Five Frogs on a Log

Mark L. Feldman, Michael F. Spratt

• Publisher: HarperCollins e-books
• Year: 2010
• ISBN:
  9780062046079
• Topic: Betriebswirtschaft
• Subtopic: Verwaltung

A riddle:
Five frogs are sitting on a log.
Four decide to jump off. How many are left?
Answer: Five
Why?
Because there's a difference between deciding and doing.

Written by Mark L. Feldman and Michael F. Spratt of PricewaterhouseCoopers, Five Frogs on a Log offers readers an entertaining and no-nonsense field guide to the mergers and acquisitions jungle, packed with insight and instruction for executing corporate change and capturing shareholder value. Whether you're buying another company or acquiring a new vision of the future, this book proffers an unconventional perspective and a practical, readily accessible set of solutions to the single greatest challenge facing today's managers: executing rapid transitions ion mergers, acquisitions and gut wrenching change.

Designed for corporate managers and CEOs caught up in the whirlwind of change, every chapter provides accessible ideas and wisdom for navigating the most demanding business transitions. The authors offer a unique hands-on perspective based on their work with top Fortune 500 firms. As they state:

"Increasingly, the companies that win are those that learn faster, act quicker and adapt sooner. They will compress time by making and executing early, informed decisions about economic value creation, ruthless prioritization and focused resource allocation. They will use these decisions to take early firm stands on management deployment, organization structure and culture. Their actions will increasingly be linked to long-term, sustained economic value creation."

The advice and expertise offered in this book can be used to solve a range of operational problems from speeding up new product development to merging two businesses; from changing company culture to repositioning a business in a while new marketplace.

Whatever the challenges and opportunities facing you, your company, your industry, Five Frogs on a Log will move you from deciding to doing.

1

Opportunity Lost

The Dealmaker’s Nightmare

What a coup! Wired magazine called it “a marriage tasked in heaven.” The Wall Street Journal called it the “boldest technology deal in years, preempting competitors and ushering in a new era of convergence.” And you re the dealmaker who pulled it off. Industry watchers called you a strategic genius. The Financial Times called you a visionary. Even your competitors were impressed. You didn’t mind. Not a bit.

So, congratulations, if they’re in order. And that’s a very big “if.”

The story started well. Your aging baby. Global Computer, had seen the future and blinked. Saddled with fading technology and fierce competition, you counted up your mercifully huge cash kitty and went shopping for a brilliant young partner. Nexus Technologies was ideal, a Seattle prodigy with the hottest networking concept in the industry. Founded by Johnny Wu, a twenty-something Cantonese immigrant with a doctorate from Cal Tech, Nexus’s wunderkinder were front-runners in a whole new market niche, but the cost of heading off hungry rivals had loaded them with life-threatening debt. Their recent IPO had soared for three months, enriching their investment bankers and some fast-thinking arbitrageurs, but had then inexplicably (though not to the bankers) sunk to single-digit oblivion.

So you had what Nexus coveted: quick cash and survival, albeit as a junior partner. They offered what you coveted: Global Computer’s reincarnation as the sharpest blade in cutting-edge computerdom.

Business Week initially labeled you the “dealmaker of the quarter.” Other CEOs were generous with envy-spiced praise, and you suddenly acquired a dozen new best friends. God knows, you earned that glow. Inventing Global-Nexus wasn’t easy. Twice you had to revise the offer, juggling the cash and stock payment mix and massaging the executive roles and compensation packages. The way those Seattle prima donnas acted, you’d never know they were bleeding and desperate for your cash transfusion and marketing savvy. Then came the board approvals, endless press briefings, employee announcements, and the pitch to Wall Street.

In justifying the merger to the board, you waxed eloquent about strategic and economic opportunity, complementary products, overlapping accounts, new market channels, reduced costs, scale economies, and—best of all—that hot new technology in the near future.

But months have since drifted past—almost four, in fact—and the truth is no longer beautiful. It’s not ugly, but there’s a little secret gnawing in your belly. Your heavenly marriage is not going well. It hasn’t even been consummated.

Three months ago, you told the world what you then firmly believed: Global-Nexus was about to become a spectacular whole far greater than the sum of its already impressive parts. Unfortunately, you may have hoisted expectations a bit high. Within weeks, impatient customers and anxious software developers began asking when they would see the technology breakthroughs you promised. Analysts wondered aloud about your earnings estimates. One business columnist printed some vicious gossip. Competitors smelled blood. Corporate buyers were publicly taking a wait-and-see position.

Back at Global’s headquarters in Palo Alto, you began to hear disturbing rumors about Johnny Wu’s Nexus kids up there in Seattle. Lots of preening about who was indispensable, suggesting lots of worry about who was getting fired, whether the survivors would have to relocate, and, indeed, whether you “old guys” in Palo Alto knew what you’re doing. More and more, Johnny Wu doesn’t return your calls, sometimes for days. His voice mailbox is invariably full; he’s supposedly too frantic to glance at his E-mail. So now you clearly have a generation and communication gap as well as a geographical one.

What if some of those Nexus wizards jump ship before you even leave port? Will the new products ever be developed? How will you keep the few Nexus customers that signed on early if the people they relied on depart? And don’t forget your own customers. Ravenous competitors are already soliciting them, while shamelessly courting your best people and attacking your reputation in the marketplace.

As time flits past with no real integration occurring, no leveraging of channels and customers, no technology transfer, no new breakthroughs, and no cost savings captured, uncertainty begins to skyrocket. It breeds anxiety and backbiting. Your new two-company sales team is united only in blaming Hart-Scott-Rodino, the entire legal profession, and Congress for stopping them from sharing data essential to pursuing new customers. When they’re not ranting and raving, they’re attacking one another, engineering, and product management.

How will you ever bridge the cultural gap? Suits versus T-shirts. Design review meetings versus food fights. Planning retreats versus white-water rafting trips. Even your corporate colors don’t fit—teal and kelly green?

Everyone is leaning on your information systems people for customer, product, and market data. They say they have other priorities. If you step in and order them to switch priorities, what other projects will you obstruct?

So far, the critics—internal and external—have monopolized the conversation. Unencumbered by facts and gripped by paranoia, they’ve been describing the deal’s downside to anyone who will listen. How do you quiet these naysayers? How do you prove to your customers, employees, shareholders, suppliers, vendors, and the communities in which you operate that the deal is good for them? And what about those acerbic analysts? How do you convince them you won’t become yet another merger casualty?

Whom can you trust to help you deploy the new company’s key people? You were sure three months ago, but now there’s a different question—who will be left to deploy? With astonishing boldness, the headhunters have swooped down on the best and the brightest, most of whom can’t bear delay and uncertainty. They like money, but they adore brain chic and revenge-of-the-nerds glory. They’re not content with shaping the future. They want to own it.

The lords of infrastructure are busily trying to dictate the pace of the transition. You’ve seen the list of post-deal tasks they’ve assembled. It isn’t pretty. Twenty-six typed, single-spaced pages backed up by eighteen linear feet of Gantt charts—and not a revenue driver to be found.

Accordingly, star players are flocking elsewhere, and despite all those confidentiality agreements, proprietary information is seeping out to competitors. Not surprisingly, deadlines and productivity are slipping. Suddenly you’re paying too many people retention fees on top of paying others severance. Overtime and rework costs are rising. So is the unplanned cost of training new people to replace the deserters. Margins are falling. Certain journalists are happy. They like self-fulfilling prophecies.

Questions are propagating faster than answers, and everyone is running out of patience. You know that the agitation over prolonged uncertainty may well abort Global-Nexus, but you don’t know quite how to fix it. How do you stabilize the new organization? How do you create clarity, focus, and urgency? What do you say to whom, and when do you say it? Everybody has questions. Nobody has answers.

The lords of infrastructure are busily trying to dictate the pace of the transition. You’ve seen the list of post-deal tasks they’ve assembled. It isn’t pretty. Twenty-six typed, single-spaced pages backed up by eighteen linear feet of Gantt charts—and not a revenue driver to be found.

At last sighting, your two human resource chiefs were holed up and building the mother of all compensation programs. You just wanted some guidelines for paying people. The last time you peeked in, they were debating which sabbatical program was the best. You didn’t even know that Global had a sabbatical program!

Everybody wants to be involved in the transition, to control it and bend it around their own agenda. How do you get them to see this from the perspective of the total company and keep them engaged without sacrificing progress?

You feel overwhelmed: so much to do, so little time. So much time wasted, so little accomplished. You don’t have a plan for day one, and like playing the quarterback in a kids’ game of touch football, you now find that your entire team has gone out for a pass, leaving you to be sacked. Value is eroding every day. You feel your chest tightening. You know Global-Nexus is a terrific concept, a win-win deal for you and Johnny Wu and hundreds of other people, not to mention all those customers and shareholders who stand to benefit. But the merger is stalled, refuses to budge. Will it ever move forward?

Global-Nexus is slipping through your fingers.

No more champagne. No more euphoria.

Your eyes ache, your head pounds. … It’s 3:56 A.M., and the deal-maker of the quarter keeps twisting instead of sleeping.

Some nights you wish God would postpone dawn.

Just delete it.

2

The Ugly Truth

Deciding Is Easy,
Executing Is Hard

A sardonic newspaperman once said, “In war, the first casualty is truth.” When it comes to corporate change and transition, the first casualty is usually shareholder value.

Companies throughout the world move from fad to fad and failure to failure in the quest for profitable growth. Each year billions of dollars are spent in the push for competitive superiority. The single greatest push for business advantage is in the area of mergers and acquisitions.

By and large, the track record is abysmal. An exhaustive analysis of hundreds of deals made in the first half of the 1990s led Business Week to conclude that even those deals that were several years old hadn’t begun to work. Of 150 deals valued at $500 million each or more, about half actually destroyed shareholder value. Another third contributed only marginal improvements.

The statistics for the past twenty years have not favored mergers and acquisitions. Committed dealmakers insist the evidence is circumstantial. But, as Thoreau once said, “Some circumstantial evidence is very strong, as when you find a trout in the milk.”

There are more fools among buyers than among sellers.

French proverb

Even the technology sector is not immune. Nearly 40 percent of the semiconductor industry deals done in the mid-1980s actually hurt the combined revenue potential of the companies involved. A little over half of the acquisitions had no discernible effect on the combined companies’ revenue potential, and a mere eight percent showed positive results.

How Do They Get Away with It?

They reinvent history. Take a look at a company’s annual report a few years after a disappointing acquisition. The reason for doing the original deal has been adjusted, the targets have been restated to better fit the actual results, the vagaries of the market are cited, and the litany of turmoil in the industry is chanted. Copywriters turn this stuff out faster than George Orwell’s Ministry of Truth could rewrite history.

There is an old story of a medieval king who wanted, more than anything, to be a great archer. He practiced every day and carefully observed the finest archers in contests of skill. Then one day, while riding in the countryside, he passed a barn that had a dozen arrows firmly planted in a dozen bull’s-eyes. He was stunned by this feat and ordered his soldiers to find the archer. They returned with a young, barefoot boy.

The king showered the boy with compliments and asked him how he managed to be so expert an archer. Embarrassed and shy, the boy glanced up at the king and said, “It’s really quite simple. I notch an arrow in the bow, draw it back, aim, and release. Then I walk over to the barn and draw the bull’s-eye around the arrow.”

This is a form of archery frequently practiced by some of the world’s most prolific dealmakers. As Malcolm Forbes once noted, “Anyone who says businessmen deal in facts, not fiction, has never read old five-year projections.”

In 1996 PricewaterhouseCoopers conducted a nationwide study of 124 recently merged or acquired companies, and found that the objectives that drove the deal were met only half the time and often took years to be realized. Further, the least-achieved objectives had often been the most sought after, such as reductions in manufacturing costs, distribution costs, and operating expenses.

Despite this, CEO after CEO continues to buy companies, playing the odds with shareholders’ cash. It reminds you of the Ma...