Riklis
Strategic Concepts & Mechanics
Primary Evidence
"An Israeli emigrant, Riklis had started out with a stake of just $ 25,000, buying and combining small companies in the 1950s. By the time he met Milken in about 1970, Riklis controlled a conglomerate, Rapid-American, which had sales of close to $ 2 billion. It included such companies as International Playtex, Schenley Industries, Lerner Shops and RKO–Stanley Warner Theatres. What Riklis had done was acquire one company and then use its assets to acquire the next, and that company’s to acquire the next, in ever larger circles. He acquired these companies by issuing mainly bonds, or debt, in exchange for the company’s stock. As Riklis liked to say, Rapid-American owed its success to “the effective nonuse of cash.”"
"The major difference between Riklis’ debt-laden acquisitions and those of Milken’s later acquirers was that Milken’s chosen would issue the bonds for cash and then give the cash to the shareholders, while Riklis would issue the bonds directly to the shareholders. Both Riklis and his successors a generation later, however, would be using to their advantage the same debt-favoring provision of the U.S. tax laws: interest (on bonds) is deductible, but dividends (on stock) are not. Therefore, assuming roughly a 50 percent corporate-income-tax rate, a company that can pay shareholders a rate of return of 7 percent on dividends can just as easily pay 14 percent interest on subordinated debt, because it can deduct the interest."
"The major difference between Riklis’ debt-laden acquisitions and those of Milken’s later acquirers was that Milken’s chosen would issue the bonds for cash and then give the cash to the shareholders, while Riklis would issue the bonds directly to the shareholders. Both Riklis and his successors a generation later, however, would be using to their advantage the same debt-favoring provision of the U.S. tax laws: interest (on bonds) is deductible, but dividends (on stock) are not. Therefore, assuming roughly a 50 percent corporate-income-tax rate, a company that can pay shareholders a rate of return of 7 percent on dividends can just as easily pay 14 percent interest on subordinated debt, because it can deduct the interest."
"An Israeli emigrant, Riklis had started out with a stake of just $25,000, buying and combining small companies in the 1950s. By the time he met Milken in about 1970, Riklis controlled a conglomerate, Rapid-American, which had sales of close to $2 billion. It included such companies as International Playtex, Schenley Industries, Lerner Shops and RKO–Stanley Warner Theatres. What Riklis had done was acquire one company and then use its assets to acquire the next, and that company’s to acquire the next, in ever larger circles. He acquired these companies by issuing mainly bonds, or debt, in exchange for the company’s stock. As Riklis liked to say, Rapid-American owed its success to “the effective nonuse of cash.”"