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International -- Finance: U.S. CONGLOMERATES
RON PERELMAN, THE MAN WHO COLLECTS COMPANIES (int'l edition)
New York's East 62nd Street in Manhattan between Madison and Park Avenues is a quiet enclave of townhouses. But one of the houses--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 PO. Perelman, one of America's savviest dealmakers.
His first-floor office is mogul-size, with huge modern paintings--a Warhol and a Twombley. Crowding every surface are lucite mementoes of various deals. On the leather sofa lie cushions needlepointed with such epigrams as: "No Guts, No Glory," "Happiness Is Positive Cash Flow," and "Love Me, Love My Cigar."
Perelman, 52, looks as if he's basking in all three: glory, positive cash flow, and an ever-present cigar. Tanned, intense, and impatient, his leg draped over the side of a chair, puffing 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 desire to acquire and own them. The array is 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 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 detractors sometimes criticize his tactics, Perelman has built a U.S. empire nearly from scratch. He started in 1978 with a $1.9 million bank loan. He used it to buy a New Jersey jewelry-store chain, which he 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 richest people in the U. S.
Perelman's 100% ownership of New York-based MacAndrews & Forbes, which he bought in 1978, is what sets him apart from the general run of dealmakers. Players such as Henry B. Kravis, the American leveraged-buyout specialist, buy companies with their clients' money and collect fees, while Perelman buys with his own money. "Henry is doing it for the fees. Ron is doing it to own it," says Steven I. Chazen, CFO of Occidental Petroleum Corp. and a former Perelman banker at Merrill Lynch & Co.
Perelman didn't build his empire just by being a shrewd wheeler-dealer. His companies flourish because he spends time operating them. He took companies such as Revlon and Coleman, which had great brand names but were going nowhere, and turned them around. The stock 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 a further $200 million at Mafco Consolidated ready to spend, which could back a multibillion-dollar bid, says Gittis.
Perelman faces hurdles. One is his reputation, 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 bitterest hostile takeovers. Since then, he has become known as a successful operator of companies, but blue-chip America 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."
Perelman's skills as an operator are far from infallible. It took him years to create a strategy for Revlon, 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 has already had an embarrassment with Revlon: In 1992, an IPO flopped because of poor timing and overoptimistic projections.
Even after a turnaround, Revlon won't be an easy sell. Just deciding what it's worth is controversial. Sources close to Revlon put it at $4.7 billion, while analysts think the figure is half that---barely enough to cover its debt.
It's not only Revlon's value 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. 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. Furthermore, MacAndrews & Forbes doesn't subtract $1 billion in Revlon operating-company debt and $300 million in First Nationwide preferred stock
"POOR MAN'S DISNEY." Perelman's recent forays into creative realms, such as publishing and TV production, have proved more difficult than those in the simpler industries, such as camping equipment, that have been his mainstay. One example: Marvel's 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 has yet to bag a top-tier media company. New World is a second-tier player, with limited TV production and uncertain cash flow from its stations. As for Marvel, Perelman contents himself with "a poor man's Disney," as one analyst dubbed Marvel. Of running creative firms, Perelman says, "it's harder."
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 TV company from the ground up. In the past year, he has reeled in deals with Fox Broadcasting Co. and NBC Inc. and has 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 his money around 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 entertained the President at his Palm Beach (Fla.) house for a fund-raiser.
Perelman gave BUSINESS WEEK broad access to his operations. Interviews with Perelman executives and competitors, bankers, and analysts show a complex structure that gives flexibility and control, aggressive use of debt that has supercharged profits, and hardball tactics.
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 80% or more. That lets Perelman 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 gives Perelman a 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 U.S. tax code in other ways as well. "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 jackpot in 1988. The Federal Savings & Loan Insurance Corp., desperate to get rid of a group of Texas thrifts, First Gibraltar, 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 tax losses. He can use these losses for 15 years to offset income elsewhere in his empire. The savings 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 the founder's great-grandson, Sheldon Coleman.
PLAYING HARDBALL. Perelman favors companies with products 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," says a friend. "He likes recognition."
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 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, an indication 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 the men 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."
The tide that has lifted Perelman's boat highest 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.
Perelman says 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 former chief financial officer. Tepperman charged that Perelman fired him for taking time off to care for his sick wife. In court testimony, Tepperman described a boss who screamed and demanded 24-hour-a-day dedication. Perelman fought the claims, saying Tepperman shirked his duties and took advantage of Perelman's generosity, but he abruptly settled the matter for a rumored $10 million.
Perelman also just concluded a suit over his 1983 purchase of Technicolor Inc., a cinema company, 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 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, Perelman won--in July, 1995. The Delaware Supreme Court decided that even though the directors were negligent, shareholders still got a fair price.
CAR TALKS. 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's RGP Holding Co., he launched a campaign against Champion Parts Inc., an Oak Brook (Ill.) auto-parts maker, in an effort to revive it'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."
Raymond was a decisive factor in Perelman's success. Raymond tutored 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, during the drive home, the two would discuss the merits of the deal. By age 11, Ronald was coming to board meetings. As a teenager, he read balance sheets and annual reports after school.
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. After the break, it took six years to become reconciled with his father.
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 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 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.
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."
Where does one of the U.S.'s richest men go from here? Perelman says he has no grand plan. He has just bought 50% of Premiere magazine as a publishing "laboratory." He's looking for a site in Manhattan for a Marvel-theme restaurant. And Bevins says New World wants to buy a record company. Given his ambition and taste for the spotlight, the Perelman empire is sure to keep growing.By Leah Nathans Spiro in New York, with Ronald Grover in Los Angeles