Wednesday, August 31, 2005

Sale of AT&T Wireless

Glad to see people are reading – Parkite poses a question about whether the sale of AT&T Wireless to Cingular was really in the shareholders’ interest. It’s a good question, and certainly one that a few shareholders asked when the deal was announced. However, in my opinion it was an outstanding deal for the shareholders. I would also note that I’m not going out on a limb with this sentiment – the merger did, of course, go before the shareholders for a vote, and it was overwhelming approved.

Frustration on the part of long-term holders of AWE stock isn’t hard to understand. The stock went public (as a tracking stock) in April 2000 at $29 a share. It peaked in the $30s a couple of weeks later, and never came remotely close again. By the time AT&T Wireless was spun off from AT&T in July 2001, the stock was trading at $16 a share. Telecom in general (and wireless in particular) crashed further in early 2002, as the capital markets dried up and a wave of bankruptcies ensued. Overlaid on top of all of this was the AWE initiative to replace its TDMA technology with GSM, an expensive and at times customer-frustrating initiative. AWE shares fell below $10 a share in early 2002, and went below $4 a share at one point. For most of 2002 and 2003 the stock bounced between $6 - $8 a share.

When the deal with Cingular was signed in February 2004, the $15 per share price represented a premium of more than 100% over where the stock had traded prior to the rumors of the auction process being underway. More importantly, it was a very full price when viewed through the internal modeling work we did to evaluate the company's options. It’s fair to say that many people were stunned to get a price as high as $15 per share.

For shareholders who had bought at the IPO and held, it obviously represented a significant loss. Despite the timing of the company’s life as a stand-alone company (In hindsight, April 2000 was not the best of time to have an IPO), many felt that with snappier execution and decision-making the company could have done far better, perhaps swallowing Cingular or Voicestream and becoming the dominant U.S. wireless carrier. I wish that could have happened. However, looking at the state of the business at the beginning of 2004, it’s hard to imagine a better outcome than the $15 per share Cingular paid. As business managers and owners (as with our personal investments), we always need to look forward, rather than backward. We have to focus on maximizing shareholder value at that particular moment, not based on what could have been done had the business been run more effectively.

Tuesday, August 30, 2005


Several folks have asked about books on negotiating and corporate development. There’s not a lot out there directly for corporate development, but McKinsey & Cos. Valuation is the bible for the analytical aspect of the work you do in corporate development. With my background, I also found it useful to read a book on financial statements for non-accountants. I can’t remember the exact title, but there’s probably something in the “Dummies” line by now.

There’s a lot of stuff out there on negotiating – books, seminars, even flash cards. It’s a mixed bag. I still like Getting to Yes, which is a classic (and has several sequels), but it still contains a lot of very useful general negotiating advice: Always know your BATNA (best alternative to a negotiated solution) and that of the other side. Focus on interests, not positions. Create solutions. I hope to follow up on these in future posts on negotiations, but Getting to Yes is a great overview on negotiating.

I also greatly enjoyed James Surowiecki’s The Wisdom of Crowds. It’s more about decision making, and arriving at the right or optimal outcome, even when faced with incomplete facts (Surowiecki also writes an excellent semi-monthly economics column in The New Yorker). The book is fascinating, offering all sorts of counter-intuitive examples of how crowds or markets can reach far better decisions than an individual is likely to do (one example: the average of all entries at a country fair “guess-how-much-the-ox-weighs” contest coming within one pound of the correct answer).

Of course, anyone who has sat through a board meeting, strategy session or attempt to make a decision via group consensus will scoff loudly at that assertion as applied to the corporate world. After all, it’s simply too familiar to see decisions made in advance of analysis (which is thereafter prepared to show that the decision is the right one), or decisions made by the senior person and then agreed to by the rest of the group without meaningful discussion or consideration of alternatives. Surowiecki points out that in order to get the benefit of “crowd” decision making in these contexts, the group must be diverse and independent. Not necessarily diverse in the EEOC sense, nor independent in the James Dean sense – just that the group possesses enough diversity of experience and enough independence that its members are willing to speak their minds.

Making the right decision and ensuring it happens can be two different things. Surowiecki also notes that when a decision is made the members must be able to put their passionate arguments aside and fully support the implementation of the decision. Sadly, we’ve all seen the passive-aggressive type who outwardly supports the decision and then does everything possible to subvert it.

Monday, August 29, 2005

Seth Levine & VC Adventure

Thanks for the mention, Seth. I'd been thinking about blogging for a while (okay, a few weeks), but reading Seth's blog is really what convinced me that I should do it. Lots of perspective on what he's doing, what life is like in the VC world, and the occasional off-the-wall observation. I'm not sure I'll ever be as up to speed on blogging tools as Seth is, but I hope I can live up to his example and provide a window into what (in my view, at least) makes corp dev tick.

Friday, August 26, 2005

Internal Relationships

It’s funny, as I gather my thoughts about corporate development, so much of it seems to center around the process of working internally – getting input from the appropriate people, making sure other teams are involved, and getting the deal approved. I’m sure I’m not the only one who feels like the work of negotiating externally with sellers, buyers and potential partners is the easy part of the job!

As I work through my first few months here at a much smaller company, I’m reminded of how important it is to have healthy and productive internal relationships. Not formal command-and-control or even the dreaded “matrix management” – just go-to people at all levels of the organization who can get things done for you. Even with as relatively few HQ people as we have here, I’m having to replace the network I had built before – the brilliant accounting manager who always made sure I took care of working capital adjustments in the deal; the guy in engineering who could always dig up whatever obscure technical info I needed on a moment’s notice; the lawyers with the patience to deal with having an ex-lawyer as a client, and all the others. It takes time to find the right people, and even more time to build trust and camaraderie.

Tuesday, August 23, 2005

More on Objectivity

At AT&T Wireless, all deals had to be approved by a group of senior managers made up of our CEO, COO, CFO and GC. Many other senior managers would also attend these meetings and chime in, particularly if the deal potentially impacted their function (and often even if it didn’t). We in corp dev would typically bring deals to this committee for approval once a term sheet had been finalized with the counterparty but before any discussions on definitive documents. With the committee’s blessing, we would then have full authority to complete the deal, including signing and closing. Only for deals over $100 million was the additional step of board of directors approval required. As one might imagine, these were critical meetings for getting our work done! Obviously I wanted my presentations to shine and my recommendations to be adopted.

The problem is, there can be a natural tendency toward salesmanship in such situations: Accentuate the positive; downplay (or ignore) the negative. Big mistake, as I was fortunate enough to learn – in the very first one of these meetings I attended - by watching someone else get savaged for not paying adequate attention to certain risks in their deal.

To avoid suffering a similar fate, I seized on a strategy that served me well as a lawyer and which, in a modified form, turns out to work even better when presenting to senior management: Disclose all major negatives up front. You can then go on to present the good aspects of your deal, illustrating how they outweigh the negatives, without fear of one of the cannibals in the room ripping in to you for bullshitting them. Sure, someone may press – hard – on some of the issues you’ve raised, but you can argue back even-handedly, without also having to defend your credibility.

If you’ve done your work with senior management before the meeting, you’ll know what the hot button issues are and who in the room you’re going to need to be concerned about. Some deals seem like such slam dunks this hardly seems necessary, but I’d recommend always pre-selling the critical decision makers and presenting the negatives. Meetings like this are blood sport for some senior managers, so you’ve got to be prepared.

Monday, August 22, 2005

Objectivity & Credibility

It’s critical to an investment banker’s credibility that he or she not push deals that aren’t in the client’s best interests. Indeed, the best bankers I’ve worked with will aggressively dissuade their clients from exploring combinations that don’t maximize shareholder value.

Likewise, I’ve found it critical to success in corporate development that one not be perceived as someone who is always pushing to do the next deal. Sure, corp dev folk are paid to do deals, but more importantly, they’re paid to do SMART deals. Again, it comes back to enhancing shareholder value. You must be perceived as someone who prizes shareholder value over all else. You’ve got to be unafraid to tell senior management that a deal under consideration should not be done (of course, if they’re fond of the deal you’ve also got to be exceedingly well-prepared to tell them WHY it should not be done).

In some ways, you've got to be even more objective than those running other functions, whose fights over turf are considered (within limits) healthy behavior. If senior management gets even a whiff that you are pushing a deal that isn't squarely within the shareholders' interest, your credibility is shot. Even a slight blemish on your credibility will make the work of getting internal buy-off on deals very, very hard.

Thursday, August 18, 2005

Deals not Done

There’s an interesting dynamic to doing deals inside a company. Most likely, you’re going to be measured (and rewarded) based on the deals you’ve done. When you tally your achievements at the end of the year, what you hope to find is a litany of deals successfully closed at great valuations, integrations achieved within the allotted time and budget, excess synergies created, thriving joint ventures – you get the idea. What you can’t take credit for is something that’s every bit as important and which in some years will account for the bulk of your time at work – deals that don’t get done.

Probably 80+% of potential deals shouldn’t be done, and to be effective as a corporate development professional you’ve got to have the ability to quickly identify the stinkers and cut them loose before you waste too much time on them. Sometimes you don’t have a choice – if you’re evaluating a major strategic merger or acquisition that senior management is behind, that deal will suck you up in its vortex, and there you’ll toil for months until the wheels fall off. I spent a good chunk of 2002 in such a place. However, on smaller deals that you lead, you must eliminate the non-starters before you’ve invested too much of your time. By all means, take the time to think creatively about whether something can be done. But look very critically at every deal at the earliest stages. Look for reasons to kill the deal – over-rated talent or products; potential integration nightmares; senior management reticence to back a particular deal structure or product area. Scour the financials and treat any forecasts as pure fiction. This is no place for rose-colored glasses.

Tuesday, August 16, 2005

Shareholder Value

If there’s one thing, and one thing only, that should matter in corporate development, it’s the enhancement of shareholder value. Now before I get beat up as some kind of neo-Hobbesian, let me stress that shareholder value is a complicated concept. It’s not, as some narrow-minded types would have it, wringing the last cent of value out of every interaction or transaction. It’s looking at the big picture and determining whether a given decision or course of action enhances or detracts from the overall value of the enterprise.

Now, every company is different, and will typically view itself as being positioned in the market in one of four basic ways: The customer service leader, the technical leader, the price leader or the quality leader (and there ends most of what I know about marketing . . .). This positioning will obviously impact the factors that influence shareholder value, but here are a few universal factors that influence shareholder value:

Positive to Shareholder Value:
Growing revenue and increasing margins
Treating employees well and paying them fairly
Attention to customers
Good media relations

Negative to Shareholder Value:
Suing your competitors (most of the time)
Treating employees as fungible assets to be “squeezed” for efficiency
Creative accounting
Over-reaching defense of trademarks
Many, many mergers

One thing that has always perplexed me about corporate life is how little focus most employees, even at relatively senior levels, give to enhancing shareholder value. I think this is also a problem that grows with the size of the company. If your company has more than $10 billion in annual revenue, ideas (or extra work) that “only” enhance revenue by $1 million or less, or “only” save a couple hundred thousand dollars in expense can get rationalized as not worth the time to work on. I don’t get that. Early in my career, a colleague in the finance group made a comment that has stuck with me: His goal, he explained, was to save the company each year at least 2X the amount of his salary. Often times it can be a matter of simply spending 1-2 hours on something that will save the company $50,000 or more. Is that not time well spent?

At the end of the day, corporate development work doesn’t have a creative or artistic aspect to it that one can fall back on if you’re not focused on shareholder value. So you might as well use your creativity to find ways to make the business hum that much faster.

Friday, August 12, 2005

Corporate Development

When I tell people I do "corporate development" work, I usually get a blank stare. So I lamely have to add, "you know, mergers and acquisitions, that sort of thing. . . " It was easier when I just had to say I was a lawyer, but of course the work wasn't nearly as fun.

I'm sure different companies put slightly different spins on what "corporate development" means, but in my view it's the group with responsibility for ensuring that 1) the company's inorganic growth needs are met, and 2) the value of company assets are maximized, whether in asset sales, spin-offs, major investments or sale of the company itself. Or to put it simply - you buy and sell all the stuff that your purchasing department doesn't deal with.

In my experience, the scope of corporate development has also included interactions with competitors (joint ventures, roaming agreements), development of corporate strategy and resolution of big, nasty problems that no other function seems positioned to solve. I've also seen some companies where the development function also incorporates long-term financial planning of the sort usually found in the CFO's shop.

My purpose in this blog is to develop my thoughts (and hopefully pick up some insights) on the strategy and tactics behind the bread-and-butter corporate development work of buying, selling and making strategic alliances. Much of this stuff - negotiating, building relationships, making good decisions - can also be usefully applied to just about anything in corporate life.

Why Blog?

Why not? The process of auctioning off my former company (AT&T Wireless) and dealing with the year-long effort to close the deal with Cingular and divest assets to meet the needs of the Department of Justice, has crystallized many of my thoughts on good and bad corporate development practices and tactics. Of course, considering what to do with my life post-merger, engaging in an extensive job search, going through numerous interviews and taking a new job has also given me ample opportunity to consider what I like and don't like about corporate development (and the corporate world in general).

I'm hoping this forum will help organize some of these thoughts on corporate development, negotiating tactics, and other corporate fun-and-games. Even if no one else is interested - and I always wondered who reads blogs, until I came across some genuinely enlightening ones - I've found that committing my thoughts to paper (of a fashion) has a powerful benefit in deepening my understanding. I'd also love to hear thoughts from others on their favorite negotiating tips, corporate development practices and amusing deal stories.