O. Perelman--America's richest short, bald, forty-six-year-old chain-cigar-chomper--seemed
to have a delicious deal when he bought Marvel Entertainment Group
in January 1989. This was not a hostile takeover. It was simply
a matter of negotiating a fair price for a property that seemed
to have untapped potential.
owner dumping Marvel was New World Entertainment, a Hollywood production
company that garnered very limited payoffs from made-for-television
movies featuring the Incredible Hulk and other Marvel comics superheroes.
New World had gone flat and wanted to pump itself up with new genres
of TV and movies. So Marvel was on the auction block, and when Perelman
saw that half a dozen companies were making bids he hardly needed
to check his credit line. He simply outbid the others at $82.5 million.
delicious part was what Wall Street calls leverage: He had to put
up only a small percentage of the money. All the rest was somebody
& Forbes, the shell company owned personally and wholly by Perelman,
cut a check for just $10 million. More than $70 million was borrowed
from a syndicate of banks, led--as was becoming standard for Perelman--by
Chase Manhattan. Chase would handle all the paperwork and formally
make the loan offer while recruiting other banks to take on portions
of the risk. But what could be so risky here?
and the others were happy to finance Perelman's Marvel acquisition.
This was small change compared with the billions of dollars of business
that this tycoon represented in his recent past and his likely future.
So far he had displayed a terrific eye for spotting undervalued
companies, taking them over, giving them new management, and often
breaking them up so that the pieces could be sold for an easy profit.
That is what corporate raiders do for a living.
told his bankers--the "secured lenders," in the parlance of mergers
and acquisitions--that owning Marvel would be "fun." Chase Manhattan
did not lend money for laughs, but his idea of a good time seemed
sound enough. Some in the business community had seen the needlepoint
message in the ground-floor conference room of the Townhouse. Beneath
the huge, framed paintings by Roy Lichtenstein and Andy Warhol was
one pillow with stitching that read: "Love Me, Love My Cigar." Another
had this motto: "Happiness Is a Positive Cash Flow." What banker
said that he would take Marvel far beyond the sleepy and small business
of publishing comic books. "It is a mini-Disney in terms of intellectual
property," he said. "Disney's got much more highly recognized characters
and softer characters, whereas our characters are termed action
heroes. But at Marvel we are now in the business of the creation
and marketing of characters."
never claimed to have a clear blueprint for this kind of expansion.
And the bankers had no earthly idea how much more they would be
lending him in the six years to follow.
Manhattan and the other banks treated Ron Perelman as the wizard
he appeared to be, and they enjoyed a constant stream of fee-generating
transactions with him. When they loaned money to Perelman's companies,
the banks were "secured"--first in line to be repaid should the
debtor go bankrupt.
was not, however, a word even remotely in the lexicon when discussing
Perelman's early years at Marvel. True, the comic book characters
had not been fully exploited by New World. But the books were selling
to a core of loyal fans, and the beginnings of a collectibles craze
could be detected as the 1990s got under way.
also felt he had the perfect man to lead Marvel into a wider world
of entertainment: the tall, blue-eyed, and articulate Bill Bevins,
former chief financial officer of Ted Turner's broadcasting empire
in Atlanta. One newspaper assigned Bevins the perfect characteristics
for his job, calling him "an affable numbers cruncher accustomed
to coddling mercurial tycoons."
a few years, Marvel's obligations mushroomed into a total debt of
$700 million. No one, certainly not the banks, had planned it that
way; but little by little and lot by lot, Marvel managed to get
"yes" after "yes" in a system that often kept the right hand of
a bank syndicate unaware of what the left hand did. And if a banker
should ever lean toward saying "no," the Townhouse could step up
the pressure by hinting that Perelman would take his business elsewhere.
never afraid of debt. Through large ups and small downs, various
forms of borrowed money had fueled his rise to riches. As a boy,
he learned about business--and takeovers--from his father, Raymond,
who was quite an aggressive conqueror of companies and corporate
boards on a Philadelphia, if not a New York, scale. The Perelmans
had the fanciest house in an affluent, largely Jewish suburb--Elkins
Park. Perelman the Younger studied business at the University of
Pennsylvania's Wharton School and showed signs of impatiently wanting
to outdo his dad. With some paternal advice, he bought a brewery
for $800,000 and sold it three years later for a million-dollar
launched his own family in 1965 by marrying Faith Golding, a wealthy
New Yorker whom he had met on a cruise to Israel. The bottom line:
an infusion of capital from the well-to-do Golding clan; four children
in eighteen years of marriage; and, in the end, a divorce that was
court-contested and acrimonious. When Mrs. Perelman discovered that
there was a mistress, she hired high-powered lawyers who loudly
laid claim to much of Mr. Perelman's stock portfolio.
key development in that marriage was the family's move to New York
when the children were young. It was 1978, Perelman was thirty-five
years old, and he had definite ideas of how best to make his mark.
His father was angry over his departure, and Ronald and Raymond
hardly spoke to each other for several years. Somewhat coldly, the
younger Perelman explained: "I wanted to create an entity on my
own, without the constraints of the familial relationship."
younger Perelman quickly formed a pack of Wall Street wolves that
included Michael Milken: carnivores who invented, tailored, and
perfected a groundbreaking weapon--the junk bond.
at least, Perelman and his crowd did not call these investment vehicles
"junk." They were "high-yield securities." In the great balancing
act between risk and reward, there was plenty on both sides of the
fulcrum. The issuer of these bonds would never deny that they were
risky, because the principal--the face value--might never be repaid,
but the high interest being offered was sufficiently seductive to
make up for the risk.
bonds are sold to the most sophisticated investors," said Howard
Gittis, who had been a prominent lawyer in Philadelphia before Perelman
brought him to New York as his right-hand man. "They're not widows
and orphans. And we don't hold a gun to anybody's head."
before his takeover and expansion of Marvel, Perelman enjoyed and
employed more than $2 billion raised for him by Milken's junk bonds.
Sometimes Perelman would put a billion or so off to the side, in
a reserve fund invested in other companies' bonds, so he could be
ready to pounce at a moment's notice. When a financial-market scavenger
bought bonds at low prices, he was betting that the companies issuing
them would recover. Recovery meant that the bond price could soar
and feather the vulture's nest quite lavishly.
bonds were so popular that they were traded from one investor to
the next, in a "secondary market" that added to the impression that
they always had some definable value. By the time the maturity date
came around--or "at the end of the game," as Gittis put it--"the
players are not the same people who originally bought the securities."
So there was nothing resembling the social contract between a bank
and a customer who deposited money into a safe, guaranteed savings
true wizardry in these arrangements was that the bond issuers also
protected themselves by setting up "holding companies," separate
legal entities to carry the somewhat uncertain obligation to pay
off the bonds. Perelman issued junk bonds, for instance, through
companies with names such as "Marvel Holdings" and "Marvel Parent
structure offered him the flexibility to subtract the losses of
one business from the income of others so as to minimize the amount
of income tax to be paid. Perelman and his team were considered
geniuses in the use of NOLs--"net operating losses." Sometimes a
company would be acquired just for its yet-to-be-deducted NOLs.
now had a wide range of options for raising cash when he needed
it. Through his chain of holding companies, he personally owned
100 percent of Marvel Entertainment, and his first goal was to get
back the $10 million he had invested. The method was the standard
route that made corporate raiders so unpopular: step one, "streamline"
the company; step two, sell a piece of it to the public through
a stock offering.
operations were analyzed, top to bottom, stem to stern. Departments
deemed unprofitable or unpromising were shut down and workers were
fired. Net income quickly doubled. By 1991, Marvel was selling shares
to the public. In 1993, Perelman was issuing high-yield bonds through
the Marvel holding companies he created.
means did he have to use the money to expand or improve Marvel.
The small print in the bond prospectus gave him the right simply
to keep all the cash raised when the bonds were issued. Junk bonds
were a kind of "hedge," allowing him to pocket part of his paper
profits but hang on to the stock in hopes of creating more.
further protection, Perelman and his Townhouse team were clever
enough to buy themselves extra time from the start. Instead of paying
interest every year, many of their bonds had no "coupon" to clip
and redeem annually. These were "zero coupon" bonds. Instead of
yielding cash each year, the interest due would be rolled up so
that only on the final maturity date would it all have to be paid,
along with the principal. That way, Perelman did not have to come
up with cash until the end of the preset date of four or five years.
these notes "high-yield holding company zeroes," and they were a
step beyond what even Michael Milken had divined. The inventiveness
of the bond markets, searching for marriages of convenience and
mutual profit between corporate issuers and rate-hog investors,
was true alchemy, turning base metal into gold.
still was some social contract, or what religious philosophers might
call a belief system, underlying all this. For how could a holding
company, engaging in no profitable activity and existing only for
the purpose of issuing junk bonds, ever be expected to pay the interest?
Buyers had to have confidence in the issuer.
man behind the holding company--the wizard behind the curtain--would
get to decide just how to come up with the full sum on the maturity
date. Perelman's first-choice method would be to issue another tranche
of bonds to cover the repayment when it came due. That kind of refinancing
would be the smoothest solution: issuing more high-yield securities,
perhaps at a lower interest rate if his reputation remained strong.
Then he could use the new money to pay the principal and interest
to the holders of the old bonds.
that sink Marvel, the operating company, drowning it in more debt?
No, because it was the "holding company"--not Marvel itself--which
issued the bonds and carried that debt. The junk bonds and the holding
companies constituted a separate game, running parallel to the normal
business of the operating company.
if the stock did poorly, falling so low that Perelman would not
want to pay off the bonds? He might lose his shares, which he used
as collateral, but things could get nasty. The Wizard might attempt
a "cramdown" on the bondholders, forcing them to accept a pittance
because they faced a high probability of getting nothing at all.
threaten to declare bankruptcy, but then the bondholders might fight
back by blocking any reorganization plan in court. Add oversized
egos and warlike lawyers to the mix, and the stage was set for one
of the epic battles in financial history.
might have known that stocks-and-bonds blood would be shed. He helped
create the risks, the rewards, and the strategies. Gobbling up companies
the new way allowed the suitor to offer sums that seemed insanely
high for the shares of the target company. Gone was the old delicacy
of minimizing your proffer per share, hoping it would be just enough
to persuade a majority of shareholders to sell to you. Now, Wall
Street wizards could offer bushels of genuine cash to shareholders,
cash conjured up from other investors wooed by absurdly high interest
before the Marvel acquisition, Perelman's first major deal was fairly
conservative, what he later termed "a low-risk transaction." After
studying corporate balance sheets long and hard, just as he had
done since around the time of his bar mitzvah, Perelman found a
chain of jewelry stores--Cohen Hatfield Industries--that had shares
priced well below the true value of its merchandise. He got a $2
million bank loan to buy a controlling stake in the company and
then set about to do what all modern businessmen claim is their
first priority: "unlocking value." Perelman personally flew around
the country, disposing of the Hatfield Jewelers retail outlets.
He quickly earned a $15 million profit and retained the wholesale
side of the business.
the $15 million, plus a bank loan for $35 million more, to acquire
MacAndrews & Forbes, a New Jersey company that his father had once
tried but failed to nab. This was Perelman's first company with
a New York Stock Exchange listing. And the loan, the largest he
had ever taken, was granted by a consortium that Chase Manhattan
Bank put together. This was the launch of a long relationship.
Chase by repaying that first loan in just one year, in late 1980.
The $35 million came from his first issue of junk bonds, sold by
both Milken's Drexel Burnham Lambert and Bear Stearns. Perelman
now had firm friends on Wall Street.
& Forbes was in the esoteric business of importing licorice extract,
used in cigarettes and other products, as well as making industrial
quantities of chocolate. Perelman was willing to learn the details
of this business, too, sending executives to far-flung corners of
the globe to find cheaper suppliers and new markets in which to
sell the company's goods. Business did improve, and best of all
he found a buyer for the chocolate division. He was paid $42 million
for that alone in 1986. Said Perelman: "We effectively ended up
owning the flavors business for nothing."
Excerpted from Comic Wars by Dan Raviv Copyright 2002 by Dan Raviv. Excerpted by permission of Broadway, a division of Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.