growth by affiliation; reinventing acquisitions …

GROWTH BY AFFILIATION; REINVENTING ACQUISITIONS WITH LESS RISKS

GROWTH BY AFFILIATION

REINVENTING ACQUISITIONS

WITH LESS RISKS

Li Fujun, Suzanne Ross, Jack McNaughton

A BETTER APPROACH TO

MERGERS & ACQUISITIONS


PREFACE

Insanity is doing the same thing repeatedly and expecting different results.

-Albert Einstein.

The history of business growth by Mergers & Acquisitions (M&A) is not a happy

one. Stories of failure far exceed those stories of success. Yet, the compelling

reasons for rapid growth, rather than via natural growth, mean many continue to try

to grow by M&A only to fail.

This book explores a change to the way business has tried and mostly failed, to

complete M&As. It covers the reasons behind M&As and the common pitfalls. Then

continues onto an alternative approach that removes these common reasons for

failure and provides a method to help make rapid growth a success. Several case

studies are included that are based on the real experiences of these methods, which

were used to achieve an M&A with less risk successfully.

The Growth by Affiliation1 (GbA) method outlined is far removed from the major

press releases made by management and investment bankers when announcing

M&A plans, such as, “the biggest merger in history”. Those announcements seem

focused on completing a successful M&A deal transaction and potentially a

subsequent share price increase, more than any substantial increase in the underlying

business value.

The GbA method can be used by businesses big and small. Moreover, it is ideal for

cross border transactions. Now, more than ever before, it is time to look again at the

risky and failing M&A approaches currently used. The current M&A methods are

outdated and have mostly failed to achieve the results that business and other

stakeholders expect.

Li Fujun, Suzanne Ross, Jack McNaughton

Hong Kong & Australia July 2019

[email protected] 1 Suzanne Ross & Jack Mcnaughton, Copyright@2019


Table of Contents

PREFACE

PLACE YOUR BETS

WHY PLAY THE GAME?

YOU LOSE!

CHANGE THE GAME

WIN-WIN

CASE STUDIES

BIBLIOGRAPHY

ABOUT THE AUTHORS


PLACE YOUR BETS

“There is a very easy way to return from a casino with a small fortune;

go there with a large one.” 2

The Harvard Business Review says M&A failure rates are staggeringly high with

between 70 to 90 percent missing the original goals.3 The Hay Group4 analyzed 200

European M&As and found that senior business leaders believed only 9 per cent

were "completely successful" in achieving their objectives5. Others have reported

that failed and disappointing M&As occurred for 75 percent of all deals6. Many

organizations attempting M&As are statistically more likely to reduce their

Enterprise Value. Lakelet Advisory7 said that 83 percent of M&A activity did not

boost Shareholder value or conversely, only 17 percent produced a “WIN”.

It is also estimated that only 17 percent of casino gamblers are winners8. The thought

that M&As may only produce a "WIN" at the same rate as games of chance in a

Casino is a very sobering idea. The abysmal “WIN” rate achieved for an M&A raises

the question; why attempt it?

The M&A market is very active, despite the poor results achieved. In the first half

of 2018 alone, there were more than 16,000 deals with a value of $USD1.7 trillion.

In 2015 it was a record-setting year, and in China, the value of M&As totalled

$USD350 billion, an increase of 61.6 percent year-on-year.

Management, Shareholders and Professional Advisory firms know that to snowball,

you need to be able to acquire other enterprises. It would seem this attitude has been

translated into ever-increasing M&A deals. Increasing the deal flow has not,

however, improved the likely outcomes.

2 James Bond in Casino Royale by Ian Fleming 3 Business Chief reported on January 28, 2015 4 in 2007 5 “Nine out of 10 M&As fail to deliver” by Nic Paton 26 March 2007. 6 (Mitchell LM, 2001) 7 March 2017 8 Wall Street Journal 26 April 2019


Global deal volumes for the 30 years to 2015 have shown incredible growth9.

Acquisitions are designed to help business grow and to improve productivity,

performance and efficiency via production and cost efficiencies. Another significant

reason is to reinvent the nature of the business by changing products or categories.

Nokia, for example, evolved from a Swedish forestry pulp mill company founded in

1865 into a global telecoms business in the 1990s.

Organic growth is less risky as it builds on the existing knowledge base, core

competencies and can be funded using internal resources while growing at a slower

rate rather than rapid growth via M&A. The business can adapt and develop the

teams and systems needed to manage the brand, market, product, distribution and

culture of the company. Businesses, however, are under pressure from many places

such as the Stock Market, Shareholders, and Management to grow faster, leading to

Mergers and Acquisitions. Nevertheless, a majority of M&As fail to reach the goals

forecast; that is, they fail by not achieving the initial objective set for the M&A.

9 Increasing Agility for Mergers and Acquisitions by Okta.com


WHY PLAY THE GAME?

A business must decide why to grow and choose to do so organically or to adopt an

M&A approach.

Growing Organically:

Organic growth implies that the business can grow by using its existing expertise,

products, distribution channels, internal knowledge and team to improve market

share. There are many ways a company may achieve growth when using its

resources:

• Cut business costs to improve profitability and extract efficiency and

productivity gains;

• Expansion of product distribution channels, for example, going to an online

sales model and expanding into new markets locally and overseas.

Additionally, moving the products into entirely new and different markets and

market segments such as via wholesale. Our co-author10 created a new

marketplace for traditional pension planning services. Clients were unwilling

to have their pension entitlements assessed in a face-to-face meeting by a

Financial Planner because of significant upfront costs11.

Clients were unsure of the value of the service provided by a Financial

Planner. The creation of a D.I.Y. report allowed them to assess their

entitlement position anonymously and cost-effectively via an online

questionnaire that inputs their data into a pension entitlements calculator. The

Client received a very prompt “Age Plan pension entitlements report” emailed

back to them at a low fixed price. Clients confirmed that the convenience and

low cost of the DIY report allowed them to check if they needed additional

help from a Financial Planner; without the otherwise initial commitment to

significant time and unknown costs;

10 Suzanne Ross 11 Age Plan entitlement report; www.ageplan.com.au


• Expansion of the existing product range with innovative new models,

complementary products that increase the revenue “take” per client, quality

enhancement, and design enhancements. Using the Age Plan reporting

example above, additional products markedly increased the services in the

online D.I.Y. offering that are extra too but part of the Client's needs. These

additional products, in this example, were for other reports dealing with

estimated retirement incomes and documents such as online Wills.

Other examples abound around the world, and McDonald's, for example, built

in the added product items as a natural part of the ordering process with staff

taught to “upsell”; and

• Changes to advertising, product brand, and methods of promotion of the

product range, including moving the product into different price bands

appealing to new and different market segments.

• It is using the knowledge base of the business to evolve products into new

categories and areas. Kodak attempted this approach with its innovative

development of digital photography. The digital technology was an internal

development that unfortunately was not successfully adopted due to the

culture within Kodak.

Growing by Mergers and Acquisitions:

Many arguments are supporting the advantages of M&A versus organic growth.

Those arguments revolve around Growth, Competition, Security, and Change.


The reported strategic drivers for M&As identified by global accounting and

advisory firm, Ernst & Young12:

A rationale for M&As is that a business can expand by acquiring more of the market

in the same or complementary products. Competitive pressure can lead to a belief

that by buying a competitor, you can forecast that the combined business will

increase profits via sales and margin improvements and cost savings. The removal

of a competitor or competing brand may mean the existing brand is better able to

survive and prosper. The market also may be more interested in products where there

are multiple brands of similar products, creating “perceived” competition. In this

way, the business is attempting to secure its brand and its position in the market.

The resulting changes made to a business can also include the acquisition of features

of another company that provides improvements in production, distribution,

technology, back office, and management. Such changes allow for a better operation

leading to a business better placed in terms of its ability to operate profitably and to

respond effectively to the challenges presented by the market. In 2018 ride-sharing

Apps, Uber and Grab (Singapore) merged their Singaporean operations. The

apparent objective was to join to improve profitability, remove competitive price

discounting and increase efficiencies.

The simplest form of M&A is where management wants to adopt a strategy to

increase sales or reduce cost by taking advantage of the economies of scale created

by the merged businesses. The most important driving forces involved are often

12 “Why dealmaking is expected to come in many forms in 2019” Steve Krouskos EY Global Vice-Chair Transaction

Advisory Services 15 April 2019.


overlooked. These driving forces are reflected in the word TRAM13; meaning

technology, resources, access to market, and management. One or more TRAM

factors is the engine to drive company growth faster and continuously. A successful

M&A deal must include one or more of these TRAM factors; otherwise, the expected

benefits of the economies of scale will not last.

There are many examples of deals lacking in the TRAM factors resulting in the

beneficial M&A effects quickly fading away. The importance of the TRAM factors

is, therefore, integral to the valuation of any targeted M&A company. Moreover, it

is capable of being represented by the formula:

V=ST/C

Where: V=Valuation;

S=Sales

C=Cost

T=TRAM

The TRAM factors are typically the key drivers behind the continued growth of any

business. And are incorporated into the methods developed later in this book as part

of the development of new ways to successfully grow via M&A.

Occasionally a business may identify that market conditions are changing in a way

that points to the need for different products or even a different market ultimately.

Additional innovative products and techniques acquired during an M&A can save

the research and development time and cost associated with innovation and failures

that arise with new and innovative product development.

In 2016 Walmart (USA) was suffering at the hands of the sales of Amazon in the

rapidly growing online area. Amazon’s continuing sales growth was showing that

online selling was a cornerstone sales channel that all retail businesses need. To

catch up, Walmart acquired Jet.com for $USD3.3 billion. Jet.com was in the online

sales sector appealing to the "urban millennial shopper" demographic. This sector is

considered an essential retail sector that Walmart was losing to Amazon. Walmart’s

acquisition provided a ready-made infrastructure, systems, technology, knowledge

and management to redress the gap in Walmart's sales channels quickly.

13 Li Fujun copyright@2019 and TRAM means: Technology, Resources, Access to market, Management


A valuation disparity can also deliver a reason to acquire another entity. The

valuation of PRC (China) listed companies are much higher than for Hong Kong and

other international markets. The new value is created by the Price/Earnings ratio

difference when the foreign assets are injected into a PRC listed company.

Significant additional synergy and economies of scale also can be achieved with

M&As where the international businesses have operations or market potential in

China or another cross-border market.

Currently, 90 percent of the M&As in the PRC is only amongst Chinese enterprises.

This intense M&A competition is causing the cost of China's domestic M&As to

increase. The price competition results in significantly reduced value “upside”. At

the same time, this effect is increasing the demand for international M&As by PRC

listed companies. PRC listed companies have expanded their overseas M&A

activities by 62 percent year on year.

Given the importance of the M&A concepts to growth, why is the failure rate so

appalling?


YOU LOSE!

Blame-shifting is a natural human reaction.

It happens on the smallest to the largest scale.14

Understanding the prime causes of failure for an M&A provides the starting point in

developing a new method and way of growing. The widely reported primary causes

of M&A failure are:

• Team:

The people tasked with completing and implementing the M&A deal are the

wrong choice for implementing the integration of the activities of the

businesses. An M&A is a process, and what is too often overlooked is the goal

of adding value to the acquiring companies. The objective of the advisory

team is to conclude the deal and not run the business. However, the forecast

value accretion can only be delivered if the implementation of the M&A

succeeds. In M&As conducted by our co-author15, the post-implementation

team was accorded more importance than the advisory/deal team. This

approach recognized where the future value was to arise.

14 H.G. Tudor, Your Fault: Blame and the Narcissist. 15 Suzanne Ross

75%

25%

TIME & MONEYAn M&A deal is front loaded

TRANSACTION TRANSITION


• Culture:

If a more prominent company is acquiring a smaller company, there will be a

loss of the culture that created that business value. The management can

become disillusioned with being hidden inside the newly enlarged entity. This

change and loss of culture is a form of disempowerment with disgruntled staff

replacing the previously successful teams. The resulting demotivation and

fear of unemployment can become a severe roadblock to the former business

continuing to deliver the forecast deal valuations.

The importance of an implementation team and their focus on integration

played a pivotal part in “on-boarding” of the acquired employees in the M&As

undertaken by our co-author. Her team were able to "buddy" with new

employees and ensure they could transition seamlessly to the new operation.

Additionally, they were ready to start to identify with and adopt the new

business culture. Her team was able to handle the integration that followed the

transaction phase. The importance of post-merger integration is now being

recognized.

"It is the actual execution of the merger strategy through the pre-merger and

post-merger integration that appears to have the least understanding."16

The HP/Compaq M&A had a significant cultural clash related to the speed of

the merger and the approach adopted by each business. HP "relying heavily

on organized plans for their work" versus Compaq’s strategy “relying on their

ability to respond to just-in-time opportunities; continually turning on a dime

to meet demand”17. The extra costs and management distraction rapidly

consumed the advantages expected from the deal. A better pre and post-

merger integration plan would have dealt with this issue.

16 Journal of Organizational Dynamics, business scholar Marc Epstein, PhD. And many M&A deals fail to adequately consider

the "post-merger integration" (or PMI) during the transition phase. It is an area that must have more attention and is a core focus

for the GbA process. 17 “The Soft Things that make Mergers Hard” Greta Roberts Harvard Business review 12 July 2011


Recognition of these “Quiet Drivers”18 as qualitative features that are grouped

around elements such as:

• the ability to change,

• motivation,

• independence,

• feedback,

• their “care factor”,

• respecting discipline and rules,

• a desire for success,

• dedication,

• approachability,

• capacity for collaboration,

• respect for others and themselves,

and the like are vital to the implementation and integration of businesses. Those

elements were incorporated into a successful “humanistic” approach to design

and communication of the culture, creation of check/review points and

expectations to the employees from both businesses. Implementing these Quiet

Drivers became part of the duties allocated to the onboarding team during the

integration of the businesses. The integration plan is an essential, onboarding

tool.

• Due Diligence:

Poor and incomplete Due Diligence ranked highly as a reason for failure

caused by the speed needed to conclude a deal, the lack of expertise necessary

to understand the business being acquired and the inability to include in the

process those most likely to be the business operators. The failure of Due

Diligence is apparent in HPs (USA) acquisition of Autonomy (UK). This

$USD 11 billion deal resulted in a $USD 5 billion loss due to income

statements, balance sheet and cash flow being inaccurate never detected nor

disclosed during due diligence.

An even more significant error was the Time Warner (USA) $USD 111 billion

acquisition of AOL (USA). Due diligence was rushed as Time Warner raced

18 www.quietdrivers.com; Suzanne Ross copyright @2019

http://www.quietdrivers.com/


to get into the online media business. It resulted in a $USD 99 billion write-

down; making it the most massive loss in history.

Sprint (USA) acquired Nextel (USA) for $36 billion as a complementary

product acquisition. However, between employee integration and culture

clashes and an inadequate assessment of the Nextel technology, Sprint wrote

down $USD29.5 billion.

Due Diligence failures of this magnitude are not the result of the work of one

person. Massive and expensive expert advisors were involved. The money

spent on these professional advisors did not change the outcome. Later we

will consider why it is that the now apparent points of failure were so easily

overlooked or not found in valuations.

• Funding Stress:

The funding required to complete the M&A is an allocation of resources via

debt and equity that affects the remainder of the existing businesses. Using

any funding source such as debt imposes added risk on the outcome of a deal.

Equally, the dilution of existing shareholders as a result of new share issues

to the acquired company's shareholders means that "Return on Assets and

Equity" are under pressure. The added performance requirements can lead to

results such as Management adopting short-term goals to boost performance

to justify the Acquisitions to the detriment of long-term performance and

Businesses value.

• Focus:

M&As take on a life of their own affecting the advisory professionals, the

press covering the project and the Shareholders, Management and Staff many

with a vested interest in the success of the deal. Management focus is a Quiet

Driver, where the added distractions of issues arising from a deal start to

consume the time management are spending on running the daily operations.

Management then has a choice to focus on the effects of their deal or attempt

to balance issues between the current business and those deal issues. The

results are all too predictable once the focus is removed from daily operations.


• Leadership:

Those with the most power in an M&A have less understanding usually of the

intricacies of the M&A or the underlying business operations. The exclusion

of lower-level management from the transaction means those most

responsible for the day to day business functioning have no or little say in the

M&A. Moreover, the skills needed to operate an acquired business at both the

operational and leadership level can be lacking, wrongly allocated or applied.

• Value attribution:

The understanding of where the M&A is adding the value can be poorly

interpreted or applied as seen in examples such as the Time Warner /AOL

deal. The forecast value added from the “synergy” is often elusive. The

benefits of the client base may not always result in a gain to the merged entity

and, in some circumstances, may result in a reduction in sales and clients. The

failure to forecast the added value can be a failure to comprehend the

consequences associated with the M&A.

• Blame Game:

The combined business has the legacy of the M&A such as cash shortages,

product under-investment, Staff issues and control changes affecting culture

and existing processes. Moreover, it is the genesis of the resulting blame game

that further erodes culture, trust, and loyalty to the business. The HP CEO,

Carly Fiorina, was generally blamed for the Compaq acquisitions, routinely

described as disastrous with over 30,000 employees were fired. In 2005 She

stood down as a result of a continuing blame game and serious boardroom

disagreements.

The M&A "Failure Factors" clarifies that the process you undertake in a deal does

not usually result in success. Surprisingly, gambling at a casino may be an alternative

strategy. It has as much chance of producing your forecast performance goals or the

risk of losing money is about the same.

The Growth by Affiliation technique attempts to remove many of the “Failure

Factors”. In doing so, it allows the business the chance to test numerous options for

growth within defined and controlled budgets. Using the GbA method results in an


accumulation of internal expertise and knowledge. It also builds-up expertise like

that gained in usizing an organic growth model.

Behavioural economics

Trying to understand the M&A "failure factors" and how best to change and reinvent

a better process leads into the world of behavioural economics. It was theorized 50

years ago that the behaviour of individuals in economic situations does not follow a

rational approach, as suggested by economists in their theory of financial markets

(homo economicus). The issues and failures that arise during an M&A process stem

from the scientific findings that humans were just as likely to ignore the numbers

and adopt their own beliefs, not supported by facts. It provides the scientific basis

upon which the process of Growth by Affiliation is built.

The research and mathematics of “game theory” highlighted that an individual

would not act in a way to make an optimal choice when confronted with a range of

possible outcomes. It suggests that an individual’s “cognitive limits and social

representations of reality” affect what they decide (Bounded Rationality)19. The

studies have also pointed to another area where the individual will not follow optimal

economic decisions. Prospect Theory put forward that individuals when confronted

with choices, will break them down into two stages20.

1. The “editing phase” takes the risk involved in a decision and speeds that decision-

making by adopting a range of mental shortcuts such as making a guess, utilizing an

existing habit, using intuition, using historical practices, and the practical knowledge

and prior experience of the person.

2. The follow-on stage is an “evaluation phase” of four principles adopted during the

decision process:

• Decisions are referenced against some arbitrary level, determined by the

individual, and the performance of choice is either a win/lose against that

reference level;

19 (Simon, 1955) 20 (Tversky & Kahneman, 1992).


• Any likely losses are magnified when compared to the gains. This loss-

weighting or loss-premium is based on the prospect of an economic decline

and was valued 2.25 times21 the value ascribed to the same amount of gain.

That is, say a profit was a forecast of $1million, at the same time, it would be

mentally linked to a loss valued at $2.25 million in terms of the decision-

making process being undertaken. “Fear of Loss” has a much more significant

weighting against any profit forecast. This weighting will then find its way

into an assessment of win/lose decisions;

• A similar inaccurate weighting is applied to probability or chance that events

will take place. Individuals apply an increased opportunity to smaller events

occurring versus more significant chances of events taking place; and

• When an individual's sensitivity to gains or losses is measured repeatedly

against an initial reference level, then the effect of that gain or loss diminishes

in the eyes of the individual.

These aspects of decision making contained in Prospect Theory have been expanded

on to incorporate other psychological elements associated with the “overconfidence

and bias” in forecasting the future. The theory found that a forecaster's current

understandings of their surrounding "environment" impacted the forecasts made;

The forecaster's use of his surrounding environment to support predictions is now

called Projection Bias22. Projection Bias can cause forecasting also to be affected by

an individual’s personality unless a counteracting or controlling process exists to

prevent that bias from infecting the forecasts. The effects of Projection Bias extend

beyond forecasting and is now also associated with impulse buying.

Acknowledging that decision making is not always optimal and rational helps

understand some of the failure factors that arise during the M&A process.

Individuals are confronted with a variety of psychological processes that mean an

optimal and a rational approach may be clouded by numerous unintended influences

inherent in those charged with the M&A decisions. Behavioural economics research

provides a strong reason to guard against a process that is possibly flawed, time-

21 (Tversky & Kahneman, 1992) 22 (Loewenstein, O'Donoghue, & Rabin, 2003).


consuming and expensive and with the chance of severely damaging the underlying

business. Methods exist to minimize poor decision making, lousy forecasting and

projection bias during and M&A.

The various types of biases that can arise are understood but have been limited here

to recognizing the financial implications surrounding Projection Bias and others

such as:

• Overconfidence in post-mergers results;

• Confirmation bias or the ability to only “see” what confirms your opinion;

• Commitment Bias that results in an inability to say, “enough is enough” and

revisit the performance due to “emotional attachment” to a project;

• Planning Fallacy Bias that forecasts the needs of the project at an

unrealistically low level; and

• Incentive Bias is the inevitable effect of linking rewards to the completion of

a project rather than against a better selection and alignment of KPIs to the

results that the business wants to achieve.

Those responsible for commencing or delivering on an M&A may understand the

issues associated with the typical failure factors for M&As. However, an M&A is

made up by many individuals advising, collaborating and at times undermining the

M&A.

It is not enough to know about the failure factors and the likely Biases that contribute

to a failure of the M&A. The ability to successfully guard against so many competing

biases should be viewed as a difficult, if not an impossible task. What is needed is a

self-sustaining approach that makes re-aligns all those individuals involved in the

goals of the business’s growth plans in a merger or acquisition.


Growth by Affiliation (GbA)

Another often overlooked rationale for an M&A is to reinvent the business. Business

disruption is today a frequent event. Any company that is not watching the horizon

for the next disruptive event may find that they are no longer a viable and relevant

business. Increasingly, the "growth-drivers" are identified as those businesses that

are disruptive innovators, and they are “the driver of future productivity, growth, and

employment”23. Many more M&As that are executed are on transactions where the

acquiring business will confront new and disruptive innovation pressuring

management with new cultures and ways to market and operate.

Kodak invented the very disruptive technology of digital cameras, but the culture

was built around the idea that film, photo processing and printing was its core

business. Management had many decades perfecting their existing film processing

market, and their employees and distributors were firmly wedded to that film

processing market. Kodak was not able to master the transition to the rapidly

evolving digital marketplace despite the significant investments made into digital

products and the related technology. Kodak management failed to recognize the

urgent need to disrupt their existing film processing business. They owned an

internally developed technology that would have allowed for organic growth. This

failure meant they were unable to fend off the resulting decline in the core film and

print business ending in Kodak’s eventual bankruptcy.

Kodak management had disruptive innovation, leading market position, the product,

brand recognition, and the capital base to exploit the digital camera technology.

However, management was unable to defeat the culture that had made Kodak a

household name on film and print. Despite having three of the key TRAM drivers,

it became a victim of its original culture and could not change it when a change was

needed. The emphasis, in this case, is placed on the inertia to change created within

a successful business.

In addition to the disruption caused by new technologies and processes businesses

also needs to look at their market position, changes in distribution systems and

23 (Mcnaughton, 2019)


solutions, developing markets and the general commoditization of its products

resulting in lower margins and price improvement possibilities.

The management team of Kodak had a dominant market position that they

considered was beyond being challenged by any new technology. This invincible

attitude is not an uncommon situation and should be seen in the context of the impact

of confirmation bias where management was convinced that their success protected

them. The decline in Kodak was rapid and fitted into a general picture of failure

represented as five stages of decay that a business enters.

“Every institution is vulnerable to decline, no matter how great. We found

companies fall in five stages:

1) Hubris Born of Success,

2) Undisciplined Pursuit of More,

3) Denial of Risk and Peril,

4) Grasping for Salvation, and

5) Capitulation to Irrelevance or Death.

Institutions can be sick on the inside and yet still look strong on the outside; decline

can sneak up on you, and then-seemingly suddenly -you’re in big trouble”24

Contrast Kodak with Netflix. Netflix originally distributed rental DVDs via Post.

The improvement in distribution possibilities made available via high-speed

broadband opened Movie Streaming distribution methods over the internet. In

capturing the distribution benefits of the internet, Netflix also commenced the

creation of its product library, allowing them the ability to control content

availability and price. No longer were Netflix only renting content owned by others.

They had moved to distribution then the creation of their content.

The difficulty confronting any business that wants to reinvent itself or to grow is that

they need to have the expertise, time, discipline, teams and the money to carry out

the tasks involving the traditional M&A approach. Equally, existing performance is

not a guide to the ability to undertake an M&A nor proof that the business has the

skills needed to operate in new sectors or avoid bias that arises from past success.

24 (Collins, 2009)


Using existing staff and hiring in professional help still places management under

pressure to continue to operate an existing business and to understand a new, and

sometimes a different product, structure, process, culture, market, and management.

The solution to the desire to reinvent the business or to grow traditionally can be

done to remove the Casino risk from the M&A process and places management back

in control at a significantly lower risk level to the business and its capital.

Research has shown that successful M&A are those that are a fit or an enhancement

to a business’s existing “core capabilities”; “Regardless of the type of merger,

focusing on (these) core processes:

• sales, support, and order management reduce the level of effort required for

the post-merger integration.

• Design processes to present one consistent face to the customer.

• Deliver the benefits of merger synergies visibly to customers – new products,

better service, more for their money.

• Create and staff interim processes to sustain the quality of products and

services through the transition”.25

Do more to aid in the success of an M&A. Moreover, adapting the "core capabilities"

of a business and making it deal-ready can be viewed as an evolutionary process that

better prepares the company for an M&A.

Understanding the core capabilities can also be re-phrased as “organizational-fit”

and has been described as the similarities in “culture, structure and systems”26. These

similarities will not always exist in a targeted acquisition. Yet, the ability for

Management to establish the organizational fit has been recognized to improve the

chances of an M&A succeeding. Such a methodology is the basis for GbA.

The evolutionary process is at the heart of the Growth by Affiliation27 (GbA)

concept. The process and its application were successfully applied to multiple

25 (Abrams, 2013) 26 Castro and Uhlenbruck, 1998. 27 27 GbA was developed around the original idea of a centralised “Office Hub” several decades ago by Suzanne Ross to

significantly reduce the integration risks then rapidly arising caused by numerous M&As being undertaken


acquisitions of both different and complementary businesses using variations of the

technique.

GbA avoids many of the M&A pitfalls by controlling and reducing the significance

of the cultural differences and biases that surround any M&A strategy. The resulting

"de-risking" is because the failure factors are removed by educating management

and the business about the incoming venture, its culture and market. It allows the

company to absorb the many new elements that come with undertaking a new and

expanding venture. In many respects, the adaptation that takes place in the process

is like the adaptation that occurs during natural evolution.

The continued development of the various GbA techniques can now be applied to

most businesses that want to accelerate growth on a risk-averse basis. It helps avoid

many of the pitfalls that have affected others attempting rapid growth thru the

acquisition of other businesses.

GbA emphasizes a continuous feedback loop that helps to learn the business being

acquired and to adapt to the cultures and peculiarities of the M&A target. The

familiarity has the effect of making the M&A more like a complementary or

horizontal industry M&A. The intended effect of the GbA approach is making the

incoming business, its culture, product, market, processes and staff seem to be a

natural fit for the existing business. That is, it is replicating the benefits of natural

growth.

25%

75%

TIME & MONEYGbA is backend loaded

TRANSACTION TRANSITION


The energy needed to undertake the M&A is also materially altered with the most

time now spent on the transition or integration phase (The Backend) and not on the

deal itself.


CHANGE THE GAME

“You have to reinvent to stay fresh, to stay in the game.” - Madonna Ciccone

DRAGON

The GbA model follows a set of steps grouped around the acronym “DRAGON”.

The steps are followed sequentially to achieve the targeted results of the technique.

The basic approach behind DRAGON is to alleviate bias, reduce capital and

management risk while developing business growth in a way that more closely

resembles organic growth. Moreover, the approach follows the path that recognises

the importance and management of cultural change. And understands that the clashes

that can occur during any merging of cultures can be significantly reduced.

The desire for growth means that there is a desire for change to take place, and

change must be successfully managed. The DRAGON approach is an adaption of

the “Plan-Do-Check-Act”28 That uses the feedback loops created for continuous

product improvements and adapts them for sustained organic style growth. By

utilizing a "feedback loop," the organization is continuously monitoring the results

of its performance. Provided there is a process that can adapt and act on the

messages from the feedback the organization can continually evolve its methods and

culture.

Decide:

The starting point is the need for the business to decide and then commit to an

approach using GbA. This decision is more than a commitment to an idea. An

enterprise adopting the GbA process is investing in and planning to undertake

accelerated organic style growth. GbA is not as outwardly attractive or as

newsworthy an event like an M&A. Preferably it forms part of the removal of one

of the significant bias that forms part of the psychological effects which contribute

to the M&A failure factors - Focus.

28 (Deming, 1986)


The business instead adopts a process where growth forms part of the ongoing

culture of the company rather than a "once-off" super-event that distracts

management, investors and shareholders.

By making the decision and implementing a GbA process, the business can continue

to operate with management entirely focused on their core activities without the

exposure of the many significant distractions that occur in an M&A. Moreover, the

added time and costs in dealing with large numbers of professional advisors,

reviewing and understanding complicated transaction documents and the pressures

associated with any deal are avoided.

The decision to grow using the DRAGON approach constitutes the Plan element in

the "Plan-Do-Check-Act". And ideally, it is developed into a recurring process that

forms part of the business culture. The "Office-Hub"29 outlined in case study#1

highlights the advantages of internalizing a continuous process. The ability to gain

knowledge of the markets, operations, shortcuts and participants, allows the growth

goals to be adjusted and methods improved. The power of feeding back results from

the decisions planned and acted upon enhances your knowledge.

A good decision is based on knowledge and not in numbers- Plato.

The Plan-Do-Check-Act concept as a continuous process used in Production and manufacturing. (Deming, 1986)

The constant feedback and acting on that feedback develops a learning culture within

the organization. It is recognized that any M&A is more likely to succeed if the

29 Suzanne Ross Copyright@2005


business is experienced in M&As. And it is that prior experience that has allowed

the managers to deal with the integration of the new venture into the business.

Learning to implement a continuous feedback loop, like the Deming method, assists

in teaching management and the organization as the integration evolves.

Research:

Growth plans require a deep understanding of the proposed direction the business is

going to take if the company is seeking a complementary deal, taking out a

competitor or reinventing the business. These growth plans always gaining the

knowledge that entails a deep understanding of the likely markets, costs and players

in that market. Gathering this knowledge is only one part of the GbA strategy. A

framework can be used as a starting point to guide the business on its growth path.

The adoption of the JADE30 the process provides this framework in which to operate

to help formulate an understanding of possible acquisitions and any decision.

The JADE acronym covers the four steps of discovery undertaken by the

management team during this phase:

1. Judgement:

Sensitivity is paramount in deciding to proceed to make a change by rapid

growth. It is more than the economic effects of the decision to grow. There

needs to be consideration given to the qualitative issues such as the culture

within the organisation and the potential dislocation and impact on the

support of staff, suppliers, creditors and investors. Management must

recognize the effects of change and communicated why growth and change

are needed. Management must decide how change fits into the business and

its culture and finally, what is the risk to the company if growth does not take

place.

2. Analysis:

Any research requires a professional and rigorous approach that can be called

a scientific approach or method. A scientific approach is not limited to the

30 Li Fujun copyright@2019


collection of historical facts but extends to forecasts based upon a solid

understanding of the interplay between the business and market. Any

estimates must be tested in ways that remove the impact of Projection Bias.

Results derived from a forecast need to be "stress-tested" and subjected to

comprehensive and critical analysis by those outside any team formed to

undertake the research.

3. Decision:

Management must accept that any decision they make must commit the

business. Creating "Buy-In", that is, the adoption by of the rapid growth

concept by those most likely to affect the business, such as Staff, Major

Investors, Bankers and Major Suppliers. Buy-In helps avoid resistance to

growth plan and provides comfort to those most likely to be affected in that

the direction will not create issues for them.

Fear of the change can contribute to resistance to that change and at times

outright sabotage of the process by those that consider they will be adversely

affected. Management can develop the culture of the business to appreciate

and value growth. This education will ensure that at least six of the seven

major failure factors associated with a typical M&A are avoided or dealt with

positively.

4. Experiences:

Inclusion of the various parties affected by the growth plans in the early

decision phase assists in mitigating the risks of resistance to the changes

being planned. Communication and Knowledge are essential in this phase

and needs to form a crucial part of the rapid growth plans rather than being

dealt with in isolation of those plans.

Approach:

The research stage will lead to a series of potential targets that can be considered by

management. After ranking the targets, the method of approach will need to be

determined. Approaching another Party is an extremely sensitive time in the GbA

system. Flagging intentions in the wrong way or to the wrong parties can cause


competitive damage to an organisation. How best to determine if another party may

consider entering a GbA pathway to some level of co-operation that may lead to

acquisition is that point where the process may break-down.

An approach via a "Warm Contact" or socially is generally the better option. It is a

necessity to attempt to stop any approach from becoming overly formal. The GbA

method works at its best when all the parties are collaborating. This assists in keeping

the cultures of each enterprise intact. And both management teams focused on their

usual daily operations. As such, the initial approaches need to be very limited and

non-threatening. Case Study#1 highlights a technique developed and used

successfully on many occasions.31

Growth by Affiliation:

GbA changes the priority away from the M&A activity being at the front of a

transaction to the last item to take place.

Emphasizing the operations and not on an "up-front" deal is the critical aspect of the

entire GbA approach to rapid growth. GbA purposedly intends to invest an excessive

amount of time in gathering knowledge about culture as well as the market and

processes of the organizations involved. The failure factors repeatedly point to the

speed, failure of intelligence, due diligence and the human factors around culture

and the like as the causes of M&As failing to reach their goals. By putting the M&A

transaction to the “end-of-the-line” many of the failure factors are removed. An

approach that removes those failure factors responsible for an estimated 60 to 90

percent of all M&As failing seems a logical and desirable improvement and a

superior technique.

In an M&A market, spending, about USD$3 Trillion per year GbA can be valued at

saving up to USD$2.7 Trillion. This spending and the knowledge that most M&As

are not successful makes GbA one of the most valuable techniques to be adopted.

31 Suzanne Ross used the non-confrontational approach helping improve the business outcomes for both parties by using

infrastructure collaboratively. No discussion took place until some time later after the Parties were better acquainted with their

respective cultures and modes of operation. The benefits to each Party were then much more comfortable to identify and

quantify.


Following on from any approaches made to potential growth candidates leads onto

a cautious and considered multi-stepped process where the initial introduction is

further developed by aligning the interest of the Parties.

1. Discussions revolve around the advantages each business can offer. The

benefits may include providing support in back-office function thru to

supporting the distribution, purchase and sale of product into another market;

Develop the relationship to incorporate the products or services being “re-

branded”, supported and distributed with the supplier business effectively

undertaking all but the “purchase/sale”. This contentious element is an

integral part of the GbA process and is the creation of a new brand owned and

controlled by the business, notwithstanding the product or service is only

being marketed. The new brand creates a focus and acts as a backstop should

the other party feel they want to enter the market directly and ride on the value

of the supplier’s brand. In owning the brand, the value of the efforts in

developing the market secured for the business.

2. Take the business to the next step by bringing “in-house” more of the activity

with the agreement and support of the other Party; and

3. Provide the other Party with options to Joint Venture (JV) and Partner. This

choice will probably have been identified in the Research phase and refined

during the early steps.

4. Continue to identify efficiencies possible that can lead to an even closer

merging of the respective organizations; and

5. Eventually, highlight the practicalities of a formal merging of interests into a

combined structure supported by the accumulated knowledge gained into both

organizations, the unique, developing culture, the clear lines of succession and

management and the support of employees and others to what has become a

distinct and relatively simple next step.

Onboarding:

Establish the integration team and use the "Quiet Drivers" to bring the teams together

around robust and communicated KPIs successfully. The Quiet Drivers such as the

ability to change, motivation, independence, "care factor", respecting discipline and


rules, a desire for success, dedication. Teams formed from both organizations adopt

Approachability, capacity for collaboration, respect for others and themselves.

Where possible a co-ordination team with dedicated senior managers in charge work

to smooth over and respond to the inevitable collaboration and process clashes that

arise.

The teams' task is to make all the business want to be involved in the success of the

collaboration, acquisition or merger. The teams are carefully constructed to avoid

the appearance of dominating the other Party, that is, avoiding any impression that

some people or products are treated as "junior" or inferior.

Negotiate:

Present a merger or acquisition plan built around the success of the business

relationship to date. And laying out the additional benefits from the M&A.

Emphasize that the business has been operating together and has already developed

a robust combined culture and work ethic. This existing collaboration means that

any M&A is seen as a natural fit and not forced. Nor are the employees forced to

deal with new and uncertain cultures, rules and future.


WIN-WIN

“The more you learn, the more you know. The more you know, the more you can

improve. The more you can improve, the more you can succeed.”

Skye Anderton.

The maximization of profits is the goal of all well-run businesses. Many times, this

concept is interpreted as meaning that to "win" then someone else must "lose". The

basis of this interpretation creates a short-sighted approach to any negotiation. A

more balanced concept is where all those in the negotiation are treated reasonably,

then it is more likely that a long-term arrangement will result.

Creating a mutual benefit is a cornerstone concept in the GbA process. It is the idea

that rapid organic growth can be achieved by parties working to evolve the business

arrangements to a point where they can merge. When a negotiation results in only

one party coming out on top, it is almost always inevitable that the potential for

conflict and negative attitudes arise. These negative results can only increase the

likelihood of a failure in a deal. The GbA process is not immune to this potential

failure factor.

Building Trust using the GbA process by:

i) learning about the business,

ii) its people and operation, and

iii) the market it;

Operates to increase both the understanding and nature of a workable future business

where collaboration can assist in making the merger of the companies work. Equally,

envisaging the deals likely long-term goals and objectives should include the shared

benefits that can arise from the arrangement.

In practical terms, the GbA process works when Trust and shared benefits are the

first items considered. During the research phase of the DRAGON steps, the mutual

benefits need to be identified. An example would include the possibility of

delivering the services of an international group into a significant domestic market.

In this situation, the business in the local market is not trying to be just a reseller or

distributor. The ultimate objective is to grow the business both domestically and

globally rapidly.


Ideally, the business would show the international company the advantages of

dealing with the domestic industry to increase or create a profitable market share.

And by having created their local brand, the Business protects itself if the

arrangements do not work-out. It is always open to both Parties to go their way, and

the ownership of a brand helps to protect the investment made in creating and

growing a market.

In trying to understand the many potential win-win scenarios that may need to be

considered, some basic concepts need to be kept in mind:

• The Parties may not value the benefits of any arrangement on the same terms.

The research phase must identify the key benefits and attempt to reconcile the

mutual benefits the Parties can expect from an agreement.

• When those benefits accrue to each Party may differ of the time it takes to

derive the benefits may have a different value to each Party. Each Party will

view the benefits differently, and the task for the negotiators is to bridge those

differences either tangibly or intangibly.

• Each party will have their reasons for doing a deal. And it is crucial to

understand those reasons quickly. It may be that they want to grow or exit,

expand their relationships or even deal with financial, family or health issues.

In understanding the potential reasons for being approachable to any deal can

lead to managing the relationship better to arrive at the mutual benefits all

Parties are seeking.

It is not always possible to establish a potential candidate for a GbA. Ans it's not

always possible for a business to have the necessary time, finances and skills to

undertake an M&A. But the GbA process provides a higher chance of a positive

outcome because:

• The focus is removed from the deal transaction to the operation of a business

reducing the risk to reputations and business value if a deal does not hit the

goals expected and announced the marketplace;

• The capital at risk is potentially significantly reduced and should the GbA

process result in an acquisition the certainty that the business can operate the

merged companies is dramatically improved. Any bias in forecasting is

reduced if only because the industry is better understood.


• The impact on employees, bankers, creditors and management is reduced as

the focus on the deal completion gives way to more time to complete and a

better knowledge of the underlying business.

• Management can risk a variety of new markets without potentially destroying

the business value. A team can be set up for many GbA approaches that

penetrate different markets, products or services. This approach allows a well-

structured test market of several potential segments without disrupting the

core business.

• Management can gain knowledge of products, services, the market,

employees, the integration into the current business, trends in the market,

pricing and capacity needs without risking the core business.

• Professional advisor costs are kept under control, and the influence and bias

that they can bring to the deal are removed.

• Unintended consequences that can be very significant arise at any time but

tend to have a bigger effect when the numbers and risk are more significant.

• The ability to introduce "feedback loops" to monitor and control the

arrangements are more natural with the GbA approach than one focused on a

"closing date" for a significant transaction. Firstly, the feedback is about the

operation, and secondly, the relevance of that feedback to the arrangement

assists in determining if it is a project that should continue, change or be

terminated.

• Valuations and payment commitments for any future acquisition are made

based upon a real analysis of actual performance. GbA can be likened to a “try

before you buy” approach. But be warned this approach works in the same

way for both parties. Hence the need to fully understand the benefits both

parties are targeting.

The flexibility offered under the GbA process is an approach to de-risk an acquisition

and is as a positive method to rapidly grow the business by selecting the best product

or service to use for rapid growth. It is a method like natural evolution using the best

fit for the company.


CASE STUDIES

Each case study presented here is base on real events that involved the co-authors

and each highlight elements of the GbA approach.

CASE STUDY ONE –

FINANCIAL SERVICES CLIENT AFFILIATION

Summary:

The organization was a multi-disciplinary financial services business staffed mostly

with highly qualified professionals. Organic growth usually required the acquisition

of clients who lived relatively near the offices of those professionals and came via

referrals received from a variety of sources.

Rapid growth had traditionally been by acquiring competing practices of

Independent Financial Planning groups. As a result, there was a price premium on

buying into that sector.

Additionally, “client stickiness’ following an acquisition was at best marginal due

to the loss of the personal relationships that had been built up between the

professionals and their clients following the introduction of the “new” business.

Moreover, the motivation for sale often involved the exit of an owner for retirement

or a change in work desires. Other “roll-ups” by acquisition had been tried and

highlighted the difficulty in maintaining the client base.

The solution to using GbA was to follow the DRAGON model, then called the

"Office-Hub".

Decide:

The owners were considering how to grow the business, within their resources, and

obtain a more extensive client base. The revenue per client was one measure used to


value any acquisition. The cost of acquiring traditional Financial Planner businesses

were well establish at four times gross revenue. But a problem with the acquisition

of Financial Planners was the up-front cost and the difficulty growing the recurring

revenue from new billings to the client. Clients did not always need to discuss their

financial affairs regularly. So, the ability and opportunity to increase revenue by

additional product sales and services was limited.

The real worth of any Financial Planner business was the commission “Trails” paid

annually by insurance companies and other investment products where the client has

a recurring payment to make. Such Trails formed a significant asset in the Financial

Planners business. Any concept that would allow for more clients to be obtained that

could lead to expanded Trails was vital to the growth in the business revenue,

profitability and value.

Accounting firms were available for acquisition at significantly cheaper multiples of

one-time the gross revenue. These Accounting practices often had client bases that

were untapped for the expanded services available from Financial Planners.

Effectively, the Accounting practices constituted an untapped lead referral

“network”.

Research:

The Owners set about searching the market for viable businesses to acquire. The

JADE acronym concept was used and covered the four steps of discovery undertaken

by the management team during this phase:

Judgement:

The search highlighted the competition for Financial Planning businesses. And the

probability that any growth from this direction would be at a premium price. Instead,

attention turned to other Financial Services businesses that had underserviced clients

or where a “one-stop-shop” approach could lead to a higher revenue earned per

client.


Analysis:

The research focused on the cost to “buy” a client. It demonstrated that Accounting

related practices had clients with recurring billings, were of a lower price per client

to buy and are restricted by law from dealing in Financial Planning. The practice

valuation prices were around 1-time gross revenue and were materially cheaper than

the four times being paid for a Financial Planning practice. These Practices also had

underserviced clients with Financial Planning needs that could quickly be developed

as additional revenue sources.

The analysis focused on the methods and processes that could be adopted that would

allow the Accounting clients to be serviced by the Financial Planning practice. There

were legal and regulatory issues to overcome that provided a natural “umbrella” to

restrict any crowding of buyers in the market. The Financial Planning and

Accounting industry had been carefully separated by regulation.

Decision:

It was established that by creating a carefully constructed set of procedures in dealing

with a client and their records, it was possible to gain both access to the client for

the Financial Planning practice as well as increasing internal cost efficiencies in

reducing back-office duplication. Certain record-keeping functions, discussions and

recommendations to the client had to be approached with care by different

professionals, but the process was capable of being correctly and legally

implemented.

The owners decided that this concept could be instituted. It was also decided before

making any approaches the business would need a rational that provided a benefit to

the potential targets. It was decided to create a state of the art “Office-Hub” that

could provide outsourced services as an improvement to their operations and later

as a demonstration of its effectiveness in increasing efficiency and profitability. The

Office-Hub was to be a self-contained profit centre using the latest technology and

operated by well-motivated and experienced staff that would be an attractive and

efficient operator.

The practical effect of the internal Office-Hub adoption was to maximize all aspects

of the existing firm’s operation:

• Administration;

• Marketing;

• IT;


• Performance Reporting;

• Reduction in micromanagement and maximization of self-management;

• Improved training experience by focusing on both technical shortcomings and

areas to improve efficiencies; and

• Advances in client care and management with an efficient CRM system.

The Office-Hub had the advantage of raising the awareness internally of the client

care and servicing needs and upselling techniques. The Office-Hub was designed

from the beginning as a stand-alone operation so that its offerings could be used as

an outsource service for other firms.

Experiences:

The small staff were quickly able to see that access to more clients was a significant

benefit for them. They were also able to understand that confidentiality was

important. Actual targets were not discussed, but the importance of legally correct

treatment of each client was reinforced as the dominant culture.

The Office-Hub also offered a measure of pride and independence to traditional

back-office staff that was not usual in Financial Planner or Accounting firms. The

elevation of status provided an improve culture of professionalism and autonomy.

This approach extended to the hiring criteria, training, culture development

(seminars, gatherings and other group development techniques) and supported a

lateral thinking approach to the continued development and use of the Office-Hub.

It did not take very long for the Office-Hub to become the core element around which

the existing business segments were restructured and allowed other businesses to be

cheaply developed; requiring only a marginal increase in marketing activity.

Office-Hub

Business

POD

Business

POD


The additional businesses add-ons were Business PODS that were complementary

services or offered as “upsell” additional services improving the revenue per client.

PODS were developed as stand-alone profit centers making use of the Office-Hubs

services. And by using the Office-Hub, they accessed the reporting, monitoring and

control systems that were already well established which provided a Feedback loop

allowing for continuous “Deming Style”32 improvements to be made.

Approach:

The approach made to the accounting practices constituted the most sensitive feature

of the deal. The Accounting Practice clients and staff were firmly attached to the

people in the accounting practices with many having been associated with them for

years. Growth by accessing the revenue potential of the client base was the deal

objective and the worse result would be any significant loss of that client base.

All approaches were at the owner level and followed a carefully crafted pattern:

• An offer to assist the business with back-office processes utilizing the

existing independent Office-Hub that was equipped with the latest

cost-efficient technology and systems;

• An additional approach was made suggesting that to make the use of

the Office-Hub worthwhile a “first right of refusal” on any future sale

of the accounting practice could be agreed and documented; and

• A further proposal that during any leave for holidays or health that the

Office-Hub (locum style) could act as a resource to provide the

necessary continuity of the accounting practice business.


The use of the Office-Hub as an outsourced back-office and possible support for the

accounting practices whenever staff shortages arose provided an ideal platform for

the GbA approach. The build-up in trust by providing this support allowed the

32 Deming, W. E. (1986)


targeted accounting practices to place ever-increasing reliance on the Office-Hub to

support their practice and growth.

The Office-Hub provided a convenient method to align work processes and staff

culture since it was mainly an extension of the targeted accounting practice. The

introduction of the client to the Office-Hub also allowed those clients to be better

understood and their potential needs for Financial Planner services and other

products to be recognized.

Onboarding:

The onboarding process of the business started as each targeted accounting practice

agree to participate in what the Office-Hub could provide. The culture had been

established, via the Office-Hub, that all internal staff, as well as the external users,

were to be serviced as Office-Hub clients. This established culture allowed the back-

office management process to be integrated smoothly and with little disruption.

The culture of onboarding was extended to teams from within the business around

the need to smooth the integration for everyone involved. Such an approach

involved:

• Client handling procedures;

• Staff integration and being made to feel special using seminars, festive and

high-quality functions;

• Development of marketing programs and standard pricing algorithms and

targets that also matched KPIs;

• Implementation of Monitoring and Control systems and feedback loops;

• Behavior and Performance training around client-centric approaches and

empowerment of staff from clear KPIs;

• First-class and continuous development and training programs and

encouragement to use lateral thinking and disruptive innovation;

• Retention of the offices of the targeted company until clients were able to be

“relocated” that is, change affecting the client was also managed;

• Office layout and appearance;


• Senior management goal setting;

• Staff opportunities, including different areas in the business, so they could

personally grow as well as the potential for direct ownership of a franchise-

style office that continued to make efficient use of the Office-Hub;

• The potential in the growth of the combined business to develop a fully

outsourced model that could expand globally; and

• Expansion of the product offerings to clients to include legal, travel, business

services such as consulting, and sale and financing broking were planned as

future developments. These additional services had the objective of providing

a “one-stop” Financial Services company that clients could grow with.

The onboarding was identical and did not differentiate for internal and external staff.

All staff were treated similarly, and the onboarding allowed the business culture to

be adopted in the expanded organisation. This process eased and encouraged the

adoption of the Office-Hub approach and further encouraged its utilization BEFORE

a final deal was concluded.

Negotiate:

Targeted Accounting Practices and others were able to see the seamless approach in

operation. Price discussions were, as a result, generally about the market value rather

than non-priced aspects such as staff continuity. When the business was able to make

use of a stock exchange listing, it was able to accelerate the rate of the acquisitions

further. The Office-Hub also allowed external businesses time to consider the merits

of any acquisition. The mutual benefits were clear, and the aftermath of the

acquisition was known before a deal concluded.

Multiple deals were undertaken, and each succeeded in using this approach. Several

Owners of the businesses acquired choose to stay on recognizing the benefit of

operating in the enlarged groups. And the expansion of products being offered to the

client base grew to include other business services, including real estate, travel, HR

and related agency services.


CASE STUDY TWO –

COMPLEMENTARY PRODUCT

Summary:

The business was involved in providing a laundry and linen service to Hospitals,

Nursing Care Homes and Hotels. To be able to undertake the activity cost-effectively

the Business needed to import the commercial laundry equipment, install that

equipment and offered a financing method for the Clients. Expansion of the Business

came organically by increasing equipment capacities and including additional

complementary products for sale such as different versions of linen. The business

considered overseas expansion to accelerate growth but found equipment

distribution rights were limited in other markets. Providing capital equipment to a

limited domestic market restricted growth potential.

The business decided to engage in an approach that would lead to a merger with a

supplier of the essential consumables used with the equipment, that is, the various

cleaning agents.

Decide:

The Business looked closely at viable approaches that could deliver long-term stable

growth into a limited domestic market that required expensive capital equipment.

Early on it was decided that a regular consumable was the most likely area to focus

on for growth.

Research:

Using the JADE approach, the Research is broken down as follows:

Judgement-

The market was well known and the various chemical consumables, their suppliers,

costs and usage understood in detail. These consumables consisted of an extensive

range of industrial cleaners, softeners and soaps of different use.

The research sought to understand the plans of the leading suppliers and what

approaches they were taking to improve their market position and share. In

particular, the likelihood of the suppliers remaining in the market as they were all


foreign-controlled chemical companies. The research found a company wanting to

secure its market share and was also researching ways to do that.

Analysis-

Extensive enquiries made it clear that the only rational approach that would provide

growth was to align the Business with the Supplier more closely. A "reverse

acquisition" could be orchestrated if the equipment the business was installing was

able to ensure that only the suppliers' chemicals were used. Forecasts calculated that

the financing options available would permit the approach being considered and that

the market share growth would provide significant financial gains to all parties.

Additionally, forecasting highlighted that the chemical supplier would achieve many

of their objectives due to a “locked-in” supply arrangement with the end-user.

Decision-

To be placed in a position that would appeal to the suppliers required an alteration

to the financing methods offered to customers wanting an installed commercial

laundry solution. Adjusting the client financing to a rental agreement allowed the

customer to be contractually obligated to use many of the services specified,

including the chemicals from the designated supplier. Management viewed that this

financing concept was achievable.

Experiences-

Staff were already dealing with the Suppliers staff; however, all staff were carefully

informed of the importance of a close working arrangement with the preferred

supplier. No discussion on ownership change was discussed at that time.

Approach:

The supplier was well known to the company due to the consumables supplied, and

it was straight-forward to arrange regular discussions about the market. Great care

was taken to identify the strategy being adopted, requiring customers to use the

selected chemicals and to build in appropriate warranties and commissions.


Within a short time, customer service representatives from both companies were able

to deal with client issues regarding equipment programing and chemical selection.

Training days were arranging, and management attended monthly informal meetings

to plan market growth and deal with any problems. Each company maintained its


own identity and warranty responsibilities, but each developed a strong ethic of

client problem solving and new sales lead generation.

All staff saw it in their best interest to support the close working relationship that

was developing. The complementary nature of the product and the requirement for

the equipment and chemicals to work correctly was well understood and accepted as

vital. It was not long after that suggestions could arise that it would not be in either

parties’ interest to permit the relationship to be torn apart. Several competing

chemical suppliers had expressed an interest in becoming part of the equipment

suppliers’ operations. And these advances were duly passed along to the preferred

supplier. Within 18 months, an approach was made to discuss an equity interest that

could lead to a total acquisition.

Onboarding:

A team from each group was established to look at various aspects of acquisition

and due diligence. Operational staff were already fully conversant with the systems

and people in each business. Accounting staff were the last to be indoctrinated into

the needs of each party. The Supplier was a Fortune 500 company from the USA

and had stringent reporting rules. The much smaller equipment company was an

SME, and while it had proper systems, the reporting needs of the USA company

were vastly more complicated.

The Deal team and the Accountants knew each other for years, allowing the

relationship to become a collaborative effort and not one built around fear or

resistance.

Negotiation:

Pricing and valuations dominated since it was believed that the working relationship

was already well understood. The limited due diligence needs making the process

very quick, and a deal was executed within three months of first being raised. As all

the staff were engaged in operations together, already little else was needed.

The completed deal resulted in a 100 per cent acquisition of the company by the

supplier. It was not an exit for the shareholders and management but an opportunity

to continue to grow a unique business within the structure of a Fortune 500 company.


CASE STUDY THREE –

COMPETITORS; TAKE-OUT

Summary:

This organization marketed the rental of space for advertisements on Billboards. Its

operation was limited to the sale of the space available, where others owned that

Billboard space. The business expanded but was confronted by the competing

interests of the existing space owners. Over time the company managed to gain

exclusive rights to sell the space on a profit share basis with the Billboard space

owners by forming them into a loosely structured "Club". The business also

developed its own space using mobile billboards on the back of trucks and trailers

and digital screens located in Shopping Malls.

However, the major advertising markets continued to be in the street-fronting

Billboards. The business considered that they could acquire the billboards as a

complementary growth strategy and to expand into innovations by investing heavily

into the newly emerging digital display solutions. The success of this approach was

heavily reliant on the repeated acquisition of rental space from Club members.

Decide:

The marketing approach adopted by the company was a very fragile arrangement.

The goodwill of the existing Billboard owners in providing access to space was

paramount to the success of the business. The goodwill from these owners of space

came at a significant cost, usually the largest share of the space rentals earned as

revenue. In many cases, it exceeded 70 per cent.

Management understood that the manhours, profit-share and energy needed to retain

the space provided by the owners was limiting the Company’s ability to grow. The

capital required to own space outright or the lease cost of space was an important

limiting factor also to be considered. Significant capital would be required to replace

and duplicate the amount of space being sold by the Company for advertisements at

that time. Attempting to acquire any new space would come at a considerable cost


in a competitive and scare market for available “owned” or leased space. The

availability of rental space was strictly limited to Government designated and

approved locations. Any new space was not only controlled it was impossible to

obtain in some areas.

Management took the decision to change the business model to the more traditional

concept of space ownership rather than being solely a marketer of someone else’s

space. The decision was only the first step as to how to apply that decision was

unknown.

Research:

Using the JADE approach, the Research is broken down as follows:

Judgement:

The growth plans needed to be understood. More rental space would allow more

revenue to be earned. But there was a trade-off. The property ownership of the

underlying rental space may have a ground lease attached. Some sites had

Government rules related to the surrounding parkland maintenance. Other sites were

electronic systems with different maintenance requirements and power costs.

Analysis:

Management analyzed the market and the spaces available, their costs and the

likelihood of purchase of any space, their valuations, lease costs and likely lease

increases as well as the attaching site obligations. They produced several algorithms

that reduced the buying decision for any space to an easy to use test of the value of

a site against its profitability.

Management also had to calculate the capital and funding requirements and consider

the best methods to deliver on any acquisitions. Funding restrictions was deemed the

main limitation going forward.

Decision:

It was decided to commence a phased acquisition strategy. Rather than attempt to

acquire a competitor the decision was made to focus solely on Club member space.


That is those people already working with the Company, who were well known and

whose space was already being sold by the Company.

It was felt that such an approach would reduce any competitor reaction and restrict

any upward pressure on space valuations.

Experiences:

Staff were informed of the process during the early stages of the research as the staff

had the necessary knowledge to identify the space that was most undervalued and

profitable as the first targets. And it was understood that the negotiations and growth

plans were crucial to the future for all the staff.

Approach:

The targets to approach were well known. But those to be approached first were

quickly identified using the financial modelling and algorithms developed. The Clun

members were regularly in contact with Management and a series of low-key

approaches were arranged to “sound-out” any interest. Each approach was different

depending on the relationship and attitudes of the Owner.


The Company was undertaking an unusual GbA as the operational aspects were

already inhouse. Where the relationship needed work was those locations where the

space was on property owned by another third party and leased to the Clun member,

usually on very long-term ground leases. The relationships in those cases needed

careful handling as the value of the space was dependent upon it continuing under

that lease.

Onboarding:

Many leases were expiring over the next five years. This expiry date gave time for

the gradual establishment of new relationships. And that approached formed part of

the on-boarding. The process involved a team being formed to fully understand the

integration of that space into the inventory of the business. And to quickly ensure


that the site owners providing the ground leases would be comfortable with the

relationship change. The team developed a comprehensive database of each location

and any requirements such as the lease term but also any maintenance or other

conditions such as garden care for sites in parklands. In doing so, they became aware

of any issues affecting the site before any deal closing.

Negotiate:

The final step was the acquisition of the spaces from the Club members. By now,

the arrangement and integration had reached a point that this was a simple step with

a transparent valuation model agreed by the parties. This valuation certainty also

made the financing of the spaces either via, equity, vendor finance or bank finance

a clear process. Within a short timeframe, the process of acquiring space had reached

a critical mass, and the company was able to list on several exchanges and continue

to grow using equity and debt ass a public company.


BIBLIOGRAPHY

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Companies. COLLABORATE 13 eprentise LLC.

Collins, J. (2009). How the Mighty Fall: And why some companies never Give in (Good to

Great). Harper Collins.

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"Projection Bias in Predicting Future Utility", 1209-1248.

Mcnaughton, J. (2019). Regional Resilience, Using Disruptive Innovation. Gold Coast: Lakeland

House Publishing LLP.

Mitchell LM, P. H. (2001). Making mergers and acquisitions work: strategic and psychological

preparation and executive commentary. Acad Manage Exec 15(2), 80-94.

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ABOUT THE AUTHORS

LI FUJUN (Roger)

Roger is a CFA Charter Holder and graduated from Tsinghua University and China

UIBE with a bachelor’s degree in Engineering and a master’s degree in Economics.

He has 25 years of experience in financial management, M&A and investment

activities in the Hong Kong and PRC-China capital markets.

He is the Managing Director of the business and M&A consulting firm Noble Bridge

Capital Limited, an Independent Director of Beijing Enterprises Clean Energy

Group Ltd. (HK listed with code No.1250) and the Permanent Executive Vice

President of Shenzhen M&A Association of Listed Companies.

He has worked as a Director with a listed property insurance company with fellow

Directors such as Jack Ma of Alibaba, Pony Ma of Tencent. And Ma Mingzhe of

Ping An Insurance as a significant shareholder.

Roger has also worked as Executive Director with Town Gas China Holdings Ltd

(HK listed with code No.1083) and help contribute to the market value increase of

USD$ 1.3 billion a jump of some 42 times within six years. He led an M&A team

that acquired 22 projects in China with a total value of USD$500 million and also

contributed in planning to an MBO project which resulted in 15 times return within

three years. He has also worked as a Chief Financial Officer to another HK listed

company.

SUZANNE ROSS

Suzanne is a business process expert. She has started and grown, by acquisition, a

very successful multi-disciplinary national professional Financial Services business

that was rated one of the fastest-growing startups in the country.

She has an Executive MBA from the prestigious RMIT together with legal training

in her early career with some of the largest global insurance companies. She

continues to foster the development of numerous startups that are revolutionizing

the functioning and delivery of Financial Advice. Suzanne also provides a unique

one-on-one training program that helps CEO’s be better prepared to represent their


business. She also consults globally to other companies and shows them how to grow

and develop their business successfully. She is presently advising companies with

activities in a range of sectors in Australia, Canada, England, Ghana, New Zealand,

Mexico, Tanzania, Turkey and the USA.

She maintains an extensive global network that helps develop the culture and

concepts her clients need to provide for a sustainable business with future resilience

and growth opportunities. She is prized for her “outside-the-box” thinking and

solutions as well as her development of the “Quiet Drivers.”

JACK McNAUGHTON

Jack is a qualified accountant and has a master’s degree in Change, Management

and Leadership from York St. John University in England. He currently provides

consulting services to various groups involved with Startups and Companies looking

to grow internationally. His expertise in global structure, business and project

establishment is called upon in numerous locations around the world. He consults in

diverse areas such as banking, financial services, funds management, affordable

housing mining, food trading and supply, cryptocurrencies, software solutions,

fundraising, advertising and branding and stock exchange listings in different

countries.

He has been responsible for over 20 stock exchange listings with a total market value

over $USD1.5 billion and direct fundraising. He has taught MBA classes in

Entrepreneurship and Funding New Ventures as an Assistant Professor. He has

written extensively on disruptive innovation and how it needs to be encouraged and

supported. He has published Monetizing Ideas from Startup to Success and Regional

Resilience, Using Disruptive Innovation.

Jack has travelled the globe and works from offices located in Australia, South

Korea, Switzerland and Spain.

You can contact him at [email protected]

COPYRIGHT @ 2019, JACK McNAUGHTON

ALL RIGHTS RESERVED

growth by affiliation; reinventing acquisitions …

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