Thousands of men across America have had to make peace with their demon. With a little better luck or a little more playing time or one less injury—they could have made it in the NBA. But in the competitive and unforgiving realm of professional sports, they either never got out of training camp or were cut after a season or two on the bench.

In the summer of 1966, I was a typical 12 year-old boy who loved basketball.  Like so many little Hoosiers, what I lacked in ability I made up for in hustle.  The most important weeks of my summer were spent at the Arad McCutchan basketball camp at Evansville College. McCutchan was the renowned coach of the Purple Aces, whose teams had won back-to-back NCAA Division II championships when anchored by a player who was the hero of every boy in southern Indiana.  For those teams, Jerry Sloan had been the defensive warrior, leading rebounder, second leading scorer, second team All-American and NCAA tournament MVP.

In that summer of 1966, Jerry had just completed his rookie year with the Baltimore Bullets, one of only nine NBA franchises at the time. The Bullets had made Sloan their first pick in a draft that included Rick Barry, Bill Bradley, Bob Love, Gail Goodrich, and Billy Cunningham.

Sloan made the Bullets’ roster, but the year was a disappointment.  He found himself down the bench from some superb players. The Bullets used him sparingly.  He was 10th in minutes played, 10th in scoring and, prophetically, fifth in number of fouls committed.  As Sloan later said in a Hall of Fame interview, “I was totally lost and frustrated.”

After his rookie season, the Bullets decided not to protect Sloan and allowed the expansion Chicago Bulls to draft him. A concern about Sloan was that he was long on defense but short on offense.  In the NBA of yesterday and today, there was no room for specialists.  If you could not score, you were taking up space on the court for a guy who could produce on both ends.

Sloan returned to Evansville as the main draw for McCutchan’s camp and to have access to a first-class training facility.  Stoic is an understatement when describing Jerry.  He was good to the campers but he was never effusive, and he had something very important on his mind.

Camp ended around noon, and Jerry’s real workday began.  Hour after hour and day after day, Jerry did what only a select number of players at his level have ever had the heart to do.  In that summer of 1966, Sloan created a brutal practice regimen.  He used his unflagging work ethic to take his game to a new level—an NBA level.

The memory is as clear to me today as it was 35 years ago.  Jerry and another NBA hopeful going one-on-one, switching off on offense and defense.  Full court.  Full speed.  Weaving, stretching, dipping shoulders, pushing for a split-second advantage. An endless exhausting drill—powerful, reckless sprints up and down the court.  The object was to score by simulating what it would take to push your body through a forest of NBA defenders.

The other drill I remember was of Jerry pulling up, leaping high, and shooting 15 to 20-foot “close range” jump shots as if he were finishing a fast break or had slipped his defender.  Hundreds of shots each day. Thousands through the summer.  Relentless.  Sloan was preparing himself to make three to five of these a game—if he could get his minutes.

The rest is NBA history. Jerry Sloan started on that first Bulls team which set a record for most wins in an expansion year.  He became “The Original Bull,” a two-time All-Star, a four-time NBA All-Defensive First Team awardee, and a Hall of Fame coach. His signature jump shot and his quick moves to the rim made Sloan a consistent high scorer on the Bulls at 14 points a game.  He became a complete player, leading by example in tenacity, rebounds, steals and assists— as well as personal and technical fouls.

Jerry Sloan’s example of courage and fortitude in the face of failure has lived in me for over three decades, part of the personal myth that we all create for ourselves.  A private man like Jerry Sloan, who admits to his fair measure of personal faults, has no interest in playing the part of a role model. It is enough to say he has been a great teacher and a great coach to more people than he can imagine.

It is no secret why his players have always given him their last ounce of energy and devotion.  Players who reach that elite level in sports know one of their own.

Douglas M. Schmidt is an investment banker and a writer who lives in Towson, Maryland.  He grew up in Evansville, Ind., where he would ride his bike to the stadium to watch the Purple Aces.

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© 2011 The Salt Lake Tribune

[Published in Baltimore Citybizlist.com on November 1, 2010.  See http://baltimore.citybizlist.com/1/2010/10/30/Maryland%E2%80%99s-Gambling-Governors%E2%80%94Lies-Damned-Lies-and-Statistics.aspx#]

By Douglas M. Schmidt

Years from today, if Marylanders are asked to cite Governor Martin O’Malley’s greatest achievement while in office, the first answer will be, “He was the governor who gave us slots.”

The Governor’s ego and self-image will surely bristle at this epitaph on his career, but the fact is that no single issue in memory in Maryland has engendered more lobbying money, public rallies, legislative hearings, arm twisting, bill printing, press reporting and hot air than slots gambling.  Slots is a mass from which there is no calculable escape velocity.  Long after Governor O’Malley retires, his legacy of slots and the gambling industry will remain with us.

When Governor O’Malley shepherded through the new era of slots gambling in Maryland, he thought he was achieving two important goals.  The first was to plug, in the face of a recession, a major leak in state revenues with a predicted $660 million per year of new revenue by 2013.  The second was to put an end, once and for all, to the perpetual, divisive debate about slots in Maryland.  He has accomplished neither.

The Governor led a campaign for slots based on a claim that the State of Maryland would have to cut services or increase taxes without slots revenues.  The gambling lobby, the largest lobby in Annapolis, spent an estimated $7.1 million in its efforts to convince the electorate to vote for the November 2008 referendum to change the Maryland Constitution, outspending the citizen-led coalition against slots by 7 to 1.  In the last week before the referendum, the Governor robo-called Maryland homes politicking for slots.  It was an all-out fear mongering campaign.  Deficit budget or slots.  Reduced funding for education or slots.  Considering the pressure politics, it is notable that four out of ten Marylanders still voted against the referendum, suggesting that the moral and political debate on this issue would persist.  Nevertheless, the Governor claimed a tremendous mandate.  Slots forged ahead.

Slots was originally designed to save Maryland horse racing, but to the chagrin of the horse racing industry, this objective has become a shadow of its former self.  When Governor Robert L. Ehrlich, Jr. first took office in 2003, he was greeted with a potential tsunami of a deficit that he inherited from Governor Parris Glendenning.  In a move that may have doomed him to one term, Governor Ehrlich rejected seizing the moment in a Reaganesque fashion to use his political goodwill and capital to right-size state government, shelf the unfunded “Thornton” education mandate, and otherwise rein in spending.  Instead, he and his poorly prepared advisors grasped at slots as a life ring.

The Ehrlich administration took what was his modest and soft-pedaled campaign promise to push forward slots for the horse racing industry and turned slots revenues into the foundation for his administration’s balanced budget.  Ehrlich’s slots bill was hastily conceived and poorly written.  After spending two sessions battling a Democratic legislature and dragging luminaries such as Maryland State Superintendent of Schools Dr. Nancy S. Grasmick in front of committees to shill for slots, Governor Ehrlich finally tossed in the towel.  Surely partisan politics defeated his effort.  But a sloppy bill and concept made it easy to reject.

Fast forward to newly elected Governor O’Malley in 2007.  The same set of circumstances awaited him—a budget with a looming deficit that only draconian cuts, new taxes or the promise of slots could cure.  Politicians get elected on promises to spend money on new programs not to cut them.  So, like his predecessor, O’Malley chose the hope of slots revenues over better budgeting and better government.  Key to the whole slots initiative was the Governor’s and the Department of Legislative Services’ projection that slots would, after a few years, bring $660 million of annual revenue to the State’s coffers.

The numbers do not add up.  The numbers have never added up.  Even the humblest church lady who ever testified against slots in Annapolis could see into the future better than two governors.  What people did not understand at the time was that to net $660 million for the state, gamblers had to lose approximately $1.4 billion at the machines.  The majority of the $1.4 billion take was promised to the slots parlor licensees, horse racing, local governments and various other constituencies needed to pass a gambling bill.  Everybody got something—or so they thought.

The great folly of Maryland’s slots plan was to be the fifth and last state in the region to enact slots after New Jersey, Delaware, West Virginia and Pennsylvania.  Jack Welch of General Electric fame used to preach that GE would not own or enter a business where GE could not be number one or number two.  His summation of being a follower was, “When you’re number four or five in a market, when number one sneezes, you get pneumonia.”  The concept that Maryland could expect people to flock to our slots parlors from across a highly competitive and saturated regional market was flawed from the beginning.

Even more ridiculous was that this $660 million was based on Maryland jamming into our little state more slot machines than already existed in either Delaware or West Virginia.  The total take per machine per year was rosily projected to be better than what is actually achieved in Delaware or West Virginia.  In a final display of financial lunacy, Maryland was going to accomplish all of this by exacting from the gambling companies one of the lowest revenue sharing deals in the nation.

Senate President Thomas V. Mike Miller, Jr. was equally reliant on the people’s inability to add and subtract.    He was particularly obsessed with repatriating the money he claimed that Marylanders gambled in other states, as if he could turn around Charles Town bound buses at the West Virginia border.  An oft-cited $350 to $400 million gross number came from a study of dubious origins and limited sampling.   Again, even if it was correct, the math did not work.  The question people never asked was how do you get from $400 million currently spent by Maryland gamblers to $1.4 billion needed to make Maryland slots work?  That is apples to apples.  You get there not be enticing Maryland gamblers to come home or depending upon already satisfied out-of-state gamblers to stream across our borders.  You get there by turning tens of thousands of Maryland citizens who formerly did not gamble into slots gamblers.

Fast forward to 2010.  Where are the millions of dollars of predicted revenues?  The rollout of slots parlors is far behind schedule.  The revenues are almost non-existent and they certainly will fail to reach the $90 million promised for 2010.  What is the likelihood that Maryland will deploy 15,000 machines in five locations?  No chance whatsoever.  1,500 machines out of 2,500 are up and running in Cecil County.  Two of the five locations are lying fallow with weak bidders or no bidders.   The market economy is speaking loudly and clearly to Maryland’s plans.

The State of Maryland will never see $660 million of revenue from slots.  There is no math and no planned deployment of machines to get close to that number.  Has Governor O’Malley silenced once and for all the incessant demands and debate over slots?  Look at the Arundel Mills Mall controversy, look at Penn National Gaming lobbying, and look at the clamor for table games from newcomers such as Baltimore Mayor Stephanie Rawlings-Blake.  The squabbling over Maryland gambling will never cease.

A public policy under-achiever like slots might be just so much grist for the political mill, except that slots has been the controversy of the decade in Maryland pitting neighbor against neighbor, the wealthy against the poor, and even parishioner against parishioner.   The failure of slots to deliver as promised begs two troubling questions.  Were citizens of Maryland purposely lied to in order to force a favorable vote on the referendum?  Or is it the case that our state politicians are just fools and incapable of being trusted with such a complex, far-reaching project as slots?

The insidious answer lies somewhere between these two depictions and is best summed up as “Cheney Think.”  Cheney Think is exemplified by basing a massive public policy initiative on a false, institutional premise—in the case of the Iraq War it was the assumption that Iraq had weapons of mass destruction when it had absolutely none.  First, you establish in your administration a policy or goal that you want to achieve.  Then, that policy becomes the lens through which your administration views all facts, reports, studies, hypotheses and calculations.  In the end, the tail wags the dog.  Loose studies become facts.  Simple math is substituted for statistical review and analysis.  After securing the facts that they needed, the Governor and his administration proceeded to sell the public on the necessity of slots with total certainty in its position and of its convictions.  You be judge.  Is that prevarication or stupidity or Cheney Think?

It should come as no surprise to anyone what drove this irrational slots policy.  It was the age-old lure of money—very big money when it comes to slots.  For the gambling industry that is facing a nationwide decline in revenues in its traditional bastions such as Las Vegas and Ocean City, every new state where the industry can create new gamblers is precious.  For a governor and a legislature struggling with exogenously induced deficits, a new source of funds that sidesteps the word “tax” is as rare as a vein of gold.  For a developer who has become a billionaire by exploiting the ineptitude of governments, the chance to snooker the state and put a government-sponsored monopoly into a major mall is nothing short of genius.  For candidates running for office, the grouping of individual campaign contributions by the Ocean Downs slots licensee William Rickman and his family as well as other gambling and racing interests such as the Maryland Jockey Club is a necessity.

Lost in this headlong rush for funds and riches is something that used to be called “the public good.”  Never mind that our government will create tens of thousands of new gamblers out of its own citizens or that those who can afford it the least will be the preponderance of those who will lose their money.  Never mind that gambling is an unproductive waste of discretionary income that underwrites a minimal number of low-skilled jobs compared to our state’s real economic drivers in technology and biotech.  Never mind the personal toll on families and communities caused by the increased number of problem gamblers and the addicted.

Our leaders told us that the state would be bankrupt and the education of our children would suffer without slots.  We believed them.  We voted for this great panacea.  We chose the lesser of two evils and, in the end, we find that a lesser evil is still an evil and it will not go away.  Because it never ends is why Martin O’Malley will be forever remembered as the governor who brought slots to Maryland.
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Mr. Schmidt is CEO & Managing Director of Chessiecap, Inc., a financial services and information company.  Chessiecap is also the parent company of Chessiecap Securities, Inc., an investment bank raising capital and providing M&A and strategic advisory services to growth and technology companies in the Mid-Atlantic region.  See www.chessiecap.com.

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This commentary is based in part on information obtained from government documents, government and commercial websites, press reports and other sources believed to be reliable and prepared in good faith.  The views and opinions expressed in this commentary are those of the author and are intended for general information purposes only.

[Published in The Baltimore Sun on July 20, 2010.  See www.baltimoresun.com/news/opinion/oped/bs-ed-crowder-20100720,0,307036.story]

By Douglas M. Schmidt

5:17 PM EDT, July 20, 2010

John Crowder, playing for Our Lady of Mt. Carmel High School, was a special and feared presence on the basketball court. He was not demonstrative or overbearing — but there were moments when, at 6 feet, 8 inches, he could control a game, from rebounding to blocking shots to scoring. He was the single player who could beat your whole team, so you had to defend him with all that you had.

John had “the gift,” and he was one of the rare young people who had learned to harness it and play team basketball. John had support from teammates, coaches, teachers and parents of the dozens of players he played with at Mt. Carmel and on the elite teams of Baltimore. He was smart, friendly, big and sometimes goofy. He had a winning smile as well as a vulnerable side that made people want to care for him. But as he entered the turbulent times of his late teens, he lost too much of that innocent magic and turned toward the siren song of the streets of Baltimore.

In the early hours of July 5, John was found in a yard in northeast Baltimore, dying of a gunshot wound.

John had a lot going for him, including a coveted pathway to a “D-1″ ( NCAA Division I) basketball program. You can ask any boy in any Baltimore basketball camp, and he knows exactly what “D-1″ means. It’s the ticket up and out. Yet, with all that support and potential, John was missing many of the essentials in life. His mother died of cancer when he was 2 years old. His father was nowhere to be found. In their place, he had a series of caring, well-meaning relatives, coaches and school communities whose collective care for John was ultimately overwhelmed by the irrational risk-takings of a teenager who wanted, like all teenagers, to answer to nobody.

Anyone who has raised a teenage male to maturity knows that despite all our best efforts, there are failures. Failure on the streets of Baltimore is magnified and deadly. Compulsive youths are armed with weapons. In a flash of anger from an immature brain, lives are ruined and lives are taken. As one distraught mother who knew John said, “I have quit asking about the tattoos. You can’t ask. ‘This one is for my brother who was murdered.’ Some of these boys grow up with death and they don’t have a long view of life.”

I had to give my son the news by telephone. “No way. No way. That can’t be,” he protested. He is the same age as John was — 17 — and had played against him.

Try to remember yourself as a teenager. For the rest of your life, you will never forget the local high school sports stars of your era, just as you will never forget your few classmates who died young. The long church services, the sobbing family, the homilies aimed at making you understand what made no sense to you. As you age, those who died never do. All your fading memories and impressions become encased in a yearbook picture that smiles at you across time.

When we lose a teenager, it affects us all. Our God and our Prophets admonish us to care for the young, the weak, the sick and the poor. Whether we are religious or not, this is our heritage, and we judge ourselves by how well we take care of those among us who are less fortunate. The murder of a teenager is an unwelcome mirror that exposes the sham of our claim to civilization. Scores of our youth are lost each year to the streets or death — and it is our shame that we tolerate it and that we do not turn this city upside-down to protect them.

Last week, there were many parents and coaches who grieved for John and who thought that if they only knew then what they know now, they could have done something more to save John from his fate. But it is never so simple as personal heroics. John’s slide was long in the making, and many tried to intervene and failed. Even if John had been saved, what about the next teen — and the one after him?

So throw out politicians who give lip service every four years to education and fixing Baltimore. Demand that schools serve your children and not the needs of adults. Give police everything they need to drive the drug culture off the streets. Support every teacher, preacher, coach, social worker and Scout leader who will show youth the path to success.

But dispense with the object lessons and hollow warnings to teenagers. Better that you should get angry. Get angry at every pointless death. Be enraged that a teenager can die of a bullet wound on your city streets.

Because nothing good comes from the murder of a teenager — nothing — and we should not pretend otherwise. It is lesson that we do not need to learn, and it is repeated daily in some city in America. John had friends, he had family, he had a future, he had a soul. He deserves more than to end up an example, as if he were to blame for the streets that claimed him.

There is no turning back the clock and fixing this for John. There is only what we demand of the future that saves the next teen.

Douglas M. Schmidt is an investment banker and a father and lives in Towson. His e-mail is doug@chessiecap.com.

Copyright © 2010, The Baltimore Sun

December 2009 – Fourth Quarter 2009 Statistical Review

Mid-Atlantic Deal Review

Editor’s Note: The December edition consists only of a statistical review of 4^th Quarter Mid-Atlantic capital markets activity with associated commentary.

Quick Stats from Chessiecap is the most comprehensive and thoroughly researched presentation of Mid-Atlantic transaction data available—Private Placements, M&A and Public Offerings.  Mid-Atlantic is defined as D.C., Virginia, Maryland and West Virginia.  Private placements include all private equity investment including venture capital, PIPEs, private investors and other forms of new investment.  The M&A data are the first to capture true regional activity.  80% of all M&A transactions are “undisclosed,” resulting in almost meaningless analysis.  Chessiecap reviews all reported regional transactions and uses its market knowledge to assign probable deal values and uncover secondary sources of deal values.  The data below does not capture debt transactions, recapitalizations, non-corporate real estate financings (project financing) or purchases by local companies of companies outside this region.

DEAL DATA: Q4 2009

Mixed results in December cannot undo an anemic Fourth Quarter. Private Placements fell off the table in December, while M&A deals saw a typical year-end spike as companies and bankers push to meet a target that makes accounting easier and bonuses flow.   The Public Offering data looks good for December, but there are so few data points that one or two deals create a wild swing.  Across the quarter, there is nothing to get excited about and no trends to suggest (in retrospect) an economic recovery or revival of the deal world.  In recent months, Maryland companies have been more in need of capital, so they have received the lion’s share of new capital from private placements and public offerings.  But Maryland investors and owners are harvesting less in the M&A market.  Conversely, Virginia companies are harvesting more than they are attracting capital.  The Biotech focus of Maryland versus the IT/Telecom concentration in Virginia coupled with the sorry state of overall investing explain this trend.  Biotechs have to have capital—you cannot walk away from a multi-year research and testing regimen.  But you can always trim back software development and sales.   Finally, in troubled times, there are many non-standard types of transactions which muddy the data.  For instance, publicly held companies (like many Biotechs) do not practically have access to the traditional public offering market, so you see many PIPES (Private Investment in Public Equity), which we classify as private placements.  Nevertheless, traditional venture capital investment still captured almost 80% of the private placement market for the quarter, but less than 10% of that total was in new investments.  In other words, the fourth quarter continued the trend of meager opportunity for entrepreneurs as venture investors concentrated on maintaining the health of their current portfolio companies.

Private Placements: Q4 2009

Major transactions for the quarter include:

• -GP Strategies (Tech training & solutions)-$20M PIPE
• -Motley Fool (Media)-$25M in the first round since 2001
• -Millennial Media (Mobile advertising)-$16M in a new round for a hot sector
• -United BioSource (Biotech/Pharma)-a huge round of $125M by Berkshire Partners, Boston
• -Glyco Mimetics (Biotech)-two rounds totaling $43M
• -Coastal Sunbelt (Food distribution)-$20M in a new money recap or refinancing
• -TEOCO (Telecom solutions)-$60M in a major investment by Boston’s TA Associates

1. The pace of activity is approximately 25 deals per month, with 10 to 15 being traditional venture capital.
2. As mentioned, traditional venture investing captured almost 80% of the total private placement volume for the quarter, but less than 10% of that investing was in new opportunities.
3. Maryland outpaced Virginia with just over half the deals and almost 70% of the volume.  The District of Columbia showed a credible 12% of deal activity with most being small fundings.
4. For the region, the capital thirsty Biotech sector took 46% of the private placement dollars with only 21% of the deals.  Telecom, often another capital intensive industry, soaked up 18% of the dollars with 15% of the deals.  After that, activity was spread across many Mid-Atlantic sectors such as IT, Media, Internet and Security.

Mergers & Acquisitions: Q4 2009

Major transactions for the quarter include:

• -Phoenix Consulting (Government IT) to Dyncorp-$51M
• -IXI Corp (Info & Research) to Equifax-$124M
• -SunEdison (Solar projects) to MEMC-$340M
• -Ellicott Dredge (Manufacturing) to Markel Corp-$60M estimate
• -Datatel (Software for Education) to Hellman & Friedman/JMI-over $300M estimate

1. M&A activity in the region is just low, averaging around 15 deals per month, with only 10 of those above $1 million in transaction value.  Average deal size is quite high, ranging from $30M to $40M, influenced greatly by the lack of deals and the subsequent dominance of large ones.
2. Virginia outpaces Maryland in M&A, with 56% of the volume and 60% of the number of deals.  Maryland has 40% of the volume with only 27% of the number of deals.  D.C. fills in the rest.
3. Despite the dominance of a couple of large transactions in Energy and Information, the rest of the transactions were spread across a variety of regional industries such as software, media, finance, health care, government and more.

Public Offerings: Q4 2009

The moribund public markets showed a flicker of life locally.  Primary transactions were:

• -FBR Capital Markets (Finance) eliminating its major institutional shareholder-$89M Secondary
• -American Capital Agency (REIT)-$133M Follow-on
• -Global Defense Technology & Systems (Government IT)-$60M IPO and Secondary
• -Human Genome Sciences (Biotech)-$477M Follow-on
• -Pebblebrook Hotel Trust (REIT)-$403M IPO
• -ICF International (Government IT)-$88M Follow-on

1. In a poor market for public offerings, 11 deals in the region is not chump change.  But they are certainly all the usual suspects—REITs, Biotech, Government IT, and a couple of struggling small commercial banks.
2. Hurray for the Government IT sector in getting out one IPO and one secondary.  My understanding is that the market still was not easy for these companies.
3. Virginia and Maryland almost split the number of deals, but Maryland volume was 5X that of Virginia, paced by hungry REITs and Biotech.

When I first learned of the sale of Black & Decker Corporation (NYSE: BDK) to The Stanley Works (NYSE:SWK) in November of 2009,  I was immediately suspicious and wondered how much money Black & Decker executives would be making by selling their own company.  For decades now, it has been a growing and, in my opinion, destructive trend in U.S. acquisitions for the buyer to offer large monetary incentives to management of the seller to “influence” a favorable outcome.  In an acquisition such as this one that totals over $8 billion of market capitalization for the combined companies, the payments to selling management, even when measured in tens of millions of dollars, can be a small fraction of the transaction value at stake. 

An early attempt by Black & Decker to paint this acquisition as an almost ‘merger of equals’ suggested a fairly straight-up transaction.  But it soon became clear that Stanley was driving the bus.  Stanley would control the new board, Stanley management would run the company, and Stanley stockholders would own a slight majority of the total shares.  An initial favorable article by a New York Times online reporter also threw me off track.  He praised Black & Decker Chairman and Chief Executive Officer (CEO) Nolan D. Archibald for foregoing immediate vesting of stock and options plus other benefits worth over $20 million upon the sale of the company.  This standalone fact was corroborated in a Black & Decker filing.  Mr. Archibald was apparently in the forefront of reforming Wall Street’s takeover tactics.

Then I read closely the U.S. Securities and Exchange Commission (SEC) filings of both companies.  Only by reading both sets of filings was the full picture revealed.  The New York Times reporter had failed to see that Mr. Archibald, designated to become the first “Stanley Black & Decker” Executive Chairman, was simply keeping all of his stock and options and converting them into Stanley stock and options—he wasn’t giving up a penny.  He was merely changing horses.

But the real shocker was tucked away in a Stanley filing describing Mr. Archibald’s new Stanley contract.  In addition to the continuance of his over $10 million per year pay package for each of the next three years and a guarantee of the same for 2009, regardless of the company’s poor performance, Mr. Archibald, and Mr. Archibald alone among Black & Decker executives, was being awarded a “cost synergy bonus” of up to $45 million for cutting costs and eliminating jobs in the new combined company.  And there was more.  In addition to his current holdings of Black & Decker, which I estimated to be worth over $110 million, Mr. Archibald would also receive one million options in the new Stanley Black & Decker at the price of the stock when the transaction is closed.  My estimate is that Mr. Archibald can increase his personal wealth by $70 million or more in the coming years, not including his $10 million plus annual salary and benefits, based on the achievement of the $350 million of cost synergies and a reasonable yearly rise in the value of the new Stanley Black & Decker stock.

You might wonder how hard Mr. Archibald will be working to earn this cost synergy bonus—a bonus based on consolidating plants and operations and eliminating jobs in the middle of the worst U.S. employment crisis in decades.  Subsequent filings have shown that Mr. Archibald is the only Black & Decker member on a six person Integration Steering Committee that has begun overseeing the consolidation planning prior to closing the transaction.  Stanley management, as might be expected of the acquirer, is already hard at work on consolidation and cost-cutting.  In my opinion, and it is not much of an intellectual leap to get there, this “cost synergy bonus” conceit was created by Stanley and its advisors to make a major influencing payment to Mr. Archibald more palatable and less overt.  No matter how you dress it up, the payment’s purpose seems quite obvious and simply falls in line with established corporate takeover practice.  A U.S. CEO is enriched as he supervises the sale of his company.  Just another dog bites man story on Wall Street.

After the first commentary that reported the above payments, I had no intention of writing a second one.  But on December 4, 2009, Stanley filed its Form S-4 (subsequently amended), a joint proxy statement/prospectus describing all the details of the proposed transaction and its history.  This is the document upon which investors and shareholders rely to make an informed decision about whether to support or reject the transaction.  It contained one of the most remarkable narratives I had ever read in a public filing.  Page after page describing how Mr. Archibald led Black & Decker’s negotiations, how the emphasis shifted from a wishful-thinking Black & Decker acquisition to a Stanley one, how the “cost synergy bonus” was devised, how the discussions began to include an emphasis on satisfying Mr. Archibald’s contracts with both companies, how in meeting after meeting the boards of both companies addressed both the transaction and Mr. Archibald’s contracts, and how, in a final board meeting, with his unique and rich new contract in the offing, Mr. Archibald was “very supportive” of the transaction before excusing himself from the final vote due to the obvious conflict of interest.

“Who is this Black & Decker board?” I wondered as I penned the second commentary.  After digging through public filings and the Internet, it became clear that the board lacked experience in the tool and manufacturing sectors as compared to Stanley’s board, and it contained at least three out of ten “independent” members who had personal and/or professional ties to Mr. Archibald.  In addition, I found that two of the board members were on an elite Deutsche Bank Americas Advisory Board, whose mission includes “business development.”  Deutsche Bank is, along with Goldman Sachs, the investment banker to The Stanley Works and appeared to be involved in first suggesting that a transaction be revived.  After uncovering all of these non-obvious facts and reaching some conclusions about why this transaction was fated to happen and which company’s leadership was more competent, I shut down the computer and was done with this public burial of an old U.S. corporate name.  So I thought.

In the weeks that followed the publication of the second commentary, I heard from many readers.  But two readers, who had been on the inside of Black & Decker, knew one fact that I did not know.  One fact that seemed eminently pertinent; yet, in the wisdom of our system, this fact apparently did not require disclosing in the transaction filings.  These two readers were angry and bitter, believing strongly that their CEO had stepped over the line.

Both readers steered me to a pubic website for “Red Ledges.” Red Ledges is a “private, four-season recreational development in the beautiful Heber Valley” in Utah.  It includes a brand new Jack Nicklaus Signature Golf Course, luxury lots for sale, and many other activities (such as tennis, an equestrian center, a spa) completed or in design.  Red Ledges is a short drive from Deer Valley and Park City Mountain ski resorts.   Red Ledges sells lots for building upon or finished “cottages” for $1.2 million and up.  A development project of this magnitude takes an enormous time and planning commitment and many millions of dollars of upfront capital to create.  The grand opening for the Red Ledges golf course occurred in July of 2009, straight into the headwinds of one of the worst markets in memory for golf course expansion and luxury real estate and, coincidentally, in the middle of the negotiations between Stanley and Black & Decker.

Red Ledges is a private enterprise described as having two equal owners—Nolan Archibald, the Chairman and CEO of Black & Decker, and Tony Burns, the managing owner of Red Ledges.  Who is Tony Burns?  Tony Burns is a lifelong friend of Nolan Archibald’s dating back to their college days.  Tony Burns is described in the annual Black & Decker prospectus as M. Anthony Burns, Chairman Emeritus of Ryder System, Inc., a description that does not mention his managing owner role with Red Ledges.  Tony Burns is a board member of Black & Decker, a board member who I included in the category of not having direct relevant experience in the tool industry but one that I missed counting as having a personal relationship with Mr. Archibald.  Instead of three of ten, there were now at least four of ten to be counted as owing their board seats to a relationship with the chairman and CEO.

Missing one more friend of the chairman is not what drove this third commentary.  That point regarding boardroom patronage was already made, and I had allowed that other personal connections might be discovered.  What drove this writing is that Mr. Burns’ name triggered a memory and a reference.  I returned to the original S-4 filing and found what I thought would be there.  The Black & Decker board had chosen Mr. Burns to be one of three independent directors on the special “Black & Decker Transaction Committee.” This committee, as explained in the S-4 narrative, played a crucial role in evaluating and approving of the Stanley transaction for the entire Black & Decker board.  This committee was instrumental in negotiating with Stanley and its advisors as well as in reviewing and recommending to the board Mr. Archibald’s contract with Black & Decker as it related to the new, even more lucrative one with Stanley.  In determining whether the 100-year-old company would live or die, Mr. Burns was given a special position of leadership.

At this point, you have to wonder whether the Black & Decker board had been vaccinated against the spread of common sense.  From a regulatory standpoint, one presumes that Mr. Burns is labeled an “independent” director because he is not an employee of Black & Decker nor does he do business with the company.  But for heaven’s sakes, Mr. Burns is in a major business partnership with the chairman & CEO.  This business partnership involved the sale of luxury real estate in a recession.  The financial success and well-being of Mr. Burns’ business partner is critical to Mr. Burns’ own interests.  There are tens of millions of dollars at risk.  Yet, the Black & Decker board deemed Mr. Burns sufficiently independent to place him on the three person committee that passed judgment not only on the transaction but on the appropriateness of his business partner’s compensation.  I am at a loss for words to describe what I believe is the bewildering conduct that infuses this transaction.

If you, as a shareholder, think it is important to know information such as which board members have personal connections with the chairman and CEO and which board members do business with the CEO—then don’t look to the SEC for help.  The SEC is silent on this point, choosing with unpredictability when and where it becomes an advocate for disclosure.  The question is not what Black & Decker failed to do, because presumably the company has stayed within the rules as they exist today.  The question becomes what Black & Decker (and other public companies) should do to be more responsible and transparent for shareholders and the market.

The concerns presented in the first days after the announcement of this proposed deal still persist.  Why is Black & Decker selling itself at the beginning of a business cycle upturn (favorable to construction, housing, home improvement and ‘business products’ companies) and at the lower end of its trading range for four of the past ten years?  Why is a stellar brand name such as Black & Decker not the consolidator and acquirer instead of the seller?  Why does Black & Decker fall by the wayside while Stanley survives?

One answer to these questions is in how Black & Decker was led and governed over the last two decades.  In its final chapter, Black & Decker becomes, in my opinion, a parody of good corporate governance.  Good governance encompasses best industry practices, and Black & Decker falls short in many categories.  None of these failings appear to violate any explicit rules or regulations.  None of them are unique to Black & Decker; they can be found across the universe of today’s major public companies.  But together, they seem indicative of a tradition of misguided governance that has brought Black & Decker to its final days:

• Entrenched CEO. Black & Decker’s chairman and CEO has retained his position for almost 24 years—an extraordinary record of longevity for corporate America.  But in my opinion, this level of imperial leadership begets many shortcomings in a typical company.  Potential rivals within the executive ranks are eliminated or marginalized. Succession planning is made irrelevant.  Innovation and rejuvenation are stifled.  At the end of over two decades at the helm, Nolan Archibald became synonymous with Black & Decker.  As he gets elevated to his non-managerial role with Stanley, little remains of Black & Decker management.  No other Black & Decker leader after Mr. Archibald is invited into the executive suite.  From a governance viewpoint, it is, in my mind, no coincidence that the legacy of a 24-year CEO is no legacy.
• Chairman and executive functions in one person. A CEO who is also chairman of the board is effectively his own boss and employer.  Where are the checks and balances on his tenure, compensation, board appointments and more?  The SEC has only recently flagged this obvious and most common corporate conflict as one for concern and disclosure.
• Board patronage. Aside from Mr. Archibald, the Black & Decker board consists of ten “independent” members as defined by the SEC and an internal Black & Decker code.   Yet, many directors have personal connections to the chairman and CEO (at least 40%).   These relationships marginalize the board’s ability to question, discipline or fire its chief executive.
• Board inexperience. The majority of the Black & Decker board has little to no experience in the tool or manufacturing industries, raising into question the board’s ability to challenge management on strategy and operating issues versus a more experienced competitor’s board.
• Executive compensation. Per dollar of market capitalization, Mr. Archibald is one of the highest paid CEOs in the U.S. when compared to the Standard & Poor’s 500 Index of companies in general and Black & Decker’s peer group in particular.  In 2008, his total compensation was over three times that of the CEO/chairman of his counterpart at The Stanley Works.  In 2007, it was over twice that of his acquirer.  In addition, Mr. Archibald’s perks total over 30% more than S&P 500 companies that average twice the size of Black & Decker. Over twenty-four years, the Black & Decker board has helped Mr. Archibald amass a fortune of Black & Decker stock and stock equivalents worth, by my estimate, at least $110 million, making him the largest individual Black & Decker stockholder and an equal to the company’s largest institutional shareholders.
• Conflicts of interest. It is a long list with this board.  A fraternizing investor relationship between board members.  Board members on an advisory board of the acquirer’s investment banker.   A CEO leading sale negotiations while negotiating personal contracts with both companies.   The CEO’s investment partner on the board committee that recommends the transaction to the full board.  The word that comes to mind is sloppy.  Sloppy controls and sloppy governance.

Conclusion: On March 12, 2010 at a special meeting of stockholders, Black & Decker will be consigned to the dustheap of famous U.S. corporations that have met their end through acquisition by a competitor.  The 100-year-old brand name will be tucked behind the Stanley name.  Good jobs will be lost in Maryland and elsewhere as Stanley takes costs out of the combined businesses to make the transaction a success.  No tears will be shed for senior Black & Decker management.  They are well-cared for, particularly the chairman and CEO.

Few people will remember this, but Mr. Archibald was once hailed as a young innovator, the Harvard Business School trained executive who brought in his team to save a struggling old tool maker.  Twenty-four years later, he will be remembered as the last Black & Decker CEO, the man who had no successors and no surviving strategy, except to sell the company.   Black & Decker has a special anniversary in 2010.  In January, the company rolled out a press campaign entitled “Black & Decker(R) Celebrates 100 Years of Innovation.” If that were true at the governance level, this story might have a different ending.

November 2009

Mid-Atlantic Deal Review

from Chessiecap, Inc.

Editor’s Note: Running late for Nov reporting, but I think you will find the Deal and News Notes sections informative.  This is the 3rd Edition of the Mid-Atlantic Deal Review, a monthly review of transaction activity in the D.C.-Maryland-Virginia-West Virginia region. This edition is a Free Trial, which we hope will begin to add great value to your work and knowledge of the region.  Our goal is to measure actual transaction activity and get beneath the surface of deals, news and trends. Your online edition is found at www.midatlanticdealreview.com.

Stat Notes:

Quick Stats is the most comprehensive and thoroughly researched presentation of Mid-Atlantic transaction data available.  Mid-Atlantic is defined as D.C., Virginia, Maryland and West Virginia.  Private placements include all private equity investment including institutional equity, PIPEs, private investors and other forms of new investment.  The M&A data are the first to capture true regional activity.  Over 2/3 of all M&A transactions are “undisclosed,” resulting in almost meaningless totals.  Chessiecap reviews all reported regional transactions and uses its market knowledge and deal intelligence to assign probable deal values.  The data above does not capture debt transactions, recapitalizations, non-corporate real estate financings (project financing) or purchases by local companies of companies outside this region.  The primary filter is the addition or transfer of value into or within the region at the corporate level.

Private Placements: After October was dominated by several gigantic placements, November came back down to earth to $135M of volume spread across a reduced number of deals.  There were only 14 placements above the $1M threshold versus 19 each in the previous two months.   Venture capital quality investments (as opposed to personal, corporate or unnamed sources of capital) were 13 of the 14.  That 13 is fairly representative of previous months.  The region is seeing 11 to 15 venture investments per month, with only 2 or 3 of those being new investments. Those three November new investments totaled $22M or about 17% of total venture investments for the month.  Media, Entertainment & Publishing surprisingly tied Biotech in November, each with 31% of total placement volume.  Media, Entertainment & Publishing was paced by a large investment in Motley Fool ($25M) followed by a new round for Millennial Media ($16M).  D.C. registered 3 small investments for the month.

M&A: The number of M&A transactions for the region in November stayed very low at only 7 above the $1M value threshold.  Of these seven, one deal represented 80% of the overall volume of $421M.  That was the sale of Maryland’s solar company SunEdison for $340M to publicly traded MEMC Electronic Materials.  (May I recommend a P/R firm for a basic name change if you are going to go solar?)  The remaining six averaged a meager $13M per deal.  Again, D.C. had several small transactions.  With so few transactions, there is no real trend to observe in industry concentration.

Public Offerings:  The moribund public markets showed a flicker of life locally, saved by a government sector IPO and secondary from Global Defense Technology & Systems, Inc. (Nasdaq:GTEC) for $39 million .  Otherwise you had your obligatory small bank in need of capital (SonaBank) and your thirsty Biotech company (Novavax Inc.).  That’s it.  One IPO/secondary and two follow-ons.

BroadSoft, Inc. Takes a Pinch to Facilitate an Acquisition.  11/2/09 Private Placement.

This was the tiniest of rounds at $1.5M.  The SEC filing says that the money is used for acquisition purposes.  This news comes just weeks after the company announced plans to acquire Silicon Valley-based Packet Island, a maker of web-based software used to manage Internet phone and video networks.  The question that comes to mind when I read about BroadSoft is why is this Gaithersburg company still around?  Great idea to pioneer the VoIP software market.  Good execution and market penetration.  Excellent management.  Why didn’t this sell years ago?  I presume the company is a victim of bad timing and the downturn of telecom and technology M&A.  A further complication is that there is over $60M of venture equity invested in BroadSoft by the likes of Columbia, Bessemer and Grotech.  It takes a big number to make everyone whole and then happy.  While waiting for a market, the company must believe that the best strategy is to keep the foot on the accelerator.  Hence, an acquisition.