interest from the bond would sell because these pay-ments would stop when the company did its Chapter 11 filing.
The information flows were very bad. Penn Central fa prominentearly bankruptcy restructuring] hadn’t happened yet. So people didn’tknow yet, and wouldn’t for many years, that you could make moneyinvesting in bankruptcies. We learned that the market was very inef-ficient and that there was a way to create cheap common stocks. Tobuy “NewCo,” the new company that is reorganized around the bestbusinesses the debtor in possession had, you design an appropriatecapitalization [financial structure] and create the NewCo stock bybuying the old claims.
Tanous:How does that process work?
Price: The day a company files Chapter 11, lawyers, investmentbankers, and the creditors will, through the negotiation process, findparts of that business to restructure. They'll sell off everything else,negotiate and formulate a reorganization plan to pay people out, andat the end of the period, could be a year or ten years as in the caseof Penn Central, you’re going to have new bonds and new stock andcash distributed. If you buy the old claims cheaply enough, you’regoing to wind up owning that stock for nothing. In that ten year
37PETER J. TANOUS
period, you can get much smarter than you can buying EastmanKodak on the New York Stock Exchange because Eastman Kodak filesquarterly and then annually. A bankrupt company files every monthin the bankruptcy court. They file all sorts of things, copies of leases,and other things that a regular company would never disclose.
Tanous:ls it safe to say that any company that files Chapter 11gets your attention?
Price: No. They hit our radar screen well before any filing. Mostof the time, when a company files it’s because of too much debt. Butthey also file because of lawsuits, environmental problems, and allsorts of claims against them. So, all those companies are on our radarscreen all the time. We look at the securities of “OldCo,” the companythat is going to go, and there are senior, junior, and preferred secur-ities. We want to buy the seniormost securities so we get protectedbecause we’re senior. As we learn more about the case, we'll go down,if the returns are there, to the more junior securities. We try to be oneof the biggest investors in the company so we can control the case,but not so large that we are on the committee and prevented fromtrading. We try to bring the company out with the best and cleanestbalance sheet it can get. [The less debt a company has, and the moreequity, the “cleaner” its balance sheet.]
Tanous:We’re moving toward another aspect of what you do thatis a bit peculiar: You not only take a large position in a company,but you become an activist. Your role as the catalyst in theChase/Chemical merger is almost legendary. I’m curious to know whyyou would devote your time and energy, since you do run a mutualfund company after all, to getting so involved in a corporate decision.
Price: The bankruptcy process has evolved today to where there ismote competition and you have to get smarter about how you investyour money. Just buying the bonds isn’t good enough. In the last fiveor ten years, we have come up with some pretty creative ways to putmoney in companies to create new securities.
Tanous:Do you want to talk about them?
Price: Yeah. Rights offerings and cash infusions are ways. We goto a company that needs money. Often it’s as simple as reading anewspaper to know that if Morrison Knudson doesn’t get $150 millionby June 30th it has a problem. So you hop on a plane; you go out toBoise.
Tanous: You did that?
38INVESTMENT GURUS
Price: Yeah. You say to the guys, we read in the paper you needsome money. We'll put up the money. Of course, we do all ourhomework first. We do a lot of homework after, too. We ended upnot putting up the money for Morrison Knudson because there wasno deal to be done. It ended up being way overpriced in the marketat that time and we knew it, but there’s a way to say, we'll guaranteeyou your money. Offer the same right to your shareholders througha rights offering, and if none of them wants it, we'll take it all. Butif they want it, you have to guarantee us a third of the deal. And weprice it where we love the stock. Say the price is six. We might priceit at four.
Tanous:Okay. Let me understand this transaction. You go to thecompany. The stock is six. They’re in trouble and they need $150million real soon.
Price: We say, if you get $150 million and the pressure is off, thestock is now at 6. (I’m not going to pay 6 for 6. It may have beenworth 6 or 7 a year ago, based on our research. That was then. Nowit’s worth 2 because they did a lot of things wrong.) But we say we'llpay 4 bucks a share. So say I buy 40 million shares of stock at 4, fora total of $160 million. But first go offer that deal [at 4.00/share] toyour shareholders. And if the shareholders don’t buy it, I'll buy it. Ifthey do buy it, you’ve got to guarantee me 30 or 40 million sharesat 4. So I’m what’s called a standby purchaser. We’ve done aboutseven or eight of those deals.
Tanous:In fact, how could a company say no if they’re in trouble?
Price: What happens is if you get there too early, there’s not enoughpain so they don’t want to give you a bargain. If you get there whenthings are changing or the bookkeeping is no good, maybe it’s toouncertain to buy. This is one of the ways we have found to investwithout competing in the marketplace.
Tanous:Okay. So the shares go into your fund at 4.
Price: Right. But the stock never trades down at 4. Maybe it tradesat 4 1/2 or 5, but it goes right back to 6, because, one, the companynow has the money; two, we’re a large owner, people know that we’regoing to make sure the things are done right; three, the company nowhas a year or two of breathing room to go sell assets, pay down debt,and do all the right things.
Tanous:At the same time your stock has to be perfectly tradable orit couldn’t go into the mutual fund.
39PETER J. TANOUS
Price: No. If we buy a big block like that, if it’s large enough,sometimes we’re restricted. Liquidity matters. [“Liquidity” refers tothe ability to buy and sell readily. If a stockholder owns too much ofthe total stock outstanding, usually over 5%, trades by that stockholdermust be disclosed to the SEC And in bankruptcy cases, there are morelegal restrictions. In some circumstances, the buyer of a large blockof stock may have to accept restrictions on selling all or part of theblock for a period of time.]
Tanous: We started to talk about the Chase/Chemical deal.
Price: You’re talking about rattling cages. Our job isn’t to rattlecages. Our job is to make money for our shareholders. We can’t takeour eye off that ball. We never file hostile 13Ds [the form that mustbe filed with the SEC when a purchaser acquires 5% or more of apublicly held company] to get in the press. We only get difficult ifwe're being screwed. And in the case of a Chase/Chemical and a lotof others, we’re not hostile. We’re not trying to get control or managea bank. We’re simply trying to get them to allocate their capital in away that will bring the value out. We thought that structurally Chasewas not set up right. The book value was $42 when we bought thestock at $35,
Tanous:Chase’s book value was $42 when you bought it at $35?
Price: Yep. And it was earning, I don’t know, 5 or 6 bucks. Andthere was another $30 per share of assets, like the credit card business,mortgage business, all sorts of stuff, which was not in the book value.And these guys were using their stock to make an acquisition. Thatwas crazy! The stock is worth $65 and they’re using their stock tobuy something when the stock was trading at $35. So we had to puta stop to that.
Tanous:How did you do that?
Price: Well, we bought 6.8% of the stock. That’s over 11 millionshares. We came out with a 13D which said we think the stock isworth a lot more. And that started to focus people’s attention on whatthe assets were. Our 13D started to get all the banking analysts tosay, hey, let’s take a harder look at Chase. Maybe something is goingto change. Then what we did, which was very smart, and this was myanalyst’s idea, Ray Garea, was we went to the top ten holders of Chasestock and we sat down and had lunch with each one of them, andwent through our analysis of what Chase was worth. We did thatright away, in the month after we filed. We filed on April 6 and by
40INVESTMENT GURUS
June we had seen six of the top ten holders. One wouldn’t see us. Wewere the largest holder. We laid out our case and within a week ortwo, Tom Labrecque, Chase’s chairman, was doing the same thing.So wherever he went, we had already been there. So what kind ofimpression is that going to make on him?
Now we didn’t say we’d run a proxy fight. We didn’t say we weregoing to do anything other than to say to the board you should focuson getting the shareholders $60 to $65, not on keeping the stock pricedown at $35.
Tanous:So what did Chase do at that point?
Price: They immediately took away the right of a shareholder tocall a meeting, which alienated some of the holders. They hired allthe top bank takeover lawyers to protect themselves because I wastrying to do the same. None of the top lawyers would work for mebecause they were all working for him. So we hired another firm, andwe started the process to get clearance to buy more stock and getseats on the board. The stock at this time was starting to move up,and analysts wrote up not only what the values were but how greatit would be if Chase and another money center back would get togeth-er and profit from the overhead reductions. In August, they announcedthe deal with Chemical and the stock got into the low fifties. Todaythe stock is over $70 because, you know, Wall Street is giving theseguys a lot of credit.
Tanous: Whose idea was Chemical as a merger partner?
Price: Shipley runs Chemical. He bought Manufacturers Hanoverso they had been through a merger four years earlier. It had beensuccessful. We owned two million shares of Chemical. So, now we’regoing to own 14 million shares of the combined entity. It’s our firstbillion dollar position in one stock. When the merger closes, we'llhave one billion dollars in that company.
Tanous:Let me tell you something that people in my business getexcited about. Your funds historically have relatively low standarddeviations and yet your performance is, to use one word, exceptional.How do you achieve the returns with such low volatility or risk?
Price: The goal is to make good returns with less risk. Risk is notthe same as volatility. It’s very hard to measure risk. It’s very simpleto measure return. You can’t model it. You’d have to go into everycompany in our portfolio, which is 250, and come up with a discussionabout what might happen to the stock if earnings were disappointing.
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Well, in the case of Florida East Coast, nothing! Cause they’re sittingon all the land, it’s a debt-free railroad, and at some point it will gettaken over. The stock is not going to go down.
So what we did way back when the fund was small, it was $5 mil-lion when I got here in 1975, is divide the portfolio into components.Cash is between 5% and 25% always. Well cash doesn’t move withthe market. Bankruptcies don’t really move with the market, theymove with the progress of the case. Arbitrage deals, announcedtenders, mergers, buybacks, and liquidations, trade as a function ofthe deal’s progress. So if you add up our cash, the bankruptcies andarbitrage and liquidation deals, and some other unusual securities wesometimes carry, it generally will be 40% of the fund. The other 60%will be made up of what I call POCS, Plain Old Common Stocks, andthose are value stocks and most are trading if not below book, at leastbelow intrinsic value, so they should go down less than the market.So, if 40% of your portfolio is not really related to the market, youcan get a beta of .6 or a real low standard deviation.
We perform well because some of our stocks have these catalysts.You asked why do we spend our time going around to shake somecages? It’s because a lot of times you can buy good values. But untilthere’s a catalyst, the value is not going to get realized.
Tanous:You’ve been quoted as saying that RJR is your favoritestock.
Price: Reynolds is interesting now because there’s a catalyst in thepicture. Ben LeBow and Carl Icahn are trying to push them to do aspinoff.
Tanous:Are you involved?
Price: I’m not involved except as a shareholder. I think the stock’stoo cheap.
Tanous:Let me tell you something interesting about an interview Idid with John Ballen [page 281]. He runs the MFS Emerging GrowthFund. He’s a growth guy with an amazing record. I asked him whatmade him happiest. He said this: the thing that makes me happiestis to know that Michael Price and I own the same stock. He said valueand growth investors are looking for the same thing, growth at areasonable price. If Michael owns the same stock I have, I know I’vegot a winner.
Price:/laughs] There’s probably very little overlap. What's the nameof the fund?
42INVESTMENT GURUS
Tanous:MFS Emerging Growth. His turnover last year was verylow. Only 20%.
Price: Our turnover is in the mid 70s, but it is skewed by the arbit-tage deals. A lot of our stocks get taken over.
Price:[At this point Michael calls his assistant.] Bring me a copyof MFS Emerging Growth portfolio.
Tanous:! also noticed that one of your funds, Discovery, is essen-tially a global fund.
Price: It’s mostly Europe. A couple of things in the Far East. Nothingin Latin America.
Tanous:How do you apply the Michael Price process to findingthese European deals?
Price: We started in Europe in 1984 when | noticed some of theguys buying closed end funds at big discounts. Remember I told youI followed certain smart people? I noticed some very smart guys inNew York buying closed end funds at 25% to 30% discounts in Lon-don, and all those funds owned were U.S. oil and gas stocks. So webought one, too. Then it went from closed ended to open ended andwe made about 25%. I then hired a guy in London. We started to buystocks over there, because from time to time the stocks were muchcheaper than comparable companies in the U.S. After ten years, we’vegot three traders on our foreign desk hedging currencies and doingthe trades, and four or five analysts working on foreign situations;one of them just moved to London. We’ve got $2.6 billion investedin Europe.
I think we’re the largest foreign investor in Sweden. We are thelargest non-Swedish holder of Swedish stocks. If you can buy a candycompany here like Hershey’s, Wrigley, those are the best, they’remoney machines. But they have P/E’s around 25. Then we go overthere and find Van Melle’s - they make Mentos. We found that com-pany and bought a big block of it at 8 or 9 times earnings and they’rein the same business. When you “true up” the accounting, we’re tryingto buy the same kind of thing much cheaper. Because unless you'rebuying companies 25% to 30% cheaper, you don’t want to take themoney outside the United States.
Tanous: What about the currency exchange risk?
Price: We don’t make currency bets. We hedge all the currencyrisks.
Tanous: Why?
43PETER J. TANOUS
Price: Because we’re stock pickers. We don’t know anything aboutcurrencies.
Tanous:Let me tell you something I find interesting in interviewinginvestment Gurus. There’s a guy I like a lot called Richard Driehaus[page 53]. He’s a momentum investor. I find it very interesting thathis approach is totally different from yours. His idea is buy high, sellhigher. That’s Richard. It’s exactly the opposite of what you do, yetboth of you do extraordinarily well.
Price: Look. You’re looking at this after a period of a long bullmarket, whether you measure it from 1990, from 87, from 81, or even1975. I just think we’re all so spoiled. I think you’ve got to go througha two or three year bear market to see how these guys do. We'll godown, but we'll go down a lot less than these other guys. That’s mymission. My mission isn’t to make money in bull markets. My missionis to preserve capital.
Tanous:Has there been a time when you weren't successful in doingthat?
Price: The only time was in 1990 when three things came togetherall at once, and we were down 9% to 10% when the market was down3%. We should have been flat. What happened was the Secretary ofthe Treasury, Nick Brady, and the Fed, stopped money center banksfrom lending for deals. In 1988, we had a huge year in mergers. 1989started off that way. Then in the summer of ’89, they stopped creditfor mergers and hostile tender offers. We owned a few of those posi-tions, since we always have 5% to 10% of the fund in deals. A lot ofthose stocks went down and a lot of our value stocks, which weresubject to rumors of takeovers, came down. We also had a huge pos-ition in Time Life. Remember that $200 bid from Paramount that theboard didn’t take? The stock still hasn’t gotten back to it. That stockwent from $180 down to $80. 1990 was our only down year.
Tanous: Michael, I notice you have an interesting set-up here. Canwe visit your trading room and see how you are organized?
Price: This is our only office. At one end we talk to our sharehold-ers. At the far end we have accounting. In the middle we have thetrading room, which is a trading desk surrounded by the analysts. Isit on the desk and I can talk to the traders, pick up lines and hearwhat’s going on. The traders’ job is to post the analyst with what isgoing on in the market, rumors they hear and all that. These postshave 800 lines capacity, so each trader has all these wires to all the
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other desks. If they are bond traders they have lines to bond desksand the stock traders to stock desks and the foreign traders to overseas.So I hear the analysts and traders talking; I’m talking to the analysts,pushing them; I’m talking to the traders asking what’s going on; it’sa discourse that everyone hears. We don’t have meetings here. It’s anopen dialogue. By sitting here and listening all day, you get to tellpeople what to do and all that stuff. [Price’s assistant returns withthe information on the MFS Emerging Growth Fund. Michael has alook at it and hands it back to her.] There’s very little overlap.
[We leave the conference room and proceed down the corridor toMichael Price’s trading room. The large area features a long tradingdesk in the center of the room around which clusters of analysts andtraders speak into phones and monitor information on dozens ofscreens all competing for attention. Behind and to the sides of thetrading desk other analysts sit at desks poring over research reportsand other information. A hum of activity hangs over the room andthe intense concentration of the mostly young employees creates atension that seems to permeate the place.]
Tanous:Who are the people who work in here?
Price: These are analysts here. Here we do domestic stocks and overthere we have foreign securities analysts.
Tanous:Where do you sit?
Price: Here. [Michael points to the chair at the center of the largetrading desk. From this vantage point he has traders on his right andleft as well as facing him across the desk. He points to one of themany screens at his desk]. These are the funds, priced in real time.As the market changes we see what’s going on. [He points to anotherscreen.] That’s our trading system, which has all our orders in it. Ican look up what we’ve done so far on that screen. First Call is righthere.[He points to yet another screen.] Up here is our news edge. Thisis Edgar up here.
Tanous:What’s Edgar?
Price: Edgar displays SEC filings as they come out. This is all theSEC filings as they are released by the SEC today. I have the computerprogrammed to take our names fof the companies Price’s funds ownor are interested in] and print them here. You see, Mutual's Edgarfiles? These are the companies programmed in where there’s been afiling. You see this one? Revco filed a five page 14D-9 on their pro-posed merger with Rite-Aid. And here’s the document. [The screen
45PETER J. TANOUS
displays the full image of the document filed with the SEC, in realtime.] In the old days we had to wait to get this in the mail.
Tanous:In real time?
Price: Yeah. And it’s on both sides of the desk, so you can’t missit. Here’s the Bloomberg [a financial news service].
We go over to the analysts’ cluster of desks behind the trading desk.
Price: This is Tom Price.
Tanous:Hi Tom. Any relation7Tom Price: No relation!
Price: These analysts have their own computer set-up. Notice thelaptop attached to the computer. They go off to visit companies andtake the laptop to update their spreadsheets.
Tanous:Do ideas get generated here?
Price: The first job of the analyst is to look at what we own. Thesecond job is to work on developments, news, things we need to reactto. The third is to come up with ideas.
[Traders are shouting news in the background from the desk.]
Price:[Michael leads us back to the near side of the trading desk.He addresses one of the traders.] Here’s where we do the foreign se-curities. Today we have $2.6 billion in what, nine different currencies?
Trader: More, actually.
Price: And the foreign positions are hedged perfectly every day socurrency movements don’t affect our fund price. How many curren-cies?
Trader: We’ve got 15 currencies.
Price:. How could we have that many?
Trader: Some are very small. Let’s see Norwegian krone, Frenchfranc, Italian lira, they’re all there.
Tanous:It costs money to do all that hedging.
Price: No.
Tanous:It doesn’t cost money?
Price: Less than 1% a year. So that’s it. [Michael turns to one ofthe traders.] Tell her we’re a buyer, you can be a buyer...
Tanous:By most standards, you’re a pretty young guy.
Price: I’m 44,
Tanous:Do you have any other goals or ambitions?
Price: No.
Tanous: This is it?
Price: Yeah.
Tanous: Michael, there’s one last question I have to ask you. It’s a
46INVESTMENT GURUS
question that’s being asked a lot these days, although I think mostpeople are asking the wrong question. We’re talking, of course, aboutreports that you might sell your firm. My observation is, you're verysuccessful, you obviously make a lot of money, in fact, you probablyhave more money than most people would ever need to do any reason-able thing anyone would want to do. Here’s my question: if a veryrich uncle died and left you $500 million dollars, what would you dowith it?
Price: Let me say, first of all, that no decisions have been made atall. But there are three reasons to maybe look at deals and, you know,it has nothing to do with money. It has to do with - and this is notBS - one, what complementary products and services could be offeredto the Mutual Series shareholders? Are some of them people whomight want to trade into bond funds? Well, we don’t run a bond fund.Might some of them want a money market fund? We don’t have amoney market fund. How about those who want more exposure inthe Far East? We have very little.
Two, do Mutual Series shareholders deserve to have, not an indi-vidual as the owner of the management company, but an institutionthat could weather any shocks to the financial system?
Three, the Fund Group has grown to $16 billion. It’s big, and I thinkwe're doing fine today with the group of people I have. They haveevolved into an absolutely first rate team. It’s not just the investmenttalent here, it’s a cohesive group effort that is not typical Wall Streetcompetitiveness in a cutthroat environment. We work in a teamworkway, as a team.
Tanous:I know. I’ve observed that first hand.
Price: People here, the 16 or 17 analysts, the dozen or so traders,work so well together. Our back office people work so well together.Taking it to the next level, if we grow and continue to earn our 15%return, the money will double to 30 billion in four or five years, andthat’s a pressure and a strain.
Tanous: You'll need a bigger infrastructure to handle that.
Price: I’ve invested in the last years a fair bit of money to upgradeall the systems in the house, the hardware, the software, the tradingdesk, and we’ve doubled the space of the office. So the infrastructureis not so much the issue. It’s all the other things. So we’ll see whathappens. But the idea is not about money at all.
Tanous:That’s the part I couldn’t understand, unless there was
47PETER J. TANOUS
something out there that might cost a half billion or billion dollarsthat Michael Price had his eye on.
Price: No.
Tanous:So that’s not it at all?
Price: No sir.
I confess that few of the meetings I had during the course of writingthis book stuck with me as long and as vividly as this one with Mi-chael Price. Think about it. Here is a value investor who doesn’t justgo out and find cheap stocks. He sees an opportunity in a companythat needs a lot of cash, so what does he do? Michael hops on a planeand goes out to make them an offer. I’ve got all the cash you want,he says. Just sell me some of your stock real cheap. My shareholderswill like that. Or he sees that Chase Bank is making acquisitions withits stock when Michael thinks the stock is too cheap. What does Mi-chael do? Just listen to him. “We had to put a stop to that.” Scary,isn’t it? Well, that depends on your perspective. If you had been oneof his shareholders for the past 10 or 20 years, I'll venture to say thatyou are cheering him on. It takes guts and dedication to go to theselengths to maximize your investment returns. It’s plenty of hard work.
Another point. Notice as you continue reading how often the conceptof smart people comes up in the different interviews. Early on, MichaelPrice made it a point to identify the smartest investors and observewhat they were doing? He mentions people he doesn’t want to be onthe other side of a trade with. Of course, that’s what we're trying todo, too. We want to find those really smart people and see what theydo with their investments, and how they do it. I think you'll agreethat there are few better examples to follow than Michael Price.
Postscript: In late June, 1996, Franklin Resources Inc., the fifthlargest mutual fund company and manager of the Franklin and Tem-pleton funds, announced it was purchasing Heine Securities Corp.from Michael Price. Price would stay on for a minimum of 5 years.The acquisition, which involved cash and stock, included a cashpayment of $550 million to Price, plus stock and incentives whichcould raise the ultimate purchase price to $800 million. Michaelagreed to invest $150 million of his money in Mutual Series fundsthe first year. By joining Franklin Resources, Michael fulfilled thecriteria he spoke about during our interview to broaden the productsand services offered to his present shareholders.
48RICHARD H. DRIEHAUS
Even though Richard Driehaus is not well known to the public, heis extremely well known in the investment community. His name ismost often associated with the investment style known as momentuminvesting. A wiry, high energy Chicagoan, Driehaus graduated fromDePaul University and went straight to work as a research analystfor a brokerage firm. He started to manage money in 1970 at A.G.Becker, where he was the youngest portfolio manager to be asked tomanage a portion of the firm’s pension and profit sharing plan. Veryearly on, his performance ranked him in the top 1% of his peers. Hethen spent time at two other firms, and never looked back. He beganhis own firm in 1980.
Driehaus’ acknowledged focus has been in small-cap stocks, com-panies with market capitalizations less than $500 million - someconsiderably less. The small cap sector of the market is known for thefastest growth and also the most painful declines. This stands toreason, since many small companies which go public in bursts of in-vestor enthusiasm never make it to maturity. Success in this line ofbusiness has a price, and vigilance is requisite.
Today, Richard manages $1.9 billion not only in small caps butalso in international stocks and mid-cap stocks (typically with marketcapitalization of $500 million to $3 billion). He is even dabbling inlarge companies, where he believes he can consistently beat the S&P500 and the Dow Jones Averages.
How about his performance? In his small-cap accounts, Richard’sresults were up over 34% annualized for the past five years (through1995) and over 28% for ten years. It takes your breath away. Hismid-cap results are almost as good. I need not tell you that this ishigh volatility investing and so, as one of our other interviewees putit, not for the faint-hearted. But, as Richard might say, it’s volatilityon the way down that hurts; volatility on the way up feels just right.
Driehaus Capital Management, Inc. is housed in a mansion indowntown Chicago. The offices have become something of an interna-tional landmark. The building was constructed in 1885 as the resid-ence of Ransom C