I’ve been in the workforce a long time, and one of my basic “rules” is that whenever I hear someone trying to make a case for a merger or deal predicated on all the wonderful “synergies” it will bring, well, that just tells me to run and get as far away from it as quickly as possible.
Sound extreme? Maybe, but in my experience, deals that are predicated on the great synergies they bring are almost always doomed to fail. That’s because the benefits of the synergies are wildly exaggerated and overstated (especially the so-called cost savings) in order to sell the deal, then grossly under-realized later after the dust from the actual merger has settled.
Here’s an example of what I’m talking about: the just-unwound merger between Time Warner and AOL. Not only was it terrible financially— “valued at $166 billion when the self-styled ‘deal of the century’ between America Online and Time Warner was announced on January 10, 2000, an AOL-containing Time Warner today commands a market capitalization of $28 billion … an 83 percent loss in market value,” according to TheDeal.com—but it was also a horrible cultural fit, bringing together an overhyped and overvalued new-media company with a solid and sober old-media giant.
How did it work out? Well, the overhyped new-media company tried to cram its culture and coolness down the throat of the stodgy old-media giant, and the results were predictably bad.
“Although the partnership between Time Warner and AOL was once pitched as a way to advantageously meld old media with new,” The Washington Post notes, “the deal has been regarded in recent years as one of the largest blunders in corporate history. None of the supposed synergies of the expensive union between the two ever paid off, and in recent years AOL’s flagging fortunes have increasingly cut into its parent company’s profit.”
Time Warner brought a ton of great brands to this deal—Warner Bros. Entertainment (including Warner Bros. Pictures), Turner Broadcasting (which includes CNN, TBS, TNT and Turner Classic Movies), HBO and magazine publisher Time Inc. (Time, People, Fortune, In Style, and Sports Illustrated magazines).
American Online brought its Internet service provider business that claimed as many as 34 million subscribers at its peak, according to PC World, “but it lacked the infrastructure and management savvy to transition from dial up to broadband, and its ISP business remained stuck in the ’90s. … While AOL remains a major Internet service provider with about 6.3 million subscribers, it has been letting that business waste away for years. … Today it’s [primary] income source is its declining online advertising generated by its eclectic mix of content sites, including the AOL.com portal, gossip site TMZ.com, and MapQuest. There’s a business model there, certainly, but AOL is small potatoes compared to competitors Google, Yahoo and Microsoft—not the Internet behemoth Time Warner wants it to be.”
In fact, the cool new-media company ended up being a gigantic albatross around the neck of Time Warner, pulling down the value of the combined company. And those great synergies that everyone touted when the merger was announced back in January 2000? Well, they ended up being as overhyped as AOL’s pre-merger stock price.
The New York Times points out: “The [Time Warner-AOL] merger was fed by heady ideas that did not quite pan out—that big online audiences would necessarily yield big profits, and that there were profound synergies to be had by owning different media.”
Synergies in business always sound great, but they should simply be regarded as a nice bonus if they actually work out and not the main reason for making the deal in the first place. In other words, the concept of synergy is more myth than anything else. In fact, if you are basing your deal on the synergies you’ll see, well, my guess is that you don’t have much of a deal to begin with. Just ask Time Warner.
The overpayments weren’t that big—they ranged from hundreds of dollars up to $5,000 per employee—but the notion of requiring laid-off workers to pay back a relatively small amount of money due to a company foul-up seemed pretty callous. Microsoft senior vice president of human resources Lisa Brummel ended up having to do damage control on this one and eventually fell on her sword and said the company erred in asking for the money back.
She said that senior management has “asked leaders across the company to minimize the amount of e-mail sent today, as employees told us the e-mail volume in January was distracting.” For the latest round of layoffs, Brummel wrote that Microsoft “leaders have agreed to streamline their e-mail communications.”
Of course, The Wall Street Journal found out about the don’t-talk-about-the-layoffs e-mail when a copy of Brummel’s memo “was posted in the comments section of Mini-Microsoft, a blog run by an anonymous Microsoft employee that’s popular with company staffers.”
This just proves one of the basic rules that every smart, thinking manager should inherently understand: Trying to muzzle or otherwise pressure employees to limit communications about something as serious as a mass layoff is both futile and shortsighted.
Microsoft management will undoubtedly claim that limiting e-mail communications in this instance is a good thing. In fact, Brummel’s admonition is that “rather than sending e-mail, we encourage you to meet with your employees face-to-face or via Live Meeting, where possible, to address their questions.”
Face-to-face communication, especially about something as critical as a mass layoff, is always the best way to go. But, most anyone who has handled layoffs will tell you that over-communication is always preferable to under-communication, so why would Microsoft want to limit in any way a critical tool they have to help communicate with both the departing and surviving employees?
Never mind the odd notion of a high-tech company wanting to stifle high-tech communications; trying to tell employees NOT to discuss something as serious as a mass layoff, in any way, shape, or form only invites more rumors and discussion of the very thing that management is trying to curtail.
And, it fails to understand the psychology of layoffs. This will be the ONLY real topic that Microsoft people will be talking about right now, and a management admonition to limit discussion about the situation in any way is simply futile and counterproductive, because workers will be chattering about the layoffs ad infinitum, no matter what management says.
This just proves another management truism: Don’t ever underestimate the ability of smart companies to do dumb things. You’d think Microsoft would have learned this lesson from the overpaid-severance fiasco, but clearly, handling layoffs the right way is something that even highly successful companies like Microsoft have a hard time getting straight.
This is the second installment of a new feature here at the Business of Management blog: Hey Management Guy! If you have a question about a workforce management practice (stupid or otherwise), just post it at the bottom of this blog item or e-mail it to me at jhollon@workforce.com. I’ll pick out the best queries and answer them here each month.
Hey, Management Guy! I just heard that Microsoft accidentally overpaid severance to some workers they laid off last month. Do they really need to pay it back? It seems like a cruel and heartless thing for the company to do to people who just lost their jobs, but in this economy, I guess anything is possible. What do you think?
—Seth from Sioux City, Iowa
Seth:
Take it from The Management Guy: Payback is a bitch.
I discovered this during the late-90s Internet boom when I was working as a vice president at a well-known (but now deceased) San Francisco dot-com.
Somehow, not only was my paycheck being direct-deposited in my bank account, but so was the paycheck of an administrative assistant. This went on for a couple of months until the company controller brought to my attention and—nicely—demanded the money back.
What to do? For me, the answer was simple: I quickly wrote that check because: a) I liked my job, and b) I wanted to keep it. People asked me how I could possibly not know I was getting overpaid, but it was complicated.
I was new on the job, living in San Francisco and working seven-day-a-week dot-com hours, while my wife, family and bank account were all back home in Southern California. I wasn’t terribly focused on anything other than my new job, and my wife had her hands full as well.
The bigger mystery was how the administrative assistant didn’t notice the problem, but she was a bit spacey about everything. The paycheck fiasco raised legitimate questions about her job skills and attention to detail that led (thankfully) to her departure a short time later.
The Microsoft situation is very different. The software giant overpaid the amount of severance it gave “to some of the 1,400 employees it laid off last month, stating that because of an administrative error it had paid them too much severance and now wanted the money returned,” according to the Seattle Post-Intelligencer.
People who get overpaid by mistake, for whatever reason, are generally required to give back the money—they aren’t entitled to it. But in this case, there was another dynamic involved: These people had just been laid off, in a terrible economy, and this mega-bucks company is now coming after them for money.
Should the workers have known they were overpaid? Probably. But remember, they had just lost their livelihood and faced the prospect of having to find a new job in the midst of the worst employment market in more than 30 years. It’s entirely possible that they were just a little bit distracted.
When all of this became public over the weekend, and the media started asking questions about whether Big, Bad Microsoft was right to demand money out of people they just threw out of work, Microsoft did what any smart company would do: It abandoned the cash hunt and became magnanimous.
According to the Seattle Times, “Human-resources chief Lisa Brummel called each of the 25—part of the 1,400 people notified Jan. 22 in the company’s first widespread job cuts—to personally explain the ‘clerical error’ that caused the overpayment, and inform them they could keep the extra dough.”
And as the Post-Intelligencer noted, “at an average of $4,000 to $5,000 for each of the 25 overpaid workers—roughly $100,000 to $125,000 total—this was a public-relations blunder that Microsoft cleaned up on the cheap, at least relative to its $20.7 billion bank balance.”
Did Microsoft do the right thing here? Of course. Would the company have done it voluntarily without the glaring spotlight of media attention? That’s hard to say. But I agree wholeheartedly with the unnamed Microsoft spokesperson who told the Seattle newspapers: “This was a mistake on our part. We should have handled this situation in a more thoughtful manner.”
What can you say about a top manager who is so blinded by the past that he can’t see the future?
That pretty much sums up Yahoo CEO Jerry Yang. He finally decided to step down late Monday, “ending a brief, turbulent tenure,” according to the San Francisco Chronicle, “that was marked by a slumping business and a failed takeover bid by Microsoft Corp.”
That pretty much covers Yang’s 17-month tenure as CEO, but it fails to fully capture just how badly he did leading the company he founded, and how inconsistently he managed his most important resource—his human capital. Here are a few highlights:
• Yang single-handedly blocked an offer from Microsoft to buy Yahoo at $33 per share, or more than three times what the stock traded at Monday. A key component of his push to block the deal was his unprecedented decision to offer a lucrative severance package to every single Yahoo employee in an attempt to make the deal too expensive for Microsoft to pursue. My take at the time: If Yang and Yahoo had applied that kind of creativity to its ongoing business, maybe it would never have had to defend itself against Microsoft in the first place.
• He brought in highly paid consultants to handle what every person with half a brain who was watching the company knew—that Yahoo needed to cut its workforce. My take at the time: Yang doesn’t have the managerial huevos to do the tough stuff that comes with a management role.
As CNBC’s Jim Goldman put it, “Clouded by self-interest, [Yang] lost his way, sacrificed tens of billions of dollars in shareholder equity, abandoned reason, and surrounded himself with people who slapped him on the back, or gave each other high fives when Microsoft pushed back from the table, depending upon who you believe, for a job well done. … The stunner is that it took this long to get him out. The stunner is that the board gave him such an amazing amount of latitude to leaf-blow his way through so much shareholder value.”
Yang will now go back to his job as “Chief Yahoo, a nebulous position that will allow him to keep his fingers in a number of projects but has no day-to-day management responsibilities. He will also remain on the company’s board,” according to the San Francisco Chronicle.
That’s probably an appropriate place for a guy who founded the company, but if I were the Yahoo board, I’d keep Yang away from anything resembling a management duty. He’s shown time and time again that despite his technical expertise, he doesn’t have a managerial bone in his body. Getting rid of him now falls into the category of “better late than never,” but it remains to be seen if Yahoo, and its beaten-down workforce, can rebound from bad managerial mojo its overmatched chief yahoo left at the company’s doorstep.
This is just as true in the world of business, maybe more so. Everyone likes to think they’re a critical part of the operation and that they still bring a lot of value to the equation, but that’s also why it is important to be brutally honest and have the ability to read the writing on the wall.
Here are two examples of what I’m talking about: Jerry Yang and Steve Smith.
Jerry Yang is a guy you’ve probably heard of. He’s one of the founders of Yahoo, and currently, he’s the company’s CEO. Yang was coaxed back from whatever founder duties he was tending to in 2007 to become chief executive, and although it seemed like a good idea at the time, Yang has pretty much been a disaster as Yahoo’s CEO.
If that wasn’t enough to convince Jerry Yang to return to the land where successful company founders go to graze on their money, maybe this will: a Bloomberg News story this week that points out how smart Microsoft looks for not closing the Yahoo takeover deal earlier this year at $47.5 billion (or $33 per share), given that Yahoo’s market value now is around $18.5 billion (or about $13.50 per share).
In other words, Yang missed an opportunity to cash in and get out—and get his shareholders out—while the getting was good. And given the current state of the financial markets, it’s highly doubtful that Microsoft or anyone else will bid anywhere close to what Yang turned down. If this isn’t a loud and clear signal that Jerry Yang should return to the land where founders don’t have to be bothered managing, I don’t know what is.
Now contrast Jerry Yang’s inability to step away with that of Steve Smith, the now-former editor of the Spokane Spokesman-Review. Smith, like so many newspaper editors in this day and age, has had to slash budget and cut staff numerous times over the past few years. This month, when he was asked to do it again, Smith said no mas. He resigned instead.
“My parting with my publisher, Stacey Cowles, was quite amicable,” Smith told National Public Radio’s On the Media program this week. “I don’t agree that these cuts are necessary at this time, but I understand and respect his decision to the contrary. And frankly, one of the reasons that I resigned is that he needs an editor who can stand up in public and say to people, ‘This paper is going to be OK.’ Actually, better than OK—leaner, easier to read, etc. And I was not in a position to carry out the publisher’s marketing strategy.”
Yes, the Spokane newspaper isn’t Yahoo or anything even remotely close to it in size and scope, but the management challenge is still the same: making smart decisions to drive the larger organization ahead. Steve Smith knew this and recognized when he had reached a point where he couldn’t be an effective leader anymore. Once he realized that, he quit.
Unfortunately in this world, there are far more Jerry Yangs (or Richard Fulds, or Bob Nardellis) than there are Steve Smiths, and it gets back to my central premise: There is a fine art in knowing when to depart. Unfortunately, it’s a talent that many talk about, but all too few can actually bring themselves to do.
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