M&A Style ⑦: It's Because of Your Flaws That I Can Work With You

This is Kaoru Hosoda. Thank you for noticing me!

The 7th installment of my "M&A Style" series. The phrase this time is "It's because of your flaws that I can work with you." I will be talking about how "bad points or things not yet done" does not equal "evil".

The culture of reading between the lines born from a demerit-based system—I believe this is the root cause of the disease in Japanese corporate M&A.

Do you want a perfect boyfriend or girlfriend?

If you are hesitant about M&A, one way to think about it is to relate it to human society. M&A is often compared to marriage, and that is exactly right; it is a valid approach to compare an M&A target company to a "partner or spouse."

Everyone, in the real world, would you want to take on a "perfect person" as a partner who is:
① Flawlessly beautiful,
② Intelligent and possesses tireless curiosity,
③ Has the virtue of being liked by everyone,
④ Has a healthy body... etc.?

Most people's answer would be "NO." Even if you think "Wow!" when being with someone who can complete everything on their own, it is difficult to feel like you "want to walk together" with them, isn't it?

Because we each have things we lack and we complement and support each other, we can realize "the meaning of being together," and perhaps that is how deeper bonds are fostered.

And above all, there is no such thing as a "perfect person" in the first place. Everyone should know this well.

The mystery of why people think "there is a perfect company"

Nevertheless, for some reason, I feel that many acquiring companies think "there is a perfect company." Furthermore, there are people who act as if their own company is perfect.

What happens then? A demerit-based system. In Due Diligence (DD), which is the process of getting to know the target company well, various points of concern and problems arise. This is even more true if the target is a company with a long history. For example...

・There are doubts about past tax filings
・The aging of manufacturing equipment is serious
・There are existing contracts that carry excessive risks
・Current accounting standards are insufficient, and monthly closings are late
・There are concerns about the president's leadership
・Poor at raising funds... etc.

There is no end to the list of cases. But it is natural for them to appear. After all, they are running a business. They are not solving math problems every day.

However, every time these points are discovered, comments like "I'm worried about this part of the company. Is it okay?" or "Is it okay to have a company that doesn't follow global standards?" follow one after another.

But there is no perfect company. And the person in charge wants to do the deal. What happens? "Concealment." In other words, they only report pleasant information and hide unpleasant information as much as possible.

The person hiding it is definitely aware that they are hiding it. However, the culture of a demerit-based system creates the incentive for them to do so. Humans are slaves to incentives. When this happens, only information that deviates from reality reaches the decision-makers, leading to incorrect decisions.

I believe that the biggest factor behind why Japanese companies repeatedly fail in M&A is this

culture of reading between the lines born from a demerit-based system

.

Flaws = Charm!!

On the other hand, I cannot forget the following words I heard when I attended a seminar by one of the world's leading investment funds in the past.

When we find a flaw during due diligence, we rejoice, saying, 'Finally, we've found a reason to invest!!'

Once a flaw is found, we carefully examine whether we can improve it, and if it is improvable, the possibility of that deal getting the green light increases dramatically.

Now, I can wholeheartedly agree with these words.

If it is a 'flaw' that neither we nor the other party can do anything about, then unfortunately, it can become a reason not to invest. But if it is something we can compensate for,new value is created in the world, and everyone becomes happy.

Conversely, a deal where that is not possiblecan never be a 'win-win-win' situation, so it will not be a good M&A. A cold relationship connected only by money will continue, and someday, a bitter parting will await.

Let's find our own 'strengths' and understand them properly

Even if you find a flaw in the target company, if you cannot carefully examine 'whether we can do something about it,' the story in the previous section will not hold up.

This is also the same as in human society, and I truly think the following.

You (your company) do not know yourself (your company) the best

This may also be a Japanese tendency, but I often meet people who say, 'Our department doesn't have any strengths...' Just as much as people who say, 'I don't have any strengths...'

But that cannot be true. If your strengths were zero, even in the protected Japanese economy, you would have been wiped out long ago. There is definitely something.

Clearly define the strengths of your company, your department, and yourself, and ensure that all stakeholders have the same understanding.

This leads to 'whether you can find a good partner,' and by extension, it also leads to 'whether you can negotiate from a position of strength.' It is precisely because you are confident in yourselves that you can say 'goodbye.'

Before you start considering an acquisition deal, please first take a fresh look at your own company. Please have a thorough brainstorming session. After that, let's go find the best and most beloved partner.

Conclusion

More than just 'doing a good M&A,' isn't ithappier and more funto work and face others with the mindset of 'looking for the good points in the other party' and 'viewing flaws as opportunities'?

I believe that 'happy and fun' feeling is definitely conveyed to the other party as well. If you can believe that the other party will fully accept you, it becomes easier to talk about your own flaws, doesn't it?

I have been thinking a lot lately that the era where business succeeds based on a sense of money-counting is over. People who provide as much happiness to the world as possible receive the most compensation. And the act of giving compensation to that person itself has a positive effect on the world.

I keenly feel that we are living in such an era. I wish we could live more positively and comfortably. M&A simply exists within that grand era. I would like to continue approaching M&A with that mindset.

Thank you very much for reading until the end.

Kaoru Hosoda