Wednesday, February 24, 2010

Smith International as Buyer and Seller

That's a big deal — Schlumberger's acquisition of Smith International for $11 billion, announced on Feb. 21. It would be the largest acquisition in the U.S. so far this year, according to the Wall Street Journal's report on the transaction.

Smith International is a company that came to the attention of Directors & Boards almost 30 years ago. In 1981, Warren Bennis, then and still a guru on leadership and governance, visited with Jerry Neely, then the CEO of Smith, for a conversation on "Keeping the Entrepreneurial Spirit Alive," as we titled the resulting Q&A article. Bennis found much to admire in Neely's management practices and in Neely himself as a personable CEO, and we shared their informative exchange with the journal's readers.

You always read horror stories of companies botching up acquisitions because they want to make wholesale changes with their new purchases — which causes the sellers, the very people that made the company a worthy purchase, to bail out. Well, that seems to have been something Neely was quite keenly aware of and determined not to do as he grew Smith. Listen in to this exchange between Neely and Bennis:

Neely: Interestingly enough, in most of the companies that we acquired, the presidents or the owners stayed on until they retired. We tell them, "Look, you are selling your company, but we want to preserve your entrepreneurial spirit. However, in order to grow, we think that certain things have to be done. Can you live with that?" And if he can't, we don't want him or his company.

Bennis: You wouldn't just say to him, "Look, you're through, and we're going to put our personnel in there."

Neely: We have done that twice and failed miserably both times. I don't think that you can buy a company that feels right, or that appeals to you, then change all of the structure and hope to run it better yourself. A lot of people like to think they are turnaround specialists. I guess there are those people, but I haven't really seen any of them. I look with a jaundiced eye at people who say they can turn a company around. So, as a result, we try to keep people on board.

As the M&A market heats up, which it is, as this deal for Smith demonstrates, this seems like awfully good advice that holds up after all these years. Perhaps today's management team at Smith will benefit from this enlightened approach, presuming that this policy is embedded in Schlumberger's M&A strategy.

Jerry Neely, who started with Smith in 1966 as a plant manager, retired as chairman at the end of 1988 and stayed on the Smith board until 2007. He continues to serve as an advisory director of the oil tool manufacturer, and is also on the advisory board of Arenda Capital Management, among other board affiliations. [Illustration of Neely that appeared in the 1981 Directors & Boards article]