Buyside View from Corporate Development & Private Equity Investors | Transaction Advisors Institute

hi everyone thanks so much for joining it's been a great day thus far I hope everyone's getting a lot out of our talks and panels here throughout the afternoon I just wanted to come up here and introduce our next panel specifically our moderator Quinn Carlsen he is the director of M&A at dolphin Phelps has many years experience in M&A and corporate development as well and he's gonna lead our panel here with our other experts terrific thank you so as as Brennan mentioned I'm a director of M&A at Duffin Phelps where you may have heard my colleague Elise booth earlier today I focus principally on MA mostly in the industrial manufacturing and distribution sectors and I'm delighted to have some of our panelists here representing local you know local you know large corporations as well as a private equity fund talk about corporate development so I guess maybe the first thing I'll do is maybe turn it over to to Lee introduce yourself and and and then also define your role sure Thank You Quinton Lee why is me Johnson nutrition headquartered locally here in Chicago of course vice president business development so in that context within me Johnson its handling mergers acquisitions investments joint ventures anything strategic in nature in terms of a transaction so we do that on a global basis here from Chicago for those not who are unaware of meet Johnson where our infant formula companies so pediatric nutritions all we do one brand one focus so it's it's a tight market for us to focus a man--a on Michael good afternoon my name is Mike the flood scam with a wind church capital wind church is an industrial private equity fund headquartered in the beautiful Rosemont Illinois and so well we really focus on buying businesses through the economic cycle and as a result of that we buy both very healthy businesses and underperformers and companies that are in distress or undergoing some sort of bankruptcy and my role there is to really find the deals and then work on and get involved in doing acquisitions and the ultimate sale of the company I'm Don Bartholomew and I run a corporate development for here on consulting we're focused about half our businesses in healthcare we're also in education life sciences legal advisory and a little bit of business advisory so we're about we're traded on NASDAQ so we're about eight hundred million in revenue excellent thank you we heard earlier professor Morissette talked about the four pillars of essentially an effective M&A strategy starting with strategy corporate development M&A and then ultimately integration and I'm curious of the of the panelists that we have maybe you can spend a little bit of time just telling us how much time you spend on strategy development versus corporate development versus executing the M&A and then how far do you get involved in as it relates to the integration of the the target for my perspective strategies first and foremost we spend a great deal of time coordinating with the really global marketing who runs a strategy process within meet Johnson and so we sit with them and try and help articulate you know what markets are we gonna address where's our focus gonna be at and we are a focused company on pediatric nutrition so it's pretty easy as to come of those decisions the questions become later in the future you know how far do we go to Jason sees that usually comes with a pile up of cash which we're seeing right now and and where does that go but for us executing M&A strategy is really building upon the corporate strategy and figure out how we can help execute that so if it's you know building a presence in a country we're not at can we gain greater scale via an axe acquisition of a platform company manufacturing process you name it so everything we do is focused on strategy and from my personal standpoint probably 50% of my time but you know we'll take the deal Shepherd it and kind of run an integration team alongside of it during a diligence and a deal acquisition stage and still hold the the reviews afterwards so post 30-60-90 thirty-six month type reviews so that all runs through our group I guess maybe a question for dawn you know we also heard professor Morissette talk about some of the decision biases that exist within an organization how do you remain in your role as in in charge of corporate development how do you remain unbiased and and how do you you know how do you counter some of those decision biases that exist in an organization sometimes you know it's actually pretty difficult we're kind of run more like a portfolio company where each of the business leaders you know the head of healthcare is pretty much you know given a lot of control and how they want to run their business so sometimes we've encountered that where they're very passionate about a deal and I'm coming in saying it does not make financial sense or you know we've got some deal killers here and it becomes quite contentious so it's it's it's a difficult way to do it it's it's really a lot of it kind of comes down to making sure we've got the right numbers and the support and the data that goes behind why we're making the arguments and offering the alternatives for ways we can restructure the deal or put something in to kind of protect us from what we're kind of seeing is some of the red flags but it's interesting cuz a CFO said that to me actually the other day says I realize you're in a really tough spot because you're usually on the front line so he he kind of helps out too like stepping in when he needs to one you know the Holy Grail in private equity corporate development beyond just generating great returns for shareholders and for your LPS's it's getting proprietary deal flow and and it happened what what did it what is this like exactly so it does happen and I'm curious to know you know maybe for Michael how do you you know position win Church in those discussions how do you generate you know proprietary deal floor flow for acquisitions for platforms or perhaps for add-ons to the existing portfolio but that's a very fair question I - look obviously we want as limited of a process as possible and don't want to have Lazard in between us and seller it's pretty straightforward right so I think it's the easiest to have an angle in a dialogue in sourcing that deal if you have a portfolio company so we currently have 20 portfolio companies across different parts of industrial industrial world automotive building products aerospace and defense energy services so through those management teams and through those verticals it becomes easier to source deals just thinking about acquisitions we've made I think a lot of it is really around the CEOs of our portfolio companies are also combining market knowledge with industries that are going through through change so we're currently talking to a public company that competes with to public companies separately competing with a couple of our portfolio companies we found those we've been in direct dialogue with one of those businesses since we made the initial acquisition and the second one we actually found through really doing screens of companies that are trading and lean maybe to elaborate you know particularly in a strategic context you know many of the targets that you'd like to acquire you know may be reluctant to engage in any kind of proprietary discussions with you just for competitive reasons you know what sort of tactics do you use to overcome some of those obstacles to generate a meaningful dialogue with a target that's that's a good question because we have a really consolidated industry so we're far down a consolidation curve probably four to five global players and a couple niche in specific emerging markets it's a tough discussion because you're you're really you know you're competing versus I'm head-to-head on a daily basis and then how do you engage with them or or you'll find circumstances where the business is embedded in a larger pharmaceutical type company you know we kind of blur the line between food and pharmaceutical and so it's a tough - it's a tough discussion but I'd say it really starts with building relation ship and articulating our value proposition it's something that's you can't get done overnight but it's I think it's building your reputation and what it stands for I think that goes a long way to if I may add to that answer but for us that the one single word that's worked the best for these conversations proprietary deals or for add-ons is collaboration so if you call someone says hey and they may know they probably know the portfolio company that we have and say hey we'd like to collaborate with you or get together talk about how we can work together it's pretty pretty high chance that they're not gonna get turned down for that versus call and say hey are you for sale the answer there is probably going to be no we're not for sale so collaboration is a pretty good kind of buzzword if you want to strike those beetles and then maybe perhaps question for for dawn put you on the hot seat so to speak but you know we're here with Michael tip let's key from Wynn church and of course we've been talking a lot about private equity in you know over the course of the day today and the influence that private equity has had on the on the M&A environment you know dawn from your perspective do you see here on competing in auctions with private equity firms more today than you have in the past yeah we have actually especially in the healthcare space I know that there's a couple couple auctions that we were in that we we tried really hard and we just couldn't compete with them and it wasn't even a price it was the structure that they were offering you know we're building or we're buying a lot of people businesses so a lot of them still want to kind of retain or have another upside or another play at it that we just can't can't really offer what sort of you know given that your what you're doing is you're buying businesses that are predominantly made of people what sort of things do you do what sort of structures do you use to you know ensure that post close that the the people that you're buying actually stay within the family you know we've done some retention bonuses but a lot of it is just kind of trying to spend a lot of focus time on that culture piece on the front end and directly our leadership spends a lot of time getting to know those leaders we just closed a deal Studer group which was a 300 million dollar deal and it was all about the people so we made sure from day one that we were there on the ground when the deal was announced we were at their all employee meeting we had you know we spent a lot of time kind of prepping and making sure that we were presenting to them the same way we were presenting to investors about why it made sense and really engaging them we spend a lot of time kind of with that whole hearts and minds planning I had a deals in this in this day and age with so much information at our fingertips and you know S&P Capital IQ is a you know is is is a great product you know there's there's no shortage of information out there and in that context you know I've found over the years that you know it's it's amazing to me that some most some of the most logical strategics don't end up buying a company that I think makes a lot of sense and I guess my question is twofold number one are there deals that that are on the target list that you believe you should be the owner of that you don't see in a process are there deals that you sort of miss and what steps can you or and and what steps do you take to to make sure that you don't miss deals that are highly strategic like it's like that yeah it's a good question because just again focusing in my industry people are paying upwards the last transaction was a twenty times EBIT of multiple and that was based on pro forma normalized EBIT uh and it was you know Nestle in our space and so you're competing against you know some some pocketbooks that are pretty big so you got to have your strategic story lined up and you know as the earlier discussion of strategy was spot on you know prioritize your targets and be prepared you never know when that could strike so if you're not prepared you don't stand a chance I think that's especially true in my industry but you know to extent you're capped out you know Nestle can make a decision overnight to go by somebody with the cash on their balance sheet because it's earning zero right now it's a negative number so it becomes very difficult to get your strategy executed so certainly I think there's companies out there that we'd be the better owner of you blend it into a three hundred billion dollar company it's tough to tell how it's truly performing but you stay prepared for the opportunity you never know when it's gonna strike yeah I think that in our space were so focused on industries and what we do that if there's somebody out there and there have been companies out there that have been they're just always on our radar I mean we've we've engaged with them previously our leadership sin gauged with them so we've either had a run at them or there was another reason that we we chose not to and sometimes they chose they chose not to go with the strategic buyer so we just we just were left out of it but it's you know anything that's a prime focus for us we we've already had our eye on there's just so few big players in healthcare consulting space or education space that there's you know we know who they are Michael from the perspective of a private equity buyer how would you characterize today's environment being a participator and many of the the options that are that are taking place you know seeking you know the the top most optimal evaluation how would you characterize today's M&A environment from the perspective of a private equity investor yeah well the market is insanely competitive so you better have some sort of an edge so the way we we view the world is number one I think we're gonna be the most competitive in situations where we have to follow companies making that position in those situations we can play as a strategic and have some sort of a synergy so in fact decent number of the transactions in fátima last couple of years we were strategic buyer number two we spent a lot of time certain industries and we think we we have good executive contacts and through through those contacts we may have some sort of an operational strategic or commercial edge in the process so we may have a different view on what the or we can do of the company in terms of growth finally we're pretty opportunistic so we try to see as many deals as possible we can hundreds and hundreds of yields per year and through those through different relationships we're gonna see deals that are off the beaten path or have some sort of a story to them where those those companies just aren't perfectly suited for it convent you know conventional is art auction and there that would be our strength is those tougher deals there's probably more risk they're also more upside you know just a tail under that I think there's an opportunity of private equity has to that strategics don't have because it there's no you know five hundred million dollar infant formula company I can go acquire it's maybe a leg of a you know 1.5 billion dollar company so to take a swing at that it's very difficult a lot of tax leakage and stuff involved you know they can step right in in those situations and take advantage of the structure I would also add we try to be pretty nimble and reactive and always thinking about the economic cycles so we're in the industrials world the industries that are having some sort of challenges are obviously the energy space defense has been solved generally agricultural equipment so we're always looking at these industries and say okay well can we be proactive and finding companies in that space obviously in the energy world nobody's gonna sell unless they have to right now so it's gonna be the distrust maybe even distressed debt sales would definitely participate in those maybe each of you can give a sense to the folks in the audience um how many deals that you look at perhaps in a given week or a month and how many of those you you know on a percentage basis make it past the initial vetting stage rough estimate per month five to ten and if you make it fat past the first stage I'd say one to two it's a you know we tend to see a lot of things that are core more adjacent to us that just don't quite make sense so we tend to pass more than not but you want to keep those relationships going with the bankers who have that nice nice ideal flow and you try and you try and educate him a little bit on your strategy but yeah it's it's more passing than not I would say it was it picked up a bit last year though in terms of the deal flow at the end of the year so I I could tell you in our system we log probably thousand deals per year and our goal is to buy around three to five companies three to five platforms per year maybe some add-ons I know it sounds like a very low percentage I'm including deals where we've just gotten teaser and didn't really spend a lot of time in the business ultimately I don't know it's probably you know you pursue maybe 40 I think we we were kind of tracking this for a while so I think we looked at about 200 deals last year we did four acquisitions in a minority investment and you know at any time we probably have 10 to 20 in our pipeline that is some stage and probably 60 70 percent of those came in bound versus a sourcing one of the you know being on many of my clients you know who are looking to sell their business you know often ask about valuation and you know what my view is on a strategic sale versus a private equity sale and what that means in terms of the doulton valuation in today's capital markets environment where you have low cost of capital lots and lots of cash sitting on the balance sheet of large companies and you know an ability and an interest in doing deals how do you balance the need to deploy capital with the valuation dynamics that are out there today and how do you how do you remain disciplined in in pursuit of acquisitions you know in terms of discipline I think that stays pretty easy for us we focus on return on invested capital and what does that compare to our next alternative which is typically reinvesting in our growth markets we have top-line 10% sales growth as a company so we can make the strong case that you know why disrupt our focus and so that's that becomes a pretty easy comparison the downside is you know the internal investments have been a little bit more robust than the external opportunities that we've seen and so it does create an issue for putting cash to work but it's it's really balancing that versus the other alternatives as dividends and/or buybacks and the key issue there's really repeated repatriation of cash and what does that look like the net impact Michael that's a tough question the market is very competitive so and we just rate we just raised a new 1.3 billion dollar fund which is double the size of our prior fund so it gets especially complicated I feel like we have a pretty straightforward business model it's work for now we'll just raise the fourth fun so we've had successes we've had failures we've learned from our mistakes we invest in complicated deals or situations where there is a story or complexity we have a straightforward business model and we kind of we know what we're looking for we pursue companies and situate in industries we like and have experience in and we look for situations where we can use crude amount of leverage to earn a fair return and beyond that we want to create meaningful value through operational improvements excuse me and strategic improvements and commercial improvements if we can't do it it's not a win Church deal it's pretty straight forward yeah I would say we're pretty conservative police from our mindset and now we're investing and it was challenging for until we did the studio ssin we had a large amount of capital we had raised and we were looking to deploy it in healthcare and finding the right fit was extremely challenging we walked away from a lot of deals that made us kind of question our own judgment just at the time because we just knew we had to do something we had to do something big and there was just so few options but then when it was you know I think we we really stuck to it and when we found the right opportunity we spent a lot of time betting it we spent a year talking with them and really making sure it was the right fit but the rest of the stuff we do is kind of small that there's kind of like that room for error if you're only spending you know a couple million you kind of get a little more lacks on on your judgment probably but otherwise we stick we talked David the earlier presenter talked about the process and the in timing how do you as global organizations this is more for for Lee and for Dawn how do you how do you get a global organization to move quickly on a deal that you know needs to be done yeah it's a it's a tough question I think it starts off with structure so when you start off thinking about the acquisitions the way we structured it were very very slim and flat here and that Glenview where we're headquartered two or three people work in business development at any given point so we rely in the local countries to bring up the acquisition ideas we can't tell a company or our local manager in Vietnam what he should go buy from internet search so we already raised him up get him to a regional level and blowing up to a corporate level so we got to see across the platforms understand where they're at once that's done it's easy to get everybody pre aligned but the actual execution you know a time difference I can't tell you how difficult it is to execute on a deal you just have to you have to be willing to work odd hours 7:00 a.m. calls 9:00 p.m. calls but to get everybody strategic a lion to takes a lot of communication and I think it's it's actually a benefit sometimes where you can get twice the work done so when I'm asleep when somebody else is working and you can make a lot of progress with Lee in that regard we we kind of from a corporate structure everybody's I think we've done enough transactions everyone's pretty pretty much trained on what they need to do and in the timeline in which they need to do it and we run a very structured process with internal deadlines and calendars to keep everyone in line working globally it becomes a little bit more challenging because we don't have local resources we can rely on so it's usually getting on a plane and going there and just just trying to get it done you know if I could supplement to we use a lot of advisers since we're so skinny here headquarters you know I can't translate you know Chinese financials into a US GAAP so it's it's we rely upon the the PwC's Deloitte's ian wise of the world to help us do that so we're pretty heavy on using consultants let's talk about perhaps the the integration once you buy a business how do you approach the integration of of that target how how do you get involved how much do you get involved or do you let it stay the business that it is from my perspective we're heavily involved we like to highlight somebody as an integration lead you know at the onset past term sheet execution because they really have to understand what the deal strategy is so everything that we're crafting you know from a synergy standpoint they have to be totally aware of and so you set up a committee program management office to oversee all that make sure it gets executed so I haven't heavily involved in Dawn do you have a similar strategy and night it is now I can tell you that honestly prior to probably about this past year we just kind of like jammed everything in day one and it was complete chaos and then you would come back and do the post those reviews and found out all the things that you thought were gonna happen didn't happen because so we've kind of taken over the integration function and been much more you know we start with kind of key assumptions that we're going in and the beliefs and the milestones and the way that we're going to treat it whether it's you know partial or it's gonna set us side and kind of approach it that way in a much more controlled setting the you know there's two kinds of synergies there's the cost synergies and then there's the revenue synergies give us a little bit of perspective on what you know what the key you know elements of achieving both of those types have caught you know synergies both on the cost side and the revenue we usually don't assume a lot on the cost side because it's just there are certain things that are just inherent in the way we run our business so we know a lot of times it's more expensive when we buy these smaller companies we're offering better benefits we're offering all these things cut their salaries so we we usually don't get a lot of cost synergies and from a revenue synergy sides we tried to operate very conservatively I mean we do you know full kind of customer analysis only assuming you know five percent penetration do some really conservative calculations but we can also kind of keep that in our back pocket and not necessarily present that to the street or the board or anything like that Michael I don't know how do you get involved in in integration in your role at wind church sure well yeah we do the integration really is running principally by the CEOs and companies so we may augment the team and there have been instances where we've hired consultants to help set up some sort of an integration office but really before before we buy the business we're gonna have a it's absurd of an integration plan 90-day plan or hundred they plan together business integrative there have been some deals we bought a company within the last 12 months where the our CEO used to run that the business that required and he took 30 million of synergies combination within 30 days which is pretty impressive so we kind of stay out of their way we heard a lot about good Matt good deals bad deals earlier today maybe you can share with us some some of your perspective on of the bad deals that happen are the deals that perhaps you shouldn't have done without getting too specific you know what sort of things did you learn you know kind of post-mortem that you've implemented into your approach to doing deals in the future yeah I don't think anyone's to claim they've done a bad deal up here next question you know I would say maybe bad processes that we fixed there was a you know in terms of areas to improve and work on I think there's always those situations you know it's a tough question I may just say that I learned firsthand that you need to go to on-site due diligence kind of a funny story I'll do it really quickly but we pursued a company that we didn't buy one at one point and and going there we saw the exit doors were actually bolted shut out of this manufacturing facility and everything looked good on paper except for that and we said well you know what's behind that whether the workers were leaving early they can't do that okay next question was why aren't there sprinkler systems installed well we thought about that but you know you know didn't think is appropriate but the doors are bolted and so you know just learning those type of things about a company firsthand will tell you a lot you need to know about whether it's a good investment or not well we only have a few more minutes maybe we can pull the audience see if there are some questions for these uh folks now what specific sector would that be and why it's an interesting question look I think aerospace is a pretty good place to be there's a big backlog that Airbus and Boeing have on on planes and you can get a supplier it gets plugged into that system you're in a pretty good position for a while so I think commercial aerospace [Applause]

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Keywords: M&A, Mergers and Acquisitions, Transaction Structuring, M&A Strategy, M&A Structures, M&A Conference at Wharton San Francisco, M&A Conference at Cornell Tech New York, M&A Conference at the University of Chicago, Transaction Advisors, M&A Strategy & Governance, Transaction Structuring & Negotiation, Valuation & Transaction Opinions, M&A Regulation & Litigation, M&A Integration & Culture, M&A Finance, M&A Accounting, M&A Tax, M&A Master Classes, M&A Academy

Id: eHXtcJ5iKmE

Length: 30min 1sec (1801 seconds)

Published: Wed Jan 11 2017