By noon the following Monday, NEI’s Director of Investor Relations had received dozens of phone calls from investment bankers. He dutifully told them, “NEI has a policy of using excess cash to acquire its own stock for investment purposes. The current market price for NEI stock makes it an attractive investment.”
At one o’clock Monday afternoon, the Vice President of Real Estate informed Eric $350 million had been deposited in NEI’s bank account after executing sale-and-leaseback agreements. Eric phoned NEI's Treasurer immediately. “Make one last stock buy. Use every cent in the InterNorth account. No need to use multiple brokers. Pick your favorite. This’ll be the last cheap NEI stock we’ll be buying for a long time!”
Tuesday morning, the MPC met in the boardroom for an update from Eric. “When the market opened this morning, NEI stock was trading at $25 a share. After two hours of trading today, it’s up to $30. In the past week, we’ve repurchased 15% of our stock. We also added $25 billion of debt. That lowers the breakup value for NEI from $120 to $100 per share. We’ve lowered the gap between market price and breakup value from $100 to $70 per share. We’re going in the right direction, but we’ve still got a long way to go. Selling off a couple business units will close the gap considerably, but NEI is still an attractive target.”
Vincent was beaming. “Eric, would you say everything is going according to plan so far?”
Eric nodded vigorously. “Yes, sir. We have buyers lined up for three business units. When we sell them and use the cash to buy our stock, I estimate the gap between market price and breakup value will be less than $30 per share. At that point, the risk of a hostile takeover is minimal since the potential reward is so much less. If all goes well, we should be able to complete this next phase in a month.”
Harold Green scratched his sore-covered bald head. “I wish we could do it all tomorrow. The suspense is driving me crazy!”
As the meeting adjourned, NEI’s deputy treasurer entered the boardroom, nearly out of breath. “Osiris Investments just bought 4.9% of our stock.”
Eric turned to Vincent. “Mr. Chairman, we are now in play, as they say on Wall Street.”
“What the hell kind of name is Osiris?” Harold asked.
Eric chuckled. “Osiris Investments is the vehicle Sol Samuels uses to acquire companies. I think the name is Sol’s little joke. He’s only interested in companies worth more dead than alive, so he chose the name Osiris, the Egyptian god of death. I’m sure Sol believes he has the power of life and death, too.”
Day 1
On Wednesday, NEI closed deals to sell two of its business units. The cash these deals generated was used to buy more NEI common stock. The price of a share of NEI common stock sailed right past $40 per share and continued all the way to $53. At that point, NEI had repurchased 25% of its own stock. Vincent personally owned another 10% of NEI’s stock. The potential breakup value had been driven down from $120 to $80 per share while the market price rose from $20 to $53 dollars per share. The gap between market price and breakup value was only $27 per share. Still, there were buyers who considered a 50% profit margin worth going after. Sol Samuels was such a buyer.
NEI’s Boardroom
Vincent read the message he received an hour earlier to the MPC. “Mr. Chairman, Osiris Investments has acquired 19.9% of NEI common stock. It is our intention to acquire all issued and outstanding shares of NEI common stock for $60 per share. We urge you and the board of directors of NEI to accept our offer on behalf of all NEI shareholders. This offer expires at midnight five days after the tender date indicated below. For Osiris Investments, Sol Samuels.”
Eldon Finch gazed across the table at Eric with unabashed admiration. “I’ll be damned! Congratulations, Eric! Before you joined us, I’d never have believed this could happen. What do we do now?”
Assuming command again, Vincent rephrased Eldon’s question. “Eric, perhaps you could cover the options available to us and recommend a course of action.”
“Gladly,” Eric nodded. It was important that all MPC members understand and agree with NEI’s strategy since the battle would get messy in a hurry. He would need their commitment and their willingness to react fast. The better prepared they were on the front end, the faster they could move later. “Knowing who we’re facing is a positive development, allowing us to tailor our strategy. No matter what you’ve heard about Sudden Sol, he’s vulnerable. I think it might be best to brief you on our opponent’s methods first. Then, I’ll explain our options and evaluate our present position.”
Eric’s eyes roved from face to face as he spoke. Unlike his first meeting with the MPC, he now commanded their total respect. In less than sixty days, he had reshaped the way they viewed the world, their company, and their role as executives. They had adopted a new language and new concepts. In the process, Eric came to respect each of them. They demonstrated more flexibility than Eric imagined they were capable of.
“There are four types of corporate buyer,” Eric continued. “First, there are those who buy stock cheap and sell quickly at a profit. They’re known as activists. They buy a sizeable chunk of stock, threaten to make trouble for management, force reorganizations, and insist that the company take many of the actions we’ve already taken in order to drive the stock price up. These guys almost never litigate, nor do they take control of their targets. They’re speculators who leave when they get a nice return on their investment in a short period of time. Sol Samuels is not an activist.
“The second type of buyer specializes in rollups. They splice together many small companies in the same business, paying 4 or 5 times cash flow. Once they control a sizeable share of the market, they flip their business to an even bigger company for 10 or 12 times cash flow, doubling or tripling their investment. There are tons of these private equity guys, but they usually stick to small, closely held companies. Sol’s not a rollup guy.
“Next, there are empire builders. They’re usually large corporations which grow through acquisitions, trying to spot undervalued companies in their same line of business. Some of the great media, shipping, entertainment, and retail empires were built this way. Their offers are serious. They do litigate if they think they can win. And they actually take control of acquired companies with every intention of operating them. Less than forty per cent of these deals work out. Sol started that way. It’s how he built his shipping empire. Then Sol discovered there was an even more lucrative way to make money.
“The last type of corporate buyer specializes in breaking up empires for profit. Their offers are serious, they litigate, and they know as much about their targets as the targets know about themselves. They take control for one purpose: resale. Their motto is ‘worth more dead than alive’. They are constantly on the prowl for companies whose stock price is significantly less than its breakup value.
“Sol funds his acquisitions with junk bonds. He’s in a risky business, so he does a sensible thing. He keeps his own fortune safely invested elsewhere and uses other people’s money. Investment bankers underwrite hundreds of billions of dollars of bonds for guys like Sol. The coupon rates on these bonds are sky high. If the rates are more reasonable, there’s probably some call provision so onerous the borrower will never default. These provisions are referred to as first-borns, a reference to the pledging of one’s first-born child. With cash in his hot little hands, Sol pays off the shareholders of companies he buys, cuts the companies up, sells the pieces, then closes the doors all within a year. He’s got to move fast or the interest expense will eat up his profit. He operates on a slimmer profit margin than other corporate buyers, but he can afford to. His personal investment is practically zero, but the profits are all his. If he pays $100 billion for all of NEI’s stock, and sells our remaining business units for $180 billion, he’ll have $20 billion left after paying off all our debts. Sol will probably only risk a half billion of his own money, borrowing the rest of the purchase price in the junk bond market. The faster Sol liquidates NEI, the more he gets to keep
and the less interest he has to pay bondholders. After paying interest, taxes, legal fees, and other operating expenses, Sol might walk away with $10 billion. Not a bad return on his half billion dollar investment.”
Eric waited anxiously for the MPC members to digest what he’d told them. Their questions would indicate how well they understood the situation.
Harold Green, whose head looked terribly sunburned, asked the first question. “Eric, if Sol takes too long to buy, slice up, sell off, and close down NEI, he’ll end up paying more interest than he’s gonna earn. Isn’t that right?”
“Precisely!” Eric cried. If Harold figured it out, then Eric knew the whole room had kept pace. Harold’s blushing face nearly matched his bald head. He was tickled to death that he finally understood Eric Price.
“Time is our best possible defense, right, Eric?” Vincent asked.
“Yes, sir,” Eric nodded eagerly. “Sol has already issued junk bonds to acquire a 20% stake in NEI. Just hanging on to the stake is going to cost around $15 million a month.”
Eldon frowned. “Sol can afford $15 million a month for a long time. He won’t issue the rest of those junk bonds until he’s ready to buy the other 80% of our stock. We can try to delay using the courts, but I understand they expedite these cases because of the large dollar amounts. They’re trying to be fair to guys like Sol. The most we can delay is a few weeks.”
“Not so!” General Counsel Brandon Hays III cried, thrusting himself into the discussion. “We can get at least ninety days, if not more.”
Eric nodded. “Tell them why, Brandon.”
“Under Minnesota law, any offer soliciting one-hundred per cent of a corporation’s stock for the purpose of transferring control to a party outside the state must be made with a ninety-day notification period. Any purchase offer violating this will be deemed invalid. The offer must be extended again with proper notification. A penalty of .5% of the total purchase amount will be assessed and must be paid to the state before transfer of control can occur. That means between interest and penalties, we just added around five-hundred million to Sol’s upfront cost.” Brandon smiled smugly. “At Eric’s suggestion, we quietly changed NEI from a Delaware to a Minnesota corporation last month. Apparently Sol didn’t notice!”
Eldon Finch was ready to kiss Eric. “You thought of everything, didn’t you? But Sol can afford $500 million and still walk away with a huge profit, can’t he?”
Eric nodded. He leaned close to the table and spread his hands before himself, then folded them together. “The next part is tricky. I don’t know any company that’s done this, but it should work. We’ve bought ourselves some time, now we have to use it wisely. We’re going on a buying trip with the cash and credit we have left. Brandon will take center stage as the corporation’s chief spokesman, snarling up old Sol in court as long as possible. We want to create the impression we’re relying solely on the courts to save us. If our strategy works, we’ll completely close the gap between market price and breakup value. We’ll get back the stock Sol owns. Our shareholders will be delighted their stock is worth three times what it was worth a year ago. NEI will be safe from hostile takeovers for a long time and we can get back to running our business. There might be a special bonus, but we can discuss that later.”
Only Vincent and Eric smiled. Their colleagues were baffled about how the total strategy would be executed, but two things were abundantly clear. First, Eric knew what he was doing and enjoyed their complete trust. Second, Vincent’s decision to hire Eric had been one of his best.
Day 16
NEI’s board met the day the Osiris purchase offer expired. The board voted unanimously to reject the Osiris offer after hearing Eric’s strategy. Brandon Hays, General Counsel for NEI, filed suit against Osiris Investments in St. Paul, Minnesota’s federal district court. A federal judge issued an injunction enjoining Osiris Investments from buying additional shares of NEI without first filing the appropriate papers, and waiting ninety days.
Sol Samuels was not amused when he received a message late that evening. It read simply: OFFER REJECTED. FOR NEI, VINCENT NEWHOUSE, CHAIRMAN & CEO. Sol was even less amused when U.S. marshals served papers ordering him to appear before a federal judge in St. Paul. The news which caused Sol to jump on top of his solid oak desk and stamp his size seven shoes into the woodwork was the penalty he had to pay the state of Minnesota. Sol would have fired his attorney for not noticing NEI changed its state of incorporation except his attorney was also his brother, business partner, and only friend.
Day 122
Eric had never flown aboard a private jet equipped for transoceanic flight. The upper level had four sleeping compartments and two meeting rooms. The lower level had large open areas, comfortable seating, and an enormous conference room. After inspecting the entire plane, Eric joined Eldon on the lower level. “Seems wasteful to use this big jet for just the two of us to fly to New York,” he remarked.
Eldon chuckled. He had the same reaction the first time Vincent made him use the corporate jet for a highly confidential business trip. “As long as we’re being frivolous, should we stop and pick up some dancing girls on the way, Eric?”
Face devoid of expression, Eric glared at Eldon. “Fine for you, but what about me?”
“Sorry,” Eldon apologized, wincing slightly. “I meant dancing boys and girls.”
Eric was amused, grateful he did not have to hide his gay identity. He had brought his colleagues a long way in a few months. He’d taught them how to defend themselves and how not to offend him.
There was a growing list of qualities Eldon admired about Eric. He was tough without being cruel; bold without being reckless. Wise beyond his years, he was a storehouse of knowledge about how things worked. Eldon wondered what Eric’s personal life was like.
Once the pilot informed them they were at cruising altitude and free to roam, Eldon offered Eric a soft drink.
“Thanks, but no.”
“Mind if I have something a bit stronger, Eric?”
“Not at all,” Eric smiled. “You look old enough, so I won’t need to see an ID.”
“You’d be the first to ask for one in thirty years,” Eldon laughed. “How long since your last drink, Eric?”
“Almost three years,” Eric replied quietly, recalling the morning his two colleagues drove him to a treatment center.
“Congratulations, Eric! It certainly didn’t damage your brain.”
“Not permanently,” Eric chuckled.
“Can I ask you something personal?”
“Sure,” Eric nodded, stretching his legs to a more relaxed position.
“Do you have someone? I mean…..like a boyfriend?”
“Not right now,” Eric replied evenly.
“How come? You’re attractive, smart, and successful. I’d think you’d be a real good catch.”
“Thanks for the vote of confidence, Eldon. You know the old saying. He travels fastest who travels alone.”
Eldon was skeptical. “And what do you do when you get there?”
“Haven’t figured that out yet,” Eric admitted. “Guess I’m pretty fussy and so are all the guys I meet. The older I get, the more selective I become. It’s the same for straight people, isn’t it?”
“Yeah, I guess so. Kinda makes me glad I got Annie waiting at home for me. Don’t you sometimes wish there’d be someone to go home to?”
“I have a gay housemate. We’re good friends, but not lovers. I have tons of friends. It’s not as if I’m alone or even lonely. But, there are times, Eldon, when I do wish there was someone special. Someone to curl up with by the fireplace. Someone like your Annie,” Eric smiled.
Eldon had never seen this side of Eric. He was surprised by the subtle transformation which occurred when Eric shed his business veneer. There was a definite softening of Eric’s facial features and voice. Eldon blushed since it was like seeing Eric naked.
“Do you stay single because of your career, Eric? When this takeover battle e
nds, you’re likely to get some national exposure for masterminding our strategy. Are you trying to keep your personal life above reproach?”
“That’s part of it,” Eric admitted.
“Eric,” Eldon continued, “that’s an awfully heavy load to carry. I’m not telling you how to live your life. However, you’re entitled to romance, love, and mistakes, just like the rest of us. Any smartass reporter or NEI executive who gives you crap about your choices will answer to me!”
Eric understood Eldon was being supportive, and it touched him deeply. What went unspoken was that Eldon’s affection was for Eric, but not other gays. Rather than challenging Eldon’s sincerity, Eric chose to lighten the conversation.
“So, Eldon, you got any cute sons I might like to meet and marry?”
Eldon’s shocked expression turned quickly to laughter when he realized Eric was teasing him. As he hoisted himself out of his comfortable seat to fetch another cocktail, Eldon scolded Eric. “You’re terrible! Here I am being ever-so-serious and there you go with your teasing. Well, I haven’t got any sons. Harry’s got a couple. One about your age, too. Poor lad still has acne. Bad skin runs in that family. Got buckteeth and wears the ugliest glasses I’ve ever seen. Probably not your type, Eric.”
Eldon freshened his drink and toddled back to his seat, icecubes tinkling as he crossed the plane. “Don’t you think it’s getting easier to be openly gay?”
“Maybe, but only in North America and Europe,” Eric nodded. “When the day comes that no gay man has to go through the trauma of coming out to his family, friends, co-workers, and classmates, then I’ll tell you being gay is easier. As long as 80% of the world’s gays live in countries where they can be killed, beaten, or jailed just because they’re suspected of being gay, then I’d have to say being gay isn’t all that easy.”
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