The Offer, Part Eight
Thursday, April 5, 2007, was destined to be a big day for me, although just how big--and in what way--I could hardly have anticipated. It was the day we'd set for signing the contract that would formally transfer ownership of my records storage, document destruction, and trucking businesses to Nova Records Management, the company I'd been negotiating with for almost a year. In the weeks leading up to the signing, papers flew back and forth between the various lawyers. I monitored the progress from Telluride, Colorado, where my wife, Elaine, and I had gone to get in some end-of-the-season skiing. From time to time I'd get frustrated that the documents we got back from Nova's lawyers did not reflect the agreements I thought we'd reached, but overall I felt the process was moving forward, and I fully expected to meet the deadline. I was so sure that I had my office fax me a list of our employees so that Elaine and I could decide how much of the sale proceeds each person would receive.
Then, just as we were packing our bags to return to New York, a brand-new issue arose. Frank, one of the five members of Nova's board, let it be known that he had a problem with the sale price. He noted that we would be getting real estate tax abatements on our property for the next 15 years, while Nova was getting a 17-year lease with options to renew for another 10 years. Using a complicated formula, he had calculated that we therefore owed Nova an additional $2.5 million. He wanted us to deduct that amount from the sale price.
Now, some people might contend that in a deal as big as this one, $2.5 million is a relatively small amount, less than 3 percent of the total. We had an understanding, however, that the price was set and we weren't going to reopen issues we'd agreed upon. I called Chris Debbas, who'd put together the deal, and told him I was furious. "What are you worried about?" he said. "My partner is chairman of the Nova board. Another member is someone I appointed to take my seat. The two others are all for the deal as is. It's 4 to 1. This is not going to be an issue."
My partner Sam, meanwhile, received an e-mail message with an attachment outlining other issues that Frank and his associate, Lane, felt we still needed to resolve. I told Sam, "If you hear from them, tell them we aren't discussing it." Lane did call, and Sam told him we weren't even going to open the e-mail attachment: It was too late to raise new issues, and the old issues were settled.
Shortly thereafter, Frank called Sam. "What do you mean, you won't discuss anything?" he said. "Who do you think you're talking to?"
"I'm talking to one member of a board that has five people on it," Sam replied, "and the others are all in agreement."
"Those votes are meaningless," Frank said. "I have veto power."
A moment later, Sam came into my office, where I was sitting at my desk, having just returned from Telluride. "Guess what?" he said. "Frank says he has veto power over the board."
I was stunned. My first thought was, That's impossible. My second was, Nobody would say that if it weren't true. To get a sense of what we might be dealing with, Sam and I decided to look at the e-mail attachment. There were 16 "open issues" listed and 11 "items still to be discussed," almost all of which we had, in fact, discussed and settled already--or so I'd thought. I immediately phoned Chris. "Does Frank have veto power over the board?" I asked. The silence on the other end seemed to last for hours, although it was probably not more than seven seconds. "I guess that means yes," I said. "You might have told me before now. I've been negotiating with the wrong guy."
I then called my friend Bob, who had sold his company to Nova a couple of years earlier, and told him about Frank's last-minute demand for an extra $2.5 million. "Oh, yeah," Bob said. "They did that with me, too. Twice I walked away from the table because of last-minute demands they were making. But I didn't realize Frank had veto power." My next call was to my friend Harvey, who'd also sold his business to Nova. He did know about the veto. He'd found out about it at his own closing, when Frank had suddenly demanded that he put another $600,000 in escrow. "But everybody does stuff like that," Harvey said.
So apparently this was Frank's modus operandi. He'd drag out the negotiations and then come up with new demands at the end, when the other party had committed so much time and money to the sale that it had no choice but to go along. I might have been in the same situation if I didn't have such terrific people working for me. My businesses had actually done better during the six months that Sam and I had been tied up negotiating the sale than during any comparable period in the past. So I had a choice. I could give in to Frank's demands, or I could call off the sale.
For me, it wasn't a question of the money. Yes, everybody says that, but in this case it happened to be true. The sale was not going to change my lifestyle, and I had already provided for my family. The additional proceeds eventually would have wound up in various charities. In that respect, selling the businesses for a few million dollars less was not a big deal. The issue was trust. I would be leaving millions of dollars in Nova, much of which was supposed to be distributed to my employees over the next few years. If I was being forced now--before the sale--to reopen issues that I believed had been settled, could I count on Nova to honor our agreements after the sale, when I would have little if any leverage? What if the company got into trouble and the board decided it couldn't afford to pay my people what they'd been promised? The options I'd have at that juncture would all be bad.
It was Tuesday, April 3. I asked Louis Weiner, my partner and the president of the records storage business, to call a meeting of our seven senior managers for Thursday, April 5--the day the deal was supposed to close--at 3 p.m. Only Louis, Sam, Elaine, and I knew what had happened. I told them not to breathe a word to anyone. I wanted to tell the managers myself.
Before I made an irrevocable decision, however, I thought I should be sure there was no scenario that would cause me to change my mind. When Chris called me back that evening, I said, "I don't think I can go through with this."
"No, no, no," he said. "Don't say that. We'll sit down and work it out."
"I'm not sitting down with anyone unless I have a signed letter from Frank saying that he's giving up his veto power on this deal. He can vote any way he wants but no veto."
"I don't know if he'll do that," Chris said.
"Then we won't have a deal," I said. "I'm meeting with my managers on Thursday at 3 o'clock. Once I tell them the deal's off, there's no turning back."
On Wednesday, the telephone didn't stop ringing. I heard about another guy who'd sold his company to Nova and had an experience similar to Bob's and Harvey's, with Frank making new demands at the end. Chris called. And so did Nova's CEO, Mike Gold, who said that Frank had agreed to take the tax abatement issue off the table. "That's real nice," I said, "but it's not enough. He has to waive his veto in writing." When Mike called back, he said that Frank couldn't waive the veto without violating contracts he'd signed, and now he was putting the tax issue back on the table. "What does that have to do with anything?" I asked.
"Since you're raising a new issue, Frank thinks he should be able to do it as well."
I just laughed. "He doesn't get it, does he?" I said. "This deal is off as long as he insists on retaining his veto. There's nothing to discuss."
At some point on Wednesday afternoon, Sam came to me. "You know," he said, "it may really be true that Frank can't waive his veto power even if he wants to. He may have legal obligations to the people who put up the money for the deal. They might have made it conditional on him having the veto."
"Okay," I said. "So what?"
"So you might want to think of an alternative," he said. "I'm not saying you should, but--if you really want to do the deal--you might have to."
Sam was right, and on Thursday morning when Chris called back to confirm that Frank's lawyers wouldn't let him waive the veto, I was prepared. "There's got to be an alternative," Chris told me.
"Okay," I said. "I'll give you one. It has three parts. First, I want the whole board to come to New York for a meeting starting Friday at 8 a.m. at one of the lawyers' offices. Second, they have to stay in that room from 8 to 6 every day until the deal is done. Third, I want a check for $200,000 by 3 o'clock today."
"What's that for?" he asked.
"I've already spent more than $400,000 in legal fees," I said. "I'm not spending another dime negotiating a deal that's going to fall apart when Frank tries to hold me up at the end. That's how he works, and I won't stand for it. I'm willing to sit and talk with you, but you have to pay for it. You have until my staff meeting at 3 o'clock to get me the check."
Chris called back an hour later. "We agree to your three conditions," he said.
"Okay, good, great," I said.
"Except for one thing," he added.
"Wait, wait, wait," I said. "If you agree, you agree--no exceptions."
"We'll pay any additional legal expenses you incur at the end."
"No, you won't," I said. "When the deal falls apart, you won't pay anything. No. The answer is no."
"Well, that's the best I can do."
"Chris, you might as well mourn the deal. I started mourning two days ago. It's over."
At about 1 p.m., Mike Gold called. Now the plan was for us to meet without lawyers. "It won't cost you anything," he said.
"Yes, it will!" I said. "It will cost me another two or three days! This is already the longest deal in the history of deal making. Three o'clock. You pay me the money by then, or it's over."
The last call came from Chris at 2 p.m. "I have to ask you a personal favor," he said.
"Personal favor?" I said. "There are no personal favors in business."
"You have to sit down with me and my partner and Frank and Lane," he said.
"I'll only meet if you give me a check for $200,000," I said. "Let me ask you something. Why won't you or your company put up the money?"
"We can't," he said. "What if the deal doesn't go through in the end?"
"Exactly!" I said. "Nobody will do it because they know Frank! Listen, Frank's a good guy, a smart guy. I just can't deal with his negotiating style."
And I meant it. There was nothing wrong with Frank's way of negotiating. It wasn't my way, but it had obviously worked for him in the past. Of course, I believed it had worked only because of his veto, which I hadn't known about but should have. I had clearly failed in my own due diligence. True, I'd never heard of a minority board member having a veto, but that was just my ignorance. The next day, I saw a headline in The New York Times announcing that Sam Zell was getting a veto as part of his deal to acquire the Tribune (NYSE:TRB) publishing company.
I suppose I could also have blamed Chris and Harvey for not telling me about Frank's veto, but that would have been a cop-out. They had no obligation to tell me anything. Their job was to get the best deal for Nova. No, the fault was all mine. I hadn't asked enough questions early on about Nova's decision-making process. If I had known then about Frank's veto power, I would have spent more time with him at the beginning and probably concluded that he and I could never do a deal together, which would have saved us all a lot of time, money, and anguish.
Not that my employees were the least bit upset by this turn of events. The senior managers told me later that they came to the 3 p.m. meeting expecting me to announce another delay in the closing, which they had known was set for that day. When I instead told them that the sale was off, they broke into radiant smiles. "I guess I can keep my gasoline credit card," said Peter Gunderson, who oversees our operations.
"Oh, great, June is just around the corner," said Patti Kanner-Post, one of our key salespeople, referring to the end of our fiscal year. "I guess we're going to get our annual bonus after all."
Later that afternoon, I met with all of the supervisors in groups of two or three. They seemed equally glad that they wouldn't be dealing with new owners. Even Elaine, who had pushed to sell from the start, was comfortable with my decision. Indeed, she had given up on the sale before I had. Considering the difficulty I was having in getting our agreements down in writing, she had begun to fear how the employees would be treated under the new regime.
And me? It's going to take a while for me to process what we've been through. I've been getting a lot of calls from people who want me to do a deal under other conditions, but I think we'll need a considerable period of time before we're ready to make long-term decisions about the future of the company. Meanwhile, I'm just trying to figure out what I've learned from this saga. I'll have some thoughts about that in next month's column, which will be the last in this series--the last, that is, unless something else completely unexpected happens.
Norm Brodsky has been writing about the possible sale of his businesses in his monthly Street Smarts column. His co-author is editor-at-large Bo Burlingham. Comments? Questions? Suggestions? Send them to firstname.lastname@example.org.
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