Debbie Fretz says risk is a double-edged sword in the world of business. With a tolerance for risk, you can drive change and make the acquisitions that can ultimately land your company at the top of its industry. But risk can also create frustration and sleepless nights, even for a veteran CEO.
In more than four years at the helm of Sunoco Logistics, Fretz has had to take her share of risks.
She has been president and CEO of Sunoco Logistics since Sunoco Oil spun the company off in 2002. Since its IPO on the New York Stock Exchange, the $4.5 billion oil distribution company has performed 12 acquisitions, mostly of pipeline companies, totaling more than $400 million.
Fretz says risk is a necessary if worrisome part of business growth. “Obviously, if you take no risks, you’re not going to make any transactions,” she says.
To Fretz, risks of growth are best managed with patience, self-discipline, a willingness to delegate authority, open-mindedness about company culture, and maintaining open lines of communication throughout the company.
Planning from the outset
Fretz has a message for any CEO anticipating growth, particularly growth through acquisitions: “Your patience is certainly going to be tried.”
Many aspects of a business acquisition are not under the direct control of the acquiring company’s CEO. Often, an acquisition is at the mercy of the due diligence process, negotiations and, above all, the asking price. “It’s usually frustrating for a Type-A personality,” she says. “That’s why you don’t do this yourself.”
The first thing Fretz does, before the due diligence even begins, is place a senior manager in charge of the whole process. That person oversees the whole process, start to finish, including the integration of the acquired company or pipeline systems into the company.
Having a single person in charge allows the company to react more quickly than if it was managed by committee. That’s important because, while acquisitions might take a long time to come together, once the pieces are in place, the process can pick up steam in a hurry. “What you find is that the transaction can end up going fairly quickly, and you haven’t planned for the integration or how you bring the assets on, and that can get complicated,” Fretz says. “That’s why we make one person accountable for handling the integration and give them the right tools. We’ve found that to be a successful method.”
Fretz says good acquisitions don’t just start when you identify a company you want to purchase. Doing it right begins beforehand, when you and your senior managers sit down to plot a course for your company.
You need a well-defined identity and a set of values that will determine how the company grows in the long-term. Without an agreed-upon vision for growth, companies tend to grow erratically and may make acquisitions that are a bad match. “You have to know what you want to have happen,” Fretz says. “The initial plan is critical.”
The plan should enable your employees to make the most of growth opportunities. “Too often, you can add people to an organization, and you don’t give them the right tools, whether it’s the right computers, operations manuals or anything else,” she says. “Not surprisingly, then they can’t get the job done. It’s very important for a company to provide people with the resources they need and the capital investment they need. “If the focus is to grow the business, people have to feel you are in back of them, supporting what they are trying to do.”
Because she runs a company that primarily acquires physical infrastructure such as pipeline, Fretz doesn’t typically have to integrate company cultures the way CEOs in other industries might. But she says every acquisition requires, to some degree, the splicing of two organizations into one body.
When combining cultures, you must be able to look at the bigger picture. From a financial standpoint, one company is purchasing another. From a people and culture standpoint, the playing field should be far more level. “I’ve been through acquisitions where we’ve brought on people in the past,” Fretz says. “I think what is good about a business with diversity is that it brings in people from different areas with different ideas.”
A company needs an injection of new ideas every so often and the ability to consider those ideas. Otherwise, it will go stagnant. “If you’ve been with a company for a long time, you tend to have some tunnel vision sometimes,” Fretz says. “In our company, much of our top management has come from other companies. I think that diversity of thought is very helpful in trying to think about new ways of looking at assets, coming up with new ideas about how to be more efficient or how we can attract more people.”
It’s all part of a top-to-bottom analysis that Fretz and her senior managers perform upon making an acquisition. Though Sunoco Logistics is primarily interested in the physical infrastructure of an acquisition, Fretz says it would be foolish not to look at the human capital, as well. “Some of the people who come over here have had ideas that are more efficient, and you just have to move to implement that,” she says. “If you’re not that big, then that’s not a difficult thing to do. We stay fairly open to new ideas.”
Fretz says a best-practices approach to culture integration is critical. “The success of the company is based on how well you select your employees,” she says. “We bring in a lot of people from the outside, and whether they are coming in through hiring or acquisitions, my view is, that determines the success of the company.”
Acquisitions typically mean a bigger footprint, which can make communication a major challenge.
Sunoco Logistics has a presence across a wide area 1,100 employees in 13 states. The broad area of operation means Fretz cannot always communicate directly with those in the field and must rely on those beneath her to disseminate her vision and messages.
Trying to speak through the organizational chain of command has taught Fretz to keep the message simple and to the point. “The thing that is important is not to send too many messages out,” she says. “You have to figure out what’s important to the company, the five key things that no matter where you are or what group you’re talking to, you’re focused on.”
Fretz uses a combination of informal communication such as e-mail and phone calls, and more formal communication such as managerial meetings and newsletters, to communicate the company’s main themes of maintaining a safe work environment and improving cash flow. “Safety is a big deal to us, as is continuing to improve the cash flow to the unit holders,” she says. “I am talking to the field locations, but they’re not seeing me all the time, nor should they. It’s really about sending messages down through the managers. “Since we’re spread out across 13 states, I can’t talk to everyone on the phone every day.”
When your operations are spread across a large area, messages tend to become contorted or diluted as they pass from CEO to corporate manager to site manager to worker.
Fretz says the only way to combat that is repeated reinforcement of the message whenever possible.
After an acquisition has had some time to become assimilated to its new surroundings, a CEO should ask one question before any other, Fretz says: “Did it do what I wanted it to do?”
After you have sat down, mapped out a plan, did your due diligence and bought the asset, you should always ask yourself, six months, a year or two years later, if the acquisition is a success. The answer to that question is usually found in the financials of an acquisition. Fretz says that normally leads to a second question: “What could I have done better?” “Were there risks involved that I didn’t anticipate?” she says. “You have to put that in your model going forward.”
At Sunoco Logistics, the risk in an acquisition begins and ends with the money involved: the money spent versus the money reaped and whether the addition created value for the company’s unit holders.
Viewing an acquisition first and foremost through a financial lens allows a CEO to take a more objective picture of how an acquisition is affecting his or her company, Fretz says. It’s valuable information that can aid a CEO in the next acquisition opportunity.
Fretz says that as part of the due diligence process, the project manager helps calculate a walkaway price based on the production that can be expected from an asset and the risk involved with taking over the company. If the price exceeds the walkaway number, that’s exactly what the company must do. “We try to assess all the financial risks and come up with what we feel we can afford to pay for the asset,” she says. “We also look at how we might be able to grow that asset in the future, because that’s really the key to going out and acquiring something. “We come up with a walkaway price that we’re willing to pay for something or invest in something. You just sometimes have to have the discipline to walk away from something that’s just gotten too expensive.”
HOW TO REACH: Sunoco Logistics, www.sunocologistics.com