How a Culture Clash Killed a Merger
from
January/February 2002
by Ann Reilly Dowd
It was supposed to be one of those marriages made in heaven, a “merger of equals.” New Orleans-based energy giant Entergy Corp. would merge with FPL Group Inc., the holding company for Florida Power & Light, to create the nation’s largest power utility. The timing, too, was perfect. In mid-2000, when the merger was announced, the energy market was rapidly deregulating and regional players like these perceived a need to pair up.
At first all the arrangements proceeded smoothly. The prenups included an agreement that Entergy CEO J. Wayne Leonard would be chief executive of the combined company. Entergy chairman Robert v. d. Luft would step down, while FPL chairman and CEO James Broadhead would be executive chairman for the first year before being downgraded to non-executive chairman. FPL directors would hold eight of the 15 seats until any FPL director retired; then it would become an even split. Wall Street applauded the deal, which would have resulted in a company with assets of $27 billion. “We felt we had mutual values and views of the industry,” says Luft. “We felt we had a good match.” By December 2000, the shareholders of both companies had cast votes that overwhelmingly blessed the marriage.
But the initial love-fest masked some important cultural differences between the two companies. For one thing, Broadhead, now 66, was a tough, results-oriented boss who prized profits and stock prices more than almost anything else. In contrast, Leonard, 15 years younger, talked more about serving not only his shareholders but also other stakeholders, such as customers, communities, and employees—a concept that, he admits, “is not something they teach in business school. It’s something you have to believe in your heart.”
Second thoughts began to develop on both sides even as the shareholders were voting to approve the transaction. FPL hired Leocadia Burke, a consultant with the Levinson Institute in Boston, to conduct a “culture audit” of the two companies, and last February she duly presented her findings to Broadhead, Leonard, and other top executives from both outfits in a meeting at FPL’s Juno Beach, Florida, headquarters. Armed with charts and graphs, she dispassionately explained that Entergy had an “empowered culture”: its employees bragged about their company, their service, and their values. She called it “a company of the future.”
By contrast, she described FPL’s culture as “operations-oriented, performance-driven, and authoritarian.” She also reported that while Entergy’s management was encouraged to interact with the board, FPL’s was forbidden to do so unless they cleared what they had to say with Broadhead.
The consultant might as well have set a match to gunpowder. “You call Entergy an empowered culture?” Broadhead yelled. “I call it chaotic. Yeah, people are happy. They don’t have to work! That’s the problem.” According to Leonard, who offered this version of what happened to Corporate Board Member, Broadhead added irately that trying to merge two radically different companies “could result in ugly, dumb kids with the worst traits of both parents.” Then he said, “A lot of people think my first move should be to fire Wayne because he’s not performance-oriented.”
Now it was Leonard’s turn to shout, and before long the Entergy team was on its way back to New Orleans, taking with it the box lunches FPL had ordered for what had been intended to be a working lunch. The planned merger was over.
FPL would not make Broadhead or any of the other executives involved in the deal available for comment. When approached directly, FPL’s outside directors declined to be interviewed or didn’t return phone calls. “The company may choose to comment, but I certainly wouldn’t,” says Robert M. Beall, the chairman of a department-store chain bearing his name and an FPL director since 1989.
The task of explaining the FPL point of view fell to spokesperson Mary Lou Kromer. “We disagree with Mr. Leonard’s accounts of events very substantially,” she said. “But our company is a very conservative company. We don’t like to get into a negative discussion.” Kromer claimed that the key concern from FPL’s point of view was the financial acumen and “integrity” of Entergy’s management. “We thought we would be able to integrate these two companies,” she said. “As time passed, however, we became increasingly concerned about our ability to do that.”
By any account, an examination of this botched merger reveals a series of misjudgments by the directors and top executives of both companies. The yawning culture gap should have been clear: Leonard’s commitment to a wide range of stakeholders is common knowledge in New Orleans, even though it has fallen out of fashion in recent years. Most CEOs of publicly traded companies say they work exclusively for shareholders, which is what the likes of super-investor Warren Buffett encourage. But energy companies are slightly different animals. That’s because major pieces of their business are still monitored by regulators who keep tabs on how well they provide their products and services.
Leonard’s contrarian faith can be traced back to his childhood. He grew up near Indianapolis, where his parents and their five children struggled to get along on his father’s salary as a high school English teacher and part-time worker at jobs like painter and security guard. Young Wayne had a paper route and held on to it for nine years. “I think I set a record,” he jokes. “But it taught me the value of hard work, and what it’s like having people try to cheat you. I remember customers cheating me out of 40 cents. They did it because they could, and there was nothing I could do about it. That shapes your values. You know how hard life can be and how tough people can be.”
In high school Leonard couldn’t afford to buy lunch in the cafeteria, so every day he’d run a mile home, eat, and then run back, all within the lunch hour. That training regimen paid off with a cross-country track scholarship at Ball State University. Later he earned a master’s degree in business from the University of Indiana, graduating at the top of his class.
From business school Leonard joined the Indiana utility PSI Resources, which became part of Cinergy Corp. after a 1990s merger with Cincinnati Gas & Electric. He started out as a trainee accountant and ultimately became CFO. But to hear him talk, the best part of the job was the two years he spent in the field, working with line crews, customer-service agents, engineers, and power-plant operators. He learned that the utility business, despite its stodgy reputation, was a place where you could make a difference. “You show up, and the lights aren’t on,” he says. “The family is distressed. The kids are outside. The food is spoiling. Then you get the lights back on. It’s a miracle! Everyone is smiling. You’ve gone from total misery to happiness, just like that.”
In 1998, Leonard left to become president and chief operating officer of Entergy. The job also put him on the shortlist of candidates to be the next CEO, a position then held on an interim basis by chairman Robert Luft. Entergy needed someone with Leonard’s customer skills. The company was in all kinds of trouble, not least because of a string of hefty penalties that angry regulators had imposed on Entergy for poor customer service. “We had lost the confidence of our customers and regulators,” Luft says. Leonard became CEO the following year and moved fast to turn Entergy’s image and performance around. Before long he’d upended the company’s approval ratings, raising them from close to the bottom of the list to close to the top in all kinds of areas, including safety, environmental responsibility, and employee satisfaction. He also made some tough business decisions, including the spin-off of a home-security company and an Australian utility, and took an earnings hit his first year. In 2000, however, profits were up almost 20%, to $711 million. That year Entergy’s stock rose about 75%.
Throughout this period, Leonard maintained his commitment to customer service and the community, particularly its neediest members. That was music to the board’s ears. “We were delighted by Wayne’s values,” says independent director Paul Murrill, professor emeritus of chemical engineering at Louisiana State University. “He restructured the whole thought process within the company.”
But what Entergy didn’t yet have was the scope and scale Leonard felt it needed to be a global player, particularly as the industry began to deregulate. After bouncing various potential partners off the Entergy board, Leonard zeroed in on FPL. In January 2000, after a number of exploratory phone calls, he flew to Juno Beach to talk details with Broadhead.
But others fancied FPL, too—specifically the Spanish utility Iberdrola, which wanted to buy the company outright—and Leonard returned to New Orleans empty-handed. Soon thereafter the Spanish deal fell through, and now it was Broadhead’s turn to pick up the phone. He called Leonard and in April flew to New Orleans to discuss a merger. Everything moved along smoothly, with the boards of both companies and then their shareholders agreeing on the perfection of the match.
In December 2000, as merger plans proceeded, two back-to-back ice storms swept the Southeast and put Leonard’s values to the test. While other utilities in the region tried to control their repair costs, he ordered his managers to put people first. “There are no restrictions on what you can spend,” he told them. “Just get the job done in the safest possible manner.” Entergy brought in 10,000 additional emergency workers from 25 states, many by plane. People were so thankful that they collected food and cooked meals by firelight for the crews that were working overtime to turn the light and heat back on. Arkansas governor Mike Huckabee called Entergy “the angel of the ice.” Even though the company’s final bill for its quick restoration of power came to some $200 million, the board thought it was money well spent. “Wayne was our hero,” Murrill says.
But just as Leonard’s priorities should have been obvious to any potential partner, so too should Broadhead’s. A lawyer and engineer with an M.B.A., Broadhead has always kept his companies on a short leash, dominating both his top management and his board. He had run mining and telephone operations before coming to FPL. He was an operations guy.
Broadhead rarely speaks to the press, and most of his public statements are carefully worded. Like Leonard, he had to contend with regulators and customers, but he focused on shareholder value. Indeed, FPL’s stock did a mite better than Entergy’s in 2000, climbing about 79%.
There appears to have been some confusion over Broadhead’s exact role in the integrated corporation, and whether he would really let Leonard be the CEO. What is clear is that Broadhead was increasingly uncomfortable with the casual dress, big-hearted programs, and decentralized management style at Entergy. Leonard and his team were just “too soft,” he’d later tell the Entergy board.
Then, on February 2, 2001, after months of due diligence, came the climactic clash triggered by the report from consultant Leocadia Burke. Burke told Corporate Board Member that Leonard’s version of what happened required elaboration, which she declined to give. In any event, after her presentation and Broadhead’s outburst, FPL president Paul Evanson, who also serves on the company’s board, moved to center stage. He demanded that Leonard produce all of Entergy’s financial forecasts from 1995. Leonard had already promised to make them available by the following Monday.
“What possible good would a forecast done in 1995 do?” Leonard says he asked Evanson. “This is 2001! What’s going on here?”
“I just want to know what you’re hiding,” Evanson replied.
“What motive would I have to hide anything?” Leonard shot back.
“I won’t know until I see what you’re hiding,” said Evanson.
According to Leonard, Evanson soon tried to move the meeting along, but the Entergy CEO, who admits he started yelling, wouldn’t let him. “Oh, no, we’re not done yet!” he shouted. He turned to Broadhead and said, “I’ve got one question. Given the fact that you started this meeting by questioning my credibility, my integrity, my performance, given the fact that you’ve asked for financial forecasts that are years old, are you just looking for a reason to break this deal up? I’d like a straight answer.”
“I don’t need a reason,” said Broadhead. Then, according to Leonard, he crossed his legs, rested his chin in his hand, and said no more.
There was still a flickering hope that the deal could be saved. At a special meeting of the Entergy board, the directors asked Luft to contact Broadhead and find out how interested he still was. Broadhead and two of his board members agreed to meet with some of the Entergy directors to see if they could get the merger back on track. Instead, it seems to have gone off the rails completely. Although FPL won’t discuss details, Entergy says that the Florida company now wanted a number of changes in the setup. Among them: a financial restructuring that would leave Entergy an acquired company rather than an equal partner in the marriage, and an agreement that Leonard and some of his top managers would have to go. None of this sat well with the Entergy directors. For one thing, they believed that a merged company that excluded Leonard and his team would never get the blessing of Louisiana regulators.
On April 2, the betrothed couple formally called it off. A last bullet for the Entergy board to bite was the question of what to say publicly about the death of a merger that they’d talked up with such enthusiasm. FPL’s lawyers suggested that both sides sign a so-called good-boy letter, agreeing to part company amicably and not to speak ill of each other. That’s standard in many cases of this sort.
But Leonard said no. “That’s crazy, crazy,” he recalls telling his board. “The fact is, we don’t like each other. The fact is, we can’t stand to be in the same room together. The fact is, we’ve been lied to and the whole deal we negotiated has been overturned. The fact is, 27 regulators have been put through nights and weekends working on this transaction, and if we break it up and say, ‘Oh well, it just didn’t work out,’ they’re going to be angry.” The board agreed. “We felt our stakeholders were due a full explanation,” says director Paul Murrill. Entergy issued a press release listing some of the reasons the deal had come apart, including FPL’s demand that Leonard be ousted.
Today Leonard continues to run Entergy with all his stakeholders in mind. His company’s shares enjoyed a brief rise last spring and were more or less unaffected by the market’s general fall. In mid-November they stood at around $37. FPL’s stock has done less well, tumbling some 10% since April, to $54.
Broadhead resigned as CEO of the Florida company in June. At year’s end he’ll step down as chairman, retiring comfortably. He has rebuffed suggestions that he return any of the $22.7 million he received as his bonus for the merger agreement with Entergy.
