Corporate Raiders in the 1980s

EVENTS | 1980s

The 1980s marked a transformative period in Western economies, particularly in the United Kingdom and the United States, characterised by a dramatic shift in corporate governance and ownership structures.

This era saw the rise of 'corporate raiders' who, through innovative financial mechanisms, dismantled established industrial behemoths, often through practices described as 'asset stripping' and 'downsizing'. These activities were perceived by some as a necessary regeneration of capitalism, while others viewed them as a ruthless pursuit of profit that destabilised communities and betrayed long-standing social contracts.

The Post-War Corporate Order 

For decades preceding the 1980s, particularly after the Wall Street Crash of 1929 and the subsequent New Deal policies in the United States, corporations had evolved into structures far beyond mere profit-making entities.

They were deliberately designed to protect economies from the chaos of unchecked free markets, fostering stability and insulating firms from volatility and change. This period saw the development of a corporatist model, often referredin the The WW2 Consensus as Stakeholder Capitalism, where industry was managed by professional executives rather than solely by owners.

These managers, who often held no shares in the businesses, were theoretically meant to operate companies in the interests of all stakeholders, including employees and the wider community. Power resided in position within a bureaucratic apparatus known as the 'Technostructure', rather than in stock ownership, rendering the individual shareholder largely irrelevant in daily operations.

Such corporations became integral to American life, viewed as great social enterprises that generated prosperity and employment, with their leaders often seen as powerful, almost God-like figures within their communities.

The Emergence of Corporate Raiders 

By the late 1970s and early 1980s, this established order faced increasing economic challenges, including declining competitiveness and perceived inertia. The political landscape shifted with the ascendancy of leaders like Ronald Reagan in the US, who promised economic regeneration by empowering financial markets rather than government intervention. This environment fostered the rise of corporate raiders, individuals who sought to challenge and overthrow the entrenched corporate establishment.

A prominent figure in this movement was Sir James Goldsmith, a financier who had previously engaged in battles against the established order in Britain. Goldsmith believed strongly in the necessity of change to combat decadence, arguing that the absence of competition and the presence of comfortable bureaucracies and monopolies would lead to dead industries. He contended that 'predators' were a necessary stimulus in business, just as in nature, preventing degeneracy. Goldsmith, known for his egotism and lack of respect for existing managements, viewed many large companies as 'sitting ducks' for takeover.

In the United States, Michael Milken, working for the then-obscure Drexel Burnham bank, spearheaded a financial revolution that provided the means for these takeovers. Milken invented high-yield bonds, which his detractors dubbed 'junk bonds'.

These bonds allowed for the raising of vast sums of money for businesses and projects that traditional banks considered too risky, such as new casinos in Las Vegas. Milken's innovation was based on statistical analysis demonstrating that while some high-risk ventures might fail, investing widely enough would yield significant returns due to the high rates of return demanded for the risk.

This mechanism democratised capital, making large-scale financing accessible to a broader range of entrepreneurs and companies, challenging the traditional monopoly of capital held by very wealthy families and old financial institutions. Milken was driven by a powerful ambition, even a Messianic belief, that he was creating a new, more dynamic world on Wall Street. His efforts directly facilitated the creation of new enterprises, including major mobile telecommunications companies and even CNN.

The Mechanics of Hostile Takeovers and Downsizing 

With Milken's financial backing, corporate raiders like Goldsmith began to target giant corporations across America. The process involved borrowing billions of dollars through high-yield bonds to acquire a controlling stake in a target company. The raiders were confident they could repay the enormous interest on these loans by unlocking and selling off hidden wealth within the often-bloated corporations.

A notable example was Goldsmith's assault on the Crown Zellerbach Corporation in 1984. This company, owning vast forests and producing paper products, was run by an elite group of international managers in San Francisco who upheld a strong sense of social responsibility but also enjoyed immense power stemming from their corporate empire. Goldsmith systematically acquired the company's shares, and once in control, began to tear the corporation apart. Factories were sold off, and thousands of workers were made redundant to service the debt and generate immense profits for Goldsmith and his investors.

This process of downsizing, a term coined by executive Al Dunlap (nicknamed 'Chainsaw'), became a hallmark of the era. Dunlap described his role as cutting 'cancers' from 'sick companies', often involving the layoff of 30-35% of the workforce and the closure of unproductive operations. While acknowledging the hardship for employees, Dunlap argued that these drastic measures were necessary for the health and profitability of the company, with the primary concern being the shareholders. The economic rationale was straightforward: reducing the expensive overhead of wages immediately improved profit margins and caused share prices to soar, thereby fuelling a booming stock market and seemingly validating the Reagan administration's economic policies.

The Pivotal Role of Pension Funds 

A crucial, and ironic, element in the success of the corporate takeover movement was the involvement of pension funds. These funds, representing billions of dollars invested on behalf of retired workers, were initially established as a cornerstone of the post-war corporate utopia, intended to secure the welfare of employees in their retirement. However, the legal mandates governing pension fund managers dictated that their primary duty was to secure the highest possible returns for their beneficiaries, provided the investments were not excessively risky.

As Milken's high-yield bonds demonstrated consistent, fantastic returns and were increasingly perceived as safe investments, pension funds began to acquire them in large quantities. This influx of capital from pension funds, tapping into a previously inaccessible source of hundreds of billions of dollars, provided Milken with unprecedented power. It transformed him from a rapidly rising force to the dominant player in the takeover boom of the 1980s.

Pension funds found themselves in a difficult position: while some major corporate executives accused them of 'selling out America' and destroying major corporations, the financial gains offered by the raiders—sometimes a 25-30% increase on investment—were difficult to refuse, especially when incumbent managements had overseen declining profits. The law explicitly required fiduciaries to act in the exclusive interest of the participants and beneficiaries, not the company that established the fund. This legal imperative compelled pension funds to provide the financial 'grease' for the takeover movement, even if it meant indirectly facilitating actions that led to job losses among the very workers they were designed to protect.

Backlash and Legal Consequences 

The escalating wave of hostile takeovers and the associated widespread layoffs generated significant public and political backlash. Concerns mounted regarding corporate responsibility to communities and the perceived ruthlessness of the new financial practices. Politicians, whose power was often intertwined with the fortunes of large corporations in their home states, began to voice strong opposition.

The growing suspicion culminated in a series of revelations regarding corruption within the takeover movement. Ivan Boesky, a prominent Wall Street dealer, became a central figure in these scandals. Boesky had built an immense computer intelligence network and employed a system of informants to track corporate movements and bribe bankers for inside information on impending takeovers. He would then buy millions of shares in target companies, selling them to the raiders for vast profits once the bid became public. This practice, known as insider dealing, was illegal, yet it was pervasive.

In November 1986, Boesky was arrested and, in exchange for a lighter sentence, agreed to cooperate with authorities, naming numerous bankers he had bribed. This cooperation revealed a substantial, systemic problem of corruption within the financial community. The revelations had a shattering effect, exposing a hidden life of cheating, lying, and stealing among seemingly shrewd and capable figures to their colleagues and families.

The fallout from Boesky's arrest spread to Britain, where the Guinness scandal exposed a similar network of illegal share dealing. Although evidence suggested widespread corruption, only four men were convicted, with much of the wider system quietly suppressed.

Ultimately, Michael Milken himself was charged by the Securities and Exchange Commission (SEC) with 94 counts of fraud, racketeering, and insider dealing. He was sentenced to three and a half years in prison. While authorities framed this as a victory against financial malfeasance, some close to Milken argued that his downfall was a result of jealousy and envy from the old money establishment, who saw him as too powerful and believed he was taking business away from them by democratising the process of acquiring wealth and power.

Transformation of Corporate Power and Enduring Legacy 

Despite the legal crackdowns and the imprisonment of key figures like Milken, the revolution they initiated proved unstoppable. The practices pioneered by the corporate raiders were not eradicated but adopted and scaled up by the very institutions that had initially opposed them. The large financial institutions, including the pension funds themselves, became the new custodians of corporate power.

Pension funds, having learned from the raiders how to squeeze vast amounts of money from corporations, realised they could achieve similar results without direct takeovers. By leveraging their enormous shareholdings, they could force managements to implement changes that would appreciate share prices, thus securing profits for their beneficiaries without needing to engage in the hostile, public battles of the raiders. This meant that pension funds, born from the power of workers, increasingly found themselves in the vanguard of practices that eliminated millions of jobs and held down wages, all in the name of securing higher profits for a more comfortable retirement for their members.

The 1980s corporate raiding phenomenon fundamentally altered the landscape of American and British industry. It accelerated a shift from a corporate model focused on long-term stability and social responsibility to one intensely focused on short-term shareholder value. The period witnessed the 'arbitraging down' of what was once an innovative, highly profitable practice into a normalised, less spectacular part of financial operations.

While hostile takeovers and leveraged buyouts continue, they no longer command the unique spectacle or generate the extraordinary profit margins seen in the 1980s. The era left an enduring legacy of a transformed corporate world, where the capital markets, driven by the imperative of maximising returns, hold unprecedented control over the day-to-day decisions regarding wealth and power.

The difference in perception between the US and UK contexts was notable, with the dismantling of British institutions, some with centuries of history, perceived as more lamentable than the breaking up of younger American corporations that had only existed for a few decades.