Air Date: Week of March 29, 1996
Activist and author David Harris has written a book titled The Last Stand which documents the links between 1980's corporate raiding, and subsequent intense logging and protests in the redwood forests of northern California. The one-time family-run Pacific Lumber was taken over with the help of some of Michael Milken's junk bonds and Ivan Boesky's stock parking, forever changing the adjoining forest community.
CURWOOD: Michael Milken is back in the news. The former junk bond king had his probation extended while the Securities and Exchange Commission investigates some of his recent business dealings. His probation follows a 2-year prison sentence and a billion dollar fine for insider trading. You don't often hear Mr. Milken's name come up in connection with environmental issues, but Mr. Milken helped financier Charles Hurwitz buy a company called Pacific Lumber, which owns just about all of the major old growth California redwood forest, still in private hands. The redwoods have been in California since the dinosaurs. Some of the trees are a thousand years old and grow up to over 250 feet tall and more than 20 feet around. They're also home to a small endangered bird known as the marbled murrelet. The redwoods are spectacular in the monetary as well as aesthetic sense; each one is worth more than $30,000 as saw lumber, and can provide enough wood to frame 5 standard-sized houses. Charles Hurwitz's purchase of Pacific Lumber provoked a conflict among Wall Street, Main Street, and environmental activists that continues to this day. His company's lawyers are now asking the US 9th Circuit Court of Appeals to throw out a lower court ruling that bars salvage logging in the Headwaters old growth forest. The fall of Pacific Lumber, the rise of Charles Hurwitz, and the violent battle over the Headwaters ancient forest are chronicled in The Last Stand by David Harris, who begins his book by telling us that Pacific Lumber was not your everyday logging operation.
HARRIS: This is the oldest log sawyer in California, the last one to own a company town. It had been in the hands of the Murphy family starting at the turn of the century and running up to the 1980s, who had put it on a distinctly different course than virtually any other timber company I'd ever heard of, and certainly any other timber company in California. During the middle of the Depression they decided to give up clear cutting altogether.
CURWOOD: Why was that?
HARRIS: Well, because clear cuts are ugly, because clear cuts tended to destabilize the hillsides, and they felt that they could get everything they wanted by pursuing what they called the selective cut, where they would take about 60 to 70 percent of the trees on any given area and leave the rest behind to hold the hillside and to seed the next generation of trees.
CURWOOD: What motivated them to have this kind of strategy, do you think?
HARRIS: Well, mostly it was a man by the name of A.S. Murphy, who was the principal architect of the Pacific Lumber Company in its modern form, anyway, and he thought the biggest problem the industry faced was the fact that it always cut itself out of work. He himself or his ancestors had started out as lumbermen in Maine and then had moved to the upper Midwest and now had moved out to California, and there was no place else to move and he understood that. What he wanted to do was design a perpetual lumber company, a company that when it finished cutting its old growth would have second growth forests as big as its old growth had been and could just turn around and start right back through its forests again and never cut itself out of work.
CURWOOD: And I think I read in your book that the company decided that it would, one, it wanted to be able to use this land forever, that it would never take more than would grow in a given year. Did I read that?
HARRIS: Yeah, that was the other part of the Murphy heritage, was a policy called sustained yield, in which each year the Pacific Lumber Company's foresters would calculate how many new board feet would be growing in the Pacific Lumber timber lands that year. And that was the top end of the cut. They would never cut more than that. Their approach was basically to treat the forest as capital and try and live off the interest.
CURWOOD: The stewardship of the land you described caused some problems with the financial markets, and this is where your story picks up, right? Can you tell me, can you explain that to me, please?
HARRIS: Well, the irony of the Murphys taking such good care of their company and of their company's assets, namely its timber lands, was that in the takeover market of the 1980s Pacific Lumber became an ideal target. First, because the company had virtually no debt, because the Murphys had always pursued a cash and carry kind of economics. And thus allowing anybody who wanted to take the company over to mortgage it to the hilt in order to pay for the takeover itself. And second, because they hadn't used their assets at the rate that everybody else in the industry used theirs. They had plenty of room in which to escalate their production, and therefore escalate their cash flow, again to pay off the debt that would be assumed to take over the company. So as one of the takeover artists put it, this was a Ferrari that was being run like a Model T Ford, and there was plenty of more cash to be squeezed out of this company because the cuts that the old company had thought would wait for the next generation or the generation after that could all be done in the next 10 years.
CURWOOD: Now, in terms of being a takeover target, Pacific Lumber was vulnerable because a) it didn't have any debt, and b) it had all this inventory, as it were, standing. How much was this all worth?
HARRIS: Well that's a matter of great debate. When the company was taken over by Charles Hurwitz, he eventually paid $850 million for the entire company.
CURWOOD: But I mean if you add up what the timber could have been sold for if it were sold quickly and the company's assets, what was the company worth, do you think?
HARRIS: Well there are those who -- the claims have gone as high as two and a half billion dollars.
CURWOOD: How does somebody buy a company that could arguably be worth two and a half billion dollars for $800 million?
HARRIS: Well, Hurwitz started by consulting the Drexel Burnham Lambert investment banking firm, looking for targets. They came back with the name Pacific Lumber as a possible target. He investigated it, decided that it was worth making a run at, began to make a secret stock accumulation. The law requires that you report your interest in a company as soon as you own 5% of its stock, but he bought up to that 5% level without ever breaching it, so that he was able to go unnoticed during this entire anticipatory phase. At the same time he went to Michael Milken in Los Angeles and said that he would need the backing of an enormous issue of junk bonds in order to come up with the cash that would be necessary to make this takeover.
CURWOOD: Now what did he need exactly from Milken? How was this going to work?
HARRIS: Well, Hurwitz did not have the money necessary to go out and buy this stock, and in order to get the money he would have to borrow it. Standard borrowing would not do, either, because he didn't have enough assets to pledge, and it would take too slow, and it would be too public. He needed somebody who could deliver money on a moment's notice, and he was willing to pay for it and willing to pay in terms of paying off high yield bonds. Michael Milken was in a position to sell hundreds of millions of dollars worth of bonds in a single afternoon because of the network he had built around his junk bond operation. So they were a natural marriage. Milken provided the money and Hurwitz grabbed it and did the rest.
CURWOOD: Okay, so Hurwitz went around and he gathered just under 5% and then he makes an offer?
HARRIS: Then he surfaces with his offer. Now at the same time, the allegations of illegality around this deal begin to crop up about this point in the procedure, because Milken, apparently worried that somebody else would come in and jump on their target before they had a chance to take it over, and did not feel that 5% was a sufficient enough foothold to ensure that nobody else would try and make their way into the deal, got his ally Ivan Boesky, started buying Pacific Lumber stock as well. So that Boesky eventually bought more than 5% of the company himself, and in so doing scared off any other possible investors and secured the flanks for Milken and for Hurwitz. Eventually, Milken would be charged with illegal stock parking for having engaged in this procedure with Boesky and the principal witness against him of course would be Boesky himself, who became a government witness when faced with a number of felony charges.
CURWOOD: David Harris is my guest. His book is called The Last Stand. We'll be back in just a moment.
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