Private equity in the 1980s
Encyclopedia
Private equity in the 1980s relates to one of the major periods in the history of private equity and venture capital
. Within the broader private equity
industry, two distinct sub-industries, leveraged buyouts and venture capital
experienced growth along parallel although interrelated tracks.
The development of the private equity
and venture capital
asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. The 1980s saw the first major boom and bust cycle in private equity. The cycle which is typically marked by the 1982 acquisition of Gibson Greetings
and ending just over a decade later was characterized by a dramatic surge in leveraged buyout
(LBO) activity financed by junk bonds. The period culminated in the massive buyout of RJR Nabisco
before the near collapse of the leveraged buyout industry in the late 1980s and early 1990s marked by the collapse of Drexel Burnham Lambert
and the high-yield debt
market.
The beginning of the first boom period in private equity would be marked by the well-publicized success of the Gibson Greetings acquisition in 1982 and would roar ahead through 1983 and 1984 with the soaring stock market driving profitable exits for private equity investors.
In January 1982, former US Secretary of the Treasury William E. Simon
, Ray Chambers
and a group of investors, which would later come to be known as Wesray Capital Corporation
, acquired Gibson Greetings
, a producer of greeting cards. The purchase price for Gibson was $80 million, of which only $1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon made approximately $66 million. Simon and Wesray would later complete the $71.6 million acquisition of Atlas Van Lines
. The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts.
Between 1979 and 1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $250 million Notable buyouts of this period (not described elsewhere in this article) include:
Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however the promise of attractive returns on successful investments attracted more capital. With the increased leveraged buyout activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the major firms founded in this period were:
Additionally, as the market developed, new niches within the private equity industry began to emerge. In 1982, Venture Capital Fund of America
, the first private equity firm focused on acquiring secondary market
interests in existing private equity fund
s was founded and then, two years later in 1984, First Reserve Corporation
, the first private equity firm focused on the energy sector, was founded.
The growth the industry was hampered by sharply declining returns and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including General Electric
and Paine Webber
either sold off or closed these venture capital units. Additionally, venture capital units within Chemical Bank
(today CCMP Capital
), Citicorp (today Court Square Capital Partners
and CVC Capital Partners
, First Chicago Bank
(the predecessor of GTCR
and Madison Dearborn Partners) and Continental Illinois National Bank
(today CIVC Partners
), among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry founders J.H. Whitney & Company
and Warburg Pincus
began to transition toward leveraged buyouts and growth capital investments. Many of these venture capital firms attempted to stay close to their areas of expertise in the technology industry by acquiring companies in the industry that had reached certain levels of maturity. In 1989, Prime Computer
was acquired in a $1.3 billion leveraged buyout by J.H. Whitney & Company
in what would prove to be a disastrous transaction. Whitney's investment in Prime proved to be nearly a total loss with the bulk of the proceeds from the company's liquidation paid to the company's creditors.
Although lower profile than their buyout counterparts, new leading venture capital firms were also formed including Institutional Venture Partners (IVP) in 1980, Draper Fisher Jurvetson
(originally Draper Associates) in 1985 and Canaan Partners
in 1987 among others.
er" moniker is rarely applied to contemporary private equity investors, there is no formal distinction between a "corporate raid
" and other private equity investments acquisitions of existing businesses. The label was typically ascribed by constituencies within the acquired company or the media. However, a corporate raid
would typically feature a leveraged buyout that would involve a hostile takeover of the company, perceived asset stripping
, major layoffs or other significant corporate restructuring activities. Management of many large publicly traded corporation
s reacted negatively to the threat of potential hostile takeover or corporate raid
and pursued drastic defensive measures including poison pill
s, golden parachute
s and increasing debt
levels on the company's balance sheet
. Additionally, the threat of the corporate raid would lead to the practice of "greenmail
", where a corporate raider or other party would acquire a significant stake in the stock of a company and receive an incentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover of the company. Greenmail
represented a transfer payment from a company's existing shareholders to a third party investor and provided no value to existing shareholders but did benefit existing managers. The practice of "greenmail" is not typically considered a tactic of private equity investors and is not condoned by market participants.
Among the most notable corporate raiders of the 1980s included Carl Icahn
, Victor Posner
, Nelson Peltz
, Robert M. Bass
, T. Boone Pickens, Harold Clark Simmons
, Kirk Kerkorian
, Sir James Goldsmith, Saul Steinberg
and Asher Edelman
. Carl Icahn
developed a reputation as a ruthless corporate raid
er after his hostile takeover of TWA
in 1985. The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to purchase the company, which was described as asset stripping
. In later years, many of the corporate raiders would be re-characterized as "Activist shareholder
s".
Many of the corporate raiders were onetime clients of Michael Milken
, whose investment banking
firm, Drexel Burnham Lambert
helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to takeover
a company and provided high-yield debt
financing of the buyouts.
Drexel Burnham raised a $100 million blind pool in 1984 for Nelson Peltz
and his holding company Triangle Industries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for this purpose. Two years later, in 1986, Wickes Companies, a holding company
run by Sanford Sigoloff would raise a $1.2 billion blind pool.
In 1985, Milken raised a $750 million for a similar blind pool for Ronald Perelman
which would ultimate prove instrumental in acquiring his biggest target: The Revlon Corporation
. In 1980, Ronald Perelman
, the son of a wealthy Philadelphia businessman, and future "corporate raider" having made several small but successful buyouts, acquired MacAndrews & Forbes
, a distributor of licorice extract and chocolate, that Perelman's father had tried and failed to acquire it 10 years earlier. Perelman would ultimately divest the company's core business and use MacAndrews & Forbes
as a holding company investment vehicle for subsequent leveraged buyouts including Technicolor, Inc.
, Pantry Pride
and Revlon
. Using the Pantry Pride
subsidiary of his holding company, MacAndrews & Forbes Holdings
, Perelman's overtures were rebuffed. Repeatedly rejected by the company's board and management, Perelman continued press forward with a hostile takeover raising his offer from an initial bid of $47.50 per share until it reached $53.00 per share. After receiving a higher offer from a white knight
, private equity firm Forstmann Little & Company
, Perelman's Pantry Pride
finally was able to make a successful bid for Revlon
, valuing the company at $2.7 billion. The buyout would prove troubling, burdened by a heavy debt load. Under Perelman's control, Revlon sold 4 divisions: two of which were sold for $1 billion, its vision care division was sold for $574 million and its National Health Laboratories division was spun out to the public market in 1988. Revlon also made acquisitions including Max Factor
in 1987 and Betrix in 1989 later selling them to Procter & Gamble
in 1991. Perelman exited the bulk of his holdings in Revlon through an IPO in 1996 and subsequent sales of stock. As of December 31, 2007, Perelman still retains a minority ownership interest in Revlon. The Revlon takeover, because of its well-known brand was profiled widely by the media and brought new attention to the emerging boom in leveraged buyout activity.
In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexel and the private equity industry attempted to move upscale.
came to epitomize the "ruthless capitalism" and "greed" popularly seen to be pervading Wall Street at the time. One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989, KKR closed on a $31.1 billion dollar takeover of RJR Nabisco
. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicled in the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring James Garner
.
F. Ross Johnson
was the President and CEO of RJR Nabisco
at the time of the leveraged buyout and Henry Kravis was a general partner at Kohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plus assumed debt), and the battle for control took place between October and November 1988. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many of the major banking players of the day, including Morgan Stanley
, Goldman Sachs
, Salomon Brothers
, and Merrill Lynch
were actively involved in advising and financing the parties.
After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco. KKR's offer was guaranteed, whereas the management offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share price might have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grown concerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal. TIME magazine
featured Ross Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This man could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far?". KKR's offer was welcomed by the board, and, to some observers, it appeared that their elevation of the reset issue as a deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 per share. F. Ross Johnson received $53 million from the buyout.
At $31.1 billion of transaction value, RJR Nabisco was by far the largest leveraged buyouts in history. In 2006 and 2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyouts of the 2006 – 2007 period would surpass RJR Nabisco. Unfortunately for KKR, size would not equate with success as the high purchase price and debt load would burden the performance of the investment.
Interestingly, two years earlier, in 1987, Jerome Kohlberg, Jr.
resigned from Kohlberg Kravis Roberts & Co. over differences in strategy. Kohlberg did not favor the larger buyouts (including Beatrice Companies
(1985) and Safeway
(1986) and would later likely have included the 1989 takeover of RJR Nabisco
), highly leveraged
transactions or hostile takeovers being pursued increasingly by KKR. The split would ultimately prove acrimonious as Kohlberg sued Kravis and Roberts for what he alleged were improper business tactics. The case was later settled out of court. Instead, Kohlberg chose to return to his roots, acquiring smaller, middle-market companies and in 1987, he would found a new private equity firm Kohlberg & Company
along with his son James A. Kohlberg, at the time a KKR executive. Jerome Kohlberg
would continue investing successfully for another seven years before retiring from Kohlberg & Company
in 1994 and turning his firm over to his son.
As the market reached its peak in 1988 and 1989, new private equity firms were founded which would emerge as major investors in the years to follow, including:
of several large buyouts including Robert Campeau
's 1988 buyout of Federated Department Stores
, the 1986 buyout of the Revco
drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR. Additionally, in response to the threat of unwelcome LBOs, certain companies adopted a number of techniques, such as the poison pill
, to protect them against hostile takeovers by effectively self-destructing the company if it were to be taken over.
History of private equity and venture capital
The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital...
. Within the broader private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
industry, two distinct sub-industries, leveraged buyouts and venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
experienced growth along parallel although interrelated tracks.
The development of the private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
and venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. The 1980s saw the first major boom and bust cycle in private equity. The cycle which is typically marked by the 1982 acquisition of Gibson Greetings
American Greetings
American Greetings Corporation, Inc. is the world's largest publicly-traded greeting card company. It is based in Brooklyn, Ohio and sells paper greeting cards, electronic greeting cards, party products , and electronic expressive content...
and ending just over a decade later was characterized by a dramatic surge in leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
(LBO) activity financed by junk bonds. The period culminated in the massive buyout of RJR Nabisco
RJR Nabisco
RJR Nabisco, Inc., was an American conglomerate formed in 1985 by the merger of Nabisco Brands and R.J. Reynolds Tobacco Company. RJR Nabisco was purchased in 1988 by Kohlberg Kravis Roberts & Co...
before the near collapse of the leveraged buyout industry in the late 1980s and early 1990s marked by the collapse of Drexel Burnham Lambert
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
and the high-yield debt
High-yield debt
In finance, a high-yield bond is a bond that is rated below investment grade...
market.
Beginning of the LBO boom
In January 1982, former US Secretary of the Treasury William E. Simon
William E. Simon
William Edward Simon was a businessman, a Secretary of Treasury of the U.S. for three years, and a philanthropist. He became the 63rd Secretary of the Treasury on May 8, 1974, during the Nixon administration. He was reappointed by President Ford and served until 1977. Outside of government, he was...
, Ray Chambers
Ray Chambers
Raymond G. Chambers currently serves as United Nations Secretary-General’s Special Envoy for Malaria. He was appointed to this position by Secretary-General Ban Ki-moon in February 2008...
and a group of investors, which would later come to be known as Wesray Capital Corporation
Wesray Capital Corporation
Wesray Capital Corporation was an early private equity firm focussing on leveraged buyout investments. The firm was founded by former US Secretary of the Treasury William E...
, acquired Gibson Greetings
American Greetings
American Greetings Corporation, Inc. is the world's largest publicly-traded greeting card company. It is based in Brooklyn, Ohio and sells paper greeting cards, electronic greeting cards, party products , and electronic expressive content...
, a producer of greeting cards. The purchase price for Gibson was $80 million, of which only $1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon made approximately $66 million. Simon and Wesray would later complete the $71.6 million acquisition of Atlas Van Lines
Atlas Van Lines
Atlas Van Lines is a moving company formed in 1948 by a group of local transfer and storage firms. As an agent-owned company it is similar in form to a cooperative. It has about 500 agents worldwide , of which 75 own shares in Atlas World Group, which controls Atlas Van Lines and other related...
. The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts.
Between 1979 and 1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $250 million Notable buyouts of this period (not described elsewhere in this article) include:
- Malone & Hyde, 1984
- KKR completed the first buyout of a public company by tender offer, by acquiring the food distributor and supermarket operator together with the company's chairman Joseph R. Hyde III.
- Wometco EnterprisesWometco EnterprisesWometco Enterprises is a company headquartered in Coral Gables, Florida; a suburb of Miami. It was a large media company but today it is known only as the owner of the Miami Seaquarium.- History :...
, 1984
- KKR completed the first billion-dollar buyout transaction to acquire the leisure-time company with interests in television, movie theaters and tourist attractions. The buyout comprised the acquisition of 100% of the outstanding shares for $842 million and the assumption of $170 million of the company's outstanding debt.
- Beatrice CompaniesBeatrice FoodsBeatrice Foods Company was a major American food processing company. In 1987, its smaller international food operations were sold to Reginald Lewis, a corporate attorney creating TLC Beatrice International, after which the majority of its domestic brands and assets were acquired by Kohlberg,...
, 1985
- KKR sponsored the $6.1 billion management buyoutManagement buyoutA management buyout is a form of acquisition where a company's existing managers acquire a large part or all of the company.- Overview :Management buyouts are similar in all major legal aspects to any other acquisition of a company...
of Beatrice, which owned SamsoniteSamsoniteThe Samsonite Corporation makes luggage with its products ranging from large suitcases to small toiletries bags and briefcases. It was started in Denver, Colorado, USA in 1910 byJesse Shwayder, as the Shwayder Trunk Manufacturing Company. Shwayder named one of his initial cases "Samson", after the...
and TropicanaTropicana ProductsTropicana Products is an American based company, and was founded in 1947 by Anthony T. Rossi in Bradenton, Florida, U.S.A. Since 1998, it has been owned by PepsiCo, Inc. Tropicana's headquarters are in Chicago, Illinois.-Anthony T. Rossi:...
among other consumer brands. At the time of its closing in 1985, Beatrice was the largest buyout completed.
- Sterling Jewelers, 1985
- One of Thomas H. LeeThomas H. Lee PartnersThomas H. Lee Partners is a private equity firm based in Boston, Massachusetts specializing in leveraged buyouts, growth capital, special situations, industry consolidations, and recapitalizations....
's early successes was the acquisition of Akron, OhioAkron, OhioAkron , is the fifth largest city in the U.S. state of Ohio and the county seat of Summit County. It is located in the Great Lakes region approximately south of Lake Erie along the Little Cuyahoga River. As of the 2010 census, the city had a population of 199,110. The Akron Metropolitan...
-based Sterling Jewelers for $28 million. Lee reported put in less than $3 million and when the company was sold two years later for $210 million walked away with over $180 million in profits. The combined company was an early predecessor to what is now Signet GroupSignet GroupSignet Jewelers Limited is the world's largest specialty retail jeweller. The Bermuda-domiciled, British headquartered company is listed on both the New York Stock Exchange and the London Stock Exchange. The group focuses on the middle mass jewelry segment and has number one positions in both the...
, one of Europe's largest jewelry retail chains.
- Revco Drug StoresRevcoRevco Discount Drug Stores , once based in Twinsburg, Ohio, was a major drug store chain operating through the Ohio Valley, the Mid-Atlantic states, and the Southeastern United States. The chain's stock was traded on the New York Stock Exchange under the ticker RXR...
, 1986
- The drug store chain was taken private in a management buyout transaction. However, within two years the company was unable to support its debt load and filed for bankruptcy protection. Bondholders in the Revco buyout ultimately contended that the buyout was so poorly constructed that the transaction should have been unwound.
- SafewaySafeway Inc.Safeway Inc. , a Fortune 500 company, is North America's second largest supermarket chain after The Kroger Co., with, as of December 2010, 1,694 stores located throughout the western and central United States and western Canada. It also operates some stores in the Mid-Atlantic region of the Eastern...
, 1986
- KKR completed a friendly $5.5 billion buyout of supermarket operator, Safeway, to help management avoid hostile overtures from HerbertHerbert HaftHerbert H. Haft was a Washington, D.C. based businessman who was famous first for the development of discount stores in the drug store, bookstore, and auto part businesses, and later as a corporate raider...
and Robert HaftRobert HaftRobert Haft, is a successful entrepreneur, primarily in health care, and became a household name in the Washington, DC, Chicago, San Francisco, Houston, and Los Angeles markets for his Crown Books television commercial tagline, "Books cost too much."...
of Dart DrugDart DrugDart Drug is a now-defunct chain of discount drug stores in the metropolitan Washington, DC region. It was founded in 1955, by Herbert Haft and his wife Gloria in Adams Morgan. The chain expanded to over 100 stores, and became a vehicle by which Herbert Haft engaged in greenmail activities against...
. Safeway was taken public again in 1990.
- Southland Corporation7-Eleven7-Eleven is part of an international chain of convenience stores, operating under Seven-Eleven Japan Co. Ltd, which in turn is owned by Seven & I Holdings Co...
, 1987
- John Thompson, the founder of convenience store operator 7-Eleven, completed a $5.2 billion management buyout of the company he founded. The buyout suffered from the 1987 stock market crash and after failing initially raise high yield debt financing, the company was required to offer a portion of the company's stock as an inducement to invest in the company's bonds.
- Jim Walter CorpJames W. Walter, Sr.James W. Walter, Sr. , of Tampa, Florida in the United States, was a home builder who started Jim Walter Homes and Walter Industries, now doing business as Walter Energy, Inc., a leading producer of metallurgical coal for the global steel industry, in 1946 with $1,000 he borrowed from his father...
(later Walter Industries, Inc.), 1987
- KKR acquired the company for $3.3 billion in early 1988 but faced issues with the buyout almost immediately. Most notably, a subsidiary of Jim Walter Corp (Celotex) faced a large asbestos lawsuit and incurred liabilities that the courts ruled would need to be satisfied by the parent company. In 1989, the holding company that KKR used for the Jim Walter buyout filed for Chapter 11 bankruptcy protection.
- BlackRockBlackRockBlackRock, Inc. is an American multinational investment management corporation and the world's largest asset manager. BlackRock is headquartered in Manhattan, New York City, New York, United States and is the leading provider of investment, advisory, and risk management solutions...
, 1988
- Blackstone GroupBlackstone GroupThe Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
began the leveraged buildup of BlackRockBlackRockBlackRock, Inc. is an American multinational investment management corporation and the world's largest asset manager. BlackRock is headquartered in Manhattan, New York City, New York, United States and is the leading provider of investment, advisory, and risk management solutions...
, which is an asset manager. Blackstone sold its interest in 1994 and today BlackRock is listed on the New York Stock ExchangeNew York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
.
- Federated Department StoresFederated Department StoresMacy's, Inc. is a department store holding company and owner of Macy's and Bloomingdale's department stores. Macy's Inc.'s stores specialize mostly in retail clothing, jewelery, watches, dinnerware, and furniture....
, 1988
- Robert Campeau's Campeau CorporationCampeau CorporationCampeau Corporation was a Canadian real estate development and investment company founded by entrepreneur Robert Campeau. It was infamous from its ultimately unsuccessful acquisitions of American department store holding companies Allied Stores in 1986 and Federated Department Stores in 1988...
completed a $6.6 billion merger with Federated, owner of the Bloomingdale'sBloomingdale'sBloomingdale's is an American department store owned by Macy's, Inc. .Bloomingdale's started in 1861 when brothers Joseph and Lyman G. Bloomingdale started selling hoop-skirts in their Ladies Notions' Shop on Manhattan's Lower East Side...
, Filene'sFilene'sFilene's was a Boston-based department store owned by Federated Department Stores , and May Department Stores . It operated throughout New England and in New York.-Early years:...
and Abraham & StrausAbraham & StrausAbraham & Straus was a major New York City department store, based in Brooklyn. Founded in 1865, in 1929 it became part of Federated Department Stores, which eliminated the A&S brand shortly after its 1994 acquisition of R.H. Macy & Company...
department stores.
- Marvel EntertainmentMarvel EntertainmentMarvel Entertainment, LLC , formerly Marvel Enterprises and Toy Biz, Inc., is an American entertainment company formed from the merger of Marvel Entertainment Group, Inc. and Toy Biz, Inc....
, 1988
- Ronald PerelmanRonald PerelmanRonald Owen Perelman is an American business magnate. Through his company MacAndrews & Forbes Holdings Inc., he has invested in various companies in grocery, cigar, licorice, makeup, car, photography, television, camping, security, lottery, jewelry, banks, and comic book industries.-Early...
acquired the company and oversaw a major expansion of its titles in the early 1990s before taking the company public on the New York Stock ExchangeNew York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
in 1991. The company would later suffer as a result of its massive debt load and ultimately the bondholders, led by Carl IcahnCarl IcahnCarl Celian Icahn is an American business magnate and investor.-Biography:Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School. His father was a cantor, his mother was a schoolteacher...
would take control of the company.
- Uniroyal Goodrich Tire Company, 1988
- Clayton & Dubilier acquired Uniroyal Goodrich Tire Company from B.F. Goodrich and other investors for $225 million. Two years later, in October 1990, Uniroyal Goodrich Tire Company was sold to MichelinMichelinMichelin is a tyre manufacturer based in Clermont-Ferrand in the Auvergne région of France. It is one of the two largest tyre manufacturers in the world along with Bridgestone. In addition to the Michelin brand, it also owns the BFGoodrich, Kleber, Riken, Kormoran and Uniroyal tyre brands...
for $1.5 billion.
- Hospital Corporation of AmericaHospital Corporation of AmericaHospital Corporation of America is the largest private operator of health care facilities in the world, It is based in Nashville, Tennessee and is widely considered to be the single largest factor in making that city a hotspot for healthcare enterprise.-History:The founders of HCA include Jack C....
, 1989
- The hospital operator was acquired for $5.3 billion in a management buyout led by Chairman Thomas J. Frist and completed a successful initial public offering in the 1990s. The company would be taken private again 17 years later in 2006 by KKR, Bain CapitalBain CapitalBain Capital LLC is a Boston-based private equity firm founded in 1984 by partners from the consulting firm Bain & Company. Originally conceived as an early-stage, growth-oriented investment fund, Bain Capital today manages approximately $65 billion in assets, and its strategies include private...
and Merrill LynchMerrill LynchMerrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
.
Because of the high leverage on many of the transactions of the 1980s, failed deals occurred regularly, however the promise of attractive returns on successful investments attracted more capital. With the increased leveraged buyout activity and investor interest, the mid-1980s saw a major proliferation of private equity firms. Among the major firms founded in this period were:
- Bain CapitalBain CapitalBain Capital LLC is a Boston-based private equity firm founded in 1984 by partners from the consulting firm Bain & Company. Originally conceived as an early-stage, growth-oriented investment fund, Bain Capital today manages approximately $65 billion in assets, and its strategies include private...
founded in 1984 by Mitt RomneyMitt RomneyWillard Mitt Romney is an American businessman and politician. He was the 70th Governor of Massachusetts from 2003 to 2007 and is a candidate for the 2012 Republican Party presidential nomination.The son of George W...
, T. Coleman Andrews III and Eric KrissEric KrissEric Arthur Kriss is a musician and business executive who served as Secretary of Administration and Finance in Massachusetts Governor Romney's cabinet , and as assistant A&F secretary under Governor William Weld...
out of the management consulting firm Bain & CompanyBain & CompanyBain & Company is a global management consulting firm headquartered in Boston, Massachusetts. Bain is considered one of the most prestigious consulting firms in the world, with 47 offices in 30 countries and over 5,500 professionals on staff globally...
; - Chemical Venture Partners, later Chase Capital Partners and JPMorgan Partners, and today CCMP CapitalCCMP CapitalCCMP Capital is a private equity investment firm that focuses on leveraged buyout and growth capital transactions. Formerly known as JP Morgan Partners, the investment professionals of JP Morgan Partners separated from JPMorgan Chase on July 31, 2006. CCMP has invested approximately $12 billion...
, founded in 1984, as a captive investment group within Chemical BankChemical BankingChemical Bank was a bank with headquarters in New York City from 1824 until 1996. The bank operated as the primary subsidiary of the Chemical Banking Corporation, a bank holding company established in 1988. At the end of 1995, Chemical was the third largest bank in the U.S...
; - Hellman & FriedmanHellman & FriedmanHellman & Friedman is a private equity firm, founded in 1984 by Warren Hellman and Tully Friedman, that makes investments primarily through leveraged buyouts and minority growth capital investments....
founded in 1984; - Hicks & Haas, later Hicks Muse Tate & Furst, and today HM CapitalHM CapitalHM Capital Partners is a private equity firm in the United States that specializes in leveraged buyouts. The firm, previously known as Hicks, Muse, Tate & Furst, was one of the largest financial sponsors of the 1990s. The firm was founded in 1989 by Tom Hicks and John Muse as Hicks, Muse & Co...
(and its European spinoff Lion CapitalLion Capital LLPLion Capital LLP is a British private equity firm, primarily focusing on leveraged buyout investments in Europe. The firm specializes on investments in the consumer sector...
), as well as the predecessor of Haas, Wheat & Partners, founded in 1984; - Blackstone GroupBlackstone GroupThe Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
, one of the largest private equity firms, founded in 1985 by Peter G. PetersonPeter George PetersonPeter G. Peterson is an American businessman, investment banker, fiscal conservative, author, and politician whose most prominent political position was as United States Secretary of Commerce from February 29, 1972, to February 1, 1973 under Richard Nixon. He is most well known currently as...
and Stephen A. SchwarzmanStephen A. SchwarzmanStephen Allen Schwarzman is an American businessman and investor and the chairman and co-founder of the Blackstone Group, the private-equity and financial advisory firm.-Early life and education:...
; - Doughty Hanson, a European focused firm, founded in 1985;
- BC PartnersBC PartnersBC Partners is a private equity firm specialising in buyouts and acquisitions financing in Europe and the United States. The firm invests across all industries...
, a European focused firm, founded in 1986; and - Carlyle GroupCarlyle GroupThe Carlyle Group is an American-based global asset management firm, specializing in private equity, based in Washington, D.C. The Carlyle Group operates in four business areas: corporate private equity, real assets, market strategies and fund-of-funds, through its AlpInvest subsidiary...
founded in 1987 by Stephen L. NorrisStephen L. NorrisStephen L. Norris is one of the co-founders of The Carlyle Group, an American private equity firm and currently the Chairman of Stephen Norris Capital Partners, LLC. He is a former member of the Federal Retirement Thrift Investment Board, who was appointed by President George H. W. Bush in...
and David M. Rubenstein.
Additionally, as the market developed, new niches within the private equity industry began to emerge. In 1982, Venture Capital Fund of America
Dayton Carr
Dayton Carr is the founder of Venture Capital Fund of America a private equity firm that is credited with inventing the Private equity secondary market....
, the first private equity firm focused on acquiring secondary market
Private equity secondary market
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
interests in existing private equity fund
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
s was founded and then, two years later in 1984, First Reserve Corporation
First Reserve Corporation
First Reserve Corporation is a private equity firm specializing in leveraged buyouts and growth capital investments in the energy sector. First Reserve was founded in 1984 and is the oldest private equity dedicated to investments in the energy sector.....
, the first private equity firm focused on the energy sector, was founded.
Venture capital in the 1980s
The public successes of the venture capital industry in the 1970s and early 1980s (e.g., DEC, Apple, Genentech) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". While the number of firms multiplied, the capital managed by these firms increased only 11% from $28 billion to $31 billion over the course of the decade.The growth the industry was hampered by sharply declining returns and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
and Paine Webber
Paine Webber
Paine Webber and Company was an American stock brokerage and asset management firm that was acquired by the Swiss bank UBS AG in 2000. The company was founded in 1880 in Boston, Massachusetts, by William Alfred Paine and Wallace G. Webber. Operating with two employees, they leased premises at 48...
either sold off or closed these venture capital units. Additionally, venture capital units within Chemical Bank
Chemical Banking
Chemical Bank was a bank with headquarters in New York City from 1824 until 1996. The bank operated as the primary subsidiary of the Chemical Banking Corporation, a bank holding company established in 1988. At the end of 1995, Chemical was the third largest bank in the U.S...
(today CCMP Capital
CCMP Capital
CCMP Capital is a private equity investment firm that focuses on leveraged buyout and growth capital transactions. Formerly known as JP Morgan Partners, the investment professionals of JP Morgan Partners separated from JPMorgan Chase on July 31, 2006. CCMP has invested approximately $12 billion...
), Citicorp (today Court Square Capital Partners
Court Square Capital Partners
Court Square Capital Partners is a private equity firm focused on leveraged buyout transactions. Court Square was originally a captive private equity firm within Citigroup known as Citigroup Venture Capital Equity Partners...
and CVC Capital Partners
CVC Capital Partners
CVC Capital Partners is one of the top five largest private equity firms globally with approximately US$46 billion in funds focused on management buyouts...
, First Chicago Bank
First Chicago Bank
First Chicago Bank was a Chicago-based retail and commercial bank tracing its roots back to 1863. Over the years, the bank operated under several names including The First National Bank of Chicago and First Chicago NBD...
(the predecessor of GTCR
GTCR
GTCR LLC is a private equity firm focused on leveraged buyout, leveraged recapitalization, growth capital and rollup transactions. As of 2008, it manages more than $8 billion in equity and mezzanine capital invested in a wide range of companies and industries....
and Madison Dearborn Partners) and Continental Illinois National Bank
Continental Illinois National Bank and Trust Company
The Continental Illinois National Bank and Trust Company was at one time the seventh-largest bank in the United States as measured by deposits with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ever bank failure in U.S. history, when a run on the bank led to...
(today CIVC Partners
CIVC Partners
CIVC Partners, previously known as Continental Illinois Venture Corporation, is a Chicago-based private equity firm that presently has over $1.3 billion of equity capital under management. The firm's predecessor was established in 1970 as a subsidiary of Continental Illinois National Bank and Trust...
), among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry founders J.H. Whitney & Company
J.H. Whitney & Company
J.H. Whitney & Company is a venture capital firm in the U.S., founded in 1946 by John Hay Whitney and his partner Benno Schmidt. Today the firm focuses primarily on leveraged buyouts, turnarounds, acquisitions, and recapitalizations of more mature companies particularly those it considers to be in...
and Warburg Pincus
Warburg Pincus
Warburg Pincus, LLC is an American private equity firm with offices in the United States, Europe, Brazil and Asia. It has been a private equity investor since 1966...
began to transition toward leveraged buyouts and growth capital investments. Many of these venture capital firms attempted to stay close to their areas of expertise in the technology industry by acquiring companies in the industry that had reached certain levels of maturity. In 1989, Prime Computer
Prime Computer
Prime Computer, Inc. was a Natick, Massachusetts-based producer of minicomputers from 1972 until 1992. The alternative spellings "PR1ME" and "PR1ME Computer" were used as brand names or logos by the company.-Founders:...
was acquired in a $1.3 billion leveraged buyout by J.H. Whitney & Company
J.H. Whitney & Company
J.H. Whitney & Company is a venture capital firm in the U.S., founded in 1946 by John Hay Whitney and his partner Benno Schmidt. Today the firm focuses primarily on leveraged buyouts, turnarounds, acquisitions, and recapitalizations of more mature companies particularly those it considers to be in...
in what would prove to be a disastrous transaction. Whitney's investment in Prime proved to be nearly a total loss with the bulk of the proceeds from the company's liquidation paid to the company's creditors.
Although lower profile than their buyout counterparts, new leading venture capital firms were also formed including Institutional Venture Partners (IVP) in 1980, Draper Fisher Jurvetson
Draper Fisher Jurvetson
Draper Fisher Jurvetson is a venture capital firm based in Menlo Park, California with affiliate offices in more than 30 cities around the world and over $7 billion in capital commitments....
(originally Draper Associates) in 1985 and Canaan Partners
Canaan Partners
Canaan Partners is a multi-billion dollar global venture capital firm focusing on investments in early stage companies in the technology and healthcare sectors....
in 1987 among others.
Corporate raiders, hostile takeovers and greenmail
Although the "corporate raidCorporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
er" moniker is rarely applied to contemporary private equity investors, there is no formal distinction between a "corporate raid
Corporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
" and other private equity investments acquisitions of existing businesses. The label was typically ascribed by constituencies within the acquired company or the media. However, a corporate raid
Corporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
would typically feature a leveraged buyout that would involve a hostile takeover of the company, perceived asset stripping
Asset stripping
Asset stripping involves selling the assets of a business individually at a profit. The term is generally used in a pejorative sense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russia or China that are making a...
, major layoffs or other significant corporate restructuring activities. Management of many large publicly traded corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s reacted negatively to the threat of potential hostile takeover or corporate raid
Corporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
and pursued drastic defensive measures including poison pill
Poison pill
A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...
s, golden parachute
Golden parachute
A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is...
s and increasing debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
levels on the company's balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
. Additionally, the threat of the corporate raid would lead to the practice of "greenmail
Greenmail
Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover....
", where a corporate raider or other party would acquire a significant stake in the stock of a company and receive an incentive payment (effectively a bribe) from the company in order to avoid pursuing a hostile takeover of the company. Greenmail
Greenmail
Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover....
represented a transfer payment from a company's existing shareholders to a third party investor and provided no value to existing shareholders but did benefit existing managers. The practice of "greenmail" is not typically considered a tactic of private equity investors and is not condoned by market participants.
Among the most notable corporate raiders of the 1980s included Carl Icahn
Carl Icahn
Carl Celian Icahn is an American business magnate and investor.-Biography:Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School. His father was a cantor, his mother was a schoolteacher...
, Victor Posner
Victor Posner
Victor Posner was an American businessman. He was known as one of the highest paid business executives of his generation. He was a pioneer of the leveraged buyout.-Career:...
, Nelson Peltz
Nelson Peltz
Nelson Peltz is an American businessman. He is a board director of Wendy's Group, the franchise parent of T.J. Cinnamons, Pasta Connection and Wendy's. Peltz is the former owner of Snapple.- Background :...
, Robert M. Bass
Robert Bass
Robert Muse Bass is an American businessman and philanthropist. He is currently the chairman of Aerion Corporation, an American aerospace firm in Reno, Nevada. Bass is worth approximately $5.5 billion as of 2007, and $4 billion in 2010 on oil and other investments-Life:Bass was born into a wealthy...
, T. Boone Pickens, Harold Clark Simmons
Harold Clark Simmons
Harold Clark Simmons is an American businessman and billionaire whose banking expertise helped him develop the acquisition concept known as the leveraged buyout to acquire various corporations. He is the owner of Contran Corporation and of Valhi, Inc.,...
, Kirk Kerkorian
Kirk Kerkorian
Kerkor "Kirk" Kerkorian is an American businessman who is the president/CEO of Tracinda Corporation, his private holding company based in Beverly Hills, California. Kerkorian is known as one of the important figures in shaping Las Vegas and, with architect Martin Stern, Jr...
, Sir James Goldsmith, Saul Steinberg
Saul Steinberg (business)
Saul Steinberg is a former financier, insurance executive, and corporate raider. He started a computer leasing company , which he used in an audacious and successful takeover of the much larger Reliance Insurance Company in 1968...
and Asher Edelman
Asher Edelman
Asher Edelman began his career on Wall Street in 1961. In 1969 he formed Mack, Bushnell and Edelman where he was CEO. Edelman’s Wall Street businesses included Investment Banking, Money Management, and Derivatives Trading...
. Carl Icahn
Carl Icahn
Carl Celian Icahn is an American business magnate and investor.-Biography:Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School. His father was a cantor, his mother was a schoolteacher...
developed a reputation as a ruthless corporate raid
Corporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
er after his hostile takeover of TWA
Trans World Airlines
Trans World Airlines was an American airline that existed from 1925 until it was bought out by and merged with American Airlines in 2001. It was a major domestic airline in the United States and the main U.S.-based competitor of Pan American World Airways on intercontinental routes from 1946...
in 1985. The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to purchase the company, which was described as asset stripping
Asset stripping
Asset stripping involves selling the assets of a business individually at a profit. The term is generally used in a pejorative sense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russia or China that are making a...
. In later years, many of the corporate raiders would be re-characterized as "Activist shareholder
Activist shareholder
An activist shareholder uses an equity stake in a corporation to put public pressure on its management. The goals of activist shareholders range from financial to non-financial...
s".
Many of the corporate raiders were onetime clients of Michael Milken
Michael Milken
Michael Robert Milken is an American business magnate, financier, and philanthropist noted for his role in the development of the market for high-yield bonds during the 1970s and 1980s, for his 1990 guilty plea to felony charges for violating US securities laws, and for his funding of medical...
, whose investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
firm, Drexel Burnham Lambert
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to takeover
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
a company and provided high-yield debt
High-yield debt
In finance, a high-yield bond is a bond that is rated below investment grade...
financing of the buyouts.
Drexel Burnham raised a $100 million blind pool in 1984 for Nelson Peltz
Nelson Peltz
Nelson Peltz is an American businessman. He is a board director of Wendy's Group, the franchise parent of T.J. Cinnamons, Pasta Connection and Wendy's. Peltz is the former owner of Snapple.- Background :...
and his holding company Triangle Industries (later Triarc) to give credibility for takeovers, representing the first major blind pool raised for this purpose. Two years later, in 1986, Wickes Companies, a holding company
Holding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
run by Sanford Sigoloff would raise a $1.2 billion blind pool.
In 1985, Milken raised a $750 million for a similar blind pool for Ronald Perelman
Ronald Perelman
Ronald Owen Perelman is an American business magnate. Through his company MacAndrews & Forbes Holdings Inc., he has invested in various companies in grocery, cigar, licorice, makeup, car, photography, television, camping, security, lottery, jewelry, banks, and comic book industries.-Early...
which would ultimate prove instrumental in acquiring his biggest target: The Revlon Corporation
Revlon
Revlon is an American cosmetics, skin care, fragrance, and personal care company founded in 1932.-History:Revlon was founded in the midst of the Great Depression, 1932, by Charles Revson and his brother Joseph, along with a chemist, Charles Lachman, who contributed the "L" in the Revlon name...
. In 1980, Ronald Perelman
Ronald Perelman
Ronald Owen Perelman is an American business magnate. Through his company MacAndrews & Forbes Holdings Inc., he has invested in various companies in grocery, cigar, licorice, makeup, car, photography, television, camping, security, lottery, jewelry, banks, and comic book industries.-Early...
, the son of a wealthy Philadelphia businessman, and future "corporate raider" having made several small but successful buyouts, acquired MacAndrews & Forbes
MacAndrews & Forbes Holdings
MacAndrews & Forbes Holdings, Inc. is the principal holding company used by and wholly owned by businessman and private equity investor, Ronald Perelman...
, a distributor of licorice extract and chocolate, that Perelman's father had tried and failed to acquire it 10 years earlier. Perelman would ultimately divest the company's core business and use MacAndrews & Forbes
MacAndrews & Forbes Holdings
MacAndrews & Forbes Holdings, Inc. is the principal holding company used by and wholly owned by businessman and private equity investor, Ronald Perelman...
as a holding company investment vehicle for subsequent leveraged buyouts including Technicolor, Inc.
Technicolor
Technicolor is a color motion picture process invented in 1916 and improved over several decades.It was the second major process, after Britain's Kinemacolor, and the most widely used color process in Hollywood from 1922 to 1952...
, Pantry Pride
Pantry Pride
Food Fair, also known by its successor name Pantry Pride, was a large supermarket chain in the United States. It was founded by Samuel N. Friedland, who opened the first store in Harrisburg, Pennsylvania in the late 1920s. As of 1957, Food Fair had 275 stores, and at its peak, the chain had more...
and Revlon
Revlon
Revlon is an American cosmetics, skin care, fragrance, and personal care company founded in 1932.-History:Revlon was founded in the midst of the Great Depression, 1932, by Charles Revson and his brother Joseph, along with a chemist, Charles Lachman, who contributed the "L" in the Revlon name...
. Using the Pantry Pride
Pantry Pride
Food Fair, also known by its successor name Pantry Pride, was a large supermarket chain in the United States. It was founded by Samuel N. Friedland, who opened the first store in Harrisburg, Pennsylvania in the late 1920s. As of 1957, Food Fair had 275 stores, and at its peak, the chain had more...
subsidiary of his holding company, MacAndrews & Forbes Holdings
MacAndrews & Forbes Holdings
MacAndrews & Forbes Holdings, Inc. is the principal holding company used by and wholly owned by businessman and private equity investor, Ronald Perelman...
, Perelman's overtures were rebuffed. Repeatedly rejected by the company's board and management, Perelman continued press forward with a hostile takeover raising his offer from an initial bid of $47.50 per share until it reached $53.00 per share. After receiving a higher offer from a white knight
White knight (business)
In business, a white knight, or "friendly investor," may be a corporation or a person that intends to help another firm. There are many types of white knights...
, private equity firm Forstmann Little & Company
Forstmann Little & Company
Forstmann, Little & Company is a private equity firm, specializing in leveraged buyouts . At its peak in the late 1990s, Forstmann Little was among the largest private equity firms globally...
, Perelman's Pantry Pride
Pantry Pride
Food Fair, also known by its successor name Pantry Pride, was a large supermarket chain in the United States. It was founded by Samuel N. Friedland, who opened the first store in Harrisburg, Pennsylvania in the late 1920s. As of 1957, Food Fair had 275 stores, and at its peak, the chain had more...
finally was able to make a successful bid for Revlon
Revlon
Revlon is an American cosmetics, skin care, fragrance, and personal care company founded in 1932.-History:Revlon was founded in the midst of the Great Depression, 1932, by Charles Revson and his brother Joseph, along with a chemist, Charles Lachman, who contributed the "L" in the Revlon name...
, valuing the company at $2.7 billion. The buyout would prove troubling, burdened by a heavy debt load. Under Perelman's control, Revlon sold 4 divisions: two of which were sold for $1 billion, its vision care division was sold for $574 million and its National Health Laboratories division was spun out to the public market in 1988. Revlon also made acquisitions including Max Factor
Max Factor
Max Factor & Company is a cosmetics company, founded during 1909 by Maksymilian Faktorowicz , Max Factor, a Polish-Jewish cosmetician. Max Factor & Company was a related, two-family, multi-generational international cosmetics company before its sale in 1973 for $500 million dollars...
in 1987 and Betrix in 1989 later selling them to Procter & Gamble
Procter & Gamble
Procter & Gamble is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of consumer goods....
in 1991. Perelman exited the bulk of his holdings in Revlon through an IPO in 1996 and subsequent sales of stock. As of December 31, 2007, Perelman still retains a minority ownership interest in Revlon. The Revlon takeover, because of its well-known brand was profiled widely by the media and brought new attention to the emerging boom in leveraged buyout activity.
In later years, Milken and Drexel would shy away from certain of the more "notorious" corporate raiders as Drexel and the private equity industry attempted to move upscale.
RJR Nabisco and the Barbarians at the Gate
Leveraged buyouts in the 1980s including Perelman's takeover of RevlonRevlon
Revlon is an American cosmetics, skin care, fragrance, and personal care company founded in 1932.-History:Revlon was founded in the midst of the Great Depression, 1932, by Charles Revson and his brother Joseph, along with a chemist, Charles Lachman, who contributed the "L" in the Revlon name...
came to epitomize the "ruthless capitalism" and "greed" popularly seen to be pervading Wall Street at the time. One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989, KKR closed on a $31.1 billion dollar takeover of RJR Nabisco
RJR Nabisco
RJR Nabisco, Inc., was an American conglomerate formed in 1985 by the merger of Nabisco Brands and R.J. Reynolds Tobacco Company. RJR Nabisco was purchased in 1988 by Kohlberg Kravis Roberts & Co...
. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicled in the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring James Garner
James Garner
James Garner is an American film and television actor, one of the first Hollywood actors to excel in both media. He has starred in several television series spanning a career of more than five decades...
.
F. Ross Johnson
F. Ross Johnson
-Biography:Born in Winnipeg, Manitoba, into a lower-middle-class family, he used a military cadet scholarship program to attend the University of Manitoba where he graduated in 1952 with a Bachelor of Commerce degree and was a member of the fraternity Phi Delta Theta. He went on to earn an M.B.A....
was the President and CEO of RJR Nabisco
RJR Nabisco
RJR Nabisco, Inc., was an American conglomerate formed in 1985 by the merger of Nabisco Brands and R.J. Reynolds Tobacco Company. RJR Nabisco was purchased in 1988 by Kohlberg Kravis Roberts & Co...
at the time of the leveraged buyout and Henry Kravis was a general partner at Kohlberg Kravis Roberts. The leveraged buyout was in the amount of $25 billion (plus assumed debt), and the battle for control took place between October and November 1988. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many of the major banking players of the day, including Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
, Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
, Salomon Brothers
Salomon Brothers
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually...
, and Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
were actively involved in advising and financing the parties.
After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco. KKR's offer was guaranteed, whereas the management offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share price might have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grown concerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal. TIME magazine
Time (magazine)
Time is an American news magazine. A European edition is published from London. Time Europe covers the Middle East, Africa and, since 2003, Latin America. An Asian edition is based in Hong Kong...
featured Ross Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This man could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far?". KKR's offer was welcomed by the board, and, to some observers, it appeared that their elevation of the reset issue as a deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 per share. F. Ross Johnson received $53 million from the buyout.
At $31.1 billion of transaction value, RJR Nabisco was by far the largest leveraged buyouts in history. In 2006 and 2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged buyouts of the 2006 – 2007 period would surpass RJR Nabisco. Unfortunately for KKR, size would not equate with success as the high purchase price and debt load would burden the performance of the investment.
Interestingly, two years earlier, in 1987, Jerome Kohlberg, Jr.
Jerome Kohlberg, Jr.
Jerome Kohlberg, Jr. is an American businessman and early pioneer in the private equity and leveraged buyout industries founding private equity firm Kohlberg Kravis Roberts & Co. and later Kohlberg & Company....
resigned from Kohlberg Kravis Roberts & Co. over differences in strategy. Kohlberg did not favor the larger buyouts (including Beatrice Companies
Beatrice Foods
Beatrice Foods Company was a major American food processing company. In 1987, its smaller international food operations were sold to Reginald Lewis, a corporate attorney creating TLC Beatrice International, after which the majority of its domestic brands and assets were acquired by Kohlberg,...
(1985) and Safeway
Safeway Inc.
Safeway Inc. , a Fortune 500 company, is North America's second largest supermarket chain after The Kroger Co., with, as of December 2010, 1,694 stores located throughout the western and central United States and western Canada. It also operates some stores in the Mid-Atlantic region of the Eastern...
(1986) and would later likely have included the 1989 takeover of RJR Nabisco
RJR Nabisco
RJR Nabisco, Inc., was an American conglomerate formed in 1985 by the merger of Nabisco Brands and R.J. Reynolds Tobacco Company. RJR Nabisco was purchased in 1988 by Kohlberg Kravis Roberts & Co...
), highly leveraged
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
transactions or hostile takeovers being pursued increasingly by KKR. The split would ultimately prove acrimonious as Kohlberg sued Kravis and Roberts for what he alleged were improper business tactics. The case was later settled out of court. Instead, Kohlberg chose to return to his roots, acquiring smaller, middle-market companies and in 1987, he would found a new private equity firm Kohlberg & Company
Kohlberg & Company
Kohlberg & Company is a private equity firm that focuses on leveraged buyout transactions founded by industry pioneer Jerome Kohlberg, Jr.Today, the firm invests in a variety of transactions including leveraged carveouts , take private transactions and acquisitions of privately held companies...
along with his son James A. Kohlberg, at the time a KKR executive. Jerome Kohlberg
Jerome Kohlberg, Jr.
Jerome Kohlberg, Jr. is an American businessman and early pioneer in the private equity and leveraged buyout industries founding private equity firm Kohlberg Kravis Roberts & Co. and later Kohlberg & Company....
would continue investing successfully for another seven years before retiring from Kohlberg & Company
Kohlberg & Company
Kohlberg & Company is a private equity firm that focuses on leveraged buyout transactions founded by industry pioneer Jerome Kohlberg, Jr.Today, the firm invests in a variety of transactions including leveraged carveouts , take private transactions and acquisitions of privately held companies...
in 1994 and turning his firm over to his son.
As the market reached its peak in 1988 and 1989, new private equity firms were founded which would emerge as major investors in the years to follow, including:
- ABRY PartnersABRY PartnersABRY Partners is a private equity firm headquartered in Boston, Massachusetts that focuses on investments in media. Since 1989, the firm has completed over $18.0 billion of leveraged transactions and other private equity and mezzanine investments, representing investments in more than 450 media...
, a media-focused firm, founded in 1989; - Code Hennessy & SimmonsCode Hennessy & SimmonsCode Hennessy & Simmons is a private equity investment firm focusing on leveraged buyout and growth capital transactions. The firm focuses on investments in middle market companies in four basic industries:* Business services* Consumer* Distribution...
, a middle market private equity firm, founded in 1988; - Coller CapitalColler CapitalColler Capital, founded in 1990 by Jeremy Coller, is one of the leading global investors in the Private equity secondary market ....
, the first European secondariesPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
firm specializing in the purchase of existing private equity interests, founded in 1989; - Landmark PartnersLandmark PartnersLandmark Partners, founded in 1989, is a leading investor in the Private equity secondary market . It is based in Simsbury, Connecticut.The firm was founded by Stanley Alfeld.-Investment Program:...
, an early secondariesPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
firm specializing in the purchase of existing private equity interests, founded in 1989; - Leonard Green & PartnersLeonard Green & PartnersLeonard Green & Partners is a private equity firm specializing in leveraged buyout transactions, particularly of middle market companies. As of 2010, the firm had with approximately $9 billion in assets under management....
founded in 1989 a successor to Gibbons, Green van Amerongen (founded 1969), a merchant banking firm that completed several early management buyout transactions; and - Providence Equity PartnersProvidence Equity PartnersProvidence Equity Partners is a global private equity investment firm focused on media, entertainment, communications and information investments...
, a media-focused firm, founded in 1989.
LBO bust (1990 to 1992)
By the end of the 1980s the excesses of the buyout market were beginning to show, with the bankruptcyBankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
of several large buyouts including Robert Campeau
Robert Campeau
Robert Campeau is a Canadian financier and real estate developer.-Early years:His formal education ended in grade eight, at the age of 14. He talked himself into jobs at Inco as a general labourer, carpenter and machinist. In 1949 he entered the residential end of the construction business...
's 1988 buyout of Federated Department Stores
Federated Department Stores
Macy's, Inc. is a department store holding company and owner of Macy's and Bloomingdale's department stores. Macy's Inc.'s stores specialize mostly in retail clothing, jewelery, watches, dinnerware, and furniture....
, the 1986 buyout of the Revco
Revco
Revco Discount Drug Stores , once based in Twinsburg, Ohio, was a major drug store chain operating through the Ohio Valley, the Mid-Atlantic states, and the Southeastern United States. The chain's stock was traded on the New York Stock Exchange under the ticker RXR...
drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR. Additionally, in response to the threat of unwelcome LBOs, certain companies adopted a number of techniques, such as the poison pill
Poison pill
A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...
, to protect them against hostile takeovers by effectively self-destructing the company if it were to be taken over.
1980s reflections of private equity
Although private equity rarely received a thorough treatment in popular culture, several films did feature stereotypical "corporate raiders" prominently. Among the most notable examples of private equity featured in motion pictures included:- Wall Street (1987) – The notorious "corporate raider" and "greenmailer" Gordon GekkoGordon GekkoGordon Gekko is the main antagonist of the 1987 film Wall Street and the antihero of the 2010 film Wall Street: Money Never Sleeps, both by director Oliver Stone...
represents a synthesis of the worst features of various famous private equity figures intends to manipulate an ambitious young stockbroker to takeover failing but decent airline. Although Gekko makes a pretense of caring about the airline, his intentions prove to be to destroy the airline, strip its assets and lay off its employees before raiding the corporate pension fundPension fundA pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
. Gekko would become a symbol in popular culture for unrestrained greed (with the signature line, "Greed, for lack of a better word, is good") that would be attached to the private equity industry. - Other People's MoneyOther People's MoneyOther People's Money is a 1991 drama/romantic comedy film starring Danny DeVito, Penelope Ann Miller and Gregory Peck. It is based on the play of the same name by Jerry Sterner. The director was Norman Jewison and the screenplay was credited to Alvin Sargent.-Plot:Corporate raider Lawrence...
(1991) – A self-absorbed corporate raider "Larry the Liquidator" (Danny DeVitoDanny DeVitoDaniel Michael DeVito, Jr. , better known as Danny DeVito, is an American actor, comedian, director and producer. He first gained prominence for his portrayal of Louie De Palma on the ABC and NBC television series Taxi , for which he won a Golden Globe and an Emmy.DeVito and his wife, Rhea Perlman,...
), sets his sights on New England Wire and Cable, a small-town business run by family patriarch Gregory PeckGregory PeckEldred Gregory Peck was an American actor.One of 20th Century Fox's most popular film stars from the 1940s to the 1960s, Peck continued to play important roles well into the 1980s. His notable performances include that of Atticus Finch in the 1962 film To Kill a Mockingbird, for which he won an...
who is principally interested in protecting his employees and the town. - Pretty WomanPretty WomanPretty Woman is a 1990 romantic comedy film set in Los Angeles, California. Written by J.F. Lawton and directed by Garry Marshall, this motion picture features Richard Gere and Julia Roberts, and also Hector Elizondo, Ralph Bellamy, and Jason Alexander in supporting roles. Roberts played the only...
(1990) – Although Richard GereRichard GereRichard Tiffany Gere is an American actor. He began acting in the 1970s, playing a supporting role in Looking for Mr. Goodbar, and a starring role in Days of Heaven. He came to prominence in 1980 for his role in the film American Gigolo, which established him as a leading man and a sex symbol...
's profession is incidental to the plot, the selection of the corporate raider who intends to destroy the hard work of a family-run business by acquiring the company in a hostile takeover and then sell off the company's parts for a profit (compared in the movie to an illegal chop shopChop shopIn motor vehicle theft, a chop shop is a location or business which disassembles stolen automobiles for the purpose of selling them as parts. It may also be used to refer to a location or business that is involved with the selling of stolen or fraudulent goods in general, an example of the latter...
). Ultimately, the corporate raider is won over and chooses not to pursue his original plans for the company.
See also
- History of private equity and venture capitalHistory of private equity and venture capitalThe history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital...
- Early history of private equityEarly history of private equityThe early history of private equity relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated...
- Private equity in the 1990sPrivate equity in the 1990sPrivate equity in the 1990s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.The...
- Private equity in the 21st centuryPrivate equity in the 21st centuryPrivate equity in the 2000s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.The...
- Early history of private equity
- Private equity firms (category)
- Venture capital firms (category)
- Private equity and venture capital investors (category)
- Financial sponsorFinancial sponsorA financial sponsor is a term commonly used to refer to private equity investment firms, particularly those private equity firms that engage in leveraged buyout or LBO transactions....
- Private equity firmPrivate equity firmA private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...
- Private equity fundPrivate equity fundA private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
- Private equity secondary marketPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
- Mezzanine capitalMezzanine capitalMezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares...
- Private investment in public equityPrivate investment in public equityA private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors. In the U.S...
- Taxation of Private Equity and Hedge FundsTaxation of private equity and hedge fundsPrivate equity funds and hedge funds are private investment vehicles used to pool investment capital, usually for a small group of large institutional or wealthy individual investors. They are subject to favorable regulatory treatment in most jurisdictions from which they are managed, which allows...
- Investment bankingInvestment bankingAn investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
- Mergers and acquisitionsMergers and acquisitionsMergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...