Winning (18 page)

Finally, about autonomy. The fact of the matter is, you are always going to want more of it than you get.

The best way to get autonomy is to earn it. If you play by the rules, you’ll get your freedom soon enough. The spotlight of the company is on you. Don’t blow it by overreacting if you feel the early constraints put upon you are stifling. They are just part of the process of your “parents” letting go.

THE PERFECT STORM

You rarely see all three guidelines at work at once, but when you do, watch out. You get a “perfect storm” like the Fox News Channel.

Fox News was launched in 1996 by Rupert Murdoch, an entrepreneur’s entrepreneur, in spite of being the owner and CEO of News Corporation, a multibillion-dollar conglomerate. Rupert wanted to get into cable news and was willing to spend whatever it took.

To succeed as a cable channel, you need two things. First, you need to get subscribers from distribution providers like Comcast and Time Warner. Second, you need to get attractive content so that enough subscribers will actually watch you—the key to ad dollars.

Rupert’s first step was to hire someone to run the new venture. He found a match made in heaven with Roger Ailes. After running several successful political campaigns, Roger had worked at NBC for three years, putting the cable channel CNBC on the map. He had just launched another cable channel for GE called America’s Talking. But he lost it when GE used the assets of America’s Talking as its contribution to creating MSNBC, a fifty-fifty joint venture with Microsoft, which put up the cash.

Roger left NBC in frustration, but Rupert was on his trail immediately. He believed that Roger was the perfect new venture manager—bursting with ideas, energy, and passion—plus the burning desire to beat the company that had taken his “baby” away.

With the right leader in place, Rupert set to work getting subscribers. He paid well above market rates to get the subscriber access the channel needed. Meanwhile, Roger was hiring the best talent—Brit Hume from ABC, Neil Cavuto and a flock of others from CNBC, and the highly rated commentator Bill O’Reilly.

As it was all happening, Rupert continuously trumpeted the new venture inside the company, making it unambiguous that he was behind Fox News through thick and thin. In the outside world, both Rupert and Roger made it so that you couldn’t open a paper or turn on a TV without hearing, in some form, about the relentless advance of Fox.

Fox News is an example of everything going right at a new venture: a high bar for people, outsize spending on resources, and lots of noise about it all. Its results tell the story. Fox quickly beat MSNBC and eventually surpassed the longtime cable news leader, CNN.

Legendary entrepreneurs like Henry Ford, Dave Packard, and Bill Gates are undeniably examples of the excitement and glory of starting something new from scratch and watching it grow to astonishing proportions.

But in each of your companies, opportunities of every size and variety await.

Grab them. Pick passionate, driven people to lead them, resource them with everything you’ve got, and give them oxygen to breathe.

Growth is great, and in business, it doesn’t always have to start in a garage. There is nothing like the fun and the sheer thrill of starting something new—especially from inside something old.

Y
OU
’
VE SEEN THE BIG PARTY
when two companies announce their merger. There’s the early morning press conference on CNBC, the chatter and the buzz, the vigorous pumping of hands, the TV lights glaring, the glossy banner proclaiming the new company’s name. It’s all there but the confetti.

And then there are the stars of the show—the merging CEOs grinning widely, slapping each other on the back, and talking about a brave new world of synergies, cost savings, and increased shareholder value. At particularly jovial merger announcements, the CEOs wrap each other in a big bear hug, like Steve Case and Jerry Levin on that fateful day of the AOL–Time Warner deal.

With the excitement, there’s exhaustion too, and sometimes you don’t have to look very hard to see it in the faces of the CEOs at center stage. They have been working around the clock for weeks, if not months, fighting over every last nickel, not to mention who will run what.

But usually, all you see at merger announcements is elation and relief. The battle is over, and now it’s time to reap the deal’s rewards.
*

In reality, as the veteran of any merger will tell you, the battle has just begun, and the deal’s rewards won’t come without a lot of blood, sweat, and tears.

If the first day of the merger is a big party, on day two, the cleanup begins. For people on the acquiring side of the deal, mountains of work stand in front of them, and while they may be pumped with optimism, there is always an undercurrent of nervousness in the room. Every deal promises cost savings, and even if you’ve been part of the deal team, working night and day grinding out numbers to justify doing it, a little piece of you has to wonder if the savings you’ve articulated will come to mean the loss of your job, or that of your boss, or your best friend down the hall, or the employee you’ve been mentoring for a year.

For the acquired, the nervousness in the room isn’t an undercurrent, it’s a tidal wave. Everyone is terrified of layoffs. But even if you think your job is safe, life has just gotten very complex. A merger can feel like a death. Everything you’ve worked for, every relationship you’ve forged—they’re suddenly null and void. Your sense is that nothing will ever be the same again.

On top of it all, day two media coverage is filled with business journalists and Wall Street analysts questioning the rationale for the deal and reminding everyone that many mergers fail.

Mergers do fail. In particular, it is a hard road for mergers forged primarily to capture industry convergence benefits or revenue synergies. It’s easier to succeed when a merger is based on cost reductions from the combination, with any upside from revenue synergies considered a pure bonus. But either way, merger success is never a layup.

And yet companies persist in merging—and they should.

In the last chapter, we looked at why organic growth is great. Every company must have the patience to consistently focus on and invest in the innovation that drives it.

But mergers and acquisitions give you a faster way to profitable growth. They quickly add geographical and technological scope, and bring on board new products and customers. Just as important, mergers instantly allow a company to improve its players—suddenly there are twice as many people “trying out” for the team.

All in all, successful mergers create a dynamic where 1 + 1 = 3, catapulting a company’s competitiveness literally overnight.

You just have to do it right.

This chapter is about that process, and it is intended for everyone involved, from the people making the deal to those who are affected by it several layers away. Over my career at GE, I was involved in well over a thousand acquisitions and mergers, and over the past three years, I have consulted with managers during several more.

Obviously, not every deal I’ve participated in has been a success. But most were, and over time, my batting average improved as I learned from the mistakes made in situations that did not work.

In the end, I’ve learned that merging successfully is about more than picking the right company to fit your strategy, laying out what plants you close and what product lines you combine, or how pretty your calculations of DCRR or IRR look.

Merging right is ultimately about avoiding seven pitfalls, by which I mean mistakes or errors in judgment. There may be other pitfalls out there, but in my experience, these seven are the most common. Sometimes they can kill a merger, but more often, they significantly slow it down or reduce its value or both.

Here they are in brief. Six are related to the acquiring company, and just one to the acquired.

 

• The first pitfall is believing that a merger of equals can actually occur. Despite the noble intentions of those attempting them, the vast majority of MOEs self-destruct because of their very premise.
  
 

• The second pitfall is focusing so intently on strategic fit that you fail to assess cultural fit, which is just as important to a merger’s success, if not more so.
  
 

• The third pitfall is entering into a “reverse hostage situation,” in which the acquirer ends up making so many concessions during negotiations that the acquired ends up calling all the shots afterward.
  
 

• The fourth pitfall is integrating too timidly.
  
 

• With good leadership, a merger should be complete within ninety days.
  
 

• The fifth pitfall is the conqueror syndrome, in which the acquiring company marches in and installs its own managers everywhere, undermining one of the reasons for any merger—getting an influx of new talent to pick from.
  
 

• The sixth pitfall is paying too much. Not 5 or 10 percent too much, but so much that the premium can never be recouped in the integration.
  
 

• The seventh pitfall afflicts the acquired company’s people from top to bottom—resistance. In a merger, new owners will always select people with buy-in over resisters with brains. If you want to survive, get over your angst and learn to love the deal as much as they do.
  *
  
 

 

BEWARE DEAL HEAT

Before looking at the pitfalls in detail, it’s worth pointing out one thing. Many of them happen for the same reason: deal heat.

I’m sure I don’t need to illustrate this phenomenon in gruesome detail; you see it every time a company is hungry to buy and the pickings in the marketplace are relatively limited. In such situations, once an acquisition candidate is identified, the top people at the acquirer and their salivating investment bankers join together in a frenzy of panic, overreaching, and paranoia, which intensifies with every additional would-be acquirer on the scene.

Deal heat is completely human, and even the most experienced people fall under its sway. But its negative impacts during the M & A process should at least be minimized if you keep these seven common pitfalls in mind.

Every time I hear about a so-called merger of equals taking place, I cringe thinking about all the waste, confusion, and frustration coming down the pike for the two companies, which usually strike these deals with the best of intentions.

Yes, a merger of equals makes sense
conceptually.
Some companies are equal in size and strength, and yes, they should merge as such. Moreover, during heated negotiations—and almost all negotiations are that way at one point—the MOE concept cools the flames. Both sides can claim to be winners.

But something happens to the MOE concept in practice—people balk.

They balk, in fact,
because
of the very concept of equality. On both sides, people think, if we’re so equal, why shouldn’t we do it
our
way?
Your
way is certainly no better.

The result, ultimately, is that no one’s way gets done.

I know this negative point of view about MOEs is not shared by everyone. My friend Bill Harrison, the CEO of JPMorgan Chase during its merger with Bank One, would tell you that in the financial industry, where the assets are the brains of proud, self-confident bankers, mergers of equals are a necessity “or else everyone would walk.”

He may very well be right about this exception; the merger he is overseeing with Jamie Dimon—who will become CEO of the merged enterprise in 2006—is going very well. And Bill’s merger experience supports his argument as well, starting with his Chemical Bank MOE with Manufacturers Hanover, followed by the MOE with Chase Manhattan and J.P. Morgan & Co.

Despite this success, I’m convinced that in the industrial world, meaning just about anyplace but banking and consulting, mergers of equals are doomed.

DaimlerChrysler is the most glaring example I can think of. Remember all the crowing back in 1998 about how the two companies were truly equivalent in all their facets; they just needed each other to globalize? No, no, the companies proclaimed, this wasn’t an acquisition by a high-end, diversified German manufacturer of a low-end American car company—no way! It was two titans of industry entering a marriage made in heaven.

Some of this posturing was surely done in order to help the merger receive regulatory approvals. But some of it also had to do with ego. The directors on Chrysler’s board certainly weren’t going to admit they’d been bought by a foreign company, and their counterparts in Germany were probably no more thrilled with the prospect of being taken over by a bunch of Americans.

And so the companies tried to execute their MOE. What a mess! For two torturous years, the new company had Airbus A318s shuttling hordes of people between Detroit and Stuttgart a couple of times a week in an attempt to settle on mutually satisfactory operating processes, everything from the new company’s culture to its financial systems, manufacturing sites, and leadership team. In the meantime, the “merged” organization bumped along in chaos while managers awaited direction and shareholders awaited the realization of all those promised global opportunities, synergies, and cost savings.

The ending of the story, of course, came in 2002, when newspapers reported what many people had long suspected—that the so-called merger of equals was, in fact, a pure and simple takeover. With the reality of the situation finally out there, Daimler could start running the show as it had intended all along. It installed one management system, one culture, and one strategy, and the company’s performance pulled out of its post-“merger of equals” dive.

The point of this story is not to pile on DaimlerChrysler—that’s been done enough in the past few years. It is to illustrate the virtual impossibility of two companies with two leaders blending seamlessly into one organization with double of everything and everyone.

Forget it. People at equal companies are probably less well equipped than anyone to merge. They may claim, during deal heat, to be entering into a perfect and equivalent union, but when the integration rolls around, who is taking charge must be established quickly. Someone has to lead and someone has to follow, or both companies will end up standing still.

Once again, deal heat is behind a mistake that pervades many mergers, a thoughtful predeal analysis of cultural fit.

Now, most companies have a relatively straightforward time evaluating
strategic
fit. Most managers (and their consultants or bankers) have the tools and experience to assess whether two companies fill meaningful gaps for each other in terms of geography, products, customers, or technologies (or all of these), and by combining, create a company that, even with some inevitable overlap, is stronger and more competitive.

But
cultural
fit is trickier. Even with a cool head, the compatibility of two sets of value systems is a hard call. That’s because lots of companies claim they have the same DNA—they believe in customer service, analytical decision making, learning, and transparency. They value quality and integrity, etcetera, etcetera. Their cultures are high performance, results driven, family friendly, and the like.

In reality, of course, companies have unique and often very different ways of doing business. But in deal heat, people end up assessing that every company is compatible. Cultural fit is declared, and the merger marches ahead.

That was clearly the case when GE bought Kidder Peabody, a disaster I mention in the chapter on crisis management and wrote about extensively in my last book. But just to briefly summarize here: a company with GE’s core values of boundarylessness, teamwork, and candor could not merge with an investment bank with three values of its own: my bonus, my bonus, and my bonus.

For me, the lack of cultural fit was never more apparent than the day that the full magnitude of our problem—for lack of a better euphemism—was really hitting the fan. It was a Sunday afternoon in April 1994, and a team of GE and Kidder Peabody executives had been working around the clock since Friday evening to figure out why we had a $300 million shortfall in reported earnings. It was already pretty clear that a Kidder trader named Joe Jett had posted phantom trades, but what we needed to understand was why and how this behavior had slipped through the bank’s controls, and just as importantly, its culture.