How Not to Negotiate a $6.1B Deal

https://www.bloomberg.com/news/features/2018-05-24/how-not-to-negotiate-a-6-1-billion-deal

by dpflan • 8 years ago

224 96 8 years ago

jonknee• 8 years ago

Matt Levine touched on this earlier in the week:

https://www.bloomberg.com/view/articles/2018-05-29/xerox-ceo...

Helping a merger along by offering the target CEO a good job at the combined company is … a fairly standard move, really; it’s the sort of thing that people grouse about in merger lawsuits but that happens a lot. Helping it along by offering the target CEO a good job at the combined company after he’d already been fired

hlmencken• 8 years ago

Are you missing part of your quote?

tempestn• 8 years ago

"Helping it along by offering the target CEO a good job at the combined company after he’d already been fired is much weirder, though. It’s more or less okay for a CEO to try to preserve his job in a merger; it’s awkward for him to try to rescue his job that way."

weliketocode• 8 years ago

Almost no matter the size or nature of the company, sales is treated as this mysterious black box.

If your top salesperson commits improprieties, well then.. you still have to keep him. Clients! Contacts! Secret Sauce!

If your CEO is AWFUL, then the board can tell him he's fired. But if he's in process to sell the company? Well... sales is tough, might as well let him stay to finish it out.

One success can also change everything for a salesperson. John Thain received a ton of criticism... but he was able to sell Merrill Lynch for $50bn during the crisis.

philwelch2• 8 years ago

Other than extreme cases like selling an entire company, sales is a case where it's trivial to measure results and align incentives, which makes top-down interference a lot less tempting.

ddebernardy• 8 years ago

sales is a case where it's trivial to measure results and align incentives

It's anything but. Good sales usually are driven by how much they make, and if there's any misalignment between your commission plan and what's good for the company they'll optimize their own revenue in a heart beat. It can be very hard to align your commission plan with what the company actually needs if the business you're into is non-trivial. (Think optimizing the use of existing work capacity, selling high profit products rather than easier to sell low profits ones, keeping sales more or less aligned with the company's capacity to hire staff that can deliver, etc. Selling too much too fast is not always a good thing.)

avs7336• 8 years ago

It seems like it would be an all around benefit to the economy to disrupt the model that hedge funds use to invest in companies. Obviously access to capital is important. Obviously there are companies that benefit from more efficient operations (e.g., the Olive Garden drama of years past...BREADSTICKS). However, I cannot seem to find any benefit in allowing a hedge fund to charge for services to a company it has taken over. To buy a company with the pure goal of extracting any short term value with the intent of destroying it seems to be a long term societal ill that should be regulated out of existence.

JumpCrisscross• 8 years ago

I cannot seem to find any benefit in allowing a hedge fund to charge for services to a company it has taken over

They could just as easily cause the company to borrow from the fund or pay it a dividend. Ownership means control over how its assets are spent. (That said, one could encourage pay-outs via one way over another by tweaking the tax code.)

avs7336• 8 years ago

I mean legally you are right...but I wasn't saying it is illegal. I was saying it should be illegal.

I can't imagine this is as common in Germany with employee elected board members.

tunap2• 8 years ago

It seems to me, the Blackstone Fund is single handedly causing massive short term societal ills in housing & rental price inflation.

refurb2• 8 years ago

Why? It seems to me that Blackstone was buying up homes when no one else was. They took a risk and it paid off.

luhn• 8 years ago

For those curious what "Olive Garden drama of years past" is, I believe it's https://en.wikipedia.org/wiki/Olive_Garden#Activist_investor...

avs7336• 8 years ago

Thanks...that was an unfortunately opaque and self-important way of phrasing that reference.

orf• 8 years ago

The chain also had stopped the common practice of adding salt to the water in which it cooked its pasta in order to secure longer warranties on the pots, which had Smith incredulous

Oh boy.

bcoates• 8 years ago

Lots of companies with lots of value are dead or irreversibly dying (that is, saving them would cost more than the entire value of the saved company).

There's nothing wrong or strange about firms specializing in extracting what can be salvaged out of the these. It's not more short-term or long-term specific than any other decision owners make about companies -- carving out viable business units that can be spun off and sold is a fundamentally long-term proposition (for the buyer and society). It's not all Michael Douglas defrauding overfunded pensions.

staticautomatic5• 8 years ago

No, but a non-zero proportion of them contribute to the death of the company (for example by saddling struggling companies with debt in LBO deals).

cortesoft2• 8 years ago

Companies need to be able to die, and extracting as much value from the dying company is worthwhile. The alternative is to let a company waste away, slowly bleeding out the last of their resources until their is nothing left. That is not good for the economy, and only prolongs the inevitable. This might feel morbid, but it shouldn't; companies aren't people.

Obviously the people at the company need to be taken care of, but that is a larger societal issue about how we deal with people who lose their jobs in general, not about companies that go out of business.

If the people making the largest bid for a company want to close it down, then that is probably the best thing to do; if it was really worth it to turn the business around, then someone else would offer more money to keep it going (or at least the same amount).

derefr3• 8 years ago

If the people making the largest bid for a company want to close it down, then that is probably the best thing to do; if it was really worth it to turn the business around, then someone else would offer more money to keep it going (or at least the same amount).

Do you really think this?

What if hedge funds just happen to get larger than anyone else in the spaces they operate in, precisely by executing this technique, such that there's no "someone else" who would offer more money?

An analogy: you're essentially saying that it's "the best thing to do" to date a vampire and let them suck out all your blood, because if there were a better partner for you to date than a vampire, surely such a partner would be more attractive than the vampire is, and would try harder to date you than the vampire is.

Now that doesn't sound right, does it? These vampire[-corporations] are supernaturally attractive [to shareholders] and are driven by their bloodlust to seduce people [i.e. board-members] far more effectively than regular human[-corporations] can manage.

skookumchuck7• 8 years ago

That's correct. When a company's assets are worth more than the company as a business, it is appropriate to reallocate those assets to something more productive.

avs7336• 8 years ago

to use an analogy...

What is the difference between a natural death, physician assisted suicide, a government sanctioned execution, manslaughter, and murder?

dbuder• 8 years ago

Companies should die off from competitive pressures. It is hard to build a company and many thousands of people rely on a company like Xerox for their welfare. I think there is a problem with the wanton destruction of companies so that a small group can take dicerolls on whether or not capital can pay down debt over the short to medium term. I'm all for activist investors, but Icahn has always been more of a vulture. His self dealing in the TWA fiasco was particularly egregious.

briandear• 8 years ago

Why? Should adults be allowed to make decisions about their own company? Nobody is actually forced to sell. And if you own something, isn’t it yours?

mlindner3• 8 years ago

To buy a company with the pure goal of extracting any short term value with the intent of destroying it seems to be a long term societal ill that should be regulated out of existence.

If a company is on its last legs, what is wrong with extracting money from it before killing it? Trying to keep dead-companies-walking afloat would be even worse.

busterarm3• 8 years ago

It seems like it would be an all around benefit to the economy to disrupt the model that hedge funds use to invest in companies

I think you maybe don't quite know exactly what a hedge fund is and what purpose it serves. Moreover, leveraged buyouts are more a tool of private equity firms.

There's some overlap, but you should probably get your basic terms right before you start suggesting new regulation.

computator• 8 years ago

Olive Garden drama of years past

Ahh, Olive Garden. I hope you won't mind a slight tangent involving Olive Garden, one of Paul Graham's essays, and a sneaky business deal:

In one of his essays[1], Paul Graham wrote, "I think most businesses that fail do it because they don't give customers what they want. Look at restaurants. A large percentage fail, about a quarter in the first year. But can you think of one restaurant that had really good food and went out of business?"

Yes, I can name a restaurant that had really good food and went out of business -- it was all of the Olive Garden locations in Ontario, Canada, about 15 years ago. They were always busy, always had a line-up to get in, and pretty much everyone I knew liked the food a lot. Then suddenly, without explanation, all of the Olive Gardens in Ontario shut down.

Much later I learned that Olive Garden USA had shifted some large debts to its Olive Garden Canada subsidiary, and allowed the Canadian subsidiary to go bankrupt, freeing the parent corporation of the debts. (So businesses fail for odd reasons even when they have excellent products and masses of loyal customers.)

[1] http://www.paulgraham.com/start.html

redcap• 8 years ago

In that case I would suggest that Olive Garden Canada didn't "go out of business" (i.e. naturally through business dying off), but was killed intentionally.

It didn't die as a result of failure on its own part.

There is also a difference between a restaurant and a chain of restaurants - in any case the US component survived, so I would say that the (overall) business didn't "die off".

kbenson4• 8 years ago

I learned that Olive Garden USA had shifted some large debts to its Olive Garden Canada subsidiary, and allowed the Canadian subsidiary to go bankrupt, freeing the parent corporation of the debts.

How does shit like that even work? It seems like it would clearly qualify under fraud. Even if it doesn't, how does it not send every potential future creditor running away as fast as possible?

jk2323• 8 years ago

"Look at restaurants. A large percentage fail, about a quarter in the first year. But can you think of one restaurant that had really good food and went out of business?"

Yes. In fact I know a shitload of restaurants with excellent food, that went out of business. In the restaurant business your are more in the real estate business than in the food business. Location, Location, Location is everything. And how much you pay for it.

csomar• 8 years ago

Yes, I can name a restaurant that had really good food and went out of business

lol. That's not how it works. The business was successful. Certainly, if you put it intentionally under fire it is going to go under.

There are infinite ways to bankrupt successful businesses. The most common I saw/experienced was family businesses where the heirs could not agree to the terms and kept fighting.

wodenokoto• 8 years ago

Plenty of restaurants go broke, despite serving good food. Just like plenty of restaurant make profits despite selling bad food.

boyce• 8 years ago

Sounds like pg has never owned or run a restaurant. Producing good food is much riskier than producing microwaved slop.

ekingr• 8 years ago

It is true that LBOs can injure companies - like what happened to Toys'R'Us bankruptcy after the Bain Cap & KKR buyout.

It is especially dangerous in times of inflated multiples like we are seeing these days, where PE valuations are kind of bubbling. The demand for M&A transactions is so much bigger than the supply that prices growth quicker than the underlying business value - making it usually harder to justify through profitability improvements.

Yet the whole PE process does bring benefits to the underlying industries is buys, especially by providing investment capacities to businesses that usually don't have enough, and also by professionalization and by introducing sophisticated management standards to the companies (eg. in terms of strategic thinking, reporting, optimization, pricing, etc.).

joeblow9999• 8 years ago

"To buy a company with the pure goal of extracting any short term value with the intent of destroying it seems to be a long term societal ill that should be regulated out of existence."

Why? The company would not have been bought otherwise, apparently. The company had issues obviously. The buy felt there was value to be extracted just not by continuing the operations. So what.

jldugger• 8 years ago

So, this is a story where Icahn is the sympathy figure? Rare space indeed.

How Not to Negotiate a $6.1B Deal

Related Stories