investiledysfunction

Yes what you’re looking at is a Krispy Kreme Cheeseburger.  This is having one of 3 impacts on you:

1. You’re completely revolted and think the person who came up with these is an idiot
2. You’re completely revolted but strangely want to have a bite of one of these
3. You’re hungry and are going to get one of these at the earliest

If you’re feeling #3, I’d recommend you purchase the burger and enjoy it at your friendly neighboorhood emergency room.  Unnatural combinations such as the above or even sometimes natural-seeming combinations often seem to lead to bad or suboptimal outcomes.  Ever buy a combo fax-copier-printer?  They generally work okay, but none of the components works as well as stand-alone units.

Some Corporate Combinations that Also Yield Dubious Results

Mergers & Acquisitions

Another example of unhealthy combinations often occurs when corporations acquire other organizations.  Whether it is done in the name of diversification, to build out a geographic footprint, synergistic value creation or some other non-sense, M&A combinations are notorious for falling flat and destroying value (Sprint-Nextel, AOL-Time Warner, Boston Scientific-Guidant).  We’ve just completed an exhaustive quantitative analysis of all mega-deals (M&A transactions over $10B) since 2000 and quantified the actual shareholder returns of such deals.  On average, they underperform the market.  Most notably, when they go bad, they go real bad.  Shareholders rarely benefit from these combinations yet they continue to happen.  (Note: We will be releasing the full mega-deal M&A analysis as a research report shortly)

Best Practices

Another unnatural and unfortunate combination we often see in corporations centers around best practices.  The logic with these combinations works something like this.

• The corporation has a broken process/strategy that is in need of fixing.  It can be anything from procurement to innovation to budgeting to strategic planning that is not working.
• To “fix” the issue, the corporation looks for best practices they can utilize based on what may have worked with other organizations - usually GE, P&G, Google, Apple, etc being favorites for practices to follow.  They find something that they like and then the magic is supposed to happen.

The recipe is:

1. Take broken process
2. Add best practice
3. The issue is fixed automagically

Unfortunately, it doesn’t work quite this way.  While researching what others have done can be useful, many organizations and managers seem content to follow the lead of others when it comes to making key organizational decisions. One of the most pervasive and damaging follower afflictions which has increasingly infested corporate psychology and behavior is a disease I call Best Practicism.

I’ve written an article entitled “The Myth of Best Practices” which just appeared in the Journal of Accounting & Finance.  A pre-print version of the article is available here as a pdf.  Click here to see it.  Some excerpts are below.

“Best Practicism is the errant belief that there are certain practices that are truly “best” and that replicating another organization’s processes, strategies and ideas within your organization will somehow miraculously yield a better reality or even leadership status. Best practices are not all bad, and some may actually exist, but when best practices become a crutch that replaces independent critical thought and innovation, it can have deleterious impacts on an organization. Best practicism is a follower’s disease and is often found in organizations who are risk-averse and unimaginative and who have lost the ability to be bold. Ironically, many organizations suffering from best practicism once were bold and risk-taking but over time, somehow that former competitive edge has been dulled.

It generally surfaces when people and organizations errantly believe that management and organizational performance are a science. The truth, however, is that there is no formula that guarantees corporate leadership or outperformance. Although obvious, organizations and managers enamored with best practices seem to have forgotten this. Phil Rosenzweig commented on this in his outstanding book, The Halo Effect, when he writes about the social science research done on company performance and states, “It’s just not very appealing to read that a given action has a measurable but small impact on company success. Managers don’t usually care to wade through discussions about data validity and methodology and statistical models and probabilities. We prefer explanations that are definitive and offer clear implications for action.”"

While M&A and best practices probably won’t lead to higher cholesterol and obesity like the wonderful Krispy Kreme Cheeseburger, the travails you are likely to encounter with them along with their uncertain results might lead to some stress and heartburn.

What is the first word that comes to mind when you hear the term internet service provider?  If you said “flowers”, you and the CEO of United Online, Mark R. Goldston, should meet as you maybe smoking the same stuff.

Yup - United Online, the owner of ISPs, NetZero and Juno, purchased FTD Group for “$456 million in cash, stock and notes in a deal that will combine the operator of the NetZero and Juno Internet-service providers with a huge network of florists and floral-products suppliers.”

So you’re scratching your head now I presume.  Let me let Mr. Goldston clear it all up for you.  According to the CEO of United Online, “”This transaction will meaningfully diversify our revenue base within a large global market experiencing significant migration to the Internet.”

Exactly, eh?

It is not the job of a company to diversify on behalf of its shareholders.  If they want to diversify their holdings, they can choose to do it on their own.  I gotta feeling this one is gonna end ugly.

I just realized that I forgot to comment about the proposed acquisition of Circuit City by Blockbuster.  And how could I forget to comment about this brilliant piece of deal making?

The logic works something like this.  Blockbuster is a struggling company in a dying business (video store movie rentals) and Circuit City is a poorly run company that perenially gets its buttocks kicked by Best Buy.  And somehow the hope is that smashing together these two winners will yield something good?  Interesting.  This is akin to to two ugly people mating and a supermodel emerging from their union.  While there is statistically some chance of this occuring, I wouldn’t advise taking this bet.  

Let’s also not forget that Blockbuster may not even be able to line up financing for this deal.   But if this deal distracts or somehow makes Blockbuster and Circuit City shareholders forget the dismal share price performance of recent years, I suppose management will have achieved at least one of their objectives. 

Isn’t M&A great?

BusinessWeek’s March 24, 2008 issue has an article about Comcast CEO, Brian Roberts, entitled “Deal or No Deal” and the supposed “fork in the road” that he is at.  Wall Street and numerous significant stockholders are hoping and pushing for Roberts to stick to Comcast’s knitting (content distribution) and not go for media mogul-dom.  I’m sure investment bankers are pushing for the big sexy acquisition of a large entertainment company.  As you may remember, Roberts did make an unsuccessful overture to Disney several years ago.

For once, I think the Street is really getting this right.  There is no reason aside from ego or shear boredom for Roberts and Comcast to go after an acquisition especially one so outside it’s core business.  Every few years, the distribution vs content debate emerges with people arguing that one is more important than the other and then people rushing to buy whatever is “hot” at the time.  AOL Time Warner was an attempt at this, right?  Wildly successful, eh?

But the main point here is not that these deals don’t work.  No actually, that is the main point.  M&A really doesn’t work esp when trying to smash two businesses together that aren’t that similar and for which the rationale for the smashing are ever-elusive “synergies”.  So I hope Mr. Roberts continues to focus on his ‘core’ business and grow that and not give into the temptation of becoming a media mogul.

The other assertion made in the article is that the cable business is a low-growth utility.  Ultimately, there should be plenty of room for Comcast to develop new, innovative ways to distribute content.  Pursuit of these efforts would serve to strengthen Comcast over the long-term and at considerably less risk.

If Comcast does pursue the mega-deal by acquiring a content play, does anyone want to bet it will destroy shareholder value?  Any takers?

For those who’ve read my blog before, heard me speak at conferences, read my book, etc, you know my feelings on M&A.  It invariably doesn’t work, destroys value, and is hugely ego-driven by senior managers looking to build empires and do things that are visionary and transformational.

In a word, M&A sucks. (excuse my bluntness)

What is most appalling about M&A as a practice is that organizations can achieve the out-size returns they aim for by doing things which are more “mundane” such as focusing on optimizing resource allocation and growing organically.  This means acquiring new customers, retaining existing customers, selling more to existing customers and innovating.  And companies know this but still pursue M&A because of ego and the cadre of bankers and consultants who encourage such foolish behavior and know they’ll earn a boatload of fees smashing the companies together and then pulling them apart a few laters to “unlock value”.

And since it appears we will repeat the debacle that AOL-Time Warner was with the combo of Microsoft & Yahoo, I thought I’d ask folks out there what are the biggest & baddest (read: horribly bad) M&A transactions of all time.  (I know Microsoft & Yahoo is far from final but it appears Mr Softee is drunk enough to believe that getting Yahoo is key to their success online and so I expect the price will go up).  Here is the list of 5 colossally bad deals to get things started and get your juices flowing:

1. Mercedes Benz & Chrysler - Let’s put a sweet German car maker together with a crappy, outdated US car manufacturer and see what happens.  The results?  Not ideal.
2. Sprint & Nextel - When they merged, the combined entity was worth about $70B and now they’re worth a combined ~$25B.  If success is determined by shedding value, this deal was wildly successful.  Bravo.
3. Sears & Kmart - Eddie Lampert was supposed to be the next Warren Buffett.  I wonder how many people have been compared to the Oracle.  What happened to that?  Again, Sears-Kmart is predicated on the idea that you mate 2 dogs and somehow get a pony.  Sorry.
4. AOL & Time Warner - Do I need to even say anything about how bad this deal was?  Mix dot com insanity with crappy dial-up biz model and dying print business and what do you get?  AOL-Time Warner of course.

So that should get the ball rolling.  Thoughts, wisdom, other deals to add?