Executing Transformative M&A to Change Business Models

0:00Emerson, Block, Cardinal Health, Broadcom, Toast, Energizer, Jam, Treehouse Food, Coram, There's too many to list. What do the best corporate development teams in the world have in common? They use Dealroom. Add a crappy data room and Excel trackers. In 2021, Emerson did an$11 billion acquisition on Dealroom. Then this year, a$14 billion platform divestiture to Blackstone. Even with every big bank name involved in the deal, they all had to use Dealroom. Learn why the best in M &A combine diligence and integration into one workflow so they can get both diligence and integration done faster. To execute M &A like the best, you have to know how to use Dealroom.

0:51See for yourself at dealroom.net. Again, that's dealroom.net. Let's get to the interview.

1:00I'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.

1:25Hello M &A scientists, welcome to the M &A Science podcast where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more on how to optimize your M &A practice or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com and subscribe to our free weekly newsletter. If you want to keep up with us on the go, head over to LinkedIn and follow M &A Science. I'm your host and chief M &A scientist, Kisan Patel. Joining me today is Tobias Givistala, head of Group M &A at GEA Group AG, one of the world's largest suppliers of process technology for the food and beverage and pharmaceutical sectors based in Germany, traded on the Frankfurt Exchange under G1A.

2:14Today, we're going to talk about executing transformative M &A to change business models. Tobias, how are you doing today? Hey, Kiesan. You're doing very well today, and thanks for having me. We're here live in Dusseldorf, Germany. Is this the global headquarters for the company? Yes, it is. We're global headquarters for the GEA group. Yeah. I'm still working in German. I got a, hello, guten Tag. Yeah, that sounds great. So maybe we can do it in German, this interview. Maybe. You know, with all the AI stuff, maybe that'll be the thing. Yeah, definitely. Live translations back and forth. Can we kick things off with a little bit about your background?

2:51Yes, sure. I'm 43 years old, married and have two children. I'm an economist by education. I started with a focus on international management, corporate finance and corporate valuation. I'm doing M &A for almost 20 years now in different roles and functions. I started my M &A journey in a big four accounting firm and a transaction advisory. But there was a certain point in time when I wanted to learn a little bit more about M &A, especially strategic aspects. And that was the reason why I then moved to the corporate side. I worked for several companies in Germany. For instance, a listed specialty chemical group in Germany or a listed construction company, as well as a large German utility company.

3:33Then I had to move back into consulting for a short term. But now I'm here and heading the global M &A responsibilities of GEA Group. Throughout my M &A journey, I did a lot of traditional buy-side and sell-side M &A, well as joint ventures, partnerships. But I was also responsible for corporate strategy, heading also corporate development team. So I have a very broad expertise, not only pure execution M &A, but one of my favorite things in M &A are transformative as well as high complex deals. And I think that's the reason why we're sitting here. Let's break it down. First of all, that's a pretty versatile background covering M &A.

4:12When you said 20 years, I was like, you basically were born to an M &A. When we say transformative M &A, what does that actually mean? For me, in the end, it's always coming along with the change in business model or with the change in governance of a company. There are lots of examples. Maybe you take the automotive industry, which is facing the pressure to change their business model to electric vehicles coming from a conventional process. And such things where especially great and good companies have to reinvent themselves or come up with creative structures to continue their former business.

4:50That's a good point. So obviously changing the business model and it seems like a big part of it's keeping up with times and staying relevant. You mentioned governance as well. Yeah. Where does that fit into it? Imagine a company which is working in a very conventional business field and facing certain difficulties to gain financing or new equity due to certain regulations that have been come up in the meantime. Here in the European Union, we introduced a couple of years ago the so-called EU taxonomy. that's definition of certain business areas which are classified as carbon neutral or on the other hand, non-carbon neutral and especially the latter one definitely has difficulties to act on the market as they are facing regulative pressure and such things have, of course, influence on the whole governance model of a company.

5:43That's actually really interesting. We'll look forward to chat more about that. Can you tell me about your experience specifically with transformative deals? Happy to give you maybe a war story as an example. Actually, indeed, very complex one. And it's referring to the time when I was head of corporate development and M &A at a large German utility company. And it turned out that due to several external shocks, especially the German law of exiting coal-fired power production, the company went into serious financial crisis. And as part of the restructuring of the group and the refinancing, there was a condition of the financing banks that at that time, six public shareholders had to sell 100 % in their stake in the company.

6:26The problem was, it was a complete integrated group with a high exposure in burning coal to produce power, to secure the German power supply. And a lot of that business was, let's call it old economy. But the group had also a lot of interesting businesses in renewable energy fields and service areas. And here comes the aspect I mentioned earlier. Due to the overtime increasingly very strict ESG requirements, so environmental, social and governance requirements, especially of investors, but also on the debt markets, A company with a huge portion in the conventional power production would neither find an investor due to the fact that investors and even statutes of certain funds are not allowed them to participate in such companies.

7:14Nor a bank financing such a deal. Not only such a deal, but also not willing to give financing to transition a business model into a new one. So there's a kind of trap you are in with a company because you cannot gain fresh capital to transform the business internally. But you also will have a tough time to find potential investors on the one hand. But even if you have one, they will need certain deal financing. And here we are back again. Banks are usually reluctant to finance such conventional assets. By the way, these ESG requirements have a very strong exposure and consequences, not only for financing.

7:53You are a company active in conventional businesses, which come along with certain CO2 footprint. You even have investment banks or even consultancies who cannot advise you anymore because they have internal policies for restricting businesses with such companies. So it's a very tough environment to be in. We ended up in a situation where we concluded that the only way for making this company executable was a complete separation of the group, especially group businesses. So we come up with an idea to introduce a conventional business arm, as well as a green or we call it growth arm with the option to sell only the growth one because that's a clean business where everyone was keen on investing, especially when talking about green energy and energy transformation in Germany.

8:42In the end, the conventional or coal arm would be the case for a windup scenario in the end and maybe using some of the proceeds that you gain from the growth business to finance that. So in the end, we took the existing holding company, which included almost every operation of the group at this point in time and made it literally empty. So we transferred everything into two legally independent 100 % subsidiaries below that holding. So it was a huge company-wide mega carve-out. It's interesting because the whole entire business got carved out basically. Indeed. And twice. The conventional one on the one hand and the growth one on the other hand.

9:21What did the shareholder distribution look like? Because you start off with the same, But now you have one business that has more accessibility to different capital and investor base. The intention was in every scenario to sell the company somehow. And therefore, we also discussed different structures. And by the structure that we have chosen, we assured that there was no connection between the coal business and the growth business. But it was a complete ring fencing of both businesses and no potential contingent abilities between those two individual entities. and everything was set up and prepared to sell the growth business to, I don't know, most likely infrastructure investors and use some, as I said, some kinds of the proceeds to pay off the financing banks on the one hand, but also to use some of the remaining cash to finance the windup of the conventional.

10:11But here, certain stakeholders step in. Unfortunately, this concept was not accepted by every stakeholder. There were some stakeholders like one or the other shareholder, but also employees, representatives, unions and stuff like that, who had a strong interest to sell only one part of that group, the growth business, but they wanted the group to be sold as a whole, meaning both subgroups under the umbrella of an empty holding company to keep the group as big and strong as possible. And also to avoid the windup scenario for a business that has more than 80 years history in Germany. Okay, so I got to pause and get a couple definitions here.

10:53One, ring fencing. Some people, I'm familiar with it, but I like when people explain it again because I get it better. So can we explain ring fencing? Yeah, here in this case, ring fencing has the meaning that a company or a group in itself has no liability for another one. In this specific case, E.C.O.L.E. and conventional power business or liabilities for the growth business and the other way around. completely separate the employees so nobody's bouncing between the companies or a shared resource. We got ring-fenced completely separate employees. You mentioned the employee unions. Can you give me a little context?

11:27Because again, part of this, I'm learning how deals happen in Germany. Because it sounds like the employee unions got a lot of say in terms of what's happening or influence on this specific example. Yeah, that's true. Germany, per history, has a very strong culture of the unions and then employee representation. It's their major interest, of course, to get out the best for the employees in every kind of transaction, in every business decision that is made. Major motivation, of course, is to avoid layoffs, to avoid relocation. The unions in Germany typically have very strong voice and some of them also very strong understanding and entrepreneurial background.

12:09In this specific case, also in other companies, especially the supervisory board of the companies are equipped 50 % employee representatives and 50 % the capital side. And if you want to come to a conclusion or to an approval of a fundamental business decision, you at least have to have them on your side. Because otherwise, there might be difficulties to gain a mutual understanding and a cooperative together. How do you guys get any deals done? I feel like 75 % of the synergies are laying people off. Well, I mean, it's definitely not the case from a strategic point of view. Of course, sometimes synergies come along with certain personal decisions.

12:52But especially when working for a big corporate, the employees are also one of the key assets you acquire because they have the knowledge, they have the history of the culture of the companies. And those things that are typically part of the synergy case are more or less administrative functions and stuff like that. And also due to natural fluctuation and the aging within the employees, it's not a key to lay off employees when doing transactions. Fair enough, especially in this case. When it comes to getting the buy-in for the employee unions, is there like a lead representation for that group?

13:29And I think in my last interview, I learned that you sort of have employee representations on your company board? Yeah, that's true for the supervisor board. And you have several discussions with them, have to offer compromises and try in the end to negotiate a good way forward that respects both sides of the motivation. So you have to keep in mind the best for the employees from their work counsel's point of view, but you also have to assure and try to explain why certain measures or structural changes are really necessary because otherwise it will harm the whole company. They, of course, also have to learn, especially when talking about financing and restrictions that come along with a certain business model, which for those sides are something you have to adapt as well because they are focused very much on the well-being of the whole employees and the whole staff, which is good, I think, and has a certain key role, especially in Germany, but also in other European countries where you have strong union culture.

14:31But on the other hand, it must be clear that such movements do not harm overall. And so therefore, you have to find a compromise. Yeah, very interesting. Let's get back. So take the sidebar off and go back to how did your deal end? Because it sounds like it's a big challenge right there. Yeah, going back to the example, the separation of that group into the two independent subgroups in the end helped on the one hand to establish a kind of financing enabler. because on the one hand, you had the conventional business that was more or less financed in itself. You did go through and split up this company into those two separate entities.

15:08Yeah, we did. That decision was clear and was also supported by every stakeholder, but only the transaction perimeter in the end. So what do we sell to whom? And that was the key question. We had to make an adjustment. But due to the established structure, the growth business was standalone and would also always be able to gain certain financing But on the other hand, we had to find the solution for the conventional business, which in itself was somehow cash positive. And due to the ongoing cash flow, it was also able to work on it and to live on its own. But as I said, that was not an option to have it separated completely.

15:48So the overall arching holding company had to be the transaction vehicle here. In the end, the standalone separation of the growth business helped also to convince certain investment committees and stuff like that to look closer into that transaction. But as you can imagine, when looking into a group which has one business which is very attractive and coming along with a good strategic way forward. But on the other hand, the second group company that is a, let's call it, dying business model. Also, investment committees would have the question in their mind, how do I handle that huge coal exposure in that case?

16:29And secondly, how can I get this financed? And to overcome this trap, we had to develop a very clear decommissioning and net zero strategy, including a step plan which laid out a strict way out of the conventional power business. We had to define measures, which power plant side can be transferred into a new technology side, which one can be used for maybe other businesses. Second enabling tool that we developed, and that's quite interesting, was a legal optional solution. We call it shareholding as a service. What does that mean? we invented a kind of model which would have enabled any investor immediately after closing the transaction to transfer the call business into a kind of trusty solution so that the investor would not have the conventional business on his books anymore.

17:26And a third party would have managed the windup of the business. This is super interesting. I like how you coined it as shareholder as a service. I think everything's becoming a subscription these days anyways. And now you found out even becoming a shareholder, you got a subscription model out of it where they're getting away from the liabilities, it sounds like in this particular case with this business and the way it's regulated and being unfavorable. And now it goes to a third party and they manage the asset, but are they also managing, are they transacting the asset as well? And then they just return that.

17:58What does it look like in terms of a fee structure? In the end, it comes with a certain participation in the wind-up proceeds. There was a certain way forward how many years the conventional business would need to run. So out of that certain operational cash flow that on the one hand used to, of course, keep the company running. But on the other hand, the surplus out of that would have brought to a kind of escrow account, if you will. And afterwards, there were some subsidiaries in that group, which you would be able to sell out throughout the time. And all those proceeds after netting potential decommissioning costs, but also costs of dealing with people.

18:40There was a clear mechanism and a clear projection how much will be left in the end. And then the clear mechanism how many or how much of that remaining amount of cash would go to the service provider in the end. a legal service group or a lawyer who would do that of service. It sounds like it's pretty up for negotiation. It's not a common thing that's standardized at this point. Definitely not. So that was something that we had to negotiate upfront to introduce it to potential investors so that they from day one know what that concept is about, but also what it will cost in the end. And then on the other side of the business, the renewable side, sound like that's just in a favorable position.

19:19It sounds like there's a lot of positive. The shareholders sort of have more autonomy of where do you want to participate and not participate. Also, they think there's some upside with the valuation. That the renewal business, all of a sudden, you're capturing the upside of the market. How they look at that as more of a favorable future for that business and not necessarily cluster it with the one that's going out of flavor. Yeah, that's definitely the case. Looking in some of the parts valuation, so valuing every part of that group separately, of course, would have come up with a more favorable valuation for the growth business because that has a clear going concern perspective, very high exposure in new technologies, favorable business environment and the conventional one.

20:03Yeah, with limited time of being active and almost identified cash proceeds for the upcoming years. But on the other hand, then coming with certain additional costs like commissioning big power plans, which is not always a cheap activity, of course has another valuation than valuing business, which is a clear way forward. It probably gives the business a better focus and their path forward as well. What was the biggest challenge? We mentioned there's sort of some roof for the shareholders, but in terms of going through this, what do you think were the biggest challenges? The biggest challenges are on your one hand, bringing all stakeholders behind that concept.

20:41So to have a mutual understanding and the mutual agreed way how to do that transaction was very key. As it is, like in every company, multi-stakeholder universe. So you're not talking only to one or two parties. You have lots of parties you have to talk to, be it shareholders, be it employee representatives, be it politicians in the end. Because energy company in Germany is always a highly political exposure. You have financing banks, you have customers, you have suppliers. So everyone needs to be introduced to at least that concept that you are intended to do. And that was a very challenging discussion and many amounts of meetings, long-hour meetings, which especially the responsible CFO of that company at the time had to do.

21:35So to bring everyone on the same level, transparent on the same level, and keep them also on the same level was at least, I think, one of the key challenges. One of the things that you mentioned to me was that you sold both companies as a whole. Can you talk me through how did you end up doing that? How did you find a buyer that way? The good thing was, obviously, that the company itself was a very prominent utility company in Germany where many infrastructure investors, but also Uplay financial sponsors had been keen on taking a look into. So there was always a question of time when that company would come to the market.

22:14There was natural interest in the company itself. And then the described separation of the group helped a lot. As the growth company was become vulnerable due to ESG compliant growth business. And this helped a lot from a structure point of view. As for instance, acquisition financing would have been able to bring into the green arm. So the growth group. But furthermore, the elaborated shareholding as a service concept, as well as the decarbonization strategy, including the CO2 footprint reduction, had a lot to attract further potential bidders to convince also their investment committees that there is a clear way out of the conventional business.

22:57Besides that, together with the investment bank that we had on that deal, we also developed a kind of remarketing document, which was especially focusing on CO2 profile reduction to bring feedback from the market sounding on a basis back into our process. We wanted to gain a view on the appetite of potential investors and to learn what we additionally might need to implement for a successful process. Thankfully, it turned out that we already had a very pretty well-prepared process and a very, pretty well-prepared asset. And everything was very good, developed, set up and explained until that investor education was quite easy.

23:39After all this work, you did the full reconfiguration, essentially restructuring here. Why not sell the businesses separately? Without the support of everyone who has to make a decision in the end. You didn't have that. It's a no-go. Then you had to sell it together. But you got the story of, hey, when the company does buy it. Yeah, because after closing, the investor, of course, can do whatever he wants with that group. But you have overcome that hurdle that an investor is willing to invest his money into that. All that stuff pays off because you'd be able to have that story. You create a lot of value by doing those things.

24:14Yeah. Very cool. So in the end, we were able to attract a good amount of investors, brought them to submit an indicative offer, run with a few of them into the diligence. The rest turned out to be a successful deal in the end. It's done. Teach me how to do this. You're sort of able to like convince anyone anything at this point. In the end, it turned out to have meetings, calls. Give me the strategy. Is it, hey, I feel like you have such diverse and especially this nature of doing deals in Germany. It's not like, I got one other executive I'm dealing with and I read that person. You have stakeholders across the board and you can't just put them all in one phone call.

24:51Indeed. And that's what I mean. The strategy is to have them all individually educated with the same message. But you have to transport that message also individually. Because someone resonates different than someone else and someone has a different background than someone else. When talking to financing banks, they have more understanding of what's the deal parameter, what's the diligence, than talking to maybe a politician. So you have to find other words, how to describe certain things. There's always a stubborn person. Every deal has got that stubborn person. How do you manage that stakeholder?

25:27Do you invite them out for a beer and try to level up with them? Yeah, in the end, it's simple like that. Maybe you have to talk to him twice, once in a formal atmosphere and once indeed taking him for dinner or do it more informal. So you need to try to identify which person you have to handle in which way. Okay, I like that. I like the breaking down, formal versus informal. Okay, so that was a big challenge is the stakeholder buy-in. When you look at this whole process, defining success metrics, how do you think about those things? You can have, of course, the formal process view on that. Looking into your checklist criteria like how many employees have I already allocated to company A and company B?

26:12How many contracts can I split? How many contracts do I have to transfer? What shall I do with IT license? How do I handle data files which need to be separated? Assets, stuff like that. Do I have the audit for the cutout financials and all those things? Those are, I think, the more formal or process-wise formal success criteria. It's like the mechanics of the deal. For this to be defined as examples like splitting those companies up, you have a mechanical definition that you're building these metrics around. Yeah, that's the case. And you have kind of inventory of all the things that are within the company and you have to look into each and every category how to deal with that.

26:53But in the end, it's just hard work doing that. But on the other hand, you also have, let's call it soft measures, you also have to come along with. And this actually goes to the culture of the company, the employees. I have to imagine it was a more than 80 years old traditional German energy company, always integrated in one operational holding. And then you come with a completely new governance and business model. So dividing into two completely different worlds. Was this a public company? Private. Oh, okay. Of course, I don't like the expression, but you have to go through a very complex change process for the people.