THE REBIRTH OF CHARLES KNAPP
There’s a chief executive officer of a large but flagging British corporation who works just four hours a day, five days a week. He doesn’t know it, but he’ll be redundant when bought out soon by Charles Knapp.
The CEO will have company. There are seven other enterprises, mainly in Europe and the US, all targeted for possible takeover by Knapp, the controversial Californian financier now chairman (and founder) of fledgling merchant bank Trafalgar Holdings of Los Angeles. Thhe targets are unlikely to get wind of Knapp until it’s too late — when he’s stealthily accumulated stock and built the blocks into controlling interests. It’s all part of the style of reborn Charlie Knapp: a new, more low-key approach than that which used to accompany his business forays.
“I’ve learned to be far less arrogant today,” he told Euromoney.
It was a reference to his flamboyant days as chairman of Financial Corporation of America, the holding company for American Savings, the nation’s largest savings and loan company. That association ended in 1984 when he was forced to resign by regulators alarmed at the headlong pace of FCA’s growth.
Under Knapp, FCA had become the first savings and loan company to scour the world for deposits, largely through the telephone solicitation of short-term, institutional funds. The impact was dramatic. Assets of $200 million in 1978 blossomed to $34 billion by 1984. His strategy was to finance the real-estate deals of American Savings with very short-term funds. This resulted in an enormous mismatch of assets and liabilities and a lot of concern in Washington.
The regulators feared that if foreign investors suddenly became nervous, they would pull their money out and American Savings would collapse. This was too much like gambling with the future of the entire savings and loan industry, they thought. The regulators did not like the fact that every couple of days, Knapp was rolling over billions of dollars as a means of keeping FCA’s head above water.
They made him restate FCA’s earnings. A $31 million gain for second-quarter 1984 became a $107 million loss. Within six weeks, investors withdrew $6.8 billion from American Savings, one of the largest-ever runs on a US financial institution. Knapp resigned, blaming regulatory meddling and a bad press.
Now, a slightly chastened Knapp was careful to point out that he would never let Trafalgar Holdings become the pressure cooker of growth like FCA. “I’m through with the accumulation phase of my life,” he told Euromoney in his first major interview since his departure from FCA. “All of us here have enough money and the lifestyle that we can go forward at our own pace. There is no rush.”
Originally Knapp saw Trafalgar Holdings (which grew out of his private investment company, Trafalgar Securities, established several years ago) as an international money manager, depending on contacts made during his time at FCA. “But pretty quick I realized I really didn’t want to manage money on a day-to-day basis,” he said. “We didn’t want to be forced to invest, to run after transactions and get emotionally involved with what we were doing. We also wanted to keep it small and under tight control.”
So small (about 30 people), and tight, in fact, that Trafalgar remains a secretive investment group that nevertheless claims to be able to raise $1 billion in capital from a network of nearly 50 aggressive investors.
Knapp’s most publicized excursion into merchant banking was his attempt, aborted earlier this year, to acquire Japanese ball-bearing manufacturer Minebea in a joint-venture with Glen International Financial Services of the UK, headed by financier Terence Ramsden, an equally flamboyant figure. Had the attempt succeeded they would have become the first western financiers to accomplish a hostile takeover in Japan.
There have been other ventures. In 1985 Knapp pledged $70 million in equity capital to California raider Paul Bilzerian’s ultimately unsuccessful efforts to take over shirt-maker Cluett Peabody and Co. Also last year, Knapp and his investors contributed to the money behind T Boone Pickens’ attempt to take over California oil company Unocal Corporation. They also tried, again without success, to snatch MGM from the clutches of Ted Turner. In the UK, Knapp has invested in and toyed with the idea of attempting takeovers of publishing group Pearsons Plc and cigarettes-hotels-and-brewing concern Imperial Group. High stock prices deterred him. At the end of September. trafalgar announced it had also taken a stake of almost 5% in another UK hotels-and-brewing group. Grand Metropolitan.
Failures haven’t disillusioned Knapp. Rather than ride the coat tails of other raiders, he’s decided that he wants to take over a company himself by the end of this year. Hence his list of eight target companies in hich he has begun to invest. “We’re being creative on a worldwide basis.” he said in the private club atop his west Los Angeles headquarters.
That list, according to Knapp, also includes the names of CEOs around the world who are prepared to run his acquisitions: “We’ve talked to a number of them who feel that they are underpaid and ready to make the move to run the right company.”
Knapp never quite says it but his goal at Trafalgar seems to be to regain his reputation as a shrewd financier rather than as a salesman who can’t quit when he’s ahead. His takeover plans are but a small part of what he wants Trafalgar to do and of the reputation he wants the company to fashion.
“This is just the tip of the iceberg,” said Donald Reynolds, a co-founder, director and executive vice president of Trafalgar Holdings. “We have profit centres in both senior and mezzanine finance, another in properties, mortgage banking and securities.”
In senior finance, Knapp has often done deals in connection with Drexel Burnham Lambert’s Los Angeles-based high yield (junk bond) activities. Said Reynolds: “Our investors are high-yield, internal rate-of-return players.”
While such deals once again colour Knapp as a man who takes risks, an increasing number of Trafalgar’s business activities are more sedate. The recent $40 million acquisition of Tuneup Masters Inc by auto parts firm Cardis Corporation is fairly typical.
“They came to us at the last minute and said they had financing for the deal but it was pretty expensive.” said Robert Fabregas, head of Trafalgar’s debt department. “They had a 30-day window to come up with new financing and they wanted to see what we could do. “Fabregas jumped on a jet to New York and in one week had placed the deal before 18 major US and foreign banks. By the middle of the second week. Dresdner Bank In New York had agreed to take on the credit at what Trafalgar said was a good saving to Cardis. Fabergas would not reveal what Trafalgar netted from the exercise – probably, say industry souces, about $500,000 – but it was worth a signing at the fashionable Jimmy’s Restaurant in west Los Angeles. “Our name will never appear on the tombstone,” said Fabergas. “We prefer to quietly do our job and let the banks take the credit.”
Knapp remains silent about most of his financing deals but acknowledged some targets for the near future: between $1 billion and $2 billion in senior and mezzanine deals for 1987 another $1 billion in mortgage brokering and property deals, and the signing of up to 300 institutions to support a booming certificates-of-deposit business. These goals are about double Trafalgar’s 1986 activity in each sector.
Most of the deals that pay the bills at Trafalgar these days are humdrum. But not all. In takeover, the picture of Knapp the buccaneer is alive and well. And no deal had more cut and thrust than the recent duel with Minebea. “There is no doubt that the concept of tender offers and corporate takeovers is extending beyond the borders of the US,” said Mark Dodge, general counsel for Trafalgar and the third of its three founding members. “Japan has had a body of takeover laws since World War Two but no outsider ever tried to utilize it.”
Knapp decided it was time to try. He quietly acquired an option to buy a 23% stake in the company with Ramsden. Knapp liked the idea of acquiring Minebea for its cash flow and had lined up a leading Japanese executive to take charge. It was not to be easy. Said Dodge: “The Japanese business community rallied abound Minebea. The Japanese securities industry refused to act as our agent and their courts ultimately refused to stop the merger Minebea brewed up with retail distributor Kanemori, to frustrate the takeover.”
The Japanese defence worked and a frustrated Knapp aborted the takeover attempt, taking a yen-dollar currency gain on the transaction. Trafalgar retains an investment in warrants to acquire 50 million shares of Minebea stock.
Knapp said: “We will try again in the Japanese market. We have broken enough ground that we don’t have to play the role of pioneer any more.” Dodge predicted that a major operating company such as General Motor would be the first to hurdle the Japanese takeover barrier with a friendly acquisition of a much smaller company. “But then the others will come,” said Dodge. “Everyone there is dying to do the second deal but no one wants to be first.”
On the possibility of future deals with Ramsden, Knapp remained tight-lipped. More so than Ramsden, who late last year told Euromoney: “The Minebea deal is the first of many. We’re looking at possibilities outside Japan. The UK looks especially interesting.” (“Gambler Ramsden ups the stakes”, Euromoney, November 1985, page 34.)
If the past is any guide, target companies won’t know Knapp is stalking until well into the takeover attempt. Knapp and Reynolds freely admitted that they had devised a number of assigned names that they could legally use in their investment transactions.
Knapp is eager to seal his first takeover by the end of this year but insisted that he was unhurried. “You know, the other day I got in the P51 [the Second World War-vintage Mustang aeroplane he owns] and flew up to northern California for a meeting. The corporation has its own plane so I could Have taken that. But flying myself made the trip more enjoyable. I like it that way.”
Knapp even took off almost two months this summer to be married aboard another of his toys, a 120-foot 1930’s yacht, to Hollywood actress Lois Hamilton as the vessel sailed along the Italian Rivera. “We have the desire to do deals now but not the ultimate need.” said Knapp. “We’re doing what is conservatively the most pleasant thing to do.”
Certainly, cruising along the Rivera is far less ambitious that his plan to sail around the world in the immediate post-FCA days. He made it from Fort Lauderdale. Florida, through the Panama Canal to Acapulco. But there, business ambition again took a hold. “There was adventure out there but not the kind of excitement of the business we’re in, said Knapp. Every day, I find myself doing deals that no one could have predicted. I missed that kind of life. “He picked up the vessel’s radio ‘phone and said “Let’s do Trafalgar,” recalled Reynolds, a former director of FCA.
Iii-wishers no doubt would say, “I told you so”, and point to Knapp’s days at FCA as illustrating an ambition that could not be quashed.
But bad as Knapp’s reputation had become in the savings and loan business, it was improving among a large group of mainly European investors. Said Reynolds: “FCA was the first savings and loan to do mortgage-based financing in Europe, the first to do a Euro-credit and the first to bring those foreign dollars home at a time when other S&Ls couldn’t attract deposits.”
“Charlie was head of his time” said a Drexel Burnham executive in Los Angeles who watched Knapp’s rise and fall. “He was aggressive and innovative. People like that always have trouble.”
Knapp sees himself as a pioneer who finally lost his battle with the Indians. “If I had continued at FCA, you would not begin to caluclate how successful we would be in this interest-rate environment,” he said.
“It wasn’t a gamble because I knew that interest rates would have to go down or it was the end for the United States. And I knew it wasn’t the end.” Said Reynolds: “Interest rates began dropping just two months after Charles stepped down. Our timing was perfect but the environment around us was the problem.”
William Popejoy, current FCA Chairman, would beg to differ.
“Cleaning up FCA is a long, dirty job; it’s like dealing with the aftermath at Chernobyl,” he said. “We’re still trying to clean up thousands of loan documentation and information errors. Their systems and procedures didn’t keep pace with the growth.”
Popejoy said Knapp had been running a 70% mismatch between assets and liabilities compared with 35% at FCA today and an average for the savings and loan industry in the high teens. The company now is turning in lacklustre quarterly profits and is saddled with bad loans of about $1.8 billion.
Popejoy said Knapp – and orphan who maintains he doesn’t know his real age but puts it at 5u – is not yet out of the legal woods. FCA hs spent $5 million investigating Knapp’s practices, he said; the probe should be conlcuded by the end of the year. The company is supplying the FBI with information relevant to the hearings of three Grand Juries, he claimed. Popejoy said the FCA was also persisting with its suit to have returned to the company a $2 million bonus that the FCA board voted for Knapp a few days before he resigned. “I’ve had a lot of explanations why he was paid that bonus but I don’t think I understand any one of them.” he said.
Knapp admitted that the FCA experience had been a painful espisode. But, with a flash of his old confidence, he added quickly: “The future is promising.”
