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The Future of business. Future of business, future of business.

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It's more global and more decentralised, making sure that enterprises are a lot more responsible.

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Smart cities, more collaboration. Consumer driven productivity.

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Environmental and social responsibility. Global human centred.

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Purposeful Individualised Automation. Big Data.

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Climate Change. Space Exploration. Renewable Energy.

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Information Security. Exciting and digital. Hello and welcome to the Future of Business podcast.

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As always, I'm your host, Alison McArthur. Today on the podcast we have a very special guest who has been pivotal in

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developing the podcast and is a love professor here at the Said Business School.

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Tim Galpin is a senior lecturer of strategy, innovation and M&A and academic director of the MBA program here at the Business School.

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Additionally, he's a consultant to many boards and author of four management books,

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two of which were best sellers and have been published in five languages.

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So welcome, Professor. Podcast. Thank you very much for coming on.

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Thanks for having me. So I just wonder if you could just start off with a very high level view of how you got

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into the industry and how M&A has changed over the four years that you've been involved.

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Yeah, so I started out actually in industry.

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I was working at an aerospace company and then I moved to over in California and then I moved to London,

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started in the consulting world, mainly doing operations strategy and customer service type consulting in the retail industry.

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And from there, back then, re-engineering was the big mantra in the consulting world.

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So we were doing that in the retail world.

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I moved into more general strategy consulting and re-engineering was really about major downsizing.

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And as that was occurring, I saw that companies were cutting out a lot of the fat and they were cutting into their muscle in some cases.

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And I realised that they couldn't cut their way to greatness,

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so I thought they were going to need to grow and a shortcut to growth as mergers and acquisitions.

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So I guess I got lucky or there was some foresight where I saw the next merger wave coming.

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This was the mid nineties and in 95 that occurred and I kind of hit that first merger

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wave and I started a little consulting practice around mergers and acquisitions,

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but mainly on the integration side because the bankers had the transaction side locked up.

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The attorneys obviously were doing the legal and regulatory work,

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but nobody was really doing the merger integration, bridging the transaction with the implementation.

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So I saw a gap in the market and that's how I got into it. So as you mentioned, M&A activity comes in waves over the years.

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What obviously which are contributed to by various macroeconomic factors, which factors are particularly relevant today?

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Well, we're seeing a lot of the same factors that affect previous waves with cheap debt,

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because companies will use cheap debt from their acquisitions, high stock prices, because they'll use that as a currency as well.

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When a company's stock is up, becomes a good currency for mergers and acquisitions.

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And this one's a little bit different from the perspective of there's a lot of disruption across various industries.

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So as tech has started to disrupt in many different industries, that's also driving the current M&A wave.

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Mm hmm. So, yeah, could you discuss maybe a couple of particular trends that you've observed in recent years?

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I know you mentioned tech, but yeah, any particular industries or types of M&A or jurisdictions in particular that are?

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Yeah, of course. So it's really interesting in the tech world because everybody thinks that they're very innovative companies and yeah,

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they do some good internal innovation, but a lot of it is acquired, so they'll do innovation through acquisition.

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They'll also do what's called aqua hiring. So is they need staff in particular skill sets.

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They'll go out and rather than try to hire 100 engineers individually, one at a time, they'll go out and buy a company that has 100 engineers.

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So they instantly have a group of technicians that they need.

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So that's in the tech world.

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The other interesting component is that a lot of people think that it's all about high tech these days and it obviously is a big industry.

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But the data shows that last year in 2018, the biggest industry for mergers and acquisitions was are chemicals and mining.

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So kind of the real nuts and bolts industries because of consolidation in the industry.

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But also there's a relationship with technology because the minerals that go into making batteries,

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for example, for different tech devices are in the electric cars are all have to come out of the ground.

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So mining used to be a traditional acquisition for iron ore to make steel for construction.

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Now they're buying mines that mine rare earth minerals to go into technology.

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So those kinds of trends are really spreading around all kinds of different industries.

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So acquisitions isn't just a technology phenomenon right now for innovation or acquiring, but across all kinds of industries.

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So, you know, as you're mentioning, like, you know, a lot of the the drive is behind acquisitions.

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You know, acquiring so human capital and IP and that sort of thing.

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And I guess we've witnessed this a lot. I know it's not just the tech industry, but, you know,

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companies like Google or Facebook that are applying kind of new start ups or even in the the banking industry,

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there's a lot of incubators who are sort of, you know, mentoring start-ups and I guess with the aim of,

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I guess kind of absorbing them into, into the organisation if they prove to be successful.

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Do you think that's a good strategy for these companies and how does that impact on competition in these industries?

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Yeah, that's a great question because it's a good strategy if they can implement.

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Well, what I mean by that isn't just to do a bit of the venture capital approach where they're investing in

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some start-ups that look promising and then the ones that end up being very promising they will acquire.

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That's just doing a transaction and that's okay.

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But that's not the end game.

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The end game is to make the transactions work, and that's something that I've been working on for a lot of years with companies.

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Again, to try to bridge that transaction with the implementation is really where mergers and acquisitions

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pay off because it's one thing to buy a company for the innovative technology they have,

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the individuals, the people that they might have, the assets that they bring with them.

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But it's another thing to make those work and to implement because you if you're hiring in capital intensive industries like tech consulting,

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legal, these are all areas accounting that have gone through waves of acquisitions or going through waves of acquisitions.

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The knowledge can walk out the door in the form of people that can just take it with them.

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So there's a lot around motivating the workforces, retaining the key talent that you're buying.

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And a lot of companies overlook that because the deal world is made up of financial

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types that really are see the mergers and acquisitions as a transaction.

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Mm hmm. And that's only half of the equation. The other half is the implementation.

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Mm hmm. Because, yeah, as you mentioned, you say you've you've written actually a lot about the importance of integration,

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integration, management and having, you know, like a comprehensive end to end deal flow model.

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At what stage in the process a company's filtering, like what steps of that model?

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Yeah. So in my model there's been three the three basic phases, the pre deal, the deal and then the post deal.

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And so there's different steps within those phases.

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Ten steps in my model and companies can make mistakes across every stage and everything from formulating their M&A strategy.

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They may be accelerating a strategy that's just a poorly chosen strategy.

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If they want to get into certain markets, they may be choosing the wrong markets just because they're doing acquisitions in those markets.

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They may be doing those fairly successfully, but it may be the wrong market.

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So their strategy is wrong. And then when you move into doing due diligence around the target companies you're looking at buying,

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they make a lot of mistakes by only doing very superficial due diligence or only looking at the financial or

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operational aspects and ignoring the cultural and human capital aspects that can come back to bite them later on.

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And then, as they do, the valuation of the companies are looking to acquire, they can end up getting deal fever,

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as it's called, and paying too much for those companies closing the transaction.

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A lot of negotiation goes on. What goes in your sales and purchase agreement?

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And they may stumble through that and really overlook some key elements in the actual deal closing phase.

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And then after integration, they make a lot of mistakes in implementation or after the transaction.

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During implementation, they make a lot of the integration mistakes that companies are prone to make.

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Ignoring culture, they don't integrate quickly enough.

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I always talk about prudent speed with my clients. I talk about that heavily in my book.

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It's not about reckless speed and slamming two companies together.

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It's about prudent speed, doing enough analysis to see where you want to integrate, how much you want to integrate.

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But then doing that in a very prudent way and but rapid as possible,

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because it's like pulling off a Band-Aid is going to be slow and painful or fast and painful.

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So and then finally, they will look at the evaluation of how they've done.

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So that's the final stage of my model, and they will just move on to the next deal without really assessing what did we do well?

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What could we do better in the future? And did we achieve the financial strategic goals for that deal the best?

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And he's really take time to look at that. They measure it along the way and they do a post deal assessment to say, you know,

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yeah, we did or we did not achieve and what can we learn for future transactions?

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And does this type of measurement,

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is this sort of a consistent across the industry or is this specific to each company have their own sets of measurement?

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It should be specific to each deal because each deal is done differently.

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There's often done for various either strategic or financial operational reasons.

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So every deal is different throughout the process.

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So the measurement needs to be different and there isn't really there's kind of standard categories of measurement around operational measurements,

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financial measurements, the people measurements, culture, but there's not necessarily a specific measure that fits all deals.

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So it has to be deal specific. Mm hmm. And could we talk a bit about deal fever?

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So a lot of acquirers typically overpay for companies.

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Does this come down to a an over some overestimation of their ability to integrate the two companies?

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Or is it more around the way that it's valued, the potential synergies and something you correct?

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Yeah, it's all of the above really when they're looking at what they the value they can get out of a company from an acquisition perspective,

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they're assessing the cost synergies where they have overlaps, whether it's in back office,

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headquarters, those sorts of overlaps or operational overlaps.

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They may have adjoining sites. They may, if they're a retail company or a bank, for example, that has outlets on the high street.

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They may have outlets across the street from each other, so they can rationalise those,

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but there's often an overestimation of how much they can do that.

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So and they also look at if they're in a bidding process, if the seller is going through an auction and you're one of the potential bidders,

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you're always trying to figure out what do you need to bid to win that acquisition if you're betting to win?

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And that drives the acquisition premiums up, the typical premium these days is about 38%.

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So you're going to have to find that value when you implement back to the implementation again.

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So companies are paying a lot more when there's more bidders in the process,

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and especially now when we're in the peak of another M&A wave, valuations are really sky high.

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So there's no cheap acquisitions out there. That happens usually in the beginning of waves, but that hasn't been the case for about ten years now.

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So if you're going to pay that much, you have to really work hard at getting that value back out of the deal.

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So that is a sort of like a psychological element here where, you know, there might be like a fear of missing out or,

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you know, another company acquiring it and, you know, what could have happened.

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Yeah, definitely. Yeah. It's the fear of missing out.

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It's the animal spirits, as they call it. You don't want to lose.

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Mergers and acquisitions gets to be a very competitive kind of game where you don't want

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your competitor to get the asset that you're looking at or the company you're looking at.

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So you both go after it much too aggressively.

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So there's a lot of the kind of human nature elements that start kicking in and you start paying too much.

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Mm hmm. And would you say it's the case that there is a an overemphasis on about, you know,

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shareholder value relative to considering the concerns of other stakeholders when it comes to.

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Yeah, it's not it's not necessarily shareholder value, but the incentives in the merger and acquisition world are aligned to make deals happen.

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So if you look at the way investment bankers are rewarded,

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they get rewarded for when the deal closes or completes, as it's called here in the U.K. and funded.

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Then they get their payout.

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So there's an incentive to have their clients actually do a transaction, not that they're pushing through bad transactions,

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but there is an incentive to make sure the transaction completes on the buy side.

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For the corporate acquirers,

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there's an incentive there to get a transaction done because a CEO is incented and senior executives are often incented through our growth.

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And again, back to that short termism.

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Yeah, the short, short term and short cut to growth is mergers and acquisitions.

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So the incentives, both on the corporate side, on the advising side,

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are often to make the deal happen and that can push people into paying too much as well.

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Mm hmm. And I guess on the you know, as you mentioned, like, the CEOs are kind of maybe incentivised,

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you know, for sort of self-interested reasons, possibly because their compensation.

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Is, I guess, linked to an appreciation and they may be want to have you know because typically that ten years was like around five years or something.

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They want some sort of legacy perhaps. And then on the other side, there are, you know, the the management board of Inquiries, I guess,

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are incentivised not to go through with acquisitions, perhaps because because they tend to get replaced after acquisition.

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So how does the how does that work? Well, it depends.

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So it depends on the incentives, both on the buy side, the acquirer.

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And that's often driven by, you know, the short termism, as we were just speaking about.

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But on the sell side, as you mentioned,

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sometimes those incentives are encouraging a sale because whether you're a founder or you have some ownership of the company through equity,

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there's an incentive there because it's a wealth creation event.

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So there's an incentive to sell if you are management of an ongoing company that isn't necessarily going to do a wealth creation event for you,

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then you may be a disincentive to do a deal because you might lose your job.

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So it really depends on where the incentives are, both on the buy side,

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on the south side, what the type, what type of behaviour are they in something.

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And it's something that again comes back to deal specific dynamics.

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But incentives matter. They definitely matter. Mm hmm.

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And then so obviously, nowadays, corporations are bigger than they've ever been, more multinational.

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So it's particularly important to have good competition legislation in place and for regulators to be very diligent.

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Britain has one of the most open markets for acquisitions. And why correct in saying that?

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Well, it has traditionally been that way, although they have it depends on the regime that's in charge of the Competition and

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Markets Authority is the entity that reviews different transactions here in the States.

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It's the FCC, the FTC. There's there's several different entities.

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And with the move towards more national security concerns, we're seeing this in the States,

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we're seeing this in the UK, in the EU, they're looking at more deals with more scrutiny.

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So a lot of the protectionism that's happening around the world is slowing deals down.

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So, for example, 2018 was a record year for deals.

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First quarter of 2019 is slowed right down because of the protectionism that's going on.

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Brexit here is creating a lot of uncertainty. Markets don't like uncertainty, including the M&A market.

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A lot of people are seeing the UK as being UN investable right now.

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So private equity deals are actually higher on the continent currently than they are in the UK where it's usually been the other way around.

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So the kind of macroeconomic dynamics that are going on around the world right now are really putting some of the

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brakes on deal flow this year and it may be the end of the merger wave that we've seen for the last ten years.

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And and do you think the legislators and regulators are acting, responding appropriately to these macroeconomic factors?

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They think they are. And if you talk to companies and dealmakers, they would say no.

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So it all depends on your view of the world, the national security concerns.

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If they put that into the regulatory design, that will open up a lot more deals at a much smaller level to more regulatory scrutiny.

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So it will slow deals down. It will make a lot of deals not happen.

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So we'll see what occurs in that area because right now it's not officially part of the review regime in protocol,

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but if it does get to be part of it, then it will slow things down significantly.

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And given the number of mega-corporations in existence and maybe I think a lot of

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organisations are struggling to adapt in terms of agility to sort of changes in the industry.

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Do you think we'll start seeing more mergers or corporate break ups over the next few years?

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Yeah, yeah, absolutely.

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And it's a good phrase, demerging, because that's really what they're being told to do and sometimes compelled to do through legislation.

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And we're seeing they both in the EU,

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the UK and the US where they're looking at big tech these days and whether they need to be broken up legislatively.

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So they're becoming the new standard oil of the 21st century when they're controlling

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in some people's views too much of our lives and they want to break them up.

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So we will see the mergers.

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And as people start divesting different assets and different aspects of their business, that will also create acquisitions on the other side,

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because as those divestitures occur, they may become a standalone entity or they may get acquired by somebody else.

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So mergers and acquisitions are all about creative destruction in markets.

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So as one industry gets broken up, another industry will start acquiring those assets.

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So it deals don't really go away.

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They just take a different form. Mm hmm. Yeah. Interesting.

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So, obviously, a career in M&A is like a big thing for, I guess, MBAs or graduates anyway.

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Do you have any why do you think that is? M&A is always been very interesting for MBAs.

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It's it's something that is seen as kind of the apex of the pecking order.

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For whatever reason in the financial world, the dealmakers make all the high profile news for big acquisitions.

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And so there's some sort of attractive element there from this hierarchical view of the world.

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And it's also never a dull moment.

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From my perspective,

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it's always been about interesting and stimulating work because I get bored very easily in the merger and acquisition world is not boring at all.

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Every deal is different. Every deal has dynamics that keep you very interested.

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It's a lot of hard work. It's 24 seven, both on the transaction side and the implementation and the integration side.

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And if you want a career that's going to keep you not just working hard,

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but also intellectually stimulated and rewarded, well, there's a reward to it both financially and psychologically.

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Mergers and acquisitions are a good way to go, but you'd better be ready to do a lot of work.

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Yes. So? So I pledge. So what sort of what research are you doing at the moment?

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So I have what's called the Oxford M&A Insights Project going and I'm doing just a very quick

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short ten question survey around mergers and acquisitions and what are the best practices,

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the worst practices across the deal spectrum.

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So everything from formulating an M&A strategy, valuing companies, doing due diligence, doing a transaction and doing your implementation.

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And I'm looking across industries and at various levels of the organisation.

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So everyone from kind of mid management all the way through senior executives.

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And that's going into my new book on M&A.

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My previous book was called The Complete Guide to Mergers and Acquisitions.

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Bit of a misnomer because I didn't have a lot of the transaction elements in it.

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I had a lot of the strategy and then the implementation components,

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although it's been a good seller, very good seller over the last almost 20 years now.

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My next book is going to be called Winning at the Acquisition Game,

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taking a little bit from Michael Porter's original articles on mergers and acquisitions,

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and the subtitle is Pitfalls and Best Practices Across the M&A process.

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So I'm really trying to look at the entire process from A to Z and look at what companies do well,

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what they can improve at every stage of the process. That sounds really interesting and it'd be pretty helpful for an MBA students.

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Hopefully it'll be helpful sometimes. Some people might think it's a sure cure for insomnia, but I think there's a need for.

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That's not the case. When? When is it due out? I try to come out next year in 2020.

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Thank you for listening to this week's podcast.

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If you have any questions, comments or suggestions, you can reach that S-based podcast at OC's Dot AC UK.

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Until next time, goodbye.