Dynamic Portfolio Strategy: Rebalancing Using Divestitures

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I'm your host, Kisan Patel, CEO and.

Founder of M and A Science. Joining me today is Jerome Combs, Noak.

Strategy and Corp Dev at Maddox.

Maddox is a life science software company that has completed 14 acquisitions to build a comprehensive platform of solutions aimed at accelerating the pace of scientific research. Today we're going to talk about building a category leader through M and A and portfolio rebalancing through divestitures. Jerome, how are you doing today?

Awesome. Thrilled to be here. Glad to finally have an opportunity to contribute a little bit to the pool of knowledge you're building with this podcast.

Hey, thank you. I know you told me you've been a big listener and it's awesome to have you in the podcast. We're out here in California, Los Angeles on a sunny day. Appreciate just taking time from doing deals literally. So I've heard you between calls with attorneys trying to get something done now. So I really appreciate making this happen.

Working on number 15 but time very well spent and really happy to be here.

Kick things off a little bit about your background.

Yeah, absolutely.

Thinking about what it takes to be strong in Corp Dev and how I wanted to bring myself up and set Myself up to be a good MA Science practitioner.

I think there's really three skills you need.

It's the quant skills, it's the strategic perspective, and it's the social skills. And the first part of my career was how do I build those skills in as thoughtful a way as I can and systematic way as I can. Starting on the quant, Carnegie Mellon undergrad, computational science, then went into investment banking. And that's where I got my kind of foundational finance quant experience on the strategy side after banking, went to Columbia Business School and joined the Boston Consulting Group. Got a little bit more qualitative strategic experience. And then something that people don't necessarily think about in that early part of their career, but as you know, is incredibly important is the social side of it. And you kind of only really get that. Or at least I only really got that through experience and repetition of doing deals and being able to talk to founders in different situations and empathize with what they were going through. I spent three years at a company called Standex leading their M and A team through a series of acquisitions and divestitures. And then a year at Perkinelmer, which is a life science instruments diagnostics company, doing five acquisitions there, deploying $6 billion in capital. And those were the formative deal reps that I think you need to hone your craft. And now finally at Thoughtmatics for the first time, I'm taking all those skills that I've built over those experiences together, and we're building a category leader in life science software research backed by Insight Partners. Really excited about what we're doing. Really excited to talk to you about it.

I like how you break that down between quant strategy and social, because I think it's so true and on point. Did you think about that, though, as a career path like that? Early you're like, I got to build these three pillars of skills. Or do you sort of reflect back and say, hey, these are the three pillars? Be honest with me.

I was probably naive early on in assuming that more of it was quant and that less of it was the qualitative and social aspects. I think, if I'm being really honest, had a naive view that a lot of these problems were more mathematical equations to be solved your first year in banking or your first real set of conversations with management teams and so forth. You realize that or organizations are a lot more complex than what you can put in a spreadsheet. Strategy is a lot more complex than what you can solve with a math equation. And so it was a conscious, I think second pivot or second effort if you will, to start building out those additional aspects of the total skillset.

Well, there you have it. Those of you listening that are early in your career, think of it that way. Quant strategy and social and experience you can gain to build those skills. You mentioned 14 acquisitions to date at dotmatics. Can you tell me more about them? What's your magic? What's your unique approach to M and A?

I should also be upfront about this. A lot of that pre existed made. This was 2017, Insight Partners and the current CEO Thomas Swalla teamed up to buy a company called GraphPad. Without going into too much detail enables, it's very broadly used by a wide range of researchers and scientists and statistical analysis that relates to the work that they're doing. They went into that with a deliberate M and a mandate strategy to acquire the very best software tools in different technical domains and bring them together in one place. And I think that having that top down guidance in our core from day one, early, from very senior leadership from our board members was a really big part of it. Since then we've done another 13 deals. The high level outline of the strategy is finding the absolute best for vertical SaaS businesses in different categories. That's thing one and finding them is hard. It's a needle in a haystack. But we have a very systemic, robust way of doing that. Second aspect of it is having a differentiated strategy, both at the product strategy level, but then also in the way we actually add value to this companies. And let me talk about our product strategy for just a second. Each acquisition we do brings a really deep specialty and a different scientific domain. What our customers need is they need to solve the specific technical problems they have in those domains, but they also need to bring that information and those different points in the workflow together in one place to get to the total answer that they're working on. So we've acquired the best tools in different categories. We've brought them together into a single platform. We've invested organically in a scientific data intelligence platform that kind of sits in the middle of that and connects those things together and enables comprehensive workflows, enables multidimensional analysis and ultimately sets up for deeper, more innovative things that researchers are doing in AI that have previously struggled to succeed because, and I realize I'm jumping topics a little bit here, but a lot of AI efforts have failed because they don't have enough deep data sets on the significantly broad set of dimensions that you need to solve these complex multidimensional problems. We have a platform now where we have the depth and breadth across a large number of data sets coming together in one place and in a very tangible way accelerating the pace of scientific research.

It sounds like the strategy is actually pretty tech oriented. It's not just, hey, we're going to buy a bunch of verticals and just grow through that way by putting together a little team of type of businesses, but you're actually tying these together on a single platform and allowing the data between these different applications to be consolidated, which is where you get a much bigger data set that you can start using AI applications with better results. There's like a consolidation of data amongst a portfolio of applications seems like the core strategy.

It's that and then in addition to that having a very well defined operating model where you're taking companies of different stages of maturity. Some of them are a PhD professor somewhere that created a really great piece of software. Some of them are further along with 5, 10, 15, $20 million in ARR, but in a very well defined value creation playbook that we've developed over the course of these acquisitions that we can apply to different companies at different stages and give them little tips and tricks.

And capability uplifts, if you will, to.

Efficiently scale to the point that we're at now. So it's that value creation playbook capability in combination with a really differentiated strategy that adds real value to our customers and adds real value to the companies joining us. And the results of it on the scientific impact side have been pretty extraordinary. Since we're talking about M and A and so forth here, it's also been pretty extraordinary on the operating results side. Organically having scaled this up to now close to 300 million in ARR with exceptional consistent organic growth, exceptional consistent profitability on that as well, that we then reinvest in developing the products and doing additional acquisitions and working towards the vision of having this transition, truly comprehensive multimodal platform for science.

Can we talk a little bit about like how you value these companies? You don't give any secret sauce, but I'm just, I'm running a SaaS company myself and I got a big dream to turn this into an M and A platform. For those of you listening want to help support one day. I'm just curious because when you look at it, you sort of have the strategy of like, hey, we can build ourselves in a market lead position and you probably like identified some initial acquisition targets and started getting that momentum going. But as you go through that how do you look at that? Is it part of the strategy is like we know what the end goal is going to be, what the value is going to be so we can come in with strong valuation and pay a premium, or are we still being like, I'm India, man, I'm trying to get value in everything I look at. Is it more of that kind of still a strong value based approach? And yeah, I'm just curious just fundamentally how you value it.

I'll say a few things that I think might surprise people. I think it's more fundamental driven than a lot of people would assume software investing is.

We do pretty rigorous and pretty real.

Math in terms of looking at the momentum of a business, being very, very precise and scientific in measuring ARR velocity and quality.

Quality of velocity is something we could expand on. Understanding the cost structure of that business in a lot of detail.

And ultimately what we want to make sure of is that there's these ephemeral.

Concepts of this is a great product.

That'S resonating with customers, but validating that and corroborating that with the momentum that.

You'Re able to see in the recurrence of revenue, the growth of revenue and so forth. It's more fundamental driven than people realize. Where we are looking in a very.

Precise way at the individual customer level, how long are those customers staying with this product?

How quickly are we able to add.

New customers and grow there?

Those indicators, those signals are really important to us.

When you have a company that's consistently retaining its customers, that's consistently adding new.

Ones through the strength of its product, and you're operating that company in a pretty disciplined way, you're able to, through not extraordinary math, get to fundamentally rooted valuations that actually still enable us to bid pretty aggressively on a lot of these relative to other software investors. The reality too is that sometimes you do the math and you can't, but then that's fine too. That tells us that wasn't the right asset for us.

I like how you break it down too, of digging in and really understanding the real organic metrics with retention and acquisitions. I think that really tells that strength of the business as opposed to just we're paying X on this multiplier of revenue or something like that.

Yeah.

And by the way, I don't think Insight would mind me sharing this because they. And I'd encourage your listeners to go to their sites, they blog a lot about this. But momentum and retention are probably the two most important things that in a.

SaaS company, you know, I'M going to chase somebody down Insight after this interview to get them on the podcast so they can explain this on record.

Absolutely.

They'll correct my notes.

I'll give you one a little more. Probably something you have FaceTime with is when you actually pitch this to the company, what is the pitch for a company to say, hey, we're going to get acquired by Matics. And why does that make sense?

I think there's two parts to the answer.

One is there really truly is, and I sincerely believe this, and our customers believe this, and the founders we talked to believe this. There truly is value that's created when you're taking all these disparate capabilities and bringing them together in one place. And it's almost like one of those team building exercises where you each have one piece of the puzzle and suddenly the lights come on and you can see everything. I'm sure we've done variations of that team exercise that really doesn't exist today in the life science world. It's incredibly fragmented. And at the same time, the drugs that are being developed now, it used to be you could drop something in a petri dish and it worked or it didn't work and you had an answer. The drugs that are being developed now require a multimodal approach of chemists collaborating with biologists collaborating with geneticists, et cetera, et cetera. And so I'm rambling a bit here, but the point is having that together in one place is distinctive, is different, creates value, enables the individual products to be elevated into this bigger context. And this is only going to become more true, by the way, as we move more ToWards data driven AI enabled discovery. And I don't think anyone's pushing us back on that.

That's part one.

Part two of the argument is each company at any stage of growth needs help in some way to get to the next stage of growth. And it doesn't matter who you are or what stage you're at, the challenges in step one are different than the challenges in step two are different than the challenges in step three. We have a little bit of a.

Secret weapon in that.

Insight Partners who's backed us up. They're one of the biggest, if not the biggest, software focused investor across all these different verticals. They know those challenges really well. In addition to that, we've codified, and I'm not exaggerating, it's a 300 page playbook. You pick different pages for different acquisitions. You do. But we have really good experience at.

Different challenges that people face at different points.

And Then in addition to that, there's the shared service operating model that brings things to these businesses that they individually might not have the scale to support. And also, by the way, would really not be fun.

Maybe this is the third point fund for a founder to support.

I'll make up an example of export control compliance or figuring out taxes in eight different jurisdictions. Founders shouldn't be focused on that. Founders should be focused on better products and servicing their customers and innovating. And we take care of a lot of the boring stuff that enables them to scale faster, more efficiently.

Sounds like a good support from Pfirm.

It is. It's great. It's been a great relationship and we've done a lot to internalize a lot of it. But despite everything we've done on that front, there's always something new and they're always there to help us and it's been great.

It's like that real core vision that you're really selling on that it seems like gets those other executives interested in combining companies.

Ultimately, I think that is the biggest thing because these are science driven companies. It's also probably worth mentioning our values, our core values. Science driven, customer centric, better together, living by that, exercising that and how we approach these deals and people realizing and experiencing that when they're with us. Maybe the last thing I'll say on this is, and I'm sure every single guest of yours has said this, reputation is so important. We're working on our 15th acquisition now. We've done a surprisingly small number of Lois to get there. When we issue an loi, we deliver on it. We also have a process that makes it easy for people to opt into our process. Our initial question list is six questions. We really are able to focus diligence on things that we know matter because we've done it enough to not ask you questions about things that don't matter. So making the process easier is also obviously lubricating everything else we talked about.

Reputation is everything. I think that should be taught the golden rule.

I probably should have said that business. I probably should have opened that business.

Business. Hey, can we talk about portfolio rebalancing? I know something that you mentioned that you had experience with and love to hear a little bit about it changing.

Gears in a pretty orthogonal way here.

But yeah, this isn't this current company that your experience was with a different.

Company, very different company. Switching gears, switching gears.

Totally different. But actually where we first started chatting was all around this and you're like, hey, this is a pretty cool experience. I had And I'm like, this sounds like a good podcast interview.

Portfolio rebalancing, very different situation as we talked about. So dotmatics, relatively new company, singular focus on this strategy. Standex and Perkinelmer, when I joined them, had each been listed on the New York Stock Exchange for over 50 years.

Great companies with storied histories and doing really good work.

But inevitably after that amount of time there's some drift in different business units. And unless you're very actively thinking about a mechanism to prune those elements of drift back to a core strategy, unless you have a real discipline and mechanism to do that, you're going to have these odd shaped things that are out there. So I think in each of those instances we, and by we I mean the central strategy Corp dev function provided that perspective, provided that impetus to do that pruning. And I should say too that there's not really anyone else except for maybe the CFO or perhaps an activist external investor, which is not how you want these things to be instigated, by the way, that's going to actively do that. I'd encourage your listeners, many of them in those corporate strategy seats, to be thinking about that. If you're not actively thinking about it, nothing happens.

I think you're right. It's easy to just put in the back burner and do business as usual versus you gotta be proactive when you think about where your portfolio fits and evaluate it.

And it's not just putting it on the back burner without thinking about it. I think there's a bias against selling because it seems like it's admitting defeat. And then management teams, there's sort of this implicit assumption that their job is to take the assets they have and do the best job they can running them. And well, that's kind of true. It's actually not exactly true. Their job is to realize the best value that they can from those assets. And we can also talk about serving customers well, serving employees well. Those other objectives are also dependent on that asset being owned by the right person that's well positioned to grow and develop that asset. There's a negative connotation that divestors are.

A form of failure.

There's that implicit thinking. And then the other thing that's working against you is people will focus on.

I call them not first principles, but.

A level below that, like goals around eps, goals around ebitda, goals around growth quarter over quarter. And when you're looking at the world through that lens, you're often missing your first obligation to total shareholder returns. And unless you're really actively thinking about it in that way, you don't come to the conclusion that, oh, maybe we should think about an investor.

I like this. These are the reasons why people don't do a portfolio review is because there's a bias against selling. They fall in love with their kids or the business aligns and that they look at selling a business as counter to growth.

Two other things I'll say it's hard.

To talk about internally and at any level. The official line has to be, we love all of our children equally and also we'll get into this at some.

Point, I'm sure, but it's a lot.

Of work, a lot of work to actually execute a divestiture. The good news is when you've done it, you can also realize a lot of value for your shareholders, but then also refresh and reawaken a stronger sense of identity and purpose and focus that then enables you to reach new heights with the remaining portfolio. And importantly, the company that got spun out also is presumably with an owner that's focused on their strategy, focused on what they're trying to do, and thereby able to achieve new heights and new purpose that they weren't able to before.

Focus and achieve greater grounds for reasons too actually do this, make divestitures. What's the critical point that a company actually does it. They actually go through the exercise, they review their portfolio and look at rebalancing the share stock is plummeted down so much.

Thing one is there's not much of an impetus unless someone's actually actively thinking about it in this way. But you're right, actually, if I were.

To give another answer, it would be.

That you'll often observe conglomerates trading at a discount. And this is classic some of the parts analysis type stuff, but you look at the individual components of a business, you see what those would be worth. You look at where your stock is trading, you look at where more focused peers of yours are trading. A lot of times when you have this amalgamation of business units, it's harder to tell a persuasive story to the street. You find yourself trading at a discount. People get frustrated with that. That often leads to the impetus to act. And as a management team, my strongest recommendation would be to acknowledge that and be proactive about it and not wait for the investor base to come back to you with their version of the solution to it.

Yeah, I like that point around looking at your business against the market and seeing where that's sitting the story. And then investors, obviously the financial performance or under other indicators. I know you have firsthand experience with this. Can you walk us through the process? Because, you know, obviously there's like board key stakeholders. How do you get all this buy in alignment? What did that look like when it actually materialized?

The first challenge you have to solve is a lot of different people have a lot of different perspectives on this and a lot of different perspectives on how they measure how they think about generating shareholder returns, how they think about the strategy and identity of the company. And the way I suggest approaching this is asking a lot of questions in a calibrated way, such as, why are we in the businesses we're in? What gives us a right to own these businesses? As a corp dev professional, you have the right to ask, what should we be looking for in our next acquisition? How do we think about excess capital and what we do with it? There's a series of questions that what we're actually trying to figure out are what are the core fundamental principles that people believe about their obligation to shareholders, their mission, their approach to creating the shareholder returns? What you want people to say is ultimately build up to a version of we're focused on total shareholder returns. But you need to first get everyone to say that and also to answer the questions in the same way before you can start to talk about divestitures. Once people are responding in the same.

Way, you can then start to begin.

To develop a framework. And I think there's three dimensions to this. One is around strategic focus. Of which industries do we like to be in? Why do we feel that we have a right to operate in those industries? But what is it about us that does that? There's the financial angle of it, which is the economic contribution of the different businesses in our portfolio. And here, by the way, you can't just be thinking about EBITDA or ebs, the absolute dollar of contribution, but the impact on quality metrics such as margins, returns on invested capital, growth rates and so forth. And what you want to do as.

A technical exercise is, and this is.

One of the things I'm most excited.

To talk about is creating a dynamic.

Portfolio model where you have each of the different business units and what they're contributing. But when you toggle a business unit on or off, when you toggle a business unit off, your earnings go down, your EBITDA goes down. But oh, this is interesting. Our growth rate is now a lot higher for the weighted average remain co. Our margins are a lot higher for the weighted average remainco. And oh, that's interesting. Our EBITDA is lower, but these other metrics are higher. And oh, that's interesting. When you correlate those improvements in those operating metrics against multiples that companies trade at, we can reasonably expect to be entitled to a higher multiple. Entitled is probably the wrong word, but we can reasonably expect to trade to see a movement in the multiple we're trading at. And then in addition to that, when you do divestiture, you give up some amount of earnings, but you also get some cash that you can redeploy into other things. And oh, by the way, actually that cash is also in a very direct way worth something to shareholders.

So one of the main problems that.

People have is unless you're actively doing that mathematical exercise, you might feel good that. I think there's another implicit assumption that if a company's generating cash flow for me, I like owning it. You might not realize a different form of dilution in how it's weighing down your. It's an anchor to growth, it's an anchor to other operating metrics that are causing you to be punished as a company.

The last, I think, financial point I'd make is that different investors will self.

Select into different strategies that align with those business units once they're spun out, which they're not able to do when you're a conglomerate. And that also leads to a trading discount.

The point I was trying to make here is that when you're a conglomerate, it's harder for thematic investors to buy your stock based on an excitement that they have in some piece of you. And if you don't have investors that are excited about specific things in your company, it's hard to get to a maximum share price. So separating it out enables that kind.

Of investor interest, that is. Otherwise, each investor feels like they're compromising in some way. Yes, I like Kasan, but anytime I invite Kasan over, he brings his friend and kind of ruins the vibes when someone else might like your friend, then dislike you.

Right, right, right. That's a nice analogy. So we got a few different things we hit on. I like the concept, that dynamic portfolio model to really do scenario simulation basically and start looking at some of these not so obvious metrics that may actually be stronger indicators or driver of potential growth in terms of key factors. It's sort of like there's this defining why and it ties into where you sit in the marketplace, the sort of theme and focus and what's going to be attractive to investors. And then there's also just pure financial positioning around it. Were there any Other key factors missing when just going through this exercise of considering divesting.

Yeah, the third one would be around feasibility, which sounds obvious, but let's talk about it for a minute. You need to think really hard about the entanglements that exist between the different business units. By entanglements, I mean situations where there's employees or functions that are supporting multiple business units. When you separate those, that's a little bit like surgically removing conjoined twins. To some extent, you have to think about, okay, each of these do well on its own, and generally you have to create some additional capabilities for one or the other or have a transitionary period between them. The weight of doing that is a lot harder for businesses that are really conjoined in a very close way and have a lot of entanglements. It's less so, obviously, for businesses that operate separately from each other. So when you're laying out all the options, I think you lay them out on three dimensions, which is which of these are core to our strategic focus, which of these are additive and the holistic, broader meaning of additive to our financial results. And that's talking about the quality metrics and everything else we talked about. And which of these are feasible. To state the obvious, you're prioritizing the vesture of non strategic, non additive, often dilutive and highly feasible things you don't always have. Yeah, maybe you get two of the three, but those are the mentions you look at.

I like this view in terms of having those areas to really put the pieces together. And you're right, the feasibility part, what's it actually going to take to make it happen?

And that's where I think the listeners to this podcast that I'm sure a lot of them operate in different specialties of negotiating transaction service agreements or setting up the functions that you would need to separate these businesses and so forth, but there's a whole world there. It's a lot of work. But again, the prize at the end of it is having a company that's able to focus on a more singular set of objectives and grow and also financially perform better. Based on everything we talked about, what's.

It like actually executing on a divestiture? Because it doesn't sound. I've never met anybody that tells me they love doing divestitures and carve outs.

Yeah, I was going to say don't make me talk about it because it'll negate everything I just said it's a lot of work and you know, it's going to be a lot of work and you do it and it's invariably more work than you thought it would be.

Sounds like a construction project.

There's no fun way to get around that. What you try to do as best.

You can is I think there's a.

Few sort of like tips I'd give people for approaching that. Executive sponsorship is huge. You need very strong alignment, if not a mandate, an edict from the board of directors that this is something we want to do and you need to have a leadership team that's, that's very aligned with that. I think you need to think early and hard about the operating model for each of the remaining company and the company that's being spun out and have an early definition of what that is so that different functions know what they're working towards and that helps people understand the task in front of them.

Of course the hard part about that is there's a lot of interdependency between the pro forma operating model for the.

Company that's separating and the acquirer of that company. You get the different answers, but have a straw man, strong hypothesis early and then this is going to sound like a cop out, but I'll say it, get external help. There's companies that specialize in advising these sorts of carve outs and by the way, they'll still miss stuff. You'll still have to be very involved, but you'll at least be able to benefit from there, from the reps that they've had and seeing things. Additional points I'd make are I think there's a hesitation to involve functions, but accept that you have to before you know you're doing it.

Keep a small tent.

But once you know you're doing it, you'll need the expertise of people within the functions to uncover those entanglements. You can't sitting from a boardroom know where these sort of like hidden traps.

Are in separating a business.

That would be my high level advice to someone doing it.

Make sure you got executive sponsorship. Define the divestiture, what's actually going, who's going with the business. Get help, pay some consulting fees and collaborate with the functions as soon as it's all finalized. In terms of the direction you're going, I guess in terms of do's and don'ts, in terms of making it smooth process. What have you learned from your experience?

The operating model definition early, the involvement of the functions in that. There's a hesitancy to have a broad tent here. But my suggestion, my experience has been you'll need to have those functions involved.

And then Joining that statement, I'd say.

You need to make a deliberate effort to frame this as a positive for both companies. It is. By the way, the best divestors are ones where each company is, for reasons.

I talked about, enabled to pursue new things.

You need the people involved in the.

Process to recognize that it's in the best interest of the customers, of the.

Employees, of everyone involved in that business that's been divested for the communication, the external communication to come in a deliberate way. Post announcement. If the communication is not that you're not helping those employees because it's potentially jeopardizing, the customers get spooked, suppliers get spooked, it's harder for the right potential.

Buyer to come forward. So you're not doing anyone any favors by not keeping a tight communication.

And then I think one way or another you need people to feel tied and invested in that outcome. And there's different ways to do that. That internal alignment, medium, tent messaging, and then clarity of what the end result operating model is for each entity will help you tremendously in getting through the drudgery, for lack of a better word of actually executing it.

Having great communication sounds like the crux of this. To really have a good definition of why this deal is good for both organizations. Being mindful of this communication going out to not only just employees, but the customers of the prospective business as well as and other stakeholders.

Yeah.

Sounds like a pretty good advice to stage this up for success. Anything else to make sure that this process goes smooth.

This is going to sound so corny, but for me personally, and hopefully you can engender some of this on the.

Other participants in the process, it's a unique opportunity to have a very transformative impact in setting up two different companies to succeed in entirely new ways. I think you have to enjoy that at some level. You have to be excited about that because so much of it is going to be hard.

That was a really big part of me personally being able to do the amount of the lift here and the.

Functions involved, being able to do the really good work that they did.

I don't think it was a cop out. I think people forget about it. It just becomes this thing nobody wants to do. But keeping this momentum, excitement about the value to be generated by actually doing this. And that's the reason why you end up doing a divestiture.

Yeah. And keep in mind every single function that I talked about involving the functions, they all have day jobs. It's hard. It's a lot of work. Right.

So having the perspective of this enabling.

Bigger things to happen strategically is really important. And part of your job in leadership.

Is to communicate that really strong point in terms of success metrics. Is there anything beyond just hey, we, ship is sailed and this business is now separated.

Two things.

One, the obvious one is the share price. And let's be clear, that's not always going to be immediate. And this kind of goes to the one of the earlier things I said to you that you were asking about early career lessons and I have this sometimes naive thought that oh, the math says this, therefore that's the right answer and I'll show people that math and obviously everyone will agree with me and the share price will double overnight. What actually ends up happening in Divestors is you had different investors that were in your stock for different reasons, with different viewpoints about different business units. And suddenly the cards are revealed in a way that will make some of them really excited and some of them that had a different view of things maybe less excited. And you try to lay the breadcrumbs. You have a communication strategy, you'll do everything you can to get in front of that. But the reality is some people are going to trade out of the stock. Some people might. And this goes to some. Again, the points I made about misconceptions people have about Divestors, someone might read it as a bearish signal about something else. And then you take the capital and what do you do with it? You give it back to shareholders. People have preconceived ideas about what that means and so forth. There's invariably going to be, I think.

In the short term some amount of.

Rotation in your shareholder base. In the long term you have again a company that's much more focused on what it's doing, providing much stronger metrics and, and trading at a much higher share price. But that's very long winded way of saying you might not have that until a quarter or two later.

Yeah, I got to play long on it.

And you need a board, I think that understands that and that's ready for it. And it's hard. And let me say this without being.

Too specific about companies. And I've also at the Boston Consulting Group, we've advised a lot of different clients on things. So I don't attribute this to any one company.

But I've seen situations where we've done a divestiture. The first one results in this short term rotation of investors. But then a quarter or two later your investor base is coming to you and saying, hey, have you thought about this other One, have you thought about this third one? And you have a positive pull around it. Once people realize the benefit of those types of actions, you'll see different reactions.

In different portions of your investor pool.

Can you share an example? We won't name names, anonymitize it, but if you can share an example of what rebalancing looked like, and I'm very much curious about the blind spots or the unexpected challenges that you came across when you saw things play out, I.

Could share a real example because it's public that it happened. Spandex international conglomerate had been listed for over 50 years, variety of niche industrial businesses in a lot of different domains. In some of those domains, we had really strong competitive advantages. We were doing things that nobody else knew how to do. We were very competitively moated. We had very differentiated brands and we were getting returns that reflected that. In other business units, we weren't. We had at one time had a very differentiated position that had since been competed away by others coming into the space or some of the technological advantages that we had had dispersed out. And other people can do similar things. And those businesses were still contributing positively to the overall results. But when you disaggregated growth, they were dilutive to growth. When you disaggregated your ROIC or EBITDA margins or pick your metric, they were dilutive to those.

And so that through the modeling exercise.

I described earlier, set to a decision to sell that business unit. I'll make this tangible. Actually, they had a industrial cooking equipment business that made the speed ovens that you see when you go to Subway and. Do you want this toasted? Yes, please. I'd like it toasted. They made those. And it used to be a really novel thing. And then today there's a lot of competitors out there that you can get now that they've sold it, now that it's old news, probably get a better unit or lower cost from someone else. They ended up divesting that business unit. It happens to be. And this is where I think it's really a success on both sides. There's another company out there called Mendelby that specializes in exactly that vertical. They love that type of equipment. They saw value in those brands because they're storied brands that had been around for a while. They had a better distribution system for selling commercial equipment than Standex did. They had some unique value creation levers that were specific to their focus on that space. And I forget which numbers are in public record or not, but it was worth considerably more to them based on the value that they were able to realize from that business and what they were able to do in growing and combining the business and cross selling it with everything else than it was in as an isolated business unit within this broader conglomerate.

That sounds great. That sounded too easy. What was the challenges? What was the big pain points in.

That the challenges are again this is.

All kind of in like the. You could look at charts, you could do a case study on this.

Two things.

One is that executing it is actually really hard. And we talked about that managing sort of the communications internally and messaging it is hard and doing it in a way that doesn't cause fear in other business units or other suppliers or other partners of yours is there's a huge communication challenge here that I don't want to understate and similar but talking about a different audience, the investor base. There's different investors that have different ideas and thesis about your stock. There's some investors that saw the lower margins in that business not as a knock on the stock but as an opportunity in the stock of this is something where we see a possibility for better performance and so forth. And so anytime you take an action like that and this is where I go to my earlier answer you lose some votes from some people and it's only in the long run. Once that's all shaken out and then you're delivering on the things that enables you to deliver on that you're getting the benefit from the shareholder community.

So the big three pins on this are communication. Like it's just tough to just have all that communication that you need and we talked about and then hard work is going to be a lot of it. Then the master alignment really getting all their diverse views on the same page.

But I would say something even above all of that, even more important than that is clarity of focus and strategy, clarity of vision. Why do we occupy the spaces that we occupy? Do we feel we have a competitive advantage in those markets? Why do we think that we're strengthening the competitive advantage over time? Do we think it's getting harder for us over time? Why is that? And then doing that in combination with the dynamic financial modeling exercise and then additionally if having a view of how.

The operating model would benefit post transaction.

And also I think a really important.

Question I can't believe I didn't say.

This is a very simple one. Are we the best owner for this asset? And in the case of the Standex example I gave we weren't middleby was they were objectively for that asset for that circumstance, a better owner of that Stanx was a better owner of everything else in their portfolio. But they've been able to go on and do that and focus on that and deliver exceptional results there now, not obscured by this other thing. And it's been a great story. It's been a great story and they're continuing it with a more focused strategy now.

All right, so add clarity of focus on the strategy and just being honest, if there's a better owner for the business, I almost feel like we'd flip these around and these are top lessons learned.

Yeah, maybe.

Hey, so I gotta ask you before we wrap up, what's the craziest thing you've seen in M and A?

There's a lot of war stories that.

Are going through my head right now, most of which I'm restricted from talking about, but I think you just don't.

Name names and dates, man. That's how we protect the innocent around here.

Yeah, yeah. No, I think I'm gonna make a more market general observation, take you to.

The bar after this to get the real crazy stories.

Yeah, yeah, There we go.

No, but it never, ever ceases to amaze me. There seems to be this pervasive idea.

In a lot of the VC community that you need to light a ton of money on fire in order to have a successful tech business. By the way, I should be open about it.

Part of the reason I started with an industrial company and not a tech company is I think I had that preconceived bias in my head that I'm.

Sort of a fundamental value, deep value person in my bones. And tech investing is, I think, a lot of times the antithesis of that, at least how it's popularly portrayed. But the number of companies that have gone out there, raised $100 million, lit it on fire is pretty remarkable. I'm thankful to now be experiencing a good counterfactual to that where now if I ever go off and run something or. I think it's good to have experienced the counterfactual to that operating style and seen the success of it.

Yes, absolutely agree with you. Having that discipline for how you manage your money, especially when it's your own money. Jo, this has been good. Thank you so much for taking the time to have this conversation with me. Enjoyed it. I learned a lot and you've helped me become a better M and A scientist.

Thank you so much, Kassan. It's been a pleasure.

Those of you still tuned in, I thank you, fellow M and A scientist. Love to hear from you. Hit me up on LinkedIn, give me some feedback, tell me what you thought about it, tell me what I could do better, give me some topic ideas, or recommend some pretty badass speakers. Until next time. Here's to the deal.

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