“An Hour and A Shower”

Excerpt, “Think Like a Walk-On!” (working title) by Ted D. Nelson, Copyright 2019

An Hour and A Shower:

How the “Walk-On” Never Quit on acquiring Knudsen Dairies and completing the First, and Largest “Leveraged Buyout” in California history

It was 5:30 a.m. on Wednesday June 1st 1983. I had just entered my room at the Bonaventure Hotel in downtown Los Angeles. I hadn’t slept much in the last couple days and I was ready to “hit the sack!” As I climbed into the freshly prepared bed, I didn’t dare let my head hit the pillow until I took care of one more piece of business. I took hold of the phone next to the bed and called the hotel operator, I heard her ask, “how can I help you?” I was sure she was a “live operator,” but her reply to my answer seemed to be quite mechanical, “yes sir, your wake-up call is set for 6:30 a.m.”

That’s right, I checked into the Bonaventure Hotel in order to secure one hour of uninterrupted sleep in a real bed. Oh, and I also left myself enough time to get a legit shower before I went back across the street to gather together with my team for our 7 a.m. pre-closing meeting.

* * * * *

It had been a full year since I first started to play with the idea of acquiring Knudsen Dairies, the Fortune 500 Dairy and Food Processing Company. Knudsen was a publicly owned company and there were no large shareholders. Since it was widely held and its market value was somewhat subject to the whims of the market, it could be possible for someone to acquire all of the outstanding shares and take the company private. That’s what I had in mind and I was ever so close to finalizing the deal! However, we were still $3M short of the required $128M and were scheduled to close the deal at 8am. I needed some time away from “the puzzle” in order to clear my mind and make room for some fresh thoughts on how to close the gap; I settled for an hour and a shower. However, as tired as I was, before I fell asleep my mind rushed back to June of 1982.

At the time, I was Chairman and CEO of a Public Company known as Builders Investment Group (BIG). BIG had been one of the nation’s largest Real Estate Investment Trusts (REITs) but after going through severe financial difficulties, like almost every other Public REIT in the ‘70’s, gave up REIT status and became a “Business Trust." (Earlier, BIG had been combined with a second former publicly held REIT known as Lincoln Mortgage Investors (Lincoln) and retained the BIG name for the combined entity).

In 1978, I had secured control of Lincoln through the conduct of an Unfriendly Proxy Solicitation and used Lincoln’s cash reserves to acquire a significant holding of BIG shares leading to a “quasi friendly take-over” of BIG and eventual merger of the two troubled REITs. Preceding the merger, BIG had approximately $120M of Defaulted Bank Debt held by some 20 individual banks lead by Citi Bank of New York and Bank of America from California. (Wrestling the banks to a favorable conclusion was a multi-year process involving a multitude of individual skirmishes to maximize the value of dozens of real estate challenges involving distressed projects left behind by the previous management group.)

The assets were comprised of in excess of 100 real estate projects located in some 30 plus states and Puerto Rico, all of which were in different degrees of completion and or distress. Included in the list of properties were hotels and motels; residential condos, mobile home parks, industrial parks, golf courses, a horse race track, office buildings, islands (including one off of the Carolinas and one off of Puerto Rico), undeveloped land among other assets. Each of the assets had been obtained through foreclosure or deed in lieu of foreclosure. It was a ‘mixed bag’ of challenging projects!

It was a very difficult real estate market at the time with the Prime Interest Rate working its way into the high teens! Over time, we were able to negotiate a payment plan with the banks and eventually liquidate a sufficient amount of our holdings to satisfy the loan with the proceeds and thereby eliminate the debt. In the process, the company had accumulated a Tax-Loss-Carry-Forward in excess of $50M. While nobody is excited about losing $50M, having those losses on your books at the expense of the previous owners is a very valuable asset allowing one to avoid paying a significant amount of taxes on future earnings!

With The Banks gone, our Stated Equity rising from less than $1M to more than $12M, and with over $50M of tax losses on the books, it was time to move from playing defense to playing offense.

We had a good vehicle, a public company. We had a valuable tax advantage on our books. And, we had positive equity on our balance sheet (albeit our equity was trapped in a hodgepodge of hard to liquidate real estate projects). All we needed now was to “Think Like a Walk-On”! Which is to say, execute a plan designed to realize our full potential without regards to what others may think is probable or even possible.

I had read a story in FORBES at the time about a computer hardware company that had suffered severe financial difficulties and had accumulated a significant Tax Loss Carry-forward. The Forbes article went on to discuss the strategy of the computer hardware company acquiring a profitable (in their words) “Cash Cow” company to take advantage of the losses incurred in their previous misfortune and thereby utilize their Tax Loss Carry-forwards by offsetting their accumulated losses against the “Cash Cow” profits. This approach allowed them to generate the cash needed to repay the loan used to purchase the “Cash Cow." It seemed like a good plan.

Accordingly, our Annual Report to our shareholders for the year ended September 1982 boldly stated on the front cover, “In the coming year, our goal will be to acquire one or more Profitable Operating Companies and a Savings & Loan, each with a Proven Management Team!” As in the case with the computer hardware company discussed above, the acquisition of one or more Profitable Operating Companies would help us take advantage of our Tax Losses.

Separately, Savings & Loans were out of favor with investors at the time providing a good opportunity for us “Contrarians” to make a “Value Purchase” by purchasing an undervalued S&L. Plus, the S&L would be in a position to benefit from equity infusions we could make by contributing certain passive real estate assets that remained in our BIG portfolio after satisfying the banks.

With our statement now publicly displayed on our annual report, we had put “a stake in the ground!" Now it was time to perform on our declaration!

So, one evening in early June of 1982, after I climbed into bed and before I turned off the lights, I picked up the current issue of Fortune Magazine from the nightstand next to my side of the bed. It was the issue where they listed that year’s top 500 companies ranked by sales volume. Hmmm... I wondered, “could we possibly acquire one of these companies?” Even I could see that it was a bold thought, at the very least! But, I thought, “you never know!"

At the time, I reflected on an object lesson delivered by Coach Black, my high school football coach. One day, at the beginning of practice, Coach Black led all of us team members over to the asphalt covered portion of our high school playground. He had us form a circle around him at a certain spot; we were shoulder to shoulder. He then pointed out a toadstool that was growing out of the asphalt.

He challenged us!

“How Did That Toadstool Make It Through That Asphalt!” He proceeded to pick the toadstool out of the asphalt and crumbled it in his fingers as he declared, “This Toadstool Is Like Paper! How Did It Get Through That Asphalt!?” He smashed his knuckles on the asphalt causing them to bleed while he declared, “This Asphalt Is as Hard As A Rock!”

He continued, “Somebody Forgot To Tell The Toadstool It Couldn’t Grow It’s Way Through Asphalt!”

Well, somebody forgot to tell me that our public company with its tax loss carry forward and mixed bag of real estate holdings couldn’t buy a Fortune 500 Company!

However, being somewhat realistic, I turned to the back of the magazine starting with company number 500 and then number 499. I quickly got to company number 496, Knudsen Dairies! (The term “Cash Cow” used in the above story I read about the Computer Hardware Company suddenly seemed quite ironic!) On the surface, it looked like it could be a suitable candidate for an LBO, no other Fortune 500 Company was even a close second, so I sent away for copies of all the Knudsen public filings (10k, 10q, Proxy Statements, Annual Reports and etc...). About two weeks later (there was no “Google” to get instant information back then), as I was saying, about two weeks later I started receiving all of the public information available regarding the company in the mail. It started piling high on my desk!

The more I read, the more I believed we were on to something. As I pointed out earlier, there was no “Control Group” among the shareholders (Management owned less than 3%). There were significant property, plant and equipment type assets that could serve as potential loan collateral and thus lend themselves to a “Leveraged Buyout Strategy” (aka LBO, a term not yet invented in 1982 although the acquisition of Gibson Greeting Cards early in 1982 was later credited with being the first LBO). And, the dairy business was considered to be very “pedestrian” and unexciting by the investment community which resulted in a somewhat low trading value for its shares in terms of its Share Price/Earnings Multiple.

It surely wouldn’t be easy, but in spite of their large size (some $500M in sales), I believed that this was a deal that could get done! So, I decided to start working on a plan.

We, my right hand man Sam and I, spent a good part of the next two months studying every piece of information we could find that would help us understand Knudsen and its potential as an LBO Candidate. As our understanding of the financial characteristics increased, we decided it was time to determine the best way to approach the company.

As it turned out, the Knudsen CFO, Rich had worked at Touche Ross & Co. (nka: Deloitte Touche) with Sam a few years earlier. While they were not all that close in their association, they did know each other well enough that Rich accepted Sam’s phone call. Sam told Rich that we had what we believed to be an interesting business proposition to share with them and convinced him to approach the CEO to see if he would agree to let us buy them lunch. Our lunch appointment was on... it was set for a week day in the middle of the summer of ‘82 at a location convenient to them.

At our lunch meeting, Sam and I held nothing back! We shared everything we had learned about Knudsen and its financial condition. We described in detail their assets that would make up the collateral pool which included real estate, diary equipment, trucks, inventory and etc.. We discussed the significant investment the company had made recently to upgrade their production facilities and that as a result of and during that distraction their earnings and therefore stock price had been negatively impacted while meaningful profit increases were expected in the coming years as a benefit from the upgrades and improvements.

Surprisingly, they didn’t even flinch when we informed them that we wanted to buy their company; that we wanted to take their company private! We explained that our company had a $50M tax loss carry-forward that we could use to significantly reduce their tax bill and accelerate the repayment of the acquisition debt. We told them that we would partner with “Management” in buying the company and that they could then buy us out at a fair price once our tax loss carry-forward had been fully utilized.

They told us they would consider our proposal and get back to us in a few days. After waiting the best part of a week, they got back to us with the bad news, without sharing any details, they simply stated that they didn’t think our idea was viable! They had no interest in pursuing our proposal! Their kurt answer didn’t make any sense to us!

What now?

Should we consider mounting an “Unfriendly Share Purchase Offer?” Or, should we accept defeat and just move on to another target? A full month passed by as we continued to ponder this question.

One morning late that summer, I was at home getting myself ready to go to the office when my phone rang.

It was Sam, “have you read this morning’s paper?” he inquired. My answer was “no." “Let me read the headline of the business section to you” he insisted! “Knudsen Management to Take Company Private!?” His words hit me like the proverbial “Ton of Bricks!" Many varied thoughts began to run through my head; how could they reject us? It was such a good plan! What do we do next?

“Thanks for the heads-up Sam, I’ll see you in the office;” as I hung up the phone, I felt completely deflated! They must have been pretty far along with their plans the day we met with them for lunch. Now it was clear the Knudsen Brain Trust tried their best not to give us even the slightest hint as to what they were up to! What could we have done differently? How could we have gotten a better response? These questions and more ran through my head.

(A couple of years later, Rich confided in us that when we first met for lunch that day and shared our plans, he and the CEO were “blown away!." His words were, ..." as you told us your idea, I almost swallowed my napkin, it was as though you had a copy of our play book; you recited every relevant fact in our plan!”)

Well, no use “crying over spilt milk," (pun intended)! I headed for the shower to get ready for the day. As I robotically worked my way through my shower routine, it occurred to me that I needed a “Pep Talk!"

Coach Black Helped Me “Think I Can”

Football has always been an important part of my life and I flashed back to the day I first met my high school football coach, Howard Black. I was a freshman at Fullerton High but was slated to attend the new school closer to my home, Troy High starting with my sophomore year (there would be no juniors or seniors our first year at Troy). Towards the end of our freshman year at Fullerton, we were informed that Troy’s new Football Coach, Coach Black would be visiting our campus and would like to meet with any boys slated to attend Troy who might be interested in trying out for the football team.

Of course, I attended the meeting with coach Black! I had played football on the Fullerton “C” Team that fall and had played “PopWarner Football” for three years prior to attending Fullerton High. I was highly interested in continuing to play football! Coach Black made a great impression on me that day. Two things I came away with were first his saying, “Come September Be In Shape," “Don’t Come September To Get In Shape!” He taught us to put in the work to “Prepare in Advance!"

The second thing I came away with was a poem attributed to “Anonymous” and titled “The Winner” that he shared with us. I committed it to memory and have recited it to myself (and to my wife, kids, Sunday School Classes and whoever else may be in my presence when I have felt so inspired) literally hundreds of times.

THE WINNER

If you think you are beaten, you are;

If you think you dare not, you don't;

If you'd like to win, but you think you can't,

It's almost a cinch you won't.

If you think you'll lose, you've lost,

For out in the world you find

Success begins with a fellow's will

It's all in the state of mind.

If you think you're outclassed, you are;

You've got to think high to rise;

You've got to be sure of yourself before

You can ever win the prize.

Full many a race is lost

Ere ever a step is run;

And many a coward fails

Ere ever his work's begun.

Think big and your deeds will grow;

Think small and you'll fall behind;

Think that you can and you will -

It's all in the state of mind.

Life's battles don't always go

To the stronger or faster man;

But sooner or later the man who wins

Is the fellow who thinks he can.

I’m deeply thankful to Coach Black for teaching me to put in the work necessary to “Prepare in Advance” and to have the mental discipline to “Think I Can!" I credit Coach Black for inspiring me to “Walk-On” at BYU where I made the team, earned a scholarship, started at middle linebacker and lead my team by averaging almost 16 tackles per game my senior year. (See cougarstats.com “lists” “defense”)

Rarely are people able to understand what the experience is like to be a “Walk-On” to a major college football team. Most if not all of your prospective teammates were recruited to be members of the team. They were given financially significant contracts which generally include multi-year guarantees. They were recruited using methods designed to promote social bonding among the members of each class.

In contrast, a “Walk-On” has received no commitment whatsoever, financial or otherwise! He can be asked to leave any day or the next day! He comes in knowing no one! Socially, he is an outsider! He must learn to be “no respecter of persons”! A “Walk-On” learns to practice at “Game Speed”! (That’s a good habit to learn!)

But that’s another story...

So, as I stood under the shower head with the hot water pounding on my shoulders and the back of my neck, I started thinking about time spent with Coach Black... Sam and I had prepared well! Our lack of success with Knudsen thus far was not due to “a lack of advance preparation!" It became clear to me that what I needed was a “Mental Adjustment!" I needed an extra shot of “I Think I Can!" I needed “The Will of a Toadstool”!

After reciting Coach Black’s poem “The Winner” out loud, I finished my shower and developed an advanced case of “I Think I Can!”

Getting to the Dance

I abruptly turned off the water, stepped out of the shower, grabbed my towel and quickly dried off. I couldn’t get to the phone fast enough! I pushed the phone buttons with a purpose and anxiously waited for Sam to answer, “Sam, before you leave home call Rich and tell him we’ll be in their office in 90 minutes, don’t let him tell you no! I’ll meet you in the office as soon as you can get there, we’ll develop our plan on the drive into LA. They can’t get rid of us that easily! We’ll present them with a ‘deal they can’t refuse!”

They Refused!!!

We explained to The Management Group that no matter how much they could rationalize paying for Knudsen, we could always pay more for one simple reason. We had $50M of Tax Loss Carry-forward that would have no value to us unless we purchased a profitable company to monetize those anticipated benefits. Therefore we would be a very aggressive bidder if they chose to subject The Company’s Public Shares to an open auction instead of becoming partners with us. They were not moved by our “pitch!”

They proceeded without us!

Management may not have been impressed with us enough to “Invite Us To The Dance," but we showed up anyway! We submitted a competing offer to The Knudsen Board.

Once Management, through their investment banker, Dean Witter Reynolds, made their offer for The Company official and public, we followed shortly thereafter by submitting our competing offer. The members of the Board quickly formed an Independent Committee (independent from management) to consider and independently negotiate the sale of The Company. As one of their first actions, The Board hired an independent Investment Bank, 1st Boston to represent the Independent Directors and the Company in the selling process.

One of 1st Boston’s first actions was to call a 30-day moratorium on any activity between the company and any potential suitors, including us and The Management Group. 1st Boston indicated that they would use the 30-day moratorium to put together “A Book” they would distribute to qualified suitors. The Book would provide all of the appropriate information required to prepare a suitor to deliver a qualified offer to purchase The Company. They were anticipating an active auction! They declared that The Book would be ready for distribution at the end of the 30-day moratorium.

30 Days Passed.

We Did Not Receive a “Book!!!”

Once the 30-day moratorium expired, we were expecting to receive a copy of The Book! We let a few more days slide by before we picked-up the phone and called 1st Boston (maybe The Book wasnt’ complete yet).

“Hey Brian,” I said (Brian was the guy running this deal for 1st Boston who had earlier contacted me and directly given me the 30-day expectation), “it’s been over 30-days, can we get a copy of the Knudsen Book?”

His answer was anything but ambiguous. “We won’t be giving you a copy! We’ve looked at your company’s public financial statements and determined that you are not a qualified bidder!”

Of course, we were deeply disappointed, to put it politely!

Was it Time to Give-Up?

We didn’t think so! But what should our next step be? We needed a copy of “The Book!"

How could we get a copy of “The Book?” We puzzled over this question for a few days before I bought an airline ticket and headed to New York. One of our shareholders in BIG had introduced themselves to us over lunch several months earlier as Allen & Company, the Investment Bank. They (Phil & Foster) had told us that they had been accumulating shares of our company over the past several months in the Public Market and that they were interested in learning more about what we were doing with our company. We were flattered that they had picked us out as a company they wanted to follow as an investor. They agreed to meet with me in their New York office to discuss how we might work together to accomplish our company goals.

Phil and Foster were great hosts! I brought them fully up to speed on what we had been doing, right up to our inability to get “A Book."

At that point, Foster declared, “Ted, what you need is ‘A Ticket to The Dance’!”

“Okay Foster," I queried, “what constitutes ‘A Ticket to The Dance’?”

Foster went on to tell me that I needed to hire them to serve as Investment Bankers for BIG and they would be our ‘Ticket to The Dance.’ “Okay, so if I ‘Buy a Ticket to The Dance’ and hire you guys, how would that work?”

Foster laid out the deal. Hire them as an Investment Banker for BIG with a $150k deposit plus a contingent “Success Fee” that would kick-in when we completed the acquisition and they would walk me down the street to Brian’s office at 1st Boston and pick up a copy of “The Book." I asked them if I could sleep on it and meet them again in the morning. They agreed and invited me to come to their office in the morning for breakfast.

As soon as I got back to my room at the Warwick Hotel, I called Tom, the President of BIG; he was the one who would know the most current status of cash-on-hand in our company. “Tom, can we part with $150k to hire an Investment Banker for our Knudsen Deal?”

Tom was very clear in his response, “No Way!”

“Okay, can we squeeze out $75k?” Reluctantly, Tom agreed we could manage a $75k payment.

The next morning, over breakfast, we hired our Investment Banker. The deposit was adjusted from $150k up front to $75k now and the other $75k when we had a signed definitive agreement; and, the deal was good for a year no matter the company we might need help with acquiring (just in case this “Cash Cow” slipped away).

After breakfast, we took a short walk down the street to the 1st Boston office where I had the pleasure of meeting Brian who was expecting us. Foster informed Brian that I would like to get a copy of “The Book” for the Knudsen Deal. Brian explained to Foster that I was not financially qualified to receive a copy. That’s when Foster informed Brian that Herb (Mr. Allen) was interested in potentially participating with BIG in the process of exploring the Knudsen deal and wanted Brian to give us a copy of The Book. Brian opened his file drawer, pulled out a thick book and slide it across his desk to Foster. Foster picked it up flipped through a few pages, turned and handed it to me.

“There’s your Book Ted, now let’s go to work!”

Once we bought our “Ticket to The Dance," we got our copy of “The Book!" “Now What?”

We had “The Book," all we needed now was an extra-large bucket of cash!

Creative Capital Stacking

As summer melted into fall, we found ourselves totally occupied with the challenge of putting together a “Capital Stack” for the purchase of Knudsen! Although we had become proficient with the process of turning our portfolio of “Troubled Real Estate” into cash, settling with The Banks had mostly cleaned out our ‘cash on hand’ leaving us in a bit of a scramble mode as we worked to build back any cash reserves.

The final required payment to The Bank Group for BIG had been $10M. We were able to make that payment timely as a result of selling the Buena Park Holiday Inn. We had taken possession of that property two years earlier through a Deed In Lieu of Foreclosure.

In January of ‘80, we offered the Holiday Inn Owner (who had been in default on the payments for his loan to us for quite some time) $250k if he would cooperate and sign The Deed over to us. He (Don) agreed to sign the deed over, but kept putting us off and generally being elusive (and, I might say, less than honorable). Don chose not to honor our handshake!

The clock kept ticking, and as it ticked, we got closer and closer to reaching the end of the foreclosure process. Suddenly, in June, the elusive Don appeared and let us know that he was now ready to sign ‘The Deal.’ At which time, it was incumbent upon me to introduce Don to the “Parable of the Toothpaste;” which is to say, “Once you squeeze the tube, you can’t get the toothpaste back in!" Instead of $250k, ‘The Deal’ would now be reduced to $50k, but only if Don would sign within 48 hours.

He signed!

Once we gained possession of the property, we contacted Holiday Inns’ Headquarters to inform them of the change of ownership and transfer the license. Unfortunately, they informed us that out of the 10 property pier group within which our Holiday Inn fell we were rated at the bottom of every category! They further informed us that we were no longer a Holiday Inn and that they would rent us a canvas-bag to cover the sign! (Of course this was a disastrous outcome! Folks from out of town coming to see Knott’s Berry Farm, Disneyland and etc. would generally find us and make their reservations using the “Holidex” reservation system without which we would be in “deep trouble!")

After our begging had landed us a final hearing with their management team, Tom and I flew to Memphis to the Holiday Inn Headquarters for one last ditch effort before we had to change our sign for good! Tom made a strong case and we were granted a six month probation period!

Tom and his team had a lot of experience and were experts at fixing distressed properties, especially hospitality properties. His first six-month performance with the Holiday Inn earned us additional time and so on until after two years (and $2M spent) we had become the No. 1 property in every category of the same 10 property group.

We then were able to sell the refreshed Buena Park Holiday Inn to Archie (a fellow from Texas) for $13.5M cash (plus a $1.5M note for the adjoining vacant property). The cash was then consumed mostly by making the final $10M payment to the Bank Group with the lion’s share of the balance earmarked for the remodeling of the more recently repossessed Tampa Bay Hilton.

The Tampa Bay Hilton remodel was coming along nicely, but whether or not we would be able to monetize that property in time to put some cash equity into our prospective Knudsen Capital Stack or not was at best problematic! We were looking for ideas!

The Trojan Horse

Having delivered competing bids for the purchase of Knudsen to the “Independent Knudsen Directors," we were surprised when Knudsen Management recontacted us! Rich called Sam and suggested that we renew talks about how we might work together as partners in the purchase of Knudsen. Management had made good progress organizing their “Capital Stack” in their work with Citi Bank of New York and, of course adding our tax loss carry-forward only served to improve the financial projections!

We were well into the fall of ‘82 and 1st Boston had done their job courting suitors to purchase Knudsen; chief among the suitors and perhaps the most qualified was Dart & Kraft. About two weeks before the final date to submit bids to purchase Knudsen, very suddenly The Company Management let us know that they had changed their minds; they would prefer to “go it alone!"

We were now on our own once more to develop our own “Capital Stack!" There was not nearly enough time remaining to “put our money together” before the bids were due and we would now be competing directly with Management!

I remember reading the story about the “Trojan Horse” during high school. Now I had a deep understanding of its meaning! And the phrase, “Beware of Greeks bearing gifts!” When Management had agreed to join forces, they clearly had not been “acting in good faith!" For them, the operative quote may have been, “keep your friends close and your enemies closer!”

In any event, we immediately started working with a new Bank Group, but we were still far behind when 1st Boston put everyone on notice, “Final bids were due by mid-December.''

The morning the bids were due a “Bidding War” heated up between the “Deep Pockets” of Dart & Kraft, “The Insiders Advantage” represented by Management and “The Walk-On Persistence” of BIG. As 1st Boston kept each of us updated with the latest bids telephonically, we were each given the opportunity to raise our bids and each did so more than once! Eventually, Management reached the point where their financing source would not let them go any higher and withdrew from the bidding.

Dart & Kraft had very “Deep Pockets” but decided that they “didn’t want to be ‘bid-up’ by a company that wasn’t financially qualified” (they were referring to BIG), and end up overpaying. They indicated that they would remove themselves from “The Bidding Process” but would be available at a lower price once BIG failed to perform on their Bid!

So, BIG became the “Winning Bidder!"

With a top bid of $23 per share, our total price was approximately $128M (that would be north of $320M in 2020 dollars)!

The next day I received a call from the Chairman of the Independent Directors of Knudsen, Ernie, to officially inform me that we were the successful bidder, conditioned upon signing a mutual Letter of Intent along with delivering a deposit of $2M. The Letter of Intent (LOI) called for a Definitive Agreement to be signed within 30 days. I told Ernie we would study the draft of the LOI and get back to him first thing in the morning.

As soon as I hung up the phone, I met with Tom to determine how much cash we could part with. Although we had recently been successful liquidating several of our real estate holdings, there was never a lack of cash needs. After a full and sometimes heated discussion, we agreed that we could send Ernie $750k along with our signed LOI.

The next morning, I called Ernie to let him know that we were prepared to accept the proposed LOI with the exception that we would only deliver $750k at this time but we would deliver the balance of $1.25M in 30 days, once we formally entered into a Definitive Agreement. (We had some ideas of how we might come up with another $1.25M in the next 30 days, but nothing concrete.)

Ernie accepted our proposal. We had until the close of business on January 21 to delivery the required $1.25M payment!

As the days passed by, much too quickly, Sam and I directed most of our attention to organizing our Capital Stack with our new Bank Group. We seemed to be making good progress with them and were hopeful that they would be far enough along by January 21 to be willing to help us with the $1.25M payment we needed to keep us in the deal. Both Dart & Kraft and Management were waiting “in the wings” for us to stumble so they could sweep in and buy The Company at something less than $23 per share.

We were only days away from our January 21 deadline when my wife Sandee and I took an important step in a separate and much more meaningful acquisition process. On January 19, Jeff, our sixth child (and fifth son) was born in Corona, CA. We had made adoption arrangements and were able to take him to our home the morning of January 20, pending a couple of years sorting out the legal paperwork. Once he was settled in the nursery in our home, he became one of three brothers under the age of two, one of which, Brad had been adopted the previous year. But I had to leave Sandee with the harder task and rushed back to the office.

I had just over 24 hours to figure out how to come up with the funds required by the LOI! It was clear that The Bank Group wasn’t ready to be our source for the $1.25M!

It was late morning on the 20th and time to test carefully groomed relationships!

My first call was to Bob.

Bob was the President of a prominent Bank located in Salt Lake City. I had gotten to know Bob through several relatively small business deals we completed together. I had made it a point to regularly talk with Bob about what we were doing, and the progress with our various endeavors. In fact, I had gone out of my way to regularly give Bob a “blow-by-blow” on the progress we were making rehabilitating the Tampa Bay Hilton (after he had seen what we had accomplished with the Buena Park Holiday Inn). He also knew about our audacious plans relating to Knudsen, although I had long since determined that his bank would not be a logical candidate to help us directly with our LBO plans. We occasionally met for lunch and clearly developed a mutual appreciation.

After a couple of minutes of friendly banter with his secretary, Bob came on the phone. We worked our way through the usual niceties and then I “cut-to-the-chase."

Bob, I need $1.5M by tomorrow! (It never hurts to have a cushion! In this case $250k.)

In response to his direct questions, I gave him a full rundown of all that had happened in our bidding war for Knudsen. I assured him that if he could lend us the $1.5M and wire the funds first thing in the morning, we would earmark the proceeds from the eventual Tampa Hilton sale to repay the loan.

He assured me he would “go to work on it” but indicated that he likely wouldn’t be in a position to respond until “tomorrow morning."

“Bob, that’s all I can ask! Thank you very much!"

Time to Call “Next”

My next call went to our Investment Bankers, Phil & Foster.

Phil, I need $1.5M by tomorrow! (It wouldn’t have been fair to only ask for $1.25M after asking Bob for $1.5M. Hahaha!)

Of course Phil knew almost every detail of the status of our pursuit of Knudsen, including the requirements of our LOI. We had been having discussions about the possibility of their firm buying “Warrants” for shares of BIG off and on for a few months, but now it was time to bring it to a conclusion!

We worked out agreeable terms over the phone and left it that Phil would talk to Herb and get back to me “tomorrow morning."

Of course, in 1983, moving documents around and getting deals done was not nearly as efficient and immediate as it is in our current environment. If we were to receive a wire from either Bob or Phil the next day, it would be based upon our established relationships and a “verbal-handshake” over the phone (with paperwork to follow).

Long story short, as Friday, January 21 arrived and progressed, Tom was excited to report that we had received not one, but two Bank Wires each in the amount of $1.5M!

Tom had a check prepared payable to Knudsen in the amount of $1.25M and presented it to me shortly after noon! I slid it into my inside coat pocket and immediately got in my car to make the drive to the Knudsen offices in Los Angeles!

Once at Knudsen, I joined our Diligence Team in the office space we had been invited to use. I conducted myself as if it were just another day on the “Dusty Old Acquisition Due Diligence Trail." Not wanting to miss the opportunity to “Pull Someone’s Tail," I planned to wait until just a few minutes before 5pm, the end of the business day before I presented the required $1.25M check.

The Knudsen CEO, Bill couldn’t hold back! (Maybe he had early dinner plans for a Celebratory Dinner or something like that.)

At about 4:30pm he came into the office I was working in and declared, “The Deal Is Off! You had until close of business today to pay the remaining $1.25M deposit under the terms of the LOI and you obviously have failed to do so! No Deal!” He repeated.

As much as he clearly enjoyed that moment that he obviously had longingly anticipated, one can only imagine the feelings I experienced as I retrieved the required $1.25M check from my suit coat and held it in my outstretched hand as I replied, “here’s the check!"

Now that we had completed and signed a Definitive Agreement with a closing date set for May 31, the next hurdle date was February 11 (besides being my 34th birthday) when we were required under our contract to have “Financing” lined-up and in place! It Was Coming Fast! With only a week to go to meet the “Financing Requirement," our Bank Group made it official and informed us, “This isn’t a deal we will be pursuing!” We had no financing in place and needed to find a new bank!

By the way, with the Definitive Agreement signed, our second $75k payment for our “Ticket to The Dance” came due! We made a point to get a check for this payment into Foster’s hands “before he had a chance to ask for it!" He told us that was a first!

During the negotiation of the Definitive Agreement, our Head Legal Council, Craig found a phrase in the massive document pile that basically provided that if we didn’t have our financing in place by February 11 we would "...forfeit The $2M Deposit and Cancel The Deal!" Thanks to his “Good Eye” and diligence, he submitted as one of many changes (many of which were rejected, but not this one) that the word “and” be changed to “or” so that the provision would then read, “…forfeit The $2M Deposit or Cancel The Deal!"

On February 11, once more Bill was sure he was on the winning side of our “Financial Wrestling Match," and let us know the same in no uncertain terms!

“The Deal’s Off!

He was adamant, “You don’t have your financing committed!” This time, Brian at 1st Boston was equally sure that we were disqualified by our inability to arrange our financing by (what he too was sure was required) the February 11 deadline in the Definitive Agreement!

Brian officially put us on notice of our alleged default with a carefully crafted letter delivered to Phil & Foster, our Investment Bankers.

In response to Brian’s Cancellation Letter, Foster hand carried a copy of “The Signed Definitive Agreement” to 1st Boston in New York. It didn’t take long for Foster to show Brian the relevant page in The Document. Foster reported back that Brian, after an expletive or two conceded that “The Deal remained On!"

So we made it past the February 11 Deadline knowing that our $2M deposit was non-refundable and that we had until May 31 to fund our $128M purchase! (Happy Birthday to me!)

Still In The Game!

Was it luck! Fate? Hard-Work? Accident!? Somehow we ran across a couple of Bankers out of the Bay Area in Northern California who worked at Wells Fargo Bank. Their names were Chuck and Mike and they clearly knew what they were doing! March, April & May became a blur as Chuck & Mike working with Sam did their magic helping us to organize our Capital Stack.

Suddenly it was Saturday, May 28; just three days from our May 31 deadline to close our deal! We were still $13M short of our $128M purchase price for Knudsen!

We were having endless “pre-closing meetings” with any number of lenders and potential lenders in the offices of Knudsen’s Lawyers who maintained offices in one of the two Crocker Bank Buildings in downtown Los Angeles. Late at night, when most folks had gone home, from across the street at the Bonaventure Hotel, you could see the three floors committed to the Knudsen closing process all lit-up in the otherwise dark building, with all of the participating lenders working their separate deals around the clock along with their required legal teams.

The Wells Fargo guys, Chuck & Mike; our trusted and brilliant (and handsome) attorney, Craig; My right hand man, Sam and other members of their teams were working around the clock as well, as the Tuesday deadline kept getting closer! Knudsen Management was now on our side and to demonstrate same, had committed $3M of their expected proceeds from our purchase of the Knudsen Stock they held as individuals taking us that much closer to the $128M target.

As we approached the final hour we were still $3M short. Everyone agreed including 1st Boston, Ernie and the Independent Knudsen Board Members that we would extend the deadline for starting the closing process to 8AM Wednesday, June 1.

We needed to pull one more “Rabbit out of The Hat!"

At 5am on June 1, I told Sam and Craig that I needed a break! I was going to go across the street to the Bonaventure and get a little sleep before the scheduled closing meeting set for 8am. I agreed to be back in time to meet them for a 7am pre-closing meeting. We were each keenly aware that we currently remained short $3M from funding the $128M required to complete our purchase.

I was ready for “an hour and a shower!"

Surprisingly renewed after my brief stay at the Bonaventure, I headed back to the Crocker Bank Building to meet with my team at 7am as agreed. The solution for our $3M shortfall was becoming clear in my mind. Craig and Sam agreed when I shared with them what I was thinking. Next step was to contact Phil & Foster to get their support.

There were three separate Investment Bankers involved in our deal; Dean Witter Reynolds had represented Management all along. The Company agreed that the Dean Witter Reynolds obligation would be paid out of sale proceeds at the close of escrow (and therefore was part of the required $128M).

Of course, 1st Boston was the Investment Banker that represented The Company and Allen & Company represented BIG. Altogether, the three Investment Banks were owed about $8.5M at closing.

When I got Phil & Foster on the phone, I shared my plan. If we were to withhold about 35% of each of the payments owed to the three Investment Banks, that would close our $3M gap! With $500M in annual revenues, we could pay the withheld $3M to the three Investment Banks over the next 30 days out of cash flow.

The response from Phil & Foster was immediate, unanimous and crystal clear! With Foster serving as “Voice," “Do it ‘Knelson’...!" (With a heavy accent on the “K!")

Foster had started calling me ‘Knelson’ several months earlier. Late one evening, we were working on our acquisition plan in the Knudsen Executive Offices. In the lobby, prominently displayed on the dominant wall hung a “larger than life," “full length” portrait of Tom Knudsen, the founder of the company. He was dressed in a three-piece business-suit with one hand by his side and the other tucked into his vest pocket. That evening, just to lighten the mood, I stood next to the portrait and mimicked the pose. Phil & Foster busted up laughing and I became ‘Knelson’ thereafter!

My next question received an equally quick and clear response!

“No, do not tell Dean Witter or 1st Boston in advance; let them find out at the closing!"

At 8 a.m. the closing meeting began. There was a very large group of interested parties gathered around an exceptionally large conference table. There was an escrow officer at the table in charge of the meeting. The escrow officer worked his way through a very long checklist of the various requirements that needed to be satisfied before the transaction would be declared completed.

Each prospective lender was given an opportunity to confirm that all the paperwork was in order from their perspective and was expected to present a cashier’s check payable to the escrow company in the agreed amount. The escrow company was then prepared to deliver cashier checks to each of the various parties expecting payments as previously agreed. We let Escrow know about the $3M of adjustments in the amounts to be distributed to the three Investment Banks.

Once all of the checks had been collected by the Escrow Officer in Charge, and before any checks were distributed from Escrow, a final, routine call was placed to the designated Title Company to confirm that the condition of title on each of the various assets had not changed overnight and was appropriate.

The call was placed using the speakerphone in the middle of the table so all could hear.

What a BIG surprise!

The voice on the other end of the call informed all that a last minute unauthorized lien had been placed on every asset possible by one of the equipment lenders setting at the table that very morning! Based upon the reaction in the room, I feared for that individual's life!

The meeting was adjourned for about two-hours while that mess was cleaned-up! There were a lot of very unhappy bankers and one deeply embarrassed equipment lender.

Once we were back on track, we got to the point were the escrow officer began handing out checks. Last in line of those receiving checks, were the Investment Bankers. Allen & Company had let it be known that they were happy to have their check placed in the mail. Burt was in attendance to receive the check on behalf of Dean Witter Reynolds and was quite understanding when we explained his 35% reduction and our promise to satisfy the balance in 30 days. The fellow there representing 1st Boston was not so understanding, in fact you might say “he went ballistic! He raised his voice and used very colorful language as he issued threats and assured us that we “didn’t know who we were messing with!"

“The Deal” successfully closed on Wednesday, June 1, 1983 and perhaps may be the largest LBO in California History!

By-the-way, Brian from 1st Boston reached out to me the next day to arrange for a dinner-meeting between the two of us in LA for the coming week. At that dinner-meeting I explained why we “stiffed” 1st Boston for a third of their fee. I told him that I would give him a personally guaranteed note for the amount we owed them, pay them 12% interest and give them their money in 30 days!

Brian’s response was classic!

“I like your style!," he declared. “Don’t give me a personally guaranteed note! Don’t pay me 12% interest! And don’t be late with the payment!” In the end, it seems, Brian had respect for the “Walk-On” approach for “Making it Happen!"

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Post Deal Note… at that time, my wife and I had a standing date each Friday to “go to the movies." On Friday, June 3, 1983 (two days after the deal had closed) we continued our routine, this time the movie was “Blue Thunder," starring Roy Scheider. In the movie, there were scenes of a helicopter buzzing around LA and giving an aerial tour which may have included a glimpse of The Crocker Bank buildings, the Bonaventure Hotel and even a shot of the 20 acres comprising the Knudsen headquarters and main plant. And, it occurs to me that I may be the only person not connected to the film that can tell you that when the refrigerator door in the dark apartment in the high-rise was opened with the refrigerator light providing the only light in the room (for effect), setting in the middle of the fridge was a half-gallon carton of Knudsen Milk! That made my night!

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