The Superstars of Merger

By Alexander L Taylor III

Behind a record wave of acquisitions are investment bankers and huge fees

They all work within a few minutes' walk from one another, either on Wall Street or in midtown Manhattan. They operate with the secrecy of KGB agents and the cold nerves of hired gunslingers. In a matter of hours they can build up a corporate empire or cause a company to vanish. Their services command huge fees, yet they are among the least known men in American business.

The members of this elite group, who number no more than a score, are the merger and acquisition specialists of the top American investment banks. They are the financiers of capitalism, raising funds for corporations with stock and bond issues, as well as trading securities for their own accounts. The best known of their breed was J.P. Morgan, the great financier who died in 1913. Morgan once wrote, "My job is more fun than being king, pope, or prime minister, for no one can turn me out of it, and I don't have to make any compromises with principles." He might have added that his job was also more lucrative. When Morgan Stanley & Co., a successor to the House of Morgan, helped mastermind the $13.2 billion merger of Gulf Oil and Standard Oil of California in March, history's biggest, it earned a fee of $16.5 million.

Such bonanzas are making 1984 the best year ever for dealmaking. In addition to Socal and Gulf, mergermen have put Texaco and Getty Oil together in a $10.1 billion corporate marriage and arranged a $5.7 billion combine of Mobil and Superior Oil. During the first three months of 1984, company mergers valued at a total of $34 billion took place. Should they continue at this rate, the old annual record of $82.6 billion set in 1981 will easily be broken.

Last week Esmark, the big Chicago conglomerate, announced that it was approving a $2.4 billion takeover by Kohlberg, Kravis, Roberts & Co., a New York City investment firm. A bidding war for Esmark, whose brand names include Avis car rental and Max Factor cosmetics, might get started. The price of Esmark's stock immediately shot up in expectation of a takeover battle. Said one Esmark official: "We hear that there are higher offers, and the investment bankers are out looking for them right now."

Whether it involves finding a buyer for a company like Esmark or plotting the hostile takeover of an unsuspecting firm, mergermaking has become perhaps the choicest job in American finance. "This is the era of the superstars in the merger and acquisition world," says Ivan Boesky, the merger investment specialist. "You've got perhaps ten men guiding the future of corporate America."

Mergermaking draws the top performers in investment banking: hugely competitive individuals who are blessed with hard-learned savvy. Wall Street smarts and plenty of gall. Says Joseph Flom, a top corporate lawyer who specializes in takeover cases: "You have to have nerve. You've got to be able to make tough calls on the spur of the moment with split-second timing. You've got to have the right stuff."

One of the bankers' chief talents is sheer endurance. The work is fast-paced and often requires exhausting hours. The job of ferreting out prospective acquisitions routinely requires twelve-hour days. Then, when the bidding starts, the bankers have to be ready to sacrifice their personal lives to the deal. As a result, almost all the top mergermakers are in their 30s or 40s. Jay Higgins, 38, the head of Salomon Brothers' merger department, spent six months working twelve hours a day nearly seven days a week to help Gulf Oil fend off a hostile takeover by a group of investors led by T. Boone Pickens' Mesa Petroleum. The payoff came when Gulf merged with Socal. "Don't get me wrong," says Higgins. "I'm not complaining. But you never know when a deal is going to be done, and it's almost impossible to plan a weekend or a dinner."

Observes Geoffrey Boisi, 36, a top mergermaker at Goldman Sachs: "We're a psychiatrist, a father confessor, a coach as well as a financial architect. Sometimes we have to be the bastards in the background who hold the line." When Pennzoil offered $112.50 a share for Getty Oil last January, Boisi was convinced the bid was too low. So beginning at 7:30 one morning, he phoned six U.S. oil companies and the government of Saudi Arabia to find another buyer. Within 48 hours, Texaco responded with a higher offer. When Pennzoil, advised by Lazard Freres, was slow to close the deal, Texaco moved in. The final price for Getty: $10.1 billion, or $128 a share.

Despite their derring-do, dealmakers are little known outside financial circles. One reason is their penchant for secrecy. If word of a prospective merger gets out prematurely, it can drive up the price of the target company or invite competing offers. At Merrill Lynch Capital Markets, the investment banking arm of the big brokerage house, phones are swept for eavesdropping equipment and trash is routinely shredded. The staff is trained not to talk in elevators or on public transportation, and code names are used when a deal is in progress. Explains Ken Miller, 41, who heads the 35-person department: "We don't want any slip-ups."

When companies clash in an unfriendly takeover, the bankers become field commanders, designing offensive and defensive maneuvers. The Morgan Stanley team, led by Joseph C. Fogg III, has advised Carter Hawley Hale, the California department-store chain, on strategies to protect itself from a $1.1 billion hostile takeover by The Limited, a fast-growing group of women's specialty stores. Carter Hawley Hale asked General Cinema, a group of movie theaters, to come to its aid by buying some of its preferred stock, and offered General Cinema one of its "crown jewels": the profitable Waldenbooks chain. Another part of the firm's strategy, buying back its own shares of common stock, raised the ire of the Securities and Exchange Commission. The SEC announced last week that it would sue Carter Hawley Hale for violating securities laws.

Already intense, the pressures of mergermaking are becoming even tighter. More investment banks are switching from private partnerships to public ownership. The latest is Lehman Brothers Kuhn Loeb, which is due to be bought by Shearson/American Express. With shareholders to satisfy and profits publicly reported, investment banks must push harder to show earnings increases every quarter.

At the same time, investment banking is losing its old, genteel overtones of Ivy League colleges and gentlemen's social clubs. Companies have got more fickle and change bankers with greater frequency. Says Felix Rohatyn of Lazard Freres, who built his reputation as a deal-maker during the 1960s: "Relationships are no longer as important as individual transactions. There is simply not the amount of long-term trust between clients and their investment bankers that there once was."

The rewards of mergermaking remain enormous. The fees for a completed deal can run as much as 1.5% of the merger price, and are paid regardless of whether a company's takeover battle plan is successful, or even how much work the banker does. Gulf will pay Merrill Lynch and Salomon Brothers $46 million in fees when it is bought by Socal. In the Getty-Texaco merger, Goldman Sachs, representing Getty, did most of the work and First Boston "just carried Texaco's baggage," according to one participant. Still, First Boston will receive $10 million from Texaco.

Such enormous fees raise questions. Some critics wonder whether deals are pursued because of the payoff, not because they are in the client's best interest. Rohatyn is one who thinks that payments have got out of hand. Says he: "The level of fees has reached a point that is difficult to justify and invites the suspicion that there is too much incentive to do a deal. Fees are sometimes ten times as large when a deal closes as when it doesn't, so you'd almost have to be a saint not to be affected by the numbers involved."

Not surprisingly, the bankers defend their charges. Explains James Maher, First Boston's managing director: "We have this incredible infrastructure, and it is geared up all the time, whether we get the business or not. For every successful transaction, there can be ten or 15 we do not make."

Some clients agree with the high fees. Former Chairman John Duncan of St. Joe Minerals credits First Boston with getting an extra $670 million, or $15 a share, when his company was sold to Fluor Corp. Recalls Duncan: "First Boston knew all the tricks. We got more than our money's worth." Says Michael Callahan, senior vice president of Quaker Oats, who worked closely with Salomon Brothers and Goldman Sachs when Quaker Oats bought Stokely-Van Camp last year: "Our business is food, and not mergers. So whenever we go shopping, we seek professional help."

The company shopping is expected to be especially good in coming weeks. Many firms enjoying high profits are flush with cash and hunting for acquisitions. Among the possible targets: high-tech companies whose stocks have fallen, financial services and energy companies. With opportunities plentiful, there will be no shortage of mergermen to make the deals.

--By Alexander L. Taylor III. Reportedby Thomas McCarroll and Adam Zagorin/New York

With reporting by THOMAS McCARROLL, Adam Zagorin