INTRODUCTION
OVERVIEW Welcome to the “Quantum Leap – you Can Do That!” Seminar. The YCDT seminar presentation has been designed especially for you, the entrepreneur and would-be entrepreneur. The seminar covers what I believe are the most important tools for developing, starting, and growing a business enterprise. In fact, I have attempted to organize the seminar and this course manual as if it were a new business. You won’t find a lot of detail and analysis in these pages. What you will find is a statement statemen t of a business philosophy and some guidelines for making business decisions, d ecisions, which are in line with that philosophy.
THE PHILOSOPHY The “Quantum Leap – You Can Do That” philosophy is about dealing de aling with the conventional wisdom; it’s about making decisions in business and in life that go against aga inst the tide of popular opinion. It isn’t about anarchy or rebellion. re bellion. It’s just a different approach to handling the often-heard often-heard statement, “You can’t do that.” We hear this admonition may times a day. When it protects us from harm or from committing a crime, we should heed its warning. After all, we live in a society of laws and rules and must conduct ourselves accordingly. But we also hear this phrase when it has nothing to do with harm or crime prevention. We hear it all all too often as the conclusion of other statements like, “That’s never been done before,” or “It just doesn’t sound right to me,” or the worst, “I don’t know how to do that; therefore, you can’t do that.” Philosophy is one thing, implementation and completion are others. This seminar is about recognizing “You can Do That’s”. It is about differentiating between legitimate warnings and ill-founded advice. It is about implementation, execution, and completion of decisions made in the face of the conventional wisdom. The YCDT philosophy is not for everybody. If at any time during the seminar presentation you begin to feel uncomfortable, don’t be alarmed. Many of the precepts, concepts and what I call “Peña“Peña-isms” will be very different from what you’re accustomed to. accustomed to.
SEMINAR PRESENTATION There is no set presentation format for the seminar. There is a beginning, so to speak, but there may not be an ending. It is my intention to cover the materials in this seminar manual, but it is not absolutely necessary that that be done. The beginning of the seminar will be comprised of some introductory remarks and the introduction of the participants. After that, it’s up for grabs. It’s up to you, the participants, to dictate how far we go down any an y path. It is infinitely more important that every question be resolved re solved than it is to complete the manual. You will take this manual with you when you leave; you can’t take the participants and their unique experiences and observations. You can always refer to this manual if you choose to do so; what you will not have is the option to avail yourself to the minds and voices of the seminar se minar presenter and the other participants. By the time this seminar ends, there will be no question in your mind about ab out the meaning of the YCDT philosophy. There will be no argument as to its application in business, especially for the entrepreneur and would-be entrepreneur. Each seminar group will simply find the answers using its own means.
THE SEMINAR MANUAL This seminar manual has been written in an easy-to-read, easy-to-use manner. The manual has been written, and punctuated, very much like I speak. speak . This is not an English composition book. Although based on the events of my personal and a nd business life, all of the names, dates, personalities and other nice-to-know information and data have been eliminated. All that remains is the hard-technical information that the participant needs to know about gut executive-level decision making in the face of the conventional wisdom.
SEMINAR AND SEMINAR MANUAL ORGANIZATION The topics covered in each section of the seminar manual represent homogenous groupings of issues requiring the same or similar decision process. The sections of the book from front to back represent a rough timeline of events that the entrepreneur would face in starting, developing and growing his business.
The YCDT philosophy is embodied in The Five Credos for Success. As was noted earlier, philosophy is one thing, but implementation and execution fare another. In the classic scheme of things, philosophy gets ready for action by being codified into a set se t of principles, which in turn get restated rest ated into a set of operating procedures, which in turn get restated into a set of day-to-day standard sta ndard operating practices. This is the normal implementation and execution process. And this was the process I used to build Great Western resources Inc. (“GWR”). But many hours of describing how to fit a myriad of principles, procedures and practices into each participant’s unique situation would get fairly boring, fairly fa irly quickly. For ease of presentation purposes, the PPPs have boiled down into what I term “Peña“Peña -isms”. These are hardly akin to the statements of Chairman Mao, but they are “Words to live by” if you are serious about entrepreneurial success for your business project. To illustrate how various Peña-isms worked in certain situations, some of the conventional wisdoms I faced as I built GWR are covered in this manual and the seminar presentation. A current list of all Peña-isms is provided in Appendix A. As you will quickly realize, these are not unique to me or to GWR by any stretch of the imagination, and each seminar participant has probably faced the same situation before in his own circumstances. What is unique, however, is how I handled the situation – and succeeded. During my professional life, I was told 86 times what could not be done. I know it was 86 times because I kept a list! (See Appendix B) In all 86 instances I accomplished ac complished what I really desired. And in terms of Great Western, I’m not talking about small triumphs, I’m talking about huge, insurmountable tasks like… TURNING $820 INTO $400 MILLION MARKET-VALUED ENERGY COMPANY IN 8 SHORT YEARS WHEN THE PRICE OF OIL WENT FROM $40 TO $10 PER BARREL! GETTING A $20 MILLION CONTRACT WITH THE FEDERAL GOVERNMENT WITH NO OTHER EMPLOYEES OR OFFICE SPACE… ONLY A PHONE AND LEASED FAX MACHINE! ACHIEVING REVENUE OF $50 MILLION MY FIRST YEAR IN BUSINESS! BUYING A FOREIGH SUBSIDIARY FROM A FORTUNE 200 SIZE COMPANY OVER THE PHONE… ON NEW YEARS EVE!
BUYING A $150 MILLION U.S. COMPANY FROM ITS MULTI-BILLION DOLLAR FOREIGN PARENT WHEN THEY DIDN’T WANT TO SELL! … the exciting details are in the subsequent sections.
CONCLUSION This seminar manual and the seminar presentation in which you are about to participate are about success in business in a free enterprise economy. It’s about choices; it’s about decision making at the business management level. I believe my approach to the subject matter is significantly different that no other “how -to” venues in one very important aspect: I have already achieved the success. I created the philosophy and developed the process. And, most importantly, I used the process to start, develop and grow my company, Great Western Resources. I have achieved implementation, execution, and completion. Great Western Resources is a diversified public company in the energy business. It’s real – you can go touch its oil derricks and coal mines; you can talk to its management and its employees. The YCDT philosophy isn’t a “get rich quick” scam. There is no elevator to the top. There is nothing beyond this seminar except for the audiotapes, which you get at no additional cost. There is no magic computer software, no cute T-shirts available for purchase. I’d like to see each and every one of you succeed. I did so can you. But if you don’t, well, you didn’t want success bad enough –better luck next time. As you will better understand at the end of this seminar, being an entrepreneur means there is always a next time. This seminar is simply one form of opportunity. It is knocking now at your door. But it is up to you to answer the door
THE MANY FACES OF THE CONVENTIONAL WISDOM INTRODUCTION First of all, as I’m sure you have already noticed, this manual is written in the first person singular. I can do that since this is my seminar and my seminar manual. That means that you, the reader, will see a lot of “Is” as you pour over the text. Most English teachers would tell you to minimize the use of the pronoun “I when writing. And they are probably correct. But I’ve chosen to ignore that piece of advice, which is alright, because I also ignored it back when I was still in school. Besides, if I ignored it back when I was still in school. Besides, if I
used “Daniel S. Pena” or “Dan Peña” instead of “I”, you would get tired of that, too. So, “I” it shall be; the decision has been made. Is it the right decision? Who knows, or more importantly, who cares because:
Peña-ism: the consequence of a misguided decision is de-minimis in the concept of eternity.
OPPORTUNITIES As I stated in Section I, this seminar program is really all about choices: recognizing opportunities, which present themselves to us at various times in our lives and deciding what to do with them. It is about getting on base no matter what, i.e. stepping into a pitch if necessary. It is about getting hits and knowing when to swing away for a home run. And even more important, this seminar and the YCDT philosophy is about getting into a position for a Grand Slam. But most of all, this experience is about feeling comfortable swinging away when the bases are loaded. As result of what you learn at this seminar, you will know when your “special time” comes and you’ll know what to do with that bet. Before I started Great Western Resources, I had a lot of opportunities present themselves to me. But I ignored them. Why? Because with every opportunity there came seemingly a thousand “You can’t do that’s”. There were always more than enough reasons for doing nothing. The conventional wisdom always had plenty of support for any decision which said, “Do nothing.” In fact, as time went on, the conventional wisdom presented itself to me so many times that every time an opportunity came up, the words “You Can’t Do That” would immediately float across my mind. It got to the point where “You Can’t Do That” seemed the natural and probable consequence for everything. Remember the list of the 86 times I was told it couldn’t be done! (Appendix B) Then in 1976 a significant event occurred in my life that changed the way I looked at opportunities. Between 1976 and 1978 I redefined my meaning of success.
What was that significant event? Well, I’m not going to tell you because 1) it would be too much of a surprise; and 2) it’s personal and it’s my secret and I don’t go around telling secrets. Some of you will experience significant events like mine, and some of you will not. If you don’t does that mean that you cannot possibly be successful? Of course not. But I’ll let you in on this little secret: this seminar could be a significant eve nt for some of you. This could be the proverbial knock!
SETTING GOALS AND OBJECTIVES. Whether you are in an entrepreneur on the verge of brilliance or a seasoned executive, you have already experienced some form of serious goal setting in a business environment. That pro forma you prepared for your bankers in an attempt to get working capital funds with which to start product development was the quantification of an objective. The plans for the near term that you laid on your partner or subordinated at the last meeting were really goals. Do goals and objectives have to be realistic? If they are not, the probability of achievement is low, and failure to consistently achieve goals can lead to frustration and disillusionment. At least, that’s the conventional wisdom.
Peña-ism. Always shoot for the moon. That way, even if you don’t hit the bull’s eye, you’ll at least get eighty percent. GOALS As you will see on the pages that follow, I kept track of goals (in no particular order). In some years references were set down on scraps of paper. In other years, my wife wrote them down for me very neatly on a legal pad. As a family, we normally choose the week after Christmas to sit down and list our goals. I never assigned deadline dates, fearing that it might actually become a self- fulfilling prophecy, since most goals can be achieved in less time than we believe. For example, I decided I was going to buy an island with a castle in the Spring of 1983, less than a year after founding GWR. At that time, I hadn’t bought a U.K. company or even thought about going public. Some nine months later, GWR purchased a UK company and sixteen months later, in August 1984, we went public.
I can’t tell you if we would have never gone public in the UK even by 1995 if I had put a time limit on my big goal: the castle. I just know I had no time constraint and did it in 1984. I was focused on buying a castle and I subconsciously did whatever it took to fulfil my goal. You will see that definitive time limits act as boundaries for how fast you can achieve something, not as a benchmark for achieving something in a timely manner. Castle Goal time Sequence 1) Set castle goal – April 1983 2) Looked at castles in UK – Thanksgiving 1983 3) Bought UK subsidiary from large U.S. company in a totally unrelated transaction – New Years Eve 1983. 4) Visited UK company (Spring 1984) and decided, while in the UK, there was a huge opportunity for GWR to go public. 5) Went back to US and found something to take public. 6) Made first offer on castle – June 1984 7) Went public on my 39th birthday – August 10, 1984 8) Made final offer – August 1984 9) Moved in castle – September 1984 While building Great Western I had two goals. The first was to become one of the ten highest paid executives in the energy business. The second was to amass assets at Great Western in the $2-3 billion range by the early 1990s. My tenure at GWR ended before I could realize the latter, but I did achieve the former. In fact, I was in the top five from 1986 to 1990. You may be thinking that I somehow sacrificed the latter for the former. Nothing could be further from the truth. Executives don’t get big bucks unless they perform, and I performed. And when I performed, everybody – employees, management, advisors and stockholders – benefited. I had no greater joy than when employees were able to buy a new house or something of that nature when they exercised their stock options. I was especially happy the day my long time administrative assistant bought her new house.
You may want to keep that idea in mind the first time you feel bad about how much money you’re making. Besides, always remember:
Peña-ism. Always, always, always pay yourself first. DRAWING ON EXPERIENCES We have all heard the old sayings, “Experience is the best teacher” and “Those who don’t learn from history are doomed to repeat it” many times. I firmly believe in the teachings of these words, and so should you. Experience comes in two forms: there are good ones and there are bad ones. You should build on the good ones and remember the lessons learned from the bad ones. And once you draw up the rules of conduct for the future, stick to them, no matter what.
Peña-ism. Don’t, under any circumstance, ever Ever second guess yourself. Before founding Great Western resources, I was president and CEO at another vertically integrated natural resources company, a company that I founded and helped to build and position to become a real up-an-comer in the energy business. Notwithstanding all of my well-documented successes there, there was one thing that really bugged me. I was the number two man at this company, and, as such, I didn’t really have the final word on the big decisions. That one aspect of corporate life was so distasteful to me that I vowed I would never do it again. After I left that company, I had a seemingly fantastic opportunity present itself to me. I was offered a position with a salary of $1 million a year. The position was for the number two man at an emerging company. That million dollars was more than a little tempting, believe me. However, I turned it down and never looked back. Just another “dumb luck” story? Not at all. I knew in my heart that I needed to stick to my rule of conduct. I did, and so should you. It is one of the best pieces of advice that I can give to you. Speaking of sources of advice, try looking to the experiences of others.
Peña-ism. You won’t always have all of the answers. Take seriously the advice of others who you respect. Periodically throughout this manual, I will say I went with my instincts, or I knew in my heart, or I made a gut decision.
The difference between success and failure many times will be how you, as CEO, “feel” about the course of action that should be taken. There will be times that this “feeling” will give you additional insight. I’ve learned the hard way to go with my “gut feeling.” Normally this feeling is associated with bad deals. So when the feeling comes, don’t fight it. It is likely to save you a great deal of pain and heart ache. You may develop the same “gut feeling” for good deals. I can only “feel” bad deals. One of the most influential people in my professional life was a man I met early in my career. At the time, he was almost three times my age and looked like he belonged in a retirement home. He had no formal education and was very rough around the edges. Yet he ran one of the largest international corporations in the world, with luxurious offices and accommodations in the heart of New York’s financial district. I hung on his every word, thankful for the opportunity just to get close enough to hear what he had to say. We formed a pretty close friendship and I would stop by to see him whenever I had the chance. For whatever reason, as soon as I would get to his office, he would say he had to go to the bathroom and we would talk together in the men’s room. Some of the best advice I ever got was given to me while standing side by side with this elderly gentleman at the urinal. Is there anything to pass along to you? Just one thing: simplicity. My friend ran his international corporation from New York as if it was nothing more than a vegetable stand sitting alongside a dusty country road. For instance, his entire finance department consisted of one person: one man with a journal and an adding machine whose job it was to count the money. Seriously. I never forgot that.
PERCEPTION IS REALITY Never underestimate the power of illusion. Reality is in the eye of the beholder. What seems real, is real; perception becomes reality. Early on in the development of GWR it became increasingly clear to me that if I and Great Western were going to go anywhere, we had to make ourselves look as if we were already there. I knew that our business associates had to see me in time now as I planned to be in time future, or there wasn’t going to be any future for either of us. I needed a quick transfusion of perception in order to acquire the perception. Sound like double talk? Read on. As I’ve already said earlier in this chapter when referring to goals, one day in the Spring of 1983 while running with my wife in Torrance,
California, I had decided to buy an island with a castle. Yes, a castle, the ultimate ostentation, clear evidence that one has reached the pinnacle of success. After all, I knew from my Wall Street days that if you wanted to do business with financial institutions, you had to prove to them that you didn’t need their services. So the castle was to become the perception which would cause the business community to realize that we didn’t need their help since we had already arrived, which, of course, we hadn’t. There was just one small problem: Hey, Dan Peña, what’s wrong with you anyway? You can’t buy an island with a castle. You’re a nobody and nobodies don’t go around buying such things. Before you can own a castle, you have to be somebody. You can’t buy a castle! You can’t do that! ****************************************************************** The conventional wisdom was right, of course. Which was exactly why I ignored it. I bought the castle, Guthrie Castle in Angus, Scotland. And as my wife Linda points out, it is on an island called Great Britain! I bought it because I made myself look like I didn’t need it, like I already had two or three others tucked away and this one was just a bauble. So I manipulated perception to form reality to acquire the perception which would form the basis of other realities. Guthrie Castle is now my permanent home, the safe harbour for my family. It is no longer a perception, it is real. In conjunction with our decision, my wife and I had decided we wanted to raise our children in a different socio economic milieu. This may sound like a strange example. But it really isn’t when you buy a new car or join a country club as a way to achieve business success, you are acting out perception as reality. You are putting yourself where you believe people will perceive you as being successful. The castle is merely an extension or “a quantum leap” from the rational. So where does all of this lead? Just where, you may ask, am I going with all of this talk of choices, opportunities, experiences and perception/reality. It leads to the YCDT philosophy; it leads to The Five Credos.
THE FIVE CREDOS The Five Credos is not a rock band from the 1960s. It is the operational arm of the YCDT philosophy. It’s where theory gets down to business, where the rubber hits the road. The Five Credos are what enabled me to take $820 in cold cash and turn it into a $400,000,000 public company in just eight years.
I have carried these words on my person since the late 1970’s. If you don’t believe that, just ask me and I’ll show you my DayTimer where I have written them down every month since the late ‘70s. The Five Credos – Yesterday’s dreams are today’s realities. – See your dreams ahead of time now. – Simulation: practice within when you’re without. – Act as if there are no limits to your abilities. – Enthusiasm: comes from the Greek word, “god within”.
QUANTUM LEAP/HYPER GROWTH In this seminar, I – and you – are going to cut tight to the heart of the matter. I’m going to show you how to “Quantum Leap” your career, your finances, your life by concentrating on the one and only objective that means anything at all: your real dreams! And when I say concentrating, I mean a focus, a tight focus – a “laser beam focus” on the achievement of that objective. There is only one path to success: absolute and total commitment. If you just think you may want to be successful, then you’re in the wrong seminar. And I can guarantee, you will not be successful! If you came here just to see if I was even half of what you’ve heard, I can’t do a thing for you. But if you’re here because you have a dream, and you believe deep down in your soul that your dream can come true, then you came to the right place. As long as you have a burning desire to succeed, believe me, you will succeed. You must keep those fires burning. And many times it will not be easy. In fact, very often it will be almost impossible! However, as long as you have the will, But don’t know the correct path, I can provide the way. It doesn’t matter that you may have failed in the past, no matter how many times. (And perhaps it may be better that you failed a few times.) But forget about those past experiences! Forget about those past obstacles! I’m going to show you how to ignore them completely or work around them… or over them… or go through them!
Peña-ism. To achieve hyper growth, you must avert avoidable mistakes and let your successes run their course.
All of this is possible only if you believe in your dream and are focused on it becoming reality, Laser beam focused. Concentration. When I built Great Western I lived and breathed its success. I believed in my dream. I was obsessed. I was so focused on its achievement that I slept most of the time in my office just so I could be near it. I had often wondered why CEOs had showers in their offices. I found out why. Well, it’s time to get going with that company you are trying to start and/or develop and run. No more prefatory remarks, no more introductions. It’s time to put the pedal to the metal; it’s time to put the rubber on the road. “Ladies and gentlemen, start your engines!”
BUSINESS DEVELOPMENT: A HOST OF INITIAL OBSTACLES
ARE YOU AN ENTREPENEUR? Webster’s defines an entrepreneur as “One who organizes, manages, and assumes the risk of a business or enterprise.” The guy who started General Motors was an entrepreneur. But so is the young lady who is just now starting her engineering firm, and that man who just retired and is opening his own printing shop. The concept of the entrepreneur has been blown way out of proportion. We have attached to it a sense of grandeur and awe that simply does not belong. Maybe it’s because “entrepreneur” is a French word. Anyway, most people see entrepreneurs as gallant and determined dreamers who must fight the establishment in the form of financial institutions and the industry base. It’s the little guy with the new idea against the big guys with the market share. It’s good against evil; small against big; new against old. The fate of the world hangs in the balance! Nothing could be further from the truth. It’s simple. If you work for someone else and get a regular paycheck, you’re not an entrepreneur. If you organize, manage, and assume the risk of a business or enterprise, you’re an entrepreneur. One more time. There are only two types of folks involved in business: those who like the comfort of a paycheck, or those who like to risk everything on success or failure. Pick one, but only one.
THE GREAT UNKNOWN Year after year, the single largest cause of business failures is mismanagement. But no one who ever had a failed business will admit to that. Mismanagement may have caused everyone else’s business to fail, but not their’s. No, their business failed because the market went away, or the federal government did something or didn’t do something, or it was those cheap imports. They could have made it, but external events simply overcame them. As they say in the boxing world, “ I couldda been a contenda”. Two things cause businesses to never get started or fail once they get started. The first is not having a full appreciation of the impact of the unknown, and the second is failing to manage in known conditions of the unknown. The sheer mass of the unknown is at its greatest when the business is being initially developed. Each entrepreneur starts the race to grow his company from a different position on the track. We all come to the race with different experiences and capabilities. Some of us are more prepared than others. Before starting Great Western, I had a lot of experience in the business world in general, and a little experience in the oil and gas industry in particular. That general experience gave me a head start in the race, especially because I knew:
Peña-ism. Even when one thoughtfully and judiciously plans, more often than not such plans are overcome by external events. Therefore, never underestimate how wrong you can be. At Great Western, we never underestimated how wrong we could be. We thought over everything; we put every possible event, issue, and consideration into our decision models. We ran every conceivable scenario, and then we ran them again, and then we ran them one more time. We discussed them at breakfast, over lunch, and at late night dinners. We talked about them constantly. We planned for success but provided for detours occasionally by one or more unknowns. We worked seven days a week, sixteen hours a day. It’s all part of being an entrepreneur – a surviving entrepreneur! Once you get started, you must continue to grow. The amount of time spent at the business is the same, but the areas of focus change. It is now time to manage in known conditions of the unknown.
There are many theories of management, and all of them have one or more applications across the broad spectrum of different industries products and services, utilizations of resources, and management styles. The one universal dictum seems to be that financial return is directly proportional to the assumption of risk (i.e., that which distinguishes the entrepreneur from the guy who gets the paycheck). The saying, “high risk/high payoff” is a very familiar one, indeed. But implicit in this risk/return equation is the presumption that the management of a company can, in fact, manage its affairs in such a manner so as to realize the financial return accruing from the assumption of the risk in the first place. In every business proposition there is upside risk and downside opportunity. If these two elements are in a state of equilibrium, the company will perform in the long term at some average, or normal, rate of return. I thought long and hard about these management dicta, and applied them to the natural resources industry in general, and to the operations of Great Western in particular. There is a lot of risk in the oil and gas industry. There are enumerable unknowns. In fact, every prospectus you read from an oil and gas company contains the caveat emptor, “oil and gas exploration and development is a speculative activity which, compared to other activities, involves a relatively high degree of financial risk”. I had to read that statement many times, but eventually began to wonder if it were really true. There were unknowns, but if you managed a business in a manner to account and provide for these unknowns wouldn’t you otherwise be underwriting its success? I firmly believed so. Besides, I didn’t want the management at Great Western to allow themselves the opportunity to fall back on a false premise. If you accepted the argument that it was hard to make a buck in the oil and gas industry because it was risky, then you could excuse yourself from not making that buck for the same reason. If you allowed yourself to be overcome by external events, you could excuse your poor performance due to these events. I found such a notion abhorrent.
Pena-ism. Plan for success: no back-up plans, no rip cords, no fail-safes; or, you will fail. One final point on the unknowns. Each entrepreneur believes deep down in his heart that his problems are truly unique. “A lot of other entrepreneurs have succeeded at their enterprises, but then, they never had the problems that I have“ is a familiar lament.
Let me be the first to tell you that we all share the same boat. The problems and the obstacles are the same, they just come in different guises. I looked at the risk factors enumerated in the prospectuses I saw and came to the conclusion that the oil and gas industry was really no different than any other industry. Each of us had to deal with the same unknowns, they just came wrapped in different packages. For instance: · “Even if oil and gas interests are in areas of proven reserves, there is no guarantee that a discovery would have commercial significance.” Was that any different than a pharmaceutical company trying to develop a new drug? An agricultural company trying to develop a meatier tomato? · “The appraisal of oil and gas interests is not an exact science.” Is there any form of prognosticating, estimating, and forecasting that is an exact science? · “Unforeseen circumstances may result in drilling delays or lower that expected production levels.” Was the oil and gas industry the only one having to deal with “unforeseen circumstances”? · “Movements in the market price of oil and gas or changes in taxation or other government action may have adverse effects on income levels.” What, the airline industry never had to worry about deregulation? The automobile industry about air bags? Different industries, same problems. We are all in the same boat. The unknowns don’t play favourites. I am a firm believer in the adage, “Things that start off wrong only get progressively worse.” There is no better method of operating in the world of unknowns that to do your homework. The more effort expanded before the decision, the less the pain when things don’t work out, or…
Peña-ism. The more you investigate, the less you have to invest. THE PEOPLE PROBLEM The human resources of a company represent an ironic situation: they are the one asset that counts the most but also the one that never gets counted on the balance sheet. They are also a business’s greatest source of frustration.
My experience with the people side of organizations puts the issue into three different, but related, categories: getting people, dealing with personal/professional relationships, and getting rid of people. Hey, Dan Peña. What’s wrong with you, anyway. You can’t get top quality professional people to give up their promising careers to come join you at Great Western. What can you offer them? It will never work. You’re wasting time, both yours and theirs. You can’t do that! It’s difficult when you’re starting out to let go of any portion of your dream. It’s not that you’re afraid someone else will steal it, it’s because you’re afraid no one else will embrace it with the same love and devotion as you do. Pride of authorship has killed more budding business deals than anything else I can think of. Personally, I would rather have 50% of something than 100% of nothing. But once you convince yourself that you can’t do what needs to be done alone, you need to find the right people to travel the long journey with you. How do you go about finding the right people? How do you pick your partners? How so you form the team with the greatest probability of achieving success? Before you make the final decision, ask yourself this: Could I be married to this person? Because that’s what you are going to be for an undeterminable period of time: you are going to be married to this other person or group of people. My two partners came to GWR from their professions, one from accounting and one from law. We had met along the way of separate careers, finally joining forces at my behest to pursue the dream called Great Western. They were A-1 performers at their respective firms, and both would have done exceedingly well even if t hey hadn’t done so at Great Western. They were both very well paid partners at their respective firms. The conventional wisdom was wrong once again. Both of my partners gave up a lot to dedicate themselves to Great Western. Why? I don’t know. I presume that there were any number of reasons. The lesson to be learned there by you is that it CAN be done. The means you employ are up to you. The question is often posed as to whether or not people in business can have both a personal and professional relationship without destroying both relationships. The answer is a resounding, “yes.” My partners and I did everything together. It’s all part of the entrepreneurial marriage thing of which I just spoke. You spend so much time together that a personal relationship is
unavoidable; in fact, it’s a foregone conclusion. If you can’t be friends, you can’t be business partners. We all became very close, as did our families and circles of friends. You are going to have to deal with your personal relationships outside of your professional ones. These are easy if your entrepreneurial endeavours fail. Down deep in their hearts, most of your “friends” want you to fail because that makes you look bad. If you succeed, then they look bad. When you fail, they’re happy because they have the upper hand. This revelation may shock you but, believe me, it’s true. It’s just human nature – jealousy and those other evil things. Well, you can’t control what others do, but you can control what you do.
Peña-ism Always maintain your personal relationships on the same plane upon which they were formed. True friends will rejoice in your professional successes; allow them to enjoy them with you. Do not ever reassess their personal and professional lives in terms of your own. One of the hardest jobs f or a senior manager is to get rid of people. It doesn’t matter what you call it – work furlough, layoff, early retirement, reduction-in- force, a firing – it all leads to getting rid of somebody. And don’t think it becomes any easier just because you don’t like somebody. You may not like them personally, but they were probably very good technically, and they are probably going to be hard to replace. Regardless of your approach to this matter, there is one cardinal rule you must follow:
Peña-ism When you get rid of someone, never ever give them a hook with which to get back in. Always make it a clean, definable break. Separations at the management level can be very expensive for a company, especially if employment agreements are involved. But no matter what the cost, sever the relationship completely. Do not try and save money by offering “hooks” – such as stock options – to the person who you want out. Get them out and keep them out. And money that you think you are saving will be peanuts compared to the aggravation you’ll experience later on.
DOING YOUR FIRST REAL DEAL In the early stages of the life of every business there comes the time when you, the entrepreneur, must do your first deal. It may be your first financial arrangement with a bank, an initial advertising contract with a real customer.
Regardless, how you perform at this juncture will have a significant impact on the survivability of your business enterprise. A lot of the topics discussed to this point will come into play during the conduct of your first deal-making adventure. There will be real opportunity to see how well you handle your first transaction. If all goes well, will you build on the experience? e xperience? If things go poorly, what mental corrections will you make? What illusions will you create to maximise your benefit form the transaction? Have you prepared yourself for success: no fail-safes, no fall-backs? Have you covered the unknowns from every possible angle? Have you identified and practiced (in you mind) all of the scenarios to reduce the probability of error to its minimum; have you all but eliminated the margin for error? The game is on the line, so to speak. The fulfilment of your dream hangs in the balance:
Peña-ism. The fulfilment of your dream is directly proportiona proportionall to your desire to succeed. How badly do you want to succeed, how much are you willing to sacrifice. For if you are not prepared to die, then you are not prepared to live. I remember my first real deal with what was then called Great Western Development Corporation, the company I started on Friday, July 13, 1982 with $820 cash. *************************************************************** Hey, Dan Pena. What’s wrong with you, anyway. You can’t get a major contract from the federal government with no employees, no office, no money, and a leased fax machine. They won’t give an important contract to a company like GWDC. You can’t compete for that contract. You can’t do that! *************************************************************** Great Western Development Corporation had bid on and won a jet fuel supply contract from the U.S. Government through its Defense Fuel Center operations. I had found out about the opportunities (there’s that word again) ag ain) for such contracts during my visit to Washington D.C. The original value of the contract was $20 million, but that would eventually grow to over $50 million. How improbable was this deal? It is the conventional wisdom that one could sell Amway products out of a spare bedroom in the home, but not fuel for Uncle Sam’s war machine! machine! Was I scared? You bet!
Was I apprehensive about the transaction? t ransaction? You bet! Was I comfortable with the situation? You bet! Was I afraid of success? No way! Was I afraid to die? Never, because I wanted to live more than anything.
BUSINESS DEVELOPMENT: RAISING INITIAL CAPITAL FOR GROWTH
THE NUTURING PERIOD Great Western’s fuel supply contract with the federal government came with a slim margin, but it provided enough working capital to keep the business going and also gave me breathing room in which to consider some candidate opportunities for growth. It was 1982 and the Tax Reform Act of 1986 was still four years away aw ay which meant that tax shelters were still the rage with both individual and institutional investors. As you may recall, the Tax Reform Act took away virtually all of the attractiveness of tax shelters as investment vehicles. For the next two years Great Western Development Corp. put together three tax shelters in the form of drilling funds that performed fairly well, both financially and technically. Operating capital from the funds came in the form of the G&A fees payable to GWDC. These fees paid for two things: The operations for the business and the operations of the Daniel S. Pena, Sr. Household. This was the nurturing period for GWDC. Every new business goes through this period. During this period, the business enterprise is in its most fragile condition. The slightest bump or jar will break it into a thousand little pieces. It must be handled very gently; it must be coddled; it must be nurtured as if it were a newborn child. I nurtured GWDC with a velvet-covered iron fist. The velvet was for GWDC, GW DC, the iron fist for me. I knew that GWDC needed nourishment to grow, and I also knew that selling a series of look-a-like tax shelters would not provide that needed nourishment. I knew that the second tax shelter had to be grander than the first, the third grander than the second. I knew it was time to put myself under the threat of the iron fist. It was time to see what I was made of. Great Western was either going to live or die, but either way, it was time to find out. I knew that the road to the big time in tax shelters went through Wall Street, but I also knew that you couldn’t get there from a small office in Southern California with a no-name no -name
product base. I went to work and put together a series of illusions which put me on Wall Street with the third tax shelter. It was a classic example of the perception/reality ruse, and it worked very well. It was the first time that I had really done this trick with my own money at stake, and I was surprised at how easy it was to pull off. As a matter of fact, my successes with GWDC’s second and third tax shelters lead directly to my decision to acquire what would eventually be Guthrie Castle. As I mentioned previously, even though the drilling fund tax shelters were successful financially, there was one aspect of this period in GWDC’s nurturing period that really bothered me. The revenue steam from GWDC’s operations had to fund both the business and my household. I was playing with my own money. The business decisions I had to make contained a variable that didn’t belong. There was a problem that needed to be taken care of.
Peña-ism. You cannot win at poker with scared money – it gives off a stench that is repugnant to the winning hand. If you are going to play poker, leave your money at home and play with “OPM”: Other People’s Money. Most entrepreneurs find themselves in this same situation. On the front end of the business development cycle, it is usually their money that is funding operations. It is scared money, and scared money is very difficult to play hard and tough with. Remember, this is the nurturing period for the business. Everything is in its infancy: the technical aspects, the organization, the human resources, and the financing. The entrepreneur’s attention is needed everywhere. There is a new problem occurring seemingly every minute. Stress is at its maximum pressure. It’s time to get some relief; it’s time to get some OPM.
FINANCING ALTERNATIVES A business enterprise needs funds for working capital and for facilities capital. Working capital pays for on-going operations, business development, and product development. Facilities capital pays for the facilities, machinery and equipment necessary to conduct the mission of the business. The corporate business entity has three t hree sources of funds available to it to finance working wo rking capital and facilities capital requirements: earnings retained reta ined in the business (capital surplus), debt, and equity. Debt can be in the form of trade debt (payable in the normal course cours e of business operations), short term debt (payable within a one year period), and long term t erm debt (payable in whole in
part beyond a one year period). Equity can be in the form of common or preferred shares to stock, or any hybrids and variations of the two. Financing the working and facilities capital requirements of a new business enterprise with funds from retained earnings is not a viable alternative. First of all, there probably isn’t going to be an earned surplus, but rather an accumulated deficit. Secondly, even if there exists an earned surplus, it probably won’t amount to enough to provide a serious source of funds for growth. That leaves debt or equity as the remaining sources of funds for the new business. With debt, you retain ownership but incur interest expense, a fixed charge of the business which can eat up a lot of net margin dollars, thereby restricting management’s ability to use the funds from operations for its own projects. With equity, there is no drain on the funds from operations but there is a dilution of ownership and control. A detailed discussion of the pros and cons of using debt or equity is beyond the scope of this seminar program. Each situation is different. If you are really interested, let me recommend to you that you seek independent guidance from professionals in this area. Unfortunately, most of the guidance you will receive comes from people who never started or ran their own business. In August, 1984 I chose to raise capital for Great Western Development Corporation through the use of a public offering for equity shares in a new corporate entity called Great Western Resources Inc. Another option available was a private placement of equity shares. Once again, for those readers interested in the pros and cons of public vs. Private offerings, I would direct you to the same “appropriate professionals” in this area.
GOING PUBLIC On August 10, 1984, my 39th birthday, GWRI had its initial public offering on the London Stock Exchange. Of 25,000,000 common shares authorized, 20,000,000 were issued on this day, 5,000,000 to be traded by the public on The Exchange. The stock was issued at 160p (about $2.00). At the end of the day, our stockbrokers presented me with a check for $10,000,000 representing the public’s 25% share of the IPO. The remainder of this seminar manual, starting with the IPO, covers topics on business growth and development as I encountered them at GWRI from 1984 to 1992.
THE INITIAL PUBLIC OFFERING BACKGROUND FOR THE DECISION
By the time 1984 rolled around, I had accomplished a lot with Great Western Development Corporation, the company I started with $820 cash. The conventional wisdom had tried to dictate to me on a number of key issues and had come up short on all of them. My YCDT philosophy was now a permanent part of me. I didn’t go around looking for the impossible, but I never backed away from anything just because it seemed impossible on the surface. The conventional wisdom had declared: · You can’t sell tax shelters on Wall Street from a little outfit in Los Angeles – I did it with our third drilling fund in late 1983. · You can’t come out with new tax shelters and compete in a already saturated market: I did it twice, and quite successfully, in 1983 with our second and third drilling funds. · You can’t get orthodox Jews to come out on the Sabbath and sign a contract: I did it, In Israel, as part of a joint venture deal with the Israeli government, also in 1983. In early 1984 I was convinced of a number of things concerning GWDC as an emerging company and about myself as an entrepreneur. I was convinced that GWDC was in the right business sector (oil & gas) at the right time ( pre Tax Reform Act of 1986 and with the Republicans in the form of Ronald Reagan in the White House). And I was convinced that I had the right stuff (the YCDT philosophy in the form of The Five Credos) to recognize and take advantage of the right opportunities. But I also knew that philosophy and theory were one thing, but implementation, execution, and performance quite another. I took inventory of the things I had, to see if they were enough to take GWDC out of its nurturing period and into an accelerated growth period. · First, and most important by a mile, I had a dream. That dream was to build the fastest growing and eventually the largest natural resources company in the world. · I had the human resources. I had two partners who shared my dream and believed in it. They were also very good technicians in their fields of expertise. Additionally, I had hired arguably the best administrative assistant in the world. She is still with me today. · I had seen the perception/reality ruse work with the second and third tax shelter and with the purchase of Guthrie Castle. · I had established my credibility with the American banking system. I had financial support.
Remember that federal government fuel supply contract that grew to $50 million in value? Well, that money found its way into the banking system and became what bankers call “float”. Bankers like float and they liked me because I gave it to them. · Last, but by no means least, my partners and I had tasted success. We knew how it felt and we liked it. It whetted our appetites for more. And I became even more obsessed with it!
UK vs. THE U.S. (THE PROVERBIAL KNOCK) All of GWR’s income-producing assets are in the United States. They have always been in the United States. I have been asked many times why we went public and are traded on the London Stock Exchange instead of one of the American exchanges. Some of the major reasons are listed below. They were valid back in 1984, and are still valid today. I’m not recommending that every entrepreneur run to the London Stock Exchange as the only source of ready capital. But I am suggesting that there are numerous opportunities beyond our home soil. 1. The fees available for merchant bankers, investment bankers, stock brokers, lawyers and accountants were way too low to get U.S. firms interested. However, we were big enough for the UK firms to take notice. 2. We were too small for the U.S., fees aside. It would have taken a monstrous effort just to get somebody even to the point of remote interest. 3. In 1984, the U.S. oil market was simply wrung out. Besides, the U.S. was going berserk with junk bonds and LBOs where fees generated were in the 10’s of millions of dollars. 4. The UK was new to the oil business. The first oil had been discovered in the North Sea in 1975 and the British were still enthusiastic about exploration. 5. The regulations covering IPOs were not quite as stringent in the UK as they were in the U.S., especially for natural resource companies. We were not subject to the same scrutiny as were would have been by the SEC.
THE CHINK IN THE ARMOR This last point was important, very important, to the quantum leap development schedule I had established for GWR.
It took me eight years to run $820 cash into $400,000,000+ in market capitalization for GWR by 1990. My goal was $2-3 billion by the mid 1990s. If I had tried to do that in the U.S., it probably would have taken me 20 to 25 years just to get to the first $400 million. I did it in eight years in the UK for the five reasons listed above, plus one other you won’t find any mention of it in the text books on business management. I found the chink in the armour of “The City”, the international cognomen for the financial district in the City of London. The chink was the ego, arrogance, and insecurity of the people who inhabited The City. It was all part of the tradition, the lore of life in The City. It was as British as kidney pie and cricket. It was in their blood; it was in their training; it was in their entire sense of being. And I found that I could play them like a Stradavarius. It was easy for me because the biggest ego in The City from 1984 to 1990 was mine; it was easy for Great Western because on our worst day we were smarter and more assertive than they ever dreamed they could be. They were no match; they never had a chance; it was embarrassingly easy. Whether we actually were smarter or not wasn’t important. The issue was we felt and acted a great deal smarter. We acted as if we had no limits to our abilities! Okay, so where does that leave you, the reader of this manual? “I’m no Dan Peña,” you say? “I have no desire to take on the financial institutions in London,” you say? You don’t have to be or do any of these things to succeed with your dream. All you have to do is find your own version of “The City.” That may be just a feeling of superiority you get when dealing with others in a certain way. Those that find it will succeed; those who don’t, won’t.
THE PROSPECTUS In early 1984 we had purchased for $60,000 an option to buy an equity interest in a series of oil & gas properties with the right to drill up to twenty-four wells. We still had some assets from our drilling funds around. At the close of business on August 10, 1984, Great Western had issued and outstanding 20,000,000 shares of common stock which closed that day on The Exchange at approximately £2.00, or $2.50. The market value of the company was £40,000,000, or $50,000,000.
We sold 25% of the company for $10,000,000 and the shares closed at a 25% premium to the IPO price. The company had $10,000,000 in the bank and the cost basis in the stock held by myself and my two partners was $820.00. How could this happen? How could you generate $50 million in value off of hard assets under $100,000? Opportunity? To be sure. The prospectus for the IPO included a highly respected petroleum engineer’s report on the commerciality of the oil & gas properties. The engineering report indicated there was a good probability that there was $50,000,000+ of oil reserves. Anyone buying into the 5,000,000 shares put on the market for public consumption was free to draw their own absolute conclusions. Salesmanship? To be sure. One of the things we always did best at Great Western was sell institutions on the value of our stock and the promise of our company. Perception/reality? You bet. Works every time. All that really happened was I convinced The City I would build a very large energy company. I acted as if I knew I would. Did I exploit the chink in the armor of The City? Without a doubt. But I also did build a large energy company. How much of each of these types of things is necessary to be successful? Is there a recipe? There is no recipe. There is no requirement to incorporate all of these aspects into every floatation. There are other aspects not mentioned here which may be required. There are other aspects which may be present over which you will have no control, such as general economic or market conditions. But this is for certain: IPOs are gut decision making at its finest; it’s one of the best ways I know of to separate the men from the boys and the women from the girls. The aforementioned discussion and methodology is no different when you, the entrepreneur, decide to sell assets or your entire company as part of an exit strategy. If you don’t act (sell) with enthusiasm, you will never command top dollars in the selling process.
LIFE AFTER THE IPO
THE MANDATE As an entrepreneur, probably the single most exciting event in your life is to witness the initial floatation (IPO) of your company. You will want to pinch yourself many times to make sure that you’re not dreaming. It will all seem so improbable. An initial floatation is a true measure of success, but it is by no means the final measure of success or the only measure of success. It is merely the most quantifiable. Because it is quantifiable, an entrepreneur should set “going public” as a goal. Whether it ever comes to fruition or not is of no importance. The idea will help crystallize many of your thoughts, vis-à-vis operations controls, financing, marketing, personnel, accounting and most of all, how your business is valued. You must have your “store” in order to go public because you are taking the public’s money. It is a good habit to get into. Acting as if you are a fiduciary is especially helpful when dealing with banks or other financial institutions. An IPO is a major milestone along the path to making your dream a reality, but it’s also a wake up call. It’s truly the point of no return on your company’s journey to its eventual place in the annals of trade and commerce. You can’t help but wake up the day after asking yourself, “Gee, what do we do now?” When the public buys stock in your company, they are buying into something. They are buying into an opportunity they think will generate a financial return that meets or exceeds their investment criteria. If it didn’t meet or exceed their criteria, they would invest their dollars somewhere else. Financial investment dollars will always seek out the vehicle offering the highest available return on invested capital. A company’s opportunity statement(s) are included in the prospectus for the sale of the shares of capital stock. Each investor finds their own opportunity in the prospectus. It may be the attractiveness of the current financial statements. It may be the believability of the pro formas as the basis of the discounted value of the business enterprise.
It may be the positive assessment of the downside opportunities in the face of the assumption of the upside risk. It may be the perceived strength of the company’s management structure. It may be the perceived leadership capabilities of the executives. Any and all of these things can be quantified for purposes of making an investment decision. But the prospectus for the sale of share capital is also something else, something very important, especially to the entrepreneur. It is a mission statement. It is a mandate. The mission statement and the mandate may not be obvious from a reading of the language in the prospectus. This is not to imply that the prospectus is written to hide the true intentions of the company, or that it contains false or fraudulent data. It simply means that the mission statement and the mandate may be known only to the entrepreneur; that no matter how grand and effusive the disclosure in the prospectus, it is not obvious to the casual or deliberate, reader. It is obvious only to the entrepreneur because it can only be read with the heart and soul of the person who has given life to the company. In the introductory remarks at the beginning of this manual, I talked a lot about the relationship of success and the burning desire to succeed. Wanting it more than anything else in the world. Eating it. Sleeping it. Concentration. Focus – tight focus – laser beam focus. For the entrepreneur, how do you keep the intensity level up after the IPO, the first real tangible indication that your dream has become, or is just beginning to become, a reality/ how do you keep that “fire in the belly” going? Easily. You treat it the same way you would a marriage, for those of you not married, the way you would a meaningful relationship with another person. You work at it. You work at it damn hard. Even in those times when its continuance is seemingly impossible, you work at it. Never let down; never slack off. Focus: laser beam focus. There is no such thing as too much success; there is only more success, the next sweeter than its predecessor. Concentration Hyper growth.
Quantum leap. Don’t stop, keep going. Your dream, only your dream. And in the infamous words of Sir Winston Churchill (more recently borrowed by Ross Perot), “never, never, never, never, never ever quit.”
WHICH WAY TO GO As we commenced business operations immediately after the IPO, everyone at Great Western proceeded under the assumption that the mission of the company was to explore and drill the twenty-four wells on the properties for which we had purchased options. Everyone except me. I had a much larger vision. Hey, Dan Peña. What’s wrong with you anyway? We just went public three months ago. We had a prospectus. We had facts and figures. People believed in us and what we said. They pushed our stock up to $3.50. And now you want to do something different. You can’t change direction from the IPO document so soon. You can’t do that! My vision for GWR after the IPO was the same one I had always had. It was a simple one. And it was an elegant one. In fact, I always marvelled at its elegant simplicity: I was going to buy assets in a blending fashion as the means of building the fastest growing and eventually the largest natural company in the world. When I brought this to the attention of the board of directors and the management (I was the Chairman, President and CEO in the post IPO corporate structure), they acted surprised. They saw it as “something different” and a “change of direction”. I saw it as being totally consistent with the mandate in the prospectus. I never believed for a second that the public and the institutional investors paid what they did for their shares of stock just to see how the twenty-four wells would come out. If you were conservative, you would have been better off putting your investment dollars in a passbook savings account. After all, we had no earnings and no track record in running a public company. In reality, all we had was a vision. Albeit, a very clear vision, but clearest of all to me! If you are a gambler, you might have done better with the odds in Las Vegas.
AGAINST THE ODDS
I believed then, as I still believe now, that the overwhelming response to Great Western’s IPO was a mandate for me to pursue my dream and my vision. And I set out immediately on the road of implementation in performance of that mandate. Great Western was born in a hail of “You Can’t Do That’s”. In retrospect, that environment only served to strengthen its mettle. August, 1984, may not mean anything special to you, but it did to the folks over at Jaguar (motor car) because that’s when they went public too. I was told more times than I care to remember that GWR couldn’t come out at the same time because all of the investment dollars would be scooped up by Jaguar. The British government was selling off to the public one of its cherished assets – Jaguar! I was told to wait. I didn’t wait; I knew it had to come off as planned or it would probably never come off. As it turned out, I was correct. We did very well on our IPO. As I mentioned, our share price closed at a 25% premium to the IPO offering price. And the headlines of one major U.K. newspaper said, when referring to our IPO the same day as Jaguar, “Great Western resources, The One That Really Roared.” Just another lucky shot? Perhaps. One other thing about the advice I was getting. Some of it came from the members of the most prestigious law firm in London, a law firm whose representation I was told I would never be able to get. A law firm that was older than the United States itself. Thereafter, I would tell anyone who’d listen that our firm of solicitors (as lawyers are called in the U.K.) also represented The Queen of England, The Bank of England, and Great Western Resources. Which they did! I can still remember being told by their most senior partner that if there was ever a conflict of interest between the Queen and Great Western, they would have to resign. And they hoped I understood! The conventional wisdom. Popular opinion. The tide of conventionality. These are the entrepreneurs worst enemies. You need to constantly protect yourself against them if you desire exponential growth.
GROWTH VEHICLE ALTERNTAVIES
INTERNAL VS. EXTERNAL
Great Western had two ways to go. We could watch the performance of the current assets in the form of oil & gas properties, or we could pick up the mandate and follow my vision, my vision. The conventional wisdom Vs. a dream.
Peña-ism. A number of years ago, the singer Kenny Rogers had a big hit song called “The Gambler”. There is a line in that song that has direct applicability to the business world. The CEO of a company has got to”…know when to hold them , and know when to fold them.” As a CEO, you will get more advice from your staff than you know what to do with. Most of the time it will be good, sound advice. But all the efforts of the people in the company will all be for naught if the CEO doesn’t know when to hold them, or when to fold them. Only your instincts can tell you these things. And when they say “hold them,” you hold them; and when they say “fold them.” You fold them. Do not ever- second-guess your decision. The issue before me was a simple textbook case of internal vs. external growth vehicles. We could expand our interests in our current oil & gas properties and establish our out year growth curves on that basis, contenting ourselves to watch the curve move up and to the right at some annual rate of increase.
Or, we could take a series of actions that would have the effect of taking that curve and pushing it straight up a couple of notches. We could acquire growth. My vision embraced the latter. The name of the game here is revenue. Like success, you can never have enough revenue. More revenue. More and more revenue. Tons of revenue. Tons and tons of revenue. My vision embraced more revenue; my laser beam focus was on more revenue. Anybody can control and cut costs, but you can never experience hyper growth and quantum leaps in business without generating more revenue.
Peña-ism: All managerial performance sins shall always be forgiven during periods of rapidly increasing revenue streams. One of the things that I always did better than other executives in my peer group was “…know when to hold them, and know when to fold them.” This time I was going to hold them, and then play them with a vengeance. The first series of wells on our properties didn’t turn out so well (no pun intended). Mother Nature and some overly-optimistic geological data teamed up to get us off to a rocky start.
But no matter, we were already looking at our first acquisition candidates. The issue here was the timing. It had to be done quickly or the financial performance of the initial well explorations would be cluttering up our financial statements. We isolated the acquisition target and negotiated the deal. We took it to the stockholders and got approval in June, 1985. It was the wholly owned subsidiary of a Fortune 400 conglomerate that had gotten it wrong trying their hand at oil and gas. We also got approval to increase the authorized common shares from 25,000,000 to 35,000,000 on the basis that we needed the flexibility to continue in our growth mode. Perception/reality.
OUTSIDE ADVISORS This is a good place to introduce a cast of characters who fit the good news/bad news description perfectly. These are people you can’t live with and can’t live without. They are the company’s outside advisors: merchant bankers, investment bankers, commercial bankers, stock brokers, petroleum consultant engineers, lawyers and accountants.
Peña-ism. In order to really succeed in business, you need outside advisors. These advisors must be trusted advisors. To have trusted advisors, you need a very special relationship with someone at the firm. You need a mole. The perfect mole is someone who is motivated, aggressive, ambitious and bright enough, but not as bright as he/she thinks. We had moles in each of the firms of our outside advisors. They took special care of us and we enhanced their careers, all according to Hoyle. We made their career enhancement Great Western’s business. When possible, we encouraged their respective firms to promote them ahead of the curve.
Great Western paid a lot of fees to a lot of firms, but GWR is surely not unique in that respect. All large business enterprises have large teams of outside advisors. The lessons to be learned here are twofold: 1. As an entrepreneur, it is hard enough to let go of some part of your dream to your business associates and partners inside the company, even those people who may have been your lifelong friends. It is much harder to now let go of more of your dream to people outside of the company; people who, but for the existence of your company, you wouldn’t give the time of day.
But you must do it or the company will simply wither away. Exponential growth only comes from having less control, not more. Outside advisors are merely a necessary evil; they are simply part and parcel of the game. 2. All companies of any size have outside advisors. Many more companies fail than succeed. Maintaining the stable of advisors is not a dispassionate exercise. The mole-based relationship must be established and maintained. Admittedly, GWR’s relationship with its advisors in The City was easy to accommodate because of the existing chink in the armor. Being able to dangle the carrot of power and wealth in front of the denizen’s of The City was a big help. A little greed goes a long way. But the mole-based relationships also worked quite well on this side of the Atlantic. Greed is greed; it does not discriminate between dollars or pound sterling. A good example of greed and how it affects transactions is the U.S. “junk food” fiasco of the ‘80s. One final note on advisors. You will be awestruck at how much advice you will get and how adamant the giver of the advice can be. It never ceased to amaze me how determined people can be with their strong opinions, especially when they are not responsible for the outcome of events should their advice and guidance be adapted. Anyway:
Peña-ism. When dealing with the opinionated and/or egotistical, always give credit where it is not due. A TALE OF TWO ACQUISITIONS Great Western had made its first acquisition in June, 1985. It was a $10,000,000 deal and we had gotten our feet wet and learned a lot in the process. Looking back to September 1982, Great Western did a £10,000 joint venture in New York City to get its first drilling fund on the street. Thirty-three months later, we made a $10,000,000 oil and gas acquisition from a Fortune 400 conglomerate. As I will elaborate on later in this manual, were we ready to deal with a major conglomerate? No! Were we comfortable with ourselves and the situation? Damn right! It is the comfortability of the entrepreneur that is important, not his readiness! I would now like to turn to the next two acquisitions Great Western would make. They are excellent illustrations of the process of building a company through the external growth mode. The next two sections of this manual describe how to assess the need for and then go after assets, financials, diversification, people, capabilities and opportunities. They also illustrate hyper growth at its finest.
ACQUISITION #1: HUMAN RESOURCES VS. PHYSICAL RESOURCES BACKGROUND The oil & gas industry in the U.S. was in the state of a serious recession. In September, 1985 the spot price of oil stood at $28.00 a barrel; one year later it would fall to $14.25, having dipped to $8.00 in the summer of 1986. A lot of companies in the U.S. would dimply implode upon themselves, victims of their debt loads. They had borrowed heavily for exploration projects and expansion. But remember – banks and advisors were right behind these companies collecting fees and telling them it was okay! Bad wells drove up finding costs, and contraction in the industry caused prices to tumble. They could no longer stay the course; there was no more money to fund operations, let alone exploration, because for every company going down the toilet a bank had okayed the deals would follow in the same flush. Great Western Resources had not one penny of long term debt on its balance sheet. Our finding costs were 23% below the industry average, and our lifting costs were half of those of the average new field in the North Sea. I was proud of our numbers and our performance to date, but we had to move ahead quickly.
THE STRATEGY My strategy for the growth at GWR at this time had four major points: – We were not going to spend any more time on limited partnerships, drilling funds, or tax shelters. We would concentrate on the core business area of oil & gas exploration and drilling. We were going to get very focused. – We were not going to spend any time analysing our financial data to see if the actual rates of return were equal to or greater than the ones we had estimated and disclosed in the prospectus. Nobody cared, least of all me. The ultimate share price was the single criteria by which the company would be judged. – We were going to get our advisors to help us in a way which they were not accustomed: They were going to learn how to sweat along with us; they were going to learn how to invest in the future or GWR. – I decreed that we were not going to participate in the energy recession. It was that simple: we were not going to participate!
I knew that what we were about to do was not going to be easy. It was going to take an enormous investment in time and resources. It would take a heavy toll on everybody, both professionally and personally. There would be casualties, but it just had to be that way. I had my dream. I wanted the next success. My dreams were becoming realities. I was focused. I had to be focused because…
Peña-ism. To succeed at anything, one must be focused to the exclusion of family, friends, God and country – but not necessarily in that order. THE ASSESSMENT I knew after our first acquisition in June, 1985 that we had to bring the technical aspects of our business in-house. Here we were, in early 1986, supposedly a big-time oil & gas exploration company, and we only had one person in the company with the words “petroleum engineer” on his resume. Up to this point in time we had used contract people to analyze the geological aspects of our acquisition candidates. Contract labor makes sense up to a point, but a good cost/benefit analysis should tell you when it’s time to change operating modes. The contract people seemed to be around more than our own employees. It was time. So, for purposes of our first major acquisition, assets and financials were secondary to the need for facilities and capabilities.
THE TARGET Company #1 would give us the necessary in-house technical capabilities, plus other key people to man important operations, support and staff functions. The company had a good reputation and some of the best people in the industry. In addition to the capabilities, we would also acquire corporate and field office facilities. Company #1 would give us everything we were looking for at this time in our growth program: good properties with producing wells and good reserves; good people; good office space; and good operations capabilities. But as far as I was concerned, all of these were incidental to what I really wanted from this acquisition. I had a laser beam of focus at Company #1. What I wanted you couldn’t put on a balance sheet or cram down a well shaft. The very senior management of GWR was lacking in one respect. We had a solid base in operations and finance, but were weak in exploration and business development.
The head of Company #1 had a real sense for exploration, but his strongest suit was business development. He was one of the best I ever saw at sniffing out deals. This ability, plus his natural abilities as a salesman, would serve Great Western well in the years to come. After the acquisition, I, as CEO, had three executive vice presidents reporting directly to me: one each for finance, operations, and exploration.
THE DEAL The deal for Company #1 was worth $56 million and had three major elements to it. · $11 million was for the company which was comprised of the CEO (who would become my EVP of Exploration) and his petroleum engineers, geologists and landmen; oil & gas interests in Texas, New Mexico, Wyoming and Colorado; a drilling subsidiary; and 44,000 prospect acres for future development and exploration, many of which had already been structured into prospects for sale on a promoted basis to third parties. · $27 million for certain properties which were comprised of oil & gas interests in Texas owned in part by Company #1. We bought out these interests and the interests of the other partners as part of the deal. · $18 million was to be retained by GWR for future operations. Let me elaborate a little on this third element. I always made sure that we drug a little “idle cash” out of all of our deals. This was somehow viewed by most financial institutions as “unholy” and normally irritated them to no end. And, of course, I was always told, “You can’t do that!” It was if we had made grand errors in our due diligence, but always managed to err on the right side. Nothing could have been further from the truth. We always put that extra cash to good use, and the eventual beneficiaries were always the stockholders, including the financial institutions. For example, we earmarked a lot of that cash to buy back our own stock, which always turned out to be a good investment decision.
THE FINANCING There are basically two parts to a transaction like this: First, the buyer and seller (S) need to negotiate the price; and second, the buyer has got to come up with the money, or make alternate financial arrangements, or some combination of the two. We covered the three primary sources of funds for a corporation in a previous section. They are retained earnings, debt and equity. Great Western was doing alright financially as a
result of its operations, but we had nowhere near the retained earnings to even remotely consider them as a source of capital for the Company #1 acquisition. We were in the middle of an energy recession and banks weren’t exactly disposed to loan money. This was alright with me because it was one of my personal objectives to keep any form of long term debt off of our balance sheet as long as it was practical to do so. That left a new equity offering as the remaining source of capital. At the time, we were authorized 32,500,000 common shares of which approximately 25,000,000 were already issued and outstanding. That left about 7,500,000 shares available to raise $56 million at a time when our shares weren’t doing too well because of the energy recession. Obviously, it wouldn’t stretch, which was again alright with me because I didn’t want to dilute the ownership of GWR any further. We needed a new equity vehicle. But I wanted something different this time. I convened a series of meetings with our financial advisors and instructed them to construct an equity offering which satisfied four criteria: 1. It was sufficient to raise the needed $56 million. 2. It would not change the current ownership profile of the company. 3. It would not dilute the current ownership of the company. 4. It was not tied to current market conditions, but rather to expectations and increased risk assumptions. In the end, we, not the financial advisors, came up with an equity vehicle which met all of my stated criteria. It was a new approach, at least for Great Western. The new equity offering would come in the form of 40.5 million participating preference (PP) shares with the following characteristics: 1. The PP shares would be made available to investors through a rights issue for 8 PP shares for every 5 common shares currently held. 2. The PP shares were redeemable and convertible to common shares for a period of ten years. 3. The PP shares had no voting rights. 4. The PP shares were entitled to a 30% dividend of the company’s profits available for distribution of dividends.
BEHIND THE SCENES
In retrospect, business deals always seem so neat and tidy, so perfect, so easy, so matter-offact. After you do enough of them, you begin to wonder why you simply couldn’t see the eventual outcome at the onset. The reason is because the glamour of these things becomes visible only in hindsight; in real time there is only drudgery. Business deals are the culmination of the collective efforts of a great many different people. There are accountants, lawyers, engineers, investment bankers and related functions, stockbrokers and related functions, and all of the in-house organizations of both parties to the transaction. You analyze, re-analyze, and analyze again; you evaluate the parameters of the deal over and over again; you game and predict and postulate and prognosticate and estimate and theorize until you wish that someone would put you out of your misery. And you do all of these things, mind you, while managing all of the aspects of the business base that you already own! But the necessary result of these efforts is limited to facts and figures, data and information. Dispassionate statistics. But, believe me, all of those are not near enough.
Peña-ism. Business deals start and end with people: the interaction of flesh and blood, bone and sinew, mind and emotion, heart and soul. THE FINAL ANALYSIS Every business deal is a win-win situation. Each party thinks they got the better of the other party, even in the face of a personal defeat. It has to be this way, or there would never be a handshake. What kind of person would accept a deal (unless under duress) wherein he truly thought he was getting the short end of the stick. Great Western’s acquisition of Company #1 was a good deal for all elements of both parties: 1. Great Western picked up the resources it needed to position itself for future growth while increasing its assets by 330% (hyper growth!) to $81 million at the close of its fiscal year in September, 1986. 2. My two partners and I got twice the market price for our 2.2 million shares that we sold to the CEO of Company #1 as part of the deal. 3. The CEO and majority shareholder of Company #1 got $7 million in cash for his company, 2.5 million shares in a company which he knew had no limit to its potential, and an executive vice presidency from which he would have a direct hand in helping the company to realize its potential.
4. The market got the rights to 40.5 million PP shares offering a 25% return over three years under the assumption that it was GWR’s plan to redeem the shares in that period of time. This was a win-win deal. But as it so often happens, the ink on the papers signed in February 1986 for the Company #1 acquisition was hardly dry before Great Western would be overcome by events that would take it in a new direction.
ACQUISITION #2: DIVERSIFICATION AND THE QUANTUM LEAP
BACKGROUND The recession in the oil and gas industry was worsening by the day. There was a serious over-supply on the world markets; production had to be curtailed and prices became volatile. Everything was going the wrong way: the price of oil, the GWRI share price, and even the $/£ exchange rate. This is what we had to look at during the first six months of 1986:
Oil Spot
GWR Share
Exch. Rate
Price
Price
$/£
January
$28.00
120p
1.4355
February
$25.00
50p
1.4715
March
£18.75
60p
1.4850
April
$15.00
42p
1.5595
May
$13.25
40p
1.5440
June
$14.00
58p
1.5185
Great Western had dropped from a high of £3.00 or $3.50 in December 1984 to near 50 pence, to about $0.80 in late June 1986.
THE STRATEGY HEY, DAN Pena. What’s wrong with you anyway. You can’t continue to build the fastest growing natural resources company in the world during the worst recession in the energy business in the last fifty years! Companies in this industry are dropping like flies. It’s almost impossible just to hold on, and you want to expand! You can’t do that! It was still my firm belief that the company should continue to grow through acquisitions (external mode) vis-à-vis exploration (internal mode). And although neither the Great Western management and board nor our outside advisors disagreed with that approach in the abstract, they all thought that GWR should align itself with the conventional wisdom in force at the time.
The conventional wisdom was dictating that companies in the oil and gas industry should retrench: hold on with both hands, bear down on your abdomen, clench your teeth, and pray that somehow you might come out of the recession with enough to start over. That was the conventional wisdom, but it wasn’t the obvious thing to do.
Peña-ism. You always need to reason to overlook that which is obvious. The obvious thing to do was to go after acquisitions because there was financing around for the “right” deal; because nobody wanted to expand, or explore, or do anything else but hide under the boardroom table. The reason for overlooking the obvious course of action was the recession: we can’t go after acquisitions because of the recession. That was fine for everybody else, but not for Great Western. So if you found the right acquisition and believed in it, and more importantly sold it with enthusiasm, you could get it financed. We looked at a lot of deals after the Company’s #1 acquisition and had a few in the preliminary discussion phase. Although we had looked at a lot of deals, nothing tickled my fancy. I wanted a big acquisition; I wanted a quantum leap. I wanted a minnow-swallows-whale type of combination. I wanted something that would put Great Western on the front pages of the international energy business press. And then it came to be, out of the blue, so to speak.
THE OPPORTUNITY Hey, Dan Peña. What’s wrong with you anyway. So now you want to buy a coal company! A big coal company! Where is your experience base to convince the coal people that you can perform. They won’t give you any consideration as a legitimate buyer. You’re an unknown in the coal business. You can’t acquire a major coal company. You can’t do that! It’s funny how major events sometime happen when you least expect them. In the late summer of 1986, our CFO was on airplane headed back to Houston from Denver. He struck up a conversation with his seat mate, an executive with a huge conglomerate in the energy business. The guy mentioned that he was working on a project to acquire the assets of a company, “Company #2”, which had interest in a number of coal mines and some oil and gas properties. Because its banks were squeezing it severely, Company #2 had to liquidate its assets to pay down its debt load. We knew of Company #2 and we knew of the energy conglomerate. As soon as our CFO got back, we got the principles around the table and started kicking around ideas and postulating a few strategies. During these initial session, our EVP of Exploration fought the idea because it wasn’t his, and then later on, for other reasons. It didn’t matter to me because I knew we needed an acquisition badly. And I Knew, instinctively, this was it! These were late night sessions – a lot of them – because we were busy during the normal working hours running the business interest we already had! These sessions normally didn’t start until 6:00 in the evening and lasted at least until midnight. We would arrive home in time to get a few hours of sleep only to get up the next morning at 5:00 am and start all over again. We didn’t have much time: the Company #2 deal had to be finished by the end of December and it was late October 1986. If Company #2 was going to sell off its assets, then we wanted its oil and gas interest. This was hardly going to be a fire sale, but there were going to be some good values out there. We set up a meeting with the energy conglomerate and told them that we wanted to go in on the original deal; we would acquire the oil and gas interests. To our disappointment, they told us point blank that if we were interested in Company #2’s oil and gas, then they would consider such an interest, but only after they had acquired everything. It was a smart plan on their part, and one which I myself would have wanted. Why let a smaller company reap the benefits accruing from the a larger acquisition? Why
not sell a part off your own investment in short order and make a quick profit. Good business sense.
THE DILEMMA My disappointment at not being invited to participate in the acquisition of Company #2 was short lived. I saw the rejection as an opportunity, but it placed me on the horns of a dilemma. I believed that Great Western should go after all of Company # 2: oil and gas, coal operations, everything. It was time to diversify, but something kept nagging at me.
Peña-ism. Stick to your knitting. To maximize the return on invested capital, deploy your assets, resources and capabilities in those areas where in lie your expertise and experience. I had learned this lesson the hard way. As I noted earlier, before starting Great Western, I ran a vertically integrated company in the energy business. We were in exploration, drilling, refining, marketing, and gathering distribution of oil and gas. For whatever reason, we got into some business interests far afield from what we knew and it was disastrous. I thought a lot about that experience as I now considered this acquisition which, while not a marked departure from our core business areas, represented a significant diversification.
THE TARGET Company #2 was a major subsidiary of a multi-billion dollar natural resources company operating in Canada, the United States, and elsewhere. There were four elements to the deal: 1) the coal mines; 2) the oil and gas interest of Company #2; 3) other interests in oil and gas properties in various states; and 4) the coal miners and coal operations. The biggest part (about 74% of the deal was the coal mining operations. Company #2 and the operations company both had capable and experienced management teams. Additionally, 95% of everything that came out of the ground was sold to major public utilities in the southeastern United States under long term contracts, the earliest expiring in 1995.
Notwithstanding the obvious strength of the coal operations, our EVP of Exploration now decided he liked the oil and gas assets. He now had convinced himself that he found the deal. He did everything humanly possible to dissuade me from considering the coal assets because they would easily dwarf the entire combined oil and gas operations. But again, I knew this was what Great Western needed. My instincts told me so. The acquisition of Company #2 would enable us to meet two major business objectives: 1) provide the quantum leap vehicle to implement out strategy of corporate growth via external acquisitions vis-à-vis internal exploration; and 2) spread our business base over something besides oil and gas, thereby mitigating some of the financial performance risk of Great Western currently being occasioned by the energy recession. The oil and gas interests were an added bonus because they had already met our strict acquisition criteria for oil and gas; after all, at one time we were content to take these as part of the original acquisition of Company #2 by the energy conglomerate. So how did I finally resolve the dilemma? I decided to proceed with the acquisition on the strengths of another standard of mine:
Peña-ism. Dream big; think big; Be Big! THE NEGOTIATIONS Even though Company #2 was under enormous pressure to liquidate, they had grave reservations about continuing a dialogue with us on any level. Since we had absolutely zero experience in the coal industry, they were hesitant to turn the operation over to somebody who might jeopardize the jobs and security of 900 employees. Additionally, the public utilities in the southeast might get nervous about the reliability of future coal deliveries. And, finally, they were very skeptical that we could put together the financing for the deal and, therefore, didn’t want to waste time with somebody who, in their assessment, couldn’t come through by the end of December. As this juncture of the Great Western Resources story, it is very important to understand that this $150 million deal wasn’t just our largest deal – it was much more than that! If we failed, in my judgement, GWR may have never done a big, big deal. And as it turned out, it was our first and last big , big deal while I was there.
You look and work at a lot of deals before you consummate one. Everyone knows that. But from time to time a deal has to get done not for the economics. The deal has to get done for the moral and life-blood of a growing company. When a growing company has been in the hunt and has highly-trained and capable gladiators, everyone on the team wants to do deals. Everyone wants to be tested. Everyone wants to prove how good they really are. This deal became “ a must” for intangible reasons. I was concerned that our fighting machine would react poorly to being handed a defeat on a deal where we had worked so hard. It was like some prize fighters never come back for their first defeat. This was such a deal to GWR. I knew intuitively that this was a life or death situation for the company. I didn’t know why, I just knew! And I didn’t know that Charlie Soladay would die less than a month later. Oh, God, I just knew that this deal was critically important! I knew that GWR was at the plate, it was the bottom of the ninth, and the count was 3-and-2. I still get chills and a lump in my throat thinking about it. In those glorious days I was breathing through every orifice in my body. It was easy for me to keep everybody pumped up! I had sent Charlie to New York City to secure the bridge financing. I told him not to return without it. I told him this was life or death. He went to New York, stayed ten days, and worked all day and all night at the banks and the old line brokerage firm that were our finalists in the race to finance our deal. In the final hours of the time allotted, Charlie got us the financing. He paid $250,00 to the bank and $500,000 to the brokerage firm just to look at the deal. The money was not refundable but was part of the overall fee if they went ahead and financed it. Now this might sound the exact opposite of what I profess about contingency fees. But the bottom line is you do what you have to do! And I knew I would close the deal or die trying! Just imagine how the two financial institutions felt about our level of confidence! T hey said, “This must be a good deal or these guys wouldn’t be so sure of themselves. $750,000 is a lot of money to this company (which was one of the great understatement of the ‘80s). We better take a good look at this coal deal. We might be missing a great fee! And think of the potential of even greater fees later on!” All Charlie did was act as if he had no limits to his abilities. He told them they had ten days, or we were going to the UK bank that owned our UK brokerage firm. There was no back-up. The UK bank had already turned us down!
From that time forward, even after Charlie’s death, we would refer to him as “Charlie Big” or “C.B.” He came, he saw, he conquered! The rest of acquisition #2 didn’t go that well. The head of our Exploration and Production department was continuing to sabotage the deal. The big energy company that originally brought the deal to our attention was threatening a lawsuit and the acquisition candidate’s Canadian parent was telling us to get lost! Meanwhile, our largest middle-eastern shareholder was refusing to go along with the deal because they didn’t want their name disclosed in the documents. And our own U.K. stockbrokers were undergoing major changes in their senior personnel, particularly those people responsible for our deal. As all these machinations were taking place, Mark Harrison was negotiating with the Canadian parent in Los Angeles determined to close the deal before December 31, 1986. While I was in London getting our stock brokerage firm to guarantee the deal, I was also trying to get our largest shareholder to not only consent to disclosing their name but to also sub-guarantee the deal. You see, the Canadians wanted, in addition to bank bridge financing, the entire transaction guaranteed by both our largest shareholder (a sovereign government) and our stock brokerage firm, which was owned by one of the largest banks in England. Well, I got the guarantees in the U.K.; Charlie got the financing in New York City; and the negotiating was left to Mark Harrison in Los Angeles. Why Los Angeles? Because Harrison’s wife was expecting a child and wouldn’t permit mark to leave home… even though the logical place was New York City! And it ultimately was! In the U.K. during a GWR board meeting finalizing and approving the deal we thought would be signed later that day in Los Angles, we received a panic call from Mark. “Dan, they’ve left! They just got up and left! They’re going to the airport! They’re gone! Don’t you understand, they aren’t coming back! The deal is dead!” Panic broke out at the board meeting. Everyone looked like they saw a ghost. The outside professionals saw their previous fees going down the toilet. The individual board members started to distance themselves from the deal. More than one said. “ I knew he (Dan) could never get it done! And I knew he shouldn’t have let Mark handle such a sensitive issue. Why L.A.? etc.’ etc., etc.” I screamed for everyone to shut the -#*#%* up! “Suck up your panty hose! It ain’t over till this fat lady sings! This meeting is temporarily adjourned! I’m going back to the states to resurrect this -#*#%* !!!”
I went to the nearest phone and called the guarantors, who I had just convinced to back the deal, to tell them the deal had temporarily died. But I was flying to the U.S. to breath life back into it. I jumped on a Concord and was at my lawyers’ office that afternoon. We started one of the greatest offensive attacks of the ‘80s: injun ctions, motions, and filings in New York, California and Canada. I threatened suits against every single board member of the Canadian parent. I probably spent $100,000 in 48 hours. I was like a psycho – splashing, biting and cutting. I made more important and powerful decisions in those 48 hours than I had in the 2-1/2 years since we went public. Hour after hour I just kept locking and loading, locking and loading. I felt like it was the TeT Offensive all over again. The deal was disintegrating right before my very eyes. Some of my staff were buckling under pressure for the very first time. The reasons for not doing the deal became almost insurmountable. Our largest shareholders felt they had lost face; then it was a foreign tax issue; then the Canadians cut a special deal with their lead bank; then the Canadian government had to approve the deal; Mark wasn’t talking to me; the head of Exploration & Production said he knew it would never happen; the energy conglomerate that we beat out for the deal was again back in our face; our auditors changed their minds on their computation of our real taxable income before and after the acquisition, thus changing the RoR. (Rate of Return). And finally there was a nervous calm that befell the deal. That eerie stillness that you feel in a cemetery after dark. And when the smoke cleared, I had threatened, beat, kicked, and propelled the Canadian giant back to the negotiating table! I would have one more shot at the deal – the deal of GWR’s lifetime. One shot at glory, I thought. One chance at immortality. If I could just close this deal I could die a happy man knowing I had tasted the blood of a giant at least once! Six days had passed since everyone thought the deal had died. The Canadians, advisors, and the GWR team would meet altogether in one room as I had demanded. I’ve been called “the most controversial American to set foot in ‘The City’ during the ‘ 80s” partially because of what I said at the beginning of this three-day marathon live-or-die meeting. I said, “We are here to either breathe life back into this amorphous or crush it out of existence. We will not leave this room until one or the other has occurred.”
And so we did. I stood at the end of a 40’ conference table surrounded by Charlie and a host of our advisors. I alone spoke for GWR and the others side’s U.S. subsidiary board of directors spoke for them. Again, in those three days I made more million, and ten million, dollar decisions than I had ever done before. Was I ready? No! Did I have the experience? No! Was I comfortable knowing GWR’s life hung in the balance? Yes! Was I comfortable that I would be judged in the future by the many decisions I was making during that meeting? Yes, because I knew I would do the very best I could and I couldn’t expect any bett er! Could I have made better decisions? I don’t know! I never looked back! Being an entrepreneur is only looking forward. Seventy-two hours and two fist fights later, we concluded the negotiations and consummated the deal. This was, without a doubt, the bloodiest and toughest proceeding in which I have ever participated. It was a hellish nightmare. No one is ever ready for that kind of gut-wrenching experience. No amount of deals or transactions afford you the “true grit” to carry on like that. What made it even better was it was my GWR. I wasn’t a dispassionate investment banker. I was an entrepreneur, just like you, that had his back against the wall and knew it was do or die! It ultimately involved negotiations in London, Los Angeles and New York. It involved negotiations at all levels of all organizations participating. It was conducted on both a personal and professional plane. It ended with both personal and professional failure and triumph. But it was over and done by the end of December, 1986, and Great Western Resources Inc. was in the big leagues! As they say on “The Wide World of Sports”. It is the thrill of victory and agony of defeat. Oh God, how others should envy you that have the true passion of being a real “suck-upyour-pantyhose” entrepreneur. There is something very special about being responsible for yourself and beholding to no one.
THE FINANCING In November, 1986 our balance sheet still had not one dollar of long term debt on it. But I knew the Company #2 deal was going to be in the $150 million range, and there was no
way in hell we could raise all of that through an equity issue. If I wanted Company #2, I would have to finance about half of the acquisition through debt. After much consultation with our advisors, we put together a three-point financing plan to fund the acquisition. Don’t forget, Company #2 had serious reservations; we put together a three- point financing plan to fund the acquisition. Don’t forget, Company #2 had serious reservations about our credibility as a legitimate buyer. That pressure, plus trying to hold together all three parts of the financing, was a lot to handle. The three parts were as follows: 1, A short term “bridge” loan from a major U.S. bank. 2. Bonds secured on the coal assets of Company #2. One of the oldest firms on Wall Street agreed to underwrite and/or place the bonds, contingent, of course, on our ability to put together the rest of the deal. The investment banking firm felt confident that they could sign up to as much as $85 million, and that the bonds could be issued in early 1987. 3. Nothing succeeds like success, and we went back to our trusted financial advisors in the U.K. for help with the equity end of the financing. It was agreed that we would use another participating preference share vehicle, identical to the one we had used for the Company #1 acquisition (non-voting, with provision for redemption and conversion to common shares). We needed about another $85 million, and the merchant bankers agreed to underwrite and/or place 55,000,000 new preference shares at 110p (about $1.58). Our largest shareholder tentatively agreed to be the underwriter. The new shares, Series B, would be entitled to a participating preferential dividend of 50% of net profits available for distribution. And, of course, the merchant banker’s and the large shareholder’s agreements were contingent on everybody else becoming a player. So here I was, standing on top of this consortium-in-principal, trying to get the members locked in place while each of them eyed the others – and me- making sure that when we took a step in any direction, we took that step in perfect unison. It was like trying to maintain your balance with each foot on a rotating log while shooting river rapids. Each piece of the financing deal had to fit with the others, and if one piece changed, the other’s changed with it. But none of the pieces changed and everything held together. Just another day in the life of the entrepreneur and the senior executive.
THE FINAL ANALYSIS
We paid $116 million f or Company #2’s coal operations and $25 million for their oil and gas interests. The other oil and gas interest cost us $7 million. We raised a total of $168 million in cash: the bank provided $85 million in short term loans; the Wall Street firm agreed to underwrite the bonds with which we would later retire the short term debt. Another $63 million came from the Series B preference shares and our big shareholder took the whole deal. GWR kept $20 million for “future projects”. At the interim report to the shareholders in March, 1987, GWR would proudly display total assets of $272 million, up $191 million (hyper growth!) from the previous fiscal close of $81 million. My dream, for the most part, had come true. But with success came new opportunities – and problems.
THE DARK SIDE OF EQUITY FINANCING THE TRANSITION After the Company #2 acquisition in December 1986, we were all tired. The adrenalin pumps had been working at maximum since 1984 and they needed some down time for preventive maintenance. We wanted to regroup, step back, take inventory of what we had, and decide how we were going to manage our assets. We decided to table from further consideration any and all future major acquisition candidates. Little did we know that Company #2 would be the last major acquisition for Great Western, ever. For the next couple of years the capital structure of the company and our one major shareholder would occupy most of our time, energy, and resources. We watched the financial side of our corporation very closely during 1987. As prudent managers, we always cast an eye toward the direction of our balance sheet and stock price, but during this time period we were paying an extra measure of attention. We were concerned about two things: Number one, our major shareholder owned such a significant portion of our participating preference (PP) share capital that it made the stock unattractive to investors. The vast majority, but not all, of our common shares were owned by institutions and I spent an inordinate amount of time with them directly and indirectly through our financial advisors assuring them of our plan to deal with the issue in the near term.
The second problem, separate from but related to the PP shares ownership issue, was the market value of the GWR common shares. We were convinced that they were trading well below the value of the underlying assets, and as such, made us a prime target for a takeover. One of the steps we took throughout the year was to buy back and cancel (retire) shares of our stock. Actually, it didn’t take a genius to make money in GWR stock during this time period. There were hints that the energy recession might be over when the West Texas Intermediate spot price went from $12.25 in August, 1986, to $20.00 a year later. It would dip back to the $15.00 range in 1988 and then level off to around $18.50 in 1989 and stay there until it would hit $38.25 in October, 1990, two months after Saddam Hussein invaded Kuwait. Additionally, during 1987 and 1988 the pound sterling would grow increasingly stronger against the dollar, maintaining an exchange rate of approximately $1.80 to the pound sterling during the period before heading back down to the $1.60 range in 1989. And finally, two research reports came out with strong “buy” recommendations on GWR common shares. Both recommendations came from prestigious brokerage firms. But here I was, back in the saddle again with a myriad of problems and decisions facing me. There were real tough times ahead, and there was the funding problem on the Company #2 acquisition that needed immediate attention.
THE FUNDING PROBLEM We had to clear up a financing problem on the Company #2 acquisition. As you will recall, the $85 million bridge loan from the bank was going to be replaced with the issuance of bonds secured on the coal assets then being acquired. The Wall Street firm was going to underwrite or place the bonds in early 1987. When discussions commenced on the detailed terms and conditions of the bonds, an insurance consortium, the potential placee, took a number of hard positions on some of the covenants they wanted attached to the bonds. Acceptance of these provisions would have placed severe financial and operational restrictions on Great Western with respect to our newly acquired coal assets. Negotiations will normally produce a position acceptable to both parties and you can eventually shake hands and go on with business. In this case, the consortium would not relent; they continued to make us an offer we could not accept. We had to find another way, even though the deadline for taking out the bridge loan had come and gone. We initially went to the premier old-line brokerage house who we paid the
$500,000 to back in December and who put together the insurance consortium. They merely told us the market conditions had changed; that they would like to do business with us again someday; and that GWR, not them, had a problem.
THE DARK SIDE OF EQUITY FINANCING To grow Great Western, I had to swallow hard on some financial arrangements. In the early days, I, and I alone, was the financial guarantor for Great Western. I detested debt, but to get the brass ring I considered Company #2 to be, we were more or less forced to use that vehicle. The only thing I disliked more than debt was dilution of ownership, especially ownership having entitlement to vote. And at this juncture, I had 44% of the only voting shares. Up to this point, we had successfully postponed the voting problem through the issuance of the preference shares. Preference shares didn’t have a vote, at least not now. But upon redemption and conversion to common shares, they would have a vote. In this respect, the then current capital structure of the company was a dream; the preference shares holders gave us tons of money, but they couldn’t tell us how to spend it. The dark side of this arrangement was the fact that nearly all of the preference shares were held by one major shareholder and this fact severely limited the marketability of not only those shares, but it also made our common shares unattractive. The problem was clear. I needed to do three things: A NEW PLAN 1. I had to minimize the dilution of my own voting rights accruing from ownership of the common shares. 2. I had to decrease the ownership of our PP share capital by the major shareholder as a means of making Great Western a more attractive investment to both institutional and individual investors. 3. I had to get the marketability of the common shares increased as a means of getting the common share price to a level of threat approximating the value of the underlying assets. All three of these issues were intertwined – and very complicated. I developed a two-phase plan.
PLAN PHASE I Phase I would be implemented as part of the resolution of the Company #2 acquisition funding problem. The Phase I package had four components:
1. 6% Convertible Loan Notes expected to raise approximately $60 million, net of expenses. The loan notes would be convertible to common shares from 1991 to 2002 at a conversion rate of 50 common shares for every 100 pound sterling of loan notes held. So that existing shareholders could maintain their percentage interests in the company, the convertible loan note issue would be by way of rights to the existing shareholders. There was a separate conversion rate for Common Shares, Series A Preference Shares, and Series B Preference Shares reflecting the contribution of each equity class to the total share capital. Interest on the loan notes was payable semi- annually at a fixed rate of 6% per annum. 2. A new $40 million facility with the bank to pay off existing loans of the coal subsidiary and provide an additional source of working capital for GWR. 3. Conversion of the existing preference shares to a new Class B common Share at the proximate rate of 50 Class B shares for each 100 series A or Series B preference shares. The new common shares would also be nonvoting, but would receive a 15% dividend premium over the dividend declared on the existing common shares. The primary purpose of this conversion was to increase the marketability of the shares. Additionally, this action would uncouple dividends from certain financial transactions tied to the Convertible Loan Notes. Reclassification of the existing Common shares to Class A Common Shares and an increase in the authorization from 32,500,000 shares to 55,000,000 shares , and the creation of 60,000,000 Class B Common Shares.
OBJECTIVES OF THE PLAN The obvious objective of Phase I was to raise funds to liquidate the short term, now long term, bridge loan and to increase the marketability of the company’s shares. The not-so-obvious objective was to begin the process of wrestling away from our major shareholder their influence both current and projected on Great Western. Going in, our major stockholder owned 3,519,369 common shares entitling them under the rights issue to £1.9 million of Convertible Loan Notes. They also owned 95% of the Series A preference share and 99% of the Series B preferences shares, entitling them to another £21.1 million of the Convertible Loan Notes for a total of £23.0 million, 66% of the total (a year later they would own 34.9 million, 99%). Coming out, they would own 54.2 million Class B Common Shares, or 98% of the shares issued and outstanding. It wasn’t hard to convince our major stockholder to take up their r ights to the Convertible Loan Notes. It was simple math: Their £23 million (eventually £35 million) in Convertible
Loan Notes equated to 17.5 million shares of potential voting common stock which would raise their share from the current 15% to 51% while lowering everybody else’s. My ownership would go from 44% to 26%. As for the Class B Common Shares, there was no real financing change involved since the market capitalization value remained the same. We sold the whole idea to the major shareholder on the increased marketability concept, and the fact that an authorization level of 60,000,000 shares would give us some additional flexibility. In return, they gave up their preference dividends and conversion rights. It seemed like an even trade.
AN ASSESSMENT The Convertible Loan Notes came out on December 1, 1987, the first big issue of any kind for an American company following the October crash on the New York and worldwide stock exchanges. Of course, conventional wisdom said a major issue couldn’t be done six weeks after the crash! Dan, you can’t do that! Was this a good deal for all parties involved? Was there equity on all sides of the transaction? Was this a win/win situation? I didn’t know the answer to these questions then, and I still don’t know now. Negotiations and their results can’t be evaluated or analysed in absolute terms. Everything is relative; everything is perception.
Peña-ism. Each party to every negotiation has a comfort zone: the effective negotiator is the one who can define the boundaries of the other party’s zone and place the deal at the boundary nearest to its own interests. A NEW PROBLEM None of the dealings with the various owners of Great Western would ever had come about if collectively we didn’t think that the company had the real opportunity to be a giant in the natural resources industry. In December, 1987, we had total assets of $227 million and a market capitalization of $216 million. But there wasn’t one person associated with Great Western who didn’t believe that values ten times were achievable. We had taken care of the funding problem associated with the Company #2 acquisition and put in place Phase I of the plan to straighten out the GWR share capital structure. These were major accomplishments, but there was no time to count our accomplishments or savor our victories.
Peña-ism. Any problem solved will be replaced immediately by a larger, more complicated one. The new problem was simple. As we entered 1988, our major shareholder had now put up 78% of the capital in return for 14% of the vote. In time, they could increase the percentage of their voting shares. For a year we negotiated with our major shareholder, trying to alleviate the share perceived share structure problem. None of this helped our share price, and at that time, the performance of our shares was down and I was seriously concerned about an unfriendly takeover. But, as usual, I was the only one on both sides of the Atlantic that seemed to have any concern about GWR’s shares being grossly undervalued. The consensus was since I owned 44% of the voting shares and our major shareholder had 14% of the voting shares, we were safe from any unfriendly takeover. I disagreed vehemently! I said that since the largest shareholder had 98% of the non-voting shares, 78% of the total fully-dilated capital, and had all the money in the world, they were a potential problem. If that wasn’t bad enough, their non-voting shares were able to vote under certain circumstances, one of which was during liquidation of GWR’s assets after a tak eover! In January 1989 I called a meeting of all our U.S. and U.K. advisors. We met in Houston, sequestered in a hotel for two days. Many of the attendees came under duress because they thought it was a total waste of time. My own vice-chairman scolded me for sending out invitations via the mail. The meeting started by me standing at one end of a very long conference table and putting my right hand over my left breast and said, “The milk has been sweet these past several years. I have helped many of you become partners in your respective firms. I have helped make many of you rich! GWR and I have been there when you needed to help individually! You have been part of the GWR family.” “Some of you have gotten fat and lazy making a lot of money for doing very li ttle compared to when GWR first got started. Yes, the milk has been sweet. Notwithstanding what you think, I know someone, maybe our major shareholders, who is going to make a hostile run at us.” “At the present, we are not prepared. We do not have the necessary safeguards in place. That is why I have asked you to be here. Before we leave here tomorrow, we will have a definitive step-by-step game plan.”
“Actually I’m looking out for your future fees and commissions. Because if someone else got a hold of GWR and my team was thrown out, you know you would all be history.” The rest of the meeting went especially well. By the end of the second day, GWR and its advisors had their marching orders. June 5, less than five months later, a Bahamas-based energy company, allegedly backed by a sheik from our major shareholder’s government, bid for my shares at a 60% premium to the current market price! Without even a micro-second of hesitation, I said, “Surrender? Hell, I haven’t even begun to fight!” We won the fight even though we were battling some deep, deep pockets. We won because we had planned step-by-step for such an occurrence. Only as I write this seminar manual did I think of the minimum of $30 million I left on the table that day. I made the right decision for GWR and myself. I couldn’t leave the company I created and the shareholders who had believed in my dream until the share structure was in order. I knew I had to get that restructuring accomplished now! As it turned out, this attempt to buy my shares increased the market value of GWR by 60% It also made the job of initiating meaningful discussion with our major shareholder somewhat less tense. We both knew it was time to take care of the problem.
The statistics looked like this:
Number
Pct.
Common A Shares
3,519,369
14.67
Common B Shares
52,992.423
98.01
Convertible LN
34,934,753
99.80
Our Major Shareholder
Dan Peña
Common A Shares
10,641,375
44.36
Convertible LN
43,324
0.12
Board Members Common A Shares 3,429,007 14.30 This arrangement could no longer stand. It was time for Phase II of my plan. PLAN PHASE II Just for the sake of change, let me start with the resolution and conclusion of Phase I of the plan and work backwards through the reasoning of the process. I think the point I want to make will come across much clearer using that technique.
WHAT HAPPENED When all was said and done, our major shareholder went from putting 78% of the share capital for 14% of the vote to 29% of the share capital for 29% of the vote. As they always do, the mathematics of these things make everything sound so easy. But it’s never just the mathematics, not just the technicals, nor just the financial analyses, not just the negotiations, not just behind-the-scenes actions that make these things happen. It’s everything in some proportion, such proportion being different on each and every deal. The bottom line was that our major stockholder had given up assets – their investment in Great Western – cheaply. At least that was the conventional wisdom at the time. When the deal was done and the prospectus issued, I believe that the restructure was, in fact, a draw, a true win/win situation, at least in theory. At the conclusion of negotiations, when the deal is struck, and both parties shake hands, there exists, by definition, a win/win situation. There has been value given for value received. There is equity; neither side of the table has been disadvantaged; each party is satisfied; each party has found a position that it can accept. In the share capital restructure all of the criteria had been met: there were two parties, each free to bargain; both were informed; both were wiling.
VALUE THE COMPANY After conversion of the Class B Common Shares to the New Common shares on a 7 for 6 basis (the original proposal before us), our major shareholder would have owned 70% of the voting stock. But what good would it have done them? Nothing! They would have had 70%
of a company on the verge of going out of business. There would be no market for the stock. There would be no pool of equity funds available to them in the future. They needed to reduce their ownership; they needed to get money out of the capital structure of the company. They agreed to place 27,849,118 shares with an investment banking firm, taking their voting ownership down to 29.99%, and they agree to place those shares at 164p when the stock was trading at 193p. The net asset value of the company at the time (net asset value being defined simply as the projected cash flow from the existing coal contracts, plus the commercial value of the oil and gas reserves less debt) was round 227p. Our major shareholder agreed to a 30% discount on the net asset value. Why? Because they were stupid? I don’t think so. I think they thought at the time that 164p was probably more than enough consideration for their desire to achieve a greater balance in their equity contribution and voting rights, and to increase the marketability of the shares. As it turned out, they were correct on both counts: the stock price zoomed up to 220p as soon as trading resumed, and they now had a 29%/29% parity in share capital contributed and voting shares.
THE FINAL SHAKEOUT Regardless of the assessment of who won or who lost or was it a draw, it was over. The share capital structure ws now cleaned up. This is how the Common Shares distribution looked as we faced the decade of the 1990s: Share Pct.
Our Major Shareholder
21,092,327
29.99
Dan Peña
10,641,375
15.13
Board Members
3,429,007
4.88
GWR Profit Sharing Plan
751,250
1.07
All Others
34,417,241
48.93
NEW CHALLENGES I was ready to go. We had entered into a joint venture with another major oil company and the project was doing well. We all thought that more joint ventures of this type were needed. We were having great success in the Gulf of Mexico. Of eleven offshore wells drilled or completed, nine had resulted in the discovery of commercial quantities of oil and gas. In August/September of 1990, the combination of the common shares , the market price of the shares, and the dollar to pound sterling exchange would push Great Western’s market capitalization over $400 million. I liked it. And I would have liked it even if the cost basis in my 10 million-plus shares of Great Western Resources Inc. wasn’t still $0.000082 per share. $820.00 used to go a long way in those days. ONE FINAL DEAL Hey, Dan Peña. What’s wrong with you anyway! You can’t go back into the market so soon. You just completed a restructure of the company. What could you possibly have to offer now! You can’t come back so soon. It won’t work. You can’t do that! I needed working capital to finance our current onshore and offshore drilling programs. We needed the flexibility to also consider the acquisition of additional oil and gas reserves. I needed to get to assets of $2-3 billion. We had a 2 for 7 rights issue at 190p (about $3.61) and raised about $70 million on the rights to the new 20,220,324 common shares a short eight months after the restructuring. In this particular “You Can’t Do That!. Incident, notwithstanding my previous achievements against the “conventional wisdom”, virtually everyone associated with GWR lined up against me again. The company was moving in the direction I always knew it would move once we got everything cleaned up. We had adopted a higher risk/higher payoff exploration strategy. As the financials on the following September 30 year-end schedule attest, my dreams were becoming realities: Total Net Market Share Assets Worth Capital Price ($0000) ($0000) ($0000)
1987
227,209
118,274
216,271
3.38
1988
236,103
118,651
175,262
1.79
1989
229,573
112,336
200,668
2.84
1990
302,562
180,747
325,751
3.58
QUALITATIVE VS. QUANTITATIVE ISSUES
PLANNING FOR THE UNPLANNABLE In the previous sections, I described to you the decision process I used to build Great Western into a $400 million company. That decision process had its foundation in my YCDT philosophy and was implemented on a day-to-day basis through operations extending from The Five Credos. I’ve also described how decisions, for the most part, are based on the factual data that is the grist of grinding information and data in a decision model. It’s a continuous process of interpolation and extrapolation: projecting the unknown from the known; planning for the plannable. But what about planning for the unplannable? Is such a thing possible? You carry insurance policies on key executives. You carry insurance on inventories and fixed assets so you will have funds to replace or rebuild them in the event of a catastrophic loss. But that’s not what I’m talking about. What I am talking about doesn’t fall into a statistical prediction model which can be used with any degree of confidence by the businessman. How would you plan for the raising of the Berlin Wall? Or the razing of the Berlin Wall? Would you care? You would if you were in the business of international trade. How about Desert Storm? That probably put a damper on the companies doing business there. Conversely, do you think there were any dollars in the forecasts of those companies who “cleaned up” during the clean up in Kuwait after Desert Storm? Hardly.
CLOSER TO HOME How about natural disasters? As I’m finishing this edition of this seminar manual, we are trying to recover from Hurricane Andrew in Florida and Louisiana and Hurricane Iniki in Hawaii. Great time to be in the tourism business on Kauai, right? The resort owners are saying that even after everything is rebuilt, people will still be so scared they may never come back.
Try and put that on your balance sheet. Send me the long term business forecast model you developed to project business volume on Kauai. I’d love to see it.
MY OWN BACKYARD I didn’t have to deal with the Berlin Wall or Hurricanes Andrew and Iniki. I did have more than a passing interest in Desert Storm. Nonetheless, I, like every other businessman ever born, had my own catastrophes and unforeseeable events to deal with. Let me tell you about a few of them.
THE RAINS CAME The production of the first seven wells of one of our first properties was less than anticipated. No dry holes, just disappointing rates of production. We kept hoping that the next well would be the one that would start us off on a string of successes, but even getting to the next well was a frustration. For whatever reason, it rained like crazy that year. There were bad floods all over, especially in Laramie Country, Wyoming, where our property was located. Things were not starting out well (no pun intended) at all. Mother Nature went on a rampage and there wasn’t one thing we could do about it. It rained and rained and rained. We had just gone public and were anxious to prove ourselves and to build our company. Mother Nature had other ideas; she would have her way and we would do her bidding.
THE ODD COUPLE There was one other aspect of the Company #2 acquisition that bears mentioning here. It’s another example of one of the things they don’t teach you in graduate school/ the financing for the acquisition came from two sources: Series B Preference Shares and short term debt/bonds. Our major shareholder, a Middleastern, took all of the preference shares; the Wall Street firm, which had a Jewish cast, underwrote the bond issue. What a combination, a real odd couple: Middleasterns and Jews in the same deal. Of course, to make this arrangement work, intermediary relationships had to be formed so that the members of these two groups didn’t have to “touch” each other. We got through it but it was just one more thing to deal with.
AN IRREPLACEABLE LOSS
As I’ve already mentioned, in January, 1987, I lost my best friend. He also happened to be my CFO, soon-to-be-appointed CEO. He died of a heart attack at the age of 40. I survived his death, as did Great Western. The timing of his death was all wrong. We had just closed the Company #2 deal. We were just about to move into our new corporate headquarters. We had done so much, so fast. We were ready to go even further. My CFO had been with me from the very beginning. He was as much a part of Great Western as I was. It just seemed so wrong for him to be taken from us at this time. But there was another side to this story. A side that never gets discussed openly. A side that can only come into play when organizations and chains of command are involved. Although no one ever said it to me directly, I knew that there were a number of people, both business associates and personal friends, who believed in their hearts that I killed my CFO. People who believed that I simply drove the man to his death. People who believed that the IPO, the $10 million, and the Company #1 and #2 acquisitions, all in a span of a mere twenty-eight months, were too much for any human being to survive. People who believed that no none could go from $830 to $300,000,000 (at that time) and remain alive. People who believed that the CEO of Great Western killed his CFO. Anyone who has ever been the CEO of a company goes to bed each night with the same thought, the same fear, the same apprehension: Will by subordinates help me make my dream come true? Will they support me in all matters? Will they follow when I lead the charge? Will they gird their loins with the same resolve as do I? Will they remain loyal in the face of temptation? Will they share my obsession? Will they believe in me? Will they trust me? Will they believe in my dream? I was my CFO’s superior, but I was also his friend. With the right person, you can have this kind of relationship and make it work on both planes. I did. We never thought any of us would die until we reached 100 years old. We never planned for it. It just happened.
MANAGING EGOS
THE PERSONALITY PROBLEM Bef ore getting to my concluding remarks in the next, and last, section, I think it’s important to at least touch on the subject of personalities. For the most part, I have tried to keep the
previous eleven sections free of any influences of the personalities who may have been involved, concentrating instead on the technical aspects of the subject under discussion. But personalities do play a large part in the success or failure of the business enterprise. You can have the best financials in the world, but if the people at the top of the organization hate each other, you will more than likely end up squandering them because of your inability to effectively interact on important decisions. Heretofore only when I thought it was absolutely necessary did I discuss personalities. Conversely, you should never staff your organizations with people just because you get along fabulously with them and they with each other. A group of morons, no matter how well-suited for each other, will never succeed at anything. But talking about personalities is very much akin to talking about the weather: it’s really interesting, but there isn’t much you can do about it. For purposes of this section, I’ll limit my discussion to telling you about my three key guys and some of the techniques I used to handle them. But please be aware, these were my guys and this is what worked for me. You’ll have to find your own guys and what works for you.
THE CHIEF OPERATING OFFICER My COO was a lawyer who specialized in matters involving oil and gas and corporate law. I had first met him when I was at another company, a company I also co-founded, and he was handling our legal affairs for a nationally known law firm. I was impressed by this man from the very start. In fact, it was he who I had wanted to handle the legalities during my separation from this other company; but because of obvious conflict of interest, I ended up having to get another lawyer instead. My COO started out with Great Western Development Corp. on almost a part- time basis. I gave him a verbal deal for one year. He was still officially at his law firm, but because of his stature with that firm, they agreed to give him a leave of absence so that he might test the waters and his mettle at WDC. He would leave the firm for good in the Spring of 1984. Because of his legal background, my future COO had the capability to visualize and analyze each and every aspect of an issue. He left no stone unturned during his evaluations, and I can never remember him ever saying, “ I didn’t cover that and I’ll have to get back to you.” But this penchant of his for thoroughness was to eventually become the singular greatest source of disagreements between us and the other members of GWR senior staff. He could
analyze and evaluate, but when it came down to making the final decision, he had so many facts in front of his mind that he slowed to the point of inactivity. I was to be accused on a number of occasions of carrying my COO. If I did, it didn’t count one way or another. Every CEO needs some kind of a sounding board – some person or some thing to play things off of. Perhaps in some bizarre fashion in allowing my COO the opportunity to exercise the responsibilities of his position, he became my sounding board and depth finder, my crystal ball, as it were. Maybe it was by some grand design that it came to pass that he would try his best and, in this trying, I could see the clear way. Nontheless, in 1988, I would relieve him of his operational authority. And in August 1991, I would fire him. GWR honoured his existing contract and gave him a seven-figure handshake good-bye!
THE CHIEF FINANCIAL OFFICER My other partner and the third member of the early Great Western Development management team would become my CFO. Like the COO, I had met him when I was still with the other company. He was part of an acquisition team when we went after a company in the late 1970s. At the time he was a partner with a nationally recognized accounting firm in Fort Worth, Texas. My future CFO specialized in the management and auditing aspects of companies in the oil and gas industry, and he was very good at what he did. I knew that the accounting firm became concerned when they found out that I was making overtures to him; the last thing in the world they wanted was to lose this guy. They gave him some big inducements to stay, but in the end the promise of GWDC was too overwhelming. My CFO was as technically competent as they come, but that was not why I wanted him. He was a dreamer like me, but that was not why I wanted him. He was a dreamer who could and would use his technical skills as tools to make his dreams realities, and THAT was why I wanted him. He knew the difference between theory and execution! My CFO was the most practical finance guy I ever saw and the best numbers man around, period! His contributions to what Great Western would become were immeasurable. He was, probably as much as I , Great Western Resources itself. My CFO was the guy who I played everything off of. I valued his counsel; I trusted his judgement. I trusted him.
We spent many sessions, lasting long into the night, analysing, evaluating, planning, replanning, replanning every last detail. If you think you can succeed in business by simply rolling the dice, you are sadly mistaken. You grind everything down to the smallest details, to the lowest common denominator. You think about it, over and over; you change it; you get to the point where you would love nothing more than to tear it to shreads. But when you make a decision, you stick with it! I did these things many, many times and always my CFO was there with me, stride for stride, sharing my passion, my dreams. He was great. If you are going to succeed at your business enterprise exponentially, you need a guy from the same mold as my CFO. But he was also my friend. We shared dreams. We shared laughter. We cried together. When he died a very large piece of me died with him.
ACQUIRING TALENT: THE EXECUTIVE VICE PRESIDENT In section 8, I told you the reason we wanted to acquire Company #1. Amongst other things, and probably most importantly, was the need to strengthen Great Western’s oil and gas operation and business development: I wanted a guy who could sniff out deals. What I briefly mentioned in Section 8 was the guy’s personality, and why it was important to his responsibilities. I had met my future EVP about three years before the acquisition. You couldn’t be around the oil and gas business in Texas very long and not come into contact with him, either faceto-face or by word-of-mouth. He had undergraduate and graduate degrees in petroleum engineering and had gotten his experience at a major oil company before forming his own company. My son-to-be EVP was a guy so larcenous that he would steal his grandmother’s pension check without batting an eye. He could charm your socks off while he twisted a knife in your back; he was so disarming that you would smile uncontrollably as he picked your pocket. He was basically uncaring, a man completely devoid of any emotion; he could fire you in the morning and then thoroughly enjoy his lunch and workout afterwards. He was driven to extremes by thoughts of power and authority; he was consumed by the concept of untold wealth, yet he could never accept my ideas because he didn’t understand exponential growth; he was the quintessence of greed from the moment he got up to the instant he went to sleep. The perfect business development manager.
GROWING PAINS A business combination of two companies is a lot like a marriage. The new bride and groom easily get used to having each other around all of the time; it’s the in- laws that take forever to accept each other. My new EVP and I never had a problem working together on a professional level. I respected his technical aptitudes and his ability to surface potential business deals, even when they were with his family or his buddies. I believe he respected my general business acumen. It was a marriage made in heaven; together we became a real force to be reckoned with in the oil and gas industry, and the industry sat up and took immediate notice. Our relationship on the personal level was not quite as comfy. A wall existed between us from the very start. We continued for a long time on a “forced pleasantry” basis, but I always knew if had the opportunity, he would attempt to oust me. In the end, he grew to hate me because he could never be as close to me as the other two who had been with me from the start. And he knew, short of a major discovery or a miracle from God, that he could never accomplish hyper growth. Our respective companies went through the usual cultural shock process, but we eventually settled in and got down to the day-to-day business of business. Some people from each company had to be let go, but such occurrences go hand-in-hand with business combinations; most people expected it and had prepared themselves accordingly. And there was one other small problem. My new EVP and my COO hated each other’ guts from the get-go, and I constantly had to listen to each of them relate to me what a major problem the other was. It was all office politics, of course; each guy viewed himself as my heir-apparent and, in that capacity, courted my favour continually. As President and CEO I had to listen; it was a much a part of the job as deciding where to explore for oil.
MANAGING THE EGOS Dealing with personalities is never easy, but I developed an approach that worked well for me. I always prepared myself, both mentally and physically, for all meetings with subordinates whether internal or external to the company. Because I started GWR, ate GWR, slept GWR, loved GWR, and lived its energy every second of my life, it wasn’t that difficult to be prepared. I often told GWR onlookers that I was born ready!
Perhaps this perceived need for total preparation was a carryover from my days in the Army. Whatever the reason, I trained hard in anticipation of each particular proceeding. I tried to see it in my mind: the issues, the arguments, the players involved, their strengths and weaknesses. I started every one of these meetings the same way. I looked deep into the faces of each man sitting around the table with me. I looked for a crease, an expression, any visual sign – a hint as to what he may be thinking on the inside, his predisposition on an issue – was he friend or foe. Could I convince him to come around to my side merely through persuasive argument or would I have to break his back and grind his bones into a fine powder. In every man’s face I always found something unsettling to me, something that would make the meeting a little harder than I would like. But I was prepared. I had to be. Like, you, the buck stopped with me!
CONCLUDING REMARKS
A LIFE’S STORY This has been the story of my professional life as told by my experience at Great Western resources from the events leading up to its IPO through the last equity offering in 1990. I have enjoyed a lot of successes, a lot on quantum leaps, a lot of hyper growths. Dreams became reality. There have also been many successes in my personal life, although I don’t believe that one necessarily begets the other. I have been married to the same woman for over twenty years (remember what I said about working at relationships!) and have three beautiful children by her. I have bought and sold luxurious homes in many prestigious areas: Guthrie Castle in Scotland and the Farrish Estate (founder of Exxon) in Houston, to name two. I wasn’t born into wealth or a history of what one might call raging successes. As a matter of fact, I started my adult life as what any observant and rational person would have to term a miserable failure. I am a child of the ‘60s and one who pretty much embraced the philosophy of the times. My first attempts at being a serious college student were an absolute disaster. I had already developed laser-beam focus abilities, but applied them to the pool table at the expense of my studies. If my test scores and grades had been anywhere near as stellar as my 9-Ball game, my life might have been another story. I was going nowhere fast. So, taking a cue from the ‘60s high priest, Timothy Leary, I “dropped out” of college and volunteered for the draft in the U.S. Army.
I took basic training as an enlisted man and was offered the opportunity to attend Officer’s candidate School at Fort Benning, Georgia. One of the proudest moments of my life came when they pinned on my 2nd Lieutenant bars on July 1, 1967. I had finally gotten my act together. (See Appendix C for a list of events I consider my life’s proud moments.) After a distinguished career as an intelligence officer in NATO, I left the Army for a new challenge. Actually, it was an old challenge, but one at which I had failed miserably the first time around. I went back to college, but this time with a completely different mind set. I went back with a vengeance. I was obsessed with getting out of school as fast as humanly possible and with great grades. I got on the Dean’s List with a 3.6 GPA while taking 23 units in one semester (I had to get a waiver; it’s one entry on the list of the 86 times I was told it couldn’t be done). I finished 2-1/2 years of college in 1 –1/2 years, averaging 20 units per semester.
NO PANACEA I don’t want to create the impression in your mind that the QL-YCDT philosophy is a cure-all or one that will insulate you from failure and disappointment. It will “bulletproof” you against the adversity that confronts us all and over which we can exercise some degree of control. But “bad” things happen in our lives – both professional and personal – that are caused by forces over which we are powerless. My life had been no exception. I have had to suffer profoundly sad moments that have shaken my belief in QL-YCDT to the core.
THIS IS YOUR WAKE UP CALL It is this simple: You must take responsibility for your life. If you don’t, no one else will! But there is a unique formula for success in life, especially your life. “YOU CAN DO THAT!” Y-C-D-T (Why-Cee-Dee-Tee): The letters themselves bring you face to face with the process: -Y Why did you attend this session and/or read this manual? – C To see first-hand the YCDT process, – D and to define yourself, your goals and your dreams. – T What a team for success! What a simple formula for success in your life! Your dreams + my process = your reality!
YOUR REALITY: YOU CAN HAVE IT ALL!
I had a dream and made it reality. How I did it has been the subject of this seminar and manual. My successes – success being defined as the absolute realization of my dreams – are a matter of public record. But what about your dreams? What about your successes? What about your realities? Just remember, no matter what they are, no matter how big or how small: YOU CAN DO THAT! YOU CAN QUANTUM LEAP YOUR SUCCESSES! LASER BEAM FOCUS! – YOU – EACH PERSON: · Can develop a positive self-image. You need one to succeed. · Can build your confidence by practicing the Five Credos for Success. · Will gain self-esteem. You are somebody! · Will enjoy boundless enthusiasm and energy to turn perception into reality. – CAN – IS ABLE: · To see your dreams ahead. You know where you are going and how you are going to get there. · To visualize success; to reach out in space and time and almost touch it. · To harness the power of your own affirmations; you internal energy source. · To simulate positive occurrences. Don’t waste time on the negative or those things you can’t do anything about. · To dream big. Yesterday’s dreams are today’s realities. Perception is reality. Shoot for the moon! – DO – TO REALIZE: · How to develop the image and texture of your dream before the quest begins. · How to channel your burning desires and gut feelings into explosive energies.
· How to act as if there are no limits to your abilities. · How to Think Big! – THAT – YOUR DREAMS: · What is your dream? Fill in the blank . Use another sheet of paper. Or a ream of paper! · Be big!
GLORY IS FLEETING I didn’t want to write this final subscription. I wanted to end this story on the upbeat theme in the previous subsection. Go get ‘em! The sky’s the limit! Dream big; be big! But a good friend of mine told me, “Dan, you have to level with them. You have to tell them the truth. You have to give them the full story.” As I mentioned earlier, there have been some profoundly sad moments (See Appendix C) in my life. Real gut busters. I’ve already related one of them: the death of my CFO and dear friend. Offering the eulogy (See Appendix D) at his funeral was very difficult for me. God, we had come so far, and now he was gone. As it was to turn out later, he never knew how lucky he might have been to miss the mess at Great Western in 1991. And a year later (1992), I had to participate in yet another funeral of sorts, that of my loyal dog, Driller, who died in my arms in June. But as though on Dan Peña as these times were, they were nothing compared to the sadness I felt upon the realization that my vice- chairman and the rest of the Great Western directors had turned their backs on me when I left the company as CEO on January 8 and as a Director on February 28, 1992. The company fired me. That’s right, fired me. If that doesn’t surprise you, then you skipped over Sections 4 through 10.
I can’t talk about any of the particulars because the whole mess is currently in litigation here and in the U.K. There were – and are- differences of opinion on a number of important subjects, but you expect – no, you demand – that in a big company. There were personalities and egos, not the smallest of which was mine. There were office politics, but there are always office politics. I could deal with all of that and more. But having my “friends” and associates turn their backs on me was the hardest blow I had ever sustained. My last day at Great Western – my Great Western – was one of the lowest of my life. But not for long! In case you may have wondered when it was that I started my next venture, the one of which you are now a part wonder no more. It was exactly the day after my last day at Great Western! This enterprise started with a dream on January 9, 1992. It is now a reality. Don’t believe me? Are you real? If you are, then my dream is a reality because as you read the words on this page you are participating in my newest success. Dream Big! I want to leave you with this final thought. On a pedestal in my office at Great Western was a bust of Augustus Caesar. It was there for a very specific reason. When Caesar’s legions would return from their conquests, all of Rome would turn out for a celebration parade. The conqueror would lead the procession, behind him his family and wagons of plunder, that he may pay tribute to Caesar. But in the chariot with the conqueror rode an ordinary house slave given a special task. The slave would stay close at hand, even as the magnificent horses drawing the victor’s chariot would prance and Snarl, jostling the chariot. The slave would repeat, over and over, in the conqueror’s ear: “Almighty conqueror, general of Rome, leader of legions, visage of Caesar. Hail unto thee! Enjoy thou this day. Bathe in the pride of thy family. Anoint thyself with the adulation of Caesar. Bow thy head to the gods of Rome. But knowest now this, mighty warrior! Commander of legions!
