( C a p i t a lM o r t g a g en s u r a n c e o r p o r a t i o nA ) I C
Frank Randall hung up the telephone.leanedacrosshis desk, a¡d fixed a cold slafe ai Jim Dolan. OK, Jir¡. Theyve ¡greed a neeridg. ve gorthee daysto resolve thing. ro We Lhis The quefionis. rh¡I ¡Fpro¡ch should take? we How do we getthe¡rLo ¡c.ept oü ottcr? Randall, presidentof Crpital Mo¡tgage lnsunnce Coryoration(CMI). had called Dolan,his senlorvice!ürsidentmd treasürcr, his oltice Io help hn¡ plnu theirs¡ategy into lbrcor¡pleting the ¿cquisilion Co.poüte T.a¡sfef SeNices(CTS).Thetwo menhad beof gu¡ i¡fomr¡l discustions üith the pdncip¡l stockholders olthe small enployeerelocation sefr'ices companysomefoul.monthseadief.Now, in lateMiy 1979,they weredeveloping the lerms ofa formal purchaseoffer anciplotting theif saaiegy lbf the fi¡al negotiations. The acqüisition,ifconsummated,woulclbe the first in CMI s history.FulthemoLe, it rep¡esented significantdepa.türefrom the company\ pr€sentblrsiness. ¿ Randalland Dohn knew that the ácquisitioncoüld havemaFf implic¡tions, bothfor themseLves and for the conpary they had rcviialized overthe pas¡sevefalyea$. JimDola¡ ignoredFrankRandall\ iúe¡se look and gazedout the eighth-tloorwindow overlookingPlrilAdeLphia's Inde!endenceSqLr¡re. question, We Thr¡fsnotaneasy Frank. knowtlley'Iestill looki¡g for a lor morcmotrey thir wete thi¡kingabour. thal.rhei¡urpartne¡s hLrve theirowndiir¡enccs,r¡d we Bu!bcyond wh¡t lhey'recxpe.(i¡g S0 lguesswe'dhettef thiso¡re need thinkth¡oughjust to t{lk pLetty through c¡Leillly.
Company and IndustryBackground
CMI was a wholly ownedsubsidiury Nofthwest of EquipnentCorporation, lnajor Á freight tfansportef and lessofof raiLcafs, conrm€rciAl aircrntt,and othef indüsüiAl parcnt equipment. Northwes! acquired h¡d CMI i0 I 978,tv o yea$ Aftef CMI's origin¡L company, investment coryoration, goneintoChapref I bankup¡cy had ao management I proceedings. h¡d been guafanly policies resCMI crcaled sell mortg4ge to insurance 10 pfovides identi¡l mortgage lenders throughou! UnitedStates. lhe Mo¡tgage insurance with protection b,rnks. vtvnrgs loans, and rnoftgrige bankers. oüef mortgAge and lendefs against financial losses whenhomeowners default theirmofgagelo¿ns. on normállyprotec¡ theirproperty loaninvestments offe¡ing by Lendinginstitutions lo¡ns oi ouly 70 pcrcenl(o 80 percentof the appraised valueof lhe property;the
S¿r,¿¿: CapitilModg¡gel|srr.nce CoeofrtionlAl. H¡rvardBusiness Scho.lCase9,180 057. CopyrightOl980 thePresidenr Fellows Hlrv¡rd Coll¿ge. by !trd o¡ cithe. Thk c¡sewuspr€ptrfed Janres w$e ¡s. b¡sis¡¡r cl¡$ d¡cüssioo by P úrh¿rrhrno illNúatÉ eilictiveo¡ inetective hxndlitrg ol¡n adminúir!¡ire sl'Lrlño R¿printed byp.ñnsiod ordie Hiv¡.d BnsinesSchooL. cffe wrirten 19t9.For0 vúery of re!sons. 0orpoJsibL¿ úpdrtetheIr¡rcidl This i¡ iLis t. infor¡r¡rion th¿lnct pxre'tri¡ thec8e. Wecontiune useil in thisbo!k beuu!¡e or to o'dt tethins v¡lue¡¡ dic cxse. spite.t ¡tsag.. ir
s rhe 20 remainlDg to 30 pefcertconsri¡utes homeownef do$¡ pay¡nert.Howe!ef. lbr it possible lende$ Io olTerso caliedhigh'raLlo nd(es ]o¡n insürance nrcftgage are lligh-fa¡io Lo¡'rs peft1]nred va1ue. s lorns of up !o 95 perce¡lofa hoLne appr¡ised loan: although¡he policv protectsrhe lerdef. the only whenthe ]e¡der inslrfeslhe premiums paid by thebo¡fowef,dsrn additio¡ to nlo¡thiy prilcifnl r¡ld inlcresr ¡re i¡s atlraclion ofmortgage fanceis rh¡t it makes The principxl !ulchasingn hone do\!n r¡ ch easierto pfoduce.r5 pe¡cen¡ lt possible nnny rnoreindivid(.rls. is fof rcq ired tfrcLilionaLly paymenr to srle ! the20 to 30 perce¡lt tLra¡ iLldtrsrfv instrmDcc moúg.rge withi¡ theprivate ofsuccess CMI hrd a mixedrccord the off pfesident, gotten organization to had s the FrrnkRandrLl, compnny nrstandonlt howsh.r¡e l972 Bv 1919, bv I beginning, alt^ining l'1.8peiient ¡rarkeL xn rggrcssiae hrd revenucs gfo'vnlion lxrd evef,thatsharc l¡llen tojust ovcf 10pe.cc¡teve¡thottgLl the l9T9 Rardnll¡ttributed lossot'ma¡ke! $l8millionin lgT2LoovefS30milllonin ol CNll's origi¡ pafent. by crcate.l the bankup¡cv sharcplinarily to the diülcuLties acquledCIvfIin Jrnrafv quilerclicvedwhenNoÍhlvesiEqrLilment Thushe h l been and p¡ovided CNIIwith a levelol' ¡nanag€ment fin¡ncialsuppo*it hxd Nofthwest 1978. had NoÍhwcsl s colpof¡lc management madeit Frrthefmole. neverbctbreenjoyerl. la€er,diversitled CMI intoa much to tlrrt cleafrc Fr rk Randnll he wasexpec¡ed buiLd compilny. finxncial seNices !vith Fr¡nk Randxll\ wefe highly colrsistent Norhwesl s growth expecutiorls in The stabilit] cfe¡t€d by the ¿rcquisition, combiralionwith the own ambirions. lbr lende$. madeit possible wilh modgage of increasing $oLidi(y CMI's ¡epulalion of acqaisitions his own nlorcandmorc towa|dexternal Rlndall !o turn his atten¡ion several acqui$irion hel!, had investigated R¿rflrl¡ll, Jim Dolarr's wrlh DrfiDg L9?3 CMI's of with the hoPe broadcning i¡dustries, insurance in rclated oppor'runiLies llre inves¡i8ltions, two menhM comelo be_ [nsuccessful AfteLseverAl linancirlb¿lse, less was ¡nd Pef lievetbattheirknowledge co petence fbcuse.l on insurance se th¡n Thescexperien'es Andrclatedfinnncialtf¿urslctions real wason resklenti¡1 estate i¡ h¡d I€d to ¿ recogrilion!hat, in Fm¡k Randnll'swol.ds"'we are ¡ residcnti¡lf¿al conrPany.services est¡tefinanci¡1
RealEstateIndustry The Residential brokefs, that experience feai€s|ute andJim Dol¡n kne$'fro$ personal F¡¡nk Randdll lt€s usudlyh¡veclose lmnsaclions. playanobvio s andimpof!¡ntrol€in proPedy who srvingsand loolrs Wher nor¡gngeiirnrlsarepleütifirl,bfol(e$ with localbanksand Whcn flnds ¡re instittL¡ions lenLling prospective homeblry€m parricular to ofiensteer bfotheil fnvorile refene.lbv borowers f¡vor prospective wouidthen the sc^rce. lcnders x ¡e¿ltoncouldhave n]eanlthat inlbrmalrelndonships that ke$. Rand¿llbelieved these and thlrsoD a mofgage insurance loan decision sigrificantimpncton the moúgrg0 a directed smaliportionof its marketing CNIIhrd lor manyyears For thisreason, educ'ttio¡aL of hadconsisted oftering activities estate broke$.CNII'S fe¿tl efio¡rtoward poteotial liomebuversThe co¡rp¿rrv prop€rty a¡d deveLopeff, prog|ansfor realtors,
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pfog¡a¡ns, o*eredthem in the interest br¡ ol ¡o dedveLl dnecrÉ\'en es fiom ¡hese ofinforúhgboth üralto$andhomebuy stimuLaring !:tlesand.morep¡niclrlarly, home witlr ¡ relati'ely nakesit possible puch¡se r honre to e.sof how morrgage insuf¡nce broken conkl be powerfulalliesin encoufaging Becaus¿ ftlt that real estate he developmentsthereal i¡ insurance, Randali becntracking h.Ld lende$to usemortgáge ,r collection local. of His¡orically highl) tuag¡ented estale in.lüst¡yfor many)rexrs. to the indepe¡de¡t enhepreneurs, ind slq/ in 1979appeared be on theveigeof a r¡ajor yearsm¡ny ofrhe sN¿tllef brolcrs and for restrLrcturing consolidation. thepastseveral in and tr¡nchise organizatious m efi¡rt io gaina bfandimage hadbeenjoiri¡gnarionxl ro1.qrrrcirnfro.FJ lJgern< ¡. I lle' .. il.'. ,4 rr wc.e to several largenationalcol?orrtioDs beginning More signiiicantly. 1979, in Thc mostaggressive of p¡omineni a-cencies major ufba¡ ¡reas. in acquire real eslate secudties the these appeared beMerjll LynchandCornpany, well knownWrtlStrceL to from seler¿l tnding iirnr. Mcmll Lynch\ interef in real estatebrokerssielnmed on and perhaps werether¡pidly dsingprices pfope¡ty homes. sourcesi mostimportant s¿lcs slightlyover6 peLrentof'the pdce;¡.,f/¡rl, magReal(o¡s co¡lmissions avemged ¿Lzine estimrtedthat real erate br¡kers had beer iüvolvedin home s es totaling commissio¡s excess $11 billion (in in of approxiüat€ly 190biliion in 1978,nettirlg $ transactlo¡N 1978werc ill commissions nll securities on comDilfisor1, slockbrckcrs' growing10to 20 lerccntpe¡year, values com' Withproperty estimated $3.7billion).r xt of homenened ooly $1,800, wouldonly getlarget wherc6 percent a S30.000 r¡issions jn of saleresulted a comnissionwell in excess $5,000-fo¡ 6 percen! a $90,000 of basicallt same the wofk. lrmsactions wouldcon' The¡ewercalsoclerf signsth¿tthevolumeof rcalest¿r|e to slightly, moves apperred bedeclining io increase. Although volultaryintercity tinue wefe still rising.One of Me ill Lynch'se¿rliest trAnsfers employees of cor'pomte con]an rclocation markel hadbeento ¿tcquire emPloyee moves lowad thercalestat€ with col?oftLe clients, MeüilL prny scveral years on a conlract basis earlierWofin
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Pro Lncome R€localion Company Forma Employee EXHIBIT 2 | Hypoihetcal Stalemeni homes. vo¡ume 2,000 of 1. Ar nualp! rchase pe¡odof 120days. nveniorytlrrnsoverlhreetim€sannÚaly,iof holding 2. Assume average al an average o1667 !nts in nveniory anypoint¡¡trie home ueol $75,000. va 3. Average prop€rtyvaLe red Addnonalrequ average pefcentof 50 4. Exislngmo¡tgaqes lromes o¡ perceñl d€br. lo¡g_term equiiy,60 capllalwllbe40 percent puÉ 2 of clie.tswilaverage 75 percenl va!€ ol properties 5. Feei¡óoñe lromcoaoral€ (based historical ndustry data). o¡ cha€ed 1 of wi (ma*e1ngsaLes, olfce admi¡istralion) I avoGg6 percent 6. Operating eipénses deblseú ce, purchased lcoslsassoc (á áledwithp!rcüses, inclüdi¡g value próperties ol ba.klo corporate enls). c arebilLed Tolava !e of purchases (2,000 is a1$75,000) u¡ ¡nvenlory ue va Average Exslng rnortgag€s Eqully expenses 1% at Op€rallng
lurnedinlo with MetroNefsThird-PatyEquityCommitlee Th€Müch I meeting an exploration how CMI andMetroNetmighthelp e¡clrotherby stinuhting both of Fraük hoursof disctLssion, loans.Aiier severÁl moftgiLge homesalesand high"ratio th€ company handle corto proposed lhat specificauy CMI build an oPerating Rand¿ll jointly with theMe[oNetbrokers. a quidproqlro,Raüdall As poftLte relocation incss bus home to CMI nofgage irs0rance bothpolefltial colrldmarirct ihat suggested thebroke|s and institLrtions. buyers l€nding thev Fimlly, how€vet' to response thisideawasinitiallyskeprical TlÉcommiltee's ofdirectors board at a agreed consider morelbrmalproposal a laterd¡ie MelroNeCs to lhe couldreview EquityCommitlee to wasschedülerl meelon April loi theThird-Pady board the101h. on prcsent to therulL it proposal Apdl9 and.if lheyapproved, on talkingwith Elliott brokeu!. Rand¡llandilol¿n began As the connitteemeeling lnc Transfer SeNices, of Buü andTho¡lasWi¡de¡,lwo of thelour owners Coryor.tte was business a ofCTS,hisprimary (CTS). the Burrhadbeen pdncip¡llblrnder Though 1n th¿t Chicxgo he operated paftnerfin¡ large realestate brokerage in nofthsubürban who was¡lso a CTSsrockholder' wiih Willi¿mLehman. shi¡
The four men snl b.LcLdow¡ ¿uthc nreliLlg table, ard Rardall meniioned thxt his pd ÍL¿rl¡ inteLestwas to leam morc about how ¿n enrployee relocadon businessoperated.Bi,rrf ofi¡red to seDd him copiesofconracrs wilh corpof¡teclie¡is, samplefinancialstatemerts. the ¡indso on Al orrepoint durin-s their discussion Bur meDtioüed possibilityofar ¿c.tLrR¡ndall asl(ed, sonewhatrhetoricaUy. "How do yotr put ¡ v¿lL'c á conpany like on sr¡ion. ^lnrost¡nmediately."Funny you should asL l!'ve tall€.lb an thisl tstr|| rcsponded this inlo andlulled our attomeyaüdh¡ve put together propos¡I.'Buir re¿ched his briefcase se¡ :r tlvo-lage docuneDt. ¡henprcceeded delcribea conrplex of lelnN Lnvoil¡iog He to the capi¡rlizatio¡,line! s.tleo1'ar 80 lerce¡t i¡1tercsl CTS, subjecl!o guarutccs conceming in núre. ofcredit, drtaprocessi¡gsüppoft,tulure distdbu¡ionofprofits and dilidends,aLld expl¡i¡ing ¡hat he neededto teafn¡rofe aboul the Randallbackedoff imnrediately, considefan acquisition.As Jin Dol¿rn natufeofthe business befofe he wotrl.l sc|iorLsly I thinl theywe¡ee{pe.tiig n¡ olllrright then¡!d thercBut ¡ wlisveryhtrrdto ünde¡s¡r¡d (t¡t. nt we ¡ctuallytorl( ilron Dcsides wh¡t drcyrc¡1lyq anted: wasnothi¡rg co!111 i! high oveL million we put the S5 nüúbes theywe¡ethinkingibofl wereridiculoüsly letter.way¡nd told themwe di.ln t w¡nt to eel spe.iii. ü¡ri1afrertheApril I0 tneeli|g. And drnfsrhcwrt we leli ii.
Preprrationfor the April 10 Meeting theiriüveriga¡ions ofdre emRardsllandDolancontinued DL[ingthenexrsix weeks ployee relocatio¡ stfy andstudied incl CTSnrlclr mofecloscly. qucstio¡swns how nNch additionrlnmdgrgeinsur¡nccthe One of thcif m¿rjof Frink RandalL Clvfl'$mrfketing had strtf MetroN*et brokefs üight be ableto gencfale. The suftey srggcsied conduc( telephone e suNeyof ¡bou¡25 LeyMctroNetbrokers. alLhoügh of ¡hemwere i-ew thAt mos{ bfokels were awareof motg¡ge insurance, questioned an in ir. expresscd intefest usingCIMI'S actively Fushing All of those e¿rgef leunrlnoreabou¡ to Clvll insufrnce. madetingpfogr¡nN, weL€ ¡nd By carly lvlay i iairly clear pictureof CTS was emergiügThe comprny had proiit l€v€l.AnnMI ho rre a beenfoundedin I t75 ; it hadb¡rely achieved bfeok-even purchases s¿Llcs rcached levelofalaost 500pfoperties. CTShadworled and and had a bfokefs 35 co$omteclie¡ts.To Windcrw¡s thege¡er and wi¡h abour lvle!.oNer ó5 represenratives clcrical dnd sLrppor sLrpervised a stdfofabout 25 custom¿r m.rnagefihe bfoker who hadworlcd with and MetroNet staff.Convclsations Davi.lOsgood several prclniscs MctroNet ábout developing haLl to with CTSsuggestcd rheconpany made thdt drose organization. dlt¿. however. To ¿ nflionwide,well-financed, frUy co¡rpcLilive üat prcmises werclalgelyurtunlled. Osgood believed CTSs shotageol'€qrity and, potential. c¡pacity, severely had limiredits growth lhefeforc. Lronowing 1978b¡lancesheetthat.in his copy of CTSs December Jim Dola¡ obt.rined.i ha.l nind, confiüned Osgood's fcclings(seeExhlbit 3). The compány a nel wofth ol (Elliot¡ Burf, Williañ Lehnan. ard Threeof the fouf stockholders only $420,000. had an Mich¡el Kupch,rk) invested additional million i¡ rhecompany $l.i ¡1illlon $2 in in shorcterm notesand$700,000 bankloansthattheyhxd pelsorullyguafanteed. b¿nk]o¡ns¡nd million,it alsohadxd.1ilionál WhileCTSowned honesaalLLed $ 13.:l ¡t
(Al nrsuünce Coaorution Ct¡pt¡l longa-ge
EXHIBIT 3 I CTSBaanceSheet lNu. TFANSFER SERVICES, CORPOFATE Unaudlted anceSheet Ba l978 December (s 000) $ 190 13,366 665 '143 $14,364 $ 1,602 4,161 5,670 700 300 211 $12,644
Accounls acqustionle€s¡€cevable and y deposils) Oiher(main escrow
payab lo ba.ks € Notes payab e Asslmed rnortgages Loanfroñ stockhold€rs lromMetroNet Advanco Olh€rlabliies
nat€d débenlur€ d!€ Subofd 1r s t o c k h o d e r ( A P9i8 1 ) Delct
1,300 450 (30) $ 1 43 6 4
hM totaling$9.8million.FuÍtheNore.theconlpany x highlyunmortgages llssumed couldtail olTto the e¿mings stream; FrankRandallbelieved curfentbrsiness cerlain almost nolhingwithinsix months. cotvers¡_ andDolanhada nunb€rof telePhone both Randnll DuringlateMArch ^nd quileopen;the wer€widernnging Theif discussions tiouswith Bür AndWinder. mol€th¡n w¡lling candidTheyseemed as rruck Randall beingunusually CTSparhers On the and sharc every¡hing knewabou! business theirowncompAny. oneocca' they to to Bu|| a.sl€d how muchofCTS Randallwanted buyandhow R¡ndallwouldttel sion. and led Bufr'squestion Randall a owners r€taining minorilyinter€sl. aboutthepr€s€nt Theyplan¡ed buildup lhe to concLucle in f¡ct th€ywmtediull ownership. th¿! DoLa¡ !o ofa to and considerably wan¡ed g:tinall iheben€fits lüger,morc company\equitybase prcfitable ibr CML operatiofl topresent to he the deveLoped lo¡malproposalthat jnt¿nded ln earlyApil. Randall necommitted CMI !o enter EJüibit4) Theproposal bo.lrd ofdirectors MetroNet's Gee equity fbf gotialions acquircCTS andto useCTS as a b¿tse buildinga lhird-pa¡tv lo capability sufficient s ppoftan dnnü¡lhomepurchase to wirh a capitalization company ot asked MetroNetto begina program of at least2.000 nirs.l¡ rctLrn.the proposal loans insu¡ance high-ralio on snppoding oseof CMI'S the actively
¡NunnceCo¡porxti¡¡ Calixl Mongaee lA)
EqüityConnriLlee NewYork nr Randall Dolanmet¿gai¡wilh theThird-Party and favoIably. th€¡ext nnd preview CMI proposal. conmittee The reacted the o¡ April 9 to afterdiscussing rccepted prcpos.tl the oldirectorsunaninoLsly dayMetroNetl bo¿rd il fbr lessihan15minutes. Formal Negotiations lvith Corporate Transfer Services Raildall Dolan and board meeting. ofApril i0,lbllowingtheMetroNet On theaftemoon to with Elliott Bu|| andTomWinderNow thatCMI wasfo ¡aLIycommitted l¡et again getslecilic andtalk numbers to negotialions, andWinderwereeager Burr acquisitio¡ an verycauliouswhen B rr expressed iúercst However Rendall Dolanrcmained aud 'We do¡'t know whatyou'reworlh But we ll in discussing price,Ra¡&ll repljed. a pay you lbr :LL€unent wantto m¿rke lvhy we should moreüan any e¡tertain reasonabLe to agreeme¡t fim tlringsup by your net wof¡h."The meeting endedwith a general Jim on April25. Latef,reilecting lhis session, Dolancommented, 2, comp¡ny JulyL solhe by ús an co¡¡mit!€d roh¡ving oper¿rin8 O r Lelter agreement of l0 Decting thev weknow aiierrheApril boatd th¡I on Howevel, clock\ras ru¡rning us. p¡etty eagcr' But reyvercobvioü$y pressed to bebollght, besides xnd would hafd be not wesuspected high the tvo stockholdersr the ¡t th¡tpoint tine wehod eve¡met other in not were coming theln. f¡om Ílmbers
of Furthe¡ Assessment CTS b' to h:.d Lventnorgh¡heApril l0 m
