Areas where alignment is important
It's important to have alignment across all aspects of a prospective transaction. People focus on the functional areas, first and foremost, which is certainly important. But the cornerstone of achieving alignment is really around strategy.
Whether it's a business unit strategy, a divisional strategy, or an overarching strategy for the corporation, making sure that all parties that need to be involved and aligned are, and granted there's a time and a place for everything.
Not everyone on the team needs to know everything all at once. It's a question of who needs to know what and when, and making sure that all of those parties come into the loop as part of the process at the right time, in the right place. That’s alignment on strategy and that expands out into the functional areas. And then, you can go much broader than that.
In terms of communication and a plan strategy for alignment around a prospective deal, there are upwards of a dozen disparate parties that we need to keep in the loop as we go through our process.
You have your internal stakeholders in the form of the deal team or functional heads, or your executive leadership. Then you have external stakeholders in the form of the company that you’re acquiring, their vendors, customers, employees, and eventually IR and the press.
This goes back to the “who needs to know what, when.” You’re not going to come out with the press release halfway through your process. Those are the things that go out further in the timeline.
And sooner in the timeline, you often want to do what I would call “greasing the skids.” So, before a deal gets too far, make sure that your key internal stakeholders are a part of the process and are aligned with what you’re trying to achieve with the prospective transaction.
Approach to alignment
The cornerstone of any corporate development program is the overarching strategy. So whether it's a transaction that's going to affect the entire corporation, in which case you need the strategy aligned with the executive leadership team and the board of directors, or just a divisional strategy where a prospective transaction only pertains to that portion of the company. But it all starts with that underlying strategy.
As part of that, there are certain elements that you're going to want to ensure are included. Strategy, first and foremost:
- The market that you're serving, is it growing?
- How is it important to the company?
- What do the customer segments inside of that market look like?
- How are we addressing those customer needs?
All of those things need to be clear and expressed as part of the activity that you're going to undertake as a corporate development professional. You need some initial stakeholders that are involved with shaping the strategy.
Once that is firmly in place, make sure that you have the division or CEO, whoever the unit lead is against this prospective deal, onboard with what you’re going to look at, and the timeline associated with it, and who you need from their team to be involved in the process.
Corp dev usually handles all of the functional areas and aligns those folks at the appropriate time based on the deal plan, and the timeline associated with it. But it’s almost always important to have some people from the business unit, from the division involved if it’s going to be a transaction that doesn’t involve the company as a whole.
On a division lead, the champion for the deal is usually whoever the executive is in charge of that or their designee. But almost always, they play a part in it, especially if you’re trying to sell this to the company’s executive leadership and the board.
Having those conversations upfront, getting them bought into the process, getting them to assign folks as part of their team, is super important to the process outside of the functional, legal, and financial due diligence.
Up front, you do want to keep that group relatively small. A lot of deals die on the doorstep as you will, so getting too many people involved too soon or getting people excited about a transaction that’s not going to go anywhere is not a productive use of anyone’s time.
Then, we identify an opportunity. We discuss it with the leadership team. We make sure that we have buy-in from the executive level to actually pursue it. Even just getting to an LOI, if they’re not going to back the deal, then we will have to explain to the divisional leadership why it’s not going to move forward.
And if they are going to back it, do we have, at least in a preliminary sense, the necessary resources to go after this deal at this point in time? And I don’t mean just the money, I mean people.
Resources are finite. You can’t pursue every prospective transaction. You have to prioritize what deals you will go after and what deals you’ll pass on. So making sure at least to get a green light from the powers, whether it be the CEO, divisional lead. In some cases, you have an investment board that you have to run things by. Making sure that upfront work is done and that people are at least on the same page to kick the tires on the prospective deal is super important.
Prioritizing the pipeline
The best approach to prioritizing the pipeline is impact.
- What is the potential impact of the organization as a whole?
- What deals are going to make the most difference from a shareholder accretion perspective?
- Where are we missing elements? Whether it be capability, market reach, customer reach, product development, those really are going to influence and affect the future of the organization.
Sometimes you find some of the bigger groups that you really should be putting their biggest and best foot forward, pitching small deals and things that have very little influence on the stock of the company as a whole.
And other times you have these tiny little corners of your business that bring up these things that are undue needs in terms of capital, deployment. It's all over the map. It's part of our job in terms of corporate development professionals to help the executive leadership make those decisions, to have a well-thought-out capital allocation model and deployment mechanism.
Sometimes, people in the corp dev group think it is common sense, the divisional folks won't or they don't realize the competition for the limited resources that the organization has.
If you have the opportunity to acquire an asset that's strategically aligned in its 10 cents on the dollar versus one that's strategically aligned and is 110 cents on the dollar, bargaining hunting can happen, does happen, will happen.
But you have to look at the longer term picture.
- What are the integration costs gonna look like?
- How long is this going to take?
- When will it have an impact?
Shareholder value, whether you're a public company or a small private, is really what you're striving to achieve.
So the strategy that you lay out should be focused on deriving increased shareholder value over time. And those transactions that you consummate should all build towards that. And the idea is to put first and foremost those deals that have the greatest opportunity, the greatest propensity to add shareholder value over time.
Identifying an opportunity to LOI
It all starts with the strategy. The next is looking at the market and the market context for that prospective opportunity.
- Not the company itself, but in what market does that company operate?
- How is it competitive?
- What differentiating factors does it have?
- What does the target look like over time?
Assuming tight integration with the existing assets of the acquiring company. Those, let's call it three points: strategy alignment, market indicators, and then the company factors of the detail around that, is the first step in terms of developing that alignment.
And then it's a question of at least at the top doing a thorough job of telling the story for why this prospective target, in this market at this time. So providing some background on the prospective transaction, that market context and then the specific context of the target in that market, is one of the better ways of making sure that everybody is on the same page.
Target Market Competitiveness
When it comes to the market context
- What is the overarching market size?
- What is the Total addressable market for this company?
- Is the market growing? Is it shrinking?
- How big is it?
- How is it defined?
- How has it changed over time?
- Why is that market particularly attractive to us, aside from this particular target?
- When we put these assets together with the assets that we have or don't have, will we compete?
- What does the competitive landscape look like in the market?
- Who are the players? How are they defined?
- What makes each of them unique?
- What do they bring to the party?
- How easy or challenging is it for us to be a part of this or enter the market with this asset?
- Are there any other barriers to entry?
- Why invest in this particular market versus others?
From the target context:
- What are the attributes of this business?
- What makes it unique?
- How do they fit into the competitive landscape?
- What’s their unique selling proposition inside of that market?
- How big or small are they? Provide context in terms of the financials and whether or not that’s something that we can digest.
- What are the KPIs associated with that target?
- What are the key performance indicators that make it an attractive target inside of that market context?
- How long have they been around?
- How long have they been operating?
- What does the management team look like?
- Do they have any unique capabilities that are additive to our existing business?
And as you progress through this, in terms of your due diligence, you'll start to get to the point where you're really not just describing the company or the target, but you're describing your integration plan as well. You're talking about how you're going to bring these assets together and how you're going to make one plus one equal three.
This information builds over time. When you're talking about the LOI stage, chances are you only have enough information to be dangerous. You really haven't done your due diligence yet. You haven't laid out the timeline for the prospective transaction and your integration plans.
All of those things build over time, and this gets into that piece about communication. Not everyone needs to know everything all at once, but the executive leadership team wants to be in the know. They want to know how this is going to fit. They want to know what you’re learning over time.
All of your information from due diligence is going to build over time.
- You're going to have financial due diligence that substantiates or refutes what you have in your models.
- You're going to have legal due diligence in terms of the company's standing and problems that could face pending litigation, et cetera.
- You're going to have operational due diligence that allows you to look at and to build an integration plan that, at least on paper, looks like you can execute and will realize all of your projected future gains over time.
Evolving from first conversations
It tends to evolve from a simple investment thesis and the context of a prospective deal towards either exiting the process and not being a party to pursuing it if you don’t see what you like or if you don’t think you’re going to realize what you thought you could.
When things are substantiated particularly through due diligence, people tend to get a bit more excited about it. It’s important to stick to your guns in terms of what the value actually is. Over time, particularly lengthy deals, people tend to fall in love with the prospective target and lose that perspective of what this means and the potential impact that it could have.
So, it does tend to build over time. Your knowledge builds over time. The case usually gets stronger over time. Cases that tend to get weaker over time tend to be business opportunities that you pass on or drop.
It’s not a simple decision and oftentimes they’re conflicting, so you get one aspect of the business that looks phenomenal and could be an absolute home run and others that are more black marks on the potential deal.
You have to weigh those things as you walk through the process. Hopefully, the entire deal team is presenting the case, the investment thesis, or otherwise, warts and all. It’s important that everyone knows that no deal is perfect.
No company is perfect. There’s always things to fix. There’s always something about it that doesn’t look 100% like what we thought it was going to look like. And it’s important to be transparent about those elements of the prospective transaction that are not necessarily in a positive light.
One of the inclusion pieces of an investment thesis is risks and upside opportunities.
- What are the risks?
- What can we do to mitigate those risks?
- What are the upside opportunities that we haven’t included in our financial models?
- And how can we go after those opportunities to help build the business case or to beat it?
The order of presenting these areas depends on your audience. If you’re talking about bringing a board of directors along on this journey with you, providing that the context of the prospective transaction:
- How did we come to find this company?
- Why them and why now?
- What market does it operate within?
- Why is that important to us?
- Aside from this target, what are the underlying elements of that market that are attractive to us, as an acquirer?
So, even if we didn’t pursue this company, we should be pursuing other companies in this market. The background and the details around why this target versus all of the others that are available to us in this space is sort of the step through. Then, you dig into the due diligence and you have a deeper look at the financials, the legal aspect of the company, and the operational aspects of the company.
That story is going to build over time. So the first time that you meet with your executive leadership team or with the board, it's more of a teaser. You're testing the waters to see if this is an area and a target that we can and should be pursuing. And strategic alignment works well there.
If you're well aligned with your strategy, it's very difficult for either your executive leadership team or your board to say no, unless we're not pursuing deals at all. Or if it's a no, why is it a no? And how can we adjust so that we're not wasting everybody's time on a go forward basis?
Then the story builds and this goes back to that communication plan and timeline. As the story builds, people will be more and more familiar with the story, with the market context, and with the company. But they're going to ask more and more detailed questions.
That's where your due diligence really comes to the fore because you have to answer all of those questions. You have to make sure that you've done your homework and that this is the target opportunity in the right market at the right time.
As that story builds, the questions are going to be more detailed. Your responses need to be more detailed. You need to do your homework and you need to provide a compelling case, warts and all, as to why we should be pursuing company X.
In terms of getting down to the wire, depending on how you're organized, whether you're a public company or private, it generally comes down to:
- In the case of an auction, a binding indication of interest.
- In the case of a proprietary transaction, one in which you own it, there are no other bidders or suitors too if need be either a CEO or or board approval. And usually you have all of that laid out.
- In the case of a brokered transaction where you have sell side investment bankers who are representing the sellers in a deal, they'll tell you the dates that you need to hit. Usually there's a day or two in there if you need it, but you try to hit your marks.
- And in the case of a proprietary transaction, usually corporate development will lay out a timeline that they can live within and they'll list, discuss it with the potential seller prior to the engagement going too far.
The board, generally, at least in most public companies, is not going to argue with you about whether your bid should be a hundred million, 90 million, or 110 million. And in general, you have an underlying financial model that you can live within, and you do sensitivity analysis around both price and performance.
So, in general, you’ll have at least three cases, usually five. So, let’s just use my “a hundred million dollars” as the base case. You’d have high performance, base case performance or projected performance, low performance and then you would have it at three price points: 90, 100, and 110 million.
That gives you a sense of what your internal rate of return is going to be. At three different price points, at three different performance levels, whether you do well, online, or below par. The CFOs of the worlds tend to be a bit more pessimistic. They’ve been around the block and seen things go sideways longer than expected.
Sometimes your CROs, CMOs, CEOs tend to be more optimistic. Business unit leads tend to be more optimistic about what they can do with the asset and sometimes your CROs, CMOs, CEOs tend to be more optimistic.
Business unit leads tend to be more optimistic about what they can do with the asset, and when you factor in synergies,how great things are going to be in the future. It's our job as corp dev professionals to be as middle of the road, sitting on the fence as we possibly can.
In general, the CEO has the most influence on the offer price. The business unit leads, less so. They may project optimism associated with the integration of the assets, but they tend not to focus too much on purchase consideration or enterprise value.
In general, you can tamper that optimism by looking at the business in terms of the financial returns with and without synergies. With synergies, you're going to get this performance, this IRR over time without synergies. And that's a negative way of looking at it.
You really shouldn't be doing the deal if they're zero synergies unless it's adding some capability that you don't have in your existing portfolio. The synergies are usually the element that sort of gets you over the top in terms of performance and helps get you to the price that will get a deal done.
It’s often one of the biggest pieces of the pie, and when you look at an IRR with and without synergies, you have to be skeptical if the numbers are sort of dramatically different, because what if you don't achieve those synergies? That's the part of the art and less of the science in terms of M&A.
Things to not do when dealing with the Board
Usually, you’ll iterate at least internally, with the BU leaders, the CEO, and the executive leadership team several times. Taking guidance from the CEO and the CFO, in particular, as to what they think the board’s reaction is going to be, what they think the board’s questions or queries will be about your assumptions.
Boards, in general, try to be as helpful as possible. Sometimes, they are, or at least, they think they’re being helpful by being critical, and in a way they are, trying to keep you from driving the car into the ditch.
And you almost always get smart questions and some questions out of left field that you need to come back to. For me, I always think that it’s okay, until you’re calling for a board vote, everybody should ask their fair share of questions and try to unearth what value this prospective deal could provide to us over time.
Working with functional leads
During my time with Wiley, I tended to over-communicate with the functional leads just because I really trusted their opinions and I valued the perspective that they brought to a potential deal, even if it was outside their sphere of influence or knowledge base.
For the most part, general counsel, controller, CFO, head of tax, particularly, if you’re talking about a multi-billion dollar company, these tend to be really smart people. Occasionally, if not often, they add value in an area that you didn’t expect them to.
I tended to air on the side of bringing them in sooner, and it wasn’t necessarily always in the context of a large group working on a prospective deal. It was often sidebar conversations. I tried to avoid hallway conversations because you often have people that have nothing to do with the deal.
But, sidebar conversations, private conversations, making sure that they were aware of what was going on, what kind of capital commitment we were talking about, and how important was this?
For a company like Wiley, if we were going to do a 10 or 20 million deal, you didn't need to bring the controller in early. It's just not big enough for them to worry about. But they would say that given the market context or the geographic location, you need to think about this certain area.
If you're talking, at least for a company like Wiley, a 150, 200, 300 million deal, you'll want them involved almost throughout the entire process. And to the extent that they get tied up or busy, please send somebody in your stead, such that we know that you are being kept in the loop.
This is not prior to LOI approval or sign off from the CEO or CFO, but as soon as you're in the mix, whether it be with other bidders or simply engaging the target company.
So basically when you're ring shopping, it's about the right time to get them involved. You can also just ask: does it make sense for you to be involved in this stage? They can say no and they’re going to send somebody in their stead. Or they're gonna say yes and they really need to be there. A lot of these folks, a lot of the functional areas report to the CFO or report to the CEO. So you don't want to catch them by surprise.
Alignment with functional leads
The integration plan should begin with your due diligence. So, if you’re in a data room, if you’re working on due diligence, whether it be legal, financial, or operational, you should already be talking about how this asset is going to be integrated.
The integration plan should begin long before the deal is even closed. Here's what we need to do on day one, here's what we need to do for the first 30, 60, 90 days. Here's what our targets are in terms of a year out, because as soon as the deal closes, it's now part of that business and it's part of your business. So, you really need to have a thorough, well thought out integration plan for that particular target.
The most important part comes back to strategy alignment. Does it achieve the objectives that we’re trying to achieve with our strategy? Operationally, communication is super important. Particularly, as you start to stack up transactions, in other words, if you have two or three deals closing in a given quarter, you will have to start to stretch your central services thin.
So for many, if not most deals, are you really adding sufficient finance, accounting, FP&A staff, legal staff, HR staff, in order to effectively manage this business inside of the parent organization?
Coming back to the synergies piece, sometimes we’re not adding anybody. We’re just going to take it all on ourselves and we’re getting it done. Other times, you really need to think about the impact to your central services and whether or not that’s feasible. And that’s all part of the integration process and that should be discussed openly, not with the target, but internally.
Keeping alignment to strategy
I tend to float it up the food chain. At the end of the day, who is the decision maker? Do we actually need to add staff in order to achieve what we set out to, even if it sort of breaks what we had planned?
The expression goes, all the best laid plans, and that happens post closed with a fair degree of frequency. We thought we could achieve X and we can't. And here's the reasons why.
- How do you want to adjust?
- How do you want to revise the integration plan in order to accommodate this?
And sometimes the answer is, we don't. We're just going to grin and bear it. And other times, we're going to make a conscious decision to break the model in this way in order to achieve what we think is the right objective over time.
It's a balancing act and it depends on your corporate development organization, your staffing, and what other priorities that you have as part of being a corp dev professional. There's some things that you have to hand off because you're onto the next one, and there are other things that you really need to sit on as sort of the voice of reason, that person sitting on the fence, in order to keep people honest and hold them accountable.
I don't know that there's one right way of doing that, but having transparency in both the timeline, the diligence efforts prior to the deal closing and a well thought out, well-tested, integration plan, all help to smooth out what could be those bumpy parts of post close activity.
Just being conscientious of it and transparent and having those dialogues, those conversations, even if they're tough, before the close so that there aren't any surprises. Particularly if there are differences. If a functional area says this really isn't going to work for them and they need help, and the financial folks say the model breaks they can't do the deal. You have to have those conversations. And even if it's simply documenting it.
It's not to say I told you so, it's to be able to refer to what we think is going to be a challenge at some point down the road, and try to address it to the best of your ability before you get there.
The hardest part of achieving alignment
I would say the hardest part of achieving alignment is trying to be objective and not allowing either your personal feelings about a given transaction or process or integration plan. Working with a lot of different people across the organization can be a challenge.
You have different personalities involved. People have their own way of running their own departments, and you really need to sort of get past that and think about the broader objectives, broader goals, deriving greater shareholder value over time and not letting ticky tacky things hang you up.
Everybody's going to have a different view of what and how to do things, so being open to that, certainly being transparent, trying to keep the prize in your eye over time.
How do you not fall in love with your deal?
It was a little bit easier for me because we always had a half dozen or more transactions going on at the same time. So if I found myself falling in love without one, I would pay attention to the others and vice versa. Most finance folks tend to be level-headed when it comes to these things–more balanced perhaps than pessimistic.
Pessimistic is another word. The business unit folks or the divisional folks tend to fall in love more so than functional areas, including corp dev. Sometimes it's hard when you see something that you really think is completely aligned with the objectives of the organization and how could we let this go?
But at a certain point, everything has its price. I remember several transactions where once you start to stretch the financial model, at a certain point, it just becomes silly. It becomes a modeling exercise rather than trying to deduce or use your vision about the future of the business in order to derive the right response and the right answer around enterprise value and fit and culture and things like that.
You can’t have it one way or the other. You really can't have all, if you're going to be active in Corp Dev, you can't have all naysayers. And you also can't have folks think like kids in a candy store, going after everything and everything is the most important and everything is a great fit and we can make it work.
You really do need to have some balance in how you look at the opportunities that are in front of you. It's a form of discipline. It's a form of discipline. In any organization, no company, no organization has infinite resources. So if resources are scarce, you have to be duty-ful in the way that you apply them. And that's the same with every business.