Jeff McLean, Executive Vice President of Global Commercial Strategy at CooperVision, and Mario Dottori, partner at Pillsbury Winthrop Shaw Pittman, discussed the importance of understanding culture and leadership for businesses that are targeting mergers and acquisitions.
Mario Dottori: At Pillsbury, we’ve talked a lot about best practices in managing transition and the consensus has been that a key component of success is having an "integration lead," an executive who can take the lead and execute the integration and transition strategy from a high level throughout the process, from due diligence to closing. So with that in mind, what would you say, in your experience, are best practices for effectively managing integration and transition both leading up to and following the closing?
Jeff McLean: Taking a step back for a second, if you look at the M&A function in the aggregate, whether you look at McKinsey or Bozion, or KPMG or any of these other associations that have an execution rate between 80 percent to 90 percent failure, and of that 80 percent to 90 percent failure about 50 percent actually is dilutive in value, one could make the argument that we haven’t quite identified best practices yet. With that said, whether you call it having an integration leader or champion (we call it the champion), that is certainly a great practice. We call it champion because we believe that it implies a more comprehensive role as opposed to just integration. That champion not only identifies the target, but also builds the business case and carries it right through integration. Yes, we have corporate development or business development that actually does the "hard" actions of the deals; the negotiations, the due diligence, the data room, etc. but it’s that champion that at the end of the day is accountable and responsible for the overall success of everything.
So you have essentially consolidated all the overall accountability into one person, this champion? I’d imagine though that for things like transition and integration you’d also need a team that reports to him that covers all the functions?
Yes, we’ll have an integration team that includes experts from each of the various functions. But if you peeled back the onion on most of those failures I just mentioned, the failure really comes after the deal. If you break it down into the simplest form, there are two components. There’s up to the deal and then after the deal. I think we as a business have almost perfected our process up to the deal: the IRRs, the MPVs, the actual projections, etc. And we’re not the only ones; I think a lot of smart people have really nailed that part of it. I think where it all falls apart is after the celebratory dinner.
You mean with the execution of the exit strategy?
Execution, culture, the business, the customer, all of it. When you mention customer strategy and cultural differences, people immediately think about international deals. But I’ve acquired businesses in the U.S. where the cultures couldn’t have been more different. It might as well have been a Chinese company. I think you cannot assume that there will be overlap or similarities, and I think it takes two or three years to get the culture really ingrained and adopted. When we do international acquisitions, we have country-based individuals on the ground and we spend a lot more time on the upfront aspects; trying to respect the cultures, synergies and so on before we even get into negotiations. As you know, if you do a deal in Japan, it’s a totally different process than if you do a deal in China. In China, because of their history, the growth of the country etc., you have to be a little bit more direct, but if you take that same philosophy in Japan, you’ll fail.
"Whether you call it having an integration leader or champion (we call it the champion), that is certainly a great practice. We call it champion because we believe that it implies a more comprehensive role as opposed to just integration."
That’s an interesting point and one that I don’t think came out fully in the discussions today, that emphasis on cultural sensitivity and cultural preparedness. One of the things we talk about on the transactional and multinational side is that you essentially need a handbook on all of the key components, to outline the key cultural norms and the key commercial cultural approaches and practices that we really need to be sensitive to. In some countries, the way you hold yourself, the way you speak, whether or not you’re looking somebody in the eye, has an enormous but subtle impact. It’s an excellent point, that there is an investment you make early on, to understand those nuances, long before you actually roll up your sleeves and start the negotiations.
It’s interesting watching body language, the confidence in people’s voices, when you ask about integration versus "the deal." Their voice softens and their body shrinks a bit.
In my role, I’m often involved leading up to the deal and then after the deal team leaves. I’m left with the client to say, okay, how are we going to execute this? What’s your communication plan? If there’s one thing that’s consistent across any culture and any transaction, it’s a fear of change regardless of the business and regardless of the functions that are served. Change is hard, and that’s the really difficult thing about cultural integration or assimilation. I’d imagine you agree that there is a need to recognize and selectively preserve the cultural differences of a target because that’s the essence of the business you’re looking to acquire.
I would. Unfortunately, every word has an emotional response to it. So when you say that the hard side of a deal is getting it done, and the soft side is everything else – the cultural awareness and integration – it immediately implies that because it’s a soft side we really don’t have to pay much attention to it. But culture is that red thread that runs through every organization and in a lot of ways makes an organization either a success or a failure. Peter Drucker in 1994 talked about the theory of business, where you really have to have a realistic assessment of your core competencies, your mission and your environment. And before any deal is done, besides running the numbers and all the synergies and how we’re going to leverage this and gain that distribution channel etc., you’ve really got to make sure those three things are connecting. I think businesses in general, whether it’s aerospace or technology, collectively fall short in that area.
I think that’s right. Most businesses have identified what the major driver is of less successful deals, but those less successful numbers get diluted because we all say we know how to do a great deal and it looks great on paper.
If you look at studies and you look at why deals are done, a little over 50 percent are done either to either gain market share or gain distribution. Only 20 percent of deals have the primary objective of creating shareholder value. I used to work for a guy that would fire a customer every once in a while because they weren’t profitable. So you really have to look at what that incremental market share and incremental distribution channel is really going to cost you and whether or not you are really creating shareholder value. At the end of the day, those of us in the public company realm you know that’s what it’s all about.
"Culture is that red thread that runs through every organization and in a lot of ways makes an organization either a success or a failure."
So let’s focus on what happens when the deal is done and the party’s over. Where do we go from here? What do you consider to be the main attributes of success once the deal is done, and why do some businesses succeed over others?
I’ve been doing a lot of research in this area after many years of business. Talking to a lot of different people and reading a lot of different articles and so on. I think at the end of the day whether it’s integration, whether it’s a customer’s strategy, whether it’s creating shareholder value, there are really three invisible key factors that determine success. First of all its leadership. I think M&A deals that are successful are really driven by great leaders and great leaders have that ability to develop a brand. Brand development also relates to culture. For example, when you talk about Apple, everybody focuses on the silver Apple and the fact the receipt comes out of the table. But that’s the tip of the iceberg. The brand is really below the water. It’s what cements the organization and strategy, and a great leader really drives both of those. The leader will define the value structures, the voice of the organization, how that organization makes decisions and he or she will develop the strategy. If the strategy is good and solid with a real class leader, then you’ll have success. Those elements of leadership: the right vision, and a good strategy to implement it are the soft sides; those are the things that you can’t see or document. You know when a great leader walks into the room, you feel it. It’s someone that you immediately gravitate towards because of their presence, their passion, and their focus. You know they’re aligned with the strategy. As Drucker noted, they’ve got three things connected; they understand what’s going on and they respect the individual; they respect the culture that they’re acquiring and they’ll work within those set of dynamics. Everything in business today has to be done now, now, now, because time is shrinking, shrinking, shrinking. But that leader based on his or her assessment may say, you know what, this isn’t going to happen in twelve months. This is going to take some time but it’s worth the investment because once we get it right, the returns will be even better than we thought. I think unfortunately, as an industry, and as a business, leadership is really one of those things that has fallen.
Because people are only looking to the next quarterly financial statement? Exactly, and that continues to put pressure and those leaders and when pressure starts to mount, that’s when bad decisions are made. I agree with you. It makes me think of something like Ford Motor Company for example. Mullaly may have been very unpopular when they cut the workforce significantly and shed a bunch of brands. But the sense was, shame on us for buying all these brands that weren’t really core to our business. I’m sure there was a lot of pain, but it took foresight and fortitude, especially when there’s a lot of darts being thrown. But their fourth quarter of last year showed a billion and a half profit and they didn’t take any money from the federal government.
Jack Welch when he went into GE was the same thing. Great leaders are transparent. You may not like them. You may not buy into it right away but they’re transparent. They set the vision, they tell you why they’re doing things and then they go do it. Look at Walt Disney. When Walt left Disney, they really struggled because of leadership and it’s that leadership that sets the strategy and it’s that leadership that creates the vision and mission of the brand and I think when you do a study and you start peeling back why M&A activities fail, I think that you’ll find that’s the primary reason.
"You know when a great leader walks into the room, you feel it. It’s someone that you immediately gravitate towards because of their presence, their passion, and their focus."
I agree with everything. You can’t teach someone to be a leader and how to have vision, or how to have the ability to execute. It’s in the genes. In my experience, the area that gets overlooked when compared to these sexier questions of leadership, and high-level strategy is what I’d call the back office operations. Not the questions of merging and developing new business models, but the questions of, where are we going to take our finance and accounting processes, our enterprise resource operations, our huge IT operations, our HR operations? How are we going to make these operations work over some reasonable period of time after transition and integration? What these operations should not do is interfere with achieving the business objective and often times they do. From your standpoint, how have you seen these back office issues addressed effectively? Is it something that you’ve seen as being a problem particularly when you’re talking about the acquisition of a larger company or the merger of the larger operation?
Unfortunately, it’s more on the downside than the upside and that’s why we went with the champion concept I talked about initially. The integration person gets this list of assumptions that the deal has been based upon which say, we’ll synergize finance, we’ll synergize this, that and the other but you can’t run a business that way. It’s what I call the unappreciated aspects of business, and there’s a reason why it’s called the "back office." They’re not allowed out in front because they’re supporting the business. But that’s the nuts and the bolts that keep things going. We talked earlier about readiness on day one. Well readiness on day one is making sure the ERP system is working, and making sure that you know finance is collecting the receivables. It’s not glorious, but it’s the nuts and bolts of the business. I think a lot of deals are valued up front with bad assumptions as to how much they can actually "synergize" into the business. I think you need to respect the back office as a culture, and respect it the same way you would an international deal. You’ve got to see how it’s working independently before you can say what you can and cannot do.
So there are operational challenges and cultural challenges which have to be addressed. You can’t come into it hoping that the boring stuff – the payroll and HR, the financing and accounting – will just take care of itself and is somebody else’s problem. It seems that you’re identifying this failure to roll up one’s sleeves and make the hard decisions as a main contributor to the diminishing value of a deal, rather than overall success or failure of a transaction? For a multinational company I’ve worked with that was operating globally with a billion dollars across multiple domains of outsourced operations, IT, finance and accounting etc. when it came time for a divestiture, they were smart and spent a good six months leading up to the effective date of the spin trying to align all the pieces of the puzzle. Because that’s a billion dollar investment in the back office and if it’s not all properly aligned it’s going to start hitting the bottom-line. Not only the investment part of it, but if all of a sudden we’re having problems with the network and we can’t e-mail or data centers are having down time and someone in the field on the sales force can’t get their tablet to record a sale, that’s going to have a direct impact on business. Have you experienced that at all?
We acquired a business in the U.S. and shame on us but we didn’t put enough emphasis on the back office and it was certainly a learning process. On day one, the sales reps are going, "Where are my reports?" And we ended up sending them paper copies until we got our act together. Shame on us, but I’m sure we’re not alone. It was a detail that was overlooked, because it’s not, as you said before the "sexy" part of the deal. But it gets real sexy when your customer says, "You mean to tell me you didn’t think about this?"
That’s exactly right. The example that was used today about changing the maintenance, and moving the call center offshore to India, which decreases your price and lowers your quality. I’m sure the reason is that the successor company had a big deal with an offshore call center, lots of good economics and they said, we’re going to ship that over there. We’re going to pay a little bit more for maintenance but we’ll pass that along to the customer. Right?
Right, and this is where it all falls apart because if that acquired company’s customer strategy was based on intimacy you have now just blown that right out of the water. So again, it comes back to making sure all these things are tied together. What may not be sexy on the deal may prove to be very sexy when it all falls apart with the customer.
I think we’ve really hit on the cultural aspects and nuances here and the required sensitivity to a particular cultural norms. Particularly in the new global world that we live in I think it is going to be key. The same with the need to focus on the back office functions. I think it’s going to become more and more of a concern if people don’t focus on that because it’s the lifeblood of the business. It doesn’t generate a dime of income but it facilitates the entire business model. And your mention of the three key components, or success factors, is spot on. It really starts with leadership vision and the ability to execute strategy which is not something that we’re going to legislate and it’s certainly not something you’re going to have as a condition to closing or a covenant.
I certainly agree. I think going forward as more of a global economy, and a global culture one of the areas where M&A can improve its process is more planning up front. Communication happens in an instant, and communication is hard to control. Just look at the impact of rumors. I read a study once that said that there’s a 15 percent reduction in productivity due to rumors. So, if you take the number of people you’re acquiring, and multiply the number by their salary, and then again by 15 percent, you have the cost of rumors. It gets staggering at times. So I think lessons learned or areas that could be improved upon are to invest more upfront relative to business intelligence and strategy rather than just focusing on getting a deal done.
Getting an integration strategy or transition identified very early on because in fact that should be forming the diligence process as you work through it. That diligence process helps evolve the plan and strategy, so hopefully by the time you reach closing, you’re in a much better position to execute day one is not such a shock, and all milestones have been identified and the work is done.