Building a Corporate Development Function From Scratch

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. Hi. Today I'm here with Russ Hartz, VP of Corporate Development at Ansys and former VP of Corporate Development at SAP. Russ is an experienced corporate development professional with specific expertise in M and A strategic investments and post merger integration. Today we're going to learn how to build a successful corp dev function from scratch. How are you today, Russ?

I'm doing well. Kee San, how are you?

Great. Let's kick things off with just a brief explanation on your role at Ansys.

Sure, sure. So my role at Ansys is very similar to my former role at SAP. I could boil it down to two essential functions. First is M and A strategy and deal sourcing. So this requires me to work closely with the business leaders within the organization to map out an M and A strategy that is aligned with our overall corporate strategy. I also then source deals that support that strategy. So this is the part of my job that involves identifying, connecting with potential target companies that may be aligned with our overall M and A strategy. The other core function is managing the deal execution process. So this includes really all aspects of the deal from start to finish. Specifically it is negotiating the high level terms of the deal, those that are typically laid out in a term sheet. Managing the due diligence process, coordinating all of the internal and external subject matter experts, evaluating due diligence results and their implications for both the deal terms and the integration planning. Negotiating the final terms of the transaction, usually well reflected in the definitive purchase agreement, and then finally making sure that all aspects and all of the mechanics of that are required between signing a transaction and actually closing the deal. Get completed by the the target closing date.

So you find the deal and make sure nothing goes wrong.

That's right. That's. That's a. That's perfect way to boil it down. Or if there's something that goes wrong that we, we don't do that deal which, which happens as well.

You pick it up early, you get out, right?

That's right.

Can you tell me a little bit about some of the best practices you learned at SAP?

Yeah, great experience at SAP. I was there working in corporate development focused on M and a for 12 years. So a long run there. I actually had a pretty solid base of experience and knowledge around deal execution when I joined SAP because I was an M and A attorney for about Six years at two large Philadelphia firm law firms. Before I joined SAP, SAP was actually a client of one of the firms that I was at and I did some work, some deal work for SAP. So as M and A council, I worked on both buy side and sell sides of deals across a number of industries, including tech, healthcare, financial services, and working with clients as external counsel. Observing how they manage deals give me a pretty broad and deep perspective on best practices and deal execution. Kind of the do's and don'ts, if you will. I learned a lot more when I joined SAP about managing a deal from the inside and acquiring company. A lot of that was learned on the fly simply by doing it and figuring out what worked well and what didn't. I was also part of when I joined SAP, I was part of a small team of what I refer to as founding members of corporate development. The corporate development function at SAP when I joined, the corp dev function was just instituted about a year before I got there. And so there's a small team of us, all of whom had prior experience with strategic transactions. And when we were standing up the group, we all knew that we could learn a lot about best practices by speaking with external M and A professionals, just given the volume and variety of the deals that they're constantly working on. And we had the luxury of carrying the SAP business card. So everyone was willing to take our calls and spend a lot of time talking shop with us. As I'd say, we're pretty diligent, especially in the early years after forming the group, about meeting really routinely with service providers like banks, law firms, accounting firms, to discuss both major aspects of corporate development that I mentioned, deal execution and M and A strategy. And we're trying to get their own opinions on best practices as well as get a sense of what their other clients were doing to manage these functions. So combining a lot of different perspectives and approaches is a great way to develop a comprehensive set of best practices. And that's how we did it. You just, you need to make sure that you mold and customize those practices to fit the specific culture and dynamics of the company you're at. There's no one size fits all, of course, but you know, you can figure out the common themes, the broader set of perspectives that you get when figuring out how to do, you know how you should be approaching the function.

You learned a lot of it firsthand, just the hard way. And then you also learned it by being collaborative and getting input from other practitioners. How did you bring those practices over to Ansys?

So I've been at ANSYS now about 2 1/2 years. We've instituted a lot of the same best practices at Ansys. There's just a willingness among everyone who touches M and A at Ansys, from the senior leadership level all the way down through the organization, all of the stakeholders that get involved with our acquisitions, to ensuring that our practices and our processes related to M and A are best in class. Ansys had done quite a large number of acquisitions in its history before I got there. The company's been around 50 years. I got there in year 47. They had done, I don't know, 15 or so deals in the prior time. So they weren't completely new to acquisitions. But the corp dev function was not, well formalized when I joined. And I think there was a recognition about that. And M and A is a clear stated part of the company's growth strategy. It's an important part of the growth strategy. And so we just had support all up and down the organization for making sure that we were doing things according to best practices. And so it was kind of an easy fit. They knew my background and I brought that same spirit of collaboration when I got to Ansys. So it wasn't a case of, hey, I got here, I have a lot of experience, we're going to do things my way. But over time in collaborating, meeting with other folks throughout the organization and just kind of explaining what I've done and why I did it that way and learning how that would fit in with the Ansys way, it's been pretty. Like I said, quick and easy fit here.

What would you say are the top three priorities when establishing a corporate development practice from scratch?

Yeah, it boils down to two things. There are three priorities that I would have on my list if I was starting the function from scratch. But it really comes down to people and processes. So first of all, I think the first priority you gotta, you got to bring deals in house to have a deal practice, right? So I think, you know, first establish both an internal and an external network of people. And when you're talking externally, firms, people at firms who are going to be critical in carrying out the function. So establishing strong contacts within the organization and among the line of business leaders and the influencers at your company. These, these are the colleagues that are closest to your business, its strengths and weaknesses, what your customers want, where the market is, where it's headed, what your competitors are doing. Not surprisingly, all of those things make those, those colleagues the best source and evaluators of deal opportunities. And then, you know, external parties are also an important source of deal opportunities and they can help provide an even broader perspective on what's happening in your market, what competitors are doing, and how macroeconomic conditions are affecting the market today and in the future, which in the current environment that we all find ourselves in is extremely important to have that broader understanding. And so you also need a strong bench of go to advisors to assist you when you get to the point where actually doing transactions. So investment banks, accounting firms, law firms. So you got to have that internal network to really get going, get traction with, you know, doing deals, identifying deals. You also still on the, on the people topic, second priority, I'd say is identifying specific individuals in your company from each of the major functional areas across the organization whose job it will be and should be to focus on strategic transactions. So specifically, these are the team members that are going to need to focus on transaction due diligence and the evaluation of a target company, help assist you with addressing issues that come up in diligence that relate to their functional area specifically, and help you to develop an integration plan that affects their functional area. As a corp dev leader, you can't know everything. You're not an expert in all areas across the organization. So you really need an extended team of people to help you in your deal work. And then lastly on the process front, so you need to develop repeatable processes and templates for each stage of the transaction lifecycle. And these should be developed again getting back to that collaboration point, they should be developed in coordination with the transaction team members and stakeholders internally. They should be tailored to your company size, business model, regulatory environment, culture, et cetera. You know, once, once you've got your processes and templates said, you've got to communicate those to an even broader set of individuals and stakeholders within the organization. You need clear, clear and constant communication. And you also have to acknowledge that, you know, there's this element of continuous improvement. So even as you get beyond the early phase of establishing a corp debt practice, you always have to be thinking about, you know, continually tweaking and improving the processes and your practices. So those are the three priorities, I'd say establishing the network, internal and external, establishing your extended transaction team who are going to be dedicated to the M and A function outside of corporate development, and then establishing your processes and your templates to actually do the work.

Okay, this is good stuff. So when we look at the internal people, and I like the view of roping in the business leaders because obviously they're going to have a view in terms of where the gaps are in the business and opportunities and so forth. What's that conversation like? Break it down for me in terms of how you would approach them and maybe outline that conversation to frame it in the right way and get them thinking about sort of what you're trying to get out of them.

Yeah, I mean, it starts with, you know, I go in with the attitude of, you know, this is about you, it's not a, it's not about me. And then that's the, that is the right attitude. How can I help achieve, help you achieve your business goals through M and A transactions or other strategic transactions. This would apply to, you know, partnerships or making investments, strategic investments in partners as well, to form a tighter bond with those companies. And it's really about getting into a dialogue of what their priorities are, what their history has been in either meeting those priorities or where they've fallen short. Getting an understanding of the reasons for both the successes and the areas where they've fallen short and then explaining to them how I can help, given that as the backdrop, given their perspective, as the backdrop, explaining to them how I can help them as a corporate development leader and through strategic transactions as a tool to help them meet their objectives.

How do you stay in touch with them? Stay on top of mind?

Yeah, I mean, a lot of it's informal and that's why you talk about building the network. Some of it is just striking up personal relationships with these, with these folks. So it's a start. Got to start somewhere, an email or phone call. But then it's like, hey, do you want to have coffee, grab a lunch? And make sure that you're doing that somewhat routinely when it comes to the business unit leads that are working in business units that, you know, given your corporate strategy, are going to be ripe, potentially ripe for deals. Setting up a regular cadence with those, with those individuals. So the informal is great, but you got to force yourself to sit, sit down and think critically and hard and make sure that both you and the business unit leads and other business leaders across the organization come to these discussions, kind of prepared to talk. And so we, I typically set up a cadence of meetings with business leaders, you know, once a quarter or once every six months. Once you get that rolling, it's, it's more or less checking in on, on where you are since last conversation, you know, so, so yeah, that's how I maintain the dialogue with, with the leaders. And they're very receptive to doing that. I mean, again, if it's framed in. I'm, I'm here and the corporate development function is here to help you and your business. There's, there's no pushback. There's, you know, a willingness. A lot of times I get a phone call from the business unit leader, hey, we haven't talked in a while. You got a half hour this week to just review what's going on in my business and you can tell me about what's happening in the M and A world. So that happens quite often as well.

You see more deals from them than your bankers?

Absolutely, absolutely. There's a lot of volume that we see from bankers, like a lot of opportunities that come across the transom from bankers. But when you think about it, there's just no way, no matter how much they study Ansys or SAP or any other company they're following, they can't know the inner workings of the company and they can't know at any moment what is of the highest strategic priority in a way that a senior business leader inside the company can know. And so we're always going to lean towards the ideas that the internal folks have because it's just typically more aligned, better aligned with what our specific priorities are at any given point in time.

That makes a lot of sense. I like the review too. Like, make it about you and what their goals are. When we look at building out the transaction team and pulling those people in, and these are typically your functional leads, how do you break down that conversation that, hey, I want you to be part of the special task force, it's top secret, can't tell anybody, and they get excited about it until they find out really what it is or what does that look. Conversation look like?

Yeah, I mean, you know, similarly, you know, there's a receptivity to it, partly because, you know, as you alluded to, I mean, it's kind of, it's, I think M and A is sexy. Right? It's, it's like, it's, it's super secretive. It's not a, it's not an everyday type function in terms of your business operations. And it's important, right? It's, it's, you know, it's important. It's more important than filling out expense reports. No disrespect to anybody who handles that as part of their day job. But, but, and so what I find is people around the company want to be part of it. The trick is really managing them and their involvement. Especially when you're working with folks who may not have a lot of deal experience. And so they don't know anything about the contours and dynamics of an M and A deal. There's issues with confidentiality, all of these sensitivities that are very specific and peculiar to M and A. You have to be careful to manage that when you're building out a broader team. But you probably have heard people refer to M and A as being a team sport. And I'm a huge sports fan, so borrowing that phrase from my particular line of work has always appealed to me, but it's absolutely spot on. And we talked a little bit about this before in our conversation here, that you just can't. The issues that come up in the context of diligence and negotiations are so broad and deep, and the corp dev professional, who typically has a role of leading the overall deal effort, can't know everything there is to know about all of those issues. So they have to work extremely closely with the internal experts covering all of the major functional areas to be able to effectively deal with all the issues that that come up. The best way to do it, in a way get buy in. The best way I think to do this is to kind of form a team like structure and environment around M and A transactions. And you build this kind of into your processes and how you interact with each other. That's made up of all the internal experts. And so even though the team members will likely report into different departments and leaders in your company, you need to set up a model where in the context of an M and A deal, you're all functioning in lockstep as one cohesive team.

Tell me about your people requirements. What skills and experience do you look for.

So well for the corp dev function? So bringing people into corporate development to be the leaders of transactions or involved in managing the transactions. I personally believe that finding someone with prior strategic transaction experience, ideally outside of a corporate setting, is key. And I think this is especially true when you're first establishing a corporate development function because you're usually starting with one to three people, right? So those people need to come in the door with a base of experience around transactions. And I'm referring to experience at firms, the types of firms I mentioned before when we were talking about your external network. So people from investment banks, law firms, accounting firms, VCs, private equity firms. Working at these firms simply gives people a very broad base of experience with the types of issues and dynamics that come up across very many different types of deals compared to what you could learn. If your experience is just working for one company, you're Just not going to see a lot of variety. You're not going to see a lot of volume if you're, if you only work in a corporate environment doing, maybe even doing strategic deals in a corporate environment. So I would look for folks with external strategic transaction experience. Yeah, I think that's key. And then if you're referring to also building out the broader team within the organization to form that, you know, the team I was alluding to earlier, that the extended team, you just need to have folks many times you're not going to have the benefit of that. You know, people in other functions having M and A experience. It depends on the extent to, you know, where they were in their careers at different companies did they do, you know, did those companies do M and A. But what's more important is that they're, you know, experts in whatever function it is that they're, you know, they're operating in. So it can't be the most junior person in these functions and I building out the broader team. I have kind of two groups that I refer to. One is the core M and A team and this refers to the segment of the transaction team that's made up of folks from of course the sponsoring business unit, your sales organization, and then legal finance, hr, tax, and IT. Those are the, the functions that are most deeply involved throughout the entire deal process from early evaluation through detailed diligence, negotiation of the terms and integration planning. That's the core team. And then the second group that I refer to is the extended M and A team members. So their role or interest in a deal relates to a narrow, typically relates to a narrower area. While that, while maybe it's important for post deal budgeting or planning, it doesn't have that much of an impact on the material risk of a deal or the, or the specific transaction terms. So those are the two groups internally and I'm trying to, you know, and that, that might be someone from Facilities, for example, your real estate function. So those are the, the functions that I try to, you know, that, that I think, I try to. That, that I think are absolutely required in building out, in building out your M and A transaction team.

Gotcha. Well, when you're looking at those folks that you're pulling in from the business, like what, what sticks out? I mean, are you just defaulting to whoever the functional head is and pulling them in or is there something beyond that that you're looking for?

Yeah, I, so I start with the, I would start with the functional lead, but it's typically not them because they Also have to have the bandwidth. You know, these people that are going to be of, part, part of the transaction team, they have to have the bandwidth to, you know, to handle the day to day of the deal. Like when, when you're actually in the throes of a deal, most of the time your functional lead, like maybe your head of hr, they, they have, you know, they're, they're so busy right with, with HR related functions, with their day job of managing HR that they, they just can't be involved at the pace they need to be involved in, at the level of depth that they need to be involved in the course of a transaction. And so I meet with them first and I explain that dynamic and say, okay, who from your team do you think? Either based on past experience or you know, seniority or you know, whatever what, you know, we can talk about different features that make one person or another better, better suited for the role. But you know, usually it's a dialogue with the leader as to who they might nominate from their team to be part of the MA function. And that's still a struggle because again, those people have a day job. Typically when you're first starting an M and A practice, you're tapping into the whole set of people on your team that you're tapping into all have day jobs. Very few of them are going to be dedicated to just the M and A function. Now over time and as you become more of a serial acquirer, which is usually the intent of why you would set up a corp dev function in the first place, then, you know, my recommendation, my best practice point for the other functional areas is to dedicate some resource just to ma, you know, in their, in their function. But you're not there on day one. You usually don't have the deal work to justify it on day one. And so, you know, you're dealing with that challenge of, you know, people having day jobs and moonlighting in M and A, but, but you know, it's manageable. It's manageable and people usually, you know, get the idea when they're falling behind on their deliverables, you know, for an M and A function. And the board and senior management are the ones that ultimately, you know, need to get reported to on, on deals. They usually, you know, get the picture and eventually prioritize appropriately.

Yeah, I think what you're describing is pretty accurate. What I've seen working with some of our own clients where, where they start doing deals and it's really a lot of people's little side gig is to get involved and put this deal through. But then as they increase that volume, it becomes this threshold or this point where they decide to develop a dedicated function for M and A.

Yeah, it's funny, not. Sorry to interrupt you. I mean, just a quick word story at SAP, the HR function. So the team that focused on HR related due diligence and then HR integration on the back end ultimately outpaced from a size perspective, the deal execution team. By the time I left SAP, there were more people doing HR diligence and integration than there were doing the core deal execution function. And that just speaks to how important that HR role is not only for SAP, it should be for every acquirer. You got to get that right. And the to do items stack up significantly the more deals you do. Right, because integrations have a long tail. So that's part of the reason why that happened. But just case in point, you know, we went from when first started at SAP and I mentioned the early days of building out the function, there was no one dedicated on the HR front in those days. We were getting moonlighters from the HR organization to a point where they had more people doing that function than we did actually managing the deals.

So, so going to this company that decides to like finally stand up a corporate development function and they want to make that first hire, that first lead, they're looking for their Russ. Now, I don't want to like flatter too many of the attorneys listening to this, but I've noticed the guys that have a legal M and A background are pretty sharp. I mean, they tend to do pretty well. I know James Loftus over at Square has a similar background among some other corp dev leaders.

What.

What do you think? You know, and maybe that is sort of helpful and be interested to hear your perspective on that, how that benefited. You get kind of sort of moving in from being the attorney to, to heading a corp dev function. But maybe what would be the ideal profile? Because I personally don't think it's a banker.

I gotta be careful here. I got a lot of good banking friends and, and friends in the M and A world that are not M and A attorney. You know, I'll just say this about having a background as an M and A attorney. You do have to have a very broad understanding of every aspect of a deal. Obviously the legal right, that's the default. You need to understand the legal risks, regulatory risks associated with a target company, their business and your client's own business. And obviously the legal T's and C's in the documentation of A deal, that's a given, right? That's why you're hired in the first place. But in order to, you know, evaluate and do that part of your job effectively, you also have to really understand the business deal and what's most important to the client from a business perspective. And you need to understand the numbers, you know, you need to understand the target's financial statements and the dynamics that play in the target financials and the financial plan that the acquirer has going forward. So what are the financial metrics and goals you're trying to achieve and make sure that you're not doing anything from a deal terms perspective that's at odds with those objectives. And then you need to understand kind of the go forward business model how the company, the combined company is going to operate. So I'm referring to integration aspect. So you really need to have a broad view of the entire transaction and especially if you're a business minded attorney, which I'll give myself a bit of a pat on the back for. I think that's why clients like me. When I was doing this, I was a business major in undergraduate school. So I had that kind of background coming into to my career as an attorney. And so I think it's that broad perspective that makes M and A attorneys well suited for the role of corporate development. If and when they make that transition, that's one thing. And you know, I can't speak, I was never a banker, so I don't, I can't. Do you know that, you know, the extent to which they have a broad perspective on things? I just know bankers don't like dealing with the T's and C's piece, for example, they don't want to get deep into the contractual terms of the deal.

Now I'm not, I'm not trying to knock bankers, it just seemingly seems to me it tends to be the default is that when you stand up a corp def function you sort of gravitate towards hiring, you know, a banker. And the thing I notice is like there's this sort of lack of understanding of the integration process and how it works. But then there's folks that learn it, you know what I mean, and get through it. But I think that's sort of the challenge is when they're used to doing these deal processes at volume, it's very different when you actually have to own, take ownership of everything that happens after. Which is why I'm curious what other types of personalities and I think at the end of the day we probably both agree it takes the Combination of different skill sets to really have that core team together that can carry out M and A.

Well, yeah, I mean, you know, not to get off topic on bankers, I'll say, you know, I think the most effective bankers and the bankers that I, you know, I've been most impressed with, that I've come in contact with are ones that have some business or operational experience prior to entering the banking world. And I think that kind of addresses the point you're raising about, you know, them not having good understanding about how things work out and integration. I mean if they've come from a business themselves, if they've ever had a hand in or been, you know, in charge of running a business, they have a much better handle on that. And what's important then, you know, in their banking role for that business, you know, going forward, you know, and so what, what buyers care about, for example. So I, you know, I think that helps that experience base would help them in their banking role.

Yeah, I think I got a really good point. There is which is a little bit harder to find. But having a banker that has an aptitude for the business. Who should corp dev function report to?

Yeah, I, you know, I, this is tricky because I know that many times corp dev Functions report into CFOs at many companies and I think this structure can work well if your cfo, your particular CFO is very strategic minded, business focused and has some experience in doing transactions, evaluating transactions and integrating acquired companies. But I personally think the best model is having the corp dev function report into the CEO. I feel like because strategic transactions, and this again includes M and A partnerships, investments, they're so fundamentally tied to a company's overall overall corp dev strategy, overall corporate strategy, I should say, and growth objectives. The person who is most responsible for that in the company for driving overall corporate strategy is the CEO. That's why I think that's the best model. I think that if you don't have that model, sometimes a CEO depends on your company and how big it is. And maybe it's not feasible to have your corp dev lead reporting into your CEO at a given company, but there's got be some connection there. Even if it's not a direct reporting line, there's got to be frequent interaction, frequent audience with the CEO in terms of what it is you're trying to achieve, what you're looking at in the corp dev function.

Yeah, it's interesting how that varies company to company because you've seen so many different structures on who oversees the corporate development function. What do you think the overall approval process should look like, you know, when you wake up and decide to do a $10 billion deal, is the CEO just sign off on it and you go for it?

No, especially, especially not, you know, the really large ones. I, you know, it's probably not one size fits all here. I'll tell you what I, what I've instituted. What I think is a best practice generically is kind of a, a two stage approval process or for M and A. Let's focus squarely here on M and A and that's at the LOI stage, letter of intent stage or term sheet stage, when you're really deciding, okay, are we going to spend money on external advisors and a lot of internal resource time and effort on detailed due diligence with this target company and what's the headline price, you know, of, of doing this deal, which is really the punchline of a term sheet? You know, I think you need approval at that stage. Even though the term sheet's non binding. Again, you're, you're, it triggers a lot of expenditure, time, effort and what should be a lot of commitment on, on the part of both parties. And so you know, what that approval looks like, whether it's, you know, just your C level people, whether it's full board. I think that's where you get into, you know, how big it is. And you should probably set, I think it's a good idea to set materiality thresholds where different levels of approval are required. So that's one, one stage of approval. The second one is at the final, the final phase. So now you've done all your detailed due diligence, you've put together at least a high level integration plan. You've learned everything there is to learn from a materiality perspective about the company. You've got all your detailed transaction terms negotiated. At that point you should report on all those things, give an overview on all those things to, you know, the set of approvers at that stage, educate them on everything you've learned, you found what your plan is, what your financial objectives are and get, get approval at that, at that stage. And again, what that approval looks like in terms of who gives it should depend on size of the transaction, in my view. So if you're talking at a public company, there are going to be deals of a certain smaller size and what that looks like depends on a lot of things including risk tolerance and governance, culture and everything else. But if you're a large public company, intuitively there are deals that aren't material enough to Convene your board of directors to decide upon some, what, I don't know, maybe that's $10 million deal or something where you know, say your CEO, CFO, general counsel, you know, some small set of most senior executives should be able to approve and then there'll be larger deals where, you know, you've got to bring the board in and get their approval. But the important point is these, you know, the two stages of approval at the two different phases of the deal process. I think that's a good model and that's, that's one that, you know, I, I've, I've lived by in my career.

Gotcha. So basically sort of decide what's meaningful enough that it's going to need to get that broader approval with the board and really put that in there in terms of what that threshold is and then sort of anything below that, it's pretty much handled with that, that first tier between yourself and the CEO, if that's structured that way, to report to the CEO. That sound right?

Yeah, documenting those. Yeah, yeah, yeah. And documenting those thresholds are important. You know, you want to, you want everyone that touches a deal across all the organizations to understand, you know, what the deal approval process looks like and who the audience is going to be at the finish line of each stage of approval, both the term sheet and the final phase, you know, that, that could, because that informs, you know, what the presentation looks like. A board presentation looks very different and should than a presentation to a smaller subset of, you know, executives at your company. So it's important that that's well, community, well documented and communicated to all the contributors in a deal.

What's the difference between those two presentations?

So yeah, I think that the board level one is probably high level, more high level than the internal only one. Yeah, because the internal only you're talking to C level executives who ultimately have responsibility for managing, you know, the day to day aspects of the business and making sure that's successful. So you get down to a level of nitty grittiness, let's say for your senior executives that just, you know, isn't important enough to raise at the board level. So I'll give you just a quick example. The C level folks increasingly want to understand exactly how you're going to do it. Integration. When are you moving an organization over to your networks? What security measures are you putting in place? Because typically a big company acquiring a smaller, less sophisticated company from an IT perspective. So what security measures are you putting in place on that target company's IT infrastructure? And when. Whereas you know the board not to say that they don't care and they don't think IT security is important. It's just not something you talk about in a board meeting unless you found an IT security risk that you need to make them aware of. But generally they care more about. Okay, what's the market opportunity for this transaction? Why are you doing this? What's our sales model going to be? How are investors going to view this deal? Are there any add on acquisitions that we might need to do? Like just higher level business points are the ones that, you know, you should focus on for the board presentation relative to the internal only.

Gotcha. So fit the presentation to the lens of the viewer.

That's right.

What are the steps to develop a formal M and A process?

Yeah, I mean there are a lot of detailed steps that you take when setting this up. And I've been through this a couple of times and my list is got an Excel spreadsheet that goes down deep into the rows, but there's a couple that I would, that I'd mentioned from the highest level. I think the very first step, and I've done this recently in that I've only been with Ansys two and a half years, the first step is to do your homework on your own company before you actually start putting your formal M and A process down on paper. So you need to have a good handle on things like company culture, who the senior leaders are within the organization that are going to play major roles in deals, and what are the existing policies, processes, constraints that may already exist at your company that are going to shape or at least inform your M and A processes. So that's the first step. I think once you have a solid enough understanding of the environment within which your MA function is going to operate, then you can start to actually define the processes for each major stage of the transaction life cycle. And we talked about those, you know, opportunity sourcing and early evaluation, putting a term sheet in place, conducting detailed due diligence, negotiating final terms, the final deal approval, and then planning and executing your integration processes for all of those steps or phases of the life cycle. You need to start sketching those out. And again, we've talked about this a couple of times. When building out those processes, you need to be consulting, collaborating with colleagues that represent the major stakeholder functions at your company. They're going to help you avoid potential pitfalls, misunderstandings, areas of internal controversy that that might be, that might come out of your processes and involving all these people. It's Critically important to ultimately getting the buy in across the organization. At the end of the day, you know you can have best laid plans if people don't, don't buy into them. That don't buy into your processes aren't going to follow them, don't understand why they exist. You're not going to get anywhere. And then as you define your processes and this could be done either piecemeal or as categories of processes are set, you need to start socializing them with the internal stakeholders before new deal opportunities actually arise and you actually start putting them into practice if you can, if you have that luxury. Sometimes you just have to apply them on the fly in the context of the next deal when it hits. But either way, again, clear and consistent communication about the new processes and then kind of last step here as, as it relates to processes is continuing to refine and improve your processes as you're applying them in practice. So you'll be identifying gaps, flaws when you're actually having them play out in the context of a particular deal. And you should be documenting those, doing postmortems after your deal is done with your team members, with your M and A transaction team members and, and discuss, okay, what went well, what didn't. How do we, how do we change our processes to do a better job next time? So those are some of the key steps when you're, when you're building all this stuff out.

No, those are really great points, Russ. So a couple of things I want to clarify. One is you, you mentioned process and laying out all these steps. And my experience, number one thing on, on our deal room website is people come in and they constantly download templates. They always want a due diligence checklist. So I want to get a little bit of a elaborate, elaborate, if you wouldn't mind elaborating what amount of process that you can sort of set in steps. And then there's sort of the uniqueness of every deal that you're working on, which you have a lot of unknowns. You know, we model it out. And then even going from loi and doing our conformatory diligence, we're constantly learning about the company, identifying risks and other opportunities. And then even after we close, we keep getting more information. I guess if you can maybe distinguish between here's a value of templating things. And then you mentioned too enabling your team to be collaborative, to really pick up the other side of it. Maybe if you can sort of distinguish the two. Because I feel like there's this view outside and maybe more so with companies that are new to M and A, where they think they can literally get a list and just check it down to complete a whole M and A process, and I don't believe that's true. So I. You're the source of truth.

Well, that would be the, that would be, you know, that's the panacea. Right. But you can never get to, you'll never get to that. And that happens in integration too, I think a common pitfall. And not to move away from the question you asked, which I'll get to, but a common pitfall in integration is getting locked into an integration checklist, right? And you come into a particular deal or a particular post deal and the target has a lot, is going to have a lot of uniqueness about it. Everyone does. And so applying your standard checklist is not going to work. And what that causes is a lot of frustration at the target company. I mean, the goal, obviously the goal in setting up well defined processes and templates is, is you want to be as efficient and nimble as possible throughout the entire process. Right. You don't want to miss any important steps or issues and you also, you don't want to be reinventing the wheel every time out. But you have to be flexible. The processes and the templates, they form a framework that are generally applicable to almost every deal. But you have to acknowledge everybody on the team does. And this is part of the education that a corporate development professional who's done a lot of deals in their career, especially relative to the extended team members, they have to educate the team on this. There is no one size fits all and so they need to remain flexible. And every deal, we do this in all of our deals, with all the templates we use, as we're learning information about a company, we pull out those templates and before they go across to, you know, someone at the other side of the, on the other side of the transaction, we go through the entire template and, and modify it to fit the, the particular situation. And you don't know everything. You won't know everything even at the end of the deal process. But typically you know enough at the outset about, about the company, its business, where it operates, where you can modify things in a way that makes more sense and avoids, you know, a lot of useless work frustration, explanation that need to happen, you know, with the target company. So, for example, you know, all of our templates, you know, at Ansys, you know, we're a US company, US public company, all of our templates around questions, due diligence requests and questions are obviously U.S. focused. Right. Well, if we're talking to a company that's outside the U.S. we don't leave those in there. When we send out our checklist to the, you know, on our request list to the target company, we'll talk with external experts that we may have already engaged in that geography or maybe somebody internally who knows that geography or maybe our deal team just from experience knows a given geography. We'll modify the template to fit that geography. Not all our US centric stuff that we have in our templates. Right. So it goes without, I think it goes without saying, but you're right, a lot of people just want to have that checklist that they can pull off the shelf, use in every situation. It's perfect. They don't have to put any brain power into it. That's just not realistic.

Right. So it's a starting point. It's a starting point, at least get you in the direction, but it still requires a lot of that sort of alignment with your team. The agility to keep moving on the new information that you continually process.

Yeah, yeah. And the team, as you build, I mean, as you build M and A expertise acumen, experience across the team, there is a greater and greater recognition over time about the need to be flexible. And not just in the process and the templates, but also in how you react to what you find out about a target and how you plan for integration, for example. So, you know, another thing I've noticed over the course of my career and working with, you know, acquirers is when a company is first acting as a serial acquirer, they tend to come in with a perspective of, you know, everything needs to be done our way post deal. And over time, when you see those situations play out, you realize that's there are more than one way to skin a cat, even for large, large companies. And sometimes you choke off the value prop of the acquired company when you take that approach. And so I think team members who do more and more ma get involved in more and more M and A and integration projects. They realize that. And so that flexibility becomes baked in, in everything that you're doing around a deal. Not just in the templates and the processes, but also in the, in your actual business planning and execution.

Be agile.

Yep.

So one of the things I really liked that you brought up was those postmortem sort of lesson learned around the deal. I'm, I'm curious partly because I even struggle with this myself and I know some other companies I've talked to have Similar it's, you do these things and you start gathering these lessons learned and you start building like a little knowledge bank out of it. But how do you get people to actually reference that thing and sort of build it or transfer that knowledge on a continuous basis so there's some actual value delivered out of it?

Yeah, it is easier when your team is smaller. It gets harder to do as your team. And when I'm referring to team here, I'm talking about the entire transaction team, not just the corp dev team because all these teams have their own kind of sub processes outside of the corp dev processes for deals as, as those teams add more people to them and so the overall team gets larger, they start working more and more in silos and you got to be, you got to protect against that. That's not happening at Ansys but you know, I've seen that type of thing happen and so, but when the team is small, that accountability, that follow up that happens, you know, among the, you know, 10 or so people, you know, when you're first starting out is very organic. It happens naturally. There's again a lot of accountability and you actually go in at when you do the postmortem and identify, you know, things that, that can be improved. You actually, your next step is to go to your processes and your templates and make the change to address that, that, that issue and then go back to the team and say, hey, I've changed the process in this way or I'm suggesting that we change the process in this way to identify the issue. What do you guys think? So that that happens, that's what should happen and that happens more readily when the team is smaller. It's a challenge to maintain that discipline as you're, you know, as your transaction team grows. But that's how you do it.

Yeah, definitely. A lot of big company issues as those teams grow are sort of unique on their, their own ways. You know, we talked a lot about, we talked a lot about pulling these people in the business as you do these M and A deals. How do you get them up to speed on M and A and what their role is?

You know, I, as I think about it, it really just happens in, in discussions in much the same way that I talked about building out the internal network and I was talking more there about networking with the internal business unit leads and other senior business leaders that are going to help you source deals. That same type of approach works well with the functional contacts that are going to be involved in ma so both informally and formally setting up dialogues with them to again explain what you know about deals, but also making sure that, you know, you're doing the, you know, what's your, what do you think your role is in M and A? What do you think your role is in the integration process around an M and A deal as well? And what's worked well in the past? If you've done M and A before here, before you had a more formal process and practice around it and what hasn't worked well and how can we, and how can I help you? How can we build a process that you think works for your function? And then again turning to, you know, turning that around and say, well, let me tell you what I think works for your function. I don't work in your function. I'm not a tax person or I'm not an accountant, but I've done this for a long time and this is what I've seen. And this with regard to your function, this is what I think works well. And this is the process as it relates to something you'll be touching in M and A. And that's kind of how the dialogue is. And there's always got to be a reason for everything. Every process, every practice that you have, you got to back it up with the reason for it. What you're trying to avoid, what you're trying to accomplish. And a lot of times that's not apparent to folks in these functions that have a smaller piece of, of a deal. They're coming at it from the perspective of their particular function. And they may not be thinking about a codependency with another function or another aspect of the business. And just educating them on that kind of helps bring them on board as to what you're trying to achieve and why you're setting up processes or practices in the way you are.

Diligence requires out of the box thinking to really do it right and do it well. And the thing I've noticed with companies that are relatively new in their M and A function, they sort of pull people in and here's a template and next thing you know, you have these different functional leads working in silos and it's more of a checkbox activity for them to go down a list and look for the immediate doomsday tomorrow type of risks. But then we contrast that with, with more of a mature team. And usually I see them in the tech companies where there's a much bigger emphasis on collaboration and it's more about connecting the dots and getting those functional leads to look at the deal and Find the underlying risk. How do you get company sort of A, to work more like company B?

It's a process. It's a process. I mean, again, it's. Is very much, you know, what we just talked about. It's an education process. It's a, you know, explaining to them why what the right approach is and why it should be that way. And it's a lot easier. I found in my career that that has gotten a lot easier the longer I've been doing it. Right. So I can speak to these things with a degree of credibility and experience that makes that conversation easier. But ultimately, there's going to be this element of, you know, just having it play out and what I've done where, you know, you don't have. You're not kind of where you want to be in terms of changing everyone's perspective on the, on the team. You pick up when you're. Before you actually get into the throes of a deal, before you actually working on a deal. Then what I try to do is pick it up on the teaching moments in the course of the deal and have a dialogue, just an open, transparent dialogue with team members saying, look, you see, I got a call today from the CEO and he said he's got a million things that we're asking him to do from a diligence perspective. And he said he got a call from you hounding him about some liability that's a $10,000 liability in the context of this $100 million deal. I'm just making all this up, right? Like, you know, you see why that's not. That's not a good use of his time. And frankly, it's not a. It's not a make or break issue for this deal, which is what we should all be focused on here. So let's ratchet this back, put it on our list. When we get farther down the process or perhaps even the integration, we'll figure out more about this $10,000 liability. But, you know, let it right now, this is not. This can't be something that we're spending time chasing and having the CEO spend time like those types of conversations. That's how you educate. That, frankly, is part of what needs to happen. But it's a process, so educate.

Get that level of expectation there. It sounds like communication is the key driver to getting everybody aligned and working together and enabling them to really talk to each other and give this holistic view of the deal put together.

Absolutely. I mean that, you know, you. Whatever aspect of the deal that you're talking about like the word communication is always somewhere in the discussion. It's, it's critical, it's absolutely critical to driving everything you're trying to accomplish in, you know, an M and a deal. And that's good communication with all of the stakeholders on your side of the table, with your external advisors as well with the other side. Being open, transparent and communicative is just, I think that's a major key to success.

Do you have any hacks for that? Like what have you done that worked really well to enhance communication? So weekly wise words from Russ newsletter that goes out.

No, no. I mean, I don't know. You know, obviously you always have your normal cadence of, of calls that you, you should be setting up in the context of a deal, a specific deal, a project. And that's both, you know, on, on your side of the table as well as, you know, set times with the other side. But encouraging ad hoc communication and just, you know, for me, a lot of it's a personal approach. I wish I could say there's some magic to it. I mean, I like that think of myself as someone who is approachable. I think I am and I tell my colleagues that. But I think, you know, just the way I conduct myself, they see that. And so people are not afraid to pick up the phone and call me, text me, ping me at any point on, you know, I'm a work from home employee and the good and bad of that is my office. I'm in my office 247 and people contact me 24 7. But frankly I like that. And that's the kind of environment that I try to establish with my colleagues in the context of the deal. I want to be connected in real time. And it is more of a challenge when you're a remote employee to do that. And we're all now struggling with that. And people who show up to an office every day are now finding the challenge of doing that. But I think part of it is just establishing that atmosphere of, you know, constant communication and welcoming that.

So your, your hack to communication is not being an asshole that enables you to be more approachable by your team members.

Well, yeah, yeah.

Hey, some. There's a lot of people that could take this point. It's a really important one.

Yeah, yeah. No, it's a good quality to have when in this line of work. For sure.

Yeah. Especially in this time right now I think it's a bigger thing to emphasize and focus on. How do you measure success of a post merger integration?

I think any serial acquirer Will over time develop long lists of. This is an area that I see, it's kind of rife with checklists, checking the box on did we do this and did we do that? And that is important and may be important. There's a lot of to do items in any post merger integration. But when you boil it down, I believe the best way to assess it, success of an integration is monitoring two categories of metrics. Let's say one is the financial targets or objectives for the transaction. So for example, revenue, bookings, you know, operating margins, expense budget, whatever, you know, whatever is important to your particular company. That will vary by company and industry. But your main financial targets, looking at those. And the second category is employee health. So that's mainly retention but also employee satisfaction. If you're getting those things right, it's a success. Because all the other more detailed to do items, goals, objectives in a, in an integration, they all come back to those two areas. If you ask me me there's a lot of noise that can creep into an integration process and project, particularly around smaller deals. And there's a lot of details or isolated incidents where things don't go as planned or you discover something post closing that you didn't know before, maybe you know, something wasn't adequately planned for. And oftentimes people who are very close to these things say, oh, this was a disaster. This integration was a disaster. Well, I would say that in the end, if you're hitting your targets and the employees are happy, then your board members, your senior management, and frankly the vast majority of the employees of both companies are going to view that as a successful integration.

That's interesting. So really define the bottom line, value drivers of the deal and make sure people are happy. Sort of the determinant of success.

Yeah, I mean there are other things too, like subcategories of objective post merger integration. Objectives might be like in tech, might be a product roadmap. So you know, did you successfully integrate the target company's technology with your company's technology? But what I'd say is if the answer to that is no, that didn't go well, then you're not going to have met your financial targets. So it all comes back like there are a lot of other more specific things you might look to as a measure of success. But ultimately to me, they all come back to those two broad categories. Are you hitting your financial goals and are the employees happy?

Got it. What are some of the guiding principles to consider throughout the deal?

Some of the most important ones to me, and they're ones that I remind myself of and talk about routinely in every single deal. I'd say the first is stay focused on the big picture. So how does your deal serve the overall corporate strategy and objectives? And what's the primary rationale for acquiring this particular company? This is what you need to keep in mind throughout the entire deal process. It helps you identify the issues and the concerns that are going to have the most material impact on what you're trying to achieve in the deal and to help you develop the best plan for meeting your post deal objectives. And so kind of as a corollary, I'll say you could say it a different way. It helps you prevent wasting time, too much time and effort on immaterial points that can be easily addressed at a later time. So stay focused on big picture. Another guiding principle relates to deal negotiation. So for me, a good business deal is one where both sides feel like they got a good business deal right? Like trying to find a middle ground and compromises on issues everywhere you can, particularly on issues that you know are the highest importance of the highest importance to the other side. That's what you should, that's what you should strive to do. I mean there are going to be some issues, some positions you have to take. They're just deal killers for you and your organization and you have to say no. But you know, those will be a small subset of the issues that come up in the negotiation. And most of the time the people on the other side of the table from you in a negotiation, they're going to be on your team when the deal is completed. Right? The founders, we see this a lot in Ansys space. We're dealing a lot of founder led target companies. And so many times their first impression of what is going to be their new company and their new colleagues are set in the deal process, which includes the negotiations. And if they don't feel like they've been treated fairly in the deal process, it's going to affect morale, motivation and ultimately their retention post deal. I think the point winning approach to negotiations that first of all, even in the course of the negotiations, forget about the impact later, it just usually results in a painful, very adversarial deal process. It doesn't foster trust and transparency and, and by and large, thankfully, I think those types of people that have that approach is point winning. I count up them, I got to win at every point that I possibly can. I see less and less of that. I think those types of people are dinosaurs. But you know, it's important to remind yourself. Look, what am I trying to get out of this particular point? And what does the other side care about? Can we make a compromise that achieves both objectives on the, you know, on this particular point? Then finally, I'd say the last major guiding principle relates to the integration piece, which is we borrow this phrase from the medical profession. We use it in all of our integration processes. It's do no harm. So the idea is to make sure that you're not changing aspects of the target's business or make changes too abruptly that are going to significantly affect what ultimately made the company that you're trying to acquire successful in the first place. Like, don't mess up the company's secret sauce, which is probably the reason why you look to acquire them in the first place. You know, you can apply that principle also to, you know, with respect to their pipeline, their sales pipeline, and their sales model. Like, there might be something you're going to need to ultimately migrate some of these processes of the acquired company over to yours, but you shouldn't do it in a way that's going to choke out their revenue stream. Right. That's not their best interest. Certainly not in your best interest if you're trying to achieve the value that you paid for.

These are some really good guiding principles. Stay focused on the big picture. Think of both sides of the table when negotiating and do no harm. How does deal strategy affect company alignment?

Yeah, I would think of this one. Let me turn this around a little bit. To me, deal strategy has got to be an extension of the overall company strategy. So I think we discussed this a little earlier in the conversation. I think it's essential to understand when you're developing your deal strategy, both your general M and A strategy and then your strategy for a specific deal is, you know, is, does this meet the overall corporate company strategy? M and A is just a tool to achieving that broader strategy. It's ultimately critical to achieving the deal success because your deal can and will be judged and should be judged in the context of your company's strategic objectives and goals. And so to answer your question, maybe if your deal strategy is well aligned with your corporate strategy, then alignment between your deal strategy and the other aspects of your business and the groups within your company should be easy. It should take care of itself. And on the flip side, if your deal strategy is mismatched with your corporate strategy, there are going to be challenges and impediments to getting that deal done. And maybe in a generic sense, that particular deal shouldn't get done.

Got it. So There should be alignment just in general between the company's overall strategy with the specific deal strategy to make sure we get the best outcome.

Yeah, I think that's the starting point. I think that's a starting point. When you're developing the M and A strategy. It's got to be extremely. Well, it's got to be aligned, not extremely like it just period. It has to be aligned with the overall corporate strategy. Cool.

Hey Russ, I'm probably going to skip some of this integration stuff because we got plenty of content already.

I just want to make sure you got whatever you want to.

That's a whole nother interview where we talk about lining corp dev and integration.

Yeah, we talked about some that I tried to you as you probably noticed, you know, integration to me is, and I think it comes from, you might recall from our prior discussion that I led the integration function at SAP for a couple of years and that experience was invaluable to me. And so now these integration aspects are kind of injected throughout the deal process for me and, and you know, throughout the, like the, the due diligence process, for example, like integration learning and planning is happening at those stages. And I didn't do as well a job at that before. I, you know, had some direct involvement in integration. But I, you know, I saw the light and I think it's incredibly important. So I tried to weave that in a lot of what we were talking about in the, you know, maybe the core. What you think of as a core M and a function.

Well, and that's why I think this interview complements the one I recently did with Dan Mengy, who's the ex Cisco guy that stood up the integration sort of function at Xilinx. So and that's why I'm curious even putting you two together on some kind of just like a small little sort of fireside or panel type of discussion to talk about that. So that way you got both views coming at it. And you obviously had integration experience too, but that's kind of his more sort of hold background to enter. Well, let me wrap up. Let me ask you this. What's the craziest thing you've seen in M and a?

Well, in 20 years of doing M and A, I've come across a lot of things that I would consider to be pretty crazy and those include discoveries and diligence and crazy requests or arguments that are being made in the course of negotiations. It might be tricky for me to describe something without giving away some confidentiality or some embarrassing information about one of my Employers. But I do have maybe a couple of examples of just some crazy things, one that happened in negotiation. So this was, I'll just say this goes back to my days as an M and A attorney representing a retail chain. I won't say what particular business that they were in, but it was a retail business. And they had a chain of about 12 to 15 stores up and down beach towns in the northeast. And the seller insisted at the end of the negotiations as a deal point, like a make or break deal deal point. If we didn't agree to it, my client didn't agree to it, that the deal was off for a 50% discount for all of his family members forever. And this was a multimillion dollar deal. He's going to stuff, you know, multimillions into his pocket if this deal closes and he made a make or break deal. I wanted, you know, I want 50% discount for, for all of my family members who eventually agreed to name the family members. But it was like this was going back to the early 2000, so pre smartphone era where, you know, you just didn't have the technology you do today. So we had some like really funny conversations between the client and me about how you'd even administer this, you know, across what ended up being, I don't know, eight or 10 family members in the 10 to 12 different stores. Like he didn't have like computerized. There was no database you could look to, to see who was in this guy's family. It's just a crazy thing. And then to me, I couldn't believe I was still very early in my career and it was just shocking to me that someone would walk away from again, you know, tens of millions of dollars, over 50% discount for retail shopping. The other one maybe a little bit more gravity to it. I was involved in a fairly large deal where we were just two days away from signing a definitive agreement and a competitor filed a fairly big ticket IP lawsuit against the target company. And it came out of left field and the claim was probably questionable, but just given the gravity of the risk, the potential risk, the fact that the lawsuit was filed like killed the deal. We hadn't, we didn't have any evidence that the competitor knew about the deal, wasn't a competitive deal process or anything like that. We didn't know about any leaks. So the timing may have just been coincidental, but it was, you know, just completely unbelievable. That literally on the, on the, you know, on the precipice of, of signing the deal or we put a lot of time effort into it. It fell apart for that something came out of left field. So, you know, you see a lot of things, a lot of crazy things. At the end of the day, this is just like everything else, right? People behind these deals. And so when you've got the human element, you know, you see and hear a lot of crazy, crazy things. Which is what makes it fun, is why I've been doing it for 20 years and still loving it.

You know, I feel like I could relate with the first one. I would negotiate a keep my employee discount forever.

Yeah.

Hey Russ, thanks so much for your time. I really enjoyed our conversation.

Ketone, it's been a pleasure.

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