How to Create an Agile M&A Strategy

Hello M and A friends. If you're looking to improve your in house training, we have corporate training plans provided through the M and A Science Academy. Give your team members access to the best in class courses, templates and networking opportunities in the industry. Our Academy was designed to lead practitioners with the how to of M and A practices. If you're interested in learning more about individual or team plans, go to mascience.com academy it's also a great way to show your support for M and A science. Again, that's mascience.comacademy onto the interview 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. Welcome to M and A Science where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up the latest from M and a science, visit mascience.com and subscribe to our free newsletter at. Every week we share highlights from our interviews and invitations to events online in person as we build the greatest community of forward thinking M and A practitioners. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of Mascience. Joining me today is Daniel Gitzevich, Vice President, Corporate Strategy and development at L3Harris Technologies. L3Harris is a defense contractor and information technology services provider traded on NYSE under lhx. Today we're going to talk about how to create an agile M and A strategy. Daniel, how's it going?

Great. Thanks for having me on.

Thanks for taking the time from doing deals to have a conversation with me.

My pleasure, my pleasure. This should be fun.

Can we kick things off with a little bit about your background?

Maybe I won't go all the way back, but I started my career post undergrad in finance working at Northwest Airlines. So when that company still existed I think since then on the theme of M and A it was acquired by Delta Post one of the crises that the airline industry had I did variety roles in finance and operations, financial analytics, internal consulting, project management over the course of a few years and frankly airline industry is pretty depressing in the early 2000s and late 90s and I decided to go get my business degree, attended NYU Stern, joined investment banking immediately after. So first at bank of America, Merrill lynch, then I worked at Deutsche bank on Wall street where I focused on M and A across the industrial sector. Spent a bunch of time with aerospace and defense, broader industrial, large Cap companies like Boeing, United Technologies, L3 Communications, predecessor to the company I'm now working at and a variety of sponsor owned names across across the sector. Stuck it out for quite a while, but then had an opportunity to join 3M in Minnesota. And it was a bit of a coming home for me having grown up in Minnesota. So at 3M I joined the corporate development team as leading really the M and A effort for one of the big business groups, the safety and graphics, helping them divest a number of businesses and acquire to help reshape the portfolio and execute on a growth strategy. And I only did that for a year and then was appointed to lead overall corporate strategy for the enterprise. That was more of a focus on broader portfolio initiatives. So getting into why we do deals as much as actually executing the transaction and then also broader strategic planning, enterprise initiatives, things like that. And had another role where I led M and A strategy ventures, a variety of digital initiatives as vice president of development for our largest segment. So 40% of the company. So 66 years across a variety of these roles at 3M. Then had an opportunity to come here at L3Harris where I lead strategy, M&A Ventures and our integration efforts. And here, look. This is a unique time at L3Harris for the company. And frankly the reason for making the change from 3M was to join a new leadership team at a pivotal time where this is really a three year old organization. $50 billion market cap, you're approaching 20 billion in SAL. It's an outcome of the merger between L3 Communications and Harris Corp. And the company is positioned to continue to focus on growth with inorganic and M and A in particular a core part of our strategy. So there's a lot of interesting and complicated problems to solve, but importantly driving shareholder value through M and A and other growth focused efforts.

You worked on all sides of the deals and now the deals you're working on are top secret.

As I think is practice in M and A we keep things confidential. As far as anything we're working on. Absolutely.

You have like an extra layer because I feel like you hit itar compliance and some of these interesting things. I don't know. Have you got experience that where you actually handle data differently and things like that? In an M and A deal we.

Absolutely have incremental layers of clearance that may be required to even have conversations around certain topics, what certain companies might be doing. And not every deal, not every company, not every business that we have has these ultra secret elements. But in some cases, yes, we will get into a skiff a secure facility to have these conversations with only those individuals who are appropriately cleared and have the right level of access.

There's a lot we could talk about there.

Actually there's not actually we can talk very little about very little in that area.

Fair enough. Let's get into our topic today. Why does your strategy need to be agile?

Agile is just such a broad term and especially when you think about M and A. Does it need to constantly vary? Does it need to be adapt? Does it need to just be fast and quick and be able to move on a dime? And for us it is constantly evolving and it is working our deal pipeline both top down and bottoms up. So we identify areas of focus that help us build that target pipeline. What are the biggest mark and capabilities to go after? The biggest and growing areas of the budget where we might be underrepresented, the areas where we really have the strength and capabilities that we can leverage and build off. Then we look at what are the targets that are potentially out there that actually fit these strategies and areas of focus that we're not waiting for things to come to market and we're constantly working to unlock opportunities of interest and that might be by talking to companies directly and approaching companies directly. Not necessarily with the message of we want to acquire you, but hey, we want to establish a relationship. We establish these relationships with owners of companies for private equity owned businesses. A key lover is frankly just knowing the partners, the funds, how they think about the future of those companies, if they're building or if they're exiting and position yourself as a good home for these businesses. Defense is a little bit unique and interesting. The defense sector, when I was working at 3M, it was much more clear cut of who's a competitor and who's a partner and who's a supplier, who's a customer. Here your customers, also your competitors, also your suppliers, also your partners. Depending on specific program, opportunity, contract, you will have a different relationship with the very same firm. The Lockheed Northrops. We all work together and we compete against each other. And the reason that's important is that ultimately we all try to serve the customer. And the ultimate customer here is the government and departments of defense around the world. We have to figure out how to collaborate and this whole agility of you have to go top down, we have to go bottoms up. We to make sure that the targets we identify, they might not in all cases be perfect, but we have to figure out how it might fit the strategy that we're pursuing at any given time.

Oh, this is Going to be fun to talk about now, since our prior, I'm twice as conscious of what I'm going to ask you here. So they may be a little vague questions, but the first thing you're overseeing different business units with their own different sort of strategies that they're executing on. How do you prioritize that overall?

This is something that continues to evolve and continues to be a process that, you know, is frankly, prioritization is a core part of what we do and what we need to continue to do. We have markets of focus. We have three big, broadly defined areas or segments. I would say one clearly communication systems, business, and everything around that sphere. That is a focus area for us and that's a segment. We have great positions in that space and we want to continue to build on that core. We have a great ISR and maritime franchise and I'm probably going to skip some. So if somebody from the. From L3 Harris listens to it, they'll get upset, but it's not meant to offend whoever I miss. But intelligence, surveillance, reconnaissance and maritime franchises, they're terrific. Our space franchise, where we've had a tremendous amount of wins and where we're really positioning as that prime provider, migrating up the value chain from a legacy component provider, that's been key. So broadly defined, we've identified these areas and then cyber. Cyber continues to be a focus, but very consolidated and fragmented market so challenging to go and acquire in those areas. So we identify these key markets for us to go after and when assets, I would say, not become available. But when we evaluate the set of opportunities and we do screens, we do evaluations, we look at sponsor portfolios that have been acquired and frankly built over time. We look at competitor and customer cooperator, partner businesses and which ones could potentially not be aligned with their strategy as much as with ours. And we try to fit them into these buckets. And the first cut is, hey, does it fit into these areas where we really have a core, core strength that we can bolster for us, it is important that we're not just building scale for the sake of scale. We're looking at areas where we have strengths, key capability gaps, and then how a given target might potentially fill that gap and bolster that core?

Would you then prioritize those strategies in general and saying, hey, this is the top area, we really want to expand through acquisitions. And then I'm on your website is like 14 different business lines. So I see how you can name them all off at the top right there.

The prior to say, without Getting into the details of which business unit and why. But there are key areas where frankly, in those 14 that you mentioned, we have the positions that we need and we don't need to go after. We'll prioritize depending on the market attractiveness, certainly, but we're going to prioritize areas of growth, especially as it concerns the defense budget. Because for us, unlike 3M and a lot of their businesses, we have a customer that tells us what they plan to buy and when they put out an annual budget for the next five years. And granted there's a lot that shifts from one year to another. The budget might go up or down depending on political environment and what happens in the world, but you have a stable base of long term programs. So if we're looking at areas that we want to get into, we know with some level of precision the markets that are growing, the key areas of focus, those will be prioritized ahead of others. Then from there, which of those, I would say as the next layer of prioritization, depends on the particular target. How attractive is a potential capability? How much does it strengthen our profile? Is it actionable? Does come into play. We can have all the aspirations in the world to build in a particular market or area, but there's just nothing to acquire, nothing of scale that would make a difference for an enterprise of our size. So that's a consideration as well.

We're getting to some agility now because depending on the target, it shifts your prioritization right there to some extent.

It has to. We have a core foundation of our strategy. We're going to focus on building on our technologies and on our core. We're going to prioritize certain markets that we want to access that might be higher growth. We don't play in certain areas that frankly have attractive trends. They might be either from a growth or a size perspective, areas of the defense sector that we should have a bigger plan where we're underrepresented. But if there's nothing to buy there, if there's no way to get into that area through an inorganic, through an acquisition, we can wish and dream, but it's not going to matter where. It does become a question of what is actionable, not just what's available. What has the banker called you? What's the latest idea that they might be pitching or the assignment that they have sell a given asset. But what is out there that could potentially become available? That layer of prioritization is important.

Can we talk through this gap that we referred to earlier? Having this defined strategy Using that as your guide to go find targets versus this. When you find something that you need to start shaping it to the strategy. And I guess there's like a gap because you can't be so disciplined. Here's your defined strategy. You go out and find stuff, or you could be versus stuff that comes up. It doesn't quite fit in the super defined strategy that you have. So how do you handle that? Does that make sense?

I think having a strategy and having a direction is important. Otherwise, let's just say there's 500 potential acquisitions out there. How do you even start to segment them and prioritize them? And the first cut you do is, is this aligned to our strategy? Is a piece of, of any given target aligned to our strategy? And what is that strategy? Was the first thing that we had to define when I came here. So I've been in at L3Harris for not quite a year. And the first thing that we did was say, hey, what is it that we want to be? Where are the areas that we want to focus? Moreover, what are general parameters of types of businesses that we want to go after? And this isn't unique to the defense sector, but you can play across various areas in the value chain. You can go from being a platform prime where you're building the F35, you're integrating all the pieces like Lockheed, all the way to the guys who make the circuit boards. Well, in between that are components, subsystems, systems, mission systems, and then finally the jets. So first do I want to be in the airborne domain? Then where in the value chain do I want to play? I could, as L3Harris say, I really want to be the one that builds the jet. But that's not a really like a, okay, go acquire Lockheed Martin. That's not a reasonable approach. So you have to, you have to tweak your aspirations and your strategy to what is you're able to accomplish. So in the airborne domain, where we don't have the credentials and the quality to build the jet, we are very focused on the mission solution set. Whether that's going after electronic warfare or the integrated core process, or kind of the brains of the jet effectively, variety of other airborne mission solutions that we can work with Lockheed to integrate into the jet. That becomes your focus. And then from there, okay, that's the part of the value chain where in this market it's key for us to play. Now, what are the targets that could enable that strategy? You go too far down the value chain. You don't want to be a small Time, component, supplier, fire. You want to play up, you want to play up into that, in that prime space and start tying all of these different pieces together, building that whole mission. Integrated mission solution. A set of targets narrows down pretty quickly. And you know what, you go from your 500, then you focus on airborne, maybe it's a hundred and then you go on the value chain and maybe it's 10. And then it's ones where you have the core and it's one or two. So we're not talking about trying to prioritize an unwieldy set of targets. We're trying to figure out how to get one or two deals done in a particular area. Okay, that answer across the value chain, that might be different depending on the domain you play at. In space. For example, in responsive space, we've taken a lot of prime positions where we're integrating in the space vehicle and we're putting the pieces together the same way that Lockheed does with the fighter jet. We might be doing it on the space domain. And that's what I mean. Like depending on where you are, you're in different positions. Lockheed could be a supplier to us in certain instances. Rarely they're big. But it does happen.

There's a lot of this is just through the supply chain. You can identify stuff and kind of look around it as well.

So yeah, supply chain is a factor in a lot of instances. Our focus is really on it's adjacent areas that we don't necessarily plan. So like in space, space, there's the payload stuff, so the optical imaging, the sensors, all of these things that actually do perform on the mission. And then there's the bus, the structure, the satellite bus that you actually launch into space that carries all of these sensors and everything. And those are different pieces. They might actually appear in the similar place on the value chain because you could be a prime making either one of those. It gets pretty complicated quickly.

Yeah, I can see that. How does it work when you do have a target in terms of communicating how it fits against that strategy? How do you talk that up through? Does it go right up to the CEO?

Ultimately our focus is not on making a lot of small acquisitions. Our focus is on going after scale and after doing things that matter for larger companies. As you appreciate, a deal is going to take as much time, whether it's $100 million or it's a billion dollars. Sometimes even the larger ones are going to be simpler. So you want to make sure you're prioritizing from a resource perspective. The things move the Needle. And I say all that as the preamble for I personally believe that M and a is a CEO's game. Ultimately the CEO runs the company, sets the foundation, sets the strategy to drive shareholder value. Of course he's got a team around him to help him do that. But the goal is to grow the top line and profit growth and deliver shareholder results. So our CEO is intimately involved in any deals that we might be looking at. And obviously depending on the stage it's at, it's not like he's going to be in the sausage making. But we have a quarterly cadence established where both the corporates of my team, me and a couple of individuals from my team will brief the CEO and a couple of our cfo, our general counsel, who really form our frankly deal review committee. So it's really the four of us that review all transactions for approval before any major milestone. But we'll also have these pipeline reviews where we evaluate the strategies, the potential acquisitions or targets that align to those strategies. We'll do that at the corporate level because there might be certain instances of us going after or they're trying to be provocative and looking at markets that maybe aren't aligned with each one of the corporate segments. Look, here are some stuff that could happen. These are things we should continue to monitor because even if we don't do that deal, it could fit one of our competitors strategies and here's how it could enable them. So we need to have those constant conversations. Those deals might not be part of the active pipeline, but certainly an ongoing discussion. And then we have each of our segments. So we have three segments that we operate in our communication systems, our integrated mission systems, and our space and airborne systems segments. And they will come and brief on their potential acquisition candidates that are aligned with their strategies to ensure that we're again working this top down, bottoms up, and on a monthly basis, frankly an ongoing basis, we have a cadence with each one of our segments where we'll work with them. So I have members of my team that will ensure that pipeline is constantly being worked, that we're evaluating and dispositioning candidates on an ongoing basis. And that's just the stuff we do proactively by knowing the in the space, doing our own work, doing our own screens, frankly getting ideas from bankers, not necessarily what's in the market at any given point in time, but what could make sense, what could come up, what could be actionable in the next X amount of years and then certainly as things do pop up, we have not been surprised. We have anticipated deals in advance of them coming to market. Our organization has been frankly prepared and on notice that hey, before anything even comes up, this is coming. This is how it aligns to strategy. Obviously, once you get under the covers a little bit, you get the NDA process or deals that potentially make sense and you start evaluating that could all shift. But we've been proactive in setting up these processes so that we're prepared.

It's interesting how you walked me through the strategy development part which is pretty well aligned with just good practices for building our M and A strategy. But then when you're actually putting in play, your aperture is still pretty open that you're still looking at a broader lens of things not just right in there tied to that strategy.

This under we will pretty quickly disposition and eliminate targets that are not aligned to a strategy. But we will look at most companies in defense if they touch the sector to ensure that we didn't miss something.

Okay.

This has been an active sector in a lot of ways and it's sometimes hard to figure out from the outside whether XYZ company is really what you think it is. We haven't been dismissive of things that could fit that don't necessarily fit. But I would say we've been pretty deliberate in like we are not going down this area of the supply chain and I can pretty quickly say we're not looking at this. This is eliminated. That doesn't fit our criteria for where we're going to as the new L3 Harris. It could have fit a predecessor company, but it doesn't fit us and where we're trying to go today.

Got it. So not too wide open of an aperture a little bit, but then you're focusing it right in quickly so you're just have that view around the corner of what's changing. Yeah, anything around strategy itself that evolves shape in terms of how do you reevaluate it.

So in addition to me joining last year, we've been shifting our strategy overall just as a company. It's a natural evolution. So as I mentioned, this company is 3 years old. So L3 and Harris merged 3 years ago, came together. They were both legacy component providers. So they played in lower parts of the supply chain, had some positions and some prime contracts where they were really in control and were the lead. But a lot of it was component plays. And the last three years were spent entirely focused on delivering on value realization and ensuring that integration goes smoothly. Look at our strategy and some of the investor decks from three years ago. The first thing was integrate Flawlessly. The integration management office focused on that business has been dissolved, for lack of a better word, because we're done integrating. As of the end of 21, we were done integrating. So this strategy is evolving and it is much more focused on growth. So when I came in was the perfect time. Hey, let's define what growth means for us. Where are we going to grow? We spent a lot of time when I was out with 3M figuring out what markets we're going to grow in. The reality is we play in defense, we're going to grow in defense. But you can be nuanced, of course. Are you going to grow in services? We've divested our services to different market. It's a slightly different approach. There are conflicts of interest potentially between some of your product based businesses. So no, we're not going to focus on services. We're going to focus on more of the product and mission systems, let's say businesses. So there's not the, hey, are we going to go play in health care? No, we're not. We're a defense focused company. We're focused on being disruptive, innovative technology prime. That's been the focus. So what does that mean as a growth strategy? We want to prime more, we want to increase our content in areas where we can't prime and we want to expand some of our addressable markets. But the caveat here, again, I'm not talking about going into healthcare. I'm talking about going into certain capabilities where we just don't have as strong of a position organically. I'm also talking about growing internationally. So could that be an M and A? Yes, but M and A internationally is inherently more complicated. It's also very complicated with the political environment. It's not a us versus others, but it's really, if you think about what defense is, it's a national practice. It's a national thing that every citizen of a given country has some say about. We have allies, of course, we have the five eyes, we have everything. But the reality is there's a lot of sensitivity around defense companies. Cross border mergers, US government kind of taking stakes in xyz. So we do have a lot of partnerships around the world. Obviously acquisitions have happened between us and European companies over time. It's not as straightforward when you go international. So we define that, that strategy, that was the first thing. And then we started building our pipeline and looking at hey, what are the assets and the landscape of potential targets that are out there? What can we after that first fit these criteria and where do they fit. How well do they fit and how well do they align to our current again core technology area where we have capabilities or gaps, but where we have capabilities to build off? So to me, strategy is always foundational and that's what comes first. If you're just out there running around looking at potential targets, you frankly, you end up getting yourself in a lot of trouble. Because part of what makes M and A work, and it could be an attractive growth lever for both top line as well as shareholder returns, your underlying profit growth. But the only way that works is if you execute a strategy for why you did that deal in the first place. And to build a strategy after you acquire or try to rationalize it after the fact is challenging in my view.

Is it because of the value creation net, or because of just the narrative and how the perception to investors and so forth looks like? Or is it the scale between the two?

If you do deals that are not aligned with your strategy, you quickly get distracted and lose focus. In a large company, as you appreciate, you have to deliver the quarter, you have to build your strategy, you have to execute your strategy, and you have to go after growth using every lever that's available to you. But all of those things have to have a common link. If your M and A strategy isn't aligned to the strategy that delivers the quarter, like the you eventually get disconnected or the leadership changes and now nobody knows what the strategy or the acquisition rationale for a given transaction was because it was never clearly set up and communicated. You have a big team that's trying to execute a given value realization or integration. If that wasn't crystal clear at the beginning, you're much more likely to fail. I'm not saying you will in all cases. Of course you can power through things, but there are so many ways that things could go arise. Not to have at least the basic building blocks of strategic rationale that built out well in advance of doing or even pursuing any acquisition in my experience is a mistake. It's a recipe for disaster.

Do you involve the business leader when you rationalize the target?

So we don't rationalize the target, we try not to rationalize the target and we absolutely are going to involve the business leader. And again, look, there's always the exception. There might be a situation where you're going big. The merger of L3 and Harris. I'm going to guess that there wasn't a lot of business level discussions around why this or that makes sense. Because in the end, strategy was an enterprise strategy on both sides. This is why it makes sense for us to come together and look, we're both smaller than the big guys, bigger than the small guys, lots of synergy, value creation potential. But it's a CEO to CEO connection, as I imagine. I wasn't here, wasn't a part of that transaction. But in that instance, okay, okay, maybe you don't involve the business leaders, but in the end, as I think about the majority of deals that you're going to do, especially I'm a big believer in a programmatic M and a strategy, as McKinsey would call it. You're going after a very deliberate, consistent approach where you build a pipeline, you identify targets, you go after targets, and you continually add on capabilities through acquisitions. And in that instance, those businesses aren't going to be mergers of equal. They're going to be capability ads. They're going to be areas where we continue to build on our core technology strengths. They're going to fit one way or another into either a segment or the bigger piece or what we call a sector. And we need to figure out who's going to own that. The business leader, it needs to fit the business's strategy, it needs to fit their mindset and they actually need to figure out how we're going to run these businesses together. And I'm not suggesting that in all cases is just, oh, we need to absorb it and we need to put them all together, smash it and all be in one thing, because it'll be under one business leader. In certain instances there could be rationale for actually keeping things side by side. Building center of excellence type effort. Through acquisitions, you build a center of excellence that can enable the rest of the organization. But the people who are going to run this are going to be best positioned and for whom this is key and strategic are going to be best positioned to help truly evaluate and frankly sign up for that future value realization or integration plan.

Are you bringing them in the first meeting from the get go or when do they get looped in and then do they bring you deals? Who brings deals to who?

I would say it goes both ways more often than not because we have been proactive in building our pipeline. We have certainly vetted our pipeline with our business leaders. Hey, here's what we found. Here's why we think it makes sense. This is that cadence I described. We have a monthly cadence where they're bringing us targets. We're doing independent work. My team is doing independent work. We get together and we, we hash it out. And we found 80 to 90% of the time we end up with very similar, especially things of scale where they might have a unique view is certain very niche capabilities, smaller assets that might plug in and provide that extra incremental gap filler on things that move the needle. We're going to be 90% aligned on the things that fit and why they fit. Will we bring them in and how early we bring them in? It depends generally. But look, they have a business to run. So until something is active, we try to leverage them for insights. We try to leverage them as we do our own internal work, as we do our own evaluations. Before a deal is active, we ensure that we're leveraging their business knowledge, their customer knowledge, their potential knowledge of the target, even because, and I mentioned this in some of the way I was describing the defense sector, right? We compete, we supply and we partner with the same companies depending on what we're actually doing. So in a lot of instances, instances, we will have established relationships with a potential target, with individuals within that company that might not have any view of that. There could be a potential deal or they could be sold. But the business leaders will have an understanding on the basis of those relationships, discussions where we collaborate, what the potential opportunity set is. So it gives us an advantage in that way to use their knowledge. We do try to keep them more on the outside and cognizant of the fact that, hey, they actually have a business to run. They have to deliver the quarter, deliver the year, deliver the plan, first and foremost. So once we do get active in a deal, once it looks like there's something truly actionable, yes, we're going to start getting them involved, start getting them up to speed. They have strategy and business development people as well. We have them sitting at the sectors, those will be on the front end. Those are going to be the ones who are really thinking through, but always working with the actual business leaders to dictate how things should work and especially from that value realization financial plan, what are we committing to?

You mentioned the integration part too, that they're going to ultimately own that. When does that thinking come in play? What does that look like?

Pretty early in the initial evaluation. It's all about strategic alignment. Can you make the numbers work? And I know we haven't been talking about valuation, M and A returns, things like that, but that's critical. In the end, if we're buying businesses and throwing money around and just destroying value, it doesn't work. We have to realize appropriate returns, we have to pay appropriate prices. We have to be disciplined to ensure that we are Continuing to generate shareholder value. So that's key. But the way we do that is through integration. So in order to inform what we could potentially what a given business is worth to us, what kind of returns we could realize and what we could pay or it's not just about, hey, does our balance sheet support it? It's hey, what is the potential cost synergy realization. And that's in a lot of ways going to be dictated by the integration plan. So the level of integration will drive the potential synergy realization. On the cost side it'll run, it'll drive the way we run the business and the cost that we need to incur up front. That has to happen early on. The level of detail will be different. We're participating in a first round process and we got a SIM or maybe we had a Fireside chat or an early presentation and just a conversation with management, we're going to take a high level view and this looks like a business that we could integrate pretty directly because we do something similar in a lot of our businesses and we can run this manufacturing, we have space at a given facility, so on, so forth. Or we take the opposite view and it's like this business is pretty special and what makes them special is the fact that they operate very differently than we do. So we actually need to keep it intact and not integrated in the way we would separately. That conversation happens very early. The detailed, hey, we need to like really talk about integration and the details of HR payroll. Heck, how do people get paid on day one? That happens as soon as, once we get past this initial hurdle. If you think about traditional M and A process, that second round conversation, once we start getting into more detailed due diligence, that's when we get into those questions.

Now you're making my head spin. I wanted to track this interview and just have a friend to friend conversation. I want to take your blended experience from investment banking and corporate development. Can you teach me how to pitch a deal to a VP of Corp Dev?

It's a good question, it's a good case study.

I know it's the right question for you.

So look for me to buy in to a deal again, I'll start from the beginning. What is the strategy? Forget the strategy for this deal. What is the strategy for the business as we have it today? How does that target or that particular transaction align to that strategy? For me, that's the fundamental question before we get into price and valuation and why this makes all the sense in the returns world. That doesn't matter. We're not a portfolio holding company. We have to have strategic alignment between the core business strategy and any target that we pursue. That to me is the first, the first question, then we start getting into, okay, what is the financial profile of the business? What is the valuation? What are the returns that this business will generate? Is it accretive? Does it cover? Call it our cost of capital. Right. What are the long term returns on invested capital that we can look for?

You expect me to have this put together prior to reaching out to you to pitch you this? Right.

So it depends on the state for us to engage in a transaction. So if a business leader is saying, hey, this is really strategic for me, we need to dig into this company. In a lot of instances, we're not going to have all this stuff. So depending on the phase that we are in, I'm skipping all the way to the end. If you want me to buy in and sign on the dotted line and we are buying this company, that's the level of analysis in order for us to, hey, we should really look at this because this could be really interesting. It's that first strategy lens. What is our strategy? How does the given target align to our strategy? Does it fill XYZ gap? Is it an accelerator of growth? What is it? Why does it make sense? How does it bolster us? How do we potentially make it better in a way that we can. We can't do organic. So the strategy piece to me is the first thing.

Strategy, then valuation, valuation.

It's going to come later.

Okay. Okay. So just pitching the part now, I look at it as two things. I could come at you with a company I have an engagement with, and that's my job, is to sell it, which is pretty common. What if I come to you with an idea? Let's take Gulfstream, for example, I think would be a phenomenal business unit for you to tack in your portfolio. Do you have that? Do you see people doing that where they sort of. It's not something under any kind of thing. I'm just pitching the idea and I'm willing to do the work. I'll chase down General Dynamics and we'll get a conversation going here. But what do you think, Daniel? Is that something that would align with your strategy? I got my idea on how I think it'd be a great addition and pollster given whatever financial information I can pull up. I'll make it a nice pretty chart that goes up into the right and it's going to look good. How do I get that conversation going on?

Absolutely. Not absolutely does it fit the strategy, but absolutely we get those kinds of pitches and it's always a good conversation and it's a good test of how well aligned are we and are we willing to stick by what we've said. And again, I just come back to the fact that we have a strategy for where we're pursuing. We're going to be a defense company that is continuing to move up the value chain and focus on disruptive innovative solutions that enable us to one prime more increase mission content on core platforms or expand our addressable markets in defense areas that we don't plan today. Gulfstream fits none of that. Gulfstream is a terrific, fantastic by all measures business jet manufacturer, awesome. Just not the right business for us.

You mentioned jet earlier and it's just an adjacency. It's right.

I did mention jet. You know what though, the interesting part about a company like Gulfstream, in some instances they could be a great partner because we have a missionization business out in Texas. We're actually one of the leading providers of ISR solutions where we actually missionize aircraft and Gulfstream is one of the platforms that we utilize a lot of cost energies.

If you could spy mount.

So we don't need to own this is the question of value chain. Do we need to own that in order to grow as a company and grow as a prime time? We don't. What makes Gulfstream isn't our business. What made Gulfstream is all of the business, all of the sales to non defense customers. And that is not an area where we have a lot of, I'll say, expertise, commercial aerospace and that business just customer set. That market is very different. Great market, terrific customers, but not a focus area for us. So your point of prioritization, you got to prioritize.

Daniel, I get it. I'm a little off base on my strategy. I should have done a little more homework. But as an outsider, how could I do more homework to better understand your strategy? Besides listening to earning calls, there's an.

Element of our strategy that we have to some extent keep under wraps.

I think we're speaking just for the matter. Public companies in general for sure.

For the banker set, for example, for the individuals who cover us, who track us, they do a really good job. I will tell you, looking at some of the research analysts and the way they describe our strategy, it might not be 100% endpoint, but they listen to earnings calls, they engage with management, they engage with me or whoever it might be our CEO, certainly our cfo. And there's a consistent theme coming through that you can see across investor the investor decks that we put out, the research reports that we put out, the earnings calls that we put out. So when you talk about how do you learn the strategy? Well that is frankly how you learn the strategy. You engage with the management team to try to do that.

Okay, fair enough. In terms of compensation, could I work it out where I could get a jet as deal fees for putting the deal together?

Are we still on Gulfstream?

Yeah, I just want to make sure incentivized.

I thought we dispositioned that one.

I think I just want to come back to the how I get paid on this stuff. That's all. Just I heard there was a story of the CEO that turned around the company that when he was on his way out they offered him a gift and he was like getting a jet. I don't know if you got a jet. But anyways I'll keep that in mind. What's the craziest thing you've seen in M and A?

I know there are a lot of crazy M and A stories out there. Super complicated deals. I certainly been in my share of complicated transactions or things that didn't go as planned. But crazy is not a word I would attribute to it. I think what I would say is overall I think what's happening across the M and A landscape and this is not defense sector specific question, but the what I would say is the regulatory landscape is unprecedented. And while I wouldn't say or attribute crazy to to that landscape, the fact that we are talking about FTC reviewing deals that have been done years ago like Facebook, WhatsApp, Facebook, Instagram for example, that's going to give people a lot of pause and posture and approach. It's frankly going to change the way we do deals to some extent. I think you will start involving professionals helping answer those regulatory questions a lot earlier. You might start having to involve them in an active pipeline discussion. Could we even contemplate growth through M and A in these areas? And I don't know that that has been the case case historically. And how long does that last? It's a good question. In my experience in the last 20 plus years that's probably the most unprecedented set of events and just narrative around the environment that I've seen.

They get me fired up about this. The government doesn't understand M and A and we should band together sponsor lobbyists for corporate M and A to help them better understand the value that gets created. And M and A shifting. It used to be the bad triage of finances and stuff. But now people understand. It's all about the people. How do you line them around? A vision to innovate and create value.

I completely agree with you. It is all about the vision, creating an increasing competition, ensuring that you have a supported industrial base long term and that you're continuing to innovate. And in defense, it's all about delivering the most innovative, disruptive solution to meet the mission and the demands of the customer.

This is it. And those of you tuned in, talk to your local governors and senators. Help them understand. And Daniel, I appreciate the conversation. I learned a lot. You're helping me become a better M and A scientist.

My pleasure. This has been fun. Thanks a lot for the conversation.

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