The Intricacies of M&A from Start to Finish

This is a conversation with Rajeev Dhar, VP Head of Corporate Development at NetApp. He has 20 years of experience in corporate development and in this interview he gives us advice on running your first deal. We cover the importance of strategy alignment, how to screen targets, what initial diligence should look like, the key to peaceful negotiations, and how to successfully use earnouts. Before we get into the interview, a quick word from our sponsor. Best way to support us is simply by Checking them out. This episode is sponsored by Firm Room, the world's most intuitive virtual data room. Twenty years ago, data room providers would come to your office with big bulky scanners to put physical documents on servers. Back then it made sense to charge per page. Today, with everything in the cloud, it makes no freaking sense to pay per page for a data room if you're getting duped into paying per page from companies like Intracyte and Data Links, whatever they're called, or the shady investment bankers that recommend per page data Room so they can get some kind of kickback. Fear no more. Check out Firm Room. It's the easiest to use virtual data room that takes less than two minutes to set up. At Firm Room, we believe in straightforward, honest pricing. No hidden fees, no surprises. That means about 70 to 80% lower cost than per page virtual data rooms. Talk about cost synergies. It even gets better. There's a free trial, no credit card required that allows you to put Firm Room head to head with any VDR out there in the market so you can see for yourself who is the best. Also, no waiting around for a sales rep to get back to you. Get started now with a free trial@firmroom.com Again, that's firmroom.com let's get to the conversation with Rajeev.

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. Hello M and A Scientists. Welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about our products and services to support world class M and A teams or want to get involved with our community of forward thinking M and A practitioners, visit ma. Com. You can get started by subscribing to our free weekly newsletter for the latest insights and events. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M and A science. Joining me today is Rajiv Dar, Vice president head of Corporate development at at NetApp. NetApp is a cloud led data centric software company headquartered in San Jose, California, traded on NASDAQ under ntap. Today Rajiv is going to give me advice as a first time CEO of a tech company executing his first deal. I'm running a growing company. We have 50 employees, we have four different business lines. I know we're still small and early but now the market's starting to show up opportunities with the state it's currently at. And I want to take your time and just pick your brain just as an entrepreneur and try to learn about M and A from somebody that's working on their first deal. Rajiv, how are you doing today?

Great Kisan, and good to be here with you today.

Thanks. I'm excited I finally chased you down and got you to get the time to have this conversation and I want to make the most of it. We kick things off with a little.

Bit about your background to get started. Just a little bit about myself. I started my career in engineering research and development. While I found solving complex engineering problems engaging, which I still do, I developed a keen interest in finance and strategy and to bridge these interests I pursued an MBA actually from your hometown. This has basically led to leadership roles in corporate development where I've driven various aspects of a company strategy including complex M and A. I would say debt and equity financing, strategic partnerships, product marketing, operational management and the whole yard of other things. I would say in my 20 plus years in corporate development I've seen overseen over 30m and a transactions ranging from a few million dollars to several billion dollars and spanning across the globe. I can also say that no single acquisition is similar. And so while you take learnings from one to the other, there are always differences in the acquisitions we do. I would also say that Pop Dev is a team effort and I've had the privilege of leading great teams and working with exceptional leadership teams and board members.

Worked in a lot of different companies as well.

Yes.

And it seems like most are generally tech related but sweet. Sort of spanning a whole spectrum of tech companies.

It seems like I've had a pretty wide experience from semiconductors to infrastructure companies to I would say enterprise software. But I've always stayed in tech. That's something that I'm passionate about. And I, as I said, I've started my career in engineering and that engineering thing doesn't leave me. And so when I see good products and good companies that are focused on solving a customer Pain point. I really get excited about it.

Is there a certain type of M and A that you really enjoy working on? I feel like there's all these strategies. You can go from an acqua hire to just buying the tech to a full on company of maybe mergers equals even. What's your favorite type of deals to work on.

It really depends on what you are looking from an acquisition in the sense that the acqui hires or smaller technology tokens can be extremely beneficial to the company. And if they are solving a certain pain point that a company has, or if it accelerates a roadmap for a company, they can be very exciting. And I've done several of those in my career where when we acquired a particular company it was very small, but as we integrated the technology and the talent, it grew into several hundreds of millions of dollars of revenue. There is nothing more exciting than seeing something like that actually come to fruition. The bigger transactions are usually very complex and very challenging. Not that the smaller ones don't have their complexity, but the bigger ones come with yet another aspect of complexity. And in all these acquisitions, what is very critical is having a very clear game plan in terms of what exactly is your strategy, how are you going to execute it and where you see that particular acquisition taking you. It is also very important for companies to understand who their competitors are and whether a technology or a company that you're trying to acquire will bring in a different or a new set of competitors that you have not thought about previously. The key things that excite me in a transaction other than technology and the ability to be successful in that particular acquisition. The people aspect of M and A is something that is very, very important for me. It has helped me in building great relationships with the founders who have acquired over the years. And they've become some of my best friends. And so I can easily say that most of the companies that I have acquired, even though I may have acquired them 15, 20 years ago, people from those companies still are my good friends.

That's a good point. So deals that generate value with good people amongst them.

Correct. Deals that generate value and deals where you have a very clear vision of what you're going to do. One of the things that we try to be very careful about is if we are doing a deal, we want to be absolutely clear as to what is it that excites us about the deal, what are the risks associated with it. How do you navigate that? Because. Because it can be pretty challenging. In some cases you may actually have to shut down an acquired entity how do you have that conversation? How do you go about making sure that you're doing the things that are right by your customers, your shareholders and your employees?

I was hoping we could talk through doing an M and A deal. I'm going to be the CEO of a company doing the first acquisition ever. I'm going to have a bunch of questions and maybe we can walk along the life cycle of a deal. I just want to openly learn from your experience. I'm not trying to hint to anybody listening that we're looking at M and A opportunities. But as a company our size, that's a good opportunity to really learn. Starting with just the strategy and even looking at our company. We have multiple business lines, and I think there's ideas that shape of, hey, can we accelerate an existing business line by acquiring some ip? Or if we could buy revenues from a competitive product that maybe isn't doing so hot in the market. We keep taking their customers anyways, so why not just make a deal to buy them out and migrate customers over and sunset the product? And then you got like adjacencies that, hey, here's something that could potentially serve the same customers in a different way, bring a whole different product line to the portfolio. Where do I start in really formalizing this into that clear strategy? Because I think you had a good point about there's gotta be a good vision. But I think there should be a vision before we find this actual deal of what we're looking for and why that is correct.

It is fundamentally important to define what your strategy is. In fact, the cornerstone of all successful acquisitions is having a clear strategy. You also have to make sure that as you are building your own organic plans, that you have a way to blend it with M and A in the sense that you can't forget about what you're doing internally and only focus on M and A. The two go together. It's also important to know, are you going to get to your end goal with a single transaction or do you need to do multiple transactions? In most of the cases, a single transaction may not be enough. You have to have that vision and you have to have that clarity upfront. What is your end state, what are you looking for, and what is the path to get to that end state? It is fundamentally important to have that clarity. Your board is actually going to push you to figure that out because they want to also know, is this a one and done kind of a deal? Or are you going to do multiple acquisitions in the same space or adjacent spaces that actually build on the platform that you created. It is also very important to understand who your competitors are in the sense that you may be competing with a set of companies today, but if you acquire someone else and that someone else adds more revenue or people or whatever, who are the additional competitors that you are going to be competing against? And therefore that you have to be very careful about for that example.

So say I have my market map of here's the landscape in our space and the different verticals and we did an acquisition in a different vertical. Do I simply look at it and say those are the new competitors. Is those companies logos we have in our market map?

It is companies that you may not have had previously as competitors suddenly become your competitors. And it's very important to have that clear idea as to who you're going to be up against. It's also very important to know how are you going to integrate that company that you just acquired into your organization. I think a lot of M and A fails at that point. If you don't have a clear path in terms of integration. Things like who's going to lead the acquired entity, Are you going to retain the CEO, are you going to retain the founders, which employees are you going to retain? Are you going to leave the entity alone for a certain period of time, that is incubate till you can scale it, or do you merge that entity right from day one? And there are, I can tell you, pros and cons of each of the approaches. As I said earlier, there is no one size fits all approach. And if you go with a one size fits all approach, you're going to fail.

Backing up a bit for the competitor part and introducing you did an acquisition, introduced to new competitors, how do you respond to that? What are you supposed to do to act on with that new information?

Fundamentally you've got to understand, as I said, what are the objectives of that particular transaction. Are you sort of acquiring the company for tech and talent? Are you acquiring it for revenue? Are you quoting for scale? Because if you are acquiring it to generate more revenue, understanding what the competitive landscape becomes pretty important because you go to market, team will want to understand that. How are you going to take it to the market? It becomes extremely important from that perspective. And if you don't really have a clear idea as to how you're going to take it to the market, then you will have challenges and you will not get the benefits of a transaction. I'll give you a very clear example or a simple example. If you are primarily in the market selling your products to A channel and have a certain set of competitors. And then you acquire a company that is selling directly to a different set of customers. It is pretty critical to understand that the two go to market motions are different. The two go to market motions could actually have a different. Could have a different process, could have a different set of competitors. So understanding how you get to the market and who you are competing in the market, it becomes extremely important.

Okay, so I can see how that would impact the deal. Like we have our few business lines, we have an online academy program and a lot of the deals we look at are licensing content or acquiring ip. And so much of that's how does it actually fit in. The selling motion is what really is a big driver of that strategy. And we should have it figured out. Basically how's it going to create value and add to that go to market and what's that going to look like? Right now our other business line, a product called Deal Room, that has about five or so competitors, the company's growing where it's growing at a really good pace. A lot of the other competitors I don't think are growing as much. And I can have a hypothesis that if we bought one to two competitors, we would have lead market share. Is that a proper strategy to think about and saying, hey, we want to own the market share. And I think that's going to allow us to just have a dominant position so we can expand better with that lead position. Is that fair to do? And look and say this is what we want to do is acquire one to two competitors in the space, acquire.

Their customers, you are essentially consolidating the market and that can be a great strategy. In that case, you're still going to be facing the same competition or competitors, obviously less if you are acquiring one of your competitors. But if you have a separate line of product that is not related to your primary set of products, your competition is there, is not going to change. So having a very clear idea of what your competitive landscape is going to look like post acquisition becomes very important.

And that would be in this case, if it's in the same vertical, we'd see less competition.

Correct.

That's a factor to consider.

That is a factor to consider. There are some benefits, there are some not so great benefits. Because if you are acquiring or typically what happens is if you're acquiring a competitor and that competitor is also selling to some of your customers, a customer basically could say that, hey, I want to have a dual source strategy. So irrespective of the fact that they're basically getting two products from the same company. They want to give some portion of the business to a third player and therefore you're introducing yet another competitor in your go to market.

Okay, so that's an interesting one. If it was an adjacent product that we bought because that's part of our play, right. We're playing into a platform where we want to build ecosystem, then at some point it may make sense to to buy some of these products to feed into the platform or add the expanded capability. And then your point there's still you need to look at that whole customer base and how they perceive it because they may look at it completely different and not the whole beauty of the synergies of one whole all in one solution, but rather be diversified for other reasons.

Correct. Keep you honest. A lot of customers do that. They're like, hey, I don't want to be completely dependent on one particular company. I want to have a second source. I want to have a dual source. Especially in technology where it is important for them to have a dual source strategy.

I want to come back to executing on some of these strategies. But the origination part, I'm curious if there's something interesting that you've been involved with particularly to help assist with the origination or is it simply executives knock on each other's doors for an introduction and get the conversation started that way. What's your best advice? Cause once I built this market map and I said, okay, we're going to execute on one of the five companies that I think if we picked one or two of them we can get market position. What's a good approach to start getting the conversations going?

There are various ways in which we have a conversation. The first is obviously having a very clear view in terms of what markets you want to go after. Who are the players in that particular market, having a very good picture of the competitive landscape or basically the companies that you're trying to go after and then you go and basically say, okay, how much information is publicly available for each? Where do you want to know more about a particular company and will that particular company be willing to engage in a discussion? In my experience, it's always good to be pretty clear and direct with the companies where you're trying to do some either M and A with or a partnership with as to what your objective is. Smart CEOs figure out, hey, the head of Corp Dev is not reaching just out to have a cup of coffee. He's got some agenda in his mind as to. That's the reason why that person is approaching me. So having a very clear idea as to what you are trying to get out of a conversation with someone becomes very important. And then our job from a corporate perspective is to make sure that we understand the overall sort of ecosystem, we understand the where each of the companies fits and how much information we can collect through that process. I've never found a CEO who's not willing to talk to me touchwood, so at least till now. And I also find that partners are sometimes very willing to give you the introductions or make the introductions for you if you think that there is a company that you want to go after or have a conversation with. A lot of the partners actually sometimes help make that introductions. Customers make that introduction. You obviously have advisors, whether it is bankers or other advisors that you can engage who are always willing to make those introduction. Then we use, you know, a wide variety of sources. I'm not bashful. If I want to get to somebody, I will figure out a way to get to that person.

So the warm intros are always good. Otherwise you'll start reaching out directly.

Yeah, a warm introduction is always very helpful. And even if I reach out directly, typically I'm pretty careful in explaining why I'm reaching out to that particular person. It can be just a cold question saying, hey, I want to buy your company. And so that never works. But fortunately, as I said, if I need to reach out to somebody, they're usually pretty good at either returning my call or returning my email just to see if they want to have a conversation.

I got my five competitors and I would essentially send them a note that says, hey, wanted to connect with you, compare some notes, learn about what your goals or plans are with your company in the near term, long term. Something along those lines.

Yes. Though if you are approaching a direct competitor, you just have to be very careful.

I know I'm using the extreme case because I want to learn more.

If you feel that you're approaching a competitor and the competitor will only talk to the CEO of your company, you then have to make sure that you arm the CEO with all the talking points and as to why that CEO is trying to reach out and engage in a conversation. So it can't be a casual conversation. We do a lot of prep when it comes to those kinds of discussions. It's not a casual, hey, hello. I'm trying to meet you for a cup of coffee.

Yeah, it's. Hey. I noticed our sales team's been taking a lot of your customers and thought it'd be good just to have A cordial conversation.

And if we know, especially if you're a publicly traded company and you're approaching a competitor, you have to be very careful. There are all kinds of laws and regulations and rules in terms of what you can talk about, what you cannot talk about, how you approach it. And it's a very methodical process. Lawyers involved Sometimes, yes. Not always something, how do you do?

It can't be that forward, right? We're not, hey, I'm opening conversations. We want to buy your company, but is it. We have some ideas around, some strategies that we wanted to share with you and learn about.

It cannot be. When you're talking to another publicly traded company, it cannot be a casual conversation. You have to, for example, know, hey, if we are going to have a relationship together, what is the strategic rationale under which a possible transaction can be had? Where do you see the synergies, et cetera? Because some CEOs very sensitive where they may say that, look, I don't want my team to get impacted and therefore I don't believe in having that conversation. And that's the end of it.

You have to be forward, but not too forward.

You have to be forward, but not too forward. Exactly. You pick the right words. Thank you.

That's an interesting balance. Okay, I'm going to work on that. I'm going to have to.

It's a very interesting dance, I would say, a lot of the times, actually, what happens, especially in publicly traded transactions, bankers are involved. And even at the preliminary stage where they mediate between the two companies and figure out, hey, is there a deal possible? And how do you transact as a publicly traded company?

What about, like, private to private Is my best bet still to go get the introduction and get the conversation going? I'm going to try and think, there's some competitors I have that like me, they'll easily pick up the phone and talk to me. And some of them hate my guts, but I still want to talk to the ones that hate my guts. But what's the soft way to open up that conversation? Do I get somebody in their board or somebody maybe to be more of a soft way to open the conversation?

There are various ways in which you can have that conversation. You either figure out, do you have common connections with that particular company CEO, or you figure out, is there a board member on their side who is willing to have a conversation and make the right introduction, or if the deal is big enough, where you can get either a boutique bank to get involved and make that introduction? Sometimes what happens is that you may actually meet at various conferences. We find, for example, banking conferences very beneficial for that reason because it's a neutral venue or a trade show as a neutral venue where you may run into a CEO and say, hey, can we have a conversation? And so there are various ways in which you can have that conversation. But before you have that conversation, be clear as to why you want to have that conversation, because the other side is always going to look for that clarity. And as I said, in a publicly traded company, your board, before you approach a publicly traded company CEO will want to know as to what that conversation is going to look like.

Got it. Let's say I get the conversation going and I'm talking to the company in terms of just gauging even the first call or maybe in first few calls of the relationship I'm looking to develop because obviously I got to build trust and doing the right diligence because there's stuff we already talked about. We can do a lot of things online, we can really do a good amount online. But then the key things I really want to dig into from these conversations, like what are those real key things that I should be trying to get out of those first few conversations?

There are various things that you have to watch out for. What we look for is consistency in the narrative. For example, if you're engaging with a company and you've had a conversation about a particular topic, does that narrative change from one conversation to the other conversation or is there a gap in that particular conversation? What does that individual think about the leadership team? What's the leadership team look like? Can they work together and have they been together for a while? We also try to understand what is the unique value that particular company brings to the table. Is a one plus one story better than the two individual companies? Or what's the better together story? We also tried to figure out what the culture is. There is enough information available from either publicly available sources or you may want to do some reference calls, etc. To understand, hey, what's going on in the company, what's the culture, etc. And will that company actually fit within your overall company environment? It becomes very important, I think, to understand what the chemistry between the executives is going to be like. If you're going to go after a.

Particular company leadership team, understanding what's unique about their abilities to bring value to the table, the culture.

We put a pretty strong emphasis on understanding how the company is run. What's the culture? What's what are the people like? Can they work with, with Our people.

That's interesting.

It's not a one meeting that will give you everything. It's a series of meetings. It's a series of discussions with various individuals. Especially if it is, if it is a private company and it's a smaller company, then, and obviously where you are. And so you just have to, you just have to basically understand, can they, for example, function in a larger company setup? Because our processes are very different compared to a small startup.

Let's use that example. What questions would you use to help get that information?

I have a diligence list that runs into 25 pages. For example, we are both a hardware and a software company. So there are certain things that are very important to us from a regulation perspective and how we approach the market, et cetera. And so our processes could, to the other side seem very complex and complicated. Having a very clear idea in terms of, hey, how are their processes going to change? And having that conversation and getting a reaction from them about those kinds of things gives you a fair bit of idea as to whether they are flexible in terms of their approach. Your, for example, HR structure, benefit structure could be very different from what they have. Sometimes what we find is, and this happens a lot with smaller companies, they may have policies that are extremely flexible. They may be able to bring their pets to the office, or they may be able to have plants in their office. They may be able to have things that they do socially every Thursday or every Friday. How do your policies and benefits compare to that? And can you allow certain things that are very unique to them? So having those conversations at some point during the conversations that we have with executives gives us a very clear idea as to what the culture is like. And then I can tell you that we spend a lot of time with the founders and with the CEOs of the acquired or companies that are of interest to us. It's not. We will have a conversation with the CEO and get excited about it and say, oh, that's the company that we want to acquire. That very rarely happens. It's usually months and months of dialogue where we have a very good idea as to the people and what they bring to the table and having a very clear idea about their culture. Also during COVID I actually ended up meeting the CEOs of the companies that I acquired personally.

You need to.

Yeah, I had to. I had to look them in the eye and say, hey, are you doing this just to cash out or are you going to stay? And what's your plan? I have no problem in having that conversation. Because I want to know, for example, if the leader of that entity is going to leave, who is the next set of executives that are going to be running that particular entity?

You need trust.

Absolutely, absolutely. Trust but verify.

Okay, the example you had where you know that there's going to be changes to this organization that may have the impact. I like how you were pretty transparent and it's like your hypothesis and you bring it forward and see how they respond, that, hey, you're going to have to deal with a lot more complex process than you currently have in this area and to see how they respond to it.

I am absolutely crystal clear every single time, every single deal that I've done and where I have told the acquired company that, hey, these are the changes that you're going to expect and tell us now so that we have a game plan to address that. We are very clear in terms of, for example, what the benefits are going to look like, what benefits they could lose, and what the appropriate benefit would be on our side, for example. And it's very important to have that conversation. Remember, the employees that you are acquiring, they sometimes don't want to get acquired. They were in a startup for a particular reason or they were in a smaller company for a particular reason. So you have to essentially be able to appeal to all those. And so you're the CEO and the leadership team that you're trying to acquire, become your eyes and ears into that organization so that you have a very clear idea how certain individuals are going to react and have a game plan to address it. What you cannot afford to have is noise in the system. So we have a very clear game plan in terms of how we are going to go after things like that. And so far we've been reasonably successful.

I would say I'll use the deal room company's example if I did a capability play like we found some AI technology, want to add the capability. Hey, we're going to end up doing that and really focus on integrating the product and not worry about selling it as a standalone. Right. That's a pretty big change that we'd want to communicate upfront. I'll give you a little more extreme example. I don't know why I'm after my competitors today, but if we buy a competitor for the revenue and we're going to sunset the product, like we know we're not going to support this old thing that hasn't been updated in decades, we're going to end up sunsetting it. Same thing. We bring that up and I guess, like, how early, would you bring that in the conversation?

So it really depends on where you are from a negotiation perspective. What I always say to people that are in situations like that, as I said, acquiring a competitor is always challenging because the other side will not want to expose a lot of things till they have clarity on the deal. Deal certainty is very important in those situations in the sense that they don't want to expose a whole bunch of things to you till they know that this deal is going to go through. In my experience, I always tell, especially the first timers, is if you are a seller, be careful on who you want to include on the deal team. Because if the deal does not go through, you will have a lot of people on your side where they will have morale issues, they will start to question your strategy. And so that is very important. And I think as a buyer, if you're trying to buy into revenue and say, okay, I'm going to sunset the product, you then have to be very clear what the deal terms are and what the parameters are, because you can't go down this path and saying, okay, I have all these assumptions, but I have no way of validating those assumptions. Because if you wait to validate those assumptions till you close, it's too late. At some point in the negotiation process, you have to bring it up and say, hey, this is our plan. Are we looking at it the same way or not?

Yeah, because ultimately they're going to. They shouldn't be surprised by it.

They shouldn't be surprised. And this Kisan also becomes very important if you have an earn out, for example, associated with, with a transaction. I typically don't like earnouts unless they are structured in a manner that, that we know we're not going to get into litigation. And there are various ways in which you can do that, but you have to have that conversation. You have to know, is the other side going to be willing to work with you to make that transition happen. Because let's say you do the deal and today you announce the acquisition and you say, hey, this is the plan. It's too late in, I would say in the last few acquisitions, we always been, I've always been very clear with the acquired entity as to what the plans will be. We share the vision with the acquired entities leadership team before we share that vision with the rest of the employees because we want them to be the champions of the deal. We want them to say, here is why we did this and here is why it is beneficial to your customers, to employees and shareholders.

Okay, first conversation. I'M digging into learning about their leadership team, getting a sense of the culture and then what's unique about that company. The culture thing I get where you talk to somebody a handful of times, you start getting a sense of their culture, you get a sense of their personality type and things like that. Is there specific things that you ask for to get a broader view of the company culture?

Not specific things, but as I said, we validate the narrative every time we have the conversation. And that validation can be over a series of conversations. They don't necessarily have to be just specific to, hey, tell me how you're doing on the revenue, tell me how you're doing with the customers, et cetera. But very casual conversations. And you will be amazed in terms of how much you can find out about that individual, about that individual's beliefs, about that individual's style of leadership by having those conversations.

And then that should allow me to be comfortable that, hey, this is a good team that's going to blend well together or align with what our objectives are here.

Right. For example, if they have told you during your initial discussion that, hey, this is the set of customers we are bringing to the table. Here is the revenue. And we don't really have any complex agreement with any of our customers. And you get into diligence, even preliminary diligence, and you find out that some of their agreements are just completely bogus agreements and that tells you that they're lying.

The early red flags. I was going to ask you about red flags.

The red flags, just all kinds of sirens go up at that point. If that sort of trend happens repeatedly in the conversations, you know what you have to do?

Walk away.

Yeah. Even though I've been in situations where people have said, hey, we still have to do it, it's a very tough call from my perspective. In those situations, we get our NDA.

Signed, we're going to ask for more information, start building a model and put an all together. The fun part, doing deals, what are like in that stage, these kind of red flags to look for? Because obviously we're probably going to learn more about their way of working culture, how responsive they are, how organized their information is. Are there other things I should be really looking at to identify there's reasons why I shouldn't go forward or just key information I should have.

Actually, you have to have a very clear idea as to what your objectives are from the transaction. You have to have a very clear idea in terms of what are the assumptions you're making as far as your business plan is concerned. And then you have to figure out a way, how are you going to validate those assumptions? For example, if your assumption is that the leadership team is going to stay intact and it takes a certain amount of equity to hold these leaders together, and then you find out that out of the four people that you thought you were going to get to are going to walk away as soon as the deal is done, you have a problem. How are you going to bridge that gap? Or how are you going to fill that particular scenario? The other issue is you get into a diligence and you say that I'm expecting, let's say, 20 customers to come along with this transaction. And when you look at the agreements and out of the 20 agreement then are where the customer has a right to cancel the contract on Change of Control, then you're going to figure out, okay, how do I make sure that the customers are going to come intact as part of this deal? Because as I said, the customers, especially when they're dealing with smaller companies, have very tight agreements that are actually very customer friendly. So you just have to be very clear as to what your game plan is going to be under that situation. Your business plan is just not going to be even worth the paper it's written on if that happens. So you have to have that conversation with it. So what we tried. So here is what we what has worked. A lot of the times you can't actually get into the actual contract for a wide variety of reasons, whether it is because of regulatory reasons or whether the customer, the entity that you're trying to acquire, does not want to share all the details. But you ask for, hey, you've got, let's say out of the hundred customers you have, you've got revenue dependence on five critical customers. They are 60% of your revenue. You have to have some idea as to what their terms look like. What happens at Change of control? What's the history with those customers? How dependent are those customers from an operational perspective on this particular product? And that will give you an idea in terms of the stickiness of the revenue, because the last thing you want is one of those big customers or the whales in that whole plan to churn in the larger transactions. We always have a thorough quality of earnings analysis so that we have a very clear idea. What's the revenue? What are the expenses? Are there any trends that we need to worry about? Or are there any, any terms, for example, that can basically trip the business plan and then make sure that as we go through the, the formal dd, we are Validating all that because once you are in either exclusivity or a formal dd, you essentially get access to a whole bunch of things that you didn't have access to during preliminary dd.

So you're hitting on some really key things like the change of control type of stuff in agreement. That's pretty immaterial. And you're asking all this stuff before LOI and trying to get into it.

Or you ask the customer, you ask the target, tell us about all your unusual terms, non standard terms.

That's a good way to ask.

Yeah, a lot of the times the target is oh, I don't have any non standard terms. And then you go and figure out in the, in the agreements that they've got non standard terms all over the place.

So going back to the kill the competitor strategy, I don't know why it's top of mind, but I think it's just the complexity of it. Because here you're counting on moving customers to a new product. Right. Because that's your hypothesis. What can I do to validate that if I can pre loi?

Usually if you're going after a competitor, as I said, it is difficult to validate that because the rules of engagement if you're going after a competitor, especially in a publicly traded setting, are very different compared to what you would do if you are less than 5 million, 10 million revenue.

Yeah, I don't think I want to do public company deals. I want to stick to private because I'm going to pick up the phone and start calling customers and saying hey.

Man, sometimes even the publicly traded companies, especially if you have a revenue of a, a certain size of magnitude, the regulators can come after you.

Yeah, use the phrase kill the competitor, which is pretty anti competitive but probably could cut down really quick. Yeah, we did as a private company a little bit more room. But you still got to be careful.

You still have to be very careful as far as the rules of engagement are concerned. They can be a little bit loose. But generally you have to be very careful in terms of how you approach companies.

How do you negotiate, put these terms together in deals? I can go either the competitor or capability play, but it's always, it seems like everybody uses earnouts. Even for us, we're a cash flow positive company and we talked about this in prior conversation. The debt market's pretty high right now. That doesn't look super attractive. And you're more inclined to try to work out whatever terms you could with the principal you're acquiring. I almost think you want to understand what they want first, which is always cash off the table and run away. But how do you approach it?

You have to have a very clear idea as to what terms you want.

Well, put a little cash as possible on the table and get everything paid out over the next three, four years.

Again, you're talking primarily from a private company setting perspective. But in public markets that doesn't work in the sense that you can't basically tell the shareholders, I'm going to give you the money six months later or a year later. So if you're going after a private company, you have a lot more flexibility in terms of setting the terms. The private company will want deal certainty. So whatever you can give them in terms of assurances that you are going to complete, for example, the DD in 45 days or 60 days, whatever you're comfortable with, they will be looking for that you will want exclusivity, they will want that you negotiate in under non exclusive conditions. So you just have to be very clear. You're spending the money and the effort and the time so you would want the exclusivity. And you have to explain to the other side as to why you're pushing for exclusivity. For example, sometimes you have got to include terms which would say, you know what the treatment of benefits is going to be. A lot of the CEOs insist that the benefits that they're getting shouldn't be. And it's not just about the CEO, it's about the employees as well, that they're not any in any way inferior compared to what you're willing to offer. So you have to understand as you go through the diligence process, how are you going to map their benefits into your benefits so that that is not an additional cost to you? As I said, All CEOs will insist on at one point, do you make sure that you have a deal on the table or you don't? They will look for certainty and whatever terms they can push for to get you to agree at LOI States, they will push for that.

How do you get a read on how much to actually pay? I mean, are you building the model and bidding solely off of that? And I'm trying to get away from the competitive situation. Even at the stage we're at, we're avoiding all that stuff. We're going after proprietary companies. But there's always this, hey, do I spend the effort to really pull and try to get a sense of what price they have in mind or figure out where that realm is, or solely I build something I'M confident. Put on the table and put my offer on. That's what it is.

Whatever offer you put on the table, you have to be very clear as to how you got to that number. Because remember, the other side can do an equal amount of research on why they want more. You have to be able to defend your offer and you have to understand what your walkaway positions are going to be if you are trying to negotiate, whether the terms or whether the purchase price itself.

I think, you know, I'm raised Indian, so we've brought up on good immigrant culture to be very cheap on everything. And usually you find something for a dollar and you offer 50 cents and then you go from there.

There is some of that, yes.

So that's where I want to M and A. Where does that shift?

You have to also be fair to the other side. The way we approach it is that we are not acquiring that particular company just to squeeze the founders and the employees and basically suck every single piece of blood out of that particular entity we are acquiring to grow. We want them to be equal partners in our overall plan, in our strategy. And if that is the case, you approach it from a partnership perspective and you figure out what is a minimum that they would be willing to live with and then offer them an upside, whether it's in earnouts or whether it's in performance related compensation that they will be comfortable with. Usually you come to an agreement where both sides come out as winners.

I actually like that.

It can be where you're basically trying to get the company on the cheap and then a year later or six months later that most of the employees, that company leave.

I feel like I'm a little wired that way. Just my uncle take me to garage sales when I was a kid and teach me how to negotiate.

It's good to negotiate, but at the end of the day, if you want the people, if you want the people to run that particular business, you just have to be very fair to them.

I, I'm understanding your philosophy is to be fair because they should feel that they're treated fairly and then also to add some incentives that allow them to perform beyond correct expectations.

You don't have to sort of put incentives in a fashion that is going to break your bank, but at the same time you have to basically think through that. If, for example, you're trying to get into a new market, you're trying to build a new product line, the extent or the amount of involvement that you will need from the acquired entity to be successful. Because at the end of the day. You want that acquisition to be successful, you want to hit the ball out of the park. You just have to structure it in a manner where the other side is equally incented to participate in that success. If they feel that they were treated unfairly, which a lot of the CEOs do feel that you just can't avoid it, they are wired that way. No matter what you do, they will think that they were not treated fairly. But on your end, you just have to make sure that whatever terms you're going to put forward, that you are very comfortable with it. Because you can't get into buyer's remorse 60 days into the deal. It just kills everything. It kills the morale, it kills the whole plan in terms of how you are going to execute. So we focus for example a lot on having a very clear understanding. Here is what it will take for us to execute successfully. What is the 30, 60, 90, 100 day plan? How do you scale it? Who moves where? What the chess moves are that need to be made as we progress in many situations. And this is not true about NetApp today, but in my previous companies I have actually been the general manager of the acquired entity for a period of time because I wanted to be closer to the acquisition and make sure that the deal parameters that we had set were fulfilled and before we let someone else scale that particular business.

This is a great advice. Okay, so we had the. I'm writing my notes here, but don't be too cheap. That's my big takeaway there. When you do put this offer together, I'm always curious, I don't know if is it market terms I should be reflecting on or just more of coming up my own scenarios because again, here's this offer. I want to buy a company, let's say it's like a $10 million deal, right? And I want to put as little as possible into this because cash on hand is king for a growing company because I can use that cash. I know where ROI is and allocating towards budget that's already people fighting over. So if I'm only want to put like a million, two million. Oh, do I look at the debt institutions out there now there's a variety of those because there's different funds and all different types of the venture debt and things like that. But ideally we always know traditionally the owner holding paper is good. So do I come up with a note term from the seller or do I come with more of a earn out base that others are like? How do you start deciphering which path to go or what to present.

You come out with an earn out based structure. You just have to be very clear as to under what conditions the earnout is going to get paid. And can you for example, monitor that? Because what happens in, for example, if you say okay, I'll pay you X only if I generate so much in profit or so much in revenue, then you get into the complexity of saying okay, if it is X amount of profit, how do I make sure that you're not burdening my team with additional cost? You may, six months after you do the deal, realize that in order to get to a certain revenue target, you need to add costs or you need to add more people. But because the other side has this earn out based on profitability, they will resist it. They will say no, there is no way we're going to let you add the expenses. So your whole thesis gets thrown out of the window because you had base the acquisition and the earn out on a certain parameter. The that parameter changed during the course of the execution and you have to make a course correction and you have to make an adjustment in order to meet your top line objectives. And that becomes a problem because that's when you will get into a pretty heated discussion with the other side and the other side is going to resist it. They will want to make sure that they get paid out under all scenarios and they would have to have worked out what the different scenarios would be, what happens where, etc. And so you get into a pretty bad situation very quickly. You want to avoid that at all costs.

Then why do an earn out over a seller?

Note earnouts typically are used if you have a valuation gap. You are thinking of offering X, the other side is expecting Y and the X is significantly less than Y. So you say, okay, I'm willing to get to your number provided you meet these criteria. What I like to do is under those situations you're not criteria very explicitly specified that the earn out criteria are such that you know that the other side is going to meet at least 90% of those objectives because you have to leave some room in terms of basically challenging them and trying to get the maximum out of the deal.

You want some control, you want some leverage back again going back to the debt. Like why not just put paper on it and say we'll pay back this money in this much time. In this case you're getting some leverage to say, hey, you gotta do your end of the bargain, otherwise I'm gonna pull the cord on this.

But again, the other side is gonna say okay, where is the positive? For me, that's when lawyers get involved and they'll put all kinds of terms and bells and whistles on their agreement and you'll find that, oh my God. Operating under those conditions becomes very challenging.

If I more formally just want to lower my risk into the deal and put less cash in, should I be looking more as a debt structure first? If it's not so much around a valuation gap and say, hey, we both agree it's around 10, 10, 12 million, let me structure this. I'll give you a million and a half cash and then the rest will finance out.

Yeah, you can do that. Just be aware that raising debt can be expensive and servicing debt can be expensive.

Do you have a million dollars I could borrow at a pretty good rate right now?

Yeah, I wish going back to even.

This example, that if I own the debt, there's a variance in business. It puts me at risk and there tends to be the associated cost because we're going to pay market rate on it. On the earnout, on the other hand, you don't really have a interest factor on earnout. It's just I can tend to basically create a higher purchase price, eliminate the debt thinking considerations altogether and just put more accountability in achieving these goals. So example, if we went back to buy the competitor migrate their customers, I think we'd migrate 65%. You think it's 75%. If we can do 75% here, let's build an earnout around that.

Those kinds of earnouts are pretty straightforward to structure because you have a very clear plan. You know that for example, you have 50 customers that you need to migrate and you say I'm going to pay you no matter what the revenue is. If 10 customers migrate so much, if 20 customers migrate by so much, 30 customers migrate by so much. And you can structure an earn out according to that. Sometimes where what the challenge is that you may want the customers to migrate at either a lower or higher revenue or a higher revenue or whatever their revenue is today and the customers may not migrate at that. And what happens in the dose circumstances, you may not get the benefit that you are actually looking for. The customer might have migrated, but migrated at a much lower level. Are you still willing to pay what you said you're going to pay on a per customer basis?

Who do I work with to make sure we don't miss those things as the lawyers help you figure that out or they got to call you?

Usually people who have done these kinds of deals, they know what to look forward to the gotchas. I've done enough of these when I know that there could be problems. And I, as I said, I structure very clean earnouts.

Got it.

And when you say clean, I can measure. I know that the other side will have no issues in being able to monitor it or I will not have any issues in the ability to monitor it. And it becomes a situation for both sides. Structuring an earn out based on earning is extremely complex. How do you burden the OPEX on the other side? What kind of things can you put because you are in control, you can change that PNL any which way you want.

Right.

And if you're doing it based on, based on earnings, they will want that entity to be completely separate so that they control all that. And are your objectives going to get satisfied if they want to keep that entity separate? You're not realizing the employee synergy, you're not realizing the product synergy.

What's like an ideal or not structure for you?

Ideal or not structure is top line. Easy to maintain, easy to remember, easy to process.

And then we just say, hey, this is your top line. I can still integrate my books and do the rest of the integration. You're just tracking the top line revenue.

You're just tracking the top line revenue.

What about the expense part of it where it's like, oh, we need more expenses and they're cutting off our ability to do that.

That's where a lot of people have problems because they're going to say, okay, I expect a certain level of expenses to be maintained. And if you go below the expense, then you want to figure out, okay, how do I still keep the top line?

That's why we got a bunch of lawyers that handle this. In litigation.

That's when litigation starts, especially if you start moving the chairs, all bets are off.

Is there a certain range or percentage of deal value that gets allocated to earn out versus the principal echoes?

It depends on the type of deal that you're trying to do. Smaller deals, you have a lot of flexibility. I have a friend who pretty much bought a company with no cash out. Basically said, I'm going to do it on revenue based milestones. And so long as you're generating X amount of revenue, I'm going to pay you over a period of two years.

That's like a peer management takeover.

Yeah, exactly.

That's what I want to do. If anybody's got opportunities like that, call me after this. I'm listening to this podcast if you're interested. To talk to you.

Yeah, there you have to have a very clear idea as to how you're going to operate, what the operating conditions are going to look like.

The seller's kind of got to be stuck to a degree where I'm imagining they got an asset that they can't really just take out to market through a branded bank, and they don't. They've probably exercise a number of options. And they said, all right, like, I just have other concerns. They prioritize.

You're a seller. You are, at the end of the day trying to maximize what your possible return is going to be. Because if, for example, you are a privately held company and you're having a certain amount of cash flow and that cash flow goes into your pocket every year, you just want to make sure that whatever deal you're going to have, you're going to generate more than that and some more. Because otherwise why would you sell?

That makes a lot of sense.

So you got to figure those parameters out. In the sense is that founder or group of founders better off holding on to the company for the next five years, will they generate the same amount of cash that they get today? And you've got to run all the analysis based on that.

That's where you got to really be the psychologist and understand their perspective. What are they trying to do? Is there urgency to get out of the business operationally and do something else? And that's essentially what you're doing is providing management service.

Or they've been doing it for a long time and they just want. They're tired and they want to get out of it. That happens a lot in smaller companies.

That's true. Do you get that out in the first conversation? You talk to somebody?

You.

I mean, I feel like it's hard. I feel like it's always the nice to know you conversation. And then they reach out, like if there is a real compelling thing, is.

The business plan is so great, what are we missing? Why are you trying to sell? I always ask that question. I have no problem in asking that question.

Okay, so just be real forward.

It's a good thing to get the other side's perspective.

I said there's a not for sale situation that hasn't become aware that they're for sale. But you're basically probing to see where in the spectrum is there consideration around selling. How would you get to that?

You have to have a very clear idea in terms of your market map, who's doing what and typically who's willing to have that conversation.

So you're already putting that in there. This Is the reason for the conversation we got. We've got some ideas over there.

I have two individuals on my team, for example, who are constantly out there talking to companies looking for who's doing Wharton. We have an extensive database of all the conversations we have had with anybody over the last 15 years. Come to my team and you can say what happened on this day on for this particular company and they'll be able to give you the entire history.

A lot like dating approach a lot of people until you find your match.

Exactly. There is a company that I required where I would get the financials of that company every quarter. And it happened for three years. We didn't pull the trigger. And then finally when the stock price is aligned, we were like, okay, this is the time to do the deal. Patience pays.

That's true. Is there something you do to keep in touch with other relationships like that or founders? I feel like that's a challenge I have where I found like even an opportunity I got one I'm thinking of right now. I know that could turn into something in maybe about a year. Is there anything you do? Is keeping a cadence of relationships to stay on top of mind or is it. Does it not matter? Do I just wait for a year, then reach out? Hey, why don't we catch up?

It really depends on again, what are you trying to get out of that particular relationship or are you trying to get out of that deal? You can stay connected as much as you want without being obnoxious and you can stay connected as fewer times as you want, depending on how you feel comfortable. Certainly if there is some new information you typically want to know. I have companies who I've talked to over the years and they will always find something to send me or talk about and say, hey, do you Or I'll say, hey, I'm going to be in this area. Do you want to meet for breakfast or do you want to meet for coffee? And so we stay connected.

Yeah, I agree.

The companies that I am interested in, I will always find a way to know what they're doing.

That's a good point.

The other source of information that we have and we interact with a lot of investment banks, we truly look at our banking partners as true partners in this process. We may not engage them from a transaction perspective, but they do provide a lot of guidance, provide a lot of feedback and typically they have fair amount of information.

They do that's their job is to keep tabs on the market. I can see the relationships helping with that sort of almost like a Steroid for your network.

It's a very small group of people who at least in the tech world know each other. We know what a person's style is, we know what that individual would like to see, et cetera. It becomes after some time in, for example, the bankers know that if I get into diligence even prior to the loi, I will need a ton of information to get comfortable with the company.

That's true. This is out there. But if I start an investment bank with all former heads of corporate development to compete with other investment banks, how well do you think that would play out?

Not quite sure because bankers are wired very differently from corporate folks.

I know, but that would be the selling point.

A lot of the corporate development folks are ex bankers.

That's true, but I'm talking about the other way around. We're taking the corporate folks making bankers. Yeah, the bankers, we can say they work harder, but this would be a whole level of thinking of the real strategy through integration that I don't think exists in any investment bank I've ever talked to that we would bring as a value proposition and different term. Forget the deal percentage. We're talking about just maybe hourly rates or something make it billable like our lawyers get paid.

There are a lot of boutiques who function like that. But for example, bankers don't stay with you through the entire deal or M and A lifecycle. Once a deal is closed, their job is done. In many of the corp dev teams the work actually starts post close. Especially if you're running integration and especially if you are on the hook to deliver the results. You're wired differently.

100% agree. I make a note so that when we're ready to start the M and A Science acquisition services, we're going to group you in as one of our strategic advisors here. Sure, we'll revisit that one. Anything else, Rajiv, that I should be thinking about again? I'm doing my first deal, be it a competitor buying a capability. So we talked through pretty much getting me up to an LOI in front of them and negotiating it, getting it signed. I don't think we'll have time to cover diligence through close. Maybe we'll have to save that for another conversation. Is there any other advice that we may have not touched on?

The things that sometimes people forget is you have to understand where the other side is coming from in the sense that you have to get to know the people, you have to have some empathy because they're going to get acquired. Their life is going to change post acquisition. So you have to understand where some of their fears are coming from, and you have to work around that. Also, a lot of the times when you have large companies acquiring small companies, the DD teams on the large company side tend to be significantly larger. Number of functions get involved. Right. And sometimes the functions ask for the same information from the other side. And the other side may have just maybe three or four people involved in the dd. So don't come with a big hammer and say, do you want all this information? Just be aware that the other side has very limited resources to get you through the process. We actually run a boot camp prior to engaging in any serious diligence with the employees on our side who are going to be part of the process. And this is extremely helpful because a lot of the times there are new people who are new to the M and A process who have never been on a deal before. And so that they have a clear understanding, what are the boundaries? What can they ask or they cannot ask? Has that information already been shared? Where they can get that information? We have. We maintain, other than the data room and stuff like that. We have our own extensive notes from all the conversations as far as Target is concerned. We ask them, go through it, read it, and if it's not there, only ask the question then. Otherwise, it's there.

I like the idea of doing a bootcamp program.

Yeah, we do that on all the deals.

Makes a lot of sense. That would definitely help everybody out. There should be some kind of briefing around how this gets done other than.

The DD kickoff, which is what pretty much everyone does. We actually run people through the bootcamp and say, here are the things that you need to be aware of. And we maintain a fairly extensive list of DD questions that has been built over the years. People contribute to it, and it's pretty systematic. It's organized, and so they don't have to look for pieces of paper or PowerPoint presentations or word documents, all standardized in one place.

Rajiv, what's the craziest thing you've seen in M and A?

People renegotiating the deal after the deal is closed.

After the deal is closed. You don't have to name any names and dates, but you have an example.

There are a few.

Teach me how to do this.

It's seller's remorse, right? Hey, I didn't really think that I could negotiate this town like, guys, that doesn't happen. The deal is already done.

Does it work?

No.

Oh, okay. If it works. I was like, please teach me. Let's go off record with this. I want to learn how to do this, but it's funny.

Yeah, yeah, that's pretty crazy. But you'll be able to ask once you close. Once you close your close.

Yeah, this has been a great conversation. Thanks so much for taking the time from doing deals to teach me a few things about M and A and help me become a better M and A scientist.

You're more than welcome. And thanks for being patient with me and chasing me down for this one.

Those of you still with us, you're the best listeners. Reach out to me. Give me some feedback. I love hearing from you. 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 need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.