The battle playing out between Marriott's desired acquisition of Starwood, and that deal's disruption from China's Anbang Insurance, offer real-time lessons for business leaders in today's overheated M&A environment. Marriott CEO Arne Sorenson is working to keep the acquisition on track, after watching Anbang come in with a richer, all-cash offer. After seeing its agreement cancelled by Starwood, over a weekend Marriott increased their bid, added more cash, and declared they now foresee an additional $50MM in integration efficiencies to justify the increase. For now, the marriage is back on - but the bidding likely isn't finished yet.
For Marriott, the stakes are enormous. In a recent Fortune Power Sheet column, Geoff Colvin lays out the terms and the "known unknowns" of the deal, asserting that "Sorenson faces some of the most important decisions of his CEO career." I could not agree more - yet his situation is not unique.
Over two decades of mentoring hundreds of C-Suite executives, my colleagues and I have seen this scenario many times. We believe Mr. Sorenson's next steps - and those of any leader in a similar situation - should be framed by a few key principles:
1) Beware of non-strategic buyers. At this point, emotions at Marriott are likely running high. Mr. Sorenson, his board, and the numerous bankers and lawyers who have been structuring the deal have invested time and money into the Starwood transaction. However, that does not mean they should keep increasing their bid just because another buyer has swooped in. Presumably, leadership has identified its maximum offer and cannot be afraid to walk away if another bidder's terms exceed that amount.
A few years ago, a client - CEO of a centuries-old brewery - saw the opportunity to acquire a competitor. His team conducted careful diligence and prepared a fair offer. Later, the competitor opted to conduct its sale via auction. Frustrated, the CEO and board agreed on a maximum price, submitted their bid, and stuck to it.
When the auction ended, the brewery had lost, and out of 23 bids, theirs was dead lowest. The CEO was incensed - what had his team missed in their valuation? How could they have gotten it so wrong?
They hadn't. None of the other bidders were strategic buyers, so their offers weren't based on working knowledge of the industry. The final price was far over-value, and the resulting debt load crippled the organization. Three years later, our client was able to acquire the company's book of business for pennies on the dollar. Had he become emotional and exceeded his planned bid, the resulting debt would have crippled both organizations.
Having initially offered over $12 billion for Starwood, when Marriott's 2015 revenues were roughly $14 billion, there is a real danger for Marriott should it keep chasing the deeper pockets of Anbang, just to cement a deal. Most mergers fail to realize their projected financial synergies. This fact makes that over-the-weekend $50MM in extra efficiencies Marriott just found seem a suspect rationalization for a higher price.
2) Remember that opportunity is not a zero-sum game. Even if Marriott does not acquire Starwood, it is still the world's largest hotel company. Both healthy and profitable, Marriott will live to fight another day. It will find other opportunities.
Examples abound of buyers who were outbid for large acquisitions but moved on successfully. Early last year, Dollar General's efforts to take over Family Dollar were thwarted by Dollar Tree, which made a surprise bid for Family Dollar and created a new dollar-store superpower. Despite losing the bid and facing stiffer competition, Dollar General went on to open stores in three new states and reported record financial results for 2015.
Likewise, Facebook and Apple were both outbid by Google for the social mapping app Waze. Johnson & Johnson was recently outbid by AbbVie for Pharmacyclics.
All of these "losing" companies are still perfectly fine. The key is not to act on a blind desire to win any single transaction, keeping in mind that future opportunities will present themselves.
3) Find a truly objective sounding board. More often than not, large mergers fail to achieve their stated goals. Yet most leaders at acquiring companies, believe that "this acquisition will be different." Over-paying up front tilts an already difficult exercise into negative probability. Because of effort expended and the high stakes involved, Mr. Sorenson should not assume that his board or top executives have a fully objective view at this point. Their emotional investment in the transaction likely skews toward wanting to close the deal.
Rather than seek advice from inside Marriott, Mr. Sorenson would be better served by finding a neutral party whom the transaction will neither hurt nor help. An informed outside perspective may see the situation in a new light.
Another CEO I know was in a position to purchase a company that had a specific technology his organization wanted. As the offer deadline approached, the CEO turned to an outside executive whom he valued as a mentor. He asked for unofficial, objective feedback. After reviewing the deal, the mentor opened with, "You're not going to like what I have to say."
From the mentor's perspective only 20 percent of the target organization's business was germane to the CEO's company. The other 80 percent lay in areas where the acquiring company had no history or management experience. The integration and learning curve would be massive. "Essentially," he said, "you're buying the whole dog to get the tail."
"I wanted certainty," that CEO later told me. "But what he gave me was clarity. That was much more valuable." The CEO and his board ultimately walked away from the deal and later closed a better, more targeted acquisition.
Mr. Sorenson is not asking for my advice, and I'm guessing he'd rather not be a case-study-in-process. Yet Marriott-Starwood-Anbang presents a C-suite dilemma that many leaders will face. In the fog of (business) war, the best thing leaders can do is strive to maintain clarity, not grasp for certainty.
David Reimer is an expert in the leadership development of the C-suite. As a former operator, he brings a hands-on knowledge of leadership, strategy, operations, and mentoring to the subject of accelerating the impact of top executives.