The Box - Marc Levinson [28]
Pan-Atlantic was just an appetizer. In May 1955, McLean Industries bid for Waterman itself. McLean and his bankers concocted a hugely complex financial transaction. McLean Industries would pay Waterman $75,000 to cease all domestic service and surrender its ICC operating certificate in an attempt to eliminate the ICC’s jurisdiction over the purchase. Then, McLean Industries would borrow $42 million from National City Bank, an amount approaching the bank’s legal limit for a single loan. McLean Industries would raise additional money through a $7 million issue of preferred stock. When the deal closed, Waterman’s $20 million of cash and various other assets would be used to repay half the loan. Wriston’s superiors at National City went apoplectic at the thought that $22 million of National City’s money would still be at risk. Who knew whether anyone would use McLean’s truck-ship service? Who would finance all the equipment? Would the trailers even survive a storm at sea? At the last minute, the bankers ordered the deal called off. Wriston phoned McLean at the Essex House, McLean’s New York hotel, and told him, “You’d better get down here. Things are falling apart.” When McLean arrived at National City’s headquarters on Wall Street, Wriston advised that McLean himself would have to convince the bank’s top loan executives to approve the loan. The bankers told McLean that the loan was too risky and Wriston too inexperienced. “He’s just a trainee,” one of them said. “He may just be a trainee, but he’s going to be the boss of both of you pretty soon,” McLean shot back. As McLean remembered later, “They said, ‘Maybe we’ll take another look.’” The loan was approved.19
But the deal was still not done, and a competing buyer, also financed by National City, had grown interested in Waterman. To avoid any chance of a slipup, the lawyers decided that the entire transaction needed to be completed simultaneously. On May 6, Waterman’s board and McLean’s bankers and lawyers convened in a Mobile boardroom only to realize that the board lacked a quorum. One of the Wall Street lawyers quickly took the elevator downstairs, stopped a passerby, and asked whether he wanted to earn a quick fifty dollars. The man was promptly elected a Waterman director, making a quorum. The Waterman board members then resigned one at a time, with each being replaced by a McLean nominee. The new board immediately voted to pay a $25 million dividend to McLean Industries, and with a phone call the money was wired to National City. As the meeting broke up, lawyers for the opposing bidder served the board with legal papers to prevent the transfer of the dividend, but the bank already had its money and McLean had Waterman. Typical of McLean’s financial acumen, he laid out only $10,000 of his own cash to gain control of one of the country’s largest ship lines through what later became known as a leveraged buyout. “In a sense, Waterman was the first LBO,” Wriston recalled.20
McLean’s prize was a formerly debt-free company whose bank loans and ship mortgages soared to $22.6 million at the end of 1955, nearly ten times its $2.3 million of after-tax income. In a step that set the norm for future leveraged buyouts, McLean disposed of unwanted Waterman assets to pay down debt; the sale of a hotel, a dry dock, and various other businesses raised almost $4 million within two months of the takeover. Now heavily in debt, McLean began maneuvering for a government handout. The federal government had become interested in ships carrying truck trailers, and Pan-Atlantic obtained $63 million of government loan guarantees for seven new roll