"Investment Banking is 10% Financial Analysis and 90% Psycho-analysis" – André Meyer  This blog is about the "other 90%"…

HarrySallySurely, you remember that great movie from the ’90s with Meg Ryan and Billy Crystal. They are in a ‘cat and dog’ relationship. They first meet at 21 driving home after college from Chicago to New York in a car pool, where Sally finds Harry obnoxious; 5 years later they meet again at an airport and conclude that they can’t be friends; at 31 both ‘out in the cold’ meet again first becoming ‘friends’, and realize they are in love during the usual ‘Times Square at New Year’ finale.  In the meantime, both live with and date ‘normal’ people that end up leaving them.  Apart from being chock full of gags – that even a middle aged former accountant can laugh at – there is a moral here.  Just, bear with me a minute.

First, I want to speak about a ‘Harry-met-Sally M&A deal’.  I represented a buyer, who retained me to find a service company for them that both would be synergistic and have management willing to stay as a partner. The target company itself was a de facto partnership of an entrepreneur and his 2 sidekicks.

Initially buyer and seller appeared to hit it off.  There was chemistry, but Harry made an offer that was perceived inappropriate, so Sally abruptly left.  9 months later Harry came with a better offer.  A ‘friendship’ seemed to be forming with a due diligence and binding offer tabled.  However Sally’s numbers started to soften, so the relationship cooled again.

Another 9 months or so on, Harry reappeared with another attempt to resuscitate the fragile affair.  Sally was in a more receptive mindset now and accepted the improved proposal.  However, documentation discussions got stuck on apparent technicalities (idiosyncrasies) and the romance-parties started losing interest in consummating their love due to apparent inertia.  Eventually with the help of our lawyers we helped trigger the all-important marital kiss.  The deal closed!

From then on, the relationship gradually grew solid and harmonious and the sellers even ‘forgot’ to exercise their option to sell out their remaining shares after 3 years, and continued to manage the company for the buyer (and themselves as junior partners).

So, back to the moral of the film.  I have observed that open conflict helps clear the air in relationships, as well as Merger transactions.  Like husband and wife, both buyer and seller benefit from stormy discussions during the negotiations, as their improved understanding of each other helps build a solid foundation for their future partnership.  As in marriage, un-explored problems between business partners pile up under the carpet, and eventually trip over one or both parties up the aisle, potentially killing the deal.

And as in When Harry met Sally, it helps to have a screenwriter (m&a advisor) with a sense of humor.

sink shipIt’s no smooth sailing to manage the integration of a listed or private equity owned company.  Upon the closing of the deal, the buyer’s management consultants will present a shopping list of transition tasks to the business unit manager. It is called the 100 day plan and can be summed up as “Do everything differently and make more money from day one”.

‘This is an uphill battle’ –spurted out a branch manager of a national service company, whose employer been recently bought out by a private equity backed global strategic.  My middle management has been replaced, we have migrated our IT, raised prices and toughened up contract terms with existing clients.  All our routines are out the window and what was formerly business development time is now “invested” in fixing bugs in the new system, babysitting novice executives, keeping sales managers, and demanding better retention AS WELL AS more new accounts.  ‘We have a hole in our boat and must pump water faster than its comes in, while rowing all the time.’ – he adds.

This tale is all too familiar, isn’t it?  The buyer is under pressure from its investors (who are in turn at the mercy of lenders) to harvest cost synergies to appease the limited partners that invested in their fund; all these, while stepping up sales raise margins, sooner than possible.  Meanwhile, staff is scared of losing their jobs or ending up with a worse one.

Field managers on the other hand work to save face with current customers.  They’d rather re-build their teams and fix the service first, so that they have something left to sell to existing and new clients. Trouble is, no point fixing a service if your competitors hijack your market in the meantime…  So selling first and delivering something that has sure buyers makes business sense too. Catch 22, if ever was one.

SoapThere is a fast diner next door to my office that I started frequenting lately for the odd quick office-lunch. They have two televisions playing in the seating area, one showing sports, the other soaps, achieving a combined 80% approval rate from diners. Luckily, text only, which saves digestion and allows me to guess the characters the actors are playing from mimics and body language.

It struck me how totally false these soap operas are. The life of celebrities and successful business people are portrayed as if they had the minds of unemployed dreamers. Protagonists act totally out of character of the people they are supposed to personify.

In one scene the mogul father is congratulating his loser son for accidentally succeeding with a business project, after which the boy immediately starts drinking with his subordinates. Meanwhile, his fiancé (who is having an affair) is discretely watching and delaying breaking-up with him, to let him savor the moment.

This kind of unreality reminds me of owners who present a “management team”, in order to get released from the company after the sale.  The hapless managers are often put through “accelerated seasoning” to look like they had been pulling the strings well before the exit of the ”absentee owner’. The latter is sitting through management presentations donning a tan to demonstrate his Bahamas Lifestyle.

It is worth reminding him to switch off his cellphone before the meeting, lest the constant ringing leaves the wrong impression on the would-be buyer.

FiredM&A bankers like to talk about cross-selling, up-selling, skills transfers, innovation and management talent as being the main synergy drivers of mergers.  Sure enough, there is nothing sexier than Google buying social media traffic app Waze for $1 billion. The search giant can put its maps service on steroids pulling further away from Apple Maps and closing in on Facebook in social media. Looks like a strategic no-brainer, but not if you consider that Waze has only started harvesting its 44 million users late last year and 1 billion is a lot of money to lose, should things don’t work out so well.

In general, I have observed that revenue synergies are hard to pull off.  It may seem obvious for two companies to sell each other’s products to each other’s customers therefore generating extra sales.  But in order for them to do that they first have to convince their employees to turn from rivals – conditioned to feel superior to each other – to chums hereafter.

Selling new products is a learning process and existing staff will have to sacrifice attention to their existing pipeline to do something uncertain inefficiently for a while.  Alternatively, new staff has to be brought in a trained with management attention diverted from existing revenue streams. Hardly recipes for growing sales and profits quickly.

The mere task of objectively prioritizing new products over the good ol’ portfolio is a challenge for most management teams.

On the other hand, cutting costs is more straightforward and predictable.  All you need is to annihilate the acquiree’s duplicate departments, pick the best (or at least the better known) middle managers and let them lose on their firing quotas.

Cutting cost is a low hanging fruit for the pressured CEO who must deliver the next quarter for a non-forgiving market.

2011_Berlin-KudammMust admit a weakness for jazz.  The artist who introduced me to it was Louis Armstrong.  I picked up a green boxed vinyl collection of his 1930′s recordings for 10 deutschmarks in West Berlin’s Kurfürstendamm in the late 1980′s.  I became instantly mesmerized by the energy and vivacity of the man:  He was swinging at 200 miles an hour and threw off virtuoso solos.  My favorite song became ‘Swing that Music’, which exhumed such joy, that I listened to it every grey winter morning in my car to get pumped up for the day.

Over time, I tried to collect his later recordings too.  My favorite of these is Oscar and Louis, a collection of ballads recorded in the early 1960′s with the great Oscar Peterson on piano accompanying Satchmo.  These songs could not have been more different. Louis focused on singing rather than blowing; treating the latter as the extension of his voice rather than a separate instrument.  He blew 1/20 th of the notes or fewer than during his hot Five days, but infused his songs with emotional depth.  Oscar Peterson is totally in tune and the combination of Louis’ voice and trumpet, and Oscar’s tinkling piano can conjure up the heartbreaks of youth.  But, I digress…

The transformation from technical to emotional virtuosity can be observed with some investment bankers too.  For the entrepreneur selling his company built over half a lifetime – is an emotionally charged event.  He will want to get a good price, but also leave behind a sound legacy. To have more than the money to show for his endeavors.

Negotiations take place between people and the better the advisor relates to and reads the personalities of the buyer’s team, the likelier he will get a good deal for his client.  The young banker may be compelled to be aggressive to demonstrate his guts and drive to bag a deal; while the mature advisor, rather than talking, will spend more time listening and drawing out the other side. Knowing the constraints of both seller and buyer will show the golden path to structuring a deal that works for both.

The most effective investment banking team includes both a swinger and a singer.  It’s good to appoint a young gun to drive the deal, but equally, to have a mature advisor on hand, who can analyze and strategize… step in to sooth nerves… and brainstorm a solution when the deal gets stuck in the mud of mistrust.