episode 

Why Big Companies Destroy Small Ones

Carlos Cesta

Jeff Desroches

If you're a small company about to be acquired by a larger one, you may be wondering how you can protect yourself and your employees from being destroyed by the large acquirer. Hear from M&A pros about how to protect yourself during transactions and what red flags to look out for.

Jeff Desroches
VP of Corporate Development at Atlas Copco
Ivan Golubic
Former VP Corporate Development at Goodyear
Erik Levy
Group Head Corp Dev and M&A at DMGT PLC
Kison Patel
CEO at DealRoom

Why Big Companies Destroy Small Ones

26 Apr
with 
Carlos Cesta
Jeff Desroches
Or Listen On:

Why Big Companies Destroy Small Ones

Why Big Companies Destroy Small Ones

“The worst thing is not to discuss (integration) at all. You’re setting yourself up for failure.”

Common reasons small companies get destroyed in M&A

On this episode of M&A Science, Kison interviews Carlos Cesta, Vice President of Corporate Development at Presidio, and Jeff Desroches, Vice President of Strategy and Corporate Development at VAT Group about why small companies often get destroyed during M&A. They discuss why big companies acquire small ones in the first place, how small companies can protect themselves during a deal, and the common issues that result in a small company getting destroyed.

Learn how having empathy when approaching a deal can make a difference in outcome, why deal fever can be dangerous to the success of an organization, and why beginning the integration planning process early on in a deal drastically improves the success of M&A. Jeff and Carlos educate Kison on what the early integration planning process entails and how to run integration SWOT teams.

special guests

Carlos Cesta
Vice President Corporate Development at Presidio
Jeff Desroches
Vice President, Strategy & Corporate Development at VAT GROUP

special guests

Carlos Cesta
Vice President Corporate Development at Presidio
Jeff Desroches
Vice President, Strategy & Corporate Development at VAT GROUP

Hosted by

Kison Patel
episode 

Episode Transcript



Intro

With me today in this discussion is Carlos Cesta, Vice President of Corporate Development at Presidio. Carlos is an investment banking and private equity trained executive with over 15 years of experience executing and leading strategic initiatives. Recognized for the ability to develop innovative solutions to challenging issues. 

Also joining me today is Jeff Desroches, who was until recently, Vice President of Corporate Development at Atlas Copco. Jeff has been managing full lifecycle M&A processes and other inorganic growth initiatives for over 12 years, primarily focused on the industrial manufacturing, semiconductor life science markets.

He's apt at developing strategies and then leading cross-functional teams to successfully execute those plans. These guys have over a hundred deals of experience. And today we're going to talk about why big companies destroy small ones.

We see it happen all the time in a variety of strategies and industries. I'm interviewing two senior corporate development leaders to learn why and what can be done to prevent that from happening.

Why do big companies destroy small ones? 

Carlos Cesta: Who's asking who's destroying what. Let's define that a little bit. So destroy from whose perspective, maybe one of the examples would be full absorption of a company which might have been by design. 

So the shareholders are happy about it, but with all their stakeholders, maybe be thinking differently. If you're a client, for example, I was in Bedford when United bought them. I felt they destroyed the company. 

It wasn't a good deal for the shareholders. It probably was, I don't know. It depends on who is the stakeholder you're talking about, but I think for the purposes of this, we're talking more about the disconnect between when small companies fall into big companies.

And adapting to processes and the efficiencies in professional management. From that perspective, I think we'll have to get a little bit more granular. 

Jeff Des Roches: So of course there can be some reasons why a larger company intentionally kills a smaller company. But as Carlos mentioned for the purposes of this, I think we're talking about kind of the more common mainstream situations.

Where acquirer brings a smaller business on board. And over the longer term, it doesn't meet its objectives and maybe isn't killed per se, but there are varying degrees of the performance below what the expectations were.

As Carlos mentioned, that can be different from different perspectives. Some of the issues that you run into are the overlaying of the bureaucracy and the approval processes and things like that. 

And the overhead, obviously a part of, a lot of larger companies for various good reasons, but applying those same processes, those same overheads, the smaller companies just may not be appropriate.

Kison Patel: Okay. So to clarify, we're not talking about a natural integration, or the company just gets absorbed.

We're talking about when the value gets missed, the deal objective gets missed, when we defragment the company culture within that, you have that happening accidentally, and then intentional. Strategically some companies would do that as well. I.E. Anytime there's an iTunes competitor. They tend to get purchased and disappear. That sounds right?

Jeff Des Roches: I like to use an example where the day before the deal closed, the owner of the company made almost every decision about their business. 

And then the day after the deal closes, perhaps they've transitioned to an environment where they need to get a couple of levels of approval to buy a $400 plane flight.

That's a drastic change for the owner of that company and a bit of a trivial example, but large and broadly across the acquired entity, it can really cause some serious challenges. 

That's a good example of transition change I want to get into, maybe we can get into why the big companies buy small companies in the first place?

Carlos Cesta:  If you boil down to what it is, us executing the inorganic strategy against a strategy. Why do you buy them versus why do you not partner with them or make them an RN Investment is something that came from an analysis that was before. 

And decided that we have to have a stake. We have to only have control of the asset and it could be because it's a new technology.  And by definition, the acquirer wasn't able to develop organically.

It'd be scale acquisition. More the same, because you can obviously squeeze a lot of efficiency out of it. It could be to use a very good group of engineers to bring in-house R and D, but in all of this is a recurring theme.

You weren't able to develop these things organically. So you're going out there and you're buying them and bringing it to execute against the strategy. 

Jeff Des Roches: I agree with that. I think a lot of these things, we look at them typically as a make versus buy or build by partner type of options.

Oftentimes it's more, given enough time and money you can do just about anything, but that's not always the most efficient way to try to achieve strategic goals that you have. 

So acquiring a small business that brings in a certain type of technology that you want to incorporate into your products, for example, or oftentimes competencies, capabilities that you could ultimately obtain, but acquiring them is a much more streamlined approach.

Carlos Cesta: And just to build a little bit on that, sort of trade-off between, do I build in-house and lose time to market? 

They'll just go up and acquire someone and it creates a tension of, okay, now I have integration and that's where we run into the segregation that we were talking about. 

Jeff Des Roches: If I could throw one more thing in there Kison about why big companies buy small companies at all part of it is because there's more of them out there. 

There's more opportunity to do that. And you're not betting the farm. Everyone's aware of the history of mega-deals.

It's a very checkered performance history. I think boards and shareholders in general and executive management teams are much more comfortable. 

Making these smaller investments that they're important not to say that it's not still viewed as highly strategic and critical to the long-term success of the business. 

But you're not taking such a risk that if something happens and goes wrong, you're surprised by something that it could take your whole business down as well. I think that's part of the attractiveness. 

Kison Patel: So less risk, and it seems like these scenarios can fit in a variety of different strategies in terms of what draws you into these smaller companies. 

Why do you think smaller companies are killed by bigger ones? Unintentionally? So often, regardless of strategy or industry? 

Jeff Des Roches: I think the most common issues as far as unintentional are the layering in of the bureaucracies, the decision-making or the approval processes can take much longer there are reasons why those processes are put in place for larger companies.

But for a smaller one, it doesn't necessarily make sense. Applying an allocation of shared services, overhead to an acquired business. You've got a large IT organization, which certainly wouldn't be justified for such a small company. 

Well, maybe had one, maybe two people managing most of their IT and outsourcing a lot of reviews. Now they have an allocation charge that they didn't have. , that's just another example of the kinds of inefficiencies perhaps that you can introduce inadvertently. 

Carlos Cesta: When I was purely a deal guy, there was the jargon of blaming it on integration. I did my job, I closed the deal, blame it on integration. But probably about five years ago, I got obsessed with integration, processing it, because it really where you capture the value. 

And for me, these types of situations where you hear the target companies or the acquirer companies say, “well they’re destroying my culture” “This is not what I had in mind” “destroying value” A lot of it is maybe two sources.

One is communication doing the deal. And I like to start the discussion about integration before LOI intensify. 

After LOI, design a plan together with a seller, because a lot of times, things that you discuss about how are you going to integrate, be it go-to-market, top of the house or back-office are discussed.

Well, the worst thing is to not discuss them at all. So you're setting yourself up for failure. So you have some discussions, but a lot of them don't end up on a purchase agreement. So it's this? 

Oh, I remember we discussed. So it's just. All up in the air. So what I like to do is a little memorandum of understanding. 

It doesn't have to be like a legal document, but a document that is agreeing with the seller, about how are going to go, about how the integration touchpoints, how are the workstreams, and when are you gonna integrate certain things?

When are you going to pick them off of quick books to SAP, when are you gonna do HR because these things are where it touches people's lives and they get annoyed by that. There was no communication or a way to do it. 

So I think one of them is process, process, process, and we can get into a whole chapter about how to perfect that process of putting together an integration plan.

But second, I think, especially in the middle market, we're talking about companies at the lower middle market, below a hundred million dollars, where sellers are oftentimes the owners of the company. And the entrepreneur start thinking about selling and start connecting with the deal sponsor at the acquiring company.

Things are gonna go not the way you design at first. So these two people need to be, as I like to call it the bridge builders. So these guys have to have in mind that things are going to go not as expected and it can, the first difficulty just turn around and say, Oh, it's the big guy just turning to me and squeezing me and fixating my business. 

That's a really easy cop-out from the entrepreneurial standpoint, that connection has to be tested and solid. Those two guys have to be in sync in a very solid integration process.

Walk me through the relationship with the entrepreneur. How does that evolve pre to post-close? 

Jeff Des Roches: It's interesting how that transition works. This is oftentimes for the entrepreneur, the only time they'll ever have any exposure to this type of process. I mean, of course, there are some serial entrepreneurs out there.

But oftentimes the business carries their name on it, perhaps their family name and there are family members involved in the business. 

So the evolution of their thinking, going from the primary decision-maker to having to get perhaps multiple levels of approval for something can be a very emotional transition for them, as well as the rest of the employees. 

I want to echo Carlos’s points earlier about the communication is very clear. Doing the planning upfront as early in the processes, as you can. 

And then being very clear about setting expectations with the sellers, how they're going to fit into the organization, what the roles are going to be. Setting those expectations incorrectly, poorly communicating about how that's going to work can lead to a lot of issues afterward.

Carlos Cesta: I collected some data points on that cause I conducted interviews with the companies and the CEOs.  One of them told me, Carlos, I think I could do your job even better than you're doing. 

I'm like, okay, great. Tell me what I have to do better. And it came back to integration. Very good conversation. I became friends with the guy. He said, Hey, listen, I am an entrepreneur. 

And I did a lot of work in diligence to what was going to find out. What happened is that my team, a team of about 140 people, they were never used to facing inside the big company. it's called professional management. 

It is someone that is going to check your day one after you close a deal. And you're going through the motions of the deal. You've talked to the strategic partners and division, and everybody's excited about it. 

Day two, someone calls you from finance and say, “what's your budget. Let me look at your numbers.” “Oh, you're not closing on day two? No  we have to close on day two”  it's professional management. 

It's how big companies get bigger, right? They work on the margin of efficiency. Every single dollar that they save on the processes can store the bottom line. This clash between the entrepreneur, spirit, and professional management, it needs to be smoothed out. 

There's definitely a point where everybody's excited and the thing they only understand what life's going to be, and then there's a cliff when you meet for the professional management. 

If you're not prepared for that. And that's the point process supposed to be like total transparency to say, life's going to change. 

We're working on the margin on the efficiency here. That's when things change dramatically, what causes, what we're discussing here? Right. Well, they're destroying my company because now I have to worry about know close the books in two days versus 15 days, 

I want to turn around to the big companies. What should they not be doing to destroy these small companies?

Jeff Des Roches: I mean, aside from some of the clear things that we've mentioned before, there's generally, there's a philosophy that the integrations should be done as quickly as possible. 

There's always a pain in the process. So let's go ahead and just jam it through and take on the pain early on and then get over it and move forward. What I've seen work better than that approach is more of a nuanced approach. 

Big companies ought to be acknowledging and understanding how the smaller company works, how they make their decisions, obviously the culture. 

And I think you need to try to. Appreciate the emotional transition that the company's going to go through and ensure that your employees of the acquiring entity have respect for what the company being acquired is going to go through.

There's a reason we want to pursue them. They bring something of tremendous value to us. And I think there are some times where employees on acquiring entity. 

Perhaps take a view that, hey, we bought you guys, so we're going to do things the way we want to, and perhaps not provide the acquiring entity with as much opportunity to participate in the processes as they could otherwise a more nuanced approach of this transition. 

Sorry, let me mention one other point. There are some things like financial reporting, employee onboarding payroll. There are some things that absolutely have to happen immediately, but there's a lot of things. 

Introducing your NPI process, for example, or some other business process, it doesn't necessarily have to happen right away. And so I think a more nuanced approach to the timing of which you're going to implement. 

Some of these processes can be a huge help in this moving things along and improving performance. 

Carlos Cesta: I would echo everything that Jeff said and put on top of it. People don't value how intimate a link, how you integrate a plan for integration and the deal structure needs to be. 

To allow both to happen in a successful way. And the example would be when you're in a bidding situation, usually, the economics of the deal come up front and we're talking to a banker or discussing with the seller, how much money upfront, what is the retainer? 

What is earnout? And you guys know earnouts are a good way or a very sophisticated way to bridge valuation gaps, but also introduces some challenges because you need to keep the perimeter of the acquiring company intact at all times. So you can measure them and you can compensate them.

But in a way, it prevents full integration in the classic sense of things. You end up negotiating down upfront and then go into integration. And guess what? Maybe some of these actually need to get integrated right away. Feedbacks get back to the deal terms and you need to do great right away for this to be successful. 

You need to pay everything upfront. And then if I indicate, okay, so how do we solve the valuation problem now? So how we manage risk, it's really like a spiral of these three points that you have to do or to get to where you want to be.

I think in addition to that, even if you do those things, you go back until everything lines up. The deal structure, how, and when I'm going to integrate, and then you go back to the banker and say, “guess what, we just got out bid, so we have to do something else.”

And usually, you forget about integration and then you go back to the economics of the deal again, and you sacrifice integration. That's the point where I'll be a big proponent of, if you did your work on the integration, you should not sacrifice some detriment of just getting a deal because you have to change the economics. 

Yeah. I think we should have these three pillars and iterate with them and be absolutely convinced that these are the three things they need to be successful.

Kison Patel: It's interesting. I'm hearing a few different themes here, empathy. I like Jeff mentioned just being empathetic with that company that you're acquiring. Then also, when it comes to integration, you're sort of contrary to the traditional thinking of integrating as fast as possible, no matter what. And it sounds like it's more of an emphasis as you are elaborated Carlos, to really do this stuff upfront and develop more of a joint integration plan with that company so that there is that alignment. And then. 

Everybody's on the same page or what that pace of integration is going to be? 

Carlos Cesta: No, I'm not saying that we shouldn't integrate right away. I think the integration should be customized for each case. 

I mean, I was in the situation where the target company was so much younger in terms of average. They communicate differently if you just roll them into the larger company right away would have been a disaster. 

Jeff Des Roches: That's an important point. It's not to go to the other extreme and just put it off forever and hope that it happens at some point. I certainly don't mean to imply that.

To integrate smart. Maybe that's the most concise way to put it appropriate for the deal structure and for the two companies coming together and involve the acquired entity in that  

When it comes to the small innocent companies, like the one I operate. How can we protect ourselves from the big, bad wolves? Like you guys out there. 

Carlos Cesta: I think you have to do your diligence, kind of the cliche, talk to people that were acquired by that company in the past. it's easier to find out you have 10,000 connections on LinkedIn Kison, you can get someone connected with your network and talk to them and say, okay, what was your experience? 

I think you should be asking the hard questions. I'm going to get cash in the bank, but if really want to keep doing this in a big way and you agree with the vision, ask the tough questions to your Deal sponsor and say, “okay, you never told me, how are we going to integrate this thing? Or when can you put it on their own paper? What's the plan? 

And you can say no, that's fine. We did a hundred of these. It’s gonna be great. I really like the conversation.

Jeff Des Roches: Oftentimes you're acquiring a company because they know so much more about their industry or their particular markets, their products and customers, and so on. 

An acquired company or one that's in the process should also recognize that and ensure that they feel very comfortable as Carlos put it, asking the difficult questions and challenging the assumptions as they hear about the plan and they discuss it over with the buyer. 

If you don't think those plans are going to be effective in your market or for your customers, you need to bring that up. Because it's very likely, you know more in some cases than the acquiring entity, that could be a reason they're there buying you in the first place. 

Additionally, maybe it's motherhood and apple pie at this point, I always encourage our sellers to not try to do it alone on these kinds of deals. And they're used to making a lot of the decisions and controlling a lot of their activities themselves, but they should get good advice. 

They should get professional advisors on the legal side, on the financial side, preferable ones who are not just family, friends but have actually done deals before. I always encourage folks to do that. And it makes it smoother all around. 

It's better for the buyer as well. If you have experienced people on the other side, 

Kison Patel: For a company like us. One of the things I pride the most about our company is our agility. I mean, we not only run circles around our competitors, but dance circles around our competitors. How do I preserve that? If I'm going to sell my business to a larger company like yours, because you just told me I'm going to have to adhere to all this bureaucracy and this crap I don't want to deal with already, but I know this is our competitive advantage is just this culture of agility that we develop.

How's it possible for a company like us to actually preserve that? 

Carlos Cesta: That's a billion-dollar question. If you're in the middle of diligence and feel that you won't be able to do it, maybe that's not the right partner. 

One of the things that I was thinking about in the theme of agile M&A, what happens many times is that these signs that things are not right, they come up through the process when you're doing diligence.

But then there's this perverse thing that, because it's like a train and has momentum. You are negotiating yet to get towards a point and you think if I open this right now, I already paid the attorneys I have to start over again, not a project, let’s just close it. They were going to solve it.

No, it's a problem that we have to solve. And I don't know if its agile M&A and the parallel tracks of this is something that you do but you find that more often, that people are able to admit. They get towards the final line and big issues come up and they end up doing the deal anyway, with the hopes that they're going to fix it.

Kison Patel: To Pursue with influence a deal fever huh!?

Carlos Cesta: Exactly. 

Jeff Des Roches: That does happen. Unfortunately, 

Kison Patel: how many times have you done that? 

How many small companies have you destroyed? Just because the deal fever. 

Carlos Cesta: I didn't do any integration, then blame it on integration. 

Kison Patel: That's what happens when the deal goes bad. You blame the integration. There are integration folks that are watching this right now, shaking their head.

Carlos Cesta: Well, I have one, one-story though, and I'm going to be as generic as possible again, to my point of design integration, tie the deal terms. First-year at that deal, everything is lined up. 

The deal sponsor gets out and another crack. Comes in. He has completely different ideas on how things should work. The previous deal was designed to have an earn-out and base things.

This guy comes in, so, no, no, no, no, no, no. This owned everything. We have to buy the earn-out now. Bring everything to the present value and let's see how much money I can pay the shareholders. 

This is also one issue that happens talking about like, trying to figure out the personalities I'll be an entrepreneur and the deal sponsor. 

Well, this guy is gone, should I spread my risk and having different deals sponsors, then you run into a problem of accountability, one throat to choke, but that's a tough one I haven't able to fix yet. 

Kison Patel:I guess a whole another interview just around, all the antidotes around deal fever. 

Jeff Des Roches: Sending off deal fever is a challenging one that happens on both sides.

Kison Patel: Yeah.  that can make sense. You overlook some of those concerns just to get that big fat check at the closing table. 

What are some of the successful strategies you've used to mitigate the risk of destroying a small company? 

Jeff Des Roches: The early planning, the communicating, involvement of the integration team, at least certainly the leaders of that team early on in the process involving the seller, as far as how they're going to operate afterward being transparent.I think all of that's really critical. 

There are other approaches. You could simply bolt on the company and let them run as they do currently for the most part. But there's an obvious downside to that. 

You're not likely to be able to execute the synergy projects that you would like to execute if they were fully integrated. The employees may not feel a real part of the newer company. So there are real pros and cons. I don't think there's really a silver bullet. But there are more or less appropriate ways to do it in each case. 

In any case, some careful planning and careful thought for how it connects the employees and customers and the other stakeholders, really critical.

Carlos Cesta: Yeah, I'm going to echo 100% of that. And just one point just to add to that, I think people underestimate many times the role of the lead integrator. I heard many times people say,  you just need someone to project managers this.

And you can do that, but the best project managers for integration come with a lot of experience as well. And it's a very interesting and rare profile to find. It's a good project manager. 

It's almost like a COO, someone that knows about operations knows finance that can, and by the way, my process is, what I like to do is just have integration as another workstream in parallel with diligence. 

That person manages everything and continues after we close the deal. When that person has the ability to understand, deeply understand the issues that are bubbling up during the process, but also navigate well back to the mothership one, who's going to have a say on this. 

Let's say we're in diligence and the CFO is not a great guy. Okay. So do we replace the person or do we integrate? So just bring those issues very early, discussing with the stakeholders inside the company and in solving the problems. 

When I have that type of lead integrator in my team, I sleep like a baby. Cause I know issues. I'm not going to be laughed at there. That role of the lead integrator for me is the sole key.

Jeff Des Roches: Yeah, If I could tell a quick war story related to almost exactly that situation, the very first project I was on the very first acquisition I was on. I was brought in as the integration manager because of my background in project management. 

I was brought in the day that the deal closed. So we went to breakfast. They asked me to be the project manager for the integration. And then we went to the deal announcement and, needless to say, that's not the right way to do that.

And in fact, very quickly thereafter, I found out that there was a massive disconnect in terms of what the plan was for melding the two supply chains together, whether the ERP would go to the acquired entity or they continue to use the acquiring entities want.

It was a massive disconnect and it took a while to negotiate a resolution to that. But that all could have been handled earlier. As Carlos mentioned, I like to use integration as a separate workstream as well in diligence. 

Because that's absolutely what you want to start thinking about at a high level even before that, but that's where you really start to do. Some of the detailed planning is during the diligence phase and we could have avoided that. And some other issues ran into if we've been involved a little bit earlier.

Kison Patel: I want to jump back into that whole idea of having the integration person in early. You've mentioned having integration there in parallel with diligence. Break that down for me. Like what does that actually look like? You have functional leads that are participating in diligence, and then you have your integration lead there as the other head in that group.

What does that structurally look like and how do they approach it?

Jeff Des Roches: The way I like to do it and typically the way we've operated is to develop some high-level framework of how you plan on operating post-close. And as Carlos correctly mentioned the deal structure itself, there are going to be some implications. 

You develop the high-level integration strategy early on before you even sign an LOI, for example, how this is going to work in a, in fact, who's going to actually manage those processes. What the level of interaction is, how big the team will be, what the different workstreams are going to be, and so on. 

But then in diligence, typically, that's where we're really starting to get down to crystallizing that strategic Integration plan into the more detailed project plan. 

So I may not have every tactical task on it at that point, but the idea is to make sure that you've covered all the key elements that are going to be required depending on what your integration plan is.

 I don't know that I necessarily share the full detailed plan with the entity being acquired, but I certainly do discuss it with them in some level of detail and make sure that they're on board. They think it makes sense and that we'll be able to achieve our combined goals afterward. 

Carlos Cesta: I agree with everything, but more tactically, if I double click on what the process itself looked like, when we're about to do, to make a bid, I'm talking to my deal sponsor. 

And I tell them if we were going to make a bid, you need a lead integrator. Can you nominate someone. From there on it’s just the three of us. We are the life of the deal. And then when we start diligence, integration is another workstream. 

And if I make an analogy about the other workstreams, if you have an HR team doing diligence or the finance team doing diligence, their final product in the middle of this process is a report that says, here's the additional value you can get from it. 

Or this is the value of the structure and these are the risks. These are those two things. How does it affect value? And what are the risks? That's how you tell them. 

You want me this report, for the lead integrator, the mission is, you need to give me integration plan and so forth, but it talks about each one of the workstreams. 

How are you going to integrate them, In terms of timing, there are timelines in there. Get into the details saying we're not gonna integrate in the first year and integrate this in 18 months.

These are the people that are gonna live with this and accountability in each one with that. So it's a very extensive document. 

There was a back it's some synergies, and we like to discuss the synergies with the seller. if you have some sort of earn-out component, you discussed, starting from, okay, these are the synergies. 

Do you agree with them and validate at a high level with the seller what the synergies are and how the payouts can vary. During the, I don't know, two, three weeks, or four weeks of diligence that integration pack is put together, discuss with the sellers and blessed by both parties. 

I think that's a bit more detail. 

Jeff Des Roches: Just to add one additional point on that, by having the integration manager  or the key leaders involved in that diligence process, they're able to provide you more than just a plan. 

They're able to provide you with the heads-up red flag report of their own, that says here's our plan, but this acquiring entity does things a little differently, and here are some issues that might come up and that you can start to try to mitigate early on. 

That's the logic to having them involved early. Cause if you're just going to use their standard templates, you can let them know on day one. Like I was initially notified. 

What you really want to do is bring that capability and that expertise to try to recognize issues as early as possible.

Carlos Cesta: Within those conversations, what I also use is testing the relationship and the chemistry between the entrepreneur and the deal sponsor conversations, right? You have to migrate to our system. 

Well, there are costs about who's paying. Those are tough conversations that the seller is going to say, “you told me that was the price. Why are you retrading me?” Well, we're not retrading that there are costs, how are we going to do this?” And then it's in the tough conversations that you test the chemistry if they’re bridge builders, if they're not, already, again, the train is not gonna stop maybe, or I wish the train was stopped, but at that point, if that's not working, it's a red flag.

Jeff Des Roches: Because it's likely that the entrepreneur is going to go from working with me quite a bit early on prior to closing, it's going to flip and they're going to be working with the integration manager.

Kison Patel: So I could ask frequently for integration templates. There is no such thing. Like, I mean, if you have something that you could kick off and say, Hey, we're going to start integration because everything you just described is very tailored. 

Carlos Cesta: Yeah, it's a checklist, it’s not a template.

Jeff Des Roches: Those are good places to start. You want to leverage the experience and the lessons learned from previous projects. You don't want to repeat the same issues.

Nothing against templates, those are great places to start. But they're just that. Both talking about due diligence checklists or integration project plans, they're a great place to kick off from, and then you start tailoring the deal. 

Kison Patel: I got a comment here from Greg, as opposed to a functional-driven integration plan. One experiment that can be done is to organize integrations, SWOT teams. Centered around the key value drivers of the investment thesis and this way you can prioritize the biggest impacts. It also has a functional plan across the workstreams. I like this comment because I've had a recent interview where we brought that up to around goal-based teams. So one of the agile approaches is to prioritize those value drivers and then build cross-functional teams specifically to deliver on those value drivers. I know I talked to Dan actually at Xilinx and they called it a value capture team. 

What are your thoughts on that? You ever used that before? 

Carlos Cesta: I have once, but it's pretty recent. So I think it's something that I'm going to be doing way more. That also saves money by the way, because if you use outside advisors to do polio warnings or cell phones, what you do is before they engage them before you start spending money with them, testing retests, the investment thesis on the deal itself, testing the patience of the seller is going to say, if I were going to study diligence right now, but you say, well, give me one week to test these things and then we'll come back. 

Then I have another go or no go I'm a big fan of that. 

Jeff Des Roches: Yeah, no, I think that's a great point. We didn't call them synergy teams, but to have a separate group of people focused on really getting the value that you planned on achieving out of the deals, as opposed to just putting the two entities together and on a real tactical operational basis. 

You want to also go after those projects, not just hoping that they evolve from putting the two entities together. They actually have to have a focus,  the resource and efforts and timelines and separate project-based focus on.

During these stressful times for small companies with interesting ideas, what is the perception when larger, more stable companies acquire the smaller stressed-out companies? How can they mitigate any messaging?

Carlos Cesta: I’ll take this one though, in my experience, when times are tough and you go back to this, this makes sense from a strategy perspective, I'm not, I'm just, I'm rambling a little bit, but I'm just referring back to one deal that I was. 

Or thinking about, and I was on a buy-side and it became evident that the seller was in a tough situation. It was strategic enough for us. We didn't quite, we changed the structure of the deal. 

Some of the things that we'll guarantee turned into earnouts, reduce upfront, but maintain the ability to get the full value of the deal and just work with a seller on that.

Jeff Des Roches: Back to an earlier, a couple of earlier points about both the empathy for employing that on the acquiring entity side of things for the smaller business, also leveraging what the larger business is good at.  

A great point. You sound about the smaller business being more agile. Well, the opposite is unfortunately in many cases, a negative, but in this case, would be positive. 

And that the larger company is more stable at a stronger balance sheet than it's probably stronger financially to manage through these challenging times. 

So hopefully. Some of that stability, that strength that the larger company brings can help to perhaps attenuate a little bit. Some of that stress that the smaller company is feeling 

Carlos Cesta: If you want to create a feeling that you put lipstick on a pig. When you give that perception, then from there on, it's going to be a challenge, there's a credibility issue. 

And then there's going to be questioning of everything that you said from there. Kind of be factual that tried not to be too rosy are issue. That credibility is an issue. 

Kison Patel: Carlos, you guys tooling up to go on an acquisition spree. 

Carlos Cesta: I think it's a very good time to 

Kison Patel: Answer my question. 

Carlos Cesta: But I'm gonna leave you on that.

What's the craziest thing you've seen in M&A? 

Jeff Des Roches: This was a few companies ago. Where I saw on the day that we closed half the management team closed up their laptops and walked out and decided they wanted to leave and not be part of the combined company. Surprisingly enough, that actually worked out probably as well, as it could have.

 It was a shock to us and we could have put things like retention plans in place. Generally, we'll do that kind of thing. We didn't do it in this case for various reasons, but to have them all just walk out on that day and we had to do a bit of juggling, but we managed through it.

I think it's a better company for it. Yeah. Okay. So that was a bit of a challenge. That was, it was a crazy thing to happen on closing day.

Carlos Cesta: So I was working for a publicly-traded company. We're buying another publicly traded company, actually a household name. And we were in diligence. I remember it was a call with finance to go through some boring depreciation schedule, but the head of CorpDev and the CFO of the seller.

We’re going into this excruciating detail, very dry call, 15 minutes into it. The CEO of the company, dials in unannounced. 

She interrupts her team, cuts them off, started discussing that same schedule in a level of detail that would never expect a CEO to be into discussing. Intelligently answered the questions. 

It was a call. We didn't have a video at the time, but I can only imagine the face of our team, but for me, it was just. So that of it is she is some kind of genius. He gathered that kind of information that kind of read a letter of information, thoughts up intelligence. She's some kind.

Kison Patel: A real type, a CEO, I want to wrap things up, and thank you so much for taking the time to have this conversation with me today.

For those of you that stuck through really appreciate you for spending the time and supporting this. Thank you very much. I have to go on.

Outro

Thank you for taking the time to explore the world of M&A with our podcast, please subscribe for more content conversations with industry leaders. If you like our podcast, please support us by leaving a five-star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email.

It's Kison, kison@dealroom.net. M&A Science is sponsored by dealroom, a project management solution for mergers and acquisitions. Additional educational content is available on deal rooms, blog at dealroom.net/blog. Thank you again for listening to M&A Science. See you next time.

Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.


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