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Premier Bankroller of Takeovers : Drexel Has 2 Weeks to Raise $3 Billion for Pickens’ Bid

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Times Staff Writer

Rival investment banks have known for some time that, in the field of risky corporate bonds, Drexel Burnham Lambert is the clear-cut leader.

But it wasn’t until late February, when Drexel raised $1.5 billion in 48 hours to finance New York financier Carl Icahn’s aborted raid on Phillips Petroleum, that stunned rivals, who once scorned this end of the business, realized how far ahead of the field Drexel is.

“Some of us realized how much work we have to do,” one investment banker recalled recently in recounting Drexel’s “impressive performance.”

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Drexel, which is earning a reputation not only as the premier underwriter and trader of so-called junk bonds but also as the preeminent bankroller of corporate raids, is back in the news this week. Its latest assignment: raise $3 billion in two weeks to finance T. Boone Pickens’ two-step plan to take over Unocal, the parent company of Union Oil. Drexel, which hopes to raise the first $1.5 billion by Friday and the remainder by April 24, isn’t talking about its fund-raising progress.

But Mesa Petroleum, the Amarillo, Tex., company that Pickens founded in 1964, is confident that Drexel can do the job. Mergers-and-acquisitions specialists say it is clear from the way that Pickens structured the deal--going after absolute control, 50-plus percent, instead of effective control of 33% or so--that financing is readily available.

For its fund-raising efforts, Drexel will make a handsome sum--up to $80 million if Pickens succeeds with the takeover.

Mesa heard out several investment bankers before choosing Drexel for this assignment. Besides offering “the best terms overall,” Drexel got the job because of its uncanny ability to raise a large amount of money quickly, a Mesa spokesman said.

Further testament to Drexel’s reputation as feared opponent in any takeover battle is the promise that Walt Disney Productions elicited from Drexel after Disney’s run-in with financier Saul Steinberg. Disney bought off Steinberg and secured a Drexel promise to refrain for two years from representing any future Disney suitor.

How does one go about raising more than $1 billion in less than a week?

In a nutshell, a corporate buyer such as Pickens creates a new company on paper that will make a tender offer for the target company and take control of it if the raider is successful. In this case, the paper company is called Mesa Eastern.

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Drexel devises a package of high-yielding securities, sometimes called junk bonds, to be issued by the paper company once it takes control. (The bonds are described as “junk” because they are given low safety ratings, or no rating at all, by firms that grade securities.)

And then its junk-bond wizards, a staff of about 100 led by Michael R. Milken, go to work drumming up commitments from investors to buy the bonds once the deal is consummated. The raider usually offers investors a financial incentive to commit to buying securities early in the offering process.

With the bond money raised from institutional investors, the suitor buys the shares to acquire all or part of the target company.

Who would want these risky bonds with lower credit ratings than big investors normally accept? Pension funds, big insurance companies, savings and loans, some corporations and other institutional investors seeking higher yields than top-rated bonds offer.

$2 Billion a Month

Many are institutions that have been dealing with Drexel long before it was a respectable thing to do, but a growing number of investors--many blue-chip companies--are getting in on the action. Drexel estimates that the junk-bond market is attracting $2 billion in new money a month.

Not everyone is sanguine about this growing source of financing, however. Critics warn that the junk-bond market is the equivalent of corporate incest: The investors buying the junk securities are themselves issuers of junk bonds.

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And critics contend that such a chummy scheme has a good chance of collapsing during the next recession.

Drexel doesn’t agree, of course. Executives there note that the market is broadening every month and is attracting not only some blue-chip investors but some premier investment bankers. In fact, they say, junk investors represent a small fraction of new junk issues.

Junk financing and Drexel alike have gained considerable credibility in recent weeks with the consummation of Coastal’s $2.5-billion takeover of American Natural Resources and of Triangle Industries’ acquisition of National Can.

Those were the first and second junk-bond takeovers to be consummated.

Before these recent deals, Drexel had collected sizable fees dredging up commitments for Icahn’s run at Phillips, Steinberg’s play for Walt Disney Productions and Mesa’s offer for Gulf, among others. But none of the target companies had been acquired by the suitor relying on high-yield or junk bonds.

The stock market’s reaction to Pickens’ offer for Unocal on Monday suggests that it thinks this fight will end no differently. The price of Unocal shares dropped $1.75 a share to $48 on Tuesday in trading on the New York Stock Exchange after climbing $1 the day before.

“There is obvious skepticism in the market, not because the guy investing doesn’t think the financing will get done--it will--but because he doesn’t think the deal will get done,” one investment banker said. “He’s also afraid that (Unocal) might (pay) greenmail and he’ll be stuck.”

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Greenmail More Common

Greenmail is the payment of a premium to a hostile shareholder by the target company, which wants to get its stock back. Several of the junk-financed takeover attempts have ended with the payment of greenmail.

But it is unlikely that Unocal Chairman Fred L. Hartley will pay greenmail, something he has long considered anathema.

On Tuesday, some mergers-and-acquisitions specialists who have crafted takeover defenses for other target companies said that they consider almost as unlikely the prospect that Hartley will acquire another company to make Unocal less appealing to Pickens.

Said one: “That defense is a very difficult one because of the timing involved. Before you can get everything you need to get done, Boone owns half of Union.”

The acquisition strategy had emerged Monday as the defense considered most palatable to Hartley. It was raised again Tuesday with the rumor on Wall Street that Unocal was planning to acquire Diamond Shamrock as a ploy to escape Pickens’ clutches. Both Unocal and Diamond Shamrock declined comment on the rumor, but mergers-and-acquisitions specialists familiar with the two companies characterized such a union as unlikely.

So where does that leave Unocal? Hartley, on advice from his lawyers, isn’t talking to reporters. At his disposal are the investment firms of Goldman, Sachs & Co. and Dillon Read, which have been Unocal’s financial advisers for years.

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Unocal has some elaborate takeover defenses that make it almost impossible for a hostile shareholder to challenge management--except at the annual meeting, which is scheduled for April 29. Pickens is trying to block the meeting.

Only a limited number of directors can be replaced at each annual meeting.

May Buy Own Shares

There has been some suggestion that Pickens could get half of the stock and still be ineffective in running Unocal because he may be left with a hostile board.

But sources close to the deal said Tuesday that, with 51%, “we are confident we would find a way to effect complete control.”

Mergers-and-acquisitions specialists also were focusing Tuesday on the likelihood that Unocal may buy up its own shares at a price slightly higher than Pickens’ $54-a-share offering or otherwise get some of the company’s value into the shareholders’ hands.

That was the tactic Phillips used successfully to get Icahn off its hands.

“You can be sure Fred will do something that will be dramatic,” one investment banker said. “He has to. Look at the pickle he’s got himself in.”

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