Serial acquirers

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times Op-Ed, June 12, 2002
Expanding Without Managing
By JEFFREY SONNENFELD


NEW HAVEN
Looking at the group of troubled corporate leaders ? Dennis Kozlowski of
Tyco, Ken Lay of Enron, Bernie Ebbers of WorldCom, Gary Winnick of Global
Crossing and John Rigas of Adelphia ? it is easy to conclude that flaws in
board governance or shady accounting practices are behind their problems.
This diagnosis overlooks the commonality in the approach of these corporate
executives: All of them are "serial acquirers" of other companies. Proud of
his leadership model, Mr. Kozlowski once even offered a "C.E.O. Academy" to
help new chief executives follow his path.

These executives saw their jobs first and foremost as expanding corporate
holdings, rather than managing their companies to produce better products
and services. And because their focus was on immediate financial results,
they also tended to see regulators as adversaries and accounting rules as
inconvenient barriers to fulfilling their schemes.

It is not surprising that opaque financial reports are a common denominator
with these chief executives. Nor is it surprising that those reports
withered under scrutiny. Tyco, for example, moved its headquarters to
Bermuda as a tax dodge, though it operated out of Exeter, N.H. While Mr.
Kozlowski pushed his stock publicly, he and his finance chief made more
than half a billion dollars in profits by selling stock the company granted
them. When analysts pushed for answers on how Tyco accounted for its
acquisitions, questions about asset manipulation were met with vague
responses.

Mesmerizing Wall Street with a dazzling number of deals makes an absence of
long-term management vision easy to hide. Virtually every strategic
corporate pronouncement from Tyco was reversed in short order ? from a
flip-flop over breaking up the firm to flip-flops over whether a major
business unit, CIT, a financial services firm, would be sold to an
investment bank or sold to the public.

In another example, Mr. Ebbers of WorldCom cared more about snaring new
companies and less about making all his acquisitions work together.

These serial acquirers did not build businesses around core competencies
but were scavengers for good deals, a strategy that rarely pays off in the
long run. (A study done for The Wall Street Journal by Thomson Financial
found that in the current weak economy the stocks of the top 50 acquirers
have fallen three times as much as the Dow Jones industrial average.)

Tyco, originally a government-supported laser research lab, became a
purchasing platform for Mr. Kozlowski. In three years, Tyco acquired 700
companies, creating a pileup of businesses that includes valve makers,
health care product makers, security system services, medical device and
diaper makers, electronics and telecommunications equipment manufacturers,
and businesses involved in financial services and office leasing. This huge
portfolio does not reinforce common distribution channels or share
technologies. Yet "Deal-a-Day Dennis," as Mr. Kozlowski was proud to be
known, was celebrated for Tyco's 20 percent annual growth rate ? until the
last six months, in which the stock has fallen by 81 percent, losing over
$80 billion of value.

The flawed strategic logic of these serial acquirers repeats the failures
of their predecessors from the 1970's. Shaky corporate shells like I.T.T.
under Harold Geneen, Gulf and Western under Charles Bluhdorn and American
Can, headed by Gerald Tsai, were broken up as distressed properties in the
1980's. I.T.T., a phone company, had become a base for hotels, bakeries and
industrial equipment. Gulf and Western, an auto parts seller, became a
shell for buying sugar refineries, steel mills and film studios. American
Can, an old-line packaging company, moved into retail, stocks and insurance. 

The weakness in both the new serial acquirers and the failed acquirers of
earlier decades is that managers did not understand the businesses they got
into. They assumed that they could allocate the financial resources better
than existing external financial markets could.

The academic research on diversified firms is unambiguous. They generally
do not beat the market. The executives could not possibly remain
knowledgeable about the changing technological and market requirements for
such disparate businesses. It has been reported that Gary Winnick of Global
Crossing, for example, so little understood his telecom businesses that he
relied on a Salomon Smith Barney telecom analyst, Jack Grubman, to guide
financial and strategic moves.

The serial acquirers were successful briefly in that the very complexity of
their businesses made it hard to hold them immediately accountable. No
single financial analyst can track this sort of dizzying array of companies
and industries. Rapid growth without clearly defined enterprises makes it
hard to judge the performance of these chief executives by conventional
yardsticks. Rather than having to demonstrate skill in creating new
products, providing better services or motivating employees, these
executives are usually judged by investors and analysts only by the
swelling size of their empires.

The lack of accountability also translates into a lack of successors. Few
executives of this type are interested in building enterprises that could
in time be led by others, so they generally don't nurture successors, and
the boards of these companies are rarely independent enough to insist that
they do. For many, there is also difficulty drawing the line between
corporate decisions and their private interests. At Adelphia, for example,
John Rigas transferred control of corporate assets to his family, and
family entities borrowed billions of dollars from the company.

Perhaps because they go unchallenged, executives of this kind tend to
believe that leadership is an intrinsic, unearned quality. New survey data
from the Yale School of Management and the Gallup Organization found that
out of 130 prominent chief executives surveyed, 26 percent believe that
"great leaders are born and not made." Who are these leaders anointed with
greatness at birth? They are the serial acquirers. Those who believe that
great leaders are born have tended to invest less in their existing
businesses through expanding factories, developing new products and the
like, and were far more likely to prefer growth through acquisitions (some
of them are considering making more than 20 acquisitions in the coming
year). Those who believed that great leadership is developed through
experience were less likely to be serial acquirers. 

Executives who build their businesses primarily on acquisitions are perhaps
most susceptible to another pitfall: They tend to fly solo. Their near
total control in setting strategic plans for their companies makes it
difficult for subordinates or the board to critique the direction of the
company. And yet, acquirers generally lack a strategic logic that can
survive market changes; as a result their empires of hype can be undone
very swiftly by market discipline. None of this is really new. The fall of
the most recent corporate acquirers provides spectacular reminders of
lessons we've seen decade after decade.

Jeffrey Sonnenfeld is an associate dean at the Yale School of Management
and author of "The Hero's Farewell."

Louis Proyect
Marxism mailing list: http://www.marxmail.org



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