Michael  00:46

Our podcast sponsor today is strategytraining.com. If you want to strengthen your strategy skills, you can get the Overall Approach Used in Well-managed Strategy Studies. It’s a free download, and you can go to firmsconsulting.com forward slash overall approach. That’s firmsconsulting with an s, .com forward slash overall approach. And if you are looking to advance your career and need to update your resume, you can get a McKinsey and BCG winning resume template as a free download at www.firmsconsulting.com forward slash resume PDF. That’s www.firmsconsulting.com forward slash resume PDF. Hi, Baruch. Thank you for joining us.

Baruch Lev  01:32

Thank you.

Feng Gu 01:33

Thank you for having us.

Michael  01:34

So I’m going to get straight into this, because it’s really interesting, right? So everything you’ve studied, everything you’ve come up with, makes perfect sense to me. My question is, why do CEOs repeat these mistakes?

Baruch Lev  01:46

In many cases, companies gets into get into problems, yes, like lagging sales and earnings, patents close to expiring, losing market share. And then there is huge pressure from particularly investors, large investors, influential investors, the board to do something and in many cases is to do something big. And something big is usually the acquisition. So they are convinced that, egged by investment bankers,

Michael  02:34

Yes, yes, consultants, consultants.

Baruch Lev  02:37

and others, that profits from the whole thing, they are convinced that they can save the situation with an acquisition, and in some cases, they do. I mean, we don’t show that this is a complete failure. We just show a large rate of failure. But in some cases they succeed. In many cases, they don’t succeed and they waste huge amounts of money. As for the modern the valuation guru calls calls acquisition as the greatest value destruction in corporate business. And to some extent, he’s right. So it’s saving the situation. There are two, two basic situations that call for something. One is, as I mentioned before, lagging operations, lagging sales, using market share. The other is that you look around you, you look at the competitive situation, and you realize that you need to change your business model. You can no longer work within the same business model, like, let’s say, packaged foods, you have to add something, and a relatively quick way of changing business model is buying a company that is doing this new thing, and you use it To change the business model. So these are the two two main incentives to to do acquisitions. Studies have shown that CEOs are optimists, and 30 to 40% are over optimist over confident in their ability to acquire to revive targets, so that’s what they try to do.

Michael  04:50

So that’s an interesting point. So you’re saying that one example is that they under pressure to do something big, right? That makes sense. The other one, which is interesting is. Where you said that they want to change their business model, and to them, it would seem the best way to do that is to buy into the new business model, versus organically, make the transition slowly into something new.

Baruch Lev  05:12

Yes, and yeah, you have many cases that traditional, traditional companies, like in insurance companies are buying today, AI companies and others to basically change the business model.

Michael  05:32

Yes, I looked at one of the key points you had here, which is companies need to conduct objective these data, exhaustive, correct due diligence and so on. I’ve worked with many companies on this. I remember one particular company, this was many, many years ago, I would say, by mistake, they made an investment that was enormously successful for them 20 years to 25 years later, that investment makes up the bulk of the valuation of that company, seeing that, they then created this very impressive m&a arm within the business, and they brought in really talented people that did all of the right kind of analysis, but they were never able to replicate the initial success, because while they said all the right things, Management never took the views of the M A department into consideration. I mean, one situation, the CEO met another CEO when we attended a conference, and together, they decided they’re going to do a deal, but it was not based on any numbers. So I think there’s one thing about having the numbers, but how receptive is management to that kind of detailed thinking in your experience and work.

Feng Gu  06:43

In one of the chapters, we talked about why CEOs may not be very receptive to object analysis, as Brooke just mentioned, CEOs are special type of professionals because they’re more overconfident than regular people, and their incentives making acquisitions are also very, very skewed, because by making acquisitions, in many cases, even failed acquisitions, they actually don’t pay very much for the consequences their acquisition still goes up. The majority of them receive a one time bonuses for just completing a deal instead of succeeding in making acquisition. And because most acquisitions increase company size at the end of the acquisition, the CEOs receive larger compensation because the company size is increased by acquisition. So these two factors, one is overconfidence of CEOs, and the other one is the highly skilled and wrong incentive for conducting multiple acquisitions really stand in a way and prevent many CEOs from thinking more objectively the consequences and the merit of acquisitions they consider.

Baruch Lev  08:00

Shall I may add something? Oh, please. You mentioned CEO. Don’t pay attention to numbers. Numbers are usually bleak. Yes, economics is bleak. I mean, Churchill is famous for saying one of his many great things that he wants one armed economist, because all economists that he consults with are saying on the one hand, on the other end. So he wants a one hand economist. You get the numbers. The numbers are usually with scenarios, some of the scenarios look bad. So in many cases, in many cases, they avoid the very detailed analysis that they get, and they go for more visionary things. And you also mentioned in your question an extremely important point, which is due diligence. I mean, due diligence, in many cases, is a travesty. Yeah. I mean, we, we want one of our, our three examples in in the second chapter, The Good, the Bad and the Ugly. The name that we stole from the famous film is Hewlett Packard. I mean, they, they bought an empty shell for an $11.5 billion only for a year later to basically write off 80, 85% of the entire investment. And you ask yourself, How can this be? How can it be that a technology company cannot cannot search research? Search another technology company and find out that the whole thing is a hoax. In this case, generally, they don’t like numbers.

Feng Gu 10:11

Yeah, along the same lines of due diligence poorly conducted. In our book, we offer a similar example and a more recent one. This is Prudential’s recent acquisition of a small companies they claim to specialize in using artificial intelligence and data analytics to identify policy holders, prospective policyholders, and then increase their sales. And turns out to be exact the same thing as Brooke just mentioned, they basically spent two to $3 billion to buy an empty shell and also got themselves themselves into some regulatory trouble. So by putting this term due diligence there, we cannot just assume everything is thoroughly examined. All risk factors have been identified. It’s often not the case.

Michael  11:02

Yes, I remember once involved in the due diligence to acquire an automotive company, and the auditors were asking the financial managers of the target company to send copies of the bank statements, versus going to the bank directly to make sure that nothing was altered in the statements. Simple things like that, they are often not done on a comeback to a point you made, Feng about the incentives for the CEO who’s on the acquisition side. Private equity companies tend to structure their packages for CEOs differently, if I’m not mistaken, whereby there’s a lot of upside to extracting value. Do you feel there are benefits to using that kind of model broadly.

Baruch Lev  11:42

Definitely, and, you know, that’s, that’s a very touchy point. I must say that, you know, we are very familiar, like you, probably with the literature on mergers and acquisitions. Very few people talk about CEO incentives and the incentives completely crooked. In this case, a recent study showed that 40% of acquiring companies pay CEO very large bonuses between five and $15 million for just conducting an acquisition, not conducting a successful acquisition, for conducting an acquisition, and once the acquisition is made, the size of the company becomes larger, or sometimes significantly larger. And studies have shown that the main thing that affects managers compensation, not bonuses, compensation, year in and year out, is the size of the company. So they get they get higher bonuses, they get higher compensation. And we show, I think, an amazing investment and amazing evidence in our chapter, I think it’s 14, that CEOs that conduct multiple acquisition get a four or five years additional tenure to CEOs with few acquisitions. Somehow, I think boards excited with with active CEO make acquisition, they give them the time to make the acquisition and then to make the acquisition work. The end result is that they have four to five deals on average, longer tenure in this case. So the whole the whole incentive system about acquisition within within Corporation, has to be completely changed. The emphasis has to move from just conducting an acquisition to making a good acquisition. So you give a bonus two three years after the acquisition, once you are convinced that it’s really working, otherwise there is no bonus. We also find that the penalties, so called penalties for failing acquisitions are extremely low in terms in terms of tenure for CEOs who had lots of failures, it’s less than a year difference relative to tenure of other CEOs. So basically a slap on the on the wrist in this case. So I think that’s a point that is is hardly mentioned. Maybe people don’t want to get in trouble with CEOs. I can understand it. I also don’t want to get in trouble with CEOs, which may be, maybe, May. Major readers of our of our book, but this, this thing has to be said, and we say it with evidence. This thing has to be changed.

Michael  15:12

So the book Baruch is mentioning is the M A failure trap, which is what we’re talking about here. I have a follow up question in your research you would have undoubtedly interacted with the boards and the compensation committees. What have been their reasons for not having penalties for CEOs who mishandle transactions the few discussions I’ve had, it’s always come down to recruiting, because if one company takes the first step to put in place these penalties, they’re not going to be as attractive. But what has been your research on this?

Baruch Lev  15:45

Let me say, let me say and thank completed, please. Let me say a word about our research. Our research for the book did not include interviews with CEOs or board members or compensation committees and others. Of course, that’s a good thing. If we could do it. Maybe that’s another book. Our research is, is purely economic research, we have a huge sample of 40,000 acquisitions. We developed a statistical model, quite sophisticated, with 43 variables to identify the reasons for success and failure of acquisitions, and the research that we did was really based on data, on facts. We didn’t talk to people. I mean, that’s, that’s a very good point that you raised. I don’t criticize you, but we, we didn’t, we didn’t talk with people, yeah, my guess is. My guess is, if I judge from management compensation in general, not, not just acquisitions, usually, usually, managers are not penalized, even for poor years, compensation goes up. If the firm does terribly, compensation doesn’t doesn’t decrease. There are hardly any clawbacks for disasters managers getting large bonuses, and no one asked them to return the money. I mean, they are, they are treated with Kid labs, yes.

Feng Gu 17:49

Yeah, yeah, I Yeah, so, so Brooke made a very good point about a data driven nature of our research. Interview with compensation committee and CEO is another approach, but that is going to severely limit the size of our sample. Really cannot go back to CEOs compensation committee members 2030, years ago to talk to them. Many of them are wrong, and our sample covers the last 43 years with all available data. So this is really the most important consideration for basically conducting research using available empirical data coming from the real world, including the success of acquisition, the main characteristics of each deal, as well as compensation practices. Brooke make a very good point about clawback. You know this, clawback is a relatively new idea, if you recall, it became more common after the last financial crisis of 2008 2009 heavily, heavy criticism from the society, from shareholder regulators finally forced a good number of companies to include a callback terms inside their compensation packages. But some studies have shown that even when the conditions are met, many companies just don’t exercise the callback term included in compensation packages. So the discipline is simply not there outside m&a, even in the general you know management failure. See where many managers, CEOs, are let go by the board. They often receive a one time special you know about compensation package when they don’t call it a bonus, but it basically works exact the same way we thank you for your service. Here’s a big one time payment. Thank you, and good luck. So all in all, no matter how you look at it, incentives for CEOs to face the consequences of a failed acquisition decision are simply not there. They’re just treated very nicely by the board and. And invest investors, just an interesting

Baruch Lev  20:02

example that we have in the book, in the disastrous acquisition of autonomy. Yeah, by Hewlett Packard, the CEO who conducted it and was fired after 11 months on the job, less than a year, got, got $25 million bonus, and I guess, bonus for what? Bonus for, for wasting 11 and a half billion dollars of shareholders money. But he got $25 million and was kicked out.

Michael  20:43

Yeah, I want to switch gears to talk about governance here, Ryan, because we’re talking about the different actors, CEOs, boards and shareholders. They have different mechanisms to, I wouldn’t say, enforce, but to demand higher returns and higher rewards and so on. So let’s first separate the players here in your research, have you seen differences in M, a that has been driven by the CEO, versus M and A that is driven by the board and the CEO simply is driving the agenda of the board, because in different companies, the CEO can have all the power and drives everything but M And A is typically a board matter, what does your research on any other differences in the performance of companies depending on who’s driving it?

Baruch Lev  21:29

That’s a point. Unfortunately, we didn’t look at that book.

Michael  21:32

It’s a third book point.

Baruch Lev  21:33

because our database, and any other database that I have that I can think of. Does it have this this data? This is the that’s internal data to a company. How do you distinguish, for as an outsider, to a CEO driven, board driven, it’s a very good point, but, but as researchers, you know, we are limited to available data, and that companies don’t report it. They don’t have to report it to the SEC who initiated the m&a, not, not even to investors. They just do it. So we unfortunately didn’t look at this point.

Michael  22:21

So coming back to that model you built, right? I think you’ve mentioned something like 40 variables. What were the most sensitive variables in the research?

Baruch Lev  22:30

The most sensitive variables are really easy to track, because we develop in the last chapter of the book, we developed something which I think is unique, and that’s an acquisition scorecard. Yes, you know, everyone is familiar with financial scores, like from like Equifax and others, credit scores, credit scores that usually play a major role in in lending decisions, in credit card companies, decisions whether to give you a credit card or not to give you a credit card We have, we have a scorecard in which which reflects the 10 most influential variables in our model, both good and bad in this case, and that’s a relatively easy thing for investors, Both and boats to do you just fill the data you get a score. We also have some kind of a benchmark that we give you to determine whether it’s a high score or low score. But regarding the important, the important variables that you mentioned, or you asked about, some of some of the important variables our scope. First of all, deal size, the size of the acquired company. This is a major, major determinant of success. The larger the size, the lower the success, it’s extremely, I’m sure you know it from your experience, extremely difficult to integrate to large companies. I mean, you have masses of employees on both sides. You have somehow to reassign them. Sprint Nextel is an example that we give in the book of completely bundling the integration because the companies were of very similar sizes in because of this, they maintain separate headquarters. Separate operating system. I mean, this, this was a disaster. So deal size, the premium that you pay is extremely important. I know because, because, in this case, I spoke with several people who really conducted acquisition. They say, Listen, Baroque, the price is not important. If you find a good match, if you find a good target, buy it for whatever the price. It will cover itself. Our data show that that’s not the case. The higher the premium you pay, usual premium, a premium is really the the purchase price relative to the share price, because the announcement usual premiums are between 35 and 40% higher. Premiums usually lead to failure. You overpay. You overpay and and all the benefits don’t cover this payment a third A third factor, which really surprised us a lot, was conglomerate acquisitions. And I’m old enough to remember the conglomerates of the 70s, the 80s, the LTVs and the Gulf and Western which were the toast of town and people, people even predicted that in the future, six, seven conglomerates will rule the entire US economy. But of course, all of them fell by the wayside, and in recent years, even the largest of all General Electric is just a shadow of itself. But when we looked at the data, we saw. This was a surprise to me, the largest in the last 1015, years, a large increase in conglomerate acquisitions, meaning acquisitions of a company in a different sector than the one you are operated different industry, the one you are operated like, like Amazon, buying whole foods, yes, or like CVS, which is a pharmacy, buying Aetna, which is an insurance company. A huge increase in conglomerate acquisition, particularly by tech firms. And I think they are flushed with money. They usually because of anti trust issues. They usually cannot, cannot buy direct competitors, companies in the old business they want, but they want to invest in something so like Intel, several years ago, buying mobile i which is automated driving. What is the reason? What is the reason for Amazon buying whole foods? There is absolutely no reason. The whole thing doesn’t make any economic sense if investors in Amazon want to hold shares of of a retailer, then can they can buy shares of Amazon foods and add them to their portfolio that has also Amazon in it. There is no reason for companies to do the mergers, the conglomerate mergers, and indeed, many of them, many of them don’t succeed. Some of them fail in this case. So conglomerate merger is another big reason that you asked about for for failure. We talked about foreign targets. One of the one last thing that I would mention, we have 10 factors. I just mentioned four or five. One last thing I would mention is buying a weak target, buying a shell target, like Google buying Motorola Mobility. Yes, Motorola Mobility, at the time, was nothing. I mean, it was completely shattered by the iPhone. They had nothing to offer. Nevertheless, Motorola bought it, or Microsoft buying Nokia? Why would they buy Nokia? Where Nokia was was almost an nothing company in the in the sector, so weak by weak targets? Yes, usually, I think they usually inspire the imagination of CEOs. They come in and they resurrect the target, war buffet. War buffet used this beautiful example of of they think of themselves as, as the princess who kisses the toad and the beautiful Prince comes out, but the end result is that the backyards are full with that toad. In this case, it’s very difficult to resurrect the failing operation, and that’s our model shows a major reason for acquisition failure.

Michael  30:47

Now I want to come back to the point number three on the scorecard, conglomerate merger. I remember once doing a study for a company that was primarily located in a country that had economic sanctions applied to it, and they wanted to understand how they can invest. So we studied other similar countries, and what we realized is that because they couldn’t take their money outside of the country, they were only forced to make acquisitions within their borders, and therefore they had to become a conglomerate, because they had to park their cash somewhere to get a return. So they ended up buying everything they could buy, when some cases, they ended up controlling 10, 15% of the stock market. So I can understand why they did it. But why would a tech company want to act like a conglomerate? There’s no reason for them to do that. Is there?

Baruch Lev  31:35

It’s difficult to understand. You know, I would love to have coffee with Judge Bezos.

Michael  31:42

He’s in the Mediterranean somewhere.

Baruch Lev  31:44

I think that’s always close to me. So just just asking him, what you have in mind in buying Amazon, first of all, it’s a very small company relative to yours, yes. So even, even if it’s an incredible success is like, like, put a, putting a scooter engine into into a huge car. I mean, it’s not going to do anything, just, just going to create, create problems. In some cases, the reason, I think this explains the Intel Mobileye. In some cases, they think that they make a relatively small investment, three, $4 billion Mobileye was much larger. Was 15 point. But in many cases, these are relatively small investment to the buyer, and they have a toehold in an industry that may develop into AI, and all of a sudden you have, you have a major company there that then You become a major partner. So maybe, maybe sending, sending, somehow, messengers into different areas, and hoping that some of those will make it big. Maybe that’s, that’s the reason for that.

Michael  33:17

Well, I remember back in the day, there was this idea of the portal strategy in it, where companies try to offer everything, trying to keep people coming back. And I think there’s some of that thinking it was just sticking on the conglomerate merger. I remember once working for a resources company. I used to do a lot of work in resources. It was a gold mining company, and they specialize in emerging markets, deep mines, going three kilometers into the ground and using low cost labor. And they were running out of these types of mines to develop, and they made the decision to acquire an asset, a company that was in a developed economy. It was strip mining at the top. It was highly mechanized, and they had none of the skills to do that, so obviously that did not go well. So sometimes even when you’re in the same sector, you act like a conglomerate in a way whereby you’re taking a skill that cannot be applied where you are making the acquisition. But I think what happens with tech companies is, because they’ve accomplished so much, they think they can fix everything, yeah, and they just have to digitize it and they’ll make money, but it’s a different industry.

Feng Gu  34:24

You’re absolutely right. In this case, the overconfidence of CEOs we spoke earlier plays a huge role. They think they can dominate in every industry. They can turn a regular industry into something with high performance. In the case of Amazon, they can, like you said, they can digitize every business they operate and make it super efficiency and extremely, you know, successful, and then dominate everybody else. But you’re right, sometimes the skill set knowledge from one industry do not easily transfer. Transfer to another industry setting. So that’s why the failure rate is relatively high in this case of conglomerate.

Baruch Lev  35:06

Yeah, just one point. Many people don’t realize, in addition to all the problems with conglomerates, that you have to have knowledge in several technologies, with most CEOs struggle managing in one industry, let alone in five or six industries. But conglomerates, by definition, don’t, don’t have synergies because they are in different in different sectors, you don’t get any any efficiencies and other things that you get from regular acquisitions. So these are not good acquisitions, because the companies, as mentioned before, most of them, are very successful, very rich tech companies, the failure of conglomerates doesn’t show up quickly. In this case, they can still hold on to them for years and years and somehow, somehow go along. But, but that’s that’s just a major reason, and our model shows it clearly a major reason for failure of acquisitions?

Michael  36:22

Yes, I want to come back to due diligence is because people talk about them a lot. They’re always touted as we’ve done this due diligence, but it’s often done poorly. I’ll give you an example of this. I was recently looking at a hospital acquisition, and I’m not a hospital person. I don’t have a healthcare background, so I spend a lot of time studying this, and I spoke to many people who understand the healthcare sector, and everyone felt this is a good place to be investing in. And then I spoke to a guy who’s in Operations Management at Harvard, I think it was, and he pointed out to me why this expansion plan is not going to work. It’s because there’s a shortage of nurses in the United States, and it’s one thing to build a bed and get the funding to put in place a bed, but if you don’t have the nurses to staff the beds, it’s going to cause problems down the line, because you’re going to have patients who are not well taken care of. You’re going to have nurses who suffer from burnout, which means the hospital has to pay them even more to keep them so your margins keep going down and down and down. Now, if I had not spoken to this guy, I would have not have realized this, but that’s like a really, deeply insightful due diligence point that made the entire deal not worth pursuing. So laying the groundwork here, what are the principles of good due diligence?

Baruch Lev  37:38

The first principle is, use good accountants.

Michael  37:44

We’re in good company.

Baruch Lev  37:47

I know, I know that the accounting is boring and accounting is this. Accounting is dead, but there is, there is a quite famous forensic accounting who wrote the paper on the Hewlett Packard autonomy acquisition, yes, he showed, he showed that you could see ahead of time that this company was lying. I mean, for, for like, like 2030, quarters, they always, they always beat exceeded analyst forecasts. I mean, it’s impossible to do. So just on the face of it, there was something so good accountants going over over the records, making sure that the records really the financial reports really reflect what goes on within the corporation. And then a very important point is the point of talent, because in many acquisitions, definitely they’re high tech acquisitions. You’re you’re buying talent. You’re not buying chairs and offices and things like this. You are buying talent, and we have some good evidence about what happens to the talent when you announce an acquisition. Thank can you? Can you tell him about that?

Feng Gu 39:24

Oh, yeah, absolutely. So just start with the big picture about what generally happens to employees after acquisition is completed, and then I’ll walk you back to employee reaction once acquisitions are announced. So in multiple chapters, we show that in most cases, there is a very significant amount of employee layoff as soon as acquisitions are completed, on average, across all industries, across all types of acquiring companies. At Target, we’re talking about five to 7% of. Employee loss, which is not a very small number. If you apply this to target employees, of course, that can translate into a much bigger percentage, because Target is generally smaller. So that’s not everything. What’s more important? This did not go to your book, because that chapter is already pretty long. We didn’t want to add a lot more to it. We also find in all analysis by using more detailed this is a little bit of our unconventional data you will not find elsewhere. We had access to very detailed months by months employee turnover data, not just the general turnover. We have the inflows and outflows separately, we find that as soon as acquisitions are announced, you see a large increase in employee outflows are the target. So when you connect the two pieces of evidence together, makes perfect sense, because everybody from their experience, from their experience of hearing from other people, they understand that once the merger is completed, many of them will lose their jobs, especially, you know, this doesn’t stick well with like Brooke just mentioned, highly talented employees, people who have outside opportunities, Who wants to be, you know, terminated, no people will start looking for opportunities, and many of them end up leaving the target even before the acquisition is completed and before the integration begins. So this is really a very important factor for acquisition success, because if you end up losing too much talent, nothing else really matters. You’re You’re not trying to buy physical assets. You’re trying to secure a talented workforce, which is very important for the success of acquisition.

Baruch Lev  41:56

Coming back to the your question, just completing it in my book, an important part of due diligence is to is to ascertain who remains and who is leading. Yes, this case, and if you get here, what economists call adverse selection, those who have great opportunities outside will be the first to bail out. Yeah, those who don’t have good opportunities will stay. You get the degradation of the of the workforce in this case. So you want, you want to make sure that you buy something of value, not just a name in this case, and what are the measures taken to retain target employees, bonuses, other things, what promises were given to key to Key managers of the target. All of this should go into a good due diligence.

Michael  43:06

It’s interesting because my experience supports this. Because when these deals are being negotiated, oftentimes you can’t bring the entire HR department in to start planning who’s going to stay and who’s going to leave. You want as few people as possible to know what’s happening, and then once the deal is announced, then you bring in, usually a consulting firm, an audit firm, and so on, to help you with it. But it’s almost as if before the deal goes ahead, you need to know which talent you want to keep and what’s your plan to keep them, which is difficult to do when you’re acquiring a company of 50,000 people. It’s different if you’re acquiring a company with 100 people, but you’re a quite an company with 50,000 people. And I can see that, you know, thinking as an ex consulting partner, we would have to change the way we do post merger integration to front load the work on who are the key people. What are we going to do to retain them? What kind of contracts do we need to have in place? Who’s going to speak to them? It would really change the way these things are done. So I can see why that would happen, but I would think this is a great opportunity to have a different way to do mergers, because we get this one part right. A lot of the other things will be easy. I’m not saying it’ll be very easy, but it would be easier.

Baruch Lev  44:16

Yeah, that’s a very important point you are making, and particularly the example of 50,000 the difference between 50,000 employees and 100 this goes back to our point that a major reason for acquisition failure is the size of the target. It’s very difficult to deal with 50,000 people, as you just mentioned, with 100 it’s, it’s, it’s easy,

Michael  44:41

yeah, remember once there was a situation whereby we’re dealing with taking a division of a company and splitting it over as a separate business, and because of the way the labor laws were written in that country, we would have to fire in inverted commas, 18,000 employees at the same. Same time, give them a new contract, the different legal entity, it had to be done at the same time around the country for legal and tax reasons. So, you know, we always talk about strategy, we talk about finance and valuations, but a lot of these things are constrained by legal issues, tax issues, accounting treatments and so on. And in that situation, we’re up at three in the morning coordinating this, because it’s going to happen across the country at the same time. Now, these things sound easy, but in practice, they’re very difficult to do. Yes,

Baruch Lev  45:31

yes. One last point about about conducting due diligence. It’s particularly difficult when the target is a foreign company. Yes, because accounting rules are different, regulations are different, and particularly the enforcement of these things is different. I mean, the country may have great rules with respect to insular trading and other things. But if no one enforces them, it’s, it’s like, like nothing so so due diligence in in other countries, the only exception I would make is UK, which is very different, but very, very similar to the US in accounting, rules and enforcement, due diligence in other countries are difficult, even even these days, even distance is difficult. You have to go there. You have to send people there. You don’t know the language and things like this. That’s That’s why, again, if I go back, if I come back to our model, it shows that, given all other things, foreign acquisitions detract from the success of the acquisition. There are some great successes, but on average, it’s very difficult to do. We give extensive example of General Electric and French company, Alstom, yes, and they’re like, like, seems to me like almost crazy restrictions putting by the French government on this acquisitions. You cannot fire anybody. You have to add 1000 people, 1000 employees, no matter what the circumstances are, the French government is retaining 20% of the company, and this, this makes the the integration and the success very difficult.

Michael  47:45

Yeah, that’s true. One of the things I would always tell clients is they always tell me, this deal is a great deal. Michael, it’s going to make a lot of money for us. Profits are going to go up. And I always point at them percent, how much profits you make, it’s how much you get to keep. So you better make sure your tax advisors are in this deal from the beginning, yes, because tax treatment has a huge impact on deal impact. I mean, it’s shocking to me how tax advisers are treated as if they’re going to come in at the end and optimize things, because sometimes they would say the deal doesn’t make sense at the beginning because of the tax treatment.

Baruch Lev  48:17

Yeah. Yeah. Your point. Your point at the very important issue, and that’s bringing bringing important experts like tax advisors very early to the process. They cannot come at the end of the process by migration in this case, but very early, CEOs are so enamored with the acquisitions, with the public announcement, with media investors, with all the glamor of the acquisitions, and you need those key advisors, like you mentioned that tax advisors at the beginning, not at the end of this thing.

Michael  49:04

You wanted to add something?

Feng Gu 49:06

Yeah, just to press a little bit on the difficulty of conducting foreign acquisitions from a due diligence perspective. Brooke mentioned the regulation, accounting rules and so on. Another important factor is the difficulty of getting access to other stakeholders, like customers suppliers, which is usually a very important part of due diligence. You want to find out who the suppliers are, who the customers are, what their reactions are to this pending merger. That can often give you a very valuable information. However, in the case of a foreign acquisition, most of the suppliers and customers are in a different country. Getting access to them is not going to be as easy. It’s also going to cost you a lot more money. So all in all, these factors point to the difficulty of conducting successful. Acquisitions in, you know, in a foreign market.

Michael  50:03

I remember once talking to a short seller, these guys tend to take due diligence the whole different level, and they wanted to invest in a beverage Cafe kind of business somewhere in an emerging market, and they couldn’t get what they felt was straight answers from the company. So what they decided to do is they figured out who the suppliers were, yeah. And they figured out that the factory that this company claims they buy all their paper cups from, it doesn’t have the ability to match the capacity of sales that the company is claiming to have. And they put out this paper and they shorted this company. They turned out to be right. So I think the point is here, if money’s on the table, you’ve got to be as creative and disciplined to make sure the numbers stack up. But I think most people just want the rubber stamp of an accounting firm or a consulting firm to say we did as much as we could, because as your work shows you, CEOs seem to be rewarded just for being CEOs versus being good CEOs right during acquisitions. I can’t think of any major clawbacks since the financial crisis. I mean, maybe you guys are aware of some, but I can’t think of any one.

Baruch Lev  51:13

And the same thing with those who you mentioned, accounting firms, appraisals, of course, being used extensively and others. I cannot think of lawsuits against these people. I can think of many lawsuits against CEOs and auditors, yes, in case of financial fraud, but in case in case of a complete bundling of an acquisition like like he was packed autonomy, I’m sure that those who made the due diligence were not sued or not asked to return the money. They just, they just went ahead with other acquisitions.

Feng Gu  51:59

Yeah, yeah.

Michael  52:00

And on that sad note, Baruch and Fink, thank you so much for this. I really enjoyed the conversation. Is there any closing point you want to make for our audience?

Baruch Lev  52:10

I want to make a point that the way I look at acquisition is that it is something which is very close to organ transplant in humans. I mean, you take something from the outside, and this is this case, you try, you you transplant it into a company. It has all the characteristics of of problems with organ transplant, very difficult to find good donors, very difficult to find good targets. The body, in most cases, rejects the transplant. The same thing with companies. So if you look at what doctors are doing, they are resorting to organ transplant only as a last resort. I mean, they will never do an organ transplant before they try medication and surgeries and other things and if any, if everything fails, then they will look at liver or heart transplant or something like this. The way Feng and I look at acquisition is that they should be the last result of solving a problem within the company, internal development, partnership, joint ventures. There are many things that can be done which are much cheaper, much safer, less glorious, but but much safer than acquisitions and board members have to see to it that really this is the last resort, that all other ways of correcting the situation were examined, were found deficient in this case, insufficient in this case. But the analogy with an organ transplant, I think it, I think is an important point. In this case, an acquisition should be last resort, not the first thing that you do when you find that that sales are slowing down.

Michael  54:33

I like that analogy. I haven’t had heard that before. It was a good analogy.

Baruch Lev  54:39

I just want to make sure with my son, who is a surgeon, I agreed with it.

Michael  54:46

Good son. Good son.

Feng Gu 54:47

I just want to say a few things about our book. It’s a really unique book in the sense that it’s not just a collection of a small number of case studies or some limited experience. It’s based on a rigorous analysis using a large sample of actual acquisitions there the process of conducting acquisition the outcome and we offer very different perspectives, like Baruch Lev just said, when you put these perspectives together, it totally changes the way executives and directors should look at the importance and the value of acquisition in their overall business strategy. It’s not just like any of the other books on m&a you find on the market, it’s really a game changer.

Michael  55:35

Well, I find a lot of books on m&a are anecdotal. The authors picked a few companies that they are familiar with or to make us create a story, and then they will analyze it in detail, but it’s anecdotal. At the end of the day, it’s hard to predict and draw conclusions and develop a theory and a lens from them.

Feng Gu 55:53

Yeah, you’re right about a prediction part, as Baruch Lev mentioned, we have a whole chapter at the end of the book that offers a very unique, practical 10 factor scorecard. The value of the scorecard is not just you know. It can tell. It can summarize these factors. No, if you use the scorecard beforehand, which means before you actually finalize acquisition deal, you can get very strong insights into the likelihood of success. I think this is really the value of this approach. We’re not just talking about everything exposed. No, we applied our experience the you know, what we learned from our model this to develop this tool which can really help corporations avoid so many unnecessary M&A disasters. Very good.

Michael  56:43

Thank you so much, gentlemen. I really enjoyed it. Thank you.

Baruch Lev  56:47

I found your comments very enlightening. Thank you. Bye, bye, bye, bye.

Michael  56:52

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