Laugh or Cry: Morgan Stanley’s Smith Barney Mouthful

Don’t you just love the story from this week’s Wall Street Journal about the Morgan Stanley gagging on Smith Barney? (Click here to read; registration or subscription may be required.)

Really, how can you not love Wall Street?  What industry generates more money by giving others management advice yet simply cannot manage itself? Merrill? Poof! Lehman? Poof! Drexel? Poof! Solly? Poof! Bear? Poof!

So The Merger Verger was not surprised to learn that Morgan Stanley is choking on its acquisition of Smith Barney.  According to the Journal article, the process of integrating back office IT systems was more complicated than expected!  How pathetic is that?

Do you know what “more complicated than expected” is code for?

“We didn’t do our homework very well beforehand.” That’s what it’s code for. More Wall Street bravado.

Word to the Wise:

When Wall Street comes calling with a great acquisition idea, if you remember nothing about that industry and its history remember this: They have no clue about the role that simple “picking and shoveling” plays in making an acquisition work, not as deal advisors, not as deal doers.  Their advice is about ideas (and fees), not about the practicum of making those ideas work.  Listen, they are smart guys with frequently good advice; you just have to figure out for yourself if following it can be made to work and if so how.

Fun Facts from History:

The illustration on the right is the “tombstone” ad from Ford’s IPO in 1956.  (Click on it for a larger image.) Of the 25 “major bracket” firms listed in the ad, only two remain alive and independent today. (Ironically, Morgan Stanley does not even appear on the list, suggesting that someone there had pissed Ford off in a major way.)

Recommended Reading:

One of the truly great books on Wall Street dates from 1940: Fred Schwed’s, “Where are the Customers’ Yachts?” It will make you laugh and cry!

Advertisements

Bain: How to Keep Customers

Friday’s Wall Street Journal offered up an interesting piece authored by two partners from consulting firm Bain & Company on ways to keep customers following a merger.  You can find the article here: After the Merger, How Not to Lose Customers. (link may require registration or subscription)

As with most newspaper articles, this one was short but authors Laura Miles and Ted Rouse did have some sweet points that were both specific and actionable.  Integration professional will want to pack them somewhere neatly in their bag of tricks. 

The Merger Verger highlights:

  • At the very moment when many merged companies have their noses buried in books and numbers or focused on technology issues or cost cutting, customers are looking for clues as to how they will (or won’t) be served in the newly merged enterprise.  Mistiming those clues can be, well, just watch out for Mr. Chairman with a lead pipe in the boardroom.
  • Specifically, the authors state that, “Customers watch carefully after a merger to see if service falls off.  That means that early signals of improved service carry a lot of weight.”  I would go even a step further by saying “early signals of any kind of change in service – good or bad – carry a lot of weight.”
  • Miles and Rouse also suggest the bundling of good news and bad news in communications, citing an example of what sounds a lot like the United/Continental merger.  Their comment about using this technique both to keep people informed and to ease the dissemination of bad news is applicable to suppliers and investors as well as to customers.
  • Their final point was almost frustratingly underplayed, that of the need to authorize customer-facing employees to take swift and free action to ensure consumer satisfaction through a transition.  Their example came from the airline industry but the message is the same for B2B: a merger is no time to be a control freak when it comes to empowering employees to make customers happy.  Just do it.

I caught an interesting undercurrent in the Journal piece: there are inherent – sometimes invisible – conflicts in the management of mergers.  Practitioners would be wise to make them visible in their process.  One example is the conflict between the pressure to cut costs in a merger and the simultaneous pressure to focus on revenues.  Too many dealmakers turn their attention immediately to costs, largely (methinks) because they are crisp and quantifiable.  How do you measure the avoidance of loss of a customer?

Recommendation: If you can’t be in two places at once, focus first on customer retention and then on cost reduction. 

Why?  Because costs will be there to reduce once the customers have been recommitted to the new enterprise.  But the converse will not always be true: customers may not be there to retain once you’re done attending to costs. 

I would posit the following corollary to Poor Richard (with apologies):

A penny not lost is as good as a penny earned.

There are other conflicts here that we should perhaps look at another time: as Miles and Rouse imply, between the empowerment of local employees and the need for central controls in a complex, often disorderly process or between speed and thoughtfulness (an integration classic). 

Question: What are the other inherent conflicts that companies experience in the integration process and how have you dealt with them?

If I am right in sensing that the authors are talking about United and Continental when they allude to “the recent merger of two major airlines,” they should be congratulated for their role.  My reading is that the marriage of UA and CO has been extraordinarily smooth when compared to other highly complex mergers and that shareholders have done (and will continue to do) well by the deal.  Kudos (assuming…).

Earlier postings on the United merger can be found by clicking the blue “United Airlines” link in the “Tagged” section, below.

Is Big Riskier than Many?

The Wall Street Journal is reporting today that the flow of mega-mergers – deals over $1 billion – is at its lowest level in four years.  In board rooms across the country CEOs are shedding their bravado and doing smaller deals and bolt-ons and other things that can be more easily brought into the fold.  Risk is out.

But what really makes an acquisition risky?  Seems to me that from a practical perspective deals have two kinds of risk:

  • Investment risk → Assuming all goes according to plan, am I paying the right amount of money for this company?
  • Execution risk → Having paid the right amount, am I responding in a way that will enable me to achieve the intended objectives (and thus the returns)?

It is axiomatic that by reducing the amount of capital put at risk one reduces the overall investment risk.  (Even The Merger Verger can figure that out.)  But I can also figure out that smaller deal size generally means smaller upside potential. 

Continue reading