At
Hinshaw & Grunthal, many of my contemporaries each serve a dozen or so
clients while assisting in various research-related projects for the
partners. I, on the other hand, have the luxury of serving only
three clients. Two of my clients are minor companies with minimal
maintenance requirements. They are not glamorous projects nor were
they intended to be. They are actually a cover so other attorneys
at H&G cannot question my workload based on my client count.
Having three clients is enough to stay under the corporate radar.
Not that it could be called into question. The partners have
chosen to award me these two easy clients as a sign of respect for my
third client.
That
third client is Cain International. In 1995, when their new
president announced he would be looking for new representation for his
company, the partners at H&G put out dozens of feelers through several
intermediaries. They viewed it as an appropriate and time-tested
strategy for first contact with a potential new client. When I
learned of their interest, I walked into Larry Hinshaw's office and
volunteered to bring in Cain International by myself. I was
immediately rebuffed and informed of his efforts, but I persisted.
I noted that their new president, Henry Cain, II, was not a conventional
CEO. He would appreciate candor and a reliance on people with an
ability to quickly and accurately assess situations and plot a course of
action. He preferred to think of corporations as military
operations, aggression was rewarded and subtlety was a sign of weakness.
If he received our communications through intermediaries, we would be
perceived as weak and dismissed out of hand. When questioned by
Mr. Hinshaw how I could so easily evaluate a CEO who had not been on the
job for three months, I told him. Henry Jr. and I were college
roommates. If I was given the proper authority by H&G, I could
bring in a Fortune 100 company without entering into a furious bidding
war. Immediately, my work load was distributed among my co-workers
and I was dispatched to acquire Cain International as a client.
Henry Jr.
was more than happy to utilize my services. After drinks and
negotiations, I was invited to become part of his personal advance
strategy team. His idea was to take all reasonable ideas from
Cain's Board of Directors and senior management and subject them to his
advance strategy team. The team, under Henry Jr.'s direct
supervision, would evaluate all ideas and recommend specific action.
The objective was to allow Henry Jr. to rapidly determine a complete
course of action after receiving a good suggestion. It required a
team of experts in several different departments. My
responsibility was to evaluate potential new acquisitions. The
research requirements would be massive. It was more than I had
intended to accept. My bosses noted that my role in the company
would be greatly enhanced. I was encouraged. At the time I
wasn't even thirty and I had been given the "fast track to partner"
tease. I accepted Cain's invitation and sealed a bond between our
companies. H&G instantly gained wealth and status through my
alliance with Cain International. I worked extended hours in a
prized position for a good friend. As contract attorneys go, it
was a dream job.
|
"No
one had told me that Raychel had been married! . . . Even more
shocking was the fact that he did not identify himself as Raychel's
husband when we spoke on the phone." |
In the
second quarter of 1999, Henry Jr. was determined to enter the entertainment industry.
When he first suggested it, many of us in the advance team wondered if
he was serious. Everyone knew that the instability of the industry
and the high cost of development could cause a company-wide avalanche.
If an expensive venture went south, it would have an effect on the rest
of Cain's enterprises, which would in turn cause the stock to plummet
unnecessarily. We all knew an investment in entertainment was a
high-risk situation. Unfortunately for us, Henry Jr. knew it, too.
It was bad because once he had evaluated a project and made his
decision, further discussion was futile. This was the first
instance with Henry Jr. where he had brought us his decision first, then
asked us to fulfill the request. It was clearly a personal choice
for him. He wanted to be able to say that he was in the
entertainment industry. His pride was responsible for this
decision.
Rather
than obstruct his determined decision, the advance team recommended an
approach calculated to minimize initial risk. Our recommendation
was calculated to be won on the spreadsheet. We would not have to
fight Henry Jr. We left that to the Board of Directors. Our
recommendation was to phase in our entertainment venture by making
calculated and limited investments in undervalued or outright failing
companies with significant assets. It required less capital to
purchase a current company than it would to start up our own ventures.
In addition, if Cain chose to divest itself of its entertainment
holdings, the ventures could be sold or completely liquidated with a
minimal loss or perhaps even a minor profit.
There was
one hole in our logic and Henry Jr. tore into it immediately. He
challenged us to find companies which fit our limited scope. We
accepted his challenge with a heavy heart. We knew it could be a
catch-22. The
companies to be purchased had to be good enough for Henry Jr., but bad
enough to be acquired with a minimal investment. For a company to
meet this criteria, it had to have a base level name recognition and had
to be known to be mismanaged while not overtly so. Getting a
company that was obviously bleeding cash was a financial tiger trap.
The company would drag any white knight into the hole with the tiger.
The
advance team
began shuffling through different possible ventures. Movies were
out of the question due to the expense. Radio offered little
upside per investment dollar. Television and production areas were
lucrative, but would require time to develop it into a profitable
venture. In the end, we decided upon the recording industry.
Specifically, we believed that a mismanaged independent
record company would be the most suitable target for an initial raid
into the entertainment industry. The principal reason was the
ready-made liquidity of the companies. If we decided to liquidate
the company, we could attempt to sell the contracts of the talent
already signed to the labels. This way the talent could also
double as an insurance policy. Emboldened by this strategy, we
began looking for a match.
In July
of 1999, Cain's West
Coast Headquarters found Terror Trax sitting under their noses in Los
Angeles. Terror Trax was a haven for what we hoped would be the
next phase of alternative music. At the time, their evaluation of
Terror Trax was that it was being mildly mismanaged. Terror Trax
was talent heavy and product light. Based on some innuendoes, they
also suspected that the head of the company, Ken Kincaid, was bluffing
his way through the company's financials. However, we did not
follow up on it at the time because doing so would have alerted him of
our interest before we were ready to propose a buyout. Cain was
satisfied because it met our parameters. The advance team was
satisfied because it would not jeopardize the company's long-term
financial status.
When we
pitched the complete package to him, Henry Jr. went for it from the
start. He liked the name. We recommended our price and he
was on even harder. He took the project back to the West Coast
Headquarters and had them pitch a buyout to Ken Kincaid.
|
"I
was angry with the West Coast offices. They had come at Ken
Kincaid with the maximum offer, leaving no room for negotiation.
Apparently, once Kincaid realized he was talking to Cain
International, he took our offer as an insult. Everyone knew
he was posturing for a higher price. Henry Jr. had even OK'd
an increase of 20% over our maximum recommended bid to get the deal
done. Kincaid balked at that, too." |
A week
later I received a call from an irate Henry Jr. Ken Kincaid was
not interested in selling his company under any circumstances.
Henry Jr. kept yelling at me, "Didn't you check THAT out? Isn't
that part of YOUR job?" While it did get under my skin, I was
angry with the West Coast offices. They had come at Ken Kincaid
with the maximum offer, leaving no room for negotiation.
Apparently, once Kincaid realized he was talking to Cain International,
he took our offer as an insult. Everyone knew he was posturing for
a higher price. Henry Jr. had even OK'd an increase of 20% over
our maximum recommended bid to get the deal done. Kincaid balked
at that, too. Kincaid told the Cain representative that he had no
reason to sell. He believed that he was sitting on a gold mine
with one of his acts. He accused Cain International of industrial
sabotage. He said that we learned about his discovery and were
trying to buy him off before his price would escalate. The whole
idea had been botched and everyone on the advance team was being held
accountable by Henry Jr. In an effort to get our credibility back,
I asked Henry Jr. to let me look deeper into the project. I hoped
that Ken Kincaid was overplaying his hand. If I could find
something to confirm my suspicions, Cain could regain the upper hand.
While
everyone considered the purchase of Terror Trax a dead deal, I
maintained a discreet distance. I used contacts at Cain's West
Coast Headquarters to begin discreet conversations with several banks in
the area. I let slip that Cain International was looking to
purchase a small recording company. I was sure not to mention
which one. It was enough to chum the water, I did not need to
engage in any financial chicanery. Bankers began calling me with
information about many of the independent labels. They would call
me to let me know that Company X had applied for a loan for new offices
or something along those lines. I would receive the news and move
on. I kept waiting for one piece of news, and in October I
received it.
I
received a call from one of my informants, telling me that Ken Kincaid
of Terror Trax had applied for a short-term loan to maintain operating
expenses. He was looking to repay a six-month loan until his
latest acquisition could begin recording and complete a guaranteed gold
album. The banker noted Mr. Kincaid's desperation. He also
noted that his demeanor was "less than professional" and that he may
have entered the bank in "an altered state." The banker informed
me that due to the combination of these circumstances and a critical
review of his company's assets, he could not recommend a loan. I
thanked him and asked that he keep me informed if he heard anything
else. When I hung up the phone, I knew we would acquire Terror
Trax. Rather than leap into action, however, I held firm at my
discreet distance. Three months earlier, Ken Kincaid chose to
screw with Cain International. Now it was my opportunity to return
the favor.
The first
week of November brought another call from another banker. She
informed me that Mr. Kincaid was now looking for a one-year loan for
operating expenses for Terror Trax. Now I was ready to respond.
I went back to Henry Jr. and reminded him of the initial Terror Trax
fiasco. Before he could get angry, I informed him of the current
situation. As I expected, Henry Jr. was pleased. He was
pleased in a way that let me know how personally he had taken Ken
Kincaid's negotiating tactics. He thanked me and we updated the
previous offer to reflect the date change.
A week
later I received a call from Henry Jr. He asked me to revise the
contract to reflect a new price. I asked him how much more he had
agreed to pay.
"More?, "
he asked, "Why on earth would you think I would pay more? I got
him for 70% of our original offer."
My jaw
dropped open, "70%?"
"I
originally offered him 80%, but he wants to stay on as a figurehead.
No real power. So I knocked him down another 10%. If he
stays with the company long enough, he'll make it back. Besides,
it smooths the transition for us. None of the talent is going to
abandon a label where the previous management is still on the job.
He's powerless, but still on the job."
* * * * *
That is
how I helped Cain International acquire Terror Trax. It is also
how I can claim, as I previously stated, that I do not know Ken Kincaid.
I never met him, but I have heard about him. I know that he is
untrustworthy, but to this day I still do not know one thing: Why
did Terror Trax become financially insolvent just after my sister signed
with Terror Trax? At the time I did not know that she was part of
their talent roster, and maybe it is entirely coincidental, but I have
to ask the question. I have seen his bravado on this site for far
too long. Now I want to see him answer something straight for
once.
I am
waiting.
