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Table of Contents
Section 1.Introduction
Section 2.The Many Faces Of The Conventional
Wisdom Introduction
Section 3.Business Development: A Host Of
Initial Obstacles
Section 4.Business Development: Raising Initial
Capital For Growth
Section 5.The Initial Public Offering Background
For The Decision
Section 6.Life After The Ipo
Section 7.Growth Vehicle Alterntavies
Section 8.Acquisition #1: Human Resources Vs.
Physical Resources Background
Section 9.Acquisition #2: Diversification And The
Quantum Leap
Section 10.The Dark Side Of Equity Financing
The Transition
Section 11.Qualitative Vs. Quantitative Issues
Section 12.Managing Egos
Section 13.Concluding Remarks
Introduction
OVERVIEW
Welcome to the “Quantum Leap – you Can Do That!”
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 of a business philosophy and some guidelines for
making business decisions, which are in line with that philosophy.
THE PHILOSOPHY
The “Quantum Leap – You Can Do That” philosophy is about dealing with
the conventional wisdom; it’s about making decisions in business and in
life that go against the tide of popular opinion. It isn’t about anarchy or
rebellion. It’s just a different approach to handling the 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 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.”
SEMINAR PRESENTATION
There is no set presentation format for the seminar.
It’s up to you, the participants, to dictate how far we go down any path.
By the time this seminar ends, there will be no question in your mind
about 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.
Although based on the events of my personal and 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.
In the classic scheme of things, philosophy gets ready for action by being
codified into a set of principles, which in turn get restated into a set of
operating procedures, which in turn get restated into a set of day-to-day
standard 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 quickly.
For ease of presentation purposes, the PPPs have boiled down into what
I term “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.
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 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…
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.
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.
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:
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.
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.
The conventional wisdom always had plenty of support for any decision
which said, “Do nothing.”
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
event for some of you. This could be the proverbial knock!
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.
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.
4) Visited UK company (Spring 1984) and decided, while in the UK, there
was a huge opportunity for GWR to go public.
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:
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.
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.
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.
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.
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.
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
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.
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!
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.
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.
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.
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.
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 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.
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.
· “Even if oil and gas interests are in areas of proven reserves, there is no
guarantee that a discovery would have commercial significance.”
Was the oil and gas industry the only one having to deal with “unforeseen
circumstances”?
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…
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.
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.
The lesson to be learned there by you is that it CAN be done. The means
you employ are up to you.
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.
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.
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? 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:
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) 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!
Was I scared? You bet!
It was 1982 and the Tax Reform Act of 1986 was still four years away
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, 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 product base. I went to work and put
together a series of illusions which put me on Wall Street with the third tax
shelter.
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.
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.
Debt can be in the form of trade debt (payable in the normal course of
business operations), short term debt (payable within a one year period),
and long term 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.
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.
· 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.
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
· 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.
· I had seen the perception/reality ruse work with the second and third tax
shelter and with the purchase of Guthrie Castle.
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”.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
It may be the believability of the pro formas as the basis of the discounted
value of the business enterprise.
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.
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.
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.
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.
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.
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.
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!
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.
Anybody can control and cut costs, but you can never experience hyper
growth and quantum leaps in business without generating more revenue.
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.
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.
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.
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.
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.
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.
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:
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 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.
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.
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 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.
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.
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.
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:
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.
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:
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.
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:
THE STRATEGY
That was the conventional wisdom, but it wasn’t the obvious thing to do.
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.
I wanted something that would put Great Western on the front pages of
the international energy business press.
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.
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.
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.
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.
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.
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:
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.
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! They 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.
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!
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.
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.”
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 better!
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.
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-up-your-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.
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.
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).
But none of the pieces changed and everything held together. Just
another day in the life of the entrepreneur and the senior executive.
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.
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.
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:
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.
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.
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.
“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.
Dan Peña
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.
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.
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)
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?
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.
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.
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.
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: W ill
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
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.
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.
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.
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.
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 face-to-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.
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.
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.
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.
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 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.
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.
-Y Why did you attend this session and/or read this manual?
- T What a team for success! What a simple formula for success in your
life! Your dreams + my process = your reality!
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:
· Can build your confidence by practicing the Five Credos for Success.
- 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.
- 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.
· 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.
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.”
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!
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
The slave would repeat, over and over, in the conqueror’s ear:
Anoint thyself with the adulation of Caesar. Bow thy head to the gods of
Rome.
Conqueror!
For this be thy day, but perchance not the morrow. For glory, my lord, is
fleeting.”