Nasdaq to Acquire Phil-Ex for $652 Million
Wall Street Journal, November 7, 2007
When my boys were young, they liked to bowl. Julia would take them to the local lanes, rolling balls and knocking down pins. I’ve never been much of a bowling enthusiast, but there is one simple lesson I did learn: Aim for the center pin or, even better, just to the right or left of center. Years later, I would find myself repeating the same instructions to my executive team—only this time, the bowling alley had become the much higher-stakes game of mergers and acquisitions.
When evaluating a potential acquisition, I told my team, let’s make sure that we don’t jump too far from our existing strengths—which included transactions processing, running efficient exchanges, and trading technology. I was fine about expanding through acquisition. But I didn’t want Nasdaq to become a disparate collection of barely related companies. I wanted us to grow, but not indiscriminately. I valued integration and alignment, two things that become harder at scale. One bowling pin to the right or left of that center was fine. Over time, our sweet spot would expand. But we should be very careful about trying to knock over pins outside that frame. We could very quickly end up in the gutter.
This was not always a popular approach. In the financial markets at the time, the equities business—our central bowling pin—was not the sexiest. Derivatives were all the rage, as those were higher-margin businesses. For those not familiar with derivatives markets, I’m referring to exchanges that trade contracts whose value is based on a “derivative” of an underlying asset. Trading futures in soybeans is one example. Options are also types of derivatives based on the value of the underlying stock. CME (Chicago Mercantile Exchange) and ICE (Intercontinental Exchange) were (and are) the most prominent derivatives exchanges in the country. At the time, their success put pressure on us to expand our business to compete in those markets. I had nothing against derivatives, but I didn’t want to chase margins in businesses that were too far from our core strengths. I was very disciplined with my team about our strategy.
In Good to Great, Jim Collins writes wisely about the use of acquisitions in building a great company. His key piece of advice is to be wary of using an acquisition as a distraction or a crutch, or a way to “diversify away [from] troubles.”1 Companies truly making the good-to-great transition, he observes, are able to use acquisitions to supercharge an already established, successful, and disciplined strategy. At Nasdaq, this was the approach we took. We knew our core business and our foundational strengths. Acquisitions became a method of building momentum in those areas, not diving into completely unknown businesses outside of our sphere of expertise.
A perfect example of that strategy was our purchase of the Philadelphia Stock Exchange (known as Phil-Ex) in 2007. It was actually the oldest exchange in the United States, founded in 1790, and the third-largest equity options exchange in the country. It was in our sweet spot, one bowling pin away from center. When Phil-Ex shareholders decided it was time to go public or sell the exchange, a bidding war ensued between Nasdaq, NYSE, and a couple of other exchange consortiums. We came out ahead. We paid well over $600 million for the exchange and outbid our competitors, but I was confident in the value we were getting.
Why? We did our homework. First, we had already experimented with equity options internally, allowing us to learn the business from the inside out. Second, we used sophisticated analytics—“big data,” in today’s parlance—to give us insight into the Phil-Ex market. When it comes to bidding wars, knowledge is power. Phil-Ex revealed itself in our models to be a stronger and deeper market than our competitors perhaps realized, hence our higher bid.
During my tenure at Nasdaq, we did more than forty acquisitions. Some were for technology (like the transformational purchase of Instinet), some were to expand globally (like the merger with OMX), some were to move into related markets (like the purchase of Phil-Ex), and some were for market share (like BRUT). I insisted that the acquisitions we did must be accretive to our Earnings Per Share (EPS) by the end of the first year. They helped Nasdaq grow into a dominant national exchange and a significant global one. We prided ourselves on doing them well, and I learned a lot in the process. In truth, however, this was the continuation of an education that had begun long before I accepted the CEO job at the exchange. My former employer, SunGard, built itself largely through acquisitions, which opened my eyes to the possibilities. By the time I left, I had learned a great deal. I brought that knowledge with me to Nasdaq, where I was able to hone it and put it to the test on a much bigger scale. Over time, my team and I became real experts on the subject, especially when targeting other exchanges. In the early days, we were particularly adept at transforming fat, manual, labor-heavy exchanges into fast, lean, efficient, scalable, technology-centric trading enterprises. Later on, we became primarily focused on technology-based acquisitions.
I called this strategy “leveraging the mothership.” We had developed the top technology platform in the cash equities universe. Now we could leverage it by acquiring other exchanges and integrating them into the Nasdaq transactions business, using our considerable technological know-how and deep understanding of the business of exchanges. Indeed, in one busy period of about a year from 2007 to 2008, we acquired three exchanges in addition to OMX—the Boston Stock Exchange, Phil-Ex, and Nord Pool (a Nordic energy exchange).
Acquisitions were a critical part of Nasdaq’s growth strategy. Part of our effectiveness was our technical proficiency. Part of it was our discipline. But I also believe some of our success could be credited to our capacity to understand the opportunities and mitigate the risks associated with any acquisition. Acquisitions can add tremendous value to a company and supercharge growth. But they come with inevitable risks and potential minefields.
Evaluating Acquisitions: The Four Elements of Risk
I believe that there are at least four elements that must be taken into account when considering the risk-reward profile of any given acquisition and the potential challenges of effectively integrating the newly acquired company.
1.Core Business Risk. The further a proposed acquisition is from one’s own core business, the greater the risk. That shouldn’t be surprising, but it’s something to take very seriously. As Nasdaq, equities exchanges were obviously in our sweet spot. That was our business and we knew it well. Moving away from that business—into, say, exotic financial instruments or other types of nonequity derivatives—would add risk to the acquisition. We didn’t have the internal intelligence to evaluate those businesses with the same degree of accuracy. Again, it can work, but the further you venture away from your core business in the acquisition target, the more risk you are taking on board.
2.Geographic Risk. The further a proposed acquisition is from one’s geographic center, the greater the risk. Today’s business world is global, and communications technology has brought us closer together, but geography remains a factor to carefully consider. Buying a business on a different continent with customers thousands of miles away is inevitably more complicated and risky than buying a business just across town. That’s not to say that mergers between geographically diverse organizations cannot work well. Our merger with the Nordic-based OMX proved to be a resounding success. But I was fully aware of the increased risk and the challenges we would face because of distance.
3.Cultural Risk. The greater the cultural difference with any proposed acquisition target, the greater the risk. There are at least two aspects of culture that must be considered: the internal business culture of any given company and the local culture surrounding any given company. Often in acquisitions, a company ends up taking on board a very different business culture. That creates potential problems. Trying too hard to combine and balance two distinct business cultures is a recipe for trouble. Obviously, transforming business culture is not as easy as flipping a switch, but as a general rule I think companies need to have one overarching business culture. More than likely, the acquiring company will need to impose that—to establish clear principles and expectations. That should be done early and often after an acquisition. There should be no confusion about what business culture is going to predominate. But there is one caveat to that advice when it comes to local culture—the national or regional traditions in which the company is embedded. Don’t overreach and start stamping out the distinctive flavors of local culture. Those are natural and important, and there’s no reason not to make space for them. I was happy for the OMX team to find ways to express their local culture, which was largely independent of the business culture we were working to establish.
4.Size and Head-Count Risk. The greater the size and head count of a proposed acquisition (relative to one’s own company), the greater the risk. Size equals complexity. Much of that is simply head count—with great numbers of people come greater numbers of issues to be navigated. But in most cases, size also means activities spread across more businesses, more regions, more markets, and so on. When an acquired company is bigger than your own, you also need to consider the cost and complication of the managerial infrastructure needed to deal with the larger head count. This also means that cultural mismatches will inevitably be harder to accommodate. Indeed, when you more than double your head count overnight, don’t underestimate the demands of integrating the company. In a very real sense, the size and head-count risk compounds other risks. It makes everything more difficult and uncertain. That’s not to say it’s not worthwhile, but as the risk profile of acquiring a company ratchets up in any given scenario, it’s important to make sure the corresponding potential of the reward does as well.
All of these were risks I carefully weighed before each of Nasdaq’s major acquisitions. They helped me to assess the wisdom of buying any particular company, and they also helped me to look ahead, down the road, and prepare for the challenges that I would face once the deal was done. When a long and difficult negotiation like the OMX deal finally comes to an end, it’s tempting to breathe a sigh of relief and pat oneself on the back. But the real work has hardly begun. Too many companies do a merger but then don’t really do a successful integration. Without that extra element, you don’t get the full benefit of the merger. I always found that in order to get employees to buy into the vision of a new, combined company—and benefit from a higher level of engagement—you have to start to “feel” like one company. Otherwise, you’ll never get that higher level of “buy-in” from the various teams. That requires real work at integration. It demands clear leadership and smart management skills. The OMX integration was a real test of everything I’d learned in the various chapters of my business career.
In Search of Vikings
“Magnus, we need to find the Vikings on your team.”
Magnus Böcker, former CEO of OMX, laughed in his easy way. “There’s one right there.”
He was pointing at Hans-Ole Jochumsen, who was just teeing up on the sixth hole. The light was spectacular on the golf course, especially considering that it was midnight. We were meeting for a few days in Iceland, the top executives from both Nasdaq and OMX, and working on the postmerger plans for the two companies. The Nasdaq-OMX company actually owned the Iceland Stock Exchange, and it seemed a good in-between place to convene an executive retreat. With its location near the Arctic Circle, Iceland also offered a unique sporting opportunity during the summer months. It was easy to work long days, and with ample light lingering late into the evening in this “land of the midnight sun,” nighttime golf is a popular activity.
“Okay, great. That’s one. It’s a start.” I laughed. Magnus, more than others, always seemed to bring out my lighter side.
What I meant by “Vikings” was simply those OMX employees who were intense, competitive, and ready for change, who wanted to embrace the Nasdaq approach and move forward with us into the future. Overnight, we’d become a larger, more diverse, global company, and I knew it was critical to integrate at a cultural level.
Just as I had done in my first weeks at Nasdaq, I met with the team in the Nordics and delivered a clear and unequivocal message: We are remaking this culture. It is going to be hardworking, performance focused, lean, efficient, profitable, and growth oriented. I told them that we would respect their local culture, but Nasdaq would define the business culture. I understood that for some of them, this would not be the business culture they desired or the one they had signed up for. That was perfectly fine. I encouraged people to self-select and move on. There was no shame in this. It wasn’t their fault that the company culture was shifting.
I enjoyed my time in the Nordics and grew to love both the cold climate and the warm local culture. I also learned that the business cultures are far from homogeneous among the Scandinavian countries. For example, the Swedish business culture has a long history of producing big industrial companies—Ericsson, IKEA, Volvo, and so on. Danish business culture, on the other hand, is less industrial and known for producing traders and negotiators—perhaps due to the country’s geography, situated between several different economic centers and closer to continental Europe and Germany. While such cultural generalizations must always be taken with a grain of salt, it was also true that the person I came to rely on to run the Global Trading and Market Services business at OMX was Hans-Ole Jochumsen, the highly capable Danish “Viking” Magnus had pointed out on the golf course. Hans-Ole became a critical part of Nasdaq’s executive team and ran European transactions at OMX for Nasdaq after the merger. Eventually, he ran global transactions and later became President.
Some stereotypes about Nordic culture are true—at least partially so. Our Nordic friends tend to be more consensus driven and communally focused. Those qualities are neither good nor bad. Like all cultural tendencies, they have upsides and downsides—the key is to maximize one and limit the other. Nordic cultures also have safety nets that would surprise Americans. They do take long vacations in the summer, like many of their European neighbors (six weeks is the average annual vacation time).
Despite these differences, the Nordic team was far from incompatible with American business culture. Over time, in many ways, they imbibed the Nasdaq culture as well as the Americans. Our postmerger experience certainly gave the lie to any idea that Nordic cultures lack entrepreneurial drive. In the end, we did find our Vikings. They have drive and business intelligence, along with an international sensibility. And they have truly been a great blessing to Nasdaq’s business fortunes.
Learned Knowledge vs. Lived Knowledge
One of the great advantages of growing through acquisition is the opportunity to eliminate overlapping cost structures while increasing revenue. By integrating and streamlining the businesses, you can cut costs quite significantly even as you grow. My team was very good at doing this, but before they could go in with the scalpel, I always cautioned them to go slowly and ensure that they truly understood the company we were about to remake. Before you start cutting costs, you’d better understand exactly what makes the business tick. Before you try to make it highly efficient, you’d better know what makes it effective. Otherwise, your well-meaning efforts at improving efficiency can be remarkably counterproductive.
Effectiveness before efficiency. That was one of my mantras. It’s easy to get carried away in spreadsheet simulations, plotting the synergies and savings that are possible. But that’s only learned knowledge, not lived knowledge. Lived knowledge comes from actual experience running a certain type of business. Lived knowledge allows you to see around the corner and know what obstacles might present themselves. Learned knowledge allows you to logically connect A to B, but it doesn’t allow you to extrapolate the nonlinear trend line, to anticipate the bumps and curves. Both kinds of knowledge are valuable, but when you confuse the two, it can get you in trouble. If you try to make big changes to a business based solely on learned knowledge, it’s easy to make equally big mistakes.
When you’ve just acquired a company, it’s important to balance the fresh perspective you bring as an outsider with the seasoned experience of the insiders. I applied this advice to myself when considering one of OMX’s large technology development projects soon after the merger. It had a big budget: more than $100 million. And it seemed to be going nowhere while still burning cash. I was itching to shut it down, but first I asked around. I wanted to make an informed decision and not rush to judgment. Maybe I didn’t fully grasp its importance. Interestingly, it was almost impossible to find any defenders of this initiative. Yet it was still weighing like a stone (as a capitalized development cost) on the balance sheet. In the end, after due consideration, that particular project couldn’t be justified, so I felt confident in pulling the plug.
Managing a Global Enterprise
Of course, there are limits to how far one can delve into the details of a fast-growing global business and still be an effective CEO. But that’s a hard lesson to learn. It’s a common sin of CEOs—getting lost in the details at the expense of the larger picture, wanting to be the best in the room at everything, and not letting good people do what they do best. Master-of-the-universe types find it hard to believe that they don’t know better. However, the opposite attitude can be equally problematic: flying too high above the ground (sometimes literally, as in cases where a CEO spends too much time jetting around on the company plane) and losing sight of the important operational realities of the business. As a company gets larger, it becomes easier to fall into this trap. That is why I tried to stay as closely connected as possible to the performance of all of Nasdaq’s business lines. “Bob never forgets a number” was a common refrain among my team. I hope it was true. If someone told me that they would hit a certain P&L target, my intention was to hold them to it.
I have found that the best executives become “player-coaches”—able to call plays from the sidelines, but never forgetting how to block and tackle. They learn how to delegate wisely but retain a level of direct knowledge about the businesses they oversee. For a good CEO, that means finding points of leverage that allow you to keep tabs on the business units, have a real impact, without losing touch or getting bogged down in the details.
For me, the acquisition of OMX represented a sea change in Nasdaq’s identity and challenged me to level up my management game. Once an American-centric company (and largely New York based), we were now a legitimate global enterprise running multiple businesses on two continents and serving exchanges in several others. In some ways I was thrown back to management lessons I had learned earlier in my career.
In my entrepreneurial days, as a partner of ASC, I had been a micromanager. My natural instinct back then was to get involved in all the details, and in that situation I knew it was for the best. I felt as if the company was my baby, and I had a hand in everything that was critical to our success. In that situation, micromanaging made sense. Research on close-knit human social groups suggests that “tribes” can naturally function well with around 150 members. Beyond that, you start to need new kinds of organizational structures and leadership approaches. At ASC, we were essentially a business tribe, and I was the leader. I had less than two hundred employees, and we mostly worked in one big office on a common project. It was an enjoyable context, all of us focused on the same goal, creating an exciting new product together without any extra management or bureaucratic layers to the organization.
When ASC sold to SunGard, I harbored some concern about how long I’d last in a larger organization with all the inevitable complexity and bureaucracy that came with size. But SunGard valued autonomy more than I’d expected. It was a distributed system, with lots of discrete, franchise-like business tribes, or “Burger Kings,” as I called them. These separate businesses within the larger organization ran essentially as autonomous units, supported by a few common functions shared across the enterprise. Part of SunGard’s pitch when they bought ASC was “We’ll leave you alone.” Management would not unduly interfere with what was already a successful, growing business.
Soon, I’d been promoted a couple of times and found myself overseeing many of these independent units. At this new level of scale, I could see the downsides of too much autonomy—the potential synergies wasted, the duplication of functions, and the disconnection of employees from a larger mission. My management challenge became: How do you get numerous teams to row together without compromising the relative autonomy that drives innovation, ownership, and execution? I had gone from leading my own little “Burger King” with minimal interference to being the manager seeking to interfere! “I have met the enemy and it is me,” I told myself wryly as I started knocking on doors and proposed knocking down various organizational walls, working to knit together a disparate collection of sixty separately functioning business units into a more cohesive system. Suddenly I was moving at right angles to my previous focus—seeking better integration across the enterprise while also ensuring that various businesses stayed disciplined and focused. Now I was building a large, functional organization, not just singular products—but I was determined to do so without succumbing to the bureaucratic inertia that is the death of any innovative technology company. It was an invaluable learning opportunity.
Managing a global enterprise demands that a leader find the right balance between hands-on management and smart delegation—a transition that often eludes entrepreneurs as their business grows. With thousands under your leadership umbrella, it’s simply not possible to be involved in everything. In a startup, you can walk the halls, talk to people, ask the right questions, and get an almost tactile sense of how the business is operating. In a large, global enterprise, there are far too many halls, and some of them are thousands of miles away.
In the year after the OMX merger, not only was I attempting to integrate numerous autonomous businesses, but I was attempting to do so on two continents. I needed to find people I could rely on to run a business that was far from Nasdaq’s home base. Magnus ended up coming to New York for a period. Several of the other OMX executives moved on from the newly combined company in the year after the merger, through either natural attrition or simply a cultural mismatch. In the end, Hans-Ole was the only senior executive from OMX who stayed and thrived in Nasdaq’s culture—his efforts were essential to our successful integration. Most important, much of OMX’s younger talent would end up being leaders at Nasdaq over the medium and long term.
Every morning in the year after the merger, I would get up early in my New Jersey home and head for Manhattan. I would usually get to the city by about 6 a.m., in time for a workout before the business day started. Several days per week, on the way to the office, I would take advantage of the time difference and call Hans-Ole to check in about the transaction business at OMX in Copenhagen. I received the numbers every day, but nevertheless I wanted to get the touch and feel of the business directly, especially since I couldn’t walk down the hall and take its pulse. Those calls reassured me that he understood what it took to make that transactions business work in our postmerger business environment. I kept up those conversations with him several times a week for the first year in order to develop the confidence that my faith in him was justified. Over time, it became clear that it was.
Where Silos End
Encouraging autonomy while fostering integration is always a balancing act. I wanted people to feel complete responsibility for their business lines. I always felt that if someone had to interact too much with an entirely different business line during their normal day-to-day work, the organizational chart was probably flawed. But I didn’t want to go so far that we had an exclusively “eat what you kill” mentality. In a healthy company, there needs to be some degree of cross-fertilization so that people feel connected to the success of the whole company.
In my first few years at Nasdaq, a consistent complaint I heard in the hallways was “We are too siloed.” To some extent, that was intentional on my part. The organizational chart was designed that way. But I took the feedback seriously and looked for ways to encourage cross-department and inter-silo engagement and cooperation. The most important of these strategies was a Monday morning executive team meeting that I called the “where silos end meeting.” It was required attendance for all SVPs and EVPs and soon expanded to include the OMX team via videoconference.
The meeting had a twofold purpose. Besides breaking down the silos for everyone present, it also gave me an opportunity to ground myself in the details of each business, ask direct questions of a wide range of executives, evaluate my leadership team, and take a closer look under the hood of every part of Nasdaq. Each week, I got to know exactly what were the primary concerns of my managers—what was at the top of their minds. Most important, it kept me from getting lost in the CEO bubble. Indeed, the higher up you go in an organization, the more people want to put you in a bubble. No matter what was going on during the week, every Monday morning I would get a 360-degree view of the entire business. It helped me to let go of the reins without letting go of the horse.
Another strategy I employed was to structure compensation in such a way as to encourage accountability and independence but also goodwill and collaboration across the company. I wanted to find that sweet spot between healthy competition and dynamic collaboration. Much of this comes down to the proper incentives. In my experience it is often true that people don’t do what you tell them to do; they do what they are paid to do.
Our compensation was made up of three components: a base salary, a cash bonus, and an equity award. I wanted everyone to have some equity in the company; that was the glue that put us all in the same boat, tying our financial fate together in the larger success or failure of the company. The cash bonus was where I was able to build in some creative incentives, both individual and collective. So 20 percent of the bonus was tied to specific corporate goals and targets, and 80 percent was tied to the success of the individual business unit. Finally, 10 percent of that 80 percent was based on an employee survey, at least for anyone in a leadership role. We wanted to know: How happy and engaged are the people on that leader’s team? How connected are they to the mission? In my book, you have to lead by acclaim. You have to fundamentally garner the support of those you are leading. That doesn’t mean everyone will be happy with the decisions you make, but good leaders should have the essential support of their employees.
I also wanted to discourage misuse of power. When you give people significant power in a corporate context—or any context, for that matter—there are always some individuals who have a tendency to turn into little dictators. Over the years, I spent a great deal of energy and effort thinking carefully about the kinds of questions we would ask in those surveys. Obviously, we were measuring a specific kind of satisfaction. We didn’t want these surveys to simply become a repository for fruitless frustrations. What I wanted to measure, as closely as possible, were the leadership qualities that were helping foster engaged employees. I believe that over the years, the various components of our compensation package helped encourage Nasdaq leaders to compete, innovate, collaborate, and demonstrate financial accountability—all while incentivizing our collective “better angels.”
Not everything comes down to financial incentives, of course. But with part of the compensation tied to individual performance, part to company performance, part to corporate goals, part to equity ownership, and part to employee satisfaction, I felt like we had a robust way of encouraging our team at Nasdaq to deliver on their business priorities while supporting the trajectory of the entire enterprise.
Clouds on the Horizon
With Nasdaq’s purchase of OMX, our series of smaller acquisitions, the expansion into new business lines, and our enlarged global footprint, it felt like we had reached a culmination point in our growth-by-acquisition strategy. For the moment, I was hesitant to expand further; more stood to be gained in internal transformations. We focused on taking advantage of the synergies and opportunities provided by the merger. It was a period of nation building within Nasdaq, so to speak. Our success prompted Forbes magazine to declare us “Company of the Year” in 2008, and that same year we entered the Standard & Poor’s 500. We added 177 new listings to Nasdaq, and we even convinced nine more companies to switch over from NYSE, worth $79 billion in market capitalization.
But in 2008, only one story really mattered. Indeed, the glow of Nasdaq’s success, and of several years of consistent market growth and expansion, was overshadowed by the storm clouds that amassed on the horizon. In March of that year, Bear Stearns unexpectedly collapsed, requiring a last-minute shotgun merger with JPMorgan Chase to survive. Global markets reacted nervously, and the economic tailwinds that had driven markets forward for years seemed to have exhausted themselves. By the end of that summer, as Wall Street’s finest returned from their brief, American-style summer vacations, optimism seemed in short supply. But even at that late date, few understood the true dimensions of the gathering storm.
LEADERSHIP LESSONS
• Leverage the Mothership. When growing through acquisitions, stay close to your core strengths and be aware that the risks increase as you move further away—in size, culture, geography, or primary area of focus.
• Effectiveness Before Efficiency. Make sure you have a good business and know how it really works before you try to streamline it into a highly efficient one.
• Always Be a Player-Coach. Stay connected to the business on the ground even as you keep your eye on the big picture.
• Incentives Matter. Understand the importance of employee incentives and build compensation to match. Employees who have skin in the game tend to be more engaged with the success of the whole enterprise.