M&A in a Corporate Development (Harvard's Teacher Advice)

"Pick a plan. Stick to it. If things start breaking, do your best to continue to take off the runway. As long as you haven't burnt out your engines you can still pull off and you fix the problems as you go along."

An M&A Science Podcast hosted by Kison Patel

On this episode

Business development consultant, Judah Karkowsky, shares his knowledge on cultural integration, preliminary due diligence surprises, international diligence, and data protection.

Previously, an investment banker at Credit Suisse, Karkowsky later moved into consulting in the education and technology industry. He currently leads strategic development for an educational publisher, including corporate development M&A and partnerships.

In this podcast, Karkowsky focuses on his recent work involving buy-side deals, diligence integration, and success management.

Judah’s Background

Karkowsky started his career at Credit Suisse First Boston, later Credit Suisse as an investment banker. Following his career at investment banking, he was a consultant in the education and technology industry, where the main focus was on empowering and enabling schools to take better advantage of what emerging technology had to offer.

Collaborating with companies that had a lot to offer in that area, he focused on introducing them to a complicated market of schools and government in order to help these companies raise money and sell themselves better.

As a result of these collaborations, Karkowsky has significant experience in that area and is currently leading strategic development, and this includes corporate development, mergers, and acquisitions, as well as large-scale partnerships. He worked on both buy-side and sell-side and is experienced in a wide range of roles, which all back up his expertise in M&A domain.

Buy-side Due Diligence Approach

The foundation of doing due diligence is trying to understand what business rationale is. The focus here is to go through all the salient points, the organizational structure, and the possibility of assimilation.

As the author highlights, it is crucial to find out where the interest in acquiring or merging truly lies, to begin with. It is important to analyze how could M&A possibly fail, after the close and double-check the organizational structure in order to accurately foresee what is the future regarding that M&A process.

The key question around which this idea focuses on is: How to make the decision is right and the deal doesn’t fall once the deal is made. This is when the due diligence process starts. To consolidate and be less long-winded, its important to establish that the purchase rationale isn’t focused only on one exciting part.

How to Access Culture Fit

Essentially, there are two parts of the cultural integration that are important to pay additional attention too. Not every company is motivated the same way in how they are approaching markets. However, what truly matters is how two disparate relationships can synthesize.

In the process, there is a necessity to know how both parties approach the end goal and that they do so in the same way. In other words, both parties need to same the same end goal and are motivated to get there.

Karkowsky mentioned that there needs to be extra caution in case two disparate organizations, have two healthy, but different cultures, in order to successfully integrate them and that needs to be taken in the count early on.

Things he highlights that need to be taken into a count are a leadership style, the values a company nourishes, their external and external orientation, as well as how they are perceived by the market and internally. What matters is that the novelty needs to be not only innovative but implementable.

For instance, in case there needs to be a complete reinvention of the entire organizational structure at a big cost, even if such reinvention is possible, that is perceived, or should be perceived as a red flag on the entire prospect of a safe and healthy integration. When there is no alignment on vision and mission, there needs to be a complete certainty that the vision of the buying company can be safely implemented.

Top Due Diligence Issues That Make You Question the Deal

The author mentions that there are a number of ways to managerially accounting for something, which, nevertheless, does not prevent the company from doing the necessary work fast and loose.

There are examples of an overview or consolidated financial statements he saw, where numbers simply do not match the reality, which calls for a deeper analysis of what is behind the numbers and the statistics of one company.

Additional Surprises That Pop Up During Due Diligence

When speaking about additional surprises, Karkowsky believes ownership issues can be critical, especially in cases where there are arguments about clear ownership and when there’s no clarity when it comes to stock structure, cap tables, and mass.

It is wise for the team to start with a little checklist, which is a base for understanding facts about technology, human resources, product, product managers and the PMO strategy. There needs to be one responsible individual from each of the affected organizational groups, as a business unit needs to be represented by someone who owns their budget.

If there is no one who understands the technology that the business unit owns, there can be no solid base for discussing granular aspects. Regarding ownership, unless the organization is publicly traded, ownership structure can sometimes be an issue that makes potential buyers walk away from the organization and give up merging with or acquiring them.

Another unpleasant surprise is finding out that something that seemed very promising on the outside is very problematic on the inside. This can be the spaghetti structure, that is hard to decode or absence or originators in the company, which are the people who have built the technology from the beginning. What this means is that there is no institutional knowledge in the company any longer, which pauses due diligence for a while.

In general, roadblocks can be found in all important areas, such as financial, structural, human resource and can concern clarity of legalities. It is also possible that debts, debt covenants, and warrants, as well as IP and litigation issues, are the final roadblocks as they are red flags that can’t be overlooked.

Parts of Due Diligence to Outsource

Karkowsky mentioned outsourcing a good part of the expertise around technology and IP security. There is an outside counsel, within which the subject matter experts are not M&A, but are focused on other pieces, such as tax, intellectual property and other facets.

The technology due diligence needs outsourcing as well as it can be quite time-sensitive because it requires a lot of expertise and needs to be done early on. Outsourcing is needed wherever it makes sense and it is advisable to work with individuals and entities who already have been part of a due diligence process before.

These entities know the company enough to do a well-rounded job of ensuring that the product is well built and integrable.

More often than not, with entities with international arms or subsidiaries that are either partially or wholly owned, there is a need to outsource to either advisory firms, law firms or big houses and collaborate with those who have practice areas in that country or locality.

International Deal Hurdles

Some of the bigger issues Karkowsky has come across are not around the stability of the employee base, or around products and its sales. Instead, these are around matters like leases, and being able to continue to exist.

In certain areas of the world, there are also issues around distributors, who frequently grease the wheels to ensure the sales and the distribution is even better than it would be in the absence of unethical practices. These are some of the issues that need to be ironed out in order for the process to take a positive course.

However, the positive element here is that almost every law firm that has a significant M&A practice is well aware of such issues and know how to uncover them on time.

As a result, the part that is on the buy-side can go and make adjustments, such as lower the price or make a strategic choice to walk away from the revenue. For this reason, it is not uncommon for the buy-side to self-select out of working in certain locations and set up new rules for the third party.

Approach to Integration and Strategies

The author aligns the integration thesis with the deal thesis. In cases when there is a larger scale to this, the integration process is started as early as due diligence.

Although this approach comes with a cost, it is time-effective and minimizes the possibility of wasting a good opportunity. There is a need to answer the scalar scope question in order to make these critical decisions early on. In most cases, the integration process should happen fast and be taken very seriously, but this approach varies based on the entity that is the buy-side is acquiring or integrating with.

It is wise to try and combine accounting systems, legal management, and shared services, but there are cases where neither the target or the firm should be forced to do technology integration. These are the cases where both parties are very driven, directed and have a clear division of labor.

Many times, they are not successful in the present but have a good roadmap and a good strategy, so when that is the case, it is the roadmap that should be the main focus of the integration. As the author mentions, the integration process can be paused if needed, but it always should be started earlier on.

Lastly, when it comes to employees and integration, it is setting a succinct set of reasonable targets that are achievable is a way of preventing risks of over-integration and losing key people due to unnecessary pressure.

How to Communicate with the Integrating Company

Because communication can be limited due to a great number of employees, it is wise to create a center of excellence around human resources and talent recognition.

The main reason behind this is that there are plenty of great producers that are underwhelming but deliver great products.

The center of excellence should help them manage people, articulate the process, the practices, and channel their capabilities in a better way.

Integration is a big change for everyone, so there needs to be someone who will steer the conversation from the very beginning.

Communication will slightly depend on both the organization and the structure of how the integration is supposed to happen, no matter if it’s a merger or an acquisition. Nine out of ten times it is the buying team goes into the communications before the deal gets announced.