GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
GROWTH BY AFFILIATION
REINVENTING ACQUISITIONS
WITH LESS RISKS
Li Fujun, Suzanne Ross, Jack McNaughton
A BETTER APPROACH TO
MERGERS & ACQUISITIONS
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
PREFACE
Insanity is doing the same thing repeatedly and expecting different results.
-Albert Einstein.
The history of business growth by Mergers & Acquisitions (M&A) is not a happy
one. Stories of failure far exceed those stories of success. Yet, the compelling
reasons for rapid growth, rather than via natural growth, mean many continue to try
to grow by M&A only to fail.
This book explores a change to the way business has tried and mostly failed, to
complete M&As. It covers the reasons behind M&As and the common pitfalls. Then
continues onto an alternative approach that removes these common reasons for
failure and provides a method to help make rapid growth a success. Several case
studies are included that are based on the real experiences of these methods, which
were used to achieve an M&A with less risk successfully.
The Growth by Affiliation1 (GbA) method outlined is far removed from the major
press releases made by management and investment bankers when announcing
M&A plans, such as, “the biggest merger in history”. Those announcements seem
focused on completing a successful M&A deal transaction and potentially a
subsequent share price increase, more than any substantial increase in the underlying
business value.
The GbA method can be used by businesses big and small. Moreover, it is ideal for
cross border transactions. Now, more than ever before, it is time to look again at the
risky and failing M&A approaches currently used. The current M&A methods are
outdated and have mostly failed to achieve the results that business and other
stakeholders expect.
Li Fujun, Suzanne Ross, Jack McNaughton
Hong Kong & Australia July 2019
[email protected] 1 Suzanne Ross & Jack Mcnaughton, Copyright@2019
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Table of Contents
PREFACE
PLACE YOUR BETS
WHY PLAY THE GAME?
YOU LOSE!
CHANGE THE GAME
WIN-WIN
CASE STUDIES
BIBLIOGRAPHY
ABOUT THE AUTHORS
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
PLACE YOUR BETS
“There is a very easy way to return from a casino with a small fortune;
go there with a large one.” 2
The Harvard Business Review says M&A failure rates are staggeringly high with
between 70 to 90 percent missing the original goals.3 The Hay Group4 analyzed 200
European M&As and found that senior business leaders believed only 9 per cent
were "completely successful" in achieving their objectives5. Others have reported
that failed and disappointing M&As occurred for 75 percent of all deals6. Many
organizations attempting M&As are statistically more likely to reduce their
Enterprise Value. Lakelet Advisory7 said that 83 percent of M&A activity did not
boost Shareholder value or conversely, only 17 percent produced a “WIN”.
It is also estimated that only 17 percent of casino gamblers are winners8. The thought
that M&As may only produce a "WIN" at the same rate as games of chance in a
Casino is a very sobering idea. The abysmal “WIN” rate achieved for an M&A raises
the question; why attempt it?
The M&A market is very active, despite the poor results achieved. In the first half
of 2018 alone, there were more than 16,000 deals with a value of $USD1.7 trillion.
In 2015 it was a record-setting year, and in China, the value of M&As totalled
$USD350 billion, an increase of 61.6 percent year-on-year.
Management, Shareholders and Professional Advisory firms know that to snowball,
you need to be able to acquire other enterprises. It would seem this attitude has been
translated into ever-increasing M&A deals. Increasing the deal flow has not,
however, improved the likely outcomes.
2 James Bond in Casino Royale by Ian Fleming 3 Business Chief reported on January 28, 2015 4 in 2007 5 “Nine out of 10 M&As fail to deliver” by Nic Paton 26 March 2007. 6 (Mitchell LM, 2001) 7 March 2017 8 Wall Street Journal 26 April 2019
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Global deal volumes for the 30 years to 2015 have shown incredible growth9.
Acquisitions are designed to help business grow and to improve productivity,
performance and efficiency via production and cost efficiencies. Another significant
reason is to reinvent the nature of the business by changing products or categories.
Nokia, for example, evolved from a Swedish forestry pulp mill company founded in
1865 into a global telecoms business in the 1990s.
Organic growth is less risky as it builds on the existing knowledge base, core
competencies and can be funded using internal resources while growing at a slower
rate rather than rapid growth via M&A. The business can adapt and develop the
teams and systems needed to manage the brand, market, product, distribution and
culture of the company. Businesses, however, are under pressure from many places
such as the Stock Market, Shareholders, and Management to grow faster, leading to
Mergers and Acquisitions. Nevertheless, a majority of M&As fail to reach the goals
forecast; that is, they fail by not achieving the initial objective set for the M&A.
9 Increasing Agility for Mergers and Acquisitions by Okta.com
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
WHY PLAY THE GAME?
A business must decide why to grow and choose to do so organically or to adopt an
M&A approach.
Growing Organically:
Organic growth implies that the business can grow by using its existing expertise,
products, distribution channels, internal knowledge and team to improve market
share. There are many ways a company may achieve growth when using its
resources:
• Cut business costs to improve profitability and extract efficiency and
productivity gains;
• Expansion of product distribution channels, for example, going to an online
sales model and expanding into new markets locally and overseas.
Additionally, moving the products into entirely new and different markets and
market segments such as via wholesale. Our co-author10 created a new
marketplace for traditional pension planning services. Clients were unwilling
to have their pension entitlements assessed in a face-to-face meeting by a
Financial Planner because of significant upfront costs11.
Clients were unsure of the value of the service provided by a Financial
Planner. The creation of a D.I.Y. report allowed them to assess their
entitlement position anonymously and cost-effectively via an online
questionnaire that inputs their data into a pension entitlements calculator. The
Client received a very prompt “Age Plan pension entitlements report” emailed
back to them at a low fixed price. Clients confirmed that the convenience and
low cost of the DIY report allowed them to check if they needed additional
help from a Financial Planner; without the otherwise initial commitment to
significant time and unknown costs;
10 Suzanne Ross 11 Age Plan entitlement report; www.ageplan.com.au
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• Expansion of the existing product range with innovative new models,
complementary products that increase the revenue “take” per client, quality
enhancement, and design enhancements. Using the Age Plan reporting
example above, additional products markedly increased the services in the
online D.I.Y. offering that are extra too but part of the Client's needs. These
additional products, in this example, were for other reports dealing with
estimated retirement incomes and documents such as online Wills.
Other examples abound around the world, and McDonald's, for example, built
in the added product items as a natural part of the ordering process with staff
taught to “upsell”; and
• Changes to advertising, product brand, and methods of promotion of the
product range, including moving the product into different price bands
appealing to new and different market segments.
• It is using the knowledge base of the business to evolve products into new
categories and areas. Kodak attempted this approach with its innovative
development of digital photography. The digital technology was an internal
development that unfortunately was not successfully adopted due to the
culture within Kodak.
Growing by Mergers and Acquisitions:
Many arguments are supporting the advantages of M&A versus organic growth.
Those arguments revolve around Growth, Competition, Security, and Change.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
The reported strategic drivers for M&As identified by global accounting and
advisory firm, Ernst & Young12:
A rationale for M&As is that a business can expand by acquiring more of the market
in the same or complementary products. Competitive pressure can lead to a belief
that by buying a competitor, you can forecast that the combined business will
increase profits via sales and margin improvements and cost savings. The removal
of a competitor or competing brand may mean the existing brand is better able to
survive and prosper. The market also may be more interested in products where there
are multiple brands of similar products, creating “perceived” competition. In this
way, the business is attempting to secure its brand and its position in the market.
The resulting changes made to a business can also include the acquisition of features
of another company that provides improvements in production, distribution,
technology, back office, and management. Such changes allow for a better operation
leading to a business better placed in terms of its ability to operate profitably and to
respond effectively to the challenges presented by the market. In 2018 ride-sharing
Apps, Uber and Grab (Singapore) merged their Singaporean operations. The
apparent objective was to join to improve profitability, remove competitive price
discounting and increase efficiencies.
The simplest form of M&A is where management wants to adopt a strategy to
increase sales or reduce cost by taking advantage of the economies of scale created
by the merged businesses. The most important driving forces involved are often
12 “Why dealmaking is expected to come in many forms in 2019” Steve Krouskos EY Global Vice-Chair Transaction
Advisory Services 15 April 2019.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
overlooked. These driving forces are reflected in the word TRAM13; meaning
technology, resources, access to market, and management. One or more TRAM
factors is the engine to drive company growth faster and continuously. A successful
M&A deal must include one or more of these TRAM factors; otherwise, the expected
benefits of the economies of scale will not last.
There are many examples of deals lacking in the TRAM factors resulting in the
beneficial M&A effects quickly fading away. The importance of the TRAM factors
is, therefore, integral to the valuation of any targeted M&A company. Moreover, it
is capable of being represented by the formula:
V=ST/C
Where: V=Valuation;
S=Sales
C=Cost
T=TRAM
The TRAM factors are typically the key drivers behind the continued growth of any
business. And are incorporated into the methods developed later in this book as part
of the development of new ways to successfully grow via M&A.
Occasionally a business may identify that market conditions are changing in a way
that points to the need for different products or even a different market ultimately.
Additional innovative products and techniques acquired during an M&A can save
the research and development time and cost associated with innovation and failures
that arise with new and innovative product development.
In 2016 Walmart (USA) was suffering at the hands of the sales of Amazon in the
rapidly growing online area. Amazon’s continuing sales growth was showing that
online selling was a cornerstone sales channel that all retail businesses need. To
catch up, Walmart acquired Jet.com for $USD3.3 billion. Jet.com was in the online
sales sector appealing to the "urban millennial shopper" demographic. This sector is
considered an essential retail sector that Walmart was losing to Amazon. Walmart’s
acquisition provided a ready-made infrastructure, systems, technology, knowledge
and management to redress the gap in Walmart's sales channels quickly.
13 Li Fujun copyright@2019 and TRAM means: Technology, Resources, Access to market, Management
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
A valuation disparity can also deliver a reason to acquire another entity. The
valuation of PRC (China) listed companies are much higher than for Hong Kong and
other international markets. The new value is created by the Price/Earnings ratio
difference when the foreign assets are injected into a PRC listed company.
Significant additional synergy and economies of scale also can be achieved with
M&As where the international businesses have operations or market potential in
China or another cross-border market.
Currently, 90 percent of the M&As in the PRC is only amongst Chinese enterprises.
This intense M&A competition is causing the cost of China's domestic M&As to
increase. The price competition results in significantly reduced value “upside”. At
the same time, this effect is increasing the demand for international M&As by PRC
listed companies. PRC listed companies have expanded their overseas M&A
activities by 62 percent year on year.
Given the importance of the M&A concepts to growth, why is the failure rate so
appalling?
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
YOU LOSE!
Blame-shifting is a natural human reaction.
It happens on the smallest to the largest scale.14
Understanding the prime causes of failure for an M&A provides the starting point in
developing a new method and way of growing. The widely reported primary causes
of M&A failure are:
• Team:
The people tasked with completing and implementing the M&A deal are the
wrong choice for implementing the integration of the activities of the
businesses. An M&A is a process, and what is too often overlooked is the goal
of adding value to the acquiring companies. The objective of the advisory
team is to conclude the deal and not run the business. However, the forecast
value accretion can only be delivered if the implementation of the M&A
succeeds. In M&As conducted by our co-author15, the post-implementation
team was accorded more importance than the advisory/deal team. This
approach recognized where the future value was to arise.
14 H.G. Tudor, Your Fault: Blame and the Narcissist. 15 Suzanne Ross
75%
25%
TIME & MONEYAn M&A deal is front loaded
TRANSACTION TRANSITION
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• Culture:
If a more prominent company is acquiring a smaller company, there will be a
loss of the culture that created that business value. The management can
become disillusioned with being hidden inside the newly enlarged entity. This
change and loss of culture is a form of disempowerment with disgruntled staff
replacing the previously successful teams. The resulting demotivation and
fear of unemployment can become a severe roadblock to the former business
continuing to deliver the forecast deal valuations.
The importance of an implementation team and their focus on integration
played a pivotal part in “on-boarding” of the acquired employees in the M&As
undertaken by our co-author. Her team were able to "buddy" with new
employees and ensure they could transition seamlessly to the new operation.
Additionally, they were ready to start to identify with and adopt the new
business culture. Her team was able to handle the integration that followed the
transaction phase. The importance of post-merger integration is now being
recognized.
"It is the actual execution of the merger strategy through the pre-merger and
post-merger integration that appears to have the least understanding."16
The HP/Compaq M&A had a significant cultural clash related to the speed of
the merger and the approach adopted by each business. HP "relying heavily
on organized plans for their work" versus Compaq’s strategy “relying on their
ability to respond to just-in-time opportunities; continually turning on a dime
to meet demand”17. The extra costs and management distraction rapidly
consumed the advantages expected from the deal. A better pre and post-
merger integration plan would have dealt with this issue.
16 Journal of Organizational Dynamics, business scholar Marc Epstein, PhD. And many M&A deals fail to adequately consider
the "post-merger integration" (or PMI) during the transition phase. It is an area that must have more attention and is a core focus
for the GbA process. 17 “The Soft Things that make Mergers Hard” Greta Roberts Harvard Business review 12 July 2011
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Recognition of these “Quiet Drivers”18 as qualitative features that are grouped
around elements such as:
• the ability to change,
• motivation,
• independence,
• feedback,
• their “care factor”,
• respecting discipline and rules,
• a desire for success,
• dedication,
• approachability,
• capacity for collaboration,
• respect for others and themselves,
and the like are vital to the implementation and integration of businesses. Those
elements were incorporated into a successful “humanistic” approach to design
and communication of the culture, creation of check/review points and
expectations to the employees from both businesses. Implementing these Quiet
Drivers became part of the duties allocated to the onboarding team during the
integration of the businesses. The integration plan is an essential, onboarding
tool.
• Due Diligence:
Poor and incomplete Due Diligence ranked highly as a reason for failure
caused by the speed needed to conclude a deal, the lack of expertise necessary
to understand the business being acquired and the inability to include in the
process those most likely to be the business operators. The failure of Due
Diligence is apparent in HPs (USA) acquisition of Autonomy (UK). This
$USD 11 billion deal resulted in a $USD 5 billion loss due to income
statements, balance sheet and cash flow being inaccurate never detected nor
disclosed during due diligence.
An even more significant error was the Time Warner (USA) $USD 111 billion
acquisition of AOL (USA). Due diligence was rushed as Time Warner raced
18 www.quietdrivers.com; Suzanne Ross copyright @2019
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
to get into the online media business. It resulted in a $USD 99 billion write-
down; making it the most massive loss in history.
Sprint (USA) acquired Nextel (USA) for $36 billion as a complementary
product acquisition. However, between employee integration and culture
clashes and an inadequate assessment of the Nextel technology, Sprint wrote
down $USD29.5 billion.
Due Diligence failures of this magnitude are not the result of the work of one
person. Massive and expensive expert advisors were involved. The money
spent on these professional advisors did not change the outcome. Later we
will consider why it is that the now apparent points of failure were so easily
overlooked or not found in valuations.
• Funding Stress:
The funding required to complete the M&A is an allocation of resources via
debt and equity that affects the remainder of the existing businesses. Using
any funding source such as debt imposes added risk on the outcome of a deal.
Equally, the dilution of existing shareholders as a result of new share issues
to the acquired company's shareholders means that "Return on Assets and
Equity" are under pressure. The added performance requirements can lead to
results such as Management adopting short-term goals to boost performance
to justify the Acquisitions to the detriment of long-term performance and
Businesses value.
• Focus:
M&As take on a life of their own affecting the advisory professionals, the
press covering the project and the Shareholders, Management and Staff many
with a vested interest in the success of the deal. Management focus is a Quiet
Driver, where the added distractions of issues arising from a deal start to
consume the time management are spending on running the daily operations.
Management then has a choice to focus on the effects of their deal or attempt
to balance issues between the current business and those deal issues. The
results are all too predictable once the focus is removed from daily operations.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• Leadership:
Those with the most power in an M&A have less understanding usually of the
intricacies of the M&A or the underlying business operations. The exclusion
of lower-level management from the transaction means those most
responsible for the day to day business functioning have no or little say in the
M&A. Moreover, the skills needed to operate an acquired business at both the
operational and leadership level can be lacking, wrongly allocated or applied.
• Value attribution:
The understanding of where the M&A is adding the value can be poorly
interpreted or applied as seen in examples such as the Time Warner /AOL
deal. The forecast value added from the “synergy” is often elusive. The
benefits of the client base may not always result in a gain to the merged entity
and, in some circumstances, may result in a reduction in sales and clients. The
failure to forecast the added value can be a failure to comprehend the
consequences associated with the M&A.
• Blame Game:
The combined business has the legacy of the M&A such as cash shortages,
product under-investment, Staff issues and control changes affecting culture
and existing processes. Moreover, it is the genesis of the resulting blame game
that further erodes culture, trust, and loyalty to the business. The HP CEO,
Carly Fiorina, was generally blamed for the Compaq acquisitions, routinely
described as disastrous with over 30,000 employees were fired. In 2005 She
stood down as a result of a continuing blame game and serious boardroom
disagreements.
The M&A "Failure Factors" clarifies that the process you undertake in a deal does
not usually result in success. Surprisingly, gambling at a casino may be an alternative
strategy. It has as much chance of producing your forecast performance goals or the
risk of losing money is about the same.
The Growth by Affiliation technique attempts to remove many of the “Failure
Factors”. In doing so, it allows the business the chance to test numerous options for
growth within defined and controlled budgets. Using the GbA method results in an
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
accumulation of internal expertise and knowledge. It also builds-up expertise like
that gained in usizing an organic growth model.
Behavioural economics
Trying to understand the M&A "failure factors" and how best to change and reinvent
a better process leads into the world of behavioural economics. It was theorized 50
years ago that the behaviour of individuals in economic situations does not follow a
rational approach, as suggested by economists in their theory of financial markets
(homo economicus). The issues and failures that arise during an M&A process stem
from the scientific findings that humans were just as likely to ignore the numbers
and adopt their own beliefs, not supported by facts. It provides the scientific basis
upon which the process of Growth by Affiliation is built.
The research and mathematics of “game theory” highlighted that an individual
would not act in a way to make an optimal choice when confronted with a range of
possible outcomes. It suggests that an individual’s “cognitive limits and social
representations of reality” affect what they decide (Bounded Rationality)19. The
studies have also pointed to another area where the individual will not follow optimal
economic decisions. Prospect Theory put forward that individuals when confronted
with choices, will break them down into two stages20.
1. The “editing phase” takes the risk involved in a decision and speeds that decision-
making by adopting a range of mental shortcuts such as making a guess, utilizing an
existing habit, using intuition, using historical practices, and the practical knowledge
and prior experience of the person.
2. The follow-on stage is an “evaluation phase” of four principles adopted during the
decision process:
• Decisions are referenced against some arbitrary level, determined by the
individual, and the performance of choice is either a win/lose against that
reference level;
19 (Simon, 1955) 20 (Tversky & Kahneman, 1992).
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• Any likely losses are magnified when compared to the gains. This loss-
weighting or loss-premium is based on the prospect of an economic decline
and was valued 2.25 times21 the value ascribed to the same amount of gain.
That is, say a profit was a forecast of $1million, at the same time, it would be
mentally linked to a loss valued at $2.25 million in terms of the decision-
making process being undertaken. “Fear of Loss” has a much more significant
weighting against any profit forecast. This weighting will then find its way
into an assessment of win/lose decisions;
• A similar inaccurate weighting is applied to probability or chance that events
will take place. Individuals apply an increased opportunity to smaller events
occurring versus more significant chances of events taking place; and
• When an individual's sensitivity to gains or losses is measured repeatedly
against an initial reference level, then the effect of that gain or loss diminishes
in the eyes of the individual.
These aspects of decision making contained in Prospect Theory have been expanded
on to incorporate other psychological elements associated with the “overconfidence
and bias” in forecasting the future. The theory found that a forecaster's current
understandings of their surrounding "environment" impacted the forecasts made;
The forecaster's use of his surrounding environment to support predictions is now
called Projection Bias22. Projection Bias can cause forecasting also to be affected by
an individual’s personality unless a counteracting or controlling process exists to
prevent that bias from infecting the forecasts. The effects of Projection Bias extend
beyond forecasting and is now also associated with impulse buying.
Acknowledging that decision making is not always optimal and rational helps
understand some of the failure factors that arise during the M&A process.
Individuals are confronted with a variety of psychological processes that mean an
optimal and a rational approach may be clouded by numerous unintended influences
inherent in those charged with the M&A decisions. Behavioural economics research
provides a strong reason to guard against a process that is possibly flawed, time-
21 (Tversky & Kahneman, 1992) 22 (Loewenstein, O'Donoghue, & Rabin, 2003).
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
consuming and expensive and with the chance of severely damaging the underlying
business. Methods exist to minimize poor decision making, lousy forecasting and
projection bias during and M&A.
The various types of biases that can arise are understood but have been limited here
to recognizing the financial implications surrounding Projection Bias and others
such as:
• Overconfidence in post-mergers results;
• Confirmation bias or the ability to only “see” what confirms your opinion;
• Commitment Bias that results in an inability to say, “enough is enough” and
revisit the performance due to “emotional attachment” to a project;
• Planning Fallacy Bias that forecasts the needs of the project at an
unrealistically low level; and
• Incentive Bias is the inevitable effect of linking rewards to the completion of
a project rather than against a better selection and alignment of KPIs to the
results that the business wants to achieve.
Those responsible for commencing or delivering on an M&A may understand the
issues associated with the typical failure factors for M&As. However, an M&A is
made up by many individuals advising, collaborating and at times undermining the
M&A.
It is not enough to know about the failure factors and the likely Biases that contribute
to a failure of the M&A. The ability to successfully guard against so many competing
biases should be viewed as a difficult, if not an impossible task. What is needed is a
self-sustaining approach that makes re-aligns all those individuals involved in the
goals of the business’s growth plans in a merger or acquisition.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Growth by Affiliation (GbA)
Another often overlooked rationale for an M&A is to reinvent the business. Business
disruption is today a frequent event. Any company that is not watching the horizon
for the next disruptive event may find that they are no longer a viable and relevant
business. Increasingly, the "growth-drivers" are identified as those businesses that
are disruptive innovators, and they are “the driver of future productivity, growth, and
employment”23. Many more M&As that are executed are on transactions where the
acquiring business will confront new and disruptive innovation pressuring
management with new cultures and ways to market and operate.
Kodak invented the very disruptive technology of digital cameras, but the culture
was built around the idea that film, photo processing and printing was its core
business. Management had many decades perfecting their existing film processing
market, and their employees and distributors were firmly wedded to that film
processing market. Kodak was not able to master the transition to the rapidly
evolving digital marketplace despite the significant investments made into digital
products and the related technology. Kodak management failed to recognize the
urgent need to disrupt their existing film processing business. They owned an
internally developed technology that would have allowed for organic growth. This
failure meant they were unable to fend off the resulting decline in the core film and
print business ending in Kodak’s eventual bankruptcy.
Kodak management had disruptive innovation, leading market position, the product,
brand recognition, and the capital base to exploit the digital camera technology.
However, management was unable to defeat the culture that had made Kodak a
household name on film and print. Despite having three of the key TRAM drivers,
it became a victim of its original culture and could not change it when a change was
needed. The emphasis, in this case, is placed on the inertia to change created within
a successful business.
In addition to the disruption caused by new technologies and processes businesses
also needs to look at their market position, changes in distribution systems and
23 (Mcnaughton, 2019)
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
solutions, developing markets and the general commoditization of its products
resulting in lower margins and price improvement possibilities.
The management team of Kodak had a dominant market position that they
considered was beyond being challenged by any new technology. This invincible
attitude is not an uncommon situation and should be seen in the context of the impact
of confirmation bias where management was convinced that their success protected
them. The decline in Kodak was rapid and fitted into a general picture of failure
represented as five stages of decay that a business enters.
“Every institution is vulnerable to decline, no matter how great. We found
companies fall in five stages:
1) Hubris Born of Success,
2) Undisciplined Pursuit of More,
3) Denial of Risk and Peril,
4) Grasping for Salvation, and
5) Capitulation to Irrelevance or Death.
Institutions can be sick on the inside and yet still look strong on the outside; decline
can sneak up on you, and then-seemingly suddenly -you’re in big trouble”24
Contrast Kodak with Netflix. Netflix originally distributed rental DVDs via Post.
The improvement in distribution possibilities made available via high-speed
broadband opened Movie Streaming distribution methods over the internet. In
capturing the distribution benefits of the internet, Netflix also commenced the
creation of its product library, allowing them the ability to control content
availability and price. No longer were Netflix only renting content owned by others.
They had moved to distribution then the creation of their content.
The difficulty confronting any business that wants to reinvent itself or to grow is that
they need to have the expertise, time, discipline, teams and the money to carry out
the tasks involving the traditional M&A approach. Equally, existing performance is
not a guide to the ability to undertake an M&A nor proof that the business has the
skills needed to operate in new sectors or avoid bias that arises from past success.
24 (Collins, 2009)
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Using existing staff and hiring in professional help still places management under
pressure to continue to operate an existing business and to understand a new, and
sometimes a different product, structure, process, culture, market, and management.
The solution to the desire to reinvent the business or to grow traditionally can be
done to remove the Casino risk from the M&A process and places management back
in control at a significantly lower risk level to the business and its capital.
Research has shown that successful M&A are those that are a fit or an enhancement
to a business’s existing “core capabilities”; “Regardless of the type of merger,
focusing on (these) core processes:
• sales, support, and order management reduce the level of effort required for
the post-merger integration.
• Design processes to present one consistent face to the customer.
• Deliver the benefits of merger synergies visibly to customers – new products,
better service, more for their money.
• Create and staff interim processes to sustain the quality of products and
services through the transition”.25
Do more to aid in the success of an M&A. Moreover, adapting the "core capabilities"
of a business and making it deal-ready can be viewed as an evolutionary process that
better prepares the company for an M&A.
Understanding the core capabilities can also be re-phrased as “organizational-fit”
and has been described as the similarities in “culture, structure and systems”26. These
similarities will not always exist in a targeted acquisition. Yet, the ability for
Management to establish the organizational fit has been recognized to improve the
chances of an M&A succeeding. Such a methodology is the basis for GbA.
The evolutionary process is at the heart of the Growth by Affiliation27 (GbA)
concept. The process and its application were successfully applied to multiple
25 (Abrams, 2013) 26 Castro and Uhlenbruck, 1998. 27 27 GbA was developed around the original idea of a centralised “Office Hub” several decades ago by Suzanne Ross to
significantly reduce the integration risks then rapidly arising caused by numerous M&As being undertaken
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
acquisitions of both different and complementary businesses using variations of the
technique.
GbA avoids many of the M&A pitfalls by controlling and reducing the significance
of the cultural differences and biases that surround any M&A strategy. The resulting
"de-risking" is because the failure factors are removed by educating management
and the business about the incoming venture, its culture and market. It allows the
company to absorb the many new elements that come with undertaking a new and
expanding venture. In many respects, the adaptation that takes place in the process
is like the adaptation that occurs during natural evolution.
The continued development of the various GbA techniques can now be applied to
most businesses that want to accelerate growth on a risk-averse basis. It helps avoid
many of the pitfalls that have affected others attempting rapid growth thru the
acquisition of other businesses.
GbA emphasizes a continuous feedback loop that helps to learn the business being
acquired and to adapt to the cultures and peculiarities of the M&A target. The
familiarity has the effect of making the M&A more like a complementary or
horizontal industry M&A. The intended effect of the GbA approach is making the
incoming business, its culture, product, market, processes and staff seem to be a
natural fit for the existing business. That is, it is replicating the benefits of natural
growth.
25%
75%
TIME & MONEYGbA is backend loaded
TRANSACTION TRANSITION
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
The energy needed to undertake the M&A is also materially altered with the most
time now spent on the transition or integration phase (The Backend) and not on the
deal itself.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
CHANGE THE GAME
“You have to reinvent to stay fresh, to stay in the game.” - Madonna Ciccone
DRAGON
The GbA model follows a set of steps grouped around the acronym “DRAGON”.
The steps are followed sequentially to achieve the targeted results of the technique.
The basic approach behind DRAGON is to alleviate bias, reduce capital and
management risk while developing business growth in a way that more closely
resembles organic growth. Moreover, the approach follows the path that recognises
the importance and management of cultural change. And understands that the clashes
that can occur during any merging of cultures can be significantly reduced.
The desire for growth means that there is a desire for change to take place, and
change must be successfully managed. The DRAGON approach is an adaption of
the “Plan-Do-Check-Act”28 That uses the feedback loops created for continuous
product improvements and adapts them for sustained organic style growth. By
utilizing a "feedback loop," the organization is continuously monitoring the results
of its performance. Provided there is a process that can adapt and act on the
messages from the feedback the organization can continually evolve its methods and
culture.
Decide:
The starting point is the need for the business to decide and then commit to an
approach using GbA. This decision is more than a commitment to an idea. An
enterprise adopting the GbA process is investing in and planning to undertake
accelerated organic style growth. GbA is not as outwardly attractive or as
newsworthy an event like an M&A. Preferably it forms part of the removal of one
of the significant bias that forms part of the psychological effects which contribute
to the M&A failure factors - Focus.
28 (Deming, 1986)
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
The business instead adopts a process where growth forms part of the ongoing
culture of the company rather than a "once-off" super-event that distracts
management, investors and shareholders.
By making the decision and implementing a GbA process, the business can continue
to operate with management entirely focused on their core activities without the
exposure of the many significant distractions that occur in an M&A. Moreover, the
added time and costs in dealing with large numbers of professional advisors,
reviewing and understanding complicated transaction documents and the pressures
associated with any deal are avoided.
The decision to grow using the DRAGON approach constitutes the Plan element in
the "Plan-Do-Check-Act". And ideally, it is developed into a recurring process that
forms part of the business culture. The "Office-Hub"29 outlined in case study#1
highlights the advantages of internalizing a continuous process. The ability to gain
knowledge of the markets, operations, shortcuts and participants, allows the growth
goals to be adjusted and methods improved. The power of feeding back results from
the decisions planned and acted upon enhances your knowledge.
A good decision is based on knowledge and not in numbers- Plato.
The Plan-Do-Check-Act concept as a continuous process used in Production and manufacturing. (Deming, 1986)
The constant feedback and acting on that feedback develops a learning culture within
the organization. It is recognized that any M&A is more likely to succeed if the
29 Suzanne Ross Copyright@2005
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
business is experienced in M&As. And it is that prior experience that has allowed
the managers to deal with the integration of the new venture into the business.
Learning to implement a continuous feedback loop, like the Deming method, assists
in teaching management and the organization as the integration evolves.
Research:
Growth plans require a deep understanding of the proposed direction the business is
going to take if the company is seeking a complementary deal, taking out a
competitor or reinventing the business. These growth plans always gaining the
knowledge that entails a deep understanding of the likely markets, costs and players
in that market. Gathering this knowledge is only one part of the GbA strategy. A
framework can be used as a starting point to guide the business on its growth path.
The adoption of the JADE30 the process provides this framework in which to operate
to help formulate an understanding of possible acquisitions and any decision.
The JADE acronym covers the four steps of discovery undertaken by the
management team during this phase:
1. Judgement:
Sensitivity is paramount in deciding to proceed to make a change by rapid
growth. It is more than the economic effects of the decision to grow. There
needs to be consideration given to the qualitative issues such as the culture
within the organisation and the potential dislocation and impact on the
support of staff, suppliers, creditors and investors. Management must
recognize the effects of change and communicated why growth and change
are needed. Management must decide how change fits into the business and
its culture and finally, what is the risk to the company if growth does not take
place.
2. Analysis:
Any research requires a professional and rigorous approach that can be called
a scientific approach or method. A scientific approach is not limited to the
30 Li Fujun copyright@2019
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
collection of historical facts but extends to forecasts based upon a solid
understanding of the interplay between the business and market. Any
estimates must be tested in ways that remove the impact of Projection Bias.
Results derived from a forecast need to be "stress-tested" and subjected to
comprehensive and critical analysis by those outside any team formed to
undertake the research.
3. Decision:
Management must accept that any decision they make must commit the
business. Creating "Buy-In", that is, the adoption by of the rapid growth
concept by those most likely to affect the business, such as Staff, Major
Investors, Bankers and Major Suppliers. Buy-In helps avoid resistance to
growth plan and provides comfort to those most likely to be affected in that
the direction will not create issues for them.
Fear of the change can contribute to resistance to that change and at times
outright sabotage of the process by those that consider they will be adversely
affected. Management can develop the culture of the business to appreciate
and value growth. This education will ensure that at least six of the seven
major failure factors associated with a typical M&A are avoided or dealt with
positively.
4. Experiences:
Inclusion of the various parties affected by the growth plans in the early
decision phase assists in mitigating the risks of resistance to the changes
being planned. Communication and Knowledge are essential in this phase
and needs to form a crucial part of the rapid growth plans rather than being
dealt with in isolation of those plans.
Approach:
The research stage will lead to a series of potential targets that can be considered by
management. After ranking the targets, the method of approach will need to be
determined. Approaching another Party is an extremely sensitive time in the GbA
system. Flagging intentions in the wrong way or to the wrong parties can cause
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
competitive damage to an organisation. How best to determine if another party may
consider entering a GbA pathway to some level of co-operation that may lead to
acquisition is that point where the process may break-down.
An approach via a "Warm Contact" or socially is generally the better option. It is a
necessity to attempt to stop any approach from becoming overly formal. The GbA
method works at its best when all the parties are collaborating. This assists in keeping
the cultures of each enterprise intact. And both management teams focused on their
usual daily operations. As such, the initial approaches need to be very limited and
non-threatening. Case Study#1 highlights a technique developed and used
successfully on many occasions.31
Growth by Affiliation:
GbA changes the priority away from the M&A activity being at the front of a
transaction to the last item to take place.
Emphasizing the operations and not on an "up-front" deal is the critical aspect of the
entire GbA approach to rapid growth. GbA purposedly intends to invest an excessive
amount of time in gathering knowledge about culture as well as the market and
processes of the organizations involved. The failure factors repeatedly point to the
speed, failure of intelligence, due diligence and the human factors around culture
and the like as the causes of M&As failing to reach their goals. By putting the M&A
transaction to the “end-of-the-line” many of the failure factors are removed. An
approach that removes those failure factors responsible for an estimated 60 to 90
percent of all M&As failing seems a logical and desirable improvement and a
superior technique.
In an M&A market, spending, about USD$3 Trillion per year GbA can be valued at
saving up to USD$2.7 Trillion. This spending and the knowledge that most M&As
are not successful makes GbA one of the most valuable techniques to be adopted.
31 Suzanne Ross used the non-confrontational approach helping improve the business outcomes for both parties by using
infrastructure collaboratively. No discussion took place until some time later after the Parties were better acquainted with their
respective cultures and modes of operation. The benefits to each Party were then much more comfortable to identify and
quantify.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Following on from any approaches made to potential growth candidates leads onto
a cautious and considered multi-stepped process where the initial introduction is
further developed by aligning the interest of the Parties.
1. Discussions revolve around the advantages each business can offer. The
benefits may include providing support in back-office function thru to
supporting the distribution, purchase and sale of product into another market;
Develop the relationship to incorporate the products or services being “re-
branded”, supported and distributed with the supplier business effectively
undertaking all but the “purchase/sale”. This contentious element is an
integral part of the GbA process and is the creation of a new brand owned and
controlled by the business, notwithstanding the product or service is only
being marketed. The new brand creates a focus and acts as a backstop should
the other party feel they want to enter the market directly and ride on the value
of the supplier’s brand. In owning the brand, the value of the efforts in
developing the market secured for the business.
2. Take the business to the next step by bringing “in-house” more of the activity
with the agreement and support of the other Party; and
3. Provide the other Party with options to Joint Venture (JV) and Partner. This
choice will probably have been identified in the Research phase and refined
during the early steps.
4. Continue to identify efficiencies possible that can lead to an even closer
merging of the respective organizations; and
5. Eventually, highlight the practicalities of a formal merging of interests into a
combined structure supported by the accumulated knowledge gained into both
organizations, the unique, developing culture, the clear lines of succession and
management and the support of employees and others to what has become a
distinct and relatively simple next step.
Onboarding:
Establish the integration team and use the "Quiet Drivers" to bring the teams together
around robust and communicated KPIs successfully. The Quiet Drivers such as the
ability to change, motivation, independence, "care factor", respecting discipline and
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
rules, a desire for success, dedication. Teams formed from both organizations adopt
Approachability, capacity for collaboration, respect for others and themselves.
Where possible a co-ordination team with dedicated senior managers in charge work
to smooth over and respond to the inevitable collaboration and process clashes that
arise.
The teams' task is to make all the business want to be involved in the success of the
collaboration, acquisition or merger. The teams are carefully constructed to avoid
the appearance of dominating the other Party, that is, avoiding any impression that
some people or products are treated as "junior" or inferior.
Negotiate:
Present a merger or acquisition plan built around the success of the business
relationship to date. And laying out the additional benefits from the M&A.
Emphasize that the business has been operating together and has already developed
a robust combined culture and work ethic. This existing collaboration means that
any M&A is seen as a natural fit and not forced. Nor are the employees forced to
deal with new and uncertain cultures, rules and future.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
WIN-WIN
“The more you learn, the more you know. The more you know, the more you can
improve. The more you can improve, the more you can succeed.”
Skye Anderton.
The maximization of profits is the goal of all well-run businesses. Many times, this
concept is interpreted as meaning that to "win" then someone else must "lose". The
basis of this interpretation creates a short-sighted approach to any negotiation. A
more balanced concept is where all those in the negotiation are treated reasonably,
then it is more likely that a long-term arrangement will result.
Creating a mutual benefit is a cornerstone concept in the GbA process. It is the idea
that rapid organic growth can be achieved by parties working to evolve the business
arrangements to a point where they can merge. When a negotiation results in only
one party coming out on top, it is almost always inevitable that the potential for
conflict and negative attitudes arise. These negative results can only increase the
likelihood of a failure in a deal. The GbA process is not immune to this potential
failure factor.
Building Trust using the GbA process by:
i) learning about the business,
ii) its people and operation, and
iii) the market it;
Operates to increase both the understanding and nature of a workable future business
where collaboration can assist in making the merger of the companies work. Equally,
envisaging the deals likely long-term goals and objectives should include the shared
benefits that can arise from the arrangement.
In practical terms, the GbA process works when Trust and shared benefits are the
first items considered. During the research phase of the DRAGON steps, the mutual
benefits need to be identified. An example would include the possibility of
delivering the services of an international group into a significant domestic market.
In this situation, the business in the local market is not trying to be just a reseller or
distributor. The ultimate objective is to grow the business both domestically and
globally rapidly.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Ideally, the business would show the international company the advantages of
dealing with the domestic industry to increase or create a profitable market share.
And by having created their local brand, the Business protects itself if the
arrangements do not work-out. It is always open to both Parties to go their way, and
the ownership of a brand helps to protect the investment made in creating and
growing a market.
In trying to understand the many potential win-win scenarios that may need to be
considered, some basic concepts need to be kept in mind:
• The Parties may not value the benefits of any arrangement on the same terms.
The research phase must identify the key benefits and attempt to reconcile the
mutual benefits the Parties can expect from an agreement.
• When those benefits accrue to each Party may differ of the time it takes to
derive the benefits may have a different value to each Party. Each Party will
view the benefits differently, and the task for the negotiators is to bridge those
differences either tangibly or intangibly.
• Each party will have their reasons for doing a deal. And it is crucial to
understand those reasons quickly. It may be that they want to grow or exit,
expand their relationships or even deal with financial, family or health issues.
In understanding the potential reasons for being approachable to any deal can
lead to managing the relationship better to arrive at the mutual benefits all
Parties are seeking.
It is not always possible to establish a potential candidate for a GbA. Ans it's not
always possible for a business to have the necessary time, finances and skills to
undertake an M&A. But the GbA process provides a higher chance of a positive
outcome because:
• The focus is removed from the deal transaction to the operation of a business
reducing the risk to reputations and business value if a deal does not hit the
goals expected and announced the marketplace;
• The capital at risk is potentially significantly reduced and should the GbA
process result in an acquisition the certainty that the business can operate the
merged companies is dramatically improved. Any bias in forecasting is
reduced if only because the industry is better understood.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• The impact on employees, bankers, creditors and management is reduced as
the focus on the deal completion gives way to more time to complete and a
better knowledge of the underlying business.
• Management can risk a variety of new markets without potentially destroying
the business value. A team can be set up for many GbA approaches that
penetrate different markets, products or services. This approach allows a well-
structured test market of several potential segments without disrupting the
core business.
• Management can gain knowledge of products, services, the market,
employees, the integration into the current business, trends in the market,
pricing and capacity needs without risking the core business.
• Professional advisor costs are kept under control, and the influence and bias
that they can bring to the deal are removed.
• Unintended consequences that can be very significant arise at any time but
tend to have a bigger effect when the numbers and risk are more significant.
• The ability to introduce "feedback loops" to monitor and control the
arrangements are more natural with the GbA approach than one focused on a
"closing date" for a significant transaction. Firstly, the feedback is about the
operation, and secondly, the relevance of that feedback to the arrangement
assists in determining if it is a project that should continue, change or be
terminated.
• Valuations and payment commitments for any future acquisition are made
based upon a real analysis of actual performance. GbA can be likened to a “try
before you buy” approach. But be warned this approach works in the same
way for both parties. Hence the need to fully understand the benefits both
parties are targeting.
The flexibility offered under the GbA process is an approach to de-risk an acquisition
and is as a positive method to rapidly grow the business by selecting the best product
or service to use for rapid growth. It is a method like natural evolution using the best
fit for the company.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
CASE STUDIES
Each case study presented here is base on real events that involved the co-authors
and each highlight elements of the GbA approach.
CASE STUDY ONE –
FINANCIAL SERVICES CLIENT AFFILIATION
Summary:
The organization was a multi-disciplinary financial services business staffed mostly
with highly qualified professionals. Organic growth usually required the acquisition
of clients who lived relatively near the offices of those professionals and came via
referrals received from a variety of sources.
Rapid growth had traditionally been by acquiring competing practices of
Independent Financial Planning groups. As a result, there was a price premium on
buying into that sector.
Additionally, “client stickiness’ following an acquisition was at best marginal due
to the loss of the personal relationships that had been built up between the
professionals and their clients following the introduction of the “new” business.
Moreover, the motivation for sale often involved the exit of an owner for retirement
or a change in work desires. Other “roll-ups” by acquisition had been tried and
highlighted the difficulty in maintaining the client base.
The solution to using GbA was to follow the DRAGON model, then called the
"Office-Hub".
Decide:
The owners were considering how to grow the business, within their resources, and
obtain a more extensive client base. The revenue per client was one measure used to
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
value any acquisition. The cost of acquiring traditional Financial Planner businesses
were well establish at four times gross revenue. But a problem with the acquisition
of Financial Planners was the up-front cost and the difficulty growing the recurring
revenue from new billings to the client. Clients did not always need to discuss their
financial affairs regularly. So, the ability and opportunity to increase revenue by
additional product sales and services was limited.
The real worth of any Financial Planner business was the commission “Trails” paid
annually by insurance companies and other investment products where the client has
a recurring payment to make. Such Trails formed a significant asset in the Financial
Planners business. Any concept that would allow for more clients to be obtained that
could lead to expanded Trails was vital to the growth in the business revenue,
profitability and value.
Accounting firms were available for acquisition at significantly cheaper multiples of
one-time the gross revenue. These Accounting practices often had client bases that
were untapped for the expanded services available from Financial Planners.
Effectively, the Accounting practices constituted an untapped lead referral
“network”.
Research:
The Owners set about searching the market for viable businesses to acquire. The
JADE acronym concept was used and covered the four steps of discovery undertaken
by the management team during this phase:
Judgement:
The search highlighted the competition for Financial Planning businesses. And the
probability that any growth from this direction would be at a premium price. Instead,
attention turned to other Financial Services businesses that had underserviced clients
or where a “one-stop-shop” approach could lead to a higher revenue earned per
client.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
Analysis:
The research focused on the cost to “buy” a client. It demonstrated that Accounting
related practices had clients with recurring billings, were of a lower price per client
to buy and are restricted by law from dealing in Financial Planning. The practice
valuation prices were around 1-time gross revenue and were materially cheaper than
the four times being paid for a Financial Planning practice. These Practices also had
underserviced clients with Financial Planning needs that could quickly be developed
as additional revenue sources.
The analysis focused on the methods and processes that could be adopted that would
allow the Accounting clients to be serviced by the Financial Planning practice. There
were legal and regulatory issues to overcome that provided a natural “umbrella” to
restrict any crowding of buyers in the market. The Financial Planning and
Accounting industry had been carefully separated by regulation.
Decision:
It was established that by creating a carefully constructed set of procedures in dealing
with a client and their records, it was possible to gain both access to the client for
the Financial Planning practice as well as increasing internal cost efficiencies in
reducing back-office duplication. Certain record-keeping functions, discussions and
recommendations to the client had to be approached with care by different
professionals, but the process was capable of being correctly and legally
implemented.
The owners decided that this concept could be instituted. It was also decided before
making any approaches the business would need a rational that provided a benefit to
the potential targets. It was decided to create a state of the art “Office-Hub” that
could provide outsourced services as an improvement to their operations and later
as a demonstration of its effectiveness in increasing efficiency and profitability. The
Office-Hub was to be a self-contained profit centre using the latest technology and
operated by well-motivated and experienced staff that would be an attractive and
efficient operator.
The practical effect of the internal Office-Hub adoption was to maximize all aspects
of the existing firm’s operation:
• Administration;
• Marketing;
• IT;
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• Performance Reporting;
• Reduction in micromanagement and maximization of self-management;
• Improved training experience by focusing on both technical shortcomings and
areas to improve efficiencies; and
• Advances in client care and management with an efficient CRM system.
The Office-Hub had the advantage of raising the awareness internally of the client
care and servicing needs and upselling techniques. The Office-Hub was designed
from the beginning as a stand-alone operation so that its offerings could be used as
an outsource service for other firms.
Experiences:
The small staff were quickly able to see that access to more clients was a significant
benefit for them. They were also able to understand that confidentiality was
important. Actual targets were not discussed, but the importance of legally correct
treatment of each client was reinforced as the dominant culture.
The Office-Hub also offered a measure of pride and independence to traditional
back-office staff that was not usual in Financial Planner or Accounting firms. The
elevation of status provided an improve culture of professionalism and autonomy.
This approach extended to the hiring criteria, training, culture development
(seminars, gatherings and other group development techniques) and supported a
lateral thinking approach to the continued development and use of the Office-Hub.
It did not take very long for the Office-Hub to become the core element around which
the existing business segments were restructured and allowed other businesses to be
cheaply developed; requiring only a marginal increase in marketing activity.
Office-Hub
Business
POD
Business
POD
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
The additional businesses add-ons were Business PODS that were complementary
services or offered as “upsell” additional services improving the revenue per client.
PODS were developed as stand-alone profit centers making use of the Office-Hubs
services. And by using the Office-Hub, they accessed the reporting, monitoring and
control systems that were already well established which provided a Feedback loop
allowing for continuous “Deming Style”32 improvements to be made.
Approach:
The approach made to the accounting practices constituted the most sensitive feature
of the deal. The Accounting Practice clients and staff were firmly attached to the
people in the accounting practices with many having been associated with them for
years. Growth by accessing the revenue potential of the client base was the deal
objective and the worse result would be any significant loss of that client base.
All approaches were at the owner level and followed a carefully crafted pattern:
• An offer to assist the business with back-office processes utilizing the
existing independent Office-Hub that was equipped with the latest
cost-efficient technology and systems;
• An additional approach was made suggesting that to make the use of
the Office-Hub worthwhile a “first right of refusal” on any future sale
of the accounting practice could be agreed and documented; and
• A further proposal that during any leave for holidays or health that the
Office-Hub (locum style) could act as a resource to provide the
necessary continuity of the accounting practice business.
Growth by Affiliation:
The use of the Office-Hub as an outsourced back-office and possible support for the
accounting practices whenever staff shortages arose provided an ideal platform for
the GbA approach. The build-up in trust by providing this support allowed the
32 Deming, W. E. (1986)
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
targeted accounting practices to place ever-increasing reliance on the Office-Hub to
support their practice and growth.
The Office-Hub provided a convenient method to align work processes and staff
culture since it was mainly an extension of the targeted accounting practice. The
introduction of the client to the Office-Hub also allowed those clients to be better
understood and their potential needs for Financial Planner services and other
products to be recognized.
Onboarding:
The onboarding process of the business started as each targeted accounting practice
agree to participate in what the Office-Hub could provide. The culture had been
established, via the Office-Hub, that all internal staff, as well as the external users,
were to be serviced as Office-Hub clients. This established culture allowed the back-
office management process to be integrated smoothly and with little disruption.
The culture of onboarding was extended to teams from within the business around
the need to smooth the integration for everyone involved. Such an approach
involved:
• Client handling procedures;
• Staff integration and being made to feel special using seminars, festive and
high-quality functions;
• Development of marketing programs and standard pricing algorithms and
targets that also matched KPIs;
• Implementation of Monitoring and Control systems and feedback loops;
• Behavior and Performance training around client-centric approaches and
empowerment of staff from clear KPIs;
• First-class and continuous development and training programs and
encouragement to use lateral thinking and disruptive innovation;
• Retention of the offices of the targeted company until clients were able to be
“relocated” that is, change affecting the client was also managed;
• Office layout and appearance;
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
• Senior management goal setting;
• Staff opportunities, including different areas in the business, so they could
personally grow as well as the potential for direct ownership of a franchise-
style office that continued to make efficient use of the Office-Hub;
• The potential in the growth of the combined business to develop a fully
outsourced model that could expand globally; and
• Expansion of the product offerings to clients to include legal, travel, business
services such as consulting, and sale and financing broking were planned as
future developments. These additional services had the objective of providing
a “one-stop” Financial Services company that clients could grow with.
The onboarding was identical and did not differentiate for internal and external staff.
All staff were treated similarly, and the onboarding allowed the business culture to
be adopted in the expanded organisation. This process eased and encouraged the
adoption of the Office-Hub approach and further encouraged its utilization BEFORE
a final deal was concluded.
Negotiate:
Targeted Accounting Practices and others were able to see the seamless approach in
operation. Price discussions were, as a result, generally about the market value rather
than non-priced aspects such as staff continuity. When the business was able to make
use of a stock exchange listing, it was able to accelerate the rate of the acquisitions
further. The Office-Hub also allowed external businesses time to consider the merits
of any acquisition. The mutual benefits were clear, and the aftermath of the
acquisition was known before a deal concluded.
Multiple deals were undertaken, and each succeeded in using this approach. Several
Owners of the businesses acquired choose to stay on recognizing the benefit of
operating in the enlarged groups. And the expansion of products being offered to the
client base grew to include other business services, including real estate, travel, HR
and related agency services.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
CASE STUDY TWO –
COMPLEMENTARY PRODUCT
Summary:
The business was involved in providing a laundry and linen service to Hospitals,
Nursing Care Homes and Hotels. To be able to undertake the activity cost-effectively
the Business needed to import the commercial laundry equipment, install that
equipment and offered a financing method for the Clients. Expansion of the Business
came organically by increasing equipment capacities and including additional
complementary products for sale such as different versions of linen. The business
considered overseas expansion to accelerate growth but found equipment
distribution rights were limited in other markets. Providing capital equipment to a
limited domestic market restricted growth potential.
The business decided to engage in an approach that would lead to a merger with a
supplier of the essential consumables used with the equipment, that is, the various
cleaning agents.
Decide:
The Business looked closely at viable approaches that could deliver long-term stable
growth into a limited domestic market that required expensive capital equipment.
Early on it was decided that a regular consumable was the most likely area to focus
on for growth.
Research:
Using the JADE approach, the Research is broken down as follows:
Judgement-
The market was well known and the various chemical consumables, their suppliers,
costs and usage understood in detail. These consumables consisted of an extensive
range of industrial cleaners, softeners and soaps of different use.
The research sought to understand the plans of the leading suppliers and what
approaches they were taking to improve their market position and share. In
particular, the likelihood of the suppliers remaining in the market as they were all
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
foreign-controlled chemical companies. The research found a company wanting to
secure its market share and was also researching ways to do that.
Analysis-
Extensive enquiries made it clear that the only rational approach that would provide
growth was to align the Business with the Supplier more closely. A "reverse
acquisition" could be orchestrated if the equipment the business was installing was
able to ensure that only the suppliers' chemicals were used. Forecasts calculated that
the financing options available would permit the approach being considered and that
the market share growth would provide significant financial gains to all parties.
Additionally, forecasting highlighted that the chemical supplier would achieve many
of their objectives due to a “locked-in” supply arrangement with the end-user.
Decision-
To be placed in a position that would appeal to the suppliers required an alteration
to the financing methods offered to customers wanting an installed commercial
laundry solution. Adjusting the client financing to a rental agreement allowed the
customer to be contractually obligated to use many of the services specified,
including the chemicals from the designated supplier. Management viewed that this
financing concept was achievable.
Experiences-
Staff were already dealing with the Suppliers staff; however, all staff were carefully
informed of the importance of a close working arrangement with the preferred
supplier. No discussion on ownership change was discussed at that time.
Approach:
The supplier was well known to the company due to the consumables supplied, and
it was straight-forward to arrange regular discussions about the market. Great care
was taken to identify the strategy being adopted, requiring customers to use the
selected chemicals and to build in appropriate warranties and commissions.
Growth by Affiliation:
Within a short time, customer service representatives from both companies were able
to deal with client issues regarding equipment programing and chemical selection.
Training days were arranging, and management attended monthly informal meetings
to plan market growth and deal with any problems. Each company maintained its
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
own identity and warranty responsibilities, but each developed a strong ethic of
client problem solving and new sales lead generation.
All staff saw it in their best interest to support the close working relationship that
was developing. The complementary nature of the product and the requirement for
the equipment and chemicals to work correctly was well understood and accepted as
vital. It was not long after that suggestions could arise that it would not be in either
parties’ interest to permit the relationship to be torn apart. Several competing
chemical suppliers had expressed an interest in becoming part of the equipment
suppliers’ operations. And these advances were duly passed along to the preferred
supplier. Within 18 months, an approach was made to discuss an equity interest that
could lead to a total acquisition.
Onboarding:
A team from each group was established to look at various aspects of acquisition
and due diligence. Operational staff were already fully conversant with the systems
and people in each business. Accounting staff were the last to be indoctrinated into
the needs of each party. The Supplier was a Fortune 500 company from the USA
and had stringent reporting rules. The much smaller equipment company was an
SME, and while it had proper systems, the reporting needs of the USA company
were vastly more complicated.
The Deal team and the Accountants knew each other for years, allowing the
relationship to become a collaborative effort and not one built around fear or
resistance.
Negotiation:
Pricing and valuations dominated since it was believed that the working relationship
was already well understood. The limited due diligence needs making the process
very quick, and a deal was executed within three months of first being raised. As all
the staff were engaged in operations together, already little else was needed.
The completed deal resulted in a 100 per cent acquisition of the company by the
supplier. It was not an exit for the shareholders and management but an opportunity
to continue to grow a unique business within the structure of a Fortune 500 company.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
CASE STUDY THREE –
COMPETITORS; TAKE-OUT
Summary:
This organization marketed the rental of space for advertisements on Billboards. Its
operation was limited to the sale of the space available, where others owned that
Billboard space. The business expanded but was confronted by the competing
interests of the existing space owners. Over time the company managed to gain
exclusive rights to sell the space on a profit share basis with the Billboard space
owners by forming them into a loosely structured "Club". The business also
developed its own space using mobile billboards on the back of trucks and trailers
and digital screens located in Shopping Malls.
However, the major advertising markets continued to be in the street-fronting
Billboards. The business considered that they could acquire the billboards as a
complementary growth strategy and to expand into innovations by investing heavily
into the newly emerging digital display solutions. The success of this approach was
heavily reliant on the repeated acquisition of rental space from Club members.
Decide:
The marketing approach adopted by the company was a very fragile arrangement.
The goodwill of the existing Billboard owners in providing access to space was
paramount to the success of the business. The goodwill from these owners of space
came at a significant cost, usually the largest share of the space rentals earned as
revenue. In many cases, it exceeded 70 per cent.
Management understood that the manhours, profit-share and energy needed to retain
the space provided by the owners was limiting the Company’s ability to grow. The
capital required to own space outright or the lease cost of space was an important
limiting factor also to be considered. Significant capital would be required to replace
and duplicate the amount of space being sold by the Company for advertisements at
that time. Attempting to acquire any new space would come at a considerable cost
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
in a competitive and scare market for available “owned” or leased space. The
availability of rental space was strictly limited to Government designated and
approved locations. Any new space was not only controlled it was impossible to
obtain in some areas.
Management took the decision to change the business model to the more traditional
concept of space ownership rather than being solely a marketer of someone else’s
space. The decision was only the first step as to how to apply that decision was
unknown.
Research:
Using the JADE approach, the Research is broken down as follows:
Judgement:
The growth plans needed to be understood. More rental space would allow more
revenue to be earned. But there was a trade-off. The property ownership of the
underlying rental space may have a ground lease attached. Some sites had
Government rules related to the surrounding parkland maintenance. Other sites were
electronic systems with different maintenance requirements and power costs.
Analysis:
Management analyzed the market and the spaces available, their costs and the
likelihood of purchase of any space, their valuations, lease costs and likely lease
increases as well as the attaching site obligations. They produced several algorithms
that reduced the buying decision for any space to an easy to use test of the value of
a site against its profitability.
Management also had to calculate the capital and funding requirements and consider
the best methods to deliver on any acquisitions. Funding restrictions was deemed the
main limitation going forward.
Decision:
It was decided to commence a phased acquisition strategy. Rather than attempt to
acquire a competitor the decision was made to focus solely on Club member space.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
That is those people already working with the Company, who were well known and
whose space was already being sold by the Company.
It was felt that such an approach would reduce any competitor reaction and restrict
any upward pressure on space valuations.
Experiences:
Staff were informed of the process during the early stages of the research as the staff
had the necessary knowledge to identify the space that was most undervalued and
profitable as the first targets. And it was understood that the negotiations and growth
plans were crucial to the future for all the staff.
Approach:
The targets to approach were well known. But those to be approached first were
quickly identified using the financial modelling and algorithms developed. The Clun
members were regularly in contact with Management and a series of low-key
approaches were arranged to “sound-out” any interest. Each approach was different
depending on the relationship and attitudes of the Owner.
Growth by Affiliation:
The Company was undertaking an unusual GbA as the operational aspects were
already inhouse. Where the relationship needed work was those locations where the
space was on property owned by another third party and leased to the Clun member,
usually on very long-term ground leases. The relationships in those cases needed
careful handling as the value of the space was dependent upon it continuing under
that lease.
Onboarding:
Many leases were expiring over the next five years. This expiry date gave time for
the gradual establishment of new relationships. And that approached formed part of
the on-boarding. The process involved a team being formed to fully understand the
integration of that space into the inventory of the business. And to quickly ensure
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
that the site owners providing the ground leases would be comfortable with the
relationship change. The team developed a comprehensive database of each location
and any requirements such as the lease term but also any maintenance or other
conditions such as garden care for sites in parklands. In doing so, they became aware
of any issues affecting the site before any deal closing.
Negotiate:
The final step was the acquisition of the spaces from the Club members. By now,
the arrangement and integration had reached a point that this was a simple step with
a transparent valuation model agreed by the parties. This valuation certainty also
made the financing of the spaces either via, equity, vendor finance or bank finance
a clear process. Within a short timeframe, the process of acquiring space had reached
a critical mass, and the company was able to list on several exchanges and continue
to grow using equity and debt ass a public company.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
BIBLIOGRAPHY
Abrams, H. (2013). Mergers and Acquisitions: How do you Increase the Value of Two
Companies. COLLABORATE 13 eprentise LLC.
Collins, J. (2009). How the Mighty Fall: And why some companies never Give in (Good to
Great). Harper Collins.
Deming, W. E. (1986). Out of the crisis. Cambridge, MA: MIT Centre for Advanced Engineering.
Loewenstein, G., O'Donoghue, T., & Rabin, M. (2003). The Quarterly Journal of Economics.
"Projection Bias in Predicting Future Utility", 1209-1248.
Mcnaughton, J. (2019). Regional Resilience, Using Disruptive Innovation. Gold Coast: Lakeland
House Publishing LLP.
Mitchell LM, P. H. (2001). Making mergers and acquisitions work: strategic and psychological
preparation and executive commentary. Acad Manage Exec 15(2), 80-94.
Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy. USA: Harper Brothers.
Simon, H. A. (1955). A Behavioural Model of rational Choice. Quarterly Journal of Economics
69(1), 99.
Tversky, A., & Kahneman, D. (1992). "Advances in Prospect Theory: Cumulative
Representation of Uncertainty". Journal of Risk and Uncertainty. 5 (4):, 297–323.
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
ABOUT THE AUTHORS
LI FUJUN (Roger)
Roger is a CFA Charter Holder and graduated from Tsinghua University and China
UIBE with a bachelor’s degree in Engineering and a master’s degree in Economics.
He has 25 years of experience in financial management, M&A and investment
activities in the Hong Kong and PRC-China capital markets.
He is the Managing Director of the business and M&A consulting firm Noble Bridge
Capital Limited, an Independent Director of Beijing Enterprises Clean Energy
Group Ltd. (HK listed with code No.1250) and the Permanent Executive Vice
President of Shenzhen M&A Association of Listed Companies.
He has worked as a Director with a listed property insurance company with fellow
Directors such as Jack Ma of Alibaba, Pony Ma of Tencent. And Ma Mingzhe of
Ping An Insurance as a significant shareholder.
Roger has also worked as Executive Director with Town Gas China Holdings Ltd
(HK listed with code No.1083) and help contribute to the market value increase of
USD$ 1.3 billion a jump of some 42 times within six years. He led an M&A team
that acquired 22 projects in China with a total value of USD$500 million and also
contributed in planning to an MBO project which resulted in 15 times return within
three years. He has also worked as a Chief Financial Officer to another HK listed
company.
SUZANNE ROSS
Suzanne is a business process expert. She has started and grown, by acquisition, a
very successful multi-disciplinary national professional Financial Services business
that was rated one of the fastest-growing startups in the country.
She has an Executive MBA from the prestigious RMIT together with legal training
in her early career with some of the largest global insurance companies. She
continues to foster the development of numerous startups that are revolutionizing
the functioning and delivery of Financial Advice. Suzanne also provides a unique
one-on-one training program that helps CEO’s be better prepared to represent their
GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS
business. She also consults globally to other companies and shows them how to grow
and develop their business successfully. She is presently advising companies with
activities in a range of sectors in Australia, Canada, England, Ghana, New Zealand,
Mexico, Tanzania, Turkey and the USA.
She maintains an extensive global network that helps develop the culture and
concepts her clients need to provide for a sustainable business with future resilience
and growth opportunities. She is prized for her “outside-the-box” thinking and
solutions as well as her development of the “Quiet Drivers.”
JACK McNAUGHTON
Jack is a qualified accountant and has a master’s degree in Change, Management
and Leadership from York St. John University in England. He currently provides
consulting services to various groups involved with Startups and Companies looking
to grow internationally. His expertise in global structure, business and project
establishment is called upon in numerous locations around the world. He consults in
diverse areas such as banking, financial services, funds management, affordable
housing mining, food trading and supply, cryptocurrencies, software solutions,
fundraising, advertising and branding and stock exchange listings in different
countries.
He has been responsible for over 20 stock exchange listings with a total market value
over $USD1.5 billion and direct fundraising. He has taught MBA classes in
Entrepreneurship and Funding New Ventures as an Assistant Professor. He has
written extensively on disruptive innovation and how it needs to be encouraged and
supported. He has published Monetizing Ideas from Startup to Success and Regional
Resilience, Using Disruptive Innovation.
Jack has travelled the globe and works from offices located in Australia, South
Korea, Switzerland and Spain.
You can contact him at [email protected]
COPYRIGHT @ 2019, JACK McNAUGHTON
ALL RIGHTS RESERVED