Key Regulatory Considerations for M&A in the Current Market

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Good morning. Thanks for having me. Great to be here.

Hey, thanks for taking a break to have this conversation. Can we kick things off with a bit about your background?

I lead the corporate legal team here at LinkedIn. I've been here for about a little over a year at this point. Before that, I led the M and A Investments legal team at intel for about nine years. I'm originally from New York City and before I moved to California I was at the Blackstone Group doing private equity and debt deals and then in private practice before that.

So you're pretty well versed between working external capacity, private equity capacity, and then in house?

I try to be.

That's good. I'm hoping to learn a lot in terms of all the different exposure you've had can we kick things off with what's new in this market? What are the top key considerations for M and A?

Yeah, it's a timely topic to discuss, especially in this market. I'll talk about two in particular, but I'll focus on the latter. But in my meetings with the executives, with the corp dev team and with different M and A professionals, I think everybody's really focused on the macroeconomic economy. Where is inflation headed? How are the debt markets looking? Was the impact of interest rates on financing, things like that. That has definitely put a damper on a lot of M and A activity. I won't say all but a significant amount of M and A activity in particular over the past year. So I'm in a lot of meetings about how to address that in documentation, how to do the risk profile of a particular company in this market. But the reality is what this market has really done is stop a lot of traditional M and A acquisition analysis that we've done. M and A teams I'm sure have a lot of things on the back burner, but no one's really executing. The other thing that I'm really focused on in educating our executive team, educating our corp dev team, but also talking to different lawyers and regulators more generally is how to address the heightened regulatory and in particular antitrust scrutiny that we're seeing globally. So I'll focus on three particular regulators. In the US it's the FTC and the DOJ or the Federal Trade Commission and Department of Justice. In the EU it's the European Commission and in the UK it's the Competition and Markets Authority or the cma. All three of these regulators have really focused on big tech, in particular Microsoft and LinkedIn for example, and trying to slow down or outright stop some of their acquisition investment type activities with the premise that some of those types of acquisitions are presumptively anti competitive. We of course disagree with that. We think there's a lot of benefit to M and A both for small and for larger companies. But that's the environment that we're working through and there's a lot of things that we need to consider to get through it and to find solutions so that we can continue our acquisition activity.

We got two big themes. We have financing interest rates going up. That's been throwing some wrenches and different ways you need to reconsider your deal terms and then regulatory. And you specifically mentioned the Euro and you said cma, Competition and Markets Authority. That's probably where you've seen a lot of the regulatory challenges come from. And I don't know if it's just the DOJ and FTC or always been at it and that hasn't changed. Or have you seen changes in other markets as well?

I've definitely seen a market shift in more. I'll call it aggressive behavior, but I think others might call it more proactive behavior, depending on where you sit on that spectrum.

Fair enough.

In the US since the appointment in particular of Lina Khan to head up the FTC and Jonathan Kantor to head up the DOJ antitrust division, we've seen a lot more enforcement activity and we've seen a lot more aggressive rhetoric around big tech M and A in particular, again, under the auspices of protecting consumers and competition more generally. But the practical impact of that, again, is sort of twofold. And one I said is just it puts sort of a wet blanket, if you will, on the more traditional M and A activity that a lot of companies look at because you do need to be more worried about how the regulators might act. But secondly, from more of a legal perspective, or I could be more helpful perhaps, is it changes the dynamic of both the negotiation as well as what's included in the deal documentation. And I'll give you a couple examples I do want to address as well. One quick thing that you mentioned, the UKCMA and the EU or the European Commission in particular, there has also been an increase in the activity and the types of deals that those regulators are looking at, whereas it used to be you could focus on on the US in particular and hope that the EU and the UK would follow suit. That's not the case anymore. I would consider those three regulators again, the ftc, doj, the UK CMA, and the European Commission to be the big three in terms of antitrust regulators that folks need to keep in mind. And they're all taking much more aggressive postures against certain types of M and A. Your other question was, are there other jurisdictions that we're worried about? There are. I was a hardware before in semiconductors before I joined LinkedIn. China's a big player in the semiconductor and in the hardware market. So that's a different dynamic that needs to be navigated through. Not only the antitrust regulatory, but there's some significant geopolitical issues that you'd have to work through there. But the point being, what's front page, what's on the Wall Street Journal on a daily basis these days are those three regulators. And so going back, what am I counseling my clients and my team members in terms of addressing some of these regulatory Hurdles, and there's a bunch of things, but one of the main things that I'm really focused on is making sure that deal teams know that getting to approval will take much longer than historically has been the case. So if your deal is reportable, if it needs to go through an antitrust or regulatory filing, there used to be some form of regular cadence that you could expect in terms of you make your filing, you have a discussion with the regulators perhaps if necessary, and then you get your approval. Assuming you're not doing something anti competitive. That's no longer the case. Especially in particular given this new US Administration and the new heads of the FTC and the doj. We've been counseling teams, and I've said this in different panels as well, that if you have a reportable transaction, to expect anywhere from 12 to 18 months between signing and closing. Now, that's a long amount of time. Now, if you're the buyer, does the thesis, does the valuation still make sense if you have to wait a year? If you're the seller, which we've been on the sell side as well, how can you run your business if you have to wait 12 to 18 months before closing, how does that impact your employees? How does the risk of the deal not closing impact both the buyer and the seller? So that's been a really difficult thing to navigate through. I've also considered with different teams whether if there is significant regulatory scrutiny on a deal, would we consider litigating, going to court, which takes time, ton of money, a huge distraction, but would you go to court and litigate to get a deal through, Is that something you consider? This is something I would not have counseled just two years ago because again, I think that the cost benefit analysis just wouldn't pan out in this particular market. If you really want to get a deal done, if you have conviction that this is a deal that makes sense for you as a buyer or seller, how far are you willing to go and are you willing, for example, to litigate? And I think every company, every deal team needs to really consider whether that's something that makes sense.

This is all interesting stuff. The 12 to 18 month timeframe blows my mind and I want to walk through this. There's a few things you already touched on, right? How regulators are going to act. So maybe we can get a sense of what that thought process is like and then how that lends into the actual negotiations.

One thing I definitely don't want to come off as saying is that the litigators are anti deal necessarily. While I think that the litigators are focusing a lot on big tech M and A. I don't think there's a general aversion to acquisitions or deals generally, whether it be investments or carve outs, things like that that are pro competitive or have a consumer impact. Let me just start off by saying that as a little bit of a disclaimer, that's my legal hat speaking there. At the same time, this current set of regulators that I mentioned before are less predictable and seem less reliant on historical precedent when it comes to what sorts of things they will look at when monitoring and evaluating a transaction. That makes it very hard for deal teams, including myself, to counsel teams as to the likelihood of a deal being approved. You may have seen a number of articles recently about novel theories of harm that different regulators are considering. The best example of that would be the recent challenge by the FTC of the acquisition by Meta within Meta did go to the mats for that deal to get that pushed through. They felt that their deal was not anti competitive and ultimately Meta did prevail. At the same time, I would say that the FTC considers that deal a win because their so called novel theory of harm, Meta moving into the VR space, for example, even though the VR space is not really fully established that the potential for a company like Meta to dominate that market way down the line was enough for them to try to block that deal. To go back to what I was saying, what that does for us is it makes it hard for attorneys for advisors of antitrust and regulators in particular to figure out what it is that these regulators are most worried about. I will say as well, there's probably a little bit of a political and sometimes geopolitical angle that all of these regulators are playing again, something that we can't control. But it used to be that as attorneys we could tell people based off of the past 10 years, based off of the past 20 years of precedent, here's what we expect the FTC, the DOJ, to say. We live in a different world now. It's much more difficult to gauge how the ftc, how the doj, how any regulator will gauge a transaction. In particular, if you're in big tech or if you're in a hot market like AI or something like that, unpredictability.

Is a big challenge. And that makes it tough to really gauge how regulators are going to act. Talk me through negotiations. I'm trying to imagine my head that me and you are working on a deal together. Now all of a sudden, after I put all this thought into sizable check you're going to pay me for my company. You bring up this fact that, hey, by the way, since we're big tech regulators going to probably put us through this process, and you're telling me now it's going to be 12 to 18 months between sign and close. I'm like, what the hell? Because I'm going to probably double the size of our company between that time through negotiations.

It's a great question, bunch of different pieces of advice that I've given and that I've gotten from different advisors, but there's no right answer. This is new ground for all of us. But I'll tell you, practically speaking of what we're seeing in the market, the first is you're seeing a lot of the antitrust and regulatory provisions that are typically negotiated way down the line in definitive documentation, the purchase agreement or something like that. Those types of provisions, and we'll go through them, are being moved up way sooner as soon as the indication of interest or the letter of intent. So recall that the letter of intent, the indication of interest usually is, look, we've got financing for the deal, we want to do the deal, the board of directors wants to do the deal, and here's how much we're going to give you. That's usually all it is, right? It's a two page document, maybe even less sometimes. Now we're seeing indications of interest and letters of intent that also include things like what's the break fee going to be if you don't get regulatory clearance for this? What sorts of covenants are we going to negotiate for the interim period? Because 12 to 18 months is a long time and typically a buyer is going to want to have some level of control over the business of the company between the sign and close period. If I'm the seller, it's a reasonable ask, obviously. Like you can't tell me what to do for 12 to 18 months. That's crazy. And to your point, if it's a fast growing business, if in fact you're able to double your business or in any meaningful way in 12 to 18 months, why would you ever agree to that? And so what it's done is front load a lot of conversations that again, you typically have way down the line. This is not the how much am I going to give you? How am I going to treat your executives type thing. This is deep in the weeds. If the so called hits the fan, what are we going to do? How much is the buyer going to pay the seller? All that stuff gets moved up way sooner in the process. The problem is that it takes time. You're having negotiations where both sides have a significant asymmetry of information. We're not sure what makes sense. As a buyer, sellers usually don't know what the buyer, what their profile really looks like, so they can't assess the risk of a regulatory rejection. And sometimes it's just not worth it. You've seen a lot of deals die way earlier on in the process. I'll say one thing though, and one thing that I've been counseling our executives on and other folks that we've worked with, which is if you believe a deal makes sense, if you have true conviction that the synergies make sense, that the team that you're acquiring could really contribute directly to the bottom line, you should do the deal. You should try what it's done is put a lens on the story. And I say that because it's a story you're going to have to tell. If we're buyer, you're going to tell the story to the seller to make sure the seller knows that you're convinced that this deal makes sense. And here's why. We're going to treat you guys well. But that's the same story you're going to need to tell the regulators, the antitrust authorities as to why this deal makes sense not only for the buyer and the seller, but for the market, for the consumer. All of that stuff again, just gets moved up way earlier into the process.

How do I manage the whole value with that time frame? You're giving me this a hundred million dollar offer, but is it some kind of variable that this may change based on our last quarter revenues? What does that look like?

You're spot on. I'm hesitating because I feel like I would have had a different answer for you just two years ago. Literally just two years ago. Height of the M&A market 2021. It was much more happy go lucky maybe. But I would say that the market has seen a slight increase in the use certain callers or triggers that can either impact the purchase price upward or downward if you get to a certain amount of time. So for example, if you do expect, call it a 6 to 12 month regulatory period for review and approval. You could say the seller may say, look, if after six months we've doubled to your example, we doubled our revenue, Your offer for $100 million no longer makes sense. We want a little bit of a bump so you could negotiate that into the deal. That's something for sure that you could Do. I will say, and I'm speaking now not as a corporate dev person, not as a pure business person, but as a lawyer, that these are usually terrible ideas. Inevitably they lead to litigation or claims or some form of conflict, mainly because the deal hasn't closed. The buyer wants to make sure that the seller's not doing something unnatural just to achieve an increase in purchase price. You're working towards a particular metric as opposed to the business as a whole. And then the buyer, a lot of times, if they're in fact going to increase the price, they want to get into the weeds as to how and why your revenue doubled to make sure they're not inheriting something. Again, unnatural, untoward, but we're seeing a slight increase in that just to compensate for the increased regulatory period, for the most part. I still wouldn't counsel doing something like that. I think you're creating a problem for yourself.

It's a good example why it's important to have good attorneys in your deal. That's the problem I have. I always leave attorneys out and then they tell me all the things I screwed up in the negotiations. And I'm still learning that lesson. Those of you listening, learn it early. Get the attorney on page early. Take them out for drinks once in a while. Usually have a nice liquor cabinet in their office. Does that work in the corporate too? Is there a corporate liquor cabinet?

I can neither confirm nor deny, but.

That'S why we have external. Because they do.

Exactly. Yeah. That's much better that way.

We'll talk more on that. Any other tips on negotiating these transactions with lingering regulatory potential?

One of the bigger things that. And it's not so much a legal issue, but one of the things both the buyer and seller need to get a handle of is how the market will react to a particular transaction in connection with how the regulators, how the antitrust authorities may consider your deal. You also need to consider how your competitors may consider a particular deal, how your customers and how your other consumers may consider your deal. Because for transactions that are reportable, the regulators often do turn to the broader market to get their opinion on whether a transaction makes sense or why it might not make sense. Thankfully, I think for the most part, regulators will discount the opinion of your competitors when assessing these types of antitrust concerns. That said, they still listen, of course.

Do they reach out to them or is it.

It's both. A lot of competitors will proactively, in fact, reach out to any number of regulators, government officials, to voice concerns at times. There are suppliers, customers, for example, that will reach out to voice their support for these types of transactions. So there's a little bit of both. Probably more of the competitors raising a red flag type thing.

Yeah, I was going to say because if, you know, our deal doesn't work out, you're buying my competitor. And I could do that, just be a pain in the ass, report you to everybody, doj, ftc, and. And they'd have to do some little thing. Give me a response.

Exactly. Again, if you had asked me this question two years ago, I would discount this and I would say we should definitely think about this as we're thinking about our broader antitrust strategy these days. What I'm counseling, especially for some of these larger transactions that are more transformative, more game changing, get ahead of it, get smart about it. Because God forbid, for example, the deal leaks, haven't signed the deal, your competitor gets wind of it, competitor goes crying to the regulators, and you're in a whole world of hurt then, and you're not prepared to answer it. Being proactive, getting the right folks in line internally, that's really important. So funny enough, as I say this, I was in a panel recently where we talked about what does it mean to be proactive. Being proactive to some people means bringing in more of the experts so that we have, for example, a comms team to speak to it. The problem with that, as you probably know, for big M and A transactions, is you want to keep the tent tight. You can't let everybody and their mother know, however helpful that might be down the line. And it is important from a legal confidentiality perspective that you will want to try to bring in more folks than perhaps you have historically to prepare for things like this. But you still got to keep the tent really tight about who knows and why they need to know.

There's some good tips here. We talked through the negotiations component, the timeframe. There was the part you mentioned actual, like litigation. Maybe things didn't go in your favor and your deal gets shot down and then you sue the doj, ftc, everybody.

Yeah.

How does that work?

So there are different options depending on the jurisdiction that you're focused on. In the US you are allowed to, to litigate in the event that the FTC or the DOJ rejects your deal. In other words, you're allowed to counter the narrative, submit evidence and go to court. The problem, however, is that there are certain jurisdictions where you cannot litigate, where you cannot make a claim against a finding that a deal is, for whatever reason, anti competitive or they have it the best example is the UK's competition and markets Authority. They are the judge, jury and executioner of all anti competitive deals. You can appeal the UK CMA's decision on procedural grounds, meaning if the process was not followed properly. But that's not the same as having a full litigation where you can talk about everything and have more of an opinion as to why you think a deal should go through. I'm not here to comment on whether that makes sense. There are reasons they chose to do that. In particular post Brexit, they chose to structure their competition's authority in a particular way to give them more authority, to give them more power. But most big deals have some nexus to the uk, meaning they either have customers, they have revenue, they have something that will trigger a filing, if not the jurisdiction directly of the UK cma. And so it's hard to do that, you know, to try to avoid the UK altogether. It's a tough thing. And you can litigate in other jurisdictions in the EU as well. The main issue, and it goes beyond just having conviction and time, it's really a question of whether you need a deal so much that you're willing to pay a premium, meaning a premium to the stock price. For example, if it's a public deal, you're willing to pay litigation fees and you're willing to wait the time it takes to get regulatory approval, litigation through, and then whatever else needs to happen in the end to get a deal done. There are deals that make sense even in those extended timelines. But I venture for most people, for most executive teams, there are very few, in fact, that would make sense for their company.

Is there an average hit rate on winning against one of these big regulators?

In the us The FTC and DOJ in the past couple of years have litigated a couple. No, sorry. I want to say it's less than 10 deals and I don't have the numbers in front of me. But they've definitely litigated a few deals and they have lost most of those deals. I think they've only won one or two. But the fear of going to litigation can be enough to thwart a lot of deals from the get go. If you ask most people, hey, does this deal make sense if we had to spend a hundred billion dollars on litigation fees, wait a year and a half, do you still want to do this deal? Most deal makers will say probably not. And I will also say the ftc, the doj, they're not stupid. They're made up of very smart professionals who really know their arenas. And part of what they're trying to do, as I alluded to earlier, is establish novel theories of harm. So even if they ultimately lose the case, they are bringing to market, they are bringing to public these novel theories of harm that they will likely use for future litigation and future claims. Let me say one thing there, if it's not obvious. One of the things that a lot of these regulators are trying to do is avoid the next Facebook Instagram acquisition, which I think if you ask most regulators, whether it be in the US or globally, that was a deal that they felt they should have blocked. Again, I'm not here to comment on whether it should have been blocked, but that is always referenced as the deal that should not have happened for whatever reason.

Which deals again?

Facebook Instagram and Facebook WhatsApp deals.

Yeah, I mean, there are big deals. And we didn't hear anything.

Yeah, exactly. We didn't hear anything. Exactly.

Okay. So you got to have a high level of certainty to be able to go after one of the big regulators. And there's a lot of considerations about the time and expense, which may deter. And that's why we don't have a high count of people actually do that.

Yeah, exactly.

I want to address the big elephant in the room about is competitive M and A bad. But I want to put it out there. I really been trying to get a view from the other side of the table. We had an official response from Linda Khan that she declined an interview. So if anybody listening to this podcast has some connections with any of these regulators that we've discussed, I'm sending an open invitation because I know what we're going to talk about is going to seem very biased. I want to put that out there that I am more than welcoming to get the view from the other side because there's things you can always learn. And plus, that's how you win debates. You learn the other side's perspective first and then you can fill in the gaps accordingly. Or they're more inclined to listen to you at that point. So if anybody has a connection, reach out to me, let me know. But let's talk about this. Is it really bad? You've done enough of these deals. You gotta have a view on this.

I do. And to be fair, it's probably going to come off as very biased.

Exactly. That's the whole point. That's why I put my own disclaimer. I'm welcoming the other view.

It's a great question that I feel like every M and a professional should constantly ask themselves and let Me try to espouse the opinion of the regulators for one quick second because I think there are and if Lita Khan or anyone on staff heard this, they'd probably just poo poo all over my opinion. But I look at two things that they're very focused on. One was something that when I was at intel in particular, we were very cognizant that the regulators were concerned about, which is the so called killer acquisition theory. And not to pick on Meta Facebook, but they were one of the examples of folks that were doing so called killer acquisitions. The idea being that before a small startup or a smaller company comes up with technology, comes up with a product line or a business that could compete with the core business of a large tech company, in this case, they would buy that company, they would kill it. Either kill it internally, bury it, or just loop them in into their existing offerings, thereby eliminating any future competition. I think there's some credence to that. I think there's some credence to that. At the same time, these smaller companies more often than not do not want to become the next Meta or Google. That's not their goal. Their goal in fact is to be acquired by by another company or by fund or pebc. That's their goal and that's their stated goal. Not everybody can become the next Microsoft. It seems like such an obvious statement. And so there are folks looking to find liquidity opportunities through acquisition. I think it's very important that we maintain that funnel because that's how innovation happens. If folks thought that they'd have to struggle for 20 plus years at their company, I don't think we'd have as much innovation these days. Again, I get the killer acquisition theory, but I also need to acknowledge the need to have that funnel. Whether you call it liquidity or other opportunity for these startups, right. For people to be incented, to start companies and to make quicker money than 20 plus years.

I got point one that this is the American dream.

Yeah.

Build a startup, sell it for Vuku bucks and buy a mansion Lambo jet and call it a day. That's the American dream. We should foster that. That's what's driving entrepreneurs all this innovation, technology fundamentally. Also the capital, the private equity firms that are sponsoring a lot of this, the VCs as well, are dumping a bunch of bucks with anticipation that they're going to get an exit on this.

Absolutely.

The capital are managing for large institutions. All of that is espoused around an investment thesis that invests money in, gets a return back out puts it back in shareholders hands, everybody's happy, it's a win. That's the big fundamental driver.1 now the consumers that get screwed when all these acquisitions happen because I think that's part of the position here. Right. My cell phone bill just like tripled when the T mobile deal got announced.

When Ryan Reynolds became more of a billionaire.

Yeah, mobile. That's like the big position that they hold to get the public advocacy of why they're scrutinizing M and A is because we're protecting the consumers we're looking at like FTC particularly.

Yeah, I think the FTC intent is correct that they do need to protect the individual consumers and some of the smaller businesses that are impacted by big mna. My personal opinion is that there are better ways to do that rather than, I'm close to this obviously, rather than what seems to me sometimes a blanket prohibition against big tech M and A. I don't think that's the right tool to use. I think there are a myriad of different tools and policies, laws and regulations that they could pass to foster innovation if that's what they're looking for to protect consumers without necessarily just chopping off the funnel that is M&A.

It's a fair point, but it seems easier to do than trying to create some rules and enforce it.

The sexier front page story for the ftc, for the DOJ and some of these regulators is that they're stopping a big deal because it and they're saving competition that way. And I get that, that there is value and there's need for that. But if you get down to it, if the core for example is expanding innovation, let's say that's one of their central tenets. There's a whole host of things that they could be doing right. There could be tax incentives, there could be grants, there's a whole bunch of stuff they could be doing to increase innovation. Again rather than just trying to stop certain types of M and A.

How have you seen it pan out and really impact customers negatively?

I would say it hasn't that much and I'm not just saying this again because I'm biased but throughout my career, whether it be in private practice or at any of my in house jobs, I will say that a lot of my transactions led to the acquired company being able to offer their product to a larger audience. Oftentimes we were able to lower the cost of goods sold, margins increased that way. The reason being that the bigger companies usually have better supply chain, better vendor agreements, things like that. To push down the cost for the smaller companies that don't have those same synergies. For the most part, we were able to in fact better proliferate the product of the acquired company. That said, not all MA works out. There were also deals where the company and the business that we acquired probably didn't do as well as they had hoped. I would say that's not due to any particular anti competitive issue. It was really the more mundane small company being suffocated by the bigger company type story. The integration wasn't as smooth as it could have been. The teams the executives that transitioned were unhappy working for a larger company. There's a lot of that. Not all M and A works out anyway. I think the hit rate is just around 60% of deals actually hitting their valuation thesis.

Fundamentally, these deals start with a vision to create value. Acknowledging you have your respected way of delivering value to your customers. We have our respected way of delivering value to our customers. As a combined organization. Let's collaboratively work together and see how are we going to improve that ability to deliver value for our customers. That's what it seems like is the basis of doing deals. And yes, sometimes integration. I think that's the biggest thing that's happening in the industry right now as we're maturing our thinking around how to integrate companies and making that better. Which leads me to the employees. Is there any considerations around that? Because I feel like they're the ones that really have the biggest challenge to get impacted. But is there any considerations when we think about all these regulations around employees of the companies?

Absolutely. We talk about the 12 to 18 month regulatory waiting period and the impact on the business. How do you run a business? But for both the executives and the rank and file employees, they've got this cloud over their heads until the deal actually closes. The deal documentation has a set of covenants that restrict and permit certain activities of the seller, which makes it difficult for them to run their everyday business that they were used to before signing. It's tough. I think the way to address it is to be very transparent with the selling company and their employees as to what's happening. It should be that the selling company, the selling executive team, that sort of explains, look, we might be in here, you know, for the long haul, but we think it's the right opportunity for us. Here's why, and in the end you guys are going to get compensated appropriately, all that stuff. But it's been tough and I will say I'm aware of a couple deals in the market Right now where we said, look, not we, but the buyer said, I don't think the selling team, which is composed of a bunch of, you know, serial entrepreneurs, is going to wait that long for this deal to close. They love to, to build, they love to create new businesses. So if we have to wait 12, 18 months for this deal to close, we're going to lose the key talent that we want. The practical impact in the end is that a lot of deals that historically would have at least got to sign, have not even gotten close to sign.

Yeah, a lot of little thoughts around this, but it is interesting that this does create a lot of additional challenges, but mainly a lot of stress for a lot of people dealing already with a lot of complexity and change that they're going to endure, but prolonging it and adding on to it. So not a healthy thing, which is our stated case here. Again, if anybody knows anybody at any of the regulatory institutions we mentioned, Open Invitation would love to welcome them to the podcast and have a conversation to get a deeper perspective from the biases we didn't talk about. This is obviously a huge challenge for the regulatory issues, but reality is that only impacts a rather small fraction of the total M and A deals. What are the other deal killers that you see more likely to be encountered in M and A?

For the more traditional M and A transaction that may or may not be reportable, call it the sub billion, sub half a billion deal, where you're buying, I don't know, established startup, series B, Series C, they've got revenue, maybe a little bit of revenue, they've got customers, and you're buying both the technology and the business. For me, what I'm continuing to see in the market is issues around the intellectual property of that company. And what do I mean by that? A lot of times you have companies that are really focused on all the things I mentioned, generating revenue, growing the business, and they forget to focus on ensuring things like ownership, registration of IP trademarks, patents, copyrights, algorithms, all these things. That's a really key thing that, for example, when I'm doing my diligence on the legal side, that's probably the first thing I'm looking at. It's not always intuitive and more often than not it's not straightforward. And I'll give you a couple, I'll call them orange flags. Not necessarily red flags, but orange flags to look out for both in the US and abroad. A lot of times you have folks go through university or college in the US for example, and they'll get funding from their university, which is great. Good on them to have gotten funding from a big public institution. And they go from there. They go, they do really well, they get a product, they get customers. But they forget that because they took funding from a public research institution, for example, that public research institution or university often has ownership or some claim to the intellectual property that was developed using their funds. Another more extreme example is in Israel they have what's called the Israeli Innovation Authority. It used to be called the Office of Chief Scientists for folks that may be familiar. They also issue very frequently in fact grants and other funds to folks that are coming out of university or starting up the business. And again, because they were extending these funds, the Israeli Innovation Authority has a claim to certain of the IP and certain of the ownership of the technology that was developed. These are for me, again, they're orange flags. Because what we're seeing more often, or I guess more often than you might expect, is that founders and executives from selling teams don't always realize that their IP is encumbered by these liens by these government ownership claims. They're relatively easy to clean up. Usually it just takes the money and there's a negotiation that takes some time. But for technology companies in particular, especially companies that were founded when folks were right out of college or they dropped out of college and they created a startup from there, we're seeing this more often again than you might think. And it surprises me sometimes that some buy side clients forget to check on these types of things. From a practical perspective, what I would say is when you're doing diligence, don't just take the word of the founders and the executives and the CTO that they own all their ip, that they've developed it all in house. They may have done all the necessary grunt work, but if they took funds or any sort of grant from a public institution, that's something that buyers should diligence and make sure they clean up as necessary.

I like how you went to ip. Of all the things in my head, I was thinking tax employee, what do you liabilities are you claiming in the customer contracts? But IP is the one that I didn't even think of right off the bat. You're right. I want to get an understanding of where exactly are the deal breakers in there. So for example, we have a whole series of trademarks and I know we got our exclusive trademarks and we have a couple that we got supplementals and we're now appealing to get the exclusive on that. That a big deal, our main brand. And we're still petitioning for that. Would that be a deal killer or is that. I don't know.

Probably not. I will say that for example, if you're buying a company with a trademark as valuable, say as Coke, something like a, like a name brand that everyone knows globally, then it might be more of a, again, orange ish, reddish flag, but still not a true deal killer. Where this really becomes more of an issue is in fact in the pure technology space when you're developing code or patents. Because in those situations it isn't always clear who contributed to that ip. You can't always just cut it up.

I was going to get into that one too, because a lot of the open source, Right, you get frowned on when you have a lot of open source in your tech stack. But when I look at this software landscape and the direction it's going, everything is becoming a whole series of different tech stacks. Open source comes in play and it shapes and form and then we have all these no code platforms that are emerging and low code platforms where you're just leveraging so many different things. And I'm not keeping track of that. If I got to call Mark every time and hey, I'm about to sign up for this platform, you need to read through the terms of use and make sure that we're protected on this. No, we just start building it. So we want to create a startup over the weekend and get to market.

Yeah.

Where does the deals break in those situations? Like I said, given where it's going, I'm just like, how do you deal with it? Between I get the, you know, 10 years ago where it was really specific, it's now they don't have IP on this stuff, but I feel like things are getting really blurry.

It absolutely is. I do not have an answer for you on this one. We've tried. We as a legal team, in every job that I've had, have really tried to grasp the enormity of this issue. And I'll say one further complicating factor, in fact is you have companies today in particular like OpenAI Genai and the code that these companies are using will be deployed to different customers, some of which is open source, some of which is public, but some of which is very proprietary. I think that is a further complication as folks try to integrate this into their own code stack. So it's a long way of saying it's exciting for me as a lawyer, but I have zero answers at this point as to where this is going to end up. It's super complicated.

Finally, I stumped you on something that was my whole goal. We can wrap it up here pretty soon now since we got to this point. You're right. It's going to be really interesting to see what becomes market for, for all of this emerging forms and utilization of technology and data sets.

I'll give you one example of why. Again, it's exciting but also terrifying for an attorney in particular. It used to be years ago that everyone was really focused on patents protecting your patents. This is mine. You can't touch anything that looks like my invention. All of a sudden you're seeing a transition, slight transition, depending on the industry obviously that you're in. But you're seeing a slight transition away from patents and how valuable they are to any particular company. And the reason for that is because a lot of these standards in the patent world, for example, are more open. They're proliferated in different technologies, they're just not as proprietary, they're not as valuable as a result. And the question that I have for a lot of real IP and tech trans attorneys and technologists, is that also happening? This is your point in software and code? Because it seems like it is. And if it is happening, does any of this stuff that we're doing on the code side and protecting it, protecting our algorithms, protecting our code, does that become less important? And the interesting thing, and again, I don't have an answer, the interesting thing is there are a lot of technologists that suggest it makes it more important because as things get muddier, you need to make sure that you know it's yours. It's never as easy as just putting a container around your stuff. It's infected, it's included in so many other things. So it'll be an interesting, they'll call it four years, four or five years to see where we end up. Especially as the Jenny I stuff really starts to kick off.

Can you give me an example of a deal that broke around, something IP related? I just want to get a sense of the real nature of when you actually break the deal around ip.

I unfortunately have several examples, but going back to my patent example, the main one is folks, did not the selling company did not realize that they did not have adequate protection over their technology. And so what had happened was picture a pizza and there are eight slices to that pizza and they thought all eight slices of their pizza was theirs. But you need the entire pizza to run the product. Turned out half of that pizza was actually owned by somebody else. There was third party IP that was included and for whatever reason became much more incorporated and much more utilized in the end product than they knew. They weren't the smartest folks, I will say they weren't really minding the shop as well as they should have. But through the years as they started to commercialize their product, they realized, oh actually, or we realized actually that most of their technology and the key technology that was providing value to their customers was actually a third party technology that was licensed in to their product. And as we dug into it, we said we're not actually buying your stuff. We're actually going to have to continue paying licensing fees to all these other guys and paying you premium for your product. We could probably do the same without buying it, just licensing the product. That story came up at least a half dozen times on different transactions I've worked on.

That makes sense. Especially if it's that key component. The secret sauce is that technology and that's what we do in tech, we repurpose in different areas. And you want to have rights to it, especially if that's the secret sauce.

Exactly. Because it was third party to your point, we couldn't manipulate it any further after that. So you're right. Without paying a whole ton of money.

That was a good one. I don't know if we have any other like parting advice or words around our topic and dealing with regulators or being mindful of your IP risk.

There's one thing that I will counsel again, this is from a pure lawyer's perspective, but one thing I'll counsel for executive teams, for deal teams and really for any team that is working on a potential acquisition and that is document ig. So when you have a deal that's reportable to the regulators, you need to make a filing with each of those regulators and the filing also requires you to submit a whole host of documents, including internal documents around your analysis of the deal. What can very easily kill a deal. I won't give any examples now, but there are plenty in the market as recently as in the past five years. What you never want to include in your internal documentation, by the way, that includes your emails, your non privileged emails to your buddy down the hall is something that could be deemed anti competitive or something that is disparaging of the other side of the regulators, which I've also seen anything that could force a regulator to react and block a deal. So a couple examples are that we want to buy them because they'll be our biggest competitor in the next five years or we want to buy their technology because it's better than Ours. We don't want them to compete with us. Or we should buy this company despite the fact that they are misogynistic, sexist founders. All of those things. You probably shouldn't buy that company anyway, by the way. But these. Making sure that your documentation, which again, ends up being pulled and submitted to the regulators is clean or as clean as possible. I suppose that's going to be key, in particular, given this current regulatory environment.

When you say that, those things I can imagine coming up in internal correspondence. Our Slack channels. Right. How is that going to end up being visible to the regulators?

You will have a legal team that will go into your internal systems and pull all of that information, whether it be a Slack channel, a teams channel, you name it, emails, for sure. They'll look through your computer for anything that could be relevant to the acquisition and the acquisition story in particular. Lawyers will typically go through that. There's a process of document review and document retention. And then in coordination with usually outside counsel who are experts on this, a submission is made that includes those. All of that stuff. It's a massive stack.

How the hell do I mitigate that risk? I gotta work with HR and have a formal announcement of. Don't put stupid things in email or Slack.

And putting aside regulatory and antitrust risk. I think as an attorney, and I'm sure you've seen this as well. Yeah. Don't put anything in an email, Slack, et cetera, that you wouldn't want to be included in the front page of the Wall Street Journal. I think that's just good advice for everybody.

All right. Writing this one down. Don't put anything. I won't mind the front page or mom to read. I'm adding that on there.

I like that better. Yeah.

Before we wrap up, can you tell me what's the craziest thing you've seen in M and A?

One of my favorite stories is from when I was a junior associate in New York City, when M and A was still done in person. You'd be on the 30th floor of a building in midtown Manhattan. You had one big conference room where the main negotiation was and a bunch of ancillary breakout rooms around that big conference. And there's this one particular deal. We were probably there for a week. Hadn't slept, hadn't showered. Everybody was just awful. Everybody's in suits back in the day, too, so it was really uncomfortable. Probably the third day again, just nonstop negotiations and yelling. We took a break. We went to our breakout room, and then the partner from the other side mistakenly walked into our breakout room instead and just opened the door, barged in and starts ranting about the deal, not realizing he's in the wrong breakout room. And he talks about how he starts to disparage our legal team in particular and calling us all manner of expletives. But then he also says we should just cave. This is a shit product. Sorry, this is a crap product anyway. And we couldn't believe that he said that to us. A room full of lawyers. Our client was in the room as well. He looked up, he realized he was in the wrong room and just ran out the door. Just ran out the door. It changed the tenor of the negotiations pretty significantly. We ended up probably signing that same night when we realized that it was just sort of all for show just to sort of extract some additional dollars from us. It wasn't a legal issue, it wasn't a negotiation per se. He just went to the wrong room and said the wrong thing to the wrong people. And I went home after that, which is nice. That's one of my favorite stories because it's something that will never happen today. These in person meetings don't happen as much these days.

That is hilarious. There's a lot of egos driving that.

A lot of egos. Oh yeah.

Thank you, Mark. This has been great. I'm glad you took the time to have this conversation. I learned a lot about all these regulatory bodies in the process and IP risk. Thank you.

Thank you for the time. Really appreciate it.

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