Chapter 1110: Barbarian at the Door
June 1997
"Carl Icahn's compound return is actually higher than Buffett's. Higher than anybody's. Nineteen sixty-eight to now, through two crashes and the whole junk bond business, and there isn't a manager in this country who's matched him over that stretch."
They'd cut Tokyo short and come straight back to Highland Park, and O'Grady had come out to the house with a bottle he didn't open. He set it on the floor beside his chair and it stayed there all afternoon.
"And I've got clients who were in TWA with him, APLUS. They still send me Christmas cards about it. Angry ones. Uh — you know what I'm saying? This is not a guy who goes home and cries because he lost one round to a kid in a wheelchair."
It was simple enough when you laid it out. A public company was owned by thousands of strangers and run by a handful of guys who saw each other every day. The guys who saw each other every day liked the corporate jet, the acquisition that made the company bigger, and the board seats they handed each other. The strangers only cared about the share price. Wherever those two things came apart, there was money lying on the floor, and Icahn had spent thirty years picking it up and getting called names for it.
He was a Queens boy who'd gone to Princeton, started out trading options, and made his name in the eighties as a corporate raider, the word the newspapers used for men who bought a big block of a company's stock and then demanded changes, a buyout or a fat price to go away. He'd taken over TWA in 1985, gone after Texaco and U.S. Steel's parent company, and walked off with a profit almost every time.
"He hates poison pills — cheap new shares, directors he can't buy, all that. And 3dfx ought to be great hunting for a guy like him. Newly listed, no poison pill, three founders with small holdings, a board that fights in public, and a chairman who was unconscious until two weeks ago."
"We beat him this round though, didn't we?" Alex said, smiling.
"Sure, but the price has left the fundamentals way behind now. Forty-two million of your money through one name in a single session, on the bank's margin line, and a compliance officer who's already asked me twice, in writing, what I knew and when." O'Grady looked at the bottle. "Northern Trust's not going to let me run wild like that a second time."
"Do you think he can get enough stock together to close his position?"
"There's no stock to buy! The founders are locked up until December, most of the rest is sitting in your hands and in two index funds, and the borrow was already tight on Friday."
"How much will he lose?"
"Depends how much leverage he used and where he put the position on. If he shorted at nine and the prime broker calls him at thirty-six, that's a nine-figure hole before he's bought a single share back." He made a small, unhappy noise. "More than he made out of McGill and that crowd, anyway."
"Ha!"
It wasn't a happy laugh, and O'Grady didn't join in.
He'd been running other people's money since 1986, a good chunk of it on the other side from guys like this, and he'd watched two of his own clients lose their houses to a squeeze in 1987. He didn't find it funny.
The prime broker lent against your position and marked it every night. When the number went against you, he called in the morning and asked for money. You wired it before noon or he sold you out. There was no arguing with him, and no favors either. The biggest holder in a squeezed stock and the smallest got the same call from the same clerk.
"The pity is, I didn't dare touch the Infoseek and Netscape holdings for the play—"
"Good. I told you. Don't touch them."
"—but I'll make it up other ways. We still need good news, though. To hold the price, Ballard went on a call with four analysts on Friday and claimed sixty million in profit this year, and two of them have already put it in a note."
"Sixty million out of what? The Sega contract isn't even signed."
"It isn't signed, there's no purchase order, and even if Katana ships on time, the royalties don't hit the income statement until the back half of next year."
"So he pulled sixty million out of thin air."
"Out of nothing. They lied from the first day and got rewarded for it every time, so now it's a habit," O'Grady said.
It happened all the time. A president said a number on a Friday call because the analysts wanted one, then spent the rest of the year trying to make the number come true. Sometimes he pulled it off.
Alex looked out of the study window at the convoy bringing the 3dfx board through the gate, one of the drivers already parked with two wheels on Muffler's grass. "Then we fund it. Fifteen million, from me, as a loan at prime, and make them sign it right there in the room. That covers the payroll through the spring whether Sega signs or not."
Prime was the rate the big banks charged their best corporate borrowers, eight and a half percent that summer. A company that had lost money two quarters running couldn't have gotten within three points of it anywhere. On fifteen million that was about a million two hundred and seventy-five thousand a year in interest, paid to Alex, instead of the nearly two million a bank would have charged if a bank would lend at all.
A loan at prime from the biggest shareholder looked like a plain piece of paper. The company got money on terms no bank would give it. But every director who signed it owned that signature afterwards, and Alex knew exactly whose names would be on it.
"I won't come down." O'Grady stood up, picked the bottle up off the floor and put it on the desk. "Here. For when they've gone and you need it. Two of those guys have already written to my compliance officer asking what the bank knew on the morning of the bow, and I'd rather not be in the same room with them until somebody answers it."
"Hey! APLUS! Good job!"
The share price had quadrupled in a day, so the directors who represented the other shareholders were delighted, and kept pumping his limp hand on the way in until Old Mike made them stop.
The three founders weren't. Carmack's man wasn't. John Carmack was the programmer at id Software in Texas who'd made Doom and Quake, and when id put out a version of Quake written for the Voodoo chip in January, half the PC gamers in the country had gone out and bought a card. His opinion on graphics hardware counted for more than any analyst's. Ballard looked worried, and had looked worried since Narita.
Ballard had been president fourteen months and had spent most of them explaining to San Jose why the chairman was in Chicago, and to Chicago why San Jose wouldn't do what it was told.
A board meeting in a private house was a strange thing. There was no long table, so nobody could tell who was senior and everybody had to work it out fresh. There was a woman bringing coffee who turned out to be the chairman's aunt. And there was a baseball arcade machine somewhere below them, audible through the floor, thunking out pitches to nobody all afternoon because Tony had switched it on and forgotten it.
"Take a look at this. It came out of Tokyo on Friday, and I promise you there's a copy on every desk in San Jose by now."
The second-largest shareholder's representative held out a financial magazine. The Pressure Maniac! Irimajiri's Sega Marches On! Irimajiri on the cover with his arms folded, and behind him the photograph: Alex and a row of white people bowing in front of Sega's logo wall. Beleaguered American Chipmaker Comes to Apologize!
"Heh. Well, we still need good news," Alex said.
"You think it's a good thing, do you, going to Tokyo and bending your knee to the Japanese! APLUS!" Ross Smith exploded. He'd been holding it in since Wednesday, and it came out with him on his feet. "We were about to win our suit! Our counsel had the filing drafted, we had their engineering notes, and they'd have paid us tens of millions inside a year sooner than sit through discovery in an American court. The stock would have gone up then too, and it would've gone up on something we actually earned, and now it's all gone!"
Nobody looked at him. Two of the outside directors looked at the ceiling instead.
The chairman's aunt came round twice with the pot. The second time she stopped behind Ross Smith's chair.
"Baby, sit your behind down before you spill my coffee. That boy got shot six times, he don't need you hollering over his head in this house. Sit!"
Ross sat. Two of the outside directors who didn't take sugar took sugar anyway, to be polite in a stranger's house.
Ross wasn't a fool, and he wasn't wrong, either. He'd built the thing. He'd sat in a rented unit in San Jose with two other guys and a whiteboard, and the part they'd drawn on it was, right now, the fastest of its kind in the world. And he'd just watched his chairman fly six thousand miles and give away the best weapon they had.
"I knew it," Scott Sellers said. "The minute this company went public, you people would do anything at all for the share price. It's unbelievably short-sighted! Nobody on this board asked you to fly to Tokyo and humiliate us in front of a company that stole from us. Just wait for Voodoo 2. Fourteen months of work, it doubles the fill rate, and it ships in February no matter what Sega does!"
"Last year you talked me into putting more money into VoodooRush," said a director who'd been waiting since last summer for a room to say it in. "And what did we get? A card with constant compatibility problems that cost us Compaq's trust!"
Compaq was the biggest PC maker in the world, out of Houston, and its Presario line sat in every electronics store in America. Getting a chip into a Presario meant millions of units. Getting thrown out of one meant everybody else in the business heard why.
"We ought to be concentrating on 3D chip performance," said Carmack's man. "2D is brutal, the margins are thin, and there are nine companies in it—"
"Of course you'd say that. id would love us to build nothing but 3D chips for your shooters. Four hundred thousand enthusiasts buying an add-in board, against ten million machines a quarter that need a chip for everything else!"
It went on like that. Alex let it, because he was counting. Two outside directors, the Boston man and the second-largest holder had all taken his side without being asked, and the founders were shouting at people who already agreed with him. He was the one who'd made them all money on Friday. Let the three of them spend their breath. When he came back to this board with real changes, in who ran the company and what it built, he'd need every one of those votes.
They'd carried him into the room at one o'clock and would carry him out of it at five. In between, he sat at the level of every man's belt. None of them had adjusted for that, so most of the shouting went over his head to somebody behind him.
"Stop arguing, all right? It's the weekend."
It was the institutional director. He'd flown in from Boston, represented four hundred thousand retirement accounts, and had exactly one question. "We've put out the settlement news, and it was on the wire by Tokyo lunchtime, so it's spent. What do we do at the open on Monday? We need something on the tape before nine-thirty. Is there any good news we can release?"
"You people are going to run out of lies to make up one of these days," Ross said, "and this board's going to be sitting in this room on a Monday morning with nothing to say!"
That got a silence.
"How would you feel about seeing the Compaq people on Sunday?" It was another director, the one who'd been quiet for two hours. "I'd put out word that they'll still be using our chips going forward. Their purchasing guy owes me a favor from the Presario business, and I can make sure Compaq doesn't rush out and deny it, which is all we need." He spread his hands. "The new product won't ship before next year anyway, so nothing we say on Sunday has to be true until the spring."
"Yes. Do it," Alex said.
"And a PR campaign with the American press," said the second-largest man. "Flying to Japan and bowing hasn't won you any face over here, APLUS. It ran on two networks, the Journal's written it up twice, and every distributor I talked to this morning asked me whether the chairman was feeling all right."
"I know."
"You know what they're calling you in the trade this morning?"
"The kneeling chairman. Yeah, I read it."
He let them go on for another forty minutes. Then he said, "Compaq on Sunday, the press on Monday, and nobody on this board talks to a reporter about Tokyo but me. Anybody who does can explain it to the other shareholders." Nobody asked him to explain the bow, and he didn't.
Outside, Muffler walked down the drive and had the driver on the grass move his car, then move it again.
At that same hour, in Houston, a purchasing manager took a call at home on a Saturday while a man he'd known since 1991 asked him for nothing at all.
"So you're not asking me to buy anything. Because I've got my VP breathing down my neck about Voodoo Rush, and I can't buy a paper clip from you people right now."
"I'm asking you to have lunch on Sunday, and then not correct a press release on Monday. I'm buying the lunch. Steak."
"Pappas?"
"Pappas, the big one, whatever you want. Just keep your mouth shut on Monday."
"Well, hell. For a Pappas ribeye I'll keep it shut till Christmas," the purchasing man said.
He put the phone down and went back out to the yard, where his son was standing over a lawnmower that had died in the middle of the grass.
By Sunday evening it was going to be a sentence on the wire: Compaq to continue using 3dfx in new systems. Compaq had a contract for the current chip through the end of the year, so it wasn't a lie. It just wasn't news.
When the meeting broke up, Alex asked Ballard to stay behind. "Sit down, Ballard."
He sat. He'd spent the flight home working out how to tell the chairman he'd been against the Tokyo trip from the start, and how to ask whether his job was safe. He'd decided against saying either one somewhere over the Aleutians.
"You didn't bow," Alex said.
"I— no. I dipped my head. It seemed—"
"It was fine. Just don't do it again." Alex looked at him. "Listen. If the three of them ever come to this board wanting to build the cards themselves — a board maker, a factory, anything with a roof on it — you come to me. Not the board. Me."
Ballard held his briefcase in both hands. "But every partner we have would drop us the same week. Diamond, Orchid, Creative, all of them. They buy the chip and they build the board, and the day we start building boards ourselves, we're their competitor with their design files sitting in our drawer."
That was how the business worked. 3dfx designed chips and sold them. Diamond Multimedia, Orchid, Creative Labs and the rest bought the chips, built them onto boards, put the boards in boxes and sold them at CompUSA and Fry's. Orchid's Righteous 3D and Diamond's Monster 3D were the Voodoo cards every gamer knew by name.
"Exactly. Diamond and Creative are our customers. Anybody on this board who wants to pick a fight with our customers talks to me first. That's all."
"I thought you were going to fire me."
"I thought about it on the plane. Then I watched Ross Smith yell at the ceiling for two hours and thought, no, Ballard's the calm one. Go and have your dinner, Ballard."
Ballard stood up slowly. At the door he turned round and looked at the man in the chair — the blanket, the thin wrist, the magazine still lying face up on the table with the bow on the cover — and went out.