HBR adds to business failure learning library with "7 Ways to Fail Big"

This article in the September 2008 issue of the Harvard Business Review, by Chunka Mui and Paul Carroll, discusses seven corporate worst practices and relates business stories that demonstrate them. The practices are:

1. The Synergy Mirage - companies justify acquisitions by touting synergies that just aren't there, or aren't there in enough volume to make the price worthwhile. (Quaker buys Snapple, Unum and Provident merge.)

2. Faulty Financial Engineering - companies borrowing from the future to make today's revenue look better. Enron, anyone? How about Green Tree Financial?

3. Stubbornly Staying The Course - Kodak, slow to react to digitization of photography, and Pillowtex, which failed to see the trend in outsourcing textile manufacture.

4. Pseudo-Adjacencies - the authors point to Oglebay, a company that thought it could deploy its expertise in shipping limestone to actually quarrying it. Result? Chapter 11.

5. Bets on the Wrong Technology - for example, FedEx ZapMail.

6. Rushing to Consolidate - too often mergers focus on the top-line increases but neglect "increased complexities [that] may lead to diseconomies of scale."

7. Roll-ups of Almost Any Kind - As with Loewen Group, a funeral-home aggregator, roll-ups can't withstand downturns and usually provide a short-term revenue bump at the expense of the long term (see #2).

Leaders, you have been warned. Avoid these at all costs!

Related Posts:
NASA learns to avoid its worst practices in safety
Worst practice learning means our favorite business bestsellers are all wrong

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worst practice, strategy, learning, mistakes, Harvard Business Review

Buyer's hubris harms revenue growth from acquisitions

Accenture recently released a report entitled “Leveraging Sales & Marketing to Maximize the Value of Mergers and Acquisitions.” This report quantifies what many people have felt about M&A—as far as growing revenue long-term, it’s not a successful strategy. Among Accenture’s findings was that while 56% of companies studied grew faster than their industry groups in the two years before they made a large acquisition, only 33% duplicated that feat in the two years following the year the deal closed.

The report lays out reasons this is so: disruption to customers, loss of key customer-facing staff, unexploited opportunities to market to new customers. (They also provide suggested remedies—they are consultants, after all.)

After living through three significant acquisitions (being bought twice, buying once), I believe there is a deeper reason that drives what Accenture observed—buyer’s hubris.

In spite of rhetoric like “merger of equals,” “best of breed,” and so on, in my experience buyers develop a mindset that they are superior to the company they purchased—smarter, with better products, processes, etc. (Otherwise, perhaps the shoe would be on the other foot!) This is especially true when the merger consolidates the businesses of two once-competing companies.

I recall pleading with one acquirer to retain the name of our company’s flagship product—it had brand value and keeping it would signal to the large customer base that the product itself wouldn’t be retired. At first, the integrated marketing group (led by the buyer’s VP of marketing) thought this was a crazy idea. But, after much discussion, the group reluctantly agreed. That acquiring company no longer exists, but the product—with that old name—lives on and supports many of those same customers.

Buyer’s hubris extends to the acquired company’s customers. Rather than being carefully cultivated, they are frequently taken for granted. (What they need is to be resold on the new company. This is rarely done, in my observation.)
Similarly, the people who support those customers are seen as suspect. Those people may have competed—in some cases, successfully—against the buyer’s sales team. (Perhaps sour grapes is a reason the customers are not treated as carefully as need be.) At any rate, it’s difficult to trust former competitors. As a result, they are not welcomed; their opinions are not solicited.

When consolidating a market, real humility on the buyer’s part is required. There’s a lot of human nature obstructing that, and perhaps it’s unrealistic to think hubris can be overcome. Until that day, however, we’ll continue to read studies documenting poor growth results from mergers.

(Thanks to New York Times Dealbook for the pointer to this research.)

Related posts:
Ultra-competitive mindset costs dealmakers

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acquisitions, integration, psychology, growth

Leveraged buyouts in trouble and the fiduciary responsibility of CEOs

In light of the many private-equity-funded deals that are unraveling now, and the major impact on the stock prices of the targets, how should CEOs handle investors eager for a quick stock bump via an acquisition?

What I mean is: how do they price in the risk of a deal not happening when trying to weigh the pros and cons of such a buyout? The breakup fees (assuming they can even get them) don't come close to compensating for the stock price hit, never mind the months of distractions and competitive inroads yielded while the deal goes south.

Just wondering.

private equity, acquisitions, risk, downside, breakup

Be careful using "other people's money" to make acquisitions

From The Mistake Bank.

[This story is from Ray Anderson, Founder and Chairman of Interface, Inc., a manufacturer of carpeting and fabrics.]

When we began [Interface], I made the initial investment personally. And then friends came in, then a much larger partner joined in, and we eventually financed the company. And, by the way, the day we had our finance all in hand is the day we count as the birthday of Interface. Up to then, everything is conception and gestation, beginning with the gleam in my eye, perhaps the idea; but it’s only when you have your money in hand that you can truly call yourself a company. And that’s the birthday.

Interface, after getting through that treacherous startup, in the teeth of the worst recession since 1929, really hit a home run year after year, 70 percent compound growth. And then ten years later we went public, and for the first time had access to other people’s money. Investors who bought shares in the stock, our expanded capital base of Interface, enabled us to begin to make acquisitions, and we made acquisitions in Canada, in Northern Ireland, and eventually in the United Kingdom and in Holland. And then in 1998, when the company was fifteen years old, we were a global company. Then we made other acquisitions, made subsequent stock offerings to the public, and had people subscribe to the stock and further expand the capital base, which enabled us to do more. We leveraged other people’s money time and again over the years, so much so that it got to be a little too easy to access it.

And then we made a concentrated series of acquisitions to create a downstream distribution system. We made twenty-nine acquisitions, over a very short period of time, of contract dealers, the people who install and maintain their products. We wanted a captive, owned distribution system, and we invested $150 million of other people’s money, basically by selling stock and doing bond offerings. And it was too easy.

If we’d been spending our own money, we would have thought very hard about those acquisitions. In the long run, they turned out to be a mistake, and six, seven years later we began to dismantle this distribution system and liquidate it, selling the businesses back to the owners or back to the employees. And we might not ever have undertaken that unfortunate series of investments if we’d been investing our own money. We would have questioned it.

Reprinted by permission of Harvard Business Press. Excerpted from Lessons Learned: Straight Talk from the World’s Top Business Leaders--Starting a Business. Copyright (c) 2008 Fifty Lessons Limited; All Rights Reserved.

For more information about the "Lessons Learned" series, including a showcase of 50 Lessons video stories, please follow this link.

acquisitions, narrative, capital, financing, startup, entrepreneurism, reading list, Mistake Bank

More learning from mistakes

From the New York Times, Sunday March 16, an interview with 1-800-Flowers.com CEO James McCann:

In 1986 I bought the assets of a failed floral company in Texas called 800-Flowers and took that name. I thought I was smarter than everyone else and neglected to hire lawyers and bankers to do due diligence. I unknowingly signed for all liabilities, which I later learned was a debt of $7 million.

People advised me to file for bankruptcy. Then my grandmother took me aside and said: “This bankruptcy thing? We don’t do that. Find another way.” I worked like an animal to get out of that hole....

If you look at highly successful people, they make the same number of mistakes as others, but they recover quickly. They don’t sit around moaning about what they’ve done wrong.

A more complete retelling of this same mistake can be found in this article in Inc Magazine.

mistakes, Mistake Bank, learning, due diligence, acquisitions, lawyers, bankers

Vivendi acquisition of Activision shows shift in videogame market

There's a perceptive article by Seth Schiesel in today's New York Times about how the proposed new company Activision Blizzard--a combination of the owners of Guitar Hero and World of Warcraft--demonstrates that the future of videogames relies on expanding beyond the core console audience of young-adult males.

gaming, videogames, marketing, , acquisitions, New York Times

Use your strategy to drive your acquisitions, and vice versa

It's often seemed to me that following a corporate strategy is like driving a car at night. You must decide what direction you want to go, but you have also to pay close attention to what you can see ahead of you--and adjust if necessary. As you progress, more is revealed, and you approach your destination. If you drive too fast, or focus too much on the route you've predetermined, you get into trouble.

I thought of this metaphor again when I read the article "Rules To Acquire By," in the September Harvard Business Review (link - $$). The author, Bruce Nolop, is CFO of Pitney Bowes, and in the article he describes his company's method for assessing and executing acquisitions, refined over seventy acquisitions in the past six years. It's a fascinating read, and instructive if, like me, your companies' corporate acquisition strategies were less than rigorous.

I was particularly struck by this passage in a sidebar:

In the traditional model, a company identifies—either on its own or with a consultant’s help—a new business strategy or a new space and then buys something. By contrast, we work with our board of directors to develop a general sense of our strategic direction and then refine our strategy along the way through the process of acquisitions.

It's as perfect an example of driving-at-night strategy as I've read anywhere.

(Photo: "Driving at Night" by cpurcell via stock.xchng)

strategy acquisitions Harvard Business Review

As Google buys Postini, corporate email surveillance grows

I shrugged my shoulders when I read the news the other day that Google was buying Postini, the corporate spam-filtering service provider. Oh, well, another acquisition. Google does about one of those a week, it seems. What's the big deal?

Then I read Stephen Baker's post on the subject in BusinessWeek Blogspotting, and I felt a weird vacuum in the pit of my stomach. Here's why: Postini's service searches all a company's emails looking for spam signals. It's trivial, especially given Google's expertise in real-time search, to expand that into looking for leaks of confidential information, customer or analyst communication that doesn't follow procedure, or... anything else. Writes Baker:

Once these data are searchable, it will become ever easier for managers to apply advanced analytics to corporate messaging. They'll be able mine these data for the latest trends of words and subjects that employees are writing about. Mapping the social networks inside and outside the company will be a cinch. And as automatic reading programs improve, companies will also be able to track the rising and falling sentiments of their work force.

Creepy, eh? Think about that the next time you send a dirty joke to your friends through your corporate email account. Or receive one, for that matter.

(Photo by hilaryaq via stock.xchng)

email acquisitions search information technology managed services surveillance

Hershey: the end of an era approaches

There was a small item in the Wall Street Journal today mentioning that the Hershey Company, among others, might be interested in purchasing the confectionary business of Cadbury Schweppes. Perhaps you didn't notice that. But you don't live where I do.

Our house is a few miles from the self-proclaimed "sweetest place on Earth"--Hershey, Pennsylvania. Here, Hershey is more than a company, more even than a large local employer. It is the pre-eminent industrial symbol of the area. The Hershey name graces the town (the company came first), a gigantic amusement park close enough to the factory for guests to smell the cocoa, two hotels, a minor-league hockey team, several schools, and the largest teaching hospital within 100 miles. Main Street is called Chocolate Avenue.

It's quaint, really, and, like most things quaint, its days are numbered. The early warning sign occurred in 2002, when the company put itself up for sale. A huge local backlash rose up and quashed that idea. But the changes in the offing for Hershey were just beginning.

Last month, Hershey announced that it would reduce employment by 1500 people and open a large plant in Mexico. The Harrisburg Patriot-News reported that staff members had been told the toll could be 3000 workers. The catalog-fulfillment side of the business is being outsourced to Philadephia and Illinois.

And the purchase of a company like Cadbury wouldn't be just a purchase. Cadbury is larger than Hershey, and more global. Any such combination would mean more production shifting, right-sizing, and the like. There's no way Hershey would still be Hershey the way we know it here, today.

Someday, I'll tell my grandkids about the time we lived near a company town, and they will say to me in response, "What's that?"

Voice-to-Screen messaging - powered by SpinVox

(Photo from the Hershey web site)

strategy, acquisitions, Patriot News, Wall Street Journal