Bolt-on Acquisitions from an Expert's Point of View

Here is more on Paul’s background.

Seventy-five percent of my experience is in corporate development, while the other twenty-five have been financial operations and management.

Prior to being a CFO at Paynet, I was a global head of M&A in TransUnion, and previously to that Head of Corporate Development and M&A for the Tax and Accounting Division at Wolters Kluwer and Head of Business Development for the Trading Treasury and Risk Management Division at SunGard.

I’ve probably looked at over 1000 companies throughout my career, have led, and successfully closed over 50 transactions.

Paul, I would like to start the conversation with your diverse background in a variety of different transactions, starting off with contrasting the difference between a bolt-on transaction versus the platform.

When you look at the bolt-on, you are looking to add on to your existing platform or solutions. It is a space in the industry that you know well. You have a better chance of having domain expertise to go and evaluate that and you know the customer segment.

It’s very important, from a technology standpoint to make sure that you understand thE technology, the language behind it, the architecture, and how is the user experience going to be for the end customer.

It sounds like when you are doing a platform, you are overcoming some learning curves. I’m curious, is there some type of approaches around shortening that?

Sometimes it can be a platform in your own space, but if you are building an entirely new platform, there is an average of three to five years, and by the time you actually finish that and go out there, the market has changed.

So, when you look to actually acquire it, you are buying some that’s already in the marketplace and hopefully it’s proven so you can bring that into your own organization, which gives you that speed of the market. 

You are still looking at the same kind of attributes from due diligence perspective, but in a case of a bolt-on you are adding onto your system, versus a platform, where you are looking at an entire suite and it is a much larger end-to-end solution.

Would you say that a bolt-on is a more of a tighter or more templated process?

Typically it is because you re looking for something that’s going to fit into your platform. You are going to be checking out the features, the functionality, to make sure it all works from a user perspective, but also from the technology side.

From a customer perspective, if it’s a bolt-on acquisition, you are looking to expand solutions which all should be seamless to them. From a technology standpoint, you want to make sure that the architecture is right on your platform and that the product or the solution that you are buying for the bolt-on can click well with what you’ve already got. 

Are there specific areas of synergies that you would contrast with other areas when you are looking at a particular bolt-on deal?

It all comes down to what you are buying. If you are buying a product, you want to make sure you have the product domain experts to make the technology coming with it. If it’s a bolt-on acquisition, you should be leveraging some operational synergies in the other pieces of the organization, such as the sales or back office.

With a bolt-on acquisition, it is always wise to look at whether they have a unique set of customers that you maybe don’t have in case there is a good opportunity for cross-selling the existing products.

There is always going to be a certain overlap and in cases when there are duplications in terms of personnel, that’s where you can get some cost savings or synergies. 

Do you have a specific approach going about adding up the synergies when you are doing your valuation on a target?

There are always two types of synergies: the topline revenue synergies and the operational synergies. First, you always start standalone, and then you have to justify the valuation and the price for it. When it comes to operational synergies, there is a need to stage it properly.

You need to layer in these synergies and you need to do it right from a business standpoint and from personnel and moral standpoint. You need to be very thoughtful in terms of how you deliver the message and how you execute that. You not just acquiring the product, but you are acquiring the people as well. 

So you are thinking about integration very early on?

Yes. In my experience, when you start mapping out the business case for the acquisition, in parallel to that, you also start mapping out what the integration plan is going to look like from a higher level.  If you think about it, acquisitions kind of make or break in the analysis phase and in the integration phase. 

Are there certain things you do, such as specific diligence on the team, to get an idea in terms of how they would come and play post-transaction, in terms of what the reaction would be regarding culture fit?

That’s a large component of the HR. You can look at it as a one big interview process, from the first time you meet the company, through the follow-up visits and due diligence. You want to see how would key personnel fit into your organization. Sometimes, you get a great company and a great product, but you have a difference in cultures. In these cases, you either walk away from the deal or possibly change management, because you can’t force two cultures together.

Do you have examples of that not working out either during the deal or after?  

This happens mainly on the smaller deals, which are usually founder-led and there hasn’t been a lot of succession planning and maybe you don’t have that leadership that you can come up.

With one particular transaction that I worked on, as we got into the ongoing negotiations we would face temper tantrums from the founder and a CEO on daily basics. That’s when we realized they are not going to fit into our culture. We found it to be detrimental to the transaction and walked away.

When you are looking at getting some of those busines professionals, when do you know when to bring external people in?

From my experience, with every deal worth more than five million dollars you need to bring in someone from the big four to do the quality of earnings. Typically you would have one partner.

If you find the right partner from a legal, financial, and tax perspective, they kind of get immersed in your process, you know who they are, how they work, and then they start having that repeatable sway, that consistency of approach you need going forward.

Have you ever done any advance due diligence in a particular case?

Once we were in an auction process and it was going to be a sizable transaction. We hadn’t won the deal yet, but we had just put in the letter of intent and we were one of four companies still in the process.

We spent some considerable time and dollars to really understand the market segmentation, the market spend and the forward spend to help us forge our forecast and the market opportunity from a bottoms-up approach. In the end, we didn’t win, but it was money well spent.

Going back to bolt-on transactions. When you are valuing, looking at the synergies and coming up with the investment thesis, how do you actually take that into the negotiating table?

When negotiating, you really need to have a delicate balance and triangulate between what are the comparable publically trade companies out there, the comparable transactions that you see, and your own DCF.

Sometimes with more entrepreneurial and emerging growth companies, you look to do earn-outs because you are not going to agree where they are today and where they are going to be in five years. 

Do you have any general rules or strategies that you follow when negotiating?

It’s important to be transparent and say: what we are getting to you is what we find has market value. You want to have your base case, but you always want to know what’s your upside case and downside case. I always try to hedge a little bit between downside and what we think our base case is and then go with those numbers.

Then, depending on what you find out and if you are proactive on that, it typically works in your favor. But, if it’s an auction process, you have to be much tighter in terms of valuation, because it’s not going to be based upon the price, but a number of other factors. 

When you are looking at a deal going closer to the next stage, what are the top things you look for during the diligence?

You really need to look at the critical X factors. From my experience, you can distill from due diligence lists ten major questions or data gathering attributes that you are looking for. As you start going through that critical ten across finance, operations, sales, customer service, technology, HR, et cetera, you can get a good feeling of whether or not you are hitting the major points. 

On larger deals, the first thing you want to do is go through software technology to confirm that they actually own the IP and whether they have all the assignments and the inventions. The second one would be quality of earnings.

If you see any type of materiality gaps, you have to go back and start revising the price right away. You need to know that the product is stable and it’s what you think you are buying. 

What are some other reasons you bailed out of deals, besides poor culture fit and IP issues?

What you’ll find sometimes, as you are going through diligence, the seller may start having stars in their eyes where they overestimate themselves and want to go back and retrade.

The other reason to pull out is when you have agreed on everything else, but when you get down to the purchase agreement there are reps and warranties that they may not be willing to make. This is usually not an issue, but if you made a fraudulent claim we can go after you for that. 

Are there insurance policies to cover that specifically?

Although I haven’t purchased any of them, there are some insurance policies out there. They are a little more prevalent, they are pricey. These are some sort of diligence insurance policies. 

We talked about culture, the IP, reps and warranties, and valuation. Is there anything more unique that pops up during diligence?

There are situations where you go into thinking that they own the application, and it turns out that they don’t and they knew it. In one scenario we were very close to closing, only to find out in diligence that they lost a customer that represents 25 percent of their business and didn’t tell us it. We ended up walking away from the deal.

Overall, if you find a company that is generally a keeper and is willing to work collaboratively, you always try to find ways to mitigate issues unless these are real deal-breakers.

Paul, what kind of post-closing surprises have you seen?

Earlier in my career, we had one sizable transaction, where after the transaction we found out that the company had manipulated its financial system. That was the only time we saw anything from a fraudulent perspective. 

I had a situation in a transaction that we did in Brazil, which was a great transaction, but within the first hundred days, there was a situation where I thought that the distribution had X number of salespeople and it was considerably less than what we had and this was going directly into our sales forecast.

The good news is, we found a way to accelerate that, and then we looked to expand the internal salesforce and ended up surpassing the first year’s numbers. 

I was just reading recently about how much firms typically spend on PMI. How do you go about budgeting that?

A lot of times you may have dedicated PMI people. What we ended up doing is that we would actually find someone within the business and find a business owner that we would bring along and get incorporated in terms of due diligence to then make that person the integration leader going forward.

If you re doing enough transactions, you should have a dedicated PMI person. If you are not going to be a serial acquirer, it’s important to get someone from the business that understands the business well and put them in charge of marshaling that plan going forward. 

How early would you bring that person in the deal?

You identify them about the time that you are getting the approval from your executive committee or your board to do the LOI. You start bringing them right before due diligence.

It’s critical that they understand the business that you are acquiring and all the various pieces of the business as they come together in due diligence, so they are well aware of all elements from day one.

Regarding the deal in Brazil you previously mentioned, I know that there has to be some interesting nuances that go with doing international transactions and I am curious to hear a little bit about your experience with that. 

We spent almost two years doing market research in  Brazil. We really wanted to understand the competitive landscape, the various market, the market sizing, and who the different players are. There are so many challenges doing a cross-border deal, particularly when you have different languages. There is the culture piece, the language piece and then, you have to understand all the various country-specific rules around tax and the employment components. 

Having really strong partners on the diligence side, both financial, tax, and legal were critical for us, as well as marrying up the business and the commercial side. For cross-border deals, the diligence typically does take longer and there is a lot more complexity in terms of what you are learning because you are not doing just diligence on the company, but the market as well.

There is always considerably more risk, which is why it is important to have the right market intelligence and market research behind you and you also need a much more robust integration plan.

What’s the craziest thing you’ve seen?

The craziest was probably when we had a fraud I mentioned earlier, where a person, quite a marquee name, had put in the false information into the ledger system. The magnitude of the fraud was about three or four million dollars worth of revenue, which was about 15 percent of the deal.

Looking at your past experience, what advice you’d give to a young corp dev professional? What would be some of the biggest lessons you’ve learned?

The biggest advice would be to really understand the business. It’s not a numbers game. You want to make sure that you are buying the best assets or opportunities out there that are really going to complement and build your portfolio for the next 20 or 30 years.

The key is to make sure you understand the market, the strategy, all the various players in there, and make sure you meet the various players, so you know that industry inside and out. You want to make sure you are going after top companies instead of company number 20 just because they are available.

If you have a proper framework and you follow it, you are in good shape. 

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