Performing Cultural Due Diligence to Better Understand the Target Company

Emerson Block, Cardinal Health, Broadcom Toast, Energizer Jamf Treehouse Food, Hora Main there's too many to list what do the best corporate development teams in the world have in common? They use Deal Room, add a crappy data Room and Excel trackers. In 2021, Emerson did an $11 billion acquisition on Deal Room. Then this year, a $14 billion platform divestiture to Blackstone. Even with every big bank name involved.

In the deal, they all had to use Deal Room.

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Get to the interview. 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.

Foreign.

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 A teams or want to get involved with a community of forward thinking M and a practitioners, visit mascience.com that's where you can subscribe to our newsletter, join a roundtable and network with some peers. Find a ton of free content. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of MNA Science. Joining me today is Ken Bond, Head of Corporate Development at Cetera Financial Group. Cetera is a leading US investment advisor network with over 12,000 producing financial advisors and 800 financial institutions with over 475 billion of assets under administration. Today we're going to talk about how to perform cultural diligence to better understand the target company. Ken, how you doing today?

I'm well, thanks. Good to see you Kisa.

I'm excited about this topic. I know some people listening might be rolling their eyes like he's not talking about culture again. But people got such conflicting views on it. You get some of the old school corp dev folks are like ah, culture. We're going to create a new culture, who cares? And then you get to hear about all the issues that bubble up once an LOI signed. But then what do you do? Do you push the deal through the finish line and then it Gets really tough and then other people are like, that's HR's job. So this is always a fun topic to talk about because the more we talk about, the more I realize how important it actually is for each deal you work on. Can we kick things off with a little bit about your background?

Absolutely. I look after corporate development for Cetera Financial Group. As you've mentioned, Cetera is a leading US investment advisory network. We've got 1,000 advisors and half a trillion dollars on the platform. So we're number two or number three in the industry, depending on how you manage it. I've been Corp dev professional my entire life with a very odd background. My background's in physics. Drove submarines for the Navy and nuclear engineering for a little bit and then I came out and did consulting with McKinsey before I got into corporate development. So I came at it from the strategy side as opposed to the investment banking side, which is I think an anomaly. I think that helped me build some good processes and practices when setting up high volume M and A shops. Ran corp development for aon for roughly 13 years and got about 250 deals done a little over 3 billion of deal value. And then joined Cetera three years ago and was spent another 3 billion in only three years and already had about 25 deals done. So been pretty active and really enjoy it. I'm what you would clearly label a deal. Chunky. I love doing transactions.

Good amount of operating experience, tons of M and A experience and then driving a nuclear sub. That's pretty interesting. That could be a whole podcast of its own. I don't know how you do that. Like I couldn't imagine being underwater for any period longer than anything.

How my nuclear experience trained impacted my corporate development profession. Actually there's a direct correlation, well, believe.

It or not, I'm sure around discipline and just disconnect.

Value process. The value process. The Navy encourages you not to wing it when starting up or shutting down a nuclear reactor. And the same thing should be true with processes for acquiring and selling firms within an organization. Process is the muscle that organizations use to learn and you need good process in order to retain those learnings. Otherwise they just reside within individuals and when the individuals leave, those learnings leave as well.

Relates really well with M and a disclaimer out there. Satera is a deal room customer. Those of you probably know I'm pretty involved with it as a founder CEO of that business. But that's it. That's not what this podcast is about. We're going to talk about cultural Diligence. So first things first. Who's in charge of cultural diligence?

Just like everybody else, the corp dev team is responsible for executing diligence or ensuring that diligence is done on the target company. Individual functional owners or leaders of those diligence efforts are responsible for their unique areas. I would argue that, yes, HR is a big portion of evaluating culture and they should own an understanding of what the cultural diligence yields. I would put on the HR professional.

So you do put on the HR professional, but it sounds like there's some supporting that HR professional.

Oh, absolutely. Or your diligence plan has to assess that. Let's talk about why this is important first, and then we can talk about how we assess it, and then we can talk about how we mitigate the findings out of our assessment. So there's three different phases here, but why is it important? One of the presidents that I used to work for, probably one of the most influential leaders I've ever worked for, for that matter, when it came to M and A, certainly held the position and said on stage, culture eats strategy for breakfast. Meaning, you know, if you've got a bad cultural fit, it's not going to overcome a good strategy. I would modify that slightly to say that culture is certainly an important consideration that has to drive your integration plan. I wouldn't necessarily walk from every deal that's got a bad cultural fit, but you most certainly want to adapt your integration plan to accommodate for the findings of your cultural diligence. So that's why you want to do it. When you start looking at your diligence plans, you do a great deal of cultural diligence already. The problem most folks run into is they don't really aggregate the findings from a cultural perspective to bring that diligence lens to bear. Let me give you some examples. We review the employee handbook, employee policies and procedures. You're doing a number of one on one interviews with functional leaders. Maybe it's the it, maybe it's HR finance. Each of those leaders is probably getting interviewed during your diligence effort to understand aspects of their systems, aspects of their policies or procedures or whatever it might be. It's more likely than not you're going to have one on one interviews with them. And in that process you will be able to assess how they make decisions, how they delegate, how they engage with other functional leaders and how they view their collective team, and whether that's a healthy team or not. The employee handbook is also going to give you some good insights there as well as Policies and procedures for everything from time off to diversity, inclusion, all the different policies and procedures that they, they roll into the firm of which you will certainly evaluate. What's missing is bringing together all of those findings from a lens of culture. Ask the question, what insight have we gained from the diligence we've done about the culture of the prospective firm? That makes sense.

So that's where you get an understanding of how they work, when you mention how they delegate decisions. The leadership approach in that organization. Should we start from the beginning of where do you actually start? Cultural diligence?

It actually starts with making sure that your diligence plan ensures that the data or the findings that will come out of your diligence effort are evaluated from a prospective culture. Meaning Kizan, you probably already have. If you look at your diligence plans that you've got and had many discussions about how to conduct diligence at a functional level, if cultural diligence is done right, I would argue you don't really need to modify those plans dramatically. What you need to do is to pull together the findings that come out of those functional diligence efforts and evaluate the findings from the perspective of what insight into culture did we gain from the materials and interviews that were conducted during our effort. You can then form a view around, okay, what are the key attributes of culture around decision making and community that they have? The other important component, of course, is the acquiring entity also needs a similar level of an evaluation. For global organizations. Each of the countries is almost always has its own little microcosm of culture. It's not common across a global organization or even the individual sites. Your California office may look very different than your Kansas City office or your Florida office. So if the Kansas City office is doing the acquisition, make sure you understand the culture that they're walking into. Target and acquirer both get evaluated and then you can understand. You at least have an understanding of where the friction might be as you begin to integrate the two organizations together.

So this isn't so much about having a whole work stream of doing cultural diligence. It's baked into your current approach of doing diligence. It's more about extracting that information and looking into those findings that are specific to culture. And then you also had a good point. Know thyself what your organization's culture is.

Absolutely.

And all this stuff ultimately lends to planning the integration. What are those things you really need to think about exactly?

In rare instances, you may blow up the deal and just say, listen, this is, this is A bridge too far. It's going to be oil and water. It's simply not going to work. We'll either lose the people or the clients or both. And ultimately this is likely to be a disaster. Rarely has that ever happened, but in a couple of instances.

What does that look like? Like I'm gay? Because you're right, it really happens. But I'm just curious.

Personal experience is all I can give you. What I have seen is from smaller transactions, owner, operator, where the owner is going to become a W2 employee of the acquiring entity and is critical to maintaining client relationships post close or customer relationships post close. And they are larger than life figures. They are very proud of the businesses they've built and they may not play in the sandbox well with others. It might rise to such a level that you just simply don't think that they're going to be manageable or that they are going to look after the best interests of the combined entity. And fundamentally, if you don't ultimately trust them, as you continue to do cultural diligence and you find out that they are, you believe fundamentally they are untrustworthy individuals, then that's a good reason to back out of the deal.

Senior people and their role, the company.

For sure, more likely than not, the issue is they're very centralized. They don't really push decision making down like we do. As we integrate, say, their functional teams into our functional teams, they are not going to have as strong a direction for how their work should be done that they're used to having, and they'll be asked to operate on a significantly more autonomous basis. And that's simply not going to work well for them. So we need to be thoughtful about how we bring the two teams together so that we can overcome that. Sales teams may go about prosecuting opportunities in a very different way. So I'm not talking just about business processes, differences in business processes, but how their culture of collaboration or how they engage the rest of the organization in constructive, and hopefully in a very constructive way. If it's very antagonistic between functional areas, just as a general finding, then that alone will tell you you've got a little bit of work to do. You might want to spend a little more time getting to know you before you bring them in. Not necessarily walking away from them, but certainly the findings around cultural diligence should influence the speed and depth at which you choose to integrate the businesses. What you do find is that whether you choose to integrate within one month, three months, six months, when the reductions happen, that inevitably come with those types of integrations, those one time costs don't sync a transaction. And if they could sync a transaction, you need to rethink your pricing. That deal might be a little too rich. They shouldn't one time costs like that generally shouldn't. It's run rate synergies that you ultimately really need to get in order to make a transaction work. If you're levering then lenders are going to give you 12, 18, 24 months in some cases. It really depends on what the market looks like when you go to get the lending, on whether, when you can achieve those synergies. So you've got time. It's better to be thoughtful about the timing of when you, when those savings are realized and to give yourself the, the greatest chance of success. All we're saying here is that the more armed you are in that, in that, in, in setting up that integration plan, the more data you have. Culture being a key component of a key data point that has to be folded into that, into the architecture of that integration plan that's gonna give you a better chance of a successful outcome.

You just compact a lot there. Okay, let me step back a minute. The real deal breaker stuff doesn't happen very often. Usually it's like a real, basically CEO or somebody really key that's not going to be a fit. That's going to deter getting the value out of the deal. That's good. You clarified that. I was imagining walking the office, everybody had like face tattoos and I was like oh, I don't think this is going to work out.

But that I've never had that happen. I'm not saying that we, maybe that's.

A different bias thing I got to go see a therapist about Anyways. Then from there you went into. Okay, so there's still a lot of things you want to acknowledge because ultimately this goes to how you're going to plan the integration. You mentioned the speed and depth of integration and it's going against the timeline of capturing synergies. That's where I wanted to dive a little bit deeper because it's almost like a little matrix here because I want to get a sense of those factors of cultural differences that you acknowledge. And then you know, hey, we have a lot of commonalities. Then do you look at that and say this is how it's going to shape the integration plan versus what are those differences that they have? Top down management. We're very bottoms up. Maybe we gotta look at this a little different. Maybe we do have those teams operate more independently and focus more on the backend integration. Is there like a playbook or just pattern? You've seen Playbook?

Yes, absolutely. I think each organization builds their own playbooks based upon past president and how they're organized and how they best ingest organizations that they acquire. I guess what I'm saying is that those playbooks are never rigid. They always have to adapt to the circumstances of each transaction. I'm not saying anything you probably don't know on that. They're really more like guidelines. They're starting spots. You start with the playbook, but then you have to adapt the playbook to the peculiarities of a transaction. And one of the peculiarities of the transaction is the culture of the business, which is how do they make decisions and how do they manage their people, how do they push risk, what's their willingness to take risks and how do they reward or punish mistakes. And that has to influence how you go about bringing those teams together, whether you allow them to continue to operate autonomously and side by side as like a their own little cell within a functional area. Say you want to keep the core team together, but it'll now be managed the acquiring company's department head. Or do you intermix the teams such that they're indistinguishable post close from who was acquirer and who was acquired? There's different ways that could play out and there's no reason not to be thoughtful so that you can get the best possible outcome.

Every company's culture is unique. But can you profile them when going through this exercise?

I think you can. There are certain attributes you care about and you lay those out up front in your diligence kickoff. This is one of the work streams that you're going to highlight just like everybody else. And the person in charge of HR generally also says, listen, we're also going to be evaluating culture. Just to be clear, I'm looking for the following items. I'm going to come back back to each of you after you do your one on one interviews. I'm going to spend 10, 15 minutes with you on an interview to debrief on what you found when you were engaging with the sell side. From that, I will then aggregate findings across all of the different interviews and our own diligence materials, such as policies, procedures, handbooks, et cetera. And I'll form a view around what they look like. I will share that at the final due diligence readout so that people who are also building the integration plan are aware of what they're walking into so that they've got especially the leaders, because the leader of the integration, that business executive will certainly care a great deal about whether there's likely to be friction or not.

Can we talk more about the how?

Sure.

One. I'm curious. I always find the first early interactions like really fun. When you're talking executive to executive. Are there things there in those really early conversations that you may want to ask to start getting a sense of culture?

You're always getting it, whether you realize it or not. It's playing a role in your bid strategy, in your engagement strategy, and how you are positioning the combination of the firms. If they care a great deal about autonomy, you're going to try to feed that. You're trying to find a solution that allows them to get what they need out of the transaction. But at the same time, you're starting to evaluate whether it's a healthy organization or not. Here's the point that's probably most relevant in a process where you are very limited in your engagement with the management team. And it's very controlled, a bank controlled.

Process we're talking about, right?

You get a four hour management meeting, you get some very scripted meetings that are supervised by either parent company or the banker, a couple hours, 30 minute meetings with functional leaders. Add that up, you probably get another four or five hours max with the sell side management team. You don't have a lot of time there to come to an understanding of what their culture actually is. It could be all theater. You're very likely getting the best of who they are. And we've all seen that. Once you get into diligence, inevitably it's like you're two weeks away from signing the transaction and you realize that, oh, the CEO actually hates the head of HR and the IT guy can't be in the same room as the CEO. Geez, that's not helpful. It impacts your retention plan as well. So there are personalities there that you need to make sure you understand and your ability to evaluate culture is more constrained in that environment. If you however, are doing a bilateral where you either have prior history or you've got an elongated kind of engagement with the seller, then it's a heck of a lot easier to form a real view around what the culture of the business is. Which is another reason why bilaterals are so much better than auction processes and generally yield to significantly better outcomes because you just get a better feel for who the actual people are and a more true assessment of their culture.

Really good point. Can you define bilateral? Just feel like it's a kind of an ambiguous word.

Two people, two parties, you and me are going exclusively through a conversation. There's nobody else involved, not running an auction process. So you aren't engaging with five people, just you and me, trying to see if there's a deal to be done.

Cool. Otherwise we can call it a proprietary deal.

Yeah, Bilateral.

So I want to clarify the banker situation because you're right, bilateral. You have a relationship, maybe you're already partners. I'm the CEO for years. You got a good sense of the culture, you visit their office. Those are big help. Let's take that banking situation. One of the key things that you mentioned was understanding how the organization delegates and make decisions. What do you do to do that? Do you just ask them directly or is there certain things you made try to conclude to that you're going to.

Find that out either at the management presentation when you start talking through kind of different functions. Fundamentally you've got to understand what do you call service and ops and what do we call service and ops and who does call center? What do we call center? Professionals. Everybody got a different lingo and you need to go through the process of lining all of that up for nothing else. You need that to understand making sure you're doing apples to apples comparisons either on gearing ratios or work structures when you're looking at mashing things together. And in that process you're also going to talk about well, who's got control and how do decisions, particular decisions get made. You could talk about large capital expenditures, large IT programs, or how individual hire fire decisions get done and what does a budget mean and there's lots of different nuggets that will come out of a free flowing conversation during that four hour management meeting that just need to be captured from that perspective. Alternatively, you're also going to be having conversations with the CIO so that you can better understand the architecture of the business. In some instances a discovery session where you've got a broad range of stuff that you want to get a feel for. A free flowing discovery session is the most efficient way to muddle your way through the diligence process. In that you'll almost always be asking some specific questions about who makes that decision, how do you manage, how many people do you manage and what are their roles and responsibilities? How engaged are you in this architecture? Decision how, how engaged are you in these particular programs or are they delegated to X, Y or Z? So you'll get a feel for that during those engagements.

So you're going to get a Way better read of the culture through those conversations. Opposed to just sending a checklist for diligence.

No. Yeah, you're. You can't send a checklist.

Right. What you just described, it's like you can't really.

You'll.

I mean you can tell if someone's lying basically just the way they respond.

It's not. Again, everybody's super busy on due diligence efforts. The last thing you want to do is add a new work stream for somebody to go do. It's much better if you can leverage the existing materials that are going to come out that you require anyway and just analyze the data from a different perspective. So I'd argue cultural diligence is a bit like that where you're already gathering that information. We're just simply using that data and that information for a different purpose.

Makes a lot of sense. You mentioned too, the key things are getting the handbook and HR policies. Are there things that you just really look for right away when you get those assets?

We've seen train wrecks in policies and procedures. Don't get me wrong, there's lots of things you're looking for. Compliance with local labor law is somewhat critical, but understanding how centralized control there is and how levels of gifts that they're allowed to receive from vendors to what they can do for office entertainment to office parties and celebrations even, there's lots of different little tidbits that you can pull out there. To say this is an attribute of their culture that's very different than ours. And just be aware gives you the.

Groundwork for when you do have those in person conversations of what are the areas to look into?

Yeah, for example, they have free snacks and coffee in their offices and we don't have any of that. Okay, great. Be aware. That's an attribute that they found valuable and it's been that way for a while. And when you bring the two teams together, that's going to come up.

Interesting. What's like the weirdest thing you've seen in a policy like that?

I haven't got any great horror stories other than the transactions that we walked from because the cultural fit was just too bad or probably should have walked from. We certainly highlighted a couple of deals that the cultural fit was obviously so bad that we didn't recommend proceeding forward and that ultimately you don't have to be a genius to see what's going to happen after close. A lot of bad behavior, a lot of self serving behavior and ultimately led to firing and lawsuits against the seller. And at that point it's very late. It looks bad for everybody. There are no winners when that happens. Let's put it that way.

Fair enough. I remember going to a friend invited me to a holiday party and I signed this disclaimer and I was reading through it and it's just like that I felt was an impression around the culture of like, wow, how do these events turn out?

Yeah, you wouldn't be surprised. You find some instances where people like to come together for group celebrations and they've got a number of those that happen throughout the year, including holiday parties. And then other people. They generally when they've had bad behavior at one or an event or something happened at one of those events that they've locked those down and no longer do that type of stuff. So when you bring those teams together, it's how do they celebrate success? How do they form friendships and camaraderie between individuals, Especially if they're not in the same office location. If you're not coming together, they have to figure out how to solve the fundamental problem without saying, hey, I'm right, you're wrong, there's a reason they're doing what they're doing and you need to figure out how to solve that problem without mandating a solution that's going to be unacceptable to one or the other side.

Can you tell me about using questionnaires? You mentioned that earlier.

Many times people use questionnaires today to evaluate culture. Fabulous. Not really practical at all. From the context of a confidential M and a transaction where there's generally a few people that are inside the tent and most people are completely unaware of the transaction. That being said, I was at a conference and talking to another corp dev professional where they already had questionnaires. They had a third party that they engaged to do cultural surveys or just surveys of the target firm, whatever the target might be. They had a pretty slick engagement methodology that kind of obfuscated why they were doing the survey. But they would come in as part of diligence and survey the employees, just get a better understanding what they were walking into. They had it couched under some innocuous reason, but it was done as part of the transaction to the entire organization. And those findings then informed both whether they wanted to pursue with the transaction and how they built the integration.

But it's not like a super common thing where all the deals do that kind of cultural.

That's expensive. I know in my industry that would be exceptionally difficult to pull off. I don't think sellers in general would permit that type of. That type of Engagement, even if you're willing to foot the bill, it's just too expensive and too intrusive. That's true.

Incur a lot of expenses and diligence working with the whole plethora of consultants out there.

Yes, we do.

If the deal is bilateral, it sounds like there's some pros when it comes to all this stuff, or quite a bit. I just found the timeframes are more amicable, where there's not like this countdown timer because somebody wants to get a check at the closing table for sure, or a third party that wants to get a check at the closing table. Have you found that to be a reason why there's more consideration towards doing the cultural diligence, but also relaying that to the integration planning? Or does that not impact as much when you're dealing with the bank process?

It impacts it more probably because you've got more data for the other side in a bilateral, because your engagements, you've engaged with them a lot more. You're just gathering more data and therefore it's easier for the acquiring firm to build that information into their integration plan. But auction processes, you're still going to have to form a view one way or the other and you're going to have to take some bets. You're just taking less risk because you probably have a better feel for exactly what the firm is. If it were one on one.

What does that mean in terms of your impact, like your outcome?

Impact impact is pretty easy to measure. It's the same that you would measure for a successful transaction.

So I guess I was wondering of like how it would impact that. It's like, hey, you do have your outcomes that you measure in the deal, but now all of a sudden you're running a compressed timeline. You don't have as much information, you're not putting as much consideration in. Therefore you're not tying it to the integration plan as well as a bilateral deal. Like what does ultimately the net impacts become? Is it, hey, our timelines end up taking a lot longer to hit our targets? No, you take more risk, you're taking more risks. So there's more things that could go sideways basically.

That's exactly right. The probability of a bad outcome increases in an auction process than in a bilateral. Right? To the extent you can, you're more thoughtful and better understand the acquiring firm. And you can build that in irrigation plan. That's fabulous. You're going to have a better retention to people, better retention clients, you're going to continue to be able to grow the business you'll lose less critical talent. It's all the same metrics that you would outline of what does a successful transaction look like. Did you hit the business case?

There's some pretty big pros of doing a bilateral deal in that regard.

Oh heck yeah. A lot of your listeners would. That will resonate with everybody. Would prefer to do a bilateral then run through an auction process.

Do you pay more?

Pay more in processes? Absolutely.

I like it. You're honest. That was a good litmus test. Question of are we doing this course recording or are we being real here? All right, so you're paying more and taking more risk when you go through an auction. And it's a clear message too if you're not beating the street proactively looking. And do you still participate in auctions?

Yeah, for sure. You have to.

It's a good learning experience.

Larger the deal, more likely the owners have a fiduciary duty to some shareholder or whoever's running the process or managing the business have fiduciary duty to their shareholders to maximize value. Get it to run a process.

I think it's a good learning experience too for the market. Learn about it. Anytime you do diligence, you just keep learning. But do you feel an auction process would turn away certain prospective buyers too that choose not to participate or do you feel there's not really that do that?

For sure. I knew buyers in say 10 years ago, especially on smaller deals that they weren't willing to run through processes. They'd only do bilateral transactions, but they're generally doing small roll ups and that was how. How they had set up their processes.

I've seen that a lot with rollups where that's just the way they do. They have a pretty sizable biz dev team that's outsourcing deals and that's the way they do it.

Yep.

What is the most challenging part of cultural diligence?

Most challenging part is for people to actually take it seriously and actually get the conclusions acted upon, pulling together the findings and then ensuring that they are acted upon in the integration plan.

Do you find that a thing where like corp dev folks don't really make that material consideration?

Are you saying corp debt people aren't warm and fuzzy at times a little.

Bit too much in the spreadsheets and numbers to get the business case to make financial sense and pitching that?

No, absolutely. It's Another aspect of 1617 balls you're probably juggling at the same time trying to get a transaction over the line. It's not something that's Going to hold up a transaction document. It's not a burning platform. That needs to be solved immediately or I have to go buy insurance to mitigate this risk or push it onto the third party. It is an attribute that has to be accommodated. It's important but not urgent to getting the transaction signed.

Well, what term allows you to use business case? Investment thesis, Investment memo.

Business case.

Business case. Okay. Does it get mentioned or highlighted in the business case?

It does, absolutely. Where we talk about, especially in our diligence findings about in the HR section, we absolutely talk about culture. The findings actually are pulled together there.

When you pitch the board, do you talk about culture?

Not as much.

Not as much of financial sense. Going to create shareholder value.

If you built the integration plan, if you got a track record of executing integration plans appropriately, the board's not going to get in your shorts on exactly how are you executing and to what level, show me the plan, et cetera. There. If you built a level of trust and demonstrated capabilities, they're going to let you run with that. And the assumption is that you're doing the same, you're executing the same playbooks that have yielded positive outcomes in the past. They're not going to care if it's your first transaction. Then they might dig into a bunch of different aspects of it, especially around how you're going to integrate the management teams together.

Fair enough. The bigger stakeholders are going to be the integration leads in.

Yeah, for sure. If it's a material acquisition, then you're going to have an integration steering committee that's made up of the key executives that are in ultimately the business unit owner whose throat would be choked if it goes sideways. They're the ultimate accountability partner. They're going to care a great deal about making sure that the cultural aspects of the two different firms are respected when we bring them together.

Tell me how corp dev and integration should work together for better cultural integration.

We're all the same team. Those that due diligence should be building your integration plans. We should all be one virtual team, even if we sit within different functional areas.

Tell me how, how do you make that relationship partnership successful?

I've always had integration leads, either reporting to me on a solid or a dotted line. And the people who are responsible for integration should be the program managers that are managing the due diligence activities as well. They should be the exact same individuals so that they deeply understand the diligence findings, the plan to mitigate them. And when we're building the integration plans, those mitigation strategies are actually Executed against.

Going back to taking your culture of diligence and how it impacts the integration plan. Curious about the size of the deal. Little deals, big deals, and then I'm sure you've experienced it. But you do deals that are really close to the core and you do deals that are further away from the core and just given like a couple variables there. Like, how does that get you to start rethinking cultural. Because maybe if it's like further from the core, then maybe that's like a given thing. It's not as big of a consideration.

No, you're hitting on it, which is integration plan needs to account for cultural differences. So if your integration plan is. This is an adjacency, we're going to continue to. We're going to buy this firm. We don't have anything that looks like it's today. It provides new capability or functionality to our business and we're going to operate it on a standalone basis off to the side. It's going to hang underneath one of the operating companies and keep doing what it's doing. Great. It will continue to maintain its old culture effectively. You need to make sure that there's not going to be something catastrophic that happens. But for the most part, it's going to keep operating the way it is and it's going to maintain its cultural identity as opposed to something that whether it will be deep integration. So you're doing an asset deal where you're lifting out a big chunk of the seller and you're going to integrate it into an existing entity where people are going to be working side by side, shoulder to shoulder with some new colleagues. That's a whole different challenge, a much bigger challenge, frankly, on the integration than just buying something that's going to continue to operate as it did.

Yet at preclose, we can really say size doesn't make a difference. If it's a small one versus big one, you're going to have difference there that's not as relevant, but the core one. Then you start really thinking about, hey, do we want to create that? Or acceptance of having that difference?

Yeah. And geographic proximity is always a problem as well, which is ultimately, you're going to be buying firms and there needs to be a way to inject the DNA of the acquirer into the acquired. If you're picking up, say, a new office in Seattle where you don't have an existing presence, how do you bring them into the fold? How do you take the culture of your firm to the new Seattle office that you just picked up? And there has to be a plan to do that and it has to be thoughtful and it has to be a prong of your integration plan. In other words, it can't be accidental, it needs to be intentional.

There's this view of a company's culture holistically, but then even I notice in our smaller company of 50 people that each team has its own culture. Is that like a part of it or is it. Do you focus more on the broader culture or do you start digging into.

There's always nuances from a core. There's a core ethos of the organization and then there'll be variations of that as you go into either different offices or different countries. But the core still should be the same. That's what needs to be respected. And ultimately that's what you're bringing to the new entity that's being acquired. They're going to impact you as well. And the bigger they are, the more they impact you. You're not unchanged after you do a transaction. People bring with them kind of aspects and elements of their former company.

These integration leads when they work on the deal and they execute on a lot of the changes that happen post close and they encounter culture clash and they start thinking about the corporate people that champion to get this deal done and shake their heads. What's advice there for handling that kind of stuff? You've experienced it, what do you do?

No, no, of course everybody experiences it. That is exactly why you need a strong integration model, governance model for transactions that those can be surfaced quickly. We can identify what's going sideways and what we need to do to counteract that. What you don't want is you don't want the integration lead solving it all by themselves. You want them bringing it to the steerco so that they can understand what the issue is and create a response that can be replicated across multiple areas. It's not a point solution. So that's an argument for a broader governance model across bigger integration activities.

Sounds like a whole podcast topic of its own. If you had advice to give to a corporate dev practitioner that was looking to improve their cultural diligence, what would you tell them?

There's no silver bullet. What people should take away is that it's simply trying to understand the data that you're going to gather in a standard diligence effort anyway with a different objective. And this objective isn't understanding, hey, are there any undisclosed liabilities on the balance sheet that have been accounted for either from past operating practice or otherwise? In this instance, you're looking at it from a perspective of what insight can I glean from this information about their culture and how they make decisions and how they act as a community. I'm going to use those findings to then influence how I might want to bring those two organizations together.

That's a great way to summarize it. Give me more examples of questions that would be good to ask to get a better understanding about the company's culture.

I don't want to presuppose that certain areas are more important than others. Probably delegation and ensuring that there's a common method for delegating decision making across the organization is gotta be one of the most important ones. If it's a tight centralized controller, whether they've really pushed down decision making to the lower levels, it's probably one of the biggest areas that you really care about. Yeah, I care whether they've got free toast in the employee lounge versus kind of what we do, but I care a lot more about how they make decisions. Fringe benefits and environmental issues like that are also clearly important, but probably second tier relative to decision making processes.

The focus efforts on and then expand out from there.

Sure.

Ken, what's the craziest thing you've seen in M and A.

About everything you can possibly want or fear for that matter? My biggest fear in every transaction and what's actually happened is ultimately fraud. It scares the hell out of me that the data that I'm looking at in a data room has been fabricated and that ultimately I'm not going to find out until post close. It's happened only once.

It's happened once.

Yeah. And I've done a lot of deals, so it's not very prevalent. But when it does happen, it leaves a scar for sure.

Was there recourse?

There's always recourse, but whether it's successful or not is another matter.

It's not a good thing to go through.

Yeah, there is no successful recourse. There's always damage done in those types of situations.

Other than staying up at night. What do you do to get peace of mind around that?

You do as much diligence as you possibly can and you negotiate protections in the sale and purchase agreement that are as robust as possible. And when your attorneys start talking about the fraud provisions and the definition of fraud, you pay attention. There are no legal issues. I hate it when people say, hey, this is a commercial issue. This is a legal issue. They're all commercial issues. You should care about all of those items because they don't matter until they matter. You don't want to be sitting in a bad situation where you've just not taken the effort to negotiate a proper agreement that provides you the protections you need. In the event something goes sideways, I.

Put it in my notes. Do your diligence. Hire best attorney possible.

It's exactly right. That pretty much is a good rule of life.

Ken, thank you so much for taking the time with me today. Really enjoyed this conversation. Learned a lot about cultural diligence today. You're helping me become a better M and A scientist.

Fantastic, Kisan. Thank you for having me. Always a pleasure to speak with you.

Those of you still with us, if you enjoyed this interview and want to hear more, Ken has two other podcast interviews he's done with us. The titles are First Conversation to Loi and how to Structure Teams Approaching M and A Diligence. If you're interested to continue learning more from Ken, highly recommend checking out those podcasts. Till next time, here's to the deal.

Foreign.

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 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.