Managing a Multi-Vertical M&A Strategy

Virtual data rooms are a big rip off. Are you sick of those old school data room providers that charge you by the page so you have no idea how much you're actually paying until it's too late? Well, you need a virtual data room that follows public company security standards at a fair price. It needs to be easy to learn so everyone can use it. Firm Room is the world's most intuitive virtual data room. That's only $500 per and you can cancel at any time so you only have to pay for what you use. Visit firmroom.com to learn more. Here's the deal.

I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M and A deals. Welcome to M and A Science Live. Putting together companies is complicated and taking them apart is even more complicated. In this podcast series, we interview leading M and A practitioners to learn lessons from their experience. Learning proven techniques is key to optimizing your M and A practice. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our newsletter. I'm your host, Kisam Patel. Today I'm here with Jerry Will, Vice President of corporate development at 3M. Today we're going to discuss how to manage a multi vertical M and A strategy. How are you today, Jerry? Good.

Good morning. Glad to be here. Thanks for having me on.

I reached out to your team and I was trying to get some dirt on you. I was hoping to find out that you moonlight as a breakdancer or DJ on the side or something. But I think that's all in Goldman. The thing that they pointed out was your background is really interesting that you started from a physics undergrad and then you moved right into law and then you ended up banking for 10 years and now in corporate development. I'm curious if any of those components from your background help you do M and A today?

Yeah, I think it does. My dark secret probably is that I was a lawyer, so that's my deepest bankers. Maybe not quite so surprising. And I always say about practicing law it was a good thing to have done. I enjoyed the firm I was at, enjoy the practice. I'm glad to broaden my responsibilities now, but it all helps me today. 3M. As I think about it, 3M is at a certain level. We have a lot of generalists at the firms, I mean curious people that are interested in doing many different things. We all have our different toolkits we bring. But if there's one defining aspect of 3M that defines the culture, I'd say it's curiosity. People that want to do things that are new and do things that are different. So it helps to have a broad curiosity and willingness to try different things. And I think that's what I've done across my career. I enjoyed practicing law, as I mentioned. I enjoyed the physics that I did as far as I went. But it's always on to the next thing. Yeah. And today I try to bring all those to bear. We're a technology focused firm, so it's good to have a background in technology. I'm very excited about technology and what's new and next. The legal side is very important as we kind of structure deals and relationships on the banking side and obviously figuring out what's going to generate the most value return for investors this quarter, what we do. So I try to bring it all to bear. I'm always looking for the next new thing too. 3M, there's no shortage. We quite broaden the marketplace.

I like it. Curious and keep learning. I think that keeps you in M and A because every deal is so different. You keep learning.

It's a learning organization. I mean we've been around for over 100 years. You don't do that unless you're changing. You embrace change. Willingness to change that. We talk about the science of change internally. We've been studying it for decades. How it happens, how you effectively manage through it. We're constantly changing, constantly learning. We went through a focused adoption of Lean Six Sigma 2 some time ago. That helps us. That's obviously continuous improvement. That's another aspect of it. And we embrace that. That's a big part of our culture. So it's a very dynamic enterprise. Part of it is that we know that we need to change. And that's why people come to 3M, I think, is to do something new and different. We're always trying to solve the next problem for customers. So it's. It's an exciting place to be and it's exciting place to do M and A and figure out what fits within that business model. And that's fundamentally what we do. So where should we play? Where. Where should we try to bring value to customers with a business model like that? And that's how we think about portfolio. What do we need to add? Maybe what should we exit? That's what we do every day on my team. So it's exciting.

Well, let's Jump into it. How does 3M manage a multi vertical strategy?

Yeah, it's interesting and it's multi vertical. I think it's the enterprise too is just think about how do we manage a multi vertical business. I'd say it's a combination of bottoms up and top down approach. First and foremost, we're in many different markets. We understand the benefits and the need to be close to customers and markets. So first and foremost what we do is informed by being very close to customers. When we do innovation, it's customer inspired innovation. What are the real pain points we're trying to sell for a customer? So we're in many different markets, many different core customer sets. So we start there. Everything has to be informed by our knowledge of those markets. Domain expertise, customer needs. At the top level, you need some sort of cohesive, consistent view in terms of how you go about generating value for customers in all those different markets. We spent a lot of time thinking about that and I'm part of our strategy and business development team for the enterprise Corporate development group is. And so collectively that group, which includes strategy and other parts of the thought leaders for enterprise, spend time thinking of what really unites everything that we do. What's consistent, how do we go about delivering value for customers. And we think of it in terms of our fundamental strengths we leverage. What are our fundamental strengths and how do we leverage those for customers? Our fundamental strengths are it's technology, manufacturing, global reach and brand. They're fairly broad concepts, but then it's like how do we apply it? But we have a core set of technologies that we leverage in different markets. One of the ways we get leverage on that is through manufacturing. We have a lot of manufacturing technology expertise. It's a great way to get leverage and return on your investment. Innovation. And then we're looking for things that we can go big with do global reach. And we're about every region around the world. So we're looking to leverage that for our customers and then our brand too. Our brand, we're stewards of the brand. We're conscious that we're leveraging the good work that our prior colleagues have done and our customers respect that and we have a good relationship with the customers. Our brand kind of embodies that, but it's getting close to the customers, having their trust so we can really generate the insights that help solve their problems. That's really how we think of portfolios. We think what businesses really fit with that business model. It's got to be based on technology where we can innovate and then manufacturing is key for us. If we can leverage our manufacturing expertise that can generate a lot of value and then global reach and brand. Can it go globally? Is our brand relationship going to make the whole thing work better? Because the small companies may not have that kind of relationship with the customers. Can we leverage that? So we think about that. Then it gets down to each market. We have to have an opportunity management system looking at ins and outs on the portfolio side that's pretty comprehensive across 20 plus divisions. Many profit centers within those divisions, many markets from consumer to aerospace to healthcare to it. We replicate that. So we start bottoms up in terms of there are business development people within every division that think strategically about their portfolio. We have folks in my group that are assigned to work with those divisions and business groups to help them think that and deploy the tools that we have in those business units. And then they will bubble up ideas like we think we should rotate capital to this product set this technology area. We'll aggregate all those up and then apply a top down lens too. And we have a good process set up across enterprise to bring ideas up to the bottom and then have senior leadership have the option to engage with business leaders to think broadly about how do we best leverage that business model. What sectors are going to generate the best value for customers, the best returns for our shareholders. You have to have a broad conceptual framework that applies in all these different markets at the same time. You want to drive very market specific insights. That's what we do through our processes.

It's interesting because your organization is huge. There's a lot of different verticals. I think we Talked before about 50, 60,000 products across the world platform.

Several thousands. Yeah.

And there's uniqueness to these different verticals and their strategy. Walk me through governance. What does that look like?

I would divide it into. We have different processes around the alignment and prioritizing what the opportunities are, ins or outs, acquisitions or divestitures. And then we have governance around projects, around deals, on the deals. We've got a stage gate process. I think it's very similar to what a lot of our peers would run. We'll have an approval gate when you're signing a cda. It's a good checking point. Before you start to do a lot of work or use a lot of resources. Look at a deal. We'll have another stage gate before we bid and then there's one before we sign. And I think that's pretty typical. But before you get to that point thinking about where do we even think about authorizing deployment of resources against the project. It's more on that strategic side. And we have a strategic portfolio management process. It starts with, as I mentioned, that work at the business unit level, thinking about how they want to deliver value for customers, where do they want to rotate capital into? We think about portfolio management broadly. It's really. It's about capital allocation, and that can be reallocation within the business unit. Thinking about where we put CapEx, where we put R and D dollars, first and foremost, it's just reallocation of the business we have. Then we do think about acquiring, how do we reposition the portfolio, better markets to better leverage, and then about divesting. Where do we think our model doesn't fit as well? Is there a better natural owner right now for that business? And so at a business unit level, they'll start to bubble up. And my team will meet with those business development folks from divisions every two weeks. And then generally every month, that team collectively will meet with an EVP to assess priorities and start to develop a cohesive portfolio management framework and prioritization for the business group. And then quarterly, the leader of the business group will meet with our most senior executive leadership or CEO, cfo, head of strategy to kind of align enterprise on priorities. And really trying to think about how do we deliver the most value for the time that we spend on portfolio management. And then we come out of that with prioritization. Then we roll up across the enterprise, roll up all that for the business groups. And so for both acquisitions and divestitures, we have prioritization. So when a project comes in for that gate review, that should not be the first time everyone should be familiar with that project because it's gone through that alignment process. There's many deals that we could do, but we need to do the most important ones for us. And so it's a lot about prioritization and just alignment. And that sounds like a lot, but it actually works pretty well. And I would say that for 3M, generally that's core expertise we have is how do you align and make it work where you're in so many different markets, both product markets, and then just around the world, geographically pretty flat organization where people just have to work together to make fast decisions. Our culture is that folks work well together. It's a very collaborative culture. They work quickly, there's fast clock speed. But we spend a lot of time thinking about decision rights, so we don't get bogged down like who can make the decision. But even as we focus decision rights that collaboration still happens. People want to get the best insights, leverage expertise we have broadly across the firm. It works well. We look to get the right information against a decision, but make it with pace and make the right decision.

And always prioritize what sort of drives that. How does leadership go about deciding what industries are focused on and what to prioritize?

We think about our commitment to our stakeholders, to investors, to terms of trying to deliver growth returns on capital, free cash flow, margin improvement. We think about it's a capital allocation exercise. Before you get to that, we step back and say again, it's the fundamental strengths. What markets broadly fit best with our business model and leverage? The fundamental strengths. Recently, I think it's been invested against priorities that we've identified to investors. For example, we talked about wound care for a long time. We had a very good footprint in that market. We thought it was a market that we bring a lot of value to our technologies and our products played well to the needs in that marketplace. But we wanted to get scale and relevancy, I think more broadly across that market. So we looked for a long time. We made a pretty significant acquisition a couple years ago now in Celady the KCI product for negative pressure and some other active wound care projects. That was a great ad for us, gave us tremendous scale. They're a leader, global leader in negative pressure wound care. They've got a great surgical product that's coming on. We got to business scale, so that was for us a market. There was strong alignment around that. We were going to prioritize that for capital deployment. We did the same thing in worker safety. It was a market where we felt we had a good foothold. We could deliver a lot of value with our innovation model. So we made a couple significant acquisitions. Capital Safety in the fall Protection market, Scott Safety and SCBA for firefighters and industrial. We prioritize market opportunities and market segments and then deploy capital. But the decision to prioritize markets like those is a result of that regular dialogue between our executive leadership and our business unit leaders just identify those priorities and we look at it with a variety of tools. It's fundamental strengths, strategic attractiveness, financial attractiveness. It's not just the portfolio management views too, but it comes out of the operating reviews too that they have. We develop a view about which businesses we think we want to prioritize for capital. It's one of the things that we do in corporate development is just to facilitate that dialogue and try to drive alignment around the best opportunities.

What does final approval look like in These deals, does it land on your desk and you got a big stamp to approve it or what does that look like?

Yeah, on that stage, paid approval, we have decisions out of our meetings that we document. We put in a teams data room. So there's certainly controls around that. We don't do stamps on the desk anymore, but I guess it's an official document in the Microsoft Teams room is the new stamp. We are very process oriented at 3m. We like to be efficient. We like to have a process that we can continually improve, which we do over time. So we've been running our, we call it a pre acquisition review or portfolio management review. In terms of the deal specific gate reviews that we do for ins or outs. We've been running that PAR process and acquisition side for, gosh, 15 years now and on the separation side for about 8 years. You continually hone that process every year. It gets down to be a pretty good rhythm. But we continue to think, how do we best inform those types of decisions? What information do we need in front of executives? What do we want the businesses to think about before they bring those ideas forward? For decisions at those different points, for example, on a potential divestiture or profit center or business line, we ask that they come in with a comprehensive view. Where does this fit within the business group's overall portfolio strategy? Bring that context now that should have been developed and has been developed in that bi weekly, monthly, quarterly rhythm that we have around portfolio management. We bring that in and then also we ask for how would you articulate what we're doing to investors? What would the bones of the press release look like? Because it's a good way to test does this fit strategically with what we've told investors about how we'll manage a portfolio? For example, if you want to exit it, is there a better natural owner for that business now or why? How would you articulate that? So we're constantly, not to overly complicate the process, but get it down to what are the key things that help inform a better decision around portfolio. Portfolio management moves. So we'll just constantly update that. We have playbooks that we put online for folks and that we continually improve around our processes. It's a large organization. We have a lot of folks in the business units that are doing this. A lot of them are. They're not experienced in M and A. They're marketers, they're strategy folks, they're operators. We do a lot of teaching. We try to make it so they can jump in. They've got a playbook they can read it, they can talk to us, they can rapidly get up to speed in terms of deploying the kind of model that we want. And I think it's also just learning M and A generally how to think about portfolio management. But as they rise up the leadership ranks, thinking this way about capital allocation becomes more and more important. So I'd like to think it's a, you know, it's an important part of overall development just for our leaders at 3M is how do you think about capital allocation, how do you think about portfolio? It's not just how you play, but it's where you play and with what. You don't have to accept the chessboard you have in front of you. If you wanted to reconstruct the set of assets that you're working with to really create more value for customers, what would you do? Let's think outside the box. That's a fun thing to do with them. And it's just a whole nother avenue for strategic thinking. We engage with a lot of leaders from the lower business unit levels on up, just in terms of how to deploy that for the enterprise.

And that final stamp, it goes, does it go to you or is it actually things taken up to the board? Is there a certain threshold that our.

Deal review committee, we call for an acquisition? So pre acquisition review, it's our senior leadership, it's our CEO, our cfo, it's the leads of all the core functions. We have strict governance around who needs to be there for what. Based on the deal size, we have a board review threshold above which it needs to go to the board. Below that the CEO can sign off on it. There's another threshold that's lower where CFO and the EVP could sign off on it. And they're pretty much in line, I think, with what our peers are at the decisions in the meeting. And then we document it. I'm not making those decisions. We're facilitating the process. We have strict governance and it's a control, right? So we get audited, our auditors come in and talk to us about our governance around M and A. But we have strict charts in terms of who needs to be at each meeting and how decisions are made. And we document those.

How do you gauge a company in terms of fit for 3m?

We do this fundamental strength analysis on each deal. What are they bringing to 3M or what can we bring to them? Because it's fundamentally, it's all about value creation. That's how we think about it. How can we create more value with that business. And typically look, it's a very competitive market, I would say efficient market for companies and we're generally looking for high performers for those companies. It's a very efficient market. So we always have to think about if there's a clearing price for the business, what are we going to add beyond that, how much? And goes back to fundamental strength. It's technology. Do we have technologies that we can add to what they're doing? Does their technology add to ours? So for example, we bought Mmodal, which is the natural language processing for clinical documentation. We have a large healthcare IT asset that does various things for revenue cycle management and performance improvement IT products primarily for hospitals. The technology that Mmodal had, we're taking the clinical record and coding it for reimbursement, helping make sure that hospitals and providers are getting paid appropriately for what they do. It's a very complex process. You have to achieve that goal with utilizing the language of healthcare, which we spent a lot of time working with the Medicare Medicaid officials in terms of developing. So, so getting into mmodal and their natural language processing for clinical documentation. It's an adjacency from our core coding franchise. So we felt very synergistic when we're in the process developing and launching products that combine those two solutions. And so that's a great example of a technology at for us. So it's a great franchise. We deliver a lot of value. It's another platform and they have a great technology. Their solution is a leader in the marketplace, great people, a lot of very strong technical experts in healthcare, IT and AI. And so that's just a tremendous technology ad for us. So that's a classic acquisition for us. On the flip side, in terms of how we can improve a company too, I'd mentioned a sellity, I think with some of the products they have, they have a core product around negative pressure for wound management. For example, think hard to treat wounds like diabetic foot ulcers. But they're also. They look at surgical wounds from surgical procedures and they have some exciting new products. There's. There are particular ways that those negative pressure dressings are put on that after surgery that may require repositioning. And there's certain things you can do to make a product easier to use for a doctor and for a staff. We're working on some things with them. Or we. We really think we can advance the state of the art because we're obviously expertise in adhesives and films that we have. We can do some really interesting things with that. So that's actually where they have a great product, a great application. We think we can help make it better and manufacture it very cost effectively. That's a win win on the technology side as well. I think also for Salady is a great example of an acquisition where it just brings us better presence in a market that's very important to us, where we can do a lot of value and where we become much more relevant to customers, to physicians treating wound cares, to wound care clinics in that marketplace. So with just the reputation and the market presence that they had and negative pressure, that's important for us too, just in terms of having the relevance and being close to customers, understanding the issues continue to drive improvements in the products and solutions that they need. It was great from that standpoint as well.

The two big things I hear is essentially where you can utilize your competency to help grow the business, then also identifying synergies across your different verticals to find those other opportunities as well.

You know, and I think too in case like mmodal there, not only is the expertise they're bringing around natural language processing and AI relevant for our health information services division and the HCIT dilutions, but that's an asset across the company. And there's many areas where our clients across the spectrum are looking to drive increased productivity through digital technologies, bringing that competency into healthcare. That's going to provide benefits to us in other verticals. We look very closely at automation solutions using some of our abrasives products or in markets like automotive manufacturing, we have some great partnerships there with some automation providers to use our materials and our application expertise in some of those automotive processes to deliver higher productivity and lower waste for the manufacturers. And so we can leverage a lot of the digital competency that we pick up in healthcare and employ it to industrials. That's a core part of our business model. It's that core set of technologies applied across multiple markets. And oftentimes the solutions that we're bringing to market are solutions that are driven by our curious creative technical personnel looking across the resources that we have at our disposal, which generally are broader than usually sit within any other enterprise and bringing something that's the serendipitous connection. We're combining two or three different technologies that really no one else has in one house to bring a unique solution to the world. And so that's the core of what we do. We look at that too. It's just a core platform technology that can be applied across the enterprise, not just in that market. So everything has to work. It's a lot of ways that we can look at it. We're fortunate. We can deploy capital in a lot of different spots. We can deploy capital to healthcare, to automotive, to electronics or semis or consumer. And so it's a challenge and it's an opportunity. It's a real challenge on the prioritization. But it's a tremendous opportunity for us and our investors because we can always pick the best opportunity. That's what we try to do.

All about creating value. What's the overall process for how your leaders assess deals?

Ultimately there's this kind of strong qualitative aspect that I talked about and we make a lot of these factors quantitative and we'll score fundamental strengths. We'll give a fundamental strength score. I think we look at it both quantitative and qualitatively and then beyond that, I mean we are very disciplined and analytical both technically and financially. And I think one of our other cores is that we are very financially disciplined. We are focused on generating premium returns for that capital that we deploy. It's another asset that we have is that we have a history of generating premium returns. I think they become self fulfilling. That's what our employees are focused on doing. So that translates through to M and A. So we're looking at the same return metrics think that others are. We're looking for cash returns in your X IRRs, NPVs. We'll try to do checks with market multiples. But ultimately we have a detailed plan for every acquisition about how we are going to generate value with it. And it comes down to specific dollars and specific years. We track it very closely. So we'll have post acquisition reviews. We go three months, six months, 12 months, 24 months. And for significant deals we'll have interim checkpoints like a seller that we meet more frequently. We track progress against metrics and what we committed to at the time of the deal. It's very specific around synergies, both cost and revenue. We focus on and pride ourselves on strong execution. And so we will track and look to exceed what our targets were for deals. But it ultimately comes down to delivering financial value. So we'll have a detailed plan that trickles all the way down to the very specific numbers that we'll look to beat.

My friend Jeff's got a good question related to this. Sometimes it's difficult to get bus that are not leading the deal to cooperate or feel ownership for synergy realization across organization. How do you manage this?

I think it comes down to leadership and ownership at the senior levels, the synergy plan is developed by the business units and the business leaders. We are not driving our deals from the center. It's driven by our business leaders. And I would say we do get good ownership from that. And we have deal champions internally. If you don't have a deal champion at the business level, that's an issue because you need somebody that wants to own that and make it work. We generally get strong ownership from our business units. On Synergy metrics, we're fortunate. I think we have typically exceeded most of our targets. It maybe starts at the bottom. We are not trying to drive deals from the top. I think what we see is our response with the enterprise is to make sure we're thinking about value creation in the right way. We're trying to make sure we're doing appropriate high level prioritization across the enterprise. But ultimately we need business leaders that are passionate about making the deal work. And it really, at the end of it's about driving value with the business unit, driving value for customers. It's a requirement for us that we have leadership that really feels strongly about that. And it's at a pretty senior level. I think generally the leaders of our business units are going to take responsibility for those deals together with their VPs in charge of divisions. And we have strong alignment with them about driving results through. Part of it is we started doing fewer larger deals several years ago because I think it's easier to do that. I think it's a challenge with smaller transactions because I think you would see it more often there. Even for small transactions, our leadership will take ownership of. But when a smaller deal goes off track, there's a question of what resources you can put against it to get it back on track when you have other ways to create more value with that leadership. But if it's a material deal, you're going to make it work. You're going to make it work. So that's one practical thing I think that can help address that around smaller deals. I mean, I think you have to have a higher screen at the outset. That's more of a challenge. You have to make sure, do your best to make sure you've got some kind of commitment to follow through on that too. Particularly if you think about people going on to other opportunities with enterprise and you rotate leadership, you have to think about what happens in that case. And I think the deal, the smaller deal, has to be robust enough and critical enough that it's worth trying to manage that risk and taking on that potential risk at the end of the.

Day you have to have a leader taking ownership. Otherwise not worth doing.

Yeah, well, I think back in the, I guess, gosh, it's probably 15 years ago now, we did a lot of smaller deals. We didn't have the kind of success I think we wanted to at the time with us. And so we went back and took a look at what could we learn from that. Was there commonalities? It wasn't one thing. The learning I took away was you're going to have challenges on any deal. I think on small deals sometimes they can be more impactful just because relatively it's a smaller opportunity. It's easy to get off track. It's hard to get the organizational commitment to fix it when it goes off track if they're smaller. So you have to be very careful on those and make sure that you maybe by doing fewer brings more focus to those that you do do. And I think they have to have very strong upsides to make it worth that sort of risk. But something will happen that's unexpected. You try to anticipate as much as possible. And you're going to have to deploy resources to do a course. Correct. You need to check yourself and say, when that happens, do I have enough commitment around this investment that we're going to make the commitment to resource? We will fix that, we will adapt and succeed. And it's a challenge because at the time it's like, well, it's a small project. We have this big launch over here, maybe I'm better off. It just didn't work out right. And so we should move on to something else. And you do have to constantly reprioritize yourself. But you have to be careful because there's going to be something that you're going to have to address. You didn't anticipate. And so you have to have that commitment to see it through. That's part of it. Do you have that commitment to adapt in those first year or two afterwards to make it succeed? Just because something happens you didn't expect doesn't mean that your thesis was fundamentally flawed. It just means you have to course correct and adapt. You need to think hard about that. I think went into it.

Let's flip it around. Let's take the leader that's overly optimistic about the deal. How do we prevent our sort of biases getting in the way of doing the deals?

Yeah, we've talked about one specific idea. I would say first of all, though, that's a big part of what corporate can bring too. We're One of the first sort of second checks I think the business unit will get in terms of a perspective on deals. So we definitely try to bring, you might say, dose of reality, but also just the benefits of what we've seen work or not work on deals to the project. We will ask all the questions that need to be asked as they develop their business case and they develop a plan. That's a very time intensive, labor intensive process we build out. What's the model for success here? Is it going to work? Have you thought of everything? What about this? What about that? So that's what my team will do as a business unit. We'll work closely with them. It's very collaborative, but we'll need to ask the right questions. We pass on opportunities as it goes. I think beyond that, one of the best, probably the best development that we've made in terms of just overall diligence is introducing red teams rigorously into our processes. And so I know people call them by different names. We typically call it red team, green team process. But we will stand up a red team for any material acquisition and assign a team to tell us why not to do the deal. There's no restrictions on where they can go, any arguments they can make, they can access whatever data they want, and they are asked to really lean into the question. I think red teams generally work best where you really have someone that doesn't believe in the deal. You can find that person, give them a platform. It's really been interesting for me because you can try to play the red team in your own mind. As I said, our team will sit down with the business unit and kind of vet their business plan. We'll try to ask all the right questions, but that is different from just being given a half hour at the CEO and just having a chance to air out all the reasons why not to do the deal and be very passionate about it. Just argues like typical, just a court case and just get in there, pound the table and do your best to convince the CEO not to do this deal. You need that kind of forum. I think at some point we get deep into a deal where people have the freedom to stand up and say what everyone might be thinking, but there's a specific forum to raise that and say why you shouldn't do it. And we've run them all different ways. You can do them in different ways, but I think the core is just to give that a half hour. There's a lot of prep that goes into it, but we try to condense it down and make it efficient. What are the reasons not to do it? So we run them constantly. We are a learning organization. We're always trying to think about what are we missing. We're very other directed. We try to solve problems for customers, try to look at things from outside in. We are really trying to avoid groupthink and bias and try to be confront reality. We're not looking to avoid all risk. We're taking appropriate risks, but we want to be able to look at all sides. And so they're very healthy discussions. I found them very productive.

Let's do our play. Jerry. We're going to make a play out of this. You got to give me more details. I need to know when do you start this exercise? You mentioned there's sort of that one person that has doubt in the deal. But is there a overall team structure and putting that together?

We'll start them pretty early. So we'll assume if it's a material deal, we're going to run a red team. It's not right at the outset, but pretty quickly we'll say look who's going to be on the red team? Who's going to be the green team? And we'll set up a separate work stream where they can start to get together as a team and start to develop their arguments. What are the key arguments? How do they support it? We have multidisciplinary teams. So I'll have somebody from my team. If we have outside consultants, we'll generally employ them. We might have one of our bankers on the team, one of our consultants on the team. I've mentioned we've hired a consulting firm just to be the red team. We feel it's really based on something specific about market growth. We'll hire a team that we think has the expertise and say, give me a downside scenario, tell me what's the worst that can happen here? What do you think? And don't pull back. But more often it's interdisciplinaries and I'll have somebody for my team on both sides, so my team gets drafted into. Red teams have different deals all the time. So somebody's green, somebody's red. Bankers will split them up. We'll typically have an hour. We'll set aside an hour which usually start out with the red 20 minutes, red 20 minutes, green 20 minutes discussion. And if we need you to follow up, we'll do it. Generally, if you're efficient, we always have pre reads. We're a big pre read culture. So everything's out 48 hours in advance. People will get the decks, usually big appendices will study it and then we'll go through the executive summary and some of the key backup slides and then we'll have the discussion. And discussion often is the more interesting part. It's good to get it at the highest levels visibility to what our upsides, downsides. It often generates additional diligence. It can generate deal repricings, it can generate decisions not to go forward. We'll run it around all aspects. Often it's go, no go. But sometimes there's just a specific aspect of the deal we need to run a red team around like is this product fit for us? Is the product risk profile appropriate? I mentioned growth rate. Sometimes it's what is the real market growth rate for this segment? So sometimes it's focused on a key aspect of the deal, but it's wherever it's the most value. And often what is the issue that's in the back of everybody's head that nobody wants to talk about? How do we air it out as best as we can? Is that.

I mean are those objectives that you had set up with the red team early on?

Yeah. Thinking about now we spend a fair amount of time specifying what is the question. What is the question pro con. Sometimes you'll specify what are the facts too because sometimes the argument is about I guess so called facts like say the market growth rate. But you don't want to argue about every fact. Right. So we might try to define a common set of facts and teams are working off of if there's agreement around a core and then it's the focus discussion on what really is the point of difference in the perspective. We're trying to. So a lot of it's fine. If you're going to do this in an hour and make it productive, you do need to focus the conversation at the same time very clear. The red team cannot be constrained in any way because otherwise you defeat the exercise. You have to be careful not to sometimes I'll get the initial draft of the list of constraints. They're trying to constrain the red team already the green team. Right. So you have to fight back on that and say no red team, red team can go there. We can talk about that. That's not something that's going to be stipulated up front. Important thing is that the red team has to be able to go wherever they want. And the red team often is kind of unconstructed. They try to have a really frank discussion and get the more important issues first. So it's okay. Here's why we shouldn't be doing this deal. Let me give you three points. Sometimes it's an accumulation of things that may turn you in a different direction. Often it's one key thing. There's deal breakers and a couple of key things. It's always fun to see what the red team comes up with.

Any other tips or things to look out for that might go awry when deploying this exercise.

I think you've met Jeff Schuster on our team. I'm not sure if you've met Jeff at all.

I don't think I met Jeff.

His claim to fame, he's undefeated on red team, so he takes pride in that.

I'm going to ask you for an intro so I can maybe dive a little deeper on the topic.

It's to say that the red team, it drives decisions. The red team can make an impact here. It's not a rubber stamp process at all. The red team is very influential in our ultimate decision.

I was going to say. Any other things to like, think about in terms of tips of making it work well or things to look out for?

No, I don't think so. We've tried different things. Like we've had red teams that were not part of the deal team but just were invited to all the team meetings and sat in the back row and just observed. I don't think that's necessary. I think you can have folks from the deal team. Your red team has to feel comfortable though, being able to hit the red side. And so it's difficult sometimes for people in the business unit to do that. Sometimes you have to look for people that have the complete freedom to speak. We have a culture that kind of allows for that too. So it's less of an issue for us, but that's it. But we've brought people in off the deal team. I'm not sure it's always absolutely necessary. In some cases it may be we've had it where we've run teams that they're not allowed to talk to each other. It's completely separate and siloed. We found that to be not critical success. In fact, it's almost helpful if they have an exchange of views, you know in advance. You're not surprised at the discussion. You have some chance to think and respond to the other side. We find that more productive than to say, well, we can't prejudice. We want to see independently what they come up with. We've kind of migrated away from that a little bit in terms of do you staff it? Completely Separately and have each team run separate models and completely replicate resources. It slows down the process, I think, and sometimes you just don't have the resources to do that. So we generally say, look, we're not going to run two models for the deal. We're going to allow you to both have access to maybe our core financial team that's running the model. You can ask for different scenarios. That same team will run scenarios for both teams and do sensitivities if we need to. So really you think, what do you really need to have? Separate and really, it's those core two or three people. You want people that are creative and make the arguments and think outside the box on it. We also allow team members to feed ideas to both red and green people on the deal team come up and say, hey, are you guys on the red team? Are you guys covering this issue? Because I think this is something you need to think about. Likewise on the green team, they also aggregate thoughts from across the team. Do that to make sure we have a good synthesis. At the end of the day, then.

In terms of the size of the red team, does it correlate with the size of the deal?

I might say no. Although if it's a large deal, we might tend to get more resource support or get a specific project against it. It does, I think, although it's more typical. It's more. What are the right resources for the question? If it's really a technical issue, then obviously we need the right resources from central labs and that might get a little bit bigger. It's driven not so much by size, but really almost by the question that we're trying to answer. But sometimes size.

What's 3M's view on earnouts and other contingent payments?

Nothing is out of the question. I'd say one aspect of our culture is curiosity. I've mentioned that. The other aspect is a lot of engineers. It's very much engineering culture. They are not turned off by complexity. So they have high tolerance for complexity. So that might lend itself to thinking that we can do a lot with digit payments, and we will. At the same time, we have a lot of experience with the contingent payments. We know how often it can end up just in disputes post deal. So we have a strong preference for trying to resolve those issues upfront. What I would say is that we feel at the end of the day that we really have both sides of the question. What's the utility of it? Is it absolutely necessary? Are we just. Can't we come to agreement on value and opportunity right now because none of us has the time to spend or has the appetite to spend in a dispute process after the closing for larger earnouts. It's given what's at stake. That can often happen disputes. But that said it's not something that as a rule we won't entertain. But I think probably not dissimilar for most folks. We just try to think carefully about when they're appropriate and necessary.

Makes sense. You don't just default to doing an earn out. It's sort of the tool when you need it.

We would prefer to come up with a view on appropriate value and risk allocation upfront and do it that way. There's a lot about opportunity cost of time to just the managing a contingent payment situation even if there's not a dispute.

Right.

Part of it too is having constraints on the business post deal. We are an integrated enterprise. I mentioned about how we innovate by sharing technology across enterprise. So we fully integrate every deal. They are not set up to run separately. So extent that you need to run it separately to have an appropriate way to track and measure success on an earnout or against contingent payment. That is more challenging for us because we want to integrate right away and we want the ability to pivot with the business quickly too. We might want to go a different direction on product development. We're very responsive to markets and customers. The idea of having a longer multi period earnout that constrains our ability to react to customer and market realities is not something that's really favored for us. So that's part of it too. When we acquire business we want them to feel they are part of 3M. It's one 3M. That's a big part of our day one communication strategies is that we want them to feel it's one company. Everyone can use all the technologies. You're able to move across the enterprise. There's very few constraints on what we can do and so it makes a little more difficult on some of the contingent payment structures.

That's a good point. Or now how it can impact integration. How are you finding it to have to manage deals virtually?

During COVID we've adapted pretty quickly. I was talking to one of my peers and he said he was surprised to find out when he went back and checked they'd actually done their last three deals pre Covid virtual. He didn't really appreciate that they're all virtual. So I think it was migrating that way. I think for us it's been very much net positive. We're distributed enterprise across the globe. Too. And I have members of my team in China and in Europe and allowed us to work in a different way and to utilize those people differently and better. I think we've adapted pretty well. There's always the question of can you develop the kind of relationships you'd like to. Then can you assess the cultural fit for business not being able to be in the same room and have the same type of engagement. And that's going to continue to be a challenge for everyone to manage and us as well. But as I talked to some of my peers, I know their experience has been that dissimilar. But we love to deploy technology to do everything that we do. Same thing for M and A. And that's eased some of the transition.

As you mentioned, 3M is very diversified from healthcare to consumer, et cetera and to some degree very specialized understanding Corp Dev drives the deal and rely on subject matter experts. Do you organize your team in some degrees by business group transportation and electronics versus healthcare?

We do. I have one of my senior managers aligned with each one of our four business groups. And then we have junior personnel that are just generals who work across projects. They are able to develop expertise. We will rotate our senior managers too among business groups though as well. I mean ultimately everyone needs in my team needs to understand 3M as a whole. But spending two years working with the healthcare team and just focusing on that, for example, rapidly accelerates their ability to do that and will rotate. In fact, we just had someone on our team move to a new opportunity and I'm going to do a semi rotation among some of my folks leading it. So it'd be good for them. It does help and we need some sort of stability. So at the senior level I do try to have alignment. So there's one person working every two weeks and every monthly and quarterly developing that hopper, developing the rhythm. That's one thing we need to bring at the corporate level. At the enterprise level is a view of the whole business. So ultimately my team has got to understand the business. It's challenging, but at the same time it's one of the things that we bring to the enterprise that we need ultimately. But it's interesting, I mean we try to become experts in looking at diligence in evaluating consumer companies, healthcare IT companies, adhesives companies, electronics, materials. So it's like when I was in banking, I was always moving. So I covered like five different universes. So that helps. I covered everything from Internet software companies to food companies. But you have to have an appetite to learn all those different things. So on my staff too, I'm looking for people that like to do that. Not everyone likes to do that. They want to focus and do their one thing. It's harder for them and maybe not as good of a fit.

Very interesting. Is there something you look for when you're interviewing people or how to get a feel of that person? Truly has an appetite to continuously learn. Are you looking at how many books are in their bookshelf?

Yeah. Maybe you can tell if somebody's curious or not. Has done a bunch of different things. You know, broad set of interests, broadly educated, tried many different things, enthusiastic, positive attitude, and I think loves technology in learning things. That's a big part of what we do. It's if you're curious about technologies and new products and new solutions, that's a big part in a variety of different areas. If you want to be on the cutting edge, that's good. You're looking for people that understand because we're buying companies that maybe not quite at scale yet, but still high growth, exciting, doing something new, working with growth companies and appreciating that and liking that environment. Whether it's Silicon Valley or Carnegie Mellon or in Berlin, they're generally a good fit for us. Those are the type of people that are attracted to our company.

I think I got to ask you about integration. Otherwise our integration practitioner is going to write me vape mail. I know we're hitting the last few questions here, but in your experience, because you've worked on quite a few deals in your period at 3m, what do you see drive success when it comes to integration?

Having a good plan upfront is important, I think, and the integration, it goes hand in hand with the synergy realization. Our integration at 3M is a sister group to corporate development. We're both in strategy, business development. There's a separate leader for that. Chris Colbert, my partner, I work with every single day we work together. As we start a project, integration gets involved right away and it's like, what are we trying to accomplish here? I mentioned that we have a set of principles that we go into it with, which is where trying to bring in or separate something that's part of one. 3M is usually fully integrated or it's going to become fully integrated. As we think about how to do the integration, how do we retain and drive the value that we're looking for in the deal? It's all integrated, cost and revenue side. So we have a detailed plan that maps the synergies and then we need to execute against it. We have Scorecards and we just track it. We're tracking everything now, all the key metrics but retention, customer engagements, integration on the manufacturing side could be things around tax or customer service. We have a scorecard and we're tracking progress. We have milestones and metrics and things turn yellow, red, they get attention. So Chris is an engineer, great fit for that. He likes to continuous improvement and track things and measure. So it lends itself well to our culture, successful operational execution. And that's a big part of integration. It's making it work. And so we pride ourselves on that. We have a lot of good people that can do that.

Well, I like the focus on measuring success. They feel like a lot of companies struggle with it. But it sounds like you found some really interesting metrics to keep track of. Outside of.

We constantly ask ourselves, what does success look like here? I mean, what are we trying to accomplish? You don't know where you're headed, you can't get there. So we really spent a lot of time, like whether it's on the red team, what question are we trying to answer, or it's on the integration, what end state are we driving to? We talk about what's the end state, what are the synergies and how do we measure, how do we get there and how do we measure our progress? We spend a lot of time thinking about that. It's second nature to us, I think, the way we operate. But we spend a lot of time on it. We have leadership that sets the right tone and high expectations and they monitor our progress and help coach us. So it's good, but that's a big part of it. But I think for us, at the end of the day, it's full integration that drives a lot of our thinking.

Any other tips, best practices you'd like to share with other practitioners to help them with their practice?

It varies so much by company. I think we have a unique business model. Some of these challenges that we wrestle with aren't relevant for everybody. There's lots of different models that can be successful. This is one that we're trying to optimize. But no, I think the general advice I have is know how you're going to create value and then just the continual improvement aspect of it that was critical for us. Having alignment around what we're trying to do and how we're trying to create value for customers, for shareholders, et cetera. That's a fundamental principle. Sometimes you can surprisingly skip that step, I think, and you can always benefit by going back and re looking at it. And maybe retesting that, we have to solve that because we have to apply it across so many different business markets. It puts the question right at the forefront, like what are we trying to do that's the same or similar. But even for those that are maybe more focused, you might benefit from just stopping and thinking about that and then everything else kind of. How does that map into that, what you're trying to do with acquisitions, with synergies, with integration? How does it all drive that? It can be challenging to drive one sort of integrated operation around that that's really unified. It can consistent, but it's exciting to do when it works.

It's pretty powerful, creating value, continuous improvement. And I hear this from a lot of organizations where they have this grand vision, starting the deal. But then as it continues and progresses through the stages and they get into the integration, that's where things start getting lost and people are mulling down checklists and they don't know why they're doing things. How do you prevent that from happening?

We have the post close rhythm around review. I said this pre 6 12, 24. There is a finish point, right, that you're driving towards. Maybe it's having an endpoint because if it goes on forever, it's indefinite. I think you will lose enthusiasm and you can finish early. We finish early. We celebrate success too. I think that's part of it. So we have a good outcome, we finish early, we hit a milestone early, we celebrate that it's a good job by the team, they get rewarded for that. So I think that's motivating for people to try. Good outcomes, superior outcomes, exceed expectations. So we try to do that and recognize it can't go on forever. I mean, at some point you are integrated and it's just operating as part of 3M and it goes into that operational rhythm. It's being managed day to day. Maybe it would help just to make sure you have an endpoint. And things can lag too, right? Sometimes things lag and collectively we get together and try to figure out what can we all do together to make it work. But at some point you have to be done.

I think that's interesting because having those endpoints and then metrics of success, as you continue in deals, it sort of lapses over into the next deal and builds into the culture.

I think we've evolved our thinking a lot about portfolio management the last 15 years and so it will change a lot. But yeah, you definitely try to constantly roll forward, think about how you create an institutional memory and document Things so it's not lost and just try to roll for you because it will change over time. And that's part of our lesson. 3M has changed a lot. When I first started in this role as doing some sort of retrospectives and trying to. How do I talk to people about portfolio management? We have a document, it's available online like the first hundred years of 3M. If you go back and read that as an enterprise, we've done very dynamic portfolio management over the. We were in and out of industries, we were in pharma, we were out of pharma, we were in copying, we're out of copying. We've really changed a lot over the years. So just trying to continue to do that. What stays the same as we change so much from the outside over the years, but always trying to take signals from the outside, listen to customers, listen to markets, always think about how we're creating value and the ways in which you do that will just have to change over time as the markets change and needs change, customers change. So we try to carry that forward.

Gary, what's the craziest thing you've seen in M and A?

You mentioned you're going to ask me this question. I'm trying to think every deal is crazy in some respects. So it's like what is really crazy for me, I think of all the things that pop up on deals, every deal seems different. For me, I think the most different was going down to Latin America and trying to do a deal in a semi hyperinflationary environment. So that just creates a whole set of economics and financials that were new to me. So doing the audit and finding out that a small company has $5 million of cash and it's safe, I'm like I'm looking at the number. That must be a mistake. No, no. We have to keep cash US dollars in the bank, in the safe, on site. And it was not a big company. So all the different things you do to deal when you have a current you operate in a currency that's just in hyperinflation. We did not do this deal in this hyperinflationary economy. But that and how you have to be careful in the financials because you can make money on your inventory and your working process, raw materials as inflation it can. Excess profitability will roll through the P and L. So I think working in that was probably some of the most surprising. Otherwise it's always something new.

That's definitely a unique variable to work around. Yeah, inventory and cash in the safe is Also another unique one, but there's always.

I was trying to think others. Once we had a deal we were doing, I had the opportunity to do some leadership development training. They sent me to meet with a customer in Jakarta. So I spent a week in Jakarta at the same time we're doing a deal and I was ready to fly back in the airport. I think it's like 10 o' clock at night. I'm in the airport lounge and suddenly the deal completely changed. And over the course of the next five hours, I had to. We had to renegotiate the deal. My. My luggage was already in the airplane. So I had to get my luggage off the airplane and negotiate the deal in the room. I didn't speak the language, but somehow we figured out how to get my, my suitcase off the plane. And then we finished up. Gosh, it was around 2 or 3am and there. I will tell you, there are no cabs at the Jakarta airport in the middle of night, which shocks me. But luckily my hotel was able to come pick me up again. But I just checked out. But I don't know that every deal has something like that, right. But it's always something different. It's hard to think of one thing that stands out. That's what I like about it. It's always something new.

Awesome. Well, next time we do a happy hour and share war stories, I'll be sure to send you an invite.

Okay.

Hey Jerry, thanks so much for your time today. Really appreciate it.

Yeah, thanks. Key sign.

Thank you. Here's to the deal. Thank you for taking the time to explore the world of M and A with our podcast. Please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's Kisan K I S o n@dealroom.net M&A Science is sponsored by Dealroom, a project management solution for mergers and acquisitions. Additional educational content is available on Deal Room's blog@dealroom.net blog. Thank you again for listening to M and A Science. See you next time.

Foreign.

Views and opinions expressed on M and 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.