Working with the Business Leader to Build an M&A Strategy

Hello M and A Friends. This podcast is brought to you by dealdoo. M&A is coming back. Would you like to avoid wasting hundreds of hours managing Excel Trackers and building PowerPoint reports? Do you want to make your process more efficient? Well, I have great news for you. Deal Room is an MNA management software to save you time headaches and improves collaboration so you realize value faster. Learn more@dealroom.net here's to the deal.

I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during MA deals. Foreign welcome to M and A Science. Putting together companies is complicated and taking them apart is even more complicated. On this podcast series we interview leading M and A practitioners to learn lessons from their experience. Learning proven techniques is key to perfect your M and A process. I'm your host Kisan Patel, CEO and founder of Deal Room. I spent 10 years with M and A Visor. After seeing so many industry wide challenges in 2012 I decided to pursue the dream and build the greatest software to manage M and A. Joining me today is Michael Frankel, Senior Vice President Managing Director at Deloitte New Venture Accelerator. Michael leads a team that drives the development, execution and success of new technology driven businesses across the firm. Not a consultant, he's in the actual in house role that builds new business lines for Deloitte. Both organic, inorganic, right?

That's right, Yeah. I need a sports jacket to actually be able to go and talk to clients. So I drive the firm instead.

So that was the reason why you want to opt for that role. Also joining me today, Justin Goldman, Senior Vice President, Strategic Finance and Corporate Development at Media Math. Justin leads the corporate development, FP&A teams for Media Math Pioneer and advertising technology industry and he has 15 years of deal making experience from Nelson Reed, Elvisier, American Express, Gallup Capital and CBIC World Markets.

Great to be here. Thanks for having me.

Well, let's kick things off. I'd love to talk about what had been your experience when it comes to building M and A strategies and particularly working with the business leaders.

In my mind this is one of the biggest challenges of a corporate development role. It's not sourcing deals, it's not negotiation. You're either setting yourself up for success or failure based on the the relationship you have with the business sponsor it drives. What's the strategy you pursue? How are you going to value these businesses? How are you going to execute? What are the Terms that are important and how are you going to integrate them? I think getting that right is the single biggest thing you can do to make M and A successful.

Do you agree with that, Justin?

Absolutely. It all starts with strategy. You know, my experience have been all positive actually. I think it's a great forcing function to get with your executive team and to talk about the what are the things that are most important to the business and the direction of the business and to come up with various scorecards and criteria and prioritization tools to talk about those different things. We went through an exercise where we looked at every single product category we could possibly get into. And we went one by one and we said video, should we buy a video platform? A video only platform? We talked about it and said, you know what? That would be a nightmarish integration to get to one platform when we like our platform. Why should we have to pay top dollar to buy a whole company with a whole platform when we liked our own? And so we concluded in that case that video was an important part of the strategy. But we don't need to go buy a big video platform. We could try to get in through some technology hooks in another company, in a small company or we could just hire the right talent and build our own capabilities. So yes, agree, it's critically important.

So it keeps you from making bad decisions at the same time.

Oh, big time. And Justin, I think you've had better experiences than I had. I've had a mix because I've had things like oh, M and A is super easy, we'll buy it and ta da will be bigger or I know how to do M and A. I've done an M and A transaction integration. We don't really need to staff up for integration. It'll just sort of sort itself out. Or this is the first company I spotted. I think we should just buy that one. I haven't done a market map. I don't really have a clear strategy. This is, this is the shiny object. My one theme is experienced GMs who understand M and A are an amazing pleasure to work with because you get down into the really interesting questions of how are we going to win with this strategy? What are the important characteristics of an acquisition target? Things like that. With ones that don't, the investment up front to get them up to speed is so worth it because it makes such a big difference. I think of M and a lot like a water slide. Once you sort of start a process, it's sort of out of your control. You're Going at a certain speed and you can't get off and you getting a business leader prepped for that in advance is so much better than trying to do it in flight.

That's interesting. There's a reality check on that side too, where they sometimes don't have a clear understanding of what M and A actually entails. It's not buying goods at the retail store or shopping on Amazon. There's a lot of post work after it. What are the primary challenges of working with a business leader?

One that's sort of gone away a little bit over time, but still there is this idea that M and A is something everybody does. It's not a specialty, it's not an area of expertise. When I started my career and there was less gray hair, corporate development was just an emerging job. A lot of people just sort of thought of M and A as something you did. You know, you got the finance people together, you got the lawyers together and you just did M and A. And now that we have an expertise, corporate development a specialty, and investment banking on the advisory side, it's less common. But I think the big challenge is still making business sponsors understand that they, they can't just do it on their own. Right. There's a way of doing these things, there's a way of doing them well, there's a way of doing them not well. And they need that expertise and deferring to that expertise. I think that's sort of like challenge number one. Right. It's like a 12 step program. Admit that you have a problem, admit that you need help in order to do M and A effectively. That's probably the big first one for me. I don't know, Justin, if you agree.

Absolutely agree. A couple of things that included one, that all these folks, these business leaders, they have day jobs. It's a hard exercise to sort of rope them into an M and A project, especially if it's not their baby, if they're not particularly vested in it because they've got a job to do that takes up their whole day already. And this is an extracurricular activity that's a tough effort, a tough hill to climb. And then going back to what you're saying, education. Absolutely. They don't appreciate the expertise required and they don't understand the process at all. So agree that you need to spend a lot of time upfront to educate folks. Too often I've seen situations where a salesperson will get wind of a potential acquisition and. And they'll start talking about it to a client. The client will get excited. They'll want to sign up for this new service that you don't even yet have. Then the deal falls apart and you've got a big mess on your hand because client is ready to sign up for this new product. On the other hand, there's a ton of value in testing commercial viability. So it's not to dismiss those instincts that folks like salespeople have because it can be a great way to test the viability of joining two businesses and two offerings together. It just needs to be done in a discreet way. And again, that's where some of the education comes in.

Absolutely. It's a critical differentiator. There's a big difference between it's an interesting idea and it's something we should put massive amounts of capital into. I often think of the bell curve of results. There are very, very bad results and very, very good results and then there's a bunch of stuff in the middle. And I find that business leaders often go one way or the other. They're either over optimistic, this will turn out fantastically well. We won't hit any speed bumps, we're going to exceed our goals. We or they're too terrified to act because they think about all the bad things that have happened. And it's usually based on anecdotal evidence from their experiences, articles they've read, people they've talked to. And a lot of the counseling up front is getting them to a set of realistic expectations. We can make this successful, but it's not going to be super easy. We can probably avoid a strikeout, it's probably not a home run. Reality falls right in the center of that bell curve. Getting their heads around that, I find takes time. And the irony, of course, is the more successful the business leader, the more likely you're going to want to put M and A behind them, but the more likely that they're going to be sort of overconfident and have some hubris.

About, let's get into some of the strategies and tactics to actually make that relationship successful.

So I'll throw out one we've started doing and I've done it at a couple of other companies, what I call a business sponsor lab. You know, there's lots of dialogue around an M and a strategy. You know, it's documents flying back and forth. It's part of a strategy process. There's lots of ongoing dialogue. But I find that to Justin's point about these people having day jobs, they're not getting intensely focused on it because it's five minutes here, 20 minutes there. When I think that we're getting close to a deal, either because there's a particular target that we're starting to get interested in, or just because we're revving up to find something to buy for that business leader. I like to get them in a room for a whole day. You basically take away laptops, take away phones, lock them in a room with a small group. It's gotta be small enough that everyone can be really open. It's almost like a therapy session. You get them in a small group in a room, and you wake up, work through the. Thinking around the value of doing an M and A transaction. What they're thinking, what the priorities are, what are the unknowns. Right. What are the things that, to a point, that Justin was making the difference between a gut feeling about something and we have a good fact base for it. It's not that you come out of that room with all the answers, but you come out with two things in my mind. The first is a clear action plan for what we need to know. What we need to know about our own organization, what we need to know about the target or about the market, wherever you are. And the second is it's sort of a reality check for the business. Now they're focused, right. It's been six hours. You take the opportunity to scare them a little bit. You throw questions at them that they don't know the answer to. And so I find that that's a good sort of starting gun to sort of shake them loose a little bit and get them focused on what needs to happen and how hard it is.

So you target the crap out of.

Them a little bit. A little bit of fear is a good thing.

So quarantining is essential component of this strategy, Michael?

Yeah, exactly. It's like a business quarantine. You're locked in a room, and we're not allowed to leave until. Instead of COVID clearing, it's until we have business clarity. I do find it makes a radical difference in their mindsets. It's a great way to feed into them. What are the things that have to happen? You go, integration. How are you going to do it when they go? I don't know. You go, well, here are 27 things that have to happen. Who's going to do that? I don't know. Okay, well, then we have to figure that out. Yeah.

One of the things that I think is a great part of a session like that is to create visual aids. I find them to be very valuable throughout the M and a process where you can go back to and say, remember we're in that room. We came up with this, this strategy or this visual and we can use it over and over again throughout the process. And those could be any kind of framework you want to come up with. It could be a two by two current clients, new clients, current products, new products, new verticals, new geographies. However you want to lay it out, it can be very valuable. In fact, when Michael and I were at different divisions of the same company, I did that exercise with a company called BuyerZone, which was a lead generation business. And we did a brainstorm to figure out what other verticals could we get into and where should we go acquire. Should we get into online education, online insurance verticals? We created this map that showed all these different sectors, did a bunch of work on why those were attractive sectors to get into. Made it one of those, those nice bubble charts that shows the size of these different sectors and the size of the businesses. And we just kept coming back to that throughout our search. So the idea of kind of mapping the landscape in some sort of framework can be a good visual aid throughout.

Yeah, I think that's really powerful because it's hard for them to absorb the complexity of it. And so having something they're familiar with and go back and go, remember this now we're going slightly to the left. And by the way, one point I'd make about, I think both these exercises is they're not just useful for inexperienced business sponsors. Even experienced business sponsors, I think need this kind of exercise. It's just a difference as to how much you're educating versus ideating. The more experienced they are, the less you have to give them the lessons and the more you can get onto the questions. But nobody has answers to all the questions at the start point. The other thing that I think is critically important at the beginning, not to say that you can't stop an M and A process, but M and A processes have a powerful inertia. People get excited, they get pot committed. And so one of the things that I like to do is focus on commitments of resources and time up front because it's a heck of a lot harder when you're partway through an M and A process to effectively threaten the business sponsor with this won't move forward unless you do A, B and C. So I sort of like to create a little bit of an entry door, a bouncer in front of the club that says unless you can identify as an example who's your integration Leader, who are you going to take off the line for at least 75% of their day for at least six months to integrate this? If we move forward, who's the team that's going to do the diligence? How much of your time are you going to devote to it? How much are you committing to block off and try to get them to as much as possible sign in blood about the level of commitment that they have and their team has before you get started? Because halfway through the process, it's easier for them to say, oh, you know, we got a big client pitch or we got whatever it is that we have. And then the corp dev person ends up sort of holding the bag because you're trying to drive an effective process, but you're dependent on them for resources, expertise, all that stuff.

So I got a question from Jeff Deroche, who's a M and a science alum. I find many business sponsors want to jump right into pursuing specific targets. What methods have you found to get them to focus on the strategy first?

It's a little bit of carrot and stick, at least in my experience. The stick is to say, but you got to have leadership support for this. Deals don't get done unless there's a strategic framework, unless there's a market map, unless you can explain why this one and not the other five, all that kind of stuff, you will fail. If we just race forward with this one. And then the carrot is answering all those questions is the key to success in a perfect world. That deal isn't live. So we've got time to do all the work around it, but you're going to have this thing hanging around your neck for years. And this is part of the whole horror story scare tactic. If you do this wrong, it's going to drag down your business and frankly your career for a long time. And, and I've done a bunch of these and I'm telling you, being able to answer these questions, being able to understand the dynamics in the market, pricing, all that kind of stuff is going to be critical to your success. So hammering them on both of those is important. Honestly, I'll fall on my sword about that. I know that it's exciting when something is available, but there are approximately infinity companies available for acquisition. Doing a bad deal is so much heartburn. I'd rather walk away from a deal than do a bad deal. So that's, that's my approach. I don't know, Justin, are you kinder about it?

Maybe less threatening? Definitely have to start with overall strategy. So company Strategy first. And what I like to do is as another forcing function with business leaders is to do a build partner or buy analysis and do it by category first, even before doing it by company. So looking at a specific category of business that they want to get into and do the work, do the analysis and probe and question, why should you build this versus partner versus buy? Yes, you're always going to accelerate things if you buy something, but are the numbers going to work out? Could you also achieve the same thing through a partnership? Why or why not? Could we not build this? Could we not hire a team to build this? Forcing that exercise, I think sort of resets from a strategy level and can get you to the right place and get everybody sort of on board and feel like part of the process.

I think that's hugely important. I think, Justin, you're 100% right and I sort of skipped over that. But I think build by partner is important both because buy is not always the right answer, but also because it forces you to ask all those questions that make you a better buyer once you get to the buy.

Anyway, another question, Charlie Russ, what do you expect regarding pressure on valuations? What specific tactics can be employed to bring the buyer and seller closer together?

So if I had really deep insights on valuation changes and pressures in this crisis environment, I'd be calling you from my hedge fund office. Who knows what's going to happen because this market shift is so volatile. What I will say though is in my experience, there's always a lag in valuation expectation between buyer and seller, especially private seller and buyer. I saw it in 2001 and I saw it in 2008, 9. And it always happens, especially a well funded seller because they have the ability to sit on the sideline. There's always this weird period where buyers go, prices should have dropped by 30% and sellers go, why? Or my company's great. It feels like we may be in that kind of a period right now. I don't know how long it'll take to adjust because unlike a recession where there's at least some visibility into what's going on in the future, I think there's much more uncertainty bringing buyer and seller together. My best advice is it's all about transparency and about sort of an ongoing dialogue. You need to have each side understand why they're in the position they are because it helps take emotion out of it. I find that emotion is a terrible thing when you're trying to have a valuation negotiation. You just don't think my company's Good. That's why. Or you're trying to like take me for a ride. Being transparent about why I think you're at this and you think you're at this, I think often helps the dialogue.

Yeah, you're reminding me of the fairness opinions that we used to do back in the banking days. We would sit there with the other bankers on the other side and we go through our list of comps and we say we think the business is worth this because these three are the best comps. And they would say, no, these three are the best comps. And everybody would have their own opinion of that. So I totally hear you there. Look, I think part of our role in the corporate development function is to de risk these transactions as much as possible for our companies. Any mechanisms we can employ to achieve that, especially in times of greater uncertainty, we need to do our job to protect ourselves and protect the business should things not turn out the way that we would hope they would. And various ways to do that in the business deal from a documentation standpoint. One idea, for example, is look at a two step process where you're making a minority investment in a business right now. Maybe you're not there ready to commit to the full shebang and just want to dip your toes in the water a little bit and maybe there are options to buy a remaining stake later. I think getting a little bit creative about structures and terms is one way to help do that.

Justin, Michael, let me play back a little bit back to that business leader because one thing I'm curious about is if you guys can talk about it is incentivizing them because you brought up a couple interesting points on one end. You brought up, hey, they're ambitious about doing these deals and they really don't know what it entails and blah blah, blah. But then you got this sort of other end where, and I've heard this recently from a call with the corp dev leader where they, you know, the full time job, it's an extra burden and then you don't take ownership of that integration that goes awry. Talk to me about that. Aren't they getting comped? What's really aligning them to be incentivized to do these deals but then also take it gracefully past the finish line to the very end.

I think a couple schools of thought on this one. One is, Michael, if you want me to be a little bit tougher, I could take the stance of look, this is a privilege, an opportunity to be able to work on an acquisition. This is a great learning experience. For you. And you should be thanking us for letting you participate in this deal. That's one way to do it. I think Michael and I agree. We're both very keen on making sure that the business sponsor is taking the reins of this and they're going to own it and live with this acquisition. After the deal closes, it's essentially going to become part of their P and L. They have already a vested interest in making this thing successful because they want to grow their little empire within the business. They want to gain responsibility and they want to then have to be able to prove themselves against a bigger P and L. So I think there are sort of built in features of acquisitions that already should create the right incentives.

I think that's right. I like tying comp, but I don't think that it's as critical as making sure that the deal is presented the right way to leadership. In other words, defining success. Well, because the business leader is going to be tied to that business case, whatever it is. They're concerned about comp, but I think they're more concerned about career trajectory. What I always worry about is business leaders sandbagging the business case either quantitatively or qualitatively so that they can hit those numbers right. So there's always that debate about what is it that we're promising that you are promising the parent entity in exchange for this big slug of capital giving you and making sure that we position them for success. So we don't want them to fail, but we don't want them to have an ability to sandbag the numbers. So getting realistic expectation around financial performance and operational goals like integrating, like launching new offerings, whatever it is, that's the driver of the deal and being really clear about that in the documentation that goes all the way up to the board, I think is the most powerful incentive to get that business sponsor to both take it seriously in the process and then to deliver afterwards. Comp is nice too. But most business leaders will be able to game the comp system or it's a subjective comp system based on their CEO's view of their performance. So I like locking down really specific goals for the deal.

I like your answer, but I'm not satisfied with the whole PMI aspect of it because that's when shit hits the fan, things fall apart and it gets tough. And that's where I think you're really going to struggle with that sort of pressure. So I'm not satisfied. Your answer in terms of how you're going to keep them motivated from that and keep that level of ownership.

Are you saying that if things get terrible, they'll sort of say.

They sort of back out? They're not. I mean, I'm sort of reiterating through working with my own clients on the stuff, but that's one of the biggest challenges is, yeah, you get a business leader, you're aligned and the front end stuff, that's all fine and dandy, but it's all the post close stuff where that level of accountability fizzles.

I think you're absolutely right. And the second part of it is, so first you have to get a business case that's realistically aggressive, get everyone to agree to it, and then you need to have a governance process post close. That shine sunlight is the best antiseptic. Although maybe in this environment that's not true. Bleach is the best antiseptic right now, but sunlight is the best antiseptic. It's not just that you create this business case and then it gets locked away. It's got to be brought out over and over again. As an example, I've seen a lot of companies that say we're going to do quarterly reviews against the business case for either a minimum of four years or until it's returned. Once it's returned, you're off the hook, then it's all gravy. But until then, we're going to go quarterly and we're going to bring in the cfo. So you're going to have to sit there in front of the CFO every quarter and go through each one of these 27 metrics and explain why you're hitting or missing. And it's that kind of thing that will keep the pressure on them. And then the one other dynamic is you have to accept the fact that M and A is highly volatile. Yes, we had these goals, but if it becomes clear that through market realities or whatever went wrong, they're unrealistic, there's gotta be a replan process because otherwise if you're so far off of plan you'll never make it, then you do lose motivation. But the replan process has got to be really formal. Some companies have been at, you go all the way to the board and you go, we said we're going to do this. I'm afraid now we're going to just do this. Is everyone agreed to that and then the business leaders only held to this. I think you're right. It's really important to hold their feet to the fire from a career perspective, because otherwise it's really easy to walk away and also one of the assumptions we're making here is we're talking about organizations where the leaders are in a sustained position. So the CEO of that division is likely to still be the CEO four years from now. If you have organizations that have more leadership, volatility and movement then you have a problem because they can run away from the business case.

Justin, I want to hear your thoughts about this because I think this is the root of the problem.

You do need to compensate. It's got to be on the post deal integration side of things, not before. Hopefully we can at least agree on that and have some common ground after that. Who knows?

The corrupt dev guys don't get comped that way. That's going to be a pushback.

Right, but we're talking, right, we're talking about business leaders, right? So unpacking a couple parts of that. The bankers and the lawyers and they all just want to get paid at the closing deal. But we all know the deal doesn't end there and we can't call that a success in the corporate M and A world. We have to see how well we do in integrating this business and the value that we create. And that takes time. So it's hard to create a compensation scheme when like Michael says it might take four years to see the value of this all come to fruition. What are ways to possibly do that? I mean equity in the company overall might be the safest, simplest way to do that without trying to overcomplicate these things too much because it is hard to measure.

It gets even harder to measure if you're talking about non quantitative goals. So it's hard to measure financial performance. It's really hard to measure. Did they deliver the new product offerings synergies with the rest of the organization? We thought if we bought this piece of tech then we'd be able to sell more of this piece of tech. Then you get into causation. It's a hard nut to crack. I mean honestly Khe San, I think the real answer is a CEO and a CFO who take this seriously and hold people accountable. It's no different as a culture of accountability than for a variety of other things. Employee morale. Are you really going to hammer an executive if their talent scores come back really low? There are a bunch of mechanisms. None of them are perfect. But the buck stops with the CEO and whether they're really willing to punish people for lack of performance and to dig in enough to know whether it was a lack of performance or an unexpected event makes sense.

I like it. I just didn't have a better response. So you win.

Excellent.

Let's flip it to the business leader in terms of giving them advice on working with M and a strategy. What would you tell them?

Listen to Justin.

They're lucky to be involved with this and if you screw up, you're fired.

And then obviously I would punt them back to Michael. So let them go around in circles till they figure it out. No, I mean I would just go back to the strategy exercise the build by partner. We've had great sessions where, call it our own version of a lab there where we've got all the. Not just one business leader. So you get the whole team really in a room and you go through and just debate like why it makes sense to partner here versus build there. It's a very interesting exercise and we've done it successfully and come out of that with marching orders and everybody in alignment. So now when we go do the work and bring this company up, it's much more proactive. It's not reactive. You're not going backwards into figuring out like, oh well, what other companies do, what this company does and how does this even fit into our strategy. You're going in the opposite direction. You're starting with the strategy, you're going into the categories, you're finding the best companies or the best fit in those categories for your business and you're going to talk to them and figuring out if you can do a deal. And then I think you'll get business leaders much more on board.

The one other thing I thought of that I would add to that is I really have a heart to heart with business leaders early on and I say this is different than the rest of your job. You're going to have to get your hands really dirty because the rest of your job is to manage a team of people who are deep experts at what they do. Your sales leader, your product leader, your marketing leader, your delivery leader. You hired them because they're really good and your job is to sort of manage them, get out of their way. This is not that. Unless you have a company that is hyper acquisitive, you and your management team are not familiar with this and you can't just assume and the corp dev people can't do your job for you. We'll do our job. You have to do your job. So you're going to have to get your hands much dirtier on this than you would on a big client opportunity or a new marketing initiative or a new sales team or a geographic expansion. Because this is weird and scary. I try to make sure they're prepared for that because it's going to take a lot more of their time than they expect.

You have a pretty hard talk, man.

I've seen enough deals go bad and I've seen enough deals go good. I have a nine year old daughter. I spent a bunch of time when she was younger yelling at her not to touch the stove. Why not? Because I cared about the stove, but because I didn't want her to burn her hand. I think it's the same thing with business sponsors. Corp dev people are in this unique position where there's this weird life changing event that's going to happen to this business leader and their team. And the corp dev people know what's going to happen. We've seen it, we've done it, we're almost psychic. We predict the future. I think it's on us to cajole them, train them, educate them or scare them into doing the right thing. Not touching the stove.

Some parents might differ in their approach and let their kid touch the stove so they'll learn the lesson not to touch the stove that way. But I don't think that translates well into the corporate environment. Because you don't want your colleagues to fail, right?

Well, yeah. And you lose a lot more capital this way than if you touch the stove.

If there's one part of traditional M and A you believe needs transformation to create better outcomes, what would that be?

So I'm going to throw out a weird one and then Justin will throw out something much smarter and more interesting. I think that because of human nature there is a fundamental assumption that when a business unit acquires something that that something will sit underneath the business unit. I understand why. Because that business sponsor, we let them acquire something because they built something really good. They're very talented, we're very pleased with them. But the assumption that therefore they should and their management team should be running the resultant merged business I think is a false assumption. And my analogy would be venture capital where VCs often say, hey Justin, you're a brilliant founder, you've built this fantastic business, but we're about to put a bunch of money into your business and you're really a creative founder. Kisan is a seasoned CEO because you've done such a good job, we're going to put him on top of you and that's how we're going to be more successful. I don't think we have that conversation with the business sponsors in corporates. There's this foregone Conclusion that they must be in charge and their team must be in charge of the resultant thing. I think it's a fundamental flaw. I don't know how to fix it because it's a lot of culture and power, but I think that's something that's broken.

Yeah, I was going to say something kind of similar. Put it another way, there is no one right way to integrate a business. You acquire it's case by case. There's no one formula, you don't have to insert it under a certain business unit. Everything should be handled and approached differently. And I think integration is an area that needs more innovation and attention, if you will. One of the things we did on a deal, we bought a company out of Berlin. We were a bit concerned about that new team being so far away from the home office. So we sent somebody from my team over to Berlin to live there for three months to get to know the team. So it had a couple benefits. He was a liaison back to kind of home base and he would transfer knowledge and information from that team to us and vice versa. And so it was an improved information flow and let the newly acquired team of 30 or so folks feel like part of the company. And at the same time it was a great development experience for this individual. Again, that's not something I would do on every deal. It just seemed based on the circumstances that that was just seemed like the right thing to do for that deal to make it successful.

That flexibility, agility. What are some of the unexpected things that have happened while building an M and a strategy that you did not expect?

I'll give you one that happened early in my career that I think was a great education for me. I was a corp dev officer early in my career. I came out of banking and so I sort of assumed deal closes and everyone goes ta da. And then you make a deal toy and you plan a dinner and you move on. And I was a corp dev officer and we did a deal and it was a hot tech market. About three, four weeks after the deal, I called up the business sponsor and I said, so how's the business going? He goes, oh yeah, I should probably do something there. I said what do you mean? He goes, oh, I haven't had time to go out and see them. There's a company in a different location and said oh okay, we should check and see what's going on. Well, what happened was deal closed, big announcement went up. But one thing we did was we sent out a mass email and then crickets. No one communicated with the Employees. So then two things happened. First, about half the employees left. They were all getting other job offers. Nobody told them whether they had a job with us, so they all left. The second thing that happened about the same time is the press release went out because we did do a press release, and all the clients started calling. Literally, people weren't answering the phones. The reps that they were used to dealing with were gone. This was a kind of business that you could easily transfer your contract. So they all left after 30 days. When we looked into it, we found that we'd lost about half the employees, about 40% of the revenue. And my joke is, but for one airline ticket and 40 polo shirts, we could have stopped that from happening if somebody had gone out and said, hey, we're really excited to have you on board. Here's a polo shirt, here's some pizza. Give us a few days. We're going to have to figure everything out. But it's going to be exciting to be a merged company. We could have saved all that damage. It was an important lesson for me and how powerful integration is and how important the integration process is as part of building and not destroying the value of a deal that you do.

Wow, that's a really important one. You can't let the kids alone in the house. Morali has. Can you comment on the role of transaction advisors versus internal teams? Don't be biased, Michael. No plugs for Deloitte on that. Objectively, how would you do it? How would Deloitte do it?

I mean, it varies by company, but the answer is both have an important role. Before corporate development existed, companies went to a whole set of advisors to try to sort of construct that knowledge. I think the bad news for advisors is if you have somebody in corporate development, they know how to do some of this stuff. But the flip side is they're also a really informed consumer of your services. They understand the value of your services. So I think the answer is there's a role for both of them. And it's a conscious choice for every company, what skills they're going to maintain in house and what skills they're going to use an advisor for. And that'll depend on a couple of things. One is their volume of deal flow. The more deal flow, the more you can justify having a thick internal team. And also the things that they think of as core competencies themselves. Some companies are going to do their own tech diligence, some are going to use a vendor, things like that.

Yes, I think that's right. When you're an internal corporate development person. You can walk over down the hall to somebody on the sales team and say, what do you think? Do you think this would sell? This would work. You can go around and try to build consensus around an opportunity that way. An advisor might be able to do that as well, but they're not going to have as the same familiarity with your business. And you've got those relationships already throughout your business. So that can be a huge value. And I think you're right on sort of finding those complementary skills. Like let's say you're a one person corporate development team. You can't necessarily do it all and maybe you need some help with doing a bunch of financial modeling and you need some horsepower there. Folks on the banking side may be able to really lean in there. Or maybe there's some particular expertise around international regulations that you really have no idea. You need a local advisor to help you with that. We had local council helping us out in Europe on a couple deals for sure. So I think you're right. It's just a matter of finding complementary skills and needs in each deal.

Pick and choose where you need the extra resources.

Yeah. The one lesson there is as the corporate development professional, you should proactively be thinking about that. Right. You're the orchestrator, so you're the one who should be thinking, okay, when we do deals, what are the capabilities that I want to pull from my organization, develop in my own team, use vendors, let me build an ecosystem of vendors, get to know them before you don't want to meet somebody on the field of battle. I think the corporate development leader is in the best position to drive those choices and to prepare all of that stuff so that it comes together very quickly when you move into live deal mode.

I got a question from Kevin Lobdell, a local Chicago hometown hero here. Acquisition involvement, sales buy off. I would also add that the strategy needs to involve various key stakeholders. Meaning it cannot be just a product strategy developing the strategy, but you need sales involvement to help determine how you go to market, commit on revenue plans and drive the success of the acquisition. Have you seen companies not involving the right stakeholders and therefore buy in huge problem?

Either they don't involve them or they don't involve them until the end. Right. We've decided to do this deal because we love it and we think the product is great and the product people are very excited about it. And then all the way at the end you go to the sales organization goes, oh yeah, we can't sell this. Wrong price point. It's we don't have the brand to sell it, whatever it is. So yeah, I think that's where the corporate development leader needs to make that point to the business sponsor and then the business sponsor needs to pull those people in. But this is a good example of something a business sponsor may not understand. They need to be taught that.

I've seen a couple examples where the reverse of what that individual was asking, where we had too much commercial traction after we closed the deal. All the clients wanted it and we were just overwhelmed. The product and the technology couldn't scale as quickly as the clients were demanding it. And then we looked bad in front of the clients. And part of that is because we oversteered toward having the commercial folks getting on board and pre selling, pre selling, pre selling and then post deal. We had oversold it essentially.

Samantha French Interesting on the comment about hierarchy. It's something we map out in the target operating model. What are we going to do with the business? What do we need to do to achieve our vision we set in in our strategy day?

Yeah, I think the question is if you take all this visionary strategy, how are you going to convert it into something that's detailed execution plan? And that's where I think those resources from the business come in. We have this great strategy and vision from the business sponsor. We have this acquisition. The integration and the new operating model are going to be 1000 little things. And you need a dedicated team that use this as their day job to execute on all that. Otherwise It's a beautiful PowerPoint that won't mean anything.

We like to hammer home the message repeatedly and that is going around to all the key leaders in the organization. Here's a reminder, here's why we're doing this. Okay, everybody remember that and we told you that last week and we're going to tell you again. Here's actually the model. We've gone full transparency as much as possible with some discretion of course, but showing all of these folks the model and they've got to provide their input to say, how many engineers do you think we need to scale this business up? Do we need to hire more account people? How many? We want your input, your sign off, if you will, from all the individuals to create this model and then we're all on board for delivering it.

And I'm looking back at Samantha's comment. I think the other thing around leadership and hierarchy is you need to force decisions on who's doing what and who owns what. This is such a big push into the business. You can't just assume that it'll merge into the operating model of the business. Number one, the leaders that are in the current business may not have the capacity to do all this stuff. And number two, you could be acquiring something that has different characteristics. You were a tech business and now you're acquiring a managed service business. You don't have a delivery center, you don't have delivery people. In addition to thinking about the work that needs to be done, I think she's absolutely right. You have to think about the new operating model that the combined business is going to run on and make a bunch of choices. One of the tools I think is really useful for doing this is, I hate to say it because it's goofy, but templates. And the reason I say that is not because I care about filled out templates, but I care about forcing people to answer questions or admit they don't have the answer to the question yet and go out and find it and exposing those templates to lots of people sort of forces the emperor has no clothes moment where a business sponsor has to admit in front of leadership, oh yeah, those are important questions I don't have the answer to yet. Sort of use it as a tool to force people to delve into these topics and get to the plan they're going to need to have.

So, last question. What's the craziest thing you've seen in M and a?

Back in 2000, the heyday, the Internet bubble. I was working on a deal to merge two healthcare Internet businesses together. Times were good, we were doing lots of deals. I was feeling good as a banking analyst. So I thought my family invited me out on vacation. I said, all right, it's not that easy to get away, but I'm going to go for it. I'm going to go away on vacation with my family. And I left the M and A model in the hands of another analyst, hoping that all would be well. Come back from vacation, the deal is about to be finalized. They're going to sign the documents, feeling great about it. And next thing I know, the director comes storming into the office and saying, what did you guys do? There aren't enough shares to go around. And I just kept thinking there aren't enough shares. Is there somebody sitting there with stock certificates handing out shares? And he ran out of shares. I don't understand. What happened was the pro forma capitalization table was not aligning to the deal that everybody thought they had agreed to. It was complex. There were debt holders restructuring into equity. It turns out we did the math wrong. Because when I turned that model over and I went back and checked this, there was a hidden row that this analyst created. And this hidden row was the key to the entire deal being wrong. We had to go back and recut the entire exchange ratio to make sure that everybody had the right ownership. So the moral of the story on that one is no hidden rows in your Excel model.

Yeah. What's your repercussions for that? In the banking world, they make you sit outside in the cold for a.

Few hours or a lot of yelling. A lot of yelling. Still traumatized. What's important is to not take all of that pain and suffering and inflict that later on in your career.

There you go. Early in my career, but slightly later, I was in a deal and we were negotiating sort of last points. We were buying a company that was founder owned. He was going to make, and he had never taken a lot of money out of the business. He was going to make a massive amount of money. It was like December 23rd and we were stuck in a law firm conference room and this was like day two, I think we'd gone home to get two hours sleep. We're all exhausted. Two things happened basically at the same time. The first one was that the seller's lawyer came up and said, so we have two issues that we are new issues that we need to bring up. First one is we want a change to this kind of identification. And the second one is our owner and CEO wants to keep his BlackBerry, keep his office furniture, and have you pay for his BlackBerry subscription for the next 10 years. And to put it in perspective, the purchase price, which was about 90% going to him, was about $300 million. Wow. Right. @ the same time as our side said, oh God, what are you talking about? I heard the following sound. Tap, bing. And then like a couple minutes later, tap, ping. And it kept on going. And I was near the door, so I heard it and everyone else didn't. And as we were, everyone was arguing over this stuff. I sort of, I got up and I went. I was a junior banker. I went out in the hallway and I found the founder with a putter and a glass from the cocktail bar. And he was putting. So in the room decisions about $300 million were being debated with him and his future. He couldn't have cared less. He was golfing, he wanted his BlackBerry. And I just remember thinking to myself, he's not my client, but somebody has not explained economic priorities to him. Somebody has not taught him the difference between big and little. And so my lesson is when you're working with business sponsors, make sure they don't get caught up in whatever emotional stuff they've got going on or perceptions. Teach them the difference between big and.

Little, emotions and egos in M and A. I love it. I appreciate everybody for joining us today. I posted a link to Al's books. I know you mentioned it earlier. I got a copy of it. I haven't read it yet, but I know he just wrote a book summarizing his 20 year career in M and A in the Bay Area. I'm going to read it, probably interview him. What are you guys, you guys, Any plugs shout outs to do?

Well, this will be on michaelfrankel.com along with a couple of M and A Basics books. And yeah, hopefully we get to buy some companies from you guys.

Dustin too will post his direct telephone number so anybody wants to pitch him services.

There you go.

Yeah, but yeah, that's pretty much it guys. Thanks for the time.

Thanks guys.

Thanks everyone.

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