Morgan Stanley’s takeover of Investa was one of the largest leveraged buyout transactions in Australian history. To help navigate the change, US-based real estate executive Scott MacDonald was flown to Sydney for a week to review the situation. He eventually left five years later, after experiencing one of the most challenging times in his life. Scott shares his story in the new book, Saving Investa, and in the exclusive extract below discusses what he learnt the first few days on the ground.
A week after the meeting in New York, we arrived in Sydney at 6 a.m. Monday after an overnight flight from Los Angeles, California. After a shower and change of clothes at the Westin Hotel, Chris Niehaus and I met Lynn Thurber for a quick meeting before going to Morgan Stanley’s nearby Sydney office. Chris and Lynn are two of the smartest people I have ever met. Chris was a leading banker at Morgan Stanley for over 20 years; he and I have known each other since the 1980s.
Lynn was chairman of LaSalle Investments and was previously its CEO. She was in her 60s like me, had a quick smile, a nice laugh, and a good sense of humor. But once a conversation started, she be-came serious and was very insightful and perceptive. She was the kind of person it is impossible to fool.
The three of us were the team sent by MSREF to troubleshoot what was wrong with Investa, the big Australian office and land-development company that MSREF bought in late 2007.
At Morgan Stanley’s Sydney office, we were ushered into a conference room on the 39th floor of Chifley Tower, with commanding views of Sydney Harbour out to the Heads, where the harbour meets the Pacific Ocean. Australian Navy ships were tied up at Garden Island; colorful green-and-yellow ferries motored about visiting the many wharfs; and sailboats tacked in the fresh breeze. The panoramic view was truly spectacular, but we were there to discuss Investa and could not linger on the amazing sights.
Morgan Stanley has its own waiters, kitchen, and espresso coffee machines, so there would be no shortage of caffeine for us jet-lagged travelers. The three of us drank multiple cups of espresso-style coffee while listening to the local Morgan Stanley team alternately complain about the Investa leadership and claim there were no major problems that could not be resolved with time.
The Morgan Stanley real estate office in Sydney was run by Rei Umekubo, an American of Japanese descent. Sydney was his first assignment running a major office; MSREF was obviously impressed with his work in Japan and his loyalty to the firm, or the company would not have appointed him to run such a remote office. He was clearly a very smart and extremely articulate professional.
Rei was also an enigmatic guy to me. He moved quickly and had a slender build that suggested he was in good physical shape. He had a quick smile and articulated well when he talked, but he kept most things to himself and rarely disclosed information or especially problematic issues. It was as though disclosure of an unsolved issue represented some kind of failure or loss of face. The problems of Investa were buried under paperwork and what had become unachievable budget forecasts and plans. The local office refused to acknowledge what seemed obvious to me − that Investa would not survive following its present course.
Rei was not responsible for making the Investa acquisition decision; he was working in Tokyo at the time. According to Steve Harker, CEO of Morgan Stanley Bank in Australia, everyone involved with the deal had approved moving ahead despite early economic warning signs. They had made a commitment to do the deal and intended to honor that commitment. Subsequently, when conditions deteriorated, some of the employees who left the company claimed they had been unsupportive. When an investment is unsuccessful, everyone blames someone else; when a deal goes well, everyone claims credit. Good deals always have multiple sets of parents; bad deals are orphans. In-vesta was an orphan deal.
Rei and his staff had hired John Thomas as Investa’s CEO after taking control in late 2007. John had never run a big company but had a good track record as chief operating officer at another Australian real estate company. He seemed to enjoy being a big company CEO but struggled with the management burden and high expectations of his Morgan Stanley supervisors.
Chris and I went to see John for lunch after the meeting with Morgan Stanley’s local staff the Monday we arrived in Sydney. John came across as a nice guy, with a distinct New Zealand accent and relaxed demeanor. However, we were surprised by the discussion that ensued. First, he complained about the shortcomings of his senior staff. This was a bad sign.
“I need to fire Michael Cook. He is not very good. He spends most of his time staring at his BlackBerry.” “The CFO just is not very good, and we should replace him, too.”
John’s criticisms of many of his colleagues continued through lunch, although he was complimentary toward a few of his colleagues. He appeared to rely on the acquisition projections that everything would be right in the future.
Rei had told John there would be no more capital available un-der any conditions and discouraged John from raising the issue. Rei seemed to feel solving the problem without asking for money was a badge of honor, and it was critical to uphold the business plan and underwriting projections despite changing market conditions, which had rendered such forecasts unachievable. In my view, the “Investa bus” was about to drive off the cliff, with its drivers clinging to their defective road map, which was written when economic conditions were more favorable.
Later the same day, Chris Niehaus and I had a tour of Investa’s office buildings led by Michael Cook, the same senior executive of whom John was most critical. Cookie, as he was called, was a short guy, a compact bundle of energy, always dressed in a black shirt and colorful tie. He was a nonstop talker, passionate in his beliefs, and fueled by multiple cups of coffee each day. Local coffee shops usually greeted Michael with a smile born of familiarity and the phrase, “The usual?” He also appeared to know everything about the local office market, and seemingly every detail about each building and nearby competitive buildings.
I ascribe to the theory that some people know everything about nothing while others know nothing about everything. Some specialize and some are generalists. Cookie was a specialist; he knew everything about Australian office buildings.
Late that afternoon, I pulled Chris Niehaus aside. “This guy is really impressive. I am thinking that Cookie may be more valuable to this company than the CEO.” Chris replied, “I was thinking the same thing.”
That night and each night thereafter, Lynn, Chris, and I met with senior Investa executives, usually without the CEO. Sometimes we split up; Chris could take John or another executive out to dinner while Lynn and I took out a couple of others. We wanted to talk to all the executives individually or in small groups outside the office to understand their views and insights on problems and opportunities.
What emerged was a picture of a company in deep disarray. Many of the executives were waiting for July when their “stay bonuses” were to be paid. Then they intended to leave. No one had sufficient confidence in private equity ownership or senior management to want to stay.
One of the strangest dinners was with a couple of executives, including the head of development. He told us of the many deals he was working on. I asked about the approval process to spend money since I knew the company was hemorrhaging cash and could not survive at its current cash burn rate. He said he had standing authorization to spend $100,000 per project without telling anyone, and he could divide larger projects into multiple smaller ones as necessary to avoid needing an approval.
I suggested new policies were needed to monitor expenditures and approve new projects. In response, the executive threw a temper tantrum and walked out. It was truly a bizarre scene but reflected the silos in which departments operated, and the lack of accountability and financial controls.
Wednesday of that week, the department heads presented their business plans to the three of us and the local Morgan Stanley property team. Each presentation showed a hockey-stick growth profile – no growth now but phenomenal growth coming soon and resulting in a successful accomplishment of the approved business plan. The plans were not credible and clearly not based on market conditions or recent company experience.
Finally, exasperated, I asked one of the department heads, “Did you define the forecasts and results, or were you given the outcomes by senior management and told to put together a presentation showing how you would reach the targets?”
The CEO and the local MS guys were sitting with us and turned to hear the answer. He replied, “We were given the results and told to form a presentation around the required answers.”
“Do you believe these results are possible?” I asked. “No,” he replied candidly.
The forecasts reflected wishful thinking and were unrelated to actual business conditions. Hope is never a legitimate business plan. Investa’s problems just increased geometrically. There was no realistic possibility of meeting forecasts, and the company was running out of money.
Thursday night, Chris, Lynn, and I sat in the Westin bar after dinner. It was designed to be comfortable with a living-room look featuring sofas and plush chairs in an upscale and overpriced set-ting. However, none of us was feeling very comfortable. The waitress hovered close by, plying us with salted nuts and snacks in undersized bowls. Chris and I had a beer while Lynn sipped a glass of Australian wine. Chris and Lynn were flying back to the U.S. the next day; I was scheduled to fly back Saturday.
Chris started the conversation. “The CEO plans to resign to-morrow morning. The question is what happens next. If we leave without a CEO, this place will unravel even faster. Our only hope is for one of us to stay and take on the job. I cannot because of my other MS responsibilities.”
Lynn wasted no time in replying that she was chairman of La-Salle and could not take on another job, nor was she willing to move to Australia with family obligations in the U.S. They both looked at me.
“Hey guys, I am the wrong candidate for this one. I am a shopping-center guy; what do I know about office buildings? And as far as local familiarity, this is my first trip to Australia and I have only been here four days.”
Chris responded, “Scott, we need you to do to this. Our real estate platform is under severe pressure; the investors know you and will trust us to fix this if you are involved. We have had a long history together; we really need you.”
Morgan Stanley had been good to me through the years, and the company had benefitted from the relationship as well. Much of my family’s net wealth came from MS assignments, especially the Center America deal in Houston several years earlier.
“Okay, Chris,” I replied. “But I am only committing to six months; you need to find a permanent CEO during this time. And I need to be chairman and CEO; Rei is a nice guy, but I cannot report to someone who is in denial or is defensive about the investment.”
This is an edited extract from Scott MacDonald’s new book, Saving Investa: How an ex-factory worker helped save one of Australia’s iconic companies (XOUM Publishing $29.99), now available at all good bookstores and online at Booktopia.
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