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The CFO as Deal Maker:

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

Thought Leaders on M&A Success The CFO as Deal Maker:
Edited by Robert Hertzberg and Ilona Steffen
With an introduction by Irmgard Heinz, Jens Niebuhr, and Justin Pettit Thought Leaders on M&A Success
Edited by Robert Hertzberg and Ilona Steffen
If you have ever wondered what goes on behind the headlines in major With an introduction by Irmgard Heinz,
mergers and acquisitions, you will find no more fascinating and enlight- Jens Niebuhr, and Justin Pettit
ening reading than The CFO as Deal Maker. In these pages, you will
learn how Banco Santander earned a place among the world’s top 10
banks by taking part in the US$98.5 billion acquisition of ABN Amro;
how Saudi Basic Industries acquired GE Plastics and became the world’s
number one chemicals company by market value; and how Mittal Steel
engineered 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 successful
execution 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 Justin
Pettit — explore the three core roles that CFOs play in successful mergers
and acquisitions:

• Key merger strategist, working with the CEO to ensure that merger
plans meet larger corporate objectives
• Synergy manager, capturing every deal’s cost savings, leveraging
combined 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 that
CFOs 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 ensure

the 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
A strategy+business Reader

Edited by Robert Hertzberg and Ilona Steffen

Introduction by Irmgard Heinz, Jens Niebuhr,
and Justin Pettit
The CFO as
Thought Leaders on

Edited by Robert Hertzberg and Ilona Steffen

Introduction by Irmgard Heinz, Jens Niebuhr, and Justin Pettit

A strategy+business Reader
Deal Maker:
M&A Success

Chapter title 5
A strategy+business Reader
Published by strategy+business Books

Copyright © 2008 by Booz & Company Inc.

All rights reserved.

No reproduction is permitted in whole or part

without written permission from Booz &
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Design: Opto Design

Cover art: Steve Ohlsen/Alamy

strategy+business Books
Publisher: Jonathan Gage
Editor-in-Chief: Art Kleiner
Executive Editor: Rob Norton
Managing Editor: Elizabeth Johnson
Deputy Managing Editors: Laura W. Geller,
Debaney Shepard
Senior Editors: Theodore Kinni,
Melissa Master Cavanaugh

9 Introduction: The CFO as Deal Maker

by Irmgard Heinz, Jens Niebuhr, and Justin Pettit
20 ArcelorMittal: Forging a New Steel Industry
by Viren Doshi, Nils Naujok, and Joachim Rotering
32 Banco Santander: Think Globally, Bank Locally
by Christian Reber and David Suárez
42 BASF: Reduced Cyclicality through Portfolio Management
by Klaus Mattern
52 Bayer: Preparation Enables Success
by Christian Burger and Klaus Mattern
64 Andrew Bonfield: The Fine Art of Drug-Industry M&A
by Robert Hutchens and Justin Pettit
76 Deutsche Telekom: Never Make Acquisitions Driven
Solely by Finance
by Irmgard Heinz and Klaus Mattern
86 Duke Energy: The Value of Relationships in M&A
by Thomas Flaherty
96 Enel: Creating the New European Energy Market
by Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza
Contents, continued

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

by Klaus Mattern and Walter Wintersteller
116 Henkel: Manage M&A Centrally — It Uses Corporate Money
by Adam Bird and Irmgard Heinz
128 Johnson & Johnson: M&A Requires Financial Discipline
by Charley Beever and Justin Pettit
140 Merck: Growing the R&D Pipeline
by Charley Beever
150 Saudi Basic Industries Corporation: Using Acquisitions to
Achieve Global Scale
by Ibrahim El-Husseini and Joe Saddi
160 Telefónica: Transformational Deal Making
by Jens Niebuhr and Joseph Santo
170 UnitedHealth Group: Handpicking Capabilities Rather
Than Just Adding Scale
by Gil Irwin and Justin Pettit
180 About the Authors
The CFO as Deal Maker
by Irmgard Heinz, Jens Niebuhr, and Justin Pettit

THE MOST UNIQUE advice on mergers and acquisitions that Aditya

Mittal has ever heard came from a Roman Orthodox bishop. The
CFO of Mittal Steel was considering how to turn around a newly
acquired and struggling steelmaker in Romania, when the local
bishop told him to build a church at the entrance to the facility. “I’m
telling you that will work wonders,” the bishop said. Mittal was
taken aback, but decided to take the advice. “We built a beautiful
Roman Orthodox church; all the workers got involved in it part-
time. And that changed everything,” says Mittal, remembering how
the integration barriers dropped away and the plant’s workers
embraced 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 done
by the same rules, and no one strategy fits every company. There are
many different ways to succeed at M&A, a fact made clear in the 15
interviews with CFOs of leading companies that make up this
strategy+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 to
integrate them to the extent economically sensible. There’s Deutsche
Telekom, which says M&A success is all about capturing synergies,

The CFO as Deal Maker 9

and Merck & Co., Inc., which says M&A is about obtaining a stake
in promising new discoveries.
And yet, for all the differences in how companies approach
M&A, our work with financial executives over the years and our
interactions with them in the course of conducting the interviews
for this book have led us to conclude that all CFOs play three basic
and 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 merger
plan meets larger corporate objectives. This means the CFO’s role
isn’t limited to ensuring that the deal is financially sound; it extends
to posing more qualitative questions to those championing the deal:
Is the target appropriate? Why? What could go wrong? CFOs ask
these questions not just to understand the potential problems, but
also 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 to
participate is what sort of deals their companies should pursue.
Traditional deal making is only one tool in most companies’ growth
kits — and “not necessarily the one that gets the most use,” says
Peter 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-win
approach that is financially logical,” Kellogg says.
The CFO’s second role is as the deal’s synergy manager. Synergies
can 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 who
can execute it. Good synergy managers know the value of financial
incentives, but they don’t leave anything to chance; they also insti-

10 strategy+business Reader
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 and
makes a board member responsible for its execution. In the first
year, there is too much at stake to let an integration effort go off in
the 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 organizational
structure that will best bring out a deal’s value. CFOs certainly play
a hands-on role in bringing the finance organizations of two previ-
ously separate entities together, but there is also a role for CFOs in
integrating departments outside of finance.
CFOs and their teams should define the performance metrics
and establish the goals that must be achieved to justify the deal’s
purchase 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, a
critical 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 drivers
within 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 six
rules that CFOs should follow to ensure that when it comes to
M&A, one plus one will equal more than two.

Rule 1: Shape the Strategic Intent of the Merger. The

CFOs in this book
repeatedly told us that all deals must support their companies’ long-
term, value-creation strategies. To do a deal for a short-term reason,

The CFO as Deal Maker 11

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 a
promising geographic market, to expand a product line, or to gain
better 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, and
of UnitedHealth Group, which has done almost 100 deals, many of
them 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 help
shape and communicate it. In particular, the CFO must have the
resolve not to be swayed by the market’s initial response. In a bull
market, investors sometimes throw up their hats to celebrate an
acquisition that, in the long run, will damage or even bankrupt the
acquirer. This was common during the dot-com boom. The opposite
also sometimes happens; during bear markets, fundamentally sound
deals can get an unwarranted thumbs-down from wary investors. As
one of the deal’s key strategists and its clear-eyed analyst, the CFO
has 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 all
heard it before: “Company X acted opportunistically in an M&A
setting,” 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 to
the extent that they require quick action, there is often not enough
time for a rigorous pre-deal assessment. Extreme time pressure
heightens M&A risks, especially those of paying too much and of
giving short shrift to essential internal processes. The company that

12 strategy+business Reader
boasts of having bought something “opportunistically” is often
revealed 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 advance
preparation. Such preparation increases the likelihood of a company
getting in early on an attractive deal and wresting momentum from
rival bidders. This is what Bayer accomplished a few years ago, after
a bid from a rival drug company put Schering in play. Bayer ulti-
mately prevailed, completing a deal that extended its holdings from
chemicals 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 an
existing list of potential acquisitions that included Schering. “We
had 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. It
employs dozens of regional scouts whose job is to stay abreast of
molecular discoveries at universities and startup biotechnology com-
panies. This increases the likelihood that Merck will be one of the
first 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 long
hours courting commercial banks to establish open pipelines
to capital. That groundwork paid off in 2005, when Fernández
Valbuena secured the financing for the company’s US$32 billion
bid for mobile and broadband service provider O2 over the course
of a weekend.

Rule 3: Never Overpay. Among

the many mistakes that companies can
make in M&A, none is as irreversible as paying too much. There
is no recovering from an acquisition that doesn’t earn its cost of

The CFO as Deal Maker 13

capital and that ends up diminishing the company’s profitability
or burdening it with a debt load that it can’t service. “If you can’t
build the case for how you’re going to make money, you shouldn’t
go after a certain target,” says Kurt Bock, the CFO of chemicals
company BASF.
Leading CFOs determine the value of potential targets in
several ways. They triangulate value through multiple analytic
methods, as well as subjecting critical assumptions and other risk
factors to a comprehensive sensitivity analysis. But even the most
detailed numerical forecast isn’t always sufficient. The problem is
that the model’s output is only as good as what goes into it — and
synergy 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 on
centralized M&A departments, whose job is to view the econom-
ics more dispassionately.
With its breadth of experience, a centralized M&A staff can
also play an important role in spotting some of M&A’s less obvious
risks. The departure of essential employees and the possibility of
regulatory change and culture clashes, especially when the parties
merging are from different nations, can hurt revenue and profits,
and can turn what may look like a sure bet on paper into a losing
Winning CFOs use creative deal structures to lower the risk of
paying too much. Merck CFO Kellogg, for instance, recommends
structuring riskier deals so that a portion of the payout is contingent
on 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 future
expectations of buyers and sellers. Deal structure is also often
designed to incorporate other elements of risk management, such as
the form of consideration or the use of collars on stock deals.

14 strategy+business Reader
Rule 4: Cash In Your Synergies. Once a deal is done, investors judge
CFOs on their ability to deliver on promises and achieve synergies.
There is generally little question about what is expected; CFOs have
created 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 for
blurry 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 a
success or a failure,” says Deutsche Telekom’s Eick. “If you aren’t
able 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 an
unbiased and comprehensive picture of a deal’s results. Integration
plans should include a clear time line of milestones and hold specific
managers accountable for achieving them. When the deal is closed,
financial synergies that were once theoretical discussions should be
embedded in budgets, and nonfinancial synergies should be tracked
as 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 compensation
plan that tied bonuses to achieving some of the synergies expected
in the merger that transformed Mittal Steel into ArcelorMittal;
those who didn’t achieve 85 percent of the budget, which captured
the synergy and value plan, didn’t get a bonus.
Some CFOs ask managers of acquired companies to participate
in discussions about the available synergies, as a way of getting
their buy-in. This can be a smart way to mitigate the risk, present

The CFO as Deal Maker 15

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, a
Spanish counterpart, in 2007. Instead of unilaterally imposing a set
of cost-control goals on Endesa, Enel assigned one Enel manager
and 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 and
coming to the same conclusion.”
Finally, if a deal’s synergies aren’t achieved, it often falls to the
CFO to explain why. This is another task that shouldn’t be put off,
if credibility with the capital markets is to be maintained. In these
cases, 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.

Much of the acquired value of a

Rule 5: Build Trust in Future Success.
deal hinges on existing employees. People maintain operations, own
trusted client relationships, and develop market insight. And yet in
almost every acquisition, key staff members and managers react with
concern to news of the transaction, wondering what it will mean for
their futures. Many workers lose focus, some consider leaving, and
others do leave.
CFOs can mitigate this risk in a number of ways. For one, they
can resolve staff uncertainty as expeditiously as possible. This means
making fast-track decisions about organizational structure and
staffing, 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 and
reengage people in the business as quickly as possible.
Making postmerger management appointments on the basis of

16 strategy+business Reader
merit can be a powerful retention tool. Key staff members usually
take stock of the acquiring company’s discipline and objectivity
before deciding whether to stay. Mittal remembers that after the
mammoth acquisition that brought Arcelor to Mittal, the one-time
Arcelor people were being standoffish, expecting “to be second-class
citizens.” 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 all

their far-reaching responsibilities during an acquisition, CFOs ulti-
mately must lead and reshape the finance function itself. This can be
a huge challenge, because the reporting processes, information sys-
tems, and control tools of the acquired company often differ sharply
from 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 fulfilling
external reporting requirements; a second phase intended to estab-
lish a set of common financial practices; and a third phase aimed at
transforming the entire finance function into a world-class opera-
tion, while consolidating operations.
In the first phase, which typically takes place during the first 100
days after the transaction, the lack of structure can be somewhat
daunting. The treasury and corporate finance functions in the new
merged structure must be immediately operational, even though
organizational decisions that will form the basis for the new external
reporting 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 sources
and to guarantee the quality of the final audit report.

The CFO as Deal Maker 17

During the second phase, which often starts in parallel with the
first, best-in-class CFOs identify the control capabilities the finance
department 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, it
is 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 robust
solution in place quickly — not on holding out for something that
is super-sophisticated.
It’s after the basic finance operations are established that CFOs
can work on the long-term changes that will make their finance
departments 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 their
established systems, processes, and practices with an eye toward
upgrading them.
Throughout this transformation process, CFOs ensure that
overarching quality and compliance standards are met. This is what
Ferraris, Enel’s CFO, did after his Rome-based company made
acquisitions in eastern Europe in 2006 and was assigning business-
unit CFOs to oversee those operations. “I have always sent in an
Enel executive to implement the financial control function and a
reporting system to ensure that we are speaking the same language,”
Ferraris says.
The three roles of CFOs in mergers and acquisitions and the six
rules of M&A provide a sound foundation for success, but readers
who 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 one
thing: the willingness of companies to enhance their capacity as deal

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

The CFO as Deal Maker 19

Forging a New Steel Industry

Connecting with stakeholders and being ahead

of trends is more important to M&A success than
the money you offer, says CFO Aditya Mittal.
by Viren Doshi, Nils Naujok, and Joachim Rotering

Reporter: William Boston

Chief Financial Officer
Forging a New Steel Industry
by Viren Doshi, Nils Naujok, and Joachim Rotering

ADITYA MITTAL DOESN ’ T look like a gambler. And yet two years ago
Mittal Steel, the business founded by his father and controlled by
his family, shocked the global steel industry with a wager so bold
that no one believed the company could pull it off.
Mittal recalls the sleepless nights he endured worrying about
what would happen if his company’s unsolicited bid to acquire
Arcelor, the biggest steelmaker after Mittal, failed. In the end, it
didn’t fail, and the US$38 billion deal made Aditya Mittal’s reputa-
tion. It also gave him a confidence that is characteristic of people
who, 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 trips
to visit newly acquired plants in eastern Europe.
After graduating from the University of Pennsylvania’s Wharton
School of Business with a BS in economics in 1996, the younger
Mittal worked as a financial analyst for six months before joining
Mittal Steel in a succession of finance and management roles. Three
years 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, questioning
whether he was too young to be running such a deal. His father

22 strategy+business Reader
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 one
underestimates him now, at age 32.
The numbers speak for themselves. The merged ArcelorMittal,
headquartered in Luxembourg, is the world’s biggest steelmaker and
the only truly global one, with 310,000 employees in more than 60
countries. Its products cover the entire breadth of production in the
industry, 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 has
been willing to make big bets because he has a strong vision of where
the 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 has
significant advantages, because the CEO and CFO are supposed to
work 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 two
years prior to that we probably did two or three large acquisitions
a year. Now it’s harder to do large deals, so we’re doing multiple
smaller 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 geographies
for regulatory reasons, so we’re focused on mining development

ArcelorMittal 23
and distribution development, and establishing our presence in
various geographical parts of the world. That means smaller deals.
You do a mining development program in Arizona, invest in coal in
Mozambique, and create a partnership with the Mauritanian gov-
ernment. We did about seven distribution deals, in regions such as
the Balkans, Poland, and Turkey.

S+B: In terms of the day-to-day operations of the M&A team, what is

your role?
MITTAL: Before we did the Arcelor–Mittal merger, the mergers
and acquisitions team was very small — there were just two
of us. Now there are about 20 people, and my role has changed
as the team has expanded. Historically — when we were doing
just two or three deals a year — my job was literally to lead the
project. I was involved in all the due diligence, government meet-
ings, union meetings, negotiations — whatever was needed. After
a deal closed, in cases where a turnaround was necessary, I
was part of the transition team to make sure that occurred.
Even in the Arcelor deal, I was very hands-on. Now, with 40 deals
last year — which doesn’t mean that we worked on 40, we worked
on a multiple of that — I have to delegate a lot more to various
team members.

S+B: How do you identify targets for M&A?

MITTAL: We have a very clear growth strategy that has gone through
two phases of M&A. At first, there was no one else growing as much
or as fast as we were. So we’d look at every opportunity and would
focus on areas with the most significant potential. For example, we
looked 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.

24 strategy+business Reader
S+B: How do you create a privatization?
MITTAL: Well, take the case of the Czech Republic. I’d been reading
in the press that the International Finance Corporation [IFC] was
very upset with the Czech steel company because it was defaulting
on its loans. The IFC threatened to take the Czech government to
bankruptcy 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 was
headed for bankruptcy. So we said, “Let’s go visit the government
and see what we can do.”
Incredibly, the unions were having protests on the day of our
meeting. 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 your
problems. 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 the
biggest drain on the budget. We said we could turn it around. They
said, “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 partner
because 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 identifying
areas 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 story
was coming to an end. We needed to do something else. We had
already bought one U.S. steel company, Inland Steel, in 1998,

ArcelorMittal 25
which was supplying 70 percent of all advanced steel strength
applications for automobile bumpers. We had become the largest
supplier to Toyota and to Honda, the most demanding customers.
However, we still wanted to increase our stake in the United
States. In 2005, we bought ISG, another U.S. company, which
was the old Bethlehem Steel, LTV Steel, and Acme Steel rolled
into 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’d
ever done before. How did the idea for it come about?
MITTAL: Arcelor made tremendous industrial sense. Clearly, just
thinking about it was audacious, and I was surprised to learn that
there was no significant shareholder in this company. A lot of peo-
ple said that Arcelor was a French icon and we could never succeed
in taking it over. But the more we thought about it, the more we fell
in love with it.

S+B: What was so compelling about the deal?

MITTAL: It was not a story about rationalizing or restructuring. It
was a story about making the steel industry stronger. The first thing
we realized is that by consolidating the steel industry, we could
invest more in research and development, we could invest more in
plant facilities, and we could invest more in employees. For a long
time in Europe, the steel industry had been declining; we saw this as
a way to reverse the trend.
Number two, we saw this as a way to make the European
steel industry competitive vis-à-vis steelmakers in developing
nations. We felt that if we had the chance to begin the dialogue,
people would realize that what we were saying was absolutely the
right thing.

26 strategy+business Reader
S+B: Do you feel that an essential part of your job in a takeover scenario
is to talk to employees and investors to help them understand what you’re
trying to do?
MITTAL: That’s the primary thing. People get it wrong. A
takeover is not done by offering money. A takeover is done by
convincing the key stakeholders that this is the right thing for
their future. In all of these opportunities, whether it was Poland,
the Czech Republic, or South Africa, whichever country, I
remember going in, meeting the unions, meeting the manage-
ment, meeting government and any other key stakeholder we
could identify. And we used to have delegation after delegation
from Poland, South Africa, and Algeria, and so on going to
Kazakhstan and other places where we’ve made acquisitions to see
what we had done.
That was our pitch: Come and see for yourself. Talk to your
ambassadors in the countries in which we operate. Ask them what
the local government thinks about us.

S+B: How far will you go in order to be a good corporate citizen

and win over the hearts and minds of people when you want to buy
their 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, a
very colorful man. The company was obviously not in the best con-
dition, and the bishop said: “You know, the people have lost faith in
this 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 Roman
Orthodox church. Get the workers to work with you to build
it. You spend a couple million dollars and you build a beautiful
church at the entrance to your facility. And I’m telling you, that will
work wonders.”

ArcelorMittal 27
S+B: You built a church?
MITTAL: And it was great. We built a beautiful Roman Orthodox
church; all the workers got involved in it part-time. And that
changed everything. After that, they knew we weren’t going to walk
away 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 you
invest locally also pays off in dividends globally. This is just one
small 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 that
we operate as a meritocracy — on an honest, transparent, and fair
basis. 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 in
this 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 them
in terms of performance? Is there a process whereby you have “the
Mittal Way”?
MITTAL: That was the other thing we did: We announced our
value plan on a combined basis. At that point in time, we were
doing EBITDA of $15 billion on a combined basis, and we said
we have to do $20 billion postmerger. That was the value plan.
And we have $1.6 billion of synergies. And every single person
had a certain responsibility to achieve that. So if you, for example,
worked in the United States, you knew exactly what your
EBITDA was in 2005, ’06, ’07, and ’08, what your synergy targets
were, what synergy you were supposed to achieve, who was respon-

28 strategy+business Reader
sible, and what the dates were by which you were supposed to
achieve it.

S+B: How did you track the process?

MITTAL: In the beginning, we would have management committee
meetings 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 never
seen it before. Then we had every major segment of every single
business group identify three competitors with publicly traded
information so that we could do a trend analysis. That was a
shock, because suddenly people saw that in some cases their busi-
ness was growing in absolute terms, yet actually declining against
their peers.

S+B: And this was the foundation for integrating the budget process?
MITTAL: We had a budget for the combined company starting
from January 1, 2007. And part of the budgeting process was
to understand the incentives. So we created a new incentive plan
that mirrored the budget exactly. If we didn’t achieve 85 percent of
the budget, we got zero bonus. And the budget had to capture
the 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, which
we’re trying to address because some of the concern is valid, involves
the amount of information the central office wants. The data
requests are tremendous. So now we’re trying to streamline some

ArcelorMittal 29
of it by creating a central database and allowing managers to
reject 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 acquisitions
will 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 is
to continue to grow our presence in steel, primarily in the BRIC
countries: Brazil, Russia, India, and China. We want to increase
our vertical integration. We’re focused on identifying iron ore and
coking 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 the
billion 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 there
are. Our strategy has always been to be ahead of the curve, because
that’s how you create real value. If you’re behind the curve, you’re
not creating any value; you’ll lose money. So how do you stay ahead
of the curve? You have to look at opportunities that others are not
focused on. It’s all part of transforming tomorrow.

30 strategy+business Reader
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 right
thing 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 just
locally, but globally, since your reputation precedes you.
• The integration stage of a merger should be run as a meritocracy, on an
honest, transparent, and fair basis. Choose the best people to manage the
business, regardless of which company they started at.
• Move quickly to establish clear targets and give employees an incentive to
reach them. Make their compensation dependent on reaching those targets. +

ArcelorMittal 31
Banco Santander:
Think Globally, Bank Locally

The success of Santander’s strategy is driven

by a belief that all banking is local, says CFO
José Antonio Álvarez.
by Christian Reber and David Suárez

Reporter: William Boston


Chief Financial Officer
Banco Santander
Banco Santander:
Think Globally, Bank Locally
by Christian Reber and David Suárez

TO BANCO SANTANDER , size matters. Over the last 20 years, Santander

has used mergers and acquisitions to rise through the ranks of the
global financial-services industry from 52nd place to the top 10 in
market capitalization.
In 1999, Banco Santander merged with Banco Central Hispano,
forming the largest bank in Spain and creating a significant platform
for future growth. In 2004, the Madrid-based bank acquired Abbey
National PLC, a British mortgage bank, for US$15.5 billion (€ 8.5
billion). Two years later, Santander acquired a stake in Sovereign
Bank, a U.S. bank with services including retail banking, mortgages,
and wealth management, with an option to buy the bank outright
in 2008. In 2007, Santander celebrated its 150th anniversary and
joined the consortium that bought ABN Amro, the biggest Dutch
bank, in a deal worth $98.5 billion — the largest bank takeover in
history. 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 the
effects 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 has
become known for what it calls its multi-local strategy, which boils

34 strategy+business Reader
down to being efficient and cost-conscious everywhere, but vary-
ing the tactics by geography. “We use different metrics at Abbey
in the U.K. than we use in Madrid or in Brazil because markets
are 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 finance
executive at several Spanish banks, including Argentaria, and has
held board directorships with divisions of Santander as well as
other companies.
In an interview in his Madrid office, Álvarez discussed
Santander’s M&A strategy, the lessons he has learned, and the rules
of 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 rationale
behind your strategy?
ÁLVAREZ: Well, one thing that is important is that we are a retail
bank. This is all about cost. We don’t sell a very sophisticated
product; we basically sell a commodity. So the key is to be effi-
cient enough to compete effectively in the retail market. Our
strategy is practical in the sense that we prefer to be in fewer mar-
kets with larger market share than to spread ourselves thin across
many markets. As a rule of thumb, we think you need to have at
least 10 percent market share in order to compete effectively in
retail 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

Banco Santander 35
to do more acquisitions to achieve the critical mass needed to be
competitive in Italy.

S+B: Does your 10 percent rule refer to a local market, a region, or

a 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 million
to 45 million people. And we have more than 10 percent of the Sao
Paulo 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 percent
spread 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 before
making 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 to
go out and identify targets.

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

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

36 strategy+business Reader
ÁLVAREZ: Every year, the board meets for two days for a very open
discussion. It’s my job in finance to work with the board to identify
the issues that are central to the company, usually two to three
months in advance. The meeting usually takes place on a weekend
and somewhere that allows us to get away from headquarters.
During this weekend, we discuss how we view what’s going on in the
world, how we see ourselves, and what we should be doing. The
decisions we make during these two days of intense discussion form
the 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 time
talking with investment banks and with people both inside and out-
side Santander about how we can improve our business. This is time
devoted to M&A in the pure sense.

S+B: Does that include the time you’re working on acquisitions that
have already happened and that are currently being integrated?
ÁLVAREZ: Once we integrate a new acquisition into the day-to-day
operations, I deal with it just like any other operation. But for the
first two or three years after an acquisition, I’ll spend more time on
that new company. We’ve made a commitment to the shareholders
to 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, I
deal 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. In
the 1990s, Abbey embarked on a diversification initiative that was a
complete failure. They went into wholesale banking and into secu-
rities, and when the market collapsed in 2000 they suffered losses.

Banco Santander 37
That prompted them to look at alternative business models and branch
off into insurance. Abbey’s management became distracted from what
it had been doing successfully for 60 years: mortgages and savings.
When we started to analyze Abbey, we realized that they had a
fantastic core business, but management hadn’t focused on it for
years. We felt we could improve the situation substantially. And
Abbey’s management had concluded that they had to sell the bank
to someone who could inject fresh capital into the business and keep
it competitive in the market.

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

S+B: Was it hard to get the staff at Abbey to buy into the idea that they
would have to work more efficiently?
ÁLVAREZ: Not really. It is pretty simple: If the employees at an
acquired company know that their business is not being run well,
then they expect the new owners to come in and cut costs. They
are open to the acquirer’s ideas because they know things must
change — and they understand that accepting change is a key to
staying 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 can
become a nightmare for an acquirer.

38 strategy+business Reader
S+B: During the negotiation phase, did you make it clear to Abbey that
you planned to run a tighter ship?
ÁLVAREZ: Definitely. We were very open. We said at the outset that
there would be around 3,000 redundancies. In the end, it was a
much 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 on
experience, you may believe that certain departments can be run
with 20 percent or 30 percent fewer people. Once you are inside,
you can make a determination department by department — and
sometimes you find that your assumptions were wrong. So it’s pru-
dent to be conservative until you are inside the company and can get
real numbers — especially if you are entering a new market.

S+B: The finance function itself is often an area where synergies can be
captured during the postmerger integration. What sort of restructuring
did you do with your own department?
ÁLVAREZ: At Abbey, we appointed one of Abbey’s people to finance
and sent someone from Madrid to ensure we were getting the data
we needed and to consolidate the numbers.
The challenge here is that markets are local; you have to guard
against 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 we
really want.

S+B:Looking back at synergy capture at Abbey, is there anything you

would do differently today?

Banco Santander 39
ÁLVAREZ: We were on track or ahead of target from the very begin-
ning. But we remain very ambitious and continue to find ways to
cut costs.

José Antonio Álvarez’s keys to successful M&A

• Appoint an executive on a temporary basis to oversee cost cutting. This can
make the difference between failure and success for the deal.
• Set aside ample time for your M&A activities. Some of the time you invest
will 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. With
cross-border transactions in particular, success depends on understanding
national differences.
• Fit your M&A strategy into a larger corporate plan. The availability of capital,
internal management depth, and shareholder support are all relevant things
to 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 geographic
or product area. +

40 strategy+business Reader
Banco Santander 41
Reduced Cyclicality through
Portfolio Management

Preparation, composure, and determination

are critical during the merger process, says
CFO Kurt Bock.
by Klaus Mattern

Reporter: William Boston

Chief Financial Officer
Reduced Cyclicality through
Portfolio Management
by Klaus Mattern

BASF USED TO be a typically cyclical chemicals company, its fortunes

tied to the vagaries of the global economy. When worldwide growth
surged, 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 a
new story. Through a handful of key strategic acquisitions and tar-
geted organic growth, BASF has reshaped its portfolio with the
objective of making its bottom line more resilient in tough eco-
nomic times.
Bock has the numbers to support the new story. The company
has 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 share
price 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 of
Engelhard Corporation, the U.S. catalyst maker, for almost US$5
billion. Engelhard was something of an American icon; Charlie
Engelhard, who consolidated his family’s businesses to create the
company in 1958, was the role model for Goldfinger in Ian
Fleming’s famous James Bond novel.

44 strategy+business Reader
Bock, 50, who prefers preparation when it comes to deal mak-
ing, says M&A is just one, and perhaps the least used, instrument
in his toolbox. In any acquisition, especially a hostile one, you never
know what you’re getting until you’ve taken the package home and
opened it.
During an interview in his office in BASF’s international head-
quarters in Ludwigshafen, Germany, Bock cited the steps taken to
make 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, but
those you’ve done have been successful. Why doesn’t M&A play a bigger
role in your growth strategy?
BOCK: Because acquiring a business doesn’t always create value for
shareholders. 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 two
major recent acquisitions, represent the latter situation. They made
us nine to 10 times bigger than we were previously in those indus-
tries. Each was a situation where we came to the conclusion that
this is a growth and profitability story that we can really sell to our

S+B: Is it fair to say that you haven’t encountered any acquisition

possibilities that seemed as good since 2006, when you completed
those deals?
BOCK: That has to do partly with current market valuations but
also with the task we had before us. We had teams operating

around the world, integrating about 15,000 people. That’s an
increase in our workforce of almost 20 percent. It takes time
and work.

S+B: What is BASF’s process for doing acquisitions?

BOCK: We have 13 operating divisions, and within those divisions
we have about 70 business units. These are the focus of our strate-
gic discussions.
We go through a textbook exercise. We first have to understand
our businesses in terms of their competitive advantage and how they
fit inside BASF in terms of growth and potential profitability. Then
we decide where we want to grow, where we want to invest, and
where we want to harvest the business. Only then do we consider
the best strategic measures to achieve our goals. The acquisition is
just one tool in our toolbox.

S+B: What was the strategic rationale for the acquisitions of Engelhard
and 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 very
stable in terms of earnings volatility. So that was a very important
financial consideration.

S+B: Let’s look at Degussa first. How did that come about?
BOCK: We had already defined construction chemicals as an
interesting growth business in 2005. But it was a consolidated
market with few players — we weren’t optimistic that we’d find any-
thing for sale. We told our people, “Nice idea, but there’s nothing
on the market to buy,” and filed it away. When Degussa’s construc-
tion chemicals business came up in December 2005, we were able
to react immediately — and assign a price to the company within

46 strategy+business Reader
days. That’s our strength: to be prepared, to be proactive, and not
to be surprised.

S+B: And what led you to Engelhard?

BOCK: We conducted a very careful screening of many industries to
identify a company that could fulfill our acquisition criteria in terms
of technology, market structure and attractiveness, and growth
potential. 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 and
everyone was relaxed, and then we came in and said, “We want
to buy your company.” We weren’t surprised by Engelhard’s
response. To start with, it’s management’s obligation to try to get
the highest price. They didn’t want to sell. So they tried to find a
better offer.

S+B: How did you respond, knowing that Engelhard was looking for
another buyer?
BOCK: We felt we had made a good, attractive offer. We tried to
remain the active party, to push and not to react. Having a team in
Europe and another in the States helped us here: We could basically
cover the entire day. The Americans woke up earlier than usual, but
by the time they arrived at the office, we already had a couple of
hours of work behind us, knew what was going on in the world, and
could 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 no
intention of increasing it. The offer was out there for months, which
got people nervous, especially the arbitrageurs. We did end up
increasing our offer slightly, and that helped complete the deal.

S+B: How do you determine what a final offer price should be, the line
you won’t cross?
BOCK: It’s based on our valuation and our sense of the strategic
fit. As we all know, that number doesn’t come with a guarantee; it’s
based on a lot of assumptions. There are estimates for improvements
we 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 we
think 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 if
we don’t do it, and so on. But I don’t buy it. If you can’t build the
case for how you’re going to make money, you shouldn’t go after a
certain target.
There might be exceptions, but we try not to let emotions get in
the way. Engelhard was a good example of where we held back and
said, “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 five
months in between your initial bid and when Engelhard accepted.
BOCK: We were concerned that someone else would snatch
Engelhard away by offering a higher price. But in a situation
like this, where we were making an unsolicited offer, the real risk
was 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 data
room, visit sites, talk with people, and understand what the risks and
opportunities were. There was a limited management presentation
— half a day — about their business. It was basically an investor
relations presentation. We could ask a few questions and that was it.

48 strategy+business Reader
S+B: So you were buying something without knowing all the contents
of the box?
BOCK: Exactly. There were no bad surprises, but that’s the major
risk 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 management
teams in place — what we call a shadow team that would
eventually 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 had
coordinated the acquisition process. Then we formed cross-
functional, cross-regional teams for everything from HR to IT to
It starts with the little issues. People need new business cards
and things like that. That was well prepared so that on Day One,
when the closing happened, we could almost immediately initiate
those teams and really start the integration work. They had about
four to six weeks to identify the synergy potential, to really
quantify it. Once it was agreed upon, we immediately started the
integration process. We did it in a pretty uncompromising way.

S+B: In what sense?

BOCK: When you acquire a company, you have to say, “This
is the way we do business.” And that’s what we did in Engelhard’s
case. We determined right from the beginning that we wanted
to move them onto BASF’s service platforms, and that’s what
we 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. The
business people basically continued.

S+B: You’ve already said that Engelhard’s management didn’t like the
idea of a change in ownership. How did the company’s employees
respond to life under BASF?
BOCK: I think our team did very well in communicating what we
wanted to do, openly and intensively.
We had to let about 800 people go and relocate offices. Neither
of those things was fun. Our goal was to finish the integration
process as quickly as possible, because integration creates high levels
of uncertainty, and uncertainty is by nature bad for employees. It
weakens motivation. People are focused on the integration process
instead of on markets, customers, and operational issues. So we tried
to 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 growth
industry around the world, driven by regulation. The Chinese are
adopting the European and U.S. environmental regulations. With
Engelhard, we think we are a technology leader. And so far, BASF’s
catalysts division has performed very well. Results in 2006 and 2007
have been above what the old Engelhard management had planned
for those years and above our own valuations. We’re very happy with
what we got.

50 strategy+business Reader
Kurt Bock’s keys to successful M&A
• Prepare. When an opportunity arises, you need to know immediately whether
to grab it and how to go about it.
• Put a “shadow team” in place to manage the acquired business before you make
your bid. That is your safeguard for fast integration of a hostile takeover.
• Communicate to the acquired company’s staff — but don’t make the mistake
of being too flexible. The employees you inherit should know what you’re
planning to do.
• Understand that difficult decisions are necessary and make them swiftly. Not
every manager of the acquired company is going to agree with your decisions
• 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 other
unfavorable conditions. +

Preparation Enables Success

Thinking well beyond the purchase price

before the initial offer paves the way for M&A
excellence, says CFO Klaus Kühn.
by Christian Burger and Klaus Mattern

Reporter: William Boston

Chief Financial Officer
Bayer AG
Preparation Enables Success
by Christian Burger and Klaus Mattern

UNTIL RECENTLY, BAYER AG, the international pharmaceutical and

chemicals giant, did not immediately come to mind in most discus-
sions of global M&A players. The corporate icon and inventor of
aspirin has deep, stable roots in its home base of Germany. A giant
Ferris wheel–sized aspirin tab lights up the sky at Bayer’s headquar-
ters in Leverkusen, and the company logo appears on the jerseys of
the local professional soccer team. So it might come as a surprise to
discover that only about half of Bayer’s global workforce of 105,000
employees have more than five years’ tenure, a clear indication of the
rapid pace at which the 145-year-old company is reshaping itself. It
might also be a surprise to learn that Bayer CFO Klaus Kühn, a
skillful portfolio manager, has overseen a series of acquisitions and
divestitures since 2001 valued at more than e40 billion (US$63.2
Kühn, 56, gets an early start each morning, either running or
cross-training, and seems determined to keep up the pace throughout
the day. He approaches M&A with the same discipline. His CFO
mantra: Be well prepared before a potential deal arises; strike fast and
keep up the momentum until the deal is done; and be aware that as
the ink dries on the contract, the end game is just beginning. Kühn is
convinced that successful acquisitions require a clear, uncompromis-
ing integration plan to be rolled out as soon as the deal is complete.

54 strategy+business Reader
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-counter
drug business in 2004 and of Schering in 2006 were key moves in
the company’s strategic shift toward a greater focus on health care.
Kühn was appointed head of the group finance division shortly
after joining Bayer in 1998. In May 2002, he was appointed to the
management board. Strategy+business interviewed him in his office
at 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 final
negotiations. That was our biggest disposal project. I’m not that
involved in smaller projects, though of course I am informed about
them and get updates on a regular basis.

S+B: What about Schering?

KÜHN: That was our biggest transaction so far, but also one of our
quickest in execution. I was basically occupied with the project from
the very first meeting right up to the closing of the deal.

S+B: The bidding for Schering began with an overture from Merck of
Germany, a competitor you knew well. What was your strategy?
KÜHN: To present a strategically, socially, and financially convincing
offer within the shortest time possible. From the time that Merck
announced 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?

Bayer 55
KÜHN: We had already done our homework well before the Merck
offer. Because we wanted to expand our health-care business, we had
started looking for potential targets specifically in pharmaceuticals
and OTC, the over-the-counter business.
We did a market review, a kind of competitive review, where we
looked at which potential targets would fit well with our size, finan-
cial capabilities, and business. When the Schering opportunity came
up, 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 list
at 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 project
working groups, as well as to select and communicate with our
external advisors. We had working groups focusing on the strategic
fit, business plans, synergies and valuation, transactional aspects,
financing, and communication. Another important role for me was
to connect the project team with our CEO, Werner Wenning, as
well 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 CEO
made the approach.

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

56 strategy+business Reader
In the project meetings, the team often needed guidance. I made
some decisions, but the CEO needed to make others and was usually
the one to contact Schering. The bottom line is that the two of us
communicated on a daily basis, sometimes even every hour, to make
decisions. 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 a
friendly deal.
KÜHN: We had to get 75 percent of Schering’s shareholders on our
side. The day after we went public with our offer, Merck accepted
defeat. But to our surprise, they came back at the end. Coping with
an 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 and
determination to succeed.

S+B: Was there anything that was nonnegotiable for you in the
Schering talks?
KÜHN: One example is that, once the deal was closed, we did not
discuss changing our group structure, which is based on a holding
company at the top over our three subgroups — HealthCare,
CropScience, and MaterialScience — and our service companies. It
was clear from the beginning that Schering would become part of
Bayer HealthCare and that some of its functions, like the finance
function, would be distributed to corporate headquarters. These
kinds of issues were nonnegotiable.

S+B:Did that create conflict in the talks?

KÜHN: No, it created clarity. And the earlier you create clarity, the
more benefits you get out of the integration process.

Bayer 57
S+B: You’ve stressed the need to move fast, to keep the pressure on. What’s
wrong 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. We
only had a limited amount of time. But generally, in all M&A trans-
actions, the threat of an information leak increases with each day that
passes before an announcement. Preventing that from happening
is essential to success. You have to have enough time to do things
with a certain degree of diligence, but I am a strong believer in

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, and
that adds to the uncertainty, slowing the momentum. This can
become 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 away
by the desire to do a deal. That’s very important for a CFO. You
have to examine your position and put your ego aside in the best
interests of the company. If you walk away, it’s usually because the
business case doesn’t make sense. You have to acknowledge that and
make the right decision.

S+B: Have you ever walked away from a deal?

KÜHN: Of course, several times. At the time we did Schering, we
walked away from another possible acquisition. We were working
on two deals simultaneously, but focusing on Schering.

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

58 strategy+business Reader
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 you
put on the negotiating table. For the Schering transaction, it
was not a problem to come up with the right price. First of all, we did
our own valuations. We knew what the unaffected share value was; we
did 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 for
Schering in the market. A lot of hedge funds immediately invested
in Schering and the price rose to around € 82 [$101].
But our pricing range was fairly narrow. Whatever the final
price might be, we had to make sure that we didn’t pass all the
profits on to the sellers; we had to keep part of the synergies for
our shareholders. At the same time, we didn’t want to get into a bid-
ding contest by just adding on another dollar. If someone starts
bidding at € 77 [$92], it’s quite likely that they are prepared to
pay 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 for
selecting personnel. It was important to get them on board, to get
them to agree that combining these two businesses made sense and
boosted the potential for growth and success.
There were also what we call “soft factors,” which helped get
buy-in from Schering management. We said we would preserve the
name Schering and that Berlin would become the headquarters for
our worldwide pharmaceuticals business division. These soft factors
were very important. And of course we kept our word.

Bayer 59
S+B: You predicted that you would achieve synergies of around
€ 700 million [$891 million] with the Schering acquisition. Is that
panning 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 time
our 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 some
kind of business disruption, losing some business because the mar-
ket isn’t as convinced of the merger as you are internally. In the case
of 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 in
the middle of it. Tell us about that process. What exactly are you doing
to extract those savings?
KÜHN: First we broke it all down into specific targets. How much
should come from R&D, sales, general administration, and product
supply? How much should come from the U.S. and from Europe?
Then we sent these benchmarks down to the units and down to the
countries. 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, an
IT-supported toolbox, which all the line managers have to sign off
on. 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 come
up with a database of all these measures on a worldwide basis. At
that point we can start tracking the implementation of these syner-
gies. And that’s what we do on an ongoing basis. We expect to
achieve 80 percent of the € 800 million [$1.1 billion] by the end
of 2008.

60 strategy+business Reader
S+B: So you’re actually ahead of schedule?
KÜHN: Yes — and that’s because we made some essential decisions
very early, such as filling management positions. You have to have
people in place who can take responsibility and deliver on the syn-
ergies, to guide and steer the process. And you have to decide on
locations. These things are critical and can affect the atmosphere in
the 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 impose
these on Schering?
KÜHN: It lies in the nature of the business that the corporate finance
functions we have — finance, treasury, taxes, pension asset manage-
ment, corporate external accounting, consolidation — are all done
here at headquarters and not at our subgroup Bayer HealthCare,
where Schering would be integrated. So there was not much room
for the former Schering finance as a whole. But that’s a condition of
these kinds of functions that you conduct on a global basis. This was
one 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 a
time line and set specific handover dates for various functions. You
always 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 different
business units and regions. And the global project management
office alone had about 60 meetings.
You have a checklist, and each item is named and has to be
addressed. We have final lockdown meetings where we look at the

Bayer 61
interfaces. At this point, we’ve made all the changes. But will the
invoice work? Will the next report work because all the necessary
things have been established and are working well on a worldwide
basis? It’s not just about managing specific issues; it’s about how to
manage a complex network of tasks on a global scale.

S+B: Besides the big acquisitions you’ve done, you’ve also completed some
large disposals, like the Lanxess transaction in 2004, in which you spun
off chemical lines and approximately one-third of your polymer activi-
ties. How does the CFO’s role differ in a takeover situation like Schering
and a spin-off like Lanxess?
KÜHN: On an acquisition, the hardest part of the work comes after
the closing: the integration. However, my main task in finance ends
with the closing of the deal. The integration phase becomes largely
the responsibility of the business units. But in a de-merger, the bulk
of the workload comes before the closing, since the business has
to be carved out, more or less. That’s why spin-offs require much
more time and are more demanding for the finance and accounting
Lanxess was even more demanding for me as the CFO because it
required financial and organizational restructuring. Lanxess didn’t exist
before 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 own
team or from investment bankers and outside advisors?
KÜHN: It’s usually a mix. We always get ideas from meeting with
investment banks, but at the end of the day, the vast majority of
transactions 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 and
implementing the integration.

62 strategy+business Reader
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 buying
as soon as you complete the transaction.
• Leave your ego aside. Emotion can cause you to pay too much and fail in
your fiduciary duty. +

Bayer 63
Andrew Bonfield:
The Fine Art of Drug-Industry M&A

The pharmaceutical industry’s poor track record

in acquisitions is an argument for proceeding
with caution, according to a former CFO at two
of its leading companies.
by Robert Hutchens and Justin Pettit

Reporter: Robert Hertzberg

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

ANDREW BONFIELD , knows his way around pharmaceutical-

company mergers. He was chief financial officer of U.K.-based
SmithKline Beecham PLC when it merged with Glaxo Wellcome
PLC 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 in
2001 through the sale of its Clairol unit to Procter & Gamble
Company for US$4.95 billion and the acquisition of DuPont
Pharmaceuticals for $7.8 billion.
In an interview with strategy+business, Bonfield was modest
about the status of the CFO at a pharmaceutical company (“you’re
low down in the pecking order”) and frank in saying the job is as
much art as science.
Bonfield, who was born in Wimbledon, England, and stands
well over six feet tall, has a ready wit, a generous laugh, and a
sonorous voice that wouldn’t sound out of place on the London
stage. He spoke with s+b about why it is so hard for pharmaceutical
companies to make acquisitions work, and why it is inevitable that
the industry will keep on trying.

S+B:There haven’t been any blockbuster deals in pharmaceuticals since

2002, when Pfizer Inc. announced that it would buy the Pharmacia

66 strategy+business Reader
Corporation for $60 billion. Did the Financial Times have it right
not 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 industry
have not been successful in delivering shareholder value. The issue
is productivity in the R&D pipeline. Productivity in research does
not necessarily correlate to size.

S+B: Have the mergers themselves been responsible for those companies
becoming worse at getting drugs to market?
BONFIELD: Well, there’s a famous comment by Sir Richard
Sykes, the former chairman of GlaxoSmithKline, that scientists
are sensitive flowers. So yes, there is a disruptive element to the busi-
ness caused by an M&A transaction. And then also there is the
challenge of managing innovation in a huge company — it’s so dif-
ficult to understand exactly what’s happening throughout
the operation.
In some parts of the business model, scale is useful. It helps once
you’re in development with a drug, for instance. However, for the
discovery of new molecules, that is not necessarily a place where
scale works to your advantage. Hence, biotechs survive versus big
pharma companies.

S+B: If I were an investor in a drug company, I’d regard that as a

pretty good argument not to support any big acquisitions it might make.
BONFIELD: That concern has actually slowed a lot of the M&A
activity that is inevitable given how fragmented the industry is. I
mean, Pfizer is the world’s largest pharma company, but it has less
than 10 percent of the total market. Average market share, for most
companies, runs between 3 percent and 6 percent.

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

Andrew Bonfield 67
BONFIELD: There is a need for it because, if you look out between
now and 2012, 25 percent of current brand-name prescription drug
sales will disappear to generic competition. The regulatory environ-
ment’s getting tougher. And the pricing environment is going to get
tougher 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 concerned
when companies talk about M&A. When I joined Bristol-Myers
Squibb in September 2002, the word consolidation was forbidden in
this industry. You didn’t go near it. Now there’s a sense that the
industry needs to change. I’m not sure what the trigger will be. But
big 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 had
incredibly difficult periods after their merger events. What’s tended
to happen in this industry is that companies have done mergers from
a position of weakness rather than from a position of strength. It’s
tended to be, “Oh, something’s going to happen two minutes down
the road, and I’m not ready for it. What can I do to make it happen
now, rather than own up, rather than be honest with the Street and
say 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 more
value 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.

68 strategy+business Reader
It went right down after that, but has come back as one of the
highest-rated stocks in the industry, in large part because of its
majority stake in Genentech. This is not to say it hasn’t gone
through some peaks and troughs. But Roche’s decision to keep
Genentech as an independent biotech company, with Roche as the
holding company, has been an incredibly successful M&A-type
transaction and partnership.

S+B: Let’s talk about some of Bristol-Myers’s acquisitions, which you

know well because of the time you spent at the company. The biggest was
Bristol’s $7.8 billion acquisition of DuPont Pharmaceuticals in 2001
— something that happened before your arrival. Bristol-Myers’s stock
performance postmerger would suggest that didn’t work out entirely
as planned.
BONFIELD: Yes. Well, there were other issues there. An accounting
scandal 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 its
cost 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 be
that Bristol-Myers, many people would say, overpaid.

S+B: Did Bristol-Myers’s purchase of Adnexus in 2007 for $415 million

signal 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 fight
disease 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 the
previous year.
For instance, Domantis, a biologics company that we were

Andrew Bonfield 69
collaborating with, had already gone to GlaxoSmithKline. There
was 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. At
the same time that they were negotiating with us, they were filing to
do an IPO. Obviously, they were trying to keep some competitive
tension in the process.

S+B: It sounds like Adnexus was in a good negotiating position. Do you

feel 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. At
Bristol-Myers, we were spending nearly $3 billion a year on research
and development. A lot of that was placing relatively small bets on
the possibility of getting a product approved by the FDA.
In most cases, the really promising things a pharmaceutical
company 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 that
environment. 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, what
can 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 of
the day, with a product or technology that isn’t yet in the market, it
comes down to a matter of judgment. You look at other factors:
How does the multiple compare with those of other companies that
are 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 done
purely on a net present value basis: Here’s what the bottom line is.

70 strategy+business Reader
This is what it means from an earnings-per-share perspective. This
is what it means from a cash flow perspective. This is what it means
from 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 far
away from ever being a business, it’s more a matter of “Can I afford
it, and if I lose the bet on this, what does it mean relative to the
other 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 in
Phase III, which is the last stage of clinical testing. The clinical tri-
als for those three compounds were going to cost us $2 billion. They
were all in what we would call the primary care space, two diabetes
and one cardiovascular product. The probability of getting all three
to market was probably about 10 percent. The probability of getting
two 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 become
a 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 industry
works with your responsibilities as the company’s financial steward?
BONFIELD: The thing you have to deal with is ambiguity. You have
to realize that even your best scientists don’t know what’s going to
happen. At a previous job in the pharmaceutical industry, I remem-
ber we were looking at an opportunity to license a new drug whose
peak sales potential we estimated at less than $1 billion. It is now the
best-selling drug in the world, with $12 billion in annual revenue.

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

Andrew Bonfield 71
BONFIELD: Any consumer goods industry. If you’ve got a consumer
product 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 losing
share — presumably you have to invert the thought process. What’s the
key to doing a successful divestiture?
BONFIELD: It’s the ability to identify those businesses to which you
are no longer adding value. Bristol-Myers’s consumer business,
which the company sold to Novartis in 2005, was a classic case in
point. Excedrin was a brand that was at one time the number one
analgesic in the United States. Tylenol took over, and basically
things had just gone backward for years. It became obvious that
Excedrin was going to start losing shelf space.
The CFO trick is always to say, “Hey, come on, this isn’t going
anywhere, and it’s better off in somebody else’s hands. Let’s push the
button today.” So it’s that identification of the potential, seeing
where the strategic value is for other buyers, and trying to make sure
that you keep that engaged through a process.

S+B: The drug industry is a little like high technology in that everyone
is looking for the next big thing. Does concern about missing the boat
sometimes 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 the
human genome, and there was all this talk about personalized med-
icine, or pharmacogenomics. People believed that with the decoding
of the genome and new research technologies, drug discovery would
become much more of an industrial-type process — something you
could reliably engineer, instead of chance upon. There was therefore
the need to invest in these technologies and be part of the land grab
because within the next decade or two, most of the medicines that

72 strategy+business Reader
would be needed to treat disease would have been discovered by
using these tools.
Amid that excitement, the merger was sold strictly as a research-
based deal — the companies needed to combine their money to
invest in research. But the reality is that personalized medicine is still
in its infancy. And the shareholders who supported the deal have
been saying ever since, “Where’s the pipeline?”

S+B: Was everyone from both management teams equally caught up in

the 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 many
ways 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, not
just one.
The pity is that, financially, this deal we’ve been talking about
was impeccably executed. The CEO did an outstanding job at driv-
ing cost out of the business, driving performance, and maximizing
the value of the products in the merged company’s portfolio. The
returns have been unbelievable. If the merged company had been
sold as a purely financial deal, the company probably could have
done another one.

Andrew Bonfield 73
Andrew Bonfield’s keys to successful M&A
• Base any acquisition you make on several strategic points. This increases the
chances 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. +

74 strategy+business Reader
Andrew Bonfield 75
Deutsche Telekom:
Never Make Acquisitions Driven
Solely by Finance

Successful integration requires clear ownership

in both the business and the executive suite,
says CFO Karl-Gerhard Eick.
by Irmgard Heinz and Klaus Mattern

Reporter: Julia Werdigier

Chief Financial Officer
Deutsche Telekom AG
Deutsche Telekom:
Never Make Acquisitions Driven
Solely by Finance
by Irmgard Heinz and Klaus Mattern

IT IS AN axiom of corporate M&A wisdom that you’re more

likely to stumble than surge across the finish line. But often it is
those acquirers that focus on companies in their own field, thus tar-
geting improved operational efficiency, that have the best chances
of winning.
That’s the philosophy of Deutsche Telekom, which has used
M&A to burst past its state-owned roots and become a global leader
in telecommunications. Today, about half of the company’s revenue
comes from international sources, thanks to its acquisitions of compa-
nies such as VoiceStream Wireless in the U.S., One2One in the U.K.,
and Magyar Telekom in central Europe. Those acquisitions have also
helped 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 a
healthy cash flow from operations, Deutsche Telekom seems to be
prepared to play an active role in market consolidation. And Chief
Financial Officer Karl-Gerhard Eick seems ideally suited to the
task 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 in
that time. He is also on the boards of Deutsche Bank, CorpusSireo,
and the Bayern Munich soccer club. In an interview with strategy+

78 strategy+business Reader
business at Deutsche Telekom’s Bonn headquarters, he spoke with
clarity and conviction about what he called “the core principles of
successful M&A.”
Kevin Copp, 43, an international lawyer and head of Deutsche
Telekom’s M&A function, joined in the conversation and shared his
perspective on managing deal-related risks.

S+B: It’s been a while since Deutsche Telekom has done a blockbuster
deal. 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 places
where we already operate — is still our number one priority, because
consolidating creates the most synergies. We did that in Austria a
few years ago when we bought Tele.ring and effectively reduced the
number of operators in the market. We did something similar in the
Netherlands last year, and we enlarged our footprint in the U.S. by
acquiring SunCom Wireless.
The other thing acquisitions help us do is become established in
adjacent, underdeveloped markets and participate in their growth.
This was the main rationale behind our recent investment in the
Greek telecommunications operator OTE. OTE’s strong presence
in southeastern Europe helps us to significantly enlarge our foot-
print in these highly attractive markets.
Finally, size matters, particularly in the telecommunications
industry. Gaining a critical mass of subscribers is important because
it gives us a better bargaining position with suppliers, especially
handset 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.

Deutsche Telekom 79
When acquisitions do well, it’s because the acquirer judged the busi-
ness model correctly and integrated the companies effectively. That’s
a 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’s
already 70 percent predetermined to be a success or a failure.
The closing is the point at which all the legal problems are
solved and you’ve got all the approvals you need. If you aren’t able
to flip the switch and get started at that moment, it’s too late. The
things you don’t achieve in the first six months will likely never be
achieved — 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 savings
you’d like to realize. Is it also your job to make sure those savings
EICK: No. This is where the business unit that will be running the
acquired property comes in. You never want to make an acquisition
that is driven by the group CFO alone — never! Otherwise people
will 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 candidate
and the responsible board member from the mobile communica-
tions, broadband/fixed network, or business customers operating
segment says, “Hmm, I don’t know about this one,” the smart thing
is to leave it alone.

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

80 strategy+business Reader
personally handle the details of capturing synergies. That effort
should rest largely with the head of the business unit, as I’ve men-
tioned. Still, acquisitions are the most serious steps most companies
take. A member of the board must take personal responsibility, at
least for the first year.
Second, your investor relations department must have all the
details ready for you, the CEO, and the responsible board members,
so everyone has a chance to sell the deal to the markets. Right from
the beginning, you should be asking your experts in the business
unit, M&A, legal, treasury, and investor relations not only how best
to structure the deal, but also how best to sell the deal. Nothing is
worse than an acquisition that flops in the capital markets. For a
listed 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 a
great extent, on your own cost of capital. When selling the deal to
the markets, you need to keep that in mind too. The financing of the
deal 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 merger
of a company in which we already owned a 75 percent stake. The
Internet and fixed-line market had changed toward integrated prod-
uct bundles and services. To respond to these changes, we wanted to
create a single business model with an integrated market approach
to secure a leading position in market share and innovation, and to
generate synergies of about $1.2 billion by building out the relation-
ship with our customers in the best possible way. This integration
of the business models was not possible with a publicly listed com-
pany with minority shareholders. Therefore we decided to merge
T-Online International [TOI] AG into Deutsche Telekom [DT] AG.

Deutsche Telekom 81
There were two unusual consequences of that deal. First, we
didn’t have to do a lot of due diligence. This was, after all, a company
we had founded and whose shares we had floated on the market,
so we knew the brand and the business model very well. In other
cases, due diligence can take a long time as you get familiar with
a company.
The other thing that made the T-Online merger unique was
how German takeover law affected the transaction. The exchange
ratio regarding the shares of DT AG and TOI AG was determined
by both parties on the basis of 10-year business plans and was
approved by a court-appointed independent accountant. To reduce
the uncertainty for the TOI minority shareholders during the
period between the announcement of the deal and the time the
exchange ratio was determined, we voluntarily offered to buy their
shares in cash at the price they were worth prior to the announce-
ment of the deal. As a consequence of the exchange ratio and the
market price for DT’s shares at the time, the value of the deal for the
TOI shareholders was below the value derived by the 10-year busi-
ness plans and even below the value of the voluntary offer. It was a
source of tension that you do not have in a typical acquisition, in
which you see a market capitalization, you pay a premium, and
everyone goes home happy.
It was clear that we would face a series of lawsuits. What we
didn’t expect was that the case would go all the way to Germany’s
Federal Supreme Court, and that it would take half a year to get a
decision. That was a useful thing to realize, that a risk so remote
could actually materialize. Even the slightest risks deserve a place in
your financial models.

S+B: As the biggest telecommunications provider in Europe, Deutsche

Telekom had a very different culture than T-Online, an Internet
provider. Did this create any integration challenges?

82 strategy+business Reader
EICK: It did. T-Online, for all practical purposes, was a startup —
something of a speedboat. It got its products to market very
quickly. The employees were very dynamic. The age structure was
completely 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 the
startup environment — and they wanted to remain independent.
We left T-Online as a business unit and implemented a steering
model that suited their wish for their own identity and our synergy
goals. To employ the innovative spirit of the T-Online people for the
entire group, we made T-Online the basis of a newly formed prod-
uct innovation and development unit. We also made the T-Online
people aware of the career development opportunities that existed at
Deutsche 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 newly
formed businesses in a position where decisions can be based on all
the 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, during
which 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 paid
special attention not only to identifying synergies pre-transaction
but also to tracking them post-transaction.

Deutsche Telekom 83
Every transaction will have its own peculiarities, but having a set
of resources that can be adapted as necessary allows us to hit the
ground running. Our recent acquisition of Orange Netherlands and
its integration with our mobile operations in the Netherlands is the
perfect pilot project to test the new guidelines.

EICK: I’d add that it’s key to have all your functional experts
involved in the process and even to receive negative feedback on the
deal right from the start. As a board member, you’re promoting the
deal and pushing it hard. You need a counterbalance to that. You
need 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. There
is an enormous push to get the deal done. However, many of those
people who are pushing aren’t responsible for the integration and the
after-close performance. So you definitely need the naysayers to
reduce this pro-deal bias. In fact, I’d add that as another principle to
my set of core principles of successful M&A: If you read the writing
on 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. Without
clear business ownership, the deal is bound to fail.
• Rely on your functional experts to be risk-comprehensive. Even the slightest
risks should be factored into your models; they can materialize.
• Plan the integration before the close and make an executive board member
personally 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 and
know it early. There’s nothing worse than a deal that flops in the capital
• Grow your intellectual capital. Document and share your merger and integra-
tion knowledge to enhance your internal competence. +

84 strategy+business Reader
Deutsche Telekom 85
Duke Energy:
The Value of Relationships in M&A

Connections and strong people are the

keys to success, says CFO David Hauser.
by Thomas Flaherty

Reporter: Robert Hertzberg

Chief Financial Officer
Duke Energy Corporation
Duke Energy:
The Value of Relationships in M&A
by Thomas Flaherty

U . S . UTILITIES WEREonce considered safe investments for widows and

orphans. But the Enron scandal and escalating regulatory demands
for more efficiency, greater safeguards, and cleaner forms of energy
have added uncertainty and risk to a historically stable sector.
One result has been an exponential increase in M&A activity
as utilities have sought to gain both scale and new capabilities.
Two years ago, Charlotte, N.C.–based Duke Energy Corporation
was after scale when it paid US$13.9 billion for the Cinergy
Corporation, a utility in the American Midwest. Cinergy was a
huge 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 in
Duke’s stock price post-acquisition suggests that it has — part of the
credit must go to David Hauser, Duke’s chief financial officer.
Hauser (pronounced “HOO-zir”) grew up near Duke’s headquarters
and has been with the company since the mid-1970s, the last four
years 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’m
proud of and think is important, it would be my ethics and credi-
bility. I think people believe me when I’m talking to them.”

88 strategy+business Reader
Hauser’s credibility and gracious manner (“stress isn’t one of my
big issues; I’m very fortunate in that way”) are valuable assets at a
time when Duke is looking for partners — to either collaborate with
or buy outright. The importance of personal relationships in M&A
was 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 the
energy industry.

S+B: Duke has reshaped itself with a couple of huge transactions in the
last two years — the acquisition of Cinergy in 2006 and the spin-off of
the 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 the
number of independent utilities in North America. And that’s prob-
ably going to happen in three ways.
Acquisitions by specialized infrastructure funds, which can raise
capital relatively cheaply and are flush with cash, will be one way.
Acquisitions by European energy companies will be another; they
are benefiting from the strength of the euro. The third is U.S. com-
panies coming together. Our deal with Cinergy is probably the
most successful of those in recent times. There are other proposed
deals in the industry that haven’t worked, usually because of regula-
tory issues.

S+B: How large do the regulators loom when you are contemplating
a deal?
HAUSER: When we brought Duke and Cinergy together, we had to
get 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.

Duke Energy 89
But they’re also interested in the success of the company, because
they want you to be a viable entity.
The issue is what’s the benefit to the customer and what’s the
benefit to the shareholder. With Cinergy, there were potential syn-
ergies that were of huge value. The question was, Could we achieve
those, 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 falls
into and on the particulars of the target. For example, right now an
infrastructure fund led by Australia’s Macquarie Bank is in the
process of buying Puget Energy in Washington state. There won’t be
any consequential synergies to give to the customer in that case. But
what 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’s

capital base, what are regulators looking at when they evaluate prospec-
tive deals?
HAUSER: For starters, how energy efficient you are and how much
you’re moving toward renewable sources of energy. The regulators,
the state legislatures, and the governors are going to look favorably
upon that. The issue is that for most Americans, the price of power
is cheap relative to their income. We don’t tend to worry about it
when we walk out of a room and leave the TV on, or the lights, or
whatever. We don’t worry about it because it costs us a quarter or a
buck or we don’t even know what it costs us.
What that means is that utilities are not going to persuade
most people to do things differently by asking them. We’ve got to

90 strategy+business Reader
have the energy efficiency methods that are really back of mind,
where it just happens. Like having the chips on the refrigerators
that cycle them off. A company that is successful in those areas and
has a model that works is going to have a big advantage when it’s
looking at merging with somebody that doesn’t have an equally
good model.

S+B: Do you have a pot of money earmarked for renewables, specifically

for 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 what
level 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, and
there’s also a utilization side — that’s the battery backup in case the
power goes out. I think there will be acquisitions by us and by oth-
ers in all the subspaces. The biggest challenge will be to determine
the right technology and pay a price for a development pipeline that
creates 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 more
of those than there have been historically. There could be great value
to us in having a European partner to buy something or in our part-
nering with an infrastructure fund. That would drive down our cost
of capital.
Being a good partner is not easy, but it has benefits. The most
obvious one relates to a 50–50 partnership; if you structure that
right, it takes the entity off your balance sheet and allows you to
benefit from the leverage like a private equity fund would.
For example, we couldn’t possibly have outbid Macquarie on

Duke Energy 91
Puget Energy even had we been interested. They have a lower cost
of capital. Everything else being equal, they’d beat us every time.

S+B: How about using your stock as an acquisition currency? Utility

stocks, including yours, have had a very good few years, to the point
where the companies are fully priced.
HAUSER: There isn’t that much variation in the P/E ratios in our
industry — most of the companies are trading in a pretty narrow
band. That limits the opportunity to go acquire somebody using
your 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 technologies
when maybe they shouldn’t, that run into problems getting approvals
for a power plant, or that have a major issue with a power plant
halfway through building it. Somebody will have issues. And as those
issues begin to occur, you’ll see a wider band of trading around the
P/E ratios, which will create more opportunities for stock-based
acquisitions. 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 in
the marketplace that Duke is talking to X or Y or Z, it’s true.
We don’t do that with the expectation that every conversation
will lead to an M&A event. We do it in the hope that we’ll be on
the radar screen if a smaller company realizes it needs to do some-
thing different, or if an international company decides it wants to
get more active in the United States. Relationships are a huge part
of 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.

92 strategy+business Reader
I do the same with CFOs. Between Jim, Group Executive Lynn
Good, who has the M&A function, and me, I doubt there are many
utilities 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 best
ones do is give us market insight. They’ll come in with information
about the industry and who’s doing what and what the P/E ratios
look like, and that can help facilitate our own thought processes.
They’ll tell us who’s building wind or biodiesel plants, and which
solar 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 basic
ways. He might come in and say, “This company’s CEO and CFO
are 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 those
softer things that can create a deal, as opposed to pure economics.

S+B: Your acquisition of Cinergy was a complicated transaction that

gave you a much more stable base of income from your regulated
business. What were some of the important first steps once the deal
was struck?
HAUSER: Paul Anderson, who was then Duke’s CEO, did some-
thing very smart. He sent Jim Rogers, who was then the CEO of
Cinergy, 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 — with
Jim being the expert on Cinergy and me on Duke. But Paul also
had a second motive, which was to force Jim and me to figure out
if we could work together well as CEO and CFO, which was the
executive structure he wanted. That was a very smart way for Paul to

Duke Energy 93
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 you
come together, you’ve got to put all that behind you and figure out
how to make it successful.

S+B: Duke has been active not just as an acquirer, but also in shedding
businesses 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 the
company, you gain synergies by pulling it all together. When you
decide to break it apart in whatever way, then you have to go back
into the books and say, “Oops, we wish we hadn’t kept the books
that way — we wish we’d kept them separate.” That’s the biggest
single workload challenge of a divestiture. On Spectra, it created a
huge amount of work.
The other big challenge is determining which employees go
with each company. As the companies move toward separation, they
begin to compete for talent. The top group must work together to
get the right split for shareholders.

S+B: A lot of your M&A experience reflects the unique dynamics of

the 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 Cinergy
deal, there came a point where we were having a debate about what
day to close the deal. And I said, “You know, if we don’t close it on
the end of a quarter, it’s going to be very, very hard, because neither
company keeps its books on two-week increments.” Other people
disagreed. The debate rose to the board level, and I have to admit I

94 strategy+business Reader
was getting pretty adamant. From my perspective, having the close
not coincide with the end of a quarter just wasn’t an option.
Now it so happens that Jim Hance, the former CFO of Bank of
America, is on our board. And after the debate has been going on
for a little while, Jim speaks up. He says something very under-
stated, along the lines of, “Well, I’ve probably done as many deals as
anybody. And we’ve never closed one that wasn’t on a quarter.” That
pretty 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 as
who is worth buying?
HAUSER: Sure, there are plenty of times that I’ve been in the role of
saying, “No, we shouldn’t do this.” But it’s a balance. If your answer
is always no and everyone knows that’s the answer, you start to be
seen as a barrier to success.
It’s better to develop a reputation as someone who walks that
line 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 to
your personal credibility, internally and externally. It’s tough, but
that’s the challenge.

David Hauser’s keys to successful M&A

• Partnerships can be useful in mitigating risk and occasionally in lowering
your 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 immediate
place for them in your portfolio. In a fast-changing industry, this will minimize
the possibility of losing out on a good deal.
• Once a deal moves forward, do what you can to address the mistrust that is a
natural 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. +

Duke Energy 95
Creating the New European
Energy Market

“Enel’s acquisition strategy is driven by the

conviction that the integration of European
energy markets is coming,” says CFO in
Charge of Accounting, Planning, and Control
Luigi Ferraris.
by Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza

Reporter: William Boston

Chief Financial Officer in Charge of Accounting, Planning, and Control
Enel SpA
Creating the New European
Energy Market
by Giorgio Biscardini, Irmgard Heinz, and Roberto Liuzza

ENEL SPA IS such a firm believer in the integration of Europe’s

power generation industry that over the past two years the Italian
energy group has put up more than € 34 billion (US$52.7 billion)
for acquisitions, positioning itself to be a leader in this new and
evolving energy market.
Groundbreaking deals include Enel’s massive € 28.2 billion
($43.7 billion) takeover of Spain’s Endesa SA in 2007. The company
has also moved into eastern Europe by buying a controlling stake
in Slovakia’s leading power company, Slovenske Elektrarne, and in
Russian power generator OGK-5. Enel paid € 2.6 billion ($4 bil-
lion) for the OGK-5 stake and has earmarked € 2 billion ($3.1
billion) 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 by
capacity. 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 of
Accounting, Planning, and Control Luigi Ferraris, 46, is accus-
tomed to achieving ambitious targets step by step; he knows how to
negotiate difficult ground — even at the fast pace that Enel is set-
ting in its rush to position itself in Europe. Ferraris joined Enel in
1999 after holding positions of increasing responsibility at Italian

98 strategy+business Reader
motorcycle maker Piaggio SpA and electronics conglomerate
Finmeccanica Group. In 2002, he became CFO in charge of
accounting, planning, and control of Enel’s sales, infrastructure, and
network division. He was promoted to corporate CFO in charge of
accounting, planning, and control in June 2005.
In an interview at his Rome office, Ferraris discussed what Enel
has learned from its cross-border acquisitions — including the twin
virtues of listening and maintaining control.

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

S+B: What would be a good example from your recent acquisitions?

FERRARIS: Take our acquisition of Slovenske Elektrarne in
Slovakia in 2006. Slovakia is part of central Europe, and energy
produced there is already being used in nearby countries, includ-
ing the Czech Republic and Bulgaria. We could just as easily
export Slovenske’s output to Germany, France, and the Benelux
countries. So with the acquisition of Slovenske, we gained access
to a huge market. And this is the kind of operational strategy that
has been driving our acquisitions in the region. Using the same
logic, we also made some acquisitions in Bulgaria and entered
some joint ventures to develop power plants in France.

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

Enel 99
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. In
terms of electricity, it’s an island. In the long term, Russia will become
more integrated with the rest of Europe, and 10 years from now, we
believe 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 implement
M&A strategy?
FERRARIS: The CEO ultimately defines the strategy, but we are
involved right from the beginning. Strategic planning is part of our
activity and actually involves a lot of people; it’s not something that
is decided solely by the CEO. We have a committee that includes
executives from each business division, including the division’s CFO
and 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 made
the decision that it fit and decided to go after it, it was up to the
international division [responsible for Enel’s businesses outside
Italy] to manage the process. Once a deal is done, it then comes back
to 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 business
and the key corporate functions, which also includes your

100 strategy+business Reader

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

S+B: Even before acquiring Endesa, you were operating some smaller
businesses in Spain. Was that useful in helping you enter that market?
FERRARIS: It was. Despite the long-term promise, Europe is not
really integrated yet. You need to understand the subtleties of
approaching each country, the regulatory system and the framework
in which you operate. So in Spain, first we bought some smaller
assets 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 was
another of our early businesses there — a 50–50 joint venture with
Union Fenosa to produce gas and electricity.

S+B: Do you also need to prepare the ground by discussing your plans
with stakeholders and politicians?
FERRARIS: We need to be good corporate citizens. In western
Europe, this is still a very political industry, because in the end you
are offering a public service. The best way to do this is to work with
a local partner as we did on the Endesa deal, where we teamed with
the Spanish company Acciona in making the bid.
It’s different in eastern Europe. There you are usually involved
in a privatization process and the government has already decided
to sell control of the company to make money. I think we were suc-
cessful in Slovakia and Romania because we had the right strategy
and 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?

Enel 101
FERRARIS: By changing the way people think — which hasn’t
always been easy. We’ve been working on it now for two or three
years, and are still in the early stages of development.
For instance, three years ago I created a department to ensure
strong financial control of our international businesses. At the time we
had just one CFO outside Italy — he was working in the U.S. But
with the expansion of the organization, we now have 10 executives
working as CFOs or in key management positions. So, part of the way
we created the expertise we needed was to create a community of
international CFOs. Continuing to build this extended leadership
community 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 to
other CFOs?
FERRARIS: Some of the most important tools for us are those that
enhance communication within the organization — we invest a lot
of time in internal communication. We at headquarters talk face-to-
face. In addition, we have frequent conference calls with people in
the 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 standardize
systems. 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 European
companies 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 important
to 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

102 strategy+business Reader

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

S+B: It’s important for a CFO to capture the synergies in a merger or

acquisition. How do you ensure that you are achieving your synergy
FERRARIS: Let’s take Endesa as an example. We realized they were
strong in some areas, like the generation business. But they were
weak in the distribution business because they didn’t have tools, such
as digital meters, that we had already deployed on customer prem-
ises to more accurately measure energy consumption. They were far
more inefficient than we were, so that was clearly an opportunity. To
give another example, they bought the same amount of coal that we
would 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 was
there more discussion to get the company on board?
FERRARIS: It was pretty inclusive; we created a joint team, and for
each area we had one representative from their side and one from our
side. 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 € 600
million [$930 million] in synergies.” You have to involve them in the
process 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 spent
three months working on this, and were able to tell the market in
December 2007 that we expected more than € 700 million [$1.1
billion] 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.

Enel 103
S+B: Wouldn’t it be better to be firm and set a clear policy for the
acquired company’s management to follow rather than involve them so
much in every decision?
FERRARIS: It’s important to keep people motivated. Let me come
back to the example with our digital meters. From the start, we
wanted to install the meters in Spain, but Endesa’s managers weren’t
convinced. In Italy, we had already switched 30 million customers
to 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 invited
the managers to Rome to see it for themselves. If they hadn’t been
convinced, 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 culture
is. If you have been a big multinational for years, like IBM, you can
take 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 different
stage in our history.

S+B: How much discussion do you allow when it comes to integrating

the finance function?
FERRARIS: I am very strict when it comes to integrating the finance
function. We have three business models. We have generation, we have
distribution, and we have sales. We have KPIs [key performance indi-
cators] and tools for analysis, and they have to be the same all over the
world. You have to standardize the system you use for reporting. I want
to 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 all
our acquisitions there I have insisted on tight management because
they tend not to have a culture of strong financial controls. I have

104 strategy+business Reader

always sent in an Enel executive to implement the financial control
function and a reporting system to ensure that we are speaking the
same language. The CFO has to be from Enel — not necessarily
Italian, 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 do
other kinds of reviews more frequently, and I would suggest that itis
a good practice to conduct such ex-post analyses diligently. This
helps enormously to improve your evaluation and integration
process on future deals.

S+B: What is the achievement that you are most proud of?
FERRARIS: When we bought Slovenske, EBITDA there was € 350
million [$543 million]. Now, just two and a half years later, it is
€ 600 million [$930 million]. We are making a huge amount of
money. 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 a
bigger acquisition. This will help you understand the regulatory framework
and 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 and
integration processes.
• Maintain a high level of internal communication. This is crucial given the
complexities of international expansion.
• Create a trusted community of international CFOs who know your processes
and 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.

Enel 105
Acquisitions to Get a Foot in the Door

Deals are not the first choice, but they

can be useful in propelling you into new
geographic areas or product segments,
says CFO Marcus Schenck.
by Klaus Mattern and Walter Wintersteller

Reporter: Julia Werdigier

Chief Financial Officer
Acquisitions to Get a Foot in the Door
by Klaus Mattern and Walter Wintersteller

E . ON HAS USED M&A to become one of the world’s largest energy

service providers. Since 2000, the company has divested business
units valued at approximately US$90 billion, and made more than
$60 billion in acquisitions, including deals that have given it stakes
in 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 $88
billion for projects and acquisitions to help it enter new geographic
markets or new parts of the energy industry.
Chief Financial Officer Marcus Schenck says many of these
acquisitions are designed to give E.ON “a foot in the door,” but in
a capital-intensive industry like energy, the price of admission can be
quite high. In 2002, E.ON paid $22 billion for Powergen, one of
the biggest power providers in Britain. And in 2007, it was prepared
to 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 served
as an advisor on dozens of successful transactions, including the one
that brought Powergen to E.ON. His investment banking experi-
ence also gave him a keen understanding of the many factors that
can cause deals to unravel.
Schenck got some new insights into the vagaries of deal making

108 strategy+business Reader

shortly after joining E.ON in late 2006. At the time, the company
was in the midst of its efforts to buy Endesa. E.ON didn’t walk away
empty-handed, but the consolation prize — partial ownership of
some 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 in
which, as Schenck sees it, the justifiable price has been exceeded and
it’s best to walk away. Schenck painted a clear picture of the part
acquisitions will play in the company’s future in an interview at his
Düsseldorf office.

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

S+B: What single characteristic of investment banking have you been

able to take advantage of at E.ON?
SCHENCK: Probably the art of negotiating and of interpreting the
tactical position of a party in a deal context. This is rarely something
you’re born with; it comes with experience. I’ve learned from some
awesome 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 team
of 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 to
Vivendi, covering a then-critical set of Internet projects and offering

E.ON 109
to sell some pieces of Mannesmann to Vivendi. Vivendi stopped
negotiating with Mannesmann, and a few days later Mannesmann
agreed to a friendly deal.

S+B: In most cases, an investment banker’s work ends when the deal
closes. How important to you, now that you’re in a new position, are
postmerger integration skills? Can they give you an advantage over
your competitors?
SCHENCK: Absolutely. Those companies that can digest deals
quickly, integrate the businesses and get back to normal operating
mode, that have people who can realize synergies — they are always
going to have an advantage. There are so many opportunities to
invest, and if you have all your resources tied up in integrating
an acquisition, you will have no one to look at organic growth

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

S+B: Can you make any generalizations about the sorts of functions that
lend 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 mechanisms
for integrating those are always somewhat similar. In fact, we have
our own integration teams that go in and execute the synergies
around those areas.
Integrating the actual operations themselves is trickier; you need
to address the specifics of the market and of the businesses.

110 strategy+business Reader

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, we
ask 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 will
be the competitive reaction?” Those are some of the key questions.
You also need to understand how the overall risk profile of the
company might change by making one acquisition versus another.
It’s my job as CFO to bring that to people’s attention — whereas the
M&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 course
you have to have a good grip on the financials, but you also have to
have a gut feeling for the things that could go wrong and where to
find them. That’s one place where my experience as an investment
banker 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 five
thermal power plants in Siberia and the Urals.
SCHENCK: Organic growth is always our first priority. But if we
can’t accomplish growth out of our existing asset base, then we see
whether 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 we
had very little presence in the power sector. We didn’t see a way to
go 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 power
market to look. That’s been a little tricky. The upside is that the

E.ON 111
market is likely to develop quickly. Russia’s economy depends on it.
But clearly we will see more surprises as we integrate — some of those
I 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 to
make money in the U.S. wind market was to develop and imple-
ment our own projects instead of paying for a pipeline someone else
had 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 how
to deal with regulators.
We eventually realized that the execution risk was bigger than
we thought and that there was a chance that three years later we
wouldn’t have made any progress. Faced with that possibility, it
seemed smarter to jump-start our effort with a deal.

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

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

112 strategy+business Reader

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

S+B: The credit crunch has made it harder for private equity firms to
raise 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 is
in renewables, although it’s more infrastructure funds than the
traditional private equity firms that have been competitors. But
we have actually seen them almost disappear in certain auctions,
certainly because it’s tougher for them now to put leverage structures
in place that make them competitive from a cost-of-capital perspective.
We don’t often run into private equity firms in auctions, because
our 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 they
actually can have quite a bit of risk. What’s more, the expected
return from investments in nonregulated businesses is typically
more 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 with
them in that way because we are a publicly listed company and have
to keep an eye on our balance sheet.

E.ON 113
S+B: If it’s not private equity firms you are competing against for
takeover targets, who is it?
SCHENCK: It’s really two sets of competitors. The first set looks a lot
like us — publicly traded energy companies. The second set is
owned or at least controlled by a single shareholder, very often
governments. 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 we
might compete against someone who applies different principles
than ours. But overall I’m much more comfortable knowing that
my shareholder base is institutional investors rather than the

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’t
reflected in your straight numerical analysis. That’s when you end
up paying too much.
The thing to remember is that there is always a maximum
price that is set by the fundamental valuation. The idea is never to
pay more than that. That’s one thing we can learn from the private
equity firms — they are pretty ruthless in that sense. You have to
have the discipline to walk away.

114 strategy+business Reader

Marcus Schenck’s keys to successful M&A
• Use acquisitions to gain a foothold in markets where you see an opportunity
for organic growth.
• Understand how an acquisition changes the risk profile of your entire
company. That’s an especially important discipline when expanding into new
and emerging markets.
• Great negotiation is an art that takes decades to learn because it comes only
with experience.
• Never overpay — respect your own numerical analysis. If the price gets too
high, walk away.
• Be risk-aware. Develop a gut feeling for what could go wrong and where to
look for those things.
• Be decisive and pragmatic when it comes to postmerger integration. If you
aren’t, you will spend more time digging yourself out of messes than finding
the next big opportunity. +

E.ON 115
Manage M&A Centrally —
It Uses Corporate Money

The risks of M&A can be mitigated by a

standardized selection process and systematic
postmerger integration, says CFO Lothar
by Adam Bird and Irmgard Heinz

Reporter: Julia Werdigier

Chief Financial Officer
Henkel AG & Co. KGaA
Manage M&A Centrally —
It Uses Corporate Money
by Adam Bird and Irmgard Heinz

INNOVATION LEADERSHIP HAS been Henkel’s goal since it invented

Persil, the world’s first active detergent, in 1907. Pursuing innova-
tion internally and through selected acquisitions, the company has
built a portfolio of global bestsellers including Loctite and Pritt
adhesives, 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 leading
makers of household products, with sales of € 3.1 billion (US$20
In 2004, Henkel bought the Dial Corporation, an iconic
American company whose soap products are as well known in U.S.
homes as Henkel’s Persil detergent is in European homes. At $2.9
billion, the Dial acquisition was then the biggest deal in Henkel’s
history. And the post-acquisition results, including a doubling of
Henkel’s share price, suggest it has been a resounding success.
As chief financial officer, 60-year-old Lothar Steinebach is the
mastermind 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 the
University of Michigan, Ann Arbor, and held an assistant professorship
at the University of Cologne. Before being named CFO at Henkel, he
held positions in the company’s legal and finance departments.

118 strategy+business Reader

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

S+B: Henkel hasn’t always done big deals, but it has done a lot of them
lately — several dozen in the last decade alone. Who’s responsible for
generating M&A ideas?
STEINEBACH: About a third of the ideas come from the corporate
office; the other two-thirds come from the businesses. This makes
sense, 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], we
have a very standardized approach — it’s actually a written manual
of detailed principles. That manual covers the period from when a
merger idea is conceived to when the postmerger integration starts.
We have also completed a separate handbook that spells out our
approach to postmerger practices.

S+B: Is the purpose of the postmerger handbook to identify best practices

in integrating acquisitions?
STEINEBACH: Yes. I should add that there is nothing abstract about
it. The handbook very specifically describes a central tool that is
supported by a set of processes and checklists we’ve developed to
ensure detailed monitoring and reporting of synergy capture. This
tool allows us to compare the amounts invested in any deal with
the benefits delivered, and also deals with all relevant qualitative and

Henkel 119
so-called soft factors to be taken into account when integrating an
acquired business.

S+B: How does a centralized approach to M&A benefit Henkel?

STEINEBACH: First, it allows us to systematically build expertise
within our firm. A specific unit may be involved in a takeover and
gain expertise, but if it never does another acquisition, the expertise
is lost. And the next unit that wants to embark on a takeover has to
start from scratch.
Second, because the model we use includes ways of dissecting
sales-growth assumptions and other numbers, a single department
has 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 they
think you’re interfering?
STEINEBACH: That was indeed a cause of some initial discontent.
The business units correctly assume that they run their businesses
and therefore asked why they can’t also decide on acquisitions. Units
make important decisions that contribute to the company’s bottom
line every day; they saw the centralized M&A process as infringing
on their autonomy and feared that the team’s scrutiny could even
reveal strategic shortcomings.
What we tell them is that any acquisition must eventually
be paid for with corporate money and that the allocation of cor-
porate money needs to be administered centrally. Units don’t own
full balance sheets. They have operating income, but that’s where
their responsibility ends. Capital decisions involving debt and
equity, along with tax decisions, are managed centrally by corpo-
rate finance.

120 strategy+business Reader

S+B: How do you make sure people adhere to the processes you’ve
STEINEBACH: You need to make a distinction here. Clearly, people
adhere to the premerger processes because they are dependent on us
signing off on the financing.
It’s the postmerger area where things get more difficult. What
we do is put all the processes and responsibilities, the “who has to
achieve what by when,” into a central database. Every manager who
is involved has to log in to this database. These actions are tied to
people’s bonuses, so they have a big incentive to use the database and
follow 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 comes
to M&A at Henkel?
NUHN: We help the business managers assess whether the acquisi-
tion they’re advocating fits with their strategic plans and whether
these plans generally make sense to us in the wider context of the
firm. 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 to
investment and restructuring needs, we analyze those elements top
to bottom.
In addition to that, we always generate what we call a risk version
of any calculation. We try to understand where we could encounter
problems, what effects lower growth rates or smaller synergies could
have, 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 make
compromises 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

Henkel 121
this result, we can’t change it. That’s actually another benefit of
doing M&A centrally: It guards against someone providing unreal-
istic forecasts in an effort to get an acquisition done and grow his or
her 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 read
about that is theoretical rather than practical. We would never say,
“Oh, let’s not do it because the culture is so different.” When it
comes to country-specific cultures, we think we can handle them
because of the enormous breadth of our portfolio and the countries
we operate in.

S+B: That’s a good transition into a discussion of Dial, which was, at

the 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 going
into that transaction?
STEINEBACH: There was only one area of concern, really, and that
was the extent of Dial’s integration into Henkel. We needed to be
sure that every single person on Dial’s management team supported
the 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 and
push 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 become
part of the bigger Henkel organization, but they were hoping to be
left to operate the business as they had in the past. However, at
Henkel, the businesses Dial is in — home care and personal care

122 strategy+business Reader

— 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 in
STEINEBACH: It was very difficult. Dial’s managers were used to
running an integrated company with an integrated sales force and
an integrated supply chain across their businesses. Dial’s managers
didn’t understand why we wanted to separate those things. There
was 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 interest
of quick and successful integration, you often have to make difficult
or unpopular decisions that might even cause some managers to
leave. 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 problems
did that present?
STEINEBACH: It was a challenge. In an acquisition, it’s one thing to
talk about shared visions and values and to find compromises even
when you don’t completely agree. Those things are very much on
the surface. It’s quite another thing when you have to dig into the
basic day-to-day business of recording and reporting accounts, of
understanding the laws, and of meeting requirements. There are
details that come out of that process that you would never discover
up front.
This confirmed for us that close examination of even the most
detailed processes can be valuable. The sooner you understand the
details, the sooner you can get them into alignment.

Henkel 123
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 acquired
Dial, they had just started an implementation of SAP. Obviously,
they hadn’t planned for it to work with Henkel’s version of SAP. So
we were faced with a dilemma: Do we let them continue with their
implementation 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 tend
to house a lot of critical data. In the interest of data integrity and to
avoid any disruption of day-to-day operations, we didn’t implement
the Henkel standard until a year later.

S+B: How did the switch go over?

STEINEBACH: It wasn’t easy. Any big implementation, especially
SAP, puts a strain on an organization — it’s sometimes an ordeal. It
was hard for the people at Dial to drum up much enthusiasm for
this second IT implementation project, especially since the benefi-
ciary of the new SAP implementation was the broader Henkel
organization, not Dial directly. But that was our decision, and you
absolutely 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 like
to limit the changes to those that are strictly necessary to estab-
lish whatever principles need to be established, and leave the rest
for later.

124 strategy+business Reader

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

S+B: Taking these difficulties into account, would you still say that Dial
has been successful? Indeed, years after an acquisition — and Dial has
been part of Henkel for several years now — is it possible to measure
whether it has worked?
STEINEBACH: We absolutely can measure it, and we do so with
every acquisition. In particular, Helmut’s department conducts an
internal postmerger success analysis two years after every merger.
NUHN: Yes, when we receive the initial forecasts for a specific
acquisition and create the risk version of that, we document in
detail all the assumptions that go into the model. Then, two
years later, we do the same exercise again with actual financial
results and see whether we’re on track or not. If not, the business
can take corrective measures. For us, it provides the opportunity
to see what worked during integration and what didn’t. Moreover,
the synergy-tracking tool that Lothar mentioned allows us to
see in detail which specific steps went wrong or took longer than
planned, who is responsible, and which corrective actions are
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 capital
markets are pleased with what we’ve done in M&A. That said,
we will continue to try to standardize our processes as much as
possible. Our goal is to be recognized as a decisive and successful

Henkel 125
Lothar Steinebach’s keys to successful M&A
• Manage M&A centrally and in a standardized way. A central team allows you
to evaluate acquisition opportunities consistently and capture learning.
• Question the deal proposal. Forcing the business units to show how proposals
fit their strategic agendas will help you weed out borderline deals and focus
on core competencies.
• Don’t try to force too many changes at once. Identify the changes that are
critical and focus on those.
• Monitor your integration closely. Only systematic tracking of synergies can
ensure you achieve the benefits originally planned.
• Be prepared to make difficult decisions. Make clear that some things are not
up for negotiation — it will pay off in the long run. +

126 strategy+business Reader

Henkel 127
Johnson & Johnson:
M&A Requires Financial Discipline

Deal financials require a discipline and

commitment to creating shareholder value,
says CFO Dominic Caruso. Adding capabilities
in line with corporate strategy is an important
by Charley Beever and Justin Pettit

Reporter: Robert Hertzberg

Vice President, Finance, and Chief Financial Officer
Johnson & Johnson
Johnson & Johnson:
M&A Requires Financial Discipline
by Charley Beever and Justin Pettit

JOHNSON & JOHNSONis the biggest health-care products company in

the world. If you used mouthwash last night, applied lotion to your
skin this morning, put a sugar substitute in your coffee, and took a
pill to stave off an afternoon headache, chances are you used at least
one Johnson & Johnson product in the last 24 hours. You probably
used several.
Johnson & Johnson has arrived at this position of near-
ubiquity 122 years after it first began selling surgical dressings, with
the help of an entrepreneurial culture, a decentralized structure,
and a four-paragraph credo that puts customers first. The credo
is etched on a massive piece of stone that stands in the lobby of
Johnson & Johnson’s world headquarters in downtown New
Brunswick, N.J.
It was there that strategy+business met with Chief Financial
Officer Dominic Caruso to discuss Johnson & Johnson’s acquisition
strategy. Caruso himself arrived via an acquisition: He was vice pres-
ident of finance at Centocor, a biotechnology company, when
Johnson & 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 diagnostics
group, and its group finance function, before becoming CFO on
January 1, 2007.

130 strategy+business Reader

Caruso’s arrival at Johnson & Johnson coincided with the start
of a run of acquisitions; the company has bought roughly 70 com-
panies over the last decade. Most of those acquisitions have been
small — the “tuck-ins” that Johnson & Johnson has historically
favored. But in 2005, the company was prepared to pay $23 billion
for cardiovascular device manufacturer Guidant, and in 2006, it
paid $16.6 billion to buy Pfizer’s consumer health-care business.
Johnson & Johnson ultimately bowed out of the bidding war for
Guidant, 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 a
change in your acquisition strategy?
CARUSO: Not at all. Pfizer was an opportunistic situation — a
chance 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 we
thought could help us throughout our businesses. With both Pfizer,
where we completed the transaction, and Guidant, where we
didn’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 at
Johnson & Johnson?
CARUSO: For us, the best way to create shareholder value is to grow
organically because that is the most efficient use of our capital. The
next level of shareholder value creation is probably licensing, where
less capital is needed to add value than in M&A. Acquisitions, done
selectively, come last; they’re a more difficult and riskier way of cre-
ating shareholder value.

Johnson & Johnson 131

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 enormous
breadth 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 chain
of capabilities. That is, we can selectively pick licensing or partner-
ing candidates to plug into our existing infrastructure. A company
that is not as broadly based in health care may not be able to get as
much value from an arm’s-length partnership and may need an
acquisition to get the full benefit.

S+B: You say your capability set allows you to be opportunistic. How do
you balance opportunity with the need to think strategically?
CARUSO: The way I’d put it is that we’re opportunistic if we see a
property that we can do more with than someone else might. We’re
also 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 the
opportunity to add a microelectronics capability that was primarily
implemented in our market approach to cardiac rhythm manage-
ment. But the real underlying capability that existed there was the
microelectronics. We went after it as an opportunity to add that new
base of technology to the business.
Pfizer represented a different kind of opportunity; they were
strong in certain geographic markets where we weren’t. For
instance, we had a much stronger presence in China than Pfizer
did. That was good because it meant we could sell more of their
products there. Whereas in a market like Mexico, Pfizer had
stronger ties than we did. So that turned out to be a nice set of com-
plementary growth enablers. They were strong where we were weak
and vice versa.

132 strategy+business Reader

S+B: Do you use acquisitions to meet Wall Street’s expectations, where
you might be saying, “This is how much growth we need; let’s find a way
to 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 enter
into 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 properties
to buy and then managing them?
CARUSO: The acquisition ideas typically come from people in one
of our three business segments — consumer, medical devices and
diagnostics, and pharmaceuticals. They bring an idea forward, and
then our executive committee, including me and our chairman
and CEO, Bill Weldon, will spend more or less time on that can-
didate depending on the dollars involved, how strategic it is, and
the risk associated with achieving an acceptable return.
I spend very little time managing acquisitions — it wouldn’t
make sense given the decentralized management structure we have.
But in terms of evaluating whether an acquisition is an appropriate
step forward, I spend a good amount of my time on that. Still, it’s
mostly 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 endanger
Johnson & Johnson’s financial discipline?
CARUSO: On the contrary, there’s a very good understanding among
the executive committee, myself included, as well as the line-of-
business CFOs, that a transaction is worth pursuing only if it has a
high probability of creating value for shareholders. And then the
question always is, “Well, what do we mean by creating value for
shareholders?” That definition is very well understood at Johnson &

Johnson & Johnson 133

Johnson. In order for an acquisition to be value-creating, it has to
have an internal rate of return that exceeds our cost of capital and
compensates 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 acquisition

in a more positive light?
CARUSO: It’s true, they might be. They’re closer to the market, to
the technology, than we are in the executive suite at corporate. So
they will probably champion the transaction more enthusiastically.
And that’s actually a good thing because if we were to be successful
in acquiring the property, we’d want a business champion to own
the transaction.
The more enthusiastic vantage point is also good because it
might push us to consider a deal whose potential we’d otherwise
miss. We’ll test the premise. We’ll talk about ways we can add to the
potential of this target that are currently not embedded in its inde-
pendent valuation. If we see a way to create shareholder value, we’ll
move 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. What
lessons did Guidant teach you?
CARUSO: Guidant was a reaffirmation, a test of our discipline, to see
if 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 increase
our offer above what it was, $24.2 billion. The press release we put
out was very simple in that regard: We said a higher bid would not
be in the best interests of our shareholders.

134 strategy+business Reader

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 ourselves
desperate. 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. Within
six months you had announced your acquisition of Pfizer’s consumer
health-care business. Has that deal met your expectations?
CARUSO: Pfizer has a number of attributes that should create
incredible value for us. First, the risk involved in achieving the rate
of 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 regulatory
risk. This isn’t a biotechnology acquisition; this isn’t a company
developing early-stage pharmaceuticals. It’s a consumer health-care
company — and we’ve been pretty successful with these acquisitions
in the past. Think of our acquisitions of Neutrogena and Aveeno in
the 1990s.
The second thing I would say about the Pfizer acquisition is it
has a large component of cost synergy associated with it. That’s not
typical of our deals. We usually bring in an enterprise and add it to
the family of companies in a decentralized way. In this case we were
buying brands from Pfizer that were very complementary to the
brands we already had. So, for example, Lubriderm can easily be
plugged into our skin-care franchise, or Listerine, of course, into
oral 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 risk
of not achieving the return, because you’re in charge. It’s very differ-
ent from making an acquisition and needing to get the acquired
management team to see that the product should be improved or
expanded in a particular market.

Johnson & Johnson 135

S+B: With all the acquisitions you do — you have averaged six
a year for the last decade — how do you track their progress? Who
keeps score?
CARUSO: We actually have a post-acquisition review process. Once
a year, we look back five years at all the acquisitions we’ve done. We
try to extract lessons, because it doesn’t always work the way you
thought it would. Then we use those lessons either to fine-tune how
we’re integrating the acquisition or, at least, to put variables into our
models 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 internal
investment banking arm. It’s a very talented group, and its leader has
been doing this type of work for probably 10 years here. We also
rotate high-potential finance professionals through the group, and
they spend about two and a half to three years working in it. After
that, they go back out to the businesses. That works really well,
because when they go back out they’re already familiar with the rules
of the road, so to speak.

S+B: Do the individual businesses or brands have ceilings in terms of the

acquisition capital available to them?
CARUSO: No, there’s no predetermined limit. We don’t say, “You
within Neutrogena — you can only spend so much.” Or, “You
within the consumer business — here’s your cap.” We evaluate each
transaction on its own merits, regardless of its size or sector.
Now, that doesn’t mean we treat every acquisition the same. For
instance, up to a certain level, my approval is all that’s needed. At
the next level, a deal needs the approval of our chairman and chief
executive and of the executive committee. And then there are levels
that require the board of directors’ approval.

136 strategy+business Reader

S+B: You said earlier that most of the acquisition ideas come from the
business units. What about outside investment bankers — how often do
they bring acquisition candidates to your attention?
CARUSO: It’s very rare that an investment bank brings us an idea
that we haven’t already thought about or seen. Our people know
what’s going on in their industries, and we’re plugged into a lot of
startup 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 likely
because of our credo-based culture. So we’ll often be approached or
contacted if a company is looking to join a larger organization.

S+B: You came to Johnson & Johnson as part of an acquisition. So you

speak from experience.
CARUSO: Very much so. We were cautious, at Centocor, about
where our employees and our company would end up. We viewed
Johnson & 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 important
to us. It meant our business could remain as independent as possi-
ble within a family of companies. Last, we thought we could bring
a technology base that was needed in the company, making us a
desirable addition.
Johnson & Johnson was at the top of our list. I’m not saying that
because I’m here today. No other company really matched it in
terms 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 to
strike a balance between transactions that are low and high risk?
CARUSO: No, not really. Although when we did the Pfizer consumer
health-care acquisition, the end result was that the consumer piece

Johnson & Johnson 137

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 help
the enterprise. But we don’t go into it that way, looking to create an
appropriate balance between the sectors.

S+B: Johnson & Johnson has traditionally been a product company, yet
the 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 just
depend on what’s available and what creates the most value. Our zip
code’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 consumer
presence. Then after many more years we added the pharmaceutical
presence 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 trillion
worldwide health-care market. There’s a lot of opportunity for us.

138 strategy+business Reader

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 in
ways well beyond the acquired company’s products and profits.
• Identify an internal business champion for each merger. Clear ownership in
the business is a prerequisite for successful integration.
• Adjust your models. Use the results of your postmerger review to fine-tune
your models with new variables.
• Develop your M&A team carefully. Rotation of staff into and across businesses
can benefit the whole organization. +

Johnson & Johnson 139

Growing the R&D Pipeline

Establishing a stake in a portfolio of promising

early-stage efforts is critical to ensuring success
in the pharmaceutical industry, says CFO
Peter Kellogg.
by Charley Beever

Reporter: Robert Hertzberg

Chief Financial Officer
Merck & Co., Inc.
Growing the R&D Pipeline
by Charley Beever

THERE ARE MANY reasons that Merck & Co., Inc. is considered one of
the world’s bellwether pharmaceutical companies. The main reason,
however, is the number of multibillion-dollar drug innovations that
have 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 demand
innovative, 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 ago
as 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 Merck
in 2007. The diabetes drug Januvia, which was introduced four
months after Gardasil, is another emerging hit, with revenue in its
first year on the market reaching $667.5 million. Right behind
these drugs, Merck launched a new class of HIV therapy, Isentress,
late in 2007.
“We’re not just coming up with remedies that are similar to
something else already on the market,” says Peter Kellogg, the com-
pany’s chief financial officer. “What we’re really trying to do is come
out with novel therapies in areas of significant unmet need.”
You might think Merck, which spent $4.9 billion on R&D in

142 strategy+business Reader

2007, would have the wherewithal to develop these new compounds
on 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 the
same with its M&A activities: It looks for promising new discover-
ies and, more often than not, invests in or licenses them rather than
buying them outright. In fact, Cozaar, Fosamax, and Gardasil are all
enormous successes that have stemmed from or been enhanced by
licensing deals.
To Kellogg, a Princeton-trained engineer whose career high-
lights include stints at Arthur Andersen, Booz Allen Hamilton, and
as CFO of the biotech firm Biogen Idec, this approach of emphasiz-
ing small, research-driven deals is familiar — and sensible. The drug
industry isn’t like the consumer goods sector, in which the 52-year-
old previously worked as a senior finance executive at PepsiCo; it
doesn’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 helping
Merck to structure its deals, at the company’s headquarters in
Whitehouse 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. Business
combinations, broadly speaking, are a very big part of what we do.
They have to be; biopharmaceutical research is very fragmented. It
might look like there are some large pharmaceutical and biotech
companies that dominate the intellectual property arena, but there
really aren’t.
In our industry, mergers and acquisitions have to be one of the
tools in your tool kit — but not necessarily the one that gets the
most use. For every acquisition we do, we probably enter into 20
licensing/business development deals.

Merck 143
S+B: What do you put under the heading of a business development
KELLOGG: There’s a whole set of transactions that apply. It could
be in-licensing intellectual property rights, forming small collab-
orations, or setting up formal joint ventures with separate legal
entities and governance bodies. The partnership we have with
Schering-Plough, to market cholesterol-control drugs, is an exam-
ple of the latter.

S+B: Partnerships aimed at developing new drug therapies sound

only peripherally like a job for the finance department. What’s your
role 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 that
is financially logical.
In addition to finance, research and development people play a
very large role on the team. This includes our regional scouts, who
live throughout the world and monitor scientific developments both
by therapeutic area and by geography. They’re in constant dialogue
with small companies and venture capital groups.
When we get serious about a deal, a part of our R&D group that
is dedicated to business development will start working on the due
diligence, which includes understanding how the external science
relates to projects we’re working on internally.
Our commercial organization is also a critical element of the
team. There is a finite commercialization period based on the life
span of intellectual property, so we model future scenarios for the
different disease states — the current products that are available
today, our pipeline, and what we see in competitors’ pipelines.
That’s all part of the M&A evaluation.

144 strategy+business Reader

S+B: Of the deals you look at, how many do you actually do?
KELLOGG: The batting average, quite frankly, is very low. For every
25 opportunities we look at, we might end up bringing in two or
three or four. However, the volume is very high. We have executed
about 50 licenses per year in the past several years, so it is an
extremely broad and comprehensive effort.
The selection process is important. In the course of doing our
due diligence, we often conclude that a transaction isn’t compelling
from the standpoint of shareholder value creation or it has a
risk/benefit profile that’s skewed in a way we don’t like or is in an
area 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 you
see synergies that are so meaningful that a significant acquisition
premium can be justified.
That’s not the business we’re in. We’re at the other end of the
spectrum — with products that are high in gross margins and intel-
lectual property. As a percentage of revenue, there often isn’t enough
operating expense that can be separated out and synergized, if you
will, from the core programs we’re going after to justify paying a
large economic premium for the deal. And if you are targeting com-
mercial products, the remaining patent life limits the period over
which the benefits can be realized.
In any event, when you have high margins to start with and your
business model is based on intellectual property, synergy probably
isn’t the bet you’re making. The bet you’re making is that you can
recognize a lot of potential in the intellectual property that’s been
developed so far, and develop it further in combination with your
own commercial franchise, intellectual property, or technical skills.

Merck 145
S+B: Do acquisitions ever make sense as a way to meet Wall Street’s
growth expectations?
KELLOGG: At most, you’d accord those expectations a secondary or
tertiary role. Otherwise you’d probably end up just chasing trans-
actions. We have to focus on creating value; driving shareholder
returns is “job one.”
Many have speculated that this industry will see a wave of major
acquisitions just to bolster the top line or overcome patent expiries.
But what you really have to do when considering an acquisition is
step back and ask, “Do we see enough upside in this deal? Is there a
way in which this could become much bigger than the market is
anticipating?” Because there are definitely a lot of ways it could
become 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 reflects
profit from our joint ventures and, in 2007, this line contributed
nearly $3 billion to our bottom line. All of these joint ventures were
created without any acquisition premium. And several have resulted
in 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-Plough
that I mentioned earlier, which produced an innovative and
efficacious LDL-lowering drug and another treatment option for
people who suffer from cardiovascular risk. Our combined
efforts created a new franchise that generated sales of $5.2 billion
in 2007.

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

146 strategy+business Reader

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 usually
someone else who’s interested.

S+B: In those situations, what clinches the deal? Does it all come down
to money?
KELLOGG: No, I don’t think it’s solely about the money someone is
putting on the table. Although ultimately a company has to get the
best deal for its shareholders, very often the greatest value for the
seller comes from contingent future payments based on, for exam-
ple, future revenues or royalties earned. That means the seller should
go with the partner who is likely to create the best long-term returns
from the asset, rather than simply going with the partner who offers
the highest up-front payment. In this industry, most development
efforts fail before the future contingent payments are earned, so the
seller 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 deal
with contingent earn-out elements. What’s the benefit to the seller?
KELLOGG: In the case of venture capital groups, they really like the
idea of a deal where up-front payments “de-risk” their position while
earn-out elements allow them to share in the downstream success of
what 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 IDEC
Pharmaceuticals, whose strengths were in the area of oncology. What
was the most notable thing about that merger?
KELLOGG: It was a merger where the equity split was something like
50.2 versus 49.8 — a true merger of equals. It was a zero-premium

Merck 147
transaction that offered enormous strategic fit. It accelerated the
strategic position and capabilities of both companies.

S+B: Did shareholders think so?

KELLOGG: There was a lot of curiosity as to how it would come
together — investors adopted a “wait and see” position. That’s not
unusual; 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. When
you have a big deal, investors in one stock or the other are always
thinking, “Did I just de-risk my holding or did I just give up some
of 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 the
combined company. The stock of the combined company per-
formed very well. Four or five months in, the transaction had really
become 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 to
investors intensively for quite some time. It’s not just a one-week
road show — you’re talking about the value of the transaction and
why it makes sense, for a year or two after it happens.
Fortunately, the investors who buy the stocks of pharmaceutical
or biotech companies are already working on relatively longer
time frames in terms of their investments. This investment com-
munity includes Ph.D.s and physicians who understand the
probability-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 in
projects that ultimately may not work. They also know that the

148 strategy+business Reader

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 shareholder
value and demonstrates that it supports the investor’s thesis for
investing in the deal.

S+B: Having seen how the screening process works at Merck, what
would you say differentiates the deals that get done from those that
KELLOGG: The one truth I’ve seen is that if our scientific team and
our commercial team are not excited about a transaction, there’s no
hope that it will succeed. There’s no such thing as a good financial
deal that doesn’t have great scientific endorsement. After all, it’s the
scientists 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 payout
contingent on the target’s achieving certain goals. This can work to the benefit
of both the acquired and the acquirer.
• Explaining the rationale for an acquisition is not a job you can relinquish as
soon as the deal closes. You should anticipate investors’ questions and share
your vision for a year or longer.
• M&A synergy is easiest to achieve with low-margin businesses that offer
similar products or services. It’s the rare drug-industry M&A deal that offers
enough 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 it
a 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 — and
not necessarily the one that gets the most use. At Merck, business development
deals outnumber acquisitions about 20-to-1. +

Merck 149
Saudi Basic Industries Corporation:
Using Acquisitions to Achieve
Global Scale

SABIC is using M&A to enhance and strengthen

its profile as a multinational chemicals giant, says
CFO Mutlaq H. Al-Morished.
by Ibrahim El-Husseini and Joe Saddi

Reporter: William Boston

Chief Financial Officer and Vice President, Corporate Finance
Saudi Basic Industries Corporation
Saudi Basic Industries Corporation:
Using Acquisitions to Achieve
Global Scale
by Ibrahim El-Husseini and Joe Saddi

JEFFREY IMMELT, of U.S. industry icon General Electric


Company, had nothing but praise for the Saudi Basic Industries
Corporation (SABIC) when he announced last year that the Saudi
chemicals group was buying GE’s plastics division for US$11.6 bil-
lion. SABIC, he said, was the right company at the right time to
take GE Plastics global and put it on a more competitive footing.
That might have seemed like corporate hyperbole if SABIC hadn’t
had the track record to back it up.
What Immelt didn’t tell reporters that day is the story behind
SABIC’s rise from a state-sponsored industrial experiment in the
sands 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 billion
by 2020 and to become a truly global company. Investors in SABIC,
which is still 70 percent state owned, are clearly believers in the
2020 project. Encouraged by strong sales growth and a 33 percent
rise in net profits, SABIC shares rose 82 percent last year.
And yet M&A activities are a recent addition to SABIC’s tool
kit. The company has relied largely on organic growth since it was
founded by the Saudi government in the 1970s to use the by-
products of its booming oil industry to create value-added com-

152 strategy+business Reader

modities, such as chemicals, polymers, and fertilizers. Now, SABIC
is 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 the
United States, where he lived for 16 years, earning a bachelor’s
degree in nuclear physics and mathematics from Denver University
and master’s degrees in nuclear engineering and business from
Princeton and Stanford universities, respectively. So he is no
stranger to American customs, a definite plus when it comes to deal-
ing with Western companies. He has been president of both the
Saudi Iron and Steel Company and the Saudi Petrochemical
Company, a joint venture of SABIC and Shell. In this conversation
with strategy+business, he hinted that the General Electric deal was
just a stepping-stone, albeit a major one, on the company’s path to
transforming 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. Our
target is to boost sales to $60 billion by 2020. Our preference
is to grow organically wherever possible. But if we see an opportu-
nity arise somewhere in the world that will help us grow, we will
certainly 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 important
criteria driving your M&A strategy?
AL-MORISHED: That’s right. If you take Europe, for example, the
businesses 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

Saudi Basic Industries Corporation 153

mixed portfolio, and that means moving into specialty chemical
products. Our goal is to have a revenue mix of 20 percent from spe-
cialty products and 80 percent from commodity products. The
product portfolio of our affiliate Saudi Kayan, which is currently
under development and will be the world’s largest fully integrated
petrochemical 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 you
move down the product chain, value increases. You want to capture
the value yourself, rather than sell your commodity product to
someone else who then extracts more value from it and makes
money that you could be making.

S+B: Why is it better to add new products through an acquisition than

to build the new capabilities and assets needed to produce them?
AL-MORISHED: With the right acquisition, you can leapfrog the
competition, especially when it means getting into a business in
which you aren’t active yet. You’ll be working at it for years if you try
to start a specialty business from scratch. It’s taken us 30 years to get
to where we are today. We don’t have that much time anymore. With
an acquisition, you hit the ground running. You jump in ahead of the
competition, and from Day One you are working from a position of
strength. 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 the
right thing to do, yes. But it’s not my preference because it’s not the
best thing for long-term development. Employees in the target com-
pany tend to be unhappy afterward, so I’d rather not do a hostile
takeover unless there is no alternative.

154 strategy+business Reader

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’ve
done a lot to identify and secure synergies.
But sometimes there is no head-count benefit. For example, when
sellers 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’re
not interested in doing an acquisition for its own sake, but to add
value to the business. We’d like to see that happen fast, but maybe it
will take five years or even 10 years. We are not coming to flip the
company, to take the money and run. We take businesses to operate
and grow.

S+B: SABIC seems to move very deliberately during the integration

process. 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 as
possible. 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 here
at headquarters. When we go in, we are open-minded and willing to
listen. We don’t load the target company with people from head-
quarters. Actually, we have taken people to headquarters from the
companies we’ve acquired, a kind of cross-fertilization. We want to
know how we can improve things. Maybe this isn’t the way other
companies 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 with
respect and not coming in with a hatchet. You have to show them

Saudi Basic Industries Corporation 155

that you understand and appreciate the business and that you trust
the people who operate the business. People are different. What
works 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, we
have learned a lot about taxes.

S+B: Integration after a merger can become very messy. Why do you
think so many deals fail in the postmerger phase?
AL-MORISHED: A lot of mergers fail because the buying party tends
to 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. We
understand that acquired companies have something to offer us and
that we can learn from them. Some of their practices are better than
ours. 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, treasury
and financing, and accounting and financial reporting. I’m heavily
involved in the overall integration, but leadership of the GE Plastics
integration, for example, lies with the vice president of the specialty
chemicals business unit. At headquarters we look at the financial
performance of our affiliates, but each has its own CEO, manage-
ment, and board. I get involved as the CFO of the group and they
provide me with the numbers I need to do my job. I support them
if they need to raise financing, and if I see a problem, I alert the
company’s board. But I step back from an active role because now
there is someone else running the show and we don’t want unneces-
sary interference.

156 strategy+business Reader

S+B: SABIC is becoming increasingly global. Does that mean that the
finance 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 has
become 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. Headquarters
is a good place for finance, to be honest. It needs to be there with
the CEO and other corporate functions.

S+B: Are the ideas for potential acquisitions generated more by you and
your 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 team
from different parts of the business. And once we are serious about
moving 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 market
and proposing targets?
AL-MORISHED: They are very autonomous. Sometimes they will
come to us with ideas, and sometimes we will go to them. But most
of 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 our
recent acquisitions were initiated by the corporate M&A team. We
told management in Europe and in the United States to go after the
targets in their regions.

Saudi Basic Industries Corporation 157

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 a
look at it and decide if it makes sense. Then we sit down with the
team, 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 with
the details. Once the deal is closed, or if there are any unforeseen
problems, they come back to me. I am in touch with the CEO
throughout the entire process, and when it seems necessary we’ll make
a presentation to SABIC senior management to get their buy-in.

S+B: How do you deal with cultural differences between SABIC and the
European and American companies you acquire?
AL-MORISHED: Most of us worked and lived in the United States
or studied there, so this is not a problem for us. And when you look
at 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 the
Middle East is a place where all of the world’s cultures meet. Asia,
Africa, and Europe meet here. The Silk Road from China ended
here. There has been this intersection of cultures and commerce
throughout history. So, for us, it is not that unusual an idea to work
with companies and people from around the world. The Middle
East has been at the crossroads of civilization throughout history.

158 strategy+business Reader

Mutlaq Al-Morished’s keys to successful M&A
• The right acquisition lets you leapfrog the competition — and that means
saving time. You can launch into a new business from a position of strength
and avoid making painful learning mistakes.
• The success of an acquisition depends a lot on how you treat the people you
are acquiring. It often pays to show that you have faith in the managers of the
company 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 to
teach you something that helps you run your own business more effectively.
• Develop an ability to listen. The main reason mergers fail is that acquiring
companies come in and impose their way of doing business on the acquired
company. +

Saudi Basic Industries Corporation 159

Transformational Deal Making

Sometimes you have to take a company

apart in order to build it up, says CFO Santiago
Fernández Valbuena.
by Jens Niebuhr and Joseph Santo

Reporter: William Boston


Chief Financial Officer
Telefónica SA
Transformational Deal Making
by Jens Niebuhr and Joseph Santo

SANTIAGO FERNÁNDEZ VALBUENA , CFO of Telefónica SA, has needed

the combined skills of his two private passions, skydiving and uni-
versity teaching, to get through the past few years leading M&A at
the Spanish telecommunications company.
Telefónica single-handedly changed the game in European tele-
coms in 2005 when it bought U.K.-based wireless operator O2
for US$32 billion. Overnight, Telefónica became Europe’s second-
largest wireless company. As surprising as the deal itself was the fact
that Fernández Valbuena stitched together the financing package in
a single weekend and completed negotiations with O2 in just two
weeks. Such a feat requires a CFO with a thrill seeker’s nerves and
an 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 and
has held a number of teaching posts at institutions such as the
Manchester Business School and the Instituto de Empresa in Spain.
He joined Telefónica in 1997, leaving a job as general manager
of Société Générale Valores, a commercial bank. He became
Telefónica’s CFO in 2002.
Like many of its peers, Telefónica was hit hard by the dot-com
downturn and the disappointing market penetration of the 3G wire-
less standard in Europe. After the Internet bubble burst in 2000,

162 strategy+business Reader

Telefónica cut back on its media and Internet ventures, focusing on
its core business and going into acquisition mode. O2 was the high
point, adding 25 million new customers in the U.K., Ireland, and
Germany to the 145 million customers Telefónica already had in
Spain 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 experiences
during 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 a
textbook case of Schumpeter’s theory of creative destruction unfold before
your eyes. You have made two major transformations and are now
stronger than ever.
FERNÁNDEZ VALBUENA: Our former chairman used to say that
Telefónica was a media company. And that meant we needed to
abandon telecommunications in the same way that the telegraph
became a thing of the past. He was a visionary when it came to some
things, but this idea turned out to be dead wrong. So, when César
Alierta Izuel became chairman in 2000, he moved in the opposite
direction. We refocused on strengthening the core telecommunica-
tions business. It was an implosion of the company before we could
ignite an explosion of growth.

S+B: What has been driving acquisitions such as those in Latin

America, the O2 purchase, and your alliance with Telecom Italia?
FERNÁNDEZ VALBUENA: Diversifying geographically away from
Spain, so that we have many revenue sources and can benefit
from scale efficiencies. This means that if Spain’s economy cools, we
won’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

Telefónica 163
emerging and fast-growing Latin American business that we feel
very 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’t
making money. You had also made unsuccessful moves into high-speed
wireless Internet access and television content, through the production
company Endemol. How did you sort it out?
FERNÁNDEZ VALBUENA: Through a lot of hard work. We weren’t
the only ones in the industry going through this, but that fact
wasn’t very comforting.
We moved quickly. We were one of the first to write off the
UMTS licenses for high-speed wireless access, and that was the right
thing to do. Both Lycos and Endemol were forays beyond our home
turf — you pay a price for that. As a TV company, Endemol was
in a different line of business. I have always said we need access to
content, but we don’t need to own the content. The strategy of pro-
ducing our own content was flawed and was something we needed
to fix.

S+B: Before the O2 acquisition, a lot of your initial focus was on Latin
America rather than Europe. Why was that?
FERNÁNDEZ VALBUENA: Many European governments bailed out
their big incumbents at a time when they should have let them go
bankrupt or merge with stronger players. So those of us who
believed scale was very important had to go fishing elsewhere. In
2004, we bought Bell South’s cellular assets in Latin America for
$5.6 billion, which would be a laughable price today. I’m especially
proud of that.

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

164 strategy+business Reader

FERNÁNDEZ VALBUENA: Everyone took for granted that access
to credit was unlimited and that any asset you wanted to buy
would be available. That wasn’t true; there were actually very few
assets for sale, which is why we decided to move full steam ahead
on O2.
And now the environment in Europe is becoming more protec-
tionist and nationalistic again. Should the credit crunch become
more severe, governments will probably react defensively.

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

S+B: From your perspective as CFO, what were the major challenges in
managing the reorganization of your company?
FERNÁNDEZ VALBUENA: Number one, to concentrate on the core
business. Number two, to reintegrate things that we had partially
spun off and were trading as listed stocks on the market. That latter
challenge was a corporate governance nightmare. If you have two
chairs and 10 people, you have an issue. There was a lot of that at
Telefónica: We had CFOs and CEOs of all sorts and kinds. We’ve
streamlined the management structure. It was painful, but it had to
be 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.

Telefónica 165
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 represent
finance. 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 things
that 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 very
quickly. The whole process took less than two weeks from the first
approach 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 due
FERNÁNDEZ VALBUENA: We did not do the due diligence that
everyone 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 all
that information was available — that’s the beauty of buying public
companies. I figured I could live with that because I knew the
financing was in place and the company was just four years old. I
wouldn’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, about
how 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 it
take to raise the money?” This was a $32 billion animal. No one had
ever had access to that kind of money in one shot before. That’s
great for a CFO; you’re in uncharted territory.

166 strategy+business Reader

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

S+B: Did O2 produce the post-deal synergies you expected?

FERNÁNDEZ VALBUENA: Our target was $6 billion in operating
cash flow over four or five years. Everything is on track, although it
is interesting to see that we are getting synergies from different
sources than we had anticipated.
You would expect to get more savings from procurement than
from things like centralization and shared services. Surprisingly, that
didn’t happen.
The problem is that all markets are very local. So the Nokia
phones that get sold in London are not the same phones that get
sold in Madrid or Prague. The phones are tailored for each market.
The language, software, and embedded services are unique for each
market. These things turned out to be more significant than we had
anticipated, and were an obstacle to getting volume discounts.
On the other hand, we’ve been able to elicit more substantial
synergies from the elimination of offices, and from the elimination
of services that could be centralized or integrated much faster than
we thought. Finance is an obvious example.

S+B: In what way is it obvious?

FERNÁNDEZ VALBUENA: We have been able to derive more tax and
financial synergies, because the average cost of debt from Telefónica is
so 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

Telefónica 167
draw the road map with Telecom Italia. The finance function at O2
was very well organized; it was uncomplicated. They didn’t have
any convoluted structures. They had very little exposure to compli-
cated derivatives.

S+B: How does the finance function at headquarters differ from the
finance function at the business unit level?
FERNÁNDEZ VALBUENA: The finance function at headquarters
takes a step back and tries to see the bigger picture, to ask the right
questions. But the finance people in the businesses take the bull by
the horns. So the CFO of O2 Group, Telefónica Europe, as we now
call it, should spend 80 percent of her time in operations and in
understanding where the division’s profits are coming from and how
to finance campaigns. She should be working on the iPhone nego-
tiations, for example, and not spending time worrying about the
pound exposure or hedging policy, because that’s what we do at
headquarters. We pull all the fundamental financial levers, the
financing, 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 are
part of their management executive committee. They are part of that
business. The dotted line means that they have to answer my calls or
my 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 lessons
you’ve learned that have prepared you for future deals?
FERNÁNDEZ VALBUENA: You always pay for what you get, but you
don’t always get what you pay for. So take it as a given that you
will overspend.

168 strategy+business Reader

Another lesson is not to under-budget; not doing so allows you
to 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’t
constantly wait for the right market conditions. The right time to go
out 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 with
investors. 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 what

you expect?
FERNÁNDEZ VALBUENA: We have gotten what we wanted, which
was geographic diversification. Spain is still a very large part of who
we are, but we are no longer a Spanish company. We are a European
company now.

Santiago Fernández Valbuena’s keys to successful M&A

• Work on your financing options at times when you’re not actually looking to
do a deal. This will speed your ability to act when a target emerges and may
give you a competitive advantage.
• Don’t under-budget. Having resources will allow you to prepare for the
• The right moment to invest doesn’t depend on the market cycle, but rather
on whether an acquisition will drive your operational strategy and whether
you have access to the necessary financing.
• Don’t complicate communications with shareholders. Be open and keep the
message simple.
• Never assume that targets will be available in the future. If you have an
opportunity to advance your business with an acquisition, move fast and
make it happen when the target is available. +

Telefónica 169
UnitedHealth Group:
Handpicking Capabilities Rather
Than Just Adding Scale

Business development that’s disciplined in

every detail helps attract the winners and weed
out the losers, says CFO G. Mike Mikan.
by Gil Irwin and Justin Pettit

Reporter: Robert Hertzberg

Chief Financial Officer
UnitedHealth Group Inc.
UnitedHealth Group:
Handpicking Capabilities Rather
Than Just Adding Scale
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 part
of the company’s strategy, not all of them have been big enough
to 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 Financial
Officer G. Mike Mikan, is not the number or size of deals
UnitedHealth Group has done, but how they’ve shaped the com-
pany. There, too, attention to detail has been critical; over the past
decade, the Minnetonka, Minn.–based company has developed a
process for evaluating, acquiring, and integrating companies that
goes a long way toward explaining why it now ranks among the
largest health insurance providers in the United States and among
the 25 largest U.S. corporations.
That UnitedHealth Group’s mergers and acquisitions process
comes so close to being a science is a tribute to Mikan. He first
joined the company as an executive in its then-fledgling corporate
development group in 1998, and eventually emerged as one of the
key architects of the company’s business development process. He

172 strategy+business Reader

was CFO of two business units, UnitedHealthcare and Specialized
Care 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 special
attributes. Mikan’s energy and intensity are apparent. So is his
grounding as a CPA. He is precise about numbers — the number of
deals UnitedHealth Group has done, the multiples it has paid, the
average transaction prices. He is also precise about what
UnitedHealth Group is trying to accomplish with M&A — and
what it is not. In his interview with strategy+business, that was the
first topic Mikan discussed.

S+B: UnitedHealth Group’s revenue has more than quintupled from the
year you joined it, to more than US$75 billion in 2007. Are there any
acquisitions left that could transform the company?
MIKAN: I’m not sure I would use that word, transform. There are
definitely acquisitions or targeted opportunities that would align
very well with areas where we’ve expanded, like individual insurance
or financial services.
Everyone says, “You’ve done a lot of transactions; they’ve built
this organization.” Yes, we have. We look at between 150 and 200
deals a year; that has led to almost 100 completed transactions in the
last 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 were
done to piece together capabilities. We don’t do acquisitions solely
for the purpose of a land grab.

S+B: That’s a different point of view. At a lot of big companies, an idea

that doesn’t “move the needle” dies before it ever gets started.
MIKAN: That’s true, and if our acquisition strategy were simply to
get bigger, we certainly would not be doing $14 million deals. Those
deals would be a waste of time because acquisitions — whether

UnitedHealth Group 173

you’re paying $200,000 or $9 billion — are similar in terms of their
complexity. 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 often
the ones that have something unique to bring to UnitedHealth
Group. There are a lot of people out there who are developing good
ideas and capabilities in a more entrepreneurial setting — and fund-
ing them out of their own pockets or with the help of private
investors. 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 serves
individual consumers through health savings accounts [HSAs]. We
bought it for $495 million in November 2003 — a time when we
had 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 become
a very successful business and one of our leading growth platforms.
Another example is AmeriChoice, our Medicaid business, for
which we paid $577 million. At the time we bought it, in 2002, we
were very good at serving large-scale customers — the General
Electrics and IBMs of the world. We offered Medicaid programs in
13 markets, but didn’t really have the competency to administer
these plans, which are managed by the states.
Even though AmeriChoice was in only three primary markets
— Pennsylvania, New Jersey, and New York — the company
understood what it took to optimize revenues, manage diseases,
and set up clinical programs specific to these businesses. We did
a reverse integration, meaning AmeriChoice’s management team
overtook our existing Medicaid business. In effect, we were buying
their know-how. Tony Welters, one of the founders of AmeriChoice,

174 strategy+business Reader

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 a
good company get away or buying one and finding out it doesn’t meet
MIKAN: I tell people all the time that the best deals are the ones we
walk away from because we’ve figured out that they aren’t going
to meet our needs. That kind of discipline is essential in an acquis-
itive organization. We need to make sure we’re doing deals that fit
within the organization and that maximize returns on our share-
holders’ money.
But let me answer your question in a different way. Of the
almost 100 transactions we’ve done in the decade since I’ve been
here, 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 the
median forward multiple has been 5.1 times EBITDA. So our deals
have tended to be very accretive.

S+B: What accounts for that success rate?

MIKAN: We have a very thorough process, run by our corporate
development group, which we put in place 10 years ago when we
were a $12 billion company aspiring to become preeminent in the
areas 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 the
deal meet our strategic criteria? Does it augment what we already
have or add a new capability? Is it an appropriate use of capital, and
does it meet our investment return expectations? Does the com-
pany have a strong management team? Are we better off buying it

UnitedHealth Group 175

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 [Chief
Executive] Steve Hemsley for final review. Above a certain level, it
will also go to our board for approval. The process is very thorough
and very consistent.

S+B: It sounds very time-consuming too. If you are competing against a

buyer willing to put money on the table more quickly than you, it seems
that process could cost you some deals.
MIKAN: I don’t agree with that. Our speed is actually enhanced
because a prospective deal doesn’t have to go through the layers of
bureaucracy, through people hemming and hawing, or through
someone 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, of
who’s going to be in what meeting, what we’re going to cover, and
the questions we’re going to ask. We try to do due diligence — the
financial, legal, and operational aspects — in three to four weeks
while we negotiate a purchase agreement. Once we engage, it is very
And there’s a reason we do that. We prefer not to get into bid-
ding contests with the many strategic and nonstrategic buyers whose
standard operating procedure is to throw out an initial offer —
expressed as a multiple of revenue or profit — just to get into the
next round. We set out 10 years ago to avoid that. But we realized
from the beginning that we would not be credible in sole-sourcing
deals 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?

176 strategy+business Reader

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

S+B: So you say, “We’re interested in buying you, we can’t tell you for
sure that we’re going to buy you, but our condition for possibly buying
you is that you negotiate only with us for now.”
MIKAN: In a sense, yes. We’ll sign a letter of intent that will have an
exclusivity provision in it that will essentially preclude the selling
organization 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 targets
broadly auction their businesses, there is a valuation impact to
strategic buyers like us. How can there not be? They are giving away
their market intelligence. Instead of running the business, they are
meeting with their bankers and attorneys, talking about the cash
windfall they’re going to get. They just aren’t focused.

S+B: Is UnitedHealth Group’s up-front process entirely responsible for

the 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 executive
sponsors, with the sponsors recognizing that they’re going to be held
to hurdle rates and to generating economic value, instills a lot of dis-
cipline. They won’t do deals with a negative EVA [economic value
added]. Why? Because they know it impacts their businesses’ per-
formance and, frankly, their careers. That knowledge drives out a lot
of the bad.
We haven’t done everything right. We’ve made our share of

UnitedHealth Group 177

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 of

thinking 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 big
acquisition, such as your $4.9 billion deal to buy Oxford, which
strengthened your position in the New York metropolitan area, or
your $8.8 billion purchase of PacifiCare, which did the same for you
in California?
MIKAN: That question brings us back to the late 1990s, and the
aspiration 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 we
weren’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 company
that was able to serve all Americans. Oxford and PacifiCare brought
us into the Northeast and West Coast in strong, market-leading
positions. 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 our
senior market capability, as well as providing us with a first-rate
West Coast operation. It was a very significant opportunity for
UnitedHealth 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, which
was higher than our historical multiple. But strategically it made all

178 strategy+business Reader

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

S+B: Was PacifiCare a sole-source deal?

MIKAN: I can’t say that. At the point in time we bought them, they
weren’t talking to anyone else. But they had previously talked to
other potential buyers.
Still, as a large public company, PacifiCare was different. It’s not
like negotiating with a private company that nobody knows about
and that you’d rather not see representing itself to your competitors.
Big deals, like small deals, have their special dynamics. You have to
be competent at both.

Mike Mikan’s keys to successful M&A

• Have a consistent, disciplined screening process that’s tightly managed in
every detail. It’s the best way of ensuring that you do only the right deals and
of building credibility with prospective acquisition candidates.
• Give the executives who’ll be running the acquired property a stake in making
it successful, with all the rewards and accountability that implies.
• Sole-source your acquisitions whenever possible. The intelligence that leaks
out 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 about
land grab.
• Avoiding a bad deal is much more important than occasionally bypassing
a good one. Shareholders won’t forget that you failed to maximize their
returns. +

UnitedHealth Group 179

About the Authors


(charley.beever@booz.com) is a Booz & Company (viren.doshi@booz.com) is a Booz & Company
partner in New York. He assists companies in senior partner in the London office. He focuses
the pharmaceutical, biotechnology, and medical on corporate strategy, operating model design,
products industries with strategic, organization, merger integration support, and performance
and performance improvement issues. improvement in the energy and process
(adam.bird@booz.com) is a Munich-based senior IBRAHIM EL-HUSSEINI
partner with Booz & Company. He leads the ( ibrahim.elhusseini@booz.com) is a partner with
firm’s global media, entertainment, and con- Booz & Company based in Beirut. He focuses on
sumer goods practice and specializes in strategy, strategy-based transformations of public- and
structure, and performance improvement. private-sector entities in oil and gas, chemicals,
and utilities across the Middle East.
(giorgio.biscardini@booz.com) is a Booz & BEATE ELLERMEYER
Company partner who leads the energy, chemi- (beate.ellermeyer@booz.com) is an associate
cals, and utilities practice in the Milan office. based in Booz & Company’s Frankfurt office.
He focuses on strategy, mergers and acquisi- She specializes in reorganization, process opti-
tions, and large-scale change management mization, and financial controls for telecommu-
programs, as well as operations, sourcing, and nications companies.
supply chain management.
WILLIAM BOSTON (tom.flaherty@booz.com) is a Booz & Company
(contact@williamboston.com), based in Berlin, senior partner based in Dallas. He advises
was formerly a staff reporter for the Wall Street utilities across the United States on corporate
Journal. He is a freelance journalist who has strategy, organizational design, mergers and
written for Time, Business Week, Fortune, and acquisitions, performance improvement, finan-
Institutional Investor. cial management processes, portfolio manage-
ment, and capital allocation.
(christian.burger@booz.com) is a Munich-based
senior partner with Booz & Company who spe-
cializes in organization and change leadership.
He leads the firm’s health-care practice in
Europe and also works with European telecom
operators and technology companies.

180 strategy+business Reader

(ghassan.hasbani@booz.com) is a partner with (roberto.liuzza@booz.com) is a senior associate
Booz & Company based in Beirut. He specializes with Booz & Company in Milan. He advises
in mergers and acquisitions, finance, market utilities throughout Europe on corporate stra-
strategy, organization, and performance in the tegy, organizational design and transformation,
telecommunications industry. internationalization, performance improvement,
and financial management processes.
(irmgard.heinz@booz.com) is a partner with CHIEKO MATSUDA
Booz & Company in the Munich office. Throughout (chieko.matsuda@booz.com) is a partner with
Europe, she has advised CFOs across industries Booz & Company in Tokyo, focusing on finance
on finance and performance improvement. and business strategy for top management.


(rhertzberg@gmail.com) is a freelance writer and (klaus.mattern@booz.com) is a Booz & Company
editor in New York. He has written for the New senior partner based in the Düsseldorf office.
York Times, has consulted on new product devel- He focuses on large-scale strategy-based
opment for Tribune Company, and was previously transformations in infrastructure- and
an editor at Bloomberg News in New York. technology-intensive industries in Europe, the
Middle East, the U.S., and Asia, with a special
ROBERT HUTCHENS emphasis on financial management and the
(robert.hutchens@booz.com) is a New York–based CFO agenda.
partner with Booz & Company who specializes in
supply chain, operations, and corporate strategy NILS NAUJOK
for pharmaceutical, medical device, and con- (nils.naujok@booz.com) is a Booz & Company
sumer products companies throughout the U.S. principal based in Berlin. He specializes in
supply chain and manufacturing optimization,
GIL IRWIN strategic sourcing, and postmerger integration
(gil.irwin@booz.com) is a Booz & Company senior in the pharmaceutical, chemicals, and steel
partner in the New York office. A member of the industries.
global health-care practice, he focuses on setting
strategic direction and enabling transformational
change for health plans, pharmacy benefits man-
agers, multiline insurance companies, and other
specialty health-services companies.

About the Authors 181

About the Authors, continued


(jens.niebuhr@booz.com) is a Düsseldorf-based (ole.rolser@booz.com) is a senior consultant in
partner with Booz & Company who specializes in Booz & Company’s Berlin office. He specializes
strategy, IT, and performance management in the in corporate restructuring, divestitures, and
telecommunications and high-tech industries. mergers and acquisitions, with a special focus
on the finance organization.
(justin.pettit@booz.com), a Booz & Company JOACHIM ROTERING
partner based in New York, is focused on the (joachim.rotering@booz.com) is a Booz &
intersection of corporate strategy and finance. Company partner based in Düsseldorf. He leads
He is the author of Strategic Corporate Finance: the energy, chemicals, and utilities practice in
Applications in Valuation & Capital Structure Europe and specializes in transformation and
(Wiley, 2007). operational improvement programs for chemi-
cals and steel companies.
(paolo.pigorini@booz.com) is a partner in Booz JOE SADDI
& Company’s Rio de Janeiro office whose (joe.saddi@booz.com) is the chairman of Booz &
expertise is in governance, business models, Company. He is the managing director of the
and organizational structure. firm’s Middle East business. Since he joined the
firm in 1993, his projects have covered policy
CHRISTIAN REBER formulation, corporate and business strategies,
(christian.reber@booz.com), a Zurich-based organization, and governance. He has partici-
principal with Booz & Company, has worked pated in and led multifunctional assignments
globally for financial-services firms over the on numerous continents in the public and pri-
past 12 years. He focuses on strategy develop- vate sectors covering water, oil, gas, mining,
ment, international expansion, sales, restruc- steel, automotive, consumer goods, and petro-
turing, and cost reduction for retail and private chemicals.
(joseph.santo@booz.com) works in Booz &
Company’s Madrid office as a principal. He spe-
cializes in developing business unit strategies,
optimizing performance, and implementing
large-scale transformation projects for trans-
portation, energy, and telecommunications
companies throughout Europe.

182 strategy+business Reader

ILONA STEFFEN Special thanks to Philipp Naderer, a former
(ilona.steffen@booz.com) is a director with Booz Booz & Company principal, who significantly
& Company based in Zurich. She specializes in contributed to the development of this Reader.
organizational design for financial-services and
health-care organizations.

(david.suarez@booz.com) is a principal with
Booz & Company in Madrid who works with
energy companies in Europe and the Middle
East. His focus is transformation and change
management, human capital management, and
organizational performance improvement.

(jwerdigier@gmail.com) is the business corre-
spondent for the New York Times in London. She
has covered the European takeover market for
the last four years and reported on mergers and
acquisitions at Bloomberg News.

(walter.wintersteller@booz.com) is a partner in
Booz & Company’s Munich office who works
with utilities, oil and gas, and chemicals compa-
nies. He is a specialist in corporate and busi-
ness unit strategy development, large-scale
operational improvement programs, organiza-
tional transformation, and change management.

About the Authors 183

BOOZ & COMPANYis a leading global management consulting firm,
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lished the first management consulting firm in 1914.

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The CFO as Deal Maker:

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

Thought Leaders on M&A Success The CFO as Deal Maker:
Edited by Robert Hertzberg and Ilona Steffen
With an introduction by Irmgard Heinz, Jens Niebuhr, and Justin Pettit Thought Leaders on M&A Success
Edited by Robert Hertzberg and Ilona Steffen
If you have ever wondered what goes on behind the headlines in major With an introduction by Irmgard Heinz,
mergers and acquisitions, you will find no more fascinating and enlight- Jens Niebuhr, and Justin Pettit
ening reading than The CFO as Deal Maker. In these pages, you will
learn how Banco Santander earned a place among the world’s top 10
banks by taking part in the US$98.5 billion acquisition of ABN Amro;
how Saudi Basic Industries acquired GE Plastics and became the world’s
number one chemicals company by market value; and how Mittal Steel
engineered 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 successful
execution 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 Justin
Pettit — explore the three core roles that CFOs play in successful mergers
and acquisitions:

• Key merger strategist, working with the CEO to ensure that merger
plans meet larger corporate objectives
• Synergy manager, capturing every deal’s cost savings, leveraging
combined 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 that
CFOs 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 ensure

the 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