“Culture Eats Strategy for Breakfast”
Identifying 2020 M&A Winners and Losers Through A Culture Lens
For the past few years, the investment property landscape has been characterized by intensive M&A activity and 2020 will be no different. The pressure to transact is on both the demand and supply side; the large private equity funds and investment platforms search for scale, while the small try to find a safe haven from necessary and substantial increased infrastructure costs and access to capital (as larger platforms are sucking up oxygen in the room). Scale and safety will be the two primary drivers of increased M&A activity. Recruitment strategies.
If these are the drivers, the key determinant of success in 2020 will be culture. We feel there are three aspects of culture to watch out for in identifying potential 2020 winners and losers.
Clash of cultures
As businesses expand product offering up and down the risk curve, a cultural fault line will increasingly come into view. Platforms that are at the high end of the risk spectrum – like real estate private equity funds– will continue to be run and populated by highly driven, charismatic, alpha seekers; urgent, highly numerate and entrepreneurial.
At the other end are the risk averse, core fund investors. Calmer, less urgency, typically longer dated capital. Less likely to be driven by an iconic leader and more by a cautious culture driven by the senior management team.
This clash of cultures will come into sharper focus in 2020 and is something worth watching for as the bigger players acquire the smaller ones. Efforts to align at the macro level on culture will be crucial.
Adapting to different skill sets.
Just as important is what happens in the trenches. If the generals doing the acquiring operate in very different ways, the soldiers have markedly different skillsets and cultures as well. The newly merged entities will find themselves with a greater variety of teams and skillsets they need to integrate. This will throw up two very specific challenges:
Firstly, the high growth areas within real estate, eg logistics, healthcare, living – are now targeted as specialist areas within real estate as opposed to being driven by more of a ‘bottom-up’ approach. There is a higher percentage of people with operational backgrounds and a penchant for the technical as well as a ‘nose’ for deals. Finding and absorbing these skills and personalities will be somewhat akin to the fundamental adjustment going on now as platforms with core investment banking and M&A acumen add key specialization as well as skills like intimate tenant demand understanding as well as data aggregation and analysis elements to drive the search for value.
The other key challenge will be the need to manage new infrastructure and complexity. For example, if PE funds go down the risk curve and start buying core businesses, they will now acquire research and strategy functions that traditionally have been integral parts of the core businesses, but were not necessarily part of the high-octane PE approach where speed is of the essence. Hence yet more adaptation and integration.
The difficulty in integrating new teams, skills and cultures is rightly recognised as the number one reason most acquisitions fail. How firms handle this will be a key indicator of success in 2020. Recruitment strategies.
Agility and the re-start of succession planning
The M&A holy trinity: acquisition, consolidation, integration may continue into 2020. Firms getting their plans in place before the downturn inevitably kicks in. In 2020, two themes to watch out for are cultural agility and the return of succession planning.
Agile leadership, adaptive performance and proactively thinking about technological disruption, change and innovation have all entered the executive and management consultancy lexicon in real estate. Look out for the firms that relish change and can articulate what is changing, why and what they are doing about it.
Post integration, we expect to see increased activity involving the upgrading of teams through targeted and critical hiring plans. Importantly, we believe succession planning, a big theme of 2018, will re-surge in 2020 as firms prioritise next generation leadership.
Firms that embed agility and do not shy away from the big leadership questions will be better positioned to be winners.
In a year of continued M&A activity, it is the cultural issues, mainly revolving around coping with change, that will most clearly separate the winners from the losers. Recruitment strategies.