Buying Public Companies

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Patel, senior CEO and founder of M&A Science.

Joining me today is Pranjal Gambir and Doretta Mistras. Both are Managing Directors at Citi's Global.

Investment Banking with a focus on healthcare.

Today we're going to talk about the.

Ins and outs of buying a publicly traded company. How are you both doing today?

Great. Thank you for having us.

Happy to be here.

Can we kick things off with a little bit about each of your backgrounds?

I have been with Citi for over 16 years. I've done a wide variety of roles at the place, worked in India and in the us. Now the last eight years have been in New York focused on medical technology companies and covering them. I'm glad to be here and thank you for having us today.

And I'm Doretta Mistress. I've been in investment banking for almost 20 years. It's hard to believe I'm a career banker. I actually started my career as an analyst in Goldman's Healthcare Group where I spent about 15 years and I left a little over two years ago. Join Citi's Healthcare M and A practice and I basically spend my time advising all types of healthcare clients, partnering with people to really advise them on all aspects of M and A, from sell sides to buy sides to structured deals. We have the Opportunity to work with a variety of different sub industries as well as different products. Great to be here.

There's a whole interview there just to unpack of going from analyst to managing director through all the ranks of investment banking. But let's jump into buying a publicly traded company. Is it technically easier to buy a public company than a private company? I asked that because we look at the news and there's a lot of buzz about Elon Musk is trying to do with Twitter in some ways. When you look at the timelines and how fast things are moving, is there a case around that? Is it actually easier to buy a publicly traded company?

I'm going to use a favorite banker catchphrase, which is it depends, but I will try and answer it. There are a lot of aspects of it that make it somewhat simpler. So with the public company, there's a lot of information already out there. Companies are required to disclose things through their filings. They're required to have a lot of reps and risks out there because they have shareholders and therefore they're. There's a certain level of scrutiny and disclosure that exists in public companies that you don't have in private companies. What that means is there's often a lot more access to information. The actual negotiating the contract can in some ways be a little bit easier because you don't necessarily need to have the same level of diligence in the contract. And there's. There's a public valuation out there as well. I think the fastest M and A deal I've ever worked on, we've been able from soup to nuts to engage with a target, agree upon a price and announce something within two weeks. And so that is not normal, but that is in kind of the realm of possibility. But on the other hand, you do have to answer to shareholders because of that, you have fiduciary duties and other representatives and people you need to account for. That could. Could add some complexity as it relates to options that a private company doesn't necessarily need to have.

Would you say that because as a public company you're required to have so much disclosure that there is a lot more information out there. You're essentially able to just do the diligence ahead of time at your own leisure and then really come out with a lot of this preparation offer things ready to go. That's why you're able to move quickly in terms of the timeline?

Yeah, absolutely. It also enables you to have a little bit more confidence in what you're putting forth. I know we can talk about It a little bit later, but you mentioned Elon Musk, that the fact that there was so much public information out there on Twitter is what enabled him to have confidence to be actually able to go public with an offer. Even though he wasn't given private Twitter information before he put forth that public offer. A lot of it was done with what was available in the public domain.

And then you got to make sure you're complying with your requirements of how you handle the shareholders and give them proper information. Can we talk through the significant differences between public and private?

Some of this is going to sound like Captain Obvious, but the first one is really valuation, which is it's observable for a public company, trades every day. There's a benchmark and threshold out there which is not there for private companies because private companies basically get valued at time of fundraising, which is periodic. Second, as we've talked about transparency of information, Brett, I talked about it for a great degree, just gives you a lot more information. There's also this fiduciary responsibility to report any material event to investors, which I think is pretty important as a public company. If you're looking at a public company, they have to report anything which could be significant. Last but not the least, I think it's really around the independent views you get on public companies. You've got sell side research analysts covering these public companies which give you outlook, which give you their valuation, their outlook on these companies and that's what's a price target out there on those companies as well. And lastly is just rules on governance and securities law, which gives you more confidence when you're looking at buying a public company. Just to direct his point, you can back your bid knowing what information is out there with some confirmatory due diligence we completed.

The only other thing I would add is when you talk to public companies and they say, hey, are you open to be acquired? The standard comment that you hear is listen, we are a public company, we answer to our shareholders and so we have to take all proposals seriously. And they often say that regardless if they want to be acquired or if there's no chance they want to be acquired. In terms of a private company, your shareholders are often the of owners, whether it's kind of more institutional owners or kind of founders, et cetera, where you have a lot more flexibility. And as a public company, at the end of the day you need to answer to your shareholders and that has a different level of scrutiny and responsibility than you do as a private company.

Okay, so we got a few different things here. The valuation, different. It's not what was your last funding round valuation at? There's sort of a moving target with markets perception evaluation and then that's up for debate if that from investor perspective is aligned and justifying the offer off of that reporting, obviously a lot more reporting from what public companies have to provide and then their requirements around security laws. So that provides a lot of this information and allows you to review it.

I would just make one point around valuation because I think it's particularly acute in this environment. We've seen a dramatic decline in valuations broadly, especially around growth stocks. And a question that we get all the time with Cronjal is when will stocks season? When will sellers come to the reality that this new valuation is really, is it the norm? Is it a blip? Are we going to see it with public companies? There's actually a mark out there. Anecdotally, what we've heard is public companies tend to be a little quicker to reset to that new norm. And our data, we've done a lot of analysis around this and our data suggests that it usually takes about six months for stocks to season. Private markets actually take longer. When we talk to corporates now about M and A, the number one thing we hear is on the private side, valuations have not reset. Seller expectations are still significantly higher than the public market's and where people think the market has reset. And part of that is because you don't have that kind of benchmark out there.

So I should pay attention to the public markets as lead indicators on how things may potentially change.

For private, yeah, privates tend to lag the public.

The other one was around the formalities of reviewing the offer. When you're a private company, it could float up directly to CEO and he's, man, I'm not looking to sell. And that's end of story. Whereas a public company, it sounds like there's a delegated process that's there where there is this formal consideration or process that any offer would essentially go through and have that objective review of what's best to the shareholders.

Essentially, I would say yes, but it's not that for private companies, the CEO of a private company doesn't have that fiduciary responsibility because they do as well. It's just not, to your point, not as formulaic and process oriented as it is for a public company. Because in a public company situation, you're just under more scrutiny and therefore you have to make sure your ducks are in a row. You are telling the board at the Right point of time telling all the members of the board or the right members of the board, involving all the parties and going through this in a very formulated way, which is not the case as such. In private companies it can be less formulaic.

Oftentimes it's also driven by how many quote unquote shareholders or owners you have. In private companies, it tends to be a lot more concentrated versus when you're a public company, you have a lot of shareholders where the board is representing them.

Fair enough. As a CEO of a public company, I get a lot more trouble for not disclosing an offer as opposed to a private company where it depends if I can sweep it on the rug or not. Yeah, it is interesting.

Yeah. Although at least in the us unless there's some sort of leak and even then companies don't, there is no way requirement to actually disclose when you get an offer. There's the board fiduciary to evaluate it. But it's not like companies have to make it public every time they receive an offer.

Appreciate that clarification. What are the common challenges of buying a public company?

The first one again is valuation. I would say it's probably true for private companies as well as public companies. With public companies we've talked about some of these issues, which is most public companies will have an internal view of their intrinsic value. The most sophisticated companies do this on a yearly basis with their board to say what is the intrinsic value of our company? The market value changes depending on what's happening in the macro environment. Durrera talked about it. We've seen a massive increase in valuation during COVID because of the liquidity bolus that the Fed gave specifically for growth stocks. That's coming down now and the public market valuation at times does not match what you have as your intrinsic value. So but having said that, you at least have a public markup. So the challenge is always trying to find what is the common ground with public companies. Actually it becomes a little easier because you have a public mark out there. That is your threshold. You look at that public mark over today's price for 52 weeks over the last three years. You can do all of that analysis. With private companies, you can't private companies, it's the venture investors, the owners. It's the institution is over there and they look at it as more expectation of money they put in, amount of time they put in and what's their risk reward outcome here. The second one is just around regulations, antitrust. The world is becoming smaller and smaller in a way there's convergence across industries. What would be considered not competitive five years back suddenly is considered competitive today across different industries. So antitrust is a real issue. The third one I would say is geography and politics. If a public company is buying another public company and that public company is located in another location, such as Europe or Asia, that brings along its own complexities. Because you're trying to delist a company from the stock exchange in that company brings across different complexities on takeover laws, et cetera.

And the only other thing I would add is the importance of confidentiality. And leaks can have a significantly more of an impact and pose a challenge when you're dealing with public companies, especially if you're dealing with situation where there's a big stock component to the deal.

So there's the valuation part. I like the framing that there's this internal view as one thing for the market view of valuation, but it's really about what the internal view of that organization is and then the regulatory part of it, the geography, politics. So it's generally got to be koshered from a lot of external views to make this deal work. The leaks is interesting on leaks. Is that relevant to the nature of the deal itself? Certain industries make an impact. Seems like some of this stuff does get leaked out. Not a big deal. But some of it, there's a lot of effort to make sure it doesn't get leaked. I'm just curious what drives those variances.

Everybody's always trying to uncover the next big deal and announce it. Fortunately or unfortunately, it's just in the nature of our industry. I do not abide by this. But in select situations, leaks are actually done on purpose sometimes whether that's one to actually test if you're nervous about what the stockholder reaction would be potentially to leak the deal, to see what the reaction potentially could be. Or if you're not making headway in terms of negotiations. Do people try and leak the deal to force somebody's hand? A lot of the time leaks are driven by squeaky comments and wheels. But sometimes they're actually done unfortunately as a negotiating tool.

In certain situations, that's actually interesting and it makes sense. You use it to go test the market or use it to leverage in certain situations. How do deals get leaked? Do you have journalists ringing you up and say, hey, what's going on? Can we grab drinks sometime?

Yes. And it's oftentimes symbiotic relationship. At the end of the day though, my view is the number one thing you have to clients is their trust. The Last thing anyone wants to do is break that trust. Your reputation is number one. And if you don't have your reputation, then there's no point in being in this job. But the finance community is a very small community and people have been trying to try and share general information. Sometimes it's very general when it's done in a very constructive way. But people like to know the news. It's gossip for finance. So there's always a lot of attention put around it.

I can't ask you how many deals you leaked.

Zero. It's very easy.

Bakers don't tell. What is the market share threshold of the antitrust to allow a deal?

It really depends on the situation. I think what we can say is, especially in this administration, the threshold and the scrutiny around deals has increased significantly. And a lot of that has to do with the stance that M and A is not a constructive thing for the economy, et cetera. And so the administration generally has taken a much more, more stringent view on M and A. Generally they're more focused on certain things. Historically it's been on control of power. So when it's kind of only a three or four player market and the top two players combine, which potentially creates a competitive disadvantage, but that has now broadened into even vertical. How do you think about vertical integration? And if you vertically integrate, does that also create a kind of competitive disadvantage? And so the view around what constitutes antitrust has broadened. That's forced companies to think a little bit more carefully about how they approach M and A. It also has caused them to be a lot more careful in terms of what you put on paper internally as it relates to, to M and A. Because the government doesn't necessarily have a view, they often rely on what you yourself is saying around it. Being very careful and methodical about what people put on paper as it relates to M and A is ultimately important. And then also just acknowledging that it's going to take a lot more time for deals to get done in this environment. And so making sure whether it's the drop dead date in the contract or how you structure things allows for that incremental time to account for kind of that incremental scrutiny.

Sounds like there's a big opportunity to teach M and A to politicians. I spent 10 years in doing M and A advisory in the very low end of the market. And the big dream when I was doing that was to get in the boardroom and really be involved in some of those game changing transactions. And you both do that today. Can you walk me through. How do you manage navigate being in the boardroom on these transactions?

First and foremost, a very important point, right? She said, we get hired because the trust we create and the trust clients place in us, we're thankful for that. So once you're getting into the boardroom, someone is putting their neck on the line and saying, these are our advisors and they know what they're talking about. So preparation and knowing the room is extremely important. So we spent a lot of time thinking about who's going to be in the room, preparing for it. And frankly, at the end of the day, the big the goal is what are we trying to achieve and what are we trying to solve for? What is the right answer? Because a lot of people are placing a judgment of whether they spend some money or not spend some money on what we say. So no pressure. But it is some pressure, right? So I think preparation, understanding of your subject, understanding of what you're doing, very important. You need to be a credible source as soon as you step into that room. Second is you need to know who all are going to be the key decision makers here. So you need to know the boardroom a little bit. You can't surprise people at times. It's not just the CEO, it's the audit committee chair, it's the chairman of the board. You have to have conversations with as many as possible prior know what everyone's touch points are, know what everyone cares about, and know that your materials that you intend to cover cover all those topics. So it's really a full comprehensive approach. Because at the end of the day, you have to walk out of there as an advisor, as someone who's credible, has done their work for coming into the boardroom.

Sounds like with this board, you're dealing with multiple stakeholders that potentially have different views, different goals. You're really doing your diligence ahead of time, getting to know them, trying to talk to as many of them outside of the general group as much as you can do you go through that and identify that here's this sort of sphere of influence that we really need to focus on that's going to make all this change, or is it pretty uniform in terms of the influence across the board? Is there any things around strategizing there?

There is definitely strategizing around there, but at the end of the day, you can focus on one person, but you can't alienate other people. I have been in situations where one person has felt alienated. That has been a barrier. So you can't also alienate anybody at all. It is a board for a reason. Everyone's voice counts, everyone's vote counts, and you have to make sure you're addressing everybody.

Juretta, what do you think? If I had to lay out the three to five steps to go pitch a deal to the board, what would they be?

Konjal's point. It's important to know the audience. Oftentimes, boards will set up committees as it relates to M and A, and it's important to approach it methodically. The last thing you want is surprises. And oftentimes there's periodic postings of the board starting even early if they're in the process teeing up the opportunities so that step by step, as things occur, there are no surprises and everyone is getting dated over time. And it's important to preview things ahead of the meeting, because if there's any surprises, I would say, obviously things pop up. But if there are big surprises that come up, something has gotten lost in the communication path along the way. And a lot of that falls on the CEO, who tends to have a very good relationship with key members of the board, whether it's the lead independent director, the chairman, if it's somebody different, et cetera.

I take it you're doing a lot of prep in terms of the business case. You're trying to pitch around what you're proposing.

Right.

Any magic of being in the actual room and driving the pitch or presentation? Or is that pretty typical of most other presentations?

I would say no special magic, just you're to the point, Chris, getting to the key takeaways. Too much detail is not helpful. But at the same time, you can't have not done enough analysis. So you get to the key takeaways and you're supporting material, supporting analysis later. But it's really coming out of the key judgment crisp.

It is very rewarding part. I will say, as. As a banker, to be in that room with the board, especially when you're at the point of approving a deal. I worked on a deal. It's probably been 10 years at this point. It was a large company, but they were going to do the largest deal that they had done in their history. So it took a lot of negotiating. It was very complex. But I can still remember the board meeting, giving the approval. The entire board stood up and started clapping. To be in that moment, knowing that you are instrumental in a process that is so important to the company that you're advising, it's a very rewarding experience to have the opportunity to be in that room.

Yeah, that would be pretty Epic. I got my four steps on how to pitch a deal to the board. Number one, know the audience. Number two, avoid surprises. Look around the corners. Three, preparation. Really prepare for. Get to the point when you actually deliver your presentation.

You said it more succinctly than that was me answering.

Sorry.

That's how we do in M and A science. We just simplify as much as we can and take action. What about shareholder activism? Is that like a common thing? Do you see that happening more and more?

The short answer is yes, especially in this market. It can come in a variety of different ways. But as it relates to M and A, we see it two common ways. One is to actually force to say we think this company is undervalued or we think there's a lot of strategic value here, it's being mismanaged, or there's great value here, so we think you should sell yourself. Alternatively, it could also come up with if you announce a big M and A deal, and if you, you have a shareholder that does not like the deal, an activist can jump, step in and try and prevent that deal from happening. And we have seen have a lot more capital, get a lot more influence over the past several years and especially we've seen a real pickup in activism, especially this year where you have, where you've seen valuations come down. We've definitely seen an uptick in the level of activism.

How does that work in terms of when you are doing that and especially when you're doing that direct communication, playing the Carl Icahn move and just really putting your message directly to the shareholders. How do you actually do that? Is there like a group email thread that just sort of had to funnel that to a certain point of contact? How do you actually end up getting that communication to all the shareholders?

It's done in a variety of ways. One is just through issuing reports on the Internet. The advent of social media has also produced a forum to be able to just broadly disseminate information because it's as much of a public perception story than it is an individual investor story. And then the more formalized way is depending on how contentious it gets. A lot of these, actually companies prefer this as well, prefer to settle in the private right. An activist doesn't necessarily go public day one, they'll try and engage with the company in a private setting, see if they can reach some sort of negotiation. And then if things potentially escalate, then it might go public. But they could issue, call it a proxy war to try and get board seats. But there's Actually companies out there like solicitors and stockwatch firms, that can also help in terms of reaching out to potential shareholders. And then the last piece is you'd be surprised at how much talking activists do even before they put in positions. So they might actually be reaching out to the big shareholders before they even approach you. To formulate their point of view may.

Validate it, see what their initial response may be. Fair point. How about disclosures? What are the rules around disclosures when buying a public company?

Ultimately it depends on the jurisdiction and that's where it's important to know and do the work to know where the company is domiciled. The US tends to be a little bit more flexible in terms of disclosure. But when you're in other countries, for example uk, Netherlands, et cetera, it can get a lot more complicated both in terms of timing, of when you need to disclose things, what you need to disclose. So we work very closely with the company, with lawyers to make sure that we're abiding by the rules because it can play a material impact ultimately and how you think about that disclosure.

A lot of playing of the rules by the country and the exchange you're participating in. What's the most important thing to consider when buying a public company?

I think the most important thing you have to consider is really the value to the existing investors. The board is a representative of the public investors. They're going to act based on what they think is right for the broader investors in the company. When you come to the table, you have to bring value which you think is going to pass muster. The second important thing is around we didn't talk a lot about this, but really strategic rationale of a transaction. Does it really make sense to take this company, it's a public company buying another public company. Does it make sense for those two companies to come together? Is one plus one really equal to three? What is the synergies? All that has to pass muster in the public investors eyes, right? Many a times where you see leaks, et cetera, and the stocks trading down of of both companies or one of the companies involved. And that's because the market is basically saying we don't like this. As bankers, our part of the job is to test that and say what is the real transaction rationale here? Will it pass muster? And how do you communicate that to investors saying what is the transaction rational?

Great points. Make sure you take things in consideration from the investor's perspective and then really look at the overall rationale of the deal Run Gelderad. I got to Ask both of you what's the craziest thing you've seen in M and A?

I'll just say this. There are more deals that we think of and try to do versus that actually get done. So you're at the crease batting many times and you actually get a hit. And for me it was a project where probably spent 12, 14 months, large deal, spent a lot of time, a lot of material. Two CEOs spoke, one of them said not interested, that's it, over. So that was fun.

Yeah, that's what there is. There's the big losses that you can have after putting a lot of hard work into it. I feel like bankers make it up with closing dinners. That's why they make them as fun as they can. Dot, you gotta have a crazier story.

For me, there's so many and that's frankly why we're in this job I think is because there's no situation that's the same and everyone keeps you on your toes. I will say one of them announced, so I can probably say it. We worked with Valiant Pharmaceuticals back in the day to complete one of the first re domicile into Canada when they bought Biovail 1, it was complicated because we literally did it within two weeks. Secondly, it was a reverse merger. So Valeant was a US company. They wanted to merge with Biovail, which was a smaller Canadian company. But in order for the merger to happen, Biovail needed to be the majority owner, even though Valeant was the acquirer. So we structured a deal in that Valeant paid Biovail premium. We needed to solve for kind of that 5050 ownership. And to do that, Valeant needed to pay itself a special dividend at the time of the deal closing. And so to work through all that complexity, and there was a lot more complexity behind the scenes, we needed to get a special opinion. Do all the diligence, go literally employee by employee and make sure we got through that 5050 threshold, figure out how to pay for the special dividend and all within a two week time frame. And we, we were working with Valeant at the time Morgan Stanley was working with Bioavail. And typically you're across the table with the other advisor. It was also unique in that once we agreed on the price, we were actually working hand in hand with the other bankers as one team to try and get this over the finish line. And so you were at certain times negotiating against the other side, but then other times working collaboratively to be able to complet and so just all those dynamics and then ultimately being able to get it done, I would say is probably one of the crazier things I've worked on.

Wow, that's a phrase. Good bankers are worth their weight in gold. Panjal Duretta thank you so much for taking the time and teaching me a lot of things about doing public company deals.

Thank you for having us.

For having us.

Cheers. Here's to the.

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