This piece was originally published in Fortune on July 8, 1985.
Research Associate: Darienne L. Dennis
Do corporate raiders who bid millions to take over a company really want to buy it? Or are they merely putting a company in play, hoping to sell out at a high price later in the game? Irwin L. Jacobs, the Minneapolis takeover artist, has threatened to buy many big companies but has bought only a few small ones. With his June 14 agreement to buy AMF Inc., a $1.1-billion-a-year industrial and leisure products company, however, Jacobs has become a significant conglomerator.
In April, Jacobs acquired a 7.5% interest in AMF through Minstar, a public company he controls. Jacobs then telephoned W. Thomas York, AMF’s chairman, to say he might want to purchase its Hatteras boat division, or possibly all of AMF. But York was distinctly not interested and added, according to Jacobs, “We don’t pay greenmail.” Within weeks Minstar tendered for 12 million shares of AMF at $23, which would have given Jacobs’s company 50.5% ownership.
AMF’s response was an elaborate dosage of “poison pills.” In addition, Morgan Stanley & Co., AMF’s investment banker, began to shop around for a friendly deal. Minstar sued to stop the poison pills, and AMF countersued. In federal court in New York on June 6, District Judge Mary Johnson Lowe held for Minstar. AMF’s lawyers promised an immediate appeal.
Jacobs then began quiet negotiations with Charles E. Hurwitz, chairman of New York’s Maxxam Group Inc., a real estate holding company. Morgan Stanley had invited Hurwitz to make a bid for AMF. He and Jacobs planned that Hurwitz would buy the company and immediately sell certain divisions to Minstar. The negotiations, by phone between Jacobs and Hurwitz and in person through their representatives in New York, went on for five days before the parties splintered. The two sides differ about what happened. Jacobs says that he and Hurwitz could not get together on price. Hurwitz maintains that Jacobs saw a better opportunity in trying to deal directly with AMF.
When the talks collapsed on June 13, Stephen E. Jacobs of the New York law firm of Weil Gotshal & Manges, who represents but is no relation to Irwin Jacobs, offered an acquisition proposal to Peter A. Atkins of Skadden Arps, AMF’s lawyer. After some negotiating, a new, sweetened proposal was drafted overnight.
The boards of both companies approved the deal the next day. AMF agreed to recommend that its stockholders accept Minstar’s redesigned tender proposal. It offers $24 for 12.5 million shares, including Minstar’s. Holders of remaining shares would get a debenture worth $18.25 at maturity in 1995—worth considerably less in 1985. Minstar’s cash outlay comes to $300 million. In addition, Minstar received an option to purchase AMF’s “crown jewel”—its leisure division (bowling, boating, exercise equipment)—for $300 million, a standard tactic for protecting the favored buyer in case a competing bidder comes along. For Irwin Jacobs the deal was a major victory.
When Fortune last examined Jacobs at length (September 19, 1983), he had only recently emerged on the U.S. business scene. He had served an apprenticeship in his family’s grain-bag business and later achieved a measure of local fame as a shrewd trader in salvaged and closed-out merchandise. From cut-price goods he moved on to trade in cut-price companies.
During the past two years his deals have become much bigger and more lucrative, and they have catapulted Jacobs to the top rank of such celebrated buccaneers as T. Boone Pickens, Carl Icahn, and Saul Steinberg. Last year Jacobs tried to acquire Kaiser Steel, Walt Disney Productions, and Avco Corp., losing them all and making, with his associates, over $90 million. The theme of these exertions seemed to be “how to succeed by failing—or, how to make a fortune through thwarted takeovers.”
Jacobs plans to make most of his future acquisition bids through Minstar, a company that produced snowmobiles and small boats when he bought control in 1978. Most of Minstar’s $660.4 million in revenues over the past four quarters came from Bekins, a moving company that Jacobs moved in on in 1983. Minstar’s share price, adjusted for a split, has risen from 50 cents in 1982 to $23.75 recently, and Jacobs’s stake in the company—27%—is worth about $84.6 million.
Jacobs leans heavily on the counsel of his three closest associates, whom he collectively calls “the boys”—a term they do not find demeaning: Daniel T. Lindsay, 41, Dennis M. Mathisen, 45, and Gerald A. Schwalbach, 40. Lindsay and Mathisen are lawyers, Schwalbach an accountant, and all worked on assignments for Jacobs before joining him full time. Each has big chunks of equity in Jacobs’s major deals and brings to takeover bids a degree of technical expertise that Jacobs, a college dropout (“after two days,” as he delightedly tells new acquaintances), never acquired. Jacobs consults the boys on all major decisions, but when there is disagreement his view prevails. He is unlikely to move, however, if all three oppose him. In the past year a substantial new investor has joined the group—Carl R. Pohlad, 69, the immensely wealthy president of Marquette Bank Minneapolis and an early backer of Jacobs. For years Pohlad’s three sons have been silent partners in Jacobs’s deals. Like them, Pohlad is not involved in Jacobs’s day-to-day affairs, but he takes large positions.
The debate over hostile takeovers has frequently engaged Jacobs. He rarely turns down a public forum to air his views, and in April he appeared before a Senate subcommittee on takeovers with his friend Boone Pickens. Like all raiders, Jacobs presents himself as a champion of shareholder interests, pointing out that in case after case shareholders get a better price as a result of a takeover, hostile or otherwise. But he insists he opposes greenmail—buying back a raider’s stock at a price higher than that offered other shareholders. “I don’t want it, I don’t believe in it—but I wouldn’t necessarily refuse it if it were forced on me,” he says.
While Pickens and Icahn typically go after one target at a time, Jacobs trains his sights on several simultaneously without indicating his precise purpose. “We’re an unpredictable group,” he says with a chuckle. “The problem people have with us is that they don’t know which way we’re going. If I lost that, I’d lose a great asset.” Pending completion of the AMF deal, the biggest investment of Jacobs and associates is in ITT Corp. Perhaps with the help of well-endowed partners, Jacobs could raise the $6 billion or more needed to devour ITT; perhaps he hopes his actions will help attract other bidders. His group owns 6.3 million shares, about 4.4% of the total, which it started buying last July after the dividend was cut from $2.76 to $1. The stock immediately fell nearly $10 to $21.125, and as disenchanted buyers dumped it, Jacobs bought. ITT has since recovered to about $32.
Jacobs insists that spinning off ITT’s varied businesses into four separate corporations would greatly enhance the stock’s value. ITT disagrees. In May, Jacobs and partner Dennis Mathisen flew to the ITT annual stockholders’ meeting in Savannah and made the plea in person, without apparent effect. The next day, however, the press gave Jacobs good coverage. If he was planning some kind of a campaign, it was well launched. If not, the publicity only added to his luster. Fortune asked Carl Icahn, deep in his own attempt to buy TWA, if he had any notion of Jacobs’s strategy. He didn’t. “One doesn’t always know oneself,” said Icahn.
Though Jacobs guards his goals closely, in manner he is open-faced, talkative, all seeming candor. A towering figure with a thick thatch of curly black hair and a quick-flashing smile, he has the salesman’s gift for effortless ingratiation. While he talks a lot, he also knows the flattery of listening closely. He is most accessible: despite the mounting work-load he still answers his phone when he is not talking to someone in his office.
Remarkably, he has no public relations staff or outside P.R. counsel. “I don’t need more press,” he says. When Minstar issues a news release, Jacobs’s name is usually listed as the press contact—a degree of availability perhaps unique among chief executives of companies Minstar’s size. Sheer accessibility gets him favorable notice, even if he says nothing of substance.
At 43, Jacobs still has an ingenuous enthusiasm for his work and will discourse entertainingly on how you disguise the source of multimillion-dollar orders for shares in publicly traded companies so as not to tip the market to your intentions. One way is to place orders through a bank; another is to place them with a broker, using an account bearing a number instead of a name. Next to his imitation Louis XV desk (a great buy at an art auction) is a Quotron machine that he consults regularly; behind the desk is a large red-and-yellow Mickey Mouse phone—a souvenir of the battle over Disney—that connects him directly to the office of Jefferies & Co., the Chicago brokerage firm that specializes in large-block trading and handles the bulk of his business. Jacobs sometimes has trouble disguising his transactions. When Jefferies executes a big trade, it’s often attributed to him.
An outside observer can divine four rules that govern Jacobs’s approach to takeovers. First, spot something of value—a company with substantial assets or cash flow (or both) whose shares are undervalued. Second, move with speed and stealth. Third, always be flexible—ready to buy more or to walk away abruptly, to sue or be sued. (“You must have a high tolerance for stress to survive in this business,” notes Mathisen.) Fourth, always be willing and able to buy the company you ostensibly want. When asked how anyone can possibly want to buy all these companies, Stephen Jacobs responds, “It’s like the case of the young fellow walking down the street. He wants all those attractive women he sees—but some he wants more than others.”
Two years ago Irwin Jacobs and the boys gave every indication of keenly wanting Kaiser Steel Corp., for which they had bid $275 million in a leveraged buyout. Kaiser was amenable to the deal, which would give the Jacobs group proven coal reserves worth an estimated $200 million plus a steel-fabricating business for a net investment of $8 million. But the contract with Kaiser provided that if anyone came along with a better offer, Kaiser could cancel. Someone did—a group headed by J. A. Frates of Tulsa, Oklahoma. For a time Jacobsconsidered topping Frates. At 4 P.M. one afternoon he called Steve Jacobs in New York and asked him to take the next plane to Los Angeles. The lawyer rushed home, dumped some clothes in a bag, and dashed to Kennedy Airport. He arrived with 20 minutes to spare before the 6 P.M. flight. For some reason he telephoned Irwin Jacobs in Minneapolis. “What city are you in?” asked Jacobs. “New York? Well, stay there.” He had held another meeting with the boys and decided not to get into a bidding war.
Instead Jacobs bought enough new shares to block the Frates deal. In negotiations that followed, the Jacobs group ended up getting $12 more a share for its original block than the other stockholders. Though many managers and investors would disagree, Jacobs holds that this wasn’t greenmail, since it was part of the deal that Kaiser’s shareholders approved. He also likes to note that many other shareholders profited handsomely, for Kaiser shares were selling at less than half the price that Frates paid when Jacobs first started to bid them up. Jacobs and friends made a profit of $30,804,000.
Jacobs’s next big victory through defeat came with Walt Disney Productions. He began by agreeing to lend $35 million to financier Saul Steinberg, who was trying to take over Disney.Jacobs had hardly signed the papers when he flew off to Greece with his family for a vacation. The following morning, in Athens, Jacobs read that Steinberg had been bought out of Disney. Jacobs called his office to ask what was happening. “Don’t worry,” he was told. “The check has already arrived.” It was the commitment fee: $570,000 for agreeing to lend money that, as it happened, he didn’t need to lend.
Disney’s stock sank, as stock often does after a company pays greenmail. Jacobs then began buying huge blocks. Jacobs’s group ended up with 5.8% of the stock—but Fort Worth’s formidable Bass brothers owned more. At a meeting with Sid Bass, Jacobs offered to buy him out. Not unexpectedly, Bass refused and offered to buy out Jacobs at $60 a share. Ever the bargainer, Jacobs proposed that he go to $61. Bass agreed. The group’s profit in four months on an investment of around $130 million came to $28,148,000.
From Disney, Jacobs went into Avco—one of his most lucrative in-and-out operations. Last August, Avco, an aerospace and financial services company, bought out Leucadia National Corp., which had tried to take it over. The greenmailing of Leucadia left a lot of disappointed Avco investors eager to sell, and Jacobs bought more than 2.8 million shares. According to his account, in November he telephoned Robert P. Bauman, Avco’s C.E.O., and suggested that he would be interested in studying Avco and perhaps making a bid for it. Bauman did not want to discuss a deal and was short with Jacobs.
“I was mad,” recalls Jacobs in his role as shareholders’ champion. “Imagine—he thought it was his company!” Jacobs by this time held 12.3% of the stock, but he did nothing to vent his anger. Within a few weeks Textron, which had been quietly negotiating a friendly takeover with Avco, offered $47 a share, soon raised to $50, for all shares. Jacobs sold some of his holdings in the open market; the rest went to Textron. Total profit for the group: $31,876,000. Total elapsed time to closing: about three months.
More recently, Jacobs accumulated 14% of Castle & Cooke Inc., the financially troubled food company best known for its Dole pineapples. The company fended him off and got him to sign a 60-day “stand still” agreement. Toward the end of the period C&C announced a merger agreement with Flexi-Van Corp., a marine-container-leasing company. Jacobsannounced he would vote against the agreement, launched a lawsuit, and gave every indication of leading a stockholders’ revolt that might torpedo Flexi-Van’s deal.
In May, David H. Murdock, a fellow takeover artist and chief executive of Flexi-Van, arrived in Minneapolis to call on Jacobs. During an hour of cordial negotiations, Murdock andJacobs settled on a $16-a-share price to be paid by Flexi-Van for the shares owned by the Jacobs group. That was more than $4 over the market price, and it gave Jacobs and friends a profit, after interest expenses, of more than $7 million on a four-month investment of $48.4 million. Before Murdock showed up, they had been nursing a paper loss of nearly $11 million.
Even before AMF, Jacobs on occasion got a company. A $90-million leveraged buyout brought him Bekins. And he acquired Aegis Corp., a miniconglomerate in Fort Lauderdale;Jacobs was particularly interested in adding its Wellcraft boat division to the boat-manufacturing facilities of Minstar.
The pursuit of Aegis was what Jacobs has called “a pounce.” For months Minstar quietly accumulated Aegis shares, avoiding owning more than 5%, which would require an SEC filing. At 7 A.M. on April 6, 1984, Jacobs phoned Castle W. Jordan, Aegis’s chief executive, to give him the news that Minstar was tendering that morning for Aegis’s shares. This is the obligatory call required by takeover etiquette, and Jacobs steeled himself for the response. But Jordan, whom he reached at breakfast, was philosophical and told Jacobs that he had long feared getting such a call at such an unlikely time.
Jacobs says he will not try to negotiate a deal privately when a stock is selling as low as Aegis’s was—around $5 a share. When one tries to negotiate a friendly takeover, he says, there is inevitably a leak, and the stock is likely to run up a dollar or so, whether it is priced at $30 or at $5. But $1 on a $30 stock is only a 3.3% premium; with a $5 stock, it is 20%. And so Jacobs pounced. But he then had to outbid a white knight and fight a court battle—which Dennis J. Block, another of his lawyers, feared he would lose. He got the company for $60 million.
Not every investment has been a triumph. Jacobs and associates bought 1.5 million shares of Tidewater Inc., a leading supplier of vessels that service offshore oil rigs, early in 1984 at prices in the mid-20s for an outlay of $37.5 million. Jacobs thought the oil and gas industry had nearly bottomed out; the price of Tidewater has since sunk to $15. But, as always, he is confident: “You either believe there will be an oil and gas industry or you don’t.” He does.
Pioneer Corp., an oil and gas producer, represents another loss. Jacobs’s group has invested about $100 million in it since late last year. The stock hasn’t significantly declined or advanced, but is costing plenty in interest because a large part of the group’s investment is borrowed. The group typically invests 50% on margin. On the other hand, Jacobs was in and out of Phillips Petroleum twice this year and in and out of RCA in 1984—making money each time, he says.
In May, Jacobs received a letter from a 13-year-old resident of Minneapolis who wrote, “When I am older I would like to become a ‘corporate raider.’ I think it would be a very exciting life. For the past 12 months I have been watching takeover targets, trying to guess … the raiders’ next moves … could you please tell me how you got started?” Jacobs wrote a cordial reply, but did not let on what he would be up to next.
