Podcast #40:
Making the Right Deal Happen: Mergers and Acquisitions
Transcript:
By Jim Tompkins, CEO, Tompkins Associates
Hello, this is Jim Tompkins, the CEO of Tompkins Associates and Tompkins International.
I'm pleased to be with you today on our global supply chain podcast. This is our eighth series, on the topic of mergers and acquisitions. This particular discussion today is on making it happen.
I'm pleased to welcome back today Kent Kedl, the general manager of our Technomic Asia group in Shanghai, Chain.
JIM:
Kent, welcome back! For the past several podcasts, we’ve been talking about M&A strategy and supply chain due diligence.
And now we come to a pretty important – but often overlooked – part of M&A: actually getting a deal done!
KENT:
You’re right, Jim. And maybe I would say that the stage of doing a deal is not overlooked as much as its just not thought of very much ... almost like the doing of the deal is automatic. However, we’ve found that just the opposite is true – getting a deal done takes a lot of thought and careful planning.
We have a saying in our practice that “A deal ends the way it begins”, it means, that if you start an acquisition in a disorganized and confrontational manner, then the deal is more likely to continue on that way past the close date. We’ve all heard the statistics that M&A deals are less likely to meet their original goals than they are to beat them.
JIM:
So let’s talk about doing the deal. What are the issues that we need to pay attention to?
KENT:
Well, let me start off by saying that I am going to address the “strategy” side of doing the deal ... the mechanics – in terms of legal, financial, tax, etc. - will be based primarily on where you are doing the deal (for example, doing a deal in China can look very different from doing one in the U.S.). So apart from the mechanics, successfully completing a deal, we believe, requires following three basic rules:
1. Start your integration plan early,
2. Always keep the original strategy out in front,
3. Remember that this is an integration of human beings, not just business structures.
JIM:
Sounds interesting. Let’s begin with the first one … starting your integration plan early. Typically we think of integration as the time when all the papers are signed, the money is transferred and everyone is good-to-go. But it sounds like you don't see it that way.
KENT:
No, Jim, we think of integration a bit differently. If you wait to begin your integration planning at the actual point of integration, you are too late! As you and Steve Ganster talked about in an earlier podcast, you are hopefully going into your M&A program with a really solid strategy in mind and that a detailed target selection and qualification have been done based on a set of criteria derived from that strategy.
That strategy should be at the heart of your integration plan, and you should start right away to go from a strategy to a detailed action plan. In fact, we work to start building the integration plan during the due diligence stages that you and Valerie talked about in a previous M&A podcast, because each integration plan is going to be different, depending on the target you eventually select.
For example, my strategy could be that I need to acquire distribution to several different types of customers, and my market intelligence reveals that the channels to these customers are all a bit different. So I look around for potential targets that have access to these channels. Now let’s say that my due diligence on a target reveals that they are quite strong in channels A and B but weaker in channel C. Well, in order to insure that my integration is going to be successful, I need to start developing a plan to beef up this target’s access to channel C – and I can’t wait until after close to do this! I should use the due diligence period to build and validate that plan.
Then, in discussions with the target’s management, I would focus on creating an execution strategy for after the deal closes.
JIM:
So what you are saying, then, is that you actually use integration as both a due diligence and a planning tool.
KENT:
Exactly! Think of the results of your due diligence – particularly your commercial due diligence – as the ingredients not only to validate that this is a good deal to do, but also as the foundation for your integration plan. You should have your integration plan developed – and agreed to by everyone, including, most importantly, the target management – well before you actually sign the final documents.
In fact, we’ve seen companies that actually begin to work on it while they are waiting for the mechanics of the deal to work themselves out. This is a huge time-saver and gets everyone focused on the reasons for why you did the deal in the first place.
JIM:
Well, this sounds like a good lead into your second point about always keeping the strategy firmly in mind. Why is that such a big issue? Aren’t all deals done with a particular strategy in mind? Can companies actually “lose” that strategy in the process of doing a deal?
KENT:
You’re right, Jim, a good deals start out with the strategy in mind ... however, at a certain point, doing a deal becomes a mechanical exercise, a legal and financial transaction. You’ve got certain hoops you have to jump through; approvals need to be gotten; documents drawn up, discussed and signed; lots of Ts to cross and Is to dot. But often, in the midst of the transaction, the original strategic intent of the deal gets lost ... or maybe just “misplaced”.
We had a situation recently where our client’s lawyers brought up an issue they discovered during due diligence. And in order to solve it, the lawyers recommended a certain structure to our clients. However, that structure would have lopped off a major part of the target company, a part that we were focused on because it supported our strategic intent to acquire this company to reach a certain market.
Now, I am not criticizing the lawyers … they were doing exactly what they needed to do, protect the client. However, if we would have gone ahead with that structure, a good part of our strategy would have been off the table. We were at the table when all this was happening and we were able to get everyone to look at the original strategic intent … and once we did that, we found another way around the issue, one that would satisfy the lawyers and stay true to the strategy.
JIM:
So it sounds like it's possible to do a deal, but not do the right deal.
KENT:
Exactly! In the heat of the transaction, it's crucial to remember just why you are doing this deal in the first place. Actually, my first point helps to hammer this home ... if you are focused on creating the integration plan early in the deal execution stage, then you are - almost by definition - going to be focused on the strategy itself. If the deal structure begins to change the initial strategy, you will know because it will start to mess up your integration plan.
JIM:
Sounds logical. Let’s move on to your third point: that it's important to remember that doing a deal is an integration of human beings, not just business structures. Are you getting all touchy-feely on us here Kent?
KENT:
Yeah ... sorry about that. It does sound kind of New Age-y, doesn’t it? But the point is an important one and is kind of related to my point #2 ... in the “heat of battle” of executing the deal – of negotiations, due diligence, lawyers, accountants, tax wonks, etc. – it is absolutely critical that you remember that, while you might have big plans and dreams for this new business, many people's lives are going to change. Now, you are hoping - I hope - that most of this change is going to be for the better ... you’ll give people more opportunities, more resources, a bigger playing field, etc. But remember that change - even good change - is still hard and it takes a lot of attention to the human elements in the deal to do a good deal.
JIM:
Fair enough, Kent … but you are still sounding a bit too New Age for my tastes. Give us some practical examples of how this works in doing a deal.
KENT:
Well, in our China M&A practice at Technomic Asia, we have a phase of a deal that we call “deal cultivation” … this is a focused effort to start to build relationships of trust between the buyer and the seller. In the West - and I’d say, particularly in the U.S. - we tend to trust people a bit more easily … if their company’s financials check out and they pass legal due diligence, we assume that we can trust them.
However, China is what you’d call a “low trust” culture where external validations of someone’s integrity are not trusted ... only after you spend time building a relationship with someone do you begin to trust them. Practically speaking, this means that the “deal team” and the “operations team” should have the same leaders in it. Some companies have dedicated deal teams whose job it is to come in and “do a deal”.
We call these guys “deal jockeys” and their job is to ride the transaction successfully to close. They are not to worry about whether or not the target likes them ... in fact, I’ve known some deal jockeys who think the deal is successful if the target ends up hating them, it means they got a good deal! Now, obviously, this is not the intent of every company, and most people would acknowledge that it is important to not antagonize the target, so that is a rare case.
But we always insist that the person tasked to run the newly integrated business have a key role on the deal team ... and, hopefully, should even be the key point of contact with the target during negotiations. Again, deals end the way they begin, and if you can begin the deal by having a tough, honest and yet considerate negotiation and due diligence process, then your integration is going to be that much better.
JIM:
It would also seem that, given the attention we’ve been placing on the importance of due diligence, that the integration manager would want to be involved in the early stages of the deal … that way, he or she could really jump-start their learning curve and would have a good knowledge of the history of the target company.
KENT:
I totally agree, Jim. The truth is that doing deals is a pain … the amount of details that need to be managed are, at times, overwhelming. But if the operations team is involved from the beginning and they are focused on working with the target – business person to business person – then good things can happen. We’ve seen this time and again.
JIM:
Kent, before we go, would you run through those three points on doing deals …
KENT:
Sure, Jim.
They are:
1. Start your integration plan early - keep integration in your mind from the very beginning. Use the results of your due diligence process as key ingredients for your integration plan. And have that plan done before you sign the final papers.
2. Always keep the original strategy in front – yes, doing a deal is, at its heart, a transaction and there are mechanical details that need to be handled. But don’t sacrifice the original strategic intent for expediency in getting the deal done. Doing a deal is not difficult … doing the right deal is often a challenge!
3. Remember that doing a deal is an integration of human beings, not just business structures – include key leaders of your operations team in your deal team and get them focused on building relationships with the target company leadership. Think in terms of “cultivating” this deal … it is a living, breathing thing that will have a life of its own after the deal is done. How you handle it now – and particularly how you handle the people now – will, to a great extent, determine your future success.
JIM:
Thanks, Kent. These are all very helpful points to keep in mind doing the deal.
KENT:
You’re very welcome, Jim. Thanks for having me join you.
JIM:
Well that brings us to a close of the 4th part of the Global Supply Chain Podcast series on Mergers and Acqusitions. We'll pick up next with Kim Woodard, also from our China organization, on doing global deals. We look forward to speaking with you real soon.
Additional podcasts are available - see the list here.
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