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The Operator


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THE OPERATOR

East 62nd Street in Manhattan between Madison and Park Avenues is a quiet residential enclave of posh townhouses. But one of those townhouses--you'd never know it, because there's no name on the building--is the headquarters of MacAndrews & Forbes Holdings Inc., the empire owned by Ronald O. Perelman, one of the savviest dealmakers of his time.

His first-floor office is mogul-size, with a display of huge modern paintings, a Warhol and a Twombley. Crowding every surface are lucite mementoes commemorating various deals. On the leather couch are needlepoint pillows that say "No Guts, No Glory," "Happiness Is Positive Cash Flow," and "Love Me, Love My Cigar."

Perelman, 52, looks as though he is basking in all three: glory, positive cash flow, and his ever-present cigar. Tanned, intense, and impatient, leg draped over the side of a chair, puffing away on an H. Upmann, Perelman talked in a rare interview about his sprawling empire. His vocation and avocation is collecting companies, and he is driven by the desire to acquire and own them. The array is remarkably diverse: Revlon (cosmetics), Coleman (camping equipment), Marvel Entertainment Group (comic books and trading cards), First Nationwide Bank (banking), New World Communications Group (broadcasting), and, of course, Consolidated Cigar. "I'd love to buy another cigar company," says Perelman with a hint of his native Philadelphia accent. (He smokes five cigars a day, keeping one in hand from 7:30 in the morning to 9 at night.) "I love all the businesses we are in."

While critics may sometimes attack his tactics, Perelman has built an extraordinary empire virtually from scratch. He started in 1978 with only a $1.9 million bank loan. He used it to buy a New Jersey jewelry store chain, which he then liquidated for $15 million. Over the next 17 years, he bought 44 companies, keeping some and selling others for huge profits. He parlayed his gains into a conglomerate of name-brand companies with 60,000 employees. BUSINESS WEEK values his stake at $5 billion, making him one of the dozen or so wealthiest people in the U.S.

Perelman's 100% ownership of MacAndrews & Forbes, which he bought in 1978, is what sets him apart from the general run of dealmakers. Players such as Henry B. Kravis buy companies with their clients' money and collect fees, while Perelman buys companies with his own money. "Henry is doing it for the fees. Ron is doing it to own it," says Steven I. Chazen, chief financial officer of Occidental Petroleum Corp. and a former Perelman banker at Merrill Lynch & Co.

PILES OF READY CASH. Perelman didn't build his empire just by being a shrewd wheeler-dealer. His companies are in large part flourishing because Perelman spends a lot of time operating them as well. He took companies such as Revlon and Coleman, which had great brand names but were going nowhere fast, and turned them around. The stock market values of Coleman, Marvel, and New World have soared since he took them public in the early 1990s. "Our business has always been the creation of wealth. That's what we do for a living," says Howard Gittis, Perelman's chief lieutenant.

Perelman is still very much on the hunt. He is pursuing a strategy of rapid growth, through internal expansion and constant small acquisitions. Now Perelman is gearing up for a bigger purchase. There is $500 million in free cash at MacAndrews & Forbes, with another $200 million at Mafco Consolidated ready to spend, which could back a multibillion-dollar bid, says Gittis.

Perelman does face hurdles. One is the reputation he acquired in the 1980s as a raider, a greenmailer, and a charter member of Michael P. Milken's junk-bond network. Revlon, which he snagged in 1986 with Milken's backing, was one of the decade's most bitter hostile takeovers. Since then, he has become known as a highly successful operator of companies, but blue-chip America still views him as "the plague," says one banker. And the aggressive billionaire has left a trail of enemies and lawsuits from shareholders, employees, and ex-wives. Says Perelman: "We don't like to be misused or taken advantage of. But I think the image of us being that hard is terribly exaggerated."

And Perelman's skills as an operator of companies are far from infallible. It took him years to finally create a successful strategy for Revlon, his biggest conquest and the centerpiece of his empire. He has revitalized the company, but the real test will be whether he can pull off an initial public offering. "If the markets are strong, I'd love to take it public," says Perelman. He is expected to try an IPO early next year. Perelman was already embarrassed in 1992, when a Revlon IPO flopped because of poor timing and overoptimistic projections.

Despite a turnaround, Revlon won't be an easy sell. Just determining what it's worth is controversial. Sources close to Revlon put it at $4.7 billion, while some analysts believe the figure is half that---barely enough to cover its debt.

"POOR MAN'S DISNEY." And it's not only the value of Revlon that's at issue. Gittis maintains that the gross value of what MacAndrews & Forbes owns is about $10.8 billion. MacAndrews & Forbes bankers say this includes $4.7 billion for Revlon and $2.5 billion for First Nationwide. The net worth of all Perelman's companies, according to Gittis, after subtracting all holding-company debt of $1.8 billion, therefore, comes to $9 billion. BUSINESS WEEK estimates that the figure is more like $5 billion. For one thing, MacAndrews & Forbes may be overestimating the value of Revlon by $2 billion (box, page 58). The value of First Nationwide may also be too high. Todd A. Pitsinger, an analyst at Friedman, Billings, Ramsey & Co., estimates that the thrift is worth $1.8 billion. Further, MacAndrews & Forbes doesn't subtract $1 billion in Revlon operating-company debt and $300 million in First Nationwide preferred stock.

Perelman's more recent forays into creative businesses, such as television production and publishing, have proven more difficult than those in the simpler industries, such as camping equipment, that have been his mainstay. One example: Marvel's recent loss of comic-book market share. Instead of improving the quality of the comics, say retailers, Marvel has fired talented authors and is relying on excessive licensing of Spiderman and other characters. "He's strip-mining the company," says Jim Shooter, former editor-in-chief of Marvel and now a competitor.

Perelman, further, has yet to bag a top-tier media company. New World is still a second-tier player, with limited TV production and uncertain cash flow from its TV stations. As for Marvel, Perelman must content himself with "a poor man's Disney," as one analyst dubbed Marvel. Asked about running creative firms, Perelman admits, "It's harder."

Perelman loves the financial high wire, taking out the equivalent of home-equity loans on most of his companies to buy new companies. He has considerable debt outstanding at two levels: Bonds issued by the holding companies that own the operating companies and bonds issued by the operating companies themselves. Changing economic conditions, such as recessions or high interest rates, could jeopardize Perelman's ability to grow. Perelman says that his debt level is conservative: "We could sell any one of six assets and completely eliminate our holding-company debt overnight."

Right now, Perelman seems to be everywhere, creating a buzz in Hollywood, on Wall Street, in Las Vegas, and in Atlantic City. Perelman is building a television company from the ground up. In the past year, he has reeled in deals with Fox Broadcasting Co. and NBC Inc., and hired Brandon Tartikoff, one of the biggest names in television. "They're terrific dealmakers," says Barry Diller, the former Fox and QVC Inc. chairman. Perelman is attracting a following among investors who have noticed the strong stock performance of his operating companies. On July 26, Perelman got a license to operate a casino in Atlantic City and has applied for a license in Nevada.

The billionaire is throwing around his money in Washington, too, playing both sides of the fence. He is a major contributor to Senator Bob Dole (R-Kan.). Newly married to Democratic activist Patricia Duff, his third wife, Perelman hosted the President at his Palm Beach mansion for a Clinton fund-raiser.

LOVE THOSE LOSSES. Perelman gave BUSINESS WEEK broad access to his operations. Interviews with Perelman executives and competitors, bankers, and analysts show a complex corporate structure that gives him great flexibility and control, aggressive use of debt that has supercharged profits, and hardball tactics that helped him win many a battle.

Perelman has set up his empire with a clever structure that yields tax, financial, and management benefits. A particular feature: the many holding companies that own the operating companies. Five operating companies have done IPOs, but MacAndrews & Forbes usually retains an 80% or greater interest. That allows Perelman to consolidate income from all of his companies--which saves big bucks on his tax bill. He can offset profits at one company against losses at another, paying taxes only on the net amount.

The structure also gives Perelman an efficient way to leverage the equity he has in his operating companies while minimizing his exposure. Three Marvel holding companies, for example, have issued $620 million in public debt secured by Perelman's 48 million shares of Marvel Entertainment stock. But that money is used not by Marvel Entertainment but by Perelman to buy other companies. By issuing debt in three separate holding companies, he limits the legal liability of MacAndrews & Forbes.

Perelman uses the tax code to his advantage in other ways. "He knows how to use net operating losses better than anyone," says Robert Willens, a tax analyst at Lehman Brothers Inc.

Perelman really hit the NOL jackpot in 1988. The Federal Savings & Loan Insurance Corp. was so desperate to get rid of a group of Texas thrifts, First Gibraltar, that it cut Perelman a hugely generous and controversial deal. The Texas market quickly rebounded, giving Perelman a $1 billion profit when he sold the thrifts, plus an additional $3 billion in NOLs. He can use these losses for 15 years to offset income elsewhere in his empire. The savings even let him bid $75 a share for Coleman in 1989, against the $68 a share bid by the Coleman family, in an auction for the family business, says Sheldon Coleman, the founder's great-grandson.

True, Perelman has paid what appeared to be top dollar at the time for companies with strong brand names, such as Coleman and Marvel. But by exploiting and licensing the brand names, he has made those high prices look like bargains. More often, Perelman is a bottom-fisher. He likes sellers desperate to unload their companies. He bought money-losing First Nationwide Bank from Ford Motor Co. for a rock-bottom $700 million in 1988. The company is now thriving under Perelman management. "First Nationwide is a home run," says analyst Pitsinger.

After winning such bargains, using mostly borrowed money, Perelman sells off secondary divisions and uses the proceeds to pay down the acquisition debt. Then he starts building the company, with economies and acquisitions. In the case of First Nationwide, he closed a mortgage-servicing office in Sacramento and moved it to a unit in Frederick, Md., called Federal Standard. First Nationwide bought Federal Standard from the Resolution Trust Corp., but only after the RTC laid off half the staff. Less staff and lower Maryland salaries have cut the cost of processing a loan from $109 to $65.

One of Perelman's criteria is more subjective: He favors companies with products or businesses that he would enjoy owning. "I love coming into work. I would not love making widgets," he says. He enjoys the glitz and celebrities that go with owning Revlon, for example. "He likes to have association with products with recognition. Q.E.D., he likes recognition," says a friend.

Perelman has a lot of help grabbing the right purchase at the right price. "There is not much we don't look at," says Gittis. MacAndrews & Forbes has just 20 professionals, including three analysts who crunch numbers on deals full-time. His top people are Gittis, a Philadelphia lawyer whom Perelman has described as his closest friend in the world, Donald Drapkin, a former Skadden, Arps, Slate, Meagher & Flom attorney, and Bruce Slovin, a Harvard-educated lawyer.

While he pays his top lieutenants generously--Wall Street sources say each earns about $10 million a year--they don't get any equity, a measure of Perelman's desire for control. The men are virtually inseparable, having breakfast and lunch together almost every day. The elegant townhouse has something of a fraternity house atmosphere, as they argue, tell jokes, smoke cigars, and generally have a good time.

Perelman's advisers have known him long enough to be able to tell him their honest opinion. "God knows, Ronald has an ego," says a Perelman banker. "But this is not a reverent crowd. It's like being around the dinner table at someone's home. They don't kiss his ring. I've heard them tell him he's a putz."

"MASS, NOT CLASS." Perelman's dealmeisters also maintain close relationships with financial firms that, in turn, bring him the best deals. Perelman spreads his considerable investment banking business around and supports talented bankers. These ties also give him an advantage in bidding wars. For example, when Perelman bid for Coleman in 1989, he had no trouble getting a bridge loan from Citibank and passing due diligence with the Coleman board's investment bankers. Says Sheldon Coleman: "They trusted his staff with the numbers, so they didn't feel they needed to do their own."

Perelman is also steeped in the operating end of his businesses. When the chief executives of his companies are in New York, they come to breakfast with Perelman and his top staff at Perelman's townhouse, which adjoins the MacAndrews & Forbes offices. Perelman receives daily or weekly information en each company and gets involved in details. For example, Coleman's management displayed their new products in the MacAndrews & Forbes boardroom this spring. Perelman immediately picked out the best in the lineup, an upscale camping lantern, and the worst, a pedestrian cooler. "He knows the cooler is not quite there yet. It is intuitive with Ronald," says Michael N. Hammes, Coleman CEO and ex-president of Chrysler International.

The pressure to grow internally and by acquisition is constant. "I don't think anyone is quite as driven as Ronald," says Gerald J. Ford, chief executive of First Nationwide Bank. For example, Coleman has spent $150 million on seven companies since 1993, including a backpack outfit, an aluminum-furniture company, and an Italian camping-equipment company. The result: Coleman's sales have soared from $575 million in 1993 to an estimated $950 million in 1995.

Perelman is shaking up the cosmetics industry. For five years, Revlon was a straggler. "Ron made some bad people choices, and they had a lot of crappy products," says Allen Mottus, a cosmetics industry consultant. Then in 1991, Perelman brought in Jerry W. Levin as CEO of Revlon and went with a "mass, not class" strategy, a risky and expensive move. Revlon pulled its products out of department stores and now sells them almost entirely at drugstores, Wal-Marts, and Kmarts. Revlon also developed strong lipstick and makeup products and charged more than drugstores had in the past. The company's Color Stay lipstick and Age Defying makeup are blockbusters, boosting Revlon's market share and moving Revlon to second place from third in mass market cosmetics sales. "Now we have a plan to take us to No. 1," says Levin.

THE BIG FOX SWITCH. After a few false starts, Perelman also is stirring up the TV business. In 1989, Perelman spent $145 million to buy New World, then a second-rate Hollywood studio. He discovered that the television industry no longer wanted to buy its library of schlocky movies and cornball sitcoms. So Perelman and his top entertainment executive, William C. Bevins, junked the movie business and piled on nearly $1 billion in debt to buy 12 television stations--six out of bankruptcy.

What really could make New World an entertainment powerhouse was Perelman's blockbuster 1994 deal with Fox to switch 10 of his stations from affiliation with CBS to Fox--the largest number of affiliates ever to switch. The deal with Fox, and another deal to switch the remaining two stations from NBC, gave New World guaranteed time slots for their shows on the Fox network, lifting the reach of Perelman's TV productions from 14% to 40% of the U.S. market. Further, Fox pitched in with $500 million. To produce hit shows for the networks and syndication, Perelman brought in Tartikoff, a former top NBC executive, and Stephen J. Cannell, a producer of action-TV shows. While some in Hollywood say Tartikoff has been away too long, he has already converted two out of five pilots into network shows. That batting average, says baseball fan Tartikoff, is something "Tony Gwynn would love to have."

PLAYING HARDBALL. The biggest wave that has lifted Perelman's boat is leverage. The holding companies alone have $2.6 billion in publicly traded debt and preferred stock. (Gittis puts that number at $1.8 billion because he doesn't count preferred stock and certain holding-company debt issues.) Compare that with the operating companies, which have an estimated combined market value of $8.1 billion (table, page 54).

Perelman says that his empire is not overleveraged. He limits his holding-company debt to 20% of the equity value of all of his companies. Perelman figures his companies grow around 20% a year and his debt costs him only about 10%, so he's sitting on a money machine.

A darker side to Perelman's success has been his willingness to play hardball and make enemies. This July, the public caught a glimpse of his tough side in a lawsuit filed by Fred Tepperman, Perelman's ex-chief financial officer. Tepperman charged that Perelman fired him for taking too much time off to care for his sick wife. In court testimony, Tepperman described a boss who yelled and screamed, and demanded 24-hour-a-day dedication. Perelman fought the claims, saying that Tepperman shirked his duties and took advantage of his generosity, but he abruptly settled the matter for a rumored $10 million.

Perelman also just concluded a bitter suit over his 1983 purchase of Technicolor Inc. for $125 million. The $625 million in profits Perelman made when he sold Technicolor was what fueled his future empire building. Cinerama, a 4.4% shareholder of Technicolor, objected. Cinerama says Perelman was able to buy the company dirt cheap because Technicolor directors didn't solicit other bids--because Perelman rewarded the CEO and two directors, as the court found in an earlier 1993 decision. Perelman paid one director $150,000 to introduce him to the CEO and promised the CEO increased compensation for backing his bid. Still, after a 13-year legal battle, in July, 1995, Perelman won. The Delaware Supreme Court decided that even though the directors were negligent, shareholders still got a fair price.

Perelman's ruthless reputation also comes from his hostile bids for Revlon and Gillette. In old-line corporate circles, his Milken-backed bid for Revlon was viewed as the vandals breaking into the citadel. In 1986, Perelman went after Gillette and collected $39 million in greenmail from the company to go away, a reviled practice. When he tried to acquire Salomon Brothers Inc. in 1987 and Shearson Lehman Hutton Inc. in 1990, he was repelled both times. The reason: His reputation wouldn't play well with conservative investment banking clients. "There was a prejudice against him. He was a Drexel client. There was some aversion to that sort of stewardship." says former Salomon CEO John H. Gutfreund.

To anyone who knows the Perelman family, his aggressiveness isn't surprising. His father, Raymond G. Perelman, the son of a Lithuanian immigrant, is himself a corporate raider. In 1993, at age 75 and chairman of Philadelphia-based RGP Holding Co., he launched a campaign against Champion Parts Inc., an Oak Brook (Ill.) auto-parts maker, in an effort to revive the company's sorry stock price. He used his seat on the board to oust the CEO and took the job himself. A month later, the directors removed him from the job. "He's a rough customer," a director told Crain's Chicago Business in early 1993. "A month of him as CEO was all the board could take."

It was probably Raymond who was the biggest factor in Perelman's success. Raymond apprenticed Ronald from an early age in the craft of acquiring and running companies. He would take Ronald with him to see companies he was thinking of buying, and afterward, during the car ride home, the two would discuss the merits of the deal. By age 11, he was coming to board meetings, and as a teenager he read balance sheets and annual reports after school.

ON THE GOSSIP CIRCUIT. After Perelman graduated from the University of Pennsylvania's Wharton School, the two worked together. By 1978, Perelman was itching to run the company. One day, he asked his father when he would get the title of president. Raymond said he wasn't ready to give it to him. So Perelman decided to move to New York and step out on his own. It took six years to reconcile with his father after the break.

But while Perelman's career was going gangbusters, his private life was tumultuous. In 1965, at age 21, he married Faith Golding, the daughter of a wealthy Philadelphia real estate family. They had four children. But a messy, public divorce followed in 1983, with Golding filing a statement with the Securities & Exchange Commission asserting that Perelman tried to usurp some of her assets. In early 1985, Perelman married Claudia Cohen, a gossip columnist. They had a daughter and became staples of New York's gossip columns. They divorced in 1994, with Cohen getting a rumored $80 million settlement. Perelman and his current wife, Patricia, had a private wedding in December, 1994, just before she gave birth to Perelman's baby and converted to Judaism. A security fanatic, Perelman employs the former acting director of the FBI as his director of compliance and travels with two beefy bodyguards.

LUBAVITCHER BOOSTER. Perelman is a generous but demanding father. When his son Josh got engaged, Perelman insisted that Josh's fiancee sign a prenuptial agreement. She didn't sign one, and Perelman showed his disapproval by not attending his son's March wedding. Josh's older brother, Steven, works at Revlon and is being groomed for a leadership position in the business. "It's theirs to take or not to take," says Perelman. "I plan to leave my assets to my children, so they should be interested in running them."

A constant in Perelman's life seems to be his religion. He observes the Sabbath and eats kosher food. He is a major supporter of the Lubavitchers, an ultra-orthodox sect that reveres its deceased leader, Rabbi Schneerson. This June, Perelman chaired a dinner held in Washington at the Grand Hyatt commemorating Rabbi Schneerson. The billionaire couldn't have been more incongruous. Wearing a yarmulke and accompanied by his son Steven, Perelman radiated wealth and worldliness with his trademark cigar, his public-relations man, and a personal assistant toting a cellular phone. He was surrounded by men with white beards and long black frock coats, whom he greeted with warm embraces.

Perelman's success in buying and sticking with companies has helped him shed his 1980s raider image. Times, too, have changed. In the 1990s, with such companies as IBM and AT&T making hostile bids, an '80s-style raider is no longer anathema. (Would Perelman launch a hostile raid today? "Absolutely," he says.) This April, he was a keynote speaker at the National Association of Broadcasters convention in Las Vegas, where News Corp. Chairman Rupert Murdoch and Barry Diller also spoke.

So where does one of the country's richest men go from here? Perelman says he has no grand plan. He just purchased 50% of Premiere magazine as a publishing "laboratory." He's looking for a site in Manhattan to build a Marvel theme restaurant. And Bevins says New World wants to buy a record company. Given his restless ambition and his proclivity for the spotlight, the Perelman empire is sure to keep growing.By Leah Nathans Spiro in New York, with Ronald Grover in Los Angeles


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