The Revlon Rule— How a cosmetic company helped spark the 80s takeover craze
The Early Years
Revlon was founded in 1932 by two brothers, Charles and Joseph Revon, along with chemist Charles Lachman. The company went public in 1955 at $12 a share ($111 in 2017) and within 12 weeks reached $30 a share ($279 in 2017)
In 1974 Revlon brought in Michel Bergerac as president and Chief Operating Officer, and in 1975 he was promoted to CEO. When he took over the company in 1975 sales were ~500 million dollars a year. Bergerac wanted to diversify away from a pure cosmetic company and he aggressively moved into the healthcare business. By 1977 sales reached $1 billion, and in 1979 Revlon reported $1.7 billion in sales.
The Early 80s
Despite exploding sales and profits, not all was well with Revlon. Earnings peaked in 1980 with $2.2 billion in sales and plateaued there for the next 4 years.
In 1981, for the first time, cosmetics made up less than half of the company’s earnings. In 1983 their percentage had fallen to 37%, and by 1984 it was less than a quarter.
‘’This isn’t a cosmetics company with health care,’’ said Jack Salzman, an analyst with Smith Barney, Harris Upham & Company. ‘’This is a health care company with cosmetics.’’ — “Revlon: Cosmetics Show Their Age” May 31, 1984
The overwhelming opinion at the time was that Revlon had missed fundamental market shifts as fashion and cosmetics transitioned from the 70’s to the 80’s, and they let their flagship products stagnate. This was combined with a number of duds introduced to the market, ranging from a computer which was supposed to help you pick the right colors for your skin tone to a salt substitute called “No Salt” which one analyst noted: “It tasted like hell, everyone bought it the first time, but no one bought it the second time.”
In 1984 the company announced plans to revive their marketing, bringing Joan Collins, a star of the TV show Dynasty, and further announced plans to refocus on cosmetics — but in the takeover-breakup craze of the 1980s it was too little too late, investors sensed blood in a water, and it was just a matter of time before someone moved in.
Enter Stage Left: Ronald O. Perelman
Ronald Perelman’s father was a successful businessman who taught his son the fundamentals of business at an early age. With his father, Perelman honed their strategy of buying a company, selling unwanted divisions to reduce debt and make a profit off his purchase, then either keep the original company for cash flow or sell it off. In 1978, Perelman had an acrimonious break with his father and decided to strike out on his own. Through the late 70s and early 80s, Perelman built his company MacAndrews & Forbes Holdings into a takeover machine, an empire that spanned from candy to film companies, VHS production, cigars, and most relevant for this story: Pantry Pride.
In the spring of 1985 Perelman was looking to expand his empire further and was presented with a list of 25 companies that Wall Street analysts believed would be a good candidate for taking over. From there he whittled the list down to 10 companies, and ultimately landed on Revlon. With lopsided earnings between its divisions and a reasonably strong brand, Perelman decided that stock was cheap. He believed he could easily break up the company, sell the health care parts, and pocket a pretty penny. For Perelman, and much of Wall Street in the 80s the plan was business as usual; what made this remarkable, and what caused shockwaves through boardrooms all over corporate America was Pantry Pride. With less than $1 billion in annual sales Pantry Pride was considerably smaller than Revlon who even with its struggles would post north of $2 billion in sales per year.
How could Pantry Pride afford a company the size of Revlon? With the the 80’s investor’s favorite tool, high yield ‘junk bonds’. Revlon would become the first public company in history to be bought by a junk-bond backed buyer.
“Junk bonds” or more officially High-yield debt, is a bond that is listed below investment grade because the company issuing the bond has a higher risk of default, or has bad credit. In short, they are bonds put out by risky companies, and because the companies are risky, they have to put a much higher interest rate. Good for the investor, if the company does not default, but expensive for the company issuing the bonds.
Through Drexel Burnham Lambert, Perelman was able to raise $700 million in the junk bond market, armed with cash he was ready to make his move.
The Summer of ‘85
Revlon was not oblivious to attractiveness, and weakness, as a company. In 1984 the company awarded ‘Golden Parachutes’ to its top executives in a move to make the company more expensive to potential buyers. The next year, in May of 1985, Revlon shareholders approved its first outright anti-takeover measure. Primarily it staggered the terms for the Board of Directors, and made it considerably more challenging to remove directors once they were on the Board.
In mid-June of that year, Perelman put out his first feeler to Revlon. He reached out to Bergerac, proposing a friendly takeover of the company. Meeting in Bergerac’s Manhattan apartment Bergerac told him he had “absolutely no interest” in the deal Perelman was offering, and that he didn’t see a reason for another meeting, slamming the door shut to the easy path for Perelman and firing the first shot in what would be a come a historical and brutal takeover battle.
Something of that magnitude couldn’t be kept from the Wall Street Rumor mill for long, and throughout early August there were whispers on the street and articles in the trade presses that Pantry Pride was interested in Revlon, driving the stock price up to the low $40’s.
Finally, on August 19, 1985, Pantry Pride announced their bid for Revlon at 1.9 billion dollars, or $47.50 a share, $1.88 higher than that days closing price.
Revlon reacted quickly, launching a second wave of poison pill defenses:
- It launched a suit alleging that Pantry Pride had violated security laws by raising the $700 million without announcing what it was for.
- They announced it would buy back their own shares, mainly on credit, doubling the debt on the company’s books. Pantry Pride would be responsible for that debt if they did end up with the company, so the hope is this would make them a less appealing target.
- If someone acquired 20% of the company, all stockholders, except for the 20% owner, would get the right to swap one share for $65 in one-year notes. If the 20% holder offered to buy the company for at least $65 a share in cash the provision would not apply. Basically, they set the price of the company at $65 a share.
The strong reaction by Revlon led investors to believe that they might fight off the bid. On August 28th the New York Times ran an article “A Victory By Revlon Seen Near,” but in reality, the fight was just starting.
In response to Revlon’s defenses, Pantry Pride lowered their bid in September to $42 a share before quickly backing out of that idea and raising the bid to $50 a share. At 50 dollars Revlon knew staying independent was pretty much out of the question, but they didn’t want Perelman to win, so they went out looking for another buyer.
They landed on a deal to split the company in half, with the investment company Adler & Shaykin buying the cosmetic business for $900 million, and Forstmann Little & Company buying the rest of the company for $1.4 billion.
Perelman wasn’t one to lose lightly though, and he announced that he would top any Forstmann Little bid by 25 cents, four days after Frostman offered $56, Perelman offered $56.25. The Revlon directors continued to meet throughout October working on ways to fight off Perelman. They convinced Frostman Little to raise the build by a dollar to $57.25 but Forstmann extracted a key concession from Revlon, the $65 poison pill would be waived for all bids over $57.25 instead of the original $65 price, only for Perelman to come back and offer to raise the price by 75 cents to $58.
While the battle played out on Wall Street, the companies were also battling in the courts, and on October 23, Justice Walsh, a recently appointed judge to the Delaware Supreme Court, sealed Revlon’s demise. On November 1, 1985, the Delaware Supreme Court finished the war.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.
When Pantry Pride raised their bid to $58 they simultaneously filed a claim in the Delaware Court of Chancery (Delaware being where Revlon was incorporated), they wanted the court to nullify several sections of the deal Revlon made with Forstmann Little, claiming that by agreeing to those provisions the Board had breached its fiduciary duty, in essence, it’s duty to maximize shareholder value, by locking out Pantry Pride.
Specifically, Perelman wanted to nullify provisions granting Forstmann the sole right to purchase Revlon (a lock-up option), a provision which barred Revlon from looking for other bids outside of Forstmann Little (no shop provision), and a payment of a 25 million dollar cancelation fee if the take over fell through.
Without getting into the legal weeds, the court found that Revlon acted appropriately in trying to fend off buyers when it thought the bid price was to low, notably because it allowed itself to revisit the deal if the bid price rose to an acceptable level. The court also ruled that poison pills in and of themselves are not illegal insomuch as they serve to give the company more time to bargain, but they cannot be set up in such a way to stop bargening completely. The Court found, the moment Revlon entered into talks with Forstmann Little, the board’s responsibility changed from trying to save the company, but instead, it was obligated to try and get the highest price possible for the company and could not lock out other bidders.
As the court put it:
The Revlon board’s authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company’s value at a sale for the stockholders’ benefit.
The court also found that the Board ended bidding, from its point of view, to avoid personal liability and that the Board, not the shareholders were the principal benefactors of locking out Perelman.
Thus, when a board ends an intense bidding contest on an insubstantial basis, and where a significant by-product of that action is to protect the directors against a perceived threat of personal liability for consequences stemming from the adoption of previous defensive measures, the action cannot withstand the enhanced scrutiny which Unocal requires of director conduct
Since the deal with Forstmann Little put an end to an ongoing bidding war that had already raised the bid by 38%, the Board had violated its obligation to shareholders.
This new duty placed on the Board by the Delaware Supreme Court has become known as the Revlon duty, or the Revlon Rule, shifted the Board of Directors’ duty from looking after the long-term interests of the corporation to increase the short-term financial gains of shareholders, and as such, places more legal scrutiny on the Board’s decisions.
The End
Immediately after the Court’s decision Revlon announced that this was the “end of the battle” and they were done fighting Pantry Pride and accepted the $58 a share bid. By November 5, Bergerac and all the previous directors where out and Perelman was the new chairman and CEO, along with a new Board he picked. So just like that it was over, and the face of corporate jurisdiction was changed, a cosmetic company helped open the floodgates for junk bond backed takeovers throughout the 80’s.
Michel Bergerac left Revlon with a 35 million dollar payday, and founded his own private investment company. He continued to serve on corporate boards; and he passed away on 9/11/2016 at the age of 84.
Ronald Perelman continued his rise throughout the 80’s and 90’s. As of January 2016 he was the 35th richest American, and 96th richest person in the world with a net worth of 12.7 billion dollars. He is the Chairman of the Revlon Board, and majority share owner of Revlon to this day. After the sale, Pantry Pride renamed itself Revlon Group, Inc and in 1987 Perelman took the company private. Once he had control of the company, as promised, Perelman quickly sold off four divisions, keeping the cosmetic business and shedding the health care divisions.
Was it all worth it? I suppose the 96th richest person in the world would say yes, but an interesting note is the company has shrunk from 30,000 employees in the 80’s to 5,000 today, and its sales in 2016 were only $2.3 billion, which is only $995 million in 1985, only 45% of its revenue in 1984. So perhaps what may have been good for Perelman was not good for Revlon.
