(FORTUNE Magazine) – THE LEGENDARY BAD GUY of Gulf & Western once met his reputation face-to-face. As Chairman Martin Davis recounts the story, a stranger came up to him at a cocktail party and began to tell him about ''one of the coldest, most vicious, most ruthless S.O.B.'s on earth named Martin Davis.'' ''He sounds just terrible,'' Davis replied. ''Have you ever met him?'' ''No.'' ''Well then, let me introduce myself. I am Martin Davis.'' The incident still astonishes Davis, 60. ''Can you believe it?'' he said recently. ''This man is saying terrible things about me -- and he's never even met me.'' People who have met Davis say he is demanding, but not nasty. The son of a real estate broker who had emigrated from Poland, Davis grew up in the Bronx and made his reputation in the shark-eat-shark movie business. At Paramount Pictures in the 1960s, he became known for firing dozens of executives and support staffers and for intimidating countless others. As chief executive of Gulf & Western since 1983, he sold off companies with $4 . billion in revenues and eliminated about 200 corporatestaff members. When interviewed as one of America's ten toughest bosses in 1984, he told FORTUNE: ''I don't want people weaker than I am.'' These days the shark's teeth are just as sharp, but Davis does not bare them as often. Friends and colleagues say he is less driven and more relaxed. One reason: All three of G&W's core businesses are thriving. Paramount has been the No. 1 Hollywood studio measured by box office receipts for two years running, a feat not accomplished in 15 years. Beverly Hills Cop II, Fatal Attraction, and The Untouchables, all Paramount productions, will likely be this year's three top-grossing movies. Publishing powerhouse Simon & Schuster has expanded beyond trade books into more profitable educational publications and information services. At G&W's commercial and consumer loan company, the Associates, assets have nearly doubled to $10 billion in four years. When Davis took over G&W in 1983 after the sudden death of founder Charles Bluhdorn, the company was a mess. The previous year, the hodgepodge of businesses that Bluhdorn had assembled earned a paltry $169 million on revenues of $5.3 billion; the return on equity was an unimpressive 7.7%. Now smaller and more sharply focused, G&W earned $330 million on revenues of $2.5 billion in the 12 months ended July 31. Its return on equity was 16%. Investors have been slow to catch on, however. G&W's stock sells at a price/ earnings ratio of 13, while Walt Disney and Warner Communications, two comparable companies, each carry a P/E of 16. With Gulf & Western flourishing and a war chest of about $350 million in cash, Davis is looking for acquisitions to bolster the publishing and entertainment operations. The Associates now provides 40% of G&W's profits, but some analysts speculate that Davis might sell it once he has beefed up the rest of the company. Though he takes calls from investment bankers, Davis runs his own in-house takeover operation to save on fees. In November he promoted Michael S. Hope, his chief financial officer, to executive vice president of planning and operations so that Hope can track potential acquisitions more closely. Davis is as picky as Goldilocks in the three bears' house. While he bought textbook publisher Prentice-Hall in 1984 for $700 million, he passed on Metromedia's TV stations and Ziff-Davis's magazines because he thought they were too expensive. He also circled around McGraw-Hill and Time Inc. (publisher of FORTUNE), but came away convinced that both companies wanted to remain independent. At least in those instances, the dreaded Davis would not do an unfriendly deal. With advertisers looking for bargains and some broadcasters' revenues down, Davis thinks the time will soon be ripe to buy several independent television stations or even a whole TV network. He says, ''In the current competitive environment, some companies will get weaker.'' When he adds that ''strong companies will get stronger,'' it's clear he's talking about Gulf & Western. Davis (''Call me Martin, I hate being called Marty'') left high school at 16 to join the Army. After getting kicked out because he lied about his age, he worked part time until he was 18, and then signed up again. Though he later earned his high school degree and took some college courses at night, Davis never liked school. He says: ''I didn't think I was learning anything.'' When his 2 1/2-year hitch ended, Davis landed back in New York City after World War II. Answering a newspaper ad for an office boy, he got a job at Samuel Goldwyn Studios in Manhattan. The man who hired him was Bill Ruder, who later helped start the public relations firm Ruder Finn & Rotman and who is now an independent consultant. Ruder remembers that Davis ''just seemed to have muscle -- not the physical kind but the mental kind.'' For his part, Davis had no romantic ideas about the movie business. ''I just wanted a job,'' he says. He soon became enthralled. Then as now, New York moneymen controlled Hollywood's purse strings, and the industry provided an ideal window on the world for a smart, aggressive young man. ''The motion picture business was probably the greatest testing ground in business,'' recalls Davis in an accent that still reflects his birthplace. ''You got thrown into everything, including finance and production. The door was open to me.''

DAVIS started out clipping newspapers in the publicity department, but was quickly spotted by James Mulvey, president of the studio and Sam Goldwyn's right arm. Mulvey took it upon himself to teach Davis about negotiating with Hollywood's creative types. ''He'd call me into his office and say, 'This is how you do a deal,' '' Davis remembers. ''Then he'd send me out to do my own, and yell at me when I blew it.'' After eight years Davis left Goldwyn to help shore up ailing Allied Artists. Allied went under a few years later, but Davis abandoned ship before it sank, ) becoming director of sales and marketing at Paramount in 1958. The small, publicly owned studio was losing money, and its management was moribund -- many members were in their 60s and 70s. Typically, Davis found an opportunity to shine. In 1965 Paramount became the target of a hostile takeover by two dissident shareholders. Since Davis's job included investor relations, he was put in charge of the defense. Having already cultivated such large shareholders as Seagram's Samuel Bronfman, Davis was able to mobilize enough support to fend off the raiders.

PARAMOUNT, however, was too shaky to remain independent and needed a white knight. Enter Charles Bluhdorn. A Viennese-born entrepreneur who had immigrated to the U.S. in 1942, he was in the process of building a small Michigan auto parts manufacturer into Gulf & Western, one of America's first conglomerates. Bluhdorn bought Paramount for $125 million and made Davis chief operating officer. Davis ran the studio hard for three years. Then as now he had little patience for those he refers to as ''dummies, incompetents, and people who won't step up to the plate.'' Among the survivors is Arthur R. Barron, who will soon retire as president of Gulf & Western's entertainment division. At first Davis wanted to fire Barron because he thought an expensive computer system that he was installing was unnecessary. Before his execution, Barron was allowed to present his case. When it was over, Davis pulled a cigar out of the pocket of his new blazer and a little piece of paper fluttered to the table. Davis picked it up, read it, and handed it to Barron with a nod. It said, ''Inspected by No. 1.'' Says Barron, a round, red-faced, jovial guy: ''I thought it was pretty funny -- after I threw up.'' Bluhdorn moved Davis to the corporate staff in 1969 to add some glitz to G& W's corporate image. Analysts were weary of following Bluhdorn's ragtag collection of companies, which ranged from apparel to sugar refining to zinc mining, and G&W's stock had plunged to $9.50 a share from a high of $65 only two years earlier. Events overtook the effort. In 1975 the Securities and Exchange Commission launched an investigation, later charging among other things that Bluhdorn had received improper personal loans from banks that financed the company, and had cheated the Dominican Republic out of millions of dollars in profits from his sugar trading. Once again Davis led the defense. After six long years the suit culminated in a wrist-slapping, two- ! page document in which Gulf & Western agreed to change some of its accounting practices. Along the way a rift developed as Davis tried to steer Bluhdorn from his pell-mell acquisition policy. Davis says Bluhdorn was so ''emotionally bound'' to the company that he was loath to part with any of it. When Bluhdorn died of a heart attack at age 56, Davis won the battle to succeed him. Davis remembers Bluhdorn as ''a certifiable genius, and one of the most maligned guys I have ever met.'' Nevertheless, Davis moved quickly to disassemble the company, selling off Bluhdorn's prized $1 billion stock portfolio and slicing off 65 of his favorite companies.

Today Davis runs G&W by giving his senior executives lots of rope while still keeping a tight grip on his end. He calls this approach teamwork. He frowns on memos and written reports. Says he: ''I want decisiveness, not analysis.'' In his office is a little Lucite cube on which are printed the words ''Assume nothin'.'' Davis sends replicas to executives who have made bad decisions. Occasionally managers who have not been so honored admire the plaque and ask how to find one. ''Don't worry,'' says Davis, ''you'll get one. But you have to earn it.'' This quirky sense of humor runs to affectionate needling and pranks. An amateur shutterbug, he has ambled through the Gulf & Western headquarters aiming his Leica at various employees. In one of the photographs the subject thumbs his nose at the photographer. His briefcase reflects Davis's eclectic interests. On a typical evening it brims with newspaper and magazine articles about business and technology, a copy of the American Lawyer, annual reports, and analyses of G&W's competitors. But the chairman cannot get all his questions answered. For about six months, Davis's office telephone had been broadcasting static or, on the odd day, Greek music. The phone was replaced six times without success. In frustration, he called in a team of telecommunications engineers, who suggested covering the windows and carpeting the walls. Davis did not take their advice and finally got his hands on a phone that worked. What he says he learned from the encounter is unprintable. For a modern-day movie mogul, Davis spends little time in Hollywood and avoids film colony society. He seldom discusses his private life. His weekends are spent quietly at his home in Connecticut (''I live in a small house on a lot of land''), where he and his second wife, Luella, enjoy riding horses. He pedals an exercycle daily and swims when he can to keep his 5-foot 10 1/2- inch, 167-pound frame intact. Davis owns two old automobiles, but in his idiosyncratic fashion they are vehicles not everyone would treasure: a 1963 Buick Special and a 1973 Mercedes 450 SL convertible.

CLOSE FRIENDS are not surprised by his passion for the National Multiple Sclerosis Society. Over the past 16 years he has helped raise $23 million for MS through a fund-raiser called the Dinner of Champions. He is so involved with the organization that he drops in on patients' therapy sessions. John McGillicuddy, chairman of New York's Manufacturers Hanover, asked Davis to help revive the bankrupt New York chapter in 1971. Davis had no relatives stricken with the disease, but was touched by the plight of the patients. Says he: ''There was so little money for therapy and research.'' In reflective moments Davis hints that he has not always been a happy man, but says life is better now: ''Accomplishment breeds contentment.'' He seems to have come to terms with his stormy past. In his office on the 42nd floor of the G&W building on Manhattan's West Side, Davis keeps a framed New Yorker cartoon. In it, an executive sits at a big desk. At his right is a tiny version of the executive dressed like an angel; to the left is another tiny figure, dressed as the devil. Davis likes the cartoon because he says that ''it says a lot about people.'' What, exactly? ''There's good in all of us, and bad in all of us. Everybody can be a devil. Everybody can be an angel.'' Everybody, Mr. Davis? ''Everybody. Even me.''

CHART: INVESTOR'S SNAPSHOT GULF & WESTERN SALES (latest four quarters) $2.5 BILLION CHANGE FROM YEAR EARLIER UP 26%

NET PROFIT $330.0 MILLION CHANGE UP 41%

RETURN ON COMMON STOCKHOLDER'S EQUITY 16% FIVE-YEAR AVERAGE 9%

STOCK PRICE RANGE (last 12 months) $93.50-$59.50

RECENT SHARE PRICE $68.50

PRICE/EARNINGS MULTIPLE 13

TOTAL RETURN TO INVESTORS (12 months to 11/16) 5%

CREDIT:NO CREDIT CAPTION:NO CAPTION DESCRIPTION: Color chart.