Back in NYC

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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!

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

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

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?

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

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!

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

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

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

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 . . .

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?

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

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

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

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

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

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

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

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

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

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!

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

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

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

Yahoo - Facebook Leaked Docs

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

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

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

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

3rd Place Winners

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

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

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

"Corporate TiVO"

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

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

New Corporate Dealmaker Column

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

The Evils of Private Equity?

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

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

Due Diligence - Sellers

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

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

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

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

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

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

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

Due Diligence - Buyers

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

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

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

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

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

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

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

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

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

More on Mining Deals

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

Google AdSense

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

A Classic Rediscovered

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

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

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

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

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

More Mining Consolidation

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

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

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

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

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

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

Techno-Slavery

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

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

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

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

Work-Life Balance

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

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

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

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

Hiring CEOs - Damage Control at Best?

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

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

DOJ Tries Constraining Second Requests

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

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

Private Equity Collusion

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

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

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

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

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

HP Board Leaks and the Trust Issue

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

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

Facebook and YouTube

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

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

Fortune on the Guidant Deal

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

J&J Sues Over Guidant Loss

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

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

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

Facebook - Yahoo

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

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

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

HP Board Shenanigans

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

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

Blogger in Beta

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

Wal-Mart: Half-Off the Evil

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

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

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

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

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

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

Wodehouse on Mergers

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

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

Miner's Joy

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

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

Say No More on SarBox

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