Cruise Ship Wars | A Shot Across the Bow | 3

0:07It's 1986 in Oslo, Norway. Norwegian Cruise Line co-founder Knut Kloster sits at his desk in company headquarters. He's poring over designs for his new cruise ship. He's named it the Phoenix. And it's less of a cruise ship and more of a cruise city. It will far and away be the largest cruise ship ever built, carrying over 5 ,000 passengers and nearly 2 ,000 crew members. He's already drafted mock brochures that boast it's a ship with a skyline. Canute looks up at the sound of knocking on his door. Come in. The door opens and his brother, Einar, walks in. Canute grins. Perfect timing. I just got the new designs for the Phoenix.

0:52Canute flips the designs around so his brother can see them and pounds his index finger on the pages. Can you tell what this is? Canute, I... It's a beach. A real beach on board a cruise ship. Can you believe it? We're going to import sand, have real palm trees, and the quote-unquote ocean is going to be so big that passengers will be able to paddle around in little boats on it. Can you believe it? There will be boats on a boat. How incredible is that? Canute, the board sent me to talk to you. We've decided that the time is right to go public. Carnival's going public. They're going to get an influx of capital, and this is the only way we can keep up.

1:35Yes, I know. We've discussed it several times. Right. So as you know, when a company goes public, investors scrutinize a company's bottom line. Yes, I know the process for a company going public. Why are you talking to me like I'm a six-year-old? Okay, if you understand, then why are you still commissioning new designs for the Phoenix? That's not what investors want to see right now. Because it's the future of cruising. It's a billion-dollar moonshot. That's not keeping an eye on the bottom line. Kloster is visibly taken back. But part of what makes us an attractive company is that we are visionaries.

2:13And the Phoenix will reinvent cruising as we know it. It will be the biggest cruise ship in the world. Yes, but we already own the biggest cruise ship in the world. And it's an albatross around our neck. Seven years ago, Norwegian Cruise Line bought an old ocean liner and converted her into the largest cruise ship in the world. The ship's launch generated millions of dollars in free press, and the company thought the investment was worth it. But it suffered from several mechanical failures, including complete power outages that have left the ship stranded at sea more than once. Any free publicity it earned has been outspent on constant repairs and time out of commission.

2:54Kloster shakes his head. But this will be different. We will be building the ship ourselves, not converting an ocean liner. Everything will be top of the line. Canute, this isn't a debate. We need to cancel the Phoenix. If you cancel the Phoenix, then I'm leaving. Einar stares back at his brother, not saying a word, but his meaning is clear. Kloster's mouth gapes open. He didn't think Einar would actually call his bluff. I founded this company. You can't push me out. No one's pushing you out. We're pushing the Phoenix out. If you want to follow it, that's your folly. You're going to be sorry about this.

3:41Canute rolls up the plans for his dream ship and carefully packs them into a plastic tube and strides out of the office. Einar watches him go. He feels a twinge of guilt that he gave his brother an ultimatum. The Norwegian Cruise Line is competing with Carnival to make a good impression with investors and launch a successful IPO. Einar will do whatever it takes to make sure Norwegian comes out on top. The cruise industry has entered its cutthroat era.

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5:49From Wondery, I'm David Brown, and this is Business Wars.

6:17On our last episode, Ted Arison started Carnival Cruise Lines in 1972 with one rundown ship. The company initially struggled to attract passengers to its ramshackle boat, but with the help of a new marketing executive, Arison found success by advertising Carnival as the fun ship, a wilder, less formal cruising experience than his competitors. By the end of the 1970s, Carnival was regularly turning a profit, and business analysts were warning Royal Caribbean, the industry leader, that Carnival was going to cut into its revenue sooner rather than later. Norwegian Cruise Line was also feeling the heat from Carnival.

6:57But neither Royal Caribbean nor Norwegian Cruise Line is going to let Carnival overtake them without a fight. And in the 1980s, the battle for cruising supremacy moves from the high seas to the boardroom. But there are still plenty of sharks circling. This is Episode 3, A Shot Across the Bough.

7:25It's 1986 in Miami, Florida. Mickey Arison walks into a high-end menswear store. The rush of air conditioning hits the back of his neck, giving him goosebumps. He's not used to his neck being exposed like this. Since he was in his late teens, he's worn his hair shoulder length. But just a few days ago, he got it cut short. He no longer looks like a countercultural rebel. Instead, he looks like a ruthless corporate executive. And now, he needs his clothes to match the image. A sales associate in his late 50s bustles over. He wears a perfectly tailored navy pinstripe suit with a pink satin pocket square that matches his tie.

8:06May I help you, sir? Yeah, I'm looking to buy a suit. The sales associate gives Mickey a once-over, working hard not to show his distaste for Mickey's flamboyant suit with its wide lapels. I'm afraid we may not have many options in your style. We tend to stock more classic looks. That's what we're going for. Recently, one of the bankers underwriting Carnival's IPO pulled Mickey aside after a meeting. The banker spent a long time rambling about how excited everyone was about Carnival going public. The timing was perfect. Cruises are still rising in popularity. And Carnival is selling out most of its sailings, even with more ships than ever.

8:46But then the banker stammered that there was just one concern. Mickey's appearance. With his long hair and funky clothes, Mickey didn't look the part of CEO. And, he said, as silly as it sounds, it's the type of thing investors care about. Mickey fumed. He's carefully cultivated his personal style over the years. But in the end, he cares about the success of the IPO even more. So, he's gotten his hair cut. And now he's going to buy an actual business suit. The sales associate narrows his eyes. All right, what kind of suit do you have in mind? Something that conveys that when I say my company will be worth billions, people will believe it.

9:30Ah, I know just the thing. The sales associate leads Mickey to a rack of black suits with charcoal gray pinstripes. He quickly looks Mickey up and down. Forty regular, I'm guessing. Mickey nods. The salesman grabs a suit from the rack and marches over to a table full of shirts. He picks one up that has blue and white stripes with a white collar and cuffs. And now we just need the perfect power tie. He strides to another table where ties are laid out. He snatches up a dark gray tie with a paisley pattern. Mmm, perfect. He hands the clothes to Mickey and sends him off into a fitting room. A few minutes later, Mickey strides out in the full ensemble.

10:12The sales associate claps his hands together. Once you get that suit tailored, you're going to look like the king of Wall Street. Mickey looks himself up and down and nods. He looks like a corporate titan. He just hopes investors agree. Carnival goes public in July 1987, and it's a smashing success. It raises over$386 million in its first day of trading. The sales from the stock get Carnival out of debt and make the Arisons personally very wealthy. Norwegian cruise line executives watch Carnival's IPO closely. They've been preparing for their own debut over the past year, and their changes have been much more substantial than a new suit.

10:58Knut Kloster's brother, Einar, took over and quickly changed the culture of the company. He moved the company's official headquarters from Norway to Bermuda. Since Bermuda has fewer labor regulations, the move allowed Norwegian to cancel all of the company's existing contracts with workers and draw up new ones at lower pay rates. He took the money saved on the workforce and invested in new ships. Norwegian Cruise Line files for its IPO on October 6, 1987. They plan on holding the official offering the following week. The press release promises that the offering will net the company$125 million.

11:40But it doesn't go the way Einar or the rest of the Norwegian team planned.

11:51It's nearly 10 p.m. in Oslo, Norway, on Monday, October 19, 1987. Einar Kloster pours himself a glass of wine in his kitchen. Tomorrow is Norwegian Cruise Line's IPO. and Einar is nervous. He's not sure if they should go through with it. While the stock market was trading high when Norwegian filed for its IPO two weeks ago, the intervening weeks had been rocky for the exchange with sudden dips in trading. And on Friday, October 16th, Iran had fired missiles at an American tanker ship in the Persian Gulf, causing concern about global instability. All weekend, Einar fretted. He debated canceling the IPO But Norwegian needs this influx of capital if it wants to keep up with Carnival.

12:39And as soon as the exchange opened, six and a half hours ago, there were reports of poor trading. Einar's clock in the hallway chimes. It's 10 p.m., time for the news. He turns on the TV and hopes that the stock market is rallied. He flips the channel to CNN Europe. The anchor looks somberly into the camera. The lead story tonight, the Dow Jones Industrial Average closed a record 508.32 points down. They're calling this the Monday Massacre as panicked sellers made this the worst drop in Wall Street history. Einar stares at the TV. He can't believe this is happening now. He barely has time to process what he's seeing when his phone rings.

13:25It's the chairman of Norwegian Cruise Line's board. Einar, are you seeing this? Uh, yeah. We have to cancel the IPO. Einar closes his eyes. He knows the chair is right, but it feels so unfair. Carnival held its IPO just a few months earlier and is now sitting on a bed of cash. This was Norwegian Cruise Line's chance to catch up. But the world isn't fair, and Einar can't fight against what looks like the start of a global recession. Ted Arison is a lucky bastard. That he is. Einar hangs up, pours himself another glass of wine, and slumps down in his seat to wallow. While the October 1987 stock market crash is a setback for a Norwegian cruise line, it's a boon for Carnival.

14:16The company buys back much of the stock it just sold. And with a recession that follows the crash, the other cruise companies struggle to raise money. With a deep war chest and the competition facing lean markets, the Arisons decide the time is ripe for Carnival to increase its size. And not just by building more boats this time. Now, they want to acquire another company.

14:47It's 1988 in Miami, Florida. Mickey Arison writes on a whiteboard in his office, putting the final touches on a list of all the cruise companies in the world. He stands back so his father Ted can see. He caps the marker and taps it next to the column on the far left. Okay, so this column here is the big fish. There are three names listed. Norwegian Cruise Line, Royal Caribbean, and Princess, which runs trips to Mexico from California. In the second column, these are the midsize companies. Most of them own a handful of older ships. And then lastly, these here are the small fry, companies with one to two ships.

15:27He uncaps the pen and makes a big X through the entire right-hand column of smaller cruise lines. In my opinion, these small companies are out. They just don't add enough value to be worth it. Ted nods. So what are you thinking? Who does your gut say to go after? Holland America seems like a good choice. They cater to a higher-end clientele than we do, and it would add Alaskan cruises to our offerings. Well, Holland America does make a lot of sense. Mickey looks at him. But you don't love it. I can hear it in your voice. Ted shrugs. Well, there's no denying it makes sense, but we're in a unique position here.

16:03This is our chance to make a major move. I'm just not sure it's the most ambitious choice. All right, then, what were you thinking? I've heard some rumors that Gotas Lawson might be interested in selling its shares of Royal Caribbean. Mickey's eyes go wide. I mean, if we bought Royal Caribbean, that would change everything. We would unquestionably be the biggest cruise company in the world. Ted nods. But we need more than just go toss Larson's shares to have majority control. Do you really think we could get either the Skowgins or the Wilhelmsons to sell? It'd be a fight, but I'm not afraid of a little rumble, are you?

16:41Mickey sets his jaw. Not one bit. He draws a big circle around Royal Caribbean's name on the whiteboard. The Arisons have their acquisition target, the most illustrious cruise ship brand in the world. But only time will tell if they've gone after a bigger fish than they can handle.

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19:47It's summer 1988 off the coast of Italy. Ted and Mickey Arison stand on the deck of Ted's yacht. Across from them are Jack Seabrook and Richard Fane. Seabrook is the CEO of Gotas Larsen, which owns a minority share of Royal Caribbean, and Fane is the Gotas Larsen executive who oversees the cruise company. Ted holds up a glass of whiskey, and the others follow suit. To a deal in principle. After months of negotiation, Seabrook has just agreed to sell Gotas Larsen shares of Royal Caribbean to Carnival. The deal still has to be approved by Carnival's board, but it's a big step in the Arisons' plan to acquire Royal Caribbean.

20:30They clink their glasses. Seabrook takes a sip of the whiskey. So, now that you have the minority share, what's your plan to get the majority? You have to know that the Norwegian partners in Royal Caribbean are not going to be jumping up and down at the thought of selling to the Arisons. Seventeen years ago, Arison seized money from Norwegian Cruise Line's U.S. accounts to start Carnival, betraying his partner, Norwegian Knut Kloster. The move destroyed Arison's reputation among the Norwegian shipbuilding community. This includes the Skoggen and Vilhelmsen families, who own Royal Caribbean along with Gotas Larsson.

21:10We don't need them to like us. We just need them to like our money. Well, it's going to take a lot of money. Sigurd Skoggin and Arn Wilhelmsen don't agree on much, but one thing they can agree on is that Royal Caribbean is a far superior product compared to Carnival. And they're not going to want to see you tarnish their brand. Mickey claps his hand on Seabrook's shoulder. Okay, we appreciate the heads up, but we got this. Seabrook nods and takes another drink of his whiskey. I wish you luck. I, for one, will be glad not to have to deal with those two bickering families anymore. But while the rest of the men celebrate, Richard Fane scowls.

21:51He only started working with Royal Caribbean because Seabrook assigned him to it, but he's found that he loves the cruise business. Fane's still employed by Guthas Larsson, but he was recently appointed CEO of Royal Caribbean, and if Carnival buys the company, he'll be forced out of the position he loves. The Arisons may feel confident they can convince either the Skoggans or the Vilhamsons to sell, but Fane hopes the Norwegians fight back. Both Sigur Skoggen and Arne Vilhamsen are appalled that Guttas Larsson has agreed to sell their shares to Carnival. They have great disdain for Arison's company.

22:31He offers cheap, rowdy cruises. Meanwhile, Royal Caribbean has built a reputation of offering the finest service. Movie stars and royalty regularly sail aboard Royal Caribbean ships. Scoggin and Wilhelmsen meet and resolve that they will combine their money and buy the Gotas Larsen shares themselves in order to keep control of Royal Caribbean. But their old differences rear up, and they can't come to an agreement. And in August 1988, Wilhelmsen is getting ready for a breakfast meeting with Scoggin. when it's suddenly canceled. Wilhelmsen soon learns that Scoggin is in New York and he's just sold his family's shares to Carnival.

23:20It's August 1988 in Miami, Florida. Mickey Arison pops open a bottle of champagne inside Carnival headquarters. He stands up on a chair carrying the open bottle. Everybody, everybody! Carnival Cruise Line is now the majority owner of Royal Caribbean with 70 % of the shares. Mickey takes a swig of champagne. Drink, enjoy. Everyone celebrate. Carnival is now the biggest cruise line in the world, and no one is even close. He steps down from the chair, still carrying the champagne bottle. An executive approaches him, a worried expression on his face. Aren't you getting a little ahead of yourself? You know it's not a done deal yet, right?

24:11Relax. It's all just paperwork at this point. This is done. Mickey spots a newspaper on a desk. It's open to a story on Carnival's acquisition of Royal Caribbean. Mickey grabs it. See? It's in the papers, therefore has to be true. But I thought the deal gives Arn Wilhelmsen 40 days to match the price for the Skoggin and Gotas Larsen shares. You really think Arn Wilhelmsen is going to be able to come up with$550 million? The executive shrugs. Mickey shakes his head. Maybe Skoggin was feeling a little guilty that he'd betrayed his countrymen and sold out to the evil Carnival Cruise Line. So he added this 40-day price match so Wilhelmsen could potentially stop the bill.

24:52But it's meaningless. Unless Wilhelmsen can come up with the cash. Mickey pushes the paper against the executive's chest. Trust me. This is done. We're good. Mickey turns and walks away from the executive. He's here to celebrate, not worry. But Mickey Arison underestimates just how dedicated Arne Wilhelmsen is to keeping his company out of the Arison's hands. With the clock ticking, he starts looking for a financing partner who can help him raise$550 million to match Carnival's price for the Gotas Larsen and Skoggin family shares. Wilhelmsen flies to New York and holds a series of meetings with various bankers.

25:35But there aren't many entities that have the reserves to buy out the Gotas Larsen and Skoggin shares without taking on a significant debt load. Wilhelmsen calls on everyone that might be a lead, but it's looking like he's going to come up short. Then, Wilhelmsen gets a call from a banker who's been helping him try to put together a deal The banker has good news Jay Pritzker wants to meet with him Pritzker founded the Hyatt Hotel chain in the 1950s and is now one of the wealthiest men in the world Recently, he's become interested in buying a cruise line Wilhelmsen gets on the first flight he can to Chicago where Pritzker lives The two men have a meeting that lasts for hours, and they come to a tentative deal.