How the right intent could have saved $1.5 billion!
July 4, 2014
Readers who know my work with Clarity State Decision Making will recognise this story. It is about Quaker Oats Company's then-CEO William Smithberg. In 1983, Quaker acquired Gatorade for $220 million from Stokley-Van Camp when they sold out. Smithberg clinched the deal by outbidding Kraft. The investment bankers baulked at Smithberg's bid of $77 per share. They said it should have been $74 or $75 tops. But Smithberg threw caution to the wind because he really wanted the product - it was one of the best he had tasted - and knowing that he had to outbid Kraft, put in a more aggressive number. According to bidding rules, if there was a difference of up to $1 between the two highest bidders, they had to rebid. Smithberg half suspected that Kraft might put in a bid on the top end of $75. So, by going in at $77, they would avoid rebidding, which would surely have pushed the price up. When the bids were revealed, Kraft came in at $75.50 and Quaker walked away with Gatorade. Within 10 years, Quaker grew Gatorade to $3 billion, giving Smithberg an almost cult status in the company.
In 1994, Smithberg decided he wanted another round of acquisition. He was hungry for another Gatorade success and this time found Snapple because, again, Smithberg liked the taste. Following his usual aggressive style, he went all-in and bid $1.8 billion for Snapple. Analysts again baulked but this time to the tune of more than $1billion. It should not even have been worth $800 million.
Framed by hindsight bias and a secret intent which he didn't reveal until much later, Smithberg acquired Snapple. Very quickly, Quaker found out that it was a mismatch with their current product portfolio - from manufacturing, to distribution - things that would have surfaced during due diligence but didn't because there wasn't one. After three years of trying to fit Snapple with the rest of Quaker, they finally capitulated and sold it off to Triarc for $300 million! An erosion of $1.5billion in 3 years! Humiliated by this episode, Smithberg stepped down.
Obviously biases got the better of everyone. Smithberg was operating on hindsight and affect bias, and so was the Board. None of them in the Board raised so much as an objection, seeing how Smithberg was so right the first time around. Most got fat off Gatorade and wanted more fat from Smithberg's next acquisition.
Smithberg also got caught up with the excitement of the acquisition. By his own admission, he said, "There was so much excitement about bringing in a new brand, a brand with legs. We should have had a couple of people arguing the 'no' side of the acquisition." What? Nobody questioned it? So everyone was complicit in the bad decision! Obviously, Smithberg would have to take the rap for this, and he lost his job.
But the promise of another windfall wasn't the fuel for this decision. It was something behind Smithberg's thinking which he could not reveal at the time of the acquisition. Smithberg wanted something so large that the company would have to carry a huge debt on. And the reason was because he was fearful of a hostile takeover. By loading his books with this debt, he would deter anyone with designs over the company, and leave him in peace to do his own bidding.
There you are! That was the real reason for the acquisition. The rest of it was just icing on the cake! Sure they did want another blockbuster success to follow Gatorade, but if they had acquired Snapple for $500million, they wouldn't have had to over-extend themselves, making them an even more attractive target! No, the acquisition needed to be expensive, but also needed to have some upside left after the $1.8billion price tag. In American football parlance, this was Quaker's "Hail Mary" pass that came up short. If Smithberg had but reframed the situation and put his fears of hostile takeover as his true intent, he might have kept his job and, more importantly, saved $1.5 billion.
So, when you have more than one intent, always voice them out and choose the most important one. It might just save you $1.5 billion!