The Beauty Queen

In a good book, “The Wealth Creators”, the author, Roy C. Smith, proﬁles Ronald Perelman.

“Ronald Perelman rose to fame in 1985 on this issue, that of a board’s duty of loyalty to its shareholders. Perelman, the son of a small-time but successful corporate raider, went into business for himself in 1976, after working for his father for ten years. He started with small deals (e.g., a $2 million investment in a New Jersey jewelry chain store that he sold for $15 million) and parlayed these into bigger and bigger deals, keeping some in his privately owned conglomerate, MacAndrews and Forbes (acquired in 1978), and selling others. In 1984 MacAndrews and Forbes acquired Pantry Pride for its huge tax loss carry forward. To put it to use, in 1985 he set his sights on Revlon, the queen of beauty products companies, which had been badly run down since the death of its founder, Charles Revson, in 1975. Revson, knowing he was dying of cancer, hand picked his successor, Michel Bergerac, an elegant, French-born former head of ITT’s European businesses, in 1974. Bergerac expanded the company into health care and other businesses and increased sales several fold. Proﬁts, on the other hand, were declining, along with the company's market share. The stock was thought to be cheap relative to its potential, which Bergerac and the Revlon board were thought to be holding back.

When Perelman struck (backed by Michael Milken and the junk bond men from Drexel Burnham), Bergerac and the Revlon board were horrified. They could not bear to see “a great American consumer products company” like theirs being controlled by someone they regarded as an unknown little upstart, who (worst of all) was being financed by Drexel's junk bonds. One of the most bitter defense efforts of the 1980s resulted. Revlon turned to a friendly LBO operator, Forstmann Little, that at first attempted to do a buyout deal in which management would get to own 25 percent of the stock. This was frustrated, however, so Forstmann Little made an offer contingent on Revlon agreeing to (1) sell it two key businesses for relatively low amounts-a feature called a crown jewel lockup-and (2) not negotiate with any other party. Whatever Forstmann Little offered in price, however, Perelman would top by twenty-five cents per share. Perelman also challenged the deal in the Delaware Chancery Court. The court decided in Perelman's favor-Revlon v. Mac Andrews and Forbes is now a classic case in takeover law. It established the principal that once a company has declared itself to be for sale, it has to keep the bidding process open so as to be sure that the company can be sold to the highest bidder. The court threw out the lockup, and Perelman won control of the company, though it was probably the most expensive deal ever done at that time. The Revlon shareholders did very well, gaining about $1.5 billion in increased value of their stock. Bergerac did especially well, as he was able to walk away with $35 million in stock profits and payments due him under his golden parachute, a predetermined settlement for losing his job as CEO, the biggest one ever at that time. Lawyers and investment bankers pocketed a total of about $110 million in fees, of which Drexel Burnham earned $60 million for arranging the junk financing and participating in the deal's merger advisory fees.

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Perelman began an effort to break the company into effective business units and to revive it, partly by adding new acquisitions in the cosmetics area. According to Revlon, two years after its acquisition by Perelman, operating profits were doubled. He took it public again in 1996, at $28 per share, though a previous effort in 1992 was withdrawn for lack of interest. By mid-1998 the stock had reached $57 per share, but then fell off sharply as a variety of operating and management problems emerged.

Perelman became well known as a predator after Revlon, putting together greenmailing runs on Transworld Corporation (Hilton International Co.), Gillette, and Salomon Inc. In 1988 Perelman hit the jackpot from the S&L crisis. He made a hugely favorable deal with the Federal Deposit Insurance Corp., which was trying to unload defaulted S&Ls, to acquire First Gibraltar, a group of Texas thrifts. The market quickly recovered, and Perelman sold out for a profit of about $1 billion, plus an additional $3.5 billion in tax loss carry-forwards. He used some of the money to acquire camping equipment maker Coleman Co. in 1989, which he has since sold 17 percent of back to the public. Subsequently Perelman sold his remaining 83 percent of Coleman to Sunbeam Corp. in exchange for a 14 percent interest in the appliance maker, a deal that was worked out despite Perelman's inability to get along with Sunbeam's then-new CEO, hard-nosed Albert Dunlap. Despite his reputation for turning troubled companies around, “Chainsaw AI” was not effective at Sunbeam and was fired, and Perelman's Sunbeam stock dropped from $53 per share to $5.125 by August 1998. To replace Dunlap the Sunbeam board picked Jerry Levin, Perelman's key corporate troubleshooter, and issued Perelman 23 million five-year warrants exercisable at $7 per share. If Levin can just get the stock back to where it was when Coleman was sold, Perelman would stand to earn another $1 billion. By the end of 1999, however, the stock was below $5 per share.

Revlon still serves as the anchor in MacAndrews and Forbes, which owned about forty different businesses in 1999 (including Marvel Comics, New World Communications broadcasting, First Nationwide Bank, Boston Whaler motorboats, and Consolidated Cigar) with no discernible connection except that Perelman liked them. “I love all the businesses we are in,” he says. All of his businesses are fully leveraged and run to maximize shareholder wealth. Like some of his nineteenth century predecessors, Perelman, fifty-six in 1999, is known to be a tough, even vengeful, character who is frequently in litigation with customers, investors, former employees, and former wives. Also like some of his predecessors, he is extremely religious and a generous but demanding father who intends to leave all his assets to his children. Forbes listed Perelman as its most successful raider-investor in 1997, with a net worth of $6.5 billion. But Perelman proved to be less effective as an operating manager and, caught up in the wrong part of the market, the unglamorous old economy sectors, he had to watch his net worth

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decline sharply to $3.8 billion by 1991.”