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Inside job (pg. 3)

Roger Parloff, senior editor
Last Updated: July 1, 2008: 11:05 AM EDT

Kassin set up a meeting in London between Blavatnik and Ruane to discuss an LBO of Dow that would be led by the State General Reserve Fund of the Sultanate of Oman (SGRF), an Omani sovereign wealth fund, which was prepared to ante up at least $5 billion of equity. Ruane brought with him Ian Hannam, co-head of equity capital markets at London's J.P. Morgan Cazenove, who was advising the Omanis. Again, however, Blavatnik was noncommittal at best, and Access never went forward.

On Oct. 30, Ruane and Hannam met with Reinhard and Kreinberg for the first of two meetings at the Carlton Tower in London. Some OPIC business was discussed, but the purpose of the meeting, Ruane maintained in his later affidavit, "was to discuss what a typical leveraged buyout would mean for the resulting management," with "special reference to a potential buyout of Dow."

Two Omani government ministers wanted a face-to-face with Reinhard and Kreinberg before proceeding, so Ruane arranged a meeting in Muscat. At one point the Omanis leaned across the table and asked if Reinhard and Kreinberg thought Dow would be a good investment and if they would be willing to stay in their positions to manage it. They answered yes to both questions, according to statements Ruane made to his lawyers.

Thereafter the bid moved forward in earnest. In anticipation of signing a formal engagement letter with the Omanis, the JPM Cazenove bankers notified key officials at their parent, JPM Chase, and initiated a conflicts check. The conflicts memo stated, "Buyout team led by former CFO. Not all members of current senior Dow management team are involved." Accompanying internal JPM e-mails identified Reinhard as the "former CFO." Another e-mail said, "I understand that D mgmt deliberately keeping low profile until further down track ... i.e., aiming very much for plausible deniability at this stage."

Since JPM Chase did a lot of business with Dow, the prospect of a hostile bid made some of its bankers extremely uncomfortable. But others stressed that the deal might yet win Dow board consensus. The issue then appears to have been tabled, and the signing of the engagement letter was put off pending clarification on these points.

In mid-December, Ruane brought consultant Ed Wilson, the former Dow official, back into the picture to help the bankers draw up a 100-page business plan for what was now code-named "Project Door." (The coding was half-hearted; Dow was "Door," Oman was "Oryx," and one of the Door units slated for early sale was "Door Corning.") On Jan. 19, Ruane, Hannam, Wilson, Reinhard, and Kreinberg met at the Carlton Tower again, and Wilson took the executives through the business plan.

Wilson remembered the meeting well, since he got some bad news there, he later recounted in his deposition. He had previously been told by Ruane that the two of them would be sharing a 25% slice of JPM's banking fees as their compensation on the deal. Reinhard and Ruane now informed him that the new plan was for the 25% piece to be split three ways - among Ruane, Reinhard, and Kreinberg. Wilson would just get a lump sum. Since JPM's advisory fees were then being ballparked in the $200 million range, 25% would have been about $50 million. Wilson was steamed. (Reinhard's and Kreinberg's attorneys have attacked Wilson's credibility, as they did Ruane's - and again, with some basis. After the post-termination litigation began, Wilson struck a highly unusual "cooperation" agreement with Dow under which Dow agreed not to sue him over his role in the affair, to pay him his usual consulting fee - about $4,500 a day - for time spent responding to litigation demands, and to reimburse his attorneys fees. Ruane and Wilson had some bargaining leverage because they were outside the jurisdiction of the U.S. courts.)

Media attention

It was after or during this second Carlton Tower meeting that Dow CEO Liveris sent Reinhard the previously mentioned e-mail asking him what was behind the buyout talk reported in the Financial Times, only to be told that it was a stale rumor.

Kreinberg also kept mum, according to Liveris's later testimony, when the Financial Times item came up for discussion at regular meetings of Dow's top executives. "He was there," Liveris recounted, "sitting there all the time, looking very mute and unresponsive." The item was even discussed informally at Dow's next board meeting, according to the testimony of Liveris and other directors. Reinhard was present but volunteered nothing.

By this time the Omanis and JPM Cazenove bankers were almost ready to make their formal presentations to American private equity groups. Before doing so, however, they needed to tie up crucial loose ends. The head of Oman's SGRF needed to meet Reinhard and Kreinberg personally and make sure they were okay with a stingier management-incentive package than had been originally proposed. Rather than allowing top management to come away with 10% of the surviving company if it met performance targets, SGRF was scaling that back to 6%. Second, the JPM Chase bankers needed to know how many Dow board members and executives were really backing Reinhard and Kreinberg - i.e., was there really any hope of this becoming a friendly deal.

To resolve these issues, Hannam scheduled two meetings for Reinhard and Kreinberg in London on Feb. 27. At one they would meet the head of the Omani fund and at the other, JPM Chase vice chairman Bill Winters.

Two days before the critical meetings a second, more detailed newspaper story described an impending LBO bid for Dow. It predicted a "$54 billion approach ... likely to include powerful players such as KKR, Blackstone, and Carlyle Group." Upon learning of the item, Chinh Chu of Blackstone called Liveris to assure him that Blackstone was not involved. Liveris called Kravis, who said he didn't know of anything underway, but he assured him that it was highly unlikely his firm would be involved in anything hostile.

Still, Liveris took the rumors seriously. He launched "Project Fort," by asking Dow's two primary investment banks, Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500), to perform LBO analyses of Dow in anticipation of an unsolicited bid. He also hired the nation's premier takeover-defense lawyer, Marty Lipton of Wachtell Lipton Rosen & Katz.

Meantime, the LBO planners decided that the press leaks made it too risky to meet in London. Hannam moved them to the Compleat Angler, a gorgeous inn on the Thames, about 35 miles to the west. To ensure secrecy, he didn't reveal the name of the hotel and just sent cars to Heathrow to pick up the participants. He also rented the hotel's entire residents' lounge so that the congregants could meet unobserved.

According to Dow, Kreinberg created a cover story for his trip that day. He had the OPIC chairman write a bogus letter summoning him to London to discuss an invoice reimbursement dispute.

Neither meeting went well. Reinhard and Kreinberg did not commit to the Omanis' incentives package. In fact, in an internal JPM Cazenove e-mail later that day, a banker wrote that Reinhard now saw "no compelling reason for [an] Omani link" for the deal. (Dow speculates that Reinhard objected to the stingier compensation package.) At the second meeting Winters, from JPM Chase, learned for the first time that Reinhard and Kreinberg actually had no known supporters on the board, but were acting alone. Winters was "surprise[d] that only 2 individuals in loop at this stage," a JPM Chase banker wrote to Hannam. "Any approach likely to be perceived as unfriendly/hostile.... Much of above may make JPM commitment to SGRF more difficult at this stage."

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