As the raiders pulled apart the large corporate blobs that had slowly, or not so slowly, coagulated since the 1960s, they created structures that, to this day, form the underpinnings of private equity transactions. Still, it is tempting to succumb to Oliver Stone's somewhat simple vision of the Gordon Gekkos of the world. "Greed is bad." He can be forgiven for the moment, as while he filmed Wall Street in hindsight, it was only two years of hindsight. Wall Street was released in 1987 and takes place in 1985. It is, however, hard to quibble with some of his caricatures. After all, we had Michael Milken, Ivan Boesky, Dennis Levine, and the perhaps more colorful figures of Sir James Goldsmith and Sir Gordon White- though it is hard to get more colorful than Boesky, who actually delivered a "Greed is Good" speech at University of California at Berkeley in 1986 and, it is claimed, occasionally wore a T-Shirt labeled "He who dies with the most toys wins."
There is no doubt that the Gekko character has served as an inspiration for the many Barb and Bud Foxs haunting business school classrooms. This is ironic, as the actor himself has quipped. Any number of young financial professionals have, on meeting him for the first time, credited their interest in banking to the inspiration they found in his character. "I've given up saying 'But he was the bad guy,'" Douglas says.
Denounced in the late 1980s and early 1990s, the verdict is actually still out on LBOs, "Junk Bonds," now labeled "high yield debt," and takeovers in general, but only barely. A host of studies from the late 1980s through today seems to have, aside from the criminal acts of a precious few, vindicated the LBO and, by extension, high yield debt. High yield debt did, after all, fund the telecom boom.
Among the earlier works, Steven Kaplan's 1989 study, "The Effects of Management Buyouts on Operating Performance and Value," sets the tone for academic study on the subject and focuses our attention on two things. 1. The role of debt as a negative incentive to corporate waste. (Miss those regular debt payments and the bank will take the keys). 2. The role of management equity, either as stock or options, as a positive incentive to building shareholder value.
Joseph Schumpeter called it "creative destruction." The shifting of resources from inefficient, but sentimentally charged endeavors to newer, more efficient ventures. Stone called it greed, in a sense. I leave it to you to find your own definition. Personally, I am inclined to agree with Schumpeter. Are we suddenly surprised that LBOs have reemerged after the tech boom and bust? The market, if nothing else, does have ways of dealing with inefficiencies.
Our real-world characters too, have seen a resurgence. Carl Icahn has endured and has made himself a barbed thorn in Disney's side, where his "break it into four pieces" strategy (wsj, subscription required) sounds suspiciously like a line from a shareholder meeting in 1985. Milken has experienced such a resurgence in public as to prompt one publication to pen an article titled, "The Resurrection of Michael Milken." How the mighty have fallen. And risen.
"Greed clarifies, cuts through, and captures the essence of the evolutionary spirit."
Given this history, you would think that corporations would stop focusing on diffuse and unfocused merger strategies as a proxy for growth. (Ahem, Time Warner). You would be wrong. Very wrong. Instead, there is a constant, bustling market for acquisitions while corporates snatch up, try on, and often quickly discard one or another divestiture, division or stand-alone like so many wardrobe experiments. Many times these acquisitions are well thought out. More often, in my experience, they are not. But then, failed acquisitions make for very interesting opportunities for private equity firms.
All this is a very long way of saying that the corporate mergers and acquisitions department that I finally scraped an offer out of after my first year of business school was a relic of a nearly bygone era. That didn't stop me from taking the position, of course.