Drexel Burnham Lambert - Business

Business

Drexel's legacy as an advisor to both startup companies and fallen angels remains an industry model today. While Michael Milken (a holdover from the old Drexel) got most of the credit by almost single-handedly creating a junk bond market, another key architect in this strategy was Fred Joseph. Shortly after buying the old Drexel, Burnham found out that Joseph, chief operating officer of Shearson Hamill, wanted to get back into the nuts and bolts of investment banking and hired him as co-head of corporate finance. Joseph, the son of a Boston taxicab driver, was a good fit for the firm's culture. He promised Burnham that in 10 years, he would make Drexel Burnham as powerful as Goldman Sachs.

Joseph's prophecy proved accurate. The firm rose from the bottom of the pack to compete with and even top the Wall Street bulge bracket firms. Michael Milken was clearly the most powerful man in the firm (to the point that a business consultant warned Drexel that it was a "one-product company"), but it was Joseph who was named company president in 1984 and CEO in 1985.

Drexel, however, was more aggressive in its business practices than most. When it entered the mergers and acquisitions field in the early 1980s, it did not shy away from backing hostile takeovers—long a taboo among the established firms. Its specialty was the "highly confident letter", in which it promised it could get the necessary financing for a hostile takeover. Although it had no legal status, Drexel's reputation for making markets for any bonds it underwrote was such that a "highly confident letter" was as good as cash to many of the corporate raiders of the 1980s. Among the deals it financed during this time were T. Boone Pickens' failed runs at Gulf Oil and Unocal, Carl Icahn's bid for Phillips 66, Ted Turner's buyout of MGM/UA, and Kohlberg Kravis Roberts successful bid for RJR Nabisco.

Organizationally, the firm was considered the definition of a meritocracy. Divisions received bonuses based on their individual performance rather than the performance of the firm as a whole. This often led to acrimony between individual departments, who sometimes acted like independent companies rather than small parts of a larger one. Also, several employees formed limited partnerships that allowed them to invest alongside Milken. These partnerships often made more money than the firm itself did on a particular deal. For instance, many of the partnerships ended up with more warrants than the firm itself held in particular deals.

The firm had its most profitable fiscal year in 1986, netting $545.5 million—at the time, the most profitable year ever for a Wall Street firm. In 1987, Milken was paid executive compensation of $550 million for the year.