Alliance Boots and an an offer Richard Baker couldn’t refuse

July 21, 2007

boots-directors-group.jpgRichard Baker quits as CEO of Alliance Boots after discussions with all-powerful Stefano Pessina. Although offered a new job with a generous remuneration package, he judges the role to be too toothless,and leaves the company.

I managed to extract the above happy families portrait of the Alliance Boots board before the airbrushing began. In our story today we learn why the photograph will shortly change. This version shows, left to right, Steve Duncan, Stephano Pessina, George Fairweather, Richard Baker, Scott Whewhy and Ornella Barra. Now read on …

The story so far

Cherished British Drug company Boots merges with European partner, whose wealthy owner, Stefano Pessina, becomes deputy chairman in the new company, Alliance Boots.

The amicable arrangement suggested that in any leadership transition, Mr Pessina would be a cuckoo in the nest. In short order, chairman Sir Nigel Rudd resigned. further friendly discussions were followed by a takeover by private equity firm KKR. The move was presented openly as a vehicle which would install Pessina as its main driver

KKR and Stefano Pessina had made it known that they wanted to keep the top team intact. But for all the continuing expressins of good will, the inevitable was to happen.

Thursday July 12th 2007, Richard Baker decised to accept a severance deal that would be worth some £10 million. It seems as if they made an offer for him to stay, or decline with honor. In an interview with the he says

“Stephano is a gentleman. He has been as good as his word with me every step of the way..I am confident about the future of the company ..I have looked everyone in the eye at Nottingham [corporate HQ] and told them that”

.

Another top retail executive, Scott Wheway, is also leaving, again in an amicable fashion.

Not too difficult to predict

The story has been followed in earlier posts. It struck me that in the original merger between Boots an Alliance, the new board had a majority of former Boots executives. But the Alliance side was the more profitable, and Stephano brought with him a sizable shareholding and considerable personal wealth.

It was not difficult to predict what would happen. I noted earlier this year that

If takeover is successful, I am not expecting many of actual board members to retain their positions.

And so it has come to pass. Not brutally. But Pessina has enough power to be magnanimous. Mr Baker may not have had much temptation to stay on when the alternative was a £10 million incentive to leave, with more chances of securing a new leadership role elsewhere.

Leadership lessons

I’m not sure of the leadership lessons here. Perhaps it is that self-made billionaires are not all ego-crazed narcissists. Maybe absolute power is not always accompanied by absolute ruthlessness.


Alliance Boots takeover: An Italian Perspective

April 20, 2007

The Alliance Boots takeover appears inevitable and imminent. The role of Deputy Chairman Stefano Pessina has come under increasing scrutiny. We report the views of an Italian business executive.

[Friday April 20th 2000, Alliance Boots announce acceptance of the KKR / Stefano Pessina offer. other reports indicate that a second offer from Terra Firma, The Wellcome Trust, and banking group HBOS is underway. This post summarizes the exclusive ‘off the record’ comments of an Italian business executive made earlier this week. He suggests that a heady mix of personal as well as economic considerations are in play, as the Alliance Boots takeover reaches its final stages].

Generally speaking, Italians are highly emotional people whose associations are based on strong personal bonds. Business decisions can be based on personal sympathy or positive feelings in one-to-one relationships, sometimes overriding business logic. Pride, especially if related to family business which turned out to be a success, is also a key variable to consider. A lack of humility is not rare, especially for business people coming from Milan, the Italian business capital.

Stefano Pessina

He made his family business grow to the multinational Alliance Unichem. He successfully went through a series of acquisitions in Europe, where he was always driving the acquiring company. During one acquisition, he met Ornella Barra, who quickly became his most trusted ally.

The merger between Boots and Alliance Unichem ended up with the new Alliance Boots board of Directors mainly populated by formerly Boots managers. One explanation could be because Boots was large compared to Unichem. However, Unichem was far more profitable than the loss-making Boots. Even if Pessina was appointed deputy chairman with responsibility for post-merge integration, it could be argued than he felt for the first time “acquired”. This would be difficult to accept for a successful Italian manager, whose company was also more profitable than the “acquirer”.

Leveraging his influencing 15% share in Alliance Boots, strengthened by Barra’s shares as well, he is now ready for “revenge”. Private equity company KKR will support the offer financially. Of course, Pessina can leverage his position as an insider in assessments of due diligence and future company potential.

It could be also argued that Pessina has not met performance expectation for his post-merge integration role. This could be seen as deliberate, and now he can bid for the company at lower price and only later implement the significant changes, possibly with another board of directors …

Conclusion

Even if from the outside, it looks like a friendly takeover, I have the impression that internal tensions and rivalry are playing a major role. If takeover is successful, I am not expecting many of actual board members to retain their positions. This could be justified on business grounds, but I will assume also a great component of personal incompatibility …


War and Piëch at Volkswagen

March 29, 2007

Porsche makes a bid for VW. But it’s an offer they want shareholders to refuse. It may be a bid to secure VW for the Porche family through VW’s ex-CEO Ferdinand Piëch. Confused? It so, you may thinking competitive not collaborative strategy.

This week, the financial press reported that Porsche had made a bid for Volkswagen. But the bid was accompanied by a statement that the company intended to exercise its options to acquire a slightly larger stake in the company which would push its shares to the level where it was legally obliged to offer to make an offer for all VW shares. Porsche went so far as to indicate that their bid price under-valued the shares. Even if, for some reason, there were to be an offloading, the shares would be put back on the market.

Background

Volkswagen has been protected from a hostile takeover by a little piece of German legislation that has become known as the Volkswagen law. But recently, rulings in Germany indicate that the Law violates EU principles, and is likely to be rescinded.

This has opened the way to moves from overseas bidders. German auto manufacturers dusted-down Plan B.

This is where a little background on the complicated inter-relationship of German firms and government interests helps. Porsche has enjoyed a long and collaborative relationship with Volswagen. Its first models drew extensively from the engineering technology developed down the years at VW. Today it is considered to be VW’s closest busness partner.

VW chairman is Ferdinand Piëch, one of the legendary figures of modern German industry. Piëch is the grandson of Ferdinand Porsche. He was formerly chairman and CEO, noted for his aggressive (‘proactive’) leadership style. He was to be credited with developing the brands of Audi and VW, and reversed the fortunes of VW in America, although his moves for Bentley and Rolls Royce were less successful.

One source of his wealth is the 13% share of Porsche. Under that corporation’s rules, he is barred from a directorship as a member of the family. Although no longer CEO, he has enormous influence at VW, and is still chairman of its supervisory board.

AS we noted in an earlier posts, VW has suffered a number of bloody battles over its leadership recently. After several departures following corporate misbehaviors, chief executive, Bernd Pischetsrieder, brought Mr. Bernhard, a former executive at DaimlerChrysler, into Volkswagen in October 2004 as part of his plan to cut costs at the automaker. Mr. Bernhard pushed through plans, cut 20,000 jobs and extended working hours during the course of 2006. This upset the powerful Volkswagen union, IG Metall, which is also closely allied with Volkswagen’s chairman, Ferdinand Piëch. In Novemember 2006, Mr. Piëch, together with Porsche, a major Volkswagen shareholder, pushed out Mr. Pischetsrieder in favor of Mr. Winterkorn.

So what’s going on?

If we take Der Spiegel’s line, we have just witnessed one more chess move in the game billionaire Piëch is playing to secure the future of VW with himself in change.

Pischetsrieder hadn’t posed any significant obstacle in Piech’s path towards taking power at VW. But he was an inconvenience … Shortly after Porsche’s entry as a shareholder, the VW boss commissioned J.P. Morgan to provide an expert opinion as to whether it could lead to a conflict of interests if Piech, as a co-owner at Porsche, would look to promote the interests of the sports car company as a member of the VW board. The investment bankers recommended that Piëch resign. Pischetsrieder submitted this advice to the board. And with that, his fate was more or less sealed.

So there we have it. The septuagenarian Piëch still has an undiminished appetite for a ‘friendly’ fight. Remember the cuckoo in the nest principle noted at Alliance Boots?

There are also the unheard melodies. Chess moves considered and eventually rejected. These include the possibility of VW bidding for the increasingly vulnerable Chrysler business from Mercedes.

Meanwhile, globally the next generation of global giants in the auto-industry are emerging. Will they eventually replace the increasingly vulnerable American and European dynasties?


Stefano Pessina: Friendly insider at Alliance Boots (update)

March 13, 2007

The friendly bid for Alliance Boots could hardly be friendlier. It is led by the company’s deputy chairman Stefano Pessina, in conjunction with private equity giant KKR. Friendly as in Cuckoo in the nest? (Updated).

Update

The Economist (March 17th 2007) examined the likely acquisition of Boots (as it described Alliance Boots). It noted the on-going debate on the merits of private-equity firms, pointing out that Boots was benefitting from effective management, and that the case for change was unconvincing.

It took its characteristic free-market stance to interpret the situation, accepting the story that Mr Pessina had been prompted to act by the sluggishness of performance post-merger. In short, Mr Pessina was not so much a cuckoo in the nest, as a rational agent responding to an entrepreneurial opportunity produced by sub-optimal performance. It added primly, that Mr Pessina might have been partly responsible in that he had failed in part of his well paid job to explain to the market its under-estimating of the value of the company …

My Earlier Post:

The leap in share price tells it all. This week the Alliance Boots pharmaceutical and health-care company was talking to itself. Part of the board considered a ‘friendly bid’ put together by the famed private equity company KKR. Another part of the board, led by its own deputy chairman Stephano Pessina, was spear heading the bid. The rest of the board faction has politely responded ‘thanks very much old friend, but do you think you could possibly find some more cash?’. The shares galloped up close to the proposed £10 level.

What’s going on?

Ambitious company insiders are increasingly aware of the potential of private equity support to mount a bid for ownership. The benefits of such a bid are obvious. The inside knowledge makes due diligence a rapid and relatively risk free process.

In this case, the historical events might almost have suggested that such a takeover was on the cards. It has been less than a year since Alliance Boots was created from the merger of health and beauty retailer Boots, and drugs wholesaler Alliance Unichem. After the merger, the new company retained a board strongly representing the somewhat larger Boots organisation, but with a curious-looking side-arm for deputy chairman Stephano Pessina.

Stephano Pessina

Although difficult to extract the information from the company’s official web-site, Stephano is a highly successful Milanese entrepreneur who in effect is the owner of Alliance Unichem, and thus, a thirty percent personal stake in Alliance Boots. He was the force behind the conversion of his family firm to an international organisation. A nuclear engineer by profession, he is believed to be disappointed at post-merger progress in the newly merged firm.

Cuckoo in the nest

The debate about private equity companies continues. Influential journalist and blogmeister Robert Peston of the BBC has been to the fore in bringing the debate to a wider audience. In simple terms, KKR is but one of a growing and influential group of financial consortia who have been developing innovative means of acquiring companies and capitalizing on their assets. (It is already in the news in the UK for part of a Consortium interested in the Sainsbury retailing organisation). Opponents of such firms portray them as asset strippers, impervious to human anguish and long-term social goals. Supporters argue that they rescue firms from flabby and ineffective management and return them to economic health. Examples of both kinds may be found. What is clear is that the ambitious entrepreneur within an organisation has a new way of seeking to achieve personal ambitions.


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