Russ Banham

Russ Banham
Russ Banham ( is a contributing writer to Chief Executive

Two for the Road

Are two heads better than one? When it comes to leading an organization, whether it’s a large, global enterprise or a small mom and pop shop, the answer seems to be yes. While some co-CEO arrangements enjoy the brief bliss of a Kardashian wedding, most stand the test of time.

Co-CEOs: Are Two Better than One?

The answer seems to be yes, two are better than one. Performance data for 30 companies that transitioned from a traditional single-CEO leadership to a co-CEO structure showed a positive reaction from the market.

Mergers and Acquisitions: A Deal Gone Wrong

For our November/December 2011 issue, former CEO and chairman of Procter & Gamble A.G. Lafley tells Chief Executive about an acquisition gone wrong.

You’re Married, Now What?

Key Takeaways

  • Set a tone of respect for the target, its legacy and people.
  • Identify, understand and overcome issues related to personal chemistry and cultural incompatibility.
  • Establish joint integration teams across business units, divisions and functions in advance of joining the business.
You’re Married, Now What?
Now that M&A activity is on the rise, the time seems right to re-examine an unnerving fact—roughly two-thirds of mergers and acquisitions fail insofar as creating stock market value. Moreover, a 2007 Hay Group/Sorbonne study found that more than 90 percent of mergers in Europe fall short of meeting financial goals. Why the abysmal success rate? “Most mergers fail because the strategy was flawed in the first place, the cost synergies weren’t there, the cultures clashed or the leaders of each company hated each other,” notes A.G. Lafley, who rode herd on more than a dozen major acquisitions during his tenure as CEO of Procter & Gamble (2000-2009). All too often, deal-makers get caught up in the traction that the deal will generate and neglect to give careful forethought to the look, feel and purpose of the combined entity and to overcoming the difficulties of integration. Adding to the challenge is the need for a thorough understanding of each company’s culture, intellectual capital, customer service, partner relationships, IT architecture, supply chain, back office functions and brand reputation. But while every merger or acquisition is to some degree unique, there are lessons to be drawn from past M&A transactions—both triumphs and failures. So we’ve examined a few good, bad and really ugly unions to ferret out four lessons for successful integration.

Lesson One: Prep for Post-Deal Integration

Successful mergers and acquisitions require planning the integration well before the ink is dry on the transaction—something acquirers often neglect. “The most important thing in a merger or acquisition is for both parties to write up a plan of integration ahead of signing the deal—and to stick to it,” says Michael P. Connors, CEO of Information Services Group, a large, publicly traded advisory services company that recently closed two acquisitions (Compass and STA Consulting). “This plan must be held accountable by the acquirer and acquiree.” Connors—who presided over 32 acquisitions in his long career, many as former CEO of what is today The Nielsen Company—also believes that acquiring companies often get so caught up in the promise of a merger or acquisitions that they fail to consider the post-merger governance obstacles. “Acquiring companies focus on the numbers; they give much less attention to who will run the show and how,” agrees Faisal Hoque, founder and CEO of Stamford, Conn.-based management solutions provider, BTM Corporation, and author of The Power of Convergence. “Few have a process for integrating the best people, technologies, processes and functions,” Hoque adds. “They don’t consider how the business process architecture will come together in terms of the supply chain, distribution and customer care.”

Lesson Two: Collaborative Connecting

J.P. Morgan Chase & Co. earned its investment when acquiring Banc One in 2004. The $58 billion deal made Chase the largest credit card issuer in the U.S. But trepidation suffused the target company upon news of the transaction. “I shared a wall with Jamie Dimon (CEO of Banc One at the time) and you could hear his bellowing voice,” recalls Katrina Pugh, president of Boston-based strategy consultancy Align, who was a first vice president at Banc One when the acquisition took place. “He had worked with Sandy Weill in forming Citigroup, and it was scary to think what lay ahead.”
“Acquiring companies focus on the numbers; they give much less attention to who will run the show and how.”
“Often in an acquisition, a climate of fear pervades the company being acquired, which increases the risk of the best people leaving,” says Pugh. “Jamie wanted to be sure this didn’t happen at Banc One.” Several post-merger integration teams composed of people from both banks were established to keep the anxiety at bay. Pugh was named head of the post-merger change management team within finance, involving people from both banks with the goal of sharing the best of each organization. “It was our job on the teams to send out the message that we would determine the best practices in each organization and then provide for a seamless transition,” says Pugh, who is the author of Sharing Hidden Know-How: How Managers Solve Thorny Problems With The Knowledge Jam. Teams jointly established the topics they would address. Pugh’s team, for example, tackled payroll as it might look going forward, given the differences within each bank’s functions from an operating standpoint. “The first thing we did was develop a mutual vocabulary as a baseline,” she explains. “Now that we were reading off the same page, we were able to review each other’s process maps to ferret out the best practices. Feelings of mutual trust developed, since we were in the trenches making the decisions. When the acquisition closed, the integration went smoothly.”
You’re Married, Now What?

Lesson Three: Leadership Accord—Or the Appearance Thereof

Post-deal leadership can be a thorny issue. Problems also often arise when the two CEOs are very different people. Success then hinges on the two leaders acting swiftly to resolve difference sand committing to presenting a unified front. The 1997 merger of Abitibi-Priceand Stone Consolidated, two Canadian pulp and paper companies, is a case in point. “One of the CEOs was a New Age visionary sort of guy and the other was a roll up the sleeves operational guy,” says Mitchell Marks, associate professor of management in the San Francisco State University’s College of Business and author of Joining Forces: Making One Plus One Equal Three in Mergers, Acquisition sand Alliances. Marks, who worked on the deal, notes. “They didn’t see eye to eye on much, which often happens in many mergers. But, they agreed to resolve all conflicts in private.” Marks was called upon to help bridge the divide. “They realized they had to model cooperative relations, even though they thought differently,” he recounts. “While they’d argue in private, in front of the integration teams they were all about agreement. They let it be known that one company would not dominate the other post-merger, and the best people from each organization would be identified during the pre-integration process. This reduced the risk of good people thinking their jobs were jeopardized hitting the road.” When the merger closed, the combined company, Abitibi Consolidated, enjoyed a stock value higher than most industry competitors.
“Often in an acquisition, a climate of fear pervades the company being acquired, which increases the risk of the best people leaving.”
When two CEOs get along famously,that accord streamlines integration. P&G’s Lafley cites his experience with CEO Jim Kilts during P&G’s $57 billion acquisition of Gillette in 2005. Both men believed their respective companies were more formidable combined than apart,and they broadcast this message in all appearances. “We beat our cost synergy goal by 50 percent because we integrated quickly and seamlessly,” Lafley says.Liam Brown and Colin Gounden,CEOs of market research providers Integreon and Grail Research, respectively enjoyed a similar bond. When Integreon reached out to acquire Grail in early 2009, the CEOs collaboratively laid the groundwork for the future of the combined entity. “Our chemistry was critical; fortunately, Liam and I share good chemistry,” says Gounden, chief marketing officer of Integreon,at present. “We owned up to the fact that there would be bumps in the road,but vowed that we would get over them together.” The effort paid off. Since the November 2009 acquisition, revenues from Grail Research, which kept its brand name, are up 35 percent.
You’re Married, Now What?
A lack of personal chemistry is not necessarily a death knell, notes Josh Leibner, president of organizational alignment consultancy Quantum Performance.“There will always be personality clashes,” Leibner asserts. “That’s not often the cause of break-ups. It’s the inability to create the right environment post-merger. You need to develop a vision and a direction, and get everyone to buy into it. CEOs of both organizations have to set a tone of brutal honesty, face reality without equivocation and make tough decisions immediately.”

Lesson Four: Consider Semi-Separation

Sometimes segregation rather than integration makes sense. “There are times when the best post-merger strategy is to leave the acquired company alone, particularly if you don’t know the business,” says Lafley. “We did that with a company called MD VIP, a start-up by an entrepreneurial doctor in Florida that provides family group care as a concierge service the family pays a set fee each year up front for health care guidance on nutrition, exercise and other ways of preventing disease. It was an innovative business model,a partnership between the patient and their doctors to create life-changing health care.” The target’s unique business model persuaded Lafley to run the company at arm’s length. “We put some P&G people on their board and provided some research and sales capabilities, but that was about it,” he explains. “We did not impose the P&G culture on them, which would have stifled the baby before it had time to grow. Last time I looked, its revenues were over $100 million, and we’ve made a significant return on our original investment.”

Six Avoidable M&A Mistakes

What not to do to make the most of your acquisition opportunities.

Tireless in Seattle

Two years ago, 80-year-old Safeco Insurance Co. came dangerously close to shutting its doors for good. Earnings had plunged to just 9 cents per share, and the stock price had fallen to $22 from a 1998 peak of $56. Management decisions by its former chief, including a misguided acquisition and ventures into non-core businesses, conspired with an antiquated underwriting process and poor market conditions to nearly doom the Seattle-based company. The feeble property and casualty insurer suddenly was up for grabs, and none other than Warren Buffett was digging into his pockets. Then, a hometown boy who had resuscitated the fortunes of another large insurance company returned to breathe life back into the moribund company.

New CEO Mike McGavick didn't take a kid glove approach to reviving Safeco. He cut the workforce by 10 percent; slashed 1,200 jobs; wrote off an unwise acquisition; pulled out of more than a dozen non-core large commercial insurance lines; declared a moratorium on new homeowners policies in 10 states; and sold off a profitable but debt-plagued commercial credit operation. He also assembled what analysts consider one of the best management teams in the insurance business-former Travelers CFO Christine Mead as finance chief, former Geico underwriting boss Mike LaRocco as president of Safeco's personal lines division, and the former head of Accenture's insurance practice, Yom Senegor, as CIO and director of strategic planning.

On Jan. 28, at a buoyant news conference announcing Safeco's 2002 results, McGavick proclaimed the company alive and well. "The turnaround," he said, "is complete." Safeco reported a net income of $301.1 million, compared with a net loss of $989.2 million in 2001. Profits in the fourth quarter were five times what they were the previous year's fourth quarter, $57.1 million compared to $8.6 million. "It was a long haul, but they're finally back on track," says Paul Latta, assistant director of research at Seattle-based investment bank McAdams Wright Ragen.

For McGavick, the turnaround has special meaning. "This company was here when Microsoft, and others here weren't even imaginable," he says. "There was no way we could let it fail."

Stormy weather

In an industry where turnarounds are rare-analyst Michael A. Smith of Bear Stearns once equated turning around an insurance company to "parallel parking a battleship"-

McGavick succeeded by quickly crafting a rebound strategy and sticking to it. He also refused to gloss over the enormity of Safeco's problems. "Everyone told him Safeco was a weak company, but he called it like it was-a very weak company," says Cliff Gallant, vice president at New York-based equity research firm Keefe, Bruyette and Woods.

From his 22nd story office atop Safeco Tower, overlooking the neighborhood he grew up in and his alma mater, the University of Washington, McGavick reflects on the turnaround of Safeco, which sells auto, homeowners, small business and life insurance through independent agents in 45 states. A local institution-baseball's Mariners play at Safeco Field-Safeco's troubles emerged in the mid-'90s when former CEO Roger Eigsti sought to expand the company's market share in the Midwest. In 1997, Eigsti paid $2.8 billion to acquire American States-too much money, analysts griped.

At the time, McGavick, a former insurance lobbyist and political campaign manager, was in charge of the commercial insurance division of CNA Financial. Known for his discipline and tenacity, McGavick revamped underwriting practices at the Chicago-based insurer, reviving the division and earning a reputation as a turnaround specialist. After ousting Eigsti in 2000 and fending off acquisitive overtures by Warren Buffett, Safeco's exhausted board tapped McGavick for help. "I remember their profound sense of embarrassment," he recalls. "This was a company with a great history and reputation. The board was really tired of producing results that were so out of character. They were as open to change as any organization I can imagine."

McGavick is loath to attribute Safeco's troubles entirely to the American States acquisition, which had good motives-more than 4,000 agents were to be added in the process. "The difficulties really began in the early '90s, when the company opted not to modernize its underwriting practices," McGavick says.

Other insurers had begun to use credit scoring as an underwriting tool, weeding out applicants based in part on credit history. But because Safeco did not use the tool, they wound up with the applicants other insurers rejected. "We were stuck with the bad risks," says Marcy Hall, vice president of Kibble & Prentice, a Bellevue, Wash. agency representing Safeco.

Exacerbating the company's poor underwriting practices was the softening property/casualty insurance market. Because Eigsti bought American States at the top of the underwriting cycle when prices had just begun to fall, Safeco had to reduce rates simply to retain market share. American States agents were told to hold onto the business at any price, a departure from underwriting discipline for Safeco, a conservative company with a white-shirts-only policy for male executives well into the '90s.

In 1999, the low rates and high claim activity produced some $367 million in underwriting losses, half of it on American States paper. McGavick says prior management should have known in 1995 that something was amiss with the auto underwriting results. "But they were profitable and decided to plow those profits into the American States acquisition. In all the confusion, the hemorrhaging was obscured," he says. "The company went from fabulous results to horrible."

Under Eigsti, Safeco also had wandered from its roots as an insurer of small and midsize businesses and individuals and began underwriting large commercial risk policies such as directors' & officers' liability, lawyers' professional liability and even medical malpractice. "Eigsti wanted Safeco to be a major national company like AIG," says Gallant. "But the industry was going through cutthroat competition and these were lines of business and geographies that Safeco wasn't familiar with. The strategy backfired."

Standard & Poor's reacted to the unsettling news by putting Safeco on credit watch and downgrading it from A-plus to AA-minus. A.M. Best retained Safeco's A rating but changed it from a stable to negative outlook.

Steering the course

McGavick's first decision was to reduce the dividend by 50 percent and redirect that capital-more than $95 million a year-toward the company's growth. His second move was to write off $1.2 billion in goodwill derived from the American States acquisition. "He just basically unwound the mistake," says Gallant.

McGavick then put Safeco Credit Co. on the block, announcing in July 2001 that GE Capital would acquire the profitable operation for an undisclosed sum. The sale helped cut Safeco's short-term debt in half. "While the credit company contributed $20 million to earnings, it constituted fully half the debt on the balance sheet, roughly $1.5 billion in commercial paper," McGavick notes. "Credit companies live on the spread they can create-what they can borrow at and lend at. Unfortunately, the ratings downgrades had compressed that spread and effectively undermined the entire operation."

The CEO then began a series of layoffs, asset sales and consolidations to get expenses in line with industry leaders. More than 1,000 underperforming agencies were given goodbyes, leaving 7,000. Non-core lines of business were exited, as McGavick retained only products sold at low margins and focused on broad marketplaces-auto, homeowners, small business and life insurance. "Safeco was not about brilliant individual underwriters assessing risk as an art critic might assess a Monet," he explains. "What we are is a team of disciplined underwriters looking at garden variety risks."

Most important, McGavick brought in LaRocco to revitalize underwriting. LaRocco had senior management positions at Geico and Progressive. Both have a tiered approach to underwriting, using diverse rating factors, including credit scoring, to segment policy applicants into different risk tiers.

Whereas Safeco had three different pricing tiers for auto insurance in the past, it now has more than 15. It also has 1.5 million automobile policyholders, the most in the company's history, adding up to more than $2 billion in revenues last year.

LaRocco was also charged with redeveloping Safeco's homeowners insurance line. Like many insurers, Safeco was losing money on the business, which is vulnerable to capricious weather and uncertain liabilities. He developed a new homeowners product with narrower coverage terms and conditions, took aggressive rate actions in certain states and in 10 states declared a moratorium on the product altogether.

Latta notes that mild weather coupled with the new underwriting stance is paying off. "Fewer claims from storms and other natural disasters held Safeco's costs to 93.5 cents for every dollar of premium last year written in homeowners," he says. "I anticipate as results continue to improve, McGavick will reevaluate the moratorium."

Perhaps the best news is Safeco's ratings. Both Best and S&P recently upgraded Safeco to stable. And S&P reinstituted the company's A-plus rating. But McGavick is not yet satisfied. He recently raised $329 million in capital to fund expansion activities, and has charged CIO Yenegor with developing state-of-the-art Web-based claims handling, agent interface and customer-facing IT projects. Independent agents will remain the company's primary distribution channel, although like Progressive, Safeco expects to sell more insurance on the Internet. "We see a future where you buy a Safeco policy on the Internet, make payments online and service the policy online, but with an agent's assistance as a trusted adviser," McGavick says.

Five years from now, McGavick says he fully expects Safeco to be one of the top 10 most profitable insurance companies in America, and within a decade, one of the top five. At present, it is the 15th-largest. "To have started this decade with one of the poorest performances of any U.S. insurance company and to end it in the top five would be a great victory," McGavick says. Even by the standard of a Bill Gates or Jeff Bezos.

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