Free Threshold Resistance by A. Alfred Taubman Page A

guaranteed by the pledging of Irvine Ranch ground leases.
    Determining that the Irvine Company on a present-value basis was worth at least $50 per share, we upped our offer to $31.81 per share. Charles Allen and I also felt it would be wise to bring in additional partners.
    The first person I called was Max Fisher, my dear friend from Detroit whose financial resources were matched by his extraordinary business judgment. My next calls were to other close friends: Henry Ford II, chairman of the Ford Motor Company, and Howard Marguleas, a nationally known agriculturist with many years of farming experience throughout California. I had developed a close personal relationship with Henry in Detroit, and Max and I had worked with Howard as fellow members of the United Brands board of directors. We also included Milton Petrie and were joined by Joan Irvine Smith. To round out the group, we included Donald Bren, one of the leading land developers in California. Don had constructed thousands of housing units in the state, many of which were developed on the Irvine Ranch. Each of these partners brought much-needed expertise as well as financial resources to our team. We also liked and trusted one another.
    While Cadillac Fairview and our new Taubman-Allen-Irvine team continued the bidding process, we conducted personal meetings with the eight additional banks selected to round out our consortium. In addition to Wells Fargo, we were joined by Chase Manhattan Bank of New York, First National Bank of Boston, the Bank of New York, Security Pacific, Seattle First National, Citibank of New York, Bank of America, and Manufacturers National Bank of Detroit. (I was now a board member of the bank that had provided my $5,000 loan in 1950 to start the Taubman Company.)
    Cadillac Fairview dropped out of the bidding in April 1977, which allowed us to focus exclusively on Mobil. Under court supervision, the bidding continued on a day-to-day basis. Each party was allowed just twenty-four hours to outbid the opposition. All bids were to be cash or its equivalent only. On May 2, Mobil opened with a bid of $36.50 per share.
    My partners had granted me the authority to bid up to $400 million on behalf of the shareholders, who had agreed to capitalize Taubman-Allen-Irvine personally for not less than $100 million. We would borrow the remaining $300 million.
    It is important to note that our analysis of a present-value purchase of $400 million was based on future-value assets in excess of $600 million. Unlike bureaucratic Mobil Oil, we evaluated the Irvine Company as a real estate investment, based on real estate assets. We also recognized the value of the more than $100 million in road and utility infrastructure already in the ground, waiting for development.
    In addition, the hundreds of residential ground leases held by such millionaire homeowners as advertising guru David Ogilvy represented a large asset. The ability to raise these lease payments substantially over time would boost revenue, and we predicted that most residents would opt to purchase the land under their homes rather than pay the escalating rents. My good friends Claude Ballard of Goldman Sachs and Shire Rothbart of the Taubman Company were heavily involved in assessing and ultimately following through on this extraordinary refinancing opportunity.
    In negotiating anything, it is essential that you clearly establish your own objectives and point of view. It also helps to understand just where the other party is coming from. The Irvine Company’s reported corporate earnings were incidental to our basic evaluation model. But they were critical to Mobil. We predicted, based on Irvine Company 1976 year-end earnings of $17.9 million, that themaximum bidding authority granted by Mobil’s board would be approximately nineteen times earnings, or $340 million. We were betting Mobil would quit before reaching that ceiling.
    On May 9 we outbid Mobil by $0.25, bringing our offer to $309.25