Tuesday, February 28, 2006

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!

Monday, February 27, 2006

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.

Sunday, February 19, 2006

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.

Friday, February 17, 2006


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.

Thursday, February 16, 2006

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?

Monday, February 13, 2006

Cultural Compatability

An amusing bit from a recruiting perspective, critiquing the widely-held belief that “talent” is the be-all-end-all in adding new employees. I particularly like the analogy of a company to a human body, the existing employees to antibodies, and new hires to foreign pathogens. I think the point is well-taken, and the reason so many new hires do go on to succeed - and despite being “pathogens” find themselves embraced by their new colleagues - is because their new employers hired them based on how well they would “fit” in the new corporate culture. Once the “fit” is established, the talent can flourish.

Considerations of fit and cultural compatibility are similarly worth thinking about when acquiring a bunch of new employees via a buyout or merger. On the individual level, and particularly where there is even a whiff of job overlap, the “antibodies” will be out in force to reject the new arrivals. This may just be something to be aware of and try to deal with during integration. However, at the company level – and particularly when the employees acquired are a big part of the value – such cultural considerations can be paramount. If the “systems” are different enough between acquirer and acquired, you run a big risk of quickly losing those people you paid so dearly for. And because you can’t change your own corporate culture, this is a problem that is hard to effectively mitigate with even the best planning and integration execution.

Obviously, considerations of cultural incompatibility are very hard to quantify. And they can be overblown, particularly by those seeking to scotch a deal that otherwise makes sense (I note with amusement that one of the many funny objections to Mittal’s $22B hostile bid for Arcelor – a merger in the steel industry – is that the companies are culturally incompatible). But where corporate culture matters, it must be factored in as a risk to the deal’s value, and meticulous plans must be made to make the invading pathogens feel more like a B-12 booster than a common cold.

Wednesday, February 01, 2006

The People You Acquire

Disney’s got a big task in integrating Pixar – by all accounts, the plan is to keep Pixar independent, or even let the Pixar leadership subsume Disney’s animation department. Standing in the way of this will be countless entrenched Disney minions and the mindset of an acquirer that their ways must be best. Even with the best of intentions these forces can be difficult to overcome.

But Disney – Pixar is the unusual case. The far more common case is where the acquirer simply integrates the acquired company into its operations. There’s lots more I could say about integrations, which is an area I still believe doesn’t get enough attention in the development of deals. But I’m focused at the moment on the “people” issues in an acquisition.

Besides doing acquisitions, I’ve twice been on the receiving end. It’s an interesting and unsettling feeling to be sold – all of the long-term stuff you’re working on becomes, in most cases, moot. You focus instead on the short term, getting the deal done and perhaps helping the buyer with the integration. Everyone at the seller, without exception, wants to know what’s going to happen to their job. Some are simply fearful of losing their jobs; others want to know immediately about opportunities to shine with the new owners; others simply want a severance date so they can move on. There is no end to the amount of worry, gossip and rumor-mongering that goes on at a seller in the weeks after a deal is announced. I think all buyers get this, but have a hard time dealing with it – often because they haven’t really figured out what to do with the people at the time the deal is announced.

In my experience, this causes the buyer to do one of two things with regard to the acquired people: They either clamp down on information or try to put an overly-positive but vague polish on everything. Neither works. When information is restricted, gossip intensifies and people assume the worst. The first time my company was acquired, the buyer went so far as to prohibit us from looking at an employee handbook. The ostensible reason was that our benefits wouldn’t shift to the acquirer plans until the next year, and by then the plans might have changed. This is obviously a trivial concern, and easy to deal with (“here’s our current suite of plans; as you know, by the time you roll onto these plans they may be different”). Instead, my fellow employees assumed the buyer had plans that were far worse than ours, and that’s why they wouldn’t disclose them to us. The senior people felt condescended to, being told we couldn’t answer the specific – and basic – questions our people had about the acquiring company.

Alternatively, the acquirer will repeatedly state their intention to do “best practices” hiring, making everyone at both companies compete for every job so the “best of the best” are staffing the new company. It’s a great goal, but rarely ever done in practice (although I think Sprint and Nextel may have actually implemented it in their merger). If the acquirer doesn’t put a real “best practices” program behind its words, here’s what happens: The acquirer uses the opportunity to push out a few recalcitrant pieces of deadwood, fills in the open spots and a couple of newly-created posts with stars from the acquired company, and then allows the rest of the company to be filled in by its managers. And that’s fine – hell, it’s the acquirer’s prerogative to do whatever it wants with the asset it has just bought. However, if you’ve blown smoke about hiring the “best of the best”, you’re going to have a mightily demoralized employee base when the folks start seeing all of the positions staffed from the acquirer.

Perhaps my experience is shaded by the fact that it has been in telecom, where the people who come with an acquisition are not as important an element as they might be when acquiring a technology company. But you still need people to manage the company through integration, and it’s better to have a pool of reasonably contented potential hires (and customers) than a seething, unproductive mass of resentment. Why not take the time to figure out as much as you can about what’s going to be done with the people? Be candid. Err on the side of providing more information about your company. If you don’t know what’s going to happen with a group of employees, say so, and give them a date by which you’ll know (and meet it). If you know a group won’t have a permanent home, tell them early but also give them parameters on how long their jobs are likely to last. Some HR types may wring their hands over this kind of communication, but it can be managed with little to no risk, and it will greatly benefit your integration while yielding the side benefit of being a decent thing to do.