Masterclass on the Ins & Outs of Mergers & Acquisitions

Darius Teter: Previously on Grit & Growth, we explored the stories of two strategic acquisitions in Africa, involving Nigerian and Ethiopian Fintech and a Kenyan IT outsourcing company. In both those episodes, we got powerful insights from Victor Basta, CEO of DAI Magister.

Victor Basta: In a geography like the African continent, the multiplier of value, multiplication on your own time of entrepreneurial effort, you cannot get a greater multiplier anywhere in the world today.

Darius Teter: Victor is an expert in mergers and acquisitions on the continent. And today we’re taking a deeper dive one on one, to discover more about what he’s learned along the way. We discuss the quid pro quo of working in frontier markets, how to attract potential buyers, how to get your own team on side and how to maintain value throughout the due diligence process.

I’m Darius Teter. And this is a masterclass by Grit & Growth with Stanford Graduate School of Business, the show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs. But enough from me, let’s let Victor introduce himself.

Victor Basta: So I’m Victor Basta. I’m the CEO of DAI Magister. And we’re at the moment, probably the most active advisory firm handling larger rounds and M&A deals for companies in Africa and the Middle East. Growth companies really focused on tech-enabled businesses.

Darius Teter: I read an interview that you did some time ago, and there was this great quote in there, where you said you don’t see yourself as somebody who does the deals, but someone who helps people through deals. And you consider it a privilege to be involved in somebody’s transformational life experience. Can you say a bit more about that?

Victor Basta: Sure. Almost everything we do, is at a point where an enormous amount for a company, and a team is on the line. And we get used to it after a while. I’ve been doing this for almost 30 years, but one has to step back a little bit to realize that pretty much everything we work on, is more than an inflection point. More than a pivot point for a company. I’ve lost count of the number of life changing events I’ve been privileged to have a ring-side seat to. But more than that, and this is where, really, the privilege part comes in, you’re in the middle of helping create it.

So to be able to create other people’s life changing events over and over and over again, it’s the reason I’m willing to get up and do conference calls at 7:00 in the morning on a Saturday, after all these years. And it’s a reason why we are excited to pivot so much of our work towards emerging markets, which are much harder to work in, but the privilege is even greater.

Darius Teter: So can you say a little bit more about that? What’s happening in the African emerging market ecosystem in the mergers and acquisition space that’s exciting or interesting or new?

Victor Basta: For the first time in history, you have a group of companies that are starting to transform life on the continent, in a way that grant money never could. And the process of industrialization on a continent that has far less infrastructure than it needs to have, and will not be fixed for decades, the only way to accelerate industrialization is through technology enabled businesses.

Of course, you need to build dams and rivers and highways. But again, that in and of itself, is not going to transform economic life on the continent. The only way to transform economic life, and therefore give ourselves all a chance, is accelerating the industrialization successfully of Africa. And the other dimension is that, for Africa to industrialize successfully in this day and age, isn’t the same way that China did it. Burn coal, and basically scorched the earth. We can’t afford to do that.

Darius Teter: Industrialization in Africa, actually might mean something completely different, which is remote distribution of digital services, expansion of network penetration, lower cost of bandwidth, lower cost of devices, which enables a whole bunch of things that never actually need to be brick and mortar along the way. Right? So getting back to how we bring that capital into these sectors, what does it look like to do these types of deals, that would bring that kind of growth capital in these markets?

Victor Basta: That money is not available on the continent for the most part, with a very few exceptions. It’s not local, or regional, or continental money. That money needs to be attracted from abroad. So doing these deals is all about developing a degree of conviction from a group of international investors, who could put their money anywhere and do not have to put it into Africa.

And developing that conviction in what still is considered a frontier market, means you have to overcome a lot of initial objections. One of the big things that we see, is that a fair amount of the money raised, is used effectively to quote “reinvent the wheel.” What I mean by that, is that in Europe or the U.S., you can rent infrastructure. I mean, these days you can rent AWS and rent everything, and you can literally get into business tomorrow, and deploy your product.

In Africa, if you’re going to move food from small holder farmers, to roadside stall holders, you need to have your own trucks, you need to have your own warehouses, you need to have your own tech stack, and you have control of the end to end delivery and the supply chain. That costs a significant amount of money, even in a place like Africa. And requires a level of competence that you don’t need to develop in Europe or the U.S.

And so, what are the quid pro quos? Well, in Africa, building a business that’s 20, 30 million of revenue in a particular sector, particularly in certain geographies, makes you unique today. In China, if you set up a business on a Saturday doing X, chances are if it’s even remotely successful on Monday, by the following Saturday, you’ll have 30 competitors. Right? You can get better margins, you can become profitable more quickly. And even though you’re using more capital to quote “reinvent the wheel” in certain elements, you’re able to make money out of those assets, in a way that you’re not able to in other markets.

It’s made more complicated because we haven’t seen exits repeatably. And so not many companies have been sold. And one or two have gone public and that’s pretty much it. And so people are taking a leap of faith. If I put the money in, and even if the business scales and it’s profitable, how do I know I’m going to get the money out? That is a bet that they need to make still. And the bet they would make in any emerging geography by the way. They’d have to do that in Southeast Asia 20 years ago, or 15 years ago. You don’t now. So people look at the pattern recognition that didn’t exist in India 20 years ago, but look now it exists.

Darius Teter: You described the complexity of the operating environment in a lot of these countries in Africa. And why it might make sense to build a warehouse because you can’t rent everything. Does that create an incentive for international companies to try to expand their footprint through acquisition, so that they can find someone who understands how to navigate all of that complexity, and they don’t have to do it themselves, in a sense they’re buying the answer to the complexity problem, and thereby they get access to 200 million people?

Victor Basta: Exactly. And that’s the thesis for getting eventual exits. Is that there’s going to be a small number of companies, that are now and quickly, that will graduate to a point where they cover enough of the continent, so they understand how to be an African platform business. That’s number one. Two, they’ve solved these kinds of problems and keep them under the hood if you will. Right? They know how to do it. And it’s not a problem day in and day out in their business. And they know how to operate within different regulatory regimes where that’s appropriate.

And therefore, a large company doesn’t have to do all that work, and take all that time to try and scale in the continent. So that is the payoff. And that’s the bet that investors are making. At the moment, the market is 95% plus fundraising, and a very small proportion M&A. 10 years from now that will change. But at the moment, companies adjust in the process of getting built to a point where they have the profile you’re talking about. But there are 1.2 billion people in Africa. And however little many of them have in terms of daily income, it is rising. So it’s only a question of time.

Darius Teter: I agree. And I actually think that the growth curve may be steeper as well. All the trends might be accelerating even faster than they did for example, in India. What I’m hearing more and more from these founders is, in their mind, somewhere in the future, they would like to be acquired through some kind of strategic partnership, that would enable them to grow and be part of a bigger company.

Darius Teter: So I want you to help me address those people. They’ve got a start-up, they’ve secured some venture capital, they see a strong growth path. When in their mind, should they be considering selling their business? What are the triggers?

Victor Basta: You don’t really choose your moment, at least for the best or better exits. The moment chooses you. And there’s a saying about being bought, not sold. And the best exits are companies that are bought not sold. And what I mean is, somebody will quote, come along and pay a strategic price, because they have a strategic imperative. They want to expand in this or that area. They want to do a deal to do this. And so they find the best available company to do it. And they oftentimes will pay up for that.

The dirty little secret is that being bought, not sold, takes an awful lot of selling beforehand. It’s just not cold selling. And I’ve talked about this a few times in the past. So what does it mean? It means visibility in all of the different stripes. So one of the things that tech enabled businesses don’t do, is spend very much on what I would call corporate marketing. In Africa, it’s zero.

So you’re expecting somebody to do all the work, to work out that you’re actually a reasonable size business that I should be thinking about buying, when my strategic requirements dictate. Of course, you can always go do a search for companies, but people buy people they know, or people they’ve heard of. And there’s a degree of comfort, and confidence with that.

The second, which is deeper and more relevant, is building those kinds of strategic relationships, commercial awareness, et cetera. Again, developing relationships with companies that are likely buyers years ahead of when they actually might buy. Because A, you as the CEO of that company, have no idea when they’re going to want to buy. And you might or might not have an idea why they would want to buy.

And the other thing is, there will be two or three or four other companies that also would make sense to buy at any point in time. And so you are competing. And you better think about that now, i.e. well ahead of when you think the exit window would open, because you can’t control the events. Most of the best exits we’ve worked on, are quote “surprises.”

Darius Teter: So let’s dig into that a little bit. I love the point about visibility. Basically visibility equals value. So spending on corporate marketing is not just an expense, it’s actually an investment, and should be used as an investment. And then on the business development side, try to make deals with bigger companies, so you can put yourself out there for them to see. You may not be able to see under their hood, but you’d like them to be able to see what’s going on under the hood in your business. Right?

Victor Basta: Well, I’ll tell you what we were doing so far this year. Right? On preparation work, we do a lot of prep work with companies a year, two years, plus even before they would look at doing an exit. And so, one of the things we, twice actually, we’ve written year end press releases for companies. Now, a private company doesn’t have to release any information, but proactively, we thought it was a good idea for both these companies to start getting in the practice of publishing a kind of, during Q1, how did we do last year?

Now, it’s not broadcasting numbers, because there aren’t that many numbers, but it’s broadcasting the messages around why the company’s attractive. So it’s almost like a pitch deck. And the key points that you would want to land with potential buyers for example, from an African point of view, we are going to expand into Ghana and Senegal.

People always look at the disadvantages that companies and frontier markets have. So one of the things that a lot of companies should do is look at the advantages. So the Wall Street Journal or Financial Times would fall all over themselves, to write an ESG driven story about a purpose driven business, that is scaling in an incredibly hard market of beating the odds. I mean, that story writes itself.

And if you were a 20 million SAAS business in Denmark, no disrespect to Denmark, nobody would give you the time of day. They don’t care. Right? You’re a $20 million company, doing I don’t know, supply chain optimization or whatever in West Africa. I mean, you will have CNN as an audience for that. You have an opportunity, particularly with the wave of interest in ESG to land visibility blows, left, right, and center in a way that is deeply unfair.

Darius Teter: I get that. And it’s not just visibility. I mean, another point I’ve heard you make before, is that you want to demonstrate your authority over the topic. Right? So you don’t just write about your product, you write about your industry, you write about your region, you write… So because buyers are interested in expertise, and you need to get on their radar screen as a viable expert.

Victor Basta: It’s all about the perception of safety, and effectively risk reduction. If I’ve got a senior team as expressed by the CEO, that really understands their market. And being authoritative and fault leadership and all that, really is just an expression of, we really understand our market. Discuss back to the point you said earlier which is, a buyer will pay the most for a company that sort of cracked the code, of how to operate.

So the more thoughtful you are about market trends that are really directly relevant to you, put them in a bigger picture, the more that comes across without you ever having to say, “Hey, we know the market.” You’re just showing people that you know it. And again, there’s a huge, unfair advantage going back to my point before, that companies have in Africa and the Middle East, there’s almost no market research.

You can have your own definition of the market, and frankly, that if you want a huge body blow for visibility, I mean, that is a … Nobody in any other part of the world would ever be able to do their own primary market research, and get it out there except in Africa. So there’s huge opportunities, which is a quid pro quo for all the friction.

Darius Teter: Going back to your earlier point which is, companies don’t really particularly in these emerging markets, they’re not really preparing to sell, but they should be prepared to be bought. What things should I be thinking about as a founder or CEO, to make my company attractive in the long run, when somebody starts to look under the hood?

Victor Basta: If I’m a large company doing an acquisition, one of the things I want is a really sturdy and deeper management team. So I’m going to have a premium in my mind for second line management, below the top two or three people. And I want to know that those people are also able to scale. And in Africa, there’s, as I said, a huge dearth of that contrary. So at an early stage, companies have the opportunity to create their own kind of talent academy internally.

So growing your own, but being able to show a buyer that you’ve got a full house. And when you’re gone, there’s three other people who want your job. That is incredibly distinctive. Hard to do, but it creates a degree of resilience immediately. So that kind of thing goes an enormous way towards converting the buyer, because it takes away the risk.

Darius Teter: So to sum it up, you may be undervaluing the human capital assets in your business.

Victor Basta: That’s right. A second thing that companies worry about from a buyer point of view is, is it an African platform or not? That’s different for different sectors. What is good enough in a national expansion? But the valuation is 50% higher if you’re an African platform. Maybe even 100% in some cases, versus the same amount of revenue that is regionally locked in one or two markets only.

We’re actually working on a deal now, which is sort of somewhere between an acquisition and a merger. Companies in two markets in Africa. And one of the main drivers for this, is for them to be able to operate under regulation in both areas. Right? Rather than setting up in a new market, and going through all of that, they want to do an acquisition in order to be able to show immediately that they’re a pan-African business despite the regulation.

And they think that should increase their price per share almost overnight, pretty significantly. And everybody looks for one plus one equals more than two. Being able to do that, one very clear expression of that.

Darius Teter: I’d like to pivot to some sort of more basic practical type advice from you, just to help our listeners understand a typical M&A process. And so, what are the typical steps in the process?

Victor Basta: So at its heart, it’s a deal. So the two elements of it are obviously finding or engaging a buyer who’s serious, and then closing it. They’re two very distinct parts to the process. Getting a buyer on the hook if I could put it that way. There’re many ways of going about doing it. As I said, if one wants to be bought, not sold, then really what that means is you want the phone to ring.

So there are a million things that go into the phone ringing. Confidence that you’ve built relationships with people, you’ve encouraged a commercial deal, you’ve informed their own strategic thinking. We’ve had a client who wrote a deck. We encouraged them to send it in PowerPoint, not PDF so that the buyer could lift. By the way, it was in the buyer’s colors. Buyer could copy and paste a bunch of the graphics, for their own internal presentation of what would make sense to do. There’s a lot of guidance, informing, et cetera when a buyer comes to the table, decide to do something.

Darius Teter: So I got the phone call. The first phone call. What do I do next? Right? I’ve been setting myself up, I’ve put myself out there, I’ve invested in corporate marketing, I’m a recognized thought leader, I have some importance of contracts, showing traction. I get the call. What do I need to know about this person who’s calling me? How do I vet this potential buyer?

Victor Basta: Well, it starts with, what do you say? What does a buyer want to hear? On the one hand, they want to hear that you’re open, but they don’t expect to hear anymore than that. So the answer usually is, something we’ve been thinking about, we’ve had on the radar screen, our investors, have been involved for X period of time. We’re open to talking. It’s not something that we are planning to do.

You want to sometimes give a little bit of a feel of exclusivity to the sense of, we’re not really going to shop the company. Probably we’re only going to do a deal with somebody we know. And actually your timing may not be bad. And what a buyer’s really worried about, is that the CEO in particular, has invested so much of his or her time and blood and guts in the business, that they couldn’t. They just don’t. Couldn’t imagine selling it to somebody. And a lot of deals never got off the ground, because the buyer has a feeling they’re pushing water uphill.

Darius Teter: They don’t want to lose that point. Where the person who gets the call, maybe actually really isn’t emotionally ready to sell their business.

Victor Basta: You always behave as if you’re open, even if you’re not emotionally ready. You need to be a grown up to run a company. You need to be a grown up on these phone calls. The person calling, has got a strategy behind their call, has got money behind their call. And you also don’t know what they’re going to do. I mean, they may be doing, say, well, do I acquire or do I actually invest to go in this market?

There’s all lot of things you don’t know. And it would be the height of arrogance, that is not a call I really want to have. If you’re the CEO of a business that’s got traction, part of your job description is to work out an exit. That’s your job. So it’s as simple as, do that part of your job.

Darius Teter: So what question should the founder be asking themselves, in their quiet dialogue with themselves, to understand whether they’re mentally ready?

Victor Basta: So they’re usually their own worst enemy. And especially when you have ecosystems like in Africa, where hardly anybody’s ever done an exit. The playbook hasn’t been written, and you don’t know anybody who’s done this. So it’s not like the valley where you can call five people and Hey, how does this all work? Your first job is to work out A, are they for real? B, is it something that I should spend time on now? This is an example of where emotion, and reaction in a vacuum, because it is a vacuum, it’s an early ecosystem, really can create a distortion.

Darius Teter: Let’s go to that point. So I got the call. There’s no playbook online for my market. Where do I go for help? Who do I talk to? Where do I get … What resources do I … I can’t afford Victor Basta. Who do I call?

Victor Basta: You’re touching a nerve a little bit, because this is really just where the embryonic nature of an ecosystem really, really bites. Right? In moments like this. If you’re the CEO, you have to be cautious with who you talk to in your entire orbit. Ordinarily, you’d bring your two or three direct reports into the know, relatively early on. And you’d kind of consult with them, and they would give you their view, and you want to make sure that it’s good for employees. I don’t want to over exaggerate this, but you do need to be careful.

Darius Teter: So that’s a really lonely place to be.

Victor Basta: What’s going to end up happening, is that the CEO, he or she needs to fly solo for probably much longer than they would do in a developed market.

Darius Teter: Let’s talk a little bit about what happens as we close this deal. I’m the founder CEO, my firm is being acquired. How should I think about my role in this combined firm? What are some of the different arrangements you’ve seen?

Victor Basta: So as a general rule, large buyers want to legislate to keep the CEO much longer than they end up needing him or her for.

Darius Teter: Why is that?

Victor Basta: It’s just safety de-risk. He or she has led this company, and we want them to lead a business unit, and we want everybody in place. And by the way, if that person stays, we know that the other 30 people are going to stay. So we want the CEO to sign a three year employment agreement or a lockup or whatever you want to call it. Right? We want to put their money, some of the money they’re going to get frankly, at risk based on them staying in the business.

More than 50% of the time, they all realize after a year or a year and a half, business has moved on, we got our arms around it. By the way, you’re really an entrepreneur at heart. I don’t know if this business unit thing is really for you.

Darius Teter: They accelerate it and they buy them out.

Victor Basta: Yeah. Buy them out or terminate early or maybe change their role into some other role. Because sometimes there’s a bigger opportunity for them to be able to graduate to, which is all fine. But far less often than CEOs think is the case, their role changes materially within a couple of years of a deal. But the legislation at the time you do the deal, is for everything to be hardwired exactly the same.

As far as the second line people, normally there is more opportunity normally, for those people than the company would ever have standalone. I know it sounds a little counterintuitive. But when you’re looking at strategic buyers coming into frontier geography like Africa, very few have got a big footprint that you need to fold a company into. This is not about, like, smashing this with that. They’re trying to build around it. They’re trying to buy Africa in many cases.

Therefore, for the second line person, who’s in their 30s and wants to be a CEO, I mean, you’re just going to get another huge addition to the resources you have to play with. And by the way, somebody who’s made a commitment, paid a lot of money to actually go win in Africa.

So instead of being a startup growth company whatever, you’re now seriously incumbent. Now, you may not want to do that forever, and want to start your own business. But my God, if you can do five, seven years of that, and really build it to scale, you can write your ticket anywhere on the continent with any company. So that opportunity for second line managers can really open up.

Darius Teter: What are some of the common mistakes the CEOs make on the sell side, in the M&A process?

Victor Basta: Not rehearsing their full team number one. There was a deal we worked on a few years ago. The buyer came in to do due diligence, a day was on technical due diligence. They went through the whole day and were perfectly satisfied. The CTO turns to the buyer and says, “I don’t know why you bothered asking all these questions. You really should have asked about, blank…” Oops. Needless to say, technical due diligence took weeks and weeks.

And I think it turned out. If I remember right, it was an open source licensing issue or something like that. I can’t remember what it was, but you get the idea. So we rehearse and rehearse the senior team on message. So there’re… When you’re doing due diligence, which is after you’ve agreed the terms of the deal, and you’re now trying to close it, right, the guidance is, value can shift 20, 25% easily from what you thought you agreed. And people don’t realize. They think due diligence is just checking stuff, and then we’re going to close. Value shifts in all sorts of ways.

Darius Teter: So Victor, at the end of the sales process, what does success look like?

Victor Basta: Success is having made only small compromises late in the day. Now it’s a kind of high level thing, but you end up giving stuff away. Your maximum point of leverage when you’re selling a business, is at the time you’re agreeing the deal. Right? At that point, your leverage begins to wane. Until a week or two before the deal closes, when you have the least leverage possible, success is that you live to fight another day, you make small compromises.

What we try and do actually, what I try and do, is plan ahead for compromises that seem bigger than they really are. So one big thing is around the point we talked about before, which is management, retention and packages. Right? If you can get a buyer a little more comfortable, change things around a little bit so that that part is really solid, they might forget the $20 million they want to take off of the price here.

And you as the founder, have to understand what’s your zone of agreement? What are you actually willing to give up?

Yeah. And also you go a little further even. What you do, is you then in the process of due diligence, you’re already listening to what the buyer is saying, and you get to understand what really is important to the buyer. And so if you’re already preparing two or three or four of these gives late in the process, you want to design them so they’re of most value to the buyer, but it’s based on listening to them.

Darius Teter: What do you wish I had asked you? What should I have asked you that I haven’t asked?

Victor Basta: Why on earth would anybody start a growth company in a place like Africa? The thing is, it’s not as simple as making a difference or having an impact or whatever. I think it’s more nuanced than that. We all in our lives look for opportunities where we can really get a multiplier on our own time, in the value of our own time.

And in a geography like the African continent, the multiplier of value, the multiplication on your own time of entrepreneurial effort, you cannot get a greater multiplier anywhere in the world today. The reality is, there’s so few companies doing it at scale. There’s so much to be done. It is talked about even from a species point of view frankly, could move the needle.

This is not about, well, I want to feel good or give back or make the world a better place. Nothing against any of that. Right? But through the sheer effort that these CEOs and senior teams make in these geographies, they get such a higher multiplier on the value of their time, than anybody ever could anywhere else on earth. Why wouldn’t you?

Darius Teter: Thank you Victor, for guiding our listeners through some of the best practices in the acquisition process. But especially for your optimism and commitment to economic prosperity on the continent. This has been a masterclass from Grit & Growth with Stanford Graduate School of Business. And I’m your host Darius Teter.

In an upcoming episode, we will hear from Matt Abrahams, a lecturer at Stanford and the host of the popular podcast Think Fast, Talk smart. Matt will guide us through an interactive workshop, to help entrepreneurs refine their fundraising pitches. I hope you’ll join us. If you want to find out more about how Stanford Graduate School of Business is partnering with entrepreneurs throughout Africa, and South Asia through Stanford Seed, visit us at seed.stanford.edu/podcast.

If you like this episode, don’t forget to hit follow and share it with a friend. Grit & Growth is a podcast by Stanford Seed. Laurie Fuller researched and developed content for this episode with additional research by Jeff Prickett. Kendra Gladych, she’s our Production Coordinator, and our Executive Producer is Tiffany Steeves. With writing and production from Isobel Pollard and Andrew Ganem. And sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.