In the 1980s, the leveraged buyout firm Hicks & Haas, formed by Tom Hicks and Robert B. “Bobby” Haas, was a remarkable Dallas success story. Among its biggest coups: turning $88 million of investors’ money for the acquisition of several soft drink makers into $1.3 billion. After Hicks & Haas was dissolved in 1989, Haas continued to be involved in the buyout world but also found himself drawn increasingly to Africa. There he found prominence as a photographer, documenting “the life and death drama that unfolds in the theater of the African wilderness.” In a new book titled Masters of their Universe: Business (and Life) Secrets Taught by Four-Legged Professors (Langdon Street Press, $24.95), Haas argues that risk-taking businesspeople have much in common with—and much to learn from—the creatures he studied in the wild. In the following edited final chapter from the book, called “When the Boat Comes Back,” Haas illustrates his maxim: “The most underrated part of the investment business is selling.” The excerpt that follows also brings to bear each of 10 business “secrets” Haas has explained in the book thus far.
The sale of our interests in the Dr Pepper/7-Up Cos. was no ordinary deal. It was the pinnacle of our investment firm’s track record up to that time, and a high-wire act that unfolded in a three-ringed circus of Wall Street haggling. Our firm’s role was not only to serve as the master of ceremonies in coordinating the multiple sets of negotiations, but also as the lion tamer that kept the financial predators away from each other’s throats.
To set the stage with the dramatis personae in this true-life adventure, our Dallas investment firm Hicks & Haas led the acquisition of Dr Pepper Co. in August 1986 with financial backing from Lehman Brothers and consumer giant Cadbury-Schweppes. Just a few months later, after both Lehman and Cadbury declined to finance our efforts to buy The 7-Up Co. from cigarette kingpin Philip Morris, H&H scrambled to secure the needed financing for the 7-Up buyout from Wall Street potentates Donaldson Lufkin Jenrette and Citicorp Venture Capital. Forced by the unwillingness of Lehman and Cadbury to participate in the 7-Up deal, we separated Dr Pepper and 7-Up into two different ownership structures and cobbled together an agreement between the two that allowed a single team of senior managers to direct the operations of both companies without running afoul of the antitrust rules that might otherwise prohibit such conduct.
And we were off to the races. In the year after the acquisitions, Dr Pepper continued to rack up impressive growth in earnings, while 7-Up engineered a dramatic turnaround from the humdrum performance of its years as a neglected stepchild of Philip Morris. By the end of 1987 (our first full year of ownership), Dr Pepper and 7-Up had compiled a torrid pace of combined growth, earning a total of $111 million in operating profits compared to just $58 million in the prior year.
Before our bubble had a chance to burst, we placed a figurative “For Sale” sign on the front lawn of the headquarters of our soft drink group and welcomed all bidders to come forth with their best offers. In the privacy of our own inner sanctum, we were hoping for a total price of around $1 billion for the two pieces of merchandise combined, which would have netted a tidy profit of close to $350 million to be split among our firm and its co-investors in Dr Pepper and 7-Up in the span of only about 18 months of ownership. At a price of $1 billion, it would have been a “tape-measure home run” in the jargon of Wall Street.
But rather than wait for bids to come over the transom through our investment bankers, H&H decided to reach out to a close friend and colleague who had just launched a new private-equity fund with backing from Prudential Insurance. Unencumbered by the Gordian knots that often entangle such complex transactions, we met privately on several occasions—in such nondescript settings as an all-night hamburger joint in midtown Manhattan—in an effort to hash out a bargain that worked for both sides. And lo and behold, we did just that in a fraction of the time that our investment bankers had slated for the sale process.
What emerged from those private negotiations was an eye-popping deal for the shareholders of Dr Pepper and 7-Up. We were to receive $1.3 billion for our collective investments (a gain of almost $650 million compared to the $350 million we had targeted) and, furthermore, we would be able to leave a portion of our gain invested in the two companies in exchange for continuing to hold a controlling interest in the newly named and unified Dr Pepper/7-Up Cos.
To avoid a Byzantine labyrinth of state insurance regulations, Prudential was required to own less than 50 percent of the combined enterprise, so it needed a knowledgeable and trustworthy partner that would be willing to invest capital for a 51 percent ownership stake. H&H and our investment cohorts in the Dr Pepper and 7-Up deals filled the bill just fine as a ready and willing set of partners, and thus we had the chance to realize a huge gain, maintain controlling interest, and saddle up for another ride.
LET THE LION TAMING BEGIN
In addition to the usual complexities of papering the deal (a patchwork quilt of merger and financing agreements), there was one other highly unusual obstacle that lay ahead.
The deal with Prudential had come together with such warp speed that we had not yet had a chance to pound out an agreement between the major institutional shareholders of Dr Pepper (Lehman and Cadbury) and their counterparts on the 7-Up side (DLJ and Citicorp) as to how we would split the proceeds of the sale, in the event of a single deal for both companies rather than two separate deals.
Since our firm H&H owned almost exactly the same percentage interest in each company, we were indifferent to the split. Therefore we were in a unique position to act as an “honest broker” in the ensuing negotiations as to how we would carve up the overstuffed turkey that had arrived on our doorstep well before the scheduled date for Thanksgiving.
There is only one scene on Wall Street more gruesome than witnessing a band of institutions hurling blame on each other for a deal that has gone sour—and that is being in the midst of the feeding frenzy that ensues when financial giants are called upon to decide how to divvy up an unexpectedly large gain.
With the Prudential offer hanging in the balance as both a dangling carrot that should have promoted cooperation among the parties and a piñata to be pounded by the club carriers of Wall Street, the action shifted to the sellers’ side of the table and our efforts to stitch together a deal between the Dr Pepper and 7-Up shareholders on the overall split of the proceeds. This fraternal rivalry pitted Lehman and Cadbury on the Dr Pepper side versus DLJ and Citicorp on the 7-Up side, with our firm squarely in the middle wearing the black- and-white stripes of the impartial referee.
It soon became apparent that we might just as well have been wearing the black-and-white stripes of a zebra in the midst of a clan of frenzied hyenas.
A short series of conference calls among the parties left little doubt that we were not headed anywhere near consensus, so we all thought it best for our firm to assume the role of shuttle diplomat à la Henry Kissinger. With Kissinger as our role model, we implemented each of the secrets in our dog-eared manual on the art of negotiation.
SECRET NO. 1:
Know the limits of your own territory—perhaps the world is flat after all.
The first decision was designating the site for our face-to-face negotiations. We chose Dallas, inviting each of the parties to our offices as neutral turf that favored neither the Dr Pepper nor the 7-Up side. In addition to extracting the opposing parties from the tension and peer pressure that ooze out of the sidewalks of New York, the Texas site put H&H on our home territory. In the more hospitable atmosphere that pervades Dallas, we felt we could exert greater control over the ensuing discussions than if we were gridlocked in the snarling pace of Gotham.
Besides the comfort of being on our home turf, staging the negotiations in Dallas reinforced the impression that the U.S. soft drink sector was one where our firm was more steeped in experience than any of the other financial participants. As the site of the headquarters for both Dr Pepper and 7-Up (as well as the Dr Pepper Bottling Group of Texas, another of our holdings), we would be meeting at the epicenter of a cluster of our portfolio companies that represented the third-largest soft drink group in the country. In the intense negotiations that were about to unfold, we had set ourselves up as the gracious hosts, but also as the firm that was most familiar with the territory we were about to explore in search of common ground.
SECRET NO. 2:
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.
SECRET NO. 3:
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.
SECRET NO. 4:
In the long run, integrity trumps the fleeting advantages of artifice.
SECRET NO. 5:
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.
SECRET NO. 6:
When in doubt, make the more correctable mistake.
SECRET NO. 7:
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.
SECRET NO. 8:
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.
SECRET NO. 9:
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.
SECRET NO. 10:
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.