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Information Security. Exciting and digital. Hello and welcome to the Future of Business podcast.
As always, I'm your host, Alison McArthur. Today on the podcast we have a very special guest who has been pivotal in
developing the podcast and is a love professor here at the Said Business School.
Tim Galpin is a senior lecturer of strategy, innovation and M&A and academic director of the MBA program here at the Business School.
Additionally, he's a consultant to many boards and author of four management books,
two of which were best sellers and have been published in five languages.
So welcome, Professor. Podcast. Thank you very much for coming on.
Thanks for having me. So I just wonder if you could just start off with a very high level view of how you got
into the industry and how M&A has changed over the four years that you've been involved.
Yeah, so I started out actually in industry.
I was working at an aerospace company and then I moved to over in California and then I moved to London,
started in the consulting world, mainly doing operations strategy and customer service type consulting in the retail industry.
And from there, back then, re-engineering was the big mantra in the consulting world.
So we were doing that in the retail world.
I moved into more general strategy consulting and re-engineering was really about major downsizing.
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.
And I realised that they couldn't cut their way to greatness,
so I thought they were going to need to grow and a shortcut to growth as mergers and acquisitions.
So I guess I got lucky or there was some foresight where I saw the next merger wave coming.
This was the mid nineties and in 95 that occurred and I kind of hit that first merger
wave and I started a little consulting practice around mergers and acquisitions,
but mainly on the integration side because the bankers had the transaction side locked up.
The attorneys obviously were doing the legal and regulatory work,
but nobody was really doing the merger integration, bridging the transaction with the implementation.
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.
What obviously which are contributed to by various macroeconomic factors, which factors are particularly relevant today?
Well, we're seeing a lot of the same factors that affect previous waves with cheap debt,
because companies will use cheap debt from their acquisitions, high stock prices, because they'll use that as a currency as well.
When a company's stock is up, becomes a good currency for mergers and acquisitions.
And this one's a little bit different from the perspective of there's a lot of disruption across various industries.
So as tech has started to disrupt in many different industries, that's also driving the current M&A wave.
Mm hmm. So, yeah, could you discuss maybe a couple of particular trends that you've observed in recent years?
I know you mentioned tech, but yeah, any particular industries or types of M&A or jurisdictions in particular that are?
Yeah, of course. So it's really interesting in the tech world because everybody thinks that they're very innovative companies and yeah,
they do some good internal innovation, but a lot of it is acquired, so they'll do innovation through acquisition.
They'll also do what's called aqua hiring. So is they need staff in particular skill sets.
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.
So they instantly have a group of technicians that they need.
So that's in the tech world.
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.
But the data shows that last year in 2018, the biggest industry for mergers and acquisitions was are chemicals and mining.
So kind of the real nuts and bolts industries because of consolidation in the industry.
But also there's a relationship with technology because the minerals that go into making batteries,
for example, for different tech devices are in the electric cars are all have to come out of the ground.
So mining used to be a traditional acquisition for iron ore to make steel for construction.
Now they're buying mines that mine rare earth minerals to go into technology.
So those kinds of trends are really spreading around all kinds of different industries.
So acquisitions isn't just a technology phenomenon right now for innovation or acquiring, but across all kinds of industries.
So, you know, as you're mentioning, like, you know, a lot of the the drive is behind acquisitions.
You know, acquiring so human capital and IP and that sort of thing.
And I guess we've witnessed this a lot. I know it's not just the tech industry, but, you know,
companies like Google or Facebook that are applying kind of new start ups or even in the the banking industry,
there's a lot of incubators who are sort of, you know, mentoring start-ups and I guess with the aim of,
I guess kind of absorbing them into, into the organisation if they prove to be successful.
Do you think that's a good strategy for these companies and how does that impact on competition in these industries?
Yeah, that's a great question because it's a good strategy if they can implement.
Well, what I mean by that isn't just to do a bit of the venture capital approach where they're investing in
some start-ups that look promising and then the ones that end up being very promising they will acquire.
That's just doing a transaction and that's okay.
But that's not the end game.
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.
Again, to try to bridge that transaction with the implementation is really where mergers and acquisitions
pay off because it's one thing to buy a company for the innovative technology they have,
the individuals, the people that they might have, the assets that they bring with them.
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,
legal, these are all areas accounting that have gone through waves of acquisitions or going through waves of acquisitions.
The knowledge can walk out the door in the form of people that can just take it with them.
So there's a lot around motivating the workforces, retaining the key talent that you're buying.
And a lot of companies overlook that because the deal world is made up of financial
types that really are see the mergers and acquisitions as a transaction.
Mm hmm. And that's only half of the equation. The other half is the implementation.
Mm hmm. Because, yeah, as you mentioned, you say you've you've written actually a lot about the importance of integration,
integration, management and having, you know, like a comprehensive end to end deal flow model.
At what stage in the process a company's filtering, like what steps of that model?
Yeah. So in my model there's been three the three basic phases, the pre deal, the deal and then the post deal.
And so there's different steps within those phases.
Ten steps in my model and companies can make mistakes across every stage and everything from formulating their M&A strategy.
They may be accelerating a strategy that's just a poorly chosen strategy.
If they want to get into certain markets, they may be choosing the wrong markets just because they're doing acquisitions in those markets.
They may be doing those fairly successfully, but it may be the wrong market.
So their strategy is wrong. And then when you move into doing due diligence around the target companies you're looking at buying,
they make a lot of mistakes by only doing very superficial due diligence or only looking at the financial or
operational aspects and ignoring the cultural and human capital aspects that can come back to bite them later on.
And then, as they do, the valuation of the companies are looking to acquire, they can end up getting deal fever,
as it's called, and paying too much for those companies closing the transaction.
A lot of negotiation goes on. What goes in your sales and purchase agreement?
And they may stumble through that and really overlook some key elements in the actual deal closing phase.
And then after integration, they make a lot of mistakes in implementation or after the transaction.
During implementation, they make a lot of the integration mistakes that companies are prone to make.
Ignoring culture, they don't integrate quickly enough.
I always talk about prudent speed with my clients. I talk about that heavily in my book.
It's not about reckless speed and slamming two companies together.
It's about prudent speed, doing enough analysis to see where you want to integrate, how much you want to integrate.
But then doing that in a very prudent way and but rapid as possible,
because it's like pulling off a Band-Aid is going to be slow and painful or fast and painful.
So and then finally, they will look at the evaluation of how they've done.
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?
What could we do better in the future? And did we achieve the financial strategic goals for that deal the best?
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,
yeah, we did or we did not achieve and what can we learn for future transactions?
And does this type of measurement,
is this sort of a consistent across the industry or is this specific to each company have their own sets of measurement?
It should be specific to each deal because each deal is done differently.
There's often done for various either strategic or financial operational reasons.
So every deal is different throughout the process.
So the measurement needs to be different and there isn't really there's kind of standard categories of measurement around operational measurements,
financial measurements, the people measurements, culture, but there's not necessarily a specific measure that fits all deals.
So it has to be deal specific. Mm hmm. And could we talk a bit about deal fever?
So a lot of acquirers typically overpay for companies.
Does this come down to a an over some overestimation of their ability to integrate the two companies?
Or is it more around the way that it's valued, the potential synergies and something you correct?
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,
they're assessing the cost synergies where they have overlaps, whether it's in back office,
headquarters, those sorts of overlaps or operational overlaps.
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.
They may have outlets across the street from each other, so they can rationalise those,
but there's often an overestimation of how much they can do that.
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,
you're always trying to figure out what do you need to bid to win that acquisition if you're betting to win?
And that drives the acquisition premiums up, the typical premium these days is about 38%.
So you're going to have to find that value when you implement back to the implementation again.
So companies are paying a lot more when there's more bidders in the process,
and especially now when we're in the peak of another M&A wave, valuations are really sky high.
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.
So if you're going to pay that much, you have to really work hard at getting that value back out of the deal.
So that is a sort of like a psychological element here where, you know, there might be like a fear of missing out or,
you know, another company acquiring it and, you know, what could have happened.
Yeah, definitely. Yeah. It's the fear of missing out.
It's the animal spirits, as they call it. You don't want to lose.
Mergers and acquisitions gets to be a very competitive kind of game where you don't want
your competitor to get the asset that you're looking at or the company you're looking at.
So you both go after it much too aggressively.
So there's a lot of the kind of human nature elements that start kicking in and you start paying too much.
Mm hmm. And would you say it's the case that there is a an overemphasis on about, you know,
shareholder value relative to considering the concerns of other stakeholders when it comes to.
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.
So if you look at the way investment bankers are rewarded,
they get rewarded for when the deal closes or completes, as it's called here in the U.K. and funded.
Then they get their payout.
So there's an incentive to have their clients actually do a transaction, not that they're pushing through bad transactions,
but there is an incentive to make sure the transaction completes on the buy side.
For the corporate acquirers,
there's an incentive there to get a transaction done because a CEO is incented and senior executives are often incented through our growth.
And again, back to that short termism.
Yeah, the short, short term and short cut to growth is mergers and acquisitions.
So the incentives, both on the corporate side, on the advising side,
are often to make the deal happen and that can push people into paying too much as well.
Mm hmm. And I guess on the you know, as you mentioned, like, the CEOs are kind of maybe incentivised,
you know, for sort of self-interested reasons, possibly because their compensation.
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.
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,
are incentivised not to go through with acquisitions, perhaps because because they tend to get replaced after acquisition.
So how does the how does that work? Well, it depends.
So it depends on the incentives, both on the buy side, the acquirer.
And that's often driven by, you know, the short termism, as we were just speaking about.
But on the sell side, as you mentioned,
sometimes those incentives are encouraging a sale because whether you're a founder or you have some ownership of the company through equity,
there's an incentive there because it's a wealth creation event.
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,
then you may be a disincentive to do a deal because you might lose your job.
So it really depends on where the incentives are, both on the buy side,
on the south side, what the type, what type of behaviour are they in something.
And it's something that again comes back to deal specific dynamics.
But incentives matter. They definitely matter. Mm hmm.
And then so obviously, nowadays, corporations are bigger than they've ever been, more multinational.
So it's particularly important to have good competition legislation in place and for regulators to be very diligent.
Britain has one of the most open markets for acquisitions. And why correct in saying that?
Well, it has traditionally been that way, although they have it depends on the regime that's in charge of the Competition and
Markets Authority is the entity that reviews different transactions here in the States.
It's the FCC, the FTC. There's there's several different entities.
And with the move towards more national security concerns, we're seeing this in the States,
we're seeing this in the UK, in the EU, they're looking at more deals with more scrutiny.
So a lot of the protectionism that's happening around the world is slowing deals down.
So, for example, 2018 was a record year for deals.
First quarter of 2019 is slowed right down because of the protectionism that's going on.
Brexit here is creating a lot of uncertainty. Markets don't like uncertainty, including the M&A market.
A lot of people are seeing the UK as being UN investable right now.
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.
So the kind of macroeconomic dynamics that are going on around the world right now are really putting some of the
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.
And and do you think the legislators and regulators are acting, responding appropriately to these macroeconomic factors?
They think they are. And if you talk to companies and dealmakers, they would say no.
So it all depends on your view of the world, the national security concerns.
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.
So it will slow deals down. It will make a lot of deals not happen.
So we'll see what occurs in that area because right now it's not officially part of the review regime in protocol,
but if it does get to be part of it, then it will slow things down significantly.
And given the number of mega-corporations in existence and maybe I think a lot of
organisations are struggling to adapt in terms of agility to sort of changes in the industry.
Do you think we'll start seeing more mergers or corporate break ups over the next few years?
Yeah, yeah, absolutely.
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.
And we're seeing they both in the EU,
the UK and the US where they're looking at big tech these days and whether they need to be broken up legislatively.
So they're becoming the new standard oil of the 21st century when they're controlling
in some people's views too much of our lives and they want to break them up.
So we will see the mergers.
And as people start divesting different assets and different aspects of their business, that will also create acquisitions on the other side,
because as those divestitures occur, they may become a standalone entity or they may get acquired by somebody else.
So mergers and acquisitions are all about creative destruction in markets.
So as one industry gets broken up, another industry will start acquiring those assets.
So it deals don't really go away.
They just take a different form. Mm hmm. Yeah. Interesting.
So, obviously, a career in M&A is like a big thing for, I guess, MBAs or graduates anyway.
Do you have any why do you think that is? M&A is always been very interesting for MBAs.
It's it's something that is seen as kind of the apex of the pecking order.
For whatever reason in the financial world, the dealmakers make all the high profile news for big acquisitions.
And so there's some sort of attractive element there from this hierarchical view of the world.
And it's also never a dull moment.
From my perspective,
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.
Every deal is different. Every deal has dynamics that keep you very interested.
It's a lot of hard work. It's 24 seven, both on the transaction side and the implementation and the integration side.
And if you want a career that's going to keep you not just working hard,
but also intellectually stimulated and rewarded, well, there's a reward to it both financially and psychologically.
Mergers and acquisitions are a good way to go, but you'd better be ready to do a lot of work.
Yes. So? So I pledge. So what sort of what research are you doing at the moment?
So I have what's called the Oxford M&A Insights Project going and I'm doing just a very quick
short ten question survey around mergers and acquisitions and what are the best practices,
the worst practices across the deal spectrum.
So everything from formulating an M&A strategy, valuing companies, doing due diligence, doing a transaction and doing your implementation.
And I'm looking across industries and at various levels of the organisation.
So everyone from kind of mid management all the way through senior executives.
And that's going into my new book on M&A.
My previous book was called The Complete Guide to Mergers and Acquisitions.
Bit of a misnomer because I didn't have a lot of the transaction elements in it.
I had a lot of the strategy and then the implementation components,
although it's been a good seller, very good seller over the last almost 20 years now.
My next book is going to be called Winning at the Acquisition Game,
taking a little bit from Michael Porter's original articles on mergers and acquisitions,
and the subtitle is Pitfalls and Best Practices Across the M&A process.
So I'm really trying to look at the entire process from A to Z and look at what companies do well,
what they can improve at every stage of the process. That sounds really interesting and it'd be pretty helpful for an MBA students.
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.
That's not the case. When? When is it due out? I try to come out next year in 2020.
Thank you for listening to this week's podcast.
If you have any questions, comments or suggestions, you can reach that S-based podcast at OC's Dot AC UK.
Until next time, goodbye.