Burn Rate

by Michael Wolff

  I liked David Hayden. I was responding well to his equanimity. I knew what it was like to be losing what I was losing every month, and he was losing much more than that and still breathing normally. What’s more, I figured if the Maxwell family didn’t make you hyperventilate, nothing much would. I could see him as someone steering a hard-to-manage ship, a captain just trying to stay faithful to his course.

  Whereas, I was starting to feel that many other people were steering mine.

  Magellan had two buildings near the water’s edge. The second, across a small parking lot, seemed to house most of the company’s technology systems and the large conference room where we would be meeting.

  Machinist dawdled in the parking lot, conferring with the factotum. I went back out to see what was holding them.

  “Always look at the parking lot,” Machinist said, indicating a lineup of stellar automobiles—a family of Range Rovers and other upper-end vehicles.

  The point eluded me.

  “They’re losing a million bucks a month with a fleet of luxury autos out back,” Machinist said with a whip of venom. “So that’s where we start to squeeze.”

  There were donut and bagel platters. There was a quieter Christine Maxwell, sidelined overnight it seemed, now busily working in her date book, as though to say she was not quite paying attention here. Machinist had his these-are-just-the-details face on. It was an I-am-bored expression together with a give-me-some-credit-for-showing-up look. Hayden was nervous. I was, too, although I recognized how little control I had over the direction and the outcome. I was just sitting at the gaming table.

  “We’re scheduled on the six o’clock,” Machinist said. “So we should leave here by four? I think that will be enough time.”

  “Can you push that if you have to?” Hayden asked.

  “We can do anything,” Machinist said. “I’m not sure what we’d be able to accomplish, though, that we won’t be able to accomplish by four.”

  “If we’re going to do this, if we’re going to do a deal, we’d like to do it, really move as quickly as possible,” said Hayden, trying to put the pressure on a little.

  Machinist blinked. “Yes.”

  “I’ve had a discussion with our board, and they have authorized me to move forward, hopefully toward a merger agreement with you,” announced Hayden.

  “We can stay if we have to,” Machinist shrugged. “We can stay until next week if we have to. Whatever works. But I think we are relatively close to an agreement. Why don’t I try to itemize the main issues?”

  No one was grabbing at the food. I was debating whether to go for a bagel now or wait for a more opportune moment.

  “We have an issue of governance,” Machinist said, minimizing no doubt one of the most potent issues, namely, who would run the company, our side or theirs, me or Hayden?

  “The point I would like to make—” Hayden began. You could tell that he had prepared for this, that it was certainly one of his biggest issues.

  “I have a simple proposal,” Machinist went on, holding the floor. “Neither of you wants to give this up. Neither of you should give it up. We have two organizations at disparate locales. We have a variety of different functions. I propose that you each serve as co-CEOs. Michael will be in New York, where he will run creative, marketing, and sales; Hayden will be based in California, where he will run finance, technology, and business development.”

  Hayden was caught off guard. This seemed to be both less and more than he had hoped. It gave us both another day.

  “If you two guys want it, I would be willing to serve as the tiebreaker. We’ll create an office of the chairman, made up of the three of us,” Machinist affably proposed.

  Nice work, I thought. We’d be in control. There was a delay before it dawned on me that, actually, Machinist would be in control.

  Hayden was nodding. “Philosophically, I think I can get on board with this plan. And, obviously, we want the Patricof interest, if it’s meaningful enough, to be suitably represented.”

  “On the other hand,” Machinist said, “I don’t have to do this. What we want is an efficient way to make a decision and a way that the Street will understand and buy into.”

  “Yes. I get that,” Hayden said. “You and I should talk,” he said to me.

  “Can we get a recap on the status of the mezz round?” Machinist said.

  Hayden turned to his CFO.

  “Why don’t you just run through it,” the CFO said to Hayden. “You’re probably the most up to date, I think.”

  Machinist’s head bounced just slightly. “You’re comfortable with the round so far?” Machinist asked the CFO.

  “Ah, yes,” he said.

  “Why don’t I just go through the players?” Hayden said. Perfunctorily he ran down a list of international communications companies, including GTE and Ameritech. He earmarked $5 million in hard commitments and $2.5 million in soft.

  “Why isn’t Lehman bridging this?” Machinist asked, almost with annoyance.

  “That’s a possibility—”

  “If Lehman wants to do this deal, they’re going to have to step up on this and handle the bridge,” Machinist insisted.

  “Well, if Patricof thinks it can encourage Lehman—”

  “We do a lot of business with Lehman. This is a home run for Lehman with these two companies combined. There’s no question that they’ll have to do the bridge. When were you planning to close on the mezz round?” Machinist asked.

  Hayden looked to the CFO.

  The CFO shifted. “The next ten days,” he said softly, sheepishly even. “We have operating issues,” he added.

  Machinist registered this. He did a thing with his lips, a fishlike thing. It was a kind of snatching the fact, like a fish grabbing a morsel in the water and then pulling it in and just hanging there, inert, passive.

  Christine Maxwell, writing furiously in her book, suddenly said, “What about Patricof’s investment? I’m sorry, but can we talk about that?”

  Machinist’s face became especially unreadable and expressionless. It didn’t say in the least “No, I won’t talk about it,” but it certainly didn’t say “I’m in the mood to talk about it,” either. It was “See if you can make me. Go ahead. Try.”

  “Christine,” Hayden said. “I think it makes more sense that Bob and I talk about the Patricof position later.”

  “You know the board’s authorization of a merger agreement is contingent on Patricof’s meaningful participation?” Christine Maxwell said in the manner of a parting shot.

  “We are already, and plan to continue to be, a meaningful participant,” Machinist replied. He stood up and excused himself.

  It was quite a commanding bathroom exit, I thought.

  I was trying to figure out where we were. It seemed like we were where we were supposed to be, or where Machinist wanted us to be. But at the same time, it felt that we were mostly in the same place.

  You had to separate the stated goal, which was to join two organizations in order to make a more complete and valuable enterprise, from the underlying goal, which was to get control of this enterprise, from the necessary goal, which was to secure the capital to run our various businesses in whatever combination became necessary, and from the business goal, which was to accomplish as much of the above as possible with as little risk to our respective interests as possible.

  Because Patricof clearly had its own interests, which were not necessarily mine, I could not be entirely sure how Machinist was strategically envisioning the play. But I guessed that if he could tie up a neat package here (neat enough for Lehman to get a hard-on for, as he would undoubtedly put it) then Lehman would have to put up the risk money, which would cover the operating capital needs, which would in turn motivate Lehman to complete a successful offering, which would provide Patricof with lots of millions for having put up nothing.

  “Can we take a break?” Machinist asked, returning to the room.

  I took this to mean that he wanted
to solidify a gain or cement the status quo.

  “I need a phone for a little while,” he said.

  The meeting splintered. An air of idleness settled over it. It was not unpleasant. It was quite relaxed.

  Hayden caught me as I returned from the bathroom.

  “Are you comfortable with a co-CEO arrangement?” he asked.

  “I am,” I said, as though I had given it substantial consideration. “I think Bob is right that there are so many different disciplines at this point that we can easily carve out the autonomy we need, and also, frankly, I think for the both of us the issue is the immediate goal. Let’s get this company out. Let’s do the IPO. Then we’ll see how we want to play it.”

  I believed that was the correct answer.

  “Bob is really something,” Hayden said, not so much admiringly but as if he were trying to size up the beast.

  “He really is something.”

  I was sitting and waiting. But the meeting wouldn’t come back together again. The factotum sat in the corner on his cell phone. Rubin’s technology advisor, who unexpectedly was wearing a tie rather than a T-shirt, had found a modem jack and opened his laptop. And the Magellan executives seemed to have drifted back to their real jobs.

  I went out to try to find some meaningful-looking thing to do and found Hayden and Machinist together. I would like to have overheard them, if just for the sport of the thing. The game was a clear-cut one: Hayden wanted Machinist’s money, and Machinist didn’t want to give it, or even commit to giving it, until he absolutely had to, until all the risk factors could be assessed, until every last bit of leverage could be accrued—if then. I had no doubt who was winning this game. This was Machinist’s real job, the real craft, art even: make people think you are ready and able to give them money, so ready and so able that they will reveal themselves totally, prostrate themselves completely, so that when you do give them the money—and of course by this time, knowing what you now know, you probably won’t give the money—assuming that you do, you will give the money on absolutely the most favorable conditions imaginable.

  Jon Rubin arrived, finally, and I brought him up to date.

  “That’s ridiculous,” he said, about the dual CEO solution. “God, that Machinist.”

  I told him then about Machinist in the tiebreaker role.

  Rubin let out an endearingly explosive laugh. His tense body suddenly loosened, almost dangerously. I thought that he was going to literally roll on the floor. “The amazing thing is that people take him seriously.”

  “Yes, yes,” I laughed. “It is so amazing.”

  After my conversation with Rubin, I found a private corner and called Alison.

  “I don’t understand what that means, co-CEO,” she said.

  “It means—it means we see how things develop.”

  “It means,” she said, “that Machinist is in control of your company.”

  “Yes and no. I think you have to look at a larger picture. The question is, What do we have to do at this juncture to get ourselves to the next juncture?”

  “Do you have any idea of how to play this game?”

  “I think I’m learning. I actually do.”

  Meanwhile, Hayden had been trying hard to shepherd people back to the conference table, but Machinist was immovable and impervious to suggestion.

  The arrival of lunch delayed the meeting further.

  “We should turn back to this, Bob, and look at the other issues,” Hayden said, corralling us.

  “I’m ready,” I shrugged.

  “Yes,” Machinist said. He was carefully piling high an elaborate sandwich, studiously applying his mustard. “By the way, what kind of expansion room do you have here?”

  Real estate was a favorite digression for businessmen, and Machinist handily pulled Hayden in. They got deep into renewal terms and options on additional square footage and the general price of office space up and down the West Coast.

  Machinist did not want to continue the meeting. I was not sure why, particularly if he wanted to arrive at a general agreement before we left that evening. I feared that he had just lost focus, that he had had a burst of attention that had passed and that he was now mentally out of here. But I knew there might be a strategy, too. I was, in fact, very much looking forward to finding out what he might have up his sleeve.

  It was Jon Rubin, sourly indicating that at least his time was valuable, who got the meeting going again.

  “We wanted to discuss the mezz round,” Hayden said, assuming that it was now his turn to lead, “and into what entity that comes in. I’m assuming that even if Lehman does the bridge, we will want to complete at least part of the round. Our board feels that it would not be appropriate for us to suffer the dilution on the round alone.”

  “If it’s an issue of funding operating losses,” Machinist said, “we ought to apportion the dilution pro rata rather than pari passu.” He drew his lips together in his porcelain statuette pose.

  “Bob,” Hayden said, and already you could hear the note of frustration—that was a mistake, I realized, there was a lot of line to let out here before you pulled—“That doesn’t begin to acknowledge the value of this round for what it does to the whole deal. This is not just about funding operating losses, this is about bringing in partners whose presence in the deal will increase the overall valuation and offering price. You have to understand how this industry works. It’s all about how you get your credibility.”

  That was an interesting notion.

  “We have to get credibility from a credible source,” Hayden said.

  “I accept that,” Machinist said, seeming to accept not only the acquisition-of-credibility theory but Hayden’s point about an even-steven dilution on the mezz round. “If we can do it at a valuation of one hundred and thirty million dollars on a combined basis, we’ll share the dilution.” I know that I felt for a moment at least that Bob Machinist was one of the most reasonable people I had ever met.

  That valuation, I noted too, was at least three times more than we thought we were worth.

  “I’m reasonably satisfied,” Machinist said, putting the tips of his fingers together, “that we can do this deal from a corporate finance point of view. I want to have a conversation with Lehman. I’m trying to see them as early as tomorrow, by the way. I want to have an additional conversation with Cowen [an underwriter in the Patricof camp] because I can get an honest reading there and backstop the Lehman valuation. I should take a look at the operative private placement agreement for the mezz round. I’m somewhat concerned about how we do the merger and then do the round in your timetable.” Had he, I wondered, just taken back what he had acceded to minutes before? “But there are other ways we can deal with that.”

  “We can do the merger concurrent with the mezz round,” the factotum said. Judging by Machinist’s sharp look, I guessed that the factotum shouldn’t have spoken at this point.

  “We can do it following, too,” Machinist said, rolling with the miscue. “I don’t see a problem.”

  I thought I got where he was going. He didn’t want to merge until he knew the mezz round was done and the financing for the deal was in place. He was, of course, trying to structure a sure thing.

  “I don’t think it will be that difficult to amend the private placement,” Hayden said.

  “Let’s do it this way,” Machinist said. “Let’s make sure Lehman is on board—and, again, we’re not obliged to use Lehman, but if they’re on board and up to speed, that will be a strong chit in our pocket. Let’s get ducks in order on the mezz. Then, well, I think you guys,”—he indicated Hayden and me—“have to work out the operating details. You have to decide how you guys are going to work together, how the organizations are going to mesh, and what the going-forward business plan will entail. That’s the big job now. The operating side is where you guys should be focused. You don’t have a video conferencing system, do you?”

  “Here?” Hayden seemed surprised. “No.”

  “W
e have to get the Lehman piece and the mezz round into place before we can start to structure. You guys”—again indicating Hayden and me, somewhat dismissively—“can start to work on operating issues, if you want. But right now I think the deal is better served if I’m pinning Lehman down. Can you guys”—he meant the Magellan guys—“get to Palo Alto? How far is Palo Alto from here?”

  “We can get to Palo Alto,” Hayden said, with just a slight note of exasperation that the conversation was moving in a new and seemingly far-flung direction.

  “If you can get to the Patricof office in Palo Alto,” Machinist said, with mounting enthusiasm, “we can get together tomorrow via video conference. Our system is high-end. It’s ninety percent seamless. No delay. It’s ISDN. Have you ever done a video conference?”

  “On an older system,” Hayden said, taking the bait.

  “This is going to knock your socks off. You’ll love it. You’ll immediately want to get one.”

  “What is it, about a sixty-five-thousand-dollar unit?” Hayden said, demonstrating a grip on electronic products.

  “Eighty,” Machinist shrugged. “It will be a major time-saver. I know what I want to do,” Machinist said, as though it had all just tumbled for him. “I want to get Lehman in place. I want you to be available to see them tomorrow,” he said to me. “I’m going to try to see them first thing in the morning. We’ll get together tomorrow afternoon via video conference. You want to have someone set that up with the Palo Alto office,” he said to the factotum.

  I had the sense that Machinist wanted Hayden to keep up with us, to be running after us, to be the one pursuing. Also, there was something about a string of meetings, of seeing how the nuances changed from meeting to meeting, where the emphasis fell, that, if you were attentive, gave you an advantage in a deal. But, equally, Machinist may just have been bored. Because clearly he was in motion. He wanted out of here.