How to Manage Deals From Strategy to Closing in M&A Part 2

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I'm.

Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science where we curate knowledge from the best in M and A to continuously improve. If you're interested in keeping up the latest from M and A Science, subscribe to our free newsletter at mascience. Every week we share highlights from interviews, invitations to events, M and A role openings and other resources as we build the greatest community of forward thinking M A practitioners. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M&A Science. Joining me today is Andy Ejaya, Senior Director M and A at kla. KLA is a capital equipment company that supplies process control and yield management systems for the semiconductor industry and other related and electronic industries traded on NASDAQ under klac. Today we're talking about how to manage deals from strategy to closing. Andy, welcome back. This is great. I got you to come back.

Yeah, thank you for having me back.

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

Quick background? Basically I have a unique or different background than typical M and a professional given my educational and the career background wise. Educational wise is straightforward Chemical engineering. I did some minor in finance and other more venture investment and the game theory of business or decision analysis. Career wise I'm somewhat also an outlier because I was managed to build my career along multiple stack of the high tech stack meaning from the silicon to the device level to the software and now I'm in the company levels for the MNA acquiring company. So I got to see from the nanoscale to the board level decision making.

Yeah, you're interesting. You're a mesh of an engineer and a M and a person. This last interview we did we talked about the importance of the integration team joining the diligence team and the ability to zoom in, zoom out of deals. Let's go into strategy. How do you formulate your strategy?

Strategy seems very loaded terms, but I think realistically the short answer or the more realistic answer is top down and bottom up. We're strictly talking about strategy in M and A that involve M and A. Obviously there's many different way you define a strategy. There's many different reasons why you acquire companies. But all in all, the simple overlap between strategy M and A is very simple, sir. Either when you already have a strategy, then you have to find an eminent target, one scenario, or sometimes you have a target, then you have to build a strategy. See if you can build a strategy around it. Now what I mean by top down or bottom up, realistically in the big organizations you could have interaction that started from the top or also started from the bottom. More importantly, you need to kind of understand what is the business objective for any organization, either a business unit or divisions. So you could partner with the leaders, business leader or the executive kind of top down. Or you could partner with the technical leader or marketing leader. It's kind of on the bottom up. Typically on the top down side you're trying to understand the business objective or direction of a leader in their respective divisions. This could be as simple as hey, how do we get into these new markets? How do we explore that bottom up tend to be hey, we have a roadmap. Here's the roadmap. I think we have a gap. How do we fill in that gap? So, and you kind of up level it to the executives. I would say that's the two way street of how you formulate a strategy, how you partner with your business leaders.

I like that because it's in a literal sense top down and they're working with the big picture where you're trying to go versus bottoms up. It's what are the things right in front of you that you can use to address M and A. Does that sound about right?

Oh, this goes both ways. You could end up the same strategy, but you could start it from the top or can start from the bottom, depending how things originated.

You mentioned sometimes you'll find the target and then develop the strategy, which I thought's A. No, no, I thought that's when you have deal fever and you're making your rationale to do the deal as opposed to executing against a well defined strategy.

Sometimes we live in the world that we want to have a real, have a strategy, have a process. Everyone has to fit in into my way of original objectives. In reality, I don't think we can be that naive that we know every single target out there. Sometimes you come along, there are company that they want to sell and someone reach out to user even though maybe in your other but you're not that familiar. Hey, this is interesting. Something that we know it exists, but we never really quite explore it. So you're gonna have to build a strategy if there is a way to build a strategy around it. Sometimes this come handy in terms of opportunistic or defensives. What happened if there's a company that approach you say that hey, your competitor is about to acquire us, are you interested with us? So you get your mind thinking. So even though originally it's not in your quote unquote pipelines, then you actually have to think hey, this company on sale, are we missing something? Can we build strategy around that? Is there any compelling enough reason to even entertain? There are quite a few of that. Obviously the world is big and you could never know just about everything that you want.

But how off base does that go? Is it hey, we may never thought about this really near adjacency or is it here we got all this news on regenerative AI and now this thing popped up. Why don't we start looking at it and thinking more and figure out how we can do something with it in.

Terms of adjacent Cs right? Let's say you have just making a round number. You have 100 company in your pipelines. I don't think you will have 100 deal thesis ready for any of those companies. Because obviously each of the deals that involve multiple people, multiple executives, there's always adjacency far away enough that you don't have dealt this is ready. But every now and then they pop up say hey, they're on sale, about to get acquired. So you have to build a deal thesis, see if any compelling reason enough or deal thesis that you want to entertain. That's where the time crunch is. It's not ideal, but it does often come along that way.

That's interesting way to look at it. How do you go about managing your pipeline as you start shaping these opportunities?

The short answer is it varies. Maybe I'm coming from a somewhat medium large corporation background. I spoke with my colleague in the early startup growth companies, right? It's different than large corporation kind of stuff. When I say it's very s depending on if it is in a smaller organization. It vary widely from smaller organization to what I call serial acquirer. People who acquire five 10 company a year tool wise sometimes on the small organization is just the I would say prioritization or shuffling priority in the mind of a few people. That's the simplest way. Then some people have next cells or extensive Excel list. Some people use power bi and sometimes I think it's fancy as cloud based dashboard or tie into the project management. But that's just the tools the tricky one that's hard to capture. In terms managing your pipeline, I would say as simple as how do you update your knowledge about private companies? It's hard data is not available out there and how do you update the rationales? Right. We just mentioned if you even have a 100 deal in the pipeline, not all of them will have some sort of rational thesis why you want to acquire and also the ever changing opinions of the decision makers. Those are some of the components that is hard to capture but you have to deal with it when you're managing.

A pipeline on that private company data part. Is there anything that you found that actually works?

Well we try in the past from obviously PitchBook, FactSet but all in all it tends to be incomplete or older data. The best way to accomplish that is actually by engaging with the targets. You regularly keep in touch with company that in the higher priority of your pipelines.

Okay, so get out there and get the information firsthand. And as you start approaching targets, how do you start gauging this ties like to integration. Where does that thinking come in terms of starting to gauge like level or amount of integration that's going to be involved?

This is always the conundrums. When is the integration start? When is the thinking start? First of all, I don't think it's possible to know the full integration plan prior to engaging. As we just mentioned, to get the private company information is hard, especially on the private information. Even on the public companies it's also hard the details. So I don't think it's possible to get a full integration plan. Having said that, it's always very useful to kind of have I would say high level thought in terms of how you're going to integrate down the line that support your deal thesis. In essence this gives you some sort of a objective during the engagement while you're trying to learn from the targets. So you have some assumption. High level, hey, I think I'm going to integrate the product and co locate or have everyone the same place to collaborate. Things like that. Then as you go in target engagement, that's where the learnings are. From that learning you can say hey, we have to modify this either Confirm, modify or invalidate. Sometimes as easy as we thought, we're going to have everyone in the same place. Then we just learned that a bigger portion of their R and D is somewhere else in different countries. So this can throw you off. So you have to modify your thesis to some degree. There is that to some degree. There's always some level of integration. Really hard to avoid some level of integration when you acquire a company unless you just make an investment, it becomes standalone. As simple as how do they work together. If you plan to integrate their products, they probably need to have some sort of SharePoint. So therefore there's some IT integration. Even though sometimes we don't call it integrated company. But there is some level of integration to support the deal thesis.

Start off with a really high level assumption and try to refine it as much as you can as you go.

Exactly. It's not possible to get all the detail, but it's always good to have some preliminary high level thoughts as you're going into the engagement.

Who are the people you get involved on these deals?

Going back to on the strategy side, bear in mind, right, any strategy that involving an M and A, there is confidential element to it. Typically you involve the relevant people. This could be the technical leader on the product side and the business side as well. As you go along in the process, more and more people get involved, Right. Obviously when you go to due diligence and stuff and obviously once it's signed and closed, it'll become the broader audience. This is how you communicate strategy, how you communicate M and A. In reality, it's not, hey, I'll tell everyone. You communicate sufficient information to the relevant people to kind of focus on their execution. So the keyword here is division, relevant and focus.

Okay. So you really keep it tight, seal around who is involved with it. Do you have the tech lead? You have business unit?

Well, legal, yeah, marketing. And then as you go through, obviously legal finance, as you go to Lois, once loi and you go to diligence, you will expand to other functional group and even more people on the technical side as well.

How do you work with those business unit leaders with that stage? Before you get to loi or getting to loi, I should say before giving.

An LOI or quote unquote communicating an intent to acquire. First, the acquirer would be multiple stakeholders. I would say they themselves need to convince themselves it's actually something they want to acquire. I draw the similarity with families buying a house. They themselves need to convince each other that this is the house they want. They have to convince themselves. Now as a deal leads, right? What is exactly you need to do? I know this is sound, maybe too general. You have to facilitate the discussion among the stakeholders. It's multiple people, so they can discuss it, think through it, convert to some decision or approval. Typically, I would say most if not all companies have some approval process before Lois could be as simple as they finally at the end of the meeting agree that yes, I think this is the right thing to do. The same thing with the family buying house. I need more rooms because I'm in Covid. So I need to put the baby, I need to put the office. Same thing with the companies. I need more capacity. I think it makes sense. If we acquire this company for example, then of course in the discussion there's some level of commitments. Hey, if we acquire this company, if the purpose is to expand manufacturing, we have to commit in term of putting additional capex to scale it. What's the point of buying a company to scale if you don't produce Capex? The same thing with you. This family buying a house, you have to furnish a certain room to become an office or something like that. So in a way you facilitate the discussion for them to converge and discussing some level of commitment what to do with the company. If we can confirm the duties to the engagement because post loi that's where we learn as much as possible whether some of this commitment makes sense or not.

Then how do you continue managing the process? As you bring all these stakeholders in, you get into diligence.

You have many different way of managing this. It's not one solution fits all. Let's say you have a cadence of one on one meeting with certain stakeholder. You have what I call smaller group discussion for specific topics. Sometimes certain topics involve multiple stakeholder or functional group. Then you have a team meeting that kind of run the entire show. So you run the entire show. And obviously last but not least, you also keep in touch with the execs, update them either something you learn, new milestone or approvals. So this kind of process ensuring that like I mentioned earlier, you can always go zoom in and zoom out to the high level. Therefore there is no disconnect. Sir, some problem you need to go to smaller group discussion. Some problem even you have to go to one on one that you have to facilitate and bring it to an end. Some of the problems or challenges they encounter.

Is this all mapped out and designed in terms of how you have meetings, who's involved, frequency and everything.

Generally the recurring meeting is there. Now the smaller Group discussion depending on what we learn during diligence or during engagements. And of course the one on one also is flexible.

How do you keep people in line so that you know they're doing what they're supposed to be doing?

We do have project management's way of maintaining that we have the typically the cadence. Submitting either twice a week, once a week, depending on how intense the due diligence is. There is a reporting from each function so that it can broadcast to different people. The key here is basically anything that come up the bigger audience aware of, then we can narrow it down who get impacted. Then you go to smaller group discussion, making sure that everyone understand the impact. Then you have the one on one to drive them to conclusions. You have to be realistic that a lot of your team member are not a full time M and A. So any organization, sometimes I categorize a full timer, a part timer and also external resources. Not only you have to manage the part timer, you also have to manage sort of external consultants.

That's a lot of stakeholder.

Yeah, that's what M and A is keeping you buying a company that may have 10, 20 years histories with all the baggages that we have to learn.

Yeah. How about integration stuff, how that gets stepped up? Dudley, you're getting to the thick of diligence. But then you probably should start thinking about the integration stuff.

Ideally some member if not all member of the due diligence become the integration teams. But in reality you may actually end up with some of them and actually expanding to more people for the integration. I always remind people in diligence teams, right. The early stage here is like two work stream in parallel. The first when we start the diligence is discoveries, trying to learn. Then you try to figure out if any of these risks can be mitigated. Then eventually you start transitioning to integration. How do we mitigate all these risks in terms of planning for the integration? Then they start full blown on the integration planning side of it. As you're getting toward the end of diligence, right. There is discovery mitigation and then stop planning mitigation. So therefore if it is the same group of people or majority of the people will be part of the integration and diligence. That's the best way, seamless transaction without involving different people. But in reality it's not like that. You actually have some people that kind of fade away before they pass it on to the integration. Their colleagues in that particular functional groups.

What you described makes a lot of sense. You have overlap. Ideally the Same folks doing diligence continue on to do the integration. That doesn't always happen. A lot of times it's two completely different teams and there's a disconnect. But it sounds like the ideal thing is keep the continuity there.

The disconnect will happen. The people who's in diligence at some point if they if different than the people who integrated. Two different people looking at the same event can have a two different opinion. And then this is not even two people at the same event. Some guy looking at the other one has to execute. Sir, the disconnect could happen. This is where I think important is that an integration lead has to involve in the due diligence and and sometimes earlier. So when the lead has quote unquote a set of fact and truth, even though there is a disconnect in certain places, you can always go back to the person to realign it. Integration lead could be diligence lead or it could be just integration lead. But if they are not in diligence lead, it makes sure that the integration lead actually participate in diligence. So that's one way to making sure that the set of fact and truth does not get diluted or doesn't pass down from the diligence to integrations. This one, we have to avoid that. Obviously there's many other ways.

What are other things that go wrong? What have you seen that really tends to be the fail points or where value gets leaked in the deal either miss stuff and diligence. What were the key things or the things you see that tend to get oversight and that leads to value getting leaked? Delaying your integration schedules, things like that?

People, people get oversight. What I mean by people is key talents just keep in mind on the other side also have some confidentialities. Right. They cannot get a lot of people in the discussion as well. They also to maintain some kind of secrecy. Some of their talent may not be in the discussion with us. The tricky part is that how do you make sure you understand who's the technical brain in the company. That sometimes could be the hardest part and could also be problematic for the value creations. Right. There's no point in buying a company if the key talent does not sign employment agreement or they are not happy. There is some conflict in the past or something like that. Sometimes that could be tricky to uncover in due diligence.

Yeah. Is there anything that you could do to help make sure you identify all.

Those key people in due diligence? We interview people. One thing I sometimes advise people is ask the same question to multiple different people and see if the answer is different about the company, about the flow of things. And then you'll discover some version of the truth that you think is true. Of course you will never find the truth of the truth until you acquire and then you deal with them on the daily basis so long it's not alternate alternative truth.

Yeah, yeah, that's also true. That makes sense. And then you talk to people, talk through who does what, ask them the.

Same question, see if their answer is different, how does the flow work? Then they'll tell you oh, from A to B to C to C D. Then you take the different guy oh B, C, D, E and A and you like trying to figure out what is the real key people, who's the gatekeeper. This kind of stuff.

How like bound do you make key people? Is it hey, we want employment agreement signed before we close. And that's like whatever three year, five year commitment.

And yeah, so that's your border lining of the discussion about signing tradition or as you're managing the deal. Towards sign or toward closings it varies depending on the size of the deal and the complexity of the deals. In a small deal you may be able to get a ways to have the key talent to sign agreement before if we sign a deal. Realistically when you get to even medium or larger deal they cannot broadcast this deal happening to every one of the key talents. So it may happen during between sign and closings. Regarding what are the term? It varies widely depending on country to country. Some country non compete doesn't mean anything because not enforceable by laws. Non compete could also have financial implications. I think in some country you actually have to compensate that for them not to work for other companies. So you have to balance that in terms of what can be done and then you can have given what you're facing on the maybe some limited in terms of how you can retain. Then you have to start thinking redundancies, some knowledge transfer in the early periods. Again, we cannot hold people to work for company for a certain period of time if they don't want to realistically quit Unless there's retention or some deferred consideration kind of stuff. But in reality they can always quit. Sorry. Therefore is some sort of knowledge transfer or redundancy need to happen if there is a bottleneck or a gatekeepers.

I was thinking about this that so much of this is around the people. And yeah, you got a lot of different conditions that you have to manage anything around trying to create a good people experience throughout this whole transaction. Probably as the industry as a whole has become more conscious about M and A not being just purely a financial exercise. But a lot of this is about aligning people so that they're aligned on priorities. Is there anything around that, that thinking or things you've learned around more on the stakeholder alignment and just those type of people skills that really make the deal successful.

You need to have an open minded. Keep in mind you're dealing with people that could have completely different perspective, different process of how they do things. We can come in and here's my process I want you to follow. But in reality they have different process. They are different people. They sometimes they come from a different country which completely different perspectives. Right. The thing you have to be mindful is that for example, if we enter to the new markets, we are trying to acquire them because they are successful in this market, there is something that they do right to get to the market instead of us. Therefore, to some degree you actually have to learn from them. Okay. Not to force your way of doing things to them. Sometimes we actually want to learn how do they do stuff in that market. If you're genuinely trying to learn from these people so that they can fit better to our. To the acquirers, I think that's the best strategies. Don't come in, hey, we're the big guy now you have to follow us kind of stuff.

Yeah.

They are also smart enough to know that we're interested with them because they're doing something right.

But that way that's a really good perspective. Having an open mind is important mindset to have. I don't know if there's anything like you deal with conflict resolution or other type of stuff that comes up.

It's hard to describe, sir, but you have to be creative in solving some of these problems, especially around people. It could be around sometimes people. Very interesting how different people care different things. Sometimes people, when you talk to them, what is the, the pain point that you have in the previous company and stuff? Trying to see if you can get them on board, sir. It could be as little as in some country they have a car allowance if there is a relocation is far enough from where they live. So all this you could say, say a small dollar number. It could make a huge difference in terms of people's commute, things like that. I would say you actually have to assess that, sir. So if your thesis is relocating people, you have to figure out on aggregates. For example, what is the typical commute. Remember we are dealing with people with their own family, their own dependents it could make aggregates if one of the kitten does not integrate with some of your dilt. You have to find some solutions. You have to find what is the best way to working together at different location. But nowadays I think with the COVID I think people less hesitate to do people working together at different locations. Sometimes you also have to find there is language barriers. How do you onboard someone within your team that has the they can speak their language and know their cultures. There's a lot of all this small thing that it may add up. It's hard to describe. There is one silver bullet to address the people. It's amazing Sometimes some of the concern when we deal with people and then rightfully so for them is the higher priorities. You could argue family is always the higher priority than your work. We have to respect them and figure out a creative solution out of it.

M and ain't easy. What's the hardest part of your role?

Similar to what we just discussed. You have to quickly learn and lead every M and A deal. There is new people with its own culture, new product and with all the technical acumen that you have to know sometimes new completely business model with its market landscape so that you actually have to learn all these things. You actually have to learn quick enough because you have to lead the teams right as a delete. But at the same time why people in the M and a professional like it because it's not something that you do rinse and repeat. There's always something new. There's always something you learn. I think when I was an engineer you could see the rinse and repeats every couple of years. New product improve the perspective. But the same thing over and M and A is kind of the degree of newness is big. So in different projects.

Yeah, you do. You have to learn so much for every single deal. You're actually really right for pointing that out.

You really have to be optimistic too because it's so daunting. Like I said earlier, this company may have 10, 20, 30 year experience with all their baggages. How do you unwind and learn that in a short amount of time? How do you filter that's important enough that you only care? How do you communicate this? Then how do you put some risk mitigation on some of the stuff that is there? There's.

How about closing? Anything specific on closing, like how hard is it to manage? What do you do when we're waiting for closing?

Maybe you can categorize into two the external and the internals. So obviously the external is manage, assist the Target to meet the closing conditions on the internal. Preparing for the logistics for day one and finalizing the integration plan. Sir, because one is close, it's as simple as are we going to do a town hall meeting? Where is it going to be given the qualification, multiple locations. Are we going to time it perfectly at the same time? If this is involving US Europe and Asia, there's no way you find a time that can work for all three of them. On the externals, even though the other side has to deliver closing condition, you also have to manage that. You actually have to assist them. That could be as simple as like we talk about employment offer people signing could be as complex of antitrust filing where it could take months. You actually have to assist them. It goes the opposite the complex it is on the external. The more time you have to prepare for integration, the simpler it is on the transaction wise external transaction. The shorter time you have to prepare for day one and the integrations you see the dilemmas.

Yeah, I guess that's all of M and A. It's a big variable.

Yeah. Everything sometimes is very dynamic. I just put it that way. So you just be really flexible. I have to be creative finding a solution.

That is so true. What's the craziest thing you've seen in M and A, Andy?

Given where I'm in the high tech, although it's not my deal, but I'm familiar with some of the ridiculous valuations. Right. I would say typically this happened on the peak of the hype cycle. You probably know the Gartner hype cycle. Typically new technology, new markets, Right?

Yep.

If you isolate into buyer and sellers the buyer sometimes they have to confront their formal mentalities or fear of missing out. Because on the new market there's only a few players. Once someone acquire one player then in the formal mentalities. That's funny. Yeah. So this also goes both direction. The seller could be also the victim of a kind of grids. Because when you're wanted so much, there is some bidding war. Sellers try to squeeze buyers and sometimes it can backfire. Sometimes they reject the first offer and then once the top buyer walk away typically end up with lower valuation from the subsequent buyer thinking that there is something wrong with the company that they the top buyer discovers. So it's tricky from both sides. Especially when you're in the peak of the half cycles.

Yeah. It's an interesting way to look at the product cycle as opposed to just the industry itself.

Yeah. The half cycle or less like this. Right. You go to the wave reach to the peak and then it'll come down into steady state reaching. It's like a wave reaching the beach without a few player. Once you go to a steady state flow. So it is the hardest part is during that crashing of the waves. Right. Who actually is going to stay as a player once the market is kind of maturing. Obviously if you buy the company after it's maturing is way more expensive because we already know the winner is to some degree is balancing the risk versus reward without overpaying.

I think when's the best time to sell?

Oh, high valuations.

So it's going to be before like right in the middle just before you go flat.

Yeah. Sometimes I keep telling people. So typically company when they trying to sell is there at the inflection points. Whether they can make it and break it. Do they want to have more capital through other investor or IPO and then become a big players or they sell it now they themselves has to gauge as a seller what are the risk versus rewards. Is there anyone willing to buy it now so I don't have to go through scaling it or as a buyer you're like wait, should we wait for them to scale it with other people's money before requires it's always dynamic. Typically seller come to you more during high valuation of the markets. Right. Especially just in the last couple of years, the valuation is going crazy. We talk about some company that you probably didn't quite pay attention and then suddenly up for sale. Then you're like, wait, is this. Should we even entertain this or not? Because high valuation market typically people want to sell. Same thing with us. We tend to sell our stock when high valuations.

Yeah. Hey, this has been great. Thanks for taking the time to hang out chat with me. I learned a lot from you two interviews. You're helping me become a better M and A scientist. So I value and appreciate that.

Thank you so much for having me. It's good for us to learn from each other.

Hey, welcome to M and A Science community. Those of you still with us, thank you. I hope you enjoyed the podcast. And till next time, here's to the deal.

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