Overcoming M&A Challenges

This episode is brought to you by Firm Room. Searching for a data room that offers simplicity without compromise? Elevate your data room experience with Firm Room, the world's most intuitive virtual data room. Try it free for 14 days, no strings attached. And when you're ready to power up, sign up for unlimited users and 10 gigs of storage at a flat rate of 495 bucks a month. Boost your team with Firm Room, a tool built by dealmakers for dealmakers. Check it out firmroom.com Again, that's firmroom.com I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A Deals. Hello M and A Scientists. Welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about the products and services we develop to support world class M and A teams or want to get involved with our community of forward thinking M and a practitioners, visit mascience.com you can get started by subscribing to our free weekly newsletter for the latest insights and events. And that's mascience.com I'm your host, Kisan Patel, CEO and founder of M&A Science. Joining me today is Doug Bernard, Executive Vice President, Corporate Development and legal advisor at CF Industries. CF Industries is an American manufacturer and S&P 500 chemical company based in Northbrook, Illinois, a suburb of Chicago traded on NYSE under CF. Today we're going to talk about how to overcome challenges in M and A to increase deal success. Doug, how you doing?

I'm doing great and thank you for having me here today. Kisan, admire what you're doing and looking forward to our interview.

Hey, likewise. We are here live in the M and A Science Studio in the heart of Chicago. So thank you for coming down and make this happen. We don't get to do too many in person interviews in our studios. I'm glad that you made it down.

Very exciting.

I know usually I'm thinking people take a break from doing M and A deals, but I don't think you're taking a break from any deals. I think you're moving on to the next big thing.

That's right.

Why don't we kick off a little bit about your background.

So I've been doing deals for a little over 40 years now. I was a partner in the private equity practice group at Kirkland and Ellis. And after that, I've had three general counsel roles. The first one was with a PE private equity portfolio company. Pretty large. It had 30,000 employees in multiple countries, mostly in Asia. After that, general counsel with an advertising group based here in Chicago, but with 500 offices in 90 countries.

Wow.

And for the past 20 years, general counsel at CF Industries. CF Industries. Like you mentioned, S&P 500 chemical company. 11 billion in annual revenue, 6 billion in EBITDA and 15 billion in market capitalization. I wanted to tell you an interesting story about how it all began 20 years ago at CF. When I joined the company, it was near bankruptcy. It had lost a lot of money for five years in a row. I helped take it public one year later, about the same time that Google went public. And astonishingly, over the next 10 years, as newly public companies, CF stock outperformed Google stock for that 10 years year period. So it was an amazing turnaround from near bankruptcy when I joined to the company that it is today.

Wow. Big win. That's a big, big change to be on the inflection point.

I'll just mention one other thing, since this is M and A Science, I guess you could call me an M and A scientist. I have a bachelor's degree in physics from MIT and an MBA in finance and accounting from Chicago Booth. So I like your M and A Science approach.

Hey, I love it. That's what we're always looking for is growing this community with more scientists. And it's really interesting. I was looking at your background. You've worked on not only a lot of deals, but you've worked on a lot of big deals.

I have a wide range from small to middle market to multibillion dollar deals. Over the years, particularly at cf, as the company grew so dramatically and in the chemical industry, deals come in what you might call bet the farm sizes billion on up. Most recently at CF Industries, a number of multibillion dollar deals.

When you look at back and you summarize your scorecard, is it number of deals or total transaction value?

The way I measure my own performance is what I like to think of as batting average. Of all the deals where I get involved at the outset, how many get all the way to the finish line? And we're going to talk about some of the ways a deal practitioner can increase their batting average. Make sure that if the deals you work on should happen, they get done.

Awesome. I'll get your score at the end then. So before you even start a deal, what kind of mindset should you have to be prepared for surprises that come.

Up in order to improve your batting average. There are two things I always try to do at the outset of a deal. One is to understand the lay of the land better than anyone else. And the other is to always act and come across as an honest broker. Because if people come to trust you and they realize you know the lay of the land, they're going to allow you to work your magic, find ways to find common ground and cross off issues one by one. What do I mean by lay of the land? There are three or four components that go to the lay of the land. The first is to try to understand the relative negotiating leverage of the buyer versus the seller. And that's equally important whether you're the buyer or the seller representing the buyer or the seller. So what goes to relative negotiating advantage? One important aspect is whether the seller has alternatives. Are there competing bidders if it's a pre IPO target, is an IPO an alternative to a sale? And maybe if it's in a strong growth phase, maybe the seller might decide just to defer selling it if the time isn't right. Another component that goes to leverage is whether the buyer has synergies and if it does, how that compares to competing bidders synergies. The third component of leverage is whether or not this acquisition is strategically important to the buyer. Because buyers behave very differently if it's strategically important to them to get the deal done. Otherwise they're very price sensitive and they just want the lowest possible price for yet another deal that isn't strategic. I also try to identify impediments to closing. For example, the need for regulatory clearance increasingly difficult today, the need for financing as opposed to a buyer that can just write a check without financing. And then how long is it going to take to get regulatory clearance, to raise financing, and so on. And ultimately, what is the likelihood of success or failure if the deal hangs in the balance on regulatory clearance or financing? Yet another part of lay of the land is where is the buyer on the learning curve? Does the buyer already know going in just about everything worth knowing about the target? Or at the other extreme, will they need to do a lot of due diligence to get comfortable and understand what they might be buying? I suppose the last thing I mean by knowing the lay of the land is to do triage on the negotiating issues. Is it an issue on which the buyer and seller can likely agree? Can they at least find common ground if it's a little contentious? And the third triage category would be What I call zero sum issues, where someone will win and someone will lose. Once you know the lay of the land and you've done triage on the issues, really where I think deal professionals can add a lot of value is turning those seemingly zero sum issues into issues where there is common ground so that the parties can put that issue behind them and get to closing.

You covered a lot there, Doug.

That's the most scientific of my answers, but I thought important to get a framework.

Yeah. So I want to break this down and make sure I got it so we have leverage. Understanding what are their alternative options are, if that could be an IPO or how competitive this is going to be. And then I think the synergies almost like looking at the comparison of what the synergy is going to look like with some of these competitive bidders as well. The other stuff would be the impediments of doing the deal, what's going to prevent it if there's regulatory things like that sitting in the way. So we had negotiating some of the specific things, items to get to close.

On that last point, the triage, figuring out which issues are easy to resolve, which ones can be resolved with some effort if you find common ground. And the last category, obviously the most difficult, are the zero sum issues where there will be a winner and a loser if it's going to be a successful deal. On those zero sum issues, the party with the most leverage is likely going to win them if there's to be a deal at all.

Okay, so we had these different areas we had in terms of lay of the land. We had negotiating the leverage, knowing what the alternative options are. If it's to go ipo, if it's to look at who the competitors are, then you had the specific synergies, the competitors, how they look at the deal and their synergies. And then you have the various impediments to get to close. Is there some regulatory requirements and things of that sort? As you get to close, it's negotiating the issues that come up and how you triage that. And that's where I was curious if you had specific examples around that we.

May get to that. I just want to say, in many deals, leverage depends on whether getting the deal done is strategically important to the buyer. Because if it's a must do deal, in some sense, it changes the negotiating dynamics. But leverage is always important. Most important when the buyer wants it so bad it hurts, when it's strategically important to them.

What if it's the other way around? Doug, where you looking at A company and they're in bad shape, revenues declining. And you're looking at this thing like, I don't know who else would buy this thing, and this is maybe that one. You still see some strategic alignment there. But it's going to be a lot of work to make this thing work out.

I do have an example. It was a business line that year after year for 10 years had consumed cash rather than generated cash. And I was tasked with selling it. And so how do you find someone willing to pay a meaningful amount for a business that consumed rather than generated cash year in and year out, even in good times? And I was able to get that business sold and that deal closed because I recognized it was strategically important to the buyer to expand in its existing business line. In negotiating with my counterpart, I decided it would be a losing approach to focus on numbers, financial metrics. I negotiated with just one piece of paper and it compared the relative size of the buyer to our cash consuming subsidiary in the buyer's own industry. And then I said, well, Wall street analysts think your company with your size is worth X. I'm guessing you think they have it wrong, that your company's worth even more than the Wall street analysts claim. So you just have to scale that down to our target, which is a smaller version of you, and that equates to X. That worked. The opposite, more traditional approach of saying, here are the historical financials. We think you can maybe actually generate cash some year if you play your cards right. Would never have worked. So it had to be reframed that way and couldn't have been if the buyer didn't view it as a strategically important deal instead of one driven by the numbers.

One person is trash, another person's treasure. You figured that one out in some sense.

You've seen one deal, you've seen them all. But I think it's more accurate to recognize that every deal is different. They differ along these dimensions I describe. If you master the lay of the land and you come across as an honest broker, you can usually find a way to get any deal done as buyer or seller.

Can we talk more about the honesty part? Because I think that part doesn't get talked about a lot where there's a relationship you need to develop which essentially gives you that foundation of trust. I feel like if you fundamentally don't have that, you're not in a great position to get the deal done.

It's easiest to get people to accept you as an honest broker if you have a substantive, deep understanding of the lay of the land. If you're representing the seller, you know why the buyer wants to do this deal, vice versa. And if you've given some thought to the likely open issues that need to be negotiated and have come up with approaches issue by issue, how you can find common ground and explain why that's where the common ground lies in terms that counterparty understands, because you understand where the counterparty's coming from turns into more of a workmanlike instead of contentious process. So in order to be an honest broker, you do need to know the lay of the land better than anyone else. And once you know the lay of the land that well, it's relatively easy to work constructively instead of contentiously.

Are you being pretty objective then, where you're essentially sharing the cards or your perspectives?

And yeah, it's the rare issue where the common ground is razor thin. Usually there's a range from pro buyer to pro seller within which both parties could agree if it came to it. So depending on whether you're the buyer or the seller, you're representing the buyer or the seller, you wanna scope out the most favorable part of the common range issue by issue, and try to get most, ideally all the issues to land in the common range. So the deal gets done. But at your end of the common range, issue by issue, you have an example of that. I'd have to give it some thought, but it's an approach I've used deal after deal. I was thinking heading into this interview, trying to estimate how many deals I closed, it's probably over 100. I found that approach works best in terms of batting average if applied consistently deal after deal, whether you're buyer or seller, kind of.

Here's the issue point. We're basically looking at common grounds, but there's a definition of common grounds between both sides and really figuring out where there's a nice mutual overlap that doesn't stretch it too far.

I've thought of an example and it goes to synergies. You might have a financial buyer, in which case they probably don't have any synergies, unless they already have portfolio companies in the same industry and it's a roll up, then they would have synergies. But often financial buyers don't. But strategic buyers almost always have synergies. In other words, there's value created if they add the target to their existing business in the same industry. So the synergy in some sense is the fair market value. It's what's on top of the fair market value, the value created in the buyer's Hands adding it to the buyer's empire. That needn't and usually doesn't go all to the buyer. In a competitive situation, the seller can often end up with most approaching all of the value created by adding this target to the buyer's empire. The common ground is the range between the fair value, what a financial buyer would pay if it had no synergies, and the bigger number where you add in the synergies, the value created by putting the buyer and the target together. Once you recognize that is the range where the parties could play your cards right, agree. If you're the buyer, you try to save for yourself most all of the synergies, the value created from the deal. And if you're the seller, you try to extract most all of it for yourself. Since the buyer is going to realize the synergies if they're real.

Yeah. How transparent do you see the buyers in terms of, hey, here's our model. This is how we're modeling this deal out. And where we've identified synergies, it usually.

Comes out automatically in a competitive auction where the competition drives the deal price higher and higher until one by one, people with inferior synergy drop out. It's become uneconomic for them, leaving, in theory at least, just the buyer with the greatest synergy of all the bidders. It's the rare counterparty that will put its cards on the table about something as central to the deal as the price. But you can often estimate synergies from outside looking in.

How do you negotiate that? If I'm a seller, I'm trying to take your lens into. I want to make this deal strategic. Like I get a sense from this buyer, there's a lot of value because they've got this massive distribution. They're going to be able to add this product and quadruple sales in a matter of a couple of years. And I guess how do I acknowledge that but then start negotiating off of that and saying, hey, this is how much value it's going to create. This is going to be worth X dollars because of what I'm interpreting from the value, you're going to realize it.

May be more of an art than a science. In the end game. I once worked on a divestiture of 40% of the public company parent. It was a competitive auction. I was with the seller. We opened all the bids, and of the four or five bids, the highest one stood well higher than the other bids. So our investment banker, without batting an eye, called the bidder that had put in the meaningfully Higher bid than other bidders said, you're close. If you add another hundred million, it's yours. Even though that bidder had already put in a far higher bid than the other bidders. That bidder swallowed hard, added 100 million. And so that's the art of negotiating in an auction.

Yeah. Playing some poker games here.

It's part science. Just estimating what they could afford to pay and still come out ahead with the estimated value created by buying the target. Or you can play poker and just come up with some way to test your hunch that they have more in them. And of course, few buyers lead with their final and best offer. It almost goes without saying they have more in them. Question is, how much?

How do you get good at this? I feel a lot of people don't have this in terms of you got to be in the business for a while to start understanding that valuation is based on the buyer's perception of the value and the synergy part of it. How do you get good at that? Of just starting to identify and looking at companies and how they would find synergies and deals?

I approach it maybe from the other direction. I spent roughly 10 years in private practice representing PE private equity buyers and they usually didn't have any synergies. They were loathe to participate in auctions, competitive bidding situations where there would be other bidders, strategic buyers with synergies that they didn't have value created that they couldn't create. PE buyers will often take a pass on competitive bidding opportunities with strategics bidding against them and fish in different waters. Try to get exclusive looks at something for sale. How do you get good at it? I think it's just working on enough deals, you get the hang of it. Thinking about what's going on and why, playing some of your hunches and seeing what happens.

It's almost like you got to get in their shoes, get in their mindset.

Trying to think of you could do a lot worse than learn enough about the counterparty and see the deal through their eyes. That helps you negotiate against them. It also helps you identify the common ground to put difficult issues behind you and get the deal done. And if you are inherently fair, you come across as fair and knowledgeable. It's happened a number of times in my career where both parties just look to me to find ways to resolve issues and trust me to do something fair for all concerned.

Have you found anything like unique for information gathering in terms of like, are you listening to earning calls or certain things that really give you some Good media information to help you with that.

Yeah, it's on the subject of earning calls. AI is newest on the scene. Traders on Wall street are literally turning AI loose on earnings call transcripts, looking for clues, what's said, what's not said, words chosen. But back to my example of trying to sell our cash consuming business. I spent some time confirming my hunch that the eventual buyer probably find this strategically important acquisition and might be willing to let a little thing like cash consumption rather than generation be secondary.

Yeah, this is good. How about when you're moving along the deal, when does it start getting tricky and problems start surfacing?

Typically not at the outset. It's the honeymoon phase. Both the buyer and the seller would like to see the deal happen. So they work together to build momentum. And often that means postponing dealing with some of the more difficult and contentious issues. Once the momentum has been established, the lawyers, the tax professionals arrive on the scene. In most deals, that's when the elephants on the table become evident. The contentious issues, the difficult issues, the zero sum issues are revealed. And so that's when the going gets tough and when it's really important to see if there's some way to turn the so called zero sum issues into common ground issues. And if you're creative, you can turn more than a few seeming zero sum issues into actually common ground issues and then steer towards something both parties can accept as you march towards the finish line closing. The difficult issues normally surface when the lawyers and tax professionals first get involved. Sometimes additional difficult issues surface during due diligence. And that really turns on whether the buyer already knows the target, same industry, for example, like the back of its hand or is going to be getting up to speed through due diligence. And occasionally some amazing things surface during due diligence. Not often, certainly not always, but you do 100 deals. I've seen some astonishing things come up during due diligence.

When you say astonishing, you mean like surprises? Yes, I would love to get examples. I feel like this is what you don't learn in textbooks. But if you can share some examples of surprises you've seen in diligence.

Yeah, I'm going to give five examples. The first two came to light when lawyers and business people plowed through the data room. The third, fourth and fifth issues, probably not the sort of things you would ever find in a data room. They were uncovered through the use of private investigators. So first, the two data room examples. In one case, the target company had grown through a roll up strategy. Buying companies in an Industry from entrepreneurs. And in order to keep the entrepreneur's head in the game and get those roll up acquisitions closed, they had handed out little deal by little deal, bespoke equity or equity incentive packages. And I was representing the buyer. And when we saw how pervasive these arrangements were and how bespoke they all were, our client financial buyer threw up its hands. Because it was very difficult to model how much they would get as the PE buyer versus the entrepreneurs in terms of future value created. It was almost impossible to model. So that was one and that literally killed that acquisition.

Wow.

Another one was where the target company was a manufacturer and by license from a third party, it had the right to use a well known trade name on its heavy machinery. During due diligence, the buyer learned that the extremely important license to use the trademark would evaporate on a change of ownership. Especially because the buyer competed with the third party that had licensed in the well known brand. That one got solved, but it was critical to the value. A lot of the value of the target would evaporate if it lost its right to use the well known trademark on its heavy machinery. So those were two data room examples. The three learned through using very sophisticated private investigators in each case. One case we discovered massive bribes of foreign government officials, extensive trading with enemies of the state on the OFAC list. Needless to say, that killed that deal. Another stranger one was where the target had sizable operations in a third world country. And we learned through a private investigator that the foreign government had silently appropriated the operations in that country. And the operations in that country were a sizable fraction of the global operations for the target. By silently appropriated, they had repopulated the board. So that government had a majority of the board. They had replaced the in country general manager and had silently appropriated the economics of the entire operation in that country. Again, that's the sort of thing that kills deals. And you're never going to learn that in a data room. And then the last example in some ways is stranger still. But we learned again, representing the buyer entering a new industry in a new geography, that the entrepreneur of the target, someone on whom they'd be completely dependent if they bought it, entered the new industry and the new geography, had a gambling problem. He had bet and lost huge sums at the horse races and was heavily indebted to the mob. So that killed that deal.

Wow.

I realize due diligence feels like drudgery, but every so often you find something so important that it goes to whether or not the deal should go forward or not.

It's funny. Like the surprise is how the majority of them came from the PI. Can you walk me through like I'm not familiar with it? How do you utilize a PI? Is it a common practice that you're doing on these deals? The nature of being a public company, like what's driving that?

All the well known big law firms that specialize in major M and A transactions, some of them have private investigators on staff employees of the law firm. Others have deep relationships with third parties who do essentially sophisticated private investigatory due diligence, nearly always outside the U.S. in the case of a U.S. buyer looking at something outside the U.S. and so this is a very specialized niche, but there are world class experts who do it generally through big law firms. For the big law firm's clients.

Would you take this approach in all your deals or is it, hey, it's got to be a certain size, you'd.

Only do it by exception if you're doing a big enough deal outside your home country. If you're entering a new industry, entering a new geography, you want to know what it would be like to own and operate the target.

Fair enough.

And what it may have been up to.

What's the toughest part of negotiations?

I'll go back to my triage. By triage, I mean the issues that are easily resolved, the ones that are contentious, but where you can find common ground, and the ones that remain zero sum, winner, loser, no matter how hard you try to identify common ground. So the ones that are easily resolved are easily resolved. So in situations where you think there's common ground, the trick is knowing the lay of the land well enough to identify that common ground range from pro buyer to pro seller. But being contentious, both sides are going to have to compromise somewhere in that area where they can find common ground. As a deal professional, you're not the CEO. If you're not the cfo, you need to make sure as the negotiator that you have the internal support you need to make the compromises. You must land hopefully at your end of the common ground, but not where you'd like to land. Ideally, the CEO CFO had their way. Then, of course, having identified the range of common ground, the art is in negotiating as close to your end of that range as you can, issue by issue. That leaves this intractable zero sum issues where you've tried hard to identify a common ground, but there just doesn't appear to be a common ground there. Then it comes down to leverage if the deal is going to happen at all. So if you're the party with the leverage. You want to be firm because someone's going to have to win. You have the leverage. It should be you rather than the counterparty with less leverage. Firm, but reasonable. You're playing with fire. The viability of the deal is at stake. Firm, yes, but also reasonable. Conversely, if you're dealing with these intractable winner, loser, zero sum issues and you're the party with less leverage, then you have to avoid what I'll call collective deal fever. If you're the buyer and it is strategically important to you and the CEO and CFO to get the deal done, you don't have as much leverage, but you have to guard against strategically important turning into deal fever. I don't care what it takes. We need to get this done. Concede the point, raise the offer price. I think those are the most difficult issues, and it maps to triage. And the question of whether it's strategically important or not to the buyer looms large.

There's this point where you got to be not afraid to walk away from the deal. Is that a tool? Leverage, where you're like, all right, we can't come to our common ground here. I think we just don't move forward. We're done. Use that as a tactic again. We got a little poker face here. Are they going to come back? How do you think through that?

I believe that it can often backfire. If you threaten to walk away or issue any other threat and your bluff is called, you don't follow through, that proves the counterparty was right, you were bluffing. I'm not a big fan of threatening to walk away if we don't get our way.

I wouldn't want to threaten. That's like, pull out a gun. You don't shoot it. Like you're going to pull out a gun. You better use it. So I guess the goal would be saying, hey, we are walking away.

I think it's a discussion the deal principal needs to have with top executives. Take their temperature, if you will. Could they really countenance walking away over this issue or that issue? Or is it too strategically important? Shading into deal fever. But a starting point is being able to talk about the possibility of walking away.

Can you give me an example? Like the zero sum issue, Price is.

Probably the cleanest example.

Zero sum. Yeah.

Yeah. How much is the buyer willing to pay for something strategically important if they have to? And in order to guard against deal fever, buyers will often agree on the largest amount they could ever see themselves paying. But inevitably, that will be put to the test. Did we really mean that was the most we would ever pay? Because it looks like we might have to pay a little more to stay in this competitive auction to get this strategically important deal closed. That's why it's so important for the negotiators on both sides to figure out whether it's strategically important. A must have for yourself if you're the buyer or the buyer if you're the seller. Because if it's not strategically important, then it's just going to be driven by the financial metrics. At some point it won't make sense for the buyer.

I think that's the only time I'd want to find myself in an auction situation is if it was extremely strategically important to do this deal. Otherwise I would try to avoid it like the plague.

Yeah. If you're the buyer and you have synergies, it would unlock a lot of value if you were to buy it. But none of the competing bidders have anywhere near your synergies. Then you're sitting pretty because you just have to outbid the highest of the other bidders without your synergies and you pocket the synergies for yourself.

Usually you're blind in these auction situations.

Goes without saying. As often as not, you don't hear the truth from the person conducting the auction. You may have put in by far the highest bid and be told you're close, but you're not there yet.

How do you work around that? How do you make sure that doesn't happen to you?

The most common approach is to take everything you hear from the person conducting the auction with a grain of salt and just keep your eye on your own prize. What would be a good deal for you as the buyer? What wouldn't?

Yeah, I think it's being objective because the deal fever is what's going to lean you and pull you towards increasing your offer for the sake of your emotions driving it.

Another way to deal with it is that valuation is more of an art than a science. You change one or two assumptions and you get a very different valuation. You have to take what bankers conducting an auction tell you with a grain of salt. You also have to take what your internal valuations are telling you with a grain of salt because they're incredibly sensitive to arbitrary assumptions.

Yeah, that's why I find it really difficult because banker's books are always charts that go up and to the right. Then it's difficult to nail your assumptions down. With the limited time that you typically.

Have on a deal, it's easier to get better. If you do a lot of deals and you do post mortems on them, then you can calibrate your approach better. Four out of the last five deals we did, it looks like we overpaid. With the benefit of hindsight that tells you something.

That's a really good point that you should definitely debrief or do these postmortems. Is there anything specific you do to retain those learnings somewhere just so that they don't get forgotten? Or is it just simply the conversation that keeps in mind?

At CF, we have a process where we routinely do 1 year and 3 year and 5 year check ins as a way to calibrate our thinking about valuation. So if you have that process, you capture the learning automatically and it gets discussed rather than just filed away.

Surprises between sign and close I don't.

Have any as exciting as hiring private investigators, but you would do that before.

You got to sign?

Yeah, yeah. I'll just talk about it in general terms if there's going to be a meaningful delay between signing and closing. Closing regulatory clearance, for example, maybe difficult financing. But in any event, a significant delay between signing and closing. You always have to bear in mind the risk that market, including capital market conditions, could deteriorate over the months in question. You look at the deal landscape. There have been many examples of deals signed before the financial crisis, let's say, and pending closing when the financial crisis hits. But the thing about deteriorating market and capital market conditions is that it gets buyers rethinking their willingness to do the original deal they sign and in more extreme cases, even their ability to raise the financing, for example. And close and adverse market developments aren't the only risks. There could be other material developments between signing and closing in a deal that needs regulatory clearance, and everyone thought that would be easily obtained. More and more in the US and many other countries around the world, it's getting harder to get deals cleared. That often takes the form of unexpected unpleasant surprises between signing and closing. In deals involving public companies, stockholder activism emerge. Believe it or not, it's not uncommon to find activists saying to the buyer, oh, you're paying way too much, you probably shouldn't even buy this company. And other activists going to the target company saying, oh, you never should have signed that deal. You're not getting paid nearly enough. Roughly half of stockholder activism now is deal focused and as often as not on both the buyer and the seller side. So that's something to bear in mind if there's a long period between signing and closing. Sometimes the synergy the value, if you will, for the buyer is inherent in the tax regime, in the regulatory regime. It's not unheard of for that ground to shift, maybe even dramatically, between signing and closing. There might be a lawsuit, major lawsuit, major regulatory investigation aimed at the target between signing and closing. As we sit in 2023, there are crises. Everywhere you look, a crisis might develop affecting the buyer or the target given all the things that could happen. These are some of the most heavily negotiated provisions in acquisition agreements. How to deal with them if they do come to pass between signing and closing, and why it's really important to have excellent lawyers on both sides there. People who do deals for a living have developed what I'd call market approaches to allocating the risk between buyer and seller of one or more of these things happening. It typically isn't all that bespoke. There's no reason to reinvent the wheel. The answer is just to get top lawyers who know their way around deals to deal with it in the acquisition agreement and then hope for the best. It all's quiet.

Importance of lawyers on deals Good lawyers. These are a lot of good examples of a variety of things that could come up. What do you think after close is the biggest risk around integration?

I think the single biggest risk is loss of talent or demotivation of talent at the target. That's off the charts important in tech and also in professional services because as the old saying goes, the assets of such companies go home every evening. It's really important heading into integration, during integration for months and years after closing to make sure you don't lose key talent and remain motivated to keep doing what they had been doing, making the target so attractive when you bought it. There are various ways to mitigate that risk. You can defer liquidity or key individuals at the target because there's nothing like having all the purchase price cash on the barrel head and then decide you don't really enjoy your job as a subsidiary as much as you enjoyed your job pre ipo, presale. So deferring that liquidity for one, two, three years can eliminate the temptation to just take the money and move on. Seller non competes been a classic approach for years, but now their legality and enforceability are being called into question in the US and elsewhere. So that's the efficacy of seller. Non competes is a question mark today. And then the classic carrots incentive retention packages making it well worth people's while to remain and remain engaged at the new subsidiary. I think there's ultimately no substitute for having a Work environment that people want to join and that people are loathe to leave because handcuffs, incentive packages, the like seller, non competes if possible, only go so far. People have to genuinely want to stay and want to do their very best. People are naturally drawn to workplaces with an appealing culture, an exciting strategy, a rewarding mission. At my company CF for example, we have a wonderful robust culture we call do it right. It has four components, worker and public safety. Because in the chemical industry safety is of paramount importance. Second element is inclusion and diversity because we feel we want the very best people. And so CF has become very diverse and very inclusive company. That has led to the most talented diverse candidates wanting to join cf. They have other options. So it's a virtuous circle. Third element, legal compliance, business ethics. That's very important part of doing it right. And finally, environmental stewardship. Being a chemical company, we have a major impact on climate change, for better or worse. Turning from culture to strategy, briefly, CF three years ago announced an utterly new and exciting strategy. We call it Clean energy. And our strategy involves making dramatic and rapid reductions in our carbon footprint in order to produce a carbon free product, ammonia, that is a drop in substitute for fossil fuels in certain applications. So not only are we reducing our carbon footprint rapidly and dramatically, but we're supplying our customers with a carbon free substitute for fossil fuels, enabling them to reduce their carbon footprints in turn. It's a very, very exciting new strategy and one of the reasons we have great people who want to join the company and great people who wouldn't dream of leaving it.

Yeah, actually a good theme here in terms of the biggest integration risk being people lose people, you're going to lose a lot of value and more so depending on the industry you're in, you have a few different ways to either defer some of the liquidity that they have, those non competes, but question how enforceable they are, and then creating the carrots, the retention package and then culture, almost like building your company culture as a synergizing of its own so that people are really excited about it and allow that to carry the value.

And I've become convinced it's a huge competitive advantage to have the right culture. And it helps more than a little with integration, particularly if the key assets of Target are the people.

Yeah, I totally agree. I think it's interesting to see how some companies really do that well versus others that don't. And we all know what happens when that doesn't get aligned. Do you have any examples of biggest challenge you've seen in M&A I do.

And in some sense it's my second of two war stories I told you about taking the money losing company public the same time as Google and outperforming Google for the next 10 years. That was my first war story. This is my second of two. During the financial crisis in 2009 early 2010, we found ourselves in a four way cross border takeover battle. We had made a hostile offer for a competitor in the US and a few weeks later a bigger competitor in Canada made a hostile offer for us. So we were simultaneously playing offense and defense for over a year. Then a fourth company entered the fray, a European competitor, by some measures the largest of all. And it made a friendly offer to buy our U.S. target. And that deal was signed and announced. At that point, a large Canadian company coming after us said we're still interested in acquiring cf. It looked very much like you could see the final outcome. European company buy our competitor in the US and the Canadian company buy us and that would be that. But being a lawyer, I realized that at the other company in the us, once they announced deal to be acquired by the Europeans, legally speaking, it turned it into an absolute auction board of the other company in the US really had no choice, legally speaking, but to sell the company to the highest bidder. I recognized that and I engaged in extensive consensus building within the company, up to and including our board, our investment bankers, everyone, and convince them we should put in a topping offer, outbid the Europeans or the US Company we wanted to buy. So we did that. It turned out the European company only had one bid in them. So at that point we won the contest, if you will, to buy the other company in the us. We doubled in size with that acquisition and that made a combined company, now twice as large, too big for the Canadians to handle. So they dropped their pursuit of us. So we doubled in size against all odds. To everyone's astonishment, we were the underdog right up until the end when we made the winning move. And it was a great acquisition. The combined company outperformed its competitors markedly for the next several years. If it wasn't for recognizing the winning move and convincing all my colleagues to make that move, we would have been taken over and that would have been that.

That's quite the dance.

You don't see hostile takeovers nearly as much today as you did for decades. Now it's all about stockholder activism.

Do these hostile takeovers, do they start off friendly and then get hostile or are they just hostile from the get go?

Most, but certainly not all start out with preliminary friendly discussion between CEOs about putting the two companies together. Those rarely result in mutual agreement. Yes, let's put the two companies together. I'll run it. You'll depart with a nice package. Even the typical ones that start out with a friendly discussion eventually turn unfriendly in one way or another. Sometimes the fact that it's turned hostile becomes public. Other times the hostility is behind the scenes and only inferred by the public.

Wow. Okay, that's interesting. So all the experience, 40 years doing deals, 100 plus deals. Let's back it up to the first timers. Companies like us that I don't know when it'll be, but eventually we're going to do our first deal. What's advice you'd give to us so we don't screw things up?

The best general advice is do as many deals as you can and learn from the very best. Sooner or later, though, sometimes in the natural progressions, other times much earlier than you were anticipating, you're suddenly flying solo. You may have been thrown in the deep end of the pool before you were prepared to run your own deal. Other times you've had good training and you're ready for it. But either way, odds are you've been given that responsibility for a reason. And you wouldn't have been given that responsibility if the people who gave you that responsibility didn't think you were up for it. Embrace the opportunity to learn by doing. If you've been thrown in the deep end of the pool instead of schooled for several years, you may make mistakes, but in any event, you always have the option of going back from time to the people who trusted in you, who gave you the responsibility, and saying, this is a tough challenge. I was not expecting this curveball. It's a combination of doing a lot of deals, learning from the most talented people you encounter in those early days, and then handling the transition from being part of a team to running the show.

I agree with you, Doug, because you can't read a bunch of M and A books and be promptly prepared to go do a deal. I think you're right as much. If you can get exposure without taking the risk, that's good. Or having that network, knowing folks like yourselves that have that experience that I can say, hey, here's a situation I'm encountering on Help me think through this. I feel like that's personally been way more valuable than anything else. Otherwise you stand to learn it the hard way.

I'm a big believer in learning by doing. I wanted to Learn about futures and options. I took a course in it, but I didn't feel I really understood it as well as I should. So I took small sum, but a lot at the time. Opened a retail account to trade futures and options, thinking that nothing would cement those lessons like playing with real money and all that leverage. I'm not risk averse when it comes to learning new things. You need enough risk. Pay attention. Bring out the best in yourself as you learn to master it in the.

Context M and A. Go do a deal, but just do one you can afford to take a hit on. Yeah, Doug, what is the craziest thing you've seen in M and A?

I was at a strategic buyer and we were negotiating to buy a target new industry for us from the entrepreneur. And under pressure from the president, I found myself insisting on an extreme earnout. That the entrepreneur was going to come to work for our company, running our new subsidiary, the company he'd built to that point. So the earnout ranged from literally zero purchase price for him if our new subsidiary meaningfully underperformed his forecast. All the way from literally zero, not even a fixed amount, to a princely sum if it blew the doors off under his leadership as our new subsidiary. And it was sized so that even if he got the princely sum, it would be more than self funding. There would be enough for us in that amazing outperformance that we would gladly give him the princely sum. To my astonishment, and I think the president's astonishment, who put me up to it, the entrepreneur, without blinking said, okay, we'll do it that way. We bought the company, became a subsidiary. The entrepreneur came to work for us running our new subsidiary. Four years later he had blown the doors off. We were ecstatic because it was self funding with how well we were happy to give him the princely sum. So princely that his name is now on the side of a well known college football stadium. I still don't know quite what to make of that other than the entrepreneur was supremely confident.

Yeah. Gave him the all in option.

We had nothing to lose. We would literally have a new subsidiary for free if it zeroed out and have made it enough that we'd be more than happy to give him his princely sum if he blew the doors off.

That's crazy. I hope I get an opportunity to put a deal like that on the table. Let's go at it, Doc. This has been great. I want to thank you so much for taking the time to have the conversation with me. I enjoyed it. I learned a lot. You've helped me become a better M and A scientist.

I really enjoyed it too. Thank you.

Hey those of you still tuned in, thank you for getting this far. Until next time, 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, stick 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.