M&A from a CFO’s Perspective Session 1

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1:46I'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.

2:25feels to the next level. Get started by signing up for a free weekly newsletter to stay up to date on our latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is David Barnes, CFO at Trimble. Trimble is an industrial technology company whose mission is to transform the way the world works. Their technology connects the digital and physical worlds, improving workflows across construction, agriculture, geospatial, and transportation, enabling jobs to get done more efficiently, safely, and sustainably.

3:04Traded on NASDAQ under TRMB. Today, we're going to talk about M &A from a CFO's perspective. David, how are you doing today? I'm good. Thank you for having me. Hey, thanks for taking time from operating a publicly traded company to have this conversation. Can we kick things off a little bit about your background? I started out many decades ago as a strategy consultant, realized that the consulting lifestyle had its drawbacks. And I moved to a corporate strategy group in a big technology company. And then through a series of unplanned and somewhat random events in my life, I got into finance and I've been now a CFO of a number of big private and public companies.

3:45And through that process, I've been intimately involved in M &A, mostly as an acquirer. A couple of times, sold a big business. So I've seen both sides of this process. You're all too humble. I looked you up and saw some pretty big logos, including Coors, Radio Shack, Western Union, in your background. And today you're operating, I can't count the digits you have today, and your market cap, but it's well over 10 billion. Yesterday we were 13 billion, the market's down. But yeah, we're a big company. I joined not long before COVID. So we managed through COVID in the middle of that process, we were added to the S &P 500, which brings the company a whole higher level profile.

4:21So it's been a really interesting time. Very nice. Can we talk about the CFO role in the context of how you're involved in M &A? I do oversee the corporate development teams. We manage the acquisitions and divestitures we do. But more broadly, I see my job as a CFO to be the shareholder advocate for any big decisions that we make. And there's no bigger discrete decisions we make than to make a big acquisition. I'm very intimately involved in M &A from the strategic standpoint, where should our capital go to negotiating deals and making sure we get the right terms, that we have a solid integration plan.

4:59I see myself as the eyes and ears of the shareholders making sure all that goes well. CorpDev reports up to you. You're on behalf of the shareholders doing what's best in their interests. And you mentioned integration planning. How does your role differ from the CEO's role when it comes to M &A? Our CEO was my predecessor's CFO, so he knows a lot. He's more focused on the strategic logic, and he presumes that I will handle some of the more detailed work of looking at the key provisions of the agreements we're going to make, the big terms, make sure that they're aligned to a plan that delivers shareholder value.

5:35So he's a very engaged person. He's very involved in M &A, but I and my team handle a lot more deep detail than he has time for. So he's on the big picture strategy, that narrative, shaking hands with the other CEO, making sure they feel warm about the deal. Yep. And then you're running the back end, the financial analysis, the alignment with your internal teams. Yeah, I have more day-to-day impact involvement when we hire a banker to help us either buying or selling a business than he would have time for. The thing I'm curious about, too, is when you identify an opportunity, what does that workflow look like in terms of getting through decision-making process and approvals?

6:17Because it sounds like you've got a pretty big hand right there. Does it work up through you or does it work down through you? We're very collaborative. We source deals in what I'll call two directions. There's the top-down where we're looking at really big opportunities that have resonance with our strategic theme. We're not looking at fundamentally diversifying our company because the end markets we serve offer a huge opportunity. So that's not what our M &A program is about. But we do the top-down review, looking at the biggest opportunities that fit within our framework. We also have a bottom-up process where every quarter, Rob, our CEO, and I meet with each of our operating businesses.

6:54We talk about their performance, the opportunities and challenges they face. And we hear from them about what acquisition targets would complement the business and add to the power of their strategy. So the deal sourcing comes from both within the business and then for the bigger deals, typically we're scanning the world from a corporate perspective. We have a stage gate process of making sure that we're comfortable that the fundamental strategic logic is sound before we begin real work on usually starting with some sort of NDA and a letter of intent. So we have a stage rate process to make sure we're aligned at that point.

7:31And then we have multiple stage gates as the process comes closer and closer to a definitive contractually binding transaction. The bigger the deal, the more likely it is that our CEO, Rob, is involved and he's a very detail-oriented person. So he adds a lot of value. But we have multiple opportunities where we're evaluating the strategic fit, the financial logic, and the cultural fit. Make sure all of those are aligned. Does anybody have free-range check signing ability? From an acquisition perspective, even very small ones, I have to approve. We found, and I bet some of the folks who listen to your podcast have found this, small deals can be as complicated and as fraught as really big ones.

8:10The decision to buy a business is a big one. We don't delegate those low in the business. Those are important strategic decisions. And in all cases, I'm involved at some level. And in most cases, the CEO is involved as well. You mentioned top-down, bottoms-up. What I got out of it, it sounded like top-down are these pretty big strategic, what almost fucked is like transformational type of deals. You're looking at from a very overall company strategy lens versus bottoms up, maybe from your business unit leaders or somebody in that business unit addressing, hey, here's our strategy. This acquisition could potentially help us get there faster.

8:50Does that sound about right? Yeah, it does. As I'll say, sometimes the same deals come through the top down and the bottom up. So it's a big deal. It's potentially transformative, but it also fits so nicely with what the business is doing. Sometimes we stumble across the same names of ideas from both directions. But generally, your characterization is correct. The bottom up deals tend to be smaller. They're more what we call tuck-ins. They fit within the business profile and they add either product diversity or geographic coverage or something else that the business needs to round out their portfolio.

9:23Whereas the top down, the big strategic deals are typically bolder moves in a direction that's perhaps less immediately tangential to what the businesses are doing today. How do you communicate these opportunities and even how these opportunities fit into the strategy? Are you using like market maps or is there specific tools that you're using? We have a variety of tools. I'd say we're probably more informal than formal in that regard. Good example is we're significant players in the construction software business. We sell software that enables design firms and construction firms to optimize their workflows and their business.

10:00And we knew that enterprise software would be a really key ingredient in the old shopping mall analogy, like an anchor tenant. And so we were looking for a big enterprise software provider and we bought a company called Viewpoint that fit that logic. It was just a gap in our portfolio. And about five years ago, we made that acquisition, which has been fabulously successful on its own right, just as you measure within the four walls of that business and how it's strategically pulled along the rest of Trimble. So that's a perfect example where we have a business strategy. We talk about our industry platforms for those industries that you mentioned earlier.

10:37And we can see holes where we don't have either the product or the geographic coverage to fill out the portfolio. Sometimes we partner with firms, but in that case, it made sense to do a really big game-changing acquisition to fill out what we can offer our customer. You identify this pretty clearly, like this would fit into the strategy. I'm assuming, does that get prioritized that you really clearly can communicate across the executive team? Hey, here's probably the biggest windows of opportunity that we should be looking at. Yeah, prioritization in M &A is a tricky thing because you could define the perfect strategy.

11:10This is the strategic niche we want to fill in exactly what the capabilities would be of the business. And there either might not be a company that does that and only that, or there might be a company and it's just not for sale. We're a very diverse company. We operate, as you mentioned, in construction, agriculture, geospatial, transportation. And it's a tough one to prioritize them when they're not all available at the same time. And we're very careful about our use of capital. One of the principles that we're very focused on is retaining our access to the investment-grade debt markets. There's a number of reasons why that's important.

11:44We do have situations where making a big deal, and we actually just closed a few months ago on a very big deal, the biggest one in Trimble's history. Doing that meant we wouldn't be able to do other things. Now, we scanned the universe as we got closer to that being a real idea, and we decided there was nothing really strategically compelling, a must-have asset that we wouldn't have access to because we made that investment. Now we're in the process of integrating that company and delevering so that we can be open the next time a really compelling big deal comes. But it's a four-dimensional challenge, you could say, with time being one of the dimensions where you've got to figure out how you optimize and use the capital you have to strategically enhance the company and which bets you make when.

12:27It's like a tricky version of chess. Yeah. You get a lot more discipline than I do. I feel like I'm just a bargain hunter all around looking for fire sales. We are very focused on our strategy, which has evolved over the years. We talk in our mission about transforming the way the world works, and the end markets that we serve are underserved by technology, and the technology is very siloed. The data doesn't work together. So we have this very high level of purpose that we're going to make construction and transportation and agriculture more efficient, safer, more productive, greener, all those things that you mentioned earlier.

13:00That purpose guides us and we're looking for the biggest ideas that can accelerate our progress toward that vision. Inorganic growth through M &A is a big part of how we have grown. So there's a tactical element of looking for good deals, but we're really principally focused on strategy. We're not bargain hunters. In fact, we divest a lot of businesses, including businesses which in their own right are good, but which don't either benefit from or contribute to our strategy. So we're constantly reevaluating our portfolio and we're allocating our capital, which is our money and our management time to those opportunities that really drive the momentum behind the strategy.

13:39That's how we think about it. You'll have to call me next time you're looking to sell. Not that I'm looking for a bargain here, David, but... It's interesting, man. We sold 5 % of the revenue of the company last year. Again, those were good businesses, but we weren't the right owner for it. I want to get into the nitty gritty part of being a CFO because I'm always curious around how do you balance the allocation of budgets when it comes to M &A? Because you obviously got your operating budgets for running the company. Is it defined that, hey, we're going to allocate this much for inorganic opportunities when you get these really big deals?

14:13How do you piecemeal capital together as needed? How do you think through that stuff year by year? So here's a framework. and I'll say it can be a moving dynamic. There's what I'll call internal capital allocation within our operating budgets, how we spend our money and our time on our organic growth, the business as it exists now. And we have a very diverse business. Everyone's got a good idea of what they want to spend time and money on. And if we tried to do it all, it wouldn't work. So a big part of my job is, I'll call it internal capital allocation, where are we going to put our bets to drive our business and my filter there is how much does your good idea drive the strategy of these connected solutions that transform the way our end markets work.

14:56So that's sort of one challenge is our internal capital allocation. Then what I'll call external capital allocation is all about how we take the cash flow that we generate as a business. And we're a good cash generator. And do we put it to acquisitions or share purchases? We don't pay a dividend today. And there's a balance there. It's hard to write a formula that you follow. We believe our highest and best purpose is driving growth and applying technology more thoughtfully and more wholly to connect all these solutions that our end markets need. So effective M &A growth is our number one capital allocation priority for our external capital.

15:35We have used funds to buy back shares to offset the dilution from our equity compensation programs. And we've been somewhat opportunistic when the share price was lower versus higher. That's a judgment call. Right now, we just made the biggest acquisition in Trimble's history, a company called Transporion. We're very focused now on delevering. We've committed to our customers, to our board, to the rating agencies, to our lenders that we will delever back below the level that's the typical standard for investment grade credits. So right now, that's our number one capital allocation priority. As we progress in that direction, and we are progressing, we will once again open the door to other capital allocation priorities.

16:17And the number one will be if there's a compelling business that we add value to, that adds value to us, that really drives our strategy, we'll be back in the M &A game. You just introduced a lot of financial knobs here, mentioning buying down debt and then also repurchasing stocks. Can we take a quick sidebar on you mentioned the equity compensation and that you would buy back stock to readjust for that? How does that work? We issue stock to our leaders. In fact, the CEO and I were paid principally in equity, and it's mostly performance-based equity tied to some goals. So we issue equity programs.

16:55We think it's a good way to build an ownership culture across the company. But there is a dilutive impact. So it's sort of natural to offset that dilution with using a portion of your free cash flow over time to repurchase shares, to keep the share count relatively constant. that our share issuance is actually below the mean of companies like us. But it's what, when I talk to CFOs, most of them think about that as part of their capital allocation framework. It's good to have some money to repurchase shares in the open market to offset the dilution of your equity compensation programs. And then beyond that, we're always looking at what's the best use of capital.

17:32We're in a growing business. The markets we serve are underpenetrated by technology. So our first instinct is to use that cash to add to our strategic power. We don't pay dividends. Actually, I find that most of our growth investors don't want us to pay dividends. Shower purchase is a good way, a very flexible way to use excess cash available to send it back to shareholders and yet keep the flexibility to be able to make good deals when they come your way. That's how we think about it. That's a lot to put together. How aligned do you think these investment analysts are when they're evaluating your company and starting to pick?

18:09Do they get a good understanding of all these knobs that you're dialing in? or they do we are fortunate to have very smart and engaged shareholders i will say they don't agree with each other and they don't even agree with themselves over time so when the markets were much more buoyant the enthusiasm for deals was higher among shareholders and with the recent pullback and worries about recession we have probably more shareholders that would like us to return capital to shareholders through repurchase or someday even dividends uh then was the case a year ago. But look, they all ask us about it.

18:45Our shareholders would say my job and our CEO's job right at the top of the list is being capital allocators. The cash flow we generate, what's the highest and best purpose for generating value? And they expect us to use it in that way. Now, they have different opinions. And in fact, the big acquisition we made, there were some investors who thought, gee, was this the right time to make that deal? Or the price seemed high, you know, normal questions you'd get. The one thing I'll say is that when you're talking to big equity investors, you can't please them all and you can't please them all the time.

19:16What we try to do is use our judgment and make the best decisions we can to drive value over long term. And if that means you're subject to some second guessing or criticism in the near term, that's part of the job. That's why I don't want to be in your shoes. This piece right here, I don't want to be in your shoes for it. It's a rewarding job. Look, the work I do is fascinating on so many levels. I get involved in our strategy i have a tangible sense because the numbers part of my job and the details and how it's working every month and every quarter but we're entrusted with very big decisions you asked about our market cap we've got 13 billion of equity market cap that's a lot of other people's money it's their savings accounts the investment money they've entrusted to us so it's a very serious job and it brings some stress with it no doubt forecasting when you think of m regarding that.

20:06Is some of that included in there? Part of our process, one of the first things we do is develop with the management team and validate the business plan going forward. I'll tell you, so I joined Trimble not long before COVID. At Trimble, we've got a really good business operating system of updating our forecasts every quarter. And when this thing called COVID hit, and then the supply chain crisis came down, you can basically throw aside all your forecasts. The one thing you know is that they're all wrong and you get into contingency planning. And I will say we managed through that pretty well.

20:37I'm proud of how we remain flexible as a company. But I'll say we got our forecasts wrong. Frankly, our end markets recovered from COVID way faster than we thought they would. The supply chain dynamic, which I'm sure you've talked about in your work, it was really unprecedented where goods were scarce and no one could get anything. We couldn't even begin to meet the demand we had. The hard part in most businesses, getting a customer, convincing a customer to buy something from you. That was turned on its head to the whole world was supply constrained, not demand constrained. We had a lot of trouble forecasting our way through that.

21:14And then as the supply markets normalized, figuring out what customers were going to do, that's been very difficult. It makes M &A decisions a lot harder. But that's where it's important to take a long view, because if you're buying a company for how well you think they're going to do in the next quarter or two, you're probably making a mistake anyway. So we try to see the signal through the noise and make good judgments about the fundamental direction of the markets these businesses serve and the fundamental competitive strength. Even if you get that right, you'll get short-term forecasts wrong.

21:44That's been a real challenge for us, but we continuously remind ourselves that we have to be focused on the longer term and getting that right is what really matters. I can handle anything. Just to that point, I mentioned we are really focused on staying in investment-grade credit. Investment-grade debt markets are the deepest sources of capital. It's seen by our customers and a lot of constituents as an indicator that you're a strong company. So when COVID hit, nobody could forecast. We were doing contingency plans that were really adverse. I think most companies did that. But we took actions to make sure we were a financially resilient company.

22:20It's really great that the bad scenarios when COVID came, that it wasn't nearly as bad as we thought it might be. But I'm really pleased with and proud of our team and how we kept ourselves resilient so that whatever the world threw at us, we were going to be able to handle it and emerge stronger. Very nice. Speaking of wrong forecasts, how do you look at acquisitions? If you were to prioritize the key things, is it the financial metrics first, are you clear ROI, RR, and then are you looking into the soft stuff, the culture, things like that? What's that priority that you're looking into to assess a deal?

22:53It's hard to stack them up, but I will say there are businesses we've looked at that looked really good. The strategic fit was really good. But if we didn't think there was a cultural fit and we're a unique company, I can describe what fits here and what doesn't. But there is a sense of purpose. There's a sense of working together in collaboration. There's a sense of humility that fits here. And when we find a company that's fundamentally at odds with that, that's game over. And we've walked away from opportunities just because we knew early on that the cultural fit wasn't there. But as I mentioned earlier, let's assume that's the case.

23:30And increasingly, it is. We've made some very successful acquisitions from private equity companies. And you have really financially motivated people owning the companies and sometimes in senior roles. And we've done a much better job than most strategic acquirers have of keeping the leadership following a private equity ownership situation. And that's typically because it's one of the things we're testing. What are you interested in the business you're helping to run? Is it just making money? And I'll say this proudly as the CFO of Trimble. Financial performance is important, but it's not the first thing that comes out of our mouths when we talk about why we do what we do.

24:05So we look for management teams that are really excited about changing the way work is done in their industries. And they're excited about being part of a business It has this huge array of solutions that can help make their customers happier, their business get better, can drive more growth. So we're looking for management teams that are excited and not anxious about being part of a bigger corporate company. Then we look at the financial analysis. Very often, sellers have very optimistic forecasts. So we typically do our own forecast, and we apply that forecast against a broad array of metrics.

24:40Of course, we study hard what our cost of capital is and we do net present value and IRR calculations. I found that those are so dependent on your assumptions many years out. They can be confusing. We look hard at multiples of profit revenue or recurring revenue. A lot of the businesses we're buying have recurring revenue models. So we look at those hard as a check against the valuation of the business. And then we typically put in place an incentive program. when we make a big acquisition that ties the leadership to the forecast that we've made, the financial plan that gives them either both some combination of cash and equity and Trimble.