Falls River Group
IMAP Bilbao 2022
Welcome to Bilbao, and welcome to IMAP’s 2022 Fall Conference!
“May you live in interesting times” is a phrase that is supposedly a well-known Chinese curse, but, unfortunately, according to Wikipedia, there’s no evidence that there actually is such a phrase in Chinese. The closest is, “Better to be a dog in times of tranquility than a human in times of chaos”, which is found in a 17-th century short story by Feng Menglong, which I guess is close enough. There sure is enough chaos to go around at the moment but judging by how most of us treat their dogs, the rising dominance of the pet food industry and even by how many smart Chinese dogs there are on TikTok, being a dog anytime is obviously not as bad as it used to be.
Our third quarter review noted that we were experiencing a slight slowdown this year from the exuberant 2022, but with a war in Europe, exploding inflation and collapsing corporate profits, that was something to be expected and there were comments from many of our partners that backlogs were still strong. We will be returning to this question later this morning, starting with an analysis by IMAP DeGroof’s Chief Economist Hans Bever, who told me in an interview two weeks ago that the situation is actually much worse that he expected, and he showed us what he meant in a succinct presentation. In a word, it’s bad.
Andy Grove, legendary CEO of Intel described what happens to businesses in “interesting times” – “Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.” And so, we will be looking for ways to turn weaknesses into strengths, to find opportunities where others see catastrophe, and to make sure that IMAP and its partner firms come out stronger at the other end.
Recently I read a great book called “The Obstacle is the Way”, by Ryan Holiday, which dissects the Stoic philosophy of Marcus Aurelius, Seneca and Epictetus and shows us that obstacles make us better and move us forward - obstacles are what drive innovation. He presents a sort of Stoic OODA loop. If you recall, we discussed the OODA loop in the virtual conference in October 2020. OODA stands for Observe, Orient, Decide and Act, a system developed and advanced the legendary military strategist and United States Air Force Colonel John Boyd, and which is used as the basis of training in the US military. In “The Obstacle is the Way”, the system for overcoming obstacles is presented as a discipline of three interdependent, interconnected, and contingent disciplines: Perception, Action, and the Will. Perception and Action are like the OODA loop. The Will is what sets this apart, and we will get back to that.
Last month we hosted a very successful IMAP Analysts and Associates meeting in Rotterdam, with over 70 participants from 19 countries. In my introduction to that gathering, I dissected a specific IMAP deal, the sale of Farrar Scientific to Trane Technologies, led by Steve Maddox of Falls River Group, to show what attributes contributed to the success of the transaction, but how those attributes could be attributed to many IMAP transactions. And actually, it is these attributes that can be also applied to overcoming any obstacle.
The first attribute leading to success was Expertise – understanding the market sector and segment, knowing how to pitch the Company and to whom, how to position it, what changed in the Company were needed to be able to make that pitch and understanding the market segmentation. In other words, understanding the essence of what was being sold, or knowing the story behind the deal before there even was a deal. This is Perception part of the process – understanding the problem and the challenges.
In this particular case we had a sector expert. And while it is true that not many markets can afford to have sector experts in every field, I maintain that to be successful, we have to become sector experts on every single deal. Furthermore, that shouldn’t be considered a burden, but an opportunity - the opportunity to learn new things every single day, to explore and understand new markets, new technologies, how they work, their pressure points, value chains, competitors. Even if you are not a sector expert, read books, scientific papers, trade periodicals, research competitors, find out everything you can about the market, and then you will at least start becoming a sector expert.
I have said this before and will keep repeating it, IMAP is a Learning Organization, never static, constantly evolving as markets change, one where learning is constantly emphasized, nurtured, and rewarded. And that knowledge is a pre-requisite not just for successful transactions, but also for rewarding experiences and an interesting life.
The second attribute we touched on was Persistence – great deals are not easy. This transaction meant putting in a year’s worth of concentrated work at great personal risk – the deal might have come to nothing, and that almost happened. We at IMAP Southeast Europe recently completed a transaction that took eight years from first signing the mandate. Not very efficient, but we stuck with the client through three Due Diligence processes, three contract negotiations, a corporate re-organization and investor visits too numerous to mention. Timing and luck both played their roles, but we got there in the end, proving our commitment to the client and our belief in eventual success. This is the Action part of story.
The third attribute we detected was Integrity – in this transaction IMAP pegged a starting valuation at four times what the client initially expected, and even though the client offered much more in terms of fees, IMAP took less, which nevertheless resulted in a very successful transaction at 20 times revenues and in one of the highest success fees in IMAP history.
Integrity can be manifested in many forms. Advising the client not to complete a transaction if you think it is against their interests, or advising not to go with a certain investor, even if their offer is higher. But also standing up to the client when we think he or she is wrong and standing by your colleagues when you think they are right, and never, ever just going with the flow because it’s easier.
It is also being fair and open with your partners, respecting their interests and building trust, which is essentially the glue that holds the IMAP organization together.
The final attribute we mentioned was Empathy - No transaction can be successful unless we understand what is in the mind of the client, unless we know their motivation, both intellectually and viscerally. We need to feel it in the gut. This is the only way we can drive the process, know where to press hard in negotiations, where to compromise. Obviously, we can’t, and probably don’t want to, become friends with every client, and that isn’t even the goal. But to be a trusted advisor, we have to understand deeply the person we are advising. This is why we often say that psychology (and sometimes psychiatry) is as important to M&A as knowledge of finance and industry.
So, Expertise, Persistence, Integrity, and Empathy seem to underpin most of what we do.
But we often forget that in everything that we do there is a huge element of something called luck. It was true in this case, and probably in most of our transactions. When we’re successful, we think, oh, look how smart we are, we are freakin’ geniuses; when we’re not successful, we usually find someone or something else to blame. But we forget that there is as much good luck in the cosmos as there is bad luck. Which leads me to the final virtues in the analysis, namely humility and gratitude. Understanding how much luck plays in success or failure should make us both humble and grateful, and I put it to you that humility and gratitude are virtues that should be part of our vocabulary and that we absolutely need to nurture and practice every single day.
This deal story is only one of hundreds of IMAP stories every year, and I left out all the details that I shared with the Analysts. But every time a business owner puts the result of his life’s work in our hands, this puts a tremendous burden of responsibility on our shoulders. How do we, or should we, define our role in these events that for us are “transactions”?
Sometimes when we talk about completed deals, we tend to make our IMAP transaction teams the heroes of the story. But, the real heroes of each IMAP story are the business owners, those who have sacrificed who knows what to bring their companies to the point where they are either ready to sell or need to sell. We mask this fact in vague terms like finding investors to bring the company to next level, or something like that, but the fact is, we are selling this person’s life’s work.
So, what are they looking for? Is it a corporate pitch that they can hear from everybody else? Or is it getting the lowest price for the service? Or are they looking for someone that understands them and how difficult this step is, who they can trust to reliably guide them through a process that they don’t really understand?
Every story needs a hero, and in every IMAP story, the hero is not the dealmaker, but the client, and the IMAP team is the guide that will help the hero to reach their goal. To use a Star Wars analogy, we are the Obi Wan Kenobees to the clients’ Luke Skywalkers, guiding them on how to use the Force to fight against the evil empire. Essentially, that is our role, and that is our purpose. And it is a noble purpose.
Most people will agree that to be happy, to genuinely enjoy what you’re doing, you need to have a higher purpose, a reason to be excited about what you are doing with your lives, to know that what you do makes a difference, and even better, to share that purpose with a group of like-minded friends and colleagues, as we have here today. We will hear more about that in tomorrow’s keynote address.
But for the moment let’s go a little deeper. OK, you have helped the business owner and his or her family reach their goals, and safeguard their legacy, and that (plus the success fee) gives you satisfaction. You have also learned a lot about a new business, a new sector, or some new aspect of finance – you are on your way to be a sector expert. And that learning process should give you satisfaction. But you have also helped transfer what is usually a family business into stronger hands, ensuring that more investment and resources are available to the company, protecting and improving jobs and even whole communities, strengthening local economies, and making a real difference in the lives of perhaps thousands of people. So, reflect on that the next time someone asks you what you do, and be proud, and be grateful, and be humble.
Before we forget, let’s go back to the beginning of this happy story. So, we are now facing a potentially existential macroeconomic threat in almost all parts of the world. One respected “Fed insider” has even predicted that “…Jerome Powell is endeavoring to be the architect of a controlled demolition of the leveraged bond market, whether it is securitized assets, or leveraged loans, or private middle market credit… and he’s not going to cry if those go away one by one by one, as long as nothing systemic is unleashed.” Well, that remains to be seen, but how will we react to those kind of market changes, and how will we be able to help our clients in that kind of changed environment?
I mentioned that the third part of the Stoic discipline was the Will. Sometimes we mix up the words Persistence and Perseverance. Persistence is action – we keep at something until we succeed. Bur Perseverance is something larger. As Holiday writes: “If persistence is attempting to solve some difficult problem with dogged determination and hammering until the break occurs, then plenty of people can be said to be persistent. But perseverance is something larger. It’s the long game. It’s about what happens not just in round one but in round two and every round after—and then the fight after that and the fight after that, until the end. The Germans have a word for it: Sitzfleisch. Staying power. Winning by sticking your ass to the seat and not leaving until after it’s over. Life is not about one obstacle, but many. What’s required of us is not some shortsighted focus on a single facet of a problem, but simply a determination that we will get to where we need to go, somehow, someway, and nothing will stop us.”
Alfred Lord Tennyson’s reflections on the perseverance of Ulysses and his crew, and their state at the end of their trials, give us a snapshot what it means to persevere:
Tho' much is taken, much abides; and tho'
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.
I sincerely believe that we at IMAP have that quality of Sitzfleisch, and that that is our “secret sauce”, and that we will find our way around any obstacle that comes our way and come out of the coming rough seas both stronger and smarter. Thank you!