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SIMON BROWN: I’m chatting now with PJ Veldhuizen, managing director at Gillan and Veldhuizen Inc PJ, appreciate the early morning. M&A [Merger and Acquisition] activity is something that we always think happens between companies of billion-rand valuations, listed companies and the like. But in a recent article you put out you speak around M&A activity happening around SMEs, professional service firms. It happens in smaller businesses as well and really can be beneficial for the companies.
PJ VELDHUIZEN: Yes. Good morning, Simon, and good morning to your listeners. Quite correct. One always believes what one sees in the movies – that these are things with Gordon Gekko, and greed is good, et cetera. But it happens all the time. Companies want to create efficiency, resiliency and sustainability. And with the level of regulation that we experience – not just in South Africa but worldwide – in order to create those efficiencies, one often sees strategic mergers where you can join up with like-minded people in like-minded firms and create synergies that can protect you going into the future.
SIMON BROWN: Absolutely. And the other point is really a great one – the sort of two businesses getting together and actually the sum of the parts is bigger. You plug some gaps that the one business has with the other.
The other is two businesses which are both [pretty much] struggling. But you put them together and they’re doing markedly better. A lot of those fixed costs would have been duplicated. That’s another reason for a merger that can actually come out better as the two parts are together.
PJ VELDHUIZEN: Absolutely. So if you think of a vertical integration, for example, between a farmer and a packhouse – or a packhouse, farmer and a marketer – it’s taking up the supply chain. That’s something that’s been around forever. But we’re seeing it more and more now. As I say, one wants to create the efficiencies and be in control of the entire supply chain rather than relying on people, where everybody is trying to steal a buck here or there. It is so that you control that entire supply chain.
SIMON BROWN: You mentioned Gordon Gekko, and of course the whole point there was around greed is good – and risk, lots of risk. It’s risk versus recklessness. There’s a line there. Taking risk is not a no-no. It’s around taking calculated risk in the M&A space. That’s the point that’s critically important.
PJ VELDHUIZEN: Well, that’s absolutely correct. And it’s about critical thinking. It’s about applying. I don’t know if you’ve read the book Clear Thinking by Shane Parrish – it’s about applying one of the 100 mental models – the latticework that Charlie Munger talks about – about avoiding loss being better than trying to make gains. It’s all about thinking clearly and understanding the risks that you’re taking on.
Look, you can never eliminate all risk, but if you if you apply your mind and you use the right professionals to assist you, you [can] work through it. Again, I say in my article ‘Less haste, more consideration’. Don’t be forced into things. Don’t be forced by other people’s calendars to sign deals.
If this deal is not right for you now, another deal will come along. It’s about step-by-step analysing whether this deal is going to be good for you in the long term. And one of the mental models that I always like to use is second-order thinking. What are the consequences of what I’m about to do? What are the tax consequences? What are the consequences for my employees? What is the merger of these two cultures going to be like?
When you start looking about what happens next, it opens your mind as to as to whether there are true synergies here or perceived synergies in a deal like that.
SIMON BROWN: Absolutely – and making sure that there really is something there. You also talk around proper due diligence. It’s more than just what the bank accounts look like. It’s around IP, it’s around contracts, leases – all those other bits. And often this really can get [down to the] nitty-gritty, but it’s hugely important. And some of them could be deal-breakers if not properly aligned.
PJ VELDHUIZEN: Well, 100%. I always say one of the biggest things in any deal that you put together is: What does the divorce look like? If this doesn’t work, how do you reverse? If there’s a dispute, how do you deal with that? Let’s be frank, the court system is an expensive option. It’s a lengthy option and it’s good really only for people like me – the lawyers.
So if you if you set up the rules of how to resolve these things, I’m a great proponent of mediation – commercial mediation that is – where business people can resolve things in a businesslike manner and try to keep the costs down and [arrive at] a resolution to something that can happen efficiently and quickly, as opposed to waiting five years to get into court, and then the appeal process that follows that. You may not know; maybe you’re getting into bed with a charlatan who wants to use that system to their advantage, and you can then be the subject of intense abuse.
SIMON BROWN: I like that understanding. How does this break up if it doesn’t work? Let’s be real. Not everything works. I think it’s an important point, a great point.
We’ll leave it there. PJ Veldhuizen, managing director at Gillan and Veldhuizen Inc, I appreciate the early morning time.
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