Top 10 Things That Make M&A Successful

24:04A good practice is to flip it around and say, hey, why don't we spend time to educate the target company about us? what our organization looks like, how it's structured, where they're going to ultimately fit in. I like that for a lot of reasons, because I feel like now all of a sudden the dynamics are changing where you think about the psychology of it. Like we're making this mutual. There's things like I'm trying to get from you, but I'm giving you. I mean, this is very bi-directional in terms of how we're going to collaborate and work together, at least setting a tone for collaborating and working together.

24:33I think it has a bunch of benefits. One benefit is just the messaging and the tone. And that's important because the reality is a lot of the integration work gets done by the target. You want the people in the target team to have a preview so they can start thinking about how they're going to integrate. The other reason it's important is you want the seller to raise alarm bells if there are characteristics of the way you run that would be really damaging to their business. And they won't know that unless they get that reverse diligence. So you want them to come to you partway through the diligence process and go look, it looks like you were planning on integrating us.

25:11I'll give you actually a great example from a deal that I saw. The acquirer had a standard set of titles and they just assumed that they would merge the targets employees into their title structure. What they didn't know is that the target company operated in an industry sector where certain titles were not relevant and certain titles were relevant. Basically, they came, we were the buyer, they came to us and said, look, to be clear, if you make our people change all their titles, our customers will stop talking to us. They won't see them as senior enough. I know in your industry, this isn't an appropriate title.

25:46It's too senior a title. But in my industry, that's table stakes for getting a client meet. You're either going to have to make an exception to your title structure or all of my salespeople are going to become less effective. And there are a million examples like that. But that transparency helps. Now, there is the danger that the seller sees stuff that scares them. So you have to be prepared for that. But my view is better to know that now than to surprise them with it after closing. Because as we talked about earlier in this conversation, all those employees can walk. If you have something in your operation or your culture that is not going to work for them, way better to find out pre-close.

26:24I think this is the general theme here is shake out your problems early. Go ahead. Probably similar to dating. Yeah, 100%. Number six, stakeholder engagement and communication strategy. Perhaps one of the most critical aspects of any M &A process is how we communicate and engage with stakeholders. Developing a robust strategy ensures everyone from employees to customers is informed, engaged, and aligned with the integration process. Yeah. It's a big fundamental. It's something you have to do. Yeah. But it's like, to what degree of thoughtfulness and detail do you do that? And I think that's the big difference.

27:01It's one of the success, but I feel like you're just highlighting how important it is. And maybe we could add some color about who those key people are. Because then you think about who that message goes to. It's more than just the employees. Oh, yeah. There are a whole bunch of different constituencies. And one of the things I like about this is effective communication is the closest thing to free positive outcomes that I think you can find in a deal. Sending an email to customers is a costless exercise. And if you can do it in such a way that it makes your customers happier and it makes them more excited and makes your offering stickier, it's like a free view.

27:39Good news is a great asset to leverage. And I think there are a bunch of populations of people that are not naturally considered. Everyone considers the employees, although oftentimes they only consider the target employees. Hey, you're about to be acquired by Frankelco. Here's how it's going to change your life. You should be sending messaging to your own employees as well, because they're all going to leap up and go, what does this mean for me? Is this a negative? Am I becoming less important? Is this the shiny new toy or is it a positive? It's going to expand our company. It's going to give me new opportunities.

28:09So it's not just target employees. It's also your own employees, ecosystem partners, the general market, messaging to competitors, signaling to competitors, vendors and suppliers. there's like a whole universe of people that anybody who can be directly or indirectly impacted by the transaction a you want to avoid a negative outcome by not messaging them but you can also create a positive outcome it's a great opportunity that i'll make up something reach out to a vendor and go hey just wanted to let you know we're doing this deal it's going to create a lot more opportunity for us to buy your product and obviously we'll want to talk about maybe there's volume discounting that we can discuss you've got the basis for talking about repricing your vendor relationship.

28:50I think it's really important to do. And it's very important to do with the lens of two things. One, what are you trying to accomplish? But equally or more important, what's their perception going to be? If you're messaging employees and you go, yay, we've done this thing that's great for our company, the employees may go, I'm glad it's great for the shareholders, but it's good for me. You have to assess your messaging based on what they're thinking to the best of your ability. I'm glad I brought you in on this. This is the perfect color I needed. I got to ask though, since we're starting this podcast, I think I've seen...

29:26I don't know if transparency is the right word, but the way M &A has been communicated in terms of general press releases has been far more articulated where it's almost like it's really you're reading off an investment memo. This is specifically why we are doing the deal, the value we see. I feel like I've seen that change where before it was just very vague. It wasn't... Yeah. It's just, hey, we're doing this to a very short, but now it's just like, I want the market to understand why this is such a good deal, why it makes so much sense. Why is that? One, and this goes all the way back to like the 90s, there's that classic McKinsey study that the majority of deals fail.

30:03Investors and the public market have become a little more aware of the potential downside of doing M &A. So it creates an incentive to go, look, we're not just going to tell you we did a deal. Let's explain why this is a great thing. People have become more familiar with M &A as a tool. And so all the different functions in an organization, including the comms group, have become better at telling the story. And we've all started to realize the impact that these deals have on all these different constituencies we just talked about. And oftentimes, you either can't send a direct message to those constituencies or you can't do it super fast.

30:39So a good example is if you're announcing a deal, you're not going to want to send some kind of blast email to your largest customers or to your biggest ecosystem partners, which means that the conversation you have with them one-on-one is going to happen after they've read the press release. So now we got to make sure the press release at least has enough in it to create an initial positive impression. Because by the time you get to talk to them, they'll have already seen it and come to some conclusions about how it impacts them. makes some sense. There's one we just got to keep top of mind. Number seven is continuous learning and improvement.

31:13Every deal is a lesson in itself. Embracing a mindset of continuous learning allows us to refine our strategies, learn from our missteps, improve our approach with each acquisition, make your M &A practice more robust and resilient over time. Everybody can agree with this. Again, it's like the same thing. Yeah, you got to keep getting better. But then how pragmatic you are about it, I think that varies quite a bit because it's almost like, hey, here's expectation or we just hire around experience and people are, this is all left to themselves individually versus, hey, we get together and we do a retrospective on a deal.

31:47At the end of the deal, we look back, talk about, well, it didn't go good post-mortems. But I think a retrospective is different because you can build that into an ongoing cadence. You can take a specific meeting, whether it's like a weekly, bi-weekly, monthly meeting and it tacked in there. It's, hey, let's have this 10-minute discussion or have a separate meeting for it. It's like a huge difference. I did a podcast interview with one of the Harvard professors that's like the agile expert. He made this point of you're going to make some improvements. Those conversations are going to find things to improve your process.

32:17And if you did twice a month, you had 25 different improvements that you make incrementally, which over time is going to be dramatic improvement versus, hey, we did five deals and we had five postmortems. I know this is a pretty powerful one of students learning, but how do you sort of make it mechanical? Yeah, and sustained. I 100 % agree with you. And part of the fundamental problem is that number one, corporate development teams are super small. And when they're busy, they're super busy. They're wired quite reasonably to focus on deal execution. The core of my job is deal sourcing, deal execution, and depending on my job title, maybe deal integration.

32:55It's hard to carve out time in sort of a more fire drill like job for this stuff. Building capabilities and best practices and documenting them and creating processes is valuable over the course of a 10 year cycle of doing lots of deals. But it takes a backseat to any individual deal at any individual time. And so you have to have a discipline about it and say, this is important. And I would argue it's important for a few reasons. One is, and you sort of made this point, you may have corporate development experts, but the vast majority of people involved in any given transaction are not corporate development experts.

33:34They either maybe have done a deal at some point in their career or they've never done a deal. So having best practices and taking them out of your brains, that's the other thing I hear from corporate people is, oh, I've done 100 deals. I have all the best practices. Yeah, you have them in between your ears. but that 20 person team that you assembled for this deal, 18 of whom are not corporate development professionals, doesn't have it. The other thing I'd say is best practices are not just corporate best practices generically. They are specific to an individual acquirer. What works at General Motors is not gonna necessarily work at crap.

34:09So you can't just sort of take a playbook off the shelf and be like, poof, these are the best practices. You can start with that, but you have to adapt that to what's the best practice for our corp dev organization inside of our company. Not to make a plug, but this is where platforms like Deal Room help as well because it forces you to structure your process. It forces you to take my approach to best practices that's sitting in my head and put it into a system. The appeal of that is now everybody uses that system. Everybody absorbs the best practices. And especially if you have a corp dev team that isn't static, some corp dev teams are the same five people and they'll be the same five people in 10 years.

34:48But a lot of corp dev teams, especially at the junior and mid-level, are rotating. So if you haven't developed your best practices, continuously added new tools, new approaches, new standards, you're going to start from scratch every time you hire a new person. This is the crux of building your M &A muscle. Yeah, 100%. Any free plugs in Deal Room? Tag me on social. All right, we're ready for number eight. Number eight, anticipate legal, tax, and HR challenges. Proactively addressing potential challenges in legal, tax, and HR areas can significantly smoothen the integration process. Early identification and management of these issues prevent them from becoming roadblocks down the road.

35:33This is like a reoccurring theme, being front and center on these areas early. Again, it goes back to that. Yes, you know this, but then it's easy to do this later than earlier. And if you can really put this front, the typical thing in the lawyer interview is like getting involved early, getting tax involved early, getting HR involved early. But it sounds like those are the big three. Oh, yeah. I might throw finance in there alongside tax. And sometimes there's a couple of other enabling areas like back office IT or real estate. But yeah. We'll factor in a variable. If your thesis is so much around the tech and that's specific to it, okay, yes.

36:09Yeah, you're totally right. And speaking as an ex-lawyer, I'm particularly sensitive to this. These three in particular are topic areas where there is a potential for gigantic minefields. Those practitioners are constantly frustrated when they get brought in at the end of a deal and they get told this is what we're doing. And if there's a problem, we can't go back and change everything. We're just going to have to deal with it in post. And what I would say, and this sort of circles back on the first point we talked about all the way at the beginning about crystallizing your vision. I always think the trade-off to those areas, legal tax and HR, is I'm going to bring you in early.

36:47I'm going to bring you in super early so that you are not the person coming up with the problem all the way at the end. And as one of my friends would say, peeing in everybody's lemonade. You're going to come in really early, but here's the trade-off. You own identifying and then solving all the problems that you identify. You have to buy into the vision that we have. What you can't do is just be an issue spotter. You can't come in early and go, that's a problem, that's a problem, that's a problem, and I'm going to lunch. The trade-off is I'm going to bring you in early, but then you're my partner in addressing these things and figuring them out, staying true to that vision that we all agreed to.

37:24Great way to tie it together and set it up, but one takes more work. Yeah, but I will say most of my experience with legal tax and HR professionals is they love that approach because they hate being the bad person. They hate being the person who gets brought in at the end and goes, yeah, that won't work. They would much rather most of the ones I've dealt with, and I've dealt with some phenomenal ones, would much rather be at the front end because they want to help accomplish the business goals. They're not trying to be a naysayer. They're just responsible for an important area in that area. They don't want anyone stepping on their minds.

37:59Getting the seat at the table early gives them a good strategic position. And by the way, this is where we go back to the one we just talked about, not that I'm trying to take this backwards, which is process helps. One of the arguments a corp debt person will make is they do not have time all the way at the beginning, pre-LOI, to be having lots of conversations with all the different specialty areas. That may be true. So that's why if you set up standardized processes, standardized communication engines, where we're going to put a little mini data room together, and we're going to send an alert to our point of contact in legal and tax and HR and wherever else and go, flag up, deal started.

38:36Please review this material. We will be back to you later in the process. There's a way of doing it that doesn't become a big distraction. Number nine, empathetic leadership. At the heart of every successful integration is leadership that not only understands, but empathizes with the human aspect of M &A. Leading with empathy ensures the process respects, supports, and uplifts the individual who make our organizations what they are. I think this is just one, again, easy to forget, easier to say than do. But it is. It's just being compassionate and understanding that this transaction is going to drive a lot of change.

39:09Who that's going to impact, how that's going to impact them. I like taking the extreme form of empathy, too, is when you have a dispute. And instead of defending your view to death, is take the empathetic approach to truly understand how that person thinks, why they think that way, how they feel, why they feel that way. Until you get to that point when you really agree with it, you're not creating that path to come up with the right direction, whether it's identifying where there may be gaps in their thinking or your counter argument or just you changing your mind and realizing they're actually right.

39:41Taking that same view of just the empathy and I almost feel like, again, making it mechanical. Can you remind your leadership team of taking this empathetic approach with a company? What's your take? I'll make a bold statement, which is I have never negotiated with or worked with a company. Companies are piles of paper. You negotiate with a human being who has a family and hobbies and biases and interests that represents a company. And recognizing that everybody involved in the transaction is not an automaton. They're not a, I am the lawyer bot, or I am the corp dev bot, or the finance bot. They're a human, and they have their own embedded biases and interests and perceptions is step one in every deal process.

40:30From a counterparty perspective, I find it insanely helpful to start exactly where you suggested, which is before you engage with a counterparty, understand what makes them tick. What do they care about? What do they not care about? When there's$10 on the table, you're trying to get six, I'm trying to get six. But oftentimes, if you really understand the counterparty, you can make the$10 on the table equal to$12 on the table. I love finding the thing that you really want and I don't care about. That's great. I've just created value for you and it's cost me nothing. And then, of course, in exchange, I'm going to ask you to create some value for me that costs you nothing.

41:07And the same thing is true with every human that's involved in a deal process. They all have their inherent biases from fear of change to excitement about opportunity to ego. And what does this make me look like? One of my running jokes is the single biggest driver of M &A, I would argue, is probably deep down inside the fact that it is much more impressive to your friends and family to be the CEO of a$10 billion company than to be the CEO of a$5 billion company. I'm not saying that M &A doesn't create value for shareholders, but I am saying that M &A is definitely a tool to make my company bigger, better, cooler, larger.

41:54And that has an effect on me and my management team. We probably get paid more. We look more impressive. People recognize our company's name at cocktail parties. A lot of people would say, oh, come on, it's an efficient market. Corporate executives just optimize for shareholder value. I'd be like, come on. If you say that, you've never met a corporate executive. Their life biases merge in. And the same thing is true with every one of the enabling areas. It's your HR people, your tax people, your legal people. It's the employees. It's the service providers, your lawyers, your accountants. Everybody has those little things they do differently because of who they are.

42:33And if you understand that, you can achieve a better outcome. And you can achieve a better outcome for them personally as well. I find the human psychology aspect of M &A fascinating because humans are most interesting when something dramatic and unexpected happens. It's like every murder mystery we've ever seen where there's a moment and the background music it goes dumb and everyone turns like that. And so M &A is when that happens. Suddenly everyone's world gets shaken. Having that empathy and understanding, these people are not just their titles, they're individuals, they all have different personalities and characteristics.

43:10And if you understand them, you can create a tremendous amount of value and you can avoid a lot of value destruction. I like how you took that and brought it to the higher level of overall, the impact of the psychology on the deal. the human psychology, at least having that approach of let's really understand why people do what they do. And what will get them to do what you want them to do. I'll give you a great example. I've acquired companies that have dev teams where the dev team really cares about their dress code. It's not just that they care about their dress code conceptually. It for them is a sign that they are like pirates on the high sea.

43:48They're creatives. They're not big corporate people. And so psychologically telling them that they can't wear shorts to work can be way more damaging than telling them that you're cutting their pay by 20%. That's a good example. Number 10, the ROI on strong preparation is huge. For both buyers and sellers, proper preparation is crucial. Buyers need to have their diligence resources lined up well, particularly in a fast-moving process where they risk missing key points. This is a big theme. It comes up on any sell-side perspective of just how much the prep is important in that, especially the competitive process.

44:27And then divestitures. We've done interviews about this and it was prep. And the buy side, we've actually talked about it in terms of even prep to take on integration and absorb the company. This is a good one. Again, another easier said than done. But what's your take on differentiate thinking you're prepared to really have prepared? Yeah. I think number one, I'd say you can never perfectly prepare. So 80-20 rule. If you do your best and take preparation seriously, you've accomplished the vast majority of the value. And the difference is, are you pretending to prepare or are you actually preparing?

45:00Pretending to prepare is just saying, we check the box. Actually preparing is making real change in an organization, whatever that change might be. I'll take the harder example because everyone talks about the sell side, but on the buy side, actually having conversations with your organization in advance about what you would be willing to change in order to make an integration successful. Are we going to allow the developers to keep wearing their shorts? Are we going to be willing to change our technology architecture? Are we going to be willing to change how we compensate salespeople or whether we'll switch from a direct sales model to a channel model?

45:39If you're out shopping for a certain kind of company, if you're a good corp dev officer, you can probably predict a bunch of the challenges to integration on the buy side, at least conceptually, and start to prep for them. I think it's not just sell side, but it's also buy side. But yeah, the ROI is huge. I think I've said this on your podcast. I've said it on a couple of other ones. If you're selling a small company to a large acquirer, it drives me nuts when I look at a small company and think to myself, if they've done some basic stuff differently over the last two years, I'd pay 30 % more for this company easily.

46:13Open source code is the extreme example. All these companies that misuse open source code because they're small and they're never going to get sued have to understand that the buyers assume they're going to get sued. And so what they're going to do, what I'm going to do is either not buy your company, or I'm going to budget the cost for my super expensive development team to rebuild all of that code. I'm going to add a premium for the risk of doing that. I'm going to add a premium for the time that we're going to have to not be going to market. And I'm going to remove that from whatever the purchase price is.

46:47It's penny wise and pound foolish not to do that kind of prep in advance. The ROI is really huge, especially when you consider that a lot of this is not large investment dollars. It's just changes in behavior. Yeah, that's a really good point. Just doing prep around all these different variables and different potential directions they could go. You can't plan for everything, but there's definitely an 80-20 or 90-10 rule. So if I'm a small tech company selling to a large company, I need to use open source code correctly. I need to have all my technology and my product documented. I need to have a clear roadmapping process so people understand how I'm building my product.

47:23I need to have standardized contracts to my customers that look like the contracts of the big players and have the IP protection terms of the big players. So I might not be able to get every kind of prep, but I can probably identify the majority of things that can increase my value to a buyer. And a lot of the stuff I just listed doesn't actually take a lot of resources. It's just doing things different. 100%. There we have it. That's our top 10. Yeah, that's a lot. But we got one more. And in the light of my favorite question is always the last one. What's the craziest thing you've seen in M &A?

47:58So this is a reflection on some of these stories. Oh, yeah. And the one I would say, Michael, is the multi-billion dollar transactions and what ultimately drives the value, the purchase price on those. And it's not a complex algorithm. So the bonus takeaway is deals are often about much more than the purchase price. I've seen this where you've gotten these stories of deals that swayed billion dollars. It's just egos at the table. Yeah. I think it's egos at the table. And it's also stuff that is not purchase price, but can have a financial effect. When I think about corporate divestitures, oftentimes oftentimes corporates, especially if it's a small deal, aren't as concerned about purchase price.

48:45They're concerned about, let's not make my customers mad. Let's make my employees happy. I don't want the spinoff to play with my competitors. So how do I prevent that? Maybe I need to license back technology. So there are all these other things that I care about more than the purchase price. And then if you have, that's just like corporate stuff. If you have founder sellers, then you can get into a lot of really soft stuff. You can get into, I want the brand to say the same because it's my brand. You got to promise not to fire my people. I got to take care of them. I had one guy, I was looking at a founder-owned company in a small town in Ohio.

49:22He said to me, I just want to tell you up front, one of the deal terms is going to be that you can't fire anyone for the first two years, unless for cause. And I paused and looked at him. He goes, look, you have to understand, this is a town of 2000 people. I employ 10 % of the town. I live here. If you guys come in and fire everybody, I'm not going to be able to go to my golf club anymore. The most extreme one, which I think I may have told you about in the past is I had a$300 million deal where the founder walked into the legal negotiating room, whispered in his counsel's ear, left, and his counsel looked at us with a lot of embarrassment and said, yeah, we have to add another deal term.

50:02He wants to keep his BlackBerry. So this guy was going to take$300 million off the table, but he also wanted to keep his BlackBerry. And for him, that was worth interrupting the negotiation. More than the purchase price. Yeah. This has been fun. This has been a great conversation. I know this is switched up a little different style than what we usually do, but I thought in the sake of continuous improvement that we do some reflection of our own. I really want to hear from folks listening to this, especially folks, if you listen to the M &A Science podcast for, I don't know, like more than 10 hours.

50:34I'd love to hear just to get your take on the value you get from the podcast, but also from you. How can this be improved? I'm always open topic ideas, recommendations on speakers and so forth. Except I do get a lot of inbound pitches of people that want to come in to sell some products and services, like too many, like 300 a year. We're not looking for those who want like some badass folks that really got some good wisdom and knowledge to share, to keep learning and get better at what we do. So I welcome that feedback. There's a commitment I'd like to make just to keep pushing this mission of learning from experienced practitioners and identifying proven techniques, what actually works in the industry.

51:15I think the thing I'm still wrapping around is the community that's evolving and shaping to my surprise from doing this podcast where I'll visit towns, we'll do roundtable events. And I think that's been really cool to see and shape. So I'm hoping we continue to grow that as we continue these conversations and just really build on this knowledge sharing community and that network that really helps you improve. And I think that's what this is all about. It's about the pursuit of being the best. I'd say being the best you can be. But no, I think that's right. We talked about it at the beginning.

51:49What we love about M &A is how complicated it is, how constantly changing it is. we've talked about a bunch of those variables, a lot of the human variables that make it so that deal number one is not going to look like deal number two or deal number three. That's both challenging, but it's also what makes it fun. And I think it's what makes the community so powerful because the population of people that do M &A is so small. We're like this little bit of a special club. Because every deal is different, we're all learning different things. We all have experiences that the other one hasn't had yet that we can share.

52:23I don't know about you, but I want to be best in the world. That is why you're an entrepreneur. I'm going to do that by learning from the best practitioners in the world. I think it's a wrap, Michael. Excellent. That was fun. Hey, those of you that have stuck through, again, welcome to Feedback. Michael, you've helped me reflect and become a better M &A scientist today. Until next time, here's to the deal.

52:56Thank 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.

53:41Again, that's mascience.com. Here's to the deal. Thank you.