What would we do if we paid $44 USD Billion for a business that was losing 4 million dollars a day?

It’s no different than buying any business, you’re either going to let it run, or extract and create more value through a turnaround. 

We talk about what we would do if we bought Twitter, and what you should consider if you’re buying a business.

SUBSCRIBE TO THE GROWTH WHISPERERS:

    

EPISODE TRANSCRIPT

Please note that this episode was transcribed using an AI application and may not be 100% grammatically correct – but it will still allow you to scan the episode for key content.

 

Brad Giles  00:13

Welcome to the growth whispers where everything that we talk about is building enduring great companies. What do you need to do? How do you do it? Why does it matter? And how to get there. My name is Brad Giles. And, as always, I’m joined today by my co host, Kevin Lawrence in Vancouver, Canada. Kevin, good morning. Good afternoon. How you doing today?

Kevin Lawrence  00:33

Good evening. I’m doing great. Life’s good. I’m looking forward to our conversation today. Because we’re contemplating if we did a massive acquisition. There’s this company, I don’t know if you heard about it, but it’s called Twitter and or heard was for sale? Well, or at least someone decided to buy it. So we’re digging into if we bought Twitter today, I think it’s gonna be fun. It’s we had some fun thinking about this. Yeah, some good things are good.

Brad Giles  00:59

Awesome. Awesome. I think you said today, and I know that we shouldn’t really be talking about the weather. You had one foot of snow. Is that right?

Kevin Lawrence  01:06

Yeah. Man, up near a place called Kelowna near a place called Kelowna BC. Yeah. Last couple of days. It’s serious. Yeah. And it makes it real fun when I’m driving back to Vancouver in a couple of days over the mountain pass, which always makes for a thrilling time. So yeah, yep, lots of snow. It’s fun. It was it was. It was a lots of ice in town. I was in town for breakfast this morning at a charity event thing. And yeah, there was ice all over the place. And it was quite fun.

Brad Giles  01:40

I like your idea of fun. different to mine. All right. So well, I’m equipped,

Kevin Lawrence  01:46

I’m equipped. I got all the right equipment. So it doesn’t make it more fun. I’m not worried about it. Very Go ahead.

Brad Giles  01:50

All right. So let’s talk about this episode. What we’re asking today is we’ve seen Elon Musk by Twitter recently. And he’s made headlines. Look, it’s the richest man in the world buying basically, one of the most, the most successful, I guess, social media, Town Square. Okay, so it’s where all the journalists go all the celebrities to tweet their thoughts or to communicate their thoughts. And you know, it has a impact on the world. But we can’t, we can’t undervalue Elon Musk, like he didn’t get to be the richest man in the world, with Tesla, with PayPal, with SpaceX with the boring company with all of his amazing ventures, and I probably missed one, you know, or two without being, you know, if he was a dummy without being, you know, brilliant at business. But, you know, in the interest of entertainment, we thought, let’s, let’s reflect on that, first of all, and then maybe position that into things to consider if you’re acquiring business.

Kevin Lawrence  03:04

Yeah, and I guess I mean, acquisition like that, you know, he’s got to have a pretty damn good plan. He’s not just wanting to invest that kind of money on a hope and a prayer I would imagine not. He’s a smart guy. He’s surrounded by very, very smart people. And that’s what we’re kind of digging into today. And, you know, the distinction to kind of look at this is that really, when you’re doing an acquisition like that, there’s kind of three different modes, right, is just buy it and hold it and let it run. That’s not likely what that isn’t what he’s doing so far. Not not because it wasn’t it was if he saw extra value in it. The second is when you do see extra value in it. It could be just to do a healthy renovation, update it facelifted make it better, and away you go, which people often do with, with acquisitions, you know, improving it, streamlining whatever it happens to be. And then there’s like the knock down, tear down, full blown turnaround, right, where it’s a hard core resetting a business model, gutting out all kinds of things out of it, like literally, like fully tearing it down. And I love this metaphor. When we’re talking about acquisitions with clients, and I talk about it a bit as well buying your grandma’s house. It’s like when you go and buy your grandma’s house, you know, no matter what there’s always good they’re no matter what you’re buying, otherwise you wouldn’t buy it. So is it a buy and hold? Is it a light reno that you do on grandma’s house? Keeping all the heritage there and you keep some of the old wood paneling and wood floors and and preserve it or is it a full hardcore knocked down or fully got it like a full blown turnaround to modernize the whole thing, right? There’s very different things and the root of it is you need to respect what’s there. But then find the things that you have to change. To create the extra value. And that’s, you know, in this case, he seems from everything that we’re seeing to be closer to the, to the hardcore rental almost to the point of full turnaround in his approach in his approach so far.

Brad Giles  05:16

So if you bought Twitter, you know, well, what would you do?

Kevin Lawrence  05:24

Well, definitely surround myself with some really smart people. Yeah. And I’d be doing a hell of a lot of brainstorming on the strategy and the economic model. Like at the end of the day, how are we going to take this great asset, and find a way to economically convert it into something that can produce a lot of cash? Right, it’s dominant in that space, but just just like Facebook did, and find a way to really bring the economic model and I’m not saying we do the same things, but like they did with Facebook, to find a way to bring the economic model to life. Like, you know, in the news recently, he was, you know, from from obviously started selling the verification marks, was it four bucks a month or something like that? Or? Yeah. Yeah, something like a few bucks.

Brad Giles  06:08

There’s some tactical stuff that, you know, is, is under heavy debate. But I guess if you zoom out, and you think about, like, their hedgehog. So their hedgehog being what’s their core purpose, like to be the world’s town square, or something like that to be the place where, you know, people can have healthy debate to move mankind forward. Right? And I say healthy, because it’s a toxic cesspool at times. In fact, most times.

Kevin Lawrence  06:37

Most of those platforms can be social, or

Brad Giles  06:39

they can be right. So so to be able to live the purpose, okay, to be able to understand what they can be best at, which obviously, is deeply connected to that purpose like they can, they haven’t been the best at that, right. But the challenge is the economic model, as you said, that’s the bit of the hedgehog that they’ve got to get, right, they’ve got to get their profit per x, right, in a way that, you know, adds to the user experience and and that people are willing to pay for, be it advertisers or people, whoever it is. So you got to get that right, because I saw him say recently, he was losing $4 million a day. You can’t, you can’t keep doing that for too long, even if you are the richest man on the planet.

Kevin Lawrence  07:22

No, and it doesn’t make sense. It’s a business. And unless there’s a way to because you’re the goal is always of a CEO is to improve the or increase the enterprise value. So if there’s another lever, he can pull, you know, I don’t know how many more users are available for Twitter. So user growth is probably not it. People that use Twitter, use Twitter. So could they get more eyeballs spending more time, potentially. But at some point, you have a platform that’s leveraging the revenue streams out of it. And, and there’s lots of other things. So for me, it would be the economic models, I will be studying lots of different options that other people have done. And that’s where all of the energy would be, is figuring out the economic model, because like you from that, you’re going to honour the purpose and what it’s about, you can figure out the people afterwards. In that process, I wouldn’t be thinking about human beings at all. It’s purely hard core cold capitalism connected to the purpose. Because if you think about the existing team, you’re going to be limited. And in many ways, I might not even be using a bunch of the existing team, I would take some, I would cherry pick some. But I’d be using a lot of my smartest friends and advisers around me to, to really dig in, figure it out. And I, you know, like any strong team would do is that have the finance people there with us grinding numbers, as we’re brainstorming, trying to find ways to see what would work. And, you know, I would, in my case, there’s probably, I can think of six people around the world that I would pull in from different countries that I know. And, ideally, get ourselves in the room for a couple of days and come up with a whole bunch of things that we would start to test and iterate.

Brad Giles  09:08

Yeah, and look, that’s what he’s done. He’s brought in a heap of people from Tesla and so forth. So, I mean, I’d say it’s maybe a combination of a renovation and a knock down turnaround, like there’s a little bit of, there’s some bits that are working really well, there’s some things that they need to improve, but they’re coming back to this has to be a successful business. It can be good for mankind overall, which, and I say that word mankind because he uses that language a lot. Yeah, he does, you know, to save mankind by setting up on Mars, like all of those types of things, which is, which is fabulous. It’s great to have people who care.

Kevin Lawrence  09:46

Yeah, so this reminds me of when we were trying to before the show, but this brand but of the turnaround of Etsy. Yes. You know, there’s a great Harvard Business School case study. We’ve used it with some of our clients as a case didn’t even our internal team, we did it. It’s an awesome, awesome case. But the root of it is, Etsy was coming up in the world with their handmade goods and almost like the craft fair for the world. And it was excellent. And at a certain point, though, the found the founder or the CEO of this building, I forget whether he was the founder or not, but it became kind of like, a little Woodstock ish, you know, a whole bunch of loving and freedom and all this other stuff. And people were chasing the company’s purpose. People were chasing their own purpose, everyone had a lot of autonomy going off in different directions. But economically, it wasn’t working that good. So they were kind of Woodstock trying to be commercial, but it sort of was a little more like Woodstock in the best ways. And the new CEO came in, and it was pretty damn controversial. Like he made changes, and a lot of people were very unhappy, because although he honoured the initial purpose, right, like renovating Grandma’s, he changed it fairly, he made it a little more commercial, because it needed to be in his eyes. And they realized the strategy realigned who the core customer was, interestingly, they changed the core customer. And then they slashed the updated strategy, made notable cuts on the team, and killed a lot of the programs that weren’t directly related to the strategy. So they really took is like taking that bush in grandma’s front yard, and pruning it dramatically, like really cutting it way, way back to the point where it might take a couple years to grow back and be strong for a huge pain. And it made a massive difference, once they got past all of the protests and the upset people and you know, you’ve hurt, you know, you’ve destroyed our company stuff. It was a hard, hard, hardcore renovation, and they did a great job.

Brad Giles  12:02

The problem is that eventually you run out of other people’s money. Yeah, exactly. And, and that’s why we go back to the base the Hedgehog, like, You got to be living your purpose, you got to be in the wheelhouse of what you can be the best at, and you got to get your economic model right.

Kevin Lawrence  12:21

Right! But if you don’t have the scale, all that other stuff is fine. But without the economic model, that doesn’t work. And unfortunately, in our world, there’s been a lot of companies that could get away with, especially in tech spaces of not making money. Of just using other people’s money to build this machine with the intent of making money one day someday in the future.

Brad Giles  12:42

And that’s like We Work. I don’t know, if you’ve seen there’s a Netflix series about we crashed, we work, it’s the same thing. Eventually they were 100% about the purpose and you know, elevating consciousness until they run out of someone else’s money. And then it all kind of became a bit of an issue. Yeah, so I can remember, a client acquired a business and we spent a lot of time on the culture, okay, because the problem is, is that if you if you’re bringing another this was a merger, I suppose merger acquisition rather than simply a new owner, which is the Twitter example, right. But if you look at the changes that have been made, a lot of the changes have been to realign the culture, or along with busks are the values. But if if for you, you know, coming back to me and mortals like us, if you’re looking to acquire a business or you’ve acquired a business, you can’t underestimate the integration of the two cultures, and just how much of a problem that can be, unless you spend enough time to get it right.

Kevin Lawrence  13:59

It’s a huge amount of work. We have one client, we worked with the near we’re doing that time, couple 100 million. And we acquired the number two competitors in the space who was doing I think 20 ish million in revenue, roughly ballpark numbers. And we acquired them, they were actually relieved, which was wonderful, because we were just destroying them in the market. I mean, we built a machine. We had such a strong team incredible clear strategy and execution spectrum spectacular team of a players. We were the team was getting stronger all the time, we were hardcore on only bringing on high quality talent, talent and assessing talent. Outstanding. And financial performance was great when we acquired this company, and it was an acquisition but we’re rolling them into the business. But the amount of work we did into doing it properly. Like I will tell you like everyone was working their brains out and exhausted. Yeah, we buy the business. We get the diligence done, get the capital, away we go, we went in and spent a ton of time getting to know who the key people were in the team, bringing them into our fold, we had a list of the people that we for sure wanted to keep, we knew that these were the 10 most important people, and then our executive team paired up with them. And I remember very clearly, we’re in a strap planning meeting on this acquisition. And, you know, we’re making it happen, we know who the key people are, we’re integrating them, we spent time to emotionally bond them with RFP, we did all the right things, then we started working on the systems, but then someone’s like, we’re all exhausted, we just need to take a breath. And the CEO and I were discussing, we’re saying, next quarter, this quarter, we got work to do, and I’m sorry, we’re going to have to pull up our socks, and we’re going to have to find ways to you know, dig down for our own resilience. Because we just acquired a bunch of customers. And they are the they are all signed up for the number two in the market by no and not number one, and they were number they were sold, selling against number one, like we’re the bad guys, we gotta get in the market, we got to go talk to all of the customers and make sure the new ones stay, we also got to talk to our existing customers, and make sure that they’re happy and we don’t lose any customers in the mat. So the point of it being is the engineering to do the acquisition was one, then to do the initial integration strategy, then to do the integration of the people of the customer, not remind the systems, the systems was just administrative stuff. Yep, well, we had to integrate the value of the organization, and then leverage it because we had a plan to increase the value. So it’s, it’s a lot of work, and it’s exhausting work, getting it done. And then once you’re done the planning, then you got to do all the work. Yeah. And it’s it worked out incredibly well. But the amount of work that that team put into, it was impressive. And, and we know the other ones were that were when people do an acquisition, and where people don’t properly approach it. And generally, most people don’t people buy acquisitions with a theory of the efficiencies and the lift, which rarely is seen. Because it’s it’s incredibly hard work. And sometimes they just don’t integrate that well, especially if the cultures are too different or things like that.

Brad Giles  17:25

And that’s where you need to make the hard choices. Elon Musk, you may or may not know, sent out to managers, a list of people or managers, they’re making cuts, I think they might have cut like 50% of their workforce. Okay. So substantial. Yeah, yeah, yeah, it was substantial. And so he was basically saying to the managers, who were the people that are going to succeed in this new company, and you need to make the decision as to who your team will be accountable for now, perhaps the way that he did, it might not be your way. But that’s his choice, right. But still, there are hard choices. Because if you can see, it’s like when we’re talking about a player’s in other parts of of the podcast, you know, you need to give the new business under the new purpose and the new values and the new ideologies of the new leader, the best chance of success. And if there are people who are, you know, not going to succeed in that area, or are going to be kind of against that or toxic in that environment, the quicker that you can release those people from the business the better. Yep. And like you said earlier, surround yourself with people who are living the same values as you who are aligned with the new purpose. And they, you know, they need to align with that there’s, there’s, there’s simply, they can find it, but it’s not going to go away.

Kevin Lawrence  18:57

Correct. So if we go back to what we talked about at the beginning, you know, if you’re, if you’re buying grandma’s house, you can hold it, and live in it or rent it out as an Airbnb or something. You can do a light rental, or you can do the knock down turnaround. And, you know, in our beautiful fantasy world, it’s wonderful thing that most of these businesses are wonderful. You can buy them and hold them, but it’s often not the case. There’s a reason why they’re for sale. And it’s not usually because they’re writing at their absolute prime in their perfect business. Right? Used Cars are often used for a reason. Now, sometimes the owners have other motivations and need the capital for something else. But generally, and this is where people go wrong with it. You got to be willing to make a lot of very tough decisions that will make a lot of people very unhappy and create risk. And you got to have the courage to go and take those risks and a lot of people aren’t cut for that. Or they don’t want to be disruptive or whatever it happens. To be, and it’s also being smart about knowing and have the discernment to know what works and what doesn’t. So, you know, it’s interesting, a client bought, I’ve had a couple clients, the number of actually bought underperforming businesses, buying underperforming businesses is really tricky. Because if the previous owners couldn’t make it work, what makes you think he can, and you know, if you’re doing you got to be like, Musk can be pretty aggressive to turn it around. I mean, one tried it was in another country in another continent, and they tried remotely. And it was, you know, I had a fight with the CEO, like, I rarely have this, you have quite a few fights, but I often don’t fight with CEOs. But this one almost needs to fight to get clarity, and we have a big fight about it. I’m like, Yeah, I know, you’re only buying it for a few million. Yeah, you know, you’re gonna burn 10 or more, I guarantee it. Not all road otter gender, or, you know, and this is not Kevin’s right, but they burned more than 10 million. And, and they got, you know, it was hard. And it was a great learning experience. And they got one thing out of it that was of some value. It was just, it was next to impossible to be everything that could nevermind, it was underperforming and not and not profitable. And in a different country, and in a horrible country to do business in. And there was this, there’s a whole bunch of and again, you got to do it think there’s a learning that’s required in some acquisitions, but you got another who I am in the US system, they would buy solid businesses or even underperforming businesses, but they were, they were buying other, they knew what they were buying. Yeah, they were buying customer lists, geographic talent and other things. So if the business is underperforming, it didn’t matter. They would look at the business, they had built the p&l, they know they could turn it into because they had done it many, many times before with a cookie cutter. And they would buy it, implement a few notable changes, get a notable lift. And if they’d buy it for five times earnings. By the time they were done, they were buying it for an equivalent of one and a half times earnings. And it worked incredibly well, time and time, but they had a system. And that’s the thing we’re doing this experience helps. Go ahead.

Brad Giles  22:13

The thing that you’ve left hanging there is how did they lose the 10? million? Was it through in that story? Was it through losses? Like they just sustained losses? They lost customers? What What was it that that caused the losses? Do you remember?

Kevin Lawrence  22:31

Yeah, very clearly. Well, there was the initial price was part of that 10 million, but that was it was I forget the number it was pretty low. Yeah, it was the annual the monthly and annual investment in a loss making business, right. And there was thinking, it was like, it was like a boat sunk on the bottom of the ocean. And they thought they were gonna get it to float again. And they spent a lot of money trying to pull the boat up from like, pulling up the Titanic from the bottom. And they couldn’t Yeah, sure it’s valuable. If you get it up, they just couldn’t get the damn thing off the bottom ocean floor. They couldn’t they couldn’t wrap sales. And they couldn’t find a way to get it to a profitable position. And they spent their money to and again, I love these people. They’re great people they tried. But But taking a loss making business and turning it around is a big bold move. So a couple things that you know, I made a list of your questions, Brad that you know, you and I would ask if it would have declined. We’ll wrap up here. But you know, is this a buy it and let it run? Is it an optimizer a mild rental? Or is it a knock down turnaround? Right? And if so, you better make damn sure you’ve got that experience on your team to do it. You know, clarifying who is the core customer? Who should it be? What is the strategy to win blank slate, you know, taking with what we have, you know, what’s the business model we got to use? Who is the team that we want to run with, and often cases, the team that’s in the old model, if you make massive changes that are attached to the old way of thinking, and sometimes it’s easier to replace the people than it is to change the thinking.

Brad Giles  24:07

And that’s so often you see, a new business brings a new team or an acquired business, they bring a new team in to run the business. Right. And

Kevin Lawrence  24:17

it’s, you know, a quote from I think it’s Einstein, you know, a problem will not be solved by the same mind that created it. Yeah. And sometimes they could be part of the problem. They could be part of the solution. You never know. You know, what do we need to slash like, what do we need to cut and we need to master and again, I will say for me, I am not a hardcore slash turnaround type. Leader, Coach facilitator. It’s not my preference. I can do it. It’s not my favorite. It’s not my strong suit. I like to take good companies and optimize and dial them in good companies Good to Great and I know you’re similar on that Brad. But and it takes but it takes a certain type of person and that’s why people who do it Turn around, they can they can create a lot of value. It’s just higher risk and can be really, really high reward.

Brad Giles  25:06

Yeah, yeah. Awesome. Very, very good. So what would we do? If we bought Twitter? I think we covered that. I think. Yeah, yeah. I think we broadly covered that. make significant changes, get the economic model, right. Make sure that the people in the right place. That’s good. That’s good.

Kevin Lawrence  25:28

Yep. I would say to summarize that, Brad. Yeah, I would figure out the strategy and the economic model. And then I would go and rebuild that infrastructure, clean slate, and then decide who was keeping it who I wasn’t based on that. Yeah. And then but it would be very, it would have to be willing to go in and be very clinical,

Brad Giles  25:48

unfortunately. Really quickly. In the public eye with Yes, enormous amounts of criticism from every single angle.

Kevin Lawrence  25:58

Oh, that’s I feel that that’s that’s that’s a it takes a lot a lot. That’s a takes a hell of a lot of courage to do that. Awesome. Yeah.

Brad Giles  26:05

Okay. Good. Good. Check. Have you been doing today’s episode? 136 If we bought Twitter things to consider when acquiring a business? Yeah, my name is Brad Giles. You can find me evolution partners.com.au. And Kevin, you can find at Lawrence and koat.com. You can find us if it takes your fancy. on YouTube. We can see the video version or of course, wherever you find your good podcasts, please be sure to hit like or subscribe to the podcast to hear us come to you every week and obviously, Kevin and I both have newsletters every week that comes out. So hope you’ve enjoyed the episode. I look forward to chatting to you again next week. Take care. Have a great one.