Business Exposed66
companies often have a high level of co-ordination between the
various activities and parts of their organization. This involves
technology and systems but also intangible characteristics such
as a shared culture and informal networks; just like the English
lord’s lawn I introduced earlier in this chapter. Research by
Wenpin Tsai and Sumantra Ghoshal, published in the Academy
of Management Journal, showed that these organizational abilities
take time to grow and develop. Freddy Heineken realized this;
he did quite a few acquisitions, but not too many, and carefully
added and integrated them into his company. Moreover, he did
not see them as a substitute for organic growth but, instead, as an
enabler of it. He used to undertake acquisitions with the explicit
aim of creating further opportunities for organic growth both
for the acquired company (which beneted from Heineken’s
knowledge, purchasing power, and management capability) and
for the Heineken brand (which beneted from added local
distribution).
Heineken’s focus was always on prot-
ability, rather than scale per se. This
made him stubbornly resist loud calls
(for instance, by analysts and investors,
and some business school professors. . .)
to merge with a major rival. Freddy used
to say, “I don’t want to be the biggest; I
want to be the best.” And, as a result,
he was.
Toads and acquisitions – where does CEO “hubris”
come from?
Most acquisitions don’t create much value. The famed investor,
Warren Buffett, once said that many corporate acquirers think
of themselves as beautiful princesses, sure that their kisses can
turn toads into handsome princes. The acquirers pay substantial
premiums over market value, believing that they can release the
imprisoned princes. But, as Buffett said, “We’ve observed many
kisses but very few miracles.”
‘‘
Freddy used to say,
“I don’t want to be the
biggest; I want to be
the best.” And, as a
result, he was.
’’
673
n
The urge to conquer
Because, as discussed before, when a rm acquires another
company, it usually pays a hefty premium. That is, the rm pays
quite a bit more for the company’s shares than the price it is
trading at on the stock market before the takeover, just to be able
to obtain a majority, and hence a controlling, stake.
According to academic research, this premium usually lies
somewhere between a whopping 50 and 70 percent, dependent
on the industry, the size of the rm, etc. The justication for
paying such a signicant premium is the idea that the acquiring
rm will be able to get much more value out of the company
than the seller does. As I’ve said before, the facts show that
they’re usually wrong, but rms still do it!
It gets interesting when you analyze who pays the biggest
premiums. My former colleague at the London Business
School, Mathew Hayward, now at the University of Colorado,
together with his colleague Don Hambrick, performed a slightly
mischievous analysis. They gured that CEOs who are full of
themselves would pay higher premiums – because they suffer
from “hubris” and are more likely to overestimate their own
ability to turn around “failing” companies. Therefore, they
counted the number of favorable articles that had appeared
about them in the business press (such as The Financial Times,
Business Week, etc.).
Subsequently, they computed whether CEOs who had received
more media praise paid more for their acquisitions. The answer
was: absolutely YES!! To be precise, each highly favorable article
about a company’s CEO would increase the premium paid by
no less than 4.8 percent. For an acquisition of a billion dollars,
this would equate to 48 million dollars . . . And that is for every
article!
And this really is $48 million down the drain, because
Hayward and Hambrick also showed that CEOs with more
favorable press were completely unable to create additional
value out of those acquisitions. They had simply overesti-
mated themselves.
Business Exposed68
It is tempting to blame these stupid, arrogant executives, and
their silly companies and boards. However, what I nd equally
interesting is that this research also indicates where hubris comes
from: it comes from us! We glorify top managers, print their
pictures in newspapers and magazines, praise their decisiveness
and vision, give them awards, and treat them like superstars. All
they’re guilty of – the poor bastards – is believing the BS we write
about them.
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.