Big Headhunter Is Watching You

Spencer Stuart is earning lucrative fees by sizing up the talent at M&A targets

If L. Dennis Kozlowski, chairman and CEO of Tyco International Inc., is known for anything, it's his nose for the deal. He has done 110 of them since he became CEO in 1992, building a successful $22 billion company with low staff turnover. So why would the dean of dealmaking need to bring in an executive-search firm to do a secret review of management talent at such targets as U.S. Surgical Corp. and AMP Inc. before plunging ahead?

Because, says Kozlowski, failing to scrutinize the people as intensely as you do the books is a recipe for disaster. "We're very capable of reviewing products...distribution, customers, etc.," he says. "What we don't know about is the details and backgrounds of some of the executives in the organization we're considering acquiring." It's an obvious point, but one that many companies are only now waking up to: One of the big reasons mergers fail is management problems. Although companies often spend many hours and many millions poring over the financials and the strategic fit, they pay little attention to crucial personnel issues until it's far too late. "If there's a missing link in the due-diligence process," says Dennis C. Carey, vice-chairman of Spencer Stuart U.S., the country's third-largest search firm, "it is in human capital and intelligence."

So that's why Spencer Stuart, pitching its skill at assessing the good, the bad, and the ugly of management, has stepped into the void. Nor does it hurt that the service is much more profitable than its core business of placing top executives in new jobs. For Wall Street-size fees, its Global Intelligence (GI) group will give a potential buyer a secret report on top executives at a possible target that finds out where the talent resides--and doesn't. The company, along with rival Egon Zehnder International and a few others, also offers a post-merger human-capital review, as well as a talent audit for succession-planning purposes. Despite some ethical and privacy-related concerns about the tactics used, companies such as GTE, Ameritrade, and Tyco all say GI has given them an edge in their deals. "Why is it wrong to understand what the competition has in the way of human capital?" asks J. Randall MacDonald, GTE Corp.'s executive vice-president for human resources and administration. "This is just another form of benchmarking."

HUNTING FOR JEWELS. How does a human-capital audit work? Before a merger takes place, it's a mix of corporate intelligence-gathering and investigative reporting; Spencer Stuart has even hired journalists such as John J. Keller, formerly of The Wall Street Journal. Spencer Stuart consultants, whose normal job--recruitment--requires them to analyze people and their skills, are asked to assess a group of managers at a possible acquisition target. Without revealing who is paying the bills, they interview 5 to 20 former co-workers and others with personal knowledge of a company's culture and its top managers' talents and quirks. "Most clients want to know where the jewels are, not where the alcoholics are," Carey says.

At the end, consultants deliver a report--written or oral--that gives a snapshot of each person and of the company culture. Reports might list an executive's strengths and weaknesses or rate each member of the management team, with the top score for someone who must be retained. "We've done about a dozen," says Tyco's Kozlowski. "I pick up the phone and mention a number of people." Within a week or so, he gets his info. "[Spencer Stuart is] right about 75% of the time," he says. Although neither AT&T nor Spencer Stuart will comment, one source close to AT&T says Spencer Stuart did a GI project on the proposed Tele-Communications Inc.-AT&T merger, including a review of TCI President Leo J. Hindery Jr.

The secrecy involved means there's no independent way to verify GI's quality. Yet perhaps because Spencer Stuart previously has done executive searches for all of its GI clients so far, it seems to be drawing on a reservoir of trust. In 1998, the company booked 24 GI projects worth some $10 million--4% of its fiscal 1998 revenues of $257 million--with most GI projects coming from pre-merger investigations. Carey won't name names, but he says five or six of those reports helped the client decide not to go forward with the deal. "We have no complaints, none at all," says Peter G. Peterson, chairman of the leveraged-buyout firm Blackstone Group, referring to the two GI projects completed--one an evaluation of a management team, the other an acquisition that made sense only if the target had potential top talent in the ranks. That deal has since gone through.

RISKY BUSINESS? Another satisfied customer is GTE's MacDonald. Long a client of Spencer Stuart, he asked for the GI group's appraisal after GTE announced its August, 1998, deal to buy Puerto Rico Telephone Co. Rather than scoping them out from afar, he had GI sit down with PRTC's executives for a formal talent assessment. In the end, GI came up with the same conclusions as MacDonald's own staff. Why, then, spend the money? "It was a medical second opinion," says MacDonald. GTE has also brought in GI to evaluate other deals--including some that never got done--and is using it to help with its planned merger with Bell Atlantic Corp.

But if plenty of CEOs--and even some of Spencer Stuart's rivals in management consulting and search--praise the concept, the secretive approach nevertheless raises some thorny issues. "We would never get into this," says James A. Hatch, global leader of the people strategy and human resources management practice at Arthur Andersen & Co. "It's too risky to start evaluating people from a distance." He's not the only one who sees a danger. Garry G. Mathiason, senior partner at employment-law firm Littler Mendelson, thinks recent changes to the Fair Credit Reporting Act--which require that people be told if they're being investigated--might limit companies' ability to do third-party investigations. A company could be particularly at risk if someone "were terminated based on information that was false," he says. "We think it is a significant concern."

Another problem could arise if word of Spencer Stuart's sleuthing were to get around. Although, like most high-end search firms, it is known for its ability to keep a secret, there's always a chance that someone the headhunters talk to will pass the news on to the target of the investigation. Some worry that trust could be harmed if an executive discovers after a merger that he or she had been secretly vetted by new management. The presumption "is that the relationship with Spencer Stuart is better than the relationship between the sources and the candidate," says David A. Lord, president of consultant Executive Search Information Services.

Despite those issues, Carey argues that the advantages of secrecy far outweigh the risks. He adds that GI uses the same legally and ethically sound approach as checking a candidate's references during a search. Moreover, mergers-and-acquisitions law lets an acquirer fire anyone it wishes. Still, as a legal protection, Spencer Stuart gives most of the negative findings to its clients orally.

GOOD MOVE. Nor does Carey have to fear--for now--competition from the big management consultants. Although it might seem a logical extension, none has made a big play in the field. McKinsey & Co., for example, thinks GI-style work is very different from its specialty of helping companies adapt to the new culture created in a merger. Walt Shill, a senior consultant in McKinsey's postmerger management practice, says such work could get the company involved in internal politics. "We're loath to get into individual management assessment," says Shill. "It compromises our ability to be objective."

Currently, Spencer Stuart's only strong rival in the field is Egon Zehnder. It has been doing post-merger appraisals of top managers at companies for several years, although it hasn't yet branched out into doing secret evaluations. That's good for Spencer Stuart, which, like most other executive headhunters, may soon need a shot in the arm. Even though search firms have been growing like gangbusters, Carey thinks the current merger boom could cause some 20% of their clients to disappear in the next five years. "This is an example of the new areas that search firms need to get into," says Executive Search Information Services' Lord. "The lights are on in their offices." And with M&A at an all-time high, they aren't likely to go out any time soon.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE