Bracing for More Bombshells

By Stephen Koepp

Like residents of some bombarded city taking advantage of a lull in the shelling, Wall Streeters scrambled from underneath their desks last week and tried to get their morale and finances in shape. Stunned by the Ivan Boesky insider-trading disclosures of Nov. 14 and expecting more to come, investors pulled their money out of takeover-target stocks and instead poured their cash into stabler, less controversial shares. Nevertheless, takeover artists got back some of their nerve and launched a flurry of new merger bids. All the while, angry accusations flew back and forth as the players in the widening controversy -- investors, raiders, regulators and legislators -- debated who was to blame for the state of affairs and what should be done to clean it up.

The most ravaged investors last week were Boesky's colleagues, the risk arbitragers who speculate on takeovers by investing in target companies. Arbitragers, who gamble that share prices will rise in value as a proposed merger approaches its conclusion, were left holding huge volumes of so-called deal stocks when the Boesky scandal broke. Those shares took a sharp plunge last week as investors rushed to dump them, leaving the "arbs" with collective losses of $1 billion or more. The arbitrage department at Merrill Lynch, for example, is estimated by competitors to have dropped $20 million to $50 million. "It has been a brutal time for all of us," declared one trader.

A so-called flight to quality kept the blue-chip Dow Jones industrial average rising last week, as investors bought shares of such traditional giants as AT&T, General Electric and Du Pont. Investors were picking stocks based on old-fashioned criteria like healthy profits and steady growth. The Dow went up 20.67 points during the week, to close at 1914.23.

As the week began, corporate raiders seemed to have been cowed by the surge in anti-takeover sentiment. That mood may have helped persuade Revlon Group Chairman Ronald Perelman to give up his hostile $4.1 billion offer to buy Gillette, the razor-blade maker. Probably more important, though, was the ! fast $34 million that Revlon earned by promising to back off. Investors branded the payoff as a clear case of greenmail, since Gillette agreed to buy back Perelman's 13.9% stake in the company at a premium price that was unavailable to other shareholders.

Yet only a day after Revlon's cease-fire, three more multibillion-dollar takeover bids hit the market. The Limited, a retail chain, teamed up with Real Estate Developer Edward DeBartolo to make a $1.8 billion offer for Carter Hawley Hale Stores, which operates Neiman-Marcus and Bergdorf Goodman. American Brands, a consumer-products conglomerate, made a $2.8 billion bid to take over a similar but smaller company, Chesebrough-Pond's. And Minnesota- based Corporate Raider Irwin Jacobs offered to pay about $4 billion to acquire Borg-Warner, a diversified company best known for its automotive products. The stocks of these targeted firms actually fell or remained steady just before the takeover announcements, suggesting that Wall Street's insider rumor mill may have shut down for the time being.

Why the rush of deals in such an anti-merger climate? At least one of last week's bids, the offer for Carter Hawley Hale, was admittedly timed so that the target company's shareholders would be persuaded to sell their stock before the end of the year, when federal income-tax reform will eliminate preferential treatment on capital gains.

While the SEC and the Justice Department exposed no new insider traders last week, rumors rushed through Wall Street about who might be next and how wide the net will reach. It was reported that Dennis Levine, the convicted insider trader who fingered Boesky, had agreed to have his telephone conversations recorded, just as Boesky had; the implication was that a wider range of colleagues might be involved in the scandal. Much of the suspicion focused on the go-go investment firm Drexel Burnham Lambert, where Levine had been a managing director. Drexel, the No. 1 financier of corporate raiders, had invested in several of Boesky's ventures.

Just as fear was an abundant commodity last week, so was indignation. Investors fumed when they read a Wall Street Journal estimate that Boesky had actually made at least $203 million from his insider trades, more than four times the SEC's $50 million figure. But the SEC quickly defended its original estimate of Boesky's insider earnings, for which the arbitrager had agreed to pay a settlement of $100 million. The commission contended that the Journal < confused Boesky's legal profits with his illicit ones.

Boesky's potential legal problems mounted last week as more aggrieved parties considered filing lawsuits for damages. FMC, a Chicago-based machinery and chemical manufacturer, said it is thinking about suing Boesky for allegedly using insider information last February to buy large amounts of the company's shares just before it announced a stock split and repurchase plan. The machinations of Boesky and other insiders reportedly drove the stock price up, so that the shares cost the company an extra $360 million to buy back.

On Capitol Hill the Democrats, getting ready to take control of the Senate, prepared to call Wall Streeters on the carpet. William Proxmire of Wisconsin, who will become chairman of the Senate Banking Committee, has announced plans for hearings early next year on insider trading and corporate raiders. John Dingell of Michigan, who heads the House Oversight and Investigations Subcommittee, said the panel will begin hearings into the Boesky affair Dec. 11. Even the staunch free-marketeers in the Reagan Administration have started to think about curbing Wall Street's excesses. Said Treasury Secretary James Baker: "There may be some things that are so open to abuse that you should put limits on them, even though most people are obeying the law."

With reporting by Gisela Bolte/Washington and Frederick Ungeheuer/New York