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The Once and Future C&F - Xerox, the Accidental Savior
I had good up-front seats for the Coregis sale, which was up for grabs the minute it came into existence. I started at the company right after they cooked up the new name. Jay said it was a portmanteau implying that we were there to “shield your core assets.” (My dad pronounced it “egregious.”) We were on the receiving end of more due diligence than I care to remember. You can tell a lot about a company from how they do due diligence (in particular, you can tell if you are likely to enjoy working for them). About four years in, a General Electric company called FGIC (a municipal bond insurer) showed up to kick the tires. This was strange because another GE company — ERC, a large reinsurance company — looked at Coregis a few years earlier and took a pass. (The fact that you have probably never heard of most of the companies mentioned is part of the moral of this story — and foreshadows its unhappy ending.) It is worth spending a minute on the Coregis sale to GE, because GE’s experience in insurance was arguably worse than Xerox’s. The fact that Xerox was selling while GE was still buying might point to Xerox “getting it” a little earlier. Maybe the fact that C&F’s results were so bad so fast helped in this regard — or maybe the Xerox management team was actually quicker to recognize the problems. In the modern age, corporate megafauna and their superstar CEOs are all over the place, but in the 1990s, there was GE and Jack Welch. As there is today with Amazon and Google, there was a whole cottage industry that followed and analyzed GE in order to help other companies understand how they too could take advantage of the GE way of management. This was understandable as Jack Welch’s track record to that point was impressive. Consequently, GE’s borrowing costs and stock valuation gave them an advantage when acquiring companies. To be acquired by GE was seen as a
stamp of approval on your business, so when GE bought Coregis for $375 million (a substantial premium to book value), we were feeling pretty good. Have you ever heard stories about the Roman army rolling in on poor, hapless villagers? What about stories of Genghis Khan’s army rolling in on poor, hapless villagers? Well, you get the idea: that is what it felt like to be acquired by GE. We soon had no shortage of Black Belts and Green Belts converting people to the mysteries of Six Sigma. They were like the proverbial man with the hammer: everything looked like a nail. And heaven help anyone who questioned the wisdom of the GE approach. (“Are you too clueless to understand how Six Sigma will help your business?” “Yeah … uh, I mean no … I don’t know.”) The plan was that FGIC would absorb the part of Coregis that catered to public entities, so they could cross-sell municipal bond insurance, with everything else going to ERC (since they had already passed on the deal, they were not that excited to get the “all other” bucket). Owing to my winning personality, I was given a choice of staying with FGIC in Chicago or joining ERC in suburban Kansas City. I decided ERC was the better option. It is worth mentioning that a closer examination of GE’s published numbers at this time showed that the lion’s share of their profit came from GE Capital, and the lion’s share of GE Capital’s profits came from ERC. Because they were seen as such a moneymaker, ERC had — to that point — fended off most of the GE approach (in retrospect, including some basic enterprise risk management). Fortunately, I had accelerated taking my MBA classes — but even more fortunately, I still had a few months left. This gave me enough time to realize that there was something off with ERC: they were nice people, but there was no way that their business underpinned GE’s profit machine. I never made it to Kansas City.
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