Transforming a Company Through Strategic Acquisitions

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I'm your host and chief, M and A scientist, Kisan Patel. Joining me today is Fred Heller, VP.

Nuance Corporate Development and Integration at Microsoft. Microsoft is a multinational corporation and technology.

Companies best known for software products like Windows, Microsoft 365 and the Edge Web browser. I think everybody knows Microsoft, but if you don't know they're traded on NASDAQ under msft. Today we're going to talk about how to transform a company through strategic acquisitions. Fred, how you doing?

Great, thank you.

Thanks for taking the time.

We're here live in the Boston area.

Secret undisclosed location, but we're live. This is fun. I'm glad you took the time. Really excited for this interview. Can we kick things off with a little bit about your background?

Sure. Happy to Computer Engineering Undergraduate, University of Michigan. Worked for A few years out in the Bay Area for a couple firms, including Venture capital Incubator, one of the first run by Nolan Bushnell, the founder of Atari. And then a couple of years later I went to Harvard Business School, then came east and worked for a small management consulting firm. I even did a startup at one point and then was working for Xerox in corporate strategy and then later joined. In 2006, I joined some guys who had left Xerox and started the acquisition path for what was then Scansoft, then Nuance, that was later acquired by Microsoft. So I joined them in corporate development to help them on their essentially acquisition oriented growth plan, but done a lot of different things.

I think what's interesting is you start with the engineering background and I got this hypothesis that that's what really makes top notch M and A leaders.

I personally feel that kind of the diversity of my background, engineering, actually marketing and strategy has been a benefit to me in M and A. There's a bunch of people that are in M and A come up through finance and through a very. Some are refugees from investment banks and whatnot. But certainly one of the things I've always enjoyed about my job is the diligence is the integrative nature of what we do in M and A. And having kind of this diverse background myself with again, engineering M and A, it just helps your ability to ask questions and to understand the answers. Even if I'm completely functionally obsolete with respect to engineering and even some marketing at this point. I like the fact that I have this sort of different background.

I think so. I think it plays out well from all these interviews I've done. Sort of being able to have different skills like being able to really zoom in, zoom back out.

Yeah, it helps with your, you know, your BS detector when you're hearing things, whether it's from a counterparty or whether you're hearing it from your own people. It just sometimes helps you ask better questions.

Right.

That's what it comes down to is a better BS detector.

That's right.

Your career at Nuance is pretty interesting. Quite extensive, like how many years, how.

Many deals, Depends on how you count deals. Somewhere north of 40 deals. When I joined in 2006, the company had just finished its second acquisition in Healthcare IT and they had acquired essentially Dictaphone and they had acquired a Med remote firm out of Chicago in transcription software. They hadn't divisionalized corporate development before then, but they essentially had a critical mass then of what was going on. And so they asked that I basically embed with the healthcare team and just help grow that business through acquisition. And then a short time later, they also handed me kind of the legacy document imaging part of Nuance, the part that was Scansoft, the part that was spun out of Xerox, actually. Then I stepped in and helped them with a series of acquisitions as well. But yeah, a lot of acquisitions, about 10 of them were actually what we called asset acquisition. Sort of a roll up strategy we did with very small transcription firms, which is worth its own discussion. But essentially we had a template, a cookie cutter approach, so we could very efficiently deal with acquisitions of under a million dollars without spinning up the usual diligence, legal, all the overhead. That 10 is floating there in that 40 deal. So it's somewhere north of 30 of real M and A deals.

That's a lot. Now, I know our conversation is themed around transformation can give me a general sense, what does that actually mean in the context of Nuance, how the business transformed through acquisition?

Certainly one case made it from a small company into a big company. So some of what we did was certainly consolidation and consolidating and becoming a major player in several market segments was great. But also, of course, the more interesting part of transformation is when we saw those opportunities to add some technology, add some distribution, add some capability. Some cases, adding just a very raw capability helped change the trajectory of the company in terms of what we were able to do. Moving us from essentially traditionally a voice recognition centric company into broadening the share of stomach that we had with our users, both on the radiology side and the regular clinical side. What more can we have them do and accomplish at the same time? And then as well, I'm sure we'll get into, you know, essentially the pivot into more and more natural language understanding and processing and AI, which was quite transformative. And now leading to Nuance, Microsoft being the leader in clinical ambient intelligence. The seeds of that were collected and germinated through some of these acquisitions. And it has talent, of course, but it was all catalyzed through some of these acquisitions.

Can you paint the picture? Like when you first joined, I remember this is what, back in that time, Dragon Dictation was like the main flagship product.

Yeah.

And it was pretty oriented to consumers.

Yes.

Was that majority? Is that what it was? It's like, hey, they had this dictation software. It was geared towards consumer. That was most of the revenue.

No, most of the revenue has always been B2B. Certainly the outside world would see a box product at Staples and think of that as being Dragon but all the stuff that we did, the other kind of division, so called enterprise division, was essentially the airlines, the banks, all that kind of stuff when you call in and it forced you and forces you into the voice recognition loop. It's the stuff that people love to hate but that added a lot of value to those customers. So those avoided agent interactions, high value to a lot of those companies. So that was actually a big part of the business and healthcare was really just coming on. So when I joined again, the Dictaphone acquisition was behind us. Dragon was starting to be used in healthcare, essentially building out the vocabulary. The accuracy in voice recognition has changed so much over the years and certainly early on it was enhanced a lot by the fact that the vocabulary for doctors, as you know, very complicated vocabulary, was pre programmed in. So it wasn't hearing age defibrillation for the first time from some user. It was already in the system, if you will. All that specialized vocabulary was there. And of course the other huge advantage then and now less so now was the fact that with doctors and with our professional users, the system trained up on your voice. A Dragon consumer trained up in a very trivial way. It was not extensive. Obviously doctors, the speed and accuracy requirements are so much greater nuance, totally developed that and others, but totally developed and perfected the ability for the software to understand a blazing fast doctor speaking in all sorts of jargon, English perhaps as a second language. And doctors didn't care if the software could keep up with them or not because of course in the early days a lot of this was happening behind the scenes. The doctor just spoke into a microphone, didn't see the words appearing again, they had no care. It'll all be figured out by these transcriptionists. So so they would return a draft for the doctor to sign and review. And so the software was working behind the scenes in most cases in those early days. And then more and more Dragon Medical became accurate enough for doctors when they see the words appearing on them in front of the screen. They were very satisfied with that result.

Wow, is this a good time to confess? I actually pirated a copy of Dragon Dictation when I was 15 years old.

Well, it's now being recorded so I'm not sure what the statute of limitations.

Is on that statute of limitation, but it was actually really cool at that time I was like so impressed. Like this is incredible technology. I mean this is back in like mid-90s or late-90s.

I remember my brother in law, doctor saying yeah, I take the consumer version of Dragon for $40 from Staples and I feed it pages of medical vocabulary that I scan in. And that's why I get around paying the 2, $300 for dragon medical.

It's like, all right, that's funny. But now it's really cool to hear how that evolved and they really found that focus in the healthcare industry. The strategy part I'm curious about because we kind of have this path that's basically organic of how the business is evolving. You mentioned buying transcription companies, which seems a bit counterintuitive. That's the direction that they're going or how the technology is evolving. Maybe you can walk me through how the strategy was when you joined and how it evolved over the time.

Sure. So of course the strategy, then there's sort of two or three big pieces that the transcription acquisitions did for us. One is, hey, we just needed to get as many users speaking into our systems as possible so we could keep training up our technology on more and more users. Just like we've heard about AI over the last five, 10 years, you need a lot of data. Getting customers that were willing to allow their data to be trained up on AI, of course, all the privacy concerns and all the HIPAA requirements, very important. So de identified, et cetera. And A getting a lot of data, B, of course just getting the market reach. The fact is that more and more hospitals wanted to have a one stop shop. Some still had their own set of in house transcriptionists and were using technology from companies like Nuance and others. And it just became more popular for them to say, we just want to outsource this. And then certainly Nuance supplied software to some of the outsourced firms, but then you're kind of another cog in that chain. So we made the decision, let's go into that business, let's be the service provider so we get that business and so we can use our technology, get trained up on it as well as take the service part of the revenue. Because, you know, whereas the transcription software was a penny or two per line, the amount spent on the transcribe, the full product could be anywhere from 9 to 15 cents a line. It was a big boost in revenue to go after that part of it. Of course you end up managing lots and lots of people. And then of course there was an offshoring in that period where more and more was being moved so you could reduce the labor content, pick up some of that profit. But of course customers then demanded that some of that savings be passed on to them. Certainly over time the transcription services business became more commoditized not where the value was in which we ended up then divesting that side of the business. Eventually, once we really had kind of broken free of the need for that additional data, we really had all the data and we're pivoting towards a software only kind of view. How do we in fact get more into natural language processing? That's sort of the path.

Did I miss the point? I have data market reach. The third one, Cost synergy.

Yeah, some cost synergies. Certainly that was a part of it, but frankly also just size. Our CEO Paul Ritchie just really wanted to be a bigger and bigger company and we were continually rewarded for that in the market and that was certainly a part of the strategy to grow our top line revenue.

Yeah, like fairly easy to do because you can find a bunch of those transcription companies and.

That's right. And they were relatively cost effective in terms of multiples versus pure technology companies.

How do you think about that? Were you public at the time?

Oh yeah.

When you do those kind of acquisitions, does that make any kind of impact or get viewed in terms of valuation? Like I run a SaaS company and if I started buying things or looking at adding things in a business that wasn't saf like I get big question marks as a smaller private company, but does that get looked over as a bigger public company?

No, not looked over at all. So something that everyone tracked and all the analysts and was all part of the every earnings call in terms of what is the amount that is this business versus the technology side of the business. So it was very visible and certainly some of the analysts look some of the parts kind of stuff, they would value it differently.

But you just justified the strategy enough for that.

Exactly.

Why not? Okay, so that's when you joined the company. Where were we at? I Forgot you said 2003.

2006 is when I joined. This was. This journey was just beginning. So really from 2006 through I would say 2012, 13 and healthcare, both prescription service firms as well as transcription technology in the diagnostic side of our business, radiologists again technology firms as well as we started again diverging into other kind of share of stomach acquisitions, a radiologist being in front of their multiple screens. What other information could we bring to them? What other non recognition based services could we do? And then of course how do we add more intelligence? Some of our acquisitions started doing more with natural language understanding ontologies essentially maps of the body. So you can understand when someone uses a technical term about an arm, they're talking about an arm. And the things associated with an ARM as opposed to something else. And this can help you then improve the accuracy of the software and other intelligent features that you're asking when you understand. So we acquired many technologies like that to improve our ability to understand what both regular clinicians and radiologists were saying. And then how do we feed that information back to them, not just in accuracy of the document, but how do you use it to add more value to their workflows and processes, prioritizing everything else. We also did acquisitions that moved away from recognition entirely. Things like automated coding, quality measures, other things that were associated with the healthcare information management function in a hospital where, again, the improvement of clinical language, understanding and intelligence was becoming more and more important.

It sounds like you got two themes. One's improving the existing business lines and keeping them relevant and then adding new business lines.

Yes. And we were very much into close adjacencies. So our strategy was not like, let's find a lily pad out a bit and then use this to go somewhere else. We wanted very near adjacencies where you're talking about the same buyers in many cases, the same users in many cases, or workflows that were upstream and downstream. So again, the advantages and the intelligence that you were adding in one step of the workflow actually accrued a benefit and in the other part of the workflow. So we definitely had a value chain, workflow chain kind of view of our users and decision makers. We built out with that in mind.

What's like the market position from the time you started to now where it's, hey, we have dictation software versus how would you frame Nuance's market position today?

It's a pretty amazing transformation and I feel fortunate that I was a part of the team that did all this. In 2006, we started Peter Durlock and shortly after Joe Petro, we were really finding our way. So both of those guys had a lot of prior experience in healthcare it, but for Nuance, then expanding our again, our reach, our technology, our depth, all those things. We were one of the main players in medical transcription services and technology at that time. And now we became probably the number one player in certain tools for radiologists. And of course, as we've really pivoted hard in the last five years with large language models and other forms of machine learning to add sort of this ambient intelligence, I think it's fair to say that Nuance, at that time of acquisition and now catapulting with all of Microsoft's assistance and reach what the DAX Product is, I think the industry leader and the most exciting products in the industry. It literally listens in on a conversation between a clinician and a patient and does all the work for the clinician in capturing the note and structuring the note and giving them a structured note back for them to approve. It seems very much like magic and it's life changing for these clinicians to have this work that used to be tedious and time consuming. There might be again 2006, there might be a three day delay between they spoke into a phone and when they got the draft to edit and approve. Now this happens in near real time in many cases that they just have a conversation and the software knows who's saying what, filters out extraneous information that a patient or the child of a patient or someone may say during the interaction with the doctor. It's just an amazing leapfrog and capabilities for the industry. And I believe that the nuanced Dax Microsoft product would be viewed as the leader in this whole new world.

Is it still described as dictation or how would you.

No, I don't think so.

Now it's like, yeah, you kind of broaden the scope quite a bit and you got AI in the play.

Exactly. So this is. Dictation was all about accuracy. So did you capture exactly what the doctor said? And the first baby step was taking what the doctor said and then making sure that it conforms to consistent hospital policies on how they should be identified, Identifying things like a doctor may say blood pressure, but the hospital wanted every report to use BP instead of blood pressure. So again, the software, very simple, would convert what they said into what the norms were for the policies of that hospital. So you go from that kind of stuff all the way up to where it is now, where you're really putting together a note based on the meaning of a discussion between a doctor and a patient. It's a whole different situation.

Oh, interesting. Like a little bit of that extraction and summarization.

Exactly.

All right, we're glorifying the good part. Let's talk about the bad. Like the consumer business, there's no drag and dictation as a consumer. You hear about it anywhere and it just trends change. I need to dictate something. Either Google or Apple's going to do it for me. I want to know behind the scenes in the boardroom, how do we strategize off of that?

Well, I can't say what's happening in the boardroom. Certainly as a member of the company, we were an early supplier to Apple on their voice recognition software that they supplied for free on iPhones. And that was good business for several years. And Apple got better and better at their own recognition. And then we were no longer supplying that. But certainly everyone realized once voice recognition was available on essentially everyone's phone for free, that our consumer product did not have a lot of life left in it. Certainly it remained more accurate and more useful for a lot of people than the free software provided. For example, there are some professional users especially, but also some advanced prosumer kind of users that they liked. The fact that our software was embedded into the operating system so you could actually control the whole PC using your voice. So they could just use a headset. Certainly people with disabilities relied on this as well. There was sort of a decreasing and decreasing set of users, but niches that were still into that consumer version. And professional version is still a valuable product in law enforcement, in legal. People that really need the higher accuracy want the software trained up on their voice, specialized vocabularies, et cetera, and workflow. You take documents, it automatically inserts it into another workflow. So that still remains a small segment, but certainly as a company we recognized, and it was happening to us, whether we liked it or not, that the consumer, the broad consumer side was going away. And it did. But luckily we were growing fast on the professional side of the healthcare side, on the enterprise side, on mobile. For a while we spun that off. Then some years later, that's the one.

I was curious about. Like, do you look at this and say, hey, do we divest of this business line? Do we just keep running it because it's on a very slow decline? Did you do anything that, did you have any divestitures?

The divestitures that we did over the last six years or so were for different reasons. Again, I didn't have a boardroom seat for any of them, but I was involved in several of them. In the mobile space. Nuance supplied voice recognition software for the head units, so called head units in cars. You know, you have some basic voice recognition capability in your car. Of course, then everyone goes then to CarPlay or their Android equivalent. But there is some native capability. And Nuance was the provider to major auto manufacturers for that kind of software. That was a turned out to be a very different kind of business with very long lead times, very long production runs, a royalty based business, a little bit boom and bust. So it seemed very different from the rest of Nuance. And so we spun that out. And that was a company called Sarence that was spun out and has been a public company ever since. We spun out and divested the document imaging business that I mentioned a little bit earlier. I had helped grow that business. It was the legacy kind of non speech business. And so we grew that. And then we again, our new CEO, Mark Benjamin, saw what we all knew is that it didn't quite fit. Yes, it added value to the company, but it really was one thing that was not like the others and it was past time to go ahead and divest that. So we did that. We divested the transcription services business to then make sure that we really focused on technology. That business was already in decline. As the technology got better and better, as Dragon was making it easier and easier for doctors to speak and see the words appear directly before them on the screen. The business of recording it, sending it to a transcriber to touch up the draft, that whole paradigm became smaller and smaller.

It's pretty interesting stuff.

And certainly for a person in M and A, doing divestiture is a great thing to go through. It's a great part of your experience in M and A, but it's a lot less fun. It's always fun to be the buyer, the one asking the questions, if you will, as opposed to the one having to answer the question. So it was the other part of it that was revelatory, was kind of being on the other side of the desk for a change or work on.

The sell side, isn't it?

Yes, it's the sell side.

Not as fun work either.

No, no, the sell side is my side.

You get to interrogate and just be wildly curious and ask whatever you want. And they got to respond to you.

That's right. They have to respond. And if they say, well, no, we're not ready to say, and you go, oh, that' red flag. Exactly.

Talk to leadership about this.

That's right. So the shoe was on the other.

Foot of all these deals. What was that thing that you were super good at? If I were to benchmark you in terms of your role? Yeah. What was your sweet spot? What were you really good at doing?

It would be fun and horrifying for you to ask my bosses. Over the years, of course, I really enjoyed the interaction with the CEO founders. That was really the best part of the doing the M and A Deal part and where you have a chance to really add value by the relationship being a part of the thing that the seller feels that they're getting. So made the process more enjoyable. Yes. But I think it also in some cases helped to get Deals done and maybe it saved us some money, I don't know. So there's that part of the job which was very intrinsically satisfying to have those relationships, certainly especially the firms that were smaller. You get under 10 million in revenue, you probably have kind of an owner, operator, founder involved. And it's a nice experience and a chance to use your personality. The other part of it though, that I think is just as enjoyable for me is the interaction with our whole internal team. And I don't mean just the M and A team, the virtual team that is a part of an acquisition. At Nuance. We did enough acquisitions that people knew that this was what they were supposed to do and how did they help? And this was the strategy. Some people even they were in the finance department or in hr. They had M and A on their business card. They were part of the team fully. That was their full time job. So working with them, working with the technology people, yes. Sometimes you had to kind of tug and pull to get them to commit to meetings and to give you notes after meetings and slides and edits and review things. But being that person who was coordinating all of that, being the one throat to choke on understanding it. And what I've actually said to some folks I've mentored a key role in M and A, in the kind of a deal lead position like mine is triage. You have to be able to listen to everything that's being said by the counterparty. And I like to be on every meeting. I did not like to just have the specialists that we had just run the meetings and then look at the reports. I like to be in every meeting. And you just, you listen with a different ear to the standard triage stuff. Sort of a little interesting, a little bit concerning. On the one hand, in the middle, things that are potentially troublesome, maybe we need to flag it in some way in what we're doing. Maybe it leads to some change in the model. Maybe it gets a reference as a yellow flag in something. And those things that are truly concerning, possible showstoppers at the extreme, but things that are fundamental, that you need to escalate almost immediately. So it's a key part of our job to be the voice of Nuance, to be the person who is most embedded in that acquisition, to think about things in those three buckets every time you're in a meeting. And that also goes for the meetings that you have with your own team, your diligence partners, because they can get quickly alarmed at things. And so you have to like, okay, yes, we Heard about that, but that's actually not a showstopper. That's just something that we have to make sure that we cover in a rep and warranty. That's something we may need escrow for. That's very good for us to know, but it's not a disaster. And some things that they may hear and may be something in one kind of specialist diligence meeting that is actually important for another stovepiped diligence group to know. Not everyone can be in every meeting if HR says something about some of the people that are actually contractors instead of full time people, that actually may be very important to our R and D people in terms of longevity and ip. And so you have to be the integrating mind that is hearing everything and understanding how to interpret it, how to prioritize it, triage it, and make sure that it's properly spread across all the specialties. And of course, very importantly, reflected in reps and warranties, in disclosure schedules, and in of course, the model.

How much of that is from knowing your business, all the nuts and bolts and how the business actually works and then how much of it is from intuition you developed from the years of experience of doing this?

I think back on that first year or two, I was not someone who came from M and A. I was involved in one acquisition at Xerox, but as the strategy guy, not as the M and A guy. And the leaders at Nuance had faith in me based on my background, that I would learn the new skills required to succeed at M and A. Of course, as they later said, or they would have gotten rid of me. But certainly those first couple years I was learning on the job, certainly then you were leaning more on your diligence partners internal to help you detect things that are troubling and not. And then of course over the years you get better and better at hearing what they hear and figuring out how to prioritize. Like my first deal, literally my first acquisition was an Indian based transcription company. Their corporate structure was Bahamas and this and that. It was definitely trial by fire of all of these issues, international issues, corporate governance issues. It was a mess. So that's how you learn.

It's like a combination of all these different things that really come together to make you good at it. And then I like that point around that prioritization is essentially we get better at going back to that last area we were talking about. A lot of it was relationships at the end of the day. And you had this relationship with the target company CEO and then also your internal deal Team. Especially that part where you mentioned save money because I'm Indian, as soon as I hear save money, like perk up, I'm curious about it because you mentioned the relationship with the CEO and how important that relationship is to get the deal done. I'm trying to fish here a little bit of does that relationship and how good of a relationship you have allow you to save money?

I think so. Every deal has its own personality. Some sellers, especially if you've got a financial sponsor involved, they're going out after every penny. As one PE guy said to me once when we're arguing over something in the final days of the tentative agreement, and he says to me, fred, I know we're arguing about pennies here, but it's my penny.

That's like the mindset, though, you're a big corporation, you're a machine, and this is me.

Exactly. And then you have other people who are much more. We want to get this done. There's plenty of money here for me, the founder and my people. We're getting fabulously rich. They may bring it to it. A different mindset of where they're willing to compromise and all of that. And certainly many, many books have been written about negotiation. And every situation is different. All the personalities are different in terms of the getting to. Yes. And how are you sharing risk, the dollars versus some of the other terms, conditions around it, the retention packages, and the terms and conditions around retention packages. So a deal that may have a headline number of 20 million, we were not in the billion range. We were 20, 30, 40, 50 million, sometimes 400 million, sometimes bigger, sometimes smaller. But we were in that sub billion range in almost all of our deals. The headline number, which a lot of people focus on, is not the only place where important value is being defined and apportioned. It is in a lot of those T's and C's. And again, that's why as an M and a person, you have to be fully involved in every comma and every line of the definitive agreement and the disclosure schedules. You are the fiduciary with respect to looking out for the interests of the company and the board and everyone involved and making sure that everything gets properly reflected and that you understand it. And so the price is just really a piece of it in terms of important value.

Let's say we're negotiating a deal and I'm fixated on more money. I want to get the most out of this exit. You want to save money, what would be the other dials that you'd start looking at? To maybe justify either paying more, paying.

Less, there's a thousand of them. Because it does get reflected in so many of the definitive agreement terms and conditions. So whether it's how much escrow for how long, tax protections, how long do they last? We had firms that had things in their subchapter S compliance that we may not have fully agreed with their lawyers on whether or not it was in compliance. So are you protecting the nuance on what happens if those compliance factors are later challenged? So are you getting protection for all of those other factors? And obviously a huge one, earnouts, the terms of the earn out, the flexibility in the earn out terms and conditions. So all these elements are huge elements in the factor of dividing risk and dividing value.

Every deal. New dials.

Yes.

It doesn't make this easier. Teach me how to save money on a deal.

To a certain point, you look at every decision as a source of value creation and risk division. And obviously if you take it to the illogical conclusion, then you never get a deal done because you're keeping everything to your chest. You want to win every battle. The fact is, what most people do, and again, I don't think this is unique to the nuanced style of doing deals, is that you get further and further along in a deal. Loi, wine and roses. Yes, that's an important negotiating point. But again, a lot of the value then is still further on in these terms and conditions. And as you get closer and closer to where you want to sign a definitive agreement, the list of things that are outstanding gets smaller. And obviously the things that end up being still open are things that people care about a lot. You just know that you're not going to win every one of those. You start putting together little buckets, little packages. So, okay, we're willing to give on this and this. If you give on this and this. Now, is there a risk then that the counterparty says they then cherry pick? And they said, okay, we'll take the things that you're willing to give on here, but we're not going to give you the things in return because they now know we are willing to do that. You have to just play those situations by ear and figure out how you can actually get some balance in those negotiations. And that is again, where a huge part of value gets divided in those final important negotiations.

So if you had something like, here's, I see maybe you're trying to adjust price, but you had these five other dials that you identified as leverage, would you just present those all at once and Then you get in that situation where they start cherry picking. Or is there a way to. With intuition. Right. Can I sense or do I scout it out in a conversation before I do that?

I mean, the tools of acquisition tend to make this pretty visible. You're trading red lines. And so then you move from trading red lines where you're just like, you know, you keep changing everything back to the way you want it and they keep changing it back to the way they want it. So you end up creating a tracking list of the key issues. So it ends up being a sort of a separate document, kind of a term sheet, if you will, of the things that are open and not open. This is usually the time when you have to get ready for in person discussions as opposed to doing everything remote and having those discussions, going to the whiteboard, writing things up, circling things with the counterparty. This is the scary and gut wrenching part of getting a deal done. Your CEO and everyone's either saying, just get it done or they're saying, don't give up on this. You and your other members of your tight deal team are up to your eyeballs. Then in trying to placate both your internal and external participants in getting something done without giving away the farm that is the most tense part of any deal.

What's the hardest thing you had to negotiate?

There's a lot.

No names, just I'm curious, like scenario wise, what was the hardest thing you had to negotiate?

Oh, scenario wise, yeah, we'll protect the innocent. Certainly some of these tax related reps and warranties and terms around earnouts get very emotional. Those protections, retention things, elements of those retention agreements in terms of what constitutes constructive dismissal, where they would still get their payout for the retention. If we do this, that gets very difficult. Again, in the deal that I was saying before my first deal, we had a situation where in buying the company with their several multinational Bermuda Bahama entities, there was a situation where they needed to unwrap that ownership structure and. But they didn't have the money before close. So to us on paper it looked fine. We were paying them all this money. The loans that they had done to each of these corporate entities for the various reasons they had set it up from a tax standpoint, they couldn't unwrap that pre close. So we had to come up with a way for us to provide a little bit of money for them, which again, we're not a bank, right. A little bit of money for them to literally run money around their corporate circuit three or four times paying off loans in a triangle so they could actually clear the ownership structure as we required to actually do the deal close. It's things like that where you have to get creative. In this case, you're coordinating your international tax experts, your legal people, your treasury people, everyone who's trying to do their job in protecting their turf. And you've got to get everyone to communicate and to agree on an approach. And again, in this case, as you recall, this was my first deal, so I was trying to navigate all this with lots of help from Rich Palmer, who was my boss then and my real mentor on all of this. Have to find a way in these situations. We did one public deal that has its own incredibly complicated nerve wracking things around, getting things done. It's also of course, one of my favorite stories. As many deals as I have, I have at least that many stories because each deal has these crazy stories. In this case, public deal, we've cleared HSR. We're about to close the deal literally within 48 hours. And I hear from the operations head of the counterparty that there's something that they're not sure if it's a problem or not, but one of their Indian facilities, the employees have taken over the facilities and locked the managers out. In some cases, the managers are still in there, but they're keeping them there. Okay, and is that a problem for closing? This is the phone call you get. So what do you do with that? What do you do with that? So that's the challenge and the fun of M and A is being the person that gets that phone call.

Did you ask for the crazy story at the end of the podcast? This is. This is good. I like this.

You're now the person has decide which alarm bells do you ring? Who do you bring into this? How do you keep people looking for solutions as opposed to panicking? So we found our way through it. We said, certainly we're not going to close until the situation is resolved. We're not going to step into your shoes on that situation. They understood that. So over the next couple days they were like, okay, the employees have left. So just cutting to the chase, the employees have left and we have control again of it. I'm like, okay, we're going to need proof. And so we talked about this and what they literally did is took today's copy of an Indian newspaper and they went around the office taking pictures of the office being cleared of people with today's newspaper in every shop. And so we got this 50, 60 photographs showing each of the floors of this multi floor facility with the proof of life.

What about the employees?

It was one of those points in time where the company had started reducing its footprint and so they were encouraging employees to work from home more. Some employees didn't want to work from home. And again, this is not Covid related. This is just. You can imagine the logistics of getting employees to facilities in Mumbai, very difficult. The commute time, the cost, all that stuff was much better. It's the cost of real estate. Again, this company had been reducing its footprint and encouraging people to work from. Some people were again protesting to that degree that they did not want to end up working from home. So they were essentially locking themselves in the office. I forget what the resolution was in terms of how to deal with all of that, but we did deal with all that post, but we didn't take on a building that was occupied.

The deal is you run into a brick wall, like just game over. Tell me about those.

Yeah, there's been a number of those. In general, we were pretty aggressive under Paul Ritchie, we were pretty aggressive in getting deals done. We found a way. And does that mean that we caved on very difficult terms? In some cases, probably yes. But in all cases we still felt that we were operating certainly within our guidelines and within full board approval. There was one situation, I was in New York City on another matter, but we were trying to negotiate an LOI on another matter and they were choosing between several parties. I was literally jumping out of meetings on the phone, supposed to catch a flight from LaGuardia back to Boston. On the phone the whole time, cab out to the airport, they just are going with somebody else. And we're just. And I'm talking our people, I'm talking to their people. And then they said no. They said, we're going with this other way. And that's not what our boss wanted to hear. The reason the story remains memorable is when I got to LaGuardia, there was horrible weather. So they said no flights to Boston. They ended up. Few of us that were just standing around a service car said, all right, who's going to Boston? And so three or four of us that didn't know each other piled into a car together to drive to Boston. I'm in the front seat, I'm on my laptop, headphone on dealing with my CEO, dealing with everyone, trying to figure out what we're going to do. And then the call ends and we're just flying along the Merritt Parkway and I'm just silent. And these people who I did not know sitting in the backseat. They were kind to give me the front seat because they knew I was doing that. They saw that I was involved in something and they were like, is everything okay, Fred? Are you going to be okay? Because they heard how I had to try to manage this situation. It was very heated with me being on clearly the receiving end of this heat. That was again one of those moments of high pressure. How do you do this? And then we did get authorization to increase our bid and we got the deal.

You ended up getting the deal.

Ended up getting the deal. That's the thing. Sometimes you have to snatch victory from the jaws of defeat. Sometimes you just lose.

Turn this into happy ending. I was looking for the story that ended of the bad ending. That's where I was trying to. No, no, give me a bad ending story.

So it was a bad ending story. I have to be more circumspect.

Certainly part of me just, I want to get a sense what are the circumstances that you really hit these brick walls that you can't get around. And I want to get a sense of that so I know what to look for ahead of time.

Yeah, I mean we had a deal that was our acquisition of Philips Speech recognition systems in Vienna was being HSR reviewed and so that has a second request.

Can you explain HSR real quick?

Parscott Rodino is a part of our commercial code in terms of anti competition. So that's the standard thing that we all have to deal with. If a acquisition is of a certain size, you have to, there's certain carve outs but basically if an acquisition for a certain size then it has to be filed. Then The DOJ has 30 days to tell you whether or not you can actually go ahead and close this deal or. Or they have to make a second request. The first request is the information you have to file with the deal and any ancillary initial response questions they give you back. Second request says we're really doing an investigation here. You can't close. And this is why so many deals, you'll hear this on CNBC and otherwise. Oh, like the Microsoft Nuance deal was reviewed by HSR and was reviewed by European anti competition. And because of Brexit also British deals get stretched out for a year as these competition folks do all of this work. So in the US HSR is the shorthand for this. So this deal was being reviewed by our DOJ even though only a portion of the revenue was us, blah blah, blah. In the process of all the document discovery, this is every email on the deal PowerPoint. Just imagine the volume and the stories I could tell you about kind of going through the DOJ process and some of these deals. It's just long and laborious.

The pipeline thing, I'm still stuck on to get your pipeline in review. And then all of a sudden they use that as part of the decision thing. That's bogus. I feel like that's not cool at all, because that's part of it. You got to have a vision of acquiring the whole world. That's what you're supposed to do. That's like doing your job. I don't. Anyways, I digress on that.

Yes. And we had those conversations because they would say, so it is your plan to do all of these acquisitions? No, this is a plan to do some of them. This is sort of our wish list.

Anyway, my big takeaway from keeping my ass out of trouble with the feds is like, really having phone calls and making sure they're not being recorded is, like, probably the safest bet in terms of exchanging information. Because it seems like all this stuff coming back to you is anything a.

Written document, written texts, chats. So as the technology's involved, they've gotten.

More inclusive of all of that on computer.

Yeah.

And now every time I have a zoom call, it's all recorded and transcribed.

Exactly.

Do we gotta go back to, like, payphones or remote meeting in remote locations?

So it seems especially my favorite was when I would get. And of course, because we were so involved in speech recognition, we had products, our enterprise group did that were involved in the transcription of your voicemails. We were one of the first companies to offer that. And as the supplier, we were one of the first ones to be using it. I would get an email that would be a transcription of the voicemail of someone saying, hey, Fred, I wanted to bring this to your attention. I think it's one of those things that I'm not supposed to send you an email on.

That's what you got to do. This is a great practice.

So that's great. So they left it as a voicemail, got transcribed, and then came to me as an email.

This is a good lesson for everybody. I think you got to brief your team on what information you pick up the phone and cell phone and call.

That's right.

And just unless you're thinking that's. Unless you have some most important thing.

Is just to behave. Just everyone just behave and behave.

But there's a. I've had it. I've just. Something comes on your way and it's yeah. And maybe so there is like a bucket of it's going to happen. You're going to have information that you probably don't want documented and maybe early season. But yeah, general business usual is just behave.

Yeah. And also of course just steer clear of situations that may be controversial and sometimes that means that you don't do deals.

Now I got good story mode. I'm just curious about the Microsoft exit. How is your exposure to that? Sounds like a huge deal and huge deal.

As pre signing discussions were going on, I was basically my job was to get our transcription business divested. So here's over here.

Microsoft's reaching out, their executives are probably involved. It's a big deal. And then they're probably working through your executives on it and they're coming up with this thing. Yeah, this kind of makes sense. And boards are proving this stuff because basically it's a board level decision that's hey, by the way, we need to divest this chunk of business we had.

Already started that you already started.

So hey, we're planning to divest this. We're going to keep divesting it. Fred, you got to stay focused on that.

In fact, it was already been signed because they knew that.

So it's just signing.

But getting it closed was a big deal because it was a spin out. They had to set up new systems. They had to really be ready to accept the business. So getting that all done was nail biter for everyone because we knew that it wouldn't be until that was done that everyone felt comfortable actually moving forward. But that deal had been signed, not closed during the discussions. As far as at the point that I was brought in, when I was brought in under the tent, it was probably six months before signing. But my involvement was like the last month of pre signing diligence. All of Nuance Corp Dev was involved. We became the key people to respond to those last key requests from the Microsoft Team, executives and diligence team and what I now know as an insider, the Mavs team and corporate development, the Microsoft acquisition and venture success team, asking a bunch of questions, getting ready for the deal to be finalized and the final negotiations. So I was not at all involved in any of those negotiations. I was a diligence facilitator and then after the sign pivoted to being the point person for Nuance for the integration effort.

We've talked about the front end part. I like to talk about doing the deals. Integration has been a big part of your role.

Certainly when Nuance was doing a lot of acquisitions Nuance, we were doing six a year with a small team for a few years there in 2007-2012, probably our most intense years. And so we had a very separate integration team and the idea was that we take care of getting the deal done and then we hand off as quickly as possible to the integration team to do the integration so then we can return to being deal guys. Over time, as Nuance was doing fewer deals a year, less of an integration team let it trip down and then we were leading our own integrations as well as the deal activity was lower. So there were several deals before the acquisition where I was the integration lead as well. Over time it shifted as we did fewer deals.

Makes sense to have you involved. But the integration was a huge deal.

Yeah.

How's it been? Is it like there's a playbook like a company like Microsoft's like all right, we've done similar type of big deals. I guess the other piece is like you look at LinkedIn so big that can't just fully integrate this thing just like that.

Microsoft has a very formal practice around this and a team, the MAVS team that does this and they do a great job. Obviously this deal was larger than most and it was the enterprise division that had one set of commercial characteristics. Again, this is the business, the B2B business, financial institutions, airlines, insurance companies. So that had fewer large customers with almost like a consulting paradigm involved. And then the healthcare business that was larger but still very different. So you really had almost two separate integrations to ATT and ck. And I think to Microsoft's great credit, they came into it saying we need to figure this out together. It is not here is the script of how the next six months are going to go and blah blah, blah and we're going to onboard everyone by this date. It was really, let's figure out really what we're going to be able to do without breaking the business priority is on not breaking the business growth, enabling our AI businesses to flourish and getting essentially top line synergies, not just revenue, but top line R and D. How do we collaborate most intensely, most quickly? Those were the priorities. And so in some respects, like explicitly we slowed down certain things on integration to make sure that we did not in fact break or distract from some of the high growth areas that we were all very excited in and then drop into the middle of that ChatGPT. Yes, Microsoft was involved beforehand and we actually had a relationship with Nvidia before the acquisition on a lot of the radiology imaging technology. But obviously when ChatGPT broke. That went into a whole new effort then of how do we jointly retool, rejigger, reprioritize to make the most impact in healthcare with these new tools?

The acquisitions with AI, the recent acquisitions, Akara and IceCribes.

Yeah.

Post or before Microsoft?

Before.

Before.

Okay, before. We haven't done any post. Iscribes was a few years earlier. And on your theme of transformation, I mean, I think that's really one of the very interesting stories because iscribes was a services company. They had very little technology. They were one of these firms that used remote workers to take recordings from doctors. You know how medical students will be hired to be a scribe. We've all been in the room with the doctor, like, who's this? Who's this person here? Like, I'm just a scribe. And sometimes they say things to the doctor, mumbling under their breaths and sometimes not when they're physically in the room. Iscribes is among a set of companies that had taken this to being a remote capability. But it's a services business. Very light technology, kind of a recording device. And then some workflow to get it to the right person, some tools to assist with the translation into a doctor's note. But still it was being done by a person. And then the workflow to get it back into the right place in the EHR, Epicerner or whatever small company, we'll say sub 10 million. So Pete Durlock, our head strategy guy in healthcare, says, you know, we want to go in this direction because we want to want to be in this area of intelligent understanding of what doctors are saying with patients. And we're like, this is a little services company. The P and L looked lousy. It's a labor business. We were already talking about getting out of the transcription business. This looks like a dog. How else can we get at this? We need the data. The guy who was heading corp Dev at that time and I and we don't generally play a very strong role in screening deals. We try to make sure that it makes passes a sniff test. And this didn't seem to pass the sniff test. This is subpar. Is not going to move the needle. Does not have some great technology, little services business. Pete, you know, walks into the CEO's office and says, we got to do this deal. This deal is going to give us the data to train the models to do what we now know is dax. But we'll change our ability to understand how doctors actually talk to patients, how patients respond to use that data train models to do that all on automated basis. And so Paul said do it. And so we did it. This little service business, small hiring people remote working out of their rooms. The technology to make sure that they HIPAA was all very light. It was technology to make sure they were HIPAA compliant and that the workflow worked. But really just a services business. But the data was key. With that data Nuance Technology group trained up all these models and we're able to launch this incredible product DAX that listens in on a doctor talking to a patient, sorts out what they mean, who's saying what and the generative AI because again this was new to us. We would use rekognition for understanding what was being said. We rarely were having to then turn around and generate text. That's where then Sekira came in. They had done some of the generative AI side with these relatively small acquisitions. We got the data and the technology and the know how for being essentially the industry leader in this breakthrough capability for doctors and patients to just be able to talk, not have your doctor looking at a screen. Distracted doctor can just look at you, ask you questions, you answer. Doesn't have to do anything the HR and then it gets a note that captured all that information properly. So it's just been a game changing thing and it came from small acquisitions with key technologies that were spotted by a very smart guy as being the linchpin in the future. That's transformation.

I like that. That's such a great example. It's almost like the question like the visionary mindset to be able to identify that I think is the key.

So a Pete to have the vision to see it and to know what he wanted to do. Paul to recognize the brilliance in what Pete was saying and the passion that Pete brought to it and to trust that it's a rare thing and it can create huge value.

Yeah, great example Fred. What else is the best thing I can learn from you before we sign off?

Right now there's a guy that I'm mentoring that's outside of any area of expertise involved with Microsoft. So it's just a friend that I've been introduced to who's asked me to somewhat new to his, his position in M and A He has some MMA experience. When we have these coaching, mentoring discussions and my wife overhears some of this. The thing that sort of she has said to me and the takeaway and is the benefit of experience is just being able to catch your breath. At M and A you deal with some very high Stress situations. You have a lot of stakeholders that all expect miracles. You have counterparties that expect that you're a big company, you can do anything. You have to find a way to simplify all these competing demands and find peace in taking a position and performing your fiduciary duty and being the voice of reason through these storms. So that's what's fun about the job, challenging about the job. There are those moments that it just seems, ah, how am I going to do this? And. But that's a great part of the job, is that you have those experiences. You come through the other side.

So that's what makes it fun.

Yeah.

What's the craziest thing you've seen in M and A?

I mean, certainly we had a lot of situations where just getting to the loi. Yes, it's a little bit wine and roses, but it's competitive. And somebody put it in somebody's head that they're going to be worth a hundred million and any rational thing might be a fraction of that. And how do you deal with the advisors and deal with the founders? So we had one situation where we had a mismatch of value expectations with a willing seller and a willing buyer. And we just had this completely different view of the appropriate value for a company this size. And we would try to compromise a little bit, but they were just. Weren't compromising. And we just didn't understand how they were sticking to their guns. Kind of a ridiculous situation. We weren't going to get a deal done that way through this kind of relationship building. I finally learned from the CEO that they essentially backed into the number by looking at what it was going to take for them, the three founders, to not have to work for the rest of their lives had nothing to do with the company. Just sort of hear this and you say, did I really just hear what I thought I heard? And so they, because they want us, if we're going to sell it, then we want to be set. And I'm like, okay, so how did you come up with what it would take for you to be set for the rest of your lives? And he's like, well, we thought about how much we spend a year. We thought about kind of retirement planning stuff and inflation, and that's how we came into this number. I said, you what? And he goes, yeah. And he actually shared the spreadsheet where they had calculated out, not using any formulas, essentially each year, how much money they thought. And then they had a little bit of inflation thing and they had a little bit of a return on their money thing and then they added it up and that was the number for each of them multiplied by three. And so you just say, okay, that's not how it works. I get it.

Twice you've bridged that valuation.

So we bridged it essentially with an earnout. So let's share the risk and we'd be willing to pay that if this result. So we found a way for them to save face. They knew that the goal was stretched. They knew. So we were able to everyone's got to save face, as you know. We found a way for there to be a headline number that met that thing, but they didn't quite get it because the numbers weren't quite achievable. Everyone went in with their eyes open and got the deal done.

Awesome. I love that story. If anybody's listening this and is curious of M and A Science and Deal Room, yes, it's for sale. I'm just looking for a private jet. Give me a nice like Gulfstream 650. Hit me up if you're interested. I like it. Thank you Fred. This has been a fun conversation. I loved all the stories. I learned a lot. You helped me become a better M and A scientist.

Glad to help. It's fun to share my experiences with people because it's been quite a ride.

Those of you listening, thank you. You are a true M and A scientist. Love to get feedback, even recommendations. If you got some big name speakers that would have a really interesting conversation, send me a note on LinkedIn. We'll look forward to 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.