If you’re going to be David in an arena of Goliaths, you’d better have some rocks for your slingshot.
We were no longer a niche company selling hotel rooms in Las Vegas. We were now a travel company competing in a global market against others run by giants like Microsoft, AOL, and American Airlines. We needed big-time cash. The $8 million dinner with The Captain in Baltimore was great. But now it was time to go to Wall Street.
When I first traveled to New York City just out of college to catch the Big East basketball tournament with Tim, Uncle Jack, and their pals, they loved seeing my head swivel between skyscrapers so they could tease. “Get your head out of the clouds, ya hayseed!” But the reality is that Tim had had a similar sort of experience only a few years earlier. Once, during his college years, he took a trip to New York City with Lorenzo and Lorenzo’s mom. The Fertittas booked a hotel room for Tim where they were staying—although Tim insisted upon paying his own way. When Tim checked in at the front desk of the Peninsula, he glanced at the bill and assumed it meant he was supposed to take the elevator to room 375. He asked the clerk, just to make sure, and was informed that 375 was the daily room rate. This was back in the day when $375 was like $675 would be to a college kid now. It was an amount that Tim didn’t have, and he couldn’t hold back a gasp.
More than a decade had passed since that day. We were now in the summer of 1999. Our company was growing fast. We were young and gung ho. And we couldn’t help but feel we belonged in the big time. It’s every entrepreneur’s dream to go public and see his company listed on the stock exchange. We were embracing the dream. We were such novices to the world of Wall Street that we were too naïve to even realize it.
Fortunately, we had The Captain to look out for us. He came through immediately in a meeting with Goldman Sachs. There’s a cachet to doing business with Goldman Sachs. You might have to pay a little more, but it’s often worth it to associate your company with the gold standard. The terms that Goldman Sachs was offering, though, were ridiculously loaded down with fees.
“Good morning,” the executive at Goldman Sachs cordially greeted Tim and The Captain.
“Good morning???” The Captain shot back at the banker. “With the terms you guys are offering, I don’t know what the hell is so good about it!”
If Tim or I had voiced the same opinion, we might’ve been pitched out to the sidewalk on our thirty-something asses. But having the words come from a guy who’d been to Shanghai and back before the banker was even born gave them credibility. When Tim and I got in way over our heads, we could always count on The Captain to guide us.
Trouble was, we were navigating our way through a time period that nobody—and I mean nobody—could understand. Most people remember the time as the Internet Bubble, though the guy who looked after our finances, Ed Borgato, called it something else. He called it The Crazy.
He called it The Crazy not only because the numbers on Wall Street were insane in early 1999, but also because in a normal world the idea behind running a business is to make a profit. During The Crazy, all you needed to make millions was an idea in a garage. Any young entrepreneur in a T-shirt could float up an Internet concept, and immediately the scent of money was wafting over Wall Street. None of the suits wanted to be left out of the future. Never mind that the company connected to the idea coming from the genius in a T-shirt might have little chance of success. To many of the bankers on Wall Street, it seemed like more of a risk to be left behind.
A big-time analyst like Oppenheimer’s Henry Blodget would make an outrageous assessment of a youngster like Amazon. com, predicting in December 1998 that its stock would hit $400 a share. A month later, after a feeding frenzy of investment, the stock had soared 128 percent, and it did pass $400! When Amazon grew in leaps and bounds, it spread hope that every company would do the same. It was crazy. Without showing a hint of ever having been profitable, an online procurement company called PurchasePro that was started by a guy who showed Steve Wynn workout techniques actually surpassed the value of Wynn’s Mirage!
I guess you could compare it to an untested athlete out of high school getting drafted and signed for way more money than a professional who’d proven himself as an all-star for a decade. The kid out of high school had the power to shape the future. The kid wearing a T-shirt in a garage suddenly had enough money to buy a mansion in Silicon Valley and an original copy of the Declaration of Independence.
Only time can provide true perspective of what we were living through. Hundeds of books have been written about the Internet Bubble, but as I look back now it still boggles the mind. The dot-com valuations were so out of whack during this speculative frenzy that seven years later the NASDAQ Composite would have to appreciate 105 percent to climb back to where it was at the height of The Crazy. Ed watched in disbelief as companies that had nothing to do with the Internet sent their stock climbing simply by changing their names to include a dot-com at the end. Again and again, he issued warnings in his quarterly letter to investors that a day of reckoning was coming. But amateur investors were becoming instant millionaires, and even the savvy were seduced. At the height of the hysteria, Ed wondered how The Crazy could get any crazier. He picked up a business magazine and found out. Barbra Streisand had jumped into The Crazy and was now making a fortune herself as a day trader of Internet stocks. At first, Ed could only shake his head in ridicule when he read that the diva was buying the same stocks that he was shunning. But when he reached the part where fashion designer Donna Karan had pushed aside her money manager and turned to Barbra, he actually hurled the magazine across his office and into the trash.
Ed saw the Internet Bubble for what it was: a new type of gold rush. Wall Street was simply sifting through the different ideas and companies to find the ones with real value. Like in any gold rush, the people who are sure to get rich are the ones selling the picks and the shovels. It was lucrative for Wall Street when an analyst like Henry Blodget dreamed up and affixed an astronomical value to Amazon or any other Internet company. The higher the value, the greater the fee his bank would collect when it launched an initial public offering.
So it was both the best time to go public and the worst. Hundreds of millions of dollars were being handed out on Wall Street as casually as drinks at a bar. Just get in line. If you owned any sort of company linked to the Internet during The Crazy, you were insane if you didn’t go public. But there would be consequences for those companies that couldn’t produce later on, not to mention for the people who’d invested in them.
All the old rules of business were changed overnight by the Internet. Value was no longer based on performance in the present, but on potential performance in the distant future. This was a little complicated for us. Our company was founded before the Internet. We were more than just an idea in a garage. We were an actual business that was using the Internet to sell rooms. So we had to understand how Wall Street’s new rules varied from the old and how they might affect us.
The concept that the bankers put forth made sense. Yet at the same time it went against everything I always thought a business was supposed to do. How much money your company was making no longer mattered. You were not being judged upon a multiple of your earnings. The analysts wanted the Internet companies that they were taking public to spend so much on marketing that they couldn’t possibly make money. The important thing was to use that marketing money to make your company the leader in its niche. In the short term, there would be losses. But when your company became wildly popular, the initial marketing costs would subside. Down the road, your company would reap enormous profits.
In January 1999, Tim and Captain John sat down with vice presidents from CIBC Oppenheimer. Blodget, the bank’s big-time analyst, valued the company that Tim had started with a desk, a chair, a phone, and a pillow at $400 million.
We knew Blodget’s numbers were crazy, but if he was willing to give us this sort of valuation, how could we not take it? During The Crazy, you could only wonder if a bank down the street would come up with a figure that was even crazier.
“What the hell,” Captain John said to Tim. “Let’s walk down the street and listen to Prudential.” There, Tim and Captain John heard that our company was worth only $200 million. “Holy mackerel,” Captain John said, “we just lost $200 million walking down the street.”
When Tim told Prudential about our $400 million valuation, the guy at Prudential threw up its hands. “Whoa, wait a minute, don’t do anything yet. Let me talk to our analyst. He’s in the Far East.” Next thing Tim knew, a ringing phone woke him at 3:30 AM. After quickly sharpening his pencil, the analyst in Asia apologized for overlooking certain aspects of our business, and corrected the valuation to $350 million.
“Are you ready for this?” Tim told us the next morning.
“One phone call,” Captain John marveled, “and we found $150 million!”
We decided to go with CIBC Oppenheimer and a second-tier bank, Piper Jaffray. The highest number usually won during The Crazy, and we liked Oppenheimer’s vice-chairman, Nate Gantcher. Nate seemed at home when he visited us in Las Vegas. Our rottweiler, Bally, had taken a nap with her head on Nate’s shoe during a talk in our office. Moments like those meant something to Tim and me. Even when Blodget was lured away by a rival bank and replaced by a young guy who seemed a little jittery in his presentations, we stuck with Nate. We’d shaken Nate’s hand. Once we’d given our word, we’d never go back on it. In the city that grew up outside the law, a man’s word is all he’s worth.
But in the end, the loss of Blodget was a blow. Things became even more complicated when the market grew choppy. The pressure was on Tim when he headed east toward New York and over to Europe to help the bank raise funds for the IPO.
Lorenzo’s brother, Frank, told Tim if he wanted to go up against the Goliaths, he needed to look the part. “Request a private plane from the banks in order to help arrange financing,” Frank advised. “That will make them take you seriously. The trip is going to be grueling. Ask the banks to load the plane up with whatever you need to make the trip as comfortable as you can.” Tim flew off on his mission in a Challenger 601 stocked with Johnnie Walker Blue and Fruity Pebbles cereal.
I held down the fort in Las Vegas while Tim worked his ass off between bowls of Fruity Pebbles. It’s no exaggeration to say he was taking a physical pounding as he crisscrossed the country and flew over to Europe. On a stop in Paris, he stepped out of a limo to make a presentation and put his briefcase down behind the trunk. The driver didn’t see him and slammed the trunk door down on his head, knocking him unconscious. Tim woke up and wobbled into the presentation. He spoke with blood running down the back of his neck, drenching the shirt underneath his suit. After weeks of unrelenting sales, he got his end of the job done.
On June 22, 1999, we flew family and friends to New York for a dinner at Sparks steak house to celebrate our impending entrance to the stock market. Not long before the shrimp cocktail was served, though, the next sucker punch arrived. The bankers told us they couldn’t get enough orders in their book. Why? One reason was that our company wasn’t losing enough money. Sure, we showed great potential. We could anticipate sales growth at 40 to 50 percent. But during The Crazy, that just didn’t look as appealing to investors as an unprofitable company forecasting sales growth of 200 percent. The bankers wanted us to lower our numbers because, they said, the market had softened.
But then we found out that Piper Jaffray had priced another IPO above its initial range and scheduled it for the following morning, at exactly the same time it was supposed to be doing our IPO. I couldn’t believe our bank was taking two companies in the same sector public on the same day. I thought it was total bullshit.
Usually, Tim is the guy to throw the first punch. But when I looked over at him, there was no anger on his face. You know how sometimes you get so tired that you can’t sleep? Well, Tim was so mad that he was beyond anger. He had thrown so much of himself into the process that he had no more to give. It was one of those moments when you realize you’re powerless and you throw the back of your hand in the air and say, “Whatever.”
Seeing that expression on Tim’s face hit me in the gut with a force that I still can’t describe. Suddenly, I was in a rage at the bankers in the dining room of Sparks, and Tim was holding me back on the same ground where Big Paulie Castellano was gunned down by John Gotti’s boys in one of the last notorious mob hits.
It was completely out of character for me to lose it like that. When I look back on it, I can only wonder if the bankers had tapped into that old high school wound. You’re not playing. That’s pretty much what the bankers were telling us that night. After all their bullshit about how great our company was and how great this offering was going to be, after all the work that Tim had put into raising money, the whole thing came down to almost the exact same words. We’re going with somebody else. You’re not playing.
It wasn’t like I was standing there seeing a movie flashback of myself as a dejected kid in high school. Or a flashback of Tim and me on the frozen lake when he said, “Look, if you come into the business with me, you don’t have to rely on other people to create your opportunities. We control our own destiny.” The pain behind the blank expression on Tim’s face just made me want to beat the crap out of someone.
The bankers started backpedaling, hoping to keep their commission. No, no, they said, you’re seeing it all wrong. It’s the fluctuations in the market. Just wait two weeks, they insisted, and the time for your IPO will be ripe.
But the game was over. When you walk off a court after the final buzzer, and you haven’t played, you can never get that time back.
Tim and I returned to Las Vegas.
It wasn’t possible to stay angry or be depressed for long. Word of what happened spread with the wind. Soon it reached the ears of Barry Diller, who knows an opportunity when he smells one. We had to pay attention.
Barry Diller is a billion-dollar American success story. He’s the guy who dropped out of UCLA after one semester, started to work in a mail room, went on to invent the made-for-TV movie, and hustled his way up to become chairman of Paramount Pictures. He had a hand in classics like Saturday Night Fever, Grease, and Raiders of the Lost Ark, and was responsible for the creation of the Fox Broadcasting Company. Diller was also quick to sense the power of the Internet. Over time, he amassed an Internet conglomerate that included Hotel Reservations Network, Home Shopping Network, and Ticketmaster.
Travelscape fit right in his portfolio—and he was willing to pay more than a hundred million bucks for it.
No entrepreneur who starts a business with a desk, a phone, a chair, and a pillow is going to look away when somebody offers him more than $100 million for it. But there were other reasons to take the money and go on our way. The pace of technology was moving so quickly that even a powerful company like ours could be overwhelmed and replaced in a matter of months. We’d seen it happen all around us.
A classic example is what happened with encyclopedias and the Internet, and how both led to a travel company called Expedia. When Tim and I were in high school and college, we’d go to the twenty-nine-volume Encyclopedia Britannica on the library bookshelf to do our research papers. During that time period, Microsoft approached Encyclopedia Britannica about an electronic partnership, but the folks at Britannica couldn’t see the future. They declined. Microsoft purchased the rights to another reference library called Funk and Wagnalls, and in 1993 used its contents to create an electronic encyclopedia on CD-ROM called Encarta. The project was run by a guy named Rich Barton, and it was stupendous. Because 90 percent of it was devoted to pictures, movies, and audio clips, it pole-vaulted over anything on a library bookshelf. Britannica, an icon that had been published since 1768 and was once described as “beyond comparison because there is no competitor,” would in the mid-1990s be sold as a company below book value. Not long thereafter, Funk and Wagnalls would stop printing. The first avalanche of the electronic word over the printed word had occurred. The avalanches were only beginning.
Only a year after Encarta came out, in 1994 a Web browser called Netscape arrived. Its interface enabled the owners of diverse computers to access this new thing called the Internet. When it did, the Encarta CD-ROM was rendered virtually obsolete. Information that you could get by purchasing the CD-ROM was now available on the burgeoning Internet through Netscape.
Only a year before, Encarta had looked like a moon landing of technology. Now it suddenly seemed like the Nina, Pinta, and Santa Maria. Netscape was the future. It launched an IPO in 1995 at $28 a share and shot to $75 on the first day of trading. Netscape’s new technology allowed Web sites to send weather and stock updates directly to a user’s desktop. In the mid-1990s, its user share hovered as high as 85 percent.
This was obviously threatening to Microsoft, which had its own Internet browser called Internet Explorer and a very limited CD-ROM in Encarta. Microsoft wanted to see a world with a computer on every desktop and its software in every computer. It wanted people to access the Internet through its own browser: Internet Explorer. It was involved in a multibillion-dollar game of checkers. It leaped over Netscape by packaging Internet Explorer within its software so that it was virtually free. No longer would anybody have to pay Netscape for the privilege to browse the Internet. Suddenly, Netscape was virtually useless. It would sue Microsoft for monopolistic practices and ultimately was sold to America Online. But the dots are easy to connect. By the end of 2006, the usage share of Netscape browsers had fallen to 1 percent. Not only did Microsoft triumph (although it did have to pay Netscape a settlement), it was also smart enough to rethink Encarta.
Encarta had a huge geographical component. A page containing information about Mexico could be electronically linked to a site that sold travel south of the border. Ultimately, a huge electronic travel company backed by Microsoft would be spun out of this connection. That company would be called Expedia.
The point is that if you weren’t on the cutting edge, or flush with a lot of money to reformat quickly, you were very vulnerable to the next technological avalanche. Barry Diller was offering to pay us $120 million to remove that vulnerability.
Neither Tim nor I had met Diller when he offered to buy Travelscape. At first, he sent in a team of people to study our company. That’s fairly common. If you want to buy a company valued at more than a hundred million bucks you want to know exactly what you’re getting.
But Diller owned our top competitor: Hotel Reservations Network.
Opening your books to your main rival never sits well in your stomach. Especially when the weasel-of-a-lawyer asking you questions over lunch is the type to throw his tie over his shoulder before he bites into a sandwich so he doesn’t stain it with ketchup. Those lunches were just creepy. Some of our employees, who’d met the people at the company they’d be merging with, were not particularly comfortable, either. They never came out and said so directly, but an uneasy spirit hovered over the office—a spirit that we were too busy to recognize and address. We were working eighteen hours a day, moving through the Diller deal, and handling the company’s day-to-day operations. So alarm bells didn’t go off when we asked Mr. In-credible “How ya doin’, Edward?”
And he responded “Okay.”
But that’s what happens when you’re being pulled in too many directions. The whole process felt like the sort of investigation you get when you apply for a gaming license in Nevada—and that has been described as a visit to the proctologist.
Our negotiations with Diller went on for three months and got down to the paperclips. Finally, everything was set. Diller offered us $120 million for the company. On a Thursday, we were supposed to fly to New York and have dinner with him. On Friday, we’d sign the contract.
Less than twenty-four hours before we were to board the plane, Tim got a phone call from one of Diller’s representatives. I couldn’t hear the whole conversation. I could only pick up what was going on from Tim’s responses and his facial expressions. But it’s not difficult to get the gist of a punch to the gut.
“Our board is having second thoughts,” said Diller’s rep. “It thinks the valuation is too high. And it’s not going to vote for the deal. It’s offering $90 million—less your company’s $8 million debt.”
“What kind of bullshit is this?” Tim said. “You get me pregnant on the idea of selling and then at the last minute you’re gonna haircut it?”
“I don’t want you to think this is intentional. I know you’re upset. You have every right to be. It’s not me. It’s the board.”
“Look, we made a deal for $120 million. And as far as I’m concerned, a deal is a deal.”
“But the board won’t vote for that deal.”
“Well, then, fuck it. We don’t got a deal.”
“Look, just think about—”
“There’s nothing to think about. We went through three months of due diligence in good faith. You gave me your word. A deal is a deal.”
“Look, Tim, $82 million is a lot of money.”
“Yeah, and the $38 million that you fucked us out of is a lot of money, too.”
Tim’s words lifted me right out of my chair. My fist cut through the air, and I was screaming “That’s right!” without any sound coming out of my mouth.
“Just think about it overnight,” Diller’s rep tried to soothe Tim, “and we’ll talk in the morning.”
“No, we won’t,” Tim fired back. “Unless you tell me right now, on this phone call, that we have the $120 million that we agreed on, we got no deal. I’m not sleeping on it. I’m not calling you back. I’m not gonna try to calm myself down. This is it. Either it’s $120 million on this phone call or don’t call me back.”
“Tim, I’m not authorized to give you that deal.”
“Well, then we got no deal!”
Then Tim slammed down the phone.
The earth seemed to pause. Tim and I stared at each other in silence and thought, “What the fuck just happened?”
“I think,” Tim finally said, “we just blew the deal.”
Our disbelief turned to devastation. For three months, we’d handed over nearly every scrap of company information to a top competitor. Now we had nothing, and we were numb.
But it was only a minute or two before our blood was flowing again. “Fuck ’em! We’ll just roll up our sleeves and make this company bigger than ever.”
While we were lifting ourselves out of the muck, the phone rang. It was Diller’s rep.
We just let it ring…and ring…and ring.
It wasn’t until years later that we found out what was going on at the other end of that phone line.
Tim didn’t know it, but he was on speakerphone. Diller, members of his board, and some bankers were listening to Tim’s every word.
Diller didn’t think we’d have the balls to turn him down. He’s a deal junkie, and he was taking a shot at us, knowing that a lot of guys in our situation would’ve been happy to be set for life.
“Yeah, we want the deal,” Diller had told the room before the call. “But these guys are young. Trust me, they’ll take $82 million.”
Even after Tim hung up in fury, Diller said, “Don’t worry. He’ll call back.”
The call became famous among some of Diller’s bankers because Tim was the only guy they knew who’d told Barry Diller to go fuck himself.
Twice within six months we’d gotten to the goal line only to be repelled just before we could score. Little did we know that the failed IPO and the Diller debacle were preparing us for what was coming our way, way down the road. I suppose you can rationalize what Diller did to us with motivational quotations. As Henry Ford once said, “Remember, that the airplane takes off against the wind, not with it.”
But as we turned off the lights and closed the door to Tim’s office that night, we felt like we were moving in slow motion. We headed home exhausted and beaten men.