lion_tamers_3 Illustrations by Michael Witte

Don’t kid yourself—appearance counts.

Once all parties converged on the Republic of Texas, we ushered everyone into our offices on the penthouse floor of the most exclusive office complex in Dallas—an elegant setting outfitted with Regency-era furniture, 18th- and 19th-century antiques, oriental rugs, and a conference room with a semicircular window that stretched almost the length of a squash court. The only thing that might not have been genuine was the impression that we could afford the furnishings at the time we decorated our offices.

Admittedly, there was a madness to our method, but there was also a method to our madness. By decorating our offices to the hilt, we were banking on the theory that an office that exudes Tiffany quality also exudes success.

When colleagues first visited our offices, there was often a visible sagging of the shoulders and a slight drop of the jaw. Everyone noticed—and no one failed to comment on—the décor. We would respond with the obligatory “Aw, shucks,” and a wisecrack that we had “furnished it one deal at a time” (more truth than fiction). But it never failed to impress and to tilt the home-field advantage just a tad more in our favor.

Your eyes are the most potent weapon in your arsenal.

Once all the players were assembled on stage, it was time to loosen our ties, roll up our sleeves, and get down to the business of divvying up the spoils of the Prudential deal. On the Dr Pepper side of the table, Lehman took the lead in advancing the cause of the Pepper shareholders, while DLJ did the same on behalf of the 7-Up stakeholders.

With Lehman and DLJ free to face off at will, with only occasional intervention from our firm, the first day produced nothing but rigid positions, harsh rhetoric, and a stack of boxes of partially consumed pizza that we had ordered in for dinner. As the day wore on, the amount of tension and frustration that had overtaken the conference room was visible in the glares they exchanged as well as in their verbal barbs. Brilliant colleagues who genuinely respected each other were working themselves into a frenzy, egged on by periodic input from the powers-that-be at their respective firms back in New York. The negotiations were in danger of spinning out of control when we adjourned for the day, exhausted and discouraged. Downcast eyes told it all—we were on the verge of blowing the chance to collect an ungodly jackpot, all because of intramural warfare.

In the long run, integrity trumps the fleeting advantages of artifice.

In a negotiation, you have as much leverage as the other side thinks you have.

Clearly, a different strategy was called for on the second day, lest we deteriorate from stale pizza to a complete breakdown. So we enforced a new ground rule: the Lehman representatives would be confined to one conference room and the DLJ emissaries to a separate one, and the partners from our firm would shuttle back and forth in an effort to stitch together a deal. Relieved of the pressure to be the ultimate bad boy in the room, the separated principals visibly relaxed. And the H&H diplomats wore a groove in our oriental rugs traipsing back and forth between the Dr Pepper command center and the 7-Up bailiwick.

There was a strange dynamic at work that day. Two heavily muscled New York investment firms that were used to fighting their own battles (and who controlled far more of the stock of Dr Pepper and 7-Up than H&H did) allowed themselves to be disengaged from the direct dueling that is one of the hallmarks of Wall Street lore.

Buoyed by a crest of credibility from the success of our one-on-one dealmaking with Prudential, and insulated from any charges of favoritism by virtue of our firm’s equal stake in the two concerns, H&H could don the mantle of impartiality. Our firm certainly didn’t have the clout to impose any particular settlement. But we did have the perceived leverage that in the eyes of the two opposing factions we had become indispensable to forging an agreement and could clearly be trusted to play it straight. Even in the absence of any overriding power, our small firm wielded a great deal of influence over the ensuing negotiations, simply because we could dialogue calmly and knowledgeably with both parties, all the while enjoying their unqualified trust.

When in doubt, make the more correctable mistake.

Life is a contact sport, so stay focused on the end zone.

Eventually, it became apparent that we were making headway in bridging a chasm that only one day earlier had seemed un-crossable. But often in negotiations, the last 5 percent of the gap between opposing parties is the most difficult to close. Each side is convinced to a moral certainty that it has gone more than halfway already and thus deserves that last 5 percent. Staking out self-declared final positions, the parties draw more lines in the sand than a group of 5-year-olds at a birthday party on the beach. By that point, righteous indignation has settled in, the coffee has baked to the consistency of motor oil, and patience has worn threadbare. And this deal was no exception.

Once we reconvened as a single group in the large conference room to pound out a compromise on the remaining gap between their respective positions, each side swore that it was at its “choke point,” and the Lehman delegates threatened to catch the next flight out of Dallas unless DLJ buckled to its final demands. We had come a long way, but the issue was now being framed by the opposing factions in macho terms, as if their manhood were at stake, rather than the last 5 percentage points of a deal that was already 30 percent richer than we had ever expected it to be. Like naughty children, it was time for the kids to be banished once again to their separate conference rooms.

The “fly in the ointment” of attempting to reach final agreement was the fact that 7-Up had posted a huge jump in operating profits in 1987, but it was only the first solid year in its recent history. On the other hand, Dr Pepper had been consistently profitable year after year, but not quite as impressive as 7-Up over the past 12 months. In a teeter-totter version of shuttle diplomacy, on this very point H&H would privately attempt to turn each side’s argument on its head to nudge the parties toward consensus.

On the Dr Pepper side, Lehman argued that 7-Up’s spectacular year might just have been a “flash in the pan,” and did not deserve to be valued as richly as Dr Pepper’s unbroken string of highly profitable years. To which we would respond by pointing out that if 7-Up’s growth trajectory were to continue for even one more year, the Pepper shareholders would end up with a much worse split in any future negotiations.
In the opposing conference room, citing the same numbers, DLJ would dig in its heels on the basis that 7-Up’s sensational growth deserved to be valued more highly, since it represented a disproportionate share of the combined jump in earnings in 1987. To that we would respond by cautioning that the past year might just have been a “flash in the pan” (plagiarizing our Lehman friends in the other room). No one was right and no one was wrong . . . but no one was prepared to concede anything just yet.

Convinced of the futility of attempting to budge either side from the righteousness of its position, H&H leaned into our colleagues with a heavy dose of realpolitik, repeatedly urging each side to concentrate on the so-called end zone: “You have no choice but to compromise here— you’re not going to walk away from a $1.3 billion payday, are you?” . . . “Stop focusing on what’s on the other side’s plate and focus on what’s on yours—that’s a big enough meal for you, don’t you think?”

After a while, it began to settle in with both sides that neither one was about to cave in to the other’s demands, and that we should abandon the shadowy merits of the arguments in favor of the fact that we had no option left but to compromise. A few trial balloons were floated from one conference room to the other and, with a bit of prodding and cajoling, the focus turned to the exact contours of the settlement. I remember our offering up a few reminders that we must avoid making the uncorrectable mistake:

“Stop threatening to walk out of here and head back to New York—no one in their right mind is going to leave this deal dangling in the wind!” . . .

“You know we’re going to split the difference somehow, so let’s all calm down and find that middle ground.” . . . “Once we close the gap here, you’ll return home to the Wall Street equivalent of a ticker tape parade— and one year from now, you’ll have trouble remembering how we split the last few percent.”

Eventually, the prospect of not reaching consensus became untenable. At this sensitive stage in the negotiations, what we did was to sharpen Lehman’s and DLJ’s focus on the end zone and the fact that walking away in a huff would have been a dreadfully uncorrectable mistake.

Know your weaknesses as well as you know your strengths.

In retrospect, there wasn’t anything particularly brilliant about our firm’s shuttle diplomacy. Nothing brilliant at all—just the same thing any respectable clan of predators would have done in similar circumstances. After all, we were just a bunch of hungry lions eyeing the plump zebra that had fallen in our laps.

But it was a task demanding of the skills of two different lion tamers if the negotiations were eventually to reach closure. The Lehman and DLJ protagonists on either side of the deal normally lorded over their own turf in the canyons of Wall Street, and even our spacious offices in Dallas were a tad too snug for long-term cohabitation among predators. For H&H to prevail in our efforts to lead the parties to common ground, we needed to blend together the scalloped edges of personal diplomacy with the callous reality of hard-nosed negotiating. Those two skills—adroit diplomacy and sharp-elbowed bargaining—are rarely housed in equal measure inside the confines of the same body. We had fully realized that when Messrs. Hicks and Haas formed Hicks & Haas and brought together under one roof the divergent talents and personalities of its two founders. The periodic separation of the two negotiating factions into different conference rooms allowed one H&H partner to smooth ruffled feathers while the other twisted arms just a few feet away, all in pursuit of the same goal.

Time is your most precious resource and your most dreaded foe.

Perseverance and a bit of creativity eventually carried the day as we used Elmer’s glue to attach one final Lehman proposal to the mosaic of compromise and a handful of baling wire to wrap in one of DLJ’s last demands. It definitely wasn’t a piece of art, but it was dealmaking.

At long last, there was consensus on a somewhat convoluted but mutually acceptable sharing arrangement: out of the total profits from the deal, the Dr Pepper side would receive the first $60 million of gain, the two sides would share evenly in the next $550 million, and any profits above that would be split 57.5 percent to the Dr Pepper side and 42.5 percent to the 7-Up side. We had a handshake among the negotiators in Dallas, but we all knew that the tentative agreement might well dissolve the minute each of the two sets of investors set foot back in their respective offices in Manhattan and second-guessing colleagues swooped in like vultures to pick away at the terms of the deal. The passage of time would serve only to undermine our fragile consensus if we waited even a few days to have it ratified by their Manhattan cohorts.

We were all united in our desire to bring the marathon negotiations to a close and not allow the ticking of the clock to work against our arrangement. Capitalizing on the momentum of the moment, the representatives of Lehman and DLJ wasted no time in calling their respective offices in New York and securing final approval. Arms reached across the table, hands clasped, and we walked away secure in the knowledge that this deal was destined to head toward a closing.

lion_tamers_4 Illustrations by Michael Witte

Day-old newspapers are used to wrap fish.

There was little doubt in our minds at the time of the Dr Pepper/7-Up negotiations that we were in the midst of a transaction that would become one of the storied episodes in LBO history. In the span of less than two years, we had assembled a soft drink juggernaut, avoided the crushing footsteps of the two gorillas in the jungle (Coke and Pepsi), and arranged both a lucrative exit and an encore performance with another round of upside potential. Everyone who had a part in the script genuinely believed that this deal would be heralded for years to come.

In retrospect, there was only one thing that kept my feet planted firmly on the ground: a desire to realize the ambitions that had driven me into the investment business in the first place. It was exactly the same centripetal force that keeps a clan of predators focused on a common target whenever cooperative action is called for. During the negotiations with Prudential and later with the Dr Pepper/7-Up stakeholders, our firm had only one objective in mind—harvesting what we perceived to be the fruits of a hard-earned victory. And not just any victory—this was the mother lode. In my mind, it was never about impressing the titans of Wall Street or pinning bragging rights on my lapels for the next black-tie affair in the theater district.

The newspaper articles and industry scuttlebutt that would trumpet our achievements were flattering to be sure, and yet newsprint rubs off on your hands, the articles yellow with time, and the sound of the ovations soon fades away. But when you are in a position to don a bullet-proof vest and avoid the future missteps that would strip you of that priceless garment, you have reached the destination of your chosen journey.