There were many public successes in the venture capital industry as the 70s came to a close and the decade of the 80s began. During the 80s there was a huge increase in the activities and growth of VC investment firms. In the early 80s there were only a few dozen of these firms but by the end of the decade there were over 650. Each of these VC firms was all looking for the next “big deal.” However, even though the firms increased greatly numerically, the capital that was actually managed by the firms only increased by 11%. Over the entire decade, the capital managed by these firms only rose from around $28 billion to $31 billion.
Although the VC industry enjoyed great growth it was hindered by declining returns and for the first time some firms began posting losses. Everything settled down in the middle of the 80s just before the 1987 crash of the stock market. During this time foreign corporations specifically from Korea and Japan began to pour capital into early stage companies. Most of the VC firms wisely chose to put this capital into businesses that were closely related to their areas of specific expertise primarily in the technology industries and acquired companies that had already reached a certain level of maturity. In 1989, one of the most disastrous transactions that occurred was the leveraged buyout (LBO) of Prime Computer by J.H. Whitney & Company. This particular investment on the part of Whitney ended up being nearly a complete loss since the major portion of the proceeds of the liquidation ended up going to pay company creditors.
Hostile Takeovers and the Corporate Raiders
Even though many of the buyout firms had good intentions and were useful, they were considered to be the “corporate raider” who appeared in the 80s. These raiders were known for making hostile bids which were attempts to take over a business that were opposed by the management. Private equity firms usually try to make a deal with the company’s CEO and the board but many times during the 80s they found themselves allying with managements who were being pressured by corporate raiders. Both of these groups purchased companies using leveraged buyouts (LBO) and both of them heavily relied on “junk bond financing.” Each of these usually sold off the company’s major assets, slashed the costs of operating the company and laid off employees. In the public’s eyes the two groups were the same. Many times larger corporations which were publicly traded tried to resist these forms of hostile takeover by developing defense mechanisms called “poison pills,” or by making the company’s balance sheet reflect large levels of debt.
Headed Toward a LBO Bust
Toward the end of the 1980s one of the last major buyouts actually became the beginning mark of the bust that was about to occur. Many have referred to the $31.1 billion takeover of RJR Nabisco as the beginning of the end. In 1989, KKR closed the takeover of Nabisco and at that time it was the largest LBO in business history. The huge financial event was described in detail in a book Barbarians at the Gate: the Fall of RJR Nabisco.
By the time the 80s were coming to the end the excesses and abuses of the buyout market were starting to be obvious. There were several large buyouts that ended in bankruptcy. Because many of the LBOs were unwelcomed many companies began to develop self defense procedures like the poison pill so that if there was a hostile takeover they could self destruct the company purposefully. Nabisco was certainly one of the more notable deals along with the buyout of Prime Computer by J.H. Whitney. The popular makeup company, Revlon was also purchased during this time for $2.7 billion. However this buyout was a burden since it was riddled heavily by debt. They ended up splitting the divisions of the company and selling them separately.
End of the 80s
After the stock market collapse in 1987 and in response to changes in the VC world, many VC corporations began to close out their venture capital units. General Electric and Paine Webber were among these. Many other companies began shifting focus from providing business funding for start up businesses to investing in more mature companies.