WE’RE HEARING in this world of survival of the fittest, some animals survive with intelligence and others rely on instinct. As humans, we like to think that we depend mostly upon the former, but I wonder.
I wonder partly because I live in South Florida where people often expose their bodies but appear to hide their intelligence. And then part of it comes from watching the local sports franchise, the Miami Dolphins. Obviously, these knuckleheads are leading the national news (news flash!), primarily because one team member hid his intelligence so well he forgot what team he was on. But then, with a name like Incognito, you figure he had to be hiding something.
And what about Jonathan Martin? I would have expected his fight or flight reflex to kick in a bit sooner. If it had, this whole thing might have come to light sooner and my neighbors and I wouldn’t have yet another reason to be embarrassed by what passes for professional sports down here.
I find the fact that two teammates would not get along to be troubling enough, but the even crazier part is that the two guys both started on the offensive line—they were not just teammates, they should have been brothers in arms, battling out of the same football foxhole each play.
Obviously, something is really wrong with the culture of the Dolphins, and this ultimately may be the biggest lesson in this debacle. Let me explain.
Mortgage firms are starting to take the fight or flight response seriously as it pertains to how they are going to survive as the market changes. You see, the mortgage market is getting very challenging (news flash No. 2!), as volume drops, margins compress and profits fall through the floor.
At the MBA annual we had a number of meetings with clients and they seemed to fall into two buckets. Those that have chosen to fight and those who are choosing to become part of a bigger team.
At Stratmor, we do both the buy and sell side of mergers-and-acquisitions work, and we’re seeing a good cross section of companies as we listen to their concerns. For the most part, the questions are what you might expect: is this company worth buying (or selling), can we get a good price, how will we structure the deal, and will everyone make money?
When it comes down to the time to make a decision about moving forward, it often comes down to that same fight or flight reflex. Is market share dropping? If so, do you choose to fight for it? Many banks are deciding to do just that, looking at well run retail franchises as acquisition targets. Are margins compressing too much and compliance costs rising too quickly? Many independents are thinking that is just the case, causing them to give up their independence and choose flight by selling the company to someone else.
Not sure how this will all shake out, but right now, there seems to be a huge opportunity for independent mortgage originators who have decent purchase volume, or strong call center-based firms who are still pretty strong in consumer direct, to be acquisition targets for larger banks that have a strong compliance infrastructure in place and the money to invest in acquisitions and who would rather buy volume than build it.
Most of the deals we’re seeing have earn-outs that extend out into the future which makes calculating the ultimate value in these deals difficult. In fact, much of our work at Stratmor is based around figuring this out.
I know that some M&A guys will tell you that it’s all very scientific when you start thinking about buying or selling a company. However, we think it gets scientific once the deal starts to look real, but before it’s mostly emotional...or instinctual. The people who have made the most money in this game will tell you that they often go with their gut, which some people say is akin to relying on their instincts. But even instincts can be studied scientifically.
One of the things Jim Cameron has been working on here at Stratmor is trying to determine the impact of corporate culture on post M&A performance, which is so often tied to the ultimate earn-out in the deal. It turns out that culture is critical when combining two companies into a new firm. A good match makes everyone money. A poor match can make the new teammates look like...well, like the Dolphins.
Culture, it turns out, is based on many things and from a distance, it looks like the fight or flight instinct. Two companies come together and then stand toe-to-toe, eying each other, waiting for the first to move. Will it be fight? Will it be flight? Or will they fight together, like two NFL linemen are supposed to do.
In truth, it’s not instinct at all but the result of the combination of a number of elements that go into the overall cultural makeup of the company, including leadership style, how accountability is managed, compensation and other factors. By knowing how two firms will match up before the deal is closed, players here can score big. Ignoring culture in the M&A process can lead to the new buyers and the sellers both taking a beating, and no one likes that. Just ask Jonathan Martin.
Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience, from Fortune 500 companies to startups, including management of two of the most successful mortgage e-commerce platforms. He was formerly with Chase Manhattan Mortgage and ABN Amro, where he was a senior executive during the sale of its mortgage group to Citigroup.
