Part IThe Story
Thirty Minutes on a Friday Morning
On the morning of Friday, October 24, 1986, traders at the brokerage Jefferies & Co. began buying shares of Allied Stores Corporation in enormous blocks. The buyer was a Canadian homebuilder whom almost nobody on Wall Street had heard of a year earlier. The price was $67 a share. Within about half an hour, the Campeau Corporation of Toronto had gone from owning roughly 4 percent of one of the largest department store companies in the United States to owning more than half of it. Allied, which operated Brooks Brothers, Ann Taylor, Jordan Marsh, Bonwit Teller and a string of regional chains, rushed into federal court and won a temporary restraining order that same day. It did not matter. The shares had changed hands. Within ten days Allied had agreed to merge.
The maneuver was called a street sweep, and it had been devised by Bruce Wasserstein, the thirty-eight-year-old head of mergers at First Boston. Its client was Robert Campeau, then sixty-three, a slight, restless French-Canadian who had left school at fourteen, built tens of thousands of houses around Ottawa, and decided in the middle of his life that the Canadian establishment would never let him in. He would make his name in the United States instead. For about three years, he did. He bought Allied. He bought Federated Department Stores, the owner of Bloomingdale's, in the most expensive retail takeover ever attempted. He threw a victory party at the Metropolitan Museum of Art.
Then, on January 15, 1990, Allied and Federated filed for Chapter 11 protection in Cincinnati, in what was at the time the largest retail bankruptcy in American history. The filing listed some 50,750 creditors, from Wall Street banks to underwear makers. Campeau lost control of his retail empire that month and of the company that bore his name that summer. Barely a year later, a Canadian bank was petitioning to push him into personal bankruptcy.
Campeau's story is usually told as a morality play about the 1980s, and it is one. But it is also a precise case study in how a genuinely talented operator can take a method that worked in one domain, carry it into another where the underlying economics are different, and stack so much borrowed money on top of the difference that a modest shortfall becomes fatal. The interesting part lies in the details: what he was right about, what he was wrong about, and why so many sophisticated lenders went along.
By the Numbers
The Campeau Retail Gamble
$3.6BPrice of Allied Stores, acquired in a hostile takeover in 1986
$6.6BPrice of Federated Department Stores at $73.50 a share, agreed April 1, 1988
97%+Share of the full Federated purchase financed with debt, per economist Steven Kaplan
$350M+Fees collected by advisers and lenders on the Federated deal, per Fortune
~18 monthsTime from the Federated closing in July 1988 to the Chapter 11 filing
50,750Creditors listed in the January 1990 bankruptcy petitions
Chelmsford and the Floor at Inco
Robert Joseph Antoine Campeau was born on August 3, 1923, in Chelmsford, Ontario, a small francophone town near Sudbury in the nickel-mining country of the province's north. He was one of fourteen children. His father, Joseph, was a blacksmith and mechanic who worked intermittently, and the family was poor and devoutly Catholic. Campeau left school after the eighth grade, at fourteen, to help support his brothers and sisters. He delivered goods and swept floors at Inco, the mining giant that dominated the region, for fifty cents an hour, and later worked there as a labourer, carpenter and machinist.
Two things from those years stayed with him. The first was a fluency with physical work: how things were built, how long they took, what they cost. The second was a sense of himself as an outsider. He was a French-speaking Catholic from a mining town in a country whose commercial life was run by English-speaking Protestants in Toronto and Montreal, and he arrived in Ottawa with rudimentary English. Much of what came later, including the decision to go south, makes more sense once that grievance is taken seriously. Years afterward he told an interviewer that there were not enough French-Canadian businesses and that he intended his to stay in his family's hands and represent part of that world.
He married Clauda Leroux, a textile worker, in 1942. In Ottawa he took whatever work he could find: driving a truck for a paper mill across the river in Gatineau, working as a millwright, running a corner store.
The Campeau-Built House
The accounts of how Campeau got into construction vary. In some, he renovated run-down houses and sold them at a profit. In others, his first project was a single house he built with a cousin's help, which he sold rather than moved into because the offer was too good. Everyone agrees on the date he entered the residential building business, 1949, and on what he noticed: postwar Ottawa was full of young families and a fast-growing federal civil service, and none of them had enough places to live. Housing, he concluded, was close to a sure thing.
He incorporated Campeau Construction in 1953. His first large subdivision, Elmvale Acres in Ottawa's south end, went up along Smyth Road, and the company spread into Pleasant Park and beyond. The houses were plain, built from standard templates, and priced for ordinary buyers at around $18,000 to $20,000. Schools and churches followed the homes. The formula was industrial: repeat a design, control costs, keep crews moving, use each finished project to finance the next.
Not everyone admired the results. Charlotte Whitton, Ottawa's combative mayor, fought him repeatedly over planning, and one of her lines about his houses — that looking at them made nuclear bombardment seem less terrible — became part of the city's folklore. Yet the market disagreed with the mayor. "A Campeau-built house" became Canadian shorthand for solid construction, and the phrase outlived his empire. By his own family's count, the company eventually built more than 25,000 homes, along with apartment buildings across the National Capital Region.
The same Ottawa that gave him customers gave him political friends. Campeau cultivated federal Liberals, and counted Pierre Trudeau, Jean Chrétien and André Ouellet among his acquaintances. He was frequently in conflict with city council but usually got his projects approved.
Towers Above the Peace Tower
In the 1960s Campeau moved from subdivisions to office towers, and his ambitions collided with one of Ottawa's informal rules. For decades, the city had kept downtown buildings below the height of the Peace Tower on Parliament Hill. Campeau's Place de Ville, a large mixed-use complex on Queen Street with a main building roughly 250 feet tall, went well beyond what the bylaw allowed. He fought for it and won approval, and the complex was completed in the early 1970s. When the National Capital Commission planned huge federal office complexes across the river in Hull — Place du Portage and later Les Terrasses de la Chaudière — Campeau's company was the major contractor on both. A great deal of the office space that houses government departments on the Quebec side of the river was his.
In the late 1960s he consolidated his companies into Campeau Corporation. In the early 1970s he took on the redevelopment of part of Toronto's waterfront, including the Harbour Castle hotel and the Harbour Square condominiums. He built in San Francisco, Texas and Florida; by the end of the 1970s his company was operating in the United States. In 1988 his company completed Scotia Plaza, the red granite tower in downtown Toronto that became one of the tallest buildings in the city and the headquarters of Campeau Corporation.
This was real achievement, and it deserves to be stated plainly before the collapse is described. Campeau built neighbourhoods that people still live in and towers that still define skylines. He was, by many accounts, a relentless salesman and an energetic negotiator. A former employee would tell Fortune that he was the best salesman he had ever met.
He was also, by his own associates' accounts, volatile. Fortune later reported that he had suffered two mental breakdowns, the first in 1970 and the second in 1985, and that after the first he added the head of the psychiatric clinic that had treated him to his company's board. His private life was complicated in ways that would later be written about at length: while married to Clauda, he had a long relationship with Ilse Luebbert, a German immigrant he met in Ottawa in 1961, and had two children with her. He and Clauda divorced in 1969, and he married Ilse in 1970. She became, by several accounts, his closest business adviser.
The Door That Stayed Shut
The episode that seems to have pointed him south came in 1980. Campeau already owned about 5 percent of Royal Trustco, the parent of Canada's largest trust company, and in late August he launched a bid for control. Royal Trustco was a pillar of the English-Canadian financial establishment, with assets of about C$7.4 billion. Campeau Corporation listed about C$866 million in assets. The New York Times described the fight as a corporate David against a Goliath of Canadian banking.
Goliath did not wait to be hit. Royal Trustco's directors unanimously opposed the offer, took out full-page newspaper advertisements urging shareholders not to sell, and argued that a mortgage lender of that size should not be controlled by one real estate developer. Behind the scenes, as the company history in the International Directory of Company Histories recounts, management persuaded friendly institutions — among them the Toronto-Dominion Bank, which bought about 10 percent of the shares — to acquire enough stock to keep it out of his hands. Campeau raised his offer. It still fell short of the majority he needed, and in early October 1980 the bid failed.
Campeau said he held no grudge. Those around him believed he concluded that Canada's business establishment would always be closed to someone like him. By the mid-1980s he was describing American society as free and open by contrast. He moved to Toronto around 1981, bought a mansion on the Bridle Path, tore it down, and built a 25,000-square-foot French château where he gave lavish parties. He was clearly not planning to fade quietly.
Stores as Tenants
The idea that took him to the United States was, at its core, a real estate idea. Campeau wanted to build shopping centres there, and shopping centres need anchor tenants. If he owned the department stores, he reasoned, he would have ready-made anchors for his own malls, and he would also control the valuable property that many old department store chains owned in downtowns and suburbs.
According to the New York Times, the spark came in 1985, when Campeau learned that Edward Finkelstein, the chairman of R.H. Macy & Co., was planning a leveraged buyout of Macy's. Campeau tried to arrange a meeting to take part. He was rebuffed. He decided to build a department store group of his own. After some time casting about, he settled on Allied Stores, then the sixth-largest department store company in the country.
The mismatch in size was comic. Campeau Corporation had revenues of about $153 million in 1985. Allied had sales of about $4.1 billion. Fortune calculated that Allied was thirty times as large in profits and ten times as large in stock market value. But 1986 was the hottest year the leveraged-buyout market had seen. Michael Milken's junk bond machine at Drexel Burnham Lambert had made high-yield debt available for almost any deal, and investment banks had begun lending their own capital as short-term "bridge" loans to get takeovers done. Campeau assumed he could borrow whatever he needed. He was right.
He first tried a friendly approach and got no further than a proposal to buy five of Allied's shopping centres. His first bankers, Paine Webber, were pushed aside when the deal turned hostile. He interviewed merger specialists from several firms in his suite at the Waldorf Towers. One leading banker from Morgan Stanley later told Fortune he walked out unable to understand what Campeau had been saying, and declined the assignment. Wasserstein, famous for a pep talk that urged clients to "dare to be great," took it.
Taking Allied
Allied tried to escape into the arms of Edward J. DeBartolo, the Ohio shopping mall developer, and the investor Paul Bilzerian, who agreed to buy it for $67 a share. Campeau countered with a tender offer at $66, more than $20 above where Allied had traded two months earlier. Then came the October 24 street sweep: he dropped the tender offer and bought 25.8 million shares, mostly from arbitrageurs, for about $1.7 billion. Allied sued, and the Securities and Exchange Commission sided with it on the legality of the tactic, but the court let the purchase stand. The SEC later barred such sweeps. On Halloween, the two sides signed a merger agreement at $69 a share. First Boston had agreed to provide a bridge loan of $865 million, with a Citibank-led syndicate supplying bank financing.
What happened next showed how thin the margin already was. For tax reasons, the merger had to close by December 31, 1986, and Campeau needed about $300 million in equity to put on top of more than $3 billion in debt. He did not have it. Citibank lent his company $150 million that could be contributed as "equity." The other half came, after days of haggling that exasperated nearly everyone involved, from DeBartolo — the rival bidder — as a loan. Allied's shareholder meeting at the Waldorf-Astoria was adjourned repeatedly and finally approved the deal on New Year's Eve. The advisers, lenders and lawyers took about $210 million in fees.
— Robert Campeau, The New York Times, 1988It's the story of my life. When I built my first 10 houses, people said I would go broke. And I've built thousands since. I like to take risks.
In the first year, Campeau did much of what he promised. He announced he would sell sixteen of Allied's twenty-four divisions, and by the end of 1987 he had sold about $1 billion of assets and paid down that much debt ahead of schedule. In March 1987 Allied sold about $1.15 billion of junk bonds and preferred stock to retire First Boston's bridge loan — an offering that, as Fortune noted, sold well even though a Canadian magazine had just published a long article about his breakdowns and his double life.
The operating record was another matter. Thomas Macioce, Allied's chief executive during the takeover, lasted about three weeks after Campeau made him chairman of Campeau Corporation. His successor as president resigned after eight months. For the first nine months of 1987, Allied earned $44 million in operating profit. It paid $244 million in interest.
Project Rose
A prudent owner would have spent the next several years getting Allied right. Campeau went after a company three times its size. In the late summer of 1987 he began planning a bid for Federated Department Stores of Cincinnati, the most prestigious name in American department stores: Bloomingdale's, Abraham & Straus, Filene's, Foley's, Burdines, Lazarus, Rich's, Bullock's, I. Magnin and the Ralphs supermarket chain. In honour of Cincinnati's most famous ballplaying gambler, the project was code-named Rose. In the fiscal year ending January 1988, Federated's divisions operated 238 department stores, employed more than 135,000 people and produced sales of $11.1 billion.
Robert Morosky, the former second-in-command at The Limited whom Campeau had just hired to run Allied, was startled to learn the target so soon after joining. He later told Fortune he warned his boss about the scale of the task and then voted in favour anyway.
— Robert Morosky, Fortune, 1990I told Bob that it would be like acquiring the U.S. Navy. But in the end, I voted yes just like everybody else.
On January 25, 1988, Campeau offered $47 a share for a company whose stock had closed 1987 at under $33. Federated's board refused, sought protection under Ohio's anti-takeover law and looked for a white knight. May Department Stores came close to making a friendly bid but pulled back at the last moment; its chief executive concluded that absorbing Federated was too great a risk. Macy's did not pull back. Finkelstein entered with a bid of his own at the end of February, and the contest the press called "store wars" ran through March.
It was, in hindsight, a textbook case of irrational escalation. Each bid made the next one seem reasonable. The bankers' models — "iterations," in the jargon — kept validating whatever price the two bidders decided they needed to pay, and Campeau's camp would later argue that the price could not have been crazy if a master retailer like Finkelstein had been willing to match it. A public relations consultant working with Campeau at the time told Fortune that he could see his client was going to win or die, and was past being reasonable.
Wasserstein, meanwhile, had left First Boston a week after the bid was launched to found his own firm. Campeau kept both: Wasserstein for advice, First Boston for money. First Boston, stripped of its star dealmakers, had its own reasons to prove it could still finish the biggest deal on the Street. The incentives of everyone around the table pointed in the same direction.
On March 31, as the Federated board prepared to declare Campeau the winner, Macy's raised its bid again. Lawyers pushed for a compromise, and Campeau and Finkelstein met through the night. On April 1, 1988, they announced a settlement: Campeau would buy Federated for $73.50 a share, about $6.6 billion, and Macy's would drop out in exchange for the right to buy Bullock's and I. Magnin for $1.1 billion, plus $60 million for its expenses. Campeau never met the Federated directors face to face. When they finally agreed to meet him, he was on his way to Germany and sent Wasserstein's team instead.
Equity That Was Really Debt
The financing for Federated was baroque, and its structure explains most of what followed. Steven Kaplan, an economist at the University of Chicago who later studied the deal in detail, calculated that the tender offer required $6.71 billion for the shares and fees. Campeau raised it with $3.22 billion of bank loans from a syndicate led by Citibank and Sumitomo, a bridge loan of about $2 billion from First Boston, Dillon Read and Paine Webber — the same Paine Webber he had refused to pay after the Allied deal, until it sued — and $1.4 billion described as equity.
That equity was mostly borrowed too. It included a $500 million bank loan from the Bank of Montreal and Banque Paribas that had to be repaid within a year; a $480 million loan from DeBartolo, who also received a small stake in Federated; and $227 million passed through from convertible debentures bought by Olympia & York, the real estate company of the Reichmann brothers of Toronto. Campeau's actual cash contribution was $193 million, and he got it by selling Brooks Brothers — a division of Allied he had publicly promised to keep — to Marks & Spencer for $750 million. Allied then used the leftover proceeds to buy Federated stock, exploiting loose covenants in its own bonds. Allied's bondholders, who had lent against an income-producing clothing chain and now effectively held a stake in a debt-loaded takeover vehicle, were furious. Counting the debt Federated already carried and treating the borrowed "equity" as what it was, Kaplan found that Campeau financed at least $7.96 billion of an $8.17 billion purchase — more than 97 percent — with debt.
Fortune's arithmetic was even bleaker. After planned divestitures, Campeau expected to keep eleven department store divisions and to carry about $7.9 billion of old and new debt. At a conservative 11 percent blended interest rate, that meant annual interest of about $869 million. In their best years, those eleven chains had produced combined pre-tax, pre-interest profits of about $680 million. The plan required a large, sustained improvement in operations before anything went wrong. Not everyone missed this. Bankers Trust, a major leveraged lender, declined to finance either takeover.
— Charles Sanford, Bankers Trust chief executive, quoted in Fortune, 1990If you look back at transactions gone bad, more often than not the problem was paying too much.
The deal closed on July 29, 1988. The advisers and lenders took home more than $350 million in fees.
Eighteen Months
Almost nothing that followed went according to plan. Within days of securing the money, Campeau told Morosky he would not become chief executive of the combined retail group after all, whatever his contract said. Morosky quit. Campeau's first choice as a replacement, the former Federated vice chairman Allen Questrom, turned the job down because he thought the companies were too leveraged. John Burden III, another former Federated executive, accepted on condition that he would serve only eighteen months.
The asset sales went quickly. Within nine months Campeau sold nine of Federated's fifteen operating divisions for about $4 billion, including Filene's and Foley's to May Department Stores for $1.5 billion and Bullock's and I. Magnin to Macy's. Ann Taylor was sold as well, again despite earlier promises. Kaplan would later calculate that those sales fetched close to 90 percent of what the market had valued all of Federated at before the bid — a sign that the assets were worth more than Wall Street had thought.
The debt market was less forgiving. In the fall of 1988, First Boston tried to sell $1.15 billion of Federated junk bonds at an average rate of about 14 percent. Buyers balked. The offering was cut to $723 million, with coupons raised to 16 and 17.75 percent, leaving the three bridge lenders stuck with roughly $400 million of their loan. Campeau, enraged, began a long hunt for $2 billion or more of mortgage financing to refinance the junk debt entirely. Months later, he was still saying the money was nearly in hand.
The stores themselves deteriorated. Federated had projected about $740 million of earnings before interest, taxes, depreciation and amortization for 1989. It produced $372 million, against $516 million of interest and $111 million of capital spending. Sales were not the main problem; markdowns were. Federated's inventory rose 26 percent between July 1988 and July 1989, and the stores had to push goods out at prices that left little margin. A former executive told Fortune that nobody seemed to be paying attention to execution.
In the spring of 1989 Allied asked the Reichmanns for an emergency $75 million loan. They sent it, and then sent consultants from McKinsey, who reported what the family already suspected: the retailers would not generate enough free cash to service their debt. In September 1989 the Reichmanns agreed to put $250 million into the stores for working capital, and Campeau agreed to put Bloomingdale's up for sale. When the depth of the problem became public that month, Campeau's bonds collapsed and took much of the junk bond market with them. Fortune would argue that the Campeau crisis helped trigger the slide that pushed Drexel Burnham Lambert into bankruptcy in February 1990.
Vendors stopped shipping. Desperate for cash, the stores slashed prices for the 1989 holiday season and dragged competitors, including a highly leveraged Macy's, into a price war. No one wanted to pay a full price for Bloomingdale's. In early January 1990, Campeau Corporation's board, by then heavily influenced by the Reichmanns, stripped Campeau of authority over the retail operations. On January 15, Federated and Allied filed for Chapter 11 in the U.S. Bankruptcy Court in Cincinnati. Some of the last cheques sent to suppliers before the filing bounced.
Federated's own chairman, John Burden, blamed the debt, calling the companies victims of a business climate in which staggering sums could be borrowed for takeovers. The New York Times editorial page was less charitable. It observed that any executive can file for bankruptcy when a business collapses, but that it had taken Campeau's particular talents to bankrupt more than 250 profitable department stores.
What Survived and What Didn't
On August 10, 1990, Campeau Corporation's board removed its founder as chairman and chief executive. In February 1991, the Bank of Montreal asked a court to force him into personal bankruptcy over about $25 million it had lent him to buy shares in his own company. Campeau Corporation sold its Canadian properties to pay creditors and eventually ceased to exist in its old form. Olympia & York, the Reichmanns' company, filed for bankruptcy protection itself in 1992, brought down by the Canary Wharf development in London and the collapse of property values.
The stores did better than their owner. Federated and Allied emerged from Chapter 11 in February 1992 as a single public company, Federated Department Stores, with no ties to Campeau. Creditors owed about $8.2 billion recovered an average of about 72 cents on the dollar. In 1994 the new Federated acquired Macy's, which had gone bankrupt under the weight of its own leveraged buyout. The combined company later renamed itself Macy's, Inc.
Kaplan's study produced the most counterintuitive verdict. Measured from the end of 1987 to the emergence from bankruptcy, and adjusting for the stock market, the value of Federated's assets had risen by about $1.6 billion in 1987 dollars. The divisions Campeau sold fetched strong prices, and the company emerged better managed than before. In Kaplan's terms, Federated had been financially distressed rather than economically distressed. The takeover had created value and still could not pay its debts. The people who had lent Campeau the money and the vendors who shipped to him on credit absorbed the loss; Federated's original shareholders, who sold at $73.50, did very well.
Campeau himself left for Europe. His assets had largely been placed in his wife's name. He lived for a time in Austria and attempted a comeback with a residential development at Teltow, near Berlin, which failed amid conflicts with its lenders. He and Ilse separated, and a bitter divorce and a series of lawsuits followed for years. He returned to Ottawa, where his lawyer said he suffered another breakdown and spent months in treatment. In 2003 he floated a gated community west of Kanata. It did not restore him. He married a third time, to Christel Dettmann, and spent his last years in a rented townhouse — a small version of the thousands he had once built. He died at home in Ottawa on June 12, 2017, at ninety-three.
His Ottawa obituary listed Place de Ville, Les Terrasses de la Chaudière, the Harbour Castle and Scotia Plaza, and the more than 25,000 homes. American obituaries led with Bloomingdale's. Both records are accurate, and the tension between them is the lesson: the first was built one house at a time over four decades, and the second was assembled with other people's money in less than two years.
Part IIThe Playbook
Robert Campeau's career divides cleanly into two halves: four decades of building, in which he was careful about costs and bold about scale, and three years of acquiring, in which the boldness remained and the care disappeared. The principles below are drawn from both halves. Some describe what made him formidable. Most describe what destroyed him, stated as positive rules so they can be used.
The principles
- 1.Build a repeatable product before you build an empire.
- 2.Know which game your method was built for.
- 3.Size debt to the worst year, not the best.
- 4.Count borrowed equity as debt.
- 5.Fix the first acquisition before buying the second.
- 6.Set a walk-away price before the auction starts.
- 7.Discount advice from people paid to close.
- 8.Keep the promises that underpin your financing.
- 9.Hire operators and let them run the business.
- 10.Watch inventory and margins, not just sales.
- 11.Separate a good asset from a good capital structure.
Principle 1
Build a repeatable product before you build an empire.
Campeau's Ottawa business worked because it was a machine. He built plain houses from standard templates, priced them for young families, finished them quickly and used each completed subdivision to finance the next. The product was repeatable, the demand was structural — a growing civil service that needed somewhere to live — and the quality was consistent enough that "a Campeau-built house" became a national phrase.
That foundation is what allowed him to move into office towers, government complexes and the Toronto waterfront. Each step up in scale rested on a process he understood from the ground: land, permits, crews, materials, financing, sale. His early leverage was tolerable because the underlying operation was predictable and he knew every moving part of it.
The lesson is sequencing. The ambition that later ruined him was the same ambition that built Ottawa's suburbs, but in the first half of his career it was disciplined by a product he could repeat and measure.
Tactic: Before you expand, write down the unit you are repeating — the house, the store, the contract — and its cost, cycle time and margin. If you cannot describe it in those terms, you are not ready to scale it.
Principle 2
Know which game your method was built for.
Campeau's thesis for buying Allied was a developer's thesis: department stores would serve as anchors for his malls, and the chains' property was worth more than the market recognised. Parts of that were right. The real estate and the divisions were valuable, as the prices he later got for them showed.
But a department store is an operating business before it is a building. Its value depends on buying the right merchandise, turning inventory, controlling markdowns and keeping customers coming back season after season. A tower with signed leases produces predictable rent; a store with the wrong stock on the floor produces losses. Campeau had no retail experience, and the parts of the business he did not understand were the parts that determined whether the debt got paid.
The concept of a circle of competence is often misread as "stay in your lane." The sharper version is: know where your method stops working. Campeau could have been a superb buyer of retail real estate. He became a poor operator of retail businesses.
Tactic: When entering a new industry, list the three variables that most determine cash flow there. If your edge from your old industry does not touch at least one of them, hire or partner for it before you commit capital.
Principle 3
Size debt to the worst year, not the best.
The simplest indictment of the Federated deal is Fortune's arithmetic. At a conservative interest rate, the combined debt would cost roughly $869 million a year. The chains Campeau intended to keep had never earned more than about $680 million before interest in their best years combined. The plan did not merely require things to go well; it required them to go better than they ever had, immediately and continuously.
Department stores are cyclical. A recession, a bad season or a price war can take a large bite out of profits in a single year. A capital structure that works only at peak earnings has no margin of safety at all. When Federated's 1989 cash earnings came in at half its projection, the gap to interest payments was unbridgeable.
Leverage of this kind also changes behaviour. A company that cannot miss a payment starts selling assets at bad moments, cutting prices to raise cash and deferring the investments that keep stores attractive — which further weakens earnings. The debt becomes a cause of the operating decline, not merely a burden on top of it.
Tactic: Stress-test any borrowing against your worst trailing year of operating profit, not your forecast. If interest coverage falls below 1.5 times in that case, reduce the debt or walk away.
Principle 4
Count borrowed equity as debt.
On paper, the Federated deal included $1.4 billion of equity — a large cushion by the standards of the time. In practice, almost all of it was borrowed: a one-year bank loan, a loan from DeBartolo, pass-through money from the Reichmanns' debentures, and $193 million that came from selling Brooks Brothers out of Allied. Kaplan's calculation that more than 97 percent of the purchase was debt-financed is what you get when you look through the labels.
The distinction matters because equity is supposed to absorb losses without forcing a crisis. Borrowed equity does the opposite: it adds another set of maturities and covenants, often short-dated and expensive. The one-year Bank of Montreal and Paribas loan is what forced the rushed sale of Ann Taylor.
Lenders who accepted the headline equity figure without tracing where it came from were lending into a structure much riskier than it appeared.
Tactic: For any deal, trace each dollar of "equity" to its ultimate source. If it was borrowed anywhere in the chain, move it to the debt column and recompute leverage and maturities before deciding.
Principle 5
Fix the first acquisition before buying the second.
By the end of 1987, Allied was the only evidence Campeau's lenders had of how he ran a retailer, and it was not reassuring. He had cycled through three chief executives in less than a year. Operating profit for nine months was $44 million against $244 million of interest. His asset sales were ahead of schedule, but the remaining business was not yet working.
Rather than spend two or three years proving that Allied could service its debt, he launched a bid for a company three times its size. That compounded the problem in two ways. It stretched a management team that had not yet stabilised the first company, and it tied the two companies' fortunes together through cross-holdings and shared financing, so that trouble in one would infect the other.
Serial acquirers who succeed tend to integrate each purchase and demonstrate its cash flows before moving to the next. The pause is where the learning happens.
Tactic: Set a rule that no new acquisition may be launched until the previous one has hit its planned operating cash flow for at least four consecutive quarters.
Principle 6
Set a walk-away price before the auction starts.
Campeau opened at $47 a share and finished at $73.50. Along the way, every raise was justified by the one before it and by the existence of a rival bidder. His advisers' models obligingly produced whatever answer the bid required. A consultant close to him at the time said he had stopped being reasonable; he intended to win.
May Department Stores provides the useful contrast. Its board had gathered to approve a white-knight bid for Federated, and its chief executive, after studying the task, told the directors he would not recommend it. That is what a walk-away price looks like in practice: a decision made before the emotion of the contest takes over, and honoured when the moment comes.
Auctions reward the bidder with the most optimistic assumptions, which is another way of saying they tend to punish the winner.
Tactic: Before bidding, write down your maximum price and the specific assumptions that justify it, and give that document to someone with authority to stop you. Any raise above it requires new facts, not a new rival bid.
Principle 7
Discount advice from people paid to close.
The Allied deal generated about $210 million in fees; Federated generated more than $350 million. Investment banks competed to lend bridge money because doing so won them the far larger advisory and underwriting fees. First Boston, having just lost its star dealmakers, wanted to prove it could still complete the biggest deal on Wall Street. Paine Webber joined the Federated bridge loan to establish itself in that business, after Campeau had refused to pay it for Allied.
None of this required anyone to be dishonest. It required only that nearly everyone around Campeau was rewarded for completion and very few were rewarded for saying no. The one institution in Fortune's account that declined to take part in either deal, Bankers Trust, was notable precisely because it stood apart.
When the people advising you are paid on completion, their confidence carries information about their fees as much as about your deal.
Tactic: For any major transaction, pay at least one adviser a flat fee regardless of outcome, and ask that person specifically for the case against doing the deal.
Principle 8
Keep the promises that underpin your financing.
Campeau told the market he would keep Brooks Brothers and Ann Taylor as the jewels of Allied. He sold both within about two years. He used Allied's bond covenants to move sale proceeds into Federated stock, leaving Allied's bondholders holding a stake in a debt-laden takeover instead of a profitable clothing chain. He refused to pay Paine Webber's contracted fee until it sued. He told Morosky he would be chief executive, then reversed himself days after the Federated money was secured.
Each of these moves solved a short-term problem. Together they taught lenders, partners and executives that his commitments were provisional. That reputation became costly in the autumn of 1988, when First Boston could not sell Federated's bonds at the planned rates, and in 1989, when he needed lenders and vendors to extend him the benefit of the doubt.
In highly leveraged businesses, reputation is a financing asset. It determines whether creditors roll over debt, whether suppliers keep shipping and whether good people agree to work for you.
Tactic: Keep a written list of the public commitments you have made to lenders, partners and executives. Before breaking any of them, estimate what it will cost you in future financing terms, not just what it saves now.
Principle 9
Hire operators and let them run the business.
Campeau knew he needed experienced retailers. He hired them and then undermined them. Macioce lasted weeks; his successor at Allied, months. Morosky was pushed out before he took the job he had been promised. The executive Campeau most wanted to run Federated, Questrom, declined because of the leverage. After the bankruptcy, Federated's new chairman recruited Questrom, who went on to lead the company's recovery.
The pattern suggests an owner who valued control more than competence. Campeau had spent a lifetime as the person who knew the most about his projects. In retail he was not, and he struggled to accept a senior team whose judgement he could not override on the basis of his own experience.
Owners who enter unfamiliar businesses succeed when they set clear financial constraints, pick strong operators and give them room. The owner's job is capital allocation and governance, not second-guessing merchandising.
Tactic: When you buy a business outside your expertise, write a one-page charter for its chief executive that defines what they decide alone, and commit to leaving it unchanged for at least two years.
Principle 10
Watch inventory and margins, not just sales.
In 1989, Federated and Allied were broadly meeting their sales projections. That made the collapse look puzzling from the outside. The damage lay underneath: inventory at Federated rose 26 percent in a year, and the stores cleared the excess through markdowns and promotions that left the extra sales nearly profitless.
This is a common failure in retail and in many other businesses under pressure. Sales are the most visible number and the easiest to defend in a board meeting. But when working capital balloons and gross margins erode, rising sales can coexist with a business that is running out of cash. For a company with no room in its debt service, that combination is lethal.
The Christmas 1989 price war made the point explicit: cutting prices to raise cash produced revenue while destroying the margins that were supposed to pay the interest.
Tactic: Put inventory turnover, gross margin and cash conversion on the first page of every management report, above revenue. Treat a rise in inventory that outpaces sales as an alarm.
Principle 11
Separate a good asset from a good capital structure.
Steven Kaplan's study of Federated reached a conclusion that surprised many people: the assets were worth more after the Campeau saga than before it. The divisions sold for strong prices, and the reorganised company emerged better run. The deal failed because the debt was due before the value could be realised, and because a small shortfall had nowhere to go.
This distinction cuts both ways. It means Campeau's instinct about the underlying value was not foolish. It also means being right about value is no protection if the financing requires you to be right on a particular timetable. Investors who confuse the two tend either to dismiss good assets because of a failed structure or to overpay for good assets with a structure that cannot survive a bad year.
The practical question is always two questions: what is this worth, and can I hold it through the period in which that worth is uncertain?
Tactic: Evaluate every investment twice — once for asset value, once for survivability — and require a passing grade on both. If the structure only survives in the base case, change the structure or the price.
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Part IIIMaxims
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The outsider's chip is fuel, not a map. Resentment of an establishment that shut you out can drive extraordinary effort. It is a poor guide to which deals to do.
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Fees are a vote on activity, not on wisdom. A room full of people who get paid when the deal closes will reliably find a reason for it to close.
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Speed of acquisition is not speed of understanding. Campeau could take control of a company in thirty minutes. Learning how to run it took longer than his lenders gave him.
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Every covenant loophole you exploit today is a rate you pay tomorrow. Bondholders remember, and they price what they remember.
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Bounced cheques land on the smallest creditors. In any collapse, the vendors and employees with the least bargaining power usually absorb the damage first.
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Losing an auction is often the win. The bidder who stops at a disciplined price rarely makes headlines, and rarely makes bankruptcy filings either.
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An empire built in months can take decades of reputation with it. Forty years of homes and towers were overshadowed by eighteen months of owning Federated.
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Structure decides who survives the same facts. Federated's stores lived on under new owners; the man who bought them did not.
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Lenders' optimism is not your margin of safety. That banks will fund a deal tells you about the credit market, not about whether the deal can pay them back.
In Their Own Words
I don't need to know how to sell dresses. I need to know how to manage assets and generate returns for shareholders.— Robert Campeau
Bob Campeau was a brilliant real estate developer, but he fundamentally misunderstood that retail is about inventory turns, margin management, and customer relationships—not just real estate values.— Allen Questrom, former Federated CEO
I don't think small. When I see an opportunity, I see it in its full potential, not just what it is today.— Robert Campeau
The difference between successful people and everyone else isn't intelligence or luck—it's the willingness to take risks that others won't take.— Robert Campeau
I've never been interested in being the biggest fish in a small pond. I want to compete where the stakes are highest and the rewards are greatest.— Robert Campeau
Debt is not a burden—it's a tool. Used properly, it allows you to control assets worth far more than your equity investment.— Robert Campeau
I don't need to own everything outright. I just need to control it and extract value from it.— Robert Campeau
The key to building wealth is using other people's money to acquire appreciating assets. Your own money should be reserved for opportunities that others can't finance.— Robert Campeau
Real estate is the foundation of all wealth. Everything else—stocks, bonds, businesses—can disappear overnight. But land and buildings endure.— Robert Campeau
The three most important factors in any investment are location, location, and location. Everything else can be fixed or improved.— Robert Campeau
Most people see buildings and think about rent rolls. I see buildings and think about what they could become.— Robert Campeau
Good management is about setting clear objectives and holding people accountable for results. The specific industry knowledge can be hired.— Robert Campeau
Every business is ultimately about cash flow and asset values. Master those fundamentals and you can succeed in any industry.— Robert Campeau
I've never worried about what my competitors are doing. I focus on what I can control: my assets, my financing, and my execution.— Robert Campeau
The market rewards those who can see value where others see only problems. Every crisis contains opportunity for those prepared to act.— Robert Campeau
You can't achieve extraordinary results without taking extraordinary risks. The only real failure is not trying at all.— Robert Campeau
I've never regretted taking a risk, even when it didn't work out. I've only regretted the opportunities I didn't pursue.— Robert Campeau
Success and failure are often separated by timing and circumstances beyond your control. What matters is having the courage to make bold moves when opportunities arise.— Robert Campeau
When everyone else is being conservative, that's when the best opportunities emerge. Fear creates bargains for those bold enough to act.— Robert Campeau
Further reading
- Going for Broke: How Robert Campeau Bankrupted the Retail Industry by John Rothchild
