Hesh Wiener sets the scene for the fight for control of major US computer leaser CMI Corp.
On Tuesday, May 26, Harry Goetzmann Jr arrived at the headquarters of computer lessor CMI in Bloomfield Hills, Michigan. Goetzmann is the chairman of Continental Information Systems, of Syracuse, New York, a company generally known as CIS. Like CMI, CIS is in the computer leasing business. And though CIS is a little smaller than CMI, CIS is a public company, traded on the New York Stock Exchange. The errand that had brought Goetzmann to CMI seemed, at the time, simple enough. Goetzmann’s company, CIS, was going to take over its rival, CMI, at a cost of some $105m. The bid had been presented to the two organisations that controlled a majority of CMI’s shares, and it had been accepted pending some legal formalities. Goetzmann looks a bit older than his 48 years, but that Tuesday he was wearing his boyish grin. A gray-haired barrel of a man, Goetzmann is known for his wit and confident style, which served him well not only at CIS but in recent years as the elected president of the Computer Dealers and Lessors Association. During his visit to CMI, Goetzmann’s confidence was apparent. Reportedly, he told some people working at CMI that he was the new owner as he made his way through the building to the office of CMI’s founder and chief executive, Edward Cherney. Cherney wasn’t in. But that didn’t stop Goetzmann, who went through Cherney’s reception area and into Cherney’s sanctum sanctorum. By one account, Goetzmann even sat in Cherney’s chair, leaned back, and pulled a cigar from his suit jacket.
Lighting up a fat cigar
But Goetzmann didn’t light up: Cherney has made it pretty clear he doesn’t want smoking there, or anywhere else inside the CMI building for that matter. Having tested the furniture he expected soon to occupy, Harry Goetzmann resumed his tour of the premises. Once out of Cherney’s office, Goetzmann yielded to his habit – and Cherney’s bane – by lighting up a fat cigar. According to people from both companies, Goetzmann must have liked what he saw, which was the company that would double the size of CIS, the company that would make Goetzmann’s empire a financier of more than a billion and a quarter in computers every year. It must have come as a shock when Goetzmann found out where Cherney was. For as Goetzmann was taking stock of the business he had just offered to buy, Cherney was buying time to keep Goetzmann from getting CMI’s stock. Edward Cherney had gone to his attorneys, the firm Dykema, Gossett, Spencer, Goodnow & Trigg to arrange for the preparation of a Federal lawsuit, which was filed in Detroit the next day, May 27. The suit seeks to void the takeover of CMI by outside shareholders who had agreed to sell CMI to CIS once they had the stock in their hands. The basic argument in Cherney’s suit stems from an offer made by the outside shareholders – Torchmark Corp, of Birmingham, Alabama; stockbroker Stephens Inc, of Little Rock Rock, Arkansas; and some other parties associated with Stephens. Basically, Cherney says a proper offer for CMI stock held by Cherney and other CMI managers was never made. Cherney had two months previously made an offer to the outside shareholders for all the stock they held, and the propriety of Cherney’s offer has not been contested by any of the parties embroiled in this controversy. As it turns out, Cherney may not have filed suit fast enough. A day earlier, on May 26, the very day Harry Goetzmann was casing CMI’s elegant, modern building in the suburbs of Detroit, Torchmark Corp was in Birmingham Alabama’s Tenth Circuit Court. Torchmark filed under state laws, asking the court to compel Cherney and other management shareholders to turn over their stock. Torchmark’s argument, like Cherney’s, was that the shares ought to go to the party that made the best proper offer. In contradiction of Cherney, however, Torchmark said it had not only tendered a proper bid, but one that should win the contest for CMI’s shares. The legal dispute arose in part because of a complex relationship am
ong CMI’s management shareholders, Torchmark, Stephens and the other parties. Three years ago, Torchmark acquired CMI – lock, stock, and barrel. But a little over a year ago, on May 1, 1986, CMI was partially spun out. A company called CMI Holding Inc was formed, and this entity issued a total of 10m shares of stock, 2,916,667 of them designated preferred, the remaining 7,083,333 designated common. CMI’s managers and the treasury of CMI Corp, led by Edward Cherney, bought 30% of the shares, all of them common stock. CMI’s treasury got 1,350,000 common shares; Cherney and his colleagues got 1,650,000. All told, these shares were bought for $1 a share, or $3m. Stephens bought 1,750,000 common shares for $1 each, plus 1,250,000 shares for $2.60 each, or $3,250,000. Thus, the total Stephens investment came to $5m. Torchmark held onto the remaining stock in CMI Holding. It was 2,333,333 shares of the $1 common and 1,666,667 shares of the $2.60 preferred, or $4,333,334; this bought its total investment to $6,666,667. The money paid by Torchmark, like that of the other investors, went into the treasury of CMI Holding. As part of the deal, there were two important agreements. One was what is called an earn-out for the managers of CMI; it is an arrangement that would allow them to retain their 30% of the shares. The flip side of the earn-out was a means by which the holders of preferred stock could dilute the holdings of CMI’s managers. If CMI met certain goals, all its stock would remain as issued. If CMI missed the target promised by its managers, holders of preferred could exchange each share of preferred stock for 2.6 shares of common, thus reducing the value of the common stock held by all parties, including CMI’s management. In order to retain their relative stockholding position, CMI’s managers had to get their company to earn $7m in any one calendar year 1986 through 1990. Alternatively, CMI could make an average profit of $4m a year for this period. Also, the preferred could not be converted if CMI went public before the end of 1990. If CMI didn’t make either of the financial goals or go public, Torchmark and Stephens would end up with many more shares of common stock. Preferred stock also had an advantage in the event CMI was liquidated or if it paid dividends; neither of these things happened. The other agreement among the parties that formed CMI Holding was a force-out arrangement. CMI’s managers had the right to offer a specified price per share for all the stock they didn’t own. That bid was to be good for 60 days. CMI’s outside shareholders had two possible responses: they could sell their shares at the price offered by CMI’s management, or they could buy out CMI’s management by offering the same price per share. On March 25, Cherney, on behalf of CMI’s management, offered to buy all shares of CMI Holding owned by Torchmark for $18,285,715 – which works out to $4.57 a share (if common and preferred shares were combined for this calculation). The offer to Stephens and its associated entities was $13,714,285. Thus, the total for the 70% of the stock was $32m. Meanwhile, Torchmark had found a buyer for all the stock in CMI holding willing to pay $50m. The buyer was Harry Goetzmann’s CIS. Torchmark, Stephens and their associates offered Cherney and his colleagues what Torchmark says is an equal amount per share, a total of $8,228,517 – which works out to $2.74 per share. If they got their deal, they would have laid out something under $20m, the total of their initial investments and the amount paid CMI’s management for stock they would turn around and sell to CIS for $50m. In addition to buying the stock, CIS said it would pay off $55m in loans made by Torchmark to CMI with a mix of cash, bonds and convertible debentures. The Torchmark offer is based on a weighing of preferred stock that gives it higher value than common, and amounts to an assessment that the real share of CMI Holding in the possession of management is about 20%, not 30%. By Cherney’s calculation, however, Torchmark and Stephens should pay management $
13.7m for their common stock. Because Cherney views the Torchmark offer as a failure to match his offer on a price-per-share basis, he says he should be awarded CMI Holdings. Torchmark disagrees, and maintains it made a fair offer. The Torchmark suit talks about the inherent value of the preferred stock, and cites aspects in its initial agreement with Stephens and CMI management that define the force-out deal.
The wording on the initial deal is somewhat vague
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However, the wording in the initial CMI holdings deal is somewhat vague in that it does not explicitly put a value on the preferred stock in the event a force-out is attempted before any preferred has been converted to common. Regardless of the outcome, Torchmark seems eager to buy from Cherney and then sell its interest in CMI. In filing its suit against Cherney and other CMI management, Torchmark agreed to give the Alabama court $13.7m to hold if it would rule that the CIS acquisition of CMI could be completed. Then, says Torchmark, it will stand by the court’s decision as to how much of that money rightfully goes to CMI. But CMI is expected to stick to its guns, refusing to accept the Torchmark offer as valid. Meanwhile, a hearing in the Alabama court isn’t scheduled until July 5 while the first Federal court date for the suit brought by CMI against Torchmark is slated for the 15th of this month. So far the parties haven’t sat down to serious talks, but it’s clear that each is at risk as a result of the uncertainty. CMI will have a harder time competing in the leasing business. CIS may watch its prospective acquisition wither under competitive pressure. Torchmark may find that it will be unable to complete the deal, for eventually CIS will run out of patience and withdraw or restate its offer. Ironically, the lessees who have been served by CMI are unlikely to notice any difference in the leasing company they selected to finance their computers; all this courtroom activity has no immediate bearing whatsoever on their rental contracts.
