We start another interesting 2-part series today as we discuss some common mistakes in the M&A space. To help us do that, we have with us on the show Toby Tester from Beyond the Deal. In this series, Toby talks about the M&A failure club and how you can avoid being one of their members, as it is (quite frankly) a fairly easy club to join.
- From Aerospace to M&A
- Three Key Areas of M&A Success
- Don’t Catch The Deal Fever
- Boards Need To Be Actively Involved
- Get Educated And Follow Best Practice
In this series, Toby talks about the M&A failure club and how you can avoid being one of their members, as it is (quite frankly) a fairly easy club to join. We also talk about this interesting concept if “the deal fever” – what it is and how not to catch it! And then in part 2, we also talk about “zombie acquirers” – how to avoid them and how not to be one! So, trust me when I say that the next two weeks with Toby will be a whole lot of fun – and very educating. Let’s jump right in!
Joanna: Thank you so much Toby for coming along today to talk about the common mistakes and how to avoid them.
Firstly, I just have to say I have to credit the title of today’s podcast to you “Don’t join the M&A failure club.” I think this is a fabulous title, Toby. You’re very creative clearly.
Toby: Well, to be honest I don’t know much about creativity. I have actually seen that before and I thought that’s a great title. Let’s use it on this occasion.
Joanna: I love it. I love it. I really like it. The M&A failure club. I really want to drill into this. It’s heavily loaded. Just a few words, but there’s a lot that I really want to drill into.
But first, I just thought it might help to set the scene a little bit. Maybe if you could give a really quick background of who you are and what you do just so that our listeners can get a bit of context to what we’re talking about today.
Toby: Okay. Well first of all my name is Toby Tester and I think you probably sort of gauged from my accent that I originally came from the UK. That’s where I came from. With regards to the whole merger and acquisition discipline, it’s something I’ve been involved in for the last 17 years of my career.
From Aerospace to M&A
I started off life as an engineer, moved into banking and finance, working for some major banks around the world. Then after that, I moved into M&A and I’ve been focused on this as I said for about 17 years.
It’s a fascinating exercise, a fascinating area and I have seen plenty of success but also failure too.
Joanna: When we were talking the other day, I think one of the things that I thought was really interesting in what we were discussing was your comment, which I completely agree with, that often you can learn a lot more from the failures of the things that go wrong than perhaps the success stories albeit I have a feeling today you’re going to tell us there’s not a hell lot of success stories.
Toby: Yeah. Well that’s your fact. I would say, there’s two things in life you either succeed or you learn.
Joanna: Right. I like that.
Toby: Failure is really just an opportunity to learn. It happens and obviously as we see others struggling especially with M&A. Sometimes it’s like the proverbial bar of soap in the shower. It’s sometimes rather hard to grab hold of. But it’s important to understand when you are successful in holding that soap, but also times when you drop it. Well, what can I learn from that?
Joanna: Yeah. Great. I love it. Before we get past your background and your history I just have to ask you about a couple of things that I’m extremely interested in. Aerospace, you started off your study in aerospace. Really?
Toby: Yes I did. My original degree was in aerospace. My very first job was actually writing software for flight simulators.
Toby: So I actually wrote software that went into flight simulators for pilots. People who are learning to fly for commercial aircraft are put in simulators first. They would fly these simulators using the software that I’d written to effectively practice and to obviously gain their qualifications so they can indeed fly commercial aircraft.
Joanna: That is so fascinating. Now tell me, I’m not sure if you’re going to be able to find an answer to this. But here is a tricky one. Where is the crossover between aerospace and M&A?
Toby: Well, I’ll say. It’s a deeper one. But perhaps I can explain this one.
Fundamentally, I’m an engineer. My background is fundamentally around engineering, which engineering quite frankly is often described as like mathematics applied. It’s the application of math. But also of rational, clear thought processes intending to design something that will work in practice.
When I look at M&A, I look at M&A as a very objective process which consists of a series of steps which you can indeed engineer to ultimately lead to success. So I take a very rational engineering mindset to the way M&A is done.
So I strip out the emotion. I look at the objectives of what you would need to do. Look at the stepping stones and how to engineer those stepping standards towards what is ultimate success for an M&A deal.
Joanna: That’s amazing! What a fabulous answer to that interesting question. I love it. I love it, Toby. It’s really interesting.
I think it’s great because it gives us a really good background and perspective on some of these things that we’re going to talk about today. I’ve just got one other question for you. I saw in your bio that you are an accredited PRINCE2 practitioner. Take us through that. What does that mean?
Toby: Well actually, in the project management world, there are two well-known project management methodologies out there.
One is the something called PMBOK by the Project Management Institute which is a broad set of steps that you take when you are project managing something. Then the other one is something called PRINCE and PRINCE stands for PRojects IN Controlled Environments.
Joanna: Nothing to do with the singer. Got it.
Toby: No. And it’s got nothing to do with Machiavelli.
Joanna: I thought this was going to lead into some very interesting questions but.
Toby: You thought I was somehow what a devotee of Prince or devotee of Machiavelli? Not quite.
Three Key Areas of M&A Success
Joanna: How about we talk then a bit more about the fabulous title of our podcast today which is “Don’t join the M&A failure club.” What is a failure?
To me this was a really catchy title particularly because of course it suggests that there’s quite a large club out there of failures of M&As. So how do we work out whether a merger and acquisition is in fact a failure? What does that mean?
Toby: You did highlight that in the M&A failure club, you unfortunately do have a lot of unwitting businesses out there who find themselves joining this club.
That is not one you really want to join. It’s so easy to get into this club. How can you enter this club? This failure club.
I think perhaps the best way to do it is to think of it in the flipside. Think about success. Success is obviously subjective. Sometimes people see it as subjective. They say well we did this and yes were a success. It was all great but didn’t drill down any further.
But let me just drill down just a little bit about what success is and I’ll define success to you in three major sort of areas. One is strategic success. In other words, was the deal done? Did it achieve its strategic goals that you set out right at the very beginning? Was that achieved?
The next criteria for success is financial success which is an obvious one. In other words, did it deliver shareholder value? Did it create a return on investment? Did it actually achieve the profit forecast? So there’s a number of different goals. Did it achieve those goals?
And then the third criteria of success is operational success. In other words, have you achieved what you wanted to do deep down on an operational level? So that ultimately regardless of the market conditions or whatever. This business has got a long term future to it and the long term future comes down to having good operations. Were those operational goals achieved?
So I say, was it strategically successful? financially successful? operationally successful? Those are the three key areas of success and of course the flipside of failure.
And Joanna, I’m going to show some statistics to you just to give a sense of how big this M&A failure club is. I’ve read lots and lots of surveys. They’re done all the time around the world, asking big executives these key questions.
But I’ll point to one and it was actually a 2017 survey. So it’s quite recent, by Price Waterhouse Coopers and they asked hundreds of executives who did deals – was your acquisition a strategic success? 55% said yes. 45% therefore, it wasn’t seen as a strategic success.
Same question for financial success. Did you achieve your financial goals with your acquisition and then the survey response was 50% said yes, 50% said no.
Joanna: Wow! Even to financial success?
Toby: Even financial. So this is an interesting thing and here we are, 2017. We are finding that M&A sometimes can be the biggest investment a business will ever make. The odds of success is no better than a coin toss.
Joanna: Wow. We have to highlight this quote I think Toby in this podcast. That’s definitely a tweetable quote as we say.
But when you put it in that light, that’s really huge. That it’s no better than a coin toss and certainly a lot harder.
Toby: Exactly. Now I don’t want to think of M&A as like taking a trip down to the casino. You would like to think that when you’re spending the biggest investment decision you’re ever going to make that you want to have really good odds for success. You know that it can’t be 100%. You know that there’s always going to be variables. But a coin toss? Come on. It’s got to be better than that.
Joanna: Yeah, absolutely. Out of these three areas: strategic, financial, operational. It sounds obvious that maybe organisations clearly aren’t looking at each of these areas in enough detail for those statistics to reveal what you’ve just talked about now.
Which of these areas generally do you feel organisations are looking at when they’re contemplating a deal as the most important? I’m guessing financial. But I’d be interested to hear what you say here.
Toby: Well obviously out of those three I’d say financial is obviously paramount and so it should be. Ultimately, we need to look at how a business is valued, making sure that is appropriate for a valuation exercise that is done and I like to talk about that a little bit more actually, about where valuation issues there are, valuation mistakes that are made. But valuation is absolutely key to this to achieve financial success.
I think the big mistake with strategic success is understanding very much where this deal actually fits. So if we are saying I’m going to buy this business, then you’ve got to say well strategically how do these two businesses fit together?
It’s a really fundamental question and it really comes down to how do we fit together in terms of our markets? How do we fit together in terms of the customers we fit together? How do we fit together in terms of our operations in our systems?
And so it’s making sure there’s proper deal fit and there’s a common term out there known as capabilities. In other words, when you have people like myself talking about M&A and strategy, we often talk about what are the capabilities that you have as an acquirer and what are the capabilities that you want to have to add to that you don’t currently have that you want to have. It’s important to see that from a strategic point of view so that all those capabilities do add up to something that’s greater than what you’ve currently got.
Joanna: Why do you think it is? Obviously we’ve talked about the fact that an acquisition may be one of the biggest investments an organisation makes or indeed if they’re on the path of many multiple acquisitions and the totality of those acquisitions are one of their biggest investments.
We all know acquisitions take time, energy and resources. So if an organisation is going down the path of an acquisition, why is it that they were failing in these areas: strategic, financial, operational? One would assume there would be a lot of attention applied to what success looks like from the beginning. But clearly not.
Don’t Catch The Deal Fever
Toby: Clearly not, no. Let me explain this one. I’m going to give you the really big mistakes.
I think this comes down to and I think when I say this I think people hopefully will be nodding and agreeing to this one. One of the very first mistakes and I think it is because of this whole deal pressure is something called deal fever.
It is an ailment or it is a certain condition that executives find themselves getting into when getting the deal done is all that matters. In other words, basically they are thinking that deal completion is all that matters but not necessarily deal success. Deal completion does not mean deal success.
Joanna: And I think deal fever is contagious as well within an organisation, right?
Toby: It is very contagious. And if you have someone who has deal fever, that fever will start spreading. And so what we need is an antidote to that deal fever and it’s a very simple one really, is simply just making sure that when we go through this whole M&A process, making sure we have clearly mapped it out as a process.
In other words, there really are very clear steps, objective thought and clear processes that we go through so we go from one step to another step, another step, another step and don’t suddenly leapfrog over all sorts of steps because of this fever.
So I think deal fever is our biggest problem and the answer to the antidote is make sure we have objective thought and a clear process and governance around it.
Joanna: I think that’s a really good point. I was actually just having this discussion just yesterday with an organisation that has been approached to be acquired for a very substantial sum and they were talking about this massive due diligence list that they had received. Even though it’s a sizable sale, sometimes we see these DD list that are out of control.
Toby: Absolutely. I see them all the time. Yeah.
Joanna: Yeah. And sometimes what happens there is (I feel) when you’re dealing with DD list like this, sometimes you lose the wood for the trees. But certainly this wasn’t a tale at least for the organisation that was receiving it.
But they were talking about a discussion that they had with another organisation that had previously been acquired by the prospective buyer who had also received the same DD list and started studiously working through it and the buyer had this deal fever that you’re describing and halfway through this, they said hold on it’s taking too long for us to get all that information. Don’t worry about the DD list. Let’s just move on.
I guess here is an absolutely clear example of the problems. Number one, of having a requirement that isn’t tailored to the organisations that you’re looking at purchasing right. But number two, when deal fever hits and all the sensible thought goes out the window in order to get the deal done in a quick time.
Toby: And I think Johanna, just going back on your point on the DD list. I’ve seen these big deals too. But I’m not a big fan of lists. I know they’re important. But I think they do need to cover all areas of a business, not just the financial, the legal but also the people aspect as well to make sure that the appropriate people and culture assessment is done.
Above all of this is that the whole idea of DD is really to find out where are the key risks. So it’s important that those risks are truly spotted. They are highlighted. But also, how you’re going to deal with them.
In other words, how you can deal with them during that whole deal process. But also afterwards. So if there’s a certain market risk perhaps, then let’s highlight it and say what does this highlight? Is this a deal breaker? Maybe not. Okay. How are you going to manage it afterwards? But making sure that there is a clear risk management strategy and plan.
Joanna: Absolutely. Which really requires careful thought in the beginning about the relevant aspects of this deal. It annoys me sometimes when I see cookie cutter approaches because I feel like there’s a lot of wasted time. People get focused on the wrong things.
Toby: That’s right. The cookie cutter approach sometimes is a kind of a crutch that I think people who probably haven’t had a lot of acquisitions or sales under their belt and they fall back on that.
But I think it’s the case that look it’s necessary. I think cookie cutter or templates and the like are all good but it’s experience and having passed the fire is actually finding out where the real issues are. I think that comes down to delving into these common mistakes and once again, deal fever.
Are we actually stepping over the process and tripping up ourselves and not gone through an objective thoughtful process? That’s a problem. It’s important that yes cookie cutters, we got to have that sort of thing but it’s the experience that tells you where you need to look specifically on any one deal.
Joanna: Don’t let it replace the thought process. I guess that’s the point right?
Toby: Yes. Don’t let it replace thinking.
Let’s Take A Break
Let’s take a short break. When we get back, Toby continues down his list of common mistakes which can unwittingly make you a member of the M&A failure club.
He talks about the important role of boards in acting as moderators for M&A deals, and the value of getting yourself educated about the best practices in the industry.
And that’s next! I’m Joanna Oakey and you’re listening to the Deal Room Podcast, brought to you by Aspect Legal.
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Welcome back! Earlier, we got to know Toby, his unique background in aerospace and engineering – and the fascinating connection between these two fields to Toby’s approach in mergers and acquisitions. We also talked about the three key areas for success in M&A transactions – strategic, financial and operational. Toby also warned us about “the deal fever” and how we can avoid catching it.
Now, let’s jump back to our conversation with Toby and talk about two more common mistakes that can unwittingly make you a member of the M&A failure club.
Boards Need To Be Actively Involved
Joanna: Okay, so deal fever I completely agree with that one. I’m excited to hear what number two is Toby. What’s number 2?
Toby: Oh dear. Okay, boards. I think sometimes boards are not acting as moderators.
Toby: I think it’s important that, and this comes down to avoidance of deal fever again. But I think it’s by the boards themselves not to see themselves as rubber stamps but to be the ones who are indeed the final arbiters, who do have the final say and do approve the deal.
In other words, it’s not a management exercise per say. I think boards need to be actively involved in any M&A deal, to be fully across it, understanding the risks, but also to make sure that we are indeed following a proper process.
Joanna: And so how do they do that? Because the issue for boards is that there’s a lot for them to be considering all the time. Often it’s very hard for them to get into the detail of anything really. So what’s the approach that you recommend following to make this achievable practically?
Toby: Well I think boards primarily are a governing body and so what they need to do is to ask first of all what is the governance process that we’re applying over this deal?
In other words, how did we come to select a certain number targets? How do we prove what those targets are? That’s what the board has to do.
Then it’s a case of the next stage gate, a point at which you go back to the board and say board here’s the transaction information around a particular deal. Here are those key summary of points. Let’s go sit down together and actually approve the next step.
It comes down to actively be involved in them. But above all, it is a governance exercise. So the board needs to be applying that governance process to the deal.
Get Educated And Follow Best Practice
Joanna: Okay, I like that one. And then what’s number three?
Toby: Ooh number three, not following best practice. This comes back down to deal fever again.
Now let’s be honest. There are thousands of deals happening around the world all the time. This is a major exercise for investment, where any organisation is looking for inorganic growth.
There is a lot of good practice out there. Books have been written about this. A lot of information on how to do valuations, how to do diligence, how to actually progress a deal, how to integrate a deal out there. Lots of great best practice.
Basically, read up on it. Understand what these best practices are and don’t let highly aggressive timelines run roughshod over best practice.
Joanna: So you’re talking about the education in terms of best practice. People involved need to get educated.
Toby: I think M&A is a well disciplined exercise. It does have a lot of literature. There’s a lot written out there. Don’t run it like the city of pants. Much has been written, said on this topic. There is a lot of good practices out there. I’d say follow them.
Joanna: If you can think of any off the top of your head, what are your top tips here for people who are wanting to get a bit more educated about best practice to go and read or look at?
Toby: That’s a good question. First of all, I think the Australian Institute of Company Directors they actually run courses on this topic. They also have events on this as well.
So for directors, I think that’s a great place to go. They are always running courses and they always have an event which they’re running, a seminar on this very topic and the role of directors.
For executives, I’d say that there are many articles written. I’d say first of all by the major accounting firms. So PWC, Ernst and Young, Deloittes and the like have written many articles on those best practices.
Then I’d say for accountants, I’d say that there is that going back to say for example the Australian Institute of Chartered accounting. They also have seminars. They have also training events around M&A and particularly around valuation.
Joanna: And of course we should say and listen to this podcast. I think we should add that in there as well.
Legal Wrap Up
As a quick recap, today we opened the series by getting to know Toby and his unique background in aerospace engineering, and how this field influenced the systematic approach that Toby takes on merger and acquisition deals.
Toby then identified the three key areas in assessing whether a M&A deal was successful or not. These are the strategic, financial and operational aspects of the transaction.
Then he introduced us to the common disease that’s infected members of the M&A failure club, what he calls “the deal fever.”
Toby also talked about the importance of having the board actively involved in M&A transactions, acting as moderators of every single deal.
And finally, we close part one with a discussion on how to get educated in this area.
There’s definitely a wealth of resources available for buyers, sellers and advisors in this space that provide some best practices that you can adopt to help membership in the M&A failure club be avoided. In fact, I launched this podcast to do exactly that! To help all stakeholders in a business sale and purchase get the best possible deal.
At Aspect Legal, we offer a number of great services that help businesses prepare for a sale or acquisition and get transaction ready. We also have a range of services to help guide businesses through the sale and acquisitions process.
We work with clients both big and small and have different types of services depending on size and complexity. We provide a free consultation to discuss your proposed sale or acquisition – so see our show notes on how to book a time to speak with us, or head over to our website at Aspectlegal.com.au.
Also, if you would like a copy of the transcript to this episode, head over to thedealroompodcast.com and look for this episode, Episode 30.
We hope you enjoyed our first half hour with Toby. Stand by for part two next Tuesday or of course, subscribe to our podcast on iTunes to be the first to know when a new episode is out.
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