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• Key merger strategist, working with the CEO to ensure that merger
plans meet larger corporate objectives
• Synergy manager, capturing every deal’s cost savings, leveraging
combined capabilities, and driving joint market strategies
• Business integrator, identifying the changes related to personnel, pro-
cesses, and organizational structure that best bring out a deal’s value
The introduction also identifies six rules of successful deal making that
CFOs must follow if they want one plus one to equal more than two.
A strategy+business Reader
Deal Maker:
M&A Success
Chapter title 5
A strategy+business Reader
Published by strategy+business Books
strategy+business Books
Publisher: Jonathan Gage
Editor-in-Chief: Art Kleiner
Executive Editor: Rob Norton
Managing Editor: Elizabeth Johnson
Deputy Managing Editors: Laura W. Geller,
Debaney Shepard
Senior Editors: Theodore Kinni,
Melissa Master Cavanaugh
Contents
10 strategy+business Reader
tute monitoring systems that tell them if things are going awry.
This role is increasingly essential, because the window for cap-
turing synergies closes quickly. To capture synergies in a timely man-
ner, Deutsche Telekom plans the integration before the close and
makes a board member responsible for its execution. In the first
year, there is too much at stake to let an integration effort go off in
the wrong direction, according to CFO Karl-Gerhard Eick.
The CFO’s third M&A role is as business integrator — identify-
ing the changes related to personnel, processes, and organizational
structure that will best bring out a deal’s value. CFOs certainly play
a hands-on role in bringing the finance organizations of two previ-
ously separate entities together, but there is also a role for CFOs in
integrating departments outside of finance.
CFOs and their teams should define the performance metrics
and establish the goals that must be achieved to justify the deal’s
purchase price. These goals may be tied back to the company’s com-
pensation systems, putting the CFO at the heart of incentive design.
CFOs also must ensure the monitoring of progress against targets, a
critical measurement and tracking function that is essential to suc-
cessful postmerger integration. Finally, in order to reach targets,
CFOs who act as business integrators often sponsor synergy-
oriented education and training programs or business literacy work-
shops that teach employees how to identify the key value drivers
within their control and how to attain performance goals.
In fulfilling these time-tested roles and succeeding at M&A,
leading CFOs act in certain recurring ways. Here we present the six
rules that CFOs should follow to ensure that when it comes to
M&A, one plus one will equal more than two.
12 strategy+business Reader
boasts of having bought something “opportunistically” is often
revealed later to have simply acted in haste.
This is not to say that speed isn’t important; it is vitally impor-
tant in M&A. But it is an advantage that is enabled by advance
preparation. Such preparation increases the likelihood of a company
getting in early on an attractive deal and wresting momentum from
rival bidders. This is what Bayer accomplished a few years ago, after
a bid from a rival drug company put Schering in play. Bayer ulti-
mately prevailed, completing a deal that extended its holdings from
chemicals into pharmaceuticals and that gave it a promising fran-
chise in oncology. But the deal never would have happened if Bayer,
which is committed to preparation, hadn’t been working off an
existing list of potential acquisitions that included Schering. “We
had already done our homework” when Schering became a candi-
date for acquisition, Bayer CFO Klaus Kühn says.
Merck, another drug company, prepares in a different way. It
employs dozens of regional scouts whose job is to stay abreast of
molecular discoveries at universities and startup biotechnology com-
panies. This increases the likelihood that Merck will be one of the
first to know when an interesting partnership opportunity arises.
Advance preparation can also help in the financing of a deal.
After being appointed CFO at Spanish telecommunications com-
pany Telefónica in 2002, Santiago Fernández Valbuena spent long
hours courting commercial banks to establish open pipelines
to capital. That groundwork paid off in 2005, when Fernández
Valbuena secured the financing for the company’s US$32 billion
bid for mobile and broadband service provider O2 over the course
of a weekend.
14 strategy+business Reader
Rule 4: Cash In Your Synergies. Once a deal is done, investors judge
CFOs on their ability to deliver on promises and achieve synergies.
There is generally little question about what is expected; CFOs have
created these expectations themselves, by talking to the equity mar-
kets, often in considerable detail, about the deal’s economic rationale.
In today’s demanding business environment, there is no time for
blurry plans, timid decision making, or ambiguous communication.
Woe betide the CFO who has not already created a detailed imple-
mentation plan and convinced the business units of its urgency.
“When the deal closes, it’s already 70 percent predetermined to be a
success or a failure,” says Deutsche Telekom’s Eick. “If you aren’t
able to flip the switch and get started at that moment, it’s too late.”
To meet these demands, CFOs need a dedicated financial con-
trol capability that enables them to keep track of critical events,
measure the size and robustness of identified synergies, and create an
unbiased and comprehensive picture of a deal’s results. Integration
plans should include a clear time line of milestones and hold specific
managers accountable for achieving them. When the deal is closed,
financial synergies that were once theoretical discussions should be
embedded in budgets, and nonfinancial synergies should be tracked
as integral parts of synergy scorecards.
CFOs should also ensure that every manager involved in captur-
ing synergies has skin in the game. Four-fifths of the CFOs we inter-
viewed said they create such incentives. ArcelorMittal CFO Mittal,
for instance, instituted a “very simple,” yet effective compensation
plan that tied bonuses to achieving some of the synergies expected
in the merger that transformed Mittal Steel into ArcelorMittal;
those who didn’t achieve 85 percent of the budget, which captured
the synergy and value plan, didn’t get a bonus.
Some CFOs ask managers of acquired companies to participate
in discussions about the available synergies, as a way of getting
their buy-in. This can be a smart way to mitigate the risk, present
16 strategy+business Reader
merit can be a powerful retention tool. Key staff members usually
take stock of the acquiring company’s discipline and objectivity
before deciding whether to stay. Mittal remembers that after the
mammoth acquisition that brought Arcelor to Mittal, the one-time
Arcelor people were being standoffish, expecting “to be second-class
citizens.” They were in for a pleasant surprise. “We operate as a mer-
itocracy, on an honest, transparent, and fair basis,” Mittal says.
18 strategy+business Reader
makers by taking well-calculated risks and using innovative strate-
gies and tools to achieve success. The 15 CFOs featured in this book
make this very clear as they share their ideas, their experiences, and
the lessons they have learned in the successful execution of some of
the largest deals in business history. Whether your goals are profes-
sional — to hone your deal-making skills and capabilities, to ensure
the fulfillment of fiduciary responsibility, or to build your personal
reputation for M&A success — or if you are just wondering what
goes on behind the headlines in major mergers and acquisitions, you
will find that The CFO as Deal Maker is enlightening reading. +
ADITYA MITTAL
Chief Financial Officer
ArcelorMittal
ArcelorMittal:
Forging a New Steel Industry
by Viren Doshi, Nils Naujok, and Joachim Rotering
ADITYA MITTAL DOESN ’ T look like a gambler. And yet two years ago
Mittal Steel, the business founded by his father and controlled by
his family, shocked the global steel industry with a wager so bold
that no one believed the company could pull it off.
Mittal recalls the sleepless nights he endured worrying about
what would happen if his company’s unsolicited bid to acquire
Arcelor, the biggest steelmaker after Mittal, failed. In the end, it
didn’t fail, and the US$38 billion deal made Aditya Mittal’s reputa-
tion. It also gave him a confidence that is characteristic of people
who, with the whole world watching, prevail despite long odds.
As a teenager, Mittal loved to read biographies of business lead-
ers such as Bill Gates, Larry Ellison, and Sony founder Akio Morita.
He often accompanied his father, Lakshmi Mittal, on business trips
to visit newly acquired plants in eastern Europe.
After graduating from the University of Pennsylvania’s Wharton
School of Business with a BS in economics in 1996, the younger
Mittal worked as a financial analyst for six months before joining
Mittal Steel in a succession of finance and management roles. Three
years later, he assumed responsibility for M&A.
When he outlined Mittal’s bid for Arcelor at a news confer-
ence in London in 2006, a journalist confronted him, questioning
whether he was too young to be running such a deal. His father
22 strategy+business Reader
commented that the founders of Google were the same age.
People who mistook Mittal’s youth for a lack of experience early
in his career often paid the price at the negotiating table. No one
underestimates him now, at age 32.
The numbers speak for themselves. The merged ArcelorMittal,
headquartered in Luxembourg, is the world’s biggest steelmaker and
the only truly global one, with 310,000 employees in more than 60
countries. Its products cover the entire breadth of production in the
industry, serving manufacturers of cars and trucks, household appli-
ances, and packaging. In 2007, ArcelorMittal generated revenues of
$105.2 billion, with a crude steel production of 116 million tons,
representing some 10 percent of world steel output.
During an interview in his London office, Mittal said he has
been willing to make big bets because he has a strong vision of where
the steel industry is heading. So far, that vision has been accurate.
S+B: How active has your deal making been in the last three years?
MITTAL: In the last year, we did 40 acquisitions. During the two
years prior to that we probably did two or three large acquisitions
a year. Now it’s harder to do large deals, so we’re doing multiple
smaller transactions.
ArcelorMittal 23
and distribution development, and establishing our presence in
various geographical parts of the world. That means smaller deals.
You do a mining development program in Arizona, invest in coal in
Mozambique, and create a partnership with the Mauritanian gov-
ernment. We did about seven distribution deals, in regions such as
the Balkans, Poland, and Turkey.
24 strategy+business Reader
S+B: How do you create a privatization?
MITTAL: Well, take the case of the Czech Republic. I’d been reading
in the press that the International Finance Corporation [IFC] was
very upset with the Czech steel company because it was defaulting
on its loans. The IFC threatened to take the Czech government to
bankruptcy court. The government was in a jam because the E.U.
would not allow it to provide subsidies, the unions were protesting,
and the lenders were begging for help because the steel company was
headed for bankruptcy. So we said, “Let’s go visit the government
and see what we can do.”
Incredibly, the unions were having protests on the day of our
meeting. So I’m in Prague and there are protests outside and I’m sit-
ting there saying, “Look, we can help you out; we’ll solve all your
problems. We’ll buy this company.” And within 48 hours the gov-
ernment announced the privatization process.
S+B: And what marked the next M&A phase that you mentioned?
MITTAL: In 2004, it became obvious that the privatization story
was coming to an end. We needed to do something else. We had
already bought one U.S. steel company, Inland Steel, in 1998,
ArcelorMittal 25
which was supplying 70 percent of all advanced steel strength
applications for automobile bumpers. We had become the largest
supplier to Toyota and to Honda, the most demanding customers.
However, we still wanted to increase our stake in the United
States. In 2005, we bought ISG, another U.S. company, which
was the old Bethlehem Steel, LTV Steel, and Acme Steel rolled
into one.
Once those deals were done, we looked at the world and said,
“What’s next?” And it was Arcelor. That’s how we moved forward.
S+B: With a price tag of $38 billion, Arcelor was unlike anything you’d
ever done before. How did the idea for it come about?
MITTAL: Arcelor made tremendous industrial sense. Clearly, just
thinking about it was audacious, and I was surprised to learn that
there was no significant shareholder in this company. A lot of peo-
ple said that Arcelor was a French icon and we could never succeed
in taking it over. But the more we thought about it, the more we fell
in love with it.
26 strategy+business Reader
S+B: Do you feel that an essential part of your job in a takeover scenario
is to talk to employees and investors to help them understand what you’re
trying to do?
MITTAL: That’s the primary thing. People get it wrong. A
takeover is not done by offering money. A takeover is done by
convincing the key stakeholders that this is the right thing for
their future. In all of these opportunities, whether it was Poland,
the Czech Republic, or South Africa, whichever country, I
remember going in, meeting the unions, meeting the manage-
ment, meeting government and any other key stakeholder we
could identify. And we used to have delegation after delegation
from Poland, South Africa, and Algeria, and so on going to
Kazakhstan and other places where we’ve made acquisitions to see
what we had done.
That was our pitch: Come and see for yourself. Talk to your
ambassadors in the countries in which we operate. Ask them what
the local government thinks about us.
ArcelorMittal 27
S+B: You built a church?
MITTAL: And it was great. We built a beautiful Roman Orthodox
church; all the workers got involved in it part-time. And that
changed everything. After that, they knew we weren’t going to walk
away after three years.
The lesson from this is that you have to invest in the communi-
ties in which you operate. Because word gets around. What you
invest locally also pays off in dividends globally. This is just one
small example. We do things all around the world.
S+B: How did you get Arcelor stakeholders to buy in during the post-
merger integration phase?
MITTAL: One of the key reasons for the success of the merger is that
we operate as a meritocracy — on an honest, transparent, and fair
basis. And for all of the ex-Arcelor people, this was remarkable.
They suspected that, after the merger, they were going to be second-
class citizens. But they weren’t; they were equal to anyone in
this organization.
S+B: How did you communicate targets so that on Day One the man-
agers of the combined company knew what was expected of them
in terms of performance? Is there a process whereby you have “the
Mittal Way”?
MITTAL: That was the other thing we did: We announced our
value plan on a combined basis. At that point in time, we were
doing EBITDA of $15 billion on a combined basis, and we said
we have to do $20 billion postmerger. That was the value plan.
And we have $1.6 billion of synergies. And every single person
had a certain responsibility to achieve that. So if you, for example,
worked in the United States, you knew exactly what your
EBITDA was in 2005, ’06, ’07, and ’08, what your synergy targets
were, what synergy you were supposed to achieve, who was respon-
28 strategy+business Reader
sible, and what the dates were by which you were supposed to
achieve it.
S+B: And this was the foundation for integrating the budget process?
MITTAL: We had a budget for the combined company starting
from January 1, 2007. And part of the budgeting process was
to understand the incentives. So we created a new incentive plan
that mirrored the budget exactly. If we didn’t achieve 85 percent of
the budget, we got zero bonus. And the budget had to capture
the synergies and the value plan; otherwise it was not approved.
Very simple.
ArcelorMittal 29
of it by creating a central database and allowing managers to
reject some data requests if similar information is available some-
where else.
S+B: What is your sense of where you are today and the role acquisitions
will play in the future? Where do you want to be in five or 10 years?
MITTAL: Our strategic goals are quite clearly articulated. The first is
to continue to grow our presence in steel, primarily in the BRIC
countries: Brazil, Russia, India, and China. We want to increase
our vertical integration. We’re focused on identifying iron ore and
coking coal opportunities. And we’re also very focused on expand-
ing our distribution footprint. So we’re moving on anything any-
where globally.
The new buzzword is the “alternative billion” — referring to the
billion people living in Indonesia, Pakistan, Bangladesh, Nigeria,
Congo, and Thailand.
S+B: All markets with a lot of growth potential. Is that the appeal?
MITTAL: For us it’s worth exploring to see what opportunities there
are. Our strategy has always been to be ahead of the curve, because
that’s how you create real value. If you’re behind the curve, you’re
not creating any value; you’ll lose money. So how do you stay ahead
of the curve? You have to look at opportunities that others are not
focused on. It’s all part of transforming tomorrow.
30 strategy+business Reader
Aditya Mittal’s keys to successful M&A
• A takeover’s success is not determined by the amount of money you offer.
Success is achieved by convincing the key stakeholders that this is the right
thing for their future.
• To identify the right targets, you have to stay ahead of the opportunity curve.
If you’re behind the curve, it’s hard to create any value.
• Invest in the communities in which you operate. This helps you not just
locally, but globally, since your reputation precedes you.
• The integration stage of a merger should be run as a meritocracy, on an
honest, transparent, and fair basis. Choose the best people to manage the
business, regardless of which company they started at.
• Move quickly to establish clear targets and give employees an incentive to
reach them. Make their compensation dependent on reaching those targets. +
ArcelorMittal 31
Banco Santander:
Think Globally, Bank Locally
34 strategy+business Reader
down to being efficient and cost-conscious everywhere, but vary-
ing the tactics by geography. “We use different metrics at Abbey
in the U.K. than we use in Madrid or in Brazil because markets
are different,” says José Antonio Álvarez, the company’s chief finan-
cial officer.
Álvarez has a BA in business administration and economics,
and an MBA from the University of Chicago. He has been a finance
executive at several Spanish banks, including Argentaria, and has
held board directorships with divisions of Santander as well as
other companies.
In an interview in his Madrid office, Álvarez discussed
Santander’s M&A strategy, the lessons he has learned, and the rules
of the road for future acquisitions.
S+B: Banco Santander has been putting together a global retail bank-
ing business, piece by piece, for years. What is the primary rationale
behind your strategy?
ÁLVAREZ: Well, one thing that is important is that we are a retail
bank. This is all about cost. We don’t sell a very sophisticated
product; we basically sell a commodity. So the key is to be effi-
cient enough to compete effectively in the retail market. Our
strategy is practical in the sense that we prefer to be in fewer mar-
kets with larger market share than to spread ourselves thin across
many markets. As a rule of thumb, we think you need to have at
least 10 percent market share in order to compete effectively in
retail banking.
S+B: How has market share influenced the way you do M&A?
ÁLVAREZ: Take our decision to sell Banca Antonveneta in Italy.
With Antonveneta we were looking at a bank with less than 3 per-
cent market share. We could have gone in, gotten some synergies,
and built up a good business model. But we would still have had
Banco Santander 35
to do more acquisitions to achieve the critical mass needed to be
competitive in Italy.
S+B: Is there any correlation between the size of a deal and who
drives it?
ÁLVAREZ: If it is a transformational deal, it tends to be a discussion
between the board, the CEO, and finance, and it is handled at the
corporate level. For example, decisions about using acquisitions to
enter new countries tend to be made at headquarters.
36 strategy+business Reader
ÁLVAREZ: Every year, the board meets for two days for a very open
discussion. It’s my job in finance to work with the board to identify
the issues that are central to the company, usually two to three
months in advance. The meeting usually takes place on a weekend
and somewhere that allows us to get away from headquarters.
During this weekend, we discuss how we view what’s going on in the
world, how we see ourselves, and what we should be doing. The
decisions we make during these two days of intense discussion form
the framework for the next year.
S+B: Does that include the time you’re working on acquisitions that
have already happened and that are currently being integrated?
ÁLVAREZ: Once we integrate a new acquisition into the day-to-day
operations, I deal with it just like any other operation. But for the
first two or three years after an acquisition, I’ll spend more time on
that new company. We’ve made a commitment to the shareholders
to meet certain targets, and investors always ask about it. Early on,
it’s my job to make sure the synergies are coming in. After that, I
deal with it like any other business division.
S+B: Let’s talk about Santander’s Abbey acquisition. What were the crit-
ical success factors there?
ÁLVAREZ: To answer that question, we have to take a step back. In
the 1990s, Abbey embarked on a diversification initiative that was a
complete failure. They went into wholesale banking and into secu-
rities, and when the market collapsed in 2000 they suffered losses.
Banco Santander 37
That prompted them to look at alternative business models and branch
off into insurance. Abbey’s management became distracted from what
it had been doing successfully for 60 years: mortgages and savings.
When we started to analyze Abbey, we realized that they had a
fantastic core business, but management hadn’t focused on it for
years. We felt we could improve the situation substantially. And
Abbey’s management had concluded that they had to sell the bank
to someone who could inject fresh capital into the business and keep
it competitive in the market.
S+B: How did you track synergies at Abbey after the merger was
completed?
ÁLVAREZ: We appointed an executive who is responsible for guid-
ing the cost-cutting process. This executive not only gives people
specific targets, but also suggests ways through which they might
meet those targets. We also discussed the budget in detail and
determined where cost savings would come from. We track the
budget every month and see who is delivering on the targets and
who is not. Determining the volume of costs to cut and how to do
so is a science.
S+B: Was it hard to get the staff at Abbey to buy into the idea that they
would have to work more efficiently?
ÁLVAREZ: Not really. It is pretty simple: If the employees at an
acquired company know that their business is not being run well,
then they expect the new owners to come in and cut costs. They
are open to the acquirer’s ideas because they know things must
change — and they understand that accepting change is a key to
staying employed.
But if they think they are doing a great job, then they see no rea-
son to change and they put up all kinds of resistance. That can
become a nightmare for an acquirer.
38 strategy+business Reader
S+B: During the negotiation phase, did you make it clear to Abbey that
you planned to run a tighter ship?
ÁLVAREZ: Definitely. We were very open. We said at the outset that
there would be around 3,000 redundancies. In the end, it was a
much larger number.
S+B: Yes, there were about 8,000 job cuts. Why was there such a discrep-
ancy, and how did you communicate that to the staff?
ÁLVAREZ: When you run numbers from the outside, you make esti-
mates based on things you’ve seen before. For instance, based on
experience, you may believe that certain departments can be run
with 20 percent or 30 percent fewer people. Once you are inside,
you can make a determination department by department — and
sometimes you find that your assumptions were wrong. So it’s pru-
dent to be conservative until you are inside the company and can get
real numbers — especially if you are entering a new market.
S+B: The finance function itself is often an area where synergies can be
captured during the postmerger integration. What sort of restructuring
did you do with your own department?
ÁLVAREZ: At Abbey, we appointed one of Abbey’s people to finance
and sent someone from Madrid to ensure we were getting the data
we needed and to consolidate the numbers.
The challenge here is that markets are local; you have to guard
against the temptation to apply the same measures to everyone.
For instance, if we were to force Abbey to conform to our finan-
cial reporting system in Spain, we would lose the ability to com-
pare Abbey with its peers in the U.K., which is the comparison we
really want.
Banco Santander 39
ÁLVAREZ: We were on track or ahead of target from the very begin-
ning. But we remain very ambitious and continue to find ways to
cut costs.
40 strategy+business Reader
Banco Santander 41
BASF:
Reduced Cyclicality through
Portfolio Management
KURT BOCK
Chief Financial Officer
BASF SE
BASF:
Reduced Cyclicality through
Portfolio Management
by Klaus Mattern
44 strategy+business Reader
Bock, 50, who prefers preparation when it comes to deal mak-
ing, says M&A is just one, and perhaps the least used, instrument
in his toolbox. In any acquisition, especially a hostile one, you never
know what you’re getting until you’ve taken the package home and
opened it.
During an interview in his office in BASF’s international head-
quarters in Ludwigshafen, Germany, Bock cited the steps taken to
make the Engelhard acquisition successful — including an integra-
tion process that BASF started the day the deal closed.
S+B: You haven’t done a lot of acquisitions in the past few years, but
those you’ve done have been successful. Why doesn’t M&A play a bigger
role in your growth strategy?
BOCK: Because acquiring a business doesn’t always create value for
shareholders. It has to be done selectively.
BASF 45
around the world, integrating about 15,000 people. That’s an
increase in our workforce of almost 20 percent. It takes time
and work.
S+B: What was the strategic rationale for the acquisitions of Engelhard
and Degussa’s construction chemicals business?
BOCK: We looked at growth prospects, margin stability, and reduc-
ing volatility — a very important issue for the chemicals industry.
How do we reduce cyclicality and volatility? Both businesses are very
stable in terms of earnings volatility. So that was a very important
financial consideration.
S+B: Let’s look at Degussa first. How did that come about?
BOCK: We had already defined construction chemicals as an
interesting growth business in 2005. But it was a consolidated
market with few players — we weren’t optimistic that we’d find any-
thing for sale. We told our people, “Nice idea, but there’s nothing
on the market to buy,” and filed it away. When Degussa’s construc-
tion chemicals business came up in December 2005, we were able
to react immediately — and assign a price to the company within
46 strategy+business Reader
days. That’s our strength: to be prepared, to be proactive, and not
to be surprised.
S+B: How did you respond, knowing that Engelhard was looking for
another buyer?
BOCK: We felt we had made a good, attractive offer. We tried to
remain the active party, to push and not to react. Having a team in
Europe and another in the States helped us here: We could basically
cover the entire day. The Americans woke up earlier than usual, but
by the time they arrived at the office, we already had a couple of
hours of work behind us, knew what was going on in the world, and
could initiate the next step.
BASF 47
S+B: How do you determine what a final offer price should be, the line
you won’t cross?
BOCK: It’s based on our valuation and our sense of the strategic
fit. As we all know, that number doesn’t come with a guarantee; it’s
based on a lot of assumptions. There are estimates for improvements
we can make in the cost structure, operations, and gross margins.
But at the end of the day we have to earn our cost of capital. If we
think it’s just becoming too expensive despite all the strategic attrac-
tiveness, we will walk away.
S+B: Can there ever be a strategic justification for paying too much?
BOCK: People use that argument a lot. If the model doesn’t work,
they say there’s a strategic reason and we will harm BASF’s future if
we don’t do it, and so on. But I don’t buy it. If you can’t build the
case for how you’re going to make money, you shouldn’t go after a
certain target.
There might be exceptions, but we try not to let emotions get in
the way. Engelhard was a good example of where we held back and
said, “If we don’t get it — well, that’s life.”
S+B: Still, that must have been a bit of a nerve-racking time, the five
months in between your initial bid and when Engelhard accepted.
BOCK: We were concerned that someone else would snatch
Engelhard away by offering a higher price. But in a situation
like this, where we were making an unsolicited offer, the real risk
was execution.
Engelhard was a public company so we knew its financials,
but we didn’t have a due diligence process. We couldn’t go into a data
room, visit sites, talk with people, and understand what the risks and
opportunities were. There was a limited management presentation
— half a day — about their business. It was basically an investor
relations presentation. We could ask a few questions and that was it.
48 strategy+business Reader
S+B: So you were buying something without knowing all the contents
of the box?
BOCK: Exactly. There were no bad surprises, but that’s the major
risk with this kind of offer.
S+B: How did you ensure that you achieved the synergies you expected?
BOCK: When we launched the bid, we already had management
teams in place — what we call a shadow team that would
eventually run the business in case management walked away.
This is just a smart risk management practice. We appointed a proj-
ect leader for the integration process — the same person who had
coordinated the acquisition process. Then we formed cross-
functional, cross-regional teams for everything from HR to IT to
branding.
It starts with the little issues. People need new business cards
and things like that. That was well prepared so that on Day One,
when the closing happened, we could almost immediately initiate
those teams and really start the integration work. They had about
four to six weeks to identify the synergy potential, to really
quantify it. Once it was agreed upon, we immediately started the
integration process. We did it in a pretty uncompromising way.
BASF 49
S+B: You’ve already said that Engelhard’s management didn’t like the
idea of a change in ownership. How did the company’s employees
respond to life under BASF?
BOCK: I think our team did very well in communicating what we
wanted to do, openly and intensively.
We had to let about 800 people go and relocate offices. Neither
of those things was fun. Our goal was to finish the integration
process as quickly as possible, because integration creates high levels
of uncertainty, and uncertainty is by nature bad for employees. It
weakens motivation. People are focused on the integration process
instead of on markets, customers, and operational issues. So we tried
to get through that process as quickly as possible.
50 strategy+business Reader
Kurt Bock’s keys to successful M&A
• Prepare. When an opportunity arises, you need to know immediately whether
to grab it and how to go about it.
• Put a “shadow team” in place to manage the acquired business before you make
your bid. That is your safeguard for fast integration of a hostile takeover.
• Communicate to the acquired company’s staff — but don’t make the mistake
of being too flexible. The employees you inherit should know what you’re
planning to do.
• Understand that difficult decisions are necessary and make them swiftly. Not
every manager of the acquired company is going to agree with your decisions
anyway.
• Don’t become emotionally invested in the deal’s closing. When you do so,
you increase the likelihood that you will pay too much or agree to other
unfavorable conditions. +
BASF 51
Bayer:
Preparation Enables Success
KLAUS KÜHN
Chief Financial Officer
Bayer AG
Bayer:
Preparation Enables Success
by Christian Burger and Klaus Mattern
54 strategy+business Reader
His approach seems to be working. After posting a loss in 2003,
Bayer has been able to increase its profitability — and its share price
— each year since. The acquisitions of Roche’s over-the-counter
drug business in 2004 and of Schering in 2006 were key moves in
the company’s strategic shift toward a greater focus on health care.
Kühn was appointed head of the group finance division shortly
after joining Bayer in 1998. In May 2002, he was appointed to the
management board. Strategy+business interviewed him in his office
at Bayer’s global headquarters.
S+B: When Bayer goes on the takeover path, what is your role?
KÜHN: It depends on the size of the merger. If we do a big transac-
tion, like the disposal of our diagnostics business for € 4.2 billion
[$5.4 billion] in 2006, I’ll be involved all the way through the final
negotiations. That was our biggest disposal project. I’m not that
involved in smaller projects, though of course I am informed about
them and get updates on a regular basis.
S+B: The bidding for Schering began with an overture from Merck of
Germany, a competitor you knew well. What was your strategy?
KÜHN: To present a strategically, socially, and financially convincing
offer within the shortest time possible. From the time that Merck
announced its bid, we had just 11 days to come up with a counter-
bid and a full financing package.
S+B: Could you be confident in your numbers with so little time to ana-
lyze the company and prepare an informed bid?
Bayer 55
KÜHN: We had already done our homework well before the Merck
offer. Because we wanted to expand our health-care business, we had
started looking for potential targets specifically in pharmaceuticals
and OTC, the over-the-counter business.
We did a market review, a kind of competitive review, where we
looked at which potential targets would fit well with our size, finan-
cial capabilities, and business. When the Schering opportunity came
up, we didn’t have to do any deep analysis. It was already on our list.
S+B: What was your specific role in the Schering takeover battle?
KÜHN: My job was to establish and coordinate the different project
working groups, as well as to select and communicate with our
external advisors. We had working groups focusing on the strategic
fit, business plans, synergies and valuation, transactional aspects,
financing, and communication. Another important role for me was
to connect the project team with our CEO, Werner Wenning, as
well as with my other colleagues from the board.
S+B:Who usually makes the initial contact with the target company,
and who did it in the Schering acquisition?
KÜHN: It depends on the size of the deal. With Schering, our CEO
made the approach.
S+B: How does your role differ from that of the CEO on a big project
like Schering?
KÜHN: With Schering, the CEO generally did not participate in the
daily project team meetings. His role was more focused on the dis-
cussions and negotiations with external parties.
56 strategy+business Reader
In the project meetings, the team often needed guidance. I made
some decisions, but the CEO needed to make others and was usually
the one to contact Schering. The bottom line is that the two of us
communicated on a daily basis, sometimes even every hour, to make
decisions. When necessary, we would convene a board meeting.
S+B: Besides the pressure of time, what was the biggest challenge in deal-
ing with Schering? After all, you were the white knight working on a
friendly deal.
KÜHN: We had to get 75 percent of Schering’s shareholders on our
side. The day after we went public with our offer, Merck accepted
defeat. But to our surprise, they came back at the end. Coping with
an interloper so late in the game was a real challenge, too.
S+B: Was there anything that was nonnegotiable for you in the
Schering talks?
KÜHN: One example is that, once the deal was closed, we did not
discuss changing our group structure, which is based on a holding
company at the top over our three subgroups — HealthCare,
CropScience, and MaterialScience — and our service companies. It
was clear from the beginning that Schering would become part of
Bayer HealthCare and that some of its functions, like the finance
function, would be distributed to corporate headquarters. These
kinds of issues were nonnegotiable.
Bayer 57
S+B: You’ve stressed the need to move fast, to keep the pressure on. What’s
wrong with moving slowly? The process is so complex. Why is it a disad-
vantage to take your time?
KÜHN: First of all, we had no choice in the Schering process. We
only had a limited amount of time. But generally, in all M&A trans-
actions, the threat of an information leak increases with each day that
passes before an announcement. Preventing that from happening
is essential to success. You have to have enough time to do things
with a certain degree of diligence, but I am a strong believer in
momentum.
S+B: What else can go wrong if the process takes too long?
KÜHN: People lose focus and get distracted if it takes too long, and
that adds to the uncertainty, slowing the momentum. This can
become a threat to the transaction. If negotiations drag on too long,
it usually means something is wrong with the deal. That’s one rea-
son some deals fail.
S+B: Do you walk into a deal knowing how much you’re willing to pay?
58 strategy+business Reader
KÜHN: Usually you have limits that are based on your own evalua-
tions and you’ve set your price targets, though that’s not the price you
put on the negotiating table. For the Schering transaction, it
was not a problem to come up with the right price. First of all, we did
our own valuations. We knew what the unaffected share value was; we
did our DCF [discounted cash flow] valuations and made our syner-
gy calculations, so we knew how much Schering was worth to us.
Bayer 59
S+B: You predicted that you would achieve synergies of around
€ 700 million [$891 million] with the Schering acquisition. Is that
panning out?
KÜHN: After we did a bottom-up calculation, we increased our syn-
ergy targets to € 800 million [$1.1 billion]. And at the same time
our one-time charges, which we estimated at € 1 billion [$1.3 bil-
lion], did not increase.
In takeovers or acquisitions, you always have to reckon with some
kind of business disruption, losing some business because the mar-
ket isn’t as convinced of the merger as you are internally. In the case
of Schering, this didn’t happen; there was no disruption of business.
S+B: You plan to achieve your synergy target by 2009, so you’re still in
the middle of it. Tell us about that process. What exactly are you doing
to extract those savings?
KÜHN: First we broke it all down into specific targets. How much
should come from R&D, sales, general administration, and product
supply? How much should come from the U.S. and from Europe?
Then we sent these benchmarks down to the units and down to the
countries. They reviewed our estimates and sent back their break-
down on what they expected to achieve, and how, in 2007, 2008,
and 2009.
This gives us a detailed step-by-step implementation plan, an
IT-supported toolbox, which all the line managers have to sign off
on. Thus they confirm their responsibility for very specific steps.
Then we double-check everything. We eliminate double account-
ing, which usually happens in these situations. And then we come
up with a database of all these measures on a worldwide basis. At
that point we can start tracking the implementation of these syner-
gies. And that’s what we do on an ongoing basis. We expect to
achieve 80 percent of the € 800 million [$1.1 billion] by the end
of 2008.
60 strategy+business Reader
S+B: So you’re actually ahead of schedule?
KÜHN: Yes — and that’s because we made some essential decisions
very early, such as filling management positions. You have to have
people in place who can take responsibility and deliver on the syn-
ergies, to guide and steer the process. And you have to decide on
locations. These things are critical and can affect the atmosphere in
the company. People want to know if they will be living and work-
ing in Madrid or Barcelona, Paris or Lille, Leverkusen or Berlin.
Bayer 61
interfaces. At this point, we’ve made all the changes. But will the
invoice work? Will the next report work because all the necessary
things have been established and are working well on a worldwide
basis? It’s not just about managing specific issues; it’s about how to
manage a complex network of tasks on a global scale.
S+B: Besides the big acquisitions you’ve done, you’ve also completed some
large disposals, like the Lanxess transaction in 2004, in which you spun
off chemical lines and approximately one-third of your polymer activi-
ties. How does the CFO’s role differ in a takeover situation like Schering
and a spin-off like Lanxess?
KÜHN: On an acquisition, the hardest part of the work comes after
the closing: the integration. However, my main task in finance ends
with the closing of the deal. The integration phase becomes largely
the responsibility of the business units. But in a de-merger, the bulk
of the workload comes before the closing, since the business has
to be carved out, more or less. That’s why spin-offs require much
more time and are more demanding for the finance and accounting
functions.
Lanxess was even more demanding for me as the CFO because it
required financial and organizational restructuring. Lanxess didn’t exist
before we defined what it was. We created the company from scratch.
Purely from the CFO perspective, it was an even bigger project.
S+B: Do you get more ideas for potential acquisitions from your own
team or from investment bankers and outside advisors?
KÜHN: It’s usually a mix. We always get ideas from meeting with
investment banks, but at the end of the day, the vast majority of
transactions that we do are generated from our own ideas.
You have to rely on your own expertise. This holds true for iden-
tifying and evaluating potential targets as well as for preparing and
implementing the integration.
62 strategy+business Reader
Klaus Kühn’s keys to successful M&A
• Make haste. Speed propels deals; lethargy kills them.
• Set limits. Certain decisions shouldn’t be open to negotiation —
or even discussion.
• Don’t underestimate the role that nonfinancial benefits (“soft factors”)
can play in clinching the deal.
• Have a postmerger integration plan ready for the company you’re buying
as soon as you complete the transaction.
• Leave your ego aside. Emotion can cause you to pay too much and fail in
your fiduciary duty. +
Bayer 63
Andrew Bonfield:
The Fine Art of Drug-Industry M&A
ANDREW BONFIELD
Andrew Bonfield:
The Fine Art of Drug-Industry M&A
by Robert Hutchens and Justin Pettit
66 strategy+business Reader
Corporation for $60 billion. Did the Financial Times have it right
not long ago when it said of drug-industry mergers, “Bigger isn’t neces-
sarily better”?
BONFIELD: I’d agree. The major M&A transactions in this industry
have not been successful in delivering shareholder value. The issue
is productivity in the R&D pipeline. Productivity in research does
not necessarily correlate to size.
S+B: Have the mergers themselves been responsible for those companies
becoming worse at getting drugs to market?
BONFIELD: Well, there’s a famous comment by Sir Richard
Sykes, the former chairman of GlaxoSmithKline, that scientists
are sensitive flowers. So yes, there is a disruptive element to the busi-
ness caused by an M&A transaction. And then also there is the
challenge of managing innovation in a huge company — it’s so dif-
ficult to understand exactly what’s happening throughout
the operation.
In some parts of the business model, scale is useful. It helps once
you’re in development with a drug, for instance. However, for the
discovery of new molecules, that is not necessarily a place where
scale works to your advantage. Hence, biotechs survive versus big
pharma companies.
Andrew Bonfield 67
BONFIELD: There is a need for it because, if you look out between
now and 2012, 25 percent of current brand-name prescription drug
sales will disappear to generic competition. The regulatory environ-
ment’s getting tougher. And the pricing environment is going to get
tougher given that there is only one market left for free market pric-
ing of pharmaceutical products, which is the U.S.
The issue is the track record of mergers — their having not nec-
essarily paid off — and therefore investors being very concerned
when companies talk about M&A. When I joined Bristol-Myers
Squibb in September 2002, the word consolidation was forbidden in
this industry. You didn’t go near it. Now there’s a sense that the
industry needs to change. I’m not sure what the trigger will be. But
big mergers are going to happen.
S+B: Going back a generation, has there been even one big drug-
industry merger that has worked?
BONFIELD: Probably not. All the companies that have tried have had
incredibly difficult periods after their merger events. What’s tended
to happen in this industry is that companies have done mergers from
a position of weakness rather than from a position of strength. It’s
tended to be, “Oh, something’s going to happen two minutes down
the road, and I’m not ready for it. What can I do to make it happen
now, rather than own up, rather than be honest with the Street and
say I’m not going to grow 15 percent compounded annually?”
I think as Wall Street’s expectations come down for the industry,
there’s going to be less of that. In particular, I think there’s an oppor-
tunity for M&A to be done in a different way, which may add more
value than it historically has.
S+B: What are some of these M&A offshoots that could add more value?
BONFIELD: Well, take Roche, which was the top-ranked pharma-
ceutical company in the late 1980s, thanks to the success of Valium.
68 strategy+business Reader
It went right down after that, but has come back as one of the
highest-rated stocks in the industry, in large part because of its
majority stake in Genentech. This is not to say it hasn’t gone
through some peaks and troughs. But Roche’s decision to keep
Genentech as an independent biotech company, with Roche as the
holding company, has been an incredibly successful M&A-type
transaction and partnership.
Andrew Bonfield 69
collaborating with, had already gone to GlaxoSmithKline. There
was a bit of a land grab going on. We needed to be part of that space.
Adnexus’s venture-capital backers were also very aggressive. At
the same time that they were negotiating with us, they were filing to
do an IPO. Obviously, they were trying to keep some competitive
tension in the process.
S+B: If you can’t use a CFO’s traditional valuation tools for deals, what
can you do?
BONFIELD: You can work out all sorts of fancy Monte Carlo simu-
lations and valuations — it’s just not going to work. At the end of
the day, with a product or technology that isn’t yet in the market, it
comes down to a matter of judgment. You look at other factors:
How does the multiple compare with those of other companies that
are already public, or, in the case of Adnexus, what is this value rel-
ative to the indicative IPO valuation?
A deal like DuPont, on the other hand, would have been done
purely on a net present value basis: Here’s what the bottom line is.
70 strategy+business Reader
This is what it means from an earnings-per-share perspective. This
is what it means from a cash flow perspective. This is what it means
from a return-on-investment perspective.
S+B: How did you as a CFO square the reality of how the industry
works with your responsibilities as the company’s financial steward?
BONFIELD: The thing you have to deal with is ambiguity. You have
to realize that even your best scientists don’t know what’s going to
happen. At a previous job in the pharmaceutical industry, I remem-
ber we were looking at an opportunity to license a new drug whose
peak sales potential we estimated at less than $1 billion. It is now the
best-selling drug in the world, with $12 billion in annual revenue.
S+B: Are there industries where the CFO has an easier time predicting
outcomes, including the outcomes of acquisitions?
Andrew Bonfield 71
BONFIELD: Any consumer goods industry. If you’ve got a consumer
product that’s got a market share, you can look at it and say, “Gee,
we can take this from 15 percent to 35 percent.”
S+B: When the reverse is true — when you have a business that’s losing
share — presumably you have to invert the thought process. What’s the
key to doing a successful divestiture?
BONFIELD: It’s the ability to identify those businesses to which you
are no longer adding value. Bristol-Myers’s consumer business,
which the company sold to Novartis in 2005, was a classic case in
point. Excedrin was a brand that was at one time the number one
analgesic in the United States. Tylenol took over, and basically
things had just gone backward for years. It became obvious that
Excedrin was going to start losing shelf space.
The CFO trick is always to say, “Hey, come on, this isn’t going
anywhere, and it’s better off in somebody else’s hands. Let’s push the
button today.” So it’s that identification of the potential, seeing
where the strategic value is for other buyers, and trying to make sure
that you keep that engaged through a process.
S+B: The drug industry is a little like high technology in that everyone
is looking for the next big thing. Does concern about missing the boat
sometimes have a negative impact on merger decisions in your industry?
BONFIELD: The biggest drug merger I was involved in is an exam-
ple of that. It was right around the time of the first decoding of the
human genome, and there was all this talk about personalized med-
icine, or pharmacogenomics. People believed that with the decoding
of the genome and new research technologies, drug discovery would
become much more of an industrial-type process — something you
could reliably engineer, instead of chance upon. There was therefore
the need to invest in these technologies and be part of the land grab
because within the next decade or two, most of the medicines that
72 strategy+business Reader
would be needed to treat disease would have been discovered by
using these tools.
Amid that excitement, the merger was sold strictly as a research-
based deal — the companies needed to combine their money to
invest in research. But the reality is that personalized medicine is still
in its infancy. And the shareholders who supported the deal have
been saying ever since, “Where’s the pipeline?”
Andrew Bonfield 73
Andrew Bonfield’s keys to successful M&A
• Base any acquisition you make on several strategic points. This increases the
chances that it will be seen as successful along at least one dimension.
• Declining assets should be divested, even if they’re still generating cash.
• Know where the scale brought about by M&A is useful — and where it isn’t.
Bigger isn’t always better.
• Don’t look for traditional measures of financial value where there are none.
Early-stage companies must be evaluated using different criteria.
• Sometimes an acquired company does best if it’s allowed to operate indepen-
dently. Vertical integration isn’t always the way to go. +
74 strategy+business Reader
Andrew Bonfield 75
Deutsche Telekom:
Never Make Acquisitions Driven
Solely by Finance
KARL-GERHARD EICK
Chief Financial Officer
Deutsche Telekom AG
Deutsche Telekom:
Never Make Acquisitions Driven
Solely by Finance
by Irmgard Heinz and Klaus Mattern
78 strategy+business Reader
business at Deutsche Telekom’s Bonn headquarters, he spoke with
clarity and conviction about what he called “the core principles of
successful M&A.”
Kevin Copp, 43, an international lawyer and head of Deutsche
Telekom’s M&A function, joined in the conversation and shared his
perspective on managing deal-related risks.
S+B: It’s been a while since Deutsche Telekom has done a blockbuster
deal. What part does M&A play in your current strategy?
EICK: M&A always serves two strategic goals for us: to drive consol-
idation in developed markets and to drive growth.
In-market consolidation — strengthening our position in places
where we already operate — is still our number one priority, because
consolidating creates the most synergies. We did that in Austria a
few years ago when we bought Tele.ring and effectively reduced the
number of operators in the market. We did something similar in the
Netherlands last year, and we enlarged our footprint in the U.S. by
acquiring SunCom Wireless.
The other thing acquisitions help us do is become established in
adjacent, underdeveloped markets and participate in their growth.
This was the main rationale behind our recent investment in the
Greek telecommunications operator OTE. OTE’s strong presence
in southeastern Europe helps us to significantly enlarge our foot-
print in these highly attractive markets.
Finally, size matters, particularly in the telecommunications
industry. Gaining a critical mass of subscribers is important because
it gives us a better bargaining position with suppliers, especially
handset and network infrastructure equipment makers.
Deutsche Telekom 79
When acquisitions do well, it’s because the acquirer judged the busi-
ness model correctly and integrated the companies effectively. That’s
a rule that I don’t think will ever change.
S+B: As CFO, you clearly have a role in quantifying the cost savings
you’d like to realize. Is it also your job to make sure those savings
happen?
EICK: No. This is where the business unit that will be running the
acquired property comes in. You never want to make an acquisition
that is driven by the group CFO alone — never! Otherwise people
will say at some later stage, “It’s not my problem. I wasn’t responsi-
ble for the acquisition.” If we come up with an acquisition candidate
and the responsible board member from the mobile communica-
tions, broadband/fixed network, or business customers operating
segment says, “Hmm, I don’t know about this one,” the smart thing
is to leave it alone.
S+B: Are there other things that are equally important in making an
acquisition successful, things you would advise every CFO to do?
EICK: There are a few. The first is to be careful about delegating
responsibility. By this, I don’t mean to say that as CFO, you need to
80 strategy+business Reader
personally handle the details of capturing synergies. That effort
should rest largely with the head of the business unit, as I’ve men-
tioned. Still, acquisitions are the most serious steps most companies
take. A member of the board must take personal responsibility, at
least for the first year.
Second, your investor relations department must have all the
details ready for you, the CEO, and the responsible board members,
so everyone has a chance to sell the deal to the markets. Right from
the beginning, you should be asking your experts in the business
unit, M&A, legal, treasury, and investor relations not only how best
to structure the deal, but also how best to sell the deal. Nothing is
worse than an acquisition that flops in the capital markets. For a
listed company, it can be very damaging.
Third, the additional value of your acquisition for your share-
holders is dependent not only on the synergies realized, but also, to a
great extent, on your own cost of capital. When selling the deal to
the markets, you need to keep that in mind too. The financing of the
deal is hugely important.
Deutsche Telekom 81
There were two unusual consequences of that deal. First, we
didn’t have to do a lot of due diligence. This was, after all, a company
we had founded and whose shares we had floated on the market,
so we knew the brand and the business model very well. In other
cases, due diligence can take a long time as you get familiar with
a company.
The other thing that made the T-Online merger unique was
how German takeover law affected the transaction. The exchange
ratio regarding the shares of DT AG and TOI AG was determined
by both parties on the basis of 10-year business plans and was
approved by a court-appointed independent accountant. To reduce
the uncertainty for the TOI minority shareholders during the
period between the announcement of the deal and the time the
exchange ratio was determined, we voluntarily offered to buy their
shares in cash at the price they were worth prior to the announce-
ment of the deal. As a consequence of the exchange ratio and the
market price for DT’s shares at the time, the value of the deal for the
TOI shareholders was below the value derived by the 10-year busi-
ness plans and even below the value of the voluntary offer. It was a
source of tension that you do not have in a typical acquisition, in
which you see a market capitalization, you pay a premium, and
everyone goes home happy.
It was clear that we would face a series of lawsuits. What we
didn’t expect was that the case would go all the way to Germany’s
Federal Supreme Court, and that it would take half a year to get a
decision. That was a useful thing to realize, that a risk so remote
could actually materialize. Even the slightest risks deserve a place in
your financial models.
82 strategy+business Reader
EICK: It did. T-Online, for all practical purposes, was a startup —
something of a speedboat. It got its products to market very
quickly. The employees were very dynamic. The age structure was
completely different. And the infrastructure at T-Online was devel-
oped from scratch — its billing system was just five years old.
Deutsche Telekom’s fixed-line business, by contrast, was a tanker.
You don’t operate tankers and speedboats the same way.
S+B: Did you have any trouble getting T-Online employees to stay?
EICK: It was a challenge. Many of the T-Online employees liked the
startup environment — and they wanted to remain independent.
We left T-Online as a business unit and implemented a steering
model that suited their wish for their own identity and our synergy
goals. To employ the innovative spirit of the T-Online people for the
entire group, we made T-Online the basis of a newly formed prod-
uct innovation and development unit. We also made the T-Online
people aware of the career development opportunities that existed at
Deutsche Telekom.
S+B: Kevin, we’ve touched on some key risks one faces in these transac-
tions. What are your keys to circumventing these?
COPP: One key is having a clear process for handing over responsi-
bility and capturing corporate learning. If you fail to get newly
formed businesses in a position where decisions can be based on all
the facts available, your integration is bound to fail.
That’s why we recently created postmerger integration guide-
lines. Several months of work went into this process, during
which we addressed every conceivable aspect of postmerger inte-
gration with the goal of establishing standard processes and tools.
Since value creation is the ultimate objective, we obviously paid
special attention not only to identifying synergies pre-transaction
but also to tracking them post-transaction.
Deutsche Telekom 83
Every transaction will have its own peculiarities, but having a set
of resources that can be adapted as necessary allows us to hit the
ground running. Our recent acquisition of Orange Netherlands and
its integration with our mobile operations in the Netherlands is the
perfect pilot project to test the new guidelines.
EICK: I’d add that it’s key to have all your functional experts
involved in the process and even to receive negative feedback on the
deal right from the start. As a board member, you’re promoting the
deal and pushing it hard. You need a counterbalance to that. You
need the people who say, “Stop. No further. It won’t work this way.”
These people are extremely important, even if they’re unpopular.
84 strategy+business Reader
Deutsche Telekom 85
Duke Energy:
The Value of Relationships in M&A
DAVID HAUSER
Chief Financial Officer
Duke Energy Corporation
Duke Energy:
The Value of Relationships in M&A
by Thomas Flaherty
88 strategy+business Reader
Hauser’s credibility and gracious manner (“stress isn’t one of my
big issues; I’m very fortunate in that way”) are valuable assets at a
time when Duke is looking for partners — to either collaborate with
or buy outright. The importance of personal relationships in M&A
was one of the main things that Hauser emphasized when strategy+
business sat down with him at Duke’s headquarters. The conver-
sation also provided a clear picture of the M&A landscape in the
energy industry.
S+B: Duke has reshaped itself with a couple of huge transactions in the
last two years — the acquisition of Cinergy in 2006 and the spin-off of
the natural gas business as Spectra Energy in 2007. Is all of this activ-
ity a sign of things to come in the energy industry?
HAUSER: I do think you’re going to see a significant reduction in the
number of independent utilities in North America. And that’s prob-
ably going to happen in three ways.
Acquisitions by specialized infrastructure funds, which can raise
capital relatively cheaply and are flush with cash, will be one way.
Acquisitions by European energy companies will be another; they
are benefiting from the strength of the euro. The third is U.S. com-
panies coming together. Our deal with Cinergy is probably the
most successful of those in recent times. There are other proposed
deals in the industry that haven’t worked, usually because of regula-
tory issues.
S+B: How large do the regulators loom when you are contemplating
a deal?
HAUSER: When we brought Duke and Cinergy together, we had to
get approvals from five states on our plan, which included a first-
year reduction in electricity rates. We also had to get various fed-
eral approvals.
First and foremost, the regulators’ concern is for the customer.
Duke Energy 89
But they’re also interested in the success of the company, because
they want you to be a viable entity.
The issue is what’s the benefit to the customer and what’s the
benefit to the shareholder. With Cinergy, there were potential syn-
ergies that were of huge value. The question was, Could we achieve
those, and if so, how would we split the savings between sharehold-
ers and customers?
S+B: Are the buyers competing with you for deals subject to the same reg-
ulatory constraints?
HAUSER: Not always. It depends on the category the acquirer falls
into and on the particulars of the target. For example, right now an
infrastructure fund led by Australia’s Macquarie Bank is in the
process of buying Puget Energy in Washington state. There won’t be
any consequential synergies to give to the customer in that case. But
what the state is getting out of it, if you look at it from the regula-
tors’ perspective, is an assurance that Puget Energy will get the cap-
ital it needs.
90 strategy+business Reader
have the energy efficiency methods that are really back of mind,
where it just happens. Like having the chips on the refrigerators
that cycle them off. A company that is successful in those areas and
has a model that works is going to have a big advantage when it’s
looking at merging with somebody that doesn’t have an equally
good model.
Duke Energy 91
Puget Energy even had we been interested. They have a lower cost
of capital. Everything else being equal, they’d beat us every time.
S+B:How much of the relationship side do you personally get involved in?
HAUSER: I get involved in it a lot. Our CEO [James Rogers] fre-
quently meets with other energy-industry CEOs on various subjects.
92 strategy+business Reader
I do the same with CFOs. Between Jim, Group Executive Lynn
Good, who has the M&A function, and me, I doubt there are many
utilities in the country that haven’t been pitched to us as good acqui-
sitions by someone.
S+B: Do you get many ideas from investment banks? What is the qual-
ity of the relationships you have there?
HAUSER: Bankers do give us some ideas. However, what the best
ones do is give us market insight. They’ll come in with information
about the industry and who’s doing what and what the P/E ratios
look like, and that can help facilitate our own thought processes.
They’ll tell us who’s building wind or biodiesel plants, and which
solar technologies are coming along, and which meter manufactur-
ers are on the leading edge — those kinds of things.
A good banker can provide useful information in even more basic
ways. He might come in and say, “This company’s CEO and CFO
are both 63, there’s no heir apparent, and they’re looking around.”
That might be a data point we didn’t know. It’s frequently those
softer things that can create a deal, as opposed to pure economics.
Duke Energy 93
get that answer as well as for Jim and me to develop our relationship.
The toughest thing when you do an acquisition is getting to
know people and developing the relationships. There’s a natural dis-
trust at the beginning, when you’re still negotiating. But when you
come together, you’ve got to put all that behind you and figure out
how to make it successful.
S+B: Duke has been active not just as an acquirer, but also in shedding
businesses that are no longer strategic, such as the Asia-Pacific assets,
Cinergy’s energy trading operation, and the Spectra spin-off. What spe-
cial problems does a divestiture present?
HAUSER: When you create a company and keep the books of the
company, you gain synergies by pulling it all together. When you
decide to break it apart in whatever way, then you have to go back
into the books and say, “Oops, we wish we hadn’t kept the books
that way — we wish we’d kept them separate.” That’s the biggest
single workload challenge of a divestiture. On Spectra, it created a
huge amount of work.
The other big challenge is determining which employees go
with each company. As the companies move toward separation, they
begin to compete for talent. The top group must work together to
get the right split for shareholders.
94 strategy+business Reader
was getting pretty adamant. From my perspective, having the close
not coincide with the end of a quarter just wasn’t an option.
Now it so happens that Jim Hance, the former CFO of Bank of
America, is on our board. And after the debate has been going on
for a little while, Jim speaks up. He says something very under-
stated, along the lines of, “Well, I’ve probably done as many deals as
anybody. And we’ve never closed one that wasn’t on a quarter.” That
pretty much solved that issue.
S+B: Thank you, Mr. Hance! As CFO, do you often find yourself hav-
ing to stand your ground on more fundamental M&A issues, such as
who is worth buying?
HAUSER: Sure, there are plenty of times that I’ve been in the role of
saying, “No, we shouldn’t do this.” But it’s a balance. If your answer
is always no and everyone knows that’s the answer, you start to be
seen as a barrier to success.
It’s better to develop a reputation as someone who walks that
line of assessing good ideas, even helping to create them, while mak-
ing sure the bad ones don’t get through. I think that comes back to
your personal credibility, internally and externally. It’s tough, but
that’s the challenge.
Duke Energy 95
Enel:
Creating the New European
Energy Market
LUIGI FERRARIS
Chief Financial Officer in Charge of Accounting, Planning, and Control
Enel SpA
Enel:
Creating the New European
Energy Market
by Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza
98 strategy+business Reader
motorcycle maker Piaggio SpA and electronics conglomerate
Finmeccanica Group. In 2002, he became CFO in charge of
accounting, planning, and control of Enel’s sales, infrastructure, and
network division. He was promoted to corporate CFO in charge of
accounting, planning, and control in June 2005.
In an interview at his Rome office, Ferraris discussed what Enel
has learned from its cross-border acquisitions — including the twin
virtues of listening and maintaining control.
S+B: Enel has been in an intense acquisition phase over the past two
years. What were your priorities in identifying the targets?
FERRARIS: It was clear to us that, in the long run, continental
Europe would eventually become an interconnected energy market.
In an interconnected market, you have the ability to generate
power in one country and transfer it to other countries through the
network system. Therefore, when buying generation assets in one
country, you have to be sure you can also distribute the energy in
other countries.
Enel 99
FERRARIS: Russia is a long-term investment. There are a few techni-
cal issues. It is not really interconnected with the rest of Europe yet. In
terms of electricity, it’s an island. In the long term, Russia will become
more integrated with the rest of Europe, and 10 years from now, we
believe it will be the most important supplier of natural gas to Europe.
We see Russia as a strategic location where we can make a profit.
S+B: How does your team work with the CEO to define and implement
M&A strategy?
FERRARIS: The CEO ultimately defines the strategy, but we are
involved right from the beginning. Strategic planning is part of our
activity and actually involves a lot of people; it’s not something that
is decided solely by the CEO. We have a committee that includes
executives from each business division, including the division’s CFO
and COO. We help drive the process and provide support in mak-
ing decisions.
S+B: What happens once you decide that a target fits strategically?
FERRARIS: Let’s take Slovenske again as an example. Once we made
the decision that it fit and decided to go after it, it was up to the
international division [responsible for Enel’s businesses outside
Italy] to manage the process. Once a deal is done, it then comes back
to me and I monitor the integration process and track synergies ver-
sus our estimates.
S+B: What lessons have these last few years taught you about the rela-
tionship between finance and operations in M&A?
FERRARIS: You need to work as a team and have a clear under-
standing of the strategy driving the deal right from the very begin-
ning. These are among the lessons we’ve learned. In this type of busi-
ness, you need to have the involvement of the core business
and the key corporate functions, which also includes your
S+B: Even before acquiring Endesa, you were operating some smaller
businesses in Spain. Was that useful in helping you enter that market?
FERRARIS: It was. Despite the long-term promise, Europe is not
really integrated yet. You need to understand the subtleties of
approaching each country, the regulatory system and the framework
in which you operate. So in Spain, first we bought some smaller
assets and developed our presence until we understood the market.
Our initial assets included Viesgo, a generator and seller of electric-
ity, which we bought in 2002. Enel Union Fenosa Renovables was
another of our early businesses there — a 50–50 joint venture with
Union Fenosa to produce gas and electricity.
S+B: Do you also need to prepare the ground by discussing your plans
with stakeholders and politicians?
FERRARIS: We need to be good corporate citizens. In western
Europe, this is still a very political industry, because in the end you
are offering a public service. The best way to do this is to work with
a local partner as we did on the Endesa deal, where we teamed with
the Spanish company Acciona in making the bid.
It’s different in eastern Europe. There you are usually involved
in a privatization process and the government has already decided
to sell control of the company to make money. I think we were suc-
cessful in Slovakia and Romania because we had the right strategy
and were the first mover. We made the right bid at the right moment.
S+B: As you’ve expanded internationally, how have you built the inter-
nal management expertise to master the markets you’ve entered?
Enel 101
FERRARIS: By changing the way people think — which hasn’t
always been easy. We’ve been working on it now for two or three
years, and are still in the early stages of development.
For instance, three years ago I created a department to ensure
strong financial control of our international businesses. At the time we
had just one CFO outside Italy — he was working in the U.S. But
with the expansion of the organization, we now have 10 executives
working as CFOs or in key management positions. So, part of the way
we created the expertise we needed was to create a community of
international CFOs. Continuing to build this extended leadership
community will remain a key priority for the next three or four years.
S+B: What tools do you use in M&A that you would recommend to
other CFOs?
FERRARIS: Some of the most important tools for us are those that
enhance communication within the organization — we invest a lot
of time in internal communication. We at headquarters talk face-to-
face. In addition, we have frequent conference calls with people in
the business units.
S+B: Considering how fast Enel is growing, what are you doing to man-
age risk?
FERRARIS: One very important way to manage risk is to standardize
systems. When we acquire a company, we move quickly to standard-
ize finance systems, and we are migrating all of our companies to SAP.
This process of standardizing IT is challenging with eastern European
companies in particular, because they often have very old IT systems.
S+B: How easy is it to make everybody comply with these new standards?
FERRARIS: It’s not easy, and it’s very time-consuming. It’s important
to involve everyone in the process. It isn’t just finance; all of my col-
leagues from the operational divisions must also be involved in order
S+B: Did you just present your checklist to Endesa to implement or was
there more discussion to get the company on board?
FERRARIS: It was pretty inclusive; we created a joint team, and for
each area we had one representative from their side and one from our
side. They were sent off to do an analysis and come back with a syn-
ergy target. You can’t just walk in and say, “You need to achieve € 600
million [$930 million] in synergies.” You have to involve them in the
process of making the analysis and coming to the same conclusion.
The next thing we did was to appoint a joint program manager,
because it’s important to manage this process properly. We spent
three months working on this, and were able to tell the market in
December 2007 that we expected more than € 700 million [$1.1
billion] worth of synergies.
What I’m saying is that a bottom-up approach is fundamental.
It requires having an integrated approach with a centralized pro-
gram manager.
Enel 103
S+B: Wouldn’t it be better to be firm and set a clear policy for the
acquired company’s management to follow rather than involve them so
much in every decision?
FERRARIS: It’s important to keep people motivated. Let me come
back to the example with our digital meters. From the start, we
wanted to install the meters in Spain, but Endesa’s managers weren’t
convinced. In Italy, we had already switched 30 million customers
to these meters, so for us it was no longer a test project but an estab-
lished product in the market. So we opened the books and invited
the managers to Rome to see it for themselves. If they hadn’t been
convinced, I don’t think we could have forced them to go digital.
That is what I mean by involvement.
It’s also a function of how mature your global corporate culture
is. If you have been a big multinational for years, like IBM, you can
take a top-down approach. Companies like that have a global struc-
ture that has been run well for a long time. We are at a different
stage in our history.
S+B: It sounds like you are very flexible when it comes to managing syn-
ergies, but only in the context of very strict financial control.
FERRARIS: Yes, absolutely. Eastern Europe is a good example. In all
our acquisitions there I have insisted on tight management because
they tend not to have a culture of strong financial controls. I have
S+B: What is the achievement that you are most proud of?
FERRARIS: When we bought Slovenske, EBITDA there was € 350
million [$543 million]. Now, just two and a half years later, it is
€ 600 million [$930 million]. We are making a huge amount of
money. That has worked out very well.
Editor’s Note
Throughout this interview, €1 is equal to US$1.55.
Enel 105
E.ON:
Acquisitions to Get a Foot in the Door
MARCUS SCHENCK
Chief Financial Officer
E.ON AG
E.ON:
Acquisitions to Get a Foot in the Door
by Klaus Mattern and Walter Wintersteller
S+B: How did your experience as a Goldman banker prepare you for
working through mergers from the corporate end?
SCHENCK: As a banker, you are trained to ask the right questions
and find out where the possible pitfalls may be in a transaction. I
believe I developed an understanding of possible legal difficulties, of
the financial metrics one has to look at, and, more generally, of how
to work one’s way through a deal.
E.ON 109
to sell some pieces of Mannesmann to Vivendi. Vivendi stopped
negotiating with Mannesmann, and a few days later Mannesmann
agreed to a friendly deal.
S+B: In most cases, an investment banker’s work ends when the deal
closes. How important to you, now that you’re in a new position, are
postmerger integration skills? Can they give you an advantage over
your competitors?
SCHENCK: Absolutely. Those companies that can digest deals
quickly, integrate the businesses and get back to normal operating
mode, that have people who can realize synergies — they are always
going to have an advantage. There are so many opportunities to
invest, and if you have all your resources tied up in integrating
an acquisition, you will have no one to look at organic growth
opportunities.
S+B: How do you find the right balance, after you’ve bought something,
between moving quickly and not undermining the good practices that
may already be in place?
SCHENCK: It’s more important to be decisive than to try to avoid
making any mistakes. I’ve personally seen integrations fail because
people didn’t dare to tell the truth at the beginning.
S+B: Can you make any generalizations about the sorts of functions that
lend themselves to cost savings after a deal?
SCHENCK: Administrative and support functions like IT, account-
ing, and financial controls are usually a good bet — the mechanisms
for integrating those are always somewhat similar. In fact, we have
our own integration teams that go in and execute the synergies
around those areas.
Integrating the actual operations themselves is trickier; you need
to address the specifics of the market and of the businesses.
S+B: Let’s talk about the rationale for some recent deals E.ON has done,
starting with your decision to enter the Russian market by buying five
thermal power plants in Siberia and the Urals.
SCHENCK: Organic growth is always our first priority. But if we
can’t accomplish growth out of our existing asset base, then we see
whether we can buy a platform from which we can grow further.
Our deal in Russia was a way to get started in a place where we
had very little presence in the power sector. We didn’t see a way to
go in there and build everything from scratch.
E.ON 111
market is likely to develop quickly. Russia’s economy depends on it.
But clearly we will see more surprises as we integrate — some of those
I actually expect to be quite positive given the quality of the assets.
S+B: Both of those transactions were relatively small compared with the
more than $60 billion E.ON was willing to pay for Endesa just a few
months earlier. Did your experience with that overture — which you
dropped after a bitter fight — spoil your appetite for larger deals, or any
deals for that matter?
SCHENCK: Well, we are no longer in a situation where we would
say, “Hey, we absolutely have to acquire something to grow our busi-
ness.” In fact, the organic opportunities to grow our business today
are financially more attractive and exist in abundance. The only
issue we face is that in certain markets, we first have to have a foot
in the door.
S+B: E.ON increased its offer for Endesa three times, and the appeal
was clear — you would have added 22 million customers and hundreds
S+B: The credit crunch has made it harder for private equity firms to
raise debt. To the extent that private equity competes with you for deals,
is that working to your advantage?
SCHENCK: The only area where I can think of that happening is
in renewables, although it’s more infrastructure funds than the
traditional private equity firms that have been competitors. But
we have actually seen them almost disappear in certain auctions,
certainly because it’s tougher for them now to put leverage structures
in place that make them competitive from a cost-of-capital perspective.
We don’t often run into private equity firms in auctions, because
our desire to expand via acquisitions in regulated businesses is limited.
E.ON 113
S+B: If it’s not private equity firms you are competing against for
takeover targets, who is it?
SCHENCK: It’s really two sets of competitors. The first set looks a lot
like us — publicly traded energy companies. The second set is
owned or at least controlled by a single shareholder, very often
governments. That’s the case in France and Scandinavia, for example.
S+B: Today, at a time when you’ve got so much capital at your disposal,
isn’t there a danger of entering into ill-advised deals?
SCHENCK: That’s always the biggest risk for an industrial player,
that you’ll convince yourself that there is more in the deal that isn’t
reflected in your straight numerical analysis. That’s when you end
up paying too much.
The thing to remember is that there is always a maximum
price that is set by the fundamental valuation. The idea is never to
pay more than that. That’s one thing we can learn from the private
equity firms — they are pretty ruthless in that sense. You have to
have the discipline to walk away.
E.ON 115
Henkel:
Manage M&A Centrally —
It Uses Corporate Money
LOTHAR STEINEBACH
Chief Financial Officer
Henkel AG & Co. KGaA
Henkel:
Manage M&A Centrally —
It Uses Corporate Money
by Adam Bird and Irmgard Heinz
S+B: Henkel hasn’t always done big deals, but it has done a lot of them
lately — several dozen in the last decade alone. Who’s responsible for
generating M&A ideas?
STEINEBACH: About a third of the ideas come from the corporate
office; the other two-thirds come from the businesses. This makes
sense, since it’s the businesses that know the markets best. Still,
wherever an idea is initiated, it has to be fed immediately to our cen-
tral M&A unit.
Henkel 119
so-called soft factors to be taken into account when integrating an
acquired business.
S+B: How do the divisions feel about this centralized approach? Do they
think you’re interfering?
STEINEBACH: That was indeed a cause of some initial discontent.
The business units correctly assume that they run their businesses
and therefore asked why they can’t also decide on acquisitions. Units
make important decisions that contribute to the company’s bottom
line every day; they saw the centralized M&A process as infringing
on their autonomy and feared that the team’s scrutiny could even
reveal strategic shortcomings.
What we tell them is that any acquisition must eventually
be paid for with corporate money and that the allocation of cor-
porate money needs to be administered centrally. Units don’t own
full balance sheets. They have operating income, but that’s where
their responsibility ends. Capital decisions involving debt and
equity, along with tax decisions, are managed centrally by corpo-
rate finance.
S+B: Helmut, as head of M&A, you are in the middle of this coordina-
tion effort. How would you describe the division of labor when it comes
to M&A at Henkel?
NUHN: We help the business managers assess whether the acquisi-
tion they’re advocating fits with their strategic plans and whether
these plans generally make sense to us in the wider context of the
firm. That’s a big part of what my unit does. It’s also our job to cal-
culate the precise yield and other financial results. With respect to
investment and restructuring needs, we analyze those elements top
to bottom.
In addition to that, we always generate what we call a risk version
of any calculation. We try to understand where we could encounter
problems, what effects lower growth rates or smaller synergies could
have, and where, overall, we could end up in the worst case. This nor-
mally prevents us from becoming overly optimistic about any deal.
S+B: How bulletproof has this approach been? Aren’t you forced to make
compromises during negotiations when you compete for an asset?
STEINEBACH: Actually, we never do that. We go with our calcula-
tions. Any strategic benefit goes into the model, and once we have
Henkel 121
this result, we can’t change it. That’s actually another benefit of
doing M&A centrally: It guards against someone providing unreal-
istic forecasts in an effort to get an acquisition done and grow his or
her division.
S+B: How do you factor cultural differences into your risk model?
STEINEBACH: Different corporate cultures haven’t been a big con-
sideration for us with respect to acquisitions. Much of what you read
about that is theoretical rather than practical. We would never say,
“Oh, let’s not do it because the culture is so different.” When it
comes to country-specific cultures, we think we can handle them
because of the enormous breadth of our portfolio and the countries
we operate in.
S+B: How did you get Dial’s management to accept this change in
structure?
STEINEBACH: It was very difficult. Dial’s managers were used to
running an integrated company with an integrated sales force and
an integrated supply chain across their businesses. Dial’s managers
didn’t understand why we wanted to separate those things. There
was a lot of friction. In the end, we had to make clear that the inte-
gration plan was not up for negotiation.
This kind of resistance isn’t unusual in mergers. In the interest
of quick and successful integration, you often have to make difficult
or unpopular decisions that might even cause some managers to
leave. However, when doing so is the only way to ensure a consis-
tent integration strategy, it pays off in the long run.
S+B: You bought Dial, which was publicly held, when the Sarbanes-
Oxley Act was hitting U.S. companies hardest. What special problems
did that present?
STEINEBACH: It was a challenge. In an acquisition, it’s one thing to
talk about shared visions and values and to find compromises even
when you don’t completely agree. Those things are very much on
the surface. It’s quite another thing when you have to dig into the
basic day-to-day business of recording and reporting accounts, of
understanding the laws, and of meeting requirements. There are
details that come out of that process that you would never discover
up front.
This confirmed for us that close examination of even the most
detailed processes can be valuable. The sooner you understand the
details, the sooner you can get them into alignment.
Henkel 123
S+B: Was there anything else about Dial that proved to be a test?
STEINEBACH: The IT environment. One should clearly devote par-
ticular attention to IT very early in the process. When we acquired
Dial, they had just started an implementation of SAP. Obviously,
they hadn’t planned for it to work with Henkel’s version of SAP. So
we were faced with a dilemma: Do we let them continue with their
implementation or do we stop it? Understanding the system is a pre-
requisite for decisions like that.
S+B: What would have happened if you had forced Dial to take the bit-
ter medicine right away?
STEINEBACH: We believe that, with acquisitions, it can be danger-
ous to implement too many changes too quickly. As a rule, we like
to limit the changes to those that are strictly necessary to estab-
lish whatever principles need to be established, and leave the rest
for later.
S+B: Taking these difficulties into account, would you still say that Dial
has been successful? Indeed, years after an acquisition — and Dial has
been part of Henkel for several years now — is it possible to measure
whether it has worked?
STEINEBACH: We absolutely can measure it, and we do so with
every acquisition. In particular, Helmut’s department conducts an
internal postmerger success analysis two years after every merger.
NUHN: Yes, when we receive the initial forecasts for a specific
acquisition and create the risk version of that, we document in
detail all the assumptions that go into the model. Then, two
years later, we do the same exercise again with actual financial
results and see whether we’re on track or not. If not, the business
can take corrective measures. For us, it provides the opportunity
to see what worked during integration and what didn’t. Moreover,
the synergy-tracking tool that Lothar mentioned allows us to
see in detail which specific steps went wrong or took longer than
planned, who is responsible, and which corrective actions are
necessary.
However, the short answer is: For Dial, everything looks fine.
Henkel 125
Lothar Steinebach’s keys to successful M&A
• Manage M&A centrally and in a standardized way. A central team allows you
to evaluate acquisition opportunities consistently and capture learning.
• Question the deal proposal. Forcing the business units to show how proposals
fit their strategic agendas will help you weed out borderline deals and focus
on core competencies.
• Don’t try to force too many changes at once. Identify the changes that are
critical and focus on those.
• Monitor your integration closely. Only systematic tracking of synergies can
ensure you achieve the benefits originally planned.
• Be prepared to make difficult decisions. Make clear that some things are not
up for negotiation — it will pay off in the long run. +
DOMINIC CARUSO
Vice President, Finance, and Chief Financial Officer
Johnson & Johnson
Johnson & Johnson:
M&A Requires Financial Discipline
by Charley Beever and Justin Pettit
S+B: Does your pursuit of bigger deals in the last few years signal a
change in your acquisition strategy?
CARUSO: Not at all. Pfizer was an opportunistic situation — a
chance to pick up some great brands, like Lubriderm and Listerine.
In the case of Guidant, it was a change in market dynamics —
specifically a chance to get further into the drug-eluting stent mar-
ket and gain access to a microelectronics technology that we
thought could help us throughout our businesses. With both Pfizer,
where we completed the transaction, and Guidant, where we
didn’t, we stuck to our fundamental M&A goal of creating share-
holder value.
S+B: How high up the list of value-creating activities does M&A sit at
Johnson & Johnson?
CARUSO: For us, the best way to create shareholder value is to grow
organically because that is the most efficient use of our capital. The
next level of shareholder value creation is probably licensing, where
less capital is needed to add value than in M&A. Acquisitions, done
selectively, come last; they’re a more difficult and riskier way of cre-
ating shareholder value.
S+B: You say your capability set allows you to be opportunistic. How do
you balance opportunity with the need to think strategically?
CARUSO: The way I’d put it is that we’re opportunistic if we see a
property that we can do more with than someone else might. We’re
also opportunistic if we see the ability to add to our portfolio some-
thing that we don’t already have.
The Guidant transaction was a good example. There we had the
opportunity to add a microelectronics capability that was primarily
implemented in our market approach to cardiac rhythm manage-
ment. But the real underlying capability that existed there was the
microelectronics. We went after it as an opportunity to add that new
base of technology to the business.
Pfizer represented a different kind of opportunity; they were
strong in certain geographic markets where we weren’t. For
instance, we had a much stronger presence in China than Pfizer
did. That was good because it meant we could sell more of their
products there. Whereas in a market like Mexico, Pfizer had
stronger ties than we did. So that turned out to be a nice set of com-
plementary growth enablers. They were strong where we were weak
and vice versa.
S+B: How much of your time is spent on figuring out which properties
to buy and then managing them?
CARUSO: The acquisition ideas typically come from people in one
of our three business segments — consumer, medical devices and
diagnostics, and pharmaceuticals. They bring an idea forward, and
then our executive committee, including me and our chairman
and CEO, Bill Weldon, will spend more or less time on that can-
didate depending on the dollars involved, how strategic it is, and
the risk associated with achieving an acceptable return.
I spend very little time managing acquisitions — it wouldn’t
make sense given the decentralized management structure we have.
But in terms of evaluating whether an acquisition is an appropriate
step forward, I spend a good amount of my time on that. Still, it’s
mostly a bottom-up process.
S+B: The business segments, surely, have their goals for sales and profit
— and deals can help them achieve those. Doesn’t that endanger
Johnson & Johnson’s financial discipline?
CARUSO: On the contrary, there’s a very good understanding among
the executive committee, myself included, as well as the line-of-
business CFOs, that a transaction is worth pursuing only if it has a
high probability of creating value for shareholders. And then the
question always is, “Well, what do we mean by creating value for
shareholders?” That definition is very well understood at Johnson &
S+B: Guidant was one where you walked away, but not before a bruis-
ing bidding war that you ultimately ceded to Boston Scientific. What
lessons did Guidant teach you?
CARUSO: Guidant was a reaffirmation, a test of our discipline, to see
if we could really draw the line and not cross it. In the end, the con-
clusion we reached was that it didn’t make sense for us to increase
our offer above what it was, $24.2 billion. The press release we put
out was very simple in that regard: We said a higher bid would not
be in the best interests of our shareholders.
S+B: Guidant doesn’t seem to have scared you away from M&A. Within
six months you had announced your acquisition of Pfizer’s consumer
health-care business. Has that deal met your expectations?
CARUSO: Pfizer has a number of attributes that should create
incredible value for us. First, the risk involved in achieving the rate
of return on that transaction is not as high as it would be for trans-
actions that have either a lot of technical risk or a lot of regulatory
risk. This isn’t a biotechnology acquisition; this isn’t a company
developing early-stage pharmaceuticals. It’s a consumer health-care
company — and we’ve been pretty successful with these acquisitions
in the past. Think of our acquisitions of Neutrogena and Aveeno in
the 1990s.
The second thing I would say about the Pfizer acquisition is it
has a large component of cost synergy associated with it. That’s not
typical of our deals. We usually bring in an enterprise and add it to
the family of companies in a decentralized way. In this case we were
buying brands from Pfizer that were very complementary to the
brands we already had. So, for example, Lubriderm can easily be
plugged into our skin-care franchise, or Listerine, of course, into
oral care, or Desitin into baby care.
That has given us the ability to generate significant cost syner-
gies. And whenever you can do that, you generally have a lower risk
of not achieving the return, because you’re in charge. It’s very differ-
ent from making an acquisition and needing to get the acquired
management team to see that the product should be improved or
expanded in a particular market.
S+B: You’ve been very clear about how you evaluate individual trans-
actions. Do you also think of your deals as part of a portfolio and try to
strike a balance between transactions that are low and high risk?
CARUSO: No, not really. Although when we did the Pfizer consumer
health-care acquisition, the end result was that the consumer piece
S+B: Johnson & Johnson has traditionally been a product company, yet
the new conversations you’ve been having with shareholders about com-
prehensive care would seem to suggest a push into service businesses.
How do you decide whether that’s within your zip code for M&A?
CARUSO: We could see services being more important in the com-
prehensive care approach than in the product approach. It’ll just
depend on what’s available and what creates the most value. Our zip
code’s pretty broad: It’s human health care. We don’t look at any-
thing within it as an area we’re not interested in unless it’s a com-
modity or an area with very little growth potential.
If you look at Johnson & Johnson’s history, we started as a med-
ical and surgical company. After many years we added a consumer
presence. Then after many more years we added the pharmaceutical
presence and bolstered it with biotechnology.
The question for the future that our chairman and CEO is ask-
ing is, “OK, what’s the next add-on to the evolution of Johnson &
Johnson? What’s the fourth leg? What’s the fifth leg?”
We’re the most broadly based health-care company anywhere,
yet quite frankly we still only have a small portion of the $4 trillion
worldwide health-care market. There’s a lot of opportunity for us.
PETER KELLOGG
Chief Financial Officer
Merck & Co., Inc.
Merck:
Growing the R&D Pipeline
by Charley Beever
THERE ARE MANY reasons that Merck & Co., Inc. is considered one of
the world’s bellwether pharmaceutical companies. The main reason,
however, is the number of multibillion-dollar drug innovations that
have emerged from its pipeline. Whether it is Singulair for asthma,
Cozaar for blood pressure, or Fosamax for osteoporosis, the com-
pany has a reputation for taking on big challenges that demand
innovative, world-changing solutions.
What’s more, Merck shows no signs of lowering its ambitions.
Its Gardasil vaccine, which came on the market nearly two years ago
as the first-ever cervical cancer vaccine, has become familiar to mil-
lions of girls and young women seeking protection against the dis-
ease. Gardasil generated US$1.48 billion in revenue for Merck
in 2007. The diabetes drug Januvia, which was introduced four
months after Gardasil, is another emerging hit, with revenue in its
first year on the market reaching $667.5 million. Right behind
these drugs, Merck launched a new class of HIV therapy, Isentress,
late in 2007.
“We’re not just coming up with remedies that are similar to
something else already on the market,” says Peter Kellogg, the com-
pany’s chief financial officer. “What we’re really trying to do is come
out with novel therapies in areas of significant unmet need.”
You might think Merck, which spent $4.9 billion on R&D in
Merck 143
S+B: What do you put under the heading of a business development
deal?
KELLOGG: There’s a whole set of transactions that apply. It could
be in-licensing intellectual property rights, forming small collab-
orations, or setting up formal joint ventures with separate legal
entities and governance bodies. The partnership we have with
Schering-Plough, to market cholesterol-control drugs, is an exam-
ple of the latter.
Merck 145
S+B: Do acquisitions ever make sense as a way to meet Wall Street’s
growth expectations?
KELLOGG: At most, you’d accord those expectations a secondary or
tertiary role. Otherwise you’d probably end up just chasing trans-
actions. We have to focus on creating value; driving shareholder
returns is “job one.”
Many have speculated that this industry will see a wave of major
acquisitions just to bolster the top line or overcome patent expiries.
But what you really have to do when considering an acquisition is
step back and ask, “Do we see enough upside in this deal? Is there a
way in which this could become much bigger than the market is
anticipating?” Because there are definitely a lot of ways it could
become smaller. Deals fail regularly.
S+B: Let’s talk about your more typical transactions, which as you say
are a good deal smaller. How often are you the only company knocking
on the door?
S+B: In those situations, what clinches the deal? Does it all come down
to money?
KELLOGG: No, I don’t think it’s solely about the money someone is
putting on the table. Although ultimately a company has to get the
best deal for its shareholders, very often the greatest value for the
seller comes from contingent future payments based on, for exam-
ple, future revenues or royalties earned. That means the seller should
go with the partner who is likely to create the best long-term returns
from the asset, rather than simply going with the partner who offers
the highest up-front payment. In this industry, most development
efforts fail before the future contingent payments are earned, so the
seller should select the company with the best technical and scien-
tific skills in that area.
S+B: It’s easy to see the benefit to you, as a buyer, in structuring a deal
with contingent earn-out elements. What’s the benefit to the seller?
KELLOGG: In the case of venture capital groups, they really like the
idea of a deal where up-front payments “de-risk” their position while
earn-out elements allow them to share in the downstream success of
what gets developed. I’ve been involved in a number of such trans-
actions, almost always involving companies held by private investors.
S+B: You were the CFO of Biogen in 2003 when it merged with IDEC
Pharmaceuticals, whose strengths were in the area of oncology. What
was the most notable thing about that merger?
KELLOGG: It was a merger where the equity split was something like
50.2 versus 49.8 — a true merger of equals. It was a zero-premium
Merck 147
transaction that offered enormous strategic fit. It accelerated the
strategic position and capabilities of both companies.
S+B: What was your role, as the combined company’s CFO, in articu-
lating the story line?
KELLOGG: It was a very important role. I’ve been involved in a cou-
ple of pretty sizable acquisitions and mergers. You must talk to
investors intensively for quite some time. It’s not just a one-week
road show — you’re talking about the value of the transaction and
why it makes sense, for a year or two after it happens.
Fortunately, the investors who buy the stocks of pharmaceutical
or biotech companies are already working on relatively longer
time frames in terms of their investments. This investment com-
munity includes Ph.D.s and physicians who understand the
probability-adjusted models that everybody uses in this industry.
They know that there’s a bit of odds-making to what we do —
that a lot of our R&D at any one time is being invested in
projects that ultimately may not work. They also know that the
S+B: Having seen how the screening process works at Merck, what
would you say differentiates the deals that get done from those that
don’t?
KELLOGG: The one truth I’ve seen is that if our scientific team and
our commercial team are not excited about a transaction, there’s no
hope that it will succeed. There’s no such thing as a good financial
deal that doesn’t have great scientific endorsement. After all, it’s the
scientists and commercial organizations that are responsible for get-
ting drugs to market. It’s all about the science.
Merck 149
Saudi Basic Industries Corporation:
Using Acquisitions to Achieve
Global Scale
MUTLAQ H. AL-MORISHED
Chief Financial Officer and Vice President, Corporate Finance
Saudi Basic Industries Corporation
Saudi Basic Industries Corporation:
Using Acquisitions to Achieve
Global Scale
by Ibrahim El-Husseini and Joe Saddi
Company, had nothing but praise for the Saudi Basic Industries
Corporation (SABIC) when he announced last year that the Saudi
chemicals group was buying GE’s plastics division for US$11.6 bil-
lion. SABIC, he said, was the right company at the right time to
take GE Plastics global and put it on a more competitive footing.
That might have seemed like corporate hyperbole if SABIC hadn’t
had the track record to back it up.
What Immelt didn’t tell reporters that day is the story behind
SABIC’s rise from a state-sponsored industrial experiment in the
sands of Saudi Arabia to the world’s largest chemicals group by mar-
ket value. Behind the GE Plastics takeover (the largest-ever U.S.
acquisition by a company from the Gulf region) is SABIC’s auda-
cious plan to boost revenues from $34 billion in 2007 to $60 billion
by 2020 and to become a truly global company. Investors in SABIC,
which is still 70 percent state owned, are clearly believers in the
2020 project. Encouraged by strong sales growth and a 33 percent
rise in net profits, SABIC shares rose 82 percent last year.
And yet M&A activities are a recent addition to SABIC’s tool
kit. The company has relied largely on organic growth since it was
founded by the Saudi government in the 1970s to use the by-
products of its booming oil industry to create value-added com-
S+B: You have a very ambitious growth strategy, your 2020 project.
What role will acquisitions play in executing that strategy?
AL-MORISHED: Acquisitions will play quite a significant role. Our
target is to boost sales to $60 billion by 2020. Our preference
is to grow organically wherever possible. But if we see an opportu-
nity arise somewhere in the world that will help us grow, we will
certainly take a look at it.
S+B: SABIC’s previous acquisitions were made with the goal of expand-
ing into new geographies or new products. Are those still the important
criteria driving your M&A strategy?
AL-MORISHED: That’s right. If you take Europe, for example, the
businesses we acquired there were very similar to our existing busi-
nesses, so our strategy was primarily driven by geographic expan-
sion. GE’s plastics division was a completely new business for us,
and that is part of the 2020 project. We decided we need to have a
S+B: What are the key things that you’ve learned from doing acquisi-
tions? What makes them work?
AL-MORISHED: What makes them work is treating people with
respect and not coming in with a hatchet. You have to show them
S+B: Integration after a merger can become very messy. Why do you
think so many deals fail in the postmerger phase?
AL-MORISHED: A lot of mergers fail because the buying party tends
to force its way of doing things on the other party. That’s a big risk,
and it’s not the way we work. We tend to do things slowly. We
understand that acquired companies have something to offer us and
that we can learn from them. Some of their practices are better than
ours. Why shouldn’t we take advantage of that? It has to be a two-
way street.
S+B: Are the ideas for potential acquisitions generated more by you and
your team at headquarters or by the business units?
AL-MORISHED: We have an M&A team in corporate finance,
headed by a general manager, which is the third level of manage-
ment, after the CEO and CFO. When considering doing an acqui-
sition, the general manager of M&A will assemble an ad hoc team
from different parts of the business. And once we are serious about
moving forward, we engage consultants. You need auditors and con-
sultants for environmental, safety, financial, and other key aspects.
S+B: How autonomous are the business units in studying the market
and proposing targets?
AL-MORISHED: They are very autonomous. Sometimes they will
come to us with ideas, and sometimes we will go to them. But most
of the businesses being sold hire an investment bank, so in 80 per-
cent of the cases we’ve been contacted by the bankers. Both of our
recent acquisitions were initiated by the corporate M&A team. We
told management in Europe and in the United States to go after the
targets in their regions.
S+B: How do you deal with cultural differences between SABIC and the
European and American companies you acquire?
AL-MORISHED: Most of us worked and lived in the United States
or studied there, so this is not a problem for us. And when you look
at our business, we are really a global company with significant oper-
ations in Europe, the Far East, and the U.S.
S+B: Do you believe there is a global corporate culture that allows peo-
ple in business to transcend their differences in other areas?
AL-MORISHED: Yes, I believe so. You must not forget that the
Middle East is a place where all of the world’s cultures meet. Asia,
Africa, and Europe meet here. The Silk Road from China ended
here. There has been this intersection of cultures and commerce
throughout history. So, for us, it is not that unusual an idea to work
with companies and people from around the world. The Middle
East has been at the crossroads of civilization throughout history.
S+B: Looking at Telefónica over the past few years is like watching a
textbook case of Schumpeter’s theory of creative destruction unfold before
your eyes. You have made two major transformations and are now
stronger than ever.
FERNÁNDEZ VALBUENA: Our former chairman used to say that
Telefónica was a media company. And that meant we needed to
abandon telecommunications in the same way that the telegraph
became a thing of the past. He was a visionary when it came to some
things, but this idea turned out to be dead wrong. So, when César
Alierta Izuel became chairman in 2000, he moved in the opposite
direction. We refocused on strengthening the core telecommunica-
tions business. It was an implosion of the company before we could
ignite an explosion of growth.
Telefónica 163
emerging and fast-growing Latin American business that we feel
very confident about.
S+B: When you started the process, you had some real problems to con-
tend with. You had an Internet search company, in Lycos, that wasn’t
making money. You had also made unsuccessful moves into high-speed
wireless Internet access and television content, through the production
company Endemol. How did you sort it out?
FERNÁNDEZ VALBUENA: Through a lot of hard work. We weren’t
the only ones in the industry going through this, but that fact
wasn’t very comforting.
We moved quickly. We were one of the first to write off the
UMTS licenses for high-speed wireless access, and that was the right
thing to do. Both Lycos and Endemol were forays beyond our home
turf — you pay a price for that. As a TV company, Endemol was
in a different line of business. I have always said we need access to
content, but we don’t need to own the content. The strategy of pro-
ducing our own content was flawed and was something we needed
to fix.
S+B: Before the O2 acquisition, a lot of your initial focus was on Latin
America rather than Europe. Why was that?
FERNÁNDEZ VALBUENA: Many European governments bailed out
their big incumbents at a time when they should have let them go
bankrupt or merge with stronger players. So those of us who
believed scale was very important had to go fishing elsewhere. In
2004, we bought Bell South’s cellular assets in Latin America for
$5.6 billion, which would be a laughable price today. I’m especially
proud of that.
S+B: Were there any other factors that slowed the move toward consoli-
dation in Europe?
S+B: And yet the way your talks with Telecom Italia have developed
could be a sign that there is greater willingness to give up control of an
incumbent. Do you read it that way?
FERNÁNDEZ VALBUENA: We are comfortable with our stake in the
company. Together we have 160 million accesses. That is 19 percent
of the European market. It is the biggest industrial alliance in
Europe. We understand that this business is no longer about pro-
viding a commodity like electricity or gas. It’s about providing an
increasingly varied array of services at different price points.
S+B: From your perspective as CFO, what were the major challenges in
managing the reorganization of your company?
FERNÁNDEZ VALBUENA: Number one, to concentrate on the core
business. Number two, to reintegrate things that we had partially
spun off and were trading as listed stocks on the market. That latter
challenge was a corporate governance nightmare. If you have two
chairs and 10 people, you have an issue. There was a lot of that at
Telefónica: We had CFOs and CEOs of all sorts and kinds. We’ve
streamlined the management structure. It was painful, but it had to
be done.
S+B:Is part of your job to suggest companies that Telefónica might buy?
FERNÁNDEZ VALBUENA: Not really. That’s the chairman’s role.
Telefónica 165
S+B: Where, then, do you come in?
FERNÁNDEZ VALBUENA: I’m part of the six-person executive com-
mittee. The other members come from operations; I represent
finance. It’s my job to point out the risks, based on my experience,
but also to assess the plausibility of doing the deal. There are things
that can only be done if you can get the money or that are depen-
dent upon how much money you can get or how fast you can get it.
S+B: Looking at the O2 acquisition, what was the most difficult chal-
lenge in the transactional phase?
FERNÁNDEZ VALBUENA: We had to put the deal together very
quickly. The whole process took less than two weeks from the first
approach to the closing of the deal on October 31, 2005.
S+B: Didn’t that sort of time pressure affect your ability to do your due
diligence?
FERNÁNDEZ VALBUENA: We did not do the due diligence that
everyone would have expected us to do, which is also part of the rea-
son we completed the deal. O2 went public two years before and all
that information was available — that’s the beauty of buying public
companies. I figured I could live with that because I knew the
financing was in place and the company was just four years old. I
wouldn’t dare try to take over a more mature company, an incum-
bent operator, without full-fledged due diligence.
S+B: What is the most memorable thing, from your perspective, about
how the O2 deal got done?
FERNÁNDEZ VALBUENA: When we were discussing the deal, some-
body asked, “How are we supposed to pay for it? How long will it
take to raise the money?” This was a $32 billion animal. No one had
ever had access to that kind of money in one shot before. That’s
great for a CFO; you’re in uncharted territory.
Telefónica 167
draw the road map with Telecom Italia. The finance function at O2
was very well organized; it was uncomplicated. They didn’t have
any convoluted structures. They had very little exposure to compli-
cated derivatives.
S+B: How does the finance function at headquarters differ from the
finance function at the business unit level?
FERNÁNDEZ VALBUENA: The finance function at headquarters
takes a step back and tries to see the bigger picture, to ask the right
questions. But the finance people in the businesses take the bull by
the horns. So the CFO of O2 Group, Telefónica Europe, as we now
call it, should spend 80 percent of her time in operations and in
understanding where the division’s profits are coming from and how
to finance campaigns. She should be working on the iPhone nego-
tiations, for example, and not spending time worrying about the
pound exposure or hedging policy, because that’s what we do at
headquarters. We pull all the fundamental financial levers, the
financing, up to the group level.
S+B: How do you interact with the CFOs in the operational divisions?
FERNÁNDEZ VALBUENA: There is a dotted line reporting to me,
and a straight line reporting to the CEO of the division. They are
part of their management executive committee. They are part of that
business. The dotted line means that they have to answer my calls or
my people’s calls, that they get appointed only if I sign off, and,
sometimes, that I have to approve their compensation.
S+B: Looking back at the past few years, what are the main lessons
you’ve learned that have prepared you for future deals?
FERNÁNDEZ VALBUENA: You always pay for what you get, but you
don’t always get what you pay for. So take it as a given that you
will overspend.
Telefónica 169
UnitedHealth Group:
Handpicking Capabilities Rather
Than Just Adding Scale
G. MIKE MIKAN
Chief Financial Officer
UnitedHealth Group Inc.
UnitedHealth Group:
Handpicking Capabilities Rather
Than Just Adding Scale
by Gil Irwin and Justin Pettit
S+B: UnitedHealth Group’s revenue has more than quintupled from the
year you joined it, to more than US$75 billion in 2007. Are there any
acquisitions left that could transform the company?
MIKAN: I’m not sure I would use that word, transform. There are
definitely acquisitions or targeted opportunities that would align
very well with areas where we’ve expanded, like individual insurance
or financial services.
Everyone says, “You’ve done a lot of transactions; they’ve built
this organization.” Yes, we have. We look at between 150 and 200
deals a year; that has led to almost 100 completed transactions in the
last decade. But the thing to keep in mind is that the median pur-
chase price of those transactions was $14 million. A lot of them were
done to piece together capabilities. We don’t do acquisitions solely
for the purpose of a land grab.
S+B: Can you give us an example of a small acquisition you did to pro-
pel you into a new area?
MIKAN: I’ll give you a couple. One is Golden Rule, which serves
individual consumers through health savings accounts [HSAs]. We
bought it for $495 million in November 2003 — a time when we
had fewer than 50,000 individual consumers on our HSA platform.
With HSAs increasing in popularity and small businesses participat-
ing less frequently in company insurance programs, that has become
a very successful business and one of our leading growth platforms.
Another example is AmeriChoice, our Medicaid business, for
which we paid $577 million. At the time we bought it, in 2002, we
were very good at serving large-scale customers — the General
Electrics and IBMs of the world. We offered Medicaid programs in
13 markets, but didn’t really have the competency to administer
these plans, which are managed by the states.
Even though AmeriChoice was in only three primary markets
— Pennsylvania, New Jersey, and New York — the company
understood what it took to optimize revenues, manage diseases,
and set up clinical programs specific to these businesses. We did
a reverse integration, meaning AmeriChoice’s management team
overtook our existing Medicaid business. In effect, we were buying
their know-how. Tony Welters, one of the founders of AmeriChoice,
S+B: You said before that you look at up to 200 deals a year and do, per-
haps, 5 percent to 10 percent of them. What’s more painful, letting a
good company get away or buying one and finding out it doesn’t meet
expectations?
MIKAN: I tell people all the time that the best deals are the ones we
walk away from because we’ve figured out that they aren’t going
to meet our needs. That kind of discipline is essential in an acquis-
itive organization. We need to make sure we’re doing deals that fit
within the organization and that maximize returns on our share-
holders’ money.
But let me answer your question in a different way. Of the
almost 100 transactions we’ve done in the decade since I’ve been
here, I can count on one hand the ones that haven’t met our expec-
tations. I will note also, for the corporate finance types, that the
median forward multiple has been 5.1 times EBITDA. So our deals
have tended to be very accretive.
S+B: Are you saying that you sometimes make it a condition of negoti-
ating with a company that there will be no auction?
S+B: So you say, “We’re interested in buying you, we can’t tell you for
sure that we’re going to buy you, but our condition for possibly buying
you is that you negotiate only with us for now.”
MIKAN: In a sense, yes. We’ll sign a letter of intent that will have an
exclusivity provision in it that will essentially preclude the selling
organization from going to market during our period of diligence.
In return we give them a commitment on speed of execution.
I believe in a fair market. But I also believe that when targets
broadly auction their businesses, there is a valuation impact to
strategic buyers like us. How can there not be? They are giving away
their market intelligence. Instead of running the business, they are
meeting with their bankers and attorneys, talking about the cash
windfall they’re going to get. They just aren’t focused.
S+B: Meaning the multiple was richer than for your average deal?
MIKAN: Yes, we paid 10 or 11 times PacifiCare’s EBITDA, which
was higher than our historical multiple. But strategically it made all
DAVID SUÁREZ
(david.suarez@booz.com) is a principal with
Booz & Company in Madrid who works with
energy companies in Europe and the Middle
East. His focus is transformation and change
management, human capital management, and
organizational performance improvement.
JULIA WERDIGIER
(jwerdigier@gmail.com) is the business corre-
spondent for the New York Times in London. She
has covered the European takeover market for
the last four years and reported on mergers and
acquisitions at Bloomberg News.
WALTER WINTERSTELLER
(walter.wintersteller@booz.com) is a partner in
Booz & Company’s Munich office who works
with utilities, oil and gas, and chemicals compa-
nies. He is a specialist in corporate and busi-
ness unit strategy development, large-scale
operational improvement programs, organiza-
tional transformation, and change management.
Today, with more than 3,300 people in 57 offices around the world,
we bring foresight and knowledge, deep functional expertise, and
a practical approach to building capabilities and delivering real
impact. We work closely with our clients to create and deliver essen-
tial advantage.
184 chapter
Booz & Company
Worldwide Offices
• Key merger strategist, working with the CEO to ensure that merger
plans meet larger corporate objectives
• Synergy manager, capturing every deal’s cost savings, leveraging
combined capabilities, and driving joint market strategies
• Business integrator, identifying the changes related to personnel, pro-
cesses, and organizational structure that best bring out a deal’s value
The introduction also identifies six rules of successful deal making that
CFOs must follow if they want one plus one to equal more than two.