(FORTUNE Magazine) – AT WESRAY'S Christmas bash last year, the guests had plenty to celebrate. The Morristown, New Jersey, leveraged-buyout firm was winding up its third year of mind-blowing profits. The two founding partners, former Treasury Secretary William E. Simon and Raymond G. Chambers, had each scored gains of about $100 million in 1985 alone. Chambers, 43, commemorated the year by singing cute ditties about companies that had joined the Wesray fold. Like the politician he once was, Simon, 58, enthusiastically worked the crowd of several hundred people, chatting up managers of Wesray operating companies, lawyers, accountants, secretaries, and spouses -- the whole happy Wesray family. What the family did not know was that shortly before, in a fit of rage, Simon had threatened to sever his relationship with Chambers and withdraw his valuable three initials, which form half the company's name. Simon wanted out for many reasons, not least a growing belief, conveyed to associates, that the ''bloom was off the rose'' of the leveraged-buyout business. What finally caused him to explode, however, was a growing personality clash with Ray Chambers.

The two partners repaired their differences before the year was out, but the patch may not hold. Simon and Chambers couldn't have been chummier in late June, when they invited a FORTUNE reporter to a joint interview at Simon's 65- acre New Jersey estate. There was ''tenseness'' late last year, they concede, but none today. Yet a divorce may be under way in all but name. Investors Wesray had courted for a $500-million buyout fund have been told that Simon is significantly ''scaling back'' his involvement with the company and that the fund will also be pared drastically. Simon acknowledges this, but says he is still the chairman of Wesray and intends to remain associated with it. Chambers insists that ''Bill Simon and I will be partners for life.'' Sources familiar with the feuding see it differently. Simon's main involvement from here on, they say, will be to leave those initials on the office door. He is believed to be putting together at least one very big deal that will not involve Wesray. That deal -- ''the first of a series,'' says a Simon confidant -- could surface publicly by early fall. ''Don't let anyone kid you,'' says a source close to Simon. ''They have split up.'' A life insurance executive introduced WES to Ray in 1980. They were members of the same country club near Morristown, but before their meeting they had circled in strikingly different orbits. Simon's career, as a close business associate puts it, would fill a ''25-page resume.'' After graduating from Lafayette College in 1952, he headed for Wall Street. By 1970 he was in charge of the government and municipal bond departments at Salomon Brothers, where he sat on the firm's powerful executive committee. He left Salomon as a multimillionaire in 1973 to become Deputy Treasury Secretary, and assumed the added role of national energy czar during the Arab oil embargo. A 1974 Time magazine cover featuring his hard-nosed visage no doubt became a favorite dart board for motorists steamed up over long lines at the gas pump. Simon later moved up to Treasury Secretary. When he departed along with his boss, Gerald Ford, in 1977, he joined a dozen or so blue-chip corporate and philanthropic boards. He became a well-paid favorite on the lecture circuit and wrote two best-sellers -- A Time for Truth, an account of his days in Washington, and A Time for Action, his blueprint for economic policy under Reagan. Ray Chambers, Simon's junior by 15 years, marched through the early stages of his career to an altogether different beat. While studying for an accounting degree at Rutgers University, he hit the road on summer vacations as a singer and piano player for a band that played rock-and-roll from the 1950s and other fare. For three years he worked in Price Waterhouse's Newark office, specializing in tax accounting, then set out on his own in 1968 at age 25. His first venture was a nursing-home company. Chambers served as chairman and president for nearly seven years, guiding the company, then called Metrocare Enterprises and since bought by a subsidiary of Forbes Healthmark, through a series of successful acquisitions. When Metrocare went public in 1969, Chambers's stake was worth about $1 million. Chambers left Metrocare in 1975 and began using his nest egg to buy small, relatively unleveraged companies whose basic financial condition was sound enough to support a much higher level of debt. Borrowing heavily, he bought control for a relatively tiny investment and then tapped the acquired companies' cash flow and sold off assets to repay the debt. Because of the high leverage, he made a killing when he later sold the companies for a profit. In today's parlance, he was doing leveraged buyouts, or LBOs. After Simon and Chambers met in 1980, they quickly discovered they were both enamored of LBOs. They teamed up, and among their first acquistions were a small outfit that raised oysters and supplied them to restaurants from coast to coast and a company that rented musical instruments to grammar and high school students. From the beginning they shared equally in the equity ownership of the companies. In September 1981 they agreed to become partners on a permanent basis and formed Wesray. It took just 20 months for Wesray to pull off a coup that put its partners up there with the get-rich-quick immortals. Their January 1982 purchase of Gibson Greetings, the third-largest U.S. manufacturer of greeting cards, has been so well chronicled that it became symbolic of the magical profits a leveraged buyout can produce. Simon, Chambers, and a few other investors put up about $1 million of their own money, paying off the balance of the $80.5- million purchase price by selling some Gibson assets and mortgaging others. In a practice that has become standard at Wesray, the firm let Gibson's management team have about 20% of the equity and allowed the team to run the greeting card company with little meddling from Morristown. Gibson flourished. Wesray began to cash in on the company's rising value in mid-1983, taking it public in the first of several offerings of Gibson stock. Simon and Chambers eventually realized more than $75 million apiece, or well over a 200-fold return on the money they invested. . DEALS LIKE THAT begot more deals as would-be sellers of LBO candidates beat a path to Wesray. The firm made 14 acquisitions from 1981 through the end of 1984, mostly of little-known companies in humdrum industries. Among them: Heekin Can, a manufacturer of containers for food and beer; Wear-Ever Inc., which turns out pots and pans; and Anchor Glass Container, a producer of glass bottles. According to a confidential offering memorandum prepared by Shearson Lehman Brothers for investors in Wesray's now-scaled-back LBO fund, the firm put up a mere $21.6 million of equity in deals with a total purchase price of $1.1 billion. The balance was essentially borrowed money. Just as astounding as the leverage is the speed with which Wesray's investments appreciated. In that same remarkable document, Wesray estimated that the value of its equity in those 14 companies had grown like Jack's beanstalk, to some $408 million on March 31, 1985. That didn't count some $100 million in equity that Wesray's partners had withdrawn. Because of his name, Simon had instant credibility with companies looking for a buyer. With his high-powered contacts, he also was Wesray's door-opener to the banks and insurance companies that came forth with the debt financing. He was the main strategist. He largely called the shots on such matters as what industries to get into, whether a deal should be financed with long- or short-term debt, and perhaps most crucially, when and at what price a company should be sold off. When he was not out of town on extracurricular activity, including a stint as president of the U.S. Olympic Committee, Simon was generally in the office by 7 or 7:30 A.M. He worked at machine-gun speed, and his well-known temper flared at tasks or people that kept him from making the next phone call. Chambers, by contrast, is even-keeled. Soft-spoken and guarded about his private life, he modestly describes himself as a detail man. ''Ray complements Bill perfectly,'' says William Kearns, a Shearson Lehman Brothers managing director who oversaw public offerings for Gibson Greetings and Anchor Glass. Says another source familiar with Wesray from the beginning: ''Ray is the kind of guy who could sit on the phone with a lawyer for an hour, haggling over the fine points -- but important points -- of a deal until they got it right.'' Chambers was no mere technician, however. He devised much of the ingenious structure of Wesray's deals. In each instance the partners, rather than the firm, invested separately as individuals. But their personal liability was limited if anything went wrong. Wesray made each acquisition through legally distinct affiliates, effectively erecting a fire wall between, say, Heekin Can and any troubles that might break out elsewhere in the Wesray family of companies. No fire wall seemed to be needed between the two partners. They socialized together, and through Simon, Chambers met luminaries from Richard Nixon to Floyd Patterson. Last summer Wesray employees turned out for a rousing softball game, Simon captaining one side, Chambers the other. (Neither remembers who won.) Afterward everybody repaired to Simon's spread for a dinner. As Simon and Chambers began cashing in on some of the equity mounting within Wesray's portfolio, some of their business associates began to perceive changes in their relationship. ''Ray had always been willing to do the grunt work, to play the subservient role to Bill,'' says one source who asked not to be named but who talks like a Simon ally. Says another: ''One day he seemed to have checked his bank account and realized, 'Hey, I'm a pretty rich man. I don't have to be the one to hire the secretaries anymore.' '' One informant recalls Chambers saying that he, not Simon, was the real mastermind behind Wesray. ''He talked about how Bill got all the credit,'' says this source. ''Ray said he didn't mind, but you could tell he really did.'' Chambers vigorously denies he had any such conversation. Simon is known to believe that Chambers made such comments to a number of people. A turning point seems to have come in early 1985. By then the competition to land the best LBO deals had heated up. Wall Street firms were no longer content to lead buyout firms like Wesray and Kohlberg Kravis Roberts & Co. to juicy targets. They wanted the action for themselves. At the same time, sellers of target companies became better informed of the fat profits a skillful buyout firm could wring from a deal and upped their asking prices accordingly. Says the manager of a pension fund that has been investing in LBOs: ''There weren't any more Gibsons out there.'' If Wesray was to keep landing good deals, Simon and Chambers agreed, it would need more manpower and money. With Simon's blessing, Chambers set up a Wesray office on Park Avenue in New York City, recruiting three high-paid new partners to serve as its nucleus. One recruit had been the top mergers and acquisitions man at the Bear Stearns investment banking firm, and another had held the same post at Donaldson Lufkin & Jenrette. Frank Pearl, the third new partner, had been Wesray's chief outside lawyer. FOR ADDED financial clout, Simon and Chambers decided, Wesray should sign up insurance companies and other outside investors who would be asked to commit money to a new LBO pool that Wesray could tap. If Wesray needed to move quickly on a deal, it could draw money immediately and later arrange for permanent -- and less expensive -- financing from other sources. Wesray would pay a heady 20% interest rate on whatever money it actually took from the LBO fund. The buyout firm would also give the outside investors a fifth of its equity in an acquired company whether their money was used or not. On the other hand, the firm would get a stiff 1.5% annual fee for managing the entire pool of committed money even if, as Wesray hoped, it rarely drew on it. Assuming Shearson Lehman Brothers met its goal of lining up $500 million, Wesray could count on $7.5 million a year in management fees. The firm's expanded team, which operated as a separate new entity called Wesray Capital, started making deals while the effort to woo investors was still getting under way. In April, Wesray Capital began negotiating to buy Wilson Sporting Goods from PepsiCo; by May it was dickering to acquire Gemini Industries, a distributor of parts for consumer electronics equipment. Later Wesray Capital landed Western Auto Supply, a subsidiary being sold by Beneficial Corp., for about $300 million. Simon and Chambers each took roughly a 20% slice of the equity in these deals, spreading the rest among their new partners and associates, the companies' top managers, and other investors. Simon became uneasy. He did not have the close control over the Park Avenue office he exercised over Wesray. True, no important decisions could be made without his and Chambers's clearance. But keeping up with the day-to-day goings-on in New York was not as easy as ducking next door into Chambers's office to get an answer to a question. Says a close associate, ''Bill was troubled by the fact that he was losing control.'' He was troubled, too, about the future prospects for LBOs. Simon told people that most of the remaining acquisition candidates were overpriced. He also worried about his fiduciary duty to outside investors once the money- raising for the LBO fund was completed. The offering memorandum committed him & and other Wesray principals ''to actively participate in the acquisition activities of Wesray Capital'' over the five-year term of the fund. Simon couldn't bear the idea of being chained for that long. Simon also indicated to friends that he wanted to spend more time with his wife, his seven grown children, and their families -- not to mention a 125- foot sailboat being built for him in Italy. He certainly was not worried about his health. ''I'm a scuba diver!'' he says in response to inquiries about his fitness. ''Two weeks ago I was in a glider.'' Around the end of November, shortly before he and Chambers were to make a pitch for the LBO fund to managers of Harvard University's pension fund, matters came to a head. Nobody will say exactly what ignited Simon's short fuse. But he blew up. In a voice that used to terrify Treasury subordinates, he told Chambers that he was going to leave the firm and that Wesray would have to cancel the LBO fund. Simon confidants say the two, scarcely speaking after that, were at an impasse for more than two weeks. Simon and Chambers will only say that tensions ran high. Two other sources disclose that Chambers soon went to Simon's home in an effort to salvage Wesray. The partners aired their differences and agreed that Simon would continue to be involved with the firm, though on a much reduced basis. The future of the fund was left hanging. Later it was downsized to about $180 million, which Chambers thinks can be lined up with Simon playing a smaller role. The offering memorandum describing the LBO fund will be revised to take note of Simon's more limited role and to give Wesray Capital the option of shortening the five-year term of the fund if circumstances dictate. Unclear in all this is why Simon, whose investments in the Wesray companies are in his own name and not the firm's, chose not to walk off. Possibly he worried that bad publicity from a breakup would affect the value of his investments and the morale of the managers at companies Wesray has acquired. WITH WESRAY STILL intact, Simon left for a holiday in the Bahamas. Chambers plunged back into dealmaking. In early February the firm brought home its biggest deal yet, the leveraged buyout of Outlet Communications, a group of TV stations owned by the Rockefeller family, for more than $625 million. Wesray and other investors will probably put up no more than 10% in equity. Three months later the firm announced an agreement to buy Avis from Beatrice Cos. for an estimated $250 million plus the assumption of about $1.2 billion of debt. When asked at the time about the Avis deal, Simon told FORTUNE: ''Go talk with Ray about it. It's his deal.'' An investment banker familiar with both transactions -- neither of which has been closed -- says that Simon played no visible role in either negotiation. How much will Simon's role at Wesray diminish? Simon says he expects to spend considerably less time on the firm's business. The deals he is working on that don't involve Wesray are mainly in the financial service industries. He drops hints: ''Finance companies, banks, savings and loans, real estate, and the Pacific basin -- that's where you can look for me in the future.'' Simon says he expects to spend the first five months of 1987 in Australia sailing that new boat. All of which raises the question of how Wesray would fare with Simon effectively out of the picture. By now the firm is an established force on Wall Street and will keep on doing deals. Says the manager of a pension fund that will probably invest in Wesray's LBO fund: ''Bill's involvement was never crucial to our participation. He is not the only arrow in their quiver.'' Chambers's detractors have a different view. ''Let's just wait and see how much of a genius he is,'' says one. They have a point. If those famous initials become mere initials, how many choice deals will Wesray get an early peek at? And how many lenders will unhesitatingly hand over the cash?

CHART: DEAL WESRAY'S WESRAY EQUIT CASHES IN Gibson Greetings $1 million Approximately $200 million January 1982 Total purchase price: Realized from public stock offerings of $96 $80.5 million million in May 1983 and $44 million in March 1985, plus private stock sale of $13 million in April 1985 and other stock sales Lincoln Foodservice $150,000 $11 million Products Total purchase price: Realized from public stock offering of $30 October 1982 $13.1 million million in June 1986 Heekin Can $1 million Approximately $28 million December 1982 Total purchase price: Realized from public stock offering of $29 $82.9 million million in September 1985 and other stock sales Simplicity $1 million $48 million ^ Manufacturing Total purchase price: Realized from sale of company to employee arch 1983 $31.4 million stock ownership trust for $60 million in October 1985 Anchor Glass Container $1 million $21 million June 1983 Total purchase price: Realized from public stock offering of $169.8 million $59 million in June 1986 Permian Corp. $10 million $137 million December 1983 Total purchase price: Realized from sale to National $385 million Intergroup for approximately $435 million in September 1985