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.