Dodging Bullets: Changing U.S. Corporate Capital Structure in the 1980s and 1990s

427 Pages·1999·2.795 MB·English

by  Robert N. McCauley, Frank Iacono, Judith S. Ruud

Dodging Bullets

Dodging Bullets
Changing U.S. Corporate Capital Structure in the 1980s
and 1990s
Robert N. McCauley, Judith S. Ruud, and Frank Iacono
MIT Press
Cambridge, Massachusetts
London,England
(cid:211) 1999MassachusettsInstituteofTechnology
Allrightsreserved.Nopartofthisbookmaybereproducedinanyformbyanyelec-
tronic or mechanical means (including photocopying, recording, or information
storageandretrieval)withoutpermissioninwritingfromthepublisher.
ThisbookwassetinStoneSerifandStoneSansbyAchornGraphicServices,Inc.
PrintedandboundintheUnitedStatesofAmerica.
LibraryofCongressCataloging-in-PublicationData
McCauley,RobertN.
Dodgingbullets:changingU.S.corporatecapitalstructureinthe1980sand
1990s/RobertN.McCauley, JudithS.Ruud,andFrankIacono.
p. cm.
Includesbibliographicalreferences andindex.
ISBN0-262-13351-2(hc:alk.paper)
1.Leveragedbuyouts—UnitedStates—History—20thcentury. 2.Consolidation
andmergerofcorporations—UnitedStates—History—20thcentury. 3.Corpo-
rations—UnitedStates—Finance—History—20thcentury. I.Ruud,JudithS.
II.Iacono,Frank. III.Title.
HD2746.55.U5M35 1999
338.8¢0973—dc21 99-32604
CIP
Contents
About the Authors vii
Preface ix
Acknowledgments xi
1 Introduction 1
I The Endof the 1980s 11
2 Why the 1980s Stopped: Leveraging as a Mania 13
3 Why the 1980s Stopped: Did Judges, Lawmakers, and Regulators
Kill the Leveraging Business? 63
4 RJR-Nabisco: A Case Study 121
II The 1990s 155
5 The Legacyof Debt and Corporate Refinancing in the
1990s 157
6 Relieving the Burden of Interest on Cash Flow 193
7 The Equity Infusion—Reverse LBOs 221
8 Cheap Equity Capital for Young Firms 247
9 Mergers and Acquisitions in the 1990s 265
Contents vi
III Lessons 287
10 Policy and Asset Inflation 289
11 Conclusion 327
Notes 349
Index 393
About the Authors
RobertN.McCauleyisaSeniorEconomicandFinancialRepresentative
at the Representative Office for Asia and the Pacific of the Bank for
International Settlements in HongKong.
JudithS.Ruudservesasaneconomistcoveringfinancialmarketsand
institutions at theCongressional Budget Office in Washington, D.C.
FrankIacono trades credit derivatives with Chase Securitiesin New
York City.
Theviewsexpressedinthisbookarethoseoftheauthorsandshould
not beinterpreted as thoseof the Bankfor International Settlements,
theCongressional Budget Office,or Chase Securities.

Preface
Whatisthisbookabout?Howdoesthisbookrelatetootherbookson
thesame subject? For whom is it written? This preface answers these
questionswithquotations,attimesparaphrased,of thereviewerswho
examined thebook at thebehest of thepublisher.
Thisbook offersanentertainingand carefulsummaryof thetrends
inU.S. corporatefinancial policy in thepastdecade and a half.It ad-
dressesthree major questions: Why did corporateleverage rise in the
1980s? Why did the leverage wave come to an end? And, how and
whydid companies deleveragein theearly 1990s?The chronological
organization makes sense, becauseone cannot understand why com-
panies deleveraged in the 1990s without understanding the leverage
waveof the1980s.The last partof thebookfocuses on publicpolicy,
and the recommendations in these chapters are supported by the re-
searchintheearlychapters.Readerswhodidnot followthefinancial
presscloselyoverthepast15yearscouldpickupthisbookandunder-
standwhyleveragedbuyoutsoccurredinthe1980sandwhytheyhave
been reversedin the1990s.
Thisbookfillsavoidonthesubjectofcapitalstructure.Whereasthe
subject of chapter 2, the rise and fall of the leverage wave, has been
coveredextensivelyin thepopularpress and insome academic work,
thedeleveragingofthe1990shasreceivedmuchlessattention.During
the1980s takeoverwave, publishershad a ready audience fortales of
Preface x
greedand power struggles.Althoughdeleveragingis not sexy,theau-
thors’ account is carefully researched and written in a style to hold
the reader’s attention. The treatment is objective without being too
academic.
The book covers a wider range of material than most serious treat-
ments ofcorporate finance. One ofits strengths is its styleof writing.
Unlike some economists, the authors do not torture the reader. The
authorsusesoundtheoreticalarguments,supportedbycarefulanalysis
of data, but avoid the technical details and heavy academic jargon.
TheMinsky-Kindlebergerparadigmisaningeniousstylisticdevicethat
holdsthe book together.This book fits between the broadest market
for books on corporate finance and the scholarly market for treatises
on thetheory of corporate behavior.
Thisbookthusaddressesitselftotwoaudiences.First,itcansupple-
mentacorporatefinancetextforadvancedundergraduatesinbusiness
curricula or for students in master’s in business administration pro-
grams.Forthese, thebook providesalively complementtotextbooks
andjournalarticletreatmentsofcorporatefinance.Standardtextbooks
rarely analyzemanias and bubbles. Even when the possibility of ma-
niasisallowed,thestandardanalysiscanbesmuganddry.Awayfrom
theacademiccommunity,nearlyeveryoneinthefinancebusinessdoes
notquestiontheexistenceofmanias.Financeschoolstudentsneedto
learnthe details of models that are based on strict rational optimiza-
tion.Buttheyalsoneedsomeexposuretothistypeofcarefulanalysis,
which recognizes that securitymarkets in the United States may not
conformtothestandardmodelofrationalmarketsrunbyparticipants
with fullinformation.
Second,the book addresses a wide audience in thebusiness and fi-
nancecommunity.Veryfewanalystsat investmentbanks havea big-
pictureperspectiveon corporatefinance. Thisbookcangoalongway
towardbridgingthatgap.Likewise,manypeoplecurrentlyworkingin
corporate treasuries were either not in the field in the 1980s or have
dimmemoriesof corporatecapitalstructureissues.Anyoneassociated
with corporate financeshould readthis book.