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Expanding Without Managing

June 12, 2002
By JEFFREY SONNENFELD






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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

http://www.nytimes.com/2002/06/12/opinion/12SONN.html?ex=1024903800&ei=1&en=0634435a04487b41



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