Dan Akerson Takes the Wheel at GMBy
For the directors of General Motors, this should have been a summer to savor. The carmaker has been preparing an initial public offering expected to sell up to $16 billion worth of stock, an impressive sum for an enterprise that was close to dead—filing for bankruptcy protection in June 2009, ceding majority ownership to the U.S. government, cutting 60,000 jobs since 2007, and shedding tens of billions in debt. When GM emerged from Chapter 11 in July 2009, it toughened up its board, replacing most directors and adding private equity star David Bonderman, a founding partner of TPG Capital, as well as three members chosen by the U.S. Treasury's Auto Task Force as possible chief executive officers: former telecom CEOs Edward E. Whitacre Jr. AT&T (T), Patricia Russo (Alcatel-Lucent), and Daniel F. Akerson (Nextel), who in recent years had run the largest private equity fund at the Carlyle Group. In December the new board set about remaking GM management, ousting CEO Fritz Henderson and installing Whitacre, who'd been chairman. He soon chalked up two successive quarters of profitability, a sign GM had regained the stability it needed to return to the public markets.
Then the triumphant summer turned weird. In June and July, investment bankers preparing for GM's IPO road show asked Whitacre the question every institutional investor would want to know: How long did he plan to stay on as CEO? Whitacre didn't answer, and some of GM's directors became concerned. Those who knew him best suspected the 68-year-old Texan, impatient with federal oversight, wanted to leave by yearend—a timetable that wouldn't work at a company going public. Before GM's Aug. 2 board meeting, Whitacre's attorneys told him he would have to disclose his plans in the IPO filing. At the meeting, board members wanted a decision—either stay into next year, they said, or leave now, according to three people with direct knowledge of the talks. To the surprise and irritation of some directors, Whitacre bowed out.
That plunged the board into a leadership crisis at the worst possible moment. Just seven months before, the directors had given Whitacre the job after a search turned up few qualified outsiders willing to accept federally imposed pay constraints. (Whitacre earned a base salary of $1.7 million.) Now several directors suggested launching a new search, but the majority rejected the idea—it would be time-consuming and possibly fruitless, it would disrupt continuity, and it would blow up the autumn IPO schedule. Instead, the discussion soon turned to another of those tough new board members: Dan Akerson, 61, who was already certified as CEO-worthy by the Treasury Dept. and fully immersed in the company's issues. At first the idea gave him pause, say two people with knowledge of the conversation, because it meant moving from his Washington (D.C.) home to Detroit. Within three days, however, he had agreed.
What did the GM board get by promoting another insider? Akerson may have been the board's only option, yet he is not an obvious choice to run GM. Like Whitacre before him, Akerson has never run a heavy-industrial company, let alone one with GM's global reach. "It's a revolving-door CEO," says Charles M. Elson, chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "The job keeps going to people who have no industrial experience." Telecom experts commend Akerson for his turns as president and chief operating officer of MCI in the early '90s, and as CEO of Nextel in the '90s. He turned two upstarts into major players. Nextel never made money on his watch, though that was common in that rapidly expanding, capital-intensive sector. He later had a hand in two debt-laden ventures that went bust, XO Communications and Hawaii Telecom. "He tends to think big," says former telecom analyst Jack B. Grubman, now an adviser with Magee Group, a New York-based consulting firm. "He is definitely a growth guy. He can also be stubborn to a fault."
Akerson, who declined to be interviewed for this article, has promised to continue Whitacre's cultural overhaul of GM, pushing for simplified management and more accountability. Yet those who know him say his style will be very different. Where Whitacre did little talking but eased out or reassigned two dozen managers who didn't perform, Akerson is more directly confrontational. "He'll be different than me," Whitacre says. "I think he will listen. You can't be successful and not listen."
From the time he joined the board in July 2009, Akerson clashed with GM management, pushing executives to defend even the most basic strategies. During one board meeting shortly after Akerson and Bonderman became directors, they questioned why GM was spending more than $1 billion on a new engine program, asking Henderson and others if they had a plan to show a return on the investment. Henderson explained that the four-cylinder engine would be used in several small cars sold around the world, say three people with knowledge of the discussion. Since GM charges a price for the whole car and not the engine, the company didn't calculate a rate of return on the engines. It tracked costs and tried to keep them low.
The private equity guys kept pressing. Why, they asked, couldn't GM simply buy the four-cylinder engine from someone else? The car guys explained that the engine is the heart of the automobile. GM couldn't stake its reputation on another company's power plant&mdash:if it performed poorly, they'd be stuck. Plus, GM couldn't possibly outsource the 750,000 four-cylinder motors it needed to build in a year. It takes three factories to produce that kind of volume. After forcing the car guys to get far more detailed about their cost figures, Akerson came around and began coaching Henderson on how to pitch the engine as an "operational necessity." The board finally approved it. A GM spokesman points out that it is the board's job to ask tough questions and says the debate didn't cause delays.
Akerson's style is one reason the Treasury Dept.'s Auto Task Force invited him to join the board in the first place, says Harry Wilson, a former Task Force member who is now running as a Republican for New York State comptroller. Task force chief Steve Rattner, who knew Akerson from doing private equity work in the telecom business, brought up his name, Wilson says. Rattner and Whitacre figured that an undisciplined company like GM could use a hard-liner. The original idea was to have Akerson act as a vice-chairman, working alongside Henderson and Whitacre. "GM's problems are cultural," Wilson says. "There was a lack of urgency and a lack of focus on customers and shareholder value. We wanted some private equity guys who have a focus on the shareholder. Dan is smart, thoughtful, and hard-charging."
Akerson also has some car experience. During his years at Carlyle in the late 2000s, he had a hand in four auto industry deals. The firm tripled its investment in parts firm AxleTech International. Carlyle's investment in Hertz Rent-a-Car (HTZ) is still a work in progress; the rental agency has lost $175 million this year and the stock is off 25 percent, but Carlyle has recouped its equity in the deal. Carlyle is in the process of selling United Components, an aftermarket parts maker, and owns Allison Transmission.
At GM, Whitacre is handing Akerson a company with many problems fixed and some momentum in the marketplace. GM has a healthy balance sheet. Its $15 billion in debt and preferred stock obligations is less than half of rival Ford Motor's (F). Global sales are growing at 17percent, and profits topped $2.4 billion in the first half of 2010. Even its once-moribund Buick division is showing signs of life: U.S. sales have soared 60 percent, to 87,000 through July. With the IPO on the way, the government's 61 percent stake will soon be reduced to a minority position.
Credit for all that goes to Henderson and Whitacre, the fix-it guys. Akerson's assignment is long-term transformation. The board wants him to build a nimble, high-performance culture and groom the next CEO; GM's board expects him to stay on for three to five years, according to people with knowledge of the board's plan. Sooner or later, he'll be expected to cede the stage to a new leader, perhaps one drawn from the senior managers Whitacre put in place: Vice-Chairman and CFO Chris Liddell, the former CFO of Microsoft (MSFT), hired in January; and North American President Mark L. Reuss, a GM lifer and to-the-bone car buff. Liddell, a New Zealander known for his financial acumen, has not been tested as the leader of a company of this size. (GM still has 208,000 employees worldwide.) Neither has Reuss, who must prove he can run GM by keeping its once-troubled U.S. business in the black. It's too early to tell if either man is fit to be the next CEO. Up-and-comers inside the company and promising outsiders will also be considered. "You have to build a deeper bench," Whitacre says, "pretty much across the board."
It's Akerson's good fortune that Whitacre and past managers have established a strong product plan for the next few years. GM has a new Chevy Cruze compact coming later in 2010 and a new Malibu next year. Buick will also get a couple of smaller cars to boost sales volume. Before announcing his departure, Whitacre ordered up a big, boldly styled rear-wheel-drive flagship sedan for Cadillac, expected in 2014; GM hopes it will elevate the brand and even compete with the Mercedes S-Class and BMW 7 Series. New pickup trucks should arrive in three years. GM spends about $6 billion per year to develop new models, according to its IPO prospectus. That's 33 percent more than Ford. Whitacre says he has already set product spending budgets for the next several years. They're going up.
"Out of Central Casting"
Akerson was born in California and grew up in Minnesota. His father was an army man, and Akerson attended the U.S. Naval Academy, graduating in 1970 and spending five years on a destroyer before leaving for a job at Phillips Petroleum. He found his calling at AT&T in 1979, where his military background fit well with the starchy corporate culture. He entered the management training program straightaway—and shocked co-workers four years later by leaving for upstart MCI, says Grubman, who worked with him at AT&T. "Dan was out of central casting for an executive job at AT&T," he says. "We had not pegged him as someone who would go to MCI. I think it was clear to him that he could rise faster at MCI. He was right."
Within nine years, Akerson had become president and chief operating officer. He showed genuine marketing chops, rolling out a popular "Friends and Family" plan that gave subscribers lower rates for calls to a select group. He helped transform MCI from a small discount long-distance carrier to a full-line provider, Grubman says, and also expanded the company's business services. By the time he left, MCI was a legitimate competitor to AT&T. "Dan transformed MCI," Grubman says. "He cemented his legacy at the company. After that, his results were mixed."
In 1993, leveraged buyout firm Forstmann Little lured him away to run General Instrument, the set-top box maker. Firm owner Theodore J. Forstmann eased then-CEO Donald Rumsfeld aside for Akerson, who helped get the company ready for a sale. He was lured away in 1996, when McCaw Cellular founder Craig McCaw recruited him to run Nextel.
Akerson borrowed heavily to expand Nextel's network and increased sales from $332million to $7.7billion between 1996 and 2001. He made the most of a walkie-talkie technology called Direct Connect, which allowed several users to conference simultaneously. The company lost money during those years, which were spent laying fiber-optic cable and marketing relentlessly, but turned profitable soon after. His gamble paid off in 2004, after Akerson had left Nextel, when Sprint (FON) bought the company for $35 billion. After his turns at MCI and Nextel, says James A. Attwood Jr., who later worked with Akerson at Carlyle, "Dan was regarded as the best executive in telecom."
Then his good fortune turned. In 1999, McCaw tapped him to become CEO of Nextlink, which provided voice and information technology systems to businesses and soon changed its name to XO Communications. At XO, Akerson tried to make another growth play. The company was expanding its network rapidly, and Akerson decided to fund it with debt. The company's bankers suggested a safer method: equity instead of debt. Akerson refused. XO's stock price had just dipped below $40 after reaching a high of $66; Akerson said he would be selling the stock too cheaply, Grubman recalls. The share price never recovered, and the debt load became too heavy. A GM spokesman says Akerson took XO over when it was losing money and returned it to positive cash flow. But after the credit markets froze up in 2002, the company filed for bankruptcy protection. Investor Carl Icahn acquired the firm after buying its debt in bankruptcy. Akerson "can be combative and very harsh," says Stephen Winningham, a former banker for XO who is now managing director of the major corporate group at Lloyds Banking Group in London. "Those same characteristics make him decisive and will benefit GM."
XO wasn't Akerson's last misstep. In 2003, he became a managing director at Carlyle Group, where he ran a fund that two years later acquired Hawaii Telecom from Verizon (VZ) for $1.6 billion—a deal brought to him by fellow managing director Attwood and former Federal Communications Commission director William E. Kennard. Hawaii Telecom was a landline phone service provider with no mobile service in a state that was rapidly going cellular, says Attwood. The company also had serious technology problems. As people switched to mobile phones, Hawaii Telecom lost more than 100,000 of its 700,000 customers, Attwood says. Eventually, it ended up in bankruptcy. "We thought we could run it better," Attwood says. "We thought we knew the business. It was a fundamentally flawed thesis."
A Devil's Advocate
Those who work with Akerson say that when debating business plans and strategy, he doesn't demonstrate an interest in being liked, which makes him an effective devil's advocate. Late last year, the GM board was reviewing a GM ad campaign that promoted its fuel economy in comparison to Honda (HMC) and Toyota (TM) models. Akerson asked the marketing executives why the ads placed so much emphasis on fuel economy. "Nobody cares about fuel economy," one executive recalls him saying. "When it's empty, you fill it up." GM executives patiently explained that the company's image had taken a beating for selling inefficient trucks and SUVs. Two others in the meeting say Akerson's tough line of questioning was his way of pushing GM's managers on whether fuel economy was really the best point of differentiation for the company's cars. He thought overall quality was a stronger selling point, and GM later began using that pitch with its "May the Best Car Win" campaign.
During another board meeting, Akerson questioned Henderson sharply after the company lost $1 billion on currency exchange in Korea. He demanded to know what steps Henderson had taken to manage risk. Henderson said GM had no risk management policy for currency trades and didn't need one, according to a person with knowledge of the meeting. Akerson argued that GM should not be hedging currency; it should be using hedges only for raw materials such as steel and aluminum, he said, according to two people with knowledge of the meeting. GM's board is now coming up with a risk management process, which Akerson will have to carry out as CEO.
Above all, Akerson will have to complete Whitacre's reengineering of the corporate culture: trimming bureaucracy, canceling meetings, and avoiding the strategic analysis paralysis that comes when managers share responsibilities—"so no one was really responsible," as Whitacre says.
In an Aug. 12 conference call with reporters, Akerson said he would stick with Whitacre's plan. "Ed's vision of simplifying the business, of giving people the accountability and authority to do their jobs, has served the company well," he said. The difference between the two, says retired GM Vice-Chairman Robert A. Lutz, is that Whitacre has better ears. "Sometimes these guys start out tough and then settle down," Lutz says. "He needs to develop his listening skills." A dozen colleagues—the directors of General Motors—will be listening hard to make sure he does.