Capital Gainsmanship

"When i clean the bastards out, the stock goes up. What I want is the Capital Gains." With this simple credo, Alfons Landa, a Washington investor whom Fortune magazine regards as the craftiest proxy fighter in the nation, has crystalized for posterity the principal objective of many American financial tycoons in the year 1960.

Realtor William Zeckendorf might not care to have his name mentioned in the same breath with that of Louis Wolfson, a man who has been branded by his detractors as a company raider. Nor might auto man Henry Ford II necessarily relish having his name linked to that of Howard Hughes, whom a former associate has described as "the spook of high finance." Yet a common bond does exist among these men, as it does among them all and bastard-eradicator Landa, in their determined drive through the only major fencehole left in the Federal Income Tax structure: the Capital Gains tax.

For Capital Gains tax is virtually the only gimmick left by which a man who amasses a fortune may hold onto it despite today's altitudinous personal income taxes. Taxes on personal income, as toilers who earn over $100,000 a year are especially aware, can chew away as much as 91 percent of earnings. But Capital Gains tax may never exceed 25 percent, no matter how many millions of dollars are involved, and often the tax is lower. To quality for this tax bonanza, all you need do is hold onto an investment for six months plus one day (or more). You have contributed to the growth of your country's economy, and your patriotism and vision are rewarded by this preferential tax rate. Sell out in exactly six months (or less), however, and the Government regards you as a speculator, or even a dirty-money man, and you are subjected to the same tax rates that apply to most salaried Americans. Many experts, including Senate Banking Committee Member J.W. Fulbright, consider this tax disparity rank discrimination.

Naturally, the scramble by investors in all fields to get in on this good thing has led to much confusion over the precise definition of Capital Gains. Broadly stated, however, Capital Gain is the increased value of an investment over a period of time. For example, if Peter Minuit had bad the longevity and good sense to hold onto bucolic Manhattan Island which he purportedly purchased from the Indians for $24 in 1626, all of its present $9.4 billion assessed valuation, less the $24 purchase price, would be Capital Gains.

Today, the principal beneficiaries of this levy are the real-life Cash McCalls, the Big Money men who collect huge fortunes with little or no sweat and do so not only with the consent of the law, but with the encouragement of the Capital Gains provision of the tax law. They are the J.P. Morgans, the Vander-bilts, the John D. Rockefellers of our generation and they operate spectacularly in two fields, neither of which is necessarily concerned with creating a better mousetrap. The first of these fields is real estate and the second goes under the not-so-nice designations of company raiding and proxy fighting.

To be sure, there is another, positive way of looking at proxy fights and company raiding. Often enough, it is entrenched and conservative – even stultified – big Management which freely and disengenuously cries "company raid" and imputes vicious practice and vile motives to proxy fighters when a perfectly legitimate effort is being made to wrest control from a no-longer-competent group, or to transfer control from an adequate Management to a superior one. In fact, it has been argued with some success that the vitality of the entire corporate system may depend on occasional proxy campaigns. As in most (continued on page 85) Capital Gainsmanship (continued from page 50) matters affecting real life rather than theoretical analyses of it, the line is more often than not a hard one to draw between selfish rapacity and fruitful shake-ups: frequently, in fact, the former achieves the latter as, one might say, a by-product. But our concern here is not with allocating praise or blame, or evaluating the beneficial or deleterious results of raids and proxy battles. It is the Capital Gains aspects of these activities that interest us – just as they are often the principal motivating factors in raids and proxy fights.

Among operators in this category, one man wears both the crown of Midas and the sword of Canute. He is Louis Elwood Wolfson, age forty-eight, son of a Jacksonville junk dealer. University of Georgia alumnus, Miami Beach resident and nominally occupied as President and Board Chairman of Merritt-Chapman and Scott, a diversified holding company with interests in construction, shipbuilding and chemicals.

Louis Wolfson's reputation rests upon his sense of smell, the most highly cultivated in all capitalism. Repeatedly, he has demonstrated an uncanny ability to sniff out old, conservative corporations with over-all hardening of the assets and which have been all but overlooked by the investing public. Wolfson's strategy: to buy into the old firm (secretly registering stock in the names of brokers and trusted friends in order to allay suspicions), wrest control from stodgy management, then boom the stock's price by skyrocketing dividends or waging proxy warfare. The object: to sell out for Capital Gains.

Admirers of Wolfson regard him as the Wyatt Earp of the small investor, the watchdog against complacency in the board room of American business. Detractors, on the other hand, have described Wolfson and men of his stripe as "jackals of capitalism" and "mortuary millionaires." (J. Patrick Lannan, no novice in the field – Western Industries, International Telephone and Telegraph, Automatic Canteen and eighteen other firms – once pointed out that most of the dirty-name-calling emanates from frightened Management. "No corporation head likes to be told he's not working hard enough," says Lannan.)

Wolfson exhibited his keen sense of smell early in life. In 1934, his first year out of college, he purchased for $275 a supply of pipe which had been lying in dead storage on the estate of retail mogul J.C. Penney. Its real worth was $100,000 and Wolfson lost no time in reselling it to construction firms in the Jacksonville area for that figure. Similar transactions involving perceptive appraisal of undervalued properties followed and by the time he reached thirty, Wolfson's net worth totaled over a million dollars. Following World War II, he bought the St. Johns River Shipyard in Jacksonville from the government for $1.9 million, shortly reselling it for more than twice that price. In 1951, Wolfson and associates got control of the Capital Transit Company, operator of trolleys and buses in the nation's capital. The North American Company, Capital Transit's previous owner, had been forced to sell under a death sentence clause of the Public Utilities Holding Companies Act. Wolfson's new acquisition was a conservative old firm with $6 million in idle cash set aside for a rainy day. It was paying a 50¢ dividend. Wolfson lost no time in shoveling into the cash pile, and dividends were soon octupled to $4 and the stock split four for one. By 1952, the old 50¢ dividend was equal to $15.60, more than thirty times increased. This, in addition to creating heaps of wealth for Wolfson, also brought resentment and resulted in his appearance before a number of federal investigating bodies. Following one such investigation, Oregon's Senator Wayne Morse denounced him as "an economic carpetbagger" and introduced a bill to relieve Capital Transit of its franchise.

By 1954, Wolfson and associates – a curiously docile clutch of relatives and friends who follow their master in and out of big deals with complete anonymity – were in control of a thirty-two-firm empire worth more than $240 million. Question: Can a man wielding such great financial power and drawing an annual income of $1.5 million really find happiness? Wolfson's answer: No. Not when most of this income is in dividends subject to the ravages of high taxes. However, Wolfson knew precisely what could bring him happiness: Capital Gains.

So, he set his staff of researchers hunting for a Capital Gains "situation," as Wall Streeters are wont to call the corporation that is ripe for the Capital Gains make. The researchers pored over balance sheets and profit and loss state. ments and narrowed down the number of possibilities.

One balmy July day in 1954, Wolfson and six associates boarded the Wolfson yacht anchored in New York's Hudson River. (Since Wolfson is no history scholar, the parallel was doubtless unconscious to the day in 1885 when J.P. Morgan took a party of associates aboard his yacht Corsair, also anchored in the Hudson, to determine the fates of the country's two mightiest railroads, the New York Central and the Pennsylvania.) Cruising on serene Long Island Sound, the Wolfson group debated, deliberated, and finally Wolfson made his pronunciamento to the group: "I go for Montgomery Ward." The setup was a natural for Wolfson. Montgomery Ward, as the country's second largest retailer and mail-order firm, owned $721 million in assets, almost half of it in cold cash. Since the end of World War II, dour Board Chairman Sewell L. Avery, age eighty-one, had been squirreling away profits in expectation of a depression which never materialized. The company's treasury, so overladen with cash, had come to be known facetiously in retail circles as "The Ward Bank and Trust Company." Meanwhile, Ward's chief competitor, Sears, Roebuck & Company, had been plowing profits back into its business and had a sales increase of 184 percent to show for it, against Ward's increase of 36 percent.

Following the shipboard decision, Wolfson quietly began to buy up Montgomery Ward stock. In possession of 59,000 shares and with his position secure, he called in the press on the morning of August 26 and announced his campaign for control of the company. Wall Street's traditional haste to "buy on proxy fight news" sent the stock up twenty points, from 66 to 86.

The wrestle for control between Wolfson and Avery in the following nine months will go down in history as the most flamboyant spectacle in the annals of American proxy fights. It carried the trimmings of a Presidential campaign, with electioneering from coast to coast, public rallies, PR hoopla, TV interviews, advertising pyrotechnics on the grand scale, heated allegations and more heated denials. At one point, a deputy New York police commissioner announced that he and the FBI were guarding Wolfson and his family against kidnap threats. At another juncture, an anti-Semitic whisper campaign was set in motion against Wolfson. A Wolfson minion, former Notre Dame football coach Frank Leahy, attempted to counter it with a proclamation to the Chicago press: "Louis is one of the cleanest persons I have ever known – clean in mind and body. He is really a better person than ninety-five percent of the Catholics I have known."

Neither godliness nor cleanliness availed Wolfson when the ballots were finally counted in May, however. He had failed to win a majority, picking up only three of Montgomery Ward's nine directorships. Wolfson should not have been entirely heartbroken. In October of the following year he sold his 59,000 shares at a profit estimated to have been $1,475,000, every penny of it Capital Gains.

During the proxy battle, the charge most often hurled against Wolfson was that he was ruthless. Nowadays, on reflection, Wolfson says, "Sure, I wanted money, all the money I could get. I wanted to make sure my wife and four kids would never have to worry about money as long as they live. Since when is that a crime?"

With the thick rubber band already secured around his bankroll, why does Wolfson keep chasing the fast buck? Surely the motive must be something other than concern over the family's bills. Wolfson's reply:

"Funny, my kids ask me the same question. It's because I also want to become a champion in business. I want to prove to the world that opportunity depends only on ability. Give me ten more years and I'll build a real empire. ... I might add that I also feel a great responsibility to the small stockholder, like the little old lady in Washington who told me that her whole income depended on her transit dividends and that she was praying for me. Now I ask you, what kind of human would I be if I weren't deeply touched by that kind of talk?"

Ever since the Wolfson-Montgomery Ward tiff, proxy battles have become an annual fiesta. In 1957, the contest was for control of Loew's, Incorporated. In 1958 it was Penn-Texas. This year, at least eleven firms face proxy battles, according to a New York Times survey, with the feature attraction something of a battle royal come full circle. Boston Capital Gainsman Abraham M. Sonnabend has bought into and bid for control of Allegheny Corporation, the mammoth holding company which, under direction of the late Robert R. Young, waged a successful battle for control of the New York Central Railroad in 1954.

Sonnabend feels that Allegheny's management has fallen asleep at the switch since Young committed suicide in 1958 and that the company has failed to realize full profit potential. Sonnabend is eager to apply to some of Allegheny's ailing subsidiaries a Capital Gains maneuver which has brought him a great personal fortune. This maneuver is generally referred to as the "Botany Formula," named for Botany Mills, the first corporation to which Sonnabend applied it. Simply stated, Sonnabend uses the working capital of a weak corporation to buy up small but profitable companies in other industries, rather than retool or expand in the industry where it is already losing money.

A real estate man by background, Sonnabend, now sixty-three, first applied this formula to Botany in 1954. He had bought a quarter interest in the firm, a woolens producer, only to discover at his first board meeting that Botany might not be able to meet its payroll on the following Thursday. Sonnabend embarked on a shopping spree which brought a total of twelve profitable subsidiaries to Botany within two years. These included such improbable stepchildren as an oil-well supply house in Oklahoma, a doll company in New York, a lint-cleaning machinery maker in Texas, a synthetic fur manufacturer in Wisconsin, a cashmere sweater maker, and a chain of low-overhead clothing stores.

By 1957, Botany ranked first among America's largest corporations in ratio of profit to net worth. It was showing an $8 million profit on $14 million net worth. Sonnabend, the Harvard-educated son of a Boston pawnbroker, has since applied the Botany formula to other corporations which he and associates control. For example, his Hotel Corporation of America owns, in addition to principal hotels in principal cities, Chick-Chick Easter Egg Colors, WhittemoreBrothers Shoe Polish, Dox-see's Little Neck Clams, Nature's Gold Cup 100% Pure Maple Syrup and Bennett's 100% Pure Santa Clara Prune Juice. When Sonnabend took over Artistic Foundations, a sagging girdle manufacturer, he stretched into its corporate dimensions an airplane parts distributor and a Venetian blind maker. Whether Allegheny Corporation directors will voluntarily submit their ailing subsidiaries to the wiles of this corporate Marrying Sam or whether Sonnabend will have to win a proxy war for a chance to do his stuff will become known later this year when sides line up for the 1961 Allegheny stockholders meeting. Meanwhile, Sonnabend is not likely to permit his passion for Capital Gains to burn unrequited.

With the continuing spate of proxy battles, a new specialist has emerged on the financial scene. He is known as the "anti-raider raider," a sort of jujitsu Master who leaps out and kicks the would-be raider in the groin before he ever has a chance to rape the sweet, innocent little corporation. Among such anti-raider raiders, the man who wears the black sash of champion is investor Alfons Landa, quoted at the beginning of this article. Landa is general partner in the renowned Washington corporation-law firm of Davies, Richberg, Tydings, Landa and Duff. A descendant of Spanish nobility, at sixty-one he still carries remnants of the reputation as a fast-talking, dapper cockalorum which he earned as a youth in Washington high society. His card-playing cronies have included Harry Hopkins and well-heeled Democratic businessmen Sidney Wein-berg and Bernard Baruch, while wealthy clients have included IBM's Tom Watson, Alexander de Seversky, Louis B. Mayer and Barbara Hutton, as well as several large corporations.

"Back in 1950, I was getting rich clients and large fees," he recalled not long ago."But I had no real money. I looked at these people who paid themselves a million a year [e.g., Mayer] and decided I should become a businessman." Landa first ventured into Washington real estate. Then he dabbled in transportation in Florida and Georgia. He took over Colonial Airlines, made a killing there, then mushroomed his investments with Capital Gains in oil and sugar. But the maneuver which earned Landa his reputation as the King Kong of anti-raider raiders, was his stave-off, almost single-handed, of a raid which had threatened the Fruehauf Trailer Company, of which he was a director.

It all started in early 1953 with brothers Roy and Harvey Fruehauf feuding over their respective roles in the corporation's management. Roy was President and Harvey Chairman of the Board. But Harvey's interests lay outside the board room and his attendance at meetings was poor. When brother Roy proposed that Harvey resign and become "Honorary" Chairman of the Board, Landa backed him.

Harvey swallowed the bitter prescription, but after stepping down he decided to retaliate in July of that year. Without warning to Roy, Landa or any of the other directors, he sold out 130,900 shares of Fruehauf – the largest single block, representing 9 percent of outstanding shares – to the Detroit and Cleveland Navigation Company. Nominally, the D&C was a Great Lakes steamship line. Actually, it was the corporate shell for operations of a Detroit businessman and promoter named George J. Kolowich who had a reputation as a rough customer. In part, this reputation rested upon a term in prison which Kolowich had served for embezzlement. Shortly after brother Harvey's sale of his stock to the D&C, Kolowich stalked into Roy Fruehauf's office and announced his plan to elect himself to a seat on the Fruehauf board at the annual meeting scheduled for May.

Under company bylaws Kolowich's election was a certainty because of the large block of Fruehauf stock which his company controlled. But the directors claimed to be vexed by possible repercussions in conservative financial circles which a convicted embezzler on their board might create. Landa and Roy Fruehauf soon learned to their dismay that Kolowich was buying more Fruehauf stock on the open market to further strengthen his position for the May 1954 stockholders meeting. From all indications, Fruehauf Trailer was about to fall victim to a full-scale raid.

Landa, not content merely to pass the potato to some public relations firm or high-priced consultant firm (the usual practice of a threatened Management), conceived the following daring plan:

He would pull the rug right out from under Kolowich by raiding his own firm, the Detroit and Cleveland Navigation Company, thus regaining control of the Fruehauf stock which D&C owned. Landa knew that only one sizable block of D & C stock was not owned by Kolowich, 65,000 shares in possession of Robert R. Young's Allegheny Corporation. Landa pulled strings in Washington, got the Interstate Commerce Commission to needle Young regarding a "conflict of interest" which Landa was able to detect between Allegheny's huge railroad holdings and its holdings of D&C steamship stock, and Young was thus "pur-suaded" to sell his D & C stock to Roy Fruehauf and Landa.

Throughout the fall of 1953 and early 1954, Landa's forces quietly continued to buy more D & C stock. Several weeks before the D & C stockholders meeting in April, the majority position of the Landa contingent was secure. To raise no suspicion in Kolowich, however, they kept leaking information to brokers and the financial press which would indicate to Kolowich that he still held the majority of votes. At the annual meeting, when Landa was elected President, Kolowich's shock was a thing to behold, according to eye-witnesses.

But that's not the end of the story. Landa, realizing that the D&C maneuver would have a salubrious effect upon Fruehauf stock, bought in heavily and cleared an even million dollars in Capital Gains.

Landa admits that his participation in the Fruehauf battles – and several others since, including Penn-Texas – have made him "as popular as a skunk." To others who might have been inspired to try his route to success, Landa cautions: "You don't always have to do everything for a fast buck. From now on, I'll make mine slower."

Proxy fighters, of course, are not the only men in business with big eyes for the charms of Capital Gains. Increasingly, corporation execs in the $100,000-a-year bracket and over are demanding stock options which permit them to buy stock cheaply from the company treasury and later resell it on the open market for hefty Capital Gains. The reasoning of these execs is simple: why should they forfeit so much of their income to taxes while the men for whom they work – and whose manipulations in Capital Gains they frequently mastermind – continue to pile it up? Howard Hughes' failure to provide such a Capital Gains position caused his top aide and only known confidant to quit after thirty-two years of service, throwing the $500-million Hughes industrial complex into a financial quagmire from which it has yet to emerge. The exec's name was Noah Dietrich and his salary at the time he quit was an even half million dollars a year. He had been losing more than two thirds of it to taxes.

One big industrialist – not himself a proxy fighter – solved the high tax dilemma for his key execs by placing his company's profit-sharing funds into investments with great Capital Gains potential. He is Chicago's Colonel Henry Crown, head of Material Service Corporation, which is now a subsidiary of General Dynamics. A report issued in 1959 showed that one of Colonel Crown's aides had received a $95,881 increase in his fund share during the preceding year, bringing his total fund share to $305,315.

For his own Capital Gains investments, Colonel Crown seems to prefer real estate. He is principal owner and Board Chairman of the Empire State Building as well as second largest stockholder in the Hilton Hotel Corporation. The Colonel is not alone in this preference for real estate. The late J.K. Lasser, eminent tax consultant and author of Your Income Tax, felt that real estate afforded Capital Gains possibilities "unparalleled" by other businesses. One reason advanced for the success of the best-seller How I Turned $1,000 Into a Million in Real Estate in My Spare Time is author William Nickerson's demonstration of how to parlay the technique of tax reduction through Capital Gains."A babe in taxland" is what Nickerson terms any property owner who fails to bone up on this important tax levy. (Since writing the book, Nickerson has learned painfully that income from artistic creation is not subject to low Capital Gains taxes, and he will keep precious little of his $200,000 book royalties.)

It follows axiomatically that one of the most methodical exploiters of the Capital Gains maneuver would be America's most energetic real estate trader, William Zeckendorf. At fifty-five, Zeckendorf is already a land prestidigitator of legendary proportions. The firm of Webb & Knapp,Inc., of which he is Board Chairman, President and principal stockholder, owns properties in thirty-five states, Canada, Mexico and England. (Contrast this to other realty firms which rarely operate in more than one locality or, at most, one state.)

A perusal of Webb & Knapp's portfolio reveals Zeckendorf's predilection for ownership of properties which produce Capital Gains rather than income from rent. Examples:

– 12,000 virgin acres in the Santa Monica Range, strategically waiting for Los Angeles to expand out to it.

– 65,000 acres of Florida Everglades, to be drained for farmland and range.

– 5000 acres between Dallas and Fort Worth, awaiting development as an industrial park.

– 35,000 acres of Godschaux Sugar surplus land on the Mississippi between New Orleans and Baton Rouge, also intended for industrial development.

Unimproved landsites of yesteryear which already bear the fruit of Zeckendorf's inexorable creative urge include the Denver Mile High Center and Long Island's Roosevelt Field Shopping Center, while his kiddie park in the Bronx, called Freedomland, was due to open shortly as we went to press and was already being predicted to become the Disneyland of the East Coast. The UN Headquarters in New York occupies the site of former slaughterhouses which Zeckendorf bought for $6.5 million and almost immediately resold to John D. Rockefeller, Jr., at a self-imposed profit of only $2 million because he knew that Mr. Rockefeller intended to donate it to its present use. The sale was not consummated, however, before Zeckendorf had been allowed time to pick up a number of peripheral parcels whose values soared upon announcement of the UN site.

Such wheeling and dealing has brought Zeckendorf a personal fortune of $30 million, including a Manhattan penthouse apartment and a 70-acre waterfront estate in Greenwich, Connecticut, where he has moved more than a million cubic yards of earth to alter the shore line. Not long ago, Zeckendorf was cornered in his Madison Avenue office (no easy feat considering the office is a circle 28 feet in diameter) and asked what makes him run. Zeckendorf's immortal reply:

"Some men run because of ego, some because of avarice, some because of love. But the man who runs fastest runs because of fright. I have experienced real economic fright and that is why I run so fast. I think I have very little avarice as such – I have the lowest regard for money simply as money – but my basic interest is in security, a desire to defend myself from the degradation that a lack of money can bring."

Does Zeckendorf see anything immoral in the Capital Gains disparity which taxes windfall profits at a lower rate than money earned by hard labor?

"I'm dead against windfall profit for the slick operator. As far as I'm concerned, profit belongs to the man who creates increment."

Doubtless, there are Capital Gains experts who share this economic philosophy with Mr. Zeckendorf. But one man who differs with him is Clint Murchison, the homespun Texas oilman. Murchison fails to see the distinction between windfall and increment. Says Murchison, "To me, money is the same as manure. You put it out in the fields, you till it, and it brings you good returns."

To the salaried taxpayer on the sidelines of this theoretical Capital Gains discussion, the conclusion is inescapable: call it increment or excrement, it's nice to have money.