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Inside job (pg. 4)

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

Still, Winters did not call off the deal. He instructed Hannam to tell the Omanis it might yet be possible to win Dow board approval if the board were approached in the right way. Hannam was to tell the Omanis, "We remain committed to helping you get this asset."

Reinhard's and Kreinberg's lawyers claimed in court papers that their clients were surprised by the talk of an LBO at the Angler and that they "rebuffed" such proposals, telling JPM bankers that if an overture were made, Dow would "circle the wagons." Kreinberg even claimed that he had gone to the hotel expecting to meet only Ruane and discuss mundane OPIC business. But this account strains credulity. Though Wilson did not attend either meeting, he was at the Compleat Angler and had tea with Reinhard and Kreinberg after the meetings. Neither expressed any shock or surprise at the time, Wilson testified, nor any desire to drop out of the project or have it come to a halt.

On March 1, Dow CFO Geoffrey Merszei was told at a meeting in New York with Citigroup bankers that JPM Chase was involved in the LBO bid for Dow that was spurring newspaper reports. On March 5, Liveris called JPM Chase CEO Jamie Dimon, who promised to look into the question and get back to him.

Also on March 5, Wilson met with Reinhard in Zurich, according to Wilson. The meeting focused on the 25% of JPM's banking fees that Reinhard still hoped to get a piece of and that Wilson was still angry about being cut out of. "Reinhard was trying to assure me that the payment of some of the banking fees to himself and Mr. Kreinberg would not be problematic [legally or ethically]," Wilson testified. Reinhard had invited officials from a Swiss bank to the meeting, and they were arguing that "ways could be found to structure it ... without giving rise to problems." The arrangement allegedly would have involved having Reinhard and Kreinberg's shares of the banking fees sent to Wilson, who would then forward the money to them in Switzerland. Wilson refused.

On March 7, Liveris and Dimon spoke again by phone. Dimon confirmed that his bank's Cazenove unit was working on something, but he was still trying to find out more.

On March 12, yet another newspaper item appeared, the most detailed and accurate yet. The London tabloid Evening Standard, was heralding a "$60 billion deal ... masterminded by Ian Hannam out of J.P. Morgan in London," in which "the usual suspects," including KKR, were among the likely sponsors. Furious, Dow CFO Merszei called JPM Chase's Dow account representative, Christopher Iannaccone, and told him to stop work immediately. Iannaccone promised to relay the message to higher-ups.

More cold water was poured on the deal when it was formally pitched to KKR and TPG on March 13 and 14. "We don't think the numbers work," wrote one KKR banker. At TPG, David Bonderman was likewise "underwhelmed," according to a JPM e-mail.

On March 15, JPM Chase's Winters recommended pulling out of the deal in an e-mail copied to Dimon. "Based on this feedback, we should go back to Dow now with an 'all pencils down' message. I'm happy to help with damage control if needed." It appears that Dimon called Liveris that same day to convey the message (though Liveris is not certain of the date). JPM Chase also notified the Omanis and Hannam. JPM was out of the hunt.

But Reinhard may not yet have given up. Two days after JPM withdrew, he urged Kassin, the mergers and acquisitions chief at Access, to solicit more approaches to Dow. "Had long talk with Pedro last night," Kassin wrote Blavatnik. "He is in very weird position. He is playing on too many teams in my opinion."

The last newspaper leak came on April 8 and proved to be the coup de grce for Reinhard and Kreinberg. The story reported that "a consortium of Middle Eastern investors and American buyout firms" was putting the "finishing touches" on a bid and identified JPM Chase in London as its advisor. As it happened, Dimon was scheduled to have dinner with Liveris at Dow's headquarters in Midland, Mich., the next evening. Dimon sarcastically e-mailed Winters and two others the next morning: "Considering that I am having dinner tonight with the CEO of Dow, can I get briefed about what is going on?" The bankers assured Dimon that JPM had been "tools down" since March 15.

Upon seeing the latest press account, KKR's Kravis called Liveris. According to Liveris's notes, Kravis told him his London office had been approached, but they had stopped when they found out it was hostile. He also said the Omanis were working with people "who know a lot about Dow."

'Double agent' Reinhard

Dimon's dinner with Liveris on April 9 - the "mea culpa meeting," as one JPM Chase banker referred to it - was amicable. "Mr. Dimon was very forthcoming," Liveris later testified. Dimon's "demeanor" communicated that "this was a man who had clearly found out that his company was involved in something that he ... did not support," Liveris said. "[Dimon] made reference to ... parties very, very close to Dow, and ... went on to more than insinuate that there were people that were really in the middle of this deal and that really I had to know about." Liveris pressed him for details, and Dimon promised to get back to him. Iannaccone, who had been present, reported afterward in an e-mail, "Clearly we have been dinged by this episode, but if Jamie is able to provide some color over the next couple days, we might not be in as bad a position as I thought."

Dimon fingered Reinhard and Kreinberg in a phone call to Liveris the next day. Reinhard in particular, Dimon said, was acting like a "double agent," according to Liveris's notes. "Jamie recommended I do my own homework, but if he were me, he would get these guys 'out' and off the [board of directors] asap."

Liveris broke the shocking news to the board the next day. It unanimously authorized Liveris to terminate Reinhard and Kreinberg after giving each man an opportunity to be heard. On the morning of April 12, each man offered only a lawyerly, blanket denial of wrongdoing. They were fired later that day.

The lawsuits and countersuits were filed on May 8, 2007, and settled on June 2, 2008. In addition to the confidential financial terms, Reinhard and Kreinberg publicly admitted their unauthorized LBO discussions, while the company acknowledged the men's "substantial contributions to Dow over their lengthy and illustrious careers at Dow."

"Pedro Reinhard is pleased with the settlement," his attorney Gary Naftalis said in a statement. "He greatly appreciates the company's public recognition and kind words about his illustrious career at the company." Kreinberg's attorney Stanley Arkin declined comment for this article.

"The defendants' acknowledgment that the board was right was key," says Dow's attorney David Bernick. "Once that was agreed, the only remaining question was whether to continue the litigation for the sake of getting back the last dollar of earned equity compensation. [Dow] decided that was not the appropriate path to take."

Obviously, mysteries still abound. Who misled whom into thinking the Dow board would be receptive to an LBO? Who leaked to the press? And what in God's name were these two guys thinking? Can't help you there.

To read Roger Parloff on legal affairs, go to fortune.com/legalpadTo top of page

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