We all understand that T s should be crossed, I s must be dotted and rows & columns of numbers should reconcile exactly. But an obsession with absolute accuracy and complete perfection can destroy the ROI of an acquisition or roll up. A board member (Director) can help by asking questions about the optimum pacing for transactions and the key factors driving the success of acquisitions.
Situation # 1: Investors based in Europe were expanding their company to become a multi-service one stop shop. Since their first two acquisitions were specialized companies, it was time to strengthen their account and project management capabilities. Their due diligence process for the third acquisition dragged on for over a year. The target company’s 45% growth rate slowed to 25%. Valuation was adjusted three times. Some key employees who could have become key contributors to the success of the combined businesses lost confidence in the acquiring company and accepted positions elsewhere. The distraction of the onerous due diligence process definitely increased the cost of acquisition, cost them opportunities and slowed integration. Once the transaction was completed, everyone involved concluded that they should have just used their initial valuation “guesstimates.” They lost MILLIONS as the accounting departments parsed numbers that impacted hundreds. They would have made more money if their guesstimates had been off by as much as 30%!
It pays to gauge the PACE of the industry involved before committing to a specific due diligence process. It pays to know how quickly a transaction must be completed to achieve the desired competitive advantage before establishing the due diligence budget and timeline.
Situation # 2: Another investor had a similar vision. He would acquire complementary companies to provide a range of services for corporate accounts. They ran into difficulties when the next target company was being courted by multiple investors with varying approaches to due diligence, valuation and integration. Even though the prospective buyers were from Asia, Europe and South America, one might still assume that generally accepted accounting practices (GAAP) would yield comparable valuations. In this situation the variations in what constituted gross profit ranged from 32% – 38%; which is a huge difference. When it comes to B2B service businesses, stable scalable gross profit is central to success. This transaction got bogged down because each prospective buyer expected the target company to invest in additional accounting to match the prospective buyer’s definitions. The target company would need to have the equivalent of 4 sets of books to continue negotiating with the three prospective buyers. A fourth buyer, who could deal with accounting differences later, bought the target company while the other three were still focused on the definition of gross profit.
It often pays to accept different (even less sophisticated) financial reports from companies that are targeted for acquisition. Your estimate of the cost of upgrading the accounting later can be considered when the purchase price is established.
Situation #3: Same scenario – a roll up to become a one stop shop on a global scale.
The buyer’s due diligence process was very precise re. inventory, backlog, accounts receivable, repeat business, average order size, etc. But very little attention was focused on the people. Long story short: a handful of people in each of the acquired companies had large compensation packages, impressive C level job titles, and expectations that they would retain authority over their piece of the blended company. They also had varying levels of experience, skills and sophistication. The cost, risk and complexity of leadership integration and/or replacement absolutely dwarfed the precise numbers that were generated about “things”.
It pays to remember the Pareto Principal (80/20 rule). The best transactions follow due diligence that has emphasized the key factors behind success or failure. Acquisitions often involve “companies in search of a CEO”, so leadership-related due diligence matters.
Prominent proponents of diversity in the workplace acknowledge that the unique languages spoken within different professions (departments) can become more confusing and divisive than the differences between genders, generations, races and cultures. Maybe that is because gender, age, and race differences provide more visual cues for each of us to make the effort to understand what someone else is trying to tell us.
Some of the most volatile judgmental disagreements I have witnessed in my 40+ years as a business growth strategist have involved Chief Marketing Officers (CMOs) and Chief Financial Officers (CFOs). During one strategy clarification assignment, I witnessed pretty much the same heated discussion in English, Mandarin, German, Japanese and Yiddish. The energy and anger was similar to when people of different religions argue. Maybe that’s the way to think about it. Marketing and Accounting are different religions.
Being able to discern emotional triggers and then actually craft messages that not only sparks attention but prompts action is better than any drug for enthusiastic marketing professionals. That is the currency of marketing. When that magic happens, they KNOW they deserve their company’s sustained support. In this world of hundreds of thousands of daily marketing messages, getting attention and prompting action is fragile. Nothing is more frustrating to marketing people than achieving what feels like a miracle and then their own company doesn’t support them and doesn’t promptly offer to finance more or pick up the speed. When marketing people have experienced that intense surprise, disappointment, discouragement and rejection they can sound unreasonable, distrustful, resentful, entitled, ungrateful, unrealistic and even selfish.
Please reread the previous paragraph. Let the emotion of the words in.
Marketing professionals are not all angry, demanding or unrealistic. Cooperative interaction with a respectful CFO can prevent all of that from ever developing. The proactive CFOs with whom I have had the distinct pleasure of working, recognize that at the core, CMOs and CFOs want the same things. You both want more market share, increased net profit, a more nimble organization and more cash. (Who doesn’t need more cash?)
The perceived difference between CMOs and CFOs often lies within the areas of CONTROL (budgets) and METRICS (measurement). Too often, CEOs and CFOs inadvertently hold the CMO accountable for increased REVENUE when that is the purview of the CHIEF SALES OFFICER (CSO). As a reminder, the sales department is the primary client of the marketing department. By sparking interest and prompting action (eg. inquiries), marketing delivers warm leads and qualified prospects to SALES who then do their magic to turn qualified prospects into buyers.
Over the past 6-7 years, many corporations have made great progress because their CFOs and CMOs have been asked to have regularly scheduled focused working sessions to establish or update the values of each warm lead and each qualified prospect. That effort is worth its weight in gold. As you know, that effort also requires patience and a willingness to translate marketing-ese and accountant-ese so you understand and appreciate one another.
And now that work must go even further due to shorter attention spans and higher expectations that shrink the duration of warm leads and qualified prospects. There is a much shorter window of opportunity to step up marketing to produce more warm leads and qualified prospects &/or keep them warm…and less time for sales to turn those leads/prospects into buyers. A value must also be assigned to pacing.
It is exciting when a corporation’s CFO and CMO can agree upon metrics that will trigger immediate increased investment when/if the marketing department achieves magic … sparks attention and prompts action…delivers enough warm leads and qualified prospects. The benefits go beyond increased net profit. The effort also pays off in increased job satisfaction and appreciation for one another’s professional colleagues.
Warning: This blog entry reveals a bit of cynicism.
I would like to believe that the boards of major corporations actually understand the value of a diverse workforce, including at the executive level. Varied experience and viewpoints can provide perspective and insights to generate exciting strategies or solve complex challenges.
If the leadership of General Motors and IBM truly valued diversity, would Mary Barra and Ginni Rometty be their first female CEOs? Really?
These women are bright, accomplished, highly skilled, and deserve to be CEOs.
But, look at the timing.
Barra became CEO as General Motors while dealing with the largest vehicle recall ever (29 million so far, according to FORTUNE magazine). They declared bankruptcy and needed a government bailout not that long ago. And the intractable “GM culture” poses a significant challenge for any CEO.
Rometty is CEO of IBM as revenue has been declining (-5% to $99.8 Billion in 2013) and the media keeps asking “Can IBM Ever be COOL Again?”
What is the logic? When a fairly homogenous group of corporate leaders find themselves in a terrible situation, do they think Well, maybe it’s time to give a minority or a female executive a “chance.” Why not? If the executive fails to pull the corporation out of the mess, some bigoted people would have their biases confirmed. After all, they weren’t expecting success anyway. And if/when the female (or minority) executive succeeds despite the huge odds against her, she probably won’t be compensated higher for that incredible accomplishment. She could also become so tired after pulling a huge corporation into the future, she may just retire.
And then, who will the rescued corporation bring in as her successor? Usually, the corporations revert back to homogeneity. Look at the composition of corporate boards!
This reminds me of observations my late husband had about governmental entities with which he worked. Leaders of states, counties or municipalities would repeatedly find themselves in “messes.’ Then they would scratch their heads and say, “You know what?! We need to bring in a community planner.” If they had actually understood and valued planning, wouldn’t the professional planner have been brought in long ago? And the “big mess” would have been prevented.
Be honest with yourself. Look at the composition of your executive team and your board. And look at the timing of when you “give a woman or a minority a chance.” Are you really setting people up to fail or serve as scapegoats for problems that resulted from homogeneity? (Similar people with similar thinking using similar approaches)