Lessons from the Trenches: Mastering Tech M&A, Integration, and Carve-Out Strategies Part 1

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LinkedIn and follow MNA Science. I'm your host, Kisan Patel, Founder and CEO at Deal Room and Chief Scientist at M and A Science. Today we're kicking off a special two part series with Dr. Amit Manga, founder and CEO of Sarapoint, a strategic advisory firm that focuses on value creation, growth initiatives, M and A capital advisory, and governance for public and private companies. Amit has previously worked as an investment banker, venture capitalist and founded a vertical market software company. Over the past two decades, he's been a trusted advisor to the boards and management teams of some of Canada's largest high profile public and private companies, assisting them with equity and debt financings and M and A. In part one, we'll cover key lessons in corporate M and A, from balancing strategies to managing pipelines and staying aligned with the board directives. In part two, we'll dive into software evaluation trends and tackling carve outs.

Amit, how are you doing today?

I'm doing great, Kasan. So nice to be on this podcast with you and incredible all the great work that you've been doing. I've learned a lot from the previous podcast as well.

Hey, thank you.

And we're here a lot in Toronto.

Amit, can we kick things off a little bit about your background?

I grew up in India. I did my engineering, mechanical engineering, came to Canada to do my PhD two decades ago in artificial intelligence. So I was maybe two decades too early. And then I went into consulting. Following that, I actually started a software company, vertical market software for a company focused on higher education. Sold it, came back to Canada, was a venture capitalist for three and a half years focusing on life sciences companies, and then spent two decades in investment banking focusing on technology companies. And, and now I have my own M and A advisory firm where I basically work with the C level executives and the boards.

PhD in engineering consulting, founder of tech company VC, IB, some corporate M and A. The engineering degree wasn't enough.

Exactly. But having said that, a lot of my PhD work is getting cited now, so I'm tempted to start an AI company.

I'm always fascinated by those with engineering backgrounds and those are the ones that are dangerous in the M and A field. I think you know why.

It prepares you for a lot of uncertain things where engineers are very good at scenario planning and designing stuff. And as we know, M and A, as you say, is a science. You got to be kind of looking at all different things that could go wrong and then see how you can mitigate them. So the engineering training is definitely helpful.

Just looking at your whole career, all the deals you've worked on from pretty.

Much every angle, what are the key.

Lessons from the trenches that you think are important for anybody in corporate M.

And A to know? I'm a big believer of starting with first principles. What is a strategic rationale for why are you doing this acquisition? Is that you want to go into a new market. So is it market driven? We're going to talk about technology companies. That's where I've spent most of my time. Is it a strategic technology that you want to acquire, for example? So is that what's driving it? Or in some cases is it people? So we are seeing a Lot of enterprise software companies today, they're looking at AI companies. So in some cases the products are not there yet, but they definitely want to acquire the team. So that really is, I feel, what drives that. And then of course it has to make financial sense. So I think that's super critical. And then let's talk about corporate M and A. And corporate M and A is very important because for a corporation it's all about growth. They have organic growth strategy and then M and A kicks in when it comes to inorganic growth strategy. So sitting down, understanding what products they have today, how do you complement that through M and A, that becomes very critical. Sitting down with the board understanding. For example, in some cases when we have spent time with the corporate M and A teams, the boards have said, listen, we've decided that we have a very good footprint in North America. We, we want to expand into Europe or we want to expand into Asia, for example. And then in that situation, what we're looking at is basically a corporate M and A strategy with a good direction from the board and proactively looking at targets in that area. I'm a big believer of getting the buy in. If you do find some interesting acquisitions for a corporation starting to do a little bit of homework to make sure that the integration goes well. That's how I would position some of the lessons and also things to watch out for when you're doing corporate M.

And A first principles, strategic rationale, really driving into the why do M and A. And you also referenced the broader corporate strategy, referencing M and A as a tool to use against the broader corporate strategy. And then the game plan execute to have that level of focus on integration.

In our discussion today, you're going to see I'm going to be using no surprises. So what you want to do is especially in a corporate M and A scenario, keep aligned with the board. So if board says, hey, we should be looking at an expansion into Asia or a specific country, let's say in Europe and UK and stuff like that, want to make sure that you basically are executing on that plan and not going a little bit off strategy kind of a thing. So no surprises, keep the communication lines open even with the business units over time.

I don't know why I just want to challenge you on this right off the bat. Because I'm Indian, I'm just inherently cheap.

And I struggle with this because I.

Understand and done a lot of these interviews and you really understand the value of being cohesive to your strategy and communicating it. But then I'm also Deeply rooted in being very opportunistic. If I see a good deal, it's a good deal. Why can't I pursue these deals? But it looks like it's a 50 cent on a dollar play.

I'm happy to introduce the concept of what I call proactive strategy and then the reactive strategy.

Let's talk about that.

Definitely you want to have a proactive strategy. You want to keep your team busy. You want to basically make sure that they're tracking your ideal targets. And we might be tracking some of these ideal targets and say they're not ready yet or they just did a. If it's a private company, oh, they just did a Financing. These guys are valued at $500 million. It's not going to go anywhere. It's not accretive for us and things like that. But there could be some catalyst or some event that happens. And all of a sudden now what you do is that target becomes available, there could be some issue with one of their product lines. All of a sudden they need to basically sell the asset. So the key is manage your funnel and at the same time be ready to pounce on any of these opportunities. And actually I did that all the time. I would say, what are some of the aspirational companies that you want to go after? We'll continue to track them. And then all of a sudden someone has to carve out a piece because of the regulatory issues. Two big companies are emerging and there, if you can move fast, you basically win. You basically walk in, you say, listen, fully financed offer, ready to close in 45 days, 45 to 60 days. And the guys are like perfect. And at that point, if you engage with these people, you can basically say, okay, I want, now I basically want an exclusivity. You lock them in and you move fast. So you're absolutely right. You have a proactive approach and then you have a team that is willing to be organized to take advantage of these opportunities as well.

Well, I was thinking of the same one, your carve out example, which tend to be pretty unique, complicated, but they're not always going to be right in your core. You're proactively building a pipeline that aligns with your strategy. But it sounds like there's obviously stuff.

That comes to you exactly a day in the life of a corporate development team is you always are getting inbounds from bankers. Couple of them are like, hey, have you thought of this? And then you ask them, do you have a mandate? Not really, but we are just like testing the market in some Cases there's this active sell site going on. So you said, hey, we're running a process. Are you interested? Yes. Send us a teaser. We get the teaser, we basically look at it. Are you interested? Yes. Sign the NDA, get the sim, and kind of move forward. So you always will have that piece. And then you also are doing your second job, which is, these are the things that I want to buy. Continue to track those companies. Continue to track their financings. Continue to track. Oh, wait a minute, they're laying off people. Does that mean trouble? That's the perfect time to have a conversation with their investor or with their chairman of the board and make that move. So it's always. You're tracking stuff.

How do you rate this in your pipeline?

You would rate that as actionable. Obviously you rate that as actionable based on the information that's available to you at that time. So you might say these guys just raised $50 million. That gives them another two years of Runway. There's no way these guys are gonna trade. But something could happen all of a sudden. It's now actionable. So actionable. Non actionable. 6 months, 12 months, 18 months, 24 months.

Okay, so you're looking for indicators to tag them as actionable.

Exactly, exactly.

Otherwise they're in your pipeline. But in actionable.

Or you track them, you're not intensifying your approach yet. And also in some cases, the companies might be valued too high, so it's premature to approach them.

What about these things that aren't really in the corporate strategy that are out of the scope, and the ones I did fall more into that opportunistic.

There is a separate bucket of. Have you thought of this idea bucket? Yeah, the idea bucket. And again, it shouldn't be a totally different business. Obviously, in some cases people might say there are companies that basically are acquiring companies for cash flow, for example, and they are diversified companies. They have certain metrics around, financial metrics that they want to basically track their shareholders, buy their stock because they want to get a certain kind of a dividend.

Their corporate strategy is just purely cash flow financially.

Exactly. Or it's a financial driven. So they don't care if you're in different industries and so on. What happens is over time, you know a certain industry really well, or the players. So you start acquiring those companies in that space. But there are examples where there will be companies that actually have very, very different businesses. So that's one example. The second one would be where you look at something and say, hey, wait a minute, can't I cross sell this product to my existing customer base or I want to go into this space, the only way I can do that is by actually acquiring the company. There was an example of FedEx and Kinkos. You basically have FedEx. We all know FedEx delivery company, but you also ship documents. Back in the day though, some of the people were like, what is that? Did you actually ship documents? But you would have to photocopy stuff. I remember when I started in investment banking, I had to carry pitchbooks with me to meetings. So a lot of times I would get on a flight from Toronto and my assistant would say, hey, another person there will be at Kinko's with all the pitchbooks color copies waiting for you. So now you say, hey, this makes perfect sense because you basically have a courier company and you're basically acquiring a company which is a destination for documents.

That's helpful because I always struggle with how much weight you put on this anticipation of synergies on the deal you're doing versus I'm just being hardcore opportunistic and buying at a discount, prioritizing that.

It has to be a combination.

That's the best.

If you can do both, yeah. The synergies have to be in your model, at least in these scenarios. There are also examples of companies, what we call consolidators. They are software companies that do consolidate companies and in some cases they say it's actually absolutely fine to run them separately because sometimes they're buying companies and they're saying they're profitable. We don't need to create artificial synergies kind of a thing. If organic synergies automatically happen, that's fine. But we're not going to force shared platforms for HR or not force shared platform for different financial systems. Let them happen organically. So what is an organic synergy? It could be like acquire two companies. We are not planning to integrate them. But wait a minute, we all buy Microsoft Office. We can leverage discounts. The company discounts. So synergies automatically start falling in. But you're not forcing it. So I'm not starting with saying, wait a minute, we have six people in HR here, we have 12 people here, we only need eight. So we'll need to figure out how do you do that?

I see this play out where you go through the modeling exercise and to make the numbers look good and get the deal approved, you tend to forecast a lot of synergies.

Well, the thing is on buy side, especially if you're in the corporate M and A team at the end of the day you need to defend your numbers, people will come back, they will say, actually your platform does that A very good job not to plug in dealer room here. One of the unique things that you have is integration monitoring. So funnel transaction. As an I banker, I basically spent most of my time transactions, right? It's like, hey man, Amit, we did that acquisition. People don't like that. It's like, okay, not my problem. But if you're in a corporate M and A team, you own it. So when you model synergies, as a matter of fact, what I've seen the best practices you under promise over deliver, you basically model synergies, but you're very conservative so that you basically want to make sure that it works out well at the end of the day. This also is a very big difference between buy side and sell side.

And that's a good point. Be conservative. Modeling synergies game plan to execute big part of its integration. We're already coming back to emphasize integration. How do you approach just even the fundamental decision of integrate this company? If we do, how much do we integrate it Culture.

Let's say I'm an enterprise software company, old school, the IBM days, my Navy Blazer, my Dockers and so on. And I'm selling to the banks. All of a sudden I have to actually acquire a fintech or I have to acquire like a AI company. I go to the Valley and it's a totally different culture. There is no way I'm disrupting that culture. There is no way I'm saying, hey guys, actually we all come to the office 8:30 in the morning and these are the things that we do. We have company off sites and so on. We need to kind of make sure that these acquisitions that we do come with a different culture. That's the reason they thrive and we want to make sure that they thrive in that environment. You basically bring them into the fold, but you do not fully integrate them. Now it's easier if that acquisition is in another continent, you're not going to run into them, but it's harder. You're headquartered out of New York and you acquired AI company in New York. It's tough because it's like you and I, our corp dev team, our quarterly meeting, we're going to go and visit them is Amit, you got to dress down man. Don't wear a suit. These guys are like are in sweatpants and what not. You need to be very cognizant of that. Now if you're in a different country, it's not an issue. I've looked at companies in India, for example. Totally different culture, work ethic and so on. I've looked at companies in France. So here I am saying, okay, guys, we will be meeting in August for our quarterly updates. The guy's like, we do not have any meetings in August. A lot of people take time off in August in France. I was like, oh, okay. Yep, that's true. Need to move things around so when the cultures are different, integration becomes tougher. Having said that, there are a lot of things you can do behind the scenes, financial systems and things like that. One of the selling points for a big corporation, for example, that wants to acquire an AI company would be, listen, we'll take over all the stuff that you hate. You don't want to hire 10 people. We've got a machine here. The HR machine will take care of it. You just, guys do what you're supposed to do. That's the way I see that. It's very culture driven.

That's interesting. Big emphasis on culture and the likeliness and developing your strategy for integrating the company. I got one for you. So I have an investment thesis to consolidate data room companies. You own a data room? Productfirmroom.com, if anybody's interested. The idea was taking these old data room platforms out there. A lot of small companies, been around 15, 20 years, pretty stagnant, slow declining and cost synergies. Migrate the customers on the new shiny platform, better experience and then cut costs everywhere. But I come across a deal in another country, completely different culture, just the whole ecosystem is very different, the way they operate. And you could tell the product is actually really good. It's not a bad product. That's that far behind. How do you look at it on that example? Because it goes completely against the thesis. In fact, more you try to integrate, the more you're going to break things. And the company is profitable. 35% EBITDA margin. You still look at the deal or do you say, hey, this doesn't fit in the thesis because it's not going to drive the cost synergies that we anticipate and we're sort of going global too fast.

I mean, I've been through those scenarios multiple times. It's a great teaching what to do. Yeah, exactly. You're getting free advice now. What's going on?

People don't know. That's the reason I do this podcast.

Right off the bat. If it makes financial sense, I'll go for it. If I've got the right valuation. It has to be very important for Me, the valuation is right so that financially it makes sense for me. I actually would run it as standalone for almost a year and let the synergies happen organically. So what does that mean? I'm going to run it? Of course you do your due diligence based on what the company is today. Standalone companies. If you have your own private equity fund that exclusively invests in deal rooms, how would you evaluate that company? You have your criteria, whether it's 20% IRR or 30% IRR. You do your math based on that and then you basically say, okay, I'm now I'm going to actually bid on this company. And they say, hey, we really like you. Absolutely. Acquire them, continue to run them as a standalone company. It's a hundred percent own sub of deal room. Now what you're going to start looking at is the next three to four months is your best salespeople looking at their customer list and saying can we upsell them something right off the bat? I'll tell you, I don't know. I haven't seen that many products that actually has an end to end platform. From a funnel to a transaction to integration monitoring. So let's say if those guys were primarily catering to investment banks, for example, investment banks really don't want the integration piece, they just want the deal room. They want the data room, they want to track who's reading the docs. It becomes like the deal room pops up when you sign the mandate letter and then it disappears after the deal is done from an investment banking perspective. But now you can say, go to the guys and their salespeople. I was like, hey, we actually have this product. You have been working with some of your corporate clients. Have you offered them a second piece which is basically post acquisition. So now you are slowly introducing your innovation into their product. So now this is where a little bit of technical piece comes into play. Because now I'm used to seeing a certain kind of dashboard now how would I integrate or seamlessly transition into a deal rooms? The next module, if you will. So that's where the science and the art of the science kind of comes into play. So if you know your space, you know your end markets, you know your customers start doing the consolidation. But don't start with the thesis that it only makes sense if there are synergies. The synergies in my opinion is like if you can really realize the silly keys, that's where you actually make that extra kicker.

I gotta admit, I'm impressed how much you know our business. You already gameplayed this out, shout out.

To Lizzie for that demo. I mean, she wouldn't leave it. She's like, okay, I gotta go through this and have you seen this?

But in this view, in this example, it's less about being part of the thesis, almost a hypothesis. Take note of it. But we're not going to factor it in. We are going to buy this, assuming that we're operating it independently, have it make financial sense. But it's in the same realm and there is some unknown likeliness of getting some kind of synergy there.

Absolutely.

And then learning the market because we do want to get to Europe, but we're about two years out in the current roadmap. The LISA sort of gives us an opportunity to start learning the European market with working with this business.

Imagine like you're at a European private equity M and A conference and they have a booth, this company, and you basically send one of your really good salespeople. Ideally pick someone who is culturally aligned with that country. We live in North America. We can always find someone who has a connection somewhere and watch what questions people are asking and then have this person say, hey, by the way, this is my colleague, he's visiting from Chicago or New York. And this is the product they have. It's like, you know what? We could really use the integration piece because the M and A piece was seamless, because we had advisors and stuff like that. But now I got spreadsheets to track integration. We can show you a demo phase. One could be that it's their product, but then you sell them the separate module. But over time, hopefully you can actually create a technology roadmap that's fully integrated.

Pretty good example just how to role play this out in terms of what the plan is to integrate a company.

Yes.

This example doesn't have the cultural element, so we keep it as a standalone. And the other example that might be a company, for example, that we have a partnership with, let's say one of the data providers. Yeah, I don't want to cite anybody specific because they're going to. Somebody's going to ask me some questions later. But let's say we have a really good partnership with one of the data providers and then we decide to acquire that company. Again, tight partnership. We're already doing some joint sales together. In that case, there may be a totally different plan. They're both similar. We're talking about. They got team members in New York. They're all in New York. We got team members in New York. That's the New York example. Yes, yeah, we could probably consolidate offices even and do some interesting things, but that we're starting to look at more of a full integration in that scope.

And again, I would say my advice there is don't aggressively lead with that. Say, okay, this is the integration plan. Let your M and A thesis be creative without overly emphasizing the synergies. Because synergies can also create stress. People move. You say, oh, we don't need this person. Well, oh really? Wait a minute. This person actually he's very close with the star salesperson. Okay. That person leaves. What I do in those scenario is model some of the synergies which are non people synergies which are less disruptive offices. Awesome. Actually works really well if someone has really old offices and then you move into these new offices. Hudson Yards. Oh yeah, man. I was in this building here, now I'm in Hudson Yards. Like things like that. That piece is great. A lot of people like the fact that they get newer IT equipment or they have better tools. In some cases it was as simple as man, you know what I love about our acquire? They have a great expense management software. Because these guys never grew up from the startup. The CEO said, I'm not investing in expense management software. We're going to just do it on Excel. And you got to submit it. Everyone hated it. We just love this. So these things just happen automatically.

I was one of those CEOs, by the way. Exactly. Thanks to our new CFO who changed all that.

I would say synergies on more kind of real estate administrative stuff. Rather than focusing too much on people, people sometimes over model people, synergies. You have to be very, very careful about that.

These are really good points about the emphasis of integration. It seems like you're thinking about this pretty early. And one of the things that I've been doing a lot of content around is just the whole buyer LED evolution. How a company starts off maybe first deal is very seller led, but as they do more deals, it just becomes more and more and more buyer led.

Yes.

What's your experience been like and what does that actually mean?

From my perspective, the more transactional experience you get, the more people on your team have the transactional experience, the more kind of institutional intelligence you start building in kind of a thing, you start anticipating what people underestimate, overestimate, overemphasize and the ability to basically have that conversation early on and then creating that, in my opinion, almost Playbooks, if you will, that you can test early on to kind of make sure is this the right kind of company for me to bring in into the fold or not. So what I've seen is companies that have a very mature corp dev department have very well thought out acquisition playbooks. They also track lessons learned which they basically discuss in real time. There is no shame in saying this didn't work. We underestimated X. We should not underestimate that next time. And having those lessons learned and revisiting them every time you're making a move becomes very important.

It sounds like a big driver of being a strong bio led M&A team is building that many muscle actually getting some reps in.

Exactly.

You gotta do the work fundamentally. But then along that to help with the efficiency of building that muscle. This is like taking the supplements.

Right.

You build your playbooks along with it. You sort of track the lessons learned from your retrospectives.

You tweak the playbooks. You have to fine tune it. Things change over time. For example, be very cognizant of regulatory frameworks in different geographies in some countries in Europe. I can't lay off people post acquisition. Don't even start with any of that modeling.

What does that mean when the rubber meets the road, when you're actually working with the sell side or specifically even a sell side that's working with an investment bank that wants to guard the process and have control over how the things run.

In that case, if I'm a buyer again goes back to transparency communication. If I'm on the buy side, whether it's like a software play where I'm acquiring consolidator or I'm a strategic who is very interested in these assets. The worst thing that can happen to me is I read about a potential process being launched in a Wall Street Journal or a Financial Times or on cnbc because I'm like what it's out there, they're selling and we don't know about it. So yeah, that's bad. What I want to do is in that situation, if these are my prime targets, I want to track who are they hanging out with as in who are their sell side advisors. In most of the cases, sophisticated sell side advisors, I was one of them. I would basically before even launch the process put at a very high level under the confidentiality saying hey, have you thought of this combo that makes sense to you? And what I want to get out of you at that point is what things I don't like about the deal because man, they absolutely love it. But they have this operation in Asia. There is no way my board is going to let me own that piece, given the geopolitical stuff. Or they have a development shop in one of the, let's say Eastern European country that's in a conflict. So I'm like, okay, perfect, I know what you like and what you don't like. You start collecting that intelligence. And it's my job from a buy side to actually have a track of which banker is close to my target. If they decide to sell, who's going to get the sell side mandate. And sometimes it's actually very mathematical too. If someone has lent them a lot of money in some cases, you can basically figure out which investment bank at least will be called to the beauty contest. What you want to do is you track that and then from there you basically build out your thesis. So you have to say, these are the companies I like. I have communicated to them what I don't like. And then they might come back to you and say, listen, Amit, actually you're not the only one who has that concern. So we've already told the board, if you really want to sell this asset, you need to carve that out. So all of a sudden they've got a separate mandate. Is someone going to buy their Asia business, for example? Maybe SoftBank is interested in buying that piece because they're very comfortable with that geography. All of a sudden everything has changed now and then now you are engaged in the process.

That's to get in the process in a good position that you're sort of in there and you want to be the favorite.

You're trying to create all the favorable conditions that will help you to pitch this internally. Because so imagine I come to you and you're the chair of the board. It's like, Amit, thank you, great idea. But how many times you've been in our meetings and we said, we do not want any exposure to that geography. What are we going to do with that? Someone will say, oh, we buy the whole thing, then we're going to sell that piece. No, we just want this piece. But if you've communicated that with the company and a lot of people are asking the same question, then they will be proactive and they actually will get two mandates. They will sell that piece and this piece separately.

I like this. This is being buyer led, but even very proactive early in the process that you know likely is going to get banked. You get not only that communication with the target company, but the banker that they're likely to engage. So then you've got some communication there, you know, of each other. They're still running a competitive process, right? Yep, that's part of it. At least you got strong positioning.

Yep.

And you're going to get to loi sign and I feel like this is when execution really starts.

Yeah.

How do you maintain control from execution onwards?

You got to identify what are basically the key risks and what are absolute things that you need to be comfortable with. You got to start with those priorities and not leave those till the end. So my priority list of things that are absolutely critical, that are showstoppers for me have to be addressed first and I got to go through them. Customer contracts. What's the nature of the customer contract? What are the outs? It says it's a two year contract, but if it says 30 day out. Okay, wait a minute.

That's not cancellation clause or a change of control provision.

Exactly, exactly. So things like that that are absolutely important for me, I'm going to start with that. And then you're just managing that whole process. Then you have this paratrooper commando surgical strike team and then we're churning stuff and keep that communication line open with the advisors. I absolutely love when there's an advisor on the other side because they become your partners. Hey guys, we don't like this as anyone else, they're like. And like yeah, like that's a really weak contract template. They have constantly keep on communicating to them about that because you know what, that may have an impact on my price because I might basically not give them the same revenue multiple or EBITDA multiple because people can get out of those contracts easier.

Is that a common. Would you go back and renege?

But you would ask ahead of time.

You'd say hey, out of your contracts, like what do they look like? Ploi?

No, no, we can do that. And also the companies are sophisticated. Like if they really want the company they know post acquisition, they can also bring in the customers and sign a new contract with them.

What about staging it with the whole control of the process itself? Because bankers like to control it. To stand up a data room and send a bunch of Excel sheets back and forth. But you're there. We talked a little bit about the cool tools out in the market. Do you still push to control the process or do you still abide by the banker?

I think there's a banker process in my opinion that is high level and underneath we're micromanaging the process internally and we just want to make sure that we stick to the guidelines and we stick to the timelines that have been proposed by the bankers. So it's like oh, the offers are due by this date or the last set of questions are due by this date and things like that.

But what about from loi to close?

Loi to close. That's where you really work with the bankers in investment banks. You just need to have a working relationship with that team. And when I say that actually at the junior level, analysts and associates working hand in hand do things like faster and then issue management, issue resolution happening at the MD level.

I was curious about this because I feel like this is the crux of the industry and how it's shaping. When I start thinking about the process being more buyer led from the LOI point, there is a power dynamic shift that the buyer can all of a sudden start dictating. Hey, here's how we want to run our sort of confirmatory diligence where they don't have as much pre loi to be able to leverage of how they want to actually get that done.

It all depends on how much leverage they have in dictating that kind of process. But I've never taken this approach of I want to take control. I'm very scientific about this thing. These are the 20 things I need to go through. This is the timeframe we have. Let's get there. Where's the information? And we are churning that document in real time on a daily basis. And we basically saying, where are we on this due diligence? Where are the employment agreements? Where are the reps and warranties? That's where the corp dev team, the buyer's team, has to at least show some leadership at that stage. The bankers are also looking for direction because they've brought you to that point. They are very motivated to close the deal. But now you want to make sure that you actually are working hand in hand with them and showing them exactly what you need to close the deal.

Yeah. So just being really transparent and clear about what the priorities are to get you through that confirmatory due diligence process.

Exactly. And communicating that.

Does that change at all if there's.

Not a banker involved? You're doing a proprietary deal.

Yes. It becomes complicated. Every interaction could become an education process.

Oh, is it a good thing? Isn't it?

I did this. I'm like, man, here we go again. I got to explain to them that they needed a non compete. There's your basic stuff that we just take it for granted. Like in big deals, everything is, oh, you've got the best lawyers. You know, when the company was founded, they had the best VCs. Everything is top notch because There was like solid due diligence done at every meaningful stage of the company, whether it's equity financing, debt financing. So when you come to that stage, it's like, yep, Tier 1 investment bank led the last financing, obviously, top lawyer, law firm, boom, everything should be fine. Now you're looking at bootstrap business. 20 years old, great business entrepreneur wants to sell the company. They're having a good time. They're like, yeah, I think I should retire. I'm 60. And at that point, actually, what I want to make sure, first of all, is there a catalyst or is this just a price discovery? Because I don't want to spend all my time going down that path and saying, I changed my mind. A lot of times you're looking for the catalyst. And in an ideal world, there should be an advisor because that really means that they are paying someone to actually sell the company. But coming to your question, what if you don't have an advisor?

Yeah, because I want proprietary deals. I, from my experience, they tend to be better deals.

They are better deals. But if you're going to buy them, you need to be very fair to them. This can't be a gotcha moment.

I think that's fair.

You need to basically give them that comfort level that what the value that they're getting is actually fair market value because you don't want them to be a disgruntled shareholder of your company or part of your company. I spent some time with one of the conglomerates where we had a very active proprietary pipeline of companies that were bootstrapped. But there, what we did was we basically spent time with these management teams in some cases. When I looked at the notes over 15 years of building a relationship at 50, they was like, hey, have you thought of selling the company? No. And they keep on chatting. They keep on chatting. At 65, the guy's, you know what? I am ready. What has happened over those 15 years? They basically said, listen, just as a friendly advice, if you want to sell this company, make sure you have X, Y and Z in place, things that you need to have in place before you sell the company. So make sure you have the right advisors. Even law firm. For example, this can be your friend who closed your house. Like, hey, you're my lawyer. Like, can you kind of put a shareholder agreement? Sure, why not? And I can Google something and put something. And you want to make sure everything is defensible. Because what we tell them, listen, the better the quality of your internal documents and how the structure is, the higher the value you're going to get. So you have to be a trusted advisor in that case as well. So you are like their sell side advisor, but you're also going to buy the company. And at that point be prepared if the guys are like, hey, I really appreciate it, but I'm going to run a process, not a problem. At that point you got to say, may the best person win. And you hope that the investment of time that you've made in this company, they feel much comfortable coming to you than going to someone else. In some cases, price is the only thing people look at. But I would say in bootstrap businesses, proprietary businesses, they really care about their customers, they really care about their people because a lot of people work with them for 20 plus years and they're like, are you going to take care of my people? Are you going to take care of my customers? Check, check. You know what, I'm going to go with you.

I had a deal I was looking at, I should say hypothetically, but I had this deal I was looking at same thing. We're going to engage a banker. Already started the early conversation. I bowed out and said, hey, let me know if that process doesn't work out. Now my thinking is if they do.

Come back a hundred percent at the same time, I would say that's not the time to lowball them. Okay. I think you need to still be fair. I'll give you an example. We came close and the guy's like, sorry, we're going to go with a PE shop. No problems, no hard feelings. All right? We walk away. Eight months later, inbound. Hey, we want to talk to you. What happened? We were with this private equity company and they basically said, yeah, six months. This is our six month plan. This is our 12 month plan. We need to cut down the FTEs. The top senior guys are all my friends. We stay in the same kind of golf community. I can't lay off that guy. He was with me. They didn't do the deal, right? They didn't do the deal. They came, we acquired the company.

Okay, now I should give context. My scenario one, I'm playing the opportunistic Persona here because we're still small balance sheet company and I'm Indian, always looking for a good deal.

Absolutely.

So that's where I come back and say, okay, I know where I'm at and I know if they run a competitive process, it's still a crappy asset because I'm looking only at crappy deals right now.

Sure. Okay.

Not to knock anybody. If they knock on your doors. But that's what I'm betting on is like, look, I'm going to be on the lower range. So I'd want them to run a process. If it doesn't work, which has actually happened before during the right markets.

Yes, exactly.

Nobody comes and they come back and you're like, okay, is that the right approach or am I communicating the right thing? Maybe given this certain situation where I know I'm being very opportunistic and price focused on the value because it's more of a distress situation that I'm buying in this scenario. Or am I communicating a little wrong to that banker? Should I be a little bit more, hey, I'm happy to stay along, but I'm not, you know, how should I be communicating that?

I would say that have a very amicable parting of the ways. Do not close the door. Do not slam the door shut as you're walking out. Say, listen, where we are, where my kind of investment appetite is and return appetite is, it's very hard for me to pay more. There definitely will be someone else who a strategic or someone who could pay more. You should run the process. But I just also want you to know I'm around if this thing doesn't work out. That has happened to me all the time kind of a thing.

That sounds pretty fair.

Having said that, what I have now is, let's say it's eight months, six months, seven months. I also want to understand why was this a hung deal, why this deal didn't happen at that point, I can talk to these sales the guys and say, hey, who were the people looking at it? What happened? The bankers, they'll say, yeah, sure, off the record, kind of. These are some of the things. And also this is also my time to now revisit. Has the quality of the asset deteriorated, for example? What could that be? An example could be key employees left or the CTO left or top sales guys left or they lost a big customer. Deal room has a one corporate client that actually is using it, if that's the case, actually now have the ability to renegotiate my price. I can now look at their CRM, I can look at their sales pipeline and I can adjust my numbers.

That's some of the think I have on some of these assets. It's like they're not going in the up and right direction. Yes, they're going down in the right. So it's a little bit. I might be on my side.

And actually on that point, a lot of times people was like, this pro forma doesn't make sense. What are you trying to show me? It was like, well, we model synergies. You model synergies. You want me to do the synergies and you want me to pay for them upfront. It doesn't make sense. So it's very important to say, I want to see your asset as a standalone asset. I'll do the modeling. Because modeling comes with basically its own risk profile. Because I need to put it on a curve. It might happen, it might not happen. People are trying to model, oh, you have an office in Europe. You can easily cross sell this to other. I'll make that call.

Yeah, that's right. And that's right. Sometimes they're turned off when they got the banking background. We both got banking background. It's when they bring the banker in, you know that's what they're going to do.

Yes.

Yeah, the chart goes further up and further to the right. Like, I don't want to mess around with that because it's. Again, I guess that's an interesting conversation too, because they put the. Oh, let's put all these ad backs in. Let's. Exactly how do you handle that conversation?

This is actually a great kind of discussion because sometimes I look at it, it's a very general statement, generalized statement. If I'm looking at assets from private equity shops, sometimes they are margin optimized to sell.

Yeah, very common.

Yeah, margin optimized. So it's like, wait a minute, you have 30% sales on West Coast. You have one salesperson. No, we actually had four salespeople, but now we only have one. The thing is, I probably will need to hire at least to keep that momentum going kind of a thing. So you kind of have to be careful in terms of. Is this model that you're seeing is a steady state model.

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

There was one deal where they weren't negotiating in good faith. They just walked away at the last minute. There was a lot of time and effort that was put in into the deal.

The buyers or sellers walked the seller. The seller walked at the end. But that's gotta be some personal stuff going on.

Yeah, Changed their mind. They thought they had much more Runway and then they came back two years later because they couldn't execute on their strategy. The investors wanted an out. And at that time, the management team said, no, we're never going to work with this guy, period. It was personal. Yeah, it was personal.

It depends on what side you on and what outcome? I've had one not too long ago. It reminds me of where, look, I didn't want to see a good outcome for them. That's what ended up happening.

Yeah, it's sad, but like, I mean, it is what it is, right? They just kind of said, no, I think I just want more.

There's another old saying, if you get a good offer, you should probably take it.

Yeah. And there was a lot of time invested in. I was personally involved in that company. I brought in the PE player. If it's a public company, we had agreed on a share price and that was the best offer. And they said, no, I'm not going to do it.

You think it's just ego, hey, we could do better. We can grow this.

And yeah, but in the end they did not get that. I kind of went back to the same PE fund and it's a mega fund now. And that person actually was a VP at that time and now he's actually the CEO of that fund. And we still chuckle and said, remember that day? It was 2005. I still remember it. I'm like, are you kidding me? What are we talking here? It's like, no, I've changed my mind.

The P firm was on the sell side.

He was on this buy side.

On the buy side. Oh, so that was your. You were working with the. That's funny. I was going to say, let's put them on the podcast.

Yeah, yeah, exactly. So anyways, it's all good in the end. A lot of lessons learned.

That wraps up part one of our conversation with Dr. Amit Manga. We covered corporate M and A fundamentals, from balancing strategies to building pipelines and staying aligned with boards. In part two, we'll tackle software valuation trends and carve out challenges. Don't Forget to visit mascience.com for more tips and follow us on LinkedIn for our social content. See you next time on M and A Science.

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