In-House vs. External Legal Insights in M&A

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Scientists welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M and A practice, or want to get involved with a community of forward thinking M and a practitioners, visit ma science.com subscribe for a free weekly newsletter. If you want to keep up with us on the go, head to LinkedIn and follow M&A Science. I'm your host Kisam Patel, CEO and founder of M&A Science. Joining me today is Anson Lau, Deputy General Counsel handling strategic transactions and commercial at Long Solar, one of the world's largest solar panel manufacturers listed on the Shanghai Stock Exchange. Today we're going to talk about the difference between in house and external legal insights and M and A. Anson, how are you doing today?

I'm good, thanks for having me.

Thanks for joining me live here in San Francisco. Big shout out to Slalom for providing us space to have this podcast interview. We're going to kick off a little bit about your background.

Thank you for providing that very extensive introduction to what I'm doing now, which is a little bit of trying to set up a joint venture because of the US China trade war. There are Chinese panel manufacturers that are looking to onshore some of their activities and when I'm not busy doing that, I'm negotiating commercial contracts. I used to joke I worked in house to help that very rare breed of companies not make money but actually burn their money to buy other companies and grow inorganically. Now I'm doing work that helps pay the bills as well.

That's a good balance. You got to have both sides.

Exactly. And then prior to that I was at Sea Limited, Southeast Asia's largest tech company. I was helping to set up their second global headquarters in Menlo Park. I did M and A ventures and commercial work covering the Americas. Prior to that I was here at a born and bred San Francisco company, Salesforce, doing their M and A and ventures work. Prior to my in house life, I was at two different law firms. One of them was maybe one that people would hear of if they work in Silicon Valley called Wilson Sonsini. Yes, it actually was just a few blocks down from where I ended up first going in house at Salesforce. And I worked in their M and A group there and then did some ventures work on the side if time permitted. And then for my very first law firm, I worked with a Wall street firm called Cleary Gottlieb and I started out in their New York office and I got sent out to their Hong Kong office. It was a great opportunity because I joined right at the beginning of the financial crisis and I got to work both in New York and then Hong Kong overseas doing a bunch of M and A capital markets and then just whatever hodgepodge corporate work that you would give a junior associate.

That's a pretty balanced mix between being in in house roles versus working external. Which one do you work harder in?

It's two different types of working hard at a law firm, which I highly recommend that everybody try to first start out at a big law firm. You get a great work ethic, you get a very depending on what law firm you join, you end up getting a great breadth of exposure to work. And then you basically learn how to develop your own work life integration as opposed to walking into a job and expecting work life balance. Because let's just be frank, you don't get paid what you get paid in big law for somebody to worry about your being able to sleep enough or your being able to have enough personal time. But it is completely possible after you've been in big law. And then so long as you pick a collegial enough environment to figure out your own work life integration so that for example, you live and play and work in such a close enough environment that it's comfortable for you to step away from the office when you are on call on a big deal to go and hang out with friends. And then if you do need to go back and quickly turn a document, you can do that. And you don't have somebody telling you, hey, this is the way that you should try to structure your life. Which I then think was really good for me when I went in house, because when I went in house I first started doing M and A and M and A in house is also still rather unpredictable when it comes to the time schedule. Because when a company wants to buy another company, it isn't like it's done on some preset planned out six months in advance. When the deal's alive, it's alive and then it's all hands on deck. Everyone just does whatever they try to do to get it done. The two different types of working hard would be at a law firm you can differentiate yourself really well and go really far by just being a Complete workforce. But then when you go in house you start realizing that a lot of the skills of being able to be a good in house lawyer because you are relieved of a lot of the need to do a lot of the outside counsel work. For example, formatting or cross reference checking. One, you obviously still need the technical skills to be able to review your outside counsel's work. But two, you need to think at a more strategic level at that point and then understand what are the risks. Because every single target has a bunch of warts on it that you are willing to assume in order for your company to be able to buy this company. Because the optimal level of risk in a company is never zero, otherwise you're just suspending it in amber. And then two, how do you learn to work with people within your organization? Because every in house department is a highly matrix organization over which you may not have formal authority in order to get the deal across the finish line.

External, that's really the workhorse is yeah, I just, I. Everybody I know that works at a big law firm is always working.

That's why it is. It's a lot of work. I also remember whenever you threw work over to, you know, a specialist, it's like you knew that person once they were staffed on a deal, they would drop what they had to do or they would like make sure to stay up as late as they could to get your deal done. When you go in house, you have specialists that you work with, but they have day jobs because no one's going to hire a regular IP counsel and then an IP, M&A council to help get like your deal done. In which case then for example, you as the M and a in house lead should develop enough competency beyond your core area so that you can keep the ball rolling and talk about specialist areas so that your specialist counterpart can focus on their day job and then really jump in when you need them to to sign off on some preliminary solution that you have or help you think through some prickly issue instead of your thinking, oh, I can just take this issue, focus on my little corner of the kiddie pool and then just drop that hot potato into their lap and then expect them to hand it back to me on a silver platter, which just isn't going to happen.

Let's dive right into it. Can we walk through the mindset difference between someone working as an in house counsel versus external?

In house counsel number one is as I said before, optimal level of risk in any organization that wants to grow is never zero. Otherwise you're basically suspending it in amber. So instead you need to walk into there knowing full well that you are going to be assuming risk, but which risks are the ones worth assuming? And then how do you fix them in a way that will get you across the finish line and then allow you to eventually integrate this target into your business? Here's an example. When you are buying a company, you look at their commercial contracts and then you have a specialist on your end look at them. If you just ask them to raise to you blindly all the risks that they see, oftentimes what you'll end up stumbling upon is maybe just a list of how you their contracting practices are different from yours, which in a lot of instances probably are completely understandable because one, they're so small that for them the biggest risk is not taking the risk at all. And then two, no matter how intelligent or no matter how principled their positions are on contracts, they just don't have the leverage to get the same terms that a big serial acquirer could get. At which point then to just get a list of how this small company can't get the same exact terms as a big publicly listed company isn't useful. And instead maybe what you do is you widen the aperture and you ask yourself, am I buying this company? You think about it on a spectrum and I'll just talk only in terms of extremities. And then you can obviously mix and match. In the middle is on the one end, am I just buying them for their talent, in which case then I don't care about their book of business. After which point then the question is which contracts permit me to terminate for convenience? And then of the ones that don't, how do I early exit those contracts? By for example, providing some sort of compensation or providing some sort of credit for some other services that I as a serial acquirer may be able to offer. And then on the other end, if I do care about the book of business is how do I get them to eventually move onto my serial acquirer paper, which may very well also be modified to take into consideration this targets commercial contracting practices. Is that upon the point of renewal or is it upon the point of launching a brand new product or suite of services? In which case you also ask yourself, hey, in order to motivate that, do I provide some sort of kicker like a credit? Or whenever you do come in and then move on to my paper, I'll give you discounted pricing.

Can I break it down like tactically versus strategic, that when you're working externally it could be a little bit more tactical when you generalize, like here's paper, risk differences and things of that sort of contract differences versus when you talk through like in house, it's very much more strategic of connecting a lot more dots of how things are going to progress with the way the business ultimately gets integrated and operates.

Yeah, I think that you put it well, tactical versus strategic. Strategic in the sense that it's your job as an in house counsel to understand the risks and then understand how your organization operates and then point out to your outside counsel, these are the risks that we can take and then these are the risks that you may think we potentially can't take, but for one reason or another, because if we have some sort of institutional third rails or institutional limitations on how far we're willing to bend or break to accommodate this target, we're not willing to do that. And then I think as outside counsel, I really don't blame outside counsel when they become too conservative because I think also what happens is in house counsel sometimes uses outside counsel to kind of cya, in which case then I think it's outside counsel's job to actually over disclose and over tell them what the risks are so that in house counsel can then have the full picture and then make the call as to what do I view as more a theoretical risk and then what do I view as a more practical risk or what do I view as, and these are probably the most interesting questions as an M and A in house counsel is what is that really remote risk that has a huge probability magnitude of, you know, exploding? Is that really worth it for us to take on the way that I like to think of that whenever I frame it to my internal clients, for example, Corp Dev is, I'll say we're paying X headline price for this company. If and when this risk does arise, which I'm not saying it necessarily will, this is how much I've quantified that additional risk to be. So do we really believe that this target, after we integrate them and are able to grow inorganically and offer this new suite of products or services is still worth it? And maybe the answer is yes, or maybe the answer is no, but at least you're able to frame it in a very quantifiable practical sense to your internal client instead of talking about it in legalese between other lawyers. Secondly, I think it's also your responsibility, as in house counsel to always be like, hey, it's not only the legal risks that I'm looking at and it's not only My need to be able to quantify these risks. But it's also thinking, hey, what are the reputational risks? Are there any non legal risks out there that no amount of money could really go out and solve for you? And one of those examples I would say, which really came to the fore around 2017, 2018, is me too. So when I was at Salesforce, after seeing how like that became a really big issue, we actually started working into our form agreements, Me too. Reps which basically treated them not only as just general rep and warranties that were backstopped by the escrow, but actually fundamental reps that could result in exposure beyond the escrow itself. The way that you brought them down was not applying the general materiality standard to all general reps and warranties, but instead just reading them as they were written without any materiality overlay.

That's a lot. I like it. We got some smart. Well now we're getting more attorneys listening to the podcast, so it's probably a good thing. What about negotiations? Is that something that you would differentiate between a perspective of in house external?

Oh yeah, for sure. When you are outside counsel, your job is to be a zealous advocate. It's you against the other side and you view the negotiation table as a rectangular and long and target sits on one side and buyer sits on the other. But when you're in house counsel, what you need to realize is after that deal closes, all of those target founders and high level executives that you are playing hardball with and being a zealous advocate on behalf of your employer for will end up becoming executives who very well could rank above you in your organization and who will be critical in helping your organization basically take this target out of its packaging and integrate it into whatever technology stack or whatever pre like existing infrastructure that like your employer has. At which point that any sort of unnecessary bad blood, however great of a legal advocate you were, may taint your relationship afterwards with these guys. You need to approach it from that perspective and that yes, between outside counsel, the negotiation table is a long rectangular table with people sitting on either side. But for you as in house counsel, at the end of the day you're going to end up sitting at a circular table back with these same people. And then similarly I will go in, for example, in a private deal, I will go in and negotiate really hard on the reps and warranties and on the escrow and then anything that goes above escrow because that's the buyer's self insurance regime, I will oftentimes just take the position, this is the price of my money. My money also buys this self insurance regime or policy in the event something does go wrong, which is the lawyer's job. But when it comes time to actually make an identification claim, there will actually be more of a discussion rather than just simply what does the M and A agreement say? Can we make this claim and how much can we go up against? There will be like lawyers read the black and white, tell me what our full rights are. Then afterwards it'll be our job to be like, how is the integration going? How is the company going? Do we actually want to make this claim? Because if the integration has been successful and they've been hitting everything out of the ballpark, do we want to muddy the waters by trying to claw this money back from them or do we just write it off, which is very much the buyer's right to not make a claim. In the alternative, what if something completely catastrophic does happen and like you need to for example, completely rewrite the code because you realize whatever diligence you did was imperfect, but you're still protected under the reps and warranties and then the identification regime, you might be able to throw the book at them, but instead of saying I'm throwing the book at you and I'm going to empty out the entire escrow and also I'm going to claw back your pro rata portion of the proceeds of the M and A proceeds and make you sell that brand new house and you're like grandmother's china. In order to pay me back, you might just say, technically speaking I could do that. But I know we've made great strides in other areas and at the end of the day, if I kick you out, you're the one who knows best how to fix this. So I'm going to use this as a club in the back. But really if you help me fix this, we can just let this be.

Bygones, bigger emphasis and all these post close considerations of things that could go awry. Also I like that view of this is the counterparty, but ultimately they're gonna be part of your party.

Exactly.

Play nice.

Yeah. Or you have two different ways of approaching it. If you wanna play hardball, have your outside counsel play hardball.

Yep.

Like you want your outside counsel to be overly conservative to over disclose all the risks so that when you make the decision, you do it with your eyes wide open.

I get the sense of that balance too because then you can have in house and I don't even think of deals that we're Looking at that, I want to have my in house counsel sort of take that kind of position and then be able to work with an external counsel that could be more got a lot of reps in and negotiating these kind of deals versus being a smaller company.

I mean as a lawyer, if you think about it, I always tell whether I'm doing a commercial contract or I'm doing an M and A agreement or I'm doing some ventures investment. Listen guys, if you really believe that you have a great working relationship with the counterparty, don't even bother with the lawyers. Because if you believe that if things fall apart, you guys will always find some way to hug it out and resolve this issue where neither side is unhappy about it and nobody gets the short end of the stick. No need for lawyers to write up a contract. The reason why you have a contract is in the off chance that things go completely off the rails that there are guardrails in place on how to resolve these issues so that you aren't at a time when things are most acrimonious trying to then somehow piece together a path forward.

Great point. I like that balance and how do you get the right blend and balance and co working relationship between internal and external counsel. Can we talk more about the risk mitigation view? We talked a little bit about there's some different views and how external may identify these risks or what they're basically looking at versus in house and that tactical versus strategic. But in terms of mitigating risk, is there a difference between those approaches?

As outside counsel there's only so much that you can do in helping your in house counsel. Advise them on how to mitigate certain risks. Because at the end of the day you don't really understand how the guts of their organization works. But I think outside counsel is still valuable in the sense that they can say I've represented XYZ companies, they operate in the same space as you and in the past when they've encountered these issues, this is how they've approached them. So that then your in house counsel may be like fantastic, I love that. Let me just take that and then adopt it. Or they can be like great, that's like a great starting point for me to then just pitch it inside and see how we work with it. Because as I said before, I think in house council departments are highly matrix organizations. And imagine even an entire corporation is an even larger highly matrix organization. And the big issue I think there unlike a law firm is you need to get buy in from people that you do not necessarily have formal authority over in order to develop a solution or risk mitigate issues that you identified during the deal process. And oftentimes what ends up happening is which, if you think about it, also makes sense. You don't disclose the deal to the entire world. So you oftentimes will end up having to pull in people that have no background whatsoever on your deal. It may be they're very good at doing things a certain way based off of your organizational needs. But then they may have to change it in order to accommodate this target that has a different type of business because you oftentimes do grow inorganically through M and A, which would require them to somehow change how they internally operate.

Okay, so external, they can give you a sense about what market stats say. Here's what we see as common. What's the legal word they use? What do we see as market?

Basically common precedent.

Precedent. That's what I'm looking for.

Precedential examples. I don't know.

Here's what's precedent or examples that we've seen out there. And then internal. I think it's interesting because now all of a sudden you got all these internal SMEs and then you can start looking at ways that you may change this approach internally with the team members. That could be your approach to mitigating the risk.

Yeah, because at the same time outside counsel costs so much money. I'm sure any law firm would love to help on integration because it's a very time consuming and facts and circumstances sensitive process that you could probably throw a bunch of junior associates who are eager beavers onto it and fill up a huge amount of like hours on it. But because it's that and then because it would be too costly, then it's up to in house counsel to figure all of that out and connect the dots in order to take whatever strategy that you guys decided to do at the beginning, pre closing or not close, make sure that it gets implemented post close.

Do you have any examples of how this kind of plays out with specific risks?

You deal with the way Salesforce did it, which is very good and which helped inform how I approach issues at C limited and then to a lesser extent at Longji at. My job now is Salesforce for their M and A processes. They would actually disclose a group of people that were not just legal, but say you'd have your legal folks and then you'd have your technical folks and then your finance and your accounting and your tax, but then also most critically the executive or group of executives who'd be running the business post close so that while you were doing your diligence, the executive was also live understanding, hey, these are the risks here and here is how they're evolving and this is how we are thinking of potentially mitigating them. So that one, the executive understands there is a cost to keeping this contract alive. Because if you ask anybody who's responsible for a business unit post close, do you want more revenue or less revenue through these contracts, anyone's just going to say, yeah, obviously I want more revenue. But if you say, hey, in order to keep this type of revenue, you've got to make sure that you have a certain amount of headcount in order to continue providing this sort of white glove or super tailored service that we otherwise don't already have sitting around, then they may think twice about it. Secondly, you also want all of these non legal folks or these non deal folks putting their input. Because here's like another example. You may decide that from the target's perspective a certain customer just is not worth it to keep their contract post closed because they're basically just earning beans from it. But you may want to look on the other side and say, hey, does this customer already sit on the buy side on the buyer side? Which wouldn't be uncommon because often if you're looking to grow inorganically, you may choose to grow inorganically because you have a large overlapping customer base. In which case you may decide not to terminate a piddling target side contract because you realize that it would upset that same customer because they have a buyer side contract. And once you close that deal and then you let the entire world know that you've done this fantastic acquisition, that customer doesn't care which side of the target or buyer line they sat on pre close. They're just going to view themselves as I'm your customer, period.

I want to learn more about negotiating these deals. Especially now I'm getting a better understanding of the power dynamic between external counsel and internal. Teach me how to negotiate deals. How do I leverage this? I'm getting a sense of a good cop, bad cop relationship here.

I would say if anyone's going to be a bad cop, it should definitely be outside counsel, right? I, I think outside council also knows a little bit better how to read who they're negotiating against. Because the world is small and like I'd say M and A circles are even smaller. And then oftentimes if you're outside counsel, you don't only do buy side deals, you'll do buy side and sell side. So you understand what are the counterarguments that the other side will make? And at the same time, you will also understand which ones fly with which buyers, but then which ones you'll just be forced to make for the priority principle of making them. For in house counsel, you also kind of learn to understand how to negotiate and what stance to take against which group of outside counsels representing the targets. Because oftentimes what will happen is the same law firms that you will end up sitting across from and buying companies from, you will think twice before hiring them to represent you in buying companies. Because as much as they may say there's a Chinese wall within them and that they promise not to allow associates to hear and access all of the counter arguments that you're giving, that's very hard to actually implement.

They all hang out the same bar, so word's gonna get out.

Exactly. What ends up happening is the law firms that are really good at representing companies that sell to big serial acquirers oftentimes don't end up being able to represent those same serial acquirers when they're trying to buy their customers, even though they clearly are just as technically capable of doing so. Which then means that the companies that. Or the law firms that you end up using as a serial acquirer to help represent you in buying companies are going to be a different breed of law firm.

I want to get a better gauge of this. When you work on a deal and you look at the target and then you identify the external counsel they're working with, are there, like, cultural associations just knowing the name of the firm that you right away already get a sense like, oh, this firm's gonna be easy to work with. This is gonna be harder. Does that come off right off the bat?

I would say even more specifically, because Silicon Valley, such a small world, you know the groups and you know the players, and you know how certain groups.

Operate within that law firm. So I can even say, hey, there's not, like, I can stereotype to one big culture of the law firm just by pure logo. It's more specific to that group. And then I would get a sense of like, all right, this is because.

I also think in Silicon Valley, what ends up happening is people jump from law firm to law firm. Like, partners will just jump law firms. So then for an associate, for example, when I was interviewing for law firms, firm culture was very important because I think as an associate, since you're not really working for any one group, the default culture is critical, and then making sure is critical in shaping your experience. But then when it comes to, when you've practiced longer, you're probably more wedded to working for a certain partner or a certain group of partners or senior associates than like you are working for that law firm instead. If, like those partners or some of those partners leave, they may choose to bring you along, in which case then you're really more attached to that person. And like you two or whatever group of people will end up forming a certain dynamic and a certain culture. You understand how to negotiate a certain way.

What's like, best case, worst case, reputation. I would conceive when I get a sense of this group I'm working with.

I wouldn't say that there's any sort of like, best case, worst case, you.

Don'T get one where it just like makes you cringe right away. Ah, this is going to be a slog. Working with this group.

This is the way that I kind of view deals is if as a serial acquirer, I'm going up against a small VC backed firm. My job is actually to get very clever at constantly arguing back to my paper because I'm setting a precedent and I'm communicating to the market that this is the price of my money and I just want my paper. And I'm only going to give you a handful of changes. And that's just the way the world is. I can say that with a straight face because having worked in the past and having represented other serial choirs, I know that's what they do as well. And it gets so extreme that there are examples of you as the Serial Choirs Council, just calling up the other side and saying, I've looked at your markup. I'm going to tell you, XYZ are going to get rejected. So let me tell you now what I'm going to be able to get across the finish line because this is what I've seen happen so many times before. And then after they're like okay with that and they tell their client, you don't even take their version and version up and reject all their changes. You take your prior version, save it on top of theirs, and only make the handful of changes that like you told them you would accept. And that's just what happens when the power dynamics are so large it doesn't make sense for the serial choir to bend and break in order to move away from their paper. Because if they are a serial choir, they're also looking to do a repeatable, scalable process. And like, the more you just hand something on your paper and then you're able to just Use your playbook in order to integrate this target and then deal with the risks and what have you. The better. Now you can't do that with every single target because there are other targets, for example, that have a real book of business. Maybe they're not owned by a venture capital firm. They are owned by a private equity firm that took a previously public company private. In which case if you can still argue that, more power to you. But I highly doubt that's going to happen. That's when it's your job, as in House counsel to not just be clever about arguing back to your paper and then raising all these red flags because you can't get back to your paper. Because you should understand at that point that you're. Your paper is probably pretty ridiculous and you have all these belts and suspenders. That's when you're like, I can give on this because that is market. I'm not going to give on every single one, but I must give on it. And then that's where you have to exercise your muscle in understanding how do I get my organization and all these groups of people that I don't have formal authority to change the way that they do stuff so that we can get this deal across and mitigate these risks appropriately.

Power Dynamics behind this. I like that because you're so right. Like do you have the power? Do they, you know, are you sort of the serial choir that's got all the reps in and this sort of fits in your template and then you kind of can have that conversation of this is what we're going to bend on. There's not going to be a lot of room versus maybe that Power Dynamics flipped around and you're either doing the bigger deal or they've come from that background where it's a carve out of a public company or something like that. Then it may be worked around in a totally different direction. I like how you were pretty straightforward how you cut through. You get the conversation of hey, let's just be up front, let's get this. Cause I feel like that's for me the biggest concern on any deal is that all of a sudden it's like this ongoing back and forth on some deal point when I look at it and just like guys, the odds of this actually happening is like one in zilch.

Well that's also your job as the in house counsel. Obviously you need to allow the other side to say stuff and, and then wring their hands and you guys go back and forth and there's like this Theater of going back and forth. But at the end of the day, as an in house counsel, you get paid to get deals done and your job is not to like constantly raise a red flag and say, oh, we can't sign this because we haven't gotten back to our paper. So then you also have your own come to Jesus moment where you're like, no, we can't keep on arguing back and forth. This is where I'm like, I'm going to take on these risks and like, this is fine and we're just going to get to the finish line and sign.

I'm thinking of like efficiency. At the end of the day you get the deal done and there's my legal bill. Is that sort of part of your goal is to be efficient with the resources externally? And how do you think through that to be like, all right, this is what I'm trying to do. Do I budget it and I'm trying to stay within certain parameters, or is it more of just trying to be efficient through the deal process incrementally to.

Ultimately have that result before we hop on that? Actually a lot of the ways that you can get yourself to the finish line for deals is don't underestimate the power of money. If you can just shift some costs around and say, I normally would have you pay for that, but I'll pay for that. And giving those amounts, those will probably get you farther in tying out loose ends than permitting you to win on these theoretical high magnitude risks than actually just trying to keep on arguing those points. Because it's really just a question of, hey, how about I just give you more money now at close and then you take the risk that this will either arise during the general survival period, if this is covered under the general escrow, or if for some reason this is a fundamental rep under whatever, you know, extended survival period we've agreed to. Now going back to your other question about outside counsel, I'm very cognizant of the fact I try to tell other people that I work with in case they get overly conservative. I'm like, do not underestimate yourself. You've been hired to be in house counsel. And the reason why this company has in house counsel is because they don't want to otherwise hire someone who has no idea how to advise on this to ask a lawyer to then run up the bill and go crazy. Yes, I do think as in house counsel, you realize your value add is in lowering the legal bill. Yes, in house counsel uses outside counsel to cya to a Certain extent. You can't do that every single time. Otherwise my thought process would be I could hire anybody to hire a law firm to CYA on their behalf.

So it's the right balance. It's like you got a partnership there, but you want to have it as more of an extension of your effort and be efficient about it. So it's not like a fully outsourced effort.

Oh, yeah, for sure. Outside counsel, because they do so many deals and because they're like always sitting on both sides of the table, I think at some point they're going to get very agnostic about how you decide to call the risk. I think a lot of them would be more than happy to just have in house counsel say, don't worry about that, I'll handle it later. Just drop it.

Really fair point. What's your advice to really make sure you're working with the right external counsel. Like, you've gone through this and you've built it, and there's like, cultures of the groups. But how do you approach? Do you build a go to relationship through time and then you're just always defaulting to that, or is it more of, I got a bit of a matrix of these relationships, knowing it's a really tiny deal. I'm going to work with this law firm. This is more of a bigger profile deal. I'm going to work with this law firm. How do you think through that?

Taking that apart in different layers, one, obviously, cost is a consideration. So if I'm, for example, just hiring a law firm where I know I have all the leverage, where basically I'm just negotiating back to my paper, I don't need to hire the most sophisticated law firm out there. I just need to hire a law firm that's familiar with my paper and knows how to argue back to that and then also relatively familiar with how I would mitigate risks. Although I, as in house counsel, can probably just as easily layer that on top. And I think there's a broader swath of law firms that, that you could teach that to. If I'm talking about a very prickly deal, then I'm not going to give it to the folks who are just really good at arguing back to my paper, because I need folks who understand my paper, but folks who can help me think through really prickly issues and then help me devise more sophisticated risk mitigation plans, because those prickly targets are probably also the ones that offer the biggest books of business or the biggest opportunities for me to grow into. So I shouldn't Just try to hold up the deal simply because there are risks out there or more risks that I normally would encounter. And then just thinking of when an M and A in house counsel is hiring an outside law firm, something that I learned that wouldn't have been obvious to me before is you can actually find a lot of really top tier corporate M and A lawyers out there. You can find a lot of really top tier employment attorneys and employee benefit attorneys. But what is going to be harder and what is going to drive probably more of your decision is can you find a great IP team or a privacy team because of how much more antitrust and federal scrutiny of deals are now? Those like antitrust or, you know, specialist teams that will help me deal with the risks that will arise in these deals. So that at the end of the day, it's not really how great an M and A team is, even though it probably is the M and A lawyers coming in to pitch you as a law firm on why you hire them. You have to hire a law firm that has a solid M and A team, but it's going to be another specialist group within that law firm that is going to have to really win over your specialist counterparts in deciding your decision whether to hire.

That's a lot of different directions and considerations and the ultimate working relationship and what your goals are going to be or working towards.

Yeah, because the M and A lawyers don't matter. At the end of the day, we're just like monkey scribes. We're just project managing and ensuring that all the T's are crossed and the I's are dotted. Sometimes you do feel like that.

That is very true. Do you remember like the whole monkey scribe thing that went viral?

Wasn't that at Wilson where some Winston Straw. Oh, okay. Yeah, exactly. Like a partner at Winston Strawn called like some associate a monkey scribe. Okay, yeah, I kind of remember that. That was.

That's a good friend of mine.

Oh, wow.

So I gotta ask you, thinking of myself as an operator and when I get this deal, especially when you're early, we haven't done an M and A deal, but at some point, whether it's a year, two years, whatever, out, we will likely acquire a business. I'm gonna wanna spend the time and make sure I'm really working. I think that's a moral of doing all these podcast interviews, is make sure you got great legal counsel you're working with. What's my best approach to network? Really build those relationships and identify who's going to be a good fit outside of interviewing them in this podcast.

So like you're saying you don't even work in Silicon Valley and like you just come here and then you're like, I'm going to buy some tech company and I want to make sure I hire the best tech company law firm. Okay. If I were you, I'd probably go ring up the salesforces, the Facebooks, the Googles, all the big serial acquirers that have done really sexy deals that you're interested in and then be like, hey, do you mind if I can talk to your M and A folks and then ask them which law firms do you like using and why? Right, interesting. And then separate it based off of the way that I've sliced and diced the way that I think about law firms. But maybe people slice and dice it a different way. Okay, so who would you use if you're buying a, you know, if you're just doing an acquire deal, in which case you just have all the leverage and then you also want to limit the cost as opposed to who would you use if you were doing a big boy M and A and buying a company with a real book of business and that has like a real history that may have been formerly private and is owned by a private equity firm?

Ask for referrals from in house M and A councils.

Yeah. Otherwise if you go purely off of word of mouth or I guess, reputation, or God help you if you're just reading everyone's bios on a website, which I feel like everyone purposely just copies each other so that it's very hard to tell on its face who like really does what. Maybe it works, maybe it doesn't.

I love this approach. Like I'm gonna take that to heart and I might even test it by just asking for referrals to interview people for the podcast. Yeah, yeah, that's actually makes a lot of sense. And you're right. Cause I've caught myself doing that where it's. You look up best in many law firms and you'll get this fabled list and then you start looking at their directories and then that's where you end up doing is you're like flipping through bios, which doesn't tell you about their working style.

Even for me, Like, M and A is so broad. A company that does really great M and A out in, I guess maybe east coast style M and A, where it's like they do hyper complex deals and then they're buying like manufacturing plants and really complex conglomerates or blah blah, blah, blah. Those people may not be great at doing like a textile deal, even though obviously they could learn to do it. But it may not be the most efficient to go in and find those folks or you may end up finding. Before antitrust became a big issue, antitrust was something, for example, that I used to handle with the people within my team and primarily drive with the assistance of outside counsel. But now that antitrust is a real issue, like I see deals or like I hear of deals where you'll hire one law firm to handle every aspect of the deal minus antitrust and then you will go to the law firm that has a really like fantastic antitrust practice and then hire them to just handle the antitrust aspect of your deal.

Having that network then being bespoke about who you pull in at what time. Yeah, let's talk about managing diligence, specifically preterm sheet versus post, obviously pre term sheet. We're looking at deals, we're negotiating and we really want to find out if there's any big red flags or things that are going to block the deal at the time we're getting data room set up and then from there we get an LOI sign and we really get into the thick of this stuff. Talk me through that approach to really identify some of these big showstoppers early. How do you work with the corp dev team? What does that look like?

I think it's helping corp dev understand first that no target is going to completely open their treasure trove of information to a corp dev team simply because you've signed an NDA, however robust. Because at the end of the day, if that corp dev team decides to walk away from that deal, any, you know, solid buy side NDA is going to make very clear that the buyer is a multi headed hydra. The buyer regularly goes around and looks at many different targets and that the buyer may very well end up having a different department within them develop a competing product. Because M and A. The question that I think for a buyer is always is it easier for me just to grow organically and build this in house, or is it easier for me to just go out and buy a team or buy a business and then grow inorganically? It's a very fine line that your corp dev team has to tread with each target in order to gain their trust. But then it's very important for your corp dev team to establish a track record and have one of integrity and trust so that targets do feel safe, that if they share this stuff with you, it's not going to come back to bite them later. On now post term sheet. And then when the target sets up an entire data room and lets you rifle through any and every document that they have and then ask all these follow up questions. What you need to understand as the buyer is because you still theoretically have the right to never sign an agreement or you still have theoretically the right if you signed an agreement to not close if certain things aren't done, is if you want to meaningfully exercise that right and then eventually flip to just building the product yourself, you can't for example, disclose every single technical person on your side who would be capable of building that product to go in diligence this target. Because if you do decide to walk away from the deal before signing an agreement, or if you decide to walk away from the deal between sign and close, you're not only going to be able to rely on some residuals clause in your NDA to say oh I told you that I may retain something in my unaided memory to like potentially go and build something else or I already told you in my NDA that like I'm a multi headed hydra beast and that I may eventually develop a competing product. Because if that target does see you create a competing product and then they realize that they'll be completely destroyed, they may very well just take you to court and fight tooth and nail in order to survive. And for you to be able to still continue developing that product or that competing product, you may need to just hire an entire team off the street in order to do that. Which if you haven't planned for that or if you aren't willing to do that, then you need to think beforehand carefully about who you disclose on your technical side to go diligence this target. That will still leave you optionality to walk away if you decided there's other stuff on the table that you weren't ready to take on.

Good point. What are like the big red flag items that you would push to look for pre signing the loi.

The big issues that I think are pretty low hanging fruit that people probably forget about. One reputational issues, which you could probably suss out pretty quickly if this company has a reputation via glassdoor of having a toxic work environment or God forbid an environment where there's a lot of sexual harassment or potential sexual harassment going around. Doesn't matter how valuable this target is, the reputational hit to you as the buyer for knowingly buying them may outweigh any sort of value that this target is able to add to you post close. Another one would be regulatory. I'm Thinking back to the days where people wanted to play more fast and loose with regulators, where it was like, it's easier to ask for forgiveness than for permission. It's all about disruption. It's all about being done rather than perfect. In which case then you also have to outweigh. You have to really consider, hey, there is value in buying this company. But then is the hit that like you're going to take with the regulators, especially if there's potential criminal liability far outweighed by that. And then third, it's also just understanding, for example, if you think that there is some sort of regulatory risk there, regulatory approval, for example, antitrust. It is possible to go out and get antitrust approval from the authorities on a term sheet alone. But what's going to end up happening is if you really want to keep this deal under wraps, there's nothing stopping the authorities from doing what they would do if you had already signed a deal and applied for antitrust approval, which is to go out to your competitors and ask them, hey, do you think that there's any anti competitive effects on this deal? In which case then it's like you've basically let out the bag to everybody that you wouldn't want to know that hey, you think that this is a really juicy target or a really juicy place for us to move into.

So you wouldn't want to be the one to do that where you bring that up to the competitor.

Exactly. If you're willing to do that, understand that there are risks that as much as it is supposed to be confidential, word gets out, does that still come.

In play with a smaller private to private deal?

So I haven't done as many of these super sensitive deals as of late. I wouldn't know, but I'd say it could theoretically still be an issue because there are certain private companies out there that may not have a great book of business but have a really valuable team. In which case then to know that they're in play because they're obviously not going to run around and tell everybody that they're in play, or you wouldn't allow them to run around and tell everyone that they're in play, could once that cat's out of the bag, really take whatever deal timeline or schedule that you had or track and really push it off the rails.

What's the approach when it comes to collaborating with internal stakeholders, Corp Dev team, maybe other functions. And I'm trying to get that specific sense of what that relationship looks like pre loi vs post corp dev and.

M and A I think work hand in hand all the time. The best deal teams probably have the closest relationship between corp dev and their M and A in house lawyers because those two are probably going to be the leaders in the deal process. They're going to be the ones who really rely on each other to hopefully divide and conquer and get alignment cross functional within the deal team and then across the organization. The second most important would be the people who you come in contact with on a repeat basis on your deals, being able to build a track record with them whereby you can prove to them, for example, that I will argue on your behalf to get us back to our paper or to our playbook because at the end of the day I know that you have a day job and that there's value in our creating a repeatable scalable process so that one day when I come knocking on your door and that day will come, you know that I've earned the right to disrupt your day and really have you focus on this sway generous and truly unique issue.

Sounds like the right approach is really having that relationship so that it is very collaborative. Then I take it that expands once you do sign LOI and now you're getting into big functional considerations with those leads. What's your expectation that people actually read the PA and know what the hell it means?

I don't expect anybody to read it. I expect myself to know it back and forth. Expect my outside counselor to know it really well. But for example, when I kick off a deal, I will have already summarized what the term sheet says. And then if I know that there's a certain specialist group that always like hones in on some fun fact that I otherwise wouldn't think is important, I will call it out for them. I will also try to provide as much background information in a short digestible manner to folks so that they know that when I kick off a deal they can just either attend a meeting where I'm kicking off the deal and pay attention to the slides or just pull that deck if they couldn't get on the meeting and then just refer to it later on.

So you kind of have your own summary and then it may be something like HR specific. Hey, here's some nuanced things because this company has employees in Eastern Europe and yeah, we want to make sure this is how we got it worded and then let them know everything and then.

You get that feedback for everybody else. They don't need to know anything other than the term sheet and then the target and details for the pa. I would say they also don't really need to understand a PA other than in general terms. And then I would rely on outside counsel, they're like outside counsel counterparts to really get into nitty gritty and then tell them what the big issues are. But I would still be fluent enough in their specialty area and then in their sections of the BA whereby I could say, hey, if you're not comfortable signing off on this, this is why I'm comfortable signing off on it because of XYZ in this deal. And then also hopefully I can say and because we've already signed off on this in prior deals, in which case then it's I don't expect that person to remember what they signed off in the past, but I should be able to pull that up myself to say you have signed off on this.

What would impress you? Like if a corp dev person does have a good interpretation of the purchase agreement?

Some corp dev people do like that and they do get into the weeds. Those are few and far between, quite frankly. I don't need corp dev to know that stuff. Right. But what I do need corp dev to understand is that at the end of the day, it isn't really just their job to source the deal and then be a human alarm clock. Right. I need them to understand that there is some wood to be chopped and that to have patience and that to understand that I may need to selectively pull them in to argue certain commercial points. And if I guess corp dev feels like I'm over abusing the fact that I'm like that's a commercial issue, that's for you to take. I'm more than happy to take that feedback. But I think similarly what I'd also say is it isn't just once a deal's sourced. All what I have is. And nobody really does this on a corp dev team. But I think maybe sometimes I get this for salespeople who just source a commercial deal is they suddenly just become human alarm box and tell me like, oh, I want to sign by X day without ever looking at the agreement, without ever understanding what needs to be done to button it up.

So not enough to know what's going on.

Yeah, but I also really rely on Corp Devon is understanding the deal in mathematical terms so that I know I reflected in the agreement. But then also as I told you before, whenever you're trying to button up these really tricky issues, if you can just say, hey, I'll pay for this even though I normally wouldn't pay for it, and then you think of it in the higher level of just, I'm paying you more at close so that you will assume some theoretical risk that may or may not arise post close, then you guys have alignment on that. Because at the end day, all of that is just math too. And whatever you agree to in the M and A agreement for the payout and the risk shifting has to be somehow reflected in a spreadsheet somewhere.

AI is changing things quickly. I took a waymo to get down here.

Oh, wow. I still haven't taken that yet. Although there's a bunch of them self driving.

We took it three times with the kids yesterday and it's trippy. The fact that we took one ride and my kids refused to take Uber after that. They're like, no, dad, this is way better. We don't want to deal with no. And if you think about it, one bad experience was with a driver. All of a sudden it's, oh, wow, I can eliminate that versus, like, hey, I sometimes had good experience. I have fun conversations with my Uber driver, but nope, they just like all instantly converted.

We'd rather take over. It's probably the novelty though, because afterwards people are going to start wanting to be like, it's lonely sitting in a car alone. I think I was like reading somewhere now there's this growing movement, although it isn't completely taking over, of teenagers or like college students wanting flip phones because they feel like smartphones are just too distracting and like completely like. I mean, there's just too much static and like, it completely cuts you off from the rest of the world. Which I would also agree because I grew up at a time where I remember. I think it was like in college when the Moto Razr came out. And the fact that it would flip was just like, so cool. I remember watching the news and it'd be like, oh, Paris Hilton has one. Not that I cared about her, but it was like an emblem of cool. But then back then it was like, because you couldn't just look up on your phone stuff or you couldn't just. You could text, but then you were like, each number is three different letters, so your text messages were much shorter. You were forced to have much more human interaction with people around you, which now we don't really have as much.

It is. It's a big difference. Like, it's really flipping things upside down. But I like that. Like the fact that I hope Mike is going to do that, acknowledge it, like, hey, this is way too much of a distraction. I want to dial things back with AI making a lot of impacts when it comes to legal world, how do you see the impact even taking it back to that dynamic of working with external versus internal counsel, how do you see it making an impact in those different respective roles?

I'm definitely very fascinated by it. I definitely try to read as much as I can about it and I would have to agree with what I've read so far in these general points, which is one AI is going to make the greatest probably changes within our lives. Not like from OpenAI and ChatGPT or Google's Bard, but in some boring organization or industry that somehow manages to realize great efficiencies through harnessing the power of AI. One of them I just read about was data centers that have managed to use AI in order to predict out their energy usage with AC due to weather patterns. Another one I think is financial institutions using AI in order to detect fraud, fraud, fraudulent transactions. These are all low hanging fruit, nothing fancy. But AI, once you implement it could have very great efficiency bounds. Putting that aside, which I think is something that is already happening and then will continue to happen, the other thing that I've read is that artificial intelligence is more artificial than it is intelligent. It could very well hallucinate and then produce something for you that even the people who wrote the code or trained the models have no idea why they did it that way. I think the example that I read recently was someone asked how to make a pizza but they told them to put glue on the pizza. Or I think Google was trying to make some socially liberal image generator, then people were asking it to generate images of our founding fathers and instead they were generating images of people of color as George Washington or clearly there was something happening there and it was hallucinating that was not anywhere in line with reality in the law. I've had people tell me before, they're like, oh yeah, I've been told to write this memo before and I've debated is it easier for me just to have ChatGPT write it and then I just fact check it or is it easier for me just to write it and then ensure that all the facts that I have in there are correct and 9 out of 10 times people are like, I'll just do the latter. Because the problem is with ChatGPT they'll conglomerate so many different facts and make a statement you don't understand how to disentangle it and determine what's been hallucinated and like what's real. Which I guess is my segue into I think AI will be able to, I think Once it's been trained to a certain level. And like you can check manually as a human when it has hallucinated, be very useful in diligence being able to pull out if you're like, give me all the change of control provisions or give me all these termination for conveniences. But, but it's going to need to get there. It's going to need one, a lot of different examples of how all of those are put together. And then two, you're still going to need a human being or somebody who knows what they're doing to be able to know what was put in and know what exactly should have been spit out. And not only check to see that what has been spit out should be narrowed because it's probably going to be over inclusive, but also know that it should have spit out other stuff that no one ever saw it spit out. So know where all the absences are, which I think is hard. Until you get there, you're still going to need some sort of human being in the background double checking all that work. It's going to be in the foreseeable future. The most realistic thing is hopefully you get to a point where you have lawyers who are trained well enough in AI that they can work well with a machine to get the job done. That's probably the most realistic thing right now. As opposed to thinking, oh, eventually we're just going to be able to just automate everything.

We're going to pick up the sequel to this interview a year later and it's just going to be all about the AI use cases you're currently using.

Oh, exactly. We'll be all like deep fakes. We'll just use some deep fake voices. Then afterwards you'll be like, which segments of the podcast are real? Which ones were fake?

It'll be the test. What's the craziest thing you've seen in M and A?

This is probably really basic. Maybe it just goes to show you the importance of lawyering, but also the limits of lawyering is that you as a lawyer may be able to go out and negotiate the most sophisticated or like acceptable or comprehensive solution to an issue which at the time took into consideration all of these different voices. But when it comes time to actually implementing it, if those people that you got the input from don't get the cross functional alignment across the organization later on, you may very well just end up realizing that what, whatever you negotiated for people to actually go out and plan, nobody will actually honor. I'm not saying that that necessarily immediately exposes you to great liability because you can view contracts as just more of the threat of litigation motivates people to work together. But it does go to show that as a lawyer you have to one, be really good at being a lawyer. But two, it's even more important or just as important to be really good at communicating and recognizing who who you need to communicate to to make sure that the paper is actually respected.

You got to give me an example, give me some little context to it.

I'm thinking back to when I did asset purchase deals or joint ventures, where conceptually speaking it's very simple or it's more straightforward to put these deals together. But practically speaking or logistically speaking, I think those are the most difficult to actually implement because the people that you're getting input from to say, for example, say this is the list of assets that we're going to bring over. And then we agreed that if anything's forgotten, we're going to work together to come up to somehow untangle it. Those people may not actually, at the end of the day, help be there in the postcards to help disentangle anything.

That's true. I get it. You can legal things up to the end of times, but then at the end of the day, it's really about people working together. And so this has been awesome conversation. You've helped me learn a lot, become a better M and a scientist, and thanks for taking the time with me.

Yeah, no, thank you for having me and this has been great.

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