During the Reagan years, the nation began to climb out of the recession of the 1970s. Reagan’s policies helped, though often in unpredictable ways. Reagan’s relaxed regulation of Wall Street helped precipitate a frenzy of corporate mergers. Deregulation provided the context for the merger movement, but the person most responsible for it was Michael Milken, a shrewd stockbroker of the firm of Drexel Burnham Lambert. Milken specialized in selling “junk bonds,” the debt offerings of companies whose existing debts were already high. He persuaded savings and loan associations, insurance companies, pension funds, and other big investors to buy these junk bonds, which, though risky, offered high interest rates. The success of his initial ventures prompted Milken to approach smaller companies, encourage them to borrow immense sums by floating junk bonds, and use the proceeds to acquire larger firms.
In 1985 Ronald Perelman, an aggressive entrepreneur, employed this strategy to perfection. He had recently obtained control of Pantry Pride, a supermarket chain with a net worth of about $145 million. Now he sought to acquire Revlon, a $2 billion cosmetics and health care conglomerate. With Milken’s help, Pantry Pride borrowed $1.5 billion and used that capital to buy Revlon.
He then paid off Pantry Pride’s $1.5 billion in junk bonds (“junk” because the debt so greatly exceeded the $145 million value of Pantry Pride) by selling huge chunks of Revlon. Then he integrated the food component of Revlon into Pantry Pride. The bond purchasers profited handsomely from the high return on the junk bonds, and Perelman made a fortune from his new food conglomerate. That same year the R. J. Reynolds Tobacco Company purchased Nabisco, another food conglomerate, for $4.9 billion.
Three years later this new giant,
RJR Nabisco, was itself taken over by Kohlberg, Kravis, Roberts, and Company for $24.9 billion.
During the frenzied decade of the 1980s, one-fifth of the Fortune 500 companies were taken over, merged, or forced to go private; in all, some 25,000 mergers and acquisitions were successfully undertaken; their total value was nearly a half-trillion dollars. To make their companies less tempting to cash-hungry raiders, many corporations took on whopping debts or acquired unprofitable companies. By the late 1980s, many American corporations were wallowing in red ink. Debt payments were gobbling up 50 percent of the nation’s corporate pretax earnings.
World History
