How to Build Better Deals: Sourcing and Integration with John Romeo

24:23You send a cold email. Send a cold email. You make a call. People are willing to talk. If you have something to say, in my experience, everyone wants to engage. If you can help them achieve something that is more of a struggle on their own, people are curious and want to do things. And part of this is finding that overlap that is good for them and good for us. So the framing is generally, hey, we saw you run an interesting practice. Wanted to make the introduction and see if there's some opportunities for us to line around. Yeah, and get to know each other. And it may be... I just made that up.

24:54How is this pitched down to your words? Well, in a lot of cases, we're competing with them, but there's also opportunities to collaborate. If I think about from our client side, the problems that they're trying to solve and some of those transformative moments, these are bigger than any one firm can deal with. What we're finding is we're working in different client situations alongside a whole range of other firms with different capabilities. And if I can help deliver more services to my clients to tackle their problems, that's great. That helps everyone. And maybe that ultimately becomes part of Oliver Wyman.

25:28Maybe that's us just collaborating and helping deliver things in coordination with other folks. Either way works for us. Sounds like the right way to do it. When you get these early conversations, how do you get a sense of actionability on a deal? You know that, hey, this is a firm that's going to likely start thinking about some kind of exit. Is it something, do you wait for clues or are you just a little blunt and just generally ask? It's a mix of all those things. Private equity have started to play in the professional services space more and more. Those guys, you know there's an exit coming down the road.

26:03You can work to that type of timing. Basically always for sale for the right price. Yeah, but equally they're going to have to exit for usually given their fund structure in some ways. Other folks are at a different stage. We've had a lot of success teaming up and acquiring founder-led businesses. Those are really interesting. Because the founder has usually built a lot of their life around it. They really care about it. They care not just about it today, but the legacy they're leaving behind, the people in that team. And that fits very well with how we think about things. Because it's not just buying the capability.

26:36We talked about anything we buy is mainly people. So the people need to want to come here. And part of that is the capabilities in the short term. But it's also creating an opportunity for them to build their career here and to thrive. These things you can't just do overnight in one meeting. This is about building those relationships. It's why we draw the parallel to a lot of our client coverage on the core consulting side. You ever convince anyone to sell their company? I don't think it's been us convincing them to sell. They have to want to be in that place. It's on us to convince them if they do want to do that, that this is a really compelling opportunity.

27:11and coming together with Oliver Wyman and plugging in usually to a bigger platform can create more opportunities for the business, more opportunities for them and more opportunities for the whole team. You're selling them on a future of growing better together. Yeah, that's exactly it. It's trying to create a shared history. There's nothing in our firm that couldn't be done better. Our culture, the one thing that we have fixed is around the values, but the strategy can evolve. The people will evolve. What we're looking for is not they plug in just to our culture. Let's create a shared culture.

27:43Let's create that new shared history and build something special that no one else has. And that ties back to that business case that you were developing on the value add that you talked earlier. Essentially, you're bringing them to work on that together, share that same story. That's right. You can't have a team off to the side doing that. And this is where we have to link in on the M &A side in Oliver Wyman. We have to be really closely connected to the business partners. because ultimately the business partners are the ones that own this. So a partner of mine often talks about the difference between a chicken and a pig.

28:16A chicken and a pig want to open a restaurant and have eggs and bacon. One is involved and one is committed. We think about that. Who are the pigs? Who are the ones that are really committed to this? Especially as you move to that bespoke pipeline, the expectations on the deal sponsor on the business side have gone up and up. They have to be willing to roll up their sleeves to get their hands dirty on execution and on implementation because ultimately it's their neck on the line on these deals. So they have to really need to buy into that. And that's where the link between the M &A and the business side becomes so important in the firm.

28:51You got to make sure the post-close success by linking that principle to set them up to be successful. Has it been easy to do deals? You mentioned doing four deals last year. Has the market been easy? I'm in tech and I'm just wondering, I see a huge bid-ass spread gap is the biggest struggle that I'm coming across. I don't know. Is life easier for you? I don't know if AIG's ever easy. There's a lot of opportunities out there. I don't think there's a shortage of opportunity. But do you come across that? Or there's just high expectation of valuation just because market's been on the run it's been over the past years?

29:23There are high expectations, especially on the tech side. We're not usually going out and buying a lot of technology. technology. So the consulting firm is already a little more rationalized about what to expect in valuation. We're not usually the ones willing to pay the most. There are folks that come in and will pay a higher multiple. What we're doing is thinking about how do we create the most value over a period of time? And that's why selling on the vision, why the alignment, so it's not just a transaction, but it's how do we build something together is so important. It's partly why we shifted from the banker-led processes to the bespoke processes in terms of that degree of emphasis because it gives us a little bit more control and focus and willingness to really invest in building out those relationships.

30:10You take a buyer-led approach to build those relationships, which allows you to tighten up that story of better together, how we're going to create value. How do you correlate that part of, hey, we're going to do all these great things together with the actual deal structure. I take it you're not just cutting one check and they're like, see you around, John. Is there sort of a way you structure the deal that ties you both together? I'm thinking of, is it earnouts? Is it role of equity? Are there those type of elements that you bring in structuring your deals? We're doing all of those things, right?

30:43We think about this over a period of time. So we use a whole wide set of metrics. We have a whole wide set of tools as you'd expect. It's about that alignment of interest. We're really trying to do this together. It's certainly not all up front, one and done, and then cross your fingers and hope it works. I was curious, is it more of using those tools as bridging valuation gap or more of, hey, let's keep this level of alignment that we got a vision of what we can succeed together. Let's make sure that we're both lined on it. Hey, we're going to get rewarded for it. You're going to get rewarded or the reveal second bite of the apple.

31:18It's much more the latter. There's a lot of planning up front. You can think about diligence as being a balance between risk mitigation and preparation for integration. But in any deal, in any conversation, we're spending a lot of time with the folks up front, thinking about the culture, thinking about the synergies, the pricing, the clients. But we're also thinking about some of the technology, the human capital, even things like the titles, the offices, how all those things come together. You got to think about the experience that people are going to have over time and how do we create the right foundations for them to ultimately be successful and to build their career.

31:54I want to learn how do you plan this psychology because at face, that's why I don't like that super transactional process because you're literally looking at the lump sum total amount on an LOI versus what you described. Now you're nurturing this relationship. You're building this better together business case and that principle is bought into it. But now it's, okay, here's short-term game, but now I see long-term value creation and hedging the upside of it that becomes more of a driver or interest than just that, hey, I'm giving you this much money today. Is that the playbook? Is that what it comes down to?

32:28Yeah, that's right. We go to great lengths to align the incentives for everyone joining us, as well as the folks on the Oliver Wyman side. It's that long-term approach that is our best weapon in terms of doing that. I want to follow you around for a day and learn how to do this. That's the game changer because it goes back to that bid-ask spread that always becomes a thing. People, when you start a conversation, you just want to know that. You want to know what's the offer. Here, I'll sign NDA. Here, I'll give you some preliminary information. But there is that when you can build a relationship where you're actually really excited about working with that firm together.

33:01And then you see all these upsides. And now, all of a sudden, you're looking more long-term value creation. And that's where the business involvement is so critical, right? Because you have to start to get into those conversations of what does the flying formation look like? How are we going to go to market together? How do we create some of these opportunities together? You can't do that in the bank process, can you? It's much harder. In a bank process, you'll get the level of interaction. Each of these have some degree of variation in terms of timeline, the exposure. But in general, we haven't found we can get quite the same proximity and depth of those discussions.

33:35I think this is literally the crux of the buyer-led approach. you're going to be able to test your hypothesis, get a better sense of the cultural fit, but also you're building a much better alignment on the long-term vision of what both companies are going to achieve together. In any M &A deal, there's always going to be anxiety. When you've been able to build up a little bit of that shared relationship conversation, then you can be transparent and you have the time on your side to do that. It's why we invest so much time in the deals with folks to let them meet people on our side too. So that we're very clear on what are some of the upsides, certainly, but also what are some of the challenges?

34:15Because it's always going to be a different environment. It's going to be a challenge. So let's be transparent about that and figure out how we tackle it together. Ready for story time? Well, we talked the talk. I want to get an example of a deal that you went through. I want to get how you identified the strategic, the cultural, financial fit. Let me give you an example. One that comes to mind is Avacyn. Avacint was a company that we bought a couple of years ago, November 2022. It's a terrific aerospace and defense firm based in Washington, D.C. We had known the team for a decade. In the run-up to us doing the deal, they had had five plus years of really strong organic growth.

34:55It was a founder-led business. They were servicing corporate, some of the public sector, and private equity. We knew the culture fit was there because we had known these guys for a decade. We had competed with them, but we had also collaborated on a number of projects together. So we worked alongside them. The partners in our commercial aviation team knew them. We were looking to build up Oliver Wyman's aerospace and defense capability. The market fit was really strong because the commercial aviation guys were among the best in the market. And you combine that with aerospace and defense, and we had great growth potential.

35:31Financially, it worked out. We paid a fair price for a great company. As I said, it wasn't about buying these things cheap. It was more aligning the incentives for all the staff. So you had the retention schemes, you had some of the alignment. But we spent a lot of time thinking about how would some of these folks, when they came into Oliver Wyman Thrive, what were some of the opportunities for new clients, but how could they ultimately build a career on a bigger platform? And it's been a fantastic experience for everyone. It's gotten to a great outcome. the majority, almost all the partners are still here and doing bigger and better things.

36:06We've realized a lot of operational improvement. We realized the economic improvement. It's redefined a lot of the things that we could do. We've sold work together that neither one of us would have been able to do on our own. In that example, how do you measure success? So on any deal, we have a wide set of metrics and it's not a one and done type of thing. And partly that is thinking about that one deal and tracking how it's progressing. But it's also about learning and developing and reducing the uncertainty on future deals. So we think about all sorts of things. We look at client retention.

36:40We look at new clients. We look at some of the operational and functional measures. We look at what we can do on pricing. We look at employee retention, employee engagement. We think about some of the functional aspects, the synergies. We think about revenue from different types of angles. You have all those numbers, but it's not just the average numbers. You've also got to look at the variance. Is it just sort of a few people that are really thriving versus the rest? So thinking about all of that as a whole is important to track the progress of a deal, but it's also a way to give us more conviction on future deals.

37:15Like what is the type of operational synergy or pricing up with that we're really able to achieve? And then we can apply those lessons elsewhere. I always think about these deals, even for us, like trying to do our early deals in this company is the surprises. And I feel like there's good surprises and bad surprises. What is your experience been, John? Like, I'm trying to get a little peek into like a reality of what would be the type of bad surprises you come across in a deal via indiligence or post flows and then good surprises. I got to assume there's got to be some like, you gave examples.

37:49We won some deals that we never thought we would have won. There's always surprises. One thing in M &A is something either unique or unusual will pop up in every single deal. It's not usually one of the really big things. It can be something very small that really matters to folks that you hadn't necessarily anticipated. It's getting used to more and more of those and being able to respond. Ultimately, the way we think about that is for any of the deals that have really worked well, It's when our partners have leaned into that, both personally and professionally. Yes, there's the planning, but you need to bring in a wide variety of perspectives and teams.

38:30One of the things we found really important is having our support function folks involved from day one. Not just in a confirmatory diligence perspective, but in really helping to shape things, creating a forum to raise concerns. because often they can anticipate something that will come up down the line that the business may not have. Making sure things don't fall between the cracks. And then it just goes back to that transparency. We're not trying to hide anything in the deals from folks. We're really trying to find where is that overlap between what we really care about and what they care about and being transparent on that and working through that together.

39:06Because ultimately it comes down to trust between those individuals because you can do all the work you want on the numbers, But this is really about people at the end of the day. How good can you mitigate these surprises that come up? Going back to this banker versus buyer-led contrast, in setting up a company for integration success, we use this example that in the front end of the deal, you can get better alignment on what the goals and vision are, culture. You can do that because you have more time in the relationship. You can probably control just some of the timelines of how the deal gets done versus you got to close as fast as possible.

39:39How would you look at the difference between the integration sort of planning or setting the deal up for success post-close between the banker and more of your bespoke process? You just have a lot more time to begin to anticipate some of those issues in a bespoke process where you've gotten to know each other. And it comes down to the culture. I've been at Oliver Wyman for over 30 years. I understand the culture here, but I haven't ever written that down. Somebody coming in new, there are a lot of unwritten rules. There are a lot of ways of doing things that everything's flexible, but having someone that you can talk to and say, Kisan, how important is this?

40:16It can be a 30 second conversation versus if you're not having that dialogue, someone could go away and stew on that for a couple of weeks and it could turn into a much bigger issue than ever intended. So a lot of that just comes down to the transparency and alignment. And it's very difficult if you're part of a rigid process to get that conviction. It's not that it can't be done. It just pushes that level of risk or uncertainty more into the integration than into that diligence process. That's where the bespoke process to us is so valuable because you can reduce that level of uncertainty. And it gives you just much more conviction on how you execute and where you're really willing to take the bets.

40:57Transparency and alignment. That's like part of the playbook in terms of making sure integration goes smooth. So you have the big broad form, company-wide form model, but it's almost like you're using a variant of that for your individual deal. That's right. We're not afraid to learn. Listen, we've learned from the consulting work that we've done. We learn from how our clients do these things. I go into this on the premise that there isn't a single thing that we couldn't do better. We're learning every day. We found this is working better and better for us, but I'd expect us in a few years to be even better at this than we are now.

41:29That's a big part of that cultural alignment. It's open-minded as part of the culture. So that way it's not, hey, you're going to integrate the way we tell you to. And that's the end of it. No, that's about building a shared future together. When someone comes into the firm, if we do an acquisition, it's their firm. Then as much as it is mine or any of the folks that were here before, let's build something together that we're really proud of and excited and want to be part of. What does all this M &A activity look like with the board? I'm just curious if there's just certain elements of, hey, here's our pipeline, here's stuff in flight, here's deals we've done in the past.

42:05How long do we measure success after we've done the deal? It's a living process. We track these things to learn how well any deal is doing, but ultimately it turns into post-acquisition reviews that we do on a regular basis and continue to track those. We've got a series of metrics, both within Oliver Wyman and then working with the broader Marsh McLennan corporate development team. and we track all of those things over time, both as I said, the numbers and the variance on different aspects of the financial side, but also the human side. And then we look at a lot of the retention, the engagement.

42:39It's not a one and done. It's something we have to live and breathe with. Oliver Wyman is a subsidiary of Marsh McLennan. Marsh McLennan is public, private? Public company listed on the New York Stock Exchange. This is the global headquarters. We share the same building And we work across the four operating businesses. So Marsh, Mercer, Guy Carpenter, and Oliver Wyman. And there's a lot of collaboration and coordination between the group. Do you roll up into the cooperative team at Marsh McClendon? Yes, we work tightly with that group. Does it work pretty easily? It works really well because we've got on the MMC side, we've done a huge number of deals.

43:20We've learned from that expertise. They've got world-class banking capabilities that plugs right in with our team. We work side by side on all the deals. I mean, you got a lot in-house. You got a lot of resources and expertise. But is there anything unique you get from that relationship where it's a bigger umbrella, public? I don't know if there's any advanced sophistication. Oh, I think it's a huge advantage, both in terms of the caliber of the people that team, the experience, the number of deals that have been done that we get to learn. But Marsh McClendon is 90 ,000 people. has an enormous reach.

43:53The ability to both tap into additional deals, but it becomes a key part of the career opportunities for folks that goes even beyond Oliver Wyman. So it helps on that front. It's listed. So we then have that capital as a currency, which most of our competitors in the consulting side don't have. We think it's a huge advantage for us. Do you ever find that, because now you got much bigger footprint overhead that it could slow down or you got extra opinions on valuation on deals? We get the benefit of the experience on the valuations. We're not trying to rush to do it. We're not traders. We're thinking long term.

44:29We're not trying to go into a situation where we have to take a decision overnight. This is really about building those relationships and thinking long term. To be honest, we really haven't seen any downsides from that. That's pretty cool. I just was curious. I've seen similar structures and it could get complicated at times. When we talked about integration and just setting a company up for post-close success, You're running some real people businesses, and I would think so much of it hinges on retention. Can we talk about what's the secret sauce to retaining people and keeping them happy and motivated?

45:02The integration is the big question. It's the difference between an idea and an outcome. And you know better than me the percentage of M &A deals that fail, and it comes down to that. What we found is when that works is when our partners lean in personally and professionally. It's the planning up front on some of the financial side and the synergies that you can get, but it's just as much about the people in the career. We're very clear in any of those situations that we're thinking about this as a multi-year journey for people. And it's partly around the transaction, but it's partly around their career.

45:37We pay a lot of attention to their needs, both the folks joining as well as the folks in the team that they'll be coming into. And you got to spend a lot of time with those people. It's understanding those concerns and being transparent on what we can and can't do. Some of it's the finance side, sure, and the economics. That's part of the math of the deal that we think about. But a lot of it is that bigger picture, making sure they feel this is a home where they can have a career and thrive. And you need both of those to line up. There is just the overall environment that they're going into with the partners leading in.

46:11What about some of the more mechanical retention packages? because I feel like that would be like a bigger emphasis compared to a tech, depending on what you're buying. Buying the tech, that becomes how much certainty we can have on integrating this tech versus the people. Do you see that of just mechanically having a strong retention package being a key lever? Oh, I think it's an important, it's one of the inputs to me around that alignment of incentives. We like to make sure there's alignment. And that really means from this perspective, having some economics over time. But it's partly as you think about the transaction.

46:49But then you also need to think, okay, well, they're coming into all of Rewindman. We've got our compensation system that works as it does. How will their compensation change in that? And oftentimes what we find is the upside from coming into that compensation model and then thinking not just how do I take the tools from my company and sell that to a client, but how do I think the other way around? What are the questions that my client really has? And then how do I then plug that into the 7 ,000 people I have in Oliver Wyman or 90 ,000 people in Marsh McClendon? Now I've got access to all of those capabilities that I can help deliver to my clients.

47:24When you start to think about it like that, the upside gets much, much bigger. Yes, we have the retention and the incentive packages linked to the deal. But then a big part of that is how can I plug that in for the rest of my career with some of the compensation and now the access to the whole range of tools of this bigger platform that I didn't necessarily have before. That we found has often been a compelling part of the equation. If you offer like option awards, then it's public stock, right? Yes, we have that for a lot of our senior leaders within Oliver Wyman. Does that get perceived differently, private versus public?

47:57I don't know if you've been exposed to the difference when you structure a deal. Obviously, there's more liquidity with public stock. It's part of the equation. It's one of the pieces of the conversation we have with folks. I don't think that has generally been the central point of any deal that I can think of. Again, we're trying to make things that are fair and aligned. We want to buy great companies and we want to do a fair deal for everyone where we're sharing both that risk and sharing that upside. Yeah. Just curious of these little mechanics because you've got a lot of different things you could lean on.

48:31What lessons from private equity have you applied to Oliver Wyman's M &A approach, particularly when it comes to execution and value creation? Private equity are obviously different in that they're not operators. But I'm not ashamed to say we've taken an awful lot from private equity and learned a lot of lessons on the sourcing side, the execution side, and the value creation. All of the top private equity firms build those market maps. They put a prioritization against it. They figure out the companies they really want to build relationships with. We think very similarly to that. But when you get into the execution, the best ones in private equity have real discipline through the funnel.

49:12And that's something we've spent a lot of time on the last few years. How do you make sure you're not getting swamped by small deals or deals that are slightly off strategy that might feel compelling in the moment, but you can waste an awful lot of time. And some of the small deals might be compelling, but they won't move the dial. and if they don't have a banker, that can even make things worse and disjointed. But there's a huge opportunity cost to doing that. We've been sharpening that process. On the value creation, the way PE firms think about it is, what does this company look like in five years time that maximizes the commercial value of it and then work back?

49:50And we've taken elements of that. That's a useful discipline to think, what are we trying to build and get everyone bought into that? And then you can come all the way back to today. you go annually, then you go quarterly, you go monthly, etc. And you get the metrics against that, that both the management team of that firm and on the Oliver Wyman side buy into. Now, it's rare that ever plays out according to the plan, but that doesn't matter. What you've got is you've got everyone engaged in that and agreed to it. Then when you track those metrics over time, if they're different, you ask the question, why?

50:22Is it something that we got wrong at the beginning? Is it something different in the market? Is it just playing out different than we expected and you can adapt as you go. We do that. It goes to the metrics that we talked about earlier. But we've also got within PE firms, they all have playbooks on their value creation levers and pricing, et cetera. We do the same. We think about that on pricing uplift, on operational synergies and some of the functional changes. And it's all about part of building that real clear integration plan. That's pretty cool. Yeah, there is a level of discipline to acknowledge with PE firms.

50:56I like the view of just working it backwards, almost like, all right, we're going to achieve this optimal IRR. But there is a sort of taken best from both thinking. That discipline is tricky because, as you say, there's a lot of interesting things and you could spend your time very easily chasing after lots of things. We periodically just try to check and pull up and work with the folks across Oliver Wyman and the regions and the industry and capability teams on what are the clear priorities and how are we really spending our time? Any advice you give to any practitioners looking to build a scalable buyer-led acquisition strategy?

51:31We're still learning. I wouldn't want to be presumptuous as to advise people. But when we think of the best companies in the world, they've got real alignment among the top team, but then through the organization of what is it that we're trying to achieve? And then everyone understanding how their role fits into that and moves that along. And I'd say one of the things that we've seen here is that if you want inorganic growth to be a key part of the firm's growth, then it's got to be part of the day-to-day business as usual. And Oliver Wyman, what that has meant is we need all of our partners thinking about M &A.

52:07And that's been a big mindset change. It means putting it into people's objectives and trying to change that behavior. And that's had a huge impact because then you start to build a lot of excitement, a lot of drive, but still recognize you need to counter that enthusiasm with recognizing not every idea is going to go through to a deal. It's going to be a small percentage in terms of the yield that you get from that. This is key, creating a culture of M &A. So it's not a push, but more of a pull effort. How do you do that? It takes a little bit of time. It takes explaining the vision. I think the senior folks need to have real targets on what percentage of our growth would we like to come from the inorganic side and then aligning that ambition with some of the time and the resourcing.

52:50If you have a gap between that ambition and the reality, it's unlikely to be achieved. Everything's got to be consistent. Vision, targets, time and resources. John, what's the craziest thing you've seen in M &A? I mean, one thing you know in M &A, right? There's always going to be a surprise that pops up. Now, yours is a family show, so I don't want to get into some of the things that we've seen. We had a deal a couple years ago where we had gotten to know the company over several years. We were, I think, their favorite partner to go with. We were getting close to a deal. And then pretty much last minute from our perspective, another firm came in and offered a price that was many multiples of what we were doing.

53:30And they called us up and they said, listen, we just had this come in. We said, there's no way we can match that price that you should go with them if that's what you want. Good luck. They went with the other firm. It was crazy to me, not in terms of the multiple. That's fine. Every firm can think about how it makes sense and it could plug in. And maybe they had a much better upside from what they had. What was crazy to me was they made that binding offer meeting the leadership team once. And that was it. We would never do that. Now, maybe that would work for them. In that case, it didn't. But to us, it's so important to get to know those teams and all the things we've talked about on the culture, the integration, the alignment.

54:10Someone going in and paying any price after one meeting, to me, just seems crazy. Does this story have a happy ending? We've hired a few of those partners individually as they left the firm. We'll see. But that's part of where you stay in the market. So it's a question mark if they got their return back on it. But I agree. I've been known to be pretty impulsive, and that takes the cake. It can work. I'm not saying it can't work. It's not consistent with our philosophy and how we would do things. I get it feels like an asset-based deal, like a real asset-based deal versus your hiring of that many people.

54:39We're acquiring people and the assets walk out the door every night. John, this has been a great conversation interview. I appreciate you taking the time and helping me become a better M &A scientist. Thank you for having me on the show. Fellow M &A scientists, if you got this far, I'd love to hear from you. Give me some feedback. Tell me what you liked, what you didn't like, some topic ideas. I'll take the criticism. Tell me how I get better at doing this. Otherwise, till next time, here's to the deal.

55:32have. 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. Again, that's mascience.com. Here's to the deal.

56:14Views and opinions expressed on M &A 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.