I was just listening to the Built-to-sell podcast by John Warrillow. His guest was Robert Glazer, a seasoned acquirer and a top-notch thought leader in the space of M&A. Robert shared several insights related to valuation, financials, and other areas of a deal. What stood out were the people and leadership examples.
And one specific area that was worth noting was the discussion on earn-outs. A relatively simple concept but steeped in misaligned leadership thinking and ignorance. Nine out of ten times, it ends up in failures unless it is an amicable hand-over within six to twelve months.
The podcast inspired me to put my top-5 qualities that will kill an integration and definitely the CEO’s earn-out.
If you are an alpha-person chances are that you like to hunt. At least you get an adrenaline rush for thinking like a hunter. The world of mergers and acquisitions is about glitz and glamour. Think about all that chest-beating that takes place when an acquisition announcement gets made. Champagne bottles are popped, expensive dinners are hosted to celebrate, and most importantly, the triumphant CEO can show their trophy.
Which alpha-CEO wouldn’t like to be a part of it? This is a massive silver lining in otherwise a constantly fire-fighting job.
But glitter has a downside.
“Emotion can be the enemy, if you give in to your emotion, you lose yourself. You must be at one with your emotions because the body always follows the mind.” — Bruce Lee
This quote exemplifies this aspect to the point. Leadership teams get so carried away at the prospect of buying or selling that the bigger good gets lost in the emotions. The Why becomes secondary to the What.
I have spoken to many CEOs during this stage. It is quite common to see them blindsided with the desire to buy/sell. At any cost!
Many executive leaders learn about M&A either from their MBA schools or get a shotgun course from their bankers or lawyers.
Guess what? They do not realize that their education on this matter is incomplete. But they don’t want to be seen as ignorant. No wonder, even the emperor in the emperor’s clothes fable seems smarter when the integrations go south.
Managers in many companies still work with the industrial revolution thinking. The strength of a company should be measured by its assets i.e. machinery, building, financial statements, etc.
The 21st century has paved the way for the information age to replace the industrial age. People, culture, and knowledge are at the center of it.
So, let us go back to the subject of expertise in M&A. Well, a lot of thinking is still based on the industrial age thinking in terms of assets and financials.
And come to think of it, they seem to have missed a critical component though. Do you know what it is? Yes, it is “people”.
And yes, Ms. Nancy, those advisors of yours completely omitted this section.
Men in black
I had to use a catchy phrase for this section. It is by no means any disrespect to any gender, diverse culture, and most importantly, the occupation that these folks follow. I’m talking about the people in suits, female and male both. Lawyers, bankers, consultants, brokers, and other actors play a role in the pre-deal stage.
Remember, these people in suits are very smart and have an immense convincing capability. They are bloody good in what they do and they make top-notch dollars in incentives.
These guys are informative and highly effective during the initial stages. They will educate you on market intelligence. They will draw the industry landscape. They will map out your competitive advantage. And importantly, they will draw the strategic slate for your acquisition.
So far so good. Obviously, their mannerism is impeccable and they seem to say the right thing.
But there comes a point in time, where they get so vested in the process with your company that the only way they can recover their investments is when you make an acquisition. It is no longer about if and not when.
Of course, for this article, I had dramatized this section a bit. And I know tons of people in this space who are trying to make an honest living. But every one of the honest kind, don’t be surprised if you get a fair share of the other side. Remember “Wolves of Wall Street”?
Larger than life
Like the set of people that I described in the prior section, the other group that can get pretty invested in this rat race would be the CEOs themselves.
Here I’ll mention another podcast episode that I heard recently. My friends Toby Tester and Robert Keaton run this podcast that focuses on M&A war stories. The recent podcast showcased the abysmally failed acquisition of British software company, Autonomy Corporation by Hewlett-Packard in 2011 for $11 billion.
In November 2010, HP brought in Leo Apotheker as its new CEO. Apotheker was expected to grow the company through acquisitions.
Leo Apotheker had all the traits of a larger-than-life persona that is typical of large companies. He was distribution channel-friendly. He was an inspiring technology visionary. He did not differentiate between emerging markets and developed markets. And he did not shy away from talking about his humble upbringing.
And yet, it is claimed that nobody could stand up in front of him to oppose the Autonomy Corporation. In fact, even the CFO now claims that she opposed the deal but feared that she would be fired if she did not go along with the deal.
Leo was in the job for only 11 months and yet he could complete an $11 billion acquisition during this period.
This is not an isolated example. Many companies face this dilemma with larger-than-life CEOs. Mind you, many of them have also been successful and the majority of them have struggled with it in the space of M&A.
This is the last of the five factors. The majority of the acquisitions are based on a financial business case. These financials provide the facts and figures on why an acquisition can be done and under what conditions. They are based on information captured during pre-deal and then during the due-diligence stage.
It is very difficult to argue a solidly crafted financial business case.
These business cases by design are supposed to show why an acquisition should be made. When you have enough tangible facts, it becomes easy to score a goal as the metaphor goes.
And that is where the black hole exists.
Integrations do not fail because the numbers lied (in most cases). Integrations fail because enough attention was not paid to the uncertain aspects, the unknowns.
And my friend, the biggest unknown of them all, is the human mind!
How people will react, how they will behave during consolidation, their culture, their abomination, their leadership secrets, and their politics will all surface once the hood is taken off.
Billions of dollars get washed down the drain due to people, culture, and leadership issues in an M&A integration, as my friend, Klint Kendrick often says.
And yet, very few organizations make it a point to include people, leadership, and culture in their due diligence kit.
And why don’t they include them? Because human behavior, minds, and heart are not tangible measures. They cannot be put on an excel spreadsheet to create a promising business case.
Companies spend billions of dollars in mergers and acquisitions, and yet they seem to miss noticing these five key characteristics linked to their leaders.
There are lessons to be learned from the world of M&A. Let us start with the CEO.
Mirror, mirror…tell me who is the smartest CEO in this world.
And who can accomplish a successful acquisition?