M&A Surprises and Horror Stories

Sourcing deals

Steve Coghlan: Principally, we think of three sources for deals. And the first is, that you're a core business, you're doing business with a lot of different companies, particularly OEMs. And they may be in a position where there's a business that they've determined they no longer want to be in, or it makes more sense to offload that to a manufacturing partner.

So that was in the early days, that was probably 90% of where the deals came from, which is existing customers. All through the 1990s. And that was when the land grab, as we call it, was occurring. But then it progressed where the investment bankers would be working with their clients, and these could be companies that don't necessarily, they may have, it might be a technology company or product company.

As Both Flex and Solectron progressed, they wanted to move beyond just manufacturing and get more design and intellectual property content in order to have a greater offering that would drive more margin. 

So we started looking at other product types of companies to add in. So the investment bankers would bring us deals to look at, they brought us a lot of deals. A lot of deals that just didn't make any sense, but we looked at a lot.

Along with that, the investment bankers obviously were involved in the auction process, and so they'd bring us stuff and get us into the auction if they could if we were interested.

Jim Ackerman: Early on at Solectron, I was actually part of the business unit and we were 20 million roughly in revenue in one site and we grew to over 16 sites and upwards of 800 million in revenue in just a few short years, primarily through acquisition.

So a lot of those early efforts were spent just pursuing proactive acquisitions through strategy, to the strategy that you've built. Some of that time was spent actually identifying those companies within those market segments with either the technology or capability that we were looking for, geography for that matter. And making cold calls essentially to either their board members or their PE sponsors, or executive management to see if there's any interest there, as Steve was alluding to earlier, in terms of partnership opportunities or ways that we could work together to further both of the company's strategic interests. And eventually, those talks led to an acquisition. 

Steve Coghlan: It’s a soft approach.

Jim Ackerman: Typically, you're going to engage with a CEO or CFO of a company, likely the CEO or principal owner, however it's structured. If it's a smaller company and you're going to go in with fairly high power, you're not going to bring a whole team. You're going to bring, maybe the corporate development guy and a tech guy, or it could be a business guy. It depends on how you want to engage in a conversation, what you think would be appealing for a CEO of a company to meet you, and then we'd take it from there.

Key things to ask during the first meeting

Jim Ackerman: The first meeting, from an introductory perspective, is that the target company would typically present an overview of their business, something that they would share with their customers. They're not really going into a lot of heavy details in terms of their financials or anything. It's just really about their value proposition to customers, and then we correspond. It would present an overview of Flex or Solectron or whatever company that we worked with at the time.

Here's what we're looking to do in the area. And through that, hopefully it's going to spark areas of common interest that will lead us into a further discussion to see where that discussion goes.

After they do the presentation, we’ll probably have some specifics around that's probably nothing that's proprietary, specific to their business. Because you want to establish that “I have interest in talking to you about your business and understanding your business” as opposed to, “Hey, thanks. I heard the pitch. Now here's my agenda.” You don't want to go there. Not at all. Not yet. You probably don't want to go to your agenda even in that first meeting.

And so there'd be a dialogue of what our business is and maybe how it relates to their business. And again, looking for where there's common interests and alignment to try to find those if there are, and there may not be.

It could be a supplier in a program or a product that they're a sub supplier and we're a supplier, and we come together somewhere in that supply chain. That would be the common interest piece you'd want to get to, where maybe joining forces may make sense, or maybe a strategic relationship about how we manage that material through the supply chain. Vertical integration playing. 

We convince them to sell maybe a year later. It could be two years later. It could be never, they may never be sellers, and you can establish that relatively quickly, usually when you get a look at the financials.

Jim Ackerman: But the important thing really is to start building that relationship. Demonstrate integrity through your word and keep to your commitments and in terms of the forward schedule for meetings and deliverables or sharing information that they may want to see about you and your strategy.

Steve Coghlan: Ideally you’d court them from all the way to the altar and they don’t talk to anybody else, but in reality, that’s not going to happen.

Jim Ackerman: You don’t want to talk them into selling. The objective is to talk them into selling to you. And there’s a big difference.

Steve Coghlan: Yeah, because anybody is going to get an advisor, most likely. And they’re going to want to run a competitive process to make sure you’re getting the right deal.

How to get exclusivity

Steve Coghlan: The buyer has to trust that company. They got to trust the integrity of the management team, the culture of that company. Those are really top. I mean, purchase price is big and critical and probably a deciding factor, but a lot of those other intangibles are just as important.

Jim Ackerman: Personal integrity, as well as the company's reputation is key in this. There are multiple transactions that I've been through where the advisors have given us the last look or the seller, being not an auction process. You've run into issues late in the process that could have blown up the deal easily. But you've built that reputation, you've kept your word throughout the entire process, you haven't abused them, you've been sensitive to their needs or restrictions and it's helped to bring the transaction across the line.

Steve Coghlan: Building that relationship might be, as Jim mentioned, the advisor may come back and give you a last look simply because they want you to be the buyer.

Jim Ackerman: They know you're a good buyer. They know you if they sign with you, you'll get to close. You may end up leaving it with that after the meetings. 

Steve Coghlan: And maybe not that direct, but it would be like, “hey, we would really like to pursue potentially a transaction that might make sense for both of us.”

Jim Ackerman: It may not be the right time. 

Steve Coghlan: I mean, those are businesses that are clearly not for sale.

Jim Ackerman: For some sole proprietors or family businesses, we've approached some large suppliers in the automotive industry that's been a family-run business through generations, and they just don't want to sell. Any price that's reasonable for the companies we represent. 

Steve Coghlan: But you could always go, I'll give you a billion dollars for something that's worth ten million. That's not realistic because you're not going to pay that. There’s some corporate governance that goes on.

How the governance works

Steve Coghlan: Well, it really starts with one riot, one ranger. You don't bring in the whole team early. You don't even ask input from the whole team in terms of what we need to know early before we even move ahead? I think, because of all of the deal experience Jim and I have, we pretty much know where we want to focus.

It's one page, it's seven or eight questions about the business, high level financials. You're going to want to know these:

• corporate ownership and structure
• what jurisdictions that they're operating in
• how many people and where they 

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One of the things that many times is forgotten about until later in the process that we think about, information technology–because there's many times you can't close a deal unless you have the IT scheme for day one figured out, which could be very complex or could be very simple. But you can't actually close a business unless you have that figured out.

So that's something you'd like to get a view of early on. That's just a few examples. There might be more than eight or nine questions, but you have to limit what that amount is. You can't overwhelm the potential target. It's got to be something reasonable for them to pull through without having to pull a whole bunch of their team in as well.

Jim Ackerman: Because oftentimes when you're dealing with, say sole proprietorships or small private closely held corporations, is that they may not involve anyone outside of the CEO. We've had transactions where it was just really the CEO providing 100% of the diligence through the process with us and he's still trying to run his business.

Due diligence red flags

Steve Coghlan: There could be a whole numerous items that could come out, but first and foremost, know the business. 

• What is the business? 
• Is it in a dying market?
• Is it in a growth market? 
• If it's a growth market, are they participating at the growth rate that they should be?
• How is their financial condition relative to that? 
• Are they making money? Or they have just always been losing money? 
• Or are they just on incredible profitability? 
• And from a balance sheet perspective, what's the debt situation look like? 

Things of that nature are key. At least to start there. 

Cultural integration

Steve Coghlan: Sometimes, you need to get a culture that doesn’t fit in order to disrupt part of your business to go down a path that is a winning path.

Jim Ackerman: Some of the presidents that I've supported in the past said that “We want to take the best of both companies to end up better as a whole.” And for a merger of equals that may work, but even for smaller acquisitions, there may be things that the smaller company is doing a lot better than you and has it figured out. And you want to make sure that you're able to incorporate. 

Steve Coghlan: My experience from the Flextronics acquisition of Solectron, that's exactly what happened. Solectron excelled in so many areas in terms of operational capability. Everything they were doing on how they dealt with customers and so many things that Flextronics embraced and brought over and kept it in place. 

Jim Ackerman: But there are some examples of organizations that haven't proceeded in an auction process because the CEO and his personality was too dominant throughout the entire organization. And we picked that up on our first meeting with him. Sat through the meetings, toured through the facilities and just came to the realization that that CEO would not be happy within our organization and structure. And his team is, there’s not enough leadership at the second and third levels to really sustain that business and grow it and fulfill the strategic objectives we have for that business. 

Steve Coghlan: Going back to my Solectron-Flextronics experience, the cultures couldn't have been further apart, but it was a deal from an industry perspective that had to happen because if it didn't happen, in my mind, neither company would be here today, wouldn't have survived.

Working with the board

Steve Coghlan: I can relate to one story about a board interaction, where we had some dysfunctional management people and some kind of demanding board members, which they should be demanding, and there was a particular transaction that we were trying to get completed, and it was in the optical transport space.

We had presented an acquisition case and they had known that this had been going on for some time and we were pretty well ready to go get the deal done. And the board members were just, they became irate over why haven't we gotten this deal done. You realize that you are way behind the eight ball in terms of getting into this business.

At the end of the day, it turned out to be a very failed transaction because it was not only our management team that was pressing us to get the deal done, but the board was putting pressure on us to get this deal done. And we could talk more about that, more specifics of that transaction, maybe later. But that's just one example of board interaction. 

Jim Ackerman: And I would say through the years, let's say from the late 90s to now, I've found the board to be much more informed and active from an M&A perspective at earlier stages of the transaction. The thresholds for their involvement were, let's say, a dozen years ago, the CEO had authority without board approval to do transactions under a hundred million, even though they have the authority. Believe me, they kept the board informed and what they were doing all through that process. 

At the time of my retirement, the board wanted to have approval of all even non-binding indications of interest, which is pretty soft, and it really cramps your style from a corporate development perspective in participating in auctions and things of that nature because the cycle happens so quickly. And to get the board together or board subcommittee to review and approve that non-binding indication of interest. 

The board members are there for a reason. They frequently sit on multiple boards and oftentimes, when these policies go into effect at one place, they look at another company that they may sit on the board and say, let's put it into practice here. We think that makes sense. And it works over at this other company.

Steve Coghlan: Another element, just to add to that, where the board has gotten much more active, one of the principal drivers is under the prior presidential administration. The regulatory filing requirements were tightened dramatically, and I'm talking specifically about CFIUS. And because the company that we were at was a Singaporean based company, even though there was a U. S. headquarters, tripping the requirements to file CFIUS became very uncertain. 

And at one point, it was thought that every transaction would require CFIUS filing. Now, to talk about CFIUS filings, the requirements to go do that are very costly, time-consuming, and can delay. And I actually put you in a position of not being able to close the deal because the regulators will say, no, we don't approve.

Jim Ackerman: And for advisors, they look at you as a Singaporean-registered company and maybe having to go through the CFIUS process as a risk to close. And so they'll exclude you early, even if you do have the value.

Steve Coghlan: Committee on Foreign Investment in the United States (CFIUS) is a foreign corporation investment in a US entity or business.

There was one transaction that we actually had to carve out the U.S. entity because we were selling the business to a Chinese buyer. We couldn't add it. Otherwise, we were subject to CFIUS. And we knew because the nature of that business is very strategic in terms of the kinds of products that it went into, that went into some federal government programs, that it would have been shut down. We never would have gotten the transaction done. 

Best way to pitch a deal to the board

Steve Coghlan: You just hope your CEO has already greased the skids.

Jim Ackerman: It's not the first time they see the transaction. They've seen it several times. They understand the strategy of the business unit. They see how it's aligned. And so, really it's more of a discussion around valuation. 

Stakeholder management in the board 

Steve Coghlan: What we've seen is that story I was talking about where we went to the board, it was an M&A subcommittee of the board. So it was only three, unless it's a material transaction. And then once the subcommittee approved, then typically it just went to the full board for ratification, and the deal was already done at that point. The deal was done as it relates to getting the board sign off. 

Managing M&A surprises

Steve Coghlan: Surprise? No surprise. There are no surprises. It happens on every transaction. It's all predictable. But every deal is like a snowflake, they're different. Every single one has its own interesting things that come up.

Jim Ackerman: That's one of the reasons why we've been doing it for over 20 years. It keeps us interested. Always learn something new. 

Steve Coghlan: When you're actually entering into a formal diligence process, you obviously are going to get access to some data, usually via a data room, that has been populated by, if there's a banker involved, they're probably managing the data room for the client, and it is always insufficient. There never is the right data in there that you need. There's just a lot of stuff in there that you gotta go through, and it's typically because the targets are just never ready with all the data. Or their advisory is not good enough to tell them, “hey, you really need to go pull all this stuff together.”

And likely if this is the first time that the target’s been through an acquisition, they're not ready for the questions and to be able to pull all that data. And then all the departments that they have to go to trying to pull that data together, that's what you're battling against. It's going to be insufficient and 99% of the time, that's the situation. So, surprise, no surprise.

Jim Ackerman: And there's also surprises in the sense that, when you're dealing with smaller companies without much experience in an M&A process, they'll share things that they shouldn't be sharing. Data privacy concerns. So it really helps to, when you are approaching that diligence point and you're asking them questions, you should tell them what not to provide. Because it just presents liability and risk to you, especially if you don't end up completing the transaction. 

Steve Coghlan: Yes, especially when you're dealing with international places, specifically in Europe. If you're getting information regarding employees that's illegal, that can happen and people that receive it can be personally liable. So part of that is we've got to educate, if we don't have a sophisticated seller or advisory, be careful, don't put us into a problem. I wouldn’t characterize it as a surprise. It’s almost like a risk mitigation. It’s a surprise if it ends up in there.

Jim Ackerman: I've had a transaction where they sent an Excel spreadsheet. And there were hidden rows that they didn't password protect or something on it, and it actually had their pricing, which is a big no no. 

Steve Coghlan: And so when you have to do a HSR filing in the U.S. The Hart Scott Rodino Act for antitrust filing. When you do that, there's a lot of information around what information did you get? And when you're in between signing and closing, there's a lot of things you can't violate. 

• You can't start integrating the company.
• You can talk about integration, but you can't start doing things. 
• You can't look at customer pricing or material pricing–a lot of things that are deemed to be around specifics of the business.

You got to stay clear of that. You can't get into the pricing and if it's public, chances are the enterprise is not going to be public. Typically, we do have access to review those customer contracts, but they'll get redacted. 

Good M&A Surprises

Jim Ackerman: So this gets into a little bit of mitigation as well and how you mitigate those surprises or risks. One of the companies we acquired had an outstanding lawsuit from one of their customers suing them for a defect in the product. 

It was very difficult. Negotiations were nasty and tough, but we actually got indemnification for that lawsuit, but after close, and as part of that indemnification, the seller got to defend himself with that customer, and the decision was made after close. 

Even though we had full indemnification in the purchase agreement, we ended up settling and taking on some of that liability in order to not damage that customer relationship too much because the seller is out of the business. He's actually retired now. He's sitting in Hawaii, enjoying the good life, and he doesn't care. He'll fight like hell to make sure that he doesn't pay out several million dollars on a lawsuit. 

So he could really aggravate that customer. And the customer would look at you saying, “Hey, why are you doing this to me?” So in the best interest of the customer relationship, which was substantial outside of this one little piece of business, we ended up absorbing a portion of that loss.

Steve Coghlan: We had an interesting situation. We had an acquisition and it was a little bit outside of our normal business, but we viewed it as very strategic to get us into another business area, another vertical. It was a startup company very well funded and it was on a growth projection that was just unbelievable. 

I didn't believe it the whole time in hindsight. Now, I probably should have believed it because they exceeded all expectations. So it was very good and successful. But what was really interesting is when we buy these companies, we typically do background checks on the senior management. 

There was a couple that came back from the senior management, which is absolutely unbelievable. So he had some run-ins with the law. He spent time in jail, illicit narcotics possession, firearm possession, really colorful stuff. But the CEO sure is really a good guy.

I think he was reformed by that time. But anyway, that was the background check. So it kind of gives you pause for, what are we getting into here? It didn’t break the deal. I think any other deal, something probably would have had to be changed in order to complete that deal. But on that deal, because we wanted it so bad, it was like, we don't care. Let’s not focus on that.

Jim Ackerman: And then we've had other transactions where the CEO had a colorful pass. Pardon the phrase, that really when we brought it to the board, the transaction made sense from a strategic standpoint, but the board stipulated that the CEO can't continue past close.

We also had a transaction where the owner of the company was actually retired from active management, and the current president was totally bought in, was excited, enthusiastic about joining, and agreed with the strategy. Had a lot of input there on the integration plan, and sure enough we closed the deal and within two weeks, he resigned, just dropped out. 

Whether he had a retention package, it didn’t matter. He just resigned. He had worked for a large company before and understood that structure. And he wanted more autonomy. So, from a career perspective, he didn’t want to be back in that same position. It wasn’t necessarily anything personal at all about our company at all. He just wanted to make sure that the transaction went through. So he played along and ensured that the transaction was successful, but he didn’t want to be there after close.

Steve Coghlan: Well, we’ve also had a situation where the management of the company we thought were solid and they do well going forward. But after six months, you got to really see the true colors and it was like, we gotta get this guy out of there.

Jim Ackerman: Sometimes you can’t figure that out soon. I don’t think there’s anything we could have done in that situation with that president. Because all the signals were green all the way through, and very supportive.

Steve Coghlan: If it happens to you 10 times out of 20 transactions, then you gotta look inside. You’re doing something wrong. If it happens once out of 50 or 100, well it’s going to happen.

Jim Ackerman: The very first transaction I worked on at Solectron many moons ago, it started off as an auction, but it was a failed auction, and we were really the only company in pursuit of the target at that time. And the CFO of the company became so difficult to deal with through diligence that we told the owner that if he wanted to sell the company, that the CFO had to be gone. And so essentially, he was put on garden leave through the end of the transaction. 

Accounting surprises

Steve Coghlan: The ones that are kind of indirect accounting surprises that are always there, especially when you get into European transactions, where you've got public and private pension schemes. And I know of a transaction that was next to impossible to calculate the underfunding of a particular pension scheme in the United Kingdom. And those schemes cover prior employees for many years, and some of these companies were very old companies. And so there's a lot of money associated with it.

The pension funds were underfunded and a lot of those they were investing in public markets. And during this timeframe, the public markets were really in a shock. This was back in the 2008 timeframe.

The pension funds were way underfunded. You go on and you have an analysis done every so often, but to get the analysis done in the heat of a transaction, you are not going to get it done. It was going to take months. So what was shown as being a 1 to 2 million issue at the time ended up being a 12 million issue post-close, which was actually eventually found out. 

So those off balance sheet liabilities are kind of surprises and some you can navigate through or try to navigate through some you can't because there's no way to define. And if it's a public company transaction, well, guess what? Buyer beware because there's no recourse. There's nothing left, because you bought the seller.

You’re relatively safe in the public company because you’ve got audits and you can go back. Yes, there’s going to be little stuff, but nothing really material. In private deals, there’s a ton of stuff you’ve gotta go through.

Private deal surprises

Jim Ackerman: I have a little bit of a crazy story. We were looking at a small privately held company down in the southern end of the great state of California. And as we're going through diligence in the process and the transaction, the CEO of the company called us down for a meeting, where he disclosed that his CFO has absconded with a lot of the company's money. 

He'd been siphoning off money for years. And, so we can't trust their financials and it related to an IT Implementation that they did down there of a new ERP system and the CFO led the implementation they didn't have a lot of the checks and balances in their banking and accounting systems that you should have. And the CFO actually had you know the same codes and authority so he could sign off for their bank funds requests where the CFO and the CEO was required.

He had essentially gotten away with several million dollars. At the end of the story, we didn't end up moving forward on the transaction in that instance, but they ended up luring that CFO back to the United States. Because he had left and bought a nice little villa over, somewhere in the Middle East.

And when he touched down at JFK, the authorities were waiting for him and arrested him and, and I'm not sure what they ended up being able to recover at the end of the day. But that was an interesting surprise that happened.

Steve Coghlan: So, some of the other accounting irregularities that we find, especially in a manufacturing environment where you're going to be taking over raw materials and work in process or whatever form or level of material, there's certain accounting rules. And not all companies follow the exact same accounting rules. So there's got to be some reconciliation there. But we often find that things such as excess and obsolete are not properly accounted for.

Jim Ackerman: So this kind of gets down to where, let's say in a purchase agreement, you have the phrase consistent with gap or past practice. You got to watch that or versus and. It has to always be consistent with gap and consistent with past practice. But even in the instances of gap, there are variations which could come back to haunt you.

Steve Coghlan: That’s usually a point of contention. That’s usually a fairly heavily negotiated element.

It could be as simple as, look, I value this part. This part is $1 and it's in the books for $1. But under the E&O provisions, that's excess. You haven't used that part in 300 days and it's sitting out there. I'm not going to value it. I'm not going to pay you a dollar for that. It's not worth that. 

It should have been written off and it should have either been scrapped or sold as excess. No good. So that's the fundamental. There's a lot of other twists that go into that as well. As you start to get the product into the manufacturing process where there's more value add put on. So there's different levels of where you can end up with ENO, and that could be a big financial hit. 

Somebody has to write that off. Does the seller write it off or does the buyer write it off? And that's what the discussion comes down to who takes the hit on that. So that could get into, depending on the size of the inventory that's transferring, it could be a significant part of the purchase price.

Jim Ackerman: Revenue recognition policies have changed over the years. Now there's partial completion. So what happens if that product isn't shipped? Laws are always changing. Accounting rules are always changing, so you have to keep abreast. 

I've been talking about inventory and not necessarily a surprise in diligence, but many of large multinational companies have outsourced certain portions of their business that may be something you have to manage post close. So, we had a transaction where the warehousing services and third party logistics were outsourced to third party logistics providers.

And we had only received the companies' inventory records. And, as it turned out, the third party logistics provider was on a totally separate system. That didn't balance with the target company. So there was a discrepancy there of several million dollars. And somebody's going to take the hit on that. 

IT surprises

Steve Coghlan: IT is a code word for surprise. Well, when you're trying to combine companies more often than not, you probably don't have similar IT systems, depending on what kind of processes, whether it's manufacturing, financial reporting, HR. And there's some level of integration that needs to be planned for and then completed by the time you close to get to close because typically you can't, unless you have a way to plug in the two IT systems, you probably can't close on day one simply because you probably can't pay the people in the acquired company.

That's probably one of the principal items, but there's a lot of other things, you may not be able to run certain other elements of the business, or you may have to run two sets of IT systems. So it gets very cumbersome, and that's always been one of my pet peeves. 

The IT diligence, no matter how well it's done and how well it's performed and the planning in order to get to day one close, is always insufficient. It's always wrong. And so, whenever I go to the final review of the IT diligence and time to day one, my automatic response is, I don't believe it. I don't believe the timeline. And I'd say 99% of the time I've been right, and it's just the nature of the beast. 

Jim Ackerman: That usually happens when you're talking about a divestiture of a large multinational corporation on a different system, they can't necessarily. The entity that you're acquiring is not its own standalone system, so it has to actually be separated and all that information has to be separated from the customer's larger enterprise. So there's a lot more that needs to be done to be ready for day one. 

Steve Coghlan: And it's the software providers that aren't always cooperative. Because it's a money grab for them as well. And you need their support to go forward from a licensing arrangement. 

Surprises between signing and closing

Steve Coghlan: Well, here's a crazy one. I was working on a deal. It was a Taiwanese manufacturing operation. I did batteries for laptops and it was an acquisition that we had done years prior, but it kind of ran its logical life and it was like, we don't need to be in this business. 

We ended up selling it to a private equity company. And as soon as we signed the deal, two days later, we found out the general manager had a brain tumor that I think he had known about. Because he said he wasn't going to be able to continue on with the business. Private equity said, no GM, no deal. 

Anyway, to make a long story short, it ended out he was cured of whatever his issue was. The deal finally did close about six months later. 

Jim Ackerman: I had a transaction that had a majority and minority shareholders and it was in a jurisdiction where we certainly had the ability to close the transaction and buy the company with only acquiring the majority of shareholders shares. And we had signed the transaction, and when word got out and the minority shareholders found out about the sale, it turned out that those minority shareholders were much more problematic than the majority shareholders realized.

This was originally a business that was owned by a few different families, by three families and, and then two families. And the one family that had the majority of shares, they were successfully able to increase their shareholdings over years and at the expense of the minority shareholders, which left them very disgruntled and the minority shareholders weren't involved in the management of the business. 

And so, it turned out to be a long history of disputes, not necessarily legal, that we would have been able to identify in our diligence, but newspaper article investigations and things of that nature, where it could cause a lot of unwanted publicity for us to proceed on that transaction, even though we had signed a deal. 

We ended up closing, but we had flown out to meet with the minority shareholder. He presented us several binders of what he said was malfeasance on the behalf of the majority shareholders and how they've done things illegally and to their detriment. And we looked at the data, we reviewed it with our council, and didn't see anything that, at least on the face of it, was legally wrong. 

But what we did do is go back to the majority shareholders and said, “You told us not to talk to the minority shareholders, and we respected that through the process. But you really didn't let us know how big of an issue this is with them. So now you're going to help us fix it.”

And so we ended up buying those minority shares and paying them a little bit more than the majority got per share. But a good chunk of that came from the majority shareholders themselves. So if they want to see the deal closed, they have to pay a price. 

How to mitigate risks and surprises

Steve Coghlan: To mitigate risks and surprises, our actions depend on what it is. You've got to find a way. Jim and I, our role is, if it's the right deal, make sure to get it done. If it's a risk or something that comes along as a surprise and it's the wrong deal, find a way to make sure either gets resolved so it's still a good deal. Or make sure that everybody understands that maybe this is one you need to walk away from that you can't fix it.

What trap currency is 

Steve Coghlan: One of the last transactions that I worked at was with a China business and being able to get the money paid in either RMB or U.S. dollars. And to get RMB, and I think the situation has probably not changed that much, there's a real restriction on China companies getting, moving, transferring RMB out of China and converting it into other currencies. 

So a heavy restriction on that. And there was only so much allowed per year, per company. And so we had a transaction where there had to be some creativity around how we got paid a portion of the purchase price in RMB that would stay in China for our China operations. And then how we had to get some of that converted into US dollars out of China, either into, I think we ended up getting it into Singapore. 

I don't remember the specifics of the details of how that was done, but it was a bunch of smart guys figured out how to do that. As you can imagine, with that limitation and the need to move currencies around, there's a lot of smart guys working on figuring out how to do that.

Jim Ackerman: Looking at a transaction, looking at the different legal entities involved, and taxes, and things of that nature, all determined.

Integration surprises

Steve Coghlan: Jim and I participated in a transaction. He was at the front end and I was at the back end. But one we gave away, we ended up paying $340 million for it. We ran it, proceeded to run it into the ground over a period of 3 years, and we sold it to private equity for $12 million dollars to top up their working capital and gave them the keys to the business.

Jim Ackerman: There’s more to the story there. That was something where the acquisition, the strategic underpinnings, was based on integrating the IT systems and taking that information from call centers and sharing it with our depots. And after the transaction closed, the management of that call center business talked the business unit executive leadership into not doing, not following through on that integration. And so without that integration, there's no way to reach those synergies that you had in your business plan. 

Steve Coghlan: Well see, Jim was part of that business. And so that's the explanation from the business, from my perspective, it was a failed strategy from the get go. 

Jim Ackerman: So, you see, I'm part of that business, part of the business unit, the acquiring business unit, yes. And from the business unit I was pointed on that and I wasn't happy that we weren't able to carry through with our integration plan. But it is what it is, Steve.

And then there's the transaction that you did down south, we won't say where exactly, that the integration plan wasn't really followed through with and it turned out that from just a business mix perspective, it really didn't match the larger organization. Maybe you could tell us a little bit about that. 

Steve Coghlan: It was the entry into Mill Arrow, which the company had no experience whatsoever, but had some really great ideas. Everything from building airframes to getting into microelectronics, it had great capability. But it became an orphan the first month.

Nobody paid attention and thought about how do we really integrate and how do we go drive this thing? And then that was part of the problem. The leadership that came along was less than what we thought.

Jim Ackerman: We tried to force business in there that really didn't fit their business model. So we started selling stuff into them that wasn't microelectronics, which wasn't Mill Arrow. So they struggled with that in terms of profitability, and we ended up selling it three years later. Steve did a great job negotiating the purchase price. We didn't overpay for that. And I was fairly adequate in negotiating the selling price. 

Mitigating surprises from integration

Jim Ackerman: A lot of that is really dependent on how well of a job you do on the front end, as you're going through the diligence process. 

Steve Coghlan: Well, Jim, you should talk about what we got smart on after a lot of scar tissue was we got an integration leader plugged in to the process early to the diligence so that the integration lead would know what's coming.

As opposed to, “Oh, the deal closes. Hello, are you the integration lead? Oh, here's the deal. Maybe we should meet for lunch?” That's a bad strategy. 

Jim Ackerman: So it's making sure you do a thorough, or at least an adequate amount of due diligence, making sure that the team members are experienced or if not experienced, they're mentored through that process. And Steve and I both have spent a tremendous amount of time mentoring functional team members in their respective areas.

Steve Coghlan: And the training process is more often than that. We didn't always get the same diligence, functional leads. So I would say during diligence that 80% of what we do is just keeping everybody in line and making sure that they know what they need to do from a functional perspective and what the expectations are. 

Jim Ackerman: And this might seem like a shameless plug, but it’s something I truly believe in. You have to have the tools to support that process and communication as well. And Steve and I are fortunate enough to have done M&A back in the days, where it was conducted in a closed conference room with no windows, and files and just paper. Just reams and reams of paper that you're allowed to take notes on. No copies. 

And the M&A process today is completely different, and it's so much easier based on tools and the shameless plug like DealRoom and M&A Science. So having virtual data rooms, especially with smaller companies that may not be as well-versed in how a process goes, we've had transactions where using DealRoom, we've set up that small company a data room in due diligence.

We've, we've organized it for them. We gave them control, removed our control over the data and gave them control. Actually we gave the CEO of the other company control of the data. So we could only do what he set in terms of limits for access and download and printing. And we conducted our diligence through the process using that virtual tool. And we've got a complete historical record of the diligence, the comments, the questions that you're able to share with all the team members or management that want to see what happened and what transpired, and it facilitates the integration process so much having that.

And in fact, you could use the same tools for integration that you used on the diligence side. And you're all working off the same book, off the same play. 

Instilling clear and purposeful communication

Jim Ackerman: Communication is always key. And I'm sure most of the listeners out there that have gone through a process understand this. But the seed you plant early on in a transaction, in terms of your own personal integrity, helps so much when those surprises come during integration. Or let alone earlier in the deal process to get through some of those rough patches. And so, communication and frequent communication with not just the key leadership, but the employees of the acquired company is important.

Steve Coghlan: Especially when you’re in the process of negotiating and trying to get to close, the communication with the certain leadership team of the company, it’s important that there is just one voice. You can't be having communication from, “here’s the legal readout, the HR readout”, in terms of what's going on. And so, to try to contain that, it's very important because things can get sideways really quickly. Misinformation moves at rapid speed and so it's important to control that. It's really important that communication, when something goes wrong, you have to be able to speak clearly on it. 

Hardest step to do in M&A

Steve Coghlan: The hardest step was to get paid, getting the money for the transaction. If you’re selling or you’re buying, you have to get the finance guys to pay the money.

Jim Ackerman: I would say there are difficult elements of every phase of a transaction, but I would say getting them to the point of actually sharing the information you need, and that's a process, it's often like peeling an onion. But, you have to fight through to get them to give you the information you need to make that decision of a go, no go, and finalize your business plan.

Worst deal ever done

Steve Coghlan: I had a horror story of a deal that I still wake up and night sweats over. That occurred over 20 years ago. It was early on in my M& A career. It was a deal with an OEM divestiture of a very large datacom-telecom business. It was a transaction that was probably years in the making, eventually this is what was going on in that industry at that time. All of the major providers were outsourcing and getting out. Because they had this company called Cisco that was going to eat them alive if they didn't get out and they realized they needed to get out of manufacturing. 

And our company was kind of king in that area. And we relied on the fact that we could actually take over a billion dollar business and integrate it and continue to run it. Well, there were so many issues from an industry perspective, as well as from that company's perspective, that were a constant erosion to that business. 

So, what started with what looked like to be a 1 billion business that we were going to take on, which was essentially taking on a workforce that was unionized, which was problematic in itself. Taking on an eroding business that was dropping and we couldn't even gauge how fast that was dropping. And there was probably bad management on both sides in terms of they were both committed to getting the deal done, but what ended up happening is by the time we actually closed the deal, we had worked on it for some 18 months with delay after delay and trying to teep on top of what the actual forecasted business that we're going to take on. 

It was a moving target and clearly something really bad happened by the time we close because the day we closed the morning after we wired transferred the purchase price I got an email a copy of an email from very high in the target company's management chain to the COO stating “do not give the latest forecast we're going to close the transaction this week.” And by the way, the forecast was attached to that email, and if we had seen that forecast, we wouldn't have done the deal. We would have backed away. 

Anyway it got very ugly to the point where the CEOs of both companies, the CFOs, the COOs, all of the C-level, we all met back in New York in a meeting, very contentious. Meeting ended very badly. We ended up unwinding the deal in order to avoid lawsuits. 

We actually had to take on, so we closed the deal. We owned and operated the business for another about six months. And then actually gave the business back and got our proceeds back. And it was very contentious and it was a bad outcome for everybody.

Best advice 

Jim Ackerman: Make sure you have a very strong underpinning on making the transaction, with clearly defined synergies and a team to execute that plan.

Steve Coghlan: To the next generation of young leaders, work and be in a business. And be responsible for running a business or be involved in running a business and understand the PnL associated with that business, and get experience as a business person, and then go play in M&A.

‍Jim Ackerman: If your focus is on manufacturing, understand the manufacturing process, all the elements involved in the supply chain. It really helps you as you go through to understand what the pitfalls are and how to avoid them.