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Pioneer, Billionaire--and, Soon, Unemployed : Michael Milken made Drexel a leader in 'junk bonds.' Now it has agreed to sack him.

January 26, 1989|BILL SING | Times Staff Writer

Milken then earned an undergraduate degree in business administration at UC Berkeley, avoiding the anti-war campus unrest of the time, serving instead as president of his fraternity. As a sidelight, Milken managed investments for a small group of clients, eating losses himself in exchange for half the profits.

After marrying his high-school sweetheart, Lori Hackel, Milken moved to the Philadelphia area, where he attended the University of Pennsylvania's Wharton Graduate School of Business, becoming one of its brightest students and working part time in the Philadelphia office of a precursor to Drexel Burnham Lambert.

While at Wharton, Milken began to take an interest in the securities that would make him legendary.

Junk bonds at the time were primarily debt issues that were once highly rated but had fallen in value and increased in risk when the issuing companies fell on hard times. Milken believed that investors were overly pessimistic about these bonds--which often could be bought for as little as 20 cents or 30 cents on the dollar--and that their higher yields more than compensated for their added risk of default. Investors holding diversified portfolios of many junk bonds would earn higher profits, even if some of the bonds defaulted, he reasoned.

Milken's shrewd trading of junk bonds soon began making millions of dollars for Drexel--and for himself and his band of hard-working traders and salesmen. Finally, in 1978, Milken asked to move the junk bond trading operation from New York to the Century City section of Los Angeles. (It moved in 1983 to its present home on Rodeo Drive in Beverly Hills.) Out West, Milken felt he could work long hours yet still be home in time for dinner with his family. Milken, friends say, also wanted to be close to his father, who was then dying of cancer.

Began Underwriting

Drexel executives were reportedly uncomfortable with the move because it also would give Milken more independence. But they granted it because they had no choice, given Milken's megabuck success.

Soon, Milken found that trading junk bonds wasn't enough. He and Drexel began underwriting new junk bonds, issued by companies that were too small, young or risky to get conventional bank loans or issue conventional high-rated corporate bonds.

Milken viewed the issuance of junk bonds by small- and medium-size companies as part of a crusade to change the face of corporate America. Milken correctly felt that those companies were the economy's true job creators, and allowing them access to capital markets would unleash a wave of entrepreneurial innovation that would make America more competitive.

To spur this crusade, Milken also created and unleashed a stable of corporate raiders whose hostile takeover bids were made possible by junk financing. Milken-backed entrepreneurs--such as T. Boone Pickens Jr., who launched unsuccessful bids for Phillips Petroleum, Gulf Oil and Unocal; Ronald O. Perelman, who took over Revlon, and Carl C. Icahn, who took over TWA--would displace managements that had grown tired and stale, Milken reasoned.

"Capital is no longer a scarce resource," Milken told a group of high school students in a 1986 speech. "(The) scarce resource today is management, knowledge, vision, dealing with change, recognizing what people want and need in the future and the ability to work together."

Showed Genuine Interest

Businessmen were mesmerized by Milken's broad insight, knowledge and charm.

"The guy was extremely supportive," said Robert Berglass, chairman and president of Dep Corp., a Rancho Dominguez-based manufacturer of cosmetics and other personal-care products. "I got a feeling that he had a genuine interest in our ideas as to how to grow." Since Drexel became its investment banker in 1986, Dep's sales and employment have more than doubled, Berglass said.

"I'd talk to Mike from time to time just to get ideas," said Eli Broad, chairman and chief executive of Kaufman & Broad, a Los Angeles home builder and occasional Drexel client. "He had a pretty broad window on the world. He must have talked to 200 people a day, so he was a good source of information and ideas."

Companies ranging from MCI to Metromedia, from Holiday Inns to Levitz Furniture, used Drexel-underwritten bonds to finance growth or takeovers.

"Mike's a builder; everything he's touched has been the better for it," colleague Horowitz said. "These companies didn't have opportunities to raise money in the capital markets. Some were in industries that didn't even exist before." Entire industry segments, such as health maintenance organizations, home building, entertainment and hotels, derived much of their financing through Drexel's junk juggernaut, Horowitz notes.

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