... And Robert B. Machinist said, Let there be a liquidity event.
Over the years I tried but seldom succeeded in getting Robert Machinist on the phone. The president of Patricof & Co., one of an élite group of investment banking and venture capital firms in Manhattan, Machinist had been a classmate of mine at college, but our paths had diverged in substantive and comic ways. He had achieved an air of fabulousness; he wore bespoke suits and had a large stride and a fleshy imperious face with Robert McNamara slicked-back hair. He was a sportsman (racing cars), a paterfamilias (of four!), and a philanthropist (the largest giver, by a factor of 10, in our college class). To me, he stood at the pinnacle of his life and times and was certainly one of the most confident and dominant individuals I'd ever met.
When occasionally Machinist did relent, it was almost impossible to talk with him. Our sentences didn't meet; there was always a disconnect. In part, it was the money vocabulary, which I admired without comprehending, and in part the fact that he couldn't quite find a context for my small-time enterprises. A hundred thousand dollars was my dream, a hundred million was his. Still, I could drop his name. I could hint that he might be involved with one of my schemes.
I had started Michael Wolff & Company Inc. in 1990 with three employees. Its business was to develop ideas for books, magazines, and television. For several years the company hummed along in a contented and profitable manner. Then, in 1994, the company extended its activities, as well as its definition of media, to the Internet, creating NetGuide, the book; NetGuide, the magazine; NetGuide, the ISP; and NetGuide, the Web site. There would follow Your Personal Net and NetClock on the Web, and 30 more Net-related book titles.
It came to pass that one Monday morning in late 1994, Bob Machinist rose at his country estate in Greenwich, Connecticut; his uniformed servants brought him his cappuccino, his fresh-squeezed, and his Wall Street Journal, and there, disturbing his breakfast, he found me and my Internet activities as a featured story.
In short order, I received a formal letter from him, handwritten, in fountain pen, on personal letterhead. It was a letter conferring high respect on my acumen and vision but sounding a clear cautionary note, too. An opportunity, offered to few people in a lifetime, had knocked on my door. I should look carefully at all that would be required to seize it.
"You can be a big swinging dick for a few days or realize an enormous amount of money for you and your family," he said in a follow-up phone call. "I'm suggesting that you can create a capital base for generations to come."
"We could get you out with five to ten million dollars right away," he explained when we met in his office. "But that's not, clearly, where you want to be. I know lots of guys who have sold out for US$10 million who are the walking dead. You have a family. You live in Manhattan. You don't want to risk the public schools. I know your nut. You need at least $15 million - an after-tax net of 8, which would produce a fixed income of $400,000 a year, if you didn't make a big real estate purchase - to make ends meet. Our minimum goal is to get you out inside of 18 months with $30 million. That would provide you with the leverage to go on to other enterprises. We'll play that against the opportunity to smack this way out of the park. I'm willing to share with you my personal goal, which is to do a public offering north of $200 million."
"OK," I nodded.
Put aside the inconvenient facts that I had practically no experience running a real business, that I knew scant little about technology development, that I liked to sleep late in the morning and play with my children in the afternoon. It was the age of the entrepreneur. It was the age of the visionary. Ideas, concepts, constructs, theories, perspectives, perceptions, points of view - all had value if they were sweeping enough, grand enough, beguiling enough. The great, quick fortunes were all about imagining the future.
In addition, bankers are highly competitive. The New York banking boutiques were losing out on the technology spoils. It was the Netscape factor. In order to achieve immortality in your profession as a banker, you had to turn an idea into a colossus and do it within a season or two. But it was the financiers at Kleiner Perkins, out in Menlo Park, California, who were hitting the home runs.
"Really," Machinist said, "this is a beautiful moment for you. You just need to crystallize your thinking. I'm going to help you do that, you lucky man." He seemed poised to skip around his office. It was only mildly disquieting that he knew nothing about technology.
I was brought in to meet Patricof & Co.'s most senior partner, whose enthusiasm for the project, or lack thereof, would determine the size of the firm's financial commitment to us. Nearing retirement, Alan Patricof was an A-list name gracing museum walls and benefit committees and Democratic causes. He was arguably among a handful of financiers who had shaped modern venture capital investing, having made many prescient technology and media bets. In the process, he had gained a vast personal fortune and the animus of almost everyone who had worked with him. In fact, the Patricof firm had been one of the early investors in America Online, although Alan Patricof had bickered with AOL management incessantly and the firm had gotten out of the deal as soon as it could.
From a distance, there was something appealing about Patricof's eccentricities and cragginess (and crankiness), his rumpled suits (although I suspected those suits were as costly as a car), his fulminating, his deep, penetrating scowls. If the alternative was California and its techno-VCs (homogenized sharpies who spoke the language of engineers), then New York and its worldly, blue-chip financiers, whose perspective went back a tad longer than the advent of personal computers, looked pretty good to me.
Except when you got up close. Then, the senior partner resembled a mental patient. Perhaps it was the unsettling notion of newer and newer technologies, of being confronted with a world over which he had no knowledge and hence no control, that threw him into some kind of chemical brainstorm.
"Net-scape! Net-com! Net-guide! What's the difference? What's the difference? What's the difference?"
"Alan, please," calmed Machinist. "These are entirely different - "
"So shoot me. I don't get it. So shoot me. Shoot me!"
"Alan, let's just look - "
"I've seen a computer. I've seen a computer. What do you want to show me a computer for?"
A demonstration of the Internet, its capabilities, and prototypes of our products had been carefully choreographed, but Patricof snatched the mouse from my hand, waving it in the air in one of those eye-hand disconnects. "It doesn't work! It doesn't work! It doesn't work!
"Who can use it? Who can use it? Who can use it? Where's the money? Where's the money? Where's the money? You're gonna sell advertising? Advertising? I know about selling advertising. Has anyone ever tried to sell advertising? It's hard to sell advertising. You can't just sell advertising."
"Alan, people sell advertising on the Internet," explained his partner.
"Fine! You're going to do what you want, so do what you want!"
What we wanted, according to Machinist, was about $5 million to spend against an almost entirely imaginary revenue stream. What's more, we wanted this $5 million to constitute a relatively small part of our business, less than a third, for sure. We would take this money and spend it as fast as possible to build brand, gain position, stake out beachfront property in the new cyberlandscape. And then we would cash in. We would provoke, as the bankers described it, a "liquidity event," turning our equity from a dreamed-of value into a river of cash.
After surveying the field of capital, Machinist zeroed in on our investor, a 28-year-old named Jon Rubin. Rubin would be brought into the deal by the bankers to supply the additional funds we needed to flip the company, or trade up to a different class of professional investor. Using family funds, Rubin was then dabbling in a variety of diverse businesses: helping the Clintons raise money, publishing inspirational books, selling steaks through the mail, developing microtransaction systems for the Internet. One of his other companies, First Virtual Holdings, offered an online payment method. Used frequently by online pornography vendors, First Virtual, with revenues less than our own, was planning to go public before the end of the year. Rubin seemed hungry to be a part of this new industry.
Rubin had not only check-writing capabilities, but also, Machinist said, "an incredible hard-on. He definitely wants to be a big swinging dick."
With backing from Rubin and Patricof, we took our fledgling we-love-the-Net company and, in February 1996, formed Wolff New Media LLC. With money in the bank, a football-field-size office on Madison Avenue, and an explosion of new employees, we turned our sights to the search-engine space. Could we use our 30-title Internet-guide series, our writerly skills, and our finer sensibilities to compete with the search engines?
"Show me," Machinist commanded, and I gave him a brief demonstration of search engines, on the basis of which he would complete his analysis and arrive at his conclusions.
"All right. All right. Hmm ..." He closed his eyes. "I'm waiting for an inspiration." His attention span was not long, and his concentration, while possibly deep at a given moment, moved on quickly to other opportunities and dramas. He could easily forget entire conversations.
But he didn't forget this one.
Later that spring, Machinist (who had offices in London, Paris, and Z ürich) returned from Europe with a brainstorm. He came with tales of a deal that involved oil, areas of the former Soviet Union, a pipeline route, and Kevin Maxwell, the oft-prosecuted son of Robert Maxwell, the English press baron who had intimidated critics, bamboozled bankers, and looted hundreds of millions from his employees' pension funds before taking his final dive in the sea.
Machinist and Maxwell fils, it seemed, had come to an understanding not only about oil but about the Internet, too.
"He has a search engine," Machinist said, slightly annoyed that someone else in his circle would have an Internet company.
"Yes, Magellan," I said. "It's not bad. But it's totally controlled by the Maxwells."
"The Maxwells have always been very smart about the information business," Machinist offered. "Lehman," he said, referring to the Wall Street underwriter and brokerage firm, "is prepared to take the company out at $150 million."
I shook my head. "How could anyone do business with the Maxwells?" I laughed.
"Can you be over here in 20 minutes?" Machinist was saying into the speaker phone. "David Hayden is in my office." The order could not have been more crisp if it were the Prince of Wales.
I put on the emergency tie I kept in my desk and jogged the few blocks around to the Patricof offices on Park Avenue and 57th Street.
Machinist caught me on the way in. I knew that look. I could see my fortune in his eyes.
"I've done all the foreplay," he said.
David Hayden was in his early 40s, casually (but expensively) dressed and distinguished by an electric, almost Don King, hairstyle, with spoors shooting straight up and out into the cosmos. He had a Hollywood ease and confidence, with good Italian leather luggage by his side.
He was the husband of Isabel Maxwell, one of Robert Maxwell's twin daughters. I tried to imagine the complexities of having married a child of one of the most significant crooks of the epoch. If you regarded Maxwell and his crimes as just somehow larger than life, perhaps it was something that you could deal with, make use of, even dine out on.
"I want you guys to talk," Machinist said, closing the door to the inner sanctum as he left. "Take as long as you want. You can sit here all day. Then we'll see if there's a mutuality of interest." He said "mutuality" the way the British say "sexuality," by rolling the syllables, and then quietly left us.
"Bob is brilliant, isn't he?" Hayden said.
"Yes," I nodded. I smiled.
He smiled. "Let me try to give you a sense of the ways we've been moving and where we want to be and the kind of timetable we're on." Hayden spoke quietly now, without salesmanship, without posture.
"This business, as you know, the search-engine business, when it started to get serious last summer, many people suddenly started to see a way to funnel the Net's traffic."
He told a story I was deeply familiar with. In the retelling, we bonded.
Yahoo!'s IPO had gone out in April 1996. The eager public valued a company with $1.4 million in revenues for the prior 12 months at $1 billion. Magellan - which, along with Yahoo!, Excite, Infoseek, and Lycos had a spot on the Netscape homepage, plus additional deals with AT&T and Time's Pathfinder - was poised to go out as well. The story David Hayden told me was as believable as any: Robertson Stephens, in San Francisco, perhaps the most eminent of the high tech underwriters, agrees to lead the Magellan IPO. Robertson Stephens, though, has significant connections to Kleiner Perkins - the largest Internet VC specialist - which suddenly starts to rush to get out Excite, the search-engine company Kleiner has funded. Robertson Stephens dumps Magellan and leads the highly successful Excite IPO. In fact, Excite completes its IPO one week before Yahoo!
David Hayden shrugged. I was impressed by his fortitude.
Now that Lehman was ready to take Magellan out (the S-1, that magical rite-of-passage document necessary to sell shares to the public, was almost completed), the next step was to close on another round of financing - called the mezzanine round, or the "mezz" round - prior to the IPO. This round would include players like Ameritech, GTE, and other big-name technology and telecommunications companies and would value the company at $75 million to $100 million. Lehman believed that with those name strategic investors in place it could sell the company to the public for double that value.
"Let me tell you what I think," said Machinist to Hayden after we had settled in for lunch in the partners' dining room. "Yahoo! is the 400-pound gorilla that you have to beat. The way to do that seems to be self-evident: Combine topflight technology, which Magellan has, with the gold-standard content that Wolff New Media has. Magellan has put in place key alliances with ISPs, Wolff has millions of books in the marketplace ready to move consumers from the aisles of Borders and Barnes & Noble onto the Net," he said. "And, if I'm not mistaken, your revenue base and our revenue base would together make us the largest of the search engines. One more thing, which I think will have a special appeal, particularly on the Street, is that if you put these two companies together, you unite West Coast and East Coast, Silicon Valley and Manhattan, technology and software development, with content and marketing."
Hayden chewed long and carefully.
"We have," Hayden said as he swallowed, "a two-step process in front of us - to close on our mezz round and then to go into our quiet period and complete the IPO. Obviously, a business combination with you presents attractive possibilities. I think the whole deal might become much more interesting to Lehman if they think they're looking at a $300 million offer."
Machinist's body moved at that moment. It was a subtle repositioning, as an animal to affection. I had heard what Machinist had heard. We would have put the value of our company, on the most optimistic day of the year, at no more than half the value of Magellan, but if Lehman was taking them out at $150 and Hayden had just speculated that a combined company could go out at $300 million, then he had set our value at equal to his company's value.
"But I'm reluctant to slow down the process. If we combined, we'd have to redo the mezz-round offer and S-1. I'm certainly not philosophically opposed to that in any way, I'm just concerned about the practicalities at this point."
"Let's put aside for a moment how we achieve the procedural goals and see if we have a two-plus-two business equation that can make five," suggested Machinist.
"Let me add another element which I think gives you guys an undeniable level of strength," said Hayden. "That's the Patricof involvement."
"We're totally committed to this company," Machinist said (meaning my company). "Whether this deal works out or the next deal, we'll be a part of it - I hope an important part. If this company continues to operate independently, that's also a strategy we're prepared to support." Hayden nodded.
"The notion, then, is to merge you into us or us into you," Machinist said, as though just recapitulating what we'd already agreed to, "and to achieve fifty-fifty positions. Your burn rate is running at - what? I would figure near a million a month. Whereas ours is much closer to break-even. Do we complete the mezz round before or after a merger, I wonder?" he asked rhetorically.
"I have no definite feelings either way," Hayden said, appearing to accept Machinist's notion of a merged entity, "but I think I'd like you in before the round. We'd like to do the round at $75 million, which does not seem to be an issue, and I think actually with Patricof participation, even if you came in at $65 million, we have a strong shot at doing the round at $80 to $90 million."
I was working, frankly, at about a 50 percent comprehension rate. In hindsight, though, I can offer the following explanation: Machinist began with the fifty-fifty leap, wanting to see if he'd be shot down on that. Taking no fire, he went on to characterize Magellan as losing $12 million a year and us as near to break-even. Never mind that we were losing less money than they were losing only because we had less money to lose. Fleetingly, that seemed like a virtue. He seemed to be suggesting that Magellan should raise the money it needed and suffer the necessary dilution accordingly (i.e., they'd be selling part of their company), so that when a merger occurred our company would have the full 50 percent and they'd have divided their 50 with other parties.
For his part, Hayden seemed to have one thing and one thing only on his mind, which was to bring in Patricof at a high valuation. If Patricof came in at $65 million, the financial community would accept that value and be ready to take the next step.
It was unlikely, I knew, that Patricof would go into an Internet company at anywhere near full value. First, Patricof did not make its money, nor its reputation as a firm of tough financiers (sons of bitches and proud of it), by putting money in at the top of a deal. Still, Patricof owned a significant chunk of our company, much of it gained at a $2 million valuation. Depending on how little they could put in at $65 million and how surely a mezz round could be completed at something more, they might be in a position to realize a paper profit of what looked like something close to 30 times their money.
"It's Monday," Machinist said, looking at his watch. "Why don't we meet on Wednesday? At your office. Perhaps the principals should spend some time together before that."
"Why don't you come for dinner tomorrow?" Hayden said to me.
"Great," I said, pretending ease with the coast-to-coast time-space nonchalance. "You're in town or on the Peninsula?"
"We're actually in Sausalito. We're right on the water. It's fabulous. You'll love it."
"Cool." I smiled broadly. In the course of a few hours, a plan had been put in place to make me one of the richest men in the country, partner me with one of the most blackened business names of the century, and fly me across the continent for dinner.
"We've just turned this pile-of-shit company of yours into $150 million," said Machinist after Hayden left. "I'm going down in banker history."
"Honestly, I am somewhat concerned about the Maxwells," I said.
"Trust me, we're going to get them out of this before we're finished. We're going to squeeze them out. They're gone."
"How is he going to get rid of them?" asked Alison, my wife (and also my lawyer), when I came back from the meeting.
"We're going to squeeze them out."
"How?"
"The deal. In the deal."
"Every time you go over to Patricof - what do they put in the water there? They charge you for the water, by the way."
It was true that when you reconstructed the specifics of conversations with Machinist, you often could not find the bridges by which we'd crossed these large chasms to great fortune. It was also true that they charged client companies for the meals.
"It isn't Bob who has to work with these people. It's going to be you. It's not even that you don't know who they are. You know who they are. These are the Maxwells. The Maxwells! Hello? Robert Maxwell?"
"I know that. But - "
"They have a company on the West Coast which loses a fortune. You have a company on the East Coast which loses a fortune. So bringing them together ... does what again? Adds, for the hell of it, geographic complexity?"
"I don't think you understand the larger picture. What you have here is a strategic vision. Obviously, these aren't mature companies. If they were, we wouldn't have this opportunity. But you've heard of being in the right time and the right place? I really think there's a chance that we can make two plus two equal five here. Really."
"You realize that because you're flying at such short notice that ticket is going to cost over eleven hundred dollars?"
"How small-time can you be?"
I checked into my hotel in San Francisco and then met Hayden and party for dinner at a downtown restaurant. His wife, Isabel Maxwell, sat at my right. At 45, she was an intelligent and somber-looking woman, plainly dressed, who seemed to me more like someone you might meet in an academic setting. There was something hair-shirt about her. Maybe to her credit. She probably could have lived like exiled royalty, drifting through the world's pleasure spots, but here she was, trying to build a business from ground zero like the rest of us, and working like a dog. Perhaps there had been some distance between father and children, or at least between father and daughters, to have created in them a technology-business work ethic.
But as soon as I turned to her, she asked, "Did you know my father?" In a way, I was flattered to be included at the level of people who could have known Robert Maxwell.
"He was a visionary," she said.
"Yes." I nodded.
"He knew what was happening with information."
"He did." My head wouldn't stop nodding.
"I wish you had known him."
"I really, really would have liked to have known him."
The hotel limo took me the next morning over the Golden Gate Bridge into Marin County and down the hills into the fog of Sausalito. There was a white-shirt-sleeves-rolled-up meeting going on in the glass conference room off of the reception area when I arrived. "Our CFO is going over the mezz-round papers with Ameritech," Hayden said. "I wanted to show you around and get you going with a few people first before I go into the meeting."
That was the day. I would visit with the various executives in my position as the new ... what? Boss. The new Boss. I would be trying to get a sense of what was amiss in the operation. I would be looking for telltale signs of ... what? I thought, I have to adjust to this role ....
Then, at about 4:00, our investor Jon Rubin and his technology adviser would arrive. Rubin would meet with Hayden, and the technology adviser would meet with Magellan's technology chief. Then Machinist and his factotum would arrive for dinner, in the wine cellar of a celebrated San Francisco restaurant. Certainly, the Maxwells knew how to do a deal.
The economic premise of Magellan's business was not terribly different from every other Internet business: Spend now for what will come in the future. The only difference was one of extremes: Magellan was losing money at a top-of-the-industry rate. I was starting to appreciate that Machinist liked the lever of the Magellan losses. To date, we had lost $3 million or so; Magellan had lost $10 million or thereabouts. So, we were buying our 50 percent for two-thirds less than Magellan was buying its 50 percent. That somehow seemed to make sense.
At dinner, Machinist held court at one end of the table. His was a great performance. You couldn't help feeling that the deal, this highly complex and fragile process, had a leader with the gifts and prowess and wisdom to guide us to where we all wanted to go. You naturally yielded to him. You were pleased to yield, even.
We felt like a team, it felt like a done deal - until halfway through the evening, when Christine Maxwell, the other Maxwell twin daughter and the true founder of Magellan, made her entrance. She had flown in from France and come straight from the airport. Here, I thought, was the genetic thing at work. She was much more commanding than her sister. Isabel Maxwell seemed fragile, thoughtful. Christine seemed alarmingly solid and beyond reproof. Matronly, but in the way of a royal. She went to the exact center of the table, the fulcrum spot - which at that point was occupied by Jon Rubin's technology adviser - and said, "It would be helpful if I could take that seat; perhaps you could find another."
Christine Maxwell addressed Machinist over the heads of everyone else. She questioned him with hauteur and specificity as to the terms of the Patricof commitment to a Magellan deal. And, in so many words, she indicated that she was still quite a ways from making up her mind about doing a deal with us and with Patricof.
"Christine," David Hayden said.
"I'm sorry, David," she said regally, "I think we should know - "
"Christine, why don't I fill you in later on where we are in the overall discussion."
"Of course, David. You must fill me in." But she turned back to Machinist and persisted in questioning him as though she were a prospective investor in the Patricof funds, rather than a potential investment of them.
A kind of mask crept over Machinist's face, one that allowed him to remain unfailingly polite with her, but at the same time expressed to his particular circle, in which I was included, that this woman was history.
The evening wore on, and on, past several less and less reasonable hours, with ever more food and drink, until finally, blissfully, Christine Maxwell rose in a manner to indicate that everyone else should rise, too. She said, "This has been an enjoyable evening. Thank you all for coming. I look forward to making progress on our discussions tomorrow."
What I want to know is, how do these people, these business combatants, these financial warriors, enduring late nights, jet lag, and strange beds, get up so cheerily the next morning?
Machinist was in the hotel lobby at 7:30, impeccably attired and accompanied (as always) by his factotum, a boyish banker in a significantly cheaper suit. The factotum had spent his early career at Drexel Burnham and would often compare cyber deals to Drexel transactions: "This is really nothing, you know." (The factotum, in turn, was most always accompanied by his own factotum, one or another of a group of hardworking women in an even cheaper suit.)
"Ready to get 'em?" the factotum asked, grinning.
I could barely even smile at this.
The technology adviser was in the lobby, too, but not Jon Rubin, who would - a message had been left - join us later. Maybe, I thought, if you are really rich, you can sleep in.
"I'm ready to stay if we have to," Machinist said. "But I want to check out. I want it to look like we have no intention of staying. I'd like to get the six o'clock flight. If we have to, we'll get the red-eye. And we want a deal by then."
"Oh, the red-eye," I said, exhausted at the thought.
Machinist gave instructions for the factotum to give instructions to get us seats on all the flights to New York.
In the hotel limo, we crossed the bridge once again and descended down through the fog into Sausalito.
Magellan had two buildings near the water's edge. The second, across a small parking lot, seemed to house most of the company's technology systems and the large conference room where we would be meeting. Machinist dawdled in the parking lot, conferring with the factotum. I went back out to see what was holding them. "Always look at the parking lot," Machinist said, indicating a lineup of stellar automobiles - a family of Range Rovers and other upper-end vehicles.
The point eluded me.
"They're losing a million bucks a month with a fleet of luxury autos out back," Machinist said with a whip of venom. "So that's where we start to squeeze."
There were doughnut and bagel platters. There was a quieter Christine Maxwell, now busily working in her date book, as if to say she was not quite paying attention. Machinist had his these-are-just-the-details face on. It was an I-am-bored expression together with a give-me-some-credit-for-showing-up look. Hayden was nervous.
I was, too, although I recognized how little control I had over the direction and the outcome. I was just sitting at the gaming table.
"We're scheduled on the six o'clock," Machinist said. "So we should leave here by four? I think that will be enough time."
"Can you push that if you have to?" Hayden asked.
"We can do anything," Machinist said. "I'm not sure what we'd be able to accomplish, though, that we won't be able to accomplish by four."
"If we're going to do this, if we're going to do a deal, we'd like to do it, really move as quickly as possible," said Hayden, trying to put the pressure on a little.
Machinist blinked. "Yes."
"I've had a discussion with our board, and they have authorized me to move forward, hopefully toward a merger agreement with you," announced Hayden.
"We can stay if we have to," Machinist shrugged. "We can stay until next week if we have to. Whatever works. But I think we are relatively close to an agreement. Why don't I try to itemize the main issues?"
No one was grabbing at the food. I was debating whether to go for a bagel now or wait for a more opportune moment.
"We have an issue of governance," Machinist said, minimizing no doubt one of the most potent issues, namely, who would run the company, our side or theirs, me or Hayden?
"The point I would like to make - " Hayden began. You could tell that he had prepared for this, that it was certainly one of his biggest issues.
"I have a simple proposal," Machinist went on, holding the floor. "Neither of you wants to give this up. Neither of you should give it up. We have two organizations at disparate locales. We have a variety of different functions. I propose that you each serve as co-CEOs. Michael will be in New York, where he will run creative, marketing, and sales; Hayden will be based in California, where he will run finance, technology, and business development."
Hayden was caught off-guard. This seemed to be both less and more than he had hoped. It gave us both another day.
"If you two guys want it, I would be willing to serve as the tiebreaker," Machinist affably proposed. "We'll create an office of the chairman, made up of the three of us."
Nice work, I thought. We'd be in control. There was a delay before it dawned on me that, actually, Machinist would be in control.
Hayden was nodding. "Philosophically, I think I can get on board with this plan. And, obviously, we want the Patricof interest, if it's meaningful enough, to be suitably represented."
"On the other hand," Machinist said, "I don't have to do this. What we want is an efficient way to make a decision and a way that the Street will understand and buy into."
"Yes. I get that," Hayden said. "You and I should talk," he said to me.
"Can we get a recap on the status of the mezz round?" Machinist said.
Hayden turned to his CFO.
"Why don't you just run through it," the CFO said to Hayden. "You're probably the most up-to-date, I think."
Machinist's head bounced just slightly. "You're comfortable with the round so far?" Machinist asked the CFO.
"Ah, yes," he said.
"Why don't I just go through the players?" Hayden said. Perfunctorily he ran down a list of international communications companies, including GTE and Ameritech. He earmarked $7.5 million for the round: $5 million in hard commitments and $2.5 million in soft.
"Why isn't Lehman bridging this?" Machinist asked, almost with annoyance.
"That's a possibility - "
"If Lehman wants to do this deal, they're going to have to step up on this and handle the bridge," Machinist insisted.
"Well, if Patricof thinks it can encourage Lehman - "
"We do a lot of business with Lehman. This is a home run for Lehman with these two companies combined. There's no question that they'll have to do the bridge. When were you planning to close on the mezz round?" Machinist asked.
Hayden looked to the CFO. The CFO shifted. "The next 10 days," he said softly, sheepishly even. "We have operating issues," he added. Machinist registered this.
Christine Maxwell, writing furiously in her book, suddenly said, "What about Patricof's investment? I'm sorry, but can we talk about that?"
"Christine," Hayden said. "I think it makes more sense that Bob and I talk about the Patricof position later."
"You know the board's authorization of a merger agreement is contingent on Patricof's meaningful participation?" Christine Maxwell said in the manner of a parting shot.
"We are already, and plan to continue to be, a meaningful participant," Machinist replied. He stood up and excused himself.
It was quite a commanding bathroom exit, I thought.
I was trying to figure out where we were. It seemed like we were where we were supposed to be, or where Machinist wanted us to be. But at the same time, it felt that we were mostly in the same place.
You had to separate the stated goal, which was to join two organizations in order to make a more complete and valuable enterprise, from the underlying goal, which was to get control of this enterprise, from the necessary goal, which was to secure the capital to run our various businesses in whatever combination became necessary, from the business goal, which was to accomplish as much of the above as possible with as little risk to our respective interests as possible.
Because Patricof clearly had its own interests, which were not necessarily mine, I could not be entirely sure how Machinist was strategically envisioning the play. But I guessed that if he could tie up a neat package here (neat enough for Lehman to get a hard-on for, as he would undoubtedly put it) then Lehman would have to put up the risk money, which would cover the operating capital needs, which would in turn motivate Lehman to complete a successful offering, which would provide Patricof with lots of millions for having put up next to nothing.
"Can we take a break?" Machinist asked, returning to the room.
I took this to mean that he wanted to solidify a gain or cement the status quo.
"I need a phone for a little while," he said.
The meeting splintered. An air of idleness settled over us. It was not unpleasant.
Hayden caught me as I returned from the bathroom.
"Are you comfortable with a co-CEO arrangement?" he asked.
"I am," I said, as though I had given it substantial consideration. "I think Bob is right that there are so many different disciplines at this point that we can easily carve out the autonomy we need, and also, frankly, I think for the both of us the issue is the immediate goal. Let's get this company out. Let's do the IPO. Then we'll see how we want to play it."
I believed that was the correct answer.
"Bob is really something," Hayden said, not so much admiringly but as if he were trying to size up the beast.
"He really is something."
I was sitting and waiting. But the meeting wouldn't come back together again. The factotum sat in the corner on his cell phone. Rubin's technology adviser, who unexpectedly was wearing a tie rather than his standard T-shirt, had found a modem jack and opened his laptop. And the Magellan executives seemed to have drifted back to their real jobs.
I went out to try to find some meaningful-looking thing to do and found Hayden and Machinist together. I would like to have overheard them, if just for the sport of the thing. The game was a clear-cut one: Hayden wanted Machinist's money, and Machinist didn't want to give it, or even commit to giving it, until he absolutely had to, until all the risk factors could be assessed, until every last bit of leverage could be accrued - if then. I had no doubt who was winning this game. This was Machinist's real job, the real craft - art, even: Make people think you are ready and able to give them money, so ready and so able that they will reveal themselves totally, prostrate themselves completely. So that by the time you do give them the money, if you give them the money, it will be on absolutely the most favorable conditions imaginable.
Jon Rubin arrived, finally, and I brought him up-to-date.
"That's ridiculous," he said, about the dual CEO solution. "God, that Machinist."
I told him then about Machinist in the tiebreaker role.
Rubin let out an endearingly explosive laugh. His tense body suddenly loosened, almost dangerously. I thought that he was going to literally roll on the floor.
"The amazing thing is that people take him seriously."
"Yes, yes," I laughed. "It is so amazing."
After my conversation with Rubin, I found a private corner and called Alison.
"I don't understand what that means, co-CEO," she said.
"It means - it means we see how things develop."
"It means," she said, "that Machinist is in control of your company."
"Yes and no. I think you have to look at a larger picture. The question is, What do we have to do at this juncture to get ourselves to the next juncture?"
"Do you have any idea of how to play this game?"
"I think I'm learning. I actually do."
Hayden was trying hard to shepherd people back to the conference table, but Machinist was immovable and impervious to suggestion. The arrival of lunch delayed the meeting further.
"We should turn back to this, Bob, and look at the other issues," Hayden said, corralling us.
"I'm ready," I shrugged.
"Yes," Machinist said. He was carefully piling high an elaborate sandwich, studiously applying his mustard. "By the way, what kind of expansion room do you have here?"
Real estate was a favorite digression for businessmen, and Machinist handily pulled Hayden in. They got deep into renewal terms and options on additional square footage and the general price of office space up and down the West Coast.
Machinist did not want to continue the meeting. I was not sure why. It was Jon Rubin, sourly indicating that at least his time was valuable, who got things going again.
"We wanted to discuss the mezz round," Hayden said, assuming that it was now his turn to lead, "and into what entity that comes in. I'm assuming that even if Lehman does the bridge, we will want to complete at least part of the round. Our board feels that it would not be appropriate for us to suffer the dilution on the round alone."
"If it's an issue of funding operating losses," Machinist said, "we ought to apportion the dilution pro rata rather than pari passu." He drew his lips together in his porcelain statuette pose.
"Bob," Hayden said, and already you could hear the note of frustration - that was a mistake, I realized - "that doesn't begin to acknowledge the value of this round for what it does to the whole deal. This is not just about funding operating losses, this is about bringing in partners whose presence in the deal will increase the overall valuation and offering price. You have to understand how this industry works. It's all about how you get your credibility."
That was an interesting notion.
"We have to get credibility from a credible source," Hayden said.
"I accept that," Machinist said, seeming to accept not only the acquisition-of-credibility theory but Hayden's point about an even-steven dilution on the mezz round. "If we can do it at a valuation of $130 million on a combined basis, we'll share the dilution." I know that I felt for a moment at least that Bob Machinist was one of the most reasonable people I had ever met.
That valuation, I noted too, was at least three times more than we thought we were worth.
"I'm reasonably satisfied," Machinist said, putting the tips of his fingers together, "that we can do this deal from a corporate-finance point of view. I want to have a conversation with Lehman. I should take a look at the operative private-placement agreement for the mezz round. I'm somewhat concerned about how we do the merger and then do the round in your timetable." Had he, I wondered, just taken back what he had acceded to minutes before? "But there are other ways we can deal with that."
"We can do the merger concurrent with the mezz round," the factotum said. Judging by Machinist's sharp look, I guessed that the factotum shouldn't have spoken at this point.
"We can do it following, too," Machinist said, rolling with the miscue. "I don't see a problem."
I thought I got where he was going. He didn't want to merge until he knew the mezz round was done and the financing for the deal was in place. He was, of course, trying to structure a sure thing.
"I don't think it will be that difficult to amend the private placement," Hayden said.
"Let's do it this way," Machinist said. "Let's make sure Lehman is on board. Let's get ducks in order on the mezz. Then, well, I think you guys," - he indicated Hayden and me - "have to work out the operating details. You have to decide how you guys are going to work together, how the organizations are going to mesh. You don't have a videoconferencing system, do you?"
"Here?" Hayden seemed surprised. "No."
"We have to get the Lehman piece and the mezz round into place before we can start to structure. You guys" - again indicating Hayden and me, somewhat dismissively - "can start to work on operating issues, if you want. But right now I think the deal is better served if I'm pinning Lehman down.
"If you can get to the Patricof office in Palo Alto," Machinist said, with mounting enthusiasm, "we can get together tomorrow via videoconference. Our system is high-end. It's 90 percent seamless. No delay. It's ISDN. Have you ever done a videoconference?"
"On an older system," Hayden said, taking the bait.
"I know what I want to do," Machinist said, as though it had all just tumbled for him. "I want to get Lehman in place. I want you to be available to see them tomorrow," he said to me. "I'm going to try to see them first thing in the morning. We'll get together tomorrow afternoon via videoconference. You want to have someone set that up with the Palo Alto office," he said to the factotum.
I had the sense that Machinist wanted Hayden to keep up with us, to be running after us, to be the one pursuing. Also, there was something about a string of meetings, of seeing how the nuances changed from meeting to meeting, where the emphasis fell, that, if you were attentive, gave you an advantage in a deal. But, equally, Machinist may just have been bored. Because clearly he was in motion. He wanted out of here.
"I didn't want to push it anymore," Machinist said, as I sat between him and the factotum on the shoe-shine dais at the United gate. The flight had been delayed.
"They're right there," Machinist purred. "They're ready to fall. Time is absolutely on our side. They're starting to panic. They can't hold out."
"How do you know?"
"How do I know?" He chuckled.
Then he said, coldly, "We're not merging with them anymore, we're taking them over."
The plane did not get off for several hours, so we rode east into the late night and early hours of tomorrow.
"I'm going to make you a hundred million." Machinist did not say this humorously. There was not much that was as serious as $100 million, after all. "If I do this deal for you, I want you to do something for me."
"Sure," I said, with some feeling.
"I want you to give a building to the college." It was always a small shock to remember we had gone to college together. Machinist was now a member of the board of trustees. "I'm serious. Talk it over with Alison. But it will be something that you can do. We can call it the Wolff Center for New Media."
"It's really not important for me to have my name on a building," I said.
"You'll see how you feel when you write the check."
"We're not merging with them anymore, we're taking them over," I said to Alison, who woke up as I came into the bedroom sometime before dawn.
"Who?"
"We're taking Magellan over."
"With what?"
Almost as soon as I got into the office Friday morning, Machinist was on the phone.
"I've just been with the Lehman guys," he said. "They're buying into this. They have a hard-on for an Internet play. They haven't had anything here. They've got to get something. They're coming in to see you after lunch. I want you to talk big picture. Content. Technology. You need to talk technology."
"OK." I was excited. "So Lehman really thinks this combined company will be worth $300 million?"
"They'll say anything we want them to say to get the deal. Doesn't mean anything."
I was caught up sharply by this.
"What about the valuation?"
"Don't worry about that. There is no valuation. There's only orchestration."
The Lehman guys who rushed over to our offices that afternoon surprised me. They had rough edges. The Patricof people not only had a particular sense of dress ("Dress British, think Yiddish" - they loved to say that) but a sense of presentation. Patricof partners embodied the magic of finance. Their skills encompassed considering markets, creating businesses to fit those markets, attracting talent, providing strategic growth plans, identifying merger and acquisition targets, masterminding corporate finance strategies, and providing capital from their own funds or attracting capital from other investors.
The Lehman guys, it seemed, wanted to leave just one impression: "If it can be sold, we can sell it."
"Do you think that a $300 million valuation of a combined company is realistic?"
"No question," said the older one, spreading his hands.
"The Internet? Slam dunk," said the younger.
"Of course, you can never tell what the market is going to do," the older one added. "But assuming there isn't a crash or technology doesn't go down the crapper or the government doesn't step in and regulate the shit out of the Internet, fuck yes. This is good stuff you got here. Very sexy."
"I'm hot," said the younger.
"And you've spent time with Magellan," I said, "so you're comfortable with the company?"
"Sure. Loses a goddamn fortune," he shook his head, not without some admiration, "but I guess all you guys do."
"We're working on that," I said with humility.
"The market," he shrugged, "doesn't seem to care how much you're losing. You have two or three quarters in which you can be pretty free and easy. After that, you'll get gutted like a fish."
"Schedule-wise, what do you see as the best time to do the offer?" I asked.
The older one looked at the younger one, who shrugged.
"So ASAP," the older said.
"Let's do it," the younger added.
"The Lehman guys seemed really enthusiastic," I reported back to Machinist, who was preparing for our videoconference that afternoon.
"They're idiots," Machinist said.
"Can they do it? Can they really do this offering?" I asked, slightly concerned for a second.
"They can do it. Today, anybody can do it. Tomorrow?" He shrugged. "Let's not think about tomorrow."
When the videoconference between Patricof's New York and Palo Alto offices was over, we were left with a complex etiquette moment. With lawyers on both sides conferring, it had become clear that Magellan's private-placement documents and S-1 were still merely in "draft" form. Somebody, and I guessed it was logically Machinist, had overlooked a soft spot in the melon. If Magellan's prospective investors didn't have documents yet, then the mezz round was in the best-case scenario weeks from closing, and in the worst case still in the hope-and-pray category. To belabor the point, or even to bring it up now, seemed like pushing Machinist's face in it. I didn't get to speak to him until the next afternoon. If he had had a moment of self-doubt, it had passed. But reality had altered slightly.
"What do you think? Did you expect this?"
"I expect everything. They're fucked up. It's the Maxwells."
"But you think the deal is still doable?"
"Of course it's doable. We have to decide if we want to do it."
Hayden was on his way back to New York and expected to have dinner with us the following evening.
"You and Hayden should have dinner," Machinist said. "Ask him what else he hasn't told us."
"I don't know where the deal is," I said to Alison.
"It's the same place it's always been. There is no deal. At least yet."
"We have a rationale for why there should be a deal. Now we have to massage the various pieces."
"I honestly think that's bullshit. The Maxwells have told Lehman they can put enough money in the bank to do an IPO. Then on the basis of Lehman's interest, they've brought us in, figuring that Patricof will solve the mezzanine-round problem. What has to be massaged is a missing $7.5 million," Alison said, firmly outlining the reality principle.
"So you really have doubts about their prospects for the mezz round?"
"Didn't you listen? They have no mezz round."
Jon Rubin called me at home over the weekend. "The Magellan CFO," he said, "has applied for a job at First Virtual." This was the other Internet company that Rubin had a big investment in. This sounded bad, but I was not instantly sure how bad. "What do you think that means?"
"It means he doesn't think there's going to be a public offering of Magellan. Certainly, if the CFO leaves eight weeks before a planned offering, there isn't going to be one. I've put in a call to him."
I stayed by the phone. When Rubin called back, he was muted, dispassionate, as though there existed a mortal flaw at the heart of all business and to be a businessman, a real businessman, was to have gotten past that.
"According to the CFO, the company is in disarray. The Maxwell sisters are out of control. The CFO will only stay with the company if we complete a merger and get rid of the Maxwells."
Rubin, Machinist, and I got on a conference together.
"But this doesn't change anything," I said. "Why should it?"
"Well, you would be merging with a company in a management crisis, in economic free fall, 3,000 miles away." Rubin pronounced each word clearly.
"I'm not sure that that's anything other than what we knew before," I said. "Tell me if I'm wrong."
"Michael, when you have dinner with Hayden tonight," Machinist said, "you'll tell him that the Maxwells are out of the company. I want this to be understood before we go any further."
It was a pleasant, almost soporific, dinner.
I said, almost casually, "There is a concern about Isabel and Christine's ongoing role."
"That won't be a problem," Hayden said. "Everyone understands what happens in an ongoing situation."
Then I said, "Is there anything you want to tell me before we go into what I hope will be the final deal meetings? Any surprises? Any skeletons in the closet? Anything we should put on the table?"
Pause. "No," he smiled and shook his head. "Not a thing."
That's what I would have said, too, I thought. I wondered if anyone really ever confessed.
It was a full house at Patricof on Monday morning. It included Machinist, factotum, factotum's factotum, factotum's factotum's factotum, and drop-ins by other Patricof partners. We were clearly the biggest thing going that day. There was Rubin's team, including the technology adviser and another business adviser, holding their cards closely. There was Alison, weighing everyone's motives and leaps of logic, with another lawyer in tow. On the Magellan side, David Hayden maintained his calm and elegant exterior. His marketing director seemed crisp and clear-eyed, and his lawyer acted like he had a straightforward job to do. His CFO, however, seemed uncomfortable, pulling at a tight collar.
And there was me. I was curious and nervous; cold drops ran down my sides.
"I thought I might just take a second," David Hayden opened, "to try to refocus us all on what we're trying to do here. What are the goals and what are the opportunities? The way this business works, for those here who may be more new to it than others, is that it requires a large, upfront investment before anyone will see a significant payout. We've obviously made a large part of that investment - a larger investment for a larger return, we could argue, than you've made.
I don't think, though, that any of us here thinks that's a useful direction to go, trying to gauge relative sunk value. The premise here is that by joining these two companies we produce a combined entity that can make an immediate and significant impact on the marketplace. Search engines are going to be at the center of this business. If you believe in this business, if you want to be in this business, then there's no better place to be than involved with a search engine, and no bigger opportunity than to become one of the leaders in this area."
Machinist was getting impatient, perhaps even indignant. "OK," he said.
"No, Bob, really, I think it's important that we understand the business that we're operating in and the competition that we're up against," Hayden insisted.
Machinist's face became expressionless. He made a hand gesture that seemed to say, "Go on, hang yourself."
Hayden rambled. He was trying to explain a premise that everyone understood: You had to sink a significant sum to launch a product and build a brand. But to put it this way was a mistake. There is no acceptable rationale for how much money you're going to lose - only for how much you're going to make. Hayden had, understandably, become focused on his losses. They stared him hungrily in the face.
Finally, Machinist said, quietly but firmly interrupting Hayden, "This is how I'd like to proceed: I'd like to finalize a memo of understanding for the merger agreement, and I'd like to set up procedures for producing a set of combined financials. With those documents in hand, I'd like to engage Lehman in a discussion with regard to the bridge financing." He folded his hands.
The meeting hung awkwardly for a second. Then Hayden said, "Bob, we want to finalize the memo of understanding, we think this is going to create a great company, we are all enthusiastic about the prospects, but what my board has asked me to do, and what they would like to do prior to finalizing the merger terms, is to come away with the specifics of the Patricof commitment to the deal. I was speaking to our board this morning about this. The board feels pretty strongly that that's the proper order we should be going in."
Machinist let a shroud descend over the long table. Then he said, "That's not how we invest our money, David. I don't think you'll find any funds that would invest on the quid pro quo basis you're suggesting. Either the merger makes sense from an operations and market and personality standpoint or it doesn't. We believe it does. You seem to believe that, too. The way in which we finance this enterprise is, while a no less important issue, a separate one. I have expressed to you my belief that this is a business that I'm confident would be of considerable interest to Patricof, and with a merger agreement and combined financials I think Patricof can begin to consider whether this company is an appropriate place for its funds."
I was always amazed, and impressed, by how artfully and effortlessly Machinist slipped out of giving the money that I would have sworn he'd offered.
"Bob," Hayden said, "that doesn't make a lot of sense from our point of view. From the beginning, I think I've said how much value the Patricof involvement lends to this deal."
"David, we're involved in this deal. We're as deeply involved with this company as we are with all the companies we represent and hold an interest in."
"Bob, come on."
Machinist remained impassive.
"Bob, this is not what we discussed. I made it clear, from the beginning, that you would have to take a meaningful position. Fine, I understand your procedures. I'm sure they can be expedited." Hayden's voice was hardening. His face was getting red. "Let's get real about this, OK? I can't fool around anymore with this. I have a payroll to meet next week."
Mistake. Big mistake. I knew it. It was the utterance that would change everything.
"I'm sure you'll find a way to meet your payroll, David," Machinist said.
Hayden literally threw up his hands. They went back, involuntarily, spasmodically. "Then we have nothing to talk about," he said. "This deal is dead!"
"I don't think the deal is dead, David," said Machinist calmly. "If you have a problem, I think we should look at it as partners. Why don't we all just take a break for a minute, and then we'll start again."
After the intermission came the show trial. All concerned were held there by both fascination and embarrassment as, piece by piece, excess by excess, expense account by expense account, Machinist deconstructed Hayden and the Magellan burn rate. He had a white board brought in and had Hayden list salaries and the value of perks and other bonus plans. It was not without a sympathetic interest that I followed the intricacies and the rush of this river of cash.
Several more white boards had been brought in before Machinist outlined a solution for David Hayden. The Magellan company's excesses would be stripped away, including its Range Rovers, the Maxwell sisters, and legions of its employees. It would hand us control in a merged entity and use the cash we had on hand to meet the short-term operating needs of the enterprise.
So that's how it's done, I thought. Not with a bang.
Kevin Maxwell, from points around the globe, began to call Machinist to replay the negotiation and try to modify cause and effect. But Machinist wasn't bending. If he could have it all he might take it, but otherwise Hayden and the Maxwells were no longer worthy of his time and effort. For them, the window of opportunity was about to close. It was clear that, in the combination of circumstances, in the tumble of events, in the climate of confession, Machinist had become very comfortable with his contempt for these people and for their business.
"If this was a golden opportunity yesterday," I asked, "how did Magellan become an object of our pity today?"
There was no suitable answer here, because practically nothing had changed. Magellan remained the same money-losing company (as did our company). The Internet remained the same nascent business. What had changed was that one of the players had faltered - had stepped out of character and panicked - and had stopped playing the game.
And so, for Machinist, the Magellan business became "a house of cards," a "shell game," a "fantasy land," a "reality problem."
Machinist said, "If Robertson Stephens hadn't bumped them in the winter ... Magellan's business after all, is no different than Excite, Yahoo!, Infoseek, Lycos."
"If that's true," I said, "then why are we so cool about the deal now?"
Machinist seemed genuinely to consider this, to comfortably acknowledge that the logic had a flaw. "We're not dealing with hard assets," he said. "We're not dealing with ordinary balance sheets. We're not dealing with businesses that you can analyze in any conventional sense. This is a real-life drama. There really will be winners and losers. The winners will win because they have great luck and because they're ... well, tough sons of bitches who manage to smile when their competitors get a quivering lip. Hayden and the Maxwells couldn't hold it together. Then they got sloppy. Weak. Wet." This was clearly revolting to him.
The market for technology stocks, and Internet issues especially, held in the air and then dropped dramatically, dizzyingly, over the next 60 days. There would be no more search engines to go public. There would be few Internet companies at all to try to "get out" over the next year.
"The window has closed," Machinist pronounced.
"What does that mean about Lehman?"
He thought my question was humorous, ironical.
Machinist stopped returning David Hayden's telephone calls. I made excuses for him; then I stopped returning Hayden's calls. The Maxwell sisters fired Hayden (which meant one of them was firing her husband). They then briefly tried to do another deal.
It failed. They then hired Hayden back. In distressed circumstances, Hayden sold Magellan to Excite, the Kleiner Perkins company that had kept Magellan from going public a year earlier.
Machinist moved on seamlessly. In his mind, the Magellan deal became something that he had always regarded as an unlikely possibility. Now, he simply dismissed it; it was not worthy of a second thought. I lingered on it, and felt guilty, too - for having wanted it too much, I suppose. I was worried that Machinist might see this, might see that I had taken it all so much more seriously than a real deal maker would. But if so, he didn't say anything.
He had other plans for me, big plans. He was going to make it happen, he said. We were going to hit the ball out of the park.
He had a new idea. We'd recruit a celebrity CEO. A Barksdale. Even better, a Jewish Barksdale. We could get an IPO out by end of year at the latest. I shouldn't have any doubts about that.
And I didn't.