Cerberus emerges from the underworld

Wednesday, August 24, 2005
By Randall Smith, The Wall Street Journal

NEW YORK -- In myth, Cerberus is the fearsome three-headed dog at the gates of the underworld.

One speciality of Cerberus Capital Management LP is investing

in debt of companies at the gates of bankruptcy.

The scary name has intimidation value for Cerberus founder Stephen Feinberg,

a reclusive former Princeton tennis captain with a regular-guy streak.

A onetime Army Reserve paratrooper,

he hunts deer when not hunting financial deals and drives an aging Ford pickup truck,

friends and colleagues say.

Cerberus, with $16 billion of capital,

has expanded beyond its original "vulture" investing specialty into lending,

real estate and buyouts of healthier companies.

Cerberus has mushroomed in size from $5 billion in 2000.

And Mr. Feinberg, despite his penchant for the simple life, has become rich,

with a net worth in the hundreds of millions of dollars.

Cerberus is a prominent example of hedge funds,

which historically focused on short-term trading,

"expanding into longer-term private-equity buyouts in search of high returns,"

according to Ilan Nissan, a private-equity lawyer at O'Melveny & Myers LLP.

To soften a combative image won in the smack-down arena of bankruptcy court,

Cerberus hired former Vice President Dan Quayle as an ambassador and door-opener.

Mr. Quayle, who has worked full time for Cerberus since 2000,

is chairman of Cerberus Global Investments LLC.

For example, Mr. Quayle said, he helped Cerberus with its investment in bonds of MCI Inc.,

the former WorldCom until it emerged from bankruptcy court.

He served in the same 1989-1993 administration of President George H. W. Bush as Richard Breeden,

the former Securities and Exchange Commission chairman, who was MCI's court-appointed monitor.

Mr. Quayle has also served as a point man in Japan, where Cerberus has made several large investments,

including an $850 million investment in Nippon Credit Bank, since renamed Aozora Bank Ltd.

Cerberus has participated in buyouts of healthier businesses, often cast-off units of larger companies.

They include the Mervyn's retail unit of Target Corp.,

a paper business from MeadWestvaco Corp.

and the LNR real-estate business that was once part of home builder Lennar Corp.

Because Cerberus invested heavily in vulture situations like WorldCom during the stock-market downturn of 2000-2003,

its returns were aided by the subsequent market rebound.

But Cerberus has held stakes in some companies that made multiple trips to bankruptcy court,

such as music retailer Wherehouse Entertainment Inc.

Most recently, Anchor Glass Container Corp. said

it will restate results and announced plans for its third bankruptcy in the past decade.

Two years ago Anchor went public in a $120 million initial public

offering of stock in which Cerberus reaped two-thirds of the proceeds.

Cerberus is known for tough tactics. It made last-minute cuts in its investments in Teleglobe Communications Corp.

and ICG Communications Inc. Cerberus says it was contractually entitled to make the cutbacks based on adverse developments.

Civil lawsuits have accused Cerberus of failing to hand over profits on short-term stock trading to companies,

as required, where it owned more than 10 percent,

and thus might have had access to material nonpublic information.

Cerberus says it repaid "a small amount" of such trading profits to Komag Inc.,

where it held 29 percent, after one lawsuit.

In a bankruptcy-court battle for control of Coram Healthcare Corp., another vulture investor,

Sam Zell, accused Cerberus of failing to disclose $1 million in annual compensation it paid to Coram's chief executive.

Cerberus acknowledged the disclosure could have been made sooner, but the court ruled no damages resulted.

Mr. Feinberg isn't intimidating in person.

With thinning light-brown hair and a mustache, he is in constant, restless motion.

He is also self-effacing. If asked by potential investors about lessons learned from past mistakes,

he "can go on and on" too long, says Bob Mast, a fund marketer.

"Sometimes you have to kick him under the table."

Mr. Feinberg, 45 years old, grew up in blue-collar Spring Valley, N.Y.,

the son of a World War II Army veteran who fought in the Pacific, according to his friend T.K. Duggan,

a hedge-fund investor at Durham Asset Management LLC. Mr. Feinberg declined requests for an interview.

His college tennis coach, David Benjamin,

recalls Mr. Feinberg had "an extra level of ferocious intensity."

Even when he was bed-ridden with a fever in the spring of his senior year, he said,

Mr. Feinberg would show up for matches and win. Mr. Feinberg also played chess in college and rode a motorcycle.

After a mid-1980s stint at onetime junk-bond powerhouse Drexel Burnham Lambert,

Mr. Feinberg worked at Gruntal & Co. and formed Cerberus in 1992,

near the end of a junk-bond market downturn that followed Drexel's collapse.

Staffers at Cerberus know their way around a courtroom.

The firm's chief operating officer, Mark Neporent, is a former bankruptcy lawyer.

But some friends say Mr. Feinberg gets a bum rap because of the fund's name.

Calling it Cerberus is "probably the worst thing he ever did,"

Mr. Duggan says. Cerberus "is not this fearsome figure. He protected humans from falling into the abyss."

One of Mr. Feinberg's early coups,

Mr. Duggan recalls, was investing in the bank debt of Morrison Knudsen Corp. in the mid-1990s,

around the time its chief executive was ousted and the company went through a bankruptcy-court debt restructuring.

The loans roughly doubled in price from about 50 percent of face value to 100 percent.

Some executives who run companies Cerberus controls recall dinner meetings

with Mr. Feinberg at an Italian restaurant in midtown Manhattan,

after which the workaholic Mr. Feinberg would often return to the office.

"I would give him presentations at dinner," said Randall Curran,

the former CEO of ICG Communications. Mr. Curran recalled it was "frustrating"

when Cerberus reduced its planned investment in ICG, requiring ICG to spend extra time in bankruptcy court.

On May 12, 2005, Joseph D. Martinec, the bankruptcy-court trustee for World Satellite Network Inc.

and its parent WSNet Holdings Inc.,

charged that Cerberus improperly usurped WSNet's plans to buy two cable companies.

Cerberus, a WSN investor with two board seats, gained control of the cable companies by snapping up their bonds,

Mr. Martinec charged.

Cerberus contends the companies couldn't finance the purchases at the time.

For a so-called master of the universe, Mr. Feinberg spends little.

He has a modest country house with a swimming pool in Stamford, Conn.,

and an ordinary-size apartment in Manhattan.

On business trips he prefers Holiday Inn to Hyatt, one colleague says.

"He wants to be an everyday, average guy," says Mr. Duggan.

In 1999 Mr. Feinberg was featured as one of the 40 wealthiest Americans under age 40 by Fortune magazine,

which listed his net worth as $274 million.

Yet even family members remain in the dark about his income.

At his 40th birthday party,

his father approached one guest and asked how much his son made, the guest recalled.

Minutes later, Mr. Feinberg warned the same guest, in case his father asked, not to say how much he made.