Sinister melted down last week. A lot was riding on the flagship product and now it seems clear that it either needs another 3-6 months of development, or it is entirely
worthless. In a way it doesn't make much difference. Sinister was counting on the revenue from that product to deal with debt payments. Orders were already in. Now things look bad. Very bad.
As it turns out, almost no real due diligence was performed on the
technical side. Typically, these things are handled by outside experts
Sub Rosa retains. This time it seems some corners were cut. The party
responsible? Sinister's CEO, Jeff.
This presents a real problem as Jeff was friendly with some of Sub Rosa's partners and this was his path into his own partnership with Sub Rosa. Want to be a partner in a private equity firm? Bring a deal. Close it. Run the firm. Make money. On top of this, he was also responsible for doing a good piece of the due diligence. Permitting this was an error.
It seems clear now that Sinister is in for a big lay-off, Jeff's head is on the block and there are rumblings that the entire company may be headed for an "orderly wind-down."
That I know about this at all is a bit of a shock to me. It seems only to be the fact that I am constantly working so closely with Armin that I hear so much. I walked into his office on Saturday to show him some analysis I had done. He was on the phone and I motioned to him that I would come back later but he waved me in and motioned for me to close the door, which I did before sitting on the little couch in his office.
I am not sure why exactly, but I always feel like I'm visiting my father at work when I sit in Armin's office. I catch myself sitting up straight, worried about posture, hands in my lap. It is comic when I notice it, but I can't seem to stop.
It soon became clear that Armin was on a conference call with the partnership. Not half a minute after I walked in, Armin hits the mute button and turns on the speaker phone. He sits back, watching me blankly as we listen together.
What emerges is a long string of profanities from one of Sub Rosa's partners, Sean. Armin has to turn the speakerphone down. Sean is calling for Jeff's head "on a fucking platter." This is a little amusing since apparently it was Sean who originally recommended Jeff as the man for the job. It is then suddenly less amusing because Sean is also the "industry partner" who was supposed to be watch-guarding the due diligence process for Sinister. If he is yelling now, I thought to myself, it is to try and distract the group from his complacency in the matter. Armin catches on without me saying anything. Hit hits the mute button and chimes in.
"Now just a minute. The partnership shares some of the blame here. Typically, we would have done technical due diligence like this ourselves. But in this case, we were confident that it could be handled by our incoming CEO and our own senior members here." Here, of course, everyone understands that Armin means Sean.
"Of course, none of us thought hard enough about the incentive structure we were setting up for our CEO-elect, did we? How motivated was he to find and expose problems that might have killed the deal, considering without this position his chances to be elevated to the partnership were, shall we say, limited? And now it will cost us a hand and a foot, and we may have to close the unit down entirely." Armin meant "an arm and a leg," but sometimes he has problems with English idioms.
The call went on for what seemed a long time. The bank has already warned Sinister that they are close to breaking some revenue covenants. News of this could cause them to seek "additional assurances" or even call a portion of the loan. I haven't seen the loan terms so I don't know, but given the tone of the call, it sounds bad. The call ends indecisively.
The entire thing is very embarrassing. It's highly unprofessional on the part of Sub Rosa's partnership to permit this kind of oversight. There are a variety of explanations, but it seems pretty clear that the partnership is poised to blame Sean. With good reason, in my view. I wasn't present for the Sinister transaction, but I heard that Sean pushed it though with something like vitriol. It was quite a rushed thing, and attention to management and the transformation of the firm into a real operating unit was never really undertaken properly. Enough little things, added up, can ruin a deal. Can destroy a company. There is little margin for error post-transaction in an LBO. Now the losses are looming. Someone will have to pay.
If I was shocked to be included in what was supposed to be a "partnership only" call, I was totally stunned when Armin sat me down and asked my opinion.
"What would you do?" He asked simply.
Fire the CEO? Try to buy out Sean, clearly he lacks the confidence of the partnership, and he potentially cost them a lot of money. Really, I had no idea. Nor was I keen, exactly, to be asked to chime in on partner level decisions as a Vice President.
"These people can't even fucking keep track of projectors," he grumbles. I stifle a laugh as best as I can.
