CHAPTER FOURTEEN
The task ahead can be described very simply. I was going to help DaiNippon acquire controlling stock positions in a bevy of ineptly managedAmerican high-tech companies, and she was going to be in charge ofturning them around. I was DNI's takeover artist; Tam was the fix-itexpert. That probably sounds a bit ambitious on everybody's part, butafter watching the Dai Nippon juggernaut for a couple of days I knewone 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 longoverdue. American industry was in trouble, and it was hurting a lot ofgood, 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 suitesthese days were too busy merging and acquiring and leveraging to dowhat stockholders thought they were paying them for: building industryand creating American jobs. (Well, maybe that's an overstatement; theyhad kept Drexel Burnham's junk-bond cowboys working overtime.) In themid-eighties, American corporations were spending two and three timesmore on mergers and acquisitions than on research and development. Mostindustrialists here no longer cared to try making anything as old-fashioned as competitive products; they preferred to make deals andsell imports. The net result was that America, the world's majoreconomic locomotive, was veering off the track and seriously in dangerof taking everybody else in the world along with it.
That's where Matsuo Noda came in. Part of the arrangement he'd madewith the Japanese institutions putting up the funds was that he wouldbe given proxy to exercise all voting rights. Face it, he had a prettyimpressive performance record overseeing the long-range planning andinvestment of well-run corporations. So after I'd helped Dai Nipponacquire control of a long list of poorly managed companies, he and TamRichardson were planning to move in, clear out the deadwood, and laydown priorities for restructuring. She was Dai Nippon's technicaldirector for all U.S. operations, which meant she was going to head upthe 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 wasfinally broken by The Wall Street Journal, a little squib in "What'sNews," with a short two-column analysis on page 3. The piece revealedthat all the heavy new activity building in the high-tech sector of themarket represented buys being coordinated by a new Japanese investmentconcern.
This sudden, unexpected program of foreign investment was heralded atfirst as a salubrious omen, refuting those doomsayers who were claimingthe world had lost confidence in the U.S. In fact, if anything it wasproof that overseas enthusiasm was actually increasing. Japan'sprevious practice of focusing on debt instruments was at best passiveinvestment. But buying heavily into a sector of the economy thatappeared weak was something else entirely. It was a rousing endorsementof 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 ofsome 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 theenvy of the world. The problem lay with the downside. We'd lost ourlead in electronics, drugs, scientific instruments, plastics,communications equipment . . . it's a long list. In fact, America'soverall 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 wereheaded, why were the Japanese suddenly supposed to be so impressed?
The market's initial euphoria didn't last long however. By the end ofthe second week the SEC was sniffing the air and the lunch talkdowntown, from the AMEX traders at Harry's to the expense-account crowdat historic Fraunces Tavern, was
focused on what appeared to be a major shift in Japan's investmentstrategy. Now that the stock market was in shambles, they weren't justdabbling anymore; they were cashing in on the fire sale hand over fist.
Thus the Street's early cheering melted into apprehension. Japan hadalready taken apart our debt and currency markets, turned them upsidedown, and scored a bundle. Now Noda had Wall Street looking over itsshoulder and reminiscing about the good old days when all it had toworry about was rich, crazy Arabs. When it became clear that Dai Nipponwas assaulting the U.S. securities markets with high-speed computersand a checkbook that just kept coming, there weren't all that manywisecracks about camels and tents.
Wall Street, however, merely counts; it doesn't think. The realdisquiet was reserved for corporate boardrooms. Take it as a given thatwhen the Securities and Exchange Commission reports some ten, twenty,or thirty percent of your company's stock has just been swallowed by acash-rich Japanese raider, your attention can focus most exquisitely.In a word, Matsuo Noda was the talk of industrial America. More to thepoint, and exactly what he had expected, the boards and CEOs of thecompanies being bought were beginning to be scared shitless. A majorplayer with seemingly bottomless pockets was gobbling up heavy blocksof their publicly traded shares. Worse still, nobody had the slightestinkling why.
What all those entrenched CEOs didn't realize, in their wildestparanoia, was that seven-figure salaries and cushy executive perks wereabout to go the way of Cadillac tail fins. World competition, notexecutive 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 beenprecisely on the mark. I was indeed the freelance gunslinger he wantedby 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 allowedto reach the courts, it would create a virtual "living trust" for halfthe corporate lawyers in the land. He'd be in litigation through thetwenty-first century as managements fought to the last stockholder'sdollar 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 amajor chunk of your stock with the intent of taking you over, you'vegot roughly four basic ways to stop him. The first is to try and bribethat buyer to go away, paying him a ransom--politely called greenmail--tosell his holdings and disappear. (More than one corporate raider you'veread about in the papers has made millions in a couple of weeks usingthat very play.) The drawbacks of trying to buy off a potentialacquirer are, (1) it's expensive, and (2) maybe he really does plan toeat you, in which case it won't work anyway. Matsuo Noda was in thatcategory.
A second popular means to thwart a hostile takeover is to go out andfind somebody else to buy you first, the proverbial "white knight."Ideally this friendly buyer should be, (1) too big to be taken overhimself, and (2) willing to let you keep your playpen.
A third technique to stop somebody from acquiring a controlling chunkof your stock is to jack up the price, usually by offering to buy ityourself. Float some junk bonds, sell off a few divisions, do anythingthat will raise cash and then offer the shareholders more than theraider is willing to bid. This can be very expensive, but if you're aCEO with millions in compensation every year, why should you care ifyour stockholders' company is leveraged to the brink of ruin? You'vestill got your job and your goodies. It's used a lot.
The fourth and most fashionable way these days to stop hostile mergersis to try and make yourself unmergeable. To do that, you get your boardof directors to vote a poison pill. What this does is make sure thatany company that swallows you is going to be ingesting a piranha thatwill eat said company's own guts instead. The newest twist on this isto use phony bonds with a so-called flip-over provision, a killer pillinvented by a clever New York law operation I won't name but whoseinitials might be WLR&K. Their game is as follows. In order to protectyourself you invent some convertible bonds and stash them awaysomewhere, ready. Then, should a raiding company start acquiring yourstock or ma
ke an unauthorized tender offer to your shareholders, youhand out these little bombs to everybody who owns your shares. If thisunfriendly company is then unlucky enough to actually acquire you,those convertibles "flip over" into the stock of that buyer. Yourstockholders suddenly have the right to exchange their funny paper forhuge, discounted chunks of real stock in the acquiring company--whichwould, naturally, be ruined should that happen. And usually, just forgood measure, you also vote through a few "golden parachutes" for youand all your cronies, giving everybody in the executive suite severancepay in the tens of millions.
Those were the stakes. Now, a lot of outfits suddenly found themselvesbeing bought by a mysterious Japanese entity named Dai Nippon,International. What were they going to do? At first of course everybodyjust assumed NDI was merely angling for a little greenmail. No suchluck. After a couple of days went by and we hadn't returned anybody'sphone call, they knew that wasn't it. Next, a few went looking for awhite knight with more money than DNI (a tough assignment). Notsurprisingly, however, most corporate managers very quickly decided tocall a board meeting and ram through a poison pill.
I got more than a few phone calls at my downtown office from CEOswanting to know if I could pitch in and help them stave off what lookedlike an unfriendly Japanese buy-up. I had to say, sorry fellows, I'munavailable. 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 aboutpoison pills, so he knew the problem. What he wanted to hear was oursolution.
"I'd like to try something that's never been done before. A differentbattle plan." I glanced out at the blue sky and wished I was already inSt. Croix on holiday with Amy. "However, I think it's possibly justunconventional 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 upa string of dummy corporations."
"Any particular state?" He was listening closely now, his mind clickingaway. I was never sure what the man was thinking, but I figured he'dprobably seen it all before.
"That old standby Delaware should do fine, though you might want toconsider going for some offshore tax-haven places, if only because thepaperwork is minimal. In the Caribbean I'd recommend the Turks andCaicos Islands, maybe the Cayman Islands. Then there's Bermuda or theBahamas or the Channel Islands. If you really want to get esoteric, whynot Vanuatu--used to be the New Hebrides--in the South Pacific."
"I'm familiar with world geography, Mr. Walton." He was deadpan. Ajoke?
"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. Pleaseproceed."
"While those corporations are being set up, you continue buying stockin whatever companies you need to control, making sure in all casesthat you acquire just enough to deliberately trigger their poison-pillmechanism. We force them to issue their flip-over bonds. They can'tstop the process, since it's always set up to be automatic after acertain percentage of stock has been acquired. Not even the boards ofdirectors can revoke it."
"Yes, Mr. Walton. I'm aware of that." He didn't seem the slightest bitruffled by my unorthodox opener.
"Well, let me elaborate. The reason we want to trigger their poisonpill first is so that nobody can later come in as a white knight andsave them. They're totally isolated. They'll have made themselves intositting 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 oneof the dummy outfits we've set up, in return for debt paper. Which putsDNl at arm's length and untouchable. After that, you lend that dummycorporation the rest of the millions or billions necessary to acquire acontrolling interest in the company, taking back as collateral morejunk bonds at absurdly usurious rates. That makes it a financial leper,but you don't care: you're merely lending yourself the money. Thispaper corporation is all that can be touched when the acquiredcompany's poison bonds flip over. So instead of being convertible intothe stock of some cash-rich corporation, the way they were intended,those flip-bonds are going to give their holders a piece of someoffshore phone booth with zero assets and enough debt to choke a horse.They're worthless paper. And you're in the clear."
He smiled. "Which means our program can proceed on schedule?"
"Dai Nippon will be totally insulated from their poison pills. Like theguy who sells his house and boat to his company and then lets it fileChapter 11 bankruptcy in order to protect his personal assets fromcreditors. Nobody can lay a glove on you."
"Mr. Walton"--he leaned back, a twinkle in his dark eyes--"that's exactlywhy I knew you were right for us. You have an intuitive grasp oftactics."
"If you do this, there're going to be a lot of unhappy, unemployedlawyers in this town."
"Most regrettable. Some of them might even have to go out and findproductive work." He rose and shook my hand. "You've destroyed theprospect of years of legal roadblocks in a single stroke. It'selegant."
It was. Sun Tzu and Miyamoto Musashi would definitely have approved.But there still had to be more. An unexpected opening is not enough initself; it needs an equally deft follow-up. Bushido, the Way of theSword, teaches that you should first surprise your antagonist, and thenyou must confound him. Both the initial attack and the carry-throughare crucial to success. Among other things, that meant Noda's mechanismfor calling a board meeting of the companies he'd be acquiring had tobe instantaneous, without the usual niceties.
"This setup should do the job, but only if it's used with finesse.Otherwise the whole system gets buried in paperwork."
"What do you mean?"
"You have to be fast, and flexible. Once you've taken ownership of acompany, you've got to gain immediate control over its board ofdirectors, in order to block any and all countermoves."
"I understand."
"Do you? I'm talking about the ability to call an executive session outof the blue. The _kesa_ stroke of the sword. The power to cut a CEO inhalf before he can blink. No time for consensus and the usual Japaneseniceties."
He stood quietly, thinking. At last he spoke.
"In other words, I must be able to convene the board at a moment'snotice. Is that the essence of what you are saying?"
"Nothing else is going to work."
"Very well. After we have a commanding stock position, we can institutethe necessary changes."
"Good. Remember though, that's still merely half the battle. Besidesbeing able to call board meetings, you need full authority to institutea shareholders' vote, which in this case will consist of nothing morethan you signing your name."
"Perfectly reasonable."
"It is. But it also means you've got to be available to me at alltimes. Can I rely on that?"
He turned and strolled to the window, pensively. "That may not alwaysbe possible."
"Then you've got a potential problem."
He revolved back and studied me a second, finally taking the bait."There is, of course, one very simple solution. I can merely assign youpower of attorney, allowing you to act in my name if I cannot bereached."
"That would do it. But you'd be handing over a lot of authority."
"I envision no difficulty." He looked me over with the self- assuranceof a tiger contemplating a haunch of beef. "I have every reason tobelieve you would always act in DNI's best interest, Mr. Walton."
It was possible he knew a few things I didn't. On the other hand, maybeMatsuo Noda had just overreached, taken too much for granted. Whicheverit was, the maneuvering just completed had been one small step for Tam,and Matthew Walton. Should we ever need them, I'd just conned MatsuoNoda into giving me duplicates of the keys to his Kingdom. It was our
protection and, in a way, my secret price for putting our heads intoDai Nippon's noose.
"Then it looks like we have everything we need to move forward." Inodded.
"Excellent."
Upon which I absented his office, safety net in place. The play was on.
Which brings us to Tam Richardson. If my approach to this new job was alittle unconventional, what about the college prof who showed up injeans as she readied to renovate corporate America? One thing, wesuited each other. It was a tag team made in heaven. After I'd priedopen the door to the companies DNI was buying, she was going to rollin, guns blazing, and shove everybody against the wall.
Let me add one important distinction, however. Whereas I may have beenwary, even slightly skeptical, Tam was definitely the idealist. Shewas, by God, going to get this country moving again. America was oncemore going to lead, she declared, not follow. No defensive FortressAmerica claptrap. Hers would be nothing less than a full-scale assault,intended to win back and keep a solid manufacturing base here, toe-to-toe with the world.
Since no overall American program existed to rescue industries nowbeing killed by foreign competition, she was going to do it herself,create a coordinated battle plan for our strategic sectors. Backed byNoda's Japanese billions, she was about to try and redeem thiscountry's future, leading us back to number one. She also was quick toadd she had no intention of merely copying Japan's famous managementtechniques. Japanese industry, she insisted, hadn't invented long-termplanning, sound capital investment, dedication. What they did overthere these days was what the U.S. used to do. The American work ethicwas alive and well; it was just temporarily on the wrong side of theglobe. She was about to bring it home again.
Maybe she could. One major impediment at least would be out of the way.Since the companies Dai Nippon was taking over would no longer have toanswer to a lot of fickle fund managers every three months, they couldstart investing for the longer term. Also a lot of unnecessary fat wasgoing to be sliced out of upper management. If things went as planned,Dr. Tamara Richardson and Dai Nippon were about to become the ruthlessarchitects of a new corporate America.
Unless . . . well, there seemed no reason not to take things at facevalue, at least for now. DNI's new Industrial Management Section on thetwelfth floor had already begun filling up with young Tokyo Universitygraduates, guys who embodied the work ethic in human guise. They meantbusiness. Nobody was sipping coffee and critiquing last night's rerunof Dynasty. I got the definite impression one of the unsmiling whizkids in Noda's handpicked cadre could chew up about five American MBAsfor breakfast. Tam currently had them working overtime, puttingtogether a reorganization plan for an outfit in Boston, one of theirnew acquisitions, which I guess I'd better just call XYZ. The previousweek Dai Nippon had purchased some twenty-four percent of its stock,presently at a historic low, and she was planning to make the companyher showcase turnaround.
Stock in hand, she'd buckled down with her new staff and using DNI'sanalytical machinery confirmed some alarming suspicions. It turned outXYZ was practically a terminal case, living at the moment off its realestate assets, which were being systematically dribbled away to maskheavy losses. Layoffs would be next.
By Thursday of the second week, however, she'd put together arestructuring, including some painful austerity that might just salvagethe company and its American jobs. She went home that night feelingquite proud of herself, and Friday she flew up to Boston for her firstofficial conference with XYZ's chief executive officer.
Since a quarter of a company's shares gives the holder reasonably highrecognition, the CEO was understandably nervous about who exactly hadacquired a fourth of his company inside of a week and a half. Heappeared at Logan with his Rolls limo to receive Dr. Richardsonpersonally.
She explained right off that she was there merely to pass along a fewof DNI's "recommendations." She took one look at the Rolls and addedthat, for example, one of the first was going to be to divest all limosforthwith, along with the new fifteen-million-dollar Gulfstream IV he'dbought for weekend fishing trips down in the Keys, and direct theproceeds toward capital investment.
From there on things progressed pretty much as might be expected. Bythe time they reached his paneled office she had been obliged toexplain that his options were either (1) to get in line, or (2) towatch DNI pick up another thirty percent of his company's O-T-C shares,then march him and his "golden parachute" past a stockholders' votethey would call to review his career options. After that she had claimto his unalloyed attention.
It was a tough Friday. After she flew back late, she dropped by theoffice to pick up a few things and fill me in on how it went.
"Good. You're still here." She popped her head around my office door.
"Who won? The Christians or the lions?"
"Want to hear about it?" She came on in and dropped her briefcase onthe desk.
"Wouldn't miss it for the world."
"Matt, you should have seen the look on that man's face." She clickedopen the case and pulled out the action plan she'd developed for XYZ.She was exhausted but still wired. "These CEOs forget it's shareholderswho own the companies and pay their salaries. They start thinkingthey're little Caesars."
"Hey, those are the kinds of operators who used to be my clients.Believe me, I know the type."
She then proceeded to give me the rundown. Outfit XYZ specialized inhigh-tech widgets it sold in the U.S., Latin America, and Europe.Problem: their widgets cost too much, broke down more than they should,and consequently folks didn't tend to buy them the way they once did.As a result XYZ had dropped about five million last quarter and(unbeknownst to its workers) was currently on the verge of closing twoof its three U.S. plants and exporting the assembly operation someplacewhere it could exploit two-dollar labor, a move that would tank justover a thousand American jobs. Management says, gee, that's tragic, andawards itself another year-end financial tribute.
Dr. Richardson had just dropped a bomb in the playpen. First off, shetold them, XYZ's damned widgets cost too much not because Americanworkers are overpaid, but because its assembly plants were a candidatefor the Smithsonian. Therefore, starting immediately, short-termprofits as well as dividends and all management compensation would beslashed and the resulting capital, together with a new offering oflong- term corporate equities, would be invested in automating itsfacilities and retraining workers. There would, in fact, only beworkers in future, since all freeloading middle managers, attorneys,and drones with titles such as 'administrative assistant' were to beterminated. She gave them a list.
Henceforth, she went on, management would begin planning ten yearsahead, not three months. XYZ would concern itself with worldcompetition then, not now, and it would develop a substantially morediversified product line to cushion slumps. As part of that shift, itwould double the budget for R&D immediately and expand the lab.Innovation would once again be brought to the product stage fast andadapted quickly to world markets. XYZ's new focus would be on makingits market share grow in the decade ahead, which also meant crackingdown on quality and halving the current customer-be-damned responsetime on deliveries and service. Concerning those last items, productmanagers would now be required to address customers' complaintspersonally. She figured that in itself would turn around XYZ'ssubstantial quality control debacle overnight.
Finally, there would be an immediate crash program to rectify XYZ'scostly illusion that English was the worldwide language of business.These days, she explained, the language of business is the one yourcustomer speaks. Accordingly all XYZ's overseas operatives would berequired to enroll in intensive language training now, including formalstudy of the history and social customs of their territory.
"Sounds like you let him have it with both barrels. Keep on like this,and the U.S. of A. may never be the same."
"That's the idea. One company down and about three thousand to go."
What's that saying about a journey of miles and miles starting with thefirst step? Well, she'd taken the step. The fut
ure lay ahead.
"Hey, can I buy you a drink?" I was winding up the day, the week."You've earned it."
"Like nothing better." She was repacking her briefcase. "Matt, I'mhaving the time of my life. All the things I've always wanted to do.This is like a fantasy come true. We're going to pull this off, waitand see."
"Could be." I was switching off the lights in my office. "Tell yousomething though, Doctor. I keep wondering what will happen when Nodagets through with us."
"Thoughts?" She glanced back.
"Well, after Japan takes over half the companies in this country andstarts running them right, then what?" We were headed for the securitydoors. "But maybe we ought to talk about that some other time. Andplace."
"I'll think about it tomorrow. Just now I'm bushed."
"Tomorrow, in case you've lost count, is Saturday. Don't know aboutyou, but I'm taking the day off. The hell with Japanese business hours.My daughter comes this weekend." We were saluted by heavies in thesecurity airlock, then the doors opened. "Matter of fact, we're goingto eat somewhere down in SoHo tonight. Care to join us? Be warned it'llbe mostly soy by-products and brown rice."
"I'd love to meet her." She looked at me. "Matthew Walton with adaughter. My God." She laughed. "Sorry, Matt, but you really don't seemthe father type."
"Amy's mother said approximately the same thing as she was packing herbags. But I'm now undergoing intensive on-the-job father training. Factis, I'd planned to knock off around Christmas and take her down to ourplace in the islands, though now I'm not sure there'll be time."
"Sounds very fatherly. You should go."
"I'm still hoping to." I looked her over again. "Well, the hell withit, why mince words. Tell me, Tam, how's your love life these days?"
She burst out laughing again. "You haven't changed a bit. Not at all."
"Spare the commentary, okay? Just stick to the question."
"Excuse me, counselor. The honest answer is it's nonexistent, which yousurely must know, since I'm here every night till midnight just as youare." She examined me pointedly. "Matthew, could this conceivably beconstrued as a proposition? To a horny, bone-tired woman in her momentof mental fatigue?"
"It might be a tentative gesture in that direction. I'm a slow mover."
"You always were." She finished buttoning her coat. "What time'sdinner?"
"I'll pick up Amy and buzz you. Give us an hour."
"Think she'll like me? Some stranger competing for Dad's attention?"
"If she does, it'll be a first." I pushed the down button on theelevator.
Guess what. Matthew Walton barely got a word in edgewise the entirenight. Then around eleven, in the cab headed home, Amy whispered to meshe thought Dr. Richardson was "kinda neat." Was she gonna be my newgirlfriend?
Tell you, it's not always simple learning to be a father.
The Samurai Strategy Page 19
