Saturday, June 25, 2016

The Philosophy of Emergence and the Practice of Mergers & Acquisitions

This essay will attempt to merge a complex philosophical concept with the practice of mergers and acquisitions. The philosophy of emergence is in few words is that the sum is greater than the whole of its part because as parts aggregate a new order of complexity and composition is engendered. So it is not so much about the quantitative summation itself but that the larger amount evolves into a new pattern and properties indiscernible from the sum of the parts and their constituent properties. Understand? The Stanford Encyclopedia of Philosophy says: “Emergent properties are systemic features of complex systems which could not be predicted (practically speaking; or for any finite knower; or for even an ideal knower) from the standpoint of a pre-emergent stage, despite a thorough knowledge of the features of, and laws governing, their parts.” Or also, from the Stanford Encyclopedia – “Emergent properties and laws are systemic features of complex systems governed by true, lawlike generalizations within a special science that is irreducible to fundamental physical theory for conceptual reasons. The macroscopic patterns in question cannot be captured in terms of the concepts and dynamics of physics.”

What does such high-minded thought and concept have to do with the mundane transactional world of mergers and acquisitions? I would argue that the difficulty of completing and financing transactions does not simply increase linearly as the dollar amount or the number of facilities increases.  For example, in healthcare mergers and acquisitions, when a deal hits the $100 million market, it is essentially a whole new organism. That is, the issues are more complex, the caliber of the M&A and legal teams are better and the sophistication of the seller and buyer are all at a high level. When someone is selling $100 million or $200 million business, apodictically they are smarter and more capable to begin with to achieve that level of success. Similarly, if a buyer is going to successfully close a transaction of that magnitude he needs to have or assemble a M&A, financing and legal team that is able to swim in that arena. This is not just an order of magnitude question, although that is important too, this is order of complexity and capability that is much higher, for instance, than the sum of ten $10 million deals. The air is very thin at the $100 million level and even thinner at the $200 million to $300 million levels.  I am also confident that the same is try and even more acute at higher hundred million dollar or billion dollar levels.  Trying to finance a $250 million deal is not the same as trying to arrange financing and equity for twenty-five 10 million dollars. All of this consistent with the philosophy of emergence, which is not just a philosophy, but a phenomenon observed in nature.

In conclusion, my advice is to know that deal, professional and resource requirements need to calibrated to the size of the transaction and this is not just a function of numbers alone. In order words, to do a big deal, M&A actors need to assemble a major league experienced team to conduct the deal and also to critically recognize the all-important financing of the transaction is much tougher, demanding and more complex in this stratosphere and there are fewer financial players in this rarified air. What happens is M&A players do not appreciate the philosophy of emergence and expect a larger deal to be no more than the sum of multiple small deals. It is not.  Unfortunately, this is specious and faulty reasoning.  Knowing this philosophical concept in advance can save a lot of time, money and aggravation in mergers and acquisitions and perhaps even close your deal sooner.

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