depending on the final wording of the court's decision, the outcome could provide corporate directors with a strong new shield against hostile takeovers, legal experts said.

Starting at 5:01 PM Time and Warner began to act as one, with the new name Time Warner Inc., with one board of directors, two chairmen, 35,000 employees, more than $10 billion a year in revenue - and no profits for more than a year, until it reduces some $15 billion in debt used to finance the acquisition. The new conglomerate boasts the nation's largest cable television company, the leading cable television programming service, the second largest hardback book publisher, a leading paperback publisher, the biggest American-owned music business, the premier magazine group, the top movie studio and a host of other subsidiaries. "This is a behemoth of a company with just about everything under one roof," said an investment banker who specializes in the communications industry.

For Warner executives, the combination is a bonanza. About 500 Warner executives and employees will receive $677 million in stock, stock options and bonus payments. Warner Chairman Steven J. Ross alone will make $193 million. In addition, the 61-year-old Ross will get new stock benefits worth millions more and a 10-year employment contract worth $800,000 a year plus bonuses. To Time Chairman J. Richard Munro, the acquisition makes Time "a global player ... embodying not only the interests of our companies and their shareholders but the national interest as well."

But some investment bankers said Time Warner's global aspirations will be hindered by its heavy debt. Several speculated that even though Paramount Chairman Martin Davis failed to win Time for himself - and has ruled out a bid for the combined companies - he might have succeeded in a secondary goal of hobbling a competitor. Prior to his bid, Time and Warner had planned a stock merger that would have meant less money for Warner shareholders, but less debt for the combined company. "Time Warner would have been on an expedition for acquisitions, but with its debt it probably won't make additional acquisitions in the next couple of years," said J. Kendrick Noble, media analyst for PaineWebber.

Time's president and future Time Warner chairman, Nicholas J. Nicholas, said the conglomerate would concentrate on increasing cash flow instead of selling businesses to reduce debt. Nicholas said the combined company's cash flow of more than $2 billion a year would exceed money needed to service its debt. Still other analysts said the Time Warner combination would reduce diversity and increase the trend toward homogenized media products, but Nicholas disputed those assertions. "It is hard to say why a Time cover on the Siberian miners' strike would be any different or how a new HBO comedy would be different," Nicholas said. "I think when you have a stronger financial company you can afford to take more risks and give people more freedom to do things without immediate returns."

Some analysts expect Warner to be the engine of the conglomerate because it is growing at a faster rate and because of Ross, Warner's aggressive chairman. "Warner is firing on all cylinders at the moment," said Andrew Wallach, a media analyst at Drexel Burnham Lambert Inc. Warner is enjoying a banner year thanks to the record-breaking success of the movie "Batman" and its recorded music business. Wallach estimates that Warner's music business has been growing around 30 percent a year, while Time's magazine group has been growing at less than 10 percent a year. But Time Warner can count on steady growth from the cable TV business, which still hasn't saturated the television market. In this field, Time is stronger, with around 4 million subscribers compared with 1.5 million for Warner.

Although many analysts doubt Time Warner will benefit from many "synergies," they say that the company will probably start distributing HBO movies in Europe, rights Time once regarded as marginal in importance but that can now be tapped through Warner's more extensive European distribution network. Analysts also say that Time Warner will have increased leverage in bargaining for programming and movies for cable television.

For Warner and Time shareholders, there are still some questions about the combination. Time today acquired a little more than half of Warner shares for $70 a share in cash, or about $7 billion, and boosted its holdings of Warner to 58 percent of the outstanding stock. The cash will go to shareholders under a formula to be determined July 31. Time hasn't yet announced how it will pay for the rest of Warner shares.

Today's court ruling followed a two-hour hearing, during which the three Supreme Court justices engaged in a blistering cross-examination of lawyers seeking to block Time's acquisition of Warner. The judges appeared swayed by Time's assertion that a company's directors should be allowed to proceed with established long-range business plans even if an unwanted suitor offers a greater short-term value to shareholders. Time argued the long-term benefits of the Warner acquisition exceeded the immediate value of Paramount's $200-a-share offer. "Must we adopt a rule that says that (if) a bid comes in, really on the eleventh hour after a transaction has been considered for over two years, that everything must stop and that then the board is held hostage to any bidder that walks in?" Justice Andrew Moore asked one lawyer, Michael Klein of Wilmer Cutler & Pickering. Klein represented major Time shareholders who wanted the court to force Time to reconsider the Paramount bid.

Time stock closed down $1 at $137.50 a share today. Warner stock rose $1.62 1/2 to $66.12 1/2 a share and Paramount rose $1.87 1/2 to $59.37 1/2 a share. Time stock, which traded at $126 a share before the Paramount offer, had climbed to $182.75 before falling back as investors became increasingly doubtful that Paramount would succeed. The court won't issue a written opinion for four or five months, so the full impact of the ruling on other hostile takeovers isn't clear. But Time lawyer Robert Joffe of Cravath Swaine & Moore said he expects the justices to "discourage the kind of bust-up raid that Paramount launched here." According to Joffe, the court is "obviously saying a board can look at the long run and doesn't have to operate with one eye on the stock market page. Any other ruling would make it impossible to run a company. It would be like saying Congress needs to have a plebiscite on every important bill."


"Has The Beatrice LBO Gone Pfft?" by Carol J. Loomis and Richard S. Teitelbaum, Fortune, July 31, 1989

KKR's famous food company buyout shows how investors may get unpleasantly surprised. The talk once was of a nearly $4 billion profit. Not anymore.

Until it was made to look Little League by the $25 billion RJR Nabisco deal, the most famous and flamboyant leveraged buyout was of Beatrice Cos. A group of investors led by Kohlberg Kravis Roberts & Co. bought the giant conglomerate in April 1986 for $8.2 billion, of which only $417 million was common equity. Cries of ''Success, success!'' followed. By mid-1987, Beatrice had sold off billions in assets, reduced its debt sharply, and essentially returned to KKR's limited partners - pension funds, banks, and the like - the money they had put in. Estimates of huge, quick profits from the sale of the remaining assets were rife. The press, egged on by Beatrice insiders, speculated that profits could easily run to $3 billion and perhaps approach $4 billion. Don't count on it.

Beginning in 1987, air began to go out of the Beatrice balloon. Estimates of profits shrank, the difficulties of getting gains to the investors mounted, and the timetable stretched out, shriveling returns. The lesson Beatrice brings home: Contrary to what you may have heard, LBO-land is dicey, unpredictable territory in which expectations are sometimes inflated and sour surprises can exact a punishing toll. Now, three years from the striking of the Beatrice deal, there's provocative new evidence about how diminished the profits may be. It comes from the official 1988 annual report filed with the SEC - the 10-K - of a peculiar little company named Regency Equities Corp., which controls a trust that owns warrants to buy 1.5% of Beatrice's stock. Referring to the report of ''an independent appraiser,'' the 10-K gives financial data that indicate 1.5% of Beatrice is worth about $14,550,000. That means 100% is worth $970 million. The point can be stated another way: $970 million is an estimate of the pretax profits Beatrice's investors could capture were there a plan for getting that money out of the company. By FORTUNE's estimate, $387 million of that amount would go to some special investors: KKR itself, current and former members of Beatrice's management, and various non-KKR holders of Beatrice warrants. That would leave $583 million for the limited partners. But these numbers mean little. Beatrice's investors are not due to get $970 million, or any other amount, today. KKR has no here-and-now plan for wringing money from Beatrice for investors.

The story behind Regency's appraisal of Beatrice rivals its findings. Regency is a former real estate investment trust with revenues of $5 million in 1988 and a remarkable 87 million shares outstanding, each selling for about 10 cents. Regency's chairman and ''principal executive officer,'' to quote the 10-K, is a New York lawyer, Marvin L. Olshan, 61. Olshan recently told FORTUNE that he runs Regency. But there are indications suggesting otherwise. A Regency shareholder who knows Olshan once asked him to explain the trust that owns the warrants and got the impression Olshan was himself frustrated by a lack of information. The shareholder got his stockbroker to seek information about Regency from its official headquarters in Omaha. An otherwise unhelpful person there told the broker the company was ''run out of Beverly Hills.''

Ah, Beverly Hills - the city of, among others, Michael Milken. A Milken partnership, indeed, owns 10.8% of Regency. Another partnership, controlled by Milken's brother, Lowell, who like Michael is under indictment and has pleaded not guilty, owns an additional 10.1%. The biggest block of stock, though - 41.9% - is held by two subsidiaries of First Executive Corp., the California insurance company and junk bond buyer run by Milken's longtime friend Fred Carr. Originally the warrants at issue were meant to be sweeteners for investors who bought Beatrice's junk bonds, which were underwritten by Milken's firm, Drexel Burnham Lambert. But most of the warrants instead ended up in the hands of Milken and friends, who paid only a nominal price for them. The Milken connection probably accounts for the fact that Regency has lately had to answer subpoenas from a grand jury, though the company has been told it's not a target of the investigation. Who appraised the value of Beatrice for Regency, and does the appraisal make sense? FORTUNE asked Alison Whalen, a Los Angeles lawyer who serves as general counsel of Regency and is a partner at Irell & Manella, a law firm that has long had ties to the Milkens. Whalen said that her firm helped Regency prepare its 10-K, but that she did not know who made the appraisal. Days later she called back to report that the company was not willing to say.

Nor was Marvin Olshan forthcoming on the point. If Whalen did not want to tell who made the appraisal, Olshan said, ''it would be more discreet for me not to either.'' But he did sound off about Beatrice, characterizing it as a mammoth disappointment. An appraisal, he pointed out, isn't equivalent to cash in the bank. Says he: ''We don't know whether we're ever going to get the money or whether Beatrice is ever going to be worth anything. We all know KKR is going to come a cropper one of these days.''

And what do KKR and Beatrice say about all this? KKR, through a spokesman, said it didn't know of the appraisal and thinks the valuation ''crazy.'' Speaking for Beatrice, vice president Lizabeth Sode said the company knows nothing about the appraisal, didn't help in its preparation, and thinks a figure of $970 million is ridiculously low. Beatrice's chief executive, Frederick Rentschler, wouldn't be interviewed.

There would appear to be at least two reasons for paying more attention to the appraisal than to these protestations. First, as a company dealing with a grand jury, Regency would seem to have a special incentive for providing sound data to the SEC. Second, on Wall Street the appraisal is accorded some credibility. An investment banker who knows the situation well says that $970 million is definitely in the ballpark of what Beatrice might bring in a sale. A look at Beatrice's history as an LBO may suggest why. Now and then the press reports on buyouts in which the new owners seem to have achieved great efficiencies, but Beatrice has not starred in that respect. KKR and Donald P. Kelly, until recently Beatrice's chief executive, did immediately chop about $100 million out of the company's operating expenses, mainly by cutting staff, killing a corporate ad program, and axing promotional campaigns built around marathons and racing cars.

But Beatrice has since primarily been a bust-up deal, in which debt was paid down by selling off assets: Avis, a set of Coca-Cola bottling companies, Playtex, an international food business, and Tropicana. Beatrice put most of its non-food operations into a new company called E-II Holdings, whose shares were distributed to equity investors in the LBO and which was later bought by American Brands. It was the E-II distribution that returned KKR's investors their original Beatrice stake. After Tropicana was sold in early 1988, Beatrice was basically down to being a big domestic food company that on the surface appeared eminently salable. True, in its fiscal year ended last February, with interest charges still running high, the company had earnings on continuing operations of only $5 million. But Beatrice had by year-end reduced its debt significantly, winding up with only $1.4 billion, against the $8 billion once on its books.

The company owns a lot of established brands: Wesson oil, Hunt's tomato products, Orville Redenbacher's popcorn, Peter Pan peanut butter, La Choy Oriental foods, and Swift and Eckrich meats. Sales on continuing operations were about $4 billion in the latest fiscal year. In today's stock market, well-regarded food companies often sell for a price equal to total sales or better. Nonetheless, Beatrice has tried for much of the past two years to get some such price for itself - and failed. By way of a possible explanation, some Wall Streeters note that in mid-1987, when the food business was first put on sale, KKR was raising its sixth, latest, and biggest buyout fund - $5.6 billion, as it turned out. KKR's offering circular then showed Beatrice's estimated value - conservatively calculated, a footnote explained - as about $1.3 billion.

But Henry Kravis, so the Wall Streeters say, was not the least interested in selling for anything near that price. Peddling his fund, they argue, Kravis needed to preserve the notion that Beatrice was going to be the greatest deal ever. And so, it is said, he would not accept a price that proved it to be anything less. Responds a KKR spokesman: ''That's absurd and ridiculous. There's probably some jealousy in that talk.''

A big price would leave any U.S. purchaser saddled with large amounts of accounting goodwill, whose amortization would depress the buyer's reported earnings. One bidder, H.J. Heinz, put a lid on its offer in part because of that. But even foreign companies, which don't have to worry about goodwill as much, passed Beatrice by. Why?

One reason may be potential liabilities hanging over Beatrice's head. In a sense the company resembles a parent that has packed off many children but stored some of their unwanted gear in the attic. One battered suitcase there contains the so-called TransOcean Oil tax case, which arose from a complicated 1980 transaction in which Esmark, a Beatrice acquisition, exchanged its investment in TransOcean for Esmark stock that Mobil owned. Esmark maintained this was a tax-free transaction; the Internal Revenue Service came along in 1984 and said it wasn't. Last year Beatrice, the inheritor of this problem, won the case in court, but the IRS has appealed. If the IRS were to win, the bill for Beatrice could be around $400 million. In addition, says a former Beatrice insider, the residual baggage includes ''little things like toxic shock and other contingent liabilities.''

Any toxic shock problems presumably disappeared when Beatrice sold Playtex, a tampon manufacturer, in 1986 and expressly delivered over any product liability problems to the new owners, a leveraged-buyout group. But it is remotely conceivable that a toxic shock plaintiff - of which Playtex has plenty - could look beyond that company's assets to Beatrice's. That point is more than supported by another piece of baggage called Rusty Jones, a small Beatrice company that sold rust-proofing compounds for cars and that Beatrice acknowledged last year had substantial warranty problems. Last fall Beatrice distanced itself from this headache by selling Rusty Jones. The sale was part of a bizarre series of events that took place shortly after Don Kelly's departure. First, on November 2, a partnership called C&G Holdings II, in which Kelly is an investor, paid $26 million to buy several small nonfood companies from Beatrice, including its 80% interest in Rusty Jones. Then, 20 days later, the Kelly group sold this interest to a Chicago investment group, Renaissance Capital, and a local businessman, Charles Wortman. The price, according to a partner of Kelly's, was under $50,000. This group shuffled the 80%, plus the remaining 20% (bought from Rusty's founder), into a company called Rustco Holdings.

Then, on December 5, the new owners put Rusty Jones into Chapter 11. James A. Chatz, a Chicago lawyer who helped put the Renaissance deal together and who is also Rusty Jones's lawyer in the bankruptcy, says the investment group knew it was taking on big problems when it bought Rusty but thought the name had long-term potential. The group's understanding of the near term, he says, deepened right after the purchase. Warranty claims, he recalls, were coming in at the rate of about $1 million a month. Furthermore, he says with near pride and great cheerfulness, 800,000 car owners hold warranties and that means Rusty is setting a new bankruptcy record for ''the largest number of known potential creditors.'' Actuaries, says Chatz, have estimated that the claims will run to $30 million, though he can visualize scenarios in which they climb to above $100 million.

So who's going to pay these claims? Presumably not Rusty Jones: It has only $6 million in assets. Maybe not anybody. But Chatz has filed papers with the court - so far sealed from the public - declaring Rusty Jones's intention to sue Beatrice. Chatz refused to tell FORTUNE the nature of his suit. Beatrice spokeswoman Liz Sode says the company has no liability. Its reasoning is that Rusty was a subsidiary - ''We were a stockholder,'' says Sode - for which the parent has no obligation. This Rusty ramble will not improve the reputation of leveraged buyouts. Meanwhile the threatened litigation represents just one more irritant for KKR as it attempts to extract profits from Beatrice. Lately the buyout firm has stopped talking sale and instead has broached the notion of having Beatrice repurchase certain junk bonds whose covenants prevent it from declaring dividends or making other kinds of payouts. John Canning of First Chicago Venture Capital, a longtime and loyal KKR investor, says Beatrice might then recapitalize itself further, putting income-bearing, marketable securities in the hands of KKR's investors. Says Canning: ''This deal is only three years old, which isn't that long. But expectations were probably raised with all the hoopla about Beatrice, and I think KKR feels obligated to get something to the investors.''

We will not worry in the meantime about KKR itself. The firm got paid $45 million in fees when it closed the Beatrice deal in 1986. In addition, by FORTUNE's estimate, its cut on the E-II distribution was nearly $100 million. Finally, when the hoopla was high, the firm raised that $5.6 billion buyout fund, which has earned it literally hundreds of millions in fees. As rambles go, KKR's has been kaptivatingly, kategorically rich.


"Michael Milken: The Man Who Fell To Earth," by Marie Brenner, Vanity Fair, August 1989

How could a genius be so blind? How could the man who revolutionized the way America does business in the '80s now be facing a 98-count indictment? And why has Rudolph Giuliani pursued him with such relentless passion? MARIE BRENNER penetrates the astonishingly modest Milken family home, the U.S. Attorney's bulletproof office, the closed corporate world of Drexel Burnham Lambert— and discovers for the first time the roots of Michael Milken's tragic flaw

"You're going to bang Drexel, I know you are. You're going to say Mike and Drexel were greedy, aren't you?" a Drexel Burnham Lambert partner asked me some time ago.

"Were you greedy?'' I asked him.

"Of course we were. But so were a lot of other people on Wall Street. The story of Mike Milken and what happened at Drexel Burnham is a lot more complicated than just a case of simple greed."

The case against Michael Milken, his brother, Lowell Milken, and one of his traders, Bruce Newberg, is the largest securities fraud case ever mounted by the United States government. It focused dramatically on Milken, the isolated genius who perfected the junk bond market, in December 1988, when Fred Joseph, the urbane head of Drexel Burnham Lambert, was asked to look at a group of financial spreadsheets, the bond trader's road maps. When Milken and his brain-trusters in L.A. heard about it, they jokingly asked, "Could he read them?" But the perusal didn't take place in the handsome offices of Joseph's Broad Street investment bank. It happened behind the bulletproof metal security doors guarding the lair of the famously righteous U.S. Attorney for the Southern District of New York, Rudolph Giuliani, who has since resigned his post to run for mayor of New York City.

It was then, according to friends, that Joseph ended 18 months of defiance; he decided to "crater" before he was "RlCO'd"—threatened with a racketeering indictment, which would have put Drexel out of business. He reputedly protested, "Mr. Giuliani, why are you going after Mike Milken and us on these petty trades? These infractions are the kinds of things Lehman, Salomon Brothers, Lazard Freres, and Gus Levy and Goldman Sachs—everyone—did for years. Why didn't you go after Gus Levy and Goldman Sachs?" Giuliani is said to have replied, "There are two reasons, Mr. Joseph. The first is that Gus Levy is dead. The second is that I didn't catch him."

Giuliani, out campaigning, cannot remember the conversation, but the fact is that Drexel, having paid $650 million to the government, the largest penalty in American history, was now off the hook on six felonies, and Milken, the man known as the "secret ingredient," who had made the company's fortunes, was still on—for 98. "What does your settling mean for Michael?" a close friend asked Joseph. Joseph is said to have replied, "Maybe Mike should just confess to anything. It would be better for all of us.. .. There are 10,000 jobs at stake." "What do you think Mike is going to do, leave the country and run and hide?" the friend asked sarcastically. "I don't know," Joseph said, "they've changed the rules in the middle of the game." "Fred, you've been taken hostage by Giuliani and you should just quit," the friend told Joseph.

When I interviewed Milken at his home in Los Angeles recently, I found him, as always, speaking in metaphor. "What does this nightmare since my indictment feel like? I will answer that I feel as if I am in Star Wars and they have just blown up the planet of Obi-Wan Kenobi. My life has been turned upside down. You grow up assuming you have certain rights; then you discover you don't have them. A lot of people have projected their own feelings onto me, and I am tired of it." In another conversation, he speculated, "Whatever I say or whatever you write, someone will twist later, someone in court, I mean. Everything in my life is suddenly twisted. ... I think of myself as a doctor. So many companies and people need help. Now my hands are tied behind my back, and they've put a blindfold on me."

The saga of Drexel Burnham and Michael Milken and their indictment by Rudolph Giuliani and his assistant U.S. Attorneys has become a duel of Dreiserian dimensions, a complex moral tapestry of two zealots, each surrounded by fervent admirers. "Mike Milken is being tried because of Henry Kravis's living room!" one of Milken's supporters told me last fall. "Mike Milken," said an admirer of Giuliani's, "is the biggest criminal on Wall Street." The larger questions of greed and ethics and the wobbling moral compass of this era are inevitably raised. "Just because something isn't illegal doesn't make it right," the financier Ted Forstmann told me. Conversely, the question is now often asked: If something doesn't pass the smell test, is it necessarily a criminal offense?

Giuliani and Milken and, for that matter, the assistant U.S. Attorneys who are working on the case, as well as Milken's former traders and associates, appear to have mirror characteristics. They are, in the main, children of the baby boom, highly ambitious creations of the postwar era, from modest backgrounds. "Outsiders," they call themselves. Giuliani and Milken also seem to share a striking personality trait: both are relentlessly Manichaean in their vision of life. "I am going to get that guy!" Rudolph Giuliani reputedly said of Milken during a question-and-answer session after a speech at the City Athletic Club in New York long before Milken's indictment. "How do you plead, Mr. Milken?" Judge Kimba Wood asked the financier in April, when he was arraigned in Manhattan federal court. "Your Honor, I am innocent!" Milken said in a fervent voice which boomed with utter conviction through the packed space of Courtroom 318.

Milken has not been entirely alone. In April, 90 business leaders pledged their support in an advertisement that read, "Mike Milken, We Believe in You." The signers included Roger Stone, who had been helped by Milken to build Stone Container into the world's largest corrugated paper company; Ralph Ingersoll II, the young editor and press lord, helped by Milken to strengthen his newspaper empire; William McGowan, financed by Milken's bonds to create the MCI telecommunications business; Nelson Peltz, catapulted by Milken from a $50 million vending machine-and-wire-and-cable-company owner into control of the $1.9 billion American National Can Company; Richard Grassgreen of Kinder-Care, built up with Milken bonds to head the largest childcare- ervices company in the world.

Milken did a lot for American business. He created an entirely new capital market by evangelical work among the money managers of the pension funds, the insurance companies, and the thrifts, convincing them that it was not only profitable but safe to lend money to companies outside the magic Fortune 500. He changed the way capital was allocated in this country. His high-risk "junk" bonds opened up $3 trillion to thousands of small and middle-size companies—and, much later, fueled the rocket engines of the raiders.

Notably absent from the advertisement were some of the more flamboyant members of his raiding bomb squad: Ronald Perelman, the Pantry Pride man who had tweaked the Wall Street establishment by taking over Revlon and becoming, in the spring of 1989, the richest man in America; Saul Steinberg of the Reliance Group, whose profitable raid on Disney had been financed by Milken; and Carl Icahn, who had had to turn to Milken when PaineWebber fell down on raising the money for his takeover of TWA.

Milken is an action junkie. He is imbued with the notion of endless possibilities, very California, anti-elitist. He appears to believe he can see the future, for he seems rarely to contemplate the past and how its burdens might affect the present. His personality is oddly contradictory; Milken is an eccentric "monster brain," as one friend called him. In private, he is immensely compassionate. At the same time, in business, he is capable of reckless zeal as a competitor. Everyone who meets him always remembers the intensity of his gaze. "When Mike was staring at papers, there was a weird light that seemed to come from his eyes—that's how focused he was," one of his partners told me. He was so lost in his theories and calculations that his wife, Lori, began to worry about him behind the wheel of a car.

At four in the morning, before he had a driver and bodyguards, Milken would skitter down the San Diego Freeway in his Mercedes from his modest house in the San Fernando Valley toward his office in Beverly Hills, inhaling proxies and 10-Ks, actually peering at the fine print in the darkness as he drove through the inky miasma of L. A. and dialed London, Tokyo, Boston, or New York. At that early hour, Milken was already conducting business at 60 miles an hour, presumably figuring which time zones he could reach, whom he could speak to through the static of the international phone system about the possibilities of ESOPs, LBOs, IPOs, warrants, new finances, refinances, "converts," and debentures. His speech was often maddeningly slow and deliberate, until his theories ran away with him. "What we have here..." he would often say. What we have here. Milken and his traders would arrive at the Drexel office a good hour before the opening of the New York Stock Exchange, by 5:30 AM Pacific time.

"What we have here" that morning, that particular day, might be the possibility of revamping Brazil or Mexico by rescheduling its debt, or of raising a billion or two for cellular telephones, or for Hispanic TV. Milken might raise Jimmy Goldsmith $1.1 billion to bid for Crown Zellerbach, or T. Boone Pickens $3 billion for UNOCAL. "At one point Mike realized we could take over anything in the country," Fred Joseph told me, "and we had better think about what we were doing." Milken might even be visualizing ways to profit from cheap Indonesian labor, Eurodollars, oil futures, or Third World refinancings; the scope of his financial imagination matched his ability to convert his investing customers into acolytes.

In Beverly Hills, often by four AM, the limos of the CEOs would be lined up on the cobblestone driveway at Drexel. Milken invariably carried two 60-pound canvas bags full of stock offerings, proxy statements, 8-Ks, and 10-Qs—his work from the night before. Sometimes, in the morning fog, he would walk right by the security guard, who would call out "Hi, Mike" as the unhearing Milken took the elevator to the fourth-floor trading room. "We knew to stay out of Mike's way at that early hour of the morning,'' a Drexel partner told me. "He was so lost in thought he could run you over with those goddamn bags."

The game at Drexel was to see if one predawn day you could beat Mike onto this fourth floor. It had a fine view of the hills—and of the electronic manifestation of the multibillion-dollar trading world Milken had created in junk bonds. Here sat approximately 100 traders at 300 video terminals, shooting rubber bands at one another on dull days, repeating the morning's jokes from New York, and swapping wisecracks: "They should find Mike guilty and make him Secretary of the Treasury."

Here in Milken's Rube Goldberg fantasy, the vast, crazy electronic bazaar of sellers, buyers, and wares, was the most astounding inventory of high-yield trades Wall Street might ever have imagined. The entire history of high yields was contained in the mainframes connected to those tiny computers! Every trade! Every deal! Financings and refinancings! Zero coupons and PIKs! All of it banked, even Milken's way of tailoring the bonds for each buyer. "If you didn't want a dog," as one trader phrased it, "Mike would find a way you could trade the dog for two cats. He just wanted to keep the game going." In this atmosphere, the generally distant Milken seemed to be at least as focused on his traders as he was on his technology.

"He was like a scout leader," a friend told me. "He even had unusual rules, such as forbidding profanity."

Already at dawn the traders' phones, with 150 lines, would be blinking, blinking. The electronic machinery was like the Blob: after a while it seemed to take on a life of its own. It perfectly encapsulated the life of Milken. A man obsessed, he was like a nuclear physicist isolated at Los Alamos in 1944, so focused on the splitting of the atom, so assured that his work would help to win the war, that he couldn't see that he might be creating a lethal instrument capable of jeopardizing his own security.

Milken speaks in metaphor, and sometimes metaphor speaks for him. When he drove, he was apt to bang into concrete embankments and walls. Warned repeatedly by friends and colleagues, even by his own brother, Lowell, to stay away from another obvious danger, the arbitrageur Ivan Boesky, because of the indecent and fraudulent aura which clung to him, Milken was mystified. "I don't understand what you're talking about," he would say. "Ivan's numbers always make a lot of sense."

Milken was blind even to the obvious possibility of future public outrage over his salary. For Milken, making the immense amounts that he did—$294 million one year, $550 million another, $1 billion put away in bonuses and equity deals—money appeared to be not only primal but also a way of keeping score of his achievements, the way a crazed kid might collect baseball stats. Milken was reared to believe that money was simply "a state of mind." He now says he never demanded a fee and doesn't understand why the government is treating his salary as if it were a criminal offense. It is mentioned on the second page of Giuliani's indictment.

During the recent evening I spent with Michael Milken at his home in L.A., a deceptively simple notion occurred to me: Milken was so isolated by his grand financial vision that he was positively myopic. We had been sitting out on the Milken patio looking in the direction of his children's playhouse. You could smell the eucalyptus and bougainvillea, which seem to burst out in Southern California in late May. The setting, too, was deceptive. Long ago, Milken had returned and burrowed into this neighborhood not far from where he had been reared. We were in Encino, a pleasant suburb in the San Fernando Valley, the New Jersey of Los Angeles. "You see, the houses here can be just as expensive as in Beverly Hills," valley matrons often remark defensively about local real estate. Mike Milken's two closest friends live nearby; one he met in third grade, the other, who lives directly around the corner, he met two years later in Cub Scouts. Milken's wife, with whom he fell in love when he was 15 years old, was in the kitchen making dinner. She also grew up close to this place. "We're in a time warp here," Judith Sherman Wolin, a close friend of Michael and Lori's, told me.

The Milken house has no grand sweeping vistas or elaborate gardens. A great deal of the lawn is taken up by a small swimming pool and a secluded tennis court. All the neighboring lawns are similar—modest patches of grass with carefully tended borders of azaleas and crocuses. Milken's terrace has just enough room for a table and four chairs with pink-and-white-striped cushions. The house, one of several that share a cul-de-sac a few blocks from Gelson's Market, is hardly the setting in which I expected to encounter the mysterious billionaire.

I found myself engaged in—conversation would be a misnomer—listening to a solidly built man with a forehead that protrudes over a small nose. This causes his features to appear lopsided in photographs. The financial press has often likened Milken's achievements to those of J.P. Morgan, but Milken has neither the physical stature nor the presence of the great financier. Often at Drexel, Milken, no stranger to polyesters, was teased about one particular pair of shabby blue patent-leather shoes. He was too avid to think about clothes or possessions or parties. His face is framed by dark curly hair enhanced by a toupee. In unfamiliar situations, Milken's opaque, closely set eyes often dart from side to side, as if he perceived the possibility of danger.

Milken talks almost exclusively about finance. When he is not interested, he is a poor listener. Sometimes he speaks in platitudes: "The cup is half full." "I don't like to knock others; I say, 'Things can be better.'" "Talk to me about your hopes and dreams," he used to tell company chairmen.

I noticed Milken watching me carefully, trying to determine what I was thinking of him, whether I was worthy of his attention, if I knew about ESOPs and IPOs, whether I truly understood the untapped potential of the Hispanic GNPs or the IMF. "Milken is always guessing at what people think," a close associate told me. "It is a big mistake. He has allowed himself to believe he can control people's thoughts."

The use of financial acronyms was part of the theater of his shyness, a Scheherazade of language which combined genius with arrogance. "What you have here is the need to privatize government industries," he told me, by which he meant that he, Milken, thought the Mexicans and the Brazilians should unload their nationalized telephone companies, copper mines, and ejidos, or farm collectives.

I asked about a historical example of vast hyperinflation that had occurred in Brazil. "It wasn't done properly," said Milken, and went right on. "Dummkopf!" Freud would snarl at his students. Milken, another superior intellect, often shows similar impatience.

I also asked him, "When did you realize how big your high-yield business would become?"

"I never really thought of it as big," he said.

"You raised almost $100 billion of capital."

"The debt level of Latin America is $400 billion," Milken replied coolly.

"When Michael first said to reschedule the Third World debt," said a media consultant, "it went through the financial market like a cannonball. Of course, if Michael had said the word 'sawdust,' all of Wall Street would have run out and bought timber futures."

There are no butlers, fine porcelains, silver, or paintings on display in the Milken house. There are red chintz sofas in the living room, a grand piano, and reproduction end tables. On one of them is an elaborate model of a cruise ship of the future which has skyscrapers of condominiums constructed on the decks in pastel balsa wood. This ship could accommodate 20,000 passengers at a time. "This will cost $1.8 billion to build, and I can't get anyone interested," Milken said disconsolately. Nearby is a bookshelf with novels by Gail Godwin, Renata Adler, Isak Dinesen, and other writers who particularly interest Lori Milken. Over the mantel is a large airbrushed family photo, Mike and Lori with their two teenage sons and one young daughter, with all imperfections wiped away by the portrait studio in the Town and Country Shopping Center on Ventura Boulevard. The bar has been converted into a small library for videocassettes. Michael Milken never has so much as a glass of wine.

Clark Gable and Carole Lombard used to live on this land. I imagined them taking an evening stroll into Milken's extraordinary monologues: what would they have made of the cruise ship of the future, the $1.8 billion that nobody would pay for it, or the notion of "privatization" back then, at the tail end of the Depression, when Mexico meant cheap maids, maracas, and Dolores Del Rio? Finally, I could not see Gable and Lombard in Milken's ample two-story cottage, which had been, in fact, the blue-shingled guesthouse down the lawn of their estate.

We helped ourselves to dinner in the kitchen, poured our own Kraft bottled dressing over a salad made with iceberg lettuce and served ourselves green beans and barbecued chicken from Pyrex dishes. Although Milken has earned an estimated $2 billion, he and Lori have an almost chilling indifference to living in any way other than they did as children of the San Fernando Valley thirty years ago. The table was set in the breakfast "nook" with stainless-steel flatware and paper napkins, not the fine-quality Servaides but the supermarket special, the Colortex hamper-size container, which the local Gelson's sells, 300 for $2.09.

I had been warned by Milken's PR man, "Michael hates personal questions. He doesn't want to talk about his family. He believes those things should be private. He believes in strong family values." "Family values" and "private" are words that you hear a lot around Milken—a considerable irony given the extraordinarily public nature of marketing close to $100 billion worth of junk bonds and mounting raids on dozens of companies. It has always been difficult for him to understand that you cannot change the economy and expect to remain, as he says, "a private person." Milken's only title was vice president, and he refused to have his picture in the Drexel annual report. In a 1986 book called Takeover Madness, Milken is not even in the index; that is how effective he was. His obsession with privacy has been such that it is a common error to pronounce his name Mil-li-ken.

At dinner, I brought up the subject of Milken's father, Bernard, who died 10 years ago. I asked Milken about his father's capacity for psychological survival in what I had recently learned was a harrowing life.

''When I was 15 years old, a boy said to me, 'Your father has a terrible limp!' And I said to that boy, 'You're crazy!' He said, 'I am not. Your father walks with a brace! He's limping!' I went home that night and I really looked at my father. The boy was right. It was then I realized my own father was handicapped," Milken said. At this point in the conversation, Lori Milken, exasperated by yet another example of her husband's myopia, said, "For God's sake, Michael. Your father limped. Everyone knew that."

One of the intriguing questions concerning Michael Milken's character is how a boy from a rather ordinary middle-class background developed the striving obsession with success that would form the very core of his being. Perhaps part of the explanation is connected to the extraordinary history of his father, born Bernard Milkevitz in Kenosha, Wisconsin. Bernard's mother died in childbirth, and his father was killed in a car crash when the boy was seven. Then young Bernard contracted polio. Relatives raised him, and later, Milken's sister told me, he went into an orphanage. As a student at the University of Wisconsin, he sold peanuts and worked as a waiter in a sorority house, where he met his future wife, Fem, Michael's mother. In his spare time, Bernard trained to be an accountant, and during the war he and Fem married and moved to Los Angeles, where he could find accounting work easily and presumably forget about his past. There Milkevitz changed his name. The French have an expression, corriger la fortune—to correct one's fortune through the denial of the past. When I asked Michael about his father's history, he said, "He never complained. He never really discussed it."

Bernard and Fem Milken raised their firstborn, who was not only a boy but a genius and born on the Fourth of July, and their second son, Lowell, and their daughter, Joni, with a transcendent belief in their own possibilities, as if they did not want to burden them with the grim reality of Bernard's childhood. Bernard Milken survived his life by thinking of his future and his family. Fem Milken has a similar quality. She is, Michael told me, a woman who reminds him of Auntie Marne, a powerhouse who always had "so many different activities going at once, all of which she wound up running."

Along with Bernard and Fem Milken's unquestioning love of their children, perhaps, came the inability of Michael, in particular, to assess the world realistically. When I asked him about his father's time in an orphanage, he answered, "It wasn't really an orphanage ... it was sort of a home... I prefer to think of it as a boarding school."

I reminded him that it wasn't a boarding school.

"That's how I would rather think of it," he responded. He was unable to take in the observation.

I was astonished to learn that Milken, always lost in his theories and numbers, operating in another zone entirely, was so determined to move forward into the future that he had never mentioned a word of Bernard Milken's tragic life history to his two closest friends, Judy Wolin and Harry Horowitz. "The past doesn't exist for Mike," Horowitz told me. "It's yesterday's news."

The fact that Michael Milken was under a 98-count indictment for allegedly trading on inside information with Ivan Boesky, hiding stock ownership for a variety of investors, and defrauding investors in one of the country's largest electrical-and-mechanical-contracting companies, the Fischbach Corporation, with the controversial Victor Posner lent a certain moral gravity to the balmy spring night.

On the front page of the Los Angeles Times, that morning, had been the news that Tony Coelho, the California congressman, was being investigated for an unreported $50,000 loan from Michael Milken's former client and close friend Tom Spiegel of Columbia Savings and Loan. Coelho, who had based much of his sketchy career as House majority whip on his ability to shill money for the Democrats through special interest groups, had used his $50,000 loan to purchase junk bonds from Drexel. Tom Bradley, the mayor of Los Angeles, was also being investigated, according to the Los Angeles Times, for his ownership of Drexel junk offerings. There appeared to be no direct link between Milken and Coelho or Bradley on these matters, but the mere mention of Drexel and Milken's bonds on the front pages added to the tension. A few days later, Coelho announced that he would resign from Congress.

I thought of the sagging cardboard boxes in the shabby hallways of the U.S. Attorney's office in New York. The cartons rise to ceiling after ceiling, clogging the dusty halls. In the boxes, presumably, are the 1.5 million documents Drexel has been forced to yield. They are labeled by hand with felt-tip markers: "Insider Trading," "Milken," "Drexel."

Part of the special psyche of the U.S. attorneys, products of the finest schools and clerkships, is to revel in the grotty modesty of their surroundings. The parking lot is filled with battered Plymouths and VW bugs with stickers from Harvard Law. "These guys know they are hot stuff," a criminal lawyer remarked. "They are representing the government, the flag, and the cornfields. They have the virtues of Lincoln and Jefferson. Their rectitude is a form of tyranny."

Giuliani's prosecutorial zeal goes a long way back. He had a key but little-known role, for instance, in the Alexander affair in 1975, when he was deputy to the associate attorney general in the Justice Department. The Justice Department was working with the Internal Revenue Service's strike force on a series of dirty tricks. Under a variety of code names—Leprechaun, Trade winds, Haven—they delved into the sex lives of a Florida judge and the Dade County prosecutor, and allegedly, on one occasion, broke into a motel room in the Bahamas. Donald Alexander, a Yale honors student and Harvard Law Review editor, who had been appointed by Nixon to head the IRS just before Watergate, was horrified. He put a stop to it, and was rewarded for his integrity by having Giuliani move against him. Giuliani reportedly attempted to convene a grand jury to investigate the impeccable IRS commissioner, former officials of the IRS told me. "It almost ruined Alexander."

Today, Alexander is a partner at Cadwalader Wickersham & Taft in Washington. He refused to comment on "Brother Giuliani," as he called him. I asked Giuliani about this as he campaigned for mayor. He had a hard time remembering the affair before he commented. "Alexander wanted to throw the baby out with the bathwater. Always, with law enforcement, there is the potential for abuse. Let's just say that Alexander and I did not see eye to eye on law enforcement procedures." (Oddly, a son of Alexander's works at Drexel Burnham in Houston, but he was not my source, and he refused to comment.)

I then asked Giuliani to explain to me how he had decided which Wall Street powers to prosecute, and why he had not only handcuffed a prominent Kidder Peabody partner but also employed a headline-creating, full-dress criminal indictment, instead of leaving things to the traditional jurisdiction of the SEC.

"This is simple," he said. "In the case of Drexel Burnham, there was a continuous pattern of egregious behavior: insider trading, tax evasion, falsifying records—you name it! Ivan was telling the truth! Do you think these things work on magic?... I made a mistake when we used the handcuffs." (All charges against Richard Wigton, the Kidder Peabody partner, were later dropped.)

Giuliani and I were riding through Flatbush, admiring the single-family houses. "Do you know what a house like that would cost in my neighborhood in Manhattan?" he asked me. "I bet $2 million! As we used to say when I was a kid in Brooklyn, 'Forget about 'em!'" Since leaving the U.S. Attorney's office, Giuliani has been a partner at the prestigious law firm of White & Case. He is said to earn close to $1 million a year. Like Milken, Giuliani lives very modestly. He and his wife and child have a one-bedroom "convertible" apartment in a high rise near Gracie Mansion. Several times during the afternoon, Giuliani talked about people's salaries, as if he were obsessed with the subject.

"With the Drexel case, we waited and waited, until there was a successful conclusion," Giuliani told me happily. "We came out ahead on that one, and paid for the entire investigation! The U.S. government received $650 million! We made it very clear to them that if they went to trial, they would be convicted… The powerful weapon that we had was the evidence, not the RICO statute."

"One of the great dangers of being an overzealous prosecutorial type," a former IRS commissioner told me, "is that you begin to believe that everything is a conspiracy. And once you do, it is possible then to be convinced that everyone fits into your theories."

The man now leading Giuliani's prosecution of Milken as the head of securities and commodities fraud is Bruce Baird, the former chief of narcotics in New York. Three special SEC lawyers are on loan to him from Washington. Baird and I discussed the overwhelming optimism of the great con men in Wall Street history—Eddie Gilbert, Bemie Comfeld, and Tino De Angelis, the salad oil king. Twice I had to leave Baird's office when witnesses for a grand jury arrived. Walking out, I noticed what were perhaps two significant preparatory guides for the Milken case: The Bonfire of the Vanities on Baird's shelf and a fat volume, ABA Institute on Insider Trading. "Imagine having to understand what Milken was able to figure out about finance," remarked a prosecutor. "They're driving themselves crazy. It's funny at the U.S. Attorney's office— they're just a few months ahead of Arthur Liman and his defense team trying to understand Michael's numbers.''

Baird and his assistant U.S. Attorneys, John Carroll and Jess Fardella, resemble their Wall Street counterparts; all have attended the same good schools, wear the same Brooks Brothers suspenders and fine shoes. On Baird's bulletin board, I noticed the mug shot of Michael Milken snapped on the day of his arraignment. Milken peers nervously into the camera, his perplexed gaze caught forever in a tiny square with ID numbers on a plaque under his chin.

The day I was at dinner in Los Angeles Milken had spent in meetings with Richard Sandler, another childhood friend, whom he employs as a lawyer, attempting to figure out how many of his second-level traders might be indicted and what new charges might be brought against him. Inevitably, parts of these discussions are about the government and whom it will be able to "turn" or "take hostage and torture," as well as who might ' 'crater' ' in the face of the ongoing investigations before the trial, which is tentatively set for next March. In New York, two more traders are now cooperating with the U.S. attorney. One of them, James Dahl, who sat near Milken at his famous X-shaped desk, reportedly once received a Mercedes from Milken at Christmas, in addition to his $1 million bonus, in recognition of his fantastic year.

Milken and his lawyers and friends frequently theorize about the motives of the U.S. Attorney, and about why exactly Milken and his brother have been "singled out." The government is said to be loath to enter into years of court fights involving hundreds of millions of dollars to fight the Milken brothers and their stellar lawyers, who are determined to push their case, if need be, all the way up to the U.S. Supreme Court. Recently, yet another attempt was reportedly made by the government through a third party to persuade Milken to settle. "The deal was they would free Lowell if Michael would agree just to spend a year or two in some minimum-security jail. Can you believe that? Pure Sophie's Choice," a close friend of Milken's told me.

Milken's friends study the indictments to determine how many counts are "Boesky charges," related to the allegations that Boesky paid $5.3 million to Drexel to cover his trades. The Boesky charges are important because many of them fall into the murky area of insider trading laws, an area never completely defined by the SEC. "It's like being caught in a southern speed trap on a highway going to Florida, where the sheriff doesn't post the signs and it's only after they pull you in that you learn what that day's speed limit is," Ralph Ingersoll II explained to me. A few years ago, the law firm Skadden Arps reportedly prepared a memo on insider trading laws. In it were three pages of areas that were permissible, four pages of areas that were clearly illegal, and 25 pages of matters the legality of which even experts could not determine.

The other charges, for stock-parking violations, are more ominous. "Parking," a fairly common form of hiding stock ownership for a variety of reasons, such as covering potential takeovers, has until recently been a rarely criminally prosecuted area, overseen by the SEC. The indictment alleges that the government taped Milken's trader Bruce Newberg in the following transaction: "The stock is 16 bid, up from 15 3/8. I don't want this thing to be 16 bid. I want, y—, y—, you know, to get rid of it. ... I want it down to at least 15 3/4 and hopefully lower.

.. .And umm. . .you're indemnified, uh, you know, my—, it's, y—, you know what I'm saying."

The conditions of my meeting with Milken that evening in L.A., set by his lawyer Arthur Liman, were that I would not be allowed to raise any subject even remotely connected to the indictment. The inability to speak freely gave our dinner a surreal and controlled quality. I felt as if I were sitting at the side of a banned person bathed in silence in an equally fragrant suburb of Cape Town, which parts of Los Angeles uncannily resemble.

Even so, there were many clues to his evolution. Early in the evening, I wandered into Mike and Lori Milken's dining room. There, on the dining room table, were stacks of brand-new maroon leather photo albums, about fifty in all. Michael's kid sister, Joni, who was wearing furry unicorn bedroom slippers, was there as well. "My feet are off the record," she said, laughing. Joni, as a favor to Mike and Lori, was pasting hundreds of photographs in these new albums embossed to appear old: "The Milken Family, Vol. I." "Do you mind if I have a look?" I asked her. "Help yourself," she told me. "Wait till you see Lori and Mike in high school and college. I've been working for weeks on this crazy project. The decorator thought it was a good idea."

I flipped through page after page of valley American graffiti, circa 1960: Mike with big white teeth and an eager smile, between his parents; Mike at the beach with his second-grade class; young, pert Lori Hackel and a bare-chested Mike, enthralled with each other, on a high-school picnic at Griffith Park. Corsages, proms, football games—Mike and Lori radiating the optimism of early love without the doubt of future misconnections.

Milken was obviously precocious. "Michael was doing double-digit multiplication in his head by the time we were in third grade. I can remember thinking, Whoa! Who is this kid?" Judy Wolin told me. "He was always trying to help us learn how to do it." By the time he was ten, he was helping his father prepare his clients' income taxes. In high school, he was popular, a cheerleader, a great dancer, already in love with Lori, and by the time he was in college he was investing money for his parents' friends. "The deal was that Mike would cover completely any losses, and whatever he made for them he would keep 50 percent," a friend told me, laughing at the obvious comparison with the vast profit percentages Milken was notorious for extracting when he became "the king."

"Can you believe that picture?" said Lori as she came into the room. We were staring at a photograph of Mike and her at Sigma Alpha Mu, the "Sammy" house; Mike was dressed as a pharaoh in full satin regalia, Lori as the queen. Lori remains physically very much as she was, a small-boned woman with dark hair and pleasant, even features. This evening she wore a cotton-lace sweater and matching cotton pants in Pepto Bismol pink, as if she were still presiding at A.E. Phi. Once, according to a story that went around about her, she was offered a Corot for $500,000. "Tell Saul Steinberg to buy it," she reportedly said, although now she denies this.

The Milken albums are filled with the minutiae of middle-class Jewish life: the gold-and-white napkins from Lori's wedding showers and her children's Bar Mitzvahs, snaps of Lori and Mike in Hawaii on their honeymoon. "Who didn't go to Honolulu?" she asked me. In Hawaii, their faces are radiant. They were clearly thrilled with their future, in love, innocents bound for Philadelphia and the Wharton School.

Mike, president of his fraternity at Berkeley and a Phi Beta Kappa, was already in his financial ether, oblivious even to the Berkeley riots. He had discovered the treatise that would change his life: W. Braddock Hickman's study of corporate bond performance from 1900 to 1943. It demonstrated that the rewards outran the risks over a full portfolio of high-yield bonds, even through the Depression. The Hickman study, Milken told Connie Bruck, author of The Predators' Ball, a history of Milken's career, "was consistent with what I had been thinking about for a long time."

It was in Philadelphia that Michael Milken began to come into his own. He was hired part-time to work on the delivery of securities at Drexel Harriman Ripley, a sleepy trading house dating back to 1838 that had once been part of the J.P. Morgan empire. Immediately, he started telling the partners everything they were doing wrong. "Mike was like a bull in a china shop," one partner told Connie Bruck, but he also saved the firm $500,000 by speeding up deliveries. Before completing the requirements for his MBA, he was shipped to New York and was soon given a seat on the trading desk. In 1973, Drexel Firestone, as it was then called, was acquired by Burnham and Company, a third-tier firm presided over by I.W. "Tubby" Burnham, a man of such old-fashioned ways he still "made his own margin records for customers in a ledger book," as Anthony Lamport, a Drexel managing director, told me. He increased the capital Milken could invest from less than $500,000 to $2 million. Milken doubled it in a year.

In those days, not even two decades ago, a Drexel partner usually earned no more than $40,000 a year, before bonuses. Milken was a brilliant oddball at Drexel, an intense young man who had isolated himself in New Jersey with his toddlers; he commuted by bus and often used a lamp to read reports on the trip. He was not a part of the smart young Wall Street Jewish world of Mount Sinai benefits and the Harmonie Club. Traders were, in those days especially, considered another class; they rarely aspired to the distinguished banking legacy of the Loebs, the Lehmans, the Wertheimers, and Andre Meyer. "We all got the system down real fast," a member of the Harmonie Club told me. "Thursday night dinners at the Century Country Club in Purchase, summer houses in Westchester County, services at Central Synagogue or Temple Emanu-El. It was easy then." Lamport remembered Mike as "always buried in proxies, never shooting rubber bands like the other traders," trading his high-yields and making investments in small companies, such as, in one case, "a factory in Hungary that made light bulbs." He did well for Drexel, but perhaps his xenophobia prevented him from absorbing the style of the world he was to move into.

An integral and unspoken part of that style was modesty, shunning flamboyance, personally and professionally. The Rothschilds, for example, were said to be embarrassed by their riches. If they fixed the currency markets, they would then give England the money for the Suez Canal. Andre Meyer once remarked to a flashy client, "I could never afford a Rolls-Royce!" Part of this ethos was in adhering to the Jewish folk notion of kina hora, which means in Yiddish "May the evil eye not fall upon me." It is the equivalent of a Christian's knocking on wood, which once stood for the Cross. Years ago, if an Eastern European Jew said, "I had a good year," he would follow it immediately with the words kina hora! As if the very idea of bragging could bring down the heavens upon him. Almost every person I interviewed from Drexel who happened to be Jewish laughed ruefully when I brought up the phrase kina hora, as though their own meteoric success and deportment had indeed brought down the evil eye.

Many financiers now worry about the subtle anti-Semitism which is creeping into discussions of the Milken case. Fred Joseph has received a hand-scrawled letter with a predictable reference to "greedy kikes." Euphemistic expressions like "New York bankers" are now sometimes heard in the boardrooms of the Midwest. The distinguished Felix Rohatyn of Lazard Freres, a longtime critic of Milken, has met informally to discuss this troubling situation with other prominent Jewish leaders, such as Laurence Tisch, head of CBS, and Judge Simon Rifkind.

"This story is all about kina hora," one Drexel executive told me. But, like everything else that deals with the external world, Milken could not assimilate this notion. "I don't think I ever thought about it," he told me at dinner. "I don't think in those terms." Milken, personally modest and observant of his religion, sadly lacked that sense of history which could have alerted him to the possibility of peril in his professional life.

Milken was so focused on his numbers that he could not see that he was in danger of violating a societal code which distrusts the rapid accumulation of wealth unless there is a tangible product to show for it— oil, for example, or the Model T. No one at Drexel seemed capable of teaching him that the public is suspicious of the closed world of Wall Street, because it doesn't understand that often what a Mike Milken could create would be as potentially useful to America as the Ford car. "Mike Milken could not have happened at a white-shoe firm like Morgan Stanley or Goldman Sachs," a client of Milken's told me. "At Drexel, there were no grown-ups around. Mike made so much money everyone looked the other way."

"Didn't you ever think, Good God, am I making too much money too fast?" I asked Milken. "I made my deal when I started at Drexel, and the money was never important to me," he replied.

Even at the height of the takeover spree, he seemed uncomprehending of the New York world of his tycoons, many of whom had by then ditched their first wives with their Larchmont bobs and Century Country Club mores. Milken, in love with the same girl since age fifteen, was perplexed by the tales of the new wives with their husbands' new fortunes, their walls covered with Sargent portraits, boiserie, and burled woods; their tables with new Georgian silver and Mario's embryonic roses; their flower bills often running $10,000 a month. "I can't tell people how to act. My guys are all consenting adults. I can't believe people in New York would regard some of these people as social leaders," he said recently of two of the men he had made.

Fred Joseph arrived at Drexel in 1974.

"When I came in, I told everyone here, 'You have to be aggressive.' Our guys felt like losers! They said they weren't getting any orders." At that time Wall Street was mostly closed to outsiders, and Drexel was not part of the white-shoe establishment. The son of a Boston taxi driver, Joseph went to Harvard as a scholarship student; he is an "outsider" turned Wall Street smoothy. Joseph, whom Manhattan, inc. once anointed as the "Junk Bond Baron," was the perfect front man for the secretive Milken. When, after weeks of negotiations, I finally met with Joseph, he was disarmingly casual and likable, sitting on one leg and hobbling his loafer up and down, as if we had been friends for years. In his office were a small rolltop desk and a towering construction of Lucite blocks which contained the "tombstones" of many Drexel deals. An ad on one wall in Drexel said, "6 weeks, 82 deals, $6.6 billion." There was also a hand-lettered poster that read, COME OUT FIGHTING, WE'RE IN YOUR CORNER, but that sign was propped up on the floor.

Joseph is known for his charming Boston accent, for hunting with bow and arrows on the weekend, and for his ability to project utter candor. He has been in an impossible situation; he is trying to save his firm and the jobs of 10,000 employees without betraying Milken, who was largely responsible for Drexel's great success. "When I saw that Fred Joseph brushes his hair the way Jack Kennedy used to, I knew Milken was a dead man," a New York political observer told me.

Soon after Joseph came to Drexel, he was urged, "Go meet your high-yield trader. He's really smart." Joseph made his way down to the trading floor and encountered Mike Milken for the first time: "He was working forty lines at once," he told me. "I could see he had an incredible brain! He was making new markets for certain bonds, so I said, 'Let's do some deals together.' "

One day Milken told Joseph that Lehman Brothers had financed some companies entirely with high-yield bonds. "It was like a light. Mike thought he could see some real potential there! Suddenly, all these companies that had never been able to raise any money were out there. We said to each other, 'Maybe we could sell their bonds!' Almost immediately we got the bonds going for Texas International. I remember someone in corporate finance asking me, 'Do you really think Milken has the ability to sell them?' "

That year, 1977, Drexel did seven high-yield bond deals. By 1979 it had quadrupled its high-yield business and the firm's revenues. Milken had demanded his own trading account. His profits were 100 percent.

Bernard Milken was in Los Angeles, dying of cancer. One of Milken's children was diagnosed as epileptic. Tired of his 5:30 AM New Jersey commute, Milken requested that his entire high-yield department be moved to California, where, he seemed convinced, the climate and the sense of being embraced by his past would restore calm to his family life. "Our fear was that Mike would get out to Los Angeles and just take it easy," Anthony Lamport told me.

Milken returned to California just before the Reagans, with their deregulation policies and free market ideas, ascended to Washington, creating the necessary political climate for the Milken era to commence. The LBO, or "leveraged buyout," long a standard form of Wall Street investment, had until then been a mechanism to buy private companies or invest in divisions of publicly held corporations by borrowing against the assets of the company. From 1978 to 1983, LBO activity in America totaled about $11 billion; from 1984 to 1988, it was $181.9 billion. In California, Milken's bonds were no longer scorned with the name "Chinese paper." "After the first series of megadeals, you never heard the expression 'Junk is for Jews' again," a Drexel trader told me.

In those heady days, CEOs would wait for hours in the conference rooms to make presentations to Milken, attempting to persuade him to "finance their hopes and dreams," as Milken often said. "You would sit there and wait," one financier told me. "And wait and wait. It wasn't that Michael wanted to be rude, he was just preoccupied. There were five or six conference rooms, all with guys waiting, and then the corporate finance guys would wheel Mike in—he was like this supersonic robot! You would get fifteen minutes, and he would have already read everything about your company. ... He would point out things you hadn't dreamed of!" His competitors used to speculate about how Mike felt going from room to room and what he said: Junk bonds for you! No junk bonds for you! You, Icahn, can make a run at USX! You, Kravis, can have Safeway!

"I want you to give me $300 million," Milken told one financier just after the October 1987 stock market crash. "We will buy a huge block of Texaco with it, 8 or 10 million shares! They're selling at $28! You'll have a lot of fun. You'll be the white knight in their problems with Pennzoil! There will be a lot of flash! You'll enjoy that. And you'll make a ton of money."

A week earlier, just before the market collapse, the financier had miraculously closed his new $600 million investment fund; his nerves were still frayed from how close he had come to losing every dollar he had been able to squeeze out of the pension funds and the French and the Japanese. Even more ominous, the rumors of Milken's coming indictment by the U.S. Attorney were all over the Street. Every day, it seemed, The Wall Street Journal or The Washington Post was running a new leak from the SEC.

"Mike, I can't risk $300 million! That's half of my fund. I don't have the balls to do that," the financier told me he told Milken.

"It will be all right," Milken said calmly. "I've really thought about it. I've studied the numbers. It all adds up. What you have here is a situation where the numbers make a lot of sense."

The financier left the office, and later did not invest. "What happened?" I asked. "Mike gave the deal to Carl Icahn," the financier told me. "God, I was a wimp. Carl made a ton of money. Millions and millions of dollars!" The financier, now a head of a huge private company, threw up his hands. "This guy Milken is the biggest genius in the securities business. He's like Midas. He can take dust and turn it into gold."

"When I first met Mike," Ralph Ingersoll II told me, "I wanted him to raise $100 million for a new newspaper company I had started. Mike was carrying on three conversations at once, which he always did, but in front of him was one of my newspapers, The South County Journal. He asked me, as he looked at it, to explain to him how my business worked, which I tried to do succinctly. At the end, he was able to tell me exactly what I wanted to do with my business. He got it immediately. Several years later, he advised me to invest in Spanish newspapers. He said, 'In this country, there are 20 million Hispanics, growing at the rate of four to five times the national average. Take on the needs of the American Hispanic community.' "

One Drexel executive said, "You have to understand what it was like when Mike was the king. It was Camelot. Pure magic. We thought it would go on and on."

"Was there ever a moment when you questioned whether things had gone too far with Mike and what he had pulled off at Drexel Burnham?" I asked a thoughtful former high-level Drexel executive.

"Listen," he told me, "when we hired Dennis Levine, we thought it was a good idea. He was young and hungry. We thought he would be great in the M&A department of guerrillas! We said to him, 'Dennis, if you have a good year, we're going to give you a $750,000 bonus!' That year he did a lot of business. He was working with Mike on Ronnie's deal with Revlon, they had Carl Icahn's deal with TWA, they had Oscar Wyatt and Coastal going after ANR! They had a great year! So at year-end, when it was time to evaluate how everybody had done, Dennis was told, 'You've been fantastic! You're not going to get $750,000 as a bonus, you're going to get $1.5 million!' Remember, this kid was 32 years old. Do you know what I heard he said? You won't believe this! I heard he said, 'I am insulted! How dare you insult me like this!' The partner who told me the story said, 'I could have jumped across the conference table and strangled that bastard!' But then we talked about it and we realized we had made hundreds of millions of dollars on Revlon, TWA, and Oscar's deal. Why not? $1.5 million was nothing but a small percentage of the business, and what difference did it make anyway?" The Drexel official shook his head sadly. "I think about that moment a lot."

Several months after that exchange in the conference room, Dennis Levine was arrested for selling insider information to Ivan Boesky, for whom Mike Milken had raised $660 million, despite the advice of his brother, a few of his partners, and several of his friends. Boesky and Levine are now both in jail. Before he departed for Lompoc, Boesky cut a deal with the government: He would dump his stocks, pay $100 million in fines, spend three years in prison, and tell everything he knew about Wall Street, including his allegedly sordid history with Michael Milken, the man whom the U.S. Attorneys now call "Mr. Big."

"The day Ivan Boesky was arrested was the day the party stopped at Drexel Burnham," a Drexel partner told me.

As Milken's power grew and the CEOs lined the Drexel driveway, Milken began to veer off course, a pilot flying into the storm without radar. Milken did not protest as his benign mechanism suddenly began to be used by the deal-hungry M&A boys in New York. His ability to assess character diminished. "I used to tell Mike that I thought a lot of his traders were shabby," Fred Joseph told me. "He would always defend them. Michael would forgive anyone anything if they were great salesmen." Milken actually once debated for days if it was "sensible" to attempt a $30 billion takeover.

At one point Milken tried to persuade a canny financier to join Drexel as the head of the explosive Mergers and Acquisitions area. "I can't come to work for you," the man told him. "I've given my word to someone else." "So what?" Milken is reported to have said. "What does your word mean? It means nothing." "The only thing I ever worried about with Mike was the possibility for excess," the financier told me.

There is a famous story from this period about Henry Kravis's $6.2 billion takeover of Beatrice. Milken reportedly told Kravis that he would not be able to sell the Beatrice bonds without equity. It was said that he demanded warrants, an option to buy 24 percent of the company, which was to be passed along to the bond buyers as an incentive. As it happened, Milken easily placed the Beatrice paper for Kohlberg Kravis Roberts, but, incredibly, he retained the stake for the bond buyers for Drexel and himself. "I'll never agree to warrants again," Kravis is said to have told a Drexel partner. (He would, however, on the RJR Nabisco deal.) Drexel's fee on Beatrice was $86 million. The Drexel partners earned close to $800 million on their Beatrice equity, with several hundred million going to Milken personally, according to Connie Bruck.

The seeds of disaster had been sown, though no one knew it, in the early hostile takeovers of 1985, when Drexel and Milken helped Carl Icahn make a bid for Phillips Petroleum. "Did it ever occur to you how powerful the oil lobby was in Congress?" I asked David Kay, a former senior partner at Drexel. "The numbers made sense," he told me. "The oil companies were being run poorly." Next, Drexel and Milken saddled up Boone Pickens at Mesa to attempt a takeover of UNOCAL. It was then that the national forces began to move against Drexel and Milken. Fred Hartley, a man whose idea of running an oil company efficiently was to travel with a grand piano in the corporate plane, was reportedly close not only to Standard Oil mogul Robert Anderson but also to Pete Domenici, the senator from New Mexico, who began to sponsor antitakeover bills. In the House, Representative John Dingell of Michigan convened a series of hearings, perhaps to assuage the oil lobby. "Kid, what did you do to get everybody so mad at you?" New York senator Alphonse D'Amato asked Milken when he went to Washington then. "I honestly don't know, Senator," Milken replied. Within one year, about 35 antitakeover bills were introduced in Congress. None has so far passed. "Four years have gone by. Congress has done nothing. No one has stood up for America. They've all been delighted to see their country destroyed," Fred Hartley told me. A prevalent theory around Drexel is that the oil lobby also complained bitterly and futilely to the SEC, which, handily, was then run by John Shad, Fred Joseph's mentor.

By 1986, Milken's trading room accounted for over 25 percent of Drexel's $4 billion revenues. "I realized [then] that Milken was trying to take over America," the financier Ted Forstmann told me. Forstmann, who has been highly critical of junk bonds, refused to do any business at all with Milken or Drexel. "Milken was trying to fix it through his circle that if you didn't deal with him you didn't get anything. We were happy to go our own way." At the white-shoe firms, such as Morgan Stanley and Salomon Brothers, the partners began to scramble to compete with the master trader. From Salomon Brothers, Milken took the clients Beatrice Foods, Uniroyal, TWA, Pacific Lumber, and National Can. "You tell that trader of yours on the Coast that I'm going to cut his nuts off. He can't have all of our business," John Gutfreund, the chairman of Salomon, reportedly told Fred Joseph once at a dinner party.

There is no question that acceleration of the hostile takeovers at Drexel, under Milken's aegis, was the force that finally did Mike Milken in. As Milken built his business in Beverly Hills, he and his traders could no longer control the altimeter. There were too many raiders, too many deals. Several of Milken's traders were pulling in $10 million and $20 million a year. "We didn't have time to back off and think," one Drexel partner told me. "We were doing deal after deal. We controlled almost all the business on the Street. We leveled everybody, and the guys in Beverly Hills became so arrogant. They just all got too damn rich. . . . What really finished us off was when the SEC got Ivan Boesky into their nets. Then the U.S. Attorney and the SEC believed they had struck paydirt!"

Mike Milken and I were never alone during the evening in Encino. Like Sinatra, Milken appears to surround himself with a combination of princes and courtiers, as if he were incapable of telling them apart. In this case, the prince was Ralph Ingersoll II, who has been an eloquent public spokesman for his close friend. "The man I know is a visionary, a brilliant, decent, and sensitive person," he had told me. "He deserves a fair trial, and you deserve to have access to him." Milken's PR man, Ken Lerer, who sometimes calls himself "a former journalist," was also present, complaining about having to get on the red-eye, as was the ubiquitous Richard Sandler, who, along with Lerer, attempted to censor our every word.

Milken has always demonstrated a need to rely on lavishly paid and questionable spokesmen, such as his former lieutenants at Drexel and now Lerer and Sandler, who interpret for their boss: What Michael wants. . . What Michael says. . . What Michael means. . . Milken, always oblivious to anything that isn't numerical, has allowed himself to be "packaged" as a financial Oliver North. This is an extravagantly expensive and pretentious effort, orchestrated by Lerer and his partner, Linda Robinson, the wife of the head of American Express, and it misfires. "What I need you to understand is the difference between myth and reality," Lerer told me. "Michael is the most misunderstood man in America."

"I have a breakfast for Chancellor Green in New York," Milken said to me, "and someone mentions that I am taking 1700 children to a ball game. Then I have to read how my taking kids to a ball game is a publicity stunt. It is so ridiculous."

There is no doubt that Milken has a passion for philanthropy. He is naive about the impact elaborately staged events involving baseball games, Hispanic grocers, and crippled children may have on the public's perception of him. Through his family foundation, which is now being examined by the IRS, he has given away more than $300 million, often anonymously, much of it since his problems began.

He is obsessed as well with the needs of his two sons and daughter, their sticker books, pierced ears, and driver's licenses. He has an affinity for children altogether, and actually seems more comfortable in their company than with adults. He is apt to keep business acquaintances waiting for half an hour while he gets down on the floor to play with their kids and their Barbie dolls or Legos. He dreams of solving the problems of illiteracy and emotional disturbance in children, and of finding a cure for epilepsy.

In May in Los Angeles, I attended a lunch at the Beverly Hilton with a thousand other guests to honor the Milken family for its contributions to the HELP Group, which aids emotionally disturbed children. As part of the entertainment, a group of these children were asked to tell the audience about their feelings for Mike. "He is so nice to us," one said. "Are you nervous about being onstage?" Kristy McNichol, the actress, asked the child. "Yes!" he said.

As the Milken family stood on the stage, a large banner was unfurled naming the new HELP campus, which the Milkens have funded, for Milken's late father. Then Michael Milken spoke in the parables and Delphic pronouncements he is known for. "This is a moment to turn despair into optimism," he said. "This is the moment to make everything an opportunity." He was the very picture of modesty. He praised Kristy McNichol and all of his supporters and friends gathered in the ballroom. Then he said, "It would have been enough just to have helped the children."

The tragedy of this contrived effort before Milken's coming trial is that it takes away from a dimension of the man's real persona. At the lunch, I observed Milken with one of the children, a piano prodigy who had performed on the program. Milken was unaware I was listening to his conversation. He said to the boy, "I want to come visit you later. I want to hear the new piece." No one was around, and the child, clearly used to Milken's attention, was casual. "OK, Mike, but I'm kind of busy. I have a lot of homework." Milken backed off immediately, with no sign of impatience. "Sure," he said. "I understand."

Later, Milken and I spoke of the lunch. "I've turned down hundreds of requests for similar events," he told me. "This one, I believed, would make the children happy, and that meant a lot to me. I didn't want any reporters there. All of the people who criticize me might like it if I would just vanish, but I'm not going to do that."

It is sunrise in Beverly Hills, an odd hot wind like an early Santa Ana is blowing, and it is ferociously hot for April, already 80 degrees and headed for 105. In two days, Michael Milken will be arraigned in Manhattan federal court.

The heat and the wind add to the strange atmosphere at the Beverly Hilton, where despite the duel between Mike Milken and the U.S. Attorneys the eleventh annual Drexel Burnham Lambert High-Yield Bond Conference is beginning, just as if Mike were still king, and his disciples have gathered as they have every previous spring for the "predators' ball."

"You won't find the ghost of Michael Milken here," Steve Anreder, the spokesperson for Drexel, has told me snappishly on the telephone. But he is wrong. Milken's ghost and friends hover everywhere, even though Milken does not. Instead, he is marooned a few miles away in his office adjacent to the Drexel building on Wilshire, which, ironically, he owns. Milken has been prohibited by the agreement Drexel made with the U.S. attorney not only from receiving his $200 million 1988 bonus but also from talking to his former partners about business. Fred Joseph, to save his firm, has even persuaded John Shad, formerly of the SEC, to move in as chairman. So Milken cannot appear anywhere near the Hilton, although he is presumed innocent and a year away from a trial.

With or without Milken, the high-yield machinery has lifted off; he long ago unleashed the force. "There is $3 trillion worth of capital in this room!" Milken said to this gathering during the dizzy, happy days of 1985.

Already, Milken's buyers and sellers are working the phones in the lobby, calling New York, hyping one another up, screaming "Not that much equity!" shouting "You mean we're slipping, we're slipping!" staring at their program sheets for the week.

Boone Pickens is scheduled to appear, as are Carl Icahn, Carl Lindner, Frank Lorenzo, and Henry Kravis, who is here to peddle $4 billion worth of RJR Nabisco bonds. Many others of the original bomb squad, such as Saul Steinberg and Ron Perelman, are at home, as if to detach themselves from the circus now that they have made the progression from raiders to industrialists.

Early this morning, the new head of high-yield trading, John Kissick, a tall and commanding figure with chiseled features and a long affectionate history with Mike, addressed the opening breakfast, his head eerily projected onto video screens. Kissick spoke of the Milken credo, as if it were as accepted a part of financial history as J.P. Morgan's creation of U.S. Steel. He talked of "the democratization of capital" and of how Milken's genius for raising money for deserving companies would continue to affect all corporate finance everywhere long after his trial. "Michael, our thoughts are with you," Kissick said as two thousand Drexel clients applauded, but the boys stayed in their seats, did not jump up with histrionic demonstrations—not with so much business to be done. The Drexel executives and the dealmakers need to believe there is still a prairie of hope, a world without end, as it was when Mike was king.

Two months after this conference, in June, Milken, like Giuliani out campaigning for mayor, would be focused on future possibilities. He would announce that he was officially resigning from the company he had turned from a bunch of "has-beens" into "the elixir," as one partner phrased it. He was even forming a new company, International Capital Access Group, which would specialize in helping minority entrepreneurs. "I try to help people, and even this reporters twist and think I'm doing for public relations," he would tell me.

In Los Angeles, at the conference, many of Milken's advisers are somber. "It's like a funeral. No one really knows what to say," one venture capitalist tells me. As always, Milken is interpreted through third parties: "Mike will not appear." "Mike isn't sure how he feels about a demonstration." "Mike may show up at the Bistro Gardens dinner tonight."

"Take a good look at the world Michael created," a Drexel partner tells me. All around me, the men fan out and swirl into the conference rooms, ignoring the P.A. system, which over the next few days blasts announcements through the Hilton: "Magma Copper, offering $100 million of subordinated notes, will present in the Versailles room at 10:15 AM."

A few miles away, in the hush of his office, Mike Milken has loaded his Drexel canvas bags for his trip to New York, where he is to be fingerprinted and have his mug shots taken. This time, as he filled his bags, they bulged not only with proxies and registrations but with dozens of depositions, legal memos, and strategy suggestions for his first visit to another world altogether, that of convicts and grand juries, metal security doors and bulletproof glass, inside the offices of the U.S. Attorney in New York.


"Cracks In House That Debt Built," by Sarah Bartlett, The New York Times, August 17, 1989

The biggest game on Wall Street in the 1980s has been borrowing money - lots of it - to buy up big chunks of corporate America. And usually, the biggest winners have been the firms that set up the deals, which earn huge fees for their troubles.

But cracks are appearing in this glamorous facade. Kohlberg Kravis Roberts & Company, which became a Wall Street superstar by gobbling up dozens of large companies using a mountain of debt, is beginning to falter. And that could presage troubles at other firms.

In little more than a decade, KKR has risen from next to nothing, with just $3 million of its own to invest, to control an empire that includes RJR Nabisco, the tobacco and food giant, supermarket chains like Stop & Shop and Safeway, and Duracell, the big battery maker. Analysts now say several of the firm's recent deals, known as leveraged buyouts, will generate losses or poor returns for investors, or even bankruptcies.

Unable to Meet Payments

In recent weeks, two companies that KKR helped to acquire - SCI Television, which consists of six network stations, and Seaman Furniture, the second-largest national furniture retailer - said they could not meet interest and principal payments. They will be forced to renegotiate their debt, which could mean big losses for some investors.

At least two other companies in KKR's stable - Beatrice, the food giant, and Jim Walter, the construction concern - look as if they will disappoint investors. And Owens-Illinois, the glass and plastic company, is not turning out as the smart acquisition many expected when the firm acquired it in 1987.

Trouble at KKR could have far-reaching effects. In response to a series of tumultuous takeover battles, Congress is considering new laws to curtail the use of debt. If deals engineered by the most prominent leveraged buyout firm come unglued, it could tip the balance in favor of greater regulation.

Representative Byron L. Dorgan, Democrat of North Dakota, said: ''If a good many of these companies begin to fail, those who have been skeptics will have a substantial amount of ammunition to try to slow this thing down. Those of us who have been moving to disallow interest deduction on junk bonds will be given a substantial boost.''

New Caution Seen

Whether Washington acts or not, disappointment with KKR deals is likely to introduce new caution into the financial community. Already, some of the firm's investors, as well as industry experts, say they think the firm will have trouble raising as much money as it did in the past. And both bond investors and bank lenders say they would scrutinize KKR deals more carefully before backing them.

In a leveraged buyout, a group of investors buys a company, often in cooperation with its top managers, and pays for it largely with borrowed money. In theory at least, the owners instill a new rigor by chopping away at bloated staff levels and selling unneeded assets like corporate jets. The company is then resold for a handsome profit. And since the investors put in so little in the initial purchase, profits can be gargantuan.

KKR is by no means the only firm whose buyouts are having difficulties. But its reputation, the size of its deals and its preeminence make its situation significant.

Since its inception in 1976, KKR has acquired 35 companies at a cost of more than $62 billion. Together, they would make up the largest industrial conglomerate in America, a colossus that the firm oversees with just 5 general partners and 14 associates. And KKR is as active as ever. It figures as a potential bidder for UAL, owner of the nation's second-largest airline, and BAT Industries and BTR, two British conglomerates.

KKR's three founding partners have become fabulously wealthy, known in business circles worldwide. Jerome Kohlberg, Jr. and his former partners, Henry R. Kravis and George R. Roberts, are each estimated to be worth more than $300 million. (Mr. Kohlberg left the firm in 1987, saying he had philosophical differences with his partners and wanted to make deals ''where reason prevails.'')

Donations to Museum

Mr. Kravis, 45, has become highly visible on the New York scene, especially since his marriage in 1985 to Carolyne Roehm, a fashion designer. He has donated $10 million each to the Metropolitan Museum of Art and Mt. Sinai Medical Center, both of which are naming new wings after him. The couple frequently entertain at their country home in fashionable Litchfield County, Connecticut. By contrast, Mr. Kohlberg, 64, who now runs his own buyout firm, and Mr. Roberts, 45, who works out of KKR's office in San Francisco, tend to shun the limelight.

Financial experts generally give KKR enormous credit for their acuity in recognizing the potential that leveraged buyouts had for forcing large, unwieldy corporations to streamline themselves. But some now say that the pioneering firm, eager to repeat its successes on an ever larger scale, has strayed from its early investment principles.

Even some of its own investors are concerned that the fees the firm charges on a deal have grown so greatly - from less than $1 million to $75 million - that Kohlberg, Kravis is now more interested in doing the next big transaction than in making sure it is a good one. These critics fear that the firm has become less selective about the prospects of its target companies, the prices paid and the debt they allow their new wards to take on.

No More 50% Returns

''I am relatively certain they won't generate the 50 percent-plus returns that some people used as a basis for investing in leveraged buyouts,'' said Scott M. Sperling, a partner at the Harvard Management Company, which has invested with KKR since 1982. ''It is too early to say whether they can generate 20 percent returns,'' he added, the minimum he thought acceptable for such an investment.

In an interview last week, a KKR partner, who did not want to be identified, conceded that SCI Television and Seaman were having difficulties, but said they might still work out.

As for returns slipping to 20 percent, he said: ''I don't believe it's going to happen,'' adding that so meager a harvest would be ''unacceptable.'' At that level, KKR would join the ranks of more traditional, less risk-oriented managers.

Escalating Numbers As Deals Grow, Fees Skyrocket

In the beginning, KKR attributed its success - with 63 percent returns, compounded annually, on its first 16 deals - to a vast network of investment bankers, lawyers and accountants who helped it turn up bargains. As the years went on, however, KKR often said the high returns resulted from the large size of its deals.

Leveraged buyout firms earn money three ways. They charge investors a 1.5 percent fee for managing their money. They keep 20 percent of any gains they generate. And they charge the companies they acquire a fee - typically 1 percent of the size of the deal - for negotiating and arranging the transaction. So as the deals grew, so did the fees.

Although KKR's fees were initially in line with other competitors, they gradually began exceeding the norm. When the firm sold a division or a company, for example, it charged a divestiture fee. The firm also charged directors' fees, typically $25,000, for sitting on company boards.

$75 Million on RJR

It collected a $60 million fee when it acquired Safeway and the same at Owens-Illinois, equal to 1.3 and 1.5 percent of those transactions. At Stop & Shop, it got $28 million, or 2.3 percent. At RJR Nabisco, the largest leveraged buyout ever, the firm charged less than 1 percent, but still earned $75 million, or about $20 million more than its entire stake in its latest investment pool. (KKR did also invest $80 million directly into the company.)

By comparison, Joseph L. Rice, president of the leveraged buyout firm Clayton & Dubilier Inc., said the only time he had charged more than 1 percent was on smaller deals where the appreciation of equity would not amount to much.

As KKR's fees mounted, the firm's investors, concerned that it was being given the wrong incentives, asked for a share, a suggestion that was turned down.

As KKR's fees soared, its stake in its investment pools shrank as a proportion of those funds. The partners put up 10 percent of the first fund and 4 percent of the second, and their contribution has hovered around 1 percent since then.

KKR had cited its willingness to put its own money on the line as a key reassurance to outside investors. Of late, however, its income from fees has dwarfed its money at risk. By 1986, when the firm put $20 million into its $1.8 billion fund, it made over $165 million in fees on just three deals.

A Changing Market Bidders Crowd In, Raising Prices

The financial markets have undergone a transformation, too. Other leveraged buyout firms have crowded onto the field, creating corporate auctions. To win a deal requires paying the highest price - and piling on the most debt - leaving even less margin for error.

At least one buyout firm, Forstmann Little & Company, has chosen to sit out the bidding frenzy. It has invested its $2.5 billion fund in only two deals since 1987. Nevertheless, the head of a large ''junk bond'' fund said that KKR is like many others in that ''they take the money they raise and invest it with little risk to themselves.'' He added, ''This is a fee-driven business.''

The KKR partner disputed that characterization. ''We are not in the fee business,'' he said. ''We make our money as a principal.'' In the most recent deal for which final returns are available, the firm made about $46 million on the Amstar Corporation, the sweetener maker, on an investment of about $1 million.

Seems to Respond

Still, KKR seemed to respond to a new environment. In its 1987 prospectus, it said that for the first time it would be interested in ''companies which have readily separable assets or businesses which could be available for sale.''

Instead of relying on its ability to improve a business and increase its value, the firm was also looking for companies it could break up to pay down debt and reward investors.

The financial community cooperated by growing increasingly relaxed about the substitution of debt for equity in the financing of an acquisition. In the old days, KKR had to make sure any company it bought could generate enough cash to pay interest on the debt. But now it can afford to be less stringent because investors are willing to accept bonds that pay interest not in cash but with other IOUs or in a lump sum when the bond matures.

Deals Start to Sour Investors Facing Junk Bond Losses

This relaxation of investment discipline, combined with changing incentives for KKR, may help explain the condition of some of the firm's recent deals.

Most seriously troubled is SCI Television of Nashville, once part of Storer Communications, a 1985 acquisition. Today KKR owns 45 percent of SCI, with the remainder belonging to businessman George N. Gillett, Jr. The company cannot make a September 30 debt payment, and its $375 million in junk bonds are plunging in value. Although KKR's investors did extremely well on their original investment in Storer, many analysts predict they will see nothing from their $100 million stake in this joint venture.

Seaman also cannot make interest and principal payments and will have to restructure its debt. Without cooperation from its bankers, its auditors indicated, it might be unable to ''continue as a going concern.''

Another KKR deal that has proved disappointing is Hillsborough Holdings of Tampa, the company that succeeded Jim Walter. Over the next few years cash flow is expected to fall about $150 million short of the money needed to pay down its debt. And that is before taking into account any financial penalty that might result from a $3 billion class action suit filed against it and other parties concerning asbestos products produced by a subsidiary.

Owens-Illinois, though not as badly off, was hurt by rising interest rates and pricing pressures in its domestic glass container business. In June, Owens-Illinois noted in a filing with the Securities and Exchange Commission that it would be unable to make principal payments without refinancing or selling assets.

The KKR partner says that is standard for many leveraged buyouts. Industry analysts find it is unusual, however, for a buyout two years into its restructuring. Owens-Illinois has already sold $1.9 billion in assets since KKR bought it in 1987.

Beatrice is not going to be anything like the bonanza suggested after that deal was consummated. In its 1987 fundraising literature, KKR estimated a 192 percent return - a figure that sharply boosted the return accorded to its 1986 fund as well as its composite record since 1976.

So far, however, industry analysts estimate that investors have received less than a 15 percent return on investments in Beatrice, before deducting a 20 percent cut for KKR Any further profit is locked up in $1.3 billion in assets that the firm has tried to sell for months.

Of course, some more recent KKR deals could be big winners. Safeway Stores is paying down its debt and increasing operating profits; it could well be taken public again soon. And although it is early, RJR Nabisco looks promising.

Some KKR investors and industry analysts nevertheless predict that the firm's overall returns are likely to fall considerably below the 30 and 35 percent that investors have received.

''It's going to be very difficult for them to achieve the kind of returns they had on their earlier funds,'' said John E. Hull, deputy comptroller of New York State. The state's pension funds have invested in KKR funds since 1984.

Will Investors Defect? 20% Is Still Good, If It's Still Safe

Will more modest results hurt KKR? Some investors said that with so many billions to invest, as long as the firm did better than the overall stock market, they would be satisfied.

''If you get north of 20 percent on your investment, net of fees, nobody's going to grumble,'' said Paul F. Quirk, who oversees pension funds of 26 Massachusetts municipalities and has been a KKR investor since 1986.

Mr. Sperling of Harvard Management said it depends how KKR reaches that 20 percent number. ''There has to be a consistent pattern of hitting the winners,'' he said.

Many KKR investors are commercial banks, like BankAmerica, First Chicago, Citicorp, and Bankers Trust, and they are among the largest providers of loans to finance leveraged buyouts. Thus, they earn fees from the process, which might help take the sting out of any bad deals. But junk bond investors, who provide a large part of KKR financing, are likely to be more circumspect once they have lost money on earlier investments.


"British Conglomerate To Buy Part Of Del Monte From RJR Nabisco," Los Angeles Times, September 8, 1989

RJR Nabisco Inc. said Thursday that it would sell the fresh fruit operations of Del Monte to the British conglomerate Polly Peck International PLC for $875 million in another major step toward reducing debt from its record buyout.

The cash sale of Del Monte Tropical Fruit Co. moves RJR past the halfway mark in its efforts to sell about $5.5 billion in assets to reduce the debt accumulated in the $25 billion buyout of the food and tobacco giant by Kohlberg Kravis Roberts & Co.

Del Monte is the world's largest supplier of fresh pineapples and No. 3 in bananas. Its acquisition would make Polly Peck a major player in the fresh fruit industry by allowing it to use the well-known Del Monte brand name on its entire range of produce.

RJR's plan to divest assets, particularly among its food holdings, began in June, when it sold five European food businesses for $2.5 billion to BSN SA of France, and its Chun King unit for $52 million to a Singapore syndicate. The following month it sold its biscuit and food businesses in India and Pakistan for $44 million.

"We are significantly ahead of schedule in completing that plan," said RJR Chairman Louis V. Gerstner.

'A Good Price'

RJR said the amount received for the fresh fruit business was about 13 times the unit's projected 1989 operating income, a price tag generally in line with analysts' expectations.

"I'd say it's a good price. Of course, it's not as good as what they extracted from the (European) snack food operations," said Marc I. Cohen, of the New York securities firm Sanford C. Bernstein.

John Maxwell, an analyst with Wheat First Securities in Richmond, Virginia, said he expected RJR to proceed with plans to sell the rest of Del Monte as well, including Del Monte Foods USA and separate units in Europe, Latin America, Canada and the Far East.

Del Monte Tropical Fruit, with $600 million in sales of pineapples, bananas, papayas, mangoes and other fresh fruits last year, accounted for about a quarter of Del Monte's total sales.

RJR had total revenue of $7.44 billion for the first six months of 1989.

Polly Peck said it planned to finance the acquisition through a rights issue and from bank loans. It said it hopes to complete the deal by October 26.

The rights issue will allow existing shareholders to buy new Polly Peck shares at $3.77, or 245 pence, about 20% below their recent trading range.

The London-based company also has operations in electronics, textiles and hotels. Its sales totaled $804 million for the first six months of this year.


"Qintex Tops Murdoch With Successful $1.5 Billion Bid For MGM/UA," by E. Scott Reckard, Associated Press, September 15, 1989

Australia's Qintex Group won a brief but bitter bidding war for MGM/UA Communications Corp. on Friday with a successful $1.5 billion buyout offer, topping media magnate Rupert Murdoch by $100 million.

Kirk Kerkorian, who owns 82 percent of MGM/UA, already had sold many of the assets of the old MGM and United Artists studios. The high price was attributed to MGM-UA's vast movie library, and alluring asset at a time of strong worldwide demand for U.S. entertainment.

″We believe the global development of not just television but movies is going to exceed inflation by a wide margin,″ said John Lloyd, Qintex's chief financial officer.

Kerkorian had been seeking a buyer for all or part of the company for 18 months. Nearly every big American company with entertainment holdings, as well as Japan's Sony Corp., had expressed interest.

Qintex announced a deal in April to buy MGM/UA's United Artists studio and some other assets for $600 million. At the time, the Fox Inc. unit of Murdoch's News Corp. was the final suitor to drop out of the bidding.

In a surprise move Wednesday, Murdoch bid $1.4 billion for all of MGM/UA. But negotiations between MGM's board and Murdoch's News Corporation and its Fox Inc. unit broke down late Thursday.

By bettering Murdoch's deal for all of MGM/UA, Qintex Chairman Christopher Skase turned the tables on his fellow Australian. Murdoch, whose holdings include the Fox studio, had hosted a cocktail party to introduce Skase to Hollywood's elite after the Qintex deal was announced in April.

When Murdoch reentered the picture Wednesday, Skase was in the process of buying for $8 million the palatial Los Angeles estate of the late Edie Goetz, the daughter of the late Louis B. Mayer, one of MGM's founders.

A source close to Skase, speaking on condition of anonymity, said Skase had been angered by Murdoch's offer, although not surprised by it.

Neither Murdoch nor Skase was available for interviews Friday.

Murdoch spokesman Howard Rubenstein said MGM/UA had asked Murdoch to bid for the company. ″He thought he had a deal, but then the transaction fell apart,″ he said, declining further comment.

In buying MGM/UA, Qintex also will assume $400 million in MGM/UA high-yield bond debt. It also promised to make a nonrefundable $50 million deposit on MGM/UA ″promptly.″

Qintex owns an Australian television network and 43 percent of a U.S. company that produces TV movies and specials, including the Lonesome Dove miniseries.

Qintex officials said MGM/UA's 4000-picture movie library, the largest of any studio, was the main attraction. European and Asian markets for U.S. movies and television are booming, and the films can be packaged and sold for distribution in many forms.

The 1000-movie United Artists library includes the Rocky, Pink Panther and James Bond pictures.

Ted Turner owns worldwide television broadcast rights and domestic pay-TV rights to the 3000-picture MGM library, which includes pre-1950s Warners Bros. releases and includes Casablanca, Singin' in the Rain, Gone With the Wind and The Wizard of Oz.

But Qintex will get domestic and foreign home video rights to that library, as well as non-U.S. pay-TV rights.

Lloyd said Qintex also plans to expand MGM/UA's in-house film production to 15 to 20 per year.

After sputtering as Kerkorian bought and sold pieces of the company, MGM/UA produced a dozen films last year, including Oscar-winner Rain Man. But during negotiations for the sale of the company, film production has ground to a halt.

Lloyd said there are no immediate plans to sell MGM/UA assets.

Murdoch, whose four-continent TV, newspaper and magazine empire is valued at more than $8 billion, also sought MGM/UA's movie library as programming for his Fox TV network here, fledgling satellite television networks in Britain and other enterprises.

Lloyd said Qintex's financing probably would be about half in bank loans and half in cash from a consortium of unidentified European and Asian investors.

MGM Grand Inc., a Kerkorian-controlled company that operates a first-class airline and Nevada casinos, will buy back the MGM/UA headquarters building from Qintex in October for $43 million or its independently appraised value. MGM/UA will make about $26 million on that deal, the company said.

A September 23 shareholders meeting to consider Qintex's earlier offer was canceled.


"RJR Nabisco Sells Del Monte Food Operations For $1.4 Billion: Deal Puts Company Close To Lenders' February 1990 Debt Reduction Goal," by Maria L. La Ganga, Los Angeles Times, September 26, 1989

Food and tobacco giant RJR Nabisco Inc. took a big bite out of its debt troubles by selling its Del Monte processed foods business to an investor group headed by Merrill Lynch & Co. for $1.475 billion in cash, company officials said Monday.

The Del Monte sale is part of a continuing program to cut the enormous debt that resulted from Kohlberg Kravis Roberts & Co.'s $25 billion leveraged buyout of the company early this year.

Lenders who financed the buyout gave RJR Nabisco until February 1990, to reduce the debt by $5.5 billion and an additional six months to bring the total cut to $6 billion. Monday's announcement brings RJR Nabisco to within $600 million of the February requirement.

"We are now up to $4.9 billion," said David Kalis, an RJR Nabisco spokesman. "We're almost home. . . . We don't expect any more major divestitures-by major I'm talking in the mega-billions."

In addition to Merrill Lynch, other investors include Del Monte senior management, Kikkoman Corp. of Japan and Citicorp Capital Investors Ltd. In addition to its investment, Kikkoman has agreed to purchase a variety of Del Monte's assets in the Far East, RJR Nabisco said.

The processed foods business has been for sale for several months, analysts say, with Citibank as the major would-be buyer.

"But Citicorp had to reduce its equity stake . . . because the Federal Reserve Board had rules limiting banking investments in non-financial companies," said Kurt Feuerman, analyst for Drexel Burnham Lambert. "That was the major roadblock. Merrill Lynch stepped in fairly recently when it was decided that Citibank could not have a larger equity portion."

Will Retain Parts

The sale announced Monday includes Del Monte Foods USA, Del Monte Foods Europe, the company's processed foods businesses in Mexico, the Caribbean and the Far East, and Del Monte's pineapple operations in the Philippines and Kenya.

Not sold were Del Monte/Aylmer Canada, Del Monte's processed foods business in Venezuela and Nabisco food businesses in Latin America, which were managed by Del Monte.

RJR Nabisco's sell-off campaign was made necessary when Kohlberg Kravis Roberts took control of the company last February in the biggest corporate buyout in history. In a leveraged buyout, a company is bought with borrowed money, and its own assets are used as collateral. The debt is paid off through cash generated by the firm and the sale of assets.

With RJR Nabisco so close to reaching its debt reduction goals, speculation now revolves around what further assets are left to sell.

"When the LBO was set, there were obvious things the company had to do," said Marc I. Cohen, an investment analyst with Sanford C. Bernstein & Co. "They had to get management in place and sell assets. They have made great strides on the management side. They have also made a lot of progress on the asset disposition side. They need to do a little bit more, but they don't have to get rid of any big chunks."

One "big chunk" that's left is the company's Planters LifeSavers Co., a snack food subsidiary, but industry watchers contend that RJR Nabisco will probably hold on to that business. It is more likely to sell off its 20% stake in ESPN, its Latin American and New Zealand food units and its Butterfingers/Baby Ruth candy division.

"I'd say they're really going to slow it down now," Feuerman said. "They're not in a position where they have to sell a lot of assets right now, and they're in the strong position of having a whole slew of things to get rid of. From here on in, the focus of their activities will not be on divesting assets but on growing the existing businesses."

More Deals Earlier

Earlier this month, RJR Nabisco announced the sale of its worldwide Del Monte Tropical Fruit Co. to Polly Peck International PLC, a London-based conglomerate, for $875 million in cash.

The summer was even busier, for the company also sold its India and Pakistan biscuit division for $44 million, its Chun King food line for $52 million and its European food businesses for $2.5 billion.

"From now on, we can be strategic about it (divestment)," said Kalis, the RJR spokesman. "We can take a look at businesses that might not fit into the organization and decide what to do."


"Sony to Pay $3.4 Billion for Columbia Pictures: Japanese Firm Willing To Offer High Price to Get Film, TV Software for Video Equipment It Makes," by Paul Richter, Los Angeles Times, September 28, 1989

In the largest U.S. acquisition to date by a Japanese firm, Columbia Pictures Entertainment agreed Wednesday to be acquired by Sony Corp. for $3.4 billion in cash.

Sony immediately pledged to put the 65-year-old movie and TV studio in the hands of Sony's U.S. subsidiary and to "keep it as independent as possible, as a full-fledged member of the U.S. film industry."

Sony executives said that they were in talks with producers Peter Guber and Jon Peters, co-chief executives of Guber-Peters Entertainment Co., about taking some management role at the company. Industry sources say Sony is considering making Guber Columbia's chief executive and speculated that Sony might also buy up the small, publicly traded Guber-Peters firm.

Columbia Pictures Entertainment includes the Columbia Pictures and TriStar studios, television programming and syndication operations, a huge film and TV library and the 820-screen Loews movie theater chain. The 2500-employee company has been secretly talking with Sony intermittently for more than a year, and it received a firm buyout proposal last weekend.

Columbia's board voted on the Sony proposal at a meeting in New York at 8:30 AM Wednesday and sat down to sign papers with Sony executives an hour later.

The sale is part of a consolidation that the film industry is undergoing as increasing entertainment viewing worldwide has driven up the studios' values. Already this year, the Warner Bros. studio has been sold to Time Inc. with its parent, Warner Communications; and MGM/UA Communications has agreed to be sold to Qintex Group of Australia.

The Columbia deal represents the first time that a Japanese concern has purchased a major Hollywood studio.

Sony was willing to pay a lofty $27 a share for a company with meager earnings because of the strategic value of Columbia's films and TV programs to a concern with a strong hold on emerging TV and audio technologies, analysts said. Columbia's films will provide the "software" for Sony videocassette recorders, for example, and for the 8-millimeter recorder Sony is trying to popularize.

The purchase of the studio "extends Sony's long-term strategy of building a total entertainment business around the synergy of audio and video hardware and software," said Michael P. Schulhof, vice chairman of Sony Corp. of America, in a statement.

Analysts said that the high price offered by Sony makes it unlikely that a competing bid will emerge at the last minute.

Coca-Cola Co., Columbia's largest shareholder, with a 49% stake, has given Sony an option to purchase those shares, Sony said. Coca-Cola's management has pledged that it will recommend sale of the shares at a board meeting set for October 2. Allen & Co., the New York investment banking firm that holds a 3% stake in Columbia, has given Sony an option to buy its shares as well.

Columbia's two top executives, President and chief executive Victor R. Kaufman and chief operating officer Lewis Korman, will leave the company when the sale is completed, Columbia said.

Schulhof said in an interview that he has held "conversations with Peter Guber and Jon Peters, and we're hopeful some kind of an arrangement can be reached." He would not elaborate. Trading in Guber-Peters stock was suspended at 9:26 AM Wednesday after rumors of the talks were publicized.

Reports of Guber's possible appointment raised questions in Hollywood about Columbia movie chief Dawn Steel's future, as well as the future of other senior personnel at Columbia. Some observers wondered if Guber's connections with Warner Bros. suggested that the new regime might lure talent from that studio.

Schulhof said Columbia is "run by very capable people" and described the studio's future as "business as usual." He refused to comment on Steel's future or on how effective he believes she has been since she began trying to reverse the movie unit's sagging fortunes last year.

"I know her only by reputation, and obviously the company thinks very highly of her," said Schulhof, who is also a director of Sony.

A key player in the Sony-Columbia talks has been Walter Yetnikoff, chairman of Sony's CBS Records unit. Schulhof said Yetnikoff would have a voice in Columbia's "strategic decisions" but added that Columbia would be "independent" of CBS Records and its most famous label, the similarly-named Columbia Records.

Schulhof said major layoffs are "not our style . . . . We're not a (leveraged buyout) outfit; we didn't buy the company to carve it up."

He noted that employment has increased at CBS Records since Sony purchased it from CBS Inc. early last year for $2 billion.

Since it was acquired, CBS Records has again moved into music publishing and has begun manufacturing compact discs for the first time, he said. In all, Sony Corp. of America employs 12,000, operates six major factories and is "very much an American company, run by Americans," Schulhof said.

He said he did not expect the company's Japanese ownership to be an obstacle in Hollywood, where personal relationships are so often crucial.

The acquisition will mean that Coca-Cola will end its difficult seven-year adventure in entertainment with an enormous profit. The stock sale will bring about $1.5 billion before taxes, or $1.2 billion after taxes.

The soft drink company scaled back its involvement in 1987, when it combined Columbia, TriStar and its other entertainment units into one company and spun off 51% of it to the public.

In Britain on Wednesday, former Columbia Pictures movie chief David Puttnam said he believed that Coca-Cola had been looking to sell its remaining shares even in 1987. "I had no doubt . . . this was going to happen," said the director, who alienated many of Hollywood's most powerful figures during his iconoclastic reign.

In a statement, Columbia Chairman Donald R. Keough said Sony was "an ideal buyer . . . . It has all the right characteristics and, very importantly, has the ability to take the company to its next important step."


"Running The Biggest LBO," by Judith H. Dobrzynski, BusinessWeek, October 2, 1989

RJR's Lou Gerstner has a plan. So far, it works

Louis V. Gerstner, Jr., the new chief executive of RJR Nabisco Inc., is headed for a helicopter that will whisk him out of Manhattan and out to Newark Airport to a waiting Gulfstream IV jet. The morning's newspapers are full of stories about the plummeting junk bond market, failing leveraged buyouts, and dire warnings about other deals. But is the man in charge of the world's biggest LBO nervous?

Not, apparently, in the least. Gerstner's destination, Winston-Salem, North Carolina, the locus of RJR's tobacco company and his biggest operational problem, is more on his mind.

Last March, when Gerstner was hired by Kohlberg Kravis Roberts & Co., the RJR slot was billed as Corporate America's toughest job. Slimming down and revitalizing a $17 billion food and tobacco giant would be hard under any circumstances. Doing it under a $26 billion mountain of debt is something else again-especially with a jittery junk bond market. But living with that kind of leverage was large part of the appeal for the 47-year-old Gerstner, who abdicated the post of president and heir apparent at American Express Co. for it.

GOLD STAR.

He dug in with gusto. Like a man possessed, Gerstner has scratched off dozens of items off his to-do list: auctioning off more than $3.5 billion worth of assets, issuing $4 billion worth in junk bonds, hiring a management team, discontinuing sales of a "smokeless" cigarette, moving corporate headquarters to New York, and ordering cost cuts. As he puts it: "I've spent the last five months drinking from a firehose." Things are moving so fast that RJR boasts an entire department that does nothing but restate sales, profits, and other key accounts to reflect the company's status.

That pace won't stall. Gerstner will soon announce a deal to sell RJR's Del Monte canned food operations-minus its Canadian unit-for $1.5 billion. That will bring him within hailing distance of the $5.5 billion he must raise from asset sales by February to pay against a $6 billion loan. He's also taking decisive steps to solve by year-end a monumental RJR problem: the excess cigarette inventory held by distributors, which former management shipped to pad market share. He will cancel all overtime production, reduce shipments, and take a $340 million hit to second-half earnings. After interest payments, RJR was already running in the red, to the tune of $700 million this year. But operating cash flow, the key indicator of an LBO's viability, is up substantially.

Indeed, RJR is ahead of projections in virtually every measure, pleasing insiders and outsiders alike. "We'd give him an A+ so far," says KKR partner Paul E. Raether. Agrees former RJR chairman Charles E. Hugel, CEO of Combustion Engineering Inc.: "It looks good so far. I've kept all of my paper." Those "stubs," the small amount of stock left after the buyout, have risen 13% in value since they began trading on April 10, despite troubles in the LBO world. RJR's performance to date is so good that "some people are starting to say this is easy," Gerstner complains. It's a thought that galls him. "Making debt payments, yes-that's not been hard. But that's not what Lou Gerstner is all about," he says. There is so much else to do to build and improve the company.

Besides more divestitures and refinancings dictated by the LBO, Gerstner has set one tough agenda. He must restore RJR's morale, which hasn't recovered from the trauma of going through a very public auction begun when former CEO F. Ross Johnson put the company in play last October. For months, RJR drifted under tentative leadership. Now, the new boss is planning a cultural overhaul in much of the consumer products company-which grew fat, happy, and often lazy under Johnson. He must reorient executive thinking, getting the brass to think more strategically and focus on cash flow. And, most critically, he must arrest the fall of RJR's share in a declining cigarette market.

'PROFLIGACY.'

The whole task has been made more difficult by the turmoil in junk bonds. As big name LBOs such as Campeau, Integrated Resources, and Seaman Furniture have floundered, they have dragged down the prices of other junk. RJR's bonds have been pinched, too-though to a lesser degree-as leverage began to lose its enchantment for Wall Street. In a spooked market, RJR can hardly escape scrutiny. The company has "more debt than most developing countries," notes CFO Karl M. von der Heyden, who came to RJR from H.J. Heinz Co. RJR would rank 10th, right behind the Philippines and just ahead of Morocco. The company also suffer from guilt by association with Beatrice Co., another food company that KKR took private and that has yet to achieve its forecast returns.

RJR would like to refinance $1 billion in expensive increasing-rate notes and $500 million in "payment in kind" paper held by KKR. If the market remains skittish, RJR could have trouble. That could add to its interest burden, which in 1989 comes to $3.4 billion, $2 billion due in cash. Market queasiness could hurt potential buyers of RJR's assets, too, making it harder to raise money for their purchases.

Even in a tough environment, though, Gerstner has plenty of room to maneuver. He has more flexibility than Beatrice, Campeau-indeed, most LBOs. For starters, RJR was accustomed to high living. "Under Johnson, there was profligacy," says a consultant familiar with RJR. "He can cut expenses without harming operations"-especially in tobacco. Operating margins in RJR's $5.2 billion domestic tobacco business are 35.5%, lagging behind the industry laggard by some four percentage points and trailing market leader Philip Morris Inc. by five or six points. It'll be easy red pencil capital spending, too. One look at Tobaccoville, north of Winston-Salem, shows that capital budgets can stand review. Completed in 1986 for $1 billion, the world's largest, most advanced cigarette plant was spared no expense. It wastes space in long, skylit corridors, sports a cafeteria that would enhance an upscale shopping mall, and includes a power plant that provides twice the energy required.

NOTHING MAJOR.

And Gerstner can take comfort in the strength of many operations. Volume in the international tobacco company is growing more than 10% a year. Most Nabisco brands rank No. 1 or 2 in market share and could command premium prices if sold. Plus, Nabisco owns several foreign operations that, while moneymakers, have little strategic value for U.S. operations. More big asset sales are unlikely, however, despite conjecture to the contrary. After Del Monte, "there is no real need to do anything major," says von der Heyden. Operating cash flow (before interest, taxes, depreciation and amortization) is expected to climb by several hundred million dollars this year, to some $3.7 billion. According to banking sources, from the close of the deal in April to June 30, RJR's ratio of operating cash flow to cash interest equaled 2.5, versus required coverage of 1.4.

To meet debt covenants, RJR must sell an additional $1 billion in assets-$500 million by February and $500 million by next August. But Gerstner believes he can achieve much of that with the sale of miscellaneous assets, such as RJR's 20% stake in ESPN, the cable sports network, and a few more corporate planes (four of 11 are gone already, and two are close to a sale). Next to go would be Nabisco's New Zealand unit and its Latin American business. Beyond that, Gerstner has ordered a review of product lines in RJR's food operations, where intends to follow his strong belief in "franchise." He likes being No. 1 or 2 in the market. If a product isn't, it's a candidate for sale. In this view, the much-rumored sale of Planters LifeSavers is a nonstarter, since Planters has 41% of the nut market and LifeSavers has a 47% share of the hard candy business. Gerstner has decided to sell RJR's Butterfingers-Baby Ruth business, however, which is dwarfed by chocolate market leaders Hershey Foods Company and Mars Inc. The unit could fetch $250 million. Other potential sales are ready-to-eat cereals (No. 6 in the market), hot cereals and chewing gum. In reserve-for sale only if necessary-are businesses that have a strong franchise but are unrelated to Nabisco's core cookie and cracker business. They include Milk-Bone dog biscuits, A-1 steak sauce, and Grey Poupon mustard. "They'd get obscene prices," says the CEO of a major food company.

The fact that Gerstner probably won't have to go that far sits just fine with RJR's banks. "If he can do it with fewer asset sales, all the better," says Morgan St. John, a managing director at Bankers Trust Co. "It leaves more operating income to service the debt." Several banks have already come calling on Gerstner and von der Heyden with ideas to refinance at lower rates a $1.5 billion bridge loan due in February 1991. Gerstner believes RJR will soon allay any fears about its leverage. "We will get to the point in early 1990, or mid-1990, to be conservative, where we will have our capital structure in the comfortable zone, though we will still have more debt than I would say is right for this company," he says.

NO MORE SLIDES.

All in all, Gerstner's record at RJR isn't bad for someone who, until last January, never thought much about LBOs. He grew up in Mineola, New York, the second son of a traffic manager for F&M Schaefer Corp., the beer company now owned by Stroh Brewery Co. After he earned a degree in engineering from Dartmouth College and an MBA from Harvard, consulting beckoned. For several years, he flourished at McKinsey & Co. A key client presentation, however, changed all that. In it, Gerstner made a compelling argument for change. "I was on my feet for hours, putting an enormous load of overhead slides on the projector," he says. The client refused to budge. "I went home and said I no longer wanted to be the guy putting slides on the machine. I wanted to be making the decisions."

Two years later, he moved to AmEx. In his 11 years there, he revitalized its credit card business, winning notice for creating an innovative culture at American Express Travel Related Service Co. He also developed a reputation as a quick study and sharp strategist, skills he put to work in the design of the partial spinoffs of two troubled divisions, Fireman's Fund Corp. and Shearson Lehman Hutton Inc. "He's the best young manager I've ever seen," says AmEx director Rawleigh Warner, Jr., former chairman of Mobil Oil Corp. "He had the respect of everyone at AmEx." In 1986, Gerstner edged out Sanford I. Weill, now CEO of Primerica Corp, as heir apparent to AmEx CEO James D. Robinson III, 53.

Gerstner had been approached by headhunters before-unsuccessfully. But he was growing a little restless at AmEx, wondering if the CEO slot at such a successful company would challenge him-if Robinson moved on. When KKR's recruiter called, he agreed to listen to a pitch from chief Henry R. Kravis and Raether. "From the first time we met him, he was our first choice," Raether says. "He had an impressive track record. He was the right age, had the right energy level. And he's a problem solver, not a procrastinator. With all that debt, you have to get a lot accomplished." Gerstner wanted to know how the LBO would work and if he would choose his own management team. Recalls Raether: "He said, 'Are you going to be in my hair?'" Kravis and Raether assured him they wouldn't be, although they would control the board of directors. Once Gerstner convinced himself that debt levels were manageable, he signed on, for $2.2 million in salary and bonus and the chance to buy a 1% stake in RJR for $5 million.

As Gerstner describes it, the job has been more than he bargained for. Several Johnson allies quit almost immediately. "I came in to be CEO, but I was CEO, CFO, general counsel, head of tobacco operations, and at one point, there was no treasurer," he says. And there was little infrastructure at temporary RJR's New York office. Lunch in AmEx's dining rooms was replaced by a call to a deli. Instead of a limousine to convey him from his home in Greenwich, Connecticut, he found a four-year-old car, since replaced, that kept breaking down. At 3 PM one Friday in June, Gerstner tried to send a document by messenger, only to find that his support staff had gone home. He didn't know that employees worked the summer hours of Nabisco's suburban New Jersey headquarters.

LBO PHOBIA.

Uncertainty within RJR-along with the fear that the company was eventually headed for breakup-was a knottier problem. Gerstner first assured the troops that he was a business builder, not a breakup artist. He visited major installations to meet with management, demonstrating how he differs from the mercurial Johnson. "They both have high IQs," notes one top executive. "But Lou is very intelligent; Ross is very clever. Lou is very strategic and long-term; Ross was very tactical and short-term. Lou is an analyst, creative within a framework; Ross is wild and intuitive. Lou is more hands-on."

In executive meetings, Gerstner tried to dispel misconceptions of life under an LBO. "People would tell me how they were going to cut costs, and I'd ask about new products and market share," he says. He told them that investment wouldn't stop, though it would be reviewed. Capital spending will indeed drop from $600 million this year to an estimated $500 million in 1990, though von der Heyden claims the cuts won't all hurt. "We're trying to spend capital very wisely," he says. "We'll help the operating companies in thoroughly noodling through their budgets." The investment hurdle rate is also likely to increase.

'JUNKYARD DOGS.'

Gerstner is taking his gospel to lower levels of the organization, too. On travels around the company, he often schedules a lunch or dinner with a dozen or so middle managers. The object: to find out what's on their minds and to tell them about his management objectives. The hope: to hear more discussion about external issues, such as products and customers, than internal issues and to generate enthusiasm. Typical is his mid-September visit with 14 employees of Planters LifeSavers, which has lost its marketing edge. Gerstner is intent on revving up the unit. Over a roast beef dinner, he listened to the job duties and concerns of those present. He asked their opinions. He explained his priorities-often trying to change their way of thinking. To one who pleaded for more investment in computers, for example, he responded with the need to leverage the use of equipment and services among RJR's units: "I'd love to see you guys be the junkyard dogs of RJR." Earlier, one employee had cracked, "Someone once said we had a lot of leverage in the company, but no one ever touched the lever." Presumably, Gerstner will. One example: He has consolidated the purchasing of telephone services.

Gerstner also demonstrated his famed directness, honing in on sticky matters before employees did. As soon as one employee introduced herself as a chocolate brand manager, he asked her opinion of "Project Grover"-the candy bar divestiture. He repeatedly brought up the LBO, hoping to parry fears. "There will be a focus on cost management and investment management that I'm not going to tell you is not connected to the LBO," he told them. "But if I were here under other circumstances, it would be the same thing anyway. Every dollar belongs to the shareholder." Often during the three-hour meal, Gerstner would deliver little homilies-on quality, on service, on cash flow. But he is no evangelist. He conveys his message with relentless repetition. Cash flow came up several times.

Still, he took pains to note that soon after he arrived at RJR, he authorized a $10 million capital spending project at a nut plant and accelerated the launch of a product called LifeSaver Holes, eliminating a lot of test marketing moving up rollout from next summer to early 1990. Gerstner was going by his gut, later reinforced by a secret product test: "I took this product home to my favorite consumer, who's 14, and she asked me a question she's never asked before," he said. "She said 'How much does this cost?' Because she knew if it were at school, it would go." Employees seem to love the Gerstner show. To them, this demanding boss is a charmer. "He can ratchet up the charm as he moves down the organization," explains H. John Greeniaus, president of Nabisco Brands Inc. "At high levels, his demeanor can be blunt and straightforward. He gets warmer as he goes gown." Greeniaus tells how Gerstner chatted away with a $10-an-hour production worker at a Chicago bakery. "Then he slipped away and told me, 'You've got too damn many people on this line.'"

It's lucky for Greeniaus that Nabisco has been granted "strutting rights" by Gerstner this year. With little push, Greeniaus got right down to cutting costs, pruning unsuccessful products, and launching new ones. Controversially, he trimmed an ambitious capital spending program, deciding to retrofit three existing bakeries rather than build a fancy new one. Greeniaus claims the shift was necessary to accommodate a change in product demand, not related to cost-cutting. But he vows to start building the new bakery in 1991. Greeniaus also defends his advertising and promotion spending program, which fell in the first half. Blaming the shortfall on product launch schedules, he says the difference will be made up by year-end, making marketing spending flat this year versus 1988. And he says Nabisco earnings will rise 40% this year, 17% in 1990. Gerstner likes what he sees.

YOUNG SMOKERS.

When he doesn't-as in tobacco-Gerstner can be a self-described "pain in the ass." That puts U.S. tobacco chief James W. Johnston, a former RJR executive who had spent the last five years at Citibank, on the spot. Nationwide, cigarette smoking is off 2% a year, while RJR's volume is declining at 4% annually. Philip Morris' Marlboro brand, meantime, has a stranglehold on the market-especially new, young smokers. RJR's market share dipped to 32.7% this year, according to independent store audits, from 33.6% in 1987. Because smokers are so brand-loyal and demographics are so predictable, analysts forecast a steady .5-1% a year drop for RJR.

Gerstner, a cigar smoker, feels no conflict trying to reverse that slide, despite health concerns. "50 million people in the U.S. smoke-they enjoy it and it's a legal product," he says. Since the battle largely involves getting smokers to switch brands, "I see no reason why we can't try to attract them to our brands." Nor is Gerstner bothered by the emphasis on attracting young smokers. "Young adults who want to smoke are people we compete for. They'll choose some brands, and we hope they choose ours." Gerstner refuses to comment on whether he wants his two children to smoke: "It's totally up to them." In fact, Gerstner, impatient and disciplined by nature, is impatient because he doesn't have a full-blown answer to tobacco's problem. "I pride myself on being a strategist, and I don't like telling a reported I don't know what to do," he says. What he is not going to do is clear: "We're not going to play the market share game, just to hold some theoretical market share. Profitability is the most important thing."

Gerstner does have some ideas. At base, he sees the issue as "cultural. We have to free up the culture from the enormous, bureaucratic, overstuffed organization it became over the last few years, one that never talked about its problems." Johnston, drawing from his time at aggressive Citibank, where he improved the growth of his consumer banking unit, is charged with getting the tobacco juices flowing again. So far, that has meant telling employees about the realities of the business via letters, a video, and lots of small meetings, and seeking their help. Gerstner points to the inventory decision to show that the culture is changing: "There was talk initially of it taking four years to solve."

FLAVORS.

Meanwhile, all marketing programs are up for review. So are many products, including the taste of Winston, RJR's biggest brand. Premier, the smokeless cigarette, isn't dead, just back in research, to perfect the long-commented on taste and smell issues. RJR is moving to deeper into cheaper "value price" brands, too. Magna, launched last year, is winning just a .5% share, but Johnston claims 40% of its buyers are Marlboro men and women. Chelsea, a brand with flavors like lemon, also won a .5% share in test market. If a new discount generic from Brown & Williamson Tobacco Corp. does well, Johnston promises, "we could get one out there real fast." Still, while selling more cheap packs will shore up market share, it won't help margins. Short-term cost-cutting measures seems to be the only road to better performance in tobacco.

With leverage questions so important in his first six months, Gerstner hasn't had time to address the long-term issues at RJR. Unless something goes drastically wrong, in 1990 he will probably tinker more with the company's structure and strategy. As the food industry consolidates, for example, Nabisco will need more sheer size to compete effectively. Says Gerstner: "There will be acquisitions after divestitures, if they make sense. But we've got lots of other things to do in this company that have far more leverage for value than acquisitions." Gerstner is, in fact, frustrated by how much there is to do that he can't get to. "He's clearly charged up for the long haul. One recent Sunday, he reports, "I said to my wife, 'I really can't wait to get to the office tomorrow.' It has been a long time since I wished for Monday morning to come."

6 DRASTIC MONTHS AT RJR NABISCO.

-March 13: Louis V. Gerstner, Jr. is named CEO by Kohlberg Kravis Roberts & Co.

-March 21: 700 workers in tobacco unit laid off

-April 3: Gerstner's first official day

-April 4: Premier "smokeless" cigarette discontinued

-April 27: Headquarters move from Atlanta to New York announced

-May 10: Headquarters staff cut by 300, from 650 workers

-May 12: $4 billion bridge loan refinanced

-May 22: James W. Johnston named CEO of U.S. tobacco operations

-June 6: European food units sold for $2.5 billion

-June 15: Karl M. van der Heyden named CFO

-June 21: Chun King sold for $52 million

-July 6: Three corporate planes sold for $46.4 million

-July 11: International tobacco unit reorganized, with headquarters shifted to the U.S.

-July 27: Stock offered to 300 RJR executives

-July 28: Scandinavian food unit sold for $20.4 million

-August 1: Several corporate apartments and houses sold for $8.6 million

-August 10: Reduction of 1640 announced for workforce of domestic tobacco unit

-September 7: Del Monte Tropical Fruit sold for $875 million

-In Negotiation: Sale of Del Monte Foods canned foods unit for $1.5 billion

THE MOST LIKELY REMAINING UNITS TO GO…

-20% stake in ESPN: $200 million

-Latin American food unit: $400 million

-New Zealand food unit: $150 million

-Butterfingers/Baby Ruth: $250-300 million

…AND WHAT'S IN RESERVE

-Ready-to-eat cereals: $450 million

-Hot cereals: $225-250 million

-Chewing gum: $225 million

-Milk-Bone dog snacks: $350 million

-A-1 steak sauce: $200 million

-Grey Poupon mustard: $200 million


"Even Rupert Murdoch Has His Limits," by Chris Welles, Ronald Grover and Richard A. Melcher, BusinessWeek, October 2, 1989

Financial strains may be forcing him to curb costly takeovers

Out on a limb, over his head-that's the typical reaction every time Rupert Murdoch adds another debt-financed chunk to his global media colossus, News Corporation. In the past five years, its reported assets have more than quadrupled. But Murdoch keeps confounding his critics. Although the takeover market has become increasingly nervous, Murdoch on September 13 stepped up to the plate again, with a $1.4 billion offer for MGM/UA Communications Co., which later accepted a higher bid from Australia's Qintex Group.

But there are signs Murdoch is now being forced to curb his voracious appetite-at least temporarily. He just shelved plans for Media Partners International Ltd., a blind investment pool managed by News Corp. That would have allowed him to keep on buying without taking on more debt. Credit Suisse First Boston Ltd., his investment banker, could only raise half of the expected $1 billion. Another sign: Murdoch in the past has handled acquisition debt by pumping up the cash flow of the new properties. But his $2.8 billion purchase last October of TV Guide publisher Triangle Publications Inc. forced him to raise cash by disposing of $1.6 billion in assets. And some analysts think it's significant that Murdoch, who has previously made preemptive bids far above the prevailing market to get properties he wanted, backed away from MGM/UA when his bid was bested by $100 million.

OPEN DRAIN.

What's more, Murdoch is struggling with the huge cash drain from Sky Television, his most ambitious media venture. The four-channel British satellite service began operating last February and in its first five months ate up $116 million. It has lured far fewer subscribers than expected. The upshot: Sky executives estimate it could lose $775 million before it breaks even, and that could take three to five years. Drexel Burnham Lambert Inc. media analyst John S. Reidy figures the combination of Sky losses and a major upgrading of Murdoch's British and Australian newspapers will consume all of News Corp.'s $1.3 million cash flow in fiscal 1990, ending next June.

Most pressing is this: Murdoch is rapidly approaching limits on his ability to borrow. News Corp.'s ration of debt to equity on June 30 was .98, up from .7 in 1986, and not far below the 1.1 ceiling imposed by the large group of banks that make up News Corp.'s chief source of borrowing. A News Corp. insider estimates the company only has about $1 billion in additional borrowing power under the bank covenants. And any increase in borrowings would only make the task of servicing his debt that much tougher. Already, News Corp.'s interest coverage-its ratio of income to interest expense-was a paper-thin 1.6, down from 2.9 in 1985. The company's coverage ratio, said a Standard & Poor's Corp. report last December, "leaves little margin for error in the company's ability to meet its debt servicing obligations."

Murdoch partisans argue that he's not as stretched as he seems. "There's no doubt Rupert can find the money if he wants to make a deal," says Rothschild Inc. President Robert S. Pirie, who helped Murdoch look over media assets put in play by the Time Warner Inc. fracas.

JUGGLING ACTS.

An executive close to News Corp. adds that Murdoch has several ways he can raise off-balance-sheet debt or reduce News Corp.'s debt. One favorite ploy: News Corp. has often raised cash by selling "preference", or preferred, shares. Fully $1.4 billion worth of such shares were outstanding on June 30, and they are usually convertible into stock in companies such as Reuters Holdings PLC, in which News Corp. has a stake. Accounting rules in Australia, where News Corp. is based, classify preferred shares as equity. But because preferred shares are required to pay dividends, U.S. accountants view them more like debt.

One off-balance-sheet maneuver provides insight into Murdoch's options. News Corp. sold its book publishing operations to a joint venture with Credit Suisse First Boston. That removed $900 million in debt from News Corp.'s books, while permitting Murdoch to keep control of the properties. Australian and British accounting rules also allow News Corp. to restate certain assets every three years to reflect market values. If the values go up, as those of Murdoch's properties typically have, then so would News Corp.'s equity and borrowing power. News Corp. will be able to do so this fiscal year. CL Global Partners Securities Corp. analyst Jessica Reif estimates that the company could thus bolster its balance sheet by $1.6 billion.

Although Murdoch has resisted diluting his 45% interest in News Corp., a News Corp. director says he might be willing to reduce his stake if he were especially eager to make a deal. But this director still suggests that Murdoch may move more slowly, at least for the time being, because of the "priciness" of good assets. "He's just being prudent and cautious." Cautious, however, is not a word that comes readily to mind when people think of Murdoch. Many observers, including Drexel's Reidy, believe he will resume his aggressive empire building as soon as the media marketplace and his balance sheet permit. That, in turn, will likely produce a fresh round of speculation that his operations are dangerously overleveraged. Feeding that suspicion are News Corp.'s multinational financial statements, which sometimes seem to obscure more than they reveal. It requires careful analysis to learn, for instance, that large portions of News Corp.'s reported earnings in some years consisted of nonrecurring items that would not be included in net income under U.S. accounting rules. Such maneuvers are easier to spot in reports of U.S. companies.

Given his ability to tuck debt away from News Corp.'s balance sheet, Murdoch's leverage may well be greater than meets the eye. But those who fear Murdoch has placed News Corp. in a precarious spot don't recognize the special characteristics of his empire. In contrast to such as department stores and airlines, Murdoch's media properties are stunningly reliable producers of cash flow. Case in point: The Sun, Murdoch's top London tabloid, now ranks among the most profitable English-language papers in the world. In evaluating properties, Murdoch considers their ability to generate cash-and service debt-as a far more important variable than their asset value.

CASH COWS.

Murdoch's skill in enhancing his holdings' cash flow is shown by the success of his Fox TV and movie operations. According to Chief Executive Barry Diller, they will report substantially higher profits this year, even though Fox has been spending heavily to expand its fledgling TV network. Moreover, Murdoch's 200-odd holdings are highly diversified. Some, such as magazines, thrive during expansions, while others, like movies, weather recessions. "Murdoch is extraordinarily well positioned, balanced and entrenched," says John J. Veronis, chairman of Veronis Suhler & Associates, a media investment banking firm that advised Murdoch on the Triangle deal. "No one situation can impact him critically."

His properties are also highly liquid, which provides insurance against serious cash flow reverses. Although prices for some media properties, notably TV stations, have softened recently, most analysts expect the long-range trend will be upward. "If you had to put the biggest risk on the company," says Edward Falkiner, an analyst with Australia's Ord Minnett Ltd., "it would be Murdoch getting hit by a bus." For the moment, expect Murdoch to look both ways before making his next move.


"American Air Gets Trump Bid Of $7.5 Billion," by Agis Salpukas, The New York Times, October 6, 1989

Donald J. Trump yesterday offered to buy the nation's largest airline, American Airlines, with a $7.5 billion offer for the AMR Corporation, its owner.

Analysts said AMR was likely to reject the bid. In his offer, Mr. Trump said he hoped to cooperate with AMR's management in negotiating a deal. It was not clear whether Mr. Trump would pursue a hostile takeover against AMR's chairman, Robert L. Crandall, one of the most fiercely independent executives in the airline business.

But industry analysts said Mr. Trump's bid could attract other offers for AMR and might force the company to take steps that its shareholders and employees would find more attractive than a sale. In one such defensive step, the airline would borrow money to finance an employee stock ownership plan.

AMR Stock Jumps

Amid the speculation, AMR's stock jumped $16.875 yesterday, to $99.875, in trading on the New York Stock Exchange, with more than 8 million shares traded.

Mr. Trump's offer makes AMR the third of the nation's four largest airline companies to be engaged in a takeover battle since the spring. Last month, the parent of the nation's second-largest airline, United Airlines, accepted a $6.75 billion offer from a group including the carrier's pilots and executives and British Airways. Earlier this year, the parent of the fourth-largest carrier, Northwest Airlines, was acquired by an investor group that includes KLM Royal Dutch Airlines for $3.65 billion. Among the top four carriers, only Delta Air Lines has not yet been involved in such a bid.

Mr. Trump brings to his bid a strong staff, recent experience at another airline and a good record for repaying debts, but he suffers from an image as a corporate raider who may not be seriously interested in completing transactions.

Some analysts who did not want to identified said it appeared that Mr. Trump wanted his to attract higher rival bids so he could cash in the close to 3 million shares he owns at a considerable profit. By some estimates, Mr. Trump's stake is almost 5 percent of the company.

In an interview, Mr. Trump denied that this was his intention.

In a letter yesterday to Mr. Crandall Mr. Trump said praised the company's management and said he hoped that if he acquired the company, ''operating management would continue to work with me to build on the company's reputation as the premier airline in the industry.''

AMR responded that its board ''would consider the proposal in due course.''

The recent bids for the biggest American carriers indicate that investors are willing to bet that the biggest carriers emerging under deregulation of the industry will be very profitable and will even be able to carry the large amounts of debt during a recession.

But analysts said Mr. Trump's move would increase the attention focused on whether the costly deals have been good for the health of the industry and the safety of the public.

Mr. Trump's move might force AMR to seek to defend itself, possibly by turning to its employees to buy a stake, just as United's parent, the UAL Corporation, did recently to fend off a takeover attempt by Marvin Davis, the Los Angeles financier.

It could also leave AMR, which is based in Dallas, with heavy debt if a takeover attempt is successful and may force it to turn to a foreign carrier as another means of fending off a hostile bid.

The trend toward loading airlines with debt in takeovers and allowing foreign carriers to buy stakes that might enable them to influence domestic airlines has raised the concern of Secretary of Transportation Samuel K. Skinner, who last week persuaded the new parent of Northwest to cut the size of KLM's investment.

Trump's Confidence

In an interview, Mr. Trump said that he could raise the more than $8 billion needed to finance the transaction, which would include the assumption of some AMR debt, and that he had already talked to banks about raising the money. He said he would put up $1 billion in equity toward a deal, but he has no written commitments from lenders for the rest of the financing. He has also not hired an investment banking firm to advise him and has not retained an aviation consulting firm to analyze the company for him.

He took a conciliatory tone toward AMR. ''I have great respect for Bob Crandall and American Airlines management,'' he added. ''They have done a great job. I would hope to keep them.''

But analysts said that given Mr. Crandall's fierce determination to keep the airline independent, Mr. Trump might have to increase his offer and make it a hostile one.

''He's going to have to show them that he is serious,'' said Candace Browning, the airline analyst for Wertheim Schroder & Company.

Shuttle Purchase Cited

Rather than sell his stake, Mr. Trump said in an interview, ''I would much rather purchase the airline.'' He cite his acquisition this year of the Boston-New York-Washington shuttle from Eastern Airlines for $365 million after outlasting bidders like America West Airlines.

Mr. Trump may be opposed on at least two fronts. ''With all the attention being paid in Washington about takeovers you would think that buyers would wait and see the outcome before they made a move,'' Paul Karos, the airline analyst for First Boston, said yesterday.

''There is definitely a high risk that Washington will become more involved in airline takeovers than they have in the past,'' he said.

Mr. Trump has also chosen to deal with the man analysts consider one of the toughest and craftiest executives in the airline industry.

Fight for Independence

Mr. Crandall has fought hard to keep his airline independent and has spent more than a year honing his strategy with the aid of investment bankers and attorneys specializing in takeover defenses.

Mr. Crandall, the only American Airlines executive on AMR's 15-member board, has been known to wield considerable influence. The 14 outside directors include Edward A. Brennan, chairman and chief executive of Sears Roebuck & Company; Christopher F. Edley, president and chief executive of the United Negro College Fund, and Maurice Segall, chief executive of the Zayre Corporation.

Susan Heilbron, an executive vice president in the Trump Organization, said Mr. Trump had had numerous discussions with various institutions about his offer and at this point did not need an investment banker or retain advisers.

''He understands this company,'' she said.

'He Can Get Prepared'

Ms. Browning said that while Mr. Trump seemed unprepared for a long takeover battle, ''he can get prepared.''

She also said the $120-a-share bid was well conceived and about on target as an opening bid.

An analyst who did want to be identified said one could not go much above the $120 mark because it was close to the value the company should command.

The $7.5 billion value for the deal is based on 68.7 million shares outstanding of the company's stock. Besides the airline, AMR owns Sabre, a computer reservation system.

AMR could make a bid by Mr. Trump or others more difficult by selling about a 20 percent stake of its shares to its employees, the analyst said.

Since employees are considered to be friendly stockholders, such a 20 percent stake would take advantage of the law in Delaware, where AMR is incorporated, that says a bidder with less than 15 percent of a company before a tender offer is made must gain 85 percent of the shares in the tender offer or else the bidder generally cannot complete the takeover for three years.

If AMR chooses to resist, Ms. Browning noted, Mr. Trump has his reputation at stake.

''If he does this and puts out the letter and then comes up with nothing more,'' she said, ''people will say that he is not a force to be recko