Rethinking growth in M&A | Isaac Marshall | TEDxCranfield University

[Music] So this has been terrific, right? I mean

just such wonderful conversations this evening. Thank you so much for having me

evening. Thank you so much for having me here. Um I want to start by talking

here. Um I want to start by talking about the most important question through all the talks we've heard today.

The most important question is what are the patterns of human relationships that need to be built for humanity to solve the problems we face

today. And naturally this is at the

today. And naturally this is at the heart of how we rethink growth. How we

think about a model of economic growth that achieves prosperity not just for a few but for as many people as possible. And you know in my work as an investment manager focused

on Africa I think a lot about this question of of growth. And naturally my mind tends to to drift to um some of the sacred writings in my faith. You know

I'm I'm a Bahai. In short Bahigh is believed that all faiths are the same God and the destiny of humanity is world peace. And I've found the teachings of

peace. And I've found the teachings of of faith to be very very powerful in the course of my career. And there's

actually some beautiful ones on this subject of how two people should think about an economic transaction of giving a loan to one another. Right? And the

the writings talk about how in a spirit of amity and fellowship and joy and gladness should be undergirling that

transaction. Right? Right. And and you

transaction. Right? Right. And and you know, I don't if you've ever done a control F for any of these words in the annual reports of banks, but uh it's it's not a common thing that you that you encounter. And at the same time, if you

encounter. And at the same time, if you talk to anybody who works inside of a bank, at the very heart of banking are these principles that you see on on the screen.

Integrity outward-lookingness vibrancy community fellowship right?

And the idea that relationships are important for economic growth or important for business is not a novel idea. Right? I mean we have this idea of

idea. Right? I mean we have this idea of networking. We have this idea of uh

networking. We have this idea of uh spaces like this where people come together. But often times it is

together. But often times it is appropriated towards the goal of growth. Unicorns, right? We love growth.

growth. Unicorns, right? We love growth.

Billion dollar companies, billion dollar fundraisers at this point trillion dollar companies, right?

And the challenge is that often times human relationships are applied for the purpose of growing enterprises bigger and bigger and bigger. And one of the central things I will speak about across

several case studies is that bigness is an inherent problem when we don't get the human relationships right.

Scalability is inherently a problem if we don't have the right human relationships to undergard it. And I see this all the time in my work in subsaran Africa. So over the past 5 years there's

Africa. So over the past 5 years there's been $39 billion of foreign direct investment in Africa. This is aid, this is money going into different companies.

Uh this is loans to governments. And in

that same time period, we've had three governments that have gone bankrupt in the loans that they've been given. Major

economies in Africa. We've seen

broad-based currency depreciation across most markets. uh many investment

most markets. uh many investment projects have have failed. In fact, on average, 27% of the average bank bank's loan book is non-performing and there

was a huge amount of companies are in economic distress despite the volume of of money that is being poured into the the problem and many development economists see development aid as a as a

very challenged enterprise. If anything,

some might say a failed construct in in many African countries. And the problem is that the size of the programs has

prevented a degree of thinking about how these should be applied to solve real grassroots problems. And and to look at another example before we dive more into

that is in M&A, right? So M&A is perhaps the pinnacle example of growth mergers and acquisitions. In other words, when

and acquisitions. In other words, when two companies come together to form a bigger one or one company acquires another. And what you find, what my alma

another. And what you find, what my alma mater uh discovered, a study actually just December of last year from NYU, uh, Professor Lev looked at 40,000 M&A

transactions over the past couple of decades and found that only 25 to 30% of M&A transactions improve value over the long run. And I'm not talking about

long run. And I'm not talking about human well-being here. I'm actually

talking about strictly cash flows. I'm

talking about purely profitability. In

other words, 70% of the time you actually end up destroying cash flows. Instead of a situation where uh 2

flows. Instead of a situation where uh 2 plus 2 equals 5, right? Where two

companies come together and make something even better. It actually is more like 2 plus 2 equals 3 or in many cases 2 plus 2 equals 1.

The biggest challenge to M&A that the study found is that the cultures of two companies coming together have a lot of difficulty intertwining. In other words,

difficulty intertwining. In other words, it is a human problem, a deeply spiritual, social, personal problem of these two companies coming together. Do

we have the right values in the way we combine our entities? And again, this is never something that's discussed in M&A perspectives right?

And you can kind of think about okay why are we so obsessed then with growth right why why do we always I had a professor who made this brilliant quip when asked okay if if M&A fails at this

level why do people do it why do people try to grow their companies so big and he gave a cheeky smile and he said because the king always wants to grow the castle right but there is an economic

logic that is described for why people try to grow their companies bigger and bigger and bigger and that logic is economy of scale. So given I'm giving a TED talk, I I have put a teddy bear

factory uh on the on the screen here and the logic is a little bit clear, right?

If you have a huge factory that's producing a huge amount of goods, the cost of the factory uh is evenly dispersed across a very large volume of goods. And as a result, there's some

goods. And as a result, there's some economic benefits to being uh so big.

And actually, you know, for manufacturing uh aerospace engineers in the audience and things like that, they know that there are some benefits to this. This is true. But more often than

this. This is true. But more often than not, you actually end up with diseconomies of scale precisely because of the human conflicts that come

inherent with scale. And we see this for example in the ecological crisis that's facing our planet as a consequence of companies growing bigger and bigger and bigger but not

having foundational principles like an idea of altruism, an idea of fellowship, an idea of working together. These ideas

are very difficult to introduce into a corporate setting. They're perhaps

corporate setting. They're perhaps somewhat alien despite the fact that anyone in any of the or these organizations would agree that that's what you want to hire for. that's what

you want to work for with the people sitting next to you, right? And so our planet ends up in a situation where uh it faces many challenges because of this. Now to explore this very

this. Now to explore this very concretely, I want to bring it back to markets in Africa and I want to give you a case study of two companies I was

looking at uh both operating in small markets in Africa. On the I guess from your perspective, left hand side we have micro finance bank A. On the right hand

side we have Micro Finance Bank Bank B.

Now Micro Finance is very small loan sizes averaging $40 for both banks. The

one on the left is AI enabled. It is a leading fintech company backed by a bunch of brandame venture capital firms that you probably have heard of. And

this company has a $200 million loan book which for Africa is quite big, especially doing $40 loans. uh and it uses this AI algorithm to disperse these loans and assess credit profiles. Now,

the company on the right uses none of this fancy technology. It is entirely human-based. It has a $200,000 loan

human-based. It has a $200,000 loan brook that has grown organically across a population of about 7,000 people who pretty much know each other in some way or another. Rather than AI and digital

or another. Rather than AI and digital interfaces, we're talking about humans that sit down with the local tailor and the local shoemaker and help them plan a budget for how they're going to use the

$50 loan that they're receiving. Right?

So, completely different uh enterprises in this sense. In fact, the one on the right is perhaps explicitly not scalable. And we're going to assess them

scalable. And we're going to assess them across three boxing matches. The first

is revenue growth. Micro finance big A seems to be winning, right? They're

growing revenue at 130% plus compared with micr finance bank B that's only growing at 18%. Right? This is the power of

18%. Right? This is the power of scalability and action. But when we cut a layer deeper and we look at profitability micro finance bank A is burning through cash. Now at the same

time look this is a fintech company. We

know how startups work right. They burn

cash for a long time. When they get a big enough scale then it doesn't matter because they can suddenly switch on the the switch to profitability and then everything's fine, right? Right? So

maybe we shouldn't worry too much about this. But at a basic level, we can see

this. But at a basic level, we can see that micro finance B is perhaps a little bit more sustainable in this perspective. But let's peel one layer

perspective. But let's peel one layer further. Why is there this difference in

further. Why is there this difference in profitability? Loan loss

profitability? Loan loss provisioning. These are non-performance

provisioning. These are non-performance rates.

the bank on the left for every dollar they lend out 49% doesn't come back right in other words half of the money lent out does not get repaid why

would you repay a faceless AI that you have no relationship with right whereas the bank on the right 12% non-performance now still these are high-risisk markets right in in Uganda

this is not an easy environment to build so there's some non-performance but let me ask you the question if you're losing losing half the money right off the bat.

What interest rate do you have to charge to break even? So, let's do the math. A $100

even? So, let's do the math. A $100

loan right?

$50 lost right off the bat. What percent

do you have to charge on the other $50? Is it 50%? No, it's 100%. You have

$50? Is it 50%? No, it's 100%. You have

to double it. You have to double your money to break even before you even think about your other costs. So you're

looking at what interest rates of 150% plus, right? That sounds about right.

plus, right? That sounds about right.

And that's what they charge. Micro finance bank B because it

charge. Micro finance bank B because it has a lower loss ratio can charge much lower interest rates. It can create a model of growth

rates. It can create a model of growth that is sustainable that is community-led. Now the paradox is as a

community-led. Now the paradox is as a fund micro finance bank B is too small for me to even look at. my transaction

fees, my legal fees would exceed the value of the transaction. So what do we

transaction. So what do we do? We have to get a little bit more

do? We have to get a little bit more creative. What would it look like for

creative. What would it look like for example if we were able to rather than funding a singular large micro finance bank that's super scalable where only a

couple people acrue all of the profits that come in. What if we funded a federation of very small micro finance banks? Right? These are economic models

banks? Right? These are economic models that have not been built before that are rooted in community. And I want to give you a

community. And I want to give you a couple other case studies. But before

that, I want to introduce you to a man called Mr. Schumasher. He wrote a book in 1973

Schumasher. He wrote a book in 1973 called Small is Beautiful. Formerly, he headed

Beautiful. Formerly, he headed industrial policy for the United Kingdom. And he said, "If human vices

Kingdom. And he said, "If human vices such as greed and envy are systematically cultivated, the inevitable result is nothing less than a collapse of

intelligence. A man driven by greed or

intelligence. A man driven by greed or envy loses the power of seeing things as they really are, of seeing their

roundness and wholeness, and his very successes become failures.

If whole societies become infected by these vices, they may achieve astonishing things, but they become increasingly incapable of solving the

most elementary problems of everyday existence. And so we have enormous scale

existence. And so we have enormous scale trillion dollar companies in my home city of New York right next to people who are unsheltered, sleeping rough on the

streets. This is the problem with the

streets. This is the problem with the growth model that we've undertaken.

And it's interesting because my very first job coming out of university was co-founding an organization to do some research into this problem of homelessness. When you're going to

homelessness. When you're going to school in New York, you pass by homeless people every single day. And um it's deeply perplexing, right? How could it be that we cannot solve this most elementary problem, but we can make AI

that I can talk to? That's

crazy. And we discovered that the problem is not a technical problem. It's a spiritual problem. It's

problem. It's a spiritual problem. It's

a human problem. It's about the way we treat one another.

What we found of the 1500 people who we interviewed uh who were sleeping rough in New York City, which at the time was the largest data set that had ever been collected on street homelessness in New

York, we found that the reason why people failed to end chronic homelessness, in other words, they failed to be able to escape being homeless for more than a period of two

years was because the systems that were designed to help them um did not nec necessarily make them feel like a human being. It was the level of the

being. It was the level of the relationships they were building. And at

the same time, when you meet people who work in shelters, they they're deeply good-tentioned people. So, what is the

good-tentioned people. So, what is the problem? How do we design a system that

problem? How do we design a system that is more human in its character? I think

part of the problem is we focus too much on just trying to put beds, trying to put together uh trainings, trying to put together food, and we don't think enough about what are the kinds of relationships we're building. Just

because we get someone off the street does not mean that they have a community to enter into. Does not mean that they have meaningful friendships. We don't always think about

friendships. We don't always think about these sorts of challenges. And another

element we found is that even at a level of of why people become homeless in the first place, there are many different reasons that one might describe, economic reasons, eviction reasons,

addiction reasons, psychological reasons, a whole range of things. But

fundamentally, homelessness occurs when a person has no social support system to turn to. When you have nobody that

turn to. When you have nobody that you're able to be taken in by, that is is ultimately what what occurs when someone becomes homeless. And what we

also discovered is that there are many cultures that have very high rates of poverty in New York City, but where you do not find high rates of

homelessness, right? Because where there

homelessness, right? Because where there is a culture of vibrancy, a culture of common support, of mutual aid, this problem does not exist. So now, how do

we take that idea and transcend it beyond a a a singular culture or a singular religion or a singular background and encompass the entirety of the human race where we are here for one another

because we are brothers, we are sisters, we are friends.

This is a model of growth that is very different than what we're looking at uh in most of our markets today and it sounds really pie in the sky. So I want to give you a couple really practical

examples of this happening the car club. So the last time I was in Cape Town, I was doing some research on on the auto lending sector and I began asking people how they got

financing for their cars if they're Uber drivers, right? And what I discovered

drivers, right? And what I discovered is, of course, banks don't service the Zimbabwean migrants who come to South Africa. And so they have to figure out

Africa. And so they have to figure out some creative solutions. And the main solution that many people rely on is the car club. And you won't read about this

car club. And you won't read about this in any newspaper. There's no studies that have been done on it, but there should be. Um, but there are basically

should be. Um, but there are basically these groups of people who come together and they pull together money and they buy cars for people who present themselves to the group. And the rule is

you do not have to pay interest. You

don't even have to pay back the loan that was given to you for the car. You

just join the group and help buy the next person the car. And when you're in the group, you're in the group for life.

This is a banking model founded on altruism. It's a banking model founded

altruism. It's a banking model founded on the principle that the whole is greater than the individual.

The Bayion Association in Honduras is a more formalized example of this sort of model where a community in Honduras

raises charitable aid to train financial literacy in bank managers, but the money is pulled together by the community and

loans are made by a democratically elected board created by the community.

profits are shared among all the people involved and the community is able to run its own banking by the way at non-performance rates that are significantly lower than fintech companies operating in the same

market. So this is not pie in the sky.

market. So this is not pie in the sky.

The way it happens is in our daily lives by exploring how do we build vibrant and outward-looking communities. How do we move beyond the

communities. How do we move beyond the people we know through our profession, the people we know because of our common ethnicity? You know, my my mother's from

ethnicity? You know, my my mother's from Pakistan, my dad's from Texas, and Pakistanis are quite vibrant when they're together. Uh yet, it's not

they're together. Uh yet, it's not always so outward-looking, right? And

and similarly, cultures that are that are very um very outward-looking are not necessarily always vibrant. If you have lots of different people of different backgrounds, you don't have the same vibrancy of when I go to my auntie's

house and she's making nahari, right? So

we have to crack this problem of in our daily lives at our dinner tables, how do we build vibrant community that involves people of many different backgrounds.

And when we do that, we will rethink growth and achieve something that looks far different to today and will attain a level of

prosperity not for a few but for all in a way that we can scarcely imagine. So

thank you very much guys. It's been a pleasure talking with you. Heat. Heat.

[Applause] [Music]