Corporate merger activity is heating up with several recent announcements, according to the Huffington Post. American Airlines and US Airways are tying the knot; Office Depot is buying OfficeMax; and several others are in the works (Dell, Virgin Media, etc.). Berkshire Hathaway, run by Warren Buffett, announced it’s bringing Heinz into its conglomerate. I don’t know for certain, but I suspect Mr. Buffett has read The Prince by Machiavelli, and what’s more, he paid attention. Here’s what Machiavelli wrote and how Buffett is using 16th century wisdom in corporate America today.
First, a little bit about the book. Machiavelli wrote The Prince in the 1500s as a gift for a young noble he advised. What do you get the noble who has everything? Machiavelli didn’t know either so he decided to write a how-to guide for the young up-and-comer. I’m just talking about Chapter 5 here. There’s lots more. For such a small book, The Prince has a ton of great stuff in it.
In those heady days of yore, they were always capturing cities. I’m sure we’ve all wondered exactly what you do with a city once you’ve captured it. Machiavelli lays out three options for us (Machiavelli, Chapter 5, available here). Mr. Buffett seems to like number three.
Option 1: Despoil them. Well, we’re not going to be sacking cities any time soon, but this isn’t much different than the LBOs of the ’80s. And with different tactics, it’s still being practiced by hedge funds today. Basically you “conquer” the company, via a proxy fight, leveraged buyout, or whatever, and then you begin to “despoil” it by selling off pieces. Think Richard Gere’s character in Pretty Woman — the parts are worth more than the whole. Maybe. Or maybe that city looked like a potential orgy of beauty and gold, but turned out to be full of ugly women with brass jewelry. Regardless, once you sell off the assets, you’re forced to go conquer another city, er, company. Sure, you have some cash in your pocket, but you know, here today, gone tomorrow. And maybe no one wants to buy some of the parts so now you’re stuck with a clunker. I’m thinking of those really smart hedge fund guys who bought Chrysler in 2007.
Option 2: Move in. Okay, sounds promising, but what does it mean in the here and now? It means you take over and install a new management team (your people) to rule the citizens (their people). Might work but difficult to manage. Cultures clash, lack of understanding of the business, etc. Ross Perot tried this with GM in the ’80s and ran into a buzz saw. Perot tried to implement crazy ideas like listening to the customers, committing to excellence (most notably in the Cadillac line), etc. Sadly, GM was able to resist the siren’s call to get better so they could continue on course for their 2009 Chapter 11 bankruptcy.
Option #3 – Let them rule themselves and “pay tribute.” Sounds easy enough. This would be analogous to a friendly takeover. What you’re saying as the conqueror is, hey, you’ve got a pretty good system, and I’ll let you keep it, but now you owe me a slice of the pie. This is eerily similar to Warren Buffett’s modus operandi. Buffett routinely talks about how he buys companies with great management, like Geico. Or Burlington Santa Fe. Or just about any of his takeovers. From the Berkshire website, the #4 criteria for acquisitions is “Management in place (we can’t supply it).” Machiavelli says this is the best way because you incur the least amount of resentment from the ruled. Seems to work for Buffett!
It’s funny–almost 500 years later and we still have princes making the same mistakes. Only now, they’re the Princes of Wall Street. But the Noble from Nebraska has it figured out!