How to Drive Transformational Change Through M&A

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. I'm here with Toby Tester, senior M and a consultant with BDT. Toby has 20 years of experience delivering strategic, financial and operational value for M and A deals. He's designed operating models, carve out strategies, post merger integration plans, and has worked on integration, management, office development. During this interview, our goal is to discuss how our listeners can best approach M and A as a transformational strategy for their organizational growth. Toby, how are you doing today?

Oh good, good. Good to talk to you. Keith on this is great.

I'm excited for this topic because we're going to talk about driving transformation through M and A. Specifically during this interview, our goal is to discuss how listeners can best approach M and A as a transformational strategy for their organizational growth. MA is a constantly evolving strategy that organizations employ to gain competitive edge, enter new markets and drive revenue growth. How has M and A as a strategy changed over the past few decades and how do you think it's being utilized in today's market?

You know, keystone. That's a really interesting question because it has been changing, I should say that, look, it's been changing in certainly the deals I've been working on over the past couple of decades. And you know what's been happening, and I'm pretty sure people who listen to this, who have seen this as well, is that, you know, almost all the deals we might have been doing, say 20 years ago or so, were your typical cost consolidation type deals working in the same industry. Really what you're doing is you're acquiring a firm, sometimes an often small firm, and you're basically just simply integrating that into the business to achieve cost efficiencies. And that's the way it has been working. And I call that kind of like a very traditional way of doing things. But you know, the thing is that what we're seeing this day and age is that organizations are now doing MA because they have to in order to maintain a competitive edge. And it's not about cost saving, it is about revenue and it's about changing their very business models. And, and they're using M and A to transform what they do. And that used not to be the case. It wasn't about transformation 20 odd years ago. It was about scale and cost cutting.

Specifically what types of strategic acquisitions are they making in order to do so?

Organizations, I think Perhaps the majority of organizations are effectively playing what I would refer to as digital catch up. In other words, changing their product platforms, changing the way they interact with their customers and introducing digital into what they. And quite often you could do this organically, but quite often you simply are better off by acquiring that out in the market and effectively integrating that into your business. I would say strategy wise, I would say invariably it's about playing digital catch up, making sure that you have those digital capabilities just like your competitors do or your competitors are going to do. So that you are there, you're relevant, you have a sustained business that can continue to grow into the future. But to do that you've got to have those capabilities on board.

So it's like Walmart buying a bunch of e commerce platforms.

That could be the case, yes, absolutely. Because sometimes Walmart will turn around and say, well look guys, how long is it going to take us to do this organically? How long literally is it going to take in terms of acquiring the people, having the people on board, the investment you need. But importantly it's time. And that's the thing that's not on people's side is time. It's just faster to actually have those technology capabilities, depending on what they are, to simply bring those on board because it really takes time to do this in time. And also high risk. Because if you're building solutions organically, there's a lot of investment and you're not and there's with all these, any kind of transformation type exercise, there's always a little bit of risk that it actually may not come out as intended. So quite often M and A can often be a safer bet.

Because I know we talked prior about the transaction mindset and being focused on value capture, which I think most listeners are familiar with, shifting more into a transformational mindset where there's more of an emphasis on value creation.

Yeah, I think this is, I think it comes down to thinking always in terms of not just what you actually capture from what was defined pre deal because obviously those sort of things you're capturing might be straightforward cost savings, perhaps combining the two businesses, but actually thinking in terms of also what can be created from this business in terms of future value. I think of this as going from continuity to opportunity. It's really a way of thinking and doing that sees M and A as an opportunity. Opportunity not only just to produce deliver short term value, which is actually critical, but also the long term value as well. So it becomes basically an approach that's both eclectic, that's in its approach, but also aspirational in its goals. So it's taking a much wider view as to what M and A is intended to deliver. And I can go into a little bit of detail into that. So what I'm saying here is that when you are going down the more the transformational MA path, your value horizon is not, not just on well, what do you need to do? Deliver short term benefits more that short term bottom line focus. But it's also essentially particularly when you actually have acquired the business and you're going through the integration process that you actually look at the same time, what are the long term growth prospects? As well, there will be things that you'll be doing once the deal is done where you can actually start uncovering those opportunities that weren't uncovered during the due diligence phase. So it's actually looking for those seeking out where that value is and actually start delivering upon that value after the deal and making it part of that whole transformation exercise. That's what we're really talking about here is trying to sort of bring it and making sure we got a much wider view as to making sure that yes, we do capture the short term value from the business that was pre deal, but also keeping an eye out for the potential opportunities and bringing that into the whole integration process as well. So where you see other opportunities to deliver value, that those get identified and they get part of your plan as well to deliver value.

Can you give me an example of this?

Yeah. For example, there may be potential opportunities to increase the, or change the profit model, maybe increase the price of the product, but also maybe some branding changes. You can also make some quick changes. You can make change the customer experience perhaps effectively it's the chain of value from say price through to brand through to customer experience that you could be making and you could be making these early to actually improve the value proposition of the core product offering. And that sort of thing is not a difficult exercise. It potentially has a lot of value associated with it and it's something you could be doing earlier, not later. You don't have to necessarily wait for all the integration to occur. When it comes to combining the two businesses, you can be doing those sorts of things upfront. What I'm saying here is that when you're driving transformation in a minute, yes, you are integrating, but you're also transforming at the same time. They're both happening in parallel. This comes down to this whole way of working, which is effectively a more of an agile, a more fluid way of doing business as opposed to doing it in a more serial type of way.

When I interviewed James Harris at Google, he had a good example of that where they acquired a company and realized their manufacturing technology was better than what they had. But that was part of it, was being able to capture that and bring it into their own process. Again, I was just iterating after the deal was closed. I'm curious if you had examples like that where you've ran a process and it was that level of agility that brought in that type of mindset to capture those values with more of a transformational approach.

Yes. Say for example, with that example, like you're saying that their supply chain model was better than the acquirers. This is the transformation. Because really what you're doing is you're actually changing your operating model. So sometimes you're better off just saying, well why not just simply take what they do and we'll just basically use their platform for the supply chain operations. And so you'd actually be using theirs to do it rather than actually trying to integrate that into yours. Key part of the whole transformation exercise is sometimes actually utilizing other people's operating models and making it your own.

How do you get there? Because traditionally you build out a playbook and you don't do any of this and nobody thinks about it and people are frustrated because they know it doesn't make sense. Why are we going to the legacy old technology we just got rid of and updated to something new and modern. But that was the playbook created by the choir. How do you get out of that mindset and be adaptive and really leverage those kind of value creation opportunities?

Well, I think, look, the thing is, I think that comes down to it's a sort of a mindset thing. I think first of all there has to be a propensity. Always looking for not keeping ways currently working, but always looking for new ways of working. Always being driven by purpose and vision, looking at how the operating model begin to change to enhance the value of propositions. Always looking for transformation value and not just transaction value. It is a mindset thing. It's a different type of way of working. It's certainly an agile way of working, but also important one in leadership too. The key to everything. And I think what we're discussing here, Kisan, is that it comes down to shifting away from that more transactional thinking. Because once you take a transactional mindset, particularly for these sort of mad trawn transformative deals, you're actually limiting your horizons, you're actually reducing your thinking, you're reducing what's possible and you're following a literal playbook approach. When you're doing that, you're actually not realizing the true value of a potential business and what it has to offer.

I'm curious where the target company fits in in terms of approaching with that mindset because I feel like it can't be driven off of one side. It needs to be a bit of a bilateral approach.

Absolutely. Look, the transformational agile way of doing things is always to think of yourselves as being one team. You're driven by purpose and vision, you're collaborating, you're communicating people before process. We will to a higher set of goals where we'll live and breathe the risks we're looking for long term growth and we will do what we can on both sides to deliver the best solutions for the customer.

But related to this, you talk about engineer the delivery of value. Can you tell me a little about that?

I think one thing we're quite very, very familiar with is that organizations, and typically people who work in valuations, will invariably use the vast range of accounting tools, techniques to isolate value and to go through a very extensive spreadsheeting exercise to go through it. But what I'm suggesting here, and I'm not saying it's not done, but I just think it needs to be given something that actually complements the spreadsheet valuation process as well, and that is putting your engineering hat on. Just think of yourself as an engineer and think of your organization a bit like a car engineering. And really what you want to do is you want to break that car engine down to its respective nuts and bolts to say, well, how does this company operate? And when you actually start breaking it down into its nuts and bolts, what you're really doing is you're actually isolating the parts of the business that through a set of steps is actually delivering value all the way through to the customer. So you can actually start isolating the more detailed functions. Now that could be, for example, in terms of pricing, it could be more in terms of perhaps the way people are incentivized. It then might move into aspects in terms of the supply chain or the value chain operations. Then it moves into branding and then it moves into the way the customer experience works. But nonetheless it's still a set of stepping stones that you're taking which actually helps deliver that value to the customers. All I'm saying here is just break it down to its constituent parts so you can understand the way those value drivers actually connected together because they're like little levers that you're pressing and you press one lever and then that helps another one that press another lever. Then if you do that, then you can start seeing the connection. What I say is that just don't spreadsheet it, engineer it.

Does the customer journey fall into that in terms of mapping that out?

Absolutely, because the customer journey is the endpoint. You're seeing the way the customer operates. But you got to remember that when you're doing that. What's happening behind the scenes, of course, is that there are certain things that are happening in operations that are occurring. It's actually piecing together the things that are happening behind the scenes in the backstage that would impact the things that happen on stage.

Who would be the ideal people that you would want involved to map that out?

Really what it needs is simply someone who's got an expertise in operating model analysis. You can do that facilitation to bring it all together so that you can actually start seeing in a most visual sense, the way the individual bits of people, people doing behind the scenes that actually deliver upon a particular value proposition.

How about when do you actually do this? Because if we look at the lifecycle of a deal, we don't have much information or access to people in the beginning, and it sort of expands from there as we progress. When would be the ideal time to put this in play?

As I said, I think before, is that when it comes to putting all of this sort of work in play, this is all done as part and parcel of a larger transformation initiative where you're effectively not only integrating, because we know that there's some work you've got to do simply from a continuity perspective, but you'd actually be running in parallel, more of a transformational initiative, which actually involves probably potentially different people. But you'd be doing this as soon as practicable and in combination with what's happening in integration, because there's a certain symbiotic relationship between the two, because it all comes down to that notion of value. So it really does come down to doing this as soon as you can. Can. Don't leave it until integration is completed, and then go ahead and do this work, do it in parallel.

Let's see here. One of the strategies you have listed is live and breathe risk management. Can you tell me about that?

Yeah. We tend to go through what I'd refer to as more of a risk avoidance mindset. And I think that's what drives the more transactional way of managing M and A. In other words, really what you're trying to do is Trying to say, well, look, how can we make sure that we don't screw things up? So really what you do is you lower the bar a bit and you say, well look, let's not do anything that's too adventurous or too dangerous. Let's just basically go through what we need to acquire the business and to integrate it, no more, no less to make it a success. In other words, you just simply capture the value that was defined pre deal. And that's fine, but that's more of a transactional way of working, but it's also more of a way of avoiding risk. And what's needed in more of a transformational perspective is actually living and breathing risk, which is really a case of understanding that risk exists, but risk goes hand in hand with opportunity. You can't have one without the other. That effectively, when you are actually going through and executing upon certain bits of work which actually may have a risk, recognizing that on occasions they are irrevocable risks that you're taking, but you're taking it because the prize is high. So you are making a risk reward decision here. And the key thing about living and breathing risks is actually having a more enlivened view and a positive view of risk. Because risk management in many ways is actually a value creating opportunity in itself by actually talking about risk. Because when you talk about risk, you talk about opportunity and the two go hand in hand. And there's a cultural side of this as well, and that is that you don't leave risk to, say, the last agenda item in some governance meeting. It's not like that. Risk is something that you embrace, you talk about, you're transparent about it, gets communicated with all your stakeholders in an open, transparent way so that we all understand collectively what we're going in for and how we're managing risk. And there's also an acceptance that risks are being taken.

Toby, in your article Driving Transformation Through M and A, I feel like there's one quote that really sums the whole piece up and is for MA to be successful, it must always be agile. And agile emphasizes a lot of components of innovation. Keeping teams aligned around, shifting goals and utilizing project management methodologies, focusing on the end state. What do you think of the importance of Agile will be for practitioners as M and A continues to evolve?

Let's be frank, MA itself is fundamentally an agile exercise in itself. Because you know that you're dealing with a fair degree of uncertainty, you know that the end state is not entirely known, and you know that to get there, there's going to Be an element of discovery. These are the things that exist in M and A. They exist particularly when it comes to when you're transforming yourself through M and A. And so those are the same things that from an agile perspective you're confronted with. And so I say M and A, to be successful, must be agile because you need to have that agility in leadership and the people behaviors, but also agility in the methods, the tools and techniques that you use. If I take the leadership part of it and the people behaviors, it's really just having the attitudes to support an agile working environment, being more collaborative, strong focus on early and continual delivery of value, a willingness to adapt and a readiness to commit almost every day. So it's actually adapting to what is actually happening as they occur. And that's something that's absolutely essential because that's what it means to be agile. And I think ultimately it's having those people, those leadership behaviors in high performing teams. And that's what makes the whole agile way of doing things so powerful. That's the leadership part. And it's important to have that there. And then once you got that there, then you can actually use the processes and the processes in deal management integration. Look, that's a playbook thing. It requires the methods and the tools that we see often used by software professionals and other organizations who are well versed in agile. It's actually taking that and applying that to M and A. What does that look like, for example, when it comes to due diligence? What does that look like when it comes to closing a deal? What does it look like when you're integrating and transforming? That is something that can be readily molded because there's plenty of information out there in terms of organizations being very successful in taking that approach. It's just a case of applying it in the M and A context.

You're absolutely right. That's one of the biggest challenges in the deal. But how do you really keep people aligned throughout that process? Do you champion them or rally them around a vision statement? How do you approach that?

There's a really great quote, I love it. It's from Albert Einstein and he said everything should be made as simple as, but not simpler. And I think if you break that down, really what he's saying is that you need to make complex things as simple as they can be without compromising their meaning. So if we liken that to, in an M and A context, which is probably one of those complex things you can actually do in the corporate environment, is simply having simple messages, principles, codes of conduct, certain rules which actually define what you do. Because if you have simple rules, really what you're doing is you're actually empowering people. Because what you're doing is you're giving a simple statement which actually gives them an understanding. It gives them direction and empowers them to what they do. And as long as they're working to those rules or those principles, then effectively you're giving them control to do what they can do to help influence the outcome. And so what I say is that if you've got large, complex plans, big vision, documents, all that sort of thing, boil it down to what I would say will be essential. Messages, rules, principles that drive the work ahead.

This is great, Toby. Unfortunately we don't have time to go through six other strategies you have in your article here, so we'll post a link to it so listeners can follow up and read that and check that out and probably a little bit more structured on conversation here. Toby, thank you so much for your time today. I really appreciate you taking it so we can discuss M and A as a transformation strategy for growth. And also want a special thanks to Abby Hart who helps with all our production for M and A Science so that these podcasts actually sound polished when they're published.

Very good.

Thanks Toby. Appreciate it.

Okay, thanks. Thanks Keith.

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