M&A Lawyers vs. Bankers: What’s Changed and What Still Matters with Rob Kindler

26:23We had a situation just last week where we put in a very high bid for a company, a public company. and they basically said, we really don't know how to value ourselves now. We really don't. There's too much flow going on. And look, the tariffs will settle out. I don't think there's anyone who doesn't believe that at some point it will all settle out, but no one knows exactly the timeframe for that. So it just becomes difficult to do deals now. I think it's going to be relatively fine, but relatively slow for the next three or four months. Okay, teach me how to negotiate. Well, you got four decades of experience.

26:59I want to short my learning curve here. This aspiration is the business I'm running now. We got about 48 employees. We're right at 10 million run rate. I want to do M &A. It's in my DNA. I get excited about it. I want to evolve this business into M &A platform. I just want to learn from you in terms of the terms. I feel like there's always a NASB spread on pretty much every deal. How do you structure it? Do you sit there and think about multiple scenarios? Is there a way to really get in the other person's head and figure out what it's going to take to get this deal done? You take them out and get them so many cocktails to sort of get them to teach me how to do this.

27:33Thank you for pointing out that I've actually done this a lot over the last 44 years. I recently built a house. And as you noted, I'm very well known to be one of the best negotiators in the business. And because of my skill, it only cost two and a half times what it was supposed to cost and took twice as long to build. So I'm not sure that I'm the best negotiator for myself. That usually works. I actually think, and there's lots written about the art of negotiation, experience does matter because if you know what the end of the movie should be, then you know how to approach things up front. That's really the most important aspect.

28:16I, you know, involve the negotiations all the time. My client says, well, I want to take this position. I say, that's fine, but you're not going to get it. But that's fine. We can do that. and maybe we'll trade it for this. But of course, explaining why, being able to explain to a client why the other side, the rational reason why the other side of a transaction is not going to accept it, that's invaluable. People don't dig in on that. It is something of an art and takes time to learn. And it's the most enjoyable part of what I do. I really enjoyed my time at Morgan Stanley for lots of reasons.

28:54We had wonderful leadership under James Gorman, now wonderful leadership under Ted Pick. Part of my role there, I got there in 2006 with John Mack, was I did all the deals for Morgan Stanley. I actually advised Morgan Stanley when they took the investment from the Japanese, when they were who've been great partners, great partners, MUFG. And when they bought Smith Barney, when they bought E-Trade, Eaton Vance, frankly, when they spun off Discover Financial. which now is merging with Capital One. It was an advantage to me that I had seen kind of everything and was able to guide, again, very sophisticated executives in how to negotiate that.

29:37That was the best part of my job because I was able to, for the first time, negotiate as a principal. I was negotiating for the firm I was working for, Morgan Stanley. I take every negotiation seriously, but when you're negotiating and you're a stockholder and you're an employee, it gives you an entirely different and very good perspective. Any examples of just deals where you had to get really creative and negotiating to get them done? Most deals involve some level of that. It's hard to go into specifics without going into specific deals around it. We just won't name anybody or name any dates.

30:15Isn't that the legal protection? No names, no dates? No, no names, no dates. This was actually way back when, and it's in a book called Dethroning the King. Anheuser-Busch. Anheuser-Busch. I read the book. It's a very interesting book, and because I've been involved in these things, I've always been Dethroning the King, Too Big to Fail, The Engine That Could, which was all about Cummins' engine, The Man Who Owns the News, which was written about the Wall Street Journal takeover. But in Dethroning the King, which was when Anheuser-Busch was subject to a hostile bid by InBev, and the way that they may have been able to avoid that was by buying Modelo, because that would have made it too big for them to be owned by InBev.

30:59And so I was advising Modelo. In the first meeting that we had, which was in Mexico City, I basically told the client, I said, look, it's fine for you to go down this path of negotiating to be bought by Anheuser-Busch as a way of fending off InBev, but it's never going to happen. Okay. What I can tell you exactly what's going to happen when they get right to the end, they're going to use you as a stalking horse to get in Biff to raise their price. And right when you think that they're going to sign up, they're going to sign a deal with him. I'm just telling you that you would never going to get this deal.

31:34Let's try to get other things. Let's try to amend our relationship with them in certain ways. And we did, we actually got some favorable changes to it. and just as I had predicted, we were literally about to sign the agreements and we got the call, oh, we're going to give InBev one more chance to bid. And anyway, this is in the first 20 pages of The Throne and the King, but it's basically knowing how the movie's going to end. Yeah. From the client's perspective, yeah, they were somewhat disappointed that they didn't get the deal, but they were never under any illusions. They would never, and of course, The postscript to that is they ultimately did get bought by Anheuser-Busch, now InBev, at a much higher price because they had leverage in other things.

32:19So it ended up being fine all around. But anyway, that's one story. I've picked this up on some of the deals I've been looking at. Like right now, doing a recapitalization is a big one. And right now, I'm building the relationship with private equity firms, getting a sense of who do I actually want to work with. But at some point, it's going to come to the wire of let's negotiate some terms. At that point, that would probably be good to work with somebody that's been there, done that. And that could be a banker. The other one I found interesting too is I've seen a trend with strategics that are doing these kind of minority recaps.

32:48But obviously, they want to create like a call so that they can acquire the business later. So they sort of get favorable multiplier terms up front. But again, I've seen that a good experienced banker can negotiate that deal. So there are certain stipulations. You got to produce so much revenue to exercise that call, things of that sort. So there's some ways out of it if things didn't produce the way they wanted to. You get to a point and you've obviously grown your business and you have a lot of people working for you. But you do get to the point where you may decide you want to have a partner.

33:20But reality is certain things that you don't want to do if you can avoid it. One thing you don't want to do is go public. It's hard being a public company. It's really hard. It's particularly hard being a micro cap. And that's literally anything under a billion dollars now. I know it's hard to believe, but it's anything under a billion dollars is a micro-cap company. So it's hard being a public company. You don't want to sign up with a private equity firm unless you need capital. If you need capital, then they're the greatest source out there. Private equity firms have been incredibly important to our overall system.

33:57So if you didn't need the capital, you obviously wouldn't connect with a private equity firm. But if you need the capital, they're great. They really are great. My son works for a private equity firm. We do the work for private equity firms. Actually, lawyers would be more valuable to you than bankers because we've seen every variation of deals where PE firms come in and take a stake. And the issues have to do with control. They have to do with exit. They have to do with all kinds of things. But can a private equity firm, look, their only interest is making money for you. It's obviously for them.

34:33That's their only interest. You find the right firm, that's a winner. I agree. You get a straight point on just, you got to see what the end of the picture looks like. And that way you get a sense of what's that path to get there. And by the way, there are some people who bring in private equity firms just to do a recap and pull money out. And I'm not, it can work, but I'm not a big fan of that. You really want a PE firm that wants to give you capital to make acquisitions. As I said, I'd put a majority of it primary to go do some deals. Yeah. In fact, that's what I'm trying to do get a deal lined up.

35:06And have you seen that where the goal here would be to line up a deal and to do a recap based on a post-merger performa as opposed to just raising money beforehand? Of course, nothing wrong with taking some money off the table. You've been at this a long time. But a PE firm is also their motivation is to grow. Their motivation is to go out and do M &A. What factors determine whether an M &A deal actually delivers value and how can companies avoid becoming other deal-failure statistics? That is actually fairly complicated. And I'll tell you from different perspectives. At base, as a general proposition, this is as a general proposition, it all comes down to intrinsic value.

35:50So as a general proposition, you have to believe that present value of future cash flows, including if you're a strategic, whatever synergies you can get, exceed what you're paying. Otherwise, there's zero value. At the end of the day, intrinsic value is the most important measure. It really is the most important measure. It's not really as simple as that, though, because there are companies that do deals. And from the outside, it looks like that deal was a failure. But what you couldn't judge is what would have happened had they not done the deal. Maybe they did the deal to stop a competitor from buying that company.

36:31Maybe they did a deal because they knew that their core business was extraordinarily weak. So it's almost impossible to measure where would my stock have been trading if I had never done this deal versus where it's trading having done the deal. There are reasons beyond intrinsic value that people do deals. It's pretty hard to measure. But at the end of the day, if you're a, what do you call it, buyer-led M &A, at the end of the day, it's intrinsic value. It really is. At the end of the day, if you're out there doing serial acquisitions, you need to do the math around with the synergies I can get.

37:11And by the way, even though the market doesn't give credit to so-called revenue synergies, the market will give you credit for cost synergies, but not revenue synergies. If you really believe buying this company is going to increase the revenue. I remember when EMC bought Data Domain. I represented EMC in buying Data Domain. They paid a tremendous price based upon the historical model. But EMC had great leadership with Tucci, was brilliant and realized that with his sales force, he knew he could sell that product. And it was a huge success. Whereas if you had done the quote intrinsic value calculation without revenue synergies, you wouldn't have gotten there.

37:55Every deal is different. What is generally good is that people now are looking to do deals within their core business. So this is not one of these things where you have another Sarah Lee, which owns Haynes Stockings and Oscar Mayer Baloney. People are looking to be within their particular business. Yeah, there's some vertical aspects to it, but in their particular business and doing what we call when I was at Morgan Stanley, we called it value math. It was quite good. It was quite it was a quite good predictor of whether you succeeded. Got to be strategic. Has to be strategic. What are surprises you've seen in deals?

38:36I know you worked on a lot of high profile deals, but I'm just always curious about the things that you can't predict or expect. Well, I'll tell you a deal that wasn't a surprise. which is the last deal I did as a lawyer was the merger of AOL Time Warner, which was in 1999. Obviously, I'm a lawyer again, so I've done deals since I've become a lawyer again. But the last deal I did when I was a lawyer before was AOL Time Warner. And I have to say that the lawyers on the deal, my partners at Travath, were all, we don't understand this. Why are you merging with AOL? If you want to get into online, just go buy Yahoo.

39:18It's 1 20th of the price. We did the deal. I remember being in the boardroom and everyone was very excited about it because what happened is a matter of rationality. What happened was that AOL had actually come down in price by 50 % before they did the deal. And Time Warner was getting a very big premium. So even if it went down by 50 % more, it would still be an at-market deal. So you understood the economics of, well, it already had come down. But for those of us, maybe it's like my view about, again, I don't want to comment on crypto generally, but a lot of people's views about crypto is it just was not understandable.

39:57It just wasn't understandable. Everyone knew that online was free in most countries. So you're going to charge a subscription for it the way AOL did? So that took years to unravel. But I have to say that all my partners at Cravath and I, we weren't surprised by it. And I was the lawyer on that deal, not the banker. I really don't think anyone saw that it would be that much of a drop. I know. Yeah. Overshot intrinsic value on that one. Just a little bit. A little bit. Some of these things I don't, you know, I had a friend that worked on the Yahoo sale. Not the, I think they sold again, like really cheap.

40:32But the Ford. So Verizon bought it. Verizon and they sell it. And then Verizon sold it. Yeah, so when Verizon bought it, he worked on that deal. I remember when it came to the wire for pricing, because they had the breach during the deal, and then they had to go back and renegotiate. There was persistence that it's not going to sell for less than what AOL sold for. If you look at the price, it's one-tenth of a decimal place over what AOL sold for. So I'm wondering, how much of this is really ego versus some real factored math? Again, it goes back to the intrinsic value. There's no highly calculated formula around it.

41:04I remember when all of the yellow pages were being sold. directories. And it wasn't that every single person involved in that deal didn't think that directories eventually would be displaced. It was just a question of how long it would take the melting ice cube to fully melt. I'm not really familiar with how Yahoo is doing or not doing. So I haven't really followed that. I do remember when Lycos, because I advised Lycos, but I only remember Lycos, but that sold for$10 billion. And I was their banker for that. And then I think it ultimately resold for$110 million. There you go. But it wasn't that people felt in the Yellow Pages business were like blind to the fact that Yellow Pages eventually wouldn't be obsolete.

41:47It was just how long could the legacy business go and how long could you run it out? So there was a degree of value, Matt. Everyone was just wrong on how long it was. So there's a lot of that. You got this intrinsic value within the long-term view because all these other factors are going to impact it and change things. was a whole other discussion. Yeah. What else is the best thing I can learn from you about doing deals? Well, don't ever hire me to negotiate you building a house. That's one thing I can tell you. The term. I'm going to do the recap. We can negotiate some of those terms. But I like the experience, someone that's seen it from the end state.

42:20I'm just wondering if there's anything to shorten, like making mistakes on deals, just things that you've seen that get overlooked. The most important thing when you're doing a deal is to be commercial. and I find that the lawyers and bankers who are most commercial and recognize what's really important and what's not important, they do the best for their client. My protege, Scott Barche, who's here always and used to work with me, used to work for me at Pervath, he is just such a commercial lawyer. He cuts through it right away. He'll say to the client, this is what should matter to you and this is what shouldn't.

43:00And the problem with less effective lawyers is that they focus on things that just don't matter and they die on hills that just don't matter. And it ends up that negotiations become far too torturous. And I'm not belittling things, though maybe different things matter to different people, but you got to keep an eye on what's the most important thing of the deal. I've always prided myself on doing that. And Paul Weiss is filled with lawyers just like Scott. That's their focus. How do I make sure I got that right representation I'm working with? There are certain things that you want. I feel like that's almost like any professional you hire.

43:38You sort of ask people for referrals, which is one thing, but just to have your own peace of mind, there are things that you could ask to get a sense if they're like the person you described, very commercially oriented versus one that'll get caught up in the weeds negotiating pointless deal point? You ask around enough, you'll end up with the same few names. I really think you will. I can't tell you how frustrating it can be when you have lawyers who literally are caught up in things that if they either had more experience or more common sense, because some of them have a lot of experience, but not a lot of common sense.

44:18Clients, they're not looking for swashbuckling lawyers. They are looking for lawyers who are very careful and can keep them out of trouble, but knows what's important. This is not looking for someone that isn't extraordinarily careful. But again, knowing what matters. In negotiations, yes, sometimes you throw things out that you know don't really matter to you, but they're going to matter to the other side so you can trade them later. It's just an art of doing it. I remember a long time ago, this was back in 1985, and a client, I was negotiating a deal, and the client said, you go and tell the other side, unless they do this, the deal is off.

44:58So I dutifully, I wasn't a partner yet, I dutifully went over and told the other side, unless you do this, the deal is off. And they said, okay, well, the deal is off. And I went back and reported to my client, and they were like, you're kidding me, the deal is off. I was like, How could you have done? I said, well, you told me to do that. And by the way, what they asked me to tell them that the deal was off on didn't make sense to me. So I learned a very valuable lesson. Now, we did put the deal back together and all of that. But I learned a valuable lesson is, first of all, when clients ask me to do that, I tell them, you call them up and tell them the deal is off.

45:34Because I don't want to have any miscommunications on how I delivered it or didn't deliver it. It's also important in deals that you literally mean what you say. I tell this to clients all the time. If you're taking the position, which I understand you're going to take, you need to, and I understand it's a logical position. It's an important position. That's your position. And you have to be willing to lose the deal over it. And that's okay. There are lots and lots of deals that don't get done. And that's just fine. You've worked on some largest, most complex deals. Take me in the boardroom. What's the magic to managing the high stakes ego tension?

46:12Everything with boards is keeping boards prepared. If you're going into a board meeting on an important deal and you haven't been in front of that board already three or four times, you've made a mistake. This is serious stuff. And the board really has to understand what they're doing. So when you get to the final board meeting, the board, again, you go through all the issues again, but nothing should be surprising to the board. I didn't really understand this. I didn't know this. I did a deal last year where we were getting a very small premium. And from the very first board meeting, I just said to the board, I said, look, you have to understand the premium to market is a meaningless concept.

46:53Markets go up, markets go down. That's not your job is to decide whether a 5 % premium, 10 % premium, or no premium. You need to look at the fundamental value of the business and where it's going to be in five years and all of that. And by the way, early on, I said to the board, because again, from my banking experience, there's no way this buyer is going to pay more than X. No buyer similarly situated is going to pay more than X. By the way, that's going to be a small premium. and the board from right on signed off on it because they understood the math. I went through with the banker, who's an excellent banker, and she went through all with the board explaining what the buyer could pay, explaining this so that a board was fully comfortable by the end of the process doing a deal with a very low premium.

47:42And by the way, the market loved it and the thing got overwhelmingly approved and everyone was happy. But if we hadn't done the job for literally the first board meeting, it would have been a lot of board members saying, hold on a second, how can we agree to a 5 % premium? How could we do that? They knew exactly what they were doing. No surprise for the board, making sure the board is really informed. Do you just start picking at people one by one on the board and getting that alignment before you present to the whole group? Or I'm just trying to get a sense of... What I do when I advise the board is I always say, any board member can call me separately.

48:20If you have any questions about anything, you do not need to go through the CEO. You do not need to go through the chairman. If you have any questions, please call me. By the way, it's pretty rare, but I think them knowing that they can call. There's never been a time when I've gotten a call where I couldn't say, let me go through it with you. Let me explain it to you. And let's share this all with the full board. There's never been a time where there wasn't something that I would share with the full board. But it's not a question. Sometimes you suggest to the CEO that they go person by person to sense where they're coming from.

48:55Because sometimes people don't want to speak up in a big meeting, but you want to make sure that each director is comfortable. If there's anything that's of concern, that we address it. What separates good versus great deals at the strategic level? Sometimes it's luck, to be honest with you. Just having vision is very important. James Gorman was a great CEO and Ted Pick is a great CEO because they had a vision. They basically said, investment banking is very volatile and I want to get into much more stable businesses, which is asset management and wealth management. The vision didn't come after they did the deals, the vision came before they did the deals.

49:40And they didn't look out. And I remember so many times with James making a decision, do I write this off? Don't write this off. That would affect a quarter. And he would always say, I don't care about the quarter. We disclose everything. We do everything. I'm looking out five years from now. That is what makes great deals is basically doing something, not for the sake of doing the deal, but because it's consistent with your vision. But that line, the other thing I was going to ask is, what do you see that top CEOs get about M &A that others don't? If you look historically, people have to see M &A as part of a growth of your core business or extension of your core business, rather than, as I said, the conglomerate mindset.

50:24I don't think we're seeing a lot of that anymore, but that's what you're getting into. So that ties back to that vision. You got to have this really compelling long-term vision and then the pieces of M &A fit into it. Then you find people who do acquisitions that literally are financial engineering. Anytime anything is financial engineering, meaning I can pay this, I can get this amount of synergies. So therefore the math will get me here. Anything that smacks of financial engineering just doesn't end well. Now, obviously, Jack Welch was a masterful in many ways, but many ways. And he trained some incredible CEOs.

51:06But that was not a sustainable model. Now, everything Jack Welch did, which was buying companies, over-reserving, releasing reserves, was all out in the open. He didn't do anything that wasn't known to the world. But it wasn't a sustainable long-term strategy. It was really a lot of financial engineering. Again, he built many wonderful companies and he had many wonderful leadership skills. But if you're doing things that really are not part of a vision for the long term, just to give another example, a lot of people make mistakes when they do large stock repurchases because they look at it and they think, oh, here's the math.

51:48If I lever up and buy my stock back, I'm increasing my earnings by X. And so if I keep the same multiple, my stock's going to go up. The reality is that never works. It's not a strategy. Sure, if you have excess cash that you don't need for building factories or doing M &A, if you truly have excess cash, of course, buying back stock makes sense. Or if you're issuing a lot of stock every year to employees, of course, it makes sense to buy back stock. But buying back stock as a strategy makes no sense. It never has been any sense. What do you believe about M &A that most professionals would disagree with?

52:23Well, I don't know that most professionals would disagree with that. Trying to get your controversial views here. That or give me like a rule you'd rewrite an M &A. In the last, I can't believe I'm saying this, the last 45 years I've seen it all. You can tell when a deal really doesn't make sense. You really can tell. You can tell whether it's a Hail Mary for a CEO who believes it's going to give them more runway. that it's someone who's otherwise their strategy is failing. And I personally have never been shy about expressing that. I just never have been. Maybe easier said than done. And maybe I've been very fortunate to be able to do that.

53:07But you can see it. You really can. Obviously not always, but you can sense when the deal doesn't make sense. Being on the alert for that's important. There's a lot of times when someone goes to a banker and says, I'd like to buy, I'm in the corn harvesting business, and I'd really like to buy a television set company. And the banker should say, are you out of your mind? And sometimes, again, most bankers, particularly at these large institutions, are pretty good. But too often they say, what's our fee? Yeah. And doing that. But the good bankers to have longevity don't. They really don't. Sometimes bankers get a bad reputation, but the bankers that I know at these firms, the Goldman Sachs, Morgan Stanley, J.P.

53:53Morgan, and then at the boutiques like Paul Taumann's firm and Blair Efron and Ken Mollis, these are high quality people who really do look for the long term. But as a practitioner generally, you know when it's a bad deal. Yeah, that's a fair point. What's the craziest thing you've seen in M &A, Rob? back in the early 90s, I was negotiating a deal. And the other side was a Midwest law firm. And I was negotiating at a point. And they said, you think we fell off a turnip truck? You really think we fell off a turnip truck? And then we had a meeting the next day. This was at Cravath. And I brought in 300 pounds of turnips.

54:31And I put them on the conference table. And I have to say, from that moment on, it was great. Because, no, I didn't think they fell off the turnip truck. There's great lawyers wherever you're from. I always try to have fun. My brother's a comedian and I always try to do things with humor. Humor works. People who've known me for the last years know that I always try to be funny on deals to break the tension and try to be funny. A really good thing. I remember I was on a conference call with the CEO of a company and I had my team behind me and they didn't know that I had muted the phone. And he made a comment and I said, you are an idiot.

55:12That is the stupidest thing I've ever heard. What kind of moron are you? How do you even stay in business? Are you really running this company? And behind me, they're like in total shock. Obviously, I had the mute button on, but you try to have fun. That's what life's all about. And my brother, Andy, really is totally hilarious. He really is hilarious. Andy Kindler. You're a little plug to my brother. I know. He has a good influence on each other. He is. He is. You know, we did a podcast together in Bloomberg a long time ago. And I pointed out that when my brother was little, he was in the backyard.

55:47You always saw him playing ball and he would pretend he was part of the Mets and he was playing catch and running around and I would be out there. And all I ever wanted to be was an M &A lawyer and banker, even when I was eight years old. We keep adding to this crazy. Well, this has been a great conversation. thank you so much for taking the time helping me become a better M &A scientist those of you still listening fellow M &A scientists thank you love to hear from you connect with me on LinkedIn like getting feedback on this content some ideas topics I should be covering or criticism I get that once in a while I'll take it that's how I get better at this till next time here's to the deal

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57:25Again, that's mascience.com. Here's to the deal. Thank you.