Navigating Large-Scale M&A Deals and Legal Complexities

22:03We use external for all our big deals, keep some of our smaller deals in-house. External counsel will, on the bigger deals we're using, they'll generally take the pin on the major transaction agreements that, of course, we will weigh in heavily on and help get done. One thing we're doing more and more moving in-house is due diligence, low-hitting fruit type. It's expensive, especially when you're using a big AML firm, very expensive proposition. And it's something that can usually be handled in-house potentially or the lower cost vendors. That's something we try to take off our external counsel.

22:37But a lot of the diligence, especially for doing a divestiture, we'll do a lot of all that ourselves. Emerson has a full M &A team. We have our own tax team, HR, finance. We're able to rely on our own team, do a lot of the work. And the outside counsel is really just helping execute the deal. What would be the thing that you really want external counsel to do on those bigger deals, knowing that you're going to get the best bang for your buck? the transaction agreement. That's where they'll live. They'll live on helping draft, negotiate that. It's a big deal. The other side will also have very sophisticated counsel.

23:08So we're relying on them to help steer us, help negotiate against the big players on the other side too. That's really where we get good value. And these big deals can also be very complex. We do a lot of M &A law firms. That's all they do. So they see stuff even more than we do. So to help rely on their expertise and what they've seen in other deals and they know how to get it done. So relying on them to help navigate us through the complicated waters. I can see that, especially in these cross-border deals as well. Oh yeah, cross-border is interesting too. You definitely need good outside counsel there, particularly for the local law aspect.

23:40I know M &A, but I'm a US attorney. I know how to get deals done in the US. I don't know the law in every single country around the world. There can be specific requirements for getting a deal done in an Asian country or somewhere in Europe that would never cross my mind to even put on the checklist to do, But for having external counsel will say, oh, no, you have to get this notarized and this has to go here. And some of this helping navigate the local law requirements. And also, I know it's market in the U.S., but your market might be different in other countries. So relying on the external counsel, the local counsel, and just jurisdictions to help us with what's standard and how to get a deal done in those places is very important.

24:17Localized expertise. Yeah. Working on the transaction agreement. You mentioned the due diligence, pulling that in-house. Can you give me just a quick high level, like what is legal due diligence entail? Because I'm just imagining, I always think of every company, you have a bunch of employment contracts, a bunch of customer contracts, venture vendor contracts across the board. Yeah. Just reviewing all those contracts, like what else does it include? That is probably the biggest and most time consuming piece is reviewing contracts. You're reviewing for any unusual provisions, non-competes, say you're on the buy side.

24:46If you're taking up on an agreement as a non-compete, you want to figure out how that's going to impact you. You're looking for things, indemnities in these contracts, depending on what space the business is in. A limitation that caps on those liabilities can be very important. You're looking at the logistics for transfer, whether it requires consent for assignment or change of control. So the things you have to comply with to actually move the contracts over. So it's a lot of contract review. You also will get into corporate document review. So you're looking at their governing documents, basically sometimes maybe what they have to do, especially if there's a large shareholder base.

25:18What are the requirements to get approval to do the deal? Look at their minutes, their board, shareholder minutes, because oftentimes they'll discuss issues that pop up. So you look at those and you might see something like, oh, you're discussing this litigation at this board meeting. What happened with that? Litigation is another thing the legal team dives into the litigation profile. Somebody getting sued all the time. Are they not getting sued all the time? Are there product liability risks with a certain business? Looking at the IP portfolio, Have they adequately protected their IP portfolio?

25:49Is there really value in that? Are there gaps? Have you gotten the proper invention assignments from employees or third parties? And then you're looking at the employee side, employment contracts, things like that, handling all the benefits and ERISA stuff and everything that comes with that. Tax attorneys are weighing in. Contracts is what people really think about, but there's a lot more to it than just looking at contracts. I'm going to stop writing off the value of legal counsel now. So that's a lot of little things that really add up. And some of these things you mentioned tend to be pretty cross-functional.

26:20Like I can imagine the employment agreements, you start noticing some things, you got to talk to HR about it. Yeah, I was going through that list and I'm lucky enough here at Emerson that we have a team, that we have a lawyer in those functional areas that's dedicated to our M &A team. So I personally am not the one checking the IP portfolio. We have an IP attorney that helps us. We have tax attorneys that helps us. We have HR attorneys. We have litigators that all get involved. So not just us and they're illegal. They all, different lawyers in different functional areas are getting involved. I'm fortunate enough to be able to rely on those other people to help.

26:54Hey, let's talk about cross-border deals. Sure. All these big deals you've done, are they all cross-border? Yeah, they're interesting. The main genesis of the deal is usually US-based. Obviously, US seller, usually US buyer or vice versa. But when you're dealing with deals of this, handling deals of this size, there's always international components because you have subsidiaries all over the world. We're buying so many. There's often subsidiaries all around the world. So although it might be a US-based, US-centric, there are cross-border aspects coming into it for sure. I talked a little bit earlier about how important it is to have good local counsel.

27:27We augment our team with having international law firms to carve out expertise to help us navigate the waters, so to speak, helping us address all the ex-US stuff and figure out how to get that part of the deal done. Do they do that? Who do you guys use? Do you guys go to one default firm or do you sort of bounce around between a bunch of them? We have a primary firm that we like. You work at a large law firm. You would rely on that relationship, having that law firm help you find the localized expertise. In many cases, they actually have offices in the countries we're doing. So they have the localized expertise themselves.

28:01But in a rare occurrence, if they don't, they'll have a network of firms and be able to get us the expertise we need. That's good. Right. So you're not scrambling to find local experts. Right. No, that's one of the great values that they bring. I'm not calling law firms in Timbuktu trying to figure out who can do M &A there. They have the network built in and rely on them. What are the biggest complexities when it comes to doing those crossword deals? Because I feel like the people laws are always a lot more complicated outside the U.S. Yeah, the European Works Council and the people issues are very complex.

28:33Two things that come up as complexities is I'm a U.S. attorney. I know how to do USM &A. I don't know what I don't know in those other countries. So I really rely on the local law firm to tell me if there's something that needs to happen in that country. Like if you're in Germany and you have to go to a notary and you're signing up your deal docs. I know that now because I've done plenty of German deals. But things like that, when there's a local law requirement, and if I don't know it as a U.S. attorney because we wouldn't do it in the U.S., getting the right law firm to help you navigate that.

29:05The other difficulty is just, it's almost, I don't know if the right word is cultural, but we're doing a deal that's sometimes on the other side of the world. You have time zone issues, you have language issues. We're fortunate in the US, a lot of times people will be able to speak English to us in our negotiations. And if not, they'll have somebody that will speak English. But oftentimes it's not their first language. So it can be complex trying to negotiate a complex transaction with somebody that might not be their first language. And sometimes it's cultural norms where it can be a little difficult trying to get things done on Zoom, which is one thing that I've found is an advantage.

29:41In this day, post-COVID, a lot of stuff is done on Zoom. A lot of negotiations are Zoom, not as in-person as they used to be. I was doing a deal in Europe. We're negotiating it on Zoom. And I've found that because of the time difference and also language, it was difficult. It drugged the negotiation out over several weeks where I thought if we would just get in the room with them and just establish a rapport, because you have a different rapport in your room and somebody looking them in the eye than just going on the computer screen. If you just get in the room with them and get it done, it would have been like a two-day thing instead of two-week.

30:18I do think that's still important. It's something that should still come back. And sometimes it can be costly, but it might be actually cost-efficient to actually travel someplace, get in a room. you save time in the long run, save expense. We have traveled. It's come back a little bit. I've been traveling to other places. We did a deal in Asia. When I say time zone, it's just the time windows to actually negotiate, turn documents. We just really drag it on. But going to a place, sitting in a room, flipping documents live, it just makes it much more efficient. The trust is a different level and you can feel out the cultural aspects.

30:53I really think it's important to still sit in a room when it calls for it. Sometimes things can still be done over Zoom and cross borders. Sometimes you kind of feel it like this is one we need to actually get in a room with these people and get it done. Yeah, I totally agree. It's the whole thing of, what is this thing, 70%, 80 % body language. Yeah, yeah. And that's the thing, I feel like especially in some other cultures, my body language might be even more so than it has here in the U.S. So it is important to get in a room with people. Fair point. Right. Do you have a cross-border deal that you found particularly challenging you could talk about that maybe has some interesting lessons learned from it?

31:27Well, I kind of actually just touched on it. It was the one that I was talking about in Europe where the negotiation took us two weeks jumping on the Zoom every day for three, four hours, because then it got to the end of the day, they need to go to bed. And then it took so long that it's not to reiterate what I had just said, but the lesson learned was don't be afraid to go get in a room. it's still a good way to get stuff. Sometimes the efficient way can help deals get done a lot quicker sometimes. Just go there, be in person on those cross-border deals. Technology is playing an increasing role in M &A.

31:58How have you guys leveraged tools like DealRoom to streamline your processes? DealRoom has been very efficient for us. The data room aspect is great. We use it to put a ton of stuff in there. It's very user-friendly. We're sharing the documents, even if it's not like diligence documents. We can share other documents in there because our whole team is on there. that's very helpful. You guys have actually rolled out a new tool, the AI that helps with diligence. We're exploring that. There's some great opportunity there to help streamline a process, enhance cost efficiencies. You still need a human to do it.

32:28The AI can reduce the time to do it significantly, see some good value opportunity there. There's other things like using online platforms for integration or something like that to be a single source of truth instead of just passing around Excel documents and email and having everything leave an email having online platforms that serve as a single source of truth for diligence documents, deal docs, integration stuff. So really leveraging the software and technology space there. I don't want to make this too big of a commercial for Deal Room, but I got you here. The thing I'm really curious about, I watch you guys do$35 plus billion of deals in just like the last three years.

33:06And all these deals, and it's all public. There's always JPM, Goldman Sachs, Blizzard, Guggenheim, top tier banks on all those deals. All those major deals you've ran through Dealroom. And I always get this thing where bankers, they're always obsessed over the old school data rooms that still build per page. And that's what they always want you to use. How did you convince them to go otherwise? Bankers probably like their built-in tools that they're just used to using. For us, you're a regular M &A player. Our team is fully up to speed on how to use Dealroom, has all the functionality we need.

33:40At the end of the day, the bankers work for us. So if we say we want to use Dealroom, in both cases, they, you know, in other cases, they've like tested it and like, yeah, it works. I guess the more directly answer your question, like if you have a tool that you really want to use, force the issue and say, this is what we're going to use. I got it. So because your adoption is so strong in the company, that sort of makes it an easier leverage because you're like, hey, we don't have to worry about you got so many people in your company on the buy side. They're going to be engaged in this deal. They don't have to learn something new.

34:09They've already are familiar with this. This is what they know. day in, day out. Yeah, that's exactly right. It's also self-fulfilling where we've done billions of dollars of deals using Dealroom. So they can't say like, you can't run a deal like this on Dealroom. We've done it. This is going to be fine. Let's use this. I'm going to coach you on that, by the way. You're going to be on our next ad. So anyways, I don't want to press on it too much. If people are interested, just go to the website and learn more. Broadly though, how would you say technology, AI, automations impacted the legal approach in M &A?

34:40The biggest point is really diligence, helping with contracts and taking out that very time-consuming part of a deal. Firms are usually having first-year, second-year people out of law school doing it. It still costs a ton of money. To be able to leverage AI technologies to help maybe bring some of that in-house or lower-cost sources, that's one of the biggest points. But the AI revolution, or whatever you want to call it, is happening, and we don't want to get left behind. So we're always investigating, talking to people, seeing how we can better leverage technology. And I'm sure as it all continues to develop, it'll become more and more intertwined in the M &A process.

35:18I feel like ignoring the trends and where technology is going is to do so at your own peril. It's the future. Sounds like you're pretty optimistic about where this is going. Just trying to play devil's advocate, I would, one, be concerned about accuracy. we just had an example of where AI generated our interview outline and we specifically talked about things to admit from it, but it included it. And my thing was like, hey, somebody should have actually still done their original work and did their review and they would have caught that mistake. Do you have concerns around that? People get too dependent and then it ends up making mistakes.

35:52At this stage, AI does not replace humans completely. What it does is it takes a team of instead of five or six humans reviewing, but with the AI pulling it all the faster, maybe you can get down to a team of one or two humans. But then the humans do need to still, one, the humans actually need to tell the AI what to do. So you still need that interface and you still need people to go back and quality check, make sure that what's being spit out is accurate, not relying 100 % on AI, but using it as a tool to make everything more efficient, but still having the human component to it as well is still definitely needed.

36:27What are the positive business outcomes that would make you motivated to adopt? Is it cutting costs? They say, hey, we can save money on external legal fees or is it just getting things done faster? It's both. It's cutting costs in business at the end of the day. That's the bottom line. You cut costs, that's of course going to be a great value proposition. But it also is saving time. It's freeing teams up to focus on more sophisticated tasks where they might need a higher level of thought, things that AI can't do, at least yet. It brings down costs and frees up time to spend that time on more valuable projects and parts of a deal.

37:04What about these external councils that want to raise fees every year? Like what's going to... I don't know where you want to start. It's the fees of outside lawyers keep going up and up for sure. It's tough. That's also really driving in-house teams to look at what tools they can use and what things they can bring in from an outside council. So only use the outside council for the most sophisticated and pressing parts of the deal and try to bring other parts in-house and help leverage the tool. So as the firms are charging more, the overall deal fields might not be near the same as people try to bring other parts that they traditionally might have put out to a law firm and try to bring them in-house.

37:43I've heard from other in-house colleagues at other places that they're also really looking at ways to do stuff in-house and decrease the reliance on external counsel because the fees are getting very high. Now I know who the early adopters are going to be for AI diligence products out there, especially ours. Yeah. Moving from law firm work to an in-house role at Emerson, what strategic changes did you have to make in that transition? Coming in-house, I talked a little bit earlier about the broader teams, a lot more cross-functional exposure with people that aren't necessarily lawyers. So really building up that skill set, one of the first skill sets you get here is you got to actually figure out who everybody is, who's the right person to go to for this and that, and build a rapport with all these different people outside of the legal department.

38:24I feel like you really increase your business acumen, business strategy. You get a lot more involved on the strategic level. We like to be viewed as business partners with our corporate development or businesses. We want to be a business partner with them, not just a lawyer. We want to help them form strategies. We want to be pragmatic. Sometimes law firms are very conservative and risk-averse and say no. We want to help get the yes. We want to be a business partner, somebody that our business teams run to instead of away. So really developing that skill set where you really take a pragmatic approach to being a lawyer instead of just saying no.

38:59Developing that skill set is another thing that's really important for in-house attorneys. How does being in-house influence your role beyond doing the legal tasks? Our corporate development team, it's one thing I love about being in-house. They bring me in on strategic discussions. It's not just executing, drafting the agreement. It's how should we position this? How should this negotiation go? How should we set up the data room? And what should we do at this fact point? Strategy, how are we going to go about executing this deal? There's a lot more input on the strategy part of it than just black and white, executing the X's and O's of getting the deal done.

39:33It's a skill set you need to develop as an in-house lawyer, but it's also one of the things that makes being in-house so fun and attractive is being able to not just be a lawyer, but being able to weigh in on the strategic aspects of deals and things like that. What's that conversation look like? If you can walk me through, we'll nomatize it, but just that first phone call, hey, John, we got this deal we're working on, you know? They'll call you up, say they want to talk about a deal. You can go sit in their office and just kind of spitball and bounce. First of all, you have to earn trust of your team.

40:05Day one, they might not be having these conversations, but you can earn your trust over time that they know they can rely on you, that you have sound judgment, good judgment, pragmatic judgment. I'll go sit in their office and we'll just spitball and throw things against the wall and go back and forth and play devil's advocate. As the lawyer often played devil's advocate, even if it's not something I'm personally championing, just saying how somebody else might take it. So just kind of spitball and go back and forth and maybe have a strategy session like that. Things like that happen pretty often and it's enjoyable.

40:34This is like before we're considering throwing a LOI a company, this is more of just, hey, here's some ideas of things that we're thinking about doing or even maybe just initial conversations we're having with this company and just wanted to get your thoughts on it. Yeah. I mean, that happens to an extent. I will say that's probably more at our corporate strategy level, probably more when we're working towards possibly doing an LOI. There's definitely some strategy brainstorming. Like, I'm going to go have a discussion with them. We don't have a draft LOI yet. What questions should I ask? What things should we be thinking about?

41:04Things like that, getting involved at that stage. So like kind of right before they're like, hey, we're ready to send this LOI out. But almost of what can we do to shape and get the right information to put together an LOI? Yep. You got any key questions there? We talked a little bit about it. And again, you're going to throw the, it depends on the deal. That's what I was going to say. That's the default answer for a lawyer. Now we know how to work with it. That's the answer to every law school question too. It depends. Let's make it up. Let's make up a tech company. I like tech because I work in tech.

41:32We're looking to buy this small tech company. Let's say it's in Europe. Add a little extra layer to it. It's one where they got big valuation expectations and we're probably going to have to wrap some kind of earn out in there or figure something out around to bridge that valuation gap. that's what we're got an initial impression on at that point I would counsel a counterpart to try to avoid an earn out I know a lot of people and I used to do that back when I was at a law firm too is we draft earn outs pretty often but my I guess maybe my personal view is they invite disputes after the fact people are going to fight about if you do an earn out they need to be very carefully drafted but my advice in this scenario would be like find a way to avoid an earn out if possible sometimes it's not possible and you have to go down that route and in that case you need to get very specific in your definitions and parameters.

42:20And it becomes a very complex drafting process. We're going to come back to the avoiding earn-out. Oh, so some of the questions I would ask. So, avoid the earn-out. You said Europe. So, I'd maybe want to figure out what kind of works council issues they have, what their employee base is in works council. It's a tech company. So, maybe that's not an issue. It depends where they are, how many employees they have. You said it's a tech company. So, I'd want to know a little bit about their IP portfolio. Is it protected? Do they own everything? Have they had any challenges challenging their patents or infringement, anything like that?

42:52Has any disputes come up in the past? I'd maybe want to know about their customers and suppliers before even getting into actually reviewing the contracts. Is your customers, is it spread across a number or do you have just one customer? If it's just a small number of customers and that goes away, what's still there? We're like this. The change of control provision is always one because I've encountered that in a deal where basically every agreement had a change of control provision. And that was one where it just changes everything. Normally, you don't really get into the change of control provision, especially pre-LOI.

43:22But if this is a situation where there is one customer that's two customers that are 80 % of the business and they have change of control, you want to feel out, are they going to be an issue with a steal going down? The seller would probably say no. But if you identify that there's no way that that major customer is going to say yes to your company buying the deal, that's a major red flag. If that's all the revenue are tied up in one or two people who aren't going to approve the deal, where are you buying? So something to think about. What if they just had it as standard in their agreement that there was a change of control revision?

43:54Wouldn't you want to know that before LOI? Oh, you mean like their form customer agreement? Yeah. Pre-LOI, you're at a little bit higher level stage than getting into what your form agreements have as far as change of control and everything like that. Again, I think you want to identify potential issues with major customers, suppliers too, for that matter. But I don't think you're at that stage, I don't think you're really drilling down into. Okay. So if I came to the customer saturation and found out it's like half the revenues from one huge customer, then I would probably dig deeper and say, okay, do they have a change of control provision?

44:25Knowing that. You might ask that. Is there a change of control provision or do you foresee them objecting to this deal and not consenting to it? That might be the type of thing you put in the LOI. It's conditioned on their approval. So there's no surprises when you put that in the purchase agreement that we're not going and do the deal unless the customer that has 50 % of revenue or something gives their consent to the deal if it's required. What about people side? Is there anything I want to dig into there? Yeah. I mentioned the works council piece. You might also want to feel out who are the key people in an initial discussion like that.

44:54Is there a key engineer or something that really makes the technology work? Are they about to retire and go away? Is there a COO type person who really makes the company tick. And if they're about to get$10 million in the deal or something, are they going to go sit on a beach somewhere and the company will fall apart if this person isn't there? Trying to figure out who the key people are, who you need there. That's a good early discussion point. And then also just going to Europe, trying to get a sense for the works council and what you have to do there. Just asking them, are your employees part of the works council?

45:27Okay. So we got those part of the employee, knowing the key people, the IP stuff, understanding the customer base where there might be high saturation or low saturation. And then the earn outs. How do I avoid the earn out? I always think a roll over equity is either here you pay cash or roll over equity. Instead of doing earn out, do we just roll over more equity? That's one way you incentivize them that way. It's not a XYZ formula for the earn out. Just this company does well. You're going to do well because you still have equity. So that's one way to do it. It's just a heavy negotiation that this is a fair price and this is why.

46:01There might be employment agreements that have, it's not necessarily rollover equity, you might get RSUs or something. So your - Bonus. Yeah, bonus, something like that. To the extent you do end up with that, you definitely just want to make sure everything is very well defined, not open for interpretation because that's when disputes arise. And if you're arguing it or not, it's very important to make it very tight and get the perimeter on it very correct. Not based on EBITDA? Yeah. With the future of M &A. How do we feel about the future? How do you see the role of legal teams at M &A evolving?

46:30Especially we talked about technology and it sounds like more collaborative processes in general. I'm excited about the future. I think M &A is always going to be around. It's going to be very important for a place like Emerson. It would be a matter of figuring out how to work with technology. My wife asked me about the AI. She's like, are you worried about AI taking your job? And I was like, no, because somebody's supposed to tell the AI what to do. There's still going to be an important place in the future for an in-house M &A legal counsel to work, to utilize technology and help everything get done.

47:03That's good. The optimistic view and you're right. It gives folks more time to focus on the real people issues and connecting with people. What's the craziest thing you've seen in M &A? It's hard to get into it. I've seen some threats and some very unprofessional emails from lawyers. I've seen people copying CEOs on random complaints. I've seen the all-nighters. The one thing about M &A is sometimes it gets down to those last couple of days. You're doing very long hours. If it's taking calls at family events and stepping out, some of the demands M &A takes are, like I said, pulling the all-nighters, working all night on a deal and signing it at 7 or 8 in the morning after being up all night.

47:41Some of the crazy, more stressful parts of it. Like I said, I thrive on that, especially on the in-house role. It's few and far between. I mean, they happen, but it's not every week. So it's manageable. That's true. That can really push your limits. Yeah. What do you do to pull those all-nighters? A lot of Red Bull? Energy drinks, coffee. Sometimes you got to rely on a lot of caffeine, but it's worth it to get it done and the feeling you get when you get that deal across the finish line. Then you go take a vacation after? Sometimes. There used to be, I say used to be, there used to be closing dinners, which were pretty fun.

48:13They don't happen as much as they used to. Been to a couple fun, one of those over the years. And I heard even before my time, I've been doing this for about 14 years, but I heard they were even crazier back in the day, but they're fun things to look forward to after getting the deal done. No big sabbatical. Just keep me, Mike, get a closing dinner. Yeah. Got to get back to work. Absolutely. The next deal is around the corner. Exactly. Hey, John, this has been a great conversation. Thanks for taking the time, helping me become a better M &A scientist. Absolutely. Thanks for coming in. Fellow M &A scientists tuned in.

48:41Thanks for sticking through. I love to hear from you. Feedback, criticism. Always welcome criticism. want to get better at this, reach out to me on LinkedIn. Until next time, here's to the deal.

49:03Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

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