Posts Tagged ‘M&A’

Profit In A False Sense of Security

Wednesday, April 26th, 2017


I am fascinated by the probable cause when owners, Boards and top management in mid-market businesses (US$10M to US$Bn), “don’t take the money” and shortly thereafter, end up with a failing or failed business. Specifically, when a serious offer is made for growth capital or even an outright sale of the business, and in the next 6-12 months after the refusal, the fortunes of the business partially or totally collapse. Nowhere is this more visible than today’s high growth private tech businesses (the infamous “unicorns”) and in an often overlooked area, service businesses with a powerful owner-operator or managing partner in a partnership structure.

The decision-making factors are consistent throughout. The business has deliberated carefully or taken an opportunistic approach to accepting external capital or key talent. What has varied is the owners’, the Board’s  and/or top management’s judgement, resilience or trust over time. Faced with changing market conditions (regulation, technological and other convergent forces), a key client “win” or “loss”, rising/declining investor or trade interest and so on, there is a discernible change. They consciously ignore other’s prudent advice that they have implicitly trusted in the past (mitigating risk). They increasingly believe that they are “impregnable” in their market position (market hype or vanity investments). They allow common sense to be distorted by inflated but unsubstantiated talk (valuations, growth prospects, barriers to entry, unique technology etc.).

Having worked with six privately-held mid-market businesses over the past 3 years around the globe, who turned down offers and subsequently, experienced very public falls from grace (legal, e-commerce, hotels, gaming, financial services), the underlying “cause” in my experience is ultimately, poor leadership. It is people, not the business that have screwed up.

For my current and prospective clients reading this, who fear my strategic advice comes with a poison in the tail, rest assured I have had a great many more winners than losers!

Yet in the immediate aftermath of a partial or total business failure, there is a rush to assume that the firm’s opportunistic or conservative approach to accepting new capital or talent is the “cause”. That is inaccurate, and here is why. There are a great many successful businesses, who have been consistent in adopting diametrically opposed approaches to accepting external capital or ownership (in insurance, AJ Gallagher vs Hub International, in hotels, Peninsula vs. Fairmont Raffles, or in the premium art business, Christie’s vs Sotheby’s). In just the same way, sticking to niche products, services or geographies or constantly, adopting a diversification approach, is rarely the “cause” of failure.

Take great care in jumping to a conclusion. Profit is to be found, as many smart long-short investors have found, in looking out for a business owner’s, the Board’s and/or top management’s increasing false sense of security, the resulting changes in their behaviour and the positive/negative impact on their business and the competition.

© James Berkeley 2017. All Rights Reserved.


Abandoning Growth

Thursday, August 18th, 2016











I am at a zoo in the English countryside with my daughter, watching rare breeds of monkeys play and eat. Once they have chewed on the best bits of lettuce they flick them off their perch onto the floor so they can make room for new supplies. They don’t hoard or persist in trying to nibble away at food that has passed its’ “sell by” date or they are bored with.

Yet in many expansive mid-market and larger businesses I see huge amounts of time invested and energy deployed in processes and activities that have long ceased to be effective. Managers lack sufficient focus, organisation, and the volition to make “tough calls” on what to abandon.

The consequence is that they are becoming less productive, they are self-limiting their value to their clients and the organisation’s growth potential.

Assuming there is no “spare capacity” in your business, in order to ascend to the next level of growth:

  1. What exactly are you going to stop doing or do less of this month and the month thereafter?
  2. When are going to schedule the time and where are you going to implement that?
  3. How will you measure progress and success?
  4. Who must be held personally accountable to ensure your goal is met?

In my own business, I have consciously made a decision to abandon working for owners of startups and early stage businesses unless they past a stringent “smell test”. I will only offer strategic advice on dramatic growth opportunitiest to investors with substantial means and managers of businesses with upwards of £50M enterprise value from 1st September. I plan to keep a bi-weekly calendar. Account for the time saved (emails not read, calls not scheduled, meetings not set, and follow up not required) in rejecting the offers and the increased productivity earned.

I currently receive 3+ requests a week from entrepreneurs and small business owners, particularly seeking help attracting growth capital. They have an unquenchable appetite for advice but by and large, a poverty mentality in paying for it and investing in their own performance. Sorry I need to better invest my time if I am to be more valuable to clients, who want to go where I want to go.

If monkeys can make that simple determination without fear, why cannot intelligent managers and ambitious organisations?

© James Berkeley 2016. All Rights Reserved.





Interview With Me:

Tuesday, July 5th, 2016

In an interview with CNBC’s online platform, James shines a light on the challenge today for high-growth small businesses seeking to ascend to the next level and successfully transition ownership. Essential insight for entrepreneurs, HNW investors and Family Offices with direct investments in illiquid investments.

How To Sell Your Small Business

Producing and Rewarding Loyalty

Monday, November 2nd, 2015

I am always fascinated by the differences between “producing” and “rewarding” loyalty.

In a great many financial services businesses, particularly in post merger integration or when members of a leadership team walk out, there is a huge confusion between the two. You cannot motivate an individual to stay. Motivation comes from within the individual.

He or she makes a determination that their self-interest is best served by being loyal to their direct report and the firm’s strategic direction. In return for their contribution to the firm’s future health and well-being, the employee has expectations (pay, incentives, affiliation, career development and so on) that must be met or exceeded.

This is not Alcatraz. Legal “lock up” remedies that demand “compliance” are largely ineffectual.  Equally, peer pressure,  for example, midway through the sale process, “we are best served by sticking together”, only works where there is hard evidence or strong anecdotal information to support it (peer pressure).

To understand how you produce loyalty, turn the question upside down, “what would most likely cause the individual to walk away?” Write down a list of 10 probable reasons. Highlight the five most probable reasons. Delete the other four most probable reasons and work on the top reason. Once addressed, move on to addressing the next most probable reason.

Ask yourself, “what alternative exists or we could quickly create to meet this objective?” and then, “How easy is this to implement?” (timing, approval, flexibility)

Of course, your accuracy and probability of success is dramatically enhanced by having this conversation with each individual in-person on neutral territory.

If you think that by hiding from having the conversation you are safer, you are deluding yourself. Silence is not golden, it is merely a retreat into a higher risk and more obscure position.

The default position for many owners of newly acquired businesses or businesses responding to a mass departure of executives is to throw money at it. A belief that a one time retention bonus alone will “secure” the businesses prized assets (people, clients, intellectual property and so on). I am sorry that is crap. You are dealing with human behaviours.

Financial incentives in the form of carrots need to be frequent to impact human behaviour. One off payments do very little to engender loyalty other than to negatively impact the firm’s expense growth and cash resources. You are making disillusioned key employees richer but not more committed to the firm’s future.

Indeed, retention bonuses in isolation are often counter effective. People believe what they see happening not what they hear or read in the organisation.

You immediately create the “have’s” and the “have not’s” in the acquired or ongoing business (divisive behaviour). The “have not’s” lose trust and respect for the “have’s” (a belief, often correct, that their loyalty has been bought). You are encouraging leaders to protect THEIR nest egg (short-term thinking) ahead of furthering your interests (future growth and expansion).

Money alone is rarely the reason someone leaves a financial services business with the exception possibly of a heavily commission-orientated trader, broker or relationship manager. In 75% of cases I observe it is about the relationship with their direct boss. Therein lies the biggest clue to producing loyalty, develop great bosses who engender high levels of trust and respect from their subordinates (an honest-to-god belief that they will do the right thing for their subordinates).

In the acquiring company, make it a risk management priority in the due diligence phase to go through middle managers’ past performance in making smart people decisions and managing crises. Does the business have middle managers who command high, moderate or low levels of respect from key subordinates? Find the “glue” (answers) and you will be on the fast track to making smart decisions about securing the firm’s prized assets.

© James Berkeley 2015. All Rights Reserved.




Five M&A Flashing Lights

Thursday, September 17th, 2015

With global M&A passing the US$3 trillion mark, as reported by the Wall Street Journal last week, and low growth sectors such as insurance and gaming incurring an unprecedented level of recent activity, commentators try to out do each other to explain the rationale – “insipid organic growth”, the dreaded “FOMO” (fear of missing out), “optimum scale” and “diversity of earnings”. Yet, are we in danger of trying to tie the “dots” together in cases that are highly situational and ignoring the more insightful indicators?

After all every business has a unique “past”, and a preferred way of applying their people’s talented to transform their “unique” set of clients’ futures. To put it simply, no two companies provide exactly the same value to their clients or are valued the same by external investors. Hence trying to extrapolate one set or executives’ reasoning to pursue M&A over organic growth or a strategic alliance is fraught with generalisations and danger. Yet markets routinely “mark up” listed companies and “talk up” others in the distinct belief that their situations are exactly the same, different management teams will act like lemmings to keep their shareholders happy and investors will “go shopping” at the same time for the same target. There is very little hard evidence or strong anecdotal evidence to show that this is true. Indeed in cases, where you might argue I am wrong, there is a body of evidence to show many of those deals were value dilutive AOL-TimeWarner, MySpace-News Corp and RBS-ABN Amro.

I would suggest investors and commentators would be better served applying the following logic:

1. Quality of Management (QoM): is there a discernible change (positive or negative) in the capability of management to achieve its’ strategic goals (capital allocation, make good people decisions, embrace innovation and implement business strategy), where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

2. Quality of Employees (QoE): is there a discernible change (positive or negative) in the capability of the firm’s employees to achieve its’ strategic goals, where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

3. Level of Uncertainty (LoU): is there a discernible change (positive or negative) in the the level of uncertainty around management and its’ employees capability to accomplish its’ strategic goals, where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

4. Competition (C): is there a discernible change (positive or negative) in the competitive threat level and the probable impact on management and its’ employees accomplishing its’ strategic goals, where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

5. Future Confidence (FC): combined, do the discernible changes in the quality of the firm’s management (QoM) and employees (QoE) today relative to the level of uncertainty within the business (LoU) and the external competitive threat level (C), indicate a merger, acquisition or divestiture would demonstrably create a more impressive future and provide greater peace of mind for the firm’s shareholders?

If you cannot categorically say “YES” to the above, in all likelihood you will be rushing to a judgement that is ill-informed or a deal that is carrying excessive risk.

© James Berkeley 2015. All Rights Reserved.

Inside The Executive Office I – Instant Value Creation

Tuesday, September 1st, 2015

In a new series, Inside The Executive Office, James provides a series of quick fire techniques, powerful lessons and ideas set in real world examples for executives, managers, Board members and shareholders to rapidly apply in their own business.

In the first outtake from a recent executive discussion on integrating two multi-million dollar insurance businesses, James explains that the business integration process requires a process of its’ own. In a rush to integrate, whether it is a traditional takeover (the smaller business being fully integrated), a merger of equals (largely a mirage to save face for executives who won’t admit it is a takeover, in everything but name) or a financial acquisition (intent to allow the businesses to operate as two separate entities in the same ownership), way too many businesses start at the wrong point (action).

James points out that there is a necessity to consider first (in this order): business outcomes, integration alternatives, and the related risks and rewards of each BEFORE determining action. Otherwise “action” is largely driven by planning rather than strategy. An extrapolation of the present to determine the short-term future of the two combined or separate businesses rather than a picture of the desired future and the steps back to today. An excessive focus of executives’ and managers’ knowledge and time spent on “easy to implement” or “hygiene” tasks rather than performance-based priorities consistent with the deal thesis.

The effect with the former is 6 months post-acquisition  a combined business that has made a swathe of largely cosmetic changes (new titles, new policies and procedures, new reporting forms) but very few profound changes (significant synergies captured, greater capital efficiency, stronger brands, increased productivity). It may operate marginally better than before the deal, at best but it is not “fit” to profitably grow and expand, at least at a pace commensurate with the competition. Indeed, it may very well be worse off, where the management distraction has resulted in missed opportunities in existing markets or the prospects for those existing markets have deteriorated at a fast pace than originally presumed.

The litmus test is “would your ideal customers and the competition honestly state that your “new” business is a more powerful/about the same/less powerful competitor in your highest potential growth markets?” The faster you can demonstrate increased power, the greater the level of value creation. Conversely, the longer it takes to get there (delays, procrastination, avoidance of disruption), the probable lower the value creation or even value dilution (management distraction in existing businesses).

© James Berkeley 2015. All Rights Reserved.


Consolidating The CEO’s Ego

Monday, August 10th, 2015

Why does most market “consolidation” in the insurance and financial services sectors rarely leave existing shareholders with a smile on their face? If the objective, is to rapidly improve top and bottom line performance shouldn’t we first start from a position of strength not

1. Timing – with rare exception consolidation accelerates when convergent forces (capital, technology and distribution) and perceived wisdom infer it is the only viable option for profitable growth. The amount of uncertainty and competitive threat is sufficiently high that the very survival of the acquired firm is at stake (JP Morgan / Bear Stearns).

2. Re-Invention in A Tough Market – the very reason for consolidation is many businesses and top management have run out of other ideas. Faced with heightened pressure on operating margins in core parts of the business, there is a belief that top management can “buy time” slashing overheads in the combined businesses before conditions improve. What if those market assumptions are incorrect? A protracted period of sluggish demand continues or indeed customers have become more tolerant of managing greater levels of risk on their own balance sheet (reinsurance).

3. Cultures Clash – the deal logic is largely predicated on a new growth strategy, tactics and execution and the CEO’s ego without regard to changing operating beliefs and all employees behaviour in the newly combined entity. Individual teams become fiercely defensive about their client banks, unwilling to embrace new ideas or working habits, which they don’t see in their own best interest. Competitors prey on top performers’ frustration giving them the promise of an unfettered focus on what they love to do best and they are great at.

These are but three key factors you can readily apply to any sub sector in a period of intense consolidation. The loser in many cases is the existing shareholder of the acquiring businesses, their customers and their best employees.

Is there another option? Of course. Strong and dynamic businesses don’t need to play actively in the market consolidation. Sure they can pick off disenchanted and talented people.

This presumes that the CEO has a high level of self-worth and a trusting relationship with his Board and shareholders. He is willing to subordinate his own ego for the improved health and well-being of his firm in the long-term. You would be surprised how few CEO’s possess those traits in abundance.

Copyright James Berkeley 2015. All Rights Reserved.

Willis Towers Watson Uncovered

Tuesday, June 30th, 2015

A few weeks after my recent blog post low and behold Willis and Towers Watson surprise the market this morning. Occasionally you see a deal announced and your first reaction is to re-read the headline making sure what you think you have read is in fact true. Uhm, a “merger of equals”, really?

On the surface the logic would be obvious, Willis’s immediate competitors, AON and Marsh both own substantial professional services firms, Hewitt and Oliver Wyman. The future is largely being shaped by high-value advisory services and low-cost transactional broking and administrative services. That is where the easy comparisons stop.

Oliver Wyman largely operates as a separate “silo” with its’ own brand focus, leadership, culture and resources inside MMC. Collaboration is limited to a small number of “joint” client assignments.

Hewitt has been absorbed more comprehensively into AON’s brand offering, leadership and culture. The healthcare consulting has largely been transferred to AON’s transactional healthcare broking business. The Hewitt outsourcing business has undergone extensive changes. What exists of “Old Hewitt” today is largely a talent, rewards, retirement and investment consulting business.

Twinkle Eyes

Willis and Towers Watson had the advantage of getting know each other last year in the due diligence phase of the sale of Towers Watson’s reinsurance broking business (ultimately sold to JLT). At the time, JLT trumpeted a future collaboration with Towers Watson. Are we to presume that the JLT/TW collaboration has really proved underwhelming or were there hidden attractions for a Willis/TW merger that few in the public domain spotted? While surely welcome, the mention that ValueCapital, Willis’s activist shareholder, is supportive of the transaction, could be interpreted to mean that Willis was under pressure to consummate a deal with organic growth prospects hardly setting the pulse racing?

The Challenges Ahead

A “merger of equals” is the hardest type of deal to pull off. The first requirement to a successful merger is everybody is open to change. Yet both firms would be characterised by conservative leadership teams and cultures that more often than not have rejected change or accepted it with some reluctance, particularly in the era of Joe Plumeri.

Here are some fundamental questions that investors and analysts need to ask:

  1. Would Willis Towers Watson be willing to abandon, for example, default labels such as investment consultant, treaty broker and political risk broker? The world is looking for expertise, it is not looking for a client issue to be wrapped in a broking, consulting or investment solution with the inevitable internal competition that does nothing to help the client. Would they be willing to rip up widely held beliefs about fee-setting (scrapping unethical hourly billed fees, a relic of audit firms) or contingent commissions?
  2. What do the people within the new firm need to thrive? (very light on detail)
  3. What are the benefits of this union to the customer? (very light in today’s announcement)
  4. Do the leaders and people within each of the businesses truly believe in those benefits? (Fostering compliance or commitment to the “cause”)
  5. Do they have people with the skills and volition in the real world to leverage Willis’s global distribution platform or articulate TW’s consulting proposition in the cherished mid-market? Are we going to see a TW expert called in by a Willis broker and vice-versa? (The unwelcome legacy of Willis’s foray into the US – HRH acquisition – has been a high dependency on the local broker’s trusting relationship and very rich producer incentive plans that do little for margin improvement)
  6. To what extent is each firm’s current structure fundamental to the new firm’s profitable growth and success? (Abandon existing structure or selective tinkering. For example, TW’s prized asset Liazon is dependent on 640 indepdendent brokers who cannot reasonably expect to standby and hand opportunities to a competitor)

My experience and observation is that the combined firm will have some of the brightest and best people working in their respective fields (reinsurance, political/credit risk, capital markets, insurance consulting). They have thrived because they have had strong leaders willing to cut through the institutional bureaucracy and it has been in their self-interest to do so. On top of the Miller-Willis liaison, this is a high-risk foray and investors would be wise to ask the right questions of senior management.

As a footnote, the departure of Steve Hearn, Willis Deputy CEO, yesterday is incidental to the firm’s announcement today. It almost certainly has more to do with Hearn returning to his passion (wholesale broking) in a business where he can have a greater impact on its’ future.

© James Berkeley 2015. All Rights Reserved.



California Broker: Certainty In An Uncertain World

Thursday, May 21st, 2015

The challenge for many owner-managers of brokerages is that they find thinking about the future of their organisation hard work. I am referring to taking conceptual ideas of how to transform the business into pragmatic steps that everyone within the firm can readily understand how their daily interactions support or hinder the firm’s progress.The future of brokerages in California and other businesses is frighteningly simple. There are five components, here are three of them: the quality of management (QM), the quality of employees (QE) and the amount of uncertainty within the business (AU).

In this month’s California Broker, the pre-eminent publication for life and health insurance businesses in California, James provides essential advice for every Owner, irrespective of their time horizon and objectives.

Click below to learn about the other two components and how you can quickly apply this powerful technique to better understand what action you need to undertake to accelerate the probability of arriving at your desired destination.

© James Berkeley 2015. All Rights Reserved.

Competitive Pressure Alone Rarely Driving M&A

Thursday, December 18th, 2014

Observing merger and acquisition activity often resembles an expectant Mother waiting for her kids to get engaged, you wait an age and then a clutch of announcements arise in a very brief time period. The logic of “competitive pressure” drives friends and acquaintances of the family to pass comment, however, ill informed on “how many of their friends are getting married” (need), “how it is about time” (urgency), “how in love they are” (trust) or “how they can now afford to get married” (money). Of course, many of these unsolicited comments are more for the benefit of the speaker than the person they are directed to. My point is that logical reasoning alone rarely causes top management to act. Unless you understand the emotional priorities of top management and their shareholders, you will rarely understand what has motivated them to move on the opportunity. They won’t reveal their emotional objectives unless you first have established a trusting relationship and secondly, you have the social, intellectual and language skills to interact as a “peer”.

Look at the global insurance sector, where the logic dictates that competitive pressure (excess supply of capital and declining demand from buyers) will drive suitors into each others arms at record speed. I have sat with senior executives and an abundance of financial advisers over the past 12-18 months, all shouting from the rooftops that M&A was inevitable. Ask them “who” explicitly, “when” and “why”, and they start shuffling nervously with vague pronouncements.


My observation is that the same rules apply as in human relationships:


  1. Most people don’t know what goes on inside someone’s relationship and the impact on their hopes and dreams. Be very careful who you listen to.
  2. You must be on the “inside” to credibly past comment (you have a peer level trusting relationship with all parties), otherwise your opinion is largely worthless.
  3. Competitive pressure makes people “think” about change but it does not alone cause them to take action
  4. Action is a result of the level of trust and confidence that the “acquired” party has built up that their best interests (power, influence, legacy, promotion and so on) will be served by combining with the acquirer.  It is about people, not organisations, spending time together in each other’s company and willingly sharing their emotional imperatives. It is about moving at a speed that is most appropriate for BOTH parties. It is about above reaching conceptual agreement that the combination of their respective “pasts” (expertise, knowledge, history and so on) will enhance their ability to transform their respective futures (happier clients, improved image, more powerful brand, greater profit and so on). It is about a shared belief that the journey to the desired future is planned and will not have catastrophic consequences.  This is why “forced” combinations rarely work with strong and dynamic businesses in conservative sectors (insurance, professional services, wealth management etc).

Contrast two such proposed transactions in 2014, the substance and style of John Charman’s increasingly aggressive pursuit of Aspen and this week’s proposal by Mike McGavick and Stephen Catlin to combined XL and Catlin.

If you were to ask yourself why both deals might make sense? You might reasonably state “competitive pressure” (changes to current and anticipated market needs).

If you were to ask yourself what would it  take for both parties to get married? You might reasonably state that both management teams had established sufficient trust and confidence in each other’s ability (competency and passion) to make it work (alleviate or even gain from the competitive pressure) and in so doing accomplish their emotional priorities.

If you were to ask yourself will it be a success? You almost certainly couldn’t give a definitive answer without knowing firstly, “What are the critical elements in McGavick and Catlin’s emotional priorities?” Next, “What changes to those critical elements could we reasonably anticipate ?” and finally, “How easily could the cause be eliminated or action taken to minimise the impact and live with the problem?” For example, if one of Stephen Catlin’s emotional priorities as the Company’s founder is to “leave a lasting legacy for our clients and employees”, the critical elements might be perceived trust, integrity and consistency. If post the merger or sale, the new management team change the Sales Incentive Plan to emphasise increased short-term top line revenue growth in specialty business, it is quite possible the effect is a dramatic increase in the churning of clients and greater attrition among long-term Catlin clients. Alternatively, if there is a decision to merge or close the Catlin underwriting hubs in one or more location, it is quite possible there will be an uptick in Catlin’s best people deciding their futures are better served in other firms.  The question is then how quickly and effectively could XL Catlin eliminate the cause or mitigate the impact on their clients and employees, and in so doing accomplish Stephen Catlin’s legacy objective.

As an investor, customer, employee, business partner, competitor and so on, you have no option but to apply good judgement and common sense in answering those questions.

For most marriages are rarely without strife and we cannot predict the future accurately.

© James Berkeley 2014. All Rights Reserved.