Creating the Right Governance Structure in an M&A Deal
7 Feb 2022 · 50 min
Kison Patel talks with Tomer Stravitsky from Intuitive Surgical about running M&A as a solo operator. They cover deal sourcing, diligence, integration planning, and how to set up governance structures and steering committees that actually work.
Hello M and A Friends. This podcast is brought to you by Deal Room, an M and A Science company. One of the biggest challenges in M and A is keeping teams focused on the highest priority tasks throughout the deal life cycle. With your Excel based process, collaboration is lacking. Your deals move a lot slower than they need to. Email trackers back and forth. Knowledge transfer is limited. You need a platform that allows all parties, internal, external and counterparty to collaborate in one place across the whole deal life cycle. Check out why the best in the industry use Deal room. Go to dealroom.net to learn more. Again, that's dealroom.net foreign 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. Welcome to M and A Science where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our free newsletter. Every Monday we share highlights from our interviews and invitations to events as we build the greatest community of forward thinking M and A practitioners. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M and A Science and joining me today is Tomer Stravitsky. Tomer is the corporate development partnerships and M and A lead for the digital and data business unit, Intuitive Surgical. Intuitive Surgical is a maker of robots for surgery. Their flagship product, Da Vinci, is in nearly every major hospital and they're also $120 billion NASDAQ traded company. Today we're going to talk about how to successfully execute deals as a one man M& A team and and build the needed governance and integration strategy. How are you doing today Tomer?
Doing great. How are you doing?
Wonderful. Can we kick things off with a little bit about your M and A background?
A bit about my background. So I have over 15 years of experience in M and A. It's really coming from a mix of tech, investment banking and consulting where I started my career back in Israel. I gradually grew and evolved in responsibility all focused on corporate development roles with companies that include Johnson and Johnson, Pfizer, Convatech, and currently with Intuitive Surgical. I would say that my experience is really a good mix of small to large deals across the gamut with partnerships, co developments, joint ventures, acqua hires of companies and of course also pure M and A acquisitions where you buy the whole company. So currently I Lead the digital data Corp dev efforts for Intuitive. Along with running M and A processes, I also lead the integration of these deals. Aside from that, I also handle a lot of strategic initiatives that have to do with M and A strategy also outside of M and a strategy more like business unit than corporate strategy.
This is interesting. You worked in a variety of different types of teams, different types of deals. What's your favorite part of the deal?
My favorite part of the deal is actually running it. There's obviously a lot of planning ahead of time, a lot of discussion, a lot of analysis, but actually running the deal itself is where I feel I give a lot of the value. There's all sorts of issues that come up, all sorts of things that happen in real time that require changing the trajectory and maybe even dropping the deal or taking like a different approach. So doing all these things in real time I really enjoy doing. From all the challenges that I brought.
Up as a one man M and A team. Where do you start?
There is a couple of steps to this. I really like to start with the strategy and the deal sourcing. So what I do there is I start by making sure that the strategy is solid enough to actually enable the acquisition in question. And then I also make sure in parallel that the acquisition that I'm considering is actually the right thing to do from a high level. Assuming I did that, I then go out and source the deal. I go to the market and I make sure that this deal aligns with the strategic goals that I uncovered. I then go out and pick the people internally who would actually work on this diligence and integration planning. And as I do this, I also work really hard to make sure that there is alignment between the various teams that are involved in this process. And the reason I actually do this is to make sure there's no silos in the process. This is really an effort on my view to have a really efficient and transparent process overall. So, so then what I do next is I go out and conduct the diligence and integration planning with the teams. I orchestrate the whole process. Being the deal quarterback as I do this, I also work on the governance. I essentially prepare a pitch based on my reading of the situation at hand. I collect various team members feedback. I conduct a lot of alignment with both my own management and the target company requiring management. And then I also create a steering committee structure and I borrow the reactive structure. And once I handle all these things cohesively, I go about and essentially lead and run the integration and I continue to execute on the integration until the 30, 60, 90 day plan gets to a steady state. And at that point I essentially hand off the reins to the long term integration lead for the business. But important to note, I still stay involved in monitoring the situation of the deal even a year after because I collected all this insight and I have all this experience that I can bubble up issues and solve them in real time.
It's really interesting that you stick through from beginning to end and after what benefits are there from doing that?
Yes, I would say it has to do with sort of a collective experience that a person gets from being exposed to all facets of the deals by virtue of me being there being exposed to everything that's happening. The good things, the bad things, the things in between all these issues that bubbled up. Then I can share and guide the long term integration lead and the steering committee and executive management and how to tackle issues that come up based on all this experience that I had during the deal. Because something similar might have come up during that deal when I was leading it. I might have known something about this that other person doesn't know because they were not exposed to it. So it's these sort of things that I feel give a lot of benefit and you know, makes the M and A deal more successful even in the long term.
Isn't it hard to scale doing all that?
It's hard to scale, but that's why we sort of worked on an M and A playbook and almost every company that I worked in. And the beauty of this is that we segment certain chunks of things that the person is needing to do. And after a development lead sort of hands off reins to the business to the long term lead, then the involvement in the deal is not that significant. It's only as like a need to. A need to need basis. Think about this as more like a long term advisor, kind of say like a certain issue comes up that was dealt with previously, then the long term lead would then reach out to me and ask for my advice. So it's not that I am going to handle this issue by myself. I'm more of an advisor.
I want to go back to the steps that you ran through. Let's zoom in on each of those. If we can start with strategy. How do you make sure the strategy is solid enough to do the acquisition?
I start with anticipating the trends of the market that has to do with the acquisition that we are assessing. So what I mean by that is I go in and try to gain a very deep understanding of where this market is. This Market in question, where is it going? Where is it growing? What is this market about? Who's active in this market? To go a step further, I try to actually talk to the market. I go out and actually talk with companies in the space. I have phone calls, I have emails. And I'm positioning this as we are trying to landscape this market and trying to learn more on this market. As I do this, I try to understand how these companies that participate in the market actually work, where they're going, what they're doing. And to complement this view, I also go out and speak with users of the technology or product in question. So it could either be myself, if it's like a very high level discussion, or I also work with team members. We have a competitive intelligence team that could do these sort of like market studies. Almost every large company have these kind of teams. So then what I do next is I focus really on making sure that the problem statement that we have, the problem thesis in this deal is about bringing value to customers. That is really the focus in my mind with this deal. So there needs to be in my mind a very clear problem that this deal is actually trying to solve. And by virtue of actually doing this deal, acquiring the company in question, we're actually getting a step closer to bringing more value to our customers. So then I figure out the next step is how do I actually monetize this value? Because we obviously have to monetize it somehow, otherwise it's not worth it. This is typically dollars, more revenues, less costs, things of that sort. But just want to say, in my view, it's not always direct monetization. It could actually be, for example, in the case of my company, Intuitive Surgical. We serve surgeons, we serve patients, we work with hospitals. So it could be even better outcomes to our patients. Say we bought some very nice technology that gives better outcomes to patients. It could also be a better experience, a more efficient experience for our users, the surgeons, so they use our products in a better way. Now to wrap it all up, I use all these elements to continuously evaluate the strategy at large. I do quarterly updates, at least the deal strategy, M and A strategy every quarter. And in each job that I had, not just an intuitive, I did what I described. I found that this actually helps push for updates for the strategy in a broad manner in the organization. And even if we're talking about small and incremental changes, I found that this really helps keep the M and A and the total strategy really fresh. It allows for better alignment to the corporation, to the market, and actually Also provide a look ahead to give a competitive edge for the company that I'm working for to better anticipate market trends and things of that sort of sounds.
Like one of the key steps is to get out there and talk to the market and go as far as talking to those companies and their customers.
Exactly, yes. That's a very important step.
How do you do that? How do you approach them? What kind of language are you using?
Really depends on the context of the situation. But say, for example, we're trying to learn about the market. So that is exactly what I'm going to say. I'm going to be upfront with them, I'm going to tell them, hey, we are considering doing something in this market and we want to talk with you. Obviously everything is done non confidentially, a very high level. It's done for learning purposes. Specifically explicitly saying that in calls and then outreaches and companies are very receptive to that. There's obviously a benefit for companies to talk to a major player in a given market and that is how the conversation goes. And then one of these companies that I end up talking with might end up becoming a target. There is a lot of logic in this kind of approach that's interesting because.
That approach, you're right, could lead into opportunities. Probably having a lot of these conversations. Is there a way you're mapping out and trying to identify patterns or things to really extract and roll that up into the view that lays out into strategy.
We start with a certain strategy in mind. We want to do this and that we want to do this over a certain timeline because we think it's going to give us a competitive advantage, we think it's going to improve outcomes, all sorts of things. But then as I talk with companies and I sometimes happen to understand that changes are needed and the strategic mandate that I have. So I recognize these patterns that you mentioned. And if I hear it from a couple of companies, I hear it from a couple of major KOL major users, then I go back and have discussions internally and propose changes to our approach. I don't want the strategy to be developed in a vacuum. There's obviously the market, there's obviously the users, the companies. And if we're hearing different things from external stakeholders, then I want to make sure that this is reflected in our approach because I want our approach to be effective, I want it to be current. So this is sort of like an evolving strategy. It keeps adapting and changing, hopefully not too much, not every day, but it evolves and changes according to the market.
I Like how you keep it as a continuous pattern to keep going with it. How do you ensure the target aligns with the strategic goals?
This is more art than science in my view. It really involves doing a lot of diligence, deep diligence and understanding what are the individual goals of key talent in the target company that we're acquiring. And at the same time, what is the target company existing strategy, what is their vision, where their roadmap is actually taking them? And beyond the themes that I mentioned, I also look at the execution ability of this key town that I mentioned. And I like to look at their past experience and then make an assessment for my own conversations and observations, as well as key colleagues and key functions that are involved in diligence and integration along with what other people in the market in question actually have to say about this company. So just to give an example, I may have personal relationships with investors that may heard or know something about this company question. So I would then leverage these connections to go and have a conversation, an informal conversation with these investors to learn about the company in question. That kind of gives me another piece of the puzzle along with the other stuff that I described. So then I take everything, all these facts, I go internally and couple this with a deal team's impressions. I go to the executive management of my company and in some cases I even organize a meeting between our own exec management and the target senior management during the term sheet stage, where the goal of this is to help educate our own management and myself about what the target is doing, what's their vision, and more importantly, it also serves as another set of eyes to evaluate the fit and the capabilities of the other side. So that is more or less the process that I'm taking to your question.
That gets you comfortable to get an ally out there. What about the sign off? Do you got to take this up to the board? What does that look like?
Yeah, so the sign off. And I think the same is true for other large companies out there. The sign off, the process entails pitching to the executive management and the company that I work for, they need to approve both the definitive and and the total amount that we're paying and all these associated documents after I get their approval, depending on the scope of the deal, whether the company is public, how large the acquisition is, it might need to go to the board of directors of the company. We work with the deal sponsor, we work with the exec management of Intuitive to get this deal being presented in the board level. And then there's a whole presentation going on there. Once that happens, there's full sign off and we can proceed with closing from here.
How do you build your deal team?
It starts with essentially sketching out the timelines and the overall tasks that I think are needed during diligence and during integration. I map out the functions that I think are needed to accomplish the tasks that are part of this transaction. I think through who exactly I need. Then I put forward priorities for team members based on that. I then pitch the whole situation to each and every team member individually in order to get them on board and on picking specific people. I also weigh what is their availability to accomplish the tasks at hand in the given timeline. So I'm trying to be completely transparent with them. I'm going to tell them, for example, hey, I need 20% of your time over the next couple of months and what I'm going to do next, I'm going to ask for their commitment to accomplish this 20%. I'm going to have them also appoint a backup in case any availability issues come up in real time.
I like how you're thinking about the backup and already planning out worst case situations.
Just learning from experience. If things happen, you're looking for the.
Right skills, the right people, so they tend to be pretty straightforward. Or is there any diligence you need to do or vetting out really depends.
On what's the situation like. If you're evaluating the accounting of a company and they have like standard accounting, then you probably don't need too much resources or effort in that particular area. But for example, if you are assessing a very complex supply chain that is across the world, and it's in a area of the world maybe that your company doesn't have a lot of experience in, or it's in a, a product area that people really don't have the necessary skill set internally, then it complicates matters. And in these cases, I might suggest let's involve more people internally because collectively we might have the full picture and in some cases we might even want to involve external resource consultants that might have a very specific skill set and experience on this particular question. So it's kind of a mix.
Depends on the situation, any specific techniques, and how you ensure team alignment.
I start with having each function lead. There are many team members, but there's probably anywhere from 8 to 12 function team leads. I have these folks create what I call like a team charter. So say for example, taking this example of the accounting function, So I have this accounting team lead create a charter and this charter would have all sorts of useful information on the team itself, who's in the team, what are they going to do, what are their sort of timelines, what's their challenges, what are some things that they identify in integration and diligence already? So these sort of things like a cohesive document that is formal and it's shared across the entire deal team. The goal here that I have is that I want to make sure each and every person on the deal team knows what you are striving towards with this deal, knows the tasks, knows the timeline, and that each team member in each team actually knows what other teams are doing and they know what their own team is doing. And I found that having people align on both diligence and the integration structure before we even start doing the diligence actually really helps the process. It really helps people come up with ideas and thoughts and challenges, and they're even able to offer up improvements as we go to complement that. Another thing I like doing is I keep what I call like an issue tracker. I start like thinking about issues again before we start the diligence integration. This is a live document. We share it with the entire deal team and everybody is able to assign tasks and action items to specific people. I'm able to have this broad view and also assign tasks and action items. And then what this does, in my view, is this creates a sense of ownership to all the people that have the action item. They need to agree to obviously work on these action items and they need to agree to a timeline each and every week. When we have sort of like a joint call in the deal, I'm going to ask for updates in real time. And people are going to say, there's this issue, there's that issue. So that provides a more comprehensive view of the deal, the challenges and where we're going and where we are, and then to finally wrap it all up. Another tool that I found to be very useful is a mapping of roles and responsibilities. And I'm doing this again ahead of time. I'm not waiting until the integration starts. I'm actually doing this as I build a governance structure and as I build the integration planning before the term sheet. So you can think about this as a reishi matrix of sorts, Raci, where I map each and every role, responsibility across the board in the team. This doesn't just involve the people that are doing the work on the diligence or the integration. This involves also the deal sponsor, the executive committee, the board, if they have a role. My goal with this is to make sure that it's clear and simple for everybody, that everybody knows what each person is doing. So this helps keep the deal go along and it streamlines the whole process of coming back and asking questions more than once. Saves time, it saves resources time, and it has a lot of benefit. I learned this by doing several deals, not just in the company that I'm working for, but also in previous companies. By not taking this approach, things become quite chaotic later on.
Building out those team charters, issues tracker and essentially a RACI model. One of the key things you talked about is running diligence and this integration planning. How do you align the diligence process with integration planning?
Thinking through everything that has to do with integration planning, all these activities prior to the term sheet state. So before we actually submit a term sheet, I found it helpful to have the functional integration leads, these eight to 12 functions that I mentioned earlier, to be either close contacts of the diligence leads or actually the same person. The most effective thing I found to work in the deals that I worked on is that the person that does the diligence in a given function is also the person that does the integration. The reason I found so helpful is because the people that discover the diligence findings and prioritize them, they are then able to translate these things in real time to integration activities instead of handing it off to another person. So that is where the effectiveness comes into play. And in fact, I want to say that when I kick off the process, when the diligence integration planning starts, I actually explicitly say we're doing both of these things at the same time. And I even provide templates to people that they can utilize if they want to in diligence and in integration. So even the 30, 60, 90 day plan, even that has a template. All these things coupled with the process, the templates I found to be really helpful in making the process, you know, more effective.
While they're doing diligence, they're helping to build an integration plan.
Exactly. So we're focusing first on the 30 day, then we're moving to the 60 day, then we're moving to THE 90 day. We actually separated by chunks. I'm trying to start with the more critical things and the more near term things initially.
How do you do this if it's a competitive process?
So I credit the templates to helping out because the M and A playbook process that we've been through, and again, this is not true just for my company, but for previous companies, it actually helps identify repetitive items that have to do with diligence and integration plan. Some items just keep repeating. So there's no use in asking the integration planners to kind of repeat the same thing in each and every deal because these things are there. So the templates already contain some of these activities and this saves a whole lot of time. This kind of gets into a situation where we're able to focus on the most critical things first and tailor these templates for unique items that we're finding.
Still, if it's a tight deadline or even this last year, we're highly competitive process and you're getting little to no exclusivity period. Doesn't some of that stuff just get thrown out and you're really trying to cherry pick some of the key diligence things and moving right on.
Even though the process is competitive, you can still go quickly. You can still go quickly if you plan out in the right way. I'm an advocate of planning, but I like to say that you shouldn't do excessive planning because you know the thing about analysis paralysis. So that's exactly the same in my view, with planning for M and A. If you plan too much, you'll never get to do execution on time. So I have to kind of balance the amount of planning that I'm doing and the amount of execution to the deal timelines. Of course, if I'm going to have a very short window of facility period, then I'm going to spend more time planning ahead of time while I have it. But I'm going to spend more time on execution during this exclusivity period. So my goal is to always adjust the situation to what's happening right there in the deal. So I'm not going to spend too much time on planning if I don't have too much time to spend on it. I'm going to focus on the critical stuff ahead of time if I don't have too much time and I'm just going to flow with the deal according to the situation, if that makes sense.
I'm thinking this is a really key part that I've noticed. Corp dev teams that are very successful in the outcomes of their deals versus ones that not. It almost distinguishes the traditional approach to M and A versus more of a modern approach with what you described in having this parallel of doing diligence, integration planning, any key things that you would suggest to a company that's still on more of that. I'm sure you're familiar with that traditional approach of really handing things off and doing the integration planning at the later phases to get to this area what you described so that it is more effective and efficient and producing better outcomes.
What I found most helpful in the companies I work for, that kind of went from the traditional model to a more streamlined model. I found that going through an active process of learning, actually analyzing the way you do diligence, integration and M and A, all the people know this in their heads. But once you really start analyzing it, you take like a high level view. You can understand that certain things could be more effective. And the way to do this is simply to go through an M and A playbook and M and A integration like improvement. Right. It starts by, I would say, probably key constituents of the M and A process just speaking up and saying, hey, I think this would be better, that could be better. But then it continues with formally doing this sort of project. So typically this project is best done with consultants, but I saw some companies that are doing it by themselves. But I would say always there needs to be some kind of catalyst, somebody needs to speak up and say this is not working effectively. Or it could also be a negative thing happening, right, because we didn't do this or that in the right way, or we didn't do this fast enough, we might have lost the deal, just theoretically. But these are the sort of things that I would suggest to a company that tries to move from traditional to more streamlined M and a process to really think through how it's working, find ways to improve and really dedicate the resources and time to improve. Otherwise you could end up losing deals, you can end up not doing things fast enough and this actually affects your competitive position in the marketplace. At the end of the day, let's.
Get into how to build your governance structure.
This is a multi step process. I start with thinking about how the steering committee is going to be, who's going to be in there, what's the structure. Essentially, in order to do this, I start with understanding and weighing the deal goals that I have, along with the deal strategy and the overall desired timeline of tasks that I need to accomplish in this deal. I also weigh the complexity of the target company, the business that we're acquiring, in other words, along with the complexity of the business that is going to receive this acquired entity. What I do next is I weigh the culture of the target company and their own structure, their corporate structure, where they're located, how they're formed, all these things, along with a very deep assessment of the strengths and weaknesses of the key talent. Now I take all these parameters as a package and I couple these with all the issues that we identified during diligence, the complexity of all these integration tasks that the team and I came up with, along with several talent management and technical talent growth areas that we think need to happen. All these parameters, they lead me to choose certain people for the steering committee. Important to know that the steering committee could actually be larger or smaller. As a result, it could potentially have subcommittees they could meet on a shorter or faster cadence as a result of all these parameters. What's the context of these parameters? Just to give you a quick example, what I mean by all these things that I said. If I were to run an acquisition of a business that's operating in a country where my company doesn't have a direct presence in, meaning it doesn't have payroll, it doesn't have hr, doesn't have accounting in there, these sort of things, then that will probably lead me to have the target company be more independent in the first year or two and be more fully integrated thereafter. Now, if the company that I'm acquiring needs to move much faster and they have a culture of making mistakes fast, I would probably certainly leave them to execute on their own while only fixing the critical issues. Back to the overall question, the steering committee structure. It's important for me to have membership from both the acquired company management and our own management. As you probably garnered from what I mentioned, the cadence up to a steady state when you handle this acquisition. The cadence would be more meetings in the beginning, say for the first six months. You'll have a monthly meeting with the steering committee and then you sort of move to quarterly after things become more steady.
Can you give me an example? Like make up a deal and walk me through some of the steps and a little bit of a story.
Make up an example. That's a good question. You mean like a dummy deal?
Yeah, exactly. Because this is a topic I haven't covered before. I want to get a sense of what would that look like? You walked through a lot of the analysis before of the company, even like the right sizing approach. But I want to get a little bit more of tangible feel of what that determines you. From putting together a three person steering committee to 10 people, what does that look like? With an example?
Say for example, you take a company that is currently development stage, they don't really have a product on the market, but we actually need them to develop something for us that then is going to be integrated in our own product. You think about this as like a development effort, but also a commercialization effort. And this kind of companies say they're Moving very fast because they're development stage, they're a startup. In this kind of case, what I would do, I would obviously treat them as a development company. I would treat them as a company that maybe doesn't necessarily have a lot of commercialization experience. And I'm going to treat them as a company that wants to move fast. So in this particular case, I am going to let them move very fast. So I'm not going to handicap them with a very complex steering committee. I'm going to keep very close on the development. So I'm going to have a development, a senior development person on that steering committee for my own company side, along with probably the head of R and D or the CTO of the other company. They're also going to have membership on the steering committee because development is what's important here, but also not less important is commercialization. How does that development of that feature get integrated into the products? I'm also going to have a commercial person that has a lot of experience in commercializing these sort of products from my own company side on that steering committee. And then the focus of that steering committee is going to be on driving forward that development. It's going to be on thinking forward on that commercialization strategy. And these are probably going to be the issues that are going to occupy the minds of the people on that committee. So it's not going to be a large committee. They're going to meet probably more frequently on these commercial and development items to make sure that the development is on track, to make sure that commercial is on track. And it's going to be composed mostly of people that handle development and commercial from both sides. And the goal of these commercial and development people from my side is to basically keep the other people accountable. So they're going to be able to execute on time. And we're going to be able to monitor your execution on time and sort of step into help along the way if there's any issues, if there's any concerns, if anybody is hitting a wall or something needs to be changed.
That makes way more sense. I like it. Who governs the steering committee?
So there is typically a head of the steering committee. It really depends on the situation in the deal. It could be a deal sponsor, the person that sponsors the deal, like for example, the head of a certain business unit that this acquired entity is going into. Or in another case, if it's like a really big acquisition, it could even be a C suite person. It really depends on the situation, what I try to do. When I recommend These sort of things I weigh what are the goals, who would best be in the shoes of the head of the steering committee, who would be able to best directed forward according to the situation. Sometimes it's a very senior person, sometimes it's less. But it's always somebody that has to do something and a very deep something with this acquired entity.
What does your relationship look like with the steering committee? Are you reporting to them or.
During my time as integration lead, I essentially report up to them the status in real time of what's happening with the integrations. Say you executed the deal, you closed everything, then you move on to executing the 30, 69 day plan. I essentially call the meeting meetings for the steering committee and I keep them apprised of the situation, how the integration is going, are there any issues? I essentially escalate things that need to be escalated to them for their advice and for them to make key decisions on. So there's like the decision maker layer and I'm the one that is out there understanding what's happening, what's going on with all the functions, what's happening with the company, how everybody are feeling and I'm like bubbling up all these things and seeking their advice and you know, making recommendations in real time. Once I get this integration into a steady state, typically in the 90 day period, I then hand it off to the long term integration lead and they now become the person that works with the steering committee.
Got it. The steering committee, I take it the big components or roles for them is decision making, problem solving.
Yeah, I would say decision making, problem solving advice, helping with even further escalation. For example, if there were an issue with the milestones in the deal, like for example, the target company would not be meeting the milestones, then sometimes it needs to be escalated even further. So they serve as helping make these connections where needed. They're advisors and yes, they're decision makers.
What do people get wrong when setting up a steering committee?
The most frequent thing I saw people get wrong is put the wrong people in the steering committee. Like for example, if I told you that this development company example, I told you then some previous examples that other companies that I saw doing, they don't really put a development person in there, they maybe put two commercial people in there or they put another executive that doesn't have to do with development directly. So that causes a gap in my view because if that development person is not there, then that executive has to then take all the information during these meetings, during the integration, and then go and deliver it to another person. You know, this information could change along the way a little bit and it could be misunderstandings and it also potentially causes delays through the whole process. So it's difficult to make these kinds of decisions in real time if you don't have the right people on steering committee.
How early are you thinking about setting this up?
I'm thinking about these things when I start doing the integration plan before the term sheet stage is when I start thinking about all these things. And I found that unless you do all the integration planning at the diligence stage, meaning before the term sheet, then things could become very chaotic later on. Thinking about integration early on in the process really helped me manage all my internal resources in the deal At a certain point when I feel that the deal will be moving forward and prior to the term sheet stage, I actually start reaching out to people. I start reaching out to steering committee members, potential members, that is, I start reaching out to diligence team members, integration team members, and I give them the heads up that this deal might be coming. I asked them to actually start thinking about these activities unofficially because remember, we haven't still kicked off.
This is before loi.
This is before loi. We haven't officially kicked off. So I go in unofficially and plant the seeds with them that this might be coming. And then I keep in touch with them. I try to update them in real time on when and how this deal would be moving forward. And as I do this, I also give them my expectation of how much time I need from them. Remember earlier I gave you the example that hey, I need 20% of your time for a certain function. So I try to be as transparent as possible with that because I recognize people don't do M and A all the time. They have their own job, especially the senior people. And I try to be respectful of their time. So I just give them a heads up on the commitment that I think is needed and I hear from them what they can or cannot do. And that's where the backup also comes into play. That's why I advocate for a backup, because people are not available all the time. Just coming back to my earlier point, I really found that all these things really help solve chaos that could come later on. And all these things help streamline the whole process. Especially I found that the teams themselves, so not just me, the teams themselves really find that this process helps them manage their own resources more effectively. Even save time catching up within their own team and cross functional.
It seems like a lot of work to do for Yellow Eye.
Yeah, it is. Work, it's not an insignificant amount, but once you focus on the critical steps, once you focus on what really matters, remember, utilize all these templates that I mentioned because there's an actual M and a playbook process. So it's not like I'm going through the same thing each and every time because some things are already mapped out. So I'm only focusing on all these things that I'm telling you. I'm focusing on the critical steps and I'm still applying judgment to remember that there is a deal that I need to do. Remember the timelines and remember that it might be a competitive process. Because if it's a competitive process, I obviously have less time. If it's not competitive, I have more time. But I still don't want to take all the time in the world because the targets might just not want to do the deal. If we take say like a year, it's probably too much.
Is there anything else notable that you're doing pre loi related to integration planning?
I just try to have a very clear idea of what it feels about all the issues, not much beyond that. There's a lot of small details, obviously, but I think the things I mentioned hit the high point for the main and critical things to think about.
When is integration done? Because you mentioned 30, 60, 90 day, then handoff to the business. Can you talk to me a little bit more about that?
If you mean my own integration responsibility directly, it ends around the 90 day point because that is the point where I hand off the reins to the long term integration lead. But obviously the work continues because the long term integration leads continues to do that work. And actually to come back to your previous question, so another thing that I'm doing during the planning phase is to map out the integration steps beyond 90 days. We're thinking about the strategy overall and we're actually separating the strategy for integration into steps. So step one, for example, would be very light integration, where you integrate accounting, you integrate payroll, you integrate hr, things of that sort of. Step two could be having additional functions be integrated and step three could be integrate the whole thing. So accordingly, we also map out these steps for the long term integration, and we actually map out the strategy around each and every step. And the composition of the steering committee actually end up changing in each of these steps. Step one doesn't necessarily require a certain type of specialization, but step two does. The steering committee could actually grow from each step as you move forward. So the integration really ends when the last step is reached and it could be anywhere From a couple of months to maybe three years. But again, it really depends on how we map out the steps.
What's the biggest challenge when doing this kind of end to end M and A approach?
Yeah, I would say the biggest challenge in my mind has to do with timely execution of the deal. Because you heard for me that there is a lot of planning involved. Not too much planning, but too, there's a lot of planning in there. There's obviously a certain time frame that you agreed in the term sheet with the target. It could be 30 days, 68, 90 days. Whatever it is, I am going to want to stick to that timeline and not exceed it. And I'm also going to want to stick to having the 30, 60, 90 day integration plan done in time. Now, it's quite challenging because I mentioned to you there's planning involved, there's multiple roles that I'm playing. I'm actually also doing other deals as I'm doing this particular deal. So I'm working on multiple deals at the same time. But the way I handle this is through all this planning. So my goal with all this planning is to help myself, help the team, help the steering committee, help the organization, anticipate all these issues, anticipate all these pitfalls, anticipate what happens if something changes. This helps actually come up with solutions to all types of problems that come up during the deal. Another thing that's very helpful to solve these challenges is targeted communication, both internally and externally. So targeted communication, in my view, really gets the job done. Well, because targeted communication provides a clear understanding to the team members what happens if we miss on the timeline. What's the actual impact of missing on a certain activity? One activity that's not critical might not be that impactful, but a critical activity like setting up manufacturing lines, you know, in step two of the integration stage, that's pretty impactful. If you're missing that, you just can't manufacture the product. Essentially, I tried to get everybody on board with how important it is we execute timely and effectively on the critical things. I found that people actually understand that pretty well. Nobody's perfect, people can make mistakes. But I found that people give their best with this particular framework and this really helps get the process to go about in time and go about being executed in a good way.
Great example. Targeted communication. Going on that same track. What are the biggest lessons learned from all your years of experience?
One of the biggest lessons that I learned is not to underestimate the scope of planning for the deal and invest a good chunk of time and thinking into it. Always be sort of on your guard, not rest on your laurels during the deal. Even when things seem to work, always think ahead, think outside the box in every step of the process. What could actually go wrong? Question. Are you doing the right thing? So not obsessively do it, do it in a balanced way and be prepared to change the process in real time and adapt to the changing situation. And another thing I mentioned, I think several times, probably not a surprise to you that I'm going to say it, but communicate, Communicate. Always communicate. Be crystal clear in communication. Look at this this way. You have personal relationships. Everybody has personal relationships in life. Communication is key in personal relationships. The same is key in M and A. If an M and A is to be successful, communication needs to be good. It needs to be clear. The same is true for every single layer out there in ma, both internal and external. I actually learned all these things by seeing that when one side on the table during an M and A deal doesn't have the full picture of what's happening with the other side. Say you just take a random deal. The lawyers of the target, they're doing a lot of work. They're doing hard work on strict timelines. But what happens if they're not fully aware of the impact of certain diligence findings that I came up with? What happens there? They might not be aware that a specific finding has a very specific effect on the timeline of the deal, both for the target company and both for my company. If they don't know that, they can't really prioritize whatever it is they're doing. For example, working on a contract, working on some specific diligence for their client and that might end up delaying the deal. I guess my bottom line is plan ahead, always adapt, always communicate across below and upwards to make sure that things are clear and things are moving forward.
Great advice. I have a couple questions here. I saw came in the first one I have here. Tomer, how do you know that the people you are reaching out are going to dedicate the necessary attention to the deal? They probably have other day to day duties.
This is not a simple matter to assess. So this is where relationships come in. As I do my role in the company I work for, I strive to build very deep relationships with the people I work with. So I get to know them, I get to know what they care about, I get to know what they're concerned about. I actually also ask for a commitment. If you remember what I mentioned earlier, I ask for a commitment, I give them a sense of what is required of them. I give them essentially a picture of what are the tasks. I actually ask them to come up with a task. They have a say in what you're doing. Then I tell them, okay to do all these tasks. I feel like 20, 25, 30% of your time is needed over the last couple of months. Do you think you can do it? So then sometimes I hear, I can probably do it. I can do it for sure. Maybe not. But in all cases I asked, let's appoint a backup. Let's appoint a backup. Let's make sure that the backup is able to step in and do things when you're not able to do it. By having this particular structure, people do what they said they're going to do, but there are cases they can do it and then the backup steps in. Sometimes there could be situations that are even more complex that both the person that's leading the team and the backup are not available. So in this case, we're working to find another person that could do it that is associated with these folks. But we are doing this ahead of time. We're not stuck during diligence or integration without anybody because we can anticipate these things. And we have, remember, we have this issues list. So people can actually come up with issues on that issue list that have to do with their availability. And they can reach out to me at any given point in time and say, I have an availability issue and even my backup has an issue. So then we say, let's focus on the critical stuff and find somebody else that could step in. It actually really helps to get things done.
Are you successful by sending documents to the team? My experience is that most of the team members do not read presentations documents. They'll wait until you call them to do that.
I actually like to really focus on the things that matter. Say, for example, there's 100 slide presentation that I want them to look at. So obviously I don't want them to look at all the hundred pages. Say, for example, I want him to consider something that has to do with distributions. I'm going to essentially chunk up that presentation and just give them the key snippets of things that they need to look at. Things maybe about distribution, things maybe about the company itself. And I'm going to tell them, hey, look at this. And I'm going to ask him very specific questions. I'm going to try to relate it to what I want them to do. So I don't just want him to go over something. I want an outcome out of that. What's the outcome? Is it changing some integration activities? Is it finding some diligence issues? Is it maybe bubbling up something to the deal sponsor? Whatever it is, I'm going to be very clear with them with the expectation and what it is they need to review.
Tomer, what's the craziest thing you've seen.
In M and A in this current environment? There's a couple of things, but in my view, without a doubt, evaluation expectations is among the top things out there that I would say that are becoming kind of crazy. See an overall market trend for high valuation, especially for tech companies. Now this is both true for private companies that are venture backed and the public markets. It seems like during COVID valuations just exploded. And this is true not just for tech companies, it's true for other industries. Especially if you're talking about companies that have a tech component in their product or service. It gets to a point where some super early companies actually come up and think about unreasonable expectations. When you start off the negotiations. What this actually leads to, in my view is that the negotiation starts from a difficult place. If somebody tells you my valuation jumped 3x, for example, in the last half year, just to give you an example, I once heard a half joke, half true statement from a founder of a very early stage company. This came to me and said, sure, if you give me a billion dollars right now, you can buy my company. That obviously started the negotiation for a very difficult place with that particular company. In my view, these sort of high valuation expectations in this current market environment are actually going to complicate deal making in couple of years. They might lead to overpayments in M and A. They might even lead to lower returns for the buyers. Especially if you're thinking about areas where business models are not fully defined or they're actually unproven, you think it's a.
New normal or a bubble to pop?
That's a difficult question. I think it depends on the industry you're looking at. I think if you look at some industries, there's probably a bubble out there. If I look at industries with companies where nothing really happened during the last three months except for the venture firms investing more money in a certain space, then I probably say that this is a bubble and it's going to burst at some point. But there are some industries where variations go up just like actual innovation happened. There's a lot of innovation in the COVID space. All these companies developing vaccines, all these companies developing diagnostics in these kind of things where there's true innovation, I think the jump up is justified. But in things where nothing really changed and all that happened is that more money flew into this particular industry, I would say probably a bubble is going to pop at some point. It's difficult to say when. It could happen in a year, it could happen in two years, it could happen when the Fed is going to stop supporting the market. Who knows when it's going to happen. But I think it's good to be with open mind that things could change and not be surprised when the bubble pops.
Great assessment comer. Thank you so much for your time today. I enjoyed this conversation. It's been fun hanging out, learning from me.
Yeah, me too. Thank you for your time.
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