Biggest inefficiencies in corporate development
Based on my experience, with the diversity in assets, you can see bidders' behavior: how they interact and organize themselves. Of course, you won't see how they feel behind the curtain, but you can get a feel for how they're organized.
One inefficiency is the lack of preparation. When entering a process, you must stand back and be well-prepared across workstreams and other facets.
One of those is governance. From my experience, you need to know the key decision-makers and committees. There may be some subsidiary boards you need to deal with, so make sure you've thought through all the key stakeholders. Be very deliberate about engaging with committees, giving them what they want.
Know the decision-makers. Some executives might not want to be on the journey. Some may want to check in once every week or two weeks. Others may want a phone call when there's a key issue that you're working through.
Some executives don't want to be on the roller coaster, nor should they. On the other hand, some executives do want to be in a loop and understand the key dynamics that you're wrestling with. There's a fine line between bringing that executive on the roller coaster and giving them what they need. So be prepared. Governance and vendor due diligence set you up for success.
Another inefficiency is that the M&A teams running the deal may not fully have the organization running at the speed that they are, which is important for decision-making, especially when you're in a negotiation.
You must ensure that everyone in the organization, the board, senior executives, and business sponsors, are running at your pace. Be organized for negotiation, and have buy-in from key stakeholders. Also, make sure that senior decision-makers are aligned in terms of the following:
- what you're trying to do
- what you're trying to achieve from a transaction, whether an investment or an acquisition.
Making sure you've got buy-in support may sound obvious, but you'll be surprised at how many times a buyer would take a while to come back to the seller to renegotiate certain elements.
When I say governance, I mean the management of the projects from the typical governance, which is the oversight function, approval, decision-making, and assessing risks to the nuts and bolts of the machine you're driving to get the outcome. Leadership alignment would be part of it.
Time kills deals. Speed can be a competitive advantage in an acquisition. You may have a bidder who wants execution certainty. If they see that you are moving quickly, you're diligent in how you operate, and you're professional, that could give you a competitive advantage.
If it's a shootout on price and it's marginal, then that could be the swing factor. When you're selling a business, being one step ahead in front of bidders in terms of turning around the Q&A and due diligence process, making sure that you can deal with issues that can pop up quickly and that you can facilitate a swift, efficient due diligence process is paramount.
Setting up an efficient governance
Before we get into how to set up efficient governance, it's important to understand that there are always constraints to how you build the process from an internal perspective.
We're an insurance and a bank, so we're a highly regulated entity here in Australia. We've got licenses to both carry out insurance activities and banking activities. Our regulators give us the license to operate and be in the market. We've got very crucial stakeholders, and we're very sensitive to them and our regulatory obligations.
People not in the financial services industry may think I am over-governing, and how they think about it is heavy. But from my perspective, there are certain aspects I need to be.
We need to make sure that the decision-making is clearly articulated and documented. We need to deal with the subsidiary trustee boards. We need to deal with them in a particular manner because they may have very different regulatory requirements. Their duty may not be to the shareholders, but to the members in a superannuation fund, for example.
We all deal with confidentiality. We need to retain confidentiality internally and externally. We need to make sure that we've got the tight protocols internally, and it minimizes business disruption.
Sometimes, we want the business to grow and create value in a divestment. We don't want the business to stop through this process. That would be disruptive to the people and the deal value. So consider who you bring in and how you bring these people in.
Preparation is key. You must be prepared for M&A. With experience, you can look forward and see the potholes and steer the ship around them or lay something over the top of them. Spending the time to sit back, reflect, and build this is paramount.
To set an M&A function up for success, have the right capability in your team. Have individuals who enjoy the intensity, the ups and downs, and the fast-paced nature of M&A. When you've got a thousand things to think about, he will lay out the following:
- the key stakeholders
- the consultation process
- who do we need to engage with
- how we can engage with them
He puts a military-esque framework around how we execute, and it will change. But as long as you've got that pathway and who your key stakeholders are, how you're going to consult and engage, you're setting an M&A function up for success. And they might be different from the typical capability you think could run valuation contracts.
You will be running a large project, so you need the right project management and advisors for the situation. You've got:
- Legal transaction advisory
- Transaction services
Make sure you've got the right individuals for the situation. Also, make sure that your investment bank and M&A advisor's skillset they bring to the table will be incremental to any situation, whether it's a bilateral or auction process.
Quick, timely decision-making. Know who needs to make the end decision to do what you need to do. I've been rounding my organization long enough to understand the delegated authority limits, get across those, and understand who, in the end, will need to make certain decisions and plan backward from that.
It happens all the time when you need approval, you need to put something in the data room, or you need a certain sign-off on an agreement. And then you're throwing that on someone the night before or the day before an extreme. So ensure you've pre-thought those and think back to facilitate quick and timely decision-making.
Consult with those key stakeholders. This can be resource-intensive, but it's worth the investment. Make sure you talk personally to those key stakeholders and understand their thoughts about the process. Make sure you are aligned on the objectives that they fully briefed. At the end of the process that's set up, everyone should be well-informed and well-aligned.
Some key executives who haven't been in M&A may struggle with the pace and the fact that things change quite quickly. Matters will spark up, and you'll need a decision or input quickly. So make sure they are aware that's part of the process. Don't assume that's a given.
To set up an M&A function for success, do quick and timely decision-making. It may be a large team in terms of due diligence. You may have some workstream leaders across all the disciplines running the teams. Whether you're doing due diligence in a business or feeding into the vendor's due diligence, make sure that the threads and streams are a part of a whole.
Ensure the key workstream leaders and the people inputting your process get it. Make sure they understand what you're trying to achieve, their role in the big machine, and what you will ask of them.
What we do is we template as much as we can. We have a template for due diligence reports which provides a materiality threshold, so when they are conducting their DD procedures and activities, they know what to focus on and what to not focus on.
Down to the details around meetings:
- Make sure there's a clear purpose around meetings and agendas
- Make sure people understand what they're doing
- Be respectful of other people's time
- Pre-brief for any bitter interaction – make sure that when people are in front of bidders, from a diversity perspective, they know the do's and don'ts, and they are well-briefed around what they should be delivering and what information they're headed on.
When you're part of advisor meetings or management meetings, ensure you understand what you want to get out of that session, key thematics, questions you don't know, and unclear areas. People have a lot of questions. Don't get stuck in the weeds, and focus on the material items.
Lastly, I know we've all had bad experiences, but I've learned my lessons, and I always look back at the processes and spend the time to understand what went well and what didn't.
PIRs or post-implementation reviews are important. Look back at your performance. Talk to your key stakeholders and always look to improve your function and delivery continually.
The process and the people involved
When you're not in an active process, i.e., when you've got board approval to push forward and prepare a business for sale and get a process set up, or when you are looking at an asset and you're about to step into a process. At that point, the clock's already started to tick. You've got a mandate and instructions; at that point, it takes a lot of work to get deep into thought around process development and get the stuff well-considered.
I would first and foremost talk this case through and then talk about what I should do if I've got instructions and we're moving. But if you've got time, look back at past processes you've run. Then, I would run a post-implementation review. Think about the areas of agitation and friction, be honest with yourself, and put your ego to one side.
Listen to your stakeholders. Did you give them enough clarity on what they needed to do? Did you give key stakeholders enough time to review the information and absorb and consider making decisions quickly in a considered manner?
Look back at what's gone wrong. Then start looking forward to what the ideal process looks like and map out committees, stakeholders, governance, and the team, ensuring you got the right capabilities to deliver an efficient process.
Consider the project management aspect. Typically, that's a side thought. You'll have an analyst or something running a Gantt chart, a key actions list, or a workstream key actions list. In my experience, it's not good enough. You have to think through how you will conduct vendor due diligence. What does that process take? Give enough time to be able to do that properly. What are the key issues in the business? Understand the business, the commercial value drivers, and some key risk elements, and set your team up around that.
If you've got time, start developing templates so you can move quickly, such as due diligence reports templates for key work stream leaders, steering committee updates, risk statuses, reports, NDAs, and a whole bunch of artifacts you use regularly. Make sure that aligns with your risk function.
There are services out there that will independently run, which is quite run PIRs for you and what is best in class. So many people say they can do that but think about an organization that's got a good sense of what best practice looks like.
But if you've got instructions and the clock is ticking, and you're running hard, I would focus on the capability of the M&A team, the internal team, and the advisors and how they will execute. Then I'll spend time thinking about the approval processes and the key stakeholders and ensuring you've got the governance set out.
You can work all night on an issue. If you find a problem in the business or a due diligence issue, your team can do what they need to do to get across that issue. But you can't control a stakeholder who may be on annual leave, who may be uncontactable or a senior executive who just doesn't like to move quickly. That will create agitation and friction. Try to avoid that type of situation.
Understand who the key stakeholders are. It's like managing upwards and downwards, ensuring your team's in place, you've got the right capability, you've thought through milestones, and your stakeholders are well-managed.
At Suncorp, this is how we do it. At the top, you've got the board: the main board, your group board, or a subcommittee of that board. For transactions over a certain value, the group board will have to approve those transactions. Our CEO has delegated authority to approve. Most of the time, it's above the line of the CEO's delegation, and we also like to bring our board along on the journey.
As you know, in an M&A, at times, it doesn't matter about the natural size or materiality of the deal. However, it can still have significant risks attached, so we always like to keep the board informed.
So, we have our group board, and they can convene a board subcommittee with weekly regular, and frequent oversight. Then, they'll make it a recommendation to the group board. So, that's the key approval bodies in our world.
We have an M&A steering committee, which is our CEO, CFO, CRO, and general counsel, and everything needs to go through that committee. So before I can budget and allocate resources, that committee must approve the activity. So that's the committee that I manage, and those are the key stakeholders directly involved out of the executive leadership team.
Another way we do this is by having one business sponsor for every transaction from our senior leadership team. So the M&A team can't champion a deal, it needs to be sponsored by a senior leadership team member, which is important.
Sometimes M&A teams can operate in a silo. They can run five steps ahead of the organization, and the way we try to control that is to have a business sponsor presenting the material and the headline they'll be responsible and accountable for.
Under that, you'll have your working group. Your working group leads all the classic disciplines, finance, accounting, tax, risk, legal, commercial, pricing, and general insurance perspective claims. You'll have a working group with the leaders and the key subject matter experts, and that's the group that you will frequently be meeting, dealing with issues, and guiding along the journey.
Some of your listeners might think that's heavy, but that is in place to manage the risk around M&A to ensure the key people, the organization, and the board is well-informed and the appropriate oversight governance is in place.
We can meet our regulatory obligations as a licensed insurer license bank and have documented clear decision-making and processes.
Deal execution framework
You need to be able to get this group, and it could be a large group of stakeholders to move quickly. That's how M&A works. You do, or you don't. Processes can fall over just because this whole process is mismanaged. Back to those thematics before:
- Be well-prepared.
- Understand the layers.
- Understand when you need to go to the layers and when you need to go to the governance committees and what you're asking.
Map all that at once and spend time looking forward so you're not running, muddling your way through.
- What are the potholes?
- What are the milestones?
- What are the approval points?
- Who do I need to be there at that time?
As we know, M&A is not rigid. It's dynamic. It moves, so making sure that those key stakeholders know that this is how you will engage with them and keep them along the journey is important. Also, small things like understanding annual leaves for the key stakeholders and understanding if they will be on road shows or offshore. Understand where they will be and that detail because you can't be underprepared.
Be clear on what you're asking and give the right level of detail. For example, some board members want to see transaction documents, and you'll put them on their board books or the platform they have for reference but make sure the papers that go up are succinct and clear on what you want.
Make it easily digestible for a board. When you're putting a transaction document, put the key terms and what it means, the risks, etc.
If you're in negotiations and it's moving, I ensure that I have the right delegated authority. I know my limits and guide rails, and then I'll ensure that I have people on the phone and that I have the right people ready to go. That could be the CFO, CEO, the chair of the board subcommittee. The CEO will manage the board but ensure that the CEO knows that the right board members are ready to join a call or consider an item.
Having the right decision makers at your disposal and ready to go and knowing where your guardrails are is key. In having a guardrail, don't have a point estimate. Several times when I've been engaging with bidders, they'll put a position on the table, and we won't be able to accept it. Then you hit a brick wall. Then you'll have to put that on one side, they'll go back into their machine, get the right approvals, and come back.
Make sure you've set yourself up for success from a negotiation perspective. You've got the guide rails, you know where you can and can't go, and there's no point estimate. You'll have your position; if it's a point estimate, then it's a point estimate, then hold on to it. But if there is latitude, make sure you know the top end and lower ends. It's so important as an M&A practitioner to be very clear about how you attack your negotiation.
Managing accountability in a governance structure
Be clear about roles and what you're asking of individuals. For example, workstream leaders. "I must ask you to sign off on the pre-completion conduct section clause in the sale purchase agreement."
So this individual knows that we're selling the business, and the bidder wants to be very clear about the activities that you undertake while you still control the business up to completion or settlement. They'll put guide rails. It could be CapEx, employees, executing the business plan, and all that stuff, so make sure you're clear.
At Suncorp, the M&A team doesn't just agree to that in isolation. I don't want to have an agreement that I've put on the table that needs to be operable, and then people ask who's responsible for signing up for that. That is a bad scenario.
Make sure people understand what you're asking of them in accountabilities but give them the right support, so they completely understand what is required.
For synergies, make sure that you have the people that are going to be responsible for extracting those synergies by signing off on the quantum and the source and thinking through how they're going to do it before you sign a contract or before you put a bid in.
Be clear about the requirements and the asks. Don't just think that synergy number fits into the percentage of operating costs. Make sure that the right person signs off on those synergies.
At Suncorp, we also do risk moderation sessions. We've got a given regulated entity–we'll either have a prudential or a risk team. Have a risk individual, so it's not the deal team, and you create a risk template that will have itemized the risk. It will have the owner of that risk.
- What are the controls you will put in place to mitigate the risk?
- If there's any residual risk, what does that look like?
It can be done quickly, and it helps not only identify problems, issues, and risks but also assign an individual in control to mitigate that risk so that person's accountable for those controls and make sure those controls are operable and alive.
We'll run that session before steering committee check-ins. We'll do it upfront. An important piece is we have a risk rating, so the risk is either severe, critical, or moderate. Then we report the dashboard or the five key severe or critical risks, and the controls report that to the steering committee. It keeps you honest and accountable and keeps you constantly thinking if the controls are effective.
- Is that risk so severe?
- Should it be moderate?
- Are we doing a good job of managing that risk?
If you've got residual risks you can't control or mitigate, that's then reported and transparently reported up the chain. So we're either comfortable with accepting that risk, or we're not.
In these meetings, I typically involve a small group. You don't want to cast thousands because it can run away from you. I'd have a risk individual who is independent and objective, the M&A team, advisors, and some of the key people that know the business and the situation, you just have to use your judgment. Not the business sponsor but their right-hand person or someone who knows the business and the issues. It's more of a commercial discussion.
Approaching key stakeholders
I'm always surprised at how little importance is placed on relationships internally and externally. Building connections, and trust, even with a better account party, is key. More importantly, it's internal trust and understanding of the individual.
We're not all the same, and we don't think the same. And when M&A can be intense, it can be stressful. Reputations can be on the line. People can be conscious of what it means for them and their careers, so you've got to be empathetic.
I've been around Suncorp for ten years, so I've got a good sense of the individuals. You may have a new executive coming at the senior level, so make sure that you book time in with them, brief them on what you're trying to achieve, the objectives, and what's important to you, and ask those questions from an M&A function, how do you want to be engaged?
Some people like the phone call and some prefer emails or booking time with me. Get a sense of the individual and the time of the investment in getting off your computer and on the phone or in person and just understanding what's important to that person.
When I came from investment banking to in-house, it was a massive transition for me because when you're in an advisory in the M&A, you'll have instructions to do X, and you'll get about to do that. And if you have a blockage internally, if you're not getting the right information, or if someone's not pulling in the weight, you can typically escalate and unblock that. When you're in-house, it's all about trust. You have to build relationships.
Sometimes you're not invited into certain discussions, but you must unwind all that stuff. Having the trust that people come to you early, people trust that you're thinking about them, the process, the governance, and the risk elements is key to building that trust. They're making sure they feel like they're part of the process, and you should put it into it.
Keeping people aligned is challenging because their purpose or perception would change. Purpose and priorities would change, which wasn't aligned with the overall objectives. We started to do this a couple of deals ago when we reported to the steering committee, the first thing we do is have our key objectives on the table on the left. That may be all the classics: maximize shareholder value, minimize business disruption, minimize execution risks, and maximize certainty.
You might have three or four at that level, and then describe what that means for this unique situation.
- Are you on track?
- What are the issues?
- What are the thematics that are holding that back?
It's very simple. Table up the front. Objectives, a bit of description around how that relates to this unique situation, and then how you track it against those. When you keep it that simple and you roll all the detail that's sitting under when you elevate it up to what you're trying to achieve, and you keep reminding people of those objectives, that would help because when work streams or individual signs are varying off, you can just bring them back to those core elements.
How critical is the speed in divestitures
Speed is critical. The benefit of that simply is to increase the probability of executing successful deals. Achieving your objectives, getting the right outcome for your stakeholders, doing a better deal, doing the right deals, and doing great deals.
Speed and efficiency create better outcomes. It reduces confusion and the time for external factors to impact the value of the business or the deal and increases certainty.
However, going too fast and skipping corners, and not being well-prepared can have adverse effects. This is where preparation comes in. It allows you to go efficiently. Fast is not the right word, it's efficient.
A good example is if you don't undertake the appropriate, robust, rigorous vendor due diligence when selling a business. Suppose you want to understand everything about the business, the proposition you're selling. You skip corners, you don't do a good enough job, and you don't understand the business. Due diligence magnifies every element of the business and the managers that run that business.
If bidders find an issue that you haven't found and you're getting it through a Q&A, they're requesting management meetings on the topic, and in the background, you are trying to solve, reconcile, and do whatever it is to get your head around that issue. That will create distrust in the process because your Q&A turnaround times will blow out past 48 hours if you can't answer it quickly. Then credibility starts to get impacted.
You need to think through efficiency, and it needs to be swift. You must ensure you understand the business and the material setouts that make it easy for people to do due diligence and get their heads around it.
Suppose you do due diligence in the business and the data room's scattered and the information's all over the place. In that case, you need to conclude immediately around the quality of that business.
Fostering speed efficiently
Fostering speed efficiently all comes down to the governance, how you structure yourself, and how you see that yourself.
- Make sure you've got all these stakeholders along with you
- Make sure everyone's running at the same pace as fast as you are
- Make sure you've set your team up for success and have the right capability.
When running Q&A in the due diligence process, ensure team members understand that they have to turn them around straight away. There has to be a 48-hour, 24-hour turnaround and Q&A. That means that this work is always on top of their BAU work, so they have to create capacity in their day to respond quickly to Q&A. It's all those elements and just being well-managed and thinking through what you need to set up to execute a successful transaction.
Reflecting back on previous deals
We have a format, and we're building more sophistication into that. I like to get an independent individual and make sure we've got a really good relationship.
The process is that we look at our objectives. Did you hit those objectives simply? Around the table, how well did you do against that scorecard? And then there's an interview process with all the key stakeholders, and that's why I can't do it. I need an independent individual outside the organization to come in and interview all the key individuals.
- Were you clear on the objectives?
- Did you hit those objectives?
- What were the key issues?
- What agitated you?
- Were all the artifacts, the board papers, and the steering committee papers clear?
- Did you appropriately canvas issues?
This independent person is having these conversations one-on-one and piecemealing them together. So it'd be typically one-on-one. You don't have to get everyone who participates in the process, but those who were heavily involved and one-on-one allow for the truth to come out.
One key feedback we got was that we're unclear on the deal objectives. People were in silos. Workstream leaders were given instructions to do stuff, but they weren't clear about how that all fit into the big picture and what the objectives of that transaction were.
You can get quite defensive, thinking you've cleared things out and done your job. But you have to take a step back and think if that person feels like that, then you haven't done your job.
We're bound by confidentiality. So there's only some of the big puzzle that I could bring them in on, which is a legitimate point, but then maybe you need to make that clear with the individual to say you can't talk about the broader picture with them, but show them how you need them to fit into that.