MAKING ACQUISITIONS, PART THREE
The material in this section is drawn from a managers' manual for making acquisitions devised by Bill Yearsley, who at the time was president of Redland Aggregates, North America. Bill had an engineering and operations background, and had risen through Western Mobile Inc., an aggregates and civil engineering company in Colorado.
Western Mobile had a very distinctive culture - it was challenging, even abrasive, but at the same time very developmental. Yearsley had a fine distain for corporate bureaucracy; he believed that businesses should be run by general managers and that staffers should support them and not get in the way. His motto was 'Give authority, expect results'.
Western Mobile (WMI) became a generator of able, vigorous, enterprising managers. So when Yearsley moved up to being President of Redland Aggregates, North America (RANA), with 5 regional companies in his group, he set about bringing the performance of a raggedy batch of companies spread over the US up to the levels he expected. He used graduates from the tough but developmental school of Western Mobile to help him and over three years a remarkable transformation began to happen - RANA moved steadily up the performance rankings of US construction materials companies to joint top during that period. The scene was set for serious development of the RANA business.
Getting Stakeholder Alignment
However, Yearsley first needed to persuade his parent company, Redland plc to support him. He had the full support of his direct boss, Brit. George Phillipson, an equally strong-minded and expressive individual. Phillipson and Yearsley developed a high level of mutual respect through frequently vivid and often public 'debates'. Yearsley's subordinates much relished these confrontations which invariably ran a stormy course to eventual mutual agreement.
He used a creative mechanism to involve the Redland plc CEO and his staff. His line of thinking ran as follows:
If these corporate people are any good they should be able to add something to our thinking. Furthermore, if they are singing off the same hymn-sheet as me and my managers, we can run and develop the business through mutual understanding and not through formal written plans and other forms of bureaucracy. He put it this way to Robert Napier, Redland's CEO..."If you and I understand the business equally well and we are on side about the strategy we are going to pursue, then we can agree on specific moves like acquisitions on the 'phone, rather than dragging through great presentations and mounds of paper. And if you know that we have a stringent process for evaluating significant initiatives, we won't have to duplicate the work.
The same applies to our staff - I want my finance director and his corporate equivalent to know and understand each other - the same applies to HR - that way we can benefit from the experience of your people and oil the decision-making wheels.
The way all of this was made real was by engaging in business planning jointly - instead of the usual process of divisional plans being prepared and then presented to corporate management, the two sets of managers worked together for four or five days each year and created the plans together.
One of the most important elements in the plans was the goals for strengthening the businesses market strength and extending regional positions by acquisitions.
The joint planning sessions reviewed the possible targets and set some basic ground rules for evaluating proposals - so that 'When a particular acquisition possibility comes up, I can simply call you and we can agree what to do - is that OK Robert?
It was against this background that Yearsley and his team set about developing the business, primarily by improving competitiveness but also by acquisitions.
In planning his approach to acquisitions, Yearsley followed his maxim of 'Give authority, expect results' stringently.
The central plank of his approach was to devolve the whole process of identifying and making acquisitions to the managers who would be responsible for extracting the expected results from them. Control would be exercised by ensuring that all responsible managers followed a stringent process that was clearly laid out in a comprehensive manual covering all aspects of acquisitions. Managers were rigorously indoctrinated into this process and were expected to understand the full spectrum of techniques for appraising and negotiating acquisitions, including quite complex financial and tax computations.
It was made absolutely clear that acquisitions were management-led, that advisers and lawyers were there to serve management and thus managers had to know enough not be mystified by them.
What follows is a short summation of the acquisitions process and a flavour of the content of the Manual.
- All acquisitions would be led by the manager who would be responsible for making it produce value. They would lead a team containing all the key functional and operational skills, plus external advisers as needed.
- Advisers would be strictly subordinate to managers and work under their direction.
- The central aim of making an acquisition was to add value to the acquired company.
- This would be done by rapidly and comprehensively assimilating acquisitions into the acquiring company infrastructure - culture, management, systems and methods.
- No acquisition would be left to stand alone - thus the favoured form of acquisition was the 'Tuck-in'. If they were separate from existing regional infrastructures, a full RANA team would take over and rapidly convert the acquired company into 'one of us'.
- There would be a rigorous post-acquisition analysis, assessing the actual performance outcome against ingoing targets prepared by the responsible team. Managers' performance, and their rewards through a long term bonus plan, would be assessed through this review and they would be held to account for the results.
- The overall pace of acquisitions would be determined by the availability of effective managers and specialists to make them and man acquired businesses.
RANA had a comprehensive manual to guide managers and senior staff through the process of making an acquisition. This manual described the guiding principles outlined above.
The Content of the Manual was as follows:
A flavour of these is drawn from the manual:
- First and foremost, we are 'strategic buyers' of companies. Our advantage is that the business is worth more in our hands than the sellers. For a tuck-in acquisition to be worth more under our ownership, we must do something to the acquired business, i.e consolidate it properly, eliminate redundancies and overlaps, evaluate and change pricing, reduce capital intensity. This improvement in value is our accomplishment not to be given away in sales price to the seller. One and one must equal more than two. The performance improvements we can make to the acquired business in Net Present Value terms are again ours.
- If negotiations become stalled, do not leave it to attorneys or other advisors to unravel the problems. One of the best ways for stalled negotiations is to set up an intense meeting with the decision-makers from each side present, along with their advisers...
- Financial considerations:
- Internal Rate of Return goal should be at least 20%, preferably 30% after tax, based on total capital invested.
- Use conservative assumptions based upon your real experience in this market in the cash model.
You should include the value we add to this business to the assumptions, but again, be conservative...
- Work as hard towards lowering the invested capital as you do in enhancing performance....
Financial Considerations, Financial Analysis.
Managers were provided with comprehensive and detailed guidance on how to gather data and prepare financial analyses and projections.
This included cash flow computations and tax considerations.
This section is laced with reminders, such as: Warning......Do not become too intent on making the deal. Be prepared to walk away at any time. If you want it too badly, you will pay too much.......
The Negotiating and Closing Process.
Detailed guidance on the likely steps of the acquisition process with hints on preparation of Confidentiality Agreements - then,
First Phase of Negotiations probably leading to a Letter of Intent, together with guidance on how to avoid getting involved in auctions.
Next, the Due Diligence process, accompanied by detailed checklists of all facets of the business to be covered from financial, operations, people, marketing and capital assets through to legal and community issues.
Finally, a section titled After Closing, which is worth covering in some more detail:
This stage is simply to turn plans and models into reality. But it takes commitment and timely action to yield the performance you forecasted prior to closing.
- Employment decisions made at both hourly and salary levels on Day One.
- Our IT systems in place first week of operation. We are going to need good reports on a system we know and trust to monitor progress.
- Immediately convert financial control to our central accounting group and systems.
- Excess equipment identified and moved within two weeks of closing - all excess equipment should be sold within 3 months of closing.
- Change acquired business name to ours and label equipment and sites first week.
- Integrate operating crews of merging company within first month.
- Decentralise operating control early. Make the hand-over to the chosen operations manager and allow him to move ahead with the assignment.
- Install our practices and culture beginning day one - there can only be one way and one game plan from the closing forward.
- Do not lose sight of the reason for the acquisition - make the hard decisions! Make it happen!
If the practices described above were followed by very large companies it is certain that there would be less of the massive value destruction we have seen; less M&A activity overall and much more post-event performance analysis - which in turn should lead to more forced departures by those who capriciously enter into M&A deals. There would also be fewer Investment Bankers and fewer monstrous bonuses for destroying value!