Mastering Carve-Out Transactions with Keith Crawford

Hey MNA scientists. Quick one before we jump in. Today's episode is brought to you by SMP Global Market Intelligence. It's Q4. That means closing out deals and building pipeline for next year. If you're sourcing new opportunities or pressure testing a target, you need real visibility, especially with private companies where data is usually a black box. SMP's private company data is gives you access to comps, market maps, headcount trends, ownership insights and more across over 58 million companies globally. If you're tired of flying blind, check it out. Spglobal.com PCD Science that's spglobal.com PCD Science or find a link in the show notes. Now let's get into the episode. 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. Welcome.

I hope you are all joining us. I see a couple hundred people joining for our live M and A Science podcast. Welcome to the virtual bio led M&A Summit. We are so excited to have you today. We've already had a session and a keynote which has been awesome. And it's time for one of our most requested things that we offer at the summit. A live M Science podcast. And this is a fun one because Kisan and Keith from Keith Crawford from State street are actually sitting next to each other. So I'd like to bring to the stage Kisan Patel, host and CEO of M& A Science, host of M and A Science Podcast, and Keith Crawford, Head of Corp Dev at State Street.

All right, you ready Keith?

I'm ready.

This is it for everybody. This is authentic live podcast setup that I actually use to record these with that. Hello and welcome to the M and A Science Podcast. We are live at the buyer led M&A virtual summit. Buyer led M&A is about strategy, alignment and efficiency, putting value creation at the center of every deal. Today we're diving deep into one of the most complex and underestimated areas of M and A Carve out transactions. Joining me is Keith Crawford, Global Head of Corporate Development and M and A at State street corporation. Trading as STT on the NYSE. Keith brings over 20 years of expertise at State street where he's led some of the most intricate custody business carve outs in the financial services industry. Previously serving as CFO at State Street Global Advisors, Keith is an expert in navigating dependencies, negotiations and integration challenges that make carve out so difficult. Keith, how are you doing today?

I'm doing great. How are you?

Hey, thanks for joining me live this time.

Absolutely.

I know we last time we did this years ago is like a virtual hopefully get a little more fun. We're here live in deal room headquarters in Boston with a fellow Boston based company as well.

That's right. It's a great setup here.

I appreciate it. I know you got a bigger, nicer office, but you can. Our humble beings over here. Can we kick things off a little bit about your background?

I'm an accountant by trade. Got my letters, CPA letters as getting out of school, passing the exam and then realized it's a little boring. It's not for me. I wanted to get into M and A. I worked for a publicly traded company which is private now. Company called Gerber Scientific. They did two acquisitions while I was in the internal audit department. And back then in those days, they used the internal audit for special projects as well. So we got put on the scene for M and A and I got the bug, said this is what I want to do. I want to do this all the time. I don't want to just do this sporadically and then do audit on the side. Moved out to Ernst and Young, got my master's in finance. And with Ernst and Young I did due diligence for private equity players mostly and some strategics who are on a massive uptick in terms of acquisitions in the late 90s into the 2000s. So I was there during the dot com boom, which was very interesting, and then moved on to State Street. And State street is a pretty astute acquisitive company for strategic purposes. And here I am.

How many deals have you done?

I'd say over 50, specifically for these.

Carve out type of transactions. How many of those have you worked on?

Probably close to 15, I would say.

Okay, that's quite a few. I'm curious because you come from a real strong finance background and when you look at today, when you're overseeing M and A end to end, what are those additional skills like beyond the financial numbers that you had to acquire to really get good at doing M and A. Yeah, absolutely.

So when someone who doesn't really understand M and A, like my kids, they say what do you do? And it's hard to explain when you give them the technical response, but the way that I've summed it up is, and it's not totally accurate, but it's the best way to do it and it's the best synonym for it is. I'm a general contractor. I assemble a team of experts, tax compliance, risk operations, IT and the like, and bring them together and we go in and we look at the underlying business opportunity. And I know enough to be dangerous, but I'm not the expert. It's sort of like a general contractor would walk in the house and he'd see wires sticking out from the wall and he'd say, oh, need to call an electrician. It's the same thing. I'd look at it and. Or looking at something and the tax situation's a little messed up. I bring in the tax expert and we look at it. It's really bringing all the thoughts and ideas and the findings together to try to figure out are we at the true valuation and then what are the issues and the hurdles for us to get the transaction completed and why we're here today. What is the integration? Can the integration be done in the timeframe that the team collectively projects to go forward?

I like that analogy. It's all about the team and making sure you got the best team for the job.

Yeah, absolutely. No one person on the team can determine a large issue that comes up. You need a collective view from everybody because it is interrelated and that's the key and that's the key to integration. A lot of things are interrelated and people need to work together to do it.

When it comes to carve outs, what are the biggest misconceptions people have about carve outs?

The biggest misconception is firms that do it, do it often and do it well, that they can adopt some kind of scalable template to go forward. And I caution on that because no two deals are alike. So what I like to say is that the template is probably 80% accurate from deal deal, but then the 20% white space in there, which you've got to create your own projections going forward, your own performance in terms of how they're going to execute. Those are the things that you've got to keep open for that distinct deal. Because no two companies are alike. They all establish and set them up, sets themselves up differently. At least in my industry. I know, and we're dealing with banks, and banks are fairly homogeneous in terms of what they do, but at the same time, how they set up their operations internally, that's bespoke and it differs bank to bank. So that's why you need to make sure that you've got that area where you're going to really focus on and put the team in to analyze that to ensure you're not just relying on, oh, we did this in the past. I've seen this is where it goes. You need to make sure you go down all the way to that detailed service level to understand how that's going to be transferred over.

You can't be fully template reliant.

That's right.

So I want to speak from a little experience some folks know, but if you haven't, I recently stepped down as CEO of Deal Room about a month ago and I'm actually working on carving out M and A science from Deal Room and standing it up into its own business, which is the absolute opposite size of scale that you've probably worked on, where I'm grabbing maybe three employees or so. But I got to tell you from firsthand experience, it's such a pain in the ass. And the things I didn't expect, first and foremost was all the vendors you have to renegotiate with every vendor you're basically doing business with and come up with new terms to stand up in this new entity. That's the one that was a big surprise. And then the other was all these things that you thought you had scoped out for the carve out. Then you find out these, these other things that you didn't scope out. So once you pull the rug back, then you find those. And then the other thing was the people side that the ring fencing is the term. But really figuring out who goes with the business, who stays. And when you have people that were split 50, 50, it ends up being some pretty tough decisions.

You've highlighted key areas that we focus on in the carve outs. They're important, particularly third party contracts. Massively important because when you've looked at their projections going forward, they're using their historical projections of what their either their license fee or service fee is with that third party provider. It could be a major part of their platform or their service that they're offering. And if you come in and acquire it, most of these, they're smart, they have change of control provisions in there. What it requires you to do is to renegotiate.

That's the thing I'm coming across like a lot of them are going to increase the price on you or they're just not going to give you the same terms that you had with the previous entity.

That's correct. That's why in our preliminary non binding bid that we have a long list to set of assumptions and one of the assumptions we have is that all third party contracts are at or near the historical costs or the historical fee levels, because that's going to impact your underlying valuation. If you come in and you're paying 20, 25% on a large third party contract.

So that's going to be in the LOI that we're hoping at the same.

Terms as the vendors valuation is based on these set of assumptions. And then if you go in and you do due diligence and you get into the agreements, you do need to eventually, before you actually sign the transaction, probably on a confidential basis, reach out to those significant third party providers and see if you can get a replicate the actual service and license at the same level or near that level.

What if you get surprised? Some vendor doesn't want to play nice and they want to double the price.

And it's happened before. You ultimately get there because the vendor doesn't want to be too greedy about it because they're going to continue their service. So if you don't execute the transaction, they're at the same level and it may get sold off again and there may be issues where they'll actually try to do a workaround in the future so that they're not going to prohibit that business from being sold.

That's good. I'm getting my money's worth on this interview. Get that up early. Put in the loi. What about the unscoped stuff as you go through this? Part of this lends to the TSAs. In this case, they have controlling interests on both sides. But how do you navigate the TSA component? Because there's things that you'll know about, but then all these things that pop up you didn't know about.

That's where the details, the devil in the details comes out in terms of where you can really run into trouble if you haven't had a full scope of what the perimeter is. And that's typical and it progresses through the deal. No one seller is going to have the full perimeter figured out. They just don't understand what the buyer has and doesn't have. It's definitely an iterative process between the buyer and seller to figure out, okay, I need these services, I need these supports. Particularly if you're going into another country. We have capabilities, but sometimes we don't have capabilities that abide by the local requirements of the local country requirements and laws and regulations. So they're assuming that, oh, you've got your global, you have your own platform. But there are nuances that happen, particularly with some certain services that we can't replicate because we just don't have that level of requirements. In that particular country to work through. So those are things that can pop up that you have to be careful on. And you got to write a TSA on that for sure to make sure that you have continuity going forward. And then the question is, do you either lift that out, do they turn around and license that to you and you use that in the future? That's not ideal because then you're dependent on the seller. The seller doesn't like that either because they'd like a clean break. Those are things that you have to think about. Or is there another player in the market that provides that service that you could eventually migrate that to?

Sounds like no matter what, you can't get around it. There's going to be these unknowns that you're going to have to work out. I'm curious, I'm unfortunate. This is like a pretty closely held deal I'm working on. But if it wasn't. And sometimes you deal with difficult sellers. I'm sure you have.

Yes.

Out of the 15 deals, what do you do?

You try to be as transparent as possible in terms of what the need is. It's not a deal tactic or a deal negotiation position. It's something that's inherent. A couple of years ago we looked at a company internationally, a bank as well. It was a carve out and as you said, when we were going through it and we were going every level of service in the actual core due diligence, we realized there were some services that were being provided by outside of the perimeter of what we were acquiring. And that involved people in an organization in the bank that serviced different parts of the bank that weren't part of the perimeter. And we said to them, we need some of those people to continue the continuity of the service. And they said, well, you have that and we don't, we don't have that. We're a narrow type bank compared to a universal consumer bank. And that's something we'd either have to hire the people on or bring the expertise over. And we debated, we debated about the cost of it. It ended up being material enough that we thought that the transaction should require an adjustment. And we ultimately didn't get there as a result that they thought it was an immaterial component. But at the end we thought it was material. So we walked away.

That goes back to the people side, the ring fencing and making sure that stuff's allocated. And you saw clearly a gap.

That's correct. It's hard to know even when you're signing because you can't get down to the detailed level of service because confidentiality reasons. You've got a small group of people on the sell side that are selling their business. You're worried about this leaking to the market. So you're even doing work post signing, between signing and closing that you'll find issues on. So you try to build a reserve in there for that as well. Because you're not letting everybody know in that business, depending on the size and in most instances, most deals that we look at, you're not letting them know that they're being acquired while you're negotiating it. So there's certain components and details that even the smartest people at the top of the house in the bank that are selling this asset, they don't know the underlying services that are being provided either. So that's something you've got to work together, as I said before, an iterative process between the two parties to try to make sure that they've really nailed down exactly what the perimeter is. Wow.

Is it because you're public, there is like exponentially more sensitivity for deals getting leaked versus private private?

Yeah, I think so. Private private. I don't think it really impacts anything. But you would be worried from a private firm as well because you don't want other players coming in and coming over the top. But yes, from a public perspective, absolutely. It's just, it's material, non public information and that should never be disclosed.

So if it's private, it's more concern about competitive bids coming in and also maybe employee perception, if that creates some negative sentiments and then you're public, you got a stock picker.

That's right. You've got stock and you've got SEC laws that are out there, as they should be. And then the other thing I would say is most employees, if they hear that they're being sold, it's not a comforting thing to them. If they don't have the details when it leaks, it causes a lot of chaos in the organization.

You want to control that. How do you build strategic alignment up front to avoid M and A on impulse when you're doing these deals?

The deal team is fairly specialized, has a great degree of expertise. But what also needs to happen is you need to include in the deal team those individuals that maybe don't know so much about deal tactics, valuation and the like, but know the underlying business cold. And you have to bring them in. Not too many. You have to have the right balance. You can't overburden the team. And they have day jobs too. They're doing other things that they work on. But you bring them in and you augment the team with that expertise. And their focus is as you're going through the diligence process, they're thinking about the integration and the day one and the BAU opportunity and they're giving us feedback in terms of hey, it's an easy one or hey, this is going to be difficult, or we have difficulty in these types of areas and we got to focus ahead. So that does direct some of the diligence that happens at that point, which is a good thing. And then you have the continuity of those individuals because your intent and the hope is those individuals will actually be key individual members of the actual integration team, where hopefully they're spending full time until the integration's complete or a considerable amount of their time.

They're bringing people for the business. They're thinking about how's this actually going to come together, how are they going to integrate it? But because of that, they're going to be able to impact diligence in a lot of ways, knowing that what they're trying to achieve. What about the deal model is that also because when you look at the deal team, it's fun to come up with assumptions on synergies and model it out.

Yeah, you're hitting on where I was going to go next. It's the synergies. The synergies are critical and the synergies don't happen before the closing. So that's why integration is critical. So the integration team needs to know clearly what the synergies are and when they need to be achieved. Because that's the operational or the migration or the integration aspect that needs to be mapped out from a timeline perspective so that the deal model actually comes true.

I've been doing more part of M and A science cover, like lecturing more about M and A and what the life cycle looks like. I find it difficult to explain how M and A. It's beyond the timeline. You always think of like, hey, sign a loi. You go through conform utility diligence, you get to purchase agreement. But what you described is the key thing that doesn't show visually. It's more of this correlation of here's diligence, here's integration planning and your deal model. One discovery affects the other, where you might come up with something or here's something that we didn't think of integration plan that warrants us to do more diligence in a specific area. It has us go back and change.

One of those synergies, assumptions that's absolutely right. Way early, way back in my career, it was bifurcated. The deal team went and executed the actual transaction and then when they knew the transaction was going to happen or right when it signed, hey, let's set up an integration team. And then you had to do that data flow information sharing, which takes time and it's inaccurate because you're actually feeding your observations or your findings to the integration partners and they're not seeing it firsthand for themselves. So that's what's happened over time to create it. And why we've been so successful is integrating that sort of, no pun intended, integration team into the deal team at the right level, at the right balance to make sure that the handoff is seamless. Nobody's surprised by we were going to do this by when or those synergies are, they're quite high.

So a handoff. There's this sort of alignment on timelines, also alignment on synergies, that this is realistic and achievable. I like this. This is where you're describing buyer led M and A. This is that approach to really focus on success of the deal with the early thinking and innovation.

And we do a post of day one, we do a day one sort of hundred day plan going forward and there's goals and highlights and achievements and milestones that we build into that plan and then we meet pretty frequently to ensure that we're going there. And we do post deal analysis as well. In terms of maybe a year out we go back or 18 months out we go back, we look at the deal model and we look at the actual results and we say, did we achieve or did we not achieve or do we overachieve?

Do you have an example of how bringing this model with the integration team in, how they've impacted deal terms?

They have. It's really in terms of the duration, they probably impact the deal terms in every way. But I would say more commonly in the transition services agreement, and that is you've got the deal team who has some degree of knowledge, but they actually aren't the ones that go through and perform the migration or the integration. You have to have that integration team there to really realistically set the deadlines. Because we think in terms of quarters or multiple quarters and if it is a comprehensive process, for whatever reason, it might be jurisdictional, regulatory, they will tell us, you can't do this in six months. This takes eight months, takes 12 months. And sometimes it is in terms of reporting periods because of what we do. Quarters matter, investment portfolios matter and the like. So you just can't do it. A lot of our conversions actually have to happen over a weekend and you need to be able to do it in a big bank. So that is critical in terms of when you can actually manage the tsa. What's the duration of the tsa? And then client sellers typically want you to get out of there quickly. And we want to be out of there quickly as well. But it doesn't always happen that way. And that's where I think it's critical from having those expert integration people on.

The team so they prevent headaches and surprises. Do they ever push back on your synergy assumptions?

Always. Always.

So that's something we don't want to talk about.

It's a healthy debate. It is. If you leave it to their own discretion, they're going to pad it by nature, being the financial and representing the financial side of State street, they're going to want those synergies to show up sooner rather than later. So there's that healthy exercise. And it does get heated at times. We have enough deal comps in our industry, in our space, to understand what past transactions, not even just State street transactions, but what past transactions have actually realized in terms of cost synergies and revenue synergies. So while they're guideposts, there are reasons, as I said previously, all companies are created differently. You may not realize them to the norm of what the industry is, but if you're not close to the industry standards, then you've got to explain why.

It's admirable. It's a voice you actually listen to. Because there's a lot of organizations I know they absolutely have no voice anywhere near the table. And you just build a model to get the deal done.

What I would say is most synergies are critical for what we do. I would say just because of the space that we're in and the different businesses that we're in at State street, we're not able to go out and buy something. X synergies. Synergies are required there to substantiate the deal and substantiate with the return of the deal. So it's always critical in terms of us realizing that and being able to scale our business or being able to expand our revenue profile in different countries or with different clients or different services.

Can we talk about sourcing deals? I'm curious about. How do you approach proactively sourcing, carve out opportunities rather than waiting for a banker book to hit your inbox?

Yeah, absolutely. Because we're a unique trust bank. There's not a lot of trust banks around the world. There are a handful of them and we're very bespoke in terms of what we provide our services. We're not as wide and diversified as the other GCP type banks out there like JP Morgan were more like the trust banks are State street, bank of New York and Northern. Those are the three largest trust banks. But there are universal banks around the world that actually still do custody and administration and accounting on their own. And they haven't outsourced it or sold it. There are a handful, I'd say a little more than a handful. And we know we visit them when we go into their jurisdiction or their geography. We're there with them when we're trying to tell them that your service would be better, it would reduce your costs and your service enhancement would be better if you actually decided to carve that business out and sell it to us. And I would say there's a lot of interest in those discussions. But even though carve outs are hard for buyers, they're just as hard for sellers as well because they need to augment and change their business. And that's not an easy thing to do. They sometimes adhere to the status quo before they actually say this is a good idea because this is a non core capability or business that we provide. It's a bit of a back and forth and a dialogue that we've had with banks over the years.

Can you explain custody business to me?

We consider to be kind of an institutional. We're an institutional bank player. We're a bank or a charter bank. But you can't go on the street and find an ATM and take money out of State Street. So we don't essentially touch retail, we don't touch retail players. You can't open a bank account with State street unless you're an institution or a sovereign wealth fund. So we move money behind the scenes. So when a sovereign wealth fund wants to manage their fund and execute trades, we facilitate the trades for them, we facilitate the reporting, we facilitate the investment and the evaluation which is the administration, the accounting as well. And we custody the assets through our global network that we have around the world. So if they're trading Japanese equities and they're in Germany, we can handle it with the infrastructure that we have built.

You move the big bucks.

We touch a lot of money as does bank of New York every day.

So then this is a business that you really focus on. And when you look at as a strategy for your Carve out that you identified is that there's these other banks, that's essentially their side business. And then that's where you have this thesis that you've been operating on this for a while. It sound like you've done a number of these deals.

The biggest kind of impetus for the firms to actually consider carving out their businesses. We're very technology reliant, as you could imagine. Moving that much money and custodying assets and performing administration and accounting on portfolios and accounts. We actually require a lot of regulatory requirements that happen in terms of jurisdictionally, as we all know, the regulatory environment, it doesn't sit still. It's constantly moving, it's constantly changing. And if you have new regulatory requirements for your underlying portfolios or your clients or whatever it might be, that requires a change to your technology, you have to upgrade your technology or augment the technology so that it can actually provide the service at the standards in which the regulators require. That's a big sell point for us to say, yeah, you may be doing okay right now, but you constantly have to upgrade this non core part of your system to meet the regulatory requirements. And you don't really have the critical mass.

Were you part of shaping the strategy or is this something that was already existent when you joined State Street?

Well, I think it was there, it was implied. I wouldn't say I was an architect of it, but with the key executives in the custody security services business that we operate, we constantly work together and coordinate with each other in terms of what's the angle, how do we help other firms, how do we help other customers? A lot of it comes from word of mouth as well. Certain clients find out that we're providing certain capabilities to somebody that they know and we get a referral in. But I'd say we're fairly versed in terms of what the opportunities are on a global level. And we try to focus on areas that we think we can execute on at a high level and a high scale.

What I'm trying to get to is step one is having a clearly defined strategy. What I'm getting is you're not knocking on doors saying, hey, you got anything to carve out? It doesn't work that way. Or does it?

We do, we knock on doors. It didn't attack.

But can you knock on doors and just ask, hey, you guys got anything for sale? Are you looking to carve out?

Well, we know their business ahead of time, right?

We're not just saying you have it. And that's what I'm getting is you have the strategy that you've shaped, which is essentially why us, we've already got expertise in this, we're able to make the regulatory overhead a lot more efficient, just overall efficiency in operating the business and the benefits for them, I guess selling the business as well.

That's absolutely right. We understand what they're performing in house. And because they're in most instances, not all, but in most instances they're large universal banks. Universal banks have a ton of divisions, ton of services, ton of products, capabilities. We just believe that we can do it more efficient and scalable for them. And that's something that we can take off their hands. It's not really front facing. They're not touching the institutional clients. And if it's a service that they can outsource and have a steady rate and a high level of service, that's something that they're interested in.

Do you think that's a must have to have an angle that you approach these firms versus just knocking on doors saying, hey, I'm looking for businesses you want to carve out.

We have to be very concise, otherwise I just don't think we'll get there. And even when we are concise, it does take time. As I said earlier, carving out a business is not an easy thing for a seller to do. It's a lot of work. Even selling a business in your portfolio is a lot of work, even if it's on its own and it's segregated. So buying is actually buying is less comprehensive than selling because selling you have to know every single little thing. It is an extensive process, especially to.

Get them to want to do this without running a process or it's sort of on you proactively engaging them to want to do this deal.

That's right.

Okay, so step one, strategy, get the angle down. What's step two?

Yeah, so step two would be in terms of what's the initial price range, valuation range. You got to get them interested in what can we do, how can we help you. So you have the strategy. It could be worth this.

Do we got to talk to like identify the right banks and like the right people to talk to?

Yeah, but through our conversations with the, with my conversations with the business leaders and the network that we have globally in most instances, even when I said this in a prior discussion, but when I was the CFO at the Asset Management Group, which is now called State Street Investment Management, used to be ssga. Anywhere I went in the world in terms of meeting with my teams, I could call up a competing Asset manager and say, hey, do you want to have me? Do you want to have coffee? Do you want lunch? It was an easy thing and I did it. I did it a lot. And the team does it a lot as well. In terms of we're in the top five in terms of assets under management globally, it's a big ticket. And those are doors and you need to be outwardly looking. And I would say 85% of the conversations probably don't continue. But then there's that 15 in there. And I wouldn't say the 15 are successful because we all know M and A is hard to do. But those are 15 that are in that area of sourcing of. Okay, they're interesting. Is it the right time? Is this where we want to be? How high is it on our priority.

Scale if people don't talk about this? With proactive deal sourcing, you gotta work your butt off. There's no shortcuts.

But I would say, fortunately for us, we're narrow in terms of what we do. So asset management and investment services. We're now moving into wealth. Someone like, I'd say JP Morgan, who's corporate advisory. There's a lot of businesses in there for them to figure out, okay, how am I going to make this grow? We're very, I wouldn't say narrow, but we're very concentrated in terms of where we play. So it's actually easier from that perspective. But we did enter the fintech world with the CRD transaction. That is the wild west. That's not an easy market to get your arms around and understand who all the players are. Because as we all know, and maybe don't know, but in fintech, what I find is most of the firms that were created were all created for sort of one reason and then they developed thereafter. So any fintech firm that you look at, they're not in categories, they're not homogeneous. They might do the same thing, but then they started or they developed into something different. So it's a really. I think it's a really fragmented space and it's just one that you really got to spend a lot of time on to understand where the opportunities are.

The benefits of having a clearly defined angle strategy. So that way it's easier to see what targets fit and then sounds like the big step is just having the conversations. It helps to have a big company logo.

It definitely helps Global company. That's a plus.

Is there certain titles that you want to talk to to really make a deal actionable?

Absolutely. Particularly in the custody space. What you want to do is you want to speak to the individual. They're in charge of the custody business or the security services business, but they're not in the business. So if you go to the head of the security services business, we always say it's like inviting the turkey to Christmas. You don't want to go and talk to the head of the business and say, hey, we want to buy you. Their first reaction is, I'm running this division or I'm running this part of the company. I'm being successful. If I get bought out, there's a chance I won't have my job. Which in most instances is not the case because we acquire talent along with it. We're not all about just eliminating headcount. That's not the point. It's about scaling. And if you look through our organization, some of the people on the senior management level and the executive level were part of past acquisitions. So we bring in quality talent as well as part of it. But you can't initiate the conversation with that individual day one. So you have to go above the head of the security services business and put that idea, that thought in and why they should do it. So that's the target point.

Okay, so let's say I'm taking this as free advice and coaching from you. I'm going to go do a carve out and for me it would make total sense to look at these large companies that have some kind of data room business. So I know like S and P Global, Thomson Reuters, they have these sort of legacy data rooms that are underperforming. Where you're telling me is I don't want to go to that directly to the business unit leader.

I don't think that's a good start.

Yeah, I did tried this and actually it was like they didn't want to have the conversation.

Yeah.

So I would go above them. They feel like it's just so blurry in these large organizations.

It is, it is. And like I said, all companies are different. That's where I tap into the investment banking knowledge. I have a very wide and extensive network of financial advisors, investment banks, large bracket banks, all the way down to the tier three banks. However you want to evaluate them. And I do find depending on what level that you're going on, large banks sometimes don't have the contacts that the next tier down has because the next tier down has to. They really have to go out there and beat the street for their transactions. Whereas the large ones, they're going to be on one side of the transaction or another if it's a sizable transaction and they. So they don't have as much networking and contacts into these kind of carve out type opportunities. Which is why we utilize some of the mid tier investment banks because they actually know the individuals almost personally. In a lot of cases you could engage.

So it's good to have the network of bankers and you can say, hey Bob, at Greenl or whoever, I'm interested in this company, I know this, got this business, can you help me? And they might know something already. They might know who to talk to. And then when you bring them in, are they engaging with you as buy side representation?

Then they aren't necessarily depending. So look, bankers are critical. They all need to be on transactions and they need to be on successful transactions. We're open, we're agnostic to the bankers out there. And my position throughout my career is if you bring a transaction exclusively to State street and we execute on it, you will be on that transaction. And I've held firm on that and that's been consistent. I haven't reached that in my career. But it's really just an introduction to get it at first. And the bankers are more than happy to do it. It's light work for them at that point in time and it might be a referral back to them if we actually do go with the transaction.

In some cases they could help you make the deal actionable.

If they already, yeah, absolutely. In a lot of cases, I would say they end up on the other side.

In this example, you're still buyer led, you're still practically sourcing, you're still doing this. But they're still using this extended network with the bankers and playing nice and working with them. They can get the leverage and increase the opportunity of making the deal actionable. It's still a win for you.

Yeah.

Okay, so we get the combos, we get the opportunity where hey, there's something potential here. I like your story. I like the why us and why this business case makes sense. To do this carve out, where do you go from there?

It's a, you sign an NDA, they assimilate their information for the preliminary bid, they give us their the core financials of the business. In some instances we require to go hire one of the big four or another accounting firm to actually do a quality of earnings analysis which actually takes the carve out and the accountants go in there and they go through every part of the business that they know of and they try to build a perimeter, carve out P and L and balance sheet and that's utilized for the preliminary information of which we put our preliminary bid on.

You've got an NDA signed and then you're have a preliminary request list that you'll ask for information. But you'll also do this buy side Q of either before putting an loi.

It'll be a sell side to be. So if they really want to carve it out, we recommend to them that they do it.

So you tell them to do it.

Okay.

Which is pretty common practice if they're going to go bankrupt.

It is if they decided they want to sell the business. If they don't want to sell the business or they're still on the fence about it, sometimes they won't and they'll give you preliminary information that's interesting.

So if they are pretty inclined, like they're motivated to do it, they'll do it. If not, they just give you plenary information. What's your sense between the two? If they do a QV versus they.

Don'T, they do a qov, it's within the ballpark of accuracy. If they don't, it could be wrong. It could be grossly wrong. When you get in and you do due diligence and then you self insure the deal, you require it do quality of earnings on self insurance that the underwriters require you to do that you go in there and you find out there's mistakes or there's costs that they didn't include or there's revenue that's overstated. So that tends to happen. We'll do it quickly and swiftly. But our level of risk assessment is much higher for those types of transactions than a qab.

More likely to get surprises. We end up having to go back and renegotiate.

That's been my experience.

This is a great walkthrough on how to source deals. Let's talk about your approach around mapping out the dependencies, creating a unified process across your teams when you actually go and due diligence on this company.

We've been a successful acquirer over the years and acquisitions for us it's not a strategy, it's to enhance our strategy. We're pretty astute about that. We do think creatively in how we go through this. But when we do get into the M and A environment, we have a core team. It's built off the historical success of what we do and what we want to augment over time and how prior transactions have been successful or not successful. And we try to augment it. But like I Said we bring in a core team and we're pretty detailed upfront in terms of the areas of focus and risk. To start now, again, 20% of that is whiteboard. Again, I was going to say, like.

How do you deal with the.

Yeah, so if we're looking at a transaction in another country, we've got to talk about, you know, country risk. Is there currency risk, is there net interest income risk? Because the interest rates are either tremendously lower than where we are at the home office or they're higher. These are the types of things that we try to identify up that's driving that initial valuation model and that's where we tend to focus the teams in terms of getting in there early on in the process to really confirm those points. So the material assumptions are where we focus initially in diligence.

Well, then when you go on like my example of my tiny little carve out I'm doing, there's all these little things that keep popping up that drive me crazy. How do you keep the smooth cadence going?

You've got to be agile. It's never going to stop. You're never going to encapsulate a transaction up front and have it be consistent with no surprises all the way up to the signing and even some instances, the closing, which you don't want. But you have to be ready, you have to be on. There's always last minute things that happen and there's always last minute surprises. And that's why the deal team needs to be present, available around the clock, because these do come up in very tight timeline frames in terms of where you're going to print or you're actually going to sign on a transaction and you find these things out. So you've got to have the team ready to triage right away and try to resolve that to get to that next phase.

Is there any tactics or approaches to sue that over?

It's about knowledge and really being inquisitive and intuitive while you're going through it. It doesn't avoid all of it. But if you think that the agreements are there, we're settled, everything's working out. There is handoff things that are required. Even just wire transferring money is a big deal. Between the signing and closing. If it's got to go to different accounts, different jurisdictions, that stuff does take time. You got to do preparation. You just can't take that and think it's going to happen within a matter of hours. You've got to spend the time to prep for it. So it's being thorough for everything. That's required for signing conditions or even closing conditions.

Get in early, be very inquisitive. I feel like some of these are just reps you do over time. You know what the key things that you don't want to get surprised with.

Yeah. And constant check in. If you don't hear something, check in anyway.

Is there like a cadence you found that works really well? I'm doing like a weekly right now. Is that the right amount should be more or less?

It depends on the type of transaction that you're on and the complexity of the transaction. And so if it's complex, I'd say two times a week the team should get together. In many cases you're canceling the meeting. When we're trying to get to assigning, sometimes on transactions we actually have a nightly meeting. At the end of the day, are we still on track? What's popped up? Are there any changes? And in many cases there are. Oh, we got some more information on this. We've got to deal with this. And then that's when you triage the team to get together. So yeah, I would say over a. It's better to over schedule meetings and call them if there's not anything there. It's a good check in. And it forces people to be transparent because a lot of times when you're not connected or people aren't showing up, things can happen. And look, we're a global company so you've got to be connected. We're not all sitting in the same floor, in the same room or in the same office. A lot of times it's multi offices and it's multi jurisdictional.

I'm sure people are happier with cancel meetings than surprise meetings that show up at the California.

Exactly.

So I like that. That might be good. Thing I'm going to take in is just increase the cadence and then play it by ear if we need them. And like you said, there's parts of the deal that you're just going to need to do a high frequency of check ins. Going back to that example with the international bank, what are the some of the things that we can talk through that went wrong and how may have changed your buyer letter approach?

There's a lot of components that need to be finalized. One of the international banks, there was a component as I mentioned, we couldn't cover. We needed to actually create a greenfield or they needed to transfer over that capability. In the security services business, when we go to a lot of these banks, they have their own asset management group and their asset management group they're doing the security services, the custody, the fund administration, the fund accounting for their own in house asset manager. It's segregated for regulatory purposes. However, when they spin it out, you've got to create a commercial contract between our business and that asset manager. So that's one of the clients that's going to come along. And in many instances the clients are up to 50% of the revenue. They could be more, but up to 50%. And the critical aspect of that is what are the terms going forward? So when we talked earlier about third party contracts and making sure that they're not going to increase the fee 20 to 5 to 50%, it's the same thing that we have to do on the captive. I think the captive asset manager, of course they're realizing they're entering into an agreement with a third party now. And now they're thinking, okay, we're going to reduce our fees. And then you've got the top of the house within the bank that's saying, no, we want the highest price possible. So we're going to sell this contract going forward. And when you talk to asset managers, they are, they're fiduciaries. So a lot of times they will fight their own parent company in terms of where they think fees should provide. That's a very delicate situation that you have to deal with when you have a large captive client.

How did you change your approach overall?

We asked the seller early on in the process that we'd like to meet the asset management team who's ever deciding this going forward. We want them integrated. There have been instances in my past where transactions have terminated because they didn't want to bring the asset management team. They promised that the fees that we were going to get would be the fees. And they ended up not being the fees because the asset manager rebelled.

Oh, wow. So goes back to that theme of just early and being inquisitive.

Yeah. I'll never forget at one point it was back in maybe 2000, I'm dating myself, but 2005, I had a good friend, he was a banker, he's a good friend of mine still, but he was working on the transaction with us and he called me. I was sitting at dinner before I was going back to my hotel and he said, we have a problem. And I said, what's the problem? And he said, we just lost $25 million of EBITDA. And I said, why? And he said, the asset manager repriced. They came in the fees they want. It's a material change to 25 million of EBITDA at maybe 8 to 12 times.

Wow.

Yeah.

That kills a deal.

Yeah.

When you make these deals successful, it's all hinges around this integration. You're giving me really good examples of stuff you absolutely want to avoid. Post close. What's your planning process look like to create your 100 day integration plan?

On the large transactions, we do seek third party outside help. So we'll go to the consultants out there who have program management expertise and capability and we bring them in actually earlier, probably just prior to signing. We'll bring them in, we'll engage with them. And from between signing and closing, we build in a fairly rigorous plan. And as we said before, that's when the meeting cadence gets set up. And that's where we work through a lot of the issues to ensure that synergies arrive on time. The closing, and you mentioned employees earlier, before. And the other thing that's key is day one, you want the employees to feel like they're part of our company, State Street. That's a lot of planning that has to happen with the HR folks and with the operations and IT folks because you want them to have segregated. It's required. They need to have their own email with State street at the end of it. And they need to be in a secure space. So that's a lot of planning that has to happen when you're doing a carve out because a lot of times the seller doesn't want you in their facility. So you got to find new facilities. But you don't want to move the employees too far away because that disrupts their work life balance. So that's some of the critical stuff you really need to think about that some people don't think is that big of an issue. And it does become an issue.

I think early on doing some of these deals makes sense to lean in on some consultants to help out.

Absolutely.

The other big thing I always think of integration, biggest risk is the people. Things go bad, people walk away. Culture alignment is a big part of it. If you nail it, people stay motivated and happy. If not, they're terrified and they run away. How do you make that work? Like how do you. Is there any.

There's a lot of thought that goes into that, I would say dating back all the way to crd. When we bought Charles river, they were very successful business, software business. They were very proud in terms of what they did, but they were very creative. And that's not so much equivalent to what a banking structure is. So we took steps, steps throughout that integration to make sure that we didn't destroy the culture there and the creativity. And it was unique, it was different. They kept their old email. We didn't immediately transfer them to State Street. We wanted them to feel like they were a division of State street, but they were still had that identity and they still do to this day. So it's been one of these things where you've got to think about how you preserve the culture and you preserve the morale in terms of where the employees want to be so that they're continuing to be successful when we own it just as well as they were prior to owning it. So that. And then also retention, you want retention of employees and that's critical and that's a big part of the due diligence process as well. All the way to the integration is making sure that you're incentivizing and ensuring that those critical employees are going to be there. Not just day one when you close the transaction, but beyond that.

In this example, you acknowledged the cultural differences and actually modified your integration plan with that North Star goal of having a high retention.

That's correct. And they we maintain their facility and their facilities outside of Boston. It's probably a little bit more integrated today, but that facility's still there. And when you go there, the brand name's there, it's still there. And we've maintained the culture and the success of the business.

Pretty cool. How do you approach estimating carve out costs?

Again, it's bespoke to the actual transaction that you're looking at. And then I would say going back to the non binding letter of intent, however you want to call it, the bid, you have to have assumptions in there as to what you think the ongoing costs are and that's third party operations, compensation and the like. I would say there are other extra costs that are outside of that zone. And those costs are your deal fees, your legal fees, your transition costs, starting stuff, reading stuff, travel. So you should have a general range based on past transactions. So you should be able to just take an estimate and start to map it out. For large publicly traded organizations, it's not a great thing and it's becoming scrutinized more and more by investors and shareholders is they exclude deal fees or one time fees out of transactions. You have that liberty, but it's a double edged sword. You gotta be careful. It's not something you can use all the time. But in reality when shareholders and investors are looking at your growth rate and your return and they know that those deal costs or those deal Fees aren't going to happen in the next two to five years because they only happen when you close the transaction. Those should legitimately be taken out of the run rate so those costs can fit in that bucket. But you got to be careful and you got to adhere to what the requirements are under the accounting rules. But those are the areas that you focus on. It's really hard. And you got to know what the migration is. How do you get clients on board, what's it take to repay for clients? And the other critical aspect is when we go in, one of the first things that I think our legal team looks at are the contracts. Do they have a change of control provision? So if it's a share deal, in a lot of cases you don't need to go and get consent from each client, which is great. Reduces your legal costs, your tracking costs. So it does vary by transaction and you should be able to estimate it based on your past deals. But again, it's gotta be a range.

I want to break this down because this is an interesting one that is pretty critical. So if it's a share deal, you're taking over entity purchasing the shares.

In most instances there are jurisdictions and requirements where you still need to get it. But I would say for the most part, yes.

And then your agreements stay intact because there technically isn't. There isn't a change of control in the sense that you are. You're going to have to have them sign a new contract.

Basically, yeah. And some of them you don't have to sign a new contract. And that's another thing that's critical we didn't talk about as well, is understanding the client composition. Because if it's very concentrated, then what you want to do is it's the 8020 rule. You want to focus on the large clients that are providing most of your revenue. And then you have the small tail clients. But what we find in our industry, and probably happens most others, is clients don't usually walk. They wait around to see. And then you need to look at the repricing ability of the clients and the contracts as well, because a lot of them, they don't have the ability to reprice. Fortunately for some of our businesses to move off of the platform that we're acquiring, it's disruptive for the client. That's a retention component as well. You want it all to go smoothly. That's where we're at. And you just need to make sure that you're thinking about the retention, what the legal requirements are and the work that needs to be done. I did a transaction just recently where we tried to sell a business within our company and we got all the way to the end and the clients didn't want it. It was a small business. But the client didn't want to do the conversion of the contracts. They had to go get positive consent from every single client. We do that all the time. So I was surprised by, yeah, we're not interested. We don't want to do that transition.

Pastor I was curious about this stuff because I feel like it happens post loi. Then you find out all these contracts are changing control provision and then it comes a lot messier to work through.

And to me, I chalked that up to them not having a formalized expert deal team because everything went sequentially. And that's not having somebody on the integration side or on the legal side that says how are we going to get these clients on board? They didn't think about that until the end. And we were just assuming that they understood that all the way through.

Can we recap, like, what are the major deal breakers that would cause you to walk away from a carve out during the process?

Uncertainty on the perimeter is the first one. The second one, I would say employees in scope. You absolutely need to know who's going to be there day one so you can perform the services that are required day one. You can't slip up or be deficient on that.

How do you differentiate that between when you say uncertainty on perimeter.

So uncertainty on perimeter in terms of services. So I'm not thinking individuals. So this could go to. I'm getting a feed from this area, I'm getting a feed from that area.

Okay.

It doesn't involve an employee, but it's critical information that's needed to perform the service.

So this is the broader business versus the actual operational employees in scope.

That's correct.

What you're buying, if you can't define what you're buying and you can't perform.

The service because you forgot about it and we didn't transition it over or build an interface to ensure that was showing up.

That sounds like the hardest part of doing these cars.

And that's why our team needs to be augmented with the right people who really know their stuff and really know how the process works.

Where does the future look like? Are you going to see more carve outs in the future? Less?

We're always looking inward out and we've been focused on growing the business and actually trying to do this the right way. And we help out even on the organic Side internally with the investment side when things aren't happening from A, an M and A perspective or we're terribly swamped in the pipeline. But it is a concerted effort. We wear different hats and we try to think creatively. Look, an acquisition is hard to do. I said it earlier, it's not part of our strategy, it's to help our strategy. And if they think we can get there quicker, it's something that we're interested in. But we're not out there just to acquire for the sake of acquiring. We're fairly global, established quality provider to our clients globally and we're focused on keeping shareholders happy but also making sure that we're building a long term approach.

Optimistic, hard to do, but still optimistic that more to come. I gotta ask, what's the craziest thing you've seen in M and A?

When I talked earlier about having that asset manager who's a captive, who's going to become a major client, you need to commercialize the arrangement with them. We were down to the wire on a certain transaction outside of the U.S. the head of the asset manager caught pneumonia. And I didn't know this until my deal counterpart called me and said, we need to have a meeting. And I showed up with the head of Europe and myself and said, okay, it was a meeting. We show up to a different building and we walk into the building and when we walk in there's this big video screen and he said, sit down. So we sat down and then the screen lit up and a gentleman with an IV in his arm and a hospital smock walks in and sits down in a chair and proceeds to tell us that he's not going to agree to the price that we agreed on in the underlying valuation. He's in the hospital telling it's us. And then to top it off, this was probably 15 years ago. There was a delay. In this memory when we have delays, there was a delay. So we would speak and he would start speaking before we would finish. And it just went back and forth. It was crazy. Nevertheless, we got the message. And then the triage through the night, all night negotiations to try to figure it out because the parent company saying, we want to get the deal done, yet this gentleman's in the hospital. We got to figure it out. We were down to the wire. We ultimately got there. But that was a pretty crazy story. Sitting at dinner the next day with my colleague saying that was strange gauche from the er.

Keith, this has been a great conversation. I appreciate you taking the time from doing deals thanks for having me helping me become a better M and A scientist. Those of you that have been tuning in live, hey. Love to hear from you of the feedback. Feel free to reach out to me on LinkedIn like topic ideas. Appreciate you joining us. Here's to the deal. Thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M 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.