A loss on a bet of the heart Merry-Go-Round was alluring risk for many investors

February 03, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Sometimes you're the vulture, and sometimes you're the carrion.

As the last $7 million of value in Merry-Go-Round Enterprises Inc.'s 54 million shares prepared to go p-f-f-t yesterday, Baltimore investors reacted to news of the company's liquidation with a mixture of nostalgia, regret -- and reminders that they had done just fine betting on companies to rebound from problems as bad as Merry-Go-Round's looked when it filed for bankruptcy court protection in January 1994.

"Most people who bought it with me were people who have an attraction to the company and the history of the company," said Mike Levin, a stockbroker with Legg Mason Inc. in Towson.

"They bought it when it got to around $2, as a representation of faith and hope for the best. They thought the company could turn around, and they wanted to support it."

Such was the bond between Baltimore's money class and one of the town's biggest, most raffishly romantic success stories ever. People wanted to bet on Merry-Go-Round.

Mostly, they wanted to bet on Boogie Weinglass, the ne'er-do-well from the movie "Diner" who grew up -- quite on his own terms -- to turn his drug paraphernalia shop into a chain of 1,400 mall stores, making $150 million on paper without ever cutting off his pony tail.

Big and small, Baltimore held Merry-Go-Round stock. A lot of it still belonged to founders and the heirs of former chief executive Harold Goldsmith. T. Rowe Price Associates Inc., the mutual fund firm, owned about 5 percent of Merry-Go-Round in one of its growth funds.

And it was sweet while it lasted. A $100 investment in Merry-Go-Round in 1990 was worth $201.93 the next year.

But many people, big and small, bought the shares as a high-risk bet on the company after it was down. From Fidelity Investments' 4.2 million shares to much smaller plays by locals, much of the stock was held by aggressive "vulture" investors.

Baltimore attorney James J. Hanks made his own foray into the shares after the bankruptcy filing, figuring "at $3, how low could it go?" So did Michael A. Conte, an economist at the University of Baltimore, who wagered on more or less the same idea.

But they were wrong. That $100 of stock was worth $22.74 by last year. Now it's basically worthless. Mr. Hanks said he held on to the end because the stock was worth so little that selling it would barely cover the brokers commission.

"There goes the last $200 of my $5,000 investment," Mr. Conte said. "I'm a big believer in fallen angels, but this was a fallen devil."

"Fallen angels" is the term for companies that have screwed up enough to run themselves into the red, but not into the ground. That's how Merry-Go-Round looked to many after the filing.

Sales had been declining for two years, but the initial post-bankruptcy reports were optimistic, focusing on the fact that the company still had a positive net worth and was able to line up new financing quickly. The company's problem was that it had missed fashion shifts in its core youth market. But many thought that could be fixed as Mr. Weinglass took back control of his company after the filing.

"I underestimated the difficulty of turning around damaged goods," Mr. Hanks said. He bet on MNC Financial Inc., owner of Maryland National Bank, when it was down and made out fine, he said. "A troubled bank has a substantial franchise, but a troubled retailer may have lost its customer base."

And that's what happened, said Herb Stiles, a T. Rowe Price portfolio manager and vulture investing specialist who served on the stockholder committee appointed during the Chapter 11 case. He said T. Rowe bought shares shortly before the Chapter 11 filing, figuring that many retailers have bounced back from a bad year or two.

"None of the things looked terrible at the time they filed: they all looked like things they could recover from," Mr. Stiles said. "[But] people didn't come back into the stores. It's very simple. We had no idea it would continue to fall like that."

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