Sourcing Companies That Are Not For Sale

Companies have been dressed up for sale and are under-invested for profit maximization and growth. According to Rishabh Mishra, Vice President and Head of Corporate Development at Infostretch, buying companies that are not for sale is the most lucrative acquisition you can do.

Sourcing Companies That Are Not For Sale

27 Jun
Rishabh Mishra
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Sourcing Companies That Are Not For Sale

Sourcing Companies That Are Not For Sale

"Knowing companies in your space is the biggest asset of M&A professionals. Even if you have to value one company, you need comparable transactions because transactions happen at market comparables" - Rishabh Mishra

Traditionally, corporate development sources deals by looking for willing sellers. While that is an excellent way to find initiate M&A, there are alternative options. In this episode of the M&A Science Podcast, Rishabh Mishra, Vice President and Head of Corporate Development at Infostretch, talks about how to source companies that are not for sale.

special guests

Rishabh Mishra
Vice President and Head of Corporate Development at Infostretch

Hosted by

Kison Patel

Episode Transcript

Proprietary Deals 

Traditionally everybody has believed that M&A is only done in a marketplace where you have a willing buyer and a willing seller. My philosophy is that all entrepreneurs, all CEOs, either are building businesses, which eventually will sell companies. 

Even in a private scenario, you can't expect the founder entrepreneur to run it for his lifetime or beyond his lifetime. So, eventually, companies get sold.

But if you see the companies available in the market, they have often been dressed up for sale. They are under-invested for growth and maximize profitability and value. 

The ones which are not ready for sale are the ones that have the maximum growth potential and are being built for the future; they're not dressed up. 

So if you can find those, those are the best acquisitions for any buyer, investor, and even growth capital investor.

Finding the companies in their growth phase, you don't get a very decorated marketing collateral, which they call confidential information memorandum, but getting the raw data and analyzing it, it's a lot of hard work, I must say. 

This adds to the work being done by our export investment banker sell-side and, financial advisors, but finding them raw, you find good deals, and those are the most accretive investments or acquisitions.

You can do the same job the investment banker does on the other side if you have a bank. You will probably do it better because the investment banker and the sell-side advisor will obviously lose certain messages in the translation and communication.

Or essentially, what bankers do is not just help the company put together data, help negotiate, but also educate their clients, which is the seller in this case, what is the market? What is the buyer asking for? Why is it important to them? Things like those. So you can do that education yourself.

I think what is difficult to do is establish trust between two parties, which are negotiating tooth and nail for every dollar, every penny; that is the most difficult part. 

When you see a seller, the sell-side investment bankers will bring a lot of competitive pressures in the process. So for the same asset, which is fairly valued X, you end up being X and a half more than the real intrinsic value of an asset, which you will derive in a non sellers market. 

So to eliminate that competitive pressure, many buyers and investors are more hungry than you for that asset, so they're willing to pay high. So two things happen, not just do the valuations go up, but your success ratio also comes down.

If you channel your energies into chasing proprietary deals, most likely you will close one. If you channel your energies chasing 50 competitive deals, you will probably still do one or may not even get that one. So, the choice is very simple, you focus your energies on proprietary deals, which are not necessarily auctioned processes.

The timeline between doing an auction process and a proprietary deal  

Proprietary deals are much shorter and faster than the competitive sell-side auction processes. In a proprietary deal, you're getting the raw information process and according to your own taste, according to your own decision making, ecosystem, your own board, etc.

In a competitive deal where you get the book from the sales time investment banker, firstly, a hundred pages actually have only meaningful information of 20 pages. So you are wasting a lot of time. 

Removing the gloss from the real asset and trying to get the message cutting the noise from the messages, then you keep waiting, you will get a process letter, the first-round bid, then they downselect, and they will have management meeting, scheduling is difficult because they're talking to 20 other buyers. 

All of this takes a lot of time, and then the worst is that they give you a format of the documents that you have, you mark it up, and then there is a lot of back and forth. 

In a proprietary deal, once you get going, the parties at least agree to explore the path together. You're asking for the information which matters to you. If they are giving you the raw information, you process it in parallel, you can do financial diligence and documentation and wrap it up quickly.

Integration planning starts when the deal is about to close. The problem there is that you are always trying to optimize for the seller in the transaction structure and all the various nuances of a structure or announce on employees, apart from the sellers, how will you structure the retention package and all of that. 

Whereas in the case where you're not dancing to anybody's tune, the seller, the management team, or the target company yourself, you are all trying to solve everything through the documentation structure, retention package, the earnouts, and even the brand for that matter, you can decide during the structuring of the deal.

So a lot of things are going on in parallel. Also the diligence findings straight away go into the integration planning. There is no adjustment of EBITDA. 

One thing that definitely takes a lot of time in my experience is getting a company or the seller or owner to agree to a sale process. So it also depends on every sector.  

Sourcing Proprietary Deals

Sources of names can come from anywhere, talking to your friends, family, where your cousins work, anywhere in your office environment, in your company, the talent acquisition team may be hiring from somewhere that could be a potential target for acquisition.

They could be sales guys complaining we lost a deal to this tech company, whatever. All of these are acquisition targets for you in the long run. So, just keep compiling all of this, and then whenever you need a certain technology, capability, market access, anything, you will always have a few names ready to go after.

Knowing the companies in the space where you work is the biggest asset of an M&A professional. Transactions happen at market comparables. So you need to keep track of what is happening among the players. Which companies are being sourced, bought, and sold? 

A lot of bankers are my good friends. In fact, you can never discount the value they bring to the table. No matter how much you do, they are institutionally doing this, and their access to the information and the openness of their clients, which is the target companies, is much more than a seller would ever open to a buyer or an investor. 

A lot of times, you have to help them. If you are chasing a company which you realize is not going to sell, I sometimes share the names with the bankers also and help them build their pipeline.

And they give you a favorable treatment in the process; sometimes, you get an early look. So it works both ways. 

I have a lot of corp dev friends, and I keep understanding their companies, dynamics, how they source, and how they execute. Normally, corp dev teams work in silos, and they don't mix up with the rest of the organization because they're not required. 

Whenever there is a deal situation, they would pull teams. But on a day-to-day basis, they don't work that closely with the HR, talent and acquisition, procurement, business, and sales teams. I try and spend a lot of time whenever I get an opportunity with all of these teams.

The talent acquisition teams have actually been the best source of names for proprietary deals. Where are you hiring from? Why are you hiring there? What kind of capabilities as a company do they possess? so they have all of this. 

You can also talk to consulting teams like Bain and Company, McKinsey, BCG, they have very deep knowledge of all industry verticals and they understand the businesses. 

Private company's data is normally not available but there are a lot of them right now and some of them are big, which claim that we have information on 50,000 companies and all, but if you look at your own company in their database, the information is wrong. 

These consulting organizations, have a lot of data that is accurate. So if you are able to make them friends, and it works both ways, nobody gives you information unless you give them some business in return. 

Lawyers, are a good sources because even if they're working on labor law consulting or anything, they would know companies in that space. And if nothing else, they do client take on formalities, so they get a lot of information on the customer even if they're doing a small job for a corporate. So all of these are sources of a deal. 

The best source of deals is conferences, whether it is industry conference, normally the CEOs go to these YPOs, young presidents organizations, or CEO conferences who needs to find a way of getting into this and then you can talk to them.

Tracking Relationships 

How do you come in contact? You come in contact when you do transactions.

These are all the people who are involved either on your side, or on the other side, but you spend so much of time, you end up building some relationship with them and you form perceptions about them. 

So as you do many deals, your ecosystem will keep going. Like any other business, you have to put an effort to keep in contact and maintain relationships.

Whenever I'm visiting a city, this was pre-COVID, I would look at my LinkedIn contacts and I would reach out to those who are available. Even if they don't give you time, then they would catch up on the phone, exchange texts or, you can catch up later on zoom or something like that. So that's how I keep doing it.

For some of the more important ones, I actually have a clearance of there are 3 detail list, one that I have to talk to them at least once a quarter. The other list, which at least a month, some of them I speak every fortnight. Just generally, they benefit from the conversation, we get new ideas from them. 

So over a period of time, we will put them in different priority baskets and keep track. It's not very,rigid that I have to speak with them. The list keeps changing. Some would just chitchat, you don't benefit, they don't benefit, and those drop out.

And some of them you are, you want to talk to, they don't find the time. So you make time, whatever time they're available and talk to them. So, yeah, it's a lot of hard work. 

For budding M&A professionals, I create a short profile, even if it is five lines on a word document or anything just to memorize things. 

In different situations, you may be looking for different assets. So two things happen, one is whenever a teaser comes, a lot of times I'm able to make out what this company is about. So, when you ask the counter side, Oh, this is this company, how is it doing?

Half of their story is gone which they were trying to build around. They're trying to change the positioning of the company. So you get to see the thing earlier. That's one thing that happens. The second thing, what happens is let's say in a boardroom, a CEO says, Oh, look, we need to get into this market or we want to acquire this technology or whatever, the inorganic growth plan is. 

You are very quickly able to bring five names, 10 names, as many names as you want, summarize, this is what is happening, these kinds of players are there. So your own brand and profile in the board meetings and the ecosystem keep on improving. So in the longer end, this is priceless for career progression. 

Let's say you reached out cold to a founder to sell their company, even if they don't want to sell their company, even if this is not going anywhere. They would like to know about their own competition. So what happens is like, let's say I'm talking to you, Kison why don't you sell your company?

The conversation will be 90% around what Kison's competition is doing. You will be very interested in knowing. So what happens is when that same founder is talking to 10 other people, he will remember that this gentleman is very knowledgeable about the market. I want to maintain this relationship. 

So that goes in the back of the mind and then you are the first to recall whenever your name pops. So, in various management meetings, I come across people I have not met in the last 10 years, but they remember some very good things about from the last 10 years or five as well.

So, everything comes together, nothing is a waste of time when you're tracking the industry that you wanna do M&A. 

Approaching the targets

This is the most difficult part; there is no shortcut, and every situation is different. Sometimes I suspect companies that respond immediately because they will may not be the right ones because they're ready to talk to you. They're desperate to talk to you. 

So usually, there is a pattern that has emerged over a of time and normally connects with the founders or the board members or the shareholders on LinkedIn. Try to assess their interest in exploring a transaction on LinkedIn itself because they don't want such emails all of the time. The CEOs have email access to their executive assistant or secretaries, and they don't want these kinds of emails hitting their mailboxes.

You may not even have the email addresses, so you make permutations and combinations and you put all of them in bcc and send them a cold email.

You need to write something about them or their company that will catch their attention. It just cannot be about yourself and what you want to talk about. 

It needs to give them a message because they would be getting several such emails, something which you would have read, especially if it is not the recent news or about their past. Something they would have done that catches their attention and forces them to read the email.

Even then they may not respond, but normally if you can connect with something which matters to them or something which the public doesn't know or recall, that creates this thing. 

And then you ask for an intro call, and you want to tell them that I want to talk about ourselves and give an introduction and all that, but write it very briefly, make it a teaser of sorts. Don't make it an encyclopedia, not very superficial. Over some time, people realize that it is a teaser that gets the best response. 

The subject is the most difficult one. So if it is somebody you've ever met, or not, you were in a conference where they were.

They would not remember everybody that they met in a 500 people, 200 people conference, so you can try to reconnect, and that gets a better response than somebody who's just reaching out cold. So the subject is most important, the art of teasing in the email is very important. 

Last but not least, there have been situations where I really wanted to talk to the CEO and those turned out to be deals and they were not responding. I kept cold-calling them. 

One bad thing that happened in COVID is that while the deals continue, M&A is very difficult to do remotely. You have to be in front of the person for such a thing. I have started traveling again: go meet people, pick a city, try and fix 10 meetings there over two days. 

And to fix ten meetings, you reach out of 50 people, go attend conferences, the CEOs go to these YPOs, young presidents organizations, or CEO conferences. 

You have to do a lot of hard work research before you show up. It's not just traveling and showing up; you need to do a lot of hard work behind that. And even if you get two minutes from them over drinks, coffee, and you're able to connect the right, whatever you wanna talk about and it is of interest to them, come back and fix the time and take it forward.

CEOs are also human beings, and they have doubts about themself. They have big egos, all of those things. 

If you can find something they did five years back and they spoke about it that you know, or even if you don't, just look at press releases from a few years back. 

You want to boost their ego by telling them something which may be close to their heart and the world has forgotten about or something like that. Or I remember you mentioned this and I have been, chasing, following, whatever, all of that.  

The First Conversation

All of these people have no time to waste on pleasantries. So you keep a very brief introduction and why this request for this conversation and what will you deliver to them?

Make the message very clear from the 50,000 feet level, starting to go to the ground quickly in two to three months. Don't try and mince words. The attention span is very short, especially for these people. So if you want to acquire, say that you want to acquire, and this is what is in it for them compared to any other options that they may have at that point in time. 

Try and solve their problem also. If you can talk about their problem, that's the best. And within the first 10, 15 seconds, talk about something that may be bothering them. 

What if they're not interested

So you take a step back and say, you respect it, it is good to know them, and so then you change the conversation. You show and demonstrate your knowledge of the industry. 

And I have seen that even if the first response is no if you're able to tell them about their competition, they're always interested and you can come back.

So in those situations where they don't want to be seen as a seller, you take them through the longer route, you get them excited with some other thing, and then try and push in your edge in there. Even if that then they don't want to be, then there it is, you just met them and you continue to have them in your long-term pipeline. 

The thing is you talk to anybody, not just M&A, you talk to anybody about their interest areas, about their pain points, they will get excited and interested in it. 

Even if you meet a stranger and by chance, you end up talking about things of their interest, their concern, their areas, they will get interested in talking to you and learning more. 

For a CEO, for a shareholder, if you're talking about their competition, their area of interest, or whatever is bothering them, they will get interested in talking to you.

So I don't think culture as far as my cultural background or anybody's cultural background is different. Cultural difference is there in different markets when it comes to M&A. 

In the United States, which is the best place to do business across the world, M&A is a lifestyle in all industries, restaurants, and everything, in Japan, another very, very developed economy, M&A is not so prevalent. 

They grow organically. So you will not, if you're M&A professional, you will probably not flourish as much as you do in the US. UK also, it's not as much as US. So, the transactions are of different nature. They're mainly capital markets transactions and not M&A transaction.

So culture differentiates in terms of the volume of deals and how equipped they are to manage the processes, et cetera, but not otherwise. 

If the conversation is going towards more of partnership, let's explore, I get turned off and I switch off mostly unless there is equity participation of some sort, unless there is inorganic wealth creation of some sort, I pass it on to my business development colleagues and that opportunity goes out of corporate development into business development. 

So when you have the art and science of abnormal wealth creation through inorganic means, I absolutely waste no time on the regular organics,  which is very important by the way. But you need to choose your time wisely.

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