Business Intelligence

Sampler Chapter of Second Edition, Intelligent M&A

Posted on Wednesday, 14 May 2014. Filed under: Blogroll (UK links), Books on Intelligent M&A, Business Intelligence, Commentary, Mergers |

Here’s a sampler chapter of the second edition of Intelligent M&A, Navigating the Mergers and Acquisitions Minefield (Wiley, 2014) which has been released on 9 May.

Book Sampler v6 May

The book is also on Amazon (http://www.amazon.co.uk/gp/product/1118764234?adid=0EJAAYMKPEM0B5PAKCD2&camp=1406&creative=6394&creativeASIN=1118764234&linkCode=as1&tag=intellmerger-21) where there are some other electronic excerpts.

The book is not yet available in full electronic form, but keep an eye on Amazon for when it is.

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M&A Maturity Index — Emerging markets for M&A

Posted on Thursday, 16 December 2010. Filed under: Business Intelligence, Commentary, Mergers |

If you want to expand overseas — from whatever your base — what do you do?  Start up new in a country in which you’ve never operated before?  Maybe a joint venture?  Do a big acquisition there?

If you’ve decided that an acquisition is the best route forward, then you have the big decision to make about which country (or countries) to enter?  This question is easy to ask, but often expensive and difficult to answer.  Help is now at hand!

Cass Business School has an M&A Research Centre (full disclosure:  I’m the director of that research centre).  We’ve recently published, in conjunction with Allen & Overy, Credit Suisse and Ernst & Young, a new index which ranks 175 countries on the ease with which one can do an M&A deal there:  The Cass MARC M&A Maturity Index.  Ernst & Young have turned this study into an interactive website, and the study itself can be obtained from Cass here.

Whereas others have looked at the attractiveness of markets for M&A solely based on financial and economic factors, for example, or even the legal environment, this index looks at six country development indicators:

  • Regulatory factors (e.g., rule of law and regulatory quality)
  • Economic factors (e.g., GDP growth and economic freedom)
  • Financial factors (e.g., stock market capitalisation and access to financing)
  • Political factors (e.g., political stability and corruption of officials)
  • Technological factors (e.g., R&D expenditure and innovation)
  • Socio-cultural factors (e.g., people, talent and labour skills)

These are combined in the index and a score for each country is generated, ranging from 1.0 (best) to 5.0 (worst).  Approximately two-thirds of countries, including Indonesia, Egypt, Ukraine and Nigeria, appear in the bottom grouping as relatively unattractive — and the reasons differ per country, of course.  The top one-third has those that are mature (Canada heads the list, and ends with China) and those that are ‘transitional’, which is the most interesting group.

In fact, the press coverage of this study since its release three days ago has been greatest about this transitional group, which has a number of countries from the Middle East (led by the UAE but also including Qatar, Saudi Arabia and Kuwait), Central Europe (Czech Republic, Poland and some others), Latin America (Chile, Mexico, etc) and Asia (Thailand, India, Philippines, etc).  You can see some of these articles here:  Middle East and Asia, for example.  There’s even a video: Cass M&A research signals the emergence of Asia.

I found one of the most interesting findings to be that the technological factors were the discriminating factor amongst those transitional countries as to whether they were attractive for M&A activity or not:  in fact, technological development represented 40% of the differences between these countries.  Amongst the most mature markets, socio-cultural factors were most important.

Very interesting will be to see the movement in a year when the second such index is issued, and at which time I expect to see some of the ‘transitional’ countries to move into the ‘mature’ category.

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The Wall Street Journal on why CEO’s do M&A deals quickly after being appointed

Posted on Friday, 18 June 2010. Filed under: Business Intelligence, Commentary, Mergers |

There’s been a lot of press reaction to our recent report on what happens when a new CEO takes over: ‘Here’s the deal:  move fast as a new CEO’.  The report was written by Cass Business School and the M&A Research Centre (MARC) (which I head).  See also my blog entry ‘What comes next? Change your CEO and (bang!) you’re acquiring another company‘ and another one regarding the intial coverage by Stefan Stern, the ‘On Management’ columnist, in the Financial Times and in the blog entry ‘Article on CEOs and M&A deals‘.  Clearly good use of business intelligence when a board is appointing a new CEO!

The Wall Street Journal has written on this topic as well: ‘Why Your New CEO Should Be a Deal Maker’, which emphasises that the firms of CEOs who do deals in their first year in office outperform those who do not do a deal in their first year.  The Wall Street Journal has also put together a video interview on this, tieing it to the recent Prudential deal to purchase the Asian assets of AIG … a deal which was recently pulled.  See the interview here:  ‘Bankers: New CEO Means New M&A. Make That Call Now!‘ and another related article with the same video here: 
‘New CEOs Have an Urge to Merge’.

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Due Diligence Requirements in M&A Deals

Posted on Tuesday, 8 June 2010. Filed under: Business Intelligence, Commentary, Mergers |

In QFinance, a very extensive on-line financial markets resource, I’ve written an article entitled ‘Due Diligence Requirements in Financial Transactions‘.  Due diligence is a critical business intelligence process, and in our book on the use of business intelligence in doing M&A deals better (Intelligent M&A, Navigating the Mergers and Acquisitions Minefield), the chapter on due diligence is the longest.  In it, I make the following arguments:

  • There is an urgency for companies to conduct intensive due diligence in financial deals, both before announcement (when it should be easy to call off the deal) and after.
  • Traditional due diligence merely verifies the history of the target and projects the future based on that history; correctly applied due diligence digs much deeper and provides insight into the future value of the target across a wide variety of factors.
  • Although due diligence does enable prospective acquirers to find potential black holes, the aim of due diligence should be this and more, including looking for opportunities to realize future prospects for the enlarged corporation through leveraging of the acquiring and the acquired firms’ resources and capabilities, identification of synergistic benefits, and postmerger integration planning.
  • Due diligence should start from the inception of a deal.
  • Areas to probe include finance, management, employees, IT, legal, risk management systems, culture, innovation, and even ethics.
  • Critical to the success of the due diligence process is the identification of the necessary information required, where it can best be sourced, and who is best qualified to review and interpret the data.
  • Requesting too much information is just as dangerous as requesting too little. Having the wrong people looking at the data is also hazardous.

The whole due diligence can therefore be summarised with four ‘w’ questions:  What? When and where? Who? 

  • What do you need to review?  Be careful, as note above, of requesting too much as you may then only superfically review even the important things.  Focus on the critical, the potential deal-breakers and the things you need to know to design the best post-merger integration (too often managers seek this information AFTER the deal, but by then it’s too late to design a proper post-deal integration strategy).
  • When do you need the information and where do you find it?  Much due diligence can be done even before a deal is announced … and even before you start discussions with the target.  For example, you often don’t need to ask the target for their sales information:  even if they are privately held and don’t disclose this information, you can get it from industry sources such as publications, government data bases, suppliers and customers.  Management consultants can provide excellent market information.  Thus think about whether you can get information from other sources early, as then you don’t waste time once the deal process has started in earnest (once you’ve contacted the target) on things that you could have found out from other sources.  It also allows you to focus during the intense due diligence process on facts that are only available from the target itself:  such as it’s strategic plans and key contracts (with managers, suppliers, clients, etc).  Also, some information can safely be deferred until after the deal is done.
  • Who reviews the due diligence information?  This critical question is often mishandled because of the (often overemphasised) need for secrecy in the pre-deal announcement period.  At that time in the deal process, the finance departments are often driving the deal on behalf of the CEO and Board.  You then find accountants reviewing human resource due diligence (employment contracts, for example), IT systems and even looking at operational data.  The experts in these area don’t yet know a deal is taking place, but they are best placed to review any due diligence.  This continues after the deal is announced, when you’ll find those same accountants walking a shop floor or factory looking for problems.  But one of your own plant managers is best placed to look at the target’s factory;  your HR team knows best how an employment contract should be written and therefore whether there are problems with the contracts of target company staff.  Expand the due diligence team to allow for this proper review by the proper people!  And do not outsource the review of this critical process, as you will need the findings from the due diligence process for the entire period — often many years — of integration so you will want this information in-house.

Lastly, do not forget that even the target needs to do due diligence on the buyer:  who would want to do a deal only to find out that the bidder could not complete the deal due to circumstances that could have been anticipated.

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M&A and Strategic Change

Posted on Monday, 30 November 2009. Filed under: Business Intelligence, Commentary, Scenario Planning |

Dr Robert Davies, in his fascinating blog on strategy (see weblink at the bottom of this page in the blogroll or check it out here), has written an interesting article on what he sees as the eight major issues that will drive corporate strategy and behaviour over the next several years (see his blog: ‘2010 AND BEYOND: The real issues and trends‘).

These issues range from the drive toward localisation (and away from globalisation) to the increase in stress in society (and on individuals).  It certainly is worthwhile considering whether these will impact the M&A market if several of these actually do turn out to be correct.   Briefly, the eight issues are (in Robert’s very conversational and catchy style):

  • ISSUE #1: GOODBYE GLOBALISATION, HELLO LOCALISATION. There are too many forces pushing against globalisation for you to bet on the end of history and a harmonised world.  Even academics are divided upon the issue of the sustainability of a single global society. Remember too that we have not suffered a global recession, we are in the midst of a series of localised depressions, recessions, recoveries or in some cases, just mere slowdowns.
  • ISSUE #2: CHANGE COMES IN PHASES. Unlike some, I don’t see a simple ‘bounce back’. The real effects of the recession in terms of your markets and the behaviours of your customers will take between three to five years to appear. Understanding and monitoring four key phases of change must be a central task for any customer focused organisation.
  • ISSUE #3: FROM LUXURY TO SECURITY. FROM CONSUMERISM TO REPLETION. Customer needs (both in consumer and business markets) will change. How they change will largely be determined by the direction taken by globalisation. For some, purely Web based customer management strategies may prove problematic in at least one future new where new consumers seek more personal inter-action.
  • ISSUE #4: BIG BROTHER, MY FRIEND. Some large corporate brands have been tarnished – especially in the financial sector. There is some emerging evidence that new consumers may trust central government more than large corporates.
  • ISSUE #5: CSR – A NEW GENERIC STRATEGY? In the face of new regulation, many especially in financial services, will find it difficult to gain competitive advantage. Is corporate social responsibility the answer?
  • ISSUE #6: BACK TO THE PAST – THE FRUITS OF CREATIVE DESTRUCTION. Within all the doom and gloom there is the prospect of quite massive levels of innovation, bringing with it opportunity.  But you may have to move quickly. So, in what shape are you to innovate?
  • ISSUE #7: THE DEATH OF ‘WHAT WORKED BEFORE’. Be careful about extrapolating from the past. The datasets and variables have changed.
  • ISSUE#8: BEWARE OF STRESS. It’s going to take time to get through this. So are you taking care of your staff?

Now, what does this imply for those who are interested in M&A?  Could these issues be influencers on M&A generally?  (Actually, think about these as ‘trends’, which they areally are (aren’t they?), as most have already begun in some fashion and even have antecedents from years ago.

I’d be interested in the views of others, but first let me say that I agree with most of these issues — especially their application to the next several years.  On a longer-term basis, I do believe we’ll find ourselves largely back on the same trajectory that we’ve been for the past two or three decades and that the past 18 months won’t be considered quite the sea change that many other pundits believe.

Nevertheless, these issues will impact the M&A market.  Some positively:

  • Localisation means that there’s a greater need for local presence, which can be obtained by purchasing a local company already knowledgeable about the local markets and recognisable to the people there.
  • Creative destruction will drive the purchase of distressed and bankrupt (or insolvent) companies.  (See as well the M&A discussion of distressed deals.)
  • It may be easier to have an appreciated impact on CSR issues if the organisation is large and able to afford high-impact, high-cost CSR programmes.  How do companies get scale?  They go out and buy another company…

But others negatively, such as the ‘big brother’ trend of increased trust in governments which implies lower trust in corporations, especially the largest ones.  (But the flip side of this may be increased M&A activity as companies downsize and refocus back to the core, thus divesting divisions:  one company’s sale is another company’s acquisition!).

We’ve discussed before the need to incorporate appropriate business intelligence into the M&A process, which otherwise often seems opportunistic at best and ‘me-too’ at worst.  These trends discussed by Robert in his blog should be used by all M&A corporate development teams and their advisors in stress-testing their proposed mergers and acquisitions.  (See our writings on scenario planning as well.)

Your thoughts?

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What next in M&A?

Posted on Wednesday, 25 November 2009. Filed under: Business Intelligence, Commentary, Mergers |

An excellent study was issued by IntraLinks and mergermarket a few weeks ago.  (You can find it here.) In August and September, they conducted a survey of experts in M&A – the people within each company responsible for deals.  The key finding:  almost two-thirds of those surveyed thought that the overall economic environment in their own regions would improve in 2010 (which is in distinct contrast to the economist, politician and journalist Cassandras who feel that we’re in for a double dip or even worse in 2010 and beyond).  Interestingly, 16% felt that this recovery was already underway and 8% that it would happen before year-end.  And in Europe, over 40% of respondents felt that corporate M&A would increase in the next year (and only 12% were pessimistic).

This is a significant finding, because the M&A market is driven at the corporate board and senior exec level by optimism (I would almost prefer to say ‘hubris’) and general business confidence.  The perception of an improving market is critical to the market’s turnaround prospects.

But caution amongst those surveyed is also noted in the study:  when asked about their own company’s activity, only about a third were optimistic or very optimistic.  (Yet only 20% were pessimistic and most (44%) were neutral.)  This is a valid cause for concern.  This would indicate that firms are reticent to commit their own money toward committed rapid expansion – and an M&A deal IS the way for a major existing firm to expand rapidly, even if most deals fail in the execution – despite those firms seeing the general business environment improving.

It was nice to see that 75% agree with me that the M&A market has already reached its inflexion point (see ‘M&A inflexion point: The turn to ‘up’ in activitywhich we published back in late September).

We’ve noted before on this site back in the summer (see ‘Distressed and bankrupt acquisitions: Should you do one of these deals?‘) that distressed acquisitions would be a major driver for some time to come.  This Intralinks / mergermarket survey confirmed that, as almost half of all respondents in Europe felt that distressed deals were the principal driver to the market for the next year (followed by 31% looking at market consolidation as the principal driver).  The overhang from the recession will still take a while to work through the M&A system, which is a wonderful mechanism to assist industry in self-correcting.

What are firms most expecting to do?  When respondents looked at what they would do in their own companies, they still feel that their M&A activity will be driven by finding undervalued targets (over 50% thought this).  If this is true, the growth in M&A activity might be faster, as a continuing stock market rise would make fewer such undervalued targets around.  Nicely, two-thirds of the companies DID expect to make an acquisition in the next 12 months.  Given the lead time to many of these strategic deals, the planning and even negotiations may be underway already.  This is support for the strong backlog of deals that many advisors note.

Overall corporate organisational restructurings were expected by 73% of respondents, and by a whopping 81% of those in Europe.  Europe really does appear to be the region that is pulling out of the recession with the greatest difficulties remaining.

I found most interesting the thoughts about which industries would see more consolidation, at least according to this survey.  There’s so much conjecture about where the next big deals will come, and each observer seems to have different feelings.  It’s nice to see a survey taking in the opinion of many experts, as this IntraLinks / mergermarket survey is.  Contrary to my own personal view, financial services was seen in Asia/Pacific and North America as being the most likely industry to see deal activity.  In Europe, the consumer area was suggested to be the most active.  Notably, pharmaceuticals, industrials & chemicals, the extractive industries and the technology industries that saw huge deals in 2009 were not in the top list.

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YouTube Video: M&A Deal successes and failures

Posted on Friday, 6 November 2009. Filed under: Business Intelligence, Commentary, Mergers |

On 8 October 2009, I was interviewed about why merger and acquisition deals fail or succeed.  Together with several other experts in the industry (including Paul Schiavone of Zurich Financial), the conversation is now available on YouTube here: M&A – successes and failures.  This clip is actually one of eight that are available on YouTube (‘M&A: What lessons have we learnt from the boom and bust?‘ and click on the M&A Directors Forum on the right-hand side of the page), if you want to see the entire conversation including discussions of M&A risks (especially a discussion about risks to directors and officers of the merging companies) and some forecasts about the M&A industry.

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Interlocking Directorates and Mergers

Posted on Monday, 19 November 2007. Filed under: Business Intelligence, Commentary, Mergers |

We love to see the application of new intelligence techniques in assessing mergers, acquisitions and divestitures.  Check this out… 

A most interesting comment was posted on this blog on 19 November in response to our own thoughts regarding the possible break-up of Merrill Lynch, Citibank and Northern Rock (see More about breaking up Merrill Lynch, Citi and Northern Rock and the comment added at the bottom of our blog on that day).  That comment is from a website entitled News Visual which uses knowledge maps to look at the links between companies. 

This technique is not uncommon in places such as business schools and consultancies, and that website shows how it can be particularly useful in a merger or acquisition situation.  Links between the two companies may not be direct but the News Visual website shows where these exist.  Most of the information appears to come from public regulatory filings in the US, so non-US deals appear to be less covered;  nevertheless, it is all very useful. 

A few examples from their website: 

The comment about the News Visual website that was left on our own blog also merits some attention.  We’ve written several times that a number of firms might face dismantling as they fall from grace.  As noted before, we (and now many others) have suggested this is possible for Northern Rock, Merrill Lynch and Citibank.  But a close look at the strong connections of the new master of Merrill Lynch (John Thain) has casued News Visual to come to a different conclusion:  given all the people John Thain knows, he can draw on those connections (both personal and corporate) to help him succeed where others, presumably Stan O’Neal, failed — with the implication being that Thain’s predecessor was less well connected (see the blog entry:  Past Experience and Connections Valuable as John Thain Steps Up to CEO Role at Merrill Lynch).  They have concluded as well that Chairman Robert Rubin’s connections at Citibank  can help to save that bank, too (see the blog entry: Former Ties Offer the Advantage as Rubin Takes on the Challenge as Citigroup’s Chairman).

All very useful if you want to look whether a deal — or inverse deal (otherwise known as a break-up or divestment) — is likely.  Not that these knowledge maps should be used in isolation, but they do provide useful information … and as we’ve often written (including in our book, Intelligent Mergers), information is power. 

Thank you, News Visual for producing these, and we do intend to look at them in the future as well. 

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The need for business intelligence in M&A

Posted on Thursday, 11 October 2007. Filed under: Business Intelligence, Commentary, Mergers |

We’ve been writing on this blog about the importance of doing deals smarter.  This is even more critical today than ever as the market becomes more difficult. 

Funding a deal with leverage is now more difficult.  The days of lending at 10x EBITDA are now over.  It is more likely that you will see figures at around 6.5x EBITDA. This decrease is significant, yet not enough to stop the well-funded hedge and private equity funds that are still awash in cash (and still raising more).  Returns will be lower, however, and some private equity houses will pause.

The Finance Director included a nice excerpt from the first chapter of our book a few weeks back.  Click here to see that excerpt, although we have copied it as well below:

The Need for Business Intelligence in M&A Decisions

Mergers and acquisitions are an integral part of the global strategic and financial business landscape. Deals, especially when hostile, cross border or among large companies, might be front-page news, yet there is a great deal of conflicting evidence as to whether they are successful or not. Scott Moeller and Chris Brady investigate.

Some M&A failures have been dramatic. The AOL-Time Warner deal lost 93% of its value during the integration period as the internet service provider merged with the publishing company in an attempt to combine content with delivery. VeriSign, another internet-related services company, lost $17bn of its 2000 $20bn acquisition of Network Solutions and its stock fell 98%.

“A full merger or acquisition should be attempted only when there is a compelling reason.”

It is not just the fallout from dot.com acquisition failures that lose money. A classic example of failure – and one where the very basic elements of business intelligence were ignored – is Quaker Oats, the food and beverage company founded in the 19th century.

In 1994, they acquired Snapple, a quirky fruit-drinks company, for approximately $1.9bn, thus becoming the third largest producer of soft drinks in the United States. Less than three years later, in 1997, Quaker Oats sold its Snapple division for just $300m.

BUSINESS INTELLIGENCE FAILURE

Only following the acquisition of Snapple was it determined that the pricing and distribution methods were different for the two drinks lines and, most importantly, the cultures were incompatible. Additionally, in the quarter just prior to the acquisition, Snapple had experienced a 74% drop in sales on a year-over-year basis, a fact that was only revealed to Quaker Oats shortly before the deal was announced even though this should have been evident to even a casual industry observer.

The key word in the above paragraph is – ‘following’. It is the key identifier of an intelligence failure. The term intelligence here is defined as the use of legitimate competitive intelligence techniques. Quaker Oats had simply failed to gather the most basic intelligence in advance of the deal.

Failed deals are, unfortunately, the norm not the exception. No matter how it is measured, a fair degree of consistency has emerged in the results of studies that have examined M&A ‘success’. Well over half of all mergers and acquisitions should never have taken place and many studies have found that only 30% to 40% were successful.

The challenge for management is to reconcile the low odds of deal success with the need to incorporate acquisitions or mergers into their growth strategy. This is where an embedded intelligence function is essential.

“Intelligence is defined as the use of legitimate competitive intelligence techniques.”

Prior acquisition experience may not be a predictor of success, although some studies have shown that companies do better when making an acquisition that is similar to deals they have done previously. Here again the need for specific intelligence is central.

Studies have shown that inexperienced acquirers might inappropriately apply generalised acquisition experience to dissimilar acquisitions. VeriSign appears to have failed with its 2004 purchase of Jamba AG despite having made 17 other acquisitions in the previous six years, many in related internet businesses. Intelligence cannot, therefore, be taken for granted.

DIFFERENT TYPES OF MERGERS AND ACQUISITIONS

Different types of mergers and acquisitions are driven by different goals and raise different issues for the use of business intelligence.

Horizontal mergers are mergers among competitors or those in the same industry operating before the merger at the same points in the production and sales process. For example, the deal between two automotive giants, Chrysler in the US and Daimler, the maker of Mercedes cars and trucks, in Germany, was a horizontal merger. That deal, of course, was of questionable strategic value, but other horizontal mergers have been very successful: Exxon Mobil, GlaxoSmithKline, Royal Bank of Scotland (acquiring NatWest) and many others.

In horizontal mergers, the managers of one side of the deal will know a lot about the business of the other side. Intelligence may be easy to gather, not just because there will likely be employees that have moved between the two companies over time in the course of business, but the two firms will also most likely share common clients, suppliers and industry processes.

Vertical mergers are deals between buyers and sellers or a combination of firms that operate at different stages of the same industry. One such example is a merger between a supplier of data and the company controlling the means through which that information is supplied to consumers, such as the merger between Time Warner, a content-driven firm owning a number of popular magazines and AOL, the world’s largest internet portal company at the time of the deal.

There is often less common knowledge between the two companies in a vertical deal, although there may still be some small degree of shared clients and suppliers, plus some previous shared employee movement. Cultures are likely to be very different.

“Different types of mergers and acquisitions are driven by different goals.”

Conglomerate mergers take place between unrelated companies, not competitors and without a buyer / seller relationship. This type of merger was common in the past, but has fallen out of favour with shareholders and the financial markets except as practiced by some hedge funds and private equity houses. When they do occur, they can benefit greatly from the more creative uses of business intelligence. For example, detailed scenario planning involving simulations based on high-quality information can identify unforeseen issues that can drive such deals and provide a logical rationale.

WORTH THE RISK?

M&A deals are risky. A full merger or acquisition should be attempted only when there is a compelling reason because the odds of success are so low. There’s the tendency to overpay when acquiring another company. For bidder and target alike, it is critical to use the intelligence function as an integral element of the process.

The outcome of a merger or acquisition is never pre-ordained. It is necessary to crawl carefully through the minefield, using as much intelligence as possible to avoid the potential and often very real dangers.

Edited excerpt from Chapter 1 of Intelligent M&A: Navigating the Mergers and Acquisitions Minefield by Scott Moeller and Chris Brady, published by John Wiley, 2007.

The following people contributed to this article:

  • Chris Brady, Business School Dean, Bournemouth University
  • Scott Moeller, CEO of Executive Education, Cass Business School

First published in The Finance Director on 21 September 2007

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Scenario Planning in M&A

Posted on Monday, 1 October 2007. Filed under: Business Intelligence, Commentary, Mergers, Scenario Planning |

An acquisition or merger is difficult to get right, and the other alternatives should be vigorously considered before a deal is contemplated.  Those alternatives include organic growth, strategic partnerships, joint ventures, partial ownership of the target, joint shareholdings, or even ‘doing nothing.’ 

But when acquisition or merger is necessary, it must be entered into carefully and after much consideration – not hastily or only in response to the actions of competitors.  This is a principal premise of our book, Intelligent M&A:  Navigating the Mergers and Acquisitions Minefield, and scenario planning is one very important tool that should be used.  No military planner would even consider going into battle without conducting detailed scenario plans, yet many business leaders will engage in a merger or acquisition without such planning. 

Military and business intelligence techniques can be used in an M&A deal – and not just in the due diligence stage when such techniques have traditionally been employed to uncover confidential information. 

Scenario planning should start at the very beginning when the merger is just an idea floated by the CEO, one of the planning team, or an outside advisor.  It will help to determine if the longer-term future is being properly considered, and not just – as is too often the case – the immediate future where deals are made in response to a recent and short-term change in the market.  At Shell, for example as we noted in an earlier post from May and in our book published in June, their scenario teams are tasked to ‘help charter routes across three interrelated levels:   the Jet Stream of long-term trends, uncertainties, and forces;  the Weather Systems that reflect specific features of key regions; and the Turbulence of market level factors.’  By forcing management to consider all three, they avoid making long-term decisions in response to short-term issues – turbulences.  Shell has kindly put its Jet Stream level scenarios on-line at www.shell.com/scenarios, which benefits those companies not positioned to conduct such macro-level research themselves.

Many CEOs, especially at small and medium-sized companies, find planning a lonely activity at the top of their organization. Most of their managers and indeed the rest of the company is appropriately focused on the conduct of the day-to-day business and therefore not looking much beyond the next sale or production target.  Joint decision-making, brainstorming, and other group planning activities are a luxury unfortunately relegated to at most a few days at an annual off-site meeting.  Consultants can clearly help in this regard, but another tool – straight out of scenario planning and business intelligence – is to use the power of the bookmaker.  There can be great wisdom in the masses, especially when the people in those ‘masses’ have their own hard-earned money at stake.

Where can this be found?  Where people or companies have ‘bet’ on the future, either literally (through bookmakers) or figuratively (in hedging risks in the markets).  The former is useful if the company’s markets are affected by events where there are established betting odds continually updated, which today go well beyond whether Germany will win the next World Cup or the Yankees the World Series.  The futures markets can tell a lot about prices months and years ahead for energy and other commodities including foodstuffs (which give an idea about future weather conditions).  Risk management markets exist in some very unexpected areas affecting business.  Check out www.cantorindex.com and www.intrade.com for some examples. 

As mentioned in another earlier post on scenario planning, to give an idea of just how far these can go, consider that in 2003, a smart – but perhaps insensitive – analyst in the Pentagon proposed setting up a speculative futures market on terrorist attacks.  Nothwithstanding the obvious temptation for real terrorists to be able to financially benefit from their actions, the idea was sound.  Getting people to bet real money on future events focuses the thinking of those people, attracts those who are expert in an area and may actually know more, and saves replication of planning in multiple locations.  

Yes, there really can be wisdom in crowds.  In the right situation, of course, and selectively.  There’s danger in always following ‘conventional wisdom’ and remember that many great idea have been heckled when first proposed.  That’s where leadership comes into play – recognizing when to use the power of scenario planning and when to be ‘bold, daring, and different,’ to paraphrase Anita Roddick, the founder of Body Shop.  

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