Pete Musser built his company over 40 years. Then he was Seduced by the Internet. And his billion-dollar fortune melted away.
(FORTUNE Magazine) – On the evening of Sept. 26, Pete Musser went to sleep knowing that in the 46 years since he founded Safeguard Scientifics he hadn't sold a single share of its stock. That knowledge comforted him. There had been moments when he could have unloaded a few shares and reaped big rewards. There were other, turbulent times when a less tenacious investor might have cashed out. Not Musser. He knew that some people might find his loyalty old-fashioned, but that didn't bother him. As long as he was CEO--and even at 74, he intended to stay CEO for a long time--he would hold on to the company's stock. It was his way of showing confidence in his creation.
The next morning Musser, who lives outside Philadelphia, followed his usual routine. He had a breakfast of granola at the Radnor Hotel, a local hot spot for tech executives where Musser, a regular, sits in a chair engraved with his name. Afterward he drove four miles to Safeguard's campus, a quiet huddle of eight buildings in Wayne, Pa. Shortly after 9:30 a.m. he looked at a computer terminal displaying the company's stock price. It was then he realized that he would have to break the pledge he'd kept for nearly five decades. Safeguard's stock was trading below $20; that meant he was going to have to pay up on a debt--a debt that had once seemed manageable but that now seemed menacing. To avoid ruin, he would have to sell not just a few of his Safeguard shares but pretty much the whole stash.
That someone like Musser got into this fix is a testament to the Internet's deeply intoxicating effects. Musser was not some starry-eyed, get-rich-quick kid. He was a seasoned, old-school businessman who had steered through booms and recessions. In short, he was the kind of person you'd expect to know better. But he didn't. He got sucked in by watching technology stocks--including Safeguard's--defy the laws of nature. He bought blocks of Internet company stocks on margin, borrowing money from his brokerage firm to help pay for his purchases and using his Safeguard stock as collateral. When the unthinkable happened and Safeguard's stock slid from a split-adjusted high of $98 down to $19 that Sept. 27 (it eventually fell as low as $5), the value of his holdings came perilously close to the total of his debt, and his brokers demanded their money back. Musser won't divulge exactly how much debt he took on, but several sources familiar with the matter say it was close to $100 million. To help pay down that debt he had to sell 7.5 million of his nine million Safeguard shares. By the end of last year his $1 billion paper fortune had nearly evaporated.
Of course, Musser could have sold his Safeguard stock back when it was flying high and used the proceeds to buy stock in all those Internet companies, but his pride in Safeguard prevented him from doing that. "I'm fighting hard to put this behind me," he says during an interview on a cold, overcast afternoon in January, four months after receiving the fateful margin call. It's been a hard fight because Musser recognizes that he made big mistakes. He bought too many stocks, bought them with borrowed money, and ignored the extreme risk they contained. "I got seduced by the value of my holdings," says Musser, who has vowed never to buy stocks on margin again. "I didn't count on the market going off by 90% in six months. I wasn't ready for that. I got caught up in the exuberance of the moment."
To friends in and around Philadelphia, where Warren "Pete" Musser has spent the past 51 years, the Safeguard CEO is not a man normally driven by whims and exuberance. Musser has had more or less the same game plan since 1955. At age 28, six years out of Lehigh University, where he earned a degree in industrial engineering, Musser had the idea to start a firm that would invest in young companies. He raised $300,000 from family and friends and started looking for smart, talented people who were running interesting businesses. These days Safeguard invests in technology startups, but Musser has funded all kinds of endeavors, from farm machinery in the late '60s to auto parts companies in the '70s and real estate in the '80s. He'd invest Safeguard's money and help a company grow, and Safeguard would make money if the company went public or was acquired.
Over the years he played supporting roles in the creation of some prominent companies. In the '60s, Musser sold Comcast its first cable system, and in the late '80s he encouraged QVC founder Joe Segel to start a home-shopping network. Most notably, he put $7 million into Novell in the early '80s. Not what you would call tech-savvy, Musser has never actually used a personal computer (his faithful assistant of 30 years, Diane Swiggard, prints his e-mail for him). But he knew enough to steer Novell in a smart strategic direction. When the young company ran into trouble, Musser persuaded its founders to get out of the PC business and into software, avoiding what would probably have been a fatal war with IBM. Musser was one of the first to formalize the now popular "incubation" of startups, housing companies on Safeguard's campus. Had he started Safeguard in Silicon Valley instead of suburban Pennsylvania, Musser might be revered today as a grandfather of venture capital. Instead he is a relative unknown.
Musser's company, too, had a low profile. Safeguard went public in 1971, but big-name Wall Street banks and large institutional investors ignored it. So Musser hawked his stock personally, talking up the company to friends, relatives, acquaintances. Handsome and energetic, Musser was also persuasive: Almost everyone he knows owns Safeguard stock. But his investors needed to adopt an attitude of extreme patience; during the '80s the stock barely moved more than a few points.
So what a joy for Musser and friends when all that changed. Safeguard had invested heavily in tech companies, and by the mid-'90s its stock, finally, began to rise. Then a most remarkable thing happened. Internet Capital Group, a business-to-business investment company that was spawned within Safeguard, went public in August 1999, and within two months its stock had quadrupled. This stunning event set into motion what Musser would later regard as his "seduction." Safeguard's $15 million investment in ICG was suddenly worth $2 billion--more money than Safeguard had ever made on any other single company, even Novell. Moreover, Safeguard, as ICG's largest investor, caught some of the hot new company's buzz. Safeguard's stock shot out of the cannon, hitting $55 by the end of 1999.
Amazed by this turn of events, Musser decided to do something he had never done before. In December he bought $25 million of ICG stock in the public markets. Previously he had only bought Safeguard companies' stock at their cheap IPO price under a program offered to all Safeguard shareholders. That was how he profited personally from Safeguard's offshoots--sometimes handsomely. He had never thought to go out and buy more stock after the IPO. And he had certainly never thought to turbocharge a purchase by buying a large amount on margin.
But now things were different. It seemed easy to make money. So the $25 million in ICG was followed by $10 million in another Safeguard company, Sanchez Computer Associates, a software outfit whose stock had been publicly traded for three years but was now on the move. Several months later, in early 2000, he bought $15 million in eMerge, a B2B exchange for the cattle industry that Safeguard had recently taken public. All those purchases were made on margin. He put a percentage down in cash and borrowed the rest from his broker, using his Safeguard stock as collateral. He could have sold some of those Safeguard shares and used the proceeds to buy shares of young Internet companies, but he chose not to. He'd always felt that as long as he was actively involved in running Safeguard, selling would be hypocritical. "You get into patterns, and Pete's pattern was to buy and hold," says Buck Bell, a Safeguard board member who has known Musser since they were college buddies at Lehigh University. "I think it's a testament to his confidence in Safeguard." Selling shares in the offshoot companies was one thing, but Safeguard was sacred. "Pete's a very emotional guy, though not many people realize that," explains Mike Emmi, CEO of Systems & Computer Technology in Malvern, Pa., and a member of Safeguard's board. "He always took the issue of not selling very personally."
If Musser felt loyalty to Safeguard, he also believed unfailingly in the companies it funded and encouraged. Bob Keith, who runs TL Ventures, one of the seven venture capital funds on Safeguard's campus, says that Musser's enthusiasm for companies like ICG and eMerge prevented him from entertaining the idea that their valuations would ever plummet, as they eventually did. "Pete doesn't have a cynical bone in his body," says Keith, who's also a Safeguard board member. "The glass isn't just half full with Pete; it's completely full."
Of course, you could just as easily interpret Musser's actions as reckless and greedy. Rather then sell Safeguard shares and have to forgo profits from any stock appreciation, Musser was leveraging existing Internet assets to create more Internet wealth. "You're basically saying, 'Instead of a five-times return, give me a 25-times return.' It's like sitting at a poker table and doubling down," says one Wall Street analyst who covers Safeguard. It would have been safer had Musser secured his margin loans with a diversified portfolio of stable blue-chip companies, but Musser doesn't own those kinds of stocks. The bulk of his holdings has always been those nine million Safeguard shares. A financial planner of the variety that most wealthy people employ to look after their affairs would almost certainly have advised Musser to sell some of his Safeguard shares to diversify. But Musser didn't have a financial advisor; he preferred to follow his instincts.
Like many people who lost their heads in the Internet mania, Musser found his instincts leading him in unexpected new directions, personally as well as in business. Friends describe Musser as the sort of guy who drove the same car for years and wore sweater vests no matter what the occasion. But as his stock holdings swelled, he had taken to paroxysms of lavish spending. Divorced from his wife of 43 years, Musser had a new woman in his life. He met Hilary Grinker six years ago at a reception at Philadelphia's Franklin Institute, where she was working in the promotions department, and they started dating shortly thereafter. For Grinker's 35th birthday last summer, Musser held a big party at their Nantucket home, ferrying guests from all over the world in his private plane. The couple bought property, including a $3.2 million three-story farmhouse in rural Pennsylvania, and upgraded two other homes befitting a man worth $1 billion. Grinker took a particular interest in redecorating. On a trip to Europe last summer she bought an entire showroom of antiques for the "farmhouse." The Nantucket home--Musser named it Higgin's Haven after his beloved golden retriever--was outfitted with extravagant details like $100,000 garage doors equipped with state-of-the-art pistons, and hand-painted tiles decorated with tennis rackets for the "tennis bathroom." They also built his-and-her tennis courts so that Musser, a tennis buff, could enjoy a doubles match without interrupting Grinker's private lessons.
Musser says that he wanted to please Grinker by funding these spending sprees but adds that he, too, was enjoying the ride. "I went along with it because it was quite exhilarating. It was something I wasn't used to, but it was a pleasant existence," says Musser. "Still is." It goes without saying that Musser would have had more cash on hand to deal with the margin call had he not been living like Jay Gatsby, but he says that the luxuries weren't what drove him into a black hole of debt. "The basic problem wasn't her or my living expenses," reflects Musser. "It was just that I bought too many stocks."
At the time, of course, it didn't seem like too many. When he was making those large, optimistic purchases of Internet stock, the value of his Safeguard holdings, which were guaranteeing his margin debt, oscillated between $400 million and $900 million. What was a few million here and there on margin when you were worth nearly $1 billion? Besides, he had always been comfortable taking risks. He pumped money into a flailing Novell when many on Safeguard's board wanted to shut it down. He sank $5 million into Coherent Communications and patiently waited 12 years before it ever returned a penny. Going purely on his gut, he chose a factory employee who lacked a college degree to be the CEO of a Minnesota metal-furniture company he funded in the '80s (the guy went on to be on the board of governors of the Federal Reserve). If Musser believed, he never flinched. More often than not he won the gamble.
Compared with those risks, the margin debt barely registered. He knew he wasn't going to have to pay up unless Safeguard's stock traded below $20. (As a longtime valued customer, Musser's brokerage firm, which he declines to name, was willing to let him go down to the wire.) With Safeguard's stock trading in the 90s, the likelihood of its falling below $20 seemed about as probable as a giant earthquake's swallowing up Wayne, Pa.
Even when Safeguard's stock started skidding in concert with the shares of virtually every other technology stock, landing at $50 in April, Musser remained calm. In his worst-case scenario he assumed that Safeguard's stock would lose half its value. That had happened, so things could only look up. Besides, Safeguard had just signed strategic partnerships with IBM and Compaq, each of which had invested $50 million in the company. There was mayhem in techland, sure, but two industry stalwarts had just offered a big vote of confidence in Safeguard, and that had to mean something. Musser figured the worst was over.
It wasn't. Safeguard's stock continued its free fall--as did the stocks of ICG and other Internet companies he'd bought on margin--and by August it was down to $25. That was dangerously low for Musser, but once again he told himself there was no way it could possibly go lower. It was only on Sept. 27, when Musser saw on Safeguard's Compaq computer terminal that the stock was trading at $19, that he really understood that the day of reckoning had come.
The next day Musser called an impromptu board meeting by telephone conference. He told the directors about his margin call and that he would have to sell a large amount of his Safeguard stock to cover the debt. Upset and embarrassed, Musser spoke only briefly, letting Safeguard's lawyers detail the ugly particulars. The board, which includes a good number of Musser's friends and former Safeguard executives, decided to offer Musser a $10 million loan so that he wouldn't have to dump his Safeguard stock hastily and further depress the price. The board also guaranteed $35 million of his debt. Within a few weeks Musser had sold 7.5 million Safeguard shares to an investment bank, generating $62 million.
The two months following the margin call were miserable ones for Musser. He continued to drive the six miles from his home to Safeguard's office every day, but he wasn't his usual affable self. "Here was a guy who a few months ago thought everything was great. It was literally like somebody threw him off a cliff," recalls board member Keith. The public scrutiny wrought by unprecedented media attention--articles in local papers and a story in the Wall Street Journal--was humiliating to him. He worried that his personal disaster would reflect poorly on Safeguard. It was foolish, he now realizes, to let his margin debt get so high and not have a financial advisor who could have helped him plan ways to periodically sell his nest egg of Safeguard shares in an organized manner. "Bill Gates lays out plans for when he's going to sell shares, and we should have done something like that," muses Musser.
One of Philadelphia's biggest philanthropists, Musser says that he would have given the millions he made from his Internet gamble to charity. That was also the plan for his Safeguard holdings--he had intended to bequeath them to his private foundation. (Before everything fell apart, Musser had already donated one million Safeguard shares to a Catholic elementary school in Philadelphia.) But in the heat of it, Musser's decision to buy tens of millions of dollars of Internet stocks on margin was not necessarily motivated by charity. Like other investors, Musser jumped into the game because, simply put, it was a big game, and he wanted to be a part of it.
Despite his massive financial loss, Musser isn't broke. Far from it. He still owns roughly 400,000 shares of ICG, 400,000 shares of CompuCom, 400,000 shares of Cambridge Technology Partners, a remaining 500,000 Safeguard shares (after the donation to the Catholic school), and an assortment of other Safeguard company stocks, which altogether add up to roughly $15 million. His personal life is in fine form. Just as his billion-dollar fortune was collapsing last fall, Musser and Grinker were married in a ceremony at their house in Bryn Mawr. When I visited him at Safeguard's campus in January, nothing about Musser's mood that day gave a hint of his recent despondence. Wearing a sweater vest and a cotton shirt that both said SAFEGUARD SCIENTIFICS, Musser spoke vivaciously about the company's history. Several of Musser's friends I spoke to later believe he has already put his misfortunes behind him. "After just a few months, I think he's 97% back," says Safeguard director Mike Emmi. "I wouldn't bet a nickel against this guy being really rich again within the next ten years." Then again, who has the stomach for betting on anything anymore?