M&A Strategy and Deal Evaluation | Transaction Advisors

got too technical for me um so my name is joelle bernstein i um i uh work at the adobe laboratories uh where i uh to recently head off corporate development efforts i recently took a more operating role in our faster growing cinema business but most of my background has really been on the banking side i've been on the corporate side the last six seven years but i spent about 15 years on the investment banking side as an m a banker goldman sachs and and think equity partners and i've also served on a public board for the past 11 years where we have been doing a lot of m a and restructuring uh through some very volatile cycles in the in the metals industry so hopefully can bring a little bit of a versatile perspective on on mna good morning i'm fred grafam i run investor relations and corporate development for a company called digitalglobe probably what you would know about digitalglobe is we provide most of the foundational imagery for apple maps google applications where mappers are you know have their information online before i came to digital globe i spent about 17 years with comcast most of my background is actually operations uh either financial operations or i've been general manager of several business units so when i do mna i think of it from an operating perspective less as a as a banker for example i really think a lot about how we're going to integrate the business and ultimately drive value for the shareholders my institute tandon i'm an associate partner with mackenzie in our silicon valley office uh we've been mckenzie for about six and a half years uh focused mostly on uh transactions primarily in high tech and uh semiconductors so really excited to actually bring a lot of people have been doing a lot of research in this and have a lot of real-time experiences sitting next to colleagues such as you around as you guys go through the thinking from conceptualization to execution and then full integration so happy to happy to share any thoughts thank you so what we're going to do today is we're going to hopefully bring to life how to make m a work for you in in corporate settings and we're going to do it based on our panelists experience and we're going to interplay that with some theoretical frameworks and what we'd like to have you be able to take away sort of a pragmatic framework to use and consider as you think about evaluating uh future deals um and then we're going to zero in after that a little bit on the potential pitfalls that may happen either in the strategy side or the implementation side so let's dive in one of the things that you know we all have heard is that m a as a growth strategy is suspect that 50 of transactions fail so at the same time if you do some reading you will see that many consulting firms including mackenzie will tell you that serial acquirers return higher yields to their shareholders so which is it and uh maybe uh url i'll start with you just to kind of uh approach that big picture question is you know are are is m a acquisitions doomed from the start yeah it's kind of interesting i've struggled with with those headlines for for many many years because you know people tend to read those headlines and you get the impression that mna is sort of a way of sort of playing the odds but you know i think it's really a discipline like like any other discipline you either do it well or you do it poorly and of course then you fail but of course it's a it's a very uh specific capability and it is if you don't have that capability of course your risk increases dramatically and the downside can be very significant when you do m and i think that that's different i don't see so many headlines about you know half half of the marketing expenses are wasted right you know but m a sort of grabs the headlines and i think that that's that that's that's a mistake because you you it it seats that impression very often particularly among companies that are not used to doing m a that it's just it's a risky thing it's something that you can't control and you're really just playing the odds so i uh i very much disagree with those statements i think you have to sort of go a little bit deeper and figure out what does it take to do to do uh to do emanate the right way so yarl your point is experience is critical and the more you do it the lower the risk is is uh absolutely and i read an article not too long ago that actually came from mckenzie that that highlighted some of the stats that you mentioned that you know companies that that do a lot of mma are serial acquirers and i can't remember the exact number of transactions every year but they tend to generate a lot of shareholder value but in situations where you may only do one or two transactions a year you really don't build that capability and the risk of failure is quite high and so for me the question becomes because i think that's really the vast majority of companies that do fewer transactions may not have done it before maybe doing for the first or second time and so the question for those companies really are how can you minimize the risk of of doing m a like what do you need to put in place what do you think about how do you destructor the company in the organization to really facilitate a transaction and what you want to achieve with it and and fred i'll turn to you in in view of wading in what do you think about the importance of the size of the deal relative to the size of of of the buyer well it's interesting i i don't come from companies that were serial acquirers back to your original question i think 100 of poorly planned and poorly executed m a transactions fail i mean so i absolutely agree with you're all on that point um from the standpoint of size most of the deals that i've been involved with both as an integrator and as the m a guy uh have been larger deals transformative deals deals that you would do only you know every 12 to 18 months i mean like everybody else we do bolt-ons and there's a whole different set of uh kind of rules for a bolt-on you get into culture and and generally you're you're doing something that's enabling a product or enabling a capability or introducing yourself to a new customer set but from the standpoint of size i think it's really really important to understand the integration implications of acquiring a company for example um you know i was with comcast when we bought a t broadband at t broadband was twice as big as we were and so the amount of of integration work that was done both during the deal negotiations just sort of thinking about how are we going to integrate this thing into the broader organization as well as post announcement we spent a good deal of time during the regulatory process really thinking about how we were going to do this how many people from the comcast side of the of the of the fence were going to be introduced into the uh into the acquired companies and i think because we did that level of groundwork and really thought about culture and structure and all those things early on and then executed well upon them including making sure that we achieved all the synergies we were looking for both on the revenue and expense side i think that greatly increased our likelihood of success um sort of the same thing with another deal we did at digital globe we bought a mirror image of ourselves a company that was essentially about the same size as we were did essentially the same thing we did the market was downsizing and couldn't support two companies of that size and we ended up with a large government contract that kind of ensured our you know that we would continue as a as a viable entity anyway we brought them in and that was a that was a large deal for us uh and a deal entirely based on synergies between the two companies we had projected to the market that we would bring take about 100 million dollars of run rate cost out of the business we ended up taking about 120 million dollars of rendering costs out of the business and um that ended up being a successful deal and and again through a a significant level of planning going back to your deal model and saying what are we expecting to achieve in this in this deal and then and making sure that you have people executing on that plan and that you didn't sort of let the creep happen some of you don't know what i'm talking about you know people leave and then somehow they show back up we we really were disciplined in our cost management and and and making sure that we got got the synergies we were looking for and thanks thanks fred uh sid is it do deals fail because of the wrong strategy or do they fail because of poor integration or is there is a one have more pitfalls than the other or it's everywhere yes i think it's it's a couple of things right i mean the thing that we've seen is this whole construct of 70 500 deals fail or whatever it's basically a fallacy because there's no the the time by the time you see the success or not success of a deal or failure deal is multiple years into the transaction when the integration the synergies and all that stuff starts kicking in right and so many times when you see these studies or constructs that's why it sort of runs at odds with companies that do serial mna actually do very well over a period of time versus companies that don't right and primarily the reason is because the effects just take time to basically flow through your uh your strategy and your your p l right uh the um the two things that we've seen which are three things you've seen which are critical for success one is the time of the m a themes like having a thematic m a program rather than on just a purely an opportunistic mma program is critical that's what ties into your your strategy right whether it's it's consolidating an industry whether it's driving for growth whether it's buying a disruptor like whatever the strategy that you're putting in place mna is basically a core part of it and the themes are built around that right that's so that's one the second point is around proactive sourcing so a lot of times basically sitting back we see companies that are out performers actually go out and proactively source deal they'll actually actively network they will actually go to like venture capital conferences and stream or from high-tech perspective right to see what's coming out then what's out there rather than sitting back and getting the deal flow come to you right which which again separates are the winners from the losers and i think the last piece is the point that both uh fair and yeah mention is integration right and if you if you literally look at the integration post from the time you close the transaction that's what determines the success of a transaction versus you essentially whether you have the right theme in mind or strategy in mind order everything can work if you basically have the right integration mindset and yet in the pro the issue also as people look at it companies that don't do this often they look at it as after as post fact they'll basically invest in integration capabilities but the companies are really good at it are companies that actually have uh invested in systems and processes and and people that are there to basically drive integration as a core capability and that's basically the thing that separates one of the key things that separates the people who really win long term versus not so those are the three main things that we've seen all right so so uh as we get more specific around a strategy framework uh in preparing for this session uh i read some uh articles uh in in the uh particularly on transaction advisors it's a great great library of articles uh william and uh one article by stephen morris at university of chicago booth school really provides an effort to understand where are the successful acquisitions and in what areas do they fall and i'm going to describe it briefly and then ask the panel to kind of opine on some of these these issues because i think we'd like you to leave here with some idea of a structure a decision structure as you're thinking through strategy questions and morris it says basically that you can think about acquisitions in terms of expansion of scope expansion of scale and expansion of capabilities or technology those three and each of them is very different so scope is cross-selling new products to your existing customers cross-selling existing products to new customers vertical integration there's basically six or seven different ways of expanding the scope of the business uh to accelerate market access or expand the products scope so that's scope scale is let's take two companies very similar as you did with dg and put them together and take out a whole bunch of cost and get back-end synergies because we're going to share some relatively fixed costs over a much higher revenue field and and that tends to be more cost centered whereas the scope tends to be more revenue focused and then the last and very relevant for technology companies is getting new capabilities and and r d and i think that speaks for itself so uh maybe i'll just ask each of you to kind of think about and talk a little bit about where should companies focus should they focus should they stay tight in to where they're uh you know where is it getting risky and where are the opportunities uh and can companies if they stay too narrow are they actually expanding their opportunities set enough et cetera where how far do you go a field from the core url yeah well i mean it's obviously a a complicated question because a lot of that depends on the industry dynamics you know what what's going on and what you need to do strategically to to survive or or succeed in your industry and it may be that you have to do as far as transformational transactions and take a lot of risk in order to be a long-term survivor there may be a you know technological shift in your industry for example but but of course the the further you move away from your core business the more risk you're gonna take and of course the more downside you're gonna have in your your m a situations i think that um at the end of the day it comes down to certainly from my perspective and they should be driving every transaction what what are you doing for with regards to shareholder value are you actually creating value from doing this whether it's getting into a new growth area or whether it is is buying a similar business where you know there's low hanging fruit and you can take the cost out not that every company is necessarily good at doing that but i think that you got to look at each situation individually and you got to look at the the return versus the risk and and make a decision like that but of course uh the the the the strategy of just going out and acquiring interesting things because it may be a good opportunity and it has no relationship to your core business and your core capabilities of course is an extremely risky uh proposition and the landscape is littered with with massive failures in that area and fred uh you know in your experience i mean talk a little bit about dg what you do at your core and you know some maybe one or two acquisitions that you did like radiant that you know as to you know how they fit into that framework of so our our sort of our bread and butter business is the tasking of our satellites for both the us government and international defense and intelligence organizations across the world you know probably a half a billion of our revenue comes from that that business that's core to what we do we know how to fly operate well design fly and ultimately sell imagery off the satellites so that's that's our core business what's happened recently i'd say recently in the next in the last two years is this whole idea of analysis and conflation of information has become very important to our industry that the the value of a pixel is declining over time and the value of the information is derived from both current imagery and historical imagery is is increasing so uh the radiant deal uh is is an interesting one for us it was a small part of our business it was about a 30 million dollar piece of our business this was a company that generated in excess of 100 million dollars of of uh revenue and it was it was really doing things it was kind of where the puck was going in the industry so if you think about imagery is important first of all take a step back what what intelligence agencies are are really good at mitigating threats in areas that they know about the problem is that every once in a while in oklahoma city happens and nobody was looking and so uh so they're looking for solutions that take lots of data or take data and and say okay there's something interesting going on over there and nobody's looking at it and so this company we bought a series of companies but they're all under this company called the radiant group these guys conflate data so they take information you know tweets you know all the social media information multiple sources of imagery you know cellular data everything and they conflate it they put it into a big algorithm and then they say okay something really weird is happening there and that's kind of where the industry is going so i i guess that's a scope play for us uh it's it's tangent or it's uh adjacent to what we were currently doing and and actually from an integration perspective this is an important point we wanted to keep their dna we wanted to keep sort of the entrepreneurial aspect to that company and so we we sort of reverse integrated we moved our smaller business into their larger business and tried to keep their dna we keep them away from us you know so they're in dc we're in we're in denver colorado and and that's not a small thing and we kept most of their leadership because it's all about keeping sort of the brains there um i that that we haven't lost a beat uh it's early but we haven't lost the beat that the company's growing very nicely uh and i think it was really important to send us the message to the people there that you know you're you're very valuable to where we're going as a company in the future and uh we're gonna let you have your autonomy and let you to continue to be entrepreneur entrepreneurial and creative so so that so it was a scope increase because you were selling a a an additional service to the same intelligence agencies and additional three-letter agencies one of which i can talk about but yeah and and uh we can guess and and uh but it was also a technology play right because you you didn't have the capability in-house necessarily to do exactly that uh big data analysis and if they didn't have a revenue stream it would be in my mind it'd be a riskier transaction if they didn't have a highly um it was a revolution week of diligence in a meaningful way because of the nature of their contracts i would say that they'll you know these plays typically are not cost takeouts they're typically revenue plays and so if we didn't have that i think it would have been a much more risky transaction than what it what it was and and probably this one was a bit of an anomaly because normally you don't have that level of visibility into future revenue big contracts government agencies a little a little more auditable for lack of a better term so when we think about this idea of scope scale and and capabilities sid should the emphasis be on growing revenues or should it be on cost takeout or how do we think about you know where the more you know what's what's the best focus area when you're thinking about an acquisition so i think i'll go back to what y'all said which is it sort of depends on what your overall corporate strategy is and also it depends to some extent and you're limited to some extent by what your investor base is basically looking for you to do particularly if you're a public company because if your investor base is looking for you to essentially drive cash flows then it drives a certain set of transactions or types of transactions if your investor base is looking for growth which is a lot in high tech for example on software then you basically have a different set of transactions right um the the interesting thing you can think of also is um you can think of it as a portfolio play and if one of the things that we've seen over um over a long time as companies that basically have survived in the global 500 global 1000 essentially at their core they are very good portfolio managers right and so one of the things that we've we typically companies tend to talk less about is the other side of mna which is the divestment right so if you think about say a 10 year or 20 year journey of a company this especially in high tech and in semiconductors very rarely will you find something that will just be there for 20 years i mean there's stuff changes every three to five years and it becomes obsolete and it goes from being different parts of the s-curve right and the question then basically becomes is as a management team are you flexible and agile enough that you essentially can say here's a portfolio of stuff that i have which sets me up well from and it's balanced to where my shareholder needs are versus where my strategy is and and against that you basically then there's puts and takes so you basically will have you may take steps around honestly looking at your portfolio and saying am i the right national owner of this asset or not and that's usually a very tough conversation to have because it's like you build something from scratch or you bought something that made a lot of sense five years ago or seven years ago and now it doesn't and typically you'll see companies start becoming more bloated and slowing down because they don't do the divestment don't look at the divestment side of the story right but companies that over a period of time that have been successful are companies that have transitioned and and look still have the core capabilities they'll still be the core software company and so on and so forth but they've transitioned in such the way that the business that they started off in 20 years ago may only be 20 of the revenue now or in three years from now versus being 70 percent of the revenue going forward right and that's that's a good in high tech and at least from what i've seen in semiconductors and software the radar stuff with the innovation happens you can't you can't have a 10 year 20 horizon so okay i just want to make a point it's it's a great point you made the process of taking a look at what you currently have and evaluating it is very valuable frankly we wouldn't have done radiant had we not gone through that process because it was a small piece of our business we were you know we weren't sure that it was really core to what we do and is it more of a distraction and what we ultimately figured out is a very valuable part of our business and not only do we want to maintain it but we want to grow it and we would i don't think we would have done that uh done the deal had we not had that strategic conversation first so i think it's a great point you make just like the the headline about you know 50 failure rate in mna there's also this sort of very traditional notion that m a is equivalent to cost synergies and and i very often come up against this um this perspective that look if we're doing m a it must be about cost synergies and we've got to take something out even if there's nothing that we could sort of beneficially take out and it may not create value to you know fire half the sales people or do this or that and take that cost out but there's just this inclination that for us to do a deal you know we must take certain amount of cost out and i think it requires a lot more judgement than that and and pre-planning as we've been been talking about here to really assess where's the value generated why are we doing this you know not not clinging on to these sort of headlines about m a and what needs to happen here and there i think i think it's become a lot more nuanced over the last couple of decades any uh example at dolby in terms of uh you know of a transaction that was maybe more revenue focused where there was not some obvious cost takeout but yeah yeah well i would uh i'd rather stay at the hypothetical okay sure but um uh you know there was there's definitely been situations where uh there has been an urge from certain parts of a company to justify the transaction might take some cost out and and almost at a point where you take costs out just so you can show you're taking costs out but it wasn't necessarily um uh you know beneficial for the ongoing business to do it i think they're i don't think that's a uh a rare situation at all isn't that because cost takeout synergies are much easier to predict much easier to forecast and nobody's confident of revenue synergies i mean in fred comment on that because i think that was something that that we well if i can make a deal model work with cost take and it's not the silly cost takeout it's not you know eliminating half your sales force or taking out people that maintain relationships that are very important to the future of the business but if it's truly duplicative costs or administrative costs where you can you can take a you know take a decent amount out and justify the deal model that that's that's a low-risk deal and and honestly we've done quite a few of those and they're you know you sleep a lot better at night after you sign all the documents because you know that especially if you have an integration team that kind of gets it which we do at digital web and frankly at some of the other companies i've worked very strong folks that lead the the operators through you know the process of integrating a company and what we're looking for in the deal model so yes i absolutely agree that the um the risk of a deal as long as you're fundamentally maintaining the business and the opportunities you're looking at for growth going forward if if you can justify a deal model through cost takeouts that's that's that's a win now fortunately some of the deals we've done we've been able to do both we've been able to grow the revenue side and and take costs but i but it's it's certainly harder to to predict where the because you're dependent on things that have nothing to do with the deal a lot of times explain why revenue synergies are harder well generally we minimize uh how you know the disruption first of all so typically even in the best run organizations um m a organization you may take a step back on day one and i don't ever see a dual model that shows the year one step back so if your business goes backwards five percent in the first year you know what it may still be a good deal but i bet you your deal model didn't show that um on top of that entering new markets uh is a lot harder we have we talked a little bit about the buy versus build thing and one of the uh you know it's hard enough to to dovetail off of uh you know a sales for what you do on a sales force that already exists with customers that already exist and you're just sort of introducing your brand and your products to them that's hard it's really hard um in the buy versus build discussion you know then you're saying can we do it ourselves and build it from the ground up you always underestimate how hard that is it always takes twice as long and cost twice as much as what you thought um but yeah i think i think you just underestimate how hard it is to build a business you know from soup to nuts and the good thing is the company you're looking at typically has already built a business and so um you know the uh so i think i think just underestimating the difficulty of integration there's more organizational complexity you buy a company because you think that your sales force can throw another product on the on the van and go and sell it to the existing customers but you at the end of the day you don't really know if that customer will be interested in buying that product you don't know if they want to pay full price for it so you don't know if you have sort of the synergies that you expected right the cost synergies are sort of just a really nice thing because you don't really have to to do very much you just cut it and that's done and now you justified the whole thing and so the revenue thing is just so much more unpredictable you can't control it but of course you generate a lot more revenue it's a lot more value from from from building revenue than just cutting costs it's sort of a one-time thing and it's that benefit is not growing the way a revenue benefit will grow and so i think it's really a matter of how what can you control and that's why i think a lot of people in m a situations you know will very quickly sort of elude to go maybe go a little bit overboard on the cost cutting and then be a little bit vague on on the revenue synergies right so you see there's a trap there both investor um and corporate development yep are there methods with which you can educate both your investors as well as the board of a much more realistic first-year assessment or are their expectations well i'm going to eventually have to be real with them one way or other i could just be real with them on day one or reel with them on day 365 right so the the i mean the answer is i have to set reasonable expectations and i have to paint the picture on why you know maybe year one where uh you know we're not going to see the growth that necessarily we expect in the long term because we're integrating and you know what they're smart they get that they've seen pla analysts and investors have seen plenty of deals and they understand that there's always some level of hiccup and frankly we've done a pretty good job of setting those expectations and then exceeding them we haven't had as big a hiccup um you know with these with these businesses that we've acquired um but it is my job that's the sad part is i have to i go do the deal i get excited about it but then i have to go resell it to the investors after i do it for a public company yeah so i i have to always have that in the back of my mind and i do i i i make sure that i understand why am i doing this uh as i go through the process and how am i going to talk to our investors about it but yeah it's my job to set expectations if i do a poor job setting expectations and shame on me for i deserve the beating i'm going to get in a year so so let's talk about ways that an organization can protect itself from group think and going down the rabbit hole on an acquisition that maybe is ill-advised so one thing that you guys might engage in is buy versus build analysis so how does that help do you do it is it you know is it is it helpful girl start with you well i think i think it's it can be a very good exercise um just to get a sense of you know the magnitude of the resources that has gone into something you're looking to buy and and and very typically you you will do this in connection with a sort of a a smaller acquisition maybe it's a startup or it's something where you actually have the alternative to build it yourself you know you're not gonna you know suddenly create a billion dollar company in in instead of buying it but but it's also in in my view uh can be a massive rat hall to go down because first of all most of the engineers that that i have known they will always feel that they can you know build something that is much better than what you can acquire so that's one thing and so it always becomes a a a real alternative the problem is that um your build plan will you know require that you know you have you know 10 15 people sitting idle to actually build this thing but your resources are committed to your existing strategic plan you don't have those resources around so what do you do we'll assume you can go out and find the equivalent number of experts in this area and let's say that takes 18 months to do well i mean by the time you've hired those people and got them in their seats you know the industry is now on the third generation of the product so my point is i don't think it's really a practical solution most of the time it's it's um it doesn't really it doesn't really work it's not a viable alternative uh but it can create a lot of distortion in your decision process right because why go out and buy something where you can build something better for half the cost and as i think you know fred alluded to it always ends up also costing a lot more than what you think but you simply don't have those the resources are not available it's very often a theoretical exercise and so i think it's something that that you have to be a little bit uh cautious about and just quickly uh fred do you do the same do you do a we do the analysis we do the analysis the engineers i deal with design satellites so they can they think they can do everything and they're brilliant but i absolutely agree with all the comments roommate it takes typically it's it it ends up very quickly going from a buy versus bill to just do we want to do this do we want to buy forget the the the build but do we actually want to do this but it's too long yeah it's a disa but it's a discipline you need to go through because every once in a while you're going to trip across something that you actually can do and and you know you have the infrastructure to it i i wouldn't minimize the the mind share piece of it too you just don't at least at digital globe and any other company i've worked for we just don't have people sitting around look you know with available bandwidth to do something new and increase their job scope you know 50 percent it's just those people don't not in public companies certainly so it also depends on the disruption piece of it right and one of the things we've seen is is just to build on fred's point is that the build versus buy sort of works well if you're doing an incremental in your sort of swim lane analysis right the moment you basically start thinking about my swim lane is shrinking and there's something else in addition that's shrinking that swim lane or like my market's going to be disrupted by something else that's where a lot of the bias comes in because like it's very difficult for an organization that's built a 5 billion or 10 billion dollar business over 20 years to suddenly stay look itself in the mirror and say oh we can't like we are going to get disrupted significantly and then go and actually take it uh they will always keep arguing about no it's not going to be tomorrow or something tomorrow and i think from a management team's perspective what we've seen is that people the management teams that are very honest with the with that analysis about that our core is actually under threat from a significant disruption that's when basically you sort of don't go through this can we sort of gradually build our way into the market versus do we use our current cash flows and our current scale and everything else to make a transformative transaction that basically makes us a leader in that space rather than somebody can analyzing us over a period of time five or ten years we basically we essentially bring that in-house and then we basically control both sides of the equation and we use this cache to basically drive the other side i think that's it's in in particularly in the fast moving tech space and software and all that stuff it happens all the time right and i think this this being honest with yourself about the the disruption that you may not see everything right i mean that's the other point is everybody thinks that we know everything going on in a space but the whole beauty of the reason silicon valley exists is because two guys in a garage can basically disrupt you right and so that's basically the construct that you need to be aware of and and be able to come to terms with very openly so and then sid you mentioned earlier another way of sort of monitoring self-monitoring a company which is are we the natural buyer are we the logical buyer is that a valuable tool is it important that you are the most logical buyer um you know but there is something to that and so i mean let's just explore that for a minute yeah i mean the natural owner of an asset is is interesting because you sort of have to look at it from a perspective of um is you may not it's like do your custom are the customers that you're selling to and essentially are they essentially looking for this technology or this product that essentially you can then uh and they would look traditionally to you to offer it right um like just saying that basically a company x is my customer doesn't mean anything like one of the things that we obviously many times see is the buyer inside a business can be very different so you can say my my uh a large fortune 500 company is my customer if i'm an enterprise tech provider but in one case you could be selling to the vp of the vp of it infrastructure and the other case you would be selling to the apps guy and like those things don't necessarily just meld together as seamlessly as you would think they would right and so just saying x is my customer and hence i'm the natural owner of this asset doesn't really work right i think you need to do it but at the same point in time you know there's no need to over index on it particularly when you're going through a disruptive uh phase right so if you if you are selling into an industry and you're getting disrupted by somebody else the perception is you're a legacy old company why would you be like why would you be the right owner for this vibrant fast growing uh entity and at that point in time i think that analysis uh is uh you sort of have to give it your credit but at the same point in time the strategic intent of moving into that space to to what i was talking about earlier in terms of covering your own disruption overrides it right so and fred or y'all do you guys do that in in-house as well say are we the natural buyer are we the logical buyer either of you uh yeah i don't i don't think we uh you know we're conservative by nature and we'd say not to sort of we're into very new areas so i think most of the time we're sort of naturally one of the best buyers for something yeah we're better at it than what we were um i think we've that's partially because we've solidified our strategy as a company in a much more robust fashion than than maybe historically we had and so if you don't fit into our strategy we really question whether we're the logical buyer for for and i have companies that come in all the time and you know with pitch pitch books and talk to us about things and i'm thinking to myself why in the world aren't you talking to so-and-so and uh and so i don't know that it ever gets to the board level at that we've done that work really early in the process because again we're small we have limited resources i can't waste time on things that aren't consistent with our strategy and then we're going to talk about integration and we have a few more minutes here but i want to is integration discussion part of the decision whether we should proceed or not um do you guys have a view on that in other words do you do some pre-merger integration discussion as to can we implement this how would we implement this absolutely i think i've certainly been in situations where an assessment my assessment certainly been you know we don't have the capability capability to integrate something and a a proposal may have been that we're going to leave them separate and run their own business it may be sort of adjacent to our own business and it's not something we necessarily have to integrate unless we're just absolutely dying to get those cost synergies i talked about before but if we decide that we have to integrate them there are situations where you know we would absolutely decide that we can't do it because you can predict that it's going to be a meltdown and we don't have to capacity to it maybe at that time or ever it may be just too complicated for us and uh we know what the consequences might be and so we we would back away from a situation like that okay and sid maybe some thoughts on the importance of thinking through integration before you actually pull the and i think it's it's absolutely been we've seen it's absolutely crucial right i mean this uh some of the clients i serve basically they spend a lot of time upfront thinking through the integration like all aspects of it right it's not just and you you were and you were triangulate so you would actually go out and and test it with your customers right like like with your sales force and whether the integration is going to work or not you'll think about the culture right whether that's going to melt or not you're going to start thinking about systems right as much as you can you can see outside in because a lot of the stuff also especially in bigger transactions it relies on essentially bringing the systems and the technology together seamlessly and that's again something that you can't fully plan going in and obviously there'll always be surprises on the other side of the curtain but the more time that basically you see people spend up front is with obviously the limited information that you have before going into transaction is significant but i think the other point is also the moment as you get closer to a transaction once you've announced like once you announce the transaction there's typically a significant especially in big transactions there's typically a significant lag time between announcement to close and this given given obviously within the legal parameters of what you can and cannot do that's really a time to like double down on integration planning like really deeply and like really put your best people at it start thinking about it holistically put in place the systems and processes to do it and the more the more you do that then so the day when day one comes you're ready to go as much as you can ready to go i think that's the the time frame that i would look at is is there some work you can do up front which sort of gives you a sense of whether this is going to work or not and how difficult is it going to be and that's typically not the gating criteria to whether or not you do a transaction that's like what you need to do to de-risk the transaction and then the second one moment you announce a transaction then you double down on the de-risking and integration planning of it and so that the execution on day one you run it you hit the ground running essentially and how do you guys you know turn to url and fred how do you guys organize the integration process internally because you know just thinking through you know is a separate team or how do you develop continuity and i think we may be different in this regard but um at digital globe uh we we typically and by the way to answer it better be part of your pre uh club or your pre uh before you make the decision actually about you better be thinking about integration but we have a separate group in our company small group but uh someone who has a lot of experience in integrating companies and you know the way we do it is we have the small group direct the operating heads to uh you know to sort of think about how they're going to do it in the most efficient and effective manner so we have a separate group we typically bring that team in before we sign anything but you know maybe uh you know a couple weeks before we're ready to sign documents uh we'll bring them in and just get you know look for any red flags or concerns that we haven't thought about and and then they kind of take the ball from there and and they're so good at it that it's it's actually a luxury for me i don't have to spend a lot of time in integration planning because they do such a good job of it but yarl you know i i think you would say that there's a concern about continuity from deal strategy and planning to implementation and how do you develop that continuity yeah so so we don't have a we don't do enough to have a a sort of a team on standby to do integration and so when we do something we we basically assemble the team a cross-functional team for that transaction but of course we need to lead and drive that and make sure everybody's coordinated but i think it's it's extremely important that there is that continuity you know from the beginning of the due diligence process all the way through integration because it's just amazing how much you learn through due diligence that can have an impact on integration which i think in many situations many companies who do it a little bit differently where the dlc throws it over the wall when to the integration team and they run with it there's a lot of information that gets lost and you know whether it relates to you know operational issues or defect products or you know litigation or certain customer issues and problems that should be addressed right away that can very easily sort of be be dropped so having that continuity from the deal into the integration team and even have an overlap i think is extremely important now is it best when you're doing implementation to do it fast rip off the band-aid and just kind of make it happen or should this be done gradually or how do you guys think about customizing it to the situation in the scenario and maybe sid start with you and then go to the corporate guys yes i think it it answers our depends on some functions like the gna functions for example you may want to go faster because a lot of your reporting your internal systems and so on so forth depend on that right and that's so the first place you can achieve your cost energy is the fastest right the places the more you start getting into engineering um r d for example or sales and marketing you have other factors that start playing into consideration like your product roadmaps are already ongoing on both sides it takes time for those things to merge over a period of time so you can't just rip the bandit off right on customers there's existing account relationships that exist and how you bring them together can have a material impact on your revenue trajectory i mean whether you rebound from that first year blip or not kind of depends on that right and um the and the the last piece i think is is is it but at some stage we've seen that typically over a couple of years right two to three year time frame is when sort of everything converges and you now are operating as a integrated entity and different functions just take different time frames to basically come together over a period of time and do you guys have ideas and how fast you should go i break the world into things you do to play and things you do to win i think the things you do to play you know pay your people pay your bills you know do all the you know the sort of my job stuff the um that stuff i think you should move as quick as possible uh typically has less impact on on the end the end customer i think the things you do to win serving your customers product development all that kind of stuff you really you can screw up on the first one a little bit and get away with it on on the ladder it's you really need to be thoughtful and make sure you're not impacting your customers that's the first thing they're looking for they're looking for you know what does this mean to me you know this new organization has gotten out ahead of its skis and now it's you know it's not delivering the way it used to deliver and so i think you just need to be more thoughtful which probably means a little bit slower yeah i just say it's really a judgment call i mean things like you know customers how to deal with customers who is calling which customer and all of that that has to be ready on day one it's absolutely critical and then there are probably a lot of things in sort of on the back end in operations that doesn't necessarily have to happen day one and so i think applying that judgment across the board is very important but one thing i've seen very often is that companies go down a path where they think that i can stage it maybe over three years and i'll just have these people finish this and after two years i'm gonna fire them that doesn't work in in in real life i mean just can't but it's it's a it's a notion that i've seen repeatedly right and so i think that there you have to be a lot more decisive and say look you know this is what i is critical for day one and the rest of it uh knowing what my plan is i got to do it sooner rather than later and it would it be fair to say that if you think go back to our strategy framework that where you're talking about scope extensions and even far reaches of scope extensions that you're probably going to integrate slower whereas if it's a scale if it's more back end weighted more cost synergy you're going to go faster is that a fair fair assessment i think you assess you assess what are the resources i need to execute the plan i put in place why am i doing this transaction what is it i'm going to achieve over the next one to three years and what is required for that and whatever is not required of course you should you should take out but also come back comes back to what what fred talked about what the expectations you're setting with your board and you're sitting with the street etc right so i think you just have to be very measured about how you do it make sure that you can deliver what you promise the other thing is also on the river the construct is that's pretty very common on the valley is the reverse integration construct right which is reverse integration so you buy an entity you essentially are it's a new space that either you're not and going back to your point around scope right it's you actually may not integrate as much as as you would normally do in a typical transaction and the reason is basically they are your core to going building the stuff going forward and depending on um depending on where you are with your own systems and your own product roadmap and everything else the extreme version of that essentially you reverse integrate into them because if they basically have leading edge systems they basically have uh they've built it from the ground up right it's like they use all uh next generation uh processes and so on so forth you might say look the indication doesn't work the other way around where you just say you just reverse flip it around to the other side so i think that's the other angle also is that you have a reverse integration construct that you can keep in mind in certain situations right that's interesting how important the other thing i just mentioned which i think is actually quite important because it's very underrated and that is the use of divestitures is something that's that's that's that's very ignored in the corporate world because it's a capability that doesn't exist in most companies but if you can actually you know you can use that and generate a lot of value from that i think in many situations where you get something something is just not core and if you can just immediately start carving that out and prep for that and divest it i think you can you can save yourselves a lot of problem because very often that becomes something that's lingering for years look what i'm going to do with this it's you know i'm not really paying attention to it and and and i think that you can proactively uh generate a lot of value by more more use of the vestiges but of course that's where you you need a little bit of help like like an advisor right but i think that's something that's neglected way too often and then how important is culture in in implementing uh in integration you know in in terms of retaining talent etc what and how do you deal with cultural and what does this mean you know what are we talking about when we're talking about culture and culture i mean if you look at the transactions that essentially fail right i mean that's probably one of the top reasons why the transactions fail over a period of time right it's just because the cultures didn't come together very well you were not able to retain the best engineers you basically had a misalignment of what how you plan to run the company from a strategic perspective and the interpretation of the strategy was different from what was laid out so i think that the cultural aspect is is super important and particularly particularly in a situation where you're actually buying fast growth innovative companies into larger organizations it is that is like the death knell if you don't figure that part out right and very you essentially need a a very astute view of okay i'm either going to bring these guys inside and and protect them from the stuff around like there's been transactions where basically big companies have bought emerging startups and just allowed them to bloom right under their umbrella without actually like uh uh they're actually imposing their own systems and processes and everything else on them right and the same thing also is true if if you're and in extreme situations you can actually generate a lot of value out of it right there's been instances where in tech people have bought companies they basically have allowed them to nurture from let's say 400 million revenue to say a billion or two billion revenue and then you basically at some point you're like this is big enough we can actually spin it out and and run it as and you can create so much value i mean the emc vmware transaction is one of the most value generating transactions in history right in tech and that was part of that kind of a construct right and so i think the culture of when vmware's still here emc is always in boston right and that culture is super critical understanding that and going into it is quite important so isn't this it's almost a structural problem going into it because if you have a large buyer and a relatively small target the small target the in its entrepreneurs they make decisions on the fly it's a very small group of decision makers a large corporate has to have a decision uh a hierarchy and decisions are slower and everything needs to be cleared at the top and so things become more bureaucratic how do you keep the entrepreneur how do you retain the entrepreneur i mean fred yeah you know it's the culture is so important that you actually will structure your company to accommodate it if it's a culture you want to maintain right so i use the example of radiant we we left that business essentially alone we kept most of the leadership um you know back at comcast you know we bought qvc left all the the leadership in qvc put incentives and and then over time we integrated certain portions again mostly back office stuff but for the most part we left the culture alone so i think in your example where you're buying a highly entrepreneurial quick decision making company and you're a larger public company you're just going to have to get smart about how you you you figure out how you give them enough you know of the field where they can make good decisions and drive the business forward and still maintain your corporate governance in a way that you know you have to as a public company and you know that's where the pre you know signing everything diligence comes in it's just as important as checking pipeline and you know all the environmental issues that is just as important as part of diligence i believe you see you know you see a lot of uh you know the history is littered with entrepreneurs leaving you know within a month or two of an acquisition uh you know apple's acquisition of siri for example you know and pretty soon that team is out building their next ai uh platform which they then just sold to samsung and how how long will samsung keep that team i mean these are you know and and yet without the team what do you you know you're buying a static one of the things i've seen is the management team of the acquirer actually spending a significant amount of one-on-one time with the with the founders of the smaller over the duration of both the obviously during the deal negotiation is slightly more difficult but like post signing and before closing you can spend a significant amount of time just understanding between the two uh between two sets of groups right because it it's really important for the ceo and the and the management team to get a real handle on basically like okay how do these guys really think how do they operate and you can only get by face time so uh fi i'm we're going to finish up with just a short discussion on how do you know if it worked do you guys do any post-merger review of of success is there a measure of success yarl yeah no absolutely in our case i mean it's on the case-by-case basis because the rationale will be different i think that that's that's the way to do it but it can be everything from you know retaining gaining market share to retaining employees to you know development and getting a product to market i mean it all it all depends on on the situation but we definitely uh we definitely keep track of that and and and measure it and try to try to get more sophisticated also about measuring the financial return which can be a little bit difficult once you start you know blending things together and and and it gets harder to to measure but uh we do want to keep close track of um of uh you know how we perform in these situations and and fred what's your what do you do our board requires it so the internal audit group looks at every deal we do and and reports out to the board we typically set on essentially day one we set five or six metrics that are key metrics for success and we're held accountable to them yeah hopefully metrics that you can measure yeah i mean and contemplating things like we're going to integrate this into our cost structure so it's not going to be as so it may just be we're going to look at the top line or we're going to you know but yeah it's things that ultimately i have to sign off that i'm going to be held accountable for yeah i'm agreed and management teams all and most of the clients we serve have clear kpis and and to account for the integration and success of these things and attract pretty closely so so we'd love to uh answer any questions from uh the group here so feel free to just raise your hand and we'll uh we'll please uh tom could you comment on which process you use internally to evaluate prioritize your yield pipeline how often you do that is involved in those conversations so tom was asking how do you prioritize the deal pipeline given that you're probably looking at hundreds of deals a year yeah i mean i think in our case it's a very very uh fluid process you know there's there's a constant deal flow and sometimes it's actually quite overwhelming but i think we have a very good understanding of in in in our group you know what what might be of interest and what what what is not of interest but we actually vet a very large number of transactions and it really comes down to is there a is there a good strategic rationale and is there someone who would be interested in sponsoring this right and in 99 out of 100 times the answer is no right but we do uh we do as long as it's somewhat close to our business we look at it quite carefully and so it's just an ongoing process i mean constantly have you know i don't know you know probably between 10 and 20 situations going at the same time that that that we're just keeping in the air and making sure we we analyze and get input in it then if it goes to sort of a little bit the next stage so to speak and that's not terribly formal you know we may start doing uh you know some deeper analysis on it may start engaging a little bit just to uh to get a better sense whether this would fit with us we have a two-prong approach we have a company full of hunters so we're always putting it out there in our corporate communications i speak to the company quite a bit on the ir side so we always say there's no bad ideas you know if you guys have an idea about a company that you think might be interesting send it to me we also have a formal process we do executive leadership meetings off-site generally once a quarter typically an hour and a half of that is an m a discussion where leaders are bringing ideas in or we're bringing you know hey these are the the top 20 targets we're thinking about right now what are your thoughts and um you know if one piques the interest of the team typically you get an executive sponsor and you start looking at it in earnest but so we have i actually believe the former is in some ways more valuable i'd rather have it come real time as long as the whole organization is thinking about it it's it can be very effective if you if you don't have a culture of m a or you haven't created one or people just think i'm wasting my time by even saying anything then it's not as effective we've been pretty good over the last couple years we've most of the deals we've done have come as a result of that not as not some formal review every quarter and we browse landscapes all the time we have certain areas that we know we we should be looking at and we we look at any target we can we can find right to sid's point which is you're not sitting back waiting for things to come across your desk from the investment bankers we're more likely to buy something that we identified and something that just happens to be brought to us yeah um it's sort of a little bit more uh you know finding that sponsor you know a business group head if a business group here says this is something that that that i could use for my strategy and and and i can do something with that then it goes further you know it doesn't it doesn't go up and then come down to the to the business committee so it's something that's sort of built from the ground up and uh and uh normally by the time it gets to the very senior level you know a fair amount of you know conviction has been built into it please brian what point of your is particularly in competitive auction scenarios it's a good question we we didn't talk much about valuation but obviously it's always central to every uh every transaction yeah the first question is is it consistent with your strategy does it you know can you integrate it can you but i mean it's you know what point it's probably running contemporaneous with a lot of other stuff starting to develop valuation things of that nature sometimes you're right you don't have a lot of time to think about it so you have to make a you know you have to do those other evaluations pretty quickly but i wouldn't say it's before or after anything kind of runs you know at the same time um but we do know when we're saying okay this is you know it's either not strategic or you know what we just know the valuation is going to be beyond what we're willing to stomach and um again being a public company we're going to be held accountable pretty quickly for what we pay for these things especially being a smaller public company so it's it's it's earlier in the process especially if we think it's a red flag that you know we're just not gonna be able to afford to do it yeah we don't we don't valuation is not just a big issue right in the beginning but it's something that we look at because from the beginning i need to have a a a view on it right whether it's just a loose guess on the estimate or you know whatever it is right but it's not a it's not a a a hurdle you know the strategic fit is really the first thing and then we figure out what the valuation is and we tend to we we can actually get quite creative on on structuring you know you know deals that that that that sort of bridges gaps and things like that we we've done some creative era structures and things like that so so evaluation is something that we feel that if we really want it from a strategic perspective you know valuation is something that we can get comfortable with but we're very very fundamentally oriented i mean you know taken some fact for this over the years but you know my standard thing is the dcf over a ten-year period with excruciating detail just so you can understand what is it that you have to believe about the industry and the company in order to justify what you're doing but i think that that is the most educational process you can go through on from a valuation perspective what you end up doing at the very at the end of the day that's that sort of is is sometimes a different definition yeah and i would say you know at lazard in terms of our sell side processes strategic fit is so much more important because that's that's a binary yes or no and there's going to be a market clearing price and and usually there's two or maybe three strategics circling this asset it's not a huge universe and they can typically overpay relative to a financial buyer and you know if the fit is there and the models work obviously you're not going to pay more than the dcf with with you know reasonable assumptions but any other thoughts or questions and if anybody has you know a comment or an editorial uh your feel free to chime in as well please er do urn outs really work i i say most of the time no i think it's something that you know everybody hates them and but you sometimes gets to the point where uh it's really the only way to get something done and uh i think the sort of traditional learnouts where it's you know it's an ebitda measure and you know if you hit it you get paid if you don't you don't i think the key is simplicity you know is it something that you can clearly measure and something that you are completely unlikely to litigate over right and if you can create something a metric that everybody agrees that look if you hit this metric you get paid and we're really happy because the business has been a success and it may be as simple as you know what we we ship x number of units and we we know kind of what the cash flow value of each unit is in our model you know let's we can we we can figure something like that out and that that works for both parties so i think the answer to the question is you know you know 99 of time no it doesn't work it's terrible and i i've always also heard that most buyers you know when they enter an earn out they don't really expect to pay it because it's pretty easy to to uh to create a scenario where you don't pay it as you know but if it's something that you can't really manipulate on either side i think you can structure something that works and if you're in a situation where you actually have to bridge a gap and it could be something simple as you know i think the industry is going to do this but but but they think the industry is going to do that you know what's the value of that gap and and and and and if if if if i'm wrong about the industry more than happy to to pay so um so it's in specific situations like that you can you can structure it and and we have not been afraid of going down that path and trying to figure out something that is fair for everybody and very very transparent that can work the rest of it no i would never touch it well thank you all

Channel: Transaction Advisors Institute

Views: 26,234

Rating: 4.9472294 out of 5

Keywords: Mergers and Acquisitions, M&A, Transaction Structuring, M&A Strategy, M&A Structures, M&A Synergies, M&A Conference at Wharton San Francisco, M&A Conference at Cornell Tech New York, M&A Conference at the University of Chicago, William Jefferson Black, 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

Id: 3V16JiKGzHQ

Length: 66min 53sec (4013 seconds)

Published: Mon May 15 2017