How a Public Equity Analyst Evolves to Executing M&A

20:53And there might be one exception where it's been a little bit more challenging. But overall, at least I've been here. We've done a good job of integrating the businesses and having the cultures mesh. We're a professional culture. We try to buy organizations that are the same way. When you start considering integration aspects... Yeah, right away. And this is, I guess, where the difference in my public equity background shines in. From a public equity perspective, you wouldn't necessarily think about that, or at least you think about very high level kind of the financials. But an MA deal, you could do everything right from sourcing, paying a fair price, filling a need for the company, bringing the right culture.

21:29But ultimately, if you don't successfully plan for integration, it'll fail. Simple as that. We initially try to figure out, at least at a high level, what we think their reporting structure will be, what are the offerings, go to market, how each of these will be rolled out. Just for example, so we actually spent a lot of time looking at a specific transaction late last year in the ITS space, and we ultimately passed on it for a few reasons. But even though we didn't put in a formal LOI bid, we had already built out a preliminary integration timeline. So I'll give you an example of that. We'll put in what do we need to do prior to acquisition.

22:00So that could be choosing an integration leader, developing day one plans, defining longer-term goals, identifying synergies, KPIs, things like that. What are we going to do in the first six months, six to 12, 12 to 24 months and beyond? Some of those will be implementing a leadership structure, onboarding, comp plans, branding, synergy realization, integrating the offerings, delivery and service, which is really important for Xerox, just given the legacy of our company, and the sales coverage. So these are all things that we try to think of beforehand. What I think of beforehand, I very often think of what can go wrong and build my way back.

22:34What can we do to make sure everything goes as smoothly as possible. Not everything always goes according to plan. We had one acquisition about a year and a half ago or so where there was a miscommunication with payroll and there was a hiccup and it caused when we switched over the payroll short delay. And fortunately, all of that got settled. You want to do things that ultimately does not lead to any consternation with the target company. It's really important to maintain that trust between each other because ultimately that's how a transaction is going to be successful. But our track record has gotten better.

23:01My team has learned off it with each iteration, learned from prior experiences. And now when we essentially look at a transaction, we keep all that in mind. Then we build upon that even further post-LOI when we're negotiating the transaction docs. We always put a formal integration checklist, which defines the legal things we need to do, the operating things that we need to do, guiding principles of the deals, closing matters. So that's obviously signing docs, getting approval, setting up wiring accounts, an RWI policy if needed. And then post-closing matters, setting up a program management checklist, if needed, integration workshops, and then obviously any marketing comms around, both external and internal.

23:38So you've done this a bunch of times. This is something that we really focus on. I mentioned at the top of the answer that you could do everything right, and if you don't do integration well, it will fail. It's the number one important thing. I actually noticed and sometimes look at your trivia questions you put out, and one of them was when do you start planning for integration? It seemed like other people agree with that. It's a day one consideration. What are other things that you anticipate could go wrong on a deal? A premortem, which I think is a very good exercise. What are the things that could potentially go wrong?

24:08I just assume Murphy's Law. So everything, everything I mentioned, the easy one we talked about, or not the easy one, but the one that we just spoke about is culture. You don't have a culture that buys in, you're going to have massive attrition. You have massive attrition, the engine starts to break. Sometimes if you can't fix that in time, it's irreversible. So that's one thing. Communication is very often the reason why things don't work out, where you ultimately have a plan, but it's not communicated to the right people, or the right people don't know what they're supposed to do. At the end of the day, it's not just the M &A team or even the integration team, and we're pretty integrated, but you're going to need people on the ground really helping facilitate all that.

24:46So you're going to need the leader in the region. If you're moving facilities, you're going to need to make sure that they have a place to sit. If there's delivery and you're taking over, you're going to need to make sure that is going well. HR functions, I mean, across the board, that's going to be important. What about AR and AP if you're moving it over into our systems? That's the thing people don't really talk about that much, or at least early on. But what are you going to do with all your systems? Are you going to migrate everything over? Are you going to move to one instance of Salesforce?

25:10Are you going to move to a certain ERP system? These can be very cumbersome. And if they're not handled carefully, they could be a problem. And they could disrupt the flow of the business. It sounds like, too, when you start thinking of those things, this lends into how you prioritize your diligence. Yeah, it's broad. Early on in the diligence, so we have a couple people before an LOI usually look at things. We'll get basic high level from a couple of business people. But then once we sign an LOI, we always do. And this would be the same thing, honestly, if you're divesting a business as well.

25:39We're buying a business. We do a kickoff call always internally and externally. So the internal one is we gather everyone we think will be relevant. We NDA them. There's usually 15 different work streams. We'll work with counsel. We'll put together a question list. will obviously need to see their diligence reports, which is table stakes before you close a deal. But we try to get as many people involved as possible and identify every possible issue. Some of those people will not have any part in the post-close, but some of them will have part in the post-close. And to get them aligned as early as possible and understand what we're trying to achieve is super important.

26:12And I don't have every answer. The people on our team don't have every answer. And we rely on others to tell us what are some considerations? What are some market dynamics we should consider? What aren't we thinking about that we need to, that ultimately when we close this transaction, that we're not missing anything. Again, you're probably never going to bet 100 % or 1 ,000, I should say. But the goal is to make as few and small as possible mistakes there are. And if you do that, and if you put together a reasonable base case for your transaction, you'll feel pretty good that it will ultimately achieve what you're trying to achieve.

26:45You mentioned guiding principles when we talked a little bit about integration and some of the pre and post-close things you need to do. Can you talk me through what are guiding principles? Think of the deal by itself. Will this deal create value? That's kind of the first one. How we're executing it, how we're getting people involved. And then ultimately, it's the postmortem of, did we achieve what we wanted to? And we obviously look at that in the steer codes that we do, which are monthly, post-close. I don't really have necessarily a defined list of it. It really depends on every single deal.

27:15Ultimately, it will be what is this acquisition trying to achieve? We bought a company last year in the UK called GoInspire. Our principle was to extend our product offering, which would allow us to be more competitive in the marketplace, to provide more services and features for our customer base. It was to work together, to introduce ourselves to new accounts, to cross-sell. One of the benefits of that, and this is a marketing performance partner, is they worked with a bunch of customers that we didn't work with. And ultimately, we said it that we were going to integrate to an extent these sales teams and ultimately try to leverage our skill sets and Xerox offerings to inspire current customers and vice versa.

27:56That's a good example. Can you walk me through the timeline of a typical deal and who gets involved when? I'm just trying to get a sense of how that expands as you progress on the deal through integration. The deals either come in through our business team, probably one of three ways. through business team relationships, through brokers, or the work we do. And it's actually been across the board. The transaction that I just mentioned before, that started off of a cold call. We worked with the head of our digital services business. We looked on both a geo basis and an offerings basis of what we needed.

28:28We put together a target company list. I probably reached out to about 15 or 20 companies, kind of had a variety of discussions with them. And this was a conversation where I reached out and ultimately asked for a half an hour and tried to understand what they were looking for and what we were looking for and took it from there. But usually early on, it'll be myself, it'll be the associates of my team who are helping me with the analysis. And it will generally be a business leader who understands what they're trying to achieve. So it could be the head of our digital services business or IT service business.

28:58It could be a regional head, a country head. Sometimes it could be multiple people if it's a functional offering, but in a specific region where you might need a couple of people involved. This is pre-LOI stage. We'll work together. We'll come up with kind of diligence request lists. And we ask a lot of questions. And we'll try to get in a place where ultimately we think it's ready to go in front of our executive committee. So if there's any kind of outstanding issues to bring that case to the executive committee, we'll go to the relevant experts. So if we think there could be a tax issue or there could be an accounting issue, or well, maybe this is going to be a strain on our delivery network, we'll go to them as well.

29:34But we do keep it fairly high level. One thing we do is every LOI generally has to get approval from our executive committee. And I like to think of really that as the test run, where we actually put together a fairly robust business case and get approval. The hope is that once we go for final approval before a deal closes, it's more of just a formality and answering any questions that they had and figuring out any red flags that were there. And obviously, if there's big red flags, we would call off the deal. But if there aren't, then we wouldn't. But we'll get their approval. So ultimately, by the time we sign an LOI, we have full buy-in to do the transaction.

30:07And then at that point, we'll get all the subject matter experts. And I had mentioned it, besides the ones I mentioned, extends to real estate, tax, HR, so forth. It becomes quite broad over time. And we realize that we're there to facilitate the transaction. We're obviously there to play Switzerland. We need to make sure that we get people involved across all levels of organizations. So depending on the acquisition, there's probably, it's a small acquisition at minimal 10 or 15 people are looking at it. And it could be many multiples of that. It's going to be across function or across region or so forth.

30:40And we're a matrix organization, which also plays maybe a little of that part. It's not like just every region is siloed. Do you have overlap with people doing diligence versus doing the integration planning? And ideally, they're progressing that during diligence? Yes, we're all on the same team. There are certain people that work more on the front end. So I have associates reporting to me that focus more on the sourcing, focus more on the modeling, financial work, the QOE work. And then I have a member on our team who is more focused on helping me lead the diligence and then obviously the integration.

31:08Our counsel as well do that also. So we're an integrated team. And I really think that's the best way to do it because ultimately we have the most knowledge of the transaction. If we hand it over to an integration head two weeks before the close and say, go run with it, they're not going to have the answers. They may not know where to look. They may not have the relationships. it's allowed me when I've seen a potential problem brewing to squash it immediately. I like that approach. Who ends up quarterbacking the deal process? I guess diligence versus integration. Generally, it'd be me or one other person on our team.

31:37We just promoted someone to run any IT services deal. And then really everything else falls in my bucket. So I'll quarterback that from sourcing, negotiation, diligence into integration. Now, I may not be leading the integration and I don't lead the specific integrations, But I'm still involved in almost every conversation. I'm still involved in the steer co. Anytime I look at the numbers, I'm the one who asks a million different questions. Maybe it's my personality, but I get very in the weeds on that stuff. I just think the interplay helps. We could solve things very quickly by understanding different perspectives and where things are coming from.

32:11I want to go back to your public equity analyst hat here. When you do preliminary diligence on a company, Are there any things unique coming from that background that you would do that maybe a typical corp dev person doesn't? I don't know. Teach me some stuff. It depends the size of the company. Obviously, in public equities, I'm looking at generally more mature companies just by nature. A lot of the companies I look at are in the world, just for how it's been, tend to be maybe lower middle market where it's tens or hundreds of millions in revenue. So it's definitely different. I think what helps me is I've spent so many years focused on a company and where its play is in the marketplace.

32:49I try to use that to my advantage and try to basically say, is the story they're saying makes sense? I've seen it play out this time or that time or so forth. And just being in the public markets, you get an advantage on perspective. You look at so many names. You look at so many situations. You get a more encompassing view. You get a better sense of appropriate valuation. and ultimately transaction success. I mentioned just kind of in my banking background, I think the limitation there is you focus on the deal, you're trying to get the deal done and then you move on. And sure, you could look back, but you're really not necessarily focused on that.

33:22It's onto the next deal, onto the next. So the advantage of the public equity markets of having that perspective, I think is huge because it's a skillset that others don't have. And I personally, and maybe it's in my mind, I think it gives me an edge in every process. You ever go into companies S1 filing to get some dirt on them? Yes. Not from my seat right now. From public equity markets, yes. In my seat, no. I've done that in my early days. And you discover some very interesting stuff when you dig deep into the original paperwork they filed. Oh, 100%. I covered Groupon when I was on the sell side and some of the stuff in there.

33:55And obviously, we work and have all these other companies that I'm not trying to pile it on. But yeah. Maybe that could be a podcast series of its own, Greg. See what you can dig out of S1 filings and we'll do interviews about it. When I covered Groupon and we had a sell on it because of course we had to sell on everything. They had a metric called adjusted consolidated operating income. It basically took out, it showed how profitable the company would be if it wasn't so unprofitable. So it just took out every cost like you could imagine. It was ridiculous. But that's what companies, that's kind of the Silicon Valley and a lot of the business models in Silicon Valley, listen, SaaS business models are fantastic.

34:29Obviously we would love to have 90 something percent recurring revenue with 130, 140 % net retention rates. These are very good business models. But at the same time, people are willing to believe a story. Seeing a story like that play out over and over again, history repeat itself over and over again, has allowed me to be effective. And not just on the super growth side, but again, this is not necessarily exclusive to what I'm doing now, but I do get pitched transactions that would ultimately heavily lever our business. and it's rolling the dice on it. And I came in and I saw Tribune go private and Sam Zell put 11 turns of debt on it in the ESOP and kind of all the employees get wiped out.

35:07And another example was when I was covering telecom, GTT buying InterRoute, which was a tier one provider buying a massive fiber footprint in Europe. And I didn't really get it. And they were leveraging so much and they were buying a company that had growth problems. And two years later, they filed bankruptcy. So that's stuff that kind of tying it all back and trying to decipher through the message. and also just making sure that I avoid pitfalls. That's half of my job. Some people tie success in this role to the amount of deals they complete. Absolutely ridiculous. If you're compensated on that, if you tie your success with the deals you complete, like you should just not be involved in this industry.

35:42It's the exact wrong way to look at it. If you complete no deals a year or 10 deals a year, everyone should be focused on, am I driving value? Am I creating more value than I'm consuming? I mentioned that, and that's something that really just underpins everything I do. What else can I learn from you? You got any good tips for negotiations? I actually really enjoy negotiating. I took a class in business school where you kind of learn all the zone of possible outcomes. I forget the exact terminology, but for some reason, that's one of the things that have lasted with me since school. But it really just depends on the counterparty.

36:14What are we trying to achieve? And there's a lot of things that it could be. It's not just price. It's terms of the deal. It's the liability. It's the size of the escrow. Obviously, there's different perspectives if you're a buyer or a seller. From my perspective, if we're buying it, was it founder owned and led? Is it PE owned? Is management staying? Are they going? At the end of the day, I'm always trying to get the best deal for the company and I'm pretty firm about it, but at what cost? The last thing I want to do is try to get the very best price, antagonize the person that's coming over, have them not want to be part of the company and then hurt the company.

36:45So if I know the leaders are going to be leaving, yeah, I probably might push some things more than if I'm going to have to work with that person for the next one, two, three, four years. I do try to make it where the other party also feels it's a deal and everyone's winning. But obviously, I push on things and I try to get terms that will ultimately benefit Xerox, whether it's on price, whether it's on liability and things like that. Do you put the first offer or do you really try to fish around and see where their head's at? Oh, I always try to fish around. That's why I set the price. I think that's a golden rule.

37:15You don't want to negotiate against yourself. Absolutely. One of the things, and this is another public equity trick I learned, The first analyst I worked for asked the same question over and over again to the CFO. And eventually the CFO would just break down and they'll give the answer. All public information. You try to get a sense of what they're trying to do, what they're trying to accomplish, any potential things on the horizon. And I'll very often do that too. I'll push on things over and over again. Because even if I don't get an answer, you still get an answer with body language. You can tell how strong someone is, not by what they're saying, but how they're reacting.

37:46I try to always be reasonable, but you clearly want to position yourself to come out with the best outcome. So I'm always transparent. I'm always honest. But at the end of the day, I still do things that will ultimately position us for the best possible outcome. A lot of mind games behind all this. What's your best advice for people that would like to transition from public equity role into M &A? I mentioned on the advantage side that the skill sets and the kind of encompassing view of the market is a huge advantage. Anyone who's trying to make the switch should lean into that. I think you get a different perspective.

38:20You get a broader perspective. You get a sense of ultimately where things are going, probably more so than where you're just deep in it and you're looking from one angle. With that being said, until you're in the seat, never really know what it's like to think like an operator and all the considerations that go with it. So there is a learning curve to that. You have to be able to have interpersonal skills. You have to, and that's both internally and externally, because there's a lot of people within an organization you're going to have to speak with. It's much different than a normal person in a public equity role, whether it's a hedge fund, mutual fund, so forth.

38:51Being organized and having checklists certainly comes in handy just because there's so many people I need to speak to, so many tasks I need to complete. So I don't think I've ever put together so many different checklists because things could fall through the weeds. I make sure my emails are organized. I make sure the tasks are done, set reminders. That's something that you need to do. And another is managing a team. Unlike in a public market role, it's much more collaborative, much more team oriented. So it depends the role, whether you're a junior person or a senior person, but leveraging your team successfully could make you so much more efficient and so much more effective.

39:21And it could also fill in areas where you lack certain expertise, which we highlighted, talked about obviously having this financial acumen. And when I joined here, that was why I was hired. That's what I was told. But obviously, there were an expertise on the legal side and playing off of that. Those are definitely some considerations you want to make. I've never bought into the theory that you need to have a certain type of job and a certain type of background to be successful in a role. I really think it's all person dependent. You need to have certain interpersonal skills. You need to have a certain drive.

39:50Obviously, you need to have functional understanding. You need to understand how to look at a company, how to build a three-statement model, basic things like that. But it's ultimately the type of person you are and what drives you, what motivates you, and maybe not having a confirmation bias, knowing what deals are good, what deals are not, and also when to pull the plug. Great advice. More importantly, I got to ask you, what's the craziest thing you've seen in M &A? I've had crazy reasons for delay. I had a deal last year where we spent much of the night correcting the sell side on working cap and fund of flows just because there were so many different mistakes and couldn't go to bed on that.

40:23Another was we lost the deal after months of diligence. We were diligently in the company for about six months, probably in the eighth inning on transaction docs. And then the owner decided, you know what? It had very little comments. It didn't seem to have much pushback. And then the eighth inning, he said, I want 50 % more for the transaction. and we're like, okay, nice knowing you. So that was frustrating. But I do actually have a really good story. One of my colleagues, first job out of law school, he was representing a tech company selling to a big e-shop. And on the morning of the close, the founder, CEO, largest shareholder called him, the most junior member on the team, no one else, none of the senior lawyers.

41:01We called him on the morning and he said, he was in the middle of divorce proceedings and the judge had frozen his assets, including his stock. And therefore, they couldn't complete the deal that day. And lo and behold, this person knew about this at a one-page decree. And the judge from months before decided not to tell anyone, including his own counsel. And obviously, all the reps, title, ownership, and so forth, didn't say anything. And obviously, caused consternation. I mean, the postmortem is that the deal ultimately happened, but it delayed it by a month or so. And obviously, added complications.

41:34That's probably not a nice surprise to have when you're about to close a transaction. and then you find out that the largest shareholder is going to have to give half of his stock to his ex-wife. Yeah, that's not a good surprise. I thought that was a funny story. There's so many variables, as you're well aware of, in a transaction that anything can happen. That's true. There's no surprises kept, I guess. They'll tend to shake out at some point. You hope that everyone's truthful for each other, especially between the client and counsel. This has been great, Greg. Thanks for taking the time. I appreciate the conversation.

42:04I learned a lot. You've helped me become a better M &A scientist here. It was great to be on and enjoyed speaking with you. And hopefully my background's interesting to some of your listeners. Those of you still with us, thank you. Until next time, here's to the deal.

42:30Thank 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.

43:15Again, that's mascience.com. Here's to the deal.

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