Winning (19 page)

I joined the team that day to get their report, and over the next several hours we came to understand the situation and comprehend its consequences for the company. What blew my mind was that three times during the afternoon and evening, twice in the hallway and once in the men’s room, the same thing happened. A Kidder Peabody manager on the team approached me, and with a worried look on his face, asked me in one way or another: “What’s this going to do to our bonuses this year?”

Ten years later, it still sends me over the top.

In the end, with the sale of Kidder Peabody to Paine Webber and ultimately to UBS, the deal ended up being OK for our shareholders. But the truth is, we should have never put the organization through the trauma that merger wrought. When it was all over, I swore I would never buy another company unless its values were a close match with GE’s or it could easily be brought into the GE fold.

I passed over some deals on the West Coast in the ’90s because of my concerns about cultural fit. But I just couldn’t go down that values-mismatch road again. The booming technology companies in California had their cultures—filled with chest thumping, bravado, and sky-high compensation.

By contrast, our software operations in places like Cincinnati and Milwaukee were made up of hard working, down-to-earth engineers, most of whom were graduates of state universities in the Midwest. These engineers were every bit as good as the West Coast talent, and they were paid well but not outrageously.

Frankly, I didn’t want to pollute the healthy culture we had.

Every deal affects the acquiring company’s culture in some way, and you have to think about that going in. The acquired company’s culture can blend nicely with yours. That’s the best case. Sometimes, a few of the acquired company’s bad behaviors creep in and pollute what you’ve built. That’s bad enough, but in the worst case, the acquired company’s culture can fight yours all the way and delay the deal’s value indefinitely.

That’s why if you want your merger to work, don’t just look at strategic fit. Cultural fit counts just as much.

Sometimes you want to own a company so badly, you end up letting it own you!

This dynamic is a real by-product of deal heat, and it’s so common, it’s frightening. Every time I talk about mergers with an experienced deal maker, it comes up.

I let it happen for the first (but unfortunately not the last) time in 1977, a few years before I became CEO. By that time, I was a veteran of dozens of mergers, so I should have known better, but I was so hot to acquire a California-based semiconductor company named Intersil that I couldn’t bring myself to say no to any of their demands. The CEO was convinced that his company was operating smoothly, and he made it perfectly clear that while he liked GE’s money, he didn’t need its advice.

Before I knew what was happening in the negotiations, I was kissing this guy’s rear end in every possible way. He wanted a special (oversize) compensation scheme for himself and his people, because that’s the way it was in his industry. I said OK. He said we couldn’t have GE people at his planning meetings. I said OK. He said we weren’t allowed to ask his finance people to change their reporting system to match ours. I said OK.
*

I couldn’t pay them $300 million fast enough.

What was I thinking?

Well, obviously, I wasn’t. That’s deal heat for you.

For several years, we muddled along, “merged” with Intersil. Frequently, when we made a suggestion about how the CEO might improve his operating systems—in HR, for instance—he would brush us off with, “You don’t understand this industry. Just leave us alone and you’ll get your earnings at the end of the quarter.”

It was unpleasant, to put it mildly, and far from productive. I found that I could call their headquarters for information, but unless I asked my question in
exactly
the right way, I would get nothing but a head fake. GE managers stopped visiting because they were given such a cold reception. Technically, we owned the company, but for all intents and purposes, it was running the show.

Finally, we sold Intersil at about break-even. The only thing we got from the deal was an important lesson: don’t ever buy a company that makes you its hostage.

The facts are, I was hamstrung with Intersil. We didn’t have sufficient knowledge of semiconductors or a senior manager with enough stature and experience in the industry to replace the CEO, let alone his management team.

When we bought RCA ten years later, a similar situation rolled around, but we were prepared for it. During negotiations we were told that the head of NBC, Grant Tinker, was thinking of leaving. We certainly didn’t have direct experience in managing TV networks, but I knew I had the bench strength in Bob Wright, the CEO of GE Capital at the time, to put a capable all-around leader in Grant’s place quickly, should he depart. I tried hard to keep Grant but couldn’t, and when he left, Bob stepped right in and eighteen years later is still running NBC.

A couple of years later, a potential hostage situation developed in one of NBC’s divisions, News. Its leaders openly—you might say brazenly—questioned GE’s ability to manage a journalistic enterprise and started throwing up the information firewalls that are so typical of this hostage dynamic. The division’s manager, Larry Grossman, led the resistance and wasn’t willing to put together a reasonable budget—that is, a budget where we made money. We asked him to leave and brought in Michael Gartner, who had significant journalistic and business experience. Michael took a lot of heat for starting the process of ridding NBC News of its entitlement mentality, and he did a good job, but unfortunately, he had to leave because of a crisis that occurred on his watch. (The NBC News show
Dateline
rigged a General Motors car to explode for a report on automobile safety; we publicly apologized for the incident.) We next turned to a CBS executive producer filled with journalistic credentials, Andy Lack. And it was Andy who really made NBC News into the high-integrity, highly profitable business it is today.

A final word on the reverse hostage dynamic. In the last moments of deal heat, companies often strike an earn-out package for the acquired company’s founder or CEO, hoping they will get retention and great performance of an important player in return.

All they usually get is strife.

The reason is that earn-out packages most often motivate their recipients to keep things the same. They will want you to let them run the business the way they always did—that’s how they know how to make the numbers. At every opportunity, they will block personnel changes, accounting systems consolidation, and compensation plans—you name it.

But an integration will never fully happen if there’s someone blocking every change, especially if that person used to be the boss.

What can you do? Well, if you absolutely want to keep the former CEO or founder around for reasons of performance or continuity, cut your losses and forget an earn-out package. Offer a flat-rate retention deal instead—a certain sum for staying a certain period of time. That gives you the free hand you need and want to create a new company.

Earn-outs are just one aspect of the reverse hostage pitfall. Yes, sometimes you have to make concessions to get a company you really want.

Just don’t make so many that, when the deal is sealed, your new acquisition can hold you up—with your own gun.

Return for a second to those partylike press conferences that accompany most merger announcements. Even in pure buyout situations, the CEOs promise a new partnership ahead. The two companies will cooperate, reach consensus, and then smoothly integrate.

Unfortunately, if partnership building isn’t done right it can create paralysis. The two sides talk and talk and talk about culture, strategy, operations, titles, letterheads, and the rest—while the integration waits.
*

For a change, deal heat is not the culprit behind this pitfall. Instead, it is something more admirable—a kind of politeness and consideration for the other side’s feelings. No one wants to be an obnoxious winner, pushing through changes without any appearance of discussion or debate. In fact, many acquirers want to preserve whatever positive vibes existed at the end of negotiations, and they think moving slowly and carefully will help.

I’m not saying that acquirers shouldn’t engage in debate about how the two companies will combine their ways of doing business—they absolutely should. In fact, the best acquirers are great listeners. They ask a lot of questions and take in all the information and opinions swirling around, and usually there are plenty.

But then they have to act. They have to make decisions about organizational structure, people, culture, and direction, and communicate those decisions relentlessly.

It is uncertainty that causes organizations to descend into fear and inertia. The only antidote is a clear, forward-moving integration process, transparent to everyone. It can be led by the CEO or an official integration manager—a top-level, widely respected executive of the acquirer—vested with the power of the CEO. The process should have a rigorous timetable with goals and people held accountable for them.

The objective made clear to everyone should be full integration within ninety days of the deal’s close.

Every day after that is a waste.

A classic case of moving too cautiously—and paying the price for it—is New Holland’s acquisition of Case Corporation in November 1999.

New Holland, a Dutch company with headquarters in London and a division of the giant Italian manufacturer Fiat, was the No. 3 player in the agriculture and construction equipment industry. Strategically, its managers were right in thinking that buying the Wisconsin-based Case, a solid No. 2, would allow it to finally take on the longtime industry leader, John Deere. Six billion dollars later, the deal was done.

Given the overlap in products and markets, you would think that the integration of these two companies would proceed swiftly, especially with those cost reductions so obvious. But New Holland was a company with a European parent, and its leaders were cautious about taking over an American enterprise on its own turf. Moreover, Fiat had paid a large premium for Case. That redoubled New Holland’s trepidation. My old friend Paolo Fresco, the former vice-chairman of GE and at the time of the deal the chairman of Fiat, remembers the impact of the premium this way: “We didn’t want to rock the boat or sink it with too many changes—we’d paid too much for the company to let that happen.”

Fiat made the CEO of Case the head of the new company. In addition, most of the positions in the new organization were filled with Case managers, including COO and CFO.

Needless to say, the integration was rocky. The integration team did make one big decision—to keep two brands and two distribution systems. But most everything else was left up in the air.

When the market for farm equipment tanked in 2000, and with the integration stalled, the merged company tanked with it. In crisis mode, Fiat sent a new CEO, Paolo Monferino, to the United States, and he launched the integration the way it should have been on day one—quickly and decisively. The then-CEO of Case, Jean-Pierre Rosso, was made chairman. Ironically, Fiat had been afraid of making that change, but once it did, its managers quickly saw that Jean-Pierre was a perfect fit for the job and that he was happy to fill its role. He was strong with customers and an excellent industry statesman. All that timidity had been unnecessary!

When Congress passed the Farm Bill in 2002, the fully integrated CNH Global N.V., as the company was renamed, was positioned to take advantage of the market upsurge. But as Paolo Fresco notes, “We lost at least a year and maybe more because of our cultural uncertainty.”

The Case New Holland story is not unique.

Back in 2000, GE tried to buy Honeywell—a deal, as some might recall, that never received European Union approval. But in the seven months that we awaited the regulatory OK, teams from both sides worked hard to merge the two companies.

Part of that process meant looking closely at the progress of Honeywell’s own merger with AlliedSignal in 1999. The two companies had been together for a year at that point, so we expected to see notable progress.

Instead we were shocked to find that AlliedSignal and Honeywell managers were still “in discussions” about the merged company’s values and behaviors, and both sides were still pining for the way they used to do things. The AlliedSignal people had an aggressive, numbers-driven culture. Honeywell’s managers, however, liked their company’s more consensus-based approach. The merged company’s CEO, Mike Bonsignore, was disinclined to make a choice between the two ways of working. And so, well after the deal was signed, they still had two distinct companies operating side by side, with little integration.

Integrating at the right speed and with the right level of forcefulness will always be a balancing act. But when it comes to this pitfall, at least you know when you’re off track. If ninety days have passed after the deal is closed and people are still debating important matters of strategy and culture, you’ve been too timid. It’s time to act.

If acquirers are often too timid when it comes to integrating culture and operations, just as often they are too provincial when it comes to people selection.