Aligning People in M&A for a Better Outcome

Intro

Today. I'm here with Carlos Cesta, Vice President of Corporate Development at Presidio. Prior to roles for Carlos include Head of M&A at Dentsu Aegis, Director at Verizon and Verizon ventures, as well as other private equity in wall street positions.

He's an investment banking and private equity trained executive with over 15 years of experience executing and leading strategic initiatives. In this episode, we're going to talk about aligning leadership for greater deal success

Maybe we can just kick off with a brief explanation of your current role at Presidio? 

I'm responsible for executing against the inorganic growth strategy for Presidio, so my responsibility is anything from the origination, negotiation, execution, to integration. Basically, I run the M&A.

What advice would you give to entrepreneurs that are transitioning to a role in a larger company, post-acquisition?

We've done so many deals at Dentsu and Verizon, so certain practices were proven to be the most successful. Do your research and do your due diligence on the acquirer as part of the diligence.

The acquirer will point you to other companies and other CEOs that went through the same process.

That's super helpful, but it’s wise to extend that sample to the ones that they didn't point you to. This is not to go behind their backs, but to understand different views and figure out whether the way entrepreneurs are treated when they come into a larger company is something that aligns with what you're looking for.

The core of success is having the main seller, the entrepreneur, connect with a deal sponsor, which particularly relates to the middle-market where the guys are running the business are most of the time the guys that are selling it.

Both have to be bridge-builders, as they're coming from different backgrounds, where the seller doesn’t want to destroy the company and is very concerned with culture, and the deal sponsor is looking at things from a much wider perspective.

They have to be the kind of people that understand that there's going to be issues and that they have to be flexible. A person who is not a bridge builder will quickly default to us versus them kind of mentality.

The entrepreneur has to be mature enough to understand how important it is to have an open discussion with the deal sponsor about synergistically doing things.

I'm curious to know when do you start thinking about this and connecting with the deal sponsor? When do you start putting those pieces together?

If I'm on the side of the entrepreneur, the diligence will start even before we engage with a banker. If you can engage a good banker, they will help you make the distinction regarding culture. Networking is a good way to go about it and this should happen pre LOI. 

The question is how to get a deal sponsor that acts as a bridge-builder with a deep level of empathy?

Dinners, meetings, going for a drink are all ways to network and share ideas. The rubber meets the road when you have a process that is very much geared towards coming up with an integration plan that is designed by both parties. This happens before LOI, but intensifies, but it intensifies once you're in diligence.

You can consider the integration as another workstream of diligence. You have your people doing HR diligence, finance, legal, and then integration is one of them because you have a deliverable, which is the integration plan.

Are integration plans running in parallel with all the diligence that's happening?

Absolutely. You nominate an integration lead for the deal. That won't be the deal sponsor, but someone that works for the deal sponsor, or someone in the buyer's organization that can navigate those things well.

This person is going to be responsible for collecting findings from all the other workstreams and having a sensibility to look at those and say, how they will affect integration. And that should be done very early in the process because how you integrate and how you design and structure the deal is closely connected.

For instance, if you wanna integrate fast, great. But, if you want to manage some of the payments with an earnout, you can interfere with your ability to fully integrate.

So early on you want to use the overall strategy to help guide the direction of integration and that approach you're going to take?

Correct. Sometimes in the competitive process, especially if you are strategic, you will be forced into putting a lot of money upfront and not that much effort into structuring the deal. Structure comes directly from the work that you've done on the integration.

There is a fine balance between changing your deal structure to win the bid versus probably hindering your ability to integrate the way you planned. In other words, you shouldn't compromise your integration strategy because the deal got competitive. Integration dictates capturing value.

That almost sounds like you need the integration guy to be negotiating.

Yes. This is why we debated a lot about what is the profile of this lead integration person. Many would think that person is a project manager.

This is someone who is not only a very good project manager but also someone empowered to navigate the whole management structure and put their foot down when things aren't going as planned. Once you empower the lead integrator, he or she will be working very closely with me and negotiating deals. 

A lot of the items that are discussed during diligence, such as integration or the salesforce or the HR don't necessarily end up in a purchase agreement.

The integration plan is actually a document, and although a non-binding, it is there to ensure that all the important points are discussed, which also circles back to the relationship between the entrepreneur and the deal sponsor, so the way the entrepreneur and deal sponsor react to those tough topics is a very good way to do personality diligence - you test the future of the relationship by discussing the tough topics. 

What level of detail do you get into? 

It should be very detailed with timelines. If you take the LOI as a sort of milestone, you sign it, you continue doing the diligence work and integration work. In a sense, it goes beyond the LOI. 

So you'll start it and sort of start framing things before LOI jointly with that CEO, entrepreneur, and sort of developing this clear picture of what's going to happen, but then you continually iterate. I want to go back to the entrepreneur. What are some of the struggles that you can expect for that person to have and have to be able to adjust to? 

I have gained a lot of insight from post-mortem discussions or interviews with two of my colleagues about integration, what worked, and what didn't work. There were two main points.

When you close the deal, the lead integrator is still there, providing the continuity to the larger goal. However, what the entrepreneur's not used to is working with professional management.

The acquirer is likely to be far down the road of putting efficiency into everything, while that other person is focused on the numbers only. That is something the entrepreneur should be prepared for. 

The other point relates to HR. When you're trying to integrate anything that has to do with HR is also a shock, because you're going to transition people and it touches every employee.

Entrepreneurs coming from a company that's fast and agile will be faced with a cultural shock of having professional management trying to get something ahead of them. 

I love my freedom, but then I'd have to transition and change my beautiful CEO title to VP of another organization. How do you sell that? 

In these interviews, or dialogues that I just mentioned, what is also tested are entrepreneurs bridge-builder abilities. You could just turn around and decide not to deal with the big bad guy and say negative things about the acquirer, which is a bad strategy.

However, the entrepreneurs that have walked into this process having the right expectations, knowing what’s coming, be it good or the bad, they will talk to professional management and try to extract what they bring in, which is efficiency.

It is natural that you want to defend your culture, but not to the point where you start poisoning the relationship. This is why both sides need to have empathy and if both want to make the deal work they will need to find a way to take the good with the bad.

Things change when a deal happens, so you won’t be doing things the same way you did them in the past because now you have a partner. 

You're transparent and upfront. You can accommodate the best you can, but things are not going to be exactly the same and you are going to have some more rules to play by. I n the end you will profit.  

There will also be a letter of understanding, and there will be numbers there. You both need to look at those and validate or question them. You need to look at the drivers of the synergies from both sides, and then validate them or decide that what you see is too aggressive or not aggressive enough. 

What's a lesson you learned from Verizon that you carried with you throughout your career? 

To me the big lesson was humility, to be honest. I joined Verizon in 2004, so I saw the whole rise of wireless in detriment of the wireline operation at some point. Wireline was selling, doubling the number of lines, and all of a sudden you went down because of the fast internet.

The wireless guys were on the rise, and everything they touched was gold. So they rose to the higher echelons of Verizon and they were very successful when they were doing wireless deals. 

Then the humility point comes when these people ascend to power and then they try to do a deal in the media space, for example, and it's significant and we all know what happened. It was a lesson of humility because yes, everything you touch was gold back in the day, but you have to remember that every time you do a new deal, you start from scratch.

You don't capitalize on your past successes.

Let's talk about leveraging employees to ensure deal success. 

In my experience, what can make things a little easier for them is if you project manage them, provide them templates, make life easier, and engage them early.

But if you don't have a template for what they're looking for or how they have to do their diligence report, it is a good idea to have someone draft them. If you don't partner with them, the work is not going to be done right. So what I try to do is be their friend, make their life easier, and provide templates.

The checklist is a good starting point, but how do you teach people and get them up to speed to start thinking about the M&A deal in a more out of the box way?

It's also a matter of pride for them. They don't want you to point to something in their area of expertise. There are two solutions worth considering here. One is to start specializing people inside the functions.

For instance, you will have someone from the HR that is very well versed in M&A AND has experience in doing deals, and they will know what to look for right away, even outside the checklist.

Suggestion number two is to have a lead integrator by your side that has the right level of experience and will be able to look at early findings from the work streams and raise flags as to things that could go wrong.

What we used to do was to, when doing diligence, call every two days, or at least weekly or maybe weekly calls to keep up with all the workstreams. So you discuss right there and then what the dependencies are. 

When should companies start thinking about integration in the deal? We know it happens before LOI, but how early do you start thinking about integration?

I will usually start with the deal sponsor inside my organization, where we will look at the nature of the business and we start designing from there. If it is a scale acquisition, you put them together right away.

The further away it gets from the core, the higher the probability that you're going to do something more customized regarding integration, rather than just lap the companies together.

We have an opinion on how we should integrate this and then, and one of the first conversations with the seller is how we are going to conquer the world together. The natural segue from that is discussing how we are going to do that, is it going to be more isolated or customized, so everything starts there really, way before the LOI. 

We talked about developing a joint integration plan and go-to-market. What are the benefits of actually doing that?

One of the tangible benefits is that the discussions that don't get captured anywhere else in the deal box will be there. Documenting stuff is a benefit in itself. And the second is that bit of bi-directional diligence where the two people are discussing tough issues and you get to see people’s true colors.

Those two are primarily strategic. Thirdly, as part of the integration plan, you will have timelines for each of the workstreams, which is helpful, especially when project managing and ensuring a smooth transition. It forces you to do work beforehand too, which is great. 

Can you tell me the specific process of doing the integration plan?

The mobilization starts early with those conversations over the phone where you talk about how you and the other side are going to integrate this in together. You ask a sponsor to nominate their lead integrator.

I think the right profile would be someone who understands operations, finance, and business. From nomination onwards, this person is tied to the hip with us during the whole process. At that point, the integrator has the pen on the integration plan, and that person can start designing it. 

Then comes the purpose statement, where you dive into what are the main principles and why are the companies coming together, and how you are going to go about your goal.

Once that is set, you will have different sections, such as the go-to-market session, the leadership, thinking through who is leaving and staying and then, and functional issues, which include finance, HR, IP, tech, etc.

Each of those is going to include a section on how you are going to do this, including things like people that are involved and dates. You design timelines, and the lead integrator will be project managing all those timelines, even after the deal is signed.

Once you have a good draft, and this is probably a week after LOI, you sit down with the sellers, present them with an integration plan, and explain your ideas around it, so you make sure everyone involved validates it and you get feedback from the seller.

The seller will usually push back on how fast they want to integrate, and that is something we will try to accommodate, depending on what the sponsor thinks is the best way to do it.

Do you try to integrate as fast as you can? Are you taking a more of a timeframe standpoint or more of an approach standpoint?

Not necessarily. From my experience, integrating too fast can be a huge cultural shock for the people in the target company.

There are those two dialogues that you're going to play with, but choosing the right approach will tie back to the entrepreneur-to-sponsor relationship, and the sponsor will help guide in the best direction. 

When you walked through the integration plan, there seems to be a clear emphasis on the value drivers. Where does that sit and how do you keep everybody focused on what you are trying to capture? 

Yes, this is part of the integration process and transparency. When you sit down and discuss the prize with the seller and you validate it. That's how the sponsor is going to be evaluated in terms of compensation and that's how the entrepreneur is also going to be evaluated and compensated.

You know why the company is getting acquired and you see the value of it. You build up the value drivers in your investment thesis, but how do you get your functional leads to understand why you are doing the deal?

They're all informed through the process. The workstreams are interconnected, so if, for instance, the tech guy or the HR person sees something that they don't agree with, they should raise their hands, and that is a part of the process. They are introduced to the strategic rationale way before diligence.

There is a kickoff call before we start diligence saying, where we inform them that the deal is coming and introduce them with the strategic rationale they are going to be doing the diligence on. 

That's not to say that the CTO for example one day can’t disagree with what we are doing, having a valid point.

In those cases, what we would do is share their concerns with the executive sponsor. We bubble that up because if there's something that doesn't smell right it should be voiced at that point. It's a process of constant management of the expectations you have. Many of the stakeholders come up to you in the middle of the diligence with new findings

What's a common mistake you've seen, made in M&A that you believe could be easily fixed or avoided?

It’s a cliche one, but, but you see over and over that people just want to get the deal done and don’t pay enough attention to integration or how to deliver a good integration.

Another thing, which is maybe more pronounced on the middle market, you are closer to sellers are the guys that run the business, particularly in the service industry, because you're buying talent and people’s skills. When buying assets or IP that is less pronounced. 

What's the craziest thing you've seen in M&A?

There was a deal that we were looking into. It was brought by a banker and we were probably two weeks into diligence.

We were into it when then my attorney came to my office with a paper in his hand - With just a simple Google search a lot of stuff came up about the CEO of the company and his activities during college, a sort of break breaking bad scenario.

They had a fairly good reputation in the middle market and people make mistakes, but the crazy part of this is that the banker didn’t see this coming.

Sure we were not the only ones that had a problem with it. It probably hindered the ability to sell the company they had around. I don't know if they transacted or not. I didn't see it, but for me, it's a classic example of bad advice from bankers.

Ending Credits

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