The First Billion

8

You are Mr. Gavallan, I think.”

“Mr. Kirov. It’s an honor.”

The two were standing in a plush reception hall on the campus of Stanford University. Kirov had been invited to deliver the annual Grousbeck lecture on foreign affairs. As his subject, he had chosen the current state of the Russian legal system, and his performance had been impressive, an impassioned sixty-minute discourse hitting all the buzzwords a liberal California audience was dying to hear. The need for an independent judiciary, ratification of the nation’s highest judges by a legislative authority, freedom of the press, the right to free speech. It was the Federalist Papers dressed up in an Italian blazer, Cartier links, and Lobb shoes, and topped off with an irresistibly cosmopolitan Russian accent. Kirov was still glowing from the standing ovation he’d received.

“Such a joy to speak to an American audience,” he said, patting his brow with a folded handkerchief. “If only my countrymen understood the importance of democratic institutions as well as yours. I must always remind myself that you have two hundred years’ experience to put your ideas into practice. Russia has a thousand years of an altogether different experience: oppression, tyranny, poverty. In short, the boot.” He balled his hands into fists and stamped his foot dramatically on the wooden floor, but his optimistic grin promised Gavallan and the circle of devotees around him that if Konstantin Kirov had anything to say about it, “the boot” would soon be a thing of the past.

“Shall we find someplace private to speak?” Kirov asked Gavallan, and grasping him amicably by the arm, led him from the crowded reception room into a quiet hallway outside. “There, that is better. Now we can talk. Man to man.”

Kirov was a slim, compact man with narrow shoulders and an economical step. Leaving the reception area, Gavallan remarked upon the strict posture and bowed head, the carriage of the arms tucked close to his body, and rushed ahead to open the door, as if ushering a clergyman or someone whose life conveyed a sanctity of purpose greater than the never-ending quest for the almighty dollar. This higher calling was also visible in Kirov’s face. It was grave and focused, the skin so pale as to be translucent, the eyes dark, deep-set, and menacing as a witches’ hollow. His hair was a raven’s black. Cropped close to the skull, it accentuated the sharp cheekbones and drawn jowls. But there was fun in him, too. His mouth was puckish, as if ready to smile given the slightest reason. His eyes could surprise you with their playfulness. And he had a fine, boisterous laugh, louder than one would expect from such a small man. Mostly, though, what Gavallan sensed about the man was a monastic self-control, a zealot’s singularity of purpose.

“I’ve heard much about you, Mr. Gavallan,” Kirov went on. “Believe me when I say the honor is all mine. Thank you for making the trip to see me. Since you have come, I take it you are familiar with my company, Mercury Broadband?”

“Naturally,” said Gavallan, aware he was being patronized. He sure as hell hadn’t driven to Palo Alto to brush up on the principles of American democracy. “You’ve built an exciting platform for the industry. We’re all very impressed.”

The mandate to take Mercury public was the hottest ticket on the street. All the big boys wanted in. Credit Suisse, Morgan, Goldman. Gavallan considered it a miracle in itself he’d been able to secure an hour of face time with the Russian tycoon.

“Yes, it is time we offer shares in Mercury to the investing public,” said Kirov. “Time to show the world Russia is no longer a second-class country. That Russia is not a land of criminals, for criminals, and by criminals. That rights of ownership, once documented, are respected by rule of law.”

“I couldn’t agree more,” said Gavallan, liking the man: the muted confidence, the palpable determination. Of course, if Mercury Broadband had been solely a Russian company, as Kirov was implying, Gavallan wouldn’t have touched it with a ten-foot pole. But with operations in Switzerland, the Czech Republic, and Germany—and even an R &D facility literally just up the road in Palo Alto—Mercury Broadband deserved to be called a multinational, and multinationals were exactly the kind of client Gavallan was looking for. “The timing is ideal. The market’s hungry for a first-class international operation like Mercury. I’m confident an offering would be greeted favorably.”

“I am of the same opinion,” said Kirov.

“Mercury’s revenues have demonstrated a pattern of consistent growth. You have a solid record of earnings and a sustainable business model. We’ve taken a close look at the financial statements you so kindly provided, and my colleagues and I believe an offering in the neighborhood of five hundred million dollars is realistic.”

“Five hundred million?” Kirov pursed his lips, his expression puckered with uncertainty.

“For ten percent of the company,” Gavallan hastened to explain. “We’ll go out with fifty million shares priced at ten bucks per, then float another ten percent in a year when the market sees what a great job you’re doing and values the company accordingly. We don’t want to sell Mercury short before you realize your true worth.”

Normally, if a company met its revenue forecasts, it could count on floating additional shares within twelve to twenty-four months at a price significantly superior to the original offering. It was important, therefore, that the client not give away too much of itself at a less than maximal price.

“So you believe Mercury deserves a valuation of five billion dollars?”

“No,” said Gavallan. “I’d say ten or fifteen billion, but we’ll need time to work the market up to that level.” It was crucial he offer Kirov a mildly inflated but marginally realistic value for his company. There were others out there chomping at the bit to get the deal, and he could only guess at how high they had valued Mercury Broadband.

The process of winning the mandate for an IPO was called a “bakeoff” or a “beauty contest,” and like all mating rituals it had its own strict rules. Bankers strolled down the runway in their scantiest togs, planted themselves suggestively in the prospective client’s lap, and immodestly drew attention to their most lubricious assets—namely, where they ranked in the league tables, the number of IPOs their firm had done in a similar space, and the performance of those stocks six, twelve, and twenty-four months after the offerings.

Next, they turned their attention to the client, whispering tantalizing nothings in his ear about the true market value of the company in play, boasting about the size of the offering—bigger was always better—and giggling, with eager eyes about how diligently they would support the stock. Yessir, we’ll keep the price up, up, up. After a drink or two, it was time for the bankers to drop their negligees and show some skin, letting slip that their analyst, invariably an Institutional Investor “first teamer,” would start the party off with a bang by issuing a “strong buy” on the stock.

If the client was not yet sufficiently aroused, the banker would trot in the big guns, often the bank’s CEO himself, to drive home the firm’s overwhelming desire to win the business. With a wantonness that would make even the most jaded harlot blush, the CEO would run his hand through the client’s hair, drown him in butterfly kisses, and promise his firmest, longest-lasting, and deepest professional and personal commitment to the stock.

In short, it was a diamond-crusted striptease, and the bank with the nicest tits won.

“I was thinking more in the neighborhood of two billion,” Kirov suggested. “We have ambitious plans to expand. When you learn of the full scope of operations, you will be convinced.”

“I don’t doubt it,” conceded Gavallan, not wanting to lose the business before he had it. “Two billion is doable, provided you’re willing to part with the extra chunk of your company. I wouldn’t advise that at such an early stage.”

“Two billion,” Kirov repeated, his resolve to be found in the firm set of his jaw, the narrowing of his eyes. “We must have two billion. Now is the time for us to expand. We must strike while the iron is heated.”

“Two billion it is. It’s big for Nasdaq, but why not.”

“I’m afraid that Nasdaq is out of the question,” said Kirov, his voice hardly a whisper.

“Oh?” asked Gavallan, knowing that this was how the Russian showed his anger, not with bluster but with discipline, the fist clenching tighter.

“Nasdaq is for new, unproven companies. We are established. We are profitable. A market leader in the East. Perhaps you are not as conversant about our company as you should be. It comes down to a question of face. We, Russians, have a terrible inferiority complex. Several of our nation’s larger corporations are already trading on the New York Stock Exchange. We must list Mercury alongside them. It is the New York Stock Exchange or nothing.”

Gavallan made the appropriate soothing noises, ego gratification being perhaps the most important job of a chief executive. He’d bring up the listing requirements at a later date—if there was a later date. After a promising start, the meeting had embarked on a series of wrong turns. The first order of business was to change the atmosphere. A long, drafty hallway was hardly the place for this conversation.

Gavallan suggested they continue their discussion in the provost’s lounge, where they might sit and have a cup of coffee. He had attended business school at Stanford and knew the provost’s lounge as the spot where the university president wined and dined the school’s more important benefactors. Apparently there was something about oversized club chairs and oil portraits of long-dead scholars that made people free with their checkbooks.

Inside the lounge, the two men sat down, agreeing almost immediately that the chairs were wonderfully comfortable. Settling himself in, Kirov delved into his pocket for a sterling-silver cigarette case. “Sobranie?” Opening it, he offered the case to Gavallan. The cigarettes were long and black, the two-headed Russian eagle stamped boldly above a shiny gold filter. One head faced east, the other west. In Russia, danger had always come from within and without.

“No thank you,” said Gavallan. “I don’t smoke.”

“I know, I know,” pleaded Kirov, as he slipped one into his mouth and lit it with a matching silver lighter. “But a man should be allowed one vice.” The brows jumped excitedly under the curtain of blue smoke. “After all, we are not saints!”

Kirov drew thoughtfully on the cigarette, inhaling for what seemed an eternity before expelling the smoke in neat flutes through his nose. “I have spoken with a few of your competitors these last days,” he said offhandedly. “As you can imagine, a good many are anxious to work with us. Please don’t think me rude, but I was hoping you might be able to tell me why I should consider someone outside of New York. Someone so much smaller.”

Gavallan made it a point never to discuss his competitors—comparisons conveyed weakness and insecurity. “True, we’re a smaller company,” he said, launching into a pitch he’d given a thousand times, “but we think our size is one of our advantages. We choose our clients with great care and we like to think they exercise the same scrutiny in choosing us. Our record in the Internet sector is second to none. Of the forty-two companies we’ve taken public in the last four years, more than fifty percent are trading at significant multiples of their offering price. Not one has gone belly-up. We’re selective with whom we work, Mr. Kirov. Black Jet’s name on a prospectus has come to indicate a certain quality. We’re deeply committed to the companies we offer our investors. The clients for whom we do choose to work receive the complete and dedicated resources of our company.”

“So you choose your clients?”

“I prefer to think that we choose each other. Hopefully, bringing Mercury public will be the first step in a long relationship between our two groups.”

“So you wish to work with Mercury? You are sure?” Kirov’s amused tone indicated he hadn’t heard this approach before and just might be buying into it.

“It would be a privilege. And I think I can promise that in the current environment, Black Jet could insure that a Mercury offering would be a home run.”

Kirov nodded approvingly. If nothing else, he looked to be enjoying the courtship. He questioned Gavallan about Black Jet’s ability to manage so large an offering, its relative inexperience in working with international companies, and its commitment to supporting the stock once it began trading. He asked about Black Jet’s analyst, inquiring whether he was on Institutional Investor’s first team (he was, at a salary of four million a year!), and was curious to know if the larger funds would be buyers of the stock, meaning if they would look to build a long-term position in Mercury.

In short, he asked all the right questions. Either he’d been briefed by his chief financial officer or he’d already sat through a dozen of these pitches.

Gavallan addressed each of Kirov’s concerns in turn. Knowing he was at a disadvantage to the bulge bracket firms, which could commit a sales force double the size of his own to the IPO and promise a hundred-million-dollar kitty to keep the float active, the stock price above water, he concentrated on Black Jet’s strengths: its topflight research team; its position at the vanguard of the new economy; its close ties to the nation’s largest mutual funds. In the end, though, it came down to personality. Everybody on the street was offering the same services, more or less. It was a question of whether Kirov liked Miss August or Miss November.

At the close of Gavallan’s comments, Kirov placed his hand atop the American’s and gave it several pats. “I have received advice from people close to me—people I trust—that you are good man. That your company may soon be very big, very powerful. Like Mercury, I think.” Another pat to let him know they were on good terms. “I like you, Mr. Gavallan. You are young. You are ambitious. I sense you are honest, even if you are arrogant.” He laughed quietly. “You choosing your clients. Very good. I must remember to use that myself one day. But I must have a reason to explain to my own shareholders why I choose your company. We, Russians, like big names. BMW, Gucci, Rolex. We feel we must carry these brands with us to prove our legitimacy. Again our inferiority complex; excuse us. But if I may speak frankly, Black Jet is not yet such a big name.”

“You’re right, sir. We have only nine years behind us. I hope many more will follow.”

“I am sure of it. Absolutely positive,” Kirov declared collegially, but the next moment he was wincing, lowering his eyes. The reassuring hand returned to its owner’s armrest. “But so much is at risk. It is a critical moment for my country. For so long, we have been held back, our heads pressed beneath the water. Now that we are free, I fear we are terribly greedy. We want to suck in great mouthfuls of this oxygen we call liberty. We claim democracy as ours. We crave progress. Personal progress. Progress measured on the human scale. A phone for every house. Running water. Showers that function. Toilets that flush. Proper medical care. Hospitals stocked with adequate antibiotics, surgical dressings, and sufficient blood. We demand the latest technology.

“You see, technology is our lifeline to the West. We cannot afford to fall farther behind. The Russian people are smart and curious. They are voracious in their hunger for knowledge. We are not a nation of peasants. We are a nation of Ph.D.’s, of scientists, of doctors, and businessmen. Every new PC brought into an Eastern European household is a soul saved from our autocratic past. Every home that logs onto Red Star has a window into the future. And once they see it, they will not let go.” Kirov leaned closer, his eyes sparkling with hope. “In the past, weapons and ignorance kept East and West apart. But the arms race is finished. It is time technology and the quest for knowledge bring us together. The race to advance humankind has begun, and its progress will be measured in computers, not missiles. Over time we will evolve into a single empire, a democratic union of all peoples…” Abruptly, Kirov stopped. He was breathless, and a sheen of perspiration clung to his forehead. His forgotten cigarette had burned down to his fingertips, a two-inch section of ash drooping precariously toward the carpet.

Gavallan found he was breathless, too. Kirov had spoken into his heart. He had addressed all his unsatisfied selves: the conscientious benefactor, the penitent sinner, the advocate of change happiest when striving. He had touched not only his dreams but his desire to dream, which was even more important. In a world scarred with cynicism, Kirov dared to have ideals.

The Russian fixed him with a challenging gaze. “Do you believe, Mr. Gavallan?”

“Yes,” said Gavallan, without hesitation. “I do.”

Kirov said nothing for a few seconds, his black eyes burning into Gavallan. He had the gift of silence, of dignifying thought for thought’s sake. Just then, he noticed the cigarette and rushed to put it out. He smiled, embarrassed, and the evangelist became once more the man. “I’m sorry to say you have put me in a difficult position,” he said. “I have very much enjoyed our chat, but I have a late dinner with the president of one of those big names we Russians so like. He has flown in from New York to see me. I think he will promise me the moon if I ask him.”

Gavallan sighed as he scooted toward the edge of the chair. Pitch over. Business lost. Next. Despite himself, he acknowledged a jab of disappointment and had to sit straighter to keep his shoulders from sagging. He knew he had had no right to count on winning the business, but he truly believed that Black Jet could do the best job for Kirov.

“Don’t let me keep you,” he said. “I’ll be in the office tomorrow if we might answer any questions for you. If you have a free hour, I’d enjoy showing you around the firm.” He rose. “But, Mr. Kirov, I want you to know one thing.”

“Yes?”

“I do believe.”

Kirov rose from the chair, but a moment later sank back down into its cushioned folds, motioning Gavallan to sit. “I will make you proposition, Mr. Gavallan. We are close to finishing the buildout of our central Russian operations. Kiev, Minsk. These are large cities; maybe a hundred thousand subscribers each. Unfortunately, we need fifty million dollars to complete the construction.”

“Fifty million?”

“I am thinking a loan to be repaid from the proceeds of the IPO. It is uncommon?”

“Not at all,” said Gavallan, unable to keep the excitement from his voice. Part of him wanted to jump at the chance, another to take a step back. A fifty-million-dollar loan would exhaust Black Jet’s resources and leave it perilously exposed to the market’s vagaries. It was a tremendous risk. Yet, the fees the deal would bring promised to be tremendous, more than anything Black Jet had ever earned on a single transaction. Add to that the interest on the loan, and of course the prestige… My God, Gavallan said to himself, the prestige alone would do wonders for the company.

He looked at Kirov, doing his best to size him up. The personality contest went both ways. The man was controlling, vain, and at least a little bit of an egomaniac. But his conceit was his strength. How else could he muster the energy, the dedication, the tenacity to build a company like Mercury? Who but the vainest sort of individual would dare talk of aiding his country in such grandiose terms?

Gavallan turned his thoughts to the bigshot flying in from the Big Apple on his big Lear or big Cessna or big Gulfstream. Inside, he smiled. It was a delinquent’s smile, an outsider’s smile, and it reveled in the pique and fury and disbelief that the overconfident executive would feel when he learned that Black Jet had won the two-billion-dollar mandate to bring Mercury Broadband public. Nothing came easier to a Texas farmboy than spitting in the eye of his betters.

Maybe the Russians weren’t the only ones with an inferiority complex.

“Tell you what,” said Gavallan. “Cancel that dinner engagement. Let Black Jet take you public and I’ll write you a check first thing in the morning for fifty million dollars. Prime plus seven to be repaid out of the proceeds of the IPO.” He stuck out his hand.

Konstantin Kirov hesitated, searching Gavallan’s eyes. “I can trust you with my baby? It is not just for me, but for my Russia, too.”

“Yes, you can trust me.”

“Prime plus five and we repay within thirty days.”

“No,” said Gavallan, tasting the deal, wanting it more than anything, but never so much as to make a poor agreement. “It has to come from the proceeds.”

Giving a fateful shrug, Kirov rose laboriously from his chair and grasped Gavallan’s hand. “Yes, we shall work together. You are a believer. I see it in your eyes.” He laughed richly. “I tell you something. Between us, I never like BMW anyway. But you must promise to call me Konstantin. In Russia, business is family.”

Gavallan stood, and though the handshake was awkward and formal, he found himself laughing with his new client, new friend, and new family member, Konstantin Romanovich Kirov.