Viewpoint : A $30-Million Loser in Las Vegas : Reflections on the Rigors of a Failed Takeover Bid
The lawyers and investment bankers don’t tell you about the emotional costs of a hostile takeover.
Having led an unsuccessful, three-month effort to acquire Caesars World, the Los Angeles-based casino-hotel company, I know what it’s like from personal experience. The random quality of the events led to sleepless nights, and days when my stomach ached and suppressed any longing for solid food. Later, when the financing fees mounted into tens of millions of dollars, I felt like a punchy heavyweight cut up half a dozen ways.
Between our initial tender offer for the company early in March and the expiration of our final offer in mid-June, Caesars Chairman Henry Gluck and I talked twice for about two minutes. A friendly deal would have saved us both tens of millions of dollars in interest payments annually. Unfortunately, in the real world, it’s power, not money, that governs many decisions.
Thought It Was Exercise
Why did I, a money manager, want to embroil myself in a leveraged buyout of Caesars after three years as a passive shareholder? Leave aside the anger and frustration from Gluck’s stiff-arming on the issue of board representation, keeping us out. In large part, it simply was because Caesars was doing well. Its revenue growth in Las Vegas had spurted to, in terms of annualized percentages, the mid-teens, double its historical performance.
The casino business is analogous to airlines, very profitable once fixed costs are covered. All the analysts had missed this, as did the managements. Nobody could explain why revenue growth on the Strip had spurted, but it had. New business from foreign high rollers seemed the best explanation, and Caesars was raking in the lion’s share of this.
Once enmeshed in the dialectics of winning Caesars, the economics of the deal began to fade into my subconscious. Marine Midland Bank’s senior man on the loan syndicate looked at me with a banker’s moose eyes.
From the beginning, the bankers had assumed I was playing just a rich man’s game. Everyone would make some fee money, and the banks would never be called on to fund the loans. Then the bankers saw something new: This guy might be for real. Loan commitments might actually be funded. Was the paper exercise about to turn into bricks and mortar?
Meanwhile, I got very busy interviewing ex-presidents of Caesars, heads of surveillance, accounting and auditing specialists and former gaming commissioners interested in high-echelon administrative jobs.
The paper chase was turning into real-world stuff. Weekends were chewed up interviewing retired captains of police and FBI officers, who knew all the scams playable on the casino floor and on the loading and unloading platforms for food and beverages. They knew how entertainment directors could cheat you on the floral displays they rented and how some guys had changed the weights on the Toledo scales in the money-counting room.
I had visions of tens of millions of dollars slipping through our fingers. I saw myself sleeping in the bowels of Caesars Palace until I knew every dark corner and corridor.
Several paid consultants with high-level gaming experience coalesced into an advisory group ready to step in the day we assumed control of Caesars’ properties if any of the managers resigned. I was totally energized by the impending reality of owning Caesars.
But on June 8, a federal judge blocked our tender offer on the grounds that it violated a Federal Reserve Board rule governing the financing of corporate takeovers. The nation’s securities distribution machinery had finally shut me down, I thought. The judge said if you want to fight it out in the marketplace, start all over again.
But that would have meant additional fees to the banks and institutional investors. It was a highly structured ballet that had cost me $30 million to produce.
Fees Would Have Soared
By the time Caesars finished with its investment bankers, the company’s overall fees would reach $50 million--a hefty chunk of the corporation’s net worth. Deeper pockets help the house win.
When my wife and I arrived in Nice, France, a few days later, my closest friend welcomed me and said: “I never saw you looking worse.”
For Henry Gluck and me, it was a fight for ultimate power. The economics of the deal governed the outer limits and the logistics of the fight. If I had a bigger dream than Caesars’ management and deeper pockets, I would have bid higher and won the company. It took Caesars people 9 1/2 hours to convince two of the three Nevada gaming control board members that their management plan was not too risky.
Gluck has to be sleeping restlessly. I forced a recapitalization that saddles his company with $1 billion of debt, re-creating Caesars with a negative net worth of more than $500 million. Future capital spending is squelched. There is little cash flow to build new palaces.
Next door to Caesars Palace, built 20 years ago, Golden Nugget is spending $500 million for a new pleasure dome. Who knows where the high rollers will play?
At the end, I felt like Hamlet being manipulated by Rosencrantz and Guildenstern, my head lawyer and investment banker. These were the hyperactive, middle-aged children who played intellectual gamesmanship, sleeplessly, with the country’s institutions. Their clients, the players, flexed their muscles and tried to win, or at least not lose.
Win what? I thought, the day after we ended our tender offer. I couldn’t stop thinking about the $30 million of expenses. I could have built a disciplined contemporary art collection or funded a hospital with state-of-the-art instrumentation.
No! I didn’t want to think about the $30 million. Hey, Caesar! I wanted to dream about nothing but what it would have been like to win.
