How to Validate the Deal Thesis To Ensure M&A Success

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If you want to keep up with us on the go, head to LinkedIn and follow M and A Science. Today I'm joined by Jan Lau, Senior Director, corporate development at PayPal. PayPal has been at the forefront of the digital commerce revolution for over 25 years with a two sided network of over 400 million consumers and merchants processing over 1.5 trillion or over 20% of global e commerce volume traded on NASDAQ under PYPL. Today we're going to talk about how to validate the deal thesis to ensure M and A success.

Jan, how are you doing today?

I'm doing great. Kisan. Thanks for having me on. Happy to be here.

Thanks for hosting me live in person.

At PayPal World Headquarters and taking a break from doing deals to have this conversation.

Happy to. It's a beautiful day in San Jose.

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

I've spent almost my entire career in corporate development helping global tech companies of all sizes and situations drive inorganic growth. I'm currently helping the lead Corp dev at PayPal, where I joined earlier this year to support the company's ambitious turnaround strategy to revolutionize commerce globally. Previously, I spent time at Square Compass and Yahoo and Verizon mostly in corp dev roles, but also in strategic finance and business operations. I've been involved in acquisitions, divestitures, JVs, strategic partnerships, minor investments, fundraisings, and even an IPO. If you think about the companies that I've been a part of and how they've evolved during my time there, each was a uniquely different experience, even though the role was generally consistent. But that's what keeps the corp dev job interesting and that's why I've done it for so long.

Diverse background and not only the deals, but just types of transactions that you've been able to work on. Yeah. You were part of acquiring Yahoo. Yep, that was pretty notable that we talked about in the past. Can we talk a little bit about that deal?

Yeah, yeah, sure. That deal was a roller coaster.

Probably one of the most memorable and high profile deals that I've worked on. It was the first project that I was thrown into when I joined Verizon's Corp Dev team as they made a big push into digital media and ad tech. Inclusive of Yahoo, they spent nearly $10 billion basically to try to push into this space. And with the acquisition of Yahoo, they effectively became the third largest online ad network behind Google and Facebook at the time. Time and we reached about a billion consumers. That deal was effectively their way to try to monetize and capture some of the value that was flowing through their network. The deal itself was a competitive auction process initiated by one of their activist investors that came in starboard that effectively pushed to separate Yahoo's core operating business from its equity investments in Alibaba and Yahoo Japan. Yahoo at the time owned about 15% of Alibaba and 35% of Yahoo. Japan was a unique situation because the value of the company's core operations were less than the value of its equity holdings. The acquisition ultimately came in at a $5 billion purchase price, roughly four and a half and the value of the equity stakes were worth $40 billion. So you can think about Yahoo at the time before it was sold as sort of a tracking stock for these public equities that it held. It was a really complex business, obviously was a global business, had many different product lines from advertising, subscription commerce, first party, third party media. And completely different than what Verizon had been operating into. So rough financial metrics. The business was doing about $5 billion in top line revenue, was declining, low single digits but still profitable. Had a lot of potential operating leverage in there. And so not surprisingly, during the auction, aside from a few strategics, there were a number of other financial sponsors involved as well. Seeing that they could increase and improve the cash flow of the business and effectively generate a return that way. Very high profile deal as you mentioned, very public. I felt like at each step of the deal details were being leaked. We'd work on one thing and then come in the next day and see it on Bloomberg. Ultimately after a few rounds, Verizon came on top just because of the strategic value that they saw in the business. There were obviously a number of curveballs and reasons why it was so notable. One being that post signing the deal between signing close as it was going through sort of antitrust review, they announced that at the time what was the largest data breach of all time. Over a billion accounts were impacted from hacks back in 2013, 2014, but it was only revealed much later post sign the SEC even investigated why it took.

So long, et cetera.

And then there was a plan to roll out effectively a force price would reset to 500 million accounts. And so there was concerns obviously in terms of whether we should move forward with the deal, ran the analysis on what that might mean for the business, etc. Etc. And eventually was able to negotiate a $350 million discount on the deal. But we still pushed through. Given that we believe the thesis still remainder. Once the deal went through, a lot of things happened. The world changed dramatically, especially in advertising. There was more regulation, more competition. We all know about GDPR coming in back then. This was even pre the days of TikTok which then changed the ad landscape again. And then Amazon ads was also just starting and so much more competition, more difficult to hold consumer attention effectively, which is what the business is contingent on. And then there's just delays in integration that we face to capture some of the synergies. But ultimately we did capture a lot of cost synergies, maybe less so on the revenue side. It was a really interesting dynamic situation and one of two case studies of things that happened at the time. Given that AT&T as well, Manon Telco also made a big foray into media at the time and acquired Time Warner for $80 million. And we all know how the story ended. A few years later, both Verizon and ATT both spun off their media assets for roughly half of what they paid. That's kind of the long and short of what happened, but it was definitely a rollercoaster of a deal.

I just remember we talked before. That was the big highlight of the conversation was just hearing that story and it was just so interesting of having that big breach. How do you sort of recaliber the deal after something that impactful happens?

Definitely a material event if any way you cut it.

Something we have to work through for sure.

Still pulled it off. The Validating the Deal Thesis what do you want to teach me about how to validate the deal thesis?

That's something incredibly important. It's helpful to have clarity on what exactly you're looking for and acquiring going into it. But before even going to the deal thesis, I guess there's two key ingredients that I see and that's really foundational before even discussing deal thesis, which is what's your strategy and what's your alternatives?

One on just what's your strategy?

It's like basically where to play and how to win, where you're deciding to focus on how do you plan to execute against it, who's your target market capabilities, customers, et cetera. And understanding that leads you to figure out how to use M and A as a tool. It's one of many alternatives. And so that kind of lends itself to the traditional and typical sort of bill by partner framework that you typically think about. But once you have those, then you can really go after specific targets and think about validating the deal thesis itself. And that seems obvious, but I think given M and A sometimes is opportunistic and sometimes happen at times when maybe you're not ready yet or is not a perfect target. Sometimes the ideal target may not even exist. And so you have to be clear on what you're going into it for to acquire something and be clear on that piece before you even start. That's really important just to invalidate the deal thesis. Otherwise you run into a problem where you're doing a deal where the idea and what you're acquiring it for is half baked and then you try to fit it into a square hole when you're not sure that it ticks all the boxes for you.

Let's clarify the why. First and foremost, it's really to make sure that this is going to be a good fit, basically. And that's the strategy really aligning what's the strategy, how does this fit in, but then also the alternatives. Looking at build, partner and other alternatives.

Yeah, because it comes down to, is this the right path out of everything else? Are we doing it because we can't build it? Are we doing it because we weren't able to find a suitable partner? Because if you think about the other options, sometimes it comes down to speed and capability and ability to even build. And sometimes in companies that I've worked at, there sometimes is a bias towards say, saying we can build everything and you end up not doing MA because of that. Or you realize that you can't build it, but then you made the decision to pass on all those targets before and now they might be too expensive and you just have to build it yourself anyways. Having an understanding of the strategy and alternatives early on sets yourself up to being able to validate the deal thesis and whether it makes sense then and there.

The timing part was interesting too, because I feel like there's times timing of your strategy and when M and A would fit in, but then deals just pop up. I've seen it for our business, hey, here's an opportunity to acquire a competitor. Is this the right time for us? Is what's the pros and cons around that? Am I looking at the right way?

Yeah, you often get asked, hey, we're trying to fill a capability gap, let's go acquire something. Sometimes that specific capability doesn't exist in the form of a target to be acquired at the right price for all the reasons that we can discuss. But trying to make those two things meet doesn't happen all the time. And so when deals come up, then you need to have a clear framework to say why this makes sense versus not, versus trying to make it make sense.

That is interesting. You would look at this as a framework like this approach because if anything pops up anytime, you can really take a look at it and say, all right, now's not the right time for it. Or there's particular reasons why this isn't a good strategic fit.

And when we think about validating the deal thesis, it's really about targeting diligence and being clear on understanding what the value drivers of a deal are. And there's usually just three, maybe five things that really matter in a deal. If you're clear about what those are, then you can really validate Whether the target makes sense or not, does that.

Vary based on the deal or does it just sort of quarter your strategy?

It varies depending on the deal, I think depending on the business unit you're working for, depending on the specific capability you're looking to acquire. The value drivers are different for each one.

The why of doing all this stuff, Sometimes we get a little deal happy, like we just want to get deals. You buy companies, you're going to grow and just try to think of like the counterpoint to really spending that emphasis on validating the deal thesis. What happens when you don't do that and you just brush it over and you get deals done. What's like this side effect of not putting the emphasis on.

I think it goes back to two things. One is understanding what the role of corporate development is where oftentimes people equate corp Dev as equals to M and A. And I think more broadly we should be viewed as one of many alternatives and be viewed as taking a look at what the strategic alternatives are to achieve the same outcome. And MA might be one answer, might not be the only answer. And we shouldn't be the ones pushing for M and A to be the answer. And oftentimes when I've seen deals go wrong, it's just when there isn't clear accountability end to end and who's going to actually own the business Post close. It shouldn't be corp dev. It's not going to be corp dev. And even though we might want to do a deal, whether it succeeds or fails is not just on corp dev's hands. It's in partnership with the rest of the organization. You do run into trouble when you do a deal for the sake of doing a deal to try to fix a gap and solve near term problems, but don't have long term owners.

Part of your role is just making sure that that level of alignment is actually there to make the deal successful overall and to prevent it from just doing deals to the sake of doing deals.

Yep. And we should not sign term sheets or get that far in doing a deal without that alignment internally. That's part of the job.

What actually happens if you just like slam deals through the platform?

I can point to a number of examples in my career, but no names obviously. But I just say when that does happen, it causes on the other end. Once the deal closes, there's typically questions around how much continued investment the deal will get. And that's a big factor. You can't just acquire something and starve it. There's also a question of prioritization and ownership internally, Whose business unit does it roll up to? Were they a willing participant in it or not? And now that it's folded into their P and L, whoever the business unit owner is going to be is going to be accountable for it. How much control do they have over it? Do they even know what they took over and where it's going to fit? Does it fit into their overall strategy or was it a pet project? All those things determine what happens post close and the success and failure. Even if you shove something down and wanted to make it close.

Right, that's a good point. Continue investment and actual ownership to really own the continued future and growth of that business. Okay, so let's break down the how teach me how to do this how do we validate a deal thesis?

Once you have those three to five value drivers, the things that you know are the reason why you're doing the deal and is core to effectively making the deal successful, that's where you should focus 90% of your diligence on validating that piece. The typical value drivers for a deal might be the people, might be the product, might be the technology, might be the sales team, might be the user base, might be things on the regulatory side, might be the licenses that a company has, et cetera, et cetera. Depending on what that is, then you need to get the right people involved internally who are experts in the space and who are going to own it and what the integration future might look like. So you have to have a hypothesis on how it will fit into the business, and then that's how you start validating the deal thesis is okay, if the people are a key value driver, then how are we going to retain them? Are those people a fit? If we look at engineers, do they code in the same language that we do here? Do they build in the same way? What does the architecture look like? We need to bring in our technical team to talk to theirs and go far enough down the org to understand that and even their historical retention, attrition, so on and so forth, so they understand how they might fit in and how they work. So that's the simplest example on like the people side and then even on the product and technology side, oftentimes you'll hear a big value driver would be, let's buy this business for the product it has. It's a small subscale startup, we're a large big corporate. We're going to cross sell everything that it owns into our user base. Sounds great in theory, but let's validate that. And typically you can validate that early on without even going through an M and A process. Maybe you should partner with them first and see if that thesis holds, if your user base even picks it up on a white label basis before you bring it in. And then how difficult will integration be? You got to dig into their tech stack and architecture to understand what that lift might be versus what you have and what's the similarities, differences, et cetera. You need to have a view on what you're looking for and then dig in especially to figure out does that make sense and does it hold? Because again, going back to alternatives, the alternatives at a big company typically is, hey, if this is important enough, we can allocate capital to it and build it ourselves. Reason why we don't and reason why we acquire instead is typically unique domain expertise and acceleration that we wouldn't be able to do otherwise. It's just quicker, faster, easier to do it through an acquisition versus building ourselves. You want to validate, is it truly faster and will those things actually hold? Invalidating a deal thesis. So all those things, you should try to do as much upfront work as possible to validate.

I see.

This could also get your buy in too. But these key folks are going to part of owning this. Now, this is different than doing diligence, or is it sort of one and the same?

To me it's one and the same because there's the parts of diligence that are more operational, if you will, to figure out how this company will be ingested into yours, what systems they use, what benefits, where everyone is comp, everything, how they come on board. There's that piece which can be part of the key value drivers as well. The question goes back to what are you diligencing for and what is the objective? And so when you have a short time frame due diligence, say four to eight weeks, what are you focusing your time on? And that's ultimately what this is about, trying to prioritize your internal resources as well as the targets. Which is typically a smaller company, small startup that can be overwhelmed by a large company's many questions, as I'm sure you know, is where do we focus them on and where do we focus our resources on and what actually moves the needle and how can we plan it, how we can plan for integration and validate some of these things.

There's like a lot of overlap in activity because if you think about it, there's part of diligence that's going to help you get the information you need to validate the deal thesis. Then you got a broader scope of diligence that make it into general checkboxes stuff to understand the deal and the risk. Then you got integration planning that falls into this, which is our due diligence is planning for integration. So that all makes sense. Could we walk through an example and part of it, I just want to get a sense of timeline. Let's not use anything from financial services. I don't want to hear from PayPal, attorneys or any of your past employers, or you can even make one up. But just to get a sense of like, okay, here's like an ideal deal and who did I bring in and what the timeline looks like.

Let's say you're acquiring a company because you think they have interesting technology and good people for the technology. What you might want to do is just upfront, before you even have an LOI or anything. You should try to figure out those things I mentioned earlier around is the tech stack compatible with ours? Are they even writing in the same code? How easy is it to port it? Are they using the same cloud? All those questions when we evaluate tech, we have to assess up front and figure out how automated is their processes versus ours. What sort of uplift do we have to bring theirs over to ours? Typically they might have more lax information security protocols than we do. We also have to make sure their products haven't been breached or anything like that. But there's a number of things we have to do to even figure out if the tech is viable. And a lot of that you can do up front. And if there is enough passing the sniff test, then you can go deeper post loi that's like on the tech side and the people similarly, you can interview a few folks at the top to figure out the quality of talent because hopefully the leader is a good representation of everyone else in the organization. And so you interview a few people, get a good sense. Are they the right folks that would fit in? Do they have reasonable comp expectations that would allow you to make a compelling offer that they would accept? You can do a lot of that pre LOI to put together something to then unlock the next stage of diligence where you can go deeper to validate these key value drivers, but also everything else. Is it a clean enough company? Do the financials all make sense, et cetera, et cetera.

So I want to click into this a little bit. So let's say we found the company, we had an initial meeting with their executive and we said, hey, we're interested to put together something in front of you, we obviously got to do some diligence. We signed NDA. Then we would probably have, like, initial requests. Because when we want to just start getting financials and some of that stuff up front so we can build a model.

Yep.

Okay. So we get our little short list of, hey, here's financials and some of the key things about their people and things like that we want to know. And then we'd probably follow up. We understand these are the big drivers. Like, we're really after this technology and we're betting on it. So we want to make sure it integrates well. We can bring that security standard up to our level. Now what do I just start digging our head of engineering. Do we start?

Yeah, it goes back to value drivers. Now it's like a question of if you think about this in sequence, it's okay. The value drivers are technology and talent. Let's say you validated that check. Technology makes sense. Talent's great. Now let's figure out if this is worth it to us and how much is that worth to us. And so there's a financial aspect to this where you have to obviously dig into their financials, figure out what they might be worth to you, any synergies, and that allows you to maybe put a value on this thing that allows you to put forth an ly. So that would be the initial step. Once you have alignment with the other side that, yes, this is compelling enough, let's move forward. You're effectively then trying to stage and do all that diligence that we talked about. How do we integrate all the other functions that we need to understand more deeply beyond what we did initially to make the deal a reality. And there's a lot of check the box stuff, but there's a lot of.

Stuff we're still before loi.

Yeah. So that's why we divided where pre loi. You're just trying to get a sanity check. Where do you have alignment on the key value drivers and do you have an alignment on value, like how much you'll be willing to pay? If those two things check, then you'll move on to the next stage. The whole point of the pre all OI phase is to effectively do as little work as possible to validate the hypothesis, to then get into a process, hopefully exclusively with the other party, to then expend even more resources to do everything else that you need to do.

Okay. So the technology focus, there's probably some really, really key things. We want to know their specific tech stack and then we probably want to know a little bit about the security and things like that. And I'd probably have my resource that's going to be leading in charge and bringing this in. I'd still want to get a conversation going before Loi just to make sure he's got peace of mind or got a sense of okay. This is especially. I know engineers, man, they're always skeptical about everything.

Oh yeah. So in order for them to do that evaluation, they of course have to talk to the other side. There's going to be back and forth, we're going to have requests.

That's going to be part of my model of like what's it going to cost to integrate this technology and what's that timeline going to be? So there probably is going to be that conversation.

Yeah.

But it's going to be really focused on that key area, the value driver. Not so much anything out of like that scope.

Yeah, yeah, it's less so what do they use? Google Docs or Microsoft Teams, all those stuff like that doesn't matter, I guess in this sense.

Exactly.

It's like the core product itself. Does it say what you say it does and is it scalable and does it fit within our systems, et cetera? Those that's what we really care about. May take one conversation, may take a few conversations depending on the depth that we need to go down and whether we're asking the right questions from the get go or not.

Then we get to a level of confidence we would be able to bring this tech, it would integrate in our platform. There's a little bit of work to do because the tech stack's a bit different but we could work that. It's just going to take this much time frame and so forth. And here's associated cost to make the integration happen.

And obviously also it depends on the other side. Sometimes depending on the process, it may be just that targeted process where they might just be talking to us and they don't want to open up their entire management team to the process. And then it makes it a little bit more challenging to do diligence. If it's a more open process where they're letting us talk to many folks, then yeah, it makes it a little bit easier.

I remember talking to a person at a company where they were telling me how their business acquired a couple different tech products. The vision was to integrate as a platform. But he's like, they're not, they're on completely different tech stacks. And it's just such a terrible experience for that customer yeah. Is that like an example? They didn't really validate that deal thesis.

And maybe that was the intention from the beginning. And then it goes back to where was this on the prioritization post close. Was there resources dedicated to this and did it make it up the stack? If you think about every year there's planning that goes on in a company, and every year you have to prioritize your limited engineering resources and teams across the organization to keep the business running, work on new products and innovation, and then work on integration of whatever you might have acquired. Sometimes integration does not get prioritized above all those other things. Then it ends up being left on the wayside until it gets to a point when you realize, hey, what are we doing with those things that we acquired a few years ago? They're not giving us the value that we think, let's relook at them. That's what leads to potential divestitures and other things.

So there's a few different things that could happen. The company just doesn't have the resources and really had that muscle to integrate them and that's the reason why. Or there's something that completely missed. And then it was different in terms of what they actually needed sometimes.

And sometimes it's also in your example, it was basically a case where they intended to integrate but did not. There's other cases where they acquire and then just leave it alone. And that's by design until they decide to do so.

Now if you switch it up and say, hey, we're buying this business for the customers, we see an opportunity. They're selling a similar solution, a different market, but we could cross sell some of our other solutions to their customers, combine these sales teams. Which is where it gets interesting. This tends to be pretty complicated to actually do this. Then in that case, emphasis would be probably more in the sales and marketing.

Yeah.

And bringing them in and saying, hey, this is what we're building as assumptions of synergies that we can capture and then let them identify and validate that.

And typically you want to bring on the customers, but then you have to consider what is required to enable and monetize those customers. A simple example would be Facebook acquiring Instagram. They're saying, Instagram has a unique technology, but its uniqueness is also in the virality and network that it's built. Hard to replicate the technology. Obviously we've seen other people replicate what they've built, but they have that lightning in the bottle that we want. And then we're going to put all our advertising and monetization behind it and actually make money from this thing. That's an example, I guess, that everyone's familiar with from looking at the customers. But also the customer itself is what's special, but it's captured within that container of their app and their technology.

I like the deal of the century. Yeah, potentially.

Potentially, that YouTube's a great one too. There's a lot. There's a lot of them.

YouTube's up there too.

Yeah, YouTube's up there too, yeah.

Talk to me about this deal thesis.

What does that look like? What information's in there and how do.

You, like, convey this? Because I'm curious, once you put this together, is there like a formal pitch to the executive, the board? How do you sort of convey that validation effectively?

The deal thesis is a very succinct view on why we should do the deal. And as part of that articulation, you should also explain why you should not do the deal as well as what the plan is for the deal. In my view, there's various stages where you do need to articulate that formally. So obviously right up front, before you even engage, you should have a rough sense of here's what the deal thesis is. Hopefully that remains consistent, but it can be updated depending on what you find. You may have five things that are important. And then once you get through a little bit of diligence, realize that maybe it's only two things that really matter in this deal. The other two we validated that is not really real at the target. And so then it evolves. And then you have to get approvals at each step of the way as you do the deal, betting on the size and scope all the way up potentially to the board. It's a simple articulation of why you should do the deal. And maybe you should accompany that with also the reasons why you shouldn't do the deal. But on the balance, given why you should do the deal and why you should not do the deal, we recommend moving forward.

How many pages of a document are we talking about?

We typically try to keep it short. If it's a memoir, then it shouldn't be more than 5, 10 pages. If it's a presentation, then maybe up to 20 slides, tops. Try to keep it tight.

Start off with here's our investment thesis. This is why we want to buy this company. Got a unique technology that would move our roadmap faster and allow us to come out with our new product z the market. We'd be able to start building revenue faster, start building our case around that.

Sharing context and what you found during diligence, all the key next steps, what do you plan for integration? All those things you should be able to lay out.

So I would lay that out in this deal thesis that hey, this is a little bit details about their technology and then a little bit about how we see it fitting in our ecosystem. How would we approach integrating our timelines? We would even put that in there.

Yep. Depending on how far you want to go. And ideally you've done a lot of this planning is even figuring out where the people will sit after how you intend to eventually merge the companies effectively. That's the integration plan or not. You should basically lay it all out to as much detail as you can and hopefully a lot of that is done obviously pre signed to the extent you can.

If we're going to like eliminate all their sales and marketing because they really haven't sold a lot, this is like a 1 million revenue company. We just really want their technology. Will we lay that out there? Yeah, we're pretty transparent. Like hey, this is, this is what we're going to do.

Sometimes it's helpful to also not just be transparent internally, but also be transparent to the other side. Because oftentimes challenges also happen when there's a lack of transparency and understanding of what will happen to the business post close. And there's a benefit in being on the same page with the target to say here's what we're going to do with your company post close. You as the CEO and management team and the board are basically signing up to this. And if you're aligned with that vision, hopefully everything that we plan to do, including whatever retention incentives, payouts, pullbacks, all the deal economics, all the incentives should be aligned because we've agreed up front generally how we envision the deal to go.

Earn that trust through transparency.

Yeah.

Okay, so we start putting that detail information in there. Any kind of references about the deal in general. You put like comps in there.

Yeah, if it's relevant to valuation. Valuation is obviously one component of it. And a key question is why are we paying what we think we're paying? How much of the synergies are we giving away versus keeping for ourselves?

Do you have to like formally present all this?

Yeah. CEO directs the board sometimes or an M and a committee which is a subset of the board, depending on the deal size.

I heard stories like a pretty big element in terms of really pitching your deal.

Yep.

How do you do that? How do you like nail the pitch of the story?

That's why the deal thesis is so important. Part of what should be driving why that is a factor for doing the deal is not just in isolation for the deal, but those two things that I spoke about earlier around strategy and alternatives. Because you have to set the context for people around, like, here is a situation around this deal and why we're doing it. And the other things we considered that led us to the decision that this is the best path for us to achieve what we're looking to do. That in itself is the general storyline or arc around why this makes sense and why we've done all the work to validate that it does make sense. Here's all the work we've done. That's the story effectively. And if it's compelling enough and you've checked all the boxes, hopefully the deal does what it does, which is accelerate your business and your roadmap and build shareholder valley.

What's the bad guy in this story?

The bad guy in the story around what?

That's why I'm always asking if they say he got to put pictures of the story. But I'm like, okay, usually a story's got big bad guys.

And that's part of the point I made earlier around. We should always lay out why we should do a deal and why we should not do a deal. And so the bad guy is basically taking the other side of the argument and trying to frame, okay, for all these reasons, this is a great thing. But for all these reasons, it's not. But based on looking at the whole picture, we still think it's a good move to make. So you have to go in eyes wide open and not just look at one side of the story and be able to share. For all these reasons, it is bad and there could be risks, but you don't just come with the risk. You also come with, here's the risk. But we thought about the risks and we've also considered what the mitigations could be against those risks. And so for these reasons, we think it's still manageable and we should still go forward. In the event that you can't explain or justify the risks, then that's a problem. That's where you have a bad guy that's unsolvable.

So the story in the far distance, there's the promised land. And we see a vision of how we can get to the promised land by building this giant boat and crossing this massive sea. But there's going to be challenges. Boat may fall apart or we may run out of food and starve to death. Despite that we just see so much promise that we should just go for it.

Yeah, we might run out of food, but we think we can grow a sustainable farm on the boat and we'll be able to make everyone on the boat survive until we get to the promised land. There's like things that you do to try to get the end point goes back to don't just call out the risks. Is there a plan to manage the risk to get there?

Yeah. Which kind of helps flesh out the story. That said, despite all this, let's do it. Yeah, I like that. The integration part, it's like the thing that's coming up more and more over the years of doing this podcast and everybody's just becoming hyper conscious about making integration makes or breaks the deal.

What are your thoughts about how that.

Integration comes in play when it comes to the deal thesis? Is there a thesis around integration specifically? What are your views on that? Or a corp dev person doesn't give a shit?

Definitely not the latter. At the end of the day, Corp dev is really one team between the deal side and the integration side.

And that's what they all say.

We work hand in hand. And that's what they all say because that's what you need to have to make a deal successful. The execution of it is where it gets.

That's what I was saying. There's a big variance when it comes to rubber hits the road. So how do you actually make that seamless?

It comes down to recognizing the handoff between the deal side and the integration side and making that seamless and making sure that everyone recognizes obviously that value is created after the deal closes and not when it signs. So recognizing that, what are the steps again to capture and realize all the value drivers that we've talked about? Going back to the point of if the value driver is a technology, typically you want to get that technology so you can unlock a market, accelerate what you would have built otherwise, et cetera, et cetera. And so you're measuring your ability to drive value against your ability to hit those milestones. If you're saying that we could have built this in 24 months, but acquiring something will help us launch a product in 12 months, you're effectively capturing that acceleration of a year.

Whether the deal is a success or.

Not hinges on that promise. As part of integration planning, you have to figure out what do I need to do to hit that 12 month timeline to launch a product after this whole thing closes. And so that's what you have to plan against. And so you have to get in all the right folks in the room, make sure that it's again, it's prioritized as invested against. A lot of the issues that I've seen is just there's the right people are not in the room and the right people aren't building this post closure. And so you have to bring in everyone along for the ride early and help them understand the deal. Make sure you have investments against that. If you're going to need more headcount beyond the current team to sell the deal after, then yeah, your sales team should be involved. Everyone should be involved. And it goes down to the tactics. If you're bringing in a piece of technology and you're planning to cross sell it, your sales team better have the right collateral. Sales team better be trained on it and hit the ground running after the fact. And understand what capabilities does this new acquired company fill. Can I effectively sell it? All those things need to be lined up and planned down to the N degree. It's all about details and execution at that point.

Yeah, we always celebrate the close. Probably because most of the advisors and consultants make a crapload of money.

Yeah, yeah, they're paying for the celebration.

They do. But then we don't celebrate successful integration.

That's a company by company basis.

Right. I just never hear about it. Hey, we hit our 12 month timeline and we hit our goals on this deal.

Corp dev tracks the success of it. There's a window within which we track the deal and then after a certain point it becomes bau part of the business and so probably not hearing it because at that point we're just not tracking it anymore. But we definitely celebrate the success and track what happens within the few year window after it closes.

Do you ever have any roles you've been in where there's like repercussions for.

Doing a bad deal on corp dev individually and personally? Probably not, not specifically, but that's primarily because there's so many people involved that are necessary to make the deal successful.

I get it if it's a certain miss that you had responsibility for, but it is a big team effort that touches so many different.

Yeah, and if it's a salient deal point, it typically isn't just on corp dev to unilaterally approve that point. It typically is part of the deal sponsor as well to say I agree that sounds good, let's do that. As opposed to corp dev saying doing deals in a silo and just making up terms and ensuring that they just get the deal done. That's probably when you run into trouble. And yeah, that's probably more on corp dev where you can blame that one person if that happens.

What should I do on my next deal to really make sure I nail down the deal Thesis? Give me some advice here. I want to make sure I don't screw it up. I'm going to be working with this other executive like what are some of the tough questions? I need to be really digging in and making sure that I got this nailed down so the deal is going to be set up for success.

It helps to be aligned with the eventual deal sponsor just on what exactly are they looking for in a target or capability and it's up to you to then figure out sourcing and identifying the right target, et cetera. But you need a clear view on do I have the right filters in place and am I clear on what I'm looking for? That allows me to help square off the deal thesis and everything versus bringing targets. That may only fill a rough idea of what it takes to do a deal that helps to effectively validate, even pre validate, what the ideal deal would look like.

But nothing ever fits that box.

Get as much as you can and then that's where the decisions come in to it fits 90% of what I'm looking for. If it's 50% of what I'm looking for, is it still enough? And is the value I ascribe to say the 50% that I want sufficient to even acquire the company?

How do I balance this out? Because I get deal happy and I get this gut feeling I should go do the deal. And then I got the other stakeholders internally that are going to be the ones that really drive a lot of this and I want their buy in. But then they tend to be pretty type A and find all reasons not to do the deal.

You're hitting on the more psychological part of the deal thesis. I would say a lot of executives and a lot of corp dev professionals have over the years of doing deals, a lot of people have their own preconceived notions around what works and what doesn't. Some executives will swear off doing acqui hires because they don't believe that the talent is worth the extra consideration. They don't believe that talent will stick around. And maybe that's valid based on their past experience. Other people believe that, hey, it's really hard for me to hire an entire team wholesale like that. Despite all that risk, I think it's still worth it to even get a few engineers from doing a deal. And that in itself is so worth doing depending on the company you're with and the execs you're working with, that's the environment or the deal environment basically you're walking into. And that's the type of biases that you have to navigate around whether a deal makes sense or not.

That almost becomes culturally company to company. Their appetite for doing M and A, their tolerance for that difference of how well it fits strategically to the strategy and things. There's always a gap there that seems like you gotta shape. And like you said, it's never a hundred percent. It's just what's our tolerance to accept it at 50%? Hopefully at least 50%, 70%, which is.

Why this job has been different at every place I've worked at. Because different companies were at different points in their life cycle and had different varying levels of interest in inorganic growth and varying levels of how they wanted to execute on that. And so that keeps the job fresh and different and interesting and exciting in different places.

So when we look at this profile of your flexibility on fit to do a deal, I can see the challenges and clearly what those risks are ahead. And then there's the challenges that really pop up. The deal surprises. I want to learn from you about deal surprises you've encountered just to get a sense of. So I just find them interesting stories in general. Where were some of those surprises and lessons learned? Yeah, we started the story with the big rise in. Here's a breach that happened. That's a big one. But what are other examples?

Other examples of something that happened?

One of them effectively is doing a deal.

We were evaluating a company that was based out of Eastern Europe, but most of the operations were in the US and so a lot of their engineers are based on Eastern Europe. We were doing diligence. We did not have any entity or employees out in Eastern Europe. And so understanding the local employment laws and regulations around what would be even required to bring those folks on board was a challenge and something we had to navigate. What kind of offer letters would they need? How would we pay them? How would that all make sense? And then in the midst of figuring all that out, which was a headache in itself with Employment Council and hr, you can imagine just trying to see if there was even sufficient talent there while we're doing that. Then the Ukraine war popped up in.

This country we were looking at was.

Right next to Ukraine at the time. Nobody knew what was happening. We had to bring in our trust and safety team, try to figure out even what would happen in the event of war breaking out. And Spilling over into the neighboring country where the target company's employees were.

The question became, do we even do this deal?

Is it worth it for all the.

Headache that will come in?

Potentially, if you do sign, you're very much likely have to close and those employees then become your burden to bear. How do we even get them laptops to a potential war zone? All these questions that we didn't expect to even cross when we first looked at it. The first thesis was great lower cost of operations, but great engineers, let's do it. But then there's all these other considerations that you have to think about when you don't have any operations there. Is there enough talent density? What does that all look like? And then put on top of a potential war, that's a big curveball.

Do you have any like showstoppers? Where post loi it's like, all right, we can't continue this deal because it's too big of a surprise.

Typically not. The reason why is the purchase agreements are written in a way where once you sign, unless there's a very explicit termination that you have baked in that the target doesn't fulfill as say a closing condition or otherwise, there are not many ways to get out of the deal. And so you have to be very sure that once you sign that you're willing to close loi. No, a definitive. Well, definitive, yes, but at the LOI stage it's always non binding. Typically non binding anyways.

That's what I mean. From loi to close. Before it closed.

Yeah, before it closes. There. There's a lot of reasons.

So can we say like roughly, and I'm curious, your rule? I would say 90% you're going to close if you sign LOI. But what's your experience say?

Yeah, I would say that's generally right. We try not to put out an LOI unless we truly believe that we will close. Absent any material showstoppers, things pop up.

But we can negotiate, we can figure it out. Hopefully not do price adjustment, but if we do, it's mutually agreed. But what would be like between LOI and close reasons that you would just say we can't do this.

The biggest and most typical one is if it just doesn't become a priority anymore for whatever reason. That's the main thing. If we're in the middle of planning cycles, there's maybe management turnover on our side, or whatever the case might be, then this no longer is a priority, then we walk away. Or if one of the value drivers that we've identified is really not what we thought it was upfront, maybe someone key that we thought we needed during the deal walks away and there's a number of things that could come up. But again it goes down to hopefully you've done enough work to validate the deal, the value drivers, enough pre LOI to make sure that there isn't any showstoppers after.

But yeah, it would be like a pretty material change. Like here's some change that would impact your view on the deal or you had an internal change and deal sponsor left the company and oh yeah, yeah. Aside from validating the deal thesis, is there anything else you do to streamline your M and a process?

It comes down to focus and prioritization. Again, typically you're trying to balance between doing it as fast as possible to stay within that exclusivity window that you probably signed during the LOI to be as thorough as you can but also be quick from that perspective that's in your control and then making sure that you set up the right cadence in just managing the deal with all your internal stakeholders as well as a target to just continue pushing on all fronts and making progress. So if you think about, don't just send a diligence request and then wait a week to hear what happens. Make sure you have touch points regularly in between checking up there's any issues, making sure that you're dealing with things back and forth. So all those tactical things can help streamline it. And in terms of how we do it and how we streamline things like process wise too, it's from all the places I've worked at. We're still pretty old school in how we manage deals, use a spreadsheet for the most part, go back and forth. There's shared docs now, but still pretty old school. But we try to make sure that everyone works against the same documents.

Someone from the dealer room sales team is going to hear this and I'm.

Waiting for it, I'm waiting for it.

But I don't think that has anything to do with me.

I'm going to have my spam filters on.

But prioritization and being pro, I think.

That'S the biggest takeaway from this conversation is you could get a deal done for the sake of getting a deal done. But if you really want to get the deal done, well, it's just that proactive effort, prioritization, a clear focus on those value drivers but being really proactive on it because you could just say.

Oh, you know, here we got a.

Hypothesis of this and you use it and float it to get the deal done versus bringing in the right people, having the tough conversations, going to that level of detail, I feel like that's like the real big difference between the dealmakers in the market. There's ones because like I said, you can easily get the deal done, but can you really do the deal done? Well, that's exponentially more work.

Yeah. Yeah, it is. It is definitely more work. And going back to most places have a standard list of diligence questions that you kind of have to go through. But if you really think about what needs to be answered when and how you present that to the other side and make sure they're focused, that helps streamline it. I agree with all those points.

Awesome. What's the craziest thing you've ever seen in M and A?

No deals alike. So one of the craziest things was actually when I was doing a divestiture, maybe it was eight years ago or so at this point where we're trying to sell off a part of our portfolio. Couldn't find a buyer to make the sale worthwhile. We went to all these interested parties that we think would make sense. None of them bit. It wasn't worthwhile to keep the business going. And so we decided to shut it down. Then when word got out that we were going to shut it down, the former founders of the business who had since left the company already took the social media to petition our CEO to change his mind on the shutdown. So don't shut down our business, our baby. We've left the company already, but we don't think it's the right decision. Hey, community of users, come support us and rally against the big bad corporate that's trying to shut down our business. There was a lot of public pressure from this user base to then make a U turn and find an alternative path. Even though we had all the plans laid out to shut down the business, we were pressured into changing our minds basically and eventually came up with a plan to sell back the business to the original founders who at the time were sitting on a beach, weren't doing anything active. And so literally they had to spin up their own servers, their own people, try to even create an entity to even take this thing on, because as of 24 hours ago, they were basically not even operating anything. We had to do all that in a pressure deadline because we had, for regulatory reasons and others, a plan to shut it down by X date. And we have to basically do it all and set up TSAs and everything else ahead of time. It was a crazy process. We had one plan and then a post on Instagram came along and changed everything. So yeah, that was a crazy thing.

Ex founder activism.

Yeah. Yeah, that works too. Apparently that works too.

They probably got a discount.

Oh yeah, yeah, yeah, they did.

That's a crazy wild story. Jen, this has been a great conversation. I want to thank you for taking the time, schooling me on some things, helping me become a better M and A scientist.

Glad to help and happy to be here. So thanks for having me, fellow M.

And A scientist that's listened through this whole interview. I love you. I appreciate you taking the time with us. Feel free to connect with me on LinkedIn. Reach out. Love hearing the feedback. I'm open to the criticism. I want to get better at doing this. Any other ideas for topics or guest recommendations? Always appreciated. 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 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.