How to Validate the Deal Thesis To Ensure M&A Success

24:42So the technology focus, there's probably some really, really key things. We want to know their specific tech stack. And then we probably want to know a little bit about the security and things like that. And I'd probably have my resource that's going to be leading charge and bringing this in. I'd still want to get a conversation going before LOI just to make sure he's got peace of mind or got a sense of, okay, this is, especially I know engineers, man, they're always skeptical about everything. Oh, yeah. So in order for them to do that evaluation, they, of course, have to talk to the other side.

25:09There's going to be back and forth. We're going to have requests. That's going to be part of my model of like, what's it going to cost to integrate this technology? And what's that timeline going to be? So there probably is going to be that conversation. Yeah. But it's going to be really focused on that key area, the value driver, not so much anything out of that scope. Yeah. It's less so what do they use Google Docs or Microsoft Teams, all those stuff. That doesn't matter, I guess, in this sense. Yeah, exactly. It's like the core product itself. Does it say what you say it does? And is it scalable?

25:41And does it fit within our systems, etc.? That's what we really care about. It may take one conversation, may take a few conversations, depending on the depth that we need to go down and whether we're asking the right questions from the get-go or not. Then we get to a level of confidence. We would be able to bring this tech. It would integrate in our platform. There's a little bit of work to do because the tech stack's a bit different, but we could work that. It's just going to take this much time frame and so forth. And here's the associated cost to make the integration happen. And obviously, also, it depends on the other side.

26:09Sometimes, depending on the process, it may be just a targeted process where they might just be talking to us and they don't want to open up their entire management team to the process. And then it makes it a little bit more challenging to do diligence. If it's a more open process where they're letting us talk to many folks, then that makes it a little bit easier. I remember talking to a person at a company where they were telling me how their business acquired a couple different tech products. The vision was to integrate as a platform. But he's like, they're not. They're on completely different tech stacks.

26:40And it's just such a terrible experience for that customer. Is that like an example? They didn't really validate that deal thesis. Maybe that was the intention from the beginning. And then it goes back to where was this on the prioritization post-close? Was there resources dedicated to this? And did it make it up the stack? If you think about every year, there's planning that goes on in a company. and every year you have to prioritize your limited engineering resources and teams across the organization to keep the business running, work on new products and innovation, and then work on integration of whatever you might have acquired.

27:18Sometimes integration does not get prioritized above all those other things. Then it ends up being left on the wayside until it gets to a point when you realize, hey, what are we doing with those things that we acquired a few years ago? they're not giving us the value that we think. Let's relook at them. That's what leads to potential divestitures and other things. There's a few different things that can happen. The company just doesn't have the resources and really had that muscle to integrate them. And that's the reason why, or it's something that completely missed. And then it was different in terms of what they actually needed.

27:50Sometimes it's also, in your example, it was basically a case where they intended to integrate, but did not. There's other cases where they acquire and then just leave it alone. And that's by design until they decide to do so. Now, if you switch it up and say, hey, we're buying this business for the customer, we see an opportunity, they're selling a similar solution, a different market, but we could cross sell some of our other solutions to their customers, combine these sales teams, which is where it gets interesting. This tends to be pretty complicated to actually do this. Then in that case, emphasis would be probably more on the sales and marketing and bringing them in and saying, hey, this is what we're building as assumptions of synergies that we can capture and then let them identify and validate that.

28:35And typically you want to bring on the customers, but then you have to consider what is required to enable and monetize those customers. A simple example would be Facebook acquiring Instagram. They're saying Instagram has a unique technology, but its uniqueness is also in the virality and network that it's built. hard to replicate the technology. Obviously, we've seen other people replicate what they've built, but they have that lightning in the bottle that we want. And then we're going to put all our advertising and monetization behind it to then actually make money from this thing. That's an example, I guess, that everyone's familiar with from looking at the customers, but also the customer itself is what's special, but it's captured within that container of their app and their technology.

29:18I like the deal of the century. Yeah, potentially. that. YouTube's a great one too. There's a lot. YouTube's up there too. Talk to me about this deal thesis. What does that look like? What information's in there? And how do you convey this? Because I'm curious, once you put this together, is there a formal pitch to the executives, the board? How do you convey that validation? Effectively, the deal thesis is a very succinct view on why we should do the deal. And as part of that articulation, you should also explain why you should not do the deal, as well as what the plan is for the deal. In my view, there's various stages where you do need to articulate that formally.

30:03So obviously, right up front, before you even engage, you should have a rough sense of here's what the deal thesis is. Hopefully, that remains consistent, but it can be updated depending on what you find. You may have five things that are important. And then once you get through a little bit of diligence, realize that maybe it's only two things that really matter in this deal. The other two, we validated that it's not really real at the target. And so then it evolves. And then you have to get approvals at each step of the way as you do the deal, depending on the size and scope all the way up potentially to the board.

30:33It's a simple articulation of why you should do the deal. And maybe you should accompany that with also the reasons why you shouldn't do the deal. But on the balance, given why you should do the deal and why you should not do the deal, we recommend moving forward. How many pages of a document are we talking about? We typically try to keep it short. If it's a memo, then it shouldn't be more than 5-10 pages. If it's a presentation, then maybe up to 20 slides tops. Try to keep it tight. Start off with, here's our investment thesis. This is why we're going to buy this company. got a unique technology that would move our roadmap faster and allow us to come out with our new product Z in the market.

31:10We'd be able to start building revenue faster. Yeah. Start building our case around that. Sharing context and what you found during diligence, all the key next steps, what do you plan for integration? All those things you should be able to lay out. So I would lay that out in this deal thesis that, hey, this is a little bit details about their technology and then a little bit about how we see it fitting in our ecosystem. How would we approach integrating your timelines? We would even put that in there? Yep. Depending on how far you want to go. And ideally, you've done a lot of this planning is even figuring out where the people will sit after how you intend to eventually merge the companies effectively.

31:47That's the integration plan or not. You should basically lay it all out to as much detail as you can. And hopefully a lot of that is done, obviously, pre-signed to the extent you can. If we're going to eliminate all their sales and marketing because they really haven't sold a lot, this is like a 1 million revenue company. we just really want through technology. Will we lay that out there? Yeah. Okay. We're pretty transparent. Yeah, you should. This is what we're going to do. Sometimes it's helpful to also not just be transparent internally, but also be transparent to the other side. Because oftentimes challenges also happen when there's a lack of transparency and understanding of what will happen to the business post-closure.

32:24And there's a benefit in being on the same page with the target to say, here's what we're going to do with your company. post-close, you as the CEO and management team and the board are basically signing up to this. And if you're aligned with that vision, hopefully everything that we plan to do, including whatever retention incentives, payouts, pullbacks, all the deal economics, all the incentives should be aligned because we've agreed upfront, generally, how we envision the deal to go. Earn that trust through transparency. Yeah. Okay. So we start putting that detail information in there. Any kind of references about the deal in general?

33:02You put like comps in there? Yeah, if it's relevant to valuation. The valuation is obviously one component of it. And a key question is why are we paying? What do we think we're paying? How much of the synergies are we giving away versus keeping for ourselves? Do you have to like formally present all this? Yeah. Yeah. CEO directs the board sometimes or an eminent committee, which is a subset of the board, depending on the deal size. I heard story is like a pretty big element in terms of really pitching your deal. How do you do that? How do you nail the pitch of the story? That's why the deal thesis is so important.

33:34Part of what should be driving why that is a factor for doing the deal is not just in isolation for the deal, but those two things that I spoke about earlier around strategy and alternatives. because you have to set the context for people around like, here is a situation around this deal and why we're doing it. And the other things we considered that led us to the decision that this is the best path for us to achieve what we're looking to do. That in itself is the general storyline or arc around why this makes sense and why we've done all the work to validate that it does make sense. Here's all the work we've done.

34:12That's the story effectively. And if it's compelling enough and you've checked all the boxes, hopefully the deal does what it does, which is accelerate your business and your roadmap and build shareholder value. What's the bad guy in the story? The bad guy in the story around what? That's why I'm always asking. They may say he got pictures of the story, but I'm like, okay, usually the story's got big bad guys. And that's part of the point I made earlier around we should always lay out why we should do a deal and why we should not do a deal. And so the bad guy is basically taking the other side of the argument and trying to frame, okay, for all these reasons, this is a great thing.

34:50But for all these reasons, it's not. But based on looking at the whole picture, we still think it's a good move to make. So you have to go in eyes wide open and not just look at one side of the story and be able to share. For all these reasons, it is bad and there could be risk. But you don't just come with the risk. You also come with, here's the risk. But we thought about the risks and we've also considered what the mitigations could be against those risks. And so for these reasons, we think it's still manageable and we should still go forward. In the event that you can't explain or justify the risks, then that's a problem.

35:27That's where you have a bad guy that's unsolvable. So the story, in a far distance, there's the promised land. And we see a vision of how we can get to the promised land by building this giant boat and crossing this massive sea. but there's going to be challenges. The boat may fall apart. We may run out of food and starve to death. Despite that, we just see so much promise that we should just go for it. Yeah, we might run out of food but we think we can grow a sustainable farm on the boat and we'll be able to make everyone on the boat survive until we get to the promised land. There's things that you do to try to get to the end point.

36:03It goes back to don't just call out the risk. Is there a plan to manage the risk to get there? Yeah, which kind of helps flesh out the story that said, despite all this, let's do it. Yeah. I like that. The integration part, it's like the thing that's coming up more and more over the years of doing this podcast. Everybody's just becoming hyper-conscious about making integration makes or breaks a deal. What are your thoughts about how that integration comes in play when it comes to the deal thesis? Is there a thesis around integration specifically? What are your views on that? Or your corporate person doesn't give a shit?

36:36Definitely not the latter. At the end of the day, CorpDev is really one team between the deal side and the integration side. That's what they all say. We work hand in hand. And that's what they all say because that's what you need to have to make a deal successful. The execution of it is where it gets challenging. There's a big variance when it comes to reverence the road. So how do you actually make that seamless? It comes down to recognizing the handoff between the deal side and the integration side and making that seamless and making sure that everyone recognizes, obviously, that value is created after the deal closes and not when it signs.

37:17So recognizing that, what are the steps, again, to capture and realize all the value drivers that we've talked about? Going back to the point of if the value driver is a technology, typically you want to get that technology so you can unlock a market, accelerate what you would have built otherwise, etc, etc. And so you're measuring your ability to drive value against your ability to hit those milestones. If you're saying that we could have built this in 24 months, but acquiring something will help us launch a product in 12 months, you're effectively capturing that acceleration of a year. Whether the deal is a success or not hinges on that promise.

37:59As part of integration planning, you have to figure out what do I need to do to hit that 12-month timeline to launch a product after this whole thing closes. And so that's what you have to plan against. And so you have to get in all the right folks in the room, make sure that it's, again, it's prioritized, it's invested against. A lot of the issues that I've seen is just there's the right people are not in the room and the right people aren't building this post-closure. And so you have to bring in everyone along for the ride early and help them understand the deal. Make sure you have investments against that.

38:35If you're going to need more headcount beyond the current team to sell the deal after, then yeah, your sales team should be involved. Everyone should be involved. And it goes down to the tactics. If you're bringing in a piece of technology and you're planning to cross sell it, your sales team better have the right collateral. Sales team better be trained on it and hit the ground running after the fact and understand what capabilities does this new acquired company fill? Can I effectively sell it? All those things need to be lined up and planned down to the nth degree. It's all about details and execution at that point.

39:09Yeah. We always celebrate the close, probably because most of the advisors and consultants make a crap load of money. Yeah, yeah. They're paying for the celebration. They do. But then we don't celebrate successful integration. That's a company by company basis, right? I just never hear about it. Hey, we hit our 12-month timeline and we hit our goals on this deal. CorpDev tracks the success of it. There's a window within which we track the deal. And then after a certain point, it becomes BAU, part of the business. And so probably not hearing it because at that point, we're just not tracking it anymore.

39:41But we definitely celebrate the success and track what happens within a few-year window after it closes. Do you ever have any roles you've been in where there's repercussions for doing a bad deal? On CorpDev individually and personally? Probably not. Not specifically, but that's primarily because there's so many people involved that are necessary to make the deal successful. I get it. It's a certain miss that you had a responsibility for, but it is a big team effort that touches so many different parts of the business. Yeah, and if it's a salient deal point, it typically isn't just on CorpDev to unilaterally approve that point.

40:17It typically is part of the deal sponsor as well to say, I agree. That sounds good. Let's do that. As opposed to CorpDev saying, doing deals in a silo and just making up terms and ensuring that they just get the deal done. That's probably when you run into trouble. And yeah, that's probably more on CorpDev where you can blame that one person if that happens. What should I do on my next deal to really make sure I nail down the deal thesis? Give me some advice here. I want to make sure I don't screw it up. I'm going to be working with this other executive. What are some of the tough questions I need to be really digging in and making sure that I got this nailed down so the deal is going to be set up for success?

40:53It helps to be aligned with the eventual deal sponsor just on what exactly are they looking for in a target or capability. And it's up to you to then figure out sourcing and identifying the right target, etc. But you need a clear view on do I have the right filters in place and am I clear on what I'm looking for? That allows me to help square off the deal thesis and everything versus bringing targets that may only fill a rough idea of what it takes to do a deal. That helps to effectively validate, even pre-validate what the ideal deal would look like. But nothing ever fits that box. Get as much as you can.

41:35And then that's where the decisions come in to it fits 90 % of what I'm looking for. It fits 50 % of what I'm looking for. Is it still enough? and is the value I ascribe to say the 50 % that I want sufficient to even acquire the company? How do I balance this out? Because I get deal happy and I get this feeling I should go do the deal. And then I got the other stakeholders internally that are going to be the ones that really drive a lot of this. And I want their buy-in, but then they tend to be pretty type A and find all the reasons not to do the deal. You're hitting on the more psychological part of the deal thesis, I would say.

42:15A lot of executives and a lot of corporate professionals have over the years of doing deals, a lot of people have their own preconceived notions around what works and what doesn't. Some executives will swear off doing acquihires because they don't believe that the talent is worth the extra consideration. They don't believe that talent will stick around. And maybe that's valid based on their past experience. Other people believe that, hey, it's really hard for me to hire an entire team wholesale like that. Despite all that risk, I think it's still worth it to even get a few engineers from doing a deal.

42:55And that in itself is so worth doing. Depending on the company you're with and the execs you're working with, that's the environment or the deal environment basically you're walking into. And that's the type of biases that you have to navigate around whether a deal makes sense or not. It almost becomes like culturally company to company. Their appetite for doing M &A, their tolerance for that difference of how well it fits strategically to the strategy and things. There's always a gap there that seems like you got to shape. And like you said, it's never 100%. It's just what's our tolerance to accept it at 50%, hopefully at least 50%, 70%.

43:30Which is why this job has been different at every place I've worked at because different companies were at different points in their life cycle and had different varying levels of interest in inorganic growth and varying levels of how they wanted to execute on that. And so that keeps the job fresh and different and interesting and exciting in different places. So when we look at this profile of your flexibility on fit to do a deal, I can see the challenges and clearly what those risks are ahead. And then there's the challenges that really pop up, the deal surprises. I want to learn from you about deal surprises you've encountered just to get a sense of, just to find them interesting stories in general.

44:12Where were some of those surprises and lessons learned? Yeah. We started the story with the big Verizon. Here's a breach that happened. That's a big one. But what are other examples? Other examples of something that happened, one of them effectively is doing a deal. We were evaluating a company that was based out of Eastern Europe, but most of the operations were in the US. And so a lot of their engineers are based on Eastern Europe. We were doing diligence. We did not have any entity or employees out in Eastern Europe. And so understanding the local employment laws and regulations around what would be even required to bring those folks on board was a challenge and something we have to navigate.

44:54What kind of offer letters would they need? How would we pay them? How does that all make sense? And then in the midst of figuring all that out, which was a headache in itself with Employment Council and HR, you can imagine just trying to see if there's even sufficient talent there. While we're doing that, then the Ukraine war popped up in this country we're looking at was right next to Ukraine. At the time, nobody knew what was happening. We had to bring in our trust and safety team, try to figure out even what would happen in the event of war breaking out and spilling over into the neighboring country where the target company's employees were.

45:29The question became, do we even do this deal? Is it worth it for all the headache that will come in? Potentially, if you do sign, you're very much likely to have to close and those employees then become your burden to bear. How do we even get them laptops to a potential war zone? All these questions that we didn't expect to even cross when we first looked at it. The first thesis was great. Lower cost of operations by great engineers. Let's do it. But then there's all these other considerations that you have to think about when you don't have any operations there. Is there enough talent density?

46:02What does that all look like? And then put on top of a potential war. That's a big curveball. Do you have any showstoppers where post-LOI, it's like, all right, we can't continue this deal because it's too big of a surprise? Typically not. The reason why is the purchase agreements are written in a way where once you sign, unless there's a very explicit determination that you have baked in that the target doesn't fulfill as say a closing condition or otherwise, there are not many ways to get out of the deal. And so you have to be very sure that once you sign that you're willing to close. LOI. No, definitive.

46:41Well, definitive, yes. Yeah, yeah, yeah. But at an LOI stage, it's always non-binding, typically non-binding anyways, right? That's what I mean, from LOI to close, before it closes. Yeah, before it closes, there's a lot of reasons. So can we say like roughly, and I'm curious, your rule, I would say 90 % you're going to close if you sign an LOI. But what's your experience say? Yeah, I would say that's definitely right. We try not to put out an LOI unless we truly believe that we will close absent any material showstoppers. Things pop up, but we can negotiate. We can figure it out. Hopefully not do price adjustment, but we do.

47:12It's mutually agreed. But what would be like between LOI and closed reasons that you would just say, we can't do this? The biggest and most typical one is if it just doesn't become a priority anymore for whatever reason. That's the main thing. If we're in the middle of planning cycles, there's maybe management turnover on our side or whatever the case might be, then this no longer is a priority, then we walk away. Or if one of the value drivers that we've identified is really not what we thought it was up front, maybe someone key that we thought we needed during the deal walks away. And there's a number of things that could come up.

47:51But again, it goes down to like, hopefully you've done enough work to validate the value drivers enough pre-LOI to make sure that there isn't any showstoppers after. Yeah, it would be like a pretty material change. Like here's some change that would impact your view on the deal. Or you had an internal change and deal sponsor left the company. Oh, yeah. Aside from validating the deal thesis, is there anything else you do to streamline your M &A process? this? It comes down to focus and prioritization. Again, typically, you're trying to balance between doing it as fast as possible to stay within that exclusivity window that you probably signed during the LOI to be as thorough as you can, but also be quick.

48:33From that perspective, that's in your control. And then making sure that you set up the right cadence in just managing the deal with all your internal stakeholders as well as a target to just continue pushing on all fronts and making progress. So if you think about, don't just send a diligence request and then wait a week this year, what happens? Make sure you have touch points regularly in between, checking up if there's any issues, making sure that you're dealing with things back and forth. So all those tactical things can help streamline it. And in terms of how we do it and how we streamline things, like process-wise too.

49:11From all the places I've worked at, we're still pretty old school in how we manage deals. Use a spreadsheet for the most part, go back and forth. There's shared docs now, but still pretty old school. But we try to make sure that everyone works against the same documents. Someone from the dealer and sales team is going to hear this. I know, I'm waiting for it. I'm waiting for it. Don't think that that has anything to do with me. I'm going to have my spam filters on. Prioritization and being pro. I think that's the biggest takeaway from this conversation is you could get a deal done for the sake of getting a deal done.

49:43But if you really want to get the deal done well, it's just that proactive effort, prioritization, a clear focus on those value drivers, but being really proactive on it. Because you could just say, oh, you know, here, we got a hypothesis of this and you use it and float it to get the deal done versus bringing in the right people, having the tough conversations, going to that level of detail. I feel like that's like the real big difference between the dealmakers in the market. Because like I said, you can easily get the deal done, but can you really do the deal done well? That's exponentially more work.

50:14Yeah, it is definitely more work. And going back to most places have a standard list of diligence questions that you kind of have to go through. But if you really think about what needs to be answered when and how you present that to the other side and make sure they're focused, that helps streamline it. I agree with all those points. Awesome. What's the craziest thing you've ever seen in M &A? No deals alike. So one of the craziest things was actually when I was doing a divestiture, maybe it was eight years ago or so at this point, where we're trying to sell off a part of our portfolio. We didn't find a buyer to make the sale worthwhile.

50:52We went to all these interested parties that we think would make sense. None of them did. It wasn't worthwhile to keep the business going. And so we decided to shut it down. Then when word got out that we were going to shut it down, the former founders of the business, who had since left the company already, took to social media to petition our CEO to change his mind on the shutdown. So don't shut down our business, our baby. We've left the company already, but we don't think it's the right decision. pay community of users, come support us and rally against the big bad corporate that's trying to shut down our business.

51:33There was a lot of public pressure from this user base to then make a U-turn and find an alternative path. Even though we had all the plans laid out to shut down the business, we were pressured into changing our minds basically and eventually came up with a plan to sell back the business to the original founders, who at the time were sitting on a beach, weren't doing anything active. And so literally, they had to spin up their own servers, their own people, try to even create an entity to even take this thing on. Because as of 24 hours ago, they were basically not even operating anything. We had to do all that in a pressure deadline because we had, for regulatory reasons and others, a plan to shut it down by X date.

52:23And we had to basically do it all and set up TSAs and everything else ahead of time. It was a crazy process. We had one plan and then a post on Instagram came along and changed everything. So yeah, that was a crazy thing. Ex-founder activism. Yeah, that works too, apparently. They probably got a discount. Oh yeah. Yeah. Yeah. They did. That's a crazy wild story. Jen, this has been a great conversation. I want to thank you for taking the time, schooling me on some things, helping me become a better M &A scientist. Glad to help and happy to be here. Thanks for having me. Fellow M &A scientists that's listened through this whole interview, I love you.

53:03I appreciate you taking the time with us. Feel free to connect with me on LinkedIn. Reach out. Love hearing the feedback. I'm open to the criticism. I want to get better at doing this. Any other ideas for topics or guest recommendations, always appreciated. Until next time, here's to the deal.

53:45We'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.

54:28Views 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.