Three from the NYT: On Strategy, Culture and Boredom

It has been quite some time since I've published a "3 from the NYT" piece - but the time has come.

1. Andrew Ross Sorkin on "When Unequals Try to Merge as Equals" - the Sirius/XM merger

My punch line: Mel Karmazin is a smart, logical guy focused on the big picture, for the benefit of Sirius shareholders. And Mr. Sorkin's questions concerning the economics and timing of the merger announcement miss the boat from my perspective, only serving to reinforce a myopic and cynical view that obscures the big picture: that this merger is both necessary and value-creating for both Sirius and XM shareholders, especially in light of questions over the long-term viability of satellite radio as a value-added distribution platform. The merger at least gives these two companies a fighting chance to find out, and in the most efficient and shareholder-friendly manner possible.

Andrew's lead, to set the stage:

HERE’S a tip about deal-making: When companies start talking about a “merger of equals,” someone is usually getting the better deal. It is especially true in the proposed merger of XM Satellite Radio and Sirius Satellite Radio.

It is being billed as a merger of equals, with each company getting exactly half of the new entity.

But here’s the unequal part: The stock market thinks that Sirius is worth almost $1 billion more than XM. To get the numbers to work, Sirius offered to pay a handsome 22 percent premium to shareholders of XM. (The premium is actually almost a whopping 30 percent if you account for the run-up in XM’s shares the Friday before the deal was announced, as word began to leak.)

And then, a little more color to make the point:

And then Mr. Parsons played his ace: If Mr. Karmazin wanted to create the enormous savings they both projected would result from a deal — worth more than $5 billion, more than the value of either company — they needed each other.

********************

“I can’t do the deal without them,’ he said. “I thought it was more important for our shareholders that we do the deal.”

Even by giving the 22 percent premium, Sirius stands to save billions of dollars a year if the deal goes through.

These are facts. And the fact is that Mel is a big picture guy, and Mel wants to run a successful and viable entity. Is paying a premium for XM when the deal is billed as a "merger of equals" either irrational or untrue? I don't think so. Both hold valuable and necessary keys to unlock the value of the combined enterprise. I think it is quite clear what is going on here and I'm not sure why this point warrants much discussion. The cost savings alone, even if one assumes savings on the low end of the projected range, are worth well north of $10 billion. So 22% on XM's stock price to get the deal done and to get busy? A small price to pay.

The Andrew goes on to discuss the other possible motive for "rushing" into things now instead of waiting until their stock price somehow magically align in order for a "true" merger-of-equals to organically take place:

Still, it seems as if Mr. Karmazin may be paying a premium to do the deal now so that it can be rushed through the regulatory maze while the Bush administration is still in power. Many partners in mergers of equals wait around — often for years — until their stocks align.

Mr. Karmazin disputes that view, contending that he wants a deal as soon as possible so that the savings can start. His view is that there “is no regulatory window.”

In fact, he believes that the longer the companies, both now money losers, wait to merge, the better their chances would be in Washington. That’s because new technologies will continue to emerge that may prove to be competitive with satellite radio.

So Andrew puts forth the "ulterior motive" theory, and I've got to say Mel gives the right answer. Besides which, Sirius and XM have been tap dancing together for quite some time; it's not as if this is a shotgun marriage. Much thought, analysis, pondering and negotiating went into last week's announcement, so I find Mr. Sorkin's line of argument more consistent with conspiracy theory than one grounded in fact or logic. Regardless of Administration, this is going to be a challenging merger to get through the Justice Department (not that it should, but it will). But those cost savings are real - and pressing - and they are both spending prodigious sums to win in the marketplace, dollars that could be spent together in a more efficient manner developing better consolidated programming and reaching its target audience.

So Mr. Sorkin, I don't think it requires much thinking to answer the "why, when and how" this merger got announced - and it is far more simple and logical than you are making it. It is driven by the need to extract value - now. To stop the bleeding. And I hope Mel is able to get this deal done - and fast.

2. Leslie Wayne on "Starbucks Chairman Fears Tradition is Fading"

My punch line: Howard Schultz, Chairman of Starbucks, is the one guy that can help bring it back to its roots, even in the face of pressure to continue its global expansion drive. And he has the passion, vision and credibility necessary to do the job. I wrote about some worrying signs at Starbucks some months back, in a 11/26/2006 post about a little coffee shop in my Greenwich Village neighborhood called Joe. I cited five reasons why Joe was successful in a crowded field with much larger, more powerful competitors:

1. Unbridled Confidence
2. Obsessive Attention to Detail
3. In Touch with the Market
4. Condescending Competitors (read: Starbucks)
5. Ruthless Focus on Quality

I went on to conclude the following:

At this phase of Joe's existence Jonathan is right. Better to focus on refining and perfecting the model than expanding rapidly. Get the model right, learn how to scale and do so - deliberately. This will drive a stake into the heart of the marginal Starbucks, Cosi and other crappy-experience stores. Why would anyone in their right mind go to one of the mega-chains that have lost touch with their customers versus a place like Joe? Answer: they wouldn't.

This is classic Schumpeter creative destruction in action, admittedly on a micro-scale as we speak. I've written a lot about this and believe strongly that creative destruction is a healthy, and unavoidable, fixture of economic development and a natural part of the company life cycle. Success, without question, sows the seeds of failure, as rapid growth has diluted the Starbucks culture and experience and rendered them vulnerable to a down-home, grass roots entrant like Joe. Further, times change, value propositions shift, and the $5 for a consistent venti skim latte just doesn't exist any more. Yeah, people are now spending $5 for this when they don't have many good alternatives, but what about when more Joe's (or places like them) spring up around town? Invariably, they will. I'll tell you one thing - I'd sooner spend my $5 at Joe or even at a Dean and Deluca than I would a Starbucks any day. Better preparation, better experience, and I feel better giving a smaller establishment my money than the Seattle behemoth.

Well, it seems as if my concerns were not without merit, given Mr. Schultz's recent note to Company executives:

The last thing that Starbucks wants is watered-down coffee.

It may not have that. But in a passionate internal memorandum to Starbucks executives, the company chairman said that a drive for efficiency has led to a “watering down of the Starbucks experience.”

Rapid expansion, the chairman, Howard Schultz, said, has led to a “commoditization of our brand” that makes the company more vulnerable to competitors. Specifically, he cited several decisions that, he said, may have been right at the time, but which, in retrospect, have led to a “dilution” of the coffeehouse experience that he wanted to foster.

The memorandum was sent on Feb. 14, and first appeared on the Web site starbucksgossip.com. It also reflects one issue that Mr. Schultz has identified over the years — the delicate balance between expanding into a global brand while maintaining the intimate communal experience that led to success.

A Starbucks spokeswoman, Valerie O’Neil, confirmed the memorandum and said yesterday that it reflected “that we are mindful of our responsibility to do better.”

Do Howard's concerns sound familiar? He clearly gets it; something I could casually observe in my own little world is something being perceived by him on a much broader scale. I give him tremendous credit by wanting to shake things up a little for the good of the brand, the Company and its shareholders. By the way, this Valerie O'Neil is the same one who said the following back in November when speaking about successful upstart coffeehouses like Joe:

Starbucks said it welcomed the competition. “There is room for many coffeehouses in the marketplace that can meet different customers’ needs,” said a spokeswoman, Valerie O’Neil.

I'll say now what I said then: that was a stupid thing to say. As a shareholder, do I want to hear this? No. I want my company to crush the competition. But the way to do this is by working to constantly improve the product and the experience and, in the case of Starbucks, to build and preserve the value of the brand that has been so carefully cultivated throughout its existence. This can't be done by implying "We're big, we're successful, let other competitors come in and chip away at our brand," which is effectively what has happened with a small shop like Joe, which started at one location and how has three. And I'm sure before long it will be five, then seven, then...

Good thing Howard is weighing in. He gets the issue of culture and brand, which is really what has made Starbucks one of the great American success stories of the past 20 years. Hopefully his words will fall upon open ears; otherwise, creative destruction may take hold sooner than you think.

3. Ben Stein on "Of Tax Cuts and Those $10 Million Bat Mitzvahs"

My punch line: Readers of this blog know that I respect Ben Stein and his intellect a great deal and, while not always agreeing with him feel that his heart is always in the right place. But this little rant in today's NYT appears to the culmination of years of frustration that we, the dopes reading the NYT, just don't seem to get it. Or he may just be getting bored with us and needed to write something for today's column. Ben's far-ranging complaints begin at crappy customer service, wind around to conspicuous consumption fueled by conservative tax policy,  make a visit to the ills of Management Buy-Outs and finish at the lack of competitiveness of the U.S. financial markets.

Clearly somebody spiked Ben's Wheaties this morning. Usually he is more focused in his criticism and irritation, but today he pretty much covered the landscape. Customer service? Sure, Ben, I feel your pain. Nothing pisses me off more than when I pay good money for an experience, a key component of which is service, and I am let down. Ok, this sucks. My advice to you: provide feedback; don't patronize that particular establishment; write a letter to HQ; sell the stock; offer your services as a consultant. I don't think this quite rates a Sunday column in the NYT.

Conspicuous consumption? If this consumption, which itself creates jobs and opportunity, is motivation to work hard and create value, which, in turn, generates rewards with which you can consicuously consume, then what is the big deal? Is your argument economics or utility? I can certainly appreaciate that your utility function may look different than someone who throws a $10 million Bat Mitzvah, but is that really your business? The spending associated with a $10 million Bat Mitzvah ripples through the economy, in a positive way. Further, the ability to spend $10 million on a party might itself be motivating to the party-thrower, who is incentivized to work hard to be able to throw more such soirees. This isn't a bad thing, Ben. The money is being pumped into the economy. Sorry if you don't like the way people spend their tax breaks. Those tax breaks are motivating and ultimately do lead people to invest in businesses, whether directly or through consumption that incentivizes others to invest in their businesses. 

MBOs? We've talked about that. Sure, there are problems with how they are handled. I'm with you there. But didn't you just write about this less than two months ago? Are you running out of good material? And, finally, the U.S. financial markets? You have a point, particularly as it relates to listing fees (and SarBox, I'd argue). But again, old news.

Love you, Ben. But please, make sure you are taking those Wheaties straight. Because this morning there clearly was a problem.

Comments

[Drew Robertson]

Sorry there is something very bad about a $10M Bar Mitzvah. Perhaps not for the parents. Maybe not for the kid. Or his friends. But for the kid's friends' parents? A real PITA. I'm glad my kid turned 14.

[Yaser Anwar]

With regards to the Starbucks article, Sir, your punchline was that Howard can sort it out by bringing it back to the roots.

But what about when there is no more Howard? Even Charles Schwab. Before he retired, Schwab was one of the toughest discount brokerages. He decided to retire, BOOM. Schwab starts to fall in oblivion. So, Mr. Schwab has to come back and fix the company.

Now we're seeing it with Dell. It used to run well with M. Dell, then got messed with their last CEO, and now Mr. Dell is back.

In my opinion these companies don't have a Berkshire like culture, where if WB, God forbid, passed out tomorrow, another person would take the torch and run with it.

Isn't this a serious problem? How do firms deal with this, Sir?

Just curious.... (sorry if I'm off topic)