M&A Roll-Up Playbook: How Zayo Did 45 Acquisitions and Returned 8.5x | Dan Caruso (Part 1)

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I'm doing good. This is fun. I'm really looking forward to this conversation.

Thank you for hosting, taking the time from— we got a lot of things going on. To have a conversation, the hosting live here at your studio in Boulder, Colorado.

Absolutely. Thank you for being out here.

I think I was looking back at the notes and my first reach out to you was 6 years ago.

Okay.

So after 6 years of persistence, I finally got Dan on the podcast and with good reason, with the book that you published. That's one thing I wanted to preface that I really want to focus on the Zale story, but he has so much experience. Maybe we can kick off with just a little bit about your background.

Sure, absolutely. I grew up in Chicago, just south of the city, and thought I'd be living south of the city of Chicago my entire life. That's what was more traditional with my family. People just stayed around where we grew up, but for a variety of reasons, I ended up following a very different journey. After I went to undergrad and got an engineering degree, I joined management development program just as the Bell System was breaking up. So I was there just after we went from Ma Bell and one phone company to the spawning off of a lot of phone companies and the beginning of a new era. While I was at Ameritech in a management development program, I also got my MBA from the University of Chicago. And right after I graduated from my MBA that Ameritech was kind enough to pay for, I moved and joined one of the first big competitors to the Bell System called originally Chicago Fiber Optics, became MFS. We became the, not just the biggest fiber competitor in the world because we moved from US to Europe and Asia, but we also bought the biggest and baddest internet backbone of the early internet era called UNET. We sold WorldCom, which is a crazy story in and of itself. I then got back together with the CEO and some members of MFS, and together we moved out here to Colorado and we launched Level 3 Communications, which became the biggest internet backbone of that next era of the internet, as well as the biggest and craziest fiber network across not just the US, but again, Asia and Europe as well. I was there for quite a number of years. We went through the big boom cycle, gold rush, and then everything fell apart and we came crashing down and we didn't go through bankruptcy, but everyone else did. Eventually I left there and I led the take private of a public company that was about ready to go through its second bankruptcy. And that's when I started my journey as a CEO. It was very successful 2 years from a financial standpoint. We made 25 times our money back, but it was not satisfying because we basically broke apart a company. We fixed it, broke it apart, made money, but we didn't create something. And I'm a creator at the end of the day, not someone who tears things apart. That led to me launching Thales Group in 2007.

Born in Chicago.

Yes.

I'm born in Chicago as well. From there, phone company, Meritech, MFS, Level 3. I would say a good prerequisite to this interview is to actually read the book Bandwidth. Amazing job in just telling the whole story. It reads like a documentary of just how the industry— I couldn't count how many M&A transactions you referenced in the book.

Lots.

But what I loved is that you not only got this historical understanding of how that industry evolved from the rights along the railroad tracks to lay down fiber and everything. How do you get fiber across the ocean in the cities when you move it around underground? Also just getting into these M&A transactions that happen, but you tell a story from both sides, which I found fascinating. You hear a deal, then later it comes back and you sort of get the story from the other side, from buying and sell side. So that was a great background. Yeah.

I would say, you know, you mentioned it's like a documentary and that in some ways it gives you such a deep understanding of history, but I also tried to write it so that it felt like a novel. So it felt like a story being told, a story unfolding with multiple eras involved, but want it to be very riveting at times. The book Barbarians at the Gate was something I had in the back of my mind, one of my favorite books of all time, Den of Thieves. So I wanted it to at least in parts of the book, that have that kind of energy and dramatics and really understand the personalities and the backroom dynamics that were going on and crazy antics. There were so many compelling characters that were part of this big story.

It's one of my favorite books. I put it up there with Michael Dell's biography. Like, it really reads well. I got through it. It took me 3 plane rides and a train ride. That's— you got through the books.

There's a lot there, but thank you for getting through it.

Before we jump into Zayo, I'd love to hear just a little bit contextually how that background and experience that you had prior to starting Zayo just shaped your view about M&A from generally what you've seen work and not work.

I was involved in a whole bunch of both M&A transactions, but also lots of other big transactions, because when you're building out lots of networks, you're always doing deals, doing deals for right-of-way, which is the permission to lay your network in the ground. So doing big deals with railroads or with property owners, sometimes you're acquiring elements of the fiber. So there were acquisitions but not necessarily businesses. Plus we did a lot of M&A at MFS. That was my first big exposure. Actually, that's not true. When I was with Ameritech, I was part of their corp dev team, but we were doing a lot of transactions there, maybe not getting them to the finish line, but working on a whole bunch of them. So the transaction exposure I had from a relatively early point in my career, but so many transactions that I was part of and at a young age starting to lead a lot of transactions and managing a team of first dozens, then hundreds, then greater than 1,000, where a lot of people doing transactions that I had to keep an eye on and be part of more critical ones. So I did get a lot of transactional experience before sale.

You've seen some deals blow up too. You've seen WorldCom. So Given that experience, like when you started Zayo, what were some of the, I'm going to absolutely not do this?

Yeah, that's a good question. So WorldCom was the biggest bankruptcy of all time when it happened. It was the darling of Wall Street, the person who was thought to be the best CEO with the person who was viewed as the best CFO. They were on Businessweek covers and there was so much folklore about them, but there was also Quest with Joe Naccio and there was Gary Winnick and certainly the love— the MFS team was involved in a bunch of deals. So I was around all these characters doing all these deals. And yeah, I saw a lot of firsthand exposure to deals where I knew the business merits behind what they were doing were very questionable, but the optics is what they were looking for. We do this deal, that means we get to post a whole bunch of revenue and we could hide all the costs for the deal in our capital program. And guess what? You could do the same thing on your half of the deal. So we both look like We're having a really fast revenue growth rate and really high margins when all we did was a swap transaction and, or some kind of accounting maneuver. So I started to pick up early on that when you start doing transactions or even, even making business decisions, not because you're really building genuine value, but because you're trying to show the appearance of value creation, that sooner or later there was going to be a big price to pay for that. And I I fortunately learned that early on without having to be the victim of poor judgment and was able to build on that later in my career.

Don't do it for the optics. Make sure there's some strong fundamentals.

True value creation.

True value creation. Where do you see, given that experience, that first-time acquirers get wrong?

First-time acquirers, they're going to get it wrong more times than not because they're novices. When, if you're a first-time acquirer and you're trying to do something really big and really quick, you're probably going to make a lot of mistakes. So you're better off getting acquisition experience first by working on acquisitions that you don't do. Find opportunities, find opportunities to learn. So sometimes I like to, even with my young team today, is at times I'll ask them to go do something just to learn. Don't waste other people's time per se, but who knows, we might want to do something. So even though we think we don't want to, spend a lot of time on it because that's where you learn a lot. Where the stakes are very low. The stakes are really just your time, and you're going to learn how people react on the other side of a transaction.

So it's like you can just essentially do preliminary diligence on anything, just get your reps in.

Yeah, but if it's just diligence, then you're just, you're not going to learn as much. But if you test the boundaries, it's a deal that you're not really sure you want to do unless it's really compelling, and you don't think the other side would do it if it's really compelling, make the offer anyways. See how they react, what they come back with. Maybe you'll find that there's something more there than you thought, and you're going to learn a lot just by putting something forward and getting a reaction. It's when the expression, it takes two to tangle, find someone to tangle with so that you're learning how people react, not just from doing something on your computer.

I'm trying to think of the difference between getting there and actually getting a deal done where you're committed versus getting some practice in that experience.

Yeah, do some small deals then. Find smaller deals to do and get your experience on smaller deals. Well, small deals early on, as opposed to the first time I'm going to do something that's strategically significant, it's very costly and it's very risky. You're probably not going to be the one who ends up on the good side of that deal until you get some experience.

The experience matters that when you worked in corporate development, You were part of companies that were doing acquisitions. Well, I'll come work for you. Get some reps that way. Let's talk about Zayo. I want to go from the very, very beginning. How do you start it? What was like the very, very first— because I'm assuming we're going to talk through like building a thesis and all this and that, but where were you like, I got to go build something here?

Yeah. So I'm going to go to the period 2 years before Zayo. That's when I started to work with a couple of capital/private equity firms, Columbia Capital and MC Ventures. They were focused on the telecom industry and they had been for quite some time. As I was leaving Level 3 and was looking what to do next, they were trying to figure out how to put some money to work while the industry was in this highly fragile state. And we found each other and together we took the company ICD from being a public company to private. It was about ready to go through its second bankruptcy and we made an offer for the equity. And while we were doing that, I worked a bunch of deals on the side to fix a lot of their problems that were contingent on us getting the deal done. So over about a year and a half period, we went through this frenzy period of taking this company ICP and selling it off largely in pieces where we took some of their assets that might've been in one geography like Carolinas and sell it to a company that had more critical mass there. And it started giving me exposure to what was going on in this state of the industry where it had gone through a collapse and it was starting to reinvent itself, but very early. So when we finally sold the biggest piece of ICP, ironically to Level 3, I didn't go with that deal. But what I did do is I had surgery. I had to have, believe it or not, at a young age, both my hips replaced. So I was going to be laid up for a while and it was a beautiful summer. We had just sold the company, entered the— entered the agreement, but It was going to be 2 months before we closed, so I couldn't do anything else anyways. I figured Level 3 doesn't really need me to help do whatever they wanted to do during that 2-month period. So I got the hip operation done and then I had a lot of time. So what I started to do is just get on the computer and started researching what happened to this fiber network, what happened to this company. And it was like, wow. And I was starting to learn the stories. And very early on I'd be like, okay, I know enough. Let me like ping the person who looks like runs the company, introduce myself and say, hey, what's going on with your company? So I started to do that and everyone then would respond to me. They're like, wow, no one's called me up in a long time. Not since the good old days when everyone cared about what I was doing. Now no one cares and thanks for calling. And they started to tell me their stories. And that's where the thesis, the combination of what we did with ICG and then he's starting to do the research and just starting to talk to people is where the thesis of Zayo came from.

You look in the space, like what happened in all these other companies out there? And you start realizing, oh, there's quite a few of them. Started talking to folks. What was those conversations like? They basically gave you that point of, wow, we reached out. Was the conversation around what are you doing with your business? How do you sort of validate that there may be some real opportunity here?

What I was starting to learn was different than what I was expecting to learn because I came up with a couple expressions that I used in the thesis. One was fiber orphans. So fiber orphans meant it was some kind of fiber asset, typically in the form of a business, not just pure asset, but it was on an island of its own. Maybe it was a single metro network in a given city, or maybe it was a rural network that covered the outskirts of a certain market. Maybe it was 2 or 3 networks, or maybe it was even a fiber route that connected one city to another city. There were these assets that somehow found their way into context that was being worked by whoever owned them at the time. And then The other expression I came up with is accidental owner, like whoever owned those assets never intended on owning them. It was more opportunistic. It got spun off from another company because it was toxic for that company, or it went through a bankruptcy process, or someone cleverly saw an asset and bought it when no one was paying attention. Those were two. But the other big thing I learned too is most of them were like, our business is doing well. So our revenue is growing, our We got positive margins. In fact, we generate cash flow. That might not sound like much today, but in 2006, coming out of the heels of the big meltdown where everyone thought every fiber asset was toxic and losing money and worthless, you would talk to these operators and they'd be like, yeah, all is good. We're growing our revenue. We've got positive margins. We're generating cash flow. We're getting a lot of traction in the marketplace. I'm like, holy cow, this is a lot different than what I expected.

You learned some of these companies are orphan businesses or they're just essentially non-strategic, but they're performing well.

And no one was paying attention. No banker was calling them up. No strategic was calling them up. No venture capitalists or private equity firm was calling them up. They were just like operating their business and making some money and wondering if anyone was going to care about what they were doing.

Now you're connecting these dots. How do you go about building this investment thesis? Is it writing it out formally and then going out and pitching it? Or do you start calling some of those contacts you already have saying, hey, I'm seeing something here? What'd that look like as that progressed?

Turns out, and this is going to be shocking to you, when you make investors 25 times their money back in less than 2 years, they don't really care what your thesis is. They just want to give you more money and tell you to go do it again. I didn't have to go shop this deal with other investors. I decided here's what I wanted to do and then worked with my investors that we just Had come off of a great experience together and I had my management team, most of them went with the ICG deal that was sold to Level 3, but every one of them also said, just give me a couple months and I'll extract myself from there and hopefully you figure out what we're going to do next and we'll do it all over again. So I had kind of a team who wanted to reassemble around whatever was next. And I had investors who wanted to put more money behind whatever we were going to do. I needed or wanted more money than those those two investors were able to come up with by themselves. But they're like, don't worry, we'll get some of our friends to put in the rest of the money. So I didn't really have to go on a roadshow or pitch anything. We just got into execution mode.

See, this is what I've been told. Kison, you should go exit. They got one venture that's doing really well. Go exit. Then it's going to be easier to raise money in the next one. You'll be able to build your next success faster. But I don't want to be a serial entrepreneur. I want to exit MeetDots. What if you were that entrepreneur you sort of see this opportunity, but you didn't have that network. I get a lot of this outreach too, where we have a thesis on doing a consolidation or rollup, we're gonna go try to raise money. And I'm like, well, you raise money, then I'll come, I'm gonna help you out. But what would your advice be to that person that was at that point, they found an opportunity, they've sort of gotten to a level of a thesis of an area they want to consolidate, but they haven't spent the years and have that track record. Maybe they have some operating experience and it can reference that in terms of, hey, here's some validation that I can execute this. But how are you going to approach raising money?

The story I was telling you that was 2006, let's go backwards to the year 2004. And it couldn't have been more different because I was that person you just described. I was coming out of Level 3 and like a lot of places in the industry, a lot of us thought we were a big deal. Certainly Level 3 thought it was a really big deal here in Colorado. I leave Level 3 thinking people would want to engage with me on what I want to do next. And in part because the industry was in shambles, but also in part because Level 3, I thought we were really successful in navigating through this downturn cycle, but the outside world's like, you're just like the rest of them. Yeah, you didn't go through bankruptcy technically, but you went and were able to have cash to rebuy your debt at 30 cents on the dollar. So you bankrupt all your debt to avoid the bankruptcy on the equity side. And you're still struggling. So no one really cared about me. There was like a gazillion kind of ex-executives of the telecom internet world in that age, all looking what to do, and there was no money flowing. I didn't really have an independent track record that I could bring to the table, and I had some skeletons in my closet relative to the crazy cycles that we went through. So there were very few people who wanted to talk to me and give me money to go do what I want to do next. So I like to say that the reason I got the job of ICP as CEO take it private is because no one else with a good track record would've ever taken that job. On paper, it was a horrible CEO job because it was a super distressed company that everyone thought was going to go through a Chapter 7 process. And fortunately, I got introduced to these two investors by a couple different groups of people who told those investors, this is the guy you want to back. So at least a few people believed in me enough to get through all that noise, but I had to go then earn a reputation. So what would I tell someone who doesn't have a track record is, yeah, it's really hard when you don't have a track record and people aren't looking at you for how good your idea is. Yeah, they want to know your idea is a good idea, but that's like secondary to, do you have a track record? Do investors believe that putting money behind you means it's going to produce a great return on investor? And if you don't have much track record, they're probably— it's going to be hard to raise money.

Always is. You still didn't give me shortcuts on how to raise money if you don't have a track record. Oh, did I forget to mention?

Come from a very high net worth family and just have your— I never— that's a shortcut, but most people don't have that shortcut available. And many who do come from high net worth families, that doesn't mean they're just going to give you money to go do something that doesn't sound— so you got to just earn it. You got to think of all the great entrepreneurs that first come to mind. Who gave them money early on? Answer is no one. They just did what they were doing anyways. What I do give people advice on is if you think you want to be an entrepreneur that starts up a company, let's say you're coming out of college, don't start up a company. This is my advice. Find a company that already exists, is already beginning to scale, that already has a strong team, and spend a couple of years with that team and learn what success feels like, looks like, and build a network and be part of a successful journey in an area that you're interested in. And from there will come a really good investment thesis. From there will come relationships. And importantly, you'll know what success looks like. You know, a lot of people are starting up something from scratch who've never experienced success. They don't even know what success feels or looks like. They got to learn that often the hard way too.

1000% agree with you. It's number one thing I tell kids, undergrad that want to go do a startup. It's go find a Series A, B, work there for a few years and just, you'll learn so much.

Exactly.

Kind of like the earlier example, learn it more inexpensively. Would that still be true with a roll-up? Could you be somebody that's ambitious and wants to do a roll-up, but maybe I should go join roll-up, participate, and help execute that for a few years, then get that credibility to go start my own platform.

Yeah. So one of the things I'm most proud of and what probably means more to me throughout my career than anything else is to look now at the industry and see there are so many companies in the digital infrastructure that are led by people who are part of my team at Zale and/or people who are part of my team at Level 3. There's got to be at least 10, 12 companies right now that are being led by veteran teams from those two contexts. So yeah, they learned the playbook by being part of it first at MFS, secondly at Level 3, and then third what we did at Zayo. And they're the ones leading a significant portion of the industry right now. So absolutely clear proof of that.

So when we look at Zayo, it is having this thesis Those conversations probably built you some pipeline.

Yes.

You identified some opportunities.

Yeah, it did.

When you look at that thesis itself, how would you identify when people challenge it? What must hold true for this to work out and what are the potential threats of it not working out? How do you think through that?

Yeah. So some of the best business ideas are contrarian in nature. So everyone wants like a contrarian business idea. That's what you want to fund. The problem with contrarian business ideas is most of them are bad ideas. That's why they're contrarians. So the hard part is picking a contrarian idea that's also a good idea. If it's contrarian, that means most people will think you're wrong. So most people think you're wrong, you really are on the right path. That's where the magic comes from. So what was interesting to me is when I came up with the idea, now it sounds so basic. Duh, that can't possibly be your investment thesis. What's so unique about that? At the time, even my investors, they won't remember it this way, but even my investors who we just made 25 times our money back for and said, I'll back you in anything you want to do. When I went to them and said, okay, here's what we're going to do, they're like, really? That doesn't sound like a very good idea. All right, we'll back you only because you made money before and we know that you know how to pivot, and we hope that by the time you really start spending the money, you would've found something better to do. So if you ask them now, they'll be like, oh no, that was our idea. But that's how it played out.

Really?

Not quite to the black and white degree I just said it.

Well, I want to know your words, the premise of the thesis. It's got to be a little more than just Hey, we're going to consolidate these companies and do a valuation arbitrage.

It was a combination of— because remember, in that environment, everyone thought fiber networks were toxic. They were commodities, that the only way you're going to make money in our business is by having kind of value-added services and content. And whoever's operating at the infrastructure layer is just going to lose money. That was the mindset at the time, that these were not assets worth owning. They were assets worth not owning. No private equity company, no venture capital firm wanted you to even mention the word fiber optics in their investor meetings because they all lost so much money in it. So that was the context. So the idea was that there's these fiber orphans with accidental owners and their businesses are doing quite well. What they're focused on is the bandwidth layers. So we came up with the term bandwidth infrastructure. In fact, we were originally called not Zayo, but communication infrastructure investments, that wasn't a word back then. Now it's an industry. It was bandwidth infrastructure, then more broadly communication infrastructure. Now people, not surprisingly, are calling it AI infrastructure, but that didn't exist back then. So the idea that we were going to just get focused on working the depth and breadth of our fiber assets, we were going to focus on kind of that bandwidth layer. We were going to not get involved in the higher layer stuff. Those are going to be our customers and our partners. We were going to be really good at putting our core assets to work. And that's obvious now, but back then it was considered very contrarian.

You had a clear focus on where you're actually going to focus on the strategy. Do you have a view when you are building this thesis out and getting alignment with investors of what are the threats going to be? Like, what could potentially make this not work?

One of the questions that was faced is, What really will translate into true value in this kind of business model that we were describing? Because a lot of people want to focus on revenue growth as a value driver, and yes, you want your revenue to grow for certain, or they want to focus on EBITDA. EBITDA is a really important term and it's really important. The EBITDA in and of itself doesn't really mean anything. Could double your EBITDA and the question is, WBE is that good or bad? Because it could be good or it could be bad. It's good if you doubled your EBITDA and spent nothing to double it. That'd be really good. But if you doubled your EBITDA but spent a gazillion dollars to double your EBITDA, but it was at the capital line, therefore it didn't show up in EBITDA by definition, that doesn't mean you created value. You may have destroyed a bunch of value in the process. And when you're doing consolidations, you've got that component that yes, you're going to be growing revenue. How can you not be You just bought a company and yes, your EBITDA is bigger. It better be bigger. You just bought a company. How do you know what you're doing to both organically grow the business while you're also combining businesses together? How do you know financially whether that would translate into something that objectively speaking is true value creation? That part would let us to look at value creation more analytically and having lived through the experience where the appearance of value creation what people were doing in the outcome boom era. Like, as long as we're telling really good stories and we can give the appearance of value creation, that's enough. Because then at some point we can sell our company to that next sucker who comes along and then we're rich and they got the problem of this is just a house of cards. So we wanted to build something of durable long-term value in an environment where there would by definition be a lot of noise. Because if you're consolidating and then synergizing assets, there is going to be a lot of noise in the financial system.

Are there different views to that? Like here early on when you're like just before even do your first acquisition, here's what I hypothesize that's going to be a true value creation versus when you start doing deals and each individual deal may have its own unique view of how you're going to create true value off of that individual asset. Is that sort of like different where it's, here's a broad hypothesis of how we're actually going to create value stringing together these series of acquisitions? Versus each deal kind of bringing its own investment thesis on that specific deal?

A mistake that people make quite often, and I still hear it being said, and when I transitioned out of Zayo and handed the reins over, I immediately saw them starting to do this. I'm like, oh my gosh. And that is board members or investors think they're being very responsible when they say, if we're going to do this deal, we are going to track that deal and make sure that we can look and hold the management team accountable for delivering on what they said they were going to deliver on. Okay, we're going to be taking these assets that we're buying, these businesses, but these businesses have assets. And the first thing we're going to do is we're going to mash them together. We're going to mash them together. That's what we're going to do. And why are we going to mash them together? Because we want to harness the full synergies of bringing these assets together. We're going to bring them together so that it increases our ability to generate revenue. Because if you have double the assets in either a single area or adjacent areas, you could bring more product to your customers. You could sell things that neither one of them could have sold before. And we wanted it to be all on one system and we want it to look like it's a single asset. So if the investors or board tell the management team, we're going to hold you accountable for tracking those separately. Okay. But now you've just gotten in the way of our ability to get any synergies so that we can do a bunch of math on whether this particular decision was the right decision while you have no idea paying no attention on the aggregate of what we're doing. Are we creating value in aggregate? That's what matters. How that particular asset you think performed based on stuff that is just silly to even try to track is a massive distraction and a delaying of synergies. It's just crazy. You have to get investors comfortable that no, this isn't about tracking each asset individually because we don't even want them to look like separate assets. We want them to look like one thing. If we try to make it so that we could track them separately, you're just chasing kind of a fool's game.

You had a vision for one company.

Yes.

And that's what you're working towards.

One company that would be much more valuable than taking two separate things and treating them as two businesses that you own. This wasn't like having a Burger King franchise and a Wendy's franchise. This was like, no, we're just increasing the size and scope of what we're doing.

Mashing companies together. What do you think drove the success of Zayo between timing, structure, your deals, and execution?

One thing you didn't say there, I guess it's inherent execution, is like talent. There's elements of all of those, including that our investors and our management team worked together. We were in it together. This wasn't management team doing this and investors doing that, or investors trying to exert their over-influence on the management team. It was like we were a team, especially in the first 5 years or so. Investors had their role to play. They were helping. They were really effective at helping us sort through things. And the management team, a lot of us had worked together a lot of years across a lot of different ventures. So we We all worked really hard, but we also kind of knew the playbook, the playbook of what we should do next because we played that playbook before. We had the right thesis. We were maybe a little bit overconfident so we could move very decisively. It just, it was magic those first 5 or 6 years.

You got to get all of them, right? Do you want the returns that you provided?

Yeah. To put in perspective, in aggregate, we invested about a billion dollars of equity and that billion dollars of equity when we sold it was worth 8.5 billion. A, and it was not because we sold it at some kind of inflated value. It was when we sold it, we only got 12 times EBITDA, which, you know, is kind of a middle of the road EBITDA. So it wasn't like we were rewarded with an inflated EBITDA multiple. It was kind of an appropriate EBITDA multiple. So the value creation was authentic and it was 8.5x. Value creation was huge. And for the early money, and it was 25 times their money back. So all investors made money all along the way. So objectively speaking, it was a significant success story for us to make that much value that quickly. Yeah, everything had to be executed really well. The strategy had to be right. The team had to be talented. The execution had to be really strong. When we made mistakes, we had to pivot and adjust pretty quickly because we did make mistakes along the way. Join Kison Patel and Gwen Pope at Master Your Mergers People Synergy Summit on April 21st, Their closing fireside chat explores why integration models break down after close and what buyer-led execution actually looks like when it's working. If you're running acquisitions or responsible for post-close results, this is the session to catch. Register for free at peoplesynergiesummit.com. Again, that's peoplesynergiesummit.com.

How'd you earn the nickname The Bear?

Oh, how did my nickname become The Bear? Well, it wasn't because I was viewed as a cuddly bear, not for being a Bears fan, although that certainly is good interplay. You know, when you reflect on your career and how you got there, at least people like me, you spend a lot more time looking at the adversity you faced and the things you did wrong. You don't focus on the things that you did right. Especially when I wrote the book, I had to like reflect. I had to really think about the journey and what happened and what didn't happen. I was a pretty aggressive manager, probably still am today, but certainly a lot more so when I was in my mid-20s to 40. But we were doing huge things and I had gigantic amounts of responsibility under me and I was trying to navigate a family life as well. And I was on the road all the time. So I was carrying a ton of stress and I like to get shit done and I like to work with people who were fast-moving and smart and get a lot of stuff done too. And I didn't have a lot of time for people who were along for the ride or they were not as hard a worker.

Is that where I'm going to run into problems with you? Is if I'm just along for the ride? I'm getting shit done. No problem.

Yeah. The expression doesn't suffer fools wisely. People would say that around me. So I was considered the grizzly bear. Don't poke the bear and don't mess with bear cubs. And you're getting pressure from the bear, squirt some honey on someone else so that it redirects the bear. So they had this whole lexicon about how to deal with me and I embraced it.

Anything you go after now that sets the bear off?

Yeah. Not becoming experts at AI. Every single moment of every single day, I'm looking at my team out here, and when I see people being like tentative about AI, I'm like, dudes, the world's going to pass you by. And if at my age I could be better at AI than you can be, something is wrong. So be all over AI and be ambitious and be creative. And it's okay if you don't want to be those things, but then go work somewhere else because I only want to be around people who care about their journey, not just their professional journey, but their life journey and who want to be learning that next thing. And they want to be creating value. Now, creating value to me nowadays is not just creating financial value. Maybe that's what it was before. It's sometimes the way we care most about creating value now is what value are we contributing to the community around us? But we want to make a difference and I want to be around people who make a difference. Yeah. If I got people around me who are like not being part of that journey, they just want to get the benefit and hide. I respect you, but go do that somewhere else.

All right. Are we done warming up? Ready for the real interview?

Yeah, let's go.

I got to ask, do you convince people to sell their business?

Yeah. Now let's get toward people the way you say that, because sometimes the people you're committing is not CEO who doesn't want to sell the business. Maybe it's the board or maybe it's like an investor who's a little frustrated.

So my big thing is like critical part is getting deals actionable. Then you can find opportunities, look good on paper, fits into the thesis. And when you start talking to whether it's a founder owner, if there's a mix of investors involved, is it a conversation? Here's my better together story, and then I'm going to wait for you to be ready to sell, or do I actually convince you to sell your business?

The first thing is you build your own brand and then you build relationships. Today, when we're doing a lot of venture type deals, our strategy is not to like be really good at hunting down a deal that no one else knows about. We don't do any of that. What we do is we build up our brand, we build up our awareness, and we want the best deals that are out there in our strike zone. We want those best deals to come to us. So we want those best entrepreneurs and the most interesting deals, ones that are, that anyone who's like good at investing would want to do. We want those deals to come to us first. We want them to want our money. We want them to want us on their cap table when they have choices, a lot of investors. So We apply that strategy today, but in the context of Zayo, the strategy was to really be out there building relationships way before the company was ready to sell so that when they started to say, hey, maybe we should sell, you know what, let's call up Dan because Dan's been talking to us for 3 years saying he would like to buy our company. Now, what they didn't know is I was telling everyone I wanted to buy their company because I didn't know whether I wanted to buy their company or not, but I wanted them all to think I wanted to buy their company so that they thought I was talking uniquely to them so that when they were, they would approach us and then they would share information and then we can decide whether we wanted to buy their company or not. We wanted to create the dynamic where the deals would come to us as opposed to us trying to wait for them to decide and hire a banker and put together a book. And then we discovered the deal when they're on a sales process. We wanted to be in front of that.

You want to be in front of it. Relationship, but also trust. That's a part of it.

Yep. But then you develop a reputation, which we did, or when we acquire, we would bring the companies together really aggressively. So we had to balance that. We're a really good buyer because we could get deals done. We would do what we said we were going to do, but because we were really aggressive on synergy, we'd also create a lot of disruption with the company that sold to us. Some CEOs would be like, okay, I'm ready to sell a company, but I do not want to sell to Dan because I know what Dan does when he buys a company. So we had to navigate that as well, especially as we got deeper into the process.

So this is the interesting part. This is like your reputation as an acquirer. As part of this, you're building a relationship with this company, getting to know the founder. Curious to know what that actually entails because there's obviously, you have a meeting, you have a great intro call, but then how do you build the depth of the relationship to get some of that trust? And then yeah, the reputation of the market. Why was it negative? Was it, he takes our company apart, blah, blah, blah? Because obviously you have the vision of one company and that's probably, you do what you got to do to integrate and make that happen.

We had a really good reputation for being very effective at acquiring, which is really important for sellers because sellers, when they're ready to sell, they want to know that they're working with someone who, when we say we're going to do something relative to buying a company, that we're going to do it. We're not going to drag them along in a process and say we're going to get to the finish line and then find out halfway through the negotiation that the buyer really doesn't have the money or they really don't have the support from their investor group. And then they try to retrade and get a lower price. We didn't want that to be our reputation. We want our reputation to be like, you're ready to sell, you want to get the transaction done and fully approved and get your money, that we're the most reliable buyer out there. But we also, as we got deeper into the process and people would see what we did after acquiring, the investors loved it because we would get the synergies quickly and we'd prepare ourselves to do the next acquisition. Because if you take a long time to integrate the companies and you take a long time to get the synergies, that means you also have to wait a long time before you do the next deal. And we had the view that there's this window of time that we can do a lot of acquisitions before others catch on to the opportunity. If we move slow, the funniest stuff we could do is going to evaporate on us. Others are going to jump in and we're going to have a lot more competitors who are doing consolidation. So we were moving really quickly, but the result on companies that would sell to us is they would see us take what they were really proud in, the people who were part of that, like they thought they had the best provisioning system or the best maintenance system or the best strategy or the best sales team. And my attitude was, this isn't like a comparison. I'm not saying our this is better than your that, but we got a way of doing things. And part of that is integrating real quickly. So we're gonna, we're not gonna debate whether your system is better than ours because we want one system that is an end-to-end system that brings everything together and we want to get all the data represented in that system. So With all due respect, we're not gonna use your system and we're not gonna debate it for 6 months. We've already made that decision. We wanna see which ones of you wanna be part of us and help us move your processes, your systems, and your people over into one unified organization. A lot of times they'd be like, yeah, but we think our, the name of our company's better than your company. Why don't we adopt our name? Now we already got a name. We're not gonna revisit the name of the company. So it helped everyone that there was decisiveness. What a lot of companies in our industry would do, and I'm sure a lot of other industries, is when you do an integration, you start lining up teams. We're gonna put our sales team with your sales team, and then we're gonna give them 2 months to come up with an integration plan they both believe in, and we're gonna do the same thing with our ops team, and we're gonna do the same thing with our marketing teams. And now you got, like, teams on both sides trying to debate who's better, and okay, how about if we take this of ours and that of yours, and you got these Frankenstein solutions, and then you try to like look across it and it's just a mess. So we were just like, nope, we're not doing any of that. We're just going to smash the company together.

See, almost like there's a little bit of this perception of a reputation that you're tearing companies apart, but it's in the greater good. You're following that vision of one company. You're integrating fast, rip the Band-Aid off, do the right thing for—

Certainly good for our case. Zayo exists today and is one of the absolute leaders in the bandwidth. In fact, the other co-leader is Level 3 by the previous company, now branded under Lumen. So Lumen and Zayo are by far the two survivors, the two leading platforms. They own more of the fiber, particularly in North America, than anyone else. Zayo's still very operational in Europe with a very significant position. So the outcome was very good for investors and very good for building a durable— at least we started in 2007, we're going on our 20-year history, and for Level 3, our 30-year milestone's about ready to be hit. So we built really durable platforms. Level 3 would do it the old-fashioned way. Zayo would do it— the other thing, and this is maybe a personality flaw, but even though Level 3 had a 10-year start, I wanted to catch Level 3 and they'll be every bit badass. And it's pretty close right now. Right now, Zayo— I'm not involved with them anymore, but Zayo is neck and neck with Lumen in terms of the top bandwidth infrastructure company, certainly in North America.

What are these conversations like with these founders or executives of the companies you're looking to acquire? Like, how do you figure out what their motivators are to get your angle of doing the deal?

That's important because understanding what is going to make the seller want to sell, and it's not a singular person because there's a CEO involved, there's a CFO involved, but there's also the investors involved. And even with investors, you might have one investor who has a bigger voice than other investors, might have investors who have different motivations. You're trying to figure out the puzzle. What's going to motivate them to want to respond to selling their company and selling it to us? And every one of them has unique stories. So there's not a single one. So yeah, listen, you got to, first you got to get their attention and then you got to listen really carefully. And a lot of times you got to do this through a team-based approach. My CFO was really effective, different personality type than me. Everyone liked him, everyone trusted him. He was a little bit more low-key about things. He was viewed as the good guy and he would play that role really well. What they didn't know is behind the scenes, we were both bad guys when it came to M&A. Our approaches were just a little different, but we'd play the good cop, bad cop. We'd orchestrate it. And we had some other really effective people on our team. Ben Scarano was one of the early co-founders and he was really effective at certain types of deals. And we had a guy by the name of Matt Erickson who was younger, but he was starting to learn how to do deals. And We just had a lot of people who would play different roles and we would do it as a team.

This is all very buyer-led. You had this specific clear thesis, what you needed, what your criteria was. You approach those companies directly. You didn't wait for them to come on the auction block, and then you find their motivators, which ranges— what is the range of these different motivators? Because I could imagine there's obviously investors that want to get a return. What does that look like? Timeframe for them and the targets. But then there's probably CEOs that— is there something bigger they want? Is there maybe a post-acquisition role that could entice them or some kind of retention package, or maybe some kind of way to feed into an ego? I don't know. But what were the, like, the range of things that you saw that were motivators for different situations on these acquisitions?

Well, at Zayo alone, we did about 45 deals. So all the above is certainly part of that answer. And then there were a lot of other deals we did before Zayo. Sometimes you're dealing with situations where they don't want to sell and they especially don't want to sell to you. And that's when it gets even more interesting. And the biggest deal we did that really made Zayo was us buying a company that was larger than us and much more established than us and a really great company led by a really great leader called AboveNet. They had absolutely no interest in selling to us. In fact, they were a public company and their plan was to take their public company private, do a management-led LBO and They had it all lined up. In fact, they should have been already at the finish line, but for their investors that were going to lead the take private were just not able to get the deal done. They wanted to negotiate this more and they wanted to negotiate that more and it started to drag out. We didn't know any of this because they weren't sharing it with us. They weren't sharing it with anyone because the management team wanted to work with investors and do the LBO. So that turned into a hostile situation in that We just interjected ourselves. They were a public company and we made an unsolicited offer that was 100% backed by both equity and debt. We went as far as gave them the full agreement so that when they were— they were as a public company, they couldn't not pay attention to us. And fortunately, unbeknownst to us, when we gave them that offer, they were literally hours or days away from signing a deal to sell the company in a management buyout. Luckily we came in at a price that was higher than the other price. The lawyer said, "You're a public company. You can't sell it at a lower price just because you'd rather that be the outcome. You got to put your public shareholders first." And then that turned into over a 2-week period of time. I go into depth in it in Bandwidth. And the nice thing is when there's a public company transaction, everything has to be documented in SEC filings afterwards, the whole play-by-play. So I was able to pull that up and I'm going to have an accurate account of exactly what happened. Even stuff I didn't know what was happening at the time, that all had to be documented. So I was able to tell the story in a Barbarians of the Gate type of riveting format and in a very accurate way. And it turned out we were able to prevail despite the fact that they did everything they possibly could while staying within the law because they can't go and just disclose stuff that they can't disclose. But the investors who wanted to lead the leveraged buyout simply didn't believe the selling company that there was another bid because they're like, how could there be? There wasn't an alternative bid until the very end when we had a little bit of a difference in price. They never believed there was a legitimate other bidder who was about ready to sign on the dotted line until it was too late. It was pretty crazy.

How do you buy a public company? You're a CEO of Zayo. This is a bigger organization than you are. You obviously work with your CFO. You built a business case on why this makes sense to do the deal. There's an opportunity for a public company. Do you just— do the lawyers send this offer over? How do you solicit? Because you ended up going straight to the board or the shareholders or—

Yeah. So this is a really interesting story and it played out pretty publicly.

And then you had a— didn't an activist group get involved?

This was not this one. This is when we were selling Zayo. There was a big annual conference. In fact, I just came back from the same conference this year. I haven't gone in 6 years since we sold Zayo, but I wanted to go one last time. But this was a big part of the Zayo early story, and this particular deal happened literally at this conference. So we went to the conference totally prepared to make this unsolicited offer. So we came there with everything in writing in a sealed envelope, literally fully backed by debt, by equity. So it was not a verbal offer that, hey, we'd like to have a conversation about buying your company. It was, this is a fully baked, fully financed, fully funded offer that we're prepared to sign in the next week. All we need is 3 days of diligence. Think about that. You're gonna buy a multi-billion dollar company and you're telling them you're ready to sign within a week and we only need the week for diligence and a week to negotiate. That's unheard of. That just doesn't happen. But because we knew that their first response would be to try to avoid doing it, we set up the meeting. It was on the last day of the conference. Got together with the CEO one-on-one, sat down with them and began the conversation. We've known each other well for a number of years, and I made the verbal offer that, hey, we'd really like to combine our companies and we think we have a compelling offer to do so. And the first response of the person who must have been prepared for this, he must have gotten coached by his lawyers and his bankers that if Dan does this, here's what you should do. So because I set up a meeting, he probably had an inclination, okay, I know what might be coming. He's like, yeah, Dan, I just think we would have different points of view about the value of your company versus the value of our company. Feel really good about ours. So we really don't think it's likely that we would come to a meeting of the minds about what the right relative values are. And I'm like, okay, well that's interesting, but I don't know if that's relevant because we have an all-cash fully financed offer. So it doesn't really matter what you guys think about the value of our company. It just matters if we're offering you enough. And he paused and looked because I don't think They thought through that scenario, like, how could this company who's smaller come in with a premium valuation to what they're trading at and it be fully financed and ready to be signed? I put the envelope in front of him, like, and it's right there in that envelope. You're free to take it if you'd like to, but if you'd rather not, I understand. And he's like, okay, let me get back to you. So quickly breaks up, leaves. I'm sure when he went back and talked to his attorneys, they said, no, you can't just not take the offer. That's not going to look right when that gets disclosed. You have to text him right away and ask him to give you the offer. That's when I gave it to a guy on my team and he slipped it under his hotel door and the rest was history. Wow.

I like that you confronted him as a principal head-to-head and you confronted—

sounds like a negative word, but yeah, approached him and had a direct conversation and you were prepared.

You thought this through from all angles.

Yes.

Can we talk about negotiating and structuring deals?

Sure.

Teach me how to do it right.

Negotiating is like a game. You gotta have a lot of different plays in your playbook. One thing that's always worked for me is to be unpredictable. You're going to be unpredictable. It means you got to do things differently each time, not let the other side really know what you're doing. And obviously all of us use the word Trump in our vocabulary more often than we'd like to. But one thing you say about Trump is he behaves in kind of erratic ways. And sometimes when you're negotiating, that's a huge advantage. People don't really know what you're doing. They're like, okay, I don't really know how to interpret that. So a lot of times what we would do is we'd think a lot about how to behave during negotiation. Sometimes we would do things just to get a reaction, because once you get a reaction, then if you're paying close attention, you could learn things based on what the reaction is. Sometimes you even rehearse beforehand. Silence in a negotiation sometimes could be really effective. So at times I would go to my team and tell them, hey, if you see me starting to like not respond, like seconds start to pass, do not think that's an opportunity for you to speak next because the only person to speak next is the other person. 10 seconds is a long time to say nothing. So if 10 seconds goes by and they realize you're not going to say anything and they have to say something and it's a tense part of a discussion or negotiation, you're going to learn a lot about what they say next. Are they going to get anxious? Usually it's when they're trying to overplay their hand, you're not quite sure how much they're overplaying it, and then you just wait and see how they react. So When we were at our best, there would usually be 3 or 4 of us that were working off of each other in somewhat orchestrated ways and playing around with different tactics and just seeing how to get a clearer picture of what's really going on. And then once the picture is clear, then you can really get focused.

How do you get good deals? Especially me, I'm brought up by Indian immigrant parents. Like I'm always looking for a good deal and like some of these deals, it gets difficult because a smart seller shouldn't be throwing up a price. And at the same time, you don't want to come in and offend somebody looking for my bargain deals here.

Yeah, that's an art, not a science.

Yeah, teach me the art. That's how I get on points where it's like, okay, let's cut through some of this stuff. I'm wondering even just setting this sort of tone to get value and I don't know, maybe you've already built a formula and it's templated more.

If you do have a formula and it's templated, that could work for a period of time because that can work, but those don't survive long periods of time. They definitely apply over a period of time, but everything changes around it. So you have to keep revisiting.

Yeah. I'm looking at a distressed deal right now. It's distressed. So I feel like none of that's going to apply.

Yeah. It's a little bit like that contrarian comment is you got to find a deal that the other side is willing to sell it, which means they think what they're selling it for is more than it's worth. I'm going to sell you my car for $30,000. It's because I think it's worth less than $30,000 or else I would keep it and maybe sell it to the next person. So I'm selling you something that is overpriced and you think you're buying something that's worth more. Now, sometimes it's because it is worth more to the buyer than it is to the seller. That's the easiest time to have a win-win outcome, that you have synergies that they don't have. You have capability that they don't have. So in your hands, it is more valuable. So you're both making a right decision. Typically trying to find that win-win scenario is the best path forward. So you should always be looking, okay, how is this a good deal for for them and for us. You find that as opposed to one of us is going to win and the other one's going to lose. If you're in that situation, you could be the one losing and they could be the one winning. So it's easier if it's a win-win opportunity.

You're making this sound too easy because it's not easy. I was going to say the number one thing, I go to any software company right now, their valuation expectation is so high. They'll point to headlines for companies.

Not right now, they're not. We got a little bit of a meltdown going on.

We do have a meltdown, but you still got— You still got founders that hasn't settled in with them. It always starts in the public markets and it slowly comes downstream over time and finally hits probably the size of deals I'm working on. But to me, that's the number one is this bid-ask spread that founders have really high expectation of valuation, or someone might've raised in 2021 and there's even another factor in there. How do you call a baby ugly without explicitly calling their baby ugly?

Is it worth more to you than it's worth to most others. So there's one type of deal where you're more of like a stock picker. Like, I know all I'm doing is having a better understanding of what the true value is than others. I'm not bringing any value to the table. I just know how to pick the stock better. I know how to pick a company to buy better. I just am able to figure out what the true value is better than other people. That's not something I would do. That's not—

So that like bargain shopping, you're just running around looking at deals and saying, oh, this is a good deal.

Yeah, it's kind of like looking at public stocks and saying I could look at public stocks, all of which individually are trading at a price where the price they're trading at means there's sellers and buyers who are agreeing that's the right price. But me as the buyer, I'm really good at seeing that. Say when I invest in a stock, I could see that I'm buying ones that are undervalued, not ones that are overvalued. Okay. I guess if you're a really good stock picker, that might work, but that's really hard to do. But that's different than, than if you're buying and saying, I really do have something I'm bringing to the table, my company, me individually, I'm bringing something to the table that is truly a value add that most others can't bring to the table. But when you become a synergy buyer, that certainly is the most obvious example that for us it was included because early on in Zillow, we weren't a synergy buyer. We had no platform. We were just trying to develop a platform, but we had a conviction that what we would do with the assets would be value creative in nature. And part of it was because we early on, as part of our thesis, it wasn't that we had a different point of view of the seller. It's almost like we had a similar point of view of the sellers because we knew that platforms they had were legitimately doing well, but other buyers, universal other buyers didn't see that looking for— I think they were still thinking of the telecom meltdown world and the fiber networks being toxic. So we were a fresh face in terms of being willing to pay the seller what they really thought the business was worth. And we didn't disagree with them. We just thought that if we held them for 5, 10 years and consolidated around the properties, we would create something of durable value over the long term. So we had this window of opportunity where we could be acquirers where there wasn't a lot of competition to acquire these kind of properties, hence come to a price that would be a good outcome for the seller and a good outcome for us as well. That was, it was a win-win period of time. But we knew that was a window. If we were right, others would catch on and then we would have more buyers bidding up the prices.

How do you keep from over— your assumptions getting out of hand on synergies? I feel like I've seen that a lot of times where if that team's looking at a deal, they're looking at the business case they're putting together and all these synergy assumptions come in play because you want to get the price doable. You end up inflating everything or being very optimistic on those synergies to capture. How do you ground yourself, keep yourself from getting over your skis?

I mentioned earlier, we were about true value creation. Our corp dev team was one and the same as our exec team. And we were all big owners of the company. We didn't take much in the way of salaries. We were all about making money by seeing the value of the investment go up over time. So making money alongside our investors. There was no room for, we want to get a deal done, so we're going to make the synergies look better than we really think they are because we would lose. Corp dev teams can win in those circumstances because they get rewarded for doing deals and then they hand it off to other people to implement them. If the synergies didn't happen, is it because we overestimated synergies or because the people who were implementing it didn't do their job? You could get in those situations, but our culture was, we're going to do a deal. We're going to get the synergies. It's going to be us getting them. We're the ones saying we want to do the deal. So there was a buck stop here mentality. We've held ourselves accountable. And if we made mistakes, they were our mistakes. They weren't our department's mistake or the integration group's mistake. It was like, hey, we're going to make some mistakes, but we're going to need to own those mistakes, learn from them quickly, and hopefully make a lot more good decisions than bad decisions.

Out of, you said what, 45 deals with Zillow?

Yeah.

How many were proprietary versus through an auction process?

Oh, I would probably say 80% would be more proprietary. Now, some of those proprietary ones there was a process, but the process was triggered by us and by our activity. So then, okay, we're going to sell, we're going to need to hire a banker to run the process. They were creating that out of a proprietary dynamic, put it that way.

Do you usually win on those deals?

Early on, we would tend to win because we were a very effective acquirer. We got to the finish line in negotiations really quick. We could give certainty of close really quick. So we were the preferred buyer. But later on, I tell the story in Bandwidth, when we went public, and I didn't understand this at the time, I understood it from a textbook standpoint, but I never really experienced it directly. But our process of going public meant we had to open our kimono. Now we were really transparent with what we were doing before we went public, but it was like the big investors, I don't think really believed it until we went through the public offering and all of a sudden staring in their face was, how much money we made for our investors and for ourselves too. That was the first time I think the broader universe of investors got a full understanding of, holy shit, this is what those guys were doing financially. We know what they were doing industry-wise, but now we know what the financial equation is. Now we could see why their investors are thrilled with this management team. This management team is making them a shitload of money. Now investors are part of that too, but they could see even at the time we went public that Our original investors were already 8 times the money and it was only like, what, 6, 7 years. And they were able to see our financial playbook. Well, that triggered the next stage in industry. Like within a year after we went public, all of a sudden the money started flowing in the industry. Infrastructure funds started to become a big thing in our industry and they were outbidding us on deals. Then all of a sudden, instead of us getting deals done, we were like looking at deals that were being done by someone else at 4 multiples. Or extra turns of EBITDA than we were comfortable and willing to pay. And that's when it started getting hard. Okay, do we do the deals at prices we're less comfortable with, or do we watch others do the deal and start to take the wind out of our sails?

Sometimes sellers are even more ambitious on valuation expectations knowing that, oh yeah, it's a public company.

Yeah. I mean, not necessarily because we were public, but because there were now a lot of buyers and some of them with very deep pockets who were extremely motivated to get— in fact, some of the buyers, they use the expression, and this sounds pretty eloquent, right? We have a lower cost of capital. So that's what they would say. And I want to repeat it. They're really good buyers. They have a lower cost of capital. And I'm like, what does that mean? All that means is they got lower expectations for what returns they're going to deliver to their investors. That's what it means. Like, we're going to bid up the price higher because our investors expect much lesser outcome because they have a lower cost. Okay. Yeah. From a seller perspective, take advantage of that to compete with them as a buyer. No, I'm not doing this just to become bigger. I don't want to just pay the seller a lot more money and then we got to run this asset of theirs and we're not going to make any value creation in the process. So it put us in a more difficult situation in the post-IPO era for us.

How important was structuring these deals? Obviously, we talked a little bit about valuation gap. Earnouts is a very common tool used. Maybe you can roll over equity. Like, what was your sort of philosophy on structure and how did it help you with deals?

People talk about earnouts and sometimes earnouts get overplayed. So we rarely used earnouts. For one, we wanted to mesh the deals together really quickly. Yeah.

If that thwarts that, because then how are you going to track?

Exactly. So if you have an earnout, then you got to track like the performance, this and that. So it was more important like for us to identify the talent that was coming with an acquisition. Like what 3 people did we really care about and how do we bring those 3 people, make them part of our team, not them stick around for an earnout because you are sticking out for an earnout. All they care about is what's that earnout metric and how do I make that earnout metric? And then if I don't hit it, how do I exert leverage to get paid anyways? Then you're both sides, you're spending all their time on the earnouts. Like, F that. We just need to go and we bought that company. We need to own it and we need to be accountable for it. And Yeah, if we could find some people there who want to be part of our team and part of our value creation, great. Let's make them part of what we're doing, not keep them separate so that they could, quote unquote, earn out during a transition period.

So you lean in more on building out an executive retention plan over doing an earnout?

A lot of times if you give someone a clean exit, they'll sell at a lower price versus if it's a messy exit, they're going to discount their earnout. They're going to treat the earnout as like worth nothing and maybe a little bit of upside, but it's a messier deal. You gotta negotiate all that, so it slows down the deal. It's less appealing to the sellers. If you're gonna do an earnout, make sure you really thought through what you're trying to achieve in an earnout.

That's interesting from a seller's perspective that, hey, here's a clean offer. There's no earnouts to it. Actually more attractive. Maybe take less of a price.

And we'd also tend to give them cash, not stock, because if you start using stock again, that's a messiness from a seller perspective. How do I really view this stock? Are they going to be worth that? They're never going to be like, yeah, I want to get that stock because it's going to be worth double the amount. They're going to be like, okay, whatever I'm getting in the form of stock, I'm going to value it half of what it currently is worth and everything else is upside. So you're giving what is true value away in your stock price, but they're discounting what they really think their value is. So it often costs less if you're willing to take care of the financing yourself and offer them pure cash.

How do you leverage this? Because I feel as an operator myself, I'd want to hold as much cash as possible and That's why I'm always like, ideally, if you have a third cash, third earnout, third rollover equity, you're not doing that. You're not rolling over equity. You're avoiding the earnout. What levers are you pulling? Are you having them hold a note? Are you leveraging getting debt on the business yourself?

We were very good at lining up our, our capital separate from it. We would line up our equity, line up our debt. We'd firm those up like when it went off. I talked about earlier where we put the fully funded envelope. Yeah, we have to do the hard work of getting banks to say, we're going to sign on the dotted line that we will have the money there to support close because the seller's going to diligence that. First thing in that case and in others that they'll do is they said it's fully funded offer. Is it fully funded? So they'll give it to the lawyers and their bankers and say, go check this out. They'll go and look at the paper and say, did this paper that JP Morgan signed, is that truly fully backing it? Or is that just a piece of paper that says, Yeah, if all the stars align and we feel like it, we'll provide you the funding. Or is it say, yeah, that funding is there. And we would make sure that it would look really well when they would diligence it, that yeah, they really do have funding lined up.

You manage it at the organization level and then you put cash offers on the table.

My teams were really good at that. I wasn't good at that. I didn't have patience, but my CFOs were and others were. Yeah, they would know how to do that stuff. And I'd say, we need a fully backed offer. And they do all the hard work and get fully backed off her.

That's where we'll pause the conversation for now. We covered a lot of ground. In the next episode, we'll pick it up right where we left off and keep digging in. Thanks for listening. We'll see you in part 2. Thank you for taking the time to Explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M&A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kison, K-I-S-O-N, @mascience.com, or you can text me directly at 312- 857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com. Here's to the deal. Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.