808 Chapter 30 Running on Empty, 1975–1991
Reagan,Air Traffic Controllers’ Strike (1981)
atwww.myhistorylab.com
Paul Craig Roberts, The Supply-Side
Revolution (1984)atwww.myhistorylab.com
Ronald Reagan on the Wisdom of the Tax Cutat
http://www.myhistorylab.com
The New Merger Movement
During the Reagan years, the nation began to climb
out of the recession of the 1970s. Reagan’s policies
helped, though often in unpredictable ways. Reagan’s
relaxed regulation of Wall Street helped precipitate a
frenzy of corporate mergers. Deregulation provided
the context for the merger movement, but the person
most responsible for it was Michael Milken, a
shrewd stockbroker of the firm of Drexel Burnham
Lambert. Milken specialized in selling “junk
bonds,” the debt offerings of companies whose
existing debts were already high. He persuaded sav-
ings and loan associations, insurance companies,
pension funds, and other big investors to buy these
junk bonds, which, though risky, offered high inter-
est rates. The success of his initial ventures
prompted Milken to approach smaller companies,
encourage them to borrow immense sums by float-
ing junk bonds, and use the proceeds to acquire
larger firms.
In 1985 Ronald Perelman, an aggressive entre-
preneur, employed this strategy to perfection. He had
recently obtained control of Pantry Pride, a super-
market chain with a net worth of about $145 million.
Now he sought to acquire Revlon, a $2 billion cos-
metics and health care conglom-
erate. With Milken’s help, Pantry
Pride borrowed $1.5 billion and
used that capital to buy Revlon.
He then paid off Pantry Pride’s
$1.5 billion in junk bonds
(“junk” because the debt so
greatly exceeded the $145 million
value of Pantry Pride) by selling
huge chunks of Revlon. Then he
integrated the food component of
Revlon into Pantry Pride. The
bond purchasers profited hand-
somely from the high return on
the junk bonds, and Perelman
made a fortune from his new food
conglomerate. That same year the
R. J. Reynolds Tobacco Company
purchased Nabisco, another food
conglomerate, for $4.9 billion.
Three years later this new giant,
WatchtheVideoReadtheDocumentReadtheDocument RJR Nabisco, was itself taken over by Kohlberg,
Kravis, Roberts, and Company for $24.9 billion.
During the frenzied decade of the 1980s, one-fifth
of theFortune500 companies were taken over, merged,
or forced to go private; in all, some 25,000 mergers and
acquisitions were successfully undertaken; their total
value was nearly a half-trillion dollars. To make their
companies less tempting to cash-hungry raiders, many
corporations took on whopping debts or acquired
unprofitable companies. By the late 1980s, many
American corporations were wallowing in red ink. Debt
payments were gobbling up 50 percent of the nation’s
corporate pretax earnings.“A Job for Life”: Layoffs Hit Home
Most corporations coped with the debt in two ways:
They sold assets, such as factories, offices, and ware-
houses; or they cut costs through layoffs. U.S.
Steel, whose rusting mills desperately needed an
infusion of capital, instead spent $5 billion to
acquire Marathon Oil of Ohio; that decision meant
that nearly 100,000 steelworkers lost their jobs. No
firm was immune, nor any worker secure. “A job for
life” had long been IBM’s unofficial but endlessly
repeated slogan. As late as 1985, it ran an advertise-
ment to reassure employees: “Jobs may come and
go—But people shouldn’t.” Yet during the next
nine years a crippled IBM eliminated 80,000 jobs
and more than a third of its workforce. During the
1980s, the total number of employees who worked
forFortune500 companies declined by three mil-
lion; nearly one-third of all positions in middleWorkers at a Nike factory in Indonesia insert soles into sneakers.