#177 Robert Campeau Junk Bonds and Retail Bankruptcy

Summary Notes


In "Going for Broke: How Robert Campeau Bankrupted the Retail Industry, Jolted the Junk Bond Market, and Brought the Booming 80s to a Crashing Halt" by John Rothschild, the astonishing tale of Robert Campeau's reckless financial escapades is recounted. Campeau, a man with no prior knowledge of retail, borrowed billions to acquire successful companies like Allied and Federated, only to drive them into bankruptcy. His overconfidence in leverage and debt, coupled with a lack of discipline and a penchant for grandiosity, led to thousands of layoffs, a junk bond market collapse, and widespread economic repercussions. Campeau's story serves as a stark warning about the dangers of over-leverage and the importance of staying within one's circle of competence.

Summary Notes

Financial Calamity and LBOs

  • Speaker A recounts a financial disaster involving a character named Bob and leveraged buyouts (LBOs).
  • Bob, unfamiliar with the retail industry, borrowed billions to acquire two successful retail companies, leading them to bankruptcy.
  • LBOs were intended to improve productivity and profits but resulted in layoffs, a bailout of First Boston, the collapse of the junk bond market, and a recession on Wall Street.

"A stranger comes to Wall street, borrows nearly $4 billion to acquire a company that six months earlier he had never even heard of... The LBOs landed both companies in chapter eleven."

This quote outlines the audacious financial moves made by Bob, who, despite his lack of knowledge in retail and the companies he acquired, managed to secure a massive amount of debt, leading to severe financial consequences.

The Book "Going for Broke"

  • The book "Going for Broke" by John Rothschild is discussed, which details how Robert Kampoo's actions impacted the retail and financial industries.
  • Speaker A received a recommendation for the book from Chris, who describes it as a lesson on the dangers of overconfidence with debt.
  • The book serves as an "anti-model" for decision-making, suggesting one should consider what Bob would do and then do the opposite.

"This underrated book provides a glimpse into what happens when dreams become delusions."

Chris's message highlights the book's theme of caution against overconfidence and excessive debt, which can transform ambitious dreams into damaging delusions.

Bob's Personality and Early Career

  • Bob went through many personal enhancements and pursued various interests with intense ambition.
  • He had a successful real estate career before turning to Wall Street, which ended in financial ruin.
  • Bob's career began with small entrepreneurial ventures and progressed to significant real estate developments, capitalizing on the postwar migration to suburbs.

"Bob subjected himself to a barrage of improvements... The urge to supersede, to win, to maximize his every opportunity, was a constant theme in his personal history."

This quote describes Bob's relentless pursuit of self-improvement and success, which was a defining characteristic throughout his life.

Bob's Entry into Wall Street and the LBO Plan

  • Initially, Bob had no interest in retail but was influenced by the idea of participating in an LBO after being rejected by Macy's.
  • Bob's advisors struggled to manage his impulsive decisions and wild ideas.
  • Despite his lack of experience, Bob's timing coincided with the Wall Street trend of buyouts and takeovers.

"Bob arrived at the perfect moment in the final stage of the buyout frenzy, when playing it safe counted for nothing."

Speaker A emphasizes Bob's serendipitous timing, entering the financial scene during a period where risky financial maneuvers were commonplace.

The Process of Acquiring Allied Stores

  • Bob's team, unfamiliar with investment banks, randomly selected names from the Yellow Pages to find financial support.
  • Bob's impulsive nature and lack of focus were highlighted by his advisors, who hoped the banks would refuse to lend him money.
  • Bob used the reputation of others to build credibility and secure funding, leading banks to continue investing to protect their stakes.

"Bob nor his advisors really knew one investment bank from another... It was basically a matter of looking up names in the Yellow Pages."

This quote illustrates the haphazard approach Bob and his team took in seeking financial partners, demonstrating a lack of strategic planning and expertise in the area.

Bob's Secret Share Purchases and Double Life

  • Bob used a dummy corporation, Perez Capital, to secretly buy shares in Allied without their knowledge.
  • Bob's personal life was tumultuous, with two families and a history of nervous breakdowns that were unknown to his financial partners.
  • The strain of maintaining his double life led to gossip among employees, resulting in Bob admitting to his double life but also stating that nobody else could handle such a lifestyle.

"Bob secretly began to buy shares in Allied through a dummy corporation called Perez Capital. Allied didn't know this." "Bob didn't know that Payne Weber didn't really believe he had any chance to take over Allied." "He had had, and they're talking about two times in his career. He had these nervous breakdowns where there was months where he was unable to get out of bed."

The quotes illustrate Bob's clandestine approach to acquiring Allied, his underestimation by Payne Weber, and his personal struggles with mental health and a complex family situation.

Bob's Financial Strategies and Payne Weber's Skepticism

  • Bob's initial strategy was to buy a significant portion of Allied stock for a takeover attempt.
  • Payne Weber doubted Bob's financial capacity for a hostile takeover, given his limited funds for a down payment.
  • The plan relied on the promise of cash rather than actual cash, with Payne Weber's assurance of raising funds through the sale of junk bonds.

"Payne Weber knows that he doesn't have the money to buy Allied, so they're trying to get creative." "The cash itself didn't have to be there. What was required was the promise of cash, which various reliable sources would provide for a fee."

These quotes highlight the creative yet skeptical approach Payne Weber had towards Bob's financial capabilities and the emphasis on the appearance of funds rather than actual capital.

The Complexity of Secured Debt and Financial Promises

  • Bob needed both unsecured (junk bonds) and secured debt, with questionable collateral, to make a credible offer for Allied.
  • He was involved in a web of promises, offering the same collateral to multiple parties, leading to complications.
  • Citicorp, despite recognizing Bob's volatility, decided to work with him due to potential future business and the perceived adequacy of Allied's assets as collateral.

"Junk bonds in themselves were not enough to launch a credible offer." "He's borrowing money against his own shares, and they're using the shares as collateral." "Citicorps first clue that they were dealing with a volatile character who soon acquired the in house nickname Mad Bomber."

The quotes demonstrate the precarious nature of the financial arrangements Bob was making and the risky decisions by financial institutions like Citicorp, influenced by potential profits and the allure of future deals.

The Influence of Greed and Human Nature in Financial Decisions

  • The narrative reflects on the human tendency to be blinded by greed, leading to foolish financial decisions.
  • The story serves as a cautionary tale, emphasizing the importance of learning from others' mistakes to avoid similar pitfalls.
  • The banks' willingness to work with Bob despite weak arguments and assumptions is attributed to the lucrative nature of mergers and acquisitions at the time.

"They're just making so much money from M A activity." "We have to be aware of the capacity in our own lives to make foolish decisions."

The quotes discuss the role of greed in the decision-making process of the banks and the lesson to be learned about human nature's susceptibility to such temptations.

Bob's Negotiation Tactics and Focus on the Next Step

  • Bob's aggressive negotiation style is exemplified by his refusal to budge on minor details, such as a washer dryer unit and a lawn mower.
  • His strategy involved focusing on the immediate next step, believing that future problems would find future solutions.
  • Despite initial rejections, Bob persisted, and his progress led to increased willingness from others to accommodate his wishes.

"Bob wasn't budging either. He hadn't gotten to where he was by budging." "Future problems will have future solutions."

These quotes reveal Bob's stubborn and strategic approach to negotiations, focusing on immediate goals and leveraging his incremental successes to further his ambitions.

The Escalation of Bob's Takeover Attempt and the Role of Respected Institutions

  • Despite initial reluctance, financial institutions like Payne Weber quickly shifted their stance when Bob decided to make a hostile bid for Allied.
  • Bob's association with respected banks and attorneys helped him garner support from other major financial players.
  • The involvement of high-profile firms in mergers and acquisitions was driven by the success and profitability of the sector in the mid-1980s.

"How quickly this resistance was overcome." "Morgan Stanley, Lehman Brothers, first Boston, the list goes on and on."

The quotes underscore the rapid change in financial institutions' attitudes towards Bob's takeover plans and the influential role of established firms in legitimizing his efforts.

The M&A Boom of the 1980s and Its Allure

  • The mergers and acquisitions boom of the 1980s attracted top talent from prestigious universities, with high salaries and the potential for significant earnings.
  • Bruce Wasserstein, a prominent figure in the M&A field, is credited with smartly avoiding personal liability while amassing considerable wealth.
  • The growth of M&A departments and their profits exemplified the lucrative nature of the industry during this period.

"The salaries were phenomenal." "Wasserstein's highly publicized success."

These quotes discuss the financial incentives that drove the M&A boom and the shrewdness of individuals like Bruce Wasserstein in navigating the industry successfully.

The Search for a White Knight and the Involvement of Prominent Figures

  • Allied sought a white knight in Edward D. Bartolo to fend off Bob's takeover attempt.
  • D. Bartolo's partnership with Paul Bazarian, who later faced criminal charges, illustrates the risky and sometimes illegal activities of some players in the industry.
  • The narrative connects present-day figures like Dan Bilzerian to historical financial events through family ties.

"The white knight is this guy named Edward D. Bartolo." "Paul Bazarian was D. Bartolo's partner in a number of stock market deals."

The quotes detail Allied's defensive strategy to find a preferable acquirer and the complex web of relationships and legal issues in the financial world.

The Consequences of Bob's Actions and First Boston's Involvement

  • Bob's decision to switch from Payne Weber to First Boston based on his admiration for Wasserstein led to a dispute over unpaid fees.
  • First Boston was impressed with Bob's apparent real estate equity, which they believed could serve as collateral.
  • Bob's erratic behavior, including consulting a fortune teller, further highlighted the unconventional and risky nature of his business dealings.

"Bob didn't pay." "Bob's got a fortune teller."

These quotes reflect the fallout of Bob's financial maneuvers and the bizarre elements of his approach to the takeover, including his reliance on a fortune teller's predictions.

Wasserstein's Strategic Ploy: The Street Sweep

  • Wasserstein, known for his last-minute strategies, proposed a tactic called the street sweep.
  • The street sweep aimed to bypass the tender offer process and purchase shares on the open market to gain control.
  • Wasserstein noticed that a large percentage of Allied shares were held by Boyd Jeffries, which others had not capitalized on.
  • SEC regulations prevented open market purchases during tender and merger offers, but Wasserstein thought of exploiting a loophole.
  • The loophole involved withdrawing a tender offer and then immediately purchasing Jeffries' shares to gain a majority.
  • This approach was technically legal but against the spirit of the regulations, leading the SEC to close this loophole afterward.

"This particular ploy was called the street sweep. The idea was to bypass the tender offer process and buy enough shares on the open market to gain immediate control."

The quote explains the essence of Wasserstein's street sweep tactic, which was to quickly gain control of a company by purchasing shares directly from the market, circumventing the usual tender offer process.

  • Wasserstein and his legal counsel, Finkelstein, discussed the worst-case scenario for the street sweep.
  • The scenario involved a judge barring Bob from voting the newly acquired shares, leading to a failed takeover and financial ruin.
  • Bob's financial backers, who provided the funds for the street sweep, would face losses if the deal collapsed.
  • The hypothetical situation outlined the high stakes and potential for disaster inherent in the street sweep strategy.

"Bob buys the block for 1.8 billion. A disapproving judge refuses to let Bob vote these shares. So even though Bob technically owns a majority, he's barred from running the company."

This quote summarizes the possible negative outcome of the street sweep, where Bob could end up owning the majority of the shares but be legally prevented from controlling the company, leading to a cascade of financial troubles.

First Boston's Involvement and Financial Risks

  • First Boston had initially committed to a $455 million bridge loan for Bob but was now considering a much larger financial involvement.
  • Wasserstein convinced First Boston to lend Bob the money for the street sweep, despite the risks.
  • First Boston's decision was influenced by the potential for high fees and the belief that Bob had sufficient real estate assets to cover any losses.
  • The firm's management was willing to risk all of its corporate capital on the deal due to Wasserstein's influence and the lure of profit.

"Wasserstein suggests that first Boston bypass Citicor and lend him the money for the street sweep."

This quote indicates Wasserstein's recommendation for First Boston to directly fund the street sweep, which would bypass the involvement of another financial institution, Citicor, and increase First Boston's stake in the deal.

The Influence of Fees and Profit Motivation

  • First Boston and other financial institutions were motivated by the prospect of earning large fees from the deal.
  • The institutions were willing to overlook the risks because of the potential for profit from fees and interest on loans.
  • Wasserstein's M&A department was highly profitable, giving him leverage to push for risky strategies like the street sweep.
  • The high fees associated with the deal raised questions about the sustainability of such financial practices.

"The upside was that first Boston would make over $100 million in extra fees, not to mention the interest on the bridge loan."

This quote highlights the financial incentives for First Boston, emphasizing the substantial fees and interest they expected to earn, which motivated them to support the high-risk street sweep strategy.

Bob's Questionable Business Practices and Reliability

  • Bob was characterized as unreliable, often changing his financial commitments and pushing institutions beyond their comfort zones.
  • Despite his inconsistency, Bob relied on the financial institutions' vested interest in the deal to cover his equity contributions.
  • Bob's pattern of behavior raised concerns about his trustworthiness as a business partner and the stability of the entire deal.

"Bob was telling the bank he couldn't produce the other half. So I'm going to put up 300 million. Okay, just kidding. I only have 150,000,000. You lend me the 150. Oh, you lend me the 150 now? Guess what? I don't have the other 150."

The quote illustrates Bob's erratic financial behavior, where he fails to fulfill his promises regarding equity contributions, leaving the financial institutions to bear the burden and risk.

The Frenzy of Acquisitions and Overbidding

  • During the period of acquisition fever, companies were overpaying for assets due to a perceived need to keep up with competitors.
  • Allied sold off its less profitable divisions, creating an illusion of competition to drive up prices.
  • The irrational behavior of buyers, driven by emotion and a fear of missing out, often led to significantly overpriced acquisitions.

"In one of the most spectacular examples of overbidding for an allied division, the Crown American company was panicked into making a ridiculously high preemptive bid for this company called Millers."

This quote provides an example of the irrational overbidding that occurred, with companies making hasty decisions to acquire assets at inflated prices, often leading to poor financial outcomes.

Hiring Practices and Management Decisions

  • Bob's hiring practices were impulsive, often based on brief interactions rather than thorough evaluations.
  • His approach to management and decision-making was erratic, as seen in his rapid promotion of Riggs with little regard for expertise.
  • The case of Riggs illustrates the potential pitfalls of such impulsive leadership styles in business.

"The guy's name is Riggs. Fine for what? I'm hiring you as senior vice president of real estate. Okay. So after a week on the job, he was hired as senior vice president of real estate."

This quote exemplifies Bob's haphazard approach to hiring and promoting employees, which could lead to mismanagement and ineffective leadership within the company.

Substitution of Personal Thinking

  • People often rely on others' judgments rather than their own critical thinking.
  • The Toronto security analysts observed that Canadians trusted Wall Street's decision to lend Bob billions, assuming Wall Street had insider knowledge.
  • This trust led to Bob securing a $150 million personal loan to buy back his own stock, leveraging the stock's value and real estate.

"The prevailing viewpoint was that if Wall street and all its geniuses would lend Bob billions of dollars, there must be something to it."

This quote highlights the phenomenon where people defer to the perceived wisdom of a collective, especially one with a reputation like Wall Street's, without independent verification.

Overconfidence and Leverage

  • Bob's overconfidence in future outcomes led him to overpay and over-leverage.
  • He raised his offer price repeatedly during the bidding war for Federated, relying heavily on borrowed funds.
  • Ron, an associate of Bob's, recognized the risks of stacking loans but was dismissed by Bob who thrived on leverage.

"If somebody lends you a dollar, you take it. The ramifications can be handled later. There's always some way out."

Bob's philosophy on borrowing reflects a cavalier attitude toward debt, assuming future solutions will always arise, which is indicative of his overconfidence and comfort with high levels of risk.

Negotiation Tactics

  • Bob's negotiation for Brooks Brothers showcased his ability to stick to his price and exert pressure on buyers, resulting in a sale for $750 million, much higher than the anticipated $450 million.
  • His unwavering stance in negotiations was a testament to his skill in convincing others of his valuation.

"Bob negotiating with Lord Rayner was Bob at its best. In a face to face negotiation with an eager buyer, he never blinked first..."

This quote describes Bob's effective negotiation style, where his firmness and conviction in his price point led to a successful high-stakes deal.

Bidding War and Influence on Decision-Making

  • The bidding war between Bob and Macy's for Federated revealed a lack of financial prudence, with bids escalating without clear profitability.
  • Financial analysts produced simulations to justify each new bid, influenced by potential fees rather than the deal's soundness.

"At each higher level, the number crunchers dutifully produced another computer simulation to prove the deal made sense."

This quote shows how financial projections were manipulated to support escalating bids, driven by the financial incentives of the deal-makers rather than objective analysis.

Poor Management and Follow-Through

  • Bob's management style included poor follow-through, as evidenced by his handling of Anne Taylor and his volatile reaction to challenges.
  • He lacked a consistent strategy, failing to provide further instructions or follow up on important meetings.

"Bob never called back. More poor follow through."

This quote summarizes Bob's lack of consistent management and the problems it caused, including leaving employees without direction or resolution.

Excessive Fees and Unrealistic Assumptions

  • The Federated deal involved a complex model with multiple stacked assumptions, leaving no room for error due to the high fees involved.
  • Citicorp, while arranging the financing, avoided ongoing exposure to Federated after collecting substantial fees.

"All would be well, the number crunchers predicted, provided, of course, that the divisions on the block sold for the expected high prices..."

This quote illustrates the precarious nature of the financial model for the Federated deal, which was based on optimistic assumptions and ignored potential risks.

Wastefulness and Impulsiveness

  • Bob displayed wasteful behavior, such as using two limousines for himself and his luggage.
  • His impulsive decisions, like merging Rich's with Goldsmiths, caused unnecessary stress and inconvenience for others.

"Bob had flown into Atlanta. He was met by a dutiful contingent of executives and a guy named Zimmer in it."

The quote demonstrates Bob's extravagant and thoughtless behavior, highlighting his disregard for resources and the impact of his actions on others.

Sociopathic Behavior and Impact on Others

  • Bob's actions and decisions negatively affected many, including small business owners and employees, due to his sociopathic tendencies.
  • His lack of empathy and consideration for the consequences of his actions is evident in his treatment of others.

"The 50,000 creditors from a single bankruptcy filing is a record in financial history."

This quote underscores the vast number of individuals and businesses harmed by Bob's reckless financial practices, leading to a historical number of creditors affected by a single bankruptcy.

Personal Downfall and Bankruptcy

  • Bob's aggressive financial strategies ultimately led to his downfall, with his net worth plummeting and his assets liquidated.
  • His personal and professional life unraveled, culminating in involuntary personal bankruptcy and lawsuits seeking repayment of debts.

"His net worth was less than zero. The banks sued to force him into involuntary personal bankruptcy."

This quote captures the dramatic reversal of Bob's fortunes, from a high-flying businessman to a bankrupt individual with a negative net worth.

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