Lessons from the Trenches: Mastering Tech M&A, Integration, and Carve-Out Strategies Part 1

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1:28Here's to the deal.

1:34I'm Kisan Patel and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:58Hello, M &A scientists. Welcome to the M &A Science podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M &A practice or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com and subscribe to our free weekly newsletter. If you want to keep up with us on the go, head over to LinkedIn and follow M &A Science. I'm your host, Kisan Patel, founder and CEO at Dealroom and chief scientist at M &A Science. Today, we're kicking off a special two-part series with Dr.

2:36Amit Munga, founder and CEO of Sarah Point, a strategic advisory firm that focuses on value creation, growth initiatives, M &A, capital advisory, and governance for public and private companies. Amit has previously worked as an investment banker, venture capitalist, and founded a vertical market software company. Over the past two decades, he's been a trusted advisor to the boards and management teams of some of Canada's largest high-profile public and private companies, assisting them with equity and debt financings and M &A. In part one, we'll cover key lessons in corporate M &A from balancing strategies to managing pipelines and staying aligned with the board directives.

3:17and part two, we'll dive into software valuation trends and tackling carve-outs. Amit, how are you doing today? I'm doing great, Kassan. So nice to be on this podcast with you and incredible, all the great work that you've been doing. I've learned a lot from the previous podcast as well. Hey, thank you. And we're here live in Toronto. Amit, can we kick things off a little bit about your background? I grew up in India, did my engineering, mechanical engineering, came to Canada to do my PhD two decades ago in artificial intelligence. So I was maybe two decades too early. And then I went into consulting.

3:51Following that, I actually started in a software company, vertical market software for a company focused on higher education, sold it, came back to Canada, was a venture capitalist for three and a half years, focusing on life sciences companies, and then spent two decades in investment banking, focusing on technology companies. and now I have my own M &A advisory firm where I basically work with the C-level executives and the boards. PhD in engineering, consulting, founder of tech company, VC, IB, some corporate M &A. The engineering degree wasn't enough. Exactly, but having said that, a lot of my PhD work is getting cited now, so I'm tempted to start an AI company.

4:33I'm always fascinated by those with engineering backgrounds. Those are the ones that are dangerous in the M &A field. I think you know why. It prepares you for a lot of uncertain things. We are engineers are very good at scenario planning and designing stuff. And as we know, M &A, as you say, is a science. You got to be kind of looking at all different things that could go wrong and then see how you can mitigate them. So the engineering training is definitely helpful. Just looking at your whole career, all the deals you've worked on from pretty much every angle. What are the key lessons from the trenches that you think are important for anybody in corporate M &A to know?

5:10I'm a big believer of starting with first principles. What is a strategic rationale for why are you doing this acquisition? Is it you want to go into a new market? So is it market driven? We're going to talk about technology companies. That's where I've spent most of my time. Is it a strategic technology that you want to acquire, for example? So is that what's driving it? Or in some cases, is it people? So we are seeing a lot of enterprise software companies today. They're looking at AI companies. So in some cases, the products are not there yet, but they definitely want to acquire the team. So that really is, I feel, what drives that.

5:45And then, of course, it has to make financial sense. So I think that's super critical. And then let's talk about corporate M &A. And corporate M &A is very important because for a corporation, it's all about growth. They have organic growth strategy, and then M &A kicks in when it comes to inorganic growth strategy. So sitting down, understanding what products they have today, how do you complement that through M &A? That becomes very critical. Sitting down with the board, understanding, for example, in some cases, when we have spent time with the corporate M &A teams, the boards have said, listen, we've decided that we have a very good footprint in North America.

6:25we want to expand into Europe or we want to expand into Asia, for example. And then in that situation, what we're looking at is basically a corporate M &A strategy with the good direction from the board and proactively looking at targets in that area. I'm a big believer of getting the buy-in. If you do find some interesting acquisitions for a corporation, starting to do a little bit of homework to make sure that the integration goes well. That's how I would position some of the lessons and also things to watch out for when you're doing corporate M &A. First principles, strategic rationale, really driving into the why to M &A.

7:04And you also referenced the broader corporate strategy, referencing M &A as a tool to use against the broader corporate strategy. And then the game plan execute to have that level of focus on integration. In our discussion today, you're going to see I'm going to be using no surprises. So what you want to do, especially in a corporate M &A scenario, keep aligned with the board. So if board says, hey, we should be looking at an expansion into Asia or a specific country, let's say in Europe and UK and stuff like that, want to make sure that you basically are executing on that plan and not going a little bit off strategy kind of a thing.

7:42So no surprises, keep the communication lines open, even with the business units over time. I don't know why. I just want to challenge you on this right off the bat because I'm Indian. I'm just inherently cheap. And I struggle with this because I understand I've done a lot of these interviews and you really understand the value of being cohesive to your strategy and communicating it. But then I'm also deeply rooted in being very opportunistic. If I see a good deal, it's a good deal. Why can't I pursue these deals? But it looks like it's a 50 cent on a dollar play. I'm happy to introduce the concept of what I call proactive strategy and then the reactive strategy.

8:18Let's talk about that. Definitely you want to have a proactive strategy. You want to keep your team busy. You want to basically make sure that they're tracking your ideal targets. And we might be tracking some of these ideal targets and say, they're not ready yet. Or they just did a, if it's a private company, oh, they just did a financing. These guys are valued at $500 million. It's not going to go anywhere. It's not accretive for us and things like that. But there could be some catalyst or some event that happens. And all of a sudden, And now what you do is that target becomes available. There could be some issue with one of their product lines.

8:54All of a sudden, they need to basically sell the asset. So the key is manage your funnel. And at the same time, be ready to pounce on any of these opportunities. And actually, I did that all the time. I would say, what are some of the aspirational companies that you want to go after? We'll continue to track them. And then all of a sudden, someone has to carve out a piece because of the regulatory issues. Two big companies are merging. And there, if you can move fast, you basically win. You basically walk in, you say, listen, fully financed offer, ready to close in 45 days, 45 to 60 days. And the guys are like, perfect.

9:34And at that point, if you engage with these people, you can basically say, okay, I want now, I basically want an exclusivity. you lock them in and you move fast. So you're absolutely right. You have a proactive approach and then you have a team that is willing to be organized to take advantage of these opportunities as well. Well, I was thinking of the same one, your carve out example, which tend to be pretty unique, complicated, but they're not always going to be right in your core. You're proactively building a pipeline that aligns with your strategy, but it sounds like there's obviously stuff that comes to you.

10:07Exactly. A day in the life of a corporate development team is you always are getting inbounds from bankers. A couple of them are like, hey, have you thought of this? And then you ask them, do you have a mandate? Not really, but we're just like testing the market. In some cases, there's an active sell site going on. So you said, hey, we're running a process. Are you interested? Yes. Send us a teaser. We get the teaser. We basically look at it. Are you interested? it, yes, sign the NDA, get the SIM and kind of move forward. So you always will have that piece. And then you're also are doing your second job, which is these are the things that I want to buy.

10:46Continue to track those companies, continue to track their financings, continue to track. Oh, wait a minute, they're laying off people. Does that mean trouble? That's the perfect time to have a conversation with their investor or with their chairman of the board and make that move. So it's always your tracking stuff. How do you rate this in your pipeline? You would rate that as actionable. Obviously, you rate that as actionable based on the information that's available to you at that time. So you might say, these guys just raised$50 million. That gives them another two years of runway. There's no way these guys are going to trade.

11:20But something could happen. All of a sudden, it's now actionable. So actionable, non-actionable, six months, 12 months, 18 months, 24 months. Okay, so you're looking for indicators to tag them as actionable. Exactly. Otherwise, they're in your pipeline, but inactionable. Or you track them. You're not intensifying your approach yet. And also, in some cases, the companies might be valued too high. So it's premature to approach them. What about these things that aren't really in the corporate strategy that are out of the scope? And the ones I did fall more into that opportunistic. There is a separate bucket of have you thought of this?

11:58Idea bucket. like yeah the idea bucket and again it shouldn't be a totally different business obviously in some cases people might say there are companies that basically are acquiring companies for cash flow for example and there are diversified companies they have certain metrics around financial metrics that they want to basically track their shareholders buy their stock because they want to get a certain kind of a dividend their corporate strategy is just purely cash flow Exactly. Or it's a financial driven. So they don't care if you're in different industries and so on. What happens is over time, you know, a certain industry really well, all the players.

12:36So you start acquiring those companies in that space. But there are examples where there will be companies that actually have very, very different businesses. So that's one example. The second one would be where you look at something and say, hey, wait a minute. Can't I cross sell this product to my existing customer base? or I want to go into this space, the only way I can do that is by actually acquiring the company. There was an example of FedEx and Kinkos. You basically have FedEx. We all know FedEx, delivery company, but you also ship documents back in the day. Some of the people were like, what is that?

13:13Did you actually ship documents? But you would have to photocopy stuff. I remember when I started in investment banking, I had to carry pitch books with me to meetings. So a lot of times I would get on a flight from Toronto and my assistant would say, hey, another person there will be at Kinko's with all the pitch books, all their copies waiting for you. So now you say, hey, this makes perfect sense because you basically have a courier company and you're basically acquiring a company which is a destination for documents. That's helpful because I always struggle with how much weight you put on this anticipation of synergies on the deal you're doing versus I'm just being hardcore opportunistic and buying at a discount, prioritizing that.

13:57It has to be a combination. That's the best. Yes. Yeah. The synergies have to be in your model, at least in these scenarios. There are also examples of companies, what we call consolidators. They are software companies that do consolidate companies. in some cases, they say it's actually absolutely fine to run them separately because sometimes they're buying companies and they're saying they're profitable. We don't need to create artificial synergies kind of a thing. If organic synergies automatically happen, that's fine. But we're not going to force a shared platforms for HR or not force a shared platform for different financial systems.

14:35Let them happen organically. So what is an organic synergy? It could be like acquired two companies. We're not planning to integrate them, but wait a minute, we all buy Microsoft Office. We can leverage discounts, the company discounts. So synergies automatically start falling in, but you're not forcing it. So I'm not starting with saying, wait a minute, we have six people in HR here. We have 12 people here. We only need eight. So we'll need to figure out how do you do that? I've seen this play out where you go through the modeling exercise and to make the numbers look good and get the deal approved, you tend to that forecast a lot of synergies.

15:10Well, the thing is on buy side, especially if you're in the corporate M &A team, at the end of the day, you need to defend your numbers. People will come back. They will say, actually, your platform does that a very good job. Not to plug in deal room here. One of the unique things that you have is integration monitoring. So funnel transaction. As an iBanker, I basically spent most of my time transactions, right? It's like, hey, man, we did that acquisition. You know, like people don't like that. But I was like, okay, not my problem. But if you're in a corporate M &A team, you own it. So when you model synergies, as a matter of fact, what I've seen the best practices, you under-promise, over-deliver.

15:49You basically model synergies, but you're very conservative so that you basically want to make sure that it works out well at the end of the day. That's also is a very big difference between buy-side and sell-side M &A. That's a good point. Be conservative, modeling synergies, game plan to execute, big part of it's integration. We're already coming back to emphasize integration. How do you approach just even the fundamental decision of integrate this company? If we do, how much do we integrate it? Culture. Let's say I'm an enterprise software company, old school, the IBM days, my Navy Blazer, my Dockers and so on, and I'm selling to the banks.

16:26All of a sudden, I have to actually acquire a fintech or I have to acquire like an AI company. I go to the Valley and it's a totally different culture. there is no way I'm disrupting that culture. There is no way I'm saying, hey guys, actually, we all come to the office 8.30 in the morning, and these are the things that we do. We have company offsites and so on. We need to kind of make sure that these acquisitions that we do come with a different culture. That's the reason they thrive. And we want to make sure that they thrive in that environment. You basically bring them into the fold, but you do not fully integrate them.

17:03Now, it's easier if that acquisition is in another continent. You're not going to run into them. But it's harder. You're headquartered out of New York and you acquired an AI company in New York. It's tough because it's like you and I, our CorpDev team, our quarterly meeting, we're going to go and visit them. You got to dress down, man. Don't wear a suit. These guys are in sweatpants and whatnot. You need to be very cognizant of that. Now, if you're in a different country, it's not an issue. I've looked at companies in India, for example, totally different culture, work ethic, and so on. I've looked at companies in France.

17:38So here I am saying, okay, guys, we will be meeting in August for our quarterly updates. The guy's like, we do not have any meetings in August. A lot of people take time off in August in France. I was like, oh, okay, yeah, that's true. Need to move things around. So when the cultures are different, integration becomes tougher. Having said that, there are a lot of things you can do behind the scenes. financial systems and things like that. One of the selling points for a big corporation, for example, that wants to acquire an AI company would be, listen, we'll take over all the stuff that you hate.

18:13You don't want to hire 10 people. We've got a machine here. The HR machine will take care of it. You just guys do what you're supposed to do. That's the way I see that. It's very culture driven. That's interesting. Big emphasis on culture and the likeliness and developing your strategy for integrating the company. I got one for you. So I have an investment thesis to consolidate data room companies. You own a data room product, firmroom.com, if anybody's interested. The idea was taking these old data room platforms out there. A lot of small companies, been around 15, 20 years, pretty stagnant, slow declining, and cost synergies.

18:46Migrate the customers on the new shiny platform, better experience, and then cut costs everywhere. But I come across a deal in another country, completely different culture. Just the whole ecosystem is very different. the way they operate. And you can tell the product is actually really good. It's not a bad product that's that far behind. How do you look at it on that example? Because it goes completely against the thesis. In fact, the more you try to integrate, the more you're going to break things. And the company is profitable, 35 % EBITDA margin. Do you still look at that deal? Or do you say, hey, this doesn't fit in the thesis because it's not going to drive the cost energies that we anticipate.

19:19And we're sort of going global too fast. I mean, I've been through those scenarios multiple times. It's a great... Teaching what to do. Yeah, exactly. You're getting free advice now. What's going on? That's it. People don't know. That's the reason I do this podcast. Right off the bat, if it makes financial sense, I'll go for it. If I've got the right valuation, it has to be very important for me. The valuation is right so that financially it makes sense for me. I actually would run it as standalone for almost a year and let the synergies happen organically. So what does that mean? I'm going to run it.

19:53Of course, you do your due diligence based on what the company is today. Standalone companies, if you have your own private equity fund that exclusively invests in deal rooms, how would you evaluate that company? You have your criteria, whether it's 20 % IRR or 30 % IRR, you do your math based on that. And then you basically say, okay, now I'm going to actually bid on this company. And they say, hey, we really like you. Absolutely. Acquire them, continue to run them as a standalone company. It's 100 % own sub of deal room. Now what you're going to start looking at is the next three to four months is your best salespeople looking at their customer list and saying, can we upsell them something?

20:38Right off the bat, I'll tell you, I don't know. I haven't seen that many products that actually has an end-to-end platform from a funnel to a transaction to integration monitoring. So let's say if those guys were primarily catering to investment banks, for example, investment banks really don't want the integration piece. They just want the deal room. They want the data room. They want to track who's reading the docs. It becomes like the deal room pops up when you sign the mandate letter, and then it disappears after the deal is done from an investment banking perspective. But now you can say, go to the guys and their salespeople.

21:15I was like, hey, we actually have this product. you have been working with some of your corporate clients. Have you offered them a second piece, which is basically post acquisition. So now you are slowly introducing your innovation into their product. So now this is where a little bit of technical piece comes into play, because now I'm used to seeing a certain kind of dashboard. Now, how would I integrate or seamlessly transition into a deal rooms, the next module, if you will? So that's where the science and the art of the science kind of comes into play. So if you know your space, you know your end markets, you know your customers, start doing the consolidation, but don't start with the thesis that it only makes sense if there are synergies.

22:02The synergies, in my opinion, is like if you can really realize the similarities, that's where you actually make that extra kicker. I got to admit, I'm impressed how much you know our business. I thought you already game played this out. Shout out to Lizzie for that demo. I mean, she went on eBay. She's like, okay, I got to go through this. And have you seen this? In this view, in this example, it's less about being part of the thesis, almost a hypothesis. Take note of it, but we're not going to factor it in. We are going to buy this, assuming that we're operating it independently, have it make financial sense, but it's in the same realm.

22:36And there is some unknown likeliness of getting some kind of synergy there. Absolutely. And then learning the market, because we do want to get to Europe, but we're about two years out in the current roadmap. At least it sort of gives us an opportunity to start learning the European market with working with this business. Imagine like you're at a European private equity M &A conference and they have a booth, this company, and you basically send one of your really good salespeople, ideally pick someone who is culturally aligned with that country. We live in North America. We can always find someone who has a connection somewhere and watch what questions people are asking.

23:11And then have this person say, hey, by the way, this is my colleague. He's visiting from Chicago or New York. And this is the product they have. It's like, you know what? We could really use the integration piece because the M &A piece was seamless because we had advisors and stuff like that. But now I got spreadsheets to track integration. We can show you a demo. Phase one could be that it's their product, but then you sell them the separate module. But over time, hopefully you can actually create a technology roadmap that's fully integrated. A pretty good example is how to role play this out in terms of what the plan is to integrate a company.

23:46Yes. This example, it doesn't have the culture element, so we keep it as a standalone. And the other example, that might be a company, for example, that we have a partnership with. Let's say one of the data providers. Yeah. I don't want to cite anybody specific because somebody's going to ask me some questions later. But let's say we have a really good partnership with one of the data providers. Sure. And then we decide to acquire that company. Again, tight partnership. we're already doing some joint sales together. In that case, there may be a totally different plan. They're both similar. We're talking about they got team members in New York.