The task ahead can be described very simply. I was going to help Dai
Nippon acquire controlling stock positions in a bevy of ineptly managed
American high-tech companies, and she was going to be in charge of
turning them around. I was DNI's takeover artist; Tam was the fix-it
expert. That probably sounds a bit ambitious on everybody's part, but
after watching the Dai Nippon juggernaut for a couple of days I knew
one thing for sure: we'd have plenty of heavy backup.
Why did I agree to ride shotgun for Matsuo Noda's "Save America"
project? Because, if he meant what he said, such a program was long
overdue. American industry was in trouble, and it was hurting a lot of
good, hardworking people who didn't deserve to be hurt. Worse still,
this wasn't some random act of God. It was largely the result of self-
serving corporate management. Most occupiers of the executive suites
these days were too busy merging and acquiring and leveraging to do
what stockholders thought they were paying them for: building industry
and creating American jobs. (Well, maybe that's an overstatement; they
had kept Drexel Burnham's junk-bond cowboys working overtime.) In the
mid-eighties, American corporations were spending two and three times
more on mergers and acquisitions than on research and development. Most
industrialists here no longer cared to try making anything as old-
fashioned as competitive products; they preferred to make deals and
sell imports. The net result was that America, the world's major
economic locomotive, was veering off the track and seriously in danger
of taking everybody else in the world along with it.
That's where Matsuo Noda came in. Part of the arrangement he'd made
with the Japanese institutions putting up the funds was that he would
be given proxy to exercise all voting rights. Face it, he had a pretty
impressive performance record overseeing the long-range planning and
investment of well-run corporations. So after I'd helped Dai Nippon
acquire control of a long list of poorly managed companies, he and Tam
Richardson were planning to move in, clear out the deadwood, and lay
down priorities for restructuring. She was Dai Nippon's technical
director for all U.S. operations, which meant she was going to head up
the team on the newly evacuated floor just above the financial section--
Noda's management samurai.
Enough theory. Here's how it actually went. On Friday the story was
finally broken by The Wall Street Journal, a little squib in "What's
News," with a short two-column analysis on page 3. The piece revealed
that all the heavy new activity building in the high-tech sector of the
market represented buys being coordinated by a new Japanese investment
concern.
This sudden, unexpected program of foreign investment was heralded at
first as a salubrious omen, refuting those doomsayers who were claiming
the world had lost confidence in the U.S. In fact, if anything it was
proof that overseas enthusiasm was actually increasing. Japan's
previous practice of focusing on debt instruments was at best passive
investment. But buying heavily into a sector of the economy that
appeared weak was something else entirely. It was a rousing endorsement
of America's prospects.
To be fair, there was still a modest case to be made in that direction.
Our high-tech sector wasn't all struggling high fliers operating out of
some one-story cinder block on Route 128 or the Washington Beltway.
America had plenty of solid industry in high tech--computers, aerospace,
office machinery--and American laboratories and universities were the
envy of the world. The problem lay with the downside. We'd lost our
lead in electronics, drugs, scientific instruments, plastics,
communications equipment . . . it's a long list. In fact, America's
overall trade balance in high-tech products had actually gone negative,
shrunk from a twenty-five billion dollar surplus as recently as 1980.
The ignored question, therefore: Given the direction things were
headed, why were the Japanese suddenly supposed to be so impressed?
The market's initial euphoria didn't last long however. By the end of
the second week the SEC was sniffing the air and the lunch talk
downtown, from the AMEX traders at Harry's to the expense-account crowd
at historic Fraunces Tavern, was
focused on what appeared to be a major shift in Japan's investment
strategy. Now that the stock market was in shambles, they weren't just
dabbling anymore; they were cashing in on the fire sale hand over fist.
Thus the Street's early cheering melted into apprehension. Japan had
already taken apart our debt and currency markets, turned them upside
down, and scored a bundle. Now Noda had Wall Street looking over its
shoulder and reminiscing about the good old days when all it had to
worry about was rich, crazy Arabs. When it became clear that Dai Nippon
was assaulting the U.S. securities markets with high-speed computers
and a checkbook that just kept coming, there weren't all that many
wisecracks about camels and tents.
Wall Street, however, merely counts; it doesn't think. The real
disquiet was reserved for corporate boardrooms. Take it as a given that
when the Securities and Exchange Commission reports some ten, twenty,
or thirty percent of your company's stock has just been swallowed by a
cash-rich Japanese raider, your attention can focus most exquisitely.
In a word, Matsuo Noda was the talk of industrial America. More to the
point, and exactly what he had expected, the boards and CEOs of the
companies being bought were beginning to be scared shitless. A major
player with seemingly bottomless pockets was gobbling up heavy blocks
of their publicly traded shares. Worse still, nobody had the slightest
inkling why.
What all those entrenched CEOs didn't realize, in their wildest
paranoia, was that seven-figure salaries and cushy executive perks were
about to go the way of Cadillac tail fins. World competition, not
executive compensation, would be the new game. Playtime was over;
America was about to get serious again.
My early suspicions concerning my role in Noda's design had been
precisely on the mark. I was indeed the freelance gunslinger he wanted
by his side when the companies he was aiming at started to shoot back,
which they surely would. Needless to say, if his plan was ever allowed
to reach the courts, it would create a virtual "living trust" for half
the corporate lawyers in the land. He'd be in litigation through the
twenty-first century as managements fought to the last stockholder's
dollar to keep their jobs.
Enter Matt Walton. Time for some samurai-style legal swordsmanship.
The rules: If you're CEO of a company and somebody starts buying up a
major chunk of your stock with the intent of taking you over, you've
got roughly four basic ways to stop him. The first is to try and bribe
that buyer to go away, paying him a ransom--politely called greenmail--to
sell his holdings and disappear. (More than one corporate raider you've
read about in the papers has made millions in a couple of weeks using
that very play.) The drawbacks of trying to buy off a potential
acquirer are, (1) it's expensive, and (2) maybe he really does plan to
eat you, in which case it won't work anyway. Matsuo Noda was in that
category.
A second popular means to thwart a hostile takeover is to go out and
find somebody else to buy you first, the proverbial "white knight."
Ideally this friendly buyer should be, (1) too big to be taken over
himself, and (2) willing to let you keep your playpen.
A third technique to stop somebody from acquiring a controlling chunk
of your stock is to jack up the price, usually by offering to buy it
yourself. Float some junk bonds, sell off a few divisions, do anything
that will raise cash and then offer the shareholders more than the
raider is willing to bid. This can be very expensive, but if you're a
CEO with millions in compensation every year, why should you care if
your stockholders' company is leveraged to the brink of ruin? You've
still got your job and your goodies. It's used a lot.
The fourth and most fashionable way these days to stop hostile mergers
is to try and make yourself unmergeable. To do that, you get your board
of directors to vote a poison pill. What this does is make sure that
any company that swallows you is going to be ingesting a piranha that
will eat said company's own guts instead. The newest twist on this is
to use phony bonds with a so-called flip-over provision, a killer pill
invented by a clever New York law operation I won't name but whose
initials might be WLR&K. Their game is as follows. In order to protect
yourself you invent some convertible bonds and stash them away
somewhere, ready. Then, should a raiding company start acquiring your
stock or make an unauthorized tender offer to your shareholders, you
hand out these little bombs to everybody who owns your shares. If this
unfriendly company is then unlucky enough to actually acquire you,
those convertibles "flip over" into the stock of that buyer. Your
stockholders suddenly have the right to exchange their funny paper for
huge, discounted chunks of real stock in the acquiring company--which
would, naturally, be ruined should that happen. And usually, just for
good measure, you also vote through a few "golden parachutes" for you
and all your cronies, giving everybody in the executive suite severance
pay in the tens of millions.
Those were the stakes. Now, a lot of outfits suddenly found themselves
being bought by a mysterious Japanese entity named Dai Nippon,
International. What were they going to do? At first of course everybody
just assumed NDI was merely angling for a little greenmail. No such
luck. After a couple of days went by and we hadn't returned anybody's
phone call, they knew that wasn't it. Next, a few went looking for a
white knight with more money than DNI (a tough assignment). Not
surprisingly, however, most corporate managers very quickly decided to
call a board meeting and ram through a poison pill.
I got more than a few phone calls at my downtown office from CEOs
wanting to know if I could pitch in and help them stave off what looked
like an unfriendly Japanese buy-up. I had to say, sorry fellows, I'm
unavailable. But why not give it your best shot and try the old "pill"?
Most of them did. They had no option really.
Which suited me fine.
The time was late Friday--the afternoon was gorgeous, sunny and crisp--
and the place was Noda's office. Naturally he understood all about
poison pills, so he knew the problem. What he wanted to hear was our
solution.
"I'd like to try something that's never been done before. A different
battle plan." I glanced out at the blue sky and wished I was already in
St. Croix on holiday with Amy. "However, I think it's possibly just
unconventional enough to fly."
"It has to be legal, Mr. Walton." Noda leaned back in his chair,
waiting.
"It is. But in order to lay the groundwork, we'll first need to set up
a string of dummy corporations."
"Any particular state?" He was listening closely now, his mind clicking
away. I was never sure what the man was thinking, but I figured he'd
probably seen it all before.
"That old standby Delaware should do fine, though you might want to
consider going for some offshore tax-haven places, if only because the
paperwork is minimal. In the Caribbean I'd recommend the Turks and
Caicos Islands, maybe the Cayman Islands. Then there's Bermuda or the
Bahamas or the Channel Islands. If you really want to get esoteric, why
not Vanuatu--used to be the New Hebrides--in the South Pacific."
"I'm familiar with world geography, Mr. Walton." He was deadpan. A
joke?
"Fair enough. These dummy corporations of course will have no assets."
"I understand." He smiled and ran his fingers through his silver hair,
doubtless already miles ahead of me. "Absolutely no problem. Please
proceed."
"While those corporations are being set up, you continue buying stock
in whatever companies you need to control, making sure in all cases
that you acquire just enough to deliberately trigger their poison-pill
mechanism. We force them to issue their flip-over bonds. They can't
stop the process, since it's always set up to be automatic after a
certain percentage of stock has been acquired. Not even the boards of
directors can revoke it."
"Yes, Mr. Walton. I'm aware of that." He didn't seem the slightest bit
ruffled by my unorthodox opener.
"Well, let me elaborate. The reason we want to trigger their poison
pill first is so that nobody can later come in as a white knight and
save them. They're totally isolated. They'll have made themselves into
sitting ducks."
"Very good." He leaned back. Was he really that far ahead of me?
"While that's happening, you 'sell' the stock acquired thus far to one
of the dummy outfits we've set up, in return for debt paper. Which puts
DNl at arm's length and untouchable. After that, you lend that dummy
corporation the rest of the millions or billions necessary to acquire a
controlling interest in the company, taking back as collateral more
junk bonds at absurdly usurious rates. That makes it a financial leper,
but you don't care: you're merely lending yourself the money. This
paper corporation is all that can be touched when the acquired
company's poison bonds flip over. So instead of being convertible into
the stock of some cash-rich corporation, the way they were intended,
those flip-bonds are going to give their holders a piece of some
offshore phone booth with zero assets and enough debt to choke a horse.
They're worthless paper. And you're in the clear."