‘80s Over, but Takeover Artist Thrives

As the go-go ‘80s limped into the slow-grow ‘90s, it seemed likely that the takeover artists whose exploits symbolized an era would fade away and quietly spend their millions.

But Ted Forstmann was just warming up.

Using an approach he describes as art as much as science, Forstmann has targeted and purchased half a dozen companies since the ‘90s began. He drew attention on Wall Street late last year by selling Ziff-Davis Publishing, the producer of PC Magazine, for $2.1 billion.

Forstmann had bought the firm less than a year earlier for $1.4 billion--and was criticized then for paying too much.

So how does this buyer of companies decide what to buy? “I never went to business school. I was basically never in an investment banking firm worthy of mentioning,” Forstmann recounted during a recent interview. “I’ve always been a guy who had ideas.”

Investors appear willing to put their money behind those ideas. Forstmann’s firm has just put together a new takeover fund of $2.3 billion, a sum not previously disclosed.

After being ridiculed in the 1980s for his repeated warnings about the rampant use of risky junk bonds to buy large companies, Forstmann appears by having raised such a sum to be winning some respect.

Sitting in his office high above Manhattan, Forstmann seems a man at ease. In shirt sleeves and loosened tie, pulling a leg up onto the arm of his chair, he recounted his entry into the buyout business.

It began, said Forstmann, now 56 and with a head of thick, mostly silver hair, during his childhood when he read a biography of Howard Hughes.

“This guy loved doing deals,” he said.

The love of deals stayed with Forstmann. He went to Yale University, on to Columbia for law school, and then spent some time as an attorney before establishing Forstmann Little & Co. with partner Brian Little in 1978. The firm was one of the pioneers of the leveraged buyout, or LBO, a deal financed at least in part with debt.

Forstmann’s first takeovers were small ones, as he only had so much money to spend. Things picked up as the 1980s unfolded and the firm’s successes brought in more investors.

Forstmann Little profits by investing other people’s money, as well as some of its own, much as a mutual fund, except that it buys and sells companies instead of stocks and bonds.

Jan Yeomans, treasurer of Minnesota Mining & Manufacturing, was an early investor. Yeomans met Forstmann for the first time in 1983, when she was manager of 3M’s pension fund. She had never heard of him and only planned to meet for about 30 minutes.

Their talk ran for hours as Forstmann impressed, launching a relationship that continues today. 3M’s pension fund has invested hundreds of millions of dollars with Forstmann over the years, most recently in the new $2.3-billion fund.

“If you’re going to have a partner, he’s a very excellent partner to have,” she said. “He’s been very straightforward. He’s treated us with a lot of consideration and has always been available to talk. Most of all, he has done exactly what he’s said he was going to do.”

For pension fund managers like Yeomans, who make up the vast bulk of Forstmann Little investors, that means making money.

Through partnerships, Forstmann Little uses investors’ money to buy stock and debt in the companies it acquires. The debt essentially provides low-cost financing for Forstmann’s acquisitions.

Since the firm’s inception, equity investors have seen compounded annual returns of about 60%, and debt investors have seen 20% returns.

Forstmann’s acquisitions have been diverse. His first major purchase was Dr Pepper Co. in 1984, for which he paid $650 million. Since then he has bought a dozen companies for prices ranging from $83 million to $2.1 billion.

Major investments this decade include Gulfstream Aerospace, the seller of corporate jets; General Instrument, which produces set-top cable TV boxes and other television equipment; and Ziff-Davis.

Forstmann works with a surprisingly small staff to pick the companies he wants to go after, generally dominant, high-growth businesses. Forstmann included, the firm has five partners and two associates. A handful of support staffers brings the total to 19.

“This is not like your traditional investment banker,” said Katherine Rudie Harrigan, a professor at Columbia University’s Business School. “If you’ve got people sitting in an office who have pledged their own capital behind a deal, that’s a lot more real.”

Indeed, Forstmann takes the responsibility of investing his own and his investors’ money quite seriously, even solemnly. He likes to stay away from risky investments, although he thrives on being unconventional.

“I was never a guy who felt the need to play by the rules that everybody else established,” he said. “Obviously, I’m not talking about legal rules. I’m talking about being one of the group on Wall Street.”

The group on Wall Street has never been particular fans of Forstmann.

During the furious bidding for RJR Nabisco Inc. in the late 1980s, Forstmann’s protestations about the rampant use of expensive junk bonds--which carried interest rates sometimes as high as 18%--were ignored. Rival takeover firm Kohlberg Kravis Roberts & Co. ended up buying RJR in the biggest takeover in U.S. history.

When all was said and done, though, Forstmann appears to have been right. The buyout was so expensive it saddled RJR with heavy debt, as was the case with numerous junk-bond-financed takeovers. Forstmann insists, though, that he isn’t gloating.

“In the beginning they said I was jealous, and then they said I was nuts,” he said. “So it was a little tough then. But there’s been so much else, that’s almost 10 years ago.”

Forstmann’s firm still owns or has investments in a number of companies it has acquired, and Forstmann is running Gulfstream himself. He has cobbled together the big new investment fund and is searching for companies to buy.

While Forstmann eschews hostile deals, he has become more active in seeking acquisitions. He said he’s now in talks with the chief executive of a company that’s not officially up for sale.

“I’m kind of interested and he’s kind of interested--and you may read about a fairly big deal here in the next three or four weeks.”

But what does Forstmann, who cites Nelson Mandela, the Pope and Abraham Lincoln as his heroes, get out of all this besides the obvious benefits of wealth and renown in the business world?

There’s a thrill when he finds a company he wants to buy. There’s the excitement when a deal works out. There’s the pride that comes from having others willing to invest billions with Forstmann Little. But, he said, there’s another aspect too.

“I really get a kick out of participating in other people getting ahead,” said Forstmann, who has become something of a crusader in the cause of promoting capitalism.

“To see management guys . . . open up and become entrepreneurial and take a risk. Sometimes you have to kick ‘em to do it, sometimes they’ve just been waiting to do it--it’s all over the lot,” he said. “God, that’s just great.”