Takeovers have been the most awesome money machine on Wall Street. And the investment firm of Drexel Burnham Lambert frequently has been at the controls, revving things up by feeding the financial markets with high-interest bonds that it called "high yield" and others called "junk."
As the insider trading scandal surrounding professional speculator Ivan F. Boesky widens, an atmosphere of fear and panic among securities professionals has enveloped Drexel. Federal investigators have subpoenaed a number of its officials, and the resulting speculation about who might be involved in the scandal has raised doubts about the ability of Drexel and other investment houses to complete takeovers and corporate restructurings that require junk bonds to be issued.
Troubles for Drexel and junk bonds could have widespread implications for the takeover wave that they have stirred up in so many different industries.
Stocks of real and rumored takeover targets fell sharply last week, although they recovered somewhat toward the end of the week. And Drexel and corporate raiders have felt obliged to assure the rest of Wall Street that their deals won't fall apart.
While Drexel may lose some business, the firm has completed some hefty financings in the midst of the unfolding scandal. And new takeover assaults emerged last week.
Here is a look at how uncertainty in the takeover and junk bond market could affect various industries:
Investors' jitters over junk bonds may imperil or at least affect several pending deals in the broadcast industry and put a further freeze on the market for television stations, which has already been cooling fast.
Analysts said the largest deal that may be affected is the planned $2.9-billion buyout of Viacom International, the big TV-programming, broadcast and cable firm, by a management-led group of investors. The leveraged buyout has already been challenged by other investors, who wanted a higher price for their shares; analysts expect that unease in the junk bond market will add a new complication.
Drexel, First Boston Corp. and Donaldson, Lufkin & Jenrette are financial advisers in the deal, and they also plan to underwrite $1 billion in junk bonds. Viacom's stock slid last week in nervous trading before recovering somewhat.
The market's jitters may also affect Taft Broadcasting's plans to sell five of its independent television stations to tiny TVX Corp. of Virginia Beach, Va., for $240 million. TVX, a money-losing public concern that owns stations primarily in the South, has not announced its financing plans.
But David Schutz, of the New York investment banking firm of Comcapital Group, said Salomon Bros. plans to finance the transaction by floating $250 million in bonds. "It has to be junk, and the deal may be affected by what's happened," Schutz said.
Taft announced the deal only last week after accepting far less than the $500 million that some analysts had forecast the stations might bring.
Earlier this year, Drexel represented Lorimar in its merger with Telepictures. Drexel was set to arrange financing for Lorimar-Telepictures' $1.8-billion acquisition of seven television stations until that deal collapsed last week, two days before subpoenas were served at Drexel's Beverly Hills office.
At the time Lorimar's TV station deal collapsed, Wall Street professionals speculated that Drexel was having difficulty lining up investors. But Lorimar Chairman Merv Adelson said financing wasn't the problem; he blamed the station sellers' refusal to lower its price to reflect weakening advertising demand.
A current Lorimar deal that may be affected is the company's plan to purchase the non-affiliate WTTV-TV in Indianapolis, according to Schutz. The firm that now owns it, Tel-Am, used junk bonds in its financing and is 25% owned by Drexel and Drexel principals.
Lorimar has agreed in principle to purchase the station by assuming $87 million in debt. But the purchase price is still in negotiation, a Lorimar spokesman said. The deal might be affected by the junk bond market as well as by the current weakness in television advertising.
Analysts also forecast that the chill on the junk bond market might also slow the purchase by major broadcasters of companies that have come on the market in recent months. Many of the stations are struggling independents that have found themselves unable to meet their debts as the growth of television advertising has slowed.