Simon's words come back to haunt him
Comments in book about tycoons ironic in view of current business difficulties
Carla Marinucci Thursday, August 22, 2002
Bill Simon confidently predicts the court will overturn the $78 million civil fraud judgment against his family investment firm -- because his former business partner hid his past as one of the country's biggest pot dealers.
But the Los Angeles judge who will hear the appeal next month may want to pick up a fascinating book called, "How to Think Like the Masters of M&A" -- as in mergers and acquisitions. In that McGraw-Hill book published last year, the GOP candidate for governor tells author Curt Schleier that his business success stems from doing his homework on potential business partners -- the all-important "scrub" of their backgrounds.
"One thing I learned as a U.S. attorney was to be thorough -- the importance of asking questions," Simon said. "You can't ask too many questions,
even if you annoy people.
"You listen, and ask the next logical question," the Los Angeles businessman advised. "It's amazing how much you learn, just by letting people talk."
Simon's revealing discussion for the book -- which ranks him among the "Michael Jordans" of buyout kings and includes interviews with AOL's Steve Case, Henry Kravis of Kohlberg Kravis Roberts, and Cisco System's John Chambers -- has gone largely unnoticed in the current brouhaha over a jury verdict last month finding Simon's family firm, William E. Simon & Sons, guilty of investment fraud and liable for $78 million. The verdict staggered Simon's campaign for governor, which has touted his success in business.
Simon's attorneys went to court this week to ask the judge to overturn the verdict, and a hearing has been scheduled for Sept. 10. They say Simon's former partner in Pacific Coin Management, Paul Edward Hindelang, concealed his background as a convicted drug dealer, and they've asked for $26 million in damages.
Simon's firm invested $16.5 million in 1998 when he and his partners bought 60 percent of Hindelang's pay phone company. Hindelang sued the investment group saying they had launched too aggressive a growth strategy and run up such high debts that the company had gone bust.
But in "Masters of M&A," author Schleier said Simon had specifically benefited from his prosecutorial background, because "the link between fighting crime and acquiring businesses" stood him well, especially in the area of checking out potential partners.
Focusing on the importance of due diligence in business deals, Simon advised that checking out potential partners involves time, persistence, gut instinct -- but it's worth it.
Simon's remarks about his past business experience -- and the comparisons to his current legal troubles -- only underscore the problems facing his campaign, said Bruce Cain, UC Berkeley political science professor.
On the key issue of just how much Simon knew about his business partners, "it's damned if you do, and damned if you don't," Cain said.
If Simon was aware that Hindelang had a record and was considered by the government to be a leading pot dealer, "it raises questions about his values," Cain said.
If he didn't, "it raises questions about his capability and his claims to being what he says he is," Cain added.
In Simon's May 2000 interview for the book, he even warns of big trouble when investors fail to uncover criminal backgrounds in potential partners.
"Leopards don't change their spots," he said. "I learned that . . . you'd see (someone) who had lived a life of crime," and even after lengthy prison terms, "they'd still always go back and do something else (illegal)."
"You think if you commit a crime and go to jail, which is not a pleasant experience, clearly, and then get out of jail, you'd try to live an upstanding life. Well, most people don't," Simon said.
"So when we look at investment opportunities, one of the most important things we assess is . . . what kind of people are we looking at here?"
Simon's other tips on checking out potential partners include:
-- The face-to-face: "We'd have to meet a couple of times. Sure, there's a little bit of gut reaction involved. But I've been doing this for 12 years. And you get to a point where you get a sense, once you spend some time with people . . . So I'd have to get together with you on four or five or six occasions in different settings. . . . Then maybe we'd go to your place of work. I'd like to meet your family. I'd like to meet some of your friends."
-- The personality check: Beyond the normal due diligence a company conducts when it is planning a purchase, the book said, "Simon tries to investigate the personalities of the people he's dealing with."
"If it's a private investment, we spend a lot of time," Simon said. "What I look for is honesty, candor, hard work and some manner of intelligence."
-- The reference shakeup: "We do another thing that I learned at the U.S.
Attorney's office, and that is a reference check. There's no substitute for references. And that's not limited to the people you (list for) me. For example, you might say, 'I'll be happy to give you references. Here's (a list) of five people who know me.' I'll say, 'Great! But do you mind when I talk to those five people if I ask them for five additional references? I'm not going to tell you who they are.' "
-- The accounting "scrub": "You're generally at some point going to find out a lot about a company. You're going to have your accountants (go in) and 'scrub' it," he said. "Due diligence can cost anywhere from $10,000 to $300, 000."
But "that's cheap," Simon said, if you want to avoid potential legal problems.
E-mail Carla Marinucci at cmarinucci@sfchronicle.com.
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