Honeycutt thought the plan sounded good.
“Would you be interested in, um, joining us?” Pete asked.
“Only if you ignore the sage advice I just imparted about minimizing the stock options.”
Everybody laughed.
“Seriously, I like what I’m doing here at Harvard. But I have some good contacts I’m happy to share.” He handed Pete a list of names with telephone numbers and e-mail addresses. “I made an extra copy of this list: the 22 brightest business minds I know who might be available for a project like yours. Feel free to tell them you got their names from me. Unfortunately, though, I compiled this list for your friend Mr. Scoggins, so I’m afraid he has a bit of a head start.”
CHAPTER 14
THE TEAM
Dallas, Texas
July 15, 2006—A 160-year legacy ends as the General Services Administration announces it will seek a private buyer for the U.S. Postal Service. The agency is no longer considered necessary because of the availability of less expensive and more reliable transportation and communication services from private parcel and catalog delivery firms, the Internet, facsimile machines, and cellular digital data transfer. The successful bidder may discontinue any service it deems unprofitable and renegotiate salaries and work rules with the Postal Workers Union. Still, it is uncertain whether a buyer can be found at any price. If no buyer steps forward, the service will be phased out over five years.—China’s gross national product (GNP) figures are officially released. At just over $19 trillion, China’s economy is now the largest in the world, although its per capita income remains far below that of many nations, especially the United States and Japan.—The death-toll estimate from last month’s nuclear destruction of Sarajevo is raised to 155,000 as clean-up continues. No group has yet claimed responsibility for the blast. The Bosnian government still blames Serbian extremists, despite lack of evidence.
Many decades before the invention of “air-conditioning,” not to mention weather control, Civil War Union General William Tecumseh Sherman said, “If I owned Texas and hell, I would rent out Texas and live in hell.”
Some 140 years later, Pete and David were walking down Ross Avenue in Dallas. If looks could kill, David might not be dead yet, but he would definitely be limping. “I can’t believe you talked me into coming here,” Pete raved. “What do you suppose the temperature is right now, about 125 degrees?”
It was 106, but Pete was dripping with sweat. Will Skipper ever adapt to this furnace? he wondered. He’s used to Cambridge, with snow in the winter and summers when the mercury seldom rises above 90.
David, considerably more comfortable, grinned. “Don’t worry, Pete. After five or six years your blood thins out. Then you’ll start shivering if the temperature ever drops into two digits, which fortunately it never does.”
David was joking. Typically Dallas was this hot only from late June through early September. The other nine and a half months were pretty livable, except for the occasional hailstorm, flood, or tornado.
Bill Tannenbaum, a six-foot, two-inch, jowl-cheeked former classmate of Honeycutt, wasn’t entirely sure David was kidding. He had never been to Dallas until about a month ago. In a whirlwind courtship, he had been wooed and seduced by Pete’s vision of a future without deceit; last week he had quit Microsoft and uprooted his family, kicking and screaming, to Dallas. Already he pined for the mythically incessant rain of Seattle.
First meeting Tannenbaum when he and his family flew in to check things out, David had been impressed. “I like him,” he had told Pete. “He’s a roll-up-your-sleeves executive, smart, a great motivator, and best of all, he’s a cheapskate; my kind of guy. He flew here coach class on a weekend special. I suspect he won’t spend any more of your money than necessary to get the job done. You can decide if he has the technical skills you need, but I have a feeling he’s the right man.”
The price Pete paid for Tannenbaum was high. Next in line to succeed Steve Ballmer as chief operating officer (COO) of Microsoft, the third most profitable company in the world, Tannenbaum speculated that Ballmer might retire early in order to more fully enjoy his family and enormous fortune. He was tempted to wait it out. But Pete won over his new president and COO with a package that included a generous signing bonus and a stock option of 400,000 ATI shares: four percent of the company.
Still, it was considerably less than Scoggins had offered. Tannenbaum knew Pete Armstrong was a much better bet to win the Truth Machine race, so he had gone with ATI. But Scoggins’s company, Research Laboratories Group (RLG), was in Washington DC, which Tannenbaum, now covered with sweat, decided had to be a better place to live than Dallas.
Tilly had been to the “Metroplex” many times before moving there and had a higher opinion of the city. Dallas was a great town if you enjoyed night life, cultural events, and fine dining. She would have been happy almost anywhere, but Dallas suited her especially well. Still single and very attractive at 38, Tilly intended to take full advantage of the incomparable Dallas singles’ scene during her hours away from work. But over the coming months, such hours would be rare.
Several weeks earlier, Pete had offered Tilly a two percent stake in the company and the title of vice president, director of software design. She had cheerfully accepted and submitted her resignation to the FBI.
All four walked briskly to the ATI offices on Market Street in the West End. No cars were permitted. It was a charming area, comprised mostly of restored 100-year-old warehouses converted into restaurants, offices, and stores. They worked less than a block from the Texas School Book Depository, from which Lee Harvey Oswald allegedly shot and killed President John F. Kennedy almost 43 years earlier. They were also within two blocks of 17 different restaurants, including Cerveceria, the Tex-Mex café where they had just inhaled their lunch. The four executives had a big afternoon ahead.
It was time to decide who would make up the core team of ATI. Nearly all employees would be hired after Pete raised ATI’s start-up capital; only a critical few, a skeleton team, would come on board right away. The team would map out ATI’s initial strategy and provide further credibility to the new venture.
That team consisted of Pete, Tannenbaum, Tilly, and four others chosen that day from over 100 qualified applicants:
Leslie Williams, 31, comptroller and chief financial officer (CFO). Williams, a five-foot, eleven-inch, rather heavy-set11 woman, had been Pete’s personal accountant and a partner at Ernst & Young, one of only three “big eight” accounting firms that had survived H.R. 1918, the Tax Simplification Act of 2001. A fellow math prodigy, she had superb computer and systems design skills. Before making partner, she had managed a staff of 75 CPAs in E&Y’s Boston office, unusual for such a young manager. Creative with numbers, Williams never crossed the line between creativity and indefensibility; her tax filings always upheld under audit or in tax court. Williams had proved a difficult sell. Pete eventually had to relinquish two percent of ATI to convince her to leave the security of Ernst & Young.
Carl Whatley, 42, vice president, director of marketing. Whatley left the same job at Microsoft for one percent of ATI. The six-foot, three-inch, pony-tailed ad-man was Tannenbaum’s close friend. Well known throughout the industry, and not just for his creative ideas and productive work ethic, Whatley had an uncanny sense of what the public wanted. His predictions about which software programs would sell and which would “rot on the shelves” were legendary for their accuracy. Whatley, who was openly gay, had just ended a six-year relationship with a colleague at Microsoft. The relationship had ended badly and it was easy for Tannenbaum to convince him to leave Washington and join his team in Dallas.
Gene Hildegrand, 37, vice president, director of personnel. Hildegrand left his position of assistant personnel director of Texas Instruments, at the urging of David West. His son, Gene, Jr., and David’s younger brother, Philip, were best friends. Hildegrand was five feet, eleven inches tall and almost completely bald. Slight and wiry in build, he ran marathons regul
arly. The Baylor University MBA was a superb, relentless recruiter of high-tech talent and was himself recruited for a package that included one-half of one percent of ATI.
Haywood Thacker, 52, vice president, general counsel. Thacker was a distinguished-looking gray-haired gentleman of medium height and build, of whom it was said only half-jokingly that he had never been seen out of a three-piece suit by anyone, including his wife. He too was recruited by David West—at David’s interview for admission to Harvard Law School. Thacker was a legend in business law. His understanding of contract, anti-trust, torts, and intellectual properties law made him the ideal candidate for ATI. He and David were impressed by each other and Thacker eventually agreed to leave his comfortable professorship at Harvard for a new career at ATI and one-percent interest in the company.
Pete gave himself the title of chairman of the board and scientific director.
CHAPTER 15
WALL STREET
New York City
November 14, 2006—The investigation continues for the party or parties responsible for last month’s nuclear incineration of Baghdad. UN Secretary General Kwayme K’nau assures the world that those responsible will be caught and punished, and warns members of the international community not to blame any nation or group without sufficient evidence. Still, suspicion falls on Kurdish terrorists and the government of Iran, the two most likely culprits. Over one million persons, including Iraqi dictator Saddam Hussein, have either been confirmed dead or are missing and presumed dead in the aftermath of the one-megaton blast.—Surgeon General Abigail Swenson announces that Alzheimer’s disease is now the second leading cause of death in the United States. She also warns that unless a successful treatment is found, it might soon surpass strokes as America’s number one killer. Cancer, heart disease, and AIDS fatalities have sharply diminished over recent years as a result of successful new treatments and continue to decline as those therapies are further refined. Alzheimer’s affects an increasing percentage of the population as the average life expectancy of Americans steadily rises.
Wall Street anxiously awaited Randall Petersen Armstrong and his team. Over 90 investment firms had contacted ATI over the previous months, but the team had selected just five companies to interview, all headquartered in New York City. The message sent to each of the five was the same:
“Congratulations. Of the dozens of firms that have approached us, we have chosen yours and fewer than 10 others to consider. To that end, please find our business plan enclosed. Once you have analyzed the enclosed material, you may fax us any questions you have. We will answer promptly. Tomorrow Gail Watts from our office will call to arrange a meeting in Manhattan next week. In order to save us all time, please plan on having an offer ready at that meeting.”
It had been David’s clever idea to understate by implication the number of firms who had contacted ATI and to overstate the number of firms ATI would be talking to. A rhetorical strategy, not a lie, this was just the opposite of what most firms in ATI’s place would have done. David hoped the misdirection would keep bidders honest by discouraging collusion. From the letter’s wording, each firm would assume they were bidding against at least eight other firms, some apparently playing their cards close to the vest.
All five firms requested appointments, but faxed few questions to ATI’s office. The meticulously sculpted business plan addressed nearly every contingency, calling for the purchase of everything from four DNA-based parallel process super-computers to the design of field tests with thousands of subjects. ATI would stand at the forefront of other advanced technology projects involving intricate software.
The company’s biggest selling point was Pete himself. Not quite 17 years old, he had an unsurpassed talent for refining and debugging programs. Whoever had Pete as a business resource would maintain an enormous edge. He pledged to devote his full-time efforts to the company. He would also invest $10 million of his own money.
The team stayed at the modestly priced Salisbury Hotel on 57th Street, midtown. They had all flown coach. Each night they met in Pete’s small suite amid stacks of papers, PDCs, and peripherals. Their wrist-band personal computers were hooked up to two full-size laser printers that seemed to run non-stop.
All agreed that the only Wall Street firms eligible would be those willing to guarantee the company $110 million dollars of initial funding, with an additional commitment of up to $200 million if needed. Of these, the firm demanding the smallest percentage of the company would get the deal.
The consensus was that Pete should expect to relinquish 10 to 15 percent of his company for the first $110 million and about two percent for each additional $10 million. This was an unusually small percentage to give up for venture capital, but the company’s financial needs were modest given its potential. Pete intended to offer generous stock options to ATI employees and insisted on being able to maintain controlling interest in the company. That didn’t leave much margin for error. If they couldn’t negotiate acceptable terms, the team would fly home and try to figure out how to proceed with less money.
The Wall Street Journal reported that Merrill Lynch & Schwab was close to a deal with Scoggins’s RLG. Goldman Sachs was said to be courting the Renaissance Corporation, a group recently founded by the mysterious MIT computer wizard, Alan Bonhert. No one, however, was willing to sign a deal until the ATI bidding was finished and the final numbers released.
The first meeting, with Merrill Lynch & Schwab, America’s largest investment house, set the tone for the trip. Merrill senior vice president Leo Boschnak figured the initial public offering would be an easy sell; he had so much faith in Armstrong that he’d already decided Merrill would retain at least 30 percent of the initial public offering (IPO) for its own account. The firm offered to raise $110 million, after fees, in exchange for 11 percent of the company, and to guarantee additional funding of up to $200 million at the rate of three percent of the stock for each additional $15 million. This offer was so close to the team’s anticipated formula that Pete wondered if someone in his group had spoken off the record to someone at Merrill.
Pete listened intently as Tannenbaum and then Thacker pounded Boschnak and his staff with questions. Every answer appeared to be in ATI’s favor. It was obvious that Boschnak wanted the deal and wanted it badly.
Finally Pete rose from his seat holding a light bulb in his hand. The room became almost eerily quiet. “Mr. Boschnak, did you know this bulb was originally developed just to be used on ships and for nighttime baseball games?”
The senior vice president understood his point immediately, but Pete continued his well-rehearsed, prophetic speech for the benefit of Boschnak’s staff. “Once invented, the Truth Machine will have uses in all areas of interaction including business, politics, medicine, education, even human relations. There will be early resistance to invasions against a privacy we all take for granted, but once science begins its journey, there’ll be no turning back. Overall, the Truth Machine will have a positive effect on nearly every aspect of society; the market will be enormous and ATI will have a monopoly for at least 25 years. Conceivably we could become the most profitable corporation in history.”
“We understand Merrill faces keen competition in signing ATI,” Boschnak answered. “We believe in you and will go the extra mile. If our offer isn’t good enough, we’ll sharpen our pencils. Would you be willing to come back and let us have another crack before you commit to any other firm?”
Pete looked around the conference room. None of his team objected. “Very well,” Pete replied. He reset his PDC for their next destination, shook hands with everyone, and left the room.
The next day, the Dean Witter Discover Group promised the Armstrong team they could beat Merrill’s best deal. Before the week was over, Prudential and Shearson Olde bowed out; although they were willing to match Merrill’s offer, they felt they couldn’t compete in continued negotiations. Dean Witter and Goldman Sachs were still in the running and these three remaining contenders wonder
ed who else might be competing secretly. (While in fact, there was nobody else.)
The day they were scheduled to leave, Armstrong’s team reconvened at Merrill Lynch & Schwab headquarters. They had been assured Merrill would make them an offer they couldn’t turn down.
Boschnak pulled his PDC from his shirt pocket. “I’ll read you the terms and pass out hard copies. This is our absolute best offer and it has two options. You can take a week to decide which option you’d prefer, but we’d like to know before you leave here today whether or not we have a deal.”
“Fair enough,” replied Pete.
“Option number one. We’ll fund the first $110 million for a seven-percent interest in the company, plus 1.5 percent for each additional $15 million as needed, up to an additional $300 million.”
“Is that still after all fees?” Williams asked.
“That’s net to you, after everything. Pure, tax-free paid-in capital to add to your balance sheet. No new conditions or restrictions.”
Pete felt his mouth go dry. He tried to appear calm and had to consciously instruct his body, Don’t start rocking! Merrill was placing a value on his company, which still had no assets or sales, of at least $1.57 billion.
Boschnak continued. “Option number two’s a bit unusual. As you know, we’ve been holding discussions with Charles Scoggins and RLG. We propose a merger: ATI acquires 100 percent of RLG for $15 million that we’ll supply. Mr. Scoggins intends to use that money to buy out the contracts of RLG’s people not hired by ATI. He wanted six percent of ATI’s stock for his exclusive services, but we convinced him to accept four. The combination of ATI and RLG would become a formidable favorite to win the Truth Machine race. Therefore, we’d fund you at $125 million dollars for just a five-percent interest in the merged company. All other terms would remain the same. That means we’d be valuing the company at $2.5 billion.”
The Truth Machine Page 12