Drexel Burnham Lambert has stirred up plenty of controversy by backing corporate raiders in hostile takeovers. But the controversy over Drexel doesn't stop there.
Critics contend that several of its deals are riddled with apparent conflicts of interest. At various stages of some transactions, it has represented both buyers and sellers. In other deals, Drexel itself is the proposed buyer when its client is the seller, or the seller when its client is a buyer. Sometimes, some key Drexel officials are involved at one end of a deal while the firm at some point was involved at the other end.
How, critics ask, can Drexel dispense impartial advice under such circumstances?
One deal--the proposal by Lorimar-Telepictures to buy an Indianapolis TV station--is an illustration of Drexel's multiple, and some say conflicting, role in putting together business deals.
Drexel and some of its executives own 25% of WTTV, the Indianapolis TV station, which they hope to sell to Culver City-based Lorimar, a Drexel client for at least five years. While Drexel has not been retained to advise Lorimar on this particular deal, it was simultaneously working on Lorimar's behalf to raise $1.8 billion for the acquisition of seven other TV stations.
Invested in Acquiring Firm
Drexel has not responded to telephone inquiries, but the WTTV deal can be traced through public filings.
Drexel helped some of the station's executives buy the TV station for $73 million in 1984, issuing "junk bonds" and arranging other financing. Its fee was $2.15 million. Drexel then invested $1.2 million in the acquiring company, Tel-Am Corp., and now owns a 5% stake with another 20% owned by certain Drexel employees and associates.
In January, 1986--less than two years after their purchase--the station owners began trying to sell WTTV. One broker said that, judging from information Tel-Am circulated this past January, WTTV's performance probably peaked in 1984 with an annual cash flow of $6.9 million.
The broker, who spoke on the condition that he not be identified, explained that WTTV's growth stalled after outsiders bought a rival independent station in Indianapolis, sharpening the competition for programming and advertising.
In any event, WTTV languished on the auction block for nearly seven months.
Then, on July 15, Lorimar-Telepictures said it had reached an agreement in principle to assume all of WTTV's outstanding debt for about $85 million and 1% of the common stock of a new broadcasting subsidiary that Lorimar-Telepictures planned to form.
The owners of Tel-Am were not identified in the press release, and a Lorimar spokeswoman told The Times that day that she didn't know the identity of the owners. "I don't think we're hiding anything. It's been in all the documents," Lorimar Senior Vice President Barbara Brogliatti said last week, when asked about Drexel's ownership stake.
Lorimar disclosed Drexel's role in a proxy statement mailed to shareholders in October, when it identified Drexel Chairman Robert Linton as a Lorimar director.
In the proxy, Lorimar said that Drexel had no voting power over its Tel-Am shares. The Drexel employees and associates who own Tel-Am shares were not identified by name, and spokeswomen for Lorimar and Drexel said they don't have that information.
Lorimar has not retained Drexel or any other outside firm to evaluate WTTV's worth, Brogliatti said. Noting that Lorimar already owns five TV stations, she said, "we evaluate them on our own."
No License Application
More than four months have elapsed since Lorimar announced its agreement to buy WTTV from Tel-Am and another station, WPGH-TV in Pittsburgh, from Meredith Corp. During that period, Lorimar sought and received permission from the Federal Communications Commission to buy seven stations controlled by Kohlberg Kravis Roberts & Co., and it also applied for the Pittsburgh station license, Brogliatti said.
But Lorimar still hasn't applied for a transfer of WTTV's license.
"We are presently negotiating with Tel-Am and if we can reach an agreement that is in the best interest of our shareholders, we will proceed," Brogliatti said Friday, declining to predict the outcome.
Two weeks ago, Lorimar abandoned its ambitious plan to acquire the seven TV stations from Kohlberg Kravis. Wall Street professionals speculated that Drexel had failed to line up enough investors. But Lorimar insisted that it pulled out because advertising demand for TV stations had softened.
Now, some sources wonder if Lorimar will back away from the WTTV purchase, since the company no longer requires Drexel's muscle to finance the $1.8-billion purchase from Kohlberg Kravis.
"My guess is that (Lorimar executives) were doing Drexel Burnham a favor here," one TV station broker and investor said. "It was on the market forever; (Lorimar) was bailing out Drexel."