Best Ways to Approach Cultural Integration

I'm Kisam Patel and you're listening to.

M and A Science, where we talk with deal professionals and learn valuable lessons from their experience.

This podcast focuses on stories, strategies, and what actually happened during M and A Deals.

In this episode, Judah Karkowski and I explore his role in corporate development. Judah provides insight on how to efficiently approach due diligence and and how to handle ownership issues. We dive deep into the process of integration, including the timeline, human resources and key employees, and a bit of Judah's own personal advice. Here's more on Judah's background.

So I started my career as an investment banker at Credit Suisse when it was Credit Suisse First Boston, followed that up as a consultant in the education and technology industry focused on empowering and enabling schools to take the greatest advantage of what technology, as it was emerging, had to offer. Many feel that education is far behind other industries, but we look to enable our future leaders in America as well as the rest of the world to really take advantage of what's at their hands. And I was looking for a way to facilitate that. Found some phenomenal companies that were doing exciting things and worked very closely with them to introduce them to a very complicated market of schools and government and joined some of those along the way to help them raise money and eventually sell themselves. And have done that for several years. And currently I lead strategic development, which includes corporate development, mergers and acquisitions, and large scale partnerships for a sizable educational publisher.

Great. You had a variety of roles dealing with M and A. Was there a specific, I guess, range or types of deals that you worked on through those different positions?

Sure. So I worked on both buy side and sell side. The range of roles were as obvious and simple as facilitator and analyst all the way up through complex fundraising, bridge loans, sell side, standard M and A and integration operations and buy side most recently much more heavily on the buy side and the diligence, integration and success management of that.

So when you're working on a buy side and you're getting ready to start doing diligence on a company, what does your approach look like?

That's a phenomenal question. The first thing we do is we really start with trying to understand what the business rationale is. Have we really thought through all the salient points, the organizational structure, how complex it would be to assimilate that? What is it about? What's the excitement of the entity that we're looking to acquire that really motivates us to want to wholly own that or even portionly own that instead of structuring some more safe and less complex style of collaboration like a strategic partnership or even a co branded offering. Then lastly, and very strongly, we take a look at those big pieces of where traditional M and A fails after the close, which is that culture integration, the employee retention and I guess come back to that organizational structure piece to make sure we've thought through what's going to happen in 90 days or 120 days or even if it's a year long M and A process. Where does this go? Once everyone shakes hands and and says congrats on the deal, how do you make sure it doesn't fall apart? Then after that, that's when we can really dig in on the traditional M and A due diligence processes. Because now I know what I'm asking for. So to consolidate and be less long winded, we start by making sure that the purchase rationale isn't just about the one exciting part, which is the solution. The technology, the product, the client base. And we take a much more holistic, involved deep dive interview process, much like one would before they would take a new single employee. And imagine how strong you have to be about interviewing your future colleagues when it's several dozen, several hundreds or even several thousand people.

So it sounds like there's a lot of weight on culture. Could you get a little bit more specific in how do you assess that?

So there are two parts of the cultural integration piece that I take a deep look at. Not every company is motivated the same way in how they're approaching markets. There are businesses that are very hierarchical. There are businesses that are very flat. There are businesses that are driven by social good and there are businesses that are driven by money. And none of those are necessarily better or worse than others. Just because there's such a distinct difference in how one approaches both their day job and writ large, the address of market. You have to be very careful with how you synthesize too disparate relationships. If it's aligned, it gets a lot easier. But the first barrier is to make sure that we're both talking about achieving the end goal the same way and that we both care about the journey to get there. It sounds very floofy, but the same way you wouldn't want to be in a marriage with someone that you didn't have shared values and shared approaches to life and getting yourself really motivated to come and get out of bed every morning and live your life. You would not want to synthesize two businesses. Again, this is about keeping them both alive. If I'm just grabbing assets and I don't care what happens in the future. Obviously that's not as relevant. But if I'm going to take two disparate organizations that have very unique and healthily different cultures, I have to be sensitive to concentrate on my actions that will successfully culturally integrate that. And so I always focus on it very early on. For me, I look at five or six things, I guess leadership style, what are the company's values and I guess their internal and external orientation. So how are they perceived by the market? How are they perceived internally? Are they an innovating group? Are they very much the stoic, steadfast group that's going to deliver? But you don't look to them like you look to Apple to come out with something that's going to be a market changer and make sure that it aligns. Where I am currently, I'm very focused on ensuring that what we bring in is not just innovative but implementable. If the culture at the organization that I am potentially interested in acquiring is very fast paced, very get er done, we'll figure out how we solve for all of the broken pieces later. I know that that's going to be an initial challenge to integrate because we are a very practiced organization focused on ensuring we don't break things along the way.

You ever walked away from a deal just because you felt that culture wasn't.

Going to work within the last six months?

What was the signals? How'd you know?

There was a sense that it really came down to the value of the leadership that was pushed down through the organization. So if it's limited to just how the leadership is thinking about it, it's one thing, but this organization felt very strongly about the way you monetize is sometimes it's better for the company to fail and the product to succeed by losing money than it would be to not sell the product at all. So they were underpricing, they were under supporting and they were being very warm and healthily available to their clients at a terrible cost, terribly negative cash flows. And if I can't turn that around, then that would have been a deal ender there. We felt very strongly that there was an opportunity to right that ship. But that would mean having again to sort of reinvent the entire organizational structure and take it away from a let's over support at the cost of almost coddling the customers and lose money on product and project innovation. And that just we felt was a big red X on the entire prospect of a safe and healthy integration. So to boil that down again for You I felt that the employee engagement and motivation would begin to suffer, that we weren't necessarily aligned on vision and mission. And to be certain that it would be a good deal, I would have to be convinced that I can either safely and healthily transmit our vision, our values and our mission to the new entity that we now took under our wings. And I was not confident that would be possible.

That makes a lot of sense. What other top issues would you come across in diligence that would have you think twice about the deal?

Interesting thing is that there's a number of ways of managerially accounting for something, but that does not stop you from playing it fast and loose. Even when a company feels that they're financials are GAP financials unaudited GAAP financials are sometimes just as tricky as a mom and pop flower shop. So there have been many times where we have been told and been shown an overview or a consolidated financial statement which shows something like I'll pick random numbers, $20 million of top line revenue and $10 million of cash EBITDA, only to find out that that 20 million is actually 20 million of bookings, of which it's actually only $5 million of revenue. And they've sold out four years worth of commitments and they have to service those commitments at $5 million a year. That's $20 million of cash that you may have in the bank, but that's $15 billion of deferred revenue. And when you're talking with small entities, there's not that it's not a dishonesty, it's it's just not a sensitivity to the way that larger, more precise organizations operate and respectively share their financials.

Yeah, that makes a lot of sense. So really making sure the numbers obviously are what they should, looking beyond the, I guess the initial overview, the numbers and getting deep and really seeing what's actually there. Are there other things that you come across you'd have the people aspect, the financial aspect. I don't know, has there been any other sort of surprises that popped up that hey, this is something we really need to differ?

Yeah, there's been, I mean the critical ones that everyone runs into from time to time are ownership issues where it wasn't so cleanly set up, where a founder passed the ownership or the equity onto a family member. And there's arguments about clean ownership, there isn't clarity of stock structure and cap table is a mess. There are many, many pitfalls. I try and find those before I drag in big teams to undertake the more in depth due diligence processes. So we start with a mini checklist before it goes beyond myself and council myself being my group, and before we bring in, for example, technology, human resources, product project managers and the PMO strategy. Everyone, our organization and how I practice throughout my career is to make sure that there is a clear, responsible individual from each of the affected organizational groups. So a business unit can't be represented strictly by a GM at the table. They have to have someone who owns their budget if it's not them, or someone who owns their technology. If they can't speak fully and intelligently about the granular aspects, somebody from that organization gets read in and brought to the table. So before we do that, we make sure that there aren't going to be significant bottlenecks that we've identified key employees that want to run the second this thing is sold and back to the ownership. Happens more often than you'd think. There's older, there's claims, unless it's a publicly traded organization, some private organizations that you and I have both heard of that I've been involved in, whether it be financing or partial sale or full sale of stock or entity, have people have had to walk away because it gets contentious around ownership structure. But there are cases where we also walk away because we realize that when you get much further and deeper in, what looks really beautiful from the outside is quite a mess on the inside. Reasons like spaghetti code that nobody could really figure out. And the originators, the folks that built the technology from the beginning, aren't with the organization, haven't been with the organization for some time. So there's no institutional knowledge in the company any longer. And that gives us pause. And sometimes there's more debt and debt covenants and warrants than you can initially discover during preliminary due diligence. So there's a lot of financial, there's a lot of structural, there's a lot of human resource, and there's a lot of clarity of legalities. The last piece I'll give you is IP and litigation. That's a lot 100% of the time. Now this is a short statement though, 100% of the time of where deals have been challenged and some of them have closed. Where deals have been challenged. And there has been a red flag thrown up around IP and litigation. It's been discovered later on and that's because it's embarrassing to disclose something of that nature. No one likes to talk about being sued and sometimes you think that it's put to bed. But just because a claimant or a litigious individual, whether it be a customer or former employee. Former stockholder has gone quiet. Doesn't mean that they won't come roaring with their hand out once they know that there's a transaction underway.

Would your reps and warranty cover that?

Sure. And so would escrow to some degree. But If I'm paying $100 million with a $10 million escrow and there's a claimant that says, by the way, I own 100% of the intellectual property and here's the proof of it, whether it's validated or not. Sometimes it's just better to walk away than have to suffer through the slogs of multiple years of litigation.

So that's a lot of possible things that could go wrong. Are there any parts of diligence that you prefer to outsource versus manage?

So certainly we outsource a good part of the expertise around technology and IP assurity. So we have outside counsel and within outside counsel, the subject matter experts that are not M and A, that are focused on all of the obvious pieces like tax and intellectual property, as I've just mentioned, and other facets we occasionally outsource both with the company I'm currently working with and with in prior iterations, we've outsourced some of the technology due diligence because it's quite time sensitive to get that done early enough on. And it's a big investment of expertise and time. And I think the hardest part for those that are coming from a VC or PE world to fully get their arms around in a strategic entity, you still have to produce, you still have to do your day job. So if I'm taking the CTO and his team and putting them onto the focus of a due diligence for a very exciting, relevant transaction, that's going to make a big difference to our product base and therefore our customer base. It also means he's going to miss his milestones for his regular roadmap. So we outsource where we think it makes sense and they're always with entities or individuals that we've had a practice approach for diligence with in the past. It's rare we take someone even with great reputation without assimilating them into our organization. They just won't have enough again back to that institutional knowledge. They just won't know enough about our company to do a well rounded job of ensuring that both that code, that product is well built and that it's integratable into our solution.

Gotcha. That makes a lot of sense. So there are some key parts that you do want out and the time sense of nature as well makes sense. You can't bombard the guys that have responsibilities internally.

Yeah. One last piece. More often than not, with entities with international arms or subsidiaries that are either partially or wholly owned, we overwhelmingly outsource that to either advisory firms, law firms, or big houses that you and I have all known and work with. So the PWCs, the Ernst and Youngs of the world that have practice areas in that country or that locality to go ahead and do 80 to 90%.

Of the diligence, that makes a lot of sense. It seems like that's during any kind of international transaction. There's a lot of unexpected hurdles that pop up.

Indeed.

Have you come across anything particular on.

An international deal firsthand? Some of the bigger issues we've had, ironically, are not around the stability of the employee base or around the product and its sales. It turns out to be issues around either silly things like leases and being able to continue to exist. And in certain areas of the world. How do I say this diplomatically? There is occasionally, especially with either JVs or branded third party companies that are distributors of companies that were interested in intellectual property or products, there's a tendency for them to grease the wheels to ensure that sales and distribution is even better than it probably would be in absence of doing some perhaps unscrupulous or unethical practices. And that has to get ironed out before anything can happen.

I mean, is that part of the strategy where, hey, there's a level of expectation to that when doing business with certain countries?

Absolutely.

Okay.

And those countries are well known. And I think that the best part about it is almost every law firm that has a significant M and A practice is well aware and they come with bigger daggers and narrower eyes squinting at it, knowing they're going to uncover something. So it's almost a guarantee and we're just waiting for the rock to be turned over and point, there it is.

And then, I mean, do you often go back and renegotiate because of that or.

Yeah, we go back. We either lower prices, we carve it out. There are times where we intentionally don't want to own the international arm and we don't want to continue doing business. So there's shareholder value that's hard for them to realize because it can't continue to exist on its own. And we're willing to pay for some part of that pain and loss, but not for all of it, because we too are walking away from that revenue, it's just not strategic for us to do so. So there are, there are many times where we feel that we should self select out of working in certain locations and in doing so sometimes it just requires us to shunt that and say you continue to exist, we will gladly license you our content as long as you follow these rules. And sometimes you can't get the third party to agree to follow new rules and therefore we got to take our price down. It doesn't happen often, but more often than not price days where boards have already approved the preliminary indicative offer but sometimes does makes sense.

We touched on this a little earlier with culture aspect in terms of looking at that and how it fits with integration. Post closing how does your approach to planning for integration?

I align the integration thesis with the deal thesis. So if there's a scale to it that's going to be complicated and involved and there's a lot more diligence that has to happen. I start the integration process almost as early as I start the due diligence process. And there's a cost to that that everyone can acknowledge. If I bring in big either outside consultants or internal power to start an integration process on day 10 of a due diligence phase that we're expecting to be 90 days and actually takes 180 days, there's both a whole lot of bench time that I'm going to be paying for and or there's a lot of wasted opportunity and opportunity cost for those folks that could have been otherwise engaged in other areas. And so we answer the scalar scope question to make those critical decisions early but with deals that I know are are a protracted investment in time. We talked about this also a little bit on our prior conversations. The conventional wisdom dictates you should integrate fast and furiously. And I think that that is true for some parts of the business and some parts of the practice and is really dependent on the entity that you're acquiring and integrating. So if there are disparate or different or unique accounting systems, you don't want to be running two sets of books. You want to go through the pains and rip that band aid off and get right into it, push those together, have a singular accounting system. And this assumes obviously that my goal is to combine two entities, not to just have a holding in a different company. But if I'm actually truly integrating, it makes sense that I want to try and combine accounting systems, legal management, and what I would call the shared services parts of it. But sometimes it really does not make sense to force either the target or the firm to do technology integration. And sometimes it doesn't make sense. For the first 12 months you just. They're both very driven, they're both very directed. There's clean and clear division of labor between what they're both trying to accomplish and the strategy of where they're both going over the next 12 months might be the very reason I'm investing in that business now. It may not be that I want to buy what they have today. It's I'm buying into their future roadmap to try and integrate. All you've done is sort of put a sledgehammer right to the head of every excited and engaged member of that delivery team. So we press pause on certain occasions, on certain parts of the integration plan, however, we always start integration and that integration leader. And there's always a human who's in the seat whose job it is to not do anything else all day but do integration. That person's at the table no matter what from day one. And that's because there's tons that you learn during due diligence that helps you focus on what you're going to do on actual day one post deal.

So it's an interesting approach because you're looking at it in these specific elements of doing the integration and there are certain things that you want done ASAP and hey, that might tie into the day one stuff and stuff we want to get done fast and other things that may you don't want to integrate at all or down the road. I mean, does that sound pretty reasonable, like description of the strategy that you go for for integration?

Yeah, I think it's to use the same line I used before. I don't see this initially as that different than bringing in a new employee. And you just have to make sure you're understanding that in a pluralistic and multi capacity mechanism with different people and different personalities. So if you set targets for a new employee that are two pages long, you're both going to have a very underwhelming first 90 days and a very unhappy employee. So we set a succinct set of reasonable targets that everybody knows are either achievable or even if you're reaching for the stars, when you fall and land in the clouds, you're doing phenomenally because it's way better than you were 90 days ago. But I think that putting everybody into a pressure cooker and locking the lid and saying let's boil out our problems and we'll figure this out together, you lose key people, you end up with poor performance both in the base business and in the new business. There's a lot of risks in over integration.

Makes sense. How do you communicate with this company that you're integrating?

Because I was always curious.

It seems like a lot of the troubles that happen are related to the poor communication. How do you approach that?

That's a phenomenal question. Love that. Because more often than not during diligence, you can't interview or speak with everybody that you would love to have the opportunity to speak with. And so some part of that is building out a center of excellence around human resources and talent recognition. So we have done several acquisitions where we've met with C level or SVP level leadership. I'll take technology, for example, or you're meeting with the CTO or the SVP of engineering, the chief architect. And they were underwhelming. But the product is phenomenal. And you have to be able to distill that sometimes this person is a phenomenal producer, one of the best developers and designers of big systems or small systems alike. But at managing people or articulating process and practice, they're awful. And so you take them for what they are and you channel their powers and their capabilities in a far better way than they're currently delivering. And sometimes it really just is they're underwhelming. And the people underneath them who you won't get to meet until after close, or pretty darn close to close, are the real superstars. And so it could be more layers down or it could be just the same in reverse. We're talking about it in a positive way. Sometimes the broken, leaky part of the bucket, whether it be on sales, marketing, technology, other, is a group or a individual who you will not get to discover. And that's the part of the conventional wisdom of integration that I subscribe to and religiously follow, which is you start on day zero and day one with getting ahead of rumors and potential pools of disinterest and disengagement by communicating clearly, setting truthful, manageable, deliverable expectations, explaining that this isn't a switch that can get flipped overnight, that we're respectful, that this is a big change for them. It's also a big change for us. And we've had a little bit of a head start. And you start those conversations immediately. So on day zero, we launch with a team. Our folks, if it needs to be consultants, hr, team members, benefits, legal, anybody that can help steer the conversation from the very beginning. We do not walk in saying we're going to Figure out your benefits later, we're going to figure out your 401, your health plan, junior schooling and your tuition reimbursement. This is done, it's negotiated, it's finished, it is resolved. Sometimes it's not perfect, but every single time, it's uniformly understood by the integration team. This is what it is. If it's not better, it is what it is and we're going to make it better in other ways. I've never done a deal where I've had 100% worse. I've never done deal where I've had 50% of the benefits go bad.

Can you give me specific example of what that communication looks like from maybe day one, for example?

Because I feel like there's a lot.

Of people involved, a lot of rumors, a lot of question marks and I mean, do you email blast a template? Hey guys, you know, things are good, we're doing this integration. Like do you have a specific example of how you communicate or is it directly through management for these different functions that you communicate through? How do you actually go about that?

I think that there is 90% commonality and 10% last mile customization. So it will depend slightly on both the organization and the structure of how the integration is supposed to happen. Whether it be merger, acquisition, buyout, multiple different emotional responses are going to be expected. But no, more often than not, I would say again with 9 out of 10 times, it is our teams, it is the buying entities, teams or their outsourced talent that go in, do the communications before the deal gets announced. Everybody gets an email address for the organization they are now part of. Even if they're keeping their old one. We want to make sure that they feel on day one as part of the team. And so the only way that that could happen is if they truly feel on day one, whether we're keeping them or not. Mind you, there could be cost takeouts and cuts. Everyone gets some message or they're already cut before a deal happens. And we don't let it get out of hand because we, depending on the size of the entity, a company that's 500 or 600 people or smaller, you assemble them, you get them as best as you can into one room, you put them on a bus, you bring them to auditorium, a movie theater, a convention center, you talk through it. And by the time you're ready for the practiced speeches and introductions to be completed, when they get back to their desks and before often they leave the room, there is a brilliant FAQ and commonly asked concerning questions and I'm terrified. Tell me what happens next. Packets that both quash standard rumors. You can imagine some that there are folks that have unwell spouses or children that are on their insurance and they can't fathom. At the same time as they're worrying about their day job and whether they get to keep it, they're also worried about their insurance and whether something catastrophic is going to happen. Now where yesterday everything looked great. They got a five out of five on their annual review. There's uncertainty. And so what we try and do is we dispel that uncertainty from day one. We answer questions that we think they don't even yet know to ask. What's going to happen to my 401k? What's going to happen to my health insurance? Sure. But also will I have to move? Is my system going to change? Do I get to keep my title? Who's my new boss? How is the my boss going to change? Are you going to make a lot of changes to the organization? Are there going to be layoffs? Are there going to be hires? Are we going to move offices? Lots of questions come up and as many as you and I can come up with, there's always a dozen new ones that I never thought of. And that's kind of amazing. That's the best part about human nature is different things matter to different people. And really well informed and trained and educated on certain areas. But I'm ignorant about what you do for a living or what she does for a living. Come up with things that I don't know and we try our best to answer it. So it starts with incredibly well orchestrated, very well rehearsed communication plan which is live speeches, FAQs delivered, PowerPoint decks, introductions to the new company. Not everybody knows what the acquiring company does or how they do it. Introductions to the plan and the day one through day seven. More often than not that's where we stop. Sometimes earlier, sometimes a little bit more, but really not more than 10 days. Here's what's going to happen. And for the first three days we're. It's like the first days of sleepaway camp for new campers. We're there. We're the camp moms and the camp dads. We're holding hands, we're answering questions. We're having eight to ten minute one on one meetings with HR with your manager. Your manager, if he was not part of of the deal team, he definitely knew. And his manager she knew. If she wasn't part of the deal team, she was told before even he was. And this push down always happens with manager plus one. So if I tell the CTO and he did not bring in his head engineer, it's me and the CTO and his head engineer and we sit together and if his head engineer tells his head of design, he's in the room when we tell her, and so on and so forth until it gets to a point where a manager is sufficiently confident to be able to carry their own and we work very hard to teach them. It's okay to say I don't know and it's okay to say I'm going to find out about that for you rather than trying to solve for everything. No two hour or two day set of training is going to get you fully able to answer every question. Because sometimes if you ask me, I'm going to say it's a great question, let me go ask my HR people. That's why we commit lots of resources, we over deliver on the first few days and more often than not that kills a lot of the self propelling nasty ugly black rumors that can get started. More often than not rumors are way worse than the truth.

Sounds like the key is a lot of high touch communication, not just a couple company wide emails from the CEO.

That's right, yeah. And I can anecdotally tell you that the last sizable deal we did, and when I'm saying sizable, I mean it was low eight figures. So you're talking about just anything over 10 million. The CEO of the parent company flew down and he kicked off the welcoming conversation. It wasn't me, it wasn't the chief technology or chief operating, it was the CEO down there wearing a mic in an auditorium, three screens, papers on your chair, booklet under your chair, set up as if it were a Disney production that you're going to see for the very first time.

Very cool. What have you seen in integration go wrong?

So one piece from everywhere. You fail to commit to choosing between one of two very different cultures. You got to commit to that one culture. You fail to communicate. So you assume since you have knowledge of what's going on for three months you've been in integration planning. As the integrator you feel everyone should know this and you fail to be transparent. So a lack of transparency, a lack of empathy, a failure to commit to a single culture. And the biggest thing I've seen go wrong and I've learned a lot because I've been causes of it until I learned better, was you fail to realize you still have to deliver. So you've broken the Momentum of either the originating business or the target. And things begin to fall apart because there's more time spent on integration than there is on the original delivery that was so exciting in the target company to go after.

How do you prevent that from happening?

As you said before, it's over planning, it's over rehearsed, it's being very clear and clean in your communication. But it's also about setting those reasonable deliverables. If you set a goal that goes for the first time, few days and first few days, or even for the first hundred, everyone sets a hundred day plan. If your hundred day plan is 100 slides, it's at least 65 too many. If your 10 day plan is more than one slide, you're overthinking this. The first 10 days are mind numbing for everybody, even those in the know. There's a lot of change, a lot of shock, and more often than not a complete lack of of progress being made. Almost nothing positive gets done in those 10 days, unless there's a time sensitivity and urgency, in which case you're plowing through people's emotions and big concerns rather than addressing and moving past it. And then the last part is the band aid gets pulled off. We can cultivate a winning strategy that sells that deal premise, the deal thesis internally. We can speak to the integration thesis and why it's not going to disrupt. And then you just got to go with it. Pick a plan, stick to it. If things start breaking, do your best to continue to take off the Runway. As long as you haven't burnt out your engines, you should be able to still pull off and we'll fix the problems as we go along. Getting bogged down in the minutiae kills everybody. So you also shutter doors and kill reputations if you fail to deliver to your existing customers. So you focus on those fundamentals, you make your decisions and you go.

Some good advice. What kind of surprises have you seen during integration?

I've seen really talented people do very immature things and emotionally react in ways that are very unexpected. So we have planned for someone to take a very key and obvious role in the future of the combined companies. And we've made the mistake in assuming that they were up to the task. Not because they were unable to do so, but because they actually were somewhat poisonous. As much as I'd like to believe I can continue to discover that in advance, I think it's very hard. You can date someone for six months and you won't know everything, but you could also live with someone for six years and think you know them very well and those marriages end in divorces too. People are people and they go through changes. So a lot of what breaks down is actually not the plan or the technology, it's the human factor. It's the emotional, mostly illogical barriers and walls that people throw up. And then the second part is overreaching. Setting a set of plans and goals that are unreasonable that you would not put on your existing team. So you've assigned a whole bunch of new people that don't know you don't know your cadence, you give them decision rights, you give them roles that they've never had. You say co coordinate those decisions, make it happen for me. And you fail to sort of focus on the fundamentals of both making sure they're with you on the plan, they understand everything you're doing and that you've told them. There's a timetable here, it's for everyone's benefit, let's stick to it together. So under management of the integration process, overwhelming the integration and existing delivery team for the core businesses and failure to really delegate the authority in a cohesive, well thought through manner has a really, really high risk of failure.

I never thought about that people could be the biggest surprise in a transaction.

Oh absolutely.

I know we spoke before around some specific attributes with data handling during integration with the transactions you work with. Could you touch on that?

Sure. So I don't think it's unique to my industry. I focus very heavily on education and especially where you're dealing with data that is personally identifiable. So if one of the target clients is the Los Angeles Unified School District, they're going to have really dangerous sets of data if it gets into the wrong hands. I'm going to know where John Smith lives, what his birthday is, sometimes even his social and his parents names, his siblings names. I get a lot of data, his health immunization records. And while the originating entity, the target who has all this data may really handle it beautifully and they do a great job at data security, at privacy, at both meeting and exceeding regulations, rules and laws. It's really hard to diligence certain things without taking a deeper view into some of the pieces that make the trains run. And you're going to have folks that are exposed to to confidential data that the acquirers haven't signed a non disclosure agreement or been bound to specific data privacy rules. But the target has agreed never to let another entity see this information. So I'm sure it happens in financial so fig. Financial institutions. I'm sure it happens with Insurance companies, there is a special sequestration, a carving, a siloing necessary to do. And I think uniquely what we do is we stop. We acknowledge that these are 6, 10, 14 year old boys and girls that are the core customer. It's not the school district. It's making sure we're delivering. Similarly, if I were doing an integration of an insurance company, there are a number of people that will never know that athenahealth acquired this smaller insurance company or that Cardinal Health buys Kinray. The impact to them if there's a data leak is massive. And they didn't even invest in what you're doing. So we're particularly careful about certain types of data. Everyone says they're careful about financial data. Everyone says they're careful about human resources and employee data. You take an extra set of sensitivity and the way we do that is we don't traditionally use a VDR virtual data room or even a physical data room for the storage of highly sensitive files. That gets treated as if it's a metal. No hyperbole can be left on the side here, Kassan. So that can treat it like it's national security, but not under the Trump administration. We often go there, we talk through it with the stakeholders who have the honest and earnest responsibility of the protection of that data. And if we need to take a look, we do. But if we can avoid it at all costs, I have a team of. The last team I think we have is around 13 or 14 full time focused on integration. Before we even close the deal, only one person who is an attorney and a data privacy expert sat in the room. I never even saw that data. So I even did it to the exclusion of myself. I never opened those files, never got the chance to know what's in them. And there was key parts, I would say 10 or 15% of the deal was predicated on things that are in that sensitivity category. And that's just got to be okay. Sometimes that you the same way you're about to delegate to the new target company's leadership. If you're keeping them on board and in leadership roles, you've got to delegate to your team sometimes and empower. So live the very life you're preaching, delegate empower. Expect clear deliverables, set those clear expectations, lock it down when you can, and treat it as if it's your mother, your son, your father, and you'll be very, very safe the entire time.

It sounds very similar to the way we have to handle itar classified information. So I think you're definitely Taking the right steps there.

There you go.

So, Judah, if you were to go back 10 years and give yourself career advice, here are some of the big lessons that you should probably pick up and learn sooner than later. What would that be?

I hate to sound like a broken record, but I recognize my shortcomings and I know where my strengths are. So I would hire someone who's phenomenal telling the story. You need someone who's compelling, who's charismatic. And that has to translate into two very key areas, both in the diligence process and in the integration process. You need someone who is charismatic and tells a good story. That strong leader has to, in the integration piece, oversee both the introduction and the cultural integration process because that person gets stakeholders, both current and future, to buy in. And it shouldn't be disingenuous, but there's a certain tact and skill. So learning, knowing what I know now, if I could give myself advice is focus on telling the story, less worry, on getting all of the process and data points perfect because it feels stale. Be much more liquid and fluid and honest about how and why you're telling the story. And then the second part I would make sure I know is that you need to keep a communication channel during integration open with not just senior leadership, but with the middle management team. If they don't feel like they have a clear, obvious path to escalation or open communication, then you're going to fail. Not because it's not plausible to get it done, not because people are unhappy, but because they don't know. And uncertainty, as we said, sometimes festers and gets bigger than the ability to deliver and feel job satisfaction. So open communication, strong leadership, phenomenally well rehearsed communication, and realization of what you're trying to do are going to get you 90 to 95% of the way through being good at what you do. And there's no panacea or magic bullet for getting this perfect. Practice is in this case, and experience in this case is impossible to substitute. But if I knew myself 10 years ago, I would have told myself, focus on getting the story right and doing it before you ever open the doors to the auditorium to tell everybody. It'll be a lot easier on you for the next hundred days.

That's a great advice. What's the craziest shit you've seen in M and A?

Wow. Are you allowed to tell these stories out of school? The craziest shit I've seen is absolutely somebody forging someone else's name on sales documents and pawning it off as their own and attempting to sell the company out from under their partner. And I wish I could say that happened only once.

Wow.

Yeah. Yeah. I mean when you have it depends. The unique aspect of what I do is sometimes it makes good sense to buy small entities and sometimes it makes sense to buy something that's gigantic. But what's not unique to either of the two sizes is is dishonesty. If you find someone that's just not on the up and up, that's fantastic drama for you to witness. But so that's one and some of the other craziest shit I've seen. Oh yeah, on the sell side for sure. If you have any morals or scruples, the best thing good sell side people do is they weave a phenomenal story that may not match and more often doesn't match the real deal. So I've seen people and you and I, when we're not on record, I have a great story to tell you about an entity that is gigantic that purchased another entity. And there's a great story to tell there about doing a really short due diligence process that everyone was convinced this makes great sense. This is a great deal to do and you discover far too much after the fact because you had great sales before the fact.

Thanks for tuning in to M and A Science. We hope this podcast provided valuable insights. If you have interesting M and A stories or suggestions to share, reach out to me. You can find my email in the Show Notes as well as any links or tools mentioned in the podcast. Join us next time when we uncover more perspectives to successful MA transactions. This podcast was brought to you by.

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