Leucadia National Corporation Business Information, Profile, and History

Company Perspectives:

The Company concentrates on return on investment and cash flow to build long-term stockholder value rather than emphasizing volume or market share. Additionally, the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. In identifying possible acquisitions, the Company tends to seek assets and companies that are troubled or out of favor and, as a result, are selling substantially below the values the Company believes to be present.

History of Leucadia National Corporation

A holding company, Leucadia National Corporation owns businesses ranging from insurance to telecommunications. Although the roots of Leucadia National stretch back to 1854, Leucadia began to grow through acquisitions in 1980, and from that year forward purchased companies that increased its financial magnitude. Through the course of the company's growth during the 1980s, it became heavily involved in the insurance business, specifically commercial and personal property and casualty insurance, as well as health and life insurance. In addition to these businesses, Leucadia National also owned significant interests in banking and lending, trading stamps, bathroom vanities manufacturing, and motivational services. By the 1990s, the company's acquisition strategy had elevated revenues over the billion dollar mark. But Leucadia's ability to capitalize on its investments appeared to be slipping with its entry into the telecommunications business in the early 21st century.

A Hundred Twenty Years in the Making: 1850s-1970s

Both the Leucadia name and the corporate strategy that engendered its exponential increase in revenues emerged in 1980, but the foundation from which Leucadia was built was formed more than a century earlier, in 1854, when James Talcott, Inc. was established. James Talcott, Inc., incorporated 60 years after it was created as a factoring concern, generated revenue initially by accepting accounts receivable from companies involved in the textile industry and using those accounts as security to provide short-term loans. James Talcott, Inc.'s importance to Leucadia, however, did not arise until the company evolved into a more diversified concern, when it began acquiring numerous financial institutions during the 1950s and 1960s, becoming, in 1968, Talcott National Corporation, a company engaged in commercial financing, real estate mortgage financing, equipment financing and leasing, factoring, and consumer financing.

Shortly after Talcott National came into being, the seeds for Leucadia's emergence were sown. In the early 1970s the company launched an imprudent diversification into insurance, fire engines, leather processing, and machine parts that led to a $20 million loss in 1972. Although the company attempted to recover, the losses resulting from the early 1970s saddled Talcott National with mounting debt. From 1972 to 1977 these losses amounted to $355 million, and the company began to flounder, reeling from successive, unprofitable years during the decade.

Although the company was on the brink of failure, several Utah businessmen, led by a Salt Lake City investor named Brooke Grant, believed they could extricate Talcott National from its financial malaise. The investors formed Uintah National Corp. in 1976 to purchase a controlling interest in Talcott National. They borrowed $6.9 million to buy 1.6 million Talcott National shares, which gave them a 53 percent stake in the company. Grant set out to rebuild Talcott National. Within a year of assuming control of the company, Grant enlisted the help of a young, respected businessman named Ian M. Cumming, who was president of a Utah-based land development company and who would soon become the chief architect of Leucadia's creation.

While working at New York-based Carl Marks & Co., a specialty Wall Street firm active in leveraged buyouts and venture capital, Cumming convinced his company to invest $1.5 million in a small land development company in Utah named Terracor. The company's investment, however, began to sour in the early 1970s, when a deteriorating market for second homes negatively affected Terracor's business, so the Wall Street investment firm sent Cumming to Utah in 1971 to help Terracor effect a recovery. Cumming became president of Terracor within several months after his arrival, then began cutting the company's expenses and repositioning its role in the housing market.

Although Terracor continued to lose money, incurring more than $100 million in debt during the decade, Cumming's talents gained Grant's attention, and he called Cumming, asking for his help in restoring Talcott National's financial health. Cumming was elected as Talcott National's chairman and president in mid-1978. Cumming's leadership of the company was open to much debate several years later, when two lawsuits were filed against him. Once Cumming assumed stewardship of the company, he decided against the plan he and Grant had originally formulated to sell a large group of Talcott National's assets to pay off its debt. Instead, he decided to sell the portfolios of the company's commercial loan offices piece by piece, enlisting the help of Carl Marks & Co. in New York, and recruiting a former Harvard Business School classmate and vice-president at Carl Marks & Co., Joseph S. Steinberg, to assist him in his endeavors at Talcott National.

Acquisition Acumen: 1980s

Once Cumming and Steinberg were together at Talcott National they began engineering a plan to take over the company. They convinced Talcott National's creditor banks to approve a restructuring plan in 1979, then formed a partnership with Carl Marks & Co. and Stern & Stern Textiles, a textiles company that Steinberg had helped acquire while at Carl Marks & Co. Named TLC Associates, this partnership included Cumming, Steinberg, John W. Jordan II, a former Carl Marks vice-president, and Lawrence D. Glaubinger, Stern & Stern's chairman. After some initial disagreements between Cumming and Grant, TLC purchased Uintah and thereby a controlling interest in Talcott National, paying Grant slightly more than $900,000 and two of his remaining partners $28,000 to assume Uintah's $7.4 million in debt.

Several years later, in 1982, after Talcott National had become Leucadia and the company's stock began to soar, Grant filed a lawsuit against Cumming, accusing him of breach of contract and violations of fiduciary duty and security laws. Grant claimed he had not been paid the fair market value for his shares in Talcott National and that he had never received an additional payment he and Cumming had agreed upon in a peripheral deal during the TLC-Uintah negotiations, accusations that Cumming denied were true.

As this legal battle intensified, Cumming and TLC became the object of another lawsuit that same year, when Senior Corp., Terracor's main creditor, demanded Leucadia stock as partial payment of the more than $100 million debt Terracor owed. Senior Corp. charged that Cumming, who was still president of Terracor while he was working for Talcott National, had used Terracor funds to loan Grant $200,000 after his arrival at Talcott National, and had used Terracor time to negotiate for and acquire Talcott National, which entitled Senior Corp., according to its argument, to a portion of Leucadia.

Both of these cases were settled within the next two years. In the dispute with Grant, Cumming was ordered to pay $4.5 million, which he obtained from Leucadia, and in the lawsuit involving Senior Corp., Cumming and his associates retained their shares in Leucadia and gave Senior Corp. approximately half of the properties owned by Terracor, properties that were worth roughly $20 million at the time.

Part of the underlying reason both Grant and Senior Corp. had pursued their lawsuits against Cumming was attributable to the rapid success Leucadia had enjoyed during its first several years under Cumming's and Steinberg's guidance. From 1980 to 1984, the year the last of Cumming's legal disputes were concluded, the two partners had boosted annual sales at Leucadia from $39 million to $232 million. Essentially all of this growth had been realized through acquisitions orchestrated by Cumming and Steinberg.

In 1980, after changing Talcott National's name to Leucadia National Corporation, Cumming and Steinberg sold the company's factoring unit, James Talcott Factors Inc., the 126-year-old remnant of James Talcott, Inc., to U.K.-based Lloyds & Scottish Ltd. for approximately $123 million. Once divested of the company's factoring unit, Cumming and Steinberg set out to expand Leucadia's operations through acquisition, a strategy they would employ throughout the decade and one they first put into practice in December 1980.

For Leucadia's first acquisition, Cumming and Steinberg selected American Investment Company, owner of a small-loan company and a life insurance firm, which combined were much larger than Leucadia. To finance the acquisition, Leucadia arranged for American Investment to purchase the net assets of Leucadia's consumer finance company, for which Leucadia received $94 million, and then used the money obtained from this sale to purchase American Investment for $73.6 million. Leucadia then made three significant investments in 1982 by first purchasing a 57 percent interest in TFI Companies, Inc., then becoming a 50 percent partner in a newly formed private investment firm managed by John Jordan II, called The Jordan Company. The third investment was the acquisition of Terracor, the company that had originally brought Cumming to Utah. Leucadia purchased the remainder of Terracor after the settlement with Senior Corp. for $5.9 million.

By 1984, Leucadia's partnership in The Jordan Company had given it an interest in ten companies, which added $4.8 million to the company's earnings total for the year. Its most profitable achievement for the year, however, and a striking example of Cumming's ability to generate cash through aggressive corporate tactics, involved an attempted acquisition of Avco Corp., a defense supplier as well as a financial concern. Over a five-month period, Leucadia spent $77.5 million to acquire a 12 percent stake in Avco, then made a $930 million bid for the company. Not wishing to sell, Avco's management decided to buy back the stock Leucadia had acquired for $100 million. This by itself gave Leucadia a $22.5 million profit, but Cumming had secured an agreement with Avco that stipulated if Avco was acquired by another company within a year, then it would pay Leucadia the per-share difference between the price Avco's acquirer paid and the price Avco paid Leucadia to buy back its stock. Within the agreed upon time frame, a company named Textron acquired Avco for $50-a-share, $14.25 more per share than Avco had paid Leucadia, which gave Cumming's company an additional $39.8 million in profit.

By the mid-1980s, among the host of companies Leucadia either owned or maintained an interest in, the corporation's two principal operations were a small-loan company named City Finance, which James Talcott, Inc. had purchased in 1966, and Charter National Life Insurance Company, an insurance firm that sold single-premium life policies. Leucadia's investments were strengthened considerably in 1988, when Leucadia increased its interest to 64 percent in PHLCorp., a company it became involved in during a failed takeover four years earlier. One of PHLCorp.'s main operating properties was The Sperry & Hutchinson Company, Inc., which was later divided into two divisions after Leucadia increased its ownership of PHLCorp. These two divisions were organized as a trading stamp business and motivation services business, which designed and managed incentive programs. The other main operating property belonging to PHLCorp., and the company that enriched Leucadia's insurance holdings, was Empire Insurance and its then 85 percent owned affiliate Allcity Insurance Co. Based in New York and primarily serving the New York City metropolitan area, Empire wrote property and casualty policies, which broadened the scope of Leucadia's insurance operations and added assets to the company valued at more than $200 million. By this time, at the end of 1988, Leucadia was generating roughly $735 million in annual revenues and well on its way toward recording a $1 billion increase in its sales volume in a decade.

Big Deals: 1990s

An enormous step toward that direction was achieved in 1991, when the company acquired Colonial Penn Group Insurance Co. from FPL Group for $150 million. Leucadia's third insurance company, Colonial Penn was a direct marketing insurance company that became an integral component of the company's life insurance business and a nationwide provider of private passenger automobile insurance and homeowners insurance.

The addition of Colonial Penn helped elevate Leucadia's revenues to $1.57 billion in 1992, up from $1.08 billion recorded the year before, and a tremendous increase from the $39 million generated in 1980. By the conclusion of 1993, after 15 years of Cumming's and Steinberg's leadership, the value of Leucadia had increased considerably. The net worth of the company at year's end was $907.8 million, or $32.54 per share, compared to negative $0.22 in 1978 when Cumming and Steinberg assumed management of Talcott National. Leucadia's stock price also demonstrated commensurate growth, soaring from $0.16 in 1978 to $41 by 1993.

As the company planned for the future, it focused on increasing the profitability of its investments rather than increasing their market share or magnitude, a corporate philosophy that Cumming and Steinberg believed, as they wrote in a letter to the company shareholders in 1993, conformed to "the theory that the world can tolerate many mice, but few elephants." Operating according to this strategy, Leucadia looked for further growth in the 1990s.

By the mid-1990s, Leucadia's strategy and success had lent to comparisons with Berkshire Hathaway by some but not all followers of the company. "Where's the similarity to Warren Buffett's outfit? Both companies have at their core an insurance company that uses its assets to place big investment bets. Leucadia's bets, however, are less blue chip than Berkshire's. Leucadia recently bought 7 percent of Rockefeller Center Properties, the REIT that owns the mortgage to the famed Manhattan property. This stock is so dicey several other vulture investors have looked at it and passed," wrote Riva Atlas for Forbes.

Leucadia hit pay dirt with Colonial Penn in 1997, when it sold the business to Conseco and GE Capital for $1.4 billion, an 11-fold gain on the investment, according to Forbes. The next year, Steinberg and Cumming, facing a dearth of potentially profitable deals during a period of sharply rising stock valuation, said they were liquidating the company. Efforts to find deals in the financially stressed Asian market had also come up empty. The pair would receive about one-third of the $4.5 billion in assets should they be returned to shareholders.

The company's largest operating unit, Empire Group, saw premiums fall by about half between 1997 and 1999, according to Barron's. Leucadia's profits during the same period were driven by the sale of its holdings. But Steinberg and Cumming reconsidered their decision to fold up their tent after all and instead distributed $812 million to shareholders in 1999 and reentered the acquisition game.

A New Game: 2000-05

Leucadia reported a loss of $7.5 million in 2001. The company's debt rating took a hit early in 2002. A Standard & Poor's credit analyst said they were "concerned about Leucadia's erratic reported earning performance, concentration risk in commercial real estate and negative operating cash flow," noted Steven Oberbeck.

Leucadia came to the rescue of another company, the bankrupt Williams Communications, in 2002. Williams Companies, an oil and natural gas giant, entered the telecommunications business in 1985 with the stringing of optic fiber cable in decommissioned gas pipes. Williams sold WilTel to LDDS Communications (MCI World Com) in 1995 but retained one strand of fiber in all the pipelines.

During a three-year non-compete period, Williams developed its fiber optic network. About a year after entering the market, Williams Communications went public: the telecom market was hot and the Internet was growing by leaps and bounds.

By the time Williams Communications was spun off as a public company in April 2001, the telecommunications industry was in trouble. The stock, once trading at $60, had fallen to just over $4. The Tulsa-based company filed for Chapter 11 bankruptcy protection a year later.

Leucadia's part of the deal to bring Williams Communications out of bankruptcy included a $330 million investment for a 44 percent stake in the company. The telecommunication company's bondholders received 54 percent of the stock with the remaining 2 percent of new equity held for those investors pursuing class-action claims. Williams Communications would go forward under its old name WilTel Communications Group. The Daily Deal reported the transaction was among Leucadia's largest, a quarter of the holding company's $1.2 billion net worth.

WilTel returned to the stock exchange, moving from the NYSE to the NASDAQ in December 2002. The company had been trading over the counter since issuing its new stock. Through a private transaction, Leucadia had upped its ownership to 47.4 percent of the company.

The memory of the worthless Williams Communications stock put a damper on interest in WilTel as did an industry dealing with overcapacity. Moves toward consolidation among its players made WilTel's future even more uncertain. Leucadia acquired the balance of WilTel's outstanding common stock in November 2003. The total cost for 100 percent of WilTel over 2002 and 2003 amounted to $779.2 million in cash and common shares.

Leucadia had other activities in the works during 2003. In January, the company entirely ceased its loan origination business. The automobile loan operations had been cut two years earlier. In September, Leucadia purchased some of the physical, occupational, speech and respiratory therapy services operated by subsidiaries of Symphony Health Services, LLC.

Among its continuing business interests were: a plastic netting manufacturing and marketing operation, domestic real estate ventures, and wineries in Napa Valley, California, and Williamette Valley in Oregon. Leucadia held a 72.5 percent interest in MK Gold Company, which was involved in copper mine development, and a 16.1 percent interest in Olympus Re Holdings, Ltd., a Bermuda-based reinsurer. A lucrative joint venture, Berkadia LLC, formed with Berkshire Hathaway to buy the assets of bankrupt The FINOVA Group Inc., was among the entities in which it held equity but did not control.

Leucadia's largest generator of 2003 revenues was from subsidiary WilTel's fiber optic network. In turn, sales by WilTel to SBC Communications Inc. accounted for 65 percent of that business during 2003. Network competitors included AT&T, MCI, Sprint, Qwest, Level 3, Global Crossing, 360 Network and Broadwing. The industry was rife with bankruptcy, excess capacity, and intense price competition.

During 2004, Leucadia made moves toward taking control of one of its competitors, MCI. Cumming and Steinberg's track record of a 15-year average annual return of 22 percent aside, they were in a risky situation. Adam Lashinsky wrote for Fortune, "Like a host of investment-world icons before it, Leucadia is making huge bets on telecommunications even as that industry gets sicker. And buying into Leucadia is a gamble on two managers who acknowledge that their retirement isn't all that far off."

In 2005, Leucadia received a jolt when WilTel's largest customer announced plans to buy AT&T Corp. Although it would take time for SBC to receive approval for the deal and its shift of network business to AT&T, Leucadia felt some immediate impact related to the anticipated loss of revenue. Because of the "material adverse effect" to the telecommunications operation, WilTel's credit situation degraded and so did Leucadia stock.

WilTel would receive compensation for early termination of its agreement with SBC, but the company faced finding new customers in a difficult market. Moreover, although WilTel had tax credits to be utilized, it could not do so without generating a profit, and should the company be sold, change of ownership would diminish their value.

"I believe Leucadia is in the position of having to acquire something," Robert Willens, a Lehman Brothers' tax and accounting analyst told Barron's. During 2004, Leucadia had dropped a bid for MCI and came up short in an effort to buy a pipeline company.

In March 2005, Leucadia reported revenue for the past year of $2.26 billion with net income of $145.5 million, according to Tulsa World. The WilTel contribution to revenues had climbed to $1.58 billion, up from $231.9 million in 2003. The telecommunications business accounted for 43 percent of the corporate revenue.

Principal Subsidiaries: WilTel Communications, Inc.; MK Resources Company (73%).

Principal Competitors: Berkshire Hathaway, Inc.; The Blackstone Group L.P.; The Enstar Group, Inc.; Wesco Financial Corporation.

Chronology

• Key Dates:
• 1854: James Talcott, Inc. is established as factoring concern.
• 1968: Acquisitions of financial institutions lead to creation of Talcott National Corporation.
• 1976: Utah investors gain controlling interest in strapped company.
• 1979: Ian M. Cumming and Joseph S. Steinberg ban together to take control.
• 1980: Name is changed to Leucadia National Corporation.
• 1991: Colonial Penn Group Insurance Co. is acquired.
• 1997: Colonial Penn is sold for $1.4 billion.
• 2002: Leucadia acquires initial 44 percent stake in bankrupt Williams Communications.
• 2003: Company gains 100 percent stake in Williams, now operating under the name WilTelCommunications.