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My mother lent me  this book.  She was very excited when she handed it over and said, "this book is about exactly what you do!  I can see the same conversations from this book happening right in the hallways of TKO Miller."  So, I read The Capitol Game by Brian Haig and here are my thoughts.

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Clearly, I have some work to do on describing my job to my family. And if my family members are confused, think of all the people out there who don't have me to set them straight on how investment banking and merger & acquisition transactions work in the real world.

I'm slightly concerned what mom tells her fellow Wednesday morning, silver sneakers coffee group because the investment banker in this book, Jack Wiley, is a super-smart guy  (OK - that one applies) with a crazy job description.  Sometimes, he manages money for wealthy clients (investment bankers do not do this) and sometimes he works like a private equity investor (I could see a situation where that might happen, but in general investment banks do not own companies).  Throughout the book he actively wire-taps meetings to get inside dirt on his partners and is involved in several car chases.  In my 25 years of investment banking I have never wire tapped or car chased.  My life must seem so much more interesting to my mother...

Attention - spoiler alerts ahead.  If you would like to read this book, I suggest you stop here.

If you want to paint the investment banker like a well-dressed Jason Bourne, no problem with me.  It goes a long way to improving our image.

The real problems happen when the author tries to explain how buying a business occurs.  Here's what he gets wrong:

Negotiating The Offer 

At one point in the book, Wiley and his private equity partners, the Capitol Group, barge into the office of a CEO whose company, Arvan, is having some financial trouble and they shoot out the following:

"One hundred million dollars", he announced, loudly, and distinctly, like it was a nonnegotiable figure.  "A hundred million?""Yes, and in return, you'll sign over all rights, all patents, all intellectual rights.  All property will be ours."

First of all, if you are a CEO and an investment banker, or anyone, really, barges into your office uninvited, call the police.  Secondly, this is not how deal negotiations take place.   Sure, there is going to be a discussion about price but its usually not in the form of one threatening sentence.  Also, there will be a long discussion and document that outlines exactly what you are selling and for how much.  In most cases, when you sell your business, you sell all the assets that generate cash flow and that would include patents and intellectual property.  

Of course, in the book, the asset that the sneaky private equity guys are after is a super-secret polymer, so we can understand why they might be calling out patents specifically.

How You Value a Business

So now after they have barged in and declared what they will pay for this company, the following discussion takes place:

"We'd like to present this to your shareholders and employees as a friendly takeover."

"Then you better offer the shareholders a decent price."

"Seventy cents a share.  That's more than fair. "

It was a remarkable coup, one Walters was quite proud of.  The Capitol Group would pay Arvan $100 million in cash, hand over another $15 million to the shareholders...  Sure, there was another $150 million in debt... still the grand total for a corporation with the size, resources, and wealth of the Capitol Group barely came to a rounding error on the annual statement.

When a private equity group, or any other buyer makes an offer for a business, they express the valuation as an amount for 100% of the stock.  As a shareholder, the owner gets what all the other shareholders get.  There would not be a situation where a separate pot of money went to Arvan for the company and the shareholders got some little fraction of that value.  That is not what it means to be a shareholder and you would most definitely see lawsuits in your future.  

Also, when an offer for your business is received, it is typically for a company that is debt free and cash free, meaning that the seller is responsible for paying off the company's debts, but gets to keep any cash in the business.  

The Due Diligence Process

Let's continue with the book describing the due diligence process:

At nine the next morning, the assault began - an army of nosy, cold-eyed accountants, mouthy consultants, and human resources assassins descended on Arvan Chemicals.

It was all part of the standard shock treatment.  Sow confusion and fear, upend the old ways, disorient the workers, humiliate the supervisors, divide and conquer.

By the close of business they would know who to lay off; by dawn the next day, a squad of guards would be posted at the doors, gripping clipboards with the names of those who would be allowed to enter and those who would be coldly sent home, permanently.

Eh, hem....I know a lot of accountants, some can be cold-eyed, and consultants can certainly be mouthy, but never an HR professional that I would describe as an "assassin."  

Here's the kernel of truth in that paragraph;  due diligence is invasive, difficult for employees, and uncomfortable, but no buyer wants to upend and disorient.  They are going to own the company at some point and beginning with a bunch of unhappy, disoriented workers is not the right way to start turning a profit.

Also, it never happens that buyers take one day to perform this due diligence (it can take between three and four months) and they generally do not fire large groups of employees.  When a private equity group buys a business, they are most interested in growth, which means not only do they need employees to stick around, they probably need to hire more.

This is the kind of paragraph that gives mergers and acquisitions, investment bankers and private equity groups an undeserved bad name.  

How The Owner Sticks It to the Greedy Private Equity Group

Our protagonist, Jack Wiley the investment banker, and the business owner Perry Arvan have a secret up their collective sleeves; the polymer doesn't work!  Jack explains his sneaky behavior like this:

"Understand, ladies and gentlemen, the Capitol Group is in the takeover business.  They're not novices.  They're one of the most experienced firms in that line of business.  They make their fortunes gobbling up companies and chewing them up.  They had time and more than enough opportunity to conduct a thorough due diligence before they moved in."  Jack paused, then said, "Had they ever asked me if there was another report on the polymer, I certainly would've shared it with them."

Let's just be clear to all you business owners out there.  If, one day, you decide to sell your business because your technology stops working, you are going to need to share that with the potential buyers, even if they don't ask.   Sometimes we run into sellers that have challenges with their business that they would rather not disclose.  This is a terrible policy and it won't work (unless you are Jack Wiley, who, let's remember, is fictional).

First, you should assume that everything - good and bad - is going to be discovered in a non-fictional due diligence.  Telling the buyer up-front about any issues is always a good idea because then you know that the purchase price they are offering you includes the good and the bad and is less likely to change when you come to sign the definitive sale agreements.  

Second, as a seller you have an obligation to mention anything that would be material to a buyer.  It is usually spelled out in the purchase agreement in the representation and warranties section, but even if its not, under rule 10b-5 as a seller you must disclose material facts to buyers.  You don't want to end up in jail after you sell your business, you want to be in Florida in a cabana.

 

Thank you, mom, for the interesting book and the somewhat misguided nod toward sneaky superhero status.  In reality, I am glad that my life doesn't involve diving out of speeding cars and bilking investors out of billions of dollars.  What my life does involve is assisting business owners with the orderly, and safe, transition of their business to a buyer.  As an investment banker I am blessed to be in a position to assist my clients through one of the most important times of their lives.   Remember folks, don't believe everything you read.

 

 
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