Why leadership matters

By , on leadership, Mergers & Acquisitions (M&A), Potentious.

Alphabet Has a Problem

Alphabet’s acquisition of Nest is faltering as evidenced by Nests’ own purchase of Dropcam. The story behind both of these deals points to why leadership matters in successful M&As, and how quickly “bad” ones can destroy shareholder value.

Alphabet–Google Acquires Nest

Alphabet (then known as Google) closed on the Nest deal on Feb. 7, 2014 for a sum of $3.2B (USD). The acquisition of Nest, the maker of the Learning Thermostat and the Protect smoke and carbon monoxide detector, would allow Alphabet to enter into the smart-home systems market. Alphabet’s 10-K filing provided additional details on the deal and potential future plans for Nest:

“In January 2014, we entered into an agreement to acquire 100% of Nest Labs, Inc. (Nest), a company whose mission is to reinvent devices in the home such as thermostats and smoke alarms, for a total purchase price of $3.2 billion in cash, subject to adjustments. Prior to this transaction, we had an approximately 12% ownership interest in Nest, which was net against the total consideration. We expect that the acquisition will enhance Google’s suite of products and services and allow Nest to continue to innovate upon devices in the home, making them more useful, intuitive, and thoughtful, and to reach more users in more countries. The transaction closed on February 7, 2014.”

The leadership team behind Nest was former Apple employees Tony Fadell and Matt Rogers. Fadell is best known for being the “father” of Apple’s iPod media player. The mercurial Fadell is also known for his leadership style and interactions with employees:

“Fadell pushed his team, much as he did at Apple. His reputation is for being intense, willing to go to war with Steve Jobs and his lieutenants over the development of the first-generation iPod and iPhone, and hard on his own troops. “The kiss of death at any of these product meetings—what would send Tony over the fucking moon—was when he went around the table asking how things are going, and you said, ‘Great!’ ” recalls one former Apple team member. “Tony would just lose his shit, because things are never going great.” (When one employee failed to live up to his standards, Fadell ordered a manager to fire the employee, saying, “You gotta Glock Glock that dude,” as he mimed shooting off a handgun. He was joking, but unapologetic.” 1

So, we can assume that Alphabet had a good idea of what it was getting from products, development, and leadership perspectives with the acquisition of Nest. Additionally, I would pay good money to see Fadell’s leadership “report card” based on Google’s Project Oxygen, which identified the eight great behaviors that great managers exhibit 2:

  1. Be a good coach.
  2. Empower; don’t micromanage.
  3. Be interested in direct reports, success and well-being.
  4. Don’t be a sissy: Be productive and results-oriented.
  5. Be a good communicator and listen to your team.
  6. Help your employees with career development.
  7. Have a clear vision and strategy for the team.
  8. Have key technical skills so you can advise the team.

Nest Acquires Dropcam

In June, 2014, Nest, with the backing of Alphabet, acquired Dropcam for $555M (USD). According to Fadell, Rogers and Dropcam CEO Greg Duffy, Nest and Dropcam shared a common vision and very similar philosophies with respect to product development 3. The acquisition would expand on Nest’s thermostat and smoke detector with Dropcam’s Internet-connected video cameras. The merger looked to take advantage of industry optimism that the emerging market for Internet-connected smart devices in the home would be poised for rapid growth 4.

Nest Culture

The culture that appears to exist at Nest has roots in Apple culture. In an interview, Fadell acknowledged cultural differences between Alphabet–Google and Apple 5:

“Apple had a “much more hierarchical structure, and the communications structure was very understood. [While at Google], everyone could just talk to everyone and learn about everything, and there was much more transparency.”

“I’m not saying one is better than the other…But it’s very different. The very first day, when the [Nest] deal was announced, I got all these various individuals from inside Google saying, ‘Oh, congratulations,’ and ‘I want to work with you,’ and ‘Is there something we can help you with?’ And at Apple, it was very structured. It wasn’t like you were going to send a message to Steve for any reason and say congratulations and flood his email box.”

Other prospective Nest culture elements were shared by TechCrunch in an article detailing a “meeting culture” and culture of “micromanagement.” 6

These comments give valuable insight into how Nest culture evolved, and, more importantly,what a target like Dropcam would have to content with once the deal was finalized. We can safely say that the Nest leadership style was hierarchical in nature, as well as authoritarian in execution. This type of culture could slow down innovation and progress.

Nest–Dropcam Deal Unravels

Two years after the Nest–Dropcam deal, cracks turned into full-blown fissures. As BGR reported, “Nest’s product portfolio has grown very slowly since its acquisition by Google and its revenues are way below expectations.” 7 This was one indication of the culture and leadership style at Nest. However, the floodgates opened when The Information conducted an expose of Fadell and Nest 8:

“CEO Tony Fadell admitted that about half of Dropcam’s 100 employees had left, and said ‘A lot of the employees were not as good as we hoped…unfortunately it wasn’t a very experienced team.'”

Let the fireworks begin.

Almost immediately, Duffy clashed with Fadell over whom he would report to (Rogers vs. Fadell). At that time, Fadell is reported to have told Duffy “you haven’t earned it” 8 (meaning reporting to Fadell). Duffy quit a few short months later. On Duffy’s way out, he expressed regrets “…in hindsight, he felt like he had ‘failed all the people who worked for me and all the customers.'” 9 Additionally, Duffy responded to Fadell’s comments shortly after the  interview expose of the latter 10:

“I can’t publish Dropcam’s revenue, but if you knew what percentage of all of Alphabet’s ‘other bets’ revenue was brought in by the relatively tiny 100-person Dropcam team that Fadell derides, Nest itself would not look good in comparison,” he said. “So, if Fadell wants to stick by his statement, I challenge him to release full financials (easy prediction: he won’t).”

But Duffy doesn’t stop there. He continues by saying that the 50 or so Dropcam employees who have resigned did so “because they felt their ability to build great products being totally crushed.” He continues:

All of us have worked at big companies before, where it is harder to move fast. But this is something different, as evidenced by the continued lack of output from the currently 1,200-person team and its virtually unlimited budget. According to LinkedIn, total attrition to date at Nest amounts to nearly 500 people, which suggests that we were not alone in our frustrations”.

These comments by Duffy indicate a challenging environment for employees. As we know, the impact of leadership is one of the top drivers of whether employees stay or leave a place of employment. If the attrition rate was that high, Nest would have had challenges in attracting quality talent and that would have a continuing impact on the company’s success, and sheds light on why leadership mattered in this deal.

Why Leadership Matters

Leadership is the main driver of successful organizations, and why it matters is easily seen in the Nest–Dropcam deal, where good leadership didn’t exist to form a solid foundation for the combined organizations. Nest required the right leadership capabilities to create the right culture and right conditions for organizational success.The equation of this deal looks something like this:

Poor Leadership + Poor Culture + Talent Attrition + Poor Performance = Deal Failure

Alphabet/Google is partly to blame for this failure. Based on the eight behaviors identified by then Google’s Project Oxygen and what we know about Fadell, he would have gotten failing grades for 1,2,3, and 5. Additionally, when reviewing Fadell’s report card and combined with Nest’s failed revenue projections, high attrition rate, and poor Glassdoor reviews, no matter how visionary or technically brilliant Fadell is Alphabet–Google had to have known that something was wrong.

Finally, suffice it to say that the Nest–Dropcam deal is a mess and Nest appears to be an even larger mess by itself. If we review the M&A leadership skills Potentious identified for acquirers and targets that correlate to M&A success, what could have turned this deal from a failure to a success with respect to leadership?

Nest

  • Strategic Leadership Skills—Judgement, Think Strategically, Provides Vision: Nest appears to have a strategy to take over the smart-homes systems market. However, it can be argued that Nest leaders have shown poor judgement in  how to be good leaders. Additionally, one key identified leadership skill is providing vision to move the entire organization in one direction. Whether Fadell is able to create and communicate that vision is suspect with such a high attrition rate and an organization in turmoil
  • Results Leadership Skills—Builds Plans, Manages Execution, Focus on Customer Needs, Financial Acumen, Knows the Business: Nest knows their business and is considered one of the leaders in its market space. Whether Nest had an effective integration plan in place for Dropcam is less clear. If Nest did have an integration plan, its ability to execute on that plan with Dropcam are suspect, given Duffy left within just a few months.
  • People Leadership Skills—Builds Relationships, Leads Change, Organizational Savvy, Fosters Teamwork: No matter if Nest and Fadell were perfectly situated with the “strategic” and “results” leadership skills, M&A success hinges more on the “people” leadership skills. We can assume that once Fadell wooed Duffy, Duffy probably felt that a solid relationship had started because of a shared vision. Yet, Fadell showed a lack of effort to continue building the relationship with Duffy because of his hierarchical structure and belief that Duffy hadn’t earned the right to report to him. Additionally, Fadell’s recent comments about Dropcam employees will inhibit any type of meaningful and useful relationships being created going forward. Nest showed poor “change” leadership skills in executing the integration by not helping Dropcam fit into the culture and organizations. Finally, the same Nest leadership showed a disinclination to foster teamwork between Nest and Dropcam because of micromanagement.
  • Personal Leadership Skills—Show Adaptability, Develops Oneself, Communicate Effectively: Nest appears to be set in their ways, indicating a lack of ability to show adaptability, and that impacted the integration by forcing Dropcam to make all of the adjustments. Just by reading some of the things that Fadell said when Nest became part of Alphabet–Google and Dropcam, it is fairly obvious that he is a poor communicator. When things are going poorly in an M&A deal like this one, communication becomes very important.

Dropcam

  • Strategic Leadership Skills—Innovation Management: Dropcam is/was an innovative company. With Nest’s meeting culture, moving timelines, and micromanagement leadership, it is clear that innovation management would be a challenge for Dropcam.
  • Results Leadership Skills—Builds Plans, Knows the Business: Dropcam’s ability to build its own plans that integrate into the larger Nest plans, as well as its clear knowledge of its business and market, would play a major role in successful integration. However, Nest’s poor leadership would inhibit these leadership skills to play out over the long term for the mutual success of Nest. Thought, it appears that most of the Next income was a result of Dropcam’s efforts, based on Duffy’s comments.
  • People Leadership Skills—Develop Others, Motivate Others, Builds Relationships, Leads Change: Dropcam’s “people” leadership skills would play an important role in a successful integration. The ability of Dropcam leaders to build relationships between Nest and Dropcam would be critical. A shared M&A leadership skill between Nest and Dropcam, “build relationships,” forms the basis for eventually achieving direction, alignment and commitment in the combined leadership. Additionally, Dropcam needed to effectively lead change and motivate employees that this deal was for the greater good of the organization. Major changes would have formed because of the different leadership styles of Nest and Dropcam, and would have presented a significant challenge to a successful integration.

Alphabet–Google’s Nest–Dropcam deal serves as an eye-opening case study in how leadership skills can establish behaviors that destroy deals from the inside out. While the Nest–Dropcam deal carried great promise for establishing a leading position in the smart-home systems market, ultimately poor leadership capabilities in Nest doomed the Dropcam acquisition. This exercise in failure helps explains why leadership matters.

Change the mindset. Change the model. Change the outcome.

Dr. J. Keith Dunbar is founder and chief executive officer of Potentious. He can be found connecting and sharing knowledge about M&A leadership on Twitter and LinkedIn.

Twitter: JKeithDunbar
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Endnotes:

  1. The $3.2 Billion Man: Can Google’s Newest Star Outsmart Apple?
  2. Google’s Project Oxygen Pumps Fresh Air into Management
  3. Google’s Nest to Acquire Dropcam for $555 Million
  4. Is Tony Fadell In Nests’ Way?
  5. Ibid
  6. It sounds like buying Nest has been a total disaster for Google
  7. Nest Leader Tony Fadell on $555 Million Dropcam Buy: “A lot of employees were not as good as we hoped”
  8. Ibid
  9. Ibid
  10. Dropcam Co-Founder: Nest “crushed” employees ability to build great products