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I read your editorial "View from China" (November 2005), and found it long on opinion and short on facts. What in the world does Hurricane Katrina show about U.S. business other than that it was more responsive than the U.S. government? U.S. business responded both swiftly and with great generosity. I cannot imagine any Chinese business (or China's government, for that matter) showing the level of compassion that U.S. business exhibited during the storms. You fail to make a distinction between U.S. business and the U.S. government. I am not sure how you fail to make this simple distinction. I hope that Chinese business is capable of such a simple distinction.
The reality is very different. China's exports to the United States are a testimony to the willingness on the part of U.S. business and government to trust a nation that has been openly hostile to America. The current trade deficit is one area where Congress has been more than patient. U.S. business has also been more than an advocate in trade talks. This is much more than you can say about China's ability to demonstrate trust.
Tom Leander, editor-in-chief of CFO Asia and CFO China, responds:
The editorial did fail to draw a distinction between the actions of the U.S. government and U.S. business in the Katrina crisis. But the oversight reflects a common point of view about America — overseas among Chinese observers and elsewhere. Americans may think quite highly of their nation's ability to separate politics and business. But many Chinese would tell you that that's a veneer, and underneath America is a little like China, featuring a high degree of protectionism and with its military and government tied up with its companies. They would cite Halliburton and Enron as examples. It's important for Americans to be aware of this jaundiced view.
Adding Value Where It Matters
I enjoyed "Striking a Balance" (November 2005). As a former finance executive who subsequently went on to lead the supply-management organizations in two large companies, I'd like to share a few more ways that finance can add value where it really matters.
World-class procurement and supply management offer the potential for enormous top-line and bottom-line benefits. In fact, some of the biggest success stories in business (for example, Procter & Gamble and United Technologies) possess a major supply-management component.
To maximize the business benefits that can be achieved with procurement and supply management, however, your supply-management organization cannot work alone. Finance is often the most important internal "partner" with the procurement or supply-management organization. That partnering typically involves an active collaboration on such topics as: (1) managing commodity risks; (2) sponsoring and staffing strategic sourcing teams, often with embedded members from finance; (3) establishing a credible methodology for calculating and reporting benefits from sourcing initiatives; (4) implementing means to ensure compliance with new contracts (good for Sarbanes-Oxley, and good for eliminating inefficient and costly "maverick spend"); (5) devising ways to adjust budgets at the cost-center level so that sourcing successes have a chance to make it to the bottom line (and are not automatically spent on other things); (6) pursuing working-capital initiatives, such as improved payment terms, supplier inventory programs, and "asset recovery" programs; and (7) evaluating new supply-management tools and technology, and building a credible business case to take supply management to the next level of performance.
The bottom line is that world-class supply-management organizations are typically measured against aggressive objectives that directly relate to substantially improving business performance, especially return on invested capital. In that high-
performance environment, the finance function is an ideal and valuable business partner.
Robert A. Rudzki
Greybeard Advisors LLC
Practice Makes Perfect
"Secrets of the M&A Masters" (September 2005) was a concise and on-target summary of the latest thinking on how corporations should structure and run an effective, focused in-house merger-and-acquisition effort to help advance their overall strategic and growth objectives. Call it the emerging professionalization of the corporate M&A function or, more simply, "practice makes perfect."
However, there are several important limitations to the applicability or even appropriateness of what the article calls practical deal-making guidelines to the M&A efforts of many companies. First, even in today's superheated global M&A environment, there are not that many industries where companies can become serial acquirers of smaller entities. Most companies in the United States and abroad will never execute the number of deals over their entire corporate lifetime that a General Electric or a Cisco Systems does in a year. For a number of reasons, companies like GE and Cisco run corporate acquisitions as simply another core line of business. They do deals for a living, not unlike private-equity firms; they had better be good at it.
Second, the rules that apply to buying other companies are qualitatively different than those that apply when you sell. In addition to requiring different skills, selling a company or a division is intrinsically disruptive to the corporate status quo in ways that tend to short-circuit carefully designed controls and procedures. Note that private-equity firms — whose only business is buying and selling companies — rarely rely on investment banks for M&A advice when they buy companies (even though they do credit them on deals in exchange for financing help), but they almost always use them when they sell.
Third, the fact that serial acquirers do lots of acquisitions that are small in size relative to the existing business (think GE and Cisco again) means that by definition there is less at stake with each deal. One should expect overall returns to be smoothed by the aggregation of deals with good, great, and mediocre outcomes as well as the occasional lemon. No company, however well organized or experienced, can control for all potential factors in the success of its M&A deals. Therefore, companies that do only one or two acquisitions a year (which is still pretty active relative to most businesses) are much more exposed to unforeseen outcomes and bad results, regardless of the robustness of their M&A procedures.
M&A tends to be, if not a once-in-a-lifetime event, at least a rare, transformational kind of process that changes a company in drastic ways. M&A is often a bet-the-company kind of transaction. In those circumstances, passions run high, the stakes are huge, and even the best-designed system can break down under a welter of internal political and managerial crossfire. This is one important reason why external M&A advisers will never disappear: there will always be a need for experienced M&A professionals without internal corporate agendas who can help the management of a company negotiate one of the most important events of its corporate life.
Henley Advisors LLC
In "Crime, Punishment, and Relief" (Topline, December 2005) we reported that the Department of Justice had reached a deferred prosecution agreement with KPMG International when in fact it reached the agreement with KPMG LLP, the U.S. member firm.