Cross-Border M&A: How to Do Deals in Italy with Mauro Sambati and Donato Romano

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I'm Kisan Patel, and you're listening to M&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&A deals.

Hello, M&A scientists. Welcome to the M&A Science Podcast. This show is part of our mission to rethink how M&A is done and build the operating standard for buy-side M&A. That old-school sell-it approach Dead. Firelight M&A is about strategy, alignment, and execution, putting value creation at the center of every deal. It's not about closing the deal, it's about making it successful. And that comes from learning directly from the operators who've done it before. If you want to go deeper, we got you covered. There's a ton of free resources on our website, frameworks, guides, tools, all built from real operator experience. We also have the M&A Science membership, which gives you the full system, exclusive frameworks, templates, expert Q&A sessions, direct access to me, and the AI-powered Intelligence Hub. It's the home of buyer-led M&A. We also got a free newsletter on the website, so check it out. You can visit mascience.com. With that, I'm your host, Kisan Patel, Chief Scientist at M&A Science. Today I'm joined by Maros Sambati and Donato Romano, both partners in the M&A department Aggiani Origani, otherwise known as GOP, one of Italy's leading law firms with extensive experience representing foreign buyers for the US, UK, Japan, Korea, and their Italian acquisitions. Mauro and Donato have a unique perspective on what it takes to successfully close and integrate deals in Italy. They've navigated everything from complex family business acquisitions to sophisticated private equity transactions. Helping international clients understand not just legal framework, but the cultural nuances that can make or break a deal in the Italian market. Today we're going to talk about M&A in Italy, managing regulatory environment, and broader nuances of doing cross-border deals. Gentlemen, Mauro, Gennaro, how are you guys doing today?

Doing great.

How are you?

Ciao. Thanks for joining me live from Italy in Rome. Roma.

Ciao, ciao, Jason.

And thank you for hosting us in this podcast.

Thanks for taking the time from doing deals to have a conversation with me. Can we kick off with a little bit about your background?

I start first just because I'm a little bit older than— My background is that I graduated in law and I just joined my firm, Andorigoni, as you said. My track is quite boring in a way. I stick with the firm since the beginning. I started as a trainee lawyer. At the end, I succeeded to become a partner. Something like more than 10 years ago, almost. Since the beginning, I have been working in the M&A department of our firm, which is by far the largest practice that we have in the firm. During my, let's say, career, I had the opportunity to work on every kind of M&A, public or private M&A, then also with private equity funds. We are not really focused on specific industrial sectors. We tried recently to mainly focus on geographical areas. So this means that so far we've been working with a number of foreign clients. And I must say that at least half of the revenue generated by our firm comes from foreign clients. So I had the opportunity to work and advise investors from basically every part of the world, with US companies honestly still being the probably the most active in Europe and in Italy as well. Denaro? Pretty similar, really.

I was born in the southeast of Italy, studied in Rome, law course, then studied in London for a while. Then I joined this firm as a trainee lawyer, and I spent a few years in the London office of this firm. We have an office in London, among other places. Then I came back to Rome 5 years ago, became partner 3 years ago. Same as Mauro, really. So all my career, pretty much all my career in this firm, not a specific sector. And most of the deals I advise on is on the buyer side with foreign international investors.

How many deals have you guys worked on?

Me, roughly speaking, but don't have the exact number. We're talking about 100 deals.

Okay.

Well, I, I cannot count again. It's more than, it's more than 25 years that I have been working with Gianni. But more or less could be slightly more than Donato simply because, again, I have a few years of experience more than him, but roughly, yes, this is the number. And maybe we can take this opportunity to spend literally a few words about our firm, Gianni Origoni. It's not going to be advertising, but it's just to better understand how the Italian legal market is also structured. Please. Gianni Origoni is, along with probably a couple of other Italian firms, is one of the largest law firms, meaning that in terms of size, we are more or less 500 lawyers, same size of the other two Italian competitors of us. And we are a full-service firm. So we advise, as I say, on M&A deals as our core business. But then we have practices covering every field of law, from administrative, tax, labour, antitrust and competition law, and so on and so forth. And this, of course, gives us also a competitive advantage as compared to foreign firms that actually entered even quite aggressively the Italian market, because being a full service, we are also capable of providing advice to foreign buyers, not only during the deal or in making a deal successful, but also in the PMI, the post-merger integration, by, you know, dealing with any kind of issues which are not strictly linked to the acquisition, but any issues that they may face after having acquired any time target. This, in my view, is probably one of the big differences between firms like ours as compared to foreign offices of the big law firms, the multinational law firms, US or UK-based, which again are still present in Italy. Also sometimes are also very good, but probably the main limit that they have is that they are particularly focused on specific sectors. Can be M&A or banking and finance, capital markets, but rarely they are full services. They are capable to advise on every spectrum of the dialogue.

You guys ready to go? I got my espresso here, so I'm ready. I see you got the machine behind you.

We had already far too many, actually. So for us, it's afternoon.

So first question, I'll give you a softball, is tell me something that you wish you knew before your first cross-border deal.

This is actually a tricky question, Jason. It's like asking what would you have liked to know about your wife before getting married?

Yeah, exactly.

Of course, when you start and your lack of experience on the ground. You have a more romantic idea of your work. You are mainly focused on technical aspects, on legal drafting. You are keen to prepare the best legal document you can do. And probably you underestimate instead the importance of, let's say, the negotiation strategies, which kind of buyer you are advising, and which kind of Italian seller you are dealing with. And therefore, which are the sensitivities of both parties and how to better accommodate them. This is something that you cannot really probably know when you start your career, but you will understand over the years also based on the experience and the mistakes that you may do during your, again, your career. Yes, probably what I missed at the beginning is more this relationship let's say, skill and how to better approach the counterparty and also how to educate the client in setting up the best strategy to succeed vis-à-vis that specific counterparty.

I agree with Mauro, but specifically from cross-border deals, it's quite important. Something they never tell you before is the focus on communications. You're dealing with people that are not familiar with the legal framework. Not familiar with the culture. So communication is absolutely key, should be focused more on that than just the drafting session or the technical aspects. And in order to reassure the clients that deal is going well and they are prepared and always on top of what's happening. So yeah, absolutely communication is what I will be focused on if I were to start again.

Less on the emphasis on technical aspect, more so on relationships. And bridging cultural gaps.

Yeah.

Sounds like it's gonna be a big theme of our podcast here. Let's tackle the big elephant in the room. I want to learn about golden power regulations. If you can break it down to me, help me understand, like, what does it mean? How does it work in Italy?

M&A, we have a special department in this firm that deals with the golden power, but we can give you some heads up on the golden power because Italy introduced this golden power. We call it actually golden power even in Italy. So we use an English expression. In 2012, just for specific sectors. And this legislation gave the Italian government, specifically with the equivalent of number 10 in England, the Prime Minister's cabinet, really the power to review all types of transactions that involve Italian companies that carry out strategic activities or have assets with strategic relevance in specific sectors. That are deemed critical for the country. When it was introduced, to be fairly honest, and I don't know if Mauro agrees with me, it was not much, say, focus on this legislation.

It was—

sectors were specific, more like military or very specific sectors. But in the past, say, 5 years after COVID, every year we had new legislation introduced in this field. And the Golden Power Control has expanded to protect Italian strategic assets. Before, first of all, was extended also to infragroup transactions. It was expanded to other sectors like K&I, cybersecurity, aerospace, semiconductors, quantum and nuclear energy storage, food production technologies. Was expanded also, at the beginning was also for just non-Italian, non-EU. Now, this may also— this regulation may also apply to Italian and EU persons depending on which sector their target operates in. And lastly, in January, actually a few days ago, there was a new amendment introduced for the financial sector. So they introduced a new check for transactions that can have national economic and financial posed a threat for the national and economic and financial security of the country. And the Italian government had to change a little bit this legislation because of all the procedure from the European Union. I was not particularly happy with this framework, and they slightly tried to find a compromise with the European Union by introducing two rules. First of all, that the golden power authorization from the Italian government is necessary only to the extent that there is not already a strict regulation in that specific sector that basically protects the main interest of the country. And secondly, they try to have a liaison with the antitrust merger control clearance. So they specify that the 45 days for giving clearance for the golden power rules starts only after The possible clearance from EU Commission for the merger control is obtained. So they go, we have to go first to European Union, to the merger control commission, and then antitrust, and then you can get the clearance for the Italian Golden Power or FDI.

Is the major function the same as just operating for antitrust and just the competition regulation?

I would say it's slightly different. Of course, the trust regulation is mainly focused on avoiding concentration and monopoly, basically monopolistic behaviors from big conglomerates. Here, the main goal that our government had in mind when, let's say, introduced the foreign direct investment rules and then amended them was actually to protect the Italian companies, especially the ones operating in specific strategic fields or businesses, protect from becoming easy targets for international buyers. And when we say international, we say of course mainly non-EU countries, even though of course this framework also applies vis-à-vis buyers within the European community. However, what happened in reality is that probably our government overruled a little bit this kind of golden power scheme by putting a lot of constraints and making it very, very difficult, at least on paper, to make a deal without asking first for authorization. And this allowed the government then to basically have a most, let's say, invasive control on the M&A activity, not only, but also the infragroup restructuring. If an Italian big company intends to carry out a reorganization and move some strategic assets outside Italy, even that Italian company must obtain first clearance from our government based on golden power rules. So in the end, the scope was somehow understandable and probably right. The implementation a little bit less because too many rules and too strict. On the other hand, we can also say that So far, the government really reached the point to block a deal not so often.

I think that it reflects also a little bit of shift in geopolitics during and after COVID, because the first time that the Italian government really used this in an invasive way was after COVID in 2022, when they basically made a rule on a transaction which was carried out in 2018. There was an Italian company that makes drones and that was sold, the majority of the stake, 75% was sold to Hong Kong company, which was owned by another Chinese conglomerate. And the Italian government stepped in and they resolved that that transaction has to be canceled. The stake was transferred back to the Italian guy who sold the shares to Hong Kong companies because they deemed that they didn't comply with golden power regulatory framework. But that, as I said, I think it was aligned with a kind of a shift in, in geopolitical terms as well. The Chinese investors were seen less welcome than they used to be.

Yeah. And you referenced that this originally started as like regulations focused on the military sector, then it expanded to telecom and on and on and on.

Yeah. Yeah.

Now, other thing you mentioned is that there's about a 45-day period after an EU. Can you maybe walk me through kind I'm coming in as a foreign buyer, when should I start worrying and what are the early moves that I can do to reduce risk when trying to acquire a business in Italy?

Typically the procedure is you have to notify the Italian government in the cabinet, really of the prime minister, of your intention to carry out this transaction. And there is a period of 45 days within which they can actually answer. Typically they do answer. If they don't answer, you can go ahead. Typically they do answer because the rules are, let's say, a bit vague. They did it on purpose. You don't have 100% certainty if that regulation applies to that specific transaction. So they usually answer by saying either it doesn't apply or it applies, then the transaction is cleared. You have to be ready to file this notification, which is not too cumbersome, I would say. It's not easy, but it's not too cumbersome. And it's something put in a to-do list of things to do along with the potential merger control.

Regardless of the specific deadlines for the notification and, or, and for getting the clearance in the end, what we do in practice is to focus on this issue since the very beginning when the client approached us for the due diligence, for instance, on the specific target. So based on on the business of the target, we carry out also a sort of regulatory and compliance analysis in order to understand which kind of authorization may or may not be necessary. If we realize that the specific nature of the business is such that a golden power filing is required, we start working since the very beginning, the very first stage of the negotiations, even in parallel with the due diligence, okay, in order to understand how critical the issue can be. Which are the chance to succeed or to be blocked, which are the potential remedies that the government may impose in order to clear the transaction. And then of course, what we do is to provide for a specific condition precedent in the share purchase agreement, which makes closing subject to the obtainment of the authorization. This because in theory, again, theoretically speaking, you have a certain number of days, around 10 days after you acquire shares of an Italian company to make the filing, but that would be too late. That would be a disaster for a buyer to make this notification after having acquired, so after closing. So what we do is always to structure the golden power as part of the pre-closing activities and qualify it as a condition precedent to close the deal.

And then you still have that period with the European Commission that you have to get approved.

Yes. Again, merger control is, of course you have to do that, even before closing, because merger control, usually speaking, is a prerequisite in order for you to buy the shares. In order to be more efficient in terms of timeline, what we do is to work in parallel on the two filings. So to prepare whatever are the documentation required, we go with antitrust first, then we may go with the golden power later on, but we will wait until we get all the authorizations before acquiring, actually go to closing and acquiring the shares.

Basically got at least about 6 months of diligence right there.

Well, that is a waiting period that yes, you cannot really avoid. We are clear with our clients since the beginning, which are the time constraints.

What triggers scrutiny from the regulators?

First of all, the sector, they check the target, also they check the buyer. So they check if they're happy about that specific buyer acquiring the company.

If buyers may have interests that conflict with the national security, let's say the national interest in general. 5G in the telecommunication is a sensitive issue, for instance, because you have access to data, personal data of the entire Italian population. That is a sensitive issue that where the government would be extremely cautious before giving any green light to a deal.

So national security is a big one.

Yeah.

I want to turn this around a little bit since both of you've worked with buyers from other countries like Japan, Korea, US, UK. Can you tell me a little bit about how do you see different buyers from different countries approaching deals, especially when it comes to like timing, the decision-making? How do you see it vary by culture and country?

This is a very interesting question, Jason, because the way of behaving of Asian buyers, for instance, is quite different from UK or US potential buyers. Let's take as the example of one extreme before going to the other, which is US buyers. The one extreme is probably Japanese investors or Japanese buyers. In terms of timeline of the deal, they are extremely slow. They like to have extensive pre-meetings, internal alignment within the company, and then they ask to have a number of meetings and build up relationships with the buyer. Even before actually entering into the details and the specific terms of a deal. Because for them, building this sort of relationship is a prerequisite in order to get whatever approval for closing a deal. This is also linked to the decision-making process of Japanese conglomerates. The consensus around a certain deal is driven from bottom to top. There are a number of, let's say, people involved in the decision-making process. Sometimes even the stakeholders of the Japanese companies are involved. And of course, it takes time to prepare the package, explain the transaction to a huge number of potential decision-makers. And there are an internal, a huge internal reporting activity that they do in preparation of a final decision, which again is taken by a broad number of people around the table. The good thing of this is that whatever it takes at the end, if the Japanese company decides to go ahead, they are quite firm, they are quite reliable, and the risk that the decision is now revised is quite remote. I think different probably is the approach of Korean companies, just to remain in the Asia side. Koreans probably are a little bit faster than Japanese companies. They start running, they look enthusiastic. What happens, however, that is a sort of discontinuity in the sense that they, at the beginning, they may give the impression to the Italian buyer to be very keen and to want to close the deal as soon as possible. Then there are the blackout periods, silence. And sometimes we see that the Italian counterparties are a little bit surprised and they start thinking, what's going on? Probably they're not interested any longer. And then again, they suddenly come up and want to close the deal very soon. It's a quite peculiar approach. This because the Korean conglomerates are always driven by the budget constraints that they have internally. Probably when it comes to the end of the fiscal year and they have still the budget and were not able to spend, they want to speed up, close the deal, and justify the budget of the specific department. There is no, let's say, continuity in the approach, the negotiation approach, with the Italian sellers. And these sometimes has created some tensions during the negotiation. And the other peculiarity is probably due to the fact that the decision is taken basically by the senior management, can be the founder or the chairperson of the company that makes the final call. However, there are a lot of middle executives that are the most operative that come to Italy, make site visits, make interviews. Speak with lawyers and so on and so forth. However, they are not decision makers. They are simply to report to the executives in Korea. And the tricky point, at least for us, is to understand who is who actually, because in Korea, the hierarchy is very important. It's difficult for foreigners to understand, okay, this kind of hierarchy and to understand whether you're talking with the decision maker or just a paper pusher. And therefore these may create even complexity in the relationship between the client and its own lawyers. On the other side, instead, UK and US buyers are quite different in the approach. Again, UK are faster than Japanese or Korean clients, but still they want to keep the process ordered. They are also very formal in terms of structuring the process and stick with it. Verbal agreement, shakes of hand for them is not enough. Everything then must be written down and formalized in whatever document, can be LOI, stay at first stage, and then the final contractual documentation. This is probably in my view the most effective way of proceeding because it's a good balance between Taking time to build the relationship, but keep in any case the negotiations and whatever in good shape, sticking with timelines and giving also certainty on both sides about the reliability of the counterparty. US companies sometimes tend to be too fast, so they privilege speediness or closing a deal, and sometimes they are not very focused or they do not pay the necessary importance to specific issues that we may detect during the due diligence exercise simply because they are more business-oriented probably. So they want to close the deal and then to deal with whatever potential issues are afterwards in the PMI phase. They are fast also in the decision-making process. So when we see here delegation of the US people flying from US to Italy, it's because they have decisional powers, and they are perfectly able to bind the company in real time during the negotiation, which is something that you do not really see with UK and you never see probably with Korean and Japanese clients. You got some extremities of the different cultures, I would say, especially Japan and US are prob— yes, are really at the opposite, I would say. In the middle we have Korean and UK buyers.

I'm very fortunate. I did a podcast in Tokyo with Woven, one of the divisions of Toyota. At first I was like, this isn't efficient, it's so slow. But then you realize that when they get full-on consensus in their whole organization, which why it takes so long afterwards, they move incredibly well. It actually ends up being more efficient when things are said and done. It's like quite fascinating the way you contrast the big difference that it's definitely a lot slower, but the much more effort on the relationship and getting consensus. You saw that the difference as well when you referenced the Korean example as well as move faster, but then on and off in terms of getting a little hot and cold in the process. UK faster, but definitely more formal, structured. And then you got the wild west of the west, the US that likes to move fast and break things. And I guess I'm a little more biased coming from the US. Where do you see that American buyers consistently get wrong when they're acquiring it? I know one thing you emphasize that buyers, US buyers love speed, but even the culture in Italy is definitely very relationship based. Where do you see speed being helpful versus where it backfires?

I wouldn't say that they consistently get wrong because in my experience, and Mauro, please step in if you disagree, it seems American investors do spectacularly well here in Italy. More often than not, the deals they're involved in usually are satisfactory for both parties, the buyers and the seller. And clearly there's a massive amount of investment from the US in Italy. It's one of the main partner, obviously, for investments and trade. So generally speaking, it's quite a successful combination of relationship, I would say. The problem is clearly the cultural clash that's everywhere in any cross-border deal. The part on top of that, the things that American investors should know, but they've been aware by us very early on in the deals, that employment rules are quite different here compared to the US. It's much more strict. Layoffs follow a strict procedure. It's more difficult to fire people here. The second probably issue that American investors sometimes have faced in my experience is the fact that they think they can, particularly if the Italian target is like smaller target, part of a group, they can manage the company from wherever, either the UK or Ireland or directly from the US. Which is not really true. For lots of things, you need to have a presence here in Italy, or somebody that can liaise with suppliers, can liaise with customers, can liaise with authorities. You don't need an Italian person in the board, but you need somebody that at least comes to Italy quite often. And lastly is the— particularly if they go to buy a minority, the important thing is to understand the culture of the company, because Italy is based on huge amount of, I would say, quite successful, quite productive medium enterprises, rather small and medium enterprises, but more medium, particularly located in, say, from Rome and in the north. And in these companies, usually they're still the founder of this company, and the presence of this person is really fundamental for the culture of the company. So you need to understand very quickly how to deal with, with these people. With these individuals and also how to deal in the future when they want to build a relationship with the employees and the managers of the company in a scenario where the founder will not be there. So these three areas— employment, management, and relationship with the founders— it's where Americans have to be a bit careful.

One quick thing. Tomorrow, March 6th at 2:00 PM Eastern, Gwen Pope and I are running a live workshop on what we're calling the Acquisition Graveyard. It's for corp dev leaders and integration teams who have deals that are post-close but not fully delivering. We're doing a hands-on audit, real frameworks, real scenarios, tools you can use the week after. It's a totally free event. Registration link is in the show notes or visit mascience.com/events. Again, that's mascience.com/events. You've been thinking about it. Today's the last day. Now back to the conversation. I want to roleplay an example here, but I want to understand, I guess, things that may get misconstrued when you think of behavior where American buyers may think it's professionals, the Italian side may look at it as a red flag. And I'm almost thinking of, for me, it's like, how do I be like fast and credible versus like pushy? So I'm curious, like, where do things maybe get misinterpreted in terms of Trying to be that moving too fast type of buyer?

Approach here, which may sometimes result too aggressive from an Italian perspective, is, okay, we come, we pay, we buy you.

Okay.

And from the day after, you will be completely under our control. Regardless whether they acquired 100% or controlling stake, they tended to be invasive and then to, let's say, the ambition to know the business even better than locals. This is something which again, sometimes it's not true, especially on businesses which are based on relationship with customers in time. And those relationships will have been maintained by the former management, who sometimes is composed by the owners of the company itself. So the idea of jumping in, acquiring the company and get rid of the old management and so on and so forth without instead investing in them is something that sometimes can create difficulties even to them after acquiring the companies. And they only realize when it's too late. That's why it's critical. And we always sometimes negotiate even against our clients, but it's critical to set a good governance structure of the company, especially again, when the sellers still remain with a minority stake, or even when they decide to retain some of the former managers as directors or key employees in the company. Having a good structure, good rules will help on both sides to live together and to perceive the same interest, which is ultimately, you know, to make the company acquired successful.

Don't move too fast and break things. You gotta be respectful for the relationships driving the business.

Yeah. Then of course there are examples when sellers, they really want to sell. Private equity, for instance, they want to sell because they have to sell. Then American buyer, US buyer comes, the price is good, they speak the same language, and the deal goes smooth. But this is not always the case with small and medium companies in Italy.

How does deal flow happen in Italy? Like, how have you seen deals get sourced now, and how has it evolved over the past decade?

Italy has always been one of the preferred countries to invest by foreign buyers, including US. So either being private equity or sometimes there were periods even close to the pandemic where we have a lot of distressed M&A, but still in terms of deal flow, we have seen, let's say, an increasing number of deals closed, both in terms of volume and the number and value of the deals. There was probably a slowdown of the private equity funds in 2020 or during the pandemic, where again, we see more distressed M&A. But immediately afterwards, again, the private equity market has revamp again, and this has resulted in a huge number of deals closed in Italy. Then of course, in terms of value, we do not have the billion-dollar transactions that probably you are used to seeing in the US, but still we had very interesting M&A deals last year in terms of also value and importance of the Italian targets. KKR and Blackstone probably remain among the private equity funds, the big names that are always very active in Italy, and by definition they look at large-sized deals.

Is it the market overall, a heavily banked market where most of the deals you're working on have investment banks involved, or is it more of a, you're actively finding your own deals and they're proprietary deals?

Deal sourcing has changed, let's say, over the years, I must say, because when I started my career, so when I was a young associate, probably I was used to deal with the largest investment banks. As our first point of contact in whatever deal generation, because they were leading the market. So Goldman Sachs, Merrill Lynch, at that point also Lehman Brothers, JP Morgan, whatever. I mean, they basically were the most active players in terms of deal sourcing and origination for a number of reasons. Because from the seller side, involving an investment bank, would mean to have a neutral and professional advisor that could help them to get the right value for their company. On the other side, for buyers, the foreign buyers, to present themselves backed by an investment bank would mean reliability, seriousness of the approach. So the role of the banks was key. Also considering that the private equity market 10 years ago was not so active in Italy. Many of the M&A deals were industrial M&As, and the banks had access to database information about their clients, their customers, that would allow to match interest from buyers and sellers. And that was by definition probably the only way to close deals in Italy 10 years ago. Then big investment banks for large deals and small advisory firms, slightly smaller advisory firms for medium deal. Then things have changed over the years because the technology access to LinkedIn, merger market, whatever database would make it easier even for entrepreneurs to access to information worldwide. They could easily see which are their competitors or to who, which they could approach and offer to make joint venture or eventually sell the company by creating synergies. And therefore what they do is they on our work. And then they come to lawyers first. Okay. And say, look, for instance, we, Italian company, we want to open up our capital to foreign investors or eventually to sell the company because of, I don't know, generational issue that we have within the company. And they rely more on law firms rather than approaching advisory. First of all, because they know we are with have no conflict of interest by definition. Intermediating is not our main job. We do it as a part of pre-effort to ultimately get a mandate from the legal side. So we are less expensive, first of all, because we do it as a promotion, part of our promotional activities. It's not our job. And again, by liaising with all the largest investment banks, And advisory boutiques, we have the opportunity to introduce the company to a larger panel of potential buyers because they are not just mandated Goldman Sachs or JP Morgan or whatever can be an Italian advisory. They are mandated law firm, which can discreetly circulate a teaser, an info memo about the company to contacts, and probably the chance to succeed are even more. And we do it not because we like to do that. We understand it's not our job. Okay. But it's essential. It's becoming essential also for lawyers in Italy in order to generate the M&A work. Actually, it's part of the price that we are conscious that we have to pay in our job in order then to be able to do what we are able to do, which is the legal part of the M&A. Usually advisors come at the later stage. So if we contact a certain advisor, which may think to have a good match with the foreign clients that could be interested at that point, also the financial advisor jump into the process. And still they retain, in my view, a very useful role in the valuation part of the deal. So to help both seller and buyers Okay. To fill whatever gap they may have in the valuation process and to find the right price and then eventually to set up a competitive process when it makes sense to have a competitive process. So they are still very useful, very active, but not in terms of deal generation or sourcing, but say structuring and execution of the deals.

That's actually really interesting. It makes me think of the actual structure of these deals, like how that's actually done. I know one of the things that we talked about before is how you may do like typical purchase price adjustments versus using more of a lockbox approach. And maybe we can talk a little bit about that in terms of what's typically standard in the way you actually structure deals.

Pretty much mirrors what Mauro said. Until 10 years ago, the closing account adjustments was pretty much used in all deals. This was involved in, and now it's still used, but lockbox is really widely used as well. I don't know if it's 50/50 or 60/40, but it's definitely the two methods are very common now. And that these mirrors the, I said, the importance of private equity funds in M&A activities in Europe and specifically in Italy. In our experience, at least the PE funds prefer the lockbox mechanism compared to the closing accounts adjustment.

Can we like explain the difference between the two? I guess one thing to highlight too that I thought on the last point that was really unique was that it first fundamentally makes sense to engage with the law firm first in the process. It sounds like engaging the law firm first, you guys can potentially help facilitate who potential buyers are, at least have a good sense of the landscape. Here's all the things that would come with regulations. And then like a lot of times, you know, maybe if you need a specific advisor for this transaction, you can even help guide to which advisor to use. So there's just a lot of things that point at the starting place is getting a good law firm to work with if we're looking to do a deal here in the Italian market. And then I guess getting into the structure place, I think it's just shift and changes, but maybe we can explain what the fundamental difference is between having a model where, you know, you sort of engage on a price and then you do your adjustments at close versus having them more this lockbox where the price stays fixed? And I guess what determines which approach do you actually use?

When we use a typical price adjustment mechanism, which can be based on working capital or other accounting parameters, what we usually do is ask the seller to prepare a tentative balance account as of a certain closing date. So there is an exercise that the seller is required to do which is to prepare a sort of reference balance sheet as of the closing date. And this exercise should be done upfront before actually closing the deal.

Okay.

And on the basis of that balance sheet, okay, the buyers has also determined whatever is the price payable. Then you close the deal and afterwards the buyers jump in and review the accounts of the company and prepare its own final balance sheet as of the closing date. So we have a huge number of activity and efforts required from seller side to prepare the balance sheet upfront. And then the buyer has to replicate this exercise immediately after closing in order to see whether the figures match or not. And therefore a certain price adjustment must be paid based on whatever different negative or positive difference of the estimated net working capital against the actual net working capital, for instance, as of the closing date. So you may easily understand how painful, time-consuming this is, and also the risk of potential litigation around it because of the way you have calculated a certain item in the balance sheet as opposed to the other. So again, you also need a sort of guidelines and at least a set of accounting principles that the parties have to agree to use when preparing the balance sheets in order for the two of them to be consistent, the one with the other. This again entails sometimes a huge amount of time efforts on both sides. Lockbox simply avoid this because you have probably official account certified, whatever balance sheet of the company that can be 3, 2, 3 months, even 6 months back. To the closing date. Okay. But you have an official balance sheet, if possible, also certified by an external accounting firm. And that is the starting point. Okay. Then what you simply ask to the seller is to avoid any leakage and therefore any extraction of value from the company since the reference date up to the closing date. So the seller, you're simply requesting the seller, I don't know, not to distribute dividends, not to carry out related party transaction between the target company and the sellers themselves or any related parties of the sellers, because this can be a way not to extract value from the company. You ask the seller to cause the company not to grant money, not to borrow money, or not to grant securities in favor of the sellers themselves or their relatives or whatever. You basically put a number of, let's say, constraints, financial constraints mainly to the sellers from the reference date of the balance sheet up to closing. And you have then to simply check that no leakage has occurred in that period of time. And this is just a check that the buyer can easily do after closing. And then based on the outcomes, you can eventually adjust or not the purchase price.

So it's much easier.

More straightforward and probably also again, easier to understand and to be complied with by unsophisticated sellers.

It makes sense because you're eliminating, you know, one is figuring out how to get standard on the common principles, but then you're basing off a lot of assumptions that you then end up truing up after the deal's done. Yeah, it makes sense. I'm wondering if it's going to be a more trending thing because it sounds like it's already trending in your market or across Europe.

As Donato was saying, this is probably one of the good things that we imported from US private equity into the Italian M&A markets. This is perfectly matched with the needs of US private equity funds, and it became more and more popular over the years, up to the point that honestly, unless there are specific peculiarities of the business and so on, this is probably the solution that we tend to suggest even when we are on the sell side advising Italian sellers to implement.

The other question comes to mind are earnouts. Are there anything different practices when you see how earnouts are utilized in transactions you've worked on?

This is another aspect of M&A deals that has become, let's say, more popular over the years. Still, in my view, it's not used as much as in the US or in other Anglo-Saxon countries, but we have seen it and we keep seeing it often. Mainly for one reason, to basically to bridge whatever valuation gap that can exist between buyer and seller, because this would allow basically to increase eventually the purchase price payable if the target company actually meets certain key milestones and economic parameters. Still, however, the level of sophistication of the announced in Italy is probably not comparable to what you are used in the US market. In the sense that the mechanics tend to be very straightforward, very basic, and very clear because the risk that in any case we want to avoid is to end up with a litigation. Earnouts, first of all, usually they have a duration that can last between 1 and 3 years, no more than that. I have never seen, or rarely I have seen earnouts payable after 3 years from closing. Again, then they are linked to very key financial KPIs. So it can be EBITDA, can be turnover of the target, gross margin, whatever is the economic parameter. What is probably the most complex point is how to give to the buyer the flexibility to manage the company that they acquired in the way that he wishes on one end, and on the other side, to give visibility to the sellers and sometimes also certainty to the seller that nothing will be put in place by buyers in order to somehow make the payment of the earnout ineffective, to manipulate numbers or figures and so on and so forth. So there are these two conflicting interests which probably are the most critical part of the earnout mechanics to address. So sometimes what happens, especially when the sellers remain as minority, for instance, that we address these issue in the shareholders agreement, in a shareholders agreement whereby basically we say that the buyer will manage the company, but it will do that in the ordinary course of business. And the seller, who probably also has a presence in the board, has a sort of visibility on whatever extraordinary transaction and sometimes a veto on extraordinary transactions, as long as this may impact on the earnout. Private equity, they never accept, of course, vetoes. They prefer eventually to anticipate payment of earnouts and be free to make add-ons or other acquisitions within their portfolio. But among industrial parties, this can be also a viable solution. Sometimes, for instance, what we tend also to do is a combination of earnout with, for instance, stock option or long-term investment schemes. That would be applicable to the sellers when they remain in the company, for instance, by retaining managerial roles. So if they remain as key employees of certain companies, part of the remuneration is shifted as salary compensation for the work rather than price paid upfront for the shares. And these incentive schemes are linked to parameters which are different than normally from the ones to which earnouts are linked. And therefore this creates a virtuous system because at that point the manager is not encouraged to act or to behave in a way rather than another in order to get their earnout payable because this may affect the payment of its incentive, its bonus as a manager and employee of the company. So finding the right combination of these two schemes is more often the way to succeed. In structuring the deal.

So it sounds like if I get an earnout in, it's not going to be a heavy amount. You said they had short-term, usually 1 to 3 years, but, uh, I should probably expect to pay out there now.

This is probably—

I want to ask you about doing minority investments. I know we talked about M&A as a whole, but how do things differ? What does it look like if you're trying to do a minority investment in a family-owned business, like a governance structure that would actually work on that deal?

Well, first of all, I would say that the things that we do is to speak to clients, understand clearly what they have in mind, you know what I mean? Because the, my investor is a minority investor with an idea to increase stake in a company or to exit at some point. And so they have the clear view of what the timeframe is, when they want to increase their stake, when they want to buy the entire company maybe, or when they want to exit. Once this is clear, which is the most important thing, Typically what we do as a governance, we have shareholders agreements and we also amend what we call the bylaws or articles of incorporation, depending on the jurisdiction of reference, we call statuto in any case. And we insert fundamental things like, first of all, information rights for the minority investor. They need to understand how the business is doing. They need to have vital information on the company. Then we typically advise on having a presence in the board. So that they can have veto rights on board decisions and typically as well veto rights on shareholders meeting decisions. So they can actually block extraordinary transactions, which typically are resolved upon by the shareholders meetings. So they can block that, but can also have the right to block certain decisions that are made by the board at board level. Of course, the fantasy is without limits. So we can have a huge amount of different thresholds. We can have different vetoes. This is the package that we always advise our investors on focusing on.

Getting veto rights. Sounds like the board composition is going to be part of what you're outlining and then other information rights.

What we also usually see and encourage is to have also exit strategy since the beginning, either in the case the deal is successful or even in the worst case scenario when things probably didn't go as expected. Meaning put and call option agreements, ancillary to whatever is the main share purchase agreement. This would allow the buyer, which for instance has acquired majority in first instance, or even a significant minority stake, to exercise a call option in 1 or 2 years, okay, if it is satisfied by the investment, and then at that point gain control or even gain the full company, the whole ownership of the company. Or vice versa, to set up for a put option and sell back, which is an extreme case that honestly is not so frequent, but sell back the shares to the seller. Or still within the call option, we can have price mechanism that can be punitive if the company does not perform as expected, or can reflect the additional value of the company has gained the closing after the acquisition by the buyer. And again, rather than for instance paying an earnout, this can be another possible solution for the seller. So you retain your 30%, 20%, whatever. But when we exercise the call, we have not fixed already the price upfront. But if the company actually has increased its value, its enterprise value, we will pay more, proportionally more, the 20% as compared to what we paid for the 80% in first instance.

We also advise on drag-along and tag-along rights as well, so that if the majority shareholder decides to sell, they can drag out the minority, or if it doesn't, at least the minority shareholders can be tagged along and exit the company along with the majority shareholder. So it's quite typical as well.

I'm gonna give you a call when I cross that bridge and have an investment like that to work on.

Another way buildups and to structured transactions, especially with private equity that we see more and more, is the sellers reinvesting in the holding company used by the fund to make the acquisition. It's another way to compromise on price, you know, because this is an instrument that would allow the seller actually by reinvesting a certain portion of the proceeds received from the sale of the company reinvesting it into the acquisition vehicle used by the fund would allow, when the fund exits, to benefit pro rata of the upfront of the creation of value that the private equity fund has been able to generate over the years before the exit.

We have not talked a lot about these labor laws in Italy, and I'm giving you a hypothetical situation. Say I was going to buy a software business and my plan was to eliminate one of the groups, maybe the software engineers or something like that. Yeah. I'm just wanting to know, like, how does that play out? Because I know a lot of European countries, it's going to be a lot of tight regulation that's going to keep you from doing it.

It's going to be a nightmare for you. You had better to buy a software house in the US. The labor regulation here is very tough. It's very strict. And generally speaking, it tends to be in favor of the employees rather than the employer. Up to the point that, for instance, if you make a transaction, you structure a transaction in Italy as an asset deal rather than a share deal. So you buy the assets. Okay. The simple fact that you bought those assets is not per se a just cause to terminate employment relationship with the employees that you brought in your company. So sometimes again, US people say, okay, we buy this business, this branch of business comprised by these assets, whatever, and a certain number of the employees, and then we will take care of redundancy later on. It doesn't work in Italy because after you have made an asset deal, you cannot simply fire the employees because you have internal redundancy, overlapping of positions, and so on and so forth. Even before acquiring the asset deal, you have to discuss with the local trade unions and work councils which are your ideas and your decisions for the future of that branch of business that you're going to acquire and the future of the employees. And sometimes rather than redundancy, you are bound to take on retention. Mechanism whereby the buyer commits not to fire or to terminate the relationship with employees for a certain number of years. This is key for Italian entrepreneurs because even in share deal, what they are selling to you is basically their life, a portion of their life. Most of the employees have been working with that specific employer for years. They are sort of family members in the smaller companies especially. So one of the first things that an Italian seller cares when selling its own jewel, its own company, is to make sure that their employees will be safe. And they like—

some of the employees, by the way, are key for the company's future and strategy as well. So if I can advise on this, I would advise for investors to actually listen carefully when the Italian seller tries to convince them to retain at least some of the employees because they are key to the success of the target.

This applies also to large Italian companies because we advise, for instance, a deal I advised where a Japanese conglomerate was acquiring an Italian listed company. However, Italian listed company, which however brings the name, the last name of the founder in its name. So Paul, the founder, was essential Okay. To get a retention commitment undertaking from the Japanese buyer not to fire or terminate even one employee for at least 2 years. So this not only applies to small companies where again, probably there is also a very close relationship between the owners and the employees, but also to large companies because big Italian employers or businessmen, they want to save their face and keep their reputation on the Italian market.

In summary, if we wanted to break down like principles for Italian business culture, if you could give every foreign buyer one rule for Italy, what is it and why?

Relationship with the seller and the managers of the company or the key employees. Yes.

Spend a little bit of time upfront to build up this relationship and this trust. It's not a waste of time, but is then the key to succeed and to make things move. When it comes to actually close the deal. So it's not a waste of time, it's an investment of time.

So how? Drink the espresso, drink the wine? How do I do that?

For instance, inviting the seller to come to US and visit the US company, the potential buyer. And again, instead of placing a visit to the Italian target and speaking with key managers, of course in a discreet way, then it depends on the nature of the Italian target, introducing yourself, explaining a little bit about the company in the US, what they do, how synergies can be created, what could be the potentiality of this acquisition also for the benefit of the employees, the key managers. And then of course also shaking hands and drinking a glass of good wine at dinner.

Or bad one. Or bad one.

This is, let's say, part of the negotiation etiquette in Italy, I would say.

I agree. If you're gonna find until you get both parties agree. Gentlemen, I gotta ask you, what's the craziest thing you've seen in M&A?

I might tell you something in mind because it happened in probably one of the last deals that I closed where a Korean company in this case acquired the small, medium, and satay company. Negotiations were tough also because of the cultural and language barriers. Because how to draft the contracts in English or in Korean and Italian, so bilingual version Korean and Italian, which language should prevail, one or the other. But this is probably another topic. That was one of the probably of the most recurrent difficulties that you may face also when dealing with Italian people that don't even speak English or speak basic English and they are reluctant to sign 100-page contract in English. But after this tough negotiation, in a way or another, I got closer to the sellers and the owner of the company. And I asked him, sorry, but can you explain me how you get in contact with this Korean player? Because the deal was not intermediated by investment banks or advisors on both sides. How you know each other? And he said, this Korean company that acquired us, has been one of our largest customers in persistence outside Italy. We spoke about the future of the company and they showed some interest, but then we also received unsolicited interest from another customer of the company and also from a private equity. So in the end, what we did is considering the range of the price and the distance between one offer as compared to the other, were not so huge, this kind of differences. What we did is a sort of referendum with the employees. So we asked to the employees, we presented the 3 deals, okay, to them, the 3 potential buyers, and we asked them to actually say a word, express their preference for one rather than the others. And this was done with a huge number, not all of them, a huge number of employees, the ones that were let's say historically in the company, because the owners wanted again, those employees to be happy also after they left. So the employees decided for the Korean buyer because it was more reliable in their view, more similar in terms of culture to the Italian environment. And therefore they decided to go with the Korean buyer, even though he confessed to me, the owner confessed to me that the price was a couple million euros lower than what offered by the private equity fund.

I like that story a lot. Let the employees decide the buyer.

This explains how emotional is M&A or can be M&A in Italy. It's not always this the case, of course. This was a really crazy thing that happened recently to me, but still the emotional part is very important.

I like that one. Gentlemen, I want to thank you so much for taking the time to have this conversation, help me become a better M&A scientist. Those of you that stuck through, I know we even passed our time and that's what usually happens on these live interviews. So thank you for sticking through all the way to the end.

You're welcome. It's been a pleasure. We do not see actually the audience, the people connected, but if any of you guys have any questions, maybe you can follow up, send us the questions. So we are happy to answer. Absolutely.

You know, again, if you stuck through, really appreciate you listening to the podcast, my fellow M&A scientists. Appreciate the feedback. Feel free to connect with me on LinkedIn. I took my privacy filter off. Just put a little note on there. So I know that you're an actual person, cause I get about 20, 30 spam now every single day, but reach out to me on LinkedIn. Love to hear topic ideas, things we haven't covered, the criticism. I'll take it till I get better at this. Till next time, here's to the deal.

Thank you for taking the time to explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M&A function or optimizing one that you already have, we're here to help. And if we can't help help you, we probably know someone that can. You can reach out to me by email, kison@mascience.com, or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com. Here's to the deal. Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.