Deal maker Tom Hicks

indulges his passion

for speed while skiing
near his vacation
home in Snowmass
Village, Colo.

Reinventing
PHOTOGRAPH BY JEFFREY LOWE

COVER STORY/HICKS MUSE

Hicks Muse is still doing leveraged buyouts at a breathtaking

pace, but the business is much more complex By Ida Picker

om hicks likes to spend winter weekends at his

chalet in Snowmass Village, Colo., where he says he skis
fast and pretty. That used to describe the way he did
deals, too. The most famous, his leveraged buyout of
Dr Pepper Co. and Seven Up Co. back in 1988, earned investors
$600 million on a $45-million investment in just 18 months.
Today Hicks is still doing LBOs at a rapid clip, but things
arent always so pretty. His Dallas-based firm, Hicks, Muse, Tate
& Furst, has to put more equity into deals to satisfy lenders
as much as 30 percent, compared with 10 percent a decade ago.
The firm hunts far afield for buyout candidates, entering oftenrisky foreign markets. Over the past 23 months, Hicks has canceled
four deals in the U.S., Europe, and Latin America, drawing
criticism and lawsuits. Its harder, if not impossible to find a
stand-alone business to buy at attractive prices today, says Hicks.
It may have gotten a lot harder to make money in LBOs, but
Hicks is still making plenty: Hicks Muse has averaged 30 percent
returns for its four equity funds over the past nine years, almost
double the 16.7 percent average, five-year return for similar
funds, according to Venture Economics, a Newark, N.J.based
research firm. That result has also beaten the stock market; the
Standard & Poors 500 index gained 19.5 percent last year.
Investors, led by pension funds and other institutions, are
pouring more money into buyout funds like Hicks Muses than
at any time since the late 1980s. In 1998 U.S. buyout funds raised
a record $55.4 billion, though the sum raised declined last year
to $33.3 billion. In 1999 U.S. buyout firms completed deals
worth $61 billion in the U.S. and abroad, up from $40.9 billion
in 1998 and a low of just $7.1 billion in 1991. Thats still less than
the 1989 record of $74.4 billion, some $29 billion of which came
from the Kohlberg Kravis Roberts & Co. buyout of RJR-Nabisco,
according to Thomson Financial Securities Data.
Having raised $10 billion total since inception, Hicks Muse
ranks about even with E. M. Warburg, Pincus & Co. and behind
KKR, the largest buyout firm in the world with $17 billion under
management. That doesnt include Hicks Muses separate

Olympus Real Estate Corp. unit, whose funds have some $6 billion more, including debt, invested in properties ranging from
hotels and office buildings to Arnold Palmer golf courses.
Competition is increasing, though, with Wall Street firms and
commercial banks offering their own funds. Chase Capital Partners, a unit of Chase Manhattan Bank, has about $14 billion
under management to invest in buyouts, venture capital, and
other areas. Its a growing industry, says David Snow, managing
editor of Buyouts, a newsletter based in New York. What started
as an obscure boutique specialtydoing LBOshas transformed into an institutionalized business.
You can tell by looking at Hicks Muses backers, two-thirds
of which are government or corporate pension plans. Their
track record is very good. Returns are above expectations, says
Bill Quinn, who has put $115 million into Hicks Muse funds
as president of AMR Investment Services, American Airlines
pension fund manager. Quinn says he especially likes what Hicks
Muse calls its buy and build strategy, which involves purchasing
companies and bulking them up with additional acquisitions
unlike the asset-stripping LBOs of the 1980s that Quinn says
ruined businesses and laid off workers.
LBO funds fall under the category of private equity investment, a so-called alternative investment into which most institutional investors sink 25 percent of their assets. One big public
pension fund, the State of Michigan Retirement Systems, has
bought 10 percent of each Hicks Muse equity fund.
Hicks Muse funds get about 15 percent of their capital from
wealthy families like the Hunts, whose fortune came from oil,
and the Crowes, who got rich off real estate. Jim Parker, president of Hunt Petroleum Corp., administers the trust fund for
Margaret and Hassie Hunt, which has invested with Hicks Muse
since the firm began. Weve been very pleased with the returns
weve had, he says. Another 15 percent comes from banks and
other financial institutions. Hicks Muse itself puts in the
remaining 35 percent of the capitala figure Quinn, for one,
would like to see grow. That way their interests would be more

the LBO
Bloomberg February 2000 25

COVER STORY/HICKS MUSE

26 February 2000 Bloomberg

Wyatt McSpadden (3)

London-based John Muse

aligned with ours, he says.

cooked up the idea for
the firm with Hicks over
Large pension funds have pushed buyout firms
beers in a hot tub
like Hicks Muse to give investors better terms. Hicks
Muse typically takes 20 percent of profits, leaving 80
percent for investors who participate through limited
partnerships. (In a limited partnership, investors can
receive income, capital gains, and tax benefits, but
they have limited liability and dont get involved
in day-to-day management.) In the 1980s, recalls
Snow, groups like KKR and Hicks & Haas could
negotiate their take on a deal-by-deal basis. If the
returns were high, theyd take a larger cut.
Hicks Muses buy-and-build strategy works like this:
The partnership finds midsize companies that are
underperforming, buys them, and then merges them
with others in the same industry. The firm eventually
either takes the companies public or sells them to
investors. Hicks Muse goes after industry leaders with
popular products. The brands the firm has owned
include Ghirardelli chocolate, G. H. Mumm champagne, Chef Boyardee spaghetti, Stetson hats, and
Lucchese cowboy boots. And the pace of deal making is breath- of Southern California, Hicks landed a job at J. P. Morgan
taking: In barely 11 years, the firm has snapped up more than in 1970, joining the venture capital group. His friends included
300 companiesabout one deal every two weeks. Of all the buy- about 15 transplanted Texans who got bank jobs in New York,
out funds, they spend their money the quickest, says Snow.
including Blanks, his Manhattan roommate, and college chum
Credit a lot of that speed to Hicks himself. A looming figure Charles Tate. We were all trying to seek our fortunes in New
of six-foot-three who wears Lucchese boots and a puckish grin, York, says Tate. The homesick Texans got together to watch
Hicks is personable and driven. The man has a number of the Texas Longhorns football team on TV. The group stayed
forward gears, says partner Dan Blanks, whos known him since in touch over the next 20 years through annual dove-hunting
their college days at the University of Texas. High speed is the trips near Monterrey, Mexico.
one he uses most.
In 1977 Hicks moved back to Dallas and started a buyout and
His life outside work is just as fast paced and high-powered. investment firm called Summit Partners. It specialized in oil and
When hes not skiing, he spends his spare time cheering on cow- gas properties. Hicks fell out with partner Don Ingram after oil
boys at the rodeo he owns and rooting for the sports teams prices tumbled in 1983. Hicks, who had invested his own money
he owns stakes in: the Dallas Stars, a hockey team that won the in some of the deals, nearly went under. Both sides filed lawsuits.
Stanley Cup in 1999, and the Dallas Cowboys football team.
He then joined Robert Haas, a Cleveland investor whom
Or he unwinds with friends like Texas billionaire investor he had done business with while at Summit Partners, to form
Richard Rainwater, a golf partner, and Governor George W. Hicks & Haas, which became one of the most successful buyout
Bush. Hicks is raising money for Bushs presidential campaign, firms of the 1980s. The firms investments under management
but so far he hasnt passed the $100,000 mark.
jumped during the 80s from $88 million to $1.3 billion, thanks
In his work, Hicks surrounds himself with trusted friends. to deals like the Dr Pepper-Seven Up sale, which contained the
All of the partners of Hicks Muse except one (New York office seeds of Hicks Muses current buy-and-build strategy. The firm
manager Michael Levitt, a Michigan native) grew up in Texas, had bought the two soda brands separately, merged them, then
and many of them attended the University of Texas at Austin taken the company public. Hicks & Haas also ended in acrimowith Hicks in the 1960s. Says partner David Deniger, one ny in 1989, when Hicks wanted to set up the limited partnership
of Hickss Sigma Phi Epsilon fraternity brothers: We were the financing structure that Hicks Muse uses today, and Haas balked.
wanna-bes. We were not the supercool guys. We all wanted
The painful ending of Hicks & Haas marked a turning point
to make something of ourselves, and we still have that para- for Hicks, then 43, who was also in the middle of a divorce.
digmwere still wanting to make a living. Deniger now heads I redirected my life, he says. It was a time when people were
Olympus Real Estate.
questioning the whole rationale of the LBO business. The junk
After college, Hicks spurned his fathers offer of a job at the bond market was foundering, and fewer and fewer new LBOs
radio stations the elder Hicks owned. (Hicks had already spent were being announced, even though 1989 was actually the
his high school weekends as a disc jockey; he called himself Steve record year for completed buyouts.
King, the Weekend Wonder Boy.) Armed with a degree in marIn February 1999, Hicks invited John Muse, a Prudential
keting and finance from U.T. and an MBA from the University Securities banker whom hed known for two decades, to join him

The man has a number of forward gears, one of Hickss partners

says. High speed is the one he uses most
Charles Tate oversees
Latin America

on a ski weekend at a friends vacation home in Aspen. Hicks

and Muse dreamed up a plan in the chalets hot tub over a couple of beers. After hashing through various business models,
they agreed on the buy-and-build approach in recession-resistant growth industries like food and media. Rather than raise
money deal by deal, as Hicks & Haas had done, they would
accumulate pools of investment money in limited partnerships.
It allows you to move very quickly, says Hicks. Their exit strategy would be a sale or public offering. It was a hybrid between
the traditional LBO business and growth capital, recalls Muse.
In April 1990, Hicks Muse made its first investment
$24 million in an insurance company called Life Partners
Group. In 1994, a year after it took the company public, Hicks
Muse sold its stake for $143 million, increasing investors
money sixfold and bringing them a gross internal rate of
return of 65 percent. (Gross internal rate of return is essentially
the proceeds of an investment minus its cost divided by the
number of years it was held.) Even before a limited partnership
starts turning a profit, it can rack up huge annual management
fees, ranging from 1.5 to 2.5 percent of the money committed
for investment. On Hicks Muses $10 billion of capital, thats
$150 million to $250 million a year. The fees are returned to
investors once the fund earns profits, Hicks says.
In 1991 Charles Tate, 55, a Morgan Stanley & Co. banker who
had represented Philip Morris Cos.the seller of Seven Up
when Hicks & Haas bought the beverage company, joined Hicks
Muse. A six-foot-one, lanky San Antonio native, Tate convinced
Hicks that to turn his interesting little firm into a national player,

he needed a New York office. Wall Street had never

heard of this Texas firm, and Tate recalls one investment banker asking him, If I had a company for sale,
why should I ever call you guys? Hicks also hired Jack
Furst, a University of Texas MBA who had worked with
him at Hicks & Haas. The firm became Hicks, Muse,
Tate & Furst in March 1994. That same year, Tate
moved back to Texas, where he now manages Latin
American investments.
In its haste to make deals in the early days, Hicks
Muse hit a few bumps, sometimes because the firm
apparently hadnt done all of its homework. In 1991
Hicks Muse bought Healthco, the largest dental supply
company in the world. The firm bet some $53 million
that it could modernize Healthcos archaic distribution
system, which included 110 warehouses around the U.S.

Jack Furst
worked with
Hicks at his
predecessor
firm, Hicks
& Haas

The new computer systems failed, and so did the deal. Hicks
Muse exited a year later with a $52-million loss.
Hicks Muse also failed in its attempt to turn around the bankrupt beer maker G. Heileman Brewing Co., which it bought for
$390 million$61 million in equity, the rest in debtin 1994.
Two years later, the firm sold it at a $100 million loss. Hicks
attributes the fiasco to poor management and the firms mistaken belief that it could get a major beer brewer like AnheuserBusch Cos. to distribute Heilemans products. In fact, Hicks
says, alcoholic beverage producers are more heavily regulated
Bloomberg February 2000 27

Erskine Bowles goes from Wall Street to Washington

and back. Its businessand politicsas usual
A DECADE AGO, FORSTMANN LITTLE & CO. WAS KNOWN
for buying, shoring up, and selling troubled outfits like Gulfstream Aerospace Corp. Today, its pouring billions of dollars into telecommunications companies
and the Internet. And heading that effort
is an unlikely general partner: investment
banker turned politician Erskine Bowles.
To Bowles, leading the leveraged buyout
firms late-to-the-game entry into the new
economy is hardly a stretch. Compared
to my last job, this is a piece of cake,
says Bowles, 54, referring to his four-year
stint in the Clinton White House, most
recently as chief of staff.
Bowless Washington-honed diplomatic skills and connections have come
in handy in making the transition to Forstmann, which has $4 billion in capital.
Since joining the firm in Januar y 1999,
Bowles has helped make investments
totaling more than $2 billion. Take Intelysis Electronic Commerce Corp., which brings together businesses and their
clients via the Internet. First, Forstmann spent $65 million
for a third of the company. Then Bowles, as Intelysis chairman, began drumming up business from state governments. He plans to take the company public this year.
Erskine has credibility and influence, and those are huge
assets for us, says Lloyd O'Connor, chief executive of
Intelysis, whose customers include Massachusetts, Idaho,
New York, Texas, and Utah.
Its too soon to quantify the Bowles effect on Intelysis.
But shares in McLeodUSA surged about 70 percent from
Septemberwhen Bowles joined his senior par tner,
Theodore Forstmann, on the boardto January. Investors
read the move, and a $1-billion investment by Forstmann
in the Iowa telephone company, as big votes of confidence.
Bowles and Forstmann go back a long way. Nearly 20
years ago, when Bowles ran his own boutique investment
bank, Charlotte, N.C.based Bowles Hollowell Conner
& Co., he arranged the sale of Kincaid Furniture, the first
company bought by Forstmann Little. Bowles and Ted
Forstmann went on to do more than two dozen transactions together. When Bowles was ready to return to banking, he knew who to call.
The man who once defined Washington as 26 square
miles bordered by reality has no regrets. Im a creature
of the private sector, says Bowles, gazing down on New
Yorks Central Park from his 44th-floor office. This is what
I do.
David Gillen
28 February 2000 Bloomberg

than soda bottlers, so that avenue was closed and Heileman was forced
to go to a weaker distributor.
Meanwhile, Heileman lowered prices to capture market share. Hicks says
that move cut cash flow by about a thirdcash that was needed to service
Hicks Muses borrowings as well as Heilemans existing $250 million in debt.
Hicks has had better luck with businesses he knew more aboutlike
radio, his fathers field. But even there, things have been far from simple.
Hicks Muse bought two radio stations in Sacramento,
Calif., for $48 million, then began a rapid series of
A piece
acquisitions, including companies separately bought
of cake,
by Hicks and his younger brother Steve.
says
The Dallas-based radio company, which went public in
Bowles
of his
1993, has had some problems managing its rapid growth.
new job
After the federal government passed the Telecommunications Act of 1996, which liberalized regulations
restricting radio station ownership, Hicks stepped up the
pace of expansion until the company, now called AMFM,
owned 465 stations across the U.S. Things began getting
ugly after investors objected to a planned purchase of half
of a Mexican radio station company, Grupo Radio Centro,
at seven to eight times earnings before interest, taxes,
depreciation, and amortization, a multiple they considered
unreasonably generous during a volatile time in Latin
America. Hicks backed out of the deal in October 1998,
three months after announcing it, when the companys
earnings were about half what they were projected to be, Hicks says.
In March 1999, Hicks himself stepped in at AMFM, the third CEO in 11
months. We did a lot in a very compressed time period, says Hicks. When
you do that, its a difficult process to manage.
Hicks was also getting more grief from AMFMs public shareholders, who
forced him to cancel a deal for AMFM to buy LIN Television Corp., a Providence, R.I.based owner and operator of eight TV stations, from the Hicks
Muse Equity Fund III. Institutional shareholders balked at the idea of moving into the TV business, which was growing more slowly than the radio
and billboard business. We did not want to dilute the growth, says Storm
Boswick, managing director at J. & W. Seligman & Co. Investors also
charged that the transaction was not at arms length, since it was being
bought from another Hicks Muse affiliate.
LIN TV and Grupo Radio are two of the four deals Hicks Muse has
pulled out of in the past 23 months. I think public shareholders have
a hard time figuring out: Are we trying to do whats good for us or whats
good for them? Hicks says of LIN TV. They did not like merging a TV
station we controlled into a radio platform.
Shareholders ended up pleased with the outcome of the radio negotiations, Hicks Muses biggest investment to date. AMFM announced plans
in October to merge with Clear Channel Communications, a deal that
if approved would turn Hicks Muses $1.3 billion in equity into a Clear
Channel stake worth about $5.5 billion. Wall Street was happy, too: Hicks
Muse hired four firms to advise it on the deal, including Deutsche Banc
Alex. Brown, Chase Securities, Greenhill & Co., and Morgan Stanley Dean
Witter & Co. By spreading the wealth around like that, Hicks Muse now
keeps itself in the loop for new deals.
Thats important in these days of smaller returns and rarer bargains.
Nowhere are those difficulties more apparent than in Hicks Muses recent
foray into Latin America, where the firm is betting heavily on a deal that has

Rafael Fuchs

Forstmanns front man

COVER STORY/HICKS MUSE

had more anguished twists than a Gabriel Garca Mrquez novel.
Hicks nonetheless is confident that he can apply the same strategy to Latin America that he used in the U.S. Weve been to the
movie and we know how it ends, he says. The opening scene
of this deal came in July 1998, when Salomon Smith Barney
approached Hicks about buying part of Citicorps stake in its Latin
American holding company. The company, CEI Citicorp Holdings, owned chunks of Telefnica de Argentina, Argentinas
largest phone company, and Cablevision, the countrys biggest
cable company, along with a handful of TV and radio stations.
Again, Hicks jumped in fast, before he knew all the facts.
He says he saw in CEI a tremendous potential platform for
assembling a Latin American media empire. He paid $900 million for a 44 percent stake. Hicks was throwing his lot in with
such lofty partners as John Malones Liberty Media and Telefnica, Spains biggest phone company and parent of the
Argentine phone business. What Hicks didnt realize was that
each partner had blocking power over one anothers actions
and would use it. It was kind of a mess, Hicks says. We had
to untangle it.
Hicks Muse wanted to expand the cable company aggressively.
The Argentine phone company didnt; it wanted to focus on its
main business of telephony. The Spanish phone company
clashed with partners over its plans for CEIs Internet company.
Then last summer, CEIs second-largest shareholder, an Argentine
banker named Raul Moneta, went into hiding when a federal
Argentine court charged him with tax evasion and economic
subversion after his bank failed.
Hicks and his partners stepped in and bought out Monetas
CEI stake at a discount. He needed capital, Hicks says. Then
Hicks took over Monetas positions as CEI chairman and CEO.
(The charges against Moneta were dropped in December.) That
quick actionand Hicks Muses sudden ascension to majority
shareholderhelped break the logjam among the warring partners. Hicks and Telefnica chief executive Juan Villelonga
negotiated to divvy up the company.
On January 4, they announced a resolution: Hicks Muse gets
the Spanish phone companys controlling 35.9 percent share of
Cablevision for $900 million in cash. Telefnica, for its part,
agreed to drop its veto rights in sports programming company
Torneos & Competencias. It also agreed to buy Hicks Muses
stake in the Argentine phone company with stock, giving Hicks
Muse a 3 percent stake in the Spanish phone giant. We traded
a stake in an illiquid phone company for a stake in one of the
biggest telecoms in Europe, Hicks says. The resolution also
will allow him to accelerate plans to start the first cable-TV
sports network in Brazil and Argentina, probably by February
or March.
In Europe, where John Muse set up the companys outpost in
1998 and has since overseen $2.5 billion of investments, things
have been less tortuous but by no means easy. Last year, Hicks
Muse bought Hillsdown Holdings, a U.K. cookie company that
makes Cadburys Fingers, after a bidding war with Candover
Investments, a U.K. buyout firm. Hicks Muse ultimately paid 822
million pounds ($1.3 billion)70 million, or 9.3 percent,

more than it had originally offered. In December the firm was

outbid by Groupe Danone for the U.K.s biggest cookie baker,
United Biscuits. Hicks Muse owns 29.9 percent of United Biscuits,
has voting rights for another 7 percent, and stands to earn about
$48 million on the stake even if it doesnt make a higher bid.
That setback came little more than a year after Hicks Muse
had pulled out of yet another deal, to buy the Macmillan division of Simon & Schuster from publisher Pearson for $860 million. Pearson had bought the U.S. book publisher for $4.6
billion in November 1998. Pearson sued for breach of contract
and damages in New York. Still, Muse is convinced that Europe,
currently undergoing the biggest M&A boom in its history,
is an important place to be for Hicks Muse. The status quo
is not an option, says Muse. Companies will get bigger or they
will sell. This new paradigm plops right into our hands.

he pearson deal was just one of several that

Hicks Muse pulled out of because, the firm says, they
didnt hold up after it examined the books closely.
Pearson declines to comment. Youre in a high-priced
environment, says Furst. What we have seen the last two years
is a sloppiness in the process of buying and selling companies.
Some observers of the buyout business argue that Hicks Muse
was the one who was sloppyor at least, too hasty.
Hicks Muse also withdrew from an agreement to buy Coho
Energy, an oil and gas company in Texas that subsequently went
bankrupt. Coho sued. So did Grupo Radio, the Mexican radio
station company whose purchase Hicks Muse backed out of
in October 1998 under pressure from shareholders of AMFM.
Grupo Radio declined to comment.
Hicks and his partners are hardly slowing down. They plan
to raise $6 billion to $7 billion more this year, including $1 billion for real estate and a new $1-billion Latin America fund.
Hicks Muse is also venturing into a new area, Internet and similar high-growth companies, with its $1.5-billion HMTF e Fund
2000. Thus far, Hicks Muse has made few investments in those
fields, apart from $250 million in cable and phone company
RCN Corp., based in Princeton, N.J., and $153 million in Vienna, Va.based digital microwave phone firm Teligent, in which
Microsoft Corp. is also an investor. Hicks himself is studying up.
He began using a computer just six months ago, and hes asked
a Hicks Muse intern to teach him how to get on the Web.
In January Hicks Muse was completing a $1-billion joint venture with Internet investment company CMGI to do deals outside of the U.S. If Hicks Muses most recent investment is any
guide, this area may be the one that leads Tom Hicks back
to the golden returns of the 1980s. In November Hicks Muse
put $80 million into Globix Corp., an Internet services company.
By January, the stake was worth $400 million. If the price doesnt
go flat, this deal could be as fast and pretty as Dr Pepper.
For news on people mentioned in this story, type the persons
name followed by <Help> 7.

Ida Picker is a senior writer at Bloomberg News in New York

Bloomberg February 2000 29