An Empire Up For Grabs

If there was a driving force behind Robert Maxwell's life, it was a lust for fame. Whether he was riding to the rescue of New York's Daily News or flying off to aid famine victims in Ethiopia, Maxwell always thrust himself into the limelight.

Well, he'll be remembered all right -- but as one of the most brazen crooks in a brazen era. Maxwell, 68, may have defrauded his two publicly traded companies of at least $1.4 billion, mainly by filching money from the companies' employee retirement funds, before his mysterious death at sea on Nov. 5. Plundering the pension funds seems to have been a last-ditch effort to shore up his web of private holdings, which were collapsing under huge debts (table).

As accountants and government investigators sift through his tangled and largely bankrupt empire, attention is turning to a host of thorny questions, most having to do with how he got away with it. Why did such venerable financial institutions as Lloyds Bank PLC and Goldman, Sachs & Co. give advice or lend millions to a man once branded by the British government as unfit to run a public company? How did British financial regulations allow Maxwell to conceal his legerdemain from creditors and shareholders? And what happens to his properties, which include Britain's Daily Mirror tabloid and U. S. book publisher Macmillan Inc.?

The last question may be the easiest to answer. Plenty of suitors have already come forward for Maxwell's plum media assets. And they may be able to buy at prices much below what Maxwell paid for them. Trouble is, they may have to wait a while. For one thing, it's not clear yet exactly who owns what. Already, banks and pension funds are claiming some of the same Maxwell shares. That's because Maxwell put up shares owned by pension funds of his public companies as collateral for loans to his private holdings.

Prospective buyers will want to make sure their assets don't have any hidden financial holes from Maxwell's plundering. Mortimer B. Zuckerman, publisher of U. S. News & World Report, says he would like to bid for the Daily News, which filed for bankruptcy protection a day after Maxwell's private companies. But, he cautions: "I don't know much about their current liabilities."

Zuckerman may be leery. But three European players are less shy: They're jockeying to buy Mirror Group Newspapers Ltd., Britain's second-largest newspaper chain and the most solvent part of Maxwell's portfolio. The most likely winner is conglomerate Pearson PLC. Mirror Group's market value was $900 million when trading in its shares was suspended on Dec. 2. With Maxwell's looting of the pension fund, analysts now predict it will fetch $700 million.

Less certain is the future of flagship Maxwell Communication Corp., which controls Macmillan, Official Airline Guides Inc. (OAG), and Berlitz International Inc. MCC says it has no plans to file for bankruptcy, although Maxwell's intercompany loans have deprived MCC of $440 million on top of its $ 2.5 billion in bank debt. To keep afloat, MCC is asking banks to swap $1.3 billion in debt in return for preferred stock. But publishing executives familiar with MCC predict it will file for bankruptcy in as little as two weeks.

POSSIBLE BID. If that happens, Macmillan and other assets could go to the highest bidder. For now, industry insiders give the edge to K-III Holdings, a media company backed by Kohlberg Kravis Roberts & Co. K-III, which paid $650 million for Rupert Murdoch's U. S. magazines in May, is headed by William F. Reilly, a former president of Macmillan. Three other top K-III executives also come from Macmillan. A K-III spokesman declined to comment, but one publishing executive familiar with the company says K-III has hired investment banks for a possible bid.

The recession has pummeled the prices of media properties, so Macmillan certainly won't fetch what Maxwell paid for it in 1988. Industry insiders say it may command $1.7 billion. That's far less than the $2.6 billion Maxwell paid for it, although he later sold off several subsidiaries.

Also unclear is the future ownership of the profitable Macmillan/McGraw-Hill joint venture in educational textbooks. Joseph L. Dionne, chairman and chief executive officer of McGraw-Hill Inc., which publishes BUSINESS WEEK, says he is happy with its current level of investment. A publishing executive familiar with the venture says McGraw-Hill is unlikely to buy out Macmillan's 50% stake. But the executive says McGraw-Hill would consider offers from other suitors for its own stake.

The fate of the Daily News is bleak. The paper's unions are working with Maxwell's son Kevin on a reorganization plan. But former Publisher James Hoge says the News will survive only if Kevin withdraws and a new owner gives the unions an equity stake in return for concessions. Given the ad slump, some analysts don't even think that would save the paper.

As arduous as all this may seem, it's easy compared with the task of reconstructing Maxwell's financial dealings. Regulators and executives at Maxwell's more than 25 banks, who face losses of at least $2 billion, are still struggling to understand how such a massive fraud could occur. Part of the explanation lies in the nearly absolute power Maxwell had. With his domineering personality, subordinates didn't ask questions when he ordered funds shifted.

Maxwell also took advantange of Britain's lax pension-fund rules. Unlike the U. S., even large pension funds in Britain don't require independent trustees or outside custodians. Instead, trustees are simply importuned to invest prudently. That's the sort of vague language Maxwell capitalized on: He shifted management of most pension-fund assets to Bishopsgate Investment Management Ltd., a company he controlled. Bishopsgate then used the assets to buy stakes in MCC and Mirror. And Maxwell "borrowed" $760 million in the form of shares and cash from that company.

Still, even with no government regulation, Maxwell would have been able to do little without the willing aid of his bankers. Amid all the caterwauling over debts and assets, Maxwell's banks are doing some painful soul-searching. "We have to look more closely at the people running a business and at its finances," says one banker nursing big losses.

Indeed, Maxwell's banks displayed a cavalier disregard for his checkered reputation. Maxwell first ran afoul of British regulators in the late 1960s with his management of publisher Pergamon Press Ltd. A British government investigation uncovered a pattern of questionable dealings between his private companies and publicly traded Pergamon.

Just as in the current scandal, investigators found Maxwell made little distinction between his personal property and assets owned by shareholders. In a report, they concluded that Maxwell couldn't "be relied upon to exercise proper stewardship of a publicly quoted company." Today, says Sir Ronald G. Leach, a retired Price Waterhouse accountant who headed the investigation: "Everything you find in that report, he has done again, on a much larger scale."

Yet investment banks such as Rothschild, Bankers Trust, and Midland Montagu, and commercial lenders such as National Westminster Bank and Lloyds seemed to assume that Maxwell had reformed. More likely, they were enticed by Maxwell's profligate borrowing, which generated handsome fees.

His bankers seem to have had scant knowledge of Maxwell's financial condition. Last March, two months before he accelerated his looting of pension funds, one British banker told BUSINESS WEEK: "There are quite a few other companies I would be more nervous about." And the day after Maxwell's body was found, Robert S. Pirie, one of his key investment bankers, said: "Bob was a very rich man at the time he died."

One reason the British and American banks may have been caught flat-footed is that Maxwell had compiled a respectable record in the years following the Pergamon scandal. In 1984, for example, Maxwell bought and turned around the ailing Mirror Group newspaper chain. But after the 1988 Macmillan and OAG acquisitions, which were financed by $3.35 billion in debt, Maxwell's methods became more Byzantine. To thwart any outside assessment of his financial stability, he was constantly reshuffling his deck, "selling" assets from the private companies to MCC or vice versa, and switching fiscal years.

Meanwhile, MCC was faltering under the weight of its crushing debt. Maxwell had overpaid for Macmillan. And as the media market cooled, he found it hard to pare debt by selling assets. Then the company's underlying earnings began to slide. The danger for Maxwell was that so many of the bank loans to his private companies were secured by shares in MCC -- a kind of double leverage. If MCC's stock price declined, so did the value of the loan collateral. At a certain level, the decline would trigger a need for more collateral. So, Maxwell had a big incentive to keep MCC's share price up, because any decline posed a grave threat.

That's exactly what happened this past spring and summer, say bankers and accountants. Maxwell had floated 49% of Mirror Group in May and quickly started using the shares as loan collateral. But Mirror shares dropped nearly 30% within two months of the flotation. Likewise, hurt by fears of a looming cash crunch, MCC shed 41% of its value between May and early November.

In effect, Maxwell was hit by a triple whammy: His businesses were performing poorly, he was having trouble selling off assets, and the share price declines were causing a liquidity crunch in his private companies. Desperate, Maxwell turned to his pension funds, from which he had started borrowing as early as 1989. In mid-1991, Maxwell began using large amounts of pension-fund shares as collateral for private-company loans.

The situation began to spiral out of control. Coopers & Lybrand, the accounting firm handling the investigation of the missing money, believes that up to $540 million of it was squandered on secret buying of MCC and Mirror Group shares in a futile attempt to shore up the stock and keep bankers from calling in loans secured by the shares.

DISAPPEARING MONEY. As the end drew near, Maxwell's maneuvers suggested a man who knew the game was almost up. He appeared to have been gambling heavily in foreign exchange transactions. And the collateral promised for a $100 million loan from Swiss Bank Corp. was sold before it was even delivered to the bank. "Every time you turn over a rock, more worms crawl out," says one Maxwell banker.

With share prices continuing to plunge, the money disappeared into a black hole. Some former Maxwell executives suggest Maxwell stashed some of the cash in secret bank accounts. But investigators believe that Maxwell could have frittered away much of the missing money with frantic stock purchases and efforts to prop up such hemorrhaging businesses as The European newspaper. On Dec. 5, his two key private companies were forced into bankruptcy.

Still unclear is just how much sons Kevin, 32, and Ian, 35, knew. The brothers, who worked closely with their father, will both face questioning by investigators from Britain's Serious Fraud Office. Both had their passports briefly taken away on Dec. 9 by a judge who ordered them to assist investigators. At a press conference in New York on Dec. 6, Kevin insisted that his father operated "on a need-to-know basis."

Unraveling the Maxwell mess could take months and promises to be a legal donnybrook. Even his son professes to be awed: "It's a combination of events I wouldn't believe if I read them in a novel," says Kevin. For his creditors and employees, though, the ramifications of Maxwell's wild ride are all too real.

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