Windstorm Woes

My neighborhood in Redmond looked like a bomb had gone off last Friday morning, with trees down everywhere and power lines draped on the ground. While the trees have been largely chopped up (including the one that landed on my roof), we're now on Day 6 of no power. We're coping, but it doesn't inspire a lot of confidence about what will happen if we ever face a real disaster here in the Northwest . . .

Yahoo - Facebook Leaked Docs

Techcrunch posted purported internal Yahoo documents supporting an acquisition of Facebook for up to $1.6B. $1.6B? Are you kidding me? As I've posted before, the child prodigies running Facebook should take the money and run - even if it's "only" $1B.

Anyway, the Techcrunch Yahoo docs include some high level model readouts. All I can say is that I don't think I'd want to explain to senior management that my business case for a $1.6B price depends on believing that a service like Facebook can:

- Be regularly used by 60% of high school and young adult internet users and
- Reach sustainable 58% profit margins (up a tad from today's -33%)

At least they're using a 19% discount rate. I know things are tough at Yahoo, but overpaying for a MySpace also-ran like Facebook isn't the answer.

3rd Place Winners

In a recent New Yorker article titled "In Praise of Third Place", oft-praised-in-this-blog writer James Surowiecki profiles the financial success of Nintendo compared to the higher-selling but less profitable games units of Microsoft and Sony. By focusing on units that are really good at playing games - as opposed to the be-all-end-all XBox and Playstation units - Nintendo has made a great business out of third place. Meanwhile, its competitors slug it out for market share leadership, losing money on every unit sold (and no, you don't make that up in volume).

In thinking about mergers, there is often a bias for scale. While it's a fair assumption within certain parameters, there is a point beyond which scale doesn't offer meaningful cost structure reductions - and which can lead you into a bottom-line-punishing race for to preserve a market-leading position. This is why the synergies assumed in large merger financial analysis need to be carefully evaluated, and the strategic questions of whether a larger scope is truly desirable fully vetted.

Back to Nintendo vs. XBox/Playstation: A lot of my Redmond neighbors work at Microsoft, including several in the Xbox group. They ALL want the Nintendo Wii.

"Corporate TiVO"

Fascinating article in BusinessWeek Online about Best Buy's approach to working hours at corporate HQ. Trying to embrace what they call "ROWE" ("results only work environment"), Best Buy employees are to eschew "face time" and regular hours in favor of focusing solely on results. As one employee gushes, the ability to work where and when one likes is akin to "corporate TiVO."

I've railed on the topic of face time a bit in the past, and as I noted recently, technology changes over the last ten years have radically reduced the need for many corporate workers to log regular hours in an office. Unfortunately, those outdated notions still hold great currency. It says a lot that the grass roots founders of Best Buy's program had to sharply point out the need to focus on results. Nothing else about one's time in the office matters, of course, but how many of our corporate policies, procedures, rules and attitudes are directed at controlling or measuring things unrelated to results?

New Corporate Dealmaker Column

I've been writing a regular back page column in Corporate Dealmaker magazine, looking at some of the details and idiosyncrasies of doing deals. I neglected to post the first article before now, so here it is, along with the latest. It's a fun outlet; feel free to e-mail me with any comments or topics you think I should write about.

The Evils of Private Equity?

Excellent analysis from Going Private in response to the increasing spate of journalistic attacks against LBO transactions - she does a nice job dispensing with the muliple "shareholder protection" arguments that are popping up against PE deals.

I would add that there's nothing inherent in LBOs that makes them any less favorable to shareholders than strategic M&A transactions. At root, all of the objections to PE are based on a common presumption of board ineptitude and managerial duplicity. The assumption that evil managers will run their companies into the ground so they can pursue LBOs is comedic (as we've seen, such types prefer the easier work of book-cooking and options back-dating). In any event, there are just as many opportunties for corrupt management to profit via strategic M&A as there are in LBO deals, so why are our PE friends being singled out?

Due Diligence - Sellers

While diligence is ostensibly the buyer’s process, it typically is a bigger deal to the seller, who should take pains to manage the process closely. This is because wide-open diligence poses any number of problems to sellers:

- Disclosing sensitive information (often to a bitter competitor)
- Consuming management time
- Dragging on without end

As a seller, you’re highly motivated to limit the scope of review and the time buyers have to review the information. You don’t want to waste time and resources turning everything over, particularly if you know the documents are of marginal utility to the other side. It helps to try to think like the buyer and anticipate which of your information would be most useful to them, even if it’s not exactly what they’ve asked for.

You also don’t want to make your executives available for endless meetings and diligence sessions with buyers. Savvy buyers know that such meetings are not typically very helpful, particularly with public companies, and will be fine with keeping them brief. With others, you will need to set limits on availability, and be sure that the questions are appropriate for the senior exec involved. There’s nothing like seeing a slack-jawed head of marketing getting grilled about the intricacies of last year’s advertising budget . . .

And then, of course, there is the sensitive stuff. What’s important here is to keep things in perspective. Yes, it can get the hackles up to see your competitor rifling through your secrets. On the other hand, not everything marked “confidential” is worthy of considering thusly. Use this simple test: If your competitor doesn’t buy you, and violates the NDA and tries to use the info against you, what’s the worst they can do? For the vast majority of so-called "confidential" info the answer is: Precious little. Share freely if it’s painless to do so. For the truly sensitive stuff, consider providing it later in the diligence process once things have turned serious. You can even redact or simply tell the buyer it’s too sensitive to share (this last move is best used with care, as it can easily blow trivial documents far out of proportion to their meaning in the context of the deal).

Finally, while buyers would be content doing diligence 'till the cows come home, sellers are wise to put time limits on the process. The amount of time will depend on number of bidders and deal leverage, but setting boundaries is key. Naturally, you will not want to let diligence push on past signing unless it is limited to specific integration matters (and isn't set up as a closing condition).

There are far more intricies to how sellers handle the diligence process, from document copying to using multi-party diligence to further an auction process. I'll try to cover some of those in later posts.

Due Diligence - Buyers

Questions percolate in about the diligence process, so I thought I'd post some thoughts on various aspects of the process from the differing perspective of buyers and sellers. Today, the buyers:

As a buyer, your primary goal in diligence is simple:

Verify that the asset you are buying is essentially what you think it is.

However, buyers often run their diligence in ways that, at best, cost them money and time, and at worst ruin their deals. The two primary mistakes are using a cookie- cutter approach to diligence and over-reliance on outside help.

If an acquiror applies a standard diligence approach to all deals, it will inevitably be overdoing its diligence on many deals. A screaming deal - either due to price or strategic need - demands a very different level of diligence than a deal that is in the margins financially and for which there are strategic alternatives.

In the latter case, you'll want to go through everything at some level of detail, because even small hiccups could push your marginal deal into the red. In the former case, you should just be doing what I like to call "nuclear" due diligence - take a high level pass and make sure there is no radioactive waste: Subsidiary asbestos mining companies, crooked accounting - you get the idea. Subjecting such a deal to a rigorous diligence process is simply a waste of time and resources. Worse, since it is such a great deal, the delay inherent in doing such detailed work - and the annoyance it causes your target - may open a window for an interloping buyer to push you out of the way. If you went shopping for a new TV or computer last Friday, you would have seen this principle at work at Best Buy and Circuit City stores across the land: Not a lot of consultive selling; just a mad scramble to get the limited-quantity deals.

Relying over-much on outside accountants, consultants and lawyers complicates problem number 1. Diligence is in many ways an ass-covering exercise for those involved. In the absence of very clear guidance, even internal people will overdo diligence out of concern for missing something. External professionals will be even worse. Their incentives - financially, professionally and with respect to potential liability - are all aligned on the side of doing exhaustive diligence. As a buyer, you need to make sure they understand very clearly what your goals are for diligence in each case. Are you looking only for unexploded bombs, or for any accumulation of small liabilities? As is the case in many strategic deals, time to deal execution is often far more important than doing a complete diligence work-up.

As a buyer, it is important that you have a senior person running the diligence process so that the personalities can be controlled and the process tailored to the needs of the specific deal.

One final thought for buyers is the difference between valuation and integration diligence. In strategic deals involving significant integration issues, you need to do some high-level diligence on the integration process: Verify software platform versions, people issues, etc. However, the specifics of the integration process are unlikely to matter in verifying value or deciding whether the deal is go/no go. The tricky part is that your operating people will want to get into the specifics right away, because they are responsible for delivering the post-merger results. And of course, it's critical that integration happen quickly and smoothly so deal synergies can be fully realized. One approach that often works - particularly if you've been reasonable with valuation diligence up front - is to negotiate in the definitive docs a process for integration-related diligence between signing and closing. Such diligence won't be a closing condition, and it will be limited to integration-related information, but it can meet your need for speed in the stage up to signing while still getting the detail your ops folks need to start integration as quickly as possible.

More on Mining Deals

Check out The Deal for an in-depth look at the mining company M&A saga I've been posting about all year. The article, which obviously went to print more than a week ago, ends by speculating that Phelps Dodge might be an acquisition target. Indeed.

Google AdSense

With Google shares cresting the $500 mark, I thought I'd help out and add AdSense to my blog. I'm interested in seeing howly closely the AdSense program can hew to the target audience. This is a narrowly-focused blog - will it elicit ads for diligence and financial services or garden tools?

A Classic Rediscovered

I recently read Sloan Wilson's The Man in the Gray Flannel Suit. The book has often been described simply as a critique of corporate conformity, but that's far from apt. While it is in ways a period piece, its themes of balancing corporate ambition and family responsibilities should resonate with any of us corporate tools.

Our hero, Tom Rath, has even more than that to contend with: As the book opens, poor Tom strives to answer the following inane question on a job application: "The most significant fact about me is . . ."

It's a shock, then, when he considers the following response:

"It was the unreal sounding, probably irrelevant but quite accurate fact that he had killed seventeen men."

So Tom's got to climb the corporate ladder, find time for family and come to terms with his wartime experiences. Five years ago that would have seemed difficult to relate to; not so much now as our Iraq veterans return to the workplace

More Mining Consolidation

Readers of Corporate Tool will recall my fondness for the flurry of transactions this year in the mining sector, which has seen an unprecedented level of consolidation and hotly-contested deals. Those who followed this summer's trials and travails will recall the following:

1. Inco and Phelps Dodge agree to merge, with Inco acquiring Falconbridge as part of what is to be a 3-way deal.

2. Falconbridge is not to be had so easily, ultimately succumbing to Xstrata after a protracted bidding war.

3. Inco, reeling from its loss in the Falconbridge bidding, breaks off its agreement with Phelps Dodge and falls into the arms of CVRD - but not without extracting a nice premium in yet another bidding war.

This morning comes the news that Phelps Dodge, unable to bulk up as planned, has sold to Freeport-McMoRan for $26B. This represents a 33% premium on top of what has already been a nice run-up on the back of record copper prices; Phelps shares were at an all-time high before the deal was announced. A nice time to sell, and this summer's series of interloping offers obviously led Freeport to lob in what is sure to be a knockout proposal (further boosted by being two-thirds cash).

Besides the valuations and the bidding intrigue in all these deals, what's fascinating is the speed with which consolidation is causing even old-line companies in an old-line industry to lock up: Phelps has been an independent enterprise since the 1830's!

Techno-Slavery

I received a number of messages re my last post, and just at a time when my own work/life balance has precluded spending any time thinking about blogging. One common thread in the e-mail has the importance of using workplace technology as a tool for enriching one's life, rather than letting it enslave you.

Take mobile phones - I've had one since 1993, and it's hard for me to imagine a bigger productivity booster than having near-ubiquitous voice contact wherever I want it. At the time I got my first phone (an analog beast installed in my car), I had a debate with one of the other lawyers in my firm about whether it was a good idea to have a phone. He was a free-spirited surfer dude, and he sneered at mobile phones as "electronic dog collars" . . . until the day a few months later when he made a two-and-a-half-hour drive to a deposition that was cancelled ten minutes after he left the building. What I stressed then, and did again when talking to my father years later when he was dithering about getting his first phone, is that the damn things come with an "off" button for those times when you don't want to be reached.

With technology like mobile phones, e-mail and, indeed, portable broadband, the issue is more about boundaries than the technology itself. Technology is only going to enslave you to the degree you let it. And if you're able to use it to work more efficiently or shift work around so you can have a more flexible day, it's downright freeing.

Of course, even solid boundaries can't save you from the problems of "bleeding edge" technologies - those things that seem to hold the promise of making our working lives easier but consume more time than they save by clumsy interfaces, too much maintenance or lack of reliability (think voice recognition software, most PDAs and all-in-one message services). I'll take a pass on the "gee whiz" stuff unless in can make my life better right out of the box.

Work-Life Balance

Not to keep pushing Fortune, but once again I've got to point out their work - the latest issue, besides having a terrific in-depth piece on the fall of Milberg Weiss (hee, hee), has an illuminating "How I Work" portrait of Sun CEO Jonathan Schwartz (sorry; no link). I really like this feature - it's interesting how successful business people seem to have so many different ways of structuring their time.

One constant, however, seems to be a lack of balance between work and family time. This is a theme you see almost every month, whether it's Toyota's former chairman lamenting the lack of time spent with his children while they were growing up or PepsiCo's CEO flatly stating that balance doesn't exist for her. For anyone who has spent time around CEOs and other senior management types, this isn't shocking. Whether it's the job or the people who usually occupy it (or a little of both), obsessiveness seems to come with the territory. Unsurprisingly, Schwartz expresses a similar sentiment, but with a twist: "There is no line between personal life and professional life, especially if you care a lot about what you do. I used to really resent that, and then it became really freeing."

Freeing? That seems weird at first, but look at how Schwartz works - not cloistered in an office, but on the move, able to connect with employees and customers wherever broadband is available. If your work and life are interconnected, it's not so much about balance as it is about flow: Making the moves between personal, family and work activities as frictionless as possible. With broadband wherever you go, this integration becomes much easier. I'm guessing this is what Schwartz is getting at - the freeing feeling that you no longer need to sit at a desk all day; that's it's OK to spend a couple hours with your kids in the evening, knowing that you can shift some of your work to after their bedtime. This is a far more liberating attitude than the oft-heard complaint that technology is intrusive, pushing work into places it shouldn't be.

Obviously this doesn't work for all jobs, but for many corporate types it should. I've tried to work that way since as far back as the pre-broadband days, and I welcome any technology that makes it easier for me to be successful while still having a personal life. We all need time in the office to collaborate and connect, and we need to spend a certain amount of time every day getting our work accomplished. What's no longer true is that we need to do it all in one place or all in one chunk of time during the day. That is freeing.

Hiring CEOs - Damage Control at Best?

Got around to reading Justin Fox's intriguing Fortune article on measuring CEO performance. Interesting timing, as I've had a number of recent discussions with company leaders about what, precisely, a CEO is supposed to be doing. Some focus on operations, others on strategy; some sit in their offices all day, others are out meeting customers and business partners. However, the bigger the company and the more diffuse its products and customers, the narrower the scope that the CEO can directly impact. In fact, pretty much the only area a large-company CEO can affect overnight is the corporate structure and culture. Sadly, changes in those areas have disparate impacts: Positive changes will yield incremental benefits that take time to accrue into meaningful results; negative changes will stink the place up right away as talented employees flee and morale plummets.

What this means is that a great large-company CEO can have a small positive impact on a company, while a boob in the same role can cause utter havoc. Amidst the rush to hire superstar CEOs, it's sobering to think that a board's most important consideration is ensuring they get someone who won't screw the place up.

DOJ Tries Constraining Second Requests

This is welcome news that DOJ is trying to put some limits around how it handles second requests for information in large mergers. The biggest issue in second requests is the sheer number of documents that need to be provided to DOJ. When I ran the process for relying to DOJ's second request in the sale of AT&T Wireless, we ended up turning over 10 million pages of documents - and that was the smallest number provided by the 4 parties (SBC, BellSouth, Cingular, AWE) in the merger. We upended the offices of dozens of employees, and for a two-month stretch commandeered a large conference room and filled it with scanners that busily hummed away night and day collecting the documents. I doubt that the mountains of documents dumped on DOJ's door during that process could possibly have been reviewed in any meaningful way, rendering the document portion of the second request more of a costly compliance exercise than anything else.

It's unfortunate, because DOJ has an important job to do in reviewing mergers, but the tools it wields are the blunt instruments of litigation. Any merger of substantial size is going to be subjected to a second request, and thus put through the time and expense of a paper response that must follow the broad rules of discovery in litigation but that is unlikely to be useful in most cases. I suspect that DOJ's economic analyses and the parties' responses to interrogatories (and perhaps certain electronic discovery) are far more determinative to DOJ's decisions on blocking mergers and negotiating consent decrees than any documents provided. Ideally, DOJ would find a way to limit or stage document production while finding ways to more closely hone in on the critical review issues in each merger. Anything that moved this process away from the binary intractability of litigation - at least in all but the most extreme cases - would be welcome indeed.

Private Equity Collusion

Quick post in NYT Dealbook today regarding the latest prosecutorial muscle-flexing against corporate America; this time a DOJ inquiry into the possibility that private equity outfits are colluding to keep prices low.

I'm sure DOJ's investigators have thought about this a lot more than I have, but it doesn't seem to pass the smell test. Private equity is playing in bigger and bigger deals, and prices as a multiple of EBITDA (or any other measure you choose) keep rising. This hardly seems an environment colored by collusion.

Yes, as Dealbook points out, average premiums in $1B+ deals (those where consortia of PE firms are likelier to submit club proposals) are smaller at 16.5% than the 27.4% fetched by sellers in the $100M - $1B price range. But bigger companies are typically associated with mature markets, lower growth, etc. - all factors that keep a damper on the mark-up paid.

In fact, PE firms cobbling together clubs to compete for big game - bigger, at least, than any of the constituent members could take down solo - would seem to enhance, rather than detract from, competition. Finally, there's the issue of market harm - $1B+ companies are not clueless naifs being forced to take cut-rate prices. Beyond their sophistication, these companies have alternatives in strategic buyers and, of course, continuing to run independently.

If DOJ really has a bone to pick with PE, perhaps its energies would be better spent looking at all of those dividend recaps . . .

HP Board Leaks and the Trust Issue

James Surowiecki has another typically excellent article on the need for trust in making good corporate decisions. Trust among colleagues allows for vigorous debate without the participants feeling like they are being personally attacked or put at risk for airing their views. As we know - but don't see often enough in the corporate world - open, unfettered discussion of alternatives leads to the best decisions.

By all accounts, the HP board was not a model of decision-making prowess to begin with. However, as Surowiecki points out, the HP leaks, overshadowed as they might be by a bungled and overreaching investigation, further diminished that capacity.

Facebook and YouTube

I've said before that Facebook should take the money and scamper, if indeed Yahoo is willing to pony up $900MM large. My biggest concern is that while Facebook may be different in many ways than MySpace, it's not really a competitor. I'm not sure it can reach beyond its niche, and it runs a very real risk of being swamped under as MySpace's youthful devotees start entering college. I just don't see enough upside versus risk for Facebook to justify scorning mountains of the good stuff.

YouTube, apparently in play at $1.6B mark from Google, is a different story. This company is comparable to MySpace in reach, and even more so in possibility. YouTube has, seemingly overnight, built an unbelievable brand. There's a lot of hand-wringing over YouTube and copyright issues, but it's all noise - I guarantee those issues will be in the margins, if not forgotten, within a year. Besides all the kooky stuff, smart media companies have begun seizing on YouTube as a distribution source, and who knows what the company could pull off with the heft of a major partner? All in all, it's not at all shocking to see the price this high. While YouTube's sub-30-year-old leaders will most likely sell, unlike Facebook I wouldn't fault them for holding out and continuing to grow the business.

Fortune on the Guidant Deal

Good in-depth report in Fortune on the Guidant - BSX deal. It's a good thing the medical devices industry offers the potential for companies to experience "bursty" growth, as BSX has got a long road back from what is being described as the "biggest M&S blunder since AOL/Time Warner." J&J's recent lawsuit now looks more like the pouring of salt on BSX's wounds than anything else.

J&J Sues Over Guidant Loss

Readers will recall my many posts (start here and work forward) during the Johnson & Johnson - Guidant saga, which was a textbook example of the perils of being overly aggressive with enforcing material adverse change (MAC) clauses in deals. The deal progressed thusly:

- J&J bought Guidant, then backed out during the pre-closing period, citing the MAC clause over a product recall and SEC investigation at Guidant.
- Using this leverage, J&J extracted a reduced deal price from Guidant.
- This elicited interest from other firms, inciting a (post- deal signing) bidding war.
- Interloper Boston Scientific won out, acquiring Guidant for $2B+ more than J&J's original deal price, including a $705MM break-up fee to J&J.

Today, many months later, J&J has sued BSX for $5.5 billion. This figure presumably represents the lost deal value and the many expenses J&J incurred throughout the process. Curious to see what kind of evidence they have, as at first blush this looks like a loser. It's also - of course - a self-inflicted problem, as J&J could have avoided all of this unpleasantness by sticking with its original deal, despite Guidant's temporary setbacks. If J&J really wanted Guidant this badly, they should have kept the long view when the wheels were falling off last winter.

Facebook - Yahoo

Facebook is reportedly close to selling itself to Yahoo for about $1B. Although this is less than the $2B valuation Facebook was crowing about a few months back, it seems a shockingly high valuation for a property that could be reduced to irrelevancy by MySpace or whatever the next big thing in social networking turns out to be.

It's truism in dealmaking that once you've decided you want to do the deal, you need to get the ink on paper as quickly as possible. Until that happens, too many things outside of your control can cause the deal to fall apart. You'd think this concern would ring especially true for a company like Facebook, whose potential competitors have no barriers to entry and whose popularity is dependent upon the fickle tastes of people under the age of 25. Yet the WSJ reports that Facebook founder Mark Zuckerberg couldn't even be bothered to take phone calls over the weekend as negotiations wore on, due to his girlfriend being in town. Others think the company should take its time, hire bankers and get an auction going.

There are times to stretch things out, and perhaps the people at Facebook still think $2B (or close to it) is an attainable goal. It isn't. If they get an auction going they may find little interest. Now isn't the time to worry about leaving a few dollars on the table - I'd like to see the young Mr. Zuckerberg take the life-changing $1B deal rather than risk holding out for more.

HP Board Shenanigans

With my blog locked up, I haven't been able to comment on the boardroom mess over at HP, but I'll leave it at this - I am not surprised in the least that HP's Board chair pursued a take-no-prisoners investigation of boardroom leaks that included sussing out the phone records of Board members, HP employees and even several reporters. Hubris is an ugly thing.

What's disappointing is the lack of media perspective on the fact that a senior Director of a major American company was leaking confidential company information in the first place. Such disclosures are most likely violations of a Director's fiduciary duty and confidentiality agreements, have a corrosive effect on the workings of the Board, and do a disservice to the company and its shareholders. Sadly, this tale of corporate governance in breach doesn't make the juicy copy of a ham-handed pat-down by HP's investigators.

Blogger in Beta

Corporate Tool has spent the last several weeks in limbo, attempting the epic migration to Blogger in Beta. Like unfortunate immigrants in the past, the erstwhile blog encountered obstacles along the way, and became "stuck" between here and there, unable to accept posts or even receive visitors. My thanks go out to Google's Chris Sacca, who led me out of the wilderness and back to old standard Blogger. I'll try the journey again in a few weeks once these kinks get worked out.

Wal-Mart: Half-Off the Evil

Living in the middle of the Seattle metro area, I’d have to go out of my way to find a Wal-Mart. I suspect this distance from an actual Wal-Mart Supercenter is something I have in common with the vast majority of people who wring their hands over the impacts of Wal-Mart on everything from family businesses to the health care system to the labor movement.

About five years ago, I had an experience with Wal-Mart that led me to believe that the truth of its impact is far more complex. I was buying a cellular operation for AT&T Wireless on Kauai, and everything seemed to come back to Wal-Mart: Where’s the best place to keep distribution? Where should we advertise? What should we give employees as thank-yous (Wal-Mart gift cards)? Kauai may be an island paradise, but many who live there struggle to make ends meet. The conveniently located Wal-Mart turns out to be the hub of commerce for full-time residents.

While there’s little question that a Wal-Mart opening down the street is bad news for you if you’re running a convenience store, how good is it for the customers who’ve been buying your limited selection of overpriced goods? A recent article looked into this and came up with some surprising conclusions about the sheer size of the benefit to consumers of Wal-Mart’s low prices. One could quibble with the assumption that Wal-Mart’s prices are really 8% lower across the board, and commentators in the past have concluded that Wal-Mart is a sophisticated user of loss leaders and keeps many prices high. However, there’s no question that the prices and selection offered by Wal-Mart represent a major improvement for the consumers in the markets they enter.

At the same time I read the study above, I was reading Dan Baum’s otherwise excellent New Yorker article on the trials and travails of New Orleans’ Ninth Ward and was struck by this comment:

“. . . the city got a federal grant in the nineteen-nineties to raze the St. Thomas housing project, which occupied a prime spot near the Mississippi River, and replace it with mixed-income housing and resident-owned shops. . . . the result, River Garden, is a collection of simple, attractive attached houses that stood up well to Katrina. Somewhere along the way, though, the number of subsidized units fell by more than two thirds; the idea of resident management disappeared; and the small resident-owned stores became a two-hundred-thousand-square-foot Wal-Mart.”

To the residents who otherwise would have run these businesses, this is a failure. But what about the local residents who now have a reliable and inexpensive place to shop? Areas around housing projects aren’t know for having the shopping and service options a Wal-Mart brings to town. Check out the Wal-Mart “store finder” for stores near you. They are consistently in lower income and/or rural areas. Yes, the Bentonville behemoth may not be a role model for employee satisfaction or supplier relations, but like most large systems its impacts are many and varied. For many folks a new Wal-Mart coming to town is – or should be - a cause for celebration.

Wodehouse on Mergers

On vacation in sunny Central Oregon last week, I read a classic from one of my favorite writers, P.G. Wodehouse - Jeeves in the Morning. Few others can brighten one's mood like Wodehouse, particularly any of his stories involving Bertie Wooster and Jeeves. The Britishisms practically beg to be read aloud for maximum comic effect.

Jeeves in the Morning, written late in Wodehouse's life, is classic Wooster, bumbling his way into one increasingly dire situation after another - insulting his rich uncle, inadvertently getting engaged, burning his rented cottage, etc. It also features an M&A angle: The principal situation from which all of the ancillary troubles spin is Bertie's attempt (on Jeeve's suggestion, of course) to set up a clandestine meeting for merger discussions between his uncle's Pink Funnel steamship line and its American competitor, the Clam Line. Great stuff.

Miner's Joy

I couldn't possibly keep up with the wild action going on in mining company M&A, but this morning brings another development on the most volatile situation in the sector - the battle for Canadian nickel miner Inco. Readers will recall that Inco is engaged in a friendly tie-up with copper king Phelps Dodge, and that zinc miner and fellow Canadian Teck Cominco has lobbed in increasingly aggressive hostile bids.

Today brings a new entrant, Brazil's Companhia Vale do Rio Doce. CVRD, the world's biggest iron miner, fired over a hostile bid of around $15B (plus debt assumption). Inco may not have wanted an auction, but they've got one now.

Say No More on SarBox

Equity Private has another post today on the cost to U.S. business of Sarbanes Oxley compliance. In the post (and an earlier one), she provides a detailed and thoughtful way of looking at SarBox compliance expense. I can only add this: Having witnessed the compliance effort first-hand, including having had to manage the process for my department as we struggled through the initial implementation after SarBox took effect, EP's cost assumptions are without question understated.

Copper Run Continues

I posted a couple of weeks ago about the deals swirling around the mining industry. As expected, Falconbridge was snatched away from Inco last week by Xstrata, undoing a planned three-way tie-up between Inco, Falconbridge and Phelps Dodge.

Phelps plans to proceed with its friendly acquisition of Inco, but Teck Cominco is trying to crash the party, raising its hostile bid for Inco. Two interesting aspects of this that seem to point to overheating in mining assets: 1) Phelps stock popped up on news that Falconbridge was lost, and shares are up another 8% today on (among other things) hopes that Teck's sweetened offer will keep Phelps from buying Inco; and 2) Teck has improved its offer by upping the cash component. Yes, the latter provides greater certainty that the seller will receive value, but it also suggests that there has been a lot of discussion in these negotiations about how much room there really is for Teck shares to grow after making this acquisition.

Judges and Consent Decrees

I would add that judicial deference to DOJ in reviewing consent decrees is warranted. Justice does an incredibly thorough, months-long review - the companies involved must turn over thousands of documents, answer pointed interrogatories and generally let DOJ and its investigators and economists dig deep into their businesses. The fact that the remedies in consent decrees sometimes seem mild says less about DOJ's focus on enhancing competition than it does about its assessment of the chances of prevailing in a lawsuit to block the merger. Most mergers - even consolidating ones - are unappealing to a few parties but unlikely to be shot down under current antitrust laws. So, like any litigators seeking to salvage something from a bad case, DOJ will try to get some kind of concession from the merger participants.

Consent Decree Review

I'm watching with some fascination as the SBC-AT&T and VZ-MCI mergers are going through a rarely-seen kind of judicial review at the very tail end of the merger process. Up to this point, things have proceeded in what I'd call the ordinary course for big consolidating mergers: Post-signing, a Hart-Scott-Rodino review process involving lengthy discussions with DOJ, the production of millions (or tens of millions) of pages of documents, and ultimately the negotiation of a consent decree with DOJ that ends the Department's review. The consent decree obligates the merged company to undertake (or refrain from) certain actions - divesting properties, staying out of certain markets, or, in the case of these deals, keeping open to competition a limited number of fiber optic connections.

The consent decree is a settlement agreement in litigation - upon reaching agreement on the consent decree, the DOJ files a lawsuit in federal court ostensibly seeking to block the merger, and at the same time (or shortly thereafter) files the consent decree "settling" the lawsuit. As this is typically the longest lead time item in a consolidating merger, the parties usually close the deal as soon as the consent decree is filed. Later on - and, importantly, well past closing - a judge reviews the consent decree. It's fair to say that judges have typically shown a great deal of deference to DOJ's findings in approving consent decrees.

Judge Sullivan, reviewing the consent decrees here, is questioning the rationale behind the remedies agreed to by the DOJ. It's possible that he is just carefully fulfilling what he sees as a mandatory duty to review the appropriateness of consent decrees, and that the pleadings filed by the parties were too short on substance for him to do so. But the vocal opposition to these deals - and Sullivan's since-retracted call for evidentiary hearings - keep open the possibility that this may get ugly.

This new judicial toughness under the 2004 Tunney Act amendments also raises a whole new set of considerations in negotiating a consolidating deal. As a buyer, do you insist on being able to hold on closing until any consent decree is approved by a judge? As a seller, what do you need to get out of the deal in order to agree to that? Can either party afford to wait the year-plus period it takes to complete the entire process? SBC and VZ can obviously absorb a certain level of changes to the deals they cut with DOJ, but what happens when a judge imposes changes so onerous they crater the original rationale for the deal? After all, it's not like these companies can go back and recreate the status quo pre-closing without destroying a tremendous amount of value.

Sale of AWE - full article

Here's the link to the article in Corporate Dealmaker.

Sale of AT&T Wireless

I'm making a foray from blogging into print. I'd originally planned to serialize my tale of the AT&T Wireless auction here, but it will now be published in the next issue of Corporate Dealmaker magazine. Look for that next week. As a first-person account, it's a little different than typical professional magazine fare, and offers a (hopefully) entertaining view of the ups and downs of the daily work involved in completing a massive deal.

Copperheads

It's been a record-setting year for both M&A transactions and commodity prices, including copper. As often mentioned, at current prices the value of the copper used in a penny exceeds one cent. Naturally, these forces are meeting among the mining companies, where transactions are stacking up and the bidding is fierce.

The best melee going on right now revolves around Canada's Falconbridge: Nickel miner Inco made a friendly overture to acquire Falconbridge, but this has now been trumped by a quasi-hostile bid from Britain's Xstrata. Adding to the amusement is that the Inco proposal is a three-way deal under which both Inco and Falconbridge would be swallowed up into copper giant Phelps Dodge.

With the Falconbridge deal slipping away to Xstrata, other suitors are now swirling around Inco, threatening the Phelps Dodge takeover. Inco has already received a hostile bid from zinc miner Teck Cominco - and more are sure to come. A lot of people are betting that this is the run that will put the lie to the conventional wisdom that mining is a boom-and-bust industry. Time will tell . . .

Agreements, more

So what kind of agreements can be short and sweet? One big and puzzling category, where time and again I've seen an inordinate amount of attention devoted, is that of agreements that can be terminated by either party at any time on 30 days notice. It's a safe bet these agreements could be shorter; after all, you can't build much else in a business around an ongoing agreement that either party can terminate quickly, so damages for breach are likely to be limited.

Every state has a body of commercial law governing contracts that will apply even with the most minimal of terms. Warranties, implied covenants, etc - for the most part all commonsense principles that we all assume when we enter into deals. At its most basic, a written contract really only need contain those specific and idiosyncratic terms that are important to the parties. That will always include price, term and when certain key events need to take place; it will usually also include a few other matters unique to the circumstances. After that, everything else is just risk shifting.

More on Agreements

Blogging has taken a bit of a back seat of late, but a long wait in an airport is always a good cure for that, so here goes. I received several messages back responding to my "lopsided" agreement post with the general theme that it's better to keep agreements as brief as possible.

I'm a big believer in that when it comes to term sheets, and I like it in theory when it comes to definitives, but it's not always easy to achieve. Like haiku, it often takes more time to write a short agreement than a rambling one. In the (large) corporate world, the sheer number of people weighing in will often create a longer agreement, and there's no avoiding long agreements in complex transactions.

However - many commercial transactions can be handled with very brief agreements. In fact, you could write the terms on a cocktail napkin, sign and move forward. I've seen cases where the process of turning an otherwise straightforward transaction into a belt-and-suspenders legal agreement has done more than simply cost time and expense: Deals lost, relationships ruined, and lawsuits created over ambiguities in the "legal" agreement that would never have existed had the parties signed a one-page agreement. Sometimes it's best to just sign a brief letter and move on with your real business.

First Draft Agreements

As a reformed lawyer, I may be more sensitive to how contracts are drafted than some other deal guys. However, a conversation with a former colleague reminded me of a particularly annoying tactic some folks use when sending the initial draft of a definitive agreement - the one-sided, overreaching first draft. It's not something you see every day, but still far too often.

I'm not talking about terms that need to be unilateral or lopsided because of the parties' differing roles, or even terms that are being aggressively negotiated. No, these agreements are laced with terms that favor the drafting party beyond any measure of reason.

Some claim that it makes sense to send over a lopsided contract because (a) the terms may stick and (b) it gives you terms to negotiate back from. I don't find the first point compelling, and the second represents a rather juvenile outlook on negotiating. Sure, lopsided contracts will occasionally work with unsophisticated parties or those you have loads of leverage over. However, in the vast majority of cases they will:

- Piss off your counterparty, harming any useful rapport you may have established
- Make your counterparty dig deeper into the agreement to look for all the other ways you're trying to screw them
- Waste a lot of time as the agreement gets negotiated back to where it should have been in the initial draft

End result: You're back in the same place you would have been had you sent a fairly-written contract, at substantial net expense in time, fees and credibility. You may even lose the deal because of the added delay or trust issues created by your draft.

Pissing Matches

I spent the first few years after law school as a litigation attorney in a small firm. I learned a lot, and worked with some great folks, several of whom are still good friends. Despite the long time (and career changes) since then, stories like this remind me of what I hated most about litigation - the petty bickering over meaningless crap.

In a negotiation, you can usually find ways to rise above this stuff. In a lawsuit, you may be trapped by the obstinacy of your opposing counsel. What's really amazing here is that both parties to the litigation are companies (OK, insurance companies, but still). You'd think the litigation managers would be wondering why they're getting billed for motions to be filed over such nonsense.

The NPV Trap

Sorry, no link, but the FT ran an article last week on "valuing innovation" that gets right to one fundamental problem with financial analysis - its usefulness varies greatly depending on the maturity of the project. The article focuses on investment decisions in projects and R&D, but the thesis works just as well with M&A.

Probably because I come from a non-financial background, I've always nursed a little rebellious streak when it comes to financial analysis and the pedestal upon which NPV calculations are placed in the corporate world. Sure, I'll use them as much as the next guy, and I am a firm believer that a discounted cash flow analysis is the single best way to assess the value of an operating business. The problem is that such analyses are only as good as the assumptions that go into them.

While future results for mature operations can be estimated with a fair bit of accuracy (or at least conformed to the acquirer's 10 year planning assumptions for modeling purposes), trying to produce a similar DCF model for a 6-person start-up with wonderful but untested technology is an exercise in fiction writing. Yet - who hasn't seen someone trot out an NPV analysis and hold it up as objective truth, despite the fact that the assumptions underlying the analysis might as well have been plucked from a hat?

There can be a powerful tendency to try and view all potential investment via the same lens, and NPV analysis often gets a halo of legitimancy because it is numbers-driven. Sadly, the numbers that come out are no better than the assumptions that go in. The FT article thesis is that companies should use multiple scoring factors in evaluating projects, with greater weight given to financial analysis as the project gets more mature (and hence more amenable to accurate forecasting). In the case of acquisitions, companies need to weigh factors other than just the NPV analysis - strategic fit, customer needs addressed, people issues, scope of potential benefit, etc. Equally important, the NPV analysis should be known for what it is - a very useful tool under the right conditions, but one of diminishing usefulness when it comes to the new and different.

Trademarks and Cease-and-Desist Letters

Great, thoughtful post in Ventureblog regarding the dust-up over the "Web 2.0" trademark registration. As a reformed lawyer, I would take a point made at the end of the post even further - enterprises that allow their counsel to decide when to send cease-and-desist letters are almost always making a mistake.

Why? Even if the use is in the gray area, there's no downside (from a strictly legal perspective) to sending a letter, and such letters are great evidence (again, from a strictly legal perspective) to establishing that you have properly defended your marks. So, if you as the business person bring a question of possibly infringing use to your trademark counsel, the basic legal answer you get back will be to send a cease-and-desist letter. Of course, savvy trademark counsel will walk you through the pros and cons and potential PR and customer pitfalls of taking this approach. Unfortunately, many will simply apply a mechanistic legal test and advise sending the letter.

This can't be the end of your analysis. In all but the most cut-and-dried cases - say, a similarly-sized competitor making an infringing use, or outright stealing/counterfeiting - informal discussions and attempts to resolve amicably must be used prior to dropping the cease-and-desist letter. Such efforts often work, they are cheap, and they can keep your enterprise from encountering something that seems to be repeated as often as the seasons in the corporate world - big companies getting smacked back on the PR front for bullying behavior toward tiny enterprises.

More on Kimonos

My antipathy to the phrase "open the kimono" can be traced back to when I first heard it, about 10 years ago. I had recently moved to an in-house legal position and I was meeting with Lucent - recently spun out of AT&T - to try and resolve a commercial dispute that was teetering toward litigation. I don't even recall the particulars, but I vividly remember the counsel for Lucent, a humorless, pinched-face fellow in his mid-50's, saying he was "going to open the kimono." Yes, he was referring to Lucent's confidential data, but the mental image it created was most unpleasant.

New Favorite Office Book

I just picked up The Dictionary of Corporate Bullshit, which is hilarious and absolutely on point. Taking a cue from Ambrose Bierce's classic The Devil's Dictionary, it offers witty and point-on definitions of corporate buzzwords and standards (e.g., "'Merger:' Source of major freakout mode amongst employees.").

Of course, I read through the more noxious entries with some distress, thinking of how often I have sputtered out hackneyed phrases like "paradigm shift" or "putting a stake in the ground." I am proud to say I have not used "productize", which does not merit entry in the dictionary but should have a special place in corporate-speak hell.

Speaking of which, I was in a meeting this morning discussing exchanges of confidential information where the phrase "drop our shorts" was used. I have to say I like that better than "open the kimono," but all the same I'd rather just talk about "skeletons in the closet."

Phone Records

I've been following this story about the big telcos turning over call detail records to the NSA with some interest. In the late 90's, when I was general counsel for Cellular One of San Francisco, one responsibility of my department was subpoena compliance, and we faced the same type of question every day.

We received all sorts of subpoenas, civil and criminal, from myriad agencies and private attorneys, seeking everything from invoices to wiretaps. Sorting out what could be provided in response to what kind of process (simple private subpoena to court order) was a daunting task: Different agencies have different rights, and circumstances matter, too. We would sometimes provide records in advance of a warrant or order when a kidnapping was underway, for example.

To make our way through this maze of regulations, we had a thick guidebook, regularly updated, that spelled out exactly what could be done in virtually any set of circumstances. Every telco of any size has a guidebook like this - ours could trace its origins to AT&T's guidebook. Received a warrant by fax from the DEA? ATF is calling saying they've got a subpoena? Santa Clara County Public Defender wants phone records? The procedures were all spelled out, along with the accompanying citations to statute, and my folks who dealt with this stuff on a daily basis were very good at sorting through it. They had great relationships with their counterparts in law enforcement and would only come to me when a very difficult or high-profile call needed to be made.

Of these, the hardest calls to make were those involving exigent circumstances - do you believe what law enforcement is telling you about the circumstances and the reasons they need the information now (rather than after they've provided a warrant), and do you believe they will get you a warrant after the fact? But these questions were measured in minutes or hours - getting a warrant is not difficult or time-consuming where the facts justify it.

The current furor over the records turned over to the NSA falls under the much easier category - law enforcement bullying their way to records they may not be entitled to. You see, despite the complexity of so many agencies being subject to different rules about what can and cannot be provided, there is a simple fallback answer when the request falls in a grey zone - "I'd be happy to comply with your request as soon as you give me a warrant (or court order, for wiretaps)." The beauty of this answer is how much ground it covers. It insulates your company from liability for providing records illegally, and if for some reason you are wrong in asking for the warrant, you get a quick education from law enforcement counsel, who will point you to the exact regulation that provides for access without a warrant. Most of the time, they'll grumble and then go get a warrant or order. Sometimes they just go away, as the NSA ultimately did after being rebuffed by Qwest.

In my view, Qwest did the obvious thing in response to the NSA's request. The surprising thing is that AT&T, Verizon and BellSouth rolled over and gave the NSA these records when the simple expedient of insisting on a court order existed.

Dread Not

Fascinating study making news today - it seems that feelings of dread are, in rough terms, a kind of pain, and a fair number of people will engage in irrational behavior to alleviate this pain. The experiment itself is sinister: Subjects are told they are going to get an electric shock, and if they wait longer the shock will be less painful. Apparently a decent number of subjects dread the prospect of a shock so much that they are willing to take a more painful shock now in exchange for eliminating the dread of the shock occuring later.

Like most people faced with an unpleasant task, I'd rather get it over with sooner rather than later. Of course, that may have less to do with dread than with the fact that in the real world the pain/unpleasantness is almost always greater the longer one waits to face it. I'm fascinated that, at least for some people, getting rid of the dread as quickly as possible is worth taking more (physical) pain.

Does this translate to decision-making in business? In cases like Enron or WorldCom hope (or hubris, or crookedness) led businesses and their leaders to delay taking the pain until it is too late and the negative impacts had mushroomed. But what about those businesses that ruthlessly weed out uncertainty, say, at the expense of promising new initiatives or technologies with uncertain paybacks or markets? Is this efficiency, or is uncertainty the corporate version of dread?

Merger-Hostile CEO

Surprising news this morning that Autostrade's CEO, Vito Gamberale, is now opposing the company's acquisition by Spain's Abertis. Surprising not only because you simply don't expect to see such things in any merger, let alone one where the target sells for over $10 billion, but also because Gamberale was publicly touting the deal last week.

What could possibly explain this behavior? It's not unheard of for a board to push for a deal the CEO doesn't like, and that may have been the case here, with the Benetton family controlling a majority of Autostrade. It's certainly odd that Gambarele apparantly did not even know the negotiations were going on until the 11th hour. However, you'd expect owners and CEOs to work these details out before the deal is announced, with the CEO falling in line or leaving. Now Gamberele likely will leave, but only after an ugly public spat. This seems like a worst-case scenario for all concerned - the guys at Abertis have got to be pulling their hair out.

It does bring to mind one aspect of executive compensation that you don't hear much about: Does the absence of a nice equity payout on closing of a merger make company management more hostile to deals that are otherwise in shareholders' interests? In other words, are some executives more concerned about keeping their jobs (or roles) than maximizing shareholder value? I have never witnessed this phenomenon firsthand (although I have seen it in spades among rank-and-file workers), but it would not be a shocker if Gamberale had a different agenda than the Benettons for this reason.

Cross-Border Fun and Games

I spent the last week or so on vacation in Rome - a great place for unwinding and gaining perspective. During my trip I stayed clear of e-mail (and certainly blogging), but I did watch enough of Sky News to see reports of the "merger of equals" (i.e., takeover) between Spain's Abertis and Italy's Autostrade. The new company will be the world's largest operator of toll roads and airports. It will also be headquartered in Spain.

Predictably enough, Italy's incoming Prodi government was all over the deal, questioning whether the Iberian-centric company would have the proper focus on creating new infrastructure in Italy. Putting aside the utter speciousness of that argument for a moment, I am struck by the continued resistance, in our age of globalization, to cross-border deals. And it's not just leftist coalition governments in Italy: In the last year here in the U.S., we've seen major deals blown on even flimsier grounds - the recent Dubai ports debacle and the attempted takeout of Unocal by China's Cnooc. In all cases the putative buyers are major global companies, traded on global exchanges, answerable to investors spread around the world, and often managed by teams hailing far from the acquiror's corporate HQ. Why the hyper-focus on the national roots of the corporate buyer? Listen to some folks talk and you'd think these guys are the modern equivalent of Viking raiders, lighting our thatched roofs on fire and brutalizing the people.

Governments obviously have a right - and a duty - to vett foreign purchasers and make sure deals don't compromise national security. I can even be somewhat sympathetic to government objections to deals that explicitly harm domestic competitiveness or cost a large number of jobs. There are certain higher bars that a foreign acquiror should legitimately expect to have to clear. However, it seems that you've also got to spend a lot of time sniffing out the more extreme arguments, play devil's advocate like a flag-waver, and in the end make a sober assessment of whether your deal can make it past the mob.

Gun-Jumping

Sometimes it just doesn't pay to be a tough negotiator - witness Qualcomm's announcement Monday that it is entering into a consent decree with DOJ and paying $1.8M to settle claims of gun jumping in its acquisition of Flarion ("gun jumping" being where the acquiror starts getting a bit too intimate with the seller's business ops before the deal has closed).

While a buyer can't run the acquired business before the deal closes, there's always a healthy negotiation over the amount of control the buyer will exert (via operating covenants written into the acquisition agreement) during the pre-closing period. These covenants are typically designed to ensure that, to the extent possible, the acquired business continues to operate in a straight-and-narrow course until closing. Themes for operating covenants include the permissable amount of new debt, capital expenditue limits, asset sales, etc. - anything that might materially change the nature of what the buyer thought they were buying. However, buyers usually have to stay well clear of anything involving customers and markets, particularly when acquiring a competitor, to avoid the appearance of gun jumping.

Gun jumping is of heightened concern in industries like telecom, where the wait for closing can exceed one year. The long wait obviously increases the operating risk during the pre-closing period, thus ratcheting up the desire to steer the target's course during that period or get a jump on integration. Many M&A lawyers take a very conservative stance on gun jumping, preventing most conversation pre-close on the (not unreasonable) presumption that some business people will jump the gun. Buyers want to get moving; sellers usually want to be compliant - the gun gets jumped.

What's interesting about the Qualcomm news is that the claims don't relate to any over-reaching behavior by Qualcomm executives, but rather the language in the merger agreement itself.

Obviously the size of this fine is not material to Qualcomm or even this deal itself (the $1.8M fine is well less than one-half of one percent of the purchase price). However, I'm sure the threat of this action scuttling or slowing the deal caused many a sleepless night for those involved - and may still, if you are a Qualcomm lawyer.

Cougars and the Law

Non-corp dev related, but I noticed this morning that the Oregon Department of Fish and Wildlife is moving forward with an expanded plan to control the state's cougar population. Whereas to date the department has responded only to specific cougar sightings, they now plan to hunt cougars more generally in an effort to control the expanding population. To greatly increase the efficiency of this effort, they plan to use dogs.

Cougar sightings are on the increase out here in the West, and cougar populations have expanded at a time of rapid human population growth in western states. My hometown of Bend, Oregon - set in cougar territory just east of the Cascade mountains - has been one of the fastest-growing communities in the country for the last 20 years. There's little question that this combination leads to an increase in human/cougar interactions, as well as losses of livestock and domestic pets.

My first reaction to the news that state-funded hunters would be culling the cougar population was: Why not expand the cougar season and let private hunters do it? That's a cornerstone of wildlife management, as seasons, hunting rules, fees and limits are constantly adjusted to account for population fluctuations. As it turns out, the department has already done that, expanding the season to 10 months and reducing the tag fees to nominal levels. The problem? Private hunters in Oregon can't use dogs to hunt cougars, thanks to a state initiative passed some years back.

The result of the initiative's passing was a steep climb in the cougar population as hunting success plummeted due to the lack of ability to use dogs. The state tried to offset this growth by expanding the cougar season and reducing tag prices, but now finds itself turning to dogs to keep the population in check. So, the net outcome of the voters' action wasn't to permanently end the hunting of cougars with dogs; it was simply to shift the cost of hunting cougars with dogs from private hunters to the state and its taxpayers. You've got to love the initiative process.

My Vodafone Disclaimer

Nice attention from The Deal today. I should mention that when it comes to Vodafone I'm not necessarily partial; I spent several months dealing with them very closely when we were auctioning off AT&T Wireless. I came away from that process deeply impressed with Vodafone's operating efficiency. They just seemed to do everything well, even down to how they conducted diligence and negotiated the merger agreement. And you never saw a more starry-eyed group of swooning senior executives than our folks after the presentations Vodafone made to us for reverse diligence. I sometimes think I might have lost some respect for them had they paid as much for AWE as Cingular did! So - besides the lack of compelling business logic, I also have a more gut-level negative reaction to the prospect of Vodafone being taken apart by Verizon-Telefonica-Blackstone trifecta.

That sale, by the way, was quite the drama. Amir Mirza, a banker at Merrill Lynch (and a helluva guy) has always told me I should write a book about the experience. Now that I've got more than one year's distance from Cingular, I think I may do something like that and serialize the story here. Look for postings titled "The Sale of AT&T Wireless".

Vodafone Catching a Bid?

Funny rumor circulating about a potential takeover of Vodafone by Verizon, Telefonica and Blackstone. According to reports, the trio would pay about $168B for Vodafone. Since the press is notorious for not dealing with debt in merger valuation, as an equity valuation this would represent a 20% premium to today's price. Including Vodafone's $22B in long-term debt makes this a $190B deal.

It's an audacious rumor, and the market is having none of it - Vodafone stock has barely moved today. Why should it? This one of the world's biggest companies, and one of the best managed. While Vodafone has run into a rough patch in the last year, this hardly seems like the time for Vodafone shareowners to cut and run.

But what of the putative acquirors? Could it really make sense to break up this global powerhouse, built on the back of dozens of mergers over the last 10 years? I'd guess that it's easy for Blackstone, since as the glue holding this deal together they would get the pieces of Vodafone most easily grown and re-sold. It's harder for Telefonica - while it gets them more solidly into Europe, they seem to have ample room for growth in their LatAm markets without needing an expensive acquisition like this. Telefonica is also still working through the integration of O2, acquired just last year. Still, it's enormously gratifying to the corporate ego to smack a big competitor down, and that factor can't be entirely ignored.

My guess is that this rumor is a trial balloon floated by Verizon's bankers. Within the next year or so, Verizon is going to have to pony up $50B+ for Vodafone's minority interest in Verizon Wireless. There is probably a very credible model floating around Verizon's HQ showing that buying and breaking up Vodafone is a better deal for Verizon than simply paying a ton of cash for outright ownership of Verizon Wireless.

It would be a bold play (to put it mildly), but I'd be surprised to see it happen. Besides the obvious execution risk, there's the fact that, rightly or wrongly, domestic investors don't give U.S. companies adequate credit for foreign operations. This doesn't make much difference for companies with relatively low costs to enter and manage new markets, but it creates a big headwind for teleco companies having to invest billions in licenses and capital to build and maintain networks. While obtaining Verizon's UK assets may be accretive to Verizon compared with buying Vodafone out of the U.S., it would need to do so in a way that accounted for U.S. investors' tendency to treat foreign assets as non-core. Even with Vodafone stock mired in a slump, it's hard to see how this could pencil out to being anything more than marginally better than the alternative of biting down hard and paying Vodafone to walk from Verizon Wireless.

Alcatel-Lucent

While the Alcatel-Lucent tie-up makes a lot of sense on paper, creating an integrated company in high-tech manufacturing is tricky business. Throw in the cross-border and cultural compatibility issues, and this looks to be at least as steep a climb as the HP-Compaq merger. I hope it works out better than that, but both companies are going to have to be very, very focused on executing their integration plan.

I know, that seems obvious - every company going through a merger should be focused on merger integration. However, big companies can't always get out of their own ways, and when the realities of quarterly results, competition and internecine fighting start kicking in, that focus can be lost. Some consolidating mergers can absorb these effects and still succeed - this one can't.

The "Managerial Administration"

The Bush administration has often prided itself on its "managerial" nature, and I tend to agree - it has shown many of the aspects of a (poorly run) business.

Latest case in point - the appointment of Josh Bolten as Chief of Staff. As I've harped on before, one problem with corporate decision-making is a tendency by staffers to say "yes" to senior management (and a corresponding desire by senior managers to want to hear it). A related problem is a lack of diversity of viewpoints: Even if open discussion is encouraged, too much insularity precludes new ideas from getting in. The Bush administration appears to have both problems, and responding to recent crises by appointing yet another insider shows yet again the inability of this poorly-managed enterprise to right itself.

Of course, in the corporate world we would expect a business run like this to quickly fail - here we have to wait for the next election.

Merger Success

Booz Allen is now saying that the merger failure rate is lower than the two-thirds number trumpeted by Booz (and others) in years past. One of things they point to is the increase in consolidating deals, which - at least in theory - should be likelier to succeed than deals involving new lines of business.

These conclusions are anecdotal, although we may see some data to back it up in the next year or so. Still, seems like a lot of the consolidating deals I've seen (and the one I lived through) in the last couple of years have been at very full prices.

If by "failure" you mean selling the acquired company for a fraction of the purchase price several years later, I agree that you won't see much of that from consolidating acquirors. However, if you define "failure" as a merger failing to meet the IRR assumptions that led to its approval, the high prices paid of late lead me to believe the numbers really haven't changed much.

Dealmaking Balance

Interesting comment on dealmaking, sadly posted anonymously, which I'll quote in part:

Good deal making requires balance. In my opinion, the biggest hurdle to getting deals done is either a tendency to be overly conservative or too much machismo.

Point 1) . . . far too often apathy and professional butt covering lead to missed opportunities.

Pont 2) . . . we should always strive to make the appropriate opening move . . . making the opening move is often the most difficult part of doing deals but being a tough SOB is not the same thing as being a good deal maker.

Amen, brother! I'm probably on the aggressive side when it comes to dealmaking - when I see value, I want to get something done, and fast. Few things are as frustrating as dealing with counterparties who are bogged down by bureaucracy or fear. But - inside your organization, deal advocacy has to be positioned correctly. It's great to be the guy who focuses on shareholder value and zealously pursues deals that enhance such value, while being up front about the risks and challenges. It's not so good to be the "deal cheerleader" on every potential deal that comes in the door, and gloss over or omit the messy bits.

As for opening moves, no question they serve you well as long as they are reasonable. I always like making the opening offer. Although it involves more uncertainty, over time I believe making the opening offer yields better results by setting the stage for the deal and allowing me to push the timing and process for getting the deal done. However, in my experience playing the tough guy and making an outrageous opening proposal is worse than not making a proposal at all. At best, the other party will treat you as if you didn't even make a proposal. At worst, you'll really need to do the deal, and you'll have to waffle your way to a reasonable position, your credibility shot to hell. There's just no percentage in doing that.

Merger Woes

Nothing relevatory here, but nice high-level list of some of the mistakes that can keep an acquiror from realizing value from an acquisition.

And speaking of value not realized, I had to chuckle at the news that Skype is now being sued over the IP acquired by Ebay in picking up Skype. I figured that Skype was primarily a marketing/sub acquisition play by Ebay, but some tried to convince me that the deal was primarily about Skype's technology. Let's hope not.

The lawsuit may be a whole lot of nothing, and the fact that the causes of action are styled as RICO claims makes me think there's more hyperbole than merit to them. But with questions over the transferability of the technology and the Skype founders' former business dealings, I'd say the Ebay/Skype deal isn't shaping up to be a nominee for the M&A hall of fame.

Playing Devil's Advocate

Equity Private notes that in her firm, two team members are assigned to each potential deal as "pro" and "risk" advocates - an excellent example of a formalized way of maximizing input on a decision.

Most corporations do this in a similar, if less formal way, with the CFO playing the role of the "risk" advocate. As I've stressed in earlier posts, corp dev types can't afford to let this happen - you need to internalize both the "pro" and the "risk" mindsets (even if it means taking on a formal process). If you only present the good news, and your CFO has to continuously be the one to ferret out the risks, your credibility will be gone in a hurry.

In private equity, there's more allowance given for aggressively pushing a deal. After all, putting the investor's money to work via acquisitions is the name of the game, and the only real question is whether your deal is as pretty as the other deals.

In a corporation, senior management will be suspicious of deals being pushed too aggressively, especially if there's any whiff that important issues are being glossed over in the rush for approval. Senior leaders certainly care about the IRR of your deal relative to other potential investments, and, like in private equity, they also care about the risk that this IRR won't be realized. However, they will also care about integration and organic growth, subjects not typically of concern to a private equity investment committee (except in cases where the target is to be integrated into another portfolio company). As a consequence, you may have a lovely deal that sparkles in all the right ways, but if you haven't objectively addressed the integration risks and the build/buy analysis up front, you may well see it leave the investment committee in tatters.

Trying "No" for an Answer

One theme of my last post is a problem endemic to many large corporations – the tendency of employees to fear offering different points of view, and the negative impact this has on decision-making. This subject, covered in a chapter in James Surowiecki’s excellent book, The Wisdom of Crowds, now has a full book devoted to it – Michael Roberto’s Why Great Leaders Don't Take Yes for an Answer: Managing for Conflict and Consensus (see my new "Recommended Reading" sidebar for thumbnail cover photos and links).

Let’s face it – the very existence of hierarchy stifles dissenting voices. Absent any other factors, most employees will – at a minimum – be cautious in expressing differing opinions, new ideas and bad news to the person with control over their paycheck. Add a little managerial ego and that caution will turn into reticence to do anything but nod along with the powers that be.

What about senior managers? Aren't hard-charging, Type-A folks above such caution? Not in my experience. I've worked in companies that welcome debate and conflicting views (including Clearwire) and several very large companies that did not. In the conflict-adverse companies, the greater willingness of senior folks to speak their mind was usually offset by the greater ego and unwillingness to hear dissent possessed by their C-level bosses.

There’s no question that properly-channeled conflict and debate will yield the best decisions, but most organizations have a hard time encouraging this kind of healthy debate. Instead, conflict is often repressed until it explodes into personal attacks, happens too late to change a decision, is conducted passive-aggressively, or all of the above. Leaders in an organization need to be hyper-aware of the things they do to stifle input, and come up with ways to encourage openness and not “punish” those who contribute different or unpopular opinions.

Note that this does not mean giving slack to whiners – not all input is equally valuable, and habitual naysayers are no better than yes-men. Most importantly, the whole team has to get behind the decision once it is made. Giving employees license to be candid should never be confused with giving them license to contribute less than their all once the course is set.

So what can leaders do to encourage openness? Roberto suggests actively seeking dissent by soliciting it directly, having staff role-play adversaries, or even appointing someone as devil’s advocate on a proposal. While the success of such formal steps will depend on the situation, every manager should be looking for opportunities to overcome the inherent bias amongst their employees toward clamming up.

Managing By Fear

The Financial Times ran a column (subscription req’d) by Lucy Kellaway this morning extolling the virtues of “scariness” in managers. Some of the advice for managers who don’t think they’re scary enough, or feel conditioned by years of coddling their employees? Invade personal space. Shout. Make up a position and stick to it.

Kellaway is of course being satirical in her so-dry, is-this-really-her-opinion? kind of way. But as readers of Martin Lukes know, Kellaway is dead-on in skewering the nascent idiocies of corporate life, and one trend that seems to be percolating is the “death of mentoring” and the benefits of leading through fear. There have always been managers like this, and in some settings they may even be effective. The problem is that so few managers are able to straddle the line between demanding peak performance and maintaining high levels of employee loyalty and creativity. Too much fear, and your employees will certainly be motivated, but they won’t bring their best work or critical ideas. The consequences of being shot down aren’t worth taking the risk. Anyone who has spent any time at all working with top level management in a large corporation will have witnessed the dynamic of senior level bullying shortening – or eliminating – healthy debate.

Conversely, the kind-hearted, mentoring manager will engender great loyalty among his or her people. Unfortunately, without a bit of scariness – or at least a sense of accountability and high expectations – even highly-motivated employees may not do their best. The organization will be a haven for slackers, and resentment will set in among the high performers.

Despite these drawbacks to the "soft" style of managing, I hope Kellaway hasn't spotted a truly emerging trend in dispensing with understanding and involvement in the workplace. The best managers are able to maintain high expectations by staying on top of the business and the work being done, but also engender employee loyalty by welcoming ideas and providing feedback and recognition. I don’t think it’s an easy balance to achieve, but those who make it work get phenomenal results.

AT&T - BellSouth MAC

Although unlikely to ever be at the center of a J&J-Guidant-like merger termination drama, I figured the MAC clause in the AT&T-BellSouth merger might be interesting. Here it is, courtesy of the filing at Edgar:

(ii) the term "Company Material Adverse Effect" means
(x) an effect that would prevent or materially delay or impair the ability of the Company to consummate the Merger or (y) a material adverse effect on the financial condition, properties, assets, liabilities, business or results of operations of the Company and its Subsidiaries, including its interest in Cingular, YP.com and their respective Subsidiaries, taken as a whole, excluding any such effect resulting from or arising in connection with changes or conditions (A) generally affecting (I) the United States economy or financial or securities markets, (II) political conditions in the United States or (III) the United States telecommunications industry or any generally recognized business segment of such industry, (B) generally affecting the telecommunications industry (or any generally recognized business segment of such industry) in the Company Region, taken as a whole, (C) resulting from any hurricane, earthquake, or other natural disasters in the Company Region, (D) resulting from the execution, announcement or performance of this Agreement, or (E) resulting from or arising in connection with the financial condition, properties, assets, liabilities, business or results of operations of Cingular, YP.com or any of their respective Subsidiaries; and (iii) the "Company Region" means the states of Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.

This is pretty straightforward (the AT&T MAC clause mirrors this, only with different regions), and obviously doesn't provide a lot of room to exercise. The interesting part is that problems at Cingular - which is at the center of this deal - can't be the cause of a MAC, no matter how bad such problems might be. Furthermore, problems at the non-Cingular parts of BLS have to be measured against the entire BLS entity in determining if a MAC has occurred. Since Cingular represents something like 60-70% of overall BLS revenue (and growing), problems in the BLS business would have to be awfully dire to constitute a MAC.

Knowing the lawyers involved, I'm quite sure a lot of time and energy went into negotiating this clause, but it's something BLS absolutely had to have (and it's only fair they got it, since AT&T owns 60% of Cingular and effectively runs it already). Closing risk isn't always a major factor in mergers, particularly in small deals with no real regulatory conditions. Here, where closing will take 12-15 months and countless hours spent dealing with the DOJ and FCC, BLS needed to mitigate as much closing risk as possible. Looks like they did so in the MAC at least.

AT&T - BellSouth

So SBC - newly re-named AT&T - has bought BellSouth for $84B. While certainly not a shocker, I am a little surprised at how fast it happened, given that SBC is still in the re-branding campaign it launched after closing the acquisition of AT&T last fall. Wayne Watts, SBC's primary M&A guy, has now done something like $150B in transactions in the last two years - way to go, Wayne!

While there will be lots of handwringing by consumer advocates in the months ahead over this deal, there's no question it will meet with regulatory approval. AT&T and BLS don't have a lot of overlapping markets, and in the primary growth engine - Cingular - there is obviously no overlap. Plus, those guys in San Antonio are hardly neophytes or shrinking violets in getting deals like this through the sausage-making approval process at Justice and the FCC.

Most amusing to me is that the Cingular name will be gone, reborn as AT&T Wireless (this news comes less than 15 months after Cingular finished rebranding all of the AT&T Wireless stores). And here I thought that entry on my resume was going to fade into oblivion!

Rights of First Refusal - Bad for the Holder?

Intriguing article from Harvard Business School regarding rights of first refusal (or ROFRs as we corporate tools call them). For those who don't typically deal with ROFRs, they feature prominently in leases, joint ventures, distribution deals, etc. The central thesis of the article is that ROFRs can run to the detriment of the holder.

Huh? Aren't you always better off having a ROFR than not having one? Well, yeah, you are, except that not all ROFRs are created equally. A typical ROFR allows the holder to always move last. I don't think there's any debate that such a right is good to have. The authors, however, focus on what they call "Before and After" ROFRs, which allow the asset holder to set a price ceiling beyond which the asset can be transferred without being subject to the ROFR. While an arrangement like this is clearly inferior to a straightforward ROFR, it's not inherently bad - it won't always work against the holder, and at worst the holder is in the same place they'd be if they didn't have the ROFR.

The bigger point, however, is that you've got to sweat the details in your deals. You can't glaze over when you see the title header for "Right of First Refusal" (or Termination, or Indemnity, or Dispute Resolution, etc . . .). You've got to think through how these provisions will work mechanically if ever exercised, and make sure you're happy with the process. These details are often left to the lawyers; that can be a costly mistake.

DCF Models

Good and snarky post re deal making on a new private equity focused blog, “Going Private.” I like the explanation for modeling discounted cash flow, which I believe is still the gold standard for valuing any operating business. Comps are interesting, but really just as a point of reference or sanity check. I’m fortunate in never having had to construct a DCF model, but I’ve spent enough time pulling apart and tweaking them (or, more accurately, standing over my analyst’s shoulder and saying things like: “What if we assume we lose two-thirds of the customers we acquire when we force them to change rate plans?”) to know how useful they are in analyzing how an acquired business can fit into its new corporate collective. But there are two important rules corporate development types need to keep in mind when developing DCF models:

1. The model must mirror the inputs in your company’s long-term planning model, no matter how ridiculous.
2. Any deviations from rule #1 must be very strongly supported. Rest assured that your CFO will run your model by the planning trolls, and you will be asked to explain all major differences.

Any acquisition will have deviations, particularly in the first couple of years, and they are easy to explain if you are prepared. Just don’t get put in a position where you have to explain why your proposed acquisition is supposed to be generating margins 500 bp higher than the core business 8 years post-integration.

Anyway, I’m sure at some point the anonymous author of Going Private will want to own up – there’s some good (and funny) writing there. I particularly like this brutal assessment of Guy Kawasaki’s blog – ouch!

Get Your MoCo On

Another godawful term has popped up from nowhere to near-ubiquity in the wireless biz - "MoCo", short for "Mobile Content." It's not like the industry needed another acronym or abbreviated name; Newton's Telecom Dictionary is already on its 21st edition, and must weigh over 2 pounds.

Hopefully "MoCo" will die from overuse. I've already seen several references to "MoCo content" - a sure sign that the term's jaunty friendliness is getting ahead of its meaning.

Chaos and Opportunity

I’m not sure what’s got me thinking so much about the employee impacts of M&A lately – maybe it’s all the stories I hear whenever I get together with my former colleagues who are still at Cingular. As I’ve posted before, a merger is a tough thing to go through, particularly if a lot of the work you do is forward-looking. Of course, the flip side is that – as with any corporate situation involving wholesale change – there are often new opportunities amidst the chaos.

While senior people are likeliest to move on to other companies, and junior people may not feel they have access to these opportunities, those in the middle should be looking for every way to use the merger as an avenue to a bigger role. Regardless of level, being proactive is critical. It’s fine to grieve for your old company and the way things were, but don’t give in to the endless grousing that many in the acquired company give in to. Check out the terrain of the new company and start talking to people – positively – about what you can contribute. You’ll quickly find out whether there are golden opportunities or you should run fleeing for the door. Either way, you’re far better off than if you sat back morosely and waited for a pink slip.

Here’s a method I learned quite some ago from an employee of mine: I’d taken over her 10-person group, and she knew I would need to lay off half the group, including her. Instead of sulking or delaying, she came right out with it, acknowledging the reality and offering suggestions for the new staffing plan. She also asked that we pick a date for her to be laid off. Because she did this in our first or second meeting, she was able to get a date nearly four months out – which was probably 3 months more notice than she would have had if she had simply ignored the issue and waited for me to finalize a staffing plan and lay her off. This gave her plenty of time to ramp her job search up and find something new by the time her layoff date arrived. In fact, with luxury of extra time, she was able to find another job in the company, saving me the severance expense!

From almost any manager’s perspective, an employee this proactive is an enormous relief. As a manager, you never know how a termination discussion is going to turn out, or what kind of performance you’re going to get leading up to the termination. Instead, you’ve got an employee offering their professional best in return for some certainty on when they’ll be let go. It doesn’t involve more cost to the company, because you’re not delaying a layoff date – you’re simply providing more notice. It’s a brilliant solution for all involved.

Even if it’s not certain that your position will be eliminated, it’s still a great idea to be proactive with your new managers. If you really want out, it will maximize your chances of getting out on your timetable. If you want to stay, it’s a great way to display your professionalism and interest in staying with the new company. I’ve done this both times my company was acquired – once when I wanted to stay, and once when I wanted to leave – and it worked beautifully both times.

Curling

While working out yesterday, I spent nearly an hour watching women’s curling. It was strangely meditative; I felt like I could have watched for hours. Still, I’m not entirely sure it qualifies as a “sport.” I find it motivating to watch football, baseball or college hoops while running on the treadmill or climbing stairs, but this has got to be the first time I felt like I was working harder than the athletes. No question there’s a lot of skill involved, but the same is true of bocce and pool and you don’t see those at the Olympics.

Still, I’m not the only one to find curling fascinating and hard not to watch – it’s apparently become a huge hit with the Italian fans.

Know thy Target (or Suitor)

Lorne Grohe has an interesting series going on valuation. His posts contain lots of useful detail and tactics for dealing with valuation discussions. Inherent in all this is a theme that’s critical if you want to make a deal happen – you’ve got to be prepared. If you’re looking to acquire someone, you’ve got to know as much about them as you can. What challenges or opportunities will they have in the next year? Who else is sniffing around? How’s the financial position? What’s the company culture like? How viable are their transaction alternatives?

Naturally, buyers also need to have a keen understanding of their own transaction alternatives, including organic growth. The “build” alternative may not come up in negotiations, but it certainly will be of interest to senior management or the BOD when it comes time to approve the deal.

On the seller’s side, preparation is even more important, yet for some reason it’s more common to see woefully prepared sellers than buyers. If you get a call out of the blue from a potential buyer, and you’ve got no interest in selling, it’s fine to simply throw a fantasy number out there. If they want to pay it, great! If not, back to business. But if you’re actively shopping your company, there’s no excuse for not knowing everything about yourself that impacts value (good and bad) and everything about your suitors. What’s their debt capacity? How are the growth prospects? Can they build a competitive product or service, and at what cost/timing? What synergies are they likely to realize? Are there shareholder/regulatory approval issues? How hungry are they?