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Dan Grossman
(Photo: Vic and Dan at the former Jay Gould estate, Lyndhurst, N.Y., Sept. 2005)
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(address is not clickable)9/18/2005
Book Preview: How to Buy Companies, by
Daniel V. Grossman
Note from Victor Niederhoffer and Laurel Kenner: Dan Grossman, Esq., Victor Niederhoffer's business partner for four decades, has been working on a book about his acquisitions and other business deals and some deals of others that he has liked. "My general theme is how an ordinary guy, without sizable capital or the backing of a well-known financial institution, can accomplish deals with large public companies," Dan says. We are pleased to provide a preview chapter exclusive to readers of Daily Speculations, "A Deal I Wish I'd Done."
What was the best deal ever? When magazine articles ask this question, they usually cite such historic deals as the purchase of the Louisiana Territory from France, or the purchase of Alaska from Russia. The deal I nominate is not the Louisiana or Alaska purchase, and not Gibson Greetings or some other famous leveraged buyout. It is a transaction that even plugged-in dealmakers have probably never heard of. It is the buyout of the Spirits of St. Louis basketball team in the 1976 merger of the American Basketball Association and the National Basketball Association. The ten-year saga of the ABA from founding to merger was probably as close to pure frontier capitalism as one could get in late twentieth century America.The owners of the Spirits, Dan and Ozzi Silna, designated their partner Donald Schupak to negotiate with the other ABA owners the Spirits’ buyout price. The astuteness of Schupak’s approach was to focus on a form of payment currently being devalued by the other parties but still having exceptional future potential – NBA revenues from national television contracts.
In the first twenty years of payments, the cumulative amount received by the Silnas and Schupak totaled some $50 million. Not a bad return on the $800,000 in upfront cash given up in comparison with the Kentucky buyout deal. But $50 million was just the beginning. During the1990s, leading sports attractions became crucial to the television networks in building audiences for the remainder of their schedules and the networks were willing to forego all profit, even suffer losses, in order to outbid each other for multi-year football and basketball contracts. The NBA’s $2.6 billion television package negotiated in 1997 resulted in the revenue share of the Silnas and Schupak reaching a spectacular $13 million per year. And a new NBA television contract currently being negotiated will likely result in their receiving an additional increase in the near future.
To put this in perspective, there are only a few professional teams in any sport – in Major League Baseball, the National Football League or the NBA – that earn $13 million of bottom-line, pre-tax profit. And each of these teams must over an extended period invest many tens of millions to sign and develop players and win fan loyalty. The right to receive $13 million a year automatically, without the need to build a successful team, without the need for skilled management or an extensive organization, without the need for capital or risk-taking, is fantastically valuable. It is the equivalent of owning a senior bond issued by the NBA paying yearly interest of $13 million, with an added escalation feature that increases the interest pay-out as national television revenues grow. Depending on prevailing interest levels, such a bond would have a fair market value in the range of $200 million. Read the unabridged chapter
10/2/2005
Book Preview, 2nd Installment: How to Buy Companies, by
Daniel V. Grossman
Copyright © 2001 Daniel V. Grossman
Chapter Y: "The Perfect Deal"
On August 28, 2000, I sold my company, Indiana Precision, Inc., to the NYSE firm Kaydon Corporation for $10,300,000. Based on an original investment of $1,000, this was a gain of more than 1,000,000%.
These numbers would perhaps not be particularly impressive in Silicon Valley and other breeding grounds of the New Economy, where hundred million dollar or even billion dollar gains have become common (at least until recently). But $10,000,000 and a 1,000,000% gain on sale of an Old Economy machine shop in Crawfordsville, Indiana, may be considered, even in this New Economy age, worthy of some note and explanation.
...
In early April we were notified by Alcoa that we were among the bidders selected for the second round. New bids were due on May 15. Alcoa hinted to us that it needed a somewhat higher price than our original bid in order for it to avoid having to report a loss from the values at which it carried the West Plant and machinery on its books, although in keeping with its customary secretiveness Alcoa refused to reveal what its book values were. It also supplied a proposed form of Acquisition Agreement and Supply Agreement (covering Alcoa’s purchase of forming pins and prototypes), and we were asked as part of our bid to indicate any required changes. The agreements were for the most part devoid of legal commitment on Alcoa’s part, and read as if they had been prepared by a secretary copying haphazardly from other agreements in Alcoa’s legal files.
Now things were getting serious and I discussed the transaction with Victor, my 50-50 partner in Tridan. Victor is a speculator in stock futures contracts who sits in front of a trading screen all day (and most of the night). Although we were close friends since college, I rarely bothered Victor with transactions I was undertaking at Tridan. He actually would have preferred that I sell the entire company since he felt he could earn a far higher return on the money in his futures trading. But he did know a lot about acquisitions, having started his career as a leading business broker.
“That’s the stupidest acquisition I ever heard,” Victor commented amiably. “If Alcoa’s selling, they must be planning to phase those things out.”
“No, no, I looked into that. The next technology down the road is EDM, electronic discharge machining. I’m getting Alcoa to commit to buy the EDM pins from us if they switch over from the current forming pins.”
“You won’t make any money selling to them. They must know their costs.”
“I don’t think they do. There’s 50% Alcoa overhead in everything they manufacture. Paul O’Neill, their Chairman, has ordered them to save a billion dollars in costs and this is how Crawfordsville is complying. We’ll have practically no overhead, and we’ll make the 50% as profit.”
...
You would think an occasional attempt at levity would help, but this was not necessarily the case. During one frustrating negotiating session I finally said, “Okay, okay, Alcoa’s the 800-pound gorilla. Just tell me what you want here and I will do my best to accept.”
Having thought it over for a few minutes, one of the Alcoa participants then complained in a very hurt tone, “You called us a gorilla!”
“I meant a friendly gorilla. A lovable, friendly gorilla,” I said, realizing that even $100 billion companies have their sensitivities.