Forces That Shaped Drexel Will Continue

Looking ahead, will the big federal case against Drexel Burnham Lambert have much effect? Even if the government put Drexel out of business, would that change much in the stock and bond markets?

Not really. Drexel pioneered but others have settled the territory; other finance houses have adopted Drexel’s investment innovations and aggressive style. And the atmosphere of accelerated change that nurtured Drexel’s rise to prominence still prevails.

That atmosphere, healthy in many ways but questionable in others, is characterized by a constant emphasis on the faster, easier buck--buying businesses rather than building them, harvesting cash today rather than waiting for returns tomorrow. Its essential element is enormous investment funds, domestic and foreign, driven and handled by hyperactive brokers and banking houses.

Make no mistake, however. The investment directions that money takes affect the livelihoods of many ordinary people and the savings of all.

So keep alert as the beat goes on. Takeovers, for example, are headed for another record year, swelled by a growing number of leveraged buyouts--deals in which companies are bought for a handful of investment and a carload of debt. The Chicago brokerage house W. T. Grimm & Co. estimates that more than 1,000 deals worth more than $100 billion were done in 1988’s first half--up from $91 billion for last year’s first six months.

Want Control

And there is more to come because pension fund and other institutional investors have put $15 billion into leveraged-buyout funds run by investment bankers--meaning that with borrowed money added to that base, $150 billion is poised for buyout deals.

Politics is partly responsible: Deal makers are rushing the calendar out of fear that the next President will revive the anti-trust laws after almost a decade of timid enforcement.

But the overriding fact, says a Beverly Hills broker whose business is otherwise slow, “is that my corporate and individual customers who are investing want to buy control of a business.” They don’t want old-fashioned mom-and-pop investing, buying a share of this or that. They want to participate in the payoffs possible when a company’s stock is purchased for borrowed money, parts of the company are sold to pay debt, and the new stockholders wind up owning an entire company on the cheap.

Returns can be lucrative: in 1986, Avis rent-a-car was purchased for $10 million in equity and more than $1 billion of debt, then sold to its employees a year later for $750 million in equity; Beatrice Foods was bought for $417 million and sold in pieces for $7 billion.

A current game involves Interco Inc., a St. Louis company with $3 billion in sales that owns some of the best-known brand names in furniture (Ethan Allen, Lane), footwear (Florsheim, Converse) and apparel (London Fog raincoats). Because some of its divisions did poorly, Interco’s stock--at $45 a share before July--sold for what big investors believed was less than the furniture, footwear and apparel businesses could bring in separate sales.

Keep Tabs on Players

So Interco got a $70-a-share tender offer from the Rales brothers of Washington, corporate raiders backed by Drexel Burnham and Chase Manhattan bank. And even though Drexel’s troubles are casting doubt on that offer, Interco may still be broken up. Other buyers were eyeing it before the Raleses, and its own management wanted to restructure to get the stock up.

Otherwise, though, the big investing funds are unenthusiastic about the stock market, and some really valuable companies, such as Ford Motor, are going for relatively low prices.

What does all that mean to you? Plenty. Mergers mean uncertainty in your employment, and if you’re saving for retirement, you have to be aware that traditional investment rules don’t always apply; you must keep tabs on what the big players are doing.

And right now what many are doing is investing in bonds, anticipating lower interest rates ahead and also worrying that a global recession will suddenly stop the music. Either way, that favors U.S. Treasury bonds, which will rise in price as interest rates fall and also will sell at a wider premium over “junk bonds”--where the risk is default--if the economy worsens. Economist John Hekman of the Claremont Economics Institute predicts, for example, that the total return--interest plus capital gain--on a 10-year Treasury bond paying 9% today will be 11% a year for the next five years.

Meanwhile, it’s wise to keep perspective. The rush for the fast buck is not a new thing in American history--it is one spirit that built this country, although it often distracts from that other spirit, the American ability to commit and plan for the long term.

But if you think it’s time the big investors changed the way they’re behaving, support legislation for reform. Many prominent financial people, including Treasury Secretary Nicholas Brady, a Republican, and investment banker Felix Rohatyn, a Democrat, believe that there’s a need for reform. The retirement savings fueling the markets belong to all Americans, after all, not to Wall Street speculators. Maybe it’s time to take them back.