Chapter 11 - Bear Hug, February 19 – 25, 2002 - episode 6Listen to podcast
William Smothers of Arthur Williston Smothers (the ‘Smothers’ in the firm’s name is his uncle Howard) is the high-priced takeover lawyer Aaron Smyth has engaged as instructed by the hackoff.com Board of Directors. It is now 2:30 PM on February 25. The letter from antihack was received at 10:00 AM. Smothers has studied it and is now advising the hackoff Board in a conference call from his midtown office.
Larry, Donna, and Aaron are in Larry’s office at hackoff in lower Manhattan. Joseph Windaw, Franklin Adams, and Joanne Ankers have called in from Chicago, Bangalore, and San Jose respectively.
“This is what is called a bear hug,” says Smothers.
“You told us that was coming last night,” says Larry to Aaron in an aside that cannot be heard on the conference call. “We gotta pay this guy to tell us what we already know?”
“Shhh,” says Donna to him and puts her finger on his lips. “We pay him, Lar, we might as well listen to him.”
“antihack’s attorneys know that, even if you dismiss their proposal out‑of-hand, you will need to make the substance of it public. They’ve even made sure you are aware of this by pointing it out in the final sentence of the penultimate paragraph. This is, I would like to say, only one of a number of rather clumsy ... er … inappropriate phrasings in this letter. I see that they are represented by Zinger Sweetly. They are a respectable firm but not highly-regarded.
“However, we are under no immediate pressure to make this public even under an extreme reading of SEC regulations and guidance. It is not a binding proposal; they clearly anticipate your need to discuss it. A reasonable person — and the test is ‘what would a reasonable person expect?’ — a reasonable person would expect that this is meant only as a starting point for negotiation and is in no way a best and final offer. They have spelled out a number of customary conditions but they have also taken pains to say that the proposal is not binding on them even should all the conditions be met. Although they haven’t—”
“How long do we have before we have to make something public?” Larry interrupts.
“Well,” Smothers begins, “if we were to accept—”
“Forget that,” says Larry. “If we tell them to go fuck themselves, then when do we have to tell people they sent this garbage and we sent it back?”
“It is very important,” says Smothers, “that the minutes show that the Board was properly deliberative in responding to this proposal. It would not do to be hasty or to give the appearance of being hasty.”
“Yeah,” says Larry, “with all due deliberation, we’ll tell them to go fuck themselves. Then how long do we have to get a press release out?”
“I think we’re putting the cart before the horse,” says Joanne. “I think it may be in the best interests of the shareholders to consider this offer carefully. The stock is currently at eighty cents and has been lower today.”
“It is important to realize,” says Smothers, “that this is actually not an ‘offer’. They have been careful to say it is a ‘conditional proposal’. You could accept their terms and they could renege. The Board also wants to be careful not to appear to be hasty in accepting something which, in form at least, is very one-sided.”
“Surely we could respond to their proposal with a proposal of our own that better protects our shareholders,” says Joanne.
“Now who’s putting the cart before the horse?” demands Larry loudly. “Joanne, this offer or proposal or whatever the f… whatever the hell it is, it is totally out of line. The price sucks. And it is in antihack stock, which sucks. And it is from antihack, which sucks. You’re already talking about terms and conditions. There don’t need to be any terms and conditions when we turn this down.”
“Who says we’re going to turn this down?” asks Joanne.
“Actually,” says Franklin Adams, “I agree with Larry on this. It’s not a good price. It’s not an appealing offer — even ignoring the fact that it isn’t an offer at all. It is certainly not the place we would want to start a negotiation.”
“I’m surprised you’re siding with Larry on this,” says Joanne. “I think management is being very closed-minded. That often happens when—”
“Joanne,” interrupts Franklin, “are you under a lot of pressure at Big Router to get out of this position?”
“I … no … I … It is my responsibility to act on behalf of all shareholders,” says Joanne. “I am not acting as a representative of Big Router and I resent—”
“I’m sorry, Joanne,” says Franklin. “It’s the middle of the night, actually almost morning over here in Bangalore. You’ll have to forgive me if I’m a little confrontational. This is not a good offer. Even if we want to sell to antihack — understand that, at the right price, I’d sell to the devil — even if we want to sell to antihack, we don’t start with this proposal. We don’t bargain on the basis of this proposal. We DO send the garbage back — after due consideration, of course. I think that is what Larry is getting at.”
“Thank you,” says Larry. “That IS what I’m getting at. At this point the only question is how we send it back and how we announce that we got it and sent it back. And we have to wrap it up all nice so we don’t get a bunch of shareholder suits—”
“I’m not sure I agree,” interrupts Joanne. “I’m not sure at all.”
“Okay,” says Larry. “It’s time to find out where we stand. I’d like to get a sense of the Board right now before we go any further on whether the Board wants to give this crap serious consideration or whether you are with me on refusing to enter any negotiation with anyone at such a piss-poor starting point.”
“I don’t think it would be wise for the minutes to show a Board vote prior to more discussion,” says Aaron.
“I concur with my colleague,” says Smothers. “That would not be prudent.”
“Okay,” says Larry. “God forbid that we’re not ‘prudent’. I’d like to get a ‘sense of the Board’ doesn’t belong in the minutes. But, before I get that, let me tell you where I stand so there won’t be any mistakes. If this Board wants to open negotiations of any kind on the basis of this piece of shit we have here from George, then I resign immediately. Here and now. I will not vote for any such deal as a shareholder. I will oppose it. The first stockholder suit you get will be from me.”
Donna and Aaron watch him put his gun to his head and smile.
Larry begins with Franklin. “Franklin, what do you want to do?”
“I’d accept your resignation in a minute if that’s what it took to make a good deal,” says Franklin. “But, as I said, this isn’t where we want to start.”
“I believe that this is a serious offer and needs to be responded to seriously. I cannot be deterred by threats.”
“Larry, I don’t appreciate threats either. But I agree with my colleague Franklin that this is not an appropriate place to start negotiations. We will have to consider what sorts of offers we WILL entertain. But I think this should be rejected out-of-hand for both strategic and tactical reasons.”
“Thank you,” says Larry. “Donna?”
“You kidding? We gotta give this due consideration.”
“You, too?” demands Larry. “After he tried to bribe you. After…”
“Larry, let me finish,” says Donna. “As I said, we gotta give this due consideration; should take us about five minutes or so. Then tell George to shove it up his ass.”
Larry puts the gun back on his side table.
“This discussion is not in the minutes,” says Aaron. “Shall we begin our deliberation?”
The “due consideration” actually takes the better part of half-an-hour. Except for Joanne, no one takes the proposed price seriously. However, since it is higher than the price hackoff.com is trading at, there is a question, according to both Aaron and Smothers, of how they can justify turning it down without a counter. If they had the opinion of an investment banker, the lawyers say, then they would be justified in relying on that opinion. All except Larry agree that they should get such an opinion to buttress their case. Larry reluctantly agrees to contact investment bankers and engage one. But this doesn’t solve their immediate problem of the two day deadline to respond and the fact that they all (except Joanne) feel that it is important to say “no” emphatically.
In the end, Donna comes up with a solution which satisfies everyone (except Joanne). She proposes turning the preemptory deadline to advantage. Obviously the deadline is too short to say “yes” responsibly just as it is too short to say “no”. By saying “yes”, the Board would agree to a “no shop” — it would not be able to solicit bids. Nor would there be time to get the “expert” opinion of bankers. Therefore, the proposal is not serious since the Board cannot respond responsibly in accord with its fiduciary duty to shareholders. They will say “no” because it would be irresponsible to say “yes” under the terms proposed.
The lawyers tweak this some: they can say they regard the price as absurdly low. It is scarcely higher than the value of the assets including cash on hackoff’s books. Therefore it values hackoff’s ongoing business, patents, brand and customers at essentially nothing. They can come close to saying that antihack is trying to steal the company but they can’t use that word, of course.
They can say, and should say, that the are engaging investment bankers to “explore strategic options”. In fact, saying this means they are “in play”, a candidate for takeover. That, by itself, should make hackoff’s stock go up. The Street often punishes potential acquirers on the theory that they will eventually overpay so antihack’s stock may go down as well. With a little luck, everyone (except Joanne) agrees that the price of the two stocks may instantly move so much in relation to each other that the antihack bid will end up being worth less than the new value for hackoff set by the stock market. If this happens, the hackoff Board will be well-insulated from shareholder suits based on their rejection of the offer.
“So,” says Larry, “we just stall some on engaging the investment bankers. Then the stock moves; we don’t have to pay a couple of million dollars to know that if they are offering to buy us for less than the stock price, they are ripping off our stockholders.”
“Doesn’t work, Larry,” says Franklin. “I’ve been there before. Once we announce we’re going to hire investment bankers, we gotta do it. We change our minds, we decide we’re not in play, then the stock goes down lower than it was before and we’re all in trouble. What’s more, you gotta realize that we’re putting the company in play. I know this is hard for you, but the company may really get sold. Maybe antihack offers a fair price. Maybe somebody else does. And maybe the company gets sold. If it doesn’t, the stock goes back down and doesn’t come up until you guys show some solid results and maybe not even then, unless the market recovers.
“I agreed with you today that we don’t start any negotiations at this low‑ball price,” Franklin continues. “But remember I told you I’d sell the company to the devil at the right price. And that includes antihack. It’s just about money, Larry, nothing else.”
“I appreciate you being straight, Franklin,” says Larry. “And I agree it’s just about the money. This isn’t about my ego. But there is no amount of antihack stock that can buy hackoff because that stock isn’t worth shit. If antihack was paying cash — if they had cash — for sure, we got to consider that. Cash is cash. But we’d never be able to sell antihack stock — I mean our shareholders wouldn’t be able to sell it fast enough to get their money out.”
“That’s why we need the investment bankers,” Joe chimes in. “If they say that a stock offer from antihack is not in the best interest of hackoff shareholders, then it’s easy for us to turn it down. I’m not sure I’m eager to have a lot of antihack stock, to tell you the truth. I’m not happy with how much hackoff stock I have, as a matter of fact. If we could get a cash offer or get bought out with stock we can sell like Microsoft or Oracle or somebody, maybe that’s the best outcome.”
“Thanks for the vote of confidence,” says Larry.
“Larry, don’t take any of this personally,” says Joe. “It’s just about—”
“The money, I know. That’s why we’re here. Let’s get going. My plan is to put out a press release immediately following this meeting saying that we got this ridiculous low-ball not-fair-to-our-stockholders offer from the assholes at antihack who are trying to steal the valuable assets which of course belong to our shareholders. Our fearless Board of Directors has met and, after due deliberation, decided that agreeing to robbery one is not in the interest of the shareholders and so has told antihack to stuff its proposal — which wasn’t binding to begin with and (did I mention) isn’t in the interest of the shareholders — which (we should mention) is the only concern of this fearless Board.
“Furthermore, having lost confidence in the ability of management to recover single-handedly from the stock market crash of 2000-2001, the Board has decided to put the company in play to see if anyone will take this turkey off their hands. To that end the Board has instructed this same incompetent management to pay a small fortune to an investment bank that will explore strategic alternatives, whatever the fuck those are. Should these bankers actually succeed in discovering any such alternatives and should a transaction take place with said discovered alternatives, said bankers will extract another fee.”
“Larry, that isn’t exactly—” Joe begins.
“You’ve got it Larry,” Franklin interrupts. “But don’t forget to add that we love you and you have done a great job so far. Actually, that’s true. And, if the best alternative turns out to be to go it alone for a while, you’re still our man. And Donna’s still our woman. Now can I get some sleep?”
“I’m sorry to interrupt,” says Smothers, “but there is the matter of the letter back to anithack. I’m assuming that you’ll want to inform them before putting out a press release. I also assume that the actual—”
“Is there some legal requirement that we inform them before putting out a press release?” asks Larry.
“No,” says Smothers, “there isn’t. It is customary and it would be gesture of good will.”
“So not warning them would be a gesture of bad will?” Larry asks.
“I would say so.”
“Sounds good to me,” says Larry.
“I’m not at all sure we want to offend antihack in this way,” says Joanne.
“I am going to have to get some sleep,” says Franklin. “I’m dropping off the call. I don’t know that the Board has to be involved in what order we do what. We duly considered and made our decision. But, if you need to make any more decisions, Joe’s got my proxy. Good night, all.”
“Believe it or not,” says Larry, “I have a reason for wanting to get the release out first besides sticking it to Georgie boy…”
“We cannot be vindictive,” says Joanne. “We must be business-like.”
“Of course,” says Larry. “That’s what I was saying. If we write back to antihack in a polite way and say ‘we are going to reject your most kind proposal, honored sirs’, they get to make the next move and decide how they want to spin the story. They probably have a canned press release ready. Unless they’re even stupider than I think they are, they can’t believe we were going to accept this proposal. So far they’ve been forcing the pace. With hindsight, since we’re putting ourselves in play, we should have done it as soon as Georgie called me and Donna and not even let them get their offer off. But we didn’t. So now we need to regain the initiative. Catching them flat-footed with our announcement is a good way to do that.”
“But if we’re later in negotiation with them…” Joanne starts to ask.
“In that very unlikely event,” says Larry, “you are as likely to be leading the negotiations as I am because I’m probably long gone. But, should you be in that position, you’ll be glad we started tough. They aren’t bidding for us to do us a favor; they aren’t bidding for us because they’re nice guys or because we’re nice guys. They’re bidding for us because their business sucks and because our stock sucks and they think our software and our customers and our cash are the way out of a hole they dug for themselves. They’ll come back like a puppy dog if they see the chance and it won’t matter to them any more than it matters to the puppy dog that we gave them a lick in the chops.”
“I don’t—” Joanne says.
“Joanne,” Joe says, “I think we should let management take the lead here. We’ve done our job by considering this proposal and determining that it is not currently what is in the best interests of our shareholders. We have set the stage for determining exactly what our strategic options are. I think we can responsibly let management take it from here. I’m not sure I would personally proceed with as much hostility as Larry seems to be prepared to do; but we are responding to a bear hug, and I am willing to allow some latitude for those on the front line.”
After the call, Donna and Larry are alone in Larry’s office.
“Larry,” Donna says. “I just want you to know I’m with you.” She hugs him chastely, pelvis back.
“Good,” says Larry. “It means a lot to me.” He pats her ass as she leaves.
hackoff stock closes at an all time low of seventy-five cents. The hackoff press release is timed to hit the wire thirty minutes after the market closes.
Chief Marketing Officer
212 555 1000
For Immediate Release
HACKOFF CONSIDERING STRATEGIC ALTERNATIVES
BOARD REJECTS “NON-BINDING” PROPOSAL FROM ANTIHACK, INC.
New York, NY -- February 25, 2002 – (BUSINESS WIRE) hackoff.com
(NASDAQ:HOFC) announced today that the company intends to engage an investment banker to explore strategic alternatives. In a separate action, the hackoff.com Board of Directors considered and rejected an unsolicited and non-binding proposal from antihack, Inc. (NASDAQ:ANTI).
“Although we believe our core business is strong and getting stronger,” said hackoff Chairman and CEO Larry Lazard, “there have been significant changes in both the stock market and the e-commerce ecosystem in which we operate. The fact that we have cash and no debt gives us many options for the future. We feel it is in the interest of our shareholders to explore these options fully and to engage a qualified investment banking firm to help us do so. Options to be examined include continuing independently, different ways of leveraging the equities in our portfolio, or some sort of combination with another company.”
This morning the company received an unsolicited proposal from antihack, Inc., which that company characterized as non-binding. The proposal insisted that the hackoff Board agree within two days to an exchange ratio of one antihack share for each 2.5 shares of hackoff and also agree not to seek other possible combinations for the company. The hackoff Board does not believe this is a fair price for the company. Although it is a nominal premium over Friday’s closing price, it is actually at a discount to the value of hackoff determined by looking at the prior five days stock market prices. Moreover, this proposed price attributes almost no value to hackoff’s ongoing business, patent portfolio, brand name, or customer base. Under this proposal, hackoff shareholders would own 30% of the combined company according to calculations made by antihack.
The hackoff Board of Directors have acted firmly in rejecting this proposal which would have hampered the Board’s ability to achieve the best results for shareholders. Moreover, the Board was cognizant of the fact that acceptance of this proposal would have been binding on the hackoff Board under certain circumstances, but that antihack, itself, would not be similarly obligated to pursue the transaction. The Board has made clear that it will consider proper proposals in the context of the planned work with an investment banking firm as described above.