I was thinking about all of this while I was on my boat last weekend, Teddy Forstmann was saying a few weeks ago in the Los Angeles law offices of Skadden, Arps. The leveraged-buyout king was trying to explain to a roomful of irate McLeodUSA bondholders why they should be happy with the payout he was offering on their now worthless bonds.
"I'm in a tough spot," he added, "just like you guys are."
It was January 24. McLeod was going bankrupt, and Forstmann was expecting to take a $500 million write-down on his $1 billion investment. Now he was telling the bondholders that they would have to be happy with the scraps he had on offer: $670 million and some McLeod stock (now worth 18 cents a share, down 98 percent from its high) -- not quite the $3 billion they thought they had coming to them.
Forstmann had a plan, though: McLeod would declare bankruptcy, and he would take control of the company and sink in another $175 million while doing his level best to make the partners some money.
"Why can't we get more?" the roomful of bond traders half his age pleaded.
The meeting lasted eight hours, and Forstmann, who had flown in that morning on his Gulfstream V, for once looked his 61 years. Yes, the year-round suntan still glowed, and his trim physique spoke well of the hundreds of hours invested on the links and at the tennis court. But a closer examination of the man revealed eyes shot with blood and a voice scratched and weary.
Finally, losing his last bit of patience, he burst out. "Look, McLeod will be filing for bankruptcy on the 31st, and that's final," Forstmann said. "Plus, I have a golf date with Vijay Singh on February 1" -- at the AT&T pro-am at Pebble Beach -- "and I'm not going to miss it."
These days, it isn't just bondholders (who eventually endorsed his plan) clamoring for cash from Teddy Forstmann. Last week, the state of Connecticut announced that it would be suing Teddy's firm, Forstmann Little, in civil court for having written down the state's $95 million pension-fund investment in XO Communications -- Forstmann Little's other big telecom investment gone bad -- to zero. "They double-crossed us," said Attorney General Richard Blumenthal. "They pretended to be our partner and then they wiped us out."
The losses are all the more staggering because Forstmann is such a legend in the buyout community. The list of his home runs is like a brand-name hall of fame: Dr Pepper, General Instrument, Gulfstream. Until 2001, his return on equity was an extraordinary 57 percent. He dates models -- with reports of an occasional exception like Princess Di -- donates hundreds of millions to charities, and always, always makes money for his partners.
The methodology has been frighteningly consistent: He zeroes in on some lumbering mess of a company, leverages himself up, and buys a huge chunk of it. A new high-profile CEO comes in, celebrity rainmakers are added to the board, massive restructuring ensues, and, a few years later, Forstmann sells out -- taking billions in profit.
And everyone along for the ride gets rich. Especially his many Republican pals. Donald Rumsfeld, hired by Forstmann to revamp General Instrument in the early nineties, cashed in $23 million worth of GI stock in 1993. Colin Powell, a Gulfstream board member in the mid-nineties, sold $1.7 million worth of stock in 1998. To say nothing of Henry Kissinger ($2.8 million), Michael Ovitz ($813,000), and George Shultz ($1.4 million).
But now, for the first time, his partners are anything but fat and happy. Forstmann Little all but vaporized $2 billion out of the $3 billion it invested in McLeod and XO. But it wasn't just telecom. The company also blew $95 million of limited-partner money on a run-of-the-mill Internet company called Metiom. All told, it's a shocking amount. Think of it this way: The biggest loss any mutual fund booked on Enron was only $600 million.
And his latest high-profile rainmaker -- former Clinton White House chief of staff Erskine Bowles, who became a Forstmann partner and chairman of Metiom in 1999 -- ended up taking a good deal of the heat for the firm's disastrous high-tech investments. While press accounts have suggested that Forstmann was guilty, above all, of inattention -- stepping away from the day-to-day management of the firm, and allowing Bowles to make costly mistakes -- insiders say that it was Forstmann himself who was a late convert to high tech, while Bowles tagged along for the strange, sickening ride.
How'd it happen? In 1999, as Internet and telecom stocks soared, Teddy Forstmann found himself sitting on a large pile of cash (he sold out of Gulfstream for $2.4 billion) that needed a home. Forstmann himself was Old Economy all the way, with a tendency to sniff at investment fads. But the world was changing: Tech was throwing off billions for those who got in ahead of him.
At the same time, he had asked Bowles, who was a friend of Nicholas Forstmann, his younger brother, to join Forstmann Little as a senior partner. For the staunchly Republican Forstmann, it was an odd choice. Bowles was a Democrat, and Forstmann was repelled by most of what came out of the Clinton White House.
But there was no getting around it: The Forstmann Little shop needed a strong operational hand, and Bowles was well known for having brought some sanity to the messy Clinton White House. Bowles was also the founder of a regional investment boutique in North Carolina, Carousel Capital, that focused on the types of smaller, high-growth companies that were now catching Forstmann's eye. It should have been a good fit.
In April, Forstmann sent a supplement to his original offering memorandum to all his institutional clients, outlining the firm's high-growth investments in telecom, education, and business-outsourcing services. Now Bowles, who never pretended to be a high-tech-investment savant, found himself in the middle of it.
With the pressure mounting from his clients to put some money to work, and Bowles lined up to carry the water, Forstmann plunged in. In September 1999, he invested a billion in McLeod. Bowles and the other partners had urged a more conservative $250 million stake. But Forstmann, all parties agree, overruled them.
"Forget about the 250 -- let's go for the entire billion," he said, according to one partner. "This is the kind of bold decision-making that makes me great."
Two other partners in the room deny that he made the boast. And in fact, the decision to take the whole deal may reflect something other than hubris on Forstmann's part: If his firm put in only $250 million, McLeod would raise the rest by issuing junk bonds, a means of financing that Forstmann has long detested.
In January 2000, Forstmann Little put in the first $850 million of what would soon become a $1.9 billion investment in XO Communications, a provider of broadband and other phone services.
Stranger still was the firm's $60 million investment, in October 1999, in Intelisys (which became Metiom). At the time, the company was little more than an in-house software company incubated by Chase Manhattan. It aimed to develop software to feed the then booming business-to-business procurement market on the Internet. B2B, in the parlance of the time, was the hot investment theme. And since Bowles was a prep-school classmate of fellow North Carolinian and Chase CEO William Harrison, it was natural that Intelisys go first to Forstmann Little.
While Bowles was a board member of McLeod, tiny little Metiom, over which he presided as board chairman, was the company that absorbed the vast bulk of his time. For over a year, Bowles logged hundreds of hours trying vainly to use his comprehensive Rolodex to bring the company business.
It was an odd pairing. Bowles's $4.28 million salary at Forstmann Little was not far from Metiom's entire revenue. Forstmann had employed a similar strategy when he had recruited Donald Rumsfeld to whip his bedraggled General Instrument into shape in the early nineties. And Bowles did try to make some rain.
Forstmann Little wanted to build out the company aggressively. By mid-2000, the staff had ballooned to 380, with 40 full-time marketers and a sales force of more than 100 -- not to mention rooms full of consultants from Accenture and KPMG. "The questions from the Forstmann Little guys were How many people have you hired? How many consultants do you have?" remembers one senior financial executive. "They were always putting pressure on us, always asking us, How big are you growing?"
Strangely enough for a company with a burn rate that peaked at $10 million a month, for much of 2000, Metiom had no permanent CFO. Unable to find one, Bowles brought in Jason Goldberg, a twentysomething former special assistant to him during his White House days, to cut deals, and his son, Sam, to work with the comptroller and monitor expenses.
But the business didn't click, despite Bowles's efforts to tout the company's software with letters to CEOs at Ford, DaimlerChrysler, and First Union. Still the company's revenues remained more a trickle than a stream.
In the fall of 2000, the company moved into its luxury Silicon Alley offices at a cost of about $13 million.
At the same time, Bowles and the board decided to spend $1 million to change the company's name from Intelisys to Metiom -- supposedly a fusion of the words meteor and medium. Or, as the joke around the office went, meeting and tedium.
There was even talk of an IPO, with Goldman Sachs and Morgan Stanley valuing Metiom as high as $1.2 billion.
By February 2001, though, financing for Internet stocks had disappeared and Metiom continued to miss its targets. Abruptly, Bowles and his Forstmann Little partners pulled the plug on the company. In May, Metiom filed for bankruptcy.
In October, Bowles quietly resigned from Forstmann Little as well as from his affiliated board seats to focus on his run for the Senate in North Carolina. He had come to Forstmann Little with high hopes. He was supposed to institutionalize the harried little partnership as well as grow it. Instead, he found himself spending untold hours and amounts of political capital trying to salvage perhaps the most dubious of all Forstmann Little's tech investments.
"I don't think Forstmann Little ever understood that this was not an Internet company," says a Metiom alum. "What we really needed was financial governance. If you give money to a kid, he will buy a car and crash it into a tree. That's what we did."
Did Teddy Forstmann take his eye off the ball? Perhaps not: His three tech investments in 2001 carry the hallmarks of the investing style that made his name. Big, bold sums coupled with with big, bold names. It's just that this time, he was following the pack instead of leading it.
Photo: Associated Press