Ralph Ingersoll II was an entrepreneur with grand plans. An aristocratic New Yorker whose father founded and ran the daily PM newspaper in the 1940s, Ingersoll dreamed of creating a media empire as big as William Randolph Hearst Jr.’s–and thought he’d found the means in junk-bond czar Michael Milken. Between 1984 and 1989, Ingersoll raised about $500 million through bonds sold by Milken and his firm, Drexel Burnham Lambert, expanding his holdings to nearly 200 newspapers in the United States, England and Ireland. His most ambitious project was the St. Louis Sun, a tabloid launched in 1989, which he termed the “best [investment] we’ve ever made.” Ingersoll counted Milken as a close friend: even as Milken faced 98 racketeering counts, Ingersoll rallied support within the business community. MIKE MILKEN, WE BELIEVE IN YOU. ran an ad in The Wall Street Journal last year, signed by Ingersoll and 87 supporters. “His vision has enabled many of our businesses . . . to enjoy tremendous growth and opportunity.”
Fifteen months later, one of Milken’s biggest cheerleaders wasn’t doing business in America. After publishing 213 issues of the Sun and racking up $40 million in losses, Ingersoll abruptly pulled the plug on the tabloid last April, attributing its collapse to poor newsstand sales. The rest of Ingersoll’s empire had already begun to teeter under the burden of high interest payments and a slow advertising market. Ingersoll tried to buy back $160 million in junk bonds to avoid a provision that would hike his interest rates even higher. After bondholders refused, Ingersoll appeared to concede defeat. Two weeks ago he agreed to sell Ingersoll Publications Co. to his partner, E.M. Warburg Pincus & Co., leaving him with just a handful of papers in Europe. “He’d become highly leveraged in a time of looming recession in the newspaper business,” says John Morton, a media analyst with Lynch, Jones & Ryan. “He couldn’t meet his interest obligations.”
In the go-go 1980s, Milken fueled the expansionary dreams of dozens of entrepreneurs, giving them access to easy money by selling their high-yield junk bonds to a network of eager buyers. Many have turned into successful companies, like MCI Communications Inc., Triangle Industries and cable giant Tele-Communications Inc. But like Ingersoll, many other Milken “creations” have been unable to stand on their own since the financier left the scene. In recent months alone a number of Milken-financed empires, including textile giant Farley Inc. and Western Union, have racked up staggering losses. Others, like Ames Department Stores and Univision Holdings, defaulted on junk-bond payments this year. Last year 19 of 39 companies that defaulted were Drexel clients. Their bonds accounted for $4.9 billion of the $8.25 billion that went bad that year.
Cash flows: Those stark numbers raise the question: Were these companies mere puppets of Milken unable to navigate rough times without his guiding hand? Or were the deals so flawed that nobody could have saved them? In many cases the companies’ troubles can be traced back to overly rosy forecasts made by Milken and his Drexel underlings during the high-growth years. The economy began to slow, assets stopped appreciating and cash flows couldn’t keep up with interest payments. “[We] made some heroic assumptions about growth and projections,” concedes one ex-colleague. In other cases, some of the deals done by Drexel in its final years simply “shouldn’t have gotten done,” says one ex-trader. “Greed was out of control. We wanted to do more and more deals and get more and more fees.”
The collapse of the junk-bond market in 1989 and the ensuing credit crunch further hurt the companies in paying off their debt. But once things started going downhill, Milken’s departure left a vacuum in which many of his companies began to flounder. During the height of his power, Milken often helped his highly leveraged companies survive tough times by arm-twisting loyal bondholders to renegotiate terms of the debt. Milken patched together complex restructuring schemes in which creditors swapped one batch of junk bonds for others that offered smaller payouts, or took chunks of equity in exchange for lower interest payments. He persuaded junk-bond buyers that it was better to go along with his plans than to force the company into bankruptcy. Because he controlled so much of the market, says one attorney, “Milker had the influence to get people to take a deal they wouldn’t have otherwise.” With the junk czar gone, his companies couldn’t pull off similar deals. Says one former colleague, “Milker wouldn’t have had so many companies go to the brink of bankruptcy.”
William Farley, the Chicago magnate who owns Fruit of the Loom Inc., was one who faltered on his own. Analysts say Farley, who built an empire on Milken’s junk overbid spectacularly last year when he purchased West Point-Pepperell, the textile giant, for $1.56 billion after a protracted bidding war. After the junk-bond market collapsed, Farley couldn’t raise the $83 million he needed to buy the 5 percent of West Point he doesn’t yet own. Lacking full ownership, Farley hasn’t been permitted to use West Point’s cash flow to pay off his debt. In March, Farley defaulted on $796 million in bank debt and missed junk-bond interest payments. Now he is struggling to restructure his West Point debt. One source says that Milken would have insisted the deal be done differently-or not at all. “Farley has a strong ego,” the source says. “If anyone could have gotten him to back down, it would have been Milken.”
‘Bare bones’: Bennett LeBow was another Milken protege who aimed high and fell hard in the post-Milker era. Backed by Milken’s money machine, the former Pentagon analyst bought six struggling companies in five years, including the Liggett Group and Western Union. Drexel raised $530 million in junk-bond financing for Western Union. But the flagship telex business went downhill through the late 1980s as the fax machine gained popularity. To cope with $115 million annual interest payments, LeBow sold most of the company’s businesses; when he failed to get a loan from Columbia S&L, another Milken stalwart LeBow tried to persuade bondholders to exchange their debt for new bonds and stock. But response has been cool, says a company spokesman, and the company defaulted on its June 15 bond payments. “It’s down to the bare bones,” says Geoffrey Johnson, an analyst with Argus Research. Ironically, the skeletal remains may be saved by former competitor American Telephone & Telegraph Co., which has agreed to buy Western Union’s last telecommunications operations for $180 million.
Some Milken-created stars have been burned as both buyers and sellers of junk bonds. Larry Mizel, chairman of Denver-based home builder MDC Holdings, raised more than $500 million in junk-bond money in the 1980s and used half to expand into such shaky markets as Texas and Florida. He invested the rest in the junk bonds of Milken’s other clients and stock in S&Ls like Silverado Banking in Denver. By 1989, MDC had written off $50 million in junk bonds and $28 million of its Silverado stake. Its home-building business was losing millions. A recent debt swap with First Executive insurance company gave MDC a reprieve, but, says one analyst, “it’s a real cliffhanger.” As the S&L crisis grows, banks are also tightening credit and insurance companies are unloading their junk bonds. With potential rescuers drying up, more and more companies built on Drexel’s easy money may find themselves headed for a free fall.
