[Chapter 423: Fundraising and Leveraged Buyout]
The next afternoon, at a business club in Beverly Hills, Linton sat down with Elan Hames, the vice president of California Bank.
They had known each other for years -- they first met back in early 1992. It was Linton who had approached him initially to secure a loan for purchasing Microsoft stocks. Both being top professionals, they naturally became part of each other's networks. Every holiday season, they exchanged greetings, and Elan even arranged for gifts to be sent to Linton each Christmas.
However, Linton's growth had accelerated so rapidly that Elan found it hard to keep up. In just a few years, Linton had transformed from a prominent Hollywood star into a diamond-tier client of the bank. His incredible ability to generate income and the rapid expansion of his companies made him an undeniable force in Hollywood.
Linton's status in Elan's eyes kept rising every year. Just last Christmas, Elan personally visited Linton to deliver a gift. Despite holding Linton in such high regard, Elan was still stunned when Linton mentioned plans to acquire Universal Studios. His hand trembled slightly as he held his coffee cup, causing a bit of spillage.
But as a seasoned professional, Elan quickly composed himself.
"Linton, you're the most remarkable genius I've ever met. Every time I see you, I feel like I'm growing old and falling behind the times."
"Elan, we've been old friends for a long time -- no need for such formalities. You're making me feel awkward."
"Alright, let's get down to business. What do you need from me?"
"Of course, I'll need your financial support. Don't worry; I won't ask you to break any rules. Just like before, I'll provide full collateral with stocks." He handed over the stock certificates.
"Microsoft shares, Cisco shares, Oracle shares... these are all top-performing stocks in the market. Collateral is solid. As usual, we can loan you 75% of the current market value. How does that sound?"
"That's good. What about the interest rate?"
"How much do you want to borrow?"
"I still need $6 billion in cash. Can you handle the entire amount?"
"Sorry, California Bank doesn't have that capacity. The maximum loan we can offer is $3 billion."
"Alright, $3 billion it is. What about the interest?"
"We're old friends, and this is a big deal. How about I ask the board to give you a 20% discount on the standard interest rate?"
"Deal."
"You can proceed with the collateral paperwork first. We'll issue the credit line, and when you finalize the acquisition and need to make payments, just come to the bank for withdrawals or wire transfers. Interest starts accruing from the withdrawal date. And if the deal falls through, no worries -- you just don't use the credit, and we return your stock certificates."
"Thanks."
---
The following morning, still at the Beverly Hills business club, Linton met with Roger Keen, the president of Wells Fargo's California branch.
Unlike Elan, Linton didn't have a close relationship with Roger. His business with Wells Fargo was limited -- he only had a VISA credit card there. However, his film company, UPN TV Network, and charity foundation all had accounts with Wells Fargo, and their cash flow was substantial.
To Roger, Linton was a serious VIP client worth serious attention, and he hoped to build a closer partnership.
So, when he received an invitation, he came in person.
After hearing Linton's request, Roger was delighted -- it was indeed a major business opportunity. But instead of giving an immediate answer, he proposed an alternative financing plan for Linton to consider.
"Linton, based on the stocks you own, Wells Fargo can definitely offer a loan secured by 75% of their market value. But I have an even better option for you. Want to hear it?"
"Oh? There's a better plan? Go on." Linton was intrigued.
"Have you heard of a leveraged buyout?"
"I think I've heard the term, but I'm not exactly sure what it entails. Could you explain?"
"A leveraged buyout is a corporate finance strategy where the buyer uses the assets of the company being acquired as collateral for the debt incurred in the purchase. In your case, you would put in some cash upfront, but you'd primarily use Universal's own assets as collateral to secure financing from the bank."
"You mean, I could acquire Universal and use Universal's assets itself as collateral for a loan from you? That actually works?" Linton was impressed -- classic Wall Street strategy.
"Yes, it's a well-established corporate acquisition financing method."
"How is it different from a loan secured by my stocks?"
"For someone as financially strong as you, the difference might not be that big, but for those with less capital, it's a huge advantage. It allows them to leverage a small amount of money to acquire a much larger target. Specifically in your case, there are some differences."
"Go ahead."
"When you use your stocks as collateral, the certificates have to be held by the bank. Selling or transferring those stocks becomes inconvenient -- you'd need to repay the loan before retrieving your certificates. Or you'd have to sell under the bank's supervision, with some proceeds going to pay down your loan and interest before the remainder is transferred to your account. With a leveraged buyout, this problem doesn't exist, because the collateral is Universal itself."
"I see. What about interest rates? Are there extra fees for the leveraged buyout?"
"No extra financing fees, and the interest rates are the same. For the bank, the collateral method doesn't affect the terms."
"Can I get a discount on the interest rate? California Bank gave me 20% off."
"No problem. For a client of your caliber, we're happy to offer the best rates."
"Great. So how does the leveraged buyout process work?"
"For those with less capital, it's a bit more complex because it involves issuing bonds to cover the shortfall, but since you have ample funds, it's simpler for you. You'd sign an engagement agreement with us, then we'll assess Universal's assets and issue you a loan credit up to 70% of the assessed value.
For example, if the assessment values Universal at $7 billion, we'd provide a $4.9 billion credit line. Then, after your negotiations with Panasonic end, you can make payments within the limit of $4.9 billion based on actual amounts used. The loan is restricted to the acquisition of Universal and must be disbursed under the bank's supervision according to the contract between you and Panasonic, directly to the account specified therein."
"No problem. How long will the asset evaluation take?"
"Three days should be enough."
"Alright, we'll proceed with the leveraged buyout approach. I'll sign the engagement agreement now."
---
Three days later, Wells Fargo completed Universal's valuation at $6 billion and granted Linton a $4.2 billion credit line.
Meanwhile, Goodman and Henry had completed the collateral procedures with California Bank, securing a $3 billion loan credit. Notably, the collateral did not include Netscape stocks, nor stocks held by Skycrest Capital.
Now with $2 billion in cash and credit lines totaling $7.2 billion from two banks, Linton had amassed enough leverage -- it was time to make a trip to Japan.
He picked up the phone and dialed Panasonic's number.
"Hello, is this Mr. Matsushita?..."
*****
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