German Mustafin. Drexel Corporation.

Corporation "Drexel".
German Mustafin

Date of publication: September 26, 2000

In the twentieth century, management emerged as a special, incomparable form of activity. And throughout the twentieth century, the concept of management has continuously transformed. Taylor and Fayol did a lot to ensure that this concept meant a person who manages not a specific economic unit, but an abstract system. But at all times, no matter how hard researchers tried to highlight the features and roles of this category, other concepts were mixed in with it, actually merging with it. This article will discuss a similar fusion of concepts and functions: manager and entrepreneur.

Let's agree on terms. In the future, we will understand the concept of “manager” as a person who carries out organizational work. This definition, with its capacity leading to meaninglessness, can be easily understood at the everyday level. The manager leads the organization towards its goals using well-known methods and methods, varying them only within small limits. An entrepreneur, from the point of view of J. Schumpeter, can be considered a subject who creates a new activity aimed at producing a new type of product. At the same time, he carries out certain mental work: analyzes the current market situation and predicts the dynamics of its change. As a result, he must see (or design) that sector of activity and market in which it is possible to achieve an increase in effective demand and a relative increase in the value of a given product for the consumer. By developing and implementing his projects, an entrepreneur can create not only a new product, but also new forms of activity. In a sense, it can be called the pinnacle of human evolution. Let us remember Rene Descartes, who argued that the main difference between a person and an animal lies in the ability transform the patterns of their activities.

What makes us talk about the process of merging the concepts of “manager” and “entrepreneur”? The answer to this question can be found by looking at the environment surrounding modern enterprises. In the last 30-40 years, it has been more changeable and turbulent than ever. The challenges of the organization's survival come to the fore. To survive, organizations constantly have to adapt to changing conditions. The “amplitude of fluctuations” of the environment is currently so great that the task of adapting to new conditions can often turn into a task of complete restructuring of the enterprise. In the fight against the external environment, only those who are able to come up with completely new financial and other mechanisms that make it possible to change the structure of the enterprise can win. This is a classic entrepreneurial challenge. That is why today we can talk about some merging of the functions of an entrepreneur and a manager. Management work today is impossible without innovation and the development of new schemes.

Let us turn to the history that occurred in the USA in the 70-80s. It was then that American businesses felt the need to restructure their operations at the highest level. The fact is that in the late 70s the United States faced an unprecedented wave of corporate takeovers. This time in the history of corporate America is called the "age of greed." Indeed, the sums that were put into action overnight surpassed any imagination. The situation was similar to the events from Stanislaw Lem’s famous novel “Solaris,” where giant figures suddenly appeared and disappeared on the surface of the ocean planet, the creation of which required an incredible amount of energy. What mysterious forces were behind this wave of corporate takeovers that resulted in the restructuring of all American businesses? What allowed these forces to propel the whales?

In the late 70s and 80s, the American world was in a fever. Corporate takeovers have become a total phenomenon. The total amount of completed acquisitions in the first half of the 1980s increased from $30 billion to $180 billion. Acquisitions are not a rare thing in big business, but their scale exceeded all expectations. Wall Street experts are talking about a global financial revolution that should remake the entire American and world business. Here are some examples of such transactions. In 1984, financier Saul Steinberg made $60 million by buying an 11.1% stake in Walt Disney Production and then reselling the stake to them at a premium. Such transactions are known as dollar blackmail. Carl Icahn successfully took over Trans World Airlines, Booney Pickens blackmailed Gulf Oil, and Ted Turner seized control of MGM. The apogee of this activity was the offer to purchase the giant American business RJR Nabisco, made by Kohlberg Kravis Roberts (better known as KKR). RJR Nabisco was ranked 19th among the so-called 500 "gold companies" of America and was the manufacturer of the famous Winston brand and other popular products. The result of this proposal was the purchase of a controlling stake in the company for 25 billion (at $107 per share). The takeover was also the climax of the Wall Street scandal.

A typical scheme for such takeovers is as follows: a corporate raider begins purchasing shares of the company targeted for takeover on the open market. Further, the raider must comply with the requirements of paragraph 13(d) of the William Act and declare himself and his intentions within ten days after he has more than 5% of the shares of the company targeted for takeover. From this moment, as a rule, there is a sharp jump in the prices of shares of the company planned to be captured. All other stock traders join the game, trying to buy up as many shares of this company as possible. Small investors thus have the opportunity to make a handsome profit by selling their stakes at fairly high prices.

Meanwhile, the raider planning the takeover is looking for the necessary financial support. Once financial support is secured, the raider announces a bid for a controlling stake in the company. This package may already be in the hands of stock traders who are waiting for the right moment to sell their stake to a raider.

If the victim tries to fight back by buying up all the shares available to him to prevent a takeover of a controlling stake, brokers who are not listed on the main exchange may come into play. They enter into an unspoken agreement with the raider and, on his instructions, “secretly” buy up all available small blocks of shares, resell them to the raider at a profit. These operations are performed after the end of the exchange day.

The only incomprehensible point in the described scheme remains the source of the gigantic funds necessary for the raider to capture. Previously, a bank loan served as such a source. However, for two reasons, this source no longer suited the raiders. Firstly, the sums required to take over such large companies as Gulf Oil were beyond the reach of most banks. Secondly, the situation in the late 70s was such that it was impossible to get a loan for such an amount for such a dubious enterprise due to the extremely low trust in risky players on the stock exchange. However, the golden rule of the market “demand creates supply” worked here. In the late 70s, the mysterious Drexell Burnham Lambert corporation entered the scene. In just 5 years, it catapulted from the category of second-rate investment funds to one of the most successful companies in America. It owes its success to Michael Milken, a graduate of the University of California and Wharton School of Business, who received his first assignment at Drexell in 1973. It was Milken who was the inventor of the ingenious financial leverage of junk shares, which later became the main instrument of takeovers and restructuring.

Junk stocks are high-interest, low-quality bonds issued by companies that are unable to issue decent investment grade securities. Junk stocks, according to Milken himself, have always existed. The same could be said of the stock issued by J. P. Morgan when he created United States Steel at the beginning of the century. However, before the financial genius Milken appeared on the market, they were not attractive to investors. Being inherently unreliable, they could not become a significant form of capital without the use of special methods that would ensure their reliability.

Actually, even after Milken’s arrival, absolutely nothing happened to them that could increase the reliability of a single stock. But something happened to their market. Milken began underwriting junk stocks, while creating financing opportunities for small and unreliable companies. At the same time, he was able to instantly concentrate billions in his hands, providing them to corporate raiders for takeover attempts.

These billions came from a certain circle of investors for whom obtaining a high percentage of return on investment is, in a certain sense, critical for survival. An example is insurance funds. Their activities involve the risk of paying large premiums to victims. To ensure profitability, they need to use their capital effectively. The tool that provided them with this opportunity was junk shares, which, thanks to the guarantees of Milken and Drexell, were no longer “junk”.

In exchange for the ability to handle junk stock and earn a very large and stable income, Milken entered into agreements with buyers of junk stock, according to which they agreed to buy additional numbers of junk shares, thus putting huge financial resources at the disposal of Drexell. Milken hooked these financial structures on his junk shares. The whole system turned into a kind of financial symbiosis: insurance companies, loan and savings associations, interested in receiving high income from junk stocks, were forced to support the monopolist in this area - Drexell. Drexell, on the other hand, had the ability to raise billions of dollars in funds to secure corporate takeovers.

Clearly, Drexell took on enormous financial entrepreneurial risks because, as noted earlier, junk stocks are still junk stocks. What allowed Milken and Drexell to create a market for junk stocks without disappearing in a wave of bankruptcies of companies issuing unreliable high-interest bonds?

Milken's activities were based on a fairly simple statistical pattern: a sufficiently diversified portfolio of junk stocks was no longer unduly risky, and the profits from the success of some of the issuing companies more than covered the losses from the ruin of the other part. Milken turned Drexell into a holding company for a fairly diversified portfolio of junk stocks. The guarantee (essentially a guarantee of acceptance) of these shares by Drexell made the junk stock a very reliable financial instrument. Drexell's job, of course, was to keep this market sound by reducing the number of failed companies. To do this, Drexell has developed another scheme: the so-called “refinancing” technique.

This technique consisted in the fact that in the event of problems with one of the issuing companies, that is, the threat of its insolvency, the company's management and shareholders sat down at the negotiating table, the mediator of which was, of course, Drexell. As a result of these negotiations, the company's financial obligations were typically relaxed in exchange for some concessions to shareholders. This type of transaction is called an “exchange offer.”

Due to this, Drexell was able to artificially maintain at a low level the percentage of shares of corporations that could not cope with their financial obligations. This, of course, increased confidence in the junk stock market and contributed to its stability. Drexell received a fee for these transactions.

According to many financiers, Drexell has gained a lot by keeping junk stock default rates relatively low. In the eyes of investors, this market was no longer so unreliable, but rather began to be advertised from the point of view of the opportunity to obtain high income with relatively low risk.

All this was achieved through refinancing operations. If not for the successful application of this technique, the insolvency rate in 1986 would have been 6.2% instead of 1.7%. Among the companies that refinanced low-priced equity issues were Petro Lewis ($830 million in refinancing), Texas International ($205 million) and many others.

However, one more question remains unanswered. The fact is that even as a financial genius, Michael Milken could not have invented the elixir of financial happiness on his own. He brilliantly took advantage of the objective economic processes taking place in America at that time. It would be strange to say that junk capital became the lever for restructuring the entire American business. Where did this enormous potential come from that actually changed the way business was done, created a new corporate America? Why didn’t anyone notice these bags of money that were lying under everyone’s feet before? Obviously, until some time these bags simply did not exist. All the Wall Street newspapers contain virtually no information about the companies issuing junk stocks. Taking a look at the American market of the late 70s, we still come across a new type of business, with risk, high returns, and most importantly, with enormous potential, which allowed it to become the basis of the stock market on a national and even global scale. We are now talking about the so-called risk business and related businesses related to scientific and design development, implementation and operation of new equipment. In fact, these are quite highly profitable (if successful) and unreliable enterprises.

The riskiness of these companies is well understood; it is an integral part of the birth and arrival of everything new in the world. In addition, the competition in this market is enormous; it is enough to recall the ongoing struggle to this day for all kinds of standards, for example in the field of video-audio equipment or cellular communications. It’s easy to disappear in the deafening wave of competition in the field of new technologies.

Now everything is falling into place, and the current situation can be assessed not from the point of view of the witchcraft of Milken and the witches from Drexell on Midsummer, but from the point of view of objective processes occurring now. At the turn of the 70s, a new phenomenon appeared in the industry of developed countries - risky business associated with the introduction of new technologies - high-tech. The emergence of this new form of business precisely within small enterprises is due to the fact that within large corporations everything new and radically progressive is often suppressed by bureaucracy. Of course, along with the emergence of a business came the problem of financing it. It was very difficult to solve by providing a bank loan, since banks either did not want to take risks or tied entrepreneurs who had no other options with such obligations that could completely deprive their activities of any meaning. There was only one possibility left - issuing their own shares, which, due to the riskiness of the enterprise itself, became unreliable, and in order to ensure at least some demand, they required high interest rates. Milken and the company turned these shares into a very real and powerful instrument for financing risky businesses. That is, some metamorphosis has occurred. In effect, venture capital put Milken and Drexell at their service, and they put risk capital at their service. Everyone was happy.

Milken contributed to the development of new technologies in America. He contributed a lot to the development of the television and telephone industries and the introduction of microtechnologies into them. Milken has invested a total of approximately $26 billion in MCI, McCaw, Viacom, Time Warner, Cablevision Systems and other cable, telecommunications, wireless communications and entertainment companies. At the time, none of these companies looked attractive enough for banks to invest in, and therefore these companies had no other source of funding other than Drexell. Now the total market value of these companies is about 224 million dollars, and they themselves are the basis of an information infrastructure that has no analogues in the world.

With $2.5 billion from Drexell, MCI created the first national fiber-optic network and inspired AT&T and Sprint to do so, putting the United States at the forefront of such technology. The operation also helped revive struggling Kornig, which supplied 62,117 miles of fiber-optic cable to MCI. Previously, Kornig had no customers for this advanced technology. McCow used Draxell's $1.5 billion investment to create the world's first wireless telephone network.

The US cable television network Milken built virtually “with his own hands” deserves special consideration. The situation in this market was such that the leading position was occupied by “network” channels, that is, to put it simply, those on which all the programs were mixed. Cable television, which had many specialized channels, did not deserve the trust of investors. Only Milken decided to finance this type of business. Here is what he himself says about this: “The time has come when people themselves want to choose when to watch news and when to watch sports programs. “Network” channels dictated their terms to consumers. It was clear that this would not last long. A good alternative "There were specialized cable channels that were considered unpromising. But no one understood that today's loser could become tomorrow's star." Using $8 billion in investments from Drexell, Viacom, Time Warner, Cablevision Systems and many others whose shares were guaranteed by Milken and therefore traded well, they created the US cable network, which became its invaluable asset.

To be fair, it should be noted that junk shares were not Milken's only form of activity. More precisely, in addition to the banal provision of funds for corporate takeovers and all kinds of restructurings, Milken also played the role of the architect of these restructurings. Michael and his staff had an amazing understanding of financial transactions. The main thing is that they refuted the thesis that the financial structure is a constant. They were not afraid to experiment by turning working capital into debt and vice versa. Using their knowledge and instincts, they carried out many operations. During the 70s and 80s, no one played with the assets and liabilities of companies with such courage. These financial overhauls have in some cases actually saved companies on the brink. An example is the restructuring carried out at the well-known Walt Disney Company. In the mid-80s, this company found itself in a difficult situation. Due to the inability of the management team to cope with the new conditions, the company suffered serious losses. Roy Disney, one of the heirs of Walt Disney, turned to Michael Milken for help, fearing for his family empire. Milken financed Saul Steinberg's buyout and then carried out a financial restructuring. Thanks to restructuring and the fact that the Walt Disney Company was given new management after Steinberg's blackmail, the $1.8 billion company was transformed into a Hollywood colossus with a market value of $30 billion in just 11 years. Here is a wonderful example of how the actions of Milken and the raiders forced the management of one of the companies to “wake up” and reconsider its financial structure, which greatly benefited both the company itself and its shareholders. We are talking about the Goodyear Tire and Rubber Company. Faced with a downturn in the tire industry in 1983, management decided to diversify the company's operations and acquire Celeron Oil for $850 million. As a result, Goodyear's market value was reduced by 250 million, as investors did not see the point in the combination of tires and oil. In 1986, James Goldsmith began aggressively purchasing Goodyear shares, announcing his intention to reverse the company's diversification program. The management team, alarmed by the possibility of a corporate takeover, launched a leveraged buyout of Goldsmith's shares. The company bought all of his shares for $2.2 billion and another 36% of the shares in other hands. Now shareholders, including management itself, received a larger share of the company, in which the financial structure has changed in favor of increasing borrowed funds. The ending of this story was an increase in the company's value by more than $750 million.

The newborn form of activity adopted by Milken and Drexell also served as the basis for the creation of many entrepreneurial takeover and restructuring schemes. From all that has been said, one could conclude that Milken and everyone who participated with him in the total restructuring of American business became national heroes and now, having retired from their righteous labors on Wall Street, are peacefully lecturing at Harvard Business School. However, the truth of life is that Milken is still serving his prison sentence, and Drexell has ceased to exist. The answer to the legitimate question "Why?" can be considered from two points of view: from economic and partly managerial-political, as well as from philosophical and legal.

As we have already noted, the activities of Milken and Drexell led to the possibility of a huge number of corporate takeovers and the creation of many schemes related to them. In such situations there is always room for crime. In such transactions there are always resentful losers, and when we are talking about millions and even billions of dollars, it is not difficult to imagine the scale of this resentment.

During the period of active activity of Michael Milken and Drexell, the Securities Exchange Commission (the agency responsible for regulating exchange processes in the United States) opened dozens of criminal cases and carried out hundreds of interrogations. In almost all of these cases, the main charge was insider trading. In general, the accusation of trading inside information has never been the scourge of stock traders, although it has been recorded in some precedents. Using for your own benefit any information that can provide at least some help is, in a sense, the profession of stock speculators. The law requires that the use of this information not harm a wide range of investors, and this usually does not happen. Investors, seeing that a speculator has begun to actively buy or sell shares of a particular company (this cannot be hidden), follow in his footsteps and make the same transactions. However, in the “golden” eighties, the government went wild.

Drexell's meteoric success created many enemies. All her enemies can be roughly divided into three parts. The first are those who directly suffered from corporate takeovers, and these are, first of all, managers of companies that were raided by raiders financed by Milken. The management of many companies was completely renewed, hundreds of companies were “suffered” partially. If you remember which companies came under attack from raiders (Disney, Gulf Oil, Nabisco, Trans World Airlines and many others), you can understand that the former managers of these companies represent a serious force, since people working in such companies with a half-century history usually not deprived of a number of valuable connections in the highest circles. Perhaps this part of Milken's enemies can be considered the most reactionary, since these people suffered the most severe losses, and (perhaps more importantly) were deeply offended by the actions of some upstarts. Others offended are Drexell's direct competitors in the investment business. Here we need to mention such giants as Merill Lynch, Solomon Brothers and First Boston. Left out of the new form of business and having lost their former unshakable positions, they were ready to do anything to regain them. The third group of ill-wishers includes all conservative-minded people, whether or not related to the investment business. The consciousness of these people was quite skillfully used by the first two groups in the war against Drexell and Milken.

When many of America's corporations and investment funds discovered an unexpected weakness in their positions in modern, entrepreneurial management, they began to develop their own, so to speak, collective entrepreneurial scheme. This scheme was of a completely different nature than those that brought success to Milken and the corporate raiders. It can be called an information entrepreneurial scheme. The time for open competition was irretrievably lost, and there was no other way out except to attract the state to our side. This was not easy to do, however. The Reagan administration was then in power, which pursued a policy of non-interference in the internal processes of the market. To do this, failed corporations have portrayed the harm caused by normal competition to the public as an incurable disease of American business that must be combated in every possible way. They used all their connections, and all the media started talking about the destruction of honest companies by scammers and the decline in the competitiveness of the United States itself.

People are easily deceived by their own ideas. Thus, the established stereotype that an increased share of borrowed funds in a company’s balance sheet is an undoubted evil was skillfully used. There is essentially nothing wrong with this if such a financial structure is appropriate. In the mid-1980s, this structure helped many companies generate greater profits. However, in the public mind it was seen as undermining America's competitiveness.

Then everything was done according to a previously known scenario. The public and media were outraged, and Drexell's competitors brought their government connections into play, and the Reagan administration faltered. Many arbitration dealers and corporate raiders were put on trial. The Securities Exchange Commission, represented by its chief Rudy Guiliani, threatening more serious charges, forced Drexell management to admit to several violations and accept a number of the Commission's conditions. Among them was the appointment of former Commission chief John Shead to one of the top management positions, who closely monitored all Drexell operations. The main thing is that the company's management agreed to testify against the man thanks to whom Drexell achieved stunning success.

The result of all the processes described was a ten-year prison sentence for Milken and the imminent bankruptcy of the Drexell company itself. After Milken left the company, the trust of clients, which was based on personal trust in him, was undermined and the corporation's profits melted before our eyes. Moreover, the entire junk stock market collapsed like a house of cards.

In conclusion, it must be said that the junk stock market could not simply sink into oblivion, since there was a new high-tech business behind it. A year after the events described, Wall Street experts confirmed his resurrection. The potential of this sector has grown significantly and in the late 90s America needed a new Milken. It has found its embodiment in many “awakened from hibernation” managers. Innovation and entrepreneurial schemes have become key ways of doing business. It is now quite obvious that you cannot do without entrepreneurial activity in the modern corporate world. We have come to what we talked about at the very beginning: the merging of managers and entrepreneurs into a single whole.

Unfortunately, our business is just beginning to integrate into the global one. The schemes implemented in Russia boil down mainly to criminal showdowns and bribery of officials. However, we also have the sprouts of entrepreneurship. We can only hope that the generation that grew up in conditions of open information will be able to find its place in the global corporate business system.