Perot-Langone Dialogue

Below is an excerpt from the book – ‘Built From Scratch’ – by Home Depot co-founders Bernie Marcus, Arthur Blank with Bob Andelman. We would like to point to some insights from two American billionaires – Ken Langone (another Home Depot co-founder) and Ross Perot.

“Ken Langone is a man of truly unusual qualities, about as far from the cold, bottom-line-oriented investment banker as you will ever find. And for all his bombast, he’s also a man who likes being in the background but making a difference. He can effect more positive change in a day of phone calls than most people accomplish in a year.

Ken’s investment banking career with the firm of R.W. Pressprich, headquartered in New York City, had been on the upswing for ten years when he met Jack Hight at a social event, a man who became a lifelong friend and golf partner. At the end of the evening, Hight mentioned that the company he worked for was ready to go public. He even offered to arrange a face-to-face meeting with the chairman of the board. “Call me on Monday,” Hight said, “and I will get you an appointment.”

By the time Ken called on Monday morning, it was all arranged. “You have an appointment at 11:30 Wednesday morning in Dallas,” Hight said. “Be here exactly at 11:30. You have thirty minutes. You will be out of there at 12:00, and whatever you do, don’t swear!”

The company was Electronic Data Systems, EDS for short, and its founder and Chairman was H. Ross Perot. It was a scary thing, even for a well-traveled man like Ken. He arrived early, took a seat, and was looking at the second hand of his watch when, precisely at 11:30, he and two young associates were escorted into Perot’s office. This guy means business, Ken realized.

“Let me tell you who I have been talking to and what they are telling me,” Perot said, not wasting any time on introductions. Among the thirteen firms already bidding on his IPO were Goldman Sachs, Merrill Lynch & Co., Salomon Brothers, Allen & Co., and G.H. Walker. Perot then summed up what each had told him. Ken’s thirty minutes were quickly spinning by. After twenty-nine minutes, Perot said, “Okay, what do you think about what I have been saying?” “I think I will say good-bye Mr. Perot,” Ken said. [Perot] “What are you talking about?” [Langone] “Well, Jack Hight told me I had thirty minutes. I have about fifteen seconds left, so I think I will say good-bye, and maybe some other time you can see me, and I can tell you about us. “Whoa!” Perot said. “Let’s talk a little bit more. Tell me what you think about what I just said.”

Taking a deep breath, Ken figured he had already blown the thirty-minute rule; he might as well blow the other rule as well. “Mr. Perot,” he said, exhaling quickly, “that’s the biggest pile of horseshit [nonsense] I ever heard in my life.” [Perot] “What do you mean?” [Langone] “Well, Mr. Perot, it is very simple. I am going to try to get you to sell stock, and I will find somebody to buy that stock. It’s that simple. All the stuff in the middle is bureaucracy. You want to sell, I gotta find a buyer. They want to buy, I gotta find a seller. That’s it.”

Perot didn’t care for profanity, but he valued straight talk even more. He kept Ken talking till one A.M., during which time the two discovered they were married at the same hour on the same day of the same year. Scary, isn’t it? Ken went to Dallas that day with the intention of going home that night, but thirteen hours later, he and his associates were in Perot’s car, searching for a motel with a vacancy.

Meanwhile, at Ken’s urging, Perot postponed making a final decision. Over the next several months, Ken made repeated trips to Dallas, learning Perot’s business and expanding their personal rapport. Two more different men you could not find, but that seemed a common denominator in most of Ken’s business deals. Early in their discussion. Perot said, “Next time you come down, bring all the prospectuses of all the deals you have done.” [Langone] “Uh, sure.” At the end of their next meeting, Perot asked, “Did you bring the prospectuses with you?” “No,” Ken said. Perot was surprised. Ken was not forgetful. [Perot] “Did you forget them?” [Langone] “No.” [Perot] “Why didn’t you bring them?” Ken finally fessed up. “Because there are none. You are it.” [Perot] “What?” [Langone] “Yours is the first deal I am going to do.”

Perot just stood there, slack-jawed. He couldn’t believe what he was hearing. “Bear in mind one thing, Ross,” Ken continued. “You have such a great company, nobody can screw it up. An idiot can do your deal. If I blow it, I am out of business. But if I do a great job for you, my reputation is set. I have every incentive, and I promise you, I will personally handle this deal myself.”

After some time, Perot narrowed the field to two, Allen & Co., and R.W. Pressprich. By then, Perot had figured out a couple of things about going public. Number one, it didn’t matter who brought a company public. What mattered was the person who actually led the deal to the public, because if that person exerted a lot of effort and influence, the company would enjoy a successful underwriting. If that person didn’t do his job, the biggest name in the world couldn’t help.

Perot asked Milledge A. “Mitch” Hart, who was then executive vice president of EDS, for his opinion. (Mitch was later an original investor in The Home Depot and a member of our board of directors). “The safe bet is Charlie Allen [of Allen & Co.], ” Hart said, “because he has been there and done that so many times and has such a great reputation. But Langone is the guy that I would pick.” [Perot] “Why?” [Hart] “For one thing, he is so excited about this he can hardly stand it. He desperately wants to make a name for himself and he sees us as his best shot.”

In June 1968, Perot made his decision. He called Ken and said, “The deal is yours.” But there was a catch: Ken had to bring EDS out at a multiple of 100 times earnings, which was an absolutely, outrageously stretched number.

On September 11, 1968, the night before EDS went public, Ken and Elaine Langone and Ross and Margot Perot were in the back of a limousine, driving through the Holland Tunnel from New York to New Jersey. The time was midnight. In those days, you would actually sign all the papers for a stock offering in Jersey, then turn around and come right back so you didn’t have to pay New York State transfer taxes. The Perots were in the backseat looking forward, the Langones opposite them, looking backward.

[Langone] “Ross, I have something to tell you about tomorrow,” Ken said. “We won’t bring EDS out at 100 times earnings after all.”
“I knew it!” Perot said, pointing his finger. “Everybody on Wall Street told me that you will say you will do the stock offering at 100 times earnings and, at the last minute, say, ‘Sorry, we can’t do it.’ You are just like everybody else. This is exactly what they warned me was going to happen.”
“Ross, wait a minute; hold it, ” Ken said calmly. “I don’t want you upset. if that’s what you want, we will do it at 100 times earnings.”
[Perot] “Well, a deal is a deal. You said 100 times….” [Langone] “Fine, fine. We will do it at 100 times earnings.”
Just then, Margot spoke up. “Ken, what were you going to say a minute ago?” [Langone] “Just that instead of 100 times earnings, I was going to it at $16.50 a share, 118 times earnings,” Ken said, watching Perot turn from a slow burn to a big red-faced laugh. “But if he only wants 100 times, then that is okay with me.”

Questions

1. If you were in Ross Perot’s shoes, how likely would you  have been to even grant an audience to an unknown investment banking firm like R.W. Pressprich?
2. Would you agree that many of the things middle class folks get told is utter nonsense – or bureaucracy as Ken Langone put it above? Some financial planners would ask you questions to establish whether you are aggressive (tolerant of high risk), moderately aggressive, moderate, moderately conservative, conservative – those are the wrong questions. Shouldn’t the correct questions be – How much am I putting in? How soon will I get it back? After I get it back, what will I have as a residual? What control(s) would I have over my investment?
3. Investments are like a journey. Usually you want to know the origin and destination and how long it would take – that’s how you plan for feeding and accommodation. Wealthy folks usually know what they are getting into when they put their money into a venture but middle class folks (MCFs) are usually sold a bill of goods. But MCFs get asked a lot of irrelevant questions and they forget to ask the important questions that matter – do you agree?
4. The other irony is that the one whose money is at risk should be the one asking questions – don’t you think? We can’t think of any scenario in which you would be collecting a rich man’s money for a venture and you would get to interview him and ask him about his aspirations and goals – it is usually the other way round. But when wealthy folks (they control all the major financial institutions) want to collect money from MCFs, they ask all the questions in the world about you – it is still the master/slave relationship. Little wonder MCFs are not in control?
5. Given the foregoing – would you say you are in control of your money? Have you been the ones asking the questions that matter? Do you know the specifics of your investment journey in terms of origin and destination? Are the things you know based on tangible, measurable parameters (like dividends and other forms of cash flow? Or on platitudes like – the stock market has historically returned 8% per year over the last 40 years?
6. The MCWB Club would put you in charge once again – you will be the one asking the questions that matter, and until you are satisfied that you know the specifics of what is going on, you will not be parting with your money.