M&A from a CFO’s Perspective Session 1

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I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hello M and A Scientists. Here at M and A Science, our goal is to continuously expand our understanding of M and A and use that knowledge to curate top notch training programs and resources. By visiting mascience.com you'll find all the information you need to take your M and A skills to the next level. Get started by signing up for a free weekly newsletter to stay up to date on our latest courses, upcoming events and expert interviews. Again, that's mascot science.com I'm your host Kisam Patel, CEO and founder of M&A Science. Joining me today is David Barnes, CFO at Trimble Trimble is an industrial technology company whose mission is to transform the way the world works. Their technology connects the digital and physical worlds, improving workflows across construction, agriculture, geospatial and transportation, enabling jobs to get done more efficiently, safely and sustainably. Traded on NASDAQ under TR&B. Today we're going to talk about M and a from a CFO's perspective. David, how are you doing today?

I'm good. Thank you for having me.

Hey, thanks for taking time from operating a publicly traded company to have this conversation. Can we kick things off a little bit about your background?

I started out many decades ago as a strategy consultant. Realized that the consulting lifestyle had its drawbacks and I moved to a corporate strategy group in a big technology company. And then through a series of unplanned and somewhat random events in my life, I got into finance. And I've been now CFO of a number of big private and public companies. And through that process, I've been intimately involved in M and A, mostly as a acquirer. A couple times sold a big business. So I've seen both sides of this process.

You're all too humble. I looked you up and saw some pretty big logos including Coors, Radio Shack, Western Union in your back ground, and today you're operating. I can't count how many digits you have today and your market cap, but it's well over 10 billion.

Yesterday we were 13 billion. The market's down, but yeah, we're a big company. I joined not long before COVID so we managed through Covid. In the middle of that process, we were added to the s and P500, which brings the company a whole higher level profile. So it's been a really interesting time.

Very nice. Can we talk about the CFO role in the context of how you're involved in M and A?

I do oversee the corporate development teams. We manage the acquisitions and divestitures we do. But more broadly, I see my job as a CFO to be the shareholder advocate for any big decisions that we make. And there's no bigger discrete decisions we make than to make a big acquisition. I'm very intimately involved in M and A from the strategic standpoint. Where should our capital go to? Negotiating deals and making sure we get the right terms, that we have a solid integration plan. I see myself as the eyes and ears of the shareholders, making sure all that goes well.

Corp dev reports up to you, you're on behalf of the shareholders, doing what's best in their interests. And you mentioned integration planning. How does your role differ from the CEO's role when it comes to M&A.

Our CEO was my predecessor's CFO, so he knows a lot. He's more focused on the strategic logic and he presumes that I will handle some of the more detailed work of looking at the key provisions of the agreements. We're going to make the big terms, make sure that they're aligned to a plan that delivers shareholder value. But he's a very engaged person. He's very involved in M and A, but I and my team handle a lot more deep detail than he has time for.

So he's on the big picture strategy, that narrative, shaking hands with the other CEO, making sure they feel warm about the deal.

Yep.

And then you're running the back end, the financial analysis, the alignment with your internal teams.

Yeah, I have more day to day impact involvement when we hire a banker to help us either buying or selling a business than he would have time for.

The thing I'm curious about too is when you identify an opportunity, what does that workflow look like in terms of getting through decision making process and approvals? Because it sounds like you're got a pretty big hand right there. Does it work up through you or does it work down through you?

We're very collaborative. We source deals in what I'll call two directions. There's the top down where we're looking at really big opportunities that have resonance with our strategic theme. We're not looking at fundamentally diversifying our company because the end markets we serve offer a huge opportunity. So that's not what our M and A program is about. But we do the top down review looking at the biggest opportunities that fit within our framework. We we also have a bottom up process where every quarter, Rob, our CEO and I meet with each of our operating businesses. We talk about their performance, the opportunities and challenges they face, and we hear from them about what acquisition targets would complement the business and add to the power of their strategy. So the deal sourcing comes from both within the business and then for the bigger deals. Typically we're scanning the world from a corporate perspective. We have a stage gate process of making sure that we're comfortable that the fundamental strategic logic is sound before we begin real work on usually starting with some sort of NDA and a letter of intent. So we have a stage grade process that makes sure we're aligned at that point and then we have multiple stage gates as the process comes closer and closer to a definitive, contractually binding transaction. The bigger the deal, the more likely it is that Our CEO Rob is involved and he's a very detail oriented person, so he adds a lot of value. But we have multiple opportunities where we're evaluating the strategic fit, the financial logic and the cultural fit. Make sure all of those are aligned.

Does anybody have free range check signing.

Ability from an acquisition perspective, even very small ones? I have to approve. We found, and I bet some of the folks who listen to your podcast have found this, small deals can be as complicated and as fraud as really big ones. The decision to buy a business is a big one. We don't delegate those low in the business. Those are important strategic decisions. And in all cases I'm involved at some level. And in most cases the CEO is involved as well.

Now, you mentioned top down, bottoms up. What I got out of it, it sounded like top down. Are these pretty big strategic or almost fucked as like transformational type of deals you're looking at from a very overall company strategy lens versus bottoms up, Maybe from your business unit leaders or somebody in that business unit addressing, hey, here's our strategy. This acquisition could potentially help us get there faster. That sound about right?

Yeah, it does. I'll say. Sometimes the same deals come through the top down and the bottom up. So it's a big deal. It's potentially transformative, but it also fits so nicely with what the business is doing. Sometimes we stumble across the same names of ideas from both directions, but generally your characterization is correct. The bottom up deals tend to be smaller. They're more what we call tuck ins. They fit within the business profile and they add either product diversity or geographic coverage or something else that the business needs to round out their portfolio. Whereas the top down, the big strategic deals are typically bolder moves in a direction that's perhaps less immediately tangential to what the businesses are doing today.

How do you communicate these opportunities and even how these opportunities fit into the strategy? Are you using like market maps or is there specific tools that you're using?

We have a variety of tools. I'd say we're probably more informal than formal in that regard. Good example is we're significant players in the construction software business. We sell software that enables design firms and construction firms to optimize their their workflows and their business. And we knew that enterprise software would be a really key ingredient in the old shopping mall analogy, like an anchor tenant. And so we were looking for a big enterprise software provider and we bought a company called Viewpoint that fit that logic. It was just a gap in our portfolio. And about five years ago we made that acquisition which has been fabulously successful on its own. Right. Just as you measure within the four walls of that business and how it's strategically pulled along the rest of Trimble. So that's a perfect example where we have a business strategy. We talk about our industry platforms for those industries that you mentioned earlier. And we can see holes where we don't have the either the product or the geographic coverage to fill out the portfolio. Sometimes we partner with firms, but in that case it made sense to do a really big game changing acquisition to fill out what we can offer our customer.

You identify this pretty clearly. Like this would fit into the strategy. I'm assuming. Does that get prioritized that you really clearly can communicate across the executive team. Hey, here's probably the biggest windows of opportunity that we should be looking at.

Yeah. Prioritization in M and A is a tricky thing because you could define the perfect strategy. This is the strategic niche we want to fill in. Exactly what the capabilities would be of the business. And they're either might not be a company that does that and only that or there might be a company and it's just not for sale. We're a very diverse company. We operate as you mentioned in construction, agriculture, geospatial, transportation. And it's a tough one to prioritize them when they're not all available at the same time. And we're very careful about our use of capital. One of the principles that we're very focused on is retaining our access to the investment grade debt markets. There's a number of reasons why that's important. We do have situations where making a big deal and we actually just closed a few months ago on a very big deal, the biggest one in Trimble's history. Doing that meant we wouldn't be able to do other things. Now we scanned the universe as we got closer to that being a real idea and we decided there was nothing really strategically compelling. A must have asset that we wouldn't have access to because we made that investment. Now we're in the process of integrating that company and delevering so that we can be open the next time a really compelling big deal comes. But it's a four dimensional challenge. You could say, with time being one of the dimensions where you've got to figure out how you optimize and use the capital you have to strategically enhance the company and which bets you make when. It's like a tricky version of chess.

Yeah. You got a lot more discipline. I do. I feel like I'm just a bargain hunter all around Looking for fire sales.

We are very focused on our strategy, which has evolved over the years. We talk in our mission about transforming the way the world works. And the end markets that we serve are underserved by technology. And the technology is very siloed. The data doesn't work together. So we have this very high level of purpose that we're going to make construction and transportation and agriculture more efficient, safer, more productive, greener. All those things that you mentioned earlier. That purpose guides us and we're looking for the biggest ideas that can accelerate our progress toward that vision. Inorganic growth through M and A is a big part of how we have grown. So there's a tactical element of looking for good deals. But we're really principally focused on strategy. We're not bargain hunters. In fact, we divest a lot of businesses, including businesses which in their own right are good, but which don't either benefit from or contribute to our strategy. So we're constantly reevaluating our portfolio and we're allocating our capital, which is our money and our management time, to those opportunities that really drive the momentum behind the strategy. That's how we think about it.

You'll have to call me next time you're looking to sell. Not that I'm looking for a bargain here, David, but it's interesting.

We sold 5% of the revenue of the company last year. Again, those were good businesses, but we weren't the right owner for them.

I want to get into the nitty gritty part of being a cfo, because I'm always curious around, how do you balance the allocation of budgets when it comes to M and A, because you obviously got your operating budgets for running the company. Is it defined that, hey, we're going to allocate this much for inorganic opportunities? When you get these really big deals, how do you piecemeal capital together as needed? Like, how do you think through that stuff year by year?

So here's a framework, and I'll say it can be a moving dynamic. There's what I'll call internal capital allocation within our operating budgets, how we spend our money and our time on our organic growth. The business as it exists now. And we have a very diverse business. Everyone's got a good idea of what they want to spend time and money on. And if we tried to do it all, it wouldn't work. So big part of my job is, I'll call it internal capital allocation. Where are we going to put our bets to drive our business? And my filter there is how much does your good idea drive the strategy of these connected solutions that transform the way our end markets work. So that's sort of one challenge is our internal capital allocation. Then what I'll call external capital allocation is all about how we take the cash flow that we generate as a business and we're a good cash generator and do we put it to acquisitions or share repurchases. We don't pay a dividend today and there's a balance there. It's hard to write a formula that you follow. We believe our highest and best purpose is driving growth and applying technology more thoughtfully and more wholly to connect all these solutions that our end markets need. So effective M and A growth is our number one capital allocation priority for our external capital. We have used funds to buy back shares to offset the dilution from our equity compensation programs. And we've been somewhat opportunistic when the share price was lower versus higher. That's a judgment call right now. We just made the biggest acquisition in Trimble's history, a company called Transporian. We're very focused now on delevering. We've committed to our customers, to our board, to the rating agencies, to our lenders that we will deliver back below the level that's the typical standard for investment grade credit. So right now that's our number one capital allocation priority. As we progress in that direction and we are progressing, we will once again open the door to other capital allocation priorities. And the number one will be if there's a compelling business that we add value to that adds value to us, that really drives our strategy. We'll be back in the M and A game.

You just introduced a lot of financial knobs here mentioning buying down debt and then also repurchasing stocks. Can we take a quick sidebar on you mentioned the equity compensation and that you would buy back stock to readjust for that. How does that work?

We issue stock to our leaders. In fact, the CEO and I were paid principally in equity and it's mostly performance based equity tied to some goals. So we issue equity programs. We think it's a good way to build an ownership culture across the company. But there is a dilutive impact. So it's sort of natural to offset that dilution with using a portion of your free cash flow over time to repurchase shares to keep the share count relatively constant. Our share issuance is actually below the mean of companies like us. But it's what when I talk to CFOs, most of them think about that as part of their capital allocation framework. It's good to have somebody to repurchase shares in the open market to offset the dilution of your equity compensation programs. And then beyond that, we're always looking at what's the best use of capital. We're in a growing business. The markets we serve are underpenetrated by technology. So our first instinct is to use that cash to add to our strategic power. We don't pay dividends. Actually, I find that most of our growth investors don't want us to pay dividends. Share repurchase is a good way, a very flexible way to use excess cash available to send it back to shareholders and yet keep the flexibility to be able to make good deals when they come your way. So that's how we think about it.

Yeah, that's a lot to put together. How aligned do you think these investment analysts are when they're evaluating your company and starting to pick? Like, do they get a good understanding of all these knobs that you're dialing in or.

They do. We are fortunate to have very smart and engaged shareholders. I will say they don't agree with each other and they don't even agree with themselves over time. So when the markets were much more buoyant, the enthusiasm for deals was higher among shareholders. And with the recent pullback and worries about recession, we have probably more shareholders that would like us to return capital to shareholders through repurchase or someday even dividends than was the case a year ago. But look, they all ask us about it. Our shareholders would say, my job and our CEO's job right at the top of the list is being capital allocators. The cash flow we generate, what's the highest and best purpose for generating value, and they expect us to use it in that way. Now they have different opinions. And in fact, the big acquisition we made, there were some investors who thought, gee, was this the right time to make that deal? Or the price seemed high. You know, normal questions you'd get. The one thing I'll say is that when you're talking to big equity investors, you can't please them all, and you can't please them all the time. What we try to do is use our judgment and make the best decisions we can to drive value over long term. And if that means you're subject to some second guessing or criticism in the near term, that's part of the job.

That's why I don't want to be in your shoes. This piece right here, I don't want to be in your shoes for it.

It's a rewarding job. Look, the work I do is fascinating on so many levels. I get involved in our strategy. I have a tangible sense because the numbers part of my job and the details and how it's working every month and every quarter. But we're entrusted with very big decisions. You asked about our market cap. We bought 13 billion of equity market cap. That's a lot of other people's money. It's their savings accounts, the investment money they've entrusted to us. So it's a very serious job and it brings some stress with it.

No doubt forecasting, when you think of M and A regarding that, is some of that included in there part of our process?

One of the first things we do is develop with the management team and validate the business plan going forward. I'll tell you. So I joined Trimble not long before COVID The Trimble we've got a really good business operating system of updating our forecasts every quarter. And when this thing called Covid hit and then the supply chain crisis came down, you could basically throw aside all your forecasts. The one thing you know is that they're all wrong and you get into contingency planning. And I will say we managed through that pretty well. I'm proud of how we remain flexible as a company, but I'll say we got our forecasts wrong. Frankly, our end markets recovered from COVID way faster than we thought they would. The supply chain dynamic, which I'm sure you've talked about in your work, it was really unprecedented where goods were scarce and no one could get anything. We couldn't even begin to meet the demand we had. The hard part in most business is getting a customer. Convincing a customer to buy something from you that was turned on its head to the whole world was supply constrained, not demand constrained. We had a lot of trouble forecasting our way through that. And then as the supply markets normalized, figuring out what customers were going to do, that's been very difficult. It makes M and A decisions a lot harder. But that's where it's important to take a long view. Because if you're buying a company for how well you think they're going to do in the next quarter or two, you're probably making a mistake anyway. So we try to see the signal through the noise and make good judgments about the fundamental direction of the markets these businesses serve and the fundamental competitive strength. Even if you get that right, you'll get short term forecasts wrong. That's been a real challenge for us. But we continuously remind ourselves that we have to Be focused on the longer term and getting that right is what really matters.

You can handle anything.

Just to that point I mentioned, we are really focused on staying in investment grade credit, investment grade debt. Markets are the deepest sources of capital. It's seen by our customers and a lot of constituents is an indicator that you're a strong company. So when Covid hit, nobody could forecast we were doing contingency plans that were really adverse. I think most companies did that. But we took actions to make sure we were a financially resilient company. It's really great that the bad scenarios when Covid came that it wasn't nearly as bad as we thought it might be. But I'm really pleased with and proud of our team and how we kept ourselves resilient so that whatever the world threw at us, we were going to be able to handle it and emerge stronger.

Very nice. Speaking of wrong forecasts, how do you look at acquisitions? If you were to prioritize the key things, is it the financial metrics first you're clear, roi, rr, and then are you looking into the soft stuff, the culture, things like that? What's that priority that you're looking into to assess a deal?

It's hard to stack them up. But I will say there are businesses we've looked at that looked really good. The strategic fit was really good. But if we didn't think there was a cultural fit and there's. We're a unique company, I can describe what fits here and what doesn't, but there is a sense of purpose, there's a sense of working together and collaboration, there's a sense of humility that fits here. And when we find a company that's fundamentally at odds with that, that's game over. And we've walked away from opportunities just because we knew early on that the cultural fit wasn't there. But as I mentioned earlier, let's assume that's the case and increasingly it is. We've made some very successful acquisitions from private equity companies and you have really financially motivated people owning the companies and sometimes in senior roles. And we've done a much better job than most strategic acquirers have of keeping the leadership following a private equity ownership situation. And that's typically because it's one of the things we're testing. What are you interested in the business you're helping to run? Is it just making money? And I'll say this proudly as the CFO of Trimble, Financial performance is important, but it's not the first thing that comes out of our mouths when we talk about why we do what we do. So we look for management teams that are really excited about changing the way work is done in their industries. And they're excited about being part of a business that has this huge array of solutions that can help make their customers happier, their business get better, can drive more growth. So we're looking for management teams that are excited and not anxious about being part of a bigger corporate company. Then we look at the financial analysis. Very often sellers have very optimistic forecasts. So we typically do our own forecast. And we applied that forecast against a broad array of metrics. Of course, we study hard what our cost of capital is and we do net present value and IRR calculations. I found that those are so dependent on your assumptions many years out, they can be confusing. We look hard at multiples of profit revenue or recurring revenue. A lot of the businesses we're buying have recurring revenue models. So we look at those hard as a check against the valuation of the business. And then we typically put in place an incentive program when we make a big acquisition that ties the leadership to the forecast that we've made, the financial plan that gives them either both some combination of cash and equity and Trimble. So all that together, it's hard for me to say exactly which is most important. I will say an increasing number of our investors look at ROIC several years out as a indicator of are you good at turning the money you spent on an acquisition into returns? So we get more questions about that from our big investors.

Roic, what's the C?

Basically, the after tax return on the cash you deployed to buy the business. They want to see something above your cost of capital, maybe not in the first or the second year, but three, four or five years out. They want to see that ratio look favorable, the growth here, the business. And the higher the price it is, the harder it is to satisfy that calculation. But it's when we think about increasingly.

Yeah, I don't even want to do the calculation. That sounds like another thing I don't want.

Your job can be particularly difficult for Trimble because increasingly we don't just leave the businesses that we buy alone. They're more and more integrated because our strategy is about connected platforms of solutions. And so it's actually hard to measure the economics of what you bought because it's pulling through a lot of the rest of what Trimble already has. The measure is imperfect, but we don't dismiss it either. It's one way to think about the kind of returns you've generated from making a big deal you said that I.

Was thinking about, like when you structure earnouts, how do you balance that? Because you've obviously got some metrics attached to this asset you're purchasing with the management team, but then you want to integrate it. Ideally, there's going to be a lot of things that you're planning to integrate.

That is the trade off. We ground the incentive plan, which has a retention and a performance motivation aspect. We ground it in whatever metrics are really key to the driving of value. In some deals, it's the amount of recurring revenue and some it's margin and some it's bookings can be some combination of all of that. But we figure out what we can measure that won't be the subject to too much ambiguity or potential. I wouldn't say dispute, but someone feeling, gee, that's not really the right way to measure me. We work with the leadership of the businesses we acquired and we don't do this on all of them, by the way, but particularly the biggest ones where there's the most capital at play. We think it's a good way to create alignment and really to build motivation across the team that we're sharing our commitment to the same financial goals.

Wow. Still a lot to track to really measure success on these deals.

And when you set these plans in place, there's always some judgment factor. Certainly we made a bunch of acquisitions and then Covid hit. Nobody had Covid in their forecasts. And that did disrupt our business. I think it disrupted every business. So you have to have the trust of the leadership of the companies that you buy. You have to earn that trust. And sometimes where the original goal didn't make sense, we changed the goal to make it equally motivating for the company and for those employees. That's part of how we make it work.

Now you made a big emphasis about culture and I want to beat that up little bit because how do you understand a company's culture? Because we run through a process pretty quick. You're going to do some initial diligence and get to loi, especially if it's a competitive situation. How do you get to a point when you said, hey, I got really understand this culture to have confidence that we put in this LOI on the table. What is that based off of?

Most of the deals we do are not in a formal competitive process.

That's a good start.

Yeah. So these are often companies that we had some commercial relationship with and we know a lot about them. That's an easier problem to solve.

So if they're already A partner. You have a pretty good sense of what that culture is like, and you already know right away, no, we're not going to touch them.

Yeah, but look, we've bought a couple businesses. The deal I just mentioned, the really big one that closed earlier this year, was private equity, owned and sold through a process. This is something our CEO does not delegate. So he spent a lot of time with the team. And if the process was designed to prevent us from getting a sense of the culture, we would pass. We wouldn't engage because it is so important. You talk to people about your business. You can sense their enthusiasm for what we're excited about, which is really changing the way our customers do their work. We typically get time outside the formal business agenda to talk about values and how people are treated and how the community is treated. It's worked well enough that we found cases where, gee, that may be a good business, but it doesn't fit at Trimble.

Do you get a good sense of that from speaking with the management team alone versus having to really click down and hire some special diligence person to send a bunch of surveys and things like that?

It would be nicer to work deeply in the organization. We have employed consultants who sort of survey customers, and you get a sense of how companies treat their customers. That's a pretty strong indicator. The business we just bought, we got meaningful time with the senior leaders of the business and enough time that we were confident that we have a shared approach. It's close enough. It's a company based in Germany, and we closed the business in April. And I'm pleased to say that the sense we got, the trust that we've put in that team has been rewarded, and I think vice versa. We're all really excited about working together in a formal process with a real time constraint. There are limitations to how much you can know about the business, but I think we've been. We're pretty good at this. We've made 67 acquisitions over the last 10 years. So we've done it enough that we kind of know what to look for and how to look for it.

Can we talk about the integration part? And again, the CFO perspective? Because this is something I've noticed when we look at organizations that maybe, like, are really, really early, they don't plan anything for integration, budgeting. And then all of a sudden, as they mature, they really take it a lot more seriously. As a company at your stage, you probably have a pretty mature methodology in how you budget for integration. Can you talk me through that?

The Pace and the level of integration has got to be driven by the strategy. And it's not that more integration is better or worse. There are businesses where a lot of integration is absolutely needed right from the beginning. And there's other situations where it might make sense to leave the businesses more alone. Historically in Trimble, we were managed principally as a collection of individual business units where the collaboration between them was light and opportunistic. And our strategy has evolved. We talk about our strategy in terms of connect and scale. So we're connecting these businesses that used to be separate, bringing them together, using the scale of our $4 billion of revenue base to make ourselves more powerful. That strategy has dictated a more aggressive approach to integration. So it used to be the case 10 years ago. I know one of the presidents of a company we acquired, he was told, the corporate accounting people at Trimble, they're going to be a pain in your butt, but don't let anybody else mess with your business or tell you what to do. And now the acquired companies want more integration because we're about cross selling and selling bundled solutions and we are aggressively moving in that direction. Even today we have dozens of ERPs, most of which came from acquired companies. And we're going as fast as we can to bring the ERPs and the CRM systems, the corporate enterprise systems, together because that's what our strategy requires. As far as budgeting, we have dedicated resources. Part of my corporate development team does nothing but integrations and they've done it a lot, got the checklists all worked out. We were particularly careful on a number of areas, particularly where the company was private before, of investing in financial controls and cybersecurity controls. So we have an absolutely sacrosanct set aside budget for those integration activities that need to kick in immediately upon the acquisition to make sure that the financial controls are adequate and that our cyber security posture is positive. So we go after that really fast. Then we put together teams involving the target management and our teams to figure out the pace of bringing everything together. I wish it could go faster. Most of the people in our teams wish it could go faster, but there's a pragmatic limit to how much you can get done. This is something we're good at. We're more serious about it now than we used to be 10 years ago because our strategy has evolved. But it's something we take really seriously and we're really organized in how we do it.

Can I ask you something, just for an honest question? When you look at going from like this kind of very partial light touch integration to really full integration and sound like you're building in these components of go to market. How does that actually impact value realization? Did you see it make that much of a material impact or is it too hard to tell? What difference does it actually make?

Our strategy, as I said, is about connecting and scaling. And I'll never forget one of the first businesses I visited in Trimble after I joined in 2019, which was one of my last business trips to a company we had acquired in Florida. And we were debating the whole topic of the level of integration in M and A. And my opinion as a newcomer to Trimble was asked and I spent the night at dinner with some of the salespeople. Their view was there's so much opportunity now that we're not just an entrepreneurial business, but we're part of Trimble to sell together faster. And I wish we were more integrated. The normal assumption is that management teams and companies, when they're acquired, they want to be left alone. They don't want the corporate parent mess. And what I found was that the people actually at the coal face doing work with the customers wanted us to hurry up and that was really validating. To answer your question in the context of Trimble, more integration is key to creating more value because we're about selling these connected platforms of solutions and when they're on their own island as a CFO drives me nuts. We have dozens of ERP systems, we have dozens of CRM instances that's expensive to maintain and I have finance people all over the place working in different technology. It's fundamentally inefficient and it prevents us from selling to our customers bundles in the most seamless way we can. So I know there's a very high shareholder value proposition from bringing these companies together. And now we're not even debating that anymore, debating the direction we want to go. We are debating how fast can we get there.

I was going to say it's probably now the key variable is the speed to integration and it's. There's certain things that you're proactively doing to integrate faster.

Yeah, it's interesting. So the context is that we've left these acquired businesses to a pretty great extent on their own with their own business process and system platforms and we're aggressively investing in bringing them together. In fact, we just went live a few weeks ago with a big implementation where we're taking all these disparate systems for our North American construction software company, some of which were acquired five, six, seven years ago and pulling them all together. And that's really taxed our information technology team. So when we make a big acquisition, our ability, the pace at which we can integrate those new businesses is slowed down somewhat because we have so much to do even today, integrating what we've acquired over the last few years. But we're excited about it, we're going to get to it. This will make us a more scalable, more efficient business to work in, will be much more customer friendly for customers that want all these solutions connected in a way that adds value to them. It's hard work. We have a lot going on, but I know that the direction we're going, all the validation we get from our customers, from the employees of our acquired companies, it's just reinforcing that we're going the right direction.

Yeah, you got a really good mindset around this. Not all pre deal. You're investing a lot post deal.

Oh yeah, absolutely. I say it's easy to buy a company. It's hard to make an acquisition work. And the success that can come from that hard work when you do it right is really compelling. So we have a party typically when we do a deal, but we like having the bigger parties when we've really achieved success for our shareholders and our customers. And that takes longer.

Biggest lessons learned from M and A for the next CFO is going to work on M and A, wherever you want to take it.

In some ways, the financing part is the easiest part. Evaluation. You can look at comparable transactions and trading multiples. You can do the NPV and IRR calculations. Yeah, you got to try to get the forecast right. But where, where value is really created is in two fronts. First of all, it's getting the strategy right. Do you fundamentally understand how the business you're going to buy creates value? What's its competitive position and how well does it fit with our company? You have to get that right. And if you don't, all the modeling you do and all the spreadsheets and the valuation approaches won't matter. Then I'll say the other insight is that every business is a collection of people. The employees, the customers, suppliers. It's really important to spend a lot of time and sometimes CFOs aren't very good at this, but to spend a lot of time really being thoughtful about the motivations of all the stakeholders. So before Trimble, I was CFO of a big engineering and construction company that had been employee owned for over a century. That's a consolidating industry. And there was a Very strong financial logic. Why not? Being an employee owned company was a good idea, but I think I under invested in understanding the motivations of the people who are proud of the heritage of the business. And I got things better when I put aside the spreadsheet and really focused on addressing what was on their minds, understanding it and figuring out how we could make the sale of that company a really compelling proposition for people who probably didn't want to sell or weren't that interested in the financial side of it. So I think that's where CFOs, if you're driving the M and A process, you really got to think about the softer side, the motivation of the various stakeholders and make sure you get that.

Right much more than the numbers. Yeah, now I got to pick on you a little bit. So I feel like the general population, especially people that sell, think of the CFO as this big burly, stone cold security guard that guards the company vault. I'm curious, what's the best way to pitch to the CFO in terms of your experience from being the other side that really manages capital to the T?

I think it's a fair characterization or stereotype. You know, can stereotypes be fair? It's true that CFOs tend to be more prudent than other members of the management team. The label has probably been applied to me and I wear it proudly. I do think I'm the shareholder's advocate when we're having these, the meetings about a really big investment. My job is to be looking after the shareholders. Not that my colleagues aren't, but it's just not their first instinct. CFOs are risk managers. They typically have an important risk management part of their job. So if you're selling to a corporate cfo, recognize that they've got risk on the brain, that's what they're supposed to have and help them understand risk. I tell you what doesn't work for me is a really salesy approach that says there's nothing that could go wrong and this plan is a lay down and everything's peachy and perfect. No important enterprise is in that situation. What I like is when someone says you're right, there's a risk, you're not thinking about that risk exactly right. It's a little different, but it's there. Here's how we think about it and here's how we manage it. To me, that person, whether it's a investment banker or a CEO of a target company, when they can talk confidently about the risks and challenges that actually Reassures me that we're getting the straight story. No big deal. No big business decision is without risk. And if you want to avoid risk, your enterprise will shrink. And sometimes avoiding risk is, ironically, the riskiest decision of them all. I get that we need to take risks, but I want to understand them, and I want to make sure that the people who are working with me acknowledge the risks and are also thoughtful about them and how to manage them.

Well, that is gold. That's what it comes down to is beyond the story of the hockey stick going up into the right. It is about where those challenges are.

And every forecast I've been given, every forecast I've created is wrong. Particularly in this very dynamic and volatile world. The best way to think about any investment is there's a range of possible outcome, and how do you handicap the better and the worst ones, and how you. How do you manage through them? That's. That's the job of leadership in business today. And I think you just have to embrace it. And I think most CFOs just bring their own particular lens to that process. That's good. That's what they should be doing.

That's very on point. David, what's the craziest thing you've seen in M and A?

I'm pleased to tell you I haven't seen anything that I feel is crazy.

You know, people say that they haven't done M and A is the saying, but I'm just kidding.

I think I've avoided a couple situations that might have felt crazy and that cultural fit. If you can't trust people, then it doesn't matter. All the audits and all the due diligence work you do. If the people you're dealing with on the other side of the table, whether you're a seller or a buyer, if they're not honest and trustworthy, then you're in trouble. And I have been both the seller and the buyer. I think the most, maybe surprising thing is how fundamentally we're all alike. I've done business all over the world in different cultural contexts, and most of the people who are really committed to the business they're working in are honest and are straightforward. It can be more complicated when you have people who are very meaningfully compensated on the transaction. That's where I've encountered more situations. Not too many, but where I thought, are they telling me the truth? Can I trust them? And if I figured out I can't trust them, I just ignore it. But I would say most of us were committed to the same Kinds of things. We want to be part of a company that's doing something worthwhile and interesting, that's financially successful, it's a good citizen, it's a good employer. Most of us want to grow so we can debate around the edges. But I'm an old man. I've done this a long time. I think if you spend too much time watching the news or reading Twitter, you convince yourself that everyone's angry with each other and untrustworthy. And that just hasn't been my experience.

Do you have an example when there was a lot of money at stake, that made a change some behaviors a long time ago?

Not at Trimble. Long before Trimble, I was involved in an acquisition where the sell side banker who was going to get a very big check, I had reason to believe that he was untrustworthy. And the answer at the end of the day was just hide him from me. We had our own bankers and he could talk to the bank, but literally I wouldn't be in a meeting with him because I knew he just. In fact, if he said that the sky was blue, I would pretty much assume it wasn't. We ended up doing the deal. He was a disruptive influence. If he'd been in management, we wouldn't have bought the company. So yeah, that was. I guess that was a negative experience, but I think we managed around it.

That's interesting though, that even the culture to the banker that you're hiring could make an impact, an impression, I should say.

I work with a lot of great bankers and I believe a good banker can be an incredibly important partner to a cfo, whether on the buy side or the sell side. They bring analytical rigor skills. It's just so important that you have that sense of trust, that you're both aligned, driving value, shareholder value, and doing the right thing for the other stakeholders. And the best bankers do that, but not all of them do.

Absolutely. The far and few are the best ones out there.

That's right.

Find them, hang on to them.

Absolutely.

David, this has been great. Thank you so much for taking the time to have this conversation. Every conversation helps me become a better M and A scientist here.

Yeah. Thanks everybody.

Those of you still with us, thank you. And until next time, here's to the deal.

Foreign.

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