How to Execute Successful M&A as a CEO

23:41What would people say about you on your tool film? That is the end of our life. But the same thing, I think, in business. What do you want to be said about this business at the end of your journey, which is not the end of the entire business, or come 5, 10 years? And write that narrative now so that you can begin plotting towards that goal. We had a goal at SAP to create a billion-dollar,$5 billion, and then a$10 billion analytics business on top of a$10 billion ERP business, okay, so that we could have a system of engagement that was just as big as a system of record. Business Object brought us a one-to-1.5 billion-dollar business.

24:17We added it in the half-billion-dollar business, the things that we were doing. We were already two. That business got to about four or five. Then we added HANA. That was another four or five. And before you knew it, it was a$10 billion business. That's the way you want to be thinking. How do you create a, in our case, we want to create a$5 billion revenue company here. And this deal is a very critical step to making that happen. $5 billion revenue goal is a very big, hairy, audacious goal for a company like our size. It was probably an easier goal for VMware or SAP to get to. But for a company that's a little over half a billion today, our size, to get to five and two, many of our competitors will never get there.

24:55So I think that for us, that's the way we think. That's the way I was taught to think through my experiences with SAP and VMware. And that's my advice to any business unit leader or CEO contemplating an M &A deal. So look for the leader in a category, doing diligence on their customers, understanding their impact on the market, culture and vision alignment. The culture piece I want to dig in a little bit because I feel like it's pretty subjective. What would be the red flags to get a sense of this is going to come together, these teams aren't going to match up? How do you figure that out? You know, it's a little bit like there's this psychology text called Myers-Briggs.

25:29I encourage everyone to do it. I did that multiple times. And all of us in the world have different Myers-Briggs. You probably have different Myers-Briggs than Myers. We all have different personalities. And that in itself doesn't mean that we all won't culturally get along. But as you get to know somebody, you get the sense. It's a little bit like a friendship or a marriage. I hate to use the word marriage because you're not married to a company for life. You can eventually leave if you don't want to. It's like a really good friendship. That's a better example, where you know what's the dynamic in a friend of what makes that person a really good friend, as opposed to just an acquaintance or your best friend.

26:06There's something about the personality and there's a chemistry. So you're able to detect as you get to know that company, as you talk to references. I talk to a lot of people. Hey, what's the question? Especially the people you're going to have to deal with. And you get to know them and you ask other people, what are their strengths? What are their areas? And you get a sense, because often the culture of a company is very reflective of what's at the top. The company often reflects the values of its CEO and its leadership team. So as you get to know the CEO and the leadership team, you get a sense as to what's that culture.

26:34And I spend a lot of time with the heads of HR of both companies, asking them what people like, what are the things they can take. We look at the talent down. Today, we're doing that with Doris Inveritas. Looking at talent down to the L4, L1, as the people report to me, L2, L3, L4, L5. I hope we don't have many more layers than that major L5. And I've made the commitment that I want to inspect every manager role. It may be several hundred that we have in a new company. I may not know all of them, but I want to see the spreadsheet of PowerPoint to see who those names are. And in certain organizations, I'll have a very strong opinion of the NWOL, the L2s, not to say my role there to be dictatorial.

27:15But if there's a cultural misfit or I haven't met that, and often I would ask to meet people myself. I've done a number of face-to-face or Zoom calls now with people just to get to know them. And when the CEO of the new company is willing to do that, not just for the L1 people reporting, but L2s, the L3s, the L4s, it sends a signal. I talk publicly about the fact that my management philosophy is very different from a top-down sort of military ruler. I'm very much a bottom-up, servant-leader-driven person, which means I've talked publicly about the fact that the power of an organization is at its LEAF level, meaning the first-level engineers, the individual contributors are engineers, and the individual contributors are sales members, and then their first-level managers, meaning an engineering manager or a district manager in sales.

28:03The power of an organization is there. So what does that mean? If I say that an incoming business I'm acquiring, the people at the lowest level of the company want to meet me. Now, I can't meet everybody, but they know that the CEO of this company is approachable. And if I send them a note that's important, they'll read it. It's likely there's an issue that I need to address at a customer where I need the help. As a rep, I'll get it. That's the way in which you want to build a company. And when that's the way I run business units, it's the way I'm running cohesively. It doesn't matter if it's a 100 ,000-person company called SAP, a 40 ,000-person company called VMware, or a 2 ,000-people called Cohesity that when we come together at Veritas will be over 5 ,000 people.

28:51It doesn't matter. I've seen big, I've seen small. That principle of how I choose to run the company, so our leadership stays the same. I'm probably a little more approachable now at a smaller company, but it's easier for people to get to me and there's fewer people whose names I need to remember. But it didn't matter in a 40 ,000-person company. I could go to Germany and there'd be 10 ,000 people there. And I loved meeting the people there and ensuring that they knew that I was approachable. I would spend long hours and evenings and nights in their beer gardens talking to them. That approachability you want to have so that the rank and file of a new company feel like, you know what, I'm inspired to join this company because the leadership of the top, exemplifying.

29:33It's not just the CEO, but the entire leadership team, they're approachable and they're not sitting in some ivory tower. Do you ever convince somebody to sell their company? Any art of a deal is a buying and selling process. So these deals don't happen without an AirWatch. It took me several goes that the, and it wasn't just me, it was the M &A team, Dr. Alan DeVere and John Marshall, but they finally agreed there's a combination of cultural soft factors and then there's hard factors, price. So it's never just one. Is it like a series of conversation and you're waiting for them to raise their hand and saying, hey, Sanjay, let's talk about doing a deal?

30:06Or is there sort of this proactive approach of convincing someone to do the deal? Listen, it's a little bit like a friendship or a dating relationship. People know that you're interested. You don't have to be explicit about it. When you go to meet them, you could ask them, hey, where's your vision of where things are going forward? Where do you see yourself going? Can we help you? You don't want to talk to them like, can I acquire you? That's not the way you approach it. you want to ask them can you help their business grow faster in the context of something we could do together and often i might suggest starting with a partnership right can we start as a partner together but eventually then you're like i want you to know that we started a partner we may eventually need to own this technology would you be open to the idea of being part of one company you know you kind of approach this and you don't want to be sometimes too bold about the idea, you want to approach it cautiously, and partfully, you know, with respect, often for a founder of a small company, it's their baby, you don't want to be presumptive that they want to sell.

31:05And sometimes it's like, I'm not fulfilled. Okay, got it, let's stay in touch. I'd love to get to know you better. I'd like to partner with you. How can I help you? You want to be their friend to help them. And if it's a public company, it's a little different because of the share price, and you've got to make sure shareholder is okay, and so on. And then you want to make sure that, listen, if I'm looking at a company or I'm looking for somebody to buy me. Either way, you want to be on the radar of the people who you want to acquire or you want to get acquired too, okay? I can tell you, as much as Alan DeBerry and John Marshall, the people at AirWatch, I was talking to them.

31:39They were talking to me too because they wanted to make sure I didn't go buy their competitor. And VMware was a very powerful company. They knew that if I decided to walk away from AirWatch, there's another company that I could acquire that probably was similar to them and they wanted to make sure we didn't acquire them. you always ask yourself in these deals there's going to be a little bit of give and take everyone has options you don't want to get so in love with the company that there's an alternative what if somebody comes and backs that company acquiring them before you do and you have no alternative so the boards the good boards will always ask somebody okay what if you couldn't acquire this company what's your plan oh we have a plan B we would acquire this other company oh good when we acquired AirWatch we had a plan B and a plan C and we had a everything thought the chessboard was all thought through okay so then when we were required and granted it was not a public company it was a private company it was a leasier we did this on a complete secrecy of course you find exclusives there's a way in which you get all these things done so that they can't proactively be talking to people while you're talking and there's the mna good mna people know how to do these deals but you do it in a way that if it falls through you never want to be the place where when you're doing an mna deal if it falls through okay because somebody else knackered them before you can get to it you're hold in your company strategy.

32:53You should never build a strategy or a plan where if somebody else buys the company before you announce it publicly. But that's how we think. And fortunately, with a lot of people around me that come up with joining me again here at Corici, you work hard to make sure that it's a success. And then you want a lot of people giving you input. Even once you announce the deal, I describe this as a post-M &A announcement to then closing the deal and then integrating it, you want to have a big set of years. I always tell people have two years and one month. The reason we're creating two years and one month.

33:25Anybody gives the input, like, great, tell me. And you don't have to act on it, but you never want to be presumptive to say, oh, you're wrong. Okay, got it. Let me think about it. And you'll be surprised the number of people who give you advice once you've announced the deal. You should think about this. That's great. I want to hear everybody's advice. They all want to talk to me now because we announced the deal. Great. What's your advice? I think you should do this. You should do that. Great. I want to hear everybody who's talking to me is somebody who's not talking to somebody else. Then when they're finished talking, I want them to ask me, what's your strategy when you completely have what you're doing?

33:55Here's our strategy. You only want to speak after you've listened to them. What's your input? I do the same with customers. Hey, we are thinking about this roadmap with the joint products, Bahiti and Veritas. Now, we're not allowed to officially write code that integrates these products because we're a two-separ company. But we have some ideas of the roadmap that are very well-formed in our head. But how did it get well-formed in our head? We're talking to a slew of customers, hundreds of customers that I've talked to. And the beginning credit, hey, if we have some ideas, we'll share them with you, but I'm much more interested in getting your input.

34:25What do you think we should do? And you don't want to go in there completely open slick, like we don't know what we're doing there. Like, why are you coming to us if you're idiots? No, no, we have some ideas. We'll lay them out on a canvas, but the canvas is wide open for you to change it if you think we should do something different. When you take a customer-centric approach that way and your advisory board feels they can advise you, you get a great outcome because when you're finished with your plan, they were the people who helped you architect that plan. And that's a very good way, especially on product roadmap.

34:55Same with people immigration. Okay, I have an idea of what the org chart should look like for the new company, whatever have you. You put it out there and you have a few people in your trusted circle give you some input. Okay, it might be the board. It might be a couple of execs that you really trust. I don't want the entire company giving you input on things like that. That's not a pupil experience. But there's a brain trust of people you can trust in any of these. And I tend to make decisions in the counsel of several people who are, I like this idea of a brain trust. I want a small circle of advisors.

35:24I'm never the smartest person in the room, but I can tell you, as I hear more advice, I get smarter about a particular event. Then finally, I can articulate a synthesis of 10 people's ideas into two or three key bullet points. That's certainly the job of the CEO. You want to be able to hear everybody's advice and the synthesis of it. I think the three, four detailed ideas here are there for how we do anything, whether it's the product roadmap or people integration or communication plan or financing, time to IPO, all of these things. And I'm very fortunate. We have a great team. I think we have several great executives from Veritas joining.

35:59And that same thing existed in every deal we did. Business objects, we had a great team at SAP with some great executives coming in. Cybase, AirWatch, great team at VMware, had some executives with AirWatch coming in. So those are some of the key recipes for ensuring the deal's success. And I can see that rolling up into even how you would pitch the deal by getting all that information together. The partner approach makes a lot of sense. I was thinking about the example of consolidation where you may not have the opportunity to partner. And it seems like the big emphasis on the relationships. Is there anything in the relationships approach obviously gets to know folks and understand what their vision is.

36:36But in terms of like keeping on top of it, It's pretty easy to meet a CEO, then a year later, you hear that they sold to somebody else. What do you do to really keep on top of those relationships and make sure they're healthy so that when that timing's right, you're front and center in those conversations? It's a degree of how much you want to be able to do the deal. If it's not a priority, you can not call that person as often. But if it's really an important priority, you don't want to obviously sound over-eager and be calling them 24-7. But, you know, it's like any other friendship. If it's important to you, you nurture and water that relationship and spend time with them, not just over the phone.

37:11And on Zoom calls, you meet them in person, you break bread with them. It's no different from any friendship. I think that a relationship in business is like a friendship. You build it, you water it, you're watching very closely what needs to get done. You have to have a view that if that deal drifts away to somebody else. There are deals I wanted to do, I don't want to talk about them, because some of them are confidential, that we couldn't get done because the price is too high. or we had a change of mind on the head of that company, CEO of that company or whatever have you. But I don't look back at that and say, oh my gosh, the strategy of SAP or VMware was fatally flawed because we couldn't do that deal.

37:48We're disappointed. We move on. That's where you want to approach it in the litany of M &A deals that have been done. Yeah, that's also why I view like M &A can't be your primary strategy for the company. It has to be a second or third strategy. You don't start a company and say, my first deal on that, you know, you don't start a company where the first deal I want to do is an M &A deal. You build a company, you build some product, get some substantial revenue. Then you might do a token acquisition or you might get acquired or you might merge. But I think that, listen, the wise process is to make M &A a second or third part of your strategy as opposed to a primary part of your strategy.

38:26We talk about the best practices around managing large-scale acquisitions and we talked a lot about leadership and alignment around leadership but are there any other big best practices? I think ecosystem would be another one. I've been talking a lot about it, but there's a set of ecosystem partners in our world, the cloud players, security players, the system integrators, the hardware players. We know in the ecosystem who are the key people you want. And I think that's the job of the CEO to really reach out ahead of time to the ecosystem, not to everybody on the planet, but there's a core ecosystem of players that are very important to you in the industry.

38:58You need to know who those are and have relationships with CEOs so you can call and basically say, we have an important announcement coming tomorrow. I want to give you a five-minute update. Can I call you? And many of these folks I've known for many decades or years, I can call them on their cell phone directly for five minutes. They know me well enough that they'll take a call. That's the job of a CEO in terms of building the ecosystem relationships because often you play in the context of a deal with other key ecosystem players. Then the same thing with customers. I called a couple of key customers, but I did that after the deal was announced to make sure that they knew if they were key customers of ours or theirs that they were going to be wonderfully taken care of.

39:33And then, of course, the customer outreach lasts for weeks and months because that's not like a day one. The day one, you want to have a promise plan of who you're going to call and maybe there's a day minus one of who you're going to call. And much of that, the days leading up to a deal is very busy, not just for the PR and the AR, the press and analysts. That's an important part of the communication path. But there's a set of partners and customers that you also want to be calling. Some of them, the night before, I call that day minus one. Day zero is the day you announced it. But then day zero or day one, you're working the phone with customers primarily and then partners to make sure that they're very comfortable with your strategy.

40:10Really good advice there in terms of paying attention to those EP folks involved with the deal. I was curious when you were talking through that about when you think of just like global expansion or building that sort of footprint globally, tying that into acquisition strategy. How do you think through that, like in terms of this is your natural organic plan to expand globally in certain countries? And then you look at acquisitions to achieve that, or is it just kind of a broader, we want to expand globally? I mean, listen, a big part of the rationale of the Veritas acquisitions, they have a very strong international business.

40:43So we look at how much we do internationally, how much they do, where we're doing the U.S. There's some international aspect of the growth that gives us some compliment. But those are all some of the questions you ask during the course of due diligence. You want to get a sense. It's like a jigsaw puzzle. What do I have to offer the market in terms of product and geographic presence? And where do they fit in complement to that? And product, geographic expansion, partner ecosystem, customer base. There's a variety of those things that when you put together, you want to be able to say, okay, there's not a lot of overlap.

41:14This becomes, I like to call it a 1 plus 1 equals 11 kind of move. It's not just 1 plus 1 equals 3. and one plus one equals 11. I like that. So those are the kinds of things that we think through as we prepare for the strategy. All of it is done during due diligence before we even announce the deal. What about timing? Does all these market factors come in play? Okay, when's the right time to actually do the deal or pull the trigger on it? Usually you want to be in a place where it's not being crowded out by some other major announcement in the world, like you don't do it on New Year's Day or you wanted to get some bang for the buck.

41:47So that you can time because as long as it doesn't get leaked, you can pick a day that's not coincidental with another. Sometimes there's a benefit at VMware we like to announce deals at our conference because it's our event and we can announce a big deal there at the same time. But if it's not your event, if you try to announce something at Amazon, the big AWS reInvent, you're going to get a lot in all the news there. It's not going to catch. But if it's your own customer conference or it's your own event, like Amazon, they were announcing a big deal at the AWS reInvent, again, that makes sense at your own conference.

42:15Outside of that, you pick a day that's not going to collide with the news. You want to make this obviously an eventful news day. Typically won't announce on a Monday or a Friday. It's usually Tuesday and Thursday. The thing that often in public deals that circumference that is a leak. Typically, these deals tend to have a way of leaking. And once it leaks, you're like someone who broke the news for you. You don't want to be in reactive mode. You also want to be in a place where once you've got it all prepped, you may have to pull the trigger earlier based on the fact that some press report is leaking it.

42:45And then you're prepared to accelerate that entire comms plan to the public if you end up having it. But I've never had a situation where news has leaked weeks before. It's usually like within the delta of days. Like, for example, Prohisti Veritas, we had planned, I think, to announce it on a Wednesday or Thursday, like Tuesday started leaking. OK, good. Now we just pulled the trigger and announced it earlier, one or two days earlier. But by that point, it was so close to the outcome. It was within a day or two of what we wanted to announce anyway. It was all ready to go. We just pulled it in earlier.

43:17We said, okay, let's go. We're going tomorrow morning. So I mean, those are just things that are game time calls that you can make. And a very good comms communication team can help you with that. What role does market timing play in your acquisition strategy, specifically in the context of shifting trends towards profitability over growth? We still could go public on our own. So he said we're approaching capital positive. In this quarter or next year, we will be capital positive. That's the early points of growth. So we're high growth and low profit or imminent profitability. And Veritas is lower growth than us, but high profitability.

43:53That's what we're doing together. I believe I'm a believer in profitable growth. That's what I knew at VMware. Profits found a lot more than growth at any cost. I think up to 2021, in the era of 2009 to 2021, low interest rates. okay it didn't matter if you're profitable what did but at some point in time you were just getting skyrocketing valuations that's stuff that gravy train's done interest rates and all that stuff there isn't a free money if you don't have a path to profitability you're going nowhere and you can go public but you're not going to get the valuation multiple you deserve or should get and you're not going to be able to get an expansion in your stock price until you show profitability or a path to profitability and i think i can give you many examples of companies that have gone public and have not achieved the valuation they would have liked to because they don't have a path to profitability.

44:41We at VMware and at SAP were very proud of the fact that we're very profitable businesses. So what advice would you give to other CEOs on preparing their companies for a successful IPO following a major acquisition? In an acquisition, you want to make sure the deal is accretive. If it's not accretive because you're diluting the company some on margin, you want to get back to the profit level that you're in. Many of the companies we would acquire at VMware where we're less profitable than us, and we'd have to then make it with full accretions. So that's the profitability of the core company. Like when we acquired AirWatch, it diluted our profitability some, but we expanded the growth.

45:15But in due course, we absorbed it in, and we got our profitability levels up to what we needed to be. So for a one-year hit, if you're expanding your growth and your profitability takes a little bit of hits, the CFO, I'll take that, because I'm going to sacrifice some profit margin for growth. But if it made you highly unprofitable, you're borderline profitable, move. You're going to really get some pressure to not do those kinds of deals. Every CEO has to work that through. Having a good CFO helps decide if that deal is affordable and worth doing. And once you've done that deal, chart the course.

45:47If it's an M &A deal and then the kind of course that we're in, you want to then take that company and have at least four quarters where you can show integrated success of the company because there's a lot of things in a M &A process, especially if It's the bigger the deal that could go wrong. All of our plans for the merged entity of Coezy Veritas are on a spreadsheet and a piece of paper. We have to go prove it quarter by quarter. And after three, four quarters, you pretty much have said, okay, I think I know that this thing's got some long-term viability. We can see some patterns. We're able to predict our forecast.

46:19Going public is just a lot of destination, milestone. So you want to have predictability. The worst thing you do is go public and not get the long-term stock growth that you expect. All you got is some temporary liquidity, And then at the end of the day, you're back to worrying about stock prices going high enough that you want to. I think it's much better to have a company that's got sustainable growth and has a viable path for a five or 10 year period. Balance between growth and profitability and working with a good CFO. Sanjay, what's the craziest thing you've seen in M &A? There are many M &A deals that have not gone through.

46:51I'm always intrigued by M &A deals that don't go through because the FTC blocked them or somebody else comes in and interlopes. So I've watched every big deal that's announced and smaller ones and talking to M &A bankers. We have a census to the folks who are involved in them. And then you also want to look at the most, I think the most successful deal ever done in the history is EMSB buying VMware. They paid$650 million for that company, and eventually Broadcom bought that company for$61 billion. And about what Broadcom announced in 2022, I think, the acquisition by AMC was in 2004. Like 18 years after they paid$650 million, somebody else bought it for$61 billion.

47:38If you just look at that history of time, it was an absolutely great move by AMC, and then eventually Dell bought AMC, and Dell then sells it to Broadcom. It's one of the best M &A deals ever done, VMware. Maybe you could argue it shouldn't have been sold for$650 million. But for EMC, the best acquisition ever done. So you're very intrigued by those deals where what does a buyer want in a deal? They want a cheap price. What does a seller want in a deal? A high price. So if you're a buyer, you're very interested in deals that how did they get that for that price? That's incredible. If you're a seller, you're like, my goodness, how did you get such a big price for your company?

48:16It's like buying and selling a house. If you bought a house for a cheap price, and it's on a great piece of land, and it's a great view, and you go and look it up and you ask, how did you get this business feel? Or then if you see somebody else who's not a great place, but they bought an incredible amount and they sold at the peak of the market, wow, good for you. So this is what, I mean, whether it's buying and selling a house or buying and selling a company, it's the same thing. You want to be able to, in the words of Warren Buffett, buy low, sell high. So if I'm a buyer, I want the cheapest deal.

48:45If I'm a seller, I want the most expensive. And that's how deals are made. That's where we got to do a feature on that, like the most overpaid deals and the best value deals. Exactly. This has been a great conversation. Thanks so much. I appreciate you taking the time, helping me become a better M &A scientist. Thank you so much. Those of you still tuned in, always love hearing feedback. Reach out to me on LinkedIn. Love to hear your thoughts on this podcast and any other ideas you may have for topics to cover. Until next time, here's to the deal.

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50:08Again, that's mascience.com. Here's to the deal. Thank you.