It was equally unthinkable that the president of the Republican Bank of New York would have let such a thought even cross his mind; especially since in the United States, the misuse of inside information was at least theoretically subject to legal penalties. To be sure, such misuse was most difficult to define. But one could not be too careful these days.
Dr. Walter Hofer had no such problems. Switzerland had neither traditions nor laws along such ridiculous lines. If an insider decided to take advantage of the information which was duly his as a result of the responsibility he had to bear in a corporation, it was only just that he should be free to employ such knowledge as he saw fit. The laws of other countries were equally of no concern whatsoever to Dr. Hofer. Switzerland, and especially its bankers, were not missionaries for foreign causes. If the governments involved could not enforce their laws, or enact laws which were enforceable, it was their fault, and theirs alone. But Hofer knew the mental contortions which his Anglo-Saxon colleagues were forced to perform when faced with sticky issues which could not be solved by legal contortions. Experience had demonstrated to him the necessity of helping them construct an “out” which would free them from any possible future remorse. So at the end of David Mason’s long monologue, he asked the question which both of his partners were waiting for.
“That is all highly interesting, David. I can see the importance of your coordinating this whole transaction in a most careful manner with Sir Robert. But where can the General Bank of Switzerland be of any help?”
Mason solemnly explained. “Well, as you no doubt appreciate, one can never be quite sure of whether or not a takeover bid will be fully acceptable to the seller in its proposed form. The current idea of Oriental is to put the whole thing on a paper basis; it would be strictly a share-for-share transaction. The current owners of Canadian and Western equity would receive one new Oriental Petroleum share for each ten old Canadian and Western.”
Hofer quickly calculated it out. Right. That would put the new post-takeover bid market value of Canadian and Western at almost exactly £4 per share, at yesterday’s closing market prices.
David Mason continued: “But it may prove necessary to throw in a cash kicker. We don’t know at this point. My question is whether or not you would be ready to provide Oriental with a very short-term, non-collateralized loan of, say, $50 million to bridge the gap, should cash be required in this operation? My guess is that the company would need the funds for no more than ninety days. They would be willing to pay, probably, 0.75 percent over the three months interbank Eurodollar rate in London.”
Dr. Hofer knew bloody well that Oriental Petroleum was no more short of cash than was the Bank of England. But now the circle had been closed—and fairly elegantly at that.
Hofer replied, “David, please let me make a quick phone call to Zurich to see whether such an arrangement will be feasible. Sir Robert, would you mind asking your girl to put a call right through? By the way, David, when would Oriental probably need the funds?”
“My guess is January 1,” answered Mason, with that completely straightforward manner so necessary to success in the banking industry.
Hofer moved over to a chair opposite Sir Robert’s desk and waited for the connection to come through. In the background the other two men had started on golf. Sir Robert knew that it had become highly fashionable for American executives to combine their European business trips with a weekend on the links in Scotland, so the arrangements had already been made. He was not one to buck American trends, especially when $50 million of rather suspect paper was at issue.
Dr. Walter Hofer’s phone call was, of course, totally superfluous, but it gave him the necessary time to once again mentally check out his calculations. His male secretary had already briefed him well on the situation, following Sir Robert’s phone call a few days earlier, when the items on the agenda had been mentioned. Canadian and Western had 75 million shares outstanding. About 30 percent of these were locked in, either through ownership or control by the company’s chairman, or stuck away in British trust and thus unavailable. But there were smaller blocks on the Continent which would be available. His guess was that three phone calls would get him about four million shares at maybe 5 percent—or even 10 percent—premium over the current market price. On the basis of the average turnover of C & W shares on the London exchange during the past six months, it seemed further probable that he could buy an additional three, maybe three and a half, million shares on the open market during the next month without unduly upsetting the price. That, combined with the blocks, would give him about 10 percent of the total outstanding equity of the company before the takeover bid started to come into the open. In gross terms, he stood to make a capital gain of over £15 million or about $36 million. This would allow him to take just about that amount—say, $35 million—of the Transcontinental notes off Sir Robert’s hands. His quick analysis of the Transcontinental balance sheet in Zurich had indicated beyond any doubt that even if that company was liquidated, the creditors would receive at least 40 cents on the dollar. That would mean $14 to $15 million gross profit in the worst possible instance, less the cost of tying up the funds in the Transcontinental notes for maybe two or three years, say, $7 million maximum. Which would leave…
When the telephone came through, Hofer asked a number of questions regarding the bank’s liquidity schedule during the next quarter and appeared to be receiving satisfactory answers. The charade was complete.
He returned to the coffee table and listened politely as the golf conversation drew to a close. He then decided to waste no more time. “Gentlemen, I think I can help you out regarding both items on this morning’s agenda.”
Neither Sir Robert Winthrop nor David Mason appeared especially surprised. “First, we are willing to provide Oriental with the $50 million under the condition you suggested, David. The commitment will remain an oral one, directly from me, good until January 15. Please let me know in time if you decide to draw down the funds. There will be no standby fee. Second, Sir Robert, due to the acute situation you find yourself in, we will be willing to take up to $35 million of the Transcontinental notes off of your hands. I will instruct our chief securities dealer to accept all offers up to this amount from you until the end of this year. Of course, you realize that following our usual practice, we will be using quite a number of different nominee names as the official purchasers. The only provision is that we will not pay over 90 for the notes.”
The latter thought had just occurred to the good doctor. If he got the notes at 10 percent under par, it would provide an additional cushion of a couple of million dollars. You never knew. That old bastard Robert had undoubtedly been overdoing things regarding his problem anyway.
“If you are willing to accept my word, gentlemen, I do not think that there will be any need for additional talks or documentation regarding either of these subjects.”
The response was most positive. Nothing could possibly be more acceptable than the word of Dr. Walter Hofer. Thanks were duly exchanged, but no handshakes. Sir Robert had a strong dislike for this foreign habit. The conversation returned to golf and then to interest rates.
As noon approached, Sir Robert suggested that they proceed to lunch. The dining room was exquisite. David Mason, and many of his colleagues in New York, Chicago, and San Francisco, had tried to duplicate the facilities which every respectable bank in London had. In almost every case the result had been disastrous, at least to the slightly discerning eye. The less polite called it phony. After hundreds of years, the Americans still could not quite make it when it came to natural elegance.