In these appearances, Boesky portrayed himself as more than an arbitrageur. He coined a new phrase, venture arbitrage, for the practice of buying large blocks of stock as a tactic to pressure companies into buyouts or takeovers. Yet, perhaps unwittingly, he also displayed flashes of self-doubt. In June, during his book tour appearances in Washington, Boesky was asked by a Washington Post reporter, David Vise, what motivated him. “You already are a wealthy man. What are you chasing?” Vise asked.
“Well, I sometimes say casually that I was given the God-given gift of being a horse that’s kind of good at running around a track,” Boesky explained. “I don’t know any other way. I don’t know how to be a milk horse and I don’t know how to go to pasture, so I just keep doing what I was allowed to have the good fortune to do well and try to do it better and better and better.” Then he offered a curious premonition: “As far as whether my system or formula will continue to work or not, the jury is still out. It’s quite possible that tomorrow you’ll see my epitaph and it will be something like ‘News pending. Stop trading.’”
Boesky’s vehicle for achieving his new ambitions was going to be a savings and loan: Financial Corporation of Santa Barbara. Milken and Dahl had brought the possible acquisition to him, excited by the potential in the newly deregulated savings and loan industry. Previously restricted to taking deposits and making home loans and other real estate loans, savings and loans had been liberated to invest anywhere. They attracted deposits with high interest rates. For depositors and savings and loans owners, risks were minimal because the government insured all deposits up to $100,000. It seemed almost as if the government wanted S&L owners to speculate.
To pay such rates, the savings and loans had to generate even higher returns with their own investments. Junk bonds, with their higher rates, seemed ideal. Milken and Drexel had already transformed once-sedate institutions like Centrust, Columbia, Financial Corporation of America, and American Savings into huge buyers of its junk bonds. Boesky and Financial Corporation of Santa Barbara could be a similar vehicle.
For Boesky, always in search of capital for his arbitrage plunges, an S&L offered unlimited funds. But whatever Boesky’s own plans for the capital, Milken and his team could, with some confidence, predict where most of the money would end up: invested in high-yield bonds chosen by Milken. That was the price his clients paid for continued access to Milken.
Nagle was invited to a meeting of what Boesky had begun calling his “merchant banking” group at the Elbow Beach Hotel in Bermuda. Boesky flew in by private jet, accompanied by his usual entourage: Conway; Steve Oppenheim, Boesky’s accountant at Oppenheim, Appel, Dixon; and Stephen Fraidin, his lawyer from Fried, Frank. Boesky took over the hotel’s Presidential Suite for his own accommodations and for their meetings.
Nagle, for one, was dubious about the venture. He pointed out to Boesky that California law still restricted the amount of S&L assets that could be invested in common stock; he wouldn’t have the unlimited leverage he dreamed of. Moreover, Nagle thought Santa Barbara’s financial position was bad and getting worse. Conway glared at Nagle: he was determined finally to do a deal.
Boesky listened politely, but seemed unfazed. Guided by Drexel, he’d already acquired 10% of Santa Barbara, and had options through Northview to increase his ownership to 51%, all with Drexel-provided financing. Santa Barbara, Boesky insisted, would establish him as a “merchant banker.”
Milken quickly bent Boesky and Santa Barbara to his will. Shortly after completing the agreement to purchase 51% of the shares, Boesky told Santa Barbara that it had to improve its performance before the acquisition could proceed. His formula for improvement: purchasing a huge portfolio of junk bonds chosen by Milken. He told the S&L to purchase “up to $284 million of funds” in “high-yield corporate bonds.” The S&L’s board could hardly ignore its largest shareholder and soon-to-be owner. It met with Milken and Dahl in Beverly Hills and bought a total of more than $250 million worth of junk bonds over the next eight months, all of them purchased through the Milken operation.
But Boesky’s dream of owning Santa Barbara was destined to be foiled: even in the freewheeling climate of the age of Reagan, regulators balked at the idea of S&L deposits being invested in an arbitrage operation that, by its very nature, would be highly speculative. They didn’t reject Boesky’s application for approval to take control, but they never approved it. It simply languished. Meanwhile, Santa Barbara had its huge portfolio of junk bonds.
Conway wasted no time in trying to interest Boesky in other acquisitions. He knew Boesky envied Icahn’s conquest of TWA and other companies, and felt he could play in the same leagues. He nearly bid for Scott & Fetzer, a household products concern, and even acquired a large position and made an informal offer to the company, subject to financing. But Conway couldn’t persuade Drexel to do the financing; Drexel’s evaluation of the company’s worth was more conservative than Conway’s. Legendary investor Warren Buffett, head of Berkshire Hathaway, eventually bought the company.
They looked at Kirby Vacuum Cleaners; All-Steel, a maker of office furniture; a small railroad in Louisiana. In each case, Boesky found a problem. And if that problem was solved, he’d find another. Conway became increasingly frustrated. “There’s never perfect information in a deal,” he told Boesky. “There’s always a risk.” Conway concluded that Boesky didn’t have the fortitude or confidence to be another Icahn. He seemed jealous of the raiders, but he was terrified of failing, afraid that the others would scoff. Boesky worried constantly, he told Conway, about overpaying. Conway felt Boesky’s credibility with Drexel was ebbing. David Kay had agreed at the outset that Drexel would shop opportunities and provide research if Boesky later used Drexel as its advisors and financiers. Drexel would more than recoup any expenses in the eventual financing and merger fees. This was standard at most Wall Street firms; virtually no one paid for research directly. But obviously, Drexel’s incentive to offer deals diminished as Boesky kept finding reasons not to do anything.
On one of the deals, Conway said, “Ivan, if you don’t like this company, just say so now. Don’t put my people through this bullshit. Don’t take two to three months of our time. Morale suffers when you say no for no good reason.”
Boesky rationalized his failure to act, often suggesting that the proposed deals weren’t big enough or grand enough to suit his ambitions. He wanted visibility, and he wanted some glamour. Media properties seemed the right vehicle. U.S. News and World Report had interested him; it was for sale, and the magazine also owned some valuable real estate in Washington, D.C. Boesky’s friend Martin Peretz, a big investor in his partnership, had bought The New Republic magazine, and Boesky admired the prestige and cachet that ownership of a national publication conveyed. But he was far too cautious in his pursuit, and was handily outbid by Mortimer Zuckerman, a real estate developer with similarly outsized ambitions. Boesky even talked about helping finance a new satiric monthly magazine, Spy. But Spy got off the ground without Boesky’s help.
Then an intriguing opportunity surfaced. Boesky’s longtime friend, Icahn, suggested that Boesky look into the shares of Gulf + Western, a force both in Hollywood, with its Paramount Pictures unit, and in publishing, with Simon & Schuster. Both businesses appealed strongly to Boesky’s escalating ambitions, and Icahn told Boesky he thought Gulf + Western shares were “significantly undervalued.” Boesky began amassing a position, stopping at just under the 5% level that would require public disclosure.
He remained in close contact with Icahn, who also owned a large stake in Gulf + Western. Together, they had just under 10% of the company, making them formidable shareholders. So Icahn suggested that the two of them, “as two shareholders,” visit Martin Davis, Gulf + Western’s chairman. Boesky obtained an opinion from his lawyers that he and Icahn weren’t a “group.” If so, they would have had to make a public disclosure of their holdings and their intentions.
Davis had been dealing with Icahn as a Gulf + Western shareholde
r for years. They had first met in 1983, soon after the death of Charles Bluhdorn, Davis’s predecessor at G + W. It had been an acrimonious encounter, with Icahn looking for short-term gains, and Davis committed to building the company over the long term. Over the years, Davis had developed a grudging respect for Icahn. He had come to believe that his word was good.
Boesky was another matter. The arbitrageur had wormed his way into a meeting with Davis just a few months earlier. Davis had been helping raise money for the restoration of New York’s famed Carnegie Hall, and had sent a fund-raising letter to Boesky. Icahn had called shortly after. “You dumb bastard,” Icahn said, half in jest. “Ivan’ll use this as an excuse to meet you.” Sure enough, Boesky went to Icahn, saying he wanted to make a donation to Carnegie Hall—and that he wanted to hand the check personally to Davis. So Icahn dutifully arranged a meeting. Davis took an almost instant dislike to the arbitrageur, an impression little changed by what he deemed the paltry size of Boesky’s check—$5,000.
But now that Boesky had become a shareholder as large as Icahn, Davis felt he had no choice but to meet with them. He invited them to dine with him on September 5 in his private dining room atop the Gulf + Western building at the southwestern corner of Central Park. Davis made Boesky’s bodyguard check his weapon with Gulf + Western’s own security guards. Boesky didn’t like that, but otherwise he lavished praise on Davis, saying he thought Gulf + Western to be an “exceptional company.” Davis he described as an “exceptional manager” and an “outstanding manager.” Davis was immediately suspicious. Boesky was laying it on too thick, and Davis found it obnoxious.
That evening, in the wake of all the praise, Boesky and Icahn proposed a leveraged buyout in which the company would be taken private, with Icahn and Boesky owning it, along with management. Davis would remain as chairman, they assured him. With G + W stock in the low forties, they were prepared to offer $52 a share, an amount, Boesky said, that could leave Davis with “$100 million in your pocket.”
Davis was appalled. “You’d be raping the shareholders,” he exclaimed. Davis deemed the proposal to be little more than an attempt at bribing him to sell the company at a low price. Boesky agreed that it was a lowball bid, but seemed unfazed. “You’d be my partner,” Boesky said, as odious a prospect as Davis could imagine.
Davis prudently said he’d consider the suggestion. Unlike many chairmen of public companies, he’d often said his principal goal was to increase shareholder value, and he wouldn’t reject takeover bids out of hand. Too many managements were stealing companies through LBOs at scandalously low prices, however, and he wasn’t about to join their ranks. He told Icahn and Boesky that he liked running a public company, and wanted to keep it that way. He phoned Boesky soon after, politely rejecting their suggestion for a leveraged buyout.
Icahn and Boesky persisted, meeting again with Davis on October 1. This time they had more detailed financial projections, but Davis was firm. Although the meeting began just before 8 P.M. and lasted for three hours, he didn’t offer them anything to eat. He said he’d made up his mind, and didn’t want to take the company private.
Soon thereafter, on October 3, Boesky’s friend John Mulheren paid Davis a visit. Davis had never met Mulheren, who arrived wearing an open-necked plaid shirt and cowboy boots. Davis thought he looked like a lumberjack. In an effort to insinuate himself into any bid for Gulf + Western, Mulheren told Davis, “You can’t trust Boesky. Trust me. I’ll be your eyes and ears.”
Mulheren assured Davis that he didn’t own any stock in G + W and wouldn’t buy any. But Davis didn’t trust Mulheren any more than he did Boesky. He feared Mulheren would pass information about Davis’s reaction to the buyout proposal to his wealthy investors, and, despite his promise to distance himself, even to Boesky. He thanked Mulheren and declined.
Icahn and Boesky reviewed their options. Boesky told Icahn they should accumulate still more stock to increase the pressure on Davis. But Icahn told Boesky—and Davis—that he wouldn’t do that without Davis’s consent. Boesky called Davis, and this time the lavish praise and warmth were conspicuously absent. He threatened to go up to 9.9%, adding “I want two seats on the board.” Davis was firm. “That’s not going to happen. You’re not welcome. Period.”
Boesky paused briefly, and said, “Then buy me out.” He asked for $45 a share; the stock had closed that day at $44. “Absolutely not,” Davis replied. “When the stock trades at $45, I’ll entertain the possibility of buying you out.” The company had recently announced a plan to buy back its own stock, but Davis wasn’t about to pay greenmail, which was what Boesky and Icahn now wanted.
Boesky did nothing. He had already been shaken by a far more public takeover defeat. Earlier in the year, representatives of Fairness in Media, a conservative media watchdog group led by Senator Jesse Helms, had called on Boesky, seeking support for their effort to threaten CBS with a hostile takeover. Boesky had found the prospect ludicrous, but started thinking about the prestigious network. He concluded that the Federal Communications Commission probably wouldn’t stand in the way of a hostile takeover bid, but knew he couldn’t muster the capital to launch a multibillion-dollar takeover on his own. If he could amass a large stake, however, perhaps as much as 15%, he could at least put CBS “in play.” Surely others lusted for such a crown jewel. He’d heard that Ted Turner was interested. And he’d seen how easily he and Milken had driven Pacific Lumber and Harris Graphics into the arms of hostile suitors. Perhaps he’d emerge with a prestigious seat on the network’s board. Boesky began to accumulate shares, asking Milken to buy for him, too.
When Boesky filed his SEC disclosures, however, hoping to strike fear into the heart of CBS, the network fought back vigorously and decisively. CBS’s chairman, Thomas Wyman, wouldn’t even dignify Boesky’s purchases with a face-to-face meeting, much to Boesky’s disappointment. CBS’s lawyers at Cravath, Swaine & Moore filed a blistering lawsuit, charging that Boesky was over-leveraged and had violated net capital requirements to acquire his stake.
Boesky looked grim the day the lawsuit was filed. He suspected a traitor; how else could Cravath and CBS have zeroed in on such an Achilles’ heel? Boesky couldn’t possibly subject his operation to discovery by CBS’s lawyers. He couldn’t risk discovery of the Milken dealings. Boesky caved in immediately. Desperate to negotiate a truce that would end the lawsuit, he signed a standstill agreement promising not to acquire any additional shares of CBS, and began to unwind his position.
Now, bloodied in his runs at both CBS and Gulf + Western, Boesky was stuck with his huge Gulf + Western stake. His CBS position could easily be sold at a profit; improved operating results and continued takeover speculation had pushed the stock price substantially higher, and he had a nice profit. But Gulf + Western’s had declined.
As the weeks went by, Gulf + Western stock did rally, reaching $44 by mid-October. So Boesky called Mulheren. “I like Gulf + Western,” Boesky told him. “I wouldn’t pay more than $45 for it, and it would be great if it traded at $45.”
“I understand,” Mulheren replied. Usually when Boesky said he “liked” something, Mulheren could count on big gains. So he started loading up on Gulf + Western, driving the price up further. One of his assistants asked him why he was buying the stock, and Mulheren replied, “I don’t know. Ivan likes the stock.” It was enough of an explanation.
Finally, in large part because of Mulheren’s buying, the price reached $45. Moments later, Mulheren saw a 6.7 million-share block sale of Gulf + Western cross the tape at $45. He realized Boesky had bailed out, selling his stake to G + W, leaving Mulheren with his large new position. Far from “liking” the stock, Boesky had been pushing the price up so he could bail out more profitably. “The son of a bitch,” Mulheren said out loud, to no one in particular.
By late 1985, Boesky seemed farther than ever from his dream of being a latter-day Rothschild. So he turned again to the only person who could vault him into the front ranks of American financiers: Michael Mi
lken.
The two had been discussing ways to increase Boesky’s capital for more than a year when, in the wake of the CBS and Gulf + Western failures, Boesky told Milken he wanted to go forward with plans for the largest arbitrage capitalization in history. As they had discussed previously, Boesky would wind up his existing partnership, Ivan F. Boesky Corporation, and raise $220 million in contributions from limited partners. Then Milken would raise $660 million in proceeds from the sale of junk bonds. This would be buying power on a scale Boesky had hardly dreamed of—an arbitrage operation with nearly $1 billion in capital. Leveraged at three to one, Boesky would have the unfettered power to invest $3 billion! Even the biggest and most powerful corporations would quake at his approach.
Further dependence on Milken was part of the price. This quickly became clear to Conway. Early in 1986, Merrill Lynch approached Conway and Boesky with what seemed an almost risk-free opportunity: Gulton Industries was under hostile attack from Mark IV Industries. Goldman, Sachs, representing Gulton, was all but begging Boesky to come in as a white knight for the company, which could be had for less than $50 million. Conway studied Gulton and its operations, and decided that even the cautious Boesky could be sold on this investment. He told Boesky the deal was “as close to perfect as you can get.” The board of Northview, the Boesky vehicle for the bid, met and approved the acquisition.
Then, just when Conway thought they’d cleared all the hurdles, Boesky asked him, “Should I call Mike Milken and ask him what he thinks?”
“No!” Conway exclaimed emphatically. This wasn’t a Drexel deal—Merrill Lynch was going to handle the financing, since it had shopped the company to Boesky—so Conway knew Milken would try to derail it. “Don’t talk to him, Ivan,” Conway pleaded. “He’ll just leave you with a bad taste about this, and you’ll get all kinds of vague doubts.” Conway emphasized that he’d be “very unhappy” if Boesky went to Milken on this.
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