Read The Very, Very Rich and How They Got That Way Online
Authors: Max Gunther
The Very, Very Rich and How They Got That Way (22 page)
As we’ve seen in the case of Daniel Ludwig, one way to make other people’s money work for you is to borrow it. There is another way, and the man we’re about to study – James Joseph Ling – is a man who until a few years ago was acknowledged to have mastered it. His fortunes have recently fallen and the business community has abandoned the tone of awestruck wonder with which it once flattered him. Today he’s “Hard-Luck Ling.” Still, his achievement cannot be denied.
Ling used OPM to climb from nowhere to enormous prominence as chief of perhaps the fastest-growing major company Wall Street ever saw. The huge, complex venture fell ill in 1969 and is still not off the critical list as this book goes to press. All the same, some Wall Streeters believe that what Jim Ling could do once, he can do again. Next time, perhaps, he will do it a little more carefully.
Ling used OPM mainly in the form of equity money. He borrowed, too, but it was the equity route that made him famous. Let’s see what this route is all about.
Suppose, to construct a simple example, you stumble onto a business idea that seems to offer some promise. You need money to get the venture started. You have little or no spare cash of your own. What do you do?
As we’ve noted, you can borrow what you need. Or you can take the equity route. You go to a few well-heeled friends – five, let’s say – and you outline your idea and ask them if they’d like to risk some money in it as co-venturers. You stress the word
risk
. You aren’t asking to borrow the money; nor are you contracting to pay it back. The five friends are to become co-owners of the business along with you – in other words, stockholders in an informal sense. If the business succeeds, each will reap his proportionate share of the profits. If the business fails, each will sadly kiss his money goodbye.
Let’s suppose your idea is a sound one and you’re a good talker. Each friend puts up $5000; so the infant company is capitalized at $25,000. Each friend gets (informally) one share of the stock. You also get one share, though you’ve put up no money yourself. The agreement is that you will earn your share by dong all the work – in fact, have already earned a substantial part of it by having developed the idea in the first place. You are the idea man and the chief (perhaps only) operating executive. Your five friends, having full-time jobs of their own, will take little or no part in the day-to-day management of the business. They are simply the venture capitalists.
Thus you’re launched in business through the use of OPM. Your little company has six shareholders. From now on you will collect one-sixth of the net profits, if any.
From here on, if the venture succeeds, you can go in many different directions. You can keep the company closely held if you and the other shareholders don’t want outside interference. Or, if a time comes when you or they want to reap some capital gains in cash, you can widen the circle of shareholders or even go public. You can split the original six shares into dozens or hundreds or thousands having equivalent value, and you can sell off some of the stock at whatever price the market will bear. (If the venture is truly successful, the original investors will, of course, sell their stock for much more than their original $5000.) Under the right conditions you can create new stock, sell it to the public and bring new working capital in to help the company grow. Or you can hold some shares as treasury stock and use that stock in place of money to pay for other, smaller companies your growing enterprise may want to buy.
You can build an empire this way – build it all, or almost all, on other people’s money.
Meet a man who did.
Two things about James Ling impress visitors immediately – his size and his nervous energy. He is a big, dark man, six feet two and somewhere over 200 pounds and though he is in his late 40s, he still looks fairly trim and athletic. There is only a faint suggestion of middle-aged heaviness. He might be a recently retired football player. No doubt his lack of fat results partly from his constant jittery activity. He seldom sits still; he sleeps few hours, often waking in the middle of the night to find his brain churning with magnificent ideas.
Signature
magazine once suggested he has an “incurable overdose of productive adrenaline.” Others have put it in other ways. “He’s savagely competitive,” says a New York stockbroker. “He loves a fight for its own sake. He hardly ever drinks, but I’ve seen him almost drunk with the joy of competing. He makes business into something close to a body-contact sport.”
In 1968, the year of a superheated bull market, Ling was chief executive and major stockholder of perhaps the hottest company on the Big Board: Ling-Temco-Vought (LTV, for short). The company was only seven years old. It had been created in 1961. In those seven years it had risen to become one of the 15 biggest companies in the United States, and its common stock’s trading price had screamed upward from less than $20 per share to the range of $135. Ling was a Wall Street legend in his own lifetime. His name was linked with those of other legendary company builders and stock jugglers such as Samuel Insull and Andrew Carnegie.
Two years later LTV common was trading below ten dollars, and the party was over. Investors who had been foolish or unlucky enough to hold the stock during that swift downhill journey were calling Ling various names, none of them kind. They may have been consoled somewhat by the knowledge that Ling, the biggest LTV stockholder of all, had ridden down with them. At the height of his glory, his net worth was in the neighborhood of $100 million. He is still a multimillionaire today, but not nearly as multi as he used to be.
In some ways Ling’s career parallels that of Bernard Cornfeld (chapter 7), another man who reached the top in the late 1960s but failed to hang tight. Both men were mauled by the 1969 bear market. Both – who knows? – may ride back to glory on the back of the next bull. It will be interesting to watch them.
It has been interesting to watch Ling in the past. The spectacle has often been dazzling. James Joseph Ling (the name is Bavarian, not Chinese as many seem to think) was born humbly in Oklahoma early in the 1920s. His father was an oil-field laborer. His mother died when he was in grade school, and he eventually went to live with an aunt. At the age of 14, feeling he was big enough and smart enough to hack it on his own, he quit school and ran away from the aunt. He never completed his high-school education. He spent some years bumming around the country and at age 19 landed in Dallas, where he found a job with an electrical contractor – and also, incidentally, got married.
World War Two had begun. Young Ling, supplementing his daytime pay by working nights in an aircraft plant, made enough money to put down a payment on a small house. Then, in 1944, he enlisted in the U.S. Navy. The navy put him to work as an electrician.
Back from the war in 1946, Ling decided he was tired of working for other people. It was time, he felt, to start his own business. He sold his house to raise capital, added the profit to some saved navy pay and put together a miniature wad of some $3000. With this money he started a little electrical-contracting outfit called Ling Electric. The main assets were Ling himself, a rented office and a used truck.
At first he made his living solely by wiring homes. Residential construction, which had been stifled by shortages of materials and labor during the war, was beginning to boom as the pent-up demand was released in the late 1940s. The home-building boom was to continue almost unabated, in fact, through the entire decade of the 1950s. But the young contractor kept his eyes and ears open, and after a while he thought he saw a still bigger world to conquer: the world of office and industrial construction – which was also starting to boom. In the residential business he worked for a few hundred dollars here and a few hundred there. But in the office and industrial business, he observed with interest, an electrician’s contracts were measured in the thousands of dollars.
He hustled hard, won some non-residential wiring contracts, learned to improve his profits by buying cheap military-surplus wire and other supplies. His little outfit prospered. By the early 1950s Ling Electric was riding high above the million-dollar mark in gross annual sales.
But the young contractor wasn’t altogether satisfied. For one thing, income taxes were eating him alive. As a sole proprietorship Ling Electric paid the full personal tax rates. Despite his large gross sales, Jim Ling’s take-home pay was merely that of a medium-high salary earner. This irritated him. The itch was intensified by the fact that some grandiose expansion plans were beginning to ferment in his head, and he lacked capital with which to put the plans into effect.
The way to go, he figured, was to incorporate. This would alleviate the tax problem, to begin with. Corporate rates are lower than personal rates, and a corporation has more opportunities for legal money juggling than does a lone individual taxpayer. Moreover, incorporation would pave the way for expansion. As a corporation, Ling Electric would be able to raise capital by selling stock to the public.
A minor electrical contractor going public? It was unheard of. When Ling approached Texas brokers and investment bankers with the notion, they found it quite amusing. He couldn’t find anybody in the investment community who was willing to help him float the proposed stock issue.
So he did it himself. Neither Texas nor any other state has a law saying an electrical contractor can’t issue stock. The notion may have been funny, but it was perfectly allowable as far as the law was concerned. Ling went through the required legal steps, turned Ling Electric into Ling Electric Inc. and obtained authorization to issue 800,000 shares of common stock and sell some of them to the public.
The new corporation’s internal equity setup was engineered so that Ling personally kept exactly half the stock. The rest – 400,000 shares – were to be offered to the public at $2.25 per share. Ling rounded up a small group of friends to help him do the selling. While the Texas financial community looked on in popeyed amazement, they went out and sold the stock door-to-door and by telephone – exactly as the brash young Bernard Cornfeld was then peddling mutual funds in Europe. To the horror of conservative local financiers, Ling’s group even handed out prospectuses at the Texas State fair. They sold the entire stock issue in a few months. Deducting the salesmen’s commissions and other costs, Ling Electric ended with about three-quarters of a million dollars in new working capital.
And not only that – in this one nervy maneuver, Ling had established a new, high market value for his company and for his own equity in it. Previously it had been just a small outfit of doubtful worth – in fact, of no known market value. If Ling had wanted to sell it, he might have had trouble finding a buyer. The buyer, looking at Ling’s tax-riddled personal earnings, would not likely have offered more than $250,000 for it, if even that. But now Ling owned 400,000 shares that were valued on the local over-the-counter market at nearly one million dollars – and, in subsequent market fluctuations, were to rise well over that figure in some months. He could now sell out anytime he liked and walk away a millionaire.
He had no plan to sell out, however. His plan was to build an empire.
First he bought another electrical-contracting firm, paying cash. This doubled the size of Ling Electric; the stock’s market price rose, and Ling thus moved into a favorable position for buying other companies without cash. The stock, having an established and growing market value, could be used instead of money. In a stock-swap deal that used very little of his own or his company’s cash, Ling now bought an electronics-manufacturing firm and changed the name to Ling Electronics. The stock price rose higher. Next, in a similar stock deal, he acquired another electronics outfit called Altec and changed his company’s name to Ling-Altec Electronics.
By the late 1950s he was more than just a Texas phenomenon. The national business community was beginning to take note of him. The
Wall Street Journal
, which monitors national trends from its lofty post inside Dow Jones and Company, around the corner from Wall Street, felt Ling might be a national trend in 1960 and devoted a front-page story to him. In that year his net worth was pegged at ten million dollars.
He had only just started. Late in 1960, in another exchange of stock, he acquired the assets of a large Dallas-based company called Temco Electronics and Missiles Company and once again changed his own company’s name, this time to Ling-Temco Electronics.
No longer could he be considered a small businessman. His new, merged company had sales of nearly $150 million in 1960. Now he was able to go to Wall Street itself for help in raising capital and working out stock gambits. This helped his next deal: the acquisition of Chance Vought Corporation, major aircraft and missile manufacturer.
The deal wasn’t easy to bring off, for Chance Vought didn’t really want to be acquired. Its management fought Ling off bitterly and noisily – but this only made Ling enjoy it more (and, as a dividend, brought his company some valuable publicity). Unluckily for Chance Vought’s managers, they owned very little of their company’s stock. Ling didn’t need to buy 51% of it to nail down a controlling interest. He managed to get hold of roughly two-fifths of it – by buying on the open market and by making a tender offer to existing shareholders – and that was enough. In the spring of 1961 Ling’s company once more changed its name: Ling-Temco-Vought, Inc.
It was at about this time that the word
conglomerate
first began to be used in Wall Street. The word refers to a company that grows by acquiring other companies in diverse lines of business. A few such companies had existed before – notably the old American-Marietta Company, today part of Martin Marietta. But it wasn’t until the early 1960s that this breed of company was recognized and talked about as a separate and noteworthy category. It was to become one of the hottest categories in the seething stock market of the 1960s – and LTV, raised to fame by the noisy squabble with Chance Vought, became the archetype.
Jim Ling was now a financial wheeler and dealer of nationwide repute. He didn’t let matters rest there, however. His fertile brain had conceived a grand new way of using OPM.
He wanted to acquire other companies on which his eye had alighted – big, wealthy companies, some of them bigger at that time than LTV itself. He planned to buy them, as usual, either by offering his own company’s stock as payment or by putting up that stock as collateral for loans. The stock, of course, was worth what the market said it was worth. The higher the market price went, the more valuable the stock would be for Ling’s purposes – the more buying he could do with it. The problem, therefore, was to raise the market price.
He recalled the day when his original contracting outfit had gone public. Simply by selling stock, by getting the market to place a value on the little company, he had vastly increased its apparent worth. Now he wondered, Might it not be possible to do the same with some of LTV’s component parts?
Over the years, in acquiring other companies, the Ling parent company had simply absorbed them into itself. They kept operating as before but they vanished as independent equities. Their stock disappeared from the marketplace. As each was absorbed, the original shareholders turned in their stock and were given the stock of Ling’s parent company in return. You could no longer buy stock separately in Altec, Chance Vought or the others; you could only buy the stock of LTV, the big basket that held them all.
These once-independent companies were being represented in LTV’s financial statements at what is called their “book value.” The book value of a company is essentially an accountant’s assessment of the company’s worth. It is naturally a very conservative assessment. Ling thought he saw room for improvement.
In boom times, as Ling well knew, the stock market almost always values any sound company at more than its book value. That is, if you take the going market price of the company’s stock – the price investors are willing to pay for it – and then multiply that price by the total number of shares outstanding, the resulting figure is likely to be far higher than the book value calculated by company accountants. The reason is that the stock market usually pours a heady dose of hope into the calculations. The stock price is based not only on the current, perceptible, tangible worth of the company but also on what investors think or hope or pray it will be worth in the future. This element of hope is absent, of course, from the severe and somber book-value calculations.
Mulling over these thoughts, Ling asked some questions that few conglomerate builders before had ever thought to ask. Why carry acquired companies at their mere book value? Why not set them up as independent equities, create stock for them, sell some of that stock to the public and let the market pump up their value?
And that is what Ling did in 1965. First he divided LTV’s principal operating divisions into three separate corporations named LTV Aerospace, LTV Electrosystems and LTV Ling-Altec. Each of the three issued its own stock. The parent company, LTV, Inc., kept roughly 75 to 80% of that stock in each case. The rest was offered to the public.
The public did what Ling had figured it would do. Investors bid up the stock prices of the three newly formed corporations. LTV, Inc., the parent, holding more than three-quarters of that stock, was now able to represent its acquired companies in terms of the market value rather than the stodgy old book value. The parent company’s apparent worth shot upward as a result, and so did its own stock’s market price.