The Tyranny of Tradition

(The Chief Executives of Metallica, pictured above with President Obama, Senator John McCain, and other Federal Reserve Officials in a meeting about the legality of their proposed Megadeth buyout)

We all know about the Super Collider debacle: with the collapse of their latest dud product, the executives of Megadeth have been circling the drain for months. Rumors of a top-line overhaul have leaked out of boardroom minutes, but it seemed as though the crisis was contained, at least, to the 42^nd-floor offices of the company’s CEO, CFO, and CDO. Of course, Megadeth has been bleeding capital since at least 2004, but now it looks as though Wall Street is looking to turn the fallen eagle into a veritable vulture’s picnic.

Here’s how the story began: Metallica, one of the largest investment banks on Wall Street and former owners of Megadeth, gradually began buying back Megadeth stock earlier this summer. The bank announced in early July that they would be purchasing up to 20 million Megadeth shares at prices between $52 and $58 a share, supervised by Iva Harrison’s firm, Lazard Freres. In August, they bought even more – 21 million shares – at $53.50 each. Megadeth, which had traded around $52 a share in anticipation of the buyback, immediately fell back into the mid-forties. Metallica had spent more than $1.1 billion buying Megadeth stock, and its price was lower than ever. Private equity analysts began sweating about what this spelled for Megadeth’s future.

“This reeks of classic hostile takeover,” said J. Tonlimson Heartvord, founder of Clearer Markets, a nonpartisan financial accountability firm. “Metallica purchases Megadeth stock en grosse. The stock price then falls, making the company vulnerable to a takeover.”

In a leveraged buyout, a bank, company, or hedge fund takes another, publicly held, company private. The buyout is “leveraged” because the purchaser usually needs a good deal of debt to finance it. Metallica has owned large shares of Megadeth stock since 1984, but according to classified “top-drawer” reports prepared by Metallica’s Mergers & Acquisitions arm, Mergertacquisitionallica, the bank is preparing a complete takeover of Megadeth. One such document obtained by Tyranny of Tradition, “On Megadeth Civil Service Examinations” could be straight out of Orwell:

“This report concludes by stressing the need for “report cards” to furnish conclusions concerning Megadeth staff, expressed in arithmetical terms… This includes personality, which deals with intangible elements the existence of which do not readily admit of proof, but nevertheless, each employee must be rated on personality.”

Another, “Special Report On Megadeth Research & Development” stresses the need to cut back on Megadeth staffing, by “eliminating unnecessary employees,” in order to concentrate capital on R&D projects.

Edvard Robinson and Henry Henderson, formerly of Shearson Lehman, expressed concerns about the vulnerability of Megadeth. “I hope Metallica has a plan for what to do about Megadeth, a company that has been a cash drain for nearly a decade,” said Robinson. “If they can pull off this takeover, we’ll be sure to see some major overhauls of Megadeth personnel, from the top down.”

Henderson speculated about other, far scarier, scenarios. “This could blow up in Metallica’s face – we’re already hearing whispers that other private equity firms, including Kohlberg Kravis Roberts (KKR), The Dillinger Escape Plan (TDEP), The Ocean Collective (TOC), and Lamb of God, LLC (LOG) are taking a serious look at Megadeth.”

KKR defeated Dillinger and Metallica back in 1989 to complete the leveraged buyout of RJR Nabisco, which at the time was the largest buyout in history. Subsequent layoffs, downsizing, and restructuring spelled doom for RJR Reynolds and Nabisco employees across the country, as well as the ruin of towns like Winston-Salem. In that sinking ship of a business deal, the executives, financiers, and lawyers floated to safety on golden-parachute life rafts, taking home millions in bonuses while thousands of employees of both companies lost their jobs.