Chapter 55: You’re pulling my leg, right?

May 1, 1995, Chicago, Illinois

Bedlam erupted in the conference room and over the phone.

“Holy shit!” Cindi gasped. “Holy shit!”

Her sentiment was echoed by others, with the same, or similar, expressions of surprise and disbelief. I waited a few seconds for everyone to calm down, then continued.

“As I said, please keep this closely held. We’ll make an offer to them later this week, and I expect it to be accepted, though the numbers will probably change a bit. Once we have an agreement, we’ll make an announcement and then begin the due diligence review.”

“Is this like the BLS deal?” Mario asked over the phone.

“No. We’re going to buy Lone Star outright.”

“How are you financing this?” Bruce Grady, our CPA asked.

“Participating preferred stock from a new investor,” I said. “I don’t want to reveal any more details than I need to at the moment.”

“How does that affect our shares?” Julia asked.

“It doesn’t,” I said. “Preferred stock is non-voting and non-dilutive. For all practical purposes, you can think of it as a bond or a loan. We’ll explain all the details later, I promise. For now, I need each of you to prepare for the due diligence process. Julia and Cindi, your roles are obvious - code review and customer review. Mario and Barbara, Lone Star has offices in Raleigh and Reno which will need a complete evaluation. We’ve already done most of the financial review.”

“How?” Cindi asked.

“We arranged for a trusted outside person with significant audit and financial experience to review their books.”

“Steve, did you bring in outside legal counsel?” Jamie asked.

“No, Jamie, we didn’t. Karl did the memorandum of understanding on behalf of the Board. I’m sorry I kept you out of this, but nobody except the Board, Elyse, Kimmy, and our financiers knew anything about this. Nobody at Lone Star except their Chairman, President, and main investor know anything, either. It had to be VERY closely held for reasons which will become clear.”

“How do you plan to merge the two firms?” Zeke asked.

“Very carefully?” I said, causing everyone to laugh. “In all seriousness, it all depends on what we find in the due diligence. Julia, one option I want explored is creating a GUI that closely replicates Lone Star’s to facilitate conversion without retraining.”

“That’s a pretty significant undertaking,” Julia observed. “What about using their front-end code?”

“That’s part of what you’ll need to decide during the code review. I’m operating under the assumption their code is undocumented crap. If I’m wrong, great. If not, I think creating the GUI might be our best path. Lone Star is almost similar in size to us, and I’m sure you all remember the struggles with the BLS customers. If all we change is the backend for the Lone Star customers, we’ll save ourselves a lot of grief. Then we can either keep two interfaces, or slowly, at our leisure, move customers to our standard GUI.”

“Do they have any consulting?” Julia asked.

“No. They’re purely a software company.”

“It seems as if we’re going to need to restructure somewhat,” Barbara said.

“I expect so,” I agreed. “But that’s something we can deal with down the road a bit. Our biggest issues are the code and figuring out how to bring all their customers on board. At this point, I really don’t have much more to say. It’s imperative that you keep this to yourselves until we make a formal announcement. Jamie, did Kimmy set up the meeting for tomorrow?”

“She did. I’m going to have to bring Thad Baker in on this, as well as someone in our M&A team.”

“Thad yes; the M&A team, no. I’ll bring an M&A attorney with me tomorrow.”

“I thought you said you didn’t go to outside counsel!” Jamie protested.

“I didn’t. This attorney works for our financier. I want to keep that relationship quiet all the way until we sign a definitive purchase agreement. Your M&A team leaked the last one and we can’t take that risk.”

“I know,” Jamie sighed. “OK. I’ll make sure Thad is at the meeting tomorrow.”

“Can we ask questions?” Julia asked.

“I can’t really answer anything just yet. All of you should work on your due diligence plans with Elyse, Bruce, and Michelle. That will give us a framework to build on once we make the announcement. Thank you all. If you have questions, ask me or Elyse, but we may not be able to answer just yet. Talk to you all soon!”

Kimmy disconnected the call and we all stood up.

“Un-fucking-believable!” Cindi exclaimed, shaking her head. “Did you just double the size of the company?”

“If we don’t screw it up,” I replied.

May 2, 1995, Chicago, Illinois

“Thad Baker, Jamie Ferguson, meet Bernie Spielmann. Bernie, this is our corporate attorney, Jamie Ferguson, and Thad Baker, Managing Partner of Allen & Baker.”

They shook hands.

“You are going to tell us who he works for, right?” Jamie asked.

“Come on, Counselor. Where would I get this kind of financing on a handshake?”

Jamie laughed, “Or a hug? Samantha, right?”

“Yes, of course. And my sister did the financial review, though Lone Star knows her only as Stephanie Krajick.”

“Slick,” Jamie said, shaking his head in awe. “How the heck did this come about?”

“That’s a story for later,” I said. “You’ll understand why. For now, we need to get a formal offer drawn up, and ensure several indemnity clauses are included. But there’s a twist, and once again, you’ll have to wait for an explanation.”

“Why the cloak and dagger?” Thad asked.

“There are a few things which simply cannot leak and are VERY closely held.”

“What’s the twist?” Jamie asked.

“We’re doing this in two parts. The first part, which would be completed almost immediately, is the purchase of Lone Star’s source code by Patent Partners LLC. That’s a defensive move which I’m not at liberty to explain, but that purchase would occur almost immediately after they accept our offer. We’d license the software back to Lone Star until the purchase is completed. There are a few contingencies in case we, or they, walk away, or there is material information which is withheld or not properly disclosed.”

“Would Patent Partners hold title to the software permanently?” Jamie asked.

“Yes, but we’ll phase it out as quickly as we can, so it’ll have no real long-term value. NIKA will pay PP LLC a one-time perpetual license fee once the purchase of Lone Star is completed. That fee will be exactly what PP LLC pays Lone Star for the software, making it a wash in terms of PP LLC’s value.”

“What are the contingencies?” Jamie asked, his pen poised over his yellow legal pad.

I handed him a two-page outline of how I wanted the deal structured, and we worked through it, with Bernie Spielmann providing answers to financing questions. It took nearly an hour before Jamie and Thad were satisfied that they understood the complexities of the deal.

“I have one significant concern,” I said. “My sister discovered extreme disparities in pay between the male and female programmers. One of the indemnity clauses needs to include language that protects us from paying a large settlement. If the VC firm indemnifies us, we can buy excess liability insurance for a pittance in the event they can’t, or won’t, repay.”

“That’s a bit tricky,” Thad said. “But I think we can construct the language properly. Are you going to let all of the programmers go?”

“I’m not sure, but it’s possible. At a minimum, we’ll hire one or two for slots we have open, plus at least one to maintain the Lone Star code. If the senior female programmer fits our needs, we’ll do our best to keep her. We’ll offer a contract in exchange for her moving to Chicago, and that would include a bonus in exchange for waiving any claims against Lone Star. In fact, anyone we relocate from Dallas will need to sign a waiver in exchange for a relocation bonus. And we’ll adjust all salaries to our pay scale.”

“That’s a decent strategy. Do you know how widespread the pay issue actually is?”

“According to my sister, it’s mostly with the technical staff - a couple of programmers and one support rep. Their male-female ratio is much higher than ours, and the women they do employ are in generally lower-paying jobs. According to Stephanie, only those three have real discrepancies.”

“One last piece,” Jamie said. “This structured payout. Are they going to go for it?”

“I think so, because we’ll escrow all the funds. They’ll be disbursed unless there is material fraud or undisclosed liabilities. We’re asking for ninety days, but I’m willing to negotiate that down to as little as thirty if necessary.”

The reason I was willing to do that was because I was confident Dante would make his move as soon as NIKA and Lone Star made the announcement.

“If you make this acquisition, what competitors are left?”

“There are half-a-dozen smaller companies, mostly startups. The one major one is in Vancouver. There are also a few companies which cater to very small law offices who can’t afford our license fees.”

“Which aren’t cheap!” Thad declared with a wry smile.

“Compared to what we pay you in legal fees?” I countered with my own wry smile. “Jamie, how quickly can you put this together?”

“I cleared my calendar after the conference call yesterday. Given the detailed outline, I’d expect I can have this to you for review sometime tomorrow. I’ll try to get it done today, but no promises. Bernie, do you have the financing agreement with you?”

“A draft, yes. But as Steve said before, it was a handshake deal. We have plenty of time to work on it while the due diligence is proceeding.”

“What about the funds to purchase the software?”

“That’s through the LLC,” I said. “Samantha and Stephanie have already been in touch with the attorney who handles that, and Spurgeon will provide a bridge loan to the LLC to complete the deal.”

Jamie smiled, “Not bad for a guy who doesn’t want to run his company.”

“Jamie, the day I can go back to spending most of my time programming will make me VERY happy. I HAD hoped for a nice, quiet few years while Stephanie worked for Samantha. It’s not to be.”

“Let us get to work on this. I’ll call you this afternoon with a status.”

“Thanks, Jamie.”

May 3, 1995, Chicago, Illinois

“Happy birthday, Babe,” I said on Wednesday morning when I arrived home from running with Gina.

“We must be getting old,” Jessica laughed, climbing out of bed for a hug. “Two birthdays in a row where we didn’t make love first thing in the morning.”

“We’ll make up for it tonight!” I promised. “Join me in the shower?”

“Sure! Kara?”

“Yes!” Kara squealed, scrambling from the bed.

In the end, both Jessica and I missed breakfast, because the three of us had needed a second shower, getting so worked up during the first one that we’d ended up in bed. We arrived downstairs just in time to join Elyse and Michelle for the drive to work.

“Fun morning?” Elyse teased.

“Very!” Jessica agreed. “Though my husband had a date before we made love!”

“I’m sure Bo would be very pleased to know you called my run with his wife a ‘date’!”

“I take it you’re running outside?” Michelle asked.

“As soon as the temps hit 45°F, we run outside unless it’s raining.”

“The treadmill and weights are so much easier,” Jessica said.

“I totally agree,” Elyse added. “Jorge taught us all to lift for exercise, rather than bodybuilding and I like the flexibility of being able to exercise in the evenings if I want.”

“I’ve been running in the morning pretty much consistently since I came to Chicago, with a few brief periods when I didn’t. I did switch to the treadmill for a time between Jacqui and Gina, but I like running outside if the weather permits.”

“I think we need to think about some extra exercise for Matthew and Michael,” Elyse said. “Neither of them is interested in team sports.”

I nodded, “They ride their bikes in the summer, but winter is an issue. And they do walk to school, which helps.”

“True. It’s something to think about before next winter so they don’t spend all their time in front of the SEGA or Jesse’s Nintendo.”

“Agreed.”

We dropped Jessica at Cook County, then the three of us headed to the office. I had a relatively quiet day except for reviewing the offer documents with Jamie. Late in the afternoon, we had everything exactly as we wanted, and we sent the documents via FedEx to Dallas.

That evening, Jessica, Kara, Michelle, and I went to Bucktown for our traditional birthday meal. We’d had numerous discussions about how to handle birthday celebrations and we’d concluded that the specific day wasn’t all that important, which allowed us to go out, and then have a birthday bash on Saturday to coincide with Guys’ Night and Girls’ Night Out, as well as a family celebration at dinner just before.

Alex did his usual wonderful job, and after a scrumptious dinner, we headed home for a night filled with love.

May 4, 1995, Chicago, Illinois

On Thursday morning, I received a call from Agent Stone saying he was going to come by to return my gun, which had not matched any of the unsolved murders. He arrived just before 11:00am, and we went into the ‘Tretiak’ room where he handed me the gun and magazine.

“Sorry about all the trouble,” he said.

“It’s OK. I was sure about the outcome. It was, in the end, a minor inconvenience. Is there any word on the situation with Lisa?”

“We’re working on it. The most likely outcome is going to be a contingent commutation of her sentence, with her released into the custody of the US Marshals. She’d basically be under house arrest, and have to wear a monitoring bracelet on her ankle until we have what we need. At that point, the commutation would be confirmed. She’d be on parole for a year. Do you think she’d accept that?”

I nodded, “I think so. It gets her out of prison. She wasn’t all that worried about having a record, as you can imagine.”

“I assume you’re going to see her, so make sure you let her know that she won’t be allowed to apply for a pardon under any circumstances if she accepts the deal.”

“Understood. I’ll probably go down on Tuesday.”

“While I’m here, you wouldn’t happen to have remembered anything we might be able to use in our investigation here in Chicago?”

I shook my head, “No. I’ve told you everything I can. That said, I’d bet Lisa will give you plenty to work with.”

“That is the deal. If she doesn’t, she goes right back to Logan.”

“I guarantee you she knows that!”

May 5, 1995, Chicago, Illinois

“Thanks for flying up to see me,” I said, extending my hand.

“You’re welcome,” Manny Nuñez said, shaking hands. “This is Bob Reichart from Dallas Capital Partners.”

“Nice to meet you,” I said as we shook hands. “Thanks for flying up.”

“You’re welcome.”

“This is Elyse Clarke, my CFO. And this is Kimmy Bradford, my Executive Assistant.”

They exchanged pleasantries and we all sat down.

“Can I get you gentlemen tea, coffee, or a soft drink?” Kimmy asked.

They both asked for coffee and Kimmy excused herself to bring them each a cup, along with the cream and sugar. She refilled my cup with green tea, then Elyse’s and hers, and sat down with her pad to take notes. Elyse passed out three-ring binders which contained our proposal. Unsurprisingly, both our guests flipped immediately to the numbers.

“This is a bit odd,” Bob said.

“And the number is quite low compared to our evaluation,” Manny added.

“By odd, you mean the two-stage purchase?” I asked.

“Yes. I’m not sure why we’d do that.”

I had a truthful answer for them, but it was incomplete. I’d worked out exactly what to say with Samantha, Bernie, Jamie, Thad, Elyse, and the attorney for the LLC.

“It’s part of our corporate structure for both tax and control purposes. PP LLC holds software copyrights and patents, and is meant to ensure the ownership of that software and those patents are not assets of the corporations which make use of them. It ensures that no matter what happens to NIKA, I, and my partners, keep control of the important assets. It also provides some corporate tax advantages.

“If you look at the terms of the deal, once you accept our offer, we’d immediately execute a sale of your software to PP LLC, with Lone Star receiving a royalty-free license to continue to use it until such time as the purchase is complete. There are a number of contingencies written into that deal, so that except in the case of material fraud, we either go through with the deal, or you return our money and we cancel the sale.”

“We’ll need to discuss that,” Bob said. “And this ninety-day escrow?”

“There are no contingencies except material fraud or violation of the non-compete agreement by any shareholders. In the case of fraud, we go to binding arbitration to determine what part of the escrow may be withheld. I honestly do not expect that to happen. On the other hand, if any of the shareholders were to engage in competition during those first ninety days, they would forfeit their payment.”

“That would cover the two remaining founders, Brad, and a couple of key employees,” Manny said. “How strict would your non-compete be?”

“Only for legal software. They could literally do anything else. And the restrictions would only be for ninety days.”

“Normally, it would be a much longer period. Why?”

“My only concern would be if they tried to start a new company and take customers with them. Three months is sufficient for our purposes. To be honest, that’s about the time we’d make staffing changes, and we won’t force anyone else to sign a non-compete.”

“Let us talk about that, but I think we can work with it,” Bob said. “The escrow would be fully funded prior to executing the final agreement?”

“Absolutely. And payouts are automatic for your firm, barring an order from an arbitrator.”

“Before we get to talking numbers,” Manny said. “What about this secrecy clause?”

“All terms have to be kept secret until the complete deal is executed,” I said. “The one exception is for you to inform the two remaining founders of the purchase price and allow them the opportunity to exercise their buyout clause, as I know you have a contractual obligation to do so.”