Ted Forstmann, LBO Pioneer Who Sounded Alarm on Junk Bonds, Dies at Age 71

Ted Forstmann, the Wall Street dealmaker who sounded the alarm in the 1980s when junk bonds reshaped the leveraged-buyout industry he had helped create, has died. He was 71.

He died yesterday at his home in New York City, according to George Sard, a spokesman for Forstmann Little & Co. The cause was brain cancer, for which he underwent surgery earlier this year. He told the New York Times in May that he was determined to live long enough to complete his rebuilding of IMG Worldwide Inc., the sports- and fashion-marketing company he led since buying it in 2004.

A competitive amateur tennis and college hockey player who made money in high-stakes bridge games early in his Wall Street career, Forstmann helped build the leveraged-buyout business through Forstmann Little, which opened in 1978. It purchased or led takeovers of companies including Dr Pepper, 24 Hour Fitness Worldwide, General Instrument Corp. and Gulfstream Aerospace, typically selling them in whole or in pieces for a profit.

“Once I decide to do something, I want to win in the worst way,” Forstmann told the Washington Post in 1995. “I will do anything within the law to win.” His favorite sports, he said, were golf, tennis and deals.

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IMG Worldwide Chairman Ted Forstmann attends a charity event at the American Museum of Natural History in New York on Feb. 3, 2010. Close

IMG Worldwide Chairman Ted Forstmann attends a charity event at the American Museum of... Read More

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Photographer: Jamie McCarthy/Getty Images for the Promotion Factory

IMG Worldwide Chairman Ted Forstmann attends a charity event at the American Museum of Natural History in New York on Feb. 3, 2010.

He was known for fighting rivals who financed their bids with high-yield, high-risk “junk” bonds rated below investment grade, chief among them Kohlberg Kravis Roberts & Co.

RJR Nabisco Deal

A turning point in LBOs came in 1989 when KKR, relying largely on the junk debt pioneered by Michael Milken at Drexel Burnham, beat Forstmann in a bidding war for RJR Nabisco Inc., paying $30.1 billion.

Forstmann “fervently believed junk bonds had perverted not only the LBO industry, but Wall Street itself,” Bryan Burrough and John Helyar wrote in “Barbarians at the Gate: The Fall of RJR Nabisco,” their 1990 book. “Almost alone among major acquirers, Forstmann Little refused to use them.” It was Forstmann who coined the term “barbarians at the gate.”

More than a skeptic, Forstmann became an outspoken critic, telling audiences that junk bonds that paid interest in additional bonds, or whose interest rates soared over time, were nothing more than “funny money.”

“Today’s financial age has become a period of unbridled excess with accepted risk soaring out of proportion to possible reward,” Forstmann wrote in an op-ed for the Wall Street Journal in October 1988, as the RJR Nabisco competition was beginning. “Every week, with ever-increasing levels of irresponsibility, many billions of dollars in American assets are being saddled with debt that has virtually no chance of being repaid.”

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Financier Ted Forstmann outside Connecticut Superior Court in 2004. Close

Financier Ted Forstmann outside Connecticut Superior Court in 2004.

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Photographer: Steven E. Frischling/Bloomberg

Financier Ted Forstmann outside Connecticut Superior Court in 2004.

Returns of 50%

Forstmann Little, one of the first buyout firms to raise money for acquisitions directly from pension funds, recorded average annual returns of 50 percent in its first two decades.

One of its biggest successes was its purchase of business- jet manufacturer Gulfstream Aerospace for $825 million in 1990. Forstmann Little took Gulfstream public in 1996 and held 23 percent of the stock when General Dynamics Corp. (GD) bought the company in 1999 for $5.3 billion.

In another profitable turnaround, Forstmann Little paid $1.4 billion in 1994 for 95 percent of Ziff-Davis Publishing Co., with Forstmann becoming chairman and chief executive officer. Softbank Corp. (9984), a Japanese computer-software wholesaler, bought the stake from Forstmann Little the following year for $2.1 billion.

Sued by Connecticut

In 2002, Connecticut’s treasurer sued Forstmann Little over its investments in two money-losing telecommunications companies, XO Communications Inc. and McLeodUSA Inc. The state sought return of $120 million lost from its retirement funds. In a 2004 settlement, the firm gave Connecticut $15 million.

Forstmann Little bought IMG, which represents athletes including Tiger Woods and Roger Federer, in 2004 for $750 million following the death of the company’s founder, Mark McCormack. In an interview then with BusinessWeek -- now Bloomberg Businessweek -- Forstmann credited his firm’s buyout standards for pulling off the deal.

“We don’t use public debt, and we don’t need to use bank debt either,” he said. “We can make an offer, which we did, that was totally certain. We had no financing conditions. We simply said to the trustees: ‘If you accept it, it’s done.’ Other people can’t do that.”

In hindsight, Forstmann told the Times, he “hugely overpaid” for IMG. As chairman and CEO, he broadened the company from talent management into licensing and entertainment.

Billionaire Bachelor

Forbes magazine estimated Forstmann’s net worth to be $1.6 billion in March 2011. He made regular appearances in gossip columns for squiring celebrities including Princess Diana, Elizabeth Hurley and Padma Lakshmi. In 2010, he acknowledged making a $40,000 wager on Federer to beat Rafael Nadal in the 2007 French Open final, a match Federer lost. The men’s tennis tour directed Forstmann not to violate its gambling rules, and Forstmann said he regretted making the wager.

Never married, he became the legal guardian of two boys in the 1990s after meeting them at an orphanage in South Africa. He hosted an annual off-the-record, invitation-only conference in Aspen, Colorado, for the world’s political and economic elite.

A major donor to Republican political campaigns, he gave $50 million in 1998 to a school-choice initiative he founded with philanthropist John Walton. Their charity, the Children’s Scholarship Fund, helps low-income families send their children to private schools.

Affluent Upbringing

Forstmann promised to give the majority of his wealth to charitable causes, signing onto The Giving Pledge, a movement started by Warren Buffett with Bill and Melinda Gates in 2010.

“I’ve tried to live by the motto, ‘You save one life and you save the world,’” Forstmann said. “I hope that by joining The Giving Pledge, it will encourage others to do the same.”

Theodore Joseph Forstmann was born on Feb. 13, 1940, the second of six children who were raised in affluence in Greenwich, Connecticut.

Forstmann’s father, Julius, had inherited Forstmann Woolen Co., a fabric company that had made his own father one of the world’s richest men. Forstmann grew up in fear of Julius, “an abusive alcoholic,” according to Burrough and Helyar.

Forstmann was a highly ranked junior amateur tennis player at 16, then quit after losing a match when a disputed call went against him. He played goalie for Yale University’s hockey team while earning a bachelor’s degree in English literature.

Path to LBOs

The failure of Forstmann Woolen left the future financier playing bridge games for money while attending Columbia University Law School.

After a few years at a Manhattan law firm, and a few more at small investment firms on Wall Street, Forstmann managed the sale of Graham Magnetics, a Texas company he had taken public.

The process took 18 months and the use of the secretary of his brother, Tony, at money manager Forstmann-Leff Associates, according to Burrough and Helyar. Forstmann earned $300,000 and turned his attention to LBOs, opening Forstmann Little in 1978 with his younger brother, Nick, and a former investment banker, Brian Little. (Little died in 2000, Nick Forstmann in 2001.)

In 1983, Forstmann Little faced off against Castle & Cooke Inc. in a bidding battle for soft-drink maker Dr Pepper. Castle & Cooke had a higher bid, one backed by junk bonds. With the support of company management, and a cash-backed bid, Forstmann prevailed.

Battle for Revlon

The story was different two years later, when Ronald Perelman, armed with Drexel Burnham junk bonds, sought a hostile takeover of Revlon Corp. Forstmann, working with company management, engineered a merger agreement that was rejected by Delaware courts as unfair to Perelman. Perelman proceeded with the first hostile takeover of a major public company using junk bonds.

The problem with junk bonds “was not that Mike Milken made $1 billion,” Forstmann told the Washington Post in 1995. “That would be great if he were doing something worthwhile. But what was happening was that all kinds of little people were sucked into investing in this crap and ended up losing a lot of money.”

Milken “did not know Mr. Forstmann well, but sends his condolences,” his spokesman, Geoffrey Moore, said yesterday in an e-mail.

Forstmann told the Times in 2011 that he couldn’t relate to what Wall Street had become. “They’re all a bunch of traders,” he said. “Instead of trading thousands, they’re trading trillions.”

To contact the reporter on this story: Laurence Arnold in Washington at larnold4@bloomberg.net

To contact the editor responsible for this story: Charles W. Stevens at cstevens@bloomberg.net

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