Cross-Border M&A: How to Do Deals in Italy with Mauro Sambati and Donato Romano

18:43Donato Romano:Regardless of the specific deadlines for notification and for getting the clearance in the end, what we do in practice is to focus on this issue since the very beginning when the client approached us for the due diligence, for instance, on the specific target. So based on the business of the target, we carry out also a sort of regulatory and compliance analysis in order to understand which kind of authorization may or may not be necessary. if we realize that the specific nature of the business is such that the golden power filing is required we start working since the very beginning the very first stage of the negotiations even in parallel with the due diligence okay in order to understand how critical the issue can be which are the chance to succeed or to be blocked which are the potential remedies that the government may impose in order to clear the transaction.

19:42Donato Romano:And then, of course, what we do is to provide for a specific condition precedent in the share purchase agreement, which makes clauses subject to the obtainment of the authorization. This because, in theory, again, theoretically speaking, you have a certain number of days, around 10 days after you acquired shares of an Italian company to make the filing. But that would be too late. That would be a disaster for a buyer. to make this notification after having acquired, so after closing. So what we do is always to structure the golden power as part of the pre-closing activities and qualify it as a condition president to close the deal.

20:23Mauro Sambati:And then you still have that period with the European Commission that you have to get approved.

20:27Donato Romano:Yes, again, merger control, of course, you have to do that even before closing, because merger control, usually speaking, is a prerequisite in order for you to buy the shares. In order to be more efficient in terms of timeline, what we do is to work in parallel on the two filings to prepare whatever are the documentation required. We go with antitrust first, then we may go with the golden power later on. But we will wait until we get all the authorizations before acquiring, actually go to closing and acquiring the shares.

21:01Mauro Sambati:Basically, you got at least six months of diligence right there.

21:04Donato Romano:Well, that is a waiting period that, yes, you cannot really avoid. We are clear with our clients since the beginning, which are the time constraints. What triggers scrutiny from the regulators? First of all, the sector, check the target, also check the buyer. So check if they're happy about that specific buyer acquiring the company. if buyers may have interests that conflict with the national security, let's say the national interest in general, 5G in the telecommunication is a sensitive issue, for instance, because you have access to data, personal data of the entire Italian population. That is a sensitive issue where the government would be extremely cautious before giving any green light to a deal.

21:51Mauro Sambati:So national security is a big one.

21:53Donato Romano:Yeah.

21:54Mauro Sambati:I want to turn this around a little bit, Since both of you have worked with buyers from other countries like Japan, Korea, US, UK, can you tell me a little bit about how do you see different buyers from different countries approaching deals, especially when it comes to timing, the decision-making? How do you see it vary by culture and country?

22:13Donato Romano:This is a very interesting question, because the way of behaving of Asian buyers, for instance, is quite different from UK or US potential buyers. Let's take the example of one extreme before going to the other, which is U.S. buyers. The one extreme is probably Japanese investors or Japanese buyers. In terms of the timeline of the deal, they are extremely slow. They like to have extensive pre-meetings, internal alignment within the company. and then they ask to have a number of meetings and build up relationships with the buyer, even before actually entering into the details and the specific terms of a deal.

23:00Donato Romano:Because for them, building this sort of relationship is a prerequisite in order to get whatever approval for closing a deal. This is also linked to the decision-making process of Japanese conglomerates. The consensus around a certain deal is driven from bottom to top. There are a number of, let's say, people involved in the decision-making process. Sometimes even the stakeholders of the Japanese companies are involved. And of course, it takes time to prepare the package, explain the transaction to a huge number of potential decision-makers. and there are an internal, a huge internal reporting activity that they do in preparation of a final decision, which again is taken by a broad number of people around the table.

23:56Donato Romano:The good thing of this is that whatever it takes at the end, if the Japanese company decides to go ahead, they are quite firm, they are quite reliable, and the risk that the decision is now revised is quite remote. I think different probably is the approach of Korean companies just to remain in the Asia side. Koreans probably are a little bit faster than Japanese companies. They start running, they look enthusiastic. What happens, however, that is a sort of discontinuity in the sense that at the beginning, they may give the impression to the Italian buyer to be very keen and to close the deal as soon as possible.

24:38Donato Romano:Then there are the blackout period, silence. And sometimes we see that the Dianne counterparties are a little bit surprised, and they start thinking what's going on. Probably they are not interested any longer. And then again, they suddenly come up and want to close the deal very soon. It's a quite peculiar approach. This because the Korean conglomerates are always driven by the budget constraints that they have internally. Probably when it comes to the end of the fiscal year, and they have still the budget and were not able to spend they want to speed up close the deal no and justify the budget of the specific department there is no let's say continuity in the approach the negotiation approach with the italian sellers and this sometimes has created some tensions during the negotiation and the other peculiarity is probably due to the fact that the decision is taken basically by the senior management.

25:38Donato Romano:It can be the founder or the chairperson of the company that makes the final call. However, there are a lot of middle executives that are the most operative, that come to Italy, make side visits, make interviews, speak with lawyers, and so on and so forth. However, they are not decision makers. They are simply to report to the executives in Korea. And the tricky point, at least for us, is to understand who is who, actually. Because in Korea, the jerarchy is very important. It's difficult for foreigners to understand, okay, this kind of jerarchy and to understand whether you're talking with a decision maker or just a paper pusher.

26:22Donato Romano:And therefore, this may create even complexity in the relationship between the client and its own lawyers. On the other side, instead, UK and US buyers are quite different in the approach. Again, UK are faster than Japanese or Korean clients, but still they want to keep the process ordered. They are also very formal in terms of structuring the process and stick with it. Verbal agreement shakes a hand for them. It's not enough. everything then must be written down and formalized in whatever document can be LOI stay at first stage and then the final contractor documentation this is probably in the most effective way of proceeding because it's a good balance between taking time to build the relationship but keep in any case the negotiations and whatever in good shape taking with timelines and giving also certainty on both sides about the reliability of the counterparty.

27:30Donato Romano:U.S. companies sometimes tend to be too fast, so they privilege speedness of closing a deal, and sometimes they are not very focused or they do not pay the necessary importance to specific issues that we may detect during the due diligence exercise simply because they are more business-oriented, probably. So they want to close the deal and then to deal with whatever potential issues are afterwards in the PMI phase. They are fast also in the decision-making process. So when we see here a delegation of the U.S. people flying from U.S. to Italy, it's because they have decisional powers and they are perfectly able to bind the company in real time during the negotiation, which is something that you do not really see with the UK and you never see probably with the Korean and Japanese clients.

28:27Mauro Sambati:You got some extremities of the different cultures.

28:30Donato Romano:Yes, Japan and the US are really the opposite, I would say. In the middle, we have Korean and UK buyers.

28:38Mauro Sambati:I'm very fortunate. I did a podcast in Tokyo with Woven, one of the divisions of Toyota. At first, I was like, this is inefficient. It's so slow. But then you realize that when they get full-on consensus in their whole organization, which why it takes so long, afterwards, they move incredibly well. It actually ends up being more efficient when things are said and done. It's quite fascinating the way you contrast the big difference that it's definitely a lot slower, but much more effort on the relationship and getting consensus. You saw the difference as well when you referenced the Korean example as well as moving faster.

29:12Mauro Sambati:but then on and off in terms of getting a little hot and cold in the process. UK faster, but definitely more formal and structured. And then you got the wild west of the west, the US that likes to move fast and break things. And I guess I'm a little more biased coming from the US. What do you see that American buyers consistently get wrong when they're acquiring it? I know one thing you emphasize that buyers, US buyers love speed, but even the culture in Italy is definitely very relationship based. waiting to see like speed being helpful versus where it backfires.

29:45Donato Romano:I wouldn't say that they consistently get wrong because in my experience, and if you disagree, it seems American investors do it spectacularly well here in Italy. More often than not, the deals that are involved usually are satisfactory for both parties, the buyers and the seller. And clearly there's a massive amount of investment from the US. Italy is one of the main partners, obviously, for investments and trade. So generally speaking, it's quite a successful combination of relationships, I would say. The problem is clearly the cultural clash of everywhere in any cross-border deal. On top of that, the things that Americans, investors should know, but they've made aware by us very early on in the deals that employment rules are quite different here compared to the US.

30:36Donato Romano:It's much more strict. layoffs, follow a strict procedure. It's more difficult to fire people here. The second probably issue that American investors sometimes have faced in my experiences, I've had that they think they can, particularly if the Italian target is like smaller target part of a group, they can manage the company from wherever, either the UK or Ireland or directly from the US, which is not really true for lots of things you need to have a presence here in Italy or somebody that can liaise with suppliers can liaise with customers can liaise with authorities you don't need an Italian person in the board but you need somebody that at least comes to Italy quite often and lastly is particularly if they go to buy a minority the important thing is to understand the culture of the company because Italy is based on a huge amount of I would say, quite successful, quite productive medium enterprises, rather small and medium enterprises, but more medium, particularly located in, say, from Rome in the north.

31:45Donato Romano:And this company is usually still the founder of this company. And the presence of this person is really fundamental for the culture of the company. So it's to understand very quickly how to deal with these people, with these individuals, and also how to deal in the future when I want to build a relationship with the employees and the managers of the company in a scenario where the founder will not be there. So these three areas, employment, management, and relationship with the founders, it's where Americans have to be careful.

32:21Mauro Sambati:One quick thing. Tomorrow, March 6th at 2 p.m. Eastern, Gwen Pope and I are running a live workshop on what we're calling the acquisition graveyard. It's for corp dev leaders and integration teams who have deals that are post-closed, but not fully delivering. We're doing a hands-on audit, real frameworks, real scenarios, tools you can use the week after. It's a totally free event. Registration link is in the show notes or visit mascience.com slash events. Again, that's mascience.com slash events. If you've been thinking about it, Today's the last day. Now back to the conversation. I want to role play an example here, but I want to understand, I guess, things that may get misconstrued when you think of behavior where American buyers may think it's professionals, the Italian side may look at it as a red flag.

33:16Mauro Sambati:And I'm almost thinking of, for me, it's like, how do I be like fast and credible versus like pushy? So I'm curious, like, where do things maybe get misinterpreted in terms of trying to be that moving too fast type of buyer?

33:29Donato Romano:Approach here, which may sometimes result too aggressive from an Italian perspective, is, okay, we come, we pay, we buy you, okay, and from the day after, you'll be completely under our control, regardless whether they acquired 100 % or controlling stake. They tend to be invasor and then, let's say, the ambition to know the business even better than locals. This is something which, again, sometimes is not true, especially on businesses which are based on relationships with customers in time. And those relationships have been maintained by the former management, who sometimes is composed by the owners of the company itself.

34:15Donato Romano:So the idea of jumping in, acquiring the company and get rid of the old management and so on and so forth without investing in them is something that sometimes can create difficulties even to them after acquiring the company. And they only realize when it's too late. That's why it's critical and we always sometimes negotiate even against our clients, but it's critical to set a good governance structure of the company, especially again when the sellers still remain with the minority stake or even when they decide to retain some of the former managers as directors or key employees in the company.

35:01Donato Romano:Having a good structure, good rules will help on both sides to live together and to perceive the same interest, which is ultimately not to make the company acquired and successful.

35:12Mauro Sambati:Don't move too fast and break things. You got to be respectful for the relationships driving the business.

35:19Donato Romano:Yeah. Then, of course, there are examples when sellers, they really want to sell private equity, for instance. They want to sell because they have to sell. An American buyer, a U.S. buyer comes, the price is good. They speak the same language and the deal goes smooth. But this is not always the case with small and medium companies in Italy.

35:40Mauro Sambati:How does deal flow happen in Italy? Like, have you seen deals get sourced now and how has it evolved over the past decade?

35:47Donato Romano:Italy has always been one of the preferred countries to invest by foreign buyers, including U.S. So either being private equity or sometimes there were periods even close to the pandemic where we have a lot of distressed demand, but still in terms of deal flow, we have seen, let's say, an increasing number of deals closed, both in terms of volume and number and value of the deals. There was probably a slowdown of the private equity funds in 2020 or during the pandemic, where, again, we see more of this stress of the M &A. But immediately afterwards, again, the private equity market has revamped again.

36:33Donato Romano:And this has resulted in a huge number of deals closed in Italy. Then, of course, in terms of value, we do not have the billion dollars transaction that probably you are used to seeing in the U.S., but still were very interesting M &A deals last year in terms of also value and importance of the Italian targets. KKR and Blackstone probably remain among the private equity funds, the big names that are always very active in Italy. And by definition, they look at large-sized deals.

37:10Mauro Sambati:Is the market overall a heavily banked market, where most of the deals you're working on have investment banks involved or is it more of you're actively finding your own deals and the proprietary deals?

37:22Donato Romano:Deal sourcing has changed, let's say, over the years, I must say. Because when I started my career, so when I was a young associate, probably I was used to deal with the largest investment banks as our first point of contact in whatever deal generation. because they were leading the market. So Goldman, Sachs, Merrill Lynch, at that point also Lehman Brothers, JP Morgan, whatever. They basically were the most active players in terms of deal sourcing and origination for a number of reasons. Because from the seller side, involving an investment bank would mean to have a neutral and professional advisor that would help them to get the right value for their company.

38:14Donato Romano:On the other side, for buyers, foreign buyers, to present themselves baked by an investment bank would mean reliability, seriousness of the approach. So the role of the banks was key. Also considering that the private equity market 10 years ago was not so active in Italy. Many of the M &A deals were industrial M &As, and the banks had access to database information about their clients, their customers, that would allow to match interest from buyers and sellers. And that was, by definition, probably the only way to close deals in Italy 10 years ago. Then big investment banks for large deals and small advisory firms, slightly smaller advisory firms for medium deal.

39:05Donato Romano:Then things have changed over the years because the technology access to LinkedIn, merger market, whatever database would make it easier even for entrepreneurs to access to information worldwide. They could easily see which are their competitors or to which they could approach and offer to make joint venture or eventually sell the company by creating synergies. And therefore, what they do is their own homework. And then they come to lawyers first, okay, and say, look, for instance, we, an Italian company, we want to open up our capital to foreign investors or eventually to sell the company because of, I don't know, generational issue that we have within the company.

39:55Donato Romano:And they rely more on law firms rather than approaching advisory. First of all, because they know we have no conflict of interest by definition. Intermediating is not our main job. We do it as a part of a free effort to ultimately get a mandate from the legal side. So we are less expensive, first of all, because we do it as a promotion part of our promotional activities. It's not our job. And again, by using all the largest investment banks and advisory boutiques, we have the opportunity to introduce the company to a larger panel of potential buyers because they are not just mandated Goldman Sachs or JP Morgan or whatever can be an Italian advisory.

40:44Donato Romano:They are mandated in a law firm which can discreetly circulate a teaser and info memo about the company to contacts. And probably the chance to succeed are even more. And we do it not because we like to do that. We understand it's not our job. But it's essential. It's becoming essential also for lawyers in Italy in order to generate the M &A work, actually. It's part of the price that we are conscious that we have to pay in our job in order then to be able to do what we are able to do, which is the legal part of the M &A. Usually advisors come at the later stage. So if we contact a certain advisor, which may think to have a good match with the foreign clients that would be interested, at that point also the financial advisor jump into the process.

41:35Donato Romano:and still they retain, in my view, a very useful role in the evaluation part of the deal. So to help both seller and buyers to fill whatever gap they may have in the evaluation process and to find the right price and then eventually to set up a competitive process when it makes sense to have a competitive process. So they are still very useful, very active, but not in terms of deal generation or sourcing, but structuring and execution of the deals.

42:11Mauro Sambati:That's actually really interesting. It makes me think of the actual structure of these deals, like how that's actually done. I know one of the things that we talked about before is how you may do like typical purchase price adjustments versus using more of a lockbox approach. And maybe we can talk a little bit about that in terms of what's typically standard and the way you actually structure deals.

42:35Donato Romano:Pretty much mirrors what Mauro said. Until 10 years ago, the closing account adjustment was pretty much used in all the deals this was involved in. And now it's still used, but Lockbox is really widely used as well. I don't know if it's 50-50 or 60-40, but it's definitely the two methods are very common now. and that these mirrors the importance of private equity funds in the M &A activities in Europe and specifically in Italy. In our experience, at least the P funds prefer the lockbox mechanism compared to the closing accounts adjustments.

43:16Mauro Sambati:Can we explain the difference between the two? I guess one thing to highlight to that thought on the last point of that was really unique was that it first fundamentally makes sense to engage with the law firm first in the process. It sounds like engaging the law firm first, you guys can potentially help facilitate who potential buyers are, at least have a good sense of the landscape. Here's all the things that would come with regulations. And then like a lot of times, maybe if you need a specific advisor for this transaction, you can even help guide to which advisor to use. So there's just a lot of things that point at the starting places, getting a good law firm to work with if we're looking to do a deal here in the Italian market.

43:53Mauro Sambati:And then I guess getting into the structure points, I think it's a shift in changes, but maybe we can explain what the fundamental difference is between having a model where you sort of engage in a price and then you do your adjustments at close versus having more of this lockbox where the price stays fixed. And I guess what determines which approach do you actually use?

44:13Donato Romano:When we use a typical price adjustment mechanism, which can be based on working capital or other accounting parameters, what we usually do is ask the seller to prepare a tentative balance account as of a certain closing date. So there is an exercise that the seller is required to do, which is to prepare a sort of reference balance sheet as of the closing date. And this exercise shall be done upfront before actually closing the deal. And on the basis of that balance sheet, the buyers have also determined whatever is the price payable. Then you close the deal and afterwards the buyers jump in and review the accounts of the company and prepare its own final balance sheet as of the closing date.

45:03Donato Romano:So we have a huge number of activity and efforts required from the seller side to prepare the balance sheet up front. And then the bias is to replicate this exercise immediately after closing in order to see whether the figures match or not. And therefore, a certain price adjustment must be paid based on whatever different negative or positive difference of the estimated networking capital against the actual networking capital, for instance, as of the closing date. So you may easily understand how painful, time-consuming this is and also the risk of potential litigation around it because of the way they've calculated a certain item in the ban sheet as opposed to the other.

45:46Donato Romano:So again, you also need a sort of guidelines and at least a set of accounting principles that the party have to agree to use when preparing the ban sheets in order for the two of them to be consistent, the one with the other. This, again, entails sometimes a huge amount of time efforts on both sides. Locking box simply avoids this because you have probably an official account certified whatever balance sheet of the company that can be three, two, three months, even six months back to the closing date. But you have an official balance sheet, if possible, also certified by an external accounting firm.

46:30Donato Romano:And that is the starting point. Then what you simply ask to the seller is to avoid any leakage and therefore any extraction of value from the company since the reference date up to the closing date. So the seller, you're simply requesting the seller, I don't know, not to distribute dividends, not to carry out a related party transaction between the target company and the sellers themselves or any related parties of the sellers, because this can be a way to extract value from the company. You ask the seller to cause the company not to grant money, not to borrow money, or not to grant securities in favor of the sellers themselves or their relatives or whatever.

47:15Donato Romano:You basically put a number of, let's say, constraints, financial constraints mainly to the sellers, from the reference date of the balance sheet up to closing. And you have then to simply check that no leakage has occurred in that period of time. And this is just a check that the buyer can easily do after closing. And then based on the outcomes, you can eventually adjust or not the purchase price. So it's much easier, more straightforward, and probably also, again, easier to understand and to be complied with by unsophisticated sellers.

47:54Mauro Sambati:It makes sense because you're eliminating, you know, one is figuring out how to get standard on the common principles. but then you're basing off a lot of assumptions that you then end up truing up after the deal's done. Yeah. It makes sense. I'm wondering if it's going to be a more trending thing because it sounds like it's already trending in your market or across Europe.

48:11Donato Romano:As Donato was saying, this is probably one of the good things that we imported from U.S. private equity into the Italian money markets. This is perfectly matched with the needs of U.S. private equity funds and it became more and more popular over the years up to the point that honestly, unless there are specific peculiarities of the business and so on, this is probably the solution that we tend to suggest even when we are on the same side advising Italian sellers to implement.

48:41Mauro Sambati:The other question comes to mind, earnouts. Are there anything different practices when you see earnouts are utilized in transactions you've worked on?

48:50Donato Romano:This is another aspect of the MNA deals that has become, let's say, more popular over the years. Still, in my view, it's not used as much as in the U.S. or another Anglo-Saxon countries. But we have seen it and we keep seeing it often, mainly for one reason or two, basically to bridge whatever valuation gap that can exist between buyer and seller. because this would allow basically to increase eventually the purchase price payable if the target company actually meets certain key milestones and economic parameters. Still, however, the level of sophistication of the earnouts in Italy is probably not comparable to what you are used in the U.S.

49:36Donato Romano:market in the sense that the mechanics tend to be very straightforward, forward very basic and very clear because the risk that in any case we want to avoid is to end up with a litigation. Ernest, first of all, usually they have a duration that can last between one and three years. No more than that. I have never seen or rarely I have seen Ernest payable after three years from closing. Again, then they are linked to very key financial KPI. So it can be a bid-up, it can be a turnover of the target, gross margin, whatever is the economic parameter. What is probably the most complex point is how to give to the buyer the flexibility to manage the company that it acquired in the way that he wishes on one end.

50:28Donato Romano:And on the other side, to give visibility to the sellers and sometimes also certainty to the seller, nothing will be put in place by buyers in order to somehow make the payment of the earn -out ineffective, to manipulate numbers or figures and so on and so forth. So there are these conflicting interests, which probably are the most critical part of the Arnott mechanics to address. So sometimes what happens, especially when the sellers remain as minority, for instance, that we address this issue in the shareholders' agreement, in a shareholders' agreement, whereby basically we say that the buyer will manage the company, but it will do that in the ordinary course of business.

51:15Donato Romano:and the seller who probably also has a presence in the board has a sort of visibility on whatever extraordinary transaction, sometimes a veto on extraordinary transactions, as long as this may impact on the earn-out. Private equity in the day never accept, of course, vetoes. They prefer eventually to anticipate payment of the earn-outs and be free to make ads on or other acquisitions within their portfolio. But among industrial parties, this can be also a viable solution. Sometimes, for instance, what we tend also to do is a combination of earn out with, for instance, stock option or long-term investment schemes that would be applicable to the sellers when they remain in the company, for instance, by retaining managerial roles.

52:09Donato Romano:So if they remain as employees of certain companies, part of the remuneration is shifted as salary compensation for the work rather than price paid up front for the shares. And these incentive schemes are linked to parameters which are different normally from the ones to which earnouts are linked. And therefore, this creates a virtuous system because at that point, the manager is not encouraged to act or to behave in a way rather than another in order to get their now payable because this may affect the payment of its incentive, its bonus as a manager and employee of the company. So finding the right combination of these two schemes is more often the way to succeed in structuring the deal.

53:01Mauro Sambati:So it sounds like if I get an earn out in, it's not going to be a heavy amount. You said the short term, usually one to three years. But I should probably expect to pay out the earn out. This is probably... Yes. Yeah. I want to ask you about doing minority investments. I know we talked about M &A as a whole, but how do things differ? What does it look like if you're trying to do a minority investment in a family-owned business, like a governance structure that would actually work on that deal?

53:26Donato Romano:First of all, I would say that the things that we do is to speak to clients understand clearly what they have in mind. You know what I mean? Because the minority investor with an idea to increase stake in a company or to exit at some point. So they have a clear view of what the timeframe is, when they want to increase their stake, when they want to buy the entire company maybe, or when they want to exit. Once this is clear, which is the most important thing, typically what we do as a governance, we have shareholder agreements and we also amend what we call the bylaws, or articles in cooperation, depending on the jurisdiction or reference.

54:05Donato Romano:We call statuto in any case. And we insert fundamental things like, first of all, information rights for the minority investor. They need to understand how the business is doing. They need to have vital information on the company. And we typically advise on having a presence in the board so that they can have veto rights on board decisions. And typically as well, veto rights on shareholders meeting decisions so they can actually block block extraordinary transactions, which typically are resolved upon by the shareholders' meetings. So they can block that, but can also have the rights to block certain decisions that are made by the board at board level.

54:43Donato Romano:Of course, the fantasy is of our limits, so we can have a huge amount of different thresholds. We can have different vetoes. This is the package that we always advise our investors on Focus on.

54:55Mauro Sambati:Getting veto rights sounds like the board composition is going to be part of what you're outlining and then other information rights.

55:03Donato Romano:What we also usually see and encourage is to have also exit strategy since the beginning, either in the case the deal is successful or even in the worst case scenario when things probably didn't go as expected, meaning put and call option agreements, ancillary to whatever is the main share purchase agreement. This would allow the buyer, which, for instance, has acquired majority interest distance or Or even a significant minority stake to exercise the equal option in one or two years. Okay, if it is satisfied by the investment and then at that point gain control or even gain the full company, the whole ownership of the company.

55:45Donato Romano:Or vice versa, to set up for a put option and sell back, which is an extreme case that honestly is not so frequent, but sell back the shares to the seller. Or still within the collection, we can have a price mechanism that can be punitive if the company does not perform as expected or can reflect the additional value of what the company has gained, the closing after the acquisition by the buyer. And again, rather than, for instance, paying an earn out, this can be another possible solution for the seller. So you retain your 30%, 20%, whatever. but when we exercise the call we have not fixed already the price up front but if the company actually has increased its value its enterprise value we will pay more in proportionally more the 20 percent as compared to what we paid for the 80 percent in fast distance we also based on drag along and tag along rights as well so that if the majority shareholder decides to sell, they can drag out the minority or if it doesn't, at least the minority's shareholders can be tagged along and exit the company along with the majority's shareholders.

57:00Donato Romano:So it's quite simple as well.

57:02Mauro Sambati:I'm going to give you a call when I cross that bridge and have an investment like that to work on.

57:07Donato Romano:Another way to build up a structured transaction, especially with private equity, that we see more and more is the sellers reinvesting in the holding company used by the fund to make the acquisition. It's another way to compromise on price, because this is an instrument that would allow the seller actually by reinvesting a certain portion of the proceeds received from the sale of the company, reinvesting it into the acquisition vehicle used by the fund would allow when the fund exit, okay, to benefit the pro rata of the upfront of the creation of value that the private equity fund has been able not to generate over the years before the exit.

57:53Mauro Sambati:We have not talked a lot about this labor laws in Italy. And I'm giving you a hypothetical situation. Say I was going to buy a software business and my plan was to eliminate one of the groups, maybe the software engineers or something like that. Yeah, I just want to know, how does that play out? Because I know a lot of European countries, it's going to be a lot of tight regulation that's going to keep you from doing it.

58:14Donato Romano:It's going to be a nightmare for you. You had better to buy a software house in the US. The labor regulation here is very tough. It's very strict. And generally speaking, it tends to be in favor of the employees rather than the employer. up to the point that, for instance, if you make a transaction, you structure a transaction in Italy as an asset deal rather than a share deal. So you buy the assets. Okay. The simple fact that you bought those assets, it's not per se a just cause to terminate employment relationship with the employees that you brought in your company. So sometimes, again, US people say, okay, we buy this business, this branch of business comprised by these assets, whatever, and a certain number of the employees, and then we will take care of redundancy later on.

59:09Donato Romano:It doesn't work in Italy because after you have made an asset deal, you cannot simply fire the employees because you have internal redundancy, overlapping of positions, and so on and so forth. Even before acquiring the asset deal, you have to discuss with local trade unions and work councils, which are your ideas and your decisions for the future of that branch of business that you're going to acquire and the future of the employees. And sometimes, rather than redundancy, you are bound to take on retention mechanism, whereby the buyer commits not to fire or terminate the relationship with employees for a certain number of years.

59:56Donato Romano:This is key for Italian entrepreneurs, because even in shared deal, what they are selling to you is basically their life, a portion of their life. Most of the employees have been working with that specific employer for years. They are sort of family members in the smaller companies especially. So one of the things that an Italian seller cares when selling its own jewel, its own company, is to make sure that their employees will be safe. Some of these employees, by the way, are key for the company's future and strategy as well. So if I can advise on this, I would advise foreign investors to actually listen carefully when the Italian seller tries to convince them to retain at least some of the employees because they're a key to the success of the target.

1:00:49Donato Romano:This applies also to largest Italian companies because we advise, for instance, a deal I advise where a Japanese conglomerate was acquiring an Italian listed company. However, Italian Eastern Company, which, however, brings the last name of the founder in its name. So for the founder, it was essential to get a retention commitment undertaken from the Japanese buyer, not to fire or terminate even one employee for at least two years. So this not only applies to small companies, where, again, probably there is also a very close relationship between the owners and the employees, but also to large companies because big Italian employers, so businessmen, they want to save their face and keep their reputation on the Italian market.

1:01:39Mauro Sambati:In summary, if we wanted to break down principles for Italian business culture, if you could give every foreign buyer one rule for Italy, what is it and why?

1:01:50Donato Romano:Relationship with the seller and the managers of the company or the campus. Yes, spend a little bit of time up front to build up this relationship. and this trust, it's not a waste of time, but is then the key to succeed and to make things move when it comes to actually close the deal. So it's not a waste of time, it's an investment of time.

1:02:12Mauro Sambati:So how? Drink the espresso, drink the wine? How do I do that?

1:02:15Donato Romano:For instance, inviting the seller to come to the US and visit the US company, the potential buyer. And again, instead placing a visit to the Italian target and speaking with the key manager of course, in a discrete way, then it depends on the nature of the target. Introducing yourself, explaining a little bit about the company in the US, what they do, how synergies can be created, what would be the potentiality of this acquisition also for the benefit of the employees, the key managers. And then, of course, also shaking hands and drinking a glass of good wine at dinner. Or bad ones.

1:02:56Mauro Sambati:Or bad ones.

1:02:57Donato Romano:this is, let's say, part of the negotiation etiquette in Italy, I would say.

1:03:04Mauro Sambati:I agree. You're going to find until you get both parties agree. Gentlemen, I got to ask you, what's the craziest thing you've seen in M &A?

1:03:12Donato Romano:I might have something in mind because it happened in probably one of the last deals that I closed were a Korean company, in this case, acquired a small, medium, and say Italian company. Negotiation were tough also because of the cultural and language barriers, because how to draft the contracts in English or in Korean and Italian, so bilingual version, Korean and Italian, which language should prevail one or the other. But this is probably another topic. That was one of the probably of the most recurrent difficulties that you may face also when dealing with Italian people that don't even speak English or speak basic English and they are reluctant to sign 100 pages of contract in English.

1:03:59Donato Romano:But after this negotiation, in a way or another, I got closer to the sellers and the owner of the company. And I asked him, sorry, but can you explain to me how you get in contact with this Korean player? Because the deal was not intermediated by investment banks or advisors. On both sides, how you know each other? And he said, this Korean company that acquired us, has been one of our largest customers in Pest Distance outside Italy. We spoke about the future of the company and they showed some interest. But then we also received unsolicited interest from another customer of the company and also from a private equity.

1:04:45Donato Romano:So in the end, what we did is considering the range of the price and the distance between one offer as compared to the other, were not so huge, these kind of differences. What we did is a sort of referendum with the employees. So we asked to the employees, we presented the three deals, okay, to them, the three potential buyers, and we asked them to actually say a word, express their preference for one rather than the others. And this was done with a huge number, not all of them, a huge number of employees, the ones that were, let's say, historically, in the company, because the owners wanted, again, those employees to be happy also after they left.

1:05:29Donato Romano:So in the end, the employees decided for the Korean buyer because it was more reliable in their view, more similar in terms of culture to the Italian environment. And therefore, they decided to go with the Korean buyer, even though he confessed to me, the owner confessed to me, that the price was a couple million euros lower than what offered by the private equity fund.

1:05:51Mauro Sambati:I like that story a lot. Let the employees decide the buyer.

1:05:55Donato Romano:This explains how emotional is M &A or can be M &A in Italy. It's not always this the case, of course. This was a really crazy thing that happened recently to me. But still, the emotional part is very important.

1:06:10Mauro Sambati:I like that one. Gentlemen, I want to thank you so much for taking the time to have this conversation and help me become a better M &A scientist. Those of you who stuck through, I know we haven't passed our time and that's what usually happens on these live interviews. So thank you for sticking through all the way to the end.

1:06:25Donato Romano:You're welcome. It's been a pleasure. We do not see actually the audience, the people connected, but if any of you guys have any questions, maybe you can follow up, send us the questions so we are happy to answer.

1:06:37Mauro Sambati:Absolutely. You know, again, if you stuck through, really appreciate you listening to the podcast, my fellow M &A scientists. Appreciate the feedback. Feel free to connect with me on LinkedIn. I took my privacy filter off. Just put a little note on there So I know that you're an actual person because I get about 20, 30 spam now every single day. But reach out to me on LinkedIn. I'd love to hear topic ideas, things we haven't covered, the criticism. I'll take it. It's how I get better at this. Until next time, here's to the deal.

1:07:15Mauro Sambati:Thank you for taking the time to explore the world of M &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 &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, at mascience.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.

1:08:00Mauro Sambati:Again, that's mascience.com. Here's to the deal.

1:08:14Mauro Sambati:views and opinions expressed on mna 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 Vเหства