Adventures in Diligence
When Barbara introduces me to the team she includes the phrase: "She is on our side. She is one of the good guys- er, girls. I want you gals to treat her as family and give her whatever she needs." Don't get me wrong, I'm not fooled by these kinds of public pronouncements, because you never know what was said before them (when you were not in the room) or what will be said after them in your absence or one-on-one with the individuals now standing around smiling at you. I am standing in the offices of "Challenge, Inc.," a $300 million dollar company, doing due diligence on-site.
Sub Rosa lives in small and mid-sized buyouts, and so occasionally we come across these firms that just don't have a strong grasp of the acquisition process, the right way to run it or, for instance, that you really don't want potential buyers roaming the halls of your facility just because it seems like the "right thing to do, giving open access so you can really see what our family here is like." Dear readers, allow me for a moment to just offer you a little piece of advice if ever you want to sell your business or know anyone who does:
Don't ever, ever, do that.
So I was introduced to the team putting together records for us to review. Normally, there would be a sell-side banker organizing all this, a data room set up in some lawyer's office somewhere (or, indeed, online) and quiet whisperings in conference rooms late at night in order to avoid tipping off the employees that the place might be for sale and they might all be out of a job. Not so with Project Challenge.
Instead, a "small" team of upper-middle management was let in on the "secret," and asked to help Sub Rosa "learn the business." I suspect senior management felt this would increase the valuation of Challenge, once we saw what a wonderful place it was. It helped that it was a no-auction deal. There was only one group of us to show around, after all. Of course, what a management team like this fails to realize is that potential buyers haven't been drinking the Kool-Aid for years.
I suppose I should feel guilty for taking advantage of the situation, but that's sort of my job, isn't it? Armin actually had Laura the Debt Bitch at Challenge's office for awhile until someone, totally unaware that a diligence team was roaming the halls, asked "Who's that girl who says 'fuck' all the time, is she a new employee?"
I asked Armin what, exactly, I was supposed to be looking for. He looked at me like I was wearing a tie. "Whatever you can." And so, I wandered around. Listening. Smiling. Hanging around the little kitchen and taking note of the gossip.
Barbara had been so kind (and stupid) as to provide me a cover story. I would, it seemed, be joining the firm soon, and giving me a big Challenge welcome would be the best way to show me how wonderful things here were. Astute Going Private readers will by this point have guessed that Challenge, Inc. was in California.
At some point in my wanderings- and really, let me pause to say that the Challenge people, particularly the girls, were really very nice, I was invited to something like 4 dinner parties and twice to after-work drinks after only 48 hours- I heard hushed tones emerging from a little set of three connected offices. Having long ago in my youth learned to listen very carefully when anything was spoken in hushed tones (that's where you hear the interesting bits) I keened my ears and caught as much as I could of the conversation.
"But it isn't, like, a few of the files, it is, like, almost all of the files," this from what I could only assume would be a ditsy, 20something blond once I walked around the corner.
"Well, it could be a clerical error," this from what I guessed had to be her less excitable brunette friend.
"You don't understand, it is like it was a clerical error if one of the agreements was signed. That's how many aren't signed," I couldn't hover around much longer without obviously eavesdropping, so instead I just walked right in to the offices, like I had just turned the corner in a hurry, and then stopped short suddenly and threw a mask of confusion on my face.
"Oh. This isn't...." Here I trailed off as if to name the name of someone's office I was looking for. Since I didn't really know a name of anyone on that particular floor I hoped the girls now looking at me- mouths agape like they had just been caught in a state of near undress with their boyfriends on their parent's couch- would just fill something in for me.
"Uh, hi," said the nervous blond. (I was right).
"Hello," said a much more composed blond. (I was wrong). "Oh," a look of recognition pulls down over the composed blond's expression. "You are the new girl Barbara introduced."
"Yes!" I beamed. "I am!" This worked like a charm. The nervous blond fell right into formation, as if she had just found a herd of familiar grazing animals and now she would be less vulnerable to predators roaming the great, gray commercial pile carpeted expanse of the office. Safety in numbers, you know. I could almost hear the inner monologue over the B-flat hum of the fluorescent lights:
"Oh, one of us, ok, I guess that's alright then. Phew! Ok, where's the watering hole?"
"What are you guys doing?" I asked innocently.
"Well..." And again, I could almost hear the inner monologue:
"It is supposed to be a secret, but, like, Barbara, like, introduced her and everything."
"...we are supposed to put together all the employment files and pull the actual employment agreement and the NDA everyone signed so it can be copied for someone, you know?" Yes, actually I did know. That someone it was being copied for was Sub Rosa. "But there's this, like, problem."
"What kind of problem," I asked.
"Well, Donna and Ted, you know," and, interestingly, I actually did know this too, since "Donna" and "Ted "are the founders, "they kind of didn't ever sign any of them."
A long pause.
Here it suddenly became a challenge to maintain my composure against the many competing urges that ran riot in my head. At once I had to bite my tongue to avoid laughing, spitting up and adopting a sly, sardonic smile. Nervous blond handed me the folder in her hand, opened to the employment agreement and pointed to the signature line. More composed blond looked like she thought this was a bad idea, sharing with me, but her concern never rose to the level where it could override her desire not to have a spat with nervous blond about it right there in front of me. Sure enough, right at the bottom, a signature line with both names neatly typed, Donna and Ted- and why the founders would be personally signing employment agreements (outside of some hokey family corporate values crap) was beyond me- with two glaringly empty lines above them. Why two signatures would be required was also beyond me.
"Wow, how many did they forget to sign?"
"Like, uh, all of them," the nervous blond blurted out.
"No, not all of them," now her timid friend managed to correct her, and the reason why she hadn't before came into a very sharp focus.
"Ok, like, look," nervous blond puffed herself up, her voice growing, not so much louder, as more shrill and something like rapid-fire. "Something like three quarters of them are unsigned and anyhow it doesn't matter because there are a lot that are unsigned so really the exact percentage doesn't make a difference." An uneasy silence followed this. Apparently it bothered nervous blond more than anyone else, since she, herself, was the one to break it. "The employee NDAs aren't signed either."
This was probably not good. Just off the top of my head I wondered how Challenge would even begin to correct this. Was a counter-signature required to make the agreement effective in California? If not, certainly an employee's attorney could make quite a stink about the matter.
"Well, they are just going to have to come in here and sign them all." Never fear, Challenge, Inc., nervous blond has the matter completely under control. But this made me think. There was also a date line under both signature lines. How would they date the new signature? With today's date? With the date the employee had signed? Well, the later seemed to me quite a bit like forgery. The former seemed to suggest that employees hadn't been bound for a long period of time either by non-compete clauses, non-disclosure clauses or, indeed, any other provision these contracts purported to cover. And had employees been given copies of their executed agreements? I found it hard to imagine that not a single one of these hundreds of employees hadn't asked for a copy of their signed employment agreement. So if all these were then signed with today's date, or even the date of the employee's signature, you'd have documents that either didn't agree on what looked like a fundamental term, or that looked like they might be forgeries. And what if they did sign them, but never disclose the gap to Sub Rosa. I wondered if these sorts of liabilities were substantial (I had to guess they might be) and if they were and Challenge didn't disclose, would they rise to the level of securities fraud if Sub Rosa bought the company?
"We need to get Thomas down here and ask him what to do."
"Yeah," and, you know, it occurs to me that it doesn't really matter which blond said what anymore. Thomas, I guessed, was probably the head of Human Resources. "This ought to be good," I thought to myself. I was right.
Thomas reminds me of a certain long-winded CEO from a deal long since past who I used to call "The Dirigible." This owing to the way he floated around, his massive inertia rendering him unable to operate without dozens of men hanging from ropes guiding him in and out of his hangar, at the mercy of the prevailing winds, filled with hot air, or at least some lighter than air gas, the fact that he occupied an unduly amount of space, was prone to sudden, fiery explosions and was highly annoying to the other, faster air traffic trying to navigate in the airspace in order to actually get somewhere.
