M&A Roll-Up Playbook: How Zayo Did 45 Acquisitions and Sold for $14B | Dan Caruso (Part 1)

25:00But that's how it played out. Really? Not quite to the black and white degree I just said about it. I want to know your words, the premise of the thesis. It's got to be a little more than just, hey, we're going to consolidate these companies and do a valuation arbitrage. It was a combination of, because remember, in that environment, everyone thought fiber networks were toxic. They were commodities, that the only way you're going to make money in our business is by having kind of value-added services and content and whoever's operating at the infrastructure layer is just going to lose money. That was the mindset at the time that these were not assets worth owning.

25:33They were assets worth not owning. No private equity company, no venture capital firm wanted you to even mention the word fiber optics in their investor meetings because they all lost so much money in it. So that was the context. So the idea was that there's these fiber orphans with excellent owners and their businesses are doing quite well. What they're focused on is the bandwidth layers. So we came up with the term bandwidth infrastructure. In fact, we were originally called not ZAO, but communication infrastructure investments. That wasn't a word back then. Now it's an industry. It was bandwidth infrastructure, then more broadly communication infrastructure.

26:10Now people, not surprisingly, are calling it AI infrastructure. But that didn't exist back then. So the idea that we were going to just get focused on working the depth and breadth of our fiber assets. We were going to focus on kind of that bandwidth layer. We were going to not get involved in the higher layer stuff. Those are going to be our customers and our partners. We were going to be really good at putting our core assets to work. And that's obvious now, but back then it was considered very contrarian. You had a clear focus on where you're actually going to focus on the strategy. Do you have a view when you are building this thesis out and getting alignment with investors of what are the threats going to be?

26:50What could potentially make this not work? One of the questions that was faced is what really will translate into true value in this kind of business model that we were describing? Because a lot of people want to focus on revenue growth as a value driver. And yes, you want your revenue to grow for certain. Or they want to focus on EBITDA. EBITDA is a really important term, and it's really important. EBITDA in and of itself doesn't really mean anything. Could double your EBITDA and the question is, is that good or bad? Because it could be good or it could be bad. It's good if you doubled your EBITDA and spent nothing to double it, that'd be really good.

27:32But if you doubled your EBITDA but spent a gazillion dollars, but it was at the capital line, therefore it didn't show up in EBITDA by definition, that doesn't mean you create a value. You may have destroyed a bunch of value in the process. And when you're doing consolidations, you've got that component that, yes, you're going to be growing revenue. How can you not? You just bought a company. And yes, your EBITDA is bigger. It better be bigger. You just bought a company. How do you know what you're doing to both organically grow the business while you're also combining business together? How do you know financially whether that would translate into something that, objectively speaking, is true value creation?

28:07That part would let us look at value creation more analytically and having lived through the experience where the appearance of value creation, what people were doing in the outcome boom era, like as long as we're telling really good stories and we can give the appearance of value creation, that's enough because then at some point we can sell our company to that next sucker comes along and then we're rich and they got the problem of this is just a house of cards. So we want to build something of durable long-term value in an environment where there would by definition be a lot of noise because if you're consolidating and then synergizing assets, there is going to be a lot of noise in the financial system.

28:46Are there different views to that? Like here early on, when you're like just before even do your first acquisition, here's what I hypothesize that's going to be a true value creation versus when you start doing deals and each individual deal may have its own unique view of how you're going to create true value off of that individual asset. Is that sort of like different where it's here's a broad hypothesis of how we're actually going to create value streaming together these series of acquisitions versus like each deal kind of bring its own investment thesis on that specific deal? A mistake that people make quite often, and I still hear it being said, and when I transitioned out of Zale and tanning the reins over, I immediately saw them starting to do this.

29:25I'm like, oh my gosh. And that is board members or investors think they're being very responsible when they say, if we're going to do this deal, we are going to track that deal and make sure that we can look and hold the management team accountable for delivering on what they said they were going to deliver on. Okay, we're going to be taking these assets that we're buying, these businesses, but these businesses have assets. And the first thing we're going to do is we're going to mash them together. We're going to mash them together. That's what we're going to do. And why are we going to mash them together?

29:51Because we want to harness the whole synergies of bringing these assets together. We're going to bring them together so that it increases our ability to generate revenue. Because if you have doubled the assets in either a single area or adjacent areas, you could bring more product to your customers. You could sell things that neither one of them could have sold before. And we wanted to do all on one system. And we want it to look like it's a single asset. So if the investors are bored, tell the management team, we're going to hold you a combo for tracking those separately. Okay, but now you've just gotten in the way of our ability to get any synergies so that we can do a bunch of math on whether this particular decision was the right decision.

30:29While you have no idea or we're paying no attention on the aggregate of what we're doing, Are we creating value in aggregate? That's what matters. How that particular asset you think performed based on stuff that is just silly to even try to track is a massive distraction and a delaying of synergies. It's just crazy. You have to get investors comfortable that, no, this isn't about tracking each asset individually because we don't even want them to look like separate assets. We want them to look like one thing. If we try to make it so that we could track them separately, you're just chasing kind of a fool's game.

30:59You had a vision for one company. Yes. And that's what you're working towards. One company that would be much more valuable than taking two separate things and treating them as two businesses that you own. This wasn't like having a Burger King franchise and a Wendy's franchise. This was like, no, we're just increasing the size and scope of what we're doing. Mashing companies together. What do you think drove the success of Zayo between timing, structure, redeals, and execution? One thing you didn't say there, I guess it's inherent execution, is like talent. There's elements of all of those, including that our investors and our management team worked together.

31:34We were in it together. This wasn't management team doing this, investors doing that, or investors trying to exerting their over-influence on a management team. It was like we were like a team, especially in the first five years or so. Investors had their role to play. They were helping. They were really effective at helping us sort through things in the management team. A lot of us have worked together a lot of years across a lot of different ventures. so we all worked really hard, but we also kind of knew the playbook, the playbook of what we should do next because we played that playbook before.

32:03We had the right thesis. We were maybe a little bit overconfident so we could move very decisively. It was magic those first five or six years. You got to get all of them right. You want the returns that you provide. To put it in perspective, in aggregate, we invested about a billion dollars of equity and that billion dollars of equity, when we sold it, was worth eight and a half billion. And it was not because we sold it at some kind of inflated value. When we sold it, we only got 12 times EBITDA, which is kind of a middle-of-the-road EBITDA. So it wasn't like we were rewarded with an inflated EBITDA multiple.

32:37It was an appropriate EBITDA multiple. So the value creation was authentic. And it was 8.5x. Value creation was huge. And for the early money in, it was 25 times the money back. So all investors made money all along the way. So objectively speaking, it was a significant success story for us to make that much value that quickly. Yeah, everything had to be executed really well. The strategy had to be right. The team had to be talented. The execution had to be really strong. When we made mistakes, we had to pivot and adjust pretty quickly because we did make mistakes along the way.

33:13Dan Caruso:Join Kisan Patel and Gwen Pope at Master Your Merger's People Synergy Summit on April 21st. Their closing fireside chat explores why integration models break down after close and what buyer-led execution actually looks like when it's working. If you're running acquisitions or responsible for post-close results, this is the session to catch. Register for free at PeopleSynergySummit.com. Again, that's PeopleSynergySummit.com.

33:46How'd you earn the nickname, The Bear? Oh, how did my nickname become the Bear? Well, it wasn't because I was viewed as a fuddly Bear, not for being a Bears fan, although that certainly is good interplay. You know, when you reflect on your career and how you got there, at least people like me, you spend a lot more time looking at the adversity you face than the things you did wrong. You don't focus on the things that you did right. Especially when I wrote the book, I had to like reflect. I had to really think about the journey and what happened and what didn't happen. And I was a pretty aggressive manager, probably still am today, but certainly a lot more so when I was in my mid-20s to 40.

34:22But we were doing huge things. I had gigantic amounts of responsibility under me, and I was trying to navigate a family life as well, and I was on the road all the time. So I was carrying a ton of stress, and I like to get shit done, and I like to work with people who were fast-moving and smart and get a lot of stuff done, too. and I didn't have a lot of time for people who were along for the ride or they were not as hard at work. Is that where I'm going to run into problems with you is if I'm just along for the ride. If I'm getting shit done, no problem. Yeah, the expression doesn't suffer fools wisely.

34:54People would say that around me. So I was considered the grizzly bear. Don't poke the bear and don't mess with bear cubs. And you're getting pressure from the bear, squirt some honey on someone else so that it redirects the bear. So they had this whole lexicon about how to deal with me and I embraced it. Anything you go after now that sets the bear off? Yeah. Not becoming experts at AI every single moment of every single day. I'm looking at my team out here and when I see people being like tented about AI, I'm like, dude, the world's going to pass you by. And if at my age, I could be better at AI than you can be, something is wrong.

35:26So be all over AI and be ambitious and be creative. And it's okay if you don't want to be those things, but then go work somewhere else. I only want to be around people who care about their journey, not just their professional journey, but their life journey and who want to be learning that next thing and they want to be creating value. Now, creating value to me nowadays is not just creating financial value. Maybe that's what it was before. It's sometimes the way we care most about creating value now is what value are we contributing to the community around us. But we want to make a difference and I want to be around people to make a difference.

35:57Yeah, if I got people around me who are like not being part of that journey, they just want to get the benefit in. I respect you, but go do that somewhere else. All right. Are we done warm up? Ready for the real interview? Yeah, let's go. I got to ask, do you convince people to sell their business? Yeah. Now, let's get to the word people, the way you say that, because sometimes the people you're committing is not the CEO who doesn't want to sell their business. Maybe it's the board or maybe it's like an investor who's a little frustrated. My big thing is like critical part is getting deals actionable.

36:27Then you can find opportunities, look good on paper, fits into the thesis. And when you start talking to whether it's a founder or owner, if there's a mix of investors involved. Is it a conversation? Here's my better together story. And I'm going to wait for you to be ready to sell. Or do I actually convince you to sell your business? The first thing is you build your own brand. And then you build relationships. Today, when we're doing a lot of venture type deals, our strategy is not to like be really good at hunting down a deal that no one else knows about. We don't do any of that. What we do is we build up our brand.

37:00We build up our awareness. and we want the best deals that are out there in our strike zone. We want those best deals to come to us. So we want those best entrepreneurs and the most interesting deals, ones that anyone who's good at investing would want to do. We want those deals to come to us first. We want them to want our money. We want them to want us on their cap table when they have choices, a lot of investors. So we apply a strategy today, but in the context of Zale, the strategy was to really be out there building relationships way before or company was ready to sell so that when they started to say, hey, maybe we should sell, you know what?

37:36Let's call up Dan because Dan's been talking to us for three years saying he would like to buy our company. Now, what they didn't know is I was telling everyone I wanted to buy their company because I didn't know whether I wanted to buy their company or not, but I wanted them all to think I wanted to buy their company so that they thought I was talking uniquely to them so that when they were, they would approach us and then they would share information and then we can decide whether we wanted to buy their company or not. We wanted to create the dynamic where the deals would come to us as opposed to us trying to, wait for them to decide and hire a banker and put together a book.

38:05And then we discovered the deal when they're on a sale process. We wanted to be in front of that. You want to be in front of it. Relationship, but also trust. That's a part of it. Yep. But then you develop a reputation, which we did. Or when we acquire, we would bring the company together really aggressively. So we had to balance that. We're a really good buyer because we could get deals done. We would do what we said we were going to do. But because we were really aggressive on synergy, we'd also create a lot of disruption with the company that sold to But some CEOs would be like, okay, I'm ready to sell a company, but I do not want to sell to Dan because I know what Dan does when he buys the company.

38:36But we had to navigate that as well, especially as we got deeper into the process. So this is an interesting part. This is like your reputation as an acquirer as part of this. You're building a relationship with this company, getting to know the founder, curious to know what that actually entails. Because obviously you have a meeting, you have a great intro call, but then how do you build the depth of the relationship to get some of that trust? And then, yeah, the reputation of the market. Why was it negative? Was it he takes our company apart, blah, blah, blah, because obviously you have the vision of one company, and that's probably you do what you got to do to integrate and make that happen.

39:09Yeah, we had a really good reputation for being very effective at acquiring, which is really important for sellers because sellers, when they're ready to sell, they want to know that they're working with someone who, when we say we're going to do something relative to buying a company, that we're going to do it. We're not going to drag them along in a process and say, we're going to get to the finish line. And then find out halfway through the negotiation that the buyer really doesn't have the money or they're really don't have the support from their investor group. And then they try to retrade and get a lower price.

39:37We didn't want that to be our reputation. We want our reputation to be like, you're ready to sell. You want to get the transaction done and fully approved and get your money that we're the most reliable buyer out there. But we also, as we got deeper into the process and people would see what we did after acquiring, the investors loved it because we would get the synergies quickly and we'd prepare ourselves to do the next acquisition. Because if you take a long time to integrate the companies and you take a long time to get the synergies, that means you also have to wait a long time before you do the next deal.

40:06And we had the view that there's this window of time that we can do a lot of acquisitions before others catch on to the opportunity. if we move slow the funniest stuff we could do is going to evaporate on us others are going to jump in and we're gonna have a lot more competitors who are doing consolidation so we were moving really quickly but the result on companies that would sell to us is they would see us take what they were really proud in the people who were part of that like they thought they had the best provisioning system or the best maintenance system or the best strategy or the best sales team and And my attitude was, this isn't like a comparison.

40:41I'm not saying this is better than you're that, but we got a way of doing things. And part of that is integrating real quickly. So we're not going to debate whether your system is better than ours because we want one system that is an intense system that brings everything together. We want to get all the data representing that system. So with all due respect, we're not going to use your system and we're not going to debate it for six months. We've already made that decision. We want to see which ones of you want to be part of us and help us move your processes, your systems and your people over into one unified organization.

41:11A lot of times they'd be like, yeah, but we think the name of our company is better than your company. Why don't we adopt our name? Now, we already got a name. We're not going to revisit the name of the company. So it helped everyone that there was decisiveness. What a lot of companies in our industry would do, and I'm sure a lot of other industries, is when you do an integration, you start lining up teams. We're going to put our sales team with your sales team, and we're going to give them two months to come up with an integration plan they both believe in. And then we're going to do the same thing with our ops team.

41:38And we're going to do the same thing with our marketing teams. And now you've got teams on both sides trying to debate who's better. And, okay, how about if we pick this of ours and that of yours? And you've got these Frankenstein solutions. And you try to look across it. And it's just a mess. So we were like, no, we're not doing any of that. We're just going to smash the company together. Interesting. See, almost like there's a little bit of this perception of a reputation that you're tearing companies apart, but it's in the greater good. You're following that vision of one company. you're integrating fast, rip the bandaid off, do the right thing.

42:09Certainly good for our case. Zale exists today and is one of the absolute leaders in the bandwidth. In fact, the other co-leader is Level 3, the previous company, now Brandon or Lumen. So Lumen and Zale are by far the two survivors, the two leading platforms. They own more of the fiber, particularly in North America, than anyone else. Zale is still very operational in Europe with a very significant position. So the outcome was very good for investors and very good for building a durable piece. We started in 2007. We're going on our 20-year history. And for Level 3, our 30-year milestone is about ready to be hit.

42:44So we built really durable platforms. Level 3 would do it the old-fashioned way. Zayo would do it the other thing. And this is maybe a personality flaw. But even though Level 3 had a 10-year start, I wanted to catch Level 3. And Zayo would be every bit badass. And it's pretty close right now. Right now, Zayo, I'm not involved with it anymore. But Zayo is neck and neck with Lumen in terms of the top bandwidth infrastructure company, certainly in North America. What are these conversations like with these founders or executives of the companies you're looking to acquire? How do you figure out what their motivators are to get your angle of doing the deal?

43:17That's important because understanding what is going to make the seller want to sell. And it's not a singular person because there's a CEO involved, there's a CFO involved, but there's also the investors involved. And even with investors, you might have one investor who has a bigger voice than other investors, but investors have different motivations. You're trying to figure out the puzzle. What's going to motivate them to want to respond to selling their company and selling it to us. And every one of them has a unique story. So there's not a single one. So yeah, listen, first you got to get their attention and then you got to listen really carefully.

43:55And a lot of times you got to do this through a team-based approach. My CFO was really effective. of different personality type than me. Everyone liked him. Everyone trusts him. He was a little bit more low-key about things. He was viewed as the good guy, and he would play that role really well. What they didn't know was behind the scenes. We were both bad guys when it came to M &A. Our approaches were just a little different, but we'd play the good cop, bad cop. We'd orchestrated, and we had some other really effective people on our team. Ben Scarano was one of the early co-founders, and he was really effective at certain types of deals.

44:24And we had a guy by the name of Matt Erickson who was younger, but he was starting to learn how to do deals. And we just had a lot of people who would play different roles and we would do it as a team. This is all very buyer-led. You had this specific, clear thesis, what you needed, what your criteria was. You approached those companies directly. You didn't wait for them to come on the auction block. And then you find their motivators, which ranges. What is the range of these different motivators? Because I could imagine there's obviously investors that want to get a return. What does that look like?

44:54You know, time frame for them and the targets. But then there's probably CEOs that, is there something bigger they want? Is there maybe a post-acquisition role that could entice them or some kind of retention package or maybe some kind of way to feed into an ego? I don't know. But what were the range of things that you saw that were motivators for different situations on these acquisitions? Well, at Zale alone, we did about 45 deals. So all of the above is certainly part of that answer. And then there were a lot of other deals we did before Zale. sometimes you're dealing with situations where they don't want to sell and they especially don't want to sell to you and that's when it gets even more interesting and the biggest deal we did that really made zale was us buying a company that was larger than us and much more established than us and a really great company led by a really great leader called above net they had absolutely no interest in selling to us in fact they were a public company and their plan was to take their public company private to a management-led lbo and they had it all lined up in fact they should have been already at the finish line, but for their investors that were going to lead the take private, were just not able to get the deal done.

46:00They wanted to negotiate this more and they wanted to negotiate that more. And it started to drag out. We didn't know any of this because they weren't sharing it with us. They weren't sharing it with anyone because the management team wanted to work with investors and do the LBO. So that turned into a hostile situation in that we just interjected ourselves. They were a public company and we made an unsolicited offer that was 100 % backed by both equity and debt. We went as far as gave them the whole agreement so that when they were, as a public company, they couldn't not pay attention to us. And fortunately, unbeknownst to us, when we gave them that offer, they were literally hours or days away from signing a deal to sell the company in a management buyout.

46:41But luckily, we came in at a price that was higher than the other price. The lawyer said, you're a public company. You can't sell it at a lower price just because you'd rather that be the outcome you got to put your public shareholders first and then that turned into over a two-week period of time and one of the minutes i go into depth and bandwidth the nice thing is when there's public company transaction everything has to be documented and sec files afterwards the whole play-by-play so i was able to pull that up and and have a an accurate account of exactly what happened even stuff i didn't know what was happening at the time that all had to be documented so i was able to tell the story in a barbarians of a gate type of riveting format and in a very accurate way.

47:20And it turned out we were able to prevail despite the fact that they did everything they possibly could while staying within the law because they can't go and just disclose stuff that they can't disclose. But the investors who wanted to lead the leverage buyout simply didn't believe the selling company that there was another bid because they're like, how could there be? There wasn't an alternative bid until the very end when we had a little bit of a difference in price. So they never believed there was a legitimate other bidder who was about ready to sign on the dotted line until it was too late.

47:50It was pretty crazy. How do you buy a public company? You're a CEO of Zayo. This is a bigger organization than you are. You obviously work with your CFO. You built a business case on why this makes sense to do the deal. There's an opportunity for a public company. Do you just, do lawyers send this offer over? Like, how do you solicit? Because you ended up going straight to the board or the shareholders? Yeah, so this is a really interesting story. And it played out pretty publicly. And then you had an activist group get involved. This was not this one. This was when we were talking Zayo. There was a big annual conference.

48:21In fact, I just came back from the same conference this year. I haven't gone in six years since we sold Zayo, but I wanted to go one last time. But this was a big part of this Zayo early story. And this particular deal happened literally at this conference. So we went to the conference totally prepared to make this unsolicited offer. So we came there with everything in writing in a sealed envelope, literally fully backed by debt, by equity. So it was not a verbal offer that, hey, we'd like to have a conversation about buying your company. It was, this is a fully baked, fully financed, fully funded offer that we're prepared to sign in the next week.

49:01All we need is three days of diligence. Think about that. You're going to buy a multi-billion dollar company and you're telling them you're ready to sign within a week. and we only need a week for diligence and a week to negotiate. That's unheard of. That just doesn't happen. Because we knew that their first response would be to try to avoid doing it. We set up the meeting. It was on the last day of the conference. Got together with the CO 101. We sat down with them and began the conversation. We've known each other well for a number of years. And I made the verbal picture that, hey, we'd really like to combine our companies and we think we have a compelling offer to do so.

49:33And the first response of a person who must have been prepared for this, he must have gotten coached by his lawyers and his bankers, that if Dan does this, here's what you should do. So because I set up a meeting, he probably had an inclination, okay, I know what might be coming. He's like, yeah, Dan, I just think we would have different points of view about the value of your company versus the value of our company. We're really good about ours, so we really don't think it's likely that we would come to a meeting of the minds about what the right relative values are. And I'm like, okay, well, that's interesting, but I don't know if that's relevant because we have an all cash, fully financed offer.

50:07So it doesn't really matter what you guys think about the value of our company. It just matters if we're offering you enough. And he like paused and looked, because I don't think they thought through that scenario. How could this company who's smaller come in with a premium valuation to what they're trading at and it be fully financed and ready to be signed? I put the envelope in front of him and it's right there in that envelope. You're free to take it if you'd like to, but if you'd rather not, I understand. And he's like, okay, let me get back to you. So quickly breaks up. I'm sure when he went back and talked to his attorneys, they said, no, you can't just not take the offer.

50:39That's not going to look right. When that gets disclosed, you have to text him right away and ask him to give you the offer. That's when I gave it to my team and he slipped it under his hotel door and the rest was history. Wow. I like it. You confronted him as a principal head to head. Confronted sounds like a negative word, but yeah, approached him and had a direct conversation. And you were prepared. You thought this through from all angles. Can we talk about negotiating and structuring deals? Sure. Teach me how to do it right. Negotiating is like a game. You got to have a lot of different plays in your playbook.

51:10One thing that's always worked for me is to be unpredictable. You're going to be unpredictable. It means you got to do things differently each time, not let the other side really know what you're doing. And obviously, all of us use the word Trump in our vocabulary more often than we'd like to. But one thing you say about Trump is he behaves in kind of erratic ways. And sometimes when you're negotiating, that's a huge advantage. You don't really know what you're doing. They're like, okay, I don't really know how to interpret that. So a lot of times what we would do is we'd think a lot about how to behave during a negotiation.

51:39Sometimes we would do things just to get a reaction because once you get a reaction, then if you're paying close attention, you could learn things based on what the reaction is. Sometimes you even rehearse beforehand. Silence in a negotiation sometimes can be really effective. So at times I would go to my team and tell them, If you see me starting to not respond, seconds start to pass, do not think that's an opportunity for you to speak next because the only person to speak next is the other person. Ten seconds is a long time to say nothing. So if ten seconds goes by and they realize you're not going to say anything and they have to say something and it's a tense part of a discussion or negotiation, you're going to learn a lot about what you say next.

52:19Are they going to get anxious? Usually it's when they're trying to overplay their hand. You're not quite sure how much they're overplaying it. And then you just wait to see how they react. So when we were at our best, there would usually be three or four of us that were working off of each other in somewhat orchestrated ways and playing around with different tactics and just seeing how to get a clearer picture of what's really going on. And then once the picture is clear, then you can really get focused. How do you get good deals? Especially me. I'm brought up by Indian immigrant parents. Like I'm always looking for a good deal.

52:49And like some of these deals, it gets difficult because a smart seller shouldn't be throwing up a price. and at the same time, you don't want to come in and offend somebody looking for my bargain deals here. Yeah, that's an art, not a science. Yeah, teach me the art. That's like on points where it's like, okay, let's cut through some of this stuff. I'm wondering, even just setting this sort of tone to get value and maybe you've already built a formula and it's templated more. If you do have a formula and it's templated, that could work for a period of time because that can work, but those don't survive long periods of time.

53:21They definitely apply over a period of time, but everything changes around it. So you have to keep revisiting. I'm looking at a distressed deal right now. It's distressed. So I feel like none of that's going to apply. Yeah, it's a little bit like that contrarian comment is you got to find a deal that the other side is willing to sell it, which means they think what they're selling it for is more than it's worth. I'm going to sell you my car for$30 ,000. It's because I think it's worth less than$30 ,000 or else I would keep it and maybe sell it to the next person. And so I'm selling you something that is overpriced and you think you're buying something that's worth more.

53:54Now, sometimes it's because it is worth more to the buyer than it is to the seller. That's the easiest time to have a win-win outcome, that you have synergies that they don't have. You have capability that they don't have. So in your hands, it is more valuable. So you're both making a right decision. Typically trying to find that win-win scenario is the best path forward. So you should always be looking, okay, how is this a good deal for them? and for us. You find that as opposed to one of us is going to win and the other one's going to lose. If you're in that situation, you could be the one losing, they could be the one winning.

54:27So it's easier if it's a win-win opportunity. Just making this sound too easy. It's not easy. I was going to say, the number one thing, I go to any software company right now, their valuation expectation is so high. They'll point to headlines for companies. Not right now, they're not. We got a little bit of a meltdown going on. We do have a meltdown, but you still got founders that hasn't settled in with them. It always starts with the public markets and it slowly comes downstream over time. And finally, it's probably the size of deals I'm working on. But to me, that's the number one is this bid ask spread that founders have really high expectation of valuation or someone might have raised in 2021.

55:01And there's even another factor in there. How do you call a baby ugly without, you know, explicitly calling their baby ugly? Is it worth more to you than it's worth to most others? So there's one type of deal where you're more of like a stock picker. All I'm doing is having a better understanding of what the true value is than others. I'm not bringing any value to the table. I just know how to pick the stock better. I know how to pick a company to buy better. I just am able to figure out what the true value is better than other people. That's not something I would do. That's not... Is that like bargain shopping?

55:37You're just running around looking at deals and saying, oh, this is a good deal. Yeah, it's kind of like looking at public stocks and saying, I could look at public stocks, all of which individually are trading at a price. Where the price they're trading at means there's sellers and buyers who are agreeing that's the right price. But me as the buyer, I'm really good at seeing that, say, when I invest in a stock, that I could see that I'm buying ones that are undervalued, not ones that are overvalued. Okay, I guess if you're a really good stock thinker, that might work, but that's really hard to do.

56:03But that's different than if you're buying and saying, I really do have something I'm bringing to the table. My company, me individually, I'm bringing something to the table that is truly a value add that most others can't bring to the table. But when you become a synergy buyer, that certainly is the most obvious example of that. For us, it was included because early on, Isaiah, we weren't a synergy buyer. We had no platform. We were just trying to develop a platform, but we had a conviction that what we would do with the assets would be value creative in nature. And part of it was because we early on, as part of our thesis, it wasn't that we had a different point of view of the seller.

56:41It's almost like we had a similar point of view of the sellers because we knew that platforms they had were legitimately doing well. But other buyers, universal other buyers didn't see that. They were still thinking of the telecom meltdown world and the fiber networks being toxic. So we were a fresh face in terms of being willing to pay the seller what they really thought the business was worth. And we didn't disagree with them. We just thought that we held them for five, 10 years and consolidated around properties, we would create something of durable value over the long term. So we had this window of opportunity where we could be acquirers where there wasn't a lot of competition, acquire these kinds of properties and come to a price that would be a good outcome for the seller and a good outcome for us as well.

57:24It was a win-win period of time, but we knew that was a window. If we were right, others would catch on and then we would have for buyers bidding up the prices. How do you keep from over your assumptions getting it out of hand on synergies? I feel like I've seen that a lot of times. We're up to have teams looking at a deal. They're looking at the business case they're putting together. And all these synergy assumptions come in play because you want to get the price doable. You end up inflating everything or being very optimistic on those synergies to capture. How do you ground yourself, keep yourself from getting over your skis?

57:58I mentioned earlier, we were about through value creation Our corp dev team was one and the same as our exec team. And we were all big owners of the company. We didn't take much in the way of salaries. We're all about making money by seeing the value of the investment go up over time. So making money alongside our investors. There was no room for, we want to get a deal done, so we're going to make the synergies look better than we really think they are because we would lose. Corp dev teams can win in those circumstances because they get rewarded for doing deals and then they hand it off to other people to implement them.

58:29if the synergies didn't happen as overestimated synergies or because people were implementing it didn't do their job. You could get in those situations, but our culture was, we're going to do a deal. We're going to get the synergies. It's going to be us getting them. We're the ones saying we want to do the deal. So there was a buck stop here mentality. We've held ourselves accountable. And if we made mistakes, they were our mistakes. They weren't our department's mistake or the integration group's mistake. It was like, hey, we're going to make some mistakes, but we're going to need to own those mistakes, learn from them quickly and hopefully make a lot more good decisions than bad decisions.

59:02Out of, we said, what, 45 deals of sale? Yeah. How many were proprietary versus through an auction process? Oh, I would probably say 80 % would be more proprietary. Now, some of those proprietary ones, there was a process, but the process was triggered by us and by our activity. So then, okay, we're going to sell, we're going to need to hire a banker, run the process. They were creating that out of the proprietary dynamic that way. Do you usually win on those deals? Early on, we would tend to win because we were a very effective acquirer. We got to the finish line in negotiations really quick.

59:35We could give certainty of close really quick. So we were the preferred buyer. But later on, I tell the story in bandwidth. When we went public, and I didn't understand this at the time. I understood it from a textbook standpoint, but I never really experienced it directly. But our process of going public meant we had to open our kimono. Now, we were really transparent with what we were doing. before we went public but it was like the big investors i don't think really believed it until we went through the public offering all of a sudden staring in their face was how much money we made for our investors and for ourselves too that was the first time i think the broader universe of investors got a full understanding of holy shit this is what those guys were doing financially we know what they were doing industry rise but now we know what the financial equation is now we could see why their investors are thrilled with this management team.

1:00:29This management team is making them a shitload of money. Now, investors are part of that too, but they could see even at the time we went public that original investors were already eight times in the money and it was only like, what, six, seven years. And they were able to see our financial playbook. Well, that triggered the next stage in the industry. Within a year after we went public, all of a sudden the money started flowing in the industry. Infrastructure funds started to become a big thing in our industry and they were upbidding us on deals. Then all of a sudden, instead of us getting deals done, we were like, we're going to get deals that were being done by someone else at four multiples or extra turns of EBITDA than we were comfortable and willing to pay.

1:01:04And that's when it started getting harder. Okay, do we do the deals that prices were less comfortable with or do we watch others do the deal and start to take the wind out of our sail to some degree? I bet sellers are even more ambitious on valuation expectations knowing that it was a public company. Yeah, I mean, not necessarily because we were public, but because there are now a lot of buyers and some of them with very deep pockets who were extremely motivated to get... In fact, some of the buyers, they use the expression, and this sounds pretty eloquent, right? We have a lower cost of capital.

1:01:36So that's what they would say, and I won't repeat it. They're really good buyers. They have a lower cost of capital. And I'm like, what does that mean? All that means is they got lower expectations for what returns they're going to deliver to their investors. That's what it means. Like, we're going to bid up the price higher because our investors expect much lesser outcome because they have a lower cost. Okay, yeah, from a salary perspective, take advantage of that. To compete with them as a buyer, no, I'm not doing this just to become bigger. I don't want to just pay the seller a lot more money and then we got to run this asset of theirs and we're not going to make any value creation in the process.

1:02:11So it put us in a more difficult situation in the post-IPO era for us. How important was structuring these deals? Obviously, we talk a little bit about valuation gap. Earnouts is a very common tool used. Maybe you can roll over equity. What was your philosophy on structure and how to help you with deals? People talk about earnouts, and sometimes earnouts get overplayed. So we rarely used earnouts. For one, we wanted to mesh the deals together really quickly. Yeah, if that thwarts that, because then how are you going to track? Exactly. So if you have an earnout, then you got to track the performance, this and that.

1:02:44So it was more important for us to identify the talent that was coming with an acquisition, like what three people did we really care about? And how do we bring those three people, make them part of our team, not them stick around for an earn out? Because if you are sticking around for an earn out, all they care about is what's that earn out metric? And how do I make that earn out metric? And then if I don't hit it, how do I exert leverage to get paid anyways? Then you're both sides are spending all their time on the earn outs. It's like, after that, we just need to go and we bought that company.

1:03:15We need to own it and we need to be accountable for it. And yeah, if we could find some people there who want to be part of our team and part of our value creation, brave. Let's make them part of what we're doing, not keep them separate so that they could, quote unquote, earn out during a transition period. So you lean in more on filling out executive retention plan over doing an earn out. A lot of times if you give someone a clean exit, they'll sell at a lower price versus if it's a messy exit, they're going to discount earn out. They're going to treat the earn-out as worth nothing and maybe a little bit of upside.

1:03:46But it's a messier deal. You've got to negotiate all that. So it slows down the deal. It's less appealing to the sellers. If you're going to do an earn-out, make sure you really thought through what you're trying to achieve in an earn-out. That's interesting. From a seller's perspective, that, hey, here's a clean offer. There's no earn-outs to it. Actually more attractive. Maybe take less of a price. And we'd also tend to give them cash, not stock, because if you start using stock, again, that's a messiness from a seller's perspective. They're going, how do I really view this stock? Are they going to be worth that?

1:04:14They're never going to be like, yeah, I want to get that stock because it's going to be worth double amount. They're going to be like, okay, whatever I'm getting in the form of stock, I'm going to value it half of what it currently is worth and everything else is upside. So you're giving what is true value away in your stock price, but they're discounting what they really think that values. So it often costs less if you're willing to take care of the financing itself and offer them pure cash. How do you leverage this? Because I feel as an operator myself, I'd want to hold as much cash as possible.

1:04:40And that's why I'm always like, ideally, if you have third cash, third earn out, third roll over equity, you're not doing that. You're not rolling over equity. You're avoiding the earn out. What levers are you pulling? Are you having them hold a note? Are you leveraging getting debt on the business yourself? We were very good at lining up our capital separate from it. We would line up our equity, line up our debt. We'd firm those up. Like when it went off, I talked about earlier where we put the fully funded envelope. Well, yeah, we have to do the hard work of getting banks to say, we're going to sign on a dotted line that we will have the money there to support close because the seller is going to diligence that.

1:05:14The first thing in that case and in others that they'll do is they said it's a fully funded offer. Is it fully funded? So they'll give to the lawyers and their bankers and say, go check this out. They'll go and look at the paper and say, did this paper that JP Morgan signed, is that truly fully backing it? Or is that just a piece of paper that says, yeah, if all the stars align and we feel like it will provide you the funding or just say, yeah, that funding is there. And we would make sure that it would look really well when they would diligence it. Yeah, they really do have funding lined up. You manage it at the organization level and then you put cash offers on the table.

1:05:49My teams were really good at that. I wasn't good at that. I didn't have patience, but my CFOs were and others were. Yeah, they would know how to do that stuff. And I'd say, we need a fully backed offer. and they do all the hard work and get a fully backed offer. That's where we'll pause the conversation for now. We covered a lot of ground. In the next episode, we'll pick it up right where we left off and keep digging in. Thanks for listening. We'll see you in part two.

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