March 7, 2008

Apple's Business Call

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February 28, 2008

Citigroup selling consumer-finance operations to rellocate scarce resources

Citi's Focus: Out With Old,
In With Profit Drivers

The wall street journal, February 20, 2008; Page C3

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Dow Chemical Reviews Plastics Business

Dow Chemical Reviews Plastics Business
Options Include Sale
And Joint Ventures
Amid a Shift to Growth
February 26, 2008; Page B10
Wall Street Journal

Dow Chemical Co. is reviewing several of its traditional chemicals and plastics businesses as the company shifts its focus to higher-growth operations.
The chemical giant said it is creating a new business group, Dow Portfolio Optimization, that will evaluate what to do with several businesses that produce plastics used in compact discs, auto tires and food packaging, among other products. The businesses in the new unit generate around $2 billion a year in revenue, said George Biltz, the head of the new group. Dow posted more than $50 billion in sales in 2007.
• The News: Dow Chemical is reviewing several of its traditional chemicals and plastics businesses as the company shifts its focus to higher-growth operations.
• Behind the News: Western chemicals companies face increasing competition from rivals in developing countries.
• The Shift: Dow and others are moving into specialty chemicals, but rivals are following.
The company said it will explore different options for the businesses, including selling them, entering joint ventures or blending them into another company division.
"As we look at where Dow is heading, we want to look for a financial fit, as well as a strategic fit," said Mr. Biltz, who formerly ran Dow's specialty plastics and elastomers portfolio, which included several of the businesses being reviewed.
At 4 p.m. in New York Stock Exchange composite trading, shares of Dow were up 0.65%, or 25 cents, at $39.
Companies in developing regions, such as Asia and the Middle East, are producing more specialty chemicals, increasing competition for the North American and European chemical industries. Many of these firms also have access to cheaper natural gas, a major feedstock, and are pulling down international prices.
Dow's strategy for the past few years has been to expand its specialty-chemical business, which is more profitable and less exposed to the ups and downs of energy markets. The company derives about 50% of its revenue from commodity chemicals, the basic building blocks for more sophisticated chemicals.
Although the businesses under evaluation are part of Dow's specialty-plastics unit, many of the products they make are subject to the same price pressures as commodity chemicals, says Hassan Ahmed, an analyst with HSBC Securities Inc. "If you look at the variety of subgroups [Dow is evaluating], a lot of them aren't really that special," he said.
Given the intense competition in the chemicals industry, rivals immediately try to match when one company comes out with an innovative product, he said. For example, products such as polycarbonates, which are used to make CDs and DVDs, were at the most specialized end of the spectrum less than a decade ago. Today they are fairly common.
Whatever Dow decides to do with the units under review, it will have a small impact on its bottom line, analysts say.
For the moment, the main focus is on a proposed joint venture with Kuwait Petroleum Corp. announced by Dow in December. Under the deal, Dow will shed a big chunk of its less profitable assets by selling a 50% stake in several plants to the Kuwaiti company for $9.5 billion.
"The key investors are looking at is what Dow will do with the money," said Frank Mitsch, managing director at BB&T Capital Markets, which is seeking investment-banking business with Dow.
Dow has said it will use the cash to make an acquisition or for a share buyback. The deal is expected to close before the end of the year.

Celebrity Chef Sells His TV Shows and Products to Martha Stewart

The New York Times
February 20, 2008

Correction Appended

Is there room in the well-appointed house of Martha for another larger-than-life name brand?

Martha Stewart and her new partner, the television chef Emeril Lagasse, are betting that there is. Several pieces of Mr. Lagasse’s culinary franchise were sold to Martha Stewart Living Omnimedia on Tuesday for $45 million in cash and $5 million in stock, the first major acquisition by Ms. Stewart’s media and merchandising company.

Industry analysts said the deal would enable Mr. Lagasse to “kick it up a notch? by benefiting from Martha Stewart Living’s brand expertise.

In the transaction, Martha Stewart Living will acquire the rights to Mr. Lagasse’s television shows, cookbooks, Web site and licensed products. His 11 restaurants will remain privately owned. In an interview, Ms. Stewart said the two brands would be compatible.

“His tastes are very different from mine, as is his food, and I think that’s good,? she said. “Being complementary and different is better than being competitive.?

Ms. Stewart is thought unlikely to develop an electric grill anytime soon, but it would be a natural brand extension for Mr. Lagasse. In addition, the chef’s brand stands to gain from Martha Stewart Living’s experience developing product lines for Kmart, Macy’s and Costco.

Susan Lyne, the company’s chief executive, said Mr. Lagasse had a profitable business model that would immediately contribute to Martha Stewart Living.David Bank, an analyst with RBC Capital Markets, called the acquisition of Mr. Lagasse’s brand a home run.

“It’s a great brand extension and it diversifies the risk away from pure reliance on the Martha Stewart brand,? Mr. Bank said. “It allows them to exploit another valuable brand in a related space.?

Most of Mr. Lagasse’s revenue comes from his two Food Network television shows and the licensing of his name and likeness for cookware, cutlery, kitchen appliances, sauces and spices.

The older of the two programs, “Essence of Emeril,? went off the air in 1996 and returned in 2000 in a new form. It continues to be produced. The other program, “Emeril Live,? ran from 1997 to 2007. In a statement, the channel said it looked forward to working with him on future projects.

Martha Stewart Living may also pursue international sales of the shows. “We certainly see more TV for him,? Ms. Lyne said.

Mr. Lagasse is also expected to contribute to the company’s Everyday Food magazine.

Separately, Martha Stewart Living announced the acquisition of a 40 percent stake in the Web site The two properties will share content and advertising revenue.

The purchase came on a day that Martha Stewart Living posted disappointing quarterly results and forecast full-year revenue below expectations.

In the fourth quarter, the company’s profit roughly doubled from the period a year earlier, to $33.3 million, or 63 cents a share, slightly below estimates. Its stock closed up $1.06 on Tuesday, or 17 percent, to $7.19, still down sharply from a 52-week high of $19.50 last February.

Aided by publishing and merchandise earnings, the company posted full-year operating income of $7.7 million on revenue of $327.9 million. Excluding any effect from the two deals, it forecast 2008 operating income of $9.5 million to $14.5 million on revenue of $300 million.

Copyright 2008 The New York Times Company

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GM to Expand Its Ethanol Capabilty
Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 7, 2008.

General Motors Corp. said half of its U.S. vehicle volume will be able to run on ethanol by 2012, just as partner Coskata Inc. is expected to be ramping up ethanol production.
In a speech at the Chicago Auto Show, GM North America President Troy Clarke said GM will have 11 ethanol-capable vehicles on the market this year and 15 in 2009. Mr. Clarke also announced that GM will be producing its first four-cylinder ethanol-capable model, the FlexFuel Chevrolet HHR, in 2010.
"We don't only want to respond to the needs of the market. We want to anticipate them," Mr. Clarke said.
Mr. Clarke also said that Warrenville, Ill.-based Coskata, which announced its partnership with GM in January, has formed an alliance with ethanol-plant engineering firm ICM Inc. to build its first plant, which is expected to open in late 2010.
Coskata President and Chief Executive Bill Roe said the company plans to announce the location of that plant and another plant in the next few weeks, and construction on both will start this year. ICM's production process currently is being used for half of all U.S. ethanol production.
Coskata said it will be able to mass-produce ethanol at the plant for less than $1 a gallon using a unique process that converts feedstock, biomass, agricultural waste and even municipal solid waste to ethanol.
Mr. Clarke said GM is continuing to research hybrids, plug-in electric vehicles and other fuel-saving technology, but believes ethanol can provide the quickest reduction in emissions. The U.S. already has a fueling infrastructure for ethanol, and consumers would have to make minimal changes in behavior, he said.
He said that if GM, Ford Motor Co. and Chrysler LLC meet their promises for the number of ethanol-capable vehicles they will have on the road by 2020, there would be a reduction of 29 billion gallons of fuel annually, or 18% of the country's usage. GM now has 2.5 million ethanol-capable vehicles on the road and expects to have up to 20 million by 2020, Mr. Clarke said.

Bank of America's Big Gamble

Jan 11th 2008 | NEW YORK

Buying Countrywide for $4 billion

AFTER America’s savings-and-loan crisis in the 1980s, in which hundreds of mortgage banks went bust when interest rates moved against them, fortunes were made by those who sifted through the wreckage for bargains. The same will be true of the current credit crunch. But when is the time to pounce? Bank of America (BofA) dipped a toe in last August, securing 16% of troubled Countrywide, the country’s largest mortgage lender, for $2 billion. That proved premature, with Countrywide’s shares tumbling further as gloom over America’s housing market deepened. Now BofA is having another, bolder go. “[W]here there are challenges there are also opportunities,? said Ken Lewis, BofA’s boss, on Friday January 11th after announcing a full, all-share takeover of Countrywide for $4 billion.

Countrywide, battered by an over-reliance on fickle wholesale funding and by fast-rising delinquencies (in good-quality mortgages as well as subprime ones) had been forced several times to deny that it was about to go bust. Banking is about confidence, and the markets did not believe its claims to have ample liquidity. Wall Street firms were increasingly worried that Countrywide would default on the huge pile of derivatives contracts it had struck with them in an effort to hedge its mortgage exposures. Regulators, too, were nervous: the liabilities of Countrywide’s bank had ballooned as it offered depositors high rates to keep itself funded. This raised the uncomfortable prospect of big payouts by the Federal Deposit Insurance Corporation, should Countrywide have had to file for bankrupcty. Regulators probably helped to smooth the deal’s passage.

It carries big risks for BofA. It is buying a mortgage book that continues to deteriorate. Countrywide also faces a welter of lawsuits over its marketing of subprime loans. That said, the price looks potentially alluring—a mere eighth of Countrywide’s value a few months ago. Mr Lewis has long said that he likes the mortgage business, in which BofA trails its peers, but he feels that the mortgage companies themselves have been valued too highly. No one knows if that is still true of Countrywide, but there may be no better time to find out. And BofA, which has had teams poring over Countrywide’s books, probably knows its value better than any other outsider.

BofA perhaps felt compelled to intervene to protect its earlier investment. And it is better placed to act than others. It has been far less damaged by the mortgage mess than its arch-rival, Citigroup (though it has booked sizeable investment-banking losses). Having trailed for years, BofA is now worth $34 billion more than Citi. If the Countrywide deal pays off, it will be the undisputed leader in mortgages, as well as in credit cards (thanks to its purchase of MBNA three years ago) and overall retail banking (it is the only bank close to the 10% regulatory ceiling on nationwide deposits).

Countrywide’s attractions have been all but forgotten amid the über-pessimism over housing. It has 9m mortgage customers, to whom BofA will be itching to sell other financial products (though cross-selling is not easy). Its mortgage platform has unparalleled technology. The key will be to combine its loan-origination clout with BofA’s strength in distribution to investors. In short, Countrywide has plenty of franchise value.

Dick Bove, of Punk Ziegel, believes that mortgage lending remains a good business for banks because of its (generally) steady recurring income streams. Even in the short term, it will be attractive for careful lenders, since profit margins have widened as credit has dried up. BofA is promising caution. It will ringfence Countrywide’s non-performing loans, handing them to a special workout team. And it will stop making subprime loans altogether. Not that Countrywide is doing much of that anyway: it lent a mere $6m to subprime borrowers in December, down from $3.7 billion in the same month of 2006.

The risks of this deal should not be underplayed. But BofA will see advantages beyond a potential lift to its mortgage business. The deal neatly lets it breach the 10% deposit ceiling because, under an arcane law, a bank can do so if it is through a takeover of another bank with a thrift charter (which Countrywide has). And the takeover will let it curry favour with regulators and politicians who want to see the markets stabilise.

This does not necessarily herald a wave of consolidation: Countrywide was in a uniquely awful position. But more deals are likely as weaker banks look for a wing to nestle under. Washington Mutual, a big, struggling mortgage lender, has reportedly held preliminary merger talks with JP Morgan Chase. Citigroup and Merrill Lynch have tapped sovereign-wealth funds for capital and are returning for more. Both banks are expected to announce huge further writedowns when they post fourth-quarter results next week. These losses continue to cast gloom: stockmarkets fell after the Countrywide deal was unveiled.

Medtronic Adds Kyphon

Evelyn M. Rusli, 07.27.07, 2:45 PM ET

The world's leading supplier of medical devices is about to get a bit bigger. On Friday, Medtronic announced that it would acquire Kyphon in a deal worth $4.2 billion.

Shareholders of Kyphon (nasdaq: KYPH - news - people ), a spinal medical device company, will get $71 a share, a 31.8% premium over Thursday's closing price. According to Medtronic (nyse: MDT - news - people ), the deal will be neutral to the company's earnings in the first year after the deal closes and accretive thereafter. Eventually, the merger will "yield significant revenue, cost and tax synergies," Medtronic said Friday.

The news boosted Kyphon shares up 24.8%, or $13.33, to $67.01 in afternoon trading. Meanwhile shares of Medtronic were down 0.2%, or 12 cents, to $50.80.

By acquiring Kyphon, Medtronic will significantly expand its footprint in the spinal surgery business and boost its international presence. Currently, Medtronic specializes in devices for young patients with scoliosis and degenerative disc disease. Kyphon, on the other hand, focuses on older patients with vertebral compression fractures and spinal stenosis.

The Sunnyvale, Calif.-based company has made significant gains in its niche market, on Friday, the company reported that second quarter revenues climbed 43% to $144.3 million, while profits jumped 16% to 23 cents a share. Analysts were looking for earnings of 23 cents a share on revenue of $141.1 million.

Furthermore, Kyphon's existing relationships with interventional radiologists and interventional neuroradiologists--groups that Medtronic has not focused on in the past--will also help the company enlarge its global customer base.

"Together, the combined entity will be able to leverage its knowledge of modern fusion, dynamic stabilization, artificial disc replacement, biologics, vertebral augmentation, interspinous process decompression, disc disease diagnosis, navigation and minimally invasive techniques to serve patients with a broader variety of spinal disorders in order to alleviate pain and restore health for more patients," the companies said in a joint statement Friday.

The deal comes as Medtronic faces continued pressure in the U.S. implantable cardioverter defibrillator market (ICD). Although ICD sales are strong abroad, the U.S. market has been plagued by safety concerns. Over the last two years, Medtronic and a competitor, Guidant, have issued a spate of recalls. In response, physicians and hospitals have dramatically pulled back on referrals for ICD units amid safety and insurance reimbursement problems. (See: "Medtronic Up Despite U.S. Blues." )

By building its presence in the spinal device market, Medtronic may be looking to dilute its dependence on ICDs. Of course, Medtronic has other avenues, as its pipeline also includes diabetes, spinal, and cadiac surgery devices. Recently the company hinted that it is ready for a major acquisition.

According to analysts, a takeover, such as Kryhon, would dilute its financials--the company plans to pay for the deal with a combination of cash and debt--but it would help them further diversify their business and expand their earnings multiples.

“We expect our combination with Kyphon to help accelerate the growth of Medtronic’s existing spinal business by extending our product offerings into some of the fastest growing product segments and enabling us to provide physicians with a broader range of therapies for use at all stages of the care continuum,? Medtronic Chief Executive Art Collins said Friday. "Kyphon’s world-class, global sales force will play a central role in the continued development of our spinal business,? Collins concluded.

Tata deal drives Land Rover's future

Tata deal drives Land Rover's future
Christine Buckley, Industrial Editor

Ford is expected to seal the sale of Jaguar and Land Rover to Tata, the Indian conglomerate, next week after the American carmaker recently agreed to pump hundreds of millions of pounds into the pension fund to smooth the process.

The deal is expected to be welcomed by unions, who believe that there is no immediate threat to British jobs or manufacturing.

The two sides, which have been in exclusive talks since the beginning of the year, are expected to sign a deal worth up to $2 billion (£1 billion) next Wednesday or shortly afterwards. Ford has pledged to pay £300 million into the pension fund to clear its deficit. It has also given assurances over the long-term supply of engines and some other components to the two marques to ease union fears about their future. Tata is also thought to have pledged that production will remain in the UK in the near term.

Ford uses engines for Jaguar and Land Rover from its engine factories in Bridgend, South Wales, and Dagenham, Essex.

It is Tata's second big investment in Britain, after its purchase of Corus, the Anglo-Dutch steelmaker, last year, and is its first big move into the Western car industry. At present Jaguar and Land Rover use some Corus steel. Tata makes lorries and cars in India and recently unveiled its Nano people's car, which retails at £1,300.

The sale marks the end of nearly 20 years' association with Jaguar for Ford, after it bought the iconic British brand in 1989 for $2.5 billion, and eight years' ownership of Land Rover, which it bought in 2000 for $2.75 billion when BMW split up the Rover group. Ford has been pushed into a sale of some of its most respected brands by a need to stem spiralling losses after a tough market in the United States and, to a lesser extent, Europe.

In 2006 it recorded its worst ever losses at $12.7 billion. Last year, when it sold its flagship Aston Martin business, it pared back losses to $2.7 billion. Alan Mulally, the chief executive who took over Ford 18 months ago, decided to sell the British brands to raise cash but also to allow Ford to concentrate on its core, blue-badged cars. Ford had grouped its luxury brands into a Premier Automotive Group division, which also included Volvo, a marque that it is retaining.

The recovery of Land Rover after heavy investment was always weighed down by losses at Jaguar, a brand that it failed to revive barring the success of some individual models. Ford tried to turn Jaguar into a volume producer and used the Ford Mondeo platform as a base for its X-type Jaguar, which failed to sell in large numbers. Tata is believed to be committed to developing new Jaguar models, which are already in the pipeline.

Industry observers believe that there may need to be some rationalisation of Jaguar and Land Rover's facilities in the medium term because of the number of plants that the brands have. The most likely factory under threat could be Castle Bromwich, which makes the Jaguar range excluding the X-type. Apart from Castle Bromwich's new XF, the other cars that it produces - the XJ and the XK - are made in relatively small numbers.

Tata was backed in its bid by British unions after they decided that it had the best long-term plan for the business. At the start, the sale of Jaguar and Land Rover attracted a large amount of private equity interest, but this fell off in stages until there were two main players - Tata and One Equity Partners, which was led by Jacques Nasser, the former Ford chief.

The two marques had to be sold together because Ford had merged a number of their operations and supplies. The official announcement is being timed for after the Geneva motor show, so that the two companies can try to promote their products at the key European showcase.

Jaguar and Land Rover: the nuts and bolts

Jaguar and Land Rover shared facilities

Halewood, Merseyside

— Assembly plant makes Jaguar X-type and Land Rover Freelander

— Employees: 2,100

Gaydon, Warwickshire

— Design and engineering, marketing, sales and service

— Employees: 2,890

Jaguar facilities

Castle Bromwich

— Assembly plant for XF, XJ and XK

— Employees: 2,200

Browns Lane

— Veneer manufacturing, heritage centre

— Employees: 490


— Design, research and development

— Employees: 1,980

Land Rover facilities


— Assembly plant makes Range Rover, Land Rover Discovery and Defender

— Employees: 5,730

WSJ Northrop, Loral Hook Up To Get U.S. Satellite Work

Northrop, Loral Hook Up
To Get U.S. Satellite Work
February 28, 2008

Seeking to create a potentially powerful new competitor for building future U.S. government satellites, Northrop Grumman Corp. and Loral Space & Communications Inc. announced a strategic partnership to share certain technology and production assets.

The venture aims to shake up the satellite industry by combining Northrop's history providing advanced sensors and spy-satellite systems to military, intelligence and other federal customers with Loral's track record of manufacturing lower-cost commercial satellites.

If successful, the arrangement announced yesterday could cut production costs and make Northrop a more-effective rival against Boeing Co. and Lockheed Martin Corp., the perennial top U.S. government satellite suppliers.

Northrop's management has been frustrated at being unable to break into that top tier as a prime contractor. For Loral, which faces severe production constraints at a time of rising orders for commercial satellites, the arrangement provides needed additional testing and integration facilities.

Without the help, Loral may have been forced to delay some projects and avoid bidding on others, said Pat DeWitt, chief executive of Loral's satellite-making unit. At the same time, by leveraging Northrop's close ties to national security programs and civilian research organizations, Loral hopes to realize its long-term goal of snaring U.S. government work.

But underscoring the extent of the challenge, Mr. DeWitt said "it remains to be seen whether the collaboration" can gain enough orders to "put us on a par with" the industry leaders. Capping roughly about six months of closely held discussions, the concept already has prompted the two companies to discuss submitting a joint bid for the next version of U.S. Earth-observation satellites.

Eventually, the aim is to also find a way to market dual commercial and military satellites, featuring capacity for military communications as well as corporate customers on the same orbiting platform. With defense spending on space under escalating pressure, such novel projects are coming into favor. The agreement in principle envisions cooperative efforts through much of the next decade. It also comes at a time of increasing international consolidation among second-tier satellite makers and space component manufacturers.

Taking advantage of that trend, Northrop previously announced efforts to launch cooperative programs with Israel Aerospace Industries Ltd. And according to Northrop officials, it is pursuing innovative space technology from various other sources.

The strategy, according to Alexis Livanos, president of Northrop's Space Technology unit, is creating "a diverse soup of the best companies" boasting cutting-edge technologies, "working together with Northrop Grumman as the catalyst."

Write to Andy Pasztor at

Diverging Fates for BenQ, Sony Ericsson

The Taiwanese manufacturer's mobile joint venture with Siemens will file for bankruptcy, while the No. 4 handset maker targets the top three
by Jo Best , Business Week

Two of the top 10 mobile companies are shaping up for some major changes: BenQ Mobile has filed for insolvency, while Sony Ericsson's CEO is predicting the company will enter the ranks of the top three handset manufacturers within the next five years.
BenQ Mobile was set up as a joint venture between Taiwanese hardware maker BenQ and Siemens, created when the German conglomerate sold off its struggling Com unit. BenQ Mobile has now filed for insolvency after just a year in business.
BenQ has announced it will not be making any further payments to BenQ Mobile, saying: "Both revenue and margin development will fall far short of expectations in the important Christmas quarter." As a result, BenQ Mobile Germany will now be forced to file for insolvency.
There will be around 3,000 staff affected by the change although BenQ Mobile intends to carry on operations under the brand name BenQ-Siemens. Siemens has also reportedly started a hardship fund for the staff, with some top execs donating planned pay rises.
Meanwhile, Sony Ericsson's CEO Miles Flint has told the Financial Times that the company is planning to become one of the top three mobile manufacturers. The company is currently number four by sales, according to analyst IDC, behind Nokia, Motorola and Samsung.
Flint told the FT: "Over time we have to become one of the top three manufacturers in the industry. I am reluctant to put a date on it but yes, given we are at the fifth anniversary [of the company's creation] it is logical to talk about the next five."
Flint is planning a new media campaign and is considering opening new stores across western Europe and Asia.

February 27, 2008

General Mills: Building Brand Champions

How training helps drive a core business process at General Mills
By Jack Gordon

When General Mills Inc. acquired Pillsbury in 2001, questions obviously arose about how best to integrate the two Minnesota-based packaged-food giants. Marketing was a special concern, given that both companies' brands were household names and even cultural icons. How would the Pillsbury Doughboy interact with Betty Crocker, the Jolly Green Giant, Cheerios, Wheaties, and the rest of the General Mills crew?

"When you double in size, everyone starts comparing notes about what they do and how they approach the customer," says Kevin Wilde, chief learning officer for General Mills. "We said, 'Let's get the best out of both of our marketing organizations. And let's not stop there.' " The question wasn't just how to identify, share, and integrate the best practices from both companies, Wilde says, but how to "move our expertise ahead" by searching out great brand-building ideas from other companies as well.

That goal led to the creation of a 4.5-day training program called "Brand Champions." Developed in 2002 and launched in 2003, the program to date has immersed more than 900 General Mills employees in the intricacies of how to build and maintain strong brands.

The stakes are high because consumers identify strongly with so many General Mills brands. When new package designs for Count Chocula and Frankenberry breakfast cereals were introduced in 2006, the new boxes appeared on eBay within a week, for sale to collectors.

In methodology, in follow-up, and in its link to vital business goals, Brand Champions has much to offer as an illustration of how excellent training can work.

Everyone a Brand-builder

The training program is not just for marketing specialists. Employees who work on particular brands attend in cross-functional teams—everyone on the Yoplait yogurt business team, for example, as well as people from outside advertising agencies involved with the Yoplait account.

The idea of bringing non-marketers to the course sprung from a general belief that "you can leverage beyond people's functional expertise," says Beth Gunderson, director of organization effectiveness. But specific benefits quickly became evident: "A person from human resources, for instance, would ask a provocative question [precisely because] she wasn't a marketer. And you'd see the look on the marketers' faces: 'Whoa, I never thought of that.' "

Including people from different functions also has served to improve communication throughout the company and reduce the level of uninformed griping among people with different specialties. "In any company," Gunderson says, "it's easy to cast stones at another function: 'Those marketers! What were they thinking?' But if you're in R&D [research and development], and you actually understand how the levers operate in other functions, it's harder to throw stones."

Ami Anderson, manager of marketing development and direct overseer of the Brand Champions program, says that workers in General Mills' production plants have asked for a "mini-version" of the course: "They want to understand the language marketers speak and why things are done as they are."

The program even helps General Mills attract talented new employees. The ability to say, "You'll get great training," is a powerful recruiting tool, says Wilde. "When we recruit MBAs on college campuses, we point to Brand Champions as an example of a program they'll experience early on."

Practice, Practice, Practice

The course is short on talk and long on action. Only about a fifth of it is lecture-based. The remaining 80 percent is devoted to hands-on exercises, with trainees working in teams to revitalize real brands from companies other than General Mills. Trainees zero in on a target audience, analyze that audience, choose unique benefits to communicate, and decide how to communicate those benefits. By the final day, trainees have developed an integrated marketing plan.

If the teams work with brands from other companies, don't they lack a great deal of research data that the actual sponsor would have? Yes, and for training purposes, that's an advantage, says Gunderson. "Market research data is great, but it becomes a crutch. When people are stripped of data, they're forced to think strategically about [matters such as] the underlying motivation of the consumer."

In fact, the brands often are ones that trainees don't use. "Unfamiliarity," Gunderson says, "makes you step back and think about what you can tell from their [the brands] packaging and positioning."

The course and its exercises emphasize factors such as how to define and hone in on a target audience. As Anderson puts it, "You can market hot tea or iced tea, [and there is a tendency to assume that] everyone must like warm tea, so warm tea would target both audiences. But then you realize you're targeting nobody. And, you can't just say, 'My target is women ages 18 to 49 who breathe in and out.' You have to know your customer. What is her day like?"

Once they have a clearly defined customer in mind, Anderson says, trainees tackle the question of how to communicate with that consumer. "How do I talk, in what language, with what vehicles, and when will they be open to the message?"

As trainees work out plans to build these outside brands, they also learn General Mills' own criteria for marketing and advertising campaigns, which are specific enough to be included in templates and checklists. The benefits? For one thing, Anderson says, when people evaluate "creative"—meaning TV or print advertisements, package designs, etc.—"everyone looks through a different lens. We teach people to use standard tools so that we're all looking at the same criteria to decide whether this is a good General Mills ad."

Standard criteria make life easier for outside advertising agencies, as well. Instead of hearing, "This just doesn't work for me," the agencies can operate from the same page as General Mills' marketing people, everyone using the same decision factors to determine exactly why an ad either works or doesn't.

"The feedback we get is that people come out of the course looking at brands and consumers in a whole new way," Anderson says.


To keep the learning fresh, relevant, and growing, General Mills follows up on the core 4.5-day Brand Champions program in at least two regular and formal ways.

One is a monthly online presentation sent to program "graduates" via e-mail. Anderson builds each presentation around an interesting branding effort she finds in the market, ending with key learning points.

For instance, one recent case was a "" television campaign by State Farm Insurance. In the commercials, a man's car door is blasted off by another vehicle, or a woman hands her car keys to a thief, mistaking him for a parking valet. Now what? the ad asks, and directs the viewer to When they go online, 18- to 25-year-old target consumers discover that they're dealing with State Farm Insurance, "hich they thought was their grandparents? insurance company," Anderson says. From August to October last year, State Farm saw a 10 percent increase in business from that target group, she says. "Okay, what can we learn from that?" ponders Anderson.

The second follow-up effort, called "First Wednesday" because it occurs on the first Wednesday of each month, is a live-speaker session. Recent guest presenters have included J. Walker Smith, president of marketing agency Yankelovich Inc., and Renee Mauborgne, co-author of Blue Ocean Strategy.

Like the e-mail presentations, the live events usually start by spotlighting significant developments in the marketing landscape: A meal-delivery service in India counts the calories in the food it delivers to homes. Coca-Cola and Nestle have partnered to develop a beverage that goes beyond the low-cal trend by actually burning calories. ("We don?t make beverages, but that's important," Anderson says.)

Home-furnishings chain Ikea has begun to sell not only furniture that the customer assembles at home but also Swedish meatballs and other food to be "assembled" at home.

A furniture store sells Swedish meatballs? Too sophisticated for cliches like "thinking outside the box," Anderson calls this an example of "laddering up what your brand stands for." And it has implications for General Mills. "For instance, Cheerios is a lot more than just a cereal. It's often a child?s first finger food. The target audience for Cheerios can be anyone from a baby to a 100-year-old."

After touching on cases such as Ikea and calorie-burning drinks, First Wednesday sessions move on to a segment called "Brand Champions at Work," which trumpet and analyze the recent successes of teams working on particular General Mills brands. In one brand team, for instance, the idea of getting more fiber in your diet led to thinking about how to visualize fiber, which then led to images of how many bowls of food such as broccoli a person would have to eat to get the amount of fiber contained in a bowl of Fiber One cereal. Thanks in large part to an ad campaign based on that idea, Anderson says, General Mills' Fiber One brand saw 26 percent growth in 2006.

Similarly, Betty Crocker is very well-known for packaged cake mixes, but less so for cookie mixes. Inspired by Brand Champions training, the cookie-mix team raised its sights to go after scratch bakers—a market 20 times the size of mix bakers. In other words, Anderson says, the team was "taking on grandma." The Betty Crocker mixes were reformulated until they could support advertising claims that the chocolate chip mix, for instance, tasted as good as Nestle's Original Toll House recipe. The campaign generated 15 percent growth for the Betty Crocker brand, which now owns 90 percent of the dry cookie mix category.

By calling out such triumphs, the trainers have an agenda that goes beyond pure learning. Marketing teams within the company are very competitive, says Wilde, "and when they see another team's success highlighted in Brand Champions at Work, they want to be next."

Thus, neither the learning nor the thinking nor the motivation generated by the core training program is allowed to fade. In a company where branding is a core business driver, the training function never lets go of the steering wheel.

Sidebar: Brand Builder Bios

Kevin D. Wilde, vice president, organization effectiveness, and CLO
How long at General Mills/in current position: 8 years
Prior positions: Spent 17 years at General Electric in a variety of roles, including global leadership development manager at Crotonville
Education: MS, Administrative Leadership and Adult Education, University of Wisconsin-Milwaukee; BS, Marketing and Education, University of Wisconsin-Stout

Ami Anderson, manager of Marketing Development
How long at General Mills/in current position: Five months, yet has been at General Mills for 12 years
Prior positions: Before General Mills, Anderson was a promotions assistant at Kraft General Foods.
Education: MBA, Marketing, Wharton-University of Pennsylvania; BS, Marketing, Franklin Pierce College

Beth Gunderson, director of organization effectiveness
How long at General Mills/in current position: Gunderson has been at General Mills for 20 years and in her current position for 10 years.
Prior positions: Gunderson has held positions in sales and technical service packaging materials.
Education: M.Ed., HR Development/Organization Effectiveness, St. Thomas University; BS, Package Engineering, University of Wisconsin-Stout

Renault and Nissan: Forging a Global Alliance That is Greater Than the Sum of Its Parts

Prepared by Cisco Systems, Inc.
Internet Business Solutions Group

How do two culturally different auto makers come together under the umbrella of a shared vision?
Renaultand Nissan are building a powerful alliance that optimizes both companies’ strengths and resources.
Innovation and technology are critical to their global business transformation.

On March 27, 1999, the Renault group and Nissan Motor Co., Ltd. made automotive history by entering into an agree-
ment to form an alliance—
the first industrial and commercial alliance of its kind between a French and a Japanese company.
The intent: to create a powerful automotive group by boosting
the performance of both Renault and Nissan through wide-
ranging cooperation, while preserving the two companies’ distinct identities.

Developing Synergy
“It’s very important to understand that the Alliance is formed by two companies
with clearly different identities and clearly different brands,
but with the purpose of developing as much synergy as possible to enforce each other’s performance,? says
Carlos Ghosn, president and chief executive officer of Nissan.
“The Alliance is about respecting differences because differences are a source of wealth.?
Today, the combined production of Renault and Nissan, at more than five million vehicles a year,
represents more than nine percent of the global market.
The Alliance is one of the top five carmakers in the world with its five brands: Nissan
and Infiniti for the Nissan group; and Renault, Dacia, and Samsung for the Renault group.

Just as there were opportunities for success with the Alliance, there was also the potential for failure.
It all came down to execution, and the first order of business was a turnaround at Nissan.
Nissan lost both money and market share during the 1990s, and by the end of 1998 it labored under a
debt load that reached US$19.4 billion. Financial and managerial resources provided by Renault—includ-
ing CEO Carlos Ghosn and CFO Thierry Moulonguet—generated a decisive impetus for recovery.
The turnaround plan produced rapid results and the company returned to profitability in 2001.

A Two-Fold Strategy
As Nissan completed its turnaround and the Alliance began to take shape, the executive team set its
sights on profitability and growth. “The turnaround of Nissan is a great story but it is just the start, the
first step in the deployment of the Alliance,? says Thierry Moulonguet, executive vice president and chief
financial officer, Renault.
“The signature of this revival is growth, and for us profit and growth go together.?
To achieve this two-fold strategy, Renault and Nissan first needed to find the delicate balance between
maintaining the individual uniqueness of each company and optimizing their combined global resources.

The executive teams launched a program of change management aimed at creating a global network of
people sharing a singular vision: to build the best cars in the world.
“To achieve the level of performance necessary, we knew we needed new IS/IT [information systems/information technology] capabilities,? Moulonguet says.

Workforce Integration at Nissan
“Being global means that we need to provide information in real time, not only to our employees but also
to our customers, suppliers, and dealers,? says Celso Guiotoko, vice president and CIO, Nissan.
“We are working very closely in France, in Japan, and in the United States to deliver a strategic project we call
WIN, or Workforce Integration @ Nissan.
WIN will provide the tools and technology to take Nissan to the next level in terms of communication and productivity.?
WIN offers human resource capabilities through self-service applications, as well as through real-time
access to people and information. The network, based on Cisco Systems® equipment and technology,
also helps enable standardized online supply chain and procurement systems that will streamline supplier inter-
actions. To support this transformation, Nissan is upgrading its data center and adding storage area net-
working capabilities to handle the large quantities of information that will be moving across the network.
“The bar is being raised in every area, and speed is becoming more and more critical,? says Jim Morton,
senior vice president, finance administration, Nissan. “We can meet the challenge if we have the right
tools, and WIN is one of those tools.?

Renault-Nissan Information Services
Sharing leading practices is a fundamental principle of the alliance and, in July 2002, Renault-Nissan
Information Services (RNIS) was established to deliver cost-effective systems and optimized infrastructure
for the two groups’ IS/IT departments.
“Information technologies and systems are enabling tools to transform the business processes of our two
companies,? says Farid Aractingi, managing director, Renault-Nissan Information Services.
“We created RNIS to deliver value by serving as a global repository of core IT competencies that we can use to benefit the Alliance. It is much faster than creating it in each company.?
RNIS is a joint company, created to benefit both Renault and Nissan by identifying ways to align processes
in two organizations with different cultures, languages, histories, and time zones. The expectation is that
employees in every function within Renault and Nissan will learn to use online collaboration tools to trans-
form the way they work.

Renault-Nissan Purchasing Organization
Another joint company, Renault-Nissan Purchasing Organization (RNPO), is also part of the strategic
plan. Created in 2001 to manage 30 percent of the total annual purchasing of Renault and Nissan with
online systems, by 2002 that total increased to 43 percent, representing an annual purchasing volume of
US$21.5 billion. By July 2003, the Renault-Nissan Alliance Board raised the purchase amount to US$33
billion, representing 70 percent of Alliance purchasing. The collaboration and information sharing to
make a global purchasing organization successful would not be possible without investments in the
enabling technology.

A Global Partnership
The Cisco® global account team worked closely with Renault and Nissan to evolve the existing IS/IT sys-
tems. “Cisco was one of the first companies to understand that Renault and Nissan must be dealt with as
a global group and not as the addition of two entities,? Moulonguet says.
The Cisco Internet Business Solutions Group (IBSG) provided leading practices and information-sharing
sessions to help shape the structure of the organization, refine business processes, and define measures of
success. “The feedback, the conversations, and the consultancy from the IBSG team have been very fruit-
ful for the creation of RNIS, which was a difficult task,? Aractingi says. “We rate Cisco as our preferred
partner in terms of network and telecommunications solutions.
“The combination of product complexity and mass production makes it very important to rely on IT to
transform processes, reduce the lifecycles of new products, and change the working habits of our employ-
ees,? he says. “With RNIS, we are focused on building a common future together.?

The Alliance’s evolving IP Communications platform is making it easy for people to talk and work
together more effectively across both companies. “We have been able to launch between 7 and 10 new
products starting in 2002 and are continuing that pace—this couldn’t have been achieved without very
efficient IS/IT systems,? Moulonguet says. Today, engineers from Renault and Nissan can work together
from distant parts of the world through the communication tools and connections that are now in place.
“The WIN program aims to transform the workplace,? Ghosn says. “It provides e-learning, e-meetings,
and chat rooms between specialists.? Now instead of having to travel or use the telephone, Renault and
Nissan employees can be in contact with tens or even hundreds of people in a true online collaboration.
“Common information systems and a common platform are enabling us to work together better,? he says.
This spirit of cooperation is gaining momentum within both Renault and Nissan.
“We are working together on big issues like the IS master plan,? says Jean-Pierre Corniou, chief informa-
tion officer, Renault. “The master plan is to increase velocity. We need to increase the speed of design,
engineering, manufacturing, and retail. Speed is a key factor of success in our business.?
Because this speed will only come when the tools and technology are put to use, adoption of the new
technology is very much on the minds of the executive team. “Our mission is not only to provide the best
tools, but to be sure that people are using them wisely,? Corniou says. Ghosn agrees. “You can’t trans-
form the company if you don’t transform the behavior and mindset of the people,? he says.
Technology is not an end in itself for Renault and Nissan. Rather, it functions much like a powertrain, to
drive both organizations forward.
“Information technology is an enabler,? Ghosn says. “We are developing a lot of programs inside Nissan
and Renault, but the programs by themselves are not the goal. It’s how the programs are used that is
important.? The WIN program allows more people at Nissan and Renault to communicate and exchange
ideas instantly—something, according to Ghosn, that wasn’t possible in the past.
WIN is expected to improve the productivity of every employee by two hours per day. This savings is
significant in an industry where speed to market is a compelling differentiator.
“It takes a long time to make a new car, and by using more and more digital tools, our intention is to
reduce this lifecycle by 50 percent,? Aractingi says. “With digital tools we already have reduced the time
between design and production of new products from 20 months to 10 months. Clearly, the capacity to
work together as a team at anytime from anywhere is crucial—it is the heart of the transformation.?

With its new IP infrastructure taking shape, Renault and Nissan are ready to embrace new technology.
Renault is taking the first step with a strategic decision to install IP telephony in its offices in France. This
is phase one of a strategy to move to IP Communications worldwide.
Renault and Nissan are also focusing on the importance of technology inside their vehicles. “People want
to be able to call, work, connect, and have information online while they’re driving, and in a safe way,?
Ghosn says. “It is important for us to deliver this in a user-friendly way that provides value that is much
greater than the cost for the consumer.?

Growing Pains: Adapting After a Merger


Growing Pains: Adapting After a Merger
Wall Street Journal
February 26, 2008

After entrepreneur Dieter Weidenbrueck sold his technical-illustration software company to a much-larger company in 2006, it was a struggle for him to adapt to the new environment.

"I fell into a big black hole," he says. "You go from having all the power in the world to a situation where you seem to have no power at all." He says he even considered quitting.

It's a situation faced by many who work at small companies that are acquired, from the founders to the staffers. They're used to working in close-knit, nimble environments, with more autonomy than a big company offers. Their new workplaces can seem maddeningly bureaucratic by contrast. Says Dennis Ceru, an adjunct professor at Babson College and a management consultant: "It's an emotional challenge that many find difficult to overcome."

When an entrepreneurial firm is acquired by a larger company, it can be tough for employees and -- the founder -- to adapt. WSJ's Erin White speaks with Jim Heppelmann, a senior executive at Parametric Technology Corp. and an entrepreneur.
Mr. Ceru recommends that entrepreneurial employees of acquired companies try to determine what they can gain from spending time working at a larger company. "Know oneself," he counsels. "Know what it is that you want, and what you're willing to do to get what you want."

Working at a larger company has advantages, of course. An acquiring company typically has more money, employees and customer contacts. It may also offer more stability, as well as the opportunity to learn skills, such as how to collaborate with peers across multiple divisions.

Part of the problem is that integrating new talent -- potentially a merger's great prize -- can be tough for the purchaser, which may not give it enough attention.

In an email Friday updating employees on Microsoft Corp.'s proposal to combine with Yahoo Inc., Kevin Johnson, head of the company's Platforms & Services Division, wrote about the importance of assuring that any integration planning be done in a collaborative way involving leaders from both companies. He also urged "an inclusive process with Yahoo employees, as they [would be] a key part of our success as a combined company."

When Mr. Weidenbrueck sold his company to Parametric Technology Corp., it had 40 employees and about $6 million in annual revenue. After joining Parametric, he maintained responsibility for his company's products, but his schedule was suddenly filled with endless meetings, and decisions he used to make quickly had to go through multiple stages and consultations.

Mr. Weidenbrueck became frustrated. He talked with Jim Heppelmann, an entrepreneur who had sold a small company to Parametric nearly a decade earlier and had since become a top executive at the product-development software maker. They discussed giving Mr. Weidenbrueck a position in which he could regain a sense of autonomy and influence. Mr. Weidenbrueck went from overseeing three products to nearly 30 today, accounting for roughly $60 million in revenue.

"The motivating thing is really that I've found a new challenge," Mr. Weidenbrueck says. He says he has no plans to leave.

Mr. Heppelmann spoke from experience. In 1998, Parametric acquired the 20-employee software company Mr. Heppelmann had founded two years earlier. It was a big change. "Decisions I used to be able to make all by myself now have to be negotiated with other people," he recalls thinking. He says he also ran into "a fair amount of frustration and complexity." And because he had made about $4 million on the sale, he didn't need to stay at Parametric for a salary.

But Mr. Heppelmann also saw opportunities. His company, named Windchill, a reference to its Minnesota roots, hadn't begun generating revenue when Parametric acquired it. He was excited by the prospect of having an army of salespeople and customer contacts from the larger company. "This product will be 10 times bigger and more successful than it would be if we stayed alone," Mr. Heppelmann recalls thinking.

To make it work, Mr. Heppelmann had to become a cheerleader. "I needed the executive team at the acquiring company to feel like they just acquired the hottest thing ever," he says. He also met with Parametric's biggest customers to sell them on his product.

It worked. In the first six months it was owned by Parametric, Windchill recorded $11 million in revenue; last year, it generated about $340 million. Nearly all of Windchill's 20 employees have stuck with Parametric. And Mr. Heppelmann has gotten a shot at a bigger management role. He's now executive vice president and chief product officer for Parametric, which has annual revenue of about $1 billion.

Managers at acquired companies who aren't founders face similar decisions. Guy Dubois was an executive at software maker PeopleSoft Inc. when rival Oracle Corp. made an unsolicited bid for the company in 2003. He didn't like the idea of working for Oracle, so he quit in February 2005, shortly after the deal was completed. A year later, he made a different decision.

By then, he was chief executive officer of Cramer Systems Group Ltd., a telecom-software company with about 500 employees and $100 million in annual revenue. He helped engineer a sale to Amdocs Ltd., another software company, which had about $3 billion in revenue for fiscal 2007, ended Sept. 30.

Mr. Dubois is now a top executive at Amdocs, and he has more resources to power his old company's products. "It is true I am not anymore the CEO; the CEO is my boss," he says. "But as long as you feel like you are accountable and able to design and define and execute the right strategy, I'm not sure I see a lot of difference."

Deals Without Delusions

IF YOUR FIRM IS LOOKING TO ACQUIRE, how can you tell whether a given deal is advantageous? Unfortunately, you can never be sure that any large organic or acquisition investment will pay off, which may explain why many firms shy away from purchases that might otherwise afford them important growth opportunities. The good news is that you can stack the odds in your favor by examining a psychological phenomenon that most executives never consider when making deals - the degree to which their own biases influence decisions.

Before we disentangle the biases, let's consider some facts about M&A nowadays. A typical large corporation derives 30% of its revenue growth through acquisitions. For a $10 billion company growing by 10% annually, that's $300 million in revenues a year. Our work has shown that companies that aggressively leverage acquisitions for growth are at least as successful in the eyes of the capital markets as those that focus on purely organic ways to grow. Nevertheless, recent research from McKinsey & Company reveals that approximately half of acquiring companies continue to pay more for acquisitions than they're worth. Certainly, firms are getting better at M&A - 2006 was almost a ten-year high in the percentage of shareholder value created through takeovers - but there's still plenty of room for improvement.

Many scholars have attributed the largest M&A mistakes to executive hubris in decision making, but having studied the psychology of the deal for over a decade, we believe this is only a small piece of the problem. Our insights have been confirmed by a recent McKinsey survey of executives responsible for M&A at 19 top U.S. firms. Each firm had derived at least 30% of its market value from acquisitions; the market rewarded some of these companies (their returns to shareholders exceeded those of peer firms) but did not reward others. Our analysis of responses from executives at these firms demonstrates how a variety of cognitive biases - systematic errors in processing information and making choices - can affect each step of the M&A process.

As we will show, when executives take a targeted debiasing approach to M&A, deals can be more successful. The approach requires executives first to identify the cognitive mechanisms at play during various decision-making steps and then to use a set of techniques to reduce bias at specific decision points, thereby leading to sounder judgments. (See the exhibit "How to Overcome Biases That Undermine the M&A Process.")

Preliminary Due Diligence: Five Biases
The preliminary due diligence stage of the M&A process is when biases are most likely to cause damage. They can, for example, lead a potential acquirer to overestimate enhancements to stand-alone values as well as revenue and cost synergies between the acquirer and the target. In addition, they can cause a deal maker to underestimate the challenge of integrating two corporate cultures. In this section, we explore five biases that tend to surface during preliminary due diligence. We also provide strategies for overcoming them and thereby avoiding their potentially costly consequences.

Confirmation bias. People have an overwhelming tendency to seek out information that validates an initial hypothesis. This bias is particularly pernicious during M&A preliminary due diligence, because the main outcome is a letter of intent (LOI) with a price range that's enticing enough to move a deal forward. The need to provide an acceptable initial bid often biases all analyses upward. Instead of synergy estimates guiding the price, as would be appropriate, the LOI often guides the synergy estimates. In effect, this seeds the entire due diligence process with a biased estimate, even before much factual information has been exchanged.

During the price-setting stage, deal makers also sometimes use current market multiples as evidence to confirm the wisdom of a deal, in lieu of a compelling business case. In 2003, for example, Career Education Corporation (CEC) paid $245 million - 14 times its annual operating earnings - for Whitman Education Group. (The historical multiple in this industry is six to eight times earnings.) CEC executives justified the high price by arguing that the sector was undergoing a period in which high prices were the norm. This convenient logic - in no way an independent test of the appropriate price - may explain why the executives opted to pay a high price, but it doesn't show whether that price should have been paid. Subsequently, stock prices for the industry receded to historical norms.

The best way to counteract confirmation bias is to tackle it head on - by actively seeking disconfirming evidence. Consider one company that did not do that. The firm sought to acquire a sizable firm that had a complementary technology. The acquirer hoped that the combined technology platform would enable significant new product development and fuel revenue growth. Since the quality of the technology was the driving force behind much of the due diligence, the acquirer didn't take into account the target's slowing growth rates, which should have signaled the deteriorating attractiveness of the target's markets. A harder look might have raised red flags earlier. Of course, most companies examine potential pitfalls at some point during the M&A process, but often not with the same degree of insight and strategic rigor that they build into their initial case for a deal.

Overconfidence. The ubiquitous problem of overconfidence is especially insidious when it comes to identifying revenue and cost synergies. Since revenue synergies are less likely to be realized than cost synergies are, heavy reliance on the former may signal a problem. For revenue synergies to work, there must be a specific integration plan that involves new investment in growth initiatives. This plan should complement a balanced assessment of the entire competitive environment. One way to avoid overconfident synergy estimates is to use reference-class forecasting, which involves examining numerous similar deals that your firm and others have done, to see where the current deal falls within that distribution. It provides a top-down sanity check of typical bottom-up synergy estimates (see "Delusions of Success: How Optimism Undermines Executives' Decisions," HBR July 2003).

Leading serial acquirers, such as GE, Johnson & Johnson, and Cisco, draw from past experience when contemplating mergers. Companies that don't have rich M&A histories can often use analogous situations in other companies as benchmarks. To estimate synergies, firms look at a detailed business case from the bottom up; they also make top-down estimates on the basis of comparable deals. Recently, a banking firm examined more than a dozen comparable deals on three continents to make an accurate assessment of realized synergies. It is not necessary to calculate the exact value of the synergies in comparable deals; grouping them into a few performance categories - good, bad, or disastrous, for example - often suffices. Watch out if your firm's expected synergies are skewed toward the high end of, or beyond, what comparable deals have yielded and your performance with your current assets is not similarly skewed (see the sidebar "Eight Red Flags in M&A").

Underestimation of cultural differences. Unanticipated cultural conflicts are well known to cause merger problems; less well known is the idea that conflict can arise even in the most anodyne situations. In a simulation experiment performed in 2003, Roberto Weber and Colin Camerer showed how conflict between merging firms' cultural conventions (the codes, symbols, anecdotes, and rules that bind cultures together) can substantially diminish performance. Participants were assigned to either an acquiring or an acquired firm and given time to develop, within each group, a common language for describing generic photos of employees doing various kinds of work. When the firms were "merged," participants from the acquiring company who role-played as managers were able to communicate much more effectively with subordinate participants from their own firm than with those from the other firm. Sometimes, the person in the manager role grew impatient with the subordinate from the acquired company. The researchers concluded that "the more deeply ingrained firm-specific language is, and the more efficient the firm, the harder the integration may be." They also noted that employees of both the target and the acquirer tended to overestimate the performance of the combined firm and to attribute any diminished collective performance to members of the other firm - outcomes that are often evident in real-world mergers.

One way to prevent cultural conflicts is to perform cultural due diligence (see "Human Due Diligence," HBR April 2007). According to the previously discussed McKinsey survey, companies that had been rewarded by the market were 40% more likely than unrewarded companies to perform this due diligence at least "most of the time." We have also found that network analysis maps, which describe the connections among people in an organization, provide some insight about the similarities between company cultures and can help identify the key people to be retained during integration. (See "A Practical Guide to Social Networks," HBR March 2005, and "How to Build Your Network," HBR December 2005.) For one pharmaceutical client, McKinsey used network analysis to identify whether the target's scientists really were world-class research leaders in the area where the acquirer wanted to build capabilities. The results showed that the target's scientists were not essential for doing cutting-edge research on a key chemical, so the client decided to build the skills organically.

We believe that network analysis holds huge promise for refining the work of cultural due diligence. In the future, companies will be able to use this method to help identify which types of networks are easiest to integrate. The analysis should highlight places where the target's network is dependent on too few key capabilities and may even shed light on the target's quality of work.

The planning fallacy. People have a tendency to underestimate the time, money, and other resources needed to complete major projects, including mergers and acquisitions. We believe that reference-class forecasting, mentioned in our discussion of the overconfidence bias, has great promise as a tool for anticipating how much time and money will be needed for M&A integration. The American Planning Association, a nonprofit organization that helps communities plan infrastructure projects, routinely recommends this type of forecasting, and it is used to plan infrastructure development throughout the UK and Switzerland.

Firms that are successful at integration also formally identify best practices and use them to improve future integration efforts. For example, GE Capital applies the principles of Six Sigma to drive continuous improvement in its integration practices, just as it does for its other core business processes. Started more than 20 years ago, this approach has developed as the company has faced challenges in its various acquisitions. The firm's executives discovered that mergers go more smoothly if integration begins early in the deal-making process and if detailed written plans include clear objectives that are to be met immediately after the deal closes. GE Capital also surveys its own employees and those of the other company to compare cultures, sets up structured meetings to address cultural integration, and works to solve actual business problems based on shared new understanding. Most important, the firm has put in place a process for learning from deal-making experience. It also sponsors conferences to foster idea sharing and improvement of best practices, and it constantly updates materials for leaders in the newly acquired company to use. This commitment to learning, codification, and continuous improvement has helped make GE Capital a world-class integrator across the globe.

Conflict of interest. Although advisers generally earn more business if deals they work on actually go through, the good advisers understand that the best way to secure a reputation is to provide objective recommendations that stand the test of time. Firms that do deals infrequently should be especially careful to stay clear of people who are driven by one-shot profit motives. Building a network of trusted advisers who are interested in the long haul goes far toward avoiding the conflict-of-interest bias.

Conflict of interest is an even bigger concern when a deal sponsor in charge of due diligence evaluates a merger or acquisition without obtaining any external input. Recent research by Don Moore and colleagues indicates that the judgment of internal partisans, and even of external advisers, is unconsciously influenced by the roles they play. Accordingly, they are likely to reach the same conclusions as their sponsor, unintentional as that outcome may be.

Private equity firm partners have proved very successful at reviewing one another's deals to ensure analytically rigorous due diligence. Even more important, they practice humility - that is, they approach each deal as if they didn't know anything about the relevant industry, even though they may buy multiple companies within it. They ask for expert advice; they question anyone who's willing to talk; they listen genuinely to the answers they receive. Corporate buyers, on the other hand, usually evaluate deals episodically, and certainly less often than private equity firms' investment committees, which tend to have weekly rhythms. As a result, corporate boards and management teams do not develop the skills they need to critically evaluate deals. This results in a conservative bias either to kill most deals or to take management's word and provide a rubber stamp. If your firm does deals infrequently, consider seeking out objective external expertise beyond that of the advisers assisting on the deal. (Also see the sidebar "Aversion to M&A: Two Biases.")

The Bidding Phase: Avoiding the Winner's Curse
If there are multiple bidders for an M&A target, a well-documented phenomenon called the winner's curse can come into play. Someone bids above an item's true value and thus is "cursed" by acquiring it. Bidding wars often lead to above-value offers.

One bidding war broke out recently over Guidant, which makes heart devices such as defibrillators, pacemakers, and stents. Johnson & Johnson offered Guidant shareholders $68 a share in late 2004, which wasn't much of a premium over the stock's trading price. In early 2005, though, reports of problems with some of Guidant's defibrillators began reaching the public. When J&J subsequently dropped its offer to $63 a share, Boston Scientific offered $72 a share in late 2005. The bids increased over a couple of days in January 2006, until Boston Scientific decided to make a bid so strong that it ended the contest: $80 a share (with a collar) and an agreement not to walk even if the government objected or further recalls came to light. Soon after the deal closed, however, additional product recalls were issued and the value of Boston Scientific's stock fell by about half, although this deal may have not been the only cause of the drop. Boston Scientific's failure to protect itself from future changes and its rushed offer to end the bidding war made it fall prey to the winner's curse. Of course, this doesn't mean the company won't derive value from the deal in the long term.

The previously discussed McKinsey survey suggested that successful acquirers are much more likely to exit when competitors initiate a bidding war: 83% of the rewarded companies withdrew at least sometimes, compared with only 29% of the unrewarded companies. Staying in a bidding war doesn't necessarily lead to a poor acquisition, but if your company doesn't evaluate whether to drop out when others enter the bidding, that's a red flag.

One technique for avoiding the winner's curse is to tie the compensation of the person responsible for the deal's price to the success of the deal - for example, to the percentage of estimated synergies realized. An even better strategy is to have a dedicated M&A function that actively generates alternatives to the deal under consideration and sets a limit price for each deal. (Companies that don't proactively maintain a deal pipeline are often forced to overpay for what seems to be their only alternative.) This method isn't a guarantee against the curse, since your maximum price still might be greater than the target's true value, but it can prevent you, in a fit of auction fever, from increasing your bid above the level you initially deem prudent.

If the acquiring firm's limit price changes during the bidding, someone in the firm should wave a warning flag and stop the negotiations. If the acquiring firm doesn't have a limit when it starts bidding, the bidder should be struck with the flagstaff.

The Final Phase: The Perils of Clinging Tightly
Once an initial bid is accepted, the acquirer has an important opportunity for additional due diligence, since it now has much greater access to the target's books. The final negotiation phase also encompasses the deal's legal structuring (for example, the exact composition of payment cash or stock). In this final phase of due diligence, the goal is to honestly evaluate the investment case in light of the more detailed information now available from the target. Two biases can come into play.

The first stems from a tendency to underreact to surprising news. A simplifying heuristic called anchoring is operative here. Specifically, people tend to anchor onto an initial number and then insufficiently adjust away from it, even if the initial number is meaningless. In a classic article in Science magazine from 1974, Amos Tversky and Daniel Kahneman described how anchoring works. In one experiment, subjects witnessed the spinning of a roulette-type wheel emblazoned with numbers from 1 to 100. Then the subjects were asked what percentage of African countries were members of the United Nations. The random numbers generated by the wheel biased the subjects' answers. For example, when the spun number was 10, the median answer was 25%; when the spun number was 65, the median answer was 45%.

Initial valuations, such as the price range in the LOI, can also act as anchors. Many acquirers fail to adjust sufficiently from a price, even in the face of surprising new evidence. For example, one energy company pursued a deal in part because the target had a futures contract with Enron. Even when Enron collapsed soon afterward, the would-be acquirer remained anchored to its original estimates of the deal's value. After the deal went through, it spent an additional $30 million - beyond an initial price of approximately $75 million - to keep the deal in play. The deal never succeeded because the acquirer eventually ran into its own problems with regulators. Likewise, anchoring can occur in the process of bidding. Confronted with unfavorable information, the acquirer may not lower the price sufficiently. It's rare to be able to bargain down the LOI price, so stepping away is almost always the only way to avoid paying too much.

When people feel that they've sunk a lot of time, money, effort, and reputation into making a deal happen, they aren't willing to surrender, even if the costs are unrecoverable. The sunk cost fallacy can cause an acquirer to continue pursuing the target even when it shouldn't. This phenomenon probably was operative in Boston Scientific's pursuit of Guidant. The best way to free your firm from both final-phase biases is to hire fresh, dispassionate experts to examine the relevant aspects of the deal without divulging the initial estimate. Some private equity firms use this technique. The independent team simply is asked to make its evaluation of the new information uncovered during the detailed due diligence - data that were not available before the initial bid was accepted.

Just as important, your firm should always entertain multiple M&A possibilities as part of a broader backup plan, and should know when to stop bargaining and walk away. When you have multiple offers in play, you aren't emotionally attached to one deal. Having a few options on the table also allows you to shift to another deal with a better price-value ratio as the bargaining continues. Of course, the ability to juggle several options at once requires a disciplined, ongoing M&A process and the attention of a much larger M&A team.

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M&A is a vital component of any company's growth options, but doing it well means identifying the red flags. Taking a targeted debiasing approach can help the acquiring team make better, more accurate value estimates and can help mitigate the influence of cognitive biases. By improving the decision-making process in this way, companies increase the chances that their acquisitions will lead to success rather than to post-merger disaster.

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View from Asia: India Starts Buying American

Why Indian firms tread lightly when they acquire overseas.
Tom Leander
CFO Magazine
February 1, 2008

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