Train Wreck

Crises happen. They happen to all companies and to all people. They happen in our personal lives and in our professional lives. By definition, crises bring change, big change. They can change the entire trajectory of your life or your company's future. That's why how we behave in a crisis, how we manage a crisis, is such a big deal.

For example, Yahoo is going through a crisis right now. It's attempting to reinvent itself. Microsoft's bid to buy the company further complicates matters. The way Yahoo's board handles this crisis will determine the fate of the company and its thousands of employees and shareholders. That's a pretty big deal.

One company's crisis can have a ripple effect on others. You might say that Microsoft is attempting to capitalize on Yahoo's crisis. In so doing, the software giant has created its own. Negotiating tens of billions of dollars to acquire a large company and remake its Internet business is definitely crisis material. ... Read more

Note: I wrote this on Thursday before Microsoft's latest bid for Yahoo; it's a follow-up to a post I wrote six months ago. I have two comments on Microsoft's offer: 1) It's aggressive and it's a sweetheart deal for Yahoo's shareholders; I think Yahoo's board will accept it; and 2) nevertheless, the issues I present are the same; it just becomes Microsoft's problem.

It's been seven months or so since Yahoo chief and co-founder Jerry Yang replaced Terry Semel at the helm of the ailing internet giant. At the time, I pondered the obvious question: Can Yang fix Yahoo?

For the record, I thought the board acted rashly in appointing Yang--a relatively inexperienced executive--to perform what would clearly be a challenging turnaround. I didn't think he had the experience to pull it off.

At the time, I thought that Yang--a visionary--wasn't what Yahoo needed. I thought Yahoo's problem was largely failed execution and missed opportunities in search advertising that allowed Google to leapfrog its more mature rival.

At this point, I'm even more convinced that Yang was the wrong choice. But I think the problem is bigger than missed opportunity and failed execution. The company does indeed need a new vision. And it needs a CEO who's capable of articulating and selling that vision down through the ranks and ensuring everybody's goals are aligned.

That's a tall order, but it can be done. Lou Gerstner did it at IBM, and that was no walk in the park. But Jerry Yang is no Lou Gerstner. ... Read more

I don't know how many times I've read a post or an article by some small-minded, self-important journalist advising a public company's board of directors on how to "fix" the company. The most common advice is "sell the company," "fire the CEO," or better still, "fire all the executives."

Even if a company is screwing up, how is a journalist--whose entire management experience consists of looking at his watch to be sure he files a story by 3 p.m.--qualified to dole out management advice? Is mastery of a keyboard sufficient experience to know how to run a company?

Mergers and acquisitions, M&A, business development, strategic development, corporate development, there are lots of names for the business of acquiring companies. They all sound important, even exciting. But whoever said, "may you live in exciting times," didn't necessarily mean that to be a prophecy of good things to come.

On the contrary, if you're like most investors, employees or executives, it's more of a curse. You see, in the corporate world, exciting usually means risky. And there's probably nothing riskier or more prone to failure than merging with another company.

I can cite lots of studies, but anyone in the business knows that most big mergers fail. Moreover, companies that have demonstrated a competency for acquiring companies--like Cisco and Broadcom, for example--are few and far between.

Just to be clear, for purposes of this post, we'll use the terms merger and acquisition interchangeably. The difference is primarily related to accounting, and nobody gives two beans about that...except the accountants.

So, what exactly is a failed merger? I define it two ways. Qualitatively, whatever the companies had in mind that caused them to merge in the first place doesn't work out that way in the end. Quantitatively, shareholders suffer because operating results deteriorate instead of improve.

Here's a list of 10 notorious failed mergers that I've evaluated in one way or another: AOL/Time Warner, HP/Compaq, Alcatel/Lucent, Daimler Benz/Chrysler, Excite/@Home, JDS Uniphase/SDL, Mattel/The Learning Company, Borland/Ashton Tate, Novell/WordPerfect, and National Semiconductor/Fairchild Semiconductor.

Some failed so spectacularly that the combined company went down the tubes, others resulted in the demise of the executive(s) that masterminded them, some later reversed themselves, and others were just plain dumb ideas that were doomed from the start.

In my mind, the two big questions are: Why merge to begin with? Why do mergers fail?

Companies merge when, for one reason or another, their strategic plans indicate they should. I know that sounds trite, but there are too many permutations to go any deeper.

That being the case, there must also be operating synergies between the two companies. In a nutshell, that means the whole will be financially healthier than the sum of the parts. Said differently, at some point after the merger is complete and the companies are integrated with redundant functions eliminated, shareholder value should increase. It's as simple as that...theoretically.

I experienced one merger firsthand: National Semiconductor's acquisition of Cyrix. On the surface, the deal seemed to make sense. National needed Cyrix's microprocessor technology to realize its strategic vision of becoming a system-on-a-chip company. Cyrix needed National's manufacturing technology to effectively compete with Intel.

However, once you got down beneath the surface, well, let's just say there were holes in the strategy so big you could drive a truckload of MBAs through them. This is in hindsight, mind you. Some of it I saw coming, some of it I didn't.

First, National's own strategy was flawed, merger or not. The market for its Cyrix-based system-on-a-chip products never really materialized.

Second, National didn't anticipate what competing head-on with Intel would do to its own operating results.

Third, when Cyrix's designs were produced in National's fabs, the chips didn't perform as hoped. That's about the most even-handed way I can put it.

As if that wasn't enough, National was probably too heavy-handed with its integration strategy. The two companies were culturally incompatible, and most of Cyrix's top engineers quit when their retention agreements expired.

The result was ugly. National's operating results went from black to red immediately following the merger, and the combined company continued to hemorrhage red ink until National sold most of Cyrix. A year and a half and more than $1 billion in cumulative losses and write-offs later, National was back to normal.

It's important to note that the usual three-month due diligence process didn't uncover any of the potential flaws in the deal. That's because merger due diligence processes typically have only one goal--to shield executives and directors from shareholder litigation. That, the companies did successfully. Shareholders lost their class action suit.

In summary, the planets have to align for a merger to be successful. In other words, for every way to do a merger right, there are probably 10 ways to do it wrong.

Here are my top 10 most common, preventable merger failure modes. One is enough to spell doom, but the more the merrier the train wreck:

1. Flawed corporate strategy for either or both companies
2. One company sugarcoats the truth, the other buys a PowerPoint pitch
3. Sub-optimum integration strategy for the situation
4. Cultural misfit, loss of key employees after retention agreements are up
5. Acquiring company's management team inexperienced at M&A
6. Flawed assumptions in synergies calculation
7. Ineffective corporate governance, plain and simple
8. Two desperate companies merge to form one big desperate company
9. CEO of one or both companies sells board and shareholders a bill of goods
10. An impulse buy or panic sell gets shoved down the board's throat

Last word
From a corporate governance standpoint, all significant mergers should be scrutinized by some really smart, experienced and disinterested (and therefore objective--this is key) people. Why boards don't do that as a matter of course I have no idea.

The burden of proof for mergers to make sense should be as high as their risk, their failure rate and the pain they inevitably cost shareholders.

Way back in the dark ages--before cell phones, reality TV, or social networks--there was big iron. In those archaic times, computers were actually used for computing, as opposed to watching porn or idiotic video clips. The computing giants of the day included IBM, Digital Equipment, Unisys (the marriage of Sperry and Burroughs), Data General, and Wang Laboratories.

The transition to personal computing and networking changed all that. IBM and Unisys survived by refocusing on services. The others didn't fair so well. Markets change. Companies that change with them survive. Those that anticipate change do better still. Those that resist change or change too slowly go the way of the dinosaur.

So, in the '90s, Cisco Systems, Compaq, Dell, Hewlett-Packard and Sun Microsystems became the new system powerhouses. IBM was still very much in the game. And of course there was Microsoft and Intel, owners of much of the PC's intellectual property.

In recent years, we've seen personal communications and consumer electronics overtake computers to grab the high-tech limelight. Cool devices like TiVo, PlayStation, BlackBerry, Treo, Razr, iPod, Slingbox, and iPhone have taken center stage.

Waiting in the wings are robotics, nanotechnology, and virtual reality--technologies with the potential to really change the way we live, down the road.

So why the history lesson? Because, it helps me set the stage for what's next. We're clearly in the midst of another big transition. As an industry, we've been talking about convergence for so long the word has become almost meaningless. Nevertheless, convergence--whatever that means--is upon us.

The big question on my mind is this: which companies will be the new power brokers of the post-computing era of digital convergence?

First, let's look at today's market leaders. We've already discussed computing; now add consumer electronics, mobile-handset technology, video gaming, Internet software, and various odds and ends. That gives us a laundry list of companies that looks something like this:

Amazon, Apple, Cisco, Compaq, Dell, eBay, Google, HP, IBM, Intel, LG Electronics, Matsushita Electric Industrial, Microsoft, Motorola, Nintendo, Nokia, Palm, Qualcomm, Research In Motion, Samsung Electronics, Sharp, Sony, Sun, Texas Instruments, Yahoo.

Now we determine the key criteria for leadership in the new digital age. Here's my stab at that:

Intellectual capital. That includes a broad range of technologies and design expertise, plus the ability to integrate those diverse technologies into innovative platforms.

Breakthrough marketing. That includes powerful brand loyalty and recognition, coupled with innovative promotion and market development for groundbreaking products and services.

Content delivery. This is about the ability to develop creative relationships with leading media content companies, and deliver that content through a spectrum of consumer channels, worldwide.

Then we take all those companies, their market leadership positions, their capabilities with respect to the three criteria, add some intangibles, and voila, we have our answer. In my opinion, these five companies are best positioned to be the giants of the post-computing era of digital convergence:

Sony
Sony has a leadership position in more markets than any other company. It also meets all three criteria, despite an inspirational drought as of late. The entertainment business and an early lead in robotics certainly don't hurt, either. Sony is in the best position of the five.

Apple
Not so apparent from the data, but Apple has several leadership products and a demonstrated ability to create new markets and category killers. The company that Jobs built also meets all three criteria and nobody can claim better marketing. Apple's on a roll, what more can I say.

Samsung
This company has come a long way and now boasts a powerful brand and leadership in several key categories. Samsung also meets two key criteria and is working on the last one. The Korean giant is certainly firing on all cylinders as it continues on its blistering trajectory.

Microsoft
While Microsoft has been struggling for a foothold in convergence products, the game is far from over. With a powerful brand, a huge installed base, $40 billion in cash, leadership in several key markets, and moderate strength in all three criteria, I wouldn't rule out the software giant.

Google
Here's where intangibles come into play. Although the company has never developed or marketed a product per se, it has the brand, the channel, and the cash-generating machine to make a serious go of it. It all depends on where Google, the youngest and the long shot of the five, goes from here and how well it executes.

Of course, there is a big caveat to all this. The leaders of tomorrow may not even exist today. Back in the days of big iron, nobody could have predicted that you'd be reading this post on a Web site with your eyes glued to a flat-panel display on your networked PC.

If history repeats itself, there's a high probability that a new market, category, or product will set the consumer world on fire. If digital convergence ends up in the virtual reality domain, for example, then the next Sony might develop in Second Life. Stranger things have happened.

The point, of course, is that your start-up may challenge Sony, Apple or Samsung for the title of 800-pound gorilla of digital convergence.

I realize that the advice I give CEOs may fall on deaf ears. Still, that's a lot of ears; they can't all be deaf. And if a board director, a staff member, a good friend or a gutsy employee was to forward this link, isn't a good CEO obligated to at least take a look? I know, I won't hold my breath.

Still, the CEOs of the future need to know this stuff. Now that's a thought.

Assuming somebody's getting something out of all this, today's unsolicited advice is about the business. Many technology CEOs are surprisingly short on what it really takes to build a profitable, growing company in today's competitive marketplace. This is the biggest challenge for any CEO of any company. It's not the kind of thing you learn in executive MBA school.

In many cases, and this is especially true in small- to mid-size technology companies, CEOs play to their strengths and ignore weak areas. It's human behavior. Unfortunately, they're not getting the guidance they need from their boards or others.

And that brings us to what is, without a doubt, the shortest version you'll ever see of what every CEO of every technology company needs to know about running the business, along with a few links for more info. ... Read more

Two and a half years ago, I wrote an article entitled Intel: The one-hit wonder. My conclusion, at the time, was that Intel's business and operating model--built around its dominance in PC processors--is a trap that has kept the chip giant from competing effectively in hot markets like communications and consumer electronics.

With Intel Developer Forum in full swing in the city by the bay, I found myself wondering, has anything changed since I wrote that story and is the conclusion still valid? In my opinion, the answers are no and yes, respectively.

Don't get me wrong. Intel is still the world's 800-pound chip gorilla. It's actually made quite a comeback from a tough bout of market share loss to perennial rival AMD. The Centrino brand is killing in the mobile Wi-Fi space and it's working feverishly to duplicate that success with WiMAX. ... Read more

Back in 1990, my wife and I went to Europe to explore the land of our forefathers (and foremothers) by car. The first thing I noticed when we got in our Audi rental was that it didn't have air conditioning. It was August; what were these people, barbarians?

Then I turned on the radio. The display had all this text information that identified songs and other stuff. Now that was cool. I was sure that, before long, American broadcasters would adopt similar technology.

Seventeen years later, I'm still waiting.

Last year I was asked to do a minuscule amount of consulting for iBiquity, the developer and exclusive licensor of digital radio technology in the U.S. I was dying to find out what had delayed my ability to identify a Jane's Addiction song on the radio, not to mention hear it in CD quality. Here's what I learned, but first, some background.

In 1991 CBS, Gannett (publisher of USA Today), and Westinghouse (which is now owned by Toshiba, in case you didn't know) formed USA Digital Radio Partners. I'm guessing it was some sort of joint venture. In 1998, a Westinghouse executive and former McKinsey consultant named Bob Struble led the company's spinoff with backing from a horde of broadcasting companies. Two years later, the company merged with Lucent Digital Radio and iBiquity Digital was born.

iBiquity calls its product "HD Radio." No, HD doesn't stand for high definition. It originally meant hybrid digital, but the company now claims that HD doesn't stand for anything. That's probably because it's easier to get a trade mark if the term is a name as opposed to a generic term. Intel did the same thing with MMX technology, which originally stood for multimedia extensions, although you couldn't get anyone at Intel to admit that now. ... Read more

Imagine this: a company has a $35 billion market cap, a P/E of 50, annual revenues of $5 billion, annual profits of $500 million, 60% gross margins, and about $3 billion in the bank.

Nice fundamentals, right? Now imagine the same company being characterized as "embattled." What could possibly be so wrong with this picture that an outcry from investors got the CEO booted?

The company in question, of course, is Yahoo. And what's wrong is that archrival Google has figured out how to mint money with search ads and now boasts a market cap of $170 billion and $3 billion in annual profits. The bad news for Yahoo is that advertising, for the most part, is a zero-sum game. Google's good fortunes spell boohoo for Yahoo.

It doesn't help that, in 1998, Chief Yahoo and co-founder David Filo encouraged Google's founders to start a search-engine company. Or that, in 2002, Yahoo had a chance to buy Google for $5 billion and passed.

The irony of those missed opportunities isn't lost on anyone; every Yahoo employee and shareholder has felt its demoralizing effects, not to mention Yahoo's deteriorating share price. All it took was a whopping $71 million executive pay package for CEO Terry Semel to put investors over the edge.

Less than a week after the company's annual shareholder meeting, Semel was out and Chief Yahoo and co-founder Jerry Yang was in. Until then, Yahoo had employed seasoned executives at the top--first Tim "TK" Koogle and later Semel. Still, founders Filo and Yang have remained actively involved in the company's evolving business strategy and technology.

But Jerry Yang as a turnaround CEO? I admit--I didn't see that coming. ... Read more