Am I Being Too Subtle?: Straight Talk From a Business Rebel

by Sam Zell

If I was building a new home for my family, same thing. We never had to account to each other for anything we spent. Bob and I both saw business as a puzzle to be solved, and we both had an insatiable intellectual curiosity.

We abandoned all pretense and established a casual-dress office policy—which, believe me, was unheard of in the rigid world of finance in the 1970s. We invented business casual.

Our thinking was that if you dress funny and you’re great at what you do, you’re eccentric. But if you dress funny and you’re just okay at what you do, you’re a schmuck. We were determined to show everyone that we could excel without conforming.

look. In fact, I never read one agreement. Bob, on the other hand, read every document, every word.

I’ll never forget sitting there. It was around five o’clock at night and getting dark. A very lonely feeling. But I turned to the IRS investigator and said, “Look, I told you the truth. I’m not going to lie or create a story for you. I am simply a deal guy who relied on his tax attorneys.”

By the early 1970s, my investment thesis, focusing on high-growth, small cities, had run its course. The investment community at large had caught on to the idea, and these cities were drawing new competing capital for assets, thereby lowering cap rates (the rate of return based on expected income) and making real estate in these markets more expensive. In response, for a short time, I shifted from buying existing assets to financing new property development. Different than serving as a developer who assumes all the risk for a project, I fed the equity step-by-step, based on measurable milestones.

By 1973, I was starting to realize that the supply-and-demand equilibrium of commercial real estate was getting way out of whack.

We had completed it in 1971, and within one year it was fully occupied. But by mid-1973, there were six other apartment buildings under construction around the property.

So lenders in the 1970s were often making loans at face rates significantly less than inflation. They justified this based on

market share and maintaining staff. Classic institutional, bureaucratic mentality.

This has always been a fatal flaw in U.S. real estate: the volume of development has been related to the availability of funds, not to demand. The industry has a long history of overbuilding

stopped buying assets, started accumulating capital, and got ready for what I was sure would be the greatest buying opportunity of my career thus far. My thesis was that over the next five years, we would have the opportunity to make a fortune by acquiring distressed real estate. So I established a property management firm, First Property Management Company (FPM), to focus on distressed assets.

Everyone thought I was nuts. After all, occupancies were still over 90 percent. Absorption was high. Companies were hiring. It was one of many times I would hear people tell me that I just didn’t understand.

To me, that is the essence of being an entrepreneur—to not just recognize problems but to provide solutions.

were ready. There was so much supply and opportunity we branched out from apartments into retail and office buildings. Between 1974 and 1977, we bought roughly $4 billion in assets with $1 down and a hope certificate.

First, they had to be available below replacement cost.

Overall, it was the creation of an enormous amount of nonrecourse, fixed-rate debt (in some cases three to four hundred basis points, or 3 to 4 percent) below inflation.

What I didn’t envision was that the country would elect Jimmy Carter. As a result, everything he did raised inflation. So we made a lot more.

During this period, I wrote an article for Real Estate Review called “The Grave Dancer.” My use of the moniker in the title was meant somewhat facetiously and probably inaccurately. I wasn’t so much dancing on graves as I was raising the dead. As I wrote:

One of my favorite parables is about a man named Moishe. He was an observant Jew who owned an appliance store in Brooklyn. For years Moishe was very successful, but then

people started moving out of the neighborhood, and soon his business was struggling. So one Saturday at temple, Moishe prayed for help. “God, I’ve never asked you for anything, and I’ve always been very devout. But I’ve got a problem. My business is dying. God, I need to win the lottery.”

Then from on high came the voice of God: “Moishe . . . You’ve got to buy a ticket!” The moral of the story of course is that it’s hard to get a hit if you don’t step up to bat.

So I created a simple Lucite block engraved with “We Suffer From Knowing the Numbers.” It relayed our frustration with a fundamental truth.

But “knowing the numbers” means having the discipline to listen to them—even if they’re not telling you what you want to hear.

of a sudden, any owner could hire an MBA with an HP-12C to run ten years of cash flows, none of which considered recessions or rent dips, and make an elaborate and sophisticated case for investment—and a bunch of eager investors would show up to check out the property.

So we set a goal that we would diversify our investment portfolio to be 50 percent real estate and 50 percent non–real estate by 1990.

The low-tech manufacturing and agricultural chemical industries were perfect fits for us—the former driven by Bob with his expertise in engineering and passion for anything mechanical.

my second marriage, to Sharon, in June 1979. Janet and I had divorced four years earlier, and maintained a relationship, sharing our kids and eventually our grandkids.

met Sharon on a blind date by way of a friend and business associate who was convinced we’d do well together. Sharon was a beauty queen—Miss USA, actually—from Louisiana.

I told her that I had the Sunday New York Times puzzle in my hotel room and asked her if she wanted to come back with me to do it. She misconstrued my meaning. But that really was exactly what I meant. So we ended up by the hotel...

Our largest subsidiary under GAMI was Eagle Industries, which was a collection of dull-tech (as opposed to high-tech) companies, like air conditioner manufacturers.

Frankly, there’s no substitute for limited competition. You can be a genius, but if there’s a lot of competition, it won’t matter. I’ve spent my career trying to avoid its destructive consequences. Competition skews people’s assessments; as buyers get competitive, the demand for assets inflates pricing, often beyond reason.

flamboyant company, known for its corporate excess. The management threw lavish parties, filled the drinking fountains at headquarters with Perrier, installed Persian rugs in the executive offices, and gave massive bonuses to senior executives. Even while the company was struggling, it sent its sales staff on a $1.5 million Caribbean cruise.

In 1981, Itel was one of the largest bankruptcies in the history of the country. It emerged from Chapter 11 in 1983 with its container-leasing and railcar-leasing businesses at its core, $450 million in NOLs, and a break-even cash flow.

Being no stranger to rejection, I parted amicably and continued to buy stock, increasing our ownership to 22 percent.

This led to a reconsideration by the board, and in April 1985, I was elected chairman and CEO. Up to that point the company had been run by a trustee from the bankruptcy days who then became the CEO.

Itel had three divisions: freight containers, railcars, and miscellaneous. In the miscellaneous category was a hodgepodge of orphaned equipment and leasing contracts. Since we needed capital, the first goal was to liquidate all the miscellaneous stuff. We did, for about $50 million.

We bought number three, and then we bought number seven and became number one.

Redundancies are much more predictable and transparent than theoretical opportunities to add value. My focus is always on the downside. Overly optimistic assumptions lead to the graveyard of corporate acquisitions.

In a single year, 1979, the industry had built over 100,000 railcars.

I don’t think you need a degree from MIT to follow the two lines: demand was flat, supply was going down.

Railcars were available at half or less the cost to create them (replacement cost).

One of our Itel transactions in 1988 included the Pullman Company, one of the largest assemblages of grain and tank railcars in the country. In order to make the deal work, we had to acquire the seller’s 17 percent interest in Santa Fe Southern Pacific Corporation, and that meant a seat for me on that company’s board.

It’s hard to imagine someone like me being added to a board that had been reconstituted through the 1983 merger of Santa Fe and Southern Pacific and included directors of both companies. There were thirty directors. Thirty! At the time, boards like this were populated by people with good resumes who were often past their prime. Picture row upon row of conservative older white guys in dark suits. To say the least, when I’d show up for a board meeting with my motorcycle helmet under my arm, it created a significant contrast between me and the establishment.

Oddly enough, the same individual was named as the successor for each executive position.

Our board meetings are often raucous, with frequent interruptions, questions, and commentary. As a result, our companies have always benefited from the combined wisdom of our directors.

My experience with Santa Fe also gave me a heightened awareness that companies absolutely need engaged owners.

It has never occurred to me to question whether I should do something simply because I haven’t done it before. One of my favorite examples of this was Itel’s acquisition of Anixter, a wiring and cable distribution company, in 1987.

In November 1986, I got the call from Merrill Lynch telling me that Alan Anixter wanted to sell his company, Anixter Brothers, at the

fixed price of $14 per share, two times the company’s book value.