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Building a Corporate Development Function From Scratch

Show Notes Of Podcast

Show notes:

0:00 Introduction

0:55 Russ’s background

2:42 Best practices learned at SAP

5:49 How Russ applied best practices at ANSYS

11:35 Breaking down important conversations

13:10 Staying top of mind

15:46 Building out the transaction team

24:52 SAP war story

26:54 The ideal profile for M&A team members

33:16 What the approval process should look like

39:24 What steps develop a formal M&A process

49:06 The challenge of building on post-mortem knowledge

51:24 How to get new team members up to speed on a deal

59:38 Measuring the success of a post-merger integration

1:10: 30 The craziest thing Russ has seen in M&A

1:13:27 Closing remarks and end credits

 “M&A is not an everyday type function in terms of business operations. It’s more important than filling out expense reports… No disrespect to anyone who handles that as part of their day job. But I find people around the company want to be part of it, so the trick is really managing them and their involvement - Especially if you’re working with people who may not have a lot of deal experience.”

Guiding principles to apply to your corporate development function

On this episode, Kison Patel speaks with Russ Hartz, VP of Corporate Development at ANSYS, Inc. and former VP of Corporate Development at SAP. He’s an experienced Corporate Development professional with specific expertise in M&A and investments and post-merger integration. His role at ANSYS involves M&A strategy and deal sourcing, as well as managing transaction execution.

Together, Kison and Russ discuss best practices he’s learned at SAP, how he was able to bring those best practices over to ANSYS, guiding principles he focuses on during a transaction, and how to begin building an integration process at a company that doesn’t have one. Russ also discusses how deal strategy affects company alignment and how he measures the success of a post-merger integration.

“You have to understand the business deal, what’s most important to the client from the business perspective, and you need to understand numbers - the target’s financial statements and the dynamics that play in the target’s financials.”
 “M&A is not an everyday type function in terms of business operations. It’s more important than filling out expense reports… No disrespect to anyone who handles that as part of their day job. But I find people around the company want to be part of it, so the trick is really managing them and their involvement - Especially if you’re working with people who may not have a lot of deal experience.”

Guiding principles to apply to your corporate development function

On this episode, Kison Patel speaks with Russ Hartz, VP of Corporate Development at ANSYS, Inc. and former VP of Corporate Development at SAP. He’s an experienced Corporate Development professional with specific expertise in M&A and investments and post-merger integration. His role at ANSYS involves M&A strategy and deal sourcing, as well as managing transaction execution.

Together, Kison and Russ discuss best practices he’s learned at SAP, how he was able to bring those best practices over to ANSYS, guiding principles he focuses on during a transaction, and how to begin building an integration process at a company that doesn’t have one. Russ also discusses how deal strategy affects company alignment and how he measures the success of a post-merger integration.

“You have to understand the business deal, what’s most important to the client from the business perspective, and you need to understand numbers - the target’s financial statements and the dynamics that play in the target’s financials.”

Show notes:

0:00 Introduction

0:55 Russ’s background

2:42 Best practices learned at SAP

5:49 How Russ applied best practices at ANSYS

11:35 Breaking down important conversations

13:10 Staying top of mind

15:46 Building out the transaction team

24:52 SAP war story

26:54 The ideal profile for M&A team members

33:16 What the approval process should look like

39:24 What steps develop a formal M&A process

49:06 The challenge of building on post-mortem knowledge

51:24 How to get new team members up to speed on a deal

59:38 Measuring the success of a post-merger integration

1:10: 30 The craziest thing Russ has seen in M&A

1:13:27 Closing remarks and end credits

Let’s kick things off with a brief explanation of your role at ANSYS.

I can boil it down to two essential functions. The first is M&A strategy and deal sourcing. This requires me to work closely with business leaders within the organization to map out an M&A strategy that is aligned with our overall corporate strategy. I also source deals that support that strategy, identify and connect with potential target companies that may be in line with our overall M&A strategy. 

The other core function is managing the deal execution process. This includes all aspects of the deal from start to finish. Specifically, it is negotiating high-level terms of the deal, managing the due diligence process, coordinating all of the internal and external subject matter experts, evaluating due diligence results, their implications, and negotiating the final terms of the transaction.

Can you tell me a little bit about some of the best practices you learned at SAP?

When I first joined the SAP I was a part of a small team of founding members of the corporate development function at SAP and we knew that we could learn a lot by speaking with external M&A professionals, just given the volume and variety of deals they are constantly working on. We were pretty diligent about meeting routinely with service providers like banks, law firms, accounting firms to discuss major aspects of corporate development, deal execution, and M&A strategy.

We were trying to get their opinions on best practices, as well as get a sense of what their other clients were doing to manage these functions. This gave us a comprehensive set of best practices and that is how we did it. You need to make sure that you mold and customize those practices to fit the specific culture and dynamics of the company you are at. There is no one size fits all, but you can figure out common themes.

How did you bring those practices over to ANSYS?

We’ve instituted a lot of the same best practices. There is a willingness amongst everyone who touches M&A in ANSYS to ensure that our practices and our processes related to M&A are best in class. The ANSYS isn’t new to acquisitions, but the corp dev function was not well formalized when I joined and I think there was a recognition about that. M&A is an important part of the company’s growth strategy, so we had support for making sure that we were doing things according to best practices.

What would you say are the top three priorities when establishing a corporate development practice from scratch?

There are three priorities, but it really comes down to people and processes. The first priority is to bring deals in-house to have a deal practice. First, establish an internal and external network of people who are going to be critical in carrying out functions. 

Once you get to the point of actually doing transactions, you also need a strong bench of advisors such as investment banks, accounting firms, and law firms.

The second priority is identifying specific individuals in your company from each of the major functional areas across the organization whose job will and should be to focus on strategic transactions. These are the team members that will have to focus on the transaction, due diligence, and the evaluation of a target company and help you develop an integration plan that affects their functional area. 

Lastly, the third priority, on the process front, you need to develop repeatable processes and templates for each stage of the transaction lifecycle and they should be developed in coordination with the transition team members and stakeholders internally. They should be tailored to your company size, business model, regulatory environment, culture, etc. You also need to acknowledge that there is this element of continuous improvement. 

When we look at the internal people, what’s that conversation like? How do you outline that conversation to frame it in the right way and get them thinking about what you’re trying to get out of them?

Everything starts with the question: How can I help you achieve your business goals through M&A or other strategic transactions?

This would apply to partnerships, making investments, and strategic investments that form a tighter bond with those companies. It is about getting into a dialogue about what their priorities are, what their history has been in either meeting those priorities or where they’ve fallen short, and then explaining to them how I can help as a corporate development leader, given their perspective as the backdrop. 

How do you stay in touch with those you have at the top of your mind?

A lot of it is informal and that's why we talk about building the network. Some of it is just striking up personal relationships with these folks and working on those relationships routinely. When it comes to the business unit leads and business units that you know, given your corporate strategy, are going to be potentially ripe for deals, setting up a regular cadence with those individuals matters. I typically set up a cadence of meetings with business leaders, once a quarter or once every six months. 

You see more deals from them than your bankers?

Absolutely. There is a lot of volume that we see from bankers and a lot of opportunities that come from bankers, but they can’t know the inner workings of a company and they can’t know what is the highest strategic priority in a  way a senior business leader inside the company can know. 

When we look at building up a transaction team and pulling those people in, how do you break down that conversation? 

There is receptivity to it because M&A is attractive, it’s secretive, it’s not an everyday type of function, and it’s important. People want to be part of it. The trick is managing them and their involvement. The issues that come up in the context of diligence and negotiations are so broad and deep, and a corporate professional who typically has the role of leading the overall deal effort can’t know everything there is to know about those issues.

They have to work extremely closely with the internal experts covering all of the major functional areas to be able to effectively deal with all the issues that come up. This is why there needs to be a team-like structure around M&A transactions. You need to set up a model, where, in the context of an M&A you are all functioning as one cohesive team. 

Tell me about your people requirements or what skills and experience do you look for?

I believe that finding someone with prior strategic transaction experience, ideally outside of the corporate setting, is key. Working at investment banks, law firms, accounting firms, VCs, private equity firms gives people a very broad experience with the types of issues and the dynamics that come up across many different types of deals.

When building up the broader team, there are two groups I refer to. One is the core M&A team and these are folks from the sponsoring business unit, your sales organization, legal, finance, HR, tax, and IT. Those are the functions that are most deeply involved throughout the entire deal process. The second is the extended M&A team. Their role in the deal relates to a narrower area and doesn't have that much impact on the material risk of a deal.

When you are looking at those folks, what sticks out? Are you defaulting who the functional headers are or is there something beyond that you are looking for?

I would start with the functional lead. I meet with the leaders first, explain the dynamic and ask who from their team, based on past experience or seniority, is best suited to be part of the M&A function. Over time, and as you become more of a serial acquirer, which is usually the intent of setting up a corp dev function in the first place, my best practice is to dedicate some resources just to M&A in their function.  

How having an M&A background benefited you when transitioning to a corp dev function? What would be the ideal profile for the function? 

You do have to have a very broad understanding of every aspect of a deal. You need to understand the legal risks, regulatory risks associated with the target company, the legal Ts, and Cs in the documentation of a deal. But, in order to do your job effectively, you also have to understand the business deal and what’s most important to the client from a business perspective.

You need to understand the numbers, target’s financial statements, the dynamics at play in the target’s financials, and the financial plan that the acquirer has going forward. You need to understand the go-forward business model and how the combined company is going to operate. I think it’s that broad perspective that makes M&A attorneys well suited for the role of corporate development.

It seems to me that when you stand up a corp dev function many gravitate towards hiring a banker almost by default. I noticed there is this lack of understanding of the integration process and how it works. 

The most effective bankers, the bankers I have been the most impressed with are the ones that have some business or operational experience prior to entering the banking world. I think that addresses the point you are raising about them not understanding the integration process. If they’ve come from business themselves, if they ever had been in charge of running a business they have a much better handle on that. 

Who should the corp dev function report to?

Many times, corp dev functions report into CFOs at many companies. I think this structure can work well if your CFO is very strategic-minded, business-focused, and has some experience in doing transactions, evaluating transactions, and integrating acquired companies. But, I personally think the best model is having the corp dev function report into the CEO. Strategic transactions are so fundamentally tied to a company’s overall corporate strategy and growth objectives. The person who is most responsible for driving the corporate overall strategy is the CEO. Sometimes the chosen model depends on your company and how big it is, but there has to be some connection to the CEO and frequent interaction with the CEO.

What do you think the overall approval process should look like?

What I think is the best practice is having a two-stage approval process for M&A. That’s at the LOI stage or term sheet stage when you are deciding whether or not you are going to spend money on external advisers and a lot of internal resources, time, and effort on detailed due diligence with this target company and what's the headline price of doing this deal. Even though the term sheet is non-binding, you need approval at that stage. That is when you set materiality thresholds where different levels of approval are required.

The second approval comes at the final stage. You have done your detailed due diligence, you’ve put together a high-level integration plan, learned everything there is to learn from a materiality perspective about the company, you’ve got all your detailed transaction terms negotiated. At that point, you should report on and give an overview of all those things to the set of approvers at that stage to educate them on everything you’ve learned. What those approvals should look like in terms of who gives it depends on the size of the transaction. Documenting thresholds is important as that informs what the presentation looks like. 

What’s the difference between those two presentations?

The board-level one is probably on a much higher level than the internal one, because internally only you are talking to C-level executives who ultimately have responsibility for managing the day-to-day aspects of the business and making sure that it is successful. It is higher-level business points are the ones you focus on for the board presentation. 

What are the steps to develop a formal M&A process?

The very first step is to do homework on your own company before you start putting formal M&A process down on paper. You need to have a good handle on things like company culture, who the senior leaders within the organization are that are going to play major roles in deals, what are the existing policies, processes, and constraints that already exist in your company that is going to shape or at least inform your M&A processes. 

Then you can start defining the processes for each major stage of the transaction lifecycle. You need to start sketching out processes for all of those steps or phases of the life cycle, from sourcing and early valuation to the final deal approval and integration. Once you define your processes, you need to start socializing them with the internal stakeholders before new deal opportunities actually arise.

The last step that relates to processes is continuing to refine and improve your processes as you are applying them in practice. You’ll be identifying gaps, flaws and you should be documenting them and doing post-mortems after the deal is done with your M&A transaction team members. 

Can you distinguish between a value of templating things and enabling your team to be collaborative and pick up the other side of it? 

Each target is going to have a lot of uniqueness about it, so applying your standard checklist is not going to work. The goal of setting up well-defined processes and templates is that you want to be as efficient and nimble as possible throughout the entire process. The processes and templates create a framework that is generally applicable to every deal, but there is no “one size fits all”, so you need to remain flexible. 

I like that you brought up post-mortem lessons. How do you actually get people to transfer that knowledge on a continuous basis so that there is some actual value delivered out of it?

As the transaction team expands and gets larger they start working more in silos. When the team is small, the accountability, the follow-up is very organic and happens naturally. When you do the post-mortem and identify things that can be improved your next step is to go to your processes and templates and make the change to address that issue, go back to the team and communicate that. 

As you do M&A deals, how do you introduce people with what their role is?

You need to explain, both internally and externally what you know about deals.

  • What do you think your role is in M&A and the integration process?
  • What has and what hasn’t worked well in the past if you have done M&A before?
  • How can we build the process you think works for your function?

People may not be thinking about co-dependency with another function or another aspect of the business, so just educating them on that helps bring them on board with what you are trying to achieve and why you are setting processes and practices the way you are.

What have you done that worked really well to enhance communication?

You always have your cadence of calls that you should be setting up in the context of a deal, and that's both on your side of the table as well as set times with the other side. Encouraging ad hoc communication to me is a lot about personal approach and being approachable. Part of it is just establishing the atmosphere of constant communication and welcoming that.

How do you measure the success of a post-merger integration?

I think any serial acquirer will over time develop a long list. I believe the best way to assess the success of integration is monitoring to categories of metrics. One is the financial targets or objectives for the transaction, for example, revenue bookings, operating margins, expenses, and budget. The second category is employee health. That is mainly retention, but also employee satisfaction. If you are getting those things right it’s a success. All other more detailed to-do items or goals in an integration come back to those two areas. 

What are some of the guiding principles to consider throughout the deal?

The first one is to stay focused on the big picture. How does your deal serve the overall corporate strategy and objectives? What’s the primary rationale for acquiring this particular company? This is what you need to keep in mind throughout the entire deal process.

Another guiding principle relates to deal negotiation. Trying to find a middle ground and compromises on issues everywhere you can, particularly the issues that are of the highest importance to the other side, that’s what you should strive to do. Most of the time, people on the other side of the table are going to be on your team when the deal is completed. If throughout negotiations they don’t feel like they have been treated fairly in the deal process, it is going to affect the morale, motivation, and ultimately their retention post-deal. 

The last major guiding principle relates to the integration piece. The idea is to make sure that you are not changing aspects of the target’s business or making changes too abruptly that is going to significantly affect what ultimately made the company that you are trying to acquire success in the first place. Don’t mess up the company’s secret sauce, which is probably the reason why you looked to acquire them in the first place.  

How does the deal strategy affect company alignment?

To me, the deal strategy has to be an extension of the overall company strategy. When you are developing your deal strategy, it’s essential to understand both your general M&A strategy and your strategy for a specific deal. M&A is just a tool for achieving that border strategy. If your deal strategy is well aligned with your corporate strategy, then alignment between your deal strategy and the other aspects of your business and the groups within your company should be easier to take care. 

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

One happened in negotiation and this goes back to my days as an M&A attorney representing a retail chain. The seller insisted at the end of negotiations, as a make or break deal point, for a 50 percent discount for all of his family members forever. This was a multimillion-dollar deal and it was shocking to me that someone would walk away from tens of millions of dollars over a 50 percent discount for retail shopping. 

The other one was a fairly large deal where we were only two days from signing a definitive agreement and the competitor filed a big-ticket IP lawsuit against the target company. It came out of the left field. The claim was probably questionable, but just given the gravity of the potential risk the fact that the lawsuit was filed killed the deal.  

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 “M&A is not an everyday type function in terms of business operations. It’s more important than filling out expense reports… No disrespect to anyone who handles that as part of their day job. But I find people around the company want to be part of it, so the trick is really managing them and their involvement - Especially if you’re working with people who may not have a lot of deal experience.”

Guiding principles to apply to your corporate development function

On this episode, Kison Patel speaks with Russ Hartz, VP of Corporate Development at ANSYS, Inc. and former VP of Corporate Development at SAP. He’s an experienced Corporate Development professional with specific expertise in M&A and investments and post-merger integration. His role at ANSYS involves M&A strategy and deal sourcing, as well as managing transaction execution.

Together, Kison and Russ discuss best practices he’s learned at SAP, how he was able to bring those best practices over to ANSYS, guiding principles he focuses on during a transaction, and how to begin building an integration process at a company that doesn’t have one. Russ also discusses how deal strategy affects company alignment and how he measures the success of a post-merger integration.

“You have to understand the business deal, what’s most important to the client from the business perspective, and you need to understand numbers - the target’s financial statements and the dynamics that play in the target’s financials.”

Show notes:

0:00 Introduction

0:55 Russ’s background

2:42 Best practices learned at SAP

5:49 How Russ applied best practices at ANSYS

11:35 Breaking down important conversations

13:10 Staying top of mind

15:46 Building out the transaction team

24:52 SAP war story

26:54 The ideal profile for M&A team members

33:16 What the approval process should look like

39:24 What steps develop a formal M&A process

49:06 The challenge of building on post-mortem knowledge

51:24 How to get new team members up to speed on a deal

59:38 Measuring the success of a post-merger integration

1:10: 30 The craziest thing Russ has seen in M&A

1:13:27 Closing remarks and end credits

Let’s kick things off with a brief explanation of your role at ANSYS.

I can boil it down to two essential functions. The first is M&A strategy and deal sourcing. This requires me to work closely with business leaders within the organization to map out an M&A strategy that is aligned with our overall corporate strategy. I also source deals that support that strategy, identify and connect with potential target companies that may be in line with our overall M&A strategy. 

The other core function is managing the deal execution process. This includes all aspects of the deal from start to finish. Specifically, it is negotiating high-level terms of the deal, managing the due diligence process, coordinating all of the internal and external subject matter experts, evaluating due diligence results, their implications, and negotiating the final terms of the transaction.

Can you tell me a little bit about some of the best practices you learned at SAP?

When I first joined the SAP I was a part of a small team of founding members of the corporate development function at SAP and we knew that we could learn a lot by speaking with external M&A professionals, just given the volume and variety of deals they are constantly working on. We were pretty diligent about meeting routinely with service providers like banks, law firms, accounting firms to discuss major aspects of corporate development, deal execution, and M&A strategy.

We were trying to get their opinions on best practices, as well as get a sense of what their other clients were doing to manage these functions. This gave us a comprehensive set of best practices and that is how we did it. You need to make sure that you mold and customize those practices to fit the specific culture and dynamics of the company you are at. There is no one size fits all, but you can figure out common themes.

How did you bring those practices over to ANSYS?

We’ve instituted a lot of the same best practices. There is a willingness amongst everyone who touches M&A in ANSYS to ensure that our practices and our processes related to M&A are best in class. The ANSYS isn’t new to acquisitions, but the corp dev function was not well formalized when I joined and I think there was a recognition about that. M&A is an important part of the company’s growth strategy, so we had support for making sure that we were doing things according to best practices.

What would you say are the top three priorities when establishing a corporate development practice from scratch?

There are three priorities, but it really comes down to people and processes. The first priority is to bring deals in-house to have a deal practice. First, establish an internal and external network of people who are going to be critical in carrying out functions. 

Once you get to the point of actually doing transactions, you also need a strong bench of advisors such as investment banks, accounting firms, and law firms.

The second priority is identifying specific individuals in your company from each of the major functional areas across the organization whose job will and should be to focus on strategic transactions. These are the team members that will have to focus on the transaction, due diligence, and the evaluation of a target company and help you develop an integration plan that affects their functional area. 

Lastly, the third priority, on the process front, you need to develop repeatable processes and templates for each stage of the transaction lifecycle and they should be developed in coordination with the transition team members and stakeholders internally. They should be tailored to your company size, business model, regulatory environment, culture, etc. You also need to acknowledge that there is this element of continuous improvement. 

When we look at the internal people, what’s that conversation like? How do you outline that conversation to frame it in the right way and get them thinking about what you’re trying to get out of them?

Everything starts with the question: How can I help you achieve your business goals through M&A or other strategic transactions?

This would apply to partnerships, making investments, and strategic investments that form a tighter bond with those companies. It is about getting into a dialogue about what their priorities are, what their history has been in either meeting those priorities or where they’ve fallen short, and then explaining to them how I can help as a corporate development leader, given their perspective as the backdrop. 

How do you stay in touch with those you have at the top of your mind?

A lot of it is informal and that's why we talk about building the network. Some of it is just striking up personal relationships with these folks and working on those relationships routinely. When it comes to the business unit leads and business units that you know, given your corporate strategy, are going to be potentially ripe for deals, setting up a regular cadence with those individuals matters. I typically set up a cadence of meetings with business leaders, once a quarter or once every six months. 

You see more deals from them than your bankers?

Absolutely. There is a lot of volume that we see from bankers and a lot of opportunities that come from bankers, but they can’t know the inner workings of a company and they can’t know what is the highest strategic priority in a  way a senior business leader inside the company can know. 

When we look at building up a transaction team and pulling those people in, how do you break down that conversation? 

There is receptivity to it because M&A is attractive, it’s secretive, it’s not an everyday type of function, and it’s important. People want to be part of it. The trick is managing them and their involvement. The issues that come up in the context of diligence and negotiations are so broad and deep, and a corporate professional who typically has the role of leading the overall deal effort can’t know everything there is to know about those issues.

They have to work extremely closely with the internal experts covering all of the major functional areas to be able to effectively deal with all the issues that come up. This is why there needs to be a team-like structure around M&A transactions. You need to set up a model, where, in the context of an M&A you are all functioning as one cohesive team. 

Tell me about your people requirements or what skills and experience do you look for?

I believe that finding someone with prior strategic transaction experience, ideally outside of the corporate setting, is key. Working at investment banks, law firms, accounting firms, VCs, private equity firms gives people a very broad experience with the types of issues and the dynamics that come up across many different types of deals.

When building up the broader team, there are two groups I refer to. One is the core M&A team and these are folks from the sponsoring business unit, your sales organization, legal, finance, HR, tax, and IT. Those are the functions that are most deeply involved throughout the entire deal process. The second is the extended M&A team. Their role in the deal relates to a narrower area and doesn't have that much impact on the material risk of a deal.

When you are looking at those folks, what sticks out? Are you defaulting who the functional headers are or is there something beyond that you are looking for?

I would start with the functional lead. I meet with the leaders first, explain the dynamic and ask who from their team, based on past experience or seniority, is best suited to be part of the M&A function. Over time, and as you become more of a serial acquirer, which is usually the intent of setting up a corp dev function in the first place, my best practice is to dedicate some resources just to M&A in their function.  

How having an M&A background benefited you when transitioning to a corp dev function? What would be the ideal profile for the function? 

You do have to have a very broad understanding of every aspect of a deal. You need to understand the legal risks, regulatory risks associated with the target company, the legal Ts, and Cs in the documentation of a deal. But, in order to do your job effectively, you also have to understand the business deal and what’s most important to the client from a business perspective.

You need to understand the numbers, target’s financial statements, the dynamics at play in the target’s financials, and the financial plan that the acquirer has going forward. You need to understand the go-forward business model and how the combined company is going to operate. I think it’s that broad perspective that makes M&A attorneys well suited for the role of corporate development.

It seems to me that when you stand up a corp dev function many gravitate towards hiring a banker almost by default. I noticed there is this lack of understanding of the integration process and how it works. 

The most effective bankers, the bankers I have been the most impressed with are the ones that have some business or operational experience prior to entering the banking world. I think that addresses the point you are raising about them not understanding the integration process. If they’ve come from business themselves, if they ever had been in charge of running a business they have a much better handle on that. 

Who should the corp dev function report to?

Many times, corp dev functions report into CFOs at many companies. I think this structure can work well if your CFO is very strategic-minded, business-focused, and has some experience in doing transactions, evaluating transactions, and integrating acquired companies. But, I personally think the best model is having the corp dev function report into the CEO. Strategic transactions are so fundamentally tied to a company’s overall corporate strategy and growth objectives. The person who is most responsible for driving the corporate overall strategy is the CEO. Sometimes the chosen model depends on your company and how big it is, but there has to be some connection to the CEO and frequent interaction with the CEO.

What do you think the overall approval process should look like?

What I think is the best practice is having a two-stage approval process for M&A. That’s at the LOI stage or term sheet stage when you are deciding whether or not you are going to spend money on external advisers and a lot of internal resources, time, and effort on detailed due diligence with this target company and what's the headline price of doing this deal. Even though the term sheet is non-binding, you need approval at that stage. That is when you set materiality thresholds where different levels of approval are required.

The second approval comes at the final stage. You have done your detailed due diligence, you’ve put together a high-level integration plan, learned everything there is to learn from a materiality perspective about the company, you’ve got all your detailed transaction terms negotiated. At that point, you should report on and give an overview of all those things to the set of approvers at that stage to educate them on everything you’ve learned. What those approvals should look like in terms of who gives it depends on the size of the transaction. Documenting thresholds is important as that informs what the presentation looks like. 

What’s the difference between those two presentations?

The board-level one is probably on a much higher level than the internal one, because internally only you are talking to C-level executives who ultimately have responsibility for managing the day-to-day aspects of the business and making sure that it is successful. It is higher-level business points are the ones you focus on for the board presentation. 

What are the steps to develop a formal M&A process?

The very first step is to do homework on your own company before you start putting formal M&A process down on paper. You need to have a good handle on things like company culture, who the senior leaders within the organization are that are going to play major roles in deals, what are the existing policies, processes, and constraints that already exist in your company that is going to shape or at least inform your M&A processes. 

Then you can start defining the processes for each major stage of the transaction lifecycle. You need to start sketching out processes for all of those steps or phases of the life cycle, from sourcing and early valuation to the final deal approval and integration. Once you define your processes, you need to start socializing them with the internal stakeholders before new deal opportunities actually arise.

The last step that relates to processes is continuing to refine and improve your processes as you are applying them in practice. You’ll be identifying gaps, flaws and you should be documenting them and doing post-mortems after the deal is done with your M&A transaction team members. 

Can you distinguish between a value of templating things and enabling your team to be collaborative and pick up the other side of it? 

Each target is going to have a lot of uniqueness about it, so applying your standard checklist is not going to work. The goal of setting up well-defined processes and templates is that you want to be as efficient and nimble as possible throughout the entire process. The processes and templates create a framework that is generally applicable to every deal, but there is no “one size fits all”, so you need to remain flexible. 

I like that you brought up post-mortem lessons. How do you actually get people to transfer that knowledge on a continuous basis so that there is some actual value delivered out of it?

As the transaction team expands and gets larger they start working more in silos. When the team is small, the accountability, the follow-up is very organic and happens naturally. When you do the post-mortem and identify things that can be improved your next step is to go to your processes and templates and make the change to address that issue, go back to the team and communicate that. 

As you do M&A deals, how do you introduce people with what their role is?

You need to explain, both internally and externally what you know about deals.

  • What do you think your role is in M&A and the integration process?
  • What has and what hasn’t worked well in the past if you have done M&A before?
  • How can we build the process you think works for your function?

People may not be thinking about co-dependency with another function or another aspect of the business, so just educating them on that helps bring them on board with what you are trying to achieve and why you are setting processes and practices the way you are.

What have you done that worked really well to enhance communication?

You always have your cadence of calls that you should be setting up in the context of a deal, and that's both on your side of the table as well as set times with the other side. Encouraging ad hoc communication to me is a lot about personal approach and being approachable. Part of it is just establishing the atmosphere of constant communication and welcoming that.

How do you measure the success of a post-merger integration?

I think any serial acquirer will over time develop a long list. I believe the best way to assess the success of integration is monitoring to categories of metrics. One is the financial targets or objectives for the transaction, for example, revenue bookings, operating margins, expenses, and budget. The second category is employee health. That is mainly retention, but also employee satisfaction. If you are getting those things right it’s a success. All other more detailed to-do items or goals in an integration come back to those two areas. 

What are some of the guiding principles to consider throughout the deal?

The first one is to stay focused on the big picture. How does your deal serve the overall corporate strategy and objectives? What’s the primary rationale for acquiring this particular company? This is what you need to keep in mind throughout the entire deal process.

Another guiding principle relates to deal negotiation. Trying to find a middle ground and compromises on issues everywhere you can, particularly the issues that are of the highest importance to the other side, that’s what you should strive to do. Most of the time, people on the other side of the table are going to be on your team when the deal is completed. If throughout negotiations they don’t feel like they have been treated fairly in the deal process, it is going to affect the morale, motivation, and ultimately their retention post-deal. 

The last major guiding principle relates to the integration piece. The idea is to make sure that you are not changing aspects of the target’s business or making changes too abruptly that is going to significantly affect what ultimately made the company that you are trying to acquire success in the first place. Don’t mess up the company’s secret sauce, which is probably the reason why you looked to acquire them in the first place.  

How does the deal strategy affect company alignment?

To me, the deal strategy has to be an extension of the overall company strategy. When you are developing your deal strategy, it’s essential to understand both your general M&A strategy and your strategy for a specific deal. M&A is just a tool for achieving that border strategy. If your deal strategy is well aligned with your corporate strategy, then alignment between your deal strategy and the other aspects of your business and the groups within your company should be easier to take care. 

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

One happened in negotiation and this goes back to my days as an M&A attorney representing a retail chain. The seller insisted at the end of negotiations, as a make or break deal point, for a 50 percent discount for all of his family members forever. This was a multimillion-dollar deal and it was shocking to me that someone would walk away from tens of millions of dollars over a 50 percent discount for retail shopping. 

The other one was a fairly large deal where we were only two days from signing a definitive agreement and the competitor filed a big-ticket IP lawsuit against the target company. It came out of the left field. The claim was probably questionable, but just given the gravity of the potential risk the fact that the lawsuit was filed killed the deal.  

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