M&A from a CFO’s Perspective Session 2

This is a conversation with Sam Wilson, Chief executive officer at 8x8. Also the former CFO at 8x8. His military background sets him apart with his leadership skills. This interview is all about the role of the CFO in M and A. We covered integration, budgeting, risk management in M and A, managing people and best integration practices, working with the CEO and the corporate development team and Walking away from a deal it was a great conversation. There's not a lot of podcasts out there where you can listen to public company CEOs talk about M and A. Now a quick mention of our sponsors. The best way to support us is just by taking a quick listen. Deal Room the best M and A software to manage M and A. End to end pipeline, diligence and integration. All interconnected so diligence goes faster. More importantly, integration goes faster and you can prove the value being captured. See why the best companies like Broadcom, Block, Emerson and hundreds of others use Deal Room to stay ahead of the competition. Learn more@dealroom.net. again, that's dealroom.net firm room for when you need a simple virtual data room that just works. The VDR providers out there that fill you by the page are not your friends. Run away from them. Same goes for the investment bankers who recommend them so they can get free ball game tickets. Check out Firm Room. There's a free trial so you can see how much better the product is and compare how much money you'll save. Visit firmroom.com for a free trial. Again, that's firmroom.com you can learn more about both Dealroom and Firm Room in the description. Let's get to our conversation with Sam. I'm Kisan 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. Welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven topics techniques for enterprise value creation. If you're interested in learning more about the products and services we develop to support world class M and A teams or want to get involved with our community of forward thinking M and a practitioners, visit mascience.com you can get started by subscribing to our free weekly newsletter for the latest insights and events. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M&A Science. Joining me today is Sam Wilson, Chief executive officer at 8x8 8x8 provides contact center as a service and unified communications as a service software applications. Over two and a half million users traded on NASDAQ under E G H T. They're going to talk about the CFO's role in M and A. Sam, how are you doing today?

I'm doing great. How are you doing?

I'm great. Thanks for taking the time from running a publicly traded company and doing M and A deals to have a conversation with me.

Many mentors throughout the years helped me learn a lot of stuff. So I always feel a tremendous debt of obligation to pay it backwards to the people that helped me. And you're doing that for me. So thank you so much.

Hey, I like to hear that. I'm going to do my best to learn as much as I can from you. Can we kick things off with a bit about your background?

I was a military officer. I was a product manager in the semiconductor capital equipment business. Went to business school, worked on Wall street for 12 years as an equity analyst. Then I managed money for some billionaire family offices for a few years. As part of that, got to know a lot of venture capitalists. I was asked to do some consulting work originally for a startup company that was a rocket ship. Helped them out. Ended up becoming a full time employee as a vice president of finance. Moved to 8x8 2017. In the last almost six years I've been the head of small business sales, small and medium business sales and go to market first chief customer officer, managing director in Europe, chief financial officer for a couple of years and now I'm the CEO.

Well, I want to back up. You were in the military for a period of time?

Yeah. Military taught me everything there is about leadership, managing larger organizations, those kinds of things. I would not be where I am today without being in the military.

Is there anything that you brought to M and A with you?

Hundred things. I'm a Ranger qualified individual. So I've been to Ranger School, which is one of the toughest schools in the US military. It's analogous to Navy SEALs, buds or whatever the case would be. Super hard school, et cetera. One of the key lessons I learned at Ranger School is was that people want to do the right thing. No one comes to work wanting to sabotage a business. When you're a leader and you're looking at your organization not performing as expected, the first thing you have to do is look in the mirror and say, am I communicating what's expected? The first paragraph of a five paragraph operations order is what's the commander's Intent. What are we trying to do here today? Too frequently in M and A transactions, it's outside the norm of a normal operating business. We sell widgets every day. Suddenly we're acquiring something that either doesn't sell widgets or is a competitor of ours or the case, it doesn't really matter. But it's not our normal course of business. And so you have to be overly communicative about what your expectations are, what's happening, what are the operational goals, what are the KPIs, those kinds of things. The military taught me that. Because the military taught me that. No one's coming in and saying, oh, I'm going to sabotage the 7 a transaction. People are coming into work saying, oh my God, I want this to work right. My boss, this is a chance for promotion. A lot of opportunity here, but they don't know. The biggest thing I would say that the military teaches around M and A is communicate, communicate, communicate. So if you're going to take the hill, everybody needs to know you're going to take the hill, how you're going to take the hill, when you're going to take the hill, what you need to take the hill, everything.

I can see that'd be an invaluable skill. I'm looking at my notes from our first conversation and this came up, you had a different answer. Because of that background, it makes you a better M and A person. Because once you've been shot at, you never stress about getting a deal done.

Okay. That's a general business lesson. Too frequently we induce stress into the organization over things that aren't that stressful. Yes. Once you've been shot at, suddenly how many phone systems we sold yesterday gets put into perspective. You need to put things in perspective about what you're trying to do when you're trying to build high performance teams. Every business today falls somewhere on the scale of human beings doing something for other human beings. And that's a leadership problem. That's not a management problem or a manager problem. That's a leadership thing. There's a time and a place to yell and scream and jump up and down and there's a time and place not to.

Fair enough. We'll get some hopefully examples in this conversation. Can you tell me about the M and A experience, the that you've had? I think 8x8's been pretty active.

I'll cover it to it. So when I was on Wall street, obviously I was an equity analyst. So a lot of the companies I covered did mergers and acquisitions. That taught me the spreadsheet answer, the merger model. What do the synergies look like? How do you cost a deal or price a deal? Those kinds of things. And then when I was at MobileIron, we did several deals and there I started to see the operation side. And then since I've been at 8x8, I've really gotten to see the operation side of actually. How do you combine two companies? We've done everything from a small merger to a $125 million merger across 12 time zones away to a $250 million or $220 million acquisition that was transformative as and not transformative. It was massive for us as a company in terms of size and scale. So we've done everything from small tuck in through big gnarly M and A transactions. And I've learned throughout my career how to decide whether to do a transaction or not. And then the actual mechanical operations of integrating two companies and making those things work.

Can we talk about the role of a CFO in M and A? How would you break that down?

Let me take a step back and just give your listeners a big picture answer. You can do five things with your capital inside of a company. You can invest in your business, commonly referred to as opex. You can pay a dividend, you can buy back debt, you can buy back stock, or you can do M and A. So the number one role of the CFO is to decide at any given moment what is the highest, best use of the capital that we have inside of a company.

I want to make sure I got this right. Here's your options in terms of what you do with the money in your company. It's either invest in the company itself, pay out dividends, buy back your stock, or do M and A or buy back debt. Buy Back Debt is another one.

Okay, so there's a great book called the Outsiders by William Thorndike. He talks a lot about this in his book. It's a fantastic, fantastic book. Every CEO on the planet should read it. It should be like a government regulation.

What was it called?

The Outsiders by William Thorndike. I probably single handedly keep the book in print because every vice president of my company gets given a copy when he becomes a vice president.

I'm going to check it out.

Talk about what CEOs do well and what they don't do so well. CEOs in general are sort of Jim Collins 101. Get the right people on the bus and get them in the right seat. They're pretty good at having a Vision. If you're Simon Sinek, you believe that the CEO's title should be Chief Vision Officer. The place that usually the weakest is in capital allocation. You need to make sure that the money you allocate inside of a company is in line with the people you have and the vision you want to have. M and A plays a role in that. When you think about M and A in the context of those five options, you then get very clear on when to do M and A and when not to do an M and A. That's a CFO function. I hate to say it. It's like a spreadsheet, mechanical, and those numbers change every day. But it's a very focused. We have a finite pile of money. What should we do with that money? Any given Second is the CFO's responsibility to be the strategic advisor to the CEO about, hey, this is the right use of our capital right now. That's number one. Number two is there's obviously the deal mechanics. They're super important around pricing the deal, working with the bankers, working with the lawyers, due diligence, et cetera. You really want to task a senior level executive. So it's your COO or CFO. I mean, I'm a big believer. It's CFO's job to go in there and make sure the thing that we're bidding on, the thing that we're negotiating a price around, the information that we have is the information that's true. When you start from a position of truth, pricing a deal, et cetera, negotiations are 10 times easier when you know what's true. The greatest example is, of course, the company will say, but we are about to launch this product and it'll be worth a gazillion dollars. What's the analysis behind that? Is that true or not true? Once you get that, negotiation becomes almost secondary because you have a price. You have a price that makes sense to you in the terms of your five frameworks. All the information around that you're pricing, don't go beyond that price. You'll be okay.

Responsibility of pricing the deal falls on the CFO.

I believe so. CEOs by nature, and I've been in both jobs, CEOs by nature are optimistic. That's what made you a good CEO. You stand in front of people and say, why my company's undervalued, why my products are amazing. We're optimists.

I agree, I want to buy everything.

You need a little bit of a view of, okay, you can buy everything, but here's the price we'll pay for each one of those things. That's the CFO's role. He or she is the person who's really grass tacks deciding what's this worth? Because remember, I'm a firm believer that this is relatively straightforward. You understand the context of why you're doing an acquisition and then what the return for that is. In the end, we're all about financial returns for the actions that we take, the financial returns. As soon as I say those words, CFOs, it's written abross's chest. That's their job.

Is it fair to call that risk management?

Well, you risk adjusted. To me, there's a couple angles to risk management. Number one is there's the due diligence aspect is the information we have, true or not. And everybody I'm sure that comes on your podcast can say at some point they've acquired something and three months later they were like, that's not exactly what we thought when we were doing due diligence. That didn't quite come across. I'm sorry, you're billing customers that have already churned on you and you're recognizing that revenue. That's a little wonky. I can use something analogy everyone understands. When you do a remodel, what do they tell you? Add 20% on it or whatever you think the budget's going to be. That's risk adjusted. That's risk management. The second part of that is the actual brass tacks of understanding what you're integrating. Are we acquiring this company for customers? Are we acquiring this company for technology or products? Are we acquiring this company because we're trying to lead a transformation? If you don't understand that, you don't actually understand what the key risks are. So let me run through those in sort of a framework. Answer. If you're acquiring customers, then customer retention. If you're acquiring products or market adjacencies or those kinds of things, what's the ability of your salesforce to sell those, how good are those products that you're acquiring, et cetera. And if you're running a transformation, and that transformation may involve keeping the management team of whatever you're acquiring because they're the ones that built the thing that you're using to transform, what's your employee retention strategy? So what you do need is as part of that framework of why we're acquiring something. First framework, should we acquire second framework, what's the core reason, what's the price, et cetera, Your risk assessment or your risk judgment has to Go back to why we're acquiring this and then those move top of funnel or I guess top of the to do list. In terms of the integration plan and those kinds of things, you always, every business leader makes trade off every day you're going to have to sacrifice something. And so you should plan ahead for the things you're sacrificing. And if you plan ahead for the things you're sacrificing, then you've got the maximum effort dollars, brain trust around the most important things.

All right, so I got three pillars of this role. One is this the buy or not to buy. And then there's the pricing, which ties into the information you're getting and making sure that's good. And then this third that we'll probably expand on is integration. Yeah, I'm curious about that one. If we're looking at how this deal expands, there's a strategy at play. I'm the happy go lucky CEO that wants to buy everything you come in with, hey, on the point of how we're exercising our capital, is this the right thing to do? And look at that from that view, making sure that the allocation capital, return.

Roi, whatever you want to do.

Yeah, pure capital allocations at best interest there. And then we look at a deal, we get to the point of, yeah, this is something that makes sense. Generally we get to the pricing component. When you mention that information you want to get, there's things that you mentioned that are very strategic to the deal itself. But as a cfo, am I mainly focused on the financial information to build the model and get the assumptions out there? That's a core thing.

The reason I put integration under the purview of the CFO is there is a set of assumptions that that CFO has that makes the pricing in the model work.

Yes.

So company A is acquiring company B because we want to get access to company B's customers. So the most important number is is the retention rate of company B's customers. So the CFO has a model that says to make this whole thing work financially, we need to retain this much customers. We need to have revenue synergies of X, cost synergies of Y. How does the world work when the CFO builds that model and you price based on that and then you hand it to someone else and say you didn't build these assumptions and you really didn't have a lot to do with them, or maybe you were in the meetings or whatever, but you're now responsible for that F that cfo, you built this model. We Made the decisions based on the model that you built. We made these decisions based on the assumptions that were in front of you. You own go make it happen for.

The CFO to own it. Yeah, but then you got to have your management team on board.

Of course.

How do you do that? This is where I always hear the things go awry when this numbers get made. And then who is that accountable for those assumptions?

I've got stories upon stories of that. And even after they say they're not going to go awry, they still go awry. That's that fudge factor. So as CEO, you say to the management team, I think we should acquire company xyz. And I'm going to do this at the not Microsoft level. At the Microsoft level, it's probably some BD person and some general manager or some division because they're so big they can push decision making down. But there's some leader that's saying, hey, based on what's happening and where we're going and what we want to do, we think it's time to acquire a company xyz. Then you drive that and you start to say, all right, at some point, before even due diligence, you're going to go around the table and you're going to say, hey, I've got this thesis that we should acquire company XYZ and your management team, your general, your division management team or your overall management team, you have to go around the table and I do it by calling their names out. You have to go around the table and say thumbs up, thumbs down. Now thumbs up, thumbs down isn't set in stone. But you have to force people to make a decision. Because the easiest answer is to do the Harry Truman, I call it because Harry Truman wanted one handed economists. Because economists back in the day would say on the other hand, on the other hand, on the other hand. And he's. I can never get a straight answer from them. If you let your management team do that, you'll never get a straight answer. We should acquire them. But let me give you three reasons why we shouldn't acquire them. But if it works, I want to take credit for whatever. Forget all that. Should we do this or not? Because in the end there's no return policy on M and A transactions. You have to sort of get that buy in. Number two is as part of due diligence, you send the individual respected directors or leaders into their core area and then you say you're going to be responsible for integrating. So sales, you're integrating sales customer Support R and D, R and D, whatever. You're going to own this whatever. But cfo, you're the executive sponsor of making sure integration happens. But the CFO is not going to go down and say, okay, this scrum team is getting linked to that scrum team, whatever, that's your engineering leadership. And you got to go all the way back to pre due diligence to get their buy in that they're on board with that happening.

How does this stuff, I'm thinking of organizations that get big, they get business units and then they get more business units and it becomes a platform. Like how does that relationship cascade for you? That is a lot of this working with a business unit leader and then they're working with their functional leads. How far do you actually click down and you're mentioning a lot of this stuff is really orienting people more than anything.

Yeah. Because in the end, when you get to mega scale, you can maybe afford to have M and A teams that do all the integration, everything as their full time job. But for 98% of companies, it's the regular people who are doing their regular jobs, plus integration. And so it really comes down to it's not a separate team, it's not a separate thing. And a lot of times I will tell you the mistakes from the human being sides come about from what I thought they were doing it or they were doing it and you're like, whoa, I don't know why you thought that you're doing it. Think about it. So Harvard Business School, others have written a lot about M and A. Two key factors that drive whether M and A is successful, the price you pay, and whether you can integrate the darn thing or not. And integrate is a term not like Borg Subsume. Sometimes you run as a wholly owned subsidiary, sometimes you run it's whatever level of integration was built into the original framework of doing the deal, whatever that is. Can you do that correctly? The operations, if you will, of the transaction themselves, that's what's going to drive the whole thing. Soup to nuts price you're paying. Do the operations work? As soon as you mention operations, that's a human being thing.

So if I'm a cfo, whether first time doing an acquisition or the more common do about a deal a year, what do I do to keep from screwing up integrations?

You get the framework set ahead of time. We've done acquisitions that are small. We didn't use any outside parties. When we did our Fuse transaction, we used E&Y's integration team. And I hired them for 12 weeks to help us out integrating. And that was worthwhile, that was worth its weight in gold because it was the first time that we had really done a global transaction. So what are the HR policies in 20 different countries? What are the back office entity structures in 20 different countries? All this kind of stuff. But you need to have a plan for that ahead of time. Too frequently, all the effort. I'll use a marriage analogy. And I've been married 23 years and no divorces. So there's all the dating, all the excitement's in the dating and then there's the day to day living together. But a marriage lasts on the day to day living together, not how well you date it. That's the key. The transaction has to work post transaction. And so you're the CFO you're responsible for. You need to have a framework for this. Who's going to do what? How are they going to do it? Are we going to have a weekly meeting, daily meeting? Are we going to do standups? What are we going to do? We're going to do it. How are we going to read it out? If you expect your CEO, and I'm a CEO now to do that, you're sorely mistaken as a CEO, I am going 40 different directions. The transaction may grab 10 of those slots. The best case, it's grabbing 25% of my mindshare. I still have to run the core business and that's a full time job on its own.

Get a good framework in, get some expertise. If you have no idea what you're doing.

Yeah, absolutely. Spend up. You're spending a ton of shareholder money of some sort to do a transaction. Yeah. If you don't know what's true. If you go to a deal three months after it closes and you say, wow, we didn't know, that's your fault. In due diligence. It's not somebody else's fault. It's not Sunspot's fault, it's your fault. Due diligence. Learn those lessons.

Fair point. How about the relationship, working with the CEO, how do you make that work? When's expectations that you get involved with the deal. You've seen both sides for the CFO role, now you're in the CEO role. But maybe we could talk about that.

The first thing and most important thing, and you're going to hear this all the time for me, first and most important thing is you have to be the arbiter of truth. Remember, a transaction's easy, a deal's easy, a everything is 10 times easier if you know what's true. And trust me, I've done transactions where I pitched the idea to the CEO. He was, no effing way we're doing that transaction. And then he was like, maybe we'll do the transaction. And then he was like, oh my God, we have to do this transaction. It's the greatest thing in the world. We can put a man on Mars if we do this transaction. And in that same time period as cfo, I went from hey, this might be a good transaction. And no effing way we're doing this transaction because of due diligence. I found these 10 things. You have to be that party that really drives what's true. Almost every transaction that we've done successfully at one point we walked away because there was something there that was a bridge too far. Now in almost every follow on we negotiated our way around that. That has to be the CFO because you remember the CEO. And I see this every day. You've got your board aligned. If it's been announced, you've got your investors aligned. Either way, you've got your board, your advisors, trust me, the investment bankers, they want a deal done. Your BD team wants a deal done. Usually the people receiving the employees or receiving the products, they want a deal done. You've got to be that source of truth. It's the most important job.

What have been those like points though of friction that gets you to say walk away from a deal.

So I've walked away from a deal because in the presentation there's that early dating period. In the early dating period, the target gives you some great presentation. Here's our numbers, here's our financial model, here's our new products, here's what we're doing. And based on that we build a financial model and we say, okay, based on all that, here's what we think the value is X. Well, it turns out in due diligence, one of the numbers given in that presentation that drove the financial model wasn't exactly accurate.

Maybe is the word it was made some shit up.

It was the, this is the number without the bad stuff. Once that was discovered, it fundamentally changed our financial model. And we came back and said look, we need to talk about price because this is wrong. And they're like no, no, no, no, we gave you a number. It just these one time events or these non recurring events or whatever were not. Oh, I actually had to go back to get the original presentation. Another thing I'll tell you is store everything the lawyers need Everything, Store everything. When I got the original presentation, highlighted it, took a big arrow down to it and said, that's the number you gave us. There's no asterisk, there's no footnote on the slide. That's the number you gave us. It's true story in this deal. They said, fine, we're walking away, we're going back to the airport, see you later. And I went, can I call you an Uber? They went back, they got on the plane, they flew home, and by the time they landed, they called back and said, so what would it take to get this deal done?

Wow.

But that's a great example. Due diligence. You're going to find things we found in one of our transactions. A tax issue in due diligence. When I said negotiating around it, I set up a separate reserve. There's a tax issue. They were in dispute on some of their taxes. They said, of course. Our advisors say we're going to fix this for this many dollars. Our advisor said, that may be true or it could be this big. And we said, okay, we're going to set up a reserve and if it's this big, fine, we'll cover it in the purchase price. If it goes above that, then it's coming out of the holdback. They're negotiating points. Goes back to what you said earlier. You're hitting the key points. If you do due diligence, well, you can figure out where the risks are. If you figure out where the risks are, you can start to put either human beings or contract terms or whatever the case may be. But you got to know why you're doing the transaction. You got to know what the financial assumptions are around the transaction. And you have to know all that due diligence stuff around those items. There's five things that we found in due diligence that we're like, yeah, okay, fine, not core to the premise of why we're doing this transaction. Do I wish I would've known? Sure. Now I know. Not enough to go negotiate pennies, but if it's key and core to why you're doing the deal or why you're pricing the deal the way you are, you gotta be willing to figure those things out.

Yeah, you gotta get out there. Going back to the CEO relationship, you use that phrase, arbitrator of truth, you end up having like a good cop, bad cop relationship with the CEO. And you. Because I can easily see that happening.

No, it's more like the Godfather than good cop, bad cop. You're Tom Hayden. You're the Consulari.

Okay, fair enough.

Look, in the end, it's the CEO's call. It's his or her call to override it, overlook it or whatever. You just want to make sure that they walk in all the time with the correct maximum amount of information. We're talking about M and A. But what does a CFO do in general inside of a corporation? They are not responsible for a line operating division. So they're not building products, they're not selling products, they're not marketing products, they're not supporting products. They're running the financial picture. And what are numbers? Numbers are unbiased representations of what's going on at the company at any given second. The CFO's job by its very nature is you're across the whole company. What is going on? What is going on? X 6 syllable words that are BS. Numbers don't lie. When I was on Wall street, my boss used to say, sam, numbers don't lie. Management teams, eh? And so that's your job as CFO in general is to be an arbiter around what is actually happening at the.

Company and then being a representation of that, weighing in on the deal. So I take it you're involved with the deal from the beginning?

Yeah, you should be.

Are you talking to the management team? A lot of times I know the CEO is going to have conversations with the other CEO. Get some general, yeah, we're interested in talking. Are you a part of that? Are you? Was the NDA get signed and then we get a bunch of financials and say I want you to take a look at this deal. Like how does that play out?

There's a bunch of your lawyers and your advisors will tell you there's a bunch of gates. Once you start signing things, certain set of legal ramifications start occurring. Once you sign the NDA, once you sign an loi, once you sign the actual terms of deal, et cetera, et cetera. Let's talk about how we source deals. Three ways to source deals. CEO finds it, he's at the run of the mill cocktail party and other CEO approaches him and says, hey, we should merge our two companies. Oh, okay, baby. Biz dev is out prowling doing whatever biz dev does. The other cocktail parties, they're out there trying to figure that out. Or see your investment bankers come to you with an idea. At some point past that first thing, CFO should be involved. He or she may not be directly involved. I usually assign someone from my FP and a team. Once we get to the hmm. Should we do this? You're on the deal. Build me a model, start a running spreadsheet on what the assumptions are, what are we talking about? And then once the first sort of presentations come along, the CEO and CFO need to be in constant communications because what'll happen is at all the big presentations, obviously the CFO is there, but the CEOs will have conversations and the CFO needs to get a readout on all those conversations. Need to be in the room. I just need a text. Hey, talk to someone. John Smith, he says blank and blank. Because you need to keep your CEO at. That's bs. Let me tell you the real numbers. He's making stuff up. There's all that kind of stuff.

Awesome. You're gonna be excited. We don't have a CFO right now. We're only 50 heads in the company.

But so look, what I would tell you is in general, at some point you need a vice president of finance or a cfo. And the thing you tell that CFO is, look, your job is to get the books, get em accurate, read out to the board and read out to investors and do all the other stuff. Sure, that's your day job, but your job, between you and me, is you're the arbiter of truth. You're running the numbers. You're deep in the numbers. When I was cfo, it's actually one of the things I've lost a little bit becoming CEO. When I was cfo, I knew so many numbers like the back of my hand because you live in it every day. And once you become CEO, one of the hardest things about becoming CEO is what I call context switching. I sit in the meeting, I'm meeting with the product folks. 59 minutes later, I'm meeting with sales. 59 minutes later, I'm Meeting with support. 59 minutes later, I'm on the phone with our top channel partners. 59 minutes later, I'm on the phone with an upset customer. 59 minutes later, I'm ON the phone with the prospect, trying to close them to be a customer. I'm constantly context switching these meetings. Cfo, you're in the numbers model. What's happening? Where are we going? What are we doing? Salesforce dashboard, et cetera. Your job is to do that for the CEO. We have a meeting every week that we call course and speed. That's run by the cfo. What is our course? What is our speed? You own that as your meeting. It is probably the most important meeting.

How do you tie into strategy in terms of wrapping your head and really understanding the strategy. And how do you do that?

As a CEO, you have a strategy, some vision around the product, the customers, the markets that you participate in, I'm going to guess for a second, your business. So you sell primarily to business development people, investment banks, law firms, et cetera. And so you've got some sort of vision that we want to capture big law firms and then go to little law firms or big investments. I can make this up all day long. But you have some strategy in your head. And what your CFO then needs to say, is it working? Is it not working? What's happening? Et cetera. The thing the CFO doesn't do is they don't help you get the right people on the bus and get them in the right seat. They may interview them. They may be a second voice in the room. That's really your job. And they're not setting that vision. Where do you want to be in a company? And too frequently, where I see CEOs make mistakes is they view the outcome as the vision. I think you're a private company, so you want a $5 billion valuation. I would tell you that's a stupid vision. We want 10,000 customers paying us $10,000 a month and 100 customers paying us a million dollars a month. And here's how we're going to get there. And that, in turn, at this assumption, leads to a $5 billion valuation. It's the customers. Where are they? What are they doing? Where are they? That's the vision, because that in turn drives the actual actions each one of the departments takes. One of the things I would like to do is, and I've said this publicly, is I have 65 scrum teams currently working on our contact center product. The contact center market, I think, is a $40 billion market opportunity. To go after a $40 billion market opportunity. I want over 100 scrum teams. So the thing that keeps me awake is trying to figure out how to get from 65 scrum teams to 100 scrum teams. Why did we do the fuse transaction? Because I picked up 20 scrum teams, and I was able to pay for it by sizing and getting their business correctly structured. That's the strategy. Where I've got a CFO is when I say, okay, like, how do we do this? Like, what are all the ideas on the board? And one of them is obviously, grow revenues organically or grow revenues through acquisition. That's where they come in. They help me execute that, but they help me execute the strategy. Away from bs. I've seen too many times in my career where blah, blah, blah, blah, blah, blah, blah blah blah. And the numbers don't match. The numbers have to match. And remember, the CFO doesn't have an operating role per se. They don't have a dog in the fight. They don't have a department to protect, they don't have a claim to protect. They don't have any of those things.

So the example you gave with market opportunity in the contact software side, the CFO is pretty much getting as lined as the CEO on it. But they're bringing this whole other perspective. Almost like you said, here's this little thesis that we're going after this 40 billion market, but what does that actually mean? And then you start breaking it down into some clearer metrics of what's obtainable to get there.

Like I want to go after that. Okay, what needs to happen the next 90 days? 180 days, 270 days, 365 days. And from a KPI perspective, FP&A team, CFO team, go figure that out.

So it's really a partnership.

It has to be. Being a CEO. Look, I can only speak of being a CEO of a publicly traded company and becoming a public trade income for a number of years. The job is too big for one human being. If you go to a four star general in the army, they have a huge staff. They have a staff measured in hundreds. These jobs are too big for one human being to do it all themselves. So I believe sports is a great analogy for business. But playing soccer, you can't play soccer by yourself. It's 11 people per side. That's the analogy. If you're the CEO and you're not looking around and saying I've got 10 teammates here to help me win this game, you're just the team captain today.

Really good point. The other thing I wanted to hear perspective on is I think a budgeting and a few different components. Here is overall M and A deal itself. Is that budgeted ahead of time that we're allocating X capital to do deals. After that we want to click down into how do you think about the integration budgeting.

So this gets into why you're doing the deal. So I think there's three types of M and A transactions and I mentioned them. There's a product service, either a product extension, a technology. I'm a technology guy, a software guy. So there's us tucking in a set of technology that we need, et cetera. But we're buying the technology there's buying customers. Oracle does this exceptionally well. They have a tendency more to buy customers than buy technology. AT&T, Verizon, the wireless guys, they Comcast, those are usually customer acquisitions. And then you have a transformational transaction. You're doing something because you need to fundamentally change the tone and tenor of the business. You're not messing with your product portfolio, you're not messing with your customer portfolio. You're changing something radical. Let's throw transformational out, because I don't think I would ever do one. But let's just say for a second. So when you go to a product acquisition, the decision you're making is make versus buy. Why am I acquiring this? Why am I not building it in house? And I can give you 10 parameters. One of the big ones are, do we have the talent to build it in house? Do I have to go acquire the talent? Is there a time to market here? So let's say I need to build a new product. That product is slightly outside of our core competency. We need to hire design teams, et cetera. And we're not going to get a product in market for a year, and our customers are asking for it now. I don't have a year to go figure that out. If you're Cisco, you're like, look, we have to invest in too many product categories as the market leader. And so we're going to let Sand Hill Road invest in dozens of product categories, and then some are going to be winners, and we're just going to go pay up for those, and we'll actually come out ahead because we want to have invested in all the other stuff, even paying up for the market leaders on customers. I can acquire customers through my marketing and sales organizations at a certain rate, a certain customer acquisition cost, et cetera. Or I can buy customers in the open market. Okay, so when you talk about budgeting, the way I look at it is M and A is an extension of what we're doing. Do I budget? Okay, we need to spend $10 to buy a company? No. Let's say I'm going to go back to technology acquisitions. I was going to spend $10 in R&D to build product XYZ. I'm now acquiring it. So therefore, I don't need to spend $10 on my own R and D anymore. So technology acquisitions, product acquisitions are an extension of the R and D line of the income statement. A customer acquisition is the extent of the sales and marketing line. So, no. Do I budget M and A separately? No. I look at it and purely say from a, I can do it one way or I can do it the other way. What's the most you can see in my framework where the CFO plays a pivotal role? What is our current customer acquisition cost? What does it cost to acquire? Risk adjusted through M and A.

Figure this shit out in terms of just planning for a year in the company of, hey, roughly. Let's think about how much we could spend on acquisitions for which of those strategies. No, no, because I was going to say, is it just the go happy, lucky CEO that finds shiny things? I want to buy this and then we got to build a case around it.

We're continuously looking for acquisitions. Continuously. And I have a low stock price now and I'm still looking at acquisitions. It's an engine. I'm continuously looking for acquisitions now. Go back to the big five. When I have a low stock price, is it better to acquire another company? Because everything is on a per share basis. So if I acquire another company, I can grow revenues on a per share basis or I buy back my stock, which grows revenue on a per share basis. So at any given minute I can be looking at acquiring another company or I can be looking at acquiring 8 by 8, which trades on the open market with low integration risk. It's the same to me as we do sales and marketing every day. We do R and D every day. We do M and A prospecting every day. The difference is depending on the big five, the hurdle rate of the likelihood of doing a deal. You traded a really high valuation. You're more likely to do a deal because your cost of capital is very low. And so it's better to acquire than it is to buy back stock. It's impossible to do a budget because every day the stock price is changing every day your acquisition costs are changing. Every day your R and D picture's changing. And so it just needs to be core in what the business is doing every day.

That's an ongoing conversation.

It's an ongoing conversation. At any given time, we have four to six potential transactions we're investigating.

Let's go to the live deal. We find something we want to buy. We started the pricing considerations around it. How do you think through budgeting around it. I think this is a dilemma that comes up where first time acquirers don't really budget integration. And I noticed more mature M and A becomes for a company, they start putting way more weight on integration and budgeting for integration.

Heck yeah. That's the CFO's job. The CFO's job is to say, that's the risk adjustment. What's it going to cost for me, not only what's the cost of the advisors and what's the cost of capital, but what's the cost of. Do we need outside parties to help us? Let me give you a simple example. Every company we've acquired have hired anywhere from two to six contractors, go through every one of their procurement contracts just day one, as soon as the deal closes, meet the six folks. They're going through every one of your contracts. I need to know, are there supplier overlap, what's the price you're paying relative to our benchmarks, et cetera, Day one. Those are all things that the CFO should naturally have in his back pocket as budgeted items. Do we need an integration partner? Do we need service providers? Do we need contractors? Do we need et cetera? And that goes into the deal price. The deal price is not. I'll use a startup example. $100 in revenue times 5x price to sales ratio. I'm paying $500 now, as I'm paying $500 to buy their equity. Okay, now I need to add $50 million, $20 million. Whatever integration costs, the total price I'm paying is $520 million. What's $520 million relative to taking that money and doing something else with it? You can see my framework as you ask these great questions. How the CFO plays this integral role in adding all that up for the company. Because they're not going to look at it and say, oh, my God, I want to do this deal because I get 20 more salespeople. Or, oh, my deal. I want to do this deal because I get 50 more engineers. They don't care about that stuff. Oh, my God, I do this deal because I get more cash flow per share.

Is there anybody else you collaborate deeply with than the CEO? I don't know if you have a dedicated M and A person or.

We do. I collaborate extensively with my investment bankers, my BD person. I'm a collaborative person by nature. Our BD guy that we use is awesome. But I've been like, hey, I think maybe we should do this deal. You're going to have to forgive me what I'm about to say, but our BD price is a little randy, to use the British term. But more than once he said to me, sam, put down the crack pipe. This thing has more hair on it. No, I've wasted enough time. You make me do due diligence around this, but no, we're not going to do this deal. Have a nice day. You need to collaborate deeply and then you need your BD person to know what the corporate strategy is so that you can get creative. One of the things I pride myself on is we have the ability to get creative. MA is not just company A, buying company B. What about strategic partnerships? What about minority investments? What about joint ventures? What about nre? What about all kinds of things? There are lots of transactions that have started as we want to buy you and it's ended with, listen, we're going to partner and if this thing works, then we'll buy you. And we've added a paragraph into the partnership agreement that says we'll buy you at this valuation if this partnership works.

Any other advice? Someone doing first time acquisition.

I'm going to repeat what I said earlier. So the advice is the price you pay and can you operationalize it. It's two most important things. And the price you pay has to be relative to the other decisions you can make with your capital. Too frequently, and I blame CEOs for this too frequently, we become enamored like kids at Christmas with acquiring a company and what we can do with it. And I fall prey to this too. Before I fall asleep, I have dreams of buying company xyz. It can't. It's got to be a hard nosed business decision. You go to great acquirers throughout history. Warren Buffett or Catherine Graham or Tom Murphy or Brian whatever his name is. He runs Comcast. He's great acquiring companies. There's a structure, there's a framework. It's never willy nilly. It is the same structure and framework you use to decide whether to hire sales reps or spend money on a product. You have to have that same structured framework around M and A. I guess the one other piece of advice I'd give you is pour yourself a stiff bourbon, turn out the lights, sit in a dark room with your stiff bourbon and ask yourself, why is this company selling? This is my problem with technology startups. My problem with technology startups. Why is this venture capital thing selling to me? Why?

Yeah, that's a good one.

Frequently in due diligence I can find out, product is an enterprise ready, product doesn't work as advertised, pipeline sucks. Whatever the case may be, this is.

A general question, but everybody's dying to get the CFO's time because you're signing off on a lot of big checks that go out to the companies and vendors and so forth. What is like the best way to pitch to the CFO or do that business outcome. Business outcome.

I can't believe the number of emails I get from BDRs every day. I've got the most sophisticated folder system to shove them all. And the ones that get my attention. The ones that get my attention. I don't care if you do accounts payable, accounts receivable, T and E expense reporting, whatever. The ones that get my attention. Hey, CFO, I can cut your close time by 25%. Probably full of shit, but I'm going to at least listen in case there's something in there. This is Tech Sales 101, or Sales in General 101. I don't care what you sell. I really don't care. What I care is what I get and the price I pay. What do I get? So if you're selling to the cfo, you guys run an amazing company. Hey, I can help you with your M and A transactions. I can increase the probability of having your mask transaction successful if you buy these products and services from me now, most of the time your CFOs are going to be like, I think you're full of shit. But you've already got the hook because they're listening. If you say, I sell a set of services around M and A, they're like, yeah, so does every investment bank, Silicon Valley bank, law firm, et cetera. I've already stopped. I've already delete your email. This is the thing I tell my sales teams all the time. You sell business outcome. The person buying your product or service does not care what you sell. What they care is what do they get?

You're going to have to let me know, Sam, who's the best sales rep on our team after he published this? Before we wrap things up, can you tell me what's the craziest thing you've seen in M and A?

Crazy. Well, look. Autonomy was that the company that HP bought that was a complete fraud. Buying a complete fraud, like that's the craziest thing. I don't know why those leaders don't end up in jail. How can you not violate your fiduciary responsibility if you buy a complete fraud? Did you not do due diligence? Did you not like what corners were cut? And I've had companies that we've talked to that said. I said you. There's walkaway moments. I have other examples of this where I've said, look, we want to call your top 10 customers and verify the amount of revenue that you're generating. Absolutely not. Okay, deal's done. See ya. It's Literally, like, no, no, no, no. We'll sign NDAs with them or whatever. But I want to see your billing records. I want to see if the presentations you're giving me on your top 10 customers match your invoice and billing records. And that's what I tell. I used EY. I told EY. Great firm, by the way. I told EY's M&A folks. I don't give a shit what the numbers are. What I care is the numbers on the slides I'm seeing and the invoice and collections team matches go down line by line for the top 100 customers or 200 customers. I forget and tell me they match.

Accuracy in the numbers.

You're using this to roll up a price, and the only two things that matter is price and operations. And that's in due diligence. You're trying to get the price correct and build the operations plan, but you're trying to get the price correct. The crazy stuff is I don't understand how you can buy an outright fraud. Enron and all these other things, the shenanigans stuff, I have a tendency to believe that those are people who were shady.

Yeah, I don't think I can get them on the podcast. I'll try. I like the idea of it. Oh, my God.

You should go through the records of M and A transactions where it turns out to be complete fraud and get the CFO of the acquiring company, not the acquired company, because the CFO of the acquired company is definitely not going to speak to you. He's still worried about being sued. He probably lives in Florida for that reason.

The other side will probably be a better story, too. Both would be a good story. But yeah, if anybody listening has got some tips, please reach out. That. I think it'd be a fun conversation. We can do a little series on M and A fraud.

You want to talk about lessons? I'd like to know what went wrong that you ended up acquiring a fraud.

I like it. I'll take the challenge. Sam, this has been a great conversation. I appreciate you taking the time. You're teaching me a lot, helping me become a better M and A scientist today.

Anytime, anytime you want anything, I'm here for you guys. As I said, many mentors throughout my career helped me, and the fact that I get a chance to take an hour and pay it back to them is hugely helpful. I'm here for anyone.

Hey, those of you still listening, thank you for sticking through. Until next time. Here's to the deal.

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