Why Should White Guys Have All the Fun?

by Reginald Lewis

  Angstadt and his management team would have to be highly motivated and effective for Lewis to extract maximum value from McCall. Angstadt vividly recalls his first impression of the earnest Lewis, who was smoking a cigar and wearing a ruffled suit and a blue shirt.

  “He had all of his thoughts and proposals well organized,” Angstadt recalls. “We related to each other very quickly in our first meeting. My first instinct was that this was the man with whom I wanted to make a deal.”

  Lewis peppered Angstadt with questions about the mechanics of the pattern business, which also left a favorable impression. After his face-to-face with Lewis, Angstadt lobbied International Playtex management on behalf of the fledgling financier.

  With McCall’s management seemingly on board, Lewis assembled the other key elements of his bid.

  I also hired Price Waterhouse, which served as Simplicity’s auditors and therefore knew the pattern business. My first choice was Deloitte, Haskins and Sells but that firm had a conflict because of its representation of NSI.

  Although I had hired Bear, Stearns to raise the bank financing, I could not resist making some efforts myself to pull that together. Doug Walter introduced us to the people at First Chicago and a team from there tried to put together a group of banks. It would become a useful dry run. B. J. Chubet of Bear, Stearns and I went to New Jersey and made a similar effort with Midlantic and the leading New Jersey banks—no go. But it was a useful exercise nonetheless.

  I felt I was stuck on the McCall deal and was not sure whether Bear was trying to scuttle the deal or not. I decided to give Bear a little competition.

  I was a real prospectus junkie and was reading all kinds of prospectuses. I remembered looking at the Kinney Parking Lot deal. I was very interested because I had thought of buying that. Kinney had done a preferred stock deal with Drexel. When I read through that prospectus, I said, “Holy cow, if these guys could get a deal like this done, Drexel is an outfit we should be talking to.” I decided to put the heat on Bear. I wasn’t sure the firm was pulling out all the stops for us and even feared that if I was not able to meet my deadline, the Bear might step in and do the deal with management. I decided to light a fire under Bear.

  I called in my close colleagues Charles Clarkson and Kevin Wright and brainstormed to determine who our contacts on the Street were that might be helpful. There were damn few. Our practice did not involve a lot of contact with investment bankers because the deals were generally small, about $1 million to $3 million, and did not often involve public companies.

  I mentioned that this firm called Drexel seemed to be able to sell anything: Did we know anyone there? Charles said he thought that Jean Wong, a client of ours whom we had helped start a computer software company, had gone to work there. So I called up Jean Wong in California and said, “Jean, we got a letter of intent on McCall Pattern Company. We want to buy it.” Jean got really excited. Before I could even give Jean the full picture, he said “Reg, we’ll do it and I’ll get right back to you.” Jean called back the same day with a guy named Peter Ackerman on the line.

  I outlined the deal and my plans. Ackerman focused on one thing, “Do you have an exclusive letter of intent?” I said yes. He repeated the question and I said yes again. He then asked if I would review the numbers again. I did so. Yes, we were buying it at about four times cash flow, but the business was in decline.

  He said, “I know this situation very well, because we were working with Dave Mahoney on the leveraged buyout. I didn’t even get my expenses. We can help you. What do you want?”

  So I said, “Well, we want $18 million of debt. We’ll take care of the rest.”

  “Well, where is the rest coming from?”

  “I’ll take care of the rest.”

  He said okay and asked if I was willing to give up some equity.

  “Yeah, we’re willing to give up some equity if we really get some value.”

  He repeated Jean’s line—we can do it—and asked if I could come immediately to Los Angeles. I said no because of commitments here: Could he come to New York?

  He said he expected to be in New York shortly anyway and we would get together. So Ackerman came to New York and came by to see me. I told him about Bear, but noted the arrangement was not exclusive. He said, “The first thing I want you to do is fire Bear, Stearns.”

  “Forget it, I won’t do that.”

  Second, he wanted the brochure that Bear put together. I would not give it to him. I let him see it, but I would not give it to him. I said, “Look, I don’t want to start my career on Wall Street by taking somebody else’s work and giving it to you.”

  Then I said, “Here is the basic information on the company. If you can come up with $18 million, you can get some equity.” He came back with a structure. He said, “You’ll own 55 percent, we’ll own 45 percent, and we’ll raise all of the money.” I said, “Okay, whoever gets to the finish line first, they get the deal. The first person to get me the bank financing has the deal. Period.”

  He said, “When we, Drexel, Burnham, Lambert sign on, we do the entire financing, not just the bank.” “Well,” I said, “the other piece is substantially in place. But we can talk about it.”

  Ackerman told me the first thing Drexel wanted me to do was get an extension. I told him no. “There’s no extension. You have to buy my timetable.”

  And, of course, then he said, “You’ve got to come out and see Mike Milken—you’ve got to come out and see Mike.” My reaction was, “Look, the deal is here in New York, it’s not in Los Angeles.” I wasn’t that informed yet in terms of Mike and what he was doing, so I would not go to Los Angeles.

  It was a good conversation. I immediately called Phyllis Schless at Bear. I told her I did not feel her firm was putting its full resources behind the project and that I wanted the firm to know that I was talking to Drexel. That really got them in gear. You would have thought from Phyllis’s reaction that I said the Russians were about to invade the Bear’s headquarters on Water Street.

  “Reg, this is a mistake—we are working very hard here!” I said, “Phyllis, I want results and I don’t have them. I am going with the first guy who can get me home.” Phyllis said, “I’ll get right back to you.” I put the phone down and smiled and said to the boys, “Well, it’s going to get interesting.”

  Bear—specifically Phyllis and B. J. Chubet—really started to turn on the juice. Phyllis called one afternoon and asked if I could go up and see Bankers Trust. I was tired but said yes.

  Peter Offerman was at Bankers Trust with one of his colleagues, who seemed very interested in the McCall deal. Peter was moderately friendly and asked if I would summarize the deal and my plans. It was probably good that I was tired because I laid my rationale out for the deal in clear, crisp terms that focused on the cash flow, the reasons I liked McCall, and how I would approach it. I spoke for about 20 minutes. Peter was cool but very knowledgeable and seemed to like what he was hearing.

  Believe it or not, I really didn’t care about his reaction. I believed that one way or another I was going to do the deal. In hindsight, this probably gave him the impression that I felt I had a strong hand and had an attractive piece of business for the bank. The meeting concluded with Peter saying they had a good deal more work to do and asking whether they could visit the plant. I said sure.

  B. J. set up a meeting a few days later with Acquisition Funding Corp., people who had done a lot of deals. Craig Harding was the vice president there and the chemistry was terrific. They wanted equity but would do the entire deal. Of course, the timing was mentioned again—could I get an extension? The answer was, “No.”

  Peter Ackerman and I spoke every day and it was the same thing—“Fire Bear, get an extension, and we’ll do it. Just tell Bear to get out of the way—we’ll even pay their expenses.” This was a real turnoff, and although I kept Ackerman in the process, I decided that maybe our values were too different to do a deal together. But I liked him personally and respected his qui
ck mind and his nothing-gets-in-my-way attitude.

  Ackerman was difficult to deal with. He dredged up the worst instincts in me. He was also preoccupied with ethnic considerations. I had to pull him up on that about three or four times. “I don’t talk about your Jewishness,” I told him, “so don’t you talk about my ethnicity. It’s not relevant to anything that we’re doing.” So I put him completely on the defensive on that score. Got him so that he was afraid to make any comment.

  Phyllis called and said Offerman wanted to visit McCall’s production facility in Kansas and would have an answer upon his return. Fine. Acquisition Funding had their lawyer do some work, and a deal structure was put in place. Fine. I was already formulating a structure where Joel (Smilow) would be asked to take back a lot more paper. I also called Allen & Company to see if they would play. This was a mistake, because it ended up generating a competitive bid.

  We were almost at the deadline. Acquisition said yes, but it would be expensive and the timing still bothered them.

  Offerman returned from Manhattan, Kansas, and called me around noon after he had met with “the Pope,” which was our name for Bear’s credit approval executive. Offerman said, “Eighteen million, and I believe you are buying one helluva company.” I asked, “When do we sign?” and Peter said, “This evening.” Peter then said, “Oh, Phyllis says the $2 million in subordinated debt may not be all spoken for—is that correct?” I said, “That’s right. What do you have in mind?”

  Offerman said, “Maybe we can go another million for 20 percent of the equity. Would you like me to talk to the Pope?”

  I told him yes. He called back in about 15 minutes with $19 million. I called Phyllis and asked if Offerman was for real. “Yes, Reg, he is for real,” she responded.

  I would not allow myself more than five minutes to feel good—there was no time to feel good. Damn it—execute, think—sign their goddamned commitment tonight. Get the lawyers for Bankers Trust what they need. I called Charles and Tom Lamia and Doug Walter. Get this signed and do not sweat the details. Holy shit—execute, man, and forget about everything else!

  That evening, at the office of Kaye, Scholer (a New York law firm), Bankers Trust delivered a written commitment for $19 million. It was unbelievable—the horse had talked.

  Lewis was referring to a favorite story of his about a king who had sentenced his magician to death but then agreed to the magician’s plea to delay the sentence for a year, during which time the magician promised he would make the king’s horse talk. The magician reasoned that “Anything could happen in a year. The king may die. The horse may die. I may die. Or, the horse may talk.”

  Now I could cut Ackerman completely out of the deal. I didn’t, by the way, tell him that we signed up with Bankers Trust. I just said, “Well, you know, if you can’t play on my timetable, we can’t do anything,” Ackerman then told Jean Wong, “He’ll never get this deal closed.” And so I called Jean and told him the deal was closed and that I would be happy to come out and brief them on the situation. “Really? Everybody around here said you’d never get it closed.” I said, “Well, we got lucky.” They didn’t realize that the prior 15 years I had been closing an average of 20 deals a year that were as tough.

  Peter Offerman of Bankers Trust Co. played a critical role in Lewis’s pursuit of McCall and offers the following assessment of Lewis:

  “He had a terrific strategic view of his business and a real view of how the financing would work in the context of the business plan he had. He kind of exuded the kind of personal qualities that anyone who’s assessing people would check off as positive. Reg was one of the most finely tuned negotiators I’ve ever met.” Offerman chuckles as he recalls that Lewis was wearing a shirt with a broken collar stay, causing one side of his collar to comically curl up in the air. Lewis, intent on driving his points home with Offerman, never even noticed.

  Lewis had given Offerman a list of 10 people that Lewis had done business with over the years. Offerman called each of them, and they all praised Lewis’s integrity and intellect. Finally, Bankers Trust ran Lewis up against the so-called “Five C’s of credit”: Character, Capacity of the business, Capacity of the person seeking the loan, Capital, and Collateral. Lewis checked out on all counts.

  Tom Lamia was with Lewis when he got the letter from Bankers Trust pledging $19 million to buy McCall. He remembers that Lewis remained remarkably composed when he saw the missive for the first time. He was within arm’s reach of his objective, but he wasn’t there just yet.

  “Now we’re in the game in a serious way,” he said, smiling.

  Bankers Trust’s multimillion dollar vote of confidence had taken a lot of pressure off. The next closest financing commitment was for $14 million. That didn’t matter now, because Lewis and his team had most of the financing necessary for McCall in the bag.

  In any corporate buyout, the first key hurdle is to arrive at an agreement on price. Lewis was well beyond that phase. But two critical steps still remained. Lewis still had to negotiate the terms and conditions of the transaction, which entails conducting due diligence and drafting a small mountain of documents and covenants. Only then would Lewis be able to move to the third and most critical phase: Getting the deal closed.

  Large-scale closings usually take place inside law firms, where scores of lawyers and accountants go over documents related to the transaction. A closing agenda is followed, a process that can take weeks before it is completed. Then and only then are titles and funds transferred, completing the transaction.

  Even though Lewis knew those steps lay ahead, he figured himself to be almost home free once Bankers Trust came up with a commitment letter promising to provide $19 million in financing. He still had to raise $1 million in investor equity, but he was confident of being able to scare up that kind of money.

  The commitment letter needed to be modified before it could be submitted to Playtex, so Lewis put in a call to Kevin Wright and Charles Clarkson.

  “Boys, we’re getting ready to do this commitment letter for $19 million,” he told them. “Do you guys want to get Tom Lamia involved in this, or do the two of you think that you can come and do it yourselves?” Wright and Clarkson said they were up to the challenge and caught a cab uptown to meet Lewis at Bankers Trust’s offices.

  Over the course of several hours, Lewis and his associates worked with Bankers Trust’s attorneys to put the commitment letter in its final form. The date was November 19, 1983. The sun had long since set by the time Lewis, Clarkson, and Wright finished their duties and left the bank’s offices.

  The three were strolling down Park Avenue engrossed in conversation when Lewis, in a surge of jubilation, coltishly clicked his heels and descended joyfully to earth, startling his comrades with his light-hearted display.

  The following morning, Lewis, Kevin Wright, Phyllis Schless and Doug Walter all piled into a limousine waiting for them in midtown. The vehicle navigated its way through Manhattan’s sea of darting taxis, double-parked cars, and gridlocked intersections before cruising north, toward Connecticut. Spirits were high inside the limo. The general consensus was that McCall was snared and ready to be skinned.

  After the group arrived at Playtex headquarters, Smilow met them and Lewis confidently whipped out his $19 million commitment letter and theatrically handed it to Smilow. Lewis then gave a brief description of the terms laid out in the letter.

  Looking unimpressed, Smilow took the letter, read it briefly, and then turned to Lewis and said, “I’m sorry, but I can’t sell you the business based on this statement. The deal would be too leveraged and that would be unfair to my employees.”

  Lewis looked at Smilow in astonishment. Lewis had pulled off a minor miracle to get Bankers Trust to commit $19 million to his first major deal, and here Smilow was telling him that the transaction would carry too much debt . . . ridiculous! Smilow was playing some kind of game, and everyone in the room knew it. His goal was to keep Lewis off balance so Smilow could shop Lewis’s offer ar
ound in search of a better one. By now, Lewis was smoldering.

  Straining to control his temper, Lewis informed Smilow in measured, yet forceful tones that they’d had a gentleman’s agreement and that Lewis had abided by the terms of their pact. By rights, he ought to be able to cement his bid to buy McCall. Nothing new had been put on the table—why was Lewis’s offer suddenly unacceptable?

  Other members of Lewis’s team also began to chime in with objections. At this point, Lewis and Smilow repaired into another room for a private discussion. Lewis was furious to think he had been a mere stalking horse, but he was mindful of the fact that Smilow controlled the business and Lewis’s ability to take control of it.

  Choosing his words with care, Lewis argued that Smilow should accept his deal. However, Smilow wouldn’t budge, so Lewis and the TLC team left Playtex and climbed into their limo for a glum ride back to New York City.

  “It was like coming back from a funeral,” Kevin Wright says. “The ride back was tough—there was just a pervasive sadness in the car. It was the first time I ever heard Reg talk about something he was involved in being ‘unfair.’”

  They stopped at a restaurant along the way for a cup of coffee and a despondent post mortem. Lewis asked each member of his team why they thought Smilow had turned them away.

  Lewis mulled over each response, saving Wright’s for last. Wright had a two-fold answer: First, Smilow feared that McCall was going for too low a price. Second, Wright wondered whether race hadn’t played a part. Years afterward, Lewis would harken back to Wright’s response and remark that he’d hit the nail on the head when none of Lewis’s high-priced advisers had; Smilow says he was only motivated by business.

  Lewis was bitterly disappointed. From Wall Street came whispers of what Lewis had already suspected—Playtex was shopping McCall around in search of a higher offer. He even found out that an investment banker he’d approached early on was now quietly trying to buy McCall behind his back!