As a reformed lawyer, I may be more sensitive to how contracts are drafted than some other deal guys. However, a conversation with a former colleague reminded me of a particularly annoying tactic some folks use when sending the initial draft of a definitive agreement - the one-sided, overreaching first draft. It's not something you see every day, but still far too often.
I'm not talking about terms that need to be unilateral or lopsided because of the parties' differing roles, or even terms that are being aggressively negotiated. No, these agreements are laced with terms that favor the drafting party beyond any measure of reason.
Some claim that it makes sense to send over a lopsided contract because (a) the terms may stick and (b) it gives you terms to negotiate back from. I don't find the first point compelling, and the second represents a rather juvenile outlook on negotiating. Sure, lopsided contracts will occasionally work with unsophisticated parties or those you have loads of leverage over. However, in the vast majority of cases they will:
- Piss off your counterparty, harming any useful rapport you may have established
- Make your counterparty dig deeper into the agreement to look for all the other ways you're trying to screw them
- Waste a lot of time as the agreement gets negotiated back to where it should have been in the initial draft
End result: You're back in the same place you would have been had you sent a fairly-written contract, at substantial net expense in time, fees and credibility. You may even lose the deal because of the added delay or trust issues created by your draft.
Wednesday, June 21, 2006
Monday, June 12, 2006
Pissing Matches
I spent the first few years after law school as a litigation attorney in a small firm. I learned a lot, and worked with some great folks, several of whom are still good friends. Despite the long time (and career changes) since then, stories like this remind me of what I hated most about litigation - the petty bickering over meaningless crap.
In a negotiation, you can usually find ways to rise above this stuff. In a lawsuit, you may be trapped by the obstinacy of your opposing counsel. What's really amazing here is that both parties to the litigation are companies (OK, insurance companies, but still). You'd think the litigation managers would be wondering why they're getting billed for motions to be filed over such nonsense.
In a negotiation, you can usually find ways to rise above this stuff. In a lawsuit, you may be trapped by the obstinacy of your opposing counsel. What's really amazing here is that both parties to the litigation are companies (OK, insurance companies, but still). You'd think the litigation managers would be wondering why they're getting billed for motions to be filed over such nonsense.
Monday, June 05, 2006
The NPV Trap
Sorry, no link, but the FT ran an article last week on "valuing innovation" that gets right to one fundamental problem with financial analysis - its usefulness varies greatly depending on the maturity of the project. The article focuses on investment decisions in projects and R&D, but the thesis works just as well with M&A.
Probably because I come from a non-financial background, I've always nursed a little rebellious streak when it comes to financial analysis and the pedestal upon which NPV calculations are placed in the corporate world. Sure, I'll use them as much as the next guy, and I am a firm believer that a discounted cash flow analysis is the single best way to assess the value of an operating business. The problem is that such analyses are only as good as the assumptions that go into them.
While future results for mature operations can be estimated with a fair bit of accuracy (or at least conformed to the acquirer's 10 year planning assumptions for modeling purposes), trying to produce a similar DCF model for a 6-person start-up with wonderful but untested technology is an exercise in fiction writing. Yet - who hasn't seen someone trot out an NPV analysis and hold it up as objective truth, despite the fact that the assumptions underlying the analysis might as well have been plucked from a hat?
There can be a powerful tendency to try and view all potential investment via the same lens, and NPV analysis often gets a halo of legitimancy because it is numbers-driven. Sadly, the numbers that come out are no better than the assumptions that go in. The FT article thesis is that companies should use multiple scoring factors in evaluating projects, with greater weight given to financial analysis as the project gets more mature (and hence more amenable to accurate forecasting). In the case of acquisitions, companies need to weigh factors other than just the NPV analysis - strategic fit, customer needs addressed, people issues, scope of potential benefit, etc. Equally important, the NPV analysis should be known for what it is - a very useful tool under the right conditions, but one of diminishing usefulness when it comes to the new and different.
Probably because I come from a non-financial background, I've always nursed a little rebellious streak when it comes to financial analysis and the pedestal upon which NPV calculations are placed in the corporate world. Sure, I'll use them as much as the next guy, and I am a firm believer that a discounted cash flow analysis is the single best way to assess the value of an operating business. The problem is that such analyses are only as good as the assumptions that go into them.
While future results for mature operations can be estimated with a fair bit of accuracy (or at least conformed to the acquirer's 10 year planning assumptions for modeling purposes), trying to produce a similar DCF model for a 6-person start-up with wonderful but untested technology is an exercise in fiction writing. Yet - who hasn't seen someone trot out an NPV analysis and hold it up as objective truth, despite the fact that the assumptions underlying the analysis might as well have been plucked from a hat?
There can be a powerful tendency to try and view all potential investment via the same lens, and NPV analysis often gets a halo of legitimancy because it is numbers-driven. Sadly, the numbers that come out are no better than the assumptions that go in. The FT article thesis is that companies should use multiple scoring factors in evaluating projects, with greater weight given to financial analysis as the project gets more mature (and hence more amenable to accurate forecasting). In the case of acquisitions, companies need to weigh factors other than just the NPV analysis - strategic fit, customer needs addressed, people issues, scope of potential benefit, etc. Equally important, the NPV analysis should be known for what it is - a very useful tool under the right conditions, but one of diminishing usefulness when it comes to the new and different.
Thursday, June 01, 2006
Trademarks and Cease-and-Desist Letters
Great, thoughtful post in Ventureblog regarding the dust-up over the "Web 2.0" trademark registration. As a reformed lawyer, I would take a point made at the end of the post even further - enterprises that allow their counsel to decide when to send cease-and-desist letters are almost always making a mistake.
Why? Even if the use is in the gray area, there's no downside (from a strictly legal perspective) to sending a letter, and such letters are great evidence (again, from a strictly legal perspective) to establishing that you have properly defended your marks. So, if you as the business person bring a question of possibly infringing use to your trademark counsel, the basic legal answer you get back will be to send a cease-and-desist letter. Of course, savvy trademark counsel will walk you through the pros and cons and potential PR and customer pitfalls of taking this approach. Unfortunately, many will simply apply a mechanistic legal test and advise sending the letter.
This can't be the end of your analysis. In all but the most cut-and-dried cases - say, a similarly-sized competitor making an infringing use, or outright stealing/counterfeiting - informal discussions and attempts to resolve amicably must be used prior to dropping the cease-and-desist letter. Such efforts often work, they are cheap, and they can keep your enterprise from encountering something that seems to be repeated as often as the seasons in the corporate world - big companies getting smacked back on the PR front for bullying behavior toward tiny enterprises.
Why? Even if the use is in the gray area, there's no downside (from a strictly legal perspective) to sending a letter, and such letters are great evidence (again, from a strictly legal perspective) to establishing that you have properly defended your marks. So, if you as the business person bring a question of possibly infringing use to your trademark counsel, the basic legal answer you get back will be to send a cease-and-desist letter. Of course, savvy trademark counsel will walk you through the pros and cons and potential PR and customer pitfalls of taking this approach. Unfortunately, many will simply apply a mechanistic legal test and advise sending the letter.
This can't be the end of your analysis. In all but the most cut-and-dried cases - say, a similarly-sized competitor making an infringing use, or outright stealing/counterfeiting - informal discussions and attempts to resolve amicably must be used prior to dropping the cease-and-desist letter. Such efforts often work, they are cheap, and they can keep your enterprise from encountering something that seems to be repeated as often as the seasons in the corporate world - big companies getting smacked back on the PR front for bullying behavior toward tiny enterprises.
Friday, May 26, 2006
More on Kimonos
My antipathy to the phrase "open the kimono" can be traced back to when I first heard it, about 10 years ago. I had recently moved to an in-house legal position and I was meeting with Lucent - recently spun out of AT&T - to try and resolve a commercial dispute that was teetering toward litigation. I don't even recall the particulars, but I vividly remember the counsel for Lucent, a humorless, pinched-face fellow in his mid-50's, saying he was "going to open the kimono." Yes, he was referring to Lucent's confidential data, but the mental image it created was most unpleasant.
Thursday, May 25, 2006
New Favorite Office Book
I just picked up The Dictionary of Corporate Bullshit, which is hilarious and absolutely on point. Taking a cue from Ambrose Bierce's classic The Devil's Dictionary, it offers witty and point-on definitions of corporate buzzwords and standards (e.g., "'Merger:' Source of major freakout mode amongst employees.").
Of course, I read through the more noxious entries with some distress, thinking of how often I have sputtered out hackneyed phrases like "paradigm shift" or "putting a stake in the ground." I am proud to say I have not used "productize", which does not merit entry in the dictionary but should have a special place in corporate-speak hell.
Speaking of which, I was in a meeting this morning discussing exchanges of confidential information where the phrase "drop our shorts" was used. I have to say I like that better than "open the kimono," but all the same I'd rather just talk about "skeletons in the closet."
Of course, I read through the more noxious entries with some distress, thinking of how often I have sputtered out hackneyed phrases like "paradigm shift" or "putting a stake in the ground." I am proud to say I have not used "productize", which does not merit entry in the dictionary but should have a special place in corporate-speak hell.
Speaking of which, I was in a meeting this morning discussing exchanges of confidential information where the phrase "drop our shorts" was used. I have to say I like that better than "open the kimono," but all the same I'd rather just talk about "skeletons in the closet."
Monday, May 15, 2006
Phone Records
I've been following this story about the big telcos turning over call detail records to the NSA with some interest. In the late 90's, when I was general counsel for Cellular One of San Francisco, one responsibility of my department was subpoena compliance, and we faced the same type of question every day.
We received all sorts of subpoenas, civil and criminal, from myriad agencies and private attorneys, seeking everything from invoices to wiretaps. Sorting out what could be provided in response to what kind of process (simple private subpoena to court order) was a daunting task: Different agencies have different rights, and circumstances matter, too. We would sometimes provide records in advance of a warrant or order when a kidnapping was underway, for example.
To make our way through this maze of regulations, we had a thick guidebook, regularly updated, that spelled out exactly what could be done in virtually any set of circumstances. Every telco of any size has a guidebook like this - ours could trace its origins to AT&T's guidebook. Received a warrant by fax from the DEA? ATF is calling saying they've got a subpoena? Santa Clara County Public Defender wants phone records? The procedures were all spelled out, along with the accompanying citations to statute, and my folks who dealt with this stuff on a daily basis were very good at sorting through it. They had great relationships with their counterparts in law enforcement and would only come to me when a very difficult or high-profile call needed to be made.
Of these, the hardest calls to make were those involving exigent circumstances - do you believe what law enforcement is telling you about the circumstances and the reasons they need the information now (rather than after they've provided a warrant), and do you believe they will get you a warrant after the fact? But these questions were measured in minutes or hours - getting a warrant is not difficult or time-consuming where the facts justify it.
The current furor over the records turned over to the NSA falls under the much easier category - law enforcement bullying their way to records they may not be entitled to. You see, despite the complexity of so many agencies being subject to different rules about what can and cannot be provided, there is a simple fallback answer when the request falls in a grey zone - "I'd be happy to comply with your request as soon as you give me a warrant (or court order, for wiretaps)." The beauty of this answer is how much ground it covers. It insulates your company from liability for providing records illegally, and if for some reason you are wrong in asking for the warrant, you get a quick education from law enforcement counsel, who will point you to the exact regulation that provides for access without a warrant. Most of the time, they'll grumble and then go get a warrant or order. Sometimes they just go away, as the NSA ultimately did after being rebuffed by Qwest.
In my view, Qwest did the obvious thing in response to the NSA's request. The surprising thing is that AT&T, Verizon and BellSouth rolled over and gave the NSA these records when the simple expedient of insisting on a court order existed.
We received all sorts of subpoenas, civil and criminal, from myriad agencies and private attorneys, seeking everything from invoices to wiretaps. Sorting out what could be provided in response to what kind of process (simple private subpoena to court order) was a daunting task: Different agencies have different rights, and circumstances matter, too. We would sometimes provide records in advance of a warrant or order when a kidnapping was underway, for example.
To make our way through this maze of regulations, we had a thick guidebook, regularly updated, that spelled out exactly what could be done in virtually any set of circumstances. Every telco of any size has a guidebook like this - ours could trace its origins to AT&T's guidebook. Received a warrant by fax from the DEA? ATF is calling saying they've got a subpoena? Santa Clara County Public Defender wants phone records? The procedures were all spelled out, along with the accompanying citations to statute, and my folks who dealt with this stuff on a daily basis were very good at sorting through it. They had great relationships with their counterparts in law enforcement and would only come to me when a very difficult or high-profile call needed to be made.
Of these, the hardest calls to make were those involving exigent circumstances - do you believe what law enforcement is telling you about the circumstances and the reasons they need the information now (rather than after they've provided a warrant), and do you believe they will get you a warrant after the fact? But these questions were measured in minutes or hours - getting a warrant is not difficult or time-consuming where the facts justify it.
The current furor over the records turned over to the NSA falls under the much easier category - law enforcement bullying their way to records they may not be entitled to. You see, despite the complexity of so many agencies being subject to different rules about what can and cannot be provided, there is a simple fallback answer when the request falls in a grey zone - "I'd be happy to comply with your request as soon as you give me a warrant (or court order, for wiretaps)." The beauty of this answer is how much ground it covers. It insulates your company from liability for providing records illegally, and if for some reason you are wrong in asking for the warrant, you get a quick education from law enforcement counsel, who will point you to the exact regulation that provides for access without a warrant. Most of the time, they'll grumble and then go get a warrant or order. Sometimes they just go away, as the NSA ultimately did after being rebuffed by Qwest.
In my view, Qwest did the obvious thing in response to the NSA's request. The surprising thing is that AT&T, Verizon and BellSouth rolled over and gave the NSA these records when the simple expedient of insisting on a court order existed.
Friday, May 05, 2006
Dread Not
Fascinating study making news today - it seems that feelings of dread are, in rough terms, a kind of pain, and a fair number of people will engage in irrational behavior to alleviate this pain. The experiment itself is sinister: Subjects are told they are going to get an electric shock, and if they wait longer the shock will be less painful. Apparently a decent number of subjects dread the prospect of a shock so much that they are willing to take a more painful shock now in exchange for eliminating the dread of the shock occuring later.
Like most people faced with an unpleasant task, I'd rather get it over with sooner rather than later. Of course, that may have less to do with dread than with the fact that in the real world the pain/unpleasantness is almost always greater the longer one waits to face it. I'm fascinated that, at least for some people, getting rid of the dread as quickly as possible is worth taking more (physical) pain.
Does this translate to decision-making in business? In cases like Enron or WorldCom hope (or hubris, or crookedness) led businesses and their leaders to delay taking the pain until it is too late and the negative impacts had mushroomed. But what about those businesses that ruthlessly weed out uncertainty, say, at the expense of promising new initiatives or technologies with uncertain paybacks or markets? Is this efficiency, or is uncertainty the corporate version of dread?
Like most people faced with an unpleasant task, I'd rather get it over with sooner rather than later. Of course, that may have less to do with dread than with the fact that in the real world the pain/unpleasantness is almost always greater the longer one waits to face it. I'm fascinated that, at least for some people, getting rid of the dread as quickly as possible is worth taking more (physical) pain.
Does this translate to decision-making in business? In cases like Enron or WorldCom hope (or hubris, or crookedness) led businesses and their leaders to delay taking the pain until it is too late and the negative impacts had mushroomed. But what about those businesses that ruthlessly weed out uncertainty, say, at the expense of promising new initiatives or technologies with uncertain paybacks or markets? Is this efficiency, or is uncertainty the corporate version of dread?
Monday, May 01, 2006
Merger-Hostile CEO
Surprising news this morning that Autostrade's CEO, Vito Gamberale, is now opposing the company's acquisition by Spain's Abertis. Surprising not only because you simply don't expect to see such things in any merger, let alone one where the target sells for over $10 billion, but also because Gamberale was publicly touting the deal last week.
What could possibly explain this behavior? It's not unheard of for a board to push for a deal the CEO doesn't like, and that may have been the case here, with the Benetton family controlling a majority of Autostrade. It's certainly odd that Gambarele apparantly did not even know the negotiations were going on until the 11th hour. However, you'd expect owners and CEOs to work these details out before the deal is announced, with the CEO falling in line or leaving. Now Gamberele likely will leave, but only after an ugly public spat. This seems like a worst-case scenario for all concerned - the guys at Abertis have got to be pulling their hair out.
It does bring to mind one aspect of executive compensation that you don't hear much about: Does the absence of a nice equity payout on closing of a merger make company management more hostile to deals that are otherwise in shareholders' interests? In other words, are some executives more concerned about keeping their jobs (or roles) than maximizing shareholder value? I have never witnessed this phenomenon firsthand (although I have seen it in spades among rank-and-file workers), but it would not be a shocker if Gamberale had a different agenda than the Benettons for this reason.
What could possibly explain this behavior? It's not unheard of for a board to push for a deal the CEO doesn't like, and that may have been the case here, with the Benetton family controlling a majority of Autostrade. It's certainly odd that Gambarele apparantly did not even know the negotiations were going on until the 11th hour. However, you'd expect owners and CEOs to work these details out before the deal is announced, with the CEO falling in line or leaving. Now Gamberele likely will leave, but only after an ugly public spat. This seems like a worst-case scenario for all concerned - the guys at Abertis have got to be pulling their hair out.
It does bring to mind one aspect of executive compensation that you don't hear much about: Does the absence of a nice equity payout on closing of a merger make company management more hostile to deals that are otherwise in shareholders' interests? In other words, are some executives more concerned about keeping their jobs (or roles) than maximizing shareholder value? I have never witnessed this phenomenon firsthand (although I have seen it in spades among rank-and-file workers), but it would not be a shocker if Gamberale had a different agenda than the Benettons for this reason.
Friday, April 28, 2006
Cross-Border Fun and Games
I spent the last week or so on vacation in Rome - a great place for unwinding and gaining perspective. During my trip I stayed clear of e-mail (and certainly blogging), but I did watch enough of Sky News to see reports of the "merger of equals" (i.e., takeover) between Spain's Abertis and Italy's Autostrade. The new company will be the world's largest operator of toll roads and airports. It will also be headquartered in Spain.
Predictably enough, Italy's incoming Prodi government was all over the deal, questioning whether the Iberian-centric company would have the proper focus on creating new infrastructure in Italy. Putting aside the utter speciousness of that argument for a moment, I am struck by the continued resistance, in our age of globalization, to cross-border deals. And it's not just leftist coalition governments in Italy: In the last year here in the U.S., we've seen major deals blown on even flimsier grounds - the recent Dubai ports debacle and the attempted takeout of Unocal by China's Cnooc. In all cases the putative buyers are major global companies, traded on global exchanges, answerable to investors spread around the world, and often managed by teams hailing far from the acquiror's corporate HQ. Why the hyper-focus on the national roots of the corporate buyer? Listen to some folks talk and you'd think these guys are the modern equivalent of Viking raiders, lighting our thatched roofs on fire and brutalizing the people.
Governments obviously have a right - and a duty - to vett foreign purchasers and make sure deals don't compromise national security. I can even be somewhat sympathetic to government objections to deals that explicitly harm domestic competitiveness or cost a large number of jobs. There are certain higher bars that a foreign acquiror should legitimately expect to have to clear. However, it seems that you've also got to spend a lot of time sniffing out the more extreme arguments, play devil's advocate like a flag-waver, and in the end make a sober assessment of whether your deal can make it past the mob.
Predictably enough, Italy's incoming Prodi government was all over the deal, questioning whether the Iberian-centric company would have the proper focus on creating new infrastructure in Italy. Putting aside the utter speciousness of that argument for a moment, I am struck by the continued resistance, in our age of globalization, to cross-border deals. And it's not just leftist coalition governments in Italy: In the last year here in the U.S., we've seen major deals blown on even flimsier grounds - the recent Dubai ports debacle and the attempted takeout of Unocal by China's Cnooc. In all cases the putative buyers are major global companies, traded on global exchanges, answerable to investors spread around the world, and often managed by teams hailing far from the acquiror's corporate HQ. Why the hyper-focus on the national roots of the corporate buyer? Listen to some folks talk and you'd think these guys are the modern equivalent of Viking raiders, lighting our thatched roofs on fire and brutalizing the people.
Governments obviously have a right - and a duty - to vett foreign purchasers and make sure deals don't compromise national security. I can even be somewhat sympathetic to government objections to deals that explicitly harm domestic competitiveness or cost a large number of jobs. There are certain higher bars that a foreign acquiror should legitimately expect to have to clear. However, it seems that you've also got to spend a lot of time sniffing out the more extreme arguments, play devil's advocate like a flag-waver, and in the end make a sober assessment of whether your deal can make it past the mob.
Tuesday, April 18, 2006
Gun-Jumping
Sometimes it just doesn't pay to be a tough negotiator - witness Qualcomm's announcement Monday that it is entering into a consent decree with DOJ and paying $1.8M to settle claims of gun jumping in its acquisition of Flarion ("gun jumping" being where the acquiror starts getting a bit too intimate with the seller's business ops before the deal has closed).
While a buyer can't run the acquired business before the deal closes, there's always a healthy negotiation over the amount of control the buyer will exert (via operating covenants written into the acquisition agreement) during the pre-closing period. These covenants are typically designed to ensure that, to the extent possible, the acquired business continues to operate in a straight-and-narrow course until closing. Themes for operating covenants include the permissable amount of new debt, capital expenditue limits, asset sales, etc. - anything that might materially change the nature of what the buyer thought they were buying. However, buyers usually have to stay well clear of anything involving customers and markets, particularly when acquiring a competitor, to avoid the appearance of gun jumping.
Gun jumping is of heightened concern in industries like telecom, where the wait for closing can exceed one year. The long wait obviously increases the operating risk during the pre-closing period, thus ratcheting up the desire to steer the target's course during that period or get a jump on integration. Many M&A lawyers take a very conservative stance on gun jumping, preventing most conversation pre-close on the (not unreasonable) presumption that some business people will jump the gun. Buyers want to get moving; sellers usually want to be compliant - the gun gets jumped.
What's interesting about the Qualcomm news is that the claims don't relate to any over-reaching behavior by Qualcomm executives, but rather the language in the merger agreement itself.
Obviously the size of this fine is not material to Qualcomm or even this deal itself (the $1.8M fine is well less than one-half of one percent of the purchase price). However, I'm sure the threat of this action scuttling or slowing the deal caused many a sleepless night for those involved - and may still, if you are a Qualcomm lawyer.
While a buyer can't run the acquired business before the deal closes, there's always a healthy negotiation over the amount of control the buyer will exert (via operating covenants written into the acquisition agreement) during the pre-closing period. These covenants are typically designed to ensure that, to the extent possible, the acquired business continues to operate in a straight-and-narrow course until closing. Themes for operating covenants include the permissable amount of new debt, capital expenditue limits, asset sales, etc. - anything that might materially change the nature of what the buyer thought they were buying. However, buyers usually have to stay well clear of anything involving customers and markets, particularly when acquiring a competitor, to avoid the appearance of gun jumping.
Gun jumping is of heightened concern in industries like telecom, where the wait for closing can exceed one year. The long wait obviously increases the operating risk during the pre-closing period, thus ratcheting up the desire to steer the target's course during that period or get a jump on integration. Many M&A lawyers take a very conservative stance on gun jumping, preventing most conversation pre-close on the (not unreasonable) presumption that some business people will jump the gun. Buyers want to get moving; sellers usually want to be compliant - the gun gets jumped.
What's interesting about the Qualcomm news is that the claims don't relate to any over-reaching behavior by Qualcomm executives, but rather the language in the merger agreement itself.
Obviously the size of this fine is not material to Qualcomm or even this deal itself (the $1.8M fine is well less than one-half of one percent of the purchase price). However, I'm sure the threat of this action scuttling or slowing the deal caused many a sleepless night for those involved - and may still, if you are a Qualcomm lawyer.
Friday, April 14, 2006
Cougars and the Law
Non-corp dev related, but I noticed this morning that the Oregon Department of Fish and Wildlife is moving forward with an expanded plan to control the state's cougar population. Whereas to date the department has responded only to specific cougar sightings, they now plan to hunt cougars more generally in an effort to control the expanding population. To greatly increase the efficiency of this effort, they plan to use dogs.
Cougar sightings are on the increase out here in the West, and cougar populations have expanded at a time of rapid human population growth in western states. My hometown of Bend, Oregon - set in cougar territory just east of the Cascade mountains - has been one of the fastest-growing communities in the country for the last 20 years. There's little question that this combination leads to an increase in human/cougar interactions, as well as losses of livestock and domestic pets.
My first reaction to the news that state-funded hunters would be culling the cougar population was: Why not expand the cougar season and let private hunters do it? That's a cornerstone of wildlife management, as seasons, hunting rules, fees and limits are constantly adjusted to account for population fluctuations. As it turns out, the department has already done that, expanding the season to 10 months and reducing the tag fees to nominal levels. The problem? Private hunters in Oregon can't use dogs to hunt cougars, thanks to a state initiative passed some years back.
The result of the initiative's passing was a steep climb in the cougar population as hunting success plummeted due to the lack of ability to use dogs. The state tried to offset this growth by expanding the cougar season and reducing tag prices, but now finds itself turning to dogs to keep the population in check. So, the net outcome of the voters' action wasn't to permanently end the hunting of cougars with dogs; it was simply to shift the cost of hunting cougars with dogs from private hunters to the state and its taxpayers. You've got to love the initiative process.
Cougar sightings are on the increase out here in the West, and cougar populations have expanded at a time of rapid human population growth in western states. My hometown of Bend, Oregon - set in cougar territory just east of the Cascade mountains - has been one of the fastest-growing communities in the country for the last 20 years. There's little question that this combination leads to an increase in human/cougar interactions, as well as losses of livestock and domestic pets.
My first reaction to the news that state-funded hunters would be culling the cougar population was: Why not expand the cougar season and let private hunters do it? That's a cornerstone of wildlife management, as seasons, hunting rules, fees and limits are constantly adjusted to account for population fluctuations. As it turns out, the department has already done that, expanding the season to 10 months and reducing the tag fees to nominal levels. The problem? Private hunters in Oregon can't use dogs to hunt cougars, thanks to a state initiative passed some years back.
The result of the initiative's passing was a steep climb in the cougar population as hunting success plummeted due to the lack of ability to use dogs. The state tried to offset this growth by expanding the cougar season and reducing tag prices, but now finds itself turning to dogs to keep the population in check. So, the net outcome of the voters' action wasn't to permanently end the hunting of cougars with dogs; it was simply to shift the cost of hunting cougars with dogs from private hunters to the state and its taxpayers. You've got to love the initiative process.
Thursday, April 13, 2006
My Vodafone Disclaimer
Nice attention from The Deal today. I should mention that when it comes to Vodafone I'm not necessarily partial; I spent several months dealing with them very closely when we were auctioning off AT&T Wireless. I came away from that process deeply impressed with Vodafone's operating efficiency. They just seemed to do everything well, even down to how they conducted diligence and negotiated the merger agreement. And you never saw a more starry-eyed group of swooning senior executives than our folks after the presentations Vodafone made to us for reverse diligence. I sometimes think I might have lost some respect for them had they paid as much for AWE as Cingular did! So - besides the lack of compelling business logic, I also have a more gut-level negative reaction to the prospect of Vodafone being taken apart by Verizon-Telefonica-Blackstone trifecta.
That sale, by the way, was quite the drama. Amir Mirza, a banker at Merrill Lynch (and a helluva guy) has always told me I should write a book about the experience. Now that I've got more than one year's distance from Cingular, I think I may do something like that and serialize the story here. Look for postings titled "The Sale of AT&T Wireless".
That sale, by the way, was quite the drama. Amir Mirza, a banker at Merrill Lynch (and a helluva guy) has always told me I should write a book about the experience. Now that I've got more than one year's distance from Cingular, I think I may do something like that and serialize the story here. Look for postings titled "The Sale of AT&T Wireless".
Monday, April 10, 2006
Vodafone Catching a Bid?
Funny rumor circulating about a potential takeover of Vodafone by Verizon, Telefonica and Blackstone. According to reports, the trio would pay about $168B for Vodafone. Since the press is notorious for not dealing with debt in merger valuation, as an equity valuation this would represent a 20% premium to today's price. Including Vodafone's $22B in long-term debt makes this a $190B deal.
It's an audacious rumor, and the market is having none of it - Vodafone stock has barely moved today. Why should it? This one of the world's biggest companies, and one of the best managed. While Vodafone has run into a rough patch in the last year, this hardly seems like the time for Vodafone shareowners to cut and run.
But what of the putative acquirors? Could it really make sense to break up this global powerhouse, built on the back of dozens of mergers over the last 10 years? I'd guess that it's easy for Blackstone, since as the glue holding this deal together they would get the pieces of Vodafone most easily grown and re-sold. It's harder for Telefonica - while it gets them more solidly into Europe, they seem to have ample room for growth in their LatAm markets without needing an expensive acquisition like this. Telefonica is also still working through the integration of O2, acquired just last year. Still, it's enormously gratifying to the corporate ego to smack a big competitor down, and that factor can't be entirely ignored.
My guess is that this rumor is a trial balloon floated by Verizon's bankers. Within the next year or so, Verizon is going to have to pony up $50B+ for Vodafone's minority interest in Verizon Wireless. There is probably a very credible model floating around Verizon's HQ showing that buying and breaking up Vodafone is a better deal for Verizon than simply paying a ton of cash for outright ownership of Verizon Wireless.
It would be a bold play (to put it mildly), but I'd be surprised to see it happen. Besides the obvious execution risk, there's the fact that, rightly or wrongly, domestic investors don't give U.S. companies adequate credit for foreign operations. This doesn't make much difference for companies with relatively low costs to enter and manage new markets, but it creates a big headwind for teleco companies having to invest billions in licenses and capital to build and maintain networks. While obtaining Verizon's UK assets may be accretive to Verizon compared with buying Vodafone out of the U.S., it would need to do so in a way that accounted for U.S. investors' tendency to treat foreign assets as non-core. Even with Vodafone stock mired in a slump, it's hard to see how this could pencil out to being anything more than marginally better than the alternative of biting down hard and paying Vodafone to walk from Verizon Wireless.
It's an audacious rumor, and the market is having none of it - Vodafone stock has barely moved today. Why should it? This one of the world's biggest companies, and one of the best managed. While Vodafone has run into a rough patch in the last year, this hardly seems like the time for Vodafone shareowners to cut and run.
But what of the putative acquirors? Could it really make sense to break up this global powerhouse, built on the back of dozens of mergers over the last 10 years? I'd guess that it's easy for Blackstone, since as the glue holding this deal together they would get the pieces of Vodafone most easily grown and re-sold. It's harder for Telefonica - while it gets them more solidly into Europe, they seem to have ample room for growth in their LatAm markets without needing an expensive acquisition like this. Telefonica is also still working through the integration of O2, acquired just last year. Still, it's enormously gratifying to the corporate ego to smack a big competitor down, and that factor can't be entirely ignored.
My guess is that this rumor is a trial balloon floated by Verizon's bankers. Within the next year or so, Verizon is going to have to pony up $50B+ for Vodafone's minority interest in Verizon Wireless. There is probably a very credible model floating around Verizon's HQ showing that buying and breaking up Vodafone is a better deal for Verizon than simply paying a ton of cash for outright ownership of Verizon Wireless.
It would be a bold play (to put it mildly), but I'd be surprised to see it happen. Besides the obvious execution risk, there's the fact that, rightly or wrongly, domestic investors don't give U.S. companies adequate credit for foreign operations. This doesn't make much difference for companies with relatively low costs to enter and manage new markets, but it creates a big headwind for teleco companies having to invest billions in licenses and capital to build and maintain networks. While obtaining Verizon's UK assets may be accretive to Verizon compared with buying Vodafone out of the U.S., it would need to do so in a way that accounted for U.S. investors' tendency to treat foreign assets as non-core. Even with Vodafone stock mired in a slump, it's hard to see how this could pencil out to being anything more than marginally better than the alternative of biting down hard and paying Vodafone to walk from Verizon Wireless.
Monday, April 03, 2006
Alcatel-Lucent
While the Alcatel-Lucent tie-up makes a lot of sense on paper, creating an integrated company in high-tech manufacturing is tricky business. Throw in the cross-border and cultural compatibility issues, and this looks to be at least as steep a climb as the HP-Compaq merger. I hope it works out better than that, but both companies are going to have to be very, very focused on executing their integration plan.
I know, that seems obvious - every company going through a merger should be focused on merger integration. However, big companies can't always get out of their own ways, and when the realities of quarterly results, competition and internecine fighting start kicking in, that focus can be lost. Some consolidating mergers can absorb these effects and still succeed - this one can't.
I know, that seems obvious - every company going through a merger should be focused on merger integration. However, big companies can't always get out of their own ways, and when the realities of quarterly results, competition and internecine fighting start kicking in, that focus can be lost. Some consolidating mergers can absorb these effects and still succeed - this one can't.
Friday, March 31, 2006
The "Managerial Administration"
The Bush administration has often prided itself on its "managerial" nature, and I tend to agree - it has shown many of the aspects of a (poorly run) business.
Latest case in point - the appointment of Josh Bolten as Chief of Staff. As I've harped on before, one problem with corporate decision-making is a tendency by staffers to say "yes" to senior management (and a corresponding desire by senior managers to want to hear it). A related problem is a lack of diversity of viewpoints: Even if open discussion is encouraged, too much insularity precludes new ideas from getting in. The Bush administration appears to have both problems, and responding to recent crises by appointing yet another insider shows yet again the inability of this poorly-managed enterprise to right itself.
Of course, in the corporate world we would expect a business run like this to quickly fail - here we have to wait for the next election.
Latest case in point - the appointment of Josh Bolten as Chief of Staff. As I've harped on before, one problem with corporate decision-making is a tendency by staffers to say "yes" to senior management (and a corresponding desire by senior managers to want to hear it). A related problem is a lack of diversity of viewpoints: Even if open discussion is encouraged, too much insularity precludes new ideas from getting in. The Bush administration appears to have both problems, and responding to recent crises by appointing yet another insider shows yet again the inability of this poorly-managed enterprise to right itself.
Of course, in the corporate world we would expect a business run like this to quickly fail - here we have to wait for the next election.
Thursday, March 30, 2006
Merger Success
Booz Allen is now saying that the merger failure rate is lower than the two-thirds number trumpeted by Booz (and others) in years past. One of things they point to is the increase in consolidating deals, which - at least in theory - should be likelier to succeed than deals involving new lines of business.
These conclusions are anecdotal, although we may see some data to back it up in the next year or so. Still, seems like a lot of the consolidating deals I've seen (and the one I lived through) in the last couple of years have been at very full prices.
If by "failure" you mean selling the acquired company for a fraction of the purchase price several years later, I agree that you won't see much of that from consolidating acquirors. However, if you define "failure" as a merger failing to meet the IRR assumptions that led to its approval, the high prices paid of late lead me to believe the numbers really haven't changed much.
These conclusions are anecdotal, although we may see some data to back it up in the next year or so. Still, seems like a lot of the consolidating deals I've seen (and the one I lived through) in the last couple of years have been at very full prices.
If by "failure" you mean selling the acquired company for a fraction of the purchase price several years later, I agree that you won't see much of that from consolidating acquirors. However, if you define "failure" as a merger failing to meet the IRR assumptions that led to its approval, the high prices paid of late lead me to believe the numbers really haven't changed much.
Wednesday, March 29, 2006
Dealmaking Balance
Interesting comment on dealmaking, sadly posted anonymously, which I'll quote in part:
Amen, brother! I'm probably on the aggressive side when it comes to dealmaking - when I see value, I want to get something done, and fast. Few things are as frustrating as dealing with counterparties who are bogged down by bureaucracy or fear. But - inside your organization, deal advocacy has to be positioned correctly. It's great to be the guy who focuses on shareholder value and zealously pursues deals that enhance such value, while being up front about the risks and challenges. It's not so good to be the "deal cheerleader" on every potential deal that comes in the door, and gloss over or omit the messy bits.
As for opening moves, no question they serve you well as long as they are reasonable. I always like making the opening offer. Although it involves more uncertainty, over time I believe making the opening offer yields better results by setting the stage for the deal and allowing me to push the timing and process for getting the deal done. However, in my experience playing the tough guy and making an outrageous opening proposal is worse than not making a proposal at all. At best, the other party will treat you as if you didn't even make a proposal. At worst, you'll really need to do the deal, and you'll have to waffle your way to a reasonable position, your credibility shot to hell. There's just no percentage in doing that.
Good deal making requires balance. In my opinion, the biggest hurdle to getting deals done is either a tendency to be overly conservative or too much machismo.
Point 1) . . . far too often apathy and professional butt covering lead to missed opportunities.
Pont 2) . . . we should always strive to make the appropriate opening move . . . making the opening move is often the most difficult part of doing deals but being a tough SOB is not the same thing as being a good deal maker.
Amen, brother! I'm probably on the aggressive side when it comes to dealmaking - when I see value, I want to get something done, and fast. Few things are as frustrating as dealing with counterparties who are bogged down by bureaucracy or fear. But - inside your organization, deal advocacy has to be positioned correctly. It's great to be the guy who focuses on shareholder value and zealously pursues deals that enhance such value, while being up front about the risks and challenges. It's not so good to be the "deal cheerleader" on every potential deal that comes in the door, and gloss over or omit the messy bits.
As for opening moves, no question they serve you well as long as they are reasonable. I always like making the opening offer. Although it involves more uncertainty, over time I believe making the opening offer yields better results by setting the stage for the deal and allowing me to push the timing and process for getting the deal done. However, in my experience playing the tough guy and making an outrageous opening proposal is worse than not making a proposal at all. At best, the other party will treat you as if you didn't even make a proposal. At worst, you'll really need to do the deal, and you'll have to waffle your way to a reasonable position, your credibility shot to hell. There's just no percentage in doing that.
Monday, March 27, 2006
Merger Woes
Nothing relevatory here, but nice high-level list of some of the mistakes that can keep an acquiror from realizing value from an acquisition.
And speaking of value not realized, I had to chuckle at the news that Skype is now being sued over the IP acquired by Ebay in picking up Skype. I figured that Skype was primarily a marketing/sub acquisition play by Ebay, but some tried to convince me that the deal was primarily about Skype's technology. Let's hope not.
The lawsuit may be a whole lot of nothing, and the fact that the causes of action are styled as RICO claims makes me think there's more hyperbole than merit to them. But with questions over the transferability of the technology and the Skype founders' former business dealings, I'd say the Ebay/Skype deal isn't shaping up to be a nominee for the M&A hall of fame.
And speaking of value not realized, I had to chuckle at the news that Skype is now being sued over the IP acquired by Ebay in picking up Skype. I figured that Skype was primarily a marketing/sub acquisition play by Ebay, but some tried to convince me that the deal was primarily about Skype's technology. Let's hope not.
The lawsuit may be a whole lot of nothing, and the fact that the causes of action are styled as RICO claims makes me think there's more hyperbole than merit to them. But with questions over the transferability of the technology and the Skype founders' former business dealings, I'd say the Ebay/Skype deal isn't shaping up to be a nominee for the M&A hall of fame.
Friday, March 24, 2006
Playing Devil's Advocate
Equity Private notes that in her firm, two team members are assigned to each potential deal as "pro" and "risk" advocates - an excellent example of a formalized way of maximizing input on a decision.
Most corporations do this in a similar, if less formal way, with the CFO playing the role of the "risk" advocate. As I've stressed in earlier posts, corp dev types can't afford to let this happen - you need to internalize both the "pro" and the "risk" mindsets (even if it means taking on a formal process). If you only present the good news, and your CFO has to continuously be the one to ferret out the risks, your credibility will be gone in a hurry.
In private equity, there's more allowance given for aggressively pushing a deal. After all, putting the investor's money to work via acquisitions is the name of the game, and the only real question is whether your deal is as pretty as the other deals.
In a corporation, senior management will be suspicious of deals being pushed too aggressively, especially if there's any whiff that important issues are being glossed over in the rush for approval. Senior leaders certainly care about the IRR of your deal relative to other potential investments, and, like in private equity, they also care about the risk that this IRR won't be realized. However, they will also care about integration and organic growth, subjects not typically of concern to a private equity investment committee (except in cases where the target is to be integrated into another portfolio company). As a consequence, you may have a lovely deal that sparkles in all the right ways, but if you haven't objectively addressed the integration risks and the build/buy analysis up front, you may well see it leave the investment committee in tatters.
Most corporations do this in a similar, if less formal way, with the CFO playing the role of the "risk" advocate. As I've stressed in earlier posts, corp dev types can't afford to let this happen - you need to internalize both the "pro" and the "risk" mindsets (even if it means taking on a formal process). If you only present the good news, and your CFO has to continuously be the one to ferret out the risks, your credibility will be gone in a hurry.
In private equity, there's more allowance given for aggressively pushing a deal. After all, putting the investor's money to work via acquisitions is the name of the game, and the only real question is whether your deal is as pretty as the other deals.
In a corporation, senior management will be suspicious of deals being pushed too aggressively, especially if there's any whiff that important issues are being glossed over in the rush for approval. Senior leaders certainly care about the IRR of your deal relative to other potential investments, and, like in private equity, they also care about the risk that this IRR won't be realized. However, they will also care about integration and organic growth, subjects not typically of concern to a private equity investment committee (except in cases where the target is to be integrated into another portfolio company). As a consequence, you may have a lovely deal that sparkles in all the right ways, but if you haven't objectively addressed the integration risks and the build/buy analysis up front, you may well see it leave the investment committee in tatters.
Subscribe to:
Posts (Atom)