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Reaping The Rewards Of Friendly Persuasion


Finance: DEALMAKERS

REAPING THE REWARDS OF FRIENDLY PERSUASION

How Dick Blum coaxes stunning returns from obscure and ailing companies

Last September, Richard C. Blum turned 60. Joining in the celebration was an odd mix of personalities, including Bill Clinton and Jimmy Carter, actors Sharon Stone and Roger Moore, China's President Jiang Zemin and the Dalai Lama.

Hardly the kind of company you'd expect a stodgy money manager to be keeping. But Blum, who is 6 foot 5 and wears size 15 shoes, is not your typical money manager. The San Franciscan led the first Chinese-authorized expedition up the eastern face of Mount Everest in 1981. Two years before, he founded the American Himalayan Foundation, which helps the region with issues such as health care and the environment.

A self-proclaimed political junkie and a major Democratic fund-raiser, Blum is also half of one of the more intriguing power couples around. His wife of 16 years is California Senator Dianne Feinstein. "He's not one of those computer nerds who sits around and works on models all day long," says Blum's friend Gary L. Wilson, co-chairman of Northwest Airlines Inc., Blum's largest investment. "He's out in the real world."

DIFFERENT PATH. To some, that's the secret behind Richard C. Blum & Associates (RCBA), Blum's asset management firm with $800 million invested in about 14 public companies and private deals. Instead of following the whims of Wall Street, RCBA pursues its own off-the-beaten path. After doing exhaustive due diligence, it takes stakes--on average 5%--in midsize companies that tend to be rather obscure, often troubled, and undervalued. The firm has a knack for identifying weaknesses. Then, over a period of months or years it will coax management to adopt its usually elaborate recipe for change. "The power of our ideas carries it," says N. Colin Lind, a managing director. "If it makes good economic sense, it's hard [for management] to refute."

At times, Blum also benefits from his blue-chip ties. His personal relationship with Wilson, for instance, was one reason he sank $100 million into the 1989 buyout of Northwest Airlines. But Blum is careful to avoid potential conflicts of interest due to his wife's prominence. His firm refuses to manage money for any state-run organization in California or to do any deals involving the state government. "We bend over backward not to have any of the political contacts relate to our activities either domestically or internationally," says Blum.

The firm's approach has paid off. It racked up a stunning 63% return in 1995, in large part because of gains in Northwest Airlines. That made RCBA the best money-management firm in the mid-cap equity value category, according to Nelson Publications. Over the last three years, the 22-person firm averaged annual returns of 34%, compared with a median of 14% for money managers surveyed by Money Manager Review. These results have attracted such investors as BankAmerica Corp. and Merrill Lynch & Co., as well as megamillionaires Gordon Getty and Robert M. Bass. "Their performance has been outstanding," says Peter Walker of Money Manager Review.

That has afforded Blum and his partners lifestyles few could match. Blum, for example, owns five homes in locales as far-flung as Washington, D.C., and Kauai, Hawaii. Like Blum, the firm's three other principals are, well, different. Lind, a 40-year-old former venture capitalist, flies a 1959 Swiss military aircraft in loops and rolls during his spare time. Former Goldman, Sachs & Co. banker Alexander Dean, 31, swims regularly in the chilly San Francisco Bay--without a wet suit. Jeffrey W. Ubben, 34, a former Fidelity money manager, usually reads annual reports in the bathroom.

Blum's social views are unusual for a money manager. He passed on picking up a piece of the giant RJR Nabisco Inc. buyout because he shuns cigarette companies. And he won't put money in casino stocks. "I'm sure I've missed some opportunities," says Blum. "But you don't need to go into businesses that have questionable social values or don't promote the right kind of environment."

He sees education as a critical issue. He personally funded the schooling of numerous children in the Himalayan region, including one woman he put through dental school in Canada. His interest in education attracted him to investments such as National Education in Irvine, Calif., a leader in adult education and corporate training, and Horace Mann Educators in Springfield, Ill., a seller of insurance to teachers.

CLOUT. At National Education, Blum was adamant about moving the company out of traditional publishing into multimedia education materials and believed the company's management lacked the vision to do it. As the largest shareholder and a board member, Blum had the clout to recruit a chief executive with strength in technology. "The only way to leapfrog the company into the 21st century was to bring somebody out of the world of technology," says Blum.

The investment has been a success. In 1991, RCBA invested $20 million in 5 million shares of stock at 4 a share, down from 31. Last month, RCBA sold 2 million shares for $26 million. The remaining 3 million shares are now worth $47 million, and National Education is trading at 16. RCBA "kept the company alive," says investment banker Stephen D. Weinress. Adds National Education CEO Sam Yao: "They are not just shareholders. They are agents for change."

Tektronix Inc., a $1.5 billion technology company in Wilsonville, Ore., is another example of Blum's money-management style, dubbed strategic block investing. After taking a less than 5% stake in Tektronix, RCBA presented management with a 15-page restructuring plan backed up by 45 pages of financial models. The problem, argued RCBA, was that the company had too much real estate and inventory. "It looked like an overfatted leg of lamb," says Lind. "The more we met with management, the more we were convinced we could double operating margins without moving the sales line an inch." The company took a restructuring charge of $150 million and ultimately increased operating margins 70% after consolidating factories and laying off workers. "They understood our company very well and we sought their advice," says Tektronix CEO Jerome J. Meyer.

RCBA's gentlemanly approach, however, doesn't always stop disaster. In 1990, RCBA's fund lost nearly 14% in what was generally an off-year for investors. And in 1992, it suffered a 16% paper loss, primarily because of its $100 million investment in Northwest. A bad recession and brutal fare wars hurt the entire industry, and in 1993 Northwest was just hours from bankruptcy. One-time Northwest Director Walter F. Mondale and Northwest CEO John Dasberg credit Blum with playing a major role in the subsequent turnaround. Blum helped convince labor to make concessions to the company that saved it $900 million. "Dick was central to that whole transformation," says Mondale. Northwest is flying high and RCBA's investment is worth over $300 million.

Now, Blum is ready to take an even greater risk: going global. In a joint venture with Texas dealmaker David Bonderman, Blum has formed Newbridge Capital Ltd. So far, they have raised $105 million for a China fund, with plans for another $350 million for Latin America and India.

Both men acknowledge the perils of investing in emerging markets. But for Blum, going abroad may not be as dangerous as it would be for less-connected money managers. After all, Blum is close to Chinese President Jiang Zemin, who once danced with Feinstein on a visit to San Francisco. And given his strong ties to Tibet and the Dalai Lama, Blum sometimes serves as an intermediary between China and Tibet. "We've probably been saved from investments in Asia in the past because of the friends we have there," says Blum.

When Blum isn't on the road looking for new investors or climbing mountains, he pursues his political passions. On June 9, he hosts a fund-raiser for President Clinton at his San Francisco home. This summer he'll be meeting the Dalai Lama in Rome and Los Angeles. "There's one person I call on for divine intervention," says Blum. "And that's the Dalai Lama." Given his firm's record, he probably won't need it.By Linda Himelstein in San FranciscoReturn to top


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