Key Regulatory Considerations for M&A in the Current Market

24:40Yeah, exactly. I want to address the big elephant in the room about is competitive M &A bad? But I want to put it out there. I've really been trying to get a view from the other side of the table. We've had an official response from Linda Khan that she declined an interview. So if anybody listening to this podcast has some connections with any of these regulators that we've discussed, I'm sending an open invitation because I know what we're going to talk about is going to seem very biased. I want to put that out there that I am more than welcoming to get the view from the other side because there's things you can always learn.

25:16And plus, that's how you win debates. You learn the other side's perspective first, and then you can fill in the gaps accordingly. Or they're more inclined to listen to you at that point. So if anybody has a connection, reach out to me, let me know. But let's talk about this. Is it really bad? You've done enough of these deals. You got to have a view on this. I do. And to be fair, it's probably going to come off as very biased. Exactly. That's the whole point. That's why I put my own disclaimer. I'm welcoming the other view. It's a great question. And I feel like every M &A professional should constantly ask themselves.

25:43And let me try to espouse the opinion of the regulators for one quick second, right? Because I think there are, and if Lita Conner, anyone on our staff heard this, they'd probably just poopoo all over my opinion. But I look at two things that they're very focused on. One was something that when I was at Intel in particular, we were very cognizant that the regulators were concerned about, which is the so-called killer acquisition theory. And not to pick on meta Facebook, but they were one of the examples of folks that were doing so-called killer acquisitions. The idea being that before a small startup or a smaller company comes up with technology, comes up with a product line or a business that could compete with the core business of a large tech company in this case, they would buy that company, they would kill it, either kill it internally, bury it, or just loop them in into their existing offerings, thereby eliminating any future competition.

26:33I think there's some credence to that. I think there's some credence to that. At the same time, these smaller companies, more often than not, do not want to become the next Meta or Google. That's not their goal. Their goal, in fact, is to be acquired by another company or by a fund or PEVC. That's their goal. And that's their stated goal. Not everybody can become the next Microsoft. It seems like such an obvious statement. And so there are folks looking to find liquidity opportunities through acquisition. I think it's very important that we maintain that funnel because that's how innovation happens.

27:06If folks thought that they'd have to struggle for 20 plus years at their company, I don't think we'd have as much innovation these days. Again, I get the killer acquisition theory, but I also need to acknowledge the need to have that funnel, whether you call it liquidity or other opportunity for these startups, right? For people to be incented to start companies and to make quicker money than 20 plus years. I got point one that this is the American dream. Yeah. Build a startup, sell it for Vuku bucks, and buy a mansion Lambo jet and call it a day. That's the American dream. We should foster that.

27:39That's what's driving entrepreneurs, all this innovation technology, fundamentally. Also, the capital, the private equity firms that are sponsoring a lot of this, the VCs as well, are dumping a bunch of bucks with anticipation that they're going to get an exit on this. The capital they're managing for large institutions, all of that is espoused around the investment thesis that invests money in, it's a return back out, puts it back in shareholders' hands. Everybody's happy. It's a win. That's the big fundamental driver, 0.1. Now, the consumers that get screwed when all these acquisitions happen, because I think that's part of the position here, right?

28:20My cell phone bill just tripled when the T-Mobile deal got announced. When Ryan Reynolds became more of a billionaire, yeah. Yeah, Mint Mobile. That's like the big position that they hold to get the public advocacy of why they're scrutinizing M &A is because we're protecting the consumers. We're looking at like FTC particularly. Yeah, I think the FTC's intent is correct, that they do need to protect the individual consumers and some of the smaller businesses that are impacted by big M &A. My personal opinion is that there are better ways to do that rather than, I'm close to this, obviously, rather than what seems to me sometimes a blanket prohibition against big tech M &A.

29:01I don't think that's the right tool to use. I think there are a myriad of different tools and policies, laws and regulations that they could pass to foster innovation, if that's what they're looking for, to protect consumers without necessarily just chopping off the funnel that is M &A. It's a fair point, but it seems easier to do than trying to create some rules and enforce it. The sexier front page story for the FTC, for the DOJ, and some of these regulators is that they're stopping a big deal because it, and they're saving competition that way. I get that, that there is value and there's need for that.

29:34But if you get down to it, if the core, for example, is expanding innovation, but let's say that's one of their central tenants, there's a whole host of things that they could be doing, right? There could be tax incentives, there could be grants, There's a whole bunch of stuff they could be doing to increase innovation, again, rather than just trying to stop certain types of M &A. How have you seen it pan out and really impact customers negatively? I would say it hasn't that much. And I'm not just saying this again, because I'm biased. But throughout my career, whether it be in private practice or in any of my in-house jobs, I will say that a lot of my transactions led to the acquired company being able to offer their product to a larger audience.

30:17Oftentimes, we were able to lower the cost of goods sold. Margins increased that way. The reason being that the bigger companies usually have a better supply chain, better vendor agreements, things like that to push down the cost for the smaller companies that don't have those same synergies. For the most part, we were able to, in fact, better proliferate the product of the acquired company. That said, not all MA works out. There were also deals where the company and the business that we acquired probably didn't do as well as they had hoped. I would say that's not due to any particular anti-competitive issue.

30:55It was really the more mundane, small company being suffocated by the bigger company type story. The integration wasn't as smooth as it could have been. The teams, the executives that transitioned were unhappy working for a larger company. There's a lot of that. Not all M &A works out anyway. I think the hit rate is just around 60 % of deals that actually hitting their valuation thesis. Fundamentally, these deals start with a vision to create value, acknowledging you have your respected way of delivering value to your customers. We have our respected way of delivering value to our customers. As a combined organization, let's collaboratively work together and see how are we going to improve that ability to deliver value for our customers.

31:39That's what it seems like is the basis of doing deals. And yes, sometimes integration. I think that's the biggest thing that's happening in the industry right now is we're maturing our thinking around how to integrate companies and making that better, which leans me to the employees. Is there any considerations around that? I feel like they're the ones that really have the biggest challenge to get impacted. But is there any considerations when we think about all these regulations around employees of the companies? Absolutely. We talk about the 12 to 18 month regulatory waiting period and the impact on the business.

32:09How do you run a business? But for both the executives and the rank and file employees, they've got this cloud over their heads until the deal actually closes. The deal documentation has a set of covenants that restrict and permit certain activities of the seller, which makes it difficult for them to run their everyday business that they were used to before signing. It's tough. I think the way to address it is to be very transparent with the selling company and their employees as to what's happening. It should be that the selling executive team that sort of explains, look, we might be in here for the long haul, but we think it's the right opportunity for us.

32:46Here's why. And in the end, you guys are going to get compensated to prove really all that stuff. But it's been tough. And I will say, I'm aware of a couple of deals in the market right now, where we said, look, not we, but the buyer said, I don't think the selling team, which is composed of a bunch of serial entrepreneurs is going to wait that long for this deal to close. They love to build. They love to create new businesses. So if we have to wait 12, 18 months for this deal to close, we're going to lose the key talent that we want. The practical impact in the end is that a lot of deals that historically would have at least got to sign have not even gotten close to sign.

33:22We have a lot of little thoughts around this. But it is interesting that this does create a lot of additional challenges, but mainly a lot of stress for a lot of people dealing already with a lot of complexity and change that they're going to endure, but prolonging it and adding on to it. So not a healthy thing, which is our stated case here. Again, if anybody knows anybody at any of the regulatory institutions we mentioned, open invitation, we'd love to welcome them to the podcast and have a conversation to get a deeper perspective from the biases we didn't talk about. This is obviously a huge challenge with regulatory issues.

33:56But reality is that only impacts a rather small fraction of the total M &A deals. What are the other deal killers that you see more likely to be encountered in M &A? For the more traditional M &A transaction that may or may not be reportable, call it the sub-billion, sub-half-a-billion deal, where you're buying an established startup, Series B, Series C. They've got revenue, maybe a little bit of revenue. or you've got customers and you're buying both the technology and the business. For me, what I'm continuing to see in the market is issues around the intellectual property of that company. And what do I mean by that?

34:38A lot of times you have companies that are really focused on all the things I mentioned, generating revenue, growing the business, and they forget to focus on ensuring things like ownership, registration of IP, trademarks, patents, copyrights, algorithms, all these things. That's a really key thing that, for example, when I'm doing my diligence on the legal side, that's probably the first thing I'm looking at. It's not always intuitive. And more often than not, it's not straightforward. And I'll give you a couple, I'll call them orange flags, not necessarily red flags, but orange flags to look out for, both in the US and abroad.

35:16A lot of times you have folks go through university or college in the US, for example, and they'll get funding from their university, which is great. Good on them to have gotten funding from a big public institution. And they go from there. They go, they do really well. They get a product, they get customers, but they forget that because they took funding from a public research institution, for example, that public research institution or university often has ownership or some claim to the intellectual property that was developed using their funds. Another more extreme example is in Israel. They have what's called the Israeli Innovation Authority.

35:54It used to be called the Office of Chief Scientists for folks that may be familiar. They also issue very frequently, in fact, grants and other funds to folks that are coming out of university or starting up the business. And again, because they were extending these funds, the Israeli Innovation Authority has a claim to certain of the IP and certain of the ownership of the technology that was developed. These are, for me, again, they're orange flags because what we're seeing more often, or I guess more often than you might expect, is that founders and executives from selling teams don't always realize that their IP is encumbered by these liens, by these government ownership claims.

36:35They're relatively easy to clean up. Usually, it just takes the money and there's a negotiation that it takes some time. But for technology technology companies in particular, especially companies that were founded when folks were ran out of college or they dropped out of college and they created a startup from there. We're seeing this more often again than you might think. And it surprises me sometimes that some buy side clients forget to check on these types of things. From a practical perspective, what I would say is when you're doing diligence, don't just take the word of the founders and the executives and the CTO that they own all their IP, that they've developed it all in-house.

37:13They may have done all the necessary grunt work, but if they took funds or any sort of grant from a public institution, that's something that buyers should diligence and make sure they clean up as necessary. I like how you went to IP. Of all the things in my head, I was thinking tax, employee, what liabilities are you claiming in the customer contracts? but IP is the one that I didn't even think of right off the bat. You're right. I want to get an understanding of where exactly are the deal breakers in there. So for example, we have a whole series of trademarks. And I know we got our exclusive trademarks.

37:50And we have a couple that we got supplementals. And we're now appealing to get the exclusive on that. Is that a big deal? Our main brand? And we're still petitioning for that. Would that be a deal killer? Or is that? I don't know. Probably not. I will say that, for example, if you're buying a company with a trademark as valuable, say as Coke, something like a name brand that everyone knows globally, then it might be more of an orange-ish, reddish flag, but still not a true deal killer. Where this really becomes more of an issue is, in fact, in the pure technology space, when you're developing code or patents.

38:28Because in those situations, it isn't always clear who contributed to that IP. You can't always just cut it up. I was going to get into that one too, because a lot of the open source, right? You get frowned on when you have a lot of open source in your tech stack. But when I look at this software landscape and the direction it's going, everything is becoming a whole series of different tech stacks. Open source comes in play and it shapes and form. And then we have all these no-code platforms that are emerging and low-code platforms where you're just leveraging so many different things. And I'm not keeping track of that.

39:03I got to call Mark every time and hey, I'm about to sign up for this platform. I need to read through the terms of use and make sure that we're protected on this. No, we just are building it. So we want to create a startup over the weekend and get to market. Where does the deals break in those situations? Like I said, I'm given where it's going. I'm just like, how do you deal with it between... I get the 10 years ago where it was really specific. It's now they don't have IP on this stuff. But I feel like things are getting really blurry. It absolutely is. I do not have an answer for you on this one.

39:34We as a legal team, in every job that I've had, have really tried to grasp the enormity of this issue. And I'll say one further complicating factor, in fact, is you have companies today in particular, like OpenAI, GenAI, and the code that these companies are using will be deployed to different customers, some of which is open source, some of which is public, but some of which is very proprietary. I think that is a further complication as folks try to integrate this into their own code stack. So it's a long way of saying it's exciting for me as a lawyer, but I have zero answers at this point as to where this is going to end up.

40:12It's super complicated. Finally, I stumped you on something. That was my whole goal. We can wrap it up here pretty soon now since we got to this point. Right. You're right. It's going to be really interesting to see what becomes market for all of this emerging forms and utilization of technology and data sets. I'll give you one example of why, again, it's exciting, but also terrifying for an attorney in particular. It used to be years ago that everyone was really focused on patents, protecting your patents. This is mine. You can't touch anything that looks like my invention. All of a sudden, you're seeing a transition, slight transition, depending on the industry, obviously, that you're in.

40:48But you're seeing a slight transition away from patents and how valuable they are to any particular company. And the reason for that is because a lot of these standards in the patent world, for example, are more open. They're proliferated in different technologies. They're just not as proprietary and they're not as valuable as a result. And the question that I have for a lot of real IP and tech trans attorneys and technologists is that also happening, this is your point, in software and code. Because it seems like it is. And if it is happening, does any of the stuff that we're doing on the code side and protecting it, protecting our algorithms, protecting our code, does that become less important?

41:24And the interesting thing, and again, I don't have an answer. The interesting thing is there are a lot of technologists that suggest it makes it more important because as things get muddier, you need to make sure that you know what's yours. It's never as easy as just putting a container around your stuff. It's infected. It's included in so many other things. So it'll be an interesting, they'll call it four years, four or five years to see where we end up, especially as the Gen AI stuff really starts to kick off. Can you give me an example of a deal that broke around something IP related? I just want to get a sense of the real nature of when you actually break the deal around IP.

41:59I unfortunately have several examples. But going back to my patent example, the main one is folks did not, the selling company did not realize that they did not have adequate protection over their technology. And so what had happened was picture a pizza. And there are eight slices to that pizza. And they thought all eight slices of their pizza was theirs. But you need the entire pizza to run the product. turned out half of that pizza was actually owned by somebody else. There was third-party IP that was included. And for whatever reason, it became much more incorporated and much more utilized in the end product than they knew.

42:41They weren't the smartest folks, I will say. They weren't really minding the shop as well as they should have. But through the years, as they started to commercialize their product, they realized, oh, actually, or we realized actually, that most of their technology and the key technology that was providing value to their customers was actually a third-party technology that was licensed in to their product. And as we dug into it, we said, we're actually buying your stuff. We're actually going to have to continue paying licensing fees to all these other guys and paying you a premium for your product.

43:11We could probably do the same without buying you and just licensing the product. That story came up at least a half dozen times on different transactions I've worked on. That makes sense. Especially if it's that key component the secret sauce is that technology. And that's what we do in tech. We repurpose it in different areas and you want to have rights to it, especially if that's the secret sauce. Exactly. Because it was third party, to your point, we couldn't manipulate it any further after that. So you're right, without paying a whole ton of money. That was a good one. I don't know if we have any other parting advice or words around our topic and dealing with regulators or being mindful of your IP risk.

43:46There's one thing that I will counsel. Again, this is from a pure lawyer's perspective, but one thing I'll counsel for executive teams, for deal teams, and really for any team that is working on a potential acquisition. And that is document hygiene. So when you have a deal that's reportable to the regulators, you need to make a filing with each of those regulators. And the filing also requires you to submit a whole host of documents, including internal documents, around your analysis of the deal. What can very easily kill a deal? I won't give any examples now, but there are plenty in the market as recently as in the past five years, which you'd never want to include in your internal documentation.

44:25By the way, that includes your emails, your non-privileged emails to your buddy down the hall, is something that could be deemed anti-competitive or something that is disparaging of the other side of the regulators, which has to seem anything that could force a regulator to react and block a deal. So a couple of examples are that we want to buy them. because they'll be our biggest competitor in the next five years. Or we want to buy their technology because it's better than ours, but we don't want them to compete with us. Or we should buy this company despite the fact that they are misogynistic, sexist founders.

45:05All of those things, you probably shouldn't buy that company anyway, by the way. But making sure that your documentation, which again, ends up being pulled and submitted to the regulators, is clean or as clean as possible, I suppose. that's going to be key in particular, given this current regulatory environment. When you say that, those things I can imagine coming up in internal correspondence are Slack channels, right? How is that going to end up being visible to the regulators? You will have a legal team that will go into your internal systems and pull all of that information, whether it be a Slack channel, a Teams channel, you name it, emails for sure.

45:44They'll look through your computer for anything that could be relevant to the acquisition and the acquisition story in particular. Lawyers will typically go through that. There's a process of document review and document retention. And then in coordination with usually outside counsel who are experts in this, a submission is made that includes those, all of that stuff. It's a massive stack. How the hell do I mitigate that risk? I got to work with HR and have a formal announcement of don't put stupid things in email or Slack. And putting aside regulatory and antitrust risk, I think as an attorney, and I'm sure you've seen this as well, don't put anything in an email, Slack, etc., that you wouldn't want to be included in the front page of the Wall Street Journal.

46:27I think that's just good advice for everybody. All right, writing this one down. Don't put anything on the front page or mom to read. I'm adding that on there. I like that better, yeah. Before we wrap up, can you tell me what's the craziest thing you've seen in M &A? One of my favorite stories is from when I was a junior associate in New York City. When M &A was still done in person, you'd be on the 30th floor of a building in midtown Manhattan. You had one big conference room where the main negotiation was and a bunch of ancillary breakout rooms around that big conference. And when there's this one particular deal, we were probably there for a week.

47:01Hadn't slept, hadn't showered. Everybody was just awful. Everybody's in suits back in the day too. So it was really uncomfortable. Probably the third day, again, just nonstop negotiations and yelling. We took a break, we went to our breakout room, and then the partner from the other side mistakenly walked into our breakout room instead. And just opened the door, barged in, and starts ranting about the deal, not realizing he's in the wrong breakout room. And he talks about how he starts to disparage our legal team in particular in calling us all manner of expletives. But then he also says, we should just cave.

47:35This is a shit product. Sorry, this is a crap product anyway. And we couldn't believe that he said that to us. A room full of lawyers. Our client was in the room as well. He looked up, he realized he was in the wrong room, and just ran out the door. Just ran out the door. It changed the tenor of the negotiations pretty significantly. We ended up probably signing that same night when we realized that it was just sort of all for show, just to sort of extract some additional dollars from us. It wasn't a legal issue. It wasn't a negotiation per se. he just went to the wrong room and said the wrong thing to the wrong people.

48:11And I went home after that, which is nice. Wow. That's one of my favorite stories. Because it's something that will never happen today. These in-person meetings don't happen as much these days. That is hilarious. There's a lot of egos driving that. A lot of egos. Oh, yeah. Thank you, Mark. This has been great. I'm glad you took the time to have this conversation. I learned a lot about all these regulatory bodies and the process and IP risk. Thank you. Thank you for the time. Really appreciate it. Those of you still with us, thank you for sticking it through. Until next time, here's to the deal.

48:53Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

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