Invest Like the Best with Patrick O'Shaughnessy
· Ken Langone
[00:00:00] S1: Tell me what you think." And I thought to myself, well, I'm going to blow the 30-minute rule. I might have to go all the way. I say, Mr. Perot, that's the biggest pile of horseshit I've ever heard in my life. He goes, "What do you mean?" I said, Mr. Perot, this whole process is fairly simple. You've got to pick somebody who's going to tell you what he thinks you can sell your stock for. And your bet is, can they deliver on that number. I said, It's that simple. Actually, all the talk they have about working the market, knowing the market or this, all those things. He says, "Well, that's interesting." He says, "Let's talk a little bit more." We talked until 1:00 in the morning. Driving me around and two guys, I was on the front seat. He had a big maroon Lincoln and he was driving us all over Dallas. "We're going to go back to the office at 3:30 in the afternoon." Now I figured, I'm not going to throw this meeting in. We were looking for a drugstore so we could buy shaving gear and toothbrush, stuff like -- maybe a t-shirt, because we brought nothing to Dallas. We finally found a place. We stayed at a hotel. He was going to make a decision by the following Friday. And he called up, he's like, "I'd like to get to know you a little bit better." He says, "Come on back down." So I went back down. And we talked and we talked and we talked. I had not seen one number on how much his sales were, what his earnings were, nothing. So he invited me back down. I got a chance, "Come on back down." I'm like, I'd like to go with you guys, they said, "sure." So the third time I went down, I went down alone. He picked me up at the airport. We're driving back to his office. "Ken, have you given any thought to what you think we're worth?" Mr. Perot, I said, first of all, I said, I haven't had the benefit of your numbers. "Let's assume the numbers are great." I said, can I get some kind of relevance? He got into his office and he had a closet and on the inside of the closet door, he had a graph, a chart. I didn't know what the numbers were. All it was, was a chart of the percentage growth of the earnings and of the sales. It was doubling every year. And I said to him, I knew what the business was. By now, I got a good understanding.
· Ken Langone
I said, based on those numbers and if I could be made comfortable that they can continue that way for a while, I would argue your company's worth 100x earnings. "What?" I said, yes, about 100x earnings. "Are you sure?" I said, well, Ross, I'm not sure of anything, but I'm sure of this. Those numbers are what you see. I had no idea whether it was $5 million or $9 million. Well, it turns out, it was $7 million of revenues and $3 million of pretax profit. It was a staggering margin. And the clear prospects that it continue, it's a set. So he goes, "I want to think about it." I left. About 2 weeks later, what he had done was he was calling all the other firms up and said, "Okay, what do you think I'm worth?" They settled at around 30x. Now when the -- when he called me up and he said to me, "Are you comfortable with what you've said?" I said, Ross, I'll say it again, if you can continue this progression. You just do simple math, you're gonna cut the multiple every year by 2, and it's not going to take long to get this thing down to 25x earnings. Then I said, I wouldn't be able to tell you that until I can get a better fix on the business. So he said, "Well, come on down. Bring some guy down. Let's get to know each other better and talk about how we do things." He brought in a bunch of guys, one after the other. I swear to God, he has some kind of a machine that created these guys. It was unbelievable, one more talented than the other, and common sense, plainspoken, gentlemen, and don't forget he had a dress code, white suit, white shirts, no tassel loafers, wingtip shoes, highly shined, no facial hair, military style haircuts. And the more I got exposed, the more excited I got. So he said, "Ken, well, let me think about it." This thing's into June. Now 2 weeks later, he calls me up, "Ken, Mitch Hart and I have been talking. One of the things we expect of people -- you know we Texans, we're optimistic people." Very frankly, he said, "Mitch and I are a little worried that you don't show much enthusiasm." And I'm going what the hell. I said, Ross, I'll be on the next plane down. What you're talking about? He said, "I've never seen anybody like you so I've told you that." Well, I know. I told them, Ross, so I'm coming down. "No, no. Don't come down." He says, "You know, we Texans have a good rule here.
· Ken Langone
If you got a good sense of humor, you're a good Texan." I go, goddamn it, you guys were a pain in the ass, too, okay. So anyway, he gives me the deal. The rest of Wall Street is stunned. Here's this little, they said, railroad farmhouse, getting the most sought after piece of business property in the last 5 or 10 years. And we go through the whole process. He wants to know how we're going to do it. I go, "Ross, I'm going to make you one promise I didn't tell you before. I'm personally going to be on every meeting with every investor." I said, "I intend to deliver." "Are you sure?" Oh, I know. He calls me up at the very end, decided he's going to give me the business. One of the firms that wanted it was G.H. Walker. There was a guy there by the name of Gerry Lodge, who he knew and who he liked. When Lodge heard that we were going to do the deal at 100x earnings, he said, "Ross, we'll go to 100x earnings and we'll be co-managing it." So Ross called me up and said that he got this call and how do I feel about having a partner? I said, Ross, let me ask you a question. I think you and I are on a high racing speed club going 200 miles an hour. I got the steering wheel and you got the brakes. We're sitting next to each other. How long before we're going to hit the wall, because we're going to hit the wall? I said, Ross, well, I'm going to go 200 miles an hour. I got control in the clutch, steering wheel, shift, everything, all right, or I ain't getting into that car. "I understand." I said, Ross, you want to give them the deal, if you're more comfortable with them, you can give it to them, I'm going to be around. I'm sure we'll figure a way out for you and me to... "I'm sorry!" he said. "You were the one that made him go up from 70 to 100. You're my man. Let's go." We spend the whole summer getting the prospectus together, and the more I learned about it, the more excited I got. I had a whole monty. Now back then, New York State had a stock transfer tax. When you sold stock, there was the tax. And the way you'd get around it was in underwriting, you go through the tunnel after midnight on the day of the deal, sign all the papers in Jersey and drive back in. Now, the deal was done in Jersey, it was legal. But the night before the underwriting, Elaine and I and Margot and Ross had dinner.
· Ken Langone
We got to know each other that summer, and we really hit it off personally well. By the way, I'll tell you, one of the great joys in my life was his friendship, and this is an aside. One of the great honors of my life is when I got the call from the family, Ross Jr., they'd like me to deliver a eulogy at his funeral. Wow, me. So anyway, we're driving through the tunnel. Elaine went home because our kids had to go to school the next day. We had 3 kids. So we're in a limousine -- by the way, the limousine driver was always a witness signing the papers, so this was all legal stuff. So we're driving through the tunnel. It was a back seat where you had 2 seats looking at each other. Margot and Ross are looking ahead. I'm sitting with my back to the front, looking at them. He said "Well, -- all the other guys on Wall Street told me now is when he's gonna back away from what he said he's going to do." What are you talking about, Ross? "Well, I'm told, Ken, this is when you guys say, sorry, Ross, I miscalculated. I can't do it at the 100x earnings. I got to do it at a lower number." What are you talking about? "Because I suppose this is where you're going to tell me I'm not getting 100x earnings." I said, how do you know that? "See Margot, see Margot?" I said, how did you know that? "What do you mean?" I said, I'm not going to do it at 100x earnings. I'm sorry. "See Margot, there you are, they're all alike up here! They get us company boys up here and they pick us clean." I said, wait a minute. Wait a minute. Does 100x earnings mean that much to you? "Damn right," he says. "In Texas, you put your hand out, your word is your bond. It means a lot to me, not just the number, but the fact you kept your word." I said, well, Ross, look, the last thing I want is an unhappy client. We'll do it at 100x earnings. "Damn right, you will." I said, okay. So Margot -- I winked at Margot while he was in a little bit of a tizzy. She says to me -- god bless Margot, she's sharp. She goes, "Ken, what were you going to do with that?" I go, "Well, I was going to do it at 115x earnings, but if he only wants 100x earnings, it's okay with me." We did it at 115x earnings. And by the way, it went from 16 to 24 the first day, so it was a very successful deal. And that deal, for lack of a better way to describe it, put me on the map.
· Ken Langone, Patrick O'Shaughnessy
The most important thing of all was he was a man, who when you delivered to him and you kept your word, he never forgot it. So he became perhaps my staunchest advocate. I was a young kid, 33, I had never done an underwrite. That friendship has lasted all through his life and now with his family as well. [00:00:00] S0: What about his style do you feel is most lacking in the world of leadership today, if anything? [00:00:00] S1: Integrity. That's it. The man was maniacal about keeping his word. And the second thing would be loyalty. If you promise to him, delivered for, he'd never forget it. I miss him bad. [00:00:00] S0: One of my favorite ideas of yours is this notion of leaving more on the table for the other guy than you think the other guy thinks he deserves. Did that come from Ross?
· Ken Langone
[00:00:00] S1: No. Let me tell you where that came from. That came from my experiences as a poor kid. When I realized, if somebody expected this of me, I gave them that plus some. And to me, the art of negotiating is not see who bests who, the art of negotiating to me is to get a deal for yourself and make sure the guy you're dealing with feels he got more than he thought he was going to get or he should get. 100x earnings to 115x earnings. I can't think of a deal I've done where I couldn't have gotten more than I got, but that's okay because the element of trust is the most precious thing in living. If I trust my doctor that he's going to do the right thing for me, there's a better chance he's going to be more candid with me and more willing to try and help me whatever my condition is, or a friendship or a marriage, I don't care what it is. I'll give you a for instance. I did a deal with a guy, I bought a company. He was a tough negotiator. He negotiated back and forth, back and forth, and I virtually gave in on every point. We got done around 9:30 at night, my office. I said, now are you sad or happy? He couldn't be happier. Okay, I say, well, tell you what, let's go back. I'll drop you off at your hotel, I'll pick you up in the morning, we'll have breakfast. We'll talk some more. He said, okay. So the next morning, I pick him up. We were driving to my office. He said, "Ken, could I be honest with you?" I said, Please do. He said, "I'm sorry." He says, "As I reflect on this. I don't think this is a good enough a deal for me as I'm entitled." I said, well, let's go upstairs. And I say, okay, where do you think this thing is deficient for you? And he tells me, "It's okay, you got it." What do you mean? I said. Tell me what you want, and you got it. But then I want to tell you something else. I will never do business with you again. You bargained hard all day yesterday. You assured me at the end of the day, it was exactly what you wanted, you were fairly treated. I said, I can't take a one point at it and concede to you. I said, I'm sorry. You got what you want on this deal, but I never want to do business with you again. And I feel strongly about that. And the best testimony is I never had a fear of a client or a potential partner in a deal saying something bad about me, because I did okay. I would always hope that I'd do okay.