Milken’s Proteges Rise Again

Kenny Moelis would never say so, but like others who once worked 14-hour days alongside Michael Milken, he must feel a sense of vindication.

When the Drexel Burnham Lambert investment bank collapsed in disgrace seven years ago, Moelis and many other shellshocked young employees went job-hunting for the second time in their lives. The market for junk bonds became as dry as the Los Angeles River. Newspapers like this one ran headlines such as “Junk Bonds--the Financial Revolution that Failed.” Unemployed Drexelites who once revered Milken shouldered the stigma of his guilty plea to six felonies, including securities fraud.

These were the foot soldiers of Drexel Burnham--the ones whose names did not appear in the hundreds of articles devoted to the firm or Milken, who pioneered the use of junk bonds to finance corporate takeovers.

Some spoke to Milken only once, during a hiring interview. Most cannot be found in the indexes of such Drexel tell-all books as “The Predators’ Ball” or “Highly Confident.”

Now, almost a decade later, dozens of smart, highly skilled Drexel alums like Moelis are riding high in Southern California, using techniques perfected at Drexel to help raise money for growing companies and fuel a global wave of corporate consolidations.

It’s not quite the roaring 1980s, but junk bonds--call them high-yield securities, please--are again on investors’ most wanted list. Fewer defaults have helped boost prices for the non-investment grade bonds, which offer investors higher returns to make up for the increased risk.

Also back are a friendlier, more civilized version of hostile takeovers. A mini-boom in leveraged buyouts may be just around the corner.

“People said the market was dead, but I don’t think any of us felt that way. We just wondered how long it would take to come back,” said Moelis, 38, now easily the most powerful investment banker in Los Angeles, with such clients as Donald Trump and corporate raider Carl Icahn. Moelis is advising Hilton Hotels Corp. on its $6.5-billion hostile takeover of ITT.

Milken’s proteges, many of whom were only in their mid-20s or early 30s when they worked with him in Drexel’s Beverly Hills office, are now seasoned financiers.

In part they have become successful riding the new wave of interest in junk bonds. But timing was not the only thing on their side. Drexel had a knack for hiring the best and the brightest. Once at Drexel, employees got experience on major deals at a young age.

“Drexel drafted the Dallas Cowboys of the financial world,” said Marc Rapaport, 40, a former co-director of domestic capital markets for Drexel who now is a major investor in the Los Angeles Galaxy professional soccer team. “It’s no surprise that when they were freed, they went on to do well in other places.”

Just as Milken’s junk bond outfit in the 1980s helped legitimize Los Angeles as a place for high finance, Drexel alums are again making Southern California a center for corporate mergers, takeovers and financings for growing companies.

“It’s like the Diaspora,” the dispersion of the Jews after the Babylonian exile, said Lorraine Spurge, a former Milken aide who now runs the Knowledge Exchange, a Santa Monica book publisher. “People took the ideas and ideals that Michael had and brought them to all these other organizations.”

Although shy about flaunting their newfound success publicly and extremely sensitive to how their old Drexel connections are portrayed, most of Milken’s former employees are proud of the fact that they have been able to see techniques pioneered by the firm become legitimized. Many keep in touch with Milken, who still advises some of the nation’s top executives, including moguls he helped in the 1980s.

Their network is strong. Now, in their late 30s or early 40s, they tap each other for jobs, trade tips on deals, steer business and pass on the most important commodity of all--information.

“In a way, they’re like blacklisted writers during the McCarthy era,” said Samuel L. Hayes III, a Harvard professor and Wall Street historian. “They are good and they are skillful, but you don’t play up the Drexel connections.”

Indeed, while Wall Street may have no hard feelings, others still hold a grudge against anyone who worked at the firm they say epitomized the excesses of the 1980s.

Milken did not invent junk bonds. He simply expanded their use as “securitized bank loans” for companies too risky to obtain bank financing, and as a tool for smaller companies to take over larger ones.

There is still a camp, however, that believes anyone from Drexel should be considered a pariah, and holds the firm and its employees responsible for corporate bankruptcies and the thousands of jobs lost during major leveraged buyouts and takeovers during the 1980s.

Just last month, mayoral candidate and state Sen. Tom Hayden (D-Los Angeles) began running radio spots claiming that Mayor Richard Riordan, a longtime Milken friend and supporter, received thousands of dollars in contributions from “ex-junk bond kings” to promote his effort to rewrite the City Charter.

“The 1980s have been regarded as a time of great greed, where the ends justified the means. There’s still a cloud over Drexel, Mike Milken and anyone who worked there,” said Rocky Rushing, a spokesman for Hayden.

The four-story building on Wilshire Boulevard that once sheltered Drexel is now home to a Planet Hollywood and Niketown. Milken spends most days promoting cancer research and teaching high school math. He was not available to comment for this story.

Early predictions that all those associated with Drexel would wind up in lengthy court battles never came true; most other employees were never implicated in any wrongdoing.

“We were the people behind the scenes, doing a lot of the deals, the people you never saw,” said Chris Kanoff, a former Drexel investment banker who heads corporate finance at Jefferies & Co., a Los Angeles investment bank.

Jefferies hired about 40 Drexel veterans to help it expand into junk bonds and other areas. Frank E. Baxter, chief executive officer of Jefferies, said that although his decision to hire the Drexelites was seen as “risky” at the time, “history has proved me right. These were talented people.” The investment bank reported record revenues last year.

Besides Jefferies, Donaldson, Lufkin & Jenrette was one of the few Wall Street firms willing to take a chance on hiring a Drexel group en masse.

Moelis, along with a core group of nearly 10 other Drexel refugees, has helped transform the Century City office of DLJ into a West Coast financial powerhouse, with the largest share of the nation’s junk bond business.

Southern California investment firms such as Canyon Partners, Libra Investments, Dabney Resnick Imperial, Apollo Advisors, and even big money managers such as Trust Co. of the West have either hired former Drexel bankers or been created by them. This has helped make Southern California a hotbed of expertise in high-yield bonds.

Other former Drexelites continue to reshape the financial landscape of Southern California. Peter Ackerman, Milken’s key aide for buyouts, now works in Washington, D.C., and serves on the boards of several nonprofits. Last year, he was part of an investor group bidding for MGM studios.

“When Drexel went down seven years ago, it was like having the Scarlet Letter tattooed on your forehead,” said former Drexel banker Jonathan Sokoloff, now at Leonard Green & Partners, who helped sell Thrifty PayLess for $2.3 billion last year. “Fast-forward to now, and it’s like having the badge of honor.”

Junk Bonds Gain as Stock Market Rises

Although the junk bond market chilled when Drexel faltered, it has recovered in recent years, buoyed in part by the record rise of the Dow Jones industrial average. Stronger companies have meant fewer defaults among junk bonds and rising prices.

A total of $32.6 billion in junk bonds was sold in 1996, a 24% increase from the year before and the fourth-highest year on record. However, high-yield bond values dropped in March as the stock market nose-dived. Just a month earlier, investors hungry for returns poured $2 billion of new money into junk bond mutual funds, an increase from $270 million for the same month last year. Those behind some of the most successful high-yield deals this year are Drexel alums.

In January, former Drexel bankers from DLJ in Los Angeles helped Tenet Healthcare in Santa Barbara complete a $2-billion high-yield financing, the largest since the leveraged buyout of RJR Nabisco in 1989.

“We’ve been astute enough to take away the positive parts of Drexel and avoid the pitfalls,” said Peter Nolan, a former Drexel banker who now co-heads the Los Angeles office of DLJ.

Earlier this month, money manager Trust Co. of the West raised $1 billion to create a new junk bond fund with help from Drexel veterans who now work at Jefferies in Los Angeles, Bankers Trust Co. and CIBC Woody Gundy Securities Corp. in Toronto.

Who will manage the money?

Two former Drexelites in downtown Los Angeles now employed by Trust Co. of the West.

In Moelis’ Century City corner office, so high he can look down on the Southern California smog, multimillion- and multibillion-dollar deals for DLJ are hammered out, fine-tuned, won and lost.

The inside window ledges are three rows deep with what bankers call “deal toys,” small Lucite trophies emblazoned with company names involved in some of Moelis’ successful deals.

The firm expects to make at least $15 million in fees on the Hilton-ITT merger--just one of the many mega-deals Moelis will get a cut of this year.

But despite the millions he rakes in, Moelis drives a BMW that is several years old. A sports enthusiast and family man, he likes to talk about the advantages of living near the office so he can visit his children’s school and how most days he eats lunch at his desk.

That is one of the best things, he says, he learned at his former employer, and from Milken.

“We got a great work ethic instilled very young,” said Moelis, a New York transplant who would arrive at the Beverly Hills office at 5 a.m. to find messages from Milken already waiting. “The guy making all the money came in before you and left after you.”

But, eventually, the firm began to falter and hard work could not save it.

As junk bond prices fell in late 1989 and the firm racked up mounting legal bills, Drexel defaulted on more than $100 million in borrowings. Unable to find a partner, Drexel filed for bankruptcy on Feb. 13, 1990.

Moelis, right in the middle of negotiations on behalf of Southland Corp., the Dallas parent of 7-Eleven stores, quickly flew to New York to reassure Southland executives about their deal in the wake of Drexel’s demise.

“People said, ‘What are you doing? You don’t have a firm anymore,’ ” Moelis said. “And I said, ‘I know, but I have a client.’ ”

After Drexel declared bankruptcy, the Beverly Hills office fell silent. Limos once pulled up around 5 each morning, filled with executives eager to meet Milken. Now, creditors began tagging office equipment. And bankers who once earned millions while only in their 20s found themselves on the market.

“Some of those $2-million-a-year-Gucci-loafer-wearers from Drexel have fallen off the face of the earth,” said Martin Fridson, chief high-yield strategist at Merrill Lynch. “But there were some very smart people too.”

Several Wall Street firms considered hiring the Drexelites, but it was DLJ that held a 72-hour marathon where executives interviewed more than 50 people and eventually hired 13 bankers, 11 in Los Angeles.

DLJ’s Los Angeles office, opened in 1986 with 2,000 square feet and a rented desk, has grown to include nearly 100 bankers. Raising equity for growing companies has made up the majority of the firm’s business in the last four years, although it has also corralled the largest share of the nation’s junk bond market. In December, DLJ announced that it had raised $3 billion for a new buyout fund.

“These guys have focused on the next generation of the business that Mike did 10 years ago,” said Gene Sykes, a mergers and acquisition specialist in Los Angeles with Goldman Sachs & Co., a competitor of DLJ. “It’s a natural progression from what he did.”

A Different Takeover Climate

A native Californian and UC Berkeley graduate, Milken was hired by Drexel Burnham on Wall Street in 1970. Tired of East Coast winters and missing the California lifestyle, the story goes, he asked his bosses if he could move his then still sleepy junk bond unit to Beverly Hills in 1978. Once here, he grew the division into Drexel’s engine, pulling in $550 million in compensation in 1986.

Three years later he was indicted on 98 counts of securities fraud and racketeering. He pleaded guilty to six counts, avoiding trial. He eventually paid more than $1 billion in fines, restitution and lawsuit settlements. Milken served two years of a 10-year prison sentence before being released in 1993.

Today, say Moelis and others, the investment climate is very different from the one the old Drexel folks operated in.

For one, it has a little less of the Wild West and “what if” atmosphere so prevalent in the 1980s when it seemed almost any firm, no matter how large, could be taken over by a smaller firm armed with junk bonds.

Although hostile takeovers are on the rise again, such moves are now seen as a more accepted corporate strategy. More takeovers are done to create an even bigger company than to break one up into pieces that can be sold. Leveraged buyouts, the purchase of companies by outside investors using mostly borrowed money, are on the rise. But today, borrowed money makes up a smaller percentage of an LBO, with investors putting as much as 40% down in equity. Deals were done with just 5% down in the 1980s.

“It’s a different business today. In the 1980s, it was a leveraged type of transaction,” said Ken Taratus, a managing director at Jefferies who helped raise $1 billion for Trust Co. of the West in April. “It’s more healthy now. Deals today are bigger and more liquid. They are better credits.”

The buyers also are different. Mutual funds that demand more liquid and higher quality bonds have replaced the savings and loans and insurance companies that once bought the bulk of junk bonds.

“The high-yield market today is a big, deep, sophisticated market,” Moelis said. “It has played a tremendous role in this country. It was not a crazy idea.”

Debate Over Milken’s Legacy

The debate over Milken’s legacy continues today.

His many supporters claim that his junk bonds fueled national giants such as MCI and helped grow dozens of Southern California companies such as Kaufman & Broad Home Corp. and Mattel Inc.

But critics say Milken’s use of junk bonds to finance takeovers led to the destruction of major companies. Firms weakened after taking on too much debt to avoid a takeover sometimes went bankrupt, and investors who gorged on junk such as Los Angeles-based Executive Life also became insolvent.

“There’s a large camp that still believes that Milken walked on water and another that thinks he was a crook,” said Hayes of Harvard. “I think it was both--he created a legitimate market sector that hadn’t existed before and he was a crook.”

Many of the former Drexelites in Southern California still have contact with Milken or are connected to people who speak to him. Even today, many do not want to criticize the firm.

“I have to be careful here,” said Sam DeRosa-Farag, director of high-yield strategy at Chase Securities Inc. in New York. “My boss is ex-Drexel and my boss’ boss is ex-Drexel.”

While many of the Drexel veterans have become more powerful of late, there is little speculation that any of them could become another Milken or their Southern California firms another Drexel.

“There will never be another Drexel, because in the 1980s Drexel was the market,” said Judy Resnick, a high-yield bond trader at Drexel who left in 1989 to start her own Beverly Hills firm. “No one firm can be the market anymore. It’s too large.”

* CALIFORNIA DEALIN’

An inside look at Southland investment bankers. D1

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Where They Are Now

After Michael Milken’s disgrace and indictment on 98 counts of securities fraud, many of his former employees at Drexel Burnham Lambert went on to forge successful careers in the investment banking and finance industries. A look at the Drexel hierarchy and where some key players ended up:

Michael Milken: He pleaded guilty to six counts of securities fraud and was sentenced in 1990 to 10 years in prison. He served two years and paid more than $1 billion in fines and restitution, and continues to be barred from the securities business. He is an advisor to some of the nation’s top executives and leads fund-raising efforts for cancer research.

Leon Black: Head of mergers and acquisitions at Drexel in New York, working closely with Drexel’s Beverly Hills office. Founded Apollo Advisors, a $7-billion private buyout firm with offices in New York and Century City, with other Drexel veterans. In one of Black’s most high-profile deals, he bought the Executive Life junk bond portfolio for $3 billion in the early 1990s.

John H. Kissick: Head of Drexel’s West Coast corporate finance operations, Kissick replaced Milken at Drexel Burnham in 1989. Kissick and Anthony Ressler, head of new issue syndicate trading at Drexel, opened Apollo’s Century City office. The firm is a private equity investor in Ralphs Grocery and other Southern California firms.

Lorraine Spurge: Headed high-yield syndicate trading at Drexel before Ressler, now runs a business publishing company called the Knowledge Exchange in Santa Monica. Milken is an investor.

Judy Resnick: A high-yield bond trader at Drexel Burnham in Beverly Hills. Left in 1989 to found Dabney Resnick, a Beverly Hills firm that specializes in securities issued by troubled or bankrupt companies. Resnick hired many of the analysts who once worked in Drexel’s research department.

Peter Ackerman: Head of international capital markets at Drexel in Beverly Hills, he now runs his own Washington investment firm. Last June he was part of an investor group that bid for MGM studios.

Marc Rapaport: The former co-head of Drexel’s domestic capital markets group joined Jefferies in Los Angeles, expanding its corporate finance activities. He is now chairman and lead investor in the group that owns the Los Angeles Galaxy soccer team.

Joshua Friedman: Co-head of Drexel’s domestic capital markets group. He and former Drexel employees Mitch Julis and Chris Evensen formed Canyon Partners in Los Angeles a week after Drexel failed. The firm manages more than $400 million for high-net-worth individuals and institutions.

Jess Ravich: A vice president of high-yield sales and trading at Drexel in Beverly Hills who in 1991 co-founded Libra Investments, a Brentwood investment bank specializing in high-yield deals. The firm is helping to finance a digital satellite radio venture, among other deals.

Kenneth Moelis: A corporate finance executive at Drexel’s Beverly Hills office who now heads corporate finance for Donaldson Lufkin & Jenrette in Los Angeles. He is advising Hilton Hotels on its hostile takeover of ITT.