In 1986, Robert Berglass was a man with dreams in need of an investment bank to help fulfill them.
Berglass, chairman and president of Dep Corp., a Rancho Dominguez-based manufacturer of cosmetics and other personal care products, wanted to enlarge his firm through acquisitions and internal expansion. But he needed cash. And various investment banks he interviewed for the job of raising cash said they needed three months to do the job and couldn’t get to it right away.
Berglass then interviewed Drexel Burnham Lambert’s Beverly Hills office. It promised and completed a bond financing in three weeks.
“We have nothing but good things to say about Drexel,” Berglass says today, noting that his firm has doubled its sales, operating income and employees since 1986, when Drexel became its investment banker. Drexel still provides “service day and night, 24 hours a day, seven days a week,” Berglass adds.
Dep and Berglass are among dozens of Southern California companies and entrepreneurs who have benefited from Drexel Burnham Lambert’s West Coast headquarters in Beverly Hills.
The indictment of “junk bond” impresario Michael Milken and his resulting departure from Drexel raises questions about the future of the Beverly Hills operations.
But there is no question about the Beverly Hills office’s past influence. Thanks in part to paying greater attention to Southern California’s fast-growing businesses than its rivals, the office has left an indelible mark on this area’s corporate landscape, arguably doing more to boost the region’s growth in employment and entrepreneurial companies than any other investment banking firm.
Since 1977, when it moved its high-yield junk bond department to Beverly Hills from New York, Drexel’s junk bond financings have provided the financial fuel for the growth of dozens of large and small Southern California companies.
Its Beverly Hills corporate finance office--which opened at the same time as the junk bond department and now is the largest on the West Coast among major Wall Street firms--has worked on some of this region’s and the nation’s biggest takeovers, buyouts and other corporate transactions.
Junk Bond Pioneers
Meanwhile, Drexel--far more than any other New York firm--has fueled and legitimized Southern California as a major center for investment banking and corporate finance. By committing large resources to this area--and showing that it could make money--Drexel has spurred many competitors to set up corporate finance offices in Southern California.
“They have had a bigger presence in investment banking than any other firm in Southern California,” says Eli Broad, chairman and chief executive of Kaufman & Broad, a Los Angeles-based home builder and occasional Drexel client. “Therefore, I think it would be a loss to the Southern California economy if they were forced to move.”
“They’ve illustrated that Los Angeles is not Siberia and that you can make money with a staffed-up department here,” says Frederic Roberts, head of a Los Angeles investment banking firm bearing his name and Southern California district chairman for the National Assn. of Securities Dealers.
From being virtually non-existent in this state in the mid-1970s, Drexel has grown to become the leading investment banker for California-based companies.
The firm, largely through its Beverly Hills offices, was the lead manager of more public offerings for California-based firms than any other investment bank between Jan. 1, 1985, and Dec. 31, 1988, with $15.8 billion, or 18.4%, of the total value of all deals, according to IDD Information Services in New York. That put it ahead of, in order, Salomon Bros., First Boston Corp., Goldman, Sachs & Co. and Merrill Lynch & Co.
The fuel for this phenomenal growth has been Drexel’s junk bond trading operations. Milken and Drexel did not invent junk bonds, but they pioneered their use in financing small and medium-sized firms that were either too young or not credit-worthy enough to get traditional bank loans and issue traditional corporate bonds. The corporations would issue the bonds, with Drexel devising the financial terms and then underwriting the securities. (Underwriters typically buy the entire issue and then resell it in parts to investors).
Milken and Drexel Chief Executive Frederick H. Joseph also discovered and applied another use for junk: financing takeovers.
Milken’s keen use of junk--now a $180-billion market, representing one-fourth of all corporate bonds outstanding--single-handedly catapulted Drexel from a firm in the shadows of the Wall Street giants in the mid-1970s to among the industry’s biggest and most powerful by the mid-1980s.
The firm derives, directly or indirectly, far more than half of its profits from the Beverly Hills operation, which also trades stocks and convertible bonds.
The lucrative junk bond operation in turn fueled the rapid growth of Drexel’s corporate finance office in Beverly Hills. Corporate finance deal makers were needed by the junk traders to work with corporations to develop and structure junk offerings and to advise on mergers and acquisitions financed by junk bonds.
With 81 corporate finance professionals in Beverly Hills, Drexel has more than triple the number of those key deal makers based in the Los Angeles area than any other competitor. (In total, Drexel has nine offices in California with 1,400 employees.)
Drexel’s larger staff in Beverly Hills gave it more capabilities than its competitors. Other firms generally placed corporate finance professionals in Los Angeles primarily to find new clients. When clients agreed to pursue mergers or financings, Drexel’s competitors typically flew in key investment bankers from New York to execute the deals.
“It was sort of ‘carpetbag’ investment banking,” local investment banker Roberts says.
But Drexel had enough key professionals in Southern California that they could start and finish transactions with minimal aid from New York. The Beverly Hills office became loaded with top talent, paid handsomely out of the junk bond machine’s enormous profits, and turnover has been much smaller than at rival firms.
“There are a lot of smart guys over there. The amount of talent is so deep it’s ridiculous,” says a top securities industry executive in Los Angeles. He adds: “Any one of them could get a job in New York.”
Milken also developed an extensive network of hundreds of pension funds, mutual fund management firms, wealthy individuals and other investors--many from Southern California--who bought his junk bonds. In many cases the buyers also were junk bond issuers, and they often profited enormously from the bonds’ high yields.
Aided Troubled Firms
Two Southern California entrepreneurs--Fred Carr of life insurer First Executive Corp. and Thomas Spiegel of Columbia Savings & Loan--largely owed the rapid growth of their firms and their personal fortunes to junk bond investments.
Corporate beneficiaries of Drexel’s financings include a Who’s Who of large and small companies alike. Two of Southern California’s largest home builders, Kaufman & Broad and J. M. Peters Co., as well as retailers such as Wickes Cos., Safeway Stores, Vons Cos. and Standard Brands Paint have used Drexel financings. The firm has raised more capital for California’s fast-growing communications, entertainment and health-care companies than any other.
Drexel was instrumental in helping turn around such companies as Mattel Inc., the Hawthorne-based toy maker.
Some fast-growing smaller firms say they wouldn’t be anywhere near where they are now without Drexel’s attention.
“Drexel would reach out to business at which Goldman (Sachs) or Morgan Stanley would turn up their nose,” investment banker Roberts says. “Many investment banks are more interested in the image of their clientele than the profitability of a transaction.”
One such client that might have been ignored by others is Salick Health Care, a Beverly Hills-based operator of outpatient cancer-treatment centers. “They were very smart and were willing to consider new ideas and take a chance on something unproven,” says Bernard Salick, chairman and chief executive. “And they delivered on everything they said they would deliver.”
Drexel’s Beverly Hills corporate finance office has advised or financed in some of the biggest mergers and buyouts involving California-based firms as well as other companies nationwide. The firm provided financing for the 1986 leveraged buyout of Safeway Stores by the investment firm Kohlberg Kravis Roberts & Co., and it advised Vons Cos. in its purchase last year of Safeway’s Southern California stores.
Rivals May Move In
The Beverly Hills office also was involved in raising junk bond financing for the $24.5-billion takeover by Kohlberg Kravis of RJR Nabisco, the largest merger ever. The Beverly Hills office also is advising MAI Basic Four in its bid for Prime Computer.
Drexel even has had some impact in public finance, the segment of investment banking that raises money for cities or other government entities. The firm has helped develop a market for high-yield “junk” municipal bonds, using them in financings to build streets, sewers and other infrastructure for housing projects and to provide funds to allow municipalities to obtain liability insurance, says Mark J. Adler, managing director in Drexel’s municipal finance department in Los Angeles.
But with the end of the Milken era at Drexel, some question whether Drexel can maintain its close relationships with its many clients in Southern California.
Several major rivals with corporate finance offices in Los Angeles, including Merrill Lynch, First Boston, Shearson Lehman Hutton, Salomon Bros. and Goldman Sachs, all could take some of Drexel’s clients. While their junk bond trading operations are in New York, a local junk bond presence is not seen as necessary, as long as the firms have a local corporate finance department.
The key to the future of Drexel’s Beverly Hills office will be determined by who stays at the firm. Many key professionals in the junk bond and corporate finance departments were made fabulously wealthy by Milken’s magic, but their loyalty to the junk bond king also could prompt them to leave. Many are appalled by Drexel’s agreement to plead guilty to six felony charges of securities violations, contending that those pleas betrayed Milken by damaging his legal defenses.
“Mike is going to be missed,” one Drexel insider says.
John H. Kissick, head of Drexel’s West Coast corporate finance operations and the only Beverly Hills-based executive serving on Drexel’s board of directors, is a rising star within the firm and is expected to be given greater oversight over junk bond trading. But Kissick also is a Milken loyalist, and terms of the firm’s expected settlement with the Securities and Exchange Commission are likely to call for more oversight from New York.
Drexel executives in New York who are thought to be in line for greater responsibilities over the junk bond operations include Andrew Morse, head of investment-grade corporate bond trading, and Edwin Kantor, chief of all fixed-income trading.
Related stories: Page 6, and Part I