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integration is a value capture play that not many have been able to actualize. By connecting and validating the deal thesis early, deal teams can improve their success rate. Joining us to discuss how to connect the overall transaction process and optimize the value created is Carlos Cesta, Vice President of Corporate Development at Presidio.
“You can't blame integration for everything. It's really the linkage between how you plan integration and how you price the deal.” - Carlos Cesta
A failed deal cannot be blamed on one specific function or area. You have to see the entire picture and you have to have continuity between the price, deal structure, and integration.
What is a deal structure?
To understand the importance of a deal structure in the continuity of a deal, we first have to define what it is. A deal structure is basically how much you pay and how you are going to pay for the target company. It can be cash upfront, deferred payments, contingent payments, or earnouts. It can vary depending on your strategy of managing risks and how you will integrate the business.
Three dials of a deal
There are three dials in every deal: Valuation, Risk Management, and Integration. And every time you turn one dial, it affects the other two.
If you pay cash upfront, there would be no risk management, and you will have to integrate the business fully. If you want to use an earnout, the initial payment will be smaller, but you cannot integrate the business and you need to keep that entity separate.
If you want to integrate the business within a certain period of time, you cannot hold 5-year earnouts, which will also affect how much you pay upfront.
With all this connectivity between them, you cannot blame the integration for every failed deal. You need to incorporate all these factors into the integration model. Bringing integration early into the deal would be beneficial. The best practice would be to start integration planning before you even bid so that you can price the deal with integration in mind.
“Validating synergies is part of the diligence, but also, how it’s captured is a part of integration. So they're all connected.” - Carlos Cesta
Diligence Process
Now that we have established that they are all connected, one of the best things that you can do is to bring your synergy thesis upfront in the diligence process. Constantly test if your synergy thesis are realistic and still viable. If it’s constantly coming back as negative and you are not going to get the value you initially thought, you might have to reconsider the price of the purchase or the entire deal itself.
“Whatever the value you think you’re creating, you bring that piece to the forefront of the process, even before you start doing financial diligence and tax diligence.” -Carlos Cesta
Deal Sponsor’s Role
As a corp dev lead, you need to work closely with the deal sponsor. Ultimately, he is the decision-maker for the entire deal so you have to make sure that the deal sponsor is dedicated to the deal.
Very early in the process, set up a meeting together with the deal sponsor and the target CEO to get some alignment around culture and the overview of what the integration would look like. You need to get a feel of what it is like to work with the other party.
Chemistry between the two parties is important as they are the ones who will own the integration plan. After the LOI has been signed, that’s where the very detailed integration plan begins.
Also, if you want to keep the deal sponsor motivated and accountable for the entire deal, tie up his compensation for the outcome of the deal post-close.
Conclusion
In order to capture your intended value, communication is crucial. The 3 dials of a deal need to work together in order to integrate the target company properly, at the right price, and at the right time. The deal sponsor plays a huge role in every deal and he needs to be hands-on from deal prospecting to integration.