Mergers and Acquistions - Can an IT Professional Add Any Value
Speaker 1 We are having this report that will be available the link tomorrow. And I’ll put that through with the newsletter any of the accompanying slides, and thanks to Beck’s and, and others for sending through this slide. So thank you again, Greg Clarkson. And I’m going to hand over to you now because as we spoke about earlier, integration and compatibility with IT systems is also an important consideration. And I wondered if you wouldn’t mind taking over from this point.
Greg And so we’re talking about motion acquisitions in Canada technology professional add any value to the process? Can people see that screen?
Audience Yes, yes.
Greg So the thought is that, when taken, I was going to move this one we’re going to quickly cover in about 10 to 12 minutes is the first four points of this, it’s the opportunity what normally happens, and the problem with what normally happens, and also the problem it typically plays, and then we’re going to break into a workshop, give some feedback, similar to what we did with the people piece. So why are we talking about this as what Robert said, typically, M&A returns are better in a downturn. So people are looking and you can be one of those looking forward as well. But when you think about doing your next M&A, how often do you think about the IT person? And when did they get talked to in the process? And like I said about you if you’re it contact is like this guy, probably not. Instead, you might be actually doing some, some other ways of deciding whether the deal is played. And I want to display this to Mario for a second. If you’re there just to speak about somehow deals are typically done. From your perspective.
Mario Well, people have already talked about culture. But at the end of the day, I’ve been involved in more probably more than a dozen acquisitions, myself, personally, many of them which were part of my own company. And the key criteria was culture and chemistry. And that is, if you don’t have that piece upfront, then you should never perceive them on an acquisition. I think people have talked about that already. But that’s the cornerstone of, of any acquisition, that if you think the path, the target you’re acquiring, isn’t going to have a cultural fit to the best due diligence you can do then don’t do it. On a system side, I’ve got many scars of and I won’t share them today of systems, creating huge cost barriers. integration, acquired companies that give you just one example of one of my least stellar decisions. A company that I acquired need to have a TRP system integrated from two companies into one. So I chose, I had a team put together, we chose a platform, the quote came through for us, I think it was 70 or $80,000, to have the one system for the whole business. I ended up paying close to a million dollars over three years for that, for that implementation of the VRP system and still didn’t get what I needed at the end of the day. So, doing your due diligence on systems. And what’s required is critical because it can cost you a lot of money can cost the acquire a lot more money than they think that’s just first-hand experiences from me, Greg.
Greg Thanks, Mario. So what we want to emphasize is that often in your initial decision, so making the decision to do a merger and acquisition are looking at the numbers, don’t consider the post-merger the next 12 months, which obviously includes the people piece. And there’s an IBM Research Paper that actually says that only 23% of any merges breakeven and another 50% actually experienced destruction of the shareholder value going to some of the experiences that were shared before. So I wanted to ask a bit more from a systems perspective, why is that the case? Yes, people in culture, yes, systems and it and yes, it’s the interplay between them to get these funds together. Now, as part of that the systems does play a role the traditional IT involvement within it due to diligence typically looks like this, and I think certainly encourage this to happen. It’s not wrong, it’s just not enough. So in an IT due diligence, you’d have out data systems, you look at inadequate capabilities, what are the risks, what’s the disability of documentation, so on and structures, but at the end of the day, most of the IT due diligence that happens ends up being and report on assets that goes into your balance sheet or your and just goes into discussing the value from a monetary point of view to do the deal. The problem with it is it doesn’t correlate the strengths and weaknesses of the buyers and the sellers in the business. So I want to just go through an example of breaking this down more that if we look at a business in five areas, sales, people, operations, finance and strategic. And then in one of those areas, we look at sales, and suggest the CIA Mario case, the example of ERP system, what we’re looking for in each one of these areas, and we’re wanting to marry up the various components of the system that’s delivering value in that area of the business, you want at least a one plus one equals two. So and that’s just a breakeven, ideally, you want some sort of multiplier effect in that. But what we know from the IBM Research and many other researchers that 73% of the cases, this doesn’t happen. So why is that the case? Why is it that in the post-merger, and that’s that next 12 months after the deal is done 73%, don’t get ahead did not make any value in it. So what we’re going to do is I’m going to use the CRM as an example of why that’s the case, let’s assume the Company A has strong strength, a strong sales culture, and they’re using a strong sales system to do that. They’re using a technology called dynamics. So the alpha value of one to five finds the best they’ve got available for the company based, also strong sales culture, perhaps that’s the reason why they both like each other. And there’s, and they’re using Salesforce. Now, when they merge, you have to choose which system you’re going to use dynamics, or Salesforce, one is going to get ditched. And so, therefore, the combined value is still the same as if you had dynamics. And going speaking to the cultural piece, those that love the technology that’s just been expired or retired, they’re going to gripe about it, they’re going to complain, it’s going to be one of the reasons they won’t feel like part of the team. So not only do you have the loss of value in this retiring this asset, that’s no longer useful, you’re going to have this conflict. Some businesses decide, therefore, to keep both of the systems going for the sake of the culture. And but then from a systems post point of view, you’re actually got inefficiencies, and you don’t get the expected value that probably was happening when you looked at the M&A. On the flip side, a more positive example, I can speak to a situation where there’s a project management system. And then there is value creation post-merger. So in this example, we have Company A with a strong management system project management system. So let’s give it a value for Company B has a weak project management system a value of two. So when you combine these two, it means it’s a very easy decision for you to adopt the best or keep the best and retire, the weak, particular company that I’m thinking of the smaller company that was being acquired actually had the better project management system. And this project is not only an amazing benefit from technology assistance on the view, but it also helps with culture, because the people with the knowledge could actually be promoted as champions of that system. And they could bring about that expertise for the rest of the business. So that was a very synergistic type of arrangement. So what we’re going to do now is that we’re going to go into a workshop. And hopefully, I can give you 12 minutes to spend some time on it. And we’re going to look at four companies. We’re going to have an end to mergers. And we’re going to ask the question, assuming all the financials are the same, what are the what’s a good match? What are the risks, so on? So here’s one and we’re going to use this describing the five areas of it sorry, this is salespeople production, finance and structural and we’re going to write them now the writings normally have actually got five colours, but you’ll see in the following examples that we actually going to have only four but basically red is bad blood is bleeding. Yellow is not that great. It’s a bit like poo. Green is okay and blue is your blue ribbon doing really well. So here’s Company A. So if you employ system thinking rather than just doing an IT due diligence, which gives you a number that appears on your balance sheet, you actually look at systems and you write the systems according to these colours. This is a business where they’ve got some things that are red, some things are green, some things are a little bit of a mix all over the place. And so I would call this mediocre or, you know, they’ve got some good things and bad things, as a Company A and Company B. On the flip side, you can say that their sales processes have pretty strong, there are lots of blues, lots of grains, they’re, they’re weak. So now we’re going to talk about a merge. So this is this, the financials are good. There’s a lot of interest from the economics to merge these two companies, and now you’re looking at the systems. And one of the questions you’re going to be is what’s the anticipated benefits and risks in that same company See, now, we can look at this one. And what we can see here is that they’re very strong in the production stack, some good things in the sales, but there are some also weaknesses in the people, and weakness in their financial maturity, and so on. And Company B, I would how I would describe this business is that they’re really poor sales, but they have a very strong way of operating and doing once they get a sale, they do it. So now we’re going to look at how those two would be combined. And again, that you can discuss these two merges and the pros and cons of each. So we’re going to look in their work. So we’re going to discuss the potential risk and opportunities in the post-merger system integration or both of them. And does this merger likely to create value or erode value after 12 months of operations? And we’re going to report back, and we’re going to break into six groups again. Are we ready to go with that? Rob?
Rob We are you’re being allocated into a room but I’m going to move you around. Great give you a couple of minutes and each of them So Mary Ivica room five Peter Fletcher room one Mark whispered six when you go on a room to put us into a room full and Chris cry room three.
Greg So basically, are we wanting to get the facilitators ready to share? And I’m thinking that maybe Peter, Peter, are you ready to be the first to give feedback?
Peter Yeah, absolutely. Yeah. The group sort of looking at this, and we looked at the two merger opportunities. And the first comment is, is that the profit stacks the way they are actually credited great lens for, for, for us to understand what’s going on in an organization. And so it was interesting because we were immediately able to look at the companies and see how the stacks talk to each other in terms of, you know, strengths and weaknesses, and where they could do it. So it allows people to analyse, it’s a good lens, from that point of view, the opportunity is also to think about it from a behaviours point of view, that you actually the good behaviours, they’re all the blues, and greens could be shared with those teams that maybe are red. And it could be you know, you could find the best people in it. Of the two merger opportunities. We felt that C and D were really, you know, you could almost obviously see why C would want to buy D because they had everything going really well. Except for sales, that were profitable, the systems were good, the people were happy, etc, etc. So, I mean, ultimately, the last opportunity is you could look at it from a third point of view, and you could kind of dismantle the stacks, and create a third system, which would be your ideal, your ideal scenario.
Greg Great. Excellent. Well, I’ll have to pay you later you stole some of my conclusions, Wendy, are you able to share?
Wendy Sure. So we thought a and b had more risks than opportunities, particularly risks around HR policy and compliance and customer feedback, not good. In their record keeping. Resource Management was poor for both. And they also had poor safety for both so we didn’t like it at all and thought that ultimately, e value would erode whereas C and D We liked that you could literally lay one over the top of the other and they could leverage each other’s strengths. So we thought there were more opportunities to I guess poach from each business, the good bits and leverage that and create, you know, a really good company. So we thought Same Day was created value message.
Greg Thanks, Wendy. Mario.
Mario Okay, so we only actually covered off A and B. And he’s the questions that we kind of raised amongst ourselves was that it’s really important when you work through this, that if you’re going to go and change finance if your sales operations are working well, and you’re going to change finance, that you don’t break something in the sales stack or some other stack, because you put in your finances to mean or vice versa. So, you know, because all these systems nowadays pretty much have some level of integration, right? So you got to be really careful of that. And, and the last point is that, although there are all those colours all over the screen, it doesn’t necessarily mean because something is red, that you’re going to change it, because it might have might be red, but it might still have minimal impact on the business, right? Or a huge cost to change that that isn’t justifiable by doing in the business. So you might put up with some red bits in there because the outcome to the business is not impactful enough. So they were the main things that that that we covered off.
Greg That’s great. And Mark, Mark, we are you ready to share.
Mark And so we consider that understand the reason why and it was good at sales was important. Because adopting systems or purging systems may alienate people and made it may alienate those salespeople that make that their organization good, and those sales might suffer. So, you know, it’s not necessarily linear. And, you know, the systems and the culture that makes that entity good at sales. If there’s a change, there may it might be Murphy’s Law and might undermine that. That meritorious system, we considered the capabilities of the people to use those upgraded systems in the combined entity. And I think Aria touched on this the sense of the entity that’s having those systems replaced, the people using the older systems might not be capable of using the new system. So there may be a lot of training.
Greg So, Chris, are you ready to share?
Chris So the comments were made, that we just sacked some people in the company straight up, and we’d engage back to sort out the sales team, there was a fair bit of work there for maybe and to look at some weaknesses across the whole business. Within VA, you’ve merged the assets to get a bit of market penetration. But you’d certainly be cautious in how you did that. Isolate the weak areas, Greg, and get your company back in there to get a much better platform for them both to work on, need to improve HR across the production areas. They had a good stable financial model, and I had dead issues that needed to be managed, which when you looked into that, maybe there could be a change in the sales incentives for both companies to align a performance remuneration. And then we thought that was unlikely that they’d be in any better position after 12 months due to the finance and the debt issues. Yeah. When we looked at companies C and D was certainly a better sales team probably made a lot of work doing in the production side of things and potential to increase sales. There’s opportunity to merge both the sales teams and then maximize the skill sets within the two entities. We thought both companies would survive host the 12 months change both the production teams to find better ways to add value, and probably cleaned out some lazy stuff at the same time and maybe some dead products. And then we’d finish off with some sales training in day to match the production abilities.
Greg Thanks. Awesome, Chris, and another Peter. Peter Fletcher. I think you’re the last words.
Peter Well, ultimately we thought with a and b there’s a fair bit of risk in the merger and definitely, for the next 12 months finances in both credit, an issue certainly around debt and collections we’re not terribly good with both and the issues around it will make it harder to rectify over the next 12 months though some issues in Company B in the people stack, which, which might cause problems across the cross the whole stack once it’s merged. risk and compliance practices come in customer feedback, or problems side and not a terribly good merger. With C and D, things are looking a lot better. Having sales at that juxtaposition between good and bad is going to make a good ultimate ending for the sales processes. Finance looks like a good merge well, a little bit of management of risk in company C that you’d want to keep an eye on communication production by strong, so good merger.
Greg Okay, thank you. So I appreciate Peter sharing that he thought it was a great lens, I hope in mergers and acquisitions, you know, I just get overwhelmed with the paperwork, they’re 50 page document that they’re going to do it or their Excel spreadsheets or profit and loss. Somehow, without the human brain, I appreciate that some of the feedback is that by seeing colours by saying a holistic view, you’re starting to talk about the interrelationship of different things, how one can make a change in one area, it impacts on another. And I found it also really interesting that even when all the other colours are really positive, there was one comment that just came into a group and I heard this comment. And then I had to leave again, were both instances around debt, I think it was red. And somebody said, Well, if that’s red, I’m not touching either business, like this walk away. So I’m thinking of, from the different comments that I heard that people could felt like they could digest what this merger and acquisition was going to look like. And could anticipate what was going to happen in the next 12 months. Instead of fair comment, you put your thumbs up or thumbs down on that I’ll be interested to know. So I think I find that this is the colour coding is a very useful thing. And it gets to the right level of detail. So sometimes we go into too much detail or we go too broad, we miss these really strategic ideas, which can basically give you a very quick understanding of, you know, I don’t want to touch this business, or this is a bad deal, I want to go away with it. Someone saw the talk about mixing it up. And that was one of the things that I wanted to also reflect on was maybe if you had access to all four businesses, maybe you’d be more excited if they indeed got together. And the excellent operations and finances of one and the sales of the other. But also is this true that maybe the cultures they This is their so distinct from each other. This is a bad point of view. But at least this sort of colour coding helps you get to some really interesting points for you to have a discussion. And what do you reckon? Do you think your, your negotiation around the table will be more fruitful and calming, in terms of working out terms of value for the merger, or the acquisition if you had this level of detail? Now, you might notice here that I’ve also just put the words, retail and technology. Up until now, I haven’t talked about what industry these are in. And typically people like to buy other people within their own sector. But if you had an understanding of what your business was your strengths or weaknesses, and you went to market, and you found another business, he didn’t care where they from, but they financials created your profile, what you’re looking for, and the system’s fitted yours, you know, the gaps have filled the gaps in your systems. Do you think that if a retail and technology company could get together, what could they do? If all the salespeople from the retail store came into a technology company that didn’t know how to sale sell, whether that would be a benefit for the synergy of that business. So by not going into the sort of typical market segments and getting too caught up on the numbers, you need to consider both of those, you get some different insights by just looking at the systems and the individual components of the process. So I want to wrap it up there now just want to make sure that we’re coming to the end. And I want to encourage you that if you ever are involved in mergers and acquisition process that you adopted systems thinking that you go to the right level of detail and you have a go at colour coding. And I also that you can do this for your own business. So mergers and acquisitions is an extreme case because you’re basically of looking at your own business because you want to sell it. You’re looking at an external person who’s going to determine the value of the business. And it can really help you really understand where you’re strong, where you’re weak and what you need to work on, regardless of whether you go for an M&A. Of course, all these ideas that we’ve presented have come from the profits tax framework that formalized this process. We’re happy to discuss it with anybody. And the downturn is still among us. And I think that might be continued. So it’s a good time to look at these opportunities. And thank you for your time today.