Among the many trends characterizing today’s reshaped financial landscape in Los Angeles is the re-emergence of leveraged buyouts. But while the LBO action in L.A.’s middle market is heating up, it’s a far cry from the storied LBO heyday of the 1980s. That was a time when financiers like Michael Milken, Boyd Jefferies, Thomas Spiegel and Fred Carr reigned supreme.
“It was financial euphoria,” said Peter Nolan, a former investment banker and now a corporate buyout artist with Leonard Green & Partners in West Los Angeles. “It was the same feeling that people had about making Internet venture investments in the late 1990s.”
LBO funds in the 1980s routinely reported annual returns exceeding 30 percent, back when Wall Street thought a good year was 10 percent or more, says Nolan.
Los Angeles was the epicenter of the Reagan-era leveraged buyout quake, a financial temblor that rattled chief executives of public corporations across the nation.
And where these acquirers get the dough to make their bids?
Right here in Beverly Hills from junk bond wunderkind Michael Milken, who at the time was running the local offices of New York-based securities brokerage Drexel Burnham Lambert. Milken could seemingly raise any amount of money to buy an under-priced corporate asset.
Many of Milken’s money sources were local, too. Fred Carr’s Executive Life in West Los Angeles bought Milken’s high-yield bond offerings, and so did Beverly Hills-based Columbia Savings & Loan, run by Thomas Spiegel. Coast Savings in downtown L.A. had a high-yield fund, and Woodland Hills-based Zenith National Insurance Corp. was a buyer, too. So was Century City-based insurance shop First Capital Holdings, run by Robert Weingarten.
“It was exciting. You would watch the news, read the newspapers about major companies in takeover situations, and you knew the heart of the action was right here, right in your own office or the one next to you,” recalls Ken Moelis, now head of corporate finance for Donaldson Lufkin & Jenrette Securities Corp. in Century City, but then a Milken acolyte in Beverly Hills.
The 1980s leveraged buyout boom had many roots, comments Mike Brown, now an investment banker with Sutro & Co. in West Los Angeles and one of the original bankers in Los Angeles with Milken back in the 1980s. Cheap stock was the biggest one.
In the 1970s, stock prices and corporate asset values sagged, the result of higher interest rates, rampant inflation, a so-so economy, the oil scare and general negativity. In 1979, Business Week magazine ran its now famous cover story, “The Death of Equities.”
“Back in the 1980s, asset prices were still very low,” recalls Brown. “It’s a lot easier to borrow money to buy a cheap company than to buy a very expensive company. In the 1990s, companies became expensive.”
In addition, corporate management has changed, in part due to the pressures of takeover raiders (and also greater activism by institutional shareholders). In the 1980s, there were still corporate managers in place who were largely paid by the size of the corporation they ran, not its profitability or performance on Wall Street.
Era of responsibility
Corporate managers used to give speeches about their responsibilities to constituents beyond their shareholders. In one speech in 1978, George Romney, one-time Republican presidential aspirant and chairman of now-defunct American Motors Corp., declared he was responsible to multiple publics, including the communities that surrounded AMC plants, laborers and shareholders.
Today, corporate managers are routinely incentivized by stock options or warrants meaning they hit a home run only if shareholders do too. “The words ‘fiduciary responsibility’ are spoken a lot more today,” said Bill Mason, Pepperdine business professor and money manager for Cullen Fortier Asset Management in Woodland Hills.
The end result? There are far fewer “fat” public companies around, with excess employees or money-losing divisions that can be cut to repay debt incurred through an LBO. If a company is already pretty well run, adding on debt is only a competitive disadvantage because debt has to be paid off, points out Nolan of Leonard Green.
Though not all the consequences of the LBO boom were positive, the 1980s remain a time to remember for many in Los Angeles’ still-growing financial community.
“Aside from IBM or a GM, and some of the more highly valued tech companies, there wasn’t a company in America we didn’t think we could buy,” remembers Sutro banker Brown, of his Drexel days. “We changed the corporate landscape of America.”