McKinsey – Why the Customer pays for Risk Reply

In the forthcoming McKinsey Insights article “Avoiding Blindspots in Your Next Joint Venture” the authors point out some of their recent research into the failure of JVs. Further to my previous post about the need to design accurate risk models into a JV/Alliance/PPP, the authors note:

“At the beginning of any JV relationship, parent companies naturally have different risk profiles and appetites for risk, reflecting their unique backgrounds, experiences, and portfolios of initiatives, as well as their different exposures to market risk. Parent companies often neglect this aspect of planning, preferring to avoid conflict with their prospective partners and getting to mutually agreeable terms—even if those terms aren’t best for either the JV or its parents. But left unaddressed, such asymmetries often come to light during launch, expand once operations are under way, and ultimately can undermine the long-term success of the joint venture.

Certainly, some JVs must be rigidly defined to be effective and enforce the right behavior. But when that isn’t the case, JV planners too often leave contingency planning to the lawyers, focusing on legal protection and risk mitigation without the business sense, which shows up in the legalese of the arbitration process and exit provisions. Both tend to be adversarial processes that kick in after problems arise, when in fact contingency planning should just as often focus on the collaborative processes that anticipate changes and create mechanisms or agreements that enable parent companies to adapt with less dysfunction. As the head of strategy for one insurance company noted, “If a JV is set up correctly, particularly regarding governance and restructuring, it should be able to weather most storms between the parents.” Such mechanisms might include, for example, release valves in service-level agreements, partner-performance management, go/no-go triggers, or dynamic value-sharing arrangements and can allow a joint venture to maintain balance in spite of partners’ different or evolving priorities and risks.”

Designing proper risk models need not be adversarial. In the hands of a skilled lawyer or commercial manager it is a sharp and powerful weapon at the negotiating table. This does not mean that the contract is not a win/win deal. On the contrary, insight into the proper and necessary allocation of risk is essential for a win/win deal. Anything else is simply wilful blindness. In fact, a more mathematical approach to risk modelling lays the foundation for a negotiating process that is more inquisitorial rather than adversarial. The primary questions remain: is the management sophisticated enough and does the business have the stomach for it?

Leveraging social media data analytics to improve M&A – Lexology Reply

Social media part 3: leveraging social media data analytics to improve M&A – Lexology.

Data Analytics for M&AThere is no question that social media has a role to play in M&A activity.  In a recent survey by Toronto based international law firm Fasken Martineau; respondents reported that they were not only using social media to communicate deals but also for research and due diligence .

  • 36%  for research.
  • 48% for investigation.
  • 72% like LinkedIn to research personalities.  Only 50% said the same of Facebook.
  • 78% disclose transactions through Facebook and 44% use LinkedIn.

More importantly

  • 77% said they have no social media strategy, and
  • 65% said they have no intention of developing one.

DATA v SENTIMENT

There are 2 benefits of social media: (i) expert opinion, and (ii) trending sentiment.  Much of the hype behind the trends in Big Data are about connecting these 2 powerful elements with the hard numbers around corporate valuations.  For instance, an acquirer may wish balance valuations with the trending market sentiment and the opinions of experts.  An extreme example of this is the Facebook IPO where market hype vastly outweighed traditional valuations.  So much so that Warren Buffet said that he had no idea how the valuation was so high and that he just couldn’t value companies like this.  Social media is often seen as an echo chamber; a small community talking to itself.  Posts range from  self-aggrandisement to advertising puffery with very few hard facts and figures in between.  What few figures are there may be real, may be fictional or may be somewhere in between.  The value is in aggregating these figures but the algorithms needed to ensure that the right weighting is placed against the right number based on author, time etc (let alone how they account for hearsay).  the maths behind this is hard enough let alone the semantic interpretation by computers.  Needless to say, when this sort of calculating can be done it will be worthwhile for many and will be, initially, a very, very expensive service.

The moral of the story is  – BEWARE!

Social media remains useful for advertising and developing an extended network of sector contacts in order to deepen one’s contextual market knowledge.  However, as an analytical tool, to my mind, it is still out there with witchcraft.