MAKING AN ACQUISITION - PART TWO
PREPARATION, PLANNING AND GROUND RULES.
Bill Yearsley was the CEO of Redland Aggregates North America until Redland plc's acquisition by Lafarge SA in 1997. Since then he has moved on to be the Chairman and CEO of American Civil Constructors, a $2 billion building, landscaping and construction company that has grown rapidly by a combination of organic growth and acquisitions.
Yearsley has a degree in Civil Engineering and a Masters degree in construction technology. In his early career, he had been a construction field engineer and a bridge builder. In his own words, he built his career 'from the ground up'.
In Redland, Yearsley became the President of Western Mobile, an aggregates, concrete and road-building company based in Colorado. Of all Redland's aggregates companies, Western Mobile had an exceptional record of growth and performance. Two underlying features marked the company out - its high performance culture and its track record in developing exceptional executive talent.
An architect of this culture was Yearsley, who had very strong beliefs about devolving real responsibility to operating managers, expecting them to perform well and providing a potent mix of high support and sometimes abrasive critique to hone their management abilities. The culture of Western Mobile was not for the fainthearted, but for those who could stand the heat, it provided exceptional growth opportunities.
Western Mobile developed comprehensive processes for identifying and growing talent, with extensive use of psychological assessment, coaching and high quality executive learning programmes that mixed theoretical and practical experience. Yearsley dedicated serious effort to his own learning and development, using a wide variety of different media from mentoring to external programmes.
In the early 1990's he became the President of Redland Aggregates North America, a $1 billion business group consisting of companies in Maryland and the East coast, Eastern Canada, Texas and Colorado.
Whilst he was President of Western Mobile, it occurred to Yearsley and his highly supportive British boss, George Phillipson, that there were considerable opportunities to develop the business by a combination of operational excellence and acquisitions. Yearsley applied a mix of gritty practical experience and strategic savvy to the challenge of making successful acquisitions.
Redland Aggregates North America (RANA) was part of the Redland group, a British quoted company that had grown into the upper half of the FTSE 100 by making a series of acquisitions during the 1980's and early 1990's. Many of these acquisitions destroyed value in copious quantities, so a backcloth to RANA's strategy was a parent company that had learned the hard way about what not to do in the acquisitions department!
It seems to us that a mixture of feet on the ground realism and strategic and financial insight makes it possible to use acquisitions as a pillar of a business development strategy. We therefore decided to use some of Bill Yearsley's experience to describe how to develop a successful M&A strategy.
We are grateful to him for sharing his experiences. Here is the 'scene setting' that made the strategy possible.
Clear Strategic Intent
RANA's businesses were often in geographically spread out areas. One key strategy was therefore to develop very strong market positions in regional pockets. The best way to do this was to combine three elements of strategy:
- Deployment of RANA's supply of younger, highly motivated managers, most of whom were raring to develop hands-on general management experience. Small to medium-sized regional companies were an ideal opportunity to do this.
- RANA had a strong and clear culture, which encouraged initiative-taking but was extremely harsh on 'not invented here' and prima donna behaviour. This culture was ideal for running dispersed operations without loss of control. In addition, RANA had well-honed technical and operational skills in running flexible, cost-effective, dispersed operations.
These skills gave them a distinct advantage over most competitors, who were used to more densely populated urban environments.
- The best and sometimes the only means of growing the business was to purchase and assimilate smaller competitors. Once this was known to be the overall intent, regional managers tracked, communicated with and courted potential acquisition targets, always looking for ways of creating a 'win-win' balance between potential purchaser and targets. (Looking for 'win-win's' was one of Yearsley's dictums)
Shared Understanding with key Stakeholders.
We have already mentioned managers, who as a group were raring to go.
In RANA's case the major external stakeholder was its parent company, Redland plc. In the case of a quoted company, it could be key long-term shareholders (always assuming that there are many!).
The basis of the RANA/Redland understanding was as follows:
- It was agreed that if RANA disposed of non-core operations that could not meet the cost of capital and ran its business on a 'just enough' capital invested basis, any surplus capital could be ploughed back into the business and not simply returned to the corporate office.
- Business planning was conducted jointly with the Redland plc corporate office. This meant that the process of creating and agreeing the RANA business strategy was shared with the Redland CEO and corporate staff, in this case the finance director, director of organisation and development and planning director. Initially, there was some muttering about involving 'City Hall' from some of Yearsley's RANA colleagues. This was rapidly dismissed - Yearsley said it was better to achieve full understanding from a parent that fully understood and were committed to the strategy because they had participated in its creation, rather than do all the work twice, once to create the strategy and once to persuade the parent. So, when it came to taking specific strategic actions, like making an acquisition, it was easy to reach rapid agreement informally, quite often by a couple of telephone calls.
Getting the Reward System straightened out.
All too often, reward systems distort thinking about acquisitions. This can happen in many ways. The commonest are:
- To enable managers to evade the consequences of bad acquisitions.
Managers who know that a very significant part of their rewards is dependent, not on making acquisitions, but from creating value through ,making acquisitions, are likely to become very thoughtful about their choice of targets!
It is recorded fact that many managers fail to conduct post-acquisition audits to analyse the consequences of an acquisition and what can be learned from the experience. If an acquisition turns out to be a disaster, heads may roll, but by this time it is too late, the damage to the company and its investors has been done. The fact that there is no duty on highly remunerated advisors to recommend whether specific M&A actions may destroy value, and absolutely no penalty for advising on great disasters is something that would be rectified in a sane world.
The RANA long-term reward system was based on Cash Value Added.
Managers were substantially rewarded on improvements in the degree to which cash generated by their business exceeded the cost of capital in the business. Managers therefore knew that a bad acquisition, one that destroyed value over a three to five year period, would result in a significant diminution in the earnings - as well as any other sanctions that might occur. Well planned, financially sound and well-managed acquisitions could have a very significant positive effect on reward.
- Rewarding managers for simply making acquisitions, not for creating value through making acquisitions. One famous attempt to do this was the proposed £10 million bonus to Sir Chris Gent for executing the acquisition of Mannesmann.
Fact is, almost anybody assisted by a coterie of bankers, brokers, lawyers and PR consultants can make acquisitions - the difficult trick is to create value - a much scarcer skill.
Prepare Carefully before any Acquisition.
This does not mean putting together a flurry of planning and project groups rapidly assembled just before a bid to justify the good old hackneyed cry, "Even now, integration teams are hard at work".
This phrase, plus passionate claims about 'synergy' are real warning signs that an acquisition is on thin ice!
In the case of RANA, preparation meant that the capabilities necessary to support a successful acquisition strategy had been steadily built over a number of years. Of particular note were:
- The development of a strong and very distinctive performance culture, focusing around the maxim, 'Give freedom, expect results'. RANA managers were imbued with the ideas that they would be given a lot of latitude to act provides that they did so with the overall interest of the company at heart.
- The creation of a cadre of managers through giving planned experience, tailored development and training and carefully planned recruitment.
RANA could have been a collection of disparate regional businesses had it not been for the infusion of Western Mobile developed managers across the group. These individuals provided cultural cohesion and ensured that acquisitions would be rapidly assimilated.
- Having well developed business systems. Planning, reporting, performance management and HR systems/packages were all able to be taken to acquisitions for rapid installation. Acquisition-minded companies would do well to investigate what effective franchisers do behind the scenes to support franchisees to provide consistent products and services - and develop similar support processes and packages for installation in acquired companies.
The essential process of preparation can take years. In the case of RANA, it so happened that the culture, skills and practises that had been developed to create a top-class operating company were ideal for developing a base to make and assimilate acquisitions.
In our view any company that is not at the top of its class operationally and very good at its particular business has no right to make acquisitions.
Clear, Sensible Ground Rules.
It is crucial for acquisition-minded companies to have quite clear and consistent ground rules to govern M&A activity. Why? Because it is remarkable how otherwise rational people can become so bound up in the macho aspects of acquisitions that they can justify all kinds of stupidities just to get their hands on the quarry. (No pun).
We know many women top managers who are frequently amazed at the childish antics of male colleagues when it comes to the thrill of the chase and conquest.
Bill Yearsley produced a quite detailed manual to guide his managers through the process of making acquisitions.
We will cover the content of this in Part 3. But he also had a number of 'Meta-rules, that provided a framework for those involved in M&A work. Here are some of them:
- Acquisitions will be made by the managers responsible for assimilating and running them. The whole process from soup to nuts will be led by general managers, not staffers.
- Staffers and external advisers will know their place, which is to provide expertise and advice that is helpful and supportive to those running the show. Any adviser that is incapable of understanding this and tries to exert undue influence will be expelled from the process immediately.
- There are different kinds of acquisitions that require different strategies. In the case of Redland, these were described as 'Tuck-ins', 'Bolt-ons' and major acquisitions that would change the nature of the acquirer.
Tuck-in's were acquisitions of smaller companies that could simply be absorbed into the operating infrastructure of regional businesses. The process of finding and making tuck-ins was the responsibility of regional managers.
Bolt-on's were acquisitions that could not be easily folded in to an existing regional infrastructure and which extended the regional reach of the whole business. They required specially assembled teams that would be responsible for planning the acquisition and then assimilating it into the RANA infrastructure. The leader of this process would be responsible for running the business post-acquisition.
Large acquisitions were likely to be extremely rare and treated with great care, as the attractions of 'transformatory' opportunities were likely to be false.
It was also agreed with Redland that any such possibilities would be scoped into the scenario-building aspects of the joint corporate/RANA planning so that there was joint understanding of the relative attractiveness of particular targets and the likely significance of particular industry-wide events.
- There is no shame fro walking away from an acquisition possibility that is dubious, either in terms of potential benefits or price.
RANA's acquisition manual was clear about the circumstances in which stepping back from an acquisition to think carefully about its overall effects was likely to be the best option.
- Acquisitions are only a part of the overall business strategy. The first priority is to run an excellent, competitive and value-creating operational business. Managers who forgot this were unlikely to do well in RANA, as operational excellence was regarded as the basis for making successful acquisitions.
- Acquisitions will be fully assimilated into RANA. Woolly thinking about creating the 'best of both worlds' would not be tolerated. Acquisitions would be made like RANA as quickly as possible, previous owners would not be left to run their businesses - if there were real learning experience to come from the practises of acquired companies, these would be highlighted and spread across RANA as a whole.
In Section Three, we will look in more detail at a well thought out acquisition process through examination of the RANA managers' acquisition manual.