Clashing Cultures
Whether Peter Drucker was the author of the quote above is debatable, though, it’s amply demonstrative of the fact that even the soundest strategy fails to produce the desired results if the right culture isn’t in place. While establishing a healthy culture in your organization is tough enough, when it comes to Mergers & Acquisitions (M &A), integration of different organizational cultures may, sometimes, prove to be even harder than all other affairs combined. The greater the cultural differences, the harder it’s to reconcile them. In his storied memoir ‘Straight from the Gut’ Jack Welch, a former CEO of General Electric, narrates the harrowing events that led to the divestiture of the investment bank Kidder, Peabody & Co. from GE- a classic case of irreconcilable cultural differences.
When, in early 1986, Welch first revealed his plans to buy Kidder, Peabody, one of the oldest investment banks in Wall Street, two GE board members with extensive experience in the financial services business, namely, Citibank Chairman - Walt Wriston & J.P. Morgan President - Lew Preston along with another GE board member and the then Chairman of Champion International - Andy Sigler demurred at it. “The talent goes up and down the elevators every day and can go in a heartbeat,’ warned the veteran banker Wriston. “All you’re buying is the furniture.” It was way different from other GE businesses.
“It was a classic case of hubris” recalls a self-critical Welch in his best-selling memoir. Flush from the successful completion of two massive acquisitions – Radio Corporation of America (RCA) in 1985 and Employers Reinsurance in 1984, Welch felt himself to be invincible and convinced the board to back his decision to buy it. He hoped Kidder would give GE first crack at more LBO (Leveraged Buyouts) deals, which were hot in the 1980s, without paying massive fees another Wall Street brokerage house. His rationale made perfect business sense from that perspective.
About eight months after closing the deal, the first signs of a serious crisis began to appear at Kidder, Peabody. Marty Siegel, a star investment banker at Kidder, Peabody admitted to two counts of felony - trading insider stock tips to Ivan Boesky (incidentally, Boesky is the infamous American stock trader who’d inspired the protagonist ‘Gordon Gekko‘ in the movie Wall Street (1987) directed by Oliver Stone) and making trades based on information allegedly obtained from Richard Freeman at Goldman Sachs and co-operated with US Attorney Rudi Giuliani’s investigation. For pleading guilty to the two counts of insider trading, Marty Siegel paid $9 million in fines and received two months’ prison sentence and probation.
An internal investigation by GE found that things were not that pretty and that there were serious weaknesses in the bank’s control system. Even if Ralph DeNunzio, Chairman of Kidder, had little to do with the scandal, it was obvious that Siegel had been given great latitude. He had the upper hand on the equity trading floor. When he asked the risk arbitrageurs to make a trade, few dared to question him. It was clear that Siegel took full advantage of his influence. GE eventually reached a settlement with Giuliani which saw them end up paying US $26 million in fines, shutting down Kidder’s risk arbitrage department and concurring on imposing stricter controls and procedures to prevent such criminal trading practices in the future. In the meantime, Ralph DeNunzio and some of his key people decided to leave.
While the latitude Siegel had enjoyed was outrageous in GE’s philosophy, what GE was to learn soon showed GE and Kidder couldn’t be more different. While GE, as a company that made a profit of $4 billion at the time, had a total bonus pool of just under $100 million, Kidder which made just one-twentieth of GE’s income had an astonishing total bonus pool of $140 million. When Si Cathcart, new President appointed by GE, asked each person to give a list of his or her achievements during the year, he found, to his dismay, six people claiming credit for being the key player on the same deal. Every one of them believed they made the deal happen. This was small wonder in an entitlement culture where every player overrated themselves.
In April 1994, the Kidder management found a $350 million hole in a trader’s account. Joseph Jett who ran the Fixed Income desk at Kidder had made a series of phoney trades to inflate his bonus. These bogus trades had artificially increased the Kidder’s reported income. With GE’s first-quarter earnings release just two days away, they had a $350 million non-cash write-off to deal with which would seriously hurt their stock. When asked for help, people at Kidder only kept complaining about how Jett’s bogus trades would affect their prospects; in sharp contrast, GE Business Leaders offered to pitch in with a couple million dollars each at such short notice. Too late as it already was, the responses from the two companies to the crisis sharply highlighted their opposing dynamics. They wouldn’t integrate, it was clear, not for the world.
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