Text Version of the Interview
Key principles for a Successful Acquisition
It depends on whether it's a vertical or a strategic acquisition or merger versus a horizontal one. There are some differences, and you need to conceptualize that at the starting point, as you think about even planning the activity of making it successful.
Understanding what the synergies and the advantage in the thesis that you're looking at as an acquiring company. You've got to have a fundamental strategic thesis, but I also think focusing on culture and leadership is really important, particularly if you're doing a vertical move.
When we bought Evercore for $3.6 billion in 2016-17, that was a vertical move for me. We were beginning to define ourselves as a health services company. It was a chance to visually create the transformation that we were working on strategically by adding something that was different to us. That was all about:
- Is that leadership team on board with this combination
- Can we keep them engaged?
- Can we help them help us deliver incremental value and look at what are we each bringing to the table ?
This required us to look at them as equals, even though we were buying them for $3.6 billion. They were our go-to-market strategy, so it is extremely important to understand their culture and leadership.
We wanted to buy a great team and lock them in. So we had incentives that we've never had before to motivate and keep that group of leaders. And it worked because all of them stayed for three years, which is almost unheard of and produced a lot of value for us.
The other one is I don't believe in buying crappy businesses and fixing them. I'd much rather buy a really strong business with a solid team, or if it's horizontal, a really strong customer base or a really strong geographic depth, and figure out how to integrate it without losing the magic that it brings to the table.
The other important thing is keeping focused on clients and customers of both entities through the process of merging, and really after the process of merging cannot be over-managed enough, and it simply can't be.
I've learned that it's easy to think about focusing on not wanting to lose the customers of the company you're acquiring because in many cases, that's why you're making the acquisition.
That's certainly why Express Scripts bought Medco. We don't want to lose all of our customers. Cigna buying express scripts, we had a wonderful book of health plan relationships that Cigna and I saw as an opportunity to grow health services.
Losing those customers would destroy the underlying opportunity to create longer-term value as you innovate. So there were two things that I cannot emphasize enough, and I often see the mistakes made.
One is focusing on the customers of the acquired company and the teams that support them because they're the ones those customers will listen to. Not the CEO, but it's the team they've been working with for years.
So you've got to start by convincing your new customer-facing employees that this is going to be good because their reputations are on the line with those customers every day.
On the flip side, you also got to make sure you pay attention to your native customers. The last thing you want is to focus too much on those incoming customers that your existing customers now feel like second fiddles and aren't as important as they once were.
Alignment with Leaders
If I look at the Cigna and Express Scripts merger, the recent one, what was really important was making sure that we nailed down the top team and that they all felt bought into being part of the new company and that's not easy.
Because folks look at their place in the pecking order, especially in my case, they had all been executive leadership team (ELT) members of a fortune 25 publicly-traded company. We were very proud of that.
Suddenly, in some cases you may not have been an ELT member of a much bigger company and helping people understand that and really focusing on the places they can add value, having them still be part of the strategic process, and so forth was really important to that. Because again, in our case, we didn't want to lose the leaders, and we wanted to keep them and then elevate some key leaders.
And the other thing that we've been most successful at is taking talent from one of the legacy companies and moving it onto the others and vice versa. There's also this cultural piece that we probably can go deeper on where intentionality around culture and values.
How to focus on culture
I start by validating the company's culture we just bought and validated the accomplishments. People are there for a reason, and when they're part of a merger, it's uncertainty, it's scary. They want to be understood, but they don't believe that they will be in many cases.
And that process starts long before you actually merge companies. In fact, it may even start before you begin the discussion of a merger, and it begins when you start profiling a chessboard.
I encourage every company to go deep in their pre diligence on culture, even things like reviews from Glassdoor. It can tell you a lot. It might not help excite you about the merger, but it will certainly help raise the right questions about the company.
I got asked that the Cigna folks at Express Scripts were well aware that we had been a company that rolled up its industry for 20 years. So we were brutal. I mean, we were a tough place to work, and everybody knew it.
Plus, we were taking costs out of healthcare, which is not easy work. And so, there was a little concern because Cigna's culture was very collegial, very planful. We were highly innovative, very focused, but very fast-twitch.
But I was put in to lead it because we needed to convert to organic growth. There was no more rolling up our industry in the PBM business. And so suddenly, we now had to be a place that can actually grow customer relationships, grow relationships with existing employees, we weren't going to be getting another slug of employees to evaluate and pick the best of.
And so, from that perspective, Cigna was deeply interested in how far along that path I was? What were the measures I used to measure engagement and employee satisfaction in bigger measures than just turnover?
And one of the real fortunate things in our merger was we found out we were using the same employee engagement device in the company, and so we were able to actually have a normalized perspective pre-close about the similarities and the differences in culture.
So it really informed our communication process and our leadership selection process and figuring out which leaders we need to lock down to be elevating, to have the employees see the kind of leadership that we were committing to.
Sharing of Cultural Analysis
First of all, we put our teams from the two companies together during the merger planning process and went deep on the data. Obviously, you've got some gun-jumping stuff you got to be careful with, but that stuff generally doesn't come afoul of it.
We wanted to be explicit, transparent, and clear with our entire workforce about this new company and what it stands for.
Where we sort of began to bifurcate the message values versus culture. Companies always have multiple cultures. You go inside of any given company, and there are subcultures. Those are usually adaptive and healthy in well-run companies, and you let those differences play out.
And the most classic is the technology folks versus the marketing folks. And they have different missions inside the company and therefore hire people with different biases, perspectives, and interests.
The bottom line is you can still share the same goal, but your subcultures are different, and you can negotiate that a bit, and we did. But values are harder because that's where words begin to really matter, and those aren't negotiable, and those don't get to be different across different parts of the company.
Cigna had a no-assholes rule. I think that's a great value. You can challenge ideas but don't be a jerk.
We had to reconcile some of the differences when it came to culture. Cigna was highly successful, very good at managing risk, probably not as risk-taking, and as speedy is Express Scripts.
Express Scripts, on the other hand, take more risks. Ready to pick a fight all the time because that's what we do to lower healthcare costs, whether with pharma or retailers or whatever. But you can't have them show up in values in how we work together.
I would also like to point out that the CEOs of both companies, myself and David, were deeply engaged in those working sessions. We didn't just bring staff work into our offices, and we literally were sleeves rolled up, debating certain words, discussing the order of things, debating how to best communicate it.
Because I do believe the chief executive officer of any company is the chief communication officer. And in that case, this was the most important thing we were gonna communicate. We could talk about the strategy all day long and the needs in the market.
Our employees were aware that. But what they want to know is:
- Who am I working for?
- How can I expect to be treated?
- Are the things really important to me in my sovereign state going to be equally valued in this new combined state?
We wanted to answer those questions with clarity and in a way that left no room for debate in terms of what we stood for. And so that was a crucial part of it.
It's imperative that you got to put it out there for all employees, but then you've gotta be ready to live with it because that's the risk, is you will be held accountable to those values once you put them out there.
Steps in Mapping out Culture
Values come first. When I look at deals that I didn't do, they were around values because we do a lot of pre diligence. So it was before any offer that was non-binding, for example, which would have then entailed some diligence and so forth.
Especially in today's world, you can't hide from your reputation. If you want to really understand a company, you've got to be discerning about what you can find out in the broad social media and other media sources.
- You probably have people working for you that you have worked with or for some of the companies you'd have on a chessboard.
- You would have folks that you work with, whether that be consultants or bankers who may have a perspective on folks,
- You can look at the movement of executives across the company over a period of time and assess certain things.
It requires a lot more work than most folks are willing to do, but that upfront deep profiling of the real opportunities that might exist on your chessboard, both the ones that are in the obvious zone and maybe the ones that are a little bit more creative is really important.
A year and a half ago, we did a deal with Amazon, and it was the first time they put their brand on somebody else's work and let us run their pharmacy for them. That was years in the making in getting to know one another.
So many mergers come from existing relationships, and Evercore is a great example of that. I acquired Evercore at Express Scripts, and the biggest risk I took was Cigna was their biggest customer.
But I actually saw that as an opportunity to build a relationship with them and maybe sell them other things. That's actually how the deal got started with David. David and his board were already looking at a services platform like their company; they like the culture of Evercore, I like Cigna's culture.
I saw them as a likely real buyer for us. There were several other potential merger partners for Express Scripts, but I wouldn't have stayed if one of them had acquired us. I am very concerned about the creation of value long-term and alignment.
From that standpoint, we both been looking at each other through the lens of not only business strategy, but through the lens of:
- I like the way they focus on the market
- I like the way they focus on customers
- I like the way they focus on patients
You can't be lazy at the early part because if you do your work upfront in your diligence, it's confirmatory diligence to a much larger extent, but it's informed diligence.
Questions to better understand the culture
Whether you are acquiring or being acquired, it's the same conversation. Unless you're just trying to exit a unicorn, you actually want your employees to land well. You want the thing to succeed, and you probably have some sort of financial incentive for the thing to succeed.
So the first thing is to understand value creation. The other thing is to appoint excellent executives to take the lead on key things. As a CEO, you have to be the one driving the deal; there is no delegating that. I learned very early on that if I'm not the chief cheerleader for that deal, my board will not go for it. Didn't matter how much my team wanted to do it.
Appointing key people that you can count on, that is going to carry the narrative forward, that are going to execute pieces of the analytics, including the culture piece, is really important.
One of the things I fought over many years was, don't be helpless just because you are on the bought side of the equation; you're being bought typically for a reason. They want you to come to the table, bring your ideas, and don't just wait for them to tell you what to do.
So often, folks crown to their shells, and my job as a leader and David's job was to get our people out of their shells and move forward and focus on the market and create immediate opportunities.
We've launched three new products 90 days after the merger, and that was not by accident. We wanted to send a message to our employees and our customers, and we were open for business and moving forward.
Common Mistake in Culture
One is over-promising. I stepped into one acquisition where the CEO of the acquiring company had promised nothing would change. You should never promise nothing will change.
People expect you to change things. In some cases, they want you to, but they want you to be honest about it, transparent about it and get going with it. I think the other piece is waiting too long to make changes you know that you got to do.
People don't gain faith during that process; they lose it. But if you've done a good job with a narrative and a theory upfront, the party being acquired could be excited. As in Express Scripts, we knew being part of a health plan would be good for our future.
The number of employees two or three layers down has sent me emails, excited as hell about being part of Cigna and what that was going to mean for us.
But what you couldn't ignore and what I had to over-manage is the first two layers cause that's where all the uncertainty was. I mean, our customer service reps will keep doing what they were doing, and their jobs weren't going to change a heck of a lot.
They just knew that they were now part of the company that probably had a brighter future because we had a bigger health plan.
But the person who was responsible for our clinical decision-making now knew their job and who will they report to will change. So managing that group's messaging and engagement, the first two layers underneath the CEO, is much harder than the broad workforce.
And so again, we spend a lot of time communicating to the broad workforce. I think as much time needs to be spent, just engaging and keeping a gauge that top couple of tiers and to be honest with them.
Remove uncertainty as soon as you can. Recognize not everyone is going to probably be able to stay. And get that process solved as quickly as possible.
I think the other mistake I've seen made is implementing HR systems too quickly and there are several flavors around that.
One is you simply say, all these employees got to be on our benefits. It's almost inevitable, and it's like an extra print. Whoever I bought their benefits were cheaper than mine, which means it would cost me money to put them on our benefits.
In many cases, those employees had the benefits they had because of either local differences in benefits or because the industry they were in may not have the competitors, just didn't have that same benefit.
And that's what you should benchmark your benefits to - your local piece and then the competition for labor from an industry standpoint.
And I've seen it where HR would just come in and integrate everything without any strategic thinking and raise your cost basis a ton. That will erode synergies a ton, and frankly, not get a lot for it.
The flip side is that more hardened HR departments will want to force people's titles into the acquiring companies rubric. I don't recommend that, and there's no price for doing that quickly at all. And it usually doesn't end well.
So the communications you can't do enough of too quickly, just be specific, be really honest and transparent.
The HR staff, take your time, be thoughtful. Do your diligence really well. If something's going to cost you money, put it into the diligence number, so you're not trying to find it after the merger.
The story about Cigna acquiring Express Scripts
Let's get into some context first. Express Scripts had just been told by our largest customer that they were not only leaving us but also suing us for billions of dollars for lack of performance in a contract, based on what they assessed.
We knew we would win that, but we were about to lose our large customer. That customer comprises somewhere between 20 and 30% of our operating margin.
We were still going to be a fortune 30 company when they left. So we would be fine. And my job of helping our employees stay focused was probably more important than my job, even with the investors.
Nevertheless, we were looking to somehow backfill some capacity that a large customer leaving over a two to three-year period was going to create. So I was looking for a white label deal, Cigna looked natural.
Cigna was always on the game board, but we had not activated it tremendously. Then when I bought Evercore, it brought Cigna back into the view, and that was my first meeting with Cigna.
On the other hand, Cigna had just failed a merger due to regulatory issues. So both of our companies, for different reasons, we're a bit shell shocked and a little bit not wanting to be in the press for something that wasn't going to work.
The last thing David wanted was to try to do another deal that wasn't gonna work because he just put his people through a really difficult two-year period. The last thing I wanted was a narrative on the street that my company was for sale and that we were somehow damaged goods because we lost a major customer.
So in that context, we both want the same things:
- No leaks.
- Fast resolution to a decision of whether we should merge the companies or not.
- We need to thoroughly understand the regulatory environment to make sure that we don't have a foot fault there and announce something that we can't actually close on because of regulators.
- We better know our shareholders well, and hopefully, we're guiding them along with a narrative about where each company is heading.
If all of that is taken care of, speed can actually happen. And more importantly, you can get into the real substance of depth, which is what we did to understand the deal.
So I first sat down with their CFO and a couple of his colleagues, and the idea was to talk about our capabilities and their need, white-label deal possibly. We have reached out to them through our sales channels. I actually didn't know David, and we didn't have a relationship.
Then we had dinner, David was there, and we got to know each other. We talked a lot about the role of physicians, our specialty, etc.
December 7th, David and I had dinner together, and I told him we could do something for him. He said he wanted something bigger, and I had that idea, but I needed David to say that because I didn't want to seem too eager to sell.
We were also doing good, so we were not in a rush. Interestingly, the conversation at that table was about regulatory and customer overlap. The good news was I only had a few health plans customers that viewed Cigna as a competitor. So the overlap between us was good, which means we are really expanding reach in the market for both companies.
We also talked about which bankers leak and which bankers we wanted to use to move forward. We also agreed speed would be of the essence.
My challenge was I had a board that saw speed as a potential risk because, again, the stock price was just rebounding. And so, managing a board became very important from both CEOs' perspectives.
David's board obviously had just had a failed merger, and my board did not want to have a fire sale after our largest customer left. We still believe that we had a very high intrinsic value in the longer term. My job was to convince David and his board back.
So every meeting from then on was super secretive. You would not believe the locations we were meeting. And we have a super small team. At that point, I had hired an investment banker, and we offered a four basis point, no-leak bonus.
And at the JP Morgan Conference, David and I met in the backseat of my car. After my driver got out, David gave me the first offer for the company. I looked at it and told him I would talk to my board about it, but I wasn't excited about it, but that I thought there was still strategic validity in what we did.
I counter with something that David needed to spend some real-time digesting. One of the things I did in the deal was I asked for a large, $60 million contribution to the Express Scripts foundation because I told him if we do this merger, St. Louis has been left behind.
When companies have merged and the headquarters have been moved, we needed to send a message to the employees of this combined company that we will stay engaged and we have we've delivered on that promise.
Come February, our private jets meet in Dodge City, Kansas. I got into his plane, and we talked for a good hour, discussing strategy. We talked about where we were at on the numbers. David gave me his final offer, I asked one question about it, and we shook hands.
I had to talk my board through some concerns about Cigna. And then, from March until December 20th, when we actually closed on the deal, we went to work and put our teams together.
And again, during that period of time, you can do an awful lot of good to get out of the chute strongly, which is what we really felt the need to do.
And so while David and I spent a lot of time with investors and dealing with regulators, we had teams that were doing everything that wasn't gun-jumping but really being planful about the culture and talent and day one activities.
We never had leaks, so the investment bankers got their money, and the shareholders overwhelmingly approved the deal in August 2018. And then we just moved through the regulatory piece.
The good news was the key people were super focused on growing the company and delivering value to the marketplace. In fact, that merger was one of the best years I have ever had.
Folks stayed focused on our customers, stayed focused on our patients, saw that was part of the vision of the combined company was to come out in January. We delivered on our individual promises before we began to deliver on synergies, and it also showed our existing customers in both companies that we were not losing focus.
Presenting to the Board
In my case, I didn't have a split board, but I definitely had a board that had a different opinion. Some thought we were worth more than 97.50 a share. If we just sat still, maybe we could even acquire something else. We had done a good job finding and acquiring Evercore. They had confidence in my leadership, thankfully.
The flip side was I had some board members looking at David's offered prior to 97.50 thinking, you know, given that we were at 55 and the loss of our large health plan creates uncertainty. This is a certainty, and this is good for our shareholders. And so forth.
And so there was some real debate. I actually hired a second investment banker to ensure every one of my board members understood.
And my job was to make sure the deal and the opportunity set were framed both strategically and financially so that we could move the debate to the things that mattered because there's a lot of emotion.
Another attribute of this deal that's fairly unique is the boards never communicated or met. David and I did this entire deal between the two of us. We each had the confidence of our board, and we each were doing what we had to do to manage our board.
In my case, I didn't want David to even think I had a split board or a board that might be more anxious than not. My job was to make sure that I represented all my shareholders with an asset valued fairly.
David's job was to make sure that obviously, that he got what he paid for. And so from that perspective, his board trusted him, my board trusted me and when David and I shook hands, there had never been a meeting.
And the last thing that I want to tell you about is trust. David and I built trust through those months that I told you about. And I did some intentional things, and I think one can be intentional about building trust.
There was a point where one of my bankers told me that David thought I was parallel negotiating. And in some respects, it would have been good for me to have David believe that; maybe it would have made him more nervous and so forth.
But I picked up the phone, called him, and told him that I wasn't. I gave him my word that this was the deal that I wanted, and it was a huge trust builder. We never blew an appointment time for a phone call or something else. I mean, simple things like that.
That made all the difference in creating the hearts and minds that ultimately came together in December of 2018.
Biggest Challenge in the Deal
The significant challenges are always cultural.
In a situation like this, I would recommend physically sending to St. Louis a full-time super senior HR leader to help back and forth with translation would have been very helpful.
We had a really good person engaged, but he was part-time; he lived in the Northeast rather than St. Louis. So he dips in and dips out.
It is so hard to do because you have to map the differences in all the HR systems and processes. And find the alignment for all of that in a way that people feel engaged in and part of, rather than just have it done to them.
And I think we lost some of that opportunity early on, and it took some time to recover. We were fortunate, and we kept most of our leaders though. Our retention in this deal has been very high because the vision was so clear.
I mean, David and I did get that part right. David really got it right. But I think the HR thing is where these things are more than likely going to live or die. The financial thesis will always be sort of approximately right. The market need, if you've got it understood where I was to be approximately right, it all comes down to the people.
And again, I just think as much as we did, we could have even done a bit more there.
What do you think made the deal successful
A lot of preparations. The things that we did in that period of time before the closure that kept us in good standard customers kept us in good stand with our employees, help folks understand what we're going to do.
Got them excited about launching brand new products into the market. Products by the way required both parts of the platform. I think that's the really magical pieces is we showed the promise of the thing really early to everybody, legislators, customers, employees.
Role of CEO
You've got to be the chief cheerleader. You've gotta be the chief communications officer. You gotta be the chief strategist. You've got to be the one that keeps your board excited, and so forth.
Any blinking that I would have done that deal would not have been approved by my board. And I think that's true of this merger. I think David's board never saw David blink, and my board never saw me blink. And so, I think your role is you have to be owning and driving.
The three of the best deals in my career are the three I didn't do. That was my big learning is as the CEO, you have got to believe it. It's not sufficient that your people are excited. You have to internalize it. You have to spend the time on it. You have to own it.
Leading people to embrace the acquisition
I was not a micromanager, but I was certainly a hands-on CEO and I wanted details, and I wanted to ask questions.
When you're looking to spend your shareholders' money or your investors' money on something that theoretically should add more value than doing something organically, you better believe in it, and you better have gone deep on it yourself as a leader.
It's really important to force people to think deeply and talk about the negatives.
- Why this won't work.
- How should we mitigate
- Let's talk about the cultural differences now
They're not going to get easier to manage once we sign the deal. See how people thought things through and how committed they are to it because no matter how committed you are as a CEO, you won't succeed if your team's not committed.
Walking away from a deal because of culture
I walked away from one that my board was actually interested in. My team was really excited about, and the reason was that they had a culture, specifically a culture that was known to be very loose from a regulatory and compliance standpoint.
They were touching patients, and it was known that they were just "cleaning up" just to get the company sold.
And so I had dinner with the CEO and asked him how far along they are in the "clean up." He said 70%. The deal died at that moment for me because I thought I was not going to be smart enough to find the 30% that's too hard for you to fix.
We passed on that deal, and I've watched that acquisition, subsequently, become a value destroyer for the acquirer. And I'm not saying we definitely shouldn't have bought it at that time, but if we would, we have to have our eyes wide open to the challenge ahead of us. But we didn't have the bandwidth to do that at the time.