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11 February 2002

After Enron, the bonfire of the deal-makers

For 20 years, top managers have concentrated on taking over other companies. Perhaps they will now t

By Tom Graham

Nobody who has worked in large western companies over the past 20 years should be at all surprised by the collapse of Enron. It would be comforting to assume that it is a one-off. It is not: many large western companies, to a greater or lesser degree, display some of the same symptoms. Marconi, which collapsed last year, was another example.

Enron fell because its management used financial engineering to conceal its debts. Marconi slid towards disaster because its management placed big bets on the wrong colour. The fundamental flaw of both managements was that they were mesmerised by the magic of deals.

In the late 1980s, I studied at a leading business school. I aspired to be a senior manager. I was instructed in such traditional management subjects as accounting, sales and marketing, human resources (personnel) and operations. I learnt about corporate finance, but only in relation to funding real projects such as quarries and factories. John Harvey-Jones (in his TV “trouble-shooter” guise) became my hero, his “management by walking about” my mantra.

As for deals, one of my lecturers presented statistics to show that most mergers and acquisitions fail, and that the record of international acquisitions – where Marconi bet its boots – is particularly poor. These failures, I was told, often stem from very understandable human factors, such as employees’ resentment (or “integration issues”). It was better, my lecturers advised, to stick to patient business-building, beating the competitors, customer by customer, product by product. I came to think of this as “real management” – a bit like real ale: local, down-to-earth and character-forming.

I later worked for several large UK and international businesses. I found a constant orgiastic ferment of deal exploration, in which every big-name company at different times explores virtually every kind of possible relationship with every one of its big-name rivals. As at an orgy, non-participation is the greatest sin.

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In almost all of the companies I worked for, whole swathes of senior people were really concerned with nothing else but deals. Those who weren’t, were concerned with financial presentation. Virtually no one at the top levels was engaged in real management: ordinary company business chugged on without them.

Soon I, too, walked the walk and talked the talk. I was looking not for “organic growth” – jargon for real management – but for quantum leaps. I hired bright young people from consultancies and investment banks. I stacked up air miles to meet potential merger partners in Hong Kong and New York; became familiar with the merits and demerits of numerous tax havens; and spent quality time with the chairman at Michelin-starred strategy away-days.

I learnt to exhaust entire pantheons of mythical figures – Zeus, Mars, Mercury, and so on – in devising code names for the secret acquisition projects I joined (just as Enron and Marconi had their Jedis, Raptors and Superbowls). During Project Adonis – a multimillion-pound bid – my family became convinced I was involved in a gay massage parlour.

In this world, euphemisms abound. Enron had its “special purpose entities” and “innovative transaction structures”. A friend who works for one of the Hollywood movie giants uses “The Ultimate”. It works like this. When you make a movie, naturally you pay out a lot of money in costs up-front. So you don’t make any real profits until, after four years, the film finally gets a second-run cable deal. Ultimate accounting, however, allows you to spread the costs so that they appear on the balance sheet only when the revenue matches or exceeds them. What happens if the cable deal bombs? That, my friend, will be someone else’s problem. You’ll have moved on long before.

I monitored my company’s share price obsessively: like that of most of my colleagues, my office TV was permanently tuned to the FTSE-100 pages on Teletext. I came to believe, Enron-style, that virtually any piece of financial engineering, however arcane, was justified if it improved the share price. And I learnt about the wonders of acquisition accounting, whereby the wreckage from bombed-out bum deals could be safely tucked away “below the line” – where it would not affect next year’s bonuses or upset the stock markets.

Once managers feel they are driven to make deals, it is difficult to keep them in check. In one company I worked for, a bright young junior manager in charge of a small subsidiary simply could not be persuaded away from his belief that his task was to seek out and develop acquisition opportunities (as his bosses were doing), rather than to ensure that his customers were served effectively. Both he and the subsidiary eventually “cratered” (to use deal-speak). Another friend spent months helping to pull off a large international merger that, although surviving, now faces big problems: the Belgians hate the Italians, the Italians hate the French, the French hate the Spanish, and everybody hates the Germans. Yet, divided as it is, the company’s senior management team is still agreed on one thing: it must continue to seek new deals.

This deal-making frenzy has been pervasive in British and American industry for the past 20 years. But why, in the face of much evidence, experience, training and even common sense, have so many executives in large western companies continued to follow the Marconi/Enron model? Because, compared to real management, Marconi/Enron has been more fun, more glamorous and intellectually more challenging; it has offered more potential for rapid gratification, not to mention early personal enrichment.

But times change. The great bull market of the past 20 years sustained the share-price rises that floated the boats of Marconi, Enron, Swissair and other companies whose names we don’t know yet, but will. Everything is forgiven if the share price is rising. But now the bull market is over.

The reckoning may be very painful. Real management may eventually predominate once again – plodding, unflashy and sturdy. But, sadly, too late to save the wealth of millions of shareholders and the livelihoods of millions of employees of companies such as Marconi, Enron and others as yet unknown.

Tom Graham is a pseudonym

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