8. A Failed Deal

Though I didn’t know it, I was in the twilight of my career at the bank. Mistakes that I had made in the deal that had seemed to cement my position as an up-and-comer were beginning to come to the fore. Meanwhile, I was focused on an exciting new deal advising the CEO (yes, the same CEO who ten years later I would join as a junior partner) on a possible acquisition.

Such assignments were what my job was all about; I was a deal maker. I could focus on – maybe – two or three all-consuming assignments a year. If those deals happened, the bank earned big fees and I got big bonuses. If they didn’t, well, that wasn’t good.

This new opportunity was my second chance to work with the CEO. In the first, which had taken place during the previous year, we had become extraordinarily close. We had learned that we enjoyed fighting battles side by side, and he had learned that he could trust me. These stories – of the deal that dashed my career at the bank and of the first deal I did with the CEO – are for other days; today I will focus on the CEO’s first opportunity to go bi-coastal.

The business he owned with an elderly partner was thriving, but had no reach beyond New York City. He had built it from almost nothing, brick by brick, to the point where he felt it was a big enough platform to go to the next logical location – Los Angeles. A chance to buy assets in both great cities was in plain sight.

After the CEO’s company had formally engaged the bank to provide advisory services regarding these possible acquisitions and to raise whatever funding was needed to close the deals, the CEO asked me to attend an unusual meeting. There was somebody he wanted me to meet, a man of whom he said: “This is an impressive guy, somebody who could be my partner someday. I have known him a long time and he has a track record like no other. He’s interested in these deals too.”

So I sat in on the meeting with them. The Other Guy was making a pitch that the CEO should buy the businesses in New York and Los Angeles and let him run the latter market as a full one third partner in the parent company with the CEO and his already-existing partner. The Other Guy said he would fly back and forth weekly on the MGM Grand first-class-only flights that were then making the NY/LA trip daily (at the company’s expense, naturally). He also had all kinds of other ideas about how the CEO could make his new job worth doing. The CEO thanked him for his thoughts and said that he would think about them. I had said nothing, nothing at all, during the meeting.

Afterward, the CEO told me that he had been shocked that the Other Guy had presumed that he would immediately be made a full partner in the enterprise as a whole. How could that be justified? He, the CEO, had built the company, and he and his already-existing partner would be paying for the acquisition. It was kind of impressive that the Other Guy was so ballsy, but also a little bit nuts. I made it clear that I thought the request was entirely nuts.

The CEO would think the Other Guy’s request over for a few days, then let him know he wasn’t interested. We proceeded to work on the possible deals without him.

We liked what we saw. The New York assets could be fitted right into the CEO’s business; the LA assets were a little different, but we devised a plan on how to make of them something better than what they were. We got more and more excited.

The selling company, which had businesses in multiple markets, had asked for separate bids for each market. We submitted what we thought were aggressive offers for the two that we wanted. Our offers were accepted, which meant that we signed letters of intent and began simultaneously both doing due diligence on the two businesses and negotiating final contract terms.

For reasons that will become obvious later, I need to explain the odd ownership structure of the businesses that we were trying to buy. They were owned by a company that was owned by a private equity group. The private equity group, in turn, was majority owned, and presumably controlled, by one of the WASPiest old line investment banks; bankers from that investment bank had written the investment memoranda on the various markets on the basis of which we and others had bid; they were conducting the auctions. In other words, the investment bankers, who ordinarily act as agents for companies, were in this case ultimately in control of the company for which they were theoretically acting as agents – or rather, their employer was.

In the course of our due diligence, we smelled a rat. The closer we looked at the New York numbers, the clearer it seemed that lots of business was being done off the books. We didn’t find any such shenanigans in Los Angeles, but our work there was proceeding more slowly given the complexity of our plans to change the way the seller’s products were being used in that market.

We very much wanted to proceed with the Los Angeles deal, but didn’t know quite what to do about New York. How could we pay a given figure when the one thing we knew was that we didn’t know the real numbers?

The CEO and I decided that the right thing to do was for me to go talk to the investment bankers on the other side – tell them that they had an enormous potential embarrassment on their hands. They should pull their investment memorandum about the New York business, assess and fix the internal problems at the company, and sell New York to us later off the real numbers.

It was an awkward meeting, but the investment bankers seemed grateful for what I was telling them. They asked if we still intended to proceed with the LA deal – we did – and thanked me profusely for the information, promising to get back to us about New York in due course.

The CEO and I then flew to LA for extended due diligence and final negotiations. Weeks passed in these processes, maybe a month or more. All talk regarding New York went silent. Eventually, we found ourselves sitting in Los Angeles on a Sunday afternoon, settling final contract points on the phone with the selling company’s investment bankers and lawyers. When that discussion ended, the lead investment banker for the other side told us we had a deal. We agreed to show up the following morning in New York so the CEO could sign the final contract. So, the redeye it was.

The next morning, the CEO – my client – got a call putting off the agreed time for signing. He began stewing immediately. When he got another, we knew something was going on, though the other side wouldn’t tell us what.

That afternoon the Other Guy called out of the blue. We had heard that he had bid on the Los Angeles business with another fellow, but had presumed that he had gone away when they agreed to sell it to us.

The Other Guy coolly told my client that he had just been appointed CEO of the selling company, and that he was not going to sell the Los Angeles business to us. “I’m pulling the trigger on you” were his exact words. He would later sell the Los Angeles business, instead, to the man with whom he had bid on it before being asked to replace the selling company’s previous CEO, who had been fired. He would keep New York, where he would compete with us directly.

Had the selling company’s CEO been fired because of the information about New York that we had provided to the investment bankers? That would be a bitter irony given that his replacement so clearly enjoyed “pulling the trigger” on our deal.

My client was furious. We had spent months – and considerable sums – chasing these deals and now had nothing. Just the previous day, with a fifth-draft contract in hand, he had been told that we had a deal. He threatened to sue everybody on the other side.

They offered to settle by writing a check for all the out-of-pocket expenses he had incurred. He wasn’t happy, but he took the deal.

I wasn’t happy, either. My client and friend had been deprived of an opportunity that we had worked hard for and, of more immediate concern, the bank got nothing. Our prospective fees had been success based, and this was no success.

These events took place more than thirty years ago, but their echoes reverberated for decades. If I keep disinterring old stories, you will meet the Other Guy again and again. I thought of nicknaming him Nemesis, but he wasn’t big enough for that. Perhaps Not Friend would have been most appropriate, but it would’ve been a little obvious.


M.H. Johnston


P.S. As you may have noticed, I am taking these story posts down after giving you a chance to read them over a couple of days.

2 comments to 8. A Failed Deal

  • K  says:

    It’s like reading serial plot synopses for an upcoming hit tv series. We can call it American Business. Who plays the CEO? Who plays your role?

  • DP  says:

    Great story

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