“Greg, I’ve said it once and I’ll say it again: We’re not doing this without being invited in. I’m actually in the car with Greg Curl now. I’ll put him on. He’ll tell you we’re serious about that.”
“Listen, we’re interested,” Curl said after being handed the phone. “But we do need to hear from Thain directly on this.”
“Okay, okay,” Fleming told him. “I’ll call you back.”
For all their interest in acquiring Merrill Lynch, Curl, Price, and Herlihy had reason to be wary of Fleming’s overtures. The three men knew something that no one else knew, a bizarre turn of events that had never leaked out—and thank god for that, they thought to themselves, for it would have left them the laughingstocks of Wall Street.
Ken Lewis had, in fact, already been through this dance with Merrill Lynch a year ago almost to the week with Stan O’Neal. No one outside of O’Neal and a handful of BofA executives even knew the talks had taken place, and not even Merrill’s or Bank of America’s board had been informed of them.
On the last Sunday of September, O’Neal had driven down to Manhattan from his weekend home in Westchester to meet with Lewis at his plush corporate apartment in the new Time Warner Center. The meeting had been set up by Herlihy, who had acted as an intermediary. O’Neal showed up alone, though—Lewis had brought Curl with him.
As a precondition of the meeting, O’Neal had indicated that he wanted $90 a share for Merrill Lynch, a substantial premium over its then stock price of slightly more than $70 a share. Lewis and Curl got right down to business, handing O’Neal a bound presentation of what a combination of Bank of America and Merrill would look like from a numbers and operational standpoint. As Lewis went through the proposal and was ready to start a discussion, O’Neal jumped out of his chair, excusing himself to go to the bathroom. After what felt like twenty minutes, as Lewis and Curl waited anxiously for him to return, they wavered between concern for O’Neal’s health and frustration that he seemed to have vanished.
Finally, O’Neal returned, as if nothing unusual had occurred. Lewis shrugged it off and continued going through the presentation. As he continued, O’Neal stopped him.
“Look, if we’re going to do a deal, it’s going to have to be at a reasonable premium,” O’Neal said, raising the price he wanted for the firm to $100 a share. “I’ve done some subsequent analysis and thought about it more,” he said, explaining how he justified the higher price by a sum-of-the-parts analysis of Merrill’s asset management, retail, and investment banking businesses.
The number took Lewis aback. At first he almost ended the conversation. But then he allowed that he would continue the talks, but suggested if O’Neal wanted more money, “it would require more cuts.”
“How much cost reduction do you have baked into the numbers that you have?” O’Neal asked.
Lewis’s presentation projected $6 billion in cuts over two years.
To O’Neal that was a huge number, even for someone who had been famous for his own cost cutting. And if he wanted $100 a share, it would be even more.
O’Neal asked, “So, how would you see me fitting into this?”
“Well, you’d be part of the management team, but I haven’t really thought about a structure,” Lewis told him.
That answer clearly was unsatisfactory. If they were going to have to reduce costs by as much as Lewis was saying, O’Neal said, he’d want to be the president of the firm so that at least somebody would be looking out for the Merrill employees. Lewis now became angry. “So, what you’re sayin’ is, you want me to sell out my management team to get this deal done for your benefit?”
For a moment O’Neal only stared down at his feet, until finally saying, “I appreciate you spending the time. I appreciate the presentation and the thought that went into it. I’ve always thought that, on paper, that if Merrill were to do a strategic merger you are the most compelling partner.” As he turned to the door, O’Neal said, “I’ll think about everything you said.”
Lewis never heard from him again.
What he didn’t know was that the next day O’Neal confided in Alberto Cribiore, a Merrill board member, that he had gone to see Lewis, and told him about the meeting. Cribiore, always a good proxy for the rest of the board, was clearly not receptive to the merger idea, quickly brushing it aside.
In his heavy Italian accent, Cribiore said, “But Stan, Ken Lewis is an asshole!”
The sixteenth floor of AIG was already a beehive of activity, with hundreds of bankers and lawyers roaming the floors, darting into the various rooms that had been set up to perform due diligence on different AIG assets up for sale.
Before the high-end tire kickers arrived, Douglas Braunstein of JP Morgan, fresh off a conference call with Dimon, pulled Bob Willumstad aside to confide, “You need to think about more than the $20 or $30 billion we were talking about before, because Lehman could go bankrupt this weekend.
“The market’s going to be bad,” Braunstein warned. “We should probably be thinking about $40 billion.”
Willumstad was flabbergasted; the challenge he faced had almost immediately doubled in size.
A minute later, Sir Deryck Maughan, the former head of Salomon Brothers, emerged from an elevator. Maughan—who was working for KKR, one of the bidders in the AIG fire sale—and Willumstad had known each other well but hadn’t been in touch for years. The last time they had seen each other was in 2004, when Maughan was being fired by Charles Prince, literally in Willumstad’s presence. It was Maughan, too, who had snubbed Steve Black’s wife on the dance floor more than a decade ago, resulting in a confrontation with Dimon, and his eventual ousting by Sandy Weill.
And now, on a weekend when the entire financial system hung in the balance, Willumstad, Dimon, and Black were all looking to Maughan for help. Ah, Willumstad thought as he greeted Maughan with a wide smile, life is rich with irony.
A few minutes earlier David Bonderman of Texas Pacific Group, one of the wealthiest private-equity moguls in the nation, had arrived with his own team. Bonderman, who was known for turnarounds, thanks to successful projects like fixing Continental Airlines, had also become increasingly leery of financial companies. He had acquired a $1.35 billion stake in Washington Mutual in April 2008 and watched his investment lose virtually all of its value in less than half a year.
Willumstad was becoming increasingly anxious that all these bidders were there to suck AIG dry.
Perhaps sensing Willumstad’s anxiety, Dr. Paul Achleitner, a board member of the insurance giant Allianz who had cut short his vacation in Majorca, Spain, to fly in for the diligence session, approached him.
“Can I see you privately?” he asked.
“Sure,” Willumstad replied.
Achleitner had been invited to the diligence session by Chris Flowers, who had chartered a plane to fetch Achleitner and bring him across the Atlantic.
Willumstad and Achleitner found a quiet corner.
“I want you to know that I’m not here with all these vultures,” Achleitner said, pointing at the scrum of private-equity investors swirling about. “I’m here as Allianz. If we’re going to invest, we might invest alongside them, but we’re going to make our own decision.”
“Thank you, I appreciate that,” Willumstad said, before returning to the vultures.
Willumstad and the AIG team were quickly having a difficult time keeping track of everyone in the growing crowd and, as the weekend wore on, whom they actually represented.
When Christopher A. Cole from Goldman Sachs appeared with a small army of bankers, John Studzinski, AIG’s banker from Blackstone, became alarmed. Goldman? Who invited them?
“Who are you working for?” Studzinski asked Cole. At first Cole seemed oddly reticent to say. “Well,” he said, “we have several clients here.” Studzinski just stared at him, hoping to hear more. As they spoke, Richard Friedman, who ran Goldman Sachs’ private investment business, walked by, which did not go unnoticed by everyone else in the room. Was Goldman actually there for itself? “We’re here,” Cole started speaking again, “working with Allianz, Axa, and Goldman Sachs Capital Partners.” It was all so confusing and conflicted.