Transformative M&A

Foreign.

This podcast is sponsored by SMP Capital IQ Pro. There's nothing more critical than having the most up to date and accurate data on private companies and unfortunately this tends to be the most difficult data to source. Well, not anymore. The team at SMP has been rapidly expanding its private company data coverage to provide a more comprehensive and robust data set, access, deeper private company coverage, advanced visualizations, proprietary reports, you name it. It's all there on a single web based platform so you have all the resources you need to create a winning pitch. Learn more about SMP Capitaliq Pro@spglobal.com MAScience Again, that's spglobal.com I'm Kisam Patel and you're listening to MA 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 MA deals.

Foreign.

Welcome to M and A Science Live where leading M A practitioners share lessons learned from their experience. When you use proven techniques in M and A, more value is created. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our newsletter. Again, that's mascience.com I'm your host, Kisam Patel, CEO and founder of M and A Science in Deal Room. Joining me today is Duncan Painter, Chief Executive Officer at Essential plc. Today we're going to talk about how to make transformational M and A successful. How are you doing today Duncan?

I'm very well, thank you Keith. And thank you very much for inviting me to join you.

My pleasure.

Can we kick things off with a little bit about your M and A experience?

The most relevant M and A experience would obviously be in the last nine years since I've been Chief Executive of Essential. We've done around 39 transactions through that period, trading just something in the region of $750 million in both sales and buys ranging just over 350 brands or companies. So it's been a sort of fairly active period here, but that's because we've been utilizing M and A as a key transformation tool. And prior to that I was involved in a significant sort of 20 odd years of M and A work as a chief executive, whether that's through the company I founded and then ultimately sold to to Experian or actually and then in fact seven years of work and Experian again in a very active M and A sense.

So M A is not new to you at all?

No, I've been it's been a core Element of my role for. Yeah, something in the region of the last 20 years. And I think when I tried to get the statistic together, I broadly invested, bought and sold obviously in the last 10 years, 750 million, but when I added it all up, it was about $4.9 billion of capital value through that period.

Amazing. You're pretty active in the acquisition space. What are your basic principles in targeting companies?

The first thing is that we spend a significant time focused on the specific markets we're expert in. So we're not trying to be experts across many markets or ranges. We are very specific about the types of companies we are looking to acquire within our business. And we're in the information services business and particularly around digital commerce, what has now become a very hot space. But six, seven years ago when we first started in, it was less hot. What we've learned over time is that the longer we look at businesses and the better we get to know them, the more we're targeted about our efforts around them, the better the quality of M and A we do. So we tend to look at businesses for around two years on average before we make an investment.

What does that look like when you start identifying these companies, seeing that their potential acquisition targets, how do you start nurturing the relationship to lead into that conversation?

Well, we have a couple of significant benefits and not all companies benefit from this, which is firstly, we are one of the leading information analyst services for major brand companies in how they adopt digital commerce. So what that means is that through those properties, startup or early phase or entrepreneurial businesses want to get to know us because they know that our analysts, when they're then advising major organizations on the product and services they may wish to buy, will know that we're then influencing that decision making. So we have a sort of natural inflow of companies that want to try and influence our analysts in that side of our business. We track specific markets, we then will do a big exercise of market mapping them. So we really do know what areas we want to be particularly deep in and how we will then cover and understand who really are the emerging forces within there. And then the third and final insight that we have that I don't think companies use anywhere near enough is we're very active in talking to our customers about what companies and services they may have engaged with that are really making a difference for them to run successfully in this space. Probably our biggest research group are actually our existing customers where we're providing services, asking them what companies services, products have they found in the last two to three years that have made a significant difference to their performance. And more importantly, have they delivered what they promised you when they sold it to you? And those are for us, where we gather the most intelligence.

That's really interesting. You lean in on the customers to get insights, to find market opportunities.

They are and prove to be usually our most reliable source of high quality companies. And because we can then engage with them early and we will obviously, as a quid pro quo for any information we get, as we get more knowledgeable, we will, in our quarterly reviews and with our regular dialogues with them, give them updates on what we're seeing, who we're seeing, how they might enhance that. So it's a sort of two way flow that we established with our trusted customers very early on and that frankly has been far more valuable to us than most of the market research data that we'll get. Because what those companies will tell us is, I was promised X, I'm actually getting Y. Yes, it's good. No, it's not good. The service has been poor. The service has been good. So before you sort of get into worrying about what a company's economic performance is, you can find actually if they're actually good at the products they create.

Now you're not having these conversations yourselves. How do you get the information to.

Roll up to you when you say we're not having it ourselves? If you mean like me, like you.

You personally, you're not.

Yeah, no, I know, I will. So every quarter I meet our analysts and I do effectively a roll up of anything they're seeing in the key sectors we're focused in. And then actually as chief executive, I think the placement of capital on M and A is one of the one fundamental things I wouldn't recommend you actually delegate. I have a small team that reports to me and I work on each of the major transactions. We look at where this is exactly the conversation I'll have with an end customer. So if there is a quarterly business review or a quarterly meeting with one of our customers, I will invite myself to it. And that's where I'll have this direct dialogue around the businesses we will or won't deploy capital in. We know, you know, A, that keeps it tight, B, it ensures that when we're getting research, we're hearing it directly and there's no sort of disintermediation of the information. And then thirdly, of course, when we engage with the companies, and again, that will often be myself that will engage with them, they know that we really do know the facts, because we turn up and actually can ask really high quality questions about their business. And that in itself is also, from my experience, makes a significant difference from the level of engagement and sort of willingness to engage. Post an initial meeting with an end target company.

Really good approach. It makes a lot of sense. What are transformational deals for us?

I think the most significant transformational deals have been capability deals in end markets rather than classic transformational deals which are usually fraught with danger from my experience, and very rarely make transformations. So, you know, what we look for are businesses that provide capability that we as an organization can really leverage much harder than they can. Where that capability is of a very high quality nature. Doesn't necessarily mean they have to be a big business. It's helpful if they're larger. What I have to say is by one transaction in the nearly 90 that I've done in my career, only one of them of scale and size was successful. I have a prejudice against the classically described transformational deal. I'm a great believer that very rarely do you find a deal that's a sort of, as they would call it, a murder or mainly it's a combination of smaller manslaughters that gets you there rather than one killer deal.

That's interesting. So let's define that a little bit because you said in your definition, here's transformation of the deal where it's increasing capabilities, but not in the sense where here's going to be a major 180 flip in your company. You got to go through a whole series of these type of increased capabilities to lend into that transformation. Does that sound right?

Yeah. So to give you a sort of sense of that, in 2014, when we started down the path of really getting serious about building out capabilities for consumer brand companies to be able to trade really effectively in digital marketplaces, that was a pretty nascent market, which frankly for us is quite important. We want to get in early and we want to get into markets where they've got high growth. And we have acquired six businesses from around the world over five years. But to put that into context, we've been able to get them to become high organic, long term growth businesses. So since 2016 and today, so around five years, we have gone from a business of zero revenue in that space to a business that by the end of 22 should be around something in the region of quarter of a billion dollars of revenue.

You know, I want to step back.

Into what prompted this because if I remember right, you had an interesting story of situation. You got into and knowing or sort of what prompted you to take this approach?

When I joined what was then emap, which was a public company that had been taken private by Apax, the big private equity firm, they had bought it in an auction in the 0809 vintage. And for anyone who knows that particular vintage of M and A transactions, they'll know that most of them were pretty bad. It was a classic leveraged buyout deal. So they borrowed sort of something in the region of $800 million to finance the transaction and obviously then put in around 500 million of equity to buy the business. And broadly the thesis they brought it on, like many organizations through that 09 collapse period meant that the profits of the company basically halved. No one wants to be in an eight times or seven, what was then a five times levered business that rapidly became a nine times levered business where the fundamental income streams had disappeared. It was a very difficult space. And in 2011 they bought me in as chief executive effectively where I think they would be pretty open. They were at that point doing everything they could to stop handing back the keys on the business basically and keep their equity alive and keep the business alive. And so when I joined there were pretty low expectations for the group. It was a very broad, disparate media organization, 350 odd brands and they were basically a horror, what I would call a horizontal focused company. That is, they were an events business that also provided some publishing and pretty typical media organization, doing lots of stuff justified because it was horizontal where one day you'd be publishing something around the world's rubber and then the next day you'd be in a meeting discussing waste in Brazil. It was the sort of master of doing a function, but the expert at really nothing, to be honest. And what I did was take that business and we through the period of since 2011 to today, we've recycled or sold many of those businesses to recycle the capital to then refocus it into a much more focused set of assets where they were in high growth markets, where we built true expertise around that market. So put it in context. We've gone from 350 brands or P&Ls to a business now of effectively 8. And the company today is bigger than the company that was then. In 2011 we revenue more, we make more profits and we're growing at double digits with sort of margins in the 30%. So it's a very successful business today, doing very good growth, but we're in an end market where anyone, if you want to Be a chief executive and survive. It's a darn sight easier to create a high growth business in a market where the tide is coming up fast than trying to be in a boat where the tide is going out fast. We've repositioned ourselves into high growth markets with differentiated products because we really focused on it and we believe by having that real dedicated focus, the more we get involved and the longer we stay in the market, amazingly, the luckier we seem to get.

How do you identify those high growth.

Markets for me in 2013? And if you think back and you can look this up, it was at a time when actually a number of research notes were very negative on platforms like Amazon, et cetera, as marketplaces. And people really didn't quite understand what a marketplace was and how it's going to work. No one really understood the Amazon business model. And of course Google and Facebook were really hitting their stride at that point. So for a lot of public market investors, digital looked much more attractive in advertising than it did in being an online retailer. What got our interest was the fact that we had spent quite a lot of time researching other marketplaces that were ahead of retail in the transition. So really what we're talking about here is property, classified car, classified companies, auto cars, those sort of models in the US and what we could see through those were, if they were very successful and could really leverage digital search, they had really massive network effects, much stronger network effects than Google and Facebook could drive. And of course a complete lock in, because in the case of Amazon, people are buying everything through them. And as it expanded more categories, it became more important and as it improved its services, it became more important. So we took a pretty big bet in 2014 that we thought that in the long run all the brands that were charging to do digital to consumer websites, so D2C as it became, really wouldn't win because they didn't have the network effect of our platform. And I say this with all due respect to any brand outside of the very, very, very luxury end ones or massively high profile sports ones like Nike and Adidas and these sort of very iconic brands. Not many of us wake up in the morning and think, oh, I really must log on to brand.com to buy my laundry detergent today, or I really must go and search that site to buy, I don't know, soap for the cleaning fluid. The reality is that when we're doing that sort of exercise, we go to a one location aggregate. And that's why big box retail has always been so successful. What we believe was the marketplaces would do that online. We backed that against the grain because at the time, I think it was the biggest wobble period in Amazon's history. The share price was 20% down at the time, which gives you a sense that the markets weren't believing it. And by building up capability, because we absolutely had the thesis that it was going to be successful, we got great assets very early on in the market and we're able to build on it. And as the market's grown, we've grown with it. But as with all these things, Keith, if you want to be in the early stages, you can research it to your heart's content, but at some point you've just got to make the decision to move.

I was going to ask that, hey, don't you have to pay a premium to get into these high growth markets? But listening to you, it sounds like you're getting involved early before the premium gets taxed on there.

We floated the company onto the public markets in 16. So we turned the business around very successfully. We really had started down this road. Our private equity partners, apacs, had had been in nearly seven, eight years at that point and wanted to get an exit. And in fact, actually at the point of IPO and within a year it was obvious that not only could they get an exit, but they could get an exit where they got more than the original money that they invested back. And if you think when I joined they'd actually pretty much written their equity off, and rightly so, because on a mark to market, the actual company's valuation was worth less than the actual bank debt that we had. So they got a very good exit. And what we were able to again utilize, there was a model where we're doing something quite different than most public companies aren't willing to do, which is we're using effectively high cash flow and access to public market money, which is at a lower cost money and effectively therefore a lower returns hurdle. And we're investing it into organizations and businesses at earlier phases than a PLC would typically turn up and invest it. And look, there's a risk profile attached with that, which is why we spend two years looking at businesses before we buy them, because you've got to be sure. And also it's been interesting, we've had the right blend of established companies versus the growth businesses that have sort of calmed our capital market investors. I wouldn't say make them happy or satisfied, but calm them. And so we've been able to gradually do that transition and balance of bringing through the fast growth but as they become more and more certain while then underpinning that with higher cash flow, sort of more legacy I suppose would be described by heritage businesses. And then done that sort of step change of buying in and selling down as we could get more. Sure we were in the right markets but at the same time that's tricky because as we now are getting towards the more we're now into the run phase. We learned to walk over the last two, three years. We're now running. But the issue is, as you rightly say, we're now at a point when assets in the market, if we're buying them are a much higher premium than were six, seven years ago when we started. The only good news is now of course we need to buy a lot less of them because we have the capability and so much more of our capital. Today instead of going into M and A is going into just capital organic investment. It's a sort of phasing. And what do you do? When is how we think about it.

You're investing early. Can we walk through how early? Because it sounds like you're early as a seed or series A. Yeah, yeah.

We would be in classic VC terms in and around series. Well actually even we won't do pre revenue. That's a bit early for us. We will and have done certainly pre profit. So we definitely will come in and buy businesses with revenue only. We have to be sure because we're a public company they're going to get to profits relatively quickly and that our value benefit gets them to profits fairly quickly. But we would be I would say of the about a third to slightly more of the deals we've done in the last seven years. Most of those have been businesses pre profit and the other investors looking at them at the time would be series B VC style investors.

You take some risk maybe.

I think that's why we tend to research them hard. As I say we have a real leg up compared to standard investors at that point. And that is we have a number of assets all around the space. We're only looking for the assets in that area. In digital commerce they've got to be complementary to what we're building. You could argue what we're doing is using M and A as a direct replacement to capital investment ourselves. So rather than investing capital and building that platform or that code or that system, we're buying other assets and integrating them in. So it's a sort of different way of deploying capital. But through early stage M and A where a lot of the platforms already created or is well on its way to being created. But where we have that absolute inside track that we can usually verify what they're doing with customers directly where they're. Because those customers, customers are vested to us for many other things. They'll tend to just be a lot more open and honest than they might be to an outside investor who gets a sort of one time shot to research that organization. So yes, it is definitely riskier. Yes, the revenue streams and the kind of predictability of some of the businesses we buy is not as consistent as a public market would always want. But I think that's all about knowing when to go in and how to go in and whether you're taking a majority position or a minority position for a period while you build your position and the value adds to that management team.

So you do a mix. You may come in as a typical growth investor with the minority position or you may do a full M and A. What do terms look like? Are you using earnouts in those deals?

Yeah, we are. Well, we do full M and a. We take 100% of the ownership of the company, but we're doing structured earn out programs, management, many of them, once they get comfortable with the concept and that they can see we've got a really good track record of supporting management through them. Like them, because it's basically like doing business with a VC but where you don't have the risk of having to re raise money every six to 12 months because you've got the guaranteed rates and the way you're going to get paid out later down the road. As management you can just completely focus on running the business and delivering results. For us it's very easy because we've got the capital and we can help them and guide them. We talk to the average. And I know this because I founded my own company in 2000, grew that up to be a market leader in Europe and actually exited that to experian for about 150 million doll. So I've been through the cycle of going from nothing to 600 people in a very successful company. But I also know through that sort of five, six year period just how much time I spend applying my effort to creating capital and getting the growth capital. And so what we're really positioning to them is look, you can get your rewards, you can get your returns, but you as a chief executive are going to entirely focus on your product, your customers and your teams. You're not going to spend on average six months a year trying to raise the next round of growth capital. It's a model that seems to resonate really well. It's like a third way of growing your business. And certainly for the last few years we've seen it as a relatively unique model for a public company with a platform to come and add value to other organizations with. It's become a lot more credible and a lot more viable now that we're eight, nine companies into that. And many of the management teams have clearly prospered through that.

How does that contrast with the founder that wants to continue down the path of going through the series of fundraising?

Yeah, look, I think it's not perfect for everyone. Many founders that. I suppose this most significant difference is for many founders they don't have to see the journey out to get to the value. And as long as they're agreeing that with us up front in a very open way, that's fine. They haven't got to constantly be riding the risk and those sort of good leave or bad lever clauses that very nicely come with a VC arranged investment. So they can maybe de risk it a bit. But at the same time they've also got to recognize they are becoming part of a corporate. There are certain elements we bring to that some can find frustrating. So it hasn't worked in all cases. Even though the entrepreneur and the leader of the business hasn't done anything in that respect wrong. They just don't find that culture and environment as fulfilling for them as they might have done on a standalone basis. It is horses for courses, Jason. So there's no right answer for everyone. But what I would say is we're very upfront about the downsides. We try and be very clear to them about what we are going to do for them and what we're not, what overheads we are going to bring or what we're not. So they have a chance to assess it because in that model for us, particularly as we've got better at it over the years, we really want them to come in with their eyes open. And I would say in some of the deals we did in sort of 13, 14, we were pretty good at that. But certainly as they went through a sort of four or five year earn out some of those management teams because they were very early stage and that just had to be structured that way for them to get their true value out. Some of them didn't make the four or fifth year but actually nearly all cases they got the value that they expected to get out of the business. And then on the council to that we have quite a Number of them where the leaders are still active in our company today, even post earn out running those bigger divisions. It really is horses for courses. It's not for all. Number of the ones that joined us that have left gone back to be entrepreneurs and do it all over again. And that's what drives them for our organization and we've then got reinvested in them actually. It's not like we haven't continued by not reinvesting in the number of them them and going early phase with them again. It doesn't always benefit all. But I think the key thing that we've certainly learned is just be honest about the pros and cons up front. And even if that means you don't get to acquire that business quite often, although it doesn't feel great at the time when you don't get to buy one you really want to invest in, in hindsight you usually look back and think, yeah, that probably was the right thing for everyone.

Really great point. Just thinking about what you mentioned earlier. When we reference transformation, a big part of it is divestitures. What's the process like when you have to start making those decisions on what to divest?

The most difficult decisions are obviously around the businesses, the end markets you're choosing not to operate in, particularly when they're profitable companies. They may be growing, but you can see that there's potential for slowing in growth. Doesn't mean that that means you can't turn those businesses into enhanced profit creators. But for us as a company, and particularly in media, a big driver for value creation really comes back to the old John Malone statement, no growth, no value. So in that respect, we're looking for businesses that can drive high growth. So it's about assessing the end markets, really understanding whether the growth is going to be there. And then the other fundamental feature for us is running a culture where if you have a business or a group of businesses in your structure that are going to be subject to disposal, it's just being really honest with the organizations, the management teams and the people in the business that they're not core long term. That doesn't mean you won't invest in their businesses and that you're not going to want them to do well. But ultimately you are going to find a new shareholder that will be a better shareholder for them in the long term. One of the things I've noticed through 10 years of doing this is that too many corporates are just not willing to sort of have that very honest dialogue with the teams and just tell them that's the path they're on. And I don't quite know why, because in every case if you get the balance, you're very transparent and only you treat the people in the businesses like grown ups. They don't have an issue with it. They don't have an issue with it. They're actually somewhat delighted that you're being honest with them. And therefore when you do go through that process, when you do go through that exit, when you do complete the disposal, there's actually a much higher degree of trust between the parent company and the brand that's being sold than when often it's all done as a surprise, kept very secret. You've got lots of very secret project names that no one can even remember, let alone know what they are. And that hasn't really worked for us. So if you look to our, what we called our BEP businesses, which was our built environment and policy division, that was under our public markets ownership for three years, where every half year we would publicly declare that it remained a non core business and at some point we would dispose of it. I think too many management teams feel under pressure that once they've said they're doing something, they've got to do it that week or start it. And I think the more you just educate the people in your organization to understand that fundamentally they're not going to lose their job, you're not going to stop investing in the business because you obviously want the best quality asset you can to sell. And as it goes through the process, you're going to reassure them that you are going to find the best quality investor for that company that you can find, that reassures most people. And then of course, if you have a track record of actually doing that, which we did build up over time, by the time we came to those latter disposals where we could be very open about it, people really trusted that is what you would do and therefore it became a little bit light. But this is what I say to people is, are you in a business invested in by a VC or a private equity company? Yes. Do you fundamentally have a problem with the fact that they might sell you? No, because that's kind of their business model. Why is it that corporate feels that they've got to say to everyone, well, obviously keep every company we always buy at the end of the day, if you just open in a longer term that there could be an exit for that company from the corporate, but it's not going to be negative for them. We found it actually inspired those businesses and almost Gave them an empowerment and freedom where if I'm honest with you on a couple of occasions, we got a couple of years in and thought, oh, do we really want to sell these businesses now? They're doing so well. It swings around about. I think that to me have been the key lessons I've learned in 10 years doing it.

I like the part about being honest and upfront. I think that's a skill of its own to have those tough conversations and sounds like you ultimately get more support as you go through that process.

By doing that, it's like anything if you tell someone, look, we're thinking of doing the following and we're thinking of doing it in the next three years, that is not the next three days. And that there should be no real impact to yourself. But we're going to keep a regular dialogue up and you have every right to ask us the difficult Q and A questions you want to ask us in an open forum where we're not ducking them and we're pretty honest about them. People genuinely, from my experience, say I can trust that they're being honest, they're being transparent. They're not hiding from the facts. They're making it very clear that for me personally in my job doing X, there's no immediate risk or change to my role, to the income, my career, my opportunity. Opportunity within this business. Most people quickly rationalize to why would I really care about this? It's just a set of paper that currently sits in one company's safe that within a period of time is going to end up sitting in another company's safe. And as long as the people I go to are genuinely good investors, surely this is a good thing.

Organizations don't often assess their portfolios and have those considerations on divestitures. Is that something you do on a periodic basis or is it just an ongoing assessment?

I'm pretty open and transparent about the fact that my number one job as a chief executive is capital allocation. That's what I'm basically paid for by my shareholders. It's how I allocate capital, whether that be money, human resource, any element of the company to derive the best maximum return I can get for them for their investment within our company. That's it. And I would argue that is the job of every chief executive of a business they own. They just don't think about it quite that way. And within that, we therefore take a view that every year we do a parking lot exercise where every business goes into the parking lot and then we re justify why it's core, strategic and important to our customers, to our stakeholders of the organization and ultimately our shareholders. And if you do that exercise every single year, effectively, I suppose what you'd say is reverse DD on convincing yourself not that you're selling them, but why you want to reinvest in them and keep them. We find that to be a very good exercise that really keeps everyone in the company honest. And I just think not enough companies do it. If they did on that sort of regimented basis, they'd fall back in love with a lot of brands in their business that sometimes they fall out of love with for no other reason. They forget what was the whole core value benefit of that business.

So to recap this assessment, include really focusing and understanding what's core, what's not core, what's their potential for growth and what lines don't have potential for growth. And also thinking long term, is what.

That company does still very important to its customers? Does its customers still truly value the quality of the product they're providing? What is the consistent NPS and value scores that customers are giving them? And have we deployed the capital well and have they built and enhanced their products? Are they creating that sort of network effect for their own business? Are they running other people in the business satisfied and running the business? Is it getting good results? Of course, end market is important. Is it growth? End market? I think it's all that sort of fundamentals around. Is this truly still a good business? And more importantly, have we as custodians and operators of it done a good job? And of course most companies don't want to do that because it's a tough exercise because then you have to really lean into the fact that actually collectively maybe you didn't do as good a job as you thought you were going to do. Maybe those promises that you made around enhancing products to a whole new level or whatever, that sort of marketing stroke customer promise you made three years ago, is it still valid? And did you really hit that? Have you really done X, Y and Z? And of course that's a tough exercise to go through and one that. But from my experience, not many people truly want to lean into every year and hold themselves to account.

Very true. What's the hardest part of the divestiture process?

Look, the actual exercise of divestiture, if you plan it, put the work in, get it done. Of course they're noisy and difficult, but I would say that the hardest bit for me because we've never sold particularly low quality companies. They may not have been growing, but it doesn't make and low quality companies. I take a great responsibility around am I truly picking the right investor to back that business? And from my experience, everyone just assumes you sell a business on the basis of price and that isn't the decisions we've always made. Price can often end up being not a lot different between various bidding parties. Almost not enough difference in it to justify why one would get it over the other. For me, it's truly trying to assess are we effectively selling this equity in this business where we know it better than anyone else? Are we selling it to someone that we ultimately believe is going to do what they said they would do and be a better shareholder for the company than we have been? And again, that's a hard thing to assess because it's really hard to admit that someone's going to do a better job than you might do for that company. That to me is the moment when it becomes really difficult because it's. You're judging things a lot on face value and that's never a good place to be judging things on.

Really fair point there as well. What are some of the biggest M and A lessons you've learned throughout your career?

The data and the information very rarely lies. Too many people fall in love with the concept of the deal and don't keep themselves honest enough on the facts that they get presented through the process and get deal fever. And that's just a human emotion in that basis. Michael Bloomberg, I think, is possibly one of the most successful business leaders ever. And if you listen to him, and I listen to him a lot because I think he's a very clever guy and very successful, as he says, the second you stop believing the data is the second you're about to make a bad decision. All of us see data at the end of the day where it doesn't quite match the story we want. And the problem is we then start to build stories around why that really doesn't matter anymore and therefore we still want to push ahead. All of those the elements where you just got to stop, not do it, don't convince yourself that you're going to somehow fix that challenge and just pull out. And by the way, that's really hard to do. It's really hard to do and people don't like doing it because they feel like they've made themselves look silly. So the one thing that we always do as a company is if we pull out of a deal, and particularly if we pull out of a deal late, really late in the process, which is of course where all these tough decisions have to get made. We actually celebrate that deal more than if we do one.

Really?

Yeah. So we've encouraged the culture that our teams. We go out and have a bigger celebration if we pull out than if we conclude. And that I know sounds a bit odd, but it's to make a culture in the company where everyone on the team recognizes that being transparent and raising reservations and raising concerns and highlighting that what we think we're buying is not what we're buying and not worrying that's somehow going to get frowned on or be negative or. I don't want to hear that because I want to do this deal, which I'm sure so many M and A people have heard their careers. We want to encourage the exact opposite. The second they get worries, it's transparent, they talk openly about it. We then dig in. We encourage it. It's not poo pooed. We let the data tell us whether the businesses are right. Of course you've got to rely on at the end your gut feel. But if we just got a few factors that aren't going the way we want it to go, and we know by that point we're therefore overpaying for what may not be a good asset. I'd rather encourage my teams to celebrate walking away than celebrate buying a business that becomes a problem.

I like that philosophy. It really makes a lot of sense to try to remove the deal fever part of it with the biases that you can have with your deals or just falling in love with it.

Ultimately, professional investment buyers tend to be better at that than company buyers. So private equity. I'm not saying they don't get deal fever and they end up. Because we know that in some cases professional investment buyers do as many bad deals as corporations do. Right? So it's not like that they're impervious from it. But I do think they have more rigor and controls and structure around it to hold back and not do a transaction. I think the challenge they have is quite often they'll do the transaction but just aiming for a lower price. So they go and do the discount and get it for less money. Which look in pure play financial fund cycles, that might work. But from my perspective, if you go into a business with an expectation of a certain level of quality, a certain level of performance, certain quality around the product, why their customers should really trust that business or not and that product or not, which by the way, if you look at Edelman, for instance, who's a business that publishes an annual trust barometer and they do analysis across everything in sectors around business trust. Their latest research says that that customers want to invest and buy companies they trust, not companies they love. So it's interesting that they think trust is a much more important element to understand in a business than whether customers love the product or not. Because people can fall out of love with the product. They very rarely, if the thing maintains the trust, fall out of trust with it. Those are the things we're looking for. The second the barriers come down, that's the point we walk. So as soon as those expectations are down, I'd rather not buy it at all and try and buy it for less.

This is adjacent to the point you made earlier, about a two year window to get to know that company before you're moving forward with the deal.

The best advice I've ever been given, and it was by a gentleman by the name of Tom hall at Apax, was very simple. Which is, it's amazing. The more we know the companies, the better we get at investing in them. And the longer we take to know them, the better we get to investing in them. Which is why he always argued that the best businesses to invest in, that is double down his investment, were the ones he already owned. He knew them better than any other company that he could go and buy. Frankly, I think that description is the best description that anyone in this industry can go by, which is if you spend a long time knowing a business, guess you'll have a much better assessment of its pros and cons than at the end of the day. The new shiny object has just appeared on your desk in the IM sent by the bank that you've now got six weeks to figure out whether it's good, bad, indifferent and spend spend millions of dollars potentially buying it. That to me is a sport that I'm not saying, look, no point would I say that. We never would look at businesses in a process because that would be wrong to say we don't. But I would say to you, in 10 years, I've only ever bought one from a process.

Wow. You want to get to know the business.

The challenger processes are, they're brilliantly designed to get you to an outcome. They're not necessarily brilliantly designed to get you to your best outcome.

Absolutely. To summarize our theme of transforming a business through M and A Duncan we talked about, one point you had was essentially it's not an overnight thing. You don't do one deal and transform a business. It happens through a series or essentially increments of deals. You mentioned really Being able to pick on these trends early. And that's a key factor in getting into this and sort of understanding the industries and getting involved at the right time and not paying these excessive premiums as well. And then the other point was around divestitures, you also got to be proactive, assessing what business lines are non core that you may need a divesto that can also help fund some of the new areas of growth. Is there anything else we're missing when it comes to transforming a business through M and A?

I think the other thing is you rightly say you've got to have convictions. Once you've set your strategy, once you define the space that you are going to be expert in and you're going to build around, don't suddenly then start, oh, but this one looks good. And oh, look at that one over there where it's not really where we said we wanted to be, but it's a, it kind of fits. Stick to your knitting, stick to your discipline. Don't get bumped off the road because it's really easy. If you're going to use M and A to get bumped off the road, stick to fundamentals, hold around those fundamentals and don't get coerced into doing other things. And remember, and I say this, look, I'm 10 years in and I touch wood that I am here because M and A at the core of it is a very dangerous sport. It's a bit like parachuting off of mountains and things. Yes, it can be done very safely, but my God, have you got to be really prepared, have all the kit, you've got to be expert at it and then nine times out of 10 you get away with it. But the emphasis being nine times out of 10, not 10 out of 10. And the less you know it, the less you good at it, the less disciplined you are, the more you sway, the more you don't challenge yourself on following the fundamentals, the more you convince yourself that you want to do this deal. Even though every warning signal is telling you it's not great, the more likely you are you're going to fail and the quicker you're going to lose your job. It's just holding discipline and having a long term view. So if you look at Outview, it's 10 years and I'm now looking at the next 10 years. Now, through that period, we've already created something in the real world since 2011, something in the region of $2.2 billion of value for our shareholders through that journey. So we've created A lot of value, but it's taken 10 years, not 10 minutes. It's that view. I've walked away from three or four deals that if I had bought them, would I be further along by now? Yes. But would I have as good a quality a company and therefore the value I've created now? Absolutely not. And so I know I'd much rather be a smaller business with higher quality value than having just gone fast bought stuff and then be really trying to get on the front foot, trying to sell it, oversell what these great assets are that really aren't great assets. M and A for many people, looks like a fast way to do stuff and get results. And my view to my teams is if we can do it organically, we should always do it organically first. Because M and A, when you do it, is more likely to end in tears than not.

Well said. Stick to the plan and parameters you create. I feel like you should teach a course.

Our academy, that's what we do, is.

We have practitioners that teach little half hour courses.

Really?

And you should teach one about.

Honestly, I'll be delighted if I can give anything back to people on this journey. I'd be delighted to. If you genuinely wanted me to run a course, I'd be delighted to think of doing one for you.

Yeah, I was trying to think if we did one on how to avoid deal fever, I feel like it'd be the best course that nobody would want.

To look at because, yeah, it's always the ones. Right. And the thing is getting them to recognize what are the telltale signs that you're now wrapped up in it. And it's those meetings where you're then, as a collective, coming up with the reasons why this doesn't really matter. Right. That's the moment you should be ringing the alarm bell and saying, you know what, let's just all go home, let's just pack up, go home, let's go watch the TV or walk a dog or speak to the kids. Because we are now in a territory where the only thing we can guarantee is three years from now, we're going to regret this. It's looking for those and having the courage, by the way, to pull out. We actually pulled out on one about two years ago, three years ago, where we were buying a company from a private equity business, where it became really clear we did all the due diligence we'd done with all the kind of. Came really clear in the last three to four days that the EBITDA business was not what we thought it was and that things had come out that made it clear that the plan, the growth, the issues were there. We were digging in and finding more issues. But you're two days from closing. And of course, as with any deal where you're buying from private equity, their answer at that point was a pretty simple one, which is they would just reduce the price but get you to buy because they think at that point you spend. We'd spent close on probably about one and a half million dollars at that point on diligence. So we were. Well, we were welling. And they were just so taken aback when I rang them up and just said, no, we just don't want to buy the company anymore. Not what we thought we were buying. And it doesn't matter whether you're reducing it by two turns of profit or not. It's not the business we thought we were going to buy. And that was. I remember it because we were in the us I had a board meeting. My PLC board meeting was actually happening in Baltimore. We were negotiating this business in the US and I pulled out of it at 3am in Baltimore, where my PLC board meeting was starting at 9am in Baltimore, where the board were expecting to approve the deal. The debt was arranged, the finances were there. As far as they were concerned, we were doing it because we got that far down. They couldn't imagine that we wouldn't be doing it. To say that. They were obviously surprised when I walked in and confirmed I wouldn't be doing it, but really relieved. And it was great to see our board had bought into our culture of it doesn't matter at what point before you put the pen on paper if you really don't believe. Now, we had, as you could imagine, a pretty robust discussion about whether the logic held up to pull away. And they did challenge me to make sure I'd really thought it through, because that's the other thing they're there to do. And we, as collectively a team, we'd really thought it through. But at that point, if you're the lead, and in the case of my organization, obviously I'm the lead. I'm the chief executive. So the accountability, as I say to everyone, it's great, and you do phenomenal work for me. But at this moment, there's only one backside that carries the can, and that's mine. I am 100% accountable now for the yes and the no on this, and I'm going to go no. It's tough, Keesen, to do that. Really tough. You feel bad about it. You second Guess it. For six to nine months afterwards, you feel the need to keep tracking that company to see if you we made a material mistake. Now as it is in hindsight, two and a half years later, it turns out we didn't for about six months after it looked like we could have done so. You have these real kind of oh my God, what have we done? Moments, but just comes down to that point because you got to stick to your conviction. As you said, if you set goals, standards and what the basis to which you will do this transaction on, as soon as you're diluting below them, do not do it. And that's the golden lesson. Don't talk yourselves into it.

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

Oh, we've seen lots of crazy deals over the time. We've seen really low quality businesses where the data, the actual results were not as they were presented. These whole new concepts that seem to be very fashionable really in cyclical peaks. Cash based ebitda. I still to this day do not know what cash based EBITDA is for. What it looks to me is a very aggressive form of accounting, pulling forward kind of future revenues that you haven't actually got to somehow make the profits of a company look bigger than they are right now. And from my experience, cash is cash decent. There isn't a variant of cash where you haven't got it that you can suddenly call cash. When I look at some of the stuff that's going on right now and people are buying on that basis where you basically take, I mean, I can tell you right now I looked at a transaction in the last 15 months where the cash based EBITDA suggested it was doing ebitda profits of 82 million. The gap based EBITDA suggests it's doing profits of 37 million. You pay a multiple on 82 that's got any relevance to 37. You are on a loser at that point. And I think it's just human nature, particularly when there's a gold rush, which, let's be honest about it, right now in the M and A markets because there's far too much capital around and not enough deals. We're in a gold rush. And my view is right now there are a lot of crazy deals getting done. Deals where people are paying 1 1/2 2 billion dollars for businesses that I can't get above 7,800 million in value for. And by not buying them, you have that concern and that worry that you're seen as the person that's missing out and you're the idiot. There's nothing like time to tell you whether you're good at what you do or not. And that is the way you've got to be confident. If you have your conviction, it's not a business as of that that quality worth that price. Stick to your guns is my advice because I've seen far too many crazy deals done. Price is paid. You know, look, at the end of the day, once you've paid it and you bought it, that's it. There's no easy fix.

Thank you so much for your time. I enjoyed this conversation today.

Yeah, my pleasure, my pleasure. I hope everyone in your groups that are practicing M and A, frankly, it's the best in my view. Look, I'm a chief executive, but I still are very active in it. M and A is one of the most exciting careers you can be in and one of the most exciting jobs I think that exists. Making investment and buying decisions is very exciting. So it's great that you've got so many people in the act of it doing it. But my God is adrenaline in this case is your worst friend. Go for walks regularly. Take that moment where you actually don't make that decision. Disappear off for a couple of hours, walk a dog, have a think about it, really rationalize it. Because that's the danger of M and A is adrenaline drives you to do things that normal humans just would not do. And in the cold light of day, you look back and I've seen it. I've been involved in them in my earlier career. You look back and you just think, oh my God, what were we thinking? And that would be my advice to every professional logging into this is do whatever you can to avoid those moments.

Thank you, Duckett. Well said. Very much appreciate your time today.

Yeah, and yours. I've enjoyed it. Thank you very much for having me here and I hope some people have gained some nuggets of value out of my speech today or my points.

My pleasure. And here's to the deal.

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