Broker, Trader, Lawyer, Spy - Eamon Javers [89]
Private equity firms such as Cascade often find themselves acquiring private companies. When you’re buying a privately held company, you can be in the dark about what you’re actually getting. People familiar with the relationship between them say that Cascade asked BIA to find answers to specific questions about companies that were potential acquisitions. For example, if a firm was founded by an entrepreneur, what is that person’s family like? Is the CEO’s son, who will inherit control of the company, a dysfunctional alcoholic? If so, the company might sell at a much lower price, since there’s no reliable successor to keep it going. Knowing even one piece of information could be worth millions.
In an acquisition of a private company, BIA’s team will investigate all the top executives of the company under scrutiny. Who are their professional contacts? What are their families like? What kinds of pressures are they under? The BIA team will also fan out to cover the target company’s customers, interviewing them about their transactions with the company. Are you going to re-up your contract for next year? Are you going to spend more or less money with the target company next quarter? The same with suppliers. A company needs certain raw materials to do business. BIA’s team approaches suppliers to find out how much the target company has been buying. What’s the trend line? Is the company buying more now than ever before? And what about price—is there an increase coming that could damage the target company’s profitability? Every tidbit helps form an overall picture of the company, and what Cascade should be willing to pay to buy it.
Such due diligence, of course, could be done by young MBAs, or even college graduates with specific training in corporate analysis. You don’t need veteran CIA spies to analyze a company. But having their expertise helps. The CIA experience can help BIA’s team spot a supply chain vendor who’s lying about whether he’s planning to raise prices next quarter. Their elicitation techniques can help draw that vendor out about when the hike is coming and how much it might be.
The secret, whether it’s a crime, intelligence, or the expected price of soybeans, devours the keeper.
BIA’s team of research analysts was, for a time, led by Jim Roth, a veteran of the CIA. Roth’s team offered investigative research, primarily to hedge fund clients. In one case, a hedge fund hired BIA to investigate a publicly traded home builder. The hedge fund investors had a hunch: the builder’s company might not make its revenue projections for the quarter, as it didn’t have enough land in the Los Angeles market to develop all the residences it was telling the market it would build. But how to prove that? The fund managers called BIA, which put Roth and his CIA-trained agents on the case. Roth’s team began working the phones. They called real estate agents in Los Angeles and asked about the local market. Who is buying land? Is the home builder a big buyer? Which plots does it already own? In each conversation, the BIA team used deception-detection techniques to spot dishonesty or uncertainty, and used their skills of elicitation to get the agents to reveal information about the market.
Roth’s team also called local real estate speculators and large landowners to find out who was buying up property. They did research into hard-to-find public records to find out who was making new land purchases. They talked to competitors to see if the home builder was buying land through proxies to avoid detection. After making hundreds of calls and poring over scores of documents, Roth’s team concluded that the hedge fund was right. The home builder didn’t own nearly as much land in Los Angeles as it was saying it did. There was no way the company could make its earnings targets in coming years.
On the basis of Roth’s written report and other information it had developed on its own, BIA’s hedge