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Chapter One

Six Ways to Profit from Consolidation

The most beautiful diamonds are cut in an intricate pattern of multiple facets. Under a spotlight, each facet plays upon every other to create the most radiance. The gem cutter's expertise shines through when the design is perfectly planned and the facets skillfully cut to elicit the utmost light and brilliance from the stone. Strong business leaders in the consolidating world are much like the expert diamond cutter. Managers must understand the multifaceted nature of their competitive arena and craft strategic and operational plans to create the best chance of success for the business and wealth for shareholders. They must be able to see facets their competitors ignore. They must be armed with an array of tools and use them in the proper combination to capture the vast opportunities served up by the consolidating world.

A CRUCIAL CAUSE OF MERGER FAILURE

According to a Boston Consulting Group study, many firms fail to do adequate pre-merger integration planning. They found that eight of ten acquiring companies do no pre-merger planning or analysis of the target company's business practices, staff, skills, structure or organization design, sources of core competencies, and its range of tangible and intangible resources for growth. Most mergers underperform because top managers fail to consider the specific steps required to integrate an acquisition into their company or analyze how they will maximize their joint potential. You don't need to dig too deep to uncover an eerie correlation between the 80 percent of firms who do no pre-merger planning and the almost 80 percent of mergers that fail to meet their minimal financial goals.

Rampant merger failure presents your firm with a new wealth of strategic opportunities. Our strategies are your key to achieve and maintain your escape from the swarm of direct market competitors. These six strategies will enable your firm to profit from all consolidation — both yours and your competitors'.

STRATEGY 1: THE MAGNET STRATEGY

Poorly planned and badly executed merger integration creates fear, anger, and uncertainty among employees and managers. Employees of the acquired firm often feel they've been sold out. They need someone to want them and to reestablish a trusting bond. This someone can be a strong competitor firm like yours which is not involved in merger mania.

Your firm can use the magnet strategy to attract a merging competitor's top talent who are often so anxious to flee their company's merger chaos, they may actively seek out your team. This strategy generates key additional human and intellectual resources that give you the ability to stride ahead while simultaneously hollowing out the talent pool of competitor firms, pushing them further back into the pack.

For example, in late 1998, just after Deutsche Bank's chairman Rolf Breuer boldly announced, "There will be no autonomy" for its Banker's Trust/Alex Brown acquisition, many acquired employees used this suffocating statement as their rallying cry to escape the merger chaos. They ran into the arms of welcoming competitors, including Credit Suisse First Boston, Tucker Anthony Inc., and T. Rowe Price. Six out of eleven of BT Alex Brown's highest ranking executives, along with entire branch offices and practice groups, were easily recruited away by direct competitors.

The magnet strategy creates a double win — your competitor is weakened at the same time your firm gains strength. Drawing highly capable people directly from your merging competitors is a much more powerful win. In fact, even a start-up company can be staffed directly from the talent pools of competitor firms mired in merger chaos.

In Chapter 2, we show how huge firms like Procter & Gamble, General Electric, and Citigroup, along with small firms like Houston Community Bank and Sassaby, Inc., can either use or fall victim to the magnet strategy. Houston Community Bank increased its business by 33 percent in just one year using the magnet strategy — all at the expense of larger banks in the midst of merger chaos.

STRATEGY 2: ATTACK WHILE COMPETITORS ARE DISTRACTED

Another vital non-merger strategy firms can use to beat their merging competitors is to time strategic attacks against them precisely when those firms are most vulnerable — when they are floundering in the chaos of merger or acquisition integration. Most merging companies lose their ability even to see — much less to respond to — another firm's sudden strategic attack against their business. Such well-timed attacks on stalled mergers can steal market share, customers, suppliers, distributors, and alliance partners, transferring critical velocity directly to your company. While Boeing was struggling in near total chaos with its McDonnell Douglas acquisition, Europe's Airbus Industrie quickly attacked Boeing's huge market share. Within twenty-four months Airbus completely reversed the market dominance in this worldwide duopoly. When Boeing bought McDonnell Douglas, it owned 65 percent of the entire commercial aircraft market. In the first six months of 1999, the attacks on Boeing's leadership position allowed Airbus to capture 66 percent of all orders in the world.

The difficult work of merger integration can be all-consuming, and the normal tendency in combining firms is to lose at least part of their external vision because they are forced to focus inward on immediate acquisition or integration problems. Just as in war, your corporate attacks are most effective when the enemy isn't looking, is distracted, or can't respond. As demonstrated in the Introduction, a great portion of Dell Computer's recent overwhelming success has come directly at the expense of Compaq, as that firm struggles to digest Digital Equipment Corp.

In Chapter 3, we look at how many firms, including Airbus, PepsiCo, Wal-Mart, and Burlington Northern Santa Fe, have used precisely timed strategic attacks to gain critical velocity needed to outrun competitors paralyzed in merger turmoil.

STRATEGY 3: JUMP START VITAL INTERNAL CHANGE

Your team must use the threatened mergers by your direct competitors to jump-start major change inside your firm. Often, there is no more powerful force to drive your entire company's vital update and transformation than a direct competitor's merger announcement. This strategy is specifically designed to power your firm's forward momentum by maximizing your own team's current internal resources, talents, and motivation. For example, AT&T's new CEO Michael Armstrong used the powerful direct threat created by the mega-merger of MCI and WorldCom as a catalyst to energize AT&T into action like no other time in the company's history. The entire organization attacked out-of-control costs, eliminating $5 billion per year of unnecessary expense. This allowed AT&T to free up huge cash flow for many major global initiatives, including joint ventures, acquisitions, and technology upgrades.

Chapter 4 shows how the remarkable transformation at corporate giants Ford, AT&T, Honda, and Toyota was triggered by the threat created by combining competitors. These companies propelled themselves into market-leading positions in market share, profit, or shareholder wealth by jump starting critical internal changes.

STRATEGY 4: MERGER ALTERNATIVES

Your firm's joint ventures, strategic alliances, franchising, and licensing agreements often multiply your potential universe of resources by leveraging those of all your partners. These key co-ventures quickly help your firm to accelerate its forward momentum because many different agreements can be entered into simultaneously. The benefits from such partnerships are often derived much faster, cheaper, easier, more profitably, and without the debilitating conflict and turmoil when compared to a typical merger or acquisition. Microsoft's huge dominance over Apple Computer was a direct result of Microsoft's ability — and Apple's inability or unwillingness — to forge a massive network of joint ventures and licensing agreements.

In most mergers the acquiring firm buys the equivalent of a six-foot-long sandwich which contains certain desired items, but also numerous undesired items which either must be sold off, carried at a loss, or thrown away. These undesired parts of the acquired company may confuse the buying organization and distract top management attention. More important, these non-core, largely extraneous parts often force the acquirer to bid an excessively expensive price for the acquisition, not because they ever wanted to buy those pieces, but because those pieces are deemed to have a current market value to other potential bidders. In contrast, most strategic alliances, joint ventures, or licensing deals are focused only on the needed pieces of the business. They normally do not require expensive investment bankers, are negotiated directly by the two companies, and do not involve extraneous items or non-core businesses, nor the payment of exorbitant acquisition control price premiums. Firms can "cherry pick" desired items and specifically exclude others in order to build a mutual competitive advantage.

In Chapter 5, we explore the merger alternative strategies that have propelled many firms into market leadership, including Microsoft, Motorola, NEC, and the members of the giant global airline Star Alliance.

STRATEGY 5: FAST-TRACK MERGER INTEGRATION

No manager has ever overestimated the difficulty of integrating two companies. Merger integration is so very difficult because you only get one chance to do it right. There are no test runs. By streamlining and accelerating the process, you minimize the loss of key managers and skilled technicians, the erosion of morale, and the likelihood of merger chaos. When your firm executes a fast-track, well-planned merger integration, you multiply its chance of success when compared to the typical merging firm. Your team's critical forward momentum will be accelerated through a planned fast-track integration, allowing a faster escape from the grasp of market competitors. General Electric's market leadership in all areas of its business and stratospheric $500 billion market value have been a direct result of successful integration of over six hundred acquisitions during the watch of CEO Jack Welch. Through its comprehensive strategy of lightning-quick acquisitions, Cisco Systems surpassed Microsoft to become the world's most valuable company in March of 2000. Both Cisco and GE created fast-track integration processes which they both continually improve as a corporate core competency that allows them to stay ahead of their competitors. Many firms are now copying their merger models.

Fast-track integration directly attacks two key reasons for merger failure. First, they are often entered into with no clear plan for how to best integrate the people, systems, and operations of the two firms. Second, most merger integrations take far too long. And the longer they take, the more nonproductive energy the combined organization uses up, the higher most workers' uncertainty, the greater the distraction of top leaders' attention from productive work, and the greater the probability of failure. Merger failure guarantees a huge additional gravitational force bearing down upon your firm, preventing forward momentum and profitability.

Expertly executed merger integration clearly defines the exact business units, systems, and practices that will be melded into one. Of equal importance, the business components that will remain autonomous are also clearly planned and communicated to the new organization. Chapter 6 introduces a full array of foundations and integration tools you must use to create — in advance of the merger announcement — a crystal-clear plan integrating the two firms quickly and successfully. We look at examples of companies, including General Electric, Southwest Airlines, and Swiss Bank Corp., that executed their merger and acquisition integration and actually accelerated their forward momentum, achieving the necessary speed to outrun the competition.

STRATEGY 6: COMPOSITE STRATEGY

The best global growth firms simply cannot sprint past their competitors using a single strategy. The world is far too complex and fast-changing for any old-fashioned static strategy to work. Thus, your firm's selection of the best composite strategy is the ultimate weapon to captilize on merger chaos. To most effectively profit from all aspects of rampant consolidation, you must link together the key set of dynamic strategies available to your firm. Your team can exploit others' merger chaos and keep those firms pushed into the pack of market competitors while simultaneously driving forward your own winning mergers, acquisitions, or merger alternatives. By executing two or more clear strategies that others tend to ignore or execute poorly, you gain speed to race faster than the competition.

In today's technologically fast-changing business environment, the windows of opportunity for strategic attacks often are open only briefly and close quickly. More importantly, if you do not exploit an opportunity, your direct competitors will. This turns the tables, giving them additional resources, time, market share, and profits. There are no neutral choices here.

Complex competitive multinational environments, in particular, always require a composite strategy to vault beyond the pack. In just eighteen months, Michael Armstrong completely transformed AT&T from a slow-moving long-distance telephone bureaucracy into a potential Internet juggernaut, using a complicated series of acquisitions, global alliances, strategic attacks, internal changes, and several key merger alternatives.

Today's rapidly converging industries drive the momentum of change and, for most firms, create an imperative for flexibility and require a multiple strategy approach. By learning how to use and to combine the options available in our first five key strategies — (1) creating a magnet strategy to exploit merging competitors, (2) attacking while competitors are distracted by merger chaos, (3) jump-starting internal change, (4) using multiple merger alternatives, and (5) fast-track acquisitions or mergers — you develop essential skills for dynamic flexibility. However, you and your team must create a unique composite strategy by combining two or more of these strategies to best exploit the vast array of current opportunities offered in your industry. You can only win in the consolidating world if you accurately identify, assess, and implement the most appropriate specific strategy for each market. You must develop the versatility to combine different groupings of our strategies, coupled with others unique to your situation, simultaneously when necessary.

Chapter 7 demonstrates how market leaders, including The Home Depot, Toyota, Procter & Gamble, AT&T, British Airways, and General Electric, all depend upon complex composite strategies. They exploit every opportunity to both capitalize on merging competitors and drive forward with their own consolidations.

THE DOUBLE-EDGED SWORD

These six strategies are your key for exploiting the vast new opportunities created by record levels of mergers and acquisitions. But you must embrace a panoramic perspective of the world around you. An "eat or be eaten" outlook guarantees you will miss out on many prime strategic opportunities created by many consolidating industries. These strategies are your key for racing past and staying ahead of the competition — your key to profit from tidal waves of consolidation.

In the combining industry, you must succeed and you must not fail. The rewards of successful mergers, merger alternatives, and non-merger strategies can be so enormous and the damage of losing so destructive that you must be ever-vigilant to do both — win and not lose. Much like the hand-to-hand, to-the-death gladiator battles of times past, often there is only one outcome that will allow your firm to become a market leader.

When your firm wins on the consolidation battlefield you are rewarded with a major source of competitive advantage. But severe injury results from failed mergers and you place massive self-imposed gravitational forces on your firm. The merger process confronts any company with a risk-versus-reward tradeoff that is like a dynamic fulcrum — with diametrically opposed outcomes.

If your firm effectively navigates the tidal waves of consolidation, your benefits are doubled — you are strengthened financially, organizationally, and reputationally while your competitors are simultaneously weakened. You are handed a double-edged sword, the greatest new strategic weapon in your arsenal.

But this double-edged sword can work against you just as it can work for you. When you fail in your strategic and operational navigation you hand the sword to your competitors, who then benefit directly at your expense. They steal your momentum, initiatives, and your best employees and block your opportunities. Your mistakes fuel their forward thrust while your firm suffers as a market follower.

THE GREAT ACQUIRER

Your merger or acquisition must be properly planned and executed. Not only do financial benefits come sooner, but the risks of a confused organization and financial losses are minimized and the flight of your top talent can be prevented. Yet the more powerful, far longer-term benefits your firm derives from successful acquisitions stretch well beyond simple rates of return or market share gains. You can virtually create a new vital core competency as a "Great Acquirer" with financial, managerial, and reputational benefits that cascade into the future.

What are the far-reaching advantages to General Electric, Cisco, and Ford, all possessing well-known track records of merger and acquisition excellence? The Great Acquirer gains a "halo effect" which can leverage the firm's limited resources several times over. The well-known skillful acquirer can become the "merger partner of choice." In quickly consolidating industries, like financial services, Great Acquirers are often approached by potential targets. CEOs of target firms openly request to be purchased. Whether these CEOs' motivation is protection from a hostile suitor, or maximization of their own or their shareholders' wealth, they are willing, indeed eager, to jump into the arms of a star quality acquirer.

In early 1999, Ford Motor Company reaped big dividends for being a Great Acquirer. As the consolidating world automotive industry rushed to find suitable partners in the late 1990s, Ford was richly rewarded with the prized and profitable automotive operations of AB Volvo. No explanation of our Great Acquirer concept could be more precisely stated than the Ford/Volvo merger account in The Wall Street Journal: "As the smaller auto makers look for bigger partners in the global consolidation of the auto industry, Ford has emerged as the 'acquirer of choice,' industry experts say. That is because the No. 2 auto maker world-wide has a track record of treating its acquisitions well by injecting capital and expertise without diluting a brand's character. The most visible examples are Britain's Jaguar Cars Ltd., which Ford acquired in 1989, and Japan's Mazda Motor Corp., in which Ford holds a controlling one-third stake."

The halo effect develops a self-fulfilling momentum. Great Acquirers are not only approached as white knights in hostile takeover situations, but they are approached with many more attractive opportunities than average firms. Because of the halo, over the long haul, successful acquirers retain far more top managers and the highest skilled employees. Their deep talent pool gives them the needed capability to continually beat their competition.

Additionally, the world is very forgiving in the case of the Great Acquirer. As celebrated as GE is in conducting successful mergers, they have had some terrible disasters. Their acquisitions of Kidder Peabody and Montgomery Ward were miserable failures. Kidder Peabody's trading scheme scandal resulted in a 1.2 billion loss before GE pulled the plug and sold Kidder to PaineWebber. The Montgomery Ward acquisition fared even worse, ending in bankruptcy. But, because GE has such a powerful track record with hundreds of successful acquisitions, investors and Wall Street viewed the Kidder and Montgomery Ward failures as simple aberrations. GE has a positive halo. Faith in GE was never eroded. In fact, GE sits as king of the corporate mountain as Fortune magazine's "World's Most Admired Company."

A company possessing a halo of success can turn what otherwise can be a tense hostile merger negotiation and painful integration into a positive, constructive partnership for both firms. This halo effect often speeds the merger process by reducing antagonism and building employee confidence and commitment, and therefore achieves profits far earlier than in the typical corporate acquisition.

The successful acquirer's halo provides its managers with a valuable pre-acquisition negotiation tool — they can use their halo to drive down control price premiums. When target company managers and shareholders see a record of strong merger success and well-executed merger integrations by the acquirer, they are far less likely to demand excessive premiums to accept a deal. Additionally, in the case of stock swaps, target shareholders will be far more inclined to hold onto shares of their new stock than to dump them quickly in the market. Most investors know that the history of merger success and financial gains from this firm with a halo will bring excellent shareholder returns. Because investors are far less inclined to cash out and run, the halo company's stock price remains far more stable during periods of continuing mergers and acquisitions, when compared to less-well-thought-of firms whose stock price tends to fluctuate downward during each merger attempt.

Shareholders of GE's acquisition targets have experienced just this financial success. GE's market capitalization soared to over 500 billion by the end of 1999, making it one of the world's most valuable companies. Part of this drive to GE's record corporation valuation was created by thousands of its acquired company shareholders holding tightly to their newly secured GE shares. When target shareholders see the chance to trade for shares of a Great Acquirer, they do not need huge control price premiums to make the deal palatable. It is sweet enough already. However, the real power of GE's halo is its crucial strategic leverage, which acts as a financial multiplier. For example, GE's financial division GE Capital's total of over three hundred mergers and acquisitions purchased at deep financial discounts or almost no acquisition control price premiums has literally produced many hundreds of millions, and in some cases billions, of dollars in combined investment savings and immediately increased profitability to GE each year.

The Negative Halo

Conversely, when a firm earns a reputation as an unacceptable partner, it in fact creates a "negative halo" with damages that cascade into the future. All the benefits to the good acquirer are exactly reversed. It must pay much higher control premiums to have an acquisition offer accepted. A firm with a reputation for merger failures multiplies the fears of harm or damage caused by harshly negative synergies. Many firms' gross merger failures have driven them into a "death spiral." The conglomerate graveyards of the 1970s are littered with terminally failed mergers. Many failed mergers lose their competitive and forward momentum. Union Pacific railroad alone had seriously damaged its reputation, which they are still trying to repair. Because their poorly managed merger with Southern Pacific had justifiably received enormous negative media coverage for over two years, Union's ability to effectively conduct business in many other arenas was severely diminished.

A firm that earns the reputation as a bad merger partner finds fewer opportunities, not only in additional mergers and acquisitions, but also for strategic alliances, joint ventures, and preferential treatment from customers and suppliers. A diminished ability to attract and retain top talent and an increased cost of capital are the harsh realities of the negative halo.

* * *

The following chapters describe the six strategies to Capitalize on Merger Chaos in detail. Each strategy can become a facet of your diamond-like overall strategy. When crafted and executed with skill and precision, the brilliance that can be achieved far exceeds the sum of the individual parts. Your strategy must produce the most radiance — the most profits, market share, and shareholder wealth. Only then can you achieve and sustain the ultimate business success — becoming number one in your industry.

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Capitalize on Merger Chaos : Six Ways to Profit from Your Competitors' Consolidation and Your Own

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