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	REMARKS TO THE DREXEL BOND CONFERENCE LOS ANGELES CA APRIL 6, 1989

Thank you            

It’s good to be here again. It was five years ago that I first attended a Drexel conference.

A lot of things have happened since then.

You may remember in the early 1980s everybody wanted an oil well.

[Handwritten addition: Frog joke]

1984 was the year of the Gulf deal. The media had pegged me as David going against the Goliath of the oil industry. I was called a folk hero, but the fun only lasted a minute.

Drexel started inviting me to these conferences and the next thing I know I’m being called a corporate raider.

Some people say that Ronald Reagan was a Teflon president. That is, problems wouldn’t stick to him. Sometimes I feel like I’m a Velcro businessman. Everything sticks to me.

I’ve been blamed for everything ranging from the drop in drilling rig count to the stock crash.

I’ve even been called an investor of closed-end mutual funds. I couldn’t figure that one out, then I realized they were talking about my son, Tom.

Today I want to talk about what’s happened in corporate America — look back over the past five years and then take a look at where we’re headed.

I want to leave plenty of time for questions, so I’ll keep my remarks short.

Dad’s Remark

Five years ago it was unbelievable to the Gulf management that they could do a leveraged buyout.

Remember, KKR made a bid for Gulf higher than Chevron did, but it was turned down because Gulf management did not have confidence that it could be financed.

They believed the only way out was through a white knight — the mating of two dinosaurs. In this case, it was Gulf and Chevron. And, that was a $13 billion deal.

That record stood for five years.

We’re seeing an entirely new game today. Take a look at the RJR Nabisco deal — the largest buyout in corporate history at $25 billion. That is twice the size of the Gulf deal.

This is obviously a landmark transaction. However, RJR Nabisco won’t be the last big deal.

— Other deals will be even bigger.

Let’s talk a minute about the RJR deal. Because it clearly has some interesting parts to it.

First, the business world saw that managements aren’t always the good guys.

The RJR management tried to take the company private — well below asset value — all at the expense of shareholders, and I might add to the detriment of bondholders who were not protected from this type of transaction.

The RJR management simply got greedy and tried to steal the company. There is no other way to characterize it.

Unless you believe that they didn’t know the value of their own company.

Thank goodness for the independent directors who required an auction.

I hope in the future when we see MBOs, we’ll see companies conduct auctions. Auctions can prevent some abuses from happening.

Second, RJR taught us something about the depth of our financing market — it was a quality deal with experienced buyers and a creative financing package that made it happen.

RJR made sense because you had a mature business producing more cash flow than it had investment opportunity, and that means you have to restructure.

These same fundamentals caused the oil and gas industry to restructure in the early 1980s. It was inevitable. And it has moved from oil and gas into other industries and it will keep moving.

Five years ago, management wasn’t paying a whole lot of attention to this notion of restructuring.

I can tell you now that the concept has gotten everyone’s attention.

Restructuring can take many forms — acquisitions, divestitures, recapitalizations.

High-yield bonds have obviously played an important role in the restructuring process.

Five years ago this conference was only one-third as large as it is today, and the junk bond market was a $50 billion market.

Further back than that — 10 years ago — there was no such thing as an original issuance of subordinated debt. Today, the junk bond market is a $180 billion market.

Drexel has brought together the people — issuers and buyers of bonds — to create a new industry. Know that all of you have played a part in an industry that has reshaped American business.

The opportunities are now there for the small as well as the large businesses.

You’ve all seen the statistics that small companies are the ones which have created jobs and in turn have fueled our economic expansion.

We’ve seen so much change over the last several years. Something that is perhaps more important to me than to others are the shareholder rights issues.

I remember when Joe Flom told me we’d never see confidential proxy voting. He said it just wasn’t to happen.

Today, twenty-five companies are on board with confidential voting — Alcoa, 3M, TRW and even Unocal.

Today, you can’t hardly find an annual report that doesn’t talk about the need to adjust to change to be more efficient or restructure.

Even General Motors, which as you know is the slowest, is at least starting to use the lingo in its annual reports.

In 1984, there was this quote in the chairman’s letter: “...one thing does not change: the efforts of everyone ... to build on past achievement while attaining or maintaining GM leadership throughout the world.”

What does that mean anyway?

Now, here’s a quote from GM’s 1988 report: “Why did GM, long considered one of the most successful corporations in the world, even need to change?...”

It continues, “What are the lessons of GM’s redirection: Most important is the reality that a corporation must change if it is to survive.”

GM’s 1988 report includes a special section called Strategic Redirection and it uses the words restructuring, redirection and change throughout.

We’ve witnessed a lot of change, and we will see more. Corporate America is becoming more efficient. Virtually every industry has been touched by restructuring.

And, it won’t stop. You’ll see restructuring making its way into the government and military sectors as well as into our educational system.

What we’re really talking about is cutting down on the bureaucracies.

At Mesa, we’re constantly changing. I like to think of it as a football game. [Handwritten addition: Football Analogy]

I once had the CEO from a Fortune 500 company ask me, “if I restructure, when will I have to do it again in five or ten years? Will I be left alone if I restructure once?” I answered, “No.” It continues all the time.

I should point out here that not everyone thinks about restructuring in the same terms that I do.

Texaco, for instance, called 1988 a year of historic restructuring of assets. I called it a historic restructuring of liabilities.

Here’s a direct quote from Texaco’s annual report:

“The Board of Directors in January capped one of the most successful asset restructuring plans in the history of corporate America.”

“Decision-making has been decentralized, and our people have been trained and encouraged to perform more like entrepreneurs, motivated by a desire to improve bottom-line performance without sacrificing long-term strength.”

That’s right out of Texaco’s annual report. [Handwritten addition: I didn’t know they could spell entrepreneur.] They never met one until they met Carl.

I guarantee Texaco wasn’t talking about entrepreneurs five and ten years ago.

I know all this talk about restructuring and LBOs makes bondholders nervous. Not liking it will not make it go away.

You’ll see more of it. At the same time you better get into a position to protect yourselves.

As an industry of bond buyers —you should have acted quicker to protect yourselves. The handwriting was on the wall. It wasn’t just little companies that were restructuring, it was everyone.

I think bondholders have been hurt more by the events initiated by the blue chip credits like the Texaco’s, RJR’s and Quantum Chemical’s than they have been hurt by the companies represented here.

I am convinced restructuring leads to greater efficiencies and a more competitive company. That’s good for bondholders, equity holders, employees, communities — everyone.

We better get ready to compete on the world stage in markets that are becoming more complex and global in nature.

I believe America is the best. We have the best workers, although they are sometimes poorly lead, and we have the best economic climate. And, we have more entrepreneurs than any where in the world.

That’s why everyone wants in our markets.

The challenge is clear that America business is changing for the better. It is up to us to lead that change.

Before I go to questions, I want to put in my two cents worth.

Drexel has been through some tough times. The only thing that could have made it rougher was if they had been in the oil and gas industry at the same time.

You’ve come through turmoil and you’ve held your head high.

My personal feelings go out to Mike at this time. In the past, I’ve said that my dealings with everyone at Drexel, including Mike, were always totally professional.

We are all here because we know Drexel is here to stay. They were, and are, on the leading edge of change and that change has produced many friends and some powerful enemies.

My advice to Drexel and to all of you is the same advice I got from a partner one time. Not everybody is going to understand you, but if you know you’re right — keep driving until you hear glass breaking.

[Handwritten addition: Questions]