Corporate Tool

AT&T - T-Mobile Final Thoughts

2011-12-21T12:22:00.000-08:00

Monday night, AT&T and TMO announced their $39B merger was dead. The only surprise was that they did it so quickly; as I've written before, there was a real danger that egos would prevail and AT&T would distract itself by fighting a losing battle with the regulators rather than turning its attention to competing with Verizon.

I went on CNBC's Squawk Box Tuesday morning (sorry; no video link) to offer my thoughts on whether AT&T had made a bad bet. I'll repeat and expand what I said there: It was a risky bet - which is why TMO, advised by my former counsel at Wachtell, insisted on the mother of all break-up fees. But it was a bet worth taking.

The good news for AT&T is that they aren't chasing here. They can now turn to other options, whether it's acquiring DISH, buying spectrum or capacity from Clearwire, or doubling down on a wi-fi offload strategy. None are ideal, but they've got to play the cards they were dealt.

Another topic that came up in my interview yesterday was whether scuttling this deal was good for consumers. It's easy to see why it would be; TMO gets to keep playing to the low end, and there should be more price competition. But that's also a facile and short-sighted point of view.

This timely WSJ article today touches on, at a high level, some of the fundamental economic headwinds that face U.S. wireless carriers. It's a vast country, and providing the coverage, capacity and data speeds that consumers want is incredibly costly. Carriers spent $25 billion on their networks last year. Only AT&T and Verizon got a return on capital. Think about that, and what it means over time for consumers. We're paying for marginal price competition today with hobbled companies and under-investment tomorrow. A cash-losing Sprint or T-Mobile can't innovate, can't bridge the "last mile" or the "digital divide", and will ultimately fail - leaving the monopoly or duopoly DC is so fearful of - if they can't afford to invest capital in their network.

So no, the FCC and DOJ did consumers no favors long-term in preventing this deal. It's time they updated the tools in their "preserving competition" toolbox for the reality of today's wireless industry.

AT&T & T-Mobile Reaching the Final Act

2011-12-12T13:21:00.000-08:00

There was a terrific piece in the Washington Post at the end of last week, detailing AT&T's lobbying strategy and approach to win approval of its $39B acquisition of T-Mobile. It's well worth a read, detailing as it does the combination of hubris and overreach that may have sunk the deal's chances.

The acquisition was a risky bet to begin with, but one takeaway for would-be acquirers must be this: If you're going to tout social benefits (in this case, the creation of 100,000 new jobs) in your lobbying efforts, be prepared to back up your claim with the solidest of solid analysis.

Because if you can't, then the rest of your arguments - and make no mistake, AT&T had several good ones re the benefits of this merger - are going to suffer badly by association. You'll have just handed those opposing your deal the club with which to smash your head in.

And today, AT&T has joined the DOJ in asking for a stay of the antitrust trial it had been so ardently pushing forward. This no doubt foretells the deal being scuttled or significantly re-arranged.

Here's one vote for the former - I'd much rather see AT&T in full-throated competition with Verizon than distracting itself trying to put together a less-than-optimal deal.

AT&T, T-Mobile & Opportunity Cost

2011-11-25T22:15:00.001-08:00

AT&T's acquisition of T-mobile is on the rocks, andit looks like things are going to get uglier before everything settlesout. As I mentioned in this CNN article,I'm convinced the deal is dead. My belief isn't driven by any particulardislike for this deal; in fact, I think it makes a lot of sense. But it was a big gamble that regulatoryapproval would come through, and sometimes things don't work out.

The problem here is moving on crisply. A major consolidating transaction isdistracting enough; but trying to push one through the regulatory bog AT&Tis facing? The DOJ has sued to block themerger. The FCC has referred the matterto an administrative hearing - a near-unheard of event. AT&T has responded by taking its ball and going home,pulling back its transfer application in the hopes that it can refile once itworks things out with DOJ. All of thisspells additional delay and uncertainty. Neither AT&T or T-Mobile can move forward fully until the merger isresolved, one way or the other. In themeantime, Verizon can keep taking market share steadfastly, not burdened down bydistracting strategic considerations.

It's an object lesson in one of the dark sidesof inorganic growth. Yes, many mergersfail to deliver value. But even thosemergers that likely would work out can backfire if they take too long toconsummate. Company leadership may sayall the right things about execution, but merger planning will consumeresources and narrow strategic considerations for as long as the deal is pending. Telecom mergers - with joint review via two separate federal agencies -are inherently time-consuming. Combinethat protracted merger with additional delay, a rapidly-changing industry and atough competitor leading the market, and it's a recipe for disaster. Doing a deal with T-mobile probably made allthe sense in the world when AT&T drew it up a year ago. But now that the knives have been drawn, andthe best hopes for the merger have dimmed, AT&T must ask the hard question,and ask it soon: does it continue tothrow good money after bad? For whileAT&T is on the hook for a $4 billion breakup fee, there is a very real costto letting pursuit of a merger prevent full-throated competition in themarketplace with Verizon.

Should Legal Report to PR?

2011-10-27T09:24:00.000-07:00

OK, it sounds ridiculous, but consider: Any company of size employs a public relations staff. It's how you acquire, manage and - hopefully - shape earned media. Public relations is taken very seriously, and invested in accordingly. A savvy PR staff can generate an outsized return on an investment in relationships and managing the company's image in the press.

Why then, do companies - like Sony Ericcson - continue to allow their legal departments to undermine that PR work?

Imagine the conversation if the Sony Ericcson legal group reported to PR:

PR: Wait, you want to do what?

Legal: There's a guy running a blog that has the name of one of our products in it. And get this - the domain he's using has our product name in it! We can't have that. We're going to threaten him with a UDRP action unless he shutters the blog and hands the domain to us.

PR: Haven't we talked about this? If there's someone hating on us, it's usually best to just ignore them? You know, Streisand Effect?

Legal: Oh, he's not a hater. It's a fan site.

PR: You want to take down a fan site? Someone is writing nice things about us for free and you want to stop them?

. . . you do know that we spend nearly $1 billion a year on advertising, right?

. . . and that this blogger is giving us free advertising?

. . . and that when he's forced to shut down he, and the 4chans and TechDirts of the world, are going to start saying all sorts of nasty things about us and how heavy-handed we are?

. . . which is pretty much the exact opposite of this department's primary goal?

But you're the lawyer - there must be a very good reason for going after this fan. Is he confusing lots of our customers?

Legal: No, it's clearly a fan site. But he's got an affiliate link where people can buy our products.

PR: Uh . . . we're kind of in the product selling business. So his site must be messing with our SEO, outranking our sites on Google?

Legal: Not yet, but it's a .net domain.

PR: It's a .net domain? You do know that a .net domain is the internet equivalent of second-hand store on a back street, right?

Legal: Look, the issue is that there's a chance that this use of our product name could dilute our brand and cause us to lose the trademarked name of the product. We've got to defend our trademark!

PR: OK. So stacked against the 100% chance that your letter will cost us - at a minimum - hundreds of thousands of dollars in negative publicity, what's the risk that this site being out there causes us to lose our trademark?

Legal: Oh, that would never happen. But it sets a bad precedent.

PR: [facepalm]

The Black Hole of Customer Complaints

2011-10-17T06:01:00.000-07:00

The Bizzle writes about the role of corporate counsel in occasionally having to deal with real live customer complaints. I had to chuckle; there is much to recognize there.

When I was GC of a regional wireless company, I was deemed the "black hole" of customer complaints, the place that those too crazy or persistent for even our executive escalation team to handle would be sent. Like the guy who would send 27 page faxes to us every day, copying the regulatory agencies and every government official he could think of. Or the customer who sent in a package containing his bill (crumpled up into a tight little ball), a foot-long dowel and a tube of KY Jelly.

What I found was that - much like the Bizzle's experience - for the vast majority of these complaints it was a matter of listening. Listening, because there was nothing else I could offer. Any complaints amenable to resolution would have been dealt with long before they reached me. So I listened, tried not to argue too much, and told them "no". "No," over and over again. No, we would not fundamentally change our business processes. No, we would not pay them millions of dollars for a perceived slight. No, we would not humbly and abjectly go out of business.

And - most importantly - No, there is no one to escalate to beyond me.

These complaints were stuck beyond the event horizon of my "Office of the General Counsel" black hole. They could not go forward and vent their spleen to our CEO, nor backward to make another run at our customer care staff. All further communication would be to me, and me alone. Eventually, they would exhaust themselves and move on to whatever was next in their lives.

It was a clean process, if not always the best use of a GCs time. It required listening, but never for too long; the judicious use of calendar management and setting expectations that I only had time to talk for so long at a spell. But it was a far better process than having the CEO take these calls, and it provided some comfort that if one of these people had a legitimate claim, it would find the legal department while something short of a lawsuit could still make things right.

Unsurprisingly, this is a big part of my current role. Being in the business of publishing information, ratings and reviews of attorneys, we field a number of complaints from those we profile. This is not about paying customer escalations, but rather all about unhappiness and control from a handful of those we've published information about. Many of those have been interesting conversations, and some have even led to changes in our operations. But the vast bulk of them involve me listening and saying that oh-so-familiar word: "No." And because these are attorneys, I often must follow my "no" with an explanation of why suing us would be a bad idea. I have anecdotes and correspondence from these conversations that would fill a book. But that, readers, will have to wait for another day.

The Narcissism of Revolution

2011-10-08T14:28:00.000-07:00

"Occupy Seattle", a thinly-attended offshoot of Occupy Wall Street, has been going on across the street from my office this last week. What do the "occupiers" want? If you view this rant narrated by Keith Olbermann (shredding whatever scraps of integrity he might have left), they want America to know that corporations are evil.

Don't get me wrong - I like a good protest. Lock yourself to the gates of nuclear plant, protest the war, demand equal rights, whatever. But here are the problems I have with this protest:

1. It's infantile and wrong.

Have corporations visited these evils upon us? Of course they have. But corporations have also generated jobs, enabled innovation and powered an unprecedented increase in the standard of living for Americans. Corporations have developed the tools used by the protestors, and employ most of their parents, making it possible for them to protest. And let's face it: if all you want to do is run out a one-sided diatribe, a similar litany could be employed against labor unions, public school teachers, religions - or the entire human race.

2. It's non-actionable.

What exactly would the occupiers do about the evil corporations? Regulate what they can pay their employees? How they can spend their money? How much profit they're entitled to earn?

Why yes, if you listen to many of the occupiers. They want public ownership of corporate assets. They want redistribution, Soviet-style. Never mind the experience of the last 80 years. Never mind the spectacular abuses and failures of centrally-planned economics.

3. It's narcissistic.

Many of the OWS protesters compare themselves to democracy activists in the middle east. America may have issues – we’ve got an overreaching security state, we waste tens of billions of dollars on a spectacularly failed war on drugs, we pay too much for middling health care outcomes, and we aren’t willing to tax ourselves enough to pay for all the goodies we want. But these issues are nothing - nothing - compared to what people in Egypt, Tunisia, Syria and Yemen faced or are facing.

It's embarrassing that the OWS crowd thinks getting jailed over a hippie campout is the moral equivalent of facing bullets while standing up for democracy in Cairo or Damascus.

4. It's entitled.

At the center of these complaints is a failure to take accountability. No one forced you to take out that over-leveraged mortgage, or go $100K in the hole to get a college degree. We all have choices, and we own the consequences of those choices. And don't forget that many of the problems plaguing our state and local governments stem from the rapacious appetite of government employee unions, and the failure of our leaders to protect taxpayers from the ruinous pension obligations they've signed up for.

Joe Biden said Occupy Wall Street is like the Tea Party. And he’s right. Just like the Tea Party – with its “keep your hands off my Social Security/but don’t tax us” message - OWS suffers from magical thinking in its muddled blend of tired lefty tropes.

Those of us in the reality-based community don't have patience for such indulgent, pointless crap.

Do Female Lawyers Thrive In-House?

2011-10-04T17:11:00.000-07:00

The ABA Journal asks the question of whether female attorneys are more successful in corporate jobs than in law firms due to corporations placing a higher value on female lawyers' "people skills."

The article then sloppily compares hard data (females comprising 15% of equity partners at large law firms) with anecdote ("some women lawyers are suggesting that female attorneys do better, overall, when working in-house").

Oh, but data's not hard to find. It turns out that of Fortune 500 General Counsel, women comprise (drum roll, please) . . .

18.8%

Huh. That's only slightly better than the equity partner rate.

Here's two things I know: First, people skills are important in corporations, far more so than in law firms. And second, there are plenty of attorneys with bad people skills. Lack of people skills is an equal-opportunity problem. It's why attorneys score in the 13th percentile for sociability (or as one managing partner at a large firm once told me, the 8th percentile if you control for rainmakers).

The data above would tell us that women lawyers have only marginally better people skills. And that margin could likely be explained away by the job style and hiring difference between equity partners and Fortune 500 GCs.

Can we stop falling back on counter-productive, fluffy gender stereotypes like "better people skills" - especially when the data doesn't bear them out?

Bethesda vs. Minecraft

2011-09-29T14:39:00.000-07:00

It's been a while since I've posted about trademark bullying, but Christ, it seems like it's everywhere. Proctor & Gamble is fighting with a Connecticut mom over the name she's chosen for her line of soap for tween girls ("Willa") because it sounds kinda like P&G's "Wella" brand. I've got some nimrod attorney demanding "one . . . MILLION . . . dollars" for using his name on our site (it's, uh, a legal directory. Of lawyers.).

But my new favorite for sheer cluelessness is Bethesda games going after Markus Persson, the creator of Minecraft. Bethesda worries that Persson's new game, Scrolls, might be confused with Bethesda's "Elder Scrolls" line of games. Never mind that no one would ever confuse one of Bethesda's games for one of Persson's. Or that the "Elder Scrolls" is a simply a postscript to the title of each Bethesda game.

What's really appalling here is how Bethesda is letting its lawyers crush them.

Despite possessing god-awful graphics, Minecraft is popular beyond belief. Offering up an open world with no structured gameplay, it provides a level of depth and creativity not found in any other game. Millions and millions and millions of people have flocked to it. My son and his friends are obsessed with it.

By going after Persson (who goes by "Notch"), Bethesda has aligned itself against all of these millions of ardent fans. It doesn't matter if they win the court battle and get Notch to change the name of the game; they've already lost the PR battle.

And of course, they didn't need to do this. Their lawyers may have told them that they need to "defend their intellectual property." That's bunk. Walking through all of the options and the PR implications of taking this action - particularly against a small or well-loved business - has got to factor into the equation.

I was talking to a video game journalist (!!) a few weeks back who told me that many of the gaming companies are known for being ineptly run. One sure-fire way to be run ineptly is to listen too uncritically to your lawyers. We'll see how much it costs Bethesda to learn that lesson.

Politics and the Workplace

2011-08-14T09:44:00.001-07:00

Several people wondered why I chose a political example for my post about negotiating with madmen. After all, conventional wisdom is that politics shouldn't be mixed with work, right?

And I think that point is correct - if your version of politics is the kind of single-issue advocacy, "principle-and-the-rest-be-damned" or magical thinking that seems to characterize so much of our political discourse. Best to keep it to yourself to avoid coming off as a crank, or someone with some gaping holes in their ability to reason.

But if you are someone who thinks about politics and policy, there's nothing like hashing those ideas out with others at work. Some of the most enjoyable and challenging political discussions I've had have come up this way. Why? Because in the workplace, you're more likely to run across smart people who are approaching these problems from a different perspective (as opposed to solving the world's problems for the umpteenth time with your like-minded college friends).

What's more, as our public political discourse has become more polarized, it's important that people call out the insanity. So to be clear: I don't consider the question of whether the Treasury needs to raise more revenue to be a political one. Rather, it's a self-evident proposition. Revenues are running at a level of GDP (15%) we haven't seen in 60 years. This low level of revenue is supporting a much greater swath of services than existed in the 1950's. While it is an equally self-evident proposition that entitlement spending needs to be cut, there's simply no way our modern industrial democracy can function the way Americans expect it to on a budget of 15% GDP. The political questions include how much revenue needs to be raised (and in what ratio to cuts in spending), in what form (higher taxes for the wealthy, comprehensive tax reform, etc.), and what the ultimate GDP target should look like (history and economics suggest 18-21%).

The grown-ups in the room know this and are asking these questions. There's a lot of work to be done to figure out what the ratio of revenue to cuts should be. My view is that it should be about a 1-2 or 1-3 ratio, but others I respect have suggested we could go as high as a 1-6 ratio.

So it was disappointing to see that every GOP candidate, when asked at last week's debate if they would support raising revenues at a 1-10 ratio of cuts, said they would not. That's not reality. It's not governing like an adult. We need to have a real discussion about how to change our tax code, raise more revenue, and make some fundamental changes (and cuts) to entitlement programs.

And there's no reason to rule out the workplace in having that discussion.

Negotiating with Madmen

2011-08-07T08:35:00.000-07:00

Very few deals are truly "take it or leave it." And those that are require order-takers, not deal negotiators.

But every now and then, your counterparty to a negotiation will take this nutty "my way or the highway" position. Either because they misperceive their leverage, figure there's no cost in asking for the moon, or are just plain bonkers, they'll refuse to engage in the process of compromise that lies at the heart of every successful deal.

This isn't usually a very effective negotiating tactic. Experienced people will simply take the "highway" option, pack up and walk from the negotiation. And if you didn't really mean to give the ultimatum, and have to go crawling back to get talks going again, well . . . it's pretty obvious what that does to your negotiating leverage.

In order to do so, you've got to have an alternative - another competing deal, or a willingness to simply let a bad deal go by.

And this is what bothered me so much about the "debt limit deal" worked out between the White House and Congress. Obama assumed he was dealing with responsible counterparties, when he reality he had loonies on the other side of the table. Now, maybe the GOP wasn't really ready to let the US slip into default, but they certainly gave the impression of that - and in economic matters, impressions of what a government is capable of doing matter, a lot.

The first "my way or the highway" ultimatum was the GOP insistence that no deal for deficit reduction would involve increasing revenues. This should have been met with a response along the lines of "look - if you guys aren't going to take the business of governing seriously, these negotiations are over. I'm just going to ignore the debt limit and get back to work."

Messaging like that would have sparked outrage on the right of course, but it's a valid position both from a policy perspective (the debt limit conflicts with laws authorizing expenditures) and a strategic one (forcing the Republicans to choose between negotiating in good faith and going to court to force the US into default). But most importantly, it would have clarified the issues and let us know whether a meaningful deal could really be had.

Obama may have calculated that the threat of default was enough to restrain the right, and he may been correct, to a point. The problem is, all he could wring out with that weak piece of leverage was a face-saving mess of a deal that does little to address what's wrong with our economy. And we got it for the cost of undermining confidence in the United States.

It's an object lesson in the merits of sharpening the edges of a deal early on. But to do so, you've got to be willing to walk when the other side starts talking crazy.

Reverse Synergies

2010-10-26T15:55:00.000-07:00

Amazon’s acquisition of Woot! this past summer marked the all-time best letter from a CEO announcing his company’s acquisition, as well as the infamous “We Got Acquired by Amazon” sock puppet monkey video:

Lots of people love Woot; the attitude is fun and refreshing, and they DO have plenty of great deals. It’s not hard to see why Amazon saw an attractive acquisition opportunity.

One wonders, though, if the synergies analysis for the Woot acquisition included the impact on Amazon of having to remit sales tax in Texas (Woot is based in Austin). Because Texas just submitted a bill for $269 million. That’s a heckuva lot more than what Amazon reportedly paid for Woot.

In fairness, this is the culmination of a long-running dispute between Amazon and Texas over sales taxes. But owning Woot sure isn’t going to help Amazon’s argument that it’s not responsible for remitting Texas sales tax.

Whoops.

Vote on Oracle's Next Meal

2010-08-13T07:13:00.000-07:00

The beast from Menlo Shores has an insatiable appetite, gobbling up companies large and small. Notables like Peoplesoft and Sun Micro have fallen to Larry Ellison's behemoth in recent years - so who's next?

Stephen Jannise, an ERP software analyst who follows Oracle, has taken a stab at answering that question, and invites your vote on who Oracle is likely to next set its hooded gaze upon.

Another GC Weighs in on Outside Counsel

2010-08-02T07:09:00.000-07:00

Great post from Richard Russeth: "If Nordstrom's Was A Law Firm, I'd Give Them All My Business: 7 Mistakes To Avoid With Your In-House Client."

Terrific advice for attorneys seeking long-term corporate clients, or wondering why their clients tend to "stray." I would overlay this with previous points I've made about the importance of outside counsel offering business-focused advice, but these issues of responsiveness are so important - and such low-hanging fruit - that it's surprising more attorneys can't figure them out. I especially like rule #5.

Deal Deliberations

2010-07-02T06:34:00.000-07:00

Fred Wilson has a post up regarding Foursquare's recent funding round, defending the lengthy process taken by the startup. What started as financing discussions turned into acquisition talks, then ultimately returned to financing as Foursquare decided they'd rather grow organically than cash out now.

That's a respectable, even admirable, choice. It's not without risk, but it's good to see a company swing for the fences. And while I have often urged the virtues of speed in getting deals done, I agree with Fred that Foursquare did the right thing in taking their time through this process.

The distinction lies between the time taken to evaluate alternatives and the time taken to button the deal up once the company has made its choice. During the evaluation/auction phase, the risks of waiting are likely to be heavily outweighed by the benefits of seeing things through. That may mean getting to the best acquisition deal, or arriving at the informed decision to move forward alone (or with new financing).

However, it's once that decision has been made that things need to be moved forward with haste. Even if you haven't chosen your partner and an auction still persists, once the decision to do one type of deal or another is in place it's time to race for the finish. Why? Because at this point the risk scenario is flipped. The risks attendant with delay - new competitors emerging, changes in the macro environment, etc. - strongly outweigh any potential benefits of waiting. This doesn't mean not negotiating hard, but it does mean not allowing any delay due to lawyerly handwringing or people not being willing to work around the clock to get the deal papered.

Or as someone else put more memorably: "Only one thing matters in this life: Get them to sign on the line that is dotted."

I don't know how long it took Foursquare to get their financing closed once they'd made the decision to go that route, but if it took more than a couple of weeks that would be cause for criticism.

Not, however, the time they took to reflect on their options and make the choice between selling now and moving forward independently.

Straight Outta Law School

2010-06-23T06:39:00.000-07:00

Hewlett Packard is now experimenting with hiring in-house counsel directly out of law school. It's an unorthodox move, but makes sense for a company of HP's size. They've got the volume of grunt legal work that a first year is suited to do, and enough senior counsel to provide training. Most importantly, they are assured of getting new hires who are untainted by time spent toiling in the risk-adverse halls of big law firms.

Sounds like good news for these lucky hires and their internal clients at HP.

The Perils of Hyperbole

2010-06-16T21:27:00.000-07:00

First of all, has it really been three months since I've posted here? Between being crazy-busy and writing elsewhere I've neglected Corporate Tool. But fear not - this post from What About Clients? today reminded me of how hyperbole, attractive though it might be, is to be avoided like the plague in both litigation and business.

Dan Hull is absolutely right about the corrosive effect hyperbole has on one's credibility as a litigator; how a single overstatement can undermine an entire legal brief. It's simple, really: Lie about one thing, and people won't believe you about anything.

The corollary in business is this: If you're going to overstate your position, make threats or engage in brinkmanship, you'd better be prepared to back it up. Unless you're really ready to walk from the negotiating table, bring a lawsuit or take some other decisive action, such bombast is likely to seriously backfire. Empty threats are almost never successful.

Avvo Series C

2010-03-18T10:24:00.000-07:00

I do a wide variety of things here at Avvo, from talking to angry attorneys to fetching drinks for our Friday beer gardens. Over the last week, I've been back in deal mode, wrapping our Series C financing - a $10MM round lead by DAG Ventures, joined by our existing investors Benchmark Capital and Ignition Partners.

Compared to M&A, negotiating a C round venture investment isn't exactly exciting (although it does generate a lot more paper). We kept this one hopping by closing in record time - 9 days from term sheet to close. Kudos to our great investors, DAG's counsel at Cooley and our attorneys at Perkins for moving this thing along so quickly. We're awfully excited about what the next year has in store for us.

Like Hogs to the Slaughter

2010-02-19T06:31:00.000-08:00

One pig-meat conglomerate buying another isn't typically my stock in trade, but I was intrigued by the recent news of the DOJ levying a $900K fine against Smithfield Farms for gun-jumping in its acquisition of Premium Standard Farms. Root of the problem? During the pre-close HSR waiting period, Premium Standard had submitted several long-term contracts for hog supply to Smithfield for review and approval. Sooey!

While the amount of the fine isn't huge (representing little more than one-tenth of one percent of the $810 million Smithfield paid), what's interesting is how after-the-fact it was. The deal closed nearly 3 years ago.

Lesson one, which isn't really a lesson, because both parties should have known better: Don't ask your acquiror to sign off on ordinary course contracts, even if they ARE large and DO extend beyond the closing date. Aside from the gun jumping risk, there are also significant benefits to the seller in maintaining its operational independence while awaiting the close (optionality in the event the deal goes south; additional motivation for the buyer to close quickly). And while the buyer's interest in making sure it's not saddled with non-economic contracts is obvious, tight operating covenants are a better solution than trying to assert de facto operating control pre-close.

Lesson two: Don't expect that closing the deal is the end of your dealings with the DOJ. If you haven't run a clean process, don't be surprised if the feds come calling long after the closing dinner is a distant memory.

Thoughts on Daily Bike Commuting

2010-02-01T04:32:00.000-08:00

I starting riding to work about 18 months ago, right after moving from Redmond to Seattle. A fair weather rider at first, I quickly grew to love the feeling of riding to work. From the exhilarating wakeup of flying downhill in the morning to the mind-cleansing burn of pedaling uphill on the way home, I was hooked. I've moved steadily onward to riding nearly every work day. I rode 180 days in 2009, and would have reached 200 if a mid-April sandboarding accident hadn't sidetracked me for 6 weeks with a broken foot.

While I certainly encourage others to "bike their drive," I'll be the first to acknowledge that my situation is about as perfect as it could be for bike commuting. At only 3.5 - 4 miles each way, riding doesn't take any more time than driving, and is way faster than the bus. Parking a car in my building costs $200 a month. My ride is entirely urban, so I'm not (often) dealing with speeding vehicles. With my morning ride almost all downhill, I don't work up a sweat on the way in. My workplace is very casual, so I can ride in my street clothes. Remove any of these factors and who knows how resolved I'd be?

In any event, the last year has been about removing obstacles to riding. The first of these was heavy rain, which for the first six months of riding kept me off my bike. Quality raingear (including these butt-ugly but effective shoe covers) solved that problem, and I now look forward to riding in the rain. I've also added a Cetma rack up front so I can carry bulky items to and from work and run more errands on my bike.

I've probably reached the maximum potential for riding - business travel, speeches and meetings still conspire to keep me off my bike a few weeks each year, and I won't ride in the snow, given the steepness of my hill and how clueless Seattle drivers are at operating in the stuff. I could get another bike, so mechanical problems - which cost me a handful of rides - aren't a factor. But that's probably more just rationalization for me to get this sweet lime-green Swobo.

Useless Corporate Lawyers?

2010-01-13T17:31:00.001-08:00

Yes, I've known a few . . . enjoyed this brief post from What About Clients, reminding all attorneys out there to quit wringing their hands and give their clients some freaking actionable advice for a change. Also links to WAC's classic "7 Habits of Highly Useless Corporate Lawyers" post.

Getting Help with the Deal

2010-01-07T13:11:00.000-08:00

Good post over at Venture Hacks from Scott Walker - 5 tips on getting deals closed. Here they are, with my thoughts on each:

1. Create a competitive environment. Absolutely. As I wrote about in documenting the sale of AT&T Wireless, a competitive environment drives price and terms in the seller's favor. The only thing better than telling one group that their legal ask is "no longer market" is getting a call from another that they are raising their offer. But - I would emphasize Scott's advice that this effort is one where you must have experienced help. It is a very delicate process to get an auction going and keep it alive, and not a place for any entrepreneur or business manager to learn on the job.

2. Leave your heart at home. Listen, listen, listen - and always check yourself for signs of deal fever.

3. Work your balls off. True for getting most businesses to succeed, and true in the crunch time of getting a deal done. Work 40 hours over a weekend to get a deal done while markets are closed? Spend a week in New York without eating a meal outside of a law firm conference room? You bet - everything needs to fall away when you're focused on getting the deal done.

4. Don't let your investors screw you. Doing diligence is always important - but requires focus. Pay attention to tone and priorities. Don't pay attention to things that don't make a material difference.

5. Get good legal help. God know I've spent a lot of time on this blog dealing with the failings of lawyers, and much of my deal experience has come as a principal rather than the lawyer on the deal. That said, you need to get someone who matches your energy and willingness to work your balls off, AND who knows your business and is aligned with your level of risk aversion. I've seen a lot of good lawyers blow (or nearly blow) deals by wasting time on marginal legal issues. Make sure your lawyer can tell the difference between what matters to you and what can be moved past.

Lawyers vs. "Good Enough"

2010-01-06T14:21:00.000-08:00

Ron Friedmann has a great post on the recurring problem of lawyers applying "perfection thinking" to all legal problems.

Global Warming Science and DCF Models

2009-12-23T06:40:00.001-08:00

The science behind the global warming hypothesis has always struck me as being a lot like the process of evaluating an M&A transaction. Both involve complex modeling in an attempt to predict future events, with the results used to support or refute an investment thesis.

One thing dealmakers know (or should know) is that the utility of a DCF model is constrained by the reliability of its inputs. For this reason, models should be given much more credence when evaluating stable, mature businesses than when modeling dynamic or new operations. For the latter, the "garbage-in, garbage-out" problem renders models little more than an exercise in involved guessing.

So - what to make of global warming science, where the task of modeling planet-wide systems is exponentially more complicated than that involved in even the most speculative of new businesses? Frankly, there's no way to call the conclusions drawn from this exercise, as many have, "settled science."

[As an aside, the concept of "settled science" in any field rings badly in the ear; the work of a scientist should always be to test, re-test and probe at various hypotheses and theories. The history of science is replete with examples of theories that "everyone" knew to be true being disproved.]

Complicating matters further is the curious and near-religious fervor of many GW scientists, complete with crushing of apostates and indications of thumbing the scale in favor of the desired outcome in the models. Modeling is not a precise science, and pretending it is so greatly impacts the credibility of those driving the science.

This doesn't mean the GW scientists are wrong. They could well be right, but does the state of the science - the value of the model - support the investment thesis? Many climate scientists and environmentalists would have us invest trillions of dollars in carbon reduction. Making that kind of investment (an investment which forecloses the opportunity to invest those dollars in other worthwhile endeavors, from disease elimination to feeding the starving to economic growth) absolutely requires rock-solid scientific support.

For now, the state of GW science probably supports tuck-in investment in incremental carbon reduction measures: greater efficiency, more trees, etc. It certainly doesn't support rushing headlong into policies that vastly transform our economy and way of life. Bottom line: If GW science were an M&A transaction, it would look, right now, like the worst case ever of deal fever.

The "Zero-Risk Era"

2009-12-07T17:38:00.000-08:00

I could never work be general counsel of a bank - or at least, that's what I've got to conclude after reading this piece in Corporate Counsel about the global risk regulatory paradigm set up in the Basel II Accord. Under Basel II, financial institutions must do sweeping and detailed analysis of "operational risks," complete with meetings, analysis, documentation and record-keeping.

Put aside the process issues and garbage-in, garbage-out nature of this kind of program. Simply think about this: Operating a successful business is a continuous exercise in taking on "operational risk." Hopefully this risk is smart; hopefully it is vastly outweighed by opportunity on the other side. But it involves risks none the same -and working toward a "zero-risk era" is not only fraught with risks of its own, but also does a disservice to that which makes businesses great.

Pfizer and "Compliance"

2009-09-10T10:17:00.001-07:00

So Pfizer, which made a high profile GC hiring just a little over a year ago, has been slapped again for illegal marketing practices, agreeing to a $2.3 billion federal fine. That's brutal enough, but what interests me is one of the non-economic conditions the feds imposed on Pfizer (yes, it was a "corporate integrity agreement", but that's about as much an arm's-length contract as DOJ consent decree is).

Under this agreement, Pfizer's "chief compliance officer" must report to the CEO, not the GC. Now, given Pfizer's record, perhaps that's not such a bad idea; obviously, this is an organization that needs some additional focus on compliance. However, check out this quote from Lewis Morris, chief counsel for the inspector general's office:

"The lawyers tell you whether you can do something, and compliance tells you whether you should. We think upper management should hear both arguments."

Pfizer's issues aside, this is an awfully narrow view of how in-house counsel should behave. Good business counsel should be able to give risk-adjusted advice - that is, both what you can do and whether you should do it.

Ebay - Skype - Final Chapter

2009-09-01T09:03:00.000-07:00

Almost 4 years ago to the day, I noted that "deal fever" had gripped Ebay and led it into an ill-fated $4.1B acquisition of Skype. 2 years ago, Ebay, took a massive $1.4B writedown on the acquisition, conceding that they had overpaid.

Today, Ebay announced the divestiture of a controlling interest in Skype in a deal that values the company at $2.75B. While the deal not working out is hardly shocking, it is somewhat surprising that Ebay was able to recover as much as it did, selling 65% of Skype for $1.9B in cash (of course, you can be sure that the private equity investors conditioned the deal on a long-term commercial relationship between Skype and Ebay; that deal may well include revenue commitments).

In any event, it's always good to see a little dealmaking discipline - even when it's cleaning up the mess that deal fever can create.

AP Fires First Salvo in Losing Battle

2009-07-24T11:07:00.001-07:00

The Associated Press is taking the novel position that even minimal references to its articles require a licensing agreement with the news organization that produced the piece. By way of example, the AP noted that the use of a headline and a link would violate a news organization's copyright. This, of course, is what one sees regularly on Google News and other sites, including blogs. For example:

Gates Faults U.S. on Data Privacy and Immigration

From a business perspective, it's strange to see anyone take a position that discourages linking. Linking is the lifeblood of the web, and it's how people find your content, both directly and via the "authoritative" benefit a site gets from most links. And from a legal perspective, there's no question whatsoever that any content owner who tries to enforce copyright to prevent standard linking will lose.

What of the headlines themselves? Sure, a headline is "expression" for copyright purposes, but it's hard to see how a news source can escape a fair use argument, given that a headline is a small portion of the overall piece of journalism and doesn't create an economic substitute for someone referring to the original piece. In fact, the opposite is true. Headlines are written to attract reader interest in the article; linked headlines drive traffic from a search engine, blog, etc. back to the original source to read the full piece.

It should also be noted that news outlets have, since time immemorial, referred to each other. News organizations on the one hand create content, and on the other hand avidly rely on content created by others. How often when reading media do you see a reference like "The New York Times reported today that . . . " or "according a CNN report . . ."?

The AP, like a lot of other traditional media outlets, is flailing about as its legacy business model slowly loses air. However, it's easy to see how this particular battle will end – an overreaching lawsuit or two that leaves egg on AP's face without vindicating its position. It may also see Google show some news outlets what a world without links to their content would look like – I suspect they would quickly find that is far worse than the way things stand today.

Why the Iranian Election is Like "Deal Fever"

2009-06-16T08:40:00.000-07:00

Dealmakers know the symptoms of "deal fever" - the blowing past objections, rationalizing higher valuations, inflating synergies and discounting diligence items that comes once management has set their eyes on the prize. We try, not always successfully, to avoid it in our own work. Some shops even try to inoculate against deal fever, setting up incentives to kill deals. The idea is to be ever-vigilant against confirmation bias - looking for those things that confirm the direction we want to go, and avoiding/downplaying evidence that runs counter to our bias.

So, Iran. We loathe the sawed-off, anti-Semitic Ahmadinejad. We feel some glimmer of hope that the opposition represents Iranians finally embracing modernity. We imagine that anyone with a brain would vote for progress rather than the incumbent. So we side with the green-clad protesters and call the election a fraud.

Like deal fever, this represents confirmation bias writ large. Leading up to the election, there was little question that Ahmadinejad was going to win at least a plurality. The hope was that he would not win outright, and that in the run-off election Mousavi would have a better shot. However, like deal-hungry CEOs dreaming of industry domination, we've chosen to largely ignore this evidence and cling to anything that confirms our bias - the unsubstantiated rumors of ballot box burning; the images of thronging urban crowds representing the will of a people that remains largely rural, poor and conservative.

Completing a deal often means taking advantage of deal fever on the other side (some might call this selling). We should not be so naive as to believe that the opposition in Iran doesn't realize how its message plays in the West. So while we're right to ask that allegations of election fraud be investigated, and that votes be recounted, we can't accept uncritically any claims made by the opposition. Just as we sometimes have to walk from a soured deal, we sometimes have to accept that the price of democracy is a democratic outcome that we don't agree with.

"Deal Tact"

2009-05-12T17:58:00.001-07:00

Terrific post today from John Jenkins at the Deallawyers.com blog titled "A Little 'Deal Tact' Goes a Long Way." John gets right to the heart of those factors I have consistently found key to successful dealmaking, whether you are the lawyer, financial advisor or principal: Acting respectfully to everyone in the process, not engaging in negotiating "games" or pissing matches, and always focusing on moving the deal forward.

My favorite quote:

"I’m not suggesting that deal lawyers should always act like Clark Kent -- possessing a little deal tact doesn’t mean you shouldn’t play hard ball when appropriate. I’m just saying that Conan the Barbarian shouldn’t be our role model either. I mean, if you really believe that what is best in life is “to crush your enemies, to see them driven before you, and to hear the lamentation of their women,” you’d probably be much happier as a litigator anyway."

Commodity vs. Premium Legal Advice

2009-05-06T14:21:00.000-07:00

A Financial Times piece titled "Law Firms Adapt to a Stark New World" notes:

"Many clients feel that it will no longer be acceptable for law firms to demand premium fees for legal advice that is not contextualised or couched in commercial language."

Amen. A mix of antiquated state bar regulation and attorney information-hoarding has allowed lawyers to charge high rates for what is effectively just legal issue-spotting (e.g., "doing x exposes you to a, b and c legal risks.") However, technological advances, alternative practice models and offshoring are rapidly reducing the value that lawyers can extract from this kind of commoditized counseling.

I've got very low tolerance for counseling which simply spots issues and doesn't weigh them in light of their relative risks. I am increasingly unwilling to pay anything for such advice. Technology has made it easy for me to either directly spot the issues or cheaply hire someone to do it. Those who can't contextualize their advice to my business opportunities won't be hired again.

On the other hand, I am highly insensitive to price when it comes to premium legal advice. Attorneys who understand how my business works and can provide tailored advice that weighs risk against opportunity - particularly on big ticket items - are pure gold.

Unfortunately, a lot of attorneys don't have the pragmatism and confidence to provide premium counseling (ironically, you often see the worst offenders when dealing with low-grade business problems). So, along with self-help legal products and automated solutions, I expect we'll see a continued evolution in the corporate legal world to a bifurcated structure: A small number of lawyers will be able to demand premium pricing, while a much larger cohort will find their legal work significantly devalued.

The Torture Memos, or the Lawyer as Factotum, Not Counselor

2009-04-29T12:12:00.000-07:00

The hubbub over the "torture memos" - and particularly Judge Jay Bybee's defense of the memos he signed - illustrates a legal counseling issue deeply familiar to any corporate general counsel: A leader looking for an aggressive interpretation of existing law to support a planned course of action.

Second-guessing by ivory tower types aside, there's little doubt that the memos represent a legally-defensible interpretation of the state of the law in this area. However, in a well-functioning organization, with a strong GC and open communication, the memos would go beyond discussing the outer bounds of what is permissible under the rules to point out the potential downside versus the limited utility of these methods of interrogation.

Bybee's fault is that he's too much of a lawyer's lawyer, providing only the legal analysis and not wading into the risk/reward and policy analysis (to quote from his memo: "This memorandum expresses no view as to whether the President should decide, as a matter of policy, that the U.S. Armed Forces should adhere to lhc standards of conduct in those treaties with respect to the treatment of prisoners"). And of course, he worked within a tremendously dysfunctional structure not noted for its openness.

It's regrettable he couldn't be more of a leader at that uncertain time. However, while you might not want Bybee to be providing strategic guidance to your organization, he's certainly no criminal.

The AIG Bonuses - Pure Political Theatre

2009-03-18T11:40:00.000-07:00

All hopes for moving beyond the banality of politics are out the window, as members of Congress stumble over themselves in populist indignation over the bonuses paid out by AIG.

Never mind that the government has known about AIG's comp structure since at least the time the insurer was bailed out last year.

If we believe that the bailout of AIG was necessary, we must also accept that those who crafted the bailout chose - wisely, I believe, given the stakes and time pressure involved - to focus on saving the patient and not to waste time on annoying-but-inconsequential details.

Look, there are lots of things about comp and benefits at Wall Street financial outfits that would make Main Street America's skin crawl. There are lots of ways any of these bailout details could have been handled with greater care and finesse. But in the pressure of the moment, we want those trying to save our economy to prioritize smartly. I just wish someone in our government would acknowledge this reality.

Good News! Businesses Cut Legal Costs

2009-03-16T06:26:00.000-07:00

Because sanity dictates I look for silver linings anywhere I can in this economic meltdown, let me offer one up: According to a recent article in law.com, corporate legal departments are going through an aggressive reduction in legal spend.

As I've noted before, there are benefits to a limited-resource approach when providing corporate legal guidance - whether this approach is driven by design or necessity:

- Rethinking how "goldplated" routine legal work needs to be (resulting in more responsive client service).
- Forcing inhouse teams to prioritize around where they can add the most value at the lowest cost (instead of just trying to button up every risk).
- Reducing stupid legal tricks like taking a scorched-earth approach to anything that even has a whiff of a potential trademark of copyright violation.
- Requiring inhouse attorneys to be more creative and engaged with actually driving value in their businesses.

The Virtues of Half-Assed Legal Work

2009-03-12T06:22:00.000-07:00

What do felony trials and bet-the-company litigation have in common? You don't want to cut any legal corners on either one - no stone can be left unturned in maximizing one's legal position. There is too much at stake to worry about the cost of all of that legal brainpower.

But not all legal work must be gold-plated. Indeed, the business world absolutely requires that attorneys be comfortable routinely doing a less-than-complete job.

Legal work is expensive. The vast majority of business legal issues don't involve fights for freedom or corporate survival - they're about opportunity and money. The legal work thrown against any issue must be justified by the stakes in play.

Lawyers have counseled businesspeople from time immemorial that investing in legal work upfront is a wise move. Absolutely true. However, and related to my earlier post about lawyers and risk aversion, the point of diminishing returns for legal work in business is often reached very quickly.

Does it make sense to negotiate a low-dollar contract the same way you negotiate a high-dollar deal? Should you aggressively ramp your defense on potential litigation that has no reasonable chance of denting your bottom line, even if everything goes wrong? What about an exhaustive review of compliance options and processes, when the need for compliance is uncertain and the consequences for non-compliance easily manageable?

I'll repeat - legal work is expensive. And there are costs to dithering and over-lawyering in lost opportunities and inability to prioritize. Marshall your legal resources and focus them on the big risks and opportunities. As for the rest of the stuff, "good enough" will almost always be just that.

Whole Foods - A Rare Post-Closing Consent Decree

2009-03-06T09:09:00.000-08:00

I've dealt with divestiture trusts on several occasions, both as a buyer and as a seller of assets that federal regulators required to be sold under consent decrees authorizing mergers. While these sales are concluded after the larger deal has closed, the agreement and trust has always been established prior to closing.

So this is a first - Whole Foods, which bought the Wild Oats chain in 2007, has, over 18 months after closing the deal, entered into a consent decree with the FTC to sell the "Wild Oats" name and 32 locations. As I wrote at the time, I thought both the merger AND the FTC's objections to it were out to lunch. When the FTC lost a court battle to obtain a preliminary injunction blocking the merger, Whole Foods quickly closed the deal, despite the fact that the FTC appealed the PI denial. The FTC ended up winning that appeal, and now we have this settlement.

From the perspective of Whole Foods, this settlement is no big deal. There's little chance they ever planned to use the "Wild Oats" name, and the divestitures represent little more than 25% of the total locations acquired. On the other hand, this smells strongly of face-saving by the FTC. The "Wild Oats" name has little value, and of the 32 locations in the divestiture, over half (19) have already been shuttered by Whole Foods.

Lawyers and Risk

2009-02-25T21:40:00.000-08:00

For those running businesses, here’s a little secret about lawyers: Many of us aren’t very good when it comes to risk.

Sure, we can find risk – most lawyers can identify risks all day long. That’s what law school trains our already-skeptical minds to do. Spot the issues; identify any ways risk arises in a course of action. But balancing those risks against opportunity? Not so good.

Successful businesspeople know that you win by taking smart risks – risks that are outweighed by opportunities. These risks can be competitive, personal, financial, social or, yes, legal. The problem for most businesspeople is that the law is complex, and attorneys have done a good job making themselves its gatekeepers. How can the non-lawyer businessperson determine the size of the legal risk that lurks on the other side of an opportunity?

Your average business attorney will have little trouble assessing the potential for liability in almost any scenario. With some prodding, they will strive to give you the likelihood that liability will actually come into play. However, it can be like extracting teeth to get many attorneys to combine the element of likelihood of a risk with the likely consequences should that risk materialize.

Why is this important? Because – and I can’t emphasize this enough – legal risks are not created remotely equally. A legal risk may mean a vendor is likelier to send you a pissy letter. It may mean an increased likelihood of being sued. Or it may mean the feds raiding your office with a warrant for your arrest.

Obviously, you don’t want to take a major legal risk for a minor opportunity. Just as obviously, you shouldn’t let a little legal hand-wringing over minor risks slow down your plans. You also wouldn’t want to take those risks that are likely to result in criminal liability, bet-the-company litigation or other such unpleasantness under most any imaginable set of circumstances. Due to the gatekeeping function lawyers play, you must have input from your lawyers to tell which risk is which.

Are you getting this input? Just as potential risks are easy for attorneys to assess, the likely range of potential damages is difficult to come up with. Assessing this range requires not only understanding the worst-case outcome, but also discounting from this scenario to account for the uncertainty of the situation, the circumstances of your counterparties and the likelihood that liability will even emerge as an issue in the first place. All in all, a complex and messy process - and attorneys, being risk-adverse creatures, are often loath to wrong-set your expectations.

Much of this analysis is based on experience and judgment, not modeling or mathematical analysis (there are some exceptions I will write about down the road). If you’re lucky, you’ll work with attorneys who possess these qualities and are willing to fully deploy them for you. Ask yourself – are your attorneys walking you though this way of looking at your risks, or do you get the sense that they believe every risk needs to be eliminated? If the latter, and if getting new counsel isn’t an option, at least try the “worst case” test: Always ask your lawyer what the worst thing that could possibly happen is. You may be surprised by how often even the “worst case” is of little consequence next to the size of your opportunity.

Facebook - What Happened to the Adult Supervision?

2009-02-18T08:37:00.001-08:00

Last year, in an attempt to address the burgeoning growth and complexity of its business, Facebook brought in some experienced senior management in the form of COO Sheryl Sandberg, VP, Communications Elliot Shrage (both Google alums) and General Counsel Ted Ullyot (Justice Dept.). Sadly, this leadership has abjectly failed Facebook in its Terms of Use imbroglio.

Last weekend, Facebook changed its TOU in certain ways that covered the more expansive ways it needs to license user content. Not to "own" user content, as many of the more hysterical voices in the blogoshere contended, but rather to reflect the many ways users distribute their content via applications and the profiles of others.

The issues raised by those objecting to the TOU changes were similarly overstated for several other reasons: First, only a vanishingly small fraction of a percent of the content on Facebook has any financial value whatsoever. Second, even with respect to that small fraction, Facebook would have no incentive for seeking to monetize it via their license. They don't have exclusive rights, it's not their core business, and they'd face a riot from users. Finally, it’s well-understood that website terms of use are only enforceable to the extent they are reasonable. It's silly for people to take strained and aggressive readings of TOUs and argue that the companies involved would evetake those positions. Their lawyers are smart enough to know that courts won't accept overly-broad or unreasonable interpretations of TOUs.

So, the TOU changes: The problem is that, for a complicated web service like Facebook, it’s really hard to draft website terms of use that are both clear and cover all of the situations the company needs to cover. It takes a lot more time, just as it’s harder to write a short, concise letter than a long one. Sure, Facebook could devote the time and legal resources to making their TOU both a model of lay-person clarity and legal coverage, but – this blogosphere dust-up notwithstanding – the ROI on doing that is very low. Even a well-funded startup like Facebook has bigger issues its counsel should be focused on.

I thought Facebook had this all figured out and had made their TOU changes understanding that they would meet with some complaints. After all, Google faced similar issues last year when it made TOU changes as part of the Chrome browser launch, and those quickly blew over.

But here's where the adult supervision broke down: Facebook has now apologized and backtracked to their old TOU. What's shocking about this is the tacit acknowledgement that the company hadn't considered the tradeoff inherent in expanding their TOU this way, hadn't considered how to communicate the changes and hadn't considered the possibility of blowback. It also shows a level of pliability to a vocal minority that in't going to serve the company well should it ever go public.

Corporate Tool Re-Tooling

2009-02-02T07:12:00.000-08:00

I've worked with a lot of lawyers in my career, and have even done a fair impersonation of one myself (kidding, state bars - I'm actively licensed. Sheesh.) Given the moribund M&A market, the focus of my current job on the legal market - and the fact that I've exhausted most of what I could say about corporate development - I've decided to reorient "Corporate Tool" around how businesses should think about the law, and how lawyers who serve businesses should think about their clients. All the old CT archives on M&A will remain intact, but I'll add new categories for this new focus.

First post soon, on one of my favorites subjects - risk.

My Pedestrian Rant

2008-12-08T16:46:00.000-08:00

I’ve been working in downtown Seattle for a year now, but I continue to be struck by how bad Seattle pedestrians are. They dutifully wait for the “walk” light to change to green before crossing even one-way streets that are free of traffic. Conversely, they’ll often follow, blindly and cow-like, when a more independently-minded soul decides to take a traffic-free moment to cross the street against the light.

Finally, there’s the sidewalk herding and milling about. I can walk almost anywhere in Manhattan, as quickly as I like, on sidewalks narrower and more crowded than here in Seattle. People get with the program – sidewalks are for walking, and if someone needs to make a phone call, talk to a friend, or wolf down a hotdog, they’ll stand off to the side. Here in the Northwest? People will stop abruptly mid-sidewalk and stare doe-eyed into space. They’ll talk, yell, spin around, windowshop and wait for buses, all where god intended that city people in a hurry should have an unimpeded place to walk. Perhaps instead of banning grocery bags and Styrofoam takeout containers, our city fathers’ energies could be better spent on educating our clueless pedestrians on how to properly use the public byways.

Back in NYC

2008-11-24T12:09:00.001-08:00

I slipped into Manhattan late last night; I'm speaking this evening at the New York County Lawyers' Association on social networking and legal business development. Sure, it's a diversion from my usual M&A-related trips to NYC, but it's an age of expanding horizons, right? Event is 6:00 - 9:00 tonight at 14 Vesey Street, downtown.

M&A in this Toxic Environment

2008-11-24T12:05:00.001-08:00

Must-read post from the Deal Professor on the complexion of dealmaking today, and what kind of stuff is likely to work (if anything): Exchange offers, vulture investing, etc.

Corporate Dealmaking in the Ruins

2008-10-06T11:23:00.000-07:00

I moderated a panel on “extreme dealmaking” at last week’s Corporate Dealmaker Forum in New York – I don’t know that there has been a period in living memory of more “extreme” M&A than we’ve seen in the last few months. From Bear Stearns' shotgun marriage to JPMorgan to the host of bank failures and other hastily-arranged weekend tie-ups, very large enterprises have been rushing into deals at breakneck speed.

Just as surely as the process has witnessed staggering amounts of equity destruction, it will certainly offer some fantastic opportunities coming out of the other side. The remaining healthy banks think so, as they attempt to fatten up cheaply on the remains of their less-risk-averse brethren. The tussle between Citi and Wells Fargo over Wachovia is only the latest chapter. We’ll see more activity, even if things get darker, as those with the resources to do so start laying the groundwork for better days in the future.

After the conference I did an interview on ABC News Now about the economy and the election – we polled 20 of Avvo’s top-rated bankruptcy lawyers to get their thought on this topic, and the results were certainly intriguing. Check out the video.

Corporate Dealmaker Conference

2008-09-24T15:22:00.001-07:00

I'll be moderating a panel on "extreme dealmaking" at next week's Corporate Dealmaker forum in NYC. I've also signed up for twitter - find me at @corporatetool on twitter.

Rolling Heads

2008-09-18T16:43:00.000-07:00

Former McAfee GC Kent Roberts - rogue options backdating agent, or poor sap thrown under the wheels of the corporate bus? God knows we in-house counsel are ready and willing to take the blame for things our companies want to do or not do - within the bounds of the law, of course. But stand trial with jail time on the line? Methinks not.

Was Roberts - whose federal court trial was to start yesterday - left twisting in the wind by McAfee? The company has suddenly found a bunch of emails that apparently may exonerate Roberts. As for the company and the attorneys who missed this discovery the first time around? "Heads have to roll" - that's the word from U.S. District Judge Marilyn Hall Patel.

More on Google's EULA

2008-09-09T10:11:00.000-07:00

PC World ran a comprehensive piece yesterday (including some analysis from yours truly) on the quirks of Google's terms of service and how the company claims a license to a whole bunch of user content across multiple products (Chrome, Picasa, Blogger, etc.).

Some people have wondered why I think Google won't use this license claim in a more affirmative fashion - as the argument goes, what's to stop Google from taking advantage of some particularly valuable piece of content that gets posted to Blogger or Picasa? I mean, what if the movie version of Corporate Tool is a global blockbuster - how can I be sure that Google isn't going to capitalize on my success?

Two reasons: First, Google's primary concern with having a license is to avoid operational or legal problems in running its site. It doesn't want to have to worry about copyright clearance or the like when making changes to its sites or products. Why does this matter? Because there is a fundamental difference in the strength of the company's claim between this "defensive" use and any use of the claim proactively to establish IP rights.

Secondly - and related to the business judgment that would make Google think twice before using its license claim proactively - Google is a multi-billion-dollar behemoth that makes money hand over fist, at unbelievable margins, from its advertising sales. Do you really think they'll see a viable business opportunity in pursuing a shaky-at-best licensing claim to your beach photos?

Overreaching Contracts

2008-09-03T15:26:00.000-07:00

Credit card companies, telecom operators, website publishers and software developers are all familiar with the need for standard, easily-applied agreements that customers sign up to by default when using the service.

While these agreements come in many names and forms ("shrink-wrap" for packaged software, "click-wrap" for downloaded software or software-as-a-service, "End User License Agreement," "Terms of Service," "Terms of Use" or "Customer Service Agreement" for websites or telecom providers) they all have one thing in common - they are contracts of adhesion, meaning the end user is stuck with them if they want to use the service.

There's nothing wrong with this per se - some form of agreement needs to surround these services, and such terms obviously can't be negotiated individually with every user. However, as today's kerfuffle over the terms of service for Google's new Chrome web browser shows, a company's lawyers need to pay attention to what these terms say and whether they are fair in the context of a contract of adhesion.

Why? For starters, while most anything goes in a fully-negotiated agreement, courts will quickly find a contract of adhesion unconscionable if the terms are overreaching. After all, the consumer has no other choice but to vote with their feet (and sometimes they don't even have that choice). The Washington Supreme Court recently decided a case (see Groklaw for a terrific discussion) that offers a classic look at the far reaches of unconscionability - an AT&T customer service agreement that, in addition to requiring arbitration of disputes (usually OK, even in adhesive contracts), also barred class actions, required all proceedings to stay secret, shortened the statute of limitations to bring actions, and limited consumer rights to sue for attorney's fees, while giving AT&T the right to do so (this last point wouldn't fly even in a fully negotiated contract in many states, including CA and WA).

While the Google lawyers apparently were just a little sloppy in applying terms from other services to Chrome, AT&T's lawyers must have just felt compelled to make their terms as one-sided as possible.

The problem is that this kind of overreaching has its costs. If you're AT&T, the only terms above that really make much difference are the arbitration clause and the class action waiver. The rest of the stuff is noise. However, it's so blatantly one-sided that a court couldn't help but trash all of these clauses; indeed, AT&T is lucky the entire agreement wasn't stuffed.

What would have happened if they had kept the agreement scrupulously fair on the procedural side but had retained the important limitations (arbitration and class action waiver)? I say there's a fair chance the court would have upheld their agreement. Instead, their eagerness to craft a lopsided agreement cost them what they really cared about. Nitwits.

Business Performance with Integrity

2008-07-11T11:42:00.000-07:00

WSJ law blog has a great interview today with Ben Heineman (former long-time GE general counsel), summarizing some of the key points in Heineman's new book, "High Performance with High Integrity." Lots of good points about the role of the GC, particularly the need to be neither a naysayer or a yesman.

I've pointed out before the tendency of some corporate leaders to create a culture where dissent or bad news is punished, and how much that hurts the organization. As Heineman notes, the GC has to have "the credibility, independence and guts to speak up, even in the heat of battle, about integrity issues." Too true. But organizations also need to foster cultures where such independence is encouraged (or at a minimum, tolerated) amongst as many levels of management as possible.

Microsoft and Yahoo - Saving Face All Around

2008-05-19T13:03:00.000-07:00

According to reports today, Microsoft is floating an idea to buy Yahoo's search biz and take a "minority passive stake" in the company. Please. This is nothing more than a fig leaf to cover Microsoft's renewal of acquisition discussions.

Look, it would have made things difficult for Microsoft to simply come out and said, after two weeks of avowed denials, that they still want to buy Yahoo. And it would be similarly hard for Yahoo to say they realized they'd overplayed their hand and they're really amenable to a deal at $33 or $34 per share. So, they can both engage in this barely-plausible cover story, spend a little time "examining" the pros and cons on an asset sale + investment, before concluding that it really makes the most sense for MSFT to simply acquire YHOO outright.

Clearwire, Sprint, etc.

2008-05-07T05:26:00.000-07:00

Congrats to my former colleagues at Clearwire for FINALLY getting the Wimax JV done with Sprint. Initial indications are that it was worth the wait - it's a full-blown, fully-funded deal that removes a huge measure of risk from Clearwire's business and allows it to roll out nationally. What's more, Clearwire - despite only owning 27% of the new JV -gets to run the whole thing.

You know the cable guys and Google insisted on Clearwire running the show for more reasons than just concern over potential conflicts between Wimax and Sprint's cellular service. One look at Sprint's operational track record over the last couple of years would have been all it took to make that decision.

Yahoo-Microsoft

2008-05-07T05:11:00.000-07:00

It's been highly amusing watching Yahoo step in it over the Microsoft proposal - I just hope they aren't deluding themselves into thinking that anything less than $6 - $8 of their current share price is due to speculation the deal will come back on.

Will it? Ballmer has taken some heat for how this was handled (one of his folks reportedly called MSFT's handling of last weekend's events "amateur hour" - ouch!), but if this was a tactical play by the mercurial Ballmer it may have been a good one. Yang and Decker have been falling over themselves to say they'd still be happy to deal, and have all but admitted Yahoo would take $33 a share.

So - there's still a decent shot this deal gets done. The price differential just isn't that great. Frankly, I wouldn't be surprised to see it get done for a buck or two less than MSFT's last offer of $33 when Yahoo comes back hat in hand to revive the deal.

Confidently Handling Legal Matters

2008-03-10T15:13:00.000-07:00

People ask me what, exactly, we're doing here at Avvo. It's really quite simple - despite the stakes involved, consumers have precious little in the way of resources when it comes to getting legal guidance. The #1 source for consumer legal information is the Yellow Pages!

We're trying to change that by pulling more legal information and guidance together in one place than has ever been done before. For example:

Looking for an Albany NY criminal defense lawyer, Eliot Spitzer?

Need an Orange County bankruptcy attorney now that your ARM has reset?

How about getting some free answers on what do about your first DUI?

Central to Avvo is the mixing together of public records data and user-generated content to create rich profiles of attorneys. Those profiles, along with other resources like Avvo Answers, are designed to help consumers handle their legal matters with more confidence. I'd love to hear comments and suggestions on how we can do an even better job with this.

Google Breathes a Sigh of Relief

2008-02-05T12:10:00.000-08:00

I suspect that when we see the identity of bidders in the FCC's 700 MHz auction (Auction 73), we'll see that Google was the last bidder on the package of licenses making up the C block covering all 50 states.

The last bid on that package, at about $4.7B - which came in about a week ago - was enough to push it over the reserve price and ensure that the so-called "open access" requirements Google lobbied for will apply to whoever wins the licenses. However, bids on the individual licenses comprising the package have been increasing in the interim, and have now exceeded the package price.

These bids are, without a doubt, coming from the incumbant telecoms. Google, not wanting to get into the capital-intensive, low-margin, highly-competitive network operator business, can now sit back, secure in knowing that it has acheived its lobbying end via a shill bidding strategy. It's an open question whether the "open access" requirements are truly meaningful - they are in many ways the final battle of yesterday's war, and far more toothless than what Google originally wanted. Still, you've got to admire the execution on Google's strategy here.

Microsoft's Yahoo! Bear Hug

2008-02-05T11:54:00.000-08:00

A tremendous amount has been written about Microsoft's bid for Yahoo!, so just a quick note on my perspective:

- I absolutely love the bold approach. The level of the bid really only gives Yahoo management two options: Sell to MSFT or find a white knight. Convincing shareholders that independence is the best route to unlocking value would be a laughable exercise.

- Watching the flailing about by the tech media and Yahoo insiders for potential alternatives to MSFT has been highly amusing. Points for creativity, but none of these fantastical imaginings will come to pass.

- Google needs to watch itself. While it has vastly expanded its lobbying resources in the last few years, Google doesn't always show a lot of maturity. As a near-monopolist in search and internet advertising markets, it needs to be careful about making overstated objections to this merger that will come back to haunt it when it goes to make a big acquisition down the road.

- Microsoft has a lot of work to do. Getting this deal past the regulators will be no mean feat, particularly in Europe. However, the bigger issue will come in dealing with merger integration on a scale Microsoft has zero experience with. We'll want to check back in a few years on how this one works out.

Diligence Stories

2008-01-24T14:08:00.000-08:00

Absolutely terrific post by Equity Private regarding an undercover diligence mission. I agree completely that there is absolutely no reason to ever give a buyer anything resembling this kind of unfettered access. It must be controlled, time-limited and escorted - and preferably kept entirely off-site.

Note to EP - the problem with non-signed employee agreements you ran across is probably a non-issue, as standard employee non-competes are completely unenforceable in California.

More on ROWE

2008-01-03T14:51:00.000-08:00

Cali and Jody’s ROWE (Results-Only Work Environment) blog – which hits dead-on so many of the inanities of our clock and face-time obsessed workplace culture – has a recent post regarding attorney billable hours, and the fact that clients are driving the push to rid the delivery of legal services from this archaic model.

Now, I’m sure most of these clients aren’t living the ROWE ideal, but at least there is a recognition that the results provided by legal services are not always – or even most of the time – linked to the time it takes to produce them. I spent less than three years working in a billable hours environment before entering the corporate world, but I hated it from the first. Ironically, part of the problem was the clients themselves, who had no problem paying for endless hours spent summarizing depositions or twiddling one’s thumbs in a courtroom status conference but would balk at time billed for conferences between the firm’s attorneys, to say nothing of paying on a sliding scale based on results.

On the Limits of Analysis

2008-01-03T14:14:00.000-08:00

Ken Klee over at Corporate Dealmaker penned a brief review of a recent HBR article titled "Innovation Killers: How financial tools destroy your capacity to do new things." As Ken points out, any critique of the limitations of DCF analysis is highly applicable to dealmaking.

I've mentioned before my somewhat jaundiced view toward financial analysis and the reverence to which it is held in every big company I've worked with. While DCF analysis has its place, its limitations absolutely must be recognized.

As Ken points out, one problem is that fact that most DCF models are built on status quo assumptions (or corporate growth projections) that don't account for the strategic and competitive dimension. I would add that there is also the simple problem of garbage-in, garbage-out: the less you know about what's likely to happen (as is the case with new lines of business and transformational transactions), the less reliable the output of your DCF model becomes. The problem is that instead of acknowledging this limitation, many embrace the modeled output as Holy Writ. Besides being a false data crutch, it squeezes out consideration of other "softer" factors (like assumed competitive ramifications, or non-quantifiable synergies)that are every bit as worthy of consideration.

New Gig

2007-10-31T14:47:00.000-07:00

One reason for the slowing pace of my posting here is a change in focus - I've moved from Clearwire to Avvo, Inc., an internet start-up in Seattle dedicated to helping consumers with the daunting task of finding a lawyer. It's fun stuff, but my new role will likely have very little to do with the M&A issues I've been dealing with over the last five years. I may post on corp dev topics from time to time, but I will still be writing my column in Corporate Dealmaker magazine and will be contributing to the Avvo blog.

Facebook and Microsoft

2007-10-24T16:44:00.000-07:00

The long-awaited Microsoft-Facebook linkup was announced today, with my neighbors here in Redmond ponying up $240M for a minuscule 1.6% stake in Facebook.

While this deal values the fast-growing social networking site at $15B, I doubt valuation was much of an issue for Microsoft. Yes, it's huge for Facebook to get a massive infusion of cash with only nominal dilution, but Microsoft has more nuanced concerns. Whether MSFT gets a decent return on the quarter-billion invested is of far less concern than getting linkage with Facebook and beating out Google. Besides an expansion of an extant advertising deals, the remaining scope of the MSFT-Facebook linkage hasn't been disclosed.

Bottom line? Huge win for Facebook, although it won't be raising more capital at this valuation any time soon. It's also a win for Microsoft, which now gets to participate in Facebook's strategic upside, if not the financial upside it would have also gotten had it pulled the trigger a year or so ago.

Ebay's Skype Writedown

2007-10-02T04:17:00.000-07:00

Following up and tracking the success of deals some years on is not always a strong suit for corporate dealmakers - often it's on to the next deal before the ink is dry, with little need for the nostalgia of looking back.

Accountants, however, have no such luxury, and there is a certain discipline to tracking over time how good your deals really are. With that in mind, I note Ebay's $1.4B writedown of its Skype acquisition, accompanied by the departure of Niklas Zennstrom and the announcement that the earnout in the deal had only been one-third met. With the original purchase price of $2.6B and about $500M in earnout money, the charge represents nearly 50% of deal value.

Ebay may have some internal measures that indicate the deal was a success for strategic reasons, but by any objective outside view it was a bust. I hate to say I told you so, but . . .

Facebook Bonanza

2007-09-27T10:31:00.000-07:00

I'm loving the Facebook rumors flying around here in Redmond right now - we've even got breathless reporting on Mark Zuckerberg sightings at the airport.

Microsoft is rumored to be paying $300-$500MM for 5% of Facebook, giving the social networking site a valuation of as much as $10B(!!). This, on $150MM in annual revenue, most of which is coming from MSFT already.

Facebook has enjoyed terrific growth, particularly over the last few months, and there's no question they've created something of value. That said, it boggles the mind to think that this site is game-changing enough to merit valuations in the double-digit billions. At the end of the day, this is an advertising-supported business that only six months ago was looking like an also-ran to MySpace. And, despite the robust growth, its users are characterized by low click-through rates on the site's advertising.

All this is by way of saying that Facebook would be insane to pass up an investment in this range, given the hefty valuation and nominal percentage of the company involved. The interesting part - and the area where a deal could fall apart for Facebook - is what kind of minority rights (or ancillary commercial deals) Microsoft gets along with its investment. $500MM is chump change for Microsoft; they can certainly take a flyer on Facebook - but they aren't going to do so unless the integrative side of the deal allows them to leverage Facebook across their other lines of business. Look for the details on this once the smoke clears on the crazy valuation.

More on MAC Clauses

2007-08-09T16:23:00.000-07:00

I've posted before about MACs (material adverse change clauses; also called MAE - material adverse effect - clauses), particularly around the use of a MAC by Johnson & Johnson in trying to negotiate a lower price for Guidant. As we saw there, exercising a MAC is not only the M&A equivalent of nuclear war, it also can lead to unforeseen effects like an ultimately HIGHER price for the target company.

For those interested in learning more about the arcana behind the legal dimensions of MACs and why they are so hard to exercise, the M&A Law Prof Blog has an excellent post on that very subject.

Sourcing Deals

2007-08-08T08:19:00.000-07:00

In general, I think it easier to find deals as a strategic acquiror than it is when looking for investment opportunities in the VC or PE worlds. First, the universe of potential targets is a lot smaller, unless you work for General Electric. Secondly, although your financial models may not adequately account for this factor, there is, at some level of the corporate decision-making process, a built-in "strategic bias" favoring deals that help grow the business.

Assuming you're not operating within a global conglomerate or looking to expand inorganically into a new line of business, potential targets are going to be found primarily amongst your competitors and suppliers. For example, in the wireless industry we would do deals to acquire operating markets or raw spectrum from other carriers (competitors), acquire or sell towers to or from aggregators (suppliers), and acquire companies providing billing and other IT services (suppliers). In addition, there would be the occasional deal with a financial entity (speculators) to acquire spectrum assets, or a small company with something new and exciting to offer that wasn't currently a vendor (innovators).

In at least the first two groups, you should know who the potential targets are, at least for the most part. You probably already talk regularly with some of them. Others you may cold-call to get a discussion started, or they may hire bankers to approach you. Or your CEO might come back from a two-week camping trip with a deal in hand. In any event, deals with those categories of targets are not hard to get going.

Of the other two groups, the speculators are the easiest to locate - they will usually find you. The innovators are the tough ones to find. While this category may be of lesser importance in stable, slower-growing businesses, it's critical in many technology businesses to find and acquire these talents and ideas before the competition does. The problem of finding them could stem from not knowing where they might be, not knowing how to get your inquiries returned, or not being able to efficiently filter out the few good opportunities from the flood of dreck that is being thrown on your desk every day (an issue Google no doubt struggles with). More than ever, overcoming these issues requires those doing the deals to know as much as humanly possible about their company and the environment it operates in.

Free Drugs

2007-08-06T11:26:00.000-07:00

Publix supermarkets announced today that the company will begin giving away seven popular prescription antibiotics. The articles on this development note that WalMart has been selling a number of popular generic medications for $4, and that several other pharmacies have moved in the direction of low cost/free prescriptions.

Amidst the laudatory statements of improving access to important medications, one notes that these seven medications represent nearly 50% of the generic prescriptions filled by Publix. Have you ever tried to comfort a crying child while waiting 15-20 minutes for a simple prescription to be filled? The reason it takes so long is the mind-numbing level of paperwork and authorizations a pharmacy must go through to get insurance authorization.

By making the medication free, Publix eliminates the need to deal with insurance issues on a massive volume of its pharmacy business. I don't know how much employee time this frees up for Publix, but I'm sure it greatly exceeds whatever the company pays for these generic medications. Fortunately, this is one of those rare cases where cost containment will actually lead to a better customer experience.

News Corp - Dow Jones Side Deals

2007-08-03T10:07:00.000-07:00

Interesting but shoddy piece in yesterday's NYT about the "side deals" in the News Corp - Dow Jones deal whereby News Corp agreed to pay the sellers' banking and legal fees (totalling some $40M). Quoting several disgruntled Dow Jones investors and putative bidders, the article questions whether this side deal - and past banking and legal relationships between the parties - caused the advisors to give Dow Jones less-than-objective advice in pushing for a deal.

For starters, the entire thesis of this article is specious: Bankers, and firms like Wachtell that usually only bill for M&A work when a deal closes, ALWAYS have an incentive to see the deal get completed. ALWAYS. A seller asking for an 11th-hour concession (and one that here, at .7% of deal value, represented no more than a mere lagniappe in the context of the transaction) makes no difference in this dynamic. The sellers got a better deal by $40M - bully for them, and good for the advisors in obtaining it. They also got a 67% premium in the face of buyer perception that Bancroft family issues would make for a very difficult transaction.

That said, these folks are professionals who know far too well they value of their reputations and the need to be perceived as providing objective advice on whether to proceed with a deal. Given just how good this deal was for DJ investors, there's little need for them to defend their conduct. I would also observe that Wachtell, in representing DJ and all of the craziness involved in this deal with the Bancoft family, is not likely being overpaid in collecting $10M.

Results-Only Work Environment

2007-08-01T06:58:00.000-07:00

I posted a bit about "Results-Only Work Environment" (or "ROWE") last year, in light of Best Buy's rolling out this concept at its HQ. At first blush, the name strikes me as faintly ludicrous - after all, aren't results the only thing that matters in the workplace?

It's a sad statement about how far from this headset so many corporate workplaces are that the creators of ROWE had to choose such an obvious name, but one hopes it serves as a daily reminder of what's important - and what's not - in the office. The concept of ROWE is a simple one; to quote CultureRx, the creators of ROWE:

"In a ROWE, people do whatever they want whenever they want as long as the work gets done. In the park, in a coffee shop, in the shower. At midnight or 3am or on Sunday. Whenever and wherever."

I'd take this as a manifesto of sorts - obviously not every job lends itself to a "whenever/wherever" working style, and sometimes acheiving results requires that the "whenever/wherever" be "in the office, this morning." The important distinction is that all questions of time, place and process are viewed through the lens of maximizing results, not face time or some antiquated notion of needing to clock a set number of hours each day in the office.

Of course, critical to making this work is that managers trust employees and employees take true ownership of getting results rather than filling a chair. It also means understanding that a) there are times you do all need to be together in the office to get the work done; and b) "reachability" and responsiveness become absolutely critical. Finally, it also means recognizing that some people get their best results by working in a corporate office for set hours.

The CultureRX site also has an amusing section on "sludge" - negative (and usually passive-aggressive) workplace language used to cast judgment on those who may not be filling their chairs as ardently as the sludge-slingers. Anyone who has spent quality time in a corporation has no doubt seen more than their share of this! I would add to this concept "sludge avoidance" - the subspecies of corporate type who constantly has to tell you how hard they are working, the sacrifices they are making to spend time in the office, etc.

Facebook Revisted

2007-07-30T16:52:00.000-07:00

When, last winter, I last discussed the potential for a sale of Facebook, I urged the company to jump at the purported opportunity to cash out for north of $1B. Times have changed, and so has my opinion. Facebook has opened itself up, both to new classes of users and in an open-source way that is leading to explosive growth in applications centered around Facebook. These events have made the site a far more useful means for organizing information and connecting with others. Hell, even this corporate tool - who went to college well before e-mail and the web - now has a Facebook page.

I don't know where these applications will get to, or whether they will ever make any money for those developing them. And the Facebook interface, despite having some very nice features, has some strange quirks, particularly around e-mail. Nonetheless, it appears to be building into something quite a bit more valuable than I would have imagined a few months back.

DealMaven

2007-07-26T14:04:00.000-07:00

Discovered the DealMaven Blogs, which I've added to the short list of dealmaking links here at Corporate Tool. Lots of good stuff, particular for those starting out in development or banking, or anyone who spends a lot of time with financial analysis and modeling.

Corporate Dealmaker Conference

2007-07-25T05:50:00.000-07:00

If you're in NYC in early October, I'll be speaking at the "Corporate Dealmaker's Forum" on October 2 at the Union League Club. It's a rare opportunity to exchange ideas with a bevy of other corporate development professionals - I'd be delighted to meet any Corporate Tool readers who can make it.

Also on the Corporate Dealmaker site is my latest print article, relating to a particular pet peeve of mine - unnecessary delay in getting deals done.

Whole Foods - New Leadership Needed

2007-07-11T16:09:00.000-07:00

I love seeing stuff like this - Whole Foods founder and CEO, John Mackey, has - for some 8 years - been posting anonymous comments on the WFMI stock message board at Yahoo.

Mackey claims he "had fun doing it." Look, there's no question that stock boards are completely irrelevant to all but the most thinly-traded stocks, and at least so far there is no indication that Mackey did anything more than pseudonymonously pat himself on the back and generally sing the praises of the company. But what does it say of the judgment of the leader of major company that he would even look at stock boards, much less get his jollies posting on them using as an alias an anagram of his wife's name?

Whole Foods runs a hell of a grocery store, but they desparately need some adult supervision at corporate HQ.

Let's focus on the PLANES!

2007-06-30T18:54:00.000-07:00

If there's a theme that runs through Corporate Tool, it's that results are what matter in business. Getting good results should be first and foremost in the mind of any owner, manager, or employee of an organization. If a rule or practice in your organization is getting in the way of acheiving results, it must be ditched. Period. Sure, there can be lots of debate about whether a given rule or practice leads to good results, but let's look at a specific subset: Rules or practices that employees generally don't like.

The Corporate Tool rule for such practices is that they carry a heavy burden of proving they contribute to good results. Employees who are unhappy about nettlesome, pointless rules do not create good results for you. There will, of course, be unpopular rules that easily clear this hurdle - You run a construction company and employees don't like the mandatory random drug tests? Tough; that's an unpopular rule that carries its water.

But what of dress codes? Within reason, they will not offend any but those so lacking in common sense they should be sent packing anyway. But what of dress codes applied in benumbing detail to a group of people who a) don't see the public while working; b) have one of the most stressful jobs imaginable; c) are exceedingly low-paid relative to the importance of their jobs and d) are responsible for the lives and deaths of anyone flying on an airplane in our exceedingly-crowded skies?

As someone who flies a lot, I want HAPPY air traffic controllers. Controllers who feel good about their team, their managers and the job they are doing. I don't want them feeling the least bit harassed and thinking it might be time to kick it in, start their own business and let some new guy with three month's experience keep the planes apart.

And I don't care that, as the FAA spokesperson puts it, this is a simple dress code that "would not raise an eyebrow in the business community. " The "business community" meets with customers, civic leaders, competitors, etc. Controllers sit in a darkened room, far from the public eye, and keep aluminum tubes full of hundreds of human beings from crashing into each other.

The FAA has a bad enough track record in dealing with controllers. It should be bending over backward to make their jobs as bearable as possible, but instead they come up with this. Sad.

IPhone, uRain

2007-06-29T17:52:00.000-07:00

Lots of folks lined up outside the AT&T Mobility store in Redmond Town Center, awaiting this evening's re-opening and launch of the much-hyped iPhone. I took this photo at lunchtime, when it was actually a bit sunny. I hope the wait was worth it - rain has been falling all afternoon.

Red Handed at Whole Foods

2007-06-19T16:21:00.000-07:00

I’ve stayed away from posting on the Whole Foods – Wild Oats merger and the FTC’s lawsuit to block the deal. For one thing, I’m a Whole Foods shareholder, having bought after their most recent quarter when WFMI stock finally dropped to attractive levels. For another, I’m in general agreement with the consensus that the FTC is out to lunch on its view that the relevant market in which Whole Foods competes is a narrowly-defined category of natural foods stores, and I haven’t had a whole lot to add.

However, I have a theory about why the FTC filed its lawsuit, and today's revelations bolster my view. I shop at Whole Foods, but I don’t care about getting organic carrots; I appreciate the food quality and the aesthetic of shopping there. Like most others jostling through the cheese aisle at the Redmond Whole Foods, I don’t shop there exclusively. Within a few miles there is competition on the low end from Albertson’s and Fred Meyer, at the mid-point from recently remodeled QFC and Safeway, and local stores like Larry’s and PCC (PCC, an 8-store Seattle chain, is, for all the world, like a mini Whole Foods). All of these grocers have expanded their organic and gourmet foods offerings while also enhancing the whole “shopping experience.” Just about everyone gets this – including, I believe, the FTC.

So who doesn’t get it? Whole Foods. As documents unsealed today show, WFMI’s CEO believed the merger with Wild Oats would prevent a price war. Huh? If Whole Foods competes with all groceries – as everyone believes, and Whole Foods is now trumpeting to all who will listen - what’s the rationale for buying Wild Oats in the first place? Does it really help them expand faster? How does acquiring smaller-formal stores that WFMI plans to close or relocate help them expand geographically? Why not just grow organically, as they’ve done so well for the last decade?

So, the merger never made a whole lot of sense to me, and my theory is that it didn’t make sense to the FTC, either – except as an attempt to take out a competitor (which is not, in itself, a reason to bar a merger). However, any such attempt doesn't even appear to be rational, given the widening of WFMI's competitive market. Three years ago, it might have cleared the field nationally for Whole Foods. Today, they're just buying up a second-tier competitor in a crowded marketplace.

Whole Foods is working off of yesterday’s playbook, and the FTC is probably going overboard because it found some unfortunately-worded documents. The ironic thing is that the antitrust authorities may well end up protecting Whole Foods from a value-destroying merger by killing the thing in court.

Counsel - Friend or Foe?

2007-06-04T13:32:00.000-07:00

Beyond considerations of competence, how much does your choice of deal counsel matter? For larger companies, what about your internal counsel – are they helping or hurting your cause? As I’ve harped on before, there’s a cost to having your company viewed as being hard to deal with. It’s great to be known as a tough negotiator, but you never want to cross the line to the corporate equivalent of “unreasonable asshole.”

In fact, the biggest problem I’ve encountered isn’t overly-hard negotiating, but rather being a difficult pain in the ass over things that don’t really matter. Very little in corporate law is black and white – it is almost always a balancing of risks and opportunities. When it comes to your deal, a good lawyer will pay a lot more attention to remote risks that carry major potential consequences than to those risks that are likelier but would create only minor problems. Beware those lawyers who can’t tell the difference. If you find yourself arguing more with your own attorney than with the other side, that’s a sign you’ve got a problem.

Alltel LBO

2007-05-21T12:07:00.000-07:00

Good news for AllTel, cashing out to PE buyers to the tune of $27+ billion. What caught my eye was this story, claiming that this deal pre-empted a process AllTel was running and caught other potential bidders napping. That could be true, although presumably at a minimum calls were made and no one was able to react in time. Obviously, if presented with a tight time frame, AllTel would need to take the (attractive) bird in hand. Doubtful the deal contains a go-shop, and at this valuation and what is likely a $1B+ break-up fee, I wouldn't expect to see any interlopers.

Corporate Tool Updated!

2007-05-21T12:00:00.001-07:00

I've finally gotten clear of some Blogger server glitches, and Corporate Tool is now on the new Blogger. As a result, I've been able to add categories, including those covering the broad M&A topics of sourcing, valuation, negotiation, closing and integration. Naturally, there is also a place for all of my musing on "office life." I've gone back and placed all prior posts into the appropriate categories. I KNOW that will make it more useful to me when posting, and I hope it will be similarly useful for Corporate Tool readers.

Another new addition is a Google news reader for M&A topics; time permitting, I will see about adding a Corporate Tool store.

Quit Your Yapping

2007-05-17T16:49:00.000-07:00

Here's my latest piece in Corporate Dealmaker magazine; if anything, I went light on my aversion to yapping in the workplace. I've got nothing against sports-related banter or lurid office gossip, but windbag-itis gets under my skin. Perhaps the prevalence of e-mail has made some feel the need to squeeze more out of every opportunity to talk (although their e-mail messages typically also display this tendency). Besides being annoying, this habit is ruinous when trying to get things accomplished or negotiate effectively.

Listen effectively and talk sparingly. As my favorite Southern rock band (the Drive-By Truckers) says, "just because I don't run my mouth doesn't mean I got nothin' to say."

Passing of a Non-Corporate Tool

2007-04-12T16:53:00.000-07:00

Farewell to Kurt Vonnegut, dead at 84 despite a lifetime of chainsmoking, general despiser of corporate toil and its costs (personal, environmental, spiritual, etc.) and author of many a fine, darkly satirical novel. My favorite is still his first: Player Piano, which envisions a near-future world where virtually all work is done by machines. Resistance? Futile, as you can well imagine.

Dow Shenanigans

2007-04-12T14:32:00.000-07:00

Dow Chemical, rumored to be the latest giant company to be swallowed up in a PE deal (for some $50B), fired two of its executives today over the rumors. The interesting part is that they weren’t canned for the pedestrian offense of leaking the potential deal to the media, but rather for having unauthorized discussions with potential buyers. What’s more, at least one of these guys - Romeo Kreinberg, a 30-year company veteran who currently heads Dow’s Sales & Marketing functions and its Performance Plastics division – is vehemently denying doing anything untoward.

Were Kreinberg and the other "traitor" (Pedro Reinhard, a member of Dow’s Board) really going behind the board’s back and talking to suitors, or were they thrown under the bus? While dealmakers in most organizations have (or at least should have) wide latitude to talk to potential targets and partners, there’s no question that things need to get tightly constrained when you’re talking with potential buyers. There are just too many sensitivities around relations with employees, customers and investors to let such discussions take place without the direction and oversight of the board. I’m guessing we’re going to get a good glimpse at how this works – or should have worked – at Dow as this little drama gets played out.

Sometimes you've got to stop . . .

2007-04-10T09:45:00.000-07:00

Brilliant article in the Sunday Washington Post – what happens when you take one of the world’s pre-eminent violinists, set him up in a Metro station with his $3.5M violin, and have him busk away, open case at his feet, for rush hour commuters? No, nothing related to M&A – but terrific musings nonetheless on our need to make time for beauty in our over-scheduled lives.

Wither Private Equity?

2007-03-26T14:53:00.000-07:00

Some readers have asked why I don’t have much to say about private equity, as PE seems to be the hot topic in just about any current financial forum. For starters, there’s not much that I could say, opinion-wise, about PE that isn’t already being more than adequately addressed by Equity Private and others in the PE field. Secondly, my focus always has been on corporate – strategic – dealmaking rather than that of the PE, or strictly financial, type.

For this reason, folks need to understand that my posts on topics such as the limitations of financial analysis are to be viewed through the lens of the corporate acquirer, who may be blending in non-financial (or at least difficult-to-quantify) factors relating to competition, speed to market, organic growth alternatives, etc. Obviously, financial analysis should take a far more prominent role in a PE setting.

CVS-Caremark

2007-03-10T13:27:00.000-08:00

I haven't posted on this in a while, largely because it finally has become the competitive process it should have been from the beginning. Caremark's management had to be dragged into this, but the net result is likely to be a much better deal - with the same suitor, CVS - than the company would have gotten had management had its way. Sometimes you win in spite of yourself.

More Fun with (Financial) Models

2007-03-05T17:00:00.000-08:00

Analysts I’ve worked with in the past have accused me of taking an overly-skeptical view toward financial analysis/valuation of potential deals. Guilty as charged, I suppose, although I’d quibble with the “overly” part.

As I’ve noted before, one of the inherent limitation of financial modeling is that its reliability as a predictive tool decreases with the level of uncertainty involved. Stable, slow-growing businesses are easy to model reliably; new or fast-growing ones, not so much. It’s a matter of “garbage-in, garbage-out”: if you’re guessing at future input levels (which you have to be doing for something new), your output will not necessarily conform with reality. That’s OK – often a best guess is fine – but decision-makers need to be able to differentiate between these two scenarios and discount the value of the model accordingly. I don’t see that done often enough.

Also on the subject of models: I am always amused that, more times than not, the bankers or brokers peddling distressed or declining businesses feel compelled to include a page showing three or five years of historical financials along with the corresponding period of projections. Imagine the revenue graph – the historical numbers trend downward, reaching their nadir at the time the business is being sold. Miraculously, at that point the trend reverses and heads upward from there in the projections. Sometimes there is an explanation for how this bit of magic is supposed to come about, more often not. I haven’t come up with a good name for this little bit of modeling desperation, but I’m partial to the “golden horseshoe.” Any other thoughts?

XM-Sirius

2007-02-20T08:01:00.000-08:00

I've been a happy customer of XM Radio for two years, and I'll be even happier when I can access the full suite of channels offered by XM and Sirius on their merger. Many don't think the merger will get through. The FCC has an explicit rule prohibiting joint ownership of the spectrum. A narrow definition of the relevant market for antitrust combination analysis would yield an HHI score off the charts (i.e., if the relevant market is satellite radio, the merger yields a monopoly). Despite all that, my prediction is that the merger gets through.

XM and Sirius face competition from all sorts of fronts, from traditional (free) radio to iPod link-up. While some of these might not be considered "substitutes" for antitrust analysis purposes, there's no question that terrestrial radio - and nascent high-definition radio in particular - will be considered. Layered on this competitive analysis will be the fact that two satellite competitors, with their astronomical cost structures, are probably not viable long-term anyway. This will take care of the DOJ's concerns. The FCC will do a similar analysis, and reach the same conclusion and eliminate the spectrum cross-ownership rule, although it will likely be a more tortured path getting there than that of DOJ.

Is many respects, the current FCC prohibition is akin to the cellular cross-ownership rule, which prohibited the same entity from owning both cellular licenses in any given geographic market. That rule was eliminated about four years ago as the availability of PCS spectrum made it largely moot. Circumstances demand a similar result here.

Proxy Advisor: NO to CVS-Caremark

2007-02-12T15:22:00.000-08:00

In the continuing tussle between CVS and Express Scripts over Caremark, independent proxy advisor Glass Lewis has weighed in, advising Caremark shareholders to vote "no" on the CVS link-up. I can't recall ever seeing a deal of this size (well north of $20B) run afoul of the proxy guys, much less for the target conducting a "flawed negotiating process." Glass Lewis, like many others, has latched onto the fact that Caremark has shown a strangely unyielding commitment to seeing the CVS deal through, despite ardent interest from others.

I've pointed out in previous posts some of the speculation surrounding the motivations of Caremark management. Suffice it to say is highly unusual for the managers of a multi-billion dollar public company to act as Caremark's has in handling this sale process.

Negotiating Tactics

2007-02-09T11:26:00.000-08:00

Besides the stuff on building a corporate development department, this last issue of Corporate Dealmaker also has a piece on negotiations that stresses the importance of preparing for big negotiating sessions and focusing on structural/relationship issues rather than tactics. The acticle includes a great paraphrased quote from Marty Lipton (long-term readers will know I've spent my share of late evenings at his firm): "You can get the price up 2% by at-the-table tactics; by bringing in other credible buyers you can bring the price up by 50%."

I've got little use for negotiating tactics, and I'd take this one further: That 2% opportunity is offset by an increased risk that you'll crater the deal with juvenile, offensive or misdirected tactics. Spend the time figuring out what the other side needs to get. Make sure your own objectives aren't muddled. Then go to the negotiating table as yourself - you won't need to play any games.

Google Blogger Issue

2007-02-02T13:44:00.000-08:00

Google continues to be unable to move me to the new blogger application, and it seems for the last few weeks my posts haven't actually been published. As I don't pay a lot of attention to what my blog looks like, I didn't notice until now. In any event, check back through the last few posts if there's something you've missed.

M&A Departments

2007-01-31T16:07:00.000-08:00

The latest issue of Corporate Dealmaker is a particularly good one, with a number of first-hand views from corporate dealmakers on how they've structured their departments and improved the results their companies have gotten from M&A. It's also got my now-regular back page article; this month is a look at the fun and games of corporate annual review time.

Ben Stein on Caremark

2007-01-22T16:49:00.000-08:00

Curmudgeon Ben Stein has weighed in on Caremark, and while he gives short shrift to the timing and regulatory advantages of the CVS deal, he rightly points out the lack of regard Caremark management has shown for the (financially) superior ESRX bid, and explores some of the reasons this may be the case.

Caremark - ESRX Developments

2007-01-17T09:51:00.000-08:00

Express Scripts (ESRX) continues to battle away for Caremark. Along with the proxy fight, ESRX also filed a lawsuit last week aimed at the breakup fee in the CVS-Caremark deal. I suppose they have to try everything, but the lawsuit isn't going to work; aside from the merits there's a decent chance they don't even have standing to sue.

As predicted, CVS has upped the stakes a bit in an attempt to push things over the top, announcing a $2 special dividend for Caremark shareholders. This isn't quite as good as it appears, since shareholders essentially pay themselves for the post-merger portion of the company attributable to Caremark, making the dividend closer to $1 than $2. However, between that and recent stock price increases, the ESRX bid is now less than 5% better than the CVS proposal. There's no question CVS is now the superior proposal, given the timing benefit and the fact that regulatory clearance has already been obtained.

The next move belongs to ESRX - while they will continue to slog forward on the desperation measures of the proxy fight and lawsuit, expect to see a sweetened bid in the days to come.

Proxy Fight!

2007-01-09T21:30:00.000-08:00

Express Scripts is not skulking away from Caremark's summary rejection, opting instead to raise the volume by nominating four directors of its choosing for the Caremark board. This tactic, an old standby of hostile takeovers, allows the successful hostile to get a friendly board which will, in turn, approve the hostile's takeover proposal. CVS, whose friendly proposal has been embraced by Caremark, labeled the ESRX move a "publicity stunt." It's not, unless CVS means that ESRX is using any means necessary to plead its case to Caremark shareholders.

This isn't a move you'd usually see in a deal this big, but Caremark didn't give ESRX many options. What remains to be seen is whether Caremark shareholders will be swayed. While there has been some grumbling, it doesn't seem loud enough yet. Will shareholders decide that the 50% cash component and 13% premium in the ESRX deal outweighs the better timing and increased chance of closing the CVS deal? I'd say no, unless ESRX ups its bid.

Caremark - CVS

2007-01-08T11:05:00.000-08:00

New year, new deals to watch. Some time ago, pharmaceutical services provider Caremark (NYSE: CMX) announced a "merger of equals" with CVS (NYSE: CVS) in a transaction valued at $21B. That deal had toddled along for a few months until competitor Express Scripts (NDAQ: ESRX) hurtled in with a $26B cash-and-stock offer. Today brings Caremark's rejection of the Express Script proposal, and the unusually detailed statement from Caremark is well worth a read.

After the expected litany of reasons why Caremark thinks a combination with CVS offers better strategic benefits, growth opportunities, etc., we get to three of the real reasons Caremark prefers CVS: Less integration risk, quicker timing and greater closing certainty (the CVS deal has already passed antitrust review). These are valid concerns and would certainly justify taking a lower price, particularly considering the concentration in the industry and the considerable (9+ months) timing benefit. Still, with a 20% pricing gap between the proposals you've got to wonder if Caremark has really taken the time to review the merits of a deal with Express Scripts, or at least play it out to leverage CVS to a better price or terms.

There's also a lot of drama in the backstory here, relating to options backdating, indemnity and officer compensation that I won't get into here but which may make the issue of closing certainty that much more important for Caremark management. How that works for shareholders is another matter. I suspect this one won't move quietly to closing.

Windstorm Woes

2006-12-20T12:11:00.000-08:00

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

2006-12-14T13:33:00.000-08:00

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

2006-12-13T16:28:00.000-08:00

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"

2006-12-06T13:40:00.000-08:00

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

2006-12-02T07:43:00.000-08:00

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?

2006-12-01T14:37:00.000-08:00

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

2006-11-30T13:53:00.000-08:00

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

2006-11-29T05:19:00.000-08:00

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

2006-11-27T14:09:00.000-08:00

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.