In today’s episode, Dr. Ivan Zak shares his experience from a Harvard University course about assessing mergers and acquisitions. We begin the episode by talking about the importance of knowing what your capabilities are and who can most benefit from them.
Expanding on this topic, we share vital insight on pinpointing your core values, what kind of culture is already present in your business, and how you can align the two.
Welcome to Consolidate That! Ryan, I’m happy to see you again, how are you doing?
I’m doing great, how are you?
Pretty good, I caught one day of skiing on the river and it’s all wet now. I think the skiing is over after I did it for once, so a little sad but looking forward to spring.
I caught one day of raking leaves and it was 80 degrees outside and I was wearing shorts so pretty similar days we’re having, I think.
Yeah, exactly. Well, what do you want to talk about today?
Well, I was a little jealous of you recently, that you actually got the chance to complete a really cool course through the Harvard Business School about mergers and acquisitions and I was hoping that maybe you could enlighten me, as well as our listeners about some of the things they learned in that course.
That was a pretty cool experience. I did that because I wanted to learn more about different strategies and different industries about how they do it because we’re working with consolidators and sort of acquisitions as the main source of value creation but yeah, there’s a couple of interesting things that we discussed there.
I think the first one maybe that I was curious about. I’ll probably take you through it as I was thinking how can we apply things and learn there to our industry. The first one that I was thinking, it was really about assessing the deals and the synergies that you can gain from acquisitions. When the large company’s emerging with the purpose of merging certain processes or access to market or their culture sometimes. Then deals are always assessed for synergies.
I was just thinking about the roll-ups, which is a type of businesses we’re dealing with is where it’s a known industry with a stable business that brings known amount of revenue and then as you assess the EBITDA, usually on a certain multiple of EBITDA, you acquire this business but I was thinking that you know, we don’t do a proper synergies assessment and what I mean by that is that all consolidators have thesis of what they’re going to acquire these hospitals for and how they’re going to bring value.
A lot of them talk about improving marketing so the top line, managing cogs better, managing vendors with the buying power but I don’t know if I heard any consolidator doing this diligence process from assessment of synergies. Not really looking at whether this particular hospital can be improved with the processes we have in our back pocket.
Got you. I think that’s a good point because I think that kind of falls in line with some of the things that I don’t know, my personal view of where they consolidation in the veterinary space is going to go is that each individual consolidator is going to be able to find their niche and their sweet spot of the levers that they’re best at pulling and as veterinary groups and individual practices or looking of who they want to join and who they want to court.
They’re going to say, “I’m going to John’s consolidator because they really hit the sweet spot of what I don’t do or what I’m looking for.” Is that sort of what you’re thinking? The synergies of knowing what your capabilities are and then who needs those things?
That’s exactly it. What we see a lot of the consolidators have certain thesis, they go to raise capital bills based on those or that’s what they pitched to the veterinarians and then a lot of the times, it’s really generic. It’s “We’re going to manage the back-office processes while you can be just the vet.”
What is it? Then, we’re not going to change anything, what you do is just the back office. Let’s see what that is if you’re going to do what’s called vendor management in decreasing prices off a lot of stuff that you’re buying form a certain distributor then is it going to change my medications? You need to be upfront with that. If you’re talking about improving marketing, then you need to assess that is there going to be a synergy?
Let’s talk about the marketing specific. A, did you assess the website, the SEO, the social presence and things that you are changing after acquisitions, where do you need to change them in this particular hospital.
Not only because of the curiosity, whether you should or should not but also because those synergies are the ones that bring value post acquisition. If you’re seeing the hospital that has a terrible website and a part of your thesis is to improve marketing through website optimization. Well then, you have that opportunity.
If you are talking about improving the website and their website is better than your home page or your consolidation and you don’t have opportunity there, you should outline that upfront. I think that that’s what we’re lacking and more about the marketing, let’s say you’re saying, “Okay, we’re going to improve market, we’re going to improve your webpage, we’re going to improve your web presence” but you didn’t assess the capacity of the hospital and their schedule is full, they have no more spots, they are up to the top capacity.
If you’re coming in and improving their marketing, you’re going to push over capacity and people are going to burnout and you’re not going to get to your synergy. I think it’s very important to go through your thesis than look at through the synergies that you think you’re going to bring in and then assess the hospital where it’s possible in a particular seller.
While you’re talking about synergy, is it – is part of the synergy the cultural integration of the company?
Yeah, we talk a lot in the podcast and with the consolidators about cultural integration, how important it is. It’s something that I learned, a little different in bigger company’s integration, there was a guy who – actually, one of the props was 34 years in Mackenzie, assisting integrations, massive companies.
We went through the case of American Airlines, merging with the US Airways and then we went through IBM and Lenovo merger. More like acquisition by Lenovo. On the cultural side, I think what we’re looking a lot at core values and what kind of culture in the clinic and how do they align?
I agree with all of that but what was interesting in the course that they brought up is actually culture, a big part of cultures is, how do you do things? How do you get things done in here and how do you do things and how they’re differently from what we tell you to do?
Also, is it worth changing the way you do it here?
Did you guys talk about the Amazon and Whole Foods merger acquisition and all of that?
Yeah, we talked about that and that was also how do you do things here, right? The Amazon culture is quite rigid and in Wholefoods, there were relaxed and we talked about that particular merger with you. We didn’t talk about that particular case in there but we did talk about IBM and Lenovo. Let’s pause on that, that’s the post-integration culture or integration culture.
Even upfront assessment is finding out what would make sense and what would not make sense to transfer as a part of culture and how do you do things? Let’s say you’re coming in and you’re changing the, I don’t know, end-of-day cash process that’s a rigid thing, this is how you do.
One of the things is that again, before acquisition, when you understand how things are done, tell the owner from these are the processes that we’re going to change because when you say, “I’m not going to change anything,” but you have your integration team, the entire list of things they’re going to change, talk about it.
This is what integration looks like in detail, this is who’s going to be affected. Are there any people on your team that would be resistant to that change in the processes that we’re about to change? Make sure that you’re finding out who is doing the processes because many times, consolidators would start with training the manager how to do some sort of accounting or bookkeeping at the end of the month.
Then, it turns out that this particular manager never done it in the past. This is a completely new competency for him or for her and then they will need to overcome that. That’s assessment so culture is not about only vision and mission, which is also important in the core values but also, how do you do things here and what we’re going to change?
In the due diligence, you should be assessing the culture and would that maybe be a reason not to move forward with the clinic or to change the evaluation of what you’re willing to put into the clinic, knowing what’s going to be need to be done after acquisition.
Perhaps if they’ve never done the accounting internally and that’s something that’s a core value and a need for you guys as a consolidator, is that something to maybe to step away from and not just by everyone that exist or is that to say, “All right, we need to be upfront about what we’re planning to do.”
The consolidators that are funded by private equity would rarely step away from the deal if it’s not a long-term game. You can like it, not like it but the point is that their thesis are to buy a lot of clinics very quickly and then integrate them very quickly but it is a point of conversation prior too. If you want your integration to go smoothly then articulate exactly what’s going to happen, how it’s going to happen, outline the roadmap and talk to everybody who is involved on the team.
Which actually another case that was interesting that they talked about was the – I think it was between Fuji and Xerox and they were trying to merge a couple of years ago and it didn’t go well. There was misalignment at the executive level and that reminded me about when do sellers inform their team that they’re selling. Because in our industry, it’s very common for the seller, the veterinary hospital owner to come in one morning and say, “Hi all, I just sold you all.”
Hopefully, that doesn’t happen like that but I think that talking to people that you rely on to maintain their revenue, the process and everything else in advance prepare them. If you have associates that you promise something, a lot of associates go into the clinics and the work for them so they can actually get ownership in the practice. If you didn’t align with those people, they may leave and then it’s not only that you will not gain those synergies and gain a couple more percent to your EBITDA, you will lose the entire producer of revenue, which is pretty bad.
Alignment at the leadership level inside of the hospital in advance, I think it’s very important that I think that that’s what we don’t do enough.
Yeah, I think especially for veterinarians, veterinarians that are hoping to become a partner and have ownerships stake, that’s going to be a big thing because that is not only a leader in the industry but also someone that’s really going to be a major contributor and the – as we know, one of the toughest people to be able to replace within clinics, the veterinary industry is so in such high demand right now that losing that doctor over miscommunications is a very expensive mistake.
Yeah, absolutely and coming back to the cultural integration and diligence prior why it’s so important, so there is a cool case about Lenovo acquiring IBM hardware division and it was a very interesting case because it was a Chinese company with the headquarters and production and everything in China. Lenovo, which nobody knew about it then, acquiring an American company with the division in North Carolina.
The difference in culture was incredible. I didn’t know this, I just know that now you know who Lenovo is but they actually came out to this market and the synergies were in getting the IBM brand and their ThinkPad brand and then having that five years to push the Lenovo brand into the market but the difference, the Chinese in Lenovo were singing company anthem every morning. We were laughing there and I was like, “So did Americans start singing it in North Carolina?”
I don’t think so but the acquisition happened and sometimes, there is such a compelling reason for the merger than you have to manage it post-acquisition. I feel like a lot of the times because we don’t do enough pre-acquisition. We have to do a lot on the integration process after.
Yeah, I am listening to another podcast, which I was like business wars from Wondery and they talk about big competitors and spaces and right now, I am listening to a season about FedEx and UPS and the story that they just told was when UPS bought an Italian shipping company and they showed up the first day and they were so excited and they said, “We’re going to improve things. One thing we notice is everyone takes way too long of holidays and the lunches are way too long.”
They said, the Italian guy said, “We’re not going to stop our two hour lunches” and the executives from UPS said, “Two hours? We thought they were one hour lunches and we thought they were too long” and half of its force walked off and this company they had just bought was worth nothing now because they didn’t have any of the drivers and delivery teams because of the cultural integration there. I mean I know I love singing the morning song that you have us sing to you but I wouldn’t have mind not having to do that if we didn’t have to.
It’s funny because you mentioned the Italian company. We were also going through a case of one of the professors. He’s in this consolidation of the automotive industry in Europe and he was talking about the same thing in Italy. They came in and they said, “But one thing they will have to go will be wine at lunch. You can’t have wine at lunch” and they said, “And it will go with the employees, so if you want to do that then it will go.”
They had to kind of stick with it and stay with it, so there’s a lot of things that you need to understand prior to that. I don’t think that we’re doing large, you know, international acquisitions like that where the culture is different but there is a lot of learnings that you can bring from there because when you’re mixing too, we were also going through a case of US Airline and American Airlines and it was like 16 plus, 18,000 people or something like that.
Thousands and thousands of people, processes, everything else and again, this guy who was running all the integrations he said that the complexity of it and you have to decide on each side, which processes you adopt not only for their who’s more sophisticated but also what is going to bring as the emotional piece who is acquiring who because if the seller of the veterinary clinic comes in and says, “We are merging with the company.”
Merging means we’re merging the processes and everything else but it’s a clear acquisition. If we were acquired, it brings another connotation to it where you know that the acquirer will bring their processes and it will be their way and you should probably warn your people that it is not – probably not on those words but if it is not going to be there, well they should find another place if it is not going to work out because eventually that’s what’s going to happen.
Yeah, well I think that’s going to be I want to make sure that we put a little pin next to that because I know we have a guest hopefully coming up soon that’s going to talk with us about different partnership models, which would fit into a lot of those things of the difference of your acquisition versus the merger and the American Airlines one and the US Airlines one is interesting. Did you guys talk about how the executive teams need to align in a little bit better way?
Well, the alignment of the executive teams and the decision making, so there is a couple of consolidators in the industry that had to sort of change their strategy along the way and that’s probably the worst thing that you have to do when someone starts with, “We’re not changing anything” and then you know, about two, three years into it we’re changing everything. That is probably the worst situation you can put the clinics that you already bought into.
Because they bought one idea and then the seller presented that idea to their team. For example they said, “We’re partnering with this consolidator that is not changing anything,” not the process, not the software, nothing. They believe their leader and they say, “Okay, well you are staying here as the chief veterinarian” and then that sounds okay. Then if a year later everything changes, the same person will have to tell their team that now we’re changing everything.
Then think about the position that this person is put into and the trust that is now completely not there to both corporate office and this veterinarian. Who’s the leader then? Then this creates a terrible situation on the cultural side and again, going into the burnout discussion, it may lead to burnout.
Another one about that is we’ve started to see consolidators purchasing consolidators and that’s something that I think we’re going to continue to see more of. How do you think that the way that they go about acquiring practices while growing with the understanding that they’re going to be looking to exit or have a liquidity event five years or so, how do you think that fits into it? Is that something you guys talked about?
Was a road map there or was it something you could glean out of the classroom for people to be able to think about?
Well, one thing that I notice in these transactions is that the one promise changes in three to five years to completely another promise because if you are going again, funded by private equity, there is like three to five years out and then you’re coming in and saying we’re not going to change anything but then you know that you’re going to sell the entire organization in three to five years then everything is going to change and then those that are acquiring them.
The larger, the family offices, that is something that needs to be really discussed upfront because when you’re acquiring a single veterinary practice, you’re aligning, you’re deciding, you’re discussing everything, it needs to be documented and it needs to be saved somewhere because all of those promises when you’re selling to a larger consolidator, they will have to be either carried on or broken and then there’s still 80% non-consolidated practices in North America at least.
It is easy to find a job in them, so if you will acquire 20, 30, 50, we’ve seen what? 46 recently with Pat well acquired by and it completely changes everything, there is a long process of cultural alignment that needs to happen, you can go and talk to all 46 hospitals but it is unique little culture with old promises that were made. So I think there is a lot of complexity and again, the way that it’s working these days and how it’s sort of a land grab for the next, you know, probably a couple of years on the amount of clinics that are acquired and then it needs to be further discovered how to do this process smoothly.
I’ll put in a little plug on my sale side and maybe some software side of things but I know that is one of the things that we like to hope consolidators with is putting in a CRM so that when you are looking at all of the practices, you can really have a good clear documentation of what was promised to them when you were pitching to them, when you acquired them, when you are going through the process, who is in there and then what happened throughout it.
That is something that could be really valuable not only as you are running them but then as you look to sell your consolidator to a larger group.
Not only that. I think another thing that we talked about, kind of going back to maybe the clinical but also off consolidator levels is about preparing the data because in the integration process, if you had the data plugged in immediately, then everything else sort of, you know, it’s a step-by-step tactical moves but if you have to take let’s say there’s 36 hospitals that are right now pulling Excel sheets out of 36 hospitals and then they are selling it to a larger consolidator.
Do I feel as a larger consolidator that that is actually a group or is it 36 separate hospitals that I am buying? This is an interesting thing and this is where the consolidators should early in the game understand how do they merge the data and reporting everything else and I know that a lot of them starting right now with technology behind but I think that this is something that they need to pay attention from the early days and have enough metrics.
Not too many, not many to metrics on everything that you do but you know, three to five metrics aside from the financial metrics that will give a reflection of how the organization functions as a whole before the acquisition by a bigger acquirer.
Well that’s great. I mean I’m jealous I’m taking a course with Erasmus School out in Roderem online and it is a finance course. I will be able to do a lot of math for you but I will have to use your brain for some of the other things. Again, I appreciate this. I think this was really cool and I think jealous that you now have a little Harvard sticker. You do look a little fancier now that I have seen you post-course. We always recommend a book too.
I think you and I chatted that it would be cool instead of recommending a book this time was perhaps talking about the case studies. You read the case study that’s available for purchase on the Harvard Business review. There is the Lenovo and IBM merger case study and the American Airlines-US Airways one.
That one is good for the integration if you’re interested about large scaling integrations and then also an interesting one about Fuji-Xerox case. That’s about the misalignment of the leadership team prior to acquisitions, so that one would be good too. All of those are available on the Harvard Business Review.
Awesome, well Ivan as always, I appreciate it. I’m looking forward to our next conversation and I think we got some good stuff here.
Excellent, likewise and thanks for joining me today. Cheers.