In his 30-year corporate career, Louis V. Gerstner Jr. had rarely made an acquisition, and never a hostile one. But I.B.M.'s $3.5 billion purchase of Lotus -- sealed in less than a week earlier this month -- could well go down in history as a textbook example of how to do an unfriendly deal.
"It was like clockwork, they did it just right," said Harvey J. Goldschmid, a takeover expert at Columbia University Law School.
I.B.M.'s feat is even more significant considering that Lotus, as a software developer, posed an additional problem. "If the takeover had become rancorous, I.B.M. ran an enormous risk" of losing software designers who are the key to Lotus's success, Professor Goldschmid said. I.B.M.'s investment could have gone the way of keypunch cards.
Even a lawyer for Lotus had to agree, though he declined to be identified. "It's a by-the-book deal," he said.
I.B.M. surprised itself, too. The computer leviathan, expecting the Lotus Development Corporation to throw some legal firebombs, was prepared to stick out its siege of Lotus for four to six months. "That it happened so fast was shocking to me," said one attorney involved in the deal.
Yesterday, the Government gave its endorsement. By not requesting additional information about the merger by the legal deadline, the Government indicated that it would not challenge the deal on antitrust grounds.
Luck played a role in the deal's quick conclusion. I.B.M. happened to choose a company with a crucial vulnerability: Lotus's corporate bylaws allowed a direct appeal to Lotus shareholders. Also, no opposing bidders surfaced.
But what happened before June 5, the day I.B.M. made its move, undoubtedly helped give Mr. Gerstner an early victory.
His success hinged on war-room-like planning and execution by a six-man team working with the company's investment bankers, lawyers and public relations consultants. It also relied on some clever new twists, like using the Internet to get out I.B.M.'s message. The company paid particular attention to how the deal would be perceived publicly, in the belief that winning the hearts and minds of Lotus employees and reassuring others in the industry would be vital.
"People have shied away from these situations, but I.B.M. has shown that initial hostility by a board and management can be overcome by both a sweet package and sensitive handling of everybody concerned," Professor Goldschmid said.
Mr. Gerstner gave the hostile deal a go-ahead at a team meeting at International Business Machines headquarters in Armonk, N.Y., on the afternoon of Friday, May 12. By then, the deal had been perking for months.
To bolster the company's software group, John M. Thompson, the I.B.M. senior vice president in charge of software, had long been in talks with Lotus's chairman, Jim P. Manzi, about a joint venture or an acquisition. I.B.M. needed Lotus's most successful product, a software program called Notes, to compete with the Microsoft Corporation in network operating systems. Growing impatient, I.B.M. began to consider a takeover bid seriously in late March. The Team The Players Are Assembled
The only real question was how to proceed. Mr. Gerstner called the May 12 meeting for 2 P.M., inviting Mr. Thompson; Jerome B. York, the chief financial officer; David B. Kalis, vice president of communications; Lee A. Dayton, general manager of business development, and Lawrence R. Ricciardi, who had not yet officially begun his job as general counsel. Mr. Ricciardi was a close friend of Mr. Gerstner who had also worked for him at RJR Nabisco and American Express.
Advisers from First Boston and from the law firm Cravath, Swaine & Moore were on hand to answer questions. "Several times, we asked ourselves if and why we had to do it on a hostile basis," according to one person present. "The answer was simple. If we bear-hugged Jim" -- offered a friendly deal -- "he could go to a third party and make a deal to sell the company or, worse, he could encumber Notes, giving certain rights to Notes to a third party. That was the risk, so we went hostile."
The date they picked for D-Day was June 5.
Around April 1, Mr. York and Mr. Dayton had drawn about 10 people from their staffs to study how Lotus products would fit with Big Blue's own software. Through mid-May, this team made several presentations to Mr. Thompson and Mr. York, and periodically to Mr. Gerstner.
In April, I.B.M. also drew bankers and lawyers deeply into the process. Thanks to the company's cash trove, totaling some $10.5 billion, an all-cash bid was no problem. Price was the only issue.
To determine that, the bankers drew on the premiums paid in recent software deals. "We concluded that a premium of 100 percent of the stock price would be required to do the deal," one executive said.
With Lotus's shares trading near $30, I.B.M. settled on $60 a share at first.
But I.B.M. needn't have started so high, and some critics now say that the company overpaid. "The question was whether to lob a low price and get coaxed up, or lob a higher price to send a message to other potential suitors that we were interested in concluding the deal quickly because we wanted to minimize the chance that there would be a pirating of Lotus developers by rivals," said one person familiar with the discussions.
"We wanted to close the deal quickly, and Lou bought that," he said. I.B.M. went with a knockout bid that Lotus could not ignore and rivals -- most likely AT&T and Oracle Systems, I.B.M. believed -- would not top. I.B.M. never set a maximum price, and would have bid higher than the $64 it eventually agreed to pay if a competing bid had materialized. The Attack A Lawsuit Signals 3-Sided Strategy
I.B.M.'s legal strategy also came together quickly. Cravath prepared a suit to rescind Lotus's poison pill, papers outlining the cash offer to shareholders, and papers to launch an appeal to shareholders to replace Lotus directors with I.B.M. nominees.
The three-gun barrage, which was to be triggered by the filing of the lawsuit in Delaware, would thwart most competing bidders, I.B.M. believed.
But I.B.M. worried about its impact on Lotus employees. Still, I.B.M. executives and advisers say they did not sound out Lotus employees, particularly Raymond Ozzie, the developer of Notes, at this point. That would come later, as would I.B.M.'s attempts to ameliorate any anxieties Lotus workers had about a merger.
"We thought that Ray Ozzie's principal interest would be the success of Notes, so our interest and his would be closely aligned," one I.B.M. executive said. "We thought that as long as we didn't do something stupid, he would stay."
Part of the public relations push was designed to make sure that something stupid didn't happen, and that other Lotus employees didn't flee either. Direct communication with a target company's employees is illegal, however. So I.B.M. found another way. Along with the public relations firm Sard Verbinnen & Company, I.B.M.'s staff planned to put information about the bid on the Internet, where anyone, including Lotus employees, could gain access. Another reason for using the Internet: "They told us, 'You have to be cool' to get to them," said a member of the six-man team.
The Internet would also serve to reach Lotus customers and partners with the message that I.B.M. intended to preserve Notes's compatibility with all computer operating systems. The Waiting Scary Rumors, Frayed Nerves
By the Monday after their May 12 decision to proceed, Mr. Gerstner and his team were getting nervous. They were hearing rumors that Lotus was talking with another potential partner. Weighing the need to do everything right against the need for speed, they considered pushing the announcement date up to a day during the week after Memorial Day, May 29.
But the I.B.M. board was a problem. Mr. Gerstner had given directors a summary of his Lotus intentions at their April meeting, but the board had to approve any deal costing more than $100 million. Another meeting was required.
A decision was made to go with the original announcement date, June 5. But over Memorial Day weekend, Mr. Gerstner and Mr. York, who is also a board member, called I.B.M.'s directors to alert them to a board meeting scheduled for May 31. "We got to all but one or two," said an executive familiar with the talks.
On May 31, about half the directors, including Lucio A. Noto, chairman of Mobil, and Charles M. Vest, president of the Massachusetts Institute of Technology, traveled to Manhattan for the deliberations, at I.B.M.'s office building at 590 Madison Avenue. The rest listened in by phone.
Most of the discussion, one director said, centered on the deal's strategic aspects. After talks lasting more than two hours, directors unanimously approved the deal.
Back in Armonk, Mr. Gerstner convened a final team meeting on Friday, June 2, at 4 P.M. They reviewed a detailed chronology for the following Monday -- who would call whom and in what sequence.
Work continued over the weekend. And on Sunday, June 4, a smaller group gathered in mid-afternoon in the conference room off Mr. Gerstner's office in Armonk. For about an hour, Mr. Gerstner -- dressed in khakis and an open-collared blue shirt -- again reviewed the plan for the following day. The Image Public Relations Has Its Day
Then, for some two hours, he endured a mock press conference and analysts meeting, with questions from his public relations staff designed to be worse than the real thing. Among them:
"Why did you take the hostile route?"
"Why are you doing this when I.B.M. has been a complete failure in its previous acquisitions?"
"Isn't the price too high?"
They even asked "What will happen to the Lotus secretaries?" -- a reference to I.B.M.'s recent decision to cut the pay of some top secretaries.
Around 5 o'clock, Mr. Gerstner got up and said, "O.K., I got to go home and study my stuff." Everyone agreed to meet at I.B.M.'s Manhattan office the next day.
Mr. Gerstner and Mr. Ricciardi flew in on the corporate helicopter first, leaving Armonk at 6:30 A.M. Then, the chopper returned to pick up Mr. York and his staff members.
Shortly after 8 A.M., people from I.B.M.'s Delaware law firm, Richards, Layton & Finger, were waiting at the Delaware court building, ready to file the lawsuit challenging Lotus's poison pill as soon as it opened for business. At 8:23, a lawyer called to say the suit had been filed two minutes earlier.
Mr. Gerstner then phoned Mr. Manzi. "We didn't know he would be there," said one person familar with I.B.M.'s plan. "There had been rumors that he was going to Europe, so our backup was to call a director, possibly Richard Braddock."
But Mr. Manzi answered his phone. The call lasted just a few minutes. "He said, 'I'm shocked, and I understand what you're saying, and I'll get back to you,' and then we hung up," this person continued.
Mr. Gerstner then opened the door of his office, where others were waiting. Everyone knew what to do: Calls went to the New York Stock Exchange, where I.B.M. is traded, and to the Nasdaq, where Lotus is traded. Mr. Gerstner called Lewis Platt, chief executive of Hewlett-Packard, a Lotus partner, and Robert Allen, chairman of AT&T, both a Lotus partner and a potential rival bidder.
The press release went out on the wires, announcing a 1:30 press conference. A "blast fax" notified analysts that Mr. Gerstner would hold a conference call for them at 11 A.M.; 259 of them dialed in. Computer industry consultants received word of a noon conference call for them. The Internet Posting Message For All to See
Critically, I.B.M. quickly posted on I.B.M.'s home page on the Internet an announcement of the bid, a letter from Mr. Gerstner to Mr. Manzi, a letter from Mr. Gerstner to I.B.M. employees, and edited versions of Mr. Gerstner's question-and-answer sessions that day.
Shortly thereafter, a former I.B.M. executive helped out. James Cannavino, who once headed the company's personal computer business, called a few former and current Lotus executives he knew. One recipient of a Cannavino call described it as "mainly a temperature-taking exercise," though Mr. Cannavino did ask specifically about the Notes team. He found that key Lotus executives might actually welcome the stability I.B.M. could provide.
By the next day, Mr. Manzi was starting to capitulate. He called Mr. Gerstner at midday, and they met for dinner that night and several times again that week.
On Sunday, June 11, less than a week after the announcement, I.B.M. directors again convened on the phone. Forty-five minutes later, they gave the deal a unanimous "aye." And Mr. Gerstner's baptism in hostile deal-making was over.
Photo: Louis V. Gerstner Jr., left, I.B.M. chairman, and Jim P. Manzi, Lotus chairman, at a news conference June 12. (Associated Press) Chart: "Key Pieces of a Winning Strategy" Five strategic steps I.B.M. took to help its acquisition of Lotus Development fall together easily and quickly. I.B.M. made an all-cash offer without having to resort to outside financing. I.B.M. started the bidding high to scare off potential rivals. I.B.M.'s initial bid was about double Lotus's market price. I.B.M. looked for a weak spot in the target's bylaws and exploited it -- in this case, provisions allowing I.B.M. to appeal directly to Lotus shareholders. I.B.M. reassured worriers with an adept public information campaign, using the Internet to make its message available to Lotus employees and shareholders, and contracting Hewlet-Packard and AT&T, to Lotus partners, to head off potential tensions. I.B.M. broke from the gate quickly, launching the tender offer, the public relations campaign and the legal strategy all at once.