Why Should White Guys Have All the Fun?

by Reginald Lewis

  THE BOND DEAL

  Lewis was only getting warmed up. Next on his agenda was a public bond offering for McCall. That would enable McCall to pay off the debt it owed Bankers Trust and then have enough left over to fund future acquisitions.

  Lewis had another objective in mind, too: He wanted public markets to become familiar with the TLC name and with paper issued by TLC. To build the business empire that Lewis aspired to, having the ability to raise capital in the public markets was critical, because they’re the most efficient way to raise capital.

  The more he thought about it, the more enthusiastic Lewis became about a McCall bond offering. His first choice for an investment bank for the offering was Drexel, Burnham, Lambert.

  Drexel said it could pull off an offering with no problem, but wasn’t enthusiastic about raising more money than necessary to pay off McCall’s Bankers Trust debt.

  Drexel’s marketing representative Jean Wong had stayed in touch with Lewis after the McCall acquisition. Wong pressed Lewis to attend Drexel’s yearly bond conference in Beverly Hills, an event still relatively new and unhearlded. A couple of years later, the conference would become famous as the “Predators Ball” and an invitation to it would become as prized as a ticket to the Oscars. At this time though, Lewis was skeptical about its merits.

  Jean Wong had nagged me to death to come out to L.A. to the Drexel Bond Conference, and of course at that time I did not realize that this was not the typical business conference. So Jean finally said, “Reg, Mike Milken asked me personally to please extend an invitation for you to come because we want this to be the premier conference between institutional investors and dealmakers like yourself. We regard you as one of the outstanding dealmakers in America today.”

  I guess this was enough for my ego, so I said, “Well, you never know. Why not?” And indeed, I like L.A. very much. I’ve been going there probably four times a year for the last 10 years, so I went out. I never regretted it. I remember vividly the first meeting with Milken. I had been meeting with Jean Wong, Bob Davidow, Bruce Brown, and a group of Drexel research people as I described the McCall transaction.

  I noted earlier how I offered the deal to Drexel but Ackerman was really a little bit of an amateur because he didn’t realize how experienced a deal person I was and gave me the ABCs of deal-making when I was already way past that. So as a result he didn’t get the deal, and in fact he told people the deal would never get done. And of course it got done. Without Drexel. And more important, without Peter having any piece of it, which I’m sure killed him.

  In any case, I’m sitting in this conference room and I’m going pretty good and all of a sudden, Milken walked in, moved to the head of the table and started listening. He’s not an imposing person to look at. And what’s funny is, until you get used to it, he has kind of a funny voice. Just a little squeaky and without a lot of resonance. But he is a great speaker and an unbelievable salesman. And I think not having a “Jesse Jackson-type” voice makes it better for him because he’s always talking substance, so you end up listening to the substance. And he has a wonderful ability to take financial facts and weave them into a social scenario. He’s probably one of the most effective speakers I’ve ever heard.

  One funny thing was, I didn’t realize that he had a toupee until somebody told me. First of all, I don’t really get off on people’s physical attributes. I take a lot of teasing because of my deep-set eyes. People always note that, or the space in my teeth or whatever. So I guess over the years I’ve always tried to look past people’s physical characteristics.

  I think the power of Michael’s intellect surpasses any particular physical attribute. The way he was able to grasp very quickly what I was trying to do, and to give the impression that he understood precisely what I meant when I said that I’m driven by return on equity, and that I like cash flow characteristics and solid management.

  Mike asked, “Why didn’t you buy Simplicity?” I said, “I’m not interested in buying Simplicity at this point. Not until I’ve de-leveraged the company.” Buying Simplicity would just buy a higher rate of decline. So the first thing you had to do was de-leverage.

  Michael was actually right, except the timing was not good. My philosophy is, first, if you’re using a lot of leverage, bring the capitalization into more normalized means before you start talking about another serious strategic play. In other words, digest a little bit of what you have and confirm your own judgment about the earning power of the assets before you start going off strategically. In any case, I remember I was in such a positive frame of mind that day, when in the middle of my talk, Milken got up and quietly walked out. And I just said to myself, “Well, Reg, I guess you’ve got some work to do.”

  Of course there are a million reasons as to why he could have walked out. But that was my first meeting with the great man. This would have been about the spring of 1984.

  We wanted Drexel to do a high-yield bond deal that could be used to take out the Bankers Trust Company debt. That would also enable us to buy back the warrants that we gave to Bankers Trust, bringing in some of the equity again and maybe giving us a little bit of excess cash towards some other possibilities. One of the things that was always interesting to me, though, was that people thought the Drexel team was a little reckless, but I was always very impressed with their research. And their due diligence efforts were as good as any other firm that we had dealt with that was very careful in terms of analyzing companies. The point is, they weren’t just wild men willing to do anything. The quality of their research was very good. Bruce Brown and Bob Davidow particularly were always calling on the phone, trying to find out what was going on. I think the way it worked is they would then feed their information back to Milken.

  When I think about Milken, I have a vivid impression that he was very insightful. And he has an ability to be really interested in your business and what your company is all about. Something I felt we had in common was a desire to get behind the numbers. There are a lot of people who are very good at understanding the numbers and even extricating financial information from them, but to get behind the dynamic of what is producing the numbers is interesting. In fact, I almost think you’re better off not being a finance person when it comes to doing that. I was glad I never went to business school, because it’s one thing to be able to do a good quantitative analysis, which is important, but it’s better to have a burning desire to get behind the numbers—what is driving this a particular way? And that’s part financial but it’s also understanding a culture of people. Ultimately, you will really generate significantly greater returns if you understand that.

  I also appreciate bean counters and the way they understand a business. You need bean counters—I’m a very good bean counter myself. And I certainly have a lot of respect for them. Michael brought a lot of that to bear, along with enormous powers of concentration. So that if you had a half hour meeting with him, for that half hour he was totally and completely focused on your business.

  His delivery style was also very good—he had a very good bedside manner. The best way to describe it is that during a lot of meetings with other firms on Wall Street, I could almost feel a banker’s hands sliding toward my pocket. It’s like, “Well, yes, that might be nice for the company,” but he’s primarily concerned about his commission even as I am speaking to him. But I never got that impression with Michael. That’s something else I believe: Do the job and the fee takes care of itself. The two go hand in hand. I am sure some of my good friends on Wall Street will be a little resentful of me saying this—but I think it’s fair. The culture tends to be, “How can we get the biggest fee for the least amount of work?” with the exception of people like B. J. Chubet, who is a dear friend, and Alan Schwartz, and John Sheehy, who spent a lot of time on the deals we worked on. And Michael did not give that impression. But Ackerman did give that impression—I found him a difficult person to do business with.

  The next meeting I had with Michael, I took the initiative
and called him up. I got Jean Wong and said, “Why don’t I come out and give you a little briefing on our company?” This would have been about the spring of 1985. I flew out the evening before and got in around 11:30, 12 o’clock. The morning of the meeting I was with John Brennan, who was the chief financial officer of McCall at the time. Michael raced into the room, was running a few minutes late, and clearly didn’t like the fact that he was late. He came in, sat down and started going over the deal. I vividly remember him standing up and saying, “Reg, why haven’t you done it? You want to do a debt deal? What’s so big about that? That’s doable. Why haven’t you done these things?”

  I loved it. Here finally was a man as impatient as I was, and it was my company! Impatient about seeing progress in a business that was mine. After that meeting, I was sky high. The irony, of course, is that we did do the sale-leaseback without Drexel. And we did the bond deal without Drexel.

  In any case, we got the bond deal off. Now, understanding that I’d done it with Bear, I still put Bruce Brown and his guys on the mailing list and sent them all of our public data so they could follow the story. I knew sooner or later I had to do business with Drexel if we were going to be in the marketplace. They were far and away the most dominant player and they were the only guys that I thought would spring for big bucks for the company. By the way, at that point my hot button was $100 million.

  I remember sitting with Michael and saying, “Now Michael, this is another lead. Suppose we deliver great results from McCall and I came to you and I say, ‘Mike, here is the situation. I need $100 million. What kind of reception do you think that will get?’” He said, “Reg, do the job and there’s a lot more than a hundred there for you.” This is a true story; he actually said, “There’s a lot more than a hundred.” And I believed him.

  It didn’t make much sense to Lewis to raise exactly enough money to pay off Bankers Trust, effectively replacing that debt with an identical one. He wanted an additional $10 million or so that could be used to grow his organization. So Drexel was scratched from the list. Ultimately, Lewis went with the firm that had helped him acquire McCall in the first place, and assigned the bond offering to Bear, Stearns & Co.

  Lewis had Charles Clarkson and Kevin Wright handle the myriad issues and tasks associated with a public bond offering. Laurie Nelson and law intern Orlan Johnson were also put to work.

  A lengthy prospectus detailing McCall’s business operations and financial picture had to be assembled and filed with the Securities and Exchange Commission. From there, SEC approval would be necessary before Bear, Stearns’ marketing force could use the prospectus to sell McCall bonds to institutions.

  As the printing of the bond prospectus got under way, Wright, Nelson, and Johnson stayed at the printers shop from 8 P.M. until 7 A.M., proofreading the document. They were joined by representatives from Bear, Stearns and teams of paralegals, accountants, and professional proofreaders.

  The drudgery of having to wait for a prospectus to be printed was offset by the fact that printers tend to pamper those associated with such printings. Grinding out thousands of copies of a multipage prospectus is a lucrative piece of business for printing companies. So an exquisitely prepared Italian buffet dinner was available, and Wright and Nelson finally started digging into it around 11 P.M. As they savored their meal, the last person they wanted to see come striding through the door was Reginald Lewis, so naturally that’s who materialized.

  He looked disapprovingly at his famished junior lawyers ravenously feeding their faces and demanded, “What are you guys doing?” Told that Wright and Nelson were eating dinner, an irritated Lewis posed another question, “You do realize that page 42 just came out at the print shop?” The chastened lawyers put down their plates and flitted off in the direction of the print shop.

  Once Lewis had gone home for the night, a proofreading check turned up a major error in one of McCall’s financial calculations. It was three o’clock in the morning—who would take on the responsibility of calling Lewis at home, waking him up, and telling him about the error? Since Johnson was only a summer intern, Wright and Nelson nominated him to make the telephone call to Lewis. Johnson slowly dialed the number, expecting to have his head handed to him when Lewis answered. Awakened from a deep sleep, Lewis was grateful to be made aware of the problem. He was instantly coherent and managed to craft a quick solution to the crisis.

  The prospectus was eventually approved by the SEC, and Bear, Stearns sold $22 million worth of debentures, which are bonds not secured by specific collateral.

  Lewis had walnut memo paper boxes made up for employees who played a key role in the bond offering. Each box had a copy of the cover of the prospectus on it and a brass plate inscribed with “From the $22 million, 7.8 percent subordinated debenture offering of The McCall Pattern Company.”

  Proceeds from the bond sale wiped out the debt from the Bankers Trust loan and put an additional $10 million on McCall’s balance sheet.

  “REG LEWIS WAS DRIVING THE SHOW”

  Before McCall, Lewis was just another attorney, albeit one making a rather comfortable living. But the McCall acquisition had catapulted him into the ranks of the industrial elite. Now that Lewis was the millionaire owner of a large, profitable corporation, some of those around him began to perceive subtle, and not so subtle, changes in his personality.

  “He got arrogant, I think, more so,” a former Lewis & Clarkson employee says. “Reg’s ego, it always seemed to me, got bigger and bigger as the years went on, as the successes mounted. Eventually, he felt there was nobody better financially than he. He felt he was the franchise. He actually used those words once—‘I am the franchise.’ He could do no wrong and he knew everything and no one else knew anything.”

  Another individual who declined to be named intimates that Lewis would frequently tell those in his inner circle, “‘You don’t know what you’re talking about, you jackass!’ He would say it in front of anybody. ‘Asshole! You dumb son of a bitch!’ That’s why Reg was difficult to deal with. Being screamed at and insulted in front of other people was the worst.”

  Kevin Wright observes that after the McCall acquisition, Lewis bumped Charles Clarkson’s compensation to a level that made Wright envious. He too observed a change in Lewis’s demeanor after Lewis became the owner of McCall. “He knew he was at a new station in life and he expected to be treated in accordance with his station,” Wright says. “And yes, there were people who had known him before, but they had to adjust or they had to go. You had to recognize that Reg Lewis was driving this show—he was going to do it his way. If you could accommodate that, fine. If not, ‘Thank you very much for your contribution. I will always be your friend and if you need me, call me.’”

  Tom Lamia, who remained Lewis’s attorney on business matters beyond the McCall years before the two of them eventually had a falling out, found he had to make an adjustment to remain in the Lewis camp. “He could be very difficult,” Lamia says of Lewis. “As he got older and more narcissistic than when I first met him, he became—frankly—sometimes hard to take.”

  On one occasion during the McCall days, a well-known black trial attorney came to Lewis’s office at 99 Wall Street. The two of them sat in Lewis’s office, shooting the breeze about being African-American males who used the legal system as a stepladder to success. Their conversation turned to the possibility of a joint business venture, then the subject of compensation came up.

  “Well, you know Reg, once you’re making a million a year everything else is just gravy,” the swaggering trial lawyer boasted, quite taken with himself. “Well, no, I wouldn’t say that,” Lewis interjected. The pompous attorney was insistent. “Yeah, I know man, but once you got a million a year, come on!” Lewis, whose timing could be impeccable, paused a beat. He looked his compatriot in the eye and without a hint of a smile, uttered two ego-deflating words: “Trust me.”

  When it came to McCall, Lewis preserved his habit of fighting for the last nickel. At one point, th
e company became the target of a nuisance lawsuit seeking $20,000 in damages. Kevin Wright was acting as McCall’s general counsel and he and McCall President Bob Hermann tried to fight the suit at first, then decided it wasn’t worth the trouble. Settlement seemed the prudent path to take, so Wright and Hermann decided to give the plaintiffs $20,000 to disappear. Under their risk/benefit analysis, $20,000 was a minor sum to pay to stave off a potentially costly and time-consuming legal battle.

  Afterward, Wright went back to 99 Wall Street to meet with Lewis. Charles Clarkson was in Lewis’s office. “Kevin, anything going on with McCall,” Lewis asked, glancing up briefly from some papers on his desk. “Yeah Reg, Hermann and I decided to settle this claim,” Wright answered. He instantly had Lewis’s undivided attention, because Lewis was loath to part with his hard-earned cash. “Okay, how much did you settle for?” Lewis asked. Wright replied the amount was $20,000. “Okay, how much was the claim?” Lewis wanted to know, starting to zero in. Storm warnings were waving inside Wright’s head as he told Lewis the claim and settlement amount were identical.

  “Come on, for Christ’s sake!” Lewis bellowed. “Just to make them respect you, you demand SOMETHING. You don’t just roll over.” Lewis then launched into a full-scale dressing down of Wright when the young lawyer suddenly sprang from his chair, hurled a pencil across the office and stalked toward the door. Wright was on his way out and about to slam the door behind him, when he heard Lewis warn him in a calm voice, “Kevin, don’t slam the door.”