Chapter 22 – Waxing the Board
[ 22-WaxingtheBoard.pdf ]
Cheryl Corlund looked over the room where the board of directors of Wavelife International would be meeting in less than an hour. Not that she ever had to worry about the board’s actions, but nevertheless she gave these meetings her utmost attention. The seating, the pencils, the water carafes, everything was by design. She turned on her heel and went back to her office. She had one last detail to attend to.
“Everyone here is ready to go. Anything else you can think of, Cheryl?” asked a smiling Ben Jeffries.
“No, Ben, we’re set. The numbers speak for themselves. Oh, yeah, one thing. Bruce Kaufman.”
Jeffries smile flattened a little.
“He’s out. We don’t need to waste time on his account. Oh, and be sure to give my regards to Roberto. The video was impressive. Tell Heath I appreciate his plumbing the depths and Aleja! My goodness, now that’s modern dance! And can Sonny-boy surf! Great! Just great!”
“Give you a call in a few hours with the good news?”
“Nah, it can wait till tomorrow.”
“Till then, Ben.”
The video screens went blue and Ben Jeffries got back to business in his private dining room.
“Cheryl sends her regards. How’s the fish?”
“Excellent, as usual,” said Peter Lasserman.
“Say, Ben, can I steal your chef for a party I’m having next week?” asked John Vutara.
“They liked the video,” said Cheryl Corlund.
“Yeah, I’m glad we had the time to edit it down,” said Bill Massara, “Next time we better send a team of pros, that’s for sure.”
“I think that’s the idea, Bill,” laughed June Wilson, “But first things first. Did you get a final disposition on the reef issue?”
“The issue is the value of small waves versus the value of big waves. Our position is that big waves are an ‘if’, not a ‘when’, just like a big oil find is not a sure thing based on nothing but geological data. Therefore storms, swells and big waves cannot be treated as fixed assets . We’re assuming the SEC will be all over the deal, and we’ll be happy to comply with their requests.”
“And on that note, what was it that Sonny-boy says?” asked Corlund facetiously, fingering the lucky nail in the pocket of her business suit.
“Geevum!” said three voices simultaneously.
Just as she’d done while walking through the blizzard in New York headed for a big meeting, Cheryl Corlund ran through a list of all the issues. This is not a hostile takeover per se. There is nothing overtly hostile about the laws of the marketplace. We cash out the shareholders at a price well above current share price. And they have to sell thanks to the board’s decision. And the board has no choice because this is classic “gun-to-the-head”.
Bill ran final assets and liabilities numbers against sales projection. June met with Ben to refine the loan structure. Our position is airtight, our bid is more than fair, and the board can’t say no. We even let them look like they are in charge. They will come back and demand an extra dollar or so to keep up appearances. Exactly as planned.
“Gentlemen, item 1A is a report from the chief executive officer,” said Roberto Mercante. “Thank you Mr. Chairman. Gentlemen, the company’s market share has continued to grow. We are the acknowledged leaders of the surf industry. Unfortunately, that has nothing to do with the price of our shares ,” she said, her voice clear, confident and strictly business even while delivering bad news.
“As we all know, the apparel industry has been under pressure for some time to perform against standards based solely on growth year-over-year. We have met those standards and often exceeded them for almost a decade. However, investors are no longer interested in surfing. Only a tidal wave could get their attention,” said Corlund, changing her pitch just slightly, “and with the quality of our surf team promotions thanks to Roberto, our surfers would be riding it!”
She injected levity into the room like an anesthesiologist, and everyone laughed almost on cue.
“But seriously, we have studied any number of ways to increase shareholder value and have made substantial changes in our operations to reduce costs and overhead. We’ve developed new lines, new markets, new publicity events, and new distribution channels. And indeed sales are up, but the share price remains flat. Therefore the only way we can realize the true value of the company for the shareholders is for management to execute a leveraged buyout.”
Everyone in the room knew about leveraged buyouts, though none had ever actually been through the process of having senior management, using borrowed money, buy a comp any from its shareholders . Some called it stealing the company, and the all-time classic LBO, the story of RJR Nabisco, was fresh in the mind of at least one director.
“How far has this gone, Cheryl?” asked Richard Black, once Wavelife’s senior V.P. of marketing during the early years but now making twice as much money consulting across the apparel industry.
“In order to preserve confidentiality, we haven’t gone very far, Richard. We don’t have a dime, but if the board allows us to go forward with this proposal, we will move quickly. Everyone benefits when management takes over, and our proposal is without a doubt in the best interests of the shareholders.”
She continued her presentation without violating four important rules of these kinds of deals. She didn’t tell them about potential assets not currently on the balance sheets . She didn’t tell them of her future plans for the company. She didn’t tell them anything about the financing behind her proposal. And she knew in advance what the reaction would be.
Within minutes Black was mollified when she outlined the process by which management would tender an offer for the company that included a generous incentive for shareholders to sell their stock. She knew that would be good enough for the rest of them. Still, each felt the need to weigh in.
“How generous? It would have to be north of the highest value ever traded,” said Steve Palua, former Hawaiian surf legend and a board member because of his name and his contacts . He knew a leveraged buyout would benefit the investment group he represented. He had not been able to deliver good news to them lately, and he was anxious to know how much Corlund was offering.
“Try twenty-two a share, Steve,” said Bill Massara, not blinking at the fact they’d be paying close to a billion dollars.
“Well, you’re the CFO, Bill, so I’m sure you know your numbers, and that’s a lot more than we’re trading at right now,” said Bart Thomas, on Wavelife’s board because he would have been called a ‘macher’ in the old days though his current title was “contractor relations’. Thomas knew everything about the garment industry and had contacts from the design salons to the warehouses thanks to growing up in the heart of the New York garment district pushing carts for his father’s shirt company.
“Yet it is, Bart, but that’s what the company is worth, and that’s what we are prepared to pay.”
“Don’t vee have zu do zis carefully? Und Cheryl, you und Bill und Roberto vill have zu quit from zee board,” said Gunter Jacobsen, the German president of Wavelife’s European operations.
“That’s true, Gunter,” said Cheryl Corlund. “In your board packets you’ll see the appropriate letters of resignation.”
“I’m sure everyone here would like to express their gratitude to all of you for your service to the board and the company,” said Richard Black, as chairs were pushed back all around the table and the four remaining directors could shake hands with soon-to-be new owners of Wavelife International.
When the door closed behind Corlund, Massara and Mercante, Richard Black looked around the table. Everyone had a reputation to protect, so no one was going to be the first to say anything. But he knew that would get them nowhere, and he had clients to meet later that day.
“Ok, we need a chair, don’t we? And we’ll need to set up a special committee to examine her bid. Who wants to serve on it?”
“Well, I’d say the horse is out of the barn,” said Bart Thomas, “and said committee won’t be much more than a rubber stamp . But there’s still gonna be some work to do.”
“Yeah,” said Palua, “and if someone decides to bid higher, the committee is going to be on the hot seat. But that’s not going to happen, not at twentytwo. And so we’ll just raise the price a buck for appearances, and we’re done. So why don’t you and I volunteer, Bart? Keep everybody happy and get it over with. Gunter, you’re on, too, ok?”
“Well, if we had a chairman, he’d call for a vote,” said Black.
“We got one, Black,” said Thomas, “And you’re it. All in favor?”
Everyone raised their hands.
“Done deal,” said the New Yorker, “Now, the committee. We have three names? All in favor?”
“Hold on there, Bart! I’m the chairman. Ok, all in favor?”
After half-an-hour of wrangling over the exact wording of the minutes, Richard Black called Cheryl Corlund back into the room.
“Ok, Cheryl, the board is prepared to direct you to proceed. We have elected a committee that needs to see your proposal as soon as possible, and we’ll have to issue a press release stating management has tendered an offer for the company.”
“Fine. Here’s the draft filing for the SEC. They will appreciate getting notice of your intent before reading about it in the press. We want everything to go smoothly.”
Nobody cared that she was railroading them, least of all Gunter Jacobsen who was already thinking of his exit from the board with a good severance package to help him get out of apparel and in to telcom. He did make a token effort to look professional.
“Zee committee vill need all zee financials. Three copies, please.”
“Bill has them waiting for you outside, Gunter. I’ll warn you, though, it’s a stack about a foot high.”
“How long do you think this is going to take, Cheryl?” asked Steve Palua, anxious to get working on new investments with the money his friends would be making on the deal.
“Well, after the LBO disasters of the eighties, you can’t do this kind of thing in a few weeks anymore. But if all goes as expected, we should be done by the middle of June.”