For one of the sharpest Finance Directors in the business, Bryan Wilsher of Loewy Group talks surprisingly little about numbers when it comes to Mergers and Acquisitions. Chemistry is his main concern. In the first of our in-depth series sharing the front line experience of entrepreneurs, Bryan and former Mediasquare CEO Jeremy Middleton reveal what does and doesn't work from an acquirer's perspective, writes Hugh Mason
“Loewy Group came together in March 2004 as a pure merger of a number of companies who were interested in achieving shareholder value by getting together,” says Bryan Wilsher. “We were backed at that time by Luke Johnson of Pizza Express fame. No money changed hands - we came together under a buy and build strategy which we used to acquire perhaps 20 companies ranging in size from one, two, three, or four people, up to 70 or so. The scale went up over the years and we learned a lot through that process: some good stuff and some things not to do as well.”
Bryan sees a clear set of key issues to consider in deciding whether or not to hook up with another business. The first is to get real about the terminology.
“People may not always like to face up to the fact that they are being acquired,” he says. “There can be pure mergers if there's no money changing hands but normally, if there's money changing hands, it's acquisition.”
There's a cynical old adage that says businesses come together for one of two reasons: greed or fear. Neither motive is the the starting point for success, says Bryan.
Chemistry
“Funnily enough, the very first thing we're always interested in talking about is chemistry. How's it going to work? What do your guts tell you about the people you're meeting and thinking of getting together with? Is that a good feeling when you've gone through one, two, three, four meetings? I say it every time to people who we talk to and I've spoken to well over a hundred at this particular time: 'If you gut is telling you something is wrong ... I'm not really comfortable about this ... don't do it. Stop the discussions. It's extremely important.' It's a non-financial item on the agenda but very, very important. I rate chemistry and getting on with the people you have to work with for quite some years as being the number one issue.”
For Bryan, the next factor to be sure on is honesty around objectives. “If you have a number of partners in your business at different ages, with different objectives, you have got to be honest about that and tell the people you are getting into bed with. Maybe one of the partners wants to leave. Nothing wrong with that - you can start working on succession planning. But don't let your buyer, acquirer or merger partner find out, particularly after the event, as that could sour the relationship.”
Like most groups, Loewy has a very clear commercial focus and expects the same in its acquisitions.
“You are here to create more value by getting together, than by staying on your own, that's clearly the objective. We focus intensely on shareholder value. We don't always get it right and not all acquisitions work well. That's normally when we have missed out some of the ingredients, some of the things that we have learned to look at very closely. A lot of those things, in a people business, are non-financial.”
Carry the staff with you
M&A can seem like a huge change to the employees of a business being acquired, even if the offices and most of the faces stay the same day to day. It's important to carry the staff with you through the process.
“You're creating value and, while as owners of the business ownership might be concentrated maybe in just one, two, three, or four people, you have got other key individuals in there too,” Bryan says. “We always look to see whether the vendor of a business is prepared to share value with their key members of staff. It's important to unite them with your own objectives. If they think you are just taking all the money off the table yourself, they can get pretty disaffected. We should remember that, in a people business, the assets go home at night. Clients are great but motivating your staff is absolutely vital.”
M&A also needs to put entrepreneurs in a position where they can enjoy building value on a scale that wasn't possible when they were independent, Bryan adds.
It should be fun
“Whatever you do, it should be fun. We've learned recently to ask potential partners we are acquiring: 'What are your objectives? What could you do if you were freed of a hell lot of constraints? How imaginative are you, how expansively can you think of ways to add value? What excitement can you bring to this merger? It's not just what you've done in past which is going to be terrific. What can you do for the future?”
Bryan calls that process of envisioning a positive future together “taking the gloves off:”
“You've got to take your gloves off to help us link your ambition with the money you would like to make, because the money will come from developing profits that will only come if you're having fun and you're good at what you do.”
Jeremy Middleton is the former Chief Executive of Mediasquare plc. He chose three examples of M&A that didn't work and three that did to illustrate Brian's points.
“In my career at Mediasquare, I learned a huge amount about acquiring businesses and creating shareholder value. Latterly there I also learned a huge amount about acquiring businesses and destroying shareholder value! That's the honest appraisal. If you get it right, it will work very-very well. It's very-very-very easy to get it spectacularly wrong. We had a very good run from 2002 through to about 2006 and then a very poor run from 2006 to the quarter in which I left in 2007. Subsequently, the business is still struggling.”
Jeremy's first example of M&A that did not work out was the “merger” of marketing groups Lighthouse and Cordiant.
“Lighthouse was a roll up by a group of venture capitalists,” recalls Jeremy. “They brought together a whole group of agencies very quickly, put a brand on the front saying 'Lighthouse Group', told the world it was worth ₤350 million and sold it to Saatchi & Saatchi, plc, the business that became Cordiant.”
“Saatchi & Saatchi, plc. borrowed the ₤350 million to pay for it, then found they couldn't pay that back. The whole group collapsed and the rump of it was bought by WPP ... that's a very simplified version of the story,” he says.
“Some people said it was an acquisition but I don't think there is a difference between an acquisition and a merger. If you look at the definition of merger in any dictionary, it says 'the transfer of property from one corporate entity to another corporate entity'. In my view, there is only an acquisition. Somebody always has an agenda, somebody always wants to come out on top and somebody always wants to own more than you. They might not admit it and but that's always the case,” Jeremy observes.
His next example was the merger between AOL and Time Warner.
“If you remember, that was at the height of the dot com boom and it wasn't actually driven by commercial logic. It was driven by hype in the market,” Jeremy says. “The principal reason that I think it didn't work, long term, is because the institutional shareholders decided it wasn't going to work. Operationally, management couldn't get it together and the shareholders said, 'Do something about it, kill it, reverse it.'”
Jeremy's final example of a merger that didn't work is personal to him, because it was attempted within Mediasquare plc.
“We owned two companies as the 100% shareholder,” he says. “One was called APR photography Limited and that business focused on designing and producing catalogue pages from a creative perspective. Then we had another business called 490 Limited which also focused on designing and producing catalogue pages, but much more from a production perspective. One was in Leeds, one was in Manchester. One worked for Argos, one worked for Homebase. One worked for B&Q, the other worked for the Shop Direct catalogue companies.”
“They both had big warehouses, they both had teams of photographers, they both had teams of page make-up artists,” recalls Jeremy. “Given that they were 50 miles apart, they were doing the same thing, for the same type of customers, we thought we could bring them both together. We might reduce the head count within the business and maximize the use of all facilities. But we completely overlooked what Brian was talking about a moment or two ago - culture.”
Jeremy recalls that the differences between the two firms were subtle, but deeply entrenched.
“The production based business was very old fashioned and very production focused, the other lot felt that they were very creative. As soon as we put them together, they absolutely hated it and within 12 months of bringing the two businesses together, we have to separate them all out again,” he says. “Unless you can get the leaders within the businesses to want to work together, there is no point in actually bringing together.”
For Jeremy, it's all about forging a shared vision. Yet even in M&A that subsequently turns out to be successful, there can be pain.
Give it time
“If you recall, about three or four years ago, Morrison Supermarkets from up North, decided to buy Safeway Supermarket who were principally down South,” he says. “Ken Morrison, who was the 30% shareholder of the public quoted group bearing his name, went ahead and bought Safeways in the face of some shareholder opposition. The two years following the acquisition were a complete disaster, as far as the City was concerned and as far as investors were concerned. They pilloried Ken Morrison in the press and they insisted on him being stripped of his executive duties.”
The lesson is that successful M&A needs time as well as vision.
“If you look at Morrison's today, 3-4 years down the road, the business is performing fantastically,” Jeremy says. “Ken Morrison had the foresight to see where his business needed to be for many years, and M&A gave the business a much, much stronger platform from which to compete with the likes of Tesco.”
At the beginning of a merger or acquisition process, it's essential to plan the next five years, Jeremy says. He suggests that anyone thinking too focussedly on the acquisition process itself, perhaps 2 or 3 months, or the 6 months immediately post acquisition, will be in trouble.
“The second example of M&A that I think worked very well was Royal Bank of Scotland's acquisition of Natwest. We tend to forget about it now because, more recently, RBS got into big trouble,” he says. “But go back six years. Fred Goodwin and his team were massively ambitious. They were a smaller player and they spent a huge amount of time planning their takeover of Natwest and planning exactly what they would do afterwards for the long term. Year after year after year, they executed against that, and they drove massive shareholder value as a result. Unfortunately, they then unbundled that but nevertheless the acquisition of Natwest was, I think, very skillfully handled.”
Complementary skillsets
Jeremy's third example is now part of Digital Marketing Group plc, which listed on AIM a couple of years ago. It successfully acquired Dig For Fire, another digital marketing business, based in Sheffield.
“Dig For Fire was created three years previously by the merger of two businesses: a marketing agency called Paradigm and another called Scope,” Jeremy notes.
“On their own they were relatively modest, agencies, one with about two million in revenues and the other about four. The guy that ran Paradigm, Charles Glover, knew how to run an agency. He was very focussed on planning and strategy and run the business very well,” Jeremy says.
“On the other hand, Scope was run by a guy called Charles Buddery and what he knew more than anything else was how to make the absolute most profit out of everything. The two businesses came together on the understanding that Charles Glover would slightly understudy Charles Buddery.”
According to Jeremy, Buddery set the strategy in terms of Dig for Fire made money while Glover set the strategy on to how they actually run the business.
“The net result of that was they managed to sell Dig For Fire to Digital Marketing Group three years later for a substantial premium relative to the value that a small agency based in Sheffield would normally attract,” he says.
For Jeremy and Bryan, the key ingredients for successful M&A are straightforward: chemistry, honesty, making sure you're creating value and sharing it, having fun, motivating people and thinking expansively about the future.
Bryan Wilsher and Jeremy Middleton shared their experiences with The PemBRIDGE CLUB, which meets quarterly. Membership open to any business owner serious about exploring new models of partnership and collaboration.
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