Question: What's your view of the climate for cross-border dealmaking?
Answer: Even though the dollar has strengthened, we're just scratching the surface of the potential for global mergers and acquisitions. There's plenty of capital that's available and there's lots of consolidation that needs to take place and a lot of companies that ought to be sold. I'm very optimistic because (of) low-cost capital.
Q: But will the economy hold up?
A: The economy still has plenty of steam. There are certain segments that are interest-rate sensitive, like real estate. But is it really overheated or is this really where it ought to be? We tend to think that because we haven't seen something before that's it shouldn't be at these levels. Like oil is at an all-time high right now. What happens if Hugo Chavez (of Venezuela) shuts off oil at the same time that Iran does $60 oil would look cheap. I tend to look more at the probabilities of outcomes rather than absolutes.
Q: What do you think of China's CNOOC bid for Unocal?
A: I don't see a problem with that. If it were an English or German or Dutch company, we wouldn't have said anything. I think it's fabulous that $18 billion is coming our way and it's very healthy for the relationship with our two countries and for China to be the winner here. This is an open market transaction, at the top of the market any world buyer can bid and it will repatriate anywhere from $18 billion to $20 billion.
Q: What are some of the deals you're working on?
A: We advised one client on a $1 billion transaction, but they want it kept confidential and we respect that. Last year, we financed Cannongate Golf Clubs and Exponets, which was a troubled subsidiary of a Fortune 500 company. We've been providing strategic advice to Intelligent Energy Ltd. (the British fuel cell maker which recently postponed a $110 million IPO). We recently completed financing for Genius Products Inc. We have some very exciting things in Germany, Czech Republic, Sweden, Poland and England and several clients in Australia.
Q: How did you get into international dealmaking?
A: It really began when I was a business student at USC, because one-third of its students are international. It was the friends I made as a business student that got me started. Some were students I met in classes, others were from teacher introductions.
Q: Where do you get your clients now?
A: Half our clients come from other investment banks. We don't do brokerage or trading because those are commodity businesses and that's not the future of this industry. We also don't do sell-side research, which usually is not worth the paper it's printed on. The hardest sell I have is convincing a board to hire Cappello, not Goldman Sachs.
Q: I take it large investment banks are not your favorite topic?
A: Smart issuers get the joke on this one: There are two kinds of people clamoring for analyst coverage, those that have never had it before and those who are going to get it and be disappointed.
Q: You used to be in the PIPE (private investment in public equities) market. What happened?
A: We saw gross misrepresentations of the truth by some of the agents that worked for some regional and big investment banks, who knew the least about the products. They just wanted a quick fee. Then you had smaller regional firms that had the appearance of selling positive coverage in exchange for lucrative PIPE fees. All one has to do is look at the volume of deals these guys have done in the last few years, and look at the strong buy recommendations, and that kind of activity is not something we want to be part of.
Q: What about your time as chairman of Geothermal Resources?
A: We were the last large independent power producer, producing hundreds of megawatts of power in the 1980s. I was 29. It was one of my greatest successes and greatest failures. I rode it to the top and back down to the bottom. The year before we ran into trouble, the company had record earnings, record cash flow, record sales and stock price. You just assume the upward trend can continue.
Q: What was the problem?
A: Public utilities did not want any successful power producers. They found ways to put us all out of business by not paying for power, by slowing things down, by not cooperating, by dragging out projects and killing them. We had record prices for oil at the time but once the price of oil came down, the big utilities found a way out of the high-priced contracts that we had locked in place.
Q: So what happened?
A: We had a zero-coupon bond offering coming just before Black Monday and our investment bank, J.P. Morgan, pulled the offering. Then the bond market collapsed. The worst part was that I listened to my gray-haired board and I went from being worth a few hundred million to being in debt about $30 million.
Q: Lessons learned?
A: I decided to do corporate finance for public companies in a major way because it was an underserved market. There is still a need in the market for investment bankers who give the correct advice to their clients instead of what makes them the most fees. It's probably even a bigger opportunity today because people don't think long-term.
Q: So how did you recover?
A: I sold my house and was renting a house in Little Holmby Hills when I got a call from Bill Rockford, global head of project finance at Chase Manhattan Bank. It was a rainy day and he said to me: "Kid, I've been following you for years. Meet me at Sardi's at 7 p.m." And I flew to New York and met him and he told me that I was ready to become one of his customers. He told me that I had no idea about the forces I was up against and the only way to survive was to partner with someone like him. That was the epiphany to me, about how much of the world is really about relationships. I wasn't that cocky before, but the experience helped to make me humble and tough.
Q: What did you learn growing up on a farm in Bakersfield?
A: My dad was a farmer, grower, packer and exporter. He was a pure entrepreneur who started and ran his own fresh melon and produce business, so I appreciated the long hours and risks he took. Farming was very much a pure supply-and-demand market. As soon as I was 8 years old, I worked on the farm, every weekend and in the summers through college. I became very sensitive to the prices of commodities and I learned very simply how an increase or decrease in supply caused by weather, railroad problems or strikes could impact the price of goods.
Q: Have you turned down deals that you now regret?
A: Howard Schwartz at Starbucks came to me when he had just seven stores. He was trying to raise $10 million and Donaldson Lufkin Jenrette couldn't do it and I had the chance to put in $1 million of my own money but I didn't. I ran into Howard recently because he's on the board of USC. I told him what a mistake it was and we laughed about it.
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