How to Execute an Effective M&A Integration Handoff

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Hey Keeson, thanks for having me. I'm doing well.

Hey, my pleasure. Thanks for taking the time to come and hang out. Can we kick things off with a little bit about your background?

Not terribly exciting. I was a geek accountant to start accounting degree out of university. Jumped out into the public domain there to get my letters, my CPA letters. Ended up wanting to travel, joined a publicly traded company that was headquartered in the US but very much an international organization and got to travel around through their internal audit group. That was about a three year stint and in that stint we did two acquisitions, one in Denmark and one down in Texas. I got the bug on M and A and decided this is what I want to be part of. I want to find a career that has me part of transactions, transactional driven as opposed to standard monthly reporting. I went and got my Master's in finance, ended up moving up to the Boston area. Ernst and Young, one of the Big four used to be Big eight but Big four at the time hired me to become manager in their due diligence practice and I very much loved it. It was hectic. I traveled about 80% of the time but saw companies on a two to three day stint diving into their P&LS looking at their consistency of earnings. As my clients were primarily private equity firms that needed us to come in there and do a due diligence report for them and really kick tires of the underlying company that they wanted to invest in and obviously have our report and Ernst and Young's name on there for effectively their lp. So had that and then got a referral from somebody here in town. They asked me if I wanted to come over and join State street in the M and A group. I was skeptical at first since I thought they were going to pull me into a monthly reporting job. But they did have their own independent segregated M and A team is led by a very, very respectful and one of the smartest individuals I've ever known who managed to convince me to come over into State Street. I've been here for about 20, 21 years and we have done a tremendous amount of activity. I've done about 20 billion plus worth of activity or transactions either through acquisitions, investments and divestitures and we built the company over time. I spent six years in Europe starting from 2005 and headed up their M and A team. Came back, we were a little slow post crisis because of things that were going on in the back industry and I was asked to come over to be the CFO of the asset management group State Street Global Advisors. I did that for three and a half years. When the chairman at the time wanted to grow, he asked me to come back to M and A and help build the company from a top line revenue growth perspective. And that's where I've been since it's.

Invested a lot in paper to start off with a CPA and Master's and then transition from the consulting background into working in house at corporate where you've done it for long enough and sounds like you've done quite a few deals over there too.

We have. We've done things that bolt on and add core capability, geographic expansion, particularly client expansion. But also in the last probably four years we did execute on transactions. I think particularly with Charles river, that was done in 2018. We effectively moved into a whole different adjacency space which I think was exciting for our strategy where we wanted to head where we think the industry's going. And so that's something that we've been excited about, that's added a whole new layer, a whole new area in terms of where we're looking, at least from the inside out in terms of fintech capability that will help our clients and help us better service our clients on a global basis.

Let's get into it. Why do you think an effective handoff is important in an M and A life cycle?

You think about it when you come in and either through an outside and external investment banking perspective, where they're either running a process on behalf of the seller in terms of the target company, or it's something that you pursued from your knowledge and your analysis of the overall industry. I would say it's really the pro forma, it's the future performance that you're excited about. That's where it starts. And then you back up from there. And obviously you've got to negotiate price, you've got to negotiate terms. But I would tell you that the prominent foundation is based on the future performance of that asset or that entity or that business that you're going to be acquiring. The future performance isn't reliant on necessarily on my negotiation of price terms. That matters. And that can help us, protect us. But obviously we're acquiring something that we want to perform. We actually want to perform better than we're projecting. But if it doesn't perform based on where we estimated it and where we saw internal approval and where we ran our valuation models, that's a problem. To realize that it's the integration, it's not just the negotiation. Obviously we don't want to overpay for an asset, but you also don't want to pay for an asset that very attractive, get a very attractive price. But the execution of that future performance doesn't transpire. That's the handoff part. And that handoff part is done by individuals in our organization or other organizations that understand how to bring things together, how to scale business, how to leverage the components, how to look at two organizations, the existing buying organization, and then look at the one you're bringing in and really maintain the integrity and maintain the attractiveness of that underlying organization and make sure that you're not going to destroy its ability to realize that future performance that you were so attracted to in the beginning. That is the integration. And that can span, depending on the asset, that can span over three to five years or it can happen right away. There's some assets, particularly if you're heading into an adjacent area that you don't necessarily have a scale play on. You need to preserve that. It's more of a preservation, making sure that you bring it in, you integrate it, but you don't bury it or smother it. But if it's a pure consolidation play, you need to make sure that you're executing it without destroying the revenue value or the revenue trajectory. Along with ensuring that the expenses that you originally projected come in the area.

That you would estimate about future performance and setting up the deal for success.

It is at the end of the day, that boils down to shareholder value at the very highest level.

Do you have any repercussions for missing.

Target value over the years? There has been look backs on transactions. I do think if there's a scale consolidation play, what happens in that instance is you try to set target, I think that are meaningful in terms of particularly epsilon. We feel that this transaction in a certain period of time would be accretive to our shareholders, accretive to our earnings. After that, we try to let it go because we've integrated it into the organization. And if we need to continue to report what we think the performance of that underlying asset is, it's hard to when we've already integrated it into our existing organization. So MIS would need to be very sharp, right. In terms of three to five years if you want to run an MIS system to ensure that, oh, what does this acquisition look like? What is it adding incrementally to our underlying business? That's something that sooner or later you've got to say it's part of our overall organization, we're going to move on. We see the inertia, we see the revenue growth. You can point to maybe particular set of clients, a particular product that would be helpful as well. But I would say that's more short term. The transactions that you need to I think probably be a little bit more open and long, longer term driven in terms of where you want to go or add ons capabilities that you're adding. If you're moving into an adjacency area, like for instance with State street, with front office, we've got to be open with our shareholders on that. We've got to hold ourselves internally to those targets that we want to hit. And yeah, we've got to pivot. And again, projecting future performance isn't the easiest thing. And if it was easy, everybody would be doing quite well in this world in terms of acquiring businesses or investing in certain types of technologies or even underlying equities and fixed income but it is something that you need to have a discipline on. The question is depending on the underlying entity that you're acquiring, the discipline will vary based on the scrutiny and I think the rigidness of the performance that you're going to hold the teams to.

An interesting point, if you do fully integrate, you end up blending all these financials together. So it's not as easy to financially track from that perspective.

And honestly, it's a problem on the back end as well. If you negotiate a transaction where maybe you're not acquiring 100% of the business or you're maintaining the management team and you want the management team to perform to the projections that you acquired them, it is problematic if you have a three year to five year earn out for those individuals because you're going to have a separate MIS system and then you need to make sure that you're actually everybody's working together and they're rowing the same direction in the boat because they're actually going to be concerned with hitting their targets. And if you're going to be impeding them in some unknown way, it's not intentional. You need to make sure that we're addressing those types of obstacles that can come up along the way.

What are the pillars to make an effective handoff?

With me, it starts with a sponsor, a business sponsor. I think that's critical. I can run valuations in my sleep, I can look at projections, we can boil it down, we can sensitize it, we can calculate it all the way down to what we think the impact for the shareholder will be on an earnings per share basis, on a return on capital basis. However, if we don't have a strong sponsor that's backing up this plan and actually building it. And when I say sponsor from the business side, someone who's actually going to manage it and run it and bring it into the organization and have exclusive responsibility in terms of taking this in and the performance of the underlying organization, ensuring that people headcount, culture, clients, they're all being addressed in the appropriate way. And I think that is critical. We've had transactions before where maybe that has not been the case and I will find that they don't normally get done. There will be times when you'll have an opportunity and it'll rise. And as you get up to the senior ranks or you get up to the board, it starts to wane in terms of that internal support to really convey the vision, the strategic, strategic aspects of the underlying transaction. And when you see that, you realize you spent a great deal of time chasing this and it's not really going to succeed at the higher level.

So the key ones I had the business sponsor and then basically having the right people overall to execute on this. And the vision is what drives this.

Ultimately, that's correct. And the other thing that jumps out as a pillar is actually the strategic vision. And again, this is another one that takes conviction. It takes a little bit of expertise in understanding not just the underlying business that you ultimately are acquiring, but it's where you think the industry is going. Where do you think the client's needs are going to be in the future? And is this going to enhance the client experience? That is something that again, going back to the business unit sponsor, that person has to have that vision, that conviction, but it needs to fit within the strategy. And that's what we work on every day. We work on the strategic vision. We work on where the industry is going, we work on where competitors are, we do competitor analysis. And we also talk about every day to our client, talking to our clients, understanding and then industry trends that are happening, particularly with technology. There's things that happen that cause people, particularly with AI cryptocurrency stuff that's happening. These are forces out there that we just can't ignore. And incorporating that into our strategic vision, I think is very critical in understanding in terms of assessing a transaction that comes in front of us and whether that's going to help us get to where we think the market's going or where clients are going to want or the needs of the clients in the future. Strategic vision is critical.

Strategic vision, the right business sponsor in there and then people culture component. You mentioned earlier the example of with the people you mentioned that sort of curve or pattern of people that if they aren't aligned, this deal is not going to go through. Could you expand on that a little more?

Each organization is made up a series of very strong business leaders. And I think the CEO, in times, depending on the management style of the CEO, they don't necessarily want to be the end all, be all decision because the CEO is there to guide people and try to make sure that we're all working in concert with each other. Right? Capital is not infinite, it's limited. And it's the allocation of capital that matters around the organization. And I see that that's the role of the CEO. However, you have people who are on your senior management team that are fighting for this capital. And ultimately I think they're all aligned in the sense that they want shareholder value. If I were CEO, I'd want my team to be selfishly wanting all the capital, but they know that it can't happen. And you've got to allocate that capital to optimize the total return of the underlying organization. So I think it's very important that ultimately the majority of that management team is behind that underlying acquisition. Because if they're not, then getting things done in the future might be difficult. There may be some angst, there may be things, some impediments that may arise, but they need to feel cohesive. They need to feel like they're part of the future vision of the company. They need to be bought in that this is going to drive and enhance shareholder value. That's what really what makes it work. Now, it's not a pure democracy, but I do think at the time there are transactions in which probably you don't have a unanimous consent or unanimous vote for it. But I do think getting the majority is critical for it to succeed, as I said, in that whole integration stage, because the company does work together or companies work together, and certain components rely on each other operations and all the other functional units within the business. And having everybody rowing in the same direction, I think is critical.

Is socializing and getting those various leaders on the same strategic vision your responsibility?

It is in the sense that it probably centralizes when we're evaluating an opportunity, we're in control of the actual team that manages the valuation, the negotiation, the due diligence, and obviously the execution thereafter. However, working hand in hand with the business unit sponsor. We feel like that there is uncertainty or how should I say it, Curiosity or questions about the underlying intent of that particular investment or acquisition. We'll take a view of how do we handle the questions, how do we go there? And it could be an open forum meeting with the management team, or it could be going individually to those key individual stakeholders within the organization to try to address their concerns and try to convey the vision as to why we're doing that. It's by nature of the underlying investment, size of the investment, and actually the questions that arise out of it, but pretty flexible in terms of how we try to address it.

What does that look like? Do you get to a point where you present a formal business case and share this opportunity with the broader leadership team and then do the Q and A and get a sense of who might not be on board?

We have a very extensive M and a sort of process in which we evaluate opportunities and there's different stages within there. There is a team at the senior management level that Opines on whether we want to move forward with a non binding bid to get into the round to each to at least have a look at it at that you get a little bit of the initial views as to. I don't really see why we'd be interested in this, but I'm happy to okay the non binding bid. Here's my concerns, here's my questions and that's good feedback from that team. And here's the things that we need to address in this next round. When they open up books or they open up the virtual data room and you see the management team, here's the things that I'm concerned with. Someday I want to be part of that process. I'd like to be part of that, that discussion or that analysis or that even meeting with the team and we go from there and as we go through there's always usually a follow up indication of your value. If we feel like that's where we are, we have another bite at the apple with that team to tell them what we've learned since the initial non binding and then we decide whether we want to move forward and it goes from stage to stage. So it's being conveyed. It's not we're asking for permission up front or we're not asking for permission upfront. And we come back and say we've got a fully baked deal here. Say yes or no, it doesn't happen that way. It's a very iterative back and forth process. It's customized based on the underlying nature of what we're looking at. Customized based on the complexity where we are at the time. And we do, we address the concerns as we go along and we take different approaches to get people their answers to their questions. And however we may, we may want to meet their requirements.

Ultimately you have a deal committee that through the back and forth comes to a conclusion of a go or no go decision.

That's correct. It's a large enough transaction just by our corporate governance. We have to go up to the board. We're very communicative with our board in any event. So most transactions they definitely, I would say all transactions they're aware of. But by corporate governance standards there are transactions that require board approval and board vote as well. We're a bank and we have great controls, we're very transparent. We need to make sure that we're following the right governance standards. We've got an audit team, we've got regulators, we've got external auditors that make sure that we're effectively abiding by our standards. Obviously, because we're a publicly traded company, there are those normal governance procedures that I know they have in other publicly traded companies as well, that we take those steps, but they're not stepping steps that we take for the sheer sake of hitting the governance requirements. It's really there to convey the vision, convey the reasons why we're actually involved or interested in actually acquiring or investing in the underlying business.

Going back to the business unit leader, how do you make sure that the BU is dedicated to the deal?

There's a subset of the process as well where that business unit leader is effectively communicating with their team. They're conveying their vision and their process. And that's an iterative process back and forth as well to get an idea of just, you know, okay, here's I got a view, I've got a vision. And it's not necessarily that business unit sponsored vision. I think it's probably a combination of the interaction with their team in terms of understanding where they think their business is going, what their client requirements or what their client needs are. And then that business unit person works with his team or her team to make sure that we're not missing anything, we're not missing anything in terms of capabilities. Are we looking at the best potential business out there or investment or platform out there? Are there better platforms out there? So again, it's an iterative process that I think that business unit sponsor is doing as a subset to the overall process. And then when we do get involved, that team becomes a core team that's looking at it from a pure operational perspective, sales perspective, revenue generation perspective, because we work very closely with those teams to ensure that those future performance projections are actually realizable, they're realistic, they're attainable. Are we conservative? Are we too optimistic? And that's where that back and forth osmosis process takes place, where we assess the viability of the future performance of that underlying business.

Working with business unit leaders, do they come in different flavors where some are very M and a happy, others resistant towards it? And what does that look like from your view? How do you work with those different types?

Not so much anymore, fortunately, or I think earlier on in my career, maybe not necessarily at this company, but there are instances where you've got to discern whether that business unit sponsors merely trying to require additional revenue because the core organic capability of their underlying existing business isn't generating. And I think that's something that comes up at the core committee level. You've got to make sure that the Business meets our strategic vision. I would say overstating or being too optimistic on the future performance of the business. I haven't heard it in a while, but people say deal fever. Business unit sponsor has deal fever. Is that something we should dial back on? Are these projections or is the viability of this business as positive as you're saying it'll be, or is not doing the transaction going to be detrimental? It can go the other way as well. There are some business unit sponsors in my past who have said if we don't make this step, it's going to have an impact to my existing organization. And that's a defensive play, which is warranted in certain situations. But you've got to work that through and boil that out. So, yeah, there's various different, different types of personalities. Everybody's different in terms of how they perform. But I do think most of the astute managers that I've worked with are. They're objective enough to know what the outside in looks like and they handle it in a very objective way in terms. Because they know, again, going back to the integration point that we made earlier, they know they're going to be measured on the success of the organization going forward. It's not just with the winning out or the pure closing of the transaction, the signing and the closing of the transaction. It's really the underlying performance and that integration stage that brings it into the organization.

How do you approach building that relationship alignment? Just making sure you're really on the right page with the way you work with them. Since it sounds so critical.

There's some individuals that I've worked with on multiple occasions, on multiple transactions, larger transactions. And I've built the respect. I built the respect with that individual, the business respect, where they realize that they know that I'm going to point out areas that I think they should be more concerned with and guide them. And that takes time and that style. There are some executives out there that don't necessarily want you to offer your view or your opinion on something. That's other than in my domain, which is an evaluation domain. But I like to say is, and I come across this with them most of the time is I say, look, I'm a general contractor. I'm not the expert. I'm the one who can tell you where I think something's wrong. And then we got to bring the expert in and they got to look at it, they got to report back to it and tell us what they think they should do and we decide whether we do it or not. And Some things I'm going to know really well about, like accounting issues or things that are on the balance sheet of the ultimate entity that we're acquiring because I was trained in that and that's something that I can work on. However, there are areas and clients and operations and technology that I don't have that deep knowledge of. But I do know that if there is a bit of smoke in there or something smoldering, I know that we need to get the experts on there right away and we need to assess the situation and raise it up. You get respect from the business unit sponsor when you're helping them address all these things that arise and it's normal in a transaction. That's why diligence is so difficult and trying to point to the areas that I think we need to make sure that we're covering off. So, yeah, developing. There are individuals, new ones. You have to treat them a little bit different in terms of. You have to be very deliberate with them, but very transparent. Be a little bit more extensive in terms of working with them and explaining to them what the process is like. But I do think ultimately we're not that large of a company. We are big, but I think there's been enough of a core team within our organization who have done many transactions that the degree of respect and dependency that happens in that organization or that part of the organization is not ever really questioned and they depend on it from transaction to transaction.

Sounds like the partnership, but also a level of coaching as well. Especially with somebody that may be not as familiar with M and A.

We have healthy debates. We really do. We have like really healthy debates. They get a little bit loud, but they do at times. And that's the type of individuals. And there are individuals who don't like the debate maybe out in the open, so you maybe take it behind the scenes. It's just a matter of understanding the types of individuals that you're working with. But I do think we have an organization where people really feel like they can speak up up and speak out. And that's the environment that you need in an M and A type transaction. Particularly with due diligence. There's things that can't be ignored or swept under the rug because they'll only come back to haunt you later.

Have you ever had a BU leader leave during a deal?

I've never had a business unit leader or sponsored leave during the deal, but I have had sponsors be promoted on or move to larger roles and responsibilities. And when that's happened, we did miss on things and we needed to backfill that. That comes back to having a strong sponsor who understands the underlying strategic knowledge and the strategic vision. And we're a large organization, so sometimes things fall through the cracks, but we've got to react quickly and move back in. And so I think we have learned from that. And when we do our look backs on some of the transactions, we try to do best practices, we try to understand how we resolve shortfalls and in the future for future deals. And I think one of the things that has come out of that opportunity or that example is we have from a compensation perspective, we've created a greater and a wider perspective of how those executives are actually compensated and incented. And in many instances, if they do an acquisition, even if they move off to the other area or they get promoted to a new area that still travels with them, which then in turn causes them to go back and make sure that their successor is actually carrying through the original intent and the original vision of the deal if that successor hadn't happened to be a subordinate of that person before they got their new role.

Going to the part on handing this off for integration, what does that look like? How are you involved?

So it varies. As I said, some transactions that don't require a heavy amount of integration to the platform and maybe the terms of the underlying transaction were pretty vanilla or customary. I would say we're there for advice to ensure that if anything arises in the indemnity period and the liability period that we negotiated, then we get actively involved. It depends on the nature of the indemnities that we find in diligence as well. So if there's very specific indemnities on a transaction, then we probably are involved until that indemnity period runs out. And then from an integration perspective, they have quite a bit of synergy projections, expense assumptions that come back and they battle test it to us to the original model. So we tend to be more actively involved in those sort of at scale consolidation plays than we are in something that's maybe a little more plain vanilla in terms of how the underlying transaction is structured.

Okay, we got a variance of deals. I want to come back to that because I think there's some things done pack. But then what does it look like? Do you have a dedicated IMO that steps in?

It depends. We do seek external, I'd say consultants out there that can help with setting us up in terms of where the integration or how the integration should be structured and how it should be organized. I will tell you that we're Pretty much of a self serve. We have a lot of individuals that have been through many of these transactions. So the intelligence and the know how of what we have is pretty deep in the organization. But we do ask for assistance in terms of speed. We're willing to at least get the office up, the integration office, the integration team up and running and many instances on a global scale. And it's fairly. We take out playbooks that we used before and we don't adhere specifically to every playbook. We know we have to customize it based on the underlying organization. And if we think we need to act with speed, we will seek external third party help. But I would say we do believe that the success of the underlying integration is probably more realizable if it's being done by our actual core team than actually outsourcing it to some third party provider.

Okay, and then is that like a central team that you're standing up for this transaction or is that something that goes within that business unit?

I would tell you in most instances we set it up within the business unit.

Within the business unit. Okay, so then that bu will be involved. We talk about the strategic vision. They're sort of aligned with you on it, but they carry that through as they execute on the integration.

That's correct. There are individuals that are knowledgeable the underlying business. They come from various different backgrounds, they're out of the business, they wear different hats. So they have a deep knowledge of the underlying business, but they're also part of the integration and they're part of that team that's being built up for the phase, period of bringing that business on hand or consolidating that business into State Street. And so that's something that we take great pride in, setting it up that way as opposed to setting up a pure process integration individual who doesn't have as deep knowledge in the underlying online business itself.

People talk to me about this a lot, that the strategic rationale gets lost over time.

It does.

How do you keep that from happening?

So I work very closely with a strategic corporate development team that deals more with where's the business, where's the industry going? Eyes and ear is like assessing our organization, constantly assessing the markets, constantly assessing client behaviors and client needs. And I think they work with us to ensure, number one, that the strategic vision that's put forth for that transaction is in the box or in the circle of where they believe that the business is going. So that's a nice check. But then continuing to monitor it in terms of capabilities where we think we're going, it's a good check because I think it helps us assess whether certain capabilities within the organization are being utilized to full capacity. There are areas that we know as you talk in the fintech space or you talk into processing capabilities that we have, there are areas in which we're doing something in one area that maybe someone doesn't think we're doing in another area. So that constant evaluation and communication I think helps bring the capabilities of the overall organization together to ensure that we're not going to go fire something that we already in house capability had or something, something similar and then make sure that we're maximizing the capacity of it. So strategic rationale, it gets assessed on a very frequent basis within the organization.

When you hand this deal over to the integration team, keeping that alignment on what the strategic vision was, keeping that clear so it just doesn't evaporate over time.

In my case with the strategic team, they're going through on a very periodic basis. I say from the M and A Corp. Delegate development perspective, there are transactions that we've done, particularly in Europe, from my experience in Europe, where we've added on and we've built on based on a transaction that we've executed on, our clients sometimes acquire other businesses and when they acquire other like businesses, that adds to the maximum capability. And because of the way that it's structured, that doesn't always just defer that business to us, we have to then go and pursue that business and we have to evaluate that business because of the way the fiduciary rules are in certain businesses out there, particularly in the asset manager space. So it adds more opportunity. And again, when we look at transactions, when we look at financial servicing, institutional investments in terms of custody, fund administration, we want clients that are prominent. We want clients that are going to grow. And if you find clients that are going to grow and you acquire components of their business where they have a very attractive set of clients that's going to actually provide availability for you for opportunity in the future. There have been add on sort of capabilities, investment opportunities that have happened with certain clients across the world or with certain transactions that we perform. That's another part of it. It's not a one and done type thing. It's we're a partner, we're going to take on this opportunity, but we also know you're going to grow and there'll be other opportunities for us to look at in the future. So from an M and A perspective, that's where we are. From a strategic perspective, as I Said I think they're doing it periodically and they're doing it on a very regimented. And we do a three year strategic plan, we do annual planning, we check it quarterly. And so there's communication throughout the organization in terms of reaffirming our strategy as we go through it.

I was thinking about even just the specific deal that you're bringing in. I feel like the big challenge. I don't know if there's a good answer for it. The big challenge is things cascade down and you get to the point when someone's checkboxing a to do list versus really understanding what the big picture is.

Yeah, I hear you on that. If you have to really push the strategic vision down that far, ensure that that strategic vision is being carried out. So I'm not sure that was probably the right decision or the right investment or acquisition to make, then I sort of think it should be not autopilot. I think if the market shifts or client needs shift, then you have to pivot and decide what you want to do. But I think if you have to push your strategic vision continually thereafter, then I question whether that's the right decision in the first place.

That's an interesting view that the deal itself should be rationalized pretty clearly, that everyone's generally on the same page. Yeah, that's interesting. I noticed press releases have evolved where they articulate the rationale for the deal pretty well publicly.

Yeah, it's hard. It's hard with shareholders to be hard with your board and with constituents to tell them something that's materially different from when you really originally went to them and announced the transaction. And that goes back to the strategic vision. It's not easy. Companies do better than others that execute better on their vision. And that's a secret sauce that everybody's aspiring to get to. But I do think if you hit on the strategy, it's not that difficult to carry it through. As long as you've done your homework, you've executed a very market standard transaction that's going to protect your interests. But yet you think that your projections and the future performance of that business are reasonably achieved, then I think the strategy will carry itself out almost thereafter. It should, in my view.

People side of aligning both sides of the table. Any thoughts or approaches there?

It varies by area within our organization. If it's on the asset management side and we're looking at an opportunity, you know, we're a global player, we have very large and complex clients and it takes a certain mindset for us to get through that and understand. And besides, we're friendly, regulated, we have high standards in terms of our governance and what we need to do. And we need to be very transparent with our clients. So culture matters a lot. Certain businesses out there and they'll be fine. They just probably don't operate anywhere near the standard of where we operate in terms of governance, adhering to compliance, adhering to all the risk management capabilities. That's really critical for us when we go in and talk to particular opportunities. Sometimes we know in the first half hour when we're having a conversation and we're starting to exchange information on the types of company or what that company's underlying performance or business may be. It's known pretty quickly whether they're managing at a level which is below our standards. And the question is, can we get them up to the standards if we bring them in the organization? But in some instances, I think it's a bridge too far. And another one is on some of our core CAPS capabilities. We have a lot of individuals in our organization that were. They came to State street through past transactions. So I think it's people. We need good talent, we need very quality talent. We're not acquiring things and totally eradicating the labor of the underlying business. We need that intellectual firepower to come along with the transaction. So that's something that we are very focused on, particularly in the beginning of the transaction, because we think it's added a. And as I said, there are individuals throughout our organization that have gone on to do much greater things from a previous acquisition, and that's always been beneficial as well.

How do you assess culture?

It varies. It's the nature of the underlying business and you've got to understand what drives success of the business. If you're buying a software capability, you got to make sure that you understand why they attract that talent. What is it that the talent really enjoys being part of that organization and you don't want to crush it if you come in and acquire it. So that's something. Something that you have to think about to preserve. Otherwise you lose that advantage, you lose that capability, you lose that intellectual firepower and know how. So I think you've got to look at the underlying organization. You've got to understand what it is that they do, how important the creative mindset and the intellectual firepower of that organization is. You've got to take it from there to make sure that you preserve it. Let's be honest, some of our businesses are processing. We need more operators than we need creativity, but more on the software side and maybe more on the fintech side. We need a little bit more creativity and less operations or processing because that's something we have know how inside. So I think you gotta adapt for each transaction that we look at. But you've gotta look at it and understand how important it was the underlying organization and whether that actually aligns with your ultimate culture as well. Otherwise it's just never gonna reconcile.

Are there like any tactical things or specific things that can really look into to get a sense of that? Help me out here. I don't want to screw up my next deal. Keith, you got to help me out.

A lot of it is interaction. It's not different from just human interaction and how you meet people that you enjoy being with. A lot of it is. If you can spend as much time as possible with that team, the more beneficial you will be in terms of assessing what the true cultural impacts will be. There are instances when I've had conversations with potential targets or potential opportunities over a series of three years. Some didn't pan out and others did. And I will tell you to this day, I probably speak to the individuals and the ones that didn't pan out on a pretty frequent and regular basis or a periodic basis. But you need to afford yourself to come in. And it goes back to the point earlier that we talked about with deal Fever. You've really got to understand what you're buying. The more time that you can spend with them, the better off off bar. It's harder in a competitive process, but I think it's something that you should at least demand the minimum interaction and not push forward if you don't have that. I would say with COVID we were very skeptical to execute on any transactions because we teams in person. I just don't think meeting somebody virtually is a step that you want to take. I know private equity firms out there were wrestling with that as well. But in many instances, the private equity firms firms knew the underlying management teams for years. So that didn't make it that difficult. But buying a company or investing in a company outright and meeting only the management team virtually is probably not the way to go. I wouldn't recommend it.

Spend the time, get to really know them. Do you have any examples of this red flags or inclinations that this isn't a good culture fit that prompted you to steer away?

I mean, I can't name particular ones I can give you.

I don't want names. I just want the examples.

Yeah. There was an opportunity years ago that I learned looked at that it was a very attractive business. It was independently owned and it was grown from the ground up. That individual did an excellent job developing similar products to what we were doing. And I would say there were just certain things that we were finding in diligence, in terms jurisdictions, types of products that we could sell to if we could convert them. So I would say it was probably one of the most frustrating due diligence processes that I had, but I would say probably the most rewarding in the sense that we actually found things that pointed to the direction that we just didn't want to make the transaction happen. And that was it. When you added it up, sat back and we looked at it and we came to it fairly quickly. We pointed out to a series of things that we observed and they weren't horrible things, but I think when you took them in totality, the management team agreed that, yeah, up already seeing this pattern here. We're going to have some difficulty down the road. And like I said, nothing was wrongdoing. But I think the combination of what we found and if you step back and really looked at it just came to the view of, yeah, it might work out, but it's going to take.

A lot of work and you just openly communicate that too. But hey, this is some of these indicators.

Yep.

Keith, earlier you mentioned examples of different types of deals. And as you were describing it, I keep thinking about it's doing deals close to the vest, close to the core, versus further away from the core. Can you walk me through how do you think through the complexities that emerge from that? I'm trying to get a sense of why do these deals get so much more complicated and then how does that parallel over to the way you think about the integration or delivering on value of those deals? Deals.

I'm sorry, so you were saying if we move away from the core, how.

Do the deals get as you described you do? A variety of acquisitions. Some were really tight to the core, some were further away. And from what I've learned to do in these interviews, these deals just get exponentially more complex the further away from the core and also harder to deliver on projected value. But just curious how you think through that and manage that risk in general.

I would say obviously, yeah, you're moving away from the core, maybe you're moving into an adjacent area. Number one, expense synergies are probably not anywhere near as what you would get from the core acquisition. So I think ultimately right there on a loan, you've lost one of your levers that you utilize for a core transaction. So financially it gets a little bit more difficult. I would also say that revenue synergies come more in play. It's not completely separated from our core business, but we think it's a capability that will generate additional revenue synergies. We know revenue synergies are harder to realize. They get discounted more. And then if you're acquiring something that might be in a higher multiple valuation range than say a bank multiple valuation range, how do you convince your shareholders, if you've convinced yourself internally that this is the way to go, how do you convince, convince your shareholders that this is the right step forward? That makes it complex, that causes a lot more attention, I think in terms of internal analysis, internal debate, internal review, in terms of is this something we really want to be doing? And then again, it pulls the strategy area in having that strategic vision as to why are we paying for something that isn't our. And that's. You boil it down and that's the debate you have internally. I would say a core deal is, it's easy to do, but they're not always available. And so the question is, looking at your portfolio capabilities, do you feel like it's time to move forward? And we thought the Charles river transaction was a time to move forward, to expand our capabilities, our competencies to the front office. And we were very prominent in the middle and the back office. And we thought top front office. And marrying the front office all the way to the back office was where the industry's going. And we, we still strongly believe that. And if you look around and you look at the industry, that's where the industry's moving. So we still need to execute, we're happy with our performance, but we still need to execute and move forward on that. It's something that we had to work with. But it's been a, it's been a large focus in terms of our future strategy. And that's something that we're very resolute to making sure that we, we carry.

That you wanted to revisit here, see how that goes. Keith, what's the craziest thing you've seen in M and A?

I've seen last minute changes on underlying assumptions, on transactions that were material. And it was a matter of the seller not doing their homework. And to me, at that stage in the game, it just made you realize that when we decided to walk away from the transaction, made you feel a little bit comfortable that you dodged a bullet. So when you found out that an internal pricing contract had gotten renegotiated in the 11th hour, but they were portraying it as something else and it materially changed the overall economics of the transaction. It's disappointing because you spent all the time on it. However, it is somewhat comforting to realize that it probably wasn't a good deal in the first place. So that's the one that comes off the top of my wow.

Like this big, big 12 hour change. But then you ended up walking away from the deal.

In that instance, we couldn't come to terms if we wanted to reprice. The deal was considerably lower the seller. Ultimately, they weren't successful in selling the business.

Wow. You dodged a bullet.

We did.

Keith, thank you so much for taking the time. I learned a lot. You're helping me become a better M and A scientist.

Thanks.

My pleasure. Till next time. Here's to the deal. 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 nascience.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 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.