Late on a Friday in March, Chase Manhattan banker Donald H. McCree placed a call to Milan that would give him his first good night's sleep in nearly three months.
"Roberto, you have your money," he said.
"Thank you very much. That's fantastic," said the voice at the other end of the line.
That night, Mr. McCree joined more than three dozen other bankers from Italy, Great Britain, and the United States to share a toast in honor of their part in putting together a $23.8 billion syndication to back Olivetti SpA's hostile bid for Telecom Italia SpA.
The voice in Milan was Roberto Colannino, Olivetti's chief executive officer. He celebrated the financing by calling a press conference. Not only did he have the money to back his takeover attempt, but, he told reporters, smiling, that the loan "was significantly oversubscribed."
That day marked the culmination of three months of work for the four banks responsible for rounding up commitments for the deal. When they had first announced the financing in February, almost no one thought it could be done.
Hit by a wave of uncertainty that resulted from the Russian bond default, the European loan market was struggling to absorb even the smallest credits.
Lenders in Europe were also particularly skittish about the idea of financing highly leveraged mergers.
For the Olivetti deal, bankers used a combination of methods-paying lenders with handsome fees and getting commitments by meeting directly with bank CEOs and board members.
"At the end of the day, this is good for the European loan market and the M&A market," Mr. McCree said.
No Loan, No Deal
Along with Chase, the lead banks on the Olivetti loan were Donaldson, Lufkin & Jenrette, Lehman Brothers, and Italy's Mediobanca. Each brought specific and very necessary skills to the table.
By today's end, the company's bid may be won or lost, as Olivetti uses the massive loan commitments to back its purchase of Telecom Italia shares. "Without the loan there would be no deal," said DLJ's Harold Philipps.
And without Olivetti, a company that transformed itself from a cost- laden industrial dinosaur into an efficient, lean acquirer, there would be no loan.
After a 70-year run of building sleek, stylish typewriters, Olivetti became cash-strapped at the end of the 1970s and sought a new leader to bring the firm back into the black.
Carlo De Benedetti, Olivetti's current "honorary chairman" became chief executive in 1983. He righted the company and resigned in 1996. His successor was Mr. Colaninno.
Mr. Colaninno turned the company into an aggressor. One of Italy's leading entrepreneurs, he founded auto-part maker Sogefi in 1981, when he was 38.
Mr. Colaninno took Olivetti into a series of mergers and international partnerships with companies such as Mannesmann of Germany and Wang Global, based in the U.S.
In late 1998, after a meeting with DLJ and Lehman bankers, Mr. Colaninno unveiled his plans to make a hostile run at Telecom Italia, a company five times the size of Olivetti. The news sent tremors throughout Europe.
Lehman Brothers' Peter Combe recalled that when Olivetti and its M&A advisers approached other bankers about leading a syndication that could top $20 billion, the loan market was reeling.
Because of the Russian bond crisis, investors were selling, not buying, syndicated loans in the secondary market. And even before demand dried up, a number of small syndications became stuck in the market without enough investor support.
"These loans were not large or badly structured," Mr. Combe said. "But people found that in last year's environment they were very hard to syndicate. Banks were being quite discriminating ... There was no general syndication market."
Mr. McCree remembered it the same way. "There was a lot of uncertainty as we walked into the year."
The Cast of Characters
In early January, loan professionals from New York, Rome, Milan, and London were huddling to talk about how much they could raise. Representing Lehman were Julian Entwisle, head of European leveraged finance, based in London, and Chris Ryan, head of sales and trading in New York.
DLJ sent Mr. Philipps and Stephen Hickey from New York. Mediobanca was represented by Massimo Di Carlo.
Working with bond underwriters, the group decided the deal would be roughly half bonds, half loans. Conservative estimates pegged the loan at $15 billion to $20 billion. Others suggested a loan as much as $30 billion- nearly three times the size of the largest loan to date.
"Why not more bonds and less bank debt?" Lehman's Mr. Combe asked rhetorically. "Because it was already the largest bond deal in history."
Soon after Olivetti launched its tender offer April 30, the bond deal was, in fact, announced at $20 billion, though that figure is likely to be reduced.
Before the meetings began, the team began to sense the enormity of its task. Mr. Colannino had a long relationship with Chase in Geneva, and he thought the U.S. bank would lend clout, bankers said.
Enter Mr. McCree, a boyish-looking 37-year-old who had joined Chemical Bank in New York in 1983. After five years in the bank's leveraged finance group, he moved to London in 1995 to head up Chase's lending in Europe.
Mr. McCree said he noticed several problems in syndicating a loan so large. First, it would be all new money. No refinancing would be involved, so existing lenders could be asked to increase their shares. Secondly, the deal would not be a credit line. In other words, banks would actually have to give Olivetti cash.
"We knew $22.5 billion hadn't been raised before," Mr. McCree said. "What went through my mind was 'Can you really raise this money?'"
Finally, and most challenging, Mr. McCree said, syndicating a deal this size had never been tried in Europe, much less to finance a hostile takeover. How many banks would want to risk alienating Telecom Italia, Italy's version of AT&T, by committing to finance a hostile bidder?
"Those things, put together, (created) a pretty substantial challenge," Mr. McCree said.
Locked in a Room
By mid-January the size of the loan had been set at $23.8 billion, and bankers began to plan how exactly they would sell it. Ideas were kicked around in trans-Atlantic conference calls. Small groups of bankers met in London and less frequently in New York. Eventually, on Feb. 12, bankers were called to Lehman's offices in Milan to put together a deal.
"How do you get four banks to come up with one deal?" said DLJ's Mr. Hickey. "You lock them in a room and don't let them out until they've got a loan."
Those who attended the meeting recalled at least two marathon sessions that weekend which were halted only by the break of dawn and sheer exhaustion.
The team began by drawing up a list of the world's major banks and crossing off those that might not be able to participate, because of a conflict of interest or a relationship with Telecom Italia.
Italian banks and other firms with advisory roles to Telecom Italia, such as Citigroup Inc., Credit Suisse, and J.P. Morgan & Co., were immediately nixed.
The lead bankers agreed to put up a combined $10 billion-more than one- third of the whole loan. But bankers said they made those commitments in hopes that the syndication would be successful enough to reduce the amounts substantially.
Structure was not a problem. Maturity was set at three years, along with a $1 billion commitment level. Pricing was set at the London interbank offered rate plus 225 basis points-unusually high for an investment-grade company.
The rich yield worked to offset two fears. First, Olivetti was, in fact, going deeply into debt to bid for Telecom Italia. More importantly, European banks would need to be paid to forget about wounding their relationships with Telecom Italia.
For that same reason, the bankers did not demand exclusivity agreements, which would have kept the participating banks from committing to the other side in the takeover battle.
There was also wide agreement on what would turn out to be arguably the most successful component of the deal: "drop dead" fees. Such fees, rarely used except for hard-sell, jumbo syndications, would be paid to participating banks once their share in the loan had been set.
The fees are so-called because the lenders get paid even if the deal "drops dead."
The group agreed that Olivetti should pay a $2.5 million fee for each $1 billion commitment and an additional amount, not to exceed $3 million, when the final allotments were made.
"We tried to build in remedies to what we saw as stumbling blocks in the transaction," Mr. McCree said. "There could be no doubt that it was attractive to banks."
Getting to Yes
Chase had used such fees on several deals in the early 1990s. In the Olivetti syndication, the idea to offer them may have come from Greg Nelson, who heads up loan sales and trading for Chase in New York, Mr. McCree said.
But DLJ's Mr. Hickey said he and Mr. Ryan of Lehman also discussed the payments, on a flight to Milan.
"I said, 'I'll get you a drink while you map out that fee structure,'" Mr. Hickey said. "The fees were a given."
There was some conflict over how the deal would be syndicated. Bankers said Mr. McCree stood up at a meeting and said Chase should run the deal, primarily from its huge syndications desk in London.
Said one banker, "there was absolutely no way that was going to happen."
Lehman and DLJ bankers argued that requests for $1 billion commitments should go directly to bank chairmen and CEOs, not executives lower down the ladder.
Chase's bankers were not viewed as having deep enough relationships with senior managers to make such pitches. The investment bankers who had worked those executives for their own banking deals thought they had a better shot.
In a sort of compromise, the group agreed that all of the arrangers would participate in the meetings with senior bank executives. DLJ and Lehman M&A advisers would make the initial calls.
Mediobanca would press Italian banks. Chase in London would act as the home office for the syndication, tallying commitments and reporting to other arrangers at the end of the day.
At the close of the meeting, the bankers presented their package to Olivetti.
Recalled Mr. McCree, "When you think about the amounts that banks would be asked to hold, they were going to be huge and we thought the banks would do that as long as the conditions were right.
"Olivetti obviously needed to believe that also."
A Gut Feeling
Despite some concern about the repayment schedule, Olivetti swallowed hard and accepted the fees, which would cost it more than $100 million.
Recalls one banker, "They said, 'OK, we understand, we're willing.' The main thing they told us was 'Make sure it's there.'"
By Feb. 15, after the longest and most grueling session, the lead lenders had their orders.
Despite all the intercontinental travel and heavy labor that went into the deal, Olivetti's plan to go after Telecom Italia was still largely a secret.
But on Feb. 20 the news broke. Bankers remember a barrage of criticism coming when Olivetti announced its intentions.
No one, it seemed, thought a loan of that size could be raised.
"The initial reaction was 'the money can never be raised. There's just not enough liquidity in the European loan market to do a deal like this," Mr. McCree said.
Meanwhile, the loan market had suddenly become awash in new deals that threatened to tie up capacity. Barclays Bank PLC was launching a $10.2 billion syndication effort for Vodafone Group PLC and was in the market with a $2.75 billion credit for National Grid Group PLC.
Still, Mr. McCree said, the lead banks were confident. "The concept of $25 billion being raised in the bank loan market was one that we were fundamentally comfortable with," he said. "The question was would it migrate to support Olivetti."
Not everyone, however, was skeptical.
Fergus P. Elder, vice president of loan syndication for J.P. Morgan in London and one of several bankers responsible for putting together a defense fund for Telecom Italia, said, "I was sitting in Paris working on another deal when (someone called and asked) 'What's the biggest deal you could do for TI?' and I said, '$25 billion to $30 billion.'
"They said, 'How do you work that out?' and I said 'on the back of a fag packet and my tummy telling me.'"
You've Got a Deal
By the start of March, Olivetti's bankers and Telecom Italia's were hurriedly lining up financing. Mr. Elder at Morgan worked with bankers at Credit Suisse First Boston and Citigroup to win about $9 billion in loan commitments for the defense fund.
Meanwhile, the Olivetti arrangers began a two-week effort to woo banks on two continents. The group had come up with a roughly two-hour presentation on the deal. With a March 26 deadline in sight, many of the bankers remember catching most of their sleep on planes to Rome, Frankfurt, Paris, New York, and London.
"It was exhausting," Mr. McCree said.
Olivetti's Mr. Colannino and Mr. De Benedetti were along for the ride as were the firm's M&A advisers. Their role was to answer questions about the takeover itself: How would regulatory issues be handled? How long could the battle last?
The meetings of the bank CEOs and the Olivetti team were also intended to offset any criticism of the deal. A report in a major European financial paper called the bid "audacious." And some senior bankers were initially reluctant to meet with arrangers because they felt the bid was too leveraged.
"We were worried about what we were reading," Mr. McCree said.
Growing criticism became a chief concern of John M. Anderson, corporate marketing and communications executive for Chase in London. Mr. Anderson recalled trying to urge Mr. McCree and Olivetti to be more vocal about the viability of the deal.
"I kept calling down and saying we've got do something and (Mr. McCree would reply) 'Patience, patience.'"
Mr. McCree said he now believes the meetings with the bank CEOs were crucial for the loan's success. The reception, he said, changed the momentum for the bank group.
"We would walk out of these meetings ... and we'd a get a call saying, "Hey, we thought that went great and we're going to do this deal, guys.'"
Where Greed Counts for Something
During the final week, Chase bankers in London put a call out to other arrangers in the group. The loan had surpassed $20 billion in commitments and that was even before deadline day, when most banks usually sign commitment letters.
"It felt like it was building," recalled Mr. McCree. "But there was a real ooh-ah when we went over $20 billion."
On deadline day, the arrangers were overwhelmed. Keith Barnish, from Bank of America Corp. in New York had called to offer $3 billion. In the end, the company committed $2 billion.
Tim Ritchie, head of loan syndication for Barclays Bank PLC in London, also offered $3 billion. A dozen more banks offered $1 billion or $2 billion commitments. A handful of banks called to ask for more time.
Commitments for more than $1 billion put the lead group in something of a quandary. Lehman, DLJ, Chase, and Mediobanca didn't want those that only contributed $1 billion to feel slighted by banks that came up with more.
An even better surprise was Mediobanca's success in lining up the Italian banks. No less than five made commitments.
"Massimo is the man," bellowed one smiling investment banker. "Everyone brought something to the table."
All told, when Mr. McCree made his call to Mr. Colannino, the group had more than $30 billion in commitments. The final tally was $33.6 billion, Chase said.
As a result, Chase, Lehman, and DLJ reduced their own commitments by about one-third of their initial $3 billion pledge. Mediobanca had only committed $1 billion at the outset.
As word of the amount raised began to leak out, market participants were taken aback.
"We had no idea," said Morgan's Mr. Elder. "Chase did the right thing. The fees were just so attractive."
But there was grumbling in the loan market about the drop dead fees. Said one banker, "You can bet there's a lot of banks that hope the loan doesn't fund. They wanted the quick money."
Bankers in the group scoff at the idea that participants committed solely to get the up-front payoff, but they acknowledge that the fees were part of a winning package: "We're under no delusions," Mr. McCree said.
Added Barclays' Mr. Ritchie, "Greed does count for something," but, he added, "I don't think that's typically how bankers operate. You don't go to the credit committee and sit there and say 'Well, it probably won't go through so let's give a couple billion dollars.'"
Meanwhile, Barclays was successful with its own syndications for Vodafone and National Grid. Telecom Italia's bankers were able to raise a $9 billion war chest to fend off the takeover.
Olivetti announced it would pay $600 million in costs for arranging its takeover financing. Armed with the bank loan, the company filed a tender offer for Telecom Italia shares on April 30.
The bankers who crafted the loan are now off to new deals. Should the bid be successful, a second level syndication could occur allowing the big banks to sell off their exposures.
Mr. McCree is now watching the takeover battle from the sidelines, but he remembered that Friday in March as something special.
"That was a good day," he said. "And it was a first in a series of good days. It was a landmark deal for the loan market."
