Ensuring Alignment for Deal Success

0:03This is it. M &A Science is expanding with our first M &A Conference. Introducing the M &A Science Fair this October 5th in New York City. This will not be like any other M &A conference. You know the ones I'm talking about where it's panel after panel after panel until you're bored out of your mind and need to hit the bar for tequila shots to restart your brain again. The M &A Science Fair is built around peer-driven conversations in a design thinking format that encourages real collaboration. Bring your challenges, workshop them with your peers and leave with practical solutions you can apply to take your practice to the next level.

0:48The M &A Science Fair is exclusively for heads of corporate development and heads of M &A integration. I know it's pretty limited but we want to make sure this first event drives the best quality networking and we'll probably expand it from there. If you're interested, request an invite at mascience.com slash fair. Again, that's mascience.com slash fair.

1:20I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:44Hello, M &A scientists. Here at M &A Science, our goal is to continuously expand our understanding of M &A and use that knowledge to create top-notch training programs and resources by visiting mascience.com. You'll find all the information you need to take your M &A skills to the next level. Get started by signing up to our free weekly newsletter to stay up to date on the latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Issam Patel, CEO and founder of M &A Science. Joining me today is Andy Bilbao, currently CFO of Noble Education Acquisition Corporation.

2:22Noble Education Acquisition is a blank check company focusing on the ed tech sector. Now, John's got a ton more M &A experience beyond that. I'll let him tell more about that. Today, we're going to talk about how to ensure alignment for a deal's success and nailing your pitch to the board. Andy, how are you doing today? I'm doing just fine. Thank you for having me. And it's a pleasure to be here today. Andy, can we kick things off about your background? As you mentioned, I'm currently the CFO of pre-IPO EdTech SPAC. Prior, I was with John Wiley and Sons for 11 years, seven years as Vice President of Planning and Development, helping shape the company's strategy and executing on deals.

3:04And the last four years with Wiley, I was the global head of the corp dev or mergers and acquisitions for the company, placed north of$1.3 billion with Wiley, split mainly between education technology and scholarly publishing, meaning journals or publishing and providing services to our society partners at Wiley. Before Wiley, I spent about seven years with the Nielsen company on their business media side. How many deals have you worked on? I would suspect I worked on several hundred deals, consummated several dozen. My experience with Nielsen was noteworthy in that I led the transactions that sold most of the company's media assets, their B2B assets, most of which are the noteworthy ones now are with their second or third owner after the divestiture by Nielsen.

4:05Nice. So before we start digging into achieving alignment, can we talk about the areas where it's important to have alignment? I think it's important to have alignment across all aspects of a prospective transaction. People focus on the functional areas first and foremost, which is certainly important. But as you and I have discussed, the cornerstone of achieving alignment is really around strategy. So whether it's a business unit strategy, a divisional strategy, or an overarching strategy for the corporation, making sure that all parties that need to be involved and aligned are. And granted, there's a time and a place for everything.

4:47Not everyone on the team needs to know everything all at once. It's a question of who needs to know what, when, and making sure that all of those parties do come into the loop as part of the process at the right time in the right place. So alignment on strategy, and then that expands out into the functional areas. Yeah, functional areas. And then you can go much broader than that. In terms of a communication and a plan strategy for alignment around a prospective deal, there are upwards of a dozen disparate parties that we need to keep in the loop as we go through our process. You have your internal stakeholders in the form of the deal team or functional heads or executive leadership.

5:33And then you have external stakeholders in the form of the company that you're acquiring, their vendors, their customers, their employees, and eventually IR and the press. So this goes back to the who needs to know what when. Exactly. You're not going to come out with a press release halfway through your process. So those are the things that go out further in the timeline. And sooner in the timeline, you often want to do what I would call greasing the skids. So before a deal gets too far, making sure that your key internal stakeholders are a part of the process and are aligned with what you're trying to achieve with a prospective transaction.

6:11Can we break this down? We'll make up a deal and just run it by the timeline. Sure. Just to get a sense of when do you start getting folks involved and the approach aligning them, even from the very, very beginning, before you're even looking at things, who are you having conversations with? So the first thing is that and the cornerstone of any good corporate development program is the overarching strategy. So whether it's a transaction that's going to affect the entire corporation, in which case you need the strategy aligned with the executive leadership team and the board of directors, or just divisional strategy where a prospective transaction only pertains to that portion of the company.

6:53But it all starts with that underlying strategy, whether it be at the corporate level or the divisional level, the business unit level, if you will. As part of that, there are certain elements that you're going to want to ensure are included. Strategy, first and foremost, the market that you're serving. Is it growing? How is it important to the company? What do the customer segments inside of that market look like? How are we addressing those customer needs? All of those things need to be clear and expressed as part of the activity that you're going to undertake as a corporate development professional.

7:32Okay, so we got some initial stakeholders that are involved with shaping the strategy. Yeah. And then once that is firmly in place, making sure that you have the division or CEO, whoever the unit lead is against this prospective deal on board with it. Here's what we're going to look at. Here's the timeline associated with it. Here's who I'm going to need from your team to be involved in the process. Corp dev usually handles all of the functional areas and aligning those folks at the appropriate time based on the deal plan and the timeline associated with it. But it's almost always important to have some person or people from the business unit, from the division involved if it's going to be a transaction that doesn't involve the company as a whole.

8:26Who typically is the champion for the deal? On a division lead, it's usually whoever the executive is in charge of that or their designee, but almost always they play a part in it, especially if you're trying to sell this to the company's executive leadership and the board. Having those conversations up front, getting them bought into the process, getting them to assign folks as part of their team is super important to the process outside of the functional and legal and financial due diligence. So pretty slim in terms of who's involved in terms of shaping the strategy than even earlier looking at the deals.

9:09Like we're not getting into functional leaders at this point. Up front, you do want to keep that group relatively small. A lot of deals die on the doorstep, as you will. So getting too many people involved too soon or getting people excited about a transaction that's not going to go anywhere is not a productive use of anyone's time. So then we identify an opportunity. We identify an opportunity. We discuss it with the leadership team. We make sure that we have buy-in from the executive level to actually pursue it, even just getting to an LOI. If they're not going to back the deal, then we're going to have to explain to the divisional leadership why it's not going to move forward.

9:52And if they are going to back it, do we have the, at least in a preliminary sense, the necessary resources to go after this deal at this point in time? And I don't mean just money. I mean, people, resources are finite. You can't pursue every prospective transaction. You have to prioritize what deals you will go after and what deals you'll pass on. Making sure at least to get a green light from the powers that be, whether it be the CEO, the divisional lead. In some cases, you have an investment board, if you will, that you have to run things by. So making sure that upfront work is done and that people are at least on the same page to kick the tires on the prospective deal is super important.

10:35What's your approach in prioritizing your pipeline? And I'm thinking of the firm, like you mentioned earlier, where you got multiple verticals you can be going after. Impact. What is the potential impact to the organization as a whole? What deals are going to make the most difference from a shareholder accretion perspective? Where are we missing elements, whether it be capability, market reach, customer reach, product development, that really are going to influence and affect the future of the organization. How do you factor those different elements together to get a sense of the impact? It's funny.

11:12Sometimes you find some of the bigger groups that really should be putting their biggest and best foot forward, pitching small deals and things that have very little influence on the stock of the company as a whole. And other times you have these tiny little corners of your business that bring up these things that undo needs in terms of capital deployment. It's all over the map, Isan. It's part of our job in terms of corporate development professionals to help the executive leadership make those decisions, to have a well thought out capital allocation model and deployment mechanism. Things that sometimes people in the corp dev group think are common sense, the divisional folks won't or they don't realize the competition for the limited resources that the organization has.

12:04I understand how you want everything to go towards a strategy. And the more impact towards that strategy, the better. But I don't know, Andy, I'm raised by immigrant parents. I'm wired to be a bargain hunter. I look at value for every opportunity. I don't know if that's the right way to do it. I think that's true. So if you have the opportunity to acquire an asset that's strategically aligned and it's 10 cents on the dollar versus one that's strategically aligned and is 110 cents on the dollar, bargaining hunting can happen, does happen, will happen. But you have to look at the longer term picture.

12:42What are the integration costs going to look like? How long is this going to take? When will it have an impact? And shareholder value, whether you're a public company or a small private, is really what you're striving to achieve. So the strategy that you lay out should be focused on deriving increased shareholder value over time. And those transactions that you consummate should all build towards that. And the idea is, first and foremost, those deals that have the greatest opportunity, the greatest propensity to add shareholder value over time. I got to strike a fine balance. No doubt. I want to get a better understanding from identifying an opportunity to getting assigned LOI of the alignment with the board and any other folks that weigh in on the go-no-go decision.

13:37It all starts with the strategy. I think the next step is looking at the market and the market context for that prospective opportunity. So not the company itself, but in what market does that company operate? How is it competitive? What differentiating factors does it have? What does the target look like over time, assuming tight integration with the existing assets of the acquiring company? Those, let's call it three points, strategy alignment, market indicators, and then the company factors of the detail around that, I think is the first step in terms of developing that alignment. And then I think it's a question of, at least at the top, doing a thorough job of telling the story for why this prospective target in this market at this time.

14:32So providing some background on the prospective transaction, that market context, and then the specific context of the target in that market is one of the better ways of making sure that everybody is on the same page. I got to go back and break this down because I think you gave me a whole outline for building a business case here. And I want to make sure I got it all. The strategy part, right? Hey, this is why we're buying a company. How it aligns with our strategy. Why it fundamentally makes sense. But market context, actually, I like the details around this, where how does this target company compete in the marketplace?

15:11What are its differentiators? And then I like this piece because I think it's key is what does that target look like over time as you think about the company post-acquisition and it gets integrated into your company? We can talk about the market context a little bit further and slightly discreetly from the target company. So what is the overarching market size? what is the TAM in terms of the addressable market for this particular aspect of this company? Is the market growing? Is it shrinking? How big is it? How is it defined? How has it changed over time? Why is that market particularly attractive to us aside from this particular target?

15:50How, when we put these assets together with the assets that we have or don't have, will we compete? What does the competitive landscape look like in the market? Who are the players? How are they defined? What makes each of them unique? What do they bring to the party? How easy or challenging is it for us to be a part of this or enter the market with this asset? Are there any other barriers to entry? Why invest in this particular market versus others, particularly when you're talking about a business that has disparate or different divisions in which they can make these strategic investments? That's the market context.

16:30Within that context, if you talk about the target, what are the attributes of this business? What makes it unique? How do they fit into the competitive landscape? What's their unique selling proposition inside of that market? How big or small are they providing context in terms of the financials and whether or not that's something that we can digest or not? What are the KPIs associated with that target, the key performance indicators that make it an attractive target inside of that market context? How long have they been around? How long have they been operating? What does the management team look like?

17:07Do they have any unique capabilities that are additive to our existing business or otherwise employee base? And as you progress through this in terms of your due diligence, Kisan, you'll start to get to the point where you're really not just describing the company or the target, but you're describing your integration plan as well. You're talking about how you're going to bring these assets together. How are you going to make one plus one equal three? It's a lot of information to put together and present to your board. And it builds over time. So when you're talking about an LOI stage, chances are you only have enough information to be dangerous.

17:49You really haven't done your due diligence yet. You haven't laid out the timeline for the prospective transaction and your integration plans. So all of those things build over time. This gets into the piece that we were talking about in terms of communication. Not everyone needs to know everything all at once. The executive leadership team wants to be in the know. They want to know how this is going to fit. They want to know what you're learning over time. All of your information from your due diligence is going to build over time. You're going to have financial due diligence that substantiates or refutes what you have in your models.

18:27You're going to have legal due diligence in terms of the company's standing and problems that could face pending litigation, etc. You're going to have operational due diligence that allows you to look at and to build an integration plan that, at least on paper, looks like you can execute and will realize all of your projected future gains. How does this evolve from these early conversations when I'm looking at a target? We always get that one-page teaser if it's a bank process or something that we're putting together in that format. Do we start off with something that simple and then at least get early indicator if we're going in the right direction?

19:10And then we keep iterating and turn this into a formal investment thesis? It tends to evolve that way. It tends to evolve from a simple investment thesis and the context of a prospective deal towards either exiting the process and not being party to pursuing it if you don't see what you like or if you don't think you're going to realize what you thought you could. When things are substantiated, particularly through due diligence, people tend to get a bit more excited about it. It's important to stick to your guns in terms of what the value actually is. People tend over time, particularly lengthy deals, to fall in love with the prospective target and lose that perspective of what this means and the potential impact that it could have.

19:59So yes, it does tend to build over time. Your knowledge builds over time. The case usually gets stronger over time. Cases that tend to get weaker over time tend to be business opportunities that you pass on or drop. What does the go-no-go decision trail look like? Because it sounds like it's just not one simple, here you go, Andy, go ahead and we'll give you this much of a check you can write. No, and oftentimes they're conflicting. So you get one aspect of the business that looks phenomenal and could be an absolute home run and others that are more black marks, if you will, on the potential deal.

20:38You have to weigh those things as you walk through the process. Hopefully, the entire deal team is presenting the case, the investment thesis or otherwise, warts and all. It's important that everyone knows that no deal is perfect, no company is perfect. There's always things to fix. There's always something about it that doesn't look 100 % like we thought it was going to look. And it's important to be transparent about those elements of the prospective transaction that are not necessarily in positive light. We haven't spent a lot of time talking about this. One of the conclusion pieces of an investment thesis is risks and upside opportunities.

21:24So what are the risks? What can we do to mitigate those risks? What are the upside opportunities that we haven't included in our financial models? And how can we go after those opportunities to help either build the business case or to beat it? You covered a lot of different areas between the market, where the company fits into the market, why are we buying it strategy. Is there a certain order that you find flows well when you're presenting this? It depends on your audience. So if you're talking about bringing a board of directors along on this journey with you, providing the context of the prospective transaction.

22:03So how did we come to find this company? Why? Why them? And why now? What market does it operate within? Why is that important to us? Aside from this target, what are the underlying elements of that market that are attractive to us as an acquirer? So even if we didn't pursue this company, we should be pursuing other companies in this market. And then the background and the details around why this target versus all of the others that are available to us in the space, I think is a step through. And then you get into due diligence and you have a deeper look at the financials, at the legal aspect of the company, at the operational aspects of the company.

22:45That story is going to build over time. So the first time that you meet with your executive leadership team or the first time that you meet with the board, it's more of a teaser. You're testing the waters to see if this is an area and a target that we can and should be pursuing. And strategic alignment works well there. If you're well aligned with your strategy, it's very difficult for either your executive leadership team or your board to say no, unless we're not pursuing deals at all. Or if it's a no, why is it a no? And how can we adjust so that we're not wasting everybody's time on a go-forward basis?

23:22Then the story builds. And this goes back to what we were talking about earlier, Kisan, in terms of that communication plan and timeline. As the story builds, people will be more and more familiar, A, with the story, with the market context, and with the company. But they're going to ask more and more detailed questions. So that's where your due diligence really comes to the fore because you have to answer all of those questions. You have to make sure that you've done your homework and that this is the right target opportunity in the right market at the right time. As that story builds, the questions are going to be more detailed.

23:55Your responses need to be more detailed. You need to do your homework and you need to provide a compelling case, warts and all, as to why we should be pursuing company X. When does it get down to the wire when they actually make this go-no-go decision? So depending on how you're organized, whether you're a public company or private, it generally comes down to, in the case of an auction, a binding indication of interest. And in the case of a proprietary transaction, one in which you own it, there are no other bidders or suitors to, if need be, either CEO or board approval. And usually you have all of that laid out in the case of a brokered transaction where you have sell-side investment bankers who are representing the sellers in a deal.

24:43They'll tell you the dates that you need to hit. Usually there's a day or two in there if you need it, but you try to hit your marks. And in the case of a proprietary transaction, usually corporate development will lay out a timeline that they can live within, and they'll discuss it with the potential seller prior to the engagement going too far. When you come back to putting together a bid, what does that process look like in terms of getting a number out there? Is that coming up with you to get an approval with the board? Is the board waiting on it? The board generally, at least in most public companies, is not going to argue with you about whether your bid should be$100 million,$90 million, or$110 million.

25:24And in general, you have an underlying financial model that you can live within, and you do sensitivity analysis around both price and performance. So in general, you'll have at least three cases, usually five. So let's just using my$100 million as a base case, you'd have high performance, base case performance or projected performance, low performance, and then you would have it at, say, three price points,$90,$100 million, and$110. So that gives you a sense in terms of what your internal rate of return is going to be at three different price points at three different performance models, whether you do well online or below par.

26:06The CFOs of the world tend to be a bit more pessimistic. They've been around the block and seen things go sideways longer than expected. Sometimes your OCMOs, CEOs tend to be more optimistic. Business unit leads tend to be more optimistic about what they can do with the asset. And when you factor in synergies, how great things are going to be in the future. It's our job as corp dev professionals to be as middle of the road, sitting on the fence as we possibly can. So who's got the most influence on that offer price? The corp dev lead, the BU head, the analyst working on the model? In general, the CEO has the most influence.

26:46The business unit leads less so. They may project optimism associated with the integration of the assets, but they tend not to focus too much on purchase consideration or enterprise value. And in general, you can temper that optimism by looking at the business in terms of the financial returns with and without synergies. So with synergies, you're going to get this performance, this IRR over time without synergies. And that's a sort of a negative way of looking at it. You really shouldn't be doing the deal if there are zero synergies, unless it's adding some capability that you don't have in your existing portfolio.

27:27The synergies are usually the element that gets you over the top in terms of performance and helps get you to the price that will get a deal done. That's the variable to make it all work. No doubt. It's often one of the biggest pieces of the pie. And when you look at an IRR with and without synergies, you have to be skeptical if the numbers are dramatically different. Because what if you don't achieve those synergies? That's the part of the art and less of the science in terms of M &A. Is there anything that I should absolutely not do when pitching to the board? I know you mentioned hide the little bad spots on the deal.