Text Version of the Interview
Standing up an M&A Function
M&A is a team sport. It is three-dimensional, not two-dimensional, it's not just Excel spreadsheets, and everyone looks at a transaction through their own lens. Whoever runs customer support will look at it differently from marketing, sales, finance, etc.
So there are probably 20 different functional teams that view an M&A very differently.
- Is it a foreign deal?
- How many offices?
- How many employees?
- How much revenue?
- What are the liabilities? What are the costs?
- What's the technology?
- Who are their customers?
- What's the growth rate?
- Are they serial entrepreneurs that are going to basically take the money and run and only stick around for integration?
- Are we going to close down these facilities?
- Are we going to make you relocate?
Each of those is different questions from those different functional areas. Many things don't fit on an Excel spreadsheet, like culture, people. So when you're building out an M&A team or interviewing, I always look for the type of roles we are trying to fill. And there are three distinct types of people, roles, and experiences.
The first is the industry expert. Someone who is a subject matter expert within that industry knows the competition, the growth rate and has that "BS meter" related to the industry.
That is the first stage of understanding the voice of the customer, partnering with the CTO, marketing, sales, executive team, and finding what I call digestible protein that is going to be accretive to the organization in the long run.
This is a big part of your deal flow, and if you only can bring three or four opportunities to your executive team to ponder, that's not good. The last time I presented to the board, I brought 20 companies.
And as they debate on those 20 companies, your role is to listen. So that you know their preferences and you can filter companies better next time.
The second one is the deal experts. Transactions are all about legal finance, accounting, forecasting, due diligence until you sign that definitive agreement.
- What are our knowledge qualifiers on reps and warrants?
- How much should escrow be?
- Are we doing a simultaneous sign, close, and announce?
- Do we need a fairness opinion?
Bankers and lawyers are very well-versed in these transactional things, and many of these roles can be outsourced.
The third one is the integration expert. That is a detail-oriented person, can organize, and facilitate because it's usually cross-functional dependencies that stop everything.
For instance, why didn't HR onboard people in time for day one? It was held up in contracts because they had to get a new vendor on board. Contracts couldn't get it done because legal said they have a weird contract, and this isn't what we typically signed. So then IT couldn't get the new software going because of legal and contract, and IT couldn't get it going.
This is someone who can follow this breadcrumb and manage these kinds of situations because everything needs to be done on day one. You would want the people you just acquired to feel they came into a professional organization on day on, and this absolutely needs to be a good experience for them.
Now, at a smaller company, you may have to have one or two people wear those three hats, but I assure you, the serial acquirers have completely different teams. They have a sourcing team, a deal team, and the integration team.
Our job is fascinating in M&A because you have to be a mile wide and a mile deep in finance, accounting, forecasting, sales, HR, tax, tech, sales ops, customer support, all those areas.
Because if you can't represent those functional disciplines at the negotiating table, your team behind you will be questioning your ability to run a deal because you're not looking out for their best interests. You can't have the VP of customer support on all your negotiations.
They want you to ask questions on their behalf in meetings they're not in. And If you don't ask the right question, they will not give you the right answer.
Role of head of corporate development
The first thing Corp dev has to do is understand or assimilate the company's strategy, the board of directors, the executive team.
- Are we looking for growth?
- Are we looking for profit?
- Are we looking for geographic expansion?
- Are we looking for acquihires?
- Are we looking to get into adjacent markets where we are trying to compete?
- Are we trying to get into new industries that we're not in yet?
- What is the strategy?
- Are we going to do it from a lot of small tuck-in deals?
- Are we going to get that from a large needle-moving deal?
Corp dev must not only understand the strategy but believe in it. Because if they're not on board where the company wants to go, there will be a problem in the targets they're looking at.
Whoever the person is running Corp dev needs to be honest with themselves on their strengths and weaknesses. Are they a spreadsheet jockey that can manipulate tons of different FP&A proforma models themselves, or do they need someone else to do that for them?
They need to be honest so that they hire the right people who can fill those skills gaps when they hire people.
Also, your corp dev needs to be objective. You cannot be the champion of a deal and run Corp dev, that's ridiculous.
Corp dev has to be objective, and there has to be a champion. The champion can be your CEO and a line of business; you have to partner with them. But Corp dev needs to be completely objective and stick to the facts, the good, the bad, the ugly, and be able to communicate that at an exec level or board level.
You also have to keep many things in your head because you will be asked like you are a walking Google authority on transactions. What about this company?
People will expect you to keep a lot of data at your fingertips. And you can do that by subscribing to various services. There are all kinds of services out there to make you look like a star.
And then it just depends on how many transactions you want to do. Because if you run Corp dev and you're only doing two deals a year, you can pretty much do a lot of that yourself. But if you're doing two deals a month, you need a team.
Keep in mind that deal size doesn't matter. All deals need a timeline and diligence. I have experienced a smaller deal being more complicated than buying a public company.
Lastly, corp dev needs to know how to communicate with the board and the executives and explain sticker shock. Buying lousy companies for a cheap price is not in your best interest, and you have to pay what the market demands if you want good companies.
Bringing Multiple Targets to the Execs
You can easily be impressed with something if you have nothing to compare it to. So it's an excellent exercise to have twice a month, one-hour meetings where you're going through scenarios of optionality and talking about your ideal company. Bring them upfront and create muscle memory.
- Where are they located?
- How many employees?
- How much revenue?
- Who are the top customers?
- What's their product and solution?
You can get so much data from company websites, blogs, SharePoints, and agencies. Build that data, put that in a common format, run it by the decision-makers, and the more you'll start to zero in.
Try to avoid a lot of committee meetings or group-thinking sessions. Spend time with individual functional managers one-on-one because you're wasting their time.
If I am studying finance, I don't really need to sit in on two hours and listen to them talking about source codes and dev ops. I do a lot of one-on-one meetings where I sit down with a head of finance or tech or sales or HR, tax, finance, and then I do my homework on that topic.
I tell them that no decisions have been made, we're just looking at it, keep their blood pressure down, and have them answer the big questions upfront. Bring them part of the process.
Try to solve the problems before they come up and diffuse some of these hardships. You are doing yourself a big disservice if you are not having one-on-ones scheduled before that group hug meeting.
Assessing the Target Company
Anyone can assess the target company, and I've seen deals come from engineers, CTOs, the finance team, and the CEO. Not to pick on investment bankers, but we've rarely bought companies where we're given a teaser.
So if I'm hunting for a company that has not hired a banker yet, that's usually a good indication that they want to go it alone because they're swinging for the fence.
If a company has hired a banker, which is my bias, I immediately think there's something damaged or broken in that company.
- Founders are fighting
- They can't get funding
- They lost their largest customer
- Do they have Tech issues
- HR issues
Any of those is fine. Buying a fixer-upper is fine, just go into it with your eyes wide open. Very few companies can acquire damaged goods. Unless you're like a PE company, strategics typically don't like that.
One of the things that you need to look out for is customer contracts. They can be your biggest asset or your biggest liability.
I walked away from a killer acquisition where it was a small startup and they didn't have good legal advice. They agreed to take on all liabilities for data breach, which was in the agreement.
You can't inherit 500 customer contracts with the largest banks and hospitals as a public company and embrace unlimited liability for any data breach. So they killed the deal, unfortunately.
Where to look for Corp Dev Leader?
The most logical place that everybody looks to is the banking world. They usually have an Ivy League degree, and they work at Goldman Sachs or JP Morgan, and they've been a banker broker.
For that middle phase, these are fantastic people that I told you about the transaction itself. And they're good at understanding definitive agreements, how to draft a non-binding term sheet and that whole process.
But is that the most important attribute you want?
70, 80, 90% of Corp dev people have done a tour of duty through Goldman Sachs, JP Morgan, Merrill, Bank of America, you name it. They're transaction people and there's nothing wrong with that. But ask them if they've ever done many large-scale post-merger integrations. None of them.
Other times they don't know the technology either. So if are you going for volume where you really want to do a lot of transaction deals, bring in someone with that background.
But if you can't afford to make a mistake, those mistakes are made on the front end, then hire an industry expert.
- Is it the right tech?
- Is it the right people?
- How deep was your diligence?
Of the 70 plus transactions I've done, only 10 or 20 were deemed successful. Nobody remembers what you paid for those great companies, and they just remember if it was a good deal or a bad deal and that will stick around.
With a banker, they don't feel that pain. They do the transaction and move on. But in-house Corp dev, if you do a bad deal, you're going to be known for doing that bad deal. And that can be really hard to dig yourself out of doing a bad deal.
There was one that was famous. I'm not super involved with it but SAP bought a company called Tomorrow Now, and they were a service and support company. This is all public information.
And Tomorrow Now had some type of agreement with Oracle and they were getting bug fixes. And so Oracle sued SAP over that acquisition saying that they had confidential information. That was a really bad deal. But someone should have seen that.
Would a banker have seen that? I don't know. But someone who is a customer support exec would have picked up on it because that's what they do for a living. So back to, if you don't ask the right questions, you won't get the right answers.
I put a lot of value into domain expertise because you can always get someone to do financial modeling. Someone who has a real industry insight would know if a technology is going to be short-lived because it's easy to recreate.
You need to understand what is really unique because you're usually buying things for time-to-market. We're buying this because we don't have time to do it ourselves.
Internal vs External Hires
A lot of internal folks do aspire to be part of corporate development. People think M&A is super sexy, super top secret, and you've got access to the CEO. But it's not as glamorous as you think because you definitely don't want to be caught in a bad deal.
So I've hired internally quite a bit, but getting from competitors is really dangerous. If you bring a Corp dev person over from your main competitor, you'll probably get a few letters from their legal department because that person in their head has strategies, game plans, roadmap, deal flow. It's hard to pry that out.
So I see a lot of companies that would not hire a competitor's Corp dev people just because of litigation potentials.
I'm all for hiring within, but as you've heard me talk across all these disciplines, it's hard to get someone just down a business school who can run the gamut for all the Corp dev attributes. It's tough.
In my experience, corp dev is a feast or famine thing. You need someone who can handle large workloads. You better cancel all your vacations, birthdays, anniversaries, and everything when a deal is signed.
Everything that can go wrong will go wrong at least once or twice or three times. You need someone who can tolerate the unpredictable.
The other thing about this role is to make sure you don't pretend to know things you don't know. They will come back and bite you.
And this person needs to know how to navigate legal documents and work their way around them. Just because we have an NDA doesn't mean I need to acquire you. I'm not bound to never compete with you. I'm not bound to not buy your competitor because that turns out to be a better deal.
So you want to keep optionality open and reduce your liability footprint. And that has to do a lot with who you bring over the fence.