Transcript
Speaker: With COVID -19 still affecting our lives and business, how are M &A transactions being viewed in light of all the people related issues involved? We'll explore those in this episode of The Market That Moves America. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing midsize companies and help you take advantage of new opportunities.
Speaker: Welcome to the Market That Moves America. I'm Doug Farron, Managing Director of the National Center for the Middle Market, located at the Fisher College of Business. Today's episode is about M &A in a pandemic, and in particular, what happens to the feeling of a place after merger or acquisitions? What do leaders need to think about? And is there a new playbook for the future?
Speaker: My guest today is Jennifer Fondravet of Day One Ready Consulting. Jennifer, welcome back. Great to have you here today. And if you could, tell us a little bit about your background and about your company. First, thanks for having me back. Always nice to be a second time visitor. And as you said, my company's Day One Ready. I came into the merger and acquisition space circuitously because I'm the survivor of three
Speaker: multi -billion dollar acquisitions and decided to write a survivor's playbook. Actually, the last time I was on, we talked about it. Now what? A survivor's guide for thriving through murders and acquisitions, and it was
Speaker: just in the course of writing that book that I was encouraged by a lot of the CEOs and private equity leaders who I interviewed for the book to frankly pursue a business around it. One focused on the human capital aspect of mergers and acquisitions. So that's what I do now. I advise business owners, executive, private equity leaders on how to manage the people challenges of M &A and mitigate the risk.
Speaker: you know, so that you can achieve that business valuation that you seek from the beginning of a merger and acquisition. Terrific. And we want to spend some time today talking about things that are happening in such an unusual and uncertain environment due to the COVID pandemic. Really uncertain, do you think? Yeah, to say it a bit understated, yeah, certainly uncertain.
Speaker: But yeah, let me just describe a little bit about what we've been doing here at the center, and then I have a bunch of questions teed up for you, just things that you're seeing out in the marketplace. But we recognize at the NCMM that we needed to start collecting data about how this once in a lifetime, quite frankly, pandemic was impacting the middle market. As we see typically, lots of stories out there about small businesses, and certainly we know that
Speaker: Bigger businesses have the resources generally to survive these types of shocks. But we wanted to understand what was happening in the middle market. So from a center perspective, we've collected a few different data points. One was in March of 2020, shortly after the WHO declared COVID a global pandemic.
Speaker: We surveyed 250 businesses just to see initial reactions, initial impacts. We went back in June to survey 1 ,000 companies, and a lot of the data that I'm going to reference here is a summary of some of those findings.
Speaker: And just to share a little bit more, we're going to be going out here at the end of the year in our December middle market indicator survey to collect additional data now that we seem to be in what can be called either a second or third wave, depending on who you talk to of this pandemic. So first, let me just summarize a few of the things that we found in June. First and foremost,
Speaker: 13 % of middle market companies felt that COVID could be catastrophic to their business. Now we didn't necessarily put a strict definition on that, but you can only read that to be a possible closure or bankruptcy.
Speaker: In addition, in the eight years that we've been surveying the middle market, this June survey was the lowest levels of economic confidence we have ever seen. And again, that goes back to the first quarter of 2012, as we've been measuring this.
Speaker: More specifically, as we think about investment planning, growth projects, possible acquisitions, just one year ago, in December 2019, about 30 % of middle market companies were saying that they were saving cash. The rest, you know, mix between CapEx, acquisitions, training, investing in IT.
Speaker: In June of this year, that number had jumped up to almost 50 percent, again, reflecting the uncertainty and the conservative approach to kind of managing future growth activity. However, I would say we are hearing that recently some deals are starting to slowly come back. And I wanted to start, Jennifer, with just kind of your impressions of that data, number one. And then if you could share kind of what you're seeing out in the M &A space right now.
Speaker: Well, definitely the data supports what I'm seeing, Doug.
Speaker: What I found most interesting, I love the fact that you did that study so quickly and then did it again over time. And what I found fascinating is in the summary of how businesses are seeing a way out, what I took away was they're seeing as a priority to re -engage employees and customers.
Speaker: For those who are able to weather it But how they see their way out because obviously I focus on the on the people piece and that's what I'm seeing as well what businesses That I saw be successful and successful I think has become a relative term right who just were able to not close doors at this point be they pivoted early they they saw that
Speaker: their business model had to change in order to survive. The obvious ones we saw were restaurants who quickly realized the need for takeout, curbside delivery, all of that. But you equally saw, and I think you went into this a bit in your data, manufacturing that pivoted. They went from making auto parts to respirators.
Speaker: Companies that may have made alcohol that then became hand sanitizer producers or even companies that pivoted and collaborated with others to create and distribute masks. So what I saw was those companies who didn't stay bound to their business model and what had been their long -term strategy, but looked at, okay, here's what our core values and strengths are. How do we pivot that?
Speaker: And then I'd say secondly, it was those companies that engage their employees who said, listen, we're going to do whatever we can to hold on to you. And for those we have to let go, we will do what we can to bring you back, but who are open and transparent.
Speaker: about what they saw. They didn't stay stuck in denial. And I think that in particular, I think those companies, it bodes well for them to be able to ride this out and get back to, you know, I can't say business as usual, but back to business as perhaps the way they had typically done it in the past. Sure. Yeah. You touched on some of the ongoing challenges that were cited in
Speaker: in the kind of future of dealing with this situation, you cited the employee engagement and customer engagement. Do you have any other than some of the examples that you shared? How do you assess the types of businesses that are succeeding and kind of steering their organizations? What are some of the
Speaker: the tools that they're using or do you have any other examples you might be able to share about how they can successfully either leverage their culture if it's a strong one or build again deeper engagement with customers in such a difficult and unusual time.
Speaker: Well, I always go to the leadership traits. And one of the key lessons that I think we all saw was your standard definition of leadership traits, you know, the visionary who lays out a plan, a strategy, and then delegates to execute.
Speaker: That type of leader did not do as well in navigating this crisis. We saw that whether you looked at political leaders, executives, scientists, it was those leaders who demonstrated compassion and empathy, who actually
Speaker: were transparent with what they saw and were very practical, right? They laid out in plainly spoken words, here's what's ahead of us. Here's what's going to be required of us. And they ended on a note of optimism, right? They gave people hope. So the lesson I take from that that I think is hugely applicable to merger and acquisition integration is
Speaker: I have found in the past, we tend to evaluate a leadership group on the standard leadership traits. As I said, the vision, the authority, the command control type of leader, when I think you've now seen proven globally
Speaker: that those leadership traits aren't always the most effective when people are faced with uncertainty. And in murders and acquisitions, you have an uncertainty sandwich. You know, it's a tsunami of change, as I like to say. And so I think we need to pay close attention to the leadership traits that did well during this pandemic.
Speaker: and how that applies to when you're trying to get an organization to pivot and adapt. It's a different type of leadership model that needs to be applied.
Speaker: in light of some of those leadership approaches that you just mentioned, you had previously devised an M &A survivor's handbook. Do you think there might be some applicability or utility for a, we can call it almost like a playbook for leaders in surviving this type of sudden, and really, if you think about it, universal shift,
Speaker: in the environment. Do you see a future for that? Could there be a crisis playbook that leaders could put together given everything that they've learned and done these last eight or so months? I definitely think there is. I'm sure, Doug, you've been part of those conversations where they call the pandemic the Black Swan, that event that we never thought was possible.
Speaker: But I would say baked into that playbook, and this is to me the greatest lesson learned, baked into that playbook is certainty is no longer certain. And so the ability to adapt and pivot and shift is inherent in the playbook. I think implicitly people think with a playbook, oh, if I just follow this, then everything will be fine. In fact, I actually have said
Speaker: when people have talked to me about my own handbook, right? Because I wrote my book from the perspective of someone who had survived three multi -billion dollar acquisitions. I'd been on all sides of the equation. I'd been acquired. I've been acquirer. I had been acquired by private equity. And so what I wanted to provide was transparency on what to expect
Speaker: But I even say, you can't anticipate human behavior. And as much as we would like to, it's impossible. But I think what this pandemic has done has showed us
Speaker: what happens when you deal with a crisis of this magnitude and frankly, how differently people react. I'm confident you've had multiple experiences where you might have talked with someone who you thought was going to react very differently to the pandemic than they did.
Speaker: either their philosophy on mask wearing or anything. I think a lot of people were surprised in conversation, oh, I would have thought this person would have reacted completely differently. And so I use that as another lesson for merger and acquisition integration. You can't anticipate and assume everyone's going to react the same. They don't, particularly when faced with massive amounts of uncertainty.
Speaker: And so for me, the playbook is not so much a dictate on here's what to do, but it's a blueprint. Certainly, okay, here are the things that happen. Let's be smart on how we react.
Speaker: And so on a related kind of a follow -up to that, on your previous visit to our podcast, a lot of that discussion was on corporate culture. How do you think that plays a role? So you've got your leader, you've got your kind of executive vision, but then culture specifically when a lot of people have yet to really return to the work environment full -time,
Speaker: seen whether this best are the ones that had leaders who, again, they showed what we call soft skills. They had an awareness of what their employees were facing, but they involved their employees in the strategy development. They took cues from the people closest to the work.
Speaker: How does that play a role
Speaker: And again, the best example that we all have seen, if you look at just the politicians who are most successful, you know, and I'm talking whether it's senators or governors, you know, won't throw out names. I think we all have our own view of who did well and who didn't. But I think what we can take away is those leaders who tapped
Speaker: those closest to the work who made them part of that roadmap development. And I think I would say the same thing applied with businesses I saw be successful. It was the leaders who had the people closest to the work say, okay, how do we adapt? How do we pivot? And having those people
Speaker: from the organization involved in developing that plan allowed them to feel invested in it and to be part of saying, okay, we're in this together. And I think that was critical. And I think that's particularly true for the middle market. I know it gets more difficult as you've got more employees.
Speaker: But I would still say it was those companies who the leader didn't act like he or she knew all the answers, but engaged other people to determine what was the right path forward. Yeah, we often mention that's one of the strengths of mid -sized companies is
Speaker: that they're kind of at the perfect crossroads of resilience and runway where, you know, they can pivot quickly. They can usually, you know, take advantage of opportunities that they see. But what I wanted to ask you next was,
Speaker: Um, uncertainty, flexibility, sometimes those things maybe fly a little bit in the face of being able to develop a longer term strategy. Um, you know, we know that this is much less of an inf of a formal process in the middle market to be quite honest, but how would a company go about even thinking or, or do you recommend that they don't even think.
Speaker: you know, three to five year strategic plan used to be pretty common. Do you think that's going to go by the wayside for the short term or how is it even possible to think about, you know, those types of longer term visions in when we're still dealing with so much uncertainty?
Speaker: Yeah, it's funny that you asked that because I was having a conversation in a previous group discussion and we pulled the group and 48 % said, yeah, we can still do long -term strategy and 52 % said, no way. And then someone chimed in and said, what do we call a long -term strategy now?
Speaker: Right? As you pointed out, I mean, do you remember when companies would try to do five to 10 year strategies? I remember those days. I remember thinking, wow, okay, we know exactly what we're going to do for the next 10 years.
Speaker: I think the key part of the question is, yes, I do think it's possible. Not so much for, this is the strategy, here's what we're going to do step by step and we will achieve this. But as we hear
Speaker: As we hire now more and more, part of the process is the journey, right? It's understanding, okay, how would we plan? How would we anticipate? What is our strategy? I absolutely think we can't abandon strategy development that has to continue to be part of a business, certainly, as you're looking for where your growth opportunities are. But baked into that is, again, the flexibility that things
Speaker: things can change and that they will change. One of the exercises that I do with executives going through a merger and acquisition when they're just in the discussion stages and trying to determine having executives from both sides do a pre -mortem.
Speaker: So essentially, right, we act as though the decision's been made. This has gone through. Now, what are all the ways that it will go wrong? And that includes, it's almost a reverse SWOT analysis. What are the things internally, right? Could we lose talent? But equally, what are the things externally, right? What are things that our competitors might do? Government changes, compliance, new restrictions that might upend this decision. And I find that
Speaker: For the most part, those things don't happen, but the fact that you've gone through the planning for it, that you have thought through, okay, we have a plan B, C, and D, that should we need to trigger that or pull the lever for one of those, we at least have confidence that we've talked it through and thought it through.
Speaker: One of the biggest obstacles I find in scenario planning and even in talking to middle market executives, I think there's a fear that, well, if you say it, if you say it out loud, it's going to happen.
Speaker: It's kind of like, well, I say, well, just because you write your will doesn't mean you're going to die tomorrow. It's part of the planning process and doing those pre -mortem exercises allows you to have more confidence in your long -term strategy that you've at least anticipated possible things. You can never anticipate everything. There are always going to be surprises.
Speaker: But just the process of going through that kind of a pre -mortem exercise I have found helps you feel more confident that whatever gets thrown at you as you're trying to pursue your long -term strategy, you at least have some idea of what you'll do. So let's talk about M &A integration a little bit in the middle market. I was speaking with a company earlier this week
Speaker: Very similar to you, they kind of work on post merger integration. They tend to focus more on the operations and IT side as opposed to the human capital side. But they describe to me what is very much for them a V -shaped, not recovery, but V -shaped activity curve where they certainly saw everything just kind of grind to a halt in the second quarter, but now they're as busy as they've ever been.
Speaker: What are you seeing in terms of talking with companies, leaders? What are they looking at in terms of opportunities? How are they approaching maybe the chance to integrate a new acquisition or things into their business? How is that going? What I've heard described that makes sense to me is
Speaker: the W shape, right? So V shape, but anticipating up and down and up and down. And I've heard that repeatedly and I've seen it. I think there is...
Speaker: certainly a desire, a pent up desire to try and get back to, you know, as close to what a company was doing originally, but also an acknowledgement. That's why I thought it was great, Doug, that you did the survey twice. And I suspect if you were to do the survey again, which I think you may have said you're already doing, you know,
Speaker: The swings in optimism, where people had one view in March, a completely different view in June. Now with the election behind us, we think for the most part, you'll get another point of view. So I would say muted optimism and hopefulness. Now, obviously the companies I'm talking to are the ones who were able to weather.
Speaker: The storm, I don't have visibility on the repercussions of the businesses that closed, the ones that didn't survive. I do anticipate that M &A, and you will probably have a better window on this than I do, will have a significant upswing again in mid -market given the number of companies struggling to survive, the ones who held on, but their runway has gotten a lot shorter. So I think there's
Speaker: There's optimism, particularly with the announcement of the vaccine, but it's muted. I think people just have, as we all do, you're trying to get line of sight and it's hard to anticipate where things can get back to more stable footing. Sure. Doug, what are you doing your survey again?
Speaker: Yeah, our fourth quarter survey is going out shortly after Thanksgiving. So again, we'll be measuring all of our normal middle market metrics on growth, performance, confidence, challenges, and so forth. We're going to go back with a set of questions on COVID as well. So we'll have another data set to share probably shortly after the beginning of the new year.
Speaker: I think you're going to have a fascinating analysis. You could probably have the W I referred to, right? I suspect even just each quarter of 2020 would be wildly different in terms of people's perspective.
Speaker: Yeah, I agree. So maybe we'll just wrap up with kind of getting your counsel on, you know, if you were talking to a middle market leader, you mentioned some of that pre -mortem and thought process that goes into opportunities. What advice would you give to a company who is maybe looking to do a deal, whether that's buying a competitor or
Speaker: you know, taking advantage of an opportunity to go into a new market, or maybe they're thinking about selling, you know, maybe it's a family owned business and they think right now, you know, now's a good time to exit. What advice would you give these leaders about the things they should be thinking about?
Speaker: Well, I would confess I'm always reluctant to give advice in a situation. Well, we've never had a situation like this, but when so much is uncertain, what I would say, and it comes frankly from the work I did in the
Speaker: In my book now what and and I would say a lot of the advice came from CEOs and CFOs and HR leaders and private equity who who always said, you know when When things are massively uncertain, it doesn't mean to be paralyzed, but don't make decisions you know when you're still trying to figure out your way forward that you you want to feel as though your
Speaker: You know, you're able to see the possibilities and oftentimes with so much uncertainty, you can't see that you've got to spend the time looking for where those opportunities are. And I think the businesses now that are looking for the gaps, right, innovating, pivoting where they're seeing gaps. So I'm certainly not advising, hey, go out and start buying or selling. I think, you know, business owners
Speaker: There's a lot of variables that play into that, but what I have seen is those businesses where they're seeing the opportunity to collaborate with someone who they may have thought was a competitor, but in order to stay afloat, they opened up and collaborated and pursued partnerships. I'm seeing more and more of that, and I think that is an upside, particularly in the middle market.
Speaker: where companies that may have been entrenched in looking at their business segment in one way have now seen, either through digital transformation or collaboration with companies that they may have seen as sworn enemies, those possibilities being more open to those and really evaluating what's it going to take for your business to be successful moving forward. I think
Speaker: Obviously, Doug, the center does a great job of highlighting how business owners need to be smart based on the data. So my perspective is purely from what I'm seeing, how I'm seeing business owners react and the moves that they're making to be successful.
Speaker: I lean in on the collaboration, looking for the gaps and seeing how they can capitalize on that, how they can bridge those gaps to shift their business in potentially a completely new direction, new markets, maybe even new target audiences.
Speaker: I'd like to thank Jennifer for joining us on the podcast today. For more about her, please check out her website, jenniferjfondrivet .com. And thank you for listening to The Market That Moves America. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever podcasts are found. Or you can subscribe and learn more about us at our website, www .middlemarketcenter .org.
