The Role of CEO in M&A

24:27If you get on that pulpit, whatever it might be, a Zoom call or in person, and you tell the leaders of that organization that's joining with yours that you're going to do none, you've lost credibility. If you tell them that you're going to look at it over time, I would argue you've lost credibility. If you tell them it's a natural byproduct of coming together and you start to turn the conversation in a different direction, which is for those affected, we'll do that with obvious objectivity and a duty of care that matters. And let's not forget the fact that those that remain after this combination really should expect us, as our shareholders expect us, as our governance and our board expect us, to use this allocated capital and generate a great return and create opportunity and options for everybody that remains in the company.

25:13And so that synergy isn't about some fanciful topic or the CEO looking good. It's about generating the right economic daylight and capital that you can reinvest back in the business and grow it to create all that options and optionality. I look at this to the point of be transparent, be visionary, be direct, be honest. That's like extreme transparency right there. Like it's literally this is our whole investment thesis. This is why we're doing it. This is what we're going to do with that capital, how it's going to increase shareholder value. I would tell you that someone could make a very cogent argument, 180 degrees different than what I just said.

25:52I'm going off of a long history of experience of taking that higher road route on the mountain, as opposed to one that's a little more cloaked in the trees. And it's worked for me very well. But I think if someone has a natural bias or a natural comfort zone, take the route that's best for you. I've had a client in a public environment that I really appreciated what he did in that it wasn't an area of counsel for me. He was advised by someone else. But his investors were just all over him about, tell me what the synergy amount is in this deal. And he just refused to answer the question. I really appreciated that.

26:28And I think that's a fair stance to take. If I was sitting in front of an acquisition tomorrow, would I want to get down to the dollar amount in synergies? I wouldn't want to do it publicly. I wouldn't want to do it privately. I wouldn't want to do it with my employees. I would obviously do it with my board or the investment committee around the totality of the deal economics and synergies involved in that. But I wouldn't shy away from the fact that we're going to be some. I think that's important to be transparent because, again, your brand and the organization matters. If you're going to ask people to rise and do and conduct the strategy of the organization and go forward with your leadership and direction, your brand matters a lot.

27:06Don't tarnish it over something so simple, so elementary. Leadership is about being able to deal with the tough choices and being able to deliver the tough messages as opposed to just only being able to do the stuff in the sunshine and the happy days. And so do it. Don't be afraid of it. That's great advice. Kevin, can you teach me capital allocation? I'll give you context why this is top of mind. I run a company. We're pretty small, like 50 people, 10 million run rate. But I'm already sensing this is something I need to get better at. You have internal feeding into organic initiatives. Every department wants their own budget.

27:42I'm trying to keep some cash reserve to do some inorganic activity where we have a little segment that we could potentially acquire a small business and start building up our M &A muscle, even though we're pretty early at that. I'm just already seeing that. I'm like, wow, I need to start wrapping my head around gap allocation. I figured you're working on a much bigger scale. Maybe there's some things I can learn from you. Let's take the M &A part of that and put it up on the shelf for a moment. We'll come back to it. Let's just talk about it as essence. Every organization has some degree of constraint.

28:10I haven't met the one that's unconstrained just yet. Although I think there's... Hyperscalers generally have a ton of cash and can do a lot of things. But there are limitations in any environment, whether it's capital or whether it's people. There's going to be some limitations. There's pace limitations, etc. I think any great business leader has the imperative, the necessity to think about the period ahead. Whether you plan annually like we do or you do it somewhere different. but to plan ahead and to think about that period of performance and to think about all of the market signals that you're receiving.

28:41And those market signals can be varied. They can be from customers. They can be influencers. They can be analysts. They can be your employees. What's the market telling you? And then you have to do, along with your executive team, because I would argue this isn't the job of one, it's the job of many. You have to convene and really think about operating discipline is the term I often use at Optiv. The operating discipline to discern between choices. There are some things that are more short, medium, and long-term in terms of a temporal orientation. There are things with lower and higher return.

29:13There are things where there's a different degree of risk of execution. So those are just three variables that I use as a consideration. I tend to go beyond that though. I tend to look at who's leading the initiative that I would invest in as if I was a public or private investor, not only in the initiative, but in that person, like they're the CEO? And what's their historic track record of delivering with my invested capital as a company? So I tend to put that human element to it as well. And then I tend to put another, which is around, is this a necessity or is it an aspiration? One of the things you'll find when you get really good at this and you do it at scale is as your business grows, the existing parts of your business will want to consume a lot of capital.

29:56And one of the dangers as a CEO is you allocate all your capital to the business of today and no capital whatsoever to the business of tomorrow. And you'll optimize it, you'll polish it up, and it'll be a great business. But you'll be giving away some future value in doing it. So I think you have to throw that dimension into it as well. We probably look at more data points than just those five, but those five give us an effective scoring matrix. So I can now look at the portfolio and say, how much am I putting towards new ventures, that sort of business of tomorrow element? Do I think it should be 80 % of our capital?

30:31No. But we are a growth business. So if it's zero, that's a problem. That for me is usually I'm looking for sort of 7 % to 15 % of my portfolio going in that dimension. Maybe it's staying away from wildcat oil drilling opportunities, but core to us, but great expansion. I do think there's a certain amount that you've got to feed the existing business. But you have to have the discipline to say, is it going to make an economic return or is it just going to make people feel better? Because there are certain parts of what you do that over time will commoditize in any business that happens. So how much capital do you want to put behind a commoditized business?

31:05And are you willing to make the discipline choice to say, it's good enough today, let's continue to run it and harvest the returns from that? And you have to look at all your choices through that lens. Now, let's bring the M &A thing back in off the shelf case. I think it's important. A lot of people would ask that question a little differently than you did, which is at the beginning of the year, how much of your capital should you put to inorganic growth versus organic growth? I think there's a real danger in that question as framed because if I put that capital up front and say that I'm going to buy with that, there's a real danger that if I go start falling in love with assets, I'll do a deal to spend the money versus doing a deal because I think I can make money.

31:43And so I'm always reticent to do that. I think it's okay to think about available capital and the propensity of that capital to be engaged. So I never say zero with respect to the Energonics, but I never want to make it so precise that I'm trying to fill it in like I would be with an initiative around the business of today or the business of tomorrow. I think of it always as if I find a really good deal, an asset that would make a big difference for us, whether it's scale and market share or capabilities, I'm going to look at it pretty carefully and say I'll find the money. some way, somehow. I want to make sure I got this right.

32:18So market signal, which I think ties right back to strategy. And then you look at the return against risk. Then you're also looking at the leader that's going to be driving this initiative, what their potential is, what their track record has been. Then you also look at the factor of this as a necessity versus an aspiration. The other element you mentioned is, are we looking at this from the view of business of today versus business of tomorrow. Have you seen anything? Time, just time to value. Is it important this year or is it important three years from now? That one signal matters a lot, because if you think about it, there are seasons in the business, not ours, but let's say we'll conjecture a business that's more susceptible, less immune to interest rates.

33:05And so maybe they're going through a tougher time right now with rates being higher, or maybe it's a commodity centric business. So inflation is really put a hit into their P &L. I would, as a leader, start to look in businesses like that. I would start to look at things that were more near-term effective because I've got to make sure I'm generating the economic value today so I get through whatever these destabilized times are to better times ahead. If I'm in a business that's less susceptible to that, I'm going to make some near choices, but I'm going to make some farther choices as well. So I think time is a really important consideration.

33:39There's a lot of things we're factoring in and I feel like a lot of, I guess stakeholders are battling for the same budget. How do you manage that? Because you're going to have a bunch of different verticals internally, organic, you got external, inorganic. How are just the sheer variables across the board? How do you manage that? Maybe I'm a complex guy. Maybe I'm a simple guy that grew up on a farm. And I would tell you that I've never shied away from complexity. I think it's okay for complexity to arise. But when I think about my leadership team and who I put at the table with me, I'll tell you one thing right now.

34:16I don't look for homogeneity. I actually really like diversity, not because it's favorable today to say that. But I look for diversity for many reasons. But I think diversity brings perspective difference and brings with that perspective difference insight and insights goal. So I want people at the table that are going to think different. Two, I want people at the table that are courageous enough to say what they think. So I don't pack my leadership team with a bunch of people who want to say yes to me. I look at them for the folks that will tell me the honest truth. They'll tell me their perspective.

34:50Because again, someone's ultimately going to make a call on something. There's delegations of authority in any business. So then it's really clear who makes the call on something. But I think making the call with more information around you, it's not consensus. It's actually informative. It's really valuable. And then coming back to that yes, no, it's one of the hard filters for me when I think about a leader in my team, or if I'm influencing the leader down in the organization, which I try not to do because I don't really want to be in someone else's choices in terms of their reporting structure.

35:18I'm looking for the person that finds as much comfort with the use of the word no as they do with yes, because it's easy to say yes. It's much harder to say no. So people that have operating discipline, that can discern through facts and figures and perspectives and make a decision and are comfortable with their direct reports to talk about a yes and a no, are on their way to great leadership. So if it comes down to a transaction and someone says, but I really love this, it's okay to say no. If it comes down to five investments and you've got capital to allocate against two, it's okay to say no versus trying to underserve and underinvest in all five, hoping that you're going to have a differential outcome.

36:02Now, that sounds almost Darwinian harsh, and I know it could come across that way. It's not about being harsh to an individual. It's about doing the right thing for the totality of the business as seen through its portfolio that should benefit everybody. But I will tell you, as my walks through life, 38 plus years as a leader, I see less of it than I'd like to see. And if I had one lever to pull to develop the team in my proverbial shot, it'd be around that operating discipline. Strong leaders, a lot of debate, and really put it all on the table. Kevin, the thing I'm really curious about is how do you communicate your approach to capital allocation?

36:38I'm sensing the board wants to know, and do they care? Oh, of course they care. How do you communicate it? Is it a couple of PowerPoint slides or what does it look like? Yeah, look, that's to me the substrate. You got to get to what's the substance and then what's the engagement. There's not a day that goes by that I don't appreciate being a private company, private equity backed. It creates a lot more latitude and range that I as a leader can work within, in my own opinion. I think other company CEOs are better than me in many ways because they're able to operate with all of that plus the transparency.

37:11It's not that I aspire against that or for that. I'm just recognizing that it takes a certain set of skills to be able to do that. And I have a privilege to be able to operate in a private environment. And in that private environment, you think about choices and capital allocation and even an M &A transaction in the role your board plays. The beautiful thing is that you can actually condition and work with your board in, I think, a broader way. In a public environment, they have a governance role. and they're observed in that governance role from a public basis. And there's a trust with the shareholders that has to be established and maintained.

37:47And again, I think that's a beautiful thing, not knocking it. We have all of that, obviously, as a private company. Our board has that same fiduciary responsibility to play the same role, the same degree of oversight around our choices. But in a private organization, it is my perspective that I can actually walk from that to a different place, which is using our board as a thought partner, and using them for the guidance and counsel and that incredible level of experience that they have, not just in terms of governing our choices, but shaping our choices, not releasing and seeding the authority vested in me or my leaders and delegated to us to make choices and run the business.

38:25It's not giving up management's position. It's not asking your board to play the role of management, but it is asking them to play a role that precedes their decision authority, and it's called thought partnership. How do you engage them? And all that wisdom is there. Because usually boards are full of wisdom. How do you use it to better effect? And it's been one of the things that I've studied, looked at, evaluated in every organization I've been part of. And those that I've been privileged to be in front of the board, whether it's periodic or temporary or more permanent like this role, I really have thought hard about that, long about that, come to that conclusion that if underutilized, what a waste.

39:03and if utilized, what an incredible benefit. So I engage our board in conversations around our allocation of capital long before it's on a PowerPoint slide or in an Excel spreadsheet where we're talking budgets and commitments to budgets and annual plans. And I engage with them around market signals and engage with them about risk and engage with them about the organization's ability to rise to opportunities and engage with them around sizing said opportunities and the capital we could allocate in our choices. Not against ceding the role of management and saying, I can't make a decision, you decide.

39:38That'd be a horrible moment. But rather, I'd like your thoughts on this. Score it for us. At the most critical level, the ones that are really hard. By the way, if you do that, you condition a relationship with your board that's very powerful. They're engaged more in your business. They have more passion and affinity for your choices. And I would argue they're more supportive. And I wouldn't do it to like subrogate all of their objectivity. but I have found that it creates more affinity with our choices and strategy, a more robust dialogue about those choices as we go forward. It makes a lot of sense.

40:10If you got a board, you're getting the market intelligence for them. You're getting feedback. Those are like a lot of good ways to use a board. So we had capital allocation where you're having the conversations, but it's almost like you're validating some of those things that you're going to think through. It sounds like there's a lot of interesting things. I'm just thinking anything else I'm missing in terms of getting the most value out of a board? I guess the other thing I was curious about, it sounds like, too, you're almost having these individual conversations with board members as much as just sitting in the broader board meeting.

40:40100%. Someone said this, and there's a study about this or two or seven out there, I'm sure, that in the modern era, the CEO has become one of the most isolated jobs on the planet. And it's an interesting isolation in that if you had it on a two-by-two, and you talked about isolation in one of the indices and responsibility on the other, It kind of frames the job of, well, everyone says, oh, it's a great title. It's cool. It's sexy, etc. You'd be painting a job that people would be like, wow, why do I want to do that? And so I often think about that degree of isolation. And I wonder to myself, how do we revert that?

41:11How do you change that? Which I think there's plenty of levers to do that. Don't be isolated. If you work in an ecosystem business like us, get out on the road. Spend time with your ecosystem partners. Work in a business like ours that's very talent-centric. Get on the road. Spend time with your team. If you work in an environment like everyone should be where there are customers at the end of the day, and my job is not sitting in a box in a building and looking at spreadsheets and dashboards and telling people what to do. That's a part of the job, and I'm accountable for that part. But I'll tell you, my best days are in the field with clients listening to what they want, helping our teams to go find the resources to deliver on that.

41:46Those are my best days. Take this notion of isolation and just smash it. Just get rid of it. And it's absolutely also true with the board. Why would you wait for the frequency of a board meeting, whether it's monthly or quarterly, work quarterly, but why would you wait for that? Why would you wait to get in a room with a set of folks and even if they've had the briefing document beforehand, have the dialogue then? Why would you only use all of that wisdom and capability once every 90 days? And why would you let their relationship with the organization, their knowledge of what you're doing, why would you let that sort of only be about 1 90th of their time?

42:23Why wouldn't you engage more frequently? Why don't you come to them recognizing and respecting their time and their other commitments more often? Whether you routinize it or you do it periodically, why wouldn't you engage them and say, I could use your perspective? Or I wanted to give you an update on something so that it's a more dynamic relationship. Someone could look at what I just said and say, I'm trying to hoodwink my board. No, that's not the case. I believe in transparency to my team, to the market, and ultimately to our shareholders and our board. Why wouldn't I go propagate that every day that I could?

42:53Kevin, can we talk about culture? I know you have to foster your company culture and then you do acquisitions. And how much of that is betting on a culture fit or assessing culture fit versus anticipating the changes to their culture? Yeah, so I think it's one of the more important things you can do. And it's probably one of the least invested in areas of the M &A deal. I think there's some folks out there that have started to use AI as a tool to build like cultural sensing. I think that's a good and interesting marketplace, by the way. I think there's some firms that say they offer cultural diligence.

43:28I've never used it, but I think you could go find that. It's an area you've got to dig into. And you can task some people to do some work around social media footprints and see if you see anything notable. I don't think diligence is ever going to give you the total answer, but it's going to give you better than zero. Culture comes down to two dimensions that this can kind of split. One is more diligence and looking backwards. Are you seeing something that's just not a fit, not going to work? Are you seeing a modality difference in the way the company operates? Are you seeing a sentiment difference?

44:00Are you seeing a company that's got a culture that's no longer vibrant? People are down in the mouth and upset about the organization. Don't trust leadership because that's a lot of work for you to take on to go improve it. It's a lot of trust to go build. That diligent side is important. I think from a go-forward basis, you're going to go consummate a deal and transact. The go-forward piece is equally important. What are you going to do to focus on culture? How are you going to invest the time and the resources to make sure that you're understanding theirs, that you're hearing it from them directly, that you're mapping yours in the same way, so consistent store-to-store basis?

44:39And then how are you talking about how there's great affinity and natural connection in those and where there's differences and where's the positivity in those differences. And I think the CEO plays a really unique role in that. It could be seen as a parlor trick, Kisan. I don't want to make it come across that way. But I would tell you, I think the CEO's role in the early days of an integration or a combination, if you prefer, is getting in the mosh pit, getting in with the senior leaders, getting in with the people that are influencers in our organization and having the direct dialogue. It might be nothing more complex of having nothing to say about the integration.

45:16You don't know, you haven't thought it through. Don't think that's a great place to be, but let's take that extreme condition and doing nothing more than answering everyone's questions and concerns. I've actually done that. We made an acquisition that was very people-centric and the people that have stayed are phenomenal professionals, like truly phenomenal, high degrees of integrity, high degrees of mission orientation, incredible work ethic, beautifully professional and what they do, like amazing people. But when we acquired, there was a lot of uncertainty about all the things that we would do that would be evil.

45:51And it was interesting. My favorite comment that came from this, what I'll call pit session, was someone looking at me and saying, I've always worked for a small company. I've never worked for a big company. You guys are a huge company. And I'm really worried about what's going to happen. And of course, in my mind, working for a company of our size and scaled by 2 ,500 plus people. Having come from an organization that my organization, the one that I looked after was 40 ,000 professionals. So my frame of reference is I work for a small business and I love it. I can see every edge of the property.

46:27But from this person's lens, I was a gigantic business and they worked for a small company. Interesting perspective actually matters. But getting in the pit and having that dialogue, you won't know that until you ask the question. You won't know that until you show the courage to stand in there and answer every concern, question, you name it, that comes out. Can you solve all of them? No. Are you going to make everyone happy? No. In that particular case example, just by way of reference, we retained over 89 % of the performance staff. And I don't define them by that. I define them as great people, individuals, professionals that are part of a company.

47:03But if we aggregate them on a spreadsheet, we would call them the performance staff. We kept 89 % of them. Our goal was a lot less than that. I was really excited about that. And we did it through one fundamental way. Engage, have the dialogue, address the questions, learn from what they have to say to you. There's power in that. Invest, build relationships, find opportunity and make what seems to them big look a lot more small. Just like for me, what I'm in looks small compared to where I came from big. It's all just perspective. Work it, change it. Kevin, pretty early in the deal process, it's a lot of executive-executive conversation.

47:43How consistent is that sense of culture from those executive-executive conversations to how it expands out when you get to know the broader team? You meet an executive and you're like, wow, this guy's really an asshole. I don't think we're going to do a deal. Versus you hit it off and then I'm just curious. Is that pretty consistent or is it just, whoa, you can get surprised? You can get surprised. I would be cautious to tell you it's not a one size fits all. And so you're going to find people that are really different. I'm thinking back of the entire sort of repertoire of deals I've been involved in and starting to think about all the archetypes.

48:18And we don't have enough time to get all there, get all of it in for you. But I will tell you, you're going to find organizations where the CEO thinks his organization is just like he or she is, and they're not. Whether they're the acquirer or the acquiree in a transaction, they're pretty isolated. The team's just telling them what they want to hear. They don't really know what's going on. When you're involved in a transaction like that, it shows up pretty quickly. Because you get to your point about sensing is there consistency. You get one layer and you start to realize, okay, there's an issue here.

48:49You get two and three layers and you know there's an issue where there's just such a grand difference. That to me, if I caught that in diligence, I'd run the other direction. If I caught that in integration, I'd double down what I was going to do to fix the culture. Because I would see like a massive risk in that. It's really context specific. There's other places where that senior leader or CEO, he or she, is so central to the organization. They're like part of the genetics. The company has literally mirrored everything they've done. They talk in the same way, maybe a little too homogenous. In places like that, you know that what you see is what you get.

49:21And those abilities to leverage and scale are awesome. So it's go after it with vigor. It's so context-specific. I've seen it all. I've seen a case where I was the advisor in this context. I was helping a really large tech company to do their largest inorganic ad ever. It was a moment of courage for them to really reach out and do something, I think, market spectacular. The CEO of the acquired company packed his office, put everything in boxes, shipped the boxes to his own, and never came back. And this was a deal that went through a long second review in HSR review. Went through an elongated sort of regulatory period.

49:59There's the plus out of that that we were able to really plan prospectively in a very diligent, thorough manner. But think about it for a moment. The CEO walked away and never came back once the definitive agreement was penned. What signal does that send to the people that have been in his care over all those years? I don't care about you. It's like walking away. It's one of the most horrific things I've ever seen. I'll never forget looking at the CFO as we were in that early integration moment. Again, I'm just the advisor in this, trying to help my client. And the COO of this company was the one that was still holding everything together, holding their leadership together, trying to keep the business still running.

50:37And after we talked process and timeline and calendar and roles, raised his hand and said, Can someone in this room tell me what you want to do with our business? Because my client, despite a lot of cajoling and guidance, hadn't yet put that thesis on the table and said, This is what we see. And thankfully, they had listened to me enough to actually put it on paper. is they looked over at me in this room and said, oh, we've got something we'd love to share. And the moment we did that leadership team while they stayed on their fiduciary side of the line through that regulatory review and didn't break trust and public confidence around letting us operate their business consistent with the law, really got on board with planning the combination of the businesses.

51:17It was one of the most successful things I've ever done in an integration basis because the leadership teams leaned in. But boy, if you had asked me before that watershed moment how it was going to go. I was deeply concerned about that CEO just walking away. It was just horrific. Absolutely horrific. Yeah. Showstopper. I don't know how to handle that situation, but it sounds like it made the best of it. Have you ever convinced someone to sell their business? Yes. Teach me how to do that. So let's go a little more nuanced. They don't want to and you convince them to, or they're contemplating it and you convince them that you're right.

51:53Because those are two really different questions. Let's play both out. I'm curious. I feel like people hold their cards tight to their chest. So it's hard to tell if they're contemplating it because a lot of people, I've noticed that in conversations, they warm up to you a little later and then you find out they're contemplating it. Or in the beginning, they're like, no plans to sell. So there's a little bit of that. I don't even know how you get a read of that first. I've been at the table to try and do that many times. And if someone is not signaling that they're available for that conversation, that's a warning sign for me.

52:22It's not about my prowess or ability to convince them or compel them to do this. It's more around there's a point where I don't want an unwilling participant on the other side of it. Having been the acquired, by the way, I think the same play is true where I might be an ardent defendant of what we're doing and how we're progressing our agenda and our strategy and our productivity and our performance. I might love that. And so am I willing to give it up? Maybe not. Is it ego? It shouldn't be. I think you always have to be careful as a leader where too big a dose of ego is in the way. But that being said, if I continue to be stalwart and holding people off, it should give the other side a little bit of a warning sign that you're going to face that over and over.

53:05If I open the door and say, look, you're going to have to compel me to do this. It's not just economically. You're going to have to share your vision for what you would do with us together. I've given you a signal that I'm open to it. So there's a line for me, Kisan, where I draw back and say that's as bad a signal and diligence as I've ever seen. So have I done it? Never when someone's got the heistman out and pushing back and saying I'm not interested. If it's just resistant trying to get me to think a little more bravely, courageously, pay a little more, I actually admire that in somebody. Now, the flip side, just to explore it, if someone is available and they've made it clear they're open to the conversation, then the answer to your question is 100%, absolutely every day and twice on Tuesday.

53:48I actually think the CEO or the senior leader, if it's a business unit leader, plays the quintessential role. Now, I'm not suggesting they should be negotiating on their own, out on their own, brazen, like hero moment where they've got it and the other person doesn't. Use your team. He is an operator's team, always better. But if you think that the corp dev leader is going to take your direction and your parameters and go off and do it, I think you're going to be a little bit surprised. By the way, that can be an incredibly skilled corp dev person. I've been an incredibly skilled M &A advisor where some magazine once said I was at the top three of what I did in the world.

54:24Great. That and$4. Get you a cup of coffee at your favorite coffee store. Not interested in that. But I know where there's real yield and power in a relationship. And I think if the business unit leader or the CEO in certain contexts of a scale deal can come together and say, look, this is what I see and why we should come together. Let's talk about what your business is worth. This is a personal thing. If you're the leader of a business and you're going to lay down your sword or combine your army with someone else's, if you're going to leap forward into that, it's personal. It's a personal choice.

54:57There's money involved. Yeah, there's success involved. It's a culmination of something. That's all great. but it's a personal activity. It's a personal choice. It's a personal choice wound in with your shareholders. Never forget that. There's a degree of personal in this. Do you want to be sold something by somebody that it's transactional or do you want it to be a relationship and it to be treated equally as a personal choice? I always think of it as I want to convince them. I want that to come from me. I want to talk about the terms. I want to talk about every time I've made a pitch like this, I start with principles.

55:30This is the way I think about it. This is the way I frame my logic for you. This is what we see and what you're doing. It's great. This is how it plugs into us. And then I'll get to what's it worth. So this is what we think about in terms of value. And I'll tell you, that choice as a leader, you have to accept that you're going to get told no from time to time. You have to accept you might even make someone angry from time to time if you're a value buyer to our earlier discussion. You got to accept that you're going to fail from time to time. As a leader, I hope you can get comfortable with that.

56:01But you also have to accept that when it's the right fit, you're going to find great affinity with that leader across the table or across the Zoom call. You're going to find that you'll get to terms that on a broad basis make sense. The attorneys can get in the room and hammer out all the dotted I's and cross T's. Do you fundamentally see the world the same way? And when you find someone that's willing to have that dialogue with you, you get to negotiate terms that seem to make sense for both parties, I would say you're on the road to a really successful transaction. A lot of work to be done. Not doing this correlation thing where it's, if we can do that in 10 hours, it's a successful deal a year later.

56:35That's all wizardry. Yes. But like, aren't we off to the races in a good way? Hell yes, you are. It's more about working towards a shared vision. Even if you're a robber, baron, acquirer, let's put that out on the table. Sometimes you're going to look at an asset, maybe it's a distressed asset, and you're going to be a robber, baron, acquirer. It's going to happen from time to time. even though it matters. Is it a shared vision there? Yeah, it is. Like I'm going to take the asset that's been struggling and I'm going to make it better. That's what I was curious if there's any like other drivers you'd want to hit on.

57:05So I think the shared vision is probably the main thing to lead on. Then obviously there's the price consideration. I'm always thinking of like playing devil's advocate myself here. If I was going to sell the business, if you're giving up a lot of power and control, that's one. And then the financial incentive where I have control and I know the equity growth and things of that sort versus is there sort of a picture on that of, hey, there's still opportunity for you to grow that equity with a combined business through options and things like that? There's a lot of nuance in this too. Any great leader with any title that's ever operated on behalf of their shareholders knows that this is nuanced, knows that you have to have the conversation with yourself and or your stakeholders minimally around my selling in a down environment.

57:48Are we trading down? For whatever set of fundamentals or intangibles or externalities that might drive that? Is the world worsening as I'm selling? That's a certain kind of conversation. Is it improving? That's a different kind of conversation. Did we set out on a five-year operating plan and a vision that we could realize in five years? And we're two and a half years into it. Are we selling early in that cycle? Are we being paid for what we've built? Are we being paid for the prospects of the future? Are we being paid for what we can do? Are we being paid for what we in concert with others can do?

58:17If I'm selling, those are all the questions I spend time on with my stakeholders. If I'm buying, I should be thinking about the same things, even though I might use them and articulate them differently. Am I buying at a premium because things are on an upswing and I have price point risk? Am I buying on a downswing and I might have market and economic risk? Am I buying early and I got to make sure that not just the price that I pay on the definitive agreements, but the price I need to allocate back to your persistent question about capital allocation? This is a work in process. if I underserve it at the capital allocation next year at that table and I don't put enough capital into it, great acquisition for a final outcome.

58:59It's a lot more nuanced. Yeah, it is. So lead with a shared vision, then you can figure out their financial terms through all those other considerations. This is a landscape, as you know better than me, with your approach to this market, whole dialogue about M &A science. You know that this is a landscape that by anyone's measure, anyone's study, is tragically littered with failures. Yes. But also highlighted, but incredible success. And it just depends on whose study you want to look at. I did my own that was much more scientific than I think the rudimentary one-third succeed, two-thirds fail crap that's out there all the time.

59:36But it is a landscape that's not easy. This is a place where the arduous tasks are tackled by the really courageous and great at what they do. If you're not prepared to go do the hard things, you're not prepared to invest in it, do it the right way, you're not prepared to really deal with all that risk, don't enter because it's not a risk-free environment. Gotta know how much risk you can tolerate. That fourth pillar, battle rhythm. You put the emphasis on speed. How do you make that happen besides war cries to the leadership team? I think speed always starts with expectations. I'm a believer in the people in an organization.

1:00:13I believe in sort of their goodness, their strength, their resilience, their capability, their expertise, their applied industriousness in what they do and whatever their chosen field is. I think a lot of leaders are afraid to ask of their teams what needs to be done. So I think it's all about their expectations first and foremost. Next, it's about logic. Create the imperative. Why does the speed matter? Let's talk about what we have to get done. And then I think it's third about incentives. If you're going to ask your organization to go faster, which means it's going to do more, make sure you're willing to show up when it's payday and make sure they participate appropriately.

1:00:51And paint the vision for that not only in the near term, in terms of whatever you might do for those that are doing a day job and a nights and weekends job to make this work, but also long-term. Really always come back to painting the picture around when we put these pieces together or this string of pearls together in a series of acquisitions. This is where we will sit. This is why we're doing it. It's not about the CEO and the glory of being an acquirer. It's not about the CEO and them standing in front of the board and saying, look at what a phenomenal leader I am, he or she. It's interesting.

1:01:22It's not compelling. It's about the organization creating more opportunity, creating growth, creating economic difference, which then means the organization can reinvest in itself and reinvest in its people. As it does that and continues to grow, it creates opportunity for more leadership. Leadership means progression, promotion, advancement. this is what we miss sometimes in a societal sense, is that it's not and never should be seen as an easy game. Growth is hard to do. Inorganic growth has even more risk to it, my opinion. But absent that, can we ultimately serve the market that we choose to serve in a way we choose to serve it?

1:02:01And can we serve our people, which is a gateway to serving our communities in a way that we choose to serve? There's more bias to the former than the latter, and that covenant with your employees is broken. That objective covenant with them around growth creates prosperity. Prosperity isn't just about our shareholders, it's about you too. I'll never run for president in this country and I'll never be a senator or a congressman or a mayor or a governor. But I would tell you that to me is one of the passion things for me is have that conversation with those that you look after as a leader, create that covenant around, we together have to be great things, which serves all, including the customers and communities in which we sit.

1:02:40We've failed to do that lately. We've failed to have that objective conversation. We've created entitlement in place of it, which I think is a very dangerous thing versus a merit-based system. And as leaders, I think it's incumbent on all of us to actually get back to that fundamental place of having that open conversation, creating the connectivity between performance begets reward and reward begets growth. and it's a really positive, upwardly motivated cycle. That's where you want to get your organization. Whether you started with that, whether you have to really turn an organization around, whether you started with that as a great sort of tailwind, either way, that's where we have to get back to.

1:03:17Inorganic growth is just one element of that. It's all about setting expectations. This is only the first question of the outline. I know, I think we've had a little extra time. I was thinking there's a few questions that might be interesting to ask. I know you had the common challenges. You sort of mentioned about how playbooks could be misleading. So maybe talk about the bad good. What are the challenges and what are best practices? I'm going to nerd out on you, if that's okay, and go a little bit to the science of M &A. I've been a practicing professional and now a consumer of practicing professionals in the space for a long time.

1:03:48And I believe like all markets, there's a science to the market. There's a logic to the market. There's an order to the market. And the real trick is finding what it was. And I used to be really frustrated with my legacy organization where we would go out and talk to clients about, we're going to help you be successful. And they would ask, okay, what are my chances? And we would throw out one-third or successful two-thirds of failures. And then logical ones would ask, how many of you serve that have been in the one-third? We couldn't answer that question, by the way. I was always frustrated with that.

1:04:16So I actually embarked on a study. I looked at 2 ,500 organizations that were an end that was sufficient to be statistically relevant. I looked at size. We wanted larger companies by general definition and cutting off the tail, if you will, to just get the things that were material. And we looked at them from an acquisition basis and said how effective it would be. And you could look at a lot of different ways to assess that. The one that people proffered up that we should look at is what's their share price a year later? And I was really bothered by that because there's so much extraneous in that.

1:04:51Who knows what's in that number? So I didn't buy that. I actually asked us to look at operating fundamentals. So what happened in terms of the base case to the post-effect case whether they were a single acquisition or a serial acquirer, did we see changes in their operating fundamentals? So did net income change? Did cash flow change? Did days receivables change? Did headcount change? Let's get down to the fundamentals. And we created an index off of that set of fundamentals, and we stack ranked them in four quartiles. They weren't perfectly aligned by quartile, but directionally, that was our frame of reference.

1:05:25And you won't be surprised that the quartiles were a more difficult landscape, a worse landscape than that one-third, two-thirds were successful. In fact, it was about 11 % that were successful at the top, and it was about 38 % that were horrifically failures at the bottom. The second quartile was roughly in the low to mid-20 percentile, but on a non-risk-adjusted basis, so no cost of capital implied, were effectively flat. Nothing changed. So it told me that it's not one-third that are successful, It's about 11 % or 12 % that are successful. Now, here's the epilogue of that. That 11 % to 12 % were wickedly successful.

1:06:01They were, as my earlier comment, robber barons. Created tons of economic value. The fundamentals moved substantially. But everyone else was a failure. Now, is that interesting? No, not for me, because I wanted to get down to what drove the difference. I wanted to get past correlation and get the causality. We actually took the top quartile and the bottom quartile. And to the degree we could get to the data, whether it was through interview or through public insight, we actually compared the practices of the top versus the bottom because that should give you some really interesting insight. And look, there's a lot of things that make an integration successful.

1:06:37I'm not going to try and stand here and prophesize that it's two things or three things or five things or 10 things. There's 10 ,000 variables in a deal from the point of inception and origination to that last ounce of integration that matter. And everyone should appreciate that it's about executing that entire continuum with those 10 ,000 variables in play and doing it incredibly good. That's how success happens. But five themes emerged, Kisan, that I thought were really powerful. And we've hit upon many of them today. Those five were as follows. The first was the really successful acquirers did have an integration thesis.

1:07:16That thesis co-traveled with the deal. It was loose and rudimentary up front, but it was a vision. And it got more and more detailed as the deal was prosecuted and as they headed into integration planning. And eventually it exited as a true detailed integration plan upon which to execute. So that's one. Two, a lot of the successful acquirers didn't look at integration in a historic sense through the lens of functions. Not saying functions aren't important. You've got to have a great finance team, a great IT connectivity, a great talent and HR team, all that matters. But they looked at it through a go-to-market lens first.

1:07:52What's the client experience we're trying to deliver? Who's the customers that we're trying to engender? What's the value proposition we're going to take there? What's the brand statement we're going to make? So a serious go-to-market bent on everything that they did. Now, the regulators and the attorneys are going to hit the brakes right now and say, wait a second, Kevin, if it's under regulatory review, what can you and can't you do? But there are very effective mechanisms in the world today with clean rooms that can be done in anticipation of a deal and leading right up to it to allow you to continue to push that client's facing side very far down the field and open it at the right point, utilizing things like deal desk, etc.

1:08:31at that point of deal consummation. But the really successful made it less about functional integration. They almost presumed that they would get that done right and did, but they made it about go-to-market more important. Third, while all the buzz out there it is about AI and next-gen AI. AI has been with us since the mid-1960s, by the way. I laugh a little bit at this notion of AI as new. It's not. Sorry, folks. We are still, however, all that being said, not really around a people-less organization. So organizations are people-centric. Some more so than others, but they are all people-centric to a degree.

1:09:06The truly great understood this. Whether they had a client experience, they also had a people experience or talent experience. They thought about what the day looked like for that first day from an integration basis. They thought about the uncertainty. They thought about the messaging. It wasn't just communications to be clear. They didn't just throw it over the transit, but the comms team would say, tell people a bunch of stuff. They made it personal. They defined what they wanted to land in terms of the experience. They talked about what would happen with benefits over time. They talked about pay philosophy.

1:09:33They made the talent experience a central theme. Fourth was culture. We've talked about it a bunch, Kisan. I have told you it's one of the four essential jobs of the CEO, but the entire leadership team got invested in the process and demonstrated the culture and found the bridges from company A to company B and built a new one together. And then the fifth was value. If you want to think about value, we talked about this early on, synergies and synergy capture. The truly great got after getting the value fast. So it's both a combination of value as well as battle rhythm. They got after this fast.

1:10:07They didn't wait. They didn't defer. They went and made the hard choices early on. They didn't languish. Those five themes showed up in the successful 11 % to 12 % over and over again. And they were completely and utterly absent in the bottom quartile that was, again, horrific to look at in terms of shareholder value destruction. So is it the right five things to focus on? I don't know. Are there 10 ,000 other variables to think of? Of course there are. But when I enter any deal, I think about these five based on that scientific study and based on 38 years of experience. that these five things matter a great deal.

1:10:41Get these right and you're set up for a better possibility of success than you are absolutely. That much I know to be true. I think you nailed it, Kevin. So we got one, the investment thesis, two, the go-to-market, three, the people experience coming in, four, culture, five, value. And speed, value and speed right together. Value and speed. And by the way, like people sometimes say, Kevin, do you mean like the talent experience and culture are different? They're absolutely. Talent experience is like, what's the annual review process? What's your compensation philosophy? How do you deal with promotions?

1:11:13Where do I go find help if I'm having a challenge with my benefits provider? That's the talent experience. Culture is something a little more amorphous, but equally, if not more important and powerful. Great summarization. Kevin, what's the craziest thing you've seen in M &A? You don't have enough time, my friend. You don't have enough time. I've seen everything from CEOs that have walked away to CEOs that have argued openly against the deal, even after it's been consummated and you're in that integration planning to private equity investors that have asked me as an advisor, I've got two CEOs, who should I pick and why?

1:11:52I would never delegate that choice to an outside advisor. So I think that's crazy in and of itself. So look, M &A, by definition, is a nonlinear experience. So you're going to see everything. It's crazy. I'll tell you less the crazier, craziest thing I've seen. And I'll put it to more of the most tragic thing I've seen, which is to be successful in this space, to be to the terms of science in this space. Success comes with logic and success comes with using that logic to inform your choices. And I think there's times when small companies all the way up to big companies let emotion come into this.

1:12:31And look, there's always going to be a degree of emotion. I've said this is personal, not discounting. I'm not also suggesting that people should be robots and autotrons in this where they don't care about things. But when you go past that notional line of that passion and it's personal to something where it becomes about ego, especially at the top. And people feel like they're in a win-loss situation as opposed to what's the benefit of these two things together. That's the most tragic thing I've seen. Because logic, if allowed, the full line of day will generally pay to a pretty good choice. And that pretty good choice generally benefits a lot of people, especially those senior leaders that might be frail or fragile in that moment of ego.

1:13:12But they lose their way from time to time. Yeah, emotions are powerful in M &A. Kevin, this has been a great conversation. I've learned so much. You've helped me become a much better M &A scientist today. I think I gave you the ruminations of a boy that grew up on a small farm that's traveled the world for 38 professional years, has done a lot, seen a lot, experienced a lot, and had a lot of fun and seen a lot of things that have worked well and that didn't. And if we can put science to that as a wrapper with all the analytics and all the experiential pieces, then I hope I informed others. But it's been great, Kisan.

1:13:44Thank you for having me. My pleasure. Those of you still tuned in, our fellow M &A scientists, thank you for sticking through. Feel free to reach out to me on LinkedIn. Always open to suggestions. any other suggested speakers topics. Until next time, here's to the deal.

1:14:11Thank 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.

1:14:56Again, that's mascience.com. Here's to the deal.

1:15:10views and opinions expressed on M &A science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual this podcast