How to Succeed in M&A Integration and Measure Success

‍Text Version of the Interview

How does FP&A Help in M&A?

It’s the consistent thread of problem-solving, whether it's operational financial, or integration. What I did in financial planning and analysis really helped me in M&A integration because FP&A is one of the two only functions in a company that touches everything. 

• Top Line
• Bottom Line
• Function 
• Cost center
• Skew

M&A integration is very similar to that. We touch every function and we figure out:

• Do we integrate it? 
• Do we not integrate it? 
• Does it fit? 
• Does it not fit? 
• If it doesn't fit, do we want it to fit? 
• How do we make it fit? 
• Do we use a hammer? 
• Do we use duct tape? 

It's important to understand the numbers or the costs, but it’s more important to understand how those numbers are generated. And I use that approach a lot with my teams in due diligence. 

The “how” is the real keyword. You can ask all the due diligence questions you want, but the most important question is “how does that work?” That's where the real magic happens. And that's where you have to list them. 

The how and the why is more important than the what. 

Working Backward

The how really is the precursor to developing the end state and then working backward. So if you're thinking about it the right way, once we understand what the agreed-upon end state is that is really driving the value for the deal, then we start working through the gates coming back to the beginning.

SaaS subscription is a great example because everybody does it differently. There's no one size fits all. So how do you generate revenue? We sell subscription software. How do you set up that subscription? 

And you can keep double-clicking like on a Google search, until you get to the end or till you get to the level of depth that gives you enough to move forward, to start building your plan.

We've got a model that says generate this much revenue. So how do we get to that number? Show me the math that gets to that number. And then, what are the costs associated with getting to that number? 

So again, back to the FP&A. I look at everything through the P&L, and not everybody does that. 

When you're navigating, and you start to a point where you are one degree off from your desired state, over time, you become further and further away from your target. If you don't start with the end state and work backward, your navigation is going to be all wrong. 

Communicating the End State 

It takes some time to develop the confidence to do this because usually, that dialogue is with somebody pretty senior. Somebody like your CFO or the CEO or an SVP of a product line or a business unit. And oftentimes, they don’t care about the details. 

But because i’ve been doing this for a long time, it's a little easier for me to lean in and ask for more details and commitment. 

For instance, we're going to acquire a product line and they currently generate a certain amount of revenue, supported by a number of employees. They’re at $2 million a year in revenue and our valuation model says 5 million. 

So there's gotta be some sort of synergy to get you from two to five. And I need to know what are they thinking about. You gotta be able to press them on their assumptions because people love to spend the shareholders' money if it's a public company. 

I have yet to meet an executive that doesn't love to do M&A. But we have to really understand what we’re buying. I'll help you get your goals, but you gotta pave some of the road here.

Oftentimes, people are building models based on revenue numbers that doesn’t have a lot of data behind it. So someone else is solving for the valuation model, but I have to solve for the business results, that doesn’t sound right. 

That's why it's really important that integration gets an early purview and an insight into the deal, because I can ask those hard questions like where are all these numbers coming from. 

When Should Integration Be Involved?

It has evolved in the last few years. Today there is this partnership between corp dev and integration. Back at Microsoft, I learned the primary goal of the corporate development team. 

The reality is, their job is to acquire value, and it’s the integration team's job is to create value. And that's why I look for people on my team that have really varied backgrounds because the value can be ascribed in a bunch of different ways. It's not just a currency.

• Are the people happy?
• Is the technology quality good? 
• Did we get a good team writing code?
• If we're bringing over any of the back office people, are they going to be really additive to the business? 
• Are they going to succeed in a bigger company coming from a smaller company?

The hardest part is really the go-to-market side. Are they going to be able to do what we do the way we do it? Or we should have our eyes wide open because maybe they do it better than we do. 

Having this broad fabric matrix view of how the company works is really how you create value. 

It is also important that the team doing the diligence understands their own company. If you don't understand our side of it, then how do you know how to integrate the target company? How do you know where to plug their stuff into our stuff?

Understanding Own Company

A lot of it just comes with time. You just incur enough scars in certain areas and you learn and understand how this works.

Sometimes, you can also use presentations. We just had one by one of our VPs of IT that's actually been at VMware a long time. And he actually presented the product portfolio view from an IT perspective. 

It’s boring but it was informative. And there are also classes that can be taken around product and the overall company. 

How do you get involved from the Beginning?

I think it takes a certain type of personality to be brave enough to insert themselves as far left in the process as possible. I did it at Microsoft as a director level, in the middle from a hierarchal perspective.

I always show up at meetings that I wasn't invited to. I don’t care if they kick me out or disinvite me. If you want me to leave, I'll leave. But I think I need to be here and here's why. And that conversation early on is really important.

It's not about things that go in the deck. It's about the dialogue around the things that are going in the deck that are important. The pre-LOI conversation as to why the target company is really important. What problem does this company solve for us? 

And it gets back to what's really important - how do they do all those whats? What's their secret sauce? The earlier the integration gets involved, the better. It's just that simple.

There is this initial opportunity to solve a problem, which is what most acquisitions are.

• So we want more revenue
• We want more product 
• We want awesome code writers.
• They've got a great architect. 
• They got a great customer base. 

And an early integration view is all about how to create value out of those things. 

It’s not very different from building a house. From a blueprint standpoint, it looks amazing. But that’s not reality. The reality is, if you start double-clicking, you make it tangible, then you’d start to realize that this room doesn’t make sense, it needs to be moved to another location. 

I want it to be all hardwood, not carpet. I dont want a sliding door, I want french doors. Integration is like that. And then remember that there is a cost to every changes that you want to make.

Reverse Diligence

Not everybody does it. It depends on the size. Microsoft is a great example. Microsoft was the board that was just going to consume everybody. The target companies know they’re going to lose their brand and their mojo, but they’re going to be really rich. So they won’t pretty much care about that.

I also did a previous deal where the CEO is convinced that he is going to directly report to Steve Balmer. I told him that it’s never going to happen and he threatened to pull out of the deal if he didn’t report to Steve. So I talked him out of it. 

And that is also something that I want to talk about. The integration leads need to be trusted advisors on both sides of the equation. I work really hard to get the target company to trust me because I can help you make this deal really good for you. 

But I'm also Neutral. My job is very pure and simple. Do the right thing and make the right thing happen.  

I have not gotten to the point where I am forcing the target to ask questions of us. I've never been that proactive cause it's up to them. But I always tell them that this goes a lot better if they know more about us.

Because it can be a bad deal for the target just as much as it can be a bad deal for the acquirer.  

So I'm actually more prone to be really hyped on a deal when their CEO, their president, or senior execs are like how is this going to work? How are we going to fit into your business? Or even, the dumb question that is absolutely not dumb as like, why do you want to buy us? But that's a really hard question to answer.

What are you really looking to get from this target? That conversation should be bilateral. 

Measuring Integration Success

The easy answer is, if you think about the process early on, it should be written in really dry concrete. What the strategic rationale is, what the deal value drivers are, and then you have success metrics that are driven off the deal value drivers. That's pretty straightforward.

It's really understanding what the success metrics are and being able to drive to them based on the integration plan assuming the strategy stays consistent. 

Sometimes the strategy changes. There are things that can influence the strategy post-close. So we took a hard line and said if the strategy materially changes post-close, then the deal is right out of the gate because the initial validation and reason that you went to the board to ask permission to spend a bunch of money is fundamentally changed. 

So this is basically a new deal. If you think about the way the process works, It's effectively a new deal. It's a new project at a minimum. 

There are principles that you have to run as an integration team.

• Do you commit to running full integration to a specific timeframe of 9 to 12 months and not over 12 months? 
• Are you as the integration team, as responsible for the sales team hitting the revenue numbers as the sales team is?

I knew this great M&A integration guy, he was very adamant about, if the deal model is red, were red as an integration team. It means we haven't done our job. 

It was harsh because there are so many things not under our control, but we're accountable because we are part of the team. I learned a lot from that. 

So I think there are principles that indicate success that you drive on every deal. There are constant. And then there are the deal value drivers in the success metrics.

Examples

Deal Value Drivers 

1. Revenues
2. Employee attrition 
3. Product milestone releases
4. Employee health

Deal Success Metrics 

1. Revenue - Did you hit your first-quarter number and your second-quarter number? It's basic math.
2. Employee attrition - How many employees did you lose? You need to retain 100% of key employees. You have to retain 90% of the total population. What are you doing to retain these people? For how long do you retain them?
   
   And it’s not just always about throwing money at them. It’s about giving them an opportunity and great work experience that they didn’t have in their prior company. 
3. Product milestone - If you lose the key people that is developing or driving this product, your going to miuss out on a product deliverable as well. 

Integration Principles

First is trusted advisor. The integration lead needs to be a trusted advisor on both sides of the equation. Otherwise you have too many inbounds that can come in from too many directions.

In my experience, when things go south in a deal, it's usually the integration lead that gets shot. It's like the CFO in many companies who gets blamed when te business missed their numbers.

The next one would be integrity. One of the key principles in integration is driving integrity. Because people are gonna want to cut corners, they don't want to hear the truth. And while timing is everything, you need to tell the facts.

The facts are indisputable. Truth can be subjective. 

The other thing is stick to the plan, except when it doesn't work. They have to be intelligently flexible. They can’t stick to the plan if its leading them in a dark alley. You can’t just blindly follow a plan. 

Also, try to keep things really simple. If you don't start out simple, you're screwed. Things self-complicate, they just do. So if you start complicated, you'll never get there. 

So keep it simple for as long as possible.