INSIDE THE SHADOWY EMPIRE OF ELI JACOBS
For fans of the Baltimore Orioles, the 1991 season was a big disappointment. But for Eli S. Jacobs, the American League team's mysterious owner, it was the business equivalent of a World Series victory. His triumph came in the form of an appraiser's report that valued the Orioles at $255 million. While other experts consider this figure excessive, unquestionably the Orioles are worth much more than the $70 million Jacobs paid not three years ago.
As Jacobs tells it, his Orioles bonanza is a fitting culmination to a lucrative 27-year career as a Wall Street venture capitalist. "I get an awful lot of pride out of building businesses," Jacobs once told The Washington Post. Of which is he proudest? Oddly, the question seems to incense him. "I was not brought up to talk about my successes," Jacobs snaps now, refusing to disclose so much as the names of the various operating companies he controls through E. S. Jacobs & Co., a small investment firm with offices on New York's Park Avenue.
From his earliest days on the Street, Jacobs has enfolded himself in secrecy. In an application filed with Georgia insurance authorities in 1988, Jacobs described himself as "an individual for whom no audited financial statement has ever been prepared." In lieu of the usual documented bona fides, Jacobs in effect has said: "Take my word for it." And to a remarkable extent, people have done just that, on Wall Street and in Washington alike. By all accounts, he is especially well-connected -- though not terribly influential -- within Republican Party and national security circles.
Even to many of Jacob's closest associates he remains a mystery man. "Few, if any, of his friends know anything about Mr. Jacobs' business interests, much less take advantage of them," declared Senator David L. Boren (D-Okla.) in a letter this summer to The Wall Street Journal, which had just profiled Jacobs. Boren and Jacobs attended Yale law school together.
FLUKE HIT. On Wall Street especially, Jacobs' penchant for secrecy is viewed with mounting suspicion. And for good reason. A four-month investigation by BUSINESS WEEK has identified 18 of the two dozen companies Jacobs says he now controls, plus an additional 11 formerly under his dominion (table). Judging by this sample, Jacobs' acquisition of the Orioles not only was the best deal of his life but a fluke. Nearly half of the 29 companies either have been liquidated at a loss or are operating with sharply negative shareholder's equity. Aside from the Orioles, there is not a single, major, thriving business in the bunch. Of the 29 companies identified by BUSINESS WEEK, eight have been subject to government disclosure requirements and thus offer the best-documented microcosm of Jacobs' career as corporate owner. Three have failed, and the remaining five all are operating at a loss -- hugely so, in the case of the two companies that are Jacobs' largest: Memorex Telex and Triangle Pacific Corp.
True, the youngest of these companies is exciting speculative interest in the over-the-counter market. Founded in 1988, SyStemix Inc. is a biotechnology concern that has accumulated an operating deficit of $15 million. Although the company is just beginning clinical trials on its first products, Jacobs capitalized on the stock market's mania for biotech by taking it public in August at $18 a share. The stock has shot up to about $54. Says Jacobs, who owns 38% of the company: "This could be one for the history books."
BAD MIXTURE. Perhaps it will, though biotech companies are notoriously un-predictable. What's more, BUSINESS WEEK's analysis suggests that over the long run, Jacobs' companies have tended to suffer from a noxious combination of scant equity and excessive debt. While such an imbalance was characteristic of many leveraged buyouts, Jacobs has employed the same approach in his venture-capital investing. Typically, he has infused capital into fledgling companies in dribs and drabs -- not as equity but mainly in the form of loans extended in exchange for warrants. As the burden of interest payments has grown intolerable, Jacobs' notes have often been converted into stock.
In a three-hour interview in his Park Avenue office, Jacobs acknowledges that some of his companies have carried excessive debt but insists that "the bulk of what I do is not leveraged." He accepts little responsibility for the woes of his manifestly troubled companies, blaming instead their former managers or depressed economic conditions.
Morever, he disputes the conclusion that his record as a corpo-rate owner is weighted to failure. He insists not only that he has controlled scores upon scores of businesses that have escaped BUSINESS WEEK's notice but also that the vast majority ofthese properties have thrived. If in fact these companies do exist, Jacobs has succeeded in keeping them hidden even from his former partners and employees. Not one of the more than 50 of Jacobs' past and present associates who were interviewed in the course of researching this article knew the names of more than a handful of his companies.The overriding question that emerges from an analysis of Jacobs' documented history as a corporate owner is: Where did he get the $35 million he put down in buying the Orioles for $70 million?
In a word, dealmaking.
Backed by erstwhile junk-bond powerhouse Drexel Burnham Lambert Inc., Jacobs in the mid-1980s engineered a rapid-fire series of inordinately leveraged buyouts. In the first of his big LBOs, Jacobs acquired Memorex Corp. for $523 million. Two years later, Drexel teamed up with J. P. Morgan & Co. to help fund both Memorex' $1 billion acquisition of Telex Corp. and Jacobs' $406 million LBO of Triangle Pacific.
Jacobs' initial personal investment in this $2 billion trio of deals amounted to no more than $8 million. Yet he obtained controlling blocks of common stock and pocketed $17 million in investment-banking fees. In addition, Memorex Telex and Triangle Pacific alone were required to pay him a total of $ 1.3 million in consulting fees every year. Even little Flagship Express Inc., created through a $55 million buyout, is obligated to pay Jacobs a $1 million deal fee and an annual consulting fee of $750,000.
WELL TIMED. Then there are Jacobs' trading profits. Two Wall Street sources say separately that in late 1988, Jacobs and an associate offered as "a favor" to sell them Memorex shares at $26 apiece. Both men declined, figuring the stock was worth no more than $10 a share. Nonetheless, Jacobs did unload 344,000 Memorex shares (2.8% of his holdings) by March, 1989. Jacobs says he got less than $26 a share. All he needed to recoup his initial investment was $3.50 a share.
Whatever the price, Jacobs' sale was well timed. As 1989 wore on, Memorex Telex' operating results began slipping well behind projections. Under the terms of a restructuring plan put forth in late October, the company's common stockholders would be completely wiped out. While Jacobs would lose his entire remaining stake, he comes out well ahead thanks to his up-front fees alone.This disparity angers some Memorex Telex shareholders left with worthless stock. Their complaints are echoed by investors in other Jacobs-controlled companies. Among the dozen former financial backers interviewed by BUSINESS WEEK was Victor Sperandeo, a well-known trader once described as "the ultimate Wall Street pro" by Barron's. Sperandeo says he lost the full $200,000 that he invested in two private Jacobs companies, Eyecare USA and International Housing.
MISLED? "I lose money all the time -- that's not the problem. The problem is he misleads you," Sperandeo says. "We never got the numbers on these companies unless they wanted more money from us. Whenever I asked Eli how they were doing, he made everything sound rosy. Then I couldn't get him on the phone." Jacobs says that Sperandeo's investment in International Housing has returned to full value since they last talked in 1984. "I have never failed to return a call from Victor," he adds. "Most importantly, I certainly never misled him or any other investor."
While criticism of Jacobs is pervasive on the Street, even his most vociferous critics stop short of accusing him of violating the letter of the law. The Securities & Exchange Commission has never taken action against him. Likewise, he has avoided messy lawsuits -- until recently.
In 1989, Jacobs cut a deal to acquire Rosenbalm Aviation Inc, a tightly held Michigan-based air-cargo carrier, for $55 million. Just before the transaction was to close, Jacobs altered his offer to substitute one-year notes for $15 million of cash. The notes were to be issued by Flagship Express, a shell company into which Jacobs planned to merge Rosenbalm. The sellers agreed on the condition that Jacobs unconditionally guarantee the notes. He did.
Everything proceeded smoothly until Halloween of 1990, the day before the notes came due. Jacobs filed suit against the note-holders, accusing them of cooking Rosenbalm's books. Flagship Express then defaulted on the notes, and Jacobs refused to honor his guarantee on the grounds that he had been defrauded in buying the company. The note-holders countersued. John F. Keenan, a federal judge in New York, found that Jacobs is indeed liable for the notes. "Phrases such as 'absolute and unconditional,' when placed in a guarantee by a sophisticated investor . . . mean what they say," Keenan declared. In Michigan, though, Judge Barbara Hackett ruled that Jacobs need not make good on his guarantees as long as his fraud case is pending.
In Baltimore, meanwhile, the growing discrepancy between Jacobs' words and actions have eroded his credibility asthe Orioles' owner. "As far down the road as I can see, I want to remain the owner of the Orioles," Jacobs said in mid-1990. Yet last June, Jacobs leaked word that he was willing to sell the Orioles after all and indeed was already dickering with two prospective buyers. Naturally, the about-face angered many in Baltimore and caught unawares even Orioles President Lawrence Lucchino.In trying to quell the uproar, Jacobs denied that his flip-flop had anything to do with money. "I'm just a person who likes his privacy," he said. This explanation would have engendered more sympathy had not Jacobs used the owner's box at Memorial Stadium to entertain a ceaseless parade of high-profile visitors. Indeed, just a few weeks earlier, Jacobs had played host to both President Bush and Queen Elizabeth amid great hoopla.
In Baltimore and beyond, swelling controversy has put an angry new edge on what, in some circles, is an old question: Who is Eli Jacobs, anyway?
Jacobs owes much of his effectiveness as a securities promoter to the fact that he neither looks nor acts anything like the prototypical Wall Street pitchman of the 1980s. A long-limbed 6-foot-2, Jacobs is often a bit unkempt. Manifestly ill at ease in most social settings, he haunts corners at cocktail parties and is prone to long, awkward silences even in small business meetings. "Eli can sit for a long time with people and say absolutely nothing, which can be very disconcerting," says Edward T. Foote, president of the University of Miami and a former college classmate of Jacobs'.
NAME-DROPPER. Uniformly described as highly intelligent -- even brilliant -- Jacobs is knowledgeable about a wide range of nonbusiness subjects, notably urban planning and national security policy. "Jacobs was quite a pusher -- always meeting people to meet people -- but very bright indeed," says Philip C. Johnson, the famed architect, whom Jacobs befriended at the outset of his career. Ever since, Jacobs has courted public personages as assiduously as he's avoided the spotlight himself.
Famed on Wall Street as a dropper of names, Jacobs' VIP ties long have been an essential part of the image he projects. "The first time I met Eli he spent two hours name-dropping his familiarity with every big-name Democrat in Massachusetts -- this was the Kennedy era," says David Zenoff, a Stanford University professor who met Jacobs in 1960 while attending Harvard University. "Every time we got together over the years he would name-drop about all the big people he knew in government."
At Jacobs' initiative, he supplied BUSINESS WEEK with a Washington-heavy list of references. It includes four U. S. Senators: Oklahoma's Boren, William S. Cohen (R-Me.), Joseph I. Lieberman (D-Conn.), and Alan K. Simpson (R-Wyo.). It also includes a former director of central intelligence (William Webster), two former White House staff chiefs (Howard Baker and Kenneth Duberstein), and Jonathan Bush, the President's brother.
The other critical ingredient of Jacobs' promotional mystique -- in Washington no less than on Wall Street -- is great wealth. While Jacobs has been careful to avoid making direct public claims about his wealth, privately he long has promoted himself as one of America's richest men. Once asked by a Washington Post reporter why he had never appeared on the Forbes 400 list, Jacobs responded with a coy: "I dodged them."
Reared in Newton, Mass., just outside Boston, Jacobs was the eldest of the three children of Alyce and William M. Jacobs, who made a fair amount of money in real estate. As a boy, Eli was sent off to Phillips Academy in Andover, Mass. From Andover it was on to Yale University, where he earned undergraduate and law degrees.
Jacobs got his start on Wall Street in 1964 at the august investment bank of White, Weld & Co. In 1970, he resigned to hang out his own shingle, in partnership with a wealthy Yale buddy: Lewis E. Lehrman, who would come to national prominence in 1982 as the conservative who challenged Mario M. Cuomo in the New York gubernatorial race.
According to Jacobs, he and Lehrman hit a couple of gushers drilling for gas in Texas. They plowed their profits into venture capital -- with decidedly mixed results. Jacobs did have one documented success in Analytab Products. Founded on a shoestring in 1972, Analytab was sold for $19.2 million in 1976. However, a half-dozen other Jacobs startups are known to have failed. The two most prominent -- Bio-Response Inc. and Digital Recording Corp. -- were noteworthy mainly for surviving for almost two decades while racking up losses of nearly $ 50 million.
Jacobs may have come out ahead in his 1970s dealmaking, but there's no evidence to support his privately circulated claims that he made a vast fortune in venture capital. "I remember hearing about the hundreds of millions of dollars Eli made in venture capital, but the fact is he is essentially unknown in regular venture-capital circles," says Frederick R. Adler, a prominent venture capitalist who was a director of Bio-Response. Responds Jacobs: "I'm not known in venture-capital circles because I prefer not to invest with others."
PLAY-BY-PLAY. Jacobs' partnership with Lehrman gradually came apart, undermined by what one acquaintance of both describes as "an opera buffa" of alternating fights and reconciliations. "I forget now the play-by-play of who was supposed to be screwing who because all sorts of things were going on all the time," he says. Lehrman declined repeated requests for an interview.
Jacobs operated solo until 1983, when he joined forces with Peter G. Peterson, who had just resigned as chief executive of Lehman Brothers Kuhn Loeb Inc. Peterson, Jacobs & Co. never really got off the ground, as relations between the two degenerated into animus. "Their relationship was like a time bomb," says Robert Duke DeForest, a former executive with several Jacobs companies.
In effect, the new firm served the purpose of plugging Peterson's prestige and capital into Jacobs' second generation of companies, among them Le Peep Restaurants Inc. Peterson paid $7.50 a share for his initial stake in the Denver-based outfit, which went public at $6.50 and now trades at 10~ a share. Peterson declines to comment about Jacobs.
Peterson was chairman of ill-fated Westronix Inc., a circuit-board assembly company formed from the cast-off parts of Digital Recording. After racking up operating losses of $45 million, Westronix sold its assets in 1989, leaving a residue of $20.4 million in debt -- most of it bank loans personally guaranteed by Jacobs. Instead of taking his loss, Jacobs set up a new subsidiary of Westronix through which he acquired Rosenbalm Aviation. The Westronix debt was rolled over onto Rosenbalm, which already carried substantial debt of its own. Jacobs piled on more debt by financing the purchase with $32 million in bank loans. The result: the money-losing Flagship Express, with more debt due ($40 million) than revenues ($25 million) the last time it reported results (the first half of 1990).
Jacobs' larger LBO properties have fared no better. All three of the largest companies in Jacobs' troubled domain -- Memorex Telex, Triangle Pacific, and BeefAmerica -- have fallen far behind their original loan repayments and are restructuring in hopes of staving off involuntary bankruptcy.
LOW TIDE. Meanwhile, the flood tide of deal fees that enriched Jacobs in the 1980s has receded. Since acquiring the Orioles, he has made only one small acquisition, and some of his existing companies no longer can afford to pay his consulting fees. And yet Jacobs insists that he's thriving as never before. "I have plenty of liquidity without selling the Orioles," he says.
In August, Jacobs slapped a $36 million libel suit on Warfield's, a small Baltimore magazine that ran an article dissecting his business woes. Jacobs' libel complaint states that he "is not 'in a severe cash bind,' nor is he confronting personal bankruptcy" and adds that Warfield's "was informed by a knowledgeable source . . . that Mr. Jacobs has a current net worth in excess of $500 million." The complaint reveals this source as William Blackford, a vice-president of Chemical Bank. Blackford spoke to BUSINESS WEEK, too, but would answer just two questions scripted by Jacobs' public relations firm. The key question: "Whether Mr. Jacobs' current net worth is in excess of the number published in recent newspaper reports." Blackford's answer: "Yes."
At the appraised value, his 87% stake in the Orioles has a net worth of $ 195 million. His stake in SyStemix is worth $140 million at current prices. This adds up to $335 million. As for the other corporate holdings identified by BUSINESS WEEK, it's doubtful that their net worth is sufficient even to offset Jacobs' potential liabilities for Flagship Express and Le Peep. When pressed to account for the additional wealth he claims, Jacobs says he owns real estate and has hidden holdings in many blue-chip stocks. Which ones? Characteristically, he won't say. Anthony Bianco in New York, with Amy Borrus in Washington and Joan O'C. Hamilton in San Francisco