Text Version of the Interview
Buy and Sell-Side in a Corporate Role
In the banking world, you take on the role of advisor to clients, be it on the buy or sell side.
This is a macro role in the sense that it focuses on making recommendations to companies to acquire business based on your understanding of the business and the market, which most often than not, is a fairly accurate perspective of what is happening in the industry.
In the corporate world, however, access is a bit limited to competition or competitive intelligence, at least from companies themselves. In a corporate environment, capital is the opportunity to deploy and takes various forms, such as M&A, investing in an organic business, dividends and shareholder return as well as share buybacks.
I think this is the element that doesn’t exist in the private equity world, where you allocate the capital to a portfolio and then put an incremental capital or look for other deals. In this case, that same capital is not competing for other fairly non-transaction work.
Debt is very commonly used in the corporate world and when it comes to balance, there is a preference for balance sheet capital which is essentially a balance sheet cash.
Unlike private equity, which almost always needs to have a debt bridge to complete a transaction, in the corporate world, there is a flexibility of capital and there are various flavors of funding which ensure this flexibility in a corporate setting.
Differences Between Corporate Development and Private Equity Roles
As an example, if I am investing in spine and as an investor, I have the possibility to go to a spine conference, talk to a lot of competitors and players in this space and really get intelligent on the space, but also get an insight into how foreign competitors and companies are thinking about the space.
I believe a lot of our intelligence is gotten from primary research we pay for, articles or reports we read, but also from business units.
This way, it is possible to funnel up and piece together a lot of important information to come out with a thesis on market size and market growth.
Approaches for Negotiating Transactions
I think a common theme when it comes to negotiating is the level of transparency that you want to have with the other party.
It’s very important to be very intellectually honest and keep personal integrity when negotiating.
I think the difference between the buy-side and the sell-side is that there is more opportunity to leverage the auction process when on the sell-side.
This is because the opaqueness in a process when selling a business allows the seller or their advisor to create a competitive situation when there may not be a competitive situation. It creates an opportunity to create an aura of competition to get the best terms and the best price possible for the business.
There are times in the process that that leverage shifts and part of the art of deal-making are understanding and anticipating what those points in the process are when the leverage shifts.
Being fairly upfront in how you are thinking about this, no matter if you are on the buy-side or the sell-side, in terms of value and consideration is important because there is a reputational game in play and that reputation follows you.
For me, the intersection of negotiating tactics really comes to head during the contract and I believe that if you get the contract right you can solve a lot of negotiating issues that come up in transactions.
When on the sell side, the important advice I can give is to do your own diligence on the business that’s about to be sold and position it in the most accurate light possible, in order to avoid unpleasantly surprising potential buyers. There will always be surprises, so it is important to know how to effectively manage them.
On the sell-side, this means minimizing the possibility of surprises occurring and on the buy-side it is about being less reactive to them.
Due diligence needs to include asking important questions, evaluating all the areas buyers where would explore the business.
I need to understand how buyers are thinking about the business. This has a private sale flavor to it. There is a lot of preparation, a lot of focus on confidentiality and there is a lot of advisers involved in the process, from financial and legal to investment banks.
Strategies for Handling Competing Buyers
The standard practice in the industry is to try to generate enough interest for your asset, but have that fairly controlled.
Advisors are conscious that there are a lot of assets out there for sale which is why it is important to stay focused. In other words, having a fairly focused buyer universe is a more prudent way to sell a business.
I think these strategies are twofold.
- First, there is a need to generate enough real interest for the business and the way to do that is by advertising the business, through a SIM or a teaser.
- Second, it’s important for advisors to engage with a buyer in a conversation about the company, get to understand what the red flags are, what are their thoughts on value and growth, how do they perceive strengths and weaknesses of the business and so on.
Narrowing the field can be just based on questions like:
- Are buyers asking the right questions?
- Are they fully engaged?
- Have they done their homework on the industry?
I believe part of the strategy is
- make sure the buyers are real
- make sure to stage the buyer interest in a way that allows prioritizing when it comes to buyers, as it is important to have the buyers converge to apex in value and terms.
Part of the strategy involves sharing with each buyer a developing perspective that you have on what the market is talking about when it comes to the value of the business.
Balancing Buy / Sell-Side Engagements
I think investment advisors who take time to understand focus areas of other companies bring a lot more value to a corporate in the long run, compared to those that run broad auctions.
The reason for this is, in a corporate setting, there is a need to balance the value of an asset with a certainty of getting it closed. To focus on a business that doesn’t promise the team will be able to return capital on efficiently is almost akin to how much the team can get from a value standpoint for this business because it is distracting management.
Utilizing Playbooks Over an Auction Process
Most corporate, and many organizations that have been doing deals for some time run home-grown sell-side processes and there are two reasons for that.
- The first reason is that the business may be too small.
- The second reason is that a lot of the time, it is more efficient to run the process internally without an advisor.
Over time, people like me get approached a lot, but I believe banks have figured out how we operate internally. It’s not that we won’t hire an investment bank, but we simply don’t sell a whole lot.
I think that banks that have a real, true perspective on how other players on the market are thinking about buying and selling are much more valuable than broad auction advisers just to get the huge auction process going in.
Although a huge auction process can lead to high value for assets, corporates are oftentimes not in the business of selling assets to maximize value in the business of selling an asset. Instead, they want to focus their team’s energies on more strategic targets and portfolio.
Broad Auctions vs. Proprietary Deals
We do a bit of both.
I think auctions that we get involved in are generally never that broad, just because we are out in the banking and intermediate community talking about what we want and our strategies of acquisitions, which leaves a little space for a transaction that is a huge auction.
Most of the efforts are fairly focused and we are pretty good when it comes to quickly respond to inbound interest from an advisor.
From a strategic perspective, I don’t think we shy away from a broad auction simply because it is a broad auction, but we do shy away from a deal that doesn’t strategically fit with our objective.
Ideally, there needs to be more proprietary deals, because with these deals there is already a lot of the legwork on the industry and the segment in the sector that’s already done. However, that doesn’t always happen.
Sometimes a lot of similar assets come to market together and in this case, it is important to learn from reviews of each of the similar assets, which helps refine a point of view on a specific asset. In those models, getting involved in broad auctions is actually helpful as it allows to define a point of view on a specific target or sector.
Understanding Seller Motivations
Tactics in my mind sometimes have a negative connotation to it. I think it is important to understand what the motivations of a seller are. Through an advisor and through conversations it is easier to understand what is important to the seller.
Oftentimes the longevity of their employee base or the legacy that they are leaving behind may actually be more important than the very value. Understanding what is important to the buyers or the seller makes it easier to draw the parameters in which to operate within.
Standing Out During an Auction
Related to the previous question, I think it’s important to understand what the seller really wants and then give them that. We’ve often won auctions against higher bids because of the sincerity and the openness with which we approach the transaction.
While money is important to everyone, I believe there is a baseline beyond which money becomes less important.
That needs to be discovered through an integrative process. Once you hit that threshold, a lot of the upside is nor related to money, but to other motivations and aspirations of the entrepreneur.
Creating Deal Focus
It’s important to try not to get sucked into a process.
There are times when there are so many voices at the table internally for a company, debating to do or not to do a certain deal. There are various flavors of getting emotionally tied to an asset and sometimes that forces a tough discussion internally.
Part of my role in a corporate development setting is to try to be the unbiased party as much as possible. It takes effort not to get sucked into the process and see two, three layers below the varnished package to really understand the motivations of the other party.
Top Buy-Side Strategies
The way we think about M&A is market company and then valuation. The way to triangulate on the value of an asset is to put together a cross-functional team that evaluates a business and there are two areas of that. One is a commercial diligence effort and the other is a confirmatory diligence effort.
The commercial diligence effort are those functions within the target that the team will spend time on. Assuming everything goes well with a commercial diligence effort, there comes confirmatory diligence, which is largely legal IP, IT to an extent. In case it is a foreign jurisdiction company there may be an FCPA, which is compliance.
This is how the team is built and it is a fairly extensive effort.
Having inside diligence teams work with outside advisors is valuable because as thanks to these different lenses, different perspectives its easier to see a map clearly, spot the issues and resolve them. Having a huge issue that kills the transaction does happen, but it happens seldom.
A lot of this investigative work is to defend a financial forecast that can be delivered. It’s important to think about what incremental we can bring to bear in this asset and this could be cost savings, revenue generation or steady-state, which are all subjects of discussion during due diligence period.
Surprises During Due Diligence
Compliance violations are a problem, especially if they are repeated an have an impact on PNL. Other things that get uncovered during due diligence are those related to legal issues or big environmental issues.
A lot of the times in transactions when you are acquiring the stock of a company, that comes with some real estate. On occasion, during environmental due diligence what can be found is contaminations on the walls or the ground which is not something to look forward to taking on as that might crater the deal.
I have also seen deals fall apart over intellectual property, where we realize through diligence that they may or may not be infringing on existing IP over somebody else’s IP.
This becomes an issue when such an asset gets acquired by a larger business with deeper pockets.
Identifying and Mitigating Post-Close Challenges
There is always an effort needed to try to protect your side from such surprises. The way to do that is by having a formal M&A process and a program at a company.
I think that as businesses mature in their M&A groups, the sophistication of executing transactions and doing diligence goes up and such issues get eliminated over time.
But, ultimately when they do happen, that calls for going back to and rereading the purchase agreement. I believe it is very important to make sure that deal professionals understand in detail all that they are signing up to when acquiring a business.
And I think a seller you want to be equally aware of what you are agreeing to. These documents are not easy to comprehend, which is why it is important to have the right advisors and sometimes make sure the other side has the right advisor as well so they are properly educated about what they are signing up to.
Reading agreements ultimately helps one to think through all the ways in which things could come up, be it big IP issues, environmental issues or big tax issues and how that could trickle through the system and be costly for a buyer.
Biggest/ Most Expensive Post-Close Surprise
In my experience, the biggest surprise in that regard was related to tax and it was a large deal. It should have been a part of a purchase price adjustment but I and my team missed it and overpaid twenty-five million dollars that we couldn’t recover.
Key M&A Lessons Learned
I think it’s important to remain honest and maintain your integrity on either side. You want to be able to get into details and actually engage with the content versus the process.
There is a mystery around M&A and it advisable to be aware of and appreciate that. Sometimes people discount the value corporate M&A team brings to the organization of actually running a price and getting a deal done.
It is important for all the professionals to be savvy with the legal side of transactions and be able to acknowledge when they don’t know something so they know when to reach out to lawyers timely.
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