Strategic Alignment Between M&A and Corporate Strategy

What's the difference between Deal Room and Firm Room? I get asked this all the time. I know if we could have made the branding any more confusing. So let me break it down for you. Deal Room is an M and A lifecycle management platform. It's perfect for any company that does two or more acquisitions a year. It manages your pipeline, diligence and integration, also divestitures. It automates pipeline reporting and follow ups so you stay focused on conversations with potential targets. And this is where it gets good. You can run full diligence for all parties involved internal, external and counterparty in one work stream. Then create a parallel work stream for all the integration planning. This allows your team to start integration planning at the start of diligence and iteratively update the integration plan with incoming information. This is how you get integration done faster. Nobody in the world does this better than Deal Room. I know that's a bold statement, but I will take bets on it now. Firm Room is a virtual data room that is as simple as it gets. Back in 2018, the team at Dealroom noticed many boutique investment banks and law firms that cared about their customers were just looking for a simple data room solution that wasn't charging ridiculous per page billing fees. So we did something about it and carved out the data room functionality in dealroom and made it into a dead simple self service data room offering. If your deal isn't that complicated, then probably simple Data Room is the way to go. You'll find the best value with Firm Room. Pricing starts at 500 bucks a month. So there you have it. Deal Room versus Firm Room settled once and for all. You can check them out for yourself@dealroom.net and firmroom.com Again, that's dealroom.net and firmroom.Com let's get to the interview.

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.

Foreign.

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 how to optimize your M and A.

Practice, or want to get involved with our community of forward thinking M and.

A practitioners, visit Masscience.com subscribe to our.

Free weekly newsletter for the latest industry trends and insightful content and community events. If you want to keep up with us on the go, head over to.

LinkedIn and follow M and A Science. I'm your host, Kisan Patel, CEO and founder of M and A Science. Joining me today is Baljeet Singh who has led corporate development strategy at companies.

Such as Nielsen and Avaya.

In addition, he's made investments in early.

Stage companies through a corporate venture fund.

Today we're going to talk about how to balance corporate strategy and M and.

A. Ajit, how are you doing today?

I'm doing very well and thanks for having me.

Thanks for coming.

We're doing this in person live in Midtown Manhattan at our podcast studio that's sponsored by Valuation Research Corporation.

This is great.

Let's kick things off with a little bit about your background.

Absolutely. I started my career at Verizon as an engineer. That's the first time when the company went through its transformation through merger with GTE and then acquisition of mci. I got the first taste of deal making and as a result after that I went to the business school. Coming out of business school, I did banking at UBS and Citi, advising industrial and telecom clients. After the 2009 I transitioned into corporate development. I went to a company called Telecommunication Systems which was a mid sized public company because it was a small company. In addition to M and A, I did treasury investor relations and some of the FP&A and controllership work. My next stop was Avaya. Had a great experience there, but the most transformational experience was that the company went through restructuring and then exited with a public offering. Similarly at Nielsen, two bigger transactions was we divested off half of business to Advent Capital which was the non media CPG business. And then about a year back the company went private. That was fortunate enough throughout this whole journey to have been at the place where these companies were either growing or going through their transformation and in the process ended up working with some really phenomenal people and leaders.

Quite the ride. Seeing it from all angles from the early days of as an engineer and how it gets impacted the more extreme of a large take private.

Yeah, it wasn't by design. I just happened to be at the right place and a lot of times.

Seems like a common thread with a lot of the corporate M and A story. Let's set the stage by identifying the difference between corporate strategy and M and A strategy.

This is one of those things where it's important to get the nomenclature right. Let's start with the corporate strategy. Corporate strategy is a top level strategy which sets the direction for the company as to where you want to be in the long term. For example, your corporate strategy could be price or cost centric. It could be product differentiation centric. I'll give you a couple of examples for price centric. Perfect example is Walmart everyday low prices. That's what they advertise. And in addition to that they have made them really a tech leader by providing this omnichannel access where a person, whether they go into the store or online or mobile, they get the same experience, same price. That's how they differentiate themselves. Example for product differentiation. No better example than Apple. Think about, go back to the days of when you had the ipod, then iPad, iPhone. Amazing about what comes out of that company is it's so easy to use. And I think that's where they differentiate themselves. And I'll go back to a company that I worked with for before awaya. Their tagline is innovation without disruption. And what that means is all their customers who traditionally were on premise, they need to be all moved to cloud. How do you do that in a seamless way that does not disrupt them? For that you have to build capabilities whether it is people, partners, products. So that's are the examples of what I call as corporate strategy. Now let's look at M and A strategy. M and A strategy simply is what are the gaps you have in your capabilities? This could be on the product side, could be on the commercial side. So what are the gaps that you're trying to address? So examples of that and that defines what your M and A strategy is. So one case could be you are trying to build your scale. This is what happened with a lot of airlines. Continental merger with United and all those airlines combined. So that's one. The second is you might be trying to expand into another geography. Uber acquired Kareem in Middle East. There are others where for example it's a roll up strategy and that generally works well in a very fragmented space. You keep buying very similar product, you just build scale, squeeze out the cost. Or you could be doing it to enhance your product roadmap so you buy in technology. Or it could be an echo hire case where you just want talent. Now those address specific gaps. The thing that is of most importance is M and A and strategy. They should always support your top level strategy. If you go into a 10k of a company like Google, they actually tell you that acquisitions, investments, JVs and divestitures, these are all elements that support our top level strategy. The way I think about it is corporate strategy is at the top. Anyone and everyone in the company should directly or indirectly support it and M and A execution and the strategy is one element that supports it.

I had a friend that once told me this, that M and A itself isn't a strategy, but it's a tool to use against a strategy.

That's exactly right. The only reason I address the way that is. That's why I said it is an element that supports your overall strategy. You cannot have the word M and A strategy separate from M and A execution. That's why I said it is nothing but finding what the gaps in your capability is. Finding the gaps is essentially telling what the rationale for the deal is. So. So essentially think about this in very simplistic layman's terms. It's the rationale for the deal more than anything. More complicated than that. It is the mechanical piece that addresses or supports the top level strategy. You are absolutely right. That is the way it needs to be looked at.

How do you make sure you get it right? Because I feel like this gets pretty ambiguous, all these things. When I talk to practitioners about success of M and A. It all goes back to how well was the strategy defined. There is that element of how well the M and A is defined against that overall corporate strategy. I'm just curious, like how do you see that in practice where there is some real clarity there that expands to the other stakeholders in the broader company as you progress on a deal versus when that doesn't happen?

First of all, if the strategy starts with the M and A team, that is not true corporate strategy. It actually has to start from a very CEO cfo business units. Actually that is the place where it starts with. You should be an active participant in that. But outside of that it cannot be something that starts, takes its roots in M and A and then you go out and try to sign up other people or bring them aboard. That's absolutely right. I'll give you my example. I used to report to our chief strategy officer. The chief strategy officer had many and corporate development function reporting into him. His scope and purview was lot bigger and he was truly responsible for the strategy which he looked at me and my team to handle that one component. But he also looked at how else like partnership. Huge component. Like the strategic partnership is a huge component of that. How do you address that? And also of all the capital that comes, what are the best places to invest? The prioritization of that. All that is tied to strategy. So that you make sure that you're putting the limited dollars at the right places to advance the cause of the company 100%. It needs to start at the very top and then you as an M and a practitioner has to make sure that what you're doing is not disjointed from that in any way. In fact, you should be an active participant in the framing of that. But that cannot be your sole responsibility.

Can you take me to an example of when you go to actually pitch an opportunity. You found this deal and you obviously gotta get consensus between executive leaders board. How do you convey that opportunity with that broad strategy? Is it just reiterating? This is what our company strategy is and this is how M and A fits into it. This deal, particular deal fits into it. What's the best way to nail that pitch down?

I think you summarize it well, always start with that. This is our corporate strategy. So corporate strategy, for example, a lot of companies these days as they're transitioning is to become more digital, more streaming, those kind of things. That is part of it. Now if you go out and acquire a company that actually helps you lead in that direction, then you tie it back to that. Listen, this is how it supports this component of the corporate strategy. Now there might be multiple ways to do that. One of the things as build by a partner. There are multiple avenues to do that to support the corporate strategy. Assuming the other two options are not viable option. In that case then you say that M and A bringing the assets or the technology in house is the best way to do it. But it all has to always tie when you say deal rational. So deal rational eventually has to tie it. Why are you spending very limited and precious dollars, corporate dollars, on something? Absolutely right. No M and A deal can ever be done in isolation without tying it to the broader company.

When I think of corporate strategy, I think there's like a few different defined elements I may look at. Where's our position in the market? Like for us, we want to be the number one technology provider in the M and A space.

Sure.

The second may be defined around the customer experience. We really want to have this unparalleled leadership in terms of the capabilities that we deliver to the customer. And then we have like some revenue. We want to be able to reach a billion ARR in 10 years. And when you look at that, there's a few different pillars of a corporate strategy. And then here I'm going back to the M and A opportunity and I'm trying to not justify but clarify to the team so that we got some good buy in and alignment on why we're doing this deal. Is there a certain area of that broader corporate strategy I want to hone My messaging into that would land stronger or bring all those elements together. What is the best way to approach it?

Yeah, so first of all you need to be more surgical. It means you need to tell which specific element of that corporate strategy this particular M and a transaction is addressing. So I'll go with the three examples you mentioned. You said one was you want to be the number one player, unparalleled customer support. And the third one that you said was reaching a billion dollar of error. So the way I see is the first two are ways of getting to the third because. Because you could get to a billion dollar of ARR by buying just revenue. Which means. So that I don't consider as the core part of the strategy that might be your overall corporate goal, which is where to reach it. But that is not strategy. So in that particular case, for example, even at the companies I work, they were very lopsided in the revenue they got from us versus international. A big part of that was how do you diversify so that the risk is low as well as the growth opportunities that are in the international market. You are able to avail that in that particular case. So that's your strategy. When you go out and look for a transaction, you look for certain assets and companies and international markets which are in the purview of what you do. You don't want to just randomly buy something that is not in your core area of expertise. But that's a very simplistic example of how you can support. That's one example that you said is to expand internationally.

That was like partly a trick question because I wanted to get to the point of where some of these companies are all revenue based, that they're anticipating acquiring revenue to meet some of their target goals.

And a lot of PE backed portfolio companies, when they're trying to build scale, they have this roll up strategy. But even there is a lot of thought process even in that roll up. They're not randomly just adding revenue. They're saying that this other company we are buying, it absolutely adds revenue, it adds arrangement, it advances what core area in which we are already working. Or if you have proactively decided I want to expand the scope of what I do, that is fine too. But otherwise if that's the case, you all want to increase the revenue. You can just go and buy a bunch of McDonald's franchises and bring it under your company. You will have a higher revenue. But you are not good at doing that stuff. I mean, there's no good answer to this. Everyone has their own perspective that's my perspective.

That wasn't bad. I was trying to pull the rug under you. It didn't work, so it was good.

Let's talk about capital allocation.

I'm always curious about this, especially in a larger enterprise that you're allocating capital towards these M and A opportunities. But then you have different business lines that's competing for capex. They have their own departments within it that are competing for capex.

How does this get sought out?

Yeah, I'll bring the concept of M and A into it. A lot of it is operational finance. But for any company to grow they need capital injection, whether it is for R and D, whether it is to for sales or anything in between. Well, let's take an example. There's one company that has four business units. @ the beginning of the year they will have their operational plan set, which means each will get their own revenue target and they will be told how much you can spend to achieve that revenue target. In a sense it is a simplistic P and L where your contribution EBITDA is how you are measured for timing. Let's ignore the corporate allocations that get slabbed on each of these business units. Leave that aside. So now let's assume this, that there is RNDX budget that a particular business leader has been given. If you ask anyone, everyone complains that they don't get enough. That is, even at the most well funded companies, there's always desire to have more. But some folks in a very perverse way might actually look at M and A as a way to buffer up their R and D capabilities by supporting an acquisition which is purely tech. Acquisition doesn't come with any revenue so that they can build their R and D muscles. It could be an Ecohire or something else. The reason I'm saying it's perverse is because that acquisition is being supported with a very narrow view, not the way precious M and A dollars should be spent. Now, because M and as are very episodic events, it's difficult to predict a year in advance that it's going to happen. That's not part of the plan. You could do so that's one way. The other thing is, especially in tech companies, software development is the biggest expense. The companies do have an ability to capitalize some of that software expense and move it onto the balance sheet. By doing that they reduce their operating expense as it relates to R and D, which means it improves their ebitda, their contribution ebitda. Did you really improve your profitability? The business unit level? Profitability? No. We just took advantage of how some of the accounting works. So that's why I always say the best antidote for all of these things is you should have a view of a cash based metric. So if you looked that business unit purely from a cash flow perspective, you will bring that capex expense under and you will be looking at the whole expense, doesn't matter how much of it is OPEX and how much of it is capex. So that's one way to make sure that there is right amount of accountability and you don't fall for these gimmicks which makes you artificially look better than you are. And similarly, if you did actually do an M and A transaction and costed the company money, you could ask some money back from the business unit because you spent some money. And even if you don't want to do that, then increase the top line targets that you got something you need to show in year two, year three, year four, the benefits of this expense M and A expense that you incurred. So it's just that the discipline and the clear message to the teams that your true profitability is how you're going to be measured not just on a one year basis, but on a multi year basis.

There's no like here's a clear cut budget that you have for M and A. They need to rationalize it as those opportunities come up.

Absolutely. Because if there are four business units, it doesn't mean that next year each one gets to do one transaction. That's a very myopic way of looking at it. First of all, you're constraining yourself and then you're forcing this business unit saying that oh, I need to do one transaction in my space because I have some budget for it. And that's not the best way to do it. It goes back to the concept of portfolio. Like in financial term, if you have four small portfolios and you're trying to optimize them, you can optimize them individually, but when you look at them collectively, that might not be an optimized portfolio because that's something portfolio A might be doing. It's the same mistake portfolio B might be doing. The best way is to look at collectively and that's how the M and A dollars should be looked at. Is it's possible that of four business units that we're talking about, one doesn't get to do a transaction for two years and that's fine. It should not be something that should be done artificially.

So that's almost like a broader view. You have this there's a business unit level view of hey, here's my case and why I want to do M and A to grow the business. But there's almost a broader capital allocation of there's a different size of these business units. What kind of impact is actually going to make? Because if we got $5 million and $100 million, you're going to see a greater impact on the bigger one potentially. Then you start prioritizing according to that, then you may down prioritize the one.

100% and it goes back to the previous thing we were talking about. You tie it back to the corporate strategy, which is at the corporate level and not BU strategy which is at the business level.

Got it. This is why we have a lot of corporate bureaucracy and politics.

It is, it's no different than any other function. You have to deal with these things. And as long as you have a clear message how the performance will be measured, I think it removes a lot of clutter.

PE firms.

It all fundamentally goes to irr. Is there a concept of that in the corporate world?

There are different metrics to measure performance. Especially when you're looking at the phase when you're evaluating a company, you projected its financial and you're like, let's do dcf, let's do multiples. IRR is a good way to do it. IR is basically from a pure finance perspective is the discount rate at which the future value becomes zero. So if an IRR clearly has to be significantly higher than the cost of capital for your company, otherwise it doesn't make sense off the bat, it will be dilutive. The good thing about IRR is that it's more, in my view, a more tighter view than dcf. DCF because it has so much of its value tied to very long term internal value. And if you do things there, who has seen how things are going to be 10 years out? So IRR is actually a pretty good metric. When we look at any of these metrics, none of these are looked at in isolation. That's why we have a football field where you have this, that and you come up with the most scientific triangulation and IRR could be a part of that.

You've got different things to look at. And I was curious, when you look at the performance of individual business unit, can you hold them accountable to IRR and have it at that?

The easiest way to hold a company or a business unit that has a P and L accountable is just hold them accountable on the things that they have direct control. So revenue absolutely all the direct costs, absolutely. You could give them a little bit of wiggle room on the allocations. But those two things that are totally in their control, they cannot blame anyone else for that. And that's why IRR is something. For example, I said that the cost of capital and there are many business case studies on this cost of capital is at the corporate level. If there are two business units, one has a very stable line of business, the other one has a very high fluctuation business. A high fluctuation business by definition should account for the higher irr. But let's say you're a public company and you go out and you want to raise funds. If you're going to use your parent company's stature and their stability to squeeze lower interest rate when you are trying to get the funds, you are basically cross subsidizing that particular business unit compared to others means it should be charged at least internally on the fluctuations that it has as opposed to another business unit that is more stable. So the point of all this is there are direct ways to measure the performance of business units without taking the next step, which is IRR and discount rates and other things into consideration. I'll tell you most of the cases where you do a transaction and when someone says the transaction fails, the first thing that fails is it couldn't meet the revenue targets. That's the first thing. You would hardly ever see that oh, the company met the target revenue targets but it came at slightly higher expenses. That is generally in M and A circles in corporate would not be considered as a failed transaction because you could squeeze things out. It's much easier to reduce the cost than to increase the revenue because for increasing the revenue you have to go to a customer who has to write the check to you to reduce the cost. It's all within your control. You could take a 10% haircut or 15% haircut or do something else totally in your control. So that's why I tie it back to what's in your control. Those are the metrics you use to measure the performance of a business unit.

What was the thing you mentioned earlier about some business units make their books a little funny or have a different picture about opex versus Capex so that they can give a different view about rationale of doing M and A.

The whole point there was if you're measuring again, I'm glad you brought that up. So I just now said that you measure the business units on the things that they control directly. On the things that they control directly. What I was Saying is if you're measuring them on purely contribution ebitda, they say that one way I can reduce the expense by still spending the same amount on R and D by moving or being more aggressive on quantifying of all my R and D expense. How much is capex? Just so you know, it's not that the companies can go without any restraints. There are accounting and controllership gates that prevents them from just going crazy. They cannot move everything. But when an auditor comes, there's always a little bit of a wiggle room. I used to work when I was doing controllership work, I used to work with auditors and I would put forth my case that why it makes sense to have certain value and they have to eventually sign off on it before it gets released. It is to make sure that it's very clear that the things that they control, even when they split between OPEX and capex, they control it and as a result they're held responsible for it.

That makes sense.

Hold them accountable where you prevent any acts that may make them look better than how they actually are. That's the whole thing. And that's why you got to go back to cash being your North Star for most of the things because it really clears all the clutter. You can see through it. And that's why even in the public sector a lot of companies who pay dividends are considered highly because no matter what you do in your SEC filings, when you pay dividend, you have to let the cash leave the company. There is no other way around it. You could do whatever you want to do accounting wise. That's a truth that you have to face. So that's why those companies get a lot of respect and that's why you saw this in the last 10 days or so, Facebook decided that they're going to start issuing dividends, which is very unheard of for tech companies. But that's another way to highlight to the broader industry that they can look at you a lot more confidently as opposed to being a tech company that.

Is not as solid delivering your shareholders irr.

Yeah, no, that's exactly right.

Just take private deal. We're not going to name any names. That's fine, but tell me about it. Tell me about the whole thing of this. Take private why they happen because we see it more and more big PEs are coming in and just take a whole public company private and. Fascinating.

I'll start in genetic terms first and then I'll come to the specifics. When you think about why do a company go private I can boil it down to two reasons. One is, which is very simple, that the public markets are not valuing you correctly. They don't see your intrinsic value. And there could be a whole lot of factors why that is the case. It could be that you have not as stable earnings every quarter. So it's difficult to predict you. And every time it's difficult to predict you, the public investors, they get nervous. The other is you might have missed one or two earning cycles, means you came under what the consensus was. And the third could be that you actually play in a sector where the whole sector is under pressure, which has a dampening effect on your stock as well. So that's one thing. But in my view, the second, which is more important is being a public company means under the quarterly spotlight of earnings and questions from analysts. Now, if you are trying to do something transformative that requires not just one quarter, multiple quarters, maybe many years, where you make the investments upfront and then you reap the benefits later. Going private is a good way to come out of that spotlight, make your investment be focused, put your head down and then provide something on the other end and then go public. So those are the two main reasons, I think, why the companies go private. Now let's come back to the sector we are talking about. Media and advertising sector has been undergoing transformation for some time. The biggest surprise is the rate at which that has been happening. You had the traditional TV before, but everyone is now moving to linear ott digital. This week, I think it was Tuesday announcement came that Disney, Fox and Warner, they decided to launch a super app that will carry their sports content that they have with the leagues. It was actually such a big announcement that the leagues almost got caught off guard. This is very monumental because today if you look at your traditional tv, one of the biggest factors, the erosion is slightly less than what it could be is because of the sports programming on your traditional tv. You take that away, that thing is going to deteriorate even faster. For example, today if you want to watch NFL football on Thursday, you can't watch it until unless you have prime subscription. Similarly, there are certain slots over the weekend where you need to have Paramount and other things. The point there is the shift is taking place. Now let's look at what does that do to the players. Who does the measurement in this space? Talk about measurement is simplistically saying who watches what and when. When it was a traditional TV program, Seinfeld used to come on Thursday, previously at 8 o'. Clock. Easier to measure when it's Digital you do not know who's going to download what on what platform. Could be a phone, video through Xbox or any other outputs measurement companies do is very valuable because that is the metric on which the ad buyers and the ad sellers they transact. That's the so when you hear about a Super bowl ad this weekend is going to go for 5, 6, 7 million, it's all based on who the viewership is on that basis it's a lot easier for the traditional. For digital it's a lot more difficult. But what makes it even more difficult is when you have to bring both those things together and add a layer at the top on which both the buyers and sellers can transact. That's a huge order. It's very complex. It takes a while to bring build that and not only build that, get it tested, get it adopted by the customers. That's an effort that is not easily appreciated in the public markets. And I think that is one of the bigger reasons for that. Take private recap.

Big driver of take privates is essentially the thesis is this asset is undervalued. Some of the factors are they may have varying earnings which created some skepticism.

Yeah. Because there is not a lot of patience. The public shareholders have we got bearing.

Earnings and then we have maybe missed some targets. Earning targets.

As long as it doesn't shake its inherent value, it should still be valued there. But stock market reacts. It has a very short term memory.

Could create some skepticism and then maybe the overall sector is down. Another factor then the why is when you're public there's pretty intense quarterly accountability.

Yeah, it is.

You got to hop on the earnings call and deal with the investor analyst. There reason why too is if you're playing on a long term strategic initiative that it may make more sense to take the company private, execute on that strategy and take it back public again. I think that's a good example. The one you mentioned too is a lot of that nature of that business didn't fall well in the public eye as opposed it could be private.

Yeah. And also anytime the sponsors take company private there are certain standard costs that you take out just to improve profitability. But just improving profitability by in itself is in my view not a sufficient condition to take it. There has to be a promise that you could do a lot more from a top line perspective grow it. And in some cases there are businesses that are too spread out. So bring back the focus. That's why anytime a company gets taken private there has to be a component that talks about the top line growth about it. That's the whole reason when you think about a company that is a private company, when it's time to go public. I don't know what the metric is these days. I remember there was a time when you have to have six consecutive quarters of growth, top line growth. No matter how high your profitability is, if your top line is flat, you are not a great candidate to go public. That's why there are companies that can go public who have no profits. In fact, they might be burning through cash. But there is a promise of the growth of the top line and that's very key.

Agree. You read Michael Dell's biography, Play Nice Footwind? No, I have not got to read it. He's got such a good firsthand play by play of the take private of Dell. So that's a good story. And by the way, if anybody listening.

To this has an in with Michael.

Dell and can get him on the podcast, reach out to me, we'll work something out. I would love to get him on and hear his side of the story, but I wanted to talk more about the mechanics of actually taking a company private like that. Just because it's such a unique thing. You go to this huge event, ring the stock bell to go public. Here you are saying goodbye, we're divorcing the public market and we're going to go private. Hey, tell me a little bit about what that deal process actually involves.

I know a little bit about that one because there was a sponsor that was involved in, that was also involved in a company that I was at. And in fact it almost could be said that Michael Dahl pushed for that because for the same reasons, which is not go in front of the analyst every quarter, build something great and then go out. Yes, you're absolutely right that when you go public there's a lot of fanfare associated with it. But then when you go private, it doesn't mean that it is the inverse of that. What it tells is actually it could be positive because think about this. At the point when the company is taken private, there is someone who is seeing more value in that company than what it is trading at currently. So there is optimism in that. The way you actually squeeze and enhance that value is by taking private. Yes, there's not physical ringing of the bell and those kind of things, but there's a lot more discipline. And now you have these sponsors who bring their own skills, network and whole lot of other benefits to the company to help them grow in their face when they are in the private Sphere, I would not look at it as an inverse of like you did something good when you went public and it got reversed when you went private. Because think about this, when you went public, there was a lot of hope for that company. Let's say it grew and eventually at some point it stagnated or started coming down, which is where the sponsors will find value in it. So you have to look at, not at the point where the company went public, it's where that company was just before it gets taken private. And compared with that, and I think if you look at from that lens, it would look as the right move in a lot of cases.

The reality is there's usually a premium paid on the trading price to take a company privately.

Yeah, but if a company is trading at a 60% discount to where it was trading last year and you give 15, 20% premium, you're still buying it at a discount to last year. Absolutely right. And that's why there is negotiation there. And a lot of times the companies say that no, we cannot support it, these kind of valuations. In some cases the deals don't go through.

It's really interesting how those things get negotiated because it's not a flat. Hey, it typically falls between this range. It's like what you described. There's a big picture thinking and a real perceived value with the shareholders.

And if there's a company that truly has lost its core growth driver, even if it is in that example, it is trading at a 60% discount to last year's stock price, if it is a falling knife, where it's going to go 80% discount, 90% discount, they will be happy even to take at that price.

That's true.

Think about this. If there is a lot of people who think that the price could go further down, someone is ready to come and offer you a little bit of premium, people will jump on it. I mean, no one puts a gun to your head to actually agree to that price. Company knows where it is heading in that context. They make that determination. Yes, There is no hard formula for that. Every company in their own specific situation in their life cycle evaluate that. Take extreme cases. Bear Stern. I used to be in banking at the time. It used to trade at around $100 or so. I was on my desk that day was, I think Sunday evening. A lot of these transactions at that period happened on Saturday, Sunday over the weekend because they wanted to get it done before the markets opened. On Monday we saw this thing flash. It said JP Morgan is buying it for $2 or something. Like that. I'm like, that must be a typo. But there was another article. It's actually spelled two T W O. I'm like, wow, think about this. A company that was just trading how much value it lost eventually got sold for I think $10. They said that $2 was too less, they increased. But in that case $10 sounded at least something better than nothing. I know that's an extreme example during the last massive crisis.

And then we had First Republic recently.

Yeah, exactly. Silicon Valley bank, all those same things. There is no cookie cutter approach to it. It is what the management and the shareholders think, where the value is, what the offer is made by the sponsors.

Yeah, it's an interesting game. You've worked on other unique deals in your experience. Can you give me some examples of some of those things?

First of all, I'll say that every deal, regardless of the size of the deal, it has its own idiosyncrasies. Every deal is unique. It could be a half a million dollars to 25 billion dollars. But I'll mention two deals. The first one is M and A deal and the second one actually is an M and A deal. But the part that is interesting about it is the financing of that deal. The first one, when I was at Avaya, the company was going through restructuring chapter 11. Very quickly you're going through chapter 11, the company files with the bankruptcy judge. You have the day one hearing. Bankruptcy judge says, these are the expenses I approve. Everything else you cannot collect against the company. In addition to that there is a tip financing. It's called debtor in possession financing. Basically it is cash. That's enough for a company to run till it figures out its restructuring plan. So that's the standard chapter 11 restructuring. I'm skipping all the other things that are not important. But in midst of that, if the company sells part or most of its assets, it's dictated by what's called a Section 363 sale. So we had networking assets which were not core to the company, fairly separable, which drew some interest from one of the buyers. So when a buyer comes in like that buyer becomes as a stalking horse and a stocking horse, essentially sets the floor for the valuation and also establishes the basic terms and conditions of your purchase agreement. So you get that, you go to the bankruptcy judge, bankruptcy judge approves it. Now one way M and a transaction in bankruptcy differs from in a traditional if the buyer agrees and the seller agrees contingent upon getting any regulatory approvals, the deal happens. In this case, you at least have One more actor, which is the bankruptcy judge. Because the whole process runs through that approval process. The bankruptcy just says, sure, this is good. Now you will open it for auction. We make sure that the company is getting the best price for the asset you're selling. Unfortunately, everything becomes public. So there's another buyer who can come and say that, oh, the previous stalking horse put in $10, I'll put $11. There are provisions that you have to have certain level of incrementality. And if, for example, the stalking horse gets outbid, they get breakup fee and other things for their trouble to get the process through. The reason this was very interesting is not only learning about this process, but also the way people react. So think about this. The overall company is in a little bit of a fluid situation in chapter 11, but an asset within that potentially has an option of separating the people who work for that asset. They're excited for this transaction because they're leaving. Call it a troubled home to a more stable home. The people who are actually going to work on the transactions, like the M and A Lee or those are the people who are in this troubled company. It's very difficult or challenging to keep them motivated to help with this transaction. First of all, for most of those folks, whether it's HR, IT Finance, M& A is not their day job. They just help the function. For M and A deal team, it's their day job, but not for them. On top of that, you add this other factor when their own jobs are not sure and it becomes a little more challenging. So that was the other thing that I learned how to manage and quarterback a very fluid situation like that. Let me go back to the part which is the buyers, if there's a sophisticated buyer, they love situations like this to buy an asset out of bankruptcy. The reason is that these assets you get free and clear of any hair that you get generally accept in other transactions. This is by virtue of how that bankruptcy sale works. The downside of it is just like any other sale in a traditional when store is closing, they say you have 50% down, but you cannot return it. It's similar to that, that there is limitations on the reps, warranties and escrow. And also, by the way, the consideration in almost all the cases is cash. Cash. You cannot use equity or anything else.

Or notes.

Yeah, there's a exception to that. If one of the creditors who is participating in the bankruptcy, they can use what's called as credit bidding because the company owes them the money. They said that, use my credits and I could be a bidder for these assets as well. But outside of that, it's usually a cash based transaction. So that's why was a very new learning experience for me, both from a technical perspective and as well as human nature perspective. So that's one transaction.

What happened at the end? You carved out the business.

Was it successful? Oh, it was a great sale. I can't give you the numbers, but it worked flawlessly. We separated those assets and I was talking with someone else, one of my previous connections, and it's been many years since that happened. That was like 2017. There are still a lot of those people who moved with the transaction. They're still at the buyer. So which is a metric that I use to say that not everyone dispersed after a period of time, they're still there. So there was a good reason for doing that. So no, that transaction was a good transaction both for the buyer and the seller. Don't have too many win win situations, even though that's what everyone strives to do. But that was a very good case of that.

I like it. I'm going to start watching bankruptcy news for deals.

This is not something you want to build your resume on. It's good to know this, but the learnings that you get from a restructuring deal from the beginning to the end, it definitely adds to your skill set. So the second deal I was talking about when I was at Telecommunication Systems, amazing company, mid market, public company, no debt on balance sheet, had some cash, wanted to make a transformational acquisition. They did, of a company called Networks in Motion Nim to finance that transaction. We used equity companies equity. We floated some more equity, went to two commercial banks and then went to street to raise more funds. And the instrument that we used to raise funds from the street was a convert. And the reason we used convert was convert has a benefit that the interest rate is low. That's the benefit of it. Then why doesn't everyone use that as opposed to straight debt? Because if your company starts doing well and stock price doing well, the holders of that convert will convert into equity and that will potentially not potentially, that'll definitely dilute your equity. So you give up a little bit or you gain a little bit here on lower interest rate, but you have a potential of giving up on the equity dilution. There's an instrument we bought on top of that just to manage that part of it, which is called a call spread. In a very simplistic language, call spread is two call options. You go long on a call option with a slower strike price and you go short on a call option with a long strike price. That's why it's called spread. The spread is between those two strike price. Without again going into details, the effect of that is that if your stock price crosses the first strike price, you effectually can eliminate the dilution that you get in that particular band. And that's important for companies like my company at that time is because there was a psychological barrier for that company to cross the $10 mark in stock price. I think it made a lot of sense there. The convert that we bought was for $90 million. It was oversubscribed. So we exercised the green shoe option, which allows another 15%. So it was 103 million or something like that. But there are two aspects of this that were interesting to me. One was the banks told that it was going to cost, let's say $10 million to buy this instrument. How do I, as a corporate person and a treasurer know that's the right price based on previous knowledge? I actually went and put those numbers, the strike price, volatility, duration, all that kind of stuff in the Black Scholes model, like a very, very simple off the back of the envelope calculation. And I was able to get something very close to what they were charging for that. But the more interesting part is the accounting treatment of it. There is a provision which says that if what you buy, it would only be deemed derivative if it mimics the underlying security in which in case was a convert very closely. Otherwise it would be deemed as speculative. And the accounting treatment for that is very different. But the point is the whole accounting of that was very interesting. And you had to measure those on a quarterly basis. Again, a new muscle that I had not ever used before. I developed as part of that. That was a good transaction. We had a lot of explaining to do because it was a public company, the sell side analyst, why we were going with this instrument, why not? And since I was also leading the corporate development part of it, it was all integral to what I was doing. Phenomenal experience. I had a great boss at the company. I thank him for giving me an opportunity to experience something like this. I would say those are like the two transactions. Not because they were the biggest transactions, I've done much bigger transactions, but they were unique. And you don't get to do those on a regular basis.

Creative, interesting, complex.

That one was very complex because it required you knowing about accounting for convert and then call spread. And then how do you value it? How do you make sure that, Peter to period, you are not missing something so there was. There was a bit of learning in that process. That's the part I liked about it. There was a lot of learning.

Can you teach me?

And I don't know, this is like a whole podcast interview of itself, but about just like negotiating and structure. I'm curious about this. As founder of a business that's dying to do deals. Not quite ready there. We got good organic growth, but I feel like it is early in that life stage of doing deals. You want to be savvy with capital, you want to reserve cash. You're more interested in structures that earn out owner financing, things like that. I want to learn from your experience, what are some of the approaches you've seen to really structure that in a way to preserve cash for a company that's more on the emerging side or really sensitive in how they invest cash.

More than seller financing? Seller financing. Worked on few deals when I was in banking, but in corporate development, I've used a lot of earnouts. I've used earnout as essentially a contingent consideration. If things you meet the metrics, then you get paid. Otherwise you don't get paid. And I've also used delayed consideration, which means you will get paid, but not at the time of the close of the deal, over a period of time. But that's not tied to any metric. So all those are the ways to preserve the cash on closing. The other thing is the way I've done is, for example, you use escrow to backstop the basic reps and warranties. I push for that escrow not to leave the company to a third party where it will sit. I just keep it with the company and pay that much less in consideration. And if there is nothing to charge against at the end of that escrow period. So let's say those basic reps and warranties, normally I shoot for two years. At the end of two years, there was no violation of any of those and I have to pay them. And I paid from the company's balance sheets. So that way I managed to keep and use that cash for two years as opposed to have it parked at a third party who would automatically release until. Unless I raise an objection to the breach of any of those absent warranties.

Are you releasing escrow or are you keeping.

No, no, no. It's not the escrow at that point. It's what it has become is hold back. I'm holding it back if it's an escrow going to a third party. So there's a third neutral party, whether it's a bank or Something else. That money has already left your company. It doesn't do me any good. I can't use that money. It's just sitting there. And the best I can do is if there's a breach of warranty, I could claim against that. But that money has already left. And even there, that's a high bar. You just can't say that you want to do. And more importantly, at that point, you're going against some of the people who are working for you. Now. You have to be mindful of those things. Unless there is something that really came off the rails, in which case, absolutely, you should assert your claim as strongly as possible. But outside of that, I think I like to hold the money, use it, it doesn't leave the company. And also I don't have to prove to a third party the escrow why they should not release. If I have a claim, I can work that directly with the seller why I'm not releasing the full or not paying the whole thing. And then coming back to the. There are some cases for escrow. So escrow, genesis of escrow was at a time when there was a stark difference in the expectations of the buyers and sellers. And it was a way to bridge that gap. As long as the size of the escrow is not significant, massively, like it's not too big compared to the underlying consideration, then I think it makes a lot of sense. But if you're paying, call it 1 million in cash consideration and your escrow is 4 million, that's a speculative deal. In which case it's almost like you're telling the other person, I don't believe in anything that you do. You have to prove your whole business case to me. Escrow makes sense. For example, we were paying all cash, but I made a condition that before we actually signed the deal, I wanted to speak with three retailers. They were able to make us speak with two of them. The third one, they could not make us, that couldn't happen in the time. And that was important because that retailer constituted a pretty decent amount of the revenue. So we refused to sign the deal, but we said, listen, we could do it. And it was actually in our interest to sign the deal quickly. But we will hold an escrow and that was a significant close to 25 to 30% of the escrow. We'll hold that as an earn out and only when that retailer signs next year's contract will that gets released to you. It just so happens in that case the retailer went with someone else and we ended up not paying.

Wow.

I like that all that came up because we insisted that we needed to speak with each of them pre signing. We spoke with two, those two retailers said great things about this business, insisted on three. They said, oh, you spoke with two, you got a good idea that we do a good job and this and that. I said, yes. I'm not doubting your capability. What I am trying to figure out is this third retailer, does he still want to go with you or is looking at someone else? Because in the business case, I'm assuming that revenue stream and if that doesn't come, I, as a corporate development person, but more importantly, the business sponsor who is backing this deal will be in a very hot seat very quickly. So given that we had negotiated that, I mean it helped us avoid that embarrassing situation.

It's played well. Especially you see the customer concentration.

Yeah, everyone takes hits after you've done a bunch of deals. And I think I've done over 70, 80 deals by now. You learn certain things. M and A by nature has become very. Actually the process itself has become very structured. It's the same thing. You follow the variability comes with what actors that come into it. When I say actors means what are the assets, who are the buyers or the sellers? All those kind of things.

How do I do like 100% financing or get the seller take the whole deal on or not?

If there is a seller who is ready to do that, obviously that's a sign that it's a very desperate seller.

Yes.

And if there's a desperate seller, and if it's 100% financing, the question is that 100% financing, contingent or not, if it is not contingent and they're financing you for a period of time, you would still actually you should think that you will be on the hook for that. It's just that you're not paying for that now. Why is the seller agreeing to it? It's possible that there is no other buyer. They are desperate, which happens and this is a better home for them and they see promise by combining the capabilities of the two companies. It could be a whole lot of reasons. That's why specifics matter. But if someone is ready to sell your company all on deferred or contingent consideration, there has to be another reasoning, a very solid and diligence reasoning why they are agreeing to that.

Do you ever convince sellers to sell? I feel like there's influence on that, making the decision to sell. Then there's an influence on how much you can get them to carry. Want to learn the real art of dealmaking? Here.

Yeah. So now we're talking about there's a seller going to call as a reluctant seller and you are trying to convince the seller to sell. In this particular case, you're not talking at all about contingent consideration. I'm going to dissociate that so that we focus on just this one aspect. If you're doing that, what if the valuation you're going to get will be high because you've already exposed your cards, which is you're desperate to do that until. Unless you can convince the other side that they can realize higher value in the combination, in which case you have to share with them the promise of the combination. I think that is the way to go about it. Because outside of that, the only way you're going to convince any seller to sell, any reluctant seller, I can ask if you tell me that, hey, Balji, this person doesn't want to sell, can make him sell. The easiest thing is throw a lot of money. Everyone is going to sell at some price point. The point is at what point it stops making sense. So the way you provide the value to the seller instead of just cash upfront is a promise for a greater future tomorrow. In which case you'll have to share a lot of your cards too. So you have to share what you're doing. You have to convince the other side that what Kistan is doing actually has merit. And I see a potential and I want to be on that bandwagon. I think that's a good way to.

Do it better together.

Yes.

So we get that ability to commence and then maybe there's that portion of protect equity. How about the other factors? And I'm wondering, just deals where you have multiple tools that you're using, where you're using equity, Earn out. Debt financing, have you run into that a lot? Where you're using a lot of combinations. Pretty straightforward. Cash and earn out.

I am of the opinion that if you don't have to complicate the things. Don't complicate the things for the sake of doing it. Yeah. If you have all these four options that you set and you decide to avail that for a certain transaction, the overhead associated with managing that post transaction is going to be a lot. Cash is the easiest part. It gets settled at the closing. But everything else has. You have to worry about how do you account for that in your book? So I'll give an example. Earnout. This is actually I learned a lot about controllership because I was playing that role as an associate controller at Telecommunication Systems. Earn out. You show it as a liability on a balance sheet. Because at some point you have to give out that cash. Now every quarter you have to market that. If your earn out is for $10 million and let's say the earn out could be paid anywhere from zero to $10. The day you sign the deal, you're going to mark it as a liability of $10 on your balance sheet. Okay. If the business that you're tracking you acquired, if it actually starts doing worse, you actually can next quarter or whenever the next marking period is quarter end is, you can write it down from $10 to $8. That $2 runs as a profit through your P and L. So it actually benefits you. But the point is you have to quarterly keep a track on those earnouts. It is extra work. You have to account for all those things. When you're trying to bring in other metrics other than just cash equity. In the whole spectrum between cash, everything else, equity generally pound for pound is the most expensive way of financing. It is like if you do the EPS calculations generally for standard companies, that's the most expensive. You should try not to use that. But if you're using it, use it wisely so that the other party actually feels that they have stake in the game. Because once you become an equity ownership, you want the company to succeed. We made a minority investment in the company, but a significant amount somewhere in the vicinity of $20 million. That company got sold to a third company. That company to its sold paid 80% in cash, 20% in equity. But because we were minority shareholders, we now hold the equity of that buyer with whom we had no direct dealings purely because of the way this transaction happened. And we had for a period of time till you could actually there's a stamp that goes on the shares that come whether you can openly trade it or not on the stock exchange. There's a six month period to take that sign off or the badge off those shares. For that six month, we had to keep the shares of the third party with whom we had no other relationship of that kind. The point is there is work associated with it before. You just want to think about this as different toys and you want to have one of this, one of this, one of this. You better have a good reasoning why you want to pick which one you want to pick.

This is good. I feel like I'm teeing us up for a whole other conversation.

Yeah, I mean each one of these things I'm mentioning to you, we could go into a lot of detail to look at the merits and the rational for doing any of those things.

What's the craziest thing you've seen in.

M and A anytime, by the way? This happens in so many deals. As you are trending towards the deal signing and closing, the pressure builds up. You have to tie up all the loose ends. That's where you realize sometimes, oh, I forgot this. I should have done this before. So there are many of those. In our case, there was a simultaneous sign and close. The deal was in Europe. Everything was tied up. The next day was day one for the company, which means the comms plan letting the sellers employees know, our employee know all that stuff was going to happen. But before that, we had to transfer the funds from US to Europe. Then it would go and get dispersed at the last minute. Of the three principals who are the beneficiaries? One of them, we didn't have a signature. It just so happens that the person was also a licensed pilot. So when we were trying to track him, he was actually flying a plane at that time. When you get desperate, all kinds of weird things start creeping up in your mind. We thought, is there a way to reach into his cockpit? Someone can send a message into his cockpit because everything is hinging on this thing getting done. Obviously some sensible person said that, no, let's not make it out to be more than it is. Eventually the person got down, we got the signature. We did actually get delayed by a day, but it was no harm, no foul. But that was one of those things. Another one was the deal got all tied up as part of the process. Just before you sign the deal, we have a practice of sending the whole deck once again back to the executive committee to get their final approval that yes, nothing has moved. What we told you before, it's still the same. And the one, the biggest part that's included is the deal rational, which in that particular case was we said that the value that we are getting from this deal is 100 million, but we are only paying 30 million. That was all part of it. When that approval email was sent, you know how if there's a name you have already sent to it, auto populates, auto completes the email. It actually by mistake autocompleted a name which was the seller's banker. So we ended up sending an internal draft to a seller's banker which basically said what a good deal we are getting on this one.

Oh my God.

The minute we realized it, two things happened. Sent the email directly to the banker not to open and the banker didn't respond. In a very short period of Time our lawyer wrote a letter which also went to that, that this is not meant for you. Do not open it. Do any of the stuff. The banker eventually got back to us and he said, yeah, I saw, I didn't know what it was. He downplayed it. He said, no, don't worry about it. I deleted it all. Good. Now, I don't know if he looked at it or not, but for his own self interest, I think he decided, if he did, decided not to share that. Because think about this. If you shared that with a seller and seller said that, oh, they think this is worth three times what we are, we should be asking something more. And if they did ask something more and came back to us, we would have walked away from the deal. And the banker probably realized that and his fee was tied to the success of the deal. I think it was in a weird way, incentive bill for the banker not to look at this thing or, or do something like that.

They did the right thing. I was surprised. I was waiting for the story to even get a twist here.

No, no. So here's the thing. You panic in those kind of moments. But experience has taught me eventually things have a way of working out. They might get delayed a little bit. I'll give you one transaction where we cancel the deal. You go through this experience. You remember the days. For some reason, Thursday was everything was good. Monday, we were going to sign the deal. It wasn't a simultaneous sign and close. It was signing and then there was a gap and then closing. Everything was good. There were two relatives. I don't think they were brothers, but they were two folks. Founder, owners, co owners. They were the primary beneficiaries of the deal consideration, everything was going on. Well, all settled. One of them, who was the CEO and this was a company that was outside of us, he sent an email saying that, hey, listen, all is good. I wanted to send you this. I wanted to convey how much value I contribute to this company, how much I can contribute to. To your company when we are together. As a result, my comp should be multiple factors of what it is. We took it to our CEO, looked at it. We realized that since we would never be able to physically bring this company into the fold of our company because it was in a third country, that person would always have influence over the rest of the company. So if he's unhappy, it's going to be a bad situation. And the fact that he decided to bring it up at that moment, we decided to walk away from the deal literally four days after that. And they didn't have any banker. They hired a banker. The banker calls me and he says, listen, this is the reason you should always hire a banker. Because he was trying to justify his thing. And also what the amazing thing, he said that, listen, let's get this deal done. You already have the document all signed up. And I told him, once you lose that trust, it's difficult to build it. It's not a matter of documentation at this point. And we never did that deal.

The bankers sell it for 10x more.

Now, to the extent I know we were the most natural buyer of that business because we were a bigger company, in fact, there are some smaller companies when they're building themselves up, they have one eye, they know who their buyer is going to be. And we were their natural buyer. And at least as long as I was tracking them, they were not sold. They might have been bought since then.

Oh, he's got to have the right banker. Maybe.

Maybe they add value in some cases. So I don't want to ever say that they don't. I do see the ones who actually do more brainstorming and strategic analysis with you, they do. Some are purely procedural, they're just not good.

There's some extremely good bankers. In fact, we got some really good ones down the street.

I know some very good bankers with whom actually I have kept in touch over many years and they definitely earned their keep. Yeah, this was a banker. When I'm talking about this banker, it was like a two person shop and he called himself a banker and he was like a financial advisor to those cousins or brothers. The more people you talk, the more stories are there. There's more scars that you get as you go through these experiences, but nonetheless, they're all very valuable.

Oh gee, this has been a great conversation. I appreciate you sharing your wisdom, helping me become a better M and a scientist.

Thank you.

Those of you still with us, thanks for tuning in. Till 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 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-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 MA 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.