[EP 031] How Not To Join The M&A Failure Club: The Common Mistakes And How To Avoid Them (Part 2)

Hi, it’s Joanna Oakey here and welcome back to The Deal Room Podcast, brought to you by our commercial legal practice Aspect Legal.

Welcome to the final half hour of our 2-part series with Toby Tester where we run through some common mistakes that unwittingly get you into the M&A failure club, and this is a club that you certainly don’t want to be a member of.

In part one, we got to know Toby and had a bit of discussion about his background in aerospace, and how this field heavily influenced his unique approach to M&A transactions. Toby also drilled into the three key areas by which we measure the level of success of a particular deal or transaction. So those are, if you haven’t heard the episode – strategic, financial and operational aspects.

We then talked about the first three common mistakes, which are “the deal fever,” a passive and uninvolved board, and the failure to get educated and follow best practices.

So if you missed part one, make sure to flip back to Episode 30 and have a listen to it which you’ll find on iTunes or via our website at thedealroompodcast.com.

But for now, keep listening in because in this episode, we will talk about the concept of seeing your M&A transactions as transformation opportunities rather than a mere business process. We also talk about “zombie acquirers” and how not to be one. On the flip side, if you’re the seller, these are the sorts of buyers that you would like to keep away from.

Then we look into three key investments that you ought to consider, to ensure successful outcomes from your M&A activity, that is investing in people, in processes and in good leadership. And finally, we close this series by leaving you with some actionable tips in this area, if you’re an advisor involved in this space.

So, here we go!

See M&A As A Transformation Process

Joanna: So understand best practice. Get educated. I like that one. What’s next on your list there Toby?

Toby: Well, the next one on the list is and this is an interesting one. It is to see M&A as a transformation opportunity and not a business process. When I say this what I mean is this, the reason why we go ahead and acquire business is that we want to transform what we do. Don’t see it as simply an exercise to buy a business and to complete a deal and then figure out what you’re going to do afterwards.

Think of this as here’s an enormous opportunity to really be game changer. You’re changing the game in terms of what you’re doing. M&A is a catalyst for change and so it is possible and a great opportunity to transform what you do.

M&A is a catalyst for change and a great opportunity to transform what you do. - Toby Tester #TheDealRoomPodcast Click To Tweet

Don’t just see M&A as just a process of acquiring a business, paying money for the business and then doing something afterwards that somehow integrates to a certain extent, but a few bits and pieces here and there. But think of it more holistically as a transformation opportunity.

Joanna: Which is really interesting because often I feel organizations see M&A perhaps through a singular lens as a growth tool, but perhaps not as a transformational tool as you’re talking about.

Toby: Well, it’s certainly a growth tool. But transformation and growth are somewhat synonymous. I think what we’ve got to say is yes of course it is growth. But how do you achieve growth?

Growth is achieved through the act of transformation and when I say transformation, it means looking at an actual business model, looking at your operating model and say what is it I’m actually changing to that business model and what are the steps that I need to be taking once I acquired this business to basically renew my business model.

Going back to the business model and actually saying what’s my business model going to look like after I achieved this business.

Joanna: Which requires a lot of thinking. I can see the issues about why this thinking process would really have such a massive impact in really expanding success that’s possible from an acquisition.
Toby: Yes, indeed.

Watch Out For Zombie Acquirers And Don’t Be One

Joanna: Part of what you’ve touched on there I think in relation to the integration side reminds me of. I’m dealing with an issue at the moment with a client that is dealing with an organisation that has just completed a large run of acquisitions.

Now the issue in this particular environment, a very large organisation, is that they have failed to integrate the systems. In this case, it’s in particular the technology systems. But I think that probably also runs through to many other elements of the business, but technology is the area that is primarily noticeable.

That means that what that’s caused in this business is for the business process itself, that used to run well in each of the individual organisations before, they were merged together almost seizing up because of a failure of someone to sit there and look at how we integrate all of these parts in a way that transforms us into something better. On the opposite side, what is actually created is a business model that’s starting to seize now.

Toby: Yes. Joanna, perhaps what you’re looking at is probably one of the biggest issues of all. If I go right back to failure and joining the failure club, remember I talked about strategic success which we touched on, financial success. The last one was operational success. What we’re talking about now is operational success and that’s the area where organizations find themselves to be least successful.

I have a term for this. Organizations that actually go around acquiring other businesses and don’t integrate. Basically I refer to them as zombie acquirers.

Joanna: Zombie acquirers! I like that Toby. See I told you you’re creative!

Toby: Zombie acquirers are those that buy businesses and leave nothing but dysfunction in their wake.

And the way that happens is that they don’t integrate. In other words, and I think many people have seen it, I’ve seen it where you have multiple general ledgers, multiple technology information systems and multiple this and multiple that. It gets to the point whereby the organization can’t even produce a single consolidated PNL.

Zombie acquirers are those that buy businesses and leave nothing but dysfunction in their wake. - Toby Tester #TheDealRoomPodcast Click To Tweet

Joanna: Yeah.

Toby: And if you can’t do that, then on the old adage that you can only manage what you can measure, then you’ve lost all management control and you have a rudderless ship.

So integration is the critical factor in all of this, to make sure that an M&A deal is a success.

Joanna: Yeah, absolutely. It’s interesting. If we go back to talking about what it is that organizations are looking at prior to an acquisition and we discussed financial and strategic. I just wonder if often they’re just not thinking clearly about operational and what operational success looks like at the end.

Toby: Indeed. I think that comes down to understanding what happens afterwards and I think again they come down to deal fever again.

Deal fever and what that means is that deal success, deal completion define success and it’s not. It is what happens after the deal is done. So sometimes, deal fever means that you can’t see past the deal completion. The point at which money is handed over and the key is then taken over to the business.

There is more work to be done and I think it’s important that when you acquire business and the deal completion has occurred, all you’re getting is a promissory note of future value. That check has not been cashed.

This promissory note will turn into cash. But to do that, you need to integrate the business and to integrate the business, you need to think clearly and logically about all the bits that you need to do to ensure operational success.

Joanna: I do wonder as well if this comes back to picking the right people to be on the deal team and and applying the right roles for each person. Because often there really does need to be a certain energy behind someone who is pushing the deal because sometimes to get the deal across the line you really need. Maybe you need a little element of the deal fever to actually keep you focused enough.

People, Process and Leadership

Toby: I agree. There is that little element. I’ll make it real simple.

When it comes to having success, making sure that the biggest investment that you’re ever going to make as a business is going to be successful. There are just three things.

One of them is people. Make sure that you’ve got skilled people who have passed through the fire before. They know what it feels like and you can apply those knowledge and skills to your particular deal and that could be a number of different areas, whether it’s an evaluation, whether it’s due diligence, whether it’s an integration, whether it’s in the legal side. It’s ensuring that you’ve got those experienced people on board.

Secondly, make sure you’ve got a process. You’ve got goals. You’ve got governance and a clear set of steps that take you from the beginning of a deal all the way to the very end.

That said, the third one which goes straight to your point about a little bit of the deal fever. And I’d call that leadership. I think fundamentally it’s bringing those people and the process together because ultimately a failed merger or a failed deal is a failure in leadership.

Ultimately, a failed merger or a failed deal is a failure in leadership. - Toby Tester #TheDealRoomPodcast Click To Tweet

Joanna: Yeah. Which is a really important point. Part of that leadership as well is going back to making sure you have the right people on the team.

When you’re talking about skilled people, it’s also about making sure that you have someone who specifically has their eye on the operational elements or specifically has their eye on integration as a whole.

Toby: Absolutely. I often think of it as, you remember the times in the circus when you had someone spinning lots of plates on sticks. They go around and they shake that little stick and their plate’s spinning and they shake and let’s take another plate.

I think that’s the role of leadership. It is to make sure that you’ve really got all those plates spinning and none of those plates fall over. I often think of an M&A deal like that. So I’ll give you that visual that I lay off as lots of spinning plates on sticks.

Joanna: I really like that visual. I’m sure all of our listeners now will be leaving this podcast just forever more thinking of an M&A deal in terms of spinning plates.

Toby: On top of a sticks.

Joanna: On top of sticks. Exactly.

One thing I want to ask in all of this. I think a lot of the studies that you’ve talked about have been focused on large deals. Is that right? Larger organizations, listed organizations.

Toby: Yes.

Joanna: I’d like to talk a bit about how this applies also to smaller transactions because I think everything that you’ve talked about is equally as applicable to smaller transactions as well. What’s your feeling about that?

Toby: I’d agree with you. In actual fact, I would say that it actually, if anything, it applies even more. Because when you’re dealing with the big deals, they’ve read the literature. They understand the problems and they’ve learnt the mistakes.

There was one announced today. I think it was Fox. Disney is buying Fox movies I think it was. That’s an enormous deal. Fifty-five billion if I remember correctly. There’s a lot in that and so they will make sure that that gets executed well.

The thing is that the same things I’ve been talking about really do apply to small acquisitions as well. Even if it’s just a million dollars or two million dollars or even less sometimes. The same problems come up.

It is basically making sure that we got the people on board who know what they’re doing to make sure the deal is a success. There is a process and there is leadership and so it comes from those three things. They don’t go away. And yes, you don’t need such a big due diligence checklist that you were talking about earlier on.

Joanna: Although sometimes it’s still provided.

Toby: Nonetheless, go through the steps. Sometimes it is a step you’re not going to follow or you’re not going to take on this particular case. You’re doing it knowingly.

In other words, there is most certainly a method process, clear sets of steps associated with the whole M&A exercise and to go through it consciously. Go through the steps and then when they don’t find your particular deals then that’s not applicable to us. Check. Okay fine. Next.

Let’s Take A Break

Let’s take a short break. When we get back, Toby walks us through his simple strategy in approaching M&A transactions. And of course, we close this series by leaving you with some tips if you’re an advisor working in the fascinating world of mergers and acquisitions.

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

Welcome back! Earlier, we talked about the concept of seeing M&A as an opportunity to transform what you do in your business. We also warned you about what Toby calls “zombie acquirers” (which I think is a fabulous name) – organisations that go around acquiring other businesses but don’t integrate. And just before the break, Toby drilled into the importance of investing in good people, good processes and good leadership, in order to get the best outcomes for your M&A deals.

Now, let’s keep the conversation going and talk about Toby’s simple yet unique strategy in helping his clients through a business sale or purchase. And finally, we close out the series with Toby’s top tips for M&A advisors and how they can help keep their clients from joining the M&A failure club.

A Simple Strategy That Tells A Story

Joanna: And so, when you work with organisations Toby, how is it that you help them work through each of these areas? Because there’s a lot there. There’s a lot in what you’ve been talking about. There’s a lot as you say bringing back the picture of the spinning plates. There is a lot for us to be managing and thinking about.

So what’s the process that you use that you find most effective?

Toby: Broadly speaking, whenever I talk to organisations who are doing a deal, first of all I want to be involved obviously before any deal gets completed because I think it’s so important that everything set up beforehand in a strategic sense.

So the part I play is I first will say, is there a strategy? And is there a strategy that is simple meaningful and tells a story? So I will be looking for that story and if there isn’t a story, then let’s write the story.

I often think of this as like a movie. Let’s go ahead and get the storyboard, that has simple messages, simple things we’ve got to do but very clear in terms of what we’ve got to do both before completion but also after. So let’s just get the strategy right.

The next part in this play. Let’s look at the financial success. In other words, let’s look at value. Now, sometimes it’s really hard to isolate value and you can do it to a certain extent during the due diligence. But don’t stop there. In other words, always look for value and talk to the staff. Talk to all the key stakeholders in terms of where they see opportunities for value creation.

It’s amazing how much value does not get identified and turned into real profit. I think the staff are the best founts of knowledge when it comes to identify what those sources of value are and that’s part of my role is to help identify where that value lies.

And then final thing is operations and integration. The part I play here is to look at the operations and think of that in terms of something called an operating model and to say what is the current operating model now, what is the operating model in the future going to be. Let’s draw that picture and then let’s work out what are the steps we got to take to get from this operating model to the future operating model.

Fundamentally, that’s what I do. It’s strategy. It’s finance. It’s operations.

Fundamentally, that's what I do. It's strategy. It's finance. It's operations. - Toby Tester #TheDealRoomPodcast Click To Tweet

Joanna: And you mentioned again valuation. Earlier you talked about the concept of valuation mistakes. What words do you see in this area of valuation mistakes? What are some of the biggest issues that you see played out in this area?

Toby: Okay yeah. It’s a good one.

First of all, there’s an unclear assessment of what is value in the first place. When we do evaluation of a business, we are also looking at what are the synergies that are going to be created from this deal. So from a valuation perspective, what we need to do is to itemize all those profit pools or areas of value that can be created post deal. I think in the valuation process, when we value a business we got to also identify what those areas of value can be and there’s multiple areas.

There is cost savings. Of course cost savings but also there’s areas of revenue opportunities. You may not price those revenue opportunities in terms of how you might value the business because revenue is more of a risky area. But nonetheless, still go ahead and try to value what the revenue opportunity is going to be.

The important thing is that from a valuation perspective, it’s not a point in time. It’s a continuous process. In other words, constantly revisiting your valuation and those synergies as you go through the deal. So you might just do the due diligence. Do it again around completion time and also after completion and see where there are more opportunities to unearth value.

Tips For M&A Advisors

Joanna: Okay great. All right. I guess this links in then to one of the last areas that I wanted to talk about. We have a lot of people who are advisors, M&A advisors, accountants, brokers. What tips do you think come out of each of these areas we’ve been talking about as being the common mistakes in the M&A failure club entry process? What are tips that you have for advisors to business?

Toby: Well, I’d say to advisors, when you’re dealing with your customer, think not just about deal completion as being the single point of success but also think about what deal success really is. In other words, I’d say advisors think of it from the customer’s perspective that yes they want to acquire business but don’t think it all stops just at completion.

I know that’s the way our fees are earned. But to deliver great service to the customer, always think about what is success and think of it in terms of success, not just pure completion. Because sometimes bad deals get completed. Sometimes an advisor should turn round and say quite frankly, I know I may not actually be earning fees here in this particular circumstance, but my recommendation is that I don’t think this is an appropriate deal to go ahead.

Sometimes bad deals get completed. - Toby Tester #TheDealRoomPodcast Click To Tweet

Joanna: And this is a really interesting space isn’t it? Because a lot of M&A advisors are remunerated on successful transaction completion.

Toby: Correct.

Joanna: And it’s an interesting part of that type of model, isn’t it? Really.

Toby: Yes, it is. It’s a structural issue that we actually have in M&A that chief executive officers obviously are interested not just in deal completion but obviously achieving deal success.

In other words, they truly do get a chief strategic success, financial success, and operational success. But the advisors are remunerated on completion. In other words, just simply getting the deal completed that’s how they earn their fees.

But I’d say that the more enlightened advisors need to think more on the executive side in terms of ensuring that this transaction ultimately becomes a great success. Then obviously there’s future work as well with that particular client. It’s looking beyond completion.

Joanna: I’ve actually seen a couple of sets of M&A advisors do this really well. I think that you have to be very bold to act in that way with your customers because it’s a big brave decision to advise against something that then means you’re not getting the big pay check at the end.

Quite often M&A advisors will get some sort of payment through the process. But really the biggest payment comes on success. Whilst it’s a bold move, I have seen some of the real benefits that it then creates for those advisors in terms of that lifetime relationship that you’re building up with the organizations.

Toby: Yep. Sometimes I think executors simply need to be told what they know to be the truth from their advisors point of view and to say this deal is actually not a good deal and I recommend that we do not proceed. I think that as an advisor, you’re going to get far more respect. You’re going to get far more in terms of future business if you simply turn around and say on this occasion I do not believe this is an appropriate deal for you.

Joanna: Maybe we should start here, by helping to build organisations a checklist for finding the right M&A advisors. Maybe that’s a good question to ask when you are shopping around. When have you recommended that a deal didn’t go through?

Toby: You don’t want a bunch of yes men. You don’t want to be surrounded by yes men. You want to have people who sometimes have the contrarian view and say on this occasion this isn’t the right deal for you.

Joanna: Okay, look Toby you have given us so much fabulous insight. I really hope you can come and join us again on another podcast.

Toby: Glad to.

Joanna: There’s a lot that we have to talk about and to drill further in to. Maybe before we end, are there any last tips that you want to throw out there for organisations who were seeking not to join this famous M&A failure club?

What I would say, and I think this is really an appeal to all executives, all accountants and many people involved in M&A. It is one of the most exciting things one can do in the corporate world. It is truly a fantastic opportunity to bring the business that you’re with to future heights and to put it on a new growth path. So I think it’s important then to make sure that we do it right. Do follow best practice and make sure that we don’t repeat those mistakes. Make sure it’s strategically successful, financially successful and operationally successful and don’t join the M&A failure club.

Joanna: Great! Thanks Toby. What we’ll be doing is on our show page on our podcast at thedealroompodcast.com, we will be linking through to you Toby so that if organisations or advisors are looking for some assistance in ways that they can avoid joining this illustrious failure club, they can get in contact with you.

Toby: And entry is easy.

Joanna: And I guess they can always head over to your website. And they will find you at btd.consulting.

Toby: Yes, [email protected].

Joanna: Great. Toby, thank you so much for your time. It has been an absolute pleasure.

Toby: Thank you very much Joanna.

Legal Wrap Up

Now that’s a wrap for this two-part series with Toby Tester of Beyond The Deal. We hope you enjoyed the fabulous insights that we’ve drawn from Toby’s experience in the M&A environment and his top tips for keeping away from unwittingly joining the M&A failure club.

To recap, in this episode, Toby talked about the concept of mergers and acquisitions as a catalyst for more and better opportunities for growth in an organisation. Toby also warned us against organisations who go on acquiring business and leave nothing but dysfunction in their wake because of their failure to effectively integrate.

We also drilled into three key areas – people, process and leadership – being essential elements that you ought to be investing in so that we reap the best results from our M&A transactions. Toby also gave us this amazing visual of how M&A deals can be akin to the task of spinning plates on sticks.

After our short break, Toby walked us through a simple approach that he finds most effective in delivering successful outcomes for his clients. And finally, we wrapped things up by leaving you with some actionable steps that you can use whether you’re a buyer or a seller yourself or an advisor in the fabulous world of business sales and acquisitions.

If want a copy of the full transcript to this episode, head over to our show notes at thedealroompodcast.com and look for this episode, Episode 31.

Well that’s it. Thanks again for listening in. You’ve been listening to Joanna Oakey and the Deal Room Podcast brought to you by the commercial legal practice Aspect Legal.