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F orbes ASAP, April
10, 1995
Mike
Milken & the Two Trillion Dollar Opportunity
It’s
time to deregulate America’s telecom infrastructure. And let the
creative destroyers go to work.
MICHAEL MILKEN IS BACK! Back, so the story goes, from the orgies of ‘80s
greed, back from the best-selling den of thieves, back from his preening
at the predators’ ball, back from soft time at Pleasanton pen, back
from prostate cancer and plagues of litigation, back to tell his own book
to William Novak and to buy his redemption with the spoils of his crimes.
Yes, so they say, Milken is back, while thousands of plundered companies
and communities labor to regain their standard of living and jobs, long
lost in the shuffle of his dismal deals and loaded down with his “high
yields.”
Yes, Milken is back. Back from the gutters of Ponzi finance, the rot of
junk and S&L sleaze, angling: to launder his weaseled wealth with
educational hype and charity hustles. Back, aiming now at history and
posterity rather than at new opportunity, but hitting it big instead with
Michael Jackson, Doonesbury laughs and Clifton compassion photo ops. Meanwhile,
even the ascendant Republicans in Washington try to steer clear of “eighties
excesses” of debt and deficits and supply-side economics.
Or so it looks to media observers of the Milken saga. And yet slowly and
arduously, there is emerging from the carrels of the Harvard Business
School and other institutions a distinctly different tale.
Under the leadership of Michael Jensen, a small group of Harvard Business
School scholars has been scrutinizing all the statistics of corporate
behavior during the 1980s. They have laboriously appraised the results
of all the leveraged buyouts, junk bond issues, venture capital, and other
tools of corporate making and remaking. They have arrived at unexpected
conclusions and have developed a new body of theory to explain them. From
this perspective, the events of the 1980s—and Milken’s role—assume
a wholly new meaning.
Jensen puts the Milken episode in the context of another form of wretched
excess for which Milken was the remedy: namely, the excesses of corporate
waste and conglomeration by empire-building managers with scarcely any
ownership stake in their companies. Amid the sieges of deregulation and
tax rate reduction, amid the obvious tumult in the markets for oil, tires,
tobacco, real estate, gold and commodities, many industries needed profound
restructuring. But their entrenched managements were set to expand their
domains through acquisition and investment in new capacity. Meanwhile,
a thousandfold rise in the cost- effectiveness of microchips, governed
by the centrifugal law of the microcosm, rendered obsolete the dominant
architecture of information technology.
Most conspicuously, between 1977 and 1987 the percentage of total computer
power commanded by centralized systems dropped from nearly 100% to under
1%. Less obviously, but no less profoundly, the equally centralized structures
of television and telephony were also falling before the distributive
force of the microcosm. Ordaining that the price performance of microchips
rises by the square of the increase in the number of transistors on a
single chip, the law of the microcosm exalts single chip systems, led
by the PC. Pushed into obsolescence were all monopolies and hierarchies,
pyramids and power grids of the old information structure, epitomized
by the mainframe computer, the broadcast network and the central telephone
switch.
The old establishment of AT&T, the big three TV networks and some
1,400 over-the-air broadcast stations was breaking down into a new formation
of cable and wireless schemes. Affecting virtually every company in the
economy and threatening most existing management plans and practices,
these trends created huge opportunities for wealth creation and disruption.
Beginning with his move to Century City in Los Angeles in July of 1978,
Milken aggressively rode the microcosm—inside and outside of Drexel.
Inside, he concentrated on what Jensen describes as a key role of information
technology: “taking the specific knowledge previously scattered through
a firm and making it into general knowledge usable by all.” In this
case, it was a matter of turning Milken’s command of the details
of hundreds and then thousands of high-yield issues into the foundation
for a company that could make these bonds the prime venture capital in
the U.S. economy. From the beginning, crucial to this goal was computer
technology.
A specialist in finance, information systems and operational research
at Wharton, he had begun his career at Drexel in 1970 with a computerized
move to speed up the delivery of securities to its customers, thus saving
the company some $500,000 in interest charges and setting a new standard
in the industry.
In Los Angeles, he created an advanced system for trading based on what
was then a state-of-the-art Prime 550 Model 2. Through the RS-232 9600-baud
serial ports of up to 250 Televideo terminals, the Prime computer time-shared
a Fortran database containing the trading history of all Drexel customers,
some 1,700 high-yield securities and some 8,000 securities in the public
market.
With a quick query, a member of Milken’s team could determine the
customer’s history, the amount of his potential profits or losses,
his investment philosophy and ability to buy new issues. Thus the team
could link the buyers and sellers of securities in a uniquely targeted
and opportunistic way and could command the detailed knowledge needed
to counteract the strong prejudice and ratings stigma against high-yield
securities.
Under William Haloc, a former systems analyst for Prime who joined Drexel,
the team also developed real-time analytics to allow instant calculation
of pricing for these intricate securities. These functions allowed salespeople
to view the name, issue and ratings of a security and to compute complex
yields and cash flows involving call features, sinking funds, refund schedules,
puts, warrants and prices, all instantly calculable on line. Meanwhile,
at rival firms, many dealers still fumbled with the levers on $3,000 Monroe
calculators.
The entire system was monitored by Drexel Burnham’s New York headquarters
and linked indirectly to the floors of the exchanges by Quotron, Reuters
and 10 other on-line services, each with a separate Rich monitor, switchable
from a keyboard. These arrays of small black monitors spread across the
desk collectively functioned like a present- day Windows display.
Most of the features of Milken’s system are Common today. But in
1980 they were novel. This customized $2 million computer scheme, with
five times that amount for programming and maintenance, gave the Drexel
team a mastery of 5 the high-yield market that sometimes seemed positively
sinister to outside observers and competitors. But it was not magic or
malfeasance; it was the microcosm of the new technology joined with the
knowledge and investment genius of Michael Milken.
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