"a fish, a barrel, and a smoking gun"
for 23 June 1998. Updated every WEEKDAY.
Convergence Theory


[just plain cool:]

Follow the money?


In the '80s, investors came to

an important conclusion about

large corporations. Big

business, they realized, had

become too big, and too broadly

focused, to be effectively

managed. Efficiency suffered;

earnings lagged. Fortunately,

though, there was some good

strong medicine to be had, and

investors began to apply it. The

LBO, or leveraged buyout,

allowed right-thinking

capitalists to stage hostile

takeovers against entrenched

corporate management, sending

the fat and lazy executives

who'd been in charge to the

showers and getting down to

putting things in order. In some

instances, an LBO allowed the

fat and lazy executives

themselves to buy out

shareholders and take their

companies private - which, in

the logic of Reagan-era capital,

made them the opposite of fat

and lazy. In either case, the

top priority in putting things

in order, post-acquisition, was

often the same: spinning off

pieces of sprawling companies.

Not to strip them for quick

profit, but to get competitively

lean. Wall Street responded with

kudos and cash, knowing

perfectly well that only small,

tightly focused companies can

really compete.


Almost exactly 10 years after

the golden age of the LBO, Wall

Street began to act in earnest

on another epiphany, and stocks

kept soaring on the new

understanding. The recent burst

of mergers and acquisitions has

reached across some of the

richest industries. United

Healthcare acquired Humana.

Pacific Enterprises and Enova,

two players in the newly

deregulated power markets,

prepared to get together to

share the inevitably massive

shifts and (for those not locked

into expensive old-tech

generating investments)

explosive growth, coming from

the retail electric power market

in the next decade. Wells Fargo,

still semi-fresh from a merger

with Interstate Bank, prepared

to join Norwest, as BankAmerica

- which acquired Security

Pacific a few years ago - got

ready to gobble up NationsBank.

American Home Products and

Monsanto moved into a US$34

billion stock swap that would

bring the two

pharmaceutical-biotech (and, in

the case of Monsanto, ag-chem,

too) companies under one

umbrella. Bertelsmann, a German

media company, bought US book

publisher Random House. Back in

January, Compaq acquired

Digital. And

telecommunications giant SBC,

which recently picked up Pac

Tel, hopes to acquire still

another Baby Bell in the

Northeast. And these are just

some of the M&As, completed or

proposed, big enough to bother

mentioning. When we ran a search

of a newspaper archive a few

days ago, using the word

"mergers" and looking for

stories no older than 30 days,

we got 119 articles, 41 pages

of headlines and first

paragraphs. El Torito, for

example, snapped up Koo Koo Roo,

so things are looking pretty

good for people in California

who like spicy chicken. The

lesson driving all of this

grabbing and combining, learned

in recent years by international

investors? Only large, broadly

focused companies can really



[my 1966 black fender mustang with width 'a' neck]

Back in the last decade, before

he hooked up with that fabulous

Bloomingdale's ass, Michael

Lewis took just this sort of


which-cup-is-the-ball-under game

apart with an awfully sharp eye.

In a 1988 New Republic piece,

"Leveraged Rip-Off" (reprinted

in a book titled The Money

Culture), Lewis noted that the

leveraged buyout gave some

terribly wealthy people an

opportunity to hide the quest

for more money behind the

argument that they were just,

you know, healing a sick

business climate. That piece

remains well worth reading. And

don't worry: TNR didn't even

have a fact-checking department

back then, so you can trust this

one. On the acquisition of a

department-store chain by its

managers, Lewis captured details

like this one:

The other unmentioned
reason Macy's is worth so
much more now than what
its managers paid for it,
besides the tax angle, is
that (Chairman Edward)
Finklestein's group
simply paid too little.
For example, Macy's owned
eight shopping malls.
Because American
companies hold assets on
their books at cost, the
old Macy's listed the
malls at a total value of
about $100 million.
Perhaps it appeared
generous, therefore, when
Finklestein and his
associates valued the
malls at $250 million in
the buyout. (Recall that
Finklestein boasted to
the board that he was
willing to pay 165
percent of book value for
the company.) Three
months after the buyout,
Finklestein sold the
malls to an Australian
company for $555 million.
Why didn't Finklestein
get the bright idea to
sell the malls six months
earlier, when he was
working for the public
shareholders? You know


Today, with the people moving

the world's money around the

table, offering a version of

reality 180 degrees opposite

from their 10-year-old

proclamation of Truth, much of

what Lewis wrote back then still

holds true today. How can that

be? Because the score, despite

the change in rules, is still

kept the same way, and the

players haven't really changed;

when large amounts of money flow

from one point to another, not

all of it arrives at its

intended destination, and even

less of it tends to stay there.

As Lewis noted in 1988, the

investment banking firm Goldman

Sachs picked up a little over

$80 million in cash and "equity

share," or Macy's stock, for its

help in arranging financing for

the deal. And 71 Macy's

executives turned into

millionaires not long after

taking the company private (and,

amusingly, not long before

taking it public again). Anyone

care to speculate about the

investment-bank fees and

commissions on Seagram's $10.6

billion acquisition of PolyGram,

or the $34 billion stock swap

that will bring AHP and Monsanto

together? Or about how the top

executives of those companies

will make out in the deals?


[late birthdays]

Perhaps this would be a good

time to ponder the rise of the

sacred index from sad old 2,000,

where it stood in 1988, to the

way-more-classy 9,000-plus

neighborhood. A question: Do

companies that sold 2,000

widgets a day back when the Dow

was at 2,000 now sell 9,000

widgets a day? Or sell $5000

widgets for $9000? Have US

businesses collectively improved

productivity, not to mention

sales, by 450 percent in 10



Of course not - although the

fiction about where

profitability comes from (what

con artists call "the play")

appears to be gaining in

sophistication. Without big

changes in profit-and-loss

statements, where is all that

new, added value coming from?

It's coming from you and me, and

not at the cash register.


Money held by US banks, 1988: $2.9

trillion; 1998: $4.9 trillion.


Money held by US mutual funds, 1988: $809 billion;

1998: $5.0 trillion - more than

banks, for the first time, and



In fact, just about, uh, a 450

percent increase. That is: You

pay your share - and the next

five people who buy in pay you

back fivefold. And is everyone

clear on the difference between

saving and investing? (A: Only one has

winners and losers.)


[coincidental bar meetings]

But one thing remains unclear.

If shareholders are owners and

corporations are running the con

... who's the mark? We're not

anxious to test this theory, but

it seems American know-how may

have invented something

genuinely original: The pyramid

scheme that doesn't collapse,

because everyone just keeps

playing. (Interestingly, this

scheme is built on shared

fictional notions and play-money

stock swaps and paycheck-to-401(k)

shifts that move money from

corporation to corporation by

way of employees who never get

their hands on the actual cash.)


When the fraud is perpetrated by

the defrauded, who's screwing whom?

courtesy of
Ambrose Beers