M&A (1)
In truth, problems like this always changed shape depending on where you stood.
We had published the short report and sent Thomas Motors’ stock tumbling by 90 percent.
Strictly speaking, all we had done was drag an overvalued stock back to a reasonable price after exposing a lie, but the small shareholders certainly wouldn’t see it that way.
Maybe some of them had lost everything they owned. But if I stopped to think about that kind of thing one by one, I’d never be able to do anything at all.
What an investor did was make money.
“To make real money, you have to get help from someone better than you. If David hadn’t been there, I never could have done it alone.”
To properly grow the companies we had acquired, his abilities were indispensable.
“I’m grateful you think that way.”
He spoke as if he were lost in old memories.
“I was surprised when I got that sudden email saying you wanted to hire me. I was even more surprised when we first met at the café.”
“Come to think of it, I’m curious what your first impression of me was.”
“May I be honest?”
“Go ahead.”
“You felt like a new hire.”
He wasn’t wrong. Until not long ago, I had been a new hire.
When I thought about it, less than a year had passed since I joined DA Securities. If I counted the time before my regression, though, it had really taken more than ten years.
David asked me, “What was it like at the company?”
“Just a low-level employee.”
“You said you were an analyst?”
“Not quite a full-fledged analyst. It was more like I was still learning. Think of me as an RA.”
RA stood for Research Assistant. In other words, a trainee before becoming an analyst.
David let out a quiet laugh.
“If I told someone that a low-level securities firm employee from just a few months ago had triggered the Thomas Motors scandal and was now acquiring Cooloud, no one would believe me.”
“Honestly, I can hardly believe it myself.”
“When I first signed the contract, I didn’t have high expectations. I agreed only because of the money. But once I actually started working...”
“It’s fun, right?”
David nodded.
“It is. In fact, I regretted turning down Shark Management’s offer for a while. Working at a private equity firm that handles so much capital is everyone’s dream.”
“What about now?”
“I think coming to Continue Capital was the right choice. Thanks to that, I’ve had experiences I probably never would have had in my life.”
I laughed.
“You’re saying that already? The really interesting part starts now.”
He took a sip of his beer.
“When I first heard you wanted to buy Cooloud, I thought it was impossible. But in the end, you’re actually pulling it off.”
I shook my head.
“We won’t know until tomorrow, will we? There’s no telling whether Alex will even come to the table.”
“Once you’ve secured a majority stake, taking control away from him is only a matter of time.”
“He might give up control and still keep his shares. That’s entirely possible.”
David’s answer was firm.
“No. He’ll have no choice but to sell.”
“Why do you say that?”
“You know the answer, don’t you?”
He was right.
Alex would have no choice but to sell us his shares.
“Still, he won’t be easy. Alex isn’t an idiot like Rolf.”
I nodded.
“We’ll have to pay him a proper price.”
The problem was that I didn’t have that kind of money lying around. I’d have to solve that somehow.
“Anyway, it’ll all be over tomorrow.”
Then the long road I had walked in America would finally come to an end as well.
“Let’s finish this drink and head in.”
We tapped our beer bottles lightly together.
I looked at the man in front of me.
He stood 195 centimeters tall, with a face carved in strong, hard lines and broad shoulders over thick arms. On top of that, he was a Harvard economics valedictorian.
And he came from the Preston family, one of America’s financial dynasties. By birth alone, he and I belonged to completely different worlds.
Under ordinary circumstances, we never would have had any reason to exchange even a word. But now we were here, facing each other across a negotiation table.
“It’s good to see you again.”
Alex Preston sat down without taking my hand.
David Lockhart and I took our seats, while Alex and two lawyers sat across from us.
“The representative from PrestigeA PE isn’t here.”
Alex held up a power of attorney.
“I’ve been authorized.”
“Then shall we proceed with the negotiation?”
The atmosphere was fierce enough to cut. Of course it was; this was a hostile M&A, not a tea party.
I spoke first.
“As I said before, what we want is to acquire all of your shares, Mr. Alex Preston, as well as PrestigeA PE’s stake.”
Alex asked in a flat, hard-edged voice, “And if we refuse to negotiate?”
“Then we’ll have to discuss compensation for the unauthorized use of Mimir up to now, as well as future royalties.”
“So Continue Capital gets to set the amount however it pleases.”
I didn’t deny it.
Alex nodded.
“Very well. Let’s talk about the sale, then. What figure are you thinking?”
I gave him the number I had already settled on.
“How about $4 billion?”
He didn’t look especially surprised.
“A billion dollars less than before.”
“Not exactly. That’s the price for your stake and PrestigeA PE’s stake, excluding Rolf Buchi’s shares, so in that sense it’s actually higher.”
“You do know that my fund and I have invested $4.9 billion so far, don’t you?”
“I do.”
“And that Blue Pearl valued the company at $100 billion?”
If Cooloud was worth $100 billion, then his stake alone would be worth around $49 billion.
David immediately objected.
“Cooloud’s corporate value reflects the CEO’s capabilities to a significant degree. If the two CEOs sell their shares and leave, the value will drop sharply anyway.”
The importance of a CEO hardly needed stating. A company that was running perfectly well could collapse depending on who sat in the top seat, and a dying company could be revived by the right person.
Take NS, for example. Once the CEO changed from Steven Hayden to Satya Shamalan, the stock price more than doubled.
If that was true for a global IT giant, then how much more would it matter for a startup?
Because startups were smaller, the CEO’s ability had a much greater impact on the business. There was no shortage of companies that had been doing well until the CEO sold out and left, only to fall apart afterward.
Of course, Cooloud had Sid, so I wasn’t worried about that part.
Alex’s expression hardened. “That means you’re saying I’d have to step away from management as part of the sale.”
“Even if all of this was made possible by the unauthorized use of Mimir, I fully recognize how hard you’ve worked to grow the company until now. So let’s avoid pushing each other all the way to the worst possible outcome.”
“Then shouldn’t you be making a realistic offer?”
Fair enough.
Unlike Rolf, who was little more than a fraudster, Alex had done nothing wrong. From one angle, it really was as if I were taking away a company he had been managing properly.
On top of that, he had poured everything into Cooloud. If he didn’t want to leave the impression that he had failed as an investor, he had to walk away with something substantial.
“How about $10 billion?”
“If you’re serious, then there’s no point in continuing this negotiation.”
“Then what figure do you have in mind?”
Alex’s voice was cold as ice.
“$25 billion.”
I frowned slightly.
“That’s a steep number.”
“I’ve already cut a company once worth $100 billion in half. I’d say that’s a fairly generous concession. Below this amount, I have no reason to sell.”
“$25 billion is impossible in practical terms.”
“Then what are you thinking?”
“How about $15 billion?”
Alex’s mouth curled just a little.
“Let’s be honest. Why are you trying to acquire my stake? If your only goal were control, you wouldn’t need to buy it at all. The fact that you want my shares too means you plan to keep Cooloud as a subsidiary and push the company’s value higher, doesn’t it? If Continue Capital acquires it, the risks tied to intellectual property will vanish as well. Even if the two CEOs step down, Sid Lucas will be there, so company operations won’t suffer much. So why should I sell my stake for next to nothing?”
“Because once all the profit gets siphoned off as royalties, it won’t matter anyway.”
“That’s just a fallback plan, isn’t it? If that was your intention from the start, you wouldn’t even need to hold this negotiation. Isn’t that right?”
“...”
What I wanted was to acquire Cooloud as intact as possible. And Alex knew that very well.
If we hadn’t secured 51.16 percent, he wouldn’t have even come to the table.
I said to him, “Mr. Preston, I’m sure you understand. We’re in a period of rapid industrial change, and companies are springing up all over the place. If you have the money, there are plenty of businesses worth investing in.”
“What are you trying to say?”
“There’s no need for a pointless war of attrition. If you sell the company and put the money somewhere else, you can still make plenty of money, can’t you?”
“Doesn’t that apply to Continue Capital as well?”
He wasn’t wrong.
I didn’t have the luxury of dragging this out, either. I needed to close the acquisition quickly and move on to the next thing.
Alex nodded.
“Very well. Then let’s agree to sell everything for $20 billion.”
“$20 billion?”
“Not a single penny below that. I’m not compromising.”
Looking at his face, I could tell he wasn’t bluffing.
After everything he had poured into the company, walking away with $15 billion was still a successful exit. Given the investment period, it was an impressive result.
If things had gone differently and the company had gone public, it would have been a massive windfall. But as things stood, this was still a handsome payoff.
Alex added one more thing.
“If you accept this amount, I’ll cooperate as much as possible during the acquisition process.”
In a consensual M&A, you conducted due diligence beforehand to understand the target company’s condition. A hostile M&A, on the other hand, happened without that kind of inspection.
That was why even after the acquisition, it was often difficult to take full control of the company.
Unlike Rolf, who had sat in the CEO’s chair without doing much of anything, every important matter involving finance and operations at Cooloud had passed through Alex’s hands.
If I wanted to run the company without noise after the takeover, I needed his help.
Think about it.
I absolutely wanted to buy his stake, and he could only sell it to me. In effect, this was a one-on-one standoff between seller and buyer.
Even though $20 billion was an enormous sum, his original stake had been worth around $49 billion. I was forcing him to sell it for less than half of that.
What would happen if he rejected the offer?
Alex Preston was the CEO.
To force him out of the company, the board would have to agree. But in practice, the board was already under his control.
Of course, since we held a majority stake, we would win if we called a shareholder meeting. But even if we drove him out, the problem wouldn’t end there.
He would still hold 48.84 percent of Cooloud’s shares in his own name and in the fund’s.
He would never give up that stake willingly.
If we tried a rights offering, he would participate. If we tried a third-party allotment, he would bury us in lawsuits and drag it into court.
To keep him from pulling that kind of crap, we had to buy out his entire stake right here, right now.