Michael Milken - Philanthropist, Financier, Medical Research Innovator, Public Health Advocate  

   Mikemilken.com  »  Finance Career  »  Takeovers

"As deplorable as Joe McCarthy's attacks on alleged Communists were in the 1950s, the government's attack on Michael Milken during the 1980s was even worse. It was more conspiratorial; it sent more people to jail, and it was, at bottom, an attack on such fundamental American values as entrepreneurship, individual responsibility and, ultimately, capitalism itself."
(The Wall Street Journal/book review, July 18, 1995)
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Financial Career

There was a relatively small aspect to Milken’s business that later helped dislodge less-efficient, non-stockholder managers as part of the normal process of business rationalization: takeovers. These takeovers served to improve the quality of management at less-efficient companies, and to help the economy, making both more dynamic and innovative. In a June 26, 2002, opinion column, dean of the George Mason School of Law, Henry G. Manne, called takeovers "the most powerful market mechanism for displacing bad managers ... just the threat of a takeover provides incentive for managers to run companies in the interest of the shareholders." Professor Manne called the supposed abuses of takeover activity "largely mythical."

Investment banker Roy C. Smith, who worked for Goldman Sachs – a Drexel competitor – wrote approvingly in his 1990 book, Money Wars, about the "new men" of Wall Street who in the 1980s came to "shake American corporations out of their torpor and waste."

The editor of Canada’s National Post wrote (August 2002):

Back in the 1980s, some very positive things were brought to the American economy by, among others, Milken and his investment bank, Drexel Burnham Lambert. There was, as in the 1990s, far too much irrational exuberance and stock-market hysteria. But carve away the hype, and the fact remains that Milken, et. al., did shake up and democratize North American high finance to such an extent that the institutions that used to run things – Wall Street’s white-shoe firms – today bear little resemblance to their former selves. Drexel’s use of high-yield bonds made it easier for companies to raise capital, and their widespread use of leveraged buyouts opened the door for the company’s owners – its shareholders – to strip power from unresponsive managers. On balance, the innovations they introduced made capitalism more dynamic.

In an October 2005 column for another Canadian newspaper, The Globe and Mail, columnist Eric Reguly wrote:

In reality, not many companies became the targets of junk-bond artists; the headlines just made it look that way. The ripple effect was largely positive. Shareholder value became the mantra. American companies restructured and gained power. In the 1980s, Corporate America seemed a sitting duck for brutally efficient Japanese companies. In the 1990s, the U.S. companies were taking over the world.

Michael C. Jensen of Harvard Business School has frequently cited the positive productivity effects for shareholders and society of takeovers that discipline large inefficient firms. In a 1992 Journal of Applied Corporate Finance article, he explained why this was necessary:

The conventional model of internal management control supervised by outside directors has generally failed as an effective control mechanism in our public corporations ... In the vast majority of cases, unless management and the board has a large ownership stake, major voluntary reversals in corporate strategy (such as selling or shutting down a business) are highly unlikely to come about without pressure from capital or product markets.

A February 2008 Washington Post column by Steven Pearlstein said:

Looking back, few would doubt that high-yield bonds helped to democratize corporate finance and began to shift power from banks to capital markets as the primary intermediary between savers and borrowers. Through the magic of the leveraged buyout, these junk bonds helped to make companies more responsive to shareholders and laid the foundation for the growth of private equity.

Writing in The American Spectator [June 2005], Stephen Moore, former senior economist of the Congressional Joint Economic Committee, wrote:

The economic literature is clear that the biggest gainers from M&A activities are not the acquiring firms, but the owners of the acquired firms. One value of the raiders is that they serve as the ultimate cops on the financial market beat, searching out and destroying flab and inefficiencies. For all the vilification of Michael Milken, his firm Drexel Burnham easily created more wealth for American shareholders single-handedly than all the trustbusters in American history combined. Practically every hostile takeover, even those financed with junk bonds, made hundreds of millions, if not billions, of dollars for stock owners.

An article in the Sunday Times of London (May 13, 2007) said:

Unaccountable power inevitably produced abuses: executive pay that bore no relation to performance; mergers that aimed more to aggrandise the executives of the acquiring firm than to obtain efficiencies; more attention to executive perks than to enhancing shareholder value. Enter Mike Milken. Milken created the "junk bond," an instrument that allowed entrepreneurs who did not share a country-club membership with their bankers to borrow money to finance the takeover of badly managed companies. These takeover artists ended up both owning and managing the companies they acquired. They grounded corporate jets and sold off company wine cellars in order to increase profits.

Nobody loves a revolutionary. Roosevelt was hated by entrenched business interests for passing the antitrust laws. Milken was hated by the corporocrats for making it possible for social outsiders - many of them "young, aggressive and Jewish," according to one description, and therefore ineligible for membership in the better clubs - to take over sleepy companies.

The new private-equity crowd, in its turn, is facing hostility - from three sources. The first is the corporate "establishment" with its usual hostility to the entrepreneurs who are the agents of "the perennial gale of creative destruction" that Joseph Schumpeter claims is "the essential fact about capitalism." Life at the top of corporate America will be less pleasant. Which is what dynamic capitalism is all about - change that discomfits the comfortable.

These takeovers were an important trend and clearly helpful to the economy, but what has been overlooked by press accounts is that they were merely a natural outgrowth of Milken’s revolution in capital access for entrepreneurs with ability. That revolution broke the stranglehold of the 'Establishment' lenders and shifted power from non-stockholder corporate managements to stockholders. This led to enormous job creation by the 99.9% of small- and medium-size firms that are not "investment grade" and are usually managed by owners. These companies created 62 million jobs in the last 30 years of the 20th century, while the Fortune 500 'investment grade' firms laid off more than four million. Meanwhile, all of Europe, with twice the population of the U.S. in 1970, created only about 12 million jobs in the same period. Europe did not yet have the advantage of Milken’s revolution. When his innovations began to be adopted in the U.K. in the 1990s, the U.K. economy robustly pulled away from continental Europe, and its unemployment rate dropped from more than 10 percent to around four percent.

An article in The Economist magazine (September 23, 2006) recognized the advantage that Milken’s innovations gave the U.S. over Europe: "In the days of Michael Milken and Drexel Burnham Lambert in the 1980s, junk bonds helped reshape and modernize corporate America, no matter how unpopular they were at the time."

But Milken underestimated the political clout of corporations with bloated management structures that suddenly found themselves obliged to compete with vigorous new players. There was a strong reaction from the established financial community, through their Congressional representatives and editorial pages of major newspapers. Rather than credit Milken for enlivening an economy gone dormant, they attacked him as an enabler of "raiders" who were "destroying America." Politicians to whom these corporations made large contributions, and the publishers in whose papers they bought substantial advertising, were quick to join the chorus.

As the late U.S. Senator Daniel Patrick Moynihan said, "We are all entitled to our own opinions, but not to our own facts." One fact often overlooked by the press is that takeovers were not a large part of Milken’s two decades on Wall Street. And because the public had a poor understanding of takeovers, they were a convenient target for the corporate old-boy network to use in shifting attention from their own shortcomings. According to a March 4, 1992, article in The Wall Street Journal, "Junk bonds have been blamed for takeovers, yet they provided no more than 5% of takeover financing." Ironically, most takeover financing was provided by banks, not the capital markets.