Suck

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

	*Convergence Theory* 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 compete. Back in the last decade, before he hooked up with that fabulous Bloomingdale's ass, Michael Lewis took just this sort of financial 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 why. 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? 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 years? 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 growing. 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.) 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

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

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