Time Warner and AOL - not a mistake, but a lesson

It's good to see Time Warner CEO Jeff Bewkes owning up to a mistake (http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/8031227/AOL-merger-was-the-biggest-mistake-in-corporate-history-believes-Time-Warner-chief-Jeff-Bewkes.html). It's also rather sad in a number of ways.

Firstly, he wasn't really involved in the original deal, so he presumably feels quite safe apologising for something he wasn't responsible for. After all, admitting to a cock-up of this magnitude might jeopardise his $11.75 million salary and bonus package.

Secondly, his claim that it was the "biggest mistake in corporate history" sounds suspiciously like corporate boasting. Perhaps this is to draw attention to how wonderful he is in clearing up the mess - after all he did receive a bonus of $10 million for the year in which he spun off AOL.

Thirdly, although the merger with AOL was probably the biggest mistake in terms of the absolute value of the deal, it self-evidently wasn't the biggest mistake in corporate history in any other way.

Fourthly, Bewkes seems to have taken entirely the wrong message from the merger - or worse, perhaps no message at all.

Let's go back to that third point. The merger was announced in 2000, with AOL valued at $164 billion. The merger ratio was in favour of AOL, with AOL shareholders receiving 55% of the new entity, AOL Time Warner. Soon after, with the drastic fall in Internet valuations, much of the value of AOL was written off. Eventually, in late 2009, AOL was spun off, with a market capitalisation of around $2 billion. Time Warner's stock price fell from around $250 at the time of the announcement (on an equivalent basis in the new stock that was issued in the deal.) to around $50 by the time of the spin off. On the face of it, that's a pretty bad deal for shareholders (although there were numerous other deals in the interim that complicate the picture). But AOL-Time Warner survived, and both Time Warner and AOL are now separate companies and reasonably successful.

Of course Time Warner shareholders have suffered. But they haven't lost everything, as shareholders in plenty of other companies have. Think of the UK banks such as RBS - its acquisition of ABN Amro for nearly $100 billion, mainly in cash, was not the sole cause of RBS' demise but weakened it so greatly that almost any problem would have pushed it over the edge. Think of all those smaller deals done by private equity companies at the height of the buy-out boom that have resulted in not only the investors losing everything but the banks that provided the finance taking huge hits too.

Moreover, whilst with hindsight the deal looks like a mistake, at the time it was widely praised:

"Together, they represent an unprecedented powerhouse,” said Scott Ehrens, a media analyst with Bear Stearns. "If their mantra is content, this alliance is unbeatable. Now they have this great platform they can cross-fertilize with content and redistribute.”

"It is probably the most significant development in the Internet business world to date," said Phil Leigh, an analyst at Raymond James. "If it hasn't been evident to most of us yet, it should be obvious to us now that the Internet is about audio and video and not just merely text and graphics."

I love that second comment by the way - at least he got something right!

At the time you would have been hard pushed to find anybody who disagreed that this was a deal that created the media company of the future. To paraphrase Nassim Nicholas Taleb, of Black Swan fame (although I prefer Fooled by Randomess), we should not view as a mistake something that only looks foolish with hindsight. Bewkes is wrong therefore to claim that:

"The whole the idea of [the merger with AOL] was misguided in the first place… "

Rather than being a strategic mistake, what was wrong with the deal was rather prosaic:

• AOL had inflated its revenues - making a mockery of due diligence (a story for another day)
• It became apparent very soon after the deal announced that Internet companies across the board had massively inflated valuations
• Dial-up Internet connections, AOL's main business, were soon overtaken by broadband
• The global economic downturn 2001 hit Internet advertising very hard, at the same time as hitting Time Warner's advertising revenue hard
• Too little attention was paid to merger integration

Finally, the biggest surprise of all was that content for the Internet would increasingly come not from the traditional media companies but from the users of the Internet itself. Google, YouTube, blogs, Facebook, these are the sites my children spend their time on. These are the apps downloadable on iPhones and Blackberrys, and the sites pulling in the advertising revenue.

I suspect that Time Warner would have faced massive derision if it had announced it was creating YouTube or Facebook rather than buying AOL in 2000. And that's not Time Warner's fault. It is however a powerful example of how supposed experts and specialists have no clue whatsoever about what the future holds.  

So the lesson from this is not, as Bewkes would have it, "you have to know what you are" as a business, a statement that means almost nothing. It is that predicting the future is very difficult, and betting vast amounts on what you think the future might be is very risky. By all means let the entrepreneurs and venture capitalists take those risks - they are paid to do so and if they fail (as most of them will) so what. But beware when good, solid business, that are perhaps a little boring to run, suddenly take it into their heads that they have seen the future and want to spend tens or hundreds of billions chasing that future.

A world-class HR team?

I have worked for a few big companies in my time, including one in the FTSE100 and two in the Dow Jones. I've also worked as an adviser to numerous companies, big and small. In each case, the people who work in these businesses share a single, common enemy - the HR Department.

Hardly a big surprise. Yet it seems to be a big surprise to Chief Executives and Boards. Last week there was an advertisement in The Sunday Times for a senior HR executive. What was wanted was:

"A high calibre HR professional...you will have a great track record in delivering business led HR strategies....to continually increase the value proposition of HR across the Group."

Hmm. That set me browsing through the job pages for HR roles. In each case what was wanted was an experienced HR professional, and in each case what was wanted was a successful HR professional. But if you ask most people, perhaps all people, the two are mutually exclusive. Is there a single FTSE 100 company where the managers (not the CEO and board) would put up their hands and say, "We have a world-class HR department". Anybody?

When an HR Director gets poached, how many companies' employees groan and wish that more had been done to keep him/her? Did the share price of any company ever move when a Head of HR changed? Has any senior manger ever joined a company because its HR Department has a great reputation? My guess is no to all of these.

So the big question is, why do businesses persist in employing people from HR backgrounds to run HR? HR, as we know it today in medium-sized and large organisations, is a failed discipline. It not only fails to deliver what it promises, but in many cases it actively antagonises and upsets employees. This is important, because over the years HR has taken on more and more responsibilities. In many companies, HR is now responsible for training, career development, promotions, industrial relations, and pay - or as the worst abusers call it Reward. Why would managers continue to give such powers to people who cannot demonstrate any kind of success?

The answer is two-fold. Firstly, it is part of the increasing internal specialisation of functions within a business. The culture of being a general manager, able to run various different departments and move across functions and silos, is vanishing. Everybody is a specialist, partly of course because that is seen as paying better and partly because of the rise of management-speak and jargon, which aims to make simple concepts such as selling and recruitment into jargon-filled professions. Once a discipline becomes a profession it is effectively closed to those outside its ranks. Yet is it really inconceivable that a senior manger who can run a large division of a business could not run the HR department? Are HR, marketing, sales and the management of IT really so difficult and complex that only those who have worked for years in those areas can manage those who work in them?

Secondly, it is a reflection of the cowardice of CEOs and boards. How many CEOs have the courage to implement what they know - that HR has become a useless monster, wasting everybody's time with ephemera and failing to provide high quality services in the areas that matter. I worked at a large company where HR decide to make it a requirement to tell them how many hours a week I worked. When I queried this, I was told that it was necessary for HR to monitor my work-life balance. So you want me to do more work so that you can make sure I'm not overworking? And why do you think I'm not capable of monitoring my own work-life balance? At the same company I got myself into trouble for questioning the diversity policy. When you are trying to form teams and get them pull together, do you emphasise the differences between team members or the similarities I asked?

So here's a simple idea. Next time you need someone to run your HR department, look for a good manager. Look for someone who understands how to motivate people, how important training is and how to ensure that career progression and development are pat of the company's culture, not some intricately-plotted strategy. Look for someone who wants HR to blend into the background, to be something that people hardly ever notice rather than the department cluttering up you inbox with pointless and annoying emails.

In other words, don't look for an HR professional.

Vince Cable, the classic LibDem

After an initial surge of indignation following Vince Cable's remarks at the LibDem conference, I had rather forgotten about him. However, a fine piece on Spiked! today (http://www.spiked-online.com/index.php/site/article/9656/) by Daniel Ben-Ami, author of the splendidly named blog and book Ferraris for All (http://danielbenami.com/) brought him to mind again. As Ben-Ami describes, Cable is no Marxist, but rather the classic LibDem, fearing both the Left and the Right (as currently defined, something I mean to discuss soon). Like most LibDems, he is in favour of markets but they have to be controlled - by Cable presumably. Like most LibDems, he is in favour of economic growth, but growth in a way that is not damaging - "sustainable" to use one of the current crop of vacuous words. Like most LibDems he is fine with people wanting to earn lots of money - but heaven forbid if they become greedy. And so on.

Cable seems incapable of any real analysis. Take his comments on takeovers. He lambasted short-term investors who are out to make a killing and who collude with bankers to destroy good companies. None of this makes any sense. Firstly, the share registers of most public companies are dominated by long term investors. However, when a takeover offer is announced or rumoured, many of those shareholders sell - but only if the share price equals or exceeds their valuation of the business. They sell before the takeover is completed in order to lock in the price (albeit usually as a small discount to the final price) rather than go through the long and uncertain process of regulatory clearance, shareholder approvals etc. But it is only when the long term investors sell that the short-term investors can buy enough shares to have any influence on the outcome of a bid. So the short-term investors generally buy shares at a price that has already risen and so make only a small profit - whilst taking the risk that the bid may fail and the share price fall. The "killing" is made by those investors who have been in for the long term. And despite the hype and publicity surrounding hedge funds, they only have the financial firepower to influence relatively small transactions.

Secondly, why would a company that has just spend billions buying a business destroy it? The large amounts of debt taken on to finance bids cannot be repaid quickly, so the notion that acquirers rip the heart of a businesses to repay debt quickly is silly. Corporate acquirers buy for the long term, and even private equity buys for a minimum of 5-6 years. Yes there may be rationalisations, but increases in productivity are the only way that economic growth can occur.

Thirdly, Cable massively overestimates the influence of bankers in takeovers. They are massively overpaid for this lack of influence, but in most companies you have a wide range of sophisticated investors who make up their own minds.

That's not to say that M&A is all good. There's plenty of bad takeovers out there but that's a different point and a different post.

Or take the graduate tax. The simple fact is that anybody who gets a "graduate premium" on their salary pays 40-50% more in income tax than somebody who doesn't. For example, suppose I earn £100,000, whereas somebody who didn't go to university only earns £60,000. Every year I pay £16,000 more in income tax than that person. I also probably pay more in VAT, and a whole host of other taxes such as CGT, APD, and ultimately inheritance tax. I repay the costs of my university tuition many time over. Or consider why I'm paid more as a graduate. Because I produce more. My company pays me the value of my labour, and that is good for the business, for other jobs, for corporation tax and so on. Or consider what I do with the additional £24,000 that I take home after tax. I spend it creating other jobs that pay tax and take people off benefit. And so on. The idea that graduates somehow don't pay back their costs is utterly ludicrous. Finally, consider those who take the skills they learn at university and apply them in low paid but worthy jobs. Lo and behold, they don't pay much tax. In other words, we already have a graduate tax that works pretty well.

The people who ought to be complaining are those who are in well-paid jobs but who are not graduates. Those people who worked their way up after leaving school at 16 or 18 are being taxed as if they are graduates - they are the people who Cable should be championing. But no doubt Cable would find a reason why such people should be taxed, because to him tax is a good thing in and of itself.

In the end though, Cable is the classic LibDem. He is the small businessman with small ambitions, who longs for a calm and ordered world that behaves itself and doesn't make too much of a fuss. He wants to run his company and not be bothered by all that hectic and disturbing innovation, change, upheaval and horrendous competition. He wants to look after his employees and make sure they have decent housing and schools and can cycle to work.  He doesn't want to be worth tens of millions and can't understand those who do. It's a nice dream, and is far from making him a Marxist. But it's a myth. Capitalism, free markets, free trade, liberalism mean change. They work by promoting, encouraging, enforcing change. It is when governments try to stop or direct some of the changes or try and hold back change wholesale that we run into trouble.

Not what you think

No, this is not another blog bashing capitalism. Actually it's the opposite. It's a blog that will, I hope, shine a light on companies that have forsaken capitalism, that use words and phrases such as "stakeholder", "diversity" and "social responsibility" to cover up their abdication of responsibility to their shareholders and employees to be successful, thriving and profitable businesses. And from that you can take it that I'm an ardent free marketer, a true believer in capitalism and the power of free trade.

To some of you that might mean that I'm the spawn of the devil, the bastard offspring of Mrs. Thatcher and Ronald Reagan, the Very Beast that Ed Milliband has been elected to fight and cast into eternal darkness. Whatever. I gave up long ago trying to argue with those on the Left who will not understand where wealth creation and economic progress come from, and why those are worthy and beneficial things.

But let me also make it clear from the outset that whilst I'm a libertarian, and think that small government is best, I don't believe that the poorest and those least-able to look after themselves should be ignored and forgotten. It's just that the "solutions" successive governments have tried have not worked and never will.

So that's it, the next post will be about Junk Companies rather than politics.