Episode 5 The Bottom Line

criminal organisation. And now, The Bottom Line with Evan

Davis. When the world economy is booming,

corporate bosses love nothing more than take each other's companies

over. Mergers and acquisitions stall. Many of these are a waste of

effort and money. When the badges come, the dealmaking culture fades.

We are in a low period at the moment. With signs of things picking

up, what better time to take stock of takeovers? Each week, influential

business leaders gather in London for the BBC Radio 4 programme the

bottomline. Takeovers, mergers and acquisitions.

I have three people from the world of finance industry to take as the

result and confessed their own mistakes. First of all, Sir George

Buckley, former chief executive of the 3M group in the US. Soon to be

head of a British engineering group. Also with us is the chairman of BT,

the deputy chairman of Barclays bank. And Juergen Maier, who runs

Siemens in the UK and Ireland. They thought would get you to talk me

through a specific takeover you have been involved in, tell me some of

the lessons you true from it. The essence of the deal is to try to

make money. We always like to hear that message. There is a return

calculation always make. You are investing money to return money. The

second thing you are trying to do is gain some relative competitive

advantage. It might be entry into market, getting a brand, getting new

methods of distribution and technology. One example is the

merger of Stanley and Black Decker. It was a wonderful merging

together of a handful company and a powerful company. Craftsmen in the

industry use both. It was a wonderful way to leveraged the

market knowledge and have a bigger company that was more defensible.

Did it work? Has worked superbly. So you are looking for the two plus two

equals five formula. The extra one was the fact that you are

distributing to the same places, so you had two distribution networks

that it could now make one. You get a bigger seat at the table, Tory

seat of the table were you did not have formally. `` or a seat. So you

can have more influence with the customer. That is a good one. Mike.

One that is quite recent and interesting involved the complete

transformation of the company. So far it is doing well. It was a

family publishing business in the US. It was in that area of media. It

was something called SNP. `` S and P. In the past three years it has

with a complete transformation of the company. It has sold its

publishing businesses. The acquisition of other indices

businesses. It will one day be a case study for Harvard Business

School. Very few companies transform themselves from one activity to

another. It takes courage to do it. You've got adjust culturally. You

also realise in doing that that you get more focused on what is becoming

your core business. That is quite a transformation story. He will not

responsible for the takeovers, you are on the British and of it. You do

make some decisions. Absolutely. Very often a large takeovers in

which there are British entities they have to integrate. The example

I will use is a British organisation. It is very small.

Sometimes it is interesting why a large corporation should take over a

small one. This company was in the 70 people. It is a beautiful company

because they make manufacturing software, improving the way in which

manufacturing companies scheduled that production. We have a massive

ambition to be much Jong in this area. `` much stronger in this area.

We cannot write this software fastener. We are looking out for

these companies. He was a beautiful company. They already have 4500

applications in companies over the world. For us it was a fantastic

acquisition. We have to ask how you get the two plus two equals five out

of this. You have a good company, Siemens is a good company, you join

them together. What are you getting it adds to the value of the good

company? We already have a whole host of other software suites. What

we can do is now take this better software, integrated with other bits

of software we have got and create even more value for manufacturing

customers. This small company was getting to a point where it was

struggling to get further and bigger market access will stop with our

massive sales organisations, our contacts into manufacturing, we can

help leveraged a lot more sales. What you also get it if its speed.

You can bring the benefits you would get forward. We have had three

interesting example. They have all raised different reasons. Look

through a list of all the motivations for mergers. Finance,

access to distribution, access to a foreign entity, maybe moving into

China, media technology. A lot can be refined to what has just been

said. Innovation, big companies are less good at innovation and small

companies. You can bring in innovation. There is no good reason

Lisicki news innovation that unless you can now use the innovation. Also

you can have access to people with a particular methodology of research

that is important. In other companies, particularly in the US

had unique technological advances. It was cheaper to buy them then

develop yourself. The event was to take it on, institutionalise it and

use it. The risk is that if you're not careful, you institutionalise

the people, rather than the product. A whitespace, a technological

whitespace. For Siemens the red? Clear strategic ones. One is

innovation. We have 30,000 people doing RNs di everyday. `` R and D.

We often look for small start`up companies in innovative areas that

we can join up with. Maybe a new technology, or something where we

can combine technologies. The other key area is market access. We may

have the technology, we think you will have a long time to market

access. So you want to get into a foreign country. It is a judgement

to make. Sometimes you say, we take this 10`year journey or a we have a

great company with the market access. There is opportunity to buy,

which is not always the case. There are often failing companies. They

need to find a direction. Perhaps they can be stripped down, perhaps

closed. There is a role for takeovers in those situations. It

would be something very unusual for us to do. In those cases, the rainy

weather given transformative value company is that you have some

synergies where you can join them up and make them profitable. For

organisations that Siemens that is expensive. Usually that is more

where private equity companies coming. They might then sell on to

companies like our companies. Even in the largest companies, you always

have limited resources. Whether you are 3M, Siemens, you have limited

resources. Your general philosophy is that you are better at a plane is

limited philosophy is `` resources to fixing good companies and bad

ones. Unless it is a special deal, we would shy away. They are often

cheeky get. They may have one gem that you want. You have got to be

careful you do with it. There is rubbish, and then there is rubbish.

There is no such thing as a cheap acquisition. If it is cheap to buy,

he had to invest hugely to make it work. We have listened to your

explanations. We have a comprehends it less. Good reasons for mergers.

We know a lot of them do not come out as planned. Give me some of the

bad reasons for takeovers. Ego. Personally I think the commendation

of big egos and too much cash leads to huge pressure from shareholders,

particularly now, to give the cashback. Use it or give it back

through special dividends. If you have it, give it to the

shareholders. It is what is happening. The boss wants to do the

deal, investment bankers come in and what to do a deal. If you are not

careful, you are on a rollercoaster. History shows there are a few of

those. They are in the minority, but it does happen. It is eager where

emotion is a bigger driver than looking at the value being

generated. Sometimes size gets people. We need to be bigger, how

large are we? It must be good. The companies are good, so we must make

ourselves big. The ones where the risk grows is when you start and

acquisitions away from your core. Transformation as resistance ``

acquisitions, we say, I do not like this space and they want to move

into another one. The matter how much you try to convince herself,

you do not know the customers, the market, the technology. It is a

risky pathway. It is an example of a bad one. AOL Time Warner. It was

announced in 2000. It was a three and $60 billion `` three page and

$60 billion. It was gently dismantled ten years later at less

than a quarter of the value. What was the problem with that one? They

did not understand the business is that they were in. When the future

is less certain, I do not mean uncertain, you have a big dream, at

the idea, you have to remember there is a big difference between dream

and fantasy. Sometimes it is a fantasy, rather than a dream. As a

consequence, these things sometimes go wrong. Especially in these cases

when you are mixing the old traditional companies with a seven

metre distribution with a new thing where neither party knows much about

the other. I can give you a bad example from Siemens. During the

worst we lost most of our assets, something would not talk about much

and Siemens. Most of our assets were taken by the government and given

away. When we came back into Britain with innovation of products, we were

desperate to get back what we originally had. One of those was, we

wanted to buy back a brand. Everywhere else in the world it

belongs to Siemens. In the UK it belongs to GEC. We were desperate to

get that brand. It was our main focus. Alongside of it, we picked up

all this other stuff that was an absolute nightmare to integrate. I

spent about three years closing down a couple of the factories because it

did not work. The other thing was, I have her chief executives say that

the only thing we can use is to take our overvalued stock and buy theirs.

That is a disaster. Then you are losing something really valuable. A

bad one is the acquisition of BMW buying another company. This is BMW,

that was a small volume luxury German Carmody Thatcher are trying

to buy into a Walkman to market. That did not work. Again, what it

did do, there were still a silver lining to the cloud and that it got

many. BMW had planned on a small entry`level car, and got the brand

along with it. Even though they wasted some money on the rover Peter

the acquisition, it turned out that the many brought their plans for

Wigan by about seven years. Sometimes in a real terrible

situation, there is a silver lining. Let's go into some of the mechanics

of this. Most people have not been in the `` involved in a merger at

the top level. Take us through the process, from inception to

completion. It is a bit more than buying a house. How much due

diligence do you do? The classic way that these things happen, investment

bankers come along, they tried to market it to you. Usually when I

received those visits, I go hide in the cupboard. They are the last kind

of things that I want to be involved in. My approach is to build

relationships with those companies in segments. It may take several

years. You may have a partnership of some kind early on, sharing

technology, maybe they are eight supplier, or a competitor, but you

supply a bit to them. The best targets for me, founder companies,

where there is no successor, we can beat the solution to their problem.

Every owner worth its salt, a bit like living down, you want to make

sure that your dog goes to a good family. We find in those cases, we

have a good chance of making a successful acquisition, because we

are not in an auction and the price is more modest. Is it going to be

contested, is going to be by agreement? Is it public company? You

have to have equal access, or is it a private company? The process can

vary enormously. You could have significant amount of commercial and

financial due diligence, some you can with a public company, some you

cannot, also on timeframes. An opportunistic bid that had to be

done at very fast notice, which did fulfil a strategic objective. The

Barclays acquisition of Bateman. `` laymen. It fulfilled a strategic

goal. It came after the collapse of linens. By Monday, the guys were in.

The bank... Whether the whole thing could be saved, but it could not be.

But it was opportunistic. You had to go fast with the key things. Do the

deal very quickly to keep the resources. The compaction of time.

Did it work? I do not think it would be right but the payback period

could be measured in much less than years. Let's suppose you have the

best of intentions, good strategic intentions, long`term ones, you have

done your due diligence, you have butted up the company that you are

buying, you have persuaded them it is a good team, they are or opt for

it, now you have sealed the deal. It is where the trouble begins. The

real key to success is execution. Recently, BT did a post acquisition

review of what had been sent to the board and what actually happened.

There were some brilliant products in their, technologies that we never

properly expanded. We do not understand the people, the elements

of smaller companies with good products. We found that some things

were better than we thought, but not for the reasons that we thought. It

epitomised the things that I have seen for many years. If you do not

understand how you are going to integrate the company and its

products, its people, particularly when you are big and they are small,

in a way that motivates them, so they do not walk out the door, so

you can take the technology and use it around the whole organisation,

these are challenges which you have. The one thing you do not know until

you have started, the cultural aspects. A company like Siemens, you

cannot take a small company and throw what can be quite complicated

systems onto them. You will stifle them. Listening to you talking about

the motives for takeovers, the execution of takeovers, it does

sound like... And this is a business point which is not original, the

human factors are absolutely key. Everything is about human factors.

It is 5% manufacturing plants and synergies, it is all about the

motives, they are driven by human beings who have egos and fighting

battles which may be relevant or irrelevant. There is a lot of gut

feeling on the end of it. It is not an individual one. At the end, a

team of you will get together with different experiences. The Finance

people were put their advice in, but in the end, it does come down to a

gut feeling. Many people think there is an intuition that people have

about certain issues. It tells you about something about people at the

company. Their run things that you can never programme for. It is not

good to be stupid, but it is not enough to be clever. You need to

have a bit of luck. Technologies suddenly get taken over that you did

not expect. Markets collapse for reasons that you could not have

foreseen. That is business. That is boosting king. `` risk taking. There

is an interesting piece in Robinson Crusoe, he is asking himself, why do

C think something is logically, it goes wrong, but when he relies on

his gut instinct, it goes right. There is no such thing as gut. It is

a collection of experiences, observations, packaged in a single

kind of conglomerate block. That is what you are relying on. It is not

guesswork. It is the sum of experience. There is the emotional

factor that you cannot get away from. Would you all agree that

executives, corporate executives, should not view business as a

process in dealmaking, buying and selling, it is about creation. Isn't

it exhilarating? It is. We could leave people with the impression

that it is all about deals. At a company like Siemens, and innovation

company, if you are not innovating, that is 90% plus. We have 30,000 R

people. What we have been talking about is the 10% on top, which is

just something that we could not quite do ourselves. We are adding to

a portfolio. It cannot be the majority. Innovation is not only

about doing innovation, it is about Ding and adopting stop `` adopting.

There is no doubt that at some period, 80s and 90s, if things are

going bad, confuse everyone by buying a company. I think in the

end, in many respects, their run more companies to destroy value

through acquisitions. There should always be a buy Apple where sticker

on acquisitions. Thank you all, gentlemen. `` buyer beware.

I will be back with more guests next week. Don't forget that you can

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