The CFO as Deal Maker

Thought Leaders on M&A Success

The CFO as DealMaker:

Edited by Robert Hertzberg and Ilona SteffenWith an introduction by Irmgard Heinz,Jens Niebuhr, and Justin Pettit

TheCFO

asDeal

Maker:Thought

Leaderson

M&ASuccess

The CFO as Deal Maker:Thought Leaders on M&A SuccessEdited by Robert Hertzberg and Ilona SteffenWith an introduction by Irmgard Heinz, Jens Niebuhr, and Justin Pettit

If you have ever wondered what goes on behind the headlines in majormergers and acquisitions, you will find no more fascinating and enlight-ening reading than The CFO as Deal Maker. In these pages, you willlearn how Banco Santander earned a place among the world’s top 10banks by taking part in the US$98.5 billion acquisition of ABN Amro;how Saudi Basic Industries acquired GE Plastics and became the world’snumber one chemicals company by market value; and how Mittal Steelengineered its merger with Arcelor to create a global steelmaker —and become the largest player in the industry.

This strategy+business Reader features interviews with 15 leading CFOs,who share their ideas, experiences, and lessons learned in the successfulexecution of some of the largest deals in business history. In a compel-ling introduction, three experts in finance and performance management— Booz & Company Partners Irmgard Heinz, Jens Niebuhr, and JustinPettit — explore the three core roles that CFOs play in successful mergersand acquisitions:

• Key merger strategist, working with the CEO to ensure that mergerplans meet larger corporate objectives

• Synergy manager, capturing every deal’s cost savings, leveragingcombined capabilities, and driving joint market strategies

• Business integrator, identifying the changes related to personnel, pro-cesses, and organizational structure that best bring out a deal’s value

The introduction also identifies six rules of successful deal making thatCFOs must follow if they want one plus one to equal more than two.

If your goal is to hone your deal-making skills and capabilities, to ensurethe fulfillment of fiduciary responsibility, or to build your personal repu-tation for M&A success, The CFO as Deal Maker is essential reading.

A strategy+business Reader

The CFO as Deal Maker

The CFO as Deal Maker:Thought Leaders on M&A Success


Edited by Robert Hertzberg and Ilona SteffenIntroduction by Irmgard Heinz, Jens Niebuhr,and Justin Pettit

Edited by Robert Hertzberg and Ilona SteffenIntroduction by Irmgard Heinz, Jens Niebuhr, and Justin Pettit

The CFO as DThought Leaders on M&


Chapter title 5

Deal Maker:M&A Success

A strategy+business ReaderPublished by strategy+business Books

Copyright © 2008 by Booz & Company Inc.All rights reserved.

No reproduction is permitted in whole or partwithout written permission from Booz &Company Inc. For permission requests, contactVirginia Brosnan by e-mail [email protected].

Visit Booz & Company online atwww.booz.com

Visit strategy+business online atwww.strategy-business.com

Increase your intellectual capital by subscribingto strategy+business. To subscribe for one year(four issues), visit www.strategy-business.com orcall toll-free 877 829 9108. (Outside the U.S.,call 850 682 7644.)

Design: Opto DesignCover art: Steve Ohlsen/Alamy

strategy+business BooksPublisher: Jonathan GageEditor-in-Chief: Art KleinerExecutive Editor: Rob NortonManaging Editor: Elizabeth JohnsonDeputy Managing Editors: Laura W. Geller,Debaney ShepardSenior Editors: Theodore Kinni,Melissa Master Cavanaugh

9 Introduction: The CFO as Deal Makerby Irmgard Heinz, Jens Niebuhr, and Justin Pettit

20 ArcelorMittal: Forging a New Steel Industryby Viren Doshi, Nils Naujok, and Joachim Rotering

32 Banco Santander: Think Globally, Bank Locallyby Christian Reber and David Suárez

42 BASF: Reduced Cyclicality through Portfolio Managementby Klaus Mattern

52 Bayer: Preparation Enables Successby Christian Burger and Klaus Mattern

64 Andrew Bonfield: The Fine Art of Drug-Industry M&Aby Robert Hutchens and Justin Pettit

76 Deutsche Telekom: Never Make Acquisitions DrivenSolely by Financeby Irmgard Heinz and Klaus Mattern

86 Duke Energy: The Value of Relationships in M&Aby Thomas Flaherty

96 Enel: Creating the New European Energy Marketby Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza

Contents

106 E.ON: Acquisitions to Get a Foot in the Doorby Klaus Mattern and Walter Wintersteller

116 Henkel: Manage M&A Centrally — It Uses Corporate Moneyby Adam Bird and Irmgard Heinz

128 Johnson & Johnson: M&A Requires Financial Disciplineby Charley Beever and Justin Pettit

140 Merck: Growing the R&D Pipelineby Charley Beever

150 Saudi Basic Industries Corporation: Using Acquisitions toAchieve Global Scaleby Ibrahim El-Husseini and Joe Saddi

160 Telefónica: Transformational Deal Makingby Jens Niebuhr and Joseph Santo

170 UnitedHealth Group: Handpicking Capabilities RatherThan Just Adding Scaleby Gil Irwin and Justin Pettit

180 About the Authors

Contents, continued

THE MOST UNIQUE advice on mergers and acquisitions that AdityaMittal has ever heard came from a Roman Orthodox bishop. TheCFO of Mittal Steel was considering how to turn around a newlyacquired and struggling steelmaker in Romania, when the localbishop told him to build a church at the entrance to the facility. “I’mtelling you that will work wonders,” the bishop said. Mittal wastaken aback, but decided to take the advice. “We built a beautifulRoman Orthodox church; all the workers got involved in it part-time. And that changed everything,” says Mittal, remembering howthe integration barriers dropped away and the plant’s workersembraced a new beginning. So a church played a key part in the suc-cess that the company, now ArcelorMittal, the world’s largest steel-maker, has had in Romania.

The story makes an important point: Not every deal is doneby the same rules, and no one strategy fits every company. There aremany different ways to succeed at M&A, a fact made clear in the 15interviews with CFOs of leading companies that make up thisstrategy+business Reader, The CFO as Deal Maker. There’s Johnson& Johnson, which lets most of its acquired properties operate inde-pendently in its decentralized model, and Henkel, which prefers tointegrate them to the extent economically sensible. There’s DeutscheTelekom, which says M&A success is all about capturing synergies,

Introduction:The CFO as Deal Makerby Irmgard Heinz, Jens Niebuhr, and Justin Pettit

The CFO as Deal Maker 9

10 strategy+business Reader

and Merck & Co., Inc., which says M&A is about obtaining a stakein promising new discoveries.

And yet, for all the differences in how companies approachM&A, our work with financial executives over the years and ourinteractions with them in the course of conducting the interviewsfor this book have led us to conclude that all CFOs play three basicand essential roles in the merger process.

The first role is as one of the company’s key merger strategists —the executive who, along with the CEO, ensures that the mergerplan meets larger corporate objectives. This means the CFO’s roleisn’t limited to ensuring that the deal is financially sound; it extendsto posing more qualitative questions to those championing the deal:Is the target appropriate? Why? What could go wrong? CFOs askthese questions not just to understand the potential problems, butalso to get a clear sense of the upside so that, when deals go forward,they can articulate the vision and help turn the company’s stake-holders into believers.

Indeed, one of the strategic decisions in which CFOs need toparticipate is what sort of deals their companies should pursue.Traditional deal making is only one tool in most companies’ growthkits — and “not necessarily the one that gets the most use,” saysPeter Kellogg, the CFO of Merck. Nowadays, many companies pur-sue partnerships that involve licensing and joint development, man-ufacturing, and marketing initiatives. “We seek to find a win-winapproach that is financially logical,” Kellogg says.

The CFO’s second role is as the deal’s synergy manager. Synergiescan take several forms, from the cost savings achieved by consoli-dating operations to increased sales through new capabilities.Regardless of the type of synergy, the CFO plays a key role in creat-ing the postmerger integration plan and identifying the people whocan execute it. Good synergy managers know the value of financialincentives, but they don’t leave anything to chance; they also insti-


tute monitoring systems that tell them if things are going awry.This role is increasingly essential, because the window for cap-

turing synergies closes quickly. To capture synergies in a timely man-ner, Deutsche Telekom plans the integration before the close andmakes a board member responsible for its execution. In the firstyear, there is too much at stake to let an integration effort go off inthe wrong direction, according to CFO Karl-Gerhard Eick.

The CFO’s third M&A role is as business integrator — identify-ing the changes related to personnel, processes, and organizationalstructure that will best bring out a deal’s value. CFOs certainly playa hands-on role in bringing the finance organizations of two previ-ously separate entities together, but there is also a role for CFOs inintegrating departments outside of finance.

CFOs and their teams should define the performance metricsand establish the goals that must be achieved to justify the deal’spurchase price. These goals may be tied back to the company’s com-pensation systems, putting the CFO at the heart of incentive design.CFOs also must ensure the monitoring of progress against targets, acritical measurement and tracking function that is essential to suc-cessful postmerger integration. Finally, in order to reach targets,CFOs who act as business integrators often sponsor synergy-oriented education and training programs or business literacy work-shops that teach employees how to identify the key value driverswithin their control and how to attain performance goals.

In fulfilling these time-tested roles and succeeding at M&A,leading CFOs act in certain recurring ways. Here we present the sixrules that CFOs should follow to ensure that when it comes toM&A, one plus one will equal more than two.

Rule 1: Shape the Strategic Intent of the Merger. The CFOs in this bookrepeatedly told us that all deals must support their companies’ long-term, value-creation strategies. To do a deal for a short-term reason,


such as meeting a forecasted number, is usually a mistake. “It’s dan-gerous to target levels of growth because then you may overpay,”warns Johnson & Johnson CFO Dominic Caruso.

Deals can be done to add scale, to position a company in apromising geographic market, to expand a product line, or to gainbetter control of the supply chain. Sometimes, deals are done sim-ply to add new capabilities. This is true of both Johnson & Johnson,which has completed more than 70 deals in the last decade, andof UnitedHealth Group, which has done almost 100 deals, many ofthem small. “A lot of them were done to piece together capabilities,”says UnitedHealth CFO G. Mike Mikan.

Whatever the strategic intent of a deal, the CFO needs to helpshape and communicate it. In particular, the CFO must have theresolve not to be swayed by the market’s initial response. In a bullmarket, investors sometimes throw up their hats to celebrate anacquisition that, in the long run, will damage or even bankrupt theacquirer. This was common during the dot-com boom. The oppositealso sometimes happens; during bear markets, fundamentally sounddeals can get an unwarranted thumbs-down from wary investors. Asone of the deal’s key strategists and its clear-eyed analyst, the CFOhas the responsibility not to be dissuaded by either unrealistic opti-mism or groundless pessimism, but to stay the course.

Rule 2: Sense Your Opportunities and Prepare to Capture Them.We have allheard it before: “Company X acted opportunistically in an M&Asetting,” the implication being that a profitable deal emerged unex-pectedly and that the buyer or seller pounced on it. Our experience,however, is that out-of-the-blue opportunities are quite rare, and tothe extent that they require quick action, there is often not enoughtime for a rigorous pre-deal assessment. Extreme time pressureheightens M&A risks, especially those of paying too much and ofgiving short shrift to essential internal processes. The company that


boasts of having bought something “opportunistically” is oftenrevealed later to have simply acted in haste.

This is not to say that speed isn’t important; it is vitally impor-tant in M&A. But it is an advantage that is enabled by advancepreparation. Such preparation increases the likelihood of a companygetting in early on an attractive deal and wresting momentum fromrival bidders. This is what Bayer accomplished a few years ago, aftera bid from a rival drug company put Schering in play. Bayer ulti-mately prevailed, completing a deal that extended its holdings fromchemicals into pharmaceuticals and that gave it a promising fran-chise in oncology. But the deal never would have happened if Bayer,which is committed to preparation, hadn’t been working off anexisting list of potential acquisitions that included Schering. “Wehad already done our homework” when Schering became a candi-date for acquisition, Bayer CFO Klaus Kühn says.

Merck, another drug company, prepares in a different way. Itemploys dozens of regional scouts whose job is to stay abreast ofmolecular discoveries at universities and startup biotechnology com-panies. This increases the likelihood that Merck will be one of thefirst to know when an interesting partnership opportunity arises.

Advance preparation can also help in the financing of a deal.After being appointed CFO at Spanish telecommunications com-pany Telefónica in 2002, Santiago Fernández Valbuena spent longhours courting commercial banks to establish open pipelinesto capital. That groundwork paid off in 2005, when FernándezValbuena secured the financing for the company’s US$32 billionbid for mobile and broadband service provider O2 over the courseof a weekend.

Rule 3: Never Overpay. Among the many mistakes that companies canmake in M&A, none is as irreversible as paying too much. Thereis no recovering from an acquisition that doesn’t earn its cost of


capital and that ends up diminishing the company’s profitabilityor burdening it with a debt load that it can’t service. “If you can’tbuild the case for how you’re going to make money, you shouldn’tgo after a certain target,” says Kurt Bock, the CFO of chemicalscompany BASF.

Leading CFOs determine the value of potential targets inseveral ways. They triangulate value through multiple analyticmethods, as well as subjecting critical assumptions and other riskfactors to a comprehensive sensitivity analysis. But even the mostdetailed numerical forecast isn’t always sufficient. The problem isthat the model’s output is only as good as what goes into it — andsynergy assumptions are a big part of that input. Aware of this,CFOs don’t rely only on the synergy estimates of the business man-agers who propose the deal and are pushing for it; they also call oncentralized M&A departments, whose job is to view the econom-ics more dispassionately.

With its breadth of experience, a centralized M&A staff canalso play an important role in spotting some of M&A’s less obviousrisks. The departure of essential employees and the possibility ofregulatory change and culture clashes, especially when the partiesmerging are from different nations, can hurt revenue and profits,and can turn what may look like a sure bet on paper into a losingproposition.

Winning CFOs use creative deal structures to lower the risk ofpaying too much. Merck CFO Kellogg, for instance, recommendsstructuring riskier deals so that a portion of the payout is contingenton the target’s achieving key milestones. Where feasible, these “earn-out” mechanisms can be very effective in mitigating the risk of over-payment, aligning interests, and bridging the gap between the futureexpectations of buyers and sellers. Deal structure is also oftendesigned to incorporate other elements of risk management, such asthe form of consideration or the use of collars on stock deals.


Rule 4: Cash In Your Synergies. Once a deal is done, investors judgeCFOs on their ability to deliver on promises and achieve synergies.There is generally little question about what is expected; CFOs havecreated these expectations themselves, by talking to the equity mar-kets, often in considerable detail, about the deal’s economic rationale.

In today’s demanding business environment, there is no time forblurry plans, timid decision making, or ambiguous communication.Woe betide the CFO who has not already created a detailed imple-mentation plan and convinced the business units of its urgency.“When the deal closes, it’s already 70 percent predetermined to be asuccess or a failure,” says Deutsche Telekom’s Eick. “If you aren’table to flip the switch and get started at that moment, it’s too late.”

To meet these demands, CFOs need a dedicated financial con-trol capability that enables them to keep track of critical events,measure the size and robustness of identified synergies, and create anunbiased and comprehensive picture of a deal’s results. Integrationplans should include a clear time line of milestones and hold specificmanagers accountable for achieving them. When the deal is closed,financial synergies that were once theoretical discussions should beembedded in budgets, and nonfinancial synergies should be trackedas integral parts of synergy scorecards.

CFOs should also ensure that every manager involved in captur-ing synergies has skin in the game. Four-fifths of the CFOs we inter-viewed said they create such incentives. ArcelorMittal CFO Mittal,for instance, instituted a “very simple,” yet effective compensationplan that tied bonuses to achieving some of the synergies expectedin the merger that transformed Mittal Steel into ArcelorMittal;those who didn’t achieve 85 percent of the budget, which capturedthe synergy and value plan, didn’t get a bonus.

Some CFOs ask managers of acquired companies to participatein discussions about the available synergies, as a way of gettingtheir buy-in. This can be a smart way to mitigate the risk, present


in all acquisitions, that key people will leave and morale will suffer,hurting financial results and causing customers to defect.

The Italian energy giant Enel did this when it bought Endesa, aSpanish counterpart, in 2007. Instead of unilaterally imposing a setof cost-control goals on Endesa, Enel assigned one Enel managerand one Endesa manager to collaborate on individual synergy tar-gets. “You can’t just walk in and say, ‘You need to achieve €600 mil-lion [US$930 million] in synergies,’” says Enel CFO Luigi Ferraris.“You have to involve them in the process of making the analysis andcoming to the same conclusion.”

Finally, if a deal’s synergies aren’t achieved, it often falls to theCFO to explain why. This is another task that shouldn’t be put off,if credibility with the capital markets is to be maintained. In thesecases, the CFO should communicate as quickly and clearly as possi-ble the root causes of the problem, the corrective action being taken,and revised estimates for the deal’s economics.

Rule 5: Build Trust in Future Success.Much of the acquired value of adeal hinges on existing employees. People maintain operations, owntrusted client relationships, and develop market insight. And yet inalmost every acquisition, key staff members and managers react withconcern to news of the transaction, wondering what it will mean fortheir futures. Many workers lose focus, some consider leaving, andothers do leave.

CFOs can mitigate this risk in a number of ways. For one, theycan resolve staff uncertainty as expeditiously as possible. This meansmaking fast-track decisions about organizational structure andstaffing, as well as about governance and decision rights. With cer-tain acquisitions, it may mean dealing forthrightly with labor issues.But the aim is always the same: to cut short internal speculation andreengage people in the business as quickly as possible.

Making postmerger management appointments on the basis of


merit can be a powerful retention tool. Key staff members usuallytake stock of the acquiring company’s discipline and objectivitybefore deciding whether to stay. Mittal remembers that after themammoth acquisition that brought Arcelor to Mittal, the one-timeArcelor people were being standoffish, expecting “to be second-classcitizens.” They were in for a pleasant surprise. “We operate as a mer-itocracy, on an honest, transparent, and fair basis,” Mittal says.

Rule 6: Don’t Compromise on Financial Control and Compliance. For alltheir far-reaching responsibilities during an acquisition, CFOs ulti-mately must lead and reshape the finance function itself. This can bea huge challenge, because the reporting processes, information sys-tems, and control tools of the acquired company often differ sharplyfrom those of the buyer. And time is short — the new company gen-erally has to meet deadlines for its upcoming quarterly statements,and control and compliance requirements must not be compromised.

We find that leading CFOs break the finance integration chal-lenge into three phases: a first phase focused exclusively on fulfillingexternal reporting requirements; a second phase intended to estab-lish a set of common financial practices; and a third phase aimed attransforming the entire finance function into a world-class opera-tion, while consolidating operations.

In the first phase, which typically takes place during the first 100days after the transaction, the lack of structure can be somewhatdaunting. The treasury and corporate finance functions in the newmerged structure must be immediately operational, even thoughorganizational decisions that will form the basis for the new externalreporting structure are often still pending. It usually requires a pow-erful project management effort, based on the most likely hypothe-ses and scenarios, and aligning stakeholders around essential tasks,to ensure on-time data exchange and input from a variety of sourcesand to guarantee the quality of the final audit report.


During the second phase, which often starts in parallel with thefirst, best-in-class CFOs identify the control capabilities the financedepartment will need; shift their attention to planning and perform-ance management; and determine the financial processes, systems,and tools the business units will use. From a practical standpoint, itis often best to follow a dominant-model approach in this phase,which often means adopting the acquirer’s model, to ensure finan-cial control and compliance. The emphasis is on getting a robustsolution in place quickly — not on holding out for something thatis super-sophisticated.

It’s after the basic finance operations are established that CFOscan work on the long-term changes that will make their financedepartments more effective and efficient. This is the third phase,and it entails instituting global standards for structures, processes,and practices to simplify financial control and compliance issues.The best CFOs seize this opportunity to take a fresh look at theirestablished systems, processes, and practices with an eye towardupgrading them.

Throughout this transformation process, CFOs ensure thatoverarching quality and compliance standards are met. This is whatFerraris, Enel’s CFO, did after his Rome-based company madeacquisitions in eastern Europe in 2006 and was assigning business-unit CFOs to oversee those operations. “I have always sent in anEnel executive to implement the financial control function and areporting system to ensure that we are speaking the same language,”Ferraris says.

The three roles of CFOs in mergers and acquisitions and the sixrules of M&A provide a sound foundation for success, but readerswho stop here will miss the lion’s share of the value in this Reader.Its full value resides in recognizing that the opportunity for corpo-rate growth and profit through M&A is constrained by only onething: the willingness of companies to enhance their capacity as deal


makers by taking well-calculated risks and using innovative strate-gies and tools to achieve success. The 15 CFOs featured in this bookmake this very clear as they share their ideas, their experiences, andthe lessons they have learned in the successful execution of some ofthe largest deals in business history. Whether your goals are profes-sional — to hone your deal-making skills and capabilities, to ensurethe fulfillment of fiduciary responsibility, or to build your personalreputation for M&A success — or if you are just wondering whatgoes on behind the headlines in major mergers and acquisitions, youwill find that The CFO as Deal Maker is enlightening reading. +

ADITYA MITTALChief Financial OfficerArcelorMittal

ArcelorMittal:Forging a New Steel Industry

Connecting with stakeholders and being aheadof trends is more important to M&A success thanthe money you offer, says CFO Aditya Mittal.by Viren Doshi, Nils Naujok, and Joachim Rotering

Reporter: William Boston

ADITYA MITTAL DOESN’T look like a gambler. And yet two years agoMittal Steel, the business founded by his father and controlled byhis family, shocked the global steel industry with a wager so boldthat no one believed the company could pull it off.

Mittal recalls the sleepless nights he endured worrying aboutwhat would happen if his company’s unsolicited bid to acquireArcelor, the biggest steelmaker after Mittal, failed. In the end, itdidn’t fail, and the US$38 billion deal made Aditya Mittal’s reputa-tion. It also gave him a confidence that is characteristic of peoplewho, with the whole world watching, prevail despite long odds.

As a teenager, Mittal loved to read biographies of business lead-ers such as Bill Gates, Larry Ellison, and Sony founder Akio Morita.He often accompanied his father, Lakshmi Mittal, on business tripsto visit newly acquired plants in eastern Europe.

After graduating from the University of Pennsylvania’s WhartonSchool of Business with a BS in economics in 1996, the youngerMittal worked as a financial analyst for six months before joiningMittal Steel in a succession of finance and management roles. Threeyears later, he assumed responsibility for M&A.

When he outlined Mittal’s bid for Arcelor at a news confer-ence in London in 2006, a journalist confronted him, questioningwhether he was too young to be running such a deal. His father

ArcelorMittal:Forging a New Steel Industryby Viren Doshi, Nils Naujok, and Joachim Rotering


ArcelorMittal 23

commented that the founders of Google were the same age.People who mistook Mittal’s youth for a lack of experience early

in his career often paid the price at the negotiating table. No oneunderestimates him now, at age 32.

The numbers speak for themselves. The merged ArcelorMittal,headquartered in Luxembourg, is the world’s biggest steelmaker andthe only truly global one, with 310,000 employees in more than 60countries. Its products cover the entire breadth of production in theindustry, serving manufacturers of cars and trucks, household appli-ances, and packaging. In 2007, ArcelorMittal generated revenues of$105.2 billion, with a crude steel production of 116 million tons,representing some 10 percent of world steel output.

During an interview in his London office, Mittal said he hasbeen willing to make big bets because he has a strong vision of wherethe steel industry is heading. So far, that vision has been accurate.

S+B: Among financial executives, your situation is unique — your fam-ily is the company’s biggest shareholder and your father is the CEO.How does that change the CEO–CFO relationship?MITTAL: As for the personal relationship, I think in some sense it hassignificant advantages, because the CEO and CFO are supposed towork closely together. That’s an important thing we bring to the table.

S+B: How active has your deal making been in the last three years?MITTAL: In the last year, we did 40 acquisitions. During the twoyears prior to that we probably did two or three large acquisitionsa year. Now it’s harder to do large deals, so we’re doing multiplesmaller transactions.

S+B: Why is it changing? What characterizes your M&A activity today?MITTAL: It’s hard for us to grow in steel in certain geographiesfor regulatory reasons, so we’re focused on mining development


and distribution development, and establishing our presence invarious geographical parts of the world. That means smaller deals.You do a mining development program in Arizona, invest in coal inMozambique, and create a partnership with the Mauritanian gov-ernment. We did about seven distribution deals, in regions such asthe Balkans, Poland, and Turkey.

S+B: In terms of the day-to-day operations of the M&A team, what isyour role?MITTAL: Before we did the Arcelor–Mittal merger, the mergersand acquisitions team was very small — there were just twoof us. Now there are about 20 people, and my role has changedas the team has expanded. Historically — when we were doingjust two or three deals a year — my job was literally to lead theproject. I was involved in all the due diligence, government meet-ings, union meetings, negotiations — whatever was needed. Aftera deal closed, in cases where a turnaround was necessary, Iwas part of the transition team to make sure that occurred.Even in the Arcelor deal, I was very hands-on. Now, with 40 dealslast year — which doesn’t mean that we worked on 40, we workedon a multiple of that — I have to delegate a lot more to variousteam members.

S+B: How do you identify targets for M&A?MITTAL: We have a very clear growth strategy that has gone throughtwo phases of M&A. At first, there was no one else growing as muchor as fast as we were. So we’d look at every opportunity and wouldfocus on areas with the most significant potential. For example, welooked at eastern Europe thoroughly and, in some cases, created pri-vatizations, which I think was very cutting-edge at the time. Today,ArcelorMittal has a three-dimensional growth strategy: geography,product, and value chain.

ArcelorMittal 25

S+B: How do you create a privatization?MITTAL: Well, take the case of the Czech Republic. I’d been readingin the press that the International Finance Corporation [IFC] wasvery upset with the Czech steel company because it was defaultingon its loans. The IFC threatened to take the Czech government tobankruptcy court. The government was in a jam because the E.U.would not allow it to provide subsidies, the unions were protesting,and the lenders were begging for help because the steel company washeaded for bankruptcy. So we said, “Let’s go visit the governmentand see what we can do.”

Incredibly, the unions were having protests on the day of ourmeeting. So I’m in Prague and there are protests outside and I’m sit-ting there saying, “Look, we can help you out; we’ll solve all yourproblems. We’ll buy this company.” And within 48 hours the gov-ernment announced the privatization process.

S+B: Were you able to work this way in other countries?MITTAL: We were indeed. In Romania, the steel company was thebiggest drain on the budget. We said we could turn it around. Theysaid, “Are you kidding?” But we did it.

When South Africa unbundled its mining and steel businesses,we told the government, “Look, you need a strong steel partnerbecause the steel assets are going to be weak and it would be disas-trous for your national economy if your steel company went bank-rupt.” They said, “Absolutely.”

So that’s how we began, by being very proactive in identifyingareas in which there could be a privatization opportunity.

S+B: And what marked the next M&A phase that you mentioned?MITTAL: In 2004, it became obvious that the privatization storywas coming to an end. We needed to do something else. We hadalready bought one U.S. steel company, Inland Steel, in 1998,


which was supplying 70 percent of all advanced steel strengthapplications for automobile bumpers. We had become the largestsupplier to Toyota and to Honda, the most demanding customers.However, we still wanted to increase our stake in the UnitedStates. In 2005, we bought ISG, another U.S. company, whichwas the old Bethlehem Steel, LTV Steel, and Acme Steel rolledinto one.

Once those deals were done, we looked at the world and said,“What’s next?” And it was Arcelor. That’s how we moved forward.

S+B: With a price tag of $38 billion, Arcelor was unlike anything you’dever done before. How did the idea for it come about?MITTAL: Arcelor made tremendous industrial sense. Clearly, justthinking about it was audacious, and I was surprised to learn thatthere was no significant shareholder in this company. A lot of peo-ple said that Arcelor was a French icon and we could never succeedin taking it over. But the more we thought about it, the more we fellin love with it.

S+B: What was so compelling about the deal?MITTAL: It was not a story about rationalizing or restructuring. Itwas a story about making the steel industry stronger. The first thingwe realized is that by consolidating the steel industry, we couldinvest more in research and development, we could invest more inplant facilities, and we could invest more in employees. For a longtime in Europe, the steel industry had been declining; we saw this asa way to reverse the trend.

Number two, we saw this as a way to make the Europeansteel industry competitive vis-à-vis steelmakers in developingnations. We felt that if we had the chance to begin the dialogue,people would realize that what we were saying was absolutely theright thing.

ArcelorMittal 27

S+B: Do you feel that an essential part of your job in a takeover scenariois to talk to employees and investors to help them understand what you’retrying to do?MITTAL: That’s the primary thing. People get it wrong. Atakeover is not done by offering money. A takeover is done byconvincing the key stakeholders that this is the right thing fortheir future. In all of these opportunities, whether it was Poland,the Czech Republic, or South Africa, whichever country, Iremember going in, meeting the unions, meeting the manage-ment, meeting government and any other key stakeholder wecould identify. And we used to have delegation after delegationfrom Poland, South Africa, and Algeria, and so on going toKazakhstan and other places where we’ve made acquisitions to seewhat we had done.

That was our pitch: Come and see for yourself. Talk to yourambassadors in the countries in which we operate. Ask them whatthe local government thinks about us.

S+B: How far will you go in order to be a good corporate citizenand win over the hearts and minds of people when you want to buytheir company?MITTAL: Well, I remember in Romania, after we did the deal, Mr.Mittal and I went down there and met the mayor and the bishop, avery colorful man. The company was obviously not in the best con-dition, and the bishop said: “You know, the people have lost faith inthis company; you need to rebuild their faith.”

I was thinking, “Yes, of course, but we’re not God.” He said,“Build a church at the entrance of your facility. Build a RomanOrthodox church. Get the workers to work with you to buildit. You spend a couple million dollars and you build a beautifulchurch at the entrance to your facility. And I’m telling you, that willwork wonders.”


S+B: You built a church?MITTAL: And it was great. We built a beautiful Roman Orthodoxchurch; all the workers got involved in it part-time. And thatchanged everything. After that, they knew we weren’t going to walkaway after three years.

The lesson from this is that you have to invest in the communi-ties in which you operate. Because word gets around. What youinvest locally also pays off in dividends globally. This is just onesmall example. We do things all around the world.

S+B: How did you get Arcelor stakeholders to buy in during the post-merger integration phase?MITTAL: One of the key reasons for the success of the merger is thatwe operate as a meritocracy — on an honest, transparent, and fairbasis. And for all of the ex-Arcelor people, this was remarkable.They suspected that, after the merger, they were going to be second-class citizens. But they weren’t; they were equal to anyone inthis organization.

S+B: How did you communicate targets so that on Day One the man-agers of the combined company knew what was expected of themin terms of performance? Is there a process whereby you have “theMittal Way”?MITTAL: That was the other thing we did: We announced ourvalue plan on a combined basis. At that point in time, we weredoing EBITDA of $15 billion on a combined basis, and we saidwe have to do $20 billion postmerger. That was the value plan.And we have $1.6 billion of synergies. And every single personhad a certain responsibility to achieve that. So if you, for example,worked in the United States, you knew exactly what yourEBITDA was in 2005, ’06, ’07, and ’08, what your synergy targetswere, what synergy you were supposed to achieve, who was respon-

ArcelorMittal 29

sible, and what the dates were by which you were supposed toachieve it.

S+B: How did you track the process?MITTAL: In the beginning, we would have management committeemeetings every month, and after health and safety, the next presen-tation was always the finance group. We brought a lot of transpar-ency and a strong performance management culture.

S+B: Was that received well?MITTAL: Everyone began to appreciate it because they had neverseen it before. Then we had every major segment of every singlebusiness group identify three competitors with publicly tradedinformation so that we could do a trend analysis. That was ashock, because suddenly people saw that in some cases their busi-ness was growing in absolute terms, yet actually declining againsttheir peers.

S+B: And this was the foundation for integrating the budget process?MITTAL: We had a budget for the combined company startingfrom January 1, 2007. And part of the budgeting process wasto understand the incentives. So we created a new incentive planthat mirrored the budget exactly. If we didn’t achieve 85 percent ofthe budget, we got zero bonus. And the budget had to capturethe synergies and the value plan; otherwise it was not approved.Very simple.

S+B: How did the staff react to these changes?MITTAL: The biggest complaint during the integration, whichwe’re trying to address because some of the concern is valid, involvesthe amount of information the central office wants. The datarequests are tremendous. So now we’re trying to streamline some


of it by creating a central database and allowing managers toreject some data requests if similar information is available some-where else.

S+B: What is your sense of where you are today and the role acquisitionswill play in the future? Where do you want to be in five or 10 years?MITTAL: Our strategic goals are quite clearly articulated. The first isto continue to grow our presence in steel, primarily in the BRICcountries: Brazil, Russia, India, and China. We want to increaseour vertical integration. We’re focused on identifying iron ore andcoking coal opportunities. And we’re also very focused on expand-ing our distribution footprint. So we’re moving on anything any-where globally.

The new buzzword is the “alternative billion” — referring to thebillion people living in Indonesia, Pakistan, Bangladesh, Nigeria,Congo, and Thailand.

S+B: All markets with a lot of growth potential. Is that the appeal?MITTAL: For us it’s worth exploring to see what opportunities thereare. Our strategy has always been to be ahead of the curve, becausethat’s how you create real value. If you’re behind the curve, you’renot creating any value; you’ll lose money. So how do you stay aheadof the curve? You have to look at opportunities that others are notfocused on. It’s all part of transforming tomorrow.

ArcelorMittal 31

Aditya Mittal’s keys to successful M&A• A takeover’s success is not determined by the amount of money you offer.Success is achieved by convincing the key stakeholders that this is the rightthing for their future.

• To identify the right targets, you have to stay ahead of the opportunity curve.If you’re behind the curve, it’s hard to create any value.

• Invest in the communities in which you operate. This helps you not justlocally, but globally, since your reputation precedes you.

• The integration stage of a merger should be run as a meritocracy, on anhonest, transparent, and fair basis. Choose the best people to manage thebusiness, regardless of which company they started at.

• Move quickly to establish clear targets and give employees an incentive toreach them. Make their compensation dependent on reaching those targets. +

JOSÉ ANTONIO ÁLVAREZChief Financial OfficerBanco Santander

Banco Santander:Think Globally, Bank Locally

The success of Santander’s strategy is drivenby a belief that all banking is local, says CFOJosé Antonio Álvarez.by Christian Reber and David Suárez


TO BANCO SANTANDER, size matters. Over the last 20 years, Santanderhas used mergers and acquisitions to rise through the ranks of theglobal financial-services industry from 52nd place to the top 10 inmarket capitalization.

In 1999, Banco Santander merged with Banco Central Hispano,forming the largest bank in Spain and creating a significant platformfor future growth. In 2004, the Madrid-based bank acquired AbbeyNational PLC, a British mortgage bank, for US$15.5 billion (€8.5billion). Two years later, Santander acquired a stake in SovereignBank, a U.S. bank with services including retail banking, mortgages,and wealth management, with an option to buy the bank outrightin 2008. In 2007, Santander celebrated its 150th anniversary andjoined the consortium that bought ABN Amro, the biggest Dutchbank, in a deal worth $98.5 billion — the largest bank takeover inhistory. As part of the deal, Santander took control of Banco Real,Brazil’s fourth-largest bank.

All the while, Santander has continued to perform well finan-cially. In 2007 — a year when the banking industry was feeling theeffects of the credit crisis — Santander’s profit jumped 19 percent to$12.3 billion.

Yet even as Santander plants its flag around the globe, it hasbecome known for what it calls its multi-local strategy, which boils

Banco Santander:Think Globally, Bank Locallyby Christian Reber and David Suárez


Banco Santander 35

down to being efficient and cost-conscious everywhere, but vary-ing the tactics by geography. “We use different metrics at Abbeyin the U.K. than we use in Madrid or in Brazil because marketsare different,” says José Antonio Álvarez, the company’s chief finan-cial officer.

Álvarez has a BA in business administration and economics,and an MBA from the University of Chicago. He has been a financeexecutive at several Spanish banks, including Argentaria, and hasheld board directorships with divisions of Santander as well asother companies.

In an interview in his Madrid office, Álvarez discussedSantander’s M&A strategy, the lessons he has learned, and the rulesof the road for future acquisitions.

S+B: Banco Santander has been putting together a global retail bank-ing business, piece by piece, for years. What is the primary rationalebehind your strategy?ÁLVAREZ: Well, one thing that is important is that we are a retailbank. This is all about cost. We don’t sell a very sophisticatedproduct; we basically sell a commodity. So the key is to be effi-cient enough to compete effectively in the retail market. Ourstrategy is practical in the sense that we prefer to be in fewer mar-kets with larger market share than to spread ourselves thin acrossmany markets. As a rule of thumb, we think you need to have atleast 10 percent market share in order to compete effectively inretail banking.

S+B: How has market share influenced the way you do M&A?ÁLVAREZ: Take our decision to sell Banca Antonveneta in Italy.With Antonveneta we were looking at a bank with less than 3 per-cent market share. We could have gone in, gotten some synergies,and built up a good business model. But we would still have had


to do more acquisitions to achieve the critical mass needed to becompetitive in Italy.

S+B: Does your 10 percent rule refer to a local market, a region, ora country?ÁLVAREZ: Typically, when we talk about markets, we mean coun-tries. But sometimes the market is local. This is the case in China,for example, or in the United States. In Brazil, our franchise is basi-cally in the state of Sao Paulo, which has a population of 40 millionto 45 million people. And we have more than 10 percent of the SaoPaulo market. In the U.S., we can define three, four, or five markets.We’d rather have 10 percent of a regional market than 2 percentspread across the country.

S+B: How much of Santander’s M&A activity is driven from headquar-ters and how much comes from the business units?ÁLVAREZ: Ideas flow in both directions and there is a lot of interac-tion. If anything promising emerges, we discuss it together beforemaking an offer.

At Santander, consumer finance has been the most active divi-sion over the past few years. We issued a mandate from headquar-ters to expand this division, but then relied on the business unit togo out and identify targets.

S+B: Is there any correlation between the size of a deal and whodrives it?ÁLVAREZ: If it is a transformational deal, it tends to be a discussionbetween the board, the CEO, and finance, and it is handled at thecorporate level. For example, decisions about using acquisitions toenter new countries tend to be made at headquarters.

S+B: How does Santander set overall M&A guidelines?

Banco Santander 37

ÁLVAREZ: Every year, the board meets for two days for a very opendiscussion. It’s my job in finance to work with the board to identifythe issues that are central to the company, usually two to threemonths in advance. The meeting usually takes place on a weekendand somewhere that allows us to get away from headquarters.During this weekend, we discuss how we view what’s going on in theworld, how we see ourselves, and what we should be doing. Thedecisions we make during these two days of intense discussion formthe framework for the next year.

S+B: As CFO, how much time do you spend on M&A activities?ÁLVAREZ: In a typical year I will spend up to 20 percent of my timetalking with investment banks and with people both inside and out-side Santander about how we can improve our business. This is timedevoted to M&A in the pure sense.

S+B: Does that include the time you’re working on acquisitions thathave already happened and that are currently being integrated?ÁLVAREZ: Once we integrate a new acquisition into the day-to-dayoperations, I deal with it just like any other operation. But for thefirst two or three years after an acquisition, I’ll spend more time onthat new company. We’ve made a commitment to the shareholdersto meet certain targets, and investors always ask about it. Early on,it’s my job to make sure the synergies are coming in. After that, Ideal with it like any other business division.

S+B: Let’s talk about Santander’s Abbey acquisition.What were the crit-ical success factors there?ÁLVAREZ: To answer that question, we have to take a step back. Inthe 1990s, Abbey embarked on a diversification initiative that was acomplete failure. They went into wholesale banking and into secu-rities, and when the market collapsed in 2000 they suffered losses.


That prompted them to look at alternative business models and branchoff into insurance. Abbey’s management became distracted from whatit had been doing successfully for 60 years: mortgages and savings.

When we started to analyze Abbey, we realized that they had afantastic core business, but management hadn’t focused on it foryears. We felt we could improve the situation substantially. AndAbbey’s management had concluded that they had to sell the bankto someone who could inject fresh capital into the business and keepit competitive in the market.

S+B: How did you track synergies at Abbey after the merger wascompleted?ÁLVAREZ: We appointed an executive who is responsible for guid-ing the cost-cutting process. This executive not only gives peoplespecific targets, but also suggests ways through which they mightmeet those targets. We also discussed the budget in detail anddetermined where cost savings would come from. We track thebudget every month and see who is delivering on the targets andwho is not. Determining the volume of costs to cut and how to doso is a science.

S+B: Was it hard to get the staff at Abbey to buy into the idea that theywould have to work more efficiently?ÁLVAREZ: Not really. It is pretty simple: If the employees at anacquired company know that their business is not being run well,then they expect the new owners to come in and cut costs. Theyare open to the acquirer’s ideas because they know things mustchange — and they understand that accepting change is a key tostaying employed.

But if they think they are doing a great job, then they see no rea-son to change and they put up all kinds of resistance. That canbecome a nightmare for an acquirer.

Banco Santander 39

S+B: During the negotiation phase, did you make it clear to Abbey thatyou planned to run a tighter ship?ÁLVAREZ: Definitely. We were very open. We said at the outset thatthere would be around 3,000 redundancies. In the end, it was amuch larger number.

S+B: Yes, there were about 8,000 job cuts.Why was there such a discrep-ancy, and how did you communicate that to the staff?ÁLVAREZ: When you run numbers from the outside, you make esti-mates based on things you’ve seen before. For instance, based onexperience, you may believe that certain departments can be runwith 20 percent or 30 percent fewer people. Once you are inside,you can make a determination department by department — andsometimes you find that your assumptions were wrong. So it’s pru-dent to be conservative until you are inside the company and can getreal numbers — especially if you are entering a new market.

S+B: The finance function itself is often an area where synergies can becaptured during the postmerger integration. What sort of restructuringdid you do with your own department?ÁLVAREZ: At Abbey, we appointed one of Abbey’s people to financeand sent someone from Madrid to ensure we were getting the datawe needed and to consolidate the numbers.

The challenge here is that markets are local; you have to guardagainst the temptation to apply the same measures to everyone.For instance, if we were to force Abbey to conform to our finan-cial reporting system in Spain, we would lose the ability to com-pare Abbey with its peers in the U.K., which is the comparison wereally want.

S+B: Looking back at synergy capture at Abbey, is there anything youwould do differently today?


ÁLVAREZ: We were on track or ahead of target from the very begin-ning. But we remain very ambitious and continue to find ways tocut costs.

José Antonio Álvarez’s keys to successful M&A• Appoint an executive on a temporary basis to oversee cost cutting. This canmake the difference between failure and success for the deal.

• Set aside ample time for your M&A activities. Some of the time you investwill not pay off, but this is an essential part of the process.

• Adapt your global strategy to the region where you are doing your deal. Withcross-border transactions in particular, success depends on understandingnational differences.

• Fit your M&A strategy into a larger corporate plan. The availability of capital,internal management depth, and shareholder support are all relevant thingsto factor in.

• Have a numerical bottom line for what a deal must get you. It may be some-thing as simple as the market share you require in entering a new geographicor product area. +

Banco Santander 41

KURT BOCKChief Financial OfficerBASF SE

BASF:Reduced Cyclicality throughPortfolio Management

Preparation, composure, and determinationare critical during the merger process, saysCFO Kurt Bock.by Klaus Mattern


BASF USED TO be a typically cyclical chemicals company, its fortunestied to the vagaries of the global economy. When worldwide growthsurged, BASF prospered. When growth lagged, so did BASF.

But for the past few years, Kurt Bock, the BASF CFO,and his colleagues on the board have been telling investors anew story. Through a handful of key strategic acquisitions and tar-geted organic growth, BASF has reshaped its portfolio with theobjective of making its bottom line more resilient in tough eco-nomic times.

Bock has the numbers to support the new story. The companyhas significantly reduced its reliance on the cyclical chemicals busi-ness, while expanding its income from less cyclical businesses.Profits have grown steadily over the past five years, and BASF’s shareprice has outperformed most major stock indexes.

The most notable of BASF’s acquisitions was a set of game-changing deals in 2006 that included — extremely rare for a blue-chip company such as this — a successful hostile takeover ofEngelhard Corporation, the U.S. catalyst maker, for almost US$5billion. Engelhard was something of an American icon; CharlieEngelhard, who consolidated his family’s businesses to create thecompany in 1958, was the role model for Goldfinger in IanFleming’s famous James Bond novel.

BASF:Reduced Cyclicality throughPortfolio Managementby Klaus Mattern


BASF 45

Bock, 50, who prefers preparation when it comes to deal mak-ing, says M&A is just one, and perhaps the least used, instrumentin his toolbox. In any acquisition, especially a hostile one, you neverknow what you’re getting until you’ve taken the package home andopened it.

During an interview in his office in BASF’s international head-quarters in Ludwigshafen, Germany, Bock cited the steps taken tomake the Engelhard acquisition successful — including an integra-tion process that BASF started the day the deal closed.

S+B: You haven’t done a lot of acquisitions in the past few years, butthose you’ve done have been successful. Why doesn’t M&A play a biggerrole in your growth strategy?BOCK: Because acquiring a business doesn’t always create value forshareholders. It has to be done selectively.

S+B: When does it make sense?BOCK: When it’s a natural fit — something that you always want-ed to have or that complements something you already operate —or when it fills a gap in your portfolio.

Engelhard and Degussa Construction Chemicals, our twomajor recent acquisitions, represent the latter situation. They madeus nine to 10 times bigger than we were previously in those indus-tries. Each was a situation where we came to the conclusion thatthis is a growth and profitability story that we can really sell to ourshareholders.

S+B: Is it fair to say that you haven’t encountered any acquisitionpossibilities that seemed as good since 2006, when you completedthose deals?BOCK: That has to do partly with current market valuations butalso with the task we had before us. We had teams operating


around the world, integrating about 15,000 people. That’s anincrease in our workforce of almost 20 percent. It takes timeand work.

S+B: What is BASF’s process for doing acquisitions?BOCK: We have 13 operating divisions, and within those divisionswe have about 70 business units. These are the focus of our strate-gic discussions.

We go through a textbook exercise. We first have to understandour businesses in terms of their competitive advantage and how theyfit inside BASF in terms of growth and potential profitability. Thenwe decide where we want to grow, where we want to invest, andwhere we want to harvest the business. Only then do we considerthe best strategic measures to achieve our goals. The acquisition isjust one tool in our toolbox.

S+B: What was the strategic rationale for the acquisitions of Engelhardand Degussa’s construction chemicals business?BOCK: We looked at growth prospects, margin stability, and reduc-ing volatility — a very important issue for the chemicals industry.How do we reduce cyclicality and volatility? Both businesses are verystable in terms of earnings volatility. So that was a very importantfinancial consideration.

S+B: Let’s look at Degussa first. How did that come about?BOCK: We had already defined construction chemicals as aninteresting growth business in 2005. But it was a consolidatedmarket with few players — we weren’t optimistic that we’d find any-thing for sale. We told our people, “Nice idea, but there’s nothingon the market to buy,” and filed it away. When Degussa’s construc-tion chemicals business came up in December 2005, we were ableto react immediately — and assign a price to the company within

BASF 47

days. That’s our strength: to be prepared, to be proactive, and notto be surprised.

S+B: And what led you to Engelhard?BOCK: We conducted a very careful screening of many industries toidentify a company that could fulfill our acquisition criteria in termsof technology, market structure and attractiveness, and growthpotential. Catalysts was the right fit.

S+B: Initially, Engelhard rejected your advances. Were you surprised?BOCK: No, we weren’t. It was a few days before Christmas andeveryone was relaxed, and then we came in and said, “We wantto buy your company.” We weren’t surprised by Engelhard’sresponse. To start with, it’s management’s obligation to try to getthe highest price. They didn’t want to sell. So they tried to find abetter offer.

S+B: How did you respond, knowing that Engelhard was looking foranother buyer?BOCK: We felt we had made a good, attractive offer. We tried toremain the active party, to push and not to react. Having a team inEurope and another in the States helped us here: We could basicallycover the entire day. The Americans woke up earlier than usual, butby the time they arrived at the office, we already had a couple ofhours of work behind us, knew what was going on in the world, andcould initiate the next step.

S+B: Were you willing to raise the price?BOCK: Our position was that the offer was fair and that we had nointention of increasing it. The offer was out there for months, whichgot people nervous, especially the arbitrageurs. We did end upincreasing our offer slightly, and that helped complete the deal.


S+B: How do you determine what a final offer price should be, the lineyou won’t cross?BOCK: It’s based on our valuation and our sense of the strategicfit. As we all know, that number doesn’t come with a guarantee; it’sbased on a lot of assumptions. There are estimates for improvementswe can make in the cost structure, operations, and gross margins.But at the end of the day we have to earn our cost of capital. If wethink it’s just becoming too expensive despite all the strategic attrac-tiveness, we will walk away.

S+B: Can there ever be a strategic justification for paying too much?BOCK: People use that argument a lot. If the model doesn’t work,they say there’s a strategic reason and we will harm BASF’s future ifwe don’t do it, and so on. But I don’t buy it. If you can’t build thecase for how you’re going to make money, you shouldn’t go after acertain target.

There might be exceptions, but we try not to let emotions get inthe way. Engelhard was a good example of where we held back andsaid, “If we don’t get it — well, that’s life.”

S+B: Still, that must have been a bit of a nerve-racking time, the fivemonths in between your initial bid and when Engelhard accepted.BOCK: We were concerned that someone else would snatchEngelhard away by offering a higher price. But in a situationlike this, where we were making an unsolicited offer, the real riskwas execution.

Engelhard was a public company so we knew its financials,but we didn’t have a due diligence process. We couldn’t go into a dataroom, visit sites, talk with people, and understand what the risks andopportunities were. There was a limited management presentation— half a day — about their business. It was basically an investorrelations presentation. We could ask a few questions and that was it.

BASF 49

S+B: So you were buying something without knowing all the contentsof the box?BOCK: Exactly. There were no bad surprises, but that’s the majorrisk with this kind of offer.

S+B: How did you ensure that you achieved the synergies you expected?BOCK: When we launched the bid, we already had managementteams in place — what we call a shadow team that wouldeventually run the business in case management walked away.This is just a smart risk management practice. We appointed a proj-ect leader for the integration process — the same person who hadcoordinated the acquisition process. Then we formed cross-functional, cross-regional teams for everything from HR to IT tobranding.

It starts with the little issues. People need new business cardsand things like that. That was well prepared so that on Day One,when the closing happened, we could almost immediately initiatethose teams and really start the integration work. They had aboutfour to six weeks to identify the synergy potential, to reallyquantify it. Once it was agreed upon, we immediately started theintegration process. We did it in a pretty uncompromising way.

S+B: In what sense?BOCK: When you acquire a company, you have to say, “Thisis the way we do business.” And that’s what we did in Engelhard’scase. We determined right from the beginning that we wantedto move them onto BASF’s service platforms, and that’s whatwe did.

Once the acquisition happened, we didn’t need certain inde-pendent entities anymore. So I think it’s fair to say that the func-tional people took the biggest hit in terms of integration costs. Thebusiness people basically continued.


S+B: You’ve already said that Engelhard’s management didn’t like theidea of a change in ownership. How did the company’s employeesrespond to life under BASF?BOCK: I think our team did very well in communicating what wewanted to do, openly and intensively.

We had to let about 800 people go and relocate offices. Neitherof those things was fun. Our goal was to finish the integrationprocess as quickly as possible, because integration creates high levelsof uncertainty, and uncertainty is by nature bad for employees. Itweakens motivation. People are focused on the integration processinstead of on markets, customers, and operational issues. So we triedto get through that process as quickly as possible.

S+B: Has the Engelhard merger delivered what you expected?BOCK: Yes, absolutely. Automotive catalysts are a huge growthindustry around the world, driven by regulation. The Chinese areadopting the European and U.S. environmental regulations. WithEngelhard, we think we are a technology leader. And so far, BASF’scatalysts division has performed very well. Results in 2006 and 2007have been above what the old Engelhard management had plannedfor those years and above our own valuations. We’re very happy withwhat we got.

BASF 51

Kurt Bock’s keys to successful M&A• Prepare. When an opportunity arises, you need to know immediately whetherto grab it and how to go about it.

• Put a “shadow team” in place to manage the acquired business before you makeyour bid. That is your safeguard for fast integration of a hostile takeover.

• Communicate to the acquired company’s staff — but don’t make the mistakeof being too flexible. The employees you inherit should know what you’replanning to do.

• Understand that difficult decisions are necessary and make them swiftly. Notevery manager of the acquired company is going to agree with your decisionsanyway.

• Don’t become emotionally invested in the deal’s closing. When you do so,you increase the likelihood that you will pay too much or agree to otherunfavorable conditions. +

KLAUS KÜHNChief Financial OfficerBayer AG

Bayer:Preparation Enables Success

Thinking well beyond the purchase pricebefore the initial offer paves the way for M&Aexcellence, says CFO Klaus Kühn.by Christian Burger and Klaus Mattern


UNTIL RECENTLY, BAYER AG, the international pharmaceutical andchemicals giant, did not immediately come to mind in most discus-sions of global M&A players. The corporate icon and inventor ofaspirin has deep, stable roots in its home base of Germany. A giantFerris wheel–sized aspirin tab lights up the sky at Bayer’s headquar-ters in Leverkusen, and the company logo appears on the jerseys ofthe local professional soccer team. So it might come as a surprise todiscover that only about half of Bayer’s global workforce of 105,000employees have more than five years’ tenure, a clear indication of therapid pace at which the 145-year-old company is reshaping itself. Itmight also be a surprise to learn that Bayer CFO Klaus Kühn, askillful portfolio manager, has overseen a series of acquisitions anddivestitures since 2001 valued at more than e40 billion (US$63.2billion).

Kühn, 56, gets an early start each morning, either running orcross-training, and seems determined to keep up the pace throughoutthe day. He approaches M&A with the same discipline. His CFOmantra: Be well prepared before a potential deal arises; strike fast andkeep up the momentum until the deal is done; and be aware that asthe ink dries on the contract, the end game is just beginning. Kühn isconvinced that successful acquisitions require a clear, uncompromis-ing integration plan to be rolled out as soon as the deal is complete.

Bayer:Preparation Enables Successby Christian Burger and Klaus Mattern


Bayer 55

His approach seems to be working. After posting a loss in 2003,Bayer has been able to increase its profitability — and its share price— each year since. The acquisitions of Roche’s over-the-counterdrug business in 2004 and of Schering in 2006 were key moves inthe company’s strategic shift toward a greater focus on health care.

Kühn was appointed head of the group finance division shortlyafter joining Bayer in 1998. In May 2002, he was appointed to themanagement board. Strategy+business interviewed him in his officeat Bayer’s global headquarters.

S+B: When Bayer goes on the takeover path, what is your role?KÜHN: It depends on the size of the merger. If we do a big transac-tion, like the disposal of our diagnostics business for €4.2 billion[$5.4 billion] in 2006, I’ll be involved all the way through the finalnegotiations. That was our biggest disposal project. I’m not thatinvolved in smaller projects, though of course I am informed aboutthem and get updates on a regular basis.

S+B: What about Schering?KÜHN: That was our biggest transaction so far, but also one of ourquickest in execution. I was basically occupied with the project fromthe very first meeting right up to the closing of the deal.

S+B: The bidding for Schering began with an overture from Merck ofGermany, a competitor you knew well. What was your strategy?KÜHN: To present a strategically, socially, and financially convincingoffer within the shortest time possible. From the time that Merckannounced its bid, we had just 11 days to come up with a counter-bid and a full financing package.

S+B: Could you be confident in your numbers with so little time to ana-lyze the company and prepare an informed bid?


KÜHN: We had already done our homework well before the Merckoffer. Because we wanted to expand our health-care business, we hadstarted looking for potential targets specifically in pharmaceuticalsand OTC, the over-the-counter business.

We did a market review, a kind of competitive review, where welooked at which potential targets would fit well with our size, finan-cial capabilities, and business. When the Schering opportunity cameup, we didn’t have to do any deep analysis. It was already on our list.

S+B: But not alone on your list?KÜHN: No, it wasn’t. There were some other companies on the listat the same time.

S+B: What was your specific role in the Schering takeover battle?KÜHN: My job was to establish and coordinate the different projectworking groups, as well as to select and communicate with ourexternal advisors. We had working groups focusing on the strategicfit, business plans, synergies and valuation, transactional aspects,financing, and communication. Another important role for me wasto connect the project team with our CEO, Werner Wenning, aswell as with my other colleagues from the board.

S+B: Who usually makes the initial contact with the target company,and who did it in the Schering acquisition?KÜHN: It depends on the size of the deal. With Schering, our CEOmade the approach.

S+B: How does your role differ from that of the CEO on a big projectlike Schering?KÜHN: With Schering, the CEO generally did not participate in thedaily project team meetings. His role was more focused on the dis-cussions and negotiations with external parties.

Bayer 57

In the project meetings, the team often needed guidance. I madesome decisions, but the CEO needed to make others and was usuallythe one to contact Schering. The bottom line is that the two of uscommunicated on a daily basis, sometimes even every hour, to makedecisions. When necessary, we would convene a board meeting.

S+B: Besides the pressure of time, what was the biggest challenge in deal-ing with Schering? After all, you were the white knight working on afriendly deal.KÜHN: We had to get 75 percent of Schering’s shareholders on ourside. The day after we went public with our offer, Merck accepteddefeat. But to our surprise, they came back at the end. Coping withan interloper so late in the game was a real challenge, too.

S+B: What clinched the deal for you?KÜHN: The best offer combined with our total commitment anddetermination to succeed.

S+B: Was there anything that was nonnegotiable for you in theSchering talks?KÜHN: One example is that, once the deal was closed, we did notdiscuss changing our group structure, which is based on a holdingcompany at the top over our three subgroups — HealthCare,CropScience, and MaterialScience — and our service companies. Itwas clear from the beginning that Schering would become part ofBayer HealthCare and that some of its functions, like the financefunction, would be distributed to corporate headquarters. Thesekinds of issues were nonnegotiable.

S+B: Did that create conflict in the talks?KÜHN: No, it created clarity. And the earlier you create clarity, themore benefits you get out of the integration process.


S+B: You’ve stressed the need to move fast, to keep the pressure on. What’swrong with moving slowly? The process is so complex. Why is it a disad-vantage to take your time?KÜHN: First of all, we had no choice in the Schering process. Weonly had a limited amount of time. But generally, in all M&A trans-actions, the threat of an information leak increases with each day thatpasses before an announcement. Preventing that from happeningis essential to success. You have to have enough time to do thingswith a certain degree of diligence, but I am a strong believer inmomentum.

S+B: What else can go wrong if the process takes too long?KÜHN: People lose focus and get distracted if it takes too long, andthat adds to the uncertainty, slowing the momentum. This canbecome a threat to the transaction. If negotiations drag on too long,it usually means something is wrong with the deal. That’s one rea-son some deals fail.

S+B: When is it right to walk away from a deal?KÜHN: You always have to be careful that you don’t get carried awayby the desire to do a deal. That’s very important for a CFO. Youhave to examine your position and put your ego aside in the bestinterests of the company. If you walk away, it’s usually because thebusiness case doesn’t make sense. You have to acknowledge that andmake the right decision.

S+B: Have you ever walked away from a deal?KÜHN: Of course, several times. At the time we did Schering, wewalked away from another possible acquisition. We were workingon two deals simultaneously, but focusing on Schering.

S+B: Do you walk into a deal knowing how much you’re willing to pay?

Bayer 59

KÜHN: Usually you have limits that are based on your own evalua-tions and you’ve set your price targets, though that’s not the price youput on the negotiating table. For the Schering transaction, itwas not a problem to come up with the right price. First of all, we didour own valuations.We knew what the unaffected share value was; wedid our DCF [discounted cash flow] valuations and made our syner-gy calculations, so we knew how much Schering was worth to us.

S+B: And Merck had bid €77 [$92] per share.KÜHN: That was a very important indication. There was a price forSchering in the market. A lot of hedge funds immediately investedin Schering and the price rose to around €82 [$101].

But our pricing range was fairly narrow. Whatever the finalprice might be, we had to make sure that we didn’t pass all theprofits on to the sellers; we had to keep part of the synergies forour shareholders. At the same time, we didn’t want to get into a bid-ding contest by just adding on another dollar. If someone startsbidding at €77 [$92], it’s quite likely that they are prepared topay more.

S+B: There’s always a bit of give-and-take in making a deal happen.What compromises did you make to get Schering on board?KÜHN: We have a good track record on past integration processes,and at the very beginning we said we would have a fair process forselecting personnel. It was important to get them on board, to getthem to agree that combining these two businesses made sense andboosted the potential for growth and success.

There were also what we call “soft factors,” which helped getbuy-in from Schering management. We said we would preserve thename Schering and that Berlin would become the headquarters forour worldwide pharmaceuticals business division. These soft factorswere very important. And of course we kept our word.


S+B: You predicted that you would achieve synergies of around€700 million [$891 million] with the Schering acquisition. Is thatpanning out?KÜHN: After we did a bottom-up calculation, we increased our syn-ergy targets to €800 million [$1.1 billion]. And at the same timeour one-time charges, which we estimated at €1 billion [$1.3 bil-lion], did not increase.

In takeovers or acquisitions, you always have to reckon with somekind of business disruption, losing some business because the mar-ket isn’t as convinced of the merger as you are internally. In the caseof Schering, this didn’t happen; there was no disruption of business.

S+B: You plan to achieve your synergy target by 2009, so you’re still inthe middle of it. Tell us about that process. What exactly are you doingto extract those savings?KÜHN: First we broke it all down into specific targets. How muchshould come from R&D, sales, general administration, and productsupply? How much should come from the U.S. and from Europe?Then we sent these benchmarks down to the units and down to thecountries. They reviewed our estimates and sent back their break-down on what they expected to achieve, and how, in 2007, 2008,and 2009.

This gives us a detailed step-by-step implementation plan, anIT-supported toolbox, which all the line managers have to sign offon. Thus they confirm their responsibility for very specific steps.Then we double-check everything. We eliminate double account-ing, which usually happens in these situations. And then we comeup with a database of all these measures on a worldwide basis. Atthat point we can start tracking the implementation of these syner-gies. And that’s what we do on an ongoing basis. We expect toachieve 80 percent of the €800 million [$1.1 billion] by the endof 2008.

Bayer 61

S+B: So you’re actually ahead of schedule?KÜHN: Yes — and that’s because we made some essential decisionsvery early, such as filling management positions. You have to havepeople in place who can take responsibility and deliver on the syn-ergies, to guide and steer the process. And you have to decide onlocations. These things are critical and can affect the atmosphere inthe company. People want to know if they will be living and work-ing in Madrid or Barcelona, Paris or Lille, Leverkusen or Berlin.

S+B: What happened during the integration of the finance function?You said you had clear principles about what to do. Did you imposethese on Schering?KÜHN: It lies in the nature of the business that the corporate financefunctions we have — finance, treasury, taxes, pension asset manage-ment, corporate external accounting, consolidation — are all donehere at headquarters and not at our subgroup Bayer HealthCare,where Schering would be integrated. So there was not much roomfor the former Schering finance as a whole. But that’s a condition ofthese kinds of functions that you conduct on a global basis. This wasone of the givens, as we say, which we would not change.

S+B: Is it possible to move too fast during integrations?KÜHN: It is possible, but I don’t think we did. You have to make atime line and set specific handover dates for various functions. Youalways agree on handover dates; that’s part of the methodology.

In the first half of 2007, we had 60 internal mergers and acqui-sitions. We had about 120 integration teams, so that’s quite com-plex. We compiled about 78 handover documents for the differentbusiness units and regions. And the global project managementoffice alone had about 60 meetings.

You have a checklist, and each item is named and has to beaddressed. We have final lockdown meetings where we look at the


interfaces. At this point, we’ve made all the changes. But will theinvoice work? Will the next report work because all the necessarythings have been established and are working well on a worldwidebasis? It’s not just about managing specific issues; it’s about how tomanage a complex network of tasks on a global scale.

S+B: Besides the big acquisitions you’ve done, you’ve also completed somelarge disposals, like the Lanxess transaction in 2004, in which you spunoff chemical lines and approximately one-third of your polymer activi-ties. How does the CFO’s role differ in a takeover situation like Scheringand a spin-off like Lanxess?KÜHN: On an acquisition, the hardest part of the work comes afterthe closing: the integration. However, my main task in finance endswith the closing of the deal. The integration phase becomes largelythe responsibility of the business units. But in a de-merger, the bulkof the workload comes before the closing, since the business hasto be carved out, more or less. That’s why spin-offs require muchmore time and are more demanding for the finance and accountingfunctions.

Lanxess was even more demanding for me as the CFO because itrequired financial and organizational restructuring. Lanxess didn’t existbefore we defined what it was. We created the company from scratch.Purely from the CFO perspective, it was an even bigger project.

S+B: Do you get more ideas for potential acquisitions from your ownteam or from investment bankers and outside advisors?KÜHN: It’s usually a mix. We always get ideas from meeting withinvestment banks, but at the end of the day, the vast majority oftransactions that we do are generated from our own ideas.

You have to rely on your own expertise. This holds true for iden-tifying and evaluating potential targets as well as for preparing andimplementing the integration.

Bayer 63

Klaus Kühn’s keys to successful M&A• Make haste. Speed propels deals; lethargy kills them.• Set limits. Certain decisions shouldn’t be open to negotiation —or even discussion.

• Don’t underestimate the role that nonfinancial benefits (“soft factors”)can play in clinching the deal.

• Have a postmerger integration plan ready for the company you’re buyingas soon as you complete the transaction.

• Leave your ego aside. Emotion can cause you to pay too much and fail inyour fiduciary duty. +

ANDREW BONFIELD

Andrew Bonfield:The Fine Art of Drug-Industry M&A

The pharmaceutical industry’s poor track recordin acquisitions is an argument for proceedingwith caution, according to a former CFO at twoof its leading companies.by Robert Hutchens and Justin Pettit

Reporter: Robert Hertzberg

ANDREW BONFIELD, 45, knows his way around pharmaceutical-company mergers. He was chief financial officer of U.K.-basedSmithKline Beecham PLC when it merged with Glaxo WellcomePLC in 2000 to form what was then the world’s largest pharmaceu-tical company. And until early 2008, he was the CFO of Bristol-Myers Squibb Company, an organization that transformed itself in2001 through the sale of its Clairol unit to Procter & GambleCompany for US$4.95 billion and the acquisition of DuPontPharmaceuticals for $7.8 billion.

In an interview with strategy+business, Bonfield was modestabout the status of the CFO at a pharmaceutical company (“you’relow down in the pecking order”) and frank in saying the job is asmuch art as science.

Bonfield, who was born in Wimbledon, England, and standswell over six feet tall, has a ready wit, a generous laugh, and asonorous voice that wouldn’t sound out of place on the Londonstage. He spoke with s+b about why it is so hard for pharmaceuticalcompanies to make acquisitions work, and why it is inevitable thatthe industry will keep on trying.

S+B: There haven’t been any blockbuster deals in pharmaceuticals since2002, when Pfizer Inc. announced that it would buy the Pharmacia

Andrew Bonfield:The Fine Art of Drug-Industry M&Aby Robert Hutchens and Justin Pettit


Andrew Bonfield 67

Corporation for $60 billion. Did the Financial Times have it rightnot long ago when it said of drug-industry mergers, “Bigger isn’t neces-sarily better”?BONFIELD: I’d agree. The major M&A transactions in this industryhave not been successful in delivering shareholder value. The issueis productivity in the R&D pipeline. Productivity in research doesnot necessarily correlate to size.

S+B: Have the mergers themselves been responsible for those companiesbecoming worse at getting drugs to market?BONFIELD: Well, there’s a famous comment by Sir RichardSykes, the former chairman of GlaxoSmithKline, that scientistsare sensitive flowers. So yes, there is a disruptive element to the busi-ness caused by an M&A transaction. And then also there is thechallenge of managing innovation in a huge company — it’s so dif-ficult to understand exactly what’s happening throughoutthe operation.

In some parts of the business model, scale is useful. It helps onceyou’re in development with a drug, for instance. However, for thediscovery of new molecules, that is not necessarily a place wherescale works to your advantage. Hence, biotechs survive versus bigpharma companies.

S+B: If I were an investor in a drug company, I’d regard that as apretty good argument not to support any big acquisitions it might make.BONFIELD: That concern has actually slowed a lot of the M&Aactivity that is inevitable given how fragmented the industry is. Imean, Pfizer is the world’s largest pharma company, but it has lessthan 10 percent of the total market. Average market share, for mostcompanies, runs between 3 percent and 6 percent.

S+B: Are you saying that consolidation is inevitable?


BONFIELD: There is a need for it because, if you look out betweennow and 2012, 25 percent of current brand-name prescription drugsales will disappear to generic competition. The regulatory environ-ment’s getting tougher. And the pricing environment is going to gettougher given that there is only one market left for free market pric-ing of pharmaceutical products, which is the U.S.

The issue is the track record of mergers — their having not nec-essarily paid off — and therefore investors being very concernedwhen companies talk about M&A. When I joined Bristol-MyersSquibb in September 2002, the word consolidation was forbidden inthis industry. You didn’t go near it. Now there’s a sense that theindustry needs to change. I’m not sure what the trigger will be. Butbig mergers are going to happen.

S+B: Going back a generation, has there been even one big drug-industry merger that has worked?BONFIELD: Probably not. All the companies that have tried have hadincredibly difficult periods after their merger events. What’s tendedto happen in this industry is that companies have done mergers froma position of weakness rather than from a position of strength. It’stended to be, “Oh, something’s going to happen two minutes downthe road, and I’m not ready for it. What can I do to make it happennow, rather than own up, rather than be honest with the Street andsay I’m not going to grow 15 percent compounded annually?”

I think as Wall Street’s expectations come down for the industry,there’s going to be less of that. In particular, I think there’s an oppor-tunity for M&A to be done in a different way, which may add morevalue than it historically has.

S+B: What are some of these M&A offshoots that could add more value?BONFIELD: Well, take Roche, which was the top-ranked pharma-ceutical company in the late 1980s, thanks to the success of Valium.

Andrew Bonfield 69

It went right down after that, but has come back as one of thehighest-rated stocks in the industry, in large part because of itsmajority stake in Genentech. This is not to say it hasn’t gonethrough some peaks and troughs. But Roche’s decision to keepGenentech as an independent biotech company, with Roche as theholding company, has been an incredibly successful M&A-typetransaction and partnership.

S+B: Let’s talk about some of Bristol-Myers’s acquisitions, which youknow well because of the time you spent at the company. The biggest wasBristol’s $7.8 billion acquisition of DuPont Pharmaceuticals in 2001— something that happened before your arrival. Bristol-Myers’s stockperformance postmerger would suggest that didn’t work out entirelyas planned.BONFIELD: Yes. Well, there were other issues there. An accountingscandal probably didn’t help!

S+B: What if you just look at the acquisition in isolation?BONFIELD: That acquisition probably did no better than achieve itscost of capital. It wasn’t a value-destroying deal, but it was econom-ically marginal at the end of the day. And part of the reason may bethat Bristol-Myers, many people would say, overpaid.

S+B: Did Bristol-Myers’s purchase of Adnexus in 2007 for $415 millionsignal a reentry into the M&A realm?BONFIELD: A little bit, yes. Adnexus operates in the area of biolog-ics, which are large proteins that occur semi-naturally and that fightdisease differently than chemicals. While the tendency in the indus-try has been to acquire rights to a product through a licensing trans-action, a lot of biologics companies had been bought out in theprevious year.

For instance, Domantis, a biologics company that we were


collaborating with, had already gone to GlaxoSmithKline. Therewas a bit of a land grab going on. We needed to be part of that space.

Adnexus’s venture-capital backers were also very aggressive. Atthe same time that they were negotiating with us, they were filing todo an IPO. Obviously, they were trying to keep some competitivetension in the process.

S+B: It sounds like Adnexus was in a good negotiating position. Do youfeel comfortable, in retrospect, with the price Bristol-Myers paid?BONFIELD: I think in an industry like this, an acquisition of a plat-form technology for less than $500 million is almost a bet. AtBristol-Myers, we were spending nearly $3 billion a year on researchand development. A lot of that was placing relatively small bets onthe possibility of getting a product approved by the FDA.

In most cases, the really promising things a pharmaceuticalcompany starts are 10 to 12 years away from ever coming to mar-ket. In that situation, a discounted cash flow valuation is com-pletely meaningless. You almost have to pass the red-face test in thatenvironment. Someone may ask you, “Is this what you spent a bil-lion dollars on?”

S+B: If you can’t use a CFO’s traditional valuation tools for deals, whatcan you do?BONFIELD: You can work out all sorts of fancy Monte Carlo simu-lations and valuations — it’s just not going to work. At the end ofthe day, with a product or technology that isn’t yet in the market, itcomes down to a matter of judgment. You look at other factors:How does the multiple compare with those of other companies thatare already public, or, in the case of Adnexus, what is this value rel-ative to the indicative IPO valuation?

A deal like DuPont, on the other hand, would have been donepurely on a net present value basis: Here’s what the bottom line is.

Andrew Bonfield 71

This is what it means from an earnings-per-share perspective. Thisis what it means from a cash flow perspective. This is what it meansfrom a return-on-investment perspective.

S+B: Because it’s already a business.BONFIELD: Right, it’s a business. Where it is so early and so faraway from ever being a business, it’s more a matter of “Can I affordit, and if I lose the bet on this, what does it mean relative to theother bets I’m placing in my portfolio?”

This industry is all about probabilities. I’ll give you an example.When I left Bristol-Myers, we had three compounds that were inPhase III, which is the last stage of clinical testing. The clinical tri-als for those three compounds were going to cost us $2 billion. Theywere all in what we would call the primary care space, two diabetesand one cardiovascular product. The probability of getting all threeto market was probably about 10 percent. The probability of gettingtwo out of the three was probably about 40 percent. The probabil-ity of getting one was 80 percent. But if one of them were to becomea large, blockbuster product, it would pay for our $2 billion invest-ment several times over.

S+B: How did you as a CFO square the reality of how the industryworks with your responsibilities as the company’s financial steward?BONFIELD: The thing you have to deal with is ambiguity. You haveto realize that even your best scientists don’t know what’s going tohappen. At a previous job in the pharmaceutical industry, I remem-ber we were looking at an opportunity to license a new drug whosepeak sales potential we estimated at less than $1 billion. It is now thebest-selling drug in the world, with $12 billion in annual revenue.

S+B: Are there industries where the CFO has an easier time predictingoutcomes, including the outcomes of acquisitions?


BONFIELD: Any consumer goods industry. If you’ve got a consumerproduct that’s got a market share, you can look at it and say, “Gee,we can take this from 15 percent to 35 percent.”

S+B: When the reverse is true — when you have a business that’s losingshare — presumably you have to invert the thought process. What’s thekey to doing a successful divestiture?BONFIELD: It’s the ability to identify those businesses to which youare no longer adding value. Bristol-Myers’s consumer business,which the company sold to Novartis in 2005, was a classic case inpoint. Excedrin was a brand that was at one time the number oneanalgesic in the United States. Tylenol took over, and basicallythings had just gone backward for years. It became obvious thatExcedrin was going to start losing shelf space.

The CFO trick is always to say, “Hey, come on, this isn’t goinganywhere, and it’s better off in somebody else’s hands. Let’s push thebutton today.” So it’s that identification of the potential, seeingwhere the strategic value is for other buyers, and trying to make surethat you keep that engaged through a process.

S+B: The drug industry is a little like high technology in that everyoneis looking for the next big thing. Does concern about missing the boatsometimes have a negative impact on merger decisions in your industry?BONFIELD: The biggest drug merger I was involved in is an exam-ple of that. It was right around the time of the first decoding of thehuman genome, and there was all this talk about personalized med-icine, or pharmacogenomics. People believed that with the decodingof the genome and new research technologies, drug discovery wouldbecome much more of an industrial-type process — something youcould reliably engineer, instead of chance upon. There was thereforethe need to invest in these technologies and be part of the land grabbecause within the next decade or two, most of the medicines that

Andrew Bonfield 73

would be needed to treat disease would have been discovered byusing these tools.

Amid that excitement, the merger was sold strictly as a research-based deal — the companies needed to combine their money toinvest in research. But the reality is that personalized medicine is stillin its infancy. And the shareholders who supported the deal havebeen saying ever since, “Where’s the pipeline?”

S+B: Was everyone from both management teams equally caught up inthe research rationale?BONFIELD: Actually, no. Some of us supported the research ration-ale, but others of us also wanted to be able to tell investors the manyways in which the deal made financial sense.

S+B: So you gave in and only told the research story?BONFIELD: We did. Our feeling was it’s not the end of the world.We’ll survive this one to fight another day.

S+B: What did that experience teach you?BONFIELD: To try to sell the deal on many strategic points, notjust one.

The pity is that, financially, this deal we’ve been talking aboutwas impeccably executed. The CEO did an outstanding job at driv-ing cost out of the business, driving performance, and maximizingthe value of the products in the merged company’s portfolio. Thereturns have been unbelievable. If the merged company had beensold as a purely financial deal, the company probably could havedone another one.


Andrew Bonfield’s keys to successful M&A• Base any acquisition you make on several strategic points. This increases thechances that it will be seen as successful along at least one dimension.

• Declining assets should be divested, even if they’re still generating cash.• Know where the scale brought about by M&A is useful — and where it isn’t.Bigger isn’t always better.

• Don’t look for traditional measures of financial value where there are none.Early-stage companies must be evaluated using different criteria.

• Sometimes an acquired company does best if it’s allowed to operate indepen-dently. Vertical integration isn’t always the way to go. +

Andrew Bonfield 75

KARL-GERHARD EICKChief Financial OfficerDeutsche Telekom AG

Deutsche Telekom:Never Make Acquisitions DrivenSolely by Finance

Successful integration requires clear ownershipin both the business and the executive suite,says CFO Karl-Gerhard Eick.by Irmgard Heinz and Klaus Mattern

Reporter: Julia Werdigier

IT IS AN axiom of corporate M&A wisdom that you’re morelikely to stumble than surge across the finish line. But often it isthose acquirers that focus on companies in their own field, thus tar-geting improved operational efficiency, that have the best chancesof winning.

That’s the philosophy of Deutsche Telekom, which has usedM&A to burst past its state-owned roots and become a global leaderin telecommunications. Today, about half of the company’s revenuecomes from international sources, thanks to its acquisitions of compa-nies such as VoiceStreamWireless in the U.S., One2One in the U.K.,and Magyar Telekom in central Europe. Those acquisitions have alsohelped make Deutsche Telekom’s wireless brand, T-Mobile, as famil-iar to the lawyer in Seattle as it is to the business executive in Munich.

With revenues of US$95 billion, a strong balance sheet, and ahealthy cash flow from operations, Deutsche Telekom seems to beprepared to play an active role in market consolidation. And ChiefFinancial Officer Karl-Gerhard Eick seems ideally suited to thetask ahead.

The 53-year-old Eick is deputy CEO and has been the com-pany’s CFO since 2000, overseeing more than two dozen deals inthat time. He is also on the boards of Deutsche Bank, CorpusSireo,and the Bayern Munich soccer club. In an interview with strategy+

Deutsche Telekom:Never Make Acquisitions DrivenSolely by Financeby Irmgard Heinz and Klaus Mattern


Deutsche Telekom 79

business at Deutsche Telekom’s Bonn headquarters, he spoke withclarity and conviction about what he called “the core principles ofsuccessful M&A.”

Kevin Copp, 43, an international lawyer and head of DeutscheTelekom’s M&A function, joined in the conversation and shared hisperspective on managing deal-related risks.

S+B: It’s been a while since Deutsche Telekom has done a blockbusterdeal. What part does M&A play in your current strategy?EICK: M&A always serves two strategic goals for us: to drive consol-idation in developed markets and to drive growth.

In-market consolidation — strengthening our position in placeswhere we already operate — is still our number one priority, becauseconsolidating creates the most synergies. We did that in Austria afew years ago when we bought Tele.ring and effectively reduced thenumber of operators in the market. We did something similar in theNetherlands last year, and we enlarged our footprint in the U.S. byacquiring SunCom Wireless.

The other thing acquisitions help us do is become established inadjacent, underdeveloped markets and participate in their growth.This was the main rationale behind our recent investment in theGreek telecommunications operator OTE. OTE’s strong presencein southeastern Europe helps us to significantly enlarge our foot-print in these highly attractive markets.

Finally, size matters, particularly in the telecommunicationsindustry. Gaining a critical mass of subscribers is important becauseit gives us a better bargaining position with suppliers, especiallyhandset and network infrastructure equipment makers.

S+B: What is the most important determinant of M&A success?EICK: “What are the synergies?” is always the core question. Two-thirds to three-fourths of all acquisitions fail to meet their targets.


When acquisitions do well, it’s because the acquirer judged the busi-ness model correctly and integrated the companies effectively. That’sa rule that I don’t think will ever change.

S+B: So what is the key to capturing synergies in an acquisition?EICK: Early preparation — you have to plan the integration thor-oughly before the acquisition is complete. When the deal closes, it’salready 70 percent predetermined to be a success or a failure.

The closing is the point at which all the legal problems aresolved and you’ve got all the approvals you need. If you aren’t ableto flip the switch and get started at that moment, it’s too late. Thethings you don’t achieve in the first six months will likely never beachieved — not to mention the things that take longer than a year.You have to start immediately.

S+B: As CFO, you clearly have a role in quantifying the cost savingsyou’d like to realize. Is it also your job to make sure those savingshappen?EICK: No. This is where the business unit that will be running theacquired property comes in. You never want to make an acquisitionthat is driven by the group CFO alone — never! Otherwise peoplewill say at some later stage, “It’s not my problem. I wasn’t responsi-ble for the acquisition.” If we come up with an acquisition candidateand the responsible board member from the mobile communica-tions, broadband/fixed network, or business customers operatingsegment says, “Hmm, I don’t know about this one,” the smart thingis to leave it alone.

S+B: Are there other things that are equally important in making anacquisition successful, things you would advise every CFO to do?EICK: There are a few. The first is to be careful about delegatingresponsibility. By this, I don’t mean to say that as CFO, you need to

Deutsche Telekom 81

personally handle the details of capturing synergies. That effortshould rest largely with the head of the business unit, as I’ve men-tioned. Still, acquisitions are the most serious steps most companiestake. A member of the board must take personal responsibility, atleast for the first year.

Second, your investor relations department must have all thedetails ready for you, the CEO, and the responsible board members,so everyone has a chance to sell the deal to the markets. Right fromthe beginning, you should be asking your experts in the businessunit, M&A, legal, treasury, and investor relations not only how bestto structure the deal, but also how best to sell the deal. Nothing isworse than an acquisition that flops in the capital markets. For alisted company, it can be very damaging.

Third, the additional value of your acquisition for your share-holders is dependent not only on the synergies realized, but also, to agreat extent, on your own cost of capital. When selling the deal tothe markets, you need to keep that in mind too. The financing of thedeal is hugely important.

S+B: In 2004, you decided to reintegrate the 25 percent stake in T-Online that you had floated. That wasn’t a typical acquisition, was it?EICK: T-Online was more a merger than an acquisition — a mergerof a company in which we already owned a 75 percent stake. TheInternet and fixed-line market had changed toward integrated prod-uct bundles and services. To respond to these changes, we wanted tocreate a single business model with an integrated market approachto secure a leading position in market share and innovation, and togenerate synergies of about $1.2 billion by building out the relation-ship with our customers in the best possible way. This integrationof the business models was not possible with a publicly listed com-pany with minority shareholders. Therefore we decided to mergeT-Online International [TOI] AG into DeutscheTelekom [DT] AG.


There were two unusual consequences of that deal. First, wedidn’t have to do a lot of due diligence. This was, after all, a companywe had founded and whose shares we had floated on the market,so we knew the brand and the business model very well. In othercases, due diligence can take a long time as you get familiar witha company.

The other thing that made the T-Online merger unique washow German takeover law affected the transaction. The exchangeratio regarding the shares of DT AG and TOI AG was determinedby both parties on the basis of 10-year business plans and wasapproved by a court-appointed independent accountant. To reducethe uncertainty for the TOI minority shareholders during theperiod between the announcement of the deal and the time theexchange ratio was determined, we voluntarily offered to buy theirshares in cash at the price they were worth prior to the announce-ment of the deal. As a consequence of the exchange ratio and themarket price for DT’s shares at the time, the value of the deal for theTOI shareholders was below the value derived by the 10-year busi-ness plans and even below the value of the voluntary offer. It was asource of tension that you do not have in a typical acquisition, inwhich you see a market capitalization, you pay a premium, andeveryone goes home happy.

It was clear that we would face a series of lawsuits. What wedidn’t expect was that the case would go all the way to Germany’sFederal Supreme Court, and that it would take half a year to get adecision. That was a useful thing to realize, that a risk so remotecould actually materialize. Even the slightest risks deserve a place inyour financial models.

S+B: As the biggest telecommunications provider in Europe, DeutscheTelekom had a very different culture than T-Online, an Internetprovider. Did this create any integration challenges?

Deutsche Telekom 83

EICK: It did. T-Online, for all practical purposes, was a startup —something of a speedboat. It got its products to market veryquickly. The employees were very dynamic. The age structure wascompletely different. And the infrastructure at T-Online was devel-oped from scratch — its billing system was just five years old.Deutsche Telekom’s fixed-line business, by contrast, was a tanker.You don’t operate tankers and speedboats the same way.

S+B: Did you have any trouble getting T-Online employees to stay?EICK: It was a challenge. Many of the T-Online employees liked thestartup environment — and they wanted to remain independent.We left T-Online as a business unit and implemented a steeringmodel that suited their wish for their own identity and our synergygoals. To employ the innovative spirit of the T-Online people for theentire group, we made T-Online the basis of a newly formed prod-uct innovation and development unit. We also made the T-Onlinepeople aware of the career development opportunities that existed atDeutsche Telekom.

S+B: Kevin, we’ve touched on some key risks one faces in these transac-tions. What are your keys to circumventing these?COPP: One key is having a clear process for handing over responsi-bility and capturing corporate learning. If you fail to get newlyformed businesses in a position where decisions can be based on allthe facts available, your integration is bound to fail.

That’s why we recently created postmerger integration guide-lines. Several months of work went into this process, duringwhich we addressed every conceivable aspect of postmerger inte-gration with the goal of establishing standard processes and tools.Since value creation is the ultimate objective, we obviously paidspecial attention not only to identifying synergies pre-transactionbut also to tracking them post-transaction.


Every transaction will have its own peculiarities, but having a setof resources that can be adapted as necessary allows us to hit theground running. Our recent acquisition of Orange Netherlands andits integration with our mobile operations in the Netherlands is theperfect pilot project to test the new guidelines.

EICK: I’d add that it’s key to have all your functional expertsinvolved in the process and even to receive negative feedback on thedeal right from the start. As a board member, you’re promoting thedeal and pushing it hard. You need a counterbalance to that. Youneed the people who say, “Stop. No further. It won’t work this way.”These people are extremely important, even if they’re unpopular.

S+B: You need the naysayers?EICK: Absolutely. Acquisitions set off a variety of dynamics. Thereis an enormous push to get the deal done. However, many of thosepeople who are pushing aren’t responsible for the integration and theafter-close performance. So you definitely need the naysayers toreduce this pro-deal bias. In fact, I’d add that as another principle tomy set of core principles of successful M&A: If you read the writingon the wall too late, it will cost you your job.

Karl-Gerhard Eick’s keys to successful M&A• Don’t make acquisitions driven solely by the finance department. Withoutclear business ownership, the deal is bound to fail.

• Rely on your functional experts to be risk-comprehensive. Even the slightestrisks should be factored into your models; they can materialize.

• Plan the integration before the close and make an executive board memberpersonally responsible. In the first year, too much is at stake to let an integra-tion effort go off in the wrong direction.

• Know the story you’re going to tell the capital markets — know it cold andknow it early. There’s nothing worse than a deal that flops in the capitalmarkets.

• Grow your intellectual capital. Document and share your merger and integra-tion knowledge to enhance your internal competence. +

Deutsche Telekom 85

DAVID HAUSERChief Financial OfficerDuke Energy Corporation

Duke Energy:The Value of Relationships in M&A

Connections and strong people are thekeys to success, says CFO David Hauser.by Thomas Flaherty


U.S. UTILITIES WERE once considered safe investments for widows andorphans. But the Enron scandal and escalating regulatory demandsfor more efficiency, greater safeguards, and cleaner forms of energyhave added uncertainty and risk to a historically stable sector.

One result has been an exponential increase in M&A activityas utilities have sought to gain both scale and new capabilities.Two years ago, Charlotte, N.C.–based Duke Energy Corporationwas after scale when it paid US$13.9 billion for the CinergyCorporation, a utility in the American Midwest. Cinergy was ahuge bet for Duke — one that almost doubled its customer base,expanded the company into three additional U.S. states, and (tem-porarily, at least) increased Duke’s assets to more than $70 billion.

If the Cinergy integration has gone well — and the rise inDuke’s stock price post-acquisition suggests that it has — part of thecredit must go to David Hauser, Duke’s chief financial officer.Hauser (pronounced “HOO-zir”) grew up near Duke’s headquartersand has been with the company since the mid-1970s, the last fouryears as CFO.

“I know a lot of people, and a lot of people know me,” Hauser,56, says in his understated way. “If I were picking one thing that I’mproud of and think is important, it would be my ethics and credi-bility. I think people believe me when I’m talking to them.”

Duke Energy:The Value of Relationships in M&Aby Thomas Flaherty


Duke Energy 89

Hauser’s credibility and gracious manner (“stress isn’t one of mybig issues; I’m very fortunate in that way”) are valuable assets at atime when Duke is looking for partners — to either collaborate withor buy outright. The importance of personal relationships in M&Awas one of the main things that Hauser emphasized when strategy+business sat down with him at Duke’s headquarters. The conver-sation also provided a clear picture of the M&A landscape in theenergy industry.

S+B: Duke has reshaped itself with a couple of huge transactions in thelast two years — the acquisition of Cinergy in 2006 and the spin-off ofthe natural gas business as Spectra Energy in 2007. Is all of this activ-ity a sign of things to come in the energy industry?HAUSER: I do think you’re going to see a significant reduction in thenumber of independent utilities in North America. And that’s prob-ably going to happen in three ways.

Acquisitions by specialized infrastructure funds, which can raisecapital relatively cheaply and are flush with cash, will be one way.Acquisitions by European energy companies will be another; theyare benefiting from the strength of the euro. The third is U.S. com-panies coming together. Our deal with Cinergy is probably themost successful of those in recent times. There are other proposeddeals in the industry that haven’t worked, usually because of regula-tory issues.

S+B: How large do the regulators loom when you are contemplatinga deal?HAUSER: When we brought Duke and Cinergy together, we had toget approvals from five states on our plan, which included a first-year reduction in electricity rates. We also had to get various fed-eral approvals.

First and foremost, the regulators’ concern is for the customer.


But they’re also interested in the success of the company, becausethey want you to be a viable entity.

The issue is what’s the benefit to the customer and what’s thebenefit to the shareholder. With Cinergy, there were potential syn-ergies that were of huge value. The question was, Could we achievethose, and if so, how would we split the savings between sharehold-ers and customers?

S+B: Are the buyers competing with you for deals subject to the same reg-ulatory constraints?HAUSER: Not always. It depends on the category the acquirer fallsinto and on the particulars of the target. For example, right now aninfrastructure fund led by Australia’s Macquarie Bank is in theprocess of buying Puget Energy in Washington state. There won’t beany consequential synergies to give to the customer in that case. Butwhat the state is getting out of it, if you look at it from the regula-tors’ perspective, is an assurance that Puget Energy will get the cap-ital it needs.

S+B: Besides returning savings to consumers and shoring up a utility’scapital base, what are regulators looking at when they evaluate prospec-tive deals?HAUSER: For starters, how energy efficient you are and how muchyou’re moving toward renewable sources of energy. The regulators,the state legislatures, and the governors are going to look favorablyupon that. The issue is that for most Americans, the price of poweris cheap relative to their income. We don’t tend to worry about itwhen we walk out of a room and leave the TV on, or the lights, orwhatever. We don’t worry about it because it costs us a quarter or abuck or we don’t even know what it costs us.

What that means is that utilities are not going to persuademost people to do things differently by asking them. We’ve got to

Duke Energy 91

have the energy efficiency methods that are really back of mind,where it just happens. Like having the chips on the refrigeratorsthat cycle them off. A company that is successful in those areas andhas a model that works is going to have a big advantage when it’slooking at merging with somebody that doesn’t have an equallygood model.

S+B: Do you have a pot of money earmarked for renewables, specificallyfor things like wind and solar power?HAUSER: We don’t follow a philosophy of a specific pot of money.We follow a philosophy of return on capital employed and whatlevel of return that would require.

Our acquisition strategy isn’t just central station renewables,such as wind farms. There is also a strategy of distributed renew-ables, such as rooftop solar. There’s a power generation side, andthere’s also a utilization side — that’s the battery backup in case thepower goes out. I think there will be acquisitions by us and by oth-ers in all the subspaces. The biggest challenge will be to determinethe right technology and pay a price for a development pipeline thatcreates good upside potential for our shareholders.

S+B: Is there a way to mitigate that risk?HAUSER: Through partnerships. I certainly think there will be moreof those than there have been historically. There could be great valueto us in having a European partner to buy something or in our part-nering with an infrastructure fund. That would drive down our costof capital.

Being a good partner is not easy, but it has benefits. The mostobvious one relates to a 50–50 partnership; if you structure thatright, it takes the entity off your balance sheet and allows you tobenefit from the leverage like a private equity fund would.

For example, we couldn’t possibly have outbid Macquarie on


Puget Energy even had we been interested. They have a lower costof capital. Everything else being equal, they’d beat us every time.

S+B: How about using your stock as an acquisition currency? Utilitystocks, including yours, have had a very good few years, to the pointwhere the companies are fully priced.HAUSER: There isn’t that much variation in the P/E ratios in ourindustry — most of the companies are trading in a pretty narrowband. That limits the opportunity to go acquire somebody usingyour higher-priced stock.

As we enter a new cycle in which a lot of capital is being deployed,that will change. There will be companies that invest in technologieswhen maybe they shouldn’t, that run into problems getting approvalsfor a power plant, or that have a major issue with a power planthalfway through building it. Somebody will have issues. And as thoseissues begin to occur, you’ll see a wider band of trading around theP/E ratios, which will create more opportunities for stock-basedacquisitions. I don’t think it will be very long before we see that occur.

S+B: Where does Duke get its acquisition ideas?HAUSER: We are talking to people all the time. When you hear inthe marketplace that Duke is talking to X or Y or Z, it’s true.

We don’t do that with the expectation that every conversationwill lead to an M&A event. We do it in the hope that we’ll be onthe radar screen if a smaller company realizes it needs to do some-thing different, or if an international company decides it wants toget more active in the United States. Relationships are a huge partof this business.

S+B: How much of the relationship side do you personally get involved in?HAUSER: I get involved in it a lot. Our CEO [James Rogers] fre-quently meets with other energy-industry CEOs on various subjects.

Duke Energy 93

I do the same with CFOs. Between Jim, Group Executive LynnGood, who has the M&A function, and me, I doubt there are manyutilities in the country that haven’t been pitched to us as good acqui-sitions by someone.

S+B: Do you get many ideas from investment banks? What is the qual-ity of the relationships you have there?HAUSER: Bankers do give us some ideas. However, what the bestones do is give us market insight. They’ll come in with informationabout the industry and who’s doing what and what the P/E ratioslook like, and that can help facilitate our own thought processes.They’ll tell us who’s building wind or biodiesel plants, and whichsolar technologies are coming along, and which meter manufactur-ers are on the leading edge — those kinds of things.

A good banker can provide useful information in even more basicways. He might come in and say, “This company’s CEO and CFOare both 63, there’s no heir apparent, and they’re looking around.”That might be a data point we didn’t know. It’s frequently thosesofter things that can create a deal, as opposed to pure economics.

S+B: Your acquisition of Cinergy was a complicated transaction thatgave you a much more stable base of income from your regulatedbusiness. What were some of the important first steps once the dealwas struck?HAUSER: Paul Anderson, who was then Duke’s CEO, did some-thing very smart. He sent Jim Rogers, who was then the CEO ofCinergy, and me on the road together to meet with the top 20 share-holders of each company. The main idea was to tell the story — withJim being the expert on Cinergy and me on Duke. But Paul alsohad a second motive, which was to force Jim and me to figure outif we could work together well as CEO and CFO, which was theexecutive structure he wanted. That was a very smart way for Paul to


get that answer as well as for Jim and me to develop our relationship.The toughest thing when you do an acquisition is getting to

know people and developing the relationships. There’s a natural dis-trust at the beginning, when you’re still negotiating. But when youcome together, you’ve got to put all that behind you and figure outhow to make it successful.

S+B: Duke has been active not just as an acquirer, but also in sheddingbusinesses that are no longer strategic, such as the Asia-Pacific assets,Cinergy’s energy trading operation, and the Spectra spin-off. What spe-cial problems does a divestiture present?HAUSER: When you create a company and keep the books of thecompany, you gain synergies by pulling it all together. When youdecide to break it apart in whatever way, then you have to go backinto the books and say, “Oops, we wish we hadn’t kept the booksthat way — we wish we’d kept them separate.” That’s the biggestsingle workload challenge of a divestiture. On Spectra, it created ahuge amount of work.

The other big challenge is determining which employees gowith each company. As the companies move toward separation, theybegin to compete for talent. The top group must work together toget the right split for shareholders.

S+B: A lot of your M&A experience reflects the unique dynamics ofthe energy industry. Do you find you can learn by watching how non-energy companies manage M&A?HAUSER: Absolutely. I’ll tell you a funny story. During the Cinergydeal, there came a point where we were having a debate about whatday to close the deal. And I said, “You know, if we don’t close it onthe end of a quarter, it’s going to be very, very hard, because neithercompany keeps its books on two-week increments.” Other peopledisagreed. The debate rose to the board level, and I have to admit I

Duke Energy 95

was getting pretty adamant. From my perspective, having the closenot coincide with the end of a quarter just wasn’t an option.

Now it so happens that Jim Hance, the former CFO of Bank ofAmerica, is on our board. And after the debate has been going onfor a little while, Jim speaks up. He says something very under-stated, along the lines of, “Well, I’ve probably done as many deals asanybody. And we’ve never closed one that wasn’t on a quarter.” Thatpretty much solved that issue.

S+B: Thank you, Mr. Hance! As CFO, do you often find yourself hav-ing to stand your ground on more fundamental M&A issues, such aswho is worth buying?HAUSER: Sure, there are plenty of times that I’ve been in the role ofsaying, “No, we shouldn’t do this.” But it’s a balance. If your answeris always no and everyone knows that’s the answer, you start to beseen as a barrier to success.

It’s better to develop a reputation as someone who walks thatline of assessing good ideas, even helping to create them, while mak-ing sure the bad ones don’t get through. I think that comes back toyour personal credibility, internally and externally. It’s tough, butthat’s the challenge.

David Hauser’s keys to successful M&A• Partnerships can be useful in mitigating risk and occasionally in loweringyour cost of capital. Understand how to use them.

• Personal credibility — being believed when you say something within the com-pany or outside it — is the key attribute of any executive involved in M&A.

• Talk to prospective acquisition candidates even when you see no immediateplace for them in your portfolio. In a fast-changing industry, this will minimizethe possibility of losing out on a good deal.

• Once a deal moves forward, do what you can to address the mistrust that is anatural by-product of the negotiation phase.

• Don’t get so mired in pure economics that you lose sight of the value of rela-tionships. They are the key to every aspect of M&A. +

LUIGI FERRARISChief Financial Officer in Charge of Accounting, Planning, and ControlEnel SpA

Enel:Creating the New EuropeanEnergy Market

“Enel’s acquisition strategy is driven by theconviction that the integration of Europeanenergy markets is coming,” says CFO inCharge of Accounting, Planning, and ControlLuigi Ferraris.by Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza


ENEL SPA IS such a firm believer in the integration of Europe’spower generation industry that over the past two years the Italianenergy group has put up more than €34 billion (US$52.7 billion)for acquisitions, positioning itself to be a leader in this new andevolving energy market.

Groundbreaking deals include Enel’s massive €28.2 billion($43.7 billion) takeover of Spain’s Endesa SA in 2007. The companyhas also moved into eastern Europe by buying a controlling stakein Slovakia’s leading power company, Slovenske Elektrarne, and inRussian power generator OGK-5. Enel paid €2.6 billion ($4 bil-lion) for the OGK-5 stake and has earmarked €2 billion ($3.1billion) more for Russian investments in the next five years.

The acquisition campaign has transformed Enel into an interna-tional player and made it Europe’s second-largest utility company bycapacity. In 2007, the company’s net income beat analysts’ forecasts,rising 31 percent to €3.98 billion ($6.1 billion).

A skier and mountain trekker, Enel CFO in Charge ofAccounting, Planning, and Control Luigi Ferraris, 46, is accus-tomed to achieving ambitious targets step by step; he knows how tonegotiate difficult ground — even at the fast pace that Enel is set-ting in its rush to position itself in Europe. Ferraris joined Enel in1999 after holding positions of increasing responsibility at Italian

Enel:Creating the New EuropeanEnergy Marketby Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza


Enel 99

motorcycle maker Piaggio SpA and electronics conglomerateFinmeccanica Group. In 2002, he became CFO in charge ofaccounting, planning, and control of Enel’s sales, infrastructure, andnetwork division. He was promoted to corporate CFO in charge ofaccounting, planning, and control in June 2005.

In an interview at his Rome office, Ferraris discussed what Enelhas learned from its cross-border acquisitions — including the twinvirtues of listening and maintaining control.

S+B: Enel has been in an intense acquisition phase over the past twoyears. What were your priorities in identifying the targets?FERRARIS: It was clear to us that, in the long run, continentalEurope would eventually become an interconnected energy market.In an interconnected market, you have the ability to generatepower in one country and transfer it to other countries through thenetwork system. Therefore, when buying generation assets in onecountry, you have to be sure you can also distribute the energy inother countries.

S+B: What would be a good example from your recent acquisitions?FERRARIS: Take our acquisition of Slovenske Elektrarne inSlovakia in 2006. Slovakia is part of central Europe, and energyproduced there is already being used in nearby countries, includ-ing the Czech Republic and Bulgaria. We could just as easilyexport Slovenske’s output to Germany, France, and the Beneluxcountries. So with the acquisition of Slovenske, we gained accessto a huge market. And this is the kind of operational strategy thathas been driving our acquisitions in the region. Using the samelogic, we also made some acquisitions in Bulgaria and enteredsome joint ventures to develop power plants in France.

S+B: How important is Russia in your strategy?


FERRARIS: Russia is a long-term investment. There are a few techni-cal issues. It is not really interconnected with the rest of Europe yet. Interms of electricity, it’s an island. In the long term, Russia will becomemore integrated with the rest of Europe, and 10 years from now, webelieve it will be the most important supplier of natural gas to Europe.We see Russia as a strategic location where we can make a profit.

S+B: How does your team work with the CEO to define and implementM&A strategy?FERRARIS: The CEO ultimately defines the strategy, but we areinvolved right from the beginning. Strategic planning is part of ouractivity and actually involves a lot of people; it’s not something thatis decided solely by the CEO. We have a committee that includesexecutives from each business division, including the division’s CFOand COO. We help drive the process and provide support in mak-ing decisions.

S+B: What happens once you decide that a target fits strategically?FERRARIS: Let’s take Slovenske again as an example. Once we madethe decision that it fit and decided to go after it, it was up to theinternational division [responsible for Enel’s businesses outsideItaly] to manage the process. Once a deal is done, it then comes backto me and I monitor the integration process and track synergies ver-sus our estimates.

S+B: What lessons have these last few years taught you about the rela-tionship between finance and operations in M&A?FERRARIS: You need to work as a team and have a clear under-standing of the strategy driving the deal right from the very begin-ning. These are among the lessons we’ve learned. In this type of busi-ness, you need to have the involvement of the core businessand the key corporate functions, which also includes your

Enel 101

regulatory arm. In some markets — Romania, for example — theregulations are still evolving. So it’s important that our regulatorypeople are involved from the beginning. It’s not only a matterfor finance.

S+B: Even before acquiring Endesa, you were operating some smallerbusinesses in Spain. Was that useful in helping you enter that market?FERRARIS: It was. Despite the long-term promise, Europe is notreally integrated yet. You need to understand the subtleties ofapproaching each country, the regulatory system and the frameworkin which you operate. So in Spain, first we bought some smallerassets and developed our presence until we understood the market.Our initial assets included Viesgo, a generator and seller of electric-ity, which we bought in 2002. Enel Union Fenosa Renovables wasanother of our early businesses there — a 50–50 joint venture withUnion Fenosa to produce gas and electricity.

S+B: Do you also need to prepare the ground by discussing your planswith stakeholders and politicians?FERRARIS: We need to be good corporate citizens. In westernEurope, this is still a very political industry, because in the end youare offering a public service. The best way to do this is to work witha local partner as we did on the Endesa deal, where we teamed withthe Spanish company Acciona in making the bid.

It’s different in eastern Europe. There you are usually involvedin a privatization process and the government has already decidedto sell control of the company to make money. I think we were suc-cessful in Slovakia and Romania because we had the right strategyand were the first mover. We made the right bid at the right moment.

S+B: As you’ve expanded internationally, how have you built the inter-nal management expertise to master the markets you’ve entered?


FERRARIS: By changing the way people think — which hasn’talways been easy. We’ve been working on it now for two or threeyears, and are still in the early stages of development.

For instance, three years ago I created a department to ensurestrong financial control of our international businesses. At the time wehad just one CFO outside Italy — he was working in the U.S. Butwith the expansion of the organization, we now have 10 executivesworking as CFOs or in key management positions. So, part of the waywe created the expertise we needed was to create a community ofinternational CFOs. Continuing to build this extended leadershipcommunity will remain a key priority for the next three or four years.

S+B: What tools do you use in M&A that you would recommend toother CFOs?FERRARIS: Some of the most important tools for us are those thatenhance communication within the organization — we invest a lotof time in internal communication. We at headquarters talk face-to-face. In addition, we have frequent conference calls with people inthe business units.

S+B: Considering how fast Enel is growing, what are you doing to man-age risk?FERRARIS: One very important way to manage risk is to standardizesystems. When we acquire a company, we move quickly to standard-ize finance systems, and we are migrating all of our companies to SAP.This process of standardizing IT is challenging with eastern Europeancompanies in particular, because they often have very old IT systems.

S+B: How easy is it to make everybody comply with these new standards?FERRARIS: It’s not easy, and it’s very time-consuming. It’s importantto involve everyone in the process. It isn’t just finance; all of my col-leagues from the operational divisions must also be involved in order

Enel 103

to ensure that we take an integrated approach. This makes it easierto mitigate risk.

S+B: It’s important for a CFO to capture the synergies in a merger oracquisition. How do you ensure that you are achieving your synergytargets?FERRARIS: Let’s take Endesa as an example. We realized they werestrong in some areas, like the generation business. But they wereweak in the distribution business because they didn’t have tools, suchas digital meters, that we had already deployed on customer prem-ises to more accurately measure energy consumption. They were farmore inefficient than we were, so that was clearly an opportunity. Togive another example, they bought the same amount of coal that wewould normally buy, which meant we could easily double our pur-chases of coal. We took advantage of that economy of scale.

S+B: Did you just present your checklist to Endesa to implement or wasthere more discussion to get the company on board?FERRARIS: It was pretty inclusive; we created a joint team, and foreach area we had one representative from their side and one from ourside. They were sent off to do an analysis and come back with a syn-ergy target. You can’t just walk in and say, “You need to achieve €600million [$930 million] in synergies.” You have to involve them in theprocess of making the analysis and coming to the same conclusion.

The next thing we did was to appoint a joint program manager,because it’s important to manage this process properly. We spentthree months working on this, and were able to tell the market inDecember 2007 that we expected more than €700 million [$1.1billion] worth of synergies.

What I’m saying is that a bottom-up approach is fundamental.It requires having an integrated approach with a centralized pro-gram manager.


S+B: Wouldn’t it be better to be firm and set a clear policy for theacquired company’s management to follow rather than involve them somuch in every decision?FERRARIS: It’s important to keep people motivated. Let me comeback to the example with our digital meters. From the start, wewanted to install the meters in Spain, but Endesa’s managers weren’tconvinced. In Italy, we had already switched 30 million customersto these meters, so for us it was no longer a test project but an estab-lished product in the market. So we opened the books and invitedthe managers to Rome to see it for themselves. If they hadn’t beenconvinced, I don’t think we could have forced them to go digital.That is what I mean by involvement.

It’s also a function of how mature your global corporate cultureis. If you have been a big multinational for years, like IBM, you cantake a top-down approach. Companies like that have a global struc-ture that has been run well for a long time. We are at a differentstage in our history.

S+B: How much discussion do you allow when it comes to integratingthe finance function?FERRARIS: I am very strict when it comes to integrating the financefunction.We have three business models.We have generation, we havedistribution, and we have sales. We have KPIs [key performance indi-cators] and tools for analysis, and they have to be the same all over theworld. You have to standardize the system you use for reporting. I wantto be sure that we talk the same language all over the world.This is key.

S+B: It sounds like you are very flexible when it comes to managing syn-ergies, but only in the context of very strict financial control.FERRARIS: Yes, absolutely. Eastern Europe is a good example. In allour acquisitions there I have insisted on tight management becausethey tend not to have a culture of strong financial controls. I have

Enel 105

always sent in an Enel executive to implement the financial controlfunction and a reporting system to ensure that we are speaking thesame language. The CFO has to be from Enel — not necessarilyItalian, but from Enel.

S+B: What is your process for doing a final evaluation of an acquisition,and how do you glean lessons from the experience for the future?FERRARIS: We make an annual impairment test. However, we doother kinds of reviews more frequently, and I would suggest that itisa good practice to conduct such ex-post analyses diligently. Thishelps enormously to improve your evaluation and integrationprocess on future deals.

S+B: What is the achievement that you are most proud of?FERRARIS: When we bought Slovenske, EBITDA there was €350million [$543 million]. Now, just two and a half years later, it is€600 million [$930 million]. We are making a huge amount ofmoney. That has worked out very well.

Luigi Ferraris’s keys to successful M&A• Consider doing small deals in a country where you would like to make abigger acquisition. This will help you understand the regulatory frameworkand culture.

• Involve the acquired company’s managers in the process of planning synergies.That will speed the acquired staff ’s buy-in of your cost savings initiatives.

• Do frequent reviews of past deals to improve your future evaluation andintegration processes.

• Maintain a high level of internal communication. This is crucial given thecomplexities of international expansion.

• Create a trusted community of international CFOs who know your processesand systems. It’s the surest way to ensure financial controls and reduce post-deal risk. +

Editor’s Note

Throughout this interview, €1 is equal to US$1.55.

MARCUS SCHENCKChief Financial OfficerE.ON AG

E.ON:Acquisitions to Get a Foot in the Door

Deals are not the first choice, but theycan be useful in propelling you into newgeographic areas or product segments,says CFO Marcus Schenck.by Klaus Mattern and Walter Wintersteller


E.ON HAS USED M&A to become one of the world’s largest energyservice providers. Since 2000, the company has divested businessunits valued at approximately US$90 billion, and made more than$60 billion in acquisitions, including deals that have given it stakesin the Russian, British, and U.S. energy markets.

And E.ON isn’t done yet. Through 2010, the $148 billion com-pany (its 2007 market capitalization) has earmarked another $88billion for projects and acquisitions to help it enter new geographicmarkets or new parts of the energy industry.

Chief Financial Officer Marcus Schenck says many of theseacquisitions are designed to give E.ON “a foot in the door,” but ina capital-intensive industry like energy, the price of admission can bequite high. In 2002, E.ON paid $22 billion for Powergen, one ofthe biggest power providers in Britain. And in 2007, it was preparedto pay $61 billion to buy Endesa, Spain’s largest utility.

Schenck, 42, is a good fit for an acquisitive company like E.ON.As an investment banker at Goldman Sachs for 10 years, he servedas an advisor on dozens of successful transactions, including the onethat brought Powergen to E.ON. His investment banking experi-ence also gave him a keen understanding of the many factors thatcan cause deals to unravel.

Schenck got some new insights into the vagaries of deal making

E.ON:Acquisitions to Get a Foot in the Doorby Klaus Mattern and Walter Wintersteller


E.ON 109

shortly after joining E.ON in late 2006. At the time, the companywas in the midst of its efforts to buy Endesa. E.ON didn’t walk awayempty-handed, but the consolation prize — partial ownership ofsome Endesa assets in Spain and Italy — fell short of E.ON’s origi-nal goals.

In the end, Endesa was one of the many M&A situations inwhich, as Schenck sees it, the justifiable price has been exceeded andit’s best to walk away. Schenck painted a clear picture of the partacquisitions will play in the company’s future in an interview at hisDüsseldorf office.

S+B: How did your experience as a Goldman banker prepare you forworking through mergers from the corporate end?SCHENCK: As a banker, you are trained to ask the right questionsand find out where the possible pitfalls may be in a transaction. Ibelieve I developed an understanding of possible legal difficulties, ofthe financial metrics one has to look at, and, more generally, of howto work one’s way through a deal.

S+B: What single characteristic of investment banking have you beenable to take advantage of at E.ON?SCHENCK: Probably the art of negotiating and of interpreting thetactical position of a party in a deal context. This is rarely somethingyou’re born with; it comes with experience. I’ve learned from someawesome M&A bankers who were great negotiators and tacticians.They all had 20 or more years of experience in the job.

Let me give you an example: In late 1999, I was part of the teamof bankers advising Vodafone in its takeover bid for Mannesmann.Mannesmann’s CEO preferred the idea of merging with Vivendi,which he saw as a white knight. That could have easily been the out-come, had Vodafone not swooped in with its own proposal toVivendi, covering a then-critical set of Internet projects and offering


to sell some pieces of Mannesmann to Vivendi. Vivendi stoppednegotiating with Mannesmann, and a few days later Mannesmannagreed to a friendly deal.

S+B: In most cases, an investment banker’s work ends when the dealcloses. How important to you, now that you’re in a new position, arepostmerger integration skills? Can they give you an advantage overyour competitors?SCHENCK: Absolutely. Those companies that can digest dealsquickly, integrate the businesses and get back to normal operatingmode, that have people who can realize synergies — they are alwaysgoing to have an advantage. There are so many opportunities toinvest, and if you have all your resources tied up in integratingan acquisition, you will have no one to look at organic growthopportunities.

S+B: How do you find the right balance, after you’ve bought something,between moving quickly and not undermining the good practices thatmay already be in place?SCHENCK: It’s more important to be decisive than to try to avoidmaking any mistakes. I’ve personally seen integrations fail becausepeople didn’t dare to tell the truth at the beginning.

S+B: Can you make any generalizations about the sorts of functions thatlend themselves to cost savings after a deal?SCHENCK: Administrative and support functions like IT, account-ing, and financial controls are usually a good bet — the mechanismsfor integrating those are always somewhat similar. In fact, we haveour own integration teams that go in and execute the synergiesaround those areas.

Integrating the actual operations themselves is trickier; you needto address the specifics of the market and of the businesses.

E.ON 111

S+B: How do you know where to look for possible risks?SCHENCK: That’s hard to answer in the abstract. But once our peo-ple have developed a business plan for a possible takeover target, weask tough questions to see whether they really have thought every-thing through. “Is there really a market? Are market price assump-tions realistic? What do we know about the costs? Will there be reg-ulatory hurdles? How easy will it be to implement this? What willbe the competitive reaction?” Those are some of the key questions.

You also need to understand how the overall risk profile of thecompany might change by making one acquisition versus another.It’s my job as CFO to bring that to people’s attention — whereas theM&A function itself historically lies with our chief growth officer.

The way I’d put it is that CFOs need to be risk-aware. Of courseyou have to have a good grip on the financials, but you also have tohave a gut feeling for the things that could go wrong and where tofind them. That’s one place where my experience as an investmentbanker hopefully can add some value.

S+B: Let’s talk about the rationale for some recent deals E.ON has done,starting with your decision to enter the Russian market by buying fivethermal power plants in Siberia and the Urals.SCHENCK: Organic growth is always our first priority. But if wecan’t accomplish growth out of our existing asset base, then we seewhether we can buy a platform from which we can grow further.

Our deal in Russia was a way to get started in a place where wehad very little presence in the power sector. We didn’t see a way togo in there and build everything from scratch.

S+B: Has that acquisition produced any surprises?SCHENCK: During the bid process, we learned that the Russian gov-ernment was still working out how it wants a liberalized powermarket to look. That’s been a little tricky. The upside is that the


market is likely to develop quickly. Russia’s economy depends on it.But clearly we will see more surprises as we integrate— some of thoseI actually expect to be quite positive given the quality of the assets.

S+B: What about your $1.4 billion acquisition of a wind-power oper-ation in Texas?SCHENCK: It’s the same theme. Initially we thought the best way tomake money in the U.S. wind market was to develop and imple-ment our own projects instead of paying for a pipeline someone elsehad developed. We thought all we needed was about 30 to 50 peo-ple who knew their way around the system, who had relationships,knew how to get permits, knew where to find sites, and knew howto deal with regulators.

We eventually realized that the execution risk was bigger thanwe thought and that there was a chance that three years later wewouldn’t have made any progress. Faced with that possibility, itseemed smarter to jump-start our effort with a deal.

S+B: Both of those transactions were relatively small compared with themore than $60 billion E.ON was willing to pay for Endesa just a fewmonths earlier. Did your experience with that overture — which youdropped after a bitter fight — spoil your appetite for larger deals, or anydeals for that matter?SCHENCK: Well, we are no longer in a situation where we wouldsay, “Hey, we absolutely have to acquire something to grow our busi-ness.” In fact, the organic opportunities to grow our business todayare financially more attractive and exist in abundance. The onlyissue we face is that in certain markets, we first have to have a footin the door.

S+B: E.ON increased its offer for Endesa three times, and the appealwas clear — you would have added 22 million customers and hundreds

E.ON 113

of facilities in one fell swoop. The Spanish government didn’t much likethat idea.Were you at all mollified by the outcome, in which you boughtsome pieces of Endesa from the bidders who gained control, Spain’sAcciona and Italy’s Enel?SCHENCK: People were very disappointed. There was a time in thebidding process when we thought, “We can just go and buy aminority stake in Endesa and then fight it out with the other bid-ders.” But financially we decided that didn’t make sense. So welooked for the best way out.

S+B: The credit crunch has made it harder for private equity firms toraise debt. To the extent that private equity competes with you for deals,is that working to your advantage?SCHENCK: The only area where I can think of that happening isin renewables, although it’s more infrastructure funds than thetraditional private equity firms that have been competitors. Butwe have actually seen them almost disappear in certain auctions,certainly because it’s tougher for them now to put leverage structuresin place that make them competitive from a cost-of-capital perspective.

We don’t often run into private equity firms in auctions, becauseour desire to expand via acquisitions in regulated businesses is limited.

S+B: What do you have against regulated energy businesses?SCHENCK: I am not at all opposed to regulated businesses. But theyactually can have quite a bit of risk. What’s more, the expectedreturn from investments in nonregulated businesses is typicallymore attractive for us right now. That’s because when you buy a reg-ulated business, it’s mainly a financial play, and infrastructure funds— by putting the most sophisticated leverage structures in place —are often the best owners for such assets. We can’t compete withthem in that way because we are a publicly listed company and haveto keep an eye on our balance sheet.


S+B: If it’s not private equity firms you are competing against fortakeover targets, who is it?SCHENCK: It’s really two sets of competitors. The first set looks a lotlike us — publicly traded energy companies. The second set isowned or at least controlled by a single shareholder, very oftengovernments. That’s the case in France and Scandinavia, for example.

S+B: Does that make your job easier or harder?SCHENCK: It makes it a bit more difficult because it means that wemight compete against someone who applies different principlesthan ours. But overall I’m much more comfortable knowing thatmy shareholder base is institutional investors rather than thegovernment.

S+B: Today, at a time when you’ve got so much capital at your disposal,isn’t there a danger of entering into ill-advised deals?SCHENCK: That’s always the biggest risk for an industrial player,that you’ll convince yourself that there is more in the deal that isn’treflected in your straight numerical analysis. That’s when you endup paying too much.

The thing to remember is that there is always a maximumprice that is set by the fundamental valuation. The idea is never topay more than that. That’s one thing we can learn from the privateequity firms — they are pretty ruthless in that sense. You have tohave the discipline to walk away.

E.ON 115

Marcus Schenck’s keys to successful M&A• Use acquisitions to gain a foothold in markets where you see an opportunityfor organic growth.

• Understand how an acquisition changes the risk profile of your entirecompany. That’s an especially important discipline when expanding into newand emerging markets.

• Great negotiation is an art that takes decades to learn because it comes onlywith experience.

• Never overpay — respect your own numerical analysis. If the price gets toohigh, walk away.

• Be risk-aware. Develop a gut feeling for what could go wrong and where tolook for those things.

• Be decisive and pragmatic when it comes to postmerger integration. If youaren’t, you will spend more time digging yourself out of messes than findingthe next big opportunity. +

LOTHAR STEINEBACHChief Financial OfficerHenkel AG & Co. KGaA

Henkel:Manage M&A Centrally —It Uses Corporate Money

The risks of M&A can be mitigated by astandardized selection process and systematicpostmerger integration, says CFO LotharSteinebach.by Adam Bird and Irmgard Heinz


INNOVATION LEADERSHIP HAS been Henkel’s goal since it inventedPersil, the world’s first active detergent, in 1907. Pursuing innova-tion internally and through selected acquisitions, the company hasbuilt a portfolio of global bestsellers including Loctite and Prittadhesives, Schwarzkopf and got2b hair products, Renuzit air fresh-eners, and Pril dishwashing liquid. By 2007, its centennial year,Düsseldorf-based Henkel had grown into one of the world’s leadingmakers of household products, with sales of €3.1 billion (US$20billion).

In 2004, Henkel bought the Dial Corporation, an iconicAmerican company whose soap products are as well known in U.S.homes as Henkel’s Persil detergent is in European homes. At $2.9billion, the Dial acquisition was then the biggest deal in Henkel’shistory. And the post-acquisition results, including a doubling ofHenkel’s share price, suggest it has been a resounding success.

As chief financial officer, 60-year-old Lothar Steinebach is themastermind of Henkel’s mergers and acquisitions process. His credi-bility and impact are bolstered by a wealth of legal and financial expe-rience. Steinebach studied law at both the University of Mainz and theUniversity ofMichigan, Ann Arbor, and held an assistant professorshipat the University of Cologne. Before being named CFO at Henkel, heheld positions in the company’s legal and finance departments.

Henkel:Manage M&A Centrally —It Uses Corporate Moneyby Adam Bird and Irmgard Heinz


Henkel 119

His experience was evident when Steinebach sat down withstrategy+business at the company’s headquarters to discuss Henkel’sM&A practices and tools. Fifty-nine-year-old Helmut Nuhn, who,as head of Henkel’s M&A function, works with Steinebach todecide which deals to pursue, joined the interview and shared hisperspective on target selection.

S+B: Henkel hasn’t always done big deals, but it has done a lot of themlately — several dozen in the last decade alone. Who’s responsible forgenerating M&A ideas?STEINEBACH: About a third of the ideas come from the corporateoffice; the other two-thirds come from the businesses. This makessense, since it’s the businesses that know the markets best. Still,wherever an idea is initiated, it has to be fed immediately to our cen-tral M&A unit.

S+B: Is there a set of procedures to which every deal must adhere?STEINEBACH: For deals larger than €10 million [$16 million], wehave a very standardized approach — it’s actually a written manualof detailed principles. That manual covers the period from when amerger idea is conceived to when the postmerger integration starts.We have also completed a separate handbook that spells out ourapproach to postmerger practices.

S+B: Is the purpose of the postmerger handbook to identify best practicesin integrating acquisitions?STEINEBACH: Yes. I should add that there is nothing abstract aboutit. The handbook very specifically describes a central tool that issupported by a set of processes and checklists we’ve developed toensure detailed monitoring and reporting of synergy capture. Thistool allows us to compare the amounts invested in any deal withthe benefits delivered, and also deals with all relevant qualitative and


so-called soft factors to be taken into account when integrating anacquired business.

S+B: How does a centralized approach to M&A benefit Henkel?STEINEBACH: First, it allows us to systematically build expertisewithin our firm. A specific unit may be involved in a takeover andgain expertise, but if it never does another acquisition, the expertiseis lost. And the next unit that wants to embark on a takeover has tostart from scratch.

Second, because the model we use includes ways of dissectingsales-growth assumptions and other numbers, a single departmenthas to run it. Otherwise we may end up measuring different acqui-sitions by different yardsticks.

Third, we in finance need to understand and control how cor-porate money — the money used in M&A — is being spent.

S+B: How do the divisions feel about this centralized approach? Do theythink you’re interfering?STEINEBACH: That was indeed a cause of some initial discontent.The business units correctly assume that they run their businessesand therefore asked why they can’t also decide on acquisitions. Unitsmake important decisions that contribute to the company’s bottomline every day; they saw the centralized M&A process as infringingon their autonomy and feared that the team’s scrutiny could evenreveal strategic shortcomings.

What we tell them is that any acquisition must eventuallybe paid for with corporate money and that the allocation of cor-porate money needs to be administered centrally. Units don’t ownfull balance sheets. They have operating income, but that’s wheretheir responsibility ends. Capital decisions involving debt andequity, along with tax decisions, are managed centrally by corpo-rate finance.

Henkel 121

S+B: How do you make sure people adhere to the processes you’vedeveloped?STEINEBACH: You need to make a distinction here. Clearly, peopleadhere to the premerger processes because they are dependent on ussigning off on the financing.

It’s the postmerger area where things get more difficult. Whatwe do is put all the processes and responsibilities, the “who has toachieve what by when,” into a central database. Every manager whois involved has to log in to this database. These actions are tied topeople’s bonuses, so they have a big incentive to use the database andfollow the processes.

S+B: Helmut, as head of M&A, you are in the middle of this coordina-tion effort. How would you describe the division of labor when it comesto M&A at Henkel?NUHN: We help the business managers assess whether the acquisi-tion they’re advocating fits with their strategic plans and whetherthese plans generally make sense to us in the wider context of thefirm. That’s a big part of what my unit does. It’s also our job to cal-culate the precise yield and other financial results. With respect toinvestment and restructuring needs, we analyze those elements topto bottom.

In addition to that, we always generate what we call a risk versionof any calculation. We try to understand where we could encounterproblems, what effects lower growth rates or smaller synergies couldhave, and where, overall, we could end up in the worst case. This nor-mally prevents us from becoming overly optimistic about any deal.

S+B: How bulletproof has this approach been? Aren’t you forced to makecompromises during negotiations when you compete for an asset?STEINEBACH: Actually, we never do that. We go with our calcula-tions. Any strategic benefit goes into the model, and once we have


this result, we can’t change it. That’s actually another benefit ofdoing M&A centrally: It guards against someone providing unreal-istic forecasts in an effort to get an acquisition done and grow his orher division.

S+B: How do you factor cultural differences into your risk model?STEINEBACH: Different corporate cultures haven’t been a big con-sideration for us with respect to acquisitions. Much of what you readabout that is theoretical rather than practical. We would never say,“Oh, let’s not do it because the culture is so different.” When itcomes to country-specific cultures, we think we can handle thembecause of the enormous breadth of our portfolio and the countrieswe operate in.

S+B: That’s a good transition into a discussion of Dial, which was, atthe time, the biggest purchase you had ever made — and a very aggres-sive step into the U.S. market.What sorts of concerns did you have goinginto that transaction?STEINEBACH: There was only one area of concern, really, and thatwas the extent of Dial’s integration into Henkel. We needed to besure that every single person on Dial’s management team supportedthe transformation into the Henkel structure.

Initially, there was some insistence on the part of Dial’s manage-ment that Dial operate somewhat independently — we had to over-come this. You sometimes have to take the difficult decisions andpush them through to ensure a successful integration.

S+B: Can you elaborate on where the differences were?STEINEBACH: Dial’s management knew that they would becomepart of the bigger Henkel organization, but they were hoping to beleft to operate the business as they had in the past. However, atHenkel, the businesses Dial is in — home care and personal care

Henkel 123

— are managed in different divisions. To avoid adding complex-ity to Henkel globally, we decided to align Dial with these exist-ing divisions.

S+B: How did you get Dial’s management to accept this change instructure?STEINEBACH: It was very difficult. Dial’s managers were used torunning an integrated company with an integrated sales force andan integrated supply chain across their businesses. Dial’s managersdidn’t understand why we wanted to separate those things. Therewas a lot of friction. In the end, we had to make clear that the inte-gration plan was not up for negotiation.

This kind of resistance isn’t unusual in mergers. In the interestof quick and successful integration, you often have to make difficultor unpopular decisions that might even cause some managers toleave. However, when doing so is the only way to ensure a consis-tent integration strategy, it pays off in the long run.

S+B: You bought Dial, which was publicly held, when the Sarbanes-Oxley Act was hitting U.S. companies hardest. What special problemsdid that present?STEINEBACH: It was a challenge. In an acquisition, it’s one thing totalk about shared visions and values and to find compromises evenwhen you don’t completely agree. Those things are very much onthe surface. It’s quite another thing when you have to dig into thebasic day-to-day business of recording and reporting accounts, ofunderstanding the laws, and of meeting requirements. There aredetails that come out of that process that you would never discoverup front.

This confirmed for us that close examination of even the mostdetailed processes can be valuable. The sooner you understand thedetails, the sooner you can get them into alignment.


S+B: Was there anything else about Dial that proved to be a test?STEINEBACH: The IT environment. One should clearly devote par-ticular attention to IT very early in the process. When we acquiredDial, they had just started an implementation of SAP. Obviously,they hadn’t planned for it to work with Henkel’s version of SAP. Sowe were faced with a dilemma: Do we let them continue with theirimplementation or do we stop it? Understanding the system is a pre-requisite for decisions like that.

S+B: What did you decide?STEINEBACH: We decided to finalize Phase 1 of Dial’s implementa-tion and only then transfer it to our structure. SAP applications tendto house a lot of critical data. In the interest of data integrity and toavoid any disruption of day-to-day operations, we didn’t implementthe Henkel standard until a year later.

S+B: How did the switch go over?STEINEBACH: It wasn’t easy. Any big implementation, especiallySAP, puts a strain on an organization — it’s sometimes an ordeal. Itwas hard for the people at Dial to drum up much enthusiasm forthis second IT implementation project, especially since the benefi-ciary of the new SAP implementation was the broader Henkelorganization, not Dial directly. But that was our decision, and youabsolutely need a consistent IT architecture.

S+B: What would have happened if you had forced Dial to take the bit-ter medicine right away?STEINEBACH: We believe that, with acquisitions, it can be danger-ous to implement too many changes too quickly. As a rule, we liketo limit the changes to those that are strictly necessary to estab-lish whatever principles need to be established, and leave the restfor later.

Henkel 125

The IT decision is always tricky. I don’t even think it’s necessaryto always make the same decision. You do what is best based on thefacts at your disposal, then move ahead. If it turns out that it’s notthe ideal decision as new information becomes available, you canmake adjustments later.

S+B: Taking these difficulties into account, would you still say that Dialhas been successful? Indeed, years after an acquisition — and Dial hasbeen part of Henkel for several years now — is it possible to measurewhether it has worked?STEINEBACH: We absolutely can measure it, and we do so withevery acquisition. In particular, Helmut’s department conducts aninternal postmerger success analysis two years after every merger.NUHN: Yes, when we receive the initial forecasts for a specificacquisition and create the risk version of that, we document indetail all the assumptions that go into the model. Then, twoyears later, we do the same exercise again with actual financialresults and see whether we’re on track or not. If not, the businesscan take corrective measures. For us, it provides the opportunityto see what worked during integration and what didn’t. Moreover,the synergy-tracking tool that Lothar mentioned allows us tosee in detail which specific steps went wrong or took longer thanplanned, who is responsible, and which corrective actions arenecessary.

However, the short answer is: For Dial, everything looks fine.

S+B: Do you think investors value your achievements?STEINEBACH: Our stock performance seems to reflect that capitalmarkets are pleased with what we’ve done in M&A. That said,we will continue to try to standardize our processes as much aspossible. Our goal is to be recognized as a decisive and successfulintegrator.


Lothar Steinebach’s keys to successful M&A• Manage M&A centrally and in a standardized way. A central team allows youto evaluate acquisition opportunities consistently and capture learning.

• Question the deal proposal. Forcing the business units to show how proposalsfit their strategic agendas will help you weed out borderline deals and focuson core competencies.

• Don’t try to force too many changes at once. Identify the changes that arecritical and focus on those.

• Monitor your integration closely. Only systematic tracking of synergies canensure you achieve the benefits originally planned.

• Be prepared to make difficult decisions. Make clear that some things are notup for negotiation — it will pay off in the long run. +

Henkel 127

DOMINIC CARUSOVice President, Finance, and Chief Financial OfficerJohnson & Johnson

Johnson & Johnson:M&A Requires Financial Discipline

Deal financials require a discipline andcommitment to creating shareholder value,says CFO Dominic Caruso. Adding capabilitiesin line with corporate strategy is an importantconsideration.by Charley Beever and Justin Pettit


JOHNSON & JOHNSON is the biggest health-care products company inthe world. If you used mouthwash last night, applied lotion to yourskin this morning, put a sugar substitute in your coffee, and took apill to stave off an afternoon headache, chances are you used at leastone Johnson & Johnson product in the last 24 hours. You probablyused several.

Johnson & Johnson has arrived at this position of near-ubiquity 122 years after it first began selling surgical dressings, withthe help of an entrepreneurial culture, a decentralized structure,and a four-paragraph credo that puts customers first. The credois etched on a massive piece of stone that stands in the lobby ofJohnson & Johnson’s world headquarters in downtown NewBrunswick, N.J.

It was there that strategy+business met with Chief FinancialOfficer Dominic Caruso to discuss Johnson & Johnson’s acquisitionstrategy. Caruso himself arrived via an acquisition: He was vice pres-ident of finance at Centocor, a biotechnology company, whenJohnson & Johnson bought it for US$4.9 billion in 1999. Caruso,50, served as a top executive in several of Johnson & Johnson’s phar-maceutical businesses, its huge medical devices and diagnosticsgroup, and its group finance function, before becoming CFO onJanuary 1, 2007.

Johnson & Johnson:M&A Requires Financial Disciplineby Charley Beever and Justin Pettit


Johnson & Johnson 131

Caruso’s arrival at Johnson & Johnson coincided with the startof a run of acquisitions; the company has bought roughly 70 com-panies over the last decade. Most of those acquisitions have beensmall — the “tuck-ins” that Johnson & Johnson has historicallyfavored. But in 2005, the company was prepared to pay $23 billionfor cardiovascular device manufacturer Guidant, and in 2006, itpaid $16.6 billion to buy Pfizer’s consumer health-care business.Johnson & Johnson ultimately bowed out of the bidding war forGuidant, a reaffirmation, as Caruso sees it, of the company’s finan-cial discipline. With every deal, he says, you need to know there’s a“walk away” price beyond which you shouldn’t go.

S+B: Does your pursuit of bigger deals in the last few years signal achange in your acquisition strategy?CARUSO: Not at all. Pfizer was an opportunistic situation — achance to pick up some great brands, like Lubriderm and Listerine.In the case of Guidant, it was a change in market dynamics —specifically a chance to get further into the drug-eluting stent mar-ket and gain access to a microelectronics technology that wethought could help us throughout our businesses. With both Pfizer,where we completed the transaction, and Guidant, where wedidn’t, we stuck to our fundamental M&A goal of creating share-holder value.

S+B: How high up the list of value-creating activities does M&A sit atJohnson & Johnson?CARUSO: For us, the best way to create shareholder value is to groworganically because that is the most efficient use of our capital. Thenext level of shareholder value creation is probably licensing, whereless capital is needed to add value than in M&A. Acquisitions, doneselectively, come last; they’re a more difficult and riskier way of cre-ating shareholder value.


S+B: Why is licensing such a good source of value creation for you?CARUSO: I think it’s because of who we are. We have an enormousbreadth of businesses, and therefore we have this enormous capabil-ity set — we’re very deep in marketing, manufacturing, distribution,and certain kinds of technology. Indeed, the smaller selective acqui-sitions we’ve done over time have helped us expand our value chainof capabilities. That is, we can selectively pick licensing or partner-ing candidates to plug into our existing infrastructure. A companythat is not as broadly based in health care may not be able to get asmuch value from an arm’s-length partnership and may need anacquisition to get the full benefit.

S+B: You say your capability set allows you to be opportunistic. How doyou balance opportunity with the need to think strategically?CARUSO: The way I’d put it is that we’re opportunistic if we see aproperty that we can do more with than someone else might. We’realso opportunistic if we see the ability to add to our portfolio some-thing that we don’t already have.

The Guidant transaction was a good example. There we had theopportunity to add a microelectronics capability that was primarilyimplemented in our market approach to cardiac rhythm manage-ment. But the real underlying capability that existed there was themicroelectronics. We went after it as an opportunity to add that newbase of technology to the business.

Pfizer represented a different kind of opportunity; they werestrong in certain geographic markets where we weren’t. Forinstance, we had a much stronger presence in China than Pfizerdid. That was good because it meant we could sell more of theirproducts there. Whereas in a market like Mexico, Pfizer hadstronger ties than we did. So that turned out to be a nice set of com-plementary growth enablers. They were strong where we were weakand vice versa.


S+B: Do you use acquisitions to meet Wall Street’s expectations, whereyou might be saying, “This is how much growth we need; let’s find a wayto plug the hole”?CARUSO: No, never! We always begin with our strategy. It’s danger-ous to target levels of growth because then you may overpay or enterinto a transaction as a short-term fix without looking at the long-term benefit. We’re focused on the long term.

S+B: How much of your time is spent on figuring out which propertiesto buy and then managing them?CARUSO: The acquisition ideas typically come from people in oneof our three business segments — consumer, medical devices anddiagnostics, and pharmaceuticals. They bring an idea forward, andthen our executive committee, including me and our chairmanand CEO, Bill Weldon, will spend more or less time on that can-didate depending on the dollars involved, how strategic it is, andthe risk associated with achieving an acceptable return.

I spend very little time managing acquisitions — it wouldn’tmake sense given the decentralized management structure we have.But in terms of evaluating whether an acquisition is an appropriatestep forward, I spend a good amount of my time on that. Still, it’smostly a bottom-up process.

S+B: The business segments, surely, have their goals for sales and profit— and deals can help them achieve those. Doesn’t that endangerJohnson & Johnson’s financial discipline?CARUSO: On the contrary, there’s a very good understanding amongthe executive committee, myself included, as well as the line-of-business CFOs, that a transaction is worth pursuing only if it has ahigh probability of creating value for shareholders. And then thequestion always is, “Well, what do we mean by creating value forshareholders?” That definition is very well understood at Johnson &


Johnson. In order for an acquisition to be value-creating, it has tohave an internal rate of return that exceeds our cost of capital andcompensates us for the risk we’re taking. It isn’t just our CFO com-munity that understands this. Our business leaders understand it too.

S+B: Isn’t a business leader, by nature, prone to viewing an acquisitionin a more positive light?CARUSO: It’s true, they might be. They’re closer to the market, tothe technology, than we are in the executive suite at corporate. Sothey will probably champion the transaction more enthusiastically.And that’s actually a good thing because if we were to be successfulin acquiring the property, we’d want a business champion to ownthe transaction.

The more enthusiastic vantage point is also good because itmight push us to consider a deal whose potential we’d otherwisemiss. We’ll test the premise. We’ll talk about ways we can add to thepotential of this target that are currently not embedded in its inde-pendent valuation. If we see a way to create shareholder value, we’llmove forward. But there may also be a point where everyone under-stands that it will not be value-creating, regardless of how interest-ing it might seem or how enamored you might be with it. Then,obviously, we’ll walk away.

S+B: Guidant was one where you walked away, but not before a bruis-ing bidding war that you ultimately ceded to Boston Scientific. Whatlessons did Guidant teach you?CARUSO: Guidant was a reaffirmation, a test of our discipline, to seeif we could really draw the line and not cross it. In the end, the con-clusion we reached was that it didn’t make sense for us to increaseour offer above what it was, $24.2 billion. The press release we putout was very simple in that regard: We said a higher bid would notbe in the best interests of our shareholders.


It’s always eye-opening to see what others might do in an acqui-sition environment — the level of hunger for certain acquisitions.We don’t consider ourselves hungry. We don’t consider ourselvesdesperate. I guess I learned that we’re very fortunate in that regard,that there are others that need to, and do, think very differently.

S+B: Guidant doesn’t seem to have scared you away from M&A.Withinsix months you had announced your acquisition of Pfizer’s consumerhealth-care business. Has that deal met your expectations?CARUSO: Pfizer has a number of attributes that should createincredible value for us. First, the risk involved in achieving the rateof return on that transaction is not as high as it would be for trans-actions that have either a lot of technical risk or a lot of regulatoryrisk. This isn’t a biotechnology acquisition; this isn’t a companydeveloping early-stage pharmaceuticals. It’s a consumer health-carecompany — and we’ve been pretty successful with these acquisitionsin the past. Think of our acquisitions of Neutrogena and Aveeno inthe 1990s.

The second thing I would say about the Pfizer acquisition is ithas a large component of cost synergy associated with it. That’s nottypical of our deals. We usually bring in an enterprise and add it tothe family of companies in a decentralized way. In this case we werebuying brands from Pfizer that were very complementary to thebrands we already had. So, for example, Lubriderm can easily beplugged into our skin-care franchise, or Listerine, of course, intooral care, or Desitin into baby care.

That has given us the ability to generate significant cost syner-gies. And whenever you can do that, you generally have a lower riskof not achieving the return, because you’re in charge. It’s very differ-ent from making an acquisition and needing to get the acquiredmanagement team to see that the product should be improved orexpanded in a particular market.


S+B: With all the acquisitions you do — you have averaged sixa year for the last decade — how do you track their progress? Whokeeps score?CARUSO: We actually have a post-acquisition review process. Oncea year, we look back five years at all the acquisitions we’ve done. Wetry to extract lessons, because it doesn’t always work the way youthought it would. Then we use those lessons either to fine-tune howwe’re integrating the acquisition or, at least, to put variables into ourmodels that make them more precise.

S+B: Who’s involved in these post-acquisition reviews?CARUSO: We have a central group here at corporate that is respon-sible for merger and acquisition finance. It’s sort of like our internalinvestment banking arm. It’s a very talented group, and its leader hasbeen doing this type of work for probably 10 years here. We alsorotate high-potential finance professionals through the group, andthey spend about two and a half to three years working in it. Afterthat, they go back out to the businesses. That works really well,because when they go back out they’re already familiar with the rulesof the road, so to speak.

S+B: Do the individual businesses or brands have ceilings in terms of theacquisition capital available to them?CARUSO: No, there’s no predetermined limit. We don’t say, “Youwithin Neutrogena — you can only spend so much.” Or, “Youwithin the consumer business — here’s your cap.” We evaluate eachtransaction on its own merits, regardless of its size or sector.

Now, that doesn’t mean we treat every acquisition the same. Forinstance, up to a certain level, my approval is all that’s needed. Atthe next level, a deal needs the approval of our chairman and chiefexecutive and of the executive committee. And then there are levelsthat require the board of directors’ approval.


S+B: You said earlier that most of the acquisition ideas come from thebusiness units. What about outside investment bankers — how often dothey bring acquisition candidates to your attention?CARUSO: It’s very rare that an investment bank brings us an ideathat we haven’t already thought about or seen. Our people knowwhat’s going on in their industries, and we’re plugged into a lot ofstartup businesses through our venture capital arm, Johnson &Johnson Development Corporation. We’re generally seen as a favor-able place to be within the health-care industry — most likelybecause of our credo-based culture. So we’ll often be approached orcontacted if a company is looking to join a larger organization.

S+B: You came to Johnson & Johnson as part of an acquisition. So youspeak from experience.CARUSO: Very much so. We were cautious, at Centocor, aboutwhere our employees and our company would end up. We viewedJohnson & Johnson in a very favorable light for a number of rea-sons. First, we shared the values declared in the J&J credo. Second,the decentralized operating management philosophy was importantto us. It meant our business could remain as independent as possi-ble within a family of companies. Last, we thought we could bringa technology base that was needed in the company, making us adesirable addition.

Johnson & Johnson was at the top of our list. I’m not saying thatbecause I’m here today. No other company really matched it interms of meeting our criteria.

S+B: You’ve been very clear about how you evaluate individual trans-actions. Do you also think of your deals as part of a portfolio and try tostrike a balance between transactions that are low and high risk?CARUSO: No, not really. Although when we did the Pfizer consumerhealth-care acquisition, the end result was that the consumer piece


of our business grew from 18 percent of sales to 24 percent of sales.It’s probably a good outcome that a greater proportion of our port-folio is now in a place with less risk. In the end, that’s likely to helpthe enterprise. But we don’t go into it that way, looking to create anappropriate balance between the sectors.

S+B: Johnson & Johnson has traditionally been a product company, yetthe new conversations you’ve been having with shareholders about com-prehensive care would seem to suggest a push into service businesses.How do you decide whether that’s within your zip code for M&A?CARUSO: We could see services being more important in the com-prehensive care approach than in the product approach. It’ll justdepend on what’s available and what creates the most value. Our zipcode’s pretty broad: It’s human health care. We don’t look at any-thing within it as an area we’re not interested in unless it’s a com-modity or an area with very little growth potential.

If you look at Johnson & Johnson’s history, we started as a med-ical and surgical company. After many years we added a consumerpresence. Then after many more years we added the pharmaceuticalpresence and bolstered it with biotechnology.

The question for the future that our chairman and CEO is ask-ing is, “OK, what’s the next add-on to the evolution of Johnson &Johnson? What’s the fourth leg? What’s the fifth leg?”

We’re the most broadly based health-care company anywhere,yet quite frankly we still only have a small portion of the $4 trillionworldwide health-care market. There’s a lot of opportunity for us.


Dominic Caruso’s keys to successful M&A• Exercise discipline. There’s always a price beyond which you shouldn’t go.• Buy a new capability. The best acquisitions benefit the combined firm inways well beyond the acquired company’s products and profits.

• Identify an internal business champion for each merger. Clear ownership inthe business is a prerequisite for successful integration.

• Adjust your models. Use the results of your postmerger review to fine-tuneyour models with new variables.

• Develop your M&A team carefully. Rotation of staff into and across businessescan benefit the whole organization. +

PETER KELLOGGChief Financial OfficerMerck & Co., Inc.

Merck:Growing the R&D Pipeline

Establishing a stake in a portfolio of promisingearly-stage efforts is critical to ensuring successin the pharmaceutical industry, says CFOPeter Kellogg.by Charley Beever


THERE ARE MANY reasons that Merck & Co., Inc. is considered one ofthe world’s bellwether pharmaceutical companies. The main reason,however, is the number of multibillion-dollar drug innovations thathave emerged from its pipeline. Whether it is Singulair for asthma,Cozaar for blood pressure, or Fosamax for osteoporosis, the com-pany has a reputation for taking on big challenges that demandinnovative, world-changing solutions.

What’s more, Merck shows no signs of lowering its ambitions.Its Gardasil vaccine, which came on the market nearly two years agoas the first-ever cervical cancer vaccine, has become familiar to mil-lions of girls and young women seeking protection against the dis-ease. Gardasil generated US$1.48 billion in revenue for Merckin 2007. The diabetes drug Januvia, which was introduced fourmonths after Gardasil, is another emerging hit, with revenue in itsfirst year on the market reaching $667.5 million. Right behindthese drugs, Merck launched a new class of HIV therapy, Isentress,late in 2007.

“We’re not just coming up with remedies that are similar tosomething else already on the market,” says Peter Kellogg, the com-pany’s chief financial officer. “What we’re really trying to do is comeout with novel therapies in areas of significant unmet need.”

You might think Merck, which spent $4.9 billion on R&D in

Merck:Growing the R&D Pipelineby Charley Beever


Merck 143

2007, would have the wherewithal to develop these new compoundson its own. But in fact, part of its R&D budget is devoted to ferret-ing out the brilliant therapeutic insights of others — at universities,venture-backed firms, or smaller companies. Merck does much thesame with its M&A activities: It looks for promising new discover-ies and, more often than not, invests in or licenses them rather thanbuying them outright. In fact, Cozaar, Fosamax, and Gardasil are allenormous successes that have stemmed from or been enhanced bylicensing deals.

To Kellogg, a Princeton-trained engineer whose career high-lights include stints at Arthur Andersen, Booz Allen Hamilton, andas CFO of the biotech firm Biogen Idec, this approach of emphasiz-ing small, research-driven deals is familiar — and sensible. The drugindustry isn’t like the consumer goods sector, in which the 52-year-old previously worked as a senior finance executive at PepsiCo; itdoesn’t lend itself to synergy-driven M&A. With pharmaceuticals,it’s all about growing the pipeline.

Kellogg talked about that, and about the CFO’s role in helpingMerck to structure its deals, at the company’s headquarters inWhitehouse Station, N.J.

S+B: What role does M&A play in Merck’s growth strategy?KELLOGG: It depends on how you’re defining M&A. Businesscombinations, broadly speaking, are a very big part of what we do.They have to be; biopharmaceutical research is very fragmented. Itmight look like there are some large pharmaceutical and biotechcompanies that dominate the intellectual property arena, but therereally aren’t.

In our industry, mergers and acquisitions have to be one of thetools in your tool kit — but not necessarily the one that gets themost use. For every acquisition we do, we probably enter into 20licensing/business development deals.


S+B: What do you put under the heading of a business developmentdeal?KELLOGG: There’s a whole set of transactions that apply. It couldbe in-licensing intellectual property rights, forming small collab-orations, or setting up formal joint ventures with separate legalentities and governance bodies. The partnership we have withSchering-Plough, to market cholesterol-control drugs, is an exam-ple of the latter.

S+B: Partnerships aimed at developing new drug therapies soundonly peripherally like a job for the finance department. What’s yourrole in this sort of business development, and how do other depart-ments contribute?KELLOGG: As CFO, I work with a cross-functional team to deter-mine the type of deal — an acquisition or some other form of col-laboration or in-licensing. We seek to find a win-win approach thatis financially logical.

In addition to finance, research and development people play avery large role on the team. This includes our regional scouts, wholive throughout the world and monitor scientific developments bothby therapeutic area and by geography. They’re in constant dialoguewith small companies and venture capital groups.

When we get serious about a deal, a part of our R&D group thatis dedicated to business development will start working on the duediligence, which includes understanding how the external sciencerelates to projects we’re working on internally.

Our commercial organization is also a critical element of theteam. There is a finite commercialization period based on the lifespan of intellectual property, so we model future scenarios for thedifferent disease states — the current products that are availabletoday, our pipeline, and what we see in competitors’ pipelines.That’s all part of the M&A evaluation.

Merck 145

S+B: Of the deals you look at, how many do you actually do?KELLOGG: The batting average, quite frankly, is very low. For every25 opportunities we look at, we might end up bringing in two orthree or four. However, the volume is very high. We have executedabout 50 licenses per year in the past several years, so it is anextremely broad and comprehensive effort.

The selection process is important. In the course of doing ourdue diligence, we often conclude that a transaction isn’t compellingfrom the standpoint of shareholder value creation or it has arisk/benefit profile that’s skewed in a way we don’t like or is in anarea that’s off-strategy for us.

S+B: Is the pharmaceutical business one that lends itself to synergies?KELLOGG: I’d argue that it isn’t. You can always realize synergies;but only in mergers between low-margin, high-cost-structure busi-nesses that have relatively narrow differentiation potential do yousee synergies that are so meaningful that a significant acquisitionpremium can be justified.

That’s not the business we’re in. We’re at the other end of thespectrum — with products that are high in gross margins and intel-lectual property. As a percentage of revenue, there often isn’t enoughoperating expense that can be separated out and synergized, if youwill, from the core programs we’re going after to justify paying alarge economic premium for the deal. And if you are targeting com-mercial products, the remaining patent life limits the period overwhich the benefits can be realized.

In any event, when you have high margins to start with and yourbusiness model is based on intellectual property, synergy probablyisn’t the bet you’re making. The bet you’re making is that you canrecognize a lot of potential in the intellectual property that’s beendeveloped so far, and develop it further in combination with yourown commercial franchise, intellectual property, or technical skills.


S+B: Do acquisitions ever make sense as a way to meet Wall Street’sgrowth expectations?KELLOGG: At most, you’d accord those expectations a secondary ortertiary role. Otherwise you’d probably end up just chasing trans-actions. We have to focus on creating value; driving shareholderreturns is “job one.”

Many have speculated that this industry will see a wave of majoracquisitions just to bolster the top line or overcome patent expiries.But what you really have to do when considering an acquisition isstep back and ask, “Do we see enough upside in this deal? Is there away in which this could become much bigger than the market isanticipating?” Because there are definitely a lot of ways it couldbecome smaller. Deals fail regularly.

S+B: Can you point to a deal where you exceeded expectations?KELLOGG: One way of getting a sense of that is to look at the“equity income” line on our P&L. Equity income reflectsprofit from our joint ventures and, in 2007, this line contributednearly $3 billion to our bottom line. All of these joint ventures werecreated without any acquisition premium. And several have resultedin new products that Merck would not have developed on a stand-alone basis. That is meaningful shareholder value creation.

A good example is our joint venture with Schering-Ploughthat I mentioned earlier, which produced an innovative andefficacious LDL-lowering drug and another treatment option forpeople who suffer from cardiovascular risk. Our combinedefforts created a new franchise that generated sales of $5.2 billionin 2007.

S+B: Let’s talk about your more typical transactions, which as you sayare a good deal smaller. How often are you the only company knockingon the door?

Merck 147

KELLOGG: I’d say less than 25 percent of the time. It’s not necessar-ily an auction — those often do not do well when they involve com-panies whose value isn’t proven. But in our business, there’s usuallysomeone else who’s interested.

S+B: In those situations, what clinches the deal? Does it all come downto money?KELLOGG: No, I don’t think it’s solely about the money someone isputting on the table. Although ultimately a company has to get thebest deal for its shareholders, very often the greatest value for theseller comes from contingent future payments based on, for exam-ple, future revenues or royalties earned. That means the seller shouldgo with the partner who is likely to create the best long-term returnsfrom the asset, rather than simply going with the partner who offersthe highest up-front payment. In this industry, most developmentefforts fail before the future contingent payments are earned, so theseller should select the company with the best technical and scien-tific skills in that area.

S+B: It’s easy to see the benefit to you, as a buyer, in structuring a dealwith contingent earn-out elements. What’s the benefit to the seller?KELLOGG: In the case of venture capital groups, they really like theidea of a deal where up-front payments “de-risk” their position whileearn-out elements allow them to share in the downstream success ofwhat gets developed. I’ve been involved in a number of such trans-actions, almost always involving companies held by private investors.

S+B: You were the CFO of Biogen in 2003 when it merged with IDECPharmaceuticals, whose strengths were in the area of oncology. Whatwas the most notable thing about that merger?KELLOGG: It was a merger where the equity split was something like50.2 versus 49.8 — a true merger of equals. It was a zero-premium


transaction that offered enormous strategic fit. It accelerated thestrategic position and capabilities of both companies.

S+B: Did shareholders think so?KELLOGG: There was a lot of curiosity as to how it would cometogether — investors adopted a “wait and see” position. That’s notunusual; it’s a function of how much risk there is in this business —and how big the impact can be from any given news event. Whenyou have a big deal, investors in one stock or the other are alwaysthinking, “Did I just de-risk my holding or did I just give up someof my upside?”

In the case of Biogen Idec, the period after the merger was fol-lowed by several positive news developments in both parts of thecombined company. The stock of the combined company per-formed very well. Four or five months in, the transaction had reallybecome a minor part of the dialogue with investors.

S+B: What was your role, as the combined company’s CFO, in articu-lating the story line?KELLOGG: It was a very important role. I’ve been involved in a cou-ple of pretty sizable acquisitions and mergers. You must talk toinvestors intensively for quite some time. It’s not just a one-weekroad show — you’re talking about the value of the transaction andwhy it makes sense, for a year or two after it happens.

Fortunately, the investors who buy the stocks of pharmaceuticalor biotech companies are already working on relatively longertime frames in terms of their investments. This investment com-munity includes Ph.D.s and physicians who understand theprobability-adjusted models that everybody uses in this industry.They know that there’s a bit of odds-making to what we do —that a lot of our R&D at any one time is being invested inprojects that ultimately may not work. They also know that the

Merck 149

things that do work create a huge amount of value.Ultimately, the CFO’s role is to communicate the rationale for

a transaction in a way that explains how it will create shareholdervalue and demonstrates that it supports the investor’s thesis forinvesting in the deal.

S+B: Having seen how the screening process works at Merck, whatwould you say differentiates the deals that get done from those thatdon’t?KELLOGG: The one truth I’ve seen is that if our scientific team andour commercial team are not excited about a transaction, there’s nohope that it will succeed. There’s no such thing as a good financialdeal that doesn’t have great scientific endorsement. After all, it’s thescientists and commercial organizations that are responsible for get-ting drugs to market. It’s all about the science.

Peter Kellogg’s keys to successful M&A• Risky deals should be structured in a way that makes a portion of the payoutcontingent on the target’s achieving certain goals. This can work to the benefitof both the acquired and the acquirer.

• Explaining the rationale for an acquisition is not a job you can relinquish assoon as the deal closes. You should anticipate investors’ questions and shareyour vision for a year or longer.

• M&A synergy is easiest to achieve with low-margin businesses that offersimilar products or services. It’s the rare drug-industry M&A deal that offersenough synergy to overcome the deal premium and create meaningful share-holder value.

• If a transaction happens to help you meet a near-term revenue goal, consider ita bonus. The primary application of M&A should be long-term and strategic,not short-term and numeric.

• Conventional M&A should be just one of the tools in your tool kit — andnot necessarily the one that gets the most use. At Merck, business developmentdeals outnumber acquisitions about 20-to-1. +

MUTLAQ H. AL-MORISHEDChief Financial Officer and Vice President, Corporate FinanceSaudi Basic Industries Corporation

Saudi Basic Industries Corporation:Using Acquisitions to AchieveGlobal Scale

SABIC is using M&A to enhance and strengthenits profile as a multinational chemicals giant, saysCFO Mutlaq H. Al-Morished.by Ibrahim El-Husseini and Joe Saddi


JEFFREY IMMELT, CEO of U.S. industry icon General ElectricCompany, had nothing but praise for the Saudi Basic IndustriesCorporation (SABIC) when he announced last year that the Saudichemicals group was buying GE’s plastics division for US$11.6 bil-lion. SABIC, he said, was the right company at the right time totake GE Plastics global and put it on a more competitive footing.That might have seemed like corporate hyperbole if SABIC hadn’thad the track record to back it up.

What Immelt didn’t tell reporters that day is the story behindSABIC’s rise from a state-sponsored industrial experiment in thesands of Saudi Arabia to the world’s largest chemicals group by mar-ket value. Behind the GE Plastics takeover (the largest-ever U.S.acquisition by a company from the Gulf region) is SABIC’s auda-cious plan to boost revenues from $34 billion in 2007 to $60 billionby 2020 and to become a truly global company. Investors in SABIC,which is still 70 percent state owned, are clearly believers in the2020 project. Encouraged by strong sales growth and a 33 percentrise in net profits, SABIC shares rose 82 percent last year.

And yet M&A activities are a recent addition to SABIC’s toolkit. The company has relied largely on organic growth since it wasfounded by the Saudi government in the 1970s to use the by-products of its booming oil industry to create value-added com-

Saudi Basic Industries Corporation:Using Acquisitions to AchieveGlobal Scaleby Ibrahim El-Husseini and Joe Saddi


Saudi Basic Industries Corporation 153

modities, such as chemicals, polymers, and fertilizers. Now, SABICis using M&A to expand into higher-value products.

One of the SABIC executives leading the drive is Mutlaq H. Al-Morished, the company’s CFO. Al-Morished, 50, studied in theUnited States, where he lived for 16 years, earning a bachelor’sdegree in nuclear physics and mathematics from Denver Universityand master’s degrees in nuclear engineering and business fromPrinceton and Stanford universities, respectively. So he is nostranger to American customs, a definite plus when it comes to deal-ing with Western companies. He has been president of both theSaudi Iron and Steel Company and the Saudi PetrochemicalCompany, a joint venture of SABIC and Shell. In this conversationwith strategy+business, he hinted that the General Electric deal wasjust a stepping-stone, albeit a major one, on the company’s path totransforming itself into a global player.

S+B: You have a very ambitious growth strategy, your 2020 project.What role will acquisitions play in executing that strategy?AL-MORISHED: Acquisitions will play quite a significant role. Ourtarget is to boost sales to $60 billion by 2020. Our preferenceis to grow organically wherever possible. But if we see an opportu-nity arise somewhere in the world that will help us grow, we willcertainly take a look at it.

S+B: SABIC’s previous acquisitions were made with the goal of expand-ing into new geographies or new products. Are those still the importantcriteria driving your M&A strategy?AL-MORISHED: That’s right. If you take Europe, for example, thebusinesses we acquired there were very similar to our existing busi-nesses, so our strategy was primarily driven by geographic expan-sion. GE’s plastics division was a completely new business for us,and that is part of the 2020 project. We decided we need to have a


mixed portfolio, and that means moving into specialty chemicalproducts. Our goal is to have a revenue mix of 20 percent from spe-cialty products and 80 percent from commodity products. Theproduct portfolio of our affiliate Saudi Kayan, which is currentlyunder development and will be the world’s largest fully integratedpetrochemical complex, also includes specialty products.

S+B: Why is it important to add these new products to your portfolio?AL-MORISHED: Usually a chemical company starts with commod-ity products and moves down the product chain step by step. As youmove down the product chain, value increases. You want to capturethe value yourself, rather than sell your commodity product tosomeone else who then extracts more value from it and makesmoney that you could be making.

S+B: Why is it better to add new products through an acquisition thanto build the new capabilities and assets needed to produce them?AL-MORISHED: With the right acquisition, you can leapfrog thecompetition, especially when it means getting into a business inwhich you aren’t active yet. You’ll be working at it for years if you tryto start a specialty business from scratch. It’s taken us 30 years to getto where we are today. We don’t have that much time anymore. Withan acquisition, you hit the ground running. You jump in ahead of thecompetition, and from Day One you are working from a position ofstrength. You avoid the learning curve, the painful mistakes.

S+B: Would you ever consider doing a hostile takeover?AL-MORISHED: If the opportunity arises and if it seems like theright thing to do, yes. But it’s not my preference because it’s not thebest thing for long-term development. Employees in the target com-pany tend to be unhappy afterward, so I’d rather not do a hostiletakeover unless there is no alternative.


S+B: How do you identify and realize synergies in your acquisitions?AL-MORISHED: We’re working on a global integration initiative,and, of course, synergies play a huge role. We are getting a lot of syn-ergies from manufacturing, logistics, procurement, and IT. We’vedone a lot to identify and secure synergies.

But sometimes there is no head-count benefit. For example, whensellers have centralized functions such as finance, treasury, and HR,and we buy a business unit from them, we have to actually add staff.

It’s important to mention that we are a strategic investor. We’renot interested in doing an acquisition for its own sake, but to addvalue to the business. We’d like to see that happen fast, but maybe itwill take five years or even 10 years. We are not coming to flip thecompany, to take the money and run. We take businesses to operateand grow.

S+B: SABIC seems to move very deliberately during the integrationprocess. You’re not just moving in, embracing the newly acquired com-pany, and squeezing as much out of it in terms of savings as quickly aspossible. Why is that?AL-MORISHED: We tend to appreciate the people on the other side.We don’t need to force them to do everything the way we do it hereat headquarters. When we go in, we are open-minded and willing tolisten. We don’t load the target company with people from head-quarters. Actually, we have taken people to headquarters from thecompanies we’ve acquired, a kind of cross-fertilization. We want toknow how we can improve things. Maybe this isn’t the way othercompanies do it, but this is what works for us.

S+B: What are the key things that you’ve learned from doing acquisi-tions? What makes them work?AL-MORISHED: What makes them work is treating people withrespect and not coming in with a hatchet. You have to show them


that you understand and appreciate the business and that you trustthe people who operate the business. People are different. Whatworks here in the Middle East doesn’t necessarily work in Europe,and Europe is very different from the U.S.

And then there is the issue of taxes, which is always a nightmare.Through our acquisitions in Europe and now of GE Plastics, wehave learned a lot about taxes.

S+B: Integration after a merger can become very messy. Why do youthink so many deals fail in the postmerger phase?AL-MORISHED: A lot of mergers fail because the buying party tendsto force its way of doing things on the other party. That’s a big risk,and it’s not the way we work. We tend to do things slowly. Weunderstand that acquired companies have something to offer us andthat we can learn from them. Some of their practices are better thanours. Why shouldn’t we take advantage of that? It has to be a two-way street.

S+B: What is your role in the integration process?AL-MORISHED: I’m in charge of the finance-related work streams:strategic planning, taxes, risk management and insurance, treasuryand financing, and accounting and financial reporting. I’m heavilyinvolved in the overall integration, but leadership of the GE Plasticsintegration, for example, lies with the vice president of the specialtychemicals business unit. At headquarters we look at the financialperformance of our affiliates, but each has its own CEO, manage-ment, and board. I get involved as the CFO of the group and theyprovide me with the numbers I need to do my job. I support themif they need to raise financing, and if I see a problem, I alert thecompany’s board. But I step back from an active role because nowthere is someone else running the show and we don’t want unneces-sary interference.


S+B: SABIC is becoming increasingly global. Does that mean that thefinance function needs to decentralize and move closer to the businesses?Or does it have to stay centralized?AL-MORISHED: It has to be centralized. The finance function hasbecome more challenging. It requires managing big cash flows,huge revenues. You have to look at the worldwide function involv-ing different currencies, financing arrangements, taxes, and treas-ury operations.

Where you put it is a different question. With today’s elec-tronic communications, it can be located anywhere. Headquartersis a good place for finance, to be honest. It needs to be there withthe CEO and other corporate functions.

S+B: Are the ideas for potential acquisitions generated more by you andyour team at headquarters or by the business units?AL-MORISHED: We have an M&A team in corporate finance,headed by a general manager, which is the third level of manage-ment, after the CEO and CFO. When considering doing an acqui-sition, the general manager of M&A will assemble an ad hoc teamfrom different parts of the business. And once we are serious aboutmoving forward, we engage consultants. You need auditors and con-sultants for environmental, safety, financial, and other key aspects.

S+B: How autonomous are the business units in studying the marketand proposing targets?AL-MORISHED: They are very autonomous. Sometimes they willcome to us with ideas, and sometimes we will go to them. But mostof the businesses being sold hire an investment bank, so in 80 per-cent of the cases we’ve been contacted by the bankers. Both of ourrecent acquisitions were initiated by the corporate M&A team. Wetold management in Europe and in the United States to go after thetargets in their regions.


S+B: Once you’ve identified a target, does your team handle the evalu-ation of the company before making a bid, or is that done by the busi-ness unit?AL-MORISHED: We discuss the preliminary evaluation and I’ll take alook at it and decide if it makes sense. Then we sit down with theteam, and the discussion gets rolling. I make a call to senior manage-ment to set the tone and then the guys at the M&A level proceed withthe details. Once the deal is closed, or if there are any unforeseenproblems, they come back to me. I am in touch with the CEOthroughout the entire process, and when it seems necessary we’ll makea presentation to SABIC senior management to get their buy-in.

S+B: How do you deal with cultural differences between SABIC and theEuropean and American companies you acquire?AL-MORISHED: Most of us worked and lived in the United Statesor studied there, so this is not a problem for us. And when you lookat our business, we are really a global company with significant oper-ations in Europe, the Far East, and the U.S.

S+B: Do you believe there is a global corporate culture that allows peo-ple in business to transcend their differences in other areas?AL-MORISHED: Yes, I believe so. You must not forget that theMiddle East is a place where all of the world’s cultures meet. Asia,Africa, and Europe meet here. The Silk Road from China endedhere. There has been this intersection of cultures and commercethroughout history. So, for us, it is not that unusual an idea to workwith companies and people from around the world. The MiddleEast has been at the crossroads of civilization throughout history.


Mutlaq Al-Morished’s keys to successful M&A• The right acquisition lets you leapfrog the competition — and that meanssaving time. You can launch into a new business from a position of strengthand avoid making painful learning mistakes.

• The success of an acquisition depends a lot on how you treat the people youare acquiring. It often pays to show that you have faith in the managers of thecompany you have acquired and grant them the freedom to run their business.

• Be open to learning. Realize that the companies you acquire may be able toteach you something that helps you run your own business more effectively.

• Develop an ability to listen. The main reason mergers fail is that acquiringcompanies come in and impose their way of doing business on the acquiredcompany. +

SANTIAGO FERNÁNDEZ VALBUENAChief Financial OfficerTelefónica SA

Telefónica:Transformational Deal Making

Sometimes you have to take a companyapart in order to build it up, says CFO SantiagoFernández Valbuena.by Jens Niebuhr and Joseph Santo


SANTIAGO FERNÁNDEZ VALBUENA, CFO of Telefónica SA, has neededthe combined skills of his two private passions, skydiving and uni-versity teaching, to get through the past few years leading M&A atthe Spanish telecommunications company.

Telefónica single-handedly changed the game in European tele-coms in 2005 when it bought U.K.-based wireless operator O2for US$32 billion. Overnight, Telefónica became Europe’s second-largest wireless company. As surprising as the deal itself was the factthat Fernández Valbuena stitched together the financing package ina single weekend and completed negotiations with O2 in just twoweeks. Such a feat requires a CFO with a thrill seeker’s nerves andan academic’s calm eye for detail.

Fernández Valbuena, 50, holds a master’s and a Ph.D. in eco-nomics and finance from Boston’s Northeastern University andhas held a number of teaching posts at institutions such as theManchester Business School and the Instituto de Empresa in Spain.He joined Telefónica in 1997, leaving a job as general managerof Société Générale Valores, a commercial bank. He becameTelefónica’s CFO in 2002.

Like many of its peers, Telefónica was hit hard by the dot-comdownturn and the disappointing market penetration of the 3G wire-less standard in Europe. After the Internet bubble burst in 2000,

Telefónica:Transformational Deal Makingby Jens Niebuhr and Joseph Santo


Telefónica 163

Telefónica cut back on its media and Internet ventures, focusing onits core business and going into acquisition mode. O2 was the highpoint, adding 25 million new customers in the U.K., Ireland, andGermany to the 145 million customers Telefónica already had inSpain and Latin America, where it had also done some acquisitions.Measured by market capitalization, Telefónica became the third-largest phone company in the world.

Yet as he spoke of the lessons learned from these experiencesduring an interview at the company’s new headquarters in Madrid,Fernández Valbuena was already thinking about the next deal.

S+B: Looking at Telefónica over the past few years is like watching atextbook case of Schumpeter’s theory of creative destruction unfold beforeyour eyes. You have made two major transformations and are nowstronger than ever.FERNÁNDEZ VALBUENA: Our former chairman used to say thatTelefónica was a media company. And that meant we needed toabandon telecommunications in the same way that the telegraphbecame a thing of the past. He was a visionary when it came to somethings, but this idea turned out to be dead wrong. So, when CésarAlierta Izuel became chairman in 2000, he moved in the oppositedirection. We refocused on strengthening the core telecommunica-tions business. It was an implosion of the company before we couldignite an explosion of growth.

S+B: What has been driving acquisitions such as those in LatinAmerica, the O2 purchase, and your alliance with Telecom Italia?FERNÁNDEZ VALBUENA: Diversifying geographically away fromSpain, so that we have many revenue sources and can benefitfrom scale efficiencies. This means that if Spain’s economy cools, wewon’t falter. We have a British leg, an Irish leg, and a German leg.We’ve got a Czech business, which is going well. And we have an


emerging and fast-growing Latin American business that we feelvery confident about.

S+B: When you started the process, you had some real problems to con-tend with. You had an Internet search company, in Lycos, that wasn’tmaking money. You had also made unsuccessful moves into high-speedwireless Internet access and television content, through the productioncompany Endemol. How did you sort it out?FERNÁNDEZ VALBUENA: Through a lot of hard work. We weren’tthe only ones in the industry going through this, but that factwasn’t very comforting.

We moved quickly. We were one of the first to write off theUMTS licenses for high-speed wireless access, and that was the rightthing to do. Both Lycos and Endemol were forays beyond our hometurf — you pay a price for that. As a TV company, Endemol wasin a different line of business. I have always said we need access tocontent, but we don’t need to own the content. The strategy of pro-ducing our own content was flawed and was something we neededto fix.

S+B: Before the O2 acquisition, a lot of your initial focus was on LatinAmerica rather than Europe. Why was that?FERNÁNDEZ VALBUENA: Many European governments bailed outtheir big incumbents at a time when they should have let them gobankrupt or merge with stronger players. So those of us whobelieved scale was very important had to go fishing elsewhere. In2004, we bought Bell South’s cellular assets in Latin America for$5.6 billion, which would be a laughable price today. I’m especiallyproud of that.

S+B: Were there any other factors that slowed the move toward consoli-dation in Europe?

Telefónica 165

FERNÁNDEZ VALBUENA: Everyone took for granted that accessto credit was unlimited and that any asset you wanted to buywould be available. That wasn’t true; there were actually very fewassets for sale, which is why we decided to move full steam aheadon O2.

And now the environment in Europe is becoming more protec-tionist and nationalistic again. Should the credit crunch becomemore severe, governments will probably react defensively.

S+B: And yet the way your talks with Telecom Italia have developedcould be a sign that there is greater willingness to give up control of anincumbent. Do you read it that way?FERNÁNDEZ VALBUENA: We are comfortable with our stake in thecompany. Together we have 160 million accesses. That is 19 percentof the European market. It is the biggest industrial alliance inEurope. We understand that this business is no longer about pro-viding a commodity like electricity or gas. It’s about providing anincreasingly varied array of services at different price points.

S+B: From your perspective as CFO, what were the major challenges inmanaging the reorganization of your company?FERNÁNDEZ VALBUENA: Number one, to concentrate on the corebusiness. Number two, to reintegrate things that we had partiallyspun off and were trading as listed stocks on the market. That latterchallenge was a corporate governance nightmare. If you have twochairs and 10 people, you have an issue. There was a lot of that atTelefónica: We had CFOs and CEOs of all sorts and kinds. We’vestreamlined the management structure. It was painful, but it had tobe done.

S+B: Is part of your job to suggest companies that Telefónica might buy?FERNÁNDEZ VALBUENA: Not really. That’s the chairman’s role.


S+B: Where, then, do you come in?FERNÁNDEZ VALBUENA: I’m part of the six-person executive com-mittee. The other members come from operations; I representfinance. It’s my job to point out the risks, based on my experience,but also to assess the plausibility of doing the deal. There are thingsthat can only be done if you can get the money or that are depen-dent upon how much money you can get or how fast you can get it.

S+B: Looking at the O2 acquisition, what was the most difficult chal-lenge in the transactional phase?FERNÁNDEZ VALBUENA: We had to put the deal together veryquickly. The whole process took less than two weeks from the firstapproach to the closing of the deal on October 31, 2005.

S+B: Didn’t that sort of time pressure affect your ability to do your duediligence?FERNÁNDEZ VALBUENA: We did not do the due diligence thateveryone would have expected us to do, which is also part of the rea-son we completed the deal. O2 went public two years before and allthat information was available — that’s the beauty of buying publiccompanies. I figured I could live with that because I knew thefinancing was in place and the company was just four years old. Iwouldn’t dare try to take over a more mature company, an incum-bent operator, without full-fledged due diligence.

S+B: What is the most memorable thing, from your perspective, abouthow the O2 deal got done?FERNÁNDEZ VALBUENA: When we were discussing the deal, some-body asked, “How are we supposed to pay for it? How long will ittake to raise the money?” This was a $32 billion animal. No one hadever had access to that kind of money in one shot before. That’sgreat for a CFO; you’re in uncharted territory.

Telefónica 167

I said, “I can get the financing in 48 hours.” It wasn’t macho orbravado. I knew from the groundwork I had done in the years beforethat I could get access to that much money for that particular deal.In the end, it took only 36 hours. I made the commitment Fridaynight and by Sunday we were signing the papers. That was 2005; itwouldn’t work today.

S+B: Did O2 produce the post-deal synergies you expected?FERNÁNDEZ VALBUENA: Our target was $6 billion in operatingcash flow over four or five years. Everything is on track, although itis interesting to see that we are getting synergies from differentsources than we had anticipated.

You would expect to get more savings from procurement thanfrom things like centralization and shared services. Surprisingly, thatdidn’t happen.

The problem is that all markets are very local. So the Nokiaphones that get sold in London are not the same phones that getsold in Madrid or Prague. The phones are tailored for each market.The language, software, and embedded services are unique for eachmarket. These things turned out to be more significant than we hadanticipated, and were an obstacle to getting volume discounts.

On the other hand, we’ve been able to elicit more substantialsynergies from the elimination of offices, and from the eliminationof services that could be centralized or integrated much faster thanwe thought. Finance is an obvious example.

S+B: In what way is it obvious?FERNÁNDEZ VALBUENA: We have been able to derive more tax andfinancial synergies, because the average cost of debt fromTelefónica isso much lower. So anything we do for the O2 universe gets upgraded.Those are below the line, but equally important for the bottom line.

These are important lessons that have been very helpful as we


draw the road map with Telecom Italia. The finance function at O2was very well organized; it was uncomplicated. They didn’t haveany convoluted structures. They had very little exposure to compli-cated derivatives.

S+B: How does the finance function at headquarters differ from thefinance function at the business unit level?FERNÁNDEZ VALBUENA: The finance function at headquarterstakes a step back and tries to see the bigger picture, to ask the rightquestions. But the finance people in the businesses take the bull bythe horns. So the CFO of O2 Group, Telefónica Europe, as we nowcall it, should spend 80 percent of her time in operations and inunderstanding where the division’s profits are coming from and howto finance campaigns. She should be working on the iPhone nego-tiations, for example, and not spending time worrying about thepound exposure or hedging policy, because that’s what we do atheadquarters. We pull all the fundamental financial levers, thefinancing, up to the group level.

S+B: How do you interact with the CFOs in the operational divisions?FERNÁNDEZ VALBUENA: There is a dotted line reporting to me,and a straight line reporting to the CEO of the division. They arepart of their management executive committee. They are part of thatbusiness. The dotted line means that they have to answer my calls ormy people’s calls, that they get appointed only if I sign off, and,sometimes, that I have to approve their compensation.

S+B: Looking back at the past few years, what are the main lessonsyou’ve learned that have prepared you for future deals?FERNÁNDEZ VALBUENA: You always pay for what you get, but youdon’t always get what you pay for. So take it as a given that youwill overspend.

Telefónica 169

Another lesson is not to under-budget; not doing so allows youto adjust for the unexpected.

I also think Warren Buffett was right when it comes to invest-ing; the right time to invest is when you have money. You shouldn’tconstantly wait for the right market conditions. The right time to goout and do M&A is when you badly need it to achieve your strate-gic goals and you have access to the necessary financing.

We also learned how important it is to communicate withinvestors. You need to be open, but you have to keep things simple.A complicated message just makes investors nervous.

S+B: Based on your experience, do acquisitions tend to deliver whatyou expect?FERNÁNDEZ VALBUENA: We have gotten what we wanted, whichwas geographic diversification. Spain is still a very large part of whowe are, but we are no longer a Spanish company. We are a Europeancompany now.

Santiago Fernández Valbuena’s keys to successful M&A• Work on your financing options at times when you’re not actually looking todo a deal. This will speed your ability to act when a target emerges and maygive you a competitive advantage.

• Don’t under-budget. Having resources will allow you to prepare for theunexpected.

• The right moment to invest doesn’t depend on the market cycle, but ratheron whether an acquisition will drive your operational strategy and whetheryou have access to the necessary financing.

• Don’t complicate communications with shareholders. Be open and keep themessage simple.

• Never assume that targets will be available in the future. If you have anopportunity to advance your business with an acquisition, move fast andmake it happen when the target is available. +

G. MIKE MIKANChief Financial OfficerUnitedHealth Group Inc.

UnitedHealth Group:Handpicking Capabilities RatherThan Just Adding Scale

Business development that’s disciplined inevery detail helps attract the winners and weedout the losers, says CFO G. Mike Mikan.by Gil Irwin and Justin Pettit


SOMETIMES GETTING BIG requires thinking small.That maxim captures UnitedHealth Group’s approach to busi-

ness development. Although acquisitions have been a critical partof the company’s strategy, not all of them have been big enoughto attract shareholder attention. Some, indeed, have been minus-cule, designed to add capabilities, provide management expertise,bolster UnitedHealth Group’s offerings in technology, or plug a geo-graphic hole.

The important thing, from the perspective of Chief FinancialOfficer G. Mike Mikan, is not the number or size of dealsUnitedHealth Group has done, but how they’ve shaped the com-pany. There, too, attention to detail has been critical; over the pastdecade, the Minnetonka, Minn.–based company has developed aprocess for evaluating, acquiring, and integrating companies thatgoes a long way toward explaining why it now ranks among thelargest health insurance providers in the United States and amongthe 25 largest U.S. corporations.

That UnitedHealth Group’s mergers and acquisitions processcomes so close to being a science is a tribute to Mikan. He firstjoined the company as an executive in its then-fledgling corporatedevelopment group in 1998, and eventually emerged as one of thekey architects of the company’s business development process. He

UnitedHealth Group:Handpicking Capabilities RatherThan Just Adding Scaleby Gil Irwin and Justin Pettit


UnitedHealth Group 173

was CFO of two business units, UnitedHealthcare and SpecializedCare Services, before being promoted to CFO of the parent com-pany in 2006, at the age of 35.

You don’t get that far that fast without having some specialattributes. Mikan’s energy and intensity are apparent. So is hisgrounding as a CPA. He is precise about numbers — the number ofdeals UnitedHealth Group has done, the multiples it has paid, theaverage transaction prices. He is also precise about whatUnitedHealth Group is trying to accomplish with M&A — andwhat it is not. In his interview with strategy+business, that was thefirst topic Mikan discussed.

S+B: UnitedHealth Group’s revenue has more than quintupled from theyear you joined it, to more than US$75 billion in 2007. Are there anyacquisitions left that could transform the company?MIKAN: I’m not sure I would use that word, transform. There aredefinitely acquisitions or targeted opportunities that would alignvery well with areas where we’ve expanded, like individual insuranceor financial services.

Everyone says, “You’ve done a lot of transactions; they’ve builtthis organization.” Yes, we have. We look at between 150 and 200deals a year; that has led to almost 100 completed transactions in thelast decade. But the thing to keep in mind is that the median pur-chase price of those transactions was $14 million. A lot of them weredone to piece together capabilities. We don’t do acquisitions solelyfor the purpose of a land grab.

S+B: That’s a different point of view. At a lot of big companies, an ideathat doesn’t “move the needle” dies before it ever gets started.MIKAN: That’s true, and if our acquisition strategy were simply toget bigger, we certainly would not be doing $14 million deals. Thosedeals would be a waste of time because acquisitions — whether


you’re paying $200,000 or $9 billion — are similar in terms of theircomplexity. You still need to negotiate terms. You still have to inte-grate the business and the people. Those things are hard to do.

The reason we don’t dismiss smaller deals is that those are oftenthe ones that have something unique to bring to UnitedHealthGroup. There are a lot of people out there who are developing goodideas and capabilities in a more entrepreneurial setting — and fund-ing them out of their own pockets or with the help of privateinvestors. It’s a mistake to underestimate those individuals.

S+B: Can you give us an example of a small acquisition you did to pro-pel you into a new area?MIKAN: I’ll give you a couple. One is Golden Rule, which servesindividual consumers through health savings accounts [HSAs]. Webought it for $495 million in November 2003 — a time when wehad fewer than 50,000 individual consumers on our HSA platform.With HSAs increasing in popularity and small businesses participat-ing less frequently in company insurance programs, that has becomea very successful business and one of our leading growth platforms.

Another example is AmeriChoice, our Medicaid business, forwhich we paid $577 million. At the time we bought it, in 2002, wewere very good at serving large-scale customers — the GeneralElectrics and IBMs of the world. We offered Medicaid programs in13 markets, but didn’t really have the competency to administerthese plans, which are managed by the states.

Even though AmeriChoice was in only three primary markets— Pennsylvania, New Jersey, and New York — the companyunderstood what it took to optimize revenues, manage diseases,and set up clinical programs specific to these businesses. We dida reverse integration, meaning AmeriChoice’s management teamovertook our existing Medicaid business. In effect, we were buyingtheir know-how. TonyWelters, one of the founders of AmeriChoice,


is one of our most senior executives and is still overseeing that busi-ness today.

S+B: You said before that you look at up to 200 deals a year and do, per-haps, 5 percent to 10 percent of them. What’s more painful, letting agood company get away or buying one and finding out it doesn’t meetexpectations?MIKAN: I tell people all the time that the best deals are the ones wewalk away from because we’ve figured out that they aren’t goingto meet our needs. That kind of discipline is essential in an acquis-itive organization. We need to make sure we’re doing deals that fitwithin the organization and that maximize returns on our share-holders’ money.

But let me answer your question in a different way. Of thealmost 100 transactions we’ve done in the decade since I’ve beenhere, I can count on one hand the ones that haven’t met our expec-tations. I will note also, for the corporate finance types, that themedian forward multiple has been 5.1 times EBITDA. So our dealshave tended to be very accretive.

S+B: What accounts for that success rate?MIKAN: We have a very thorough process, run by our corporatedevelopment group, which we put in place 10 years ago when wewere a $12 billion company aspiring to become preeminent in theareas of health and well-being. Every M&A idea that comes our way,no matter what its source, goes through the same disciplined screen-ing analysis.

The analysis is predicated on five critical questions: Will thedeal meet our strategic criteria? Does it augment what we alreadyhave or add a new capability? Is it an appropriate use of capital, anddoes it meet our investment return expectations? Does the com-pany have a strong management team? Are we better off buying it


outright than simply making an investment in it?If the answer comes back yes on all of those, and if the acquisi-

tion gets sponsored by the senior executive of the business that’s ulti-mately responsible for running it, it will come to me and [ChiefExecutive] Steve Hemsley for final review. Above a certain level, itwill also go to our board for approval. The process is very thoroughand very consistent.

S+B: It sounds very time-consuming too. If you are competing against abuyer willing to put money on the table more quickly than you, it seemsthat process could cost you some deals.MIKAN: I don’t agree with that. Our speed is actually enhancedbecause a prospective deal doesn’t have to go through the layers ofbureaucracy, through people hemming and hawing, or throughsomeone getting buyer’s remorse. When we get into due diligence,our experience makes us a very efficient, very streamlined buyer.There is literally a calendar of events, day by day, hour by hour, ofwho’s going to be in what meeting, what we’re going to cover, andthe questions we’re going to ask. We try to do due diligence — thefinancial, legal, and operational aspects — in three to four weekswhile we negotiate a purchase agreement. Once we engage, it is veryefficient.

And there’s a reason we do that. We prefer not to get into bid-ding contests with the many strategic and nonstrategic buyers whosestandard operating procedure is to throw out an initial offer —expressed as a multiple of revenue or profit — just to get into thenext round. We set out 10 years ago to avoid that. But we realizedfrom the beginning that we would not be credible in sole-sourcingdeals if we took too long or weren’t fair.

S+B: Are you saying that you sometimes make it a condition of negoti-ating with a company that there will be no auction?


MIKAN: I do it all the time. Golden Rule, as an example, was a sole-source deal. AmeriChoice, Dental Benefit Resources, and Specterawere, as well. I can go on and on about where we went out andsuccessfully completed deals where the sellers did not take it to mar-ket because of our credibility. When done right, it works well forboth sides.

S+B: So you say, “We’re interested in buying you, we can’t tell you forsure that we’re going to buy you, but our condition for possibly buyingyou is that you negotiate only with us for now.”MIKAN: In a sense, yes. We’ll sign a letter of intent that will have anexclusivity provision in it that will essentially preclude the sellingorganization from going to market during our period of diligence.In return we give them a commitment on speed of execution.

I believe in a fair market. But I also believe that when targetsbroadly auction their businesses, there is a valuation impact tostrategic buyers like us. How can there not be? They are giving awaytheir market intelligence. Instead of running the business, they aremeeting with their bankers and attorneys, talking about the cashwindfall they’re going to get. They just aren’t focused.

S+B: Is UnitedHealth Group’s up-front process entirely responsible forthe success you’ve had with acquisitions, or is it that along with some-thing you do after you acquire them?MIKAN: I think it’s both. Having the process involve the executivesponsors, with the sponsors recognizing that they’re going to be heldto hurdle rates and to generating economic value, instills a lot of dis-cipline. They won’t do deals with a negative EVA [economic valueadded]. Why? Because they know it impacts their businesses’ per-formance and, frankly, their careers. That knowledge drives out a lotof the bad.

We haven’t done everything right. We’ve made our share of


mistakes. But between that executive sponsorship and our experi-ence with doing deals, generally the outcomes have been positive.

S+B: Up to now, you’ve been talking largely about the virtues ofthinking small when it comes to M&A. But not all of your acquisi-tions have been small in scale. Do the same things apply with a bigacquisition, such as your $4.9 billion deal to buy Oxford, whichstrengthened your position in the New York metropolitan area, oryour $8.8 billion purchase of PacifiCare, which did the same for youin California?MIKAN: That question brings us back to the late 1990s, and theaspiration we had to become preeminent in the area of health care,and our attempt at the time to identify the things we were good at,as well as the things we lacked.

To start with, we sold the businesses and platforms where weweren’t competitive at that time. We got out of the workers’ com-pensation risk business. We got out of our undersized, nonperform-ing positions in markets like Puerto Rico and the West Coast.

Then we focused on building a strong, competitive companythat was able to serve all Americans. Oxford and PacifiCare broughtus into the Northeast and West Coast in strong, market-leadingpositions. In addition, the transactions enhanced our business plat-form as a whole.

For example, PacifiCare brought us one of the largest PBMs[pharmacy benefits managers] in the country and added to oursenior market capability, as well as providing us with a first-rateWest Coast operation. It was a very significant opportunity forUnitedHealth Group. Hence the purchase price of that deal.

S+B: Meaning the multiple was richer than for your average deal?MIKAN: Yes, we paid 10 or 11 times PacifiCare’s EBITDA, whichwas higher than our historical multiple. But strategically it made all


the sense in the world. When you’re thinking about building anational competency, you can’t cede the number one and numbertwo markets.

S+B: Was PacifiCare a sole-source deal?MIKAN: I can’t say that. At the point in time we bought them, theyweren’t talking to anyone else. But they had previously talked toother potential buyers.

Still, as a large public company, PacifiCare was different. It’s notlike negotiating with a private company that nobody knows aboutand that you’d rather not see representing itself to your competitors.Big deals, like small deals, have their special dynamics. You have tobe competent at both.

Mike Mikan’s keys to successful M&A• Have a consistent, disciplined screening process that’s tightly managed inevery detail. It’s the best way of ensuring that you do only the right deals andof building credibility with prospective acquisition candidates.

• Give the executives who’ll be running the acquired property a stake in makingit successful, with all the rewards and accountability that implies.

• Sole-source your acquisitions whenever possible. The intelligence that leaksout as a result of an open auction inevitably degrades the asset’s value.

• M&A should add capabilities you don’t have in your portfolio. It’s not aboutland grab.

• Avoiding a bad deal is much more important than occasionally bypassinga good one. Shareholders won’t forget that you failed to maximize theirreturns. +

CHARLEY BEEVER([email protected]) is a Booz & Companypartner in New York. He assists companies inthe pharmaceutical, biotechnology, and medicalproducts industries with strategic, organization,and performance improvement issues.

ADAM BIRD([email protected]) is a Munich-based seniorpartner with Booz & Company. He leads thefirm’s global media, entertainment, and con-sumer goods practice and specializes in strategy,structure, and performance improvement.

GIORGIO BISCARDINI([email protected]) is a Booz &Company partner who leads the energy, chemi-cals, and utilities practice in the Milan office.He focuses on strategy, mergers and acquisi-tions, and large-scale change managementprograms, as well as operations, sourcing, andsupply chain management.

WILLIAM BOSTON([email protected]), based in Berlin,was formerly a staff reporter for the Wall StreetJournal. He is a freelance journalist who haswritten for Time, Business Week, Fortune, andInstitutional Investor.

CHRISTIAN BURGER([email protected]) is a Munich-basedsenior partner with Booz & Company who spe-cializes in organization and change leadership.He leads the firm’s health-care practice inEurope and also works with European telecomoperators and technology companies.

VIREN DOSHI([email protected]) is a Booz & Companysenior partner in the London office. He focuseson corporate strategy, operating model design,merger integration support, and performanceimprovement in the energy and processindustries.

IBRAHIM EL-HUSSEINI([email protected]) is a partner withBooz & Company based in Beirut. He focuses onstrategy-based transformations of public- andprivate-sector entities in oil and gas, chemicals,and utilities across the Middle East.

BEATE ELLERMEYER([email protected]) is an associatebased in Booz & Company’s Frankfurt office.She specializes in reorganization, process opti-mization, and financial controls for telecommu-nications companies.

THOMAS FLAHERTY([email protected]) is a Booz & Companysenior partner based in Dallas. He advisesutilities across the United States on corporatestrategy, organizational design, mergers andacquisitions, performance improvement, finan-cial management processes, portfolio manage-ment, and capital allocation.

About the Authors


GHASSAN HASBANI([email protected]) is a partner withBooz & Company based in Beirut. He specializesin mergers and acquisitions, finance, marketstrategy, organization, and performance in thetelecommunications industry.

IRMGARD HEINZ([email protected]) is a partner withBooz & Company in the Munich office. ThroughoutEurope, she has advised CFOs across industrieson finance and performance improvement.

ROBERT HERTZBERG([email protected]) is a freelance writer andeditor in New York. He has written for the NewYork Times, has consulted on new product devel-opment for Tribune Company, and was previouslyan editor at Bloomberg News in New York.

ROBERT HUTCHENS([email protected]) is a New York–basedpartner with Booz & Company who specializes insupply chain, operations, and corporate strategyfor pharmaceutical, medical device, and con-sumer products companies throughout the U.S.

GIL IRWIN([email protected]) is a Booz & Company seniorpartner in the New York office. A member of theglobal health-care practice, he focuses on settingstrategic direction and enabling transformationalchange for health plans, pharmacy benefits man-agers, multiline insurance companies, and otherspecialty health-services companies.

ROBERTO LIUZZA([email protected]) is a senior associatewith Booz & Company in Milan. He advisesutilities throughout Europe on corporate stra-tegy, organizational design and transformation,internationalization, performance improvement,and financial management processes.

CHIEKO MATSUDA([email protected]) is a partner withBooz & Company in Tokyo, focusing on financeand business strategy for top management.

KLAUS MATTERN([email protected]) is a Booz & Companysenior partner based in the Düsseldorf office.He focuses on large-scale strategy-basedtransformations in infrastructure- andtechnology-intensive industries in Europe, theMiddle East, the U.S., and Asia, with a specialemphasis on financial management and theCFO agenda.

NILS NAUJOK([email protected]) is a Booz & Companyprincipal based in Berlin. He specializes insupply chain and manufacturing optimization,strategic sourcing, and postmerger integrationin the pharmaceutical, chemicals, and steelindustries.

About the Authors 181

JENS NIEBUHR([email protected]) is a Düsseldorf-basedpartner with Booz & Company who specializes instrategy, IT, and performance management in thetelecommunications and high-tech industries.

JUSTIN PETTIT([email protected]), a Booz & Companypartner based in New York, is focused on theintersection of corporate strategy and finance.He is the author of Strategic Corporate Finance:Applications in Valuation & Capital Structure(Wiley, 2007).

PAOLO PIGORINI([email protected]) is a partner in Booz& Company’s Rio de Janeiro office whoseexpertise is in governance, business models,and organizational structure.

CHRISTIAN REBER([email protected]), a Zurich-basedprincipal with Booz & Company, has workedglobally for financial-services firms over thepast 12 years. He focuses on strategy develop-ment, international expansion, sales, restruc-turing, and cost reduction for retail and privatebanks.

OLE ROLSER([email protected]) is a senior consultant inBooz & Company’s Berlin office. He specializesin corporate restructuring, divestitures, andmergers and acquisitions, with a special focuson the finance organization.

JOACHIM ROTERING([email protected]) is a Booz &Company partner based in Düsseldorf. He leadsthe energy, chemicals, and utilities practice inEurope and specializes in transformation andoperational improvement programs for chemi-cals and steel companies.

JOE SADDI([email protected]) is the chairman of Booz &Company. He is the managing director of thefirm’s Middle East business. Since he joined thefirm in 1993, his projects have covered policyformulation, corporate and business strategies,organization, and governance. He has partici-pated in and led multifunctional assignmentson numerous continents in the public and pri-vate sectors covering water, oil, gas, mining,steel, automotive, consumer goods, and petro-chemicals.

JOSEPH SANTO([email protected]) works in Booz &Company’s Madrid office as a principal. He spe-cializes in developing business unit strategies,optimizing performance, and implementinglarge-scale transformation projects for trans-portation, energy, and telecommunicationscompanies throughout Europe.

About the Authors, continued


ILONA STEFFEN([email protected]) is a director with Booz& Company based in Zurich. She specializes inorganizational design for financial-services andhealth-care organizations.

DAVID SUÁREZ([email protected]) is a principal withBooz & Company in Madrid who works withenergy companies in Europe and the MiddleEast. His focus is transformation and changemanagement, human capital management, andorganizational performance improvement.

JULIA WERDIGIER([email protected]) is the business corre-spondent for the New York Times in London. Shehas covered the European takeover market forthe last four years and reported on mergers andacquisitions at Bloomberg News.

WALTER WINTERSTELLER([email protected]) is a partner inBooz & Company’s Munich office who workswith utilities, oil and gas, and chemicals compa-nies. He is a specialist in corporate and busi-ness unit strategy development, large-scaleoperational improvement programs, organiza-tional transformation, and change management.

Special thanks to Philipp Naderer, a formerBooz & Company principal, who significantlycontributed to the development of this Reader.

About the Authors 183

184 chapter

BOOZ & COMPANY is a leading global management consulting firm,helping the world’s top businesses, governments, and organizations.

Our founder, Edwin Booz, defined the profession when he estab-lished the first management consulting firm in 1914.

Today, with more than 3,300 people in 57 offices around the world,we bring foresight and knowledge, deep functional expertise, anda practical approach to building capabilities and delivering realimpact. We work closely with our clients to create and deliver essen-tial advantage.

For our management magazine strategy+business, visit www.strategy-business.com.

Visit www.booz.com to learn more about Booz & Company.

AsiaBeijingHong KongSeoulShanghaiTaipeiTokyo

Australia,New Zealand,Southeast AsiaAdelaideAucklandBangkokBrisbaneCanberraJakartaKuala LumpurMelbourneSydney

Middle EastAbu DhabiBeirutCairoDubaiRiyadh

North AmericaAtlantaChicagoClevelandDallasDetroitFlorham Park, NJHoustonLos AngelesMcLean,VAMexico CityNew York CityParsippany, NJSan Francisco

EuropeAmsterdamBerlinCopenhagenDublinDüsseldorfFrankfurtHelsinkiLondonMadridMilanMoscowMunichOsloParisRomeStockholmStuttgartViennaWarsawZurich

South AmericaBuenos AiresRio de JaneiroSantiagoSão Paulo

Booz & CompanyWorldwide Offices

Thought Leaders on M&A Success

The CFO as DealMaker:

Edited by Robert Hertzberg and Ilona SteffenWith an introduction by Irmgard Heinz,Jens Niebuhr, and Justin Pettit

TheCFO

asDeal

Maker:Thought

Leaderson

M&ASuccess

The CFO as Deal Maker:Thought Leaders on M&A SuccessEdited by Robert Hertzberg and Ilona SteffenWith an introduction by Irmgard Heinz, Jens Niebuhr, and Justin Pettit

If you have ever wondered what goes on behind the headlines in majormergers and acquisitions, you will find no more fascinating and enlight-ening reading than The CFO as Deal Maker. In these pages, you willlearn how Banco Santander earned a place among the world’s top 10banks by taking part in the US$98.5 billion acquisition of ABN Amro;how Saudi Basic Industries acquired GE Plastics and became the world’snumber one chemicals company by market value; and how Mittal Steelengineered its merger with Arcelor to create a global steelmaker —and become the largest player in the industry.

This strategy+business Reader features interviews with 15 leading CFOs,who share their ideas, experiences, and lessons learned in the successfulexecution of some of the largest deals in business history. In a compel-ling introduction, three experts in finance and performance management— Booz & Company Partners Irmgard Heinz, Jens Niebuhr, and JustinPettit — explore the three core roles that CFOs play in successful mergersand acquisitions:

• Key merger strategist, working with the CEO to ensure that mergerplans meet larger corporate objectives

• Synergy manager, capturing every deal’s cost savings, leveragingcombined capabilities, and driving joint market strategies

• Business integrator, identifying the changes related to personnel, pro-cesses, and organizational structure that best bring out a deal’s value

The introduction also identifies six rules of successful deal making thatCFOs must follow if they want one plus one to equal more than two.

If your goal is to hone your deal-making skills and capabilities, to ensurethe fulfillment of fiduciary responsibility, or to build your personal repu-tation for M&A success, The CFO as Deal Maker is essential reading.


Documents

The CFO as Deal Maker