From public equity analyst to doing deals
At the end of the day, you’re ultimately digging into companies and trying to find the value of the company. For the execution side, there could be a learning curve. But if anything, it actually prepares me better to:
- Break down a company
- Understand what it’s good at
- Understand the path of that company
- Understand the overall landscape it plays in
Because sometimes, when you’re looking at one transaction, you may not understand:
- all the different contexts
- all the players
- the addressable market
- the growth rates
- where it stands competitively.
When you’re an equity analyst, you may not be so broad and wide, but you’re focused on one sector and you are the expert in that sector. It has certainly helped me.
Executing M&A against the strategy
It depends when it comes to companies executing M&A against their strategy. A lot of companies, first of all, will outline the strategy that they have.
Your question ties into the strategy that many companies follow. Let me illustrate this with an example from my experience covering the broadcasting industry. Essentially, the primary strategy was to buy up stations due to the belief that cable providers, like Comcast and Charter, would pay these stations for retransmission revenue, basically the right to carry the station. This has been the cause of numerous disputes between companies like Sinclair and Nexstar, and the larger players.
The underlying issue here is the fight over fees, which have become more attractive. Unlike the past where earnings were solely from advertising, broadcasters began earning 10 cents per subscriber, which over time, increased to 50 cents, then a dollar, and even up to three dollars. They hoped that this revenue stream would continue to grow.
The broadcast industry, therefore, decided to maximize retransmission revenue. They were strategic about it. Despite ownership restrictions and limitations, their goal was to acquire station groups that lacked substantial retransmission revenue. They had contracts with the cable providers that allowed them to integrate any acquired entity into their network. Hence, the former 10-cent revenue per subscriber escalated to 50 cents per subscriber for a substantial number of homes. This was their primary strategy.
However, not all strategies pan out as planned. There are instances where the execution is misguided. While the broadcasting roll-up strategy has been effective, I have seen others falter. For example, some declining sectors believe that certain transactions will lead to efficiency, making them more lean and nimble.
Going back 15 or so years, consider the case of McClatchy, which acquired Knight Ridder and subsequently went bankrupt. Another example is when Time purchased Meredith. The assumption was that owning these magazines would lead to a 400 million dollar savings and enhance market presence through a digital platform, but this never materialized.
Understanding the past and learning from it is crucial, as history can repeat itself. This knowledge has proven beneficial in my current role. Whether I'm speaking with a management team or a banker providing their perspectives, I can recognize certain patterns and anticipate outcomes based on past experiences.
When plotting out M&A strategy and its execution, I have a keen eye for what I believe will succeed and what won't. The deals I'm most proud of aren't necessarily the successful ones we've done at Xerox. Rather, it's the deals we didn't do, as these are the transactions that could have destroyed value. It's often said that the majority of M&A deals destroy value for a variety of reasons. I pride myself on being skilled at filtering out the noise, ensuring that the correct strategy is chosen based on my knowledge and experience."
Assessing M&A processes of companies
I don’t know the ins and outs of how their process is going. As a public equity analyst, you have to know the announcements if there is some regulatory approvals needed or shareholder vote or something like that.
Obviously, there’s a delay and you sometimes get interim updates, but you’re not really on the weeds of any of that. What you go by is what they present.
- What the strategy is
- The synergies
- The offerings
- Where we’re going to compete
It’s certainly a consideration with myself and what’s right, what’s wrong, what words and what doesn’t. But at the end of the day, every company’s strategy is somewhat idiosyncratic, so there’s only so much I could take from it. It really comes down to what are just some of the pitfalls and that’s where I really try to step away.
Not to go off on a tangent here, but many transactions I look at are like a “V”. The company has been going down for a couple of years, it’s about to take off. We’re the luckiest buyers in the world. This is the opportunity of a lifetime, you can get at a good value.
You have to be able to sift through all that stuff, and at the end of the day, it’s obvious if a company’s in decline, all of a sudden, they’re going to grow. That’s probably not going to happen, unless there’s some actual good reason for that.
But seeing over and over again, these pitches where management teams have talked about what’s going to happen, what they’re going to accomplish and all that, I just think you start getting a sense of what’s achievable and what isn’t.
One example I like to bring is the synergy discussion. You have the cost synergies and the revenue synergies. Cost synergies are fine, they're very often achievable. But it's foolish to think that if you do X amount of cost synergies, there is zero impact. Maybe you take a case in Silicon Valley where there's all these side projects and you can just shut them down.
But if these synergies, whether it's cost synergies, probably less so on shared services and things like that, they're going to have an impact. There's probably going to be a revenue impact at least to an extent on the revenue side.
I hate forecasting revenue synergies–it's all optionality but at the end of the day if you bake in a revenue case in your M&A plan and your target, you're just setting yourself up to fail and it's always nice to have a margin of safety.
I read a book a couple of years ago from the former CEO of Honeywell and he wasn’t an M&A guy, but he ultimately had a section on M&A. And Honeywell is really good for the listeners here who haven’t read. I think David Cody is the CEOs name. There’s a strategy on M&A and he talks about that over the 15 years when Honeywell did M&A and they were wildly successful.
- Average 8 transactions a year
- created a ton of value
- stock worked really well
- Bought growing businesses
- Divested dogs essentially
But they backtracked and decided and followed how much of the revenue synergies they could hit. The number was 10%. It is so hard to hit revenue synergies. That doesn’t mean we don’t try.
The last acquisition I did in the UK, a big part of it was a focus on go-to-market and how we could work together. And there’s a really good fit and we’re seeing fruits of that labor now and we’re achieving them. But it’s hard to do it. That’s hard to focus on investing in.
Trends between announcement of a deal and stock price
Well, the broadcast example I mentioned, the stocks usually popped because at the end of the day, you're buying a company at let's say eight times EBITDA and your pro forma on day one is like four or five times, because you could just roll over those contracts.
Historically, most deals, especially larger deals, stocks tend to drop. I don't have the exact numbers, but they tend to drop day one because ultimately, if you're buying in the public markets, probably paying a premium 30-40% or so o, that's assuming that's not an overly competitive deal where there's multiple horses, which could obviously be much higher.
But then, clearly the amount of debt matters. And if you're levering up, obviously in this market, especially, but then you've also had like in Silicon Valley, where if you just announced you're doing a deal, the last several years of stock works.
Like it's just the matter is how supportive the market is. There's basic tenets to follow obviously if it's analogous to your industry and you think there's go-to-market opportunities and product extensions and an ability to bolster your technology.
Obviously, the most important thing people look at is: is it accretive or not? That's another side of the road I can go down because you could technically make anything EPS accretive, especially with cheap debt. I could buy donut stands and make it. I don't think that would be a good acquisition, but there's no fast and true way.
Usually, if there's day one synergies, consolidation, those usually work. Obviously, when you start paying up to go outside of your comfort zone or to buy growth, that's when the market doesn't like it. Because at the end of the day, that's not necessarily what you're good at.
And at Xerox, we understand we're a value stock. Clearly, we want growth opportunities, that's important to us. And a lot of the areas we're looking at are natural extensions beyond print, whether that's IT services or digital services. But at the end of the day, we're really not going to buy something for 20 times revenue just because, and the stock would probably deservedly go down unless it was the Pandora that we don't know about.
Transition from public equity analyst role into corporate development
In my last shop, we were on the opposite side, we were trying to raise capital. But we then raised capital to buy a couple of companies. So I was multitasking there, but I was putting together CIMs working with bankers then also we were putting together term sheets and a lot of it was contingent upon the financing.
Coming over to Xerox, I've been very lucky. So I have just a fantastic team here. Being in the role I was in, I didn't have any of the basic experience, but clearly, some of the legal intricacies just without the repetition, obviously, I didn't have to the extent of someone who's been in the seat for 10 to 15 years or so, but have a wonderful team here.
I report to our chief strategy officer, who is a lawyer in his past life and probably one of the best lawyers I've ever seen. We've learned a ton from him, we have two people on our legal team as well, on the M&A side who come from corporate M&A law.
Ultimately I've tried to run the deals and lead when I can. If there's any questions that I have, I've been able to bounce it off them. What's helped is we've been extremely complementary to each other and as we've worked together, we've grown over time and learned from each other and, some of the things we could do now are fairly interchangeable.
But, ultimately, it matters who you work with and that will be what sets you up for success. So I never felt that I had a gap or not, but certain areas in a rep and warranty policy that's something that obviously I'll have looked at and definitely asked for advice and so forth. But hasn't really been that steep of a curve.
Part of it is some of the reasons that we discussed before where I've been exposed every which way into this market with maybe just probably a little bit less on the execution side. I've been negotiating, sourcing. All that sourcing I've done for 15 years, negotiating. At the end of the day, I've interviewed so many different management teams as an investor that you're trying to ultimately find certain answers.
They may not want to share and are really trying to find the true value of a company. So it's obviously a different perspective, but at the end of the day, it hasn't really been that hard of a learning curve.
How to evaluate a business
When evaluating businesses, it's all about taking a step back in my seat.
- What is our strategy?
- What are we trying to accomplish?
- What's our biggest need?
- And if there's a need, would something like this be a fit?
That's where I might get a business team involved and the deal flow really goes both ways. We either bring them in or vice versa as well.
There are different types of acquisitions. We might be looking at:
- certain technologies
- different offerings
- different capabilities
- go-to-market capabilities
- sales capabilities
And then, another thing we look at is, is it accretive? Not just from a PnL perspective, but IRR. Afterwards, we'll run the numbers at a high level. We'll look at the synergies, and ultimately, try to figure out if it makes sense or not.
As I mentioned, we try to be very conservative in our multiples, in our assumptions, our exit multiples. But at the end of the day, in the simplest form, I see myself as having one job, and that's to create more value than I consume. That's really it.
I could be grandiose and say I'm trying to transform a company, and I really am trying to do that. But not every transaction is going to be completely game changing for business. And so I try to look at everything and work with the teams, whether it's the M&A team I work with or the business teams and have that in mind.
- Will this transaction dry value?
- Will we be better off for it?
And then there's obviously the conversation of build versus buy, which also factors into that situation.
Walking away from a deal
We haven’t necessarily walked away from a deal. That's a bad answer. But if there's a reason to be concerned, then that's a big factor. For example, it's never ideal to buy a company where maybe the CEO owns a hundred percent. Not that we wouldn't do it, but there could be two different ways where if you lose him, the company's done. And it's all based on relationships.
But the other is the CEO's such a strong personality that every decision you make, everything that goes forward is going to be questioned and they're not going to like it as well. So that is something you have to keep in mind.
- Can they fit in the organization?
- Are they excited to be part of the organization?
- What's the reason they're trying to sell it to us?
Obviously, everyone wants the highest price, but do they want to be part of it? And in every conversation I also go into, I try to get a feel of what the fit would be. And you can get those in the early conversations. The early conversations are generally about approaching companies with the intent of:
- learning more
- listening to what they want to accomplish
- listening to what they're good at
When you get the opportunity to get behind the curtain, meeting that second layer of management and discussing with them how one plus one can equal three, their responses and openness to that informs my decision of how we can go forward.
And hearing what they have to say, I have a good sense of what our culture is, but there's going to be companies that don't fit in our culture and there's going to be companies that do. And a lot of those early conversations with the CEO, with some of their senior leaders, or sales manager, and so forth, that helps determine it.
I don't have a secret sauce for it. I probably question it, but that ultimately is how I've gone about it. And at least I feel like we've done a pretty good job. And there might be one exception where it's been a little bit more challenging, but overall, at least I've been here, we've done a good job of integrating the businesses and having the cultures mesh. We're a professional culture. We try to try to buy organizations that are the same way.
This is where the difference in my public equity background shines in. From a public equity perspective, you wouldn't necessarily think about the integration aspects. You think at a very high level about the financials.
But in an M&A deal, you could do everything right from:
- paying a fair price
- filling a need for the company
- bringing the right culture.
But ultimately, if you don't successfully plan for integration, it'll fail. It's as simple as that.
We initially try to figure out at least at a high level:
- What we think their reporting structure will be
- What are the offerings?
- Go-to-market and how each of these will be rolled out.
For example, we actually spent a lot of time looking at a specific transaction late last year in the ITS space, and we ultimately passed on it for a few reasons. But even though we didn't put in a formal LOI bid, we had already built out a preliminary integration timeline. So, to give you an example of that, we'll put in: What do we need to do prior to acquisition? That could be:
- Choosing an integration leader
- Developing day one plans
- Defining longer term goals
- Identifying synergies, KPIs, etc.
And then we'll look at:
- What are we going to do in the first six months?
- What are we doing in the 6 to 12 and 12 to 24 months and beyond?
Some of those will be:
- implementing a leadership structure
- comp plans
- synergy realization
- integrating the offerings
- delivery and service (which is really important for Xerox, just given the legacy of our company.)
- the sales coverage
Thinking about what could go wrong and working backward helps us ensure everything runs as smoothly as possible. We've had hiccups, such as a payroll miscommunication during an acquisition about a year and a half ago, but we learn from each experience. Trust maintenance is crucial to a successful transaction.
Our approach evolves further post-LOI when we negotiate transaction documents. We compose a formal integration checklist, which outlines legal and operational necessities, deal guiding principles, closing matters, approval acquisition, wire account setup, RWI policy establishment if needed, post-closing matters, program management checklist creation, integration workshops, and both internal and external marketing.
Given our experience with numerous transactions, integration remains our key focus. As I mentioned earlier, a deal will fail without proper integration, no matter how well other aspects are handled. This viewpoint aligns with your trivia question on integration planning, affirming that it's a day one consideration."
Potential pitfalls in a deal
In terms of what I anticipate could go wrong on a deal, I just assume Murphy’s law. It's everything I mentioned.
The one that we just spoke about is culture. You don't have a culture that buys in, you're going to have massive attrition. The engine starts to break. Sometimes if you can't fix that in time, it's irreversible. That's one thing.
Communication is very often the reason why things don't work out, where you ultimately have a plan but it's not communicated to the right people, or the right people don't know what they're supposed to do.
At the end of the day, it's not just the M&A team or even the integration team, and we're pretty integrated, but you're going to need people on the ground really helping facilitate all that. You need a leader in the region. If you're moving facilities, you need to make sure that they have a place to sit.
If there's delivery and you're taking over, you need to make sure that is going well. HR functions, across the board, that's going to be important.
What about AR and AP if you're moving it over into our systems? That's the thing people don't really talk about that much, or at least early on.
- But, what are you going to do with all your systems?
- Are you going to migrate everything over?
- Are you going to move to one instance of Salesforce?
So you're going to move to a certain ERP system. These can be very cumbersome and if they're not handled carefully, they could be a problem and they could disrupt the flow of the business. We can go on and on about that, but the answer is everything.
It’s broad and early on in the diligence, we have a couple of people before an LOI usually looks at things. We'll get a basic high level from a couple of business people. And this would be the same thing, honestly, if you're divesting a business as well, but we're buying a business, we do a kickoff call always internally and externally. The internal one is:
- we gather everyone we think will be relevant
- we NDA the 15 different work streams
- we'll work with counsel
- we'll put together a question list.
We’ll need to see their diligence reports, which are table stakes before you close a deal. But we try to get as many people involved as possible and identify every possible issue.
Some of those people will probably not have any part in the post close, but some of them will have part of the post close. And to get them aligned as early as possible and understand what we're trying to achieve is super important.
I don't have every answer. The people on our team don't have every answer. And we rely on others to tell us:
- What are some considerations?
- What are some market dynamics we should consider?
- What we aren't thinking about that ultimately, when we close this transaction, we're not missing anything?
And again, you're probably never going to bet a hundred percent or a thousand I should say. But, the goal is to make as few and small mistakes as possible. If you do that, and if you put together a reasonable base case for your transaction, you feel pretty good that it will ultimately achieve what you're trying to achieve.
There are a couple of things. I guess the way I want to think about guiding principles is to think of the deal by itself. Will this deal create value? That's the first one:
- how we're executing it
- how we're getting people involved
Ultimately, it's the post-mortem of: Did we achieve what we wanted to? And we obviously look at that in the steercos that we do, which are monthly post-closed.
I don't really have a defined list of it. It really depends on every single deal. But maybe to just give you an example, ultimately, what is this acquisition trying to achieve?
We bought a company last year in the UK called GoInspire. Our mission, and I don't know if necessarily it's a guiding principle, but it was to extend our product offering, which would allow us to:
- be more competitive in the marketplace
- to provide more services and features for our customer base.
- to work together
- to introduce ourselves to new accounts
- to cross sell
One of the benefits of that, and this is a marketing performance partner, they worked with a bunch of customers that we didn't work with. And ultimately, we said that we were going to essentially work together and integrate to an extent these sales teams, and ultimately, try to leverage our skill sets and Xerox’s offerings to GoInspire’s current customers and vice versa.
Deal timeline and who gets involved
I can tell you how it works with us. The deals either come in probably one of three ways:
- through business team relationships
- through brokers
- the work we do across the board.
The transaction before with GoInspire, that ultimately started off of a cold call.
- We worked with the head of our digital services business.
- We looked on both a geo basis and an offerings basis of what we needed.
- We put together a target company list. I probably reached out to about 15 or 20 companies, and had a variety of discussions with them.
This was a conversation where I reached out and ultimately asked for a half an hour and tried to understand what they were looking for, what we were looking for, and took it from there. But usually, early on it'll be myself, the associates of my team who are helping me with the analysis, and generally, the business leader who understands what's needed for what they're trying to achieve.
It could be the head of our digital services business or IT service business. It could be a regional head, a country head. Sometimes it could be multiple people if it's a functional offering, but in a specific region where you might need a couple people involved.
This is the pre-LOI stage. We'll work together. We'll come up with diligence request lists, and we ask a lot of questions. And we'll try to get to a place where ultimately, we think it's ready to go in front of our executive committee. If there's any outstanding issues to bring that case to the executive committee, we'll go to the relevant experts if we think there could be a tax issue or there could be an accounting issue, or maybe this is going to be a strain on our delivery network. We'll go to them as well.
We do keep it fairly high level. But one thing we do is that every LOI generally has to get approval from our executive committee. I like to think of it as the test run, where we actually put together a fairly robust business case and get approval.
The hope is that once we go for final approval before the deal closes, it's more of just a formality and answering any questions that they had and figuring out any red flags that were there. And obviously, if there's big red flags, we would call off the deal, but if there aren't, then we wouldn't. But we'll get their approval.
Ultimately, by the time we sign an LOI, we have full buy-in to do the transaction. At that point, we'll get all the subject matter experts, and besides the ones I mentioned, that extends to real estate, tax, HR, and so forth.
It becomes quite broad over time, and we realized that we're there to facilitate the transaction. And we're obviously there to play Switzerland. But we need to make sure that we get people involved across all levels of organization.
Depending on the acquisition, if it's a small acquisition, there’s probably at minimal 10 or 15 people looking at it. It could be many multiples of that if it's going to be across function or across region or so forth. And we're a matrix organization, which also plays maybe a little of that part. It's not like just every region is siloed.
We have overlap with people doing diligence and people doing integration planning. We're all on the same team. There are certain people that work more on the front end. I have associates reporting to me that focus more on the:
- the financial work,
- the QOE work.
And then, I have a member on our team who is more focused on helping me lead the diligence. And then for the integration, our council as well does that.
We're an integrated team and I really think that's the best way to do it because ultimately, we have the most knowledge of the transaction. If we hand it over to an integration head two weeks before the close and let them run with it, they're not going to have the answers. They may not know where to look. They may not have relationships. It's allowed me when I've seen a potential problem brewing to squash it immediately.
The one who ends up quarterbacking the deal process depends. Generally, it would be me or one other person on our team. And we just promoted someone to run any IT services deal. And then everything else falls in my bucket.
I'll quarterback that from sourcing, negotiation, diligence, and to integration. Now I may not be leading the integration, and I don't lead this specific integration, but I'm still involved in almost every conversation. I'm still involved in the SteerCo. Anytime I look at the numbers, I'm the one who asks a million different questions. Maybe it's my personality, but I get very in the weeds on that stuff, but the interplay helps. We could solve things very quickly by understanding different perspectives and where things are coming from.
Preliminary diligence as a Public Equity Analyst
In public equities, we generally deal with more mature companies. Given my current trajectory, I tend to engage with lower middle-market companies, those generating tens or hundreds of millions in revenue. It's indeed a different landscape.
However, having spent many years focusing on a company and its market position, I find that this helps me evaluate the credibility of their story. Based on my experiences, I can verify whether their trajectory makes sense.
Being part of public markets offers a unique perspective. Having reviewed numerous companies and situations, I've gained a comprehensive view, a keen sense for appropriate valuation, and an understanding of transaction success.
Unlike my banking background where the focus was purely on completing the deal and moving on, being part of public equity markets offers a broad perspective, which is a valuable skill set that many lack. Personally, I believe it gives me an edge in every process.
I recall when I covered Groupon on the sell side. They introduced a metric called Adjusted Consolidated Operating Income, which presented a rather creative representation of profitability by excluding multiple costs. This is a common practice among many business models, particularly in Silicon Valley.
Certainly, Software as a Service (SaaS) business models with high recurring revenue and impressive net retention rates are highly desirable. However, witnessing the repeated pattern of companies banking on narrative has informed my approach, making me effective beyond the realm of high-growth scenarios.
I often encounter proposals for transactions that could place a considerable amount of debt on our business. For instance, the Tribune going private under Sam Zell and the GTT acquiring InterRoute come to mind. Both instances resulted in significant financial distress and bankruptcy. Observing these cases has helped me avoid pitfalls, which is half of my role.
The success of this role should not be tied to the number of completed deals. It's absurd to base compensation or measure success on deal completion. The industry should not encourage this viewpoint. Whether you complete no deals or ten deals in a year, the primary focus should be: Am I driving value? Am I creating more value than I consume? This principle forms the foundation of everything I do.
Tips for negotiations
I find negotiating quite enjoyable. In business school, I learned about the different zones of potential outcomes, which has stuck with me since then. However, the negotiation strategy largely depends on the counterparty and what we aim to achieve. It's not only about price, but also deal terms, liability, and the size of the escrow. The perspective differs if you're a buyer or a seller.
When I consider buying a company, I look at aspects such as:
- Is it founder-owned and led?
- Is it private equity-owned?
- Will the management stay or leave?
Ultimately, my goal is to get the best deal for the company. While I am quite firm about this, it's important to consider the cost. The last thing I want is to antagonize the incoming party, making them not want to join the company, which would hurt us.
If I know the leaders are planning to leave, I might push harder on certain points than if I'm going to work with that person for the next few years. I make it a win-win situation for both parties while pushing for terms that benefit Xerox, whether in price, liability, or other factors.
Negotiation is about more than just setting the price, and you should avoid negotiating against yourself. An effective strategy I learned in public equity is persistence. One analyst I worked with would repeatedly ask the same question to the CFO until they gave an answer.
Even if I don't receive a direct answer, body language can be very telling. It's possible to gauge someone's stance not just by what they say, but by their reactions. While I strive to be reasonable, the goal is always to achieve the best possible outcome. I remain transparent and honest, yet always aim for a position that benefits us most.
Advice for people transitioning from public equity role to M&A
One of the advantages of transitioning into this role is the broader perspective it provides. The encompassing view of the market you gain is invaluable, allowing you to anticipate where things are going. But keep in mind that until you're in the position, it's challenging to fully comprehend the mindset of an operator and the considerations it involves; there is a learning curve.
Interpersonal skills are crucial in this role, both internally and externally, as you'll be communicating with numerous people within an organization. This differs significantly from a typical role in public equity, be it a hedge fund or mutual fund.
Being organized is also essential, as you'll have many conversations to hold and tasks to complete. I've never composed so many checklists in my life. It's a vital tool to ensure nothing slips through the cracks. I maintain organized emails, complete tasks promptly, and set reminders. These are necessary steps in team management.
Unlike a role in public markets, this position is highly collaborative and team-oriented. Successfully leveraging your team can significantly boost your efficiency and effectiveness while filling gaps where you lack expertise.
Even though I was hired for my financial acumen, I've had to lean on others for their legal expertise. These are some considerations to keep in mind. However, I don't subscribe to the belief that a specific job or background is required for success in a role.
In my view, it's largely dependent on the individual. You need certain interpersonal skills, drive, and a functional understanding of how to evaluate a company or build a three-statement model.
Ultimately, it comes down to who you are as a person, what drives you, what motivates you, and your ability to critically evaluate deals without confirmation bias, including knowing when to walk away from a potential deal.