Mike and the late Merton Miller during a Nobel laureate panel at the 1999 Milken Institute Global Conference.
While Mike is probably best known for his work with high-yield bonds - so-called 'junk' - his techniques were far more expansive; he used some 50 different types of securities in more than a dozen asset classes to help finance corporate growth for his clients and adapt their capital-structure needs to changing market conditions. At the core of his economic theory is his belief in how deeply capital structure matters to business' viability. The choice of capital structure can significantly affect a company's valuation and its investment risk. [Mike often debated this point with the late Merton Miller, Nobel laureate in economics, who contended that investors could reduce the risk through arbitrage.]
Mike asserts there is no one right way to capitalize a corporation, and that no single structure can be correct at all times. Sometimes, as in the late 1980s, companies in general would have been advised to deleverage by issuing equity. but for much of the 1970s, conditions generally favored debt financing. Yet, Mike believes, for certain companies at certain times – such as airlines in the 1960s – even a dollar of debt is excessive, because risk in capital structure should vary inversely with business risk.
Rote references to the "junk bond king" perpetuate a one-dimensional caricature of a multi-dimensional financial innovator. Consider the variety of corporate divisions reporting to him at Drexel Burnham Lambert:
- Investment-grade debt
- Non-investment-grade commercial paper
- Preferred stock
- Convertible bonds
- Sovereign debt
- Real estate
- Capital markets product development
- Private placements
- Non-investment-grade debt
- Distressed debt
Mike recognized that in a changing society, "The Best Investor is a Social Scientist" (the title of his first talk on Wall Street in 1969). In his book How the Markets Really Work
(Crown, New York, 2002), former Harvard Business Review
editor Joel Kurtzman wrote:
"Milken's real contribution was far greater than simply to sell portfolios of bonds. His real contribution was to get investors to understand that the stock and bond markets were not really separate markets. Milken created a tremendous pool of liquidity and guided its use with surgical precision. He did it in a way that took an often bloating and ailing American economy and made it lean, mean and resilient. Much of the strength and resilience of the economy today – including its ability to rebound in times of adversity – is due to the way people using Milken's financing vehicles remade ailing companies or put their entrepreneurial zeal to work."