The process of capital formation in the 19th century was markedly different between the British capital market and the American capital market. British industrialists were readily able to satisfy their need for capital by tapping a vast source of international capital through British banks such as Westminster’s, Lloyds and Barclays.
In contrast, the dramatic growth of the United States created capital requirements that far outstripped the limited capital resources of American bank after the Civil War.
Investment banking in the United States emerged to serve the expansion of railroads, mining companies, and heavy industry. Unlike commercial banks, investment banks were not authorized to issue notes or accept deposits. I
Instead, they served as brokers or intermediaries, bringing together investors with capital and the firms that needed that capital.
Even now, 150-years later, Investment Banking is a key driver and growth engine for the US economy because Investment Banking experts still serves as brokers and intermediaries.
While investment banking is a critical resource to grow our economy, to drive real innovation and sustainable transformation of business, we must expand the scope of the typical process, driven by investment banking, during a merger or acquisition.
The investment banking role is to facilitate the due diligence process to bring investors and companies together. The glitch occurs when their narrow focus is limited to the legal and financial aspects. Little effort or attention is given by the investment bankers to the people aspects.
For example, now one asks these questions:
- How will we align our senior management team so they can speak with one voice?
- How can we gain the buy-in and trust of all the employees?
- How can we crystalize and communicate our purpose in a way that is meaningful to our employees?
- How can we prioritize and make decisions in a way that is consistent with our purpose and our values yet narrows our focus?
- How can we engage the hearts and the minds of our teams?
- How can we grow this company so that everyone wins;
- Our shareholders?
- Our teams?
- Our customers?
By maintaining a narrow, limited perspective, deals get closed every day. The question for these investors is; “are these deals that will grow a company?”
KPMG has reported since 1999 that 83% of mergers and acquisitions fail. These deals don’t blow up necessarily but they do fail to achieve the forecasted growth in revenue, profit and shareholder value.
If Investment Banking experts could simply expand the scope of their focus, so much more growth could occur in the US economy immediately.
In our e-book, we describe eight important steps to be considered during the standard approach to due diligence by investment banking experts. Here are three of those steps:
- We suggest strongly that newly acquired companies avoid layoffs at all costs. While this may be the ‘quick and dirty’ way to slash and burn overhead and redundant administrative costs, the fallout can last as long as a decade.
Do you want your front line people to feel safe to innovate, to ask questions and to express even their smallest concerns? Or would you prefer they stand around the proverbial water-cooler and gossip about the latest hint that another layoff is pending. Your employees will not be able to bring their best, most focused selves after a lay-off. It is simply too traumatic for those retained.
- Assess the current leadership and management teams of the acquiring company and the company to be acquired or merged. By understanding the strengths, values and motivations of each key player you can build alignment from the earliest discussions.
Without alignment, you will have key executives who put their own self-interest in front of the organization’s interest, simply because they have not aligned with their colleagues around a shared purpose.
- Use strategic approaches. When we allow ourselves to become reactive we turn over control of our destiny and the destiny of this new entity to others. Either:
- Wall Street Analysts,
- Activist shareholders or
- Those we don’t see or share our vision.
When we are in reactive mode, we simply cannot remember to focus on the big picture and the long-term opportunity and possibility. We are too busy putting out fires and reacting to the issues that appear to be urgent but, in the long run, are not going to add value.
If you are racing from meeting to meeting with little time to think strategically or prepare for important decisions, you will not notice the red flags. When a company is losing it’s potential for growth, key indicators are everywhere. The question is this: Can you see the key indicators when they are slight, intuitive hunches or do you have to wait until the company faces a financial crisis to wake up? To you want to blame others are do you want to drive yours and the company’s future growth potential?
Investment Banking is a critical piece to growing our economy. However, investment banking experts and shareholders everywhere must be open to taking a broader perspective.
About the Author:
Katharine Halpin, founder of The Halpin Companies, has been facilitating transitions and transactions since 1995. Her earlier career as a CPA taught her the importance of considering not just the financial and legal aspects of a transaction but also the people and cultural aspects.
If you’d like to receive a complimentary copy of our e-book, 8 Ways to Avoid Becoming a Statistic, email Katharine Halpin at [email protected]
If you are interested in a complimentary, confidential discussion about a pending, current or recent merger or acquisition, please call 602-266-1961 or click to schedule.