Culture Mis-Mash

Fortis Market Insights are meant to convey what we think are important business / market events. Many firms share information from their “research directors”. We think hearing directly from the people who manage the money and make the decisions can provide some unique insights. We hope you enjoy. 

 

TL:DR – Making sure that you know the culture you are acquiring in M&A is critical. Many CEOs ignore this to their (and their shareholders) own peril. 

 

Culture Mis-Mash

 

I was recently recommended a biography on John Boyd. I love to read and this was the best biography I have read in a long time. This book is not a one-time read if you want to really understand everything that was presented. I’ll try to follow this up later with some relevant thoughts and applications, and I recommend giving it a read here

 

That being said, right after reading that biography, I came across this article in the journal. The article describes a merger between two companies, EQT and Rice, and how that merger isn’t working out so well. 

 

Having spent years doing M&A transactions, this is not surprising…a lot of - maybe the majority - of deals don’t work out quite as planned. The reasons are myriad, but a lot of times it simply comes down to culture

 

Culture is a funny word and to be fair, it gets mis-used constantly in business. Mainly it gets mis-used when management teams don’t execute and they are trying to find someone to blame. 

 

In the case of EQT and Rice, a very common thing happened. An old-school company (EQT) bought out a young upstart company (Rice), made some poor operational decisions, and then the Rice brothers who were bought out got upset. 

 

The reason I mention the John Boyd book is that he helped develop a lot of the operational war strategy that is used, especially by the Marines. Boyd was a big fan of getting inside his opponent’s head, knowing how they would react, and then striking very quickly when appropriate. This is old school Sun Tzu “Art of War”. 

 

Many of the generals didn’t like John Boyd, because he preached things that they were not fans of. Moving quickly opens your flanks (your sides) and can allow an opponent to get around you and then crush you. Boyd did not care about this because he believed that if you know your opponent well enough, you already know that they will be so thrown off guard that they will not be able to effectively react and take your flank…i.e., they will be so “discombobulated” that they will get stuck. And by then, you will have already taken them over. 

 

One branch of the military really embraced Boyd’s thinking…it was the Marines. 

Rice was like Boyd; they started the company only in 2007, had a plan, and pushed it aggressively. It’s no wonder that the operational issues subsequently has led to them pushing to take back over the company. 

 

Who knows where this saga ends, but one thing is clear: when evaluating an M&A transaction, understanding the culture matters more than almost anything else. That is why some of the best CEOs ever at M&A - John Malone and Warren Buffett - either let the entire management team go immediately (Malone) or only bought them if he knew the culture they had was the same as he wanted (Buffett). 

 

Disclaimer: The views and opinions expressed in this quarterly letter are those of Fortis Financial Group, a wholly owned subsidiary of Glacier Peak Capital LLC (“the firm”). Portions of this letter may contain certain statements relating to future results regarding companies we may invest in which are forward-looking statements. These statements are not historical facts, but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. Such forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

 

Forward-looking statements are subject to market, operating and economic risks and uncertainties that may cause our actual results in future periods to be materially different from any future performance suggested herein. Factors that may cause such differences include, among others: increased competition, increased costs, changes in general market conditions, changes in industry trends, changes in the regulatory environment, changes in loan relationships or sources of financing, changes in management, and changes in information systems and technology.

 

The firm will not publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which we hereafter become aware.

 

This letter should not be considered an offering or solicitation to invest with the firm. Ideas and views expressed within are not recommendations to buy or sell any securities. Past performance is not necessarily representative of future results. The investment strategy of the firm is not designed to resemble returns generated by the S&P500 or any other index mentioned herein, and strategy volatility may be materially different from that of the indices.