Financial Diligence in M&A

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M and A practitioners. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M&A Science. Joining me today is Amer Abdel Aziz, Senior Director, M and A Finance at Equinix. Equinix is the largest global data center and co location provider for enterprise, network and cloud computing. They trade on NASDAQ under Eqix. Today we're going to talk about financial diligence and M and A Amer, how's it going?

All is good. Thanks for having me. Pleasure to be here.

Thanks for coming to take the time.

To chat with me about financial diligence. Can we kick things off with a little bit about your background?

You'll be surprised to know that actually I started my career doing TV commercials. I've done Coca Cola. That was my first TV commercial. That was at the time of college. I used my downtime. I've done Coca Cola, Pepsi and others and actually venture out into fashion. I've done two seasons for Adidas and then I graduated from college and my uncle took me aside and told me this career is a bit risky. It's not sustainable. My uncle, he owns a CPA firm so he convinced me to take a CPA and join the big four. I took my CPA, joined the big four, joined the PricewaterhouseCoopers in the assurance in the audit. The first few years was good. I learned the foundation of the accounting, but I felt like I needed something more exciting. So I started to venture out into IPO and capital markets. My eyes was on M and A. Interesting. Challenging with the confidentiality. It's always exciting. Always. The M and A folks are in suits. So I was like, you know what? And I hear the announcements, this acquisition has been done. So I was really excited to join the M and A within Equinix, within PwC. And actually I joined the M and A deals team in the valuation and then I moved to the due diligence and then corporate finance with PwC. I've done more than 50 deals on the buy side and on the sell side. So after over a decade with PwC, I felt like I need to get deeper into M and A, the industry. To get into the industry. And actually I saw Equinix was like really exciting. They are the world's digital infrastructure. They are the global leader in data centers. And part of Equinix DNA is to do acquisitions. So in the last few years I've done more than 25 acquisitions and divestitures for more than $15 billion. So Equinix grow through inorganic and organic, but the inorganic pieces is part of our DNA. Currently I'm leading M and A finance.

That's quite the background there. I like how you come from the consulting side. Then you wanted to go in house with that experience. Now because you've got several years on.

Both sides, what's the big difference between industry and consulting?

Yeah, you've had a good portion of both. I'm just curious because I see a lot of career consulting folks, people that go in house, go to consulting. But then having that background and going.

In house, how is it different?

Yeah, so for the consulting side, you get to touch on many acquisitions, but you don't get deeper. So initially it's a good experience to get exposure. You just have a project like one or two months or one deal and then you jump into the other. Versus in the industry, you get to see the acquisition from the beginning until the end. Not only that, you get into the details, you get into the decision making, should we continue this deal or not? In the consulting, you're just helping. In the industry, you are taking it higher level and decision making with executives. We discussed the deal and what's in it. What's the positive and negative. Should we pursue it? We dig deeper into the financial modeling in the negotiation. So in the consulting, I didn't do much negotiation in the industry. No, we lead the negotiation it's our company, it's our acquisition. So we have to lead. It's a kind of a stepping stone. You start with getting the consulting experience and then you get deeper into the.

Industry and you get more on the line.

Yeah.

What's the role of finance and M and A?

If we zoom into M and A Finance, which is basically my team, I have two units pre sign the deal and post sign the deal. The pre sign, basically we do finance, financial due diligence, we do the negotiation, we lead the finance negotiation side of the agreement. And the post sign is managing the sign to close the condition president until we get to close. Helping controllership with the opening balance sheet, doing the value, the purchase price allocation and valuing each and every asset we acquired. So the pre sign is we try as much as we can to unpack the deal before we sign or close. What you don't want to do is to unpack after close, after you close the deal and then you are surprised with issues with liabilities. When I was with PwC there was a client actually had limited access to information. So the diligence were a little bit limited. And after close they were surprised with a huge tax liability in millions. Another acquisition machinery, it was a factory and machinery was taken out from the factory just after sign. So if you have not done your due diligence, you've done the count and understand what's exactly inside the company, then you will be surprised after close. This is what we do is try to unpack it as much as we can before we sign or we close the deal so that we don't get surprised.

Yeah, those don't sound like fun surprises.

Yeah, we see a lot of surprises but we try as much as we can, as I mentioned, to unpack. But you cannot unpack everything. We try to put protections in the sale and purchase agreement to reps and warranties and others so that we can try to minimize the risk as much as we can. And this is the role of M and E Finance is to minimize the risk on the company. Especially after close.

You break things down pre sign, post sign, the financial diligence is a big portion of what you do. The valuation falls on your lap as well.

Yeah. So there are two pieces of valuation. The valuation pre sign where you are coming up with the value to negotiate with the seller. So this is one piece that you, as you unpack the diligence or the financial information, you come out with an earnings a number that is the basis for the valuation and then we start negotiation on this valuation. Based on the financial model on the DCF and the multiple of earnings, there is another valuation that is at close date where you do a purchase price allocation. You record your goodwill, you record your intangibles. If you acquired like a trademark, your ip, real property, personal property. So this we do after sign, we prep after sign and we do as part of the accounting standards, we have to value each and every asset we acquired. And there is a valuation that is required from the accounting post or at the time of close. We call it the opening balance sheet. Yeah.

This is where you record goodwill, this is where you value intangibles.

Exactly.

Okay, so that's all fun stuff.

Yeah, it is.

I say that I'm sitting in VRC's office because they're nice enough to provide the space and I'm good friends with their CEO. And it's always like I start putting the pieces together, what they actually do. I could actually learn how it works from you. So that's even better. We got those views on valuation. What other components? When we think about your role involved with the deal, sounds like a big bulk of it is diligence, which we want to talk about. But is there any other key things?

Typically we start in the pre loi.

Walk me through the very beginning, like the timeline of the deal, of when you start and what goes on.

With our core dev team, the corporate development team, they scout. We have corporate development team in each and every region so they understand the local market, they scout for deals and they find like a good deal and then they call us. We are the kind of the SWAT team. They call us and say, M and A Finance, we need your help to unpack this and see if this is a good deal for us or not. And at this point we start our financial due diligence. We always try to get involved in the deal early in the process. In other companies you might see finance get involved late in the process and this creates a lot of issues because you unpack late in the process. It does not give a room to negotiate because you're incurring cost. But at the end of the day, if finance got involved late in the process, they might say no to the deal or they might say that we found something. So you spend a lot of time negotiating the deal, but you have red flags in the end. So having M and A Finance getting involved early in the process helps the company and helps the corp dev team as well. So as soon as they come on and unpack, we start leading our financial due diligence and then we take the outcome of this financial due diligence to say whether do we need to reduce this valuation or the purchase price, do we need to patch the risks through the sale and purchase agreement or it's a no deal. We found like a red flag and we should not pursue this deal. So this is the pre sign phase.

Yeah, I'm trying to get a sense of how deep do you go in that pre sign phase and how does it mature and post sign we get really deep.

Typically what happened, we issue a letter of intent or an expression of interest to the target saying we are interested to buy this company with this valuation. If they accept our offer, then what happened is they send us a process letter. This process letter include what are the steps. It's typically prepared by the bankers and it lays down the steps, when is the next bid is due, the time period, whether it's an exclusivity or not. And then at this time they provide us access with a virtual data room. This data room includes everything about the deal. Sometimes we found like 50% of what we need, sometimes 30%, sometimes 100%. But we start to look at the first thing is historical financial information. Looking at the income statement and try as the income statement is US gaap, it's accounting based. We convert this into what we call quality of earning. What does it mean? Quality of earnings. It means that we transform this income statement into an economic earning or an economic statement where we try to clean it up from any non recurring events, anything that is one off to see what will be the continuing operations when we do the acquisition. Examples of one off a fire happened or one time revenue related to a specific project that would never happen. We tried to clean that up to see what's the normalized revenue, what's the normalized earnings. And based on that, this is the basis core of the purchase price, the valuation.

This is all between IOI and loi.

No, I would say whether it's LOI or expression of interest. Or maybe we can step back and say what's the difference?

Just the NDA. Maybe we could step back to an NDA then.

So the expression of interest is basically saying well we are interested to buy this company. Sometimes we put the value or the offer, sometimes we don't put the purchase price. And if we put it in range, it's a very high level. And typically we issue it if we don't have much information or we want to leave it up to change. We don't want to be precise. A letter of intent on the other hand is much more detailed. We'll say this is the price point. We're looking subject to our financial due diligence and subject to we'll structure the deal that way, subject to approvals. So it will include much, much more details. This will be a few pages, five, sometimes even ten pages. So letter of intent is much more serious. Formal expression of interest is just saying, well, well, we are interested, but we want more information. A letter of intent is typically you would get an information memorandum from the seller or some historical information so that you can issue a letter of intent, expression of interest. Sometimes it's based on some verbal discussions, sometimes you get financials. But expression of interest is call it less serious. We tend to advise our corp dev team to use more expression of interest. There is no commitment. But on the other hand the debate and say we have to show serious interest to the target otherwise they will walk away and look for some other bidder. So we always have this interesting discussion, but we agree at the end whether it's we will use letter of intent or expression of interest.

And then when are you building this internal Q of E that you're doing?

Typically we do after we're done with the financial due diligence. And this is the purpose of the financial due diligence is we are saying this is what the target is saying they are earnings. And we do the dungeon and we say, no, it's actually their earnings is not $10 million, it's $6 million. And if it's $6 million, you multiply it by a multiplier to get to the value and then we go through negotiation.

You're doing this to come up with your purchase price. You're going through the exercise of building this Q of E to really be confident in the price you're putting out there.

Exactly. It's a verification is the purchase price is true. That's why in the letter of intent we say this is our offer subject to the financial due diligence and subject to that, we're looking at the earnings.

You reference doing this through an auction process. From what I know, bankers usually have a sell side qob.

Yeah.

So you see that as a standard practice.

I would say in the last few years I've seen more that the sell side prepare a qpe. Because if the sell side prepares the qpe, at least they have done some work. At least they have engaged a big four to do some work. Does this mean that I rely on it? Not necessarily. I have to do my own financial due diligence and come up with my earnings. But it means that they reached out to the target, the Advisor, whether it's PwC, KPMG or others and have done some prep work that facilitate our diligence because they have done some work already.

You don't outsource any of it. You're doing this all in house.

It really depends. We do many deals at the same time. It really depends on our capacity. So if you're doing like a $3 billion deal, you need an army, a big team. Typically we hire like the big four to help us and we are the one who's negotiating. And back to your question, if you remember, you told me what's the difference between consulting and industry? That's the difference. We take what the consulting does and we use this input to start negotiation. So we use the quality of earnings of my advisor. I will hire a buy side advisor, kpmg and get the quality of earnings that they prepare and use this and go and negotiate on the other side with the target. Because we have to reach a middle ground because we typically our quality of earnings is different than their quality of earnings. There's no standards around what the amount should be. And that's the tricky and the beauty of it, it's the negotiation art is to negotiate the deal based on this earnings.

Yeah, that's my next question. I was going to ask how much discrepancy do you see between the Q of E presented from the sell side versus what you derive?

It really depends on the deals. We have seen big, very big differences and small differences as well. But I have never or maybe rare that we agree in this is the quality of earnings from your side and this is my quality of earnings. And typically we agree on a one point in the spectrum because as I mentioned there's no standard that says this is the right earnings because we are looking at the economic earnings. It's not like a US GAAP earnings. And hence we go back and forth in negotiation. And it depends on whether it's a buyer market or a seller market. When it's buyer market, we have the upper hand. We try to push it as much as we can to our quality of earnings versus if it's a seller market, then they have several bidders. So if they don't like our quality of earnings, they will go to other bidder. So it really depends if you're an up market or a down market. And actually as part of that financial due diligence, we don't only look at the quality of earnings because the quality of earnings determine the Purchase price. We look as well at the quality of assets. What does it mean, quality of assets? We take the balance sheet and say is the AR accounts receivable is collectible or not? Because you can acquire accounts receivable, but they'll be written off, they're not collectible. There might be off balance sheet commitments, liabilities. So looking at all the liabilities and of balance sheet commitments, sometimes there's a lawsuit that they did not record the liability on the balance sheet. So we look at that and if there is any additional debt or liability, it is deducted from the purchase price. And this actually can be really material and deduction to the purchase price. So it's not just a matter of earning, but the deductions as well.

Do you get a lot of that where you find some material change post loi that has you go back to retrade on the deal?

Again, it really depends on if it's an up market or down market. Do I find discrepancies? Yes.

So the up market, it's like, all right, just because the nature of what it is right now, we take it for stride what it is. Unless it's something super explosive. And if it's a down market. Yeah, we can be more particular about it.

Yeah, we try to be as disciplined as possible because in the last two or three years, the market is an upmarket. Each and every deal you find like so many bidders. But we try to have certain parameters and saying if this deal is, for example, is not accretive after close, if 1 and 2 and 3, then we will not pursue unless there is a strategic specific objective. We want to enter into a specific market that we do not exist. And our customers are asking us to be in this market as defensive movement. We don't want our competitor to own this location because it's a strategic location. So some other aspects of the deal that you have to look at, it's not only the financial due diligence that you look at, the quality of earnings, but there are other factors that we need to look at it with business. So we sit with Corp Dev, we sit with the business folks as well to see, okay, this is the finance view on things, but we have to factor in the business view as well.

What about taxes? Where does that fit in all this?

We have a team that do basically tax due diligence and the same thing in the big four. They have a specific team that does tax structuring and tax due diligence and come up with the issues in terms of any tax issues. And you patch the issues through the purchase agreement, whether through indemnities, whether through escrow. And then typically tax issues are some, most of the time are manageable through putting an escrow on the side or having an indemnity or reps and warranties. But I'm not a tax expert, by the way, we covered only the finance side. By no means I'm a tax expert. I work very closely with the tax team. Not only with the tax team, work closely with the treasury team or the HR team, legal team. Because everything goes into back to the financial due diligence, any liability related to hr. For example, if we're acquiring company with accrued vacation with pension legal, if the legal diligence came up with a lawsuit or something that we need to factor in as a liability on the balance sheet. So each and every other function has to pull down to us to consolidate all the issues and all the deductions to the purchase price and come up with the true purchase price of this company.

We can do a whole podcast about taxes.

This sounds like 100%.

The auction process, have you seen that process change over the years? You know, how have you been managing it?

3 different from deal to deal. But I would say it's not that the auction process has changed. It is the type of market. Is it like an upmarket or a down market? Who are the bankers? Some bankers will typically deal with a specific process and some others not. But overall if it's an upmarket, you will find like a lot of pressure on the bidders. There will be many bidders and there will be a lot of pressure on the timing. Rather than having three months to do the due diligence, it will be just one month, maybe three weeks to do the due diligence and then submit an offer. Rather than working on an exclusive basis with a target, it will be you're working against other bidders. So it is the. Whether it's an upmarket or down market, you'll see the process typically change in an up market as well. Typically bankers will say it's a two phase process. What does it mean? The first phase, multiple bidders go against each other and whoever bids higher after the financial due diligence then be selected for an exclusivity for the second phase. And this is the phase where you negotiate the agreements. If it is in the down market we see like a one on one where it's just one phase. You have time, you discuss with the target the terms and there is no pressure. You sign exclusivity. So you have much more time to go back and forth. You have the upper hand. This target is not looking around as well. So it gives us much more room. When we work on an up market, it's under pressure, so we are always under stress to complete the diligence as soon as possible, sometimes with limited information.

Are you only doing bank deals these days? What about the deals that are proprietary? The ones that you source?

So what happened? We are the global leader in data centers. So what happens when we approach a target and they know that Equinix is interested to buy? What happened? They will hire advisor, they will hire a banker and say, I will invite others as well. I have Equinixes looking at us.

They always do that every time. They just know.

Yeah, especially if you're a global leader. This is what we're seeing. This is unfortunate, but this is the price we typically have to pay as a global leader in data centers. And we have seen many deals. We start looking and then they reach out to a banker and say, I want you to run a process.

Isn't that corrupt? Job is to get these CEOs drunk so that they can build enough trust to get the deal done in one shot.

We haven't tried that, but maybe it's an idea. But not with Eclipse.

Yeah, fair enough. Okay, so it sounds like most of the time, even if you start initiating these deal opportunities, it's getting that third party advisor that's going to keep it pretty competitive to make sure everyone's on their toes.

Yeah, unless you're in down market. So down market you have an upper hand because even if you got like a banker, you might not find other bidders because it really depends on how solid your balance sheet and the cash available to do the acquisition or the financing. So some other companies might not be as big as us, so they don't have the strong balance sheet to do the acquisition and hence your bidders are falling apart. Again, it really depends if it's an up market or down market.

Yep, makes a big difference. What do you want to teach me as a CEO that's going to eventually acquire new business products and lines for our company? Teach me some things so I don't screw up financial diligence.

Typically, CEOs will be really business oriented, which is typically a good thing. But you have to look at other implications. Again, you don't want to do an acquisition and then unpack it afterwards. And in my mind, I want to buy this business because it's growing 100% a month, over month or a Year over year. However, after acquisition I realized it's growing 25%. Typically we try as much as we can to inform other teams, including our exec team and our CEO about the issues we might find and that we need time to do a proper due diligence. We need time to unpack everything so that we are not surprised. If we're talking about like startups, sometimes when they do acquisition, they do small acquisitions. The startup founders are they want to do an acquisition as an acquirer, etc. And they don't think about the financial implications and they typically get surprised. But as the this founder grow into becoming like a CEO of a public company, they realize that you need time and you need to involve. You need to have a collaboration between different teams like the HR Legal Corp. Dev, even Risk and Compliance Tax integration team. All of us need to collaborate. And it takes time. It takes time that it takes time. As you unpack, you will find things that you need to make sure that you cover the risk.

Okay, so I'm getting numbers do lie and to make sure you do your proper diligence.

A hundred percent, if there's one advice is number might look pretty, but when you dig deeper, sometimes you might see like adjustments. And sometimes we find issues that even the target did not know about. And this becomes interesting. If they are not like financial savvy, they did not know that they have this issue. This happened with small targets. If we're acquiring a company, 100 million or 200 million, sometimes they don't have a financial advisor and hence we find things that are not reconciling or find an issue that they are not aware about. And we work together to make sure that this issue is whether we reduce the price or this issue is addressed in the purchase agreement.

Is there anything else that if I wanted to start looking into details, thinking about either red flags or potential surprises to start with. In terms of the early things or first things you really want to dig into and doing the diligence.

There are many things it really depends on the type of transactions. For example, if you're acquiring a tech company, typically it will start with the technical diligence. If you're doing an acquirer, this will be you'll assess your employees and retention. So it really depends on the industry and the type of company. So if we're acquiring a software company is different than acquiring a data center company that is operating a tech company. You'll start with the tech diligence and ops team will do their research and making sure this is the Right target. And then the financial due diligence might come secondary if it's a pre revenue startup or if it's just a small numbers more revenue. This is one thing that it really differs from one transaction to the other. If it's an operating data center, then your starting point would be your historical information. And the second step is looking at the projected financial information, which is an important part. And we typically see the sell side is sending us their projections and you see this hockey stick as if acquisition will happen, everything will be super good and they will grow like 200% year over year. I would say most of the cases we get this hockey stake in terms of revenue growth from the seller. We typically prepare our projections. We have a team, a modeling team that prepare the projects or projections. But we reach out to the target to understand their assumptions. Maybe we can use some assumptions that they have used, but we question the assumptions that they have used in the model. So this is a second thing you want to project what will happen after your acquisition. It's not only about history. History can give you an indication. But how are you planning to expand? Which production lines are you planning to look at or invest? Which markets you want to expand into? Is this deal is accretive to your earnings or not? Because you'll go in the guidance in the earnings call and you would be questioned about you meet expectation analysts, expectation or not, if you do an accretive deal that will increase your earnings. So this is another thing that we look at the projected financial information along with the customer contracts, big customer contracts. We typically review that as well with the projections.

There's the projections the company has. Do you create interpretation of the projections that you have or do you. Is it just all based off of what they present?

Typically we prepare our financial model and we prepare our projections. Because typically their projections is like really optimistic. If you look at history, they are growing like 5 or 10%. But magic happens after acquisition they will grow like 50% year over year. When the target sends me a conservative realistic projections, I actually ask what happened here? There's something wrong. Typically get like very optimistic that we typically do not rely on it. We might take some assumptions or we might gain an understanding how they built the model, the funnel, the pipeline, the attrition so that we can embed it in our model. But we have a global modeling team that look at everything and build our model, ground up projections.

That's the fun easy part. You just got to make a line that goes up into the right.

It is the fun easy Part it has like an art and a science. You can have an optimistic assumption, you can have a conservative assumption. Both are not wrong because valuation is not like a point. And you have seen like public markets two months ago or three months ago when everything was good, they would say, yeah, this is the right valuation because they're growing at X and then tech now is down 90% or 80% and they would say it is fair value as well. Valuation is always an R. It's how you just defy your assumption is what's important.

What about the relationship component of going through this exercise? We've been pretty objective in this conversation about here's the numbers we look at and make sure we check our boxes.

Have you ever found that to be.

An impediment on deals, just the not being able to create that working relationship with the target company? Or is there any factors around that to think about and how well the financial diligence would.

And now if we found issues, if we can communicate as early as possible with the target and have an open discussion, this is the best course. So having this line of communication going between the seller and the buyer is key. And there are like different levels of communication. So the CEOs of the two companies typically should not get involved until late in the process where everything is done. And there are like milestones where the get the view from their teams. But to talk to each other and this should be limited. And then other teams, like advisors should talk to each other. Our M and A finance team talk to their finance team and try to come up with a resolution. And if we don't come up with a resolution, it escalates each and every time it escalates so that we can find a middle ground. And sometimes what we do which helps in negotiation is we have an issue list. We tell them that we found this issue, but we put it in the parking lot and we say, well, we have this issue, we have this issue. And then we park all the issues and then we have an issue list discussion and we go through the issues list. And this is typically a very interesting meeting or negotiation where we say, okay, we'll concede on two or three. And you will concede on two or three. Because typically there is a bucket of issues. And depending on the interest from the buyer and the seller and the substance of the issue, you might concede on some and not on the others.

I like where you're going with the issues list here. What are other examples of things that you negotiate on?

Number one is the earnings, whether it's your quality of earnings or my quality of earnings. And this includes a lot of adjustments in between. So we go through each one of them. The second is this a debt or not should be deducted from the purchase price or not. So we go through the deductions. Third would be kind of anything that we feel like we need much more protection. Things that we are not sure what will happen after close. Call it like taxes. What if there is a tax claim after close? We try to put like an escrow to increase the escrow. What does the escrow mean? It's carve out. If we are doing an acquisition for 1 billion, we try to carve out for example 100 million to be paid after two years as a protection for us. So it's held with the bank until everything in relation to taxes. Sometimes it's specific to some items. Sometimes it's general escrow. So escrow amount sometimes is. We go back and forth whether we want to have a to carve out like significant amount. They would say no, it's only 10% or 5% of the deal. Sometimes they say no escrow. Then we look for protection through reps and warranties or presentation and warranties to make sure that we are covered. We try as much as we can to increase the reps and warranties so that we are not surprised. Because if you have done whatever like a detailed due diligence, you cannot do like everything. You cannot cover 100% of everything. So reps and warranties, escrow indemnities will cover any additional risk that we are not aware of.

So that covers the areas where earnings looking at that first. Then the debt deductions than the protection.

Taxes not related only to taxes. Any protection, for example, environmental liability as we acquire data centers. What if there is some environmental liability, something in the ground that will have an impact on the data center? Have we done a survey, a complete survey on the ground or not? So we want to have some protection in that regard. So this might be included in the reps and warranties. Reps on the financial that it's true and accurate. Sometimes we have even a specific rep to specific items that we noted in our financial or legal due diligence. Some permits, real estate permits, regulatory approvals. That's not. We sometimes put it in whether it's reps and warranties or conditions to close. You have to take this permit before we close or before we sign the deal.

When it comes to working with some of the other components. How's it working with the legal team? Do you get along with them.

I assume you're talking about like the legal team within the company itself, within.

The buyer, within your organization. What does that relationship look like and did you interact with them much or what things would you cover with them?

We interact with them. Legal, HR and corporate development, tax integration, team risk and compliance. All of the teams we work, we collaborate. We have a weekly, we call it a deal team meeting each and every one of us. We have a representative. We discuss everything in the deal. So we collaborate together. Specifically, we are really close to the legal team and the corp dev team when we do our financial due development and we found issues, they are the one who helps us to address and patch any risk in the agreement. So we think together how we can address the risk. I'm not a legal guy, so I need to get their advice. I found this liability, I found this issue, I found this legal or lawsuit that I believe there will be a liability. How can we address it? So the legal team will come up with a good verbiage in the agreement to address this risk? Definitely. Sometimes we debate back and forth. As a finance guy, we always like really protective and we want to make sure that we don't find any surprises. On the business side. They will want to close the transaction, they want to sign the deal. But we always come to an agreement at the end of the day and say this is good for Equinix. Although we know that there are 1 and 2 and 3. But this can be patched through the agreement or through a reduction in the purchase price.

We got the big legal part and it sounds like everything that you find, you got to work with them to document, make part of the agreement at the end of the day or figure out how you're going to manage their identified risk. What about HR is how do you work with them?

Yeah, so hr, typically they do their due diligence. Their due diligence is, and I'm not an HR expert, but it really depends on the type of deal. If we are doing an acquire, we're just acquiring the employees. Do we want to retain the employees employees or not? Is this a carve out of big company or is it like 100% acquisition? If it's a carve out, then what are we planning to do? Are we planning to put them in a separate entity? Do we need to hire a CEO for this entity or a lead for this team? So there are like a lot of things that HR think about depending on the type of the deal. But from our finance side, we have a line of communication with the HR to understand is there any liability that we should expect after close, discuss, you know, their pension, understand better if there is a pension plan, a stock option plan, anything that will lead to an obligation post close that will have to record on the balance sheet accrued vacation. Some folks will have a massive accrued vacation or bonus bonus that should be paid by the seller rather than the buyer. We want to make sure that we understand from HR what's the bonus plan and how it is. So we work closely to interpret what they found and see if there is any implication on the liability. Because this would be a deduction on the purchase price. So everything is linked back to the purchase price and the agreement.

You got to work with them. It sounds like you're going to be working with other functions too.

Yeah, we work with the treasury, especially if we're doing an acquisition, for example, in India or we think through the currency. How are we sourcing the currency? How are we planning to finance the deal? Is this through debt, through equity, through a mix of debt to equity. Do we need to raise capital for that or not? Do we need to prepare a pro forma balance sheet for them to talk to the bankers and get debt financing? They are the one who has the cash to pay. So if we're not working with them closely from the beginning to plan the deal, they would say, well, we don't have cash for you, definitely. The treasury team is really important and we keep communication. So M and A Finance college, we are kind of center. We work with everyone in the organization, trying as much as we can to take all the issues from finance, treasury and everyone and try to get the best price for the company for this target and address the risks in the agreement or through an escrow.

What happens after close? You wipe your hands clean and go golfing?

I go golfing, that's for sure. But no. As part of the close, the technical accounting team will prepare the opening balance sheet. And part of it, they will ask our team to prepare a valuation for what we acquired. What's the value of intangibles? What is the value of goodwill? What's the value of the trade name, the customer relationship? So our team prepares the valuation or the purchase price allocation that is recorded in the books on day one. Then it will go through that audit from the auditor. If they have any question, we address the questions and then we go golfing. But rather we go to the next deal and sometimes we work on multiple deals at the same time. It's a kind of a cycle. What's Interesting to me is I get bored easily. So each and every deal is different.

Yeah.

And that's what I like about M and A. It's get to see in different countries, different culture, different teams, different operations. That keeps the momentum.

It doesn't get old.

Never.

I never thought about it from the financial side too. It doesn't get old because there's no 2P and LS are alike.

Yeah. And what's interesting in the negotiation, you will be surprised that even my team will ask me, why are you passionate about going through this negotiation session? I was like, yeah, this is part of the fun is to negotiate. There's no right or wrong, but we're trying to reach a middle ground. It is interesting. It's just how things play in the negotiation meeting and the tactics used. And you'll be surprised of the tactics used and how we put tactics to get to what we want.

That's true. That's the interesting part because it is again, varies so much deal to deal. And it's a very unique experience that. Where else do you find that?

Exactly. This is an experience that most probably you will not get in the consulting. Probably it's in the industry side.

That's true. It is really different. Just the considerations. Because when it's your deal at that point.

Exactly. Sometimes we have the consultant, by the way, in the negotiation room, but they are not the leader because it's our decision at the end of the day they will state the facts. But you have to take this fact and their analysis and use it to negotiate.

That's true. It's like truly hard to care as much, you know, it just is because I've advised on deals and. Can you teach me a little bit about impairments?

My friends at VRC talk about it.

How does that work?

When you do an acquisition, as I mentioned, you record the assets, you do a purchase price allocation, you say, this is the goodwill, this is intangible. And then the SEC codification or the US GAAP codification, accounting codification. I'll tell you that each and every. If you're a publicly listed company, each and every quarter you have to assess your assets for impairment. After you do that acquisition, you have to look at your intangible, your goodwill, your real property and personal problem. Say, do I need to impair any of the assets? And this can be on a two step process or one step doing a qualitative and quantitative analysis. So you start with the qualitative and say, well, is there anything that happened that lead me to believe that I should Impair this asset or not. And then you go through the process, this process in the accounting codification until you say this needs to be impaired or not. I'll give you an example. If you have a customer relationship, you recorded $100 million of trade name or a customer relationship and then something happened in the country that you have done the acquisition where the activity is, for example a political issue like Ukraine, and then you have to revisit and say, okay, this customer relationship I value based on the graph and based on specific churn rate. However, now there is a war and now the growth is actually, it's decelerating. Do I need to impair this intangible or not? A lawsuit that happened on the trade name, you think about it as should I discount or impair this trade name value on the balance sheet or not. So you have to ask yourself these questions. What's happened to the company itself? What's happened to the economy? What happened to the industry? It's more of qualitative. And then you go deeper into quantitative about the gross margins. Is this production line is dying? Then we have to think through the factory itself. Do we need the machinery, the economic obsolescence of the machinery. If this production line will be liquidated.

Are there incentives for doing impairments where you get some tax benefits out of it? I'm just trying to get a sense of what the drivers to get you to slant to impair versus not impair.

It's not a choice. So you have to follow the accounting qualification, otherwise your financial statements will be materially mistaken.

Then what happens? Do I get a slap on the wrist or a punch in the face?

It really depends. If it is a significant impairment and you said everything is good and did not impair it, you'll get like a material misstatement and your stock price will go down. This is definitely not a choice from a tax perspective. I will leave it to the tax guys whether there is a tax benefit, but I don't think we should look at it whether it's beneficial or not. It's more of we have to follow the SEC rules regardless.

Well, that clarifies that. Yeah, it sounds like a whole other topic. I could talk more about impairments. Amer, I got to ask, what's the craziest thing you've seen in M and A?

There was a deal that I was working on the buy side and the sell side. It was a small deal. It was like 100 million or maybe $80 million. The sell side, they were not like financial savvy. They did not hire a financial advisor. They said, let's save the cost. And from our side, we have the legal advisor, we have everyone looking at the deal. So we put all the protections in the deal to make sure that we are protected debt. We included everything. And then we signed. If you remember we talked about, you prepare the purchase price and you do deductions based on the negotiation and the agreement. We have done the deduction and it came to be a discount of 90% of the purchase price. So if the deal was like 100 million, after you do the deduction, it's $10 million. Because in the agreement we were like really broad. We included each and every liability and that like item in the agreement. When we prepared this analysis and showed to the target, they were kind of what's that? And they signed the deal. From our side. We want to be overly protective, which is typical from our side as well. This does not make sense based on the economics of the deal. At the end, we reached an agreement to come up to a fair price to them against some other concessions from their side. But you should not try to save cost and not hire good lawyer or a financial advisor. It can happen both ways. But it is critical to get a solid team to help you. You can lose up to 90% of the value of your purchase what you're getting in terms of cash. This was kind of a surprise. It was funny to see it. We did not act on it because we were overly protective. But my point here is this can go wrong on either side. Yeah, I was surprised. I was on the right side and I'm the one negotiated the agreement. But as we unpack, we found like there are lease liabilities and other that needs to be deducted. But that was an interesting one. There is another one that actually between sign to close we have done everything. I was on the sell side actually. And after we have done everything in the deal, we signed the deal, we had many celebration because we get a success fee. I was an investment banker at the time. And between sign to close, the two presidents of the two countries, they didn't get along. And the president put a pause on the deal. The paper of the acquisition went to the President for regulatory approval and they rejected the deal. So sometimes after you sign the deal and you see it here in the US a lot in terms of the antitrust, because you have to look at the antitrust, the competition and make sure I assume you heard many transactions that broke. After being sung with the political part.

In my head, I'm thinking, all right, Somebody's got to get on a plane with a bottle of bourbon and get this thing through.

But there is nothing that says that we cannot close the deal. But it is from the President saying any investor from this country is not allowed and it happened between sign and close. So my point here is external factors have a big impact on M and A, whether from the economy, whether regulatory war, others that can actually put a pause on the deal. It's not just the hard work of different teams and coming to align with the sell side or the buy side.

This ties back to I should work with really good advisors as well because there's a lot of unpredictable things that can happen.

Yeah, 100%.

Amar, thank you so much for taking the time to chat. I learned a lot from this conversation.

Thanks Keesen for having me. I appreciate it. I always listen to your podcast. It's really good.

Oh, that's the best. I'm flattered. And this is fun to build the knowledge sharing platform and really define Corporate M&As their career for the industry.

You capture different parts of M and A, whether it's integration and listen to something, it's actually really beneficial for me as well. So it's helpful for the ecosystem of the M and A and our colleagues as well.

I appreciate it. Thank you. Amar. Thank you for contributing and making M and A Science a little better.

100%.

Cheers. And here's to the deal.

Foreign.

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