Trump

by Donald J. Trump

  A few minutes later, another board member walked over to me. His question was very simple. “How come,” he said, “that guy over there is filling up that hole, which he just dug?” This was difficult for me to answer, but fortunately, this board member was more curious than he was skeptical. The board walked away from the site absolutely convinced that it was the perfect choice. Three weeks later, on June 30, 1982, we signed a partnership agreement.

  Our budget was $220 million—$50 million from Holiday directly, $170 million on a loan they guaranteed—and that included everything: carrying costs, construction, operating expenses, and required cash reserves. We projected completion in May 1984, but I was confident we could finish ahead of schedule, and even under budget, based on how carefully we’d done our planning.

  One way we stood to save money was from something known as value engineering. Say, for example, that your architect shows you a certain door he wants to use, which has four hinges on it. Before you approve the door, you have your engineer look at it, and perhaps he says, “Look, you only need two hinges to hang that door, or three if you want to do a really good job.” So you eliminate one ten-dollar hinge, and you multiply that times 2,000 doors, and the saving on that one tiny item comes to $20,000. Another good example was the installation of the cooling towers for our air-conditioning system. Originally our architects placed them on the roof of the hotel tower. Through value engineering we determined that we’d save a lot of money by installing them on a lower section of roof, just seven floors up, because that roof could be poured much sooner. In turn we’d be able to start all the piping and electrical work for the air-conditioning six months earlier.

  The second way we saved money was by producing very complete plans, so that contractors could bid on every aspect of the job. When you have incomplete drawings, a smart contractor will often come in and underbid the job just to get it, knowing he’ll be able to more than cover his costs through the change orders that inevitably occur as plans become more complete.

  The final thing that helped us keep costs down was the state of the construction industry in Atlantic City in the spring of 1982. The only casino still under construction by then was the Tropicana, and thousands of local construction workers were either out of work or about to be. That gave us a lot of leverage with contractors, who had to either cover a certain overhead or go out of business. I wasn’t looking to force these guys to make such bad deals that they’d lose money. On the other hand, I was in a position to negotiate very reasonable prices.

  I got the building finished right on schedule for a May 14 opening. That meant we’d be able to take advantage of the Memorial Day weekend, traditionally the three biggest days of the year for the casino business in Atlantic City. I also came in slightly under the original budget, at $218 million. It represented the first casino-hotel in Atlantic City ever built on time and on budget.

  On May 14, the casino opened to a public response that exceeded my wildest expectations. It was a major media event attended by thousands of people, including most of New Jersey’s principal officials. The governor, Thomas Kean, was the main speaker, and he was extremely generous in praising what we had accomplished. His praise was echoed by Richard Goeglein, then president of Harrah’s, who told the crowd that for us to have completed such a huge facility on time and on budget was “a near miracle in this day and age.”

  The moment we opened the doors, thousands of people poured in. Everyone was hungry to check out the newest game in town. In a matter of minutes, they were lined up three and four deep at the tables and the slot machines.

  It is public knowledge, of course, that Holiday Inns and I had many, many disagreements over the management of the facility. But under the agreement I finally made to buy out Holiday’s share, I am precluded from saying anything in detail about those conflicts. While my attorneys unanimously believe that I would win any legal battle over my First Amendment rights on this issue, that’s just not the way I do business. As far as I’m concerned, a deal is a deal, and I live up to what I’ve agreed to, even if I don’t believe I’m technically obligated by any specific contractual provision.

  Suffice it to say that my ultimate buyout of Holiday Inns’ share of our casino-hotel in February 1986 was one of my most savored transactions.

  One reason that I particularly liked owning the facility myself—rather than with any partner—has to do with the value of depreciation. Depreciation is the percentage of the total value of a building that an owner is permitted to deduct each year from his taxable earnings. The rationale is that money spent to maintain a building—to offset its normal wear and tear—shouldn’t be taxable.

  Put simply, depreciation permits you to pay lower taxes on your earnings. For example, if the cost of our facility in Atlantic City was $400 million and we were permitted to depreciate at the rate of 4 percent a year, that would mean we could deduct $16 million from our taxable profits each year. In other words, if we earned a pretax profit of $16 million, our earnings, after depreciation, would actually be reported as zero.

  Most shareholders and Wall Street types only look at the bottom line, which shows a profit reduced by depreciation. As a result, corporate managers don’t like depreciation much. It only makes them appear less successful. But I don’t have to please Wall Street, and so I appreciate depreciation. For me the relevant issue isn’t what I report on the bottom line, it’s what I get to keep.

  The best part of the deal, however, was the facility I now owned outright. Merely by running it myself, I felt certain, I could earn a far bigger profit. In addition, I planned to build new suites and restaurants.

  Financing, of course, now became my responsibility. The prime rate had been around 14 percent when I first started looking at property in Atlantic City. By mid-1986, it had dropped to 9 percent. My problem with bank financing, even at these lower rates, was that I’d still be required to put myself personally on the line for the money. I didn’t find that appealing.

  As a result, I decided to seek public financing for the project, through a bond issue. The downside was that I’d have to pay a higher interest rate to attract buyers, but the upside was that once the issue sold out, I wouldn’t be personally liable. In the end, Bear Stearns was able to sell an offering for $250 million—which not only covered the $50 million cash due to Holiday but also permitted me to pay off the $170 million mortgage on the building and left me the money to build a suitable parking facility. Interest payments on the financing came to just above $30 million a year. That was about $7 million a year more than I’d have paid for bank financing, but to me it was money well spent. By relieving me of personal financial liability, it assured I’d sleep better at night.

  During this same period, I hired a new general manager for the facility, which I had renamed Trump Plaza Hotel and Casino. I looked first at my best competitors. At the time, Stephen Hyde was executive vice president and chief operating officer under Steve Wynn at the Golden Nugget. Before that, he’d worked at the Sands and at Caesars, both top casinos. When I asked people in town to name the best casino executives, Hyde was always at the top of the list. As soon as we met, I understood why. He had a lot of gaming experience, he was a very sharp guy and highly competitive, but most of all, he had a sense of how to manage to the bottom line. A lot of managers focus on maximizing revenue since that’s what gets reported publicly most often. The smarter guys understand that while big revenues are great, the real issue is the spread between the revenues and costs—because that’s your profit.

  No sooner had I hired Steve than we turned around and hired away a dozen of the best people who’d worked for him over the years, including Paul Patay, the number-one food-and-beverage man in Atlantic City. I have a very simple rule when it comes to management: hire the best people from your competitors, pay them more than they were earning, and give them bonuses and incentives based on their performance. That’s how you build a first-class operation.

  In 1985, the first full year of operation
under Harrah’s management, the facility earned a gross operating profit of approximately $35 million before interest, taxes, and depreciation. For 1986, Harrah’s projected a gross operating profit of $38 million. Based on the first five months during which they continued to manage the facility, they were running just slightly under projections.

  We took over on May 16. For the full year, our gross operating profit was nearly $58 million, or $20 million more than Harrah’s had projected. This was despite the fact that in June we closed down our existing parking lot to begin construction on the new garage. We’re estimating that by 1988 our gross operating profit will reach $90 million.

  By all rights, that should be the end of the story. However, success running the Boardwalk facility with my own management made me see a broader opportunity. Specifically, I started to look around at other possible deals to buy companies that owned casinos. Holiday Inns was an obvious target. Even after selling me the Boardwalk facility, they still owned three other casinos—one in Atlantic City and two in Nevada—as well as nearly a thousand hotels around the world.

  As a result, in mid-August, two months after buying them out in Atlantic City, I began purchasing stock in Holiday. By September 9, I’d purchased nearly 5 percent of the company, or some one million shares. At that point, I had two basic options: One was to hold the stock as an investment. The other was to go for control.

  I had no doubt the company was undervalued. For one thing, because they owned so much real estate, they were entitled to large write-offs for depreciation. Therefore they reported net profits far below what they were actually able to retain. On the basis of a stock price of $54 a share in early August 1986, I was in a position to purchase effective control of the company for not much more than $1 billion. In one scenario, for example, I would sell off all of the noncasino hotels—perhaps for as much as $700 million—and retain just the three casino-hotels, which by themselves were worth nearly that much.

  No sooner did word get out that I’d begun accumulating Holiday Inns stock than its price started to rise. I assume arbitrageurs were buying up the stock, figuring that either I’d make a move for control, or someone else would. By early October, the price of the stock had reached 72.

  On Wednesday, November 11, I heard from Alan Greenberg of Bear Stearns that Holiday was restructuring the company to fend off any potential hostile bid and was going to borrow $2.8 billion in order to pay an immediate $65-a-share dividend to the shareholders. The stock jumped to 76. Without hesitation, I told Alan to sell, and he agreed. I still believe I could have overcome any barriers Holiday tried to put in my way, but I just wasn’t particularly eager to spend my life in the court with these guys. The alternative—earning a huge profit on my investment without any battle—seemed far more appealing. By the end of the week I’d sold my entire stake in Holiday Inns—meaning that in just eight weeks, I earned a profit of many millions of dollars. Looked at another way, I earned back from my Holiday Inns stock much of the money I’d paid them just three months earlier to buy their share of my casino in Atlantic City.

  Obviously, I can’t complain. Perhaps no one was better rewarded by Holiday than I was. But, in a way, I got something even more valuable than money from the experience: a first-hand view of corporate management in America.

  9

  WYNN-FALL

  The Battle for Hilton

  IN MY WILDEST FANTASY, it never occurred to me that I would someday purchase the huge casino-hotel that the Hilton Hotels Corporation began building in Atlantic City in 1984. To the contrary, I watched with some dismay the progress of construction. I hardly relished another tough competitor in town, especially when the Boardwalk hotel I owned with Harrah’s wasn’t performing well even against the existing competition. Worse yet, it was quite obvious that Hilton—after several years of indecision about Atlantic City—was finally going all-out with a major facility.

  To me, Hilton was a hard company to figure. It was founded in 1921 by Conrad Hilton, who built it into one of the great hotel chains in the world. His son Barron joined the company in the 1950s, and of course it was only a matter of time before he took over. It had nothing to do with merit; it’s called birthright. In 1966, Conrad finally retired, and Barron was named chief executive. It’s not easy to make your own mark on a company your father founded and built into a huge success. Some sons opt out altogether and don’t even try to compete. Others are content to manage what their fathers have already built. A few sons set out to outdo their fathers at the same game, and that may be the toughest thing of all, particularly when the father’s name is Conrad Hilton.

  Barron’s first major responsibility, back in 1959, was to run Hilton’s Carte Blanche credit card business, which they’d just bought. He screwed it up and Carte Blanche lost millions of dollars over the next six years. Hilton finally threw in the towel in 1966 and sold out to Citibank. In 1967, Barron convinced his father to sell Hilton’s international hotel division to TWA in exchange for TWA stock, which was selling for about $90 a share. There was just one problem: OPEC. Almost immediately, oil prices started going through the roof, which devastated the airlines. Within eighteen months, TWA stock had dropped by half, and by 1974, it was down to $5 a share. Until Carl Icahn took control of the company and turned it around recently, the stock was worth far less than it should have been. On the other hand, the international hotels that Hilton sold, which were recently sold again for close to $1 billion, did great business. They earned about $70 million in 1983—almost as much as Hilton earned from all its American hotels the same year. That’s partly because Hilton, resting on its past reputation, had lost considerable ground in the luxury market to more aggressive competitors such as Marriott and Hyatt. The once-great Hilton name ceased being synonymous with the best in hotels.

  Barron Hilton did make one decision that proved successful: getting into casino gambling. In 1972 Hilton purchased two Nevada casinos for about $12 million—the Las Vegas Hilton and the Flamingo Hilton. Together, the two casinos began to account for a growing percentage of Hilton’s profits—30 percent in 1976, 40 percent in 1981, and 45 percent, or some $70 million, in 1985.

  Despite that success, Barron couldn’t seem to make up his mind about Atlantic City. Hilton purchased a site at the Marina around the time gambling was legalized, began moving forward, stopped suddenly, and then started again half-heartedly. By the time Hilton finally committed to construction in 1984, most of its major Nevada competitors—including Bally, Caesars, Harrah’s, Sands, and the Golden Nugget—already had their facilities up, operating, and earning huge profits in Atlantic City.

  I have to say this much for Hilton: having finally made the commitment, it left no doubt it was going all-out. With an eight-acre site, one of the biggest in town, Hilton was determined to build on a grand scale—a huge, majestic entrance, ceilings thirty feet high, a 3,000-car self-park garage. Hilton described the project in its annual report as “the largest undertaking in our history.” With a casino of some 60,000 square feet, and a 615-room hotel above it, the facility was comparable in size to Harrah’s at Trump Plaza—which at the time was one of the largest in town. The difference was that Hilton’s master plan included a second-phase expansion, to some 100,000 feet of casino space, and more than 2,000 guest rooms.

  Hungry to start recouping its investment as soon as possible, Hilton began construction at the same time it filed for a gaming license. As I explained earlier, the risk of getting turned down for a license midway through construction was the reason I’d gone after licensing first. But everyone else had done it Hilton’s way, and I could understand Hilton’s confidence about licensing.

  For starters, it was already licensed in Nevada. In addition, at a time when virtually no other construction was going on in Atlantic City, Hilton was making a huge investment in a mostly undeveloped part of town. Perhaps most important, in a business scarcely known for attracting boy scout companies, the Hilton name was about as all-American as you could hope to find. The licensi
ng process seemed like little more than a formality for Hilton.

  The problem was that the Hilton people got a little too smug and full of themselves. They assumed they were doing Atlantic City a favor by coming to town, when in fact the licensing authorities see it just the opposite way. The burden of demonstrating suitability for a license rests entirely with the applicant, no matter who it is. Hilton took the view that it was entitled to a license. It was a critical mistake.

  I began to hear rumblings that Hilton was in trouble early in 1985. Atlantic City is a very political town, and everyone who does business there knows that. Hilton, trying to be smart, hired a very political lawyer. On the face of it, that seemed like a savvy move. However, according to people I knew who were familiar with the Hilton licensing hearings, it may have backfired.

  The second mistake Hilton made was ignoring the experience of previous applicants. Playboy, for example, had been turned down for a license three years before. The reason, at least in part, was its past associations with a lawyer named Sidney Korshak, who supposedly had a history of organized-crime connections. For ten years he’d also been on retainer to Hilton at $50,000 a year to help negotiate labor disputes. I have no idea whether Korshak is a good guy or a bad guy, but the only issue that matters is pleasing the commissioners. They’d made it very clear that they didn’t like Korshak. Instead of quietly severing the tie, Hilton kept Korshak on his retainer right up until the Division of Gaming Enforcement raised specific objections to him in mid-1984.

  Virtually the next day, Hilton fired Korshak. Barron later acknowledged to the commission that he’d taken the action only because “we know how strongly you people feel about the matter.” That was the worst thing he could have said. As one of the commissioners who voted against licensing Hilton put it later, “The corporation apparently didn’t get religion until it was pounding on the pearly gates of licensure.”