The task ahead can be described very simply. I was going to help Dai Nippon acquire controlling stock positions in a bevy of ineptly managed American high-tech companies, and she was going to be in charge of turning them around. I was DNI's takeover artist; Tam was the fix-it expert. That probably sounds a bit ambitious on everybody's part, but after watching the Dai Nippon juggernaut for a couple of days I knew one thing for sure: we'd have plenty of heavy backup.
Why did I agree to ride shotgun for Matsuo Noda's "Save America" project? Because, if he meant what he said, such a program was long overdue. American industry was in trouble, and it was hurting a lot of good, hardworking people who didn't deserve to be hurt. Worse still, this wasn't some random act of God. It was largely the result of self-serving corporate management. Most occupiers of the executive suites these days were too busy merging and acquiring and leveraging to do what stockholders thought they were paying them for: building industry and creating American jobs. (Well, maybe that's an overstatement; they had kept Drexel Burnham's junk-bond cowboys working overtime.) In the mid-eighties, American corporations were spending two and three times more on mergers and acquisitions than on research and development. Most industrialists here no longer cared to try making anything as old-fashioned as competitive products; they preferred to make deals and sell imports. The net result was that America, the world's major economic locomotive, was veering off the track and seriously in danger of taking everybody else in the world along with it.
That's where Matsuo Noda came in. Part of the arrangement he'd made with the Japanese institutions putting up the funds was that he would be given proxy to exercise all voting rights. Face it, he had a pretty impressive performance record overseeing the long-range planning and investment of well-run corporations. So after I'd helped Dai Nippon acquire control of a long list of poorly managed companies, he and Tam Richardson were planning to move in, clear out the deadwood, and lay down priorities for restructuring. She was Dai Nippon's technical director for all U.S. operations, which meant she was going to head up the team on the newly evacuated floor just above the financial section-Noda's management samurai.
Enough theory. Here's how it actually went. On Friday the story was finally broken by The Wall Street Journal, a little squib in "What's News," with a short two-column analysis on page 3. The piece revealed that all the heavy new activity building in the high-tech sector of the market represented buys being coordinated by a new Japanese investment concern.
This sudden, unexpected program of foreign investment was heralded at first as a salubrious omen, refuting those doomsayers who were claiming the world had lost confidence in the U.S. In fact, if anything it was proof that overseas enthusiasm was actually increasing. Japan's previous practice of focusing on debt instruments was at best passive investment. But buying heavily into a sector of the economy that appeared weak was something else entirely. It was a rousing endorsement of America's prospects.
To be fair, there was still a modest case to be made in that direction. Our high-tech sector wasn't all struggling high fliers operating out of some one-story cinder block on Route 128 or the Washington Beltway. America had plenty of solid industry in high tech-computers, aerospace, office machinery-and American laboratories and universities were the envy of the world. The problem lay with the downside. We'd lost our lead in electronics, drugs, scientific instruments, plastics, communications equipment… it's a long list. In fact, America's overall trade balance in high-tech products had actually gone negative, shrunk from a twenty-five billion dollar surplus as recently as 1980. The ignored question, therefore: Given the direction things were headed, why were the Japanese suddenly supposed to be so impressed?
The market's initial euphoria didn't last long however. By the end of the second week the SEC was sniffing the air and the lunch talk downtown, from the AMEX traders at Harry's to the expense-account crowd at historic Fraunces Tavern, was focused on what appeared to be a major shift in Japan's investment strategy. Now that the stock market was in shambles, they weren't just dabbling anymore; they were cashing in on the fire sale hand over fist.
Thus the Street's early cheering melted into apprehension. Japan had already taken apart our debt and currency markets, turned them upside down, and scored a bundle. Now Noda had Wall Street looking over its shoulder and reminiscing about the good old days when all it had to worry about was rich, crazy Arabs. When it became clear that Dai Nippon was assaulting the U.S. securities markets with high-speed computers and a checkbook that just kept coming, there weren't all that many wisecracks about camels and tents.
Wall Street, however, merely counts; it doesn't think. The real disquiet was reserved for corporate boardrooms. Take it as a given that when the Securities and Exchange Commission reports some ten, twenty, or thirty percent of your company's stock has just been swallowed by a cash-rich Japanese raider, your attention can focus most exquisitely. In a word, Matsuo Noda was the talk of industrial America. More to the point, and exactly what he had expected, the boards and CEOs of the companies being bought were beginning to be scared shitless. A major player with seemingly bottomless pockets was gobbling up heavy blocks of their publicly traded shares. Worse still, nobody had the slightest inkling why.
What all those entrenched CEOs didn't realize, in their wildest paranoia, was that seven-figure salaries and cushy executive perks were about to go the way of Cadillac tail fins. World competition, not executive compensation, would be the new game. Playtime was over; America was about to get serious again.
My early suspicions concerning my role in Noda's design had been precisely on the mark. I was indeed the freelance gunslinger he wanted by his side when the companies he was aiming at started to shoot back, which they surely would. Needless to say, if his plan was ever allowed to reach the courts, it would create a virtual "living trust" for half the corporate lawyers in the land. He'd be in litigation through the twenty-first century as managements fought to the last stockholder's dollar to keep their jobs.
Enter Matt Walton. Time for some samurai-style legal swordsmanship.
The rules: If you're CEO of a company and somebody starts buying up a major chunk of your stock with the intent of taking you over, you've got roughly four basic ways to stop him. The first is to try and bribe that buyer to go away, paying him a ransom-politely called greenmail-to sell his holdings and disappear. (More than one corporate raider you've read about in the papers has made millions in a couple of weeks using that very play.) The drawbacks of trying to buy off a potential acquirer are, (1) it's expensive, and (2) maybe he really does plan to eat you, in which case it won't work anyway. Matsuo Noda was in that category.
A second popular means to thwart a hostile takeover is to go out and find somebody else to buy you first, the proverbial "white knight." Ideally this friendly buyer should be, (1) too big to be taken over himself, and (2) willing to let you keep your playpen.
A third technique to stop somebody from acquiring a controlling chunk of your stock is to jack up the price, usually by offering to buy it yourself. Float some junk bonds, sell off a few divisions, do anything that will raise cash and then offer the shareholders more than the raider is willing to bid. This can be very expensive, but if you're a CEO with millions in compensation every year, why should you care if your stockholders' company is leveraged to the brink of ruin? You've still got your job and your goodies. It's used a lot.
The fourth and most fashionable way these days to stop hostile mergers is to try and make yourself unmergeable. To do that, you get your board of directors to vote a poison pill. What this does is make sure that any company that swallows you is going to be ingesting a piranha that will eat said company's own guts instead. The newest twist on this is to use phony bonds with a so-called flip-over provision, a killer pill invented by a clever New York law operation I won't name but whose initials might be WLR amp;K. Their game is as follows. In order to protect yourself you invent some convertible bonds and stash them away somewhere, ready. Then, should a raiding company start acquiring your stock or make an unauthorized tender offer to your shareholders, you hand out these little bombs to everybody who owns your shares. If this unfriendly company is then unlucky enough to actually acquire you, those convertibles "flip over" into the stock of that buyer. Your stockholders suddenly have the right to exchange their funny paper for huge, discounted chunks of real stock in the acquiring company-which would, naturally, be ruined should that happen. And usually, just for good measure, you also vote through a few "golden parachutes" for you and all your cronies, giving everybody in the executive suite severance pay in the tens of millions.
Those were the stakes. Now, a lot of outfits suddenly found themselves being bought by a mysterious Japanese entity named Dai Nippon, International. What were they going to do? At first of course everybody just assumed NDI was merely angling for a little greenmail. No such luck. After a couple of days went by and we hadn't returned anybody's phone call, they knew that wasn't it. Next, a few went looking for a white knight with more money than DNI (a tough assignment). Not surprisingly, however, most corporate managers very quickly decided to call a board meeting and ram through a poison pill.
I got more than a few phone calls at my downtown office from CEOs wanting to know if I could pitch in and help them stave off what looked like an unfriendly Japanese buy-up. I had to say, sorry fellows, I'm unavailable. But why not give it your best shot and try the old "pill"?
Most of them did. They had no option really.
Which suited me fine.
The time was late Friday-the afternoon was gorgeous, sunny and crisp-and the place was Noda's office. Naturally he understood all about poison pills, so he knew the problem. What he wanted to hear was our solution.
"I'd like to try something that's never been done before. A different battle plan." I glanced out at the blue sky and wished I was already in St. Croix on holiday with Amy. "However, I think it's possibly just unconventional enough to fly."
"It has to be legal, Mr. Walton." Noda leaned back in his chair, waiting.
"It is. But in order to lay the groundwork, we'll first need to set up a string of dummy corporations."
"Any particular state?" He was listening closely now, his mind clicking away. I was never sure what the man was thinking, but I figured he'd probably seen it all before.
"That old standby Delaware should do fine, though you might want to consider going for some offshore tax-haven places, if only because the paperwork is minimal. In the Caribbean I'd recommend the Turks and Caicos Islands, maybe the Cayman Islands. Then there's Bermuda or the Bahamas or the Channel Islands. If you really want to get esoteric, why not Vanuatu-used to be the New Hebrides-in the South Pacific."
"I'm familiar with world geography, Mr. Walton." He was deadpan. A joke?
"Fair enough. These dummy corporations of course will have no assets."
"I understand." He smiled and ran his fingers through his silver hair, doubtless already miles ahead of me. "Absolutely no problem. Please proceed."
"While those corporations are being set up, you continue buying stock in whatever companies you need to control, making sure in all cases that you acquire just enough to deliberately trigger their poison-pill mechanism. We force them to issue their flip-over bonds. They can't stop the process, since it's always set up to be automatic after a certain percentage of stock has been acquired. Not even the boards of directors can revoke it."
"Yes, Mr. Walton. I'm aware of that." He didn't seem the slightest bit ruffled by my unorthodox opener.
"Well, let me elaborate. The reason we want to trigger their poison pill first is so that nobody can later come in as a white knight and save them. They're totally isolated. They'll have made themselves into sitting ducks."
"Very good." He leaned back. Was he really that far ahead of me?
"While that's happening, you 'sell' the stock acquired thus far to one of the dummy outfits we've set up, in return for debt paper. Which puts DNl at arm's length and untouchable. After that, you lend that dummy corporation the rest of the millions or billions necessary to acquire a controlling interest in the company, taking back as collateral more junk bonds at absurdly usurious rates. That makes it a financial leper, but you don't care: you're merely lending yourself the money. This paper corporation is all that can be touched when the acquired company's poison bonds flip over. So instead of being convertible into the stock of some cash-rich corporation, the way they were intended, those flip-bonds are going to give their holders a piece of some offshore phone booth with zero assets and enough debt to choke a horse. They're worthless paper. And you're in the clear."
He smiled. "Which means our program can proceed on schedule?"
"Dai Nippon will be totally insulated from their poison pills. Like the guy who sells his house and boat to his company and then lets it file Chapter 11 bankruptcy in order to protect his personal assets from creditors. Nobody can lay a glove on you."
"Mr. Walton"-he leaned back, a twinkle in his dark eyes-"that's exactly why I knew you were right for us. You have an intuitive grasp of tactics."
"If you do this, there're going to be a lot of unhappy, unemployed lawyers in this town."
"Most regrettable. Some of them might even have to go out and find productive work." He rose and shook my hand. "You've destroyed the prospect of years of legal roadblocks in a single stroke. It's elegant."
It was. Sun Tzu and Miyamoto Musashi would definitely have approved. But there still had to be more. An unexpected opening is not enough in itself; it needs an equally deft follow-up. Bushido, the Way of the Sword, teaches that you should first surprise your antagonist, and then you must confound him. Both the initial attack and the carry-through are crucial to success. Among other things, that meant Noda's mechanism for calling a board meeting of the companies he'd be acquiring had to be instantaneous, without the usual niceties.
"This setup should do the job, but only if it's used with finesse. Otherwise the whole system gets buried in paperwork."
"What do you mean?"
"You have to be fast, and flexible. Once you've taken ownership of a company, you've got to gain immediate control over its board of directors, in order to block any and all countermoves."
"I understand."
"Do you? I'm talking about the ability to call an executive session out of the blue. The kesa stroke of the sword. The power to cut a CEO in half before he can blink. No time for consensus and the usual Japanese niceties."
He stood quietly, thinking. At last he spoke.
"In other words, I must be able to convene the board at a moment's notice. Is that the essence of what you are saying?"
"Nothing else is going to work."
"Very well. After we have a commanding stock position, we can institute the necessary changes."
"Good. Remember though, that's still merely half the battle. Besides being able to call board meetings, you need full authority to institute a shareholders' vote, which in this case will consist of nothing more than you signing your name."
"Perfectly reasonable."
"It is. But it also means you've got to be available to me at all times. Can I rely on that?"
He turned and strolled to the window, pensively. "That may not always be possible."
"Then you've got a potential problem."
He revolved back and studied me a second, finally taking the bait. "There is, of course, one very simple solution. I can merely assign you power of attorney, allowing you to act in my name if I cannot be reached."
"That would do it. But you'd be handing over a lot of authority."
"I envision no difficulty." He looked me over with the self- assurance of a tiger contemplating a haunch of beef. "I have every reason to believe you would always act in DNI's best interest, Mr. Walton."
It was possible he knew a few things I didn't. On the other hand, maybe Matsuo Noda had just overreached, taken too much for granted. Whichever it was, the maneuvering just completed had been one small step for Tam, and Matthew Walton. Should we ever need them, I'd just conned Matsuo Noda into giving me duplicates of the keys to his Kingdom. It was our protection and, in a way, my secret price for putting our heads into Dai Nippon's noose.
"Then it looks like we have everything we need to move forward." I nodded.
"Excellent."
Upon which I absented his office, safety net in place. The play was on.
Which brings us to Tam Richardson. If my approach to this new job was a little unconventional, what about the college prof who showed up in jeans as she readied to renovate corporate America? One thing, we suited each other. It was a tag team made in heaven. After I'd pried open the door to the companies DNI was buying, she was going to roll in, guns blazing, and shove everybody against the wall.
Let me add one important distinction, however. Whereas I may have been wary, even slightly skeptical, Tam was definitely the idealist. She was, by God, going to get this country moving again. America was once more going to lead, she declared, not follow. No defensive Fortress America claptrap. Hers would be nothing less than a full-scale assault, intended to win back and keep a solid manufacturing base here, toe-to-toe with the world.
Since no overall American program existed to rescue industries now being killed by foreign competition, she was going to do it herself, create a coordinated battle plan for our strategic sectors. Backed by Noda's Japanese billions, she was about to try and redeem this country's future, leading us back to number one. She also was quick to add she had no intention of merely copying Japan's famous management techniques. Japanese industry, she insisted, hadn't invented long-term planning, sound capital investment, dedication. What they did over there these days was what the U.S. used to do. The American work ethic was alive and well; it was just temporarily on the wrong side of the globe. She was about to bring it home again.
Maybe she could. One major impediment at least would be out of the way. Since the companies Dai Nippon was taking over would no longer have to answer to a lot of fickle fund managers every three months, they could start investing for the longer term. Also a lot of unnecessary fat was going to be sliced out of upper management. If things went as planned, Dr. Tamara Richardson and Dai Nippon were about to become the ruthless architects of a new corporate America.
Unless… well, there seemed no reason not to take things at face value, at least for now. DNI's new Industrial Management Section on the twelfth floor had already begun filling up with young Tokyo University graduates, guys who embodied the work ethic in human guise. They meant business. Nobody was sipping coffee and critiquing last night's rerun of Dynasty. I got the definite impression one of the unsmiling whiz kids in Noda's handpicked cadre could chew up about five American MBAs for breakfast. Tam currently had them working overtime, putting together a reorganization plan for an outfit in Boston, one of their new acquisitions, which I guess I'd better just call XYZ. The previous week Dai Nippon had purchased some twenty-four percent of its stock, presently at a historic low, and she was planning to make the company her showcase turnaround.
Stock in hand, she'd buckled down with her new staff and using DNI's analytical machinery confirmed some alarming suspicions. It turned out XYZ was practically a terminal case, living at the moment off its real estate assets, which were being systematically dribbled away to mask heavy losses. Layoffs would be next.
By Thursday of the second week, however, she'd put together a restructuring, including some painful austerity that might just salvage the company and its American jobs. She went home that night feeling quite proud of herself, and Friday she flew up to Boston for her first official conference with XYZ's chief executive officer.
Since a quarter of a company's shares gives the holder reasonably high recognition, the CEO was understandably nervous about who exactly had acquired a fourth of his company inside of a week and a half. He appeared at Logan with his Rolls limo to receive Dr. Richardson personally.
She explained right off that she was there merely to pass along a few of DNI's "recommendations." She took one look at the Rolls and added that, for example, one of the first was going to be to divest all limos forthwith, along with the new fifteen-million-dollar Gulfstream IV he'd bought for weekend fishing trips down in the Keys, and direct the proceeds toward capital investment.
From there on things progressed pretty much as might be expected. By the time they reached his paneled office she had been obliged to explain that his options were either (1) to get in line, or (2) to watch DNI pick up another thirty percent of his company's O-T-C shares, then march him and his "golden parachute" past a stockholders' vote they would call to review his career options. After that she had claim to his unalloyed attention.
It was a tough Friday. After she flew back late, she dropped by the office to pick up a few things and fill me in on how it went.
"Good. You're still here." She popped her head around my office door.
"Who won? The Christians or the lions?"
"Want to hear about it?" She came on in and dropped her briefcase on the desk.
"Wouldn't miss it for the world."
"Matt, you should have seen the look on that man's face." She clicked open the case and pulled out the action plan she'd developed for XYZ. She was exhausted but still wired. "These CEOs forget it's shareholders who own the companies and pay their salaries. They start thinking they're little Caesars."
"Hey, those are the kinds of operators who used to be my clients. Believe me, I know the type."
She then proceeded to give me the rundown. Outfit XYZ specialized in high-tech widgets it sold in the U.S., Latin America, and Europe. Problem: their widgets cost too much, broke down more than they should, and consequently folks didn't tend to buy them the way they once did. As a result XYZ had dropped about five million last quarter and (unbeknownst to its workers) was currently on the verge of closing two of its three U.S. plants and exporting the assembly operation someplace where it could exploit two-dollar labor, a move that would tank just over a thousand American jobs. Management says, gee, that's tragic, and awards itself another year-end financial tribute.
Dr. Richardson had just dropped a bomb in the playpen. First off, she told them, XYZ's damned widgets cost too much not because American workers are overpaid, but because its assembly plants were a candidate for the Smithsonian. Therefore, starting immediately, short-term profits as well as dividends and all management compensation would be slashed and the resulting capital, together with a new offering of long- term corporate equities, would be invested in automating its facilities and retraining workers. There would, in fact, only be workers in future, since all freeloading middle managers, attorneys, and drones with titles such as 'administrative assistant' were to be terminated. She gave them a list.
Henceforth, she went on, management would begin planning ten years ahead, not three months. XYZ would concern itself with world competition then, not now, and it would develop a substantially more diversified product line to cushion slumps. As part of that shift, it would double the budget for R amp;D immediately and expand the lab. Innovation would once again be brought to the product stage fast and adapted quickly to world markets. XYZ's new focus would be on making its market share grow in the decade ahead, which also meant cracking down on quality and halving the current customer-be-damned response time on deliveries and service. Concerning those last items, product managers would now be required to address customers' complaints personally. She figured that in itself would turn around XYZ's substantial quality control debacle overnight.
Finally, there would be an immediate crash program to rectify XYZ's costly illusion that English was the worldwide language of business. These days, she explained, the language of business is the one your customer speaks. Accordingly all XYZ's overseas operatives would be required to enroll in intensive language training now, including formal study of the history and social customs of their territory.
"Sounds like you let him have it with both barrels. Keep on like this, and the U.S. of A. may never be the same."
"That's the idea. One company down and about three thousand to go."
What's that saying about a journey of miles and miles starting with the first step? Well, she'd taken the step. The future lay ahead.
"Hey, can I buy you a drink?" I was winding up the day, the week. "You've earned it."
"Like nothing better." She was repacking her briefcase. "Matt, I'm having the time of my life. All the things I've always wanted to do. This is like a fantasy come true. We're going to pull this off, wait and see."
"Could be." I was switching off the lights in my office. "Tell you something though, Doctor. I keep wondering what will happen when Noda gets through with us."
"Thoughts?" She glanced back.
"Well, after Japan takes over half the companies in this country and starts running them right, then what?" We were headed for the security doors. "But maybe we ought to talk about that some other time. And place."
"I'll think about it tomorrow. Just now I'm bushed."
"Tomorrow, in case you've lost count, is Saturday. Don't know about you, but I'm taking the day off. The hell with Japanese business hours. My daughter comes this weekend." We were saluted by heavies in the security airlock, then the doors opened. "Matter of fact, we're going to eat somewhere down in SoHo tonight. Care to join us? Be warned it'll be mostly soy by-products and brown rice."
"I'd love to meet her." She looked at me. "Matthew Walton with a daughter. My God." She laughed. "Sorry, Matt, but you really don't seem the father type."
"Amy's mother said approximately the same thing as she was packing her bags. But I'm now undergoing intensive on-the-job father training. Fact is, I'd planned to knock off around Christmas and take her down to our place in the islands, though now I'm not sure there'll be time."
"Sounds very fatherly. You should go."
"I'm still hoping to." I looked her over again. "Well, the hell with it, why mince words. Tell me, Tam, how's your love life these days?"
She burst out laughing again. "You haven't changed a bit. Not at all."
"Spare the commentary, okay? Just stick to the question."
"Excuse me, counselor. The honest answer is it's nonexistent, which you surely must know, since I'm here every night till midnight just as you are." She examined me pointedly. "Matthew, could this conceivably be construed as a proposition? To a horny, bone-tired woman in her moment of mental fatigue?"
"It might be a tentative gesture in that direction. I'm a slow mover."
"You always were." She finished buttoning her coat. "What time's dinner?"
"I'll pick up Amy and buzz you. Give us an hour."
"Think she'll like me? Some stranger competing for Dad's attention?"
"If she does, it'll be a first." I pushed the down button on the elevator.
Guess what. Matthew Walton barely got a word in edgewise the entire night. Then around eleven, in the cab headed home, Amy whispered to me she thought Dr. Richardson was "kinda neat." Was she gonna be my new girlfriend?
Tell you, it's not always simple learning to be a father.