11:15
p.m., Monday, Feb. 16, 2004 -- John Zeglis, chief executive of AT&T
Wireless, sits next to me in the lobby of the Wachtell Lipton Rosen
& Katz law offices, 22 floors above Midtown Manhattan. He spins his
cell phone around in his hands and checks his watch. He is expecting a
call from Arun Sarin, CEO of Vodafone. Five hours earlier, Sarin had
been informed that his company had won the bidding for AT&T
Wireless, beating out Cingular with an offer of $14 per share. Since
that time, there has been silence, other than the scheduling of this
call, for which Sarin is now 15 minutes late. At the end of the hall,
behind a door and a security guard, sits our Board of Directors.
They've been cloistered in there for nearly 14 hours.
Suddenly, the phone in Zeglis' hand starts buzzing. He doesn't wait
for the second ring -- he's out of the chair, answering thickly, "Yes,
Arun." He takes the call on the other side of the lobby. The length of
the conversation, and Zeglis' body language, signal that Sarin isn't
calling to tell Zeglis to put the champagne on ice. The call ends
abruptly and Zeglis walks straight into the boardroom. A few minutes
later we get the news: Sarin had called to say he wasn't quite ready to
pull the trigger, and that the Vodafone board would be meeting at 8
a.m. London time to consider -- and hopefully approve -- the deal.
Trouble was, Cingular had already been told it had lost the bidding
war. Thus, after three months of intensive work and five days of
back-to-back deal negotiations with the two bidders, there was now a
foreboding that we might have nothing.
Within hours of that phone call, AT&T Wireless had been sold.
Not to Vodafone, but to Cingular, and at a price of nearly $47 billion
-- $3 billion more than the proposal Sarin planned to put in front of
the Vodafone board that morning. The events of that evening were the
culmination of the months-long effort to auction off AT&T Wireless,
a process that began in secrecy and ended in a blaze of news coverage
as an initial field of half a dozen potential buyers from around the
globe was winnowed to two finalists and finally a winner. The
high-stakes contest featured a bevy of veteran wireless dealmakers --
many of whom had sat across from each other repeatedly over the
preceding two decades as they structured the sales, swaps and joint
ventures that built the industry -- negotiating, bluffing and otherwise
jostling for position as they had been doing for years, though never on
quite this scale. This is my story from the inside of the deal -- not
the CEO-level price negotiations, but the mechanics of the dealmaking
process that led to the largest cash transaction in history.
At the beginning of December, 2003, I had been with AT&T
Wireless (AWE) for about three years, having moved to the company's
Redmond, Wash., headquarters after AWE acquired my prior company,
Cellular One of San Francisco, in 2000. While the first few years of
this decade were a horrible period for telecom, I was having a great
time professionally. I'd been made vice president for corporate
development, with responsibility for merger integration and much of
AWE's M&A activity. Besides M&A, our corporate development team
also managed the company's strategic alliances, partnerships, spectrum
portfolio and investments, as well as running our $1 billion per year
roaming business. Leading the group was senior vice president of
corporate development Bob Stokes, whom I had known since my first days
in wireless in the mid-1990s, when Stokes was running his own midsized
Seattle law firm. An unusual personality to find in a senior leadership
role, Stokes combines a rare erudition (he tosses off jovial insults in
Latin) with a love of practical jokes, such as reprogramming any
unattended cell phones so they read out in Cyrillic. He kept the
department fun and unpredictable. He also gave me tremendous latitude
in doing my job, and as 2003 was coming to a close I was looking
forward to another year of working with him and the rest of the 20 or
so people on our team to expand the company's geographic reach and grow
our roaming business.
Unfortunately, things were less rosy for the company as a whole. In
October 2003, we'd released third-quarter numbers that were below
expectations, and AWE stock sank 15%. We were treading water at around
$6.50 a share, and more bad news loomed. A major billing system
conversion was grinding away in the fourth quarter, and it seemed to be
going wrong at every turn, with significant impact on millions of our
customers. In January 2004, cellular customers would, for the first
time, be able to take their phone numbers with them when changing
carriers, and we were the consensus pick to be the company to suffer
the most from this change. Our multi-year technology conversion from
the older digital TDMA standard to the GSM digital standard had reached
an awkward point at the 2003 holiday season, with the TDMA system
lacking cutting-edge handsets and our GSM network not widespread enough
to enable us to challenge our rivals for coverage or reliability. Thus,
what had once been the top wireless company in the U.S. had been
overtaken by Verizon, Cingular and even a resurgent Nextel -- and at a
time when the need for consolidation in the U.S. wireless market was
increasingly obvious.
At the start of December, I got word that a project code-named
"Capital" had begun and that I would be deeply involved with it. Over
the previous two years, we had been involved in a number of
consolidation discussions where we would have been the acquirer. Now we
were the ones on the block. As a deal guy, I was excited about working
on such a major transaction, but I knew that it would change everything
inside the company.
As I'd learned three years earlier when Cellular One of San
Francisco sold, the sale of one's employer creates a strange emptiness
where all the forward-looking, business-building effort used to be.
People get very concerned about their jobs and their futures, even in
the face of bigger and more exciting roles with the new company. The
identity of the eventual buyer (see box, page 23) would greatly color
the mood of my co-workers and direct reports. The conventional wisdom
was that a foreign buyer such as Vodafone or DoCoMo would need to keep
much of the AWE headquarters staff in place, unlike a domestic
consolidator such as Cingular. The truth, of course, was somewhat more
complex -- when Vodafone bought San Francisco-based AirTouch, I
witnessed firsthand the British company's efficiency in eliminating
positions. And for Cingular, the sheer magnitude of the integration
effort, sure to stretch over several years, would necessitate keeping
much of the legacy staff in place. Despite these facts, and the widely
held view that a merger with Cingular would be best for the company and
the industry, most of my co-workers found the prospect of joining with
a foreign acquirer more appealing. Truth be told, I often felt the same
way as the process unfolded. It had less to do with logic than emotions
-- it's hard at first to feel enthusiastic about the prospect of
selling to a company you have spent years competing fiercely against.
Those feelings would become more apparent as the process moved
forward. But in the first, quiet month hardly anyone even knew about
the sale. I was charged with maintaining our NDA list, and we hewed to
it with religious fervor. With discussions between AWE and potential
bidders taking place at only the highest levels, we were able to keep
the list surprisingly short -- no more than a dozen people out of a
company of 30,000.
My first task during this period was to work with our bankers at
Merrill Lynch & Co. on materials for our Board of Directors about
the process and potential outcomes. A key issue was how to present the
various acquisition scenarios. It was straightforward enough to pick a
straw-man acquisition structure for each potential buyer, based largely
on balance-sheet flexibility. A more fundamental question was the AWE
stock price to use in each illustration. We had to pick something,
since we needed a number to illustrate how each deal would work in
terms of cash-equity mix and impact on the buyer. With AWE shares
trading below $7, there was some concern that the number we chose --
$12 per share -- might set expectations too high. We ultimately went
with it, but our reluctance to do so was a telling reminder of the
parade of problems the company was up against at the time.
At this same time, Zeglis and our bankers had been having high-level
discussions with a number of the potential buyers. Most of these were
preliminary, but as December wore on, we moved into more advanced talks
with Nextel, which added a sense of urgency to the discussions with the
others. Two years earlier, Nextel had been on the brink of bankruptcy,
but they had made it back so far and so fast that they could put
together a compelling case for acquiring AWE, despite our being
considerably larger in subscribers and revenue. As they began to get
serious about putting in an offer, their information requests started
flowing, funneled through me. I would then call people I knew
throughout the company, working in a low-key way to get the data. At
first, this wasn't much of an issue -- it wasn't unusual for me to call
my contacts in marketing or finance with requests for information and
not be able to disclose its use.
By early January, some of the other potential bidders started moving
in, obviously sensing that we were "in play" and that the time for
preliminaries was over. First was NTT DoCoMo, the Japanese mobile phone
giant that about three years earlier had invested $10 billion in AWE --
which would greatly complicate the sale (see sidebar, page 24).
Vodafone and Cingular quickly followed DoCoMo, and all three started
talking to me directly as the diligence process began in earnest. With
all the requests streaming in, I pleaded for assistance and was able to
get Dave Selzer, an analyst on our team, cleared to help me. I also had
to get several key folks in finance, marketing and engineering clued in
so the more in-depth requests could be run down. Selzer had been dying
to work on the project -- despite not being under NDA, he knew exactly
what was going on by my inability to tell him what I was working on. He
jumped right in, and I quickly dubbed him the "golden shovel" for his
ability to unearth information from all corners of the organization.
| The contenders |
| When
AT&T Wireless went on the block in late 2003, there were half a
dozen potential buyers, ranging from longshots like Telefonica to
Cingular, the eventual winner, and Vodafone, the runner-up |
|
Contender |
Description |
If successful |
Obstacles |
|
|
A
JV of SBC and BellSouth, Cingular was the No. 2 U.S. wireless carrier.
Despite a strong retail image, Cingular was spectrum-constrained and
could not compete with industry leader Verizon for enterprise sales. |
Would make Cingular the largest carrier, with a deep spectrum position and a top business sales force |
• Antitrust concerns
• Past inability of SBC and BLS to act quickly and decisively |
|
|
DoCoMo is the largest carrier in Japan; owned 16% of AWE. |
Would expand to U.S. market and have the ability to dictate speed and tenor of advanced service product launches |
• No meaningful synergies
• Uncertain U.S. demand for 3G service |
|
|
The
No. 6 U.S. wireless carrier, Nextel had stellar operating results but
lacked the size, technology or spectrum resources to roll out future
services. |
Would be second-largest carrier, with most of the pieces to move to advanced services |
• Balance sheet constraints
• Technology migration probably not Nextel's ideal path |
|
|
The
No. 5 U.S. wireless carrier, T-Mobile shared AWE's technology standard
and did well with consumer sales, but lacked spectrum and scale to grow. |
Would be second-largest carrier with lots of spectrum and a relatively easy technology conversion |
• Balance sheet constraints |
|
|
Telefónica is a large mobile carrier in Spain and South America. |
Would expand brand to North America |
• No meaningful synergies
• Additional transaction likely needed to gain scale |
|
|
Largest international carrier, Vodafone is based in England; with global operations owns 40% of Verizon Wireless. |
Would give Vodafone the ability to bring its brand to the U.S. |
• Shareholder approval
• Lack of meaningful synergies |
|
Source: Josh King, The Deal |
Jan. 12
DoCoMo pays its first in-person diligence visit to our corporate HQ
in Redmond, Wash. I had been told it was to be high level, quite
preliminary, and should be kept very hush-hush. Stokes felt that for
this first meeting, we shouldn't even involve our local Seattle
counsel. I booked a two-bedroom suite at the Residence Inn, located on
the other side of the Redmond Town Center, the mixed office and retail
center housing our campus. Two days before the meeting, I received a
call from my DoCoMo contact while driving home from work. In halting
English she confirmed the time she would be arriving, but didn't
provide details on how many DoCoMo people would visit.
DoCoMo had provided a brief diligence list, primarily focusing on
our technology and network performance. Selzer and I pulled together a
set of binders with as much responsive information as we'd been able to
track down, as well as some custom reports we'd talked our friends in
engineering into creating. All together, the binders occupied a single
bankers' box. On the morning the diligence session was to begin, we
loaded the binders, along with several cases of sodas, bottled water
and snacks, into my truck and drove them over to the Residence Inn. We
loaded the fridge and left the box of binders on the table. With two
couches, two work tables and a dining-room table, I figured the room
would be big enough for any high-level business diligence session.
That afternoon, the DoCoMo folks arrived, accompanied by their
bankers from Goldman Sachs. We met at the DoCoMo offices in Redmond
Town Center (who knew DoCoMo had offices practically on top of ours?)
and walked over to the data room. Two bankers, three DoCoMo reps --
pretty much as I'd expected. We tried uncomfortably to make small talk
through the language barrier as we rode the elevator up to the suite.
As we walked in, I could tell the DoCoMo reps were puzzled. They
clustered by the door, looking around at the patterned wallpaper. Cheri
Davison, the senior Goldman banker, turned and told me that the room
was "completely unacceptable." DoCoMo, she said, had brought a "full
diligence team," of which these three were only a small part. There was
absolutely no way they could conduct their diligence in this room. With
that, they turned and left.
As it turned out, the Goldman people had just been retained, which
explained why they hadn't directly coordinated the visit with me. By
later that afternoon, the DoCoMo reps were ensconced in the ballroom of
the Hyatt in Bellevue, five miles away. When Selzer and I stopped in
that evening to check on them and answer any questions, we discovered
that their "high level business diligence team" consisted of at least
30 people, all working feverishly with the scant set of documents I had
provided. A portable copier was set up in the corner, from which they
were generating additional copies of the binders so all 30 could have
access, and a cluster of the DoCoMo people quickly formed around
Selzer, who had brought a few additional engineering reports. Well, at
least one buyer was taking the process very seriously. As for Davison,
she and I have worked together since the deal and had a good laugh
about this diligence debacle.
Jan. 14
Rumors started popping up on Bloomberg and The Wall Street Journal
last night, and AWE stock spikes 17% today, reaching nearly $10 per
share. The word internally is that at least one bidder has put in a
formal offer, but the interest level among the bidders is high enough
that we are moving forward with a formal auction process. I continue to
work head-down with the DoCoMo reps, chaperoning meetings between our
executives and the DoCoMo team. As a gesture of good faith, I allow
DoCoMo to take soft copies of many of the diligence documents so the
larger(!) team back in Japan can also review them. I present these on a
thumb drive, still something of a novelty in early 2004, and receive it
back reverently, with a bow. I feel like I've provided them very little
useful information relative to the size of their team, but they seem
genuinely pleased with what they got.
Jan. 16
Cingular has started their diligence process in earnest, and
Vodafone, Deutsche Telekom and Nextel are talking about scheduling
diligence visits. Where DoCoMo was almost exclusively focused on
technical and engineering matters, Cingular has sent over a lengthy
diligence list covering just about everything imaginable. As Cingular
is an independently operated JV with two telecom parents (SBC and
BellSouth), the list is an amalgam of all three parties' inputs -- some
requests are clear and narrowly tailored; others are repetitive or
incredibly broad. I tell Cingular's bankers at Citi that we can provide
everything they need to do their synergies analysis, but we can't
necessarily do it three different ways to satisfy everyone. I hear
sighs at the other end of the line -- it's obviously not easy managing
a three-headed client.
I meet with our lawyers and bankers and we devise an updated plan
for managing due diligence requests. Since we've got as many as five
groups coming in and the rumors of our sale are swirling, we expand the
circle of people involved. While the NDA list within the company
remains quite small, it is growing and we decide to bring in our local
counsel at Perkins Coie in Seattle. I give some thought to creating an
electronic data room, but it seems too time-consuming to set up given
how fast things are moving (I'll quickly regret that decision, as I
spend hours every day coordinating the flow of documents). We decide on
two data rooms to accommodate all of the groups -- one at Wachtell in
New York, and one at Perkins in Seattle.
As it turns out, we still have diligence files in Seattle from a
debt offering we'd done in 2003. From my perspective, these mountains
of documents aren't very helpful in assessing whether -- and at what
price -- to buy the company, but Cingular wants to see them, so they
become the centerpiece of the data room. Perkins copies a set and sends
it to Wachtell to seed their data room, and we're off. A bonus of all
this background material is that it occupies the bidders for several
days while I track down the stuff that seems far more useful -- current
operating results and supporting data. We start scheduling visits to
the data rooms, making sure there is no overlap. It's fun to be able to
tell a bidder that they'll have to return for a second session since
another bidder will be coming in later that week -- it reinforces the
message that the auction process is very active, with several serious
participants.
Jan. 21
Over the last week, I've been on the phone constantly with Merrill
and Wachtell, coordinating the flow of information to the data rooms.
For now, we are allowing almost no copying or electronic versions. No
one seems to mind too much except Cingular's lawyers, who at one point
resort to bringing a court reporter into the Wachtell data room. Their
Eddie Haskell-style defense ("Gee whiz, we're just taking notes!") is
entertaining, but we give the court reporter the boot.
Underlying this diligence-communication process is a worst-case fear
-- that Cingular will lose the auction, then sue us on the theory that
we favored other bidders unfairly. It's a reasonable fear -- although
most of us believe Cingular can justify paying the highest price, and
we know Cingular needs to buy us more desperately than the other
bidders, our history with Cingular has shown that its two owners are
not always able to make quick decisions. It's not hard for us to
imagine them stumbling in the final stages and then looking for bias in
the way we ran the process.
To guard against even the appearance of doing this, every single
document sent out of the company in response to a data request --
whether it comes off an official list or via follow-up to an informal
phone call with a bidder -- goes via e-mail from me to the data rooms,
where it is available to all bidders. I also sit in on every call or
meeting and take many of the diligence calls myself as the AWE
representative. We maintain this rigor throughout the process, making
me a one-man choke point for data out of the company, which ensures all
the bidders are getting the same data but also ensures that I'm working
around the clock.
One amusing result of this -- which I exploit in every discussion
with bankers for the bidders -- is that much of the material in the
data room has been requested not by their clients, but by their
clients' rivals. Like any big corporation, AWE captures voluminous
amounts of data about its operations. Custom reports can also be
created out of our data warehouse, and in response to specific
diligence requests we are creating many such custom reports. Every day,
I talk to bidders' bankers, providing them updates on new material
added to the data rooms and the status of open requests. Naturally, I
give special emphasis to material requested by other bidders, and note
where something requested by another bidder largely fills one of their
requests.
Jan. 22
We finally announce publicly that we are engaged in an auction
process, and that bids are due Feb. 13. This makes it far easier for me
to pry information out of its internal repositories, and enables us to
get a bunch of people in finance and marketing working full time on
responding to data requests. It also puts the story on the evening news
and the front page of the Seattle Times, and kicks the hallway
discussions about job losses into high gear. Selzer and I are walking
out of our building to lunch when a reporter stops us, wanting our
opinion on the likely sale and potential for job losses. We laugh at
the fact that she chanced to approach the two people coming out of the
building who really are in the thick of the process, but Selzer tells
her that we can't talk. All the same, and despite having so much work
that we can't spend much time dwelling on it, both Selzer and I know
that any sale will bring job losses, most likely including ours. While
my outlook on that is essentially upbeat -- there will be plenty of
time to figure out what to do next, and I've already experienced
firsthand the opportunities a merger can create -- that doesn't prevent
the occasional cloud of concern.
Jan. 24
DoCoMo has, thankfully, retreated a bit to digest everything it has
learned, just as Vodafone has really cranked up its diligence process.
Our senior management meets with Vodafone in New York for a reverse
diligence dog-and-pony show and comes back starry-eyed over what they
obviously consider a really well-run wireless company.
Jan. 28
A typical day. There's a 7 a.m. call with Vodafone (4 p.m. London
time), all day diligence calls and information
gathering/scrubbing/sending to data room, in-person meetings with
Cingular engineering staff, and a 7:30 p.m. call with DoCoMo (10:30
a.m. Tokyo time). The patterns of diligence are markedly different.
DoCoMo is hyper-focused on engineering details, is only now getting
into financial info and uses an army of lower-level folks to conduct
their review. In contrast, Vodafone seems to have an uncanny knack for
homing in on our hot-button issues, often getting their highest-level
people on to calls with our senior executives to ask very pointed
questions about our billing system conversion problems, increased
churn, exposure to number portability and digital migration issues.
Cingular takes a middle course, conducting diligence by the book and
making the management meetings more of a lovefest, with pleasantries
and softball questions.
In addition to insisting that all outgoing information come
exclusively from me, Marilyn Wasser, our corporate secretary and a
veteran of many of these processes while at AT&T, has asked that I
minimize the number of diligence calls involving our senior executives.
Besides the fact that these are busy people with a business to run,
there's another reason to keep them off the calls: Most of the calls
involve reviews of diligence documents and specific questions about
those documents, and the functional EVP may well have never seen the
documents. It simply makes more sense for me to take the calls and
bring in subject matter experts from the function as necessary.
However, this format presents a problem when it comes to Vodafone,
since they've got senior executives posing the detailed questions --
and these folks expect to be speaking to their counterparts. So, on
this morning we are talking with the head of global HR for Vodafone,
Phil Williams. The topics will include executive compensation and
stock-based compensation, so Wasser is joining as the subject matter
expert for these topics. She's in New Jersey and running late for the
call, so I try to make small talk with Williams. He is understandably
nonplussed that he is having to talk with a lawyer and a corporate
development guy instead of our head of HR.
Wasser, who talks quite fast and sometimes has a slight tendency to
the pedantic, finally joins the call. She begins to tell Williams about
the unique aspects of regulatory review of deals in the United States,
the potential pitfalls and what it takes to get approval. Williams, in
a classic display of British restraint, mentions that he has been with
Vodafone since its inception in the 1980s and has worked through
(ahem!) several deals along the way, including one in the United States
(Vodafone's $55 billion acquisition of AirTouch in 1999). It's a good
thing I've got my phone on mute.
Jan. 29
I've set up a meeting for late tomorrow morning in New York with our
President, Michael Keith, CFO Joe McCabe and their counterparts at SBC,
BellSouth and Cingular. I'm all set to fly back with Keith and McCabe
on the corporate plane when I get word that Vodafone wants to have a
call tomorrow for their head of marketing to go over our sales and
marketing results and issues. This is a call that I have to field, so I
phone flight ops and cancel my seat on the plane, figuring I'll just
call in for the Cingular meeting. At around 6:30 p.m., I get a call
from McCabe -- the plane lost power in an engine and had to make an
emergency landing in Bozeman, Mont. McCabe sounds totally relaxed and
brushes it off as no big deal (I get a more harrowing account from
Keith later), but there's no way they can get to Midtown Manhattan from
Bozeman any time before early evening tomorrow.
I have to cancel tomorrow's meeting. Problem is, it's nearly 10 p.m.
on the East Coast, and the Cingular, SBC and BellSouth people are all
leaving for New York first thing in the morning. I try all of the
Cingular bankers, but can't raise any of them. I leave messages
everywhere, and finally track down Steve McGaw, Cingular's head of corp
dev, at his home in Atlanta. He finds the bankers, and we have a call
to try to figure out how to handle the meeting. One of the bankers
whips out a flight schedule and helpfully comes up with a way that
McCabe and Keith might be able to land at JFK by about 3 p.m. I point
out that it might not be the best meeting possible if McCabe and Keith
have spent the whole day racing to make connections and beat traffic,
on top of the stress of having a forced landing the day before. I tell
them it will work only if they want to send one of their corporate jets
out to Montana to pick my guys up. McGaw decides the meeting can be
postponed.
Feb. 4
We finally take the McCabe-Keith meeting with Cingular by telephone.
Compared with the grilling I took from Vodafone's marketing guy four
days earlier, this is a cakewalk. Lots of genteel pleasantries, easy
questions about technology evolution and a few balance sheet items.
I've come to the conclusion that these senior-level management
meetings are a necessary ritual of diligence, but probably not very
useful for the buyers. By this point, I am e-mailing most of the
follow-up diligence items directly to all of the bidders rather than
sending them to the data rooms. This proves to be an even more
effective illustration of just how active the process is, as each
bidder is now regularly getting messages, unbidden, containing
documents not requested by them but by other bidders.
Besides the meetings and follow-up diligence requests, much of my
attention is now shifting to preparation of the merger agreements.
Wachtell has prepared drafts for the likely bidders, which appears to
be a shortening list. Telefónica never went through diligence, and
Deutsche dropped out early. Nextel seems done with diligence, but we
can't tell if they plan to bid.
I work with the Wachtell lawyers to ensure that the agreements
include those things we've learned about ourselves during diligence,
and make sure our internal legal folks are getting all of the
information into the schedules for the agreement. Besides listings and
descriptions of material contracts, these include descriptions of
material litigation, intellectual property rights and a host of other
items we want to make sure all of the buyers are on notice of prior to
signing the agreement.
Feb. 12
I fly out to New York, the five hours on the plane the most time
alone I've had in six weeks. In the cab from the airport I immediately
get on a call with Vodafone, which doesn't end until right before I get
to my hotel. There are nine of us in town to do the deal -- three from
corporate development (me, Stokes and Mark Bradner, another VP in our
group), three lawyers (Wasser; our general counsel, Greg Landis; and
Ben Stephens, our securities lawyer), and three senior executives
(Zeglis, McCabe and Lew Chakrin, our head of strategy). Our EVP of
public relations will arrive over the weekend. Despite the turmoil and
hectic pace of everything we're doing, I manage to have a surprisingly
relaxed dinner with Stokes, Chakrin and Bradner. This will turn out to
be my only restaurant meal in five days in New York.
Feb. 13
Bid day! I'm coordinating the last diligence requests from
Wachtell's offices and getting the merger agreements in shape. DoCoMo
has gone silent on diligence in the last day or so, and it looks like
they might be backing out. There is much anticipation in the air as the
5 p.m. bid deadline approaches. I'm getting lots of calls from
Redmond's 425 area code as folks are looking for information, but I'm
not taking any of the calls. Five p.m. comes and goes -- no bids. There
is some nervous pacing in the halls. Most of us are in a larger corner
conference room, but Wasser, Landis, Chakrin, Zeglis and McCabe have
taken a small room down the hall to review the bids. By 7 p.m. bids are
in from Vodafone and Cingular. While the exact amount of the bids is
being kept to the core group of senior executives in an attempt to
avoid leaks, I can tell from their attitudes that they are happy
indeed.
We have meetings with the Cingular and Vodafone groups that night to
begin negotiating the definitive agreements -- we had sent the drafts
to them two weeks earlier and have already had some comments back, so
we are expecting to make meaningful progress. Our plan is to run the
groups in back-to-back, thus negotiating two merger agreements at the
same time. Steve Rosenblum and Stephanie Seligman are our primary
Wachtell lawyers. Stokes is on point to negotiate deal structure
issues, I'm negotiating reps, warranties and covenants, Bradner is
working on antitrust issues for the Cingular deal, we've flown in two
lawyers from Freshfields in London to advise on shareholder voting
issues in the Vodafone deal, Stephens is working on securities issues,
and Wachtell subject matter expert attorneys for employee benefits and
tax are also on board. While we hammer out the definitive agreements,
the senior executive group is dealing with the board and working with
our bankers on the bidding process, which is to continue through the
weekend in concert with negotiating the definitive agreements.
Feb. 14
By the middle of the day, any pretense of keeping the bid amounts to
the core group is gone. All of the AWE folks, as well as the Wachtell
lawyers, know where things stand: Cingular is at $12.50 and Vodafone is
close, but a bit higher. The negotiations of the definitive agreements
have started with meetings that could not be more different. Our first
meeting, with Vodafone, is very cordial -- just their American lawyers
and bankers, along with Charles Butterworth, their English corporate
development guy. We spend some time walking through the agreement, with
no dust-ups. Cingular is a different story. They fill an entire side of
Wachtell's conference room, with several lawyers for each of SBC and
BellSouth, corp dev guys from both, and -- leading the negotiations --
SBC's Wayne Watts. Sitting at the end of the table is McGaw, the lone
Cingular representative. Watts, a no-nonsense Texas lawyer who had led
much of SBC's furious growth through acquisitions over the previous
decade, cuts right to the chase with a long speech about the
divestiture provisions we've proposed. We know that the FCC and DOJ
will impose conditions on the merger, including divestitures and
potentially onerous operating conditions. The issue, essentially, is
how many divestitures and conditions should Cingular and its parents be
obligated to accept before they have the option of walking from the
deal? Watts seems to be arguing that any conditions the DOJ imposes on
the parent companies should be grounds for them to terminate the
merger. Landis, typically friendly and patient, practically explodes,
threatening to walk out of the room. Stokes then addresses Watts'
points in his trademark calm, deliberative way; this seems to just rile
up the SBC and BellSouth people. There's a lot of history -- on both
sides of the table -- so it's not surprising we're off to a rocky start.
After a considerable amount of acrimonious back-and-forth, we move
on, the issue unresolved. We start talking about operating covenants,
where I've asked that we retain the right to increase our borrowing by
up to $2 billion during the period from signing to closing. I explain
that we need to retain flexibility and can't take the risk of being
choked for cash during the 9-to-12 month wait for the merger to close.
Where Vodafone had simply accepted this point, one of the SBC lawyers
practically pounds his fist on the table as he says that we're asking
them to buy a pig in a poke. And so it goes, for several hours.
Feb. 15
We've had numerous sessions, dragging well into the early morning
hours. Each night I slip across the street to the Hilton for three to
four hours of sleep, and then it's back to the CBS building, where
Wachtell's offices are housed. Wachtell is catered pretty much around
the clock, so one need never leave to get nourishment. From bagels in
the morning to milk shakes at 2 a.m., there's no shortage of food. It
pales a bit, however, as you look out the 22nd-floor windows at sundown
at the bustle of activity in Midtown Manhattan -- one of the world's
fine-dining meccas -- and eat another forkful of takeout manicotti.
In between negotiating sessions, I'm spending every waking minute
working with the lawyers to fine-tune language in the agreements and
coordinating with people in Redmond to finish the schedules, those
cumbersome addenda to every deal that contain the exceptions to the
reps and warranties, lists of material agreements, and in our case,
most of the "baskets" of financing and M&A activity we can do while
waiting to close. There's also work with the specialized lawyers on the
employee matters and tax sections, which Stephens and I are largely
handling in phone calls between the in-person negotiating sessions.
During one of these, Stokes saunters in while I am discussing some
arcane point with one of the bidder's counsel on the other end of the
line. I don't notice at first that Stokes has taken my BlackBerry.
Catching him out of the corner of my eye, I abruptly cut off the
discussion to take it back -- he'd gotten halfway through writing an
e-mail (from me, it being my device) to Landis telling him, in fairly
obscene terms, what a jerk he is. As Stokes and Landis are good
friends, he might well have sent it and explained later to Landis that
it was a joke, leaving me to wonder why my relations with Greg had
suddenly gone sour. I resolve to keep my BlackBerry as well as my phone
(for which I've had to memorize the numerical sequence to switch back
to English display from whatever foreign language it is reading out in)
far from Stokes' grasp.
Though we're trying to keep the two agreements largely in line,
there are some fundamental divergences. While the bankers and our
senior leaders are working on extracting the best price, the primary
charge for those of us negotiating the documents is to create deals
that have the best chance of actually closing in the shortest possible
time. Among other things, this means giving the seller as few
opportunities as possible to back out of the deal after it is signed.
Unfortunately, there are two major items we can do very little to
control, and they are different for each bidder. In the case of
Cingular, our fear is that the FCC and/or DOJ will not approve the
merger, or will do so only on such onerous conditions that the merger
no longer makes sense for Cingular. A merger with Cingular would be the
largest domestic wireless deal ever, creating concentrations of
customers in many large markets. Furthermore, it would result in an
aggregation of cellular spectrum in such markets as Los Angeles, Dallas
and Miami that, until two years previously, was specifically barred by
the FCC.
While the Vodafone deal is also subject to regulatory approval,
there are no real concerns there -- Vodafone would be selling its
interest in Verizon Wireless as part of the deal, and thus there would
be no overlaps. Rather, the concern with Vodafone is that the deal
requires the approval of Vodafone's shareholders -- and according to
news reports, Vodafone shareholders are increasingly unhappy about the
price the company would have to pay to acquire our less-than-prime
asset.
For Cingular, we can negotiate a basket of antitrust divestitures
and hope it is big enough, and for Vodafone we can insist that the
shareholder vote occur as soon as possible. In either case there is a
major uncertainty between signing and closing that is beyond our
control, but on balance, we feel slightly better about the certainty of
closing with Vodafone.
Two additional developments today bring things closer to Vodafone:
First, Cingular puts out an informal feeler about amending its pricing
proposal by adding a $500 payout to every employee on closing. We're
not sure why they've made this change; on a deal that's sure to exceed
$40 billion, this is an increase of only $15M, or far less than one
penny per share. Worse, it would create at least the appearance of
impropriety for us to accept an incentive to management and employees
rather than more consideration for the shareholders. Stephens and I
quickly label this overture the "turkey," in homage to the frozen birds
some companies give out during the holidays in lieu of a bonus. It
doesn't do much to improve Cingular's standing in the bidding.
Second, and more importantly, Vodafone finally concedes to our MAE
(material adverse effect) language. The MAE clause is the language,
found in any merger agreement, that lets the buyer walk if things
materially change for the worse in the target's business between
signing and closing. While these clauses are rarely exercised (a
notable exception being Johnson & Johnson's abortive $25 billion
merger with Guidant in 2005) and typically exclude matters that affect
the industry generally, we had enough concerns about the mounting
problems in our business that we insisted upon an ironclad MAE clause.
In the end, Wasser came up with a beauty, causing no end of angst
amongst both buyers. Along with the usual list of exceptions, it also
spelled out every problem or potential problem that we had discussed
with them and excluded it from being considered the basis for a MAE.
While there had been considerable back and forth on the issue, we had
held firm, and today Vodafone agreed to the clause in a call to
Rosenblum. In our next negotiating session with Cingular, when the
topic of the MAE comes up and Watts begins to object, Rosenblum cuts
him off by simply saying, "That's no longer market for this deal." This
being one of the most critical issues to us, Watts knows that not
meeting Vodafone's position likely means losing the deal. It takes them
another 12 hours, but ultimately Cingular concedes the point.
However, as the night gets later, the Vodafone veneer
begins to wear off. First, I hear that they've called and want more
protections on issues related to DoCoMo's 16% interest in AWE and
potential to put that interest back. They confirm as much when they
show up for a midnight negotiating session, and then proceed to
re-trade on a number of items in the operating covenants that they had
agreed to a day earlier. Stokes and I have a call at 5 a.m. with
Butterworth; he tells us Sarin has overruled him on the operating
covenants. "I've had my horns clipped," he says wearily.
Feb. 16
I've only had a couple of hours of sleep, but I'm energized -- today
should be the day we get the deal done. Throughout the morning, we work
things out with Vodafone. I concede on a few operating matters so they
conform to what I've already given Cingular (which until now has been
far more focused on interim operations than Vodafone), and Vodafone
gets over their DoCoMo put fears. By midafternoon we've gone back to
both parties for best-and-final bids, and they are both at $14 per
share. Given the balance of risks to closing (antitrust review for
Cingular, shareholder vote for Vodafone), things look to be going
Vodafone's way.
The Board of Directors has been assembled in the corner conference
room in which we've held most of the Vodafone negotiations. A security
guard is posted at the entrance. There will be no in-person
negotiations today, but I seem to be on a never-ending series of calls
to resolve some last-minute details in both the Vodafone and Cingular
agreements and schedules. Around 6 p.m., Lew Chakrin tells me that the
board has just chosen the Vodafone deal and Arun Sarin has been told
his company has come out on top. With the help of the Wachtell folks I
start assembling the Vodafone agreements for signature in the other
large conference room. I shove the Cingular documents out of the way to
make room. Around 7, I get a call from Watts and the rest of the
Cingular team; there are a number of open issues left in their
agreement they want to get nailed down, primarily items I've told them
"no" on. They're ready to concede on most of them; the rest they have
compromise positions on. None of it is a problem, but I barely make
cursory notes on my laptop before I return to the task of getting
things ready for Vodafone. I tell Watts I'll send him a redline later
that evening.
By 8 p.m. everything is ready, but there is no word from Vodafone.
Stokes, who has been going nonstop for weeks, is curled up in a fetal
position, asleep in one of the phone rooms that line the hall. Stephens
is half-heartedly reviewing draft PR materials, and I take my notes
out, make the changes in the Cingular agreement and send the new draft
to Watts. I figure it's just a formality. I don't even bother printing
it out.
We expect the Vodafone people to come over any minute -- everything
is ready, and Chakrin emerges to tell me that Cingular has been told
they've lost the auction. I take a 20-minute walk to Central Park in
the bitter cold, just to get some fresh air. By 9, the board is getting
antsy as their fine-dining options for the evening start to evaporate
and the prospect of a second meal at Wachtell sinks in, but Wasser
won't let them go until the deal is signed. And so we wait some more. I
take some time to talk to Selzer in Redmond; it's a quasi-holiday
(President's Day), but everyone is in the office, anxiously following
the rumors that are floating in the news. Many of these are indicating
that we are selling to Vodafone, but have the price wrong, at $14.50. I
feel bad for Selzer, but I can't tell him anything about where we are.
I do, however, repeat the caveat that I've mentioned every time a
fellow employee has gushed about how great it would be if Vodafone won
the auction: Yes, it's a wonderful company, but when Vodafone bought
AirTouch, a number of the AirTouch people I worked with -- and not just
the senior people -- had pink slips in hand on the day of closing.
The next few hours pass slowly, as I move from the catering table to
the chairs in the lobby and back again. We're not sure why Vodafone
hasn't come over to sign the documents -- they've been told they've won
the auction. Zeglis tells me that he's got a call scheduled with Arun
at 11 p.m., and Stephens and I take some time to go over the next day's
draft press materials. One draft makes a reference to AWE having
changed its identity more times than Madonna; this incites a laughing
fit that has as much to do with exhaustion as the quality of the joke.
And so arrives the call from Sarin to Zeglis, 15 agonizing minutes
late, and the news that the deal awaits Vodafone board approval the
next morning in London. Is this a perfunctory step, or are we being
strung along? We can't even be sure we have a deal anymore; news
reports have been swirling all day about unhappiness amongst Vodafone
shareholders over the price of the deal. I sit dazed, confused by the
fact that I suddenly have nothing to do after days of nonstop deal
negotiation and document prep. With the others, I continue to try to
read the paper, make jokes, pace, eat and wait. I take some time to
reassemble the Cingular documents, which were shoved aside hours ago in
anticipation of a Vodafone signing.
Suddenly, Rosenblum races up the stairs and sprints into the
boardroom. Within minutes we hear that Cingular has come over the top,
asking whether we'd consider a deal at $15 per share -- a $1 per share
increase that would boost Cingular's purchase price by $3 billion, to
nearly $47 billion. This is a shocker -- are they serious? Are they
just feeling us out to see if Vodafone has gone away, and if so, go
back to a lower bid as the only player left in the game? Selzer calls
again; he and several others in the corp dev group are sitting in a
Redmond bar across from our building, anxiously throwing back beers and
waiting for word that the deal is done. I tell him it may be a while.
The waiting continues; amazingly, our board is still sitting tight
in the room at the end of the hall. Suddenly, at about 1 a.m. we're
told that the board has requested that the floor be cleared. There
aren't a lot of us present outside the boardroom, but besides me,
Bradner, Stephens and Landis there is Ilene Gotts, our Wachtell
antitrust partner whose office is on the floor we are being asked to
vacate. We dutifully shuffle up the stairs, Gotts getting increasingly
flabbergasted that she has just been kicked out of her own office. We
assemble on the 23rd floor and discuss what just happened. Theories
abound, but it's late and we're too tired. I figure it means the
Cingular deal is real, and I decide there's absolutely no reason for me
to remain and watch them come over and victoriously sign the deal docs.
Stephens and I head out into the frigid evening; it is nearly 2 a.m.,
but the town cars are lined up to pick up the board members -- they've
probably been waiting there since early evening. Stephens and I are
able to grab a pint of Guinness at a bar across the street from the
hotel, and spend some time deconstructing the events of the day.
Stokes calls around 3:30 a.m. to tell me Cingular has come over to
sign; he had heard the news from Landis, who had stuck it out despite
the banishment to the 23rd floor (they let him back in after the rest
of us left). I'm so exhausted I sleep through the call, wake up to my
alarm and turn on the TV to see the news that Cingular has won the
auction, paying $15 per share.
I walk over to Wachtell, thrilled at the price Cingular was willing
to pay but oddly deflated now that the process is done. It doesn't help
that our direct competitor is taking us over. Yes, we had our troubles
as a company, and yes, of all the potential deals a merger with
Cingular had far and away the most industrial logic -- any other deal
would have left the industry fragmented and us at a disadvantage
against our larger rivals. But still, on a certain level, I felt a bit
defeated.
I circulate through the congratulations on the deal being done;
Veuve Clicquot and cold scrambled eggs are being served in the room the
board had been ensconced in the previous day. Stokes, Bradner and I
clean up our papers -- our flight back to Seattle isn't until the
evening, but I've had enough of this place. I take a long, cold walk
through Central Park, calling Selzer and some of the folks on my staff
to relay the details of what just happened. If there is a common
reaction, it is amazement that we were able to get such a great price
for the business. No one -- myself certainly included -- ever thought
we'd get $15 per share. I spend an hour or so trying to distract myself
by wandering through the Frick Museum, then head back to Midtown to
meet Stokes, Bradner and Stephens. As I wait for my car in front of the
Hilton on Avenue of the Americas, I buy a $3.50 chicken sandwich from a
street vendor. Maybe it's the fact the deal is finally done, maybe it's
the cumulative effect of five days of Wachtell catering, but I don't
think I've ever had a more satisfying meal. CD
Postscript: The deal ended up taking only nine months to close, with
DOJ-ordered divestitures far below the merger agreement cap. In the
months after closing, most of us involved in doing the deal for AWE
moved on, but Selzer moved to Atlanta and is now part of the Cingular
corporate development team. Although Cingular paid a high price for
AWE, this has been one of those mergers where things worked out better
than projected for the buyer -- the integration has gone well,
synergies have been greater than expected and the bulked-up Cingular is
a dominant force, the largest wireless carrier in the U.S. Although
layoffs began in Redmond five months after the deal closed, a
surprising number of the former HQ staff is still working for Cingular
in Redmond. Much of the AWE enterprise sales staff took over expanded
positions leading sales for Cingular, and almost all of my former
direct reports are still working for Cingular in new roles. Yet, as one
of the people who worked on the deal for Cingular told me, they had all
gone to bed on the night of Feb. 16, 2004, convinced Cingular had lost
the deal. Just a little less hesitation on the part of Vodafone, or a
bit more caution on the part of Cingular, and things would have worked
out very differently.
The DoCoMo put and a 3G deadline
In December 2000, NTT DoCoMo invested $10 billion in AWE, giving
DoCoMo a 16% stake. Although this investment did not grant DoCoMo any
meaningful control over AWE, it did contain one critical term: The
requirement that AWE commercially launch advanced (3G) wireless service
in a number of major markets by mid-2004. DoCoMo saw this obligation as
a way to ensure that the influence of its "i-mode" 3G service, popular
in Japan, would be felt in North America.
Unfortunately, North America was not ready for 3G. Cultural
differences, lack of applications, and the difficulties of a less-dense
population and lack of dedicated spectrum made U.S. carriers reluctant
to push the envelope with 3G. Even today, 3G service--Verizon and
Sprint's EV-DO and Cingular's UMTS--are used by only a tiny fraction of
mobile users.
Still, AWE had little choice but to meet the mid-2004 deadline.
Failing to do so would have given DoCoMo the right to put its 16%
interest back to AWE for the original $10 billion investment--with
interest. Suffice it to say that getting the markets launched on time
was a critical company priority. For the bidders, ensuring that
progress was being made toward the launch was a diligence matter of the
utmost importance. In the event, AWE did make its 3G deadline--four
months after Cingular acquired it, and five months before the
transaction closed.
A&T Wireless: The once and future brand
1994: AT&T completes its $12.6 billion acquisition of McCaw
Cellular Communications, the largest provider of cellular services in
the U.S.
1997: Renamed AT&T Wireless, unit launches the "Digital One
Rate," a revolutionary calling plan that, for the first time, includes
roaming and long distance charges. Sales soar.
2001: AT&T spins off AT&T Wireless amid the parent's moves
to cut debt and retreat from its bold expansion into cable in the 1990s.
October 2003: AWE releases Q3 numbers that are below expectations;
stock sinks 15%. With six major carriers competing nationwide for
customers, the clamor for industry consolidation intensifies.
November 2003: Technology conversion from TDMA to GSM is hampering
holiday sales. Advent of "number portability" could aggravate
back-office problems already dogging AWE.
December 2003: Work gets under way on sale of AWE.
February 2004: Cingular, co-owned by SBC and BellSouth, wins auction for AWE with $47 billion bid; deal closes later that year.
November 2005: SBC closes acquisition of AT&T Corp.; adopts AT&T Inc. name and "Deathstar" logo.
March 2006: AT&T announces acquisition of BellSouth,
consolidating control of Cingular. Assuming deal closes, Cingular will
be re-branded as--you guessed it--AT&T Wireless.
Decoding the deal
What's a deal without code names? Every party in a transaction needs
a set, for use in board materials and document drafts. The names
typically follow a unifying theme--sometimes even a clever one--which
may or may not make a statement about the organization that chose it.
At AT&T Wireless, with the company up for sale and so many
potential players to track, creativity took a back seat to keeping the
board from getting confused. The sale process itself was known as
"Project Capital," and the participants were known by the cities where
they were based--"Seattle" for AWE, "Tokyo" for DoCoMo, "San Antonio"
for SBC, and so forth. The Cingular team, meanwhile, went for a golf
motif. It called its effort "Project Links" and dubbed AWE "Augusta,"
SBC "Sawgrass," Cingular "Colonial" and so on. Most original was
Vodafone's "Project Alumni" designation, with AWE itself as "Alumni."
Was Vodafone thinking in terms of a graduation for its brand in the
U.S.? If so, the ceremony is still pending; it continues to hold the
40% stake in Verizon Wireless it would have sold, had it won AWE. - Josh King
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Cingular
Juergen Lasowski
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