While studying at Harvard, Schwartz operated a chain of small carpet stores in Winnipeg, Calgary and Edmonton and used to fly up on weekends to take care of business. Peter Herrndorf, the television guru who was at Harvard at the same time, remembers bumping into Gerry at the business school library. While everyone else was studying case histories, he was working over his companies’ real cash-flow statements.
One of the advantages Schwartz enjoyed at Harvard was running the Business School’s Speakers’ Club. That gave him the chance to have a private dinner with each guest. One of those speakers was Bernie Cornfeld, the former New York social worker who had become the high-flying head of Investors Overseas Services, which, before its spectacular collapse, ran the world’s largest group of mutual funds, with eighty-five thousand salespeople in a hundred countries on its payroll. The youthful Gerry made such a good impression that Cornfeld offered him a summer job in Geneva.
“Cornfeld looked like a little rabbi from Philadelphia,” Schwartz recalls. “He knew nothing about business, knew nothing about finance, but he knew everything about what motivates individuals and what they most fear. He was Rasputin-like and could transfix you with his eyes, like he was looking into you. One day he was having a fit because one of his underlings wasn’t following his marching orders. He was screaming at this guy, and the guy wasn’t paying much attention until Cornfeld said, ‘I’ll send you back where you came from. You’ll be in Kansas City the rest of your life!’ The guy wilted because it was the one thing he really feared. One lesson it taught me: nobody is better than anybody else. There are no geniuses out there. It was an eye opener to see a lot of these big shots humble themselves to Cornfeld.
“I shared his office, and every trip he took, every place he went, he took me with him. It was fun, and the people I spent time with were unbelievable.” Like the time Schwartz was sent to Rome aboard the Investors Overseas Services jet so he could meet with a cardinal in one of the hallowed rooms at the Vatican to dispense financial advice to the Holy See. Or another time, when the most coveted of smuggled goods appeared in Geneva. “I remember going out to the airport to meet Charles Bluhdorn, chairman of Gulf & Western. When we arrived back at the IOS mansion, Bluhdorn put his briefcase out on his knees and Cornfeld said, ‘Well, Charlie, did you bring it?’ Bluhdorn grinned and brought out not one, but two, giant salamis from a New York deli for Cornfeld, who hugged him and danced a little jig of joy.”
Schwartz was grateful to his mentor, but not to the point of emulation, for Bernie Cornfeld was, in the words of his protégé, “a Lothario” who “could be something of a pig.” Schwartz remembers the two of them leafing through a copy of Life magazine one evening, finding special interest in an article on bathing suits in far-away Fort Lauderdale. “There was a picture of one gorgeous, absolutely gorgeous, woman that Cornfeld kept coming back to and looking at. Three days later, she was living with us in the Geneva house. Victoria Principal, the actress who later appeared in Dallas, spent the summer there, and in fact, there was a picture in Newsweek of the three of us—Bernie, Victoria and me—sitting at the end of a long table.
“I was the young dauphin,” Schwartz recalls. “I had the run of the place.” What became increasingly clear, however, was that Bernie Cornfeld took the same blithely reckless approach to mutual funds as he did to mutual fun. “IOS actually wasn’t a scam; it was unbelievably badly managed. There were no budgets, no controls, no anything because so much money was coming in that they were always ahead of the game. We used to have dinner at his beautiful villa that Napoleon had originally built for Josephine on Lake Geneva, and Cornfeld always had four or five girls living in the house who were available to everybody. There were usually three or four businesspeople in town who we entertained in a constant round of big dinners, a party every night. The scene could get sickening. One night I was sitting there and had my feet up, just watching the goings-on, and I thought to myself, ‘This is really stupid.’ I just stood up and walked out the back door and headed to the office because I had left my car there. A light, misty rain was falling, and I’m walking on the gravel at the side of the road when I hear this crunch-crunch behind me. I turn around and there’s Cornfeld. He puts his arm on my shoulder, walks me back to the office and says, ‘I know you hate this.’”
AT THE END of the summer, Schwartz headed back to Harvard, got his MBA and hit Wall Street. At Bear Stearns, he was assigned a desk next to Henry Kravis, then in training to become the leading leveraged-buyout specialist in the country. Schwartz learned his lessons well and was involved in some of the first LBO takeovers. He was a good friend of the not-yet-imprisoned Mike Milken and later did three or four new junk-bond issues with the rogue trader.
Schwartz was searching for something permanently entrepreneurial to engage his talents when Izzy Asper visited New York. While dragging Gerry to yet another jazz joint, Asper hit upon the idea of starting a western-based merchant bank. On January 17, 1977, they received a federal charter to set up Canwest Capital Corporation. Its structures reflected an intriguing marriage between institutional financiers and entrepreneurs, with the former putting in most of the money but the latter making most of the decisions. Investors were pledged to stay in for ten years without taking out dividends, though results were monitored annually. By the summer of 1981, the young firm’s assets had exceeded $2 billion, with revenues of $700 million. Izzy teed up the purchase of Monarch Life, through Brigadier Dick Malone, then publisher of the Winnipeg Free Press. But it was Schwartz who engineered the financing through the sale of preferred shares guaranteed by the Toronto-Dominion Bank.
Schwartz and Asper formed a nearly perfect working team, though their ebullience made it difficult to tell which one of them was holding the other back. When they moved in to jointly occupy the chairman’s office of Crown Trust, which they bought from stuffy predecessors, they had a large Mickey Mouse telephone installed. A visitor asked Schwartz, “Why the Mickey Mouse telephone?” Schwartz replied, “Because I do Mickey Mouse deals.” The partnership broke up over the sale of one of their best holdings, Monarch Life. Asper, ever the Winnipeg patriot, wanted to keep the company in their portfolio because it was, outside the Richardson empire, the last major Winnipeg-owned financial institution and because he saw it as a future Great-West or Manulife. But when North American Life bid for Monarch at a price that gave the partnership a cash gain of $36 million on a $6 million investment four years earlier, Izzy was voted down by his own board, nine to one.
“I’ve never been so wounded, despondent, almost suicidal in my life,” Asper recalls nearly twenty years later. “That was my big break with Gerry. I couldn’t believe it. When he threw his vote in to sell, that was the rupture of our relationship because to me it was a violation of what we had agreed to do. The only thing that makes me mad at anybody is when he or she wastes my time because it’s all I’ve got. And here I’d spent seven years building this thing only to see it unravel.”
Schwartz tells it differently. “The sale of Monarch wasn’t just a loose event,” he claims. “The TD Bank was pushing us very hard to repay the loans in the holding company from a U.S. investment we had made in the pay-television business—it was disastrous, way ahead of its time. TD was pressuring us to pay as a way of settling that loan. It’s true that Izzy and I didn’t agree, but I think it was more a matter of what we each wanted to do with our own lives than how we wanted to run the business. The board had kind of lost faith in management’s ability to run the company because these losses were just mounting every week.
Once we made the decision to sell Monarch, which Izzy opposed and I supported, that was the end. But the actual sale of Monarch was simply a result of all those other things; it wasn’t the triggering event.”
That same unnerving dispassion is there when he is presented with the outrage of others. It’s in Schwartz’s voice when he tells critics how he built his current empire, Onex. The attacks have centred on the pay he has drawn out of his firm, especially during it
s first lean years when there was a general feeling that Onex was good for Schwartz but not so good for its shareholders. “That just burned me,” he says, “because it was good for the shareholders who have gotten between 30 and 60 percent compounded returns. We took Automotive Industries public at $11, we did a secondary at $24, and we sold the company at $33. Johnstown America we took public at $9; we got out of it at $28. We took Dura Automotive public at $13, and the stock today is around $28, something like that. We took Tower Automotive public at $11, and the stock went up to $41. People have done fantastically well by investing alongside me. Secondly, we’ve got scads of guys who have made a lot of money either running our businesses or being in Onex itself. And in every case, they are guys who had previous careers with other people and might have accumulated a $1.5 million net worth elsewhere; with us, they’ve accumulated a $10 or $15 million net worth. Tony Johnson, our partner in the automotive business, for example, has probably made $50 million in the eight years that we’ve been together. Before that, he ran Cummings Engine for North America and probably had a net worth of $1 million. So the people that I’ve worked with have done well. The people who have invested with me have done well. And I’ve done enormously well too.”
Gerry’s annual income from Onex includes not only his salary, bonuses and expenses, but also the dividends he receives on the ten million subordinated voting shares he owns, plus all those multiple voting shares, which also allow him to unilaterally name two-thirds of the directors. That amounts to an additional $4.5 million or so; his annual take now seldom dips below $20 million. Up until 1994, Onex had a unique compensation package. At year-end auditors would value the portfolio asset growth, with management receiving 20 percent of the increase and Schwartz getting the lion’s share of that payout.
If certain critics choose to find fault with such an enormous income, Schwartz is content to chalk it up to “Canadians’ desire to bring successful people down. If I earn a $4 million bonus, that’s a lifetime’s income for most people, and they like to read that I’m a jerk for having done that. It makes them feel better.”
As for those who would cast aspersions on his leveraged-buyout pedigree, Schwartz is equally sanguine. “There were some LBO excesses that were enormously negative,” Schwartz agrees, “but the technique also had huge positives, which helped reshape American business.”
Leveraged buyouts have been characterized as trading the short-term expectations of your stockholders for the short-term expectations of your bankers. Technically, they involve the purchase of an undervalued company by a small group of investors, financed largely by debt, the cost of which is borne by the acquired company, either from its treasury or by selling off its assets. (The LBO experts who do the deal usually charge a 20 percent premium or fee.) Properly done, it’s as close to an infinite money machine as you can legally get, because you grow by using somebody else’s money. In other words, LBOs are the corporate equivalent of that country-and-western ditty about becoming your own grandpaw.
SCHWARTZ HAD A TOUGH launching period with Onex in 1984 because it started as an acknowledged LBO play, making him the Canadian wizard of leveraged buyouts. This, right at the time of the aborted Barbarians at the Gate RJR Nabisco deal, and a whole series of Boone Pickens-Carl Icahn-Henry Kravis LBOs that left even the most adventurous investors with a bad taste. To quote more fully the view of Lewis Lapham, LBOs are like “cutting up the carcass of a sperm whale and selling off the parts. These predators repay the debts they accumulate through flash asset dispositions, sweetening the process by providing golden parachutes for displaced executives worth many millions— written off as tax-deductible opportunity costs, of course. It’s neat and tidy and the capitalist system at its worst, because it destroys companies instead of creating value.”
Because the LBO business in the U.S. was ultra-competitive yet super-lucrative, it attracted some questionable operators willing to accept its high risks and higher rewards. Fortune magazine compared running an LBO to “crossing the Atlantic on a high-speed catamaran. You’re screaming along at twenty-five knots with the windward pontoon flying above the wave and the leeward hull underwater. It is the ultimate test of seamanship, recommended only for expert helmsmen.”
Which some might agree describes Gerry Schwartz in action during the building of Onex. He makes no apologies. “What characterizes an LBO is two things: using the assets and cash flow of the acquired company to support a substantial portion of the purchase price in the form of debt; secondly, the original LBO firms invested other people’s money and earned a fee for doing so. LBO firms were driven to sell the companies they acquired to realize a profit from their participation in the sale. At Onex, we were never really in the LBO business because we didn’t fit the second characteristic, though in the early days, we bought and sold many companies to increase our capital base.” Another essential difference is that Onex raises permanent capital instead of depending on temporary investment partnerships, affording it the luxury of taking a longer point of view.
Today, Onex is worth $11 billion. Gerry Schwartz makes no apologies for that whatsoever. Except maybe to his father. Schwartz and his multitalented wife, Heather, have scythed their way into Toronto society, pleased to do whatever was required to be accepted. They lead charmed lives, indulging their private and commercial fantasies, with Heather running Indigo, an exquisite book and music chain, while Gerr, as she endearingly calls him, is making Hollywood movies with artistic bounce. Once a month or so, they co-host Toronto’s most prestigious literary salon in their Rosedale mansion. Its walls are crammed with medieval paintings and ancient Asian objets d’art. There’s a Gulfstream II jet to carry them between their Nantucket and Bel Air houses. They know how to live. For Heather’s fortieth birthday, Gerry flew in the Kingston Trio to serenade her. They were her favourite group when she was growing up. That year for his birthday, she gave him a red Porsche 911 Targa.
THE INITIAL MEETING of Gerry Schwartz and Heather Reisman, niece of free-trade negotiator Simon, is a matter of some dispute.
His version: “I was in Montreal seeing my friend Claude Frenette [the financier and Global director], when he said, ‘Let’s go out tonight. We’ll go out with two beautiful women, and we’ll have a wonderful time.’ I thought that was a great idea, but I didn’t know any women in Montreal. Claude said, ‘Oh look, I have two fabulous women who work for me, and I’ll call them both into my office so you can choose.’ So he calls the first one in on some trumped-up excuse, and in my opinion, she’s absolutely gorgeous. (She was Marie-Josée Drouin, later Canadian director of the Hudson Institute, a leading American think tank, and even later—after having married and divorced Montreal Symphony Orchestra conductor Charles Dutoit—the wife of Henry Kravis, the great American king of the LBOs, who had two wives to go before he would meet Marie-Josée but was at the time working with Schwartz on leveraged buyouts.) As she leaves, I say to Claude, ‘Skip the second one!’ He said, ‘No, no, you must meet the second one.’ Heather was the second woman, and that’s the end of the story. I took Heather out that night, and that was it.” A hundred days after they met, they knew they would be married, and a thousand days later, they were.
Her version: “Claude Frenette did introduce us at the Inter-Group office where I worked. But he introduced Gerry to me first. And Gerry said, ‘That’s okay. I don’t have to meet the next one.’ The first real date we had, he invited me to meet him in New York for the weekend. We went to see Annie, which had just opened on Broadway. And we weren’t into the play fifteen seconds when he started crying because it’s such a poignant opening, and I remember thinking to myself, Well, any guy who would cry within fifteen seconds is definitely worth getting to know better.
“There’s no question that Gerry has a very, very soft centre, wrapped in lots of layers of insulation that create a legitimate interface between the essence of his emotions and what he’s experiencing—the barrier between feelings and knowing. It is a really effective interface. From
a business point of view, its value is that while he’s always processing at an intellectual level, he never seems bogged down by an emotional reaction to something that could in any way deter his intelligent judgment in a strategic situation. His outward lack of emotion prevents outsiders from sharing his vulnerabilities, so that he comes off as much more cerebral than he really is.”
If that seems an oddly analytical way for one soulmate to describe another, consider the source. At first glance Heather Reisman seems soft and shy. She is not. She is whip smart, fiercely ambitious and constantly testing herself. She profoundly loves her “Gerr” but is very much her own woman. She is an optimistic feminist who believes in the inevitable empowerment of technology and thinks that the resulting meritocracy cannot and will not be based on gender. Because of her brains, energy and forest fires of ambition, Heather will never achieve the empty glories of Jewish princesshood. Though she now enjoys a life of wealth and privilege, she knows about struggles and down times, about being a single mom without a car to take the kids to school. She dresses modestly, knowing that comfort is as important as fashion. The effect is understated elegance, throwaway cool.
The daughter of a small-time Montreal developer, she graduated in social work from McGill and worked with foster kids, helping them to cope with life and to find jobs. She married a fellow student; they had two kids, then divorced. She later dated Sonny Gordon. (Dating Harold P. Gordon, an attractive lawyer who spent twenty years as a partner at Stikeman Elliott, was a rite of passage in Montreal during the 1970s and 1980s. He now lives in New York and is a mogul of the U.S. toy industry.) Heather subsequently trained in computers and polling and eventually co-founded Paradigm, a successful consulting company with a $10 million annual turnover.
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