#milkin

“In 1932, Adolf A. Berle Jr. and Gardner C. Means wrote a book entitled The Modern Corporation and Private Property. A critique of corporate management for being aloof and complacent, out of touch with the consumer and irresponsible to the stockholder, this volume became the bible of Marxists, left wing intellectuals and interventionist politicians. Under the banner of separation of ownership and control, the Berle-Means thesis led to an attack on the corporate structure from which today's top executives are still reeling.

With this background, one would have thought that the people urging a greater role for the public sector would have welcomed the advent of the corporate raider. For this new breed of capitalist has sent shivers down the spines of the denizens of the boardroom. Swooping down, launching "unfriendly" or "hostile" takeover bids, these corporate raiders have succeeded in replacing management from coast to coast in dozens of industries, and in frightening thousands of other out-of-touch chief executive officers into greater responsibility.

At least under the theory of "the enemy of my enemy is my friend," it might have been expected that critics of the marketplace, noticeably the followers of Berle and Means, would have rallied `round the cause of the corporate raider.

In the event, however, this expectation has remained unfulfilled. Not only has the activity of the corporate raider been deprecated by the champions of government interference in the marketplace, but it has been roundly condemned by practically all pundits and commentators on public policy. In 1987, the left-leaning film director Oliver Stone distilled the common image of the corporate raider into the supposedly loathsome Gordon Gekko, brilliantly portrayed in an Oscar-winning performance by Michael Douglas. And this is the image of Gekko under which the corporate raider must labor in the present day.

Yet, despite this all-but-universal criticism, the unfriendly takeover bid has benefited consumers and stockholders, and served notice on complacent management across the board. In one celebrated case that unfolded shortly before Stone's film Wall Street was released, corporate guerrilla Carl Icahn put in a bid for a block of shares of Phillips Petroleum. Stung by Icahn's bid, Phillips' executives offered to improve a recapitalization plan they had been forced to put forth in response to an earlier planned takeover, this one by T. Boone Pickens. As a result, Icahn walked away with a cool $50 million, Pickens registered a profit of $89 million on a resale of his holdings to the company, all Phillips' shareholders gained from the better offer, and the oil firm itself was left far leaner and meaner than before.

Needless to say, neither Icahn nor Pickens nor any of the other masterminds of "the 1980s takeover boom," were publicly thanked for the good they had done. On the contrary: both men were not only mocked by Oliver Stone, they were also robbed of the opportunity to do any more such good by a rash of anti-takeover statutes adopted late in the decade. Henry Manne reported that hostile takeovers had "declined to four percent from fourteen percent of all mergers."

The conventional wisdom holds that this outcome is a good one for investors, but the facts show otherwise. No story of the corporate raider can ignore the role of the heroic Michael Milken. Assume there was a hotel worth $20 million as a present discounted capital value. Given an interest rate of 5%, this concern should throw off roughly $1 million to its owners. But stipulate that due to inefficiency, or general avarice, or to the fact that the CEO salary was far higher than justified, or a combination of all such phenomena, the owners were earning far less than that in dividends. And, guess what? The stock was trading at a lower value than might have prevailed, had these tape worm factors not been in operation.

Enter the "evil" Michael Milken. He swoops in, purchases enough of the stock in this corporation to kick out the old board and replace it with his own nominees. This is considered a "hostile" takeover by a corporate "raider." From whence springs the hostility? All Milken did was buy up a mess of stocks. Did he threaten any of these stock owners that they would walk the plank if they did not sell to him? No, of course not; we are talking arm's-length stock market deals here. We can logically infer that the owners of these stocks preferred the price offered them by the "raider," otherwise they would not have sold out. No, the "hostility," instead, stems from the CEO and his cronies who were mismanaging this hotel into the ground.

The Milkins of the world are akin to the canary in the mine; they are the Distant Early Warning Line for the economy.

When they get active, it is in response to something rotten that is going on. And what was the public reaction to this corporate raider? Instead of hoisting him up on their shoulders and holding ticker tape parades in his honor, he was given the back of the public's hand to his face. To wit, he was prosecuted by the Securities and Exchange Commission for insider trading, violations of U.S. Securities Laws and other financial felonies. He pled guilty only after the authorities threatened to go after his ailing brother. For shame.” - Walter Block, ‘Defending the Undefendable II’ (2013) [p. 41 - 44]