Sovrano

by Michael Powers

  “You’re not late, Eric,” Vincent assured his new strategist. “We’re all early because we’re anxious to hear your report. Let’s keep this informal. Help yourself to some coffee and tell us what you think of our little operation so far.”

  Each officer expected to be bored to tears with Eric’s recital of their problems. They settled in to judge Eric based upon how thorough his list was.

  A tray of assorted pastries lay invitingly next to the coffeepot. Though Eric wanted to gobble down two or three chocolate eclairs, he fought the impulse. No matter what the boss said about being informal, Eric knew it was bad form to give a report while munching on food, or licking frosting from his fingers. He had left scores of meetings where the pastry tray went untouched, wondering if pastry served as a disciplinary test. Eric stirred some sugar into his coffee, then walked slowly to his seat while the group waited. “Your company is an excellent acquisition candidate,” Eric stated flatly. “It’s perhaps the most attractive takeover target on the market today.”

  The Chief Financial Officer was shocked. That was the last thing he had expected Eric to say. “Preposterous!” he sputtered.

  Eric expected such a reaction since NEI had none of the usual hostile takeover defenses. “Why do you say that, sir?”

  Eldon Finch had been with NEI for nearly thirty years, working his way up from assistant accounting clerk to the number one financial post in the company. He had earned his degree at night during his first seven years with the company. Eldon prided himself on his intimate knowledge of every important NEI transaction. No one knew the books better than Eldon Finch. Although Eldon had been determined to keep his mouth shut that morning, suggestion of a hostile takeover required a response. With a quick brush of his hand to remove several locks of slippery white hair from his eyes, Eldon began his defense. “First, NEI is too big and complex to be acquired. More to the point, who’d want to? Given our declining earnings and market share, nobody in their right mind would want to acquire NEI. No offense, Vincent.”

  Vincent moved quickly to prevent a fight. “Eric, we’ve discussed the threat of a hostile takeover from time to time, but never seriously considered it. I’m curious why you think we should reconsider our position.”

  “Fair enough,” Eric agreed, smiling pleasantly. “I’m going to ask you all to do two things. First, put aside everything you know that’s wrong with NEI and pretend you are an outsider looking in. Second, let me build my case step by step, then tear it apart if you like.”

  Eric checked around the table. There were a few nods, but mostly grim silence and blank faces.

  “In the past few days, I’ve checked on the prices paid for businesses similar to each of your fifteen business units. I estimate all fifteen units could be sold for a total of two-hundred billion dollars. You have forty billion of unsecured debt on your balance sheet, and your stock price is currently twenty dollars per share. If I wanted to buy all NEI common stock outstanding, that’d cost me about forty billion dollars. Assume I’m a corporate raider. What would I do with this publicly available data?

  “First, I’d figure out how much it’d cost me to buy all the stock. I know the price will go up when other investors realize I’m accumulating NEI stock. By the time I buy enough to take control, the price might rise from twenty dollars per share to forty. If I’m serious about a hostile takeover, I’ve got to line up at least eighty billion in cash, credit lines, or junk bonds before I buy even one share of NEI.

  “Once I took control of NEI, I’d have an auction, selling off the pieces of NEI to the highest bidder. I’d end up with about two-hundred billion dollars, and no business to run. I’d tidy things up by firing the corporate staff, selling the headquarters building, and paying the brokers, lawyers, and other professionals, leaving me with a hefty $80 billion profit. Naturally, I’d want to get all this done in a year or less to minimize the interest paid on borrowed funds. In quick, out quick. That means the breakup value of NEI is $120 per share. Compare that to the current market price of NEI, and you’ll see there’s a spread of $100 per share. I did a similar analysis for the twenty largest publicly traded companies, and none of them has such a large gap between current market price and potential breakup value.

  “At $20 per share, you can well imagine some of those greedy Wall Street types must be absolutely salivating. Now that you’ve heard my logic, it’s your turn. Fire away!” Eric’s smile positively dared Eldon Finch to shoot with both barrels.

  “Your arithmetic might be okay, but your assumptions are way off,” Eldon chastised Eric. The senior beancounter barely looked down at the notes he had scribbled. “Your estimate of $200 billion is far too high. Those fifteen businesses only earned $6 billion last year. Who in their right mind is going to pay more than thirty times earnings for a group of less-than-glamorous businesses in depressed industries? You’d be lucky to get a fourth of that amount and then your whole case falls apart.”

  While he listened to Eldon’s argument, Eric studied the rest of the group. Their expressions indicated they understood and trusted Eldon, not Eric. Eric’s chief opponent was not Eldon, it was credibility, which Eric knew he had to establish quickly. Time to bring out Schedule A.

  “Eldon, I’ll agree that my case rests heavily on the price NEI’s business units would fetch if sold individually. I’ve prepared a list of companies which have been acquired within the last six months, along with the price the buyer paid. Next to each group I’ve listed the comparable NEI business and what it would bring if buyers put a similar value on it. I’ve also calculated a few ratios for each company. Notice many of the recently acquired companies were in much worse shape than the comparable NEI business unit. Some had lost money two or three years in a row and had mountains of debt.”

  Eldon had to admit the list was impressive. He was vaguely aware many of NEI’s competitors were being snapped up for huge sums. He had not actually taken the time to determine if that trend spelled trouble for NEI. “Eric, the people buying these companies paid way too much!”

  “Eldon, value is determined by what the highest bidder is willing to pay,” Eric reminded the CFO. “When oil companies offered Arab sheiks money for allowing them to drill holes in the sand a century ago, the sheiks thought they had made a clever bargain because they placed little value on the oil. Two generations later, the offspring of those sheiks claimed they’d been swindled. I submit that it doesn’t matter what you or I think NEI’s business units are worth. What’s important is what potential buyers think the businesses are worth. The evidence suggests there are buyers who believe they are worth a great deal.”

  Chief of Operations, Harold Green, a red-faced man with the heartbreak of psoriasis circling his bald head, broke into the discussion for the first time. “I really don’t understand the fuss. Even if we could sell those businesses, what good would it do? My house is worth a million dollars today, and I only paid two-hundred-thousand for it thirty years ago. Inflation drove up the value of my house, but it inflated everybody else’s price, too. I could sell and make a big profit, but I’d end up spending my profit buying a comparable house.”

  Eric controlled his impulse to reach out and slap Harold. NEI’s officers had collectively fallen asleep at the wheel, and they were resisting Eric’s efforts to rouse them awake. Eric fought back the urge to browbeat the group, knowing it was going to require all his patience to get them to see how serious their predicament was.

  “Harold, I understand how you might think the homeowner analogy fits, but it doesn’t. The difference between your home and NEI is that the company is an income-generating investment. You assume if we sell the business units, we have to replace them like you’d replace your home, but we don’t. The same is true for a corporate buyer. Many of them buy only to resell, much like a real estate flipper.”

  “What about us?” Harold asked. “What will we do?”

  “That’s up to the new owner,” Eric replied. “If they don’t need or want us, then we find n
ew jobs or retire.”

  Vincent felt it was time to take charge again. “We’ll need to study your report in detail, Eric, but you’ve got our attention. Assuming we agree with your assessment, what can we do and how long do we have? Generally speaking…..no need for decimal point accuracy at this stage.”

  Eric’s brows arched as he considered his answer. He was impressed by Vincent’s sense of urgency, and that Vincent had neither panicked, nor grown defensive. “It only took me a week to figure this out. There are security analysts in several big investment banks who do nothing but this type of analysis for the top hundred public companies. I wouldn’t be surprised if someone is preparing a bid to acquire NEI as we speak. At most, you have a few months. During that time, we can get the board to put some poison pills and shark repellents in place, line up our own investment banks, legal defenses, and other strategies. Meanwhile, we can work on closing the gap between the market price and the breakup value per share. Until someone takes a run at us, we must be extremely careful not to draw attention. No sense in tipping our hand.”

  Vincent had heard enough. “I want everyone to read Eric’s report and become intimately familiar with it. We’ll meet here again tomorrow at the same time to determine what we’ll do. This is highly confidential, so please don’t share this information with anyone outside this room. Thank you.”

  Vincent stood to indicate the meeting was over, then asked Eric to accompany him to his office. When Eric returned moments later to retrieve a folder, he overheard Harold and Eldon in the hallway.

  “Whatdya think, Eldon?” Harold asked the CFO.

  “I think the son-of-a-bitch might be right,” Eldon growled. “What really matters is whether the old man thinks he’s right.”

  “Sorta makes you look foolish, doesn’t it, Eldon?”

  “What about you and your damned inflatable house?” Eldon replied tersely, then stomped off to his office.

  Eric chuckled quietly. Later that day he would stop by Eldon’s office, and let him find a flaw or two in the analysis, credit Eldon for having a keen eye, and gain an important ally. The other officers would quickly fall in line. The excitement of waging a successful takeover defense was intoxicating. Much better than any high alcohol had ever provided!

  The atmosphere in the boardroom on Tuesday morning was even more tense than it had been the day before. At various times throughout Monday, each of the MPC members reached the same conclusion. The threat Eric Price identified was both real and immediate. In his report, Eric identified a score of potential buyers, with a synopsis of successful takeover strategies. Descriptions of the target companies in each scenario began to sound depressingly familiar.

  “As much as I disliked reading the material you gave us yesterday, Eric, I’m grateful it was written by someone who works for me,” Vincent began the meeting.

  “Does that mean you’re going to lock me in the castle dungeon to keep the secret safe?” Eric quipped.

  “Not at all,” Vincent laughed. “Will you help us prepare our defenses? I know you took this job without realizing how vulnerable NEI is. I’ll understand if you want to leave before the fight starts. The rest of us have been here too long to leave without firing a shot, but this isn’t your fight, Eric. Not yet, anyway. I was mighty impressed with your report. You bring skills we need desperately, and just in time.”

  Such flattery would have annoyed Eric coming from most people. Coming from the legendary Vincent Newhouse, it was sweet praise. “I’ll stay until you ask me to leave, Vincent.”

  “Excellent!” Vincent grinned. “Let’s prepare a list of what needs to be done and start making assignments.”

  During the next month, Eric supervised NEI’s defense preparations. General Counsel Brandon Hayes III, drafted resolutions to discourage all but the most determined takeover bids. The Chief Financial Officer arranged huge new credit lines. At Eric’s suggestion, only Swiss, Japanese, and French banks were contacted since they were more discreet. The Chief Marketing Officer assembled all the material needed to complete a prospectus for each separate business. The Vice President of Real Estate solicited confidential bids from prospective buyers. Many companies squeezed for cash discovered they could raise large sums by selling the buildings they owned, then leasing them back with fixed payment schedules similar to a mortgage. Every piece of real estate owned by NEI was a candidate for a sale-leaseback arrangement.

  At the end of the first month, Eric and Eldon were scheduled to meet with Vincent. While they waited for Eric, Vincent thought it was time to take Eldon’s emotional temperature.

  “How’re you and Eric getting along, Eldon?”

  “Just fine, Vincent. He’s a bright guy. Smartest thing you ever did bringing him on board.”

  “I know the two of you have been working closely together and you’ve been very cooperative,” Vincent complimented his CFO. “He got the drop on us with this takeover stuff. You and I should both have seen this coming, but we didn’t. I spotted his flair for strategy at InterNorth Bank. That’s why I brought him here. Tell me what you think of Eric Price as a professional and as a person.”

  Eldon trusted Vincent, so he spoke freely. “He knows so much more than I did at that age. He uses a computer the way I used to run a ten-key calculator. His ability to conceptualize is extraordinary. Sometimes his logic gets ahead of the supporting facts, but his instincts are good. He’s polite, direct, and pleasant to work with, but he doesn’t take no for an answer, and he certainly doesn’t tolerate crap from anyone. I’ve seen him with bankers, lawyers, accountants, line managers, clients, and vendors. He treats everyone the same…..polite and respectful, but firm.”

  “Are you threatened by him, Eldon?”

  Tempted to lie, Eldon decided against it. “Sure I am, Vincent. Hey, I’m pushin’ fifty-five with maybe ten good years left. I can barely keep up with the changes in the tax code and the turnover on my staff, let alone all the tech stuff. Eric’s younger, smarter, and better educated. He’s a good manager, a good leader, a good everything. Sure I’m threatened. Who wouldn’t be?”

  “That’s what I thought,” Vincent nodded. “Eric Price doesn’t want your job, Eldon. I’m not even sure he wants mine. There’s too much administrative garbage that goes with the territory. He needs to be free to roam around without ankle weights. People like Eric thrive on crises, but they get bored when everything’s running smoothly. Don’t worry. Your job is safe until you retire. If you want that in writing, I’d be happy to oblige.”

  Eldon was grateful to have a boss who was sensitive enough to know when he needed reassurance. He was grateful to know Eric Price, and to be participating in something as dramatic as defending a large corporation. Finally, he was grateful to be Eldon Finch since he didn’t think he could live with Eric’s constant need to fix, to heal, and to contribute something on a spectacular scale. Eldon preferred his serenity to Eric’s restlessness.

  “Eldon, I suppose you already know Eric is a recovering alcoholic and gay. He makes no attempt to hide either. With your contacts around town, I’m sure you’ve been supplied with Eric’s bio, right?”

  Eldon nodded. “You know that’s standard operating procedure with me. I wasn’t sure you knew.”

  Vincent folded his hands on his lap thoughtfully. “Neither label concerns me. Eric knows I won’t tolerate any substance abuse and that I welcome everyone regardless of their sexual preference. I don’t think this is staff meeting material, but you ought to know Eric and I have talked about this. He has no objection to my discussing this with you. Furthermore, he’d appreciate it if you’d pass the word along. He’s open to talking about being gay or chemically dependent with anyone, but he won’t justify himself. He doesn’t need to apologize for who he is. I hope I’ve made myself clear.”

  “Perfectly,” Eldon nodded, since he felt pretty much the same as Vincent.

  When Eric arrived, the three men went over the defense measures they had put in place. After they finished the checklist,
Vincent leaned back in his chair. “What’s next, Eric?”

  “We can make the next move or wait for someone else to move against us. If we move first, we’ll probably trigger a reaction. Our next move is to use every bit of cash and credit to buy our own stock while the price is still low. That will drive our stock price up, lowering the gap between market price and breakup value. Simultaneously, we begin converting our non-essential assets to cash by selling the properties we’ve already selected. Each new chunk of cash will be used to buy more of our stock. We’ll continue until we close the gap between our stock price and the breakup value. I seriously doubt we’ll get that far without someone making a run at us. Our first couple moves will trigger a reaction. As our stock price goes up, we’ll drive up the cost of acquisition, so potential suitors will have to move fast. I recommend we make the next move, but it’s your choice, sir.”

  Vincent weighed his options. He had all the facts. His advisors assured him he was ready. Never one to duck a fight, he announced his decision. “Let’s make the next move. Tomorrow.”

  NEI’s Treasury Department placed orders with a dozen different brokerage firms to buy relatively small amounts of NEI stock. The Vice President of Real Estate got the green light to sign sale-and-leaseback agreements with private investors. A block of preferred stock without voting rights was issued to a Japanese securities firm for cash. Swiss and French banks were advised NEI would begin using its new credit lines.

  As cash became available throughout the week, NEI stepped up its stock repurchase program. Friday, the stock price rose from twenty to twenty-two dollars per share. At that point, NEI had quietly repurchased five percent of its own stock, not unusual for a corporation as large as NEI. Still, it was enough to draw the attention of analysts assigned to monitor NEI.