How the Art of M&A Strategy is Changing: What Top Leadership Needs to Know
Listen to Episode 161:
Episode 161 Transcript:
This episode is brought to you by Business Advancement Incorporated — enabling successful leaders and companies to accelerate to their next level of success on the web at businessadvance.com. And now, here’s Pam and Scott.
Pam Harper: Thanks, Chris. I’m Pam Harper, Founding Partner and CEO of Business Advancement Incorporated, and sitting right across from me always is my business partner and husband, Scott Harper. Hi Scott.
Scott Harper: Hi there, Pam. It’s always great to join you again for another episode of Growth Igniters Radio, and as always our purpose is to spark new insights, inspiration, and immediately useful ideas for visionary leaders to accelerate themselves — and their companies — to their next level of game-changing innovation, growth, and success.
Now Pam, one the enduring strategies for innovation and game-changing success that people have been using for quite a long time is mergers and acquisitions. Yet the success of these deals in a disruptive environment as we have now is dependent on so many factors.
Pam Harper: Well certainly, the more the strategy of M&A is to fit with your companies big-picture strategy, the higher the likelihood is of success. But in a disruptive environment, everyone top leadership team needed to understand the changing nature of M&A strategy and what this could mean for their company.
Scott Harper: That makes sense.
Pam Harper: And that’s why we’re pleased to be speaking with today’s guest. She is our longtime friend, Alexandra Reed Lajoux, Founding Principal of Capital Expert Services, LLC. A diversity-minded firm connecting law firms and other professional services firms with business specialists.
She also serves the National Association of Corporate Directors, NACD, as Chief Knowledge Officer emeritus. With more than 30 years experience in industry, she’s regarded as a trusted source of useful insights and introductions in the field of corporate governance, M&A, and the professional disciplines that underlie these two important domains.
Alex is the lead author of the 5th edition of The Art of M&A, a Merger Acquisition and Buyout Guide, which will be released in late July. Her articles have appeared in Financier Worldwide, Risk and Compliance, and Capital Insights. She’s also the series editor for corporate governance and sustainability books at DG press, an imprint of De Gruyter Publishing. You can read more about Alex by going to growthignitersradio.com, Episode 161.
Pam Harper: Alex, welcome to Growth Igniters Radio.
Alex Lajoux: Thank you so much, Pam and Scott.
Pam Harper: Well, this is a very exciting time for you as this latest edition of The Art of M&A is being published. Now, before we get into our discussion, can you tell us why is this book called “The Art” of M&A? Where’s the art?
Alex Lajoux: It’s funny. This is a wonderful question. Looking back on those days, I realized that the law firm of Lean and Edson, which was the home for the first edition of The Art of M&A in 1987- with me, thought of the idea of M&A as an art at the exact same time that Donald Trump was writing Art of the Deal. The two books came out at the same time, so no idea seemed to have a truly individual home. It’s more like a zeitgeist. But I think the zeitgeist of the ’80s was that we were having success, making money hand over fist, and then we asked ourselves, “how. How did we do this?” And the Sanskrit AR etymology root means putting things together, so it’s no coincidence that art itself, which puts things together, is no stranger to mergers. And merger’s no stranger to art.
Pam Harper: Well, there’s a lot of judgment involved. And there’s an art in that for sure.
Scott Harper: And certainly, no two deals are ever the same no matter how similar they look.
Alex Lajoux: Right. Exactly.
Scott Harper: Now, Alex, this is the fifth edition of The Art of M&A. You started back in ’87, my goodness. Over these years, what’s the biggest change that you’ve seen in how people go about developing M&A strategy from the beginning to now?
Alex Lajoux: I think there are a lot of differences. First of all, the entire economy is different now. We’re living in the age of information, of data. We have our monopolies today that involve data — Google, Facebook, Microsoft. But back when the first merger wave happened, the end of the 19th century beginning of the 20th century, there were physical commodities. And back there in the ’80s, when we did our first edition, we were on the verge of the information age, where we weren’t really there. The computer had been invented, but the internet had not yet been invented. So, a lot of the deals that galvanized in the ’80s were leveraged buyouts, manufacturing firms, based on debt. And all the paperwork for the deal was real, hard paperwork. There were binders. There were physical data rooms. And as I have religiously gone through every single edition updating the edition, the changes I make many of them have to do with the fact that we’re not living in a concrete world anymore. We’re living in a virtual world.
And then the second big change I see is really who calls the shots. Back in the ’80s, it was still the days of the imperial CEO. And now, in the year 2019, clearly shareholders represented by directors are really the ones who decide whether a deal succeeds or not and whether a deal is even feasible.
Pam Harper: And of course this isn’t the end of it. There’s always going to be more changes. That’s just the nature of what it is. So, disruption is really driving everything. How do you see regulations or the global economy also impacting this?
Alex Lajoux: Well, it’s interesting. Regulations … I was just reflecting on this when I did the most recent edition of how far we’ve come since the days of the Sherman Act of 1890, the Clayton Act of 1914. Hart-Scott-Rodino disclosure regulations of 1976. They all were so very concerned about market share. Really the idea that a company could have a monopoly. And the whole problem with mergers had to do with the fact that unfortunately, a merger might squeeze out a worthy competitor and create a kind of a monopoly or an oligopoly. And that was the emphasis of all the regulations that directly concern mergers. But now, we have the additional concern about privacy, the ownership of data of the GDPR that became effective in May 25 of 2015. General data protection regulation of the EU has a lot of repercussions. There are global regulations that affect mergers even here, the UK anti-bribery act. We have our foreign corrupt practices act that came out in ’88, and it keeps getting amended and reinterpreted.
But generally speaking, if you are involved with a public company, and you’re going to do a merger, it’s not just the anti-trust regulations you have to worry about. It’s a boatload of others, and especially there were many industry-specific regulations. So for a specific industry, say having to do with aircraft or having to do with financial services, you have to know those regulations as well.
Pam Harper: So there is a lot to think about. And of course, your book has quite a bit of this information in it. It’s very, very comprehensive. So anyway, what does this mean for top leadership on how they need to think differently as they developed their M&A strategies?
Alex Lajoux: I think that it really does depend on the size of the company you’re leading, the sector in which you’re operating, your vision for your owners. It’s quite relative. But I would say that I tend to be an optimist. And so I believe that for any given business leader, I will say the world is your oyster. Go for it. Whatever you dream, you can do it. And people like you, Pam and Scott, I have to say are inspirations in that regard. You have a vision. You go after it. You encourage others to do the same. Don’t take no for an answer. Keep trying.
And M&A is such a beautiful thing if it’s done right. So many people do it wrong, and that’s the reason that I’ve spent what is it, 40 years now, I haven’t counted — but it’s been a long time, constantly updating this edition and then doing a lot of spin-offs it and something like spinoffs and each topic would get deeper treatment. But M&A is about figuring out what your value is to the world is, how you can be of service to the world, what are your strengths, building on those strengths, what are your weaknesses, offsetting your weaknesses, where do you want to go, how can you serve? And using M&A as a tool for these higher values.
Pam Harper: Well that’s the way to think about it. And there’s much more to talk about. First, we’re going to take a quick break. And then we come back, we’ll speak more with Dr. Alexandra Lajoux, founding principal of Cap X and author of The Art of M&A, about how the art of M&A strategy is changing. Stay with us.
Scott Harper: This is Growth igniters Radio with Pam Harper and Scott Harper, brought to you by Business Advancement Incorporated. We focus on enabling visionary leaders to ignite, sustain and boost the momentum it takes to achieve game-changing results. We’re on the web at businessadvance.com.
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Pam Harper: Welcome back to Growth Igniters Radio with Pam Harper — that’s me — and Scott Harper. Today, Scott and I are speaking with Dr. Alexandra Lajoux, founding principal of Cap X and author of The Art of M&A on what top leaders need to know about how the art of M&A strategy is changing.
Pam Harper: Alex, how can people find out more about your book and Cap X?
Alex Lajoux: Oh well. Capital Expert Services has a website. It’s capitalexpertservices.com. The book is widely sold. Of course, it’s on Amazon, Barnes and Noble. We’re also having a particular book signing in August at the Fifth Avenue Barnes and Noble, and I’m excited about that. I’m kind of driving customers there to that good ole brick and mortar. So, those are the two main ways.
Pam Harper: Okay. And we will have a link as well to that book signing if you go to growthignitersradio.com, episode 161. So, Alex, before the break, we were talking about how M&A strategy has substantially changed in so many ways because we live in an information world and also, of course, there’s changes in so many other regulations and the board itself. How do you see the accountabilities of the board and see suite changing regarding M&A strategy in 2019 and even beyond?
Alex Lajoux: As I mentioned previously, I do see a rising power of shareholders, particularly institutional shareholders. They cross that 50% threshold back in the ’90s and became the dominant owners of stock, and that trend is only increasing. Retail shareholders have very little say, so it’s the institutions who are driving it. There are various types of institutions, of course, some of the public pension funds, mutual funds and so forth. And its first activism in corporate affairs was limited to a few gadflies, and then it started catching on with the union pension funds and then the public-employee pension funds, etc. And then what came out of that, and this is why my many years at the National Association of Corporate Directors is relevant is that directors began to realize that they’re not just there to support and give advice and counsel to the CEO, which is a great thing. They still do that, and it’s still very valuable. But they also represent the owners.
And to this day, now as they look at M&A, they’re not just saying what would be gratifying to our precious CEO and make our company bigger. They’re also saying what kind of total return on shareholder investment will there be from this transaction? Because we’re not just thinking about our own company, although that is ultimately their fiduciary duties to think about the company, but we want the company to last long enough and produce wealth long enough to help our owners, many of whom are beneficiaries of pension funds.
So, directors have a fiduciary duty to the corporation; they want that talented CEO who keeps driving, keep dreaming, keep proposing transactions. But they also have to be very aware of the fact that a large part of their capital base, i.e. the owners, those providing equity capital, need to understand the value of the deal in terms of are they going to get their money back?
Pam Harper: Okay. Now, we also have people listening who are leading private companies. A little bit different, but there’s the board and there’s the C Suite. Any differences that you’re seeing there, and do you talk about that in your book?
Alex Lajoux: You know, everything I said about public companies is all in one chapter, special issues for public companies. Most of the book really is about friendly deals, and it could very well involve private companies. The emphasis here has to do not so much with the duties of directors but the journey of the transaction. It starts with strategy. It moves to evaluation. It moves to financing. It moves to structuring. It moves to due diligence. You have your closing. You go to integration. So the book leads the private company’s CEO and any CEO or senior management, through the merger process, asking questions and answers that help that potential acquirer know what to do. Oh, I forgot negotiation, the most important part. Nothing is more important than an acquisition agreement. Everything needs to go in there. If you’re hoping, dreaming, praying for something, get it in the acquisition agreement. And that’s why you need a good attorney by your side. Is it in the agreement? Is it water-tight? Is it enforceable as a contract?
Scott Harper: Now, apropos to that, Alex, you’ve recommended for some time that companies share their general M&A strategy. Now is that to prospective partners, or to the world at large? And what are the benefits of being transparent about strategy?
Alex Lajoux: Basically, so much of the company’s value is tied into its brand and the amount of trust it has in the marketplace. And, not just in terms of the share price that it has at the moment, although that’s important, not just the amount of cash it has, or not just the balance sheet, debt to equity ratio, but it’s really the whole value of the company’s reputation. And owners do not like surprises, whether it’s a closely held company and you’re talking about the minority owners, or whether it’s publicly held company you’re talking about the vast, unwashed masses of mutual funds or investors. Nobody likes surprises. And so if a company can give a compelling statement and a true statement about what it plans to do in the future and then has a nice little disclaimer saying that this is a forward-looking statement. It can’t be relied upon, and so forth.
Then, that gives a level of comfort to everyone. I would recommend that companies not be too specific in expressing their vision for the future because if they change, that can be perceived as a disappointment or a shock. But if they open it wide enough, then that gives everyone a mark to look for. And it tends to attract opportunities.
Pam Harper: Well, there’s the art right there. It’s figuring out what’s the right amount to be transparent. When do you not talk about things? So, in the turbulent global economic environment, how can top leadership teams assess the significance of regulatory barriers at the planning stage of an acquisition?
Alex Lajoux: I think that if you think about the regulatory barriers too soon, it takes the fun out of everything because just about everything good is illegal, right? And so many business practices can be criminalized tomorrow. Even profit-making is soon going to be illegal in America.
Scott Harper: Let’s hope not.
Alex Lajoux: Let’s hope not. [laughs] But in any event, I think that the best advice I would give would be if the CEO works with his board of directors, who should all be trusted advisors, possibly an outside advisor, a generalist consultant, or some legal advisor, a financial advisor, getting together, brainstorming where are we headed? And then make a decision based on that as to where you want to go. Identify some opportunities. Then, down the line, start worrying about the infinite number of regulations that can hang you up. By the way, I have a quick anecdote. I hope it won’t be too long.
When I was a teenager, my father was inventing his wheel of opportunity and fit chart methodology for M&A strategic planning. So every time I brought a boyfriend home, he would take them through the wheel of opportunity and fit chart. So it served me well because I’ve been married to Bernard for 40 years.
Scott Harper: It was a good screening tool. [chuckles]
Pam Harper: It’s true though. Regulations keep changing. And if you let yourself be ruled totally by that, then you never get anywhere, but you still have to keep it in mind. And again that is the art. So we’re going to take another quick break, and when we come back, Scott and I will speak more with Dr. Alexandra Lajoux, founding principal of Cap X and author of The Art of M&A about immediately useful steps that top leaders can take as they formulate M&A strategy for their companies. Stay with us…
Scott Harper: You are listening to Growth igniters Radio with Pam Harper and Scott Harper. We’re brought to you by Business Advancement Incorporated. And we focus on enabling visionary leaders to dramatically increase momentum for game-changing results. We’re on the web at businessadvance.com.
Pam Harper: One of the ways that companies begin potential M&A relationships is through strategy partnering, such as alliances. But, this comes with its own set of challenges. So, how can you increase the likelihood of a return on your partnering investment? Read our free special report, building powerful strategic alliances. We developed our findings and conclusions based on responses from senior executives in over 15 different industry sectors. And what they told us might surprise you.
Scott Harper: So learn more now by going to growthignitersradio.com and select episode 161. Scroll down to the resources section and click on the link to download our strategic alliance report. And feel free to contact us if you have any questions.
Pam Harper: Welcome back to Growth Igniters Radio with Pam Harper and Scott Harper. Over the last two segments, Scott and I have been speaking with Dr. Alexandra Lajoux, founding principal of Cap X and author of The Art of M&A on what top leaders need to know about how the art of M&A strategy is changing. Alex, remind us again how people can find out about Cap X and your book. And that book signing.
Alex Lajoux: Oh, well thank you. Well the book, we’re going to have a signing August 22 at the Barnes and Noble on Fifth Avenue in New York. And I believe your website will have a link to that, which is very exciting. Of course the book will be available anywhere fine books are sold.
Alex Lajoux: And my company is Capital Expert Services, and the website there is capitalexpertservices.com.
Pam Harper: Great. And, just as Alex said, you can find links and other information by going to growthignitersradio.com, episode 161 and scroll down to resources. So, Alex, this is the part of our episode where we like to talk with our guests about the immediately useful next steps. And in this case, it’s about leadership teams and what they can do to find and develop M&A deals that ideally are going to be great successes.
Pam Harper: One of the biggest challenges, of course, is finding these M&A prospects. And social media’s out there, of course. How could it help you find the right prospects for an M&A deal, or could it?
Alex Lajoux: I tend to think of social media as a place to make connections and convey news. I think still the websites that are best for finding an actual target are, and I don’t have them quite at hand, but there are websites that do list companies that are prospects.
Alex Lajoux: Then again, I’m not a do-it-yourself person. I think there are so many qualified M&A advisers. There’s a whole association; it’s the Alliance of M&A advisors — AMAA out of Chicago, that has a membership of some thousand dedicated M&A advisors. So, the community there, you tap one of them, and they’re on it like a dog on a bone.
Alex Lajoux: Also, I would say that there are generalist consultants, who are very good at helping you determine your strategy before you go into your search. And as I understand, that’s the kind of work that you do, Pam.
Pam Harper: That’s right.
Alex Lajoux: So I’m a big believer in … I mean it. I’m a big believer in paying for professional expertise rather than try to do it myself. You think you can because there’s LinkedIn and there’s Google, but you can’t. You’re going to waste a lot of time.
Pam Harper: It’s true that I think there’s always a different perspective to be had. Internal, you have one perspective, you’re in your own system when you work with people when there’s enough of a stake in getting that expertise. It can make all the difference for sure.
Pam Harper: What about an immediately useful next step for developing strategy in a way that’s going to help us in this disruptive environment?
Scott Harper: So some practical, short-term stuff.
Alex Lajoux: Strategy is about moving into the future. So, I would suggest, and it’s the only way I know how, is to have the leader of the company with his or her management team, put together a number of scenarios. Identify their weaknesses. Identify their strengths. Put together a wishlist of possible acquisition targets. Take a quick look at their financial capability and what kind of ways they might finance the transaction. Start bringing in the board. Have the board weigh in. And start to let it develop, slowly but surely until does it really seem like the right thing?
See, M&A isn’t always the right thing. Sometimes internal growth is better. Organic growth is better. M&A may or may not be the right decision, and I really do think that if you have a board of directors, and I do recommend that all entities have one and use them, even if it’s an advisory board, if you’re a very, very small company, and you don’t yet have a statutory board of any real meaning other than you and your fellow owner, it’s always good to have those advisors.
And I know Pam, you and Scott, yourself have an advisory network. So, going into that advisory network, using your board, getting all those perspectives, and seeing if something takes hold. And then it really does. It’s almost like build it, and they will come. Once you build that baseball field, the players will come. The fans will come. Once you build that strategy, the opportunity will attract opportunities.
Pam Harper: Something you said a little bit earlier about the scenario planning, — especially in a disruptive environment — it’s a very important, concrete thing that more companies are going to need to do to be ready to pivot in a variety of different directions. So, it isn’t a very straight line anymore. And one of the things I noticed in your book you talked about is there are the vertical deals. There are horizontal deals. And there’s the diagonal deals. So, being able to look and say how could we look at this and come up with possible scenarios for what we might do and doing it often enough that it becomes a regular part of how your company operates.
Alex Lajoux: Yes, Pam, and you know, you mentioned the idea of pivoting. And I want to emphasize that’s such a good point. What if people stop using horses and start using something else. Are buggy whips no longer be sold, and that’s an old cliché but it’s still quite enduring. It really works. There are industries that become relatively obsolete. They have to get ready to diversify and change.
Alex Lajoux: And so it’s always important to be aware of the external environment, what is happening, especially if you’re in technology. But even if you’re not in technology.
Pam Harper: Every company is in technology these days. We’re sitting here in technology. But, this has been a very special conversation because I think more and more companies are going to … more leadership teams are going to need to think in different ways about the art of M&A, and the art of M&A starts with the art of M&A strategy.
Pam Harper: So, are there any final thoughts you’d like to leave us with on this topic?
Alex Lajoux: I’m glad you reminded me of the vertical, the horizontal and the diagonal, and that is still very true just to say you might want to merge with a competitor. You might want to buy a supplier. You might want to be bought by a customer. You might want to diversify and go into a new field. And then there’s of course geographic change.
So, if you think of strategy, and I have to back to my dad’s wheel of opportunity and a large circle with many, many pieces to the pie, you will free your imagination to face your prosperous future.
Scott Harper: So pre-planning allows you to be spontaneous in the moment. It seems like it’s impulsive, but it’s actually not.
Pam Harper: Well, this is great. Alex, thanks again for being our guest on Growth Igniters Radio.
Alex Lajoux: Thank you.
Scott Harper: Thanks, Alex, and thanks to you out there for listening to Growth Igniters Radio with Pam Harper and Scott Harper. To get show notes and resource links for this week’s episode, go to growthignitersradio.com and select episode 161.
Pam Harper: Until next time, this is Pam Harper…
Scott Harper: And Scott Harper…
Pam Harper: Wishing you continued success and leaving you with these questions to discuss with your top leadership team:
Scott Harper: How will we stay current about the changing art of M&A strategy and its implications for our company’s growth now? And how will we do it in the future?