How Corporate Raiding Rose, Peaked, and Got Rebranded.

Introduction

For most of the 1980s, the word junk bond was doing exactly what it was designed to do. It made people stop looking. A bond that pays more than the safe ones pays more because someone somewhere has judged it more likely to fail, and by 1989 those bonds had financed a decade of the largest corporate takeovers in American history. The man who built that market went to prison. The raiders he financed did not disappear so much as run out of the one thing every raid actually required, and it was never audacity. It was somebody else’s money.

The raids themselves are well documented, and the names are familiar: T. Boone Pickens, Carl Icahn, the fight for RJR Nabisco. What gets left out, almost every time the story is retold, is where the money for any of it actually came from, and why it stopped arriving. This is that version.

What a Raid Actually Was

Strip away the drama and a corporate raid was a simple transaction with an uncomfortable name. A raider identified a company whose stock traded for less than its assets, its divisions, or its cash flow were actually worth, usually because the company was poorly run, oversized, or simply out of favor with the market. He bought enough shares to threaten control, sometimes launching a formal tender offer for the rest, sometimes only accumulating a stake large enough to force a seat at the table. From there he had two ways to profit. He could win control and break the company apart, selling the pieces for more than the whole had cost him. Or he could lose, and be paid to go away, his shares bought back by a company desperate to end the standoff, a practice that came to be called greenmail. Either outcome worked. That is the part the word raider was built to obscure: failure and success paid the same account, as long as a target’s board was frightened enough to write the check. A fuller account of how a raid actually worked, mechanically, is covered separately.

The Raiders, By Name and Number

T. Boone Pickens ran an oil and gas company called Mesa Petroleum out of Amarillo, and in May 1982 he made his first real run at a target, an attempt on Cities Service Company. He lost the bidding war to Occidental Petroleum. He still walked away with roughly $31 million in profit, a lesson he never unlearned. In 1984 he set his sights on Gulf Oil, then the fifth largest oil company in the country, and Gulf’s board chose to sell itself to Chevron rather than let Pickens in. Mesa’s profit on that maneuver ran past $500 million. Pickens went on to run at Phillips Petroleum, his former employer, and then at Unocal, where a partnership he controlled bought a 13.6% stake for $322 million in March 1985. He never once won outright control of a major target. He did not need to.

Carl Icahn worked differently but ended in the same place. His first fight was in 1978, a controlling stake in the appliance maker Tappan that forced a sale to Electrolux and doubled his money. In 1983 he took a position in ACF Industries and sold it two years later to Phillips Petroleum for a $50 million profit. Then came Trans World Airlines. Icahn began buying TWA stock in March 1985, reached a 25% stake within weeks, and made a $600 million tender offer for the rest. By 1988 he owned the airline outright through a leveraged buyout, and he spent the years that followed selling off what TWA actually had, including its London routes, sold to American Airlines in 1991 for $445 million. Icahn’s personal profit on TWA is generally put at around $469 million. TWA was left holding roughly $540 million in debt. Pickens and Icahn were the two names that made the front page most often, but there was a longer roster working the same trade, and it is worth reading in full.

What Actually Paid for It

None of the above was possible on the raiders’ own money, and most retellings do not say so plainly. A leveraged buyout borrows against the target company itself, using its assets and its future cash flow as collateral for the debt that buys it, and the debt of choice through the 1980s was the junk bond: a bond rated below investment grade, paying a higher return precisely because the company issuing it was a worse credit risk. The market for that kind of debt was tiny in 1979, on the order of $10 billion outstanding. By the end of the decade it had grown past $100 billion.

The man who built that market was Michael Milken, who ran the high yield bond desk at Drexel Burnham Lambert. Milken did not just trade junk bonds. He created a standing network of investors willing to buy them on his word, which meant a raider with a Milken commitment letter could show up to a takeover fight with financing a target’s own bankers could not match. Milken’s own compensation reflected what that network was worth: over $1 billion across four years in the late 1980s, including roughly $550 million in 1987 alone. Every raid named above ran, directly or indirectly, on debt that traced back to that desk.

The Largest Deal the Money Ever Bought

The era’s largest transaction was not, strictly speaking, a raid at all. In October 1988, Ross Johnson, the chief executive of RJR Nabisco, attempted to take the company private in a management buyout, and the attempt set off a bidding war among the country’s leading takeover firms. Kohlberg Kravis Roberts won it, at a valuation near $25 billion, the largest leveraged buyout the market had ever produced. The fight is recorded in full in Bryan Burrough and John Helyar’s Barbarians at the Gate, still the definitive account of what a bidding war at that scale actually looked like from inside the room.

The Defenses

Targets did not sit still. In December 1982, the mergers and acquisitions lawyer Martin Lipton developed a defense that came to be called the poison pill: a mechanism that let a threatened company flood the market with new shares, or grant existing shareholders the right to buy more at a steep discount, the moment an unwelcome bidder crossed a set ownership threshold, diluting the raider’s position faster than he could afford to keep buying. Lipton’s first attempt at deploying it, in General American Oil’s defense against Pickens, was never used. It was first actually triggered later that year in El Paso Company’s defense against a hostile bid from Burlington Northern. Delaware’s courts upheld its legality in 1985, and within a few years it had spread to thousands of American boardrooms.

The other defense was the white knight, a friendly acquirer brought in to outbid a hostile one, and its most notable use in this period involved a name outside the usual cast of raiders. In September 1987, Ronald Perelman moved to acquire a large block of Salomon Brothers stock, financing arranged in part through Milken, in a position that would have given him effective control of the firm. Salomon’s chief executive, John Gutfreund, brought in Warren Buffett as the white knight. Berkshire Hathaway purchased $700 million of Salomon convertible preferred stock, a deal that blocked Perelman’s path, made Berkshire Salomon’s largest shareholder, and guaranteed Buffett a 9% return regardless of what happened to the stock itself.

Conclusion

The ending did not arrive as a market correction. It arrived as a prosecution. In 1986, Ivan Boesky, a Drexel client and one of Wall Street’s best known arbitrageurs, was convicted of insider trading, and his cooperation with federal prosecutors implicated Milken directly. Drexel itself was indicted in 1988 and settled for $650 million in fines. In March 1989, Milken was indicted on 98 counts of racketeering and securities fraud under the RICO statute, the first time the law had been used against someone with no organized crime connection. He pleaded guilty in 1990 to six lesser felony counts, was sentenced to ten years, served roughly two, and paid around $600 million in fines and restitution. Without Milken, Drexel’s network of junk bond buyers and issuers came apart within months, and the firm filed for bankruptcy in February 1990.

The raiders did not vanish so much as lose their financing all at once. The deals stopped because the desk that funded them closed, and the man who ran it was in a federal prison in California.