11. Never is Almost Forever

In the first flush of my apparent triumph in the deal described in yesterday’s post – Troubles – I embarked on another deal opportunity. This one would also change my life profoundly in ways that would only become clear over the course of many years. The deal described in Troubles would ruin my career at the bank; this new one – a seeming failure at the time – would ultimately make me a wealthy man.

In this new opportunity, I got to know the man with whom I would probably spend as much daylight time over the following thirty years as I would with the Beloved Spouse. Maybe more.

I had already met him briefly at an industry gathering – a big, brash Jewish entrepreneur who spoke in outer-borough cadences. He was roughly ten years older than I was, so in his late thirties at the time. He was already highly accomplished – the co-owner and CEO of a very successful small business. I would later learn that he had gotten his start with a $25,000 loan from his father in 1971; in 1997 I would help him sell his first business for $174 million. In 2014 we would sell a business that he and I had built together for several times that. Henceforth in these posts I will refer to him simply as the CEO.

He was quite a guy – I had known it right away back at the industry gathering.

So when, in 1987 as a former lender and newly anointed investment banker I stumbled across an opportunity for somebody to purchase a company that I knew would fit beautifully with the CEO’s company, I went to him immediately.

I had been right that the CEO would want the company that was for sale – he wanted it very badly and quickly engaged me, through the bank, to advise him on the possible deal.

We spent months chasing the company being sold. It was being auctioned by Goldman Sachs. We came up with all kinds of theories – which we fervently believed – why the CEO and his team would do a better job with its assets than anyone else could. We were probably right about those theories, but we would never get the chance to put them into effect.

We stretched as far as we possibly could in the bidding. The CEO’s company was worth maybe $25 million at the time; as I recall we bid $117 million, all debt financed. Those were the days when LBOs – leveraged buyouts – were all the rage and banks were eager lenders. Even so, our offer fell short by a couple of million.

The auction’s winner was a buyout fund controlled by Merrill Lynch. In the month or so that followed the final bids, though, it emerged that the Merrill fund couldn’t finance their deal. The Goldman guys called us back to ask us to rebid. They told us that our bid had been very, very close – we had been the runner up. All we needed to do was raise our offer by a couple of million and we would surely take the prize. To keep us honest, they were also going to the third-place bidder; they would give us and the other firm a week to rebid.

There was one catch: in the month or six weeks since the auction, interest rates had spiked dramatically. And so badly had the CEO wanted the prize that we had bid our last nickel in what we had thought was our one and only shot at buying the company.

As I thought about the re-bid, I concluded that we had to lower our offer by a few million, reflecting the prospective debt’s higher expected carrying costs. Even bidding the same number would, in effect, be a much higher – and therefore riskier – bid. If we even bid the old price, my new client would have much more downside than upside: did he really want to take the risk of bidding that much or more instead of owning, as he already did, a debt-free, highly profitable company?

I met with the CEO and his elderly partner to argue that they should lower their offer. The elderly partner – who had previously had no role in our pursuing the deal – was angry at this advice. He thought I should figure out a way to raise the bid.

The CEO took my advice. We lowered our bid and the other firm got the company.

The CEO told me that he had learned two things about me in pursuing this possible deal: that I knew things that he didn’t, and that he could trust my integrity. He knew that the bank had stood to earn big fees – and me a big bonus – if we had won. He said that he would never do another deal without me by his side. This promise of an unbreakable business relationship wouldn’t, in fact, last forever – but it would last for thirty years, which is almost forever in human terms.

At the time, though, inside the bank, the deal that hadn’t happened looked like a big defeat for me. I had worked for many months on a transaction that had yielded us basically nothing.

It looked like a disaster outside the bank, too.

I was friends with a woman in the bank whose husband was a high flyer on Wall Street – a partner and the head of M&A at one of the most prominent firms. One evening shortly after the events I’ve just described, the Beloved Spouse and I had my friend and her husband over to dinner at our distinctly modest, rented apartment. After I told them the story of the deal that got away, my friend’s husband said:

“It’s a good thing you don’t really work on Wall Street, Mark. You were supposed to tell them to raise their bid.”

Over the years, I’ve thought back on that conversation many times. My friend’s husband would probably have been surprised to learn that in the long run, doing the right thing in that deal proved to be the best business decision I ever made.

M.H. Johnston

P.S. It later emerged that the winning bidder had overpaid; they ultimately went into a no-doubt painful debt restructuring.

2 comments to 11. Never is Almost Forever

  • K  says:

    It is said that every day in business a goal is either make a customer or a friend. Good story again.

  • Ron  says:

    Fantastic story, I’ll read more.

Leave a reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>