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— Dealmakers —
In the eight years David Johnson served as IBM Corp.'s vice president of corporate development, the company built one of the world's most effective corporate M&A organizations. On his watch IBM completed more than 100 acquisitions and divestitures valued at more than $20 billion. This success and Johnson's place in the top tier of IBM's executive ranks were no small accomplishments. But it turns out that all along, the 27-year company veteran really wanted something else, which his superiors were unwilling to give: a job running one of IBM's business units. Johnson, 55, left IBM in May, signing on with rival Dell Inc. as senior vice president for corporate strategy. IBM promptly sued him for violating a noncompete agreement. The dispute isn't yet resolved, though so far the courts have let Johnson take up his full duties at Dell while the litigation goes forward. But the court proceedings to date have already provided a rare backstage glimpse of the life of an ambitious corp dev leader at a major enterprise -- as well as a reminder of the tricks a veteran dealmaker can pull out of his sleeve.
IBM went after Johnson hard in court. Based on materials it got in discovery, it also accuses him of misusing company resources by working on the possible launch of an IT-focused venture capital fund. The heart of its case, however, is the 2005 noncompete agreement. Johnson says it isn't valid because he deliberately signed it on the line intended for an IBM signature. A spurious argument? Not to U.S. District Judge Stephen Robinson. In a June 26 memorandum decision and order denying IBM's motion for a preliminary injunction limiting Johnson's work at Dell, he called Johnson an "extremely credible and reasonable witness." Noncompete agreements are a tricky tool, particularly in the fast-moving technology world. California law bans them, except in company sales. And while other states (including New York, where IBM is based) do allow them, and other tech firms (such as EMC Corp. of Massachusetts) do use them, executives don't like them. As recruiter Randy Gulian of Allegis/InSearch Worldwide Corp. in Stamford, Conn., points out, noncompetes can be messy to implement and they come at a cost, since executives expect to be compensated for restricting their freedom. It's not clear why IBM began requiring its senior leaders to execute one-year, global noncompetes in 2005, but according to Robinson's summary, that's what happened. The corresponding carrot IBM offered was a modest one: the right to continue with a previously existing equity grant program. For Johnson, the new noncompete regime rekindled an issue that had been simmering since 2001. That was when he passed up the chance to become CEO of another tech company based on assurances that IBM would consider him for a general manager position within two years. He brought up the matter again in 2004 with his boss, chief financial officer Mark Loughridge, and in September of that year Loughridge prepared an annual development plan indicating that Johnson's next job would be in At IBM, a line job is not a typical next step for someone who has risen through the ranks in finance, as Johnson did. To be sure, finance people have plenty of clout. But they're part of a distinct organization, with business-unit CFOs reporting up to group CFOs, who report to the corporate CFO. Thomas Figgatt Sr., a 32-year IBM veteran who left in February from a strategy job in the servers division, says some people who work in the function talk about carrying the "finance badge." As at other companies where corp dev reports to the CFO, the organization's role as the corporate capital cop is central to its authority and its duties. Johnson got the noncompete documents in March 2005. When he still hadn't signed by May, Randall MacDonald, IBM's human resources chief, sent him an e-mail asking him to do so and telling him that the deadline (if he wanted to receive his stock options that year) was June 1. Johnson's response was essentially: What about that promotion? MacDonald's answer was that he'd get back to him -- by June 30. Hence the signature on the wrong line, which Johnson says was intended to buy time. And as Robinson wrote, "Mr. Johnson's gambit appears to have worked just as he intended." It took until the fall of 2005 for IBM to return the improperly signed agreement. Around the same time Johnson got his answer about the general manager position, delivered by Loughridge. It was a no. "According to Loughridge, finance people at IBM never moved into general management," the judge wrote. What came next was a 3-1/2-year standoff on the noncompete, with IBM making several attempts to get Johnson to sign properly -- which he refused to do -- but never forcing the issue by withholding his annual stock option grants. In IBM's complaint, it's also in 2005 that it says it sees the first evidence of Johnson's efforts to launch a VC fund. Meanwhile, IBM's acquisition machinery was firing on all cylinders. In August 2006, for example, IBM announced the acquisitions of both Filenet Corp. (for $1.6 billion) and Internet Security Systems Inc. (for $1.3 billion). In November 2007, it unveiled its biggest deal ever, the purchase of Cognos Inc. for $5 billion. Through these and other deals, Johnson's corporate development team continued to refine the acquisition process. Post-merger integration got better. IBM's M&A Accelerator software became an important tool for Other tech firms were ramping up their acquisitions as well. Dell, however, was doing much less. But after founder Michael Dell returned as CEO two years ago, the company stepped up efforts to move beyond its traditional PC business and into areas including data storage for enterprise customers, where it competes with IBM and Hewlett-Packard Co. Dell brought in new executives from General Electric Co. and elsewhere. By early this year, there were press reports that Dell was looking for deals -- and also for a corporate development leader. After pressing so hard for a general management job at IBM, Johnson still doesn't have one at Dell. No doubt there are other things about the assignment he likes. A Dell spokesman won't detail Johnson's responsibilities, but one of the attractions may be the fact that he is now a senior vice president, reporting to the chairman and CEO. Clearly, Dell has an urgent need for his expertise. But just what is that expertise? There's some irony in the sharply contrasting pictures Johnson and IBM have presented in court. IBM says Johnson has detailed knowledge of its strategies and targets. Johnson downplays his role in corporate strategy and says his knowledge of targets is based on publicly available sources. Robinson is more inclined to agree with Johnson, saying that his knowledge of IBM trade secrets isn't comparable to that of Mark Papermaster, a microchip expert who left IBM for Apple Inc. and whom IBM also sued for violating a noncompete. In a January settlement IBM succeeded in placing strict limits on Papermaster's work at Apple until October 2009, a year after his departure. It's a final irony that the scope for argument is partly reflective of past teamwork. Especially in a highly matrixed organization such as IBM, a successful acquisition requires multiple players making contributions in different areas: technology and market strategy; finance and execution; and responsibility for the business results. If it's hard to tell where one leaves off and another begins, that can be a good thing. But whatever else Johnson brings to Dell, it seems likely that his most important contribution there will draw on his chief role at IBM. That would be running a process that weaves those different contributions together in a way that makes deals work. On July 15, IBM asked the U.S. Court of Appeals for the 2nd Circuit to limit Johnson's role at Dell during the litigation. After a ruling there, the case appears headed back to Robinson's court. "We'll pursue all our rights vigorously," an IBM spokesman says. Still, several legal observers expect a settlement. And since Dell has ample cash to fund an acquisition program, it is likely to start making good on its promise to get on the map in M&A. IBM has named Elias Mendoza to succeed Johnson as vice president of corporate development. Mendoza, 43, is a comparatively recent hire. A former managing director at Morgan Stanley's investment banking division in Tokyo, he joined IBM in 2006 and before his promotion headed corporate development for Japan and growth markets. Will Mendoza be competing with Dell for deals anytime soon? Perhaps. If so, he'll have one clear advantage over a company that still has an organizational learning curve to climb: an M&A machine that's been proven to work well -- even when some of the key players don't see eye to eye on everything. Comments |
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The only flaw in the Johnson Gambit is Dell itself. The company will use him up and spit him out just like has so many others. in 3 years Mr. Johnson will find himself back out on the street and with no credibility. I hope he saves his salary dollars, because this maybe his last job in the industry.