Executing M&A from a Legal Perspective

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I'm Kisan Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals.

Foreign.

Welcome to M and A Science Live, where leading M and A practitioner share lessons learned from their experience. When you use proven techniques in M and A, more value is created. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our newsletter. Also, while you're there, check out our free collection of M and A plays. Again, that's mascience.com I'm your host, Kisam Patel, CEO and founder of M&A Science. Joining me today is Brett Shahn, Senior Vice President Assistant General Counsel at Warburg Pincus. Today we're going to talk about how M and A is executed from the legal perspective. Brett, would you mind kicking things off with a little background on your M and A experience?

First job out of college was I was at JP Morgan doing asset backed securities. I found that I actually really admired.

The partners, the law firms on the.

Deals that I worked on. And then I went to law school and after law school I spent five and a half years doing mostly M and A and some securities and corporate governance work called Wachtel Lipton. And then for the last little over six years I've been in house counsel at Warburg Pincus where I'm one of the in house M and A lawyers. So Warp Pincus global private equity firm Our business is buying and selling pieces of companies, so each of those is a little M and A deal and I work on those in conjunction with our deal teams and outside counsel.

What's the hardest part of your job?

Say the hardest part of my job is getting the deal done in a way that is good for everyone.

Be a little more specific.

There's two things I would say that are hard kind of in the last, I'll say 18 months. One is just it's a seller's market out there. Things that you didn't think that you would be agreeing to on the buy side. There are plenty of people out there agreeing to them. From a legal precedent perspective, like one of the questions that lawyers are always asked is like, what's market? What's everyone else doing? If everyone else is jumping off the.

Brooklyn Bridge, would you do that?

That should always be part of the answer. You always have to think about it from what are appropriate principles. But people have been doing things they didn't do before. So understanding what the risk really means and whether you can take it, knowing that if you don't take the risk, you're going to lose the deal or you could lose the deal, that's difficult because it's something that people haven't done before. The other thing that I think gets difficult is, is a lot of the deals that we do are minority investment. We will not control the company. We'll be like 5, 10, 20, 40% holder and there'll be other people who collectively or an individual are in control of the company. So how do we think about investing in that company where we know we're not going to have ultimate decision making authority? We may have some people on the board, you may have some contractual rights. Our consent is needed to do certain things, but we may not have the ability to make all decisions as we would if we were in control of the company. That can be difficult because the person is by design not selling control of their company. How do you sort of get the comfort that it gets good company now, but you're not going to have as much control over it in the future? What are the things that you ask for to sort of give you adequate level of schmuck insurance that the company doesn't do, something you definitely know you don't want to do without your consent, but you're still able to get the deal done and preserve relationships on all sides.

We got some fun topics to get into. I like today's market, the seller's market, and how is that shifting things with balancing risk? But before we get into that, can you tell me a little bit more about minority deals and why do you find them more challenging?

There's sort of like two different general types of minority deals we see a lot of.

So one I'll call like a venture.

Round, which the company that is owned mostly by institutional investors and you're coming in and people they follow, sort of like Silicon Valley finance world company will raise rounds of private financing.

So there'll be like a seed, an.

A, A, B, a C, a D and then ultimately ipo, dspac Whatever. And when you invest in one of those rounds, there are form documents people generally use. The National Venture Capital association is one of the founding members, actually puts out model form of the documents that are used in those rounds. That model document is something that looks sort of like it is generally a starting point so that from a documentation perspective makes things simpler, but also sort of the way those deals are structured.

It's a company that is owned by.

A bunch of other institutional investors. So people that sort of think like us, they know that you want to maximize value for the shareholders. Ultimately there should be some sort of liquidity event for the shareholders, you know, be it a sale or an ipo. And that's sort of who's in control of the company. So even if individual lead investor at a Series C round, for instance, maybe.

They only own 20% of the company.

They know that the people that own 70% of the company are people that think like them and are motivated like them. So you have kind of strengthened numbers. So that puts a little bit of pressure off negotiating specific rights for you as a new 20% shareholder. Now, there might be areas which are not aligned with the other investors, like if they came in earlier round or lower valuation, they may be happy doing an IPO or doing a sale at a price that's not great for you as a new investor at a higher valuation. So there are specific things like don't sell the company for less than 2x for the next three years you might ask for. But generally you can take comfort in the fact that there's a large group of institutional investors that think the same way. So that's one type of minority investment.

The harder type is, or we're a.

Minority behind founder or a strategic, because then it's really their show and they're letting you in because they think you add some value. Maybe it's capital to help grow the business, maybe it's strategic relationships. Maybe it's just somebody smart to talk to about new strategic directions, opening into a new market, having smart people around the boardroom.

But oftentimes those people don't want to sell control. They may not want to let you sell the company without their consent. And then you really have to think about you're making an investment now with management team that you like and trust, and that's based on the information that you have to date, and that's based on a business plan they've presented to you. But as a fiduciary for our investors, what sort of protections do you put in place so that you're sure that sort of works out okay. If management actually doesn't do a good job, can you replace them? That can be extremely sensitive if you're dealing with a founder. How do you get an exit for our limited partners? If the founder or the strategic doesn't want to sell, are we okay with just selling our stake? If we want to just sell our stake, how much is someone going to pay for just our state versus buying the entire company? These are all like very difficult questions and trade offs. It's fun and challenging from a legal perspective because it's one of the situations where price doesn't always win the day. So if you're doing a buyout, you're buying a whole company, there'll be an auction. There is not as an auction, but let's just say there's an auction and the bankers are the sell side. Bankers and lawyers get all the contract markups and they get all the bids. Contract markups like some of them will be a little more seller friendly on conditionality or reps and warranties and there'll be a nice grid from the lawyers of how the contracts compare. But ultimately nine times out of ten just comes down to price. As a lawyer, I don't have much to say in terms of the price that we bid. All stuff to say about the legal risk that we take in the contract. But ultimately it comes down to price. In these minority deals oftentimes, not always, but oftentimes price is usually very important. But it's not just price, it's also governance. How much control are we letting the existing majority investor keep? Then it's on us as lawyers to help guide the business people in terms of not only what's market, what are other people going to say but but also just thinking about those risks. What should you give up? Is it smart to not have a veto over affiliate transactions? The answer is no. What sort of exit rights can you have? The other party is worried about us selling at a time they may want to not sell yet. Do you let them stay in the company? Things like that.

Those are great examples. It does clarify unique complexities when it comes to managing risk that it adds when you're doing these minority deals. I like the way you contrast between doing the traditional venture rounds that there's some precedents involved already and sort of being mindful of that. But then when you're dealing with founders directly, there's sort of a lot more variables that you do have to consider and pieces around control and exit planning. When we look at today's Market. It's a very seller oriented market right now. What are some of these interesting terms that are coming about? I feel like most of my interviews I'm doing are with strategics and one of their biggest challenges is competing with the PE guys like you out there that are just coming in with these aggressive terms and doing their three day diligence period these days and getting deals done lightning fast. What have you seen that really surprises you in terms of how things have shifted with today's market?

For a lot of middle market deals, so say sub 500 million TeV it's become much more common for larger private equity firms that have funds that are the size, they can do this to take debt financing risk themselves. So to give a so called full equity backstop versus traditionally in a private equity deal, private equity firm will have a third. So in a lot of private equity deals, not all of them, some of the purchase prices financed with debt that helps the private equity firm get a higher return on equity because you're putting leverage in the deal. Traditionally some of that financing risk is placed on the target in the sense that while there will be a commitment letter from the debt provider, if the debt doesn't show up the target, all they get is a termination fee. They can't sue the private equity firm to fill the debt with equity. In a lot of middle market deals.

We'Re seeing both on the sell side.

And the buy side we see this. You insist upon the private equity firm equity back stock. So if debt doesn't show up, the.

Private equity fund has to come out.

Of pocket and pay the entire purchase price. Effectively when that started happening more, it's a little spooky because it's different than what you're normally doing and it changes how you have to underwrite the deal. You have to be really certain if you're going to do that that you can raise the debt. That's a business decision that a lot of private equity firms didn't have to make in the past and now they have to make more and more.

But you can always go back and structure debt later on.

Yeah, one argument you can make is okay, we can be forced to close, but I mean then you're bridging it. So that's not really like an efficient use of your capital like you're calling from the LPs. Maybe you don't have to call from your LPs, we have to fund a credit facility. There's still some risk that you're taking.

Really interesting. How has the pandemic overall Affected. Has it made your job harder, easier?

Everyone's sitting around doing nothing else but deals that can make certain aspects easier, like scheduling calls. I have more calls between 6 and 8 than I ever had before because that would be time. People would be traveling home or whatever or going to dinners. And now it's just calls. So I guess that's easier or harder, depending on how you look at it from a deal perspective. It made everyone much more attuned to sort of like Black Swan events, because nobody ever thought there would be a pandemic until there was one.

I mean, a few people thought it.

But, like, most people didn't think of it until there was one. And now, like, everyone knows how to draft for a pandemic and a purchase agreement. And I think people also sort of have a little bit of appreciation for, well, what if the next crazy exogenous event is not a pandemic? How do we address other sort of systemic risks? And there is an answer for that. I mean, there wasn't even an answer for that before COVID which is systemic risks that are not specific to the target. Those risks are generally placed on the buyer. So if you look at like a definition of material adverse effect, and the reason that that term is relevant is in a. In a typical M and A deal, the buyer will have to close unless there is something wrong with the target that rises to level of material adverse effects. Material adverse effect means material adverse effect, just like defined by the courts, is like something really bad that lasts for a long time. Except the following things are not material adverse effects. And it'll say stuff like general market conditions, movement in the stock market, changes in law, things that you do as buyers, specifically things like that. So general things happening in the market that are not specific to the target, those are the buyer's risks, is the buyer knows the market that they're transacting in. And if things change, generally that shouldn't be the target's risk. And then if you put pandemic on top of that, it sort of makes sense. Like, a pandemic is not about one particular company by definition, it's pan. It's everything. So that should, in theory be the buyer's risk. And then obviously, as everyone knows, or people who followed some of this litigation know, when pandemic happened, there were certain industries that were more impacted. And it means that buyers wanted to get out of those deals that they were signed up to. They look for ways to, I won't say skirt, but like, other avenues available to them under the contract that Allowed them to not close those deals. One of the ones that very famously got pushed on is there's also a covenant in these agreements where the target promises to operate in the ordinary course and not to do certain things without the buyer's consent. The idea being that the seller has already agreed to a price. So there's some misalignment between seller and buyer in terms of operating the business. So you want a contractual hook to make sure the seller doesn't take all the value out of the business until the buyer actually gets a chance to come in there and own it.

While you're waiting for regulatory approvals and.

Things like that, the buyers looked very carefully. What did the sellers do in response to the pandemic? And if they shut down all their stores or fired all their people, you violated that covenant, even though it's not a material adverse effect. Violated the covenant. And if you violate the covenant, I don't have to close that focus on that provision, which, I mean, everyone really knew about. You always think about the interim covenant, but it, like, really put a spotlight on it.

Was that a big thing, do you think? There was a lot of deals where people are looking for either these covenants or sort of the adverse effect clauses to be able to get out of deals. I was in the impression it was more of a stalling point initially and sort of, once things settled and we. We got out of our house, we continued getting these deals done.

Yeah, I mean, I would say in the last six, nine months, the deals.

That have signed since everyone knew about COVID it hasn't really been that big of an issue. The issue was constrained to certain industries like travel, retail, things like that. You always see the provisions that were developed in response to those events. It's now kind of market in the.

Agreements, but I don't fuss over them.

As much because everyone knows what the pandemic means now, at least this pandemic. And you can guess what, there's another pandemic. It'll probably be similar. So you know about this thing, but it does make you think about other stuff that could happen.

Agree? Agree. Yeah. It'll be interesting to see if somebody reflects back and does a case study on these January, February deals last year and really see what ended up happening. How do you limit risk? What are risks that you're looking for in a deal?

So there's risks that you can address during diligence, and then there's risks that you're not going to address during diligence. The diligence risks you can address is you have a thesis about the business that's based on things that the company has told you. You can do diligence to verify if those things are true. They're telling you they have five great contracts with their customers. Go and read those contracts.

That's like simple mind.

That's theoretical risk. You can address that by doing diligence. There's also things that it's just not humanly possible to do all the diligence. Are their financial statements correct, or is there someone in the accounting department who doesn't know how to do the financials and is just not doing it properly? Well, it's hard to prove that negative. So you can do some diligence, but you know that in the few weeks you have to do your diligence, you're not going to be able to cover it all. So how do you address that? I mean, the way that people traditionally addressed it is you get a rep and then you get an indemnity. Well, now the market is such that sellers don't want to give indemnities. And a lot of times, if the indemnity is from basically the management team, the buyer doesn't really want to be.

Suing their management team either.

So now there's rep and warranty insurance that will, in theory, pay out if the reps aren't true. So that's one big way to limit that sort of risk. There's risks around consummating the deal itself. So will you have financing? I sort of mentioned that before. So that's a question of getting your financing lined up. There's also risks around. Will you get the approvals that you need for the deal to close? Is there antitrust sensitivity around the deal? There's ways to mitigate that. Probably some other risks that I'm forgetting, but those are the ones that immediately come to mind. Yeah. The other thing I'll mention is if you're in an industry that has been in the news or is regulated, one thing that's important to think about is what could come around the corner in terms of regulation. One thing we often do if we're investing in a regulated industry is not only will we talk to lawyers to tell us is the target complying with the regulations, but we often also will hire a consultant who will talk to key constituencies in Washington or wherever and understand how are those regulations likely to change, because that may be relevant not only for us, but also the future buyer. They're coming into a different regulatory environment that may impact the valuables trapped in business.

There's a lot of different areas you covered. How do you force majeure clauses that come in play here.

Force majeure clause. Okay, so a force majeure clause basically says if there's some act of God that's happening, I'm excused from the requirement.

To perform the contract.

So in a private MA deal between a single buyer and single seller, those are usually not relevant. Because if you think about it, the things that you're required to do under an M and a contract, it's pretty hard to have like a force majeure impact. Those things, let's say like a simple minded stock sale, you own 100% of the shares of the company. I want to pay you a million.

Dollars for those shares.

It's hard to imagine what would prevent me from giving you $1 million. And you handing me 100% of the company. Force majeure clause isn't really relevant there. What the question is sort of getting at is in a public company context. So you're buying a public company. So then you have the board of directors of that public company that are fiduciaries for the shareholders, they're signing onto a deal. But as a matter of like Delaware or whatever fiduciary law you're dealing with, usually they will have to have some.

Sort of fiduciary out.

So if between signing and closing, something happens that makes that deal in the director's minds no longer the best deal for the shareholders, this could be like a topping bid or this is getting sort of enforced majeure. There's this concept that is terminor bar called intervening event, which the classic example, which never actually happened, but the classic example is you find gold under the headquarters. So all of a sudden the company's not worth a million dollars because of selling some cool software product, but it is selling this cool software product and its headquarters that it owns is sitting on top of the world's largest diamond. So it's actually worth like a billion dollars. So then the directors under the terms of the contract could say as a fiduciary matter, I can no longer recommend to the shareholders they approve this contract, I'm going to change my recommendation, maybe have the right to actually terminate the agreement. So that's not exactly force majeure, but it's something outside of your control. It should be like unforeseeable. And that would in certain circumstances allow a public company board to get out of the agreement.

Sounds good in theory, but very difficult to execute.

Yes.

Going back to some of these other areas of risk. We talked about limiting target specific risk and that's the contract example you gave to what are the some of these material things? And I think that's pretty common things that we think of in diligence when we talk about financing risk. Is that just primarily around what we sorted to earlier that hey, we have some general contingencies about getting financing and want to have those in play and just make sure that our agreement outlays that. With that in mind, there are sort.

Of a couple of dimensions of this from a buyer's perspective. The way the typical private equity deal will be structured, the buyer will show up with a commitment letter. Commitment letter is some 50 page document that basically says do you meet these conditions?

I'll agree to fund.

But it's a term sheet. So in order to actually fund you need to turn it into a long form agreement. And the buyer will have an obligation under the contract with the seller to use the reasonable best efforts or something like that to turn it into a long form agreement. If they're not able to do that, if it doesn't turn into a long form agreement or it turns into a long form agreement, but the bank just doesn't show up, then the buyer can't be forced to close, but can be forced to pay a reverse termination. Everyone always says if I have to pay this fee as a sponsor, I'm getting fired. So nobody wants to pay the fee. From a buyer's perspective, how do they make sure they're not going to have.

To pay the fee?

So the thing that they're going to focus on is good relationship with the banks. They know the bank will show up when it's required to. But also the bank is lending money based on the credit of the target. So they're going to need to talk to the target management. They're going to need to get financial statements and other information from the target management. Have to sign look at like KYC information from the target management. So as a buyer you'll get a cooperation covenant from the seller that basically says please do all these things, but we can get our financing so we.

Don'T have to pay reverse termination.

Then you flip over to the seller's perspective. The seller doesn't really want to just get their reverse termination fee either because that's not a good day at the office. They just spent months trying to sell their company, signed on to this other person and then all of a sudden they're sitting there with a 5% fee and they got to go do the whole thing all over Again, so what they'll focus on is a lot of the same stuff. Is there a real bank giving an airtight as possible commitment letter? But they're also going to look at that covenant. The buyer has to turn that letter into a long contract. Does it say they have to do everything that they can reasonably do in order to do that? What if that bank goes away? Do they have to use efforts to find a replacement bank? How much worse financing can they be forced to accept from a replacement bank? And then savvy Target will also look at that cooperation code I mentioned to make sure that it's not asking to do anything they can't actually do. Because if it's too strict, they're asking to do something they can't do and then they don't do it. Then the seller could be in breach of that cooperation covenant. And then you can't even get that reverse termination phase. The debt can not show up. And then the buyer is like, well, I don't really need anything because actually you breached the contract, so I don't even have to close. So sorry. That's sort of what the seller would worry about.

Interesting. Let's talk about antitrust laws. How do you feel about them and how are you adjusting for risk around it?

Particularly as a private equity firm that invests in a variety of industries, we don't usually invest in companies that compete with one another. So that means compared to a strategic. Generally speaking, the private equity firm will bring less antitrust risk to a deal than a strategic will bring because the.

Strategic usually is not always, but oftentimes.

Is buying the competitors. Then you have to worry a lot more about can this deal get through? Are there going to be remedies? How do you allocate the risk of those remedies?

As a sponsor, that can be a.

Lot easier because you just don't own anything in the space yet. Then it should be easy to get antitrust approval. Obviously that can get more difficult if you're doing an add on, because then it's just like a strategic deal and you are buying a competitor. So then you want to think about the same standard things you think about in any deal from an antitrust perspective.

What's the chance that it gets reviewed? If it gets reviewed, how long does it take? What are the remedies look like? Is it something that you can fix relatively painlessly? And then how do you define the amount of pain that the buyer has to take? Another way that people handle it is if you think it might be able to be fixed but the way that you would fix it, nobody would want to do the deal. Then there's some fee payable by the buyer. If it doesn't happen. Is that a fair ask? That's something that often gets negotiated.

Got it. So mainly if you are sort of buying in your space is probably the bigger area of concerns.

I mean something else is an interesting one, often overlooked is and this goes back to the minority investments in a lot of jurisdictions there's a joint control test for an antitrust filing. Let's say we and another global private equity firm are each going to come together and buy 50% of a software company that sells software in Texas. Just making it up, but all they do is sell software in Texas. From an antitrust perspective, that could technically trigger a antitrust filing in all sorts of other countries, even if there's no nexus to those other countries. Because we and the other private equity firm have a bunch of businesses in Europe, let's say that, and in Europe there's a rule that if you're acquiring joint control of something with somebody else that has overlap with you, even if the thing that you're acquiring isn't the source of the overlap, that could trigger a filing. So it's not something that ever stops a deal. But it can be a timing concern because you have to make the filing and wait. It's like an annoyance more than anything else. But we take our obligations seriously so you have to do it. But it can be a timing concern if you're going into joint control with.

Someone that goes way beyond looking around the corner. You're looking under the rug on top of the house everywhere for you see.

Once and then you sit there like really? Then you have five conversations with your anti lawyer about it. It's basically saying like really all over again.

What are deal jump risks for public companies?

So it's sort of similar to what I what I mentioned before. So if there's public company board as a fiduciary duty to get the highest price and so once they sign up a deal, there's somebody else that also likes the target is willing to pay more, then there's a risk that that person puts in a bid and is able to take the deal away from the existing buyer. Now the protection for the buyer's perspective, at least in the US is you can have a termination fee. So you have a termination fee and you have match rights. So there's basically like a formulaic process where the buyer has a right to get information about the topping bid and is able to match it and has a fixed period of time to match it and go back and forth. So that can make it difficult for the person who's trying to top to ultimately get the target to agree to the better deal because the existing buyer sees all the information that they get and has sort of like a fair shot to match it. But ultimately if the other person is willing to pay more as a lower cost of capital, you can lose the deal. That sort of life in doing take privates. It can be worse in jurisdictions outside the US that don't allow the same deal protections. So there's other jurisdictions like the UK where you basically like that termination fee is not allowed. So it's much easier to top, at least from a financial perspective. So that's something we know, we just deal with if you're playing in public. M and A. Yeah.

Adds a unique component to it. How about reps and warranties? Retrenchment risk?

Retrenchment risk. I mean the reps and warranties nowadays the risk of those is on two people. It's on the sellers. To the extent they're defrauding you. If the seller knows it's not true, you can go after them for that. But if they don't know it's not true, usually these days the reps and warranties don't survive. So you're not going to be able to make an indemnity claim against the sellers if they made an honest mistake. But you can go against a rep and warranty insurer if you bought rep and warranty insurance as long as you as the buyer didn't know it was not true. So you have to do your diligence as a buyer to show that you're the rep and warranty insurer, they should be comfortable covering the risks. And then as long as you've done your diligence and don't know and there's no evidence showing that you knew, like you didn't get some email and you don't remember opening it or something, then the insurer should cover it.

Got it. The last little thing I noted here was contractual risk.

I think contractual risk is sort of like what we've talked about already. So part of it is, you know, it's interesting. Part of the lawyer's job is looking for things in contracts that business people might not think of. I'll give an example. One of our portfolio companies was looking at an add on. They were reading through the add ons M and A agreements and one of the M and A agreements where the add on had sold a piece of itself to a strategic, contained a non compete and the non compete said, you add on target shall not compete in this business and shall not provide services to anyone who competes in the business. This was actually a red flag because it could create a potential risk. If our company buys this thing then that could theoretically infect our company and could. This is maybe more of a stretch, but it is something you think about. If our company was bought by a big strategic, would that non compete infect the strategic because it says you can't provide services to anyone who's competing? Well, if the strategic is competing and you integrate the target into the strategic, is it then providing services to the strategic? Arguably, no. But would the strategic take the same view? Maybe not. They might have a lawyer who's more paramount than me. You'd say, I'm not taking that risk. That's an example of something that lawyers can catch that deal with who may not be thinking about.

You're bringing up a lot of out of the box thinking scenarios. Can we talk a little bit about red flags and maybe more of those things that you really look for when you're working on M and A deals?

Biggest red flag is probably it's a few things if you can't get information that you think is easy to give to you. If people are just being hesitant about giving information, I think that's a red flag if you get inconsistent information. So somebody tells you one thing but then you look at the documents and it's just like totally different. And the other thing I would say is just, I mean there's a lot of times where companies are just like run very informally so you'll just see kind of like sloppiness, like things aren't signed, records aren't kept very well. And then that creates a question of, well, if this thing is messed up, like what else is messed up?

How about beyond that? What are some of the things that you've come across that were sort of aha, red flag moments?

That non compete is definitely one.

This could be a whole series deal surprises.

I mean I've been in a deal where like a few days before signing, a very important government regulator sent a notice, the target saying we would like to investigate you. That set off all sorts of alarm bells and it ended up being fine, like there was no issue. But the fact that you're being investigated for something that could be an issue, you just don't know that can really put a wrench in things. And that particular deal, like we still did the deal because we did a whole bunch of diligence, figured out that it was unlikely to be an issue and then put in place a special indemnity to cover that issue. So depending on what it is, those sort of surprises can often be cabined off. Those are probably the toughest ones because the government investigating something is always something everyone takes very seriously. And you don't know how bad it's going to get. It's just not something you want to be on the wrong side of.

I like your general rules about looking for red flag if information should be pretty easy to get. It's not. That's red flag if you're seeing inconsistent information and then poor record keeping. So I think those are sort of great bases to build off of. What are common mistakes that you see non lawyers make on deals?

Yes, I would say. And I'm going to twist this into like mistakes lawyers make on deals. Not being paranoid and pessimistic enough. Whatever the other side tells you, like there must be some good explanation for it. They ask for something, they're definitely being 100% forthright in the reason they're giving as to why they want something. Falling in love with your deal, only seeing the bright side of things and you can imagine like sort of the opposite of these things is what is missing. Like being skeptical, thinking about things. Assume the other person is just as cutthroat as you and is like trying to be crafty. Think about things from that perspective. Not always assuming someone is 100% forthright. And on the flip side, I think lawyers often over index those things. If you're 100% pessimistic about everything, you're going to be too risk averse, you're going to miss good opportunities. If you're too paranoid, you may not see things in the proper context. Yes, there is a risk that some provision of a contract could be used against you, but is it really practical to think that would be the case? Because if the other side were to use that, they would face these other consequences that would be really negative to them. So it really doesn't make any sense for them to try and use that particular provision, even though technically it's available to them. Thinking about things in like too much of a abstract framework is what mistake lawyers can make. And not being abstract enough is a.

Mistake that I think non lawyers make.

Interesting. Speaking of on the lawyer side, can we walk through a deal in terms of working with in house counsel or the in house counsel's responsibility versus when you start working with external lawyers as well? How does that come in play, like, who's doing what? What's the reason why in house counsel may want to use external.

It depends a lot on the organization and particular in house counsel, there are places where in house counsel will do an M and a deal themselves. I think that's like not that usual. I would say. I would say more typical is, and this is the way we do it at Warburg, is in house counsel sort of helps everyone do the deal better, helps the deal team understand and make legal judgments, oftentimes making the legal judgments themselves, and then also helps the outside counsel understand what the deal team is trying to do and just helping everyone assess the legal risks better. So the sort of situation I mentioned before where outside lawyers incentives not to miss anything, so they're going to send you a diligence memo that has 100 pages of red flags. Okay. Part of my job is like reading that, being like, okay, technically I see why you said this is a red flag. But like, is this really practical? This is a risk. If it does turn out to be the case, it's not that big of a deal and we can handle it because it's offset by these other factors kind of calibrating and making yourselves comfortable as an organization. Taking those legal risks, I think is one of the big jobs of in house counsel. And then I think it's also sitting on top of all the deals and seeing lots of different things. Understanding as an organization, ways that you've addressed similar problems is another big value add I think that in house counsel can bring. So the minority investment example, if you're an organization that does a lot of minority investments, oftentimes in house counsel, sitting on those will kind of understand all the give and takes that come to a particular outcome. When a different deal team sees another one of the situations, they already know the playbook. Okay. The other side probably thinks about this. Here's a way that we can address it. Here's the risk. If we address it this way versus that way.

Got it. And then probably the way you use external counsel really depends on how much coverage you have internally, sort of where you are in terms of.

So if you're just like an LOI stage, depending on how detailed you're getting in the loi, oftentimes you won't bring in outside counsel for that. But if you're doing like a very detailed term sheet, you know, a lot.

Of times we will bring in outside counsel.

And that varies. There's some places to do those sorts of things in house entirely. But I would say most in house counsel. I know you're more of a consumer of work than a producer of work. So it's sort of akin to like the same thing that happens if you come with a more senior partner in a law firm. Like other people are grinding the thing out and then you're looking at it and making judgments about it and getting feedback about it. If you're doing an actual deal, you need someone to do the heavy lifting and write all the 100 page agreement. I'm not doing that anymore. So we have outside counsel do that and then I read it and send them my 30 comments about it.

Cool. You got it easy.

It's different. It's different. There's more pressure on getting it right. The buck stops with me. But I'm not the one chained to my desk at 2am anymore.

If something goes wrong, you're on the hook right now.

I may get the phone call at.

2Am from the person who has been.

Chained to their desk, but I'm not the one chained to my desk.

Let's talk a little bit about some of these different deal types and scenarios. Love to hear your thoughts around PE versus public company deals. Do PE firms really got it easier? What are your thoughts around that in terms of the legal view on putting those deals together?

There are a couple of I would say like the two traditional advantages of a PE buyer as opposed to a strategic PE buyer generally will keep the management team because they will have their own management team. So that can be attractive to the management team because they'll know that they're going to come in and be management of a P backed company. The private equity firm want to incentivize them to make the investment very valuable. So that could be lucrative to them personally. The other advantage is private equity firm.

Often doesn't own a competing business so there'll be less closing risk or less.

Antitrust related closing risk for the seller.

So those are like the two traditional advantages.

And also private equity firms full of smart investment professionals who are used to sitting on boards of companies and helping them grow really well. So you're getting that expertise to help the company rise to the next level. And then the traditional advantage of the.

Strategic is lower cost of capital synergies.

So maybe you want to pay more than a private equity firm is able to pay because a private equity firm will have a higher cost of capital.

Very interesting. What are crossfund deals?

Best way to describe the intuition behind it. Private equity firm buys a company, grows the company. It's a great investment but the private equity firm has been in it for let's say six years. And limited partners of that private equity firm want to get liquidity. So the private equity firm wants to sell it. Not because it's not a good company anymore and not because it stopped growing, but just because their existing investors want to get liquidity. So then what traditionally would happen is private equity firm would run an auction and would sell it to let's say another private equity firm and that other private equity firm would grow it. And then you do this like three times or something. One question you might ask is, well, the first private equity firm owning this thing is like this is a great company. The only reason we have to sell it is to provide liquidity to our current investors. Why not just buy with another one of our newer funds that doesn't have investors who need liquidity now? Because it's a new fund, not a six year old fund. Why don't we just sell it to that fund? And so that's a cross fund deal. Now when I describe that you might say, wait, private equity firm is like selling it to itself. Doesn't that create a conflict? The answer is yes, it does create a conflict. Then you have to think about how do you mitigate that conflict. And there's various ways to do that. You know, there are advisory committees of limited partners that can bless conflicts.

You can bring in a third party.

To buy the company alongside the new fund. So that provides a third party mark. So you should show the existing fund that it's a good investment. You're not buying it on the cheap just to benefit your new fund. You can get a fairness opinion, things like that.

Got it. Like fairness opinion makes a lot of sense. Let's get a third party in thread evaluation and bring those attributes in to show the deal wasn't all in cahoots.

Right.

How should Targus evaluate doing a deal with a PE firm versus a spac?

Good question. There are advantages to each depending on what you want. If you want to immediately be a public company and also have the benefit of professional management team that is respected by the markets, doing a deal with.

A SPAC or even like a PE.

Backed SPAC can make a lot of sense. However we do a deal with a spac, you're immediately a public company. Basically the SPAC turns into effectively turns into the target and then there's no longer a private equity fund invested in you. So if you're a company that is not interested in immediately being a public company, maybe wants to have access to future Capital from someone they know and trust to grow over time. Then doing a deal with a private equity firm may make more sense because then the private equity firm is invested in you. If you want to do an add on, you call them up and they're right there in the boardroom with you and they can write you another check. So it can be more of a long term growing relationship versus just a route to become a public company with a strategic partner.

I'll say.

Do you see SPACs as the longer term play or somewhat of a current trend?

You know, it's hard to tell. It is definitely a current trend. That doesn't mean that it is not a long term play. Are there going to be as many SPACs as there were in the last six months? Is that like the steady state of like number of spacs? I guess no. But is it something that is going to be around for a long time in some form? I would say probably yes.

The deal people like the management fees on those deals. That could be a driver. What's the craziest thing you've seen in M and A?

Right. The things that stand out in my mind are sort of like the in extremist deal situations. So you know Hurricane Sandy, I remember I was like signing multiple deals. My apartment was turned off because lower Manhattan like blacked out. So I was like couch surfing friends above 42nd street because that was like where they still had power. On the phone with lawyers in like Kentucky or wherever my deals were, signing up deals. It was kind of cool. I mean it was crazy. I was charging my phone at work. I mean I still went to work because work actually had power.

So it made a lot of sense.

It was kind of crazy. And then just it seemed like big deals always like vacation time. Fourth of July for the last few years with rare exceptions, I'm always exciting a deal on 4th of July. I remember I was in my parents house in the woods and it was over 4th of July. We were signing this public deal. It was multiple calls a day with project manager people like going through these long checklists. So it was like a total time sink obviously doing the deal. So I had like zero time. And we're in the woods so there was like no food. So I get in the car and like drive 15 minutes to the gas station for a sandwich. It was hard to do because there's so many calls like who has time to like leave the house? And that was when I was working at a firm. But those sorts of situations kind of.

Stand out to me.

That's so funny. The pursuit of deals during national disasters.

The other one I remember is earthquake.

I was on a phone call, all of a sudden the building was shaking.

And I'm talking to this guy who's actually in Tennessee, and I was like.

Hey, I think there's an earthquake.

And he's like, oh, that's cool. And then we just kept talking about the deal.

Nothing can stop the deal, right?

Exactly.

Just delay it maybe a little bit. But hey Brett, thank you so much for your time today. I really enjoyed this conversation.

Yeah, yeah, it was fun.

Hey, look forward to the next collaboration. Until then, here's to the deal.

Sounds good.

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