Sell Side M&A Advice

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. In this episode, Bamshi Madipatla and I explored M and A in the clinical research space. Banci is a veteran across several markets with firms including Merrill Lynch, Pfizer, Deloitte and others. He shares lessons learned as a founder of a company focused on data compliance in the pharmaceutical industry. We discuss post sale challenges, the value of bankers and middlemen, and why you should always be slightly pessimistic. Here's more on Vamshi's background by profession.

I have an undergraduate degree in instrumentation electronics and then my first job I landed up with Deloitte and Touche in South Africa as a management consultant trainee working at the largest aluminum foundry in the African subcontinent. That gave me a good experience for about just over a year and then I moved to the US and pursued my master's in computer science and my first job that I landed was with Pfizer and that was because of the experience that I had with Deloitte. I was responsible for sort of integrating systems between Pfizer and the company that they bought, Warner Lambert at that point did similar kind of work in Johnson and Johnson in integrating data systems that were compliant to the fda, all the operational companies of J and J again, then moved to working in Wall street with Merrill lynch in Merrily. It was very similar kind of work, but it was more of integrating systems that were in the radar or compliance of sec. That was what I did as a carrier. And then I thought, you know, maybe I should do some business of my own and then got into starting my own company in 2005 which was focused on data compliance for the pharmaceutical industry, and then got into providing technology to support clinical trials and submissions to the fda. I like to build companies, but I do like change. So at that point I thought of selling the company and rolling it up into a publicly listed company and then sold my company in 2010 and after that moved to India just to basically experiment and try out some of the thoughts that I had in doing some infrastructure or some looking at some opportunities in India and then moved to India. India is definitely a challenging place. After a year after moving to India it was very challenging. Even had thoughts of moving back to the US but said let me give it some time and I did that. And then in India we invested heavily into agro warehousing where we buy land and we basically build large warehouses. Today we have about 18 lakh square feet of agricultural warehouses where they store primarily food grains. And we lease these warehouses out to the Food Corporation of India on a rental guarantee. And some of these warehouses have railway lines that come into it for loading and unloading. So completely new industry. But enjoyed it though it was very, very challenging to get into it. And you know, all the problems in India that you face with land acquisition and conversions and dealing with the government, still, I looked at it as a valuable experience. While I was in the US I also invested into a drug discovery company in India that did not do too well from 2007 to 2011. And in 2011 I basically jumped in to control the company, restructured it and it's one of the leading drug discovery companies in India, given three clinical candidates to the US markets and that's going well. So I do spend significant amount of time on the pharmaceutical drug discovery business recently just because of my past experience in providing services in the clinical research space. With respect to the company that I had, which I sold, I came across an opportunity. I constantly have been looking at companies to basically get back into the space and there was an opportunity to buy a company called Cleonovo and I, we basically invested in the company. I have a team that runs it. The reason I got back into it is I think there is going to be a huge change in the way that clinical consulting is going to evolve in the next couple of years and also the different models in which the service is going to be provided for clients. So I basically invested and bought the company recently. So that's where I am right now in my journey, looking forward to grow the company.

How did you come to find out about Clonovo?

So I've been looking out actively and it came across through a investment banker he was representing. He had the cell mandate, his name was Felix out of Las Vegas. And he basically found me and said this could be a perfect fit. And it looks like you have the experience. And after I looked at, I constantly look at companies, but really found this company to be clean with good fundamentals, a good client base. And the size was very relevant to what I was looking at putting down investment. So I think it was a good fit.

So you came across a deal with Klonovo through an investment bank. Is there any other particular things that caught your eye or got interest in the deal that it makes sense to you see?

This was probably the seventh opportunity that I looked at at a macro level. I mean, I basically look at opportunities that come at a macro level, quickly decide if it's something that I should pursue or not pursue. With one phone call and looking at the financials, see the other six opportunities that came, the size of the companies were much larger. The size was not the problem. It was just the history and the some of the debt that these companies carried, which I was not comfortable with and also the focus. So there were companies in the consulting space who did a little bit of, you know, life sciences, clinical research, staffing. But I was very focused on getting a good client base which was focused around clinical research. And that's what Clinovo was. The company is a clean company with very good ebitda. I think I wanted to buy a business that had good profitability and I was willing to pay for the price rather than buying a company which was larger but very low profitability. And in this business, if you have good profitable clients and you have got a good track record, that's something that you can sort of leverage and grow the business. So out of all the seven opportunities I looked, this was sort of a boutique company which was the size of, you know, five and a half million dollars and of top line with a good ebitda. And I said, look, I don't mind paying a little bit more, but this company is clean, it's got blue chip customers, it's got good margins and I think it's a good platform for me to sort of leverage by with my subject matter expertise and grow it.

Okay, so you saw some good upside potential that fit for you in this transaction. What are some of the key things that you did particularly to prepare for the due diligence process?

See, considering my past experience in the similar kind of business, the fundamentals of what I should look for were very, very clear for me. There was absolutely no ambiguity. So we basically split the whole due diligence process into three areas. One is mostly the legal structure. If we acquire the company, how do we do that acquisition? Is it going to be a company sale or an asset purchase agreement and all that kind of stuff. So that was something that had to deal with the seller and you know, lead my CPA and my legal guy in structuring it. So that was one angle to it and also to do make sure the company was clean in the past. The second angle was the business diligence, which I did all by myself and with my team. And that required a lot of getting into details of, you know, who are the customers, how do they pay? How has been the customer acquisition strategy? How is the Average customer retention, what's the profitability? How do you do the pricing for opportunities that come up, all that kind of stuff. What's the average repeat customers? What are the new customers? So that is something that is my core expertise in the past. So that business diligence was not a tough thing at all. And probably I spent about, probably a week myself with my team and then we got through the business diligence. So once we got a grip of the business diligence, we basically mapped our understanding and expectations of what we understood into financial diligence. So we basically certified CPAs, accounting firms to come in and basically do random audits on, okay, is this profitability that, does it exist? What's the invoicing cycle all the way from, you know, collection of money and to see everything, everything was in track and calculating the margins. And there were certain projects the pricing was done on fixed price, when some of us were on time and material. Does that really add up? And when you look into the book. So all those kinds of things. So it was primarily business diligence, which basically mapped out the specs of what financial diligence need to be done. And my CPAs went into the accountants went into the books and got the financial diligence done. Once that all that was over, then we basically had to look at the, the macro level of how actually to do the deal. Was it going to be a corporate sale or is it going to be asset purchase agreement? Here we did an asset purchase agreement because the seller wanted to keep the legal entity for a product business that he had.

Were there any issues or concerns that came up during diligence?

See, this was a company which was relatively clean and they had good operating standards and operating procedures. But in spite of all that, there are always going to be a couple of issues that come up. One of the issues that we had was the top line and the EBITDA were good, but what's the validity of the contracts? And we realized that 60% of the contracts were actually expiring in December. So that was a red flag. But that doesn't mean that they can't be extended. So that was a sort of, we're trying to close the deal on January 1st and December. They're expiring. So we had to take a calculated risk to see if some of these contracts would extend. And that's where I think we did the business diligence to ensure there's continuity in the business model. And it's not like for every sale you have salespeople going and Making a sale rather than if you have one sale, it basically repeats and the contracts renew. We got a little bit of comfort around that, but that was one issue. And the second issue was more of the accounting part of it. Because this, the services which they sold to us and the product business was all tied up together and we had to segregate the whole financials and you know, that took a little bit of time. So that, that was another issue. But apart from that, the overall health of the company and the way that they managed it was quite professional. And, you know, thanks to the banker, he really did a fantastic job of creating a data room which cut short our diligence time by at least 60 to 70%.

Why is that?

I think it was a banker that represented the seller and it was a sell side mandate. I think the banker actually went into doing the due diligence before actually presenting this as an opportunity to the buyers. And we got the data that we asked for. It was straightforward, it was validated, it was sort of audited and that really helped in our diligence process.

In terms of working with the banker, were there any challenges in working with advisors? Would you have any kind of limitations.

Or so I always feel that it's good to have bankers and middlemen to negotiate the structure of the deal. I think it did take some time to basically agree to the structure. So there were two challenges. One is obviously like any deal, you know, if the buyer is happy and the seller is not, it's not a fair deal. If the seller is happy and the buyer is not, it's not a fair deal. So we have to strike a balance where you really can't get an ideal deal where both the sides are happy, there's a give and take. So striking that deal and trying to structure it so that both the parties are happy and they can work together and going forward and it's a fair transaction. That's where I think the bankers and the consultant from my side played a key role. I actually did not even negotiate anything with the seller directly. It was mostly the sell side banker and my consultant, who was a financial consultant, sat together and they said, look, if you need to do a deal, this is how it's got to be. And in principle, do we agree on broad structure, whether it's EBITDA times or all that kind of stuff. So I think they added a lot of value in terms of structuring the deal. And the second challenge where I think the bankers helped, the consultants helped, was once you have the term sheet and you Sign the term sheet. That's good. But when you actually work towards closing, there are so many things that open up and if they are not handled professionally and maturely, they can just blow up the deal. I mean, it's easy to just blow up a deal. So that's where I think the consultant, my consultant and the banker really were very focused. And though there were a lot of challenges in terms of closing the deal, there's finance involved, there's equity involved and all that kind of stuff. So working with both the parties and getting them to the same table and giving them comfort, I think they added a lot of value. I don't think it would have been smooth without my consultant and the banker.

How about the seller himself? How was your interaction with him during this process prior to closing?

Absolutely no issues whatsoever. I mean, obviously there were. There were some hiccups in terms of submitted statements. They did not match with some. Some returns and all that. But there was very minor issues. And. And the basically seller cooperated for all the data requests, and if there were delays from my side, he cooperated. So I think it was a give and take from both the sides. And I think the intent was to do a deal and both the sides said, okay, this seems fair and let's do it. So he was very cooperative.

Now, after the transaction, do you have an integration plan?

Oh, the business is already integrated and we're running it smoothly right now.

Did you have to plan for that or was there a lot of integration?

Oh, absolutely. There was a lot of handover and, you know, transferring of data, knowledge processes. And, you know, we couldn't keep the finance team that they had. I mean, they just said you can use them for three months. But that was a major challenge to understand how things were done and how to translate their process into ours. And, and we wanted to set up more technology than what they were using. So bringing in new technology, training, mapping the existing processes to. To new technology, that definitely was a process and it's still an ongoing effort. But I think overall we've got our hands around it and it went smooth. But just to give you my past experience, when I sold the company in 2010, when my earlier company, the sale went smooth, but the way that they managed the company was horrible. And they basically ran down the company within 18 months. The intent was to do an acquisition, but the intent was not to keep the company growing and do the right things. So I think there was a disconnect. I faced a lot of challenges post sale and the structure itself, I left a Lot of money on the table as an earn out, which basically didn't come to me. So in this kind of a situation, I think the seller and the buyer in Clinomo transaction both were cooperative and the intents were very clear.

Were there particular things that led to that business running down?

So I think the person who bought my company was a sort of a. He was more of a financial deal maker. He used to do acquisitions and try to get arbitrages and you know, play the financial game of businesses. But he was not a guy who would focus on execution and operations. And he had a team which was not capable of running the businesses as well. So he thought that he was buying a company that would just, you know, you sit there, it'll run in its own. Unfortunately, no company runs like that. I mean, you need handholding. You need to ensure, especially when you're a new management coming in, you need to ensure that there is very careful integration. And the handover process has to happen really, really smoothly. You got to get the buy in of every employee and then bring it to steady state, which they fail in all aspects.

So it sounds like an example of poor integration planning could destroy a company.

Poor integration planning. And then I think the intent of buying the entity also the reasoning for buying it also was. Was incorrect in that particular case, in addition to the bad integration.

Gotcha. Because there wasn't a strategy. You think it was related to not having a strategy to. To really grow the business?

I think he looked at most as a financial arbitrage rather than actually having business which could, which you could invest into it.

Now, on Clonova's integration, did you have any issues with personnel? Because I know a lot of times that becomes an issue when there's a transaction happening.

I think in every acquisition there are definitely going to be issues. So in Klenov also we had issues. I mean the existing team was a little nervous on the new management and they thought they had new management. So they had all kinds of new demands which were fair. And I think there's nothing wrong about it. So it's an articulate manner of how you win their confidence. At the same time get them to believe in your strategy and work with you. That is a challenge and it has to evolve. So I think there's a lot of communication that has to happen post acquisition and that's what we focused on. Too much communication is always good. So we communicated, communicated and communicated. I think that's where the team got the confidence that they're in good hands. We also Fixed some of the issues they had and the technology gaps and some process gaps, which gave the team again, a lot of confidence. So that was the easy part. Now how do you motivate the team and drive them to achieve results? During integration time, their productivity dropped and they basically pointed it to integration issues. But after that, at some point you want them to start producing results and grow the company. So how do you do that? You got to do it very carefully, motivate them and do it rather than just saying, look guys, we need to grow. It doesn't work that way. So you got to basically inspire, get them motivated and gently put them in the right direction and support them. I think if that's not done, post acquisition, integration is a big challenge.

Agree. Now, did you have any advisors to help with integration?

No.

Okay. You guys handled it all?

Yeah, completely ourselves, I guess.

If you look at the deal overall, what would you say were some of the key things that you learned?

So we underestimated the opex to run the business. And you know, that's natural. I mean, we go with assumptions which we hope are at least 80% true. That was the case of the business. The 20% was, you know, we, we underestimated the effort and the team's bandwidth that was required to run this business. And that was an area which I think we sort of, it was a little bit of a challenge, but we got our hands around it and now we have it in. We know how to, you know, do that, but that wasn't, that was an area which we sort of underestimated. What was the question? Am I answering the question correctly?

Oh, just kind of wondering what were the biggest takeaway lessons that you walked away from from this deal?

Yeah, never underestimate anything. I think it's always to overestimate. You know, you always want to buffer. You want to be a little pessimistic and look at it. Sometimes when you're doing, you're in the mood of doing a deal, doing the deal is the most important thing. And sometimes you, you fail to look into some areas which could go wrong. But as long as 80% of the things you have a good grip on and the 20% you just have to deal with, I mean, you really can't know 100% of the business when you first do the transaction. There's just some unknowns which you'll have to deal with it.

So if you were to go back and do this deal again, what would you have done different?

I think structured the, there's a payout of the Deal which is structured, I would have structured the earn out a little differently.

On this particular deal you would have structured the earn out on different terms.

Not major differences, but many minor difference which would be basically be aligned to. So now we've structured a deal where it's, you know, there's a guaranteed earn out but we wanted to. I think we should have structured a deal with some variables in it. But that's fine. I mean it's not going to impact me or the business in any way, but that's a lesson learned.

Now, were there any post closing surprises?

No, just that integration with. So the seller is a great guy. I mean I enjoy working with him. But the seller's team, the support they were supposed to render to the company was not rendered. And there were always challenges trying to get them to support us during the transition. That definitely I think was the major issue that we faced post closing.

I see, you know, just one thing curious about, because you mentioned when you sold your previous company, if you were just to briefly touch on your walkaway lessons on the sell side, I'm curious to know what that would have been.

Never leave too much cash on the table when you're selling the company. Even though the buyer gives you very grand plans and all that kind of stuff. Always if you're leaving some money on the table, always take a affirmative rights and a seat on the board which basically helps you make decisions in terms of, you know, you still have money in the company, you want to have some control. I think that was something that I did not do. And the second was to basically question and ask how they're going to integrate, how they're going to plan or how they're going to fund the business and all that stuff. They did give me a broad picture and I basically assume that they would do it, but I actually get into detail to see if they had a team to do it or not. I think these are the three lessons.

Okay. Because you are still invested in post the transaction. So just having more insight in terms of what was actually going to happen after the transaction. Yeah, that's very good. What's next?

Next we are in the pharmaceutical drug discovery space. So we're, we have some assets, we want to out license those assets. So we're looking at doing some out licensing deals and that requires a typical kind of structuring where we sort of are selling the asset or outlacing the asset with a down payment and then royalties and earn out. So that's something that I'm looking at doing for two of our assets that we've developed in the oncology space.

Thanks for tuning in to M and A Science. I'm Kisam Patel and you just listened to Vamshi Madhyapatla. We hope this episode provided valuable insight into MA transactions from the seller's perspective. If you have interesting MA stories or suggestions to share, reach out to me. You can find my email in the show Notes. For more resources, including links or tools mentioned during the show, visit dealroom.net podcast this podcast was brought to you by Deal Room. Deal Room is a technology company that helps corporations on both the buy and sell side minimize risk and maximize value on MA transactions. We take the mess of data rooms, spreadsheets and emails and replace it with one easy to use process management tool. This results in big improvements in collaboration, security and risk tracking. Learn why Deal teams are switching a deal room@dealroom.net all views or opinions expressed by any individual in any form of communication on this podcast, written, oral or otherwise, are personal and do not represent the companies, firms, institutions, organizations or otherwise that they are associated with.