Broadway Books
   


Excerpt

 

"Meet Dr. Doom!"

Ronald 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.

The 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.

The 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 else's.

MacAndrews & 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?

Chase 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.

Perelman 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 could disagree?

Perelman 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."

Perelman 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.

Chase 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.

Bankruptcy 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.

Perelman 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."

In just 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.

He was 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 profit.

Ronald 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.

The 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."

The 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.

Publicly, 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.

"These 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."

Even 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.

The 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 account.

The 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 Holdings."

A creative 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.

Perelman 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.

Marvel's 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.

By no 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.

For 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.

He called 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.

There 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.

The 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.

Would 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.

What 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.

He could 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.

Perelman 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 rates.

A decade 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.

He used 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.

He pleased 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.

MacAndrews & 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.

 


         




Comic Wars
Dan Raviv
0-7679-0830-9

April 2002

$24.95