Feeding Frenzy in the Redwoods : Robert A. Jones

If you look on Page 39 of the federal indictment of Michael Milken, you’ll see the reason for this story. That’s where the feds describe how--in their opinion, at least--the king of junk bonds pulled on the levers of capitalism, got all the gears cranking and eventually caused whole forests of redwoods to come crashing down along California’s North Coast.

Even now, the chain saws are howling in the forests surrounding this small lumber town. They are cutting to pay some heavy bills, debts that were incurred 1,000 miles south in the Beverly Hills offices of Drexel Burnham Lambert. The connection between those chain saws and Milken may turn out to be a milestone of the ‘80s.

In Milken’s indictment, the U.S. prosecutors title this section “Unlawful Acts in Connection with Maxxam’s Efforts to Purchase Pacific Lumber Company.” They go on for several pages, but the basic allegations are these: In 1985, Milken and longtime takeover buddy Charles Hurwitz mounted a successful raid on Pacific Lumber, one of the North Coast’s oldest and largest redwood companies.

Under their plan, Hurwitz would buy Pacific Lumber through his holding company, Maxxam Group. Milken’s role was to turn on the junk bond fountain at the right moment, providing a river of cash to pay for the company. Pacific Lumber’s management resisted, but it was no fair fight and the price came to $872 million.

Neither Milken nor Hurwitz pretended to know anything about the timber business. In the takeover trade, knowledge of a target’s core enterprise matters about as much as knowledge of Japanese did to the crew of the Enola Gay. What both men did know was the company’s reputation, and that told them a lot.

For 120 years, Pacific Lumber had operated virtually as a family concern, exercising great care over its lush forests. Its logging practices were so conservative that Pacific Lumber, alone among North Coast timber companies, never had a row with environmentalists. Its lands were rich in old-growth redwoods, the company owed almost nothing to anyone, and it carried a fat pension fund on its books. In other words, perfect for a takeover.

In 1984, the last year Pacific Lumber controlled its own fate, the company generated $45 million in profits. But Hurwitz needed almost twice that, or about $82 million per year, to cover his interest payments alone. He was faced with the dilemma of the ‘80s, the need for cash to feed his junk. Most likely you can guess the result.

In the next year Hurwitz announced that Pacific Lumber would double its logging rates. Clear cutting, always scorned by the old management, would henceforth be the order of the day. The oldest redwood groves, some dating back to Julius Caesar’s time, would be the first targets. Revenues would go up and up.

Identifying the victims of all this is an interesting exercise. You can count the land itself, the streams that flow through it and the wildlife that lives on it. And you can also count the people of the North Coast. They may be the most intriguing victims of all.

The North Coast, to some degree, has long operated as a colonial economy. This is not Los Angeles or San Francisco with their building booms and their bran muffins. The only important business here is timber and the companies that control the timber business are, in their turn, controlled from distant cities.

Since the 19th Century, the old stands of redwoods have been harvested, cut into lumber and the profits shipped elsewhere. The residents of the North Coast were left with the smoking mills, cities that smelled like wet cardboard from the fumes and the prospects of an inevitable decline as the volume of trees dwindled.

Now, as Hurwitz continues the cutting frenzy, the trees will dwindle even faster. The loggers and mill workers understand this, but no one seems to know what to do. Just after Hurwitz took over, he flew in to address his new employees and told them that he had a favorite version of the golden rule: He who has the gold, rules.

Hurwitz was treating them like hicks. Perhaps that is why some workers have joined an ESOP to try to buy him out, and why some others have started talking to environmentalists for the first time in decades.

And perhaps that’s why the Milken indictment became an instant best-seller here. It turns out that the feds believe that Milken was making a dupe of Hurwitz during the takeover fight, manipulating the stock to increase his own profits while raising Hurwitz’s costs by many millions.

So maybe the sharks were eating each other, as well as Pacific Lumber. And maybe Hurwitz has a little less gold than he would like. Here in Scotia, you take your revenge where you find it.