It didn’t help when Barron later testified that Korshak had never interceded on Hilton’s behalf to prevent certain unions from striking Hilton’s hotels. Within weeks of that testimony, Korshak wrote Barron a letter, which he released to the media. It described in great detail exactly the work he’d done for Hilton in Las Vegas. It also included copies of letters Barron Hilton had written thanking Korshak for his efforts. The end of Korshak’s letter was devastating. “You have caused me irreparable harm,” he wrote Barron, “and as long as I live I will never forget that. When did I become a shady character? I imagine when you were having difficulty getting a license in Atlantic City.”
Hilton might have survived everything if Barron himself had taken the licensing hearings more seriously. Instead he virtually ignored them. One of the few times he saw fit to show up in New Jersey was for his own testimony before the Casino Control Commission. Nor were any of his top corporate executives there for most of the hearings.
On February 14, 1985, I was in my office when I got a phone call from a guy named Al Glasgow, who publishes a newsletter about the gaming industry called Atlantic City Action. Al is a true Damon Runyon character who lives and breathes gaming. He knows as much as anyone in town about who’s doing what to whom. “Did you hear about Hilton?” Al asked. I said, “No, what?” And he said, “They just got turned down for a license.”
I thought he was kidding at first. Approval requires the concurrence of four commissioners. Hilton won a majority, but as was the case with Hugh Hefner, 3–2 in favor was a loss, not a win. In any case, Al said he suspected there was a possibility Hilton might just decide to put the facility up for sale rather than try to fight for a rehearing.
Hilton was scheduled to open the hotel in less than twelve weeks. They’d already hired more than a thousand employees, and they were adding at the rate of approximately a hundred people a day. By opening day, they’d have approximately four thousand people on the payroll. With that payroll and no income coming in, you’re talking catastrophe, no matter how big the company. At the very least, Hilton was under severe time pressure to get an appeal heard by the commission. Even so, I assumed that with more than $300 million already invested, they were going to do whatever they could to try to get licensed.
After talking with Glasgow, and a few other people in Atlantic City, I decided to call Barron Hilton out in California. As much as anything else, it was a condolence call. You couldn’t help feeling sorry for the man. “Hi, Barron, how are you?” I said. Not surprisingly, Barron replied, “Not well, not well at all.” “I can imagine,” I went on, “because what happened is just too bad.” “I’ve got to tell you, Donald,” he said, “that I didn’t expect it, it caught me totally by surprise.” I told him that the move had caught everyone by surprise, and the conversation just went on like that.
Before hanging up, I got to the business part of the call. “Look, Barron,” I said, “I have no idea what you want to do with this facility, but if for some reason you’re thinking of selling it, I’d be interested in buying it, if the price is right.” Barron said he’d keep that in mind, and he thanked me for calling. I think he genuinely appreciated it. I also figured that was as far as things would get. Hilton already had plans to file for a rehearing, and I still believed that the commission would eventually reverse its decision.
At the beginning of March I got a call from a friend named Benjamin Lambert, who runs Eastdil Realty. I’d first met Lambert ten years before, when I was just beginning to look for a hotel-chain partner for the Commodore Hotel deal. He made some suggestions, and over the years, Ben and I worked on several deals together. We had our disagreements, but the bottom line was that we were friends. As it happened, Ben was a member of Hilton’s board of directors. In the weeks after Hilton was turned down for a license, we talked a few times about the situation. Ben believed Hilton ought to seriously consider selling.
On this occasion, Ben was calling to invite me to a party he was holding for the Hilton board at his townhouse, prior to their annual meeting that week in New York. As he put it, “It’s not an inopportune time for you and Barron to meet about current events.”
The board, it turned put, was deeply split about how to handle the Atlantic City situation. The Casino Control Commission had just agreed to the rehearing Hilton had requested on licensing. Nonetheless, several board members, including Ben, believed that it made more sense to sell the facility immediately, if the right buyer could be found. Their argument was that if the commission didn’t reverse itself and grant Hilton a license, the consequences could be truly disastrous for the company. By that point, a couple of months down the line, they’d be carrying several thousand employees. Worse, by selling the hotel under pressure, they might get a bad price.
I went to the party, and Ben introduced me to Barron, whom I’d never met in person. We ended up walking out to the garden and talking alone together. Once again the conversation was nonspecific. Mostly, Barron vented his frustration about Atlantic City, while I listened sympathetically. Barron is wary and reserved by nature. He’s not the kind of guy who makes impulsive decisions, so I played it very low-key. We got along very well, and afterward I heard from Ben that Barron felt very comfortable with me. There are times when you have to be aggressive, but there are also times when your best strategy is to lie back.
Very shortly after that, Steve Wynn of the Golden Nugget decided to make a full-scale assault on Hilton, seeking control of the company. It was probably the best thing that could have happened to me. If it hadn’t been for Wynn, I seriously doubt that Barron Hilton would ever have made a deal with me or anyone else for his Atlantic City hotel-casino.
On April 14, Wynn wrote Barron a letter offering to buy a block of stock, amounting to 27 percent of the entire Hilton company, for $72 a share. At the time, the stock was trading for approximately $67 a share. Wynn also said he was prepared, if his initial offer was accepted, to pay the same $72 per share to all Hilton shareholders.
Ironically, Wynn could never have gone after the company at all if it hadn’t been for Conrad Hilton. When Conrad died in 1979, he totally screwed Barron. There is no nicer way to say it. The assumption had been that Conrad would pass on his near-controlling interest in the company to Barron—or at the very least that he’d spread it among family members.
Instead, Conrad Hilton used his will to disenfranchise his children and grandchildren. At the time of his death, Conrad’s stock in Hilton was worth perhaps $500 million. But Conrad believed very strongly that inherited wealth destroys moral character and motivation. I happen to agree that it often does.
To me, it makes sense to put money in trust for your children, so they don’t inherit millions of dollars when they turn twenty-one. But Conrad took that view to a ridiculous extreme. He left Barron a token number of shares of stock, and he left each of his grandchildren a piddling $10,000 each. Nearly all the rest of his wealth—specifically his 27 percent share of the Hilton Corporation—he left to the Conrad N. Hilton Foundation. He ordered most of the earnings from the stake to be used to support the charitable work of Catholic nuns in California.
The result was to make Barron just another high-level corporate manager who lacked the power of a major stockholder. Even with the stock options that he exercised over ten years as chief executive, Barron still owned only a tiny percentage of the company by 1985.
What Barron did was to enter into litigation, seeking control of the foundation’s shares. His chances of winning the case, which had dragged on for years, were uncertain. For one thing, he had the sort of adversaries you want to avoid in a litigation: nuns and priests of the Catholic Church.
Conrad’s will had specified that if for any reason the foundation was unable to accept his stock bequest, Barron had the right to purchase the stock at its market value as of 1979. Federal law prohibits charitable foundations and their affiliated parties from together owning more than 20 percent of a public company. Therefore, Barron could legitimately argue th
at he was entitled to purchase for himself the 7 percent of the foundation’s shares that were in excess of the foundation’s allowable 20 percent.
But Barron tried to take his claim much further. Basically, he tried to argue that for byzantine legal reasons he was entitled to buy out the foundation’s entire stake. Moreover, by buying its stock for the 1979 price of 24⅝—at a time when the stock was trading around 72—in effect he’d be paying $170 million for $500 million worth of stock.
It’s called a great deal. It may also be called trying to rewrite your father’s will. My strong suspicion is that Barron knew his chances of winning the litigation were questionable. More to the point, if he couldn’t get control of the stock, he was in a far weaker position to fend off Steve Wynn or any hostile takeover threat. Finally, so long as he held on to his Atlantic City facility but remained unlicensable, he was also highly vulnerable to shareholder lawsuits.
I have no doubt how I would have reacted if I had been Barron Hilton. I would have fought Steve Wynn and his takeover threat, and I would also have fought for my license at the rehearing. I’m not saying I would also have won, but if I went down, it would have been kicking and screaming. I would have closed the hotel and let it rot. That’s just my makeup. I fight when I feel I’m getting screwed, even if it’s costly and difficult and highly risky.
But then, I wasn’t running a public company, so I didn’t have to worry constantly about Wall Street and shareholders and the next quarterly-earnings report. The only person I had to please was myself. In the end, I think, Barron decided that he just wasn’t prepared to fight on two fronts at the same time—for licensing as well as for control of his company. And of the two, control of the company obviously came first.
Steve Wynn helped me in two ways. By pursuing a takeover, he put Barron on the defensive and kept him from focusing on his relicensing hearings. At the same time, the more Wynn’s aggressive style offended Barron, the more likely it was that Barron would turn to me as a white knight.
It’s not a role I’m accustomed to, but Wynn played right into my hand. Wynn grew up in his father’s bingo parlor, the son of a compulsive gambler. Later he made the right friends in Las Vegas, managed to buy a small stake in the Golden Nugget Hotel, and eventually took over. His entire world has been Las Vegas and Atlantic City and gaming. He’s got a great act. He’s a smooth talker, he’s perfectly manicured, and he’s invariably dressed to kill in $2,000 suits and $200 silk shirts. The problem with Wynn is that he tries too hard to look perfect and a lot of people are put off by him. Barron Hilton was one.
It’s hard to imagine two people with more different styles. Barron is a member of what I call the Lucky Sperm Club. He was born wealthy and bred to be an aristocrat, and he is one of those guys who never had to prove anything to anyone. He doesn’t try to impress with his style or his clothing or anything else. If Steve Wynn tries too hard, it might be said that Barron Hilton doesn’t try hard enough.
Although Steve would probably never admit it, I’m convinced that he thought he was in a no-lose situation when he launched his takeover bid against Hilton. I believe Steve figured he’d end up buying Hilton’s Atlantic City hotel, and quite possibly at a favorable price. Many people thought that the hotel was all Steve really wanted. There was even a certain logic to it. Under siege from all sides, Barron could kill two birds with one stone by dealing with Steve. He could say, “Look, I’ll sell you my hotel if you’ll agree to give up trying to get control of my company.”
But Steve Wynn underestimated how much he’d become anathema to Barron. That’s where I came in. One day after Wynn made his takeover bid, Barron Hilton became much more serious about negotiating with me.
My first offer to Hilton was $250 million. As big a number as that is, I knew Barron wasn’t going to sell for that price. He told me when we first met that he had $320 million invested in the facility. Selling out at any price was a horrible prospect for him, but reporting to shareholders that he’d taken a loss on the facility was out of the question. Within a couple of days, I raised my price to $320 million. There was no time to be cute, and no room to be tough in this negotiation. Either I bid the price, or I walked away.
At the time $320 million—even $250 million—represented by far the biggest gamble I’d ever taken in my life. Just a year earlier, I’d completed construction on the Boardwalk facility for less than $220 million. In that case Holiday financed the entire deal and guaranteed me against operating losses.
This time, the risk was entirely mine.
As soon as I decided to bid $320 million, I called John Torell, a good friend who is president of Manufacturers Hanover Trust. We’d already done a great deal of business together and on this occasion we had an amazingly short conversation. “John,” I said, “I’m calling because I have an opportunity to buy the incredible Hilton facility in Atlantic City for three hundred and twenty million dollars. I’d like you to lend me the money, and I’m going to need it within a week.” John asked me a couple of questions and after two minutes he said, “We have a deal.” Just like that. It goes to show you the value of credibility. In return, I did something I’d never done before: I personally guaranteed the loan.
It was a deal based almost entirely on my gut. I made my bid without ever walking through the hotel. Several of my people had taken a look, and I’d gotten to know a lot about the construction from contractors who’d worked on the facility. However, I felt it wouldn’t be appropriate to show up myself in the middle of all the turmoil Hilton was going through. If I’d told my father the story, he would have said I’d lost my mind. I remember very well as a kid, accompanying my father to inspect buildings he was considering buying in Brooklyn. We might have been talking about a $100,000 or $200,000 purchase price, but our inspections were anything but casual. We’d spend hours in the building, checking every refrigerator and sink, looking over the boiler and the roof and the lobby.
Nor would my father have been alone in his horror. In past situations, opinion about deals I was considering had usually been split. In this case, nearly everyone I talked to opposed the deal.
I was having enough trouble on the Boardwalk with Holiday Inns, they pointed out. I had no management for this huge new facility scheduled to open in two months. I’d have to take on huge financial risk personally. I had only a verbal commitment from Manny Hanny, and it wasn’t clear what conditions they might ultimately add when documents were drawn—or whether they’d have second thoughts about the whole deal. There was even considerable doubt that the market could support another major facility, particularly one that would have to carry a huge debt service at a time when interest rates were still quite high. Why, everyone said to me, would I even consider this deal?
For one reason only: I believed that, managed well, it had the potential to earn a ton of money.
Once we agreed on a price, we still had a thousand other smaller points to negotiate before we could sign a formal purchase-and-sale agreement. On April 14, 1985, we sat down in Jerry Schrager’s offices at 101 Park Avenue, with the lawyers from both sides, to get the deal done.
Often, the easiest part of a deal is price. It’s all the other points—in this case, guarantees about construction completion, responsibility for defects, size of deposit, allocation of expenses between contract and closing—that end up creating problems and killing deals. Hilton, from the very start, was taking a fairly hard line. Basically, they wanted to sell the hotel “as is,” so that when the contracts were signed, they could walk away from Atlantic City with no further obligations. Barron, by this time, was almost rabid in his hatred of New Jersey and particularly Atlantic City. The sooner he could put this nightmare behind him, the happier he’d be.
The problem for me was that if I didn’t win some guarantees about completion of construction, I risked getting killed later on. Say, for example, that it turned out there was a major defect in the plumbing, or the air-conditioning system, and I was forced to rip it out. In a building this size, a
major repair could easily run to many millions of dollars.
Early on in the negotiations we seemed to be winning on the deal points that we cared about. But then, about midway through, the person in charge of Hilton’s negotiations—Gregory Dillon, the executive vice president of the company—got a call from Barron Hilton, who was back in San Francisco. When Dillon returned to the table, the whole tenor of the negotiation suddenly changed. I can’t say for certain, but it’s my strong suspicion that Barron had decided he wanted out of the deal, in all likelihood because he’d gotten a last-minute offer for more money. It’s even possible that the offer came from Steve Wynn and the Golden Nugget.
In any case, Dillon and the Hilton lawyers suddenly began to raise questions about deal points that we’d agreed on. I’ve been in a lot of negotiations, and I sensed immediately that they were trying to use these points as deal-breakers. If we couldn’t agree on completion guarantees, for example, then they could walk away from the table without appearing to have welshed on the deal merely because they’d been offered a better price.
We reached something of an impasse. Greg Dillon made a suggestion. “We’re not getting anywhere,” he said, “so let’s break this up and we’ll come back tomorrow and continue.” On the face of it, the suggestion made sense. It was early on Saturday morning. We’d been in the offices around-the-clock for nearly forty-eight hours and everyone was totally exhausted and nearly incoherent. But my fear was that if we put off the negotiations for a full day, the deal would never get done. As a compromise, I suggested we take a break for several hours and get back together about one in the afternoon. The Hilton people agreed, and we broke up.
At that point my lawyers made one more attempt to convince me to let the deal die, gracefully. In particular, Jerry Schrager was concerned about the financing. Even at that point, we didn’t have a formal, signed commitment letter from Manufacturers Hanover. But to me, a verbal commitment from John Torell was as good as a signed commitment. Jerry’s point was that even if the commitment was firm, the guarantees I was being asked to make might make it hard for me to borrow money for other large deals.
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