by Jack Welch
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.
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The fourth pitfall is integrating too timidly. With good leadership, a merger should be complete within ninety days.
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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 distr
ibution 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.
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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.
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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.
By too provincial, I mean many acquirers automatically assume their people are the better players. They might be, but then again, they might not. In a merger, you have to approach your new personnel situation as if a headhunter had just delivered you a list of fresh players for about every position on your field. If you simply stick with the going-in team, you could lose better players for no good reason.
Oh sure, there’s a reason for this behavior, but it’s not good—it’s just familiarity. Your own people are the devil you know—and they know you back. They understand your business and its culture. They know how work gets done your way.
To compound matters, it is simply harder to let go of friends than strangers. You know their families. You’ve been through good times and bad. You may have once told them they had long-term potential with the company. Some may have even worked on the deal.
It’s hard to say, “You’re not good enough anymore.”
But you just have to remember, one of the great strategic benefits of a merger is that it allows acquirers to field a team from a bigger talent pool. That’s a competitive advantage you cannot let pass. Just be very fair in your severance package and face into the deed, even if it means saying good-bye to “your own.”
Without doubt, avoiding this pitfall can be challenging.
I cannot count the number of times we swooped into a deal and installed a GE manager in every leadership position. Most of the time, we were blissfully unaware of the potential that we had lost, but one time in particular, we couldn’t be. The cost was too high.
It happened in 1988, when GE acquired a plastics business based in West Virginia from BorgWarner. It was the perfect bolton deal, or so we thought. The business we bought included an ABS engineering plastic product line. We had an engineering plastics business of our own, albeit in the higher-end products Lexan and Noryl. The GE Plastics team saw one immediate cost synergy. All they had to do, they figured, was to get rid of the BorgWarner sales force and push BorgWarner products through GE channels.
But there was a problem with the plan. Our sales force was a group of sharp, button-down types, accustomed to making a technical sale, convincing engineers to switch from metal to plastic. The BorgWarner sales force was a different breed. They sold their less expensive, more commodity-like product to purchasing agents the old-fashioned way—“belly to belly”—relying on personal relationships and hefty expense accounts.
Our people weren’t very good at that.*
It was a disaster. We lost 90 percent of BorgWarner’s sales force thanks to our conquering mind-set, and our ABS market share dropped about fifteen points. The acquisition stumbled, and it never did reach its full potential. ABS eventually turned out to be a worthwhile addition to the GE market basket, but at far too high a price.
We should have known better. Two years earlier, we had gotten the people selection process right when we acquired RCA.
On every level, the RCA deal was a win for us. With the acquisition of NBC, it met one of our strategic goals of moving into services, and at the same time, it strengthened our manufacturing base with the addition of three businesses we were already in, semiconductors, aerospace, and TV sets.
In all three of these industrial cases, we took advantage of the enhanced talent pool made possible by the acquisition and picked RCA leaders to lead the merged organizations.
GE’s TV manufacturing business, for instance, was being run at the time of the deal by a smart young CEO who had come into the company through our business development staff. He was an MBA and former consultant, and although he had a bit of a swagger that he needed to be coached out of, his results were OK, and we generally thought he had long-term potential as a leader, which we’d told him more than once.
RCA’s TV business also had a very good CEO in place—he was an old industry hand, with savvy and experience that our guy was clearly lacking. He too had satisfactory performance and was a clear candidate to run the larger, merged TV business. We could have picked either CEO.
But then there was Rick Miller. Rick was the CFO of RCA, and he was a big leaguer—smart, fast, full of creativity and energy. GE already had a great CFO, and it looked like Rick would need to be let go as a result.
As much as we wanted to help out our manager in TV by giving him the job, it just didn’t make sense. We ended up suggesting that both the GE and RCA leaders find new jobs over the coming months, and gave Rick the CEO position. The two who left got great jobs elsewhere.
One last thought on people selection: in the most effective integrations, it starts during negotiations, in fact, before the deal is even signed. At JPMorgan Chase and Bank One, for instance, twenty-five of the top managers were selected by the time the merger was closed. That’s on the far extreme of a best practice, but it is something to strive for.
The main point is, fight the conqueror syndrome. Think of a merger as a huge talent grab—a people opportunity that would otherwise take you years of searching and countless fees to headhunters. Don’t squander it. Make the tough calls and pick the very best—whatever side they’re on.
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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.
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This pitfall is as old as the first marketplace. People are people; when they want something that someone else wants, all reason can disappear. Again, blame deal heat. This dynamic happens at yard sales, and it happens on Wall Street.
I’m not talking, by the way, about overpaying by a few percentage points. That kind of premium can be made up for in a well-executed integration. And in fact, leaving a little money on the table can be helpful if it prevents the residual acrimony that can slow an integration.*
I am talking, instead, about overpaying by so much you will never make it back.
The most egregious recent example of this dynamic has to be the Time Warner–AOL merger, in which a giant of a media company, with real assets and products, spent billions upon billions of dollars too much on a distribution channel with unclear competitive benefits. Amazingly, at the time, there was such excitement about an illusory notion called “convergence” that just about everyone jumped on the bandwagon. It was only after the failure of the deal was obvious that Ted Turner, a board member who was instrumental in promoting it, acknowledged on national TV that he had never liked the deal in the first place. By then, such “coolheadedness” was too late for Time Warner shareholders.
Of course, 2000 was a time when everybody was overpaying for everything. In the publishing industry, for example, the German media giant Gruner + Jahr paid an estimated $550 million for two properties, Inc. and the New Economy magazine Fast Company. At the time, the purchase scared the daylights out of other business magazines. But during the recession that followed, the premium could only be seen for what it was—excessive. No integration in the world would ever make up for it, a fact to which a crowd of deposed Gruner + Jahr executives would likely attest.