Focusing Less on Cost Synergies to Increase Value Creation

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Anirvan Sin is a founder and Managing director of Fifth Chrome, a professional advisory firm that specializes in M and A integration and operational growth. With a strong background in growth strategies for companies like ge, Axonobel, Coca Cola and Stryker, Anirvan is also a regular trainer at the Institute for Mergers and Acquisitions and Alliances. On today's episode, Anirvan and I will discuss creating deal value by focusing more on growth capabilities and revenue synergies than cost synergies. How are you doing today?

I'm doing great, Kishan, I'm doing great and thanks for inviting me on this forum. Thank you. I've heard quite a good things about you and about the podcast that you telecast. So looking forward to an interesting discussion today.

I'm excited to have you and learn from you. Maybe we can just kick off with a little brief background yourself.

Sure, yeah, a bit of background. You've already given a very nice opening intro for me. The way I describe it is I've done mergers, acquisitions and business transformation in different parts of the world. In Europe, in Asia, Middle east and Africa, Turkey, but also Latin America and Brazil, and of course the us and that kind of gives me a breadth of experiences in the mergers acquisition space, not just at the strategy level but at the execution level with having worked with it, with HR, with R& D manufacturing. It gives you a very broad based understanding of what goes on. And what I find is even after so many years, even after 40, 50 years, companies somehow have not understood the art of mergers and acquisition integration. So with that I guess we can start our conversation.

Yeah, I think for us we're really focusing on the tail end of the deal after close and it comes to value creation. A lot of the investment thesis have been organized and it's really more about execution. And one of the questions I had was what is the harm of focusing too heavily on realizing cost synergies during post merger integration?

Yeah, I think we need to take the overall context into consideration because what you'll find is quite often the exercise of coming up with the estimation of cost synergies happens behind closed doors amongst a very small group of people dealing with M and A at let's say strategy and or due diligence level. The information, the context of it is held very, very closely. And when the actual process of integration starts, quite often this is just handed like a box of things to do to the operational team. And it is expected that the operational teams would just go and blindly do that. Now what happens is that the context under which certain understanding or certain initiatives or certain cost energy numbers had come about, that context gets lost and it almost becomes like a tick in the box exercise. What happens is it takes years to create a capability, to create the ecosystem of people working together, of roles, responsibilities, governance. And when it becomes a cost synergy exercise of a stick in the box, often what you do is you take out so called. It seems that from a synergist perspective it has become a vestigial or a redundant role. But from a capability perspective or from an ecosystem perspective, it may still be vital. And that's why when you do it just like a desktop exercise of taking the box and get rid of people, it creates a big problem because as I said, it takes years to build the capability, but it's very easy to kill the capability overnight.

Yeah, it's definitely a theme I've heard before that you project these cost synergies. But in reality, as you go through a process, you discover things are very different than you expected and the redundancy wasn't as clear as expected. And there's definitely things that you can't change that you shouldn't that's going to definitely affect the actual value.

Yeah, I mean, let me sort of articulate with a couple of examples. Right. One thing is whenever I advise companies to look at part of the, let's say the operational due diligence is to find out the people who are the influencers in the organization, people who actually get the work done. Now typically these people are not your head of department, they're not a CFO or they're not head of hr, but usually a second in command or somebody that the CFO trusts on or somebody that the, let's say the operational guy has implicit faith on. And these are the people who know how to get things done. Now quite often these people may have, I call them weak jobs or not a very strong job. These people tend to be long timers with the company and these are the nerve centers. And I've seen some examples where these were the first people to let go and it kind of created a power vacuum. It's like these are the sort of the glue, the catalyst in the way the organization runs. So that's one example. The second example that I use is there is a model called the Grinder curve organization maturity model. And it's essentially got Six pillars. It starts off from a startup growth scale up and then it goes into essentially the whole model is hinged around how decision making is done. And literally at the other end, the sixth pillar, it talks about how companies have to collaborate with each other and it's an ecosystem. So it's really the most advanced kind of companies. Now as you know, majority of the transaction that take place is usually companies that are more than $250 million, etc are buying companies that are less than $250 million. Okay. So the chances are if you use the Griner curve and plot these companies, what you'll find is pillar four or pillar five ends up buying a pillar one or a pillar two company. In other words, pillar one which is highly entrepreneurial, pillar two which is highly growth oriented. And pillar five company may be higher, highly profit centered oriented or highly customer centric organization from day one or not even day one. Even from the start of the integration, there's already a capability mismatch. And when, let's say company 5 in the pillar 5 area uses their own lens to start getting rid of people or to start putting cost synergies which are hinged on headcount, they will kill some of those capabilities of entrepreneurial ship or highly revenue based or market based. So these are two examples that we could probably articulate into say how cost synergies must not be a desktop thinking exercise. But some more thought needs to be gone in and that can be done with what I call validation and revisit your due diligence cost synergy numbers. Once you get more details, once you've signed the arrangement, signed the acquisition and take a real hard look, what's the back going to be from a capability and ecosystem perspective?

Yeah, I'm curious, what's the right way to approach it? Because how do you identify true cost synergies and the ones that aren't going to affect the post value creation opportunities?

That's an interesting question. At the onset, synergies cannot be the prime reason why companies go and acquire other companies. It should always be hinged on growth and capability built. Now I can understand there will be some people who say, you know what, how about consolidation? How about when companies are buying other companies the competition that there must be synergies. So I say synergies is a result, are not, let's say end destination itself. So the focus always has to be strategically what is the reason why you're going after a certain acquisition. And that strategy has to be hinged around growth and has to be hinged around capability build. And that should give indication of where the potential cost synergies opportunities would be. The second thing I would say is when it comes to cost synergies, and this is where I wish more people would do it, I know a lot of the private equity players do it. I know very few strategic buyers do it. And that's all to do with process of operational excellence or continuous improvement or lead management, whatever name you may want to use. But I see very few companies, strategic buyers actually use that lens to identify potential efficiency opportunities when it comes to processes and procedures and organization operational governance. So instead of just focusing on headcount redundancy, I can tell you one thing and that is there is so much of hidden opportunities which can be unleashed or which can be harnessed using lean management or using operational excellence management that in many cases you may not need to even go that deep into cutting headcounts. So the focus always has to be around what capability do you want for the future, how do you want to grow and then accordingly try and optimize and make your back office processes or your operational processes more efficient and more effective. I hope that kind of answers your question.

Your approach, instead of firing or focusing on firing people, you would rather focus on introducing or looking for opportunities to bring in a process improvement framework.

Absolutely, absolutely. I must also say that with the advance that is also taking place in the technology space, especially with artificial intelligence or blockchain or analytics, these are definitely the elements that you that companies should look at to bring them in. And back to your question. And I've been a lean master black belt back from GE days and I've practiced this whole concept of operational excellence over a number of years. What I find is that it is the amount of synergies or amount of operational efficiency that we can gain quite often outweighs the amount of money we would have got just by getting rid of headcount. That's the trick which many of the private equities use. If you compare a strategic buyer with a private equity buyer, what you'll find is private equities normally tends to have a portfolio and they have almost like a step plan, two, three, four years plan where the moment they buy, they start working on value creation. And when I say value creation, I'm not just talking about tax and financial efficiencies, I'm talking about real operational gains that begin through operational excellence initiatives. And they go after it. They go after it pedantically. They want to make sure that the efficiency opportunities that are there Hidden in the processes can be unleashed very, very quickly. Strategic buyers on the other side, they believe that for them the race ends the moment the company is bought, but actually that the race starts when you actually buy the company. And that's where the opportunities are, plenty of opportunities that you can get. I'll give you an example for Procure to pay, a classic example where Procure to pay. In a company that has not been touched by Lean or that has not been touched by robotics, there usually can be up to 50 to 60% process efficiency that's hidden in these processes. And these could be purely in terms of the way people interact with each other. Or this could be also in terms of not being able to validate with the contracts or incorrect payment of invoices against an incorrect entry in a contract, and so on and so forth. Those kind of opportunities need to be looked in. Similarly, indirect spend. Indirect spend is another favorite where two companies, when they bring in together their indirect spend, third party service providers consolidation or IT infrastructure consolidation or moving from on premises to cloud solution. So there are myriads of ways that you can bring in efficiency with artificial intelligence. It can start working great successes in your recruitment. So overall there are lots of opportunities that I believe can give you way more synergies than just headcount based synergies.

Yeah, it sounds like there's just so many different areas within an organization that you could apply these process improvement initiatives. Has there been anything that really struck out that hey, we work with companies and this is often a really simple technique that they could apply for getting some low hanging fruit of process improvement that you see companies often miss?

Yeah, I think it happens in bits and bobs. And one of the challenges that during an integration companies struggle with is they may not have a unified voice when it comes to tactical steps. One of the examples that I see work really well is when you start externally from a customer journey. And I call that the key customer journey. I mean this was an article that came out in Harvard Business Review a few years back and they spoke about key customer journeys. And what we find is it's used elements from Porter's Five Forces or value creation and also talks about lean management. And what they say is when you actually get a key customer journey identified or key customer journeys identified, you can have an entire organization rally behind those areas. And let me articulate what I mean by that. So often what happens is when you look at the way you serve your customer, quite often people have the impression that it's only the sales and marketing team which are the, let's say, not just the front face, but also the interactive layer or interaction layer between the customer and you, your own company. But in reality, what you find is different departments interact with the customers at different stages. And that flow of requests coming from customer can be put into some sort of a journey that a certain request from customer goes through before it gets fulfilled. Now what we try to do is we try and identify which of Those are key, I.e. high impact or let's say required for high compliance or generates profitability or high customer satisfaction. Whatever it is, you identify a few key, let's say, journeys. And then what you do is you then look at each of the functions, how they are collaborating or how they're contributing to that flow. That's where you start subordinating their matrix, their activities as the flow takes place through the organization. And that's very important to understand because typically an organization is very silo based, whereas here you're cutting the silos. You're actually doing something that is inter functional and where the requests move through the entire organization. And that's key. And what I see is once you've identified a key customer journey, the operational efficiencies become a lot easier because the teams, let's say, whether it's operations team or supply chain team or order service delivery team, they now have a unified sense of purpose. The reason why we are doing this is because this is part of the key customer journey. Because otherwise what happens is you often end up working with, let's say, lean programs or whatever, in isolation, where the impact or the benefit or the efficiency that you may gain gets lost. Because it may not be the most important thing that the organization should have worked on. That's why it is important that you start the journey, key customer journey, and then draw your efficiencies based on the key customer journey.

I like this point of really getting the teams and rallying them around the customer experience. Essentially really good position on that. And I'm curious if you can maybe take me back to sort of the beginning and when you should start thinking about that. What stage in the life cycle of the deal. If you could try to give me maybe a little bit of a step by step approach to maybe a practitioner that's listening to this and actually wants to put it in play.

Right. So I think like every other good material M and A thought, this needs to start really at the strategy level. Okay. Now at the strategy level or when a strategy is getting decided, this is even before the company decides that they want to Go on an M and A integration or let's say an M and a M and A area, or they want to go after an M and A Strategy is what is the organization trying to do? If it's around capability, the capability has to be built around something which. But it becomes more important to also identify the kind of customers, the kind of customer profiles, the kind of services that they want to offer to the customers. That's usually the start of the genesis of an M and A journey for any company, right? So let's say, for example, we say, hey, you know what, now we want to move away from just offering, let's say a particular customer, just the logistics, transportation and logistics service, and we want to combine it and give them warehouse services as well. Okay? And we believe that this is going to be a combined value added service that we can now offer to more number of people right now. So that is, let's say the start of the journey. Now, when it comes to the M and A strategy, at that point in time, the organization also needs to start mapping out, hey, you know what, what sort of customer profile are we targeting and what sort of key customer journey are we going to support? Okay, now let's assume that this key customer journey at that point in time, the M and A strategy level gets decided upon. That's when you could say, okay, now we want to service it like this. And let's say we can get the warehouse guys, but how about the system integrator? These are the guys who actually got a system or an app or whatever which can automatically work with a warehouse and kind of connect it back to our own system. So these are the kind of things that you start looking for or that you at least start flagging up at an M and A strategy level. So that starts, okay, then when it comes to the actual sort of the act of assessment and the due diligence, that's where apart from your trinity of finance, legal and tax due diligence, you would send at least three other due diligences and that would be your tech due diligence, your operational due diligence, and your people due diligence. And when I say people, it means leadership, right? So and at that point in time, what you also try to do is that on the basis of the kind of company that's available, based on the, let's say the portfolio strategy, you've identified a few that kind of fit the slate. That's when you say, okay, in this sort of scenario, here are the leadership qualities that we would need here are the technical capabilities that we would need. And this goes a few notches deeper compared to the M and a strategy that was set. And on the basis of that you start identifying what those companies are and really take a hard look in. And again, I must sort of market with a word of caution that is at this stage be mindful that there will be people who are risk takers and there will be people who are risk averse. So when you're doing the due diligence that you have enough capability in your due diligence teams which can effectively assess the risks posed by the company that you're acquiring from an operational perspective, from a tech perspective as well as from people perspective that allows them to actually still be able to take the risk. But it's a calculated risk. This is important because many cases I've seen that people go in there, they're so risk averse that they almost reject 99 out of 100 deals. And that's not necessarily a very effective way of doing an M and A strategy. So once you're done with the due diligence and once you've signed the agreement, the period between signing and closing the deal is when you start putting your pieces in place. This would be a blueprint of how you want to create the value. This would be the leadership that you want to plant. And this could be either internal, that is your own person or it could be from the acquiring, sorry the acquired company or the target or it could be somebody external. Okay. And so you need to have the leadership. But most importantly is a very, very clear indication of what capability are we going to build. And the capability would be in form of competencies. It will be in form of the interactions that's going to take place if going to be in the form of interdependencies that will be there between functions, the governance and usually which is all sort of covered by what's going to be the value add that's going to take place financially but also revenue wise and operationally. So I would say roughly that's the kind of thing that would take you to almost like day one. On day one, you, your priority has to be on value creation. And that's where I see most of the companies kind of miss out. They are so caught up on rebranding strategies or some of the other pieces. And I say you have to go back to your drawing board and say why are we doing this? And for this is about capability then capability or the value creation has to be the step one. Rebranding should be an offset or as a result of what you set out to do in a capability. From a capability perspective, what is also important is when it comes to customer journeys and effective efficiency synergies, is that you start breaking some of the silos. This whole hundred day concept, which has existed since eternity, has certain value or has certain benefit. It gives a lot more structure. But when it comes to value creation, many times it's a hindrance and therefore you need to be pedantic or you need to be practical about what is the time frame that you need for value creation. So overall that would be kind of a journey that I would. It's a long winding way of saying that's the kind of journey I would advise companies. Yeah.

How do you go about aligning and prioritizing that customer journey that we talked about through those steps? Steps. Because it almost sounds like you should start with the customer journey and tell me if I'm wrong, but have that essentially drive your strategy.

Yeah, I mean again, the starting point has to be what capability do you want to build. And strategically the capability is hinged around, let's say offering new services or offering a portfolio services or offering a product range, diversified product range, or you want to go into new geography. So that's usually the starting point which is the capability build. Right. The second thing is you have to go through a divergent thinking, and I'm just using a term from design thinking, a divergent thinking of identifying every single customer that you're likely to come across. Once you've got a list of, let's say, maybe 15, 20 different customer journeys that you may that the company will go through, identifying the top key customer journeys, the journeys that will have the highest impact on your number one metric. If your number one metric is profitability, then identify the key journeys or identify the journeys that have direct impact on the profitability. If it's geographical expansion, market share, then accordingly, you will identify the other key journeys, key customer journeys. And that is usually how we come up with the way the customer journeys get identified as key customer journeys.

Any other tips in terms of, I guess, aligning teams around these customer journeys as you go through those phases and really start rallying them around and tying it to those process improvement initiatives as well.

Yeah, I think what is very important is number one, I would say is the organization must be aware of this and also must acknowledge the need to do this key customer journey mapping and aligning the organization and there's a huge amount of transformation, change management that's required. So if you don't have the capability in house, then you must look out, you must source out people who can come in externally and help in this, in this journey. Because chances are that your internal guys do not have the capability to actually be able to go through this exercise and do this customer journey mapping. Which is why I've seen some of the better private equity players use people with lean management background and operational excellence background or customer experience background to bring them in and they get them to work with the senior leadership teams of both the companies, the acquiring as well as the target companies. And they go through this exercise of identifying those key customer journeys. They would do a risk versus reward ratio and the impact of those key customers of those customer journeys. To identify key customer journeys, they would do a bit of scenario planning before they embark. So also another part which is important is this is not something that you will have a eureka moment and you'll figure out, oh, by the way, I can actually do it because I had this epiphany or a eureka moment and I now see the answer. You need to have people who actually have experience of running process efficiencies. You need to have people who have experience of managing transformations and changes. Without them, this is just going to be rather sort of ticking a box and, but not really having any effect on the organization.

Sounds like there's value in bringing some fresh pair of eyes into the situation.

Absolutely, absolutely. One of the advantages of bringing in, and I'm not advocating that we need to get external people at the drop of a hat, but what I'm advocating is depending on the kind of people that you need, make sure that you're right, staffed and quite often the external people will bring in a neutral perspective, they will bring in expertise, having gone through numerous business cycles in numerous conditions, and they'll not be biased. On the other side, your internal guys will always bring in that heavy context that's required which tells or which can show you how it works in an organization, the fabric of an organization, the culture of an organization. So it has to be good mix with the right staffing.

I don't know if this question makes sense, but I'm going to ask it because it might be redundant.

Sure.

What should practitioners focus on in order to optimize value and growth capabilities?

You know, when it comes to value and growth capabilities, it does not have a simple answer. The first one, of course, is that there has to be a lot of awareness and that needs to be set in or that needs to be put in right early, at an early stage during the M&A journey. It could be literally at the strategy level or definitely before the due diligence level, that people understand what is required and rally people around it. That's the first one. The second thing is that without a sound financial and a leadership, let's say a leadership goal or a leadership objective, these kind of things don't fly. So while it is important to identify the key customer journey, it is as important to identify what the leadership goals are going to be, what the financial goals are going to be, what the operational goals may be. And these things would be not just only the starting point, but these things would hold people their feet to the fire. They will hold people to be, you know, to be honest with the whole process. And that's extremely important. The other thing is that when you talk about key customer journeys or value creation, and this could be through lean optimization, these could be through bringing in new enabling technologies, is that you have, is that you have put in a good amount of not only goals and objectives, but also make sure that people are aligned to the purpose. And that's crucial as well. So once you get the financial objectives set in, it gives a definite purpose. It gives the leadership the definite purpose as well. And it probably will result in a restructuring. And one should not be afraid of using paintbrushes to be able to redefine what the future organization is going to look like.

So revenue synergies are hard and a lot of the plans tend to fall through. Why is that and what can you do about it?

Very good question. First of all, I think this kind of weaves back to again, the key customer journey and the customer experience. Right. Because again, revenue synergy is, is usually hinged on what can I do internally to increase the revenue. So that's cross selling, upselling or coming up with new sets of solution. Okay, and wherein we say if you had gone with the key customer journey in mind, they would have given you very clear indication of what and where to sell and what sort of things to sell. Right. If you have your upselling or cross selling based on key customer journeys, you can draw back what you need to do strategically. Your go to market strategy for upselling and cross selling, that's item number one in order to make that successful. And this goes back to aligning different functions to the organization. For example, the HR and the sales and the leadership needs to work in tandem to work out what should be the way commission is going to be attributed for new revenue or these extra revenue or bonuses or how are the sales guys going to be compensated, how about the work, the time, the effort that the sales guys need to put in for cross selling, how is that going to be compensated for? Because the chances are the moment you step into cross selling opportunities, it takes longer for them to sell something and very few sales guys want to take that risk. So unless and until you give them a good incentive, you made them very clear on the commissions and you have the process worked out, it becomes very difficult to incentivize the sales guys to go and do the cross and the upselling. Right. So, and then I would say the number three is that once you've done the key customer journeys, once you've done the right level of bonuses and the commissions, you need to have a very clear go to market strategy, what channels to use or what funnels to use, how the territories are going to be divided or redesigned, how the sales territories or the marketing segments, the customer segments aren't going to be defined, so and so forth. So I would say these three, four different things drive the revenue synergy. And if you do these well, you will be able to get a lot of good revenue synergies. Unfortunately, majority of the companies, they look at the revenue synergy as just an exercise to do a business case, make it look appealing, get the stakeholders to buy in and then once the day one happens, then essentially give it to the sales and marketing guy and say, hey, try to sell something. And implicitly what you're saying is it's okay if you can't sell it. And that just doesn't work.

Yeah, it seems so that it doesn't end up in the integration plan on how to actually execute and deliver on those revenue synergies.

Absolutely, absolutely. And I've seen so many cases where literally what has happened is, and I'm not going to name a company here, but essentially they are into FMCG and they've been buying companies, product companies, left, right and center. And it seems almost like when I went and reviewed them, what I found was that they would be buying these companies just to add to the portfolio of products. It was almost like, yeah, I can go, I've got the money and I could go and buy these trophies from the market and just put them in my cupboard, my glass cupboards, to show to the rest of the world that I've earned these trophies. But when you start looking at, hey, how much money did you actually make on each of these trophies? Did you make more money, more revenue than when they were independent, or did you make less revenue? And not just this company, but a large number of Companies that I've interacted with, I find that the answer is no idea or it's not important, we didn't look at it. And I'm like, okay, so how does that work? But I've never been able to get a very convincing answer around this. But what you know is chances are that these people essentially, the revenue numbers essentially got lost in their operating, let's say costs and the financial statements. It's probably a blip somewhere which people have forgotten to take notice of. Yeah. Wow.

So I have a question. Going through an acquisition, creating ambitious revenue synergy goals and start understanding like we talked about the customer journey and how it's going to impact that. Is there any way of validating things early to understand what that impact is going to have just so I can start validating what the feasibility is on vendors revenue synergy captures?

Yeah, I think there's no one love it all answer to this particular one. So there are different, I call them better practices that I've seen. The number one is use of or leveraging consultants or advisors who do it for a living. And these guys would come in and they actually have models they can work with and give can give you a very fair idea of what you should be looking for. Okay, so that's one. The second I would say is the usage of some of the efficiency tools that I mentioned. But more importantly, I would say typically like your, let's say bankers or your investors, investment advisors, transaction advisors, they charge you a certain percentage of money for a transaction if it goes well. Similarly for integration, what we see is usually the companies. And this is from a report. I don't remember who had said this, but the number that I remember was if the percentage is greater than 6% of the total value of the acquisition that gets put into a proper integration. They usually. That's kind of the tipping point beyond which you start realizing greater levels of synergy. You're realizing positive impact on your revenue line. And the ones that go into 10, 15%, even 20% of the actual value of the transaction, that's when they really, really start getting some solid return on stakeholder or shareholders, shareholder investment. So when I say these numbers, I'm not saying these are sort of gospel truth or these are the only ways, but what we have seen is people who actually understand integration, what it takes to do an effective integration, they show more ability to create these values. And this is perfectly visible when it comes to private equity because that's what they do for a living. They tend to generate value much more than Strategic buyers. When it comes to strategic buyers, companies that buy on a more regular basis, they also know that there's a certain amount of money that needs to be spent on integration. And when you see the numbers sort of closing into double digit or early double digits, that's when they start getting significant value created. So these are just indications, I would call them more hypothesis or rather than saying that that's the exact science because of which that's happened.

Got it. I like the idea about the third party that can really focus on doing customer diligence. Actually reminds me of a company I came across called Loyalty Research Center. And I think that was a primary business model, was working with M and A transactions and specifically doing diligence on the customer base to know what the impact the transaction is going to have. So it'd be interesting to reach out to them, maybe do an interview to learn more on their approach and see if that's something that actually helps validate revenue synergy goals.

Yeah, I mean, you know, and that's not a surprise at all. And by the way, I think more and more companies should essentially, literally go after some of these companies, real specialist companies, they understand how the customers think, think they can profile customers very well. And what we call in the sort of, in today's world where quite often if you're in a B2B scenario, your customer is not an individual, it's an ecosystem. Let's say if you're a supplier to, I don't know, some of the bigger companies like Oracle or GE or Siemens, you know, that's not one person that you have to influence. It's, there's a number of people that you need to work with. When it comes to that sort of a scenario, you need to have very well thought out way of how you're going to reach or how you're going to match that. Okay, now if you look at how organizations evolve, right? So typically the first stage usually is around just getting processes. That leads to the second stage, which is more functionalization. So imagine a startup where you have eight, 10 people, kind of everybody start to do everything with some specialization. And then when the company grows, let's say 50, 60 people, you start seeing some functional, let's say verticals being created. Certain people who work in finance, there's certain people who work in the service delivery and so and so forth. Beyond which if you go into that, let's say the 100, 150 sort of number of people, they start getting into what, what we call productization or based on certain products. So there are certain products which belong to a certain, let's say customer group or whatever. So you go through the productization and literally the nirvana of this trajectory is when it's customer focused. So you say I not only belong to the, let's say the oil and gas industry or the health tech industry, but I actually focus on health tech, let's say instruments, instruments to do with, let's say surgery, surgery or surgical instruments. Right. That's where you start creating a customer centric focus. And you say we're going to have syringes, we're going to have scissors, we're going to have specialized knives, etc. And then you figure out, oh by the way, I don't have a stent or something. And you say in order to fulfill my portfolio, let me go and acquire a company that could provide me with stents. And, and that is really customer focused. It's no longer product family based, but it's really customer focused. And that's what when it comes to capability build or when it comes to strategy, that's the kind of thinking organizations need to have. That's why I think the customer due diligence and the customer experience due diligence, the loyalty due diligence makes so much more sense.

Do you have an example of a deal and its outcome that focused on optimizing growth versus strictly cost?

Quite a few. And fortunately all these examples are private equity based. And what I've seen with private equity is on one side they obviously had, let's say cost transformation projects going on, but what they were trying to do is they were trying to release, let's say trying to release the expense of the cost and kind of funnel them into growth in new businesses without naming names. There's this particular health tech company which was private equity back where they used the mechanism of identifying certain finance transformation projects that led to cash generation which then they used to challenge to growth in new segments with new product offerings. So unfortunately what happens is in many of these cases, because of the NDAs that I end up signing, I often can't say who the exact customer is and also can't say anything that gives them certain which is very specific to that particular customer.

So let's trip out names and dates. I'm just curious of some specific examples of hey, here's a company that did a deal and they really focused on growth and had some success. Just kind of like maybe a technique that they did or, or just some little strategy that, that they grew successful that successfully worked. You know, we Always talk about revenue synergies, cross selling between sales teams and that tends not to work because training cross selling doesn't even apply and get applied in integration. I'm curious of examples where it's actually really worked well.

Two examples come to my mind. One is a media company. It was an American media company that quite successfully expanded into the uk UK sort of space. And the reason why they could do that is they could figure out that they could build larger capability of what they're trying to do with focusing on certain type of customers. So they set up a pretty decent back office. So pretty sizable back office with writers and with copywriters and with content generators based out of the uk, even though UK is considered more expensive. But overall that particular capability build give them a lot more growth into sort of the outside US market, that is the European market and foothold into Asia. And that they could do because they set up the sort of this office in the uk. UK as you know, has good relationships with South Asia, with Southeast Asia and they kind of took advantage of that and set up relationships in the frontier markets. But also with this, they could create content which could also start serving outside of the US market audience as well. So. So that's one example that I remember. This is a good number of years back. The other one, I'm just trying to think that will the revenue synergies are the hard ones and that's why I'm trying to think what would be another good example where they had. Oh yeah, I don't know if I want to call it really revenue synergy, but essentially it was more like an R and D kind of a thing where they got this set of people from two different companies who used to operate on two different sort of product lines and they just put them in one room and some sort of a chemistry happened and then they came up with some very, very good new products which essentially helped them to enter into a completely new market. And this is an R and D clinical sort of trial companies. So I don't know if that's a pure revenue synergy or if it was sheer luck.

Yeah, it's interesting because it's extending off of R and D, so it's correct. Yeah, it's a good surprise.

Yeah, exactly. I mean, if I were to go with my story of capability, then it fits quite well into the picture. But if somebody were to go with a revenue synergy lens, that's when. Was it really because of revenue synergy or was it because of we're trying to build this capability and based on this capability, we expect that we're going to have some very good revenue results in the future.

Yeah, I think you have the right intuition. What are some other ways practitioners can create true value and optimize post merger success?

I think what's very important is that you have a very, very clear value strategy defined up front. This should be your number one priority on day one. You should have a blueprint rather than a checklist of things that you need to do. And when I say value creation, I mean value creation not just by doing financial and organization restructuring, by saving costs here and there, but more importantly, how do you sort of unleash the hidden efficiency opportunities once you've got the blueprint? I think what is very, very important is that you, you back it by a strong leadership team. And again, I used the example of good to great by I think it was Jim Collins, right. And he says when you have a very good leader in place, you don't have to really think about if this person will be able to drive you through or not. But if you have an average leader, you know that the person will need help every now and then, Right? So if you have to win a race, how often would you actually go with an average leader versus a very good leader? Okay. And the way he articulates this point makes it very, very important that you put the right person in that job. Because without the right person in that job, in the leadership job, it's going to strike struggle from day one. Okay. So that's why it's important that you find the right person to be able to do that job. Kill all your biases upfront if you want somebody to get it done. And the right person could be internal, could be external, but that person should have the ability to drive transformation, should be able to run the course of the value creation. But more importantly, this person also needs to be given the right support in terms of resources, human resources, capital resources, financial resources to make it happen. But more importantly, I think all of these puts together with advanced technologies, one should also be able to bring in some of those elements into the value creation. Of course, whether it's team management or operation excellence or Ford's or Toyota's or any of the others. Agile leadership and I know agile is one of your favorite ones and, and I'm kind of getting there as well. But yeah, these are the ways I would say can lead to value creation.

Great tips. I really like your perspective and approach on this. They're definitely good areas to focus on versus just cutting people Loose.

And one of the ones that I use as kind of a sheet on my wall or a poster on my wall. And that's Deming's 14 points. And these are still so valid. I mean these were probably written in the early sort of 60s or I don't exactly remember but I think that's when it was written. But it's been, it's been there for ages. It could be in the 80s, I don't remember for sure. But the 14 points, one of the points was that you need to have a sense of purpose, a constancy of purpose and a sense of purpose here. When you trying to build capabilities, you need to have a purpose. And this is not just a lofty vision or a mission that we're going to conquer. We're going to conquer the world or we're going to go to wound, but based on very realistic directions. And the purpose will be manifested through very, very concrete and tangible robust blueprint and goals and objectives.

It's a golden rule.

It is, yeah, absolutely.

So what's the craziest thing you've seen.

In M and A where people just go and buy the company and literally the reason why they buy the company is because that company has a strong group of, let's say developers or programmers or people. Somebody told me that it's known as aqui hires. Aqui hires. So you really don't care about the business or the product, just want the talent and that's the reason why you want them. So that's one. So that's one example. The other one which I find quite often with companies that have got a good amount of money, they set up these corporate ventures and they don't know whether they want to acquire the company or they want to run it like a corporate venture. And in this whole chiropractor, this confusion, what should I do? And this, oh, by the way, if we are sponsoring this company, if we have a certain equity of this company, then they must produce these financial reports, these operational sort of quarterly reports which we need to submit to our shareholders. I'm like that doesn't make sense because they'll be completely overburdened with those reports. And these guys are a bunch of entrepreneurs. Their purpose is very different. So that would be another sort of crazy example.

I agree. The corporate venture. I see a good amount of them that are mis purposed.

What makes acquihires crazy, Aqua hires crazy is because I always wonder how did they convince their shareholders? Because it was a business case. Because I just can't think of that they would put a business case and say, hey, by the way, we are strategically wants to grow. Here's the capability we want to build. This is how we going to go about it. So there must be a business case somewhere. Right. And then the first thing that you do is you go out in the market and see, hey, you know what? This is a company. Let's buy them, let's kill their business, let's kill their product. But we just hired them.

It's interesting because the top five tech companies do this frequently and I've had conversations around it because I think it really comes down to is the true time and challenge of putting together a great engineering team. It's substantial and especially if you're based on Silicon Valley, it's highly competitive and it just makes more sense to throw some millions at it and just acquire the team.

Correct, correct. And that's why if you go back to the thesis of where I say what capability do you want to build? Aqui hires kind of nicely sort of dovetail into it. But the conventional way of capability build is you either look at a product or a service that you want to acquire and that's where it's just one of those things I find them. I'm not saying it's not a good practice. What I'm saying is it's not your usual M and A. It does not comply to the usual M and A part of the process.

I agree. It doesn't fit in the traditional cases or buckets.

Yeah, correct. Yeah, exactly, exactly. But hey, you know what, I wouldn't be surprised that in the Future M&As are going to also modify in the way it has been done in the past. We have aqua hires. Who knows, maybe in the future we may end up buying a few robots.

Yeah, because you're going to have the value of the AI that's developed that that becomes acquisition.

Correct, Correct. I mean Apple bought Intel's 5G chip manufacturing unit. I was like, did they buy the entire company or did they just buy that specific unit? So I was just reading this news a bit earlier today. I haven't finished reading the news, but that's another one. But yeah, we'll see. This is a fascinating area. The way things are happening and especially with the frontier markets joining the party with their own resources, with their own strength is going to throw in very interesting mix in the near future.

I definitely agree.

Yeah. Oh, and of course, yeah, one more thing. Yeah, sorry. I would probably see blockchain coming in big way. Both its cryptocurrency version, but also its version of the immutability and the tamper proof. And blockchain probably also is going to morph into more the distributed ledger technology rather than being called blockchain. But I think more and more people, especially with some of the virtual data rooms and the privacy and some of the history, we will probably start seeing some of those getting implanted into some sort of a blockchain and blockchain playing bigger, let's say part in the whole M and A space space over the next five to 10 years.

It's a really interesting thought. Hey Arnavan, thank you very much for the time today. I really appreciate you taking the time to share all your thoughts.

It was my pleasure. I enjoyed talking with you and I think let's continue the dialogue.

Going great and for all listeners, if you wanted to reach out to Arnavan, learn more about some of those concepts, I'm going to put his contact information in the show notes so you can find that information there and look forward to the next interview. Thank you for taking the time to explore the world of M and A with our podcast. Please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's Kisan K I s o n dealroom.net M&A Science is sponsored by Dealroom, a project management solution for mergers and acquisitions. Additional educational content is available on Deal Room's blog@dealroom.net blog. Thank you again for listening to M and A Science. See you next time.