In light of Bank of America’s recent woes, this piece is part of an On Leadership roundtable exploring the root causes of the corporate ‘urge to merge’.
CEOS often think they’re right, when they’re really wrong. They look around and see others who make big news with bold deals, and long for the same recognition. When confronted with data that demonstrates how unsuccessful their efforts are, they find fault with the data. “We’re different!” they claim.
These are the empire builders, those great titans of business who are driven to mergers and acquisitions to grow their companies. But at what cost? Today we are witnessing the fallout, some three years after the fact, of former Bank of America CEO Ken Lewis’ brazen deals for Countrywide and Merrill Lynch. Current CEO Brian Moynihan is selling assets, cutting deals with uber-investor Warren Buffett, and slashing some 30,000 jobs, all in an effort to right a ship that should never have been listing this way in the first place. Bank of America was always going to be a card-carrying member of the “too-big-to-fail” club, but the acquisitions of Countrywide and Merrill piled on tens of billions of dollars of subprime assets, bad mortgages and endless liabilities.
Ken Lewis was not alone. The urge to get bigger—whatever the cost—plagues many a CEO, even if countless studies have shown the risk of mergers and acquisitions to fail. It is just one of a seemingly endless array of psychological delusions and decision-making biases that drive smart and successful leaders to make dumb and dangerous mistakes.
Consider Boston Scientific. Back in 2006, medical device maker Boston Scientific acquired Guidant, a leader in cardiac devices, after an intense bidding war with Johnson & Johnson. Co-founder Pete Nicholas, CEO Jim Tobin, and CFO Larry Best were so desperate to buy Guidant that in the end, they raised their offer price to $80 a share, a full $9 a share more than J&J’s final bid.
While a premium price might be justified for an acquisition that offers huge upside, in this case Guidant was dealing with product breakdowns that had become public knowledge. Still, the trio believed they were right, when in fact they were really very wrong. Boston Scientific has never recovered from the deal, and its market cap is now just 25 percent what it was before it pulled the trigger.
I’ve been studying these types of decisions for more than ten years, and a few patterns jump out from the data. For one, far too many CEOs want to relive their company’s greatest moment with a future deal. When Quaker Oats bought Snapple years ago, for example, its leaders believed they could replicate the triumph with Gatorade. Expand distribution and install world-class marketing, the thinking went, and Snapple could also become a billion-dollar brand. Unfortunately, the differences between the two brands – different distribution contracts, market image, and customer base – were somehow disregarded in the quest to repeat Quaker’s greatest victory. Two and a half years after buying Snapple for $1.7 billion, Quaker sold the business for $300 million.
Another problematic mindset: When leaders have relied on M&A to grow, they almost always keep relying on the same playbook because they haven’t built adequate muscle memory for organic growth. As a result, CEOs become desperate to make deals that keep the engine going. This is part of the story at Boston Scientific, which was a deal-making machine. Blinded by their past success, and intent on re-igniting growth, they became so enamored with Guidant that they grossly overpaid.
Yet another common syndrome occurs when CEOs believe there is only one trophy property in the marketplace, and become bent on making it their own. This ego-driven malady seems as apt a description as any other for Rupert Murdoch’s quest for Dow Jones and its prize asset, The Wall Street Journal. For Murdoch, owning the Journal expanded his influence in media circles in the U.S. and gave him control of the dominant business newspaper in this country. That he paid a gigantic premium that has already resulted in a $2.8 billion write-down seems immaterial by this logic.
Finally, while some might find it odd that CEOs making tens of millions of dollars a year can be an insecure bunch, the reality is quite different. Too many deals are driven by the simple human impulse of “I’ll show them all!” Sometimes this insecurity takes the form of trying to outdo your predecessor. Other times it drives a CEO to try to overcome a perceived lack of respect by buying his way to the top. Both of these mindsets were almost certainly at play when Ken Lewis bought Merrill Lynch in September 2008. Lewis’ mentor and predecessor Hugh McColl created the modern Bank of America by integrating dozens of banks into a behemoth. But he never bought into the storied blue chips of Wall Street. Ken Lewis did.
It would be nice to say that the great reckoning from the financial crisis has made such mindsets a thing of the past, but I don’t think that will be the case. CEOs are people, and people are driven by psychological and social pressures that sometimes induce all of us to do things that don’t make sense. For CEOs at least partly responsible for the welfare of thousands of other people and billions of dollars of other people’s money, thinking you’re right when you’re really wrong is the root cause of many a fateful decision.
John Baldoni: Bank of America’s Napoleon complex
Rebel Cole: Creating better banks of America