Chapter 49: Mergers and Acquisitions

April 10, 1995, Chicago, Illinois

“I’m convinced there is something fishy about this entire thing,” my dad said.

“That makes two of us,” I said. “I do not understand why they would want to sell.”

“Joyce,” Karl asked. “They expressly said they would only consider an outright purchase?”

“That’s correct. Not an asset purchase. According to Steve, we couldn’t manage an asset purchase without risking NIKA’s operations and its culture because we’d need to hire a bunch of Lone Star people more or less sight unseen.”

“Then there’s something wrong,” Karl said firmly, “and we’d have to find it during due diligence.”

“Wouldn’t they have to disclose it, Commander?” Al Barton asked.

“It depends on what it is and what they actually know. We’d have to be very thorough in our review of their business records and operations.”

“What if it’s something personal?” Kimmy asked.

“What do you mean?” Karl asked.

“Well, like legal or financial problems.”

“That’s an interesting question,” Karl replied. “You’ll need an M&A attorney to answer as to whether they’d need to disclose something like that.”

“Which would make Dante’s approach to them fortuitous,” I said. “But then why not just sell to him?”

“Perhaps it’s something that requires a serious influx of cash and he was offering terms,” Karl said. “If they’re structured the way we are, their initial investors would be paid first, then everyone else. So if you sold on terms, Joyce and your dad would get their investment paid back in full, then everyone would be paid according to their shares, including your dad and Joyce.”

“Right. I remember that. They each get their $50,000 back directly, as we’ve paid their dividends consistently for nearly ten years, then they get 5% each of any additional proceeds. So you think it might be one of the initial investors?”

“This is just wild speculation,” Karl said. “We have no idea what’s going on, but given that both you and your dad have a gut feeling that something is amiss, do we want to tell them ‘thanks, but no thanks’?”

“Karl, would they have to disclose any lawsuits or criminal charges?”

“Anything against the company, yes, we’d require that information. The same would be true for the Board and any officers, if it was relevant to the company. They’re completely privately held, correct?”

“As far as I know,” I said. “But beyond the chairman and the CEO, I don’t know much about them. Cindi would know more because of her competitive analysis, but I never paid attention to anything except their software and support offerings because it really didn’t matter. I only know Brad because I met him about a year ago at an event held by the ABA which Cindi dragged me to. He and I have talked a few times since then, but mostly it was about pressuring Microsoft for changes, which was, as you all know, an utter waste of time.”

“What do we want to do?” Beth asked. “It sounds like everyone is skittish.”

“That’s a good word,” I said. “First of all, we benefit from the FUD, so it doesn’t hurt us to have a look-see. I think we take the next step and ask them to open the kimono and see what we find. We can back out at any point, so long as we don’t have a signed definitive merger or purchase agreement, depending on how we structure it for taxes.”

“Somebody has been listening to Elyse,” Joyce teased.

“Watch it, Mrs. Tarrance!” I laughed.

“Until you have a definitive agreement, you’re free to back out,” Karl said. “You do need to be very careful about how you use any information you might gain so they can’t turn around and sue you.”

“Could that be it?” Al Barton asked. “They ‘open the kimono’ as Steve says, then turn around and sue us for stealing their technology or whatever?”

“Intellectual property?” I asked. “That is an interesting angle. But an elaborate setup? Now I think we’re getting into the tinfoil hat zone!”

Al laughed, “I was just throwing it out there. I’m inclined to tell them ‘no’ on account of those hairs standing up on the back of your and your dad’s necks.”

“What do you want to do, Son?”

“I say we at least see what number they have in mind and try to gauge why they want to sell. And if we move along far enough, we ask them to fully open the kimono and see what we can see, being careful not to do anything which might get us into trouble.”

“Do you intend to go through with this?” Beth asked. “If not, it doesn’t seem to fit your ethics.”

“I don’t know the answer to that question,” I said. “Am I willing to go through with this purchase if the terms are favorable and we can find a way to integrate the two companies? Yes. Am I willing to pay a reasonable price for Lone Star? Yes. Is this a done deal? No. So I don’t think I’m violating my usual ethical standards. Which actually raises an important point. We have to be methodical, but not dilly-dally. We have a strategic advantage while Lone Star is prohibited from talking about a sale.”

“Are you considering pulling back on chasing their customers?” Elyse asked.

“They may ask us to back off during the negotiations,” my dad said.

“I think we have to refrain from actively seeking out their clients,” I said. “But if a customer approaches us, I don’t see how we can turn them down.”

“Cindi will have a fit,” Kimmy said.

I nodded, “Let me worry about Cindi.”

“I move we authorize Steve to explore the purchase of Lone Star,” my dad said, “subject to final approval of the Board of any definitive agreement.”

“Second,” Beth said.

“Any further discussion?”

“We’re not committing to any specific course of action, are we?” Doctor Barton asked.

“No, Al,” Karl said. “This is exploratory only. Steve will have to come back to the Board with a proposal. And if I understand, he’s not going to attempt to force it through.”

“Correct,” I said. “I’ll lay it all out, and bring in Jamie, Bruce, and Samantha to discuss this openly. If it makes sense to the five of you, unanimously, we do it. If not, we don’t.”

“Unanimous?” my dad asked. “Are you sure about that?”

“Yes. If we’re going to do this, everyone has to agree. If somebody doesn’t like the deal, we walk away. Remember, we don’t NEED this deal. And it’s fraught with all kinds of risks. We all have to be sure.”

“Any other discussion?” Joyce asked.

Nobody said anything, so she called the question and the vote was 5-0 in favor.

“Steve, you’re authorized to talk to Lone Star and discuss a possible purchase. Please keep the Board informed.”

“Will do. Am I supposed to call Manny Nuñez or Brad Giesma?”

“Manny is expecting a call from either you or me.”

“I’ll do that as soon as we hang up,” I said.

“Who do you intend to tell?” my dad asked.

“Right now? Just Cindi and Samantha. Nobody else needs to know unless we move forward. Elyse and Kimmy are here, obviously, and between the three of us, we can handle this for the time being. Once we get to due diligence, we’ll have a definitive agreement in place. Then we can let the word out. But we don’t know that we’ll get there. And I have all five of you for advice, should I need any.”

“Good luck, Son,” my dad said.

“I think we’ll need it,” I replied. “Thanks, everyone.”

Kimmy disconnected the call and I took a deep breath and let it out.

“What do you need us to do?” Elyse asked.

“Right now, nothing. I need to let Cindi know what’s going on, and then I’ll call Manny. That’s when I’ll have a better idea of what to do next.”

“You seem different,” Kimmy said. “Serious. Sober. Careful.”

“I haven’t had to do anything like this before. Nothing we’ve done in the past ten years has involved the kinds of risks we’re considering taking here. I’m concerned about NIKA and all of you.”

“Maybe you should just pass on this, then,” Elyse said.

I shook my head, “We need to explore it. If we can take out our major competitor, there’s a huge upside. My issue is preventing the downside. If I can’t do it, then we pass and continue. But if I can figure this out, and we, as a team, can navigate the rapids, the company will be worth north of $50,000,000.”

“Jesus,” Kimmy said. “I hadn’t thought about that.”

“Yeah. Anyone who has 1% of the stock would be worth $500,000. But, here’s something to consider - it’s worth maybe $25,000,000 now and if we blow it, it’s worth $0. The ‘Queen of Numbers’ here can confirm that.”

“It’s close, I think,” Elyse said. “We don’t do valuation in a normal way, but I’d say if Steve were willing to sell, we could get somewhere north of $20,000,000 based on revenues. But here’s the rub - NIKA is worth a lot less without Steve at the helm, or at least setting the tone and direction.”

“This is serious stuff,” Kimmy said. “Was it like this with BLS?”

“No,” I said. “They were less than half our size and we simply bought their assets. This is a very different thing. Big companies with highly experienced executives have blown it.”

“But we have something they don’t,” Elyse said. “You.”

I nodded and the three of us got up. Elyse went to her office, Kimmy to hers, and I went to Cindi’s and shut the door.

“I need you to hold off on the marketing push against Lone Star,” I said.

“What?! Why? It’s all set to go out tomorrow.”

I nodded, “And I’m about to call Manuel Nuñez and discuss buying Lone Star.”

“Are you fucking kidding me?!” she exclaimed, recoiling in her seat.

“No, I’m not.”

“Jesus, Steve! Then why do you sound like your dog died?”

“If I fuck this up, it could change NIKA in ways none of us like, or it could even ruin it.”

“Do NOT doubt yourself! If you doubt yourself, you WILL fuck it up.”

“This is NOT self-doubt,” I said firmly. “This is me contemplating the risk and knowing that a hundred people and their families are depending on me to get this right.”

“How can I help?”

“Right now? Just hold off on the marketing push. I need to talk to Manny before I decide on the next steps.”

“The Board knows, right?”

“Yes. They approved me having exploratory conversations with Lone Star. The final decision has to be unanimous, though. The Board, you, Julia, Elyse, and me, plus Jamie, Bruce Grady, and Samantha Spurgeon.”

“She’s financing the deal?”

“Yes. IF we do it. Remember that. IF.”

“Got it. What do we do if Lone Star customers approach us?”

“Same as now. Just don’t target them.”

“Let me know.”

“I will.”

I went to my office to get the phone number then went to the ‘Orr’ room so I could make a private call. I dialed the number and Manny’s secretary answered and put the call through.

“Mr. Nuñez,” I said. “This is Steve Adams at NIKA Consulting.”

“Good morning, Mr. Adams. Is it OK to call you Steve?”

“Of course. It’s much easier on a first-name basis. Joyce tells me you’re interested in selling and our Board has given me authorization to discuss a purchase with you. May I ask what prompted this?”

“We had an unsolicited inquiry which we explored, but the terms weren’t suitable, so we elected not to proceed. Once that happened, we spoke internally and decided to hear you out. Brad told me you offered cash.”

“If this happens, and it’s a big ‘if’, yes, we’ll pay cash. Obviously, there’s a long road to get there. I think the first thing we’ll need to do is get a look at your books. That’s the only way we can get an idea of a reasonable valuation. How are you structured?”

“There are about a dozen individuals who own stock, with the majority of shares held by a venture capital firm. They have a seat on the board.”

“They hold an absolute majority of voting shares?”

“Yes. The two founders each own 20%. The VC owns 51%. The other 9% are divided amongst some key early employees.”

“I’m curious about the VC. How did that come about?”

“We needed an influx of capital to expand nationally. You were already established and the only way to compete was to open offices in Reno and somewhere in the Raleigh-Durham area. That also let the founders cash out.”

“What roles are they in?”

“VP of Software Development and VP of Sales.”

“What involvement are they going to have in the negotiations?”

“They have a right of first refusal if someone offers to buy Lone Star. They won’t exercise that right.”

“We’ll need that in writing as part of our memorandum of understanding. Are there any poison pills?”

“Just that one.”

“The early employees who have shares, who are they?”

“A pair of developers, a saleswoman, and Brad.”

“Brad? I thought he came later on.”

“Sorry, yes, he did. The VC brought him in.”

“OK. I want to send someone down to go over your books. She’s a former Arthur Andersen auditor who works for a capital management firm.”

“We can set that up. Do you have an attorney you prefer to use?”

“Yes, but I haven’t brought him in on this just yet. I’m going to have an attorney who sits on our Board review the memorandum. I think we both need to keep this closely held.”

“Agreed. I do need something from you.”

“Which is?”

“Provide assurance that you won’t try to drag this out to hurt us.”

“You have my word. Have your attorney get in touch with Commander Karl Schumacher. I’ll give you the number when you’re ready.”

“Commander? As in Naval Commander?”

“Yes.”

“OK. Let me have the number, please.”

I gave him Karl’s work number, and he read it back to me.

“When do you plan to send the young woman down to look at the books?”

“As soon as we have a signed memorandum.”

“Then I’ll get on that right away. I’ll need something in writing from your finance people to show that you can obtain the funding.”

“No problem. Stephanie Krajick, the young woman I mentioned, will bring that with her when she comes down to review your books.”

“OK. I’ll call our attorney right away and have him get in touch with Commander Schumacher.”

We said ‘goodbye’ and hung up, and I dialed Karl’s number to let him know that he’d be hearing from Lone Star’s attorney.

“Jamie should handle this,” Karl protested.

“I want you to do it. When we did the BLS deal, it leaked. From Allen & Baker. We can’t have any leaks, Karl. None.”

“Got it. I may have one of the other attorneys here look it over just to make sure I’m not missing anything.”

“Use your best judgment, Karl. I know you Navy boys can keep secrets, so long as your last name isn’t Walker.”

“Those two bastards are poster children, along with a certain seaman who shall remain nameless, for why the Navy should resume use of the death penalty!”

“Jake had the same comment about the Walkers. As for a certain seaman, that was personal. If it was going to be done, one of us would have had to do it. Not some hidden executioner, hiding behind a partition. One of us would look him in the eyes and put him down like a rabid dog.”

“There are quite a few men who agree with you on that one.”

“And quite a few women, too!” I replied. “Let me know when you hear from Lone Star’s lawyer. Fax anything you need to fax to Kimmy’s private fax machine. It’s locked in a cabinet so it’s safe from all prying eyes.”

“I’d be shocked if any person in your entire office violated your privacy in that way.”

“I agree, but as your Navy propaganda posters said during World War II, ‘loose lips sink ships’.”

“I’ll call you soon, Steve.”

“Thanks, Commander.”

We hung up and I called Joyce and my dad to give them a status update, then went to Elyse’s office to fill her in. Finally, I went back to my office, but Kimmy stopped me.

“You look totally stressed. Like that day...”

I smiled, remembering that day, not for how I’d felt when Kimmy had stopped by our old offices, but for what she’d done for me. But the feeling was different now. That had been depression; this was feeling the weight of the world on my shoulders.

“I appreciate the thought, and the memories, but I’m not depressed.”

“Let me know how I can help. Anything.”

I nodded, “I know. And I appreciate that.”

“Tea?”

I nodded, “Lemon, I think. No caffeine for me today.”

I sat down at my desk and thought about the calls I needed to make. Sharing an office with Penny was a wonderful idea when we were coding, but with the amount of confidential CEO work I was going to need to do in the next few weeks or months, it was very inconvenient. But I’d given her my word that she’d never be moved out, so I needed to work around it. There was a phone in my private conference room which I rarely used, but because I’d opted for beads hanging in the doorway, rather than a proper door, I couldn’t use it for privacy from Penny.

The developments created a serious issue with the amount of time I’d be able to spend coding, but I wasn’t able to tell Dave and Julia about the potential purchase of Lone Star. Working extra hours wasn’t really possible with my other commitments, although I could probably squeeze in a few hours on Saturdays and Sundays if I had to. That wasn’t ideal, but it really was the only solution until I was able to let a few more people in on the situation.

Kimmy brought my tea and I took it, along with a notebook and a list of phone numbers, to the ‘Orr’ room so I could make my calls. The first one was made out of curiosity, more than anything.

“Did you hear anything more from Dante?”

“No,” Jefferson replied. “I called him and told him I was interested, and he said he’d be in touch soon. That was the same day you and I spoke. I haven’t heard anything from him, which I think is a bit strange because he seemed excited about my call. I suppose these things take time.”

“They do. BLS was under a severe time constraint due to their finances. I can’t imagine Lone Star is in a similar situation.”

“No. Dante implied that the company he was trying to buy was large and profitable, which was another thing that indicated Lone Star.”