Verizon, parent company of Oath, announced that 10,400 employees are accepting a separation package at a total cost of over $1B. They will write-down the value of Oath by $4.6B as part of a re-organization.
Using fluent, but vacuous, business-speak, the Verizon chief financial officer said, “The leadership team at Oath is focused on returning to revenue growth by completing the integration of the legacy AOL and Yahoo! advertising platforms by year-end, implementing initiatives to realize synergies across all of our media assets and building services around our core content pillars of sports, news, finance and entertainment.”
In the world of deals, situations like this are common. Over-confidence about what a newly formed business can achieve is rampant but hardly ever noticed, until the losses pile up. Realizing synergies is too often more dream than reality. Given the rate at which acquisitions fail to deliver the value specified in the investment thesis, it’s worth asking why. It is a major reason why I wrote the recently released The Merger Mindset. The book addresses the perceptual, cognitive and emotional aspects of deals that affect leaders and, indeed, everyone involved: leaders, shareholders, employees, suppliers and the too often ignored, customers.
Why is value creation so difficult?
Leaders are human. Acquisitions are easier to finalize than they are to integrate. Yet, the hunger to do deals is a powerful motivator and far too few understand that the desire to acquire clouds the mind. Even smart, successful leaders can have inaccurate perceptions and baseless beliefs about a potential deal partner. It is a rare leader who is aware, never mind willing to admit, the personal rewards they expect from a deal. Whether financial, reputational or emotional, these forces motivate decisions.
Value can increase in the buyer’s mind without a basis in reality. The context in which a leader operates influences his or her opinions, decisions and actions. A posse of people egging on a leader, a board demanding a deal, or investment bankers advising an action can all have influence. When Verizon acquired the companies that would later form Oath, how optimistic were the projections?
The Nobel Prize winning physicist, Richard Feynman famously said “The first principle is that you must not fool yourself and you are the easiest person to fool.” A great leader is one who is beholden to the truth, not just the information in front of them nor the predictions of those who will benefit from the deal.
Once made, decisions are likely to be defended by those who made them. It is more often than not a leader who did not put a deal together who undoes it. Whether through divestiture or re-organizations that make the entities unrecognizable, it often takes someone less personally invested in past-decisions.
However, newness is no guarantee of good, and fast decisions. John Flannery, former CEO at General Electric (GE) didn’t seem to recognize that protecting sacred cows would end his tenure, perhaps because he was a GE insider. Experience has a major influence over mindset. This is why the departure of Tim Armstrong, former CEO of Oath and former CEO of AOL, was a good move.Knowledge alone will not prevent the loss of value, such as the case with Verizon. Click To Tweet
Leaders, and all the rest of us, are over-confident. Over-confidence is a well- researched phenomenon. The work of J. Edward Russo and Paul J. H. Schoemaker makes this case well. Even when we are offered the opportunity to give a range, rather than a specific answer, people are predictably over-confident. This over-confidence leads people to make errors of judgment that, in turn, lead to poor decisions, which we are usually loath to reverse.
This over-confidence leads to:
- Over-valuing a business
- Failure to see faint signals in the environment that portend major shifts
- Unjustified confidence in leaders
- Explaining away signs of trouble
- Believing results that are too good to be true
The Value Creation Mindset
Acquisitions are an attractive path to growth because they can so quickly add value. However, the failure rate is high enough to make any leader think twice, and they should. The hit to Verizon; AOL and Time Warner; Bank of America and Countrywide; Daimler and Chrysler; Sears and Kmart and so on.
None of these deals failed because of a natural disaster. They were all mistakes of leadership. Before leaders enter into a deal, there are a few things they can do to sharpen their observations, increase awareness of the subtle pressures on them and improve their decisions.
Leaders who have a mindset that is beneficial, have the following characteristics:
- Confidence in themselves.
- Recognition of their own limitations.
- Discernment that keeps bad information out of the mix.
- Curiosity about people that enables them to understand motivation.
- Realism about what is unknown and what is unknowable.
- Acceptance that emotion plays a role in decisions.
- Recognition that culture is the responsibility of leaders.
- Resistance to flattery.
- Courage to make tough calls.
Acquisitions and mergers are often done without the parties knowing as much as they would like about each other. Knowledge alone will not prevent the loss of value, such as the case with Verizon. Mindset is a more durable, reliable and predicable asset because it leads to doing the right things at the right time, not following a rigid blueprint. A mindset of value creation keeps leaders holding their own feet to the fire, long before someone else does.