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Fred Walks On Water

Each year, Kleiner Perkins Caufield & Byers would poll attendees and give out the “Oscars of Biotech” awards by category for Top Company, Best New FDA Approved Product, Best Financing, and Best M&A Deal.  At the Sunday night formal banquet in October 1997, Byers announced that Fred had won the “Best M&A Deal of the Year” and also was recognized as the top biotech dealmaker for the past decade. The setting was outdoors around the luxurious Ritz Carlton Resort pool, which prompted Byers to joke in his remarks that Fred’s acumen made Byers wonder if Fred, seated on the other side of the large pool, might walk on water to accept the award. Fred got up to applause for the award, smiled and started walking directly towards Byers to accept the engraved crystal award. But instead of walking around the pool, he stepped right into it. “It was crazy,” remembered Fred, “I had on a silk suit and tie and just walked right into the water and started to move towards Brook. People were shocked. I was shocked.”

“It was the most amazing thing,” said Mary. “He just stepped out over the pool and to this day, some people who were there swear that he got halfway across the pool before he sank.”

Fred Finesses Johnson & Johnson Winning Neutrogena in an All Cash Deal

In 1994, Fred helped Neutrogena sell itself to Johnson & Johnson for $982 million. Fred remembered making the match:

Neutrogena retained me to sell the company. I thought the perfect home for this iconic brand would be Johnson & Johnson. So I called Ralph Larsen, chairman and chief executive officer of Johnson & Johnson and explained that I had an exceptional acquisition opportunity for them. Naturally, he asked what it was. I explained that I could not discuss it on the phone. He said, “OK, come down and let’s have lunch.” So at lunch at Johnson & Johnson, I explained that I was representing Neutrogena. He said, “Really? We have been salivating about that company for several years.” I said, “Yes, and I am prepared to let Johnson & Johnson preempt the process.” If you don’t offer an acceptable price, the process will go to an auction. He said, “Fred, I want you to work exclusively with Pete Larson, head of our worldwide consumer sector ” and he called Peter right there. Peter and I had one meeting, two telephone calls, and the deal was agreed to.

I went to present the deal to the board of Neutrogena in Los Angeles and explained that Johnson & Johnson was prepared to pay cash or cash and stock or all stock. I recommended an all-stock deal, saying, at the time, in my opinion Johnson & Johnson was undervalued, and it would be a tax-free deal. A fierce discussion ensued. Most of the board [members] were in favor of an all-stock deal. But the company accountant convinced the CEO, Lloyd Cotsen, that stock was too risky! So it was an all-cash transaction.

I excused myself to call Johnson & Johnson to congratulate them and explain that the board determined to make it an all-cash transaction. Then I said we could issue the joint press release, which had been written. There was a moment of silence. Then, Pete Larson said, “Fred I have a problem.” After my heart skipped a beat, I said, “What’s the problem? We have agreed on your proposal.” He said, “Look at the second paragraph of the press release, where it said we, Johnson & Johnson, have agreed to acquire Neutrogena in an all-cash transaction for X per share.” I said, “OK, what’s the problem?” He responded that only Pete and I knew the number.

I laughed (probably a sigh of relief) and said, “You mean, I can put in any number I want.” And he said, “Absolutely.” So we issued the joint press release. Everyone was very happy.

Fred’s Magic Merges Nielsen with Dunn & Bradstreet

Art Nielsen turned to Fred and Lehman when the company was considering a merger with Dun & Bradstreet:

“Fred, it’s very urgent that I see you. Is there any possibility you’d come out and see me tomorrow in Chicago?” Fred replied: “Alright, but why wait until tomorrow? I could see you today at lunchtime.” (This was at 10:30 in the morning, Chicago time.) Nielsen said, “How can you do that?” And I said, “I’m in downtown Chicago, by coincidence.”

Fred went out to see him, and that was when they’d been approached by Dun & Bradstreet to acquire the company. And he asked Fred to represent them and work with him on this.

Fred had a long conversation with Art about whether a merger was right for Nielsen. “It was an emotion thing, of course, because this was a family company,” said Fred. “But there was a compelling case for the merger.” Fred recalled how he explained it:

“I put together a time chart that said, okay, you went public here and now we are about here. Wall Street’s expectation is [that] you are going to go like this, and the fact you are on this curve [means] you are going have a decelerating rate of growth. Right now, you are selling at a very high price/earnings ratio. If this happens that ratio is going to get killed. If your P/E ratio goes from 40 to 20 and your earnings are up less than 15 percent a year, your stock price is going to go down. I think this is the ideal opportunity for you to do this deal with Dun & Bradstreet.”

Nielsen said, “I want your help on this plus your advice because it’s a very emotional issue, you know. I inherited the business from my father, so I have got a terrible moral issue here.” So he and Fred had a long talk, and Fred represented them in this deal with Dun & Bradstreet. in 1984. “It ended up being worth slightly over a billion dollars, which in those days was a pretty big deal.”

Mary Tanner recalled Fred’s foresight about the business-services category and answers a common question about Nielsen’s growth potential:

“The interesting thing about Nielsen was that Fred had this vision about business services and business-services models. One question that was always asked about Nielsen, who sold data to everybody, was how they could ever grow? Because they already sold everything to every consumer product company in the world. People used to ask how Nielsen would grow, but they underestimated new services to the same clients. And Nielsen itself innovated new ways to charge so that you didn’t just charge once for the data, you charged per task for the data.”

“Fred understood early on that the business-services model was shifting, because I remember an associate talking to him about these things, and he explained it to me. There were not a lot of business- services companies like that at the time. Today, business-services models are ubiquitous and even larger than before because of the Internet. But it wasn’t well understood in those days.”