June 14, 2021
The Modern Deal Economy: How Did We Get Here?
If you’re interested in the history of how the modern deal economy came to be, check out this excerpt from Prof. Jonathan Levy’s book, “Ages of American Capitalism.” Levy provides an overview of how “financiers blew up the postwar industrial corporation and dethroned the postwar managerial class.” Here’s a discussion of how the mantra of “shareholder value” transformed everything:
The investment bank Drexel Burnham Lambert is a good place to begin to dig into the character of the post-1982 business expansion. In enterprise, the turn to leveraged asset appreciation required nothing short of a revolution in US corporate governance, in which financiers, including investment bankers, continued to wrest ever more power from an already-floundering managerial class.
The weapon was the new gospel of “shareholder value,” which demanded that managers act in the pecuniary interests of shareholders. That often meant slashing wages, foregoing long-term investments, or selling off assets, all in order to benefit the immediate bottom line. There was and is no hard law that says that US corporations must be motivated to maximize short-term profit. Most postwar industrial corporations, focused on long-term growth metrics and the maintenance of “organizational slack,” had not even tried. With the shareholder value revolution of the 1980s, the present stock market price of corporate shares newly became the metric of corporate success.
What enthroned shareholder value was a wave of sometimes hostile corporate takeovers. The movement began in the late 1970s, when oilmen flush with cash from the high prices of the oil shock came to believe that the stocks of large, diversified energy companies were trading below the value of their physical assets. During his 1983 bid to take over Gulf Oil, the Texas oilman T. Boone Pickens declared in The Wall Street Journal, “We are dedicated to the goal of enhancing shareholder value.”
There’s plenty more where that came from, including the story of how Pickens successfully “greenmailed” Gulf Oil, and how institutional investors fueled the corporate takeover boom. Sometimes, it’s easy to forget that things weren’t always like they are today, but it wasn’t all that long ago that “The Organization Man” reigned supreme.
If you’re looking for more on how deal economy has evolved over the past several decades, be sure to check out The Lipton Archive, which contains a treasure trove of material by and about Marty Lipton, the legendary Wachtell Lipton lawyer who was there at the beginning and continues to be a driving force in the development of the law and practice of M&A.
– John Jenkins