February 28, 2008

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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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.

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

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

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.

* * *
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.

Continue reading "Deals Without Delusions" »

View from Asia: India Starts Buying American

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

Continue reading "View from Asia: India Starts Buying American" »


Modern Healthcare
By: Melanie Evans and Vince Galloro

Tight credit could make it tougher to finance large for-profit acquisitions like those that made headlines the past two years.

In 2007, for the second straight year, a huge corporate hospital deal dominated merger and acquisition activity. In 2008, analysts expect for-profit chains to take a back seat to not-for-profits, as the credit crunch that began with subprime mortgages ripples through healthcare. With less credit making private equity firms less active, the startup for-profit chains funded by private equity are not expected to be as aggressive in acquiring hospitals. Large not-for-profits, on the other hand, will continue to be strategic acquirers, snapping up a hospital here and there to keep another large, healthy system out of their market or to build market share to win more leverage with payers, analysts say.

The biggest deal in Modern Healthcare's 14th annual mergers and acquisitions report was Community Health Systems' $6.97 billion acquisition of 52-hospital Triad Hospitals. After completing that deal in July, Community began paring its portfolio, agreeing to six deals to sell a total of 14 hospitals, including the still-pending sale of nine hospitals to privately held Capella Healthcare for $315 million.

HCA, whose $33 billion leveraged buyout dominated dealmaking activity in 2006, also trimmed a bit from its portfolio, selling its two hospitals in Geneva, Switzerland, and a Florida hospital.

All of those deals were among the 103 acquisitions, joint ventures, long-term leases and mergers announced or completed in 2007, or four fewer deals than in 2006. The 2007 deals involved 214 hospitals, down by 117 from the previous year. The drop is explained by the size of the HCA leveraged buyout, as that deal alone accounted for 172 hospitals in the 2006 report.

Leveraged for-profit chains shed hospitals in 2007 as expected, says Dean Diaz, vice president and senior creditor officer for Moody's Investors Service. It's a "normal portfolio rationalization," he adds. The higher debt loads that most of the for-profit chains are carrying also will force those companies to be more disciplined about future acquisitions, he says, while tight credit markets could further hamper deal-making among debt-laden systems.

Strategy game

HCA's Florida deal-selling Cedars Medical Center in Miami to the University of Miami, Coral Gables-is an example of the kind of deals likely to be common in 2008, analysts say.

For the university, acquiring 350-bed Cedars was a strategic move to expand its research, education and market share. Capacity constraints at the university's teaching hospital, county-owned 1,776-bed Jackson Memorial Hospital, prompted the school to consider buying or building a hospital to accommodate planned growth, says William Donelan, vice president for medical administration and chief operating and strategy officer for the university's Miller School of Medicine and University of Miami Health System.

The $260 million acquisition, which closed Dec. 1, 2007, came after HCA spurned two prior offers from the university to buy operating control of Cedars, which is adjacent to the university's campus, Donelan says. Why HCA reversed its decision is uncertain, Donelan says, but the university's determination to own a teaching hospital-and build a competing hospital, if need be-may have been a factor. Holding onto the hospital would have meant facing competition from doctors who practiced at Cedars, Donelan says. "If we couldn't buy Cedars, we were going to do something else," he says.

The acquisition positions the university to expand into specialties and sophisticated services that take advantage of the high-end services typically offered by an academic medical center, Donelan says. The university has targeted cardiology, orthopedics and urology, as well as robotic and minimally invasive surgery for growth opportunities. Officials hope such services, and the university hospital's all-private rooms, will differentiate the hospital in Miami's competitive market and help attract patients from across South Florida or even internationally, he says.

HCA executives have said repeatedly that the company is not planning any large asset sales to pay off part of its debt, but they have acknowledged that asset sales may provide some cash for debt repayment. HCA executives also have noted that the company has continually re-evaluated its portfolio and divested hospitals almost yearly.

In a roundabout way, the tight credit market may help financially healthy not-for-profit systems make more deals, says Jeff Schaub, a senior director of Fitch Ratings who covers not-for-profit healthcare credits. With their strong credit ratings, they are less likely to have trouble selling bonds, and they also are less reliant on bond insurance, which is shrouded by uncertainty because of questions about the financial health of the largest bond insurers, Schaub says. Those factors both tend to affect hospitals that have more marginal credits, and that could help push them into selling, he adds.

"The most common acquisition candidate is the hospital that was doing OK but took a look at what stronger health systems were doing with their facilities and realized that they don't have the balance sheet or the income statement to put up a $150 million bed tower," Schaub says. "In high-growth areas, the necessity of doing that is quite plain, and it led hospitals to look for alternative sources of investment capital." A good example of a deal like this from 2007 is in Maryland, where 144-bed Montgomery General Hospital, Olney, was sold to MedStar Health, Washington, Schaub says.

These deals should continue in 2008, Schaub adds. "The big, multistate systems with good balance sheets will continue to make deals, perhaps a bit more slowly till the bond insurer questions are resolved," he says. Strategic buyers still will have strategic reasons for making their deals, even if interest rates climb or deals take longer to complete, he says.

Another area that should contribute to deal activity is physician alignment strategies, Schaub says. Selling a share in a hospital to its practicing physicians is one of many possible choices, which also include deals to manage service lines with specialist physicians and joint ventures for ambulatory facilities, he says.

Good deals, if you can do them

Those strong not-for-profit acquirers should find that they have less competition these days. Not only are the big for-profits saddled with heavy debt loads, the midsize companies also are capital-constrained because their financial backers aren't as flush with cash as they have been in recent years, says Josh Nemzoff, a transactions consultant and the head of Nemzoff & Co., New Hope, Pa. In recent auctions conducted to sell hospitals, Nemzoff says there are fewer for-profit bidders than there have been in recent years. Not-for-profit bidders are starting to outnumber for-profit bidders, even though the number of not-for-profit bidders has remained flat, he says.

"I certainly don't see the entire market, but I see a statistically significant sample of the market, and companies that used to be on our bid list aren't bidding," he says. "I don't think the number of hospitals that are for sale is going to change that much, but I think the number that get sold is going to be reduced. There are some hospitals that only for-profits will take a chance on that won't get any bidders now. For-profits have less capital, so there are fewer able to take that risk." That could lead to more distressed not-for-profits filing for bankruptcy, he adds.

Nemzoff also sees not-for-profits continuing to consolidate their markets and whole-hospital joint ventures as a physician alignment strategy. For an example of the former, he points to the Philadelphia market, where 503-bed Abington (Pa.) Memorial Hospital bought 151-bed Warminster (Pa.) Hospital in order to close it. The opportunity from consolidation "completely changes the economics of it," even though they pay more than a new entrant to the market would be willing to pay, Nemzoff says.

Delta Says Northwest Talks

February 27, 2008; Page A3

In a sign that merger talks with Northwest Airlines Corp. have stalled, top executives of Delta Air Lines Inc. issued a memo to employees saying that no "potential transaction meets all our principles."

The memo comes as executives at the two airlines wait for their pilots to reach an accord among themselves on seniority -- an accord needed before a merger can move forward. In its memo, issued yesterday, Delta said seniority for all its employees is one priority it would consider in any merger.

Delta also cited other priorities, such as keeping its Atlanta headquarters. It added the airline will continue to focus on its "stand-alone plan" until all "these conditions are met."

A spokeswoman for Delta declined to comment beyond the information contained in the memo. A Northwest spokeswoman also declined to comment.

Delta's memo was signed by Richard Anderson, Delta's chief executive, and Ed Bastian, the airline's president and chief financial officer, and follows weeks of intense negotiations. A deal would combine Delta, the country's third-biggest airline by passenger traffic, and Northwest, ranked fifth, into the largest passenger carrier in the world.

Following the Delta memo, Doug Steenland, Northwest's chief executive, also sent a message to employees in which he recognized for the first time publicly that the Eagan, Minn., airline is interested in possibly merging with another carrier. Northwest's board, the memo said, is "prepared to consider positively a transaction" that would benefit Northwest employees, shareholders, customers, and the communities in which it operates.

Some airline executives believe consolidation could help U.S. airlines compete with fast-growing foreign competitors while better managing higher fuel prices and downturns in demand for air travel by reducing the supply of airline seats throughout the industry. The memos reflect an impasse in talks that until recently appeared close to culminating in a merger agreement between the two airlines. The people familiar with the negotiations say the discussions are foundering on the one issue that has always plagued industry consolidation in the past: labor.

Though executives of both airlines had agreed on most of the basics for a merger, according to these people, they are reluctant to clinch a deal until pilots at both carriers hammer out an agreement to successfully integrate their ranks in a combined carrier. While that could still happen, it has taken longer than executives had hoped.

The pilots, represented by two separate chapters of the Air Line Pilots Association, had in principle agreed upon a common employment contract for all 11,000 pilots at both airlines, according to people familiar with the talks. They couldn't, however, find common ground when it came to combining seniority lists, which dictate pilots' pay, the aircraft they fly, and many other day-to-day work conditions and career prospects.

Recently, some Northwest pilots believed the deal Delta pilots sought would give the most sought-after flying of long-haul, wide-body jets to Delta pilots once senior Northwest pilots retire in the next five years. Most midlevel Northwest pilots would then be limited to flying smaller jets with little chance for advancement, according to one person familiar with their thinking.

But some Delta pilots fear they could lose seniority to their Northwest counterparts because after hundreds of senior Delta pilots retired before the carrier entered bankruptcy protection in 2005, many other Delta pilots moved up in seniority. If the seniority lists were combined purely on each pilot's date of hire, Delta pilots could regress as the Northwest group on average has a bit more seniority.

Those concerns in recent days have led some Delta pilots to exert pressure on their union leaders. One group of Atlanta-based pilots recently moved to recall the four representatives they have on the group's leadership council, the first step in trying to change union leadership. The group, according to organizers, is unhappy with what they consider a lack of transparency in the current negotiations.

The recall effort and the broader seniority concerns have complicated negotiations for Delta union leaders, according to one person familiar with the situation. If union leaders "see a legitimate threat to their leadership, they would put the brakes on their negotiating." Delta union leaders didn't respond to requests for comment.Delta's shares were down 24 cents, or 1.5%, at $15.91, while Northwest shares rose 15 cents, or 1%, to $16.01, yesterday in 4 p.m. New York Stock Exchange composite trading. In after-hours trading, Delta fell 51 cents, or 3.2%, to $15.40; Northwest slid 16 cents, or 1%, to $15.85.

Write to Paulo Prada at and Susan Carey at

When Unequals Try to Merge as Equals

When Unequals Try to Merge as Equals

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Published: February 25, 2007

HERE’S a tip about deal-making: When companies start talking about a “merger of equals,? someone is usually getting the better deal. It is especially true in the proposed merger of XM Satellite Radio and Sirius Satellite Radio.
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Cathy Hull

It is being billed as a merger of equals, with each company getting exactly half of the new entity.

But here’s the unequal part: The stock market thinks that Sirius is worth almost $1 billion more than XM. To get the numbers to work, Sirius offered to pay a handsome 22 percent premium to shareholders of XM. (The premium is actually almost a whopping 30 percent if you account for the run-up in XM’s shares the Friday before the deal was announced, as word began to leak.)

So why did Mel Karmazin, the chief executive of Sirius, dress up the deal as if both companies were on the same footing?

I called Mr. Karmazin soon after the deal was announced to ask just that.

“If you give me a lie detector test,? he said, “I’ll tell you that I believe we’re worth more than them.?

In most mergers of equals these days, the buyer — and there is always a buyer — pays little or no premium. Both companies simply participate in a stock swap on the assumption that the shares will rise because of the cost savings and “synergies? — to bring back a dirty word from the 1990s.

The enormous premium for XM appears, at first glance, very curious.

It’s not as if there was another buyer for XM that Sirius needed to outbid.

Sirius and XM had always been natural partners — assuming that regulators are willing to let them combine.

Things become clearer, though, when you look beyond the numbers and consider the psychology behind the deal. Because of the possibility that Washington could block the transaction, Mr. Karmazin said that nobody wants to look like the loser if things go bad. “You want to make sure if it doesn’t happen, no harm, no foul,? he said.

Of course, others have been down this road before. Remember Daimler-Benz’s takeover of Chrysler? Several years after the deal, Daimler’s chief executive, Jürgen E. Schrempp, explained that they called it a merger of equals “for psychological reasons.? (As it happens, Daimler is now considering selling off Chrysler.)

If Mr. Karmazin was willing to pay a premium, why didn’t he just buy the company outright?

All the questions in my head apparently went through Mr. Karmazin’s head, too.

When he first approached XM’s chairman, Gary M. Parsons, he was prepared either to buy the company at a premium or pursue a no-premium “merger of equals.?

A sale was no-go. “They said they were not for sale,? Mr. Karmazin explained.

So, Mr. Karmazin then pushed for a no-premium merger. This was perhaps an even harder sell because Mr. Parsons said he believed that XM was worth more than Sirius, even though neither the stock market nor Mr. Karmazin agreed with him.

Mr. Karmazin said: “I told them that all of their reasons were bogus.?

Mr. Parsons argued that his company had more subscribers and more revenue, but that its investors, mostly institutions like Axa and Legg Mason, didn’t value the company highly enough. Empirically, Mr. Parsons’ argument is right, despite the wisdom of crowds: “It never made any sense analytically that XM was worth less than Sirius,? said Craig E. Moffett, an analyst at Sanford C. Bernstein. “If anything, I was surprised that the premium was as small as it was.?

Shares of Sirius, meanwhile, which just a year and a half ago were worth less than XM’s, had leaped, partly on the back of high-profile deals like the one it signed with Howard Stern. Those deals attracted thousands of retail investors, not considered the smart money, like moths to a flame into Sirius stock.

And then Mr. Parsons played his ace: If Mr. Karmazin wanted to create the enormous savings they both projected would result from a deal — worth more than $5 billion, more than the value of either company — they needed each other. And Mr. Parsons would not play unless his shareholders could capture half of those savings.

As Mr. Karmazin explained, if the deal had been done simply, with no premium, Sirius would own about 55 percent of the company and XM would own about 45 percent. If they had tried to split the cost savings 50-50 — which Mr. Karmazin conceded was “the only fair thing to do,? Sirius would own a little more than 52 percent of the company and XM would own a bit more than 47 percent.

So why didn’t it stop there? Well, Mr. Parsons is a pushy negotiator. And Mr. Karmazin said he was willing to give in.

“I can’t do the deal without them,’ he said. “I thought it was more important for our shareholders that we do the deal.?

Even by giving the 22 percent premium, Sirius stands to save billions of dollars a year if the deal goes through.

In a statement, XM, which has hosts like Bob Dylan and Oprah Winfrey, said, “Each company believed the value of coming together was more important than one party or the other having a majority of the new combined company.?

Still, it seems as if Mr. Karmazin may be paying a premium to do the deal now so that it can be rushed through the regulatory maze while the Bush administration is still in power. Many partners in mergers of equals wait around — often for years — until their stocks align.

Mr. Karmazin disputes that view, contending that he wants a deal as soon as possible so that the savings can start. His view is that there “is no regulatory window.?

In fact, he believes that the longer the companies, both now money losers, wait to merge, the better their chances would be in Washington. That’s because new technologies will continue to emerge that may prove to be competitive with satellite radio.

But if anyone is a master of timing, it’s Mr. Karmazin. He took Infinity Broadcasting public for $17.50 a share; four years later, he sold it to CBS for $170 a share. Now his willingness to make this deal at such a curious price may be an acknowledgment of the fairy dust in Sirius stock.

Bank of America Bags Countrywide

Top News January 11, 2008,
Bank of America Bags Countrywide
The $4 billion acquisition of Countrywide Financial rescues the U.S.'s largest mortgage lender. BofA chief Ken Lewis calls it a "rare opportunity"

by Christopher Palmeri and Dean Foust

Every go-go period on Wall Street has a spectacular flame-out that comes to symbolize the excesses of the day, from Sam Insull's Middle West Utilities during the Great Depression to in the dot-com era. Now it's Countrywide Financial's (CFC) turn.

Bank of America (BAC) announced Jan. 11 that it is buying Countrywide in a deal that values the nation's largest mortgage broker at just $4 billion, or roughly $6.90 per share. Even that was a bit of a gift for Countrywide investors, who had seen their stock slip to just $5 a share in the past week as the company denied rumors it would seek bankruptcy protection. As recently as January, 2007, Countrywide's shares were selling for $42.

Bank of America Chairman and Chief Executive Kenneth Lewis said he did not plan on having Countrywide Chairman and Chief Executive Angelo Mozilo head the combined operations. "I would want him to stay until the deal gets done and then probably I would guess that he would want to go have some fun," Lewis said in a conference call announcing the deal.
Assets and Challenges

The deal brings Charlotte (N.C.)-based Bank of America assets on a grand scale. Even in these troubled times for homeowners and credit markets, Countrywide originated $408 billion in new mortgages last year. The company collects and processes payments on a $1.5 trillion portfolio, nearly one-sixth of all mortgages in the U.S. Countrywide has more than 1,000 offices and 15,000 salespeople. Lewis called the transaction a "rare opportunity to add what we believe is the best domestic mortgage platform at an attractive price."

The deal also presents great challenges for Lewis, an aggressive acquirer who's snapped up regional giants such as FleetBoston and LaSalle Bank as well as credit-card operator MBNA in recent years. Countrywide's loans in foreclosure have doubled over the past year. Its past-due loans have climbed 50% and now stand at more than 7% of the company's overall portfolio. Countrywide lost $1.2 billion in last year's third quarter. It is due to report results for the full year Jan. 29.
Easing Concerns

In his announcement, Lewis tried to ease concerns that he may be running headlong into a mess. He said Bank of America has had more than 60 people at Countrywide's offices for weeks, investigating its business. At the same time, Lewis acknowledged that things could get worse in the mortgage business before it turns around and that he wasn't claiming to have bought at the absolute bottom. Indeed, last summer Bank of America invested $2 billion in new preferred stock, convertible into 17% of Countrywide's equity. That transaction now looks overpriced.

Lewis said he planned to keep Countrywide's brand name for the time being, even putting Countrywide loan officers in Bank of America branches. He said he wants to do more research to figure out whether Countrywide is still a brand that consumers seek out when they're getting a mortgage, or whether it's tarnished. Lewis said he would also likely sell Bank of America products such as credit cards in Countrywide offices. Even before this transaction, Bank of America was the nation's largest consumer banking franchise, with more than 6,100 branches.
Mozilo's Stamp

Noticeably absent from the conference call was Mozilo, a normally outspoken executive who rarely missed an opportunity to promote Countrywide and take potshots at the competition. The son of a butcher who started out in the mortgage business as an errand boy, Mozilo co-founded Countrywide in 1969. He took advantage of the trend toward securitization of loans, serving as the largest conduit between Wall Street and thousands of independent mortgage brokers.

At the peak of the housing boom several years ago, brokers cranked out more exotic loan products, extending money to people with poor credit histories often at low teaser rates that adjusted upward. In many cases these subprime borrowers were not required to put any money down when purchasing their homes, nor demonstrate they had enough income to pay off the loans. Although Countrywide was rarely the first to offer such products, the company quickly copied them in a bid to maintain its dominant market share. Mozilo said in a conference call last year that it "would have been an insight that only a superior spirit could have had" to not follow others in the industry in making such loans.

As defaults rose, housing prices sunk, and Wall Street credit dried up, Countrywide became the target of shareholder lawsuits and an investigation by the attorney general in Illinois. Mozilo became the poster child for mortgage industry greed, having sold tens of millions in Countrywide stock before the industry downturn. The Securities & Exchange Commission is investigating insider stock sales at Countrywide. Mozilo has maintained that he sold only to exercise options that were expiring.

During the housing bubble, Bank of America avoided subprime loan business. Lewis said Countrywide would exit that business and throttle back on transactions involving independent mortgage brokers and what Lewis called the "cocaine of bulk [mortgage] purchases." Indeed, Peter Ogilvie, president of the California Assn. of Mortgage Brokers, said Bank of America was known for having more stringent requirements for the independent brokers it did business with. "They weren't entirely driven by taking in mortgages and selling them in order to survive," he said. "That may have done them well."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau . Foust is chief of BusinessWeek's Atlanta bureau .

The XM / Sirius Merger Faces Regulatory Questions

Why the XM-Sirius Merger Makes Sense
Representative Rick Boucher dismisses antitrust concerns, putting their share of the radio market at less than 4%, and argues the deal would benefit listeners

by Rick Boucher

By the end of the year, the Justice Dept. and the Federal Communications Commission should have completed their review of the proposed merger of satellite radio providers XM Satellite Radio Holdings (XMSR) and Sirius Satellite Radio (SIRI). Because the merger will promote competition and benefit consumers, it should be approved.

The key issues for both agencies are whether the merger would hinder competition in the relevant market and the effect the merger would have on consumers. In each instance, a close examination of the facts supports merger approval.
More Competition, Not Less

As the only two subscription-based satellite radio companies, XM and Sirius transmit music, sports programming, news, and other types of programs to a combined total of 15.4 million subscribers. At first blush, one might conclude that a combination of the only two providers of this satellite-based service would be an obvious antitrust abridgment. That's certainly the argument made by a phalanx of merger opponents, including the National Association of Broadcasters.

The reality of the relevant market, however, is more complex. That market is the entire audio entertainment universe, including terrestrial radio, Internet radio, and Internet-protocol-enabled applications, such as recent iterations of the Apple (AAPL) iPod.

In the marketplace of both satellite and terrestrially delivered radio services, XM and Sirius have less than a 4% share. The balance is held by AM and FM stations. In the broader audio entertainment market of radio and Internet-based news and entertainment, XM and Sirius have an even smaller share. When one concludes that the broader market is the proper measure, it is clear that the merger would not hinder competition.

Consider also the repeated statements by leading broadcast companies that they are in competition with satellite radio. For the past decade broadcasters have fought satellite radio, and they continue to do so. In fact, the leading opponent is the National Association of Broadcasters, the trade association for AM and FM stations, whose mere presence in this debate as a merger opponent is compelling evidence that terrestrial and satellite radio are in direct competition and are part of a unified market.

Under traditional antitrust analysis, regulators often look at potential substitutes for a product to determine whether a merger of two companies would lead to lower consumer welfare. They often ask, "How far would a person have to drive in order to find a substitute?" In the case of the XM and Sirius, consumers don't have to drive anywhere to find a competitive alternative, they just have to hit a different button on their car stereo.

When one rightly concludes that the market is broad and that the two satellite carriers hold less than a 4% market share, an antitrust green light should quickly follow.
Providing Consumers with More Choices

But the FCC has a broader public-interest screen and will question whether the merger will benefit consumers. Again, a careful review of the case favors merger approval.

Today, both companies maintain separate entertainment offerings. The merger would eliminate duplication of programming and eventually expand the spectrum for program delivery by a unified carrier, which would eventually mean more choices for consumers. XM and Sirius recently announced, for example, that they will offer eight different program packages post-merger, including several options that will enable consumers to select channels on an à la carte basis and to pay substantially less than the current subscription prices. This unprecedented offering will provide subscribers with more choices and lower prices and pave the way for a unique form of competition in the entertainment industry—one based on the individual programming preferences of listeners.

One new programming option will let subscribers choose 50 channels for just $6.99—a 46% decrease from the current standard subscription rate of $12.95 a month. The combined company also will offer several other new programming packages, including two "family-friendly" options. Those subscribers choosing one of the "family-friendly" options will be able to block adult-themed programming and, for the first time, receive a price credit.

A merged company will give subscribers additional programming options. Today, an XM subscriber can get MLB games, but not NFL games. After the merger, XM and Sirius subscribers should be able to get both MLB and NFL, both PGA and NCAA, both Oprah Winfrey and Martha Stewart.
A Boon to Public Interest Programming

As an additional benefit of the merger, the extra bandwidth that the elimination of duplication would produce will result in the offering of more public-interest programming than either XM or Sirius now offers. The combined company will be able to expand diverse programs for underserved interests, such as foreign language and religious programming.

Given the vibrancy of competition in the audio entertainment market and the substantial consumer benefits the merger will produce, the reviewing agencies should allow XM and Sirius to complete their proposed merger this year.

Representative Rick Boucher (D-Va.) is a co-founder and co-chair of the Congressional Internet Caucus.

Yahoo and Microsoft - Midlife Crisis

The Globe and Mail (Canada)

February 2, 2008 Saturday

Microsoft counters midlife strife with aggressive grab at Yahoo

LENGTH: 1137 words

Forget the Internet. Forget Facebook and MySpace, the iPhone, Steve Jobs and the preposterous Apple cult. There's one reason, and really only one, that Microsoft wants to spend nearly $45-billion (U.S.) to buy Yahoo.

It's because midlife stinks.

Midlife is the time when you look in the mirror and realize the promise of youth is gone; that you'll never be quite as healthy, or as fit, or as good-looking, or as cool or as carefree as you once were. Corporate midlife is similar: It's the moment when the hyperkinetic growth of adolescence is over, and nothing is quite as exciting or as easy as it was before.

For the founders and executives of fallen growth companies, this change is dismaying.

Wall Street no longer fawns over them. Their stock price falls, as does their prestige, and they find themselves in the humbling position of scuffling to catch up to the faster, shrewder new kid - in this case, that's Google.

Microsoft has been going through this awkward transition for several years. Yahoo, the dethroned king of the Web, is immersed in it - in the middle of a middle-life crisis, you might say.

The unsolicited takeover bid from Microsoft, America's third-most valuable company at $293-billion, comes after a long and fruitless courtship of Yahoo. In late 2006 and early 2007, the two companies held wide-ranging talks on a business partnership or merger, but they went nowhere. Yahoo's board rejected the takeover idea as premature.

Since then, two things have happened. Google's financial results were very strong, proving that its dominance of the Internet search business is growing, not receding. The U.S. economy has also turned south, pulling the outlook for advertising - and Yahoo's prospects - down with it. On Wednesday, Yahoo's stock price hit its lowest point since 2003, having fallen 45 per cent in three months.

Microsoft's bid is, to say the least, opportunistic. Had chief executive officer Steve Ballmer tried to buy Yahoo last autumn, he would have to had to offer at least $60-billion - and even then he might not have been taken seriously.

But even though Yahoo is struggling, it represents a possible solution to a vexing problem for Microsoft.
It may be one of the most successful companies in the history of capitalism, earning $14.1-billion in fiscal 2007, but the bulk of its profit still comes from its old products, primarily the Windows operating system. It has never managed to crack the market for online ads in a big way. Microsoft's answer to Google, the MSN portal, is an also-ran; the company's online services division lost $732-million last year on just $2.5-billion in revenue.

Mr. Ballmer knows that, for all of the unfavourable comparisons to Google, the business he's trying to buy is a healthy one. Here's what midlife looks like for Yahoo: Last year its revenues grew 8 per cent, to $7-billion; it made a $700-million operating profit and generated enough cash flow to buy a small island nation in the South Pacific. The core business, online advertising revenue, is not in such terrible shape. Some Web experts will tell you that Yahoo's improved search engine is now superior to Google's.

Yahoo also produces original content, employing some stellar writers and columnists, which ought to provide at least a small advantage over Google's model of stealing (pardon me, "aggregating") the work of others. And, like a lot of senior tech companies (Microsoft says included), Yahoo keeps its balance sheet as though it's preparing for the next Great Depression. It has $2-billion in cash and short-term investments versus $750-million in debt. Yahoo is not exactly a distress case.

So what ails it? The same things that have dogged Microsoft since it entered its middle years: Lack of focus, lack of drive, spoiled by earlier success, too fat. This isn't merely what outsiders think; read the now-famous "Peanut Butter manifesto" written in late 2006 by Brad Garlinghouse, a Yahoo senior vice-president. "We have lost our passion to win. Far too many employees are 'phoning' it in ...Where is the accountability?" Peanut butter was his metaphor for a company spread too thin.

His recommendation was to chop business units and let go of 15 to 20 per cent of the staff. His bosses read the memo, then ignored it, adding 2,200 full-time employees in the first nine months of this year.

What Yahoo suffers from, in addition to complacency, is the curse of being second-best. It's somewhat analogous to Unilever or Bank of Montreal or Zellers: They may be fine businesses, but they're not Procter & Gamble or Royal Bank or Wal-Mart.

In technology, the No. 2 spot is particularly uncomfortable. Technology takes time for consumers to learn; for that and other reasons, it tends to create a single dominant player in any field. "Once it's settled down, Google's got it locked up, and no matter what Microsoft or Yahoo do, they can jockey around their position, but their market shares haven't changed," Bill Miller, the famous U.S. investor, told The Globe and Mail in a recent interview. (He should know - his fund is a major shareholder in both Yahoo and Google.) That doesn't mean that Yahoo is in decline, or that it won't be a fine investment for Microsoft, should its bid be a winner. It's just that when they reach midlife, companies, like people, learn that they must make compromises. In their mutual midlife crisis, Microsoft and Yahoo may discover they're better off entering their golden years together than apart.

Lenovo acquisition of Thinkpad

Lenovo and IBM: East Meets West, Big-Time
BusinessWeek. MAY 9, 2005

The date was Apr. 20, 2004. The setting: the offices of Legend Holdings Ltd. in Beijing. And the event was something akin to a courtroom trial, in which the proposed purchase of IBM's (IBM ) PC division by Legend subsidiary Lenovo Group Ltd. hung in the balance. The judge and jury -- Legend's directors, including co-founder Liu Chuanzhi -- had gathered in a windowless conference room on the 10th floor of company headquarters to grill Lenovo's execs and others about potential pitfalls.

The deal's advocates faced a barrage of questions. In addition to Mary Ma, Lenovo's chief financial officer, the lineup included people from consultant McKinsey and investment bank Goldman Sachs (GS ). The directors' chief concern: Were Lenovo's execs really capable of running a complex global business? The breakthrough came after three days. The directors concluded that if Lenovo could recruit IBM's top execs to help manage the company, this merger could succeed. "The board felt there were positive solutions," says Liu.

Lenovo's strength is its unusual nature. Rather than sell its PC business outright, IBM ultimately decided to keep a 13.4% stake in the combined company and as Liu had hoped, contribute top IBM execs to help run it. In essence, IBM outsourced its PC business to Lenovo, and Lenovo outsourced much of its management and sales to IBM. As a result, the first major merger between an American company and a Chinese one is creating a true blend of East and West, of tech icon and industry upstart. The chief executive will be Stephen M. Ward Jr., the former head of IBM's PC operation. Yang Yuanqing, the former Lenovo CEO, will be the chairman. The 30-member executive staff is split down the middle. Headquarters will be near IBM's in New York.
The two companies complement each other neatly. Lenovo specializes in consumer PCs and low-cost manufacturing. It dominates the PC market in China, with a 26% share last year. IBM ranges worldwide and focuses on businesses. Its 30,000-person sales force and global network of 9,000 business partners will help sell Lenovo PCs. "They create a formidable force against the direct guys like Dell," says Kevin M. Murai, president of Ingram Micro Inc. (IM ), the No. 1 tech-products distributor.

With its added muscle, Lenovo fully intends to change the dynamics of the PC business. Rather than simply compete on price, the company plans to distinguish itself through innovation. The new company starts from a good spot. IBM's ThinkPad laptops have consistently beaten Dell to market with features such as a built-in fingerprint reader. Lenovo is no slouch either. One of its new PCs with easy-to-use Internet telephone service has won raves from reviewers. Declares Yang: "We will be the PC company with the best balance between innovation and efficiency."

The big test comes when the two organizations actually operate together. The culture gap is huge. For instance, the Chinese don't tolerate being tardy for meetings, while IBMers are often late. It's hard to predict when glitches will pop up. Last Dec. 20, when Yang, Ma, and eight other Lenovo execs landed at John F. Kennedy International Airport in New York for their first planning meetings, nobody met them. Not good: In China, visitors are greeted and taken to their hotels in limos. "We blew it," says Brad Hall, an IBM consultant working on the transition. "Yuanqing brought it up at a meeting, and Steve said, 'We'll fix that."'

Over the five months since the deal was announced, execs from both sides have been working feverishly to get off to a fast start. Initially, to avoid disruptions, they will operate three separate business units -- China PCs, China cell phones, and international operations, which were formerly IBM's. But they plan to quickly integrate supply-chain operations. Ward plans to expand consumer sales into four countries beyond China this year -- though he won't name them yet. He plans a marketing blitz to turn Lenovo into a global brand culminating with sponsorships of the 2006 and 2008 Olympics. And he's partnering with Intel, Microsoft, and others on PC innovation centers in Beijing and Raleigh, N.C. "The PC is ubiquitous, but purely being a commodity isn't good enough," says Ward, 50.

While the general idea had been floating around for months, the two companies nailed down the details to make a long-term partnership compelling for both sides. IBM would sell Lenovo PCs through its sales force and distribution network. IBM also would provide services and financing for Lenovo PCs -- and allow Lenovo to use the vaunted IBM brand name for five years. In turn, Lenovo, which is still partly owned by the government's Chinese Academy of Sciences, would help IBM gain entrée into the promising China market.

Since the deal was announced, both Lenovo and IBM have been working hard to make sure it will be a success. They've tried to be open to each other's cultures. Yang declared English Lenovo's official language. Liu tapped Ward as Lenovo's CEO, a position Ward considers a big honor. He recalls listening to news of Nixon's historic visit to China on the radio when he was a 17-year-old pumping gas at his father's Exxon station in Santa Maria, Calif. "If you had told me then that I would lead the first-ever merger of a Chinese company and an American company, I would have been stunned," Ward says.

Making history is messy, however. When Ward and Yang met for lunch at IBM's Madison Avenue offices for a get-to-know-you session, Yang said that he favored dual headquarters, in the U.S. and China. It was a point of national pride. Ward disagreed, saying there should be a single one, in New York. They couldn't resolve the issue over lunch. But a couple of days later, Yang came around. "Steve made a lot of sense," he says. "Putting the headquarters in New York tells our global customers that we're a global company."

Continue reading "Lenovo acquisition of Thinkpad" »

NWA merger could bring union friction
NWA merger could bring union friction

By DAVID PHELPS, Star Tribune

January 11, 2008

While the pilots of Northwest Airlines are demanding to have a say in any merger and could well get it, many of the airline's 32,000 employees face more unsettling times.

Seniority, pay and job security all could be affected if the largely nonunion Delta Air Lines is the surviving airline in a megacombination that would create the world's largest airline. And Northwest's ground workers and flight attendants are seen by analysts as having less clout than the pilots in trying to shape a merger to make it more to their liking.

"We're hearing a lot of questions," said Kevin Griffin, president of the Association of Flight Attendants at Northwest. "But we've been hearing about a Delta-Northwest merger for the past three years, so we're prepared."

The pilots at both airlines are represented by the Air Line Pilots Association and are in regular contact. A common union philosophy does not exist for flight attendants and employees on the ground.

Under federal law, the surviving airline would hold an election of workers to determine if they want to remain in their union.

Failure to obtain a majority of votes from a combined Delta-Northwest group would end union representation and void the existing contract.

In the case of flight attendants, an organizing drive is underway to make Delta flight attendants part of the same organization that represents Northwest's.

Another key issue to be resolved in a merger is seniority and how to consolidate the two workforces to provide some equity in pay and credit for time on the job.

"Seniority is huge in terms of assignments, plum jobs, less desirable jobs," said David Larson, who teaches employment law at the Hamline University School of Law. "It's an issue for everybody. Job descriptions are going to be different. Lines of progression are not going to fit. That can create a lot of confusion."

Many mergers result in job losses as the new, larger company looks for redundancies in its workforce and achieves new economies of scale that require fewer employees.

That could be the case in a Delta-Northwest merger, but not necessarily. A combined carrier in a rapidly consolidating airline industry might have a competitive edge with a favorable route structure, keeping planes full and employees in their jobs.

"For a merger to work, there has to be economic gain," said labor economist John Budd of the University of Minnesota's Carlson School of Management. That gain, he explained, could come through consolidation or by gaining broader route structure and pricing power.

Budd warned that Northwest's workers might face a more dire future from not merging than from the carrier entering into a merger, if Northwest then found itself facing more formidable competitors.

"If a merger is inevitable, would Northwest employees be better off with Delta and some layoffs, or would employees be better off on the outside looking in at a Delta-United merger?" Budd asked. "That might have more severe repercussions than a merger."

David Phelps • 612-673-7269


Kevin Griffin, president of the Association of Flight Attendants at Northwest

© 2008 Star Tribune. All rights reserved.

February 26, 2008

Timing is Everything in Merger Success

Mergers in a Time of Bears

Most mergers fail.

If that’s not a bona fide fact, plenty of smart people think it is. McKinsey & Company says it’s true. Harvard, too. Booz Allen Hamilton, KPMG, A. T. Kearney — the list goes on. If a deal enriches an acquirer’s shareholders, the statistics say, it is probably an accident.

But a new study puts a twist on the conventional wisdom. It’s not that all deals fail. It’s just that timing appears to be everything. Deals made at the very beginning of a merger cycle regularly succeed. It’s the rest that fall flat.

The study, published in this month’s Academy of Management Journal, found that deals struck in the first 15 percent of a consolidation wave tend to do well, at least measured by the acquirers’ share performance against that of the broad market. The duds come later, when copycats jump on the bandwagon. Even in the merger game, there’s a first-mover advantage.

The problem is that most C.E.O.’s don’t have the guts to make acquisitions when everyone is running scared. That is usually during a volatile market — like the one we’re living in right now. Which is exactly the wrong approach.

Notwithstanding Microsoft’s $44.6 billion takeover bid for Yahoo or Electronic Arts’ $2 billion offer for Take-Two Interactive, 2008 is going to be an abysmal year for deal-making. Volume in mergers and acquisitions has plummeted 37 percent this year in the United States, according to Dealogic. (Factor out Microsoft-Yahoo and the drop is a whopping 56 percent.) That’s partly a result of the private equity folks’ being taken out of the equation because of the credit crisis. But it is also because C.E.O.’s and boards become paralyzed when the markets turn turbulent. Instead of making investments, they hunker down and focus on putting their houses in order. Remember those pundits who said corporations would fill the void left by private equity? They were wrong — only they shouldn’t have been.

Baron Philippe de Rothschild, ever an opportunist, is said to have advised, “Buy when there’s blood in the streets.? Investors like Warren Buffett do just that all the time. Hedge funds have been set up specifically to take advantage of carnage in the markets.

But for some inexplicable reason, many corporate C.E.O.’s can’t seem to stomach making a big deal when the going gets tough.

It all makes sense to Gerry McNamara, Bernadine Johnson Dykes and John Haleblian, the professors behind the study, entitled “The Performance Implications of Participating in an Acquisition Wave.? The study examined 3,194 public companies that purchased other companies during acquisition waves between 1984 and 2004.

“Our findings suggest that the market rewards executives who perceive opportunities early, scan the environment for targets and move before others in their industry,? said Mr. McNamara, a professor at Michigan State University. “Conversely, the market severely punishes followers, those firms that merely imitate the moves of early participants in the wave, who jump on the acquisition bandwagon largely because of pressures created by competitors. Such companies typically lose significant stock value.?

Take the telecommunications industry. AT&T’s acquisition of Cingular (now AT&T Wireless), which was announced in February 2004, has turned out to be an unqualified winner. But the merger of Sprint and Nextel, unveiled 11 months later, was and is a disaster.

The numbers tell the story. Early movers — companies that made acquisitions in the beginning of a consolidation wave within their industry — found their stock up, on average 4 percent relative to where the shares would ordinarily trade, according to the study. Shares of latecomers, who bought at the end of a wave, fell by an average of 3 percent during that time. Of course, at the end of every wave there are bigger and more deals. After all, stocks are usually up, and so is boardroom confidence (read: exuberance). “There’s a social pressure,? Mr. McNamara said. “They like to be in the herd.?

How do you define a consolidation wave? The professors looked at 12 industries over the 20-year period. To qualify as a wave, merger activity had to show a pattern in which the peak year had “a greater than 100 percent increase from the first year followed by a decline in acquisition activity of greater than 50 percent from the peak year.? Waves were as long as six years for some industries.

By the way, serial acquirers like General Electric don’t seem to surf through consolidation waves. Companies that “undertake acquisitions on a regular basis as part of their core business routines? are less likely, the study finds, “to either seize early-mover benefits or suffer from the costs associated with bandwagon pressures.?

There are a couple of caveats to the study. The professors measured the acquirers’ stock appreciation or deprecation by using a fancy calculation of what they call “abnormal returns,? which examined share prices five days before the announcement of the acquisition and prices 15 days later. The math is complicated, but they say the “abnormal return? is predictive of stock performance in the future. Of course, critics could argue the study doesn’t measure a long enough period after a deal is made.

Nonetheless, the point is clear: C.E.O.’s should stop being such scaredy-cats. While everyone else is battening down the hatches, go make a deal. The wave is just starting.


I wrote on Feb. 12 that Michael S. Gross had 14 days to spend $300 million on acquisitions for his “blank check? company, or special purpose acquisition company (SPAC).

Well, the deadline was Monday, and Mr. Gross beat it — sort of. His company, Marathon Acquisitions, announced last Thursday that it had signed a letter of intent to make an acquisition, but it refused to say what exactly it was buying. The news leaves investors with more questions than answers. And unfortunately for other entrepreneurs trying to clinch deals via such “blank check companies,? it makes SPACs even more dubious.

Mr. Gross now has until Aug. 30 to complete his mystery deal.

Go to Column from The New York Times »

Why M&A Is Back, for Now

Despite a credit crunch and recession worries, the dealmakers have returned to Wall Street.

Their current run includes Microsoft's (MSFT) $44 billion bid for Yahoo! (YHOO). Major U.S. air carriers are reportedly talking about mega-mergers. And a wave of smaller deals has hit the headlines, including Reed Elsevier's (RUK) $4 billion buyout of ChoicePoint (CPS).

So far it's a pale imitation of 2007, when private equity firms used cheap credit to gobble up company after company. That pumped up the stock market in the first half of the year, just before the credit crunch took it down again.

Fears of a Coming Antitrust Crackdown
The credit crisis still drags on, and private equity players sit on the sidelines, unable to obtain financing for billion-dollar deals. So what's behind this encore performance of the M&A boom? And how long can its run last if the economy continues to deteriorate?

One factor is the Presidential election. The next U.S. President will appoint regulators who can decide whether to challenge deals on antitrust grounds. They will determine whether a proposed combination would restrict competition or create a monopoly. Some deals are being rushed to get them approved before President George W. Bush leaves office on Jan. 20, 2009.

Most deals ultimately get approved, but the process can create a headache for CEOs and shareholders. On Feb. 19, the proposed merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) hit its one-year anniversary as the controversial deal still waits for word from the Justice Dept.'s Antitrust Div.

Obama Has Criticized Bush's Antitrust Record

All else being equal, most assume a Democrat in the White House will be more suspicious of proposed mergers. But it's hard to know what the next President will do. Antitrust regulation is the sort of topic that makes voters' eyes glaze over, so it rarely gets attention on the campaign trail.

Senator Barack Obama [D-Ill.] was the only current candidate to respond to a questionnaire from the American Antitrust Institute last year. Obama criticized the Bush Administration for "the weakest record of antitrust enforcement of any administration in the last half century." He pledged to "reinvigorate" enforcement, and cited health care, including the insurance and pharmaceutical industries, as a sector where the lack of competition has raised prices for consumers.

Delta Air Lines (DAL), Northwest Airlines (NWA), Continental Airlines (CAL), and United Airlines (UAUA) are among the carriers said to be discussing mergers. Airline deals have gotten close scrutiny from regulators in the past, and that's likely to happen again. On Feb. 14, Senator Hillary Clinton [D-N.Y.] said the mergers should prompt "a hard look at the potential effects on workers" before they're approved.

Federal Judges Have the Ultimate Say

Antitrust law is full of "squishy language that reasonable people can disagree on," says Robert Lande, a University of Baltimore law professor who co-founded the American Antitrust Institute. While all regulators may worry that a merger would raise prices, Democrats are more likely to consider other factors, such as whether a merger would restrict consumer choices, Lande says. That approach could threaten mergers of media companies, for example, under an Obama or Clinton Administration.

Still, many argue antitrust policy won't change much even if Democrats take the White House. For one thing, political appointees don't make ultimate decisions on mergers -- federal judges with lifetime appointments do.

Also, a new Administration may affect "close cases," but there is a consensus on most questions, says antitrust expert Paul Denis, now at the law firm Dechert LLP. As a Justice Dept. lawyer in the early 1990s, he helped draft merger guidelines still in place today. The political parties may be split on many other important issues, but antitrust "is an issue where there is probably more agreement than disagreement," Denis says.

A Leadership Vacuum Could Stall Approvals
The 2008 election does create problems for dealmakers, however, Denis says. The transition to a new administration in 2009, often a chaotic process, could create a leadership vacuum, he says. Under normal circumstances, deals under review can stall for months and months, with the average review taking seven-and-a-half months, Denis says. The change in power in early 2009 could add to delays even if Republicans remain in power. Companies have just a few more months to put together big deals before they run the risk of getting stuck in post-election limbo.

For large, controversial mergers like the airline deals or the possible Microsoft-Yahoo combination, the 2008 election is undoubtedly at least one consideration. But otherwise, M&A experts say, the Presidential election is a sideshow to a number of bigger factors shaping the M&A market in 2008.

First, companies are finding more bargains when they look for acquisition targets. The weak stock market has lowered share prices. And private equity firms aren't around anymore to bid up buyout offers. Before the credit crunch made many leveraged buyout deals impossible, companies "got to the point where they didn't feel like they could compete" with private equity buyers, Denis says.

Foreign Buyers Eye Global Brands
A weak U.S. dollar adds to the advantages for foreign buyers. Strong respective currencies are helping Canadian, Asian, and European firms see lots of good prices in the U.S. stock market. "You can afford some deals that you couldn't afford before," says Stefano Aversa, co-president of AlixPartners, a global consulting firm. The most recent example is Anglo-Dutch firm Reed Elsevier's $4 billion offer for ChoicePoint on Feb. 21.

Buyers from India and China may be especially active in 2008, Aversa says. In the consumer space, foreign buyers may be attracted to global brands with great long-term value, Aversa says. In technology, firms in emerging markets with production capacity may want to buy U.S. tech firms for their respected brands and their access to technology and Western consumers, he says.

It won't just be foreign buyers on the prowl for bargains, says Mike Hogan, managing director at Harris Williams. The weak economy may be prompting more CEOs of all stripes to find ways to expand their companies through acquisitions, he says. With his firm focusing on M&A's "middle market" -- companies under $1 billion -- Hogan says the buyout market is "still very active."

More Banking Mergers Are Expected

Popular targets of M&A activity are firms in energy, technology, transportation and logistics, and commodities, Hogan says. For smaller firms, antitrust rules aren't much of a worry. However, the election may have an impact: Buyers of family-controlled firms may want to sell before Democrats allow Bush's cuts to capital-gains and estate taxes to expire, he says.

In other sectors, trends are pushing companies toward consolidation, says Mike Moriarty, a partner at A.T. Kearney, a management consulting firm. Banks, for example, will still want to merge to compete with global giants such as HSBC (HBC) and JPMorgan Chase (JPM). Given the trends in banking, "Aspiring to be the Wal-Mart (WMT) of banking is not a bad idea," he says. Hotels, publishing, aluminium, and steel are other industries undergoing consolidation, he says.

A variety of factors, from elections to strategy to good bargains, may be pushing players toward more M&A activity this year. But it won't be easy for dealmakers: A slowing economy and wild financial markets have many players sitting on the sidelines. Moriarty argues that smart CEOs will see past the current difficulties. If they do, they'll be rewarded. M&A is "such an important part of every successful company's strategic kit," he says. Despite the tough market and weak economy, "Companies are going to find a way to make that happen."

That might be true for the bravest players. But until the economic climate clears up, many firms will be reluctant to spend their rainy-day funds on expensive mergers.

Copyright © 2008 The McGraw-Hill Companies Inc. All rights reserved.

Mckesson Acquired its Customter

McKesson Corporation (NYSE:MCK - News) announced today that it has signed a definitive agreement to purchase Oncology Therapeutics Network (OTN), a U.S. distributor of specialty pharmaceuticals, for approximately $575 million, including the assumption of debt. Sales of specialty drugs are increasing rapidly, especially oncology drugs, and OTN is one of the nation's largest distributors of specialty drug products, serving the needs of more than 3,500 oncologists, 1,500 rheumatologists and other providers. Its annualized revenues are approximately $3 billion. McKesson plans to combine the operations of OTN with the operations of McKesson Specialty, which is reported in the McKesson Distributions Solutions segment.

"The integration of these two businesses will enhance our position in one of the fastest-growing categories of drugs in the United States," said John H. Hammergren, chairman and chief executive officer.

More than 200 oncology drugs are in development across the pharmaceutical and biotechnology industry, representing more than 50% of the new drug pipeline. Between 2006 and 2010, sales of oncology drugs are forecast by IMS Health to increase from $30 billion to $60 billion.

"OTN and McKesson Specialty each have strong, value-based relationships with physicians and manufacturers based on high-quality service and technologies that align clinical outcomes with financial incentives," Hammergren continued. "McKesson has relationships across healthcare and a comprehensive product offering that includes healthcare claims processing and physician revenue cycle outsourcing. We plan to use all these capabilities to provide our customer and supplier partners with a unique specialty pharmaceutical distribution solution."

The acquisition is subject to customary closing conditions, including any necessary regulatory review. Assuming that the transaction closes during the company's third quarter ending December 31, 2007, excluding restructuring charges the acquisition is expected to be marginally dilutive to both McKesson's Fiscal 2008 and Fiscal 2009 earnings per diluted share before becoming accretive to earnings per diluted share in Fiscal 2010.

McKesson also announced that its Board of Directors approved a new, additional $1 billion share repurchase authorization. In the quarter ended September 30, 2007, the company repurchased $425 million in stock, leaving $316 million remaining on the previous $1 billion share repurchase authorization announced in May 2007.

McKesson reaffirmed its previous outlook that the company expects to earn between $3.15 and $3.30 per diluted share for the fiscal year ending March 31, 2008, excluding restructuring charges and adjustments to the Securities Litigation reserve. The outlook includes the expected impact of the purchase of OTN.

"Our acquisition of OTN combined with the Board's additional $1 billion share repurchase authorization demonstrates our continuing commitment to capital deployment that creates stockholder value," Hammergren concluded.

Risk Factors

Except for historical information contained in this press release, matters discussed may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking terminology such as "believes", "expects", "anticipates", "may", "should", "seeks", "approximately", "intends", "plans", "estimates" or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, the most significant of these risks and uncertainties are described in the company's Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: adverse resolution of pending securities litigation regarding the 1999 restatement of our historical financial statements; the changing U.S. healthcare environment, including changes in government regulations and the impact of potential future mandated benefits; competition; changes in private and governmental reimbursement or in the delivery systems for healthcare products and services; governmental and manufacturers' efforts to regulate or control the pharmaceutical supply chain; changes in government regulations relating to patient confidentiality standards; changes in pharmaceutical and medical-surgical manufacturers' pricing, selling, inventory, distribution or supply policies or practices; changes in the availability or pricing of branded and generic drugs; changes in customer mix; substantial defaults in payment or a material reduction in purchases by large customers; challenges in integrating and implementing the company's internally used or externally sold software and software systems, or the slowing or deferral of demand or extension of the sales cycle for external software products; continued access to third-party licenses for software and the patent positions of the company's proprietary software; the company's ability to meet performance requirements in its disease management programs; the adequacy of insurance to cover liability or loss claims; changes in circumstances that could impair our goodwill or intangible assets; new or revised tax legislation; foreign currency fluctuations or disruptions to foreign operations; the company's ability to successfully identify, consummate and integrate strategic acquisitions; changes in generally accepted accounting principles (GAAP); ability to timely complete McKesson's acquisition of OTN as currently scheduled, including receipt of any necessary regulatory approvals; and general economic conditions. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The company assumes no obligation to update or revise any such statements, whether as a result of new information or otherwise.

About McKesson

McKesson Corporation (NYSE:MCK - News) is a Fortune 18 healthcare services and information technology company dedicated to helping its customers deliver high-quality healthcare by reducing costs, streamlining processes and improving the quality and safety of patient care. McKesson is the longest-operating company in healthcare today, and will mark 175 years of continuous operations in 2008. Over the course of our rich history, McKesson has grown by providing pharmaceutical and medical-surgical supply management across the spectrum of care; healthcare information technology for hospitals, physicians, homecare and payors; hospital and retail pharmacy automation; and services for manufacturers and payors designed to improve outcomes for patients. For more information, visit us at

Contact: McKesson Corporation Larry Kurtz, 415-983-8418 (Investors and Financial Press) Kate Rohrbach 415-983-9023 (Business and Trade Media)

Source: McKesson Corporation

Survival of the Biggest

With the dollar down and oil up, U.S. airlines are talking merger. But will consolidation be enough to fend off powerful European carriers?

By Dean Foust, with Kerry Capell in London
BusinessWeek, February 25th, 2008, Pg 28-29

The long-anticipated consolidation of the U.S. airline industry appears to be finally on the horizon. Barring the unexpected, Delta Air Lines (DAL)and Northwest Airlines (NWA) will soon announce they are joining forces to create the nation's largest carrier. When that happens, it's likely United Airlines (UAUA) and Continental Airlines (CAL) will strike their own deal, and it raises the odds that American Airlines (AMR) will follow suit—perhaps linking with a smaller player like Alaska Airlines (ALK) or Frontier Airlines (FRNT), industry sources say.

The immediate pressure driving these pacts is high oil prices. Even with all the wrenching cost-cutting that Delta, Northwest, United, and others endured in bankruptcy, most U.S. carriers are back in the red. But the mergers are also being driven by a competitive threat that could be as onerous as $90-per-barrel oil: the imminent assault by European airlines on the lucrative transatlantic routes that have been the U.S. carriers' few big profit centers. And the European carriers don't plan to stop there. Spurred by the weak dollar, European carriers are publicly agitating to expand a new bilateral aviation treaty to gain the right to acquire or buy controlling stakes in the enfeebled U.S. airlines. The European carriers "are going to trash the profitability of the international routes, which are the only thing the major [U.S.] carriers make money on," says former Continental CEO Gordon Bethune. "They've got to come together and combine their own international networks or get chewed up by the Europeans." (Executives at Delta, United, and Northwest all declined to comment on the state of merger talks or the long-term competitive implications of any deals. Continental did not respond.)

The initial steps toward this future of global megacarriers may already be taking place. In December, Germany's biggest airline, Lufthansa (DLKAY), bought a 19% stake in JetBlue Airways (JBLU). The move ensures Lufthansa access to the crowded New York market via JetBlue's slots at John F. Kennedy International Airport and gives it an effective right of first refusal on any offer for JetBlue. Virgin Atlantic Airways, after years of legal wrangling, won approval to launch Virgin America. The U.S. affiliate, in which Virgin owns a minority stake, flies coast-to-coast routes. And many of the European carriers are devoting more of their fleets to transatlantic routes at a time when cash-strapped U.S. rivals lack the resources to respond. In January, British Airways (BAIRY) announced plans to launch OpenSkies, a new brand that will focus on routes across the Atlantic. "U.S. carriers are not in a position to create new entities like British Airways. They're simply struggling to stay alive," notes Peter Morris, chief economist for Ascend, a London consultancy.

The European carriers could also invest in some of the prospective U.S. mergers. According to industry sources, Delta and Northwest may bring aboard Air France-KLM as a minority investor. Reason? With more than $6 billion in cash, the Paris-based carrier may be their best source for some of the roughly $3 billion the carriers would need to cover the costs of integrating their route structures. "I think a Delta-Northwest merger would be the first step toward a global airline controlled by Air France," says Stuart Klaskin, a Miami-based strategic aviation consultant. "Everyone in this round of U.S. consolidation will have some financing from foreign carriers, and that will be an intermediate step toward consolidation." Industry executives believe that Lufthansa—its JetBlue stake notwithstanding—would be a likely ally for United and Continental, and British Airways could attempt to partner with either American or a regional carrier.

That the European airlines would be the aggressors is a turnabout, given that the U.S. players have historically been stronger. But the rise of low-cost carriers has spurred debilitating fare wars that have left big carriers bleeding billions over the past decade. By contrast, the major European airlines have been largely protected by rules limiting the ability of upstarts to gain access to gates as easily as they can in the U.S.

The latest moves have been triggered by the Open Skies Treaty signed last year by the U.S. and European Union. In the near term, the treaty gives both U.S. and European carriers greater freedom as of Mar. 31 to fly more transatlantic routes, as British Airways plans to do with its new OpenSkies subsidiary. The name was chosen because it "signals our determination to lobby for further liberalization in this market," British Airways Chief Executive Willie Walsh told reporters in January.

While the aviation pact raises the equity stake European carriers can take in their U.S. counterparts from 25% to 49%, for now it limits the investing airline to no more than 25% voting control. That's a restriction European executives are already pushing to have lifted. In a Feb. 4 op-ed in the Financial Times, Walsh demanded U.S. bureaucrats "sweep away the anachronistic restrictions on the ownership and control of airlines, so that EU investors can take majority stakes in U.S. airlines and vice versa." And if the U.S. doesn't acquiesce by 2010, Walsh warns, "we shall press for the termination" of the Open Skies treaty.

Still, both U.S. and European execs are mindful of the certain opposition they'd face from politicians, who fear not just cuts in jobs and service but the loss of their ability to commandeer aircraft during national emergencies. Indeed, industry insiders point to the uproar when a Dubai-owned company attempted to acquire a firm that managed some key U.S. ports. Labor unions could also be an obstacle, as pilot groups could fight any mergers with airlines that employ lower pay scales. Consequently, analysts believe U.S. and European carriers are likely to opt at first for joint ventures in which they would fly more routes for each other, splitting profits. Only then, if opposition eased, would full mergers follow. The question is whether the U.S. airlines will be the carriers that survive.

February 25, 2008

Why Delta-Northwest won't work

Industry consolidation is supposed to cure the airlines' most intractable ills, right? It won't.

By Barney Gimbel, writer

NEW YORK (Fortune) -- There was little doubt last summer when former Northwest Airlines executive Richard Anderson took the helm at Delta Air Lines that the carrier would gobble up a competitor. It was just a matter of which one and when.

So Wednesday's board meeting to finalize a merger between Delta (DAL, Fortune 500) and its smaller rival, Northwest Airlines (NWA, Fortune 500), surprised no one. Shareholders clamored for it. Analysts gave their blessing. And the media breathlessly reported its inevitability. Consolidation, the thinking goes, will solve all of the industry's woes.

Not so fast. An analysis of the likely deal terms suggests this merger won't overcome the many problems facing airlines. In the end, we might just have a bigger company plagued by the same problems, including sky-high oil prices and powerful labor unions. Ditto for United (UAUA, Fortune 500) and Continental (CAL, Fortune 500) if they too, as has been widely reported, tie the knot. Let me explain.
What a difference a year makes

It was just over a year ago that Delta's former CEO, Gerald Grinstein, warned a packed room of U.S. senators about the perils of airlines mergers. Grinstein was there to fight off a hostile bid from US Airways (LCC, Fortune 500) and had a phalanx of uniformed Delta pilots standing behind him. He called the transaction "anti-competitive" and said it would "threaten the future stability of our nation's transportation industry."

For a lot of reasons, Grinstein didn't want to sell his airline to US Airways. It was his baby. He had nursed it back from the brink of insolvency and he wasn't about to let what he considered to be an unworthy competitor snap it up and reap any rewards. He may have believed what he told Congress: Once Delta emerged from bankruptcy, it would be worth far more than US Airways' $9.5 billion offer.

Things didn't work out as Grinstein had hoped. Today Delta is worth only $6.7 billion and Grinstein - and his team - are gone. Anderson inherited an angry board of directors and impatient shareholders. The only way to fix the problem was to find a partner - and fast.

What changed was the price of oil. At $100 a barrel, oil is almost double what it was when Grinstein testified in January 2007. It's become all but impossible for airlines to turn a profit. Add to that the inability to hike fares substantially, mounting foreign competition, and signs of a economic downturn, and it's no wonder airlines are scrambling for alternatives.

Combining with a rival would give airlines some much-needed capital. "This is about survival." says former Continental chief executive Gordon Bethune, who recently advised a New York hedge fund that wants Delta to merge with either Northwest Airlines or United Airlines. "These companies just need more revenue than they can generate with that kind of expense level."

Two theories are driving airline merger talks. Cost-cutting by flying the same amount of passengers on fewer airplanes is one. Delta, for instance, has nine daily flights between Nashville and its Atlanta hub. Northwest flies three times a day from Nashville to its Memphis hub. But the passengers often aren't going to either city; they're connecting to Los Angeles or Dallas or Boise. By merging, the combined carrier could, say, cut three flights and still meet demand.

The potential savings is what drove US Airways to bid for Delta last year. US Airways suggested it could save nearly $1 billion by combining the two carriers and lopping off 10 percent of the flight schedule.

But belt-tightening isn't driving the Delta-Northwest talks, according to published reports. The "new" Delta doesn't plan to cut many jobs or reduce much capacity. They don't even plan to drop any hubs. If that remains the plan, then the combined carrier won't be able to generate more revenue through higher fares.

Instead, they plan to boost revenue by leveraging their global network to seize market share. It makes sense in theory: Northwest has an extensive Asian presence while Delta has a large European and Latin American network. The problem is, size alone won't stimulate demand. The new Delta would have to use its larger footprint to steal customers from competitors - a tough proposition if other airlines merge too.

The only way Delta-Northwest plans to save money is through cutbacks in Northwest's Minneapolis base, and by combining their respective airport operations, reservation lines and technology departments. Even so, the costs savings would be negligible - and possibly offset by any deals to secure the approval of the airlines' labor unions. If Delta agrees, say, not to lay off pilots then it can't reduce the number of planes or routes it flies.

None of this bodes well for the airline industry. After a Northwest-Delta deal, expect to see the remaining large carriers - American, Continental, United and US Airways - attempt similar mergers with similar terms. And then what do you have? Bigger companies flying the same routes with the same airplanes - only now with higher labor costs. For some reason, in the airline business, people always forget that bigger doesn't mean better.

Sprint's Wake Up Call

Special Report February 21, 2008, 5:00PM EST
Sprint's Wake-Up Call
Reversing a miserable service reputation after the Nextel merger will be key to the company's turnaround
by Spencer E. Ante

When Daniel R. Hesse was named chief executive of Sprint Nextel in December, he figured that customer service was going to be one of his biggest challenges, given how poorly the wireless service provider had performed on that count in recent years. He quickly found out precisely how big. The lanky 54-year-old walked into his first operations meeting at Sprint headquarters in Overland Park, Kan., and found that customer service wasn't on the agenda at all. He changed course right away. Customer service is now the first item discussed at every one of the weekly meetings. "We weren't talking about the customer when I first joined," says Hesse. "Now this is the No. 1 priority of the company."

With good reason. Since Sprint and Nextel merged three years ago, the deal has turned into something of a fiasco, with the company's stock down 66% since the agreement was struck. Poor service is a central reason. After the merger, unhappy customers defected in droves, and profits evaporated. On Jan. 31, Sprint Nextel (S) said it would take merger-related charges of as much as $31 billion, wiping out nearly all of the deal's value. In addition, two lawsuits have been filed against the company for allegedly extending customers' service contracts without their consent.

Employees like Paula Pryor saw the merger's impact firsthand. The 38-year-old, who worked in a call center in Temple, Tex., says the numbers-driven management approach implemented after the combination led to poor morale and deteriorating customer service. Even bathroom trips were monitored. "They would micromanage us like children," says Pryor, who was fired last year after taking time off when her father died.

The toll on Sprint's reputation has been dear. The company has ranked last among the country's five major wireless carriers in customer service every year since the merger in 2005, according to annual surveys by J.D. Power & Associates (MHP).

Now, two months into his job, industry veteran Hesse is disclosing for the first time detailed plans for turning around customer service. He's increasing investments in customer care, adding service technicians in retail stores, and reversing many management practices in customer call centers. Hesse is convinced that restoring Sprint's reputation with customers is the key to its future. "You will see progress," he says. "We have the right people in place. We will get it done."

For the combined Sprint Nextel to be criticized for quality issues is a remarkable reversal. During the 1980s and '90s, when Sprint was the nation's third-largest long-distance company, it distinguished itself by advertising a fiber-optic network so high-quality you could "hear a pin drop." Nextel was known for its "push-to-talk" technology and the best rate of customer retention in the industry.

When the two unveiled plans to merge in December, 2004, there was a certain logic to the deal. Separately, they were much smaller than AT&T (T) and Verizon Wireless, but together they would nearly rival the two wireless leaders in size. The theory was that, combined, they would have the bulk to get the latest phones, best prices on equipment, and most complete network for wireless customers. "The combination of Sprint and Nextel builds strength on strength," Gary D. Forsee, CEO of Sprint and later the combined companies, said then.

But as the two formally combined in August, 2005, it became clear this deal would be even more complex than the typical megamerger. At the same time Forsee and Executive Chairman Timothy M. Donahue were piecing the two companies together, they laid out an aggressive strategy for the combined entity to become a leader in wireless broadband services and content. That led to plans to spin off Sprint's local telephone business, form partnerships with the cable industry, and develop a wireless technology known as WiMAX. "There was so much going on after the merger that there was a lack of focus," says one former senior-level insider.

In September, 2005, the month after the merger closed, Forsee told Wall Street that the deal was going more smoothly than expected. He raised the projection for expected "synergies," or cost savings, to $14.5 billion, up from the original $12 billion estimate at the time of the merger announcement.

That boosted pressures to find cost savings throughout the company, say former employees and executives. An important component of the effort was importing the quantitative management approach of Sprint to Nextel. While some of the new metrics worked well, others had detrimental effects, former employees and executives say. In particular, call centers began to be measured and viewed primarily as cost centers, rather than opportunities for strategic advantage. Customer service ended up a secondary priority, say former executives. Forsee, now the president of the University of Missouri, declined to comment for this story.

In the fall of 2005, as board members gathered for their first meetings as a combined company, the directors from Nextel noticed another key change, according to the former senior-level insider. Before the merger, Nextel directors talked at every board meeting about "churn," the industry term for the percentage of existing customers who leave each month. The directors felt churn was a good shorthand way to understand the quality of customer service, and they prided themselves on Nextel having the lowest in the industry. But after the merger closed, the combined board paid little attention to churn, concentrating instead on the progress with synergies and strategic initiatives. "From the very beginning there was a philosophical difference on churn," says the former insider.

In the trenches, meanwhile, workers were dealing with fallout from the merger. Pryor remembers the conditions in her Texas call center, originally a Nextel facility, shifting dramatically in the first months after the merger closed in late 2005. Managers began tracking what she was doing on her computer. Overtime pay became much harder to get. Most puzzling for her was the pressure to keep customer calls short. At Nextel, she was judged only on the number of customer problems she solved each month, however long they took, and she would occasionally spend 30 minutes to resolve a thorny issue. But after the merger, speed was the priority, she says. "They would say, Your calls need to be shortened,'" she says.

Other employees say they felt similar pressure. Gayle R. Romero, who worked in Sprint Nextel call centers for six years, says that at one team meeting after the merger, a manager said, "if you don't think you can handle this, I hear McDonald's is hiring." Says Romero: "Everyone was scared."

Customer service issues began to surface later that year. In January, 2006, Sprint unveiled plans to merge the two billing and customer care systems from the combined companies. But employees say there was little evidence of any progress in the following months. Service reps had to toggle back and forth between systems, and at times couldn't get access to billing or technical information for customers. "It was like Noah's Ark," says one former insider. "We had two of everything."

Churn rose quickly, hitting 2.4% in the third quarter of 2006. That was the highest among the country's major carriers and far above the 1.4% rate Nextel reported before the merger. At the same time, Sprint reported softer-than-expected earnings, punishing its stock.

As Sprint came under financial pressure in 2006, it began to ask call-center workers to engage more in sales. Whereas Nextel service reps had no sales quotas, workers at the combined companies were required to hit targets for renewing contracts or retaining customers who wanted to cancel accounts. One call-center employee says she was supposed to renew 600 to 900 contracts per month, and sometimes the target exceeded 1,000. In the customer retention unit, workers were given cash bonuses of $2,000 to $3,000 per month if they met monthly quotas. "They wanted those big bonuses," says Romero.

Allegations in the two lawsuits against Sprint raise questions about how far Sprint workers went in meeting those sales quotas. Selena L. Hayslett, a realtor from Apple Valley, Minn., says she called Sprint Nextel four times in late 2006 to dispute charges on her bill. Then she realized that each time she called, Sprint was extending her contract, without her consent, according to an affidavit filed in one of the suits. "I felt tricked," said Hayslett.

Her complaint is included in a lawsuit filed by the Minnesota attorney general, alleging that Sprint extended contracts when customers made small changes to their service. "It's kind of like the Hotel California," says Lori Swanson, the attorney general, "where you can check in and never leave." Sprint declined to comment in detail on the lawsuit. However, a spokesman says there are "discrepancies between our rec-ords and the lawsuit's portrayal of customer interactions."

Paula Appleby, a plaintiff in the other lawsuit, claims she tried to cancel her Sprint contract a number of times. But "each time she has attempted to cancel her service she has been told that her contract had been previously extended," according to the complaint, a federal lawsuit filed earlier this month seeking class action status. Sprint said it is still reviewing the Appleby lawsuit and declined to comment on specific claims.

In early 2007, as its financials deteriorated, Sprint cracked down on the freebies that call-center workers could give to keep customers happy, say current and former employees. One current manager in customer retention says that in the first half of 2007, Sprint cut back on virtually all the free minutes, service credits, and free phones that his workers used to be able to dole out. "One hundred minutes is it," says the manager, who asked for anonymity because he does not have authorization to speak to the press.

The new policies hurt Sprint's ability to build its customer base. In the third quarter of 2007, churn stayed high, and Sprint saw its subscriber numbers remain flat, at 54 million, while rivals AT&T and Verizon added millions. In October, Forsee stepped down as CEO under board pressure. Today, Hesse is reversing course on several fronts, hoping to salvage what he can from the troubled merger. He and his lieutenants aren't eliminating the quantitative approach entirely, but they're changing many of the old metrics to now emphasize service over efficiency.

Bob Johnson, Sprint's new chief service officer, has eliminated limits on the amount of time service reps spend on the phone with customers. Instead, he'll track how frequently reps resolve customers' problems on the first call. Employees who don't solve a minimum percentage on the first call won't be eligible for sales bonuses. He'll also track how quickly customer calls are answered, to ensure they're getting prompt attention. "My incentives and policies are all driven around improving the experience," says Johnson. He says the long-delayed combined billing system will be done by May.

Hesse is also returning to the Nextel philosophy in a number of areas. Churn, for example, is once again a top priority, discussed at every operations meeting. The figure remained stubbornly high, at 2.3% in the fourth quarter of 2007.

As for the allegations in the two lawsuits, Johnson says Sprint has implemented a zero tolerance policy for shoddy customer service, which includes a new focus on extending contracts only with detailed approvals from customers. Among other things, Sprint sends a letter to customers outlining any changes to their account, and customers have 30 days to cancel the changes.

Hesse knows he has a long, hard road ahead of him. Still, he's convinced Sprint is at last moving in the right direction. "We're beginning to improve customer service already," he says. "There will be a lag between when it improves and when the world knows that Sprint's customer service has improved. There's always a perception lag."

February 24, 2008

Will Steenland's baggage arrive in ATL?

"NWA's Steenland: Odd Man Out?" (Click link to download file)
by Chris Serres
Star Tribune. Minneapolis, MN. February 23, 2008.

Continue reading "Will Steenland's baggage arrive in ATL?" »

Why M&A Is Back, for Now

What's behind the new urge to merge? The November election, for starters

Despite a credit crunch and recession worries, the dealmakers have returned to Wall Street.
Their current run includes Microsoft's (MSFT) $44 billion bid for Yahoo! (YHOO). Major U.S. air carriers are reportedly talking about mega-mergers. And a wave of smaller deals has hit the headlines, including Reed Elsevier's (RUK) $4 billion buyout of ChoicePoint (CPS).

So far it's a pale imitation of 2007, when private equity firms used cheap credit to gobble up company after company. That pumped up the stock market in the first half of the year, just before the credit crunch took it down again.

Continue reading "Why M&A Is Back, for Now" »

Huawei Role Stalls Bain's 3Com Acquisition

on 20 February 2008, 06:50
by Reuters News

Bain Capital Partners said on Wednesday it withdrew its application for U.S. national security approval for its planned $2.2 billion acquisition of network-equipment maker 3Com.
The withdrawal and lack of approval by the Committee on Foreign Investment in the United States (CFIUS) marks a huge obstacle to the deal's closing. But the companies said they were still in discussions

Bain agreed in September to buy 3Com in a deal that would also give China's Huawei Technologies a 16.5 percent minority stake. Huawei could increase its stake in 3Com by up to an additional 5 percent.

The deal was subject to scrutiny by CFIUS, an inter-agency U.S. governmental panel that reviews corporate acquisitions involving foreign buyers.

"We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction," said 3Com President Edgar Masri.

"While we work closely with Bain Capital Partners and Huawei to construct alternatives that would address CFIUS' concerns, we will continue to execute our strategy to build a global networking leader," 3Com said.

In October, eight U.S. lawmakers were backing a bill suggesting that the planned buyout 3Com "threatens the national security of the United States."

3Com previously said Huawei would not have access to sensitive U.S. technology or U.S. government sales and that it would lack operational control or the ability to make decisions for the firm.

Last week, Bain offered to divest 3Com's Tipping Point unit, which makes national security software, a source familiar with the situation said.

Last year, 3Com had planned to spinoff Tipping Point through an initial public offering, but that idea was scrapped when Bain agreed to buy Marlborough, Massachusetts-based 3Com.

Tipping Point makes "intrusion prevention" systems to protect networks at large businesses and government agencies. 3Com acquired Tipping Point in late 2004 for $430 million.

February 22, 2008

Merger advice from a man who's been there, done it right

Neal St. Anthony: Merger advice from a man who's been there, done it right
By NEAL ST. ANTHONY, Star Tribune

February 18, 2008

If Delta and Northwest airlines announce a merger, its success likely will depend on whether top executives establish their employees as the No. 1 stakeholders in what would be America's largest carrier. They also must focus more on increasing revenue than on cutting costs.

That's the upshot of a conversation I had last week with Dick Kovacevich, the chairman of Wells Fargo & Co. who is widely regarded as America's most successful banker and merger architect over the last couple of decades.

Kovacevich declined to comment directly on the Delta-Northwest merger talks or the CEOs involved. But his experience bringing together two banking giants with distinct regional personalities is instructive. After all, airlines and banks are both highly regulated businesses that deliver essential services to retail customers.

Kovacevich put together a string of mergers, capped in 1998 by Norwest Corporation's stunning acquisition of the larger Wells Fargo.

Most bank mergers were disasters because they focused most on short-term cost cuts that were designed to please Wall Street analysts and investment bankers. Too often, they aggravated overworked employees and shortchanged customers, many of whom fled to smaller competitors.

"Revenue is the gift that keeps on giving," Kovacevich said in an interview last week. "My belief is that you should never do a merger unless revenue growth of the combined companies in the future will be greater than the sum of the two had they remained independent.

"Many times you see cost cuts, but revenue goes down because you cut the heart out of the service. Many mergers have resulted in less revenue. In about 80 percent of mergers, the stock of the buying company goes down."

A lot of big bank mergers were premised on promises to Wall Street that the buyer would cut up to 30 percent of the acquirer's costs within a year. Running against conventional wisdom, Kovacevich, in his capstone Wells Fargo deal, told Wall Street he would cut 6 percent of cost over three years.

"The employee has got to be the No. 1 stakeholder," Kovacevich said. "You should have seen eyes roll when I would talk to employees [at the outset of a merger] about our competitive advantage," Kovacevich said. "And we reduced some positions over time. But they saw how we did it. And we listened to them. And we did stop some things that weren't working ... employees watch what you do, not what you say.

"I'm not expert in airlines, but it is about that pilot and flight attendant. We've proven in banking, if they don't like coming to work every day, it won't work."

Northwest CEO Doug Steenland, who ran the company through an acrimonious mechanics strike and 18-month bankruptcy that meant 30 percent pay cuts for employees, is expected to step down in favor of Delta boss Richard Anderson, a former NWA CEO.

Anderson, who is more extroverted than Steenland, dodged three punishing years at NWA. Anderson had taken an executive position at United HealthGroup before parachuting into the top spot at larger Delta Airlines after it emerged from bankruptcy last spring.

Steenland, who is given credit for navigating the airline through its reorganization, nonetheless carries a lot of baggage. His controversial, multimillion-dollar compensation package was disclosed just as NWA emerged from bankruptcy proceedings last May.

Anderson seems to be the better bet to turbocharge a Delta-Northwest merger into something bigger than the two separate airlines. That means improved revenue and employee morale.

But whatever their respective roles in a merged airline, Steenland and Anderson will have to be credible and communicative. Minnesota taxpayers, who have cut NWA a half-billion in loans and subsidies since 1991, are also key stakeholders, as are the passengers of both airlines.

This can be a great, globe-spanning carrier, but only if all the stakeholders believe in a greater future that transcends the deal.

Neal St. Anthony • 612-673-7144 •

Why merger and acquisition readiness needs to be a daily Process, not a one time event

Why merger and acquisition readiness needs to be a daily Process, not a one time event
By Robert DeLeeuw © Copyright 2008 by American Venture.
Reproduction by any means prohibited without prior written consent

Robert De Leeuw

There's no doubt that venture capital is a significant source of equity for smaller companies. Yet, every venture capital firm seeks to exit their investment within a given timeframe – usually three to five years from the initial investment. Despite the cachet of an initial public offering, the reality is that most successful exit strategies involve mergers or acquisitions. And, while big companies play in the M&A arena on a regular basis, the proposal of a merger or acquisition can send chills down the spine of a smaller venture-backed company unless it starts to view merger and acquisition readiness activity as a daily process rather than a one-time event.

Merger and acquisition readiness revolves around three main components: speed, cost and quality. For example, how valuable is it to your organization to move quickly and get things done? Most venture-backed companies pride themselves on being nimble.

How critical is it to the organization to keep clients and employees fully engaged and protect ongoing revenue streams? If you've just brought your product to market and signed your first customers, you know what a major effort that was.

What are management's goals for the completion of the integration? Having the right processes in place instead of starting from a standing-still position when the news of an impending merger or acquisition is received can mean the difference between success and failure.

Yet, with everything else you need to do on a daily basis, why would you want to be thinking about M&A as well? Whether M&A is imminent or several years down the road, following best practices makes good business sense. For instance, identifying customer and employee impacts early and developing contingency plans for major change events ensures an agile, smooth-running organization.

Clearly, the ability to retain customers and employees is critical to the success of any organization. Knowing and focusing on the customer relationship — especially if the proposed M&A will open new markets or create a global organization — means customer-centric programs can be designed and implemented as part of the readiness plan. Remember, mergers can have significant impact on customers; and if the change process isn't properly defined and managed, you might be opening a door for your competitors right into your customer base.

Employee retention is also critical during times of change, especially in those jobs that touch customers. Losing key players – who may have valuable customer or subject-related knowledge – represents a big risk factor.
In order to manage speed, cost and quality, organizations need to plan, organize and assess. Productive merger and acquisition planning can be started with the formation of a transition management office (TMO). This is the recommended infrastructure needed to effectively plan, manage and control the many change-related initiatives.

By identifying key TMO personnel and defining their roles (i.e., who is going to be involved in mergers and acquisitions and who is going to "backfill" that individual's daily role if they become involved full-time in the process) you're taking the first step to getting your environment ready. All lines of business, operational, technical and support organizations should be represented in your TMO. And what if the optimal team for your TMO does not exist within your organization? Collaborating with a highly experienced "on call" provider can augment your internal resources.

Once the TMO is formed, an integration playbook must be created to manage the multiplicity of variables involved in change. When two disparate organizations come together, the "to do" list is endless. Remember, the stakes – and expectations - are high. The TMO needs to define the tools, templates, and methodologies needed for success. Mapping the organization – that is, taking an inventory of every system and every physical location, down to every person, product, and process – is an indispensable launching pad to change readiness.
Managing and fully leveraging IT resources and business data is one of the most critical issues shared by both companies. That's one area where process mapping is essential. "Mapping and gapping" horizontally for an enterprise view (versus in divisional silos) will help the TMO examine the complex inter-relationships in one view. Once that process is complete, the TMO can better define the best practices that will ensure operational stability going forward.

Readiness also means ensuring the related logistics are in place. Who owns the cost centers, budgets and related financials? Does the TMO have ready access to conference call lines, lodging and transportation? Also, who owns employee training? Are effective communication vehicles in place for customer and employee communications? I always recommend that one person oversee communications control for all merger-related activities: if this function is mishandled, recovery is difficult. Internal change impacts should be communicated in a consistent and timely manner. Employees should be informed before customers, so that they can support these activities by proactively reaching out to and answering customers' questions.

Implementing a reporting process will help support the communications process. Venture-backed companies haven't been under the microscope of the Sarbanes-Oxley Act, however, combined with Basel II, the USA PATRIOT Act and other corporate governance requirements gaining steam, it's better to get your act together BEFORE the merger because it's highly unlikely that it's going to be easier post-merger. These controls have resulted in an overhaul of the manner in which we will do business in the future. Formalizing reporting processes will result in better readiness, better communications, and better compliance.

Industry research indicates that 80 percent of venture-backed companies get sold and never go public. It's not a roll of the dice that dictates whether M&A is in your future: it's a high probability. Being prepared at the outset by creating a TMO, mapping your organization (its people, products, and processes, as well as strengths and weaknesses), and having the necessary communications plan in place to activate when the time is right, can help your venture-backed company drive reduced risks and costs, accelerate time-to-productivity, and ensure the creation of a customer-focused entity.

February 19, 2008

Rio Tinto rejects sweetened buyout bid

LONDON (MarketWatch) -- Rio Tinto has again spurned BHP Billiton Ltd., rejecting Wednesday a sweetened stock-swap acquisition offer now valued at $147 billion, in the first acquisition maneuvers since Aluminum Corp. of China and Alcoa Inc. recently agreed to buy a big block of Rio Tinto, the Anglo-Aussie mining giant.

Continue reading "Rio Tinto rejects sweetened buyout bid" »

China and Alcoa Buy Stake in Rio Tinto

BEIJING — The state-owned Aluminum Corporation of China joined Alcoa on Friday in taking a 12 percent stake in Rio Tinto. The Chinese company also said it might buy more shares to derail a hostile takeover attempt by BHP Billiton, a merger that China fears could drive up prices for raw materials even further.

Chinese officials have expressed concern that combining Rio Tinto and BHP Billiton, the world’s two biggest commodities companies, would create a giant with a dominant position, particularly in iron ore, which China needs to sustain strong economic growth. Other big commodity customers in Japan and South Korea have also objected to the BHP proposal.

China’s move came less than a week before the deadline for BHP to make a formal offer for Rio Tinto. Both miners are listed in London and Melbourne, Australia.

Continue reading "China and Alcoa Buy Stake in Rio Tinto" »

February 12, 2008

Delta & Northwest Merger Looming - could be announced in next few weeks?!

Delta - Northwest Deal Seen In Weeks

Published: February 11, 2008
Filed at 5:30 p.m. ET

NEW YORK (Reuters) - A merger between Delta Air Lines Inc and Northwest Airlines Corp could be announced in the next few weeks as Northwest pilots review details of a proposed deal, people briefed on the situation said on Monday.

Northwest's Air Line Pilots Association has been provided with details of what a combined carrier would look like, a person briefed said.

Another person said a deal between the two airlines -- which would create the largest passenger airline in the world -- could be announced within the next few weeks. Although the exact structure of the deal remains unclear, many analysts believe Delta would end up buying Northwest.

Merrill Lynch & Co Inc is advising Delta in the talks, a source briefed on the talks said.

Spokespersons for Northwest, Merrill and the pilot unions declined comment. Delta did not immediately return calls for comment.

Many airline experts say mergers are needed to help stabilize the volatile industry, which finally emerged from a five-year slump in 2006 after racking up $35 billion in losses.

United Airlines, whose parent company is UAL Corp , and Continental Airlines Inc also are in the "very initial stages" of merger talks, a source familiar with the matter told Reuters last Thursday.

Continental declined comment. UAL could not be immediately reached for comment, but the carrier has previously declined to discuss its possible merger activities.

Analysts have said the mergers could lead to higher fares in some markets, at least in the short term, as combined carriers cut costs by reducing flights and used their increased market power to raise prices.

"There is such a great sense of urgency associated with cutting costs now because of huge fuel costs, the economy in a recession and tough competition from low-cost carriers," said Robert Mann, airline industry consultant with R.W. Mann & Co.

A Delta-Northwest deal would combine Delta's strong Atlanta hub and its trans-Atlantic route network, with Northwest's extensive Asia presence that includes a hub in Tokyo.

Still, the merger would be a costly process for Delta, which, as of December 31, had $3.3 billion in cash, cash equivalents and short-term investments, of which $2.8 billion was unrestricted.

Delta has said it has an additional $1 billion available under a revolving credit facility, resulting in a total of $3.8 billion in unrestricted liquidity.

"Delta will need at least $5 billion to $6 billion in capital to pay for the deal and run through the integration process," Mann said. "That would cover the market cap of Northwest and for all the logistics of a merger."

Delta has a market cap of $4.9 billion while Northwest's market cap stands at about $4.3 billion.


The pilots of Northwest have said they would support a merger with another carrier if the workers received a stake in the combined airline.

But Delta's pilot union helped derail a hostile takeover bid by US Airways Group Inc last year by rallying opposition from the company's bankruptcy creditors committee and employees.

Northwest's flight attendants, which like the carrier's pilots were forced to accept deep wage cuts while Northwest was in bankruptcy protection, have said they also would demand a stake in a combined airline, as well as job protection and higher wages for its members.

Unions see consolidation as an opportunity to claw back some of the hundreds of millions of dollars of wages and benefits lost during the industry's five-year slump, which ended in 2006.

But the carriers' employees also are nervous, as any deal could result in job losses and upset seniority rankings -- a key concern of airline employees, union members said.

Seniority is critical for pilots because it helps determine pay, work schedules and the size of aircraft they fly.

Northwest shares closed down 45 cents to $18 on the New York Stock Exchange. Shares of Delta fell 19 cents to $18.

(Additional reporting by John Crawley in Washington D.C.)

(Editing by Carol Bishopric)

February 11, 2008

Yahoo Says "No Way Jose" to Microsoft!

Yahoo Officially Rejects Microsoft’s Takeover Offer

Published: February 11, 2008
Yahoo officially rejected Microsoft’s $44.6 billion takeover offer on Monday, calling the bid too low.

Bits: Yahoo Shareholders Believe Company Is Bluffing Microsoft
“After careful evaluation, the board believes that Microsoft’s proposal substantially undervalues Yahoo including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments,? the company said in a statement.

The company said it would continue to evaluate all its options.

Yahoo shares closed more than 2 percent higher Monday, apparently on anticipation that Microsoft might sweeten its offer. They ended at $29.87, up 67 cents, while Microsoft’s shares closed at $28.21, down 35 cents.

Analysts have suggested that Microsoft could afford to pay as much as $35 a share for Yahoo, up from its current offer of $31.

The next move is now up to Microsoft and a largely unknown executive on the company’s sprawling campus, Christopher P. Liddell.

Mr. Liddell, a former banker from New Zealand, is the behind-the-scenes architect of Microsoft’s hostile takeover, the company’s first unsolicited bid and perhaps the most audacious effort by a technology company to wrestle control of a competitor.

With Yahoo’s board rejecting Microsoft’s advances, it will fall to Mr. Liddell, an outsider to the software industry who joined Microsoft as its chief financial officer just two years ago, to plot the company’s next steps in this bitter battle — and in the process, reshape Microsoft’s not-invented-here culture toward making aggressive acquisitions.

“You have to be disciplined and ruthless,? Mr. Liddell said by telephone last week, before Yahoo’s board decided to rebuff the offer. “We should see acquisitions as a way of growth. We should not be embarrassed at all.?

Microsoft has made acquisitions over the years, but mainly smaller ones to jump-start a fledgling business or pick up a needed technology. Its media player, voice recognition, health search and business software, among others, are technologies Microsoft bought along with the companies that created them.

However, when it has come to making big deals, it has balked until recently. In late 2003, Microsoft talked to the big German business software maker, SAP, about buying it. The deal, had it been pursued, would have cost Microsoft more than $50 billion.

The talks, made public in a court case in 2004, were abandoned, Microsoft said, because of the “complexity of the potential transaction,? especially the management headaches of trying to put the two big software companies together.

Mr. Liddell, who calls himself Microsoft’s “gatekeeper of funding,? spent the weekend devising ways to raise the stakes in the fight for Yahoo now that the company’s original proposal has been rejected, holding a series of marathon conference calls with his cadre of Wall Street advisers.

More an accountant than a technologist, Mr. Liddell, who joined Microsoft after serving as chief financial officer at International Paper, the giant forest products company, clearly has no compunction about ruffling any digital feathers. Among his alternatives is a series of bare-knuckle Wall Street tactics: First, Microsoft is planning to crisscross the nation to meet with Yahoo’s largest shareholders in an election-style campaign, hoping they can put pressure on Yahoo’s board, people briefed on the company’s plans said.

Microsoft may have an easier time than it could have had two weeks ago: since then, millions of Yahoo’s shares have traded hands to short-term-oriented hedge funds that typically favor a quick sale, as opposed to value investors who hold shares for the long term.

Microsoft could also decide to make an offer directly to shareholders, called a tender offer, which would put more pressure on Yahoo’s board to negotiate. At the same time, Microsoft could also set a deadline for its bid, known as an “exploding offer.?

And if Microsoft decides to make this a nasty battle, it could start a proxy contest to oust Yahoo’s board at its next election; it would have until March 13 to nominate a new slate of directors.

Microsoft’s advisers in the takeover effort are Morgan Stanley and the Blackstone Group. Its lawyers are Simpson Thacher & Bartlett and Cadwalader Wickersham & Taft.

They are facing Yahoo’s team of bankers at Goldman Sachs, Lehman Brothers and Moelis & Company, and its lawyers at Skadden, Arps, Slate, Meagher & Flom.

Microsoft also hired outside public relations advisers, Joele Frank, Wilkinson Brimmer Katcher and Waggener Edstrom Worldwide. Yahoo has Abernathy-McGregor and Robinson, Lehrer, Montgomery.

Microsoft may simply raise its offer to clinch a deal. But Mr. Liddell, speaking generally about negotiations, seemed to suggest he was willing to play hardball. “You have to be willing to walk away,? said Mr. Liddell, who plays rugby regularly and has completed several triathlons.

For Mr. Liddell, who sends e-mail messages to colleagues at all hours and is a PowerPoint whiz, the prospect of joining Microsoft as an outsider and trying to transform it into a financially oriented acquisition machine was daunting. “I knew there had been a history of people coming in here and it not working,? he said.

Mr. Liddell was one of several high-profile outside hires at Microsoft in recent years including Ray Ozzie, the creator of Lotus Notes, as the company’s chief software architect; and B. Kevin Turner, a former Wal-Mart executive, as chief operating officer.

Mr. Liddell, who has a master’s degree in philosophy from Oxford, found that with Bill Gates and the president, Steven A. Ballmer, “If you do a good job, you fit in. They don’t suffer people very well who don’t come prepared.?

He has a background as an investment banker at Credit Suisse First Boston in Auckland. Since he joined the company, Microsoft has made 50 acquisitions.

He has pushed the company to use its cash — it has spent $54 billion on stock buybacks and dividends since his arrival. And it has even taken on, dare it be said aloud at Microsoft, debt for the first time in the company’s history. If the company’s bid for Yahoo is successful, Microsoft will be doing both.

Steve Lohr contributed reporting.

February 10, 2008

Yahoo plans to reject Microsofts bid

Fortune) -- Yahoo plans to reject Microsoft's $44.6 billion takeover bid, the Wall Street Journal reported Saturday, citing a person familiar with the situation.

The source, according to the paper, said Yahoo's board believes Microsoft's offer of $31 per share "massively undervalues" the company and does not account for the risk that a deal could be blocked by regulators.

The source also said that the company is unlikely to consider any offer below $40 per share, according to the paper. Such a premium would increase the value of the takeover offer by $12 billion.

Microsoft would not comment to Fortune on the report. Yahoo did not return a call seeking comment.

On Feb. 1, Microsoft (MSFT, Fortune 500) made an unsolicited $44.6 billion cash and stock bid for Yahoo (YHOO, Fortune 500). The bid represented a 62% premium over Yahoo stock price one day earlier.

A Microsoft-Yahoo combination would create a powerful number two player in the online search business, which Google commands. It would also be one of the biggest tech deals in years, on a par with Hewlett-Packard's $25 billion acquisition of Compaq in 2002.

Both Microsoft and Yahoo have fallen far behind Google in the lucrative field of Internet search. Yahoo's earnings and share of the online search market have badly trailed Google.

Google reigns over 58.4% of the U.S. search market, while Yahoo has 22.9% and Microsoft's share is just 9.8%, according to comScore.

The combined forces of Microsoft and Yahoo would also make a stronger force in online display advertising - the type of targeted banner ads that Yahoo is known for.

Soon after the bid was announced, Google (GOOG, Fortune 500) issued a statement against the deal, saying in a letter that the combination would pose significant competitiveness issues. At issue: The "overwhelming share of instant messaging and web e-mail accounts."

Microsoft shares have lost 12% since Jan. 31, closing Friday at $28.56. Yahoo shares have gained 52%, to $29.20.

If Yahoo does dig in its heels, the question will be whether Microsoft CEO Steve Ballmer has the stomach to pursue a hostile takeover of Yahoo, a move that would likely involve a drawn out campaign to oust the Internet pioneer's board.