On this episode Kison speaks with Toby Tester, an M&A Consultant and Project Manager with over 20 years of experience.
On this episode Kison speaks with Toby Tester, an M&A Consultant and Project Manager with over 20 years of experience driving strategic, financial and operational value through M&A. Currently a Senior Consultant with BDT, an M&A consultancy headquartered in London, Toby discusses how organizations are increasingly turning to M&A in order to transform their business and remain competitive in the modern, digital marketplace.
This podcast follows Toby’s article, Driving Transformation Through M&A, in which he discusses the trend of transformational M&A, how it differs from traditional and transactional deals, and how to best manage transformation for long-term value and growth.
Kison and Toby cover why this trend is occurring, how it’s becoming necessary for organizations to remain competitive, and how to align practitioners around this growing trend. They also discuss the important role risk management plays in this transformational form of M&A.
What we are seeing in this day and age is that organizations are now doing M&A because they have to, in order to maintain a competitive edge. This is not about cost-saving, but about revenue and changing their business models. They are using M&A to transform what they do and 20 years ago M&A wasn’t about that, but about scale and cost-cutting.
The majority of organizations are effectively playing what I would refer to as digital catch up. In other words, they are changing their product platforms, changing the way they interact with their customers, and introducing digital in what they do. You could do this organically, but quite often you are better off acquiring and integrating that effectively into your business.
Strategy-wise, it’s about playing digital catch-up, making sure you have those digital capabilities just like your competitors do so that you are present, relevant, and have a sustained business that can continue to grow in the future.
It comes down to always thinking in terms of not just what you capture from what was defined pre-deal, but also thinking in terms of what can be created from the business that can have future value. I think of this as going from continuity to opportunity. When you are going down the transformational M&A path, your value horizon is not just focused on what you need to do to deliver short-term benefits from acquisition, but what the long-term prospects are as well, especially when you have acquired a company and are going through the integration process.
Once the deal is done, there are things you will be doing to start uncovering those opportunities that weren’t uncovered during the due diligence phase. This is why it’s important to have a much wider view, to make sure that you are keeping the eye out for the potential opportunities and bringing that into the whole integration process.
For example, there may be opportunities to increase or change the profit model, maybe increase the price of the product, but also make some branding changes or changes in the customer experience. It is the chain of value, from price, through to brand, through to customer experience that you could be making, and you could be making these changes early to improve the value proposition of the core product offering.
That is not a difficult exercise, it potentially has a lot of value associated with it, and you don’t necessarily need to wait for all the integration to occur as you can be doing these things upfront. When you are driving transformation in M&A you are integrating, but you are also transforming at the same time. This way of working is more agile and a more fluid way of doing business, as opposed to doing it in a serial type of way.
Let’s say a company’s supply chain model was better than the acquirers. The change lies in actually changing your operating model, so sometimes you are better off deciding to take what acquired company does and use their platform for the supply chain operations, rather than trying to integrate them into yours. The key part of the whole transformation exercise is sometimes actually utilizing other people’s operating models and making them your own.
It comes down to having the right mindset. There has to be a propensity and you need to be focused on always searching for new ways of working, always being driven by purpose and vision. You always need to be looking at how the operating model changes to enhance the value propositions and always looking for transformation value and not just transaction value.
This is important in leadership as well. The key is in shifting away from transactional thinking because once you take a transactional mindset, you are actually limiting your horizons, reducing what’s possible and you are following a literal playbook approach. When you are doing that, you are actually not realizing the true value of potential business and what it has to offer.
Absolutely. The transformational, agile way of doing things always implies thinking of yourselves as being one team, where you are driven by the purpose you envision, you are collaborating and communicating, making sure people come before the process. You work together to achieve a higher set of goals, you are looking for long term growth and you will do what you can on both sides to deliver the best solutions for the customer.
Organizations and people who work in valuations will invariably use a vast range of accounting tools and techniques to actually isolate value and to go through a very extensive spreadsheeting exercise to go through it. This approach needs to be given something that actually complements the spreadsheet valuation process and that is to put the engineering hat on.
Think of yourself as an engineer and think of your organization as a car engine. You want to break that engine into its nuts and bolts to figure out how the company operates. When you do so, you are actually isolating parts of the business that are delivering value all the way through to the customer, so you can actually start isolating more detailed functions. This is a set of stepping stones you are taking that actually help deliver value to the customers and it also helps you understand how those value drivers are connected together.
Don’t just spreadsheet it. Engineer it.
Absolutely, because the customer journey is the endpoint. It’s actually piecing together things that are happening behind the scenes that would impact the things that would happen on stage.
You need someone who’s got expertise in operating model analysis. You can do facilitation to bring it all together so that you can actually start seeing the way the individual bits, the people behind the scenes actually deliver upon a particular value proposition.
This is all done as a part of a larger transformational initiative. You’ll be doing this as soon as practicable and in combination with what is happening in integration. Don’t leave it until integration is completed, but rather do it in parallel.
We tend to go through a risk-avoidance mindset and I think that’s what drives the transactional way of managing M&A. We lower the bar a little bit and do no more and no less than what’s necessary to capture the value that was defined pre-deal. This way, we avoid risk. However, what’s needed from a transformational perspective is actually living and breathing risk.
This is a case of understanding that risk exists, but it goes hand-in-hand with opportunity, so you can’t have one without the other. The key thing about living and breathing risks is actually having a more enlightened and more positive view of risk, because risk management, in many ways, is actually a value-creating opportunity. Risk is something that gets communicated with all your stakeholders in an open, transparent way so that we all understand collectively what we are going in for and how we’re managing risk.
‘’For M&A to be successful, it must always be agile’’.
M&A on itself is a very agile exercise because you know you are dealing with a fair amount of uncertainty and that the end state is not entirely known. You know that to get there, there will need to be an element of discovery. You need to have that agility in leadership, people’s behaviors, as well as methods, tools, and techniques that you use.
From leadership and people’s perspective, this means being more collaborative, having a strong focus on early and continuous delivery of value, a willingness to adapt, and having the readiness to commit every day. Everything is about adapting to what’s actually happening as it occurs. That’s what it means to be agile. Once you have agile leadership in place, then you can actually use the processes and you can take the methods and tools that are used by software professionals who are well versed in agile and apply that to M&A.
You need to make complex things as simple as they can be without compromising their meaning. In M&A, that would be having simple messages, principles, codes of conduct, and certain rules which actually define what you do. If you have simple rules, what you are doing is actually empowering people, because that gives them understanding, direction and empowers them to do what they do.
As long as they are following those rules and principles, you are effectively giving them control to do what they can do to help influence the outcome.
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