Why Should White Guys Have All the Fun? (34 page)

“You know, Peter, I can understand why you have those concerns,” Lewis said reassuringly. “I mean, we too are concerned about how all of this will work out. But you know that’s why we have the finest minds working on this problem and we think we’re just about there. But clearly it’s in our interest, just as it’s in your interest, to know that what we’re doing is well founded.

“So Peter, you would expect us to have been proactive in how we approach this.

“Do you think it might be useful if we ask ourselves the question: ‘Well, what if we achieve different levels of deductibility? What are the financial implications of that, what are the implications in terms of coverages and what are the implications in terms of deal returns?’ Would it be useful to construct something that allows us to measure those things?”

“And suppose we then separately go to our tax advisers and ask them where they are in the process, then pose this question: ‘Given
that you’ve got all these moving pieces in all these different areas and given where you are, what level of comfort do you have that at the end of the day you will be able to achieve a certain level of deductibility? How comfortable would you be that you can, say, get 95 percent deductibility?’

“Or suppose we ratcheted that down and said, ‘Okay, given all of these pieces, how comfortable are you that you can get 75 percent deductibility?’ And suppose I said that we were 90 percent probable that we’d be able to achieve that. Would something like that prove useful?”

Ackerman took a second to ponder the scenario Lewis laid out. “Yeah, I think that would be damn useful,” he said. “Can we do something like that?”

Lewis paused for effect. “Well Peter, we’ve been thinking about this and Cleve has some thoughts that perhaps he could share with you,” Lewis said, handing things off to Christophe in a well-choreographed move. Christophe then began passing copies of the computer model around the table.

The Drexel team was comforted by what they saw and heard, notwithstanding the fact that Lewis’s tax advisers still hadn’t categorically said how the tax structure would play out.

Having restored Drexel’s confidence and enthusiasm, Lewis flew back to New York. A bevy of smaller crises awaited his immediate attention.

It bears repeating that Michael Milken’s role was to add credibility, because Henry Kravis was conducting the auction of Beatrice through Salomon and Morgan Stanley and they didn’t even want to let us in to bid. It was kind of funny to me that I had Christophe and Sheehy meet with Morgan Stanley and Salomon and presumably those guys were checking out our bonafides. I was in California at the time. I remember saying over the telephone, “Well, tell Henry Kravis that we have as much bonafides to do this deal as he did when he bought Beatrice in the first place.”

But in any case, I got Michael on board. Mike delegated the thing to Ackerman, but he stayed involved and kept his foot up Ackerman’s butt. Ackerman then started to get kind of excited when he heard my basic strategy, which was to bid the deal at the perimeter, then immediately sell off some businesses. Mike was
comfortable that Ackerman could raise $500 million of high-yield securities. Although he naturally said, “We’ll raise anything you need,” I once asked Mike confidentially, “What are you comfortable doing?” He told me $500 million
.

That let me know that I had to sell at least $400 million of assets and get a bank piece for $200 million to $250 million. That’s because even though he said $500 million, I discounted what he said to a certain extent. But I did think that as long as Mike stayed involved that he would be able to do it. While I needed Drexel, I think the ability to hold on to control of that deal would have been very tough if they had been forced to raise more money
.

With the commitment for $1 billion in place, the next issue was to get Drexel to understand that I was going to control the deal. And that was a tough, grinding battle that we finally came to terms on after the time had elapsed to bid. In fact, I just stopped the clock and said, “I will not participate in this deal unless I control it, pure and simple. No ifs, no ands and no buts.” And they thought I was bluffing—of course I was not. And I think it was mostly Peter who wanted control. I don’t think it was Mike
.

Michael had to sit down with Peter in a very dramatic meeting at one point and tell him, “Peter, what we’re doing is backing Reg. That’s what we’re doing here.” And he just cut him off
.

After some hard bargaining, Lewis did agree to allow a Drexel entity to purchase a 26 percent share in the deal’s equity for a token amount because they had after all arranged for a significant portion of the transaction’s financing. Drexel, and Michael Milken in particular, had also enhanced Lewis’s credibility at a critical time during the bidding by committing up to $1 billion of the firm’s capital, if necessary, to finance the transaction.

In addition however, Lewis gave up the equity because he believed that there was a commitment on Drexel’s part to assist TLC Beatrice going forward in terms of raising money for future acquisitions and refinancing the debt. In this expectation, he would be bitterly disappointed. Drexel did not fulfill any of these promises. Although the firm would raise billions of dollars for acquisitions by Henry Kravis, Ron Perelman, and other dealmakers, it never raised another cent for Lewis after the close of the Beatrice transaction.

In fact, not only had the Drexelites been given common stock but, unlike the rest of the original investors in the deal, they had been given the privilege of purchasing this potentially lucrative stock without having to purchase any preferred stock, which essentially was a loan to the company with limited upside. In the end, Lewis regretted giving up the equity and he worked diligently until his final days to take Drexel and its minions out of the deal completely.

Now, in terms of the bid process itself, I pretty much felt that the price was around $950 million. We bid $950 million to be preemptive. But I was nervous about it. I was nervous because a lot of the operating units had sizable minority stakeholders, meaning you couldn’t automatically bring the cash back into the United States. If the market for assets fell, then I would be stuck with a high-cost debt structure in a business that was generating all this cash out of the country
.

We explored a number of different alternative financing structures, but none of them could be implemented under the time constraints we had for putting the entire deal together. Essentially, the strategy that evolved was very simple: We would bid $950 million or so and between the time of signing the contract and closing the deal, we would sell off at least three businesses for an aggregate price of $400 million. Then immediately after the closing, we would decide which businesses we wanted to keep and which businesses we wanted to sell. By then we would have a lot more information about them, because I would have had a chance to get out into the field and find out what was going on
.

The aim was to retain a core group of businesses that had some synergies and would improve operating results even as we reduced expenses. That was basically the operating strategy, and it was a sound strategy, because we were in effect piggy-backing on the auction work that Morgan Stanley and Salomon had already done. They had effectively heated up the market for sales of pieces of the business. So while the fact that there was an auction was a negative from the standpoint that you knew you were going to pay a high price, it was a positive from the standpoint that the market for the various assets was going to be well heated. And that’s the way we looked at it
.

Next came the actual bid. That was taken care of in a fairly straightforward manner with a one-page letter. The structure of the financing was simple, also. Regarding our original goal of $250 million to $300 million in bank debt, we wanted a commitment for more than that because—I can say it now—we were considering cutting Drexel out of the deal if the control issues got crazy. So if the bank had agreed to put up an amount equivalent to the $450 million to $400 million we were getting from the asset sale, then theoretically we wouldn’t need any high-yield debt
.

But I decided against that strategy because: One, Mike had done an outstanding job; Two, I thought that Peter who was driving my costs up and was giving me a lot of aggravation—ultimately would follow Mikes lead on the major points. There’s also the fact that there was an alliance between KKR and Drexel. I mean Drexel was KKR’s lead banker for all of its major deals. And I knew that if I had cut Drexel out of the deal, there would be tremendous pressure on KKR not to do the deal with me. And I didn’t want that
.

In any case, I thought Ackerman could be handled. He was more of a distraction on a personal basis than anything else
.

So now I delegated the due diligence effort to Paul, Weiss and Deloitte Haskins and Sells, with Cleve Christophe coordinating. Their job was to go in and review the numbers. Then I assigned the tax analysis to Arthur Kalish, a talented Paul, Weiss attorney who did some brilliant work in that regard. I limited myself to overall coordination and the asset sales, which I did with Charles Clarkson and Tom Lamia primarily. I kept Drexel completely out of the asset disposition strategy. I didn’t want them involved at all
.

Our bid went in. Word came out that KKR was going with somebody else. Ackerman even called and said, “Well, we got close.” I said, “Peter, I don’t even want to hear that. Call people—let’s create a climate where we can get it done.” There was about a 48-hour period where we really turned up the juice and placed a number of phone calls to key decision makers at Beatrice and KKR. To this day, I think KKR knew we were going to have the highest bid and was going to go with us all along, but they created doubt in our minds so that we effectively topped our own bid and increased it to $985 million. But that ultimately took it
.

We signed a definitive agreement on August 6, 1987
.

Reginald Lewis had done it. He’d managed to pull off a deal so large he could hardly believe it himself. Not only that, but the Beatrice acquisition was the largest offshore leveraged buyout that had been accomplished up to that point. Lewis had worked incredibly hard and very diligently for this moment, and it was every bit as sweet as he fantasized it would be.

A tidal wave of thoughts and emotions cascaded over Lewis, suffusing him with a glow no narcotic could ever come close to replicating. He could sense Grandpa and Grandma Cooper were somewhere beaming to themselves over his improbable accomplishment. Why should white guys have all the fun, indeed!

The smiling faces of his colleagues flashed before his eyes as though in a dream sequence and he saw hands thrusting toward him to pump his. Everything had an air of unreality about. People who thought Lewis never had any fun should get to know the euphoria that accompanies buying a billion-dollar company. And the thrill and the tremendous surge of accomplishment and pride were magnified three-fold for Lewis, because he had overcome obstacles and impediments that white financiers would never encounter and might not surmount if they did.

Lewis had a secret code that he shared with his wife whenever he accomplished something particularly noteworthy: He would sing the tune, “Raindrops Keep Falling on My Head.” Lewis picked up the phone on his desk and, praying the line wouldn’t be busy, dialed the villa in the South of France where his family was on vacation and waiting for him to join them. When Loida Lewis picked up, Lewis simply said, “Raindrops, Loida, raindrops.”

“Darling, you did it!” Loida Lewis exclaimed excitedly.

Next, Lewis made a call to the other important woman in his life. “Mom, I did it,” he said. “I accomplished what I thought I could not accomplish. I have bought almost a billion-dollar company.” Carolyn Fugett says she really wasn’t surprised by the call. “I didn’t jump up and down and scream and carry on and all that kind of stuff,” she says. “I have always, from the first day he came into this world, perceived greatness for Reg and each time that it happened, it just reassured my faith in him. 1 was elated and thrilled and what have you, but I can’t truly say that I was overwhelmed.”

After the euphoria at 99 Wall Street subsided somewhat, Lewis had to go to Morgan Stanley’s offices on 50th Street to review some
documents and sign them. When that task was taken care of, Lewis, Kevin Wright, Everett Grant, Cleve Christophe, and Tom Lamia walked out of a conference room and into a hallway. They strode around a corner, toward a bank of elevators. A smiling Lewis asked, “Is anybody looking?” After everyone had answered in the negative, Lewis jumped straight up and clicked his heels, reprising the feat he’d pulled off after getting a funding guarantee for McCall.

They left the building and walked toward the Harvard Club, with Lewis exuberantly throwing punches at the air. Once they’d reached their destination, Lewis ordered several bottles of the best champagne available, which he and his crew made short work of. As the champagne disappeared, Wright, Grant, Christophe, and Lamia each offered testimonials of sorts to the growing legend of Reginald Lewis. Christophe was first and had surprisingly little to say, but no one really noticed. The center of attention was Reginald Lewis. Smiling broadly and laughing readily when he entered the Harvard Club, Lewis was beginning to grow quiet and pensive as the evening progressed. The size of the task that lay ahead was sobering indeed. All the tension, hard work, and long hours that it took to win the bid for Beatrice were nothing compared to what would be necessary to close the deal for this globe-spanning empire, and Lewis knew it.