Michael Milken is the most powerful financier of the age, inventor of the high-yield “junk bond” financing that has powered the takeover boom and changed the corporate landscape forever.
It isn’t only balance sheets he has transformed.
Milken has touched lives in countless American communities as his dazzling financing machine has raised billions for corporations. His junk bonds have strengthened some companies, bringing new prosperity to corporate chieftains and big-time Wall Street investors and also to the ranks of middle managers and assembly-line workers.
Elsewhere, junk bonds have been used in takeovers that broke up companies, leaving managers and hourly workers jobless, straining families and communities.
As he has reshaped the financial world, Milken has made loyal followers and bitter adversaries. He has helped the less fortunate through charitable giving totaling hundreds of millions of dollars. And, if federal prosecutors are right, he has led others to break the law.
This is a story of a few of the lives Michael Milken has touched.
Sam Krasney likes to tell stories, and none more than the tale of how Milken’s junk bond financing led his plodding, old-line manufacturing company, Banner Industries, to a new era of fast growth and big-time acquisitions.
The 64-year-old executive had spent 14 years nursing the Cleveland aircraft parts manufacturer back from near-bankruptcy. But, by 1985, growth was still slow, and Krasney was in the hospital for a third round of heart surgery.
Help came, in the form of Drexel’s junk bond team and Austrian-born financier Jeffrey J. Steiner. Steiner bought most of Krasney’s stock, kept him on as vice chairman and chief operating officer and reshaped the company as a vehicle for takeovers.
Mounted Hostile Bid
In 1987, Banner used Drexel bonds and advice in the $525-million takeover of Rexnord Inc., a Wisconsin manufacturer seven times its size. Late last year, Banner mounted a $196-million hostile takeover bid for Avdel, a British aerospace parts maker; in January, it cinched a pretax profit of about $10 million when it agreed to sell its 45% stake in Avdel to a competing bidder, Textron Inc.
Although Banner is still carrying heavy debts, sales rocketed to $378 million last year from $150 million in 1986.
Every year, Krasney attends Drexel’s big junk bond conference in Beverly Hills, Calif., and claps thunderously with the others when Milken takes the podium. Banner’s recent growth was possible only because of Milken’s invention, he says.
“In the old days, only the top few percent of companies could put their hands on this kind of money,” Krasney said. “Mike has made all the difference.”
Don Search has heard all the arguments about how takeovers benefit the economy by forcing bloated companies to cut slow-growing divisions and squeeze out unneeded “fat.” But he has a special reason to be skeptical: A junk-funded takeover attempt by Wickes Cos. forced his former employer, Owens-Corning, into a whirlwind restructuring that eliminated 10,000 jobs--including his.
“You see these things differently when you’ve been through what I have,” he said.
Search, 52, held a $65,000-a-year job as a mid-level marketing manager with the Ohio firm that invented fiberglass. He had a comfortable suburban home, and his future seemed secure.
But, in 1987, amid Owens-Corning’s radical streamlining, his unit was sold to Kohler, the Chicago plumbing concern. When the new owner moved Search’s unit to Illinois, Search was not asked to follow.
He spent months looking for a job, then went to work for a business machines company as a copier salesman. It didn’t suit him, though, and he recently quit to start a company that will sell three-ring binders and other office supplies.
While he’s trying to get the new venture going, he is supporting two children at home, plus a third at a college with an annual tuition of $14,000. For the moment, he has no medical coverage, and it worries him.
“I have to admit, I feel bitter,” he said. “There may be a need for companies to streamline. But there must be a better way than this.”
A financier imagines that, if he hadn’t gone to work for Milken at Drexel, he would probably have joined the kind of conventional company that measures your progress by the location of your desk. You start out in the middle of the floor, he said, and, if you excel and follow corporate protocol, you are moved outward until you get a private corner office with a view.
Instead, some years ago, the financier went to work in Drexel’s Beverly Hills junk bond operation. In Milken’s shop, there is little protocol, long hours and no private offices. People are happy to sit in the middle of the floor--near the fabled X-shaped desk of Milken himself.
“I could have had a pretty predictable job, but I came here,” said the financier, who asked to remain unidentified because Drexel has barred employees from speaking to the press. “The place has got electricity, total informality, and even young guys can work on the big deals, if they’re good.”
Needless to say, there is also lots of money to be made in Milken’s bond operation, which has made millionaires out of many people in their 20s.
Part of the appeal is the magnetism of Milken himself, the financier said, and the gratification that the staff feels from knowing that it is at the center of one of the world’s most important financial operations. The corporate chiefs who breeze through the Drexel bond operation are a Who’s Who of American business, he said.
The financier blames Drexel’s legal problems on a hostile press and envious competitors but insists that they have not dampened his enthusiasm.
“Even with the publicity, if you lined up all the people who wanted to work here, the line would go around many, many blocks,” he said.
Richie McNulty, 53, and his fellow union members at Owens-Corning’s Barrington, N. J., fiberglass insulation plant always considered themselves among the most fortunate workers in Camden County. The company paid them one of the highest wage scales around, and they felt secure in the knowledge that the operation was profitable.
So, it was a shock in 1986 when he learned that a junk-bond-backed takeover threat was going to force the company to convert the 800-employee plant to a 25-worker warehouse. “We just didn’t understand why,” said McNulty, who was an industrial maintenance engineer at the time.
His shock turned to anger when he learned that Wickes earned $30 million in the two-month takeover attempt by selling its Owens-Corning stock back to the company during the emergency restructuring.
From December, 1987, until last September, McNulty worked as a part-time warehouseman at the plant, earning $4.19 an hour less than he did when the plant was operating at full capacity. Since September, he’s been out of work, and he is unsure how long it will take him to find a job.
McNulty left the company with a severance payment of $32,000. But that was far less than the Owens-Corning pension he had hoped for, and less than the $90,000 payment he would have received if he had been only two years older.
“From where I am, all I see is the harm from these takeover battles,” McNulty said.
James R. Caywood earned a good living as a bond salesman in the late ‘60s and for most of the ‘70s. But he started doing even better in 1979, when he got into a corner of the investment world that was taking off, due to Michael Milken.
In 1979, Caywood went to work on the junk bond sales and research operations of two investment management firms. Four years ago, when the total value of outstanding junk bonds had grown to $82 billion, he co-founded his own firm, Caywood-Christian Capital Management.
The 14-employee San Diego, Calif., firm has had booming growth as a manager of junk bond portfolios for S&Ls;, pension funds, insurance companies and others. It began with a single client and assets of about $100 million; today, as the value of outstanding junk bonds has reached about $180 billion, Caywood-Christian’s business has grown to include about 25 clients and assets of about $2.2 billion.
A key investment tenet of his firm, and others like it, is the notion--popularized by Milken--that the added return from high-yield bonds more than makes up for their added risk. Despite the concerns of those who fear that a recession could trigger massive junk bond defaults, so far in this decade the bonds have produced returns about 3 percentage points higher than high-grade corporate bonds, he said.
“It’s worked, and worked well,” Caywood said. Milken, he added, “is the man behind all of it.”
For 10 years, Pacific Lumber was the company that John Maurer worked for and admired. The Scotia, Calif., company was a family-owned, paternalistic one that offered good retirement benefits and college scholarships and didn’t lay off employees even during the recession of the early 1980s.
Also, it respected the source of its profits, the forests of redwoods that have lived for as long as 2,000 years. Pacific Lumber always grew more than it harvested, Maurer, 40, said.
But for Maurer, those days ended in 1985, when the company was bought in a takeover arranged by Houston financier Charles E. Hurwitz and funded with Milken’s junk bonds. To pay down those debts, Hurwitz began cutting employee compensation and doubled the rate of tree cutting in the nation’s largest privately owned redwood forest.
Quit Job in Protest
Such “clear cutting” not only damaged the area’s ecology, Maurer believed, but would hurt the area’s economy by not leaving trees for future harvesting. Maurer told his bosses what he thought of their actions, and, in May, 1986, he quit his job as a shipping clerk, partly in protest.
Last spring, when he ran for the county board of supervisors, he spoke of his passionate opposition to Hurwitz’s action. He lost by 28 votes.
“Whatever you can say about takeovers of manufacturing companies, your takeovers of natural resource companies are a lot more dangerous,” he said. “You’ve got to pay debts, and you start squandering resources to do it. Then everybody’s hurt.”
Mike Milken came into Barbara Firestone’s life 17 months ago, when the group of Southern California social agencies she runs faced financial problems that threatened to close several of its group homes for children.
She had met Milken one day when she was leading children from her H.E.L.P. Group through a Drexel-sponsored tour of Universal Studios. She fell into a conversation with a soft-spoken, dark-haired man in a sport coat, only later learning that he was the head of the storied Drexel bond unit.
“It didn’t register at first; his world was far from anything I knew,” said Firestone, whose organization serves 130 Southern California children with a variety of problems.
But she found him interested in her world when she wrote him to ask about financial help. Last year, Milken gave the group’s Project Six organization about $850,000 to help keep the homes going and for other purposes.
Milken visits the homes every two weeks or so.