Retired Men’s Association

Cigar Box Bulletin May 2013Volume 16 Issue 5

Inside this Issue

UpcomingMeetings

Friday, Jun 14Thursday, July 11 Thursday, Aug 8Friday, Sep 13

May Minutes

Continued on page 7

May Speaker

Reporter: Bill Johnson

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Ships Bells rang at 10:00 AM

Rey Graunas lead us in the Pledge of Allegiance, after which we sang the Star Spangled Banner.

Terry Thoman prepared the coffee, and John Iberg brought the donuts from Stop & Shop.

Rick Dugan took care of the badges.

Two special guests from the Parmenter Foundation, Stuart Hamilton and Jane Purser, presented a certifi-cate to the RMA for our support of their organization.

Member Committee announcements – new members and travel by Wally Hart, travel, visitors by Nick Veeder:

Bill Ely reported on his trip to Florida

Anniversaries 8 Birthdays 10

Erebus 11

Many of us in the RMA’s May audience have experience as employees in a compa-ny undergoing the tumultuous process of acquiring, or being acquired by, another company. In that situation, one can feel like a little boy at the back of a crowded elevator that has stopped between floors. There’s a lot of excited talk among the

lofty people around you, but none of it is directed at you. There’s a great deal of speculation about why the elevator has stopped, but you’re not being consulted about what to do. Worse, your perspective encompasses only the backsides of the adults in front of you. For us former minions, it was enlightening to hear our speaker, David Fubini, provide a higher level view of what takes place when two corporate entities go through the process of merger and integration.

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The Cigar Box BulletinP. O. Box 261

Wayland, MA 01778

Board of Directors

Bill Ely PresidentAl Persson First Vice PresidentRay Atkins Second Vice PresidentMerrill Mack Treasurer Mort Brond Program ChairmanAl Persson Editor of Bulletin Karl Geiger Ron RiggertWally Hart Wayne ClemensFrank Lyons John Kassabian

Proof ReadersYutaka Kobayashi, Bob Curtiss, Karl Geiger, Abner Salant, John

Heckscher, Harry Webber, Bob Diefenbacher

The RMA is a not-for-profit corporation

Published monthly by the Retired Men’s Association

of Weston, Wayland, Sudbury and surrounding communities.

Nine RMA members took part in the post-meeting ROMEO lunch at the Villa Restaurant in Cochituate (Wayland) MA. The food was good and plentiful, the service was fine - and all were able to share comments and stories of interest. Fellowship at its best. The June-14th ROMEO will be at Lotus Blossum in Sudbury.

Rick Dugan

Romeo Report :

Annual Dinner October 16thBar opens at 5:00 PM

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consultant, David received a BBA from the University of Massachusetts and a MBA from the Harvard David Fubini is the founder and leader of McKinsey & Company’s Worldwide Merger Integration Practice. In that role, he has served as consultant on a dozen of the 25 largest corporate mergers ever consummated. In prepa-ration for his role as a business consultant, David received a BBA from the University of David Massachusetts and a MBA from the Harvard Business School – both awarded with distinction.

David began his presentation by pointing out that the ingredients for a successful merger are well known. They fall into three categories:• Afocusonvaluecreation.o Ensuring that the approach taken to integrate the entities reflects the real reason for doing the deal.o Moving beyond the traditional focus on cost savings to include revenue and balance sheet synergies as well.o Protecting business momentum and avoiding loss of revenue.• Carefulpreparation.o Populating the integration team with top performers capable of earning respect for their talents and business acumen.o Avoiding the pitfall of underestimating the importance of differences in corporate cultures.• Executerigorously.o Streamlining the essentials needed for Day One.o Over-communicating to all stakeholder groups.

However, no amount of know-how can salvage an inherently inferior deal. David cited a number of transac-tions which, in emergency room terms, were DOA. Perhaps best known is the America Online merger with Time Warner. AOL had a bloated market value that didn’t square with reality. David said, “It was like a Con-federate bank buying a Union bank with Confederate dollars.”

Even where a deal has intrinsic merit, it sometimes happens that the architects forget the merger’s rationale. For example, Compaq’s acquisition of DEC was justified in major part by the belief that DEC’s extensive mid-range systems and its service capabilities would solve a problem for Compaq, which had been receiv-ing mounting criticism for poor service. However, subsequent to the merger, Compaq failed to integrate the DEC service organization with its own. David noted that by contrast, the P&G acquisition of Gillette was justified by the opportunity to employ Gillette’s robust international distribution to greatly enhance P&G’s global reach. Although the popular press made much of the benefits of marrying male-centric Gillette with female-centric P&G (“boy meets girl”), it has in fact been the realization of the benefits of the Gillette global distribution capability that has made this merger so successful.

David pointed out that, too often, companies focus narrowly on cost savings when looking at an acquisition opportunity. To be sure, cost savings can be significant. However, sometimes the savings are illusory. For ex-ample, when contemplating the acquisition of Volvo, Ford executives were confident that savings in procure-ment costs would be significant. It turned out that Volvo’s procurement costs were less than the far larger and presumably better scaled operations at Ford. Even where cost savings may be significant, other factors can outweigh their importance. Revenues can be stimulated by cross-selling, rebranding, smarter pricing tactics, entry into new markets, piggy-backing on advertising and promotional schemes and other tactical moves. In David’s experience, tax savings can be huge in certain instances. In the RioTinto/Alcan case, tax savings were in the hundreds of millions. In other cases, the balance sheet is the source of major benefits from a merger, as when assets can be leveraged more effectively, intrinsic values in real estate can be realized, or the cost of capital is reduced.

Page 4Speaker continued from page 3Protecting the base business is a challenge when a merger’s newly combined entities are focused on cleaning up the acquisition’s political reverberations and working on the integration of critical internal functions. Da-vid cited as an example authority? And so on.the double digit percentage decline in sales following the 2001 Hewlett Packard merger with Compaq. When IBM’s PC business was sold to Lenovo, the business suffered a dramatic loss of market share. Subsequent to the Rio Tinto merger with Alcan, done at the very top of the cyclical curve in aluminum prices, the combined company had a series of asset write-downs that totaled $20 billion. Unilever’s acquisition of Este Lauder tarnished the latter’s mystique, resulting in a loss of distribution in high-end outlets. And, as a local example familiar to many in the audience, while Bank of America strug-gled to integrate Fleet Bank, Citizen’s Bank had a field day raiding Fleet’s customer base – like shooting fish in a barrel.

Going back to an earlier point, David reminded us that leadership for the integration process is a critical ingredient for a successful merger. The worst possible choice is the tired old timer on the brink of retirement – the type of executive who is least likely to bring to the task innovative thinking, an ability to sort out the criti-cal from the mundane, and superior business acumen. The job is a logical preparation for, and a springboard to, higher executive positions. David pointed out several instances in which the leader of a successful integra-tion has gone on to become CEO in the company or in another organization.

On the matter of sorting out the critically important from the mundane, David emphasized the importance of keeping Day One focused on issues that will be hugely important for a merger’s success. Don’t waste talent, time and energy on, for example, corporate signage. Do remember the rationale for the merger and identify what has to happen to make that rationale a reality.

David next turned to a truly major issue in the integration of two formerly separate entities which, in many cases, were hostile enemies in the market place. (Haven’t we all participated in a business meeting where the topic – announced or implicit – was “How to beat the crap out of [fill in name of competitor] with our new technology?”) Inevitably, there will be significant differences between the two marriage partners in that in-effable but real stuff called “corporate culture.” Sociologists define an organization’s culture in terms of its values – what is paramount in a rank ordering of behaviors that are rewarded and those that are frowned upon or ridiculed? What kind of expertise is needed to climb the power ladder – engineering; technology; finance; marketing; etc.? How do people dress? What kind of language characterizes the conversations among employ-ees – course and filled with expletives, or genteel and politically correct? How low is the glass ceiling encoun-tered by women? Is sexual harassment tolerated? Are minorities treated as true colleagues? How rigorously are expense accounts monitored? At what level of the organization chart are people housed in private offices instead of cubicles? Authorized to fly business class instead of coach? Given hire/fire authority? And so on.

David has witnessed many cases in which executives gave lip service to the importance of cultural differences and then proceeded to ignore the issue. When Daimler purchased Chrysler, (“This is going to be a merger of equals.”) most subsequent executive meetings were held in Germany and conducted in German. No Chrys-ler executives were added to the top team. When Lenovo purchased IBM’s PC business (“We will blend the cultures and have a stronger one.”) Lenovo soon fired two western executives and kept most of its operations in China. Following Citicorp’s merger with Travelers (“Our new organization will have a culture of speed.”) co-CEOs were installed at the top with no clear definition of their respective roles.

Regardless of planning and preparation, there will be surprises following a merger and leadership must be ready to respond. Corporate leaders often encounter unanticipated intensity in cultural misalignment. Key executives may engage in ugly and divisive struggles for power (X’s people vs. Y’s people). Valued personnel may become discouraged by the new environment and be vulnerable to a recruiter’s entreaties. Or, the threat to the merger’s success may come from external sources, as when a corporate raider sees an opportunity for a hostile takeover.

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At this point, David took questions. Here are a selected few from the many. I have paraphrased the questions and David’s answers:

Q: Why do executives find the cultural issues so hard to understand? A: The issues are a composite of intangibles. Where are the handles? They don’t know how to change it. It’s outside their skill sets.

Q: You haven’t mentioned the big gorilla in the room: greed and ego.A: Of course there’s an enormous amount of ego involved in all these transactions. When Jim Kilts was hired to be Gillette’s CEO, did he move to Boston from his home in Scarsdale? He did not. Why? Many of his crit-ics would say he was focused on dressing up Gillette for sale. He stood to make a ton of money. Shareholders, too, would make a lot of money. But how about the employees? How about Boston? How about Gillette’s history? Much of that was dumped on the side of the road. If the criterion was solely increasing shareholder value, it was a success. The good news today is you hear less about increasing shareholder value and more about creating stakeholder value from a merger.

Q. Why not set up in a company like Raytheon a small group charged with the responsibility for looking at future possibilities for acquisitions, and then when one of those possibilities becomes real, pull out the study and update it as the basis for planning?A. That would be good, but it requires a degree of foresight and investment that not many companies would be willing to make because the outcome is unknown. Also, many of these things are highly opportunistic. There are many companies that are very good at this, but with smaller acquisitions. Cisco buys many compa-nies a year and they have certain predefined criteria. For example, a target has to be within 50 miles of an-other Cisco entity.

Q. I remember when Paramount wanted to buy Time, Inc. Time didn’t want that to happen. So they bought Warner, which made them too big for Paramount. You haven’t mentioned these kinds of poison pills.A. Yes, I remember when Xerox bought an insurance company to make them less attractive as an acquisition target.

Q. Sometimes it’s people in the lower echelons who are key to the future success of a merger.A. Absolutely. There always are retention agreements for top level executives. I say that I don’t care as much about them. I urge retention agreements for the staff sergeants. Who’s the person who has the Wal-Mart relationship? Who’s the COBOL programmer who knows your old legacy software? They’re the ones to worry about.

Q. The effects of relocations of people can be a problem.A. U. S. Airways and American – it’s happening as we speak. U.S. Airways is based in Tempe, Arizona and American is headquartered in Dallas. American is coming out of bankruptcy. It’s a hostile takeover in many ways. U.S. Airways is going to run the combined operations. U.S. Airways said to its key people, we won this thing and we’re all moving to Dallas! Their people are saying, “We won. Why are we moving? We like Tempe.” This could contribute to a huge cultural problem.

Q. Can’t the need to relocate be reduced by videoconferencing?A. That’s a possibility but on the other hand I’ve heard that there are some functions that just can’t be done right by videoconferencing. For example, there are four pricing meetings every day in U.S. Air.

Q. We hear about executives walking away with huge severance bonuses after a merger.A. Those stories make you wonder, Where is the Board of Directors? They often are far too passive. I chatted

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Members of the RMA installing erosion control barriers at Greenway on the Sudbury River

with a Director on a major financial company’s Board. I said to him, “You’ve been involved in a lot of transac-tions.” He replied, “You’re assuming I knew about them in advance. I get a book on the deal a day before the Board meeting.” I asked him, “Why aren’t you resigning? That’s an insult to you as a Board member.” But he’s enamored with the perqs – flying around in the corporate jet, meeting important people.

I’m reaching mandatory retirement at McKinsey at the end of this year and will be joining the faculty at the Harvard Business School. I’ve had conversations with one of the professors there and we’ve agreed that this topic needs attention. The behavior of corporate boards today is not what it needs to be.

Q. How often are top executives hired for their charisma rather than for their intelligence?A. There’s all kinds of hiring practices out there. I’d say that the problem isn’t the charismatic factor but more often it’s the greed factor and the sense of entitlement. There’s a huge amount of investment capital chasing deals and that spells opportunities to get rich.

Q. What about the question of whether the position of Chairman of the Board should be separate from the CEO?A. I view the separation as healthy. It’s like having a circuit breaker. The CEO just can’t do whatever he wants to do.

Q. When I vote my few measly shares, I really don’t have much of an impact. Isn’t that part of the problem?A. We’re seeing more activist shareholder groups. There even are consultants who are specialized in working with such groups. And the social media are making it possible for the views of smaller shareholders to coalesce into one louder voice.

Q. What percent of mergers are successful?A. The answer you often hear is that 70 per cent fail. However, McKinsey looked at 600 transactions and what we found is a subset of large transactions that were wildly successful. However, large infrequently done trans-actions usually fail. On the other hand, serial acquirers who do small deals frequently almost always add value. And, importantly, if you’ve done one, you’re better at the second one.

As we enthusiastically applauded David for a splendid presentation, it occurred to me that because he was so generous in sharing his insights, RMA now should form a consulting firm so that members can go out into Corporate America as experts on how to manage the integration of a merger. To bolster our credibility, we could elect David to the RMA Board!

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Jim Stoddard visited the Netherlands and Belgium on a riverboat trip among the tulips and greenhouses.Don Sherman, with his wife & daughter visited Australia and New Zealand after his ticket adventure.Dave Stallard visited Denver, Colorado to present a paper about ““A proposed model for ordinary gravitation”.Charlie Raskin took a river cruise through Russia, Estonia and Finland. The food was great with great people on the boat. The architecture was spectacular.Frank Lyons went to Incline Village in Nevada with his two sons and granddaughter.

Visitors:Bert Sellier introduced John Ollquist, a neighbor in Sudbury coming from Brooklyn, Long Island and Providence College.Frank Irish brought Ed Greenberg from Notre Dame and Lehman Brothers. Frank had been in the RMA earlier.Bob Cooke’s friend John Fraize (another Sudbury Methodist Church Candidate) was introduced.Al Persson brought Sam Brody, born in Tennessee, a chemistry major and an Air Force radar technician who retired from Kodak.John Iberg introduced Harry Ball, a neighbor who lives in Sudbury.

The newest members were introduced: Paul Cavereo, Jim Macavy, David Maclin, Bob Hyatt

Rick Dugan described the next hiking expedition to Walden Pond on May 13th at 10am. He will need some help with the hiking trip logistics.

Chris Hammer reviewed the planned special events:Boston Library June 10th (delayed due to the Marathon events)Pawsox Game July 29th (need relatively firm reservations)IRobot company tour ( time to be determined)

Gerry Brody had some RMA health updates:Charlie Raskin was out with glaucoma issuesBert Fowler was having pulmonary difficulties

Rick Dugan announced lunch is at Villa restaurant

Stuart Hamilton of Parmeter presenting a plaque of apprecation to the RMA

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Anniversariesin

May

Day Year Years

If you received this bulletin by U.S. mail but would like to receive it in the future by email only, please email your request to rkriggert@verizon.net or AL Pers-son, Popanlet@verizon.net. If you want to receive other email news and notifications from the RMA please send your email address to Popanlet@verizon.net. The e-mail address for the RMA is info@RMenA.org.

Reynold Graunas Claire 24 1958 55John Beeler Dianne 24 1960 53David Doran Linda 4 1963 50

David Cerul Roberta 28 1966 47Isidore Vivaldi Mary C. 7 1966 47

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May-Birthdays

Reynold Graunas 29 1928 85Maurice Fitzgerald 19 1929 84Milton Jones 10 1929 84Irwin Less 13 1933 80Irwin Silver 19 1934 79Morton Brond 2 1935 78Waldo Hart 8 1936 77Robert Allard 14 1937 76Edwin Larsen 9 1937 76David Cerul 31 1939 74William Carleton 13 1940 73Larry Vifquain 14 1940 73A. Bradford Conant 17 1941 72Jacob Levy 8 1942 71Robert Joseph 10 1943 70

Day Year Age

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Life in an Icy Inferno

“We’ve come to one of the coldest spots on Earth to search for beings that thrive in blistering heat. In a place with full daylight for only four months, we’re

seeking life that dwells in utter darkness. Welcome to the topsy-turvy world of Antarctica’s Mt. Erebus.” by Olivia Judson

Erebus is the Greek God of Darkness and the son of Chaos. It is also the name of the second highest volcano in Antarctica. Being a continuously active volcano situated in one of the coldest places on earth makes it of intense interest to science. The volcano is on Ross Island and is part of the Pacific Ring of Fire, which includes over 160 active volcanoes in the south Pacific. Hot lava makes it way to the surface and melts the ice. The result is areas of hot wet soil. These unique areas are home to microbes and a few mosses that are different from those found anywhere else in the world. By studying their DNA it appears that they have taken an evolutionary pathway that is unique. The microbes do not depend on the sun for energy as they live all of their life in darkness. They obtain energy by breaking down iron and hydrogen.

Their DNA is studied as it impossible to grow them in the laboratory. The conditions at the top of the volcano are also very harsh and those studying the microbes find that a few days on site is all they can tolerate. It has been postulated that these microbes may originate from the center of the earth and be just a sampling of a much larger ecosystem yet to be discovered. This also leads to the speculation concerning life on other planets.

by Al Persson

June 14, 2013