M&A Surprises and Horror Stories

This is a conversation with two of the most seasoned M and A practitioners, Jim Ackerman, recent Vice President of Corporate Development at Flex, and Steve Coghlan, former Vice President of Corporate Development at Flex. In this interview they discuss their unique experiences when it comes to M and A surprises. We covered a range of challenges from the seller side people side accounting side cross border deals. This is the stuff you rarely hear about from corporate development leaders unless you catch them right after they retired. This podcast is sponsored by the world's most intuitive virtual data room, Firmroom. Safeguard your business documents while enjoying significant cost savings. Firm Room is quick and hassle free. You can set up your secure data room in less than two minutes. Save up to 80% on costs. Watch out for those virtual data rooms that charge you by the page. It's a scam. Watch out for those bankers that try to dupe you into using a virtual data room that charges by the page. With Firm Room, the price you see is a price you pay. No per page billing, no surprise costs. It's super transparent so you know exactly what you're going to pay. Sign up for a free trial at firmroom. Com, Put it head to head with any other data room in the market and see for yourself what's best again that trials@firmroom.com let's get to the conversation with Jim and Steve. I'm Kisam Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hello M and A Scientists. Welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven 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 Masscience.com I'm your host Kisam Patel, CEO and founder of M&A Science. Joining me today is Jim Ackerman, recent Vice President, Corporate Development at Flex. Also joining me is Steve Coughlin, Semi, recent Vice President of Corporate Development at Flex. Both Jim and Steve have worked together for over 20 years represent nearly 50 years of M and A experience across manufacturing, supply chain technology across multiple market verticals. Today we're having a conversation to learn from M and A industry Veterans about the M and A deal process, lessons from their experience and M and A surprises. We're here live at the Elston Vineyard in East Bay, California. Gentlemen, how are we doing today?

Fantastic.

I'm doing great.

Thanks for making it happen. Jim, good call on hosting this at a vineyard.

It's something to get us out of the house.

The both of you are retired now.

That's true.

Semi retired. A lot of these M and A podcast, they don't want to host folks that are out of the prime of the career because you're not going to buy their products or services. But we don't believe that here at M and A Science we want to learn from the best. You got tons of experience. I'm really excited to have this conversation. Can we kick things off with a little bit about your backgrounds?

Hi, this is Jim Ackerman and as Keeson said, I've been an M and A practitioner for over 24 years before retiring in January. I've had the pleasure of working with the person sitting next to me, Steve coghlan, for over 20 of those years.

This is Steve Coghlan. I've been working in various tech companies through the Valley for better part of 40 years. I really entered into the EMS M&A space in the late 90s and spent 20 plus years doing M and A transactions. And talk about experience level. Between Jim and I, we've participated in hundreds of transactions and over 100 that we've actually saw to fruition and closed.

All good transactions, right?

Yeah, all good. All very successful.

But we'll see how this conversation evolves.

Now, all this experience wasn't as Flex. What other companies were you at prior to Flex?

We were both at Selectron. I participated in the sale of Selectron to Flextronics.

Yeah, you actually led that transaction.

Yeah, along with a bunch of bankers that didn't provide a lot of value.

That was a big deal. If you tacked on a bunch of companies, Selectron and then sold it to Flex.

Yeah. And if you look at the history of both the companies, they were all pretty much some organic growth, but mainly through acquisition.

How big was that transaction when you sold the Flex?

Purchase value is 3.2 billion, approximately.

Cool. Can we talk about just even from the beginning, sourcing deals, you've worked on a hundred plus closed deals and about 500 deals altogether. What was that like? You know, most of these deals coming through bankers. Did you have in house, business, unit leader, other resources bubbling up these deals to you? Were you proactively finding these deals? How'd you find M and A.

We think of kind of three sources for deals. Maybe there's a fourth, but pretty much three. And the first is your core business. You're doing business with a lot of different companies, particularly OEMs, and they may be in a position that there's a business that they've determined they no longer want to be in, or it makes more sense to offload that to a manufacturing partner. In the early days, that was probably 90% of where the deals came from, which is existing customers.

All through the 1990s.

Yeah, through the early August. And that was when the kind of the land grab, as we call it, was, was occurring. But then it progressed where the investment bankers would be working with their clients. And these could be companies that don't necessarily. They may have a. Might be a technology company or a product company. And as both Flex and Selectron progressed, they wanted to move beyond just manufacturing and get more design and intellectual property content in order to have a greater offering that would drive more margin. So we started looking at other product type of companies to add in. The investment bankers would bring us deals to look at. They brought us a lot of deals, a lot of deals that just didn't make any sense, but we looked at a lot along with that. The investment bankers obviously were involved in the auction process and so they'd bring us stuff and get us into the auction if they could, if we were interested. So those were the principle. Jim, you want to add, I think from the business unit perspective.

Yeah. Early on at Selectron, I was actually part of the business unit and we were 20 million roughly in revenue in one site. And we grew to over 16 sites and upwards of 800 million in revenue in just a few short years, primarily through acquisition. So a lot of those early efforts were spent pursuing proactive acquisitions through strategy, through the strategy that you built. And some of that time was spent actually identifying those companies within those market segments with either the technology or capability that we were looking for, geography for that matter, and making cold calls essentially to either their board members or their PE sponsors or executive management to see if there's any interest there, as Steve was alluding to earlier in terms of partnership opportunities or ways that we could work together to further both of the company's strategic interests. And eventually those talks led to an acquisition.

Your cold outreach was more framed on a partnership. Hey, how can we work together? What's some strategic opportunities instead of we're going to buy you?

It's a soft approach.

Yeah. Typically you're going to engage With a CEO or CFO of a company, likely the CEO or principal owner. However it's structured, if it's a smaller company and you're going to go in with fairly high powered, you're not going to bring a whole team. You're going to bring. It might be the corporate development guy and a tech guy, or it could be a business guy. It depends on how you want to engage a conversation. What we think would be appealing for a CEO of a company to say, yeah, I want to meet with you guys and then we'd take it from there.

It's mainly get the first meeting may have M and A interest, but keep the framing broad from their perspective. And what would pique their interest to have the meeting, which is exactly right. Let's explore some strategic opportunities essentially.

Yeah.

Can you walk me through the first meeting? We got a prospective target interested enough to have that first meeting. What are the key things you should be asking?

The first meeting from an introductory perspective is the target company would typically present an overview of their business, something that they would share with their customers. They're not really going into a lot of heavy details in terms of their financials or anything. It's just really about their value proposition to customers. Then we correspondent would present an overview of Flex or Selectron or whatever company that we worked with at the time.

And the intro pitch the sales rep would probably do and say, hey, here's our company. This is what we do.

Here's what we're looking to do in the area.

And through that, hopefully it's going to spark areas of common interest that will lead us into a kind of a further discussion to see where that discussion goes.

What else are you asking?

We'll probably have questions around after they do the presentation. Some specifics around. That's probably not nothing that's proprietary specific to their business. To their business. Because you want to establish that I have interest in talking to you about your business and understanding your business as opposed to hey, thanks, I heard the pitch, now here's my agenda. You don't want to go there?

No, not at all.

Not yet. You probably don't want to go to your agenda even in that first meeting. No.

Are there any goals of trying to get them just generally interested in your business? What would be the expected outcome of that first meeting?

Yeah. And so there's likely there'd be a dialogue of what our business is and maybe how it relates to their business. And again, looking for where there's common interests and alignment. Try to find those.

So that could Be a common market. You're going after base product line, these common elements. And then you start going through and thinking, oh, this is how they're servicing that customer, looking at that market, this is how we're looking at it. And essentially you're doing the intro of just comparing industry notes.

Well, likely it could be a supplier in a program or a product that they're a sub supplier and we're a supplier and we come together somewhere in that supply chain. That would be the common interest piece you'd want to get to. Where there could be, hey, maybe joining forces may make sense or maybe a strategic relationship about how we manage that material through the supply chain.

Vertical integration play.

Yeah, exactly.

When do you convince them to sell?

It could be a year later, it.

Could be two years later, it could be never.

They may never be sellers. And you can establish that relatively quickly, usually when you get a look at the financials.

But the important thing is really to start building that relationship. Demonstrate integrity through your word and keep to your commitments in terms of the forward schedule for meetings and deliverables or sharing information that they may want to see about you and your strategy.

Are you nurturing the relationship in the hope that when they are ready to sell or make the decision to sell, you're the first phone call or is there a way to be more proactive that you get them seeing this big picture and vision of synergies and why this deal would make a lot of sense.

Ideally you'd court them from all the way to the altar and they don't talk to anybody else. But in reality that's not gonna happen.

Yeah, you don't wanna talk em into selling. That's not the objective. The objective is to talk em into selling to you and there's a big difference.

Yeah, because anybody's gonna get an advisor. Yeah, most likely. And they're going to want to run a competitive process to make sure you're getting the right deal.

Okay, so let's talk about selling to you versus anybody. What are the key pillars or elements for somebody to really be driven? They want to sell to your company, not anybody else.

I think they have to trust that company, the buyer. They got to trust the integrity of the management team, the culture of that company. I think those are really top. Purchase price is big and critical and probably a deciding factor. But a lot of those other intangibles are just as important.

Personal integrity as well as the company's reputation is key in this. There are transactions that I've been through where the advisors have Given us the last look. The seller being at an auction process, you've run into issues late in the process that could have blown up the deal easily. But you've built that reputation. You've kept your word throughout the entire process. You haven't abused them, you've been sensitive to their needs or restrictions.

Building that relationship might be, as Jim mentioned, the advisor may come back and say, hey, we're going to give you last look simply because they want you to be the buyer.

They know you're a good buyer. They know if they sign with you, you'll get to close.

It's all about building trust in the relationship. Is there the hint that, hey, if you ever think about selling, make sure with the first phone call that you put in there at some point in.

Time, you may end up leaving it with that after the meeting.

Yeah. And maybe not that direct, but it would be like, hey, we would really like to pursue potentially a transaction that might make sense for both of us.

It may not be the right time.

Yeah, got it.

So a little bit of a we like you and a wink and you where it goes.

Yeah, I mean those are businesses that clearly aren't for sale.

Isn't there a philosophy that nothing's on the market but everything's for sale for the right price?

Not really for some sole proprietors or family businesses. We've approached some large suppliers in the automotive industry that it's been a family run business through generations and they just don't want to sell any price. Any price that's reasonable for the companies we represent.

Yeah, you could always go, yeah, but I'll give you a billion dollars for something that's worth 10 million. Yeah, that's not realistic because you're not.

Going to pay, you're not going to go there, right?

Yeah. There is some corporate governance that goes on.

Yes, there is.

You think about, we got this opportunity, we had the first meeting, we're building the trust and relationship. Eventually we get to this point where, hey, we are leaning towards selling the business. We do see where there's a strategic fit with your company. We'd like to see what that would look like. We'd like to generally see some terms from your end. Walk me through that. Because now I think this is where it comes to. Let's get an NDA signed. Here are some information. One of the things I'm personally working through on a deal is you want to request this initial information to get a LOI together. When I start bringing in key leadership in my company, they have their specific thing they're looking for. And once I start putting this stuff together, we could easily turn this into a pretty exhaustive list of a hundred plus items and try to put myself in the buyer's shoes. That's not what I want to go through off the bat. So I guess how do you strike that balance of asking for the right amount of information to get that loi together, but then at the same time you don't want the why didn't you figure this thing out beforehand? And why are we paying this much if we have to deal with this and this?

Steve, you may want to talk about your seven questions.

It really starts with one riot, one ranger. You don't bring in the whole team early. You don't even ask input from the whole team in terms of hey, what do we need to know early before we even move ahead. I think because of all of the deal experience Jim and I have, we pretty much know where we want to focus. It's one page, it's seven or eight questions about the business. High level financials.

This may irritate some of Kiestan's listeners out there that may be in a functional role, but yeah, it's true.

You're going to want to know obviously corporate ownership and structure a little bit about that. What jurisdictions that they're operating in, People. How many people? Where are they? I could think of a few other things.

Financials.

One of the things that many times is forgotten about until later in the process, but we think about information technology because there's many times you can't close a deal unless you have the IT scheme for day one figured out, which could be very complex or could be very simple, but you can't actually close a business unless you have that figured out. So that's something you like to get a view of. So that's just a few examples. There might be more than eight or nine questions, but you gotta limit what that amount is because you can't overwhelm potential target. It's gotta be something reasonable for them to pull through without having to pull a whole bunch of their team in as well.

Oftentimes when you're dealing with say sole proprietorships or small private, closely held corporations, is that they may not involve anyone outside of the CEO. We've had transactions where it was just really the CEO providing 100% of the diligence through the process and he's still trying to run his business.

What are the big reads on red flags at this stage?

First and foremost, business. What is the business? Is it In a dying market, is it in a growth market? If it's a growth market, are they participating at the growth rate that they should be? How is their financial condition relative to that? Are they making money or they have just always been losing money or are they on just incredible profitability? And from a balance sheet perspective, what's the debt situation look like? Things of that nature. That's pretty key, at least to start there.

What about the soft, fluffy stuff culture? When you talk to the folks integration, they're like, these cultures are never meant to come together and this is why this deal is not going to work.

That's funny because I would partially agree with that. But there's also sometimes you need to get a culture that doesn't fit in order to disrupt part of your business to go down a path that is a winning path.

So that's often. At least some of the presidents that I've supported in the past said that we want to take the best of both companies to end up better as a whole. For a merger of equals, that may work, but even for smaller acquisitions, there may be things that that smaller company is doing a lot better than you and has figured out. You want to make sure that you're able to incorporate.

My experience from the Flextronics acquisition of Selectron, that's exactly what happened. They took Selectron excelled in so many areas in terms of operational capability, everything they were doing on how they dealt with customers and so many things that Flextronics embraced and brought over and kept it in place.

But there are some examples of organizations that we haven't proceeded in an auction process because the CEO and his personality was too dominant through the entire organization. We picked that up on our first meeting with him, sat through the meetings, toured through the facilities and just came to the realization that that CEO would not be happy within our organization and structure and his team is. There's not enough leadership at the second and third levels to really sustain that business and grow it and fulfill the strategic objectives we have for that business.

We're talking about kingpin management style.

Yeah.

That there's multiple decisions and then you notice that and said, hey, this is probably your big indicator of this sort of open mindedness, that there should be some variance around culture and ultimately we're coming together and create something unique. But then there's some distinction that there could be some real deal breakers around that, I. E. The kingpin management approach.

I just go back to my Selectron Flextronics experience and the cultures couldn't have been further apart. But it was a deal from an industry perspective that had to happen because if it didn't happen, in my mind, neither company would be here today. Wouldn't have survived.

How was it working with the boards on these transactions that they give you like a blank check with the Limited or how does that work?

I can relate to one story about a board interaction where we had some dysfunctional management people and some kind of demanding board members, which they should be demanding. And there was a particular transaction that we were trying to get completed and it was in the optical transport space. We had presented an acquisition case and they had known that this had been going on for some time and we were pretty well ready to go get the deal done. And the board members were just, they became irate over why haven't you gotten this deal done? You realize that you are way behind the eight ball in terms of getting into this business. At the end of the day, it turned out to be a very failed transaction because it was not only our management team that was pressing us to get the deal done, but the board was putting pressure on of get this deal done.

Yeah, I guess that's a whole interesting dynamic, I can imagine.

But that's just one example of board interaction.

I would say through the years, let's say from the late 90s to now, I've found the board to be much more informed and active from an MA perspective. At earlier stages of a transaction, the thresholds for their involvement were, let's say a dozen years ago, the CEO had authority without board approval to do transactions under 100 million. Even though they have the authority, believe me, they kept the board informed and what they were doing. And all through that process, at the time of my retirement, the board wanted to have approval of all even non binding indications of interest, which is pretty soft. And it really, let's say, cramps your style from a corporate development perspective and participating in auctions and things of that nature because the cycle happens so quickly and to get the board together or board subcommittee to review and approve a non binding indication of interest. And the board members are there for a reason. They frequently sit on multiple boards and oftentimes when these policies go into effect at one place, they look at another company that they may sit on the board and say let's put it into practice here. We think that makes sense and it works over at this other company.

Yeah. Another element, just to add to that, where the board has gotten much more active, I think one of the principal drivers is under the prior presidential administration, the regulatory filing requirements were tightened dramatically And I'm talking specifically about cfius. And because the company that we were at was a Singaporean based company, even though there was a US headquarters tripping, the requirements to file CFIUS became very uncertain. And at one point it was thought that every transaction would require CFIUS filing. Now to talk about CFIUS filings, the requirements to go do that is very costly, time consuming and can delay and actually put you in a position of not being able to close the deal because the regulators will say no, we don't approve.

And for advisors, they look at you as a Singaporean registered company and maybe having to go through the CFIUS process as a risk to close and so they'll exclude you early even if you do have the value.

Can you break down what CFIUS is?

Yeah, CFIUS is so foreign corporation investment in a US entity or business.

Okay, that makes sense because you're a foreign company and you're buying US company, right?

Yeah. There was one transaction that we actually had to carve out the US entity because we were selling the business to a Chinese buyer. We couldn't add it otherwise we were subject to cfius. And we knew because of the nature of that business is very strategic in terms of the kinds of products that it went into that went into some federal government programs that it would have been shut down. We never would have gotten a transaction done.

So the board case, what is the best way to pitch a deal to the board?

As little information as you can get away with as possible.

Is that the rule of thumb, TMI will work against you.

It's not the first time they see the transaction. They've seen it several times. They understand the strategy of the business unit, they see how it's aligned. And so really it's more of a discussion around valuation.

I was always curious about the stakeholder management and the board because I look at running an up and coming startup company and to make good decisions, have few people involved, but not too few. Three seems to be the ideal amount. And you tend to make good decisions quickly. I look at some of these boards with their headcounts that ever get so increasing. How do you manage that? How do you actually make productive decisions? And have you seen some weird comments and it sounded like you had this little story around that.

Well, yeah, no, I mean what we've seen is that story I was talking about where we went to the board. It was a, it was an M and a subcommittee of it was only.

Three, unless it's a material transaction.

Once the subcommittee approved, then typically it just went to the full board for ratification. It was already done. The deal was done at that point.

Okay.

I mean the deal was done as it relates to getting the board sign off.

So ideally, if there's an M and A committee that could help streamline things.

Absolutely.

You got a real focused key people maybe have some relevant experience, they pre vet it, then it goes to the broader board. And does this make some common sense? Okay.

Yeah, exactly.

The thing I really wanted to talk to both of you about that was most excited about was these surprises that come up in deals. Yeah. Now you know what I'm talking about. Sometimes it's hard to get this out of interviews. And to me it's like you can go to any top MBA program and you can take all your academic courses you want, but you will not learn this tried and true from experience. There are surprises that come up in.

M and a surprise, no surprise.

There are no surprises.

There are no surprises.

It happens on every transaction.

Yeah, just about. It's all predictable. Every deal is like a snowflake. They're different. Every single one has its own interesting things that come up.

That's one of the reasons why we've been doing it for over 20 years. It keeps us interested. Always learn something new.

Is there a framework around surprises? Can you bucket them in certain categories? Is that possible?

Yeah, I think I can. I can give you a couple. Jim certainly has a few. When you're actually entering into a formal diligence process, you obviously are going to get access to some data, usually via a data room that has been populated by, if there's a banker involved, they're probably managing the data room for the client. And it's always insufficient. There never has the right data in there that you need. There's just a lot of stuff in there that you gotta go through. And it's typically because the targets are just never ready with all the data or they can't. Their advisory is not good enough to tell them, hey, you really need to go pull all this stuff together. And likely if this is the first time that the target's been through an acquisition, they're not ready for the questions. And to be able to pull all that data and then all the departments that they have to go to kind of pull that data together. So that's what you're battling against. It's going to be insufficient. And 99% of the time that's the situation. So surprise, no surprise.

There's already a workflow issue with this deal around the information. Access to the information that already creates Some inefficiency.

Exactly.

There's also surprises in the sense that when you're dealing with smaller companies without much experience in an M and A process, they'll share things that they shouldn't be sharing. Data privacy concerns. So it really helps to. When you are approaching that diligence point and you're asking them questions, you should tell them what not to provide because it just presents liability and risk to you, especially if you don't end up completing the transaction or back out of the way.

Especially when you're dealing with international places, specifically in Europe. If you're getting information regarding employees that's illegal, that can happen. And people that receive it can be personally liable. Part of that is we've got to educate. If we don't have a sophisticated seller or advisory, be careful, don't put us into a problem. So I wouldn't characterize that as a surprise, but almost like a little risk mitigation.

But it's a surprise if it ends up in the.

If it ends up in there and you've had access and you looked at it. So then, okay, you've looked at it, you can track back and now you're liable. Right?

Yeah, that's a bad surprise.

I've had a transaction where they sent an Excel spreadsheet and there were hidden rows that they didn't password protect or something on it. And it actually had their pricing, which is a big no. No.

Yeah. And so when you have to do a HSR filing in the US what's an HSR filing? The Hart Scott Rodino act for antitrust filing. When you do that, there's a lot of information around. What information did you get? And when you're in between signing and closing, there's a lot of things you can't violate. You can't start integrating the company. You can talk about integration, but you can't start doing things. You can't look at customer pricing or material pricing. A lot of things that are deemed to be around specifics of the business. You got to stay clear of that.

So can't get into the pricing.

No, no, no, no, no, no. That's a no. No.

If it's public, though, regain.

If it's public, chances are it's not public enterprise.

Enterprise not going to be public. It's going to be in the customer contracts. You have access to review those customer contracts?

Typically we do, but they get redacted.

They're going to redact the price.

Yeah. Okay.

But we have this. There's that information that you know, you shouldn't be looking at. You want to make sure you don't look at it because that would compromise and you have to report that.

Right.

Okay. There's maybe the lawsuits that are there. You know, any things like that.

You see where it's like, yeah, there's always that. We've got employee issues.

Give me some dirt, tell me some good stories. What are some good lawsuits that popped up?

And you shake your head and you're.

Like, what the hell? This gets into a little bit of mitigation, but as well, and how you mitigate those surprises or risks. But one of the companies we acquired had an outstanding lawsuit from one of their customers suing them. A defect in the product. It was very difficult. Negotiations were nasty and tough. But we actually got indemnification for that lawsuit. But after close, and as part of that indemnification, the seller got to defend himself with that customer. The decision was made after close. Even though we had full indemnification in the purchase agreement, we ended up settling and taking on some of that liability in order to not damage that customer relationship too much. Because the seller, he's out of the business. He's actually retired now. He's sitting in Hawaii enjoying the good life, and he doesn't care. He'll fight like hell to make sure that he doesn't pay out several million dollars on a lawsuit. So he could really aggravate that customer. And the customer would look at you saying, hey, why are you doing this to me? So in the best interest of the customer relationship, which was substantial outside of this one little piece of business, we ended up absorbing a portion of that loss.

Okay, so you got customer lawsuits. What else? We have employee lawsuits.

We had an interesting situation. We had an acquisition and it was a little bit outside of our normal business. We viewed it as very strategic to get us into another business area, another vertical. And it was a startup company, very well funded, and it was on a growth projection. That was just unbelievable. I didn't believe it the whole time. In hindsight now, I probably should have believed it because they exceeded all expectations. So it was a very good successful. But what was really interesting is when we buy these companies, we typically do background checks on the senior management. There was a couple that came back from the senior management. It was just absolutely unbelievable. What's unbelievable, he had some run ins with the law. He spent time in jail. Illicit narcotics possession, firearm possession. Really colorful stuff. But the CEO, but he's really a good guy. I think he was reformed by that time. But anyway, that was the background check. So it gives you pause for, oh, what are we getting into here?

Did it break the deal?

No, it didn't.

Okay.

I think any other deal, something probably would have had to be changed in order to complete that deal. But on that deal, because we wanted it so bad, it was like, we don't care. Let's not focus on that.

And then we've had other transactions where the CEO had a colorful pass that really, when we brought it to the board, the transaction made sense from a strategic standpoint, but the board stipulated that the CEO can't continue past close.

Just for clarification, when you say colorful, that's about equivalent as batshit crazy.

We're not seeing any names here. So, yeah, yeah, you could say that, or you could just say that they've had an exciting past.

You ever had somebody that you really felt that was 100% committed to move forward, even like, CEO or C suite gone? I heard that one before.

We had a transaction where the owner of the company was actually retired from active management. The current president was totally bought in, was excited, enthusiastic about joining and agreed with the strategy. Had a lot of input there on the integration plan. And sure enough, we closed the deal. And within two weeks, he resigned. Just dropped out. See, he had worked for a large company before and understood that structure, and he wanted more autonomy. So from a career perspective, he didn't want to be back in that same position. There wasn't necessarily anything personal at all about our company at all. It was just really. He just wanted to make sure the. The transaction went through. So he played along and ensured that the transaction was successful, but he didn't want to be there after close.

Wow.

We've also had the situation where the management of the company we thought were solid and they do well going forward, but after six months, you got to really see the true colors. And it was like, we got to get this guy out of here. So we've had a number of those as well.

It's hard, like, what can you dig into to figure that out so soon?

Because I don't think there's anything we could have done in that situation with that president, because all the signals were green all the way through and very supportive.

If it happens to you, 10 times out of 20 transactions, you got to look inside.

You're doing something wrong.

If it happens, one out of 50 or 100, that's going to happen.

Now, I was always curious. So you buy out an auction, you got like, a big moment for a management presentation, and like, all right, this Guy can ace the first interview, but.

A different angle on that. The very first transaction I worked on Selectron, many moons ago, it started off as an auction, but it was, let's say, a failed auction. We were really the only company in pursuit of the target at that time. The CFO became so difficult to deal with through diligence. Told the owner that if he wanted to sell the company that the CFO had to be gone. And so essentially he was put on garden leaf. Through the end of the transaction.

We got people surprises. How about accounting surprises?

The ones that are, you know, kind of indirect accounting surprises that are always there. Especially when you get into European transactions where you've got public and private pension schemes. And I know of a transaction that it was next to impossible to calculate the underfunding of a particular pension scheme in the United Kingdom. Those schemes cover prior employees for many years. And some of these companies were very old companies. And so there was a lot of, a lot of money associated with it.

You're talking about liability where they underpaid into a pension.

Yeah, it was underfunded defined benefit plans. Yeah. And a lot of those they're investing in public markets. And during this timeframe, the public markets were really in a shock. This was back in the 2008 timeframe and they were. The pension funds were way underfunded. You go on and you have an analysis done every so often. But to get the analysis done in the heat of a transaction, you were not going to get it done. It was going to take months to actually get the specific amount. So what was shown as being a $1 to $2 million issue at the time ended up being like a $12 million issue post close. So those are those off balance sheet liabilities or kind of surprises. And some you can navigate through, try to navigate through, some you can't because there's no way to define. And if it's a public company transaction, well, guess what? Buyer beware, because you are. There's no recourse.

Yeah, no recourse.

There's nothing left because you bought the seller.

Yeah.

Wow. Any other accounting related. Cause obviously you get this high level view of financials pre loi that gets you to loi and then you dig in there. A lot of these deals, if you're doing bank process, they'll have a Q of E and things like that. You still run your own Q of.

E. You know, you're relatively safe with a public company because you've got audits and you can go back and yeah, there's going to Be some little stuff, but nothing really material.

We're talking about a small fraction of that are public company deals.

Yeah.

Okay. Yeah. I mean, you've run into. There's just a ton of stuff you've got to go through.

There was some crazy shit you've seen.

In a little bit of a crazy story. We were looking at a small privately held company down in the southern end of our state, great state of California. And as we're going through diligence in the process and the transaction, the CEO of the company called us down for a meeting where he disclosed that his CFO has absconded with a lot of the company's money. He'd been siphoning off money for years. Can't trust their financials did related to an IT implementation that they did down there of a new ERP system. And the CFO led the implementation. They didn't have a lot of the checks and balances in their banking and accounting systems that you should have. And CFO actually had the same codes and authority so he could sign off on bank funds requests where the CEO was required. And he had essentially gotten away with several million dollars. The end of the story. We didn't end up moving forward on the transaction in that instance, but he ended up luring that CFO back to the United States because he had left and bought a nice little villa somewhere. And when he touched down at jfk, the authorities were waiting for him and arrested him. And. And I'm not sure what they ended up being able to recover at the end of the day, but it was. That was an interesting surprise that happened.

Yeah. Some of the other accounting irregularities that we find, especially in a manufacturing environment where you're going to be taking over materials, raw materials, and work in process or whatever form or level of material, there's certain accounting rules, and not all companies follow the exact same accounting rules. There's got to be some reconciliation there. But we often find that things such as excess and obsolete are not properly accounted for.

Kind of gets down, if I don't mind me interjecting, Steve, where, let's say in a purchase agreement you have the phrase consistent with GAAP or past practice. You got to watch that. Or versus. And it has to always be consistent with GAAP and consistent with past practice. But even in the instances of gaap, there are variations which can come back to haunt you.

Yeah, no, exactly.

You had an example. Is this revenues encountered differently or pushed into.

Well, no. I mean, it could be as simple as, look, I value this part. This part is $1 and it's on the books for $1. But under the E and O provisions, that's excess. You haven't used that part in 300 days and it's sitting out there. I'm not going to value it. I'm not going to pay you for a dollar for that. It's not worth that. It should have been written off and it should have either been scrapped or sold as excess. No good. So that's the fundamental. There's a lot of other twists that go into that as well as you start to get the product into manufacturing process where there's more value add put on. So there's different levels of where you can end up with Eno and that could be a big financial hit. Somebody has to write that off. Does the seller write it off or does the buyer write it off? And that's what the discussion comes down to. Who takes the hit on that that could get into. Depending on the size of the inventory that's transferring, that could be a significant part of the purchase price.

Revenue recognition policies have changed over the years. Now there's partial completion. Right. What happens if that product isn't shipped? Laws are always changing, accounting rules are always changing. So got to keep abreast. But talking about inventory and just not necessarily a surprise and diligence, but at many of, let's say large multinational companies, they have outsourced certain portions of their business. That may be something you have to manage. Post close, we had a transaction where warehousing services third party logistics was outsourced to third party logistics providers. And we had only received the companies, the target company's inventory records. And as it turned out, the third party logistics provider was on a totally separate system that didn't balance with the target company. So there was a discrepancy there of several million dollars.

And somebody's gonna take the hit on that.

And somebody's gonna take the hit on that.

Correct. Any other surprises? IT surprises.

Oh, that's a code word. It is a code word for surprise. When you're trying to combine companies, more often than not you probably don't have similar IT systems. Depending on what kind of processes, whether it's manufacturing, whether it's financial reporting, whether it's hr and there's some level of integration that needs to be planned for and then completed by the time you close to get to close, typically you can't unless you have a way to plug in. The two IT systems probably can't close on day one simply because you probably can't pay the people, the acquired company, you probably won't be able to pay them. That's probably one of the principal items. But there's a lot of other things. You may not be able to run certain other elements of the business or you may have to run two sets of IT systems. So it gets very cumbersome. And that's always been one of my pet peeves, the IT diligence. No matter how well it's done and how well it's performed and the planning in order to get to day one close is always insufficient. It's always wrong. And so whenever I go to the final review of the IT diligence and time to day one, my automatic response is I don't believe it. I don't believe the timeline. And I'd say 99% of the time I've been right. It's just the nature of the beast.

That usually happens when you're talking about a divestiture of a large multinational corporation. It's on a different system. They can't necessarily. The entity that you're acquiring isn't on its own standalone system. So it has to actually be separated, has to be separated from the customer's larger enterprise. So there's a lot more that needs to be done to be ready for day one.

And then it's the software providers that aren't always cooperative because it's a money grab for them as well and you need their support to go forward from a licensing arrangement.

A lot of this stuff would happen between Sign and Close.

Yes.

Are there other general surprises that you see between Sign and Close? That's an interesting time.

Here's a crazy one. I was working on a deal. It was a Taiwanese manufacturing operation that did batteries for laptops. And it was an acquisition that we had done years prior to. But it was ran its logical life and it was like, we don't need to be in this business. We ended up selling it to a private equity company. And as soon as we signed the deal two days later we find out the general manager had a brain tumor. That he. I think he had known about it because he said he wasn't going to be able to continue on with the business. Private equity said, no gm, no deal. Anyway, make a long story short, ended out he was cured of whatever his issue was. The deal finally did close about six months later. That's a surprise.

Quite a long period between signing clause.

I had a transaction that had majority and minority shareholders. It was in a jurisdiction where we certainly had the ability to close the transaction and buy the company with only acquiring majority shareholders shares. And we had signed a transaction. And when word got out and the minority shareholders found out about the sale, it turned out that those minority shareholders were much more problematic than the majority shareholders realized. This was originally a business that was owned by a few different families, by three families, and then two families, and the one family that had the majority of shares. They were successfully able to increase their shareholdings over years at the expense of the minority shareholders, which left them very disgruntled. And the minority shareholders weren't involved in the management of the business. It turned out to be a long history of disputes, not necessarily legal, that we would have been able to identify in our diligence, but the newspaper article investigations and things of that nature, where it could cause a lot of unwanted publicity for us to proceed on that transaction. Even though we had signed a deal.

They didn't do it.

Well, no. We ended up closing, but we had flown out to meet with the minority shareholder. He presented us several binders. What he said was malfeasance on the behalf of the majority shareholders and how they've done things illegally to their detriment. And we looked at the data, reviewed it with our counsel, didn't see anything that, at least on the face of it, was legally wrong. But what we did do is go back to the majority shareholders and said, you told us not to talk to the minority shareholders, and we respected that through the process. But you really didn't let us know how big of an issue this is with them. So now you're going to help us fix it. And so we ended up buying those minority shares and paying them a little bit more than the majority got per share. But a good chunk of that came from, from the majority shareholders themselves. So if they wanted to see the deal closed, they had to, let's say, pay a price.

That would be a fun one to negotiate. How would you go about mitigating risk and surprises? You know they're going to happen on each deal. What can you do about it?

It depends on what the. What it is, right?

You don't know.

You've got to find a way. Look, Jim and I, our role is if it's the deal, make sure we get it done. If it's a risk or something that comes along as a surprise and it's the wrong deal, find a way to make sure either it gets resolved so it's still a good deal, or make sure that everybody understands that maybe this is one you need to walk away from. Can't fix it.

You Know, I'm looking at my notes here and I had a thing about trapped currency. What the hell is that? Trapped currency.

So when you're doing offshore, especially if you're doing deals with China, one of the transactions, one of the last transactions that I worked at was with the China business and being able to get the money paid in either RMB or US dollars and to get rmb and I think the situation might not change that much. There's real restriction on China companies getting moving, transferring RMB out of China and converting it into other currencies. Heavy restriction on that. And there was only so much allowed per year per company. And so we had a transaction where there had to be some creativity around how we got paid a portion of the purchase price in RMB that would stay in China for our China operations and then how we had to get some of that converted into US dollars out of China either into. I think we ended up getting it into Singapore. I don't remember the specifics of the details of how that was done, but it was a bunch of smart guys figured out how to do that. As you can imagine, with that kind of limitation and the need to move currencies around, there's a lot of smart guys working on figuring out how to.

Do transaction, looking at the different legal ambulies involved and taxes and things of that nature.

All determined like you all got a little main degree in money laundry doing all that.

I wasn't involved. I wasn't there.

Doctor, you weren't in the room.

I wasn't in the room.

I wasn't in the room. Integration, the fun part of M and A.

Yes.

I'm curious about surprises that pop up during integration.

We never wanted this deal. Why did we get it?

That's a surprise.

Usually it comes from one of the business guys when it's like a little difficult. Hey, they don't think the way, they don't work the way we do.

Have you ever had that like a B unit sponsored deal and change his mind? I don't want this. You've had us seen that before.

More than once.

Oh no. He and I participated in a transaction. He was at the front end, I was at the back end.

End or you were at the front end and I was at the back end.

No, but one we gave away. We paid $340 million for it. We ran it, proceeded to run it into the ground over a period of three years and we sold it to private equity for. I paid them $12 million to top up their working capital and gave them the keys to the business.

Wow.

There's more to the story there. That was something that where the acquisition, the strategic underpinnings was based on integrating the IT systems and taking that information from call centers and sharing it with our depots. And after the transaction closed, the management of that call center business talked the business unit executive leadership into not doing, not following through on that IT integration. Without that integration, there's no way to reach those synergies that you had in your business plan.

Well, see, Jim was part of that business. And so that's the explanation from the business. From my perspective, it was a failed strategy from the get go.

So you say I'm part of that business. Part of the business unit. The acquiring business unit, yes. And the business unit. I was point on that and I wasn't happy that we weren't able to carry through with our integration plan. But it is what it is, Steve. And then there's the transaction that you did down south. We won't say where exactly. That really the integration plan wasn't really followed through with. And we had turned out that from just a business mix perspective, it really didn't match the larger organization. Maybe you could tell us a little bit about that.

Well, it was the entry into Milaero, which the company had no experience whatsoever but had some really great ideas. Everything from building airframes to getting into microelectronics.

Microelectronics, yeah, it was, it had great.

Capability, but it became an orphan the first month. Nobody paid attention and thought about okay, how do we really integrate and how do we go drive this thing? And then that was part of the problem. The leadership that came along was less than what we thought.

We tried to force business in there that really didn't fit their business model. So we started selling stuff into them that wasn't microelectronics, which wasn't Millero. They struggled with that in terms of profitability. We ended up selling it three years later. Steve did a great job negotiating the purchase price. We didn't pay for that and I was fairly adequate on negotiating the selling price.

Going back to the same thing of mitigating these surprises. Is there a different thinking approach when it comes to integration? Mitigating surprises from integration?

A lot of that is really dependent on how well of a job you do on the front end as you're going through the diligence process.

What we got smart on after a lot of scar tissue was we got an integration leader plugged in to the process early. Early to the diligence.

Yeah.

So that the integration lead would know, oh, okay, here's what's coming as opposed to, oh, the deal closes.

Hello.

Are you the integration lead? Oh, here's the deal. Maybe we should meet for lunch. Yeah, that's a bad strategy.

Yeah. They're involved early.

Get the integration in early.

It's making sure you do a thorough or at least an adequate amount of due diligence, making sure that the team members are experienced or not experienced. They're mentored through that process. And I think Steve and I both have spent a tremendous amount of time mentoring functional team members in their respective areas.

Yeah. And the training process, Training is more often than not, we didn't always get the same diligence functional leads. So I would say during diligence, that's 80% of what we do, is just keeping everybody in line and making sure that they know what they need to do from a functional perspective and what the expectations are.

This may seem like a shameless plug, but it's something I truly believe in. You got to have the tools to support that process and communication as well. Steve and I are fortunate enough to have done M and A back in the days where it was conducted in a closed conference room with no windows and files and paper. Yeah, Just reams and reams of paper that you're allowed to take notes on and no copies. But the M and A process today is completely different and it's so much easier based on tools like data room and like M and A Science that makes deal room.

I'll take the shameless plug.

Okay.

No, no.

But I truly believe that having virtual data rooms, especially with smaller companies that may not be as well versed in how a process goes. We've had transactions where and using dealer room. We've set up that small company, a data room in due diligence. We've organized it for them. We gave them credit control, removed our control over the data and gave them control. We gave CEO of the other company control of the data so we could only do what he set in terms of limits for access and download and printing. And we conducted our diligence through the process, you know, using that virtual tool. And you've got a complete historical record of the diligence, the comments, the question questions that you're able to share with all the team members or management that want to see what happened and what transpired. And it facilitates the integration process so much having that. And in fact, you could use the same tools for integration that you used on the diligence side. You're all working off the same book and same play.

That's the deal room difference. It's actually funny because I'll talk to our CS team and they'll get some funny requests where it is because people want sensitive about the data. We'll actually get HR that says, hey, I need to set up my own sandbox. I can't have corp dev in there. I'm like, okay, we'll set that up for you. But that's absolutely fun. It's evolving. We're excited to see the next generation of M and A here. When we talked about mitigating the risk integration sounds like doing thorough diligence is such clutch. Getting the integration leader involved early using a good tech product like deal room would be a good avenue as well. Anything else?

Communication is always key communication and frequent communication with not just the key leadership, but the employees of the acquired company.

Let me add to the communication. Especially when you're in the process of negotiating and trying to get to close the communication with the senior leadership team of the company. It's important that there's just one voice.

Yes.

You can't be be having communication from. Here's the legal readout, here's the HR readout in terms of what's going on. And so to try to contain that, it's very important because things can get sideways really quick. Misinformation moves at rapid speed and so it's important to control that.

It's really important that communication. Something goes wrong, you got to be able to speak clearly on it. I'm going to take a break, but I got my co host here since we're live and I'm on tour here and I'm going to have her step in, maybe wrap up this interview.

Nothing too tough.

Shaila Patel.

What was the hardest step to do.

An M and A?

The hardest step, get paid, get the money for the transaction. If you're selling or if you're buying, you got to get the finance guys to pay the money.

There's difficult elements of every phase of a transaction. But I would say getting them to the point of actually sharing the information you need, that's a process. It's often like peeling an onion. You have to fight through to get them to give you the information you need to make that decision of a go, no go.

What's the worst deal you've ever done?

We both have worse deals, don't we, Jim?

I've never done a bad deal, Steve. I don't know what you're referring to.

I had a horror story of A deal that I still wake up in night sweats over that occurred over 20 years ago. It was early on in my M and A career. It was a deal. It was an OEM divestiture of a very large Datacom telecom business. And it was a transaction that was probably years in making in terms of eventually this is what was going on in that industry at that time. All of the major providers were outsourcing and getting out because they had this company called Cisco that was going to eat them alive if they didn't get out. And they realized they needed to get out of manufacturing. And our company was kind of king in that area. And we relied that we could actually take over a billion dollar business and integrate it and continue to run it. There was so many issues from an industry perspective as well as from that company's perspective that were a constant erosion to that business. So what looked like to be a $1 billion business that we were going to take on, which was essentially taking on a workforce that was unionized, which was problematic in itself, taking on an eroding business that was dropping. And we couldn't even gauge how fast that was dropping. And there was probably bad management on both sides in terms of they were both committed to getting the deal done. But what ended up happening is by the time we actually closed the deal, we had worked on it for some 18 months with delay after delay and trying to keep on top of what the actual forecasted business that we were going to take on. It was a moving target and clearly something really bad happened by the time we closed. Because the day we closed, the morning after we wired transferred the purchase price, I got an email, a copy of an email from very high in the target company's management chain to the COO stating, do not give the latest forecast, we're going to close the transaction this week. Now, if we had received that, and by the way, the forecast was attached to that email, and if we had seen that forecast, we wouldn't have done the deal. We would have backed away anyway. It got very ugly to the point where the CEOs of both companies, the CFOs, the COOs, all of the C level, we all met back in New York in a meeting, very contentious meeting, ended very badly. We ended up unwinding the deal in order to avoid lawsuits. We closed the deal. We owned and operated the business for another about six months and then actually gave the business back and got our proceeds back. And it was very contentious and it was a bad outcome for everyone.

It was actually some as I recall some personal venom issued in your direction.

Yes, yes, I was not involved in the unwind.

That was a really, really rough deal.

Yes, it was.

Yes, it was. That's why he's got all that gray hair.

That's right.

Yeah. Earned every one of them.

What's your best advice when acquiring companies?

Make sure you have a very strong strategic underpinning on making the transaction with clearly defined synergies and a strong team to execute that plan.

I don't think I have anything to add.

Yeah.

What kind of advice would you give.

To the next generation of young leaders?

Work in a business, Be in a business and be responsible for running a business or involved in running a business and understanding the P and L associated with that business and get experience as a business person and then go play in M and A.

That's very good advice. Understanding, if your focus is on manufacturing, understanding the manufacturing process, all the elements involved in supply chain, it really helps you, as you go through, understand what the pitfalls are and how to avoid them.

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

Well, the story about the CFO in the middle of a process, just fleeing the country with the millions that he siphoned off was. Was pretty crazy. But we didn't complete that transaction right.

So I know I've seen crazy things and I just can't think of one now. I know there.

There's been crazy moments and there's been things that happened during the course of negotiations where essentially I've halted negotiations and told my team to get off the call and we're done. You reach that point sometimes in transactions where you can't be afraid if things are going in the wrong direction or if the other side is retrading points that you've already negotiated.

Well, one comes to mind that transaction and this is never. It'll only happen one time. The transaction that we talked about earlier, the ugliest one that I was involved in, there was one late night negotiation with attorneys. It was 2am and the attorneys almost had a fist fight that I had a breakup from either side. So that's kind of a crazy one.

That's crazy.

Yeah. One thing that she realizes that M and a isn't a 9 to 5 job. It's a 24, 7, 365. We're frequently on negotiations, regardless of the geography, early hours of the morning. Oftentimes it's somewhat a strategy to compress negotiations into late hours just to ensure that you get to close. But I've Been on negotiations at 1:30 in the morning, 2 in the morning with lawyers, and all of a sudden they bring on someone to substantiate their argument for language in the agreement. And in this one instance, it was litigation accountants. And I called a stop at that point and said, here we are trying to resolve this issue at 2 in the morning. Got to get things done by tomorrow morning. And you're already bringing in litigation personnel. I don't see how we get there from here. We've proposed something reasonable. And there was the litigation accountants yelling back at me and justifying why that they're on the call. They were showed to demonstrate their value. And essentially in that instance, we had both lawyers speak up saying, hey, time out. Let's bring an end to this issue here. Let's not discuss it further. We think the lawyers have got a solution to it, and the solution was our proposed language. So we ended up just defaulting to our original language. But you reach those points almost every transaction. You reach a point in negotiations where it's close to a breaking point and you have to, let's say, stand firm sometimes, or at least most of the times, I've been fortunate enough that it's worked out in my favor, but because I think I was in the right in terms of my arguments. But you can't be afraid to stand your ground when you need to.

Yeah, a lot of good, crazy stories out of that one. Hey, thanks, Shiloh, for filling in. Gentlemen, I want to thank you so much for taking the time. This has been a great conversation. I learned a lot. You've helped me become a much better M and a scientist.

Cheers.

Thank you.

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