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Managing a Multi-Vertical M&A Strategy

Kison Patel
CEO and Founder of DealRoom
Kison Patel
CEO and Founder of DealRoom
“Just because something happens you didn't expect, doesn't mean that your thesis was fundamentally flawed, it just means you have to course correct and adapt.”

How leaders at 3M assess deals

On this episode of M&A Science, Kison interviews Jerry Will, Vice President of Corporate Development at 3M, about managing a multi-vertical M&A strategy and what 3M's M&A strategy looks like. Together they discuss the governance of 3M, how the industry prioritizes leadership, and how the deal approval process works.

3M utilizes what they call a Red Team process as a way to prevent biases from overly optimistic leaders. In this exercise, the red team is a group of people assigned to convince the business leader not to do the deal. They are given an open platform with no restrictions on the arguments that they can make, and the data that they can access. 

Additionally, Kison and Jerry discuss how leadership takes ownership of deals and gauge whether the target company would be a fit for 3M. When it comes to prioritizing what industry to focus on, it all revolves around commitment to stakeholders and investors to deliver growth while looking at the fundamental strengths, strategic attractiveness, and the financial attractiveness of the market.

Finally, the interview closes out with a discussion on measuring integration success and best practices.

Show notes:

00.00 - Intro

1.42.96 - Background

4.36.63 - Managing a Multi Vertical Strategy

8.08.90 - Governance of 3M

11.24.13 - Industry Prioritization of Leadership 

13.24.24 - Final Approval on Deals

17.14.67 - Gauging Fit for 3M

22.26.11 - How Leaders at 3M Assess Deals

24.00.09 - Leadership Taking Ownership of the Deals

28.01.10 - How to Prevent Biases on Doing Deals

30.39.81 - In-depth Guide to Read Team Process

36.46.95 - 3M’s view on Earn-outs

39.09.66 - Managing Deals During COVID

40.09.13 - Organizing Diversified Teams into Categories

42.54.57 - Measuring Success on Integration

45.17.21 - Best Practices 

48.51.75 - Craziest Thing in M&A

Text version of interview

You started from a physics undergrad, and then you moved right into law, and then you ended up banking for 10 years and now in corporate development. I'm curious if any of those components from your background help you do M&A today. 

I think it does.  My dark secret probably is that I was a lawyer so that's my deepest move. Bankers maybe not quite so surprising. And I always say about practicing law. It was a good thing to have done. I enjoyed the firm that joined the practice. I'm glad it  broadened my responsibilities now, but it all helps me today. 

3M as I think about it, 3M is a certain level we have a lot of general except the firms. I mean, curious people that are interested in doing many different things. So we all have our different tool kits we bring, but if there's one defining aspect of 3M that defines the culture, I'd say it's curiosity.

People that want to do things that are new and do things that are different. So it helps to have a broad curiosity and willingness to try different things. And I think that's what I've done across my career. 

I enjoyed practicing law as I mentioned, I enjoyed the physics that I did as far as it went, but it's always onto the next thing. Yeah and today I try to bring all those to bear. We're a technology focused firm, so it's good to have a background technology. I'm very excited about technology and what's new and next. 

Well, let's jump into it. How does 3M manage a multi vertical strategy? 

Let's say it's a combination of bottoms up and top down approach. 

First and foremost, where there are many different markets, we understand the benefits and it needs to be close to customers or markets.  

So first and foremost, what we do is informed by being very close to customers. When we do innovation, it's customer inspired innovation. What are the real pain points we're trying to solve for customers? 

So we're in many different markets, many different core customer sets. So we start there. Everything has to be informed by our knowledge of those markets' domain expertise and customer needs. 

At that top level, you need some sort of cohesive, consistent view in terms of how you go about generating value for customers in all those different markets. We spend a lot of time thinking about that. 

What really unites everything that we do. What's consistent, how do we go about delivering value for customers? And we think of it in terms of our fundamental strengths. 

We leverage what are our fundamental strengths and how do we leverage those for customers? Our fundamental strengths are, its technology, manufacturing, global reach and brand.

They're fairly broad concepts, but then it's like, how do we apply it? But we have a core set of technologies that we leverage in different markets. 

One of the ways we get leverage on that is for manufacturing. We have a lot of manufacturing technology expertise. It's a great way to get leverage and return on your investment in innovation. 

And then we're looking for things that we can go big with to global reach, and we're finding every region around the world.  So we're looking to leverage that for our customers. And then our brand too. 

Our brand we're stewards of the brand. We're conscious that we're  leveraging the good work that our prior colleagues have done. And our customers respect that and we have a good relationship with the customer. 

And so our brand kind of embodies that, but it's getting close to the customers, having their trust so we can really generate the insights that help solve their problems. That's really how we think of portfolios. 

We think what businesses really fit with that business model. It has got to be based on technology where we can innovate. 

And then manufacturing is key for us. If we can leverage our manufacturing, it can generate a lot of value.

And then global reach and brand. Can it go globally? Is our brand relationship going to make the whole thing work better because smaller companies may not have that kind of relationship with the customers. 

Can we leverage that? So we think about that and it gets down to each market.

We have to have an opportunity management system looking at ins and outs on the portfolio side that's pretty comprehensive across 20 plus divisions, many profit centers within those divisions. 

Many markets from consumer to aerospace, to healthcare, to IT. We replicate that. So we start bottoms up in terms of the other business development people within every division that thinks strategically about their portfolio. 

We have folks in my group that are assigned to work with those divisions and business groups to help them think about deploying the tools that we have in those business units.

And then they will bubble up ideas. Like we think, we should rotate capital to this product set, this technology area. We'll aggregate all those up and then apply a top-down lens too. 

And we have a good process set up across the enterprise to  bring ideas up to the bottom and then have senior leadership have the option to engage with business leaders to think broadly about how we best leverage that business model. 

What sectors are going to generate the best value for customers, the best returns for our shareholders. 

You have to have a broad conceptual framework that applies in all these different markets. The same time you want to drive very market specific insights. That's what we do through our processes. 

Walk me through governance. What does that look like?

I would divide it into, we have different processes around  the alignment of prioritizing what the opportunities are, ins or outs, acquisitions, or divestitures. And then we have governance around projects, around deals. 

On the deals, and we've got a stage gate process, I think it's very similar to what a lot of our peers would run. 

We'll have that approval gate,  when you're signing a CDA, it's a good check-in point before you start to do a lot of work or use a lot of resources looking at a deal. 

We'll have another stage gate before we bid. And then this one before we sign, I think that's pretty typical. 

But before you get to that point, thinking about where do we even think about authorizing deployment of resources against the project?

It's more on the strategic side and we have a strategic portfolio management process. It starts with, as I mentioned,  that work at the business unit level. 

Thinking about how they want to deliver value for customers. Where do they want to rotate capital into? We think about portfolio management broadly.

It's really, it's about capital allocation and that can be reallocation within the business unit. Thinking about where we put CAPEX, where we put R&D dollars. 

First and foremost, it's just reallocation business we have. And we do think about partnering, how do we reposition the portfolio, better markets to better leverage, and then about divesting. 

Where do we think our model doesn't fit as well? Is there a better natural owner right now for that business?

And so at the business unit level, they'll start to bubble that up. And my team will meet with those business development folks from divisions every two weeks. 

And then generally every month that team collectively will meet with an EVP to assess priorities and start to develop a cohesive portfolio management framework and prioritization for the business group. 

And then quarterly, the leader of the business group will meet with our senior executive leadership, the CEO, CFO, head of strategy, to kind of align enterprise on priorities and really try to think about how we deliver the most value over the time that we spend on portfolio management. 

And then we come out of that with prioritization, and then we roll up across the enterprise, with all of that for the business groups.

And so for all the acquisitions and divestitures, with prioritization. So when a project comes in for that gate review, that should not be the first time, everyone should be familiar with that project because it's gone through the alignment process. 

There's many deals that we could do, but we need to do the most important ones for us. And so it's a lot about prioritization and just wanting it. And that sounds like a lot, but it actually works pretty well. 

And I would say that for 3M generally, the core expertise we have is how do you align it and make it work when you're in so many different markets. 

Our culture is that folks work well together, it's a very collaborative culture. To work quickly at a fast clock speed. But we spent a lot of time thinking about decision rights. So we don't get bogged down, like who can make the decision. 

But even as we focus on decision rights, that collaboration still happens, people want to get the best insights, leverage expertise we have broadly across the firm. 

It works well. We look to get the right information against a decision, but make it with pace, and make the right  decision and  always prioritize. 

What sort of drives that? How does leadership go about deciding what industries to focus on and what to prioritize? 

We think about our commitment to our stakeholders, to investors too, in terms of trying to deliver growth, returns on capital, free cash flow, margin improvement. We think about it. It's a capital allocation exercise. 

Before you get to that, we step back and say, again it's the fundamental strengths. What markets broadly fit best with our business model leverage to fund most ranks. Recently, I think it's been  that's against priorities that we've identified to investors.

We prioritize market opportunities and market segments, and then blank capital. But the decision to prioritize markets like those is a result of that regular dialogue between our executive leadership and our business unit leaders. 

Just to identify those priorities. And we look at what the writing tools, it's fundamental strengths, strategic attractiveness, financial attractiveness. It's not just the portfolio management, these two, but it just comes out of the operating reviews too, that they have. 

We develop a view about which businesses we think we want to prioritize for capital. It's one of the things that we do in corporate development, just to facilitate that dialogue and try to drive alignment around the best opportunities. 

Read also:
How to Build a Strong Corporate Development Team

What does final approval look like in these deals? Does it land on your desk to approve it or what does that look like? 

Yeah, in that stage, pre-approval, we have decisions out of our meetings that we document and we put in a team's data room, so there's certainly controls around that and we don't use stamps on a desk anymore, but I guess it's an official document. And the Microsoft teams room is the new stamp. 

We are very process-oriented at 3M. We like to be efficient. We like to have a process that we can continually improve, which we do over time. 

So we've been running our go to pre acquisition review or portfolio management review. In terms of the deal specific gate reviews that we do for ins or outs. 

We've been running the core process and acquisition side for, gosh, 15 years now. And yeah, the separation side for about eight years.

You continually hone that process every year. It gets down to be a pretty good rhythm, but we continue to think, how do we best inform those types of decisions? 

What information do we need in front of the executives? What do we want the businesses to think about before they bring those ideas forward for decisions at those different points.

For example, on a potential divestiture or profit center or business line, we ask that they come in with a comprehensive view, where does this fit within the business groups overall portfolio strategy. 

Now that should have been developed and has been developed in that bi-weekly monthly, quarterly rhythm that we have around portfolio management. We bring that in.

And then also we asked for the, how would you articulate what we're doing to investors? What would the bones of the press release look like?

Because it's a good way to test. Does this fit strategically with what we've told investors about how we'll manage the portfolio? For example, if you want to exit it, is there a better natural one for that business now or why? How would you articulate that? 

So, we're constantly not to overly complicate the process, but get it down to what are the key things that help inform a better decision around portfolio management.

So we'll just constantly update that, we have playbooks that we put online for folks and that we continually improve around our processes. It's a larger organization. 

We have a lot of folks in the business units who are doing this. A lot of them are, they're not experienced in M&A, they're marketers or strategy folks, they're operators. 

We do a lot of teaching. We try to make it so they can jump in. They've got a playbook, they can read it, they can talk to us. It can rapidly get up to speed in terms of the point, that kind of model that we want. And I think it's also just learning M&A generally. How to think about portfolio management.

But as they rise up the leadership ranks thinking this way about capital allocation becomes more and more important. So, I'd like to think it's an important part of overall development just for our leaders of 3M is how do you think about capital allocation? How do you think about portfolio? 

It's not just how you play, but it's where you play and with what. You don't have to accept the chess board you have in front of you. 

If you want it to reconstruct the set of assets that you're working with to really create more value for customers. What would you do? Just think outside the box, that's a fun thing to do with them. 

And it's just a whole another avenue for strategic thinking. We engage with a lot of leaders from the lower business unit levels up just in terms of how to deploy that for the enterprise.

That final stamp, it goes, does it go to you or is it actually things taken up to the board? Is there a certain threshold? 

Our deal review committee, we call it pre-acquisition. So pre-acquisition review. It's our senior leadership. So our CEO or CFO, it's the leads of all the core functions. 

We have strict governance around who needs to be there for what, based on the deal size. We have a board review threshold above which it needs to go to the board below that the CEO can sign off on it. 

There's another threshold that's lower where a CFO and EVP could sign off on it. I mean, they're pretty much in line I think, with what our peers are at. 

Their decisions in the meeting, and then we document it. I'm not making those decisions.We're facilitating the process. We have strict governance,  and it's a control, right? So we get audited.

Our auditors come in and talk to us about our governance  around M&A.  But we have strict charts in terms of who needs to be at each meeting and how decisions are made and we document those.

How do you gauge a company in terms of fit for 3M? 

We do this fundamental strength analysis on each deal. 

  • What are they bringing to 3m? 
  • Or what can we bring to them?
  •  How can we create more value with that business? 
  • If there's a clearing price for the business, what are we going to add beyond that? How much? 
  • Do we have technologies that we can add to what they're doing? 
  • Does their technology add to ours? 

The two big things I hear is essentially where you can utilize your competency to help grow the business. Then also identifying synergies across your different verticals to find those other opportunities as well. 

A core part of our business model, it's that core set of technologies applied across multiple markets. And oftentimes the solutions that we're bringing to market are solutions that are driven by our curious, creative, technical personnel. 

Looking across the resources that we have at our disposal, which generally are broader than usually sit within any other enterprise and bringing something that's the serendipitous connection or combining two or three different technologies that really no one else has in one house to bring a unique solution to the world. 

And so, that's the core of what we do. We look at that too. So it's a core platform technology that can be applied across the enterprise not just in that market. So everything has to work. It's a lot of ways that we can look at it. 

We're fortunate we can deploy capital on a lot of different spots. It's a real challenge and the prioritization, but it's a tremendous opportunity for us and our investors, because we can always pick the best opportunity. That's what we try to do. 

All about creating value. What's the overall process for how your leaders assess deals?

Ultimately, there's this kind of strong, qualitative aspect that I talked about it.  We make a lot of these factors, quantitative and we'll score fundamental strengths, we're going to fundamental strength score, I think we look at both quantitative and qualitatively. 

And then beyond that, I mean, we are very disciplined and analytical both technically and financially. 

And I think one of our other cores is that we are very financially disciplined and we are focused on generating premium returns for that capital that we deploy. 

It's another asset that we have is that we have a history of generating premium returns, I think they come self-fulfilling. That's what our employees are focused now on doing.

So that translates to M&A. So we're looking at the same return metrics the others are. We're looking for cash returns and your X IRRs NPVs, we'll try to do checks with market multiples.

But ultimately we have a detailed plan for every acquisition about how we are going to generate value with it. And it comes down to specific dollars and specific years. We track it very closely so we'll have post acquisition reviews. 

We go 3 months, 6 months, 12 months, 24 months. And for significant deals, we'll have interim checkpoints, like I said that we meet more frequently. 

We track progress against metrics and what we committed to at the time of the deal. It's very specific around synergies, both cost and revenue. 

We focus on and pride ourselves on strong execution. And so we will track and look to exceed what our targets were for deals, but it often comes down to delivering financial value. 

So we'll have a detailed plan that trickles all the way down to the very specific numbers that we look to beat 

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Sometimes it's difficult to get views that are not leading the deal to cooperate or feel ownership for synergy realization across the organization. How do you manage this? 

I think it comes down to leadership and ownership at the senior levels. The synergy plan is developed by the business units and the business leaders. We are not driving our deals from the center. It's driven by our business leaders. 

I would say we do get good ownership from that.And we have deal champions, internally. If you don't have a deal champion at the business level, that's an issue because you need somebody that wants to own that and make it work. 

We generally get strong ownership from our business units on synergy metrics. We're fortunate, I think we have typically needed or exceeded most of our targets.

It may start at the bottom right. We are not trying to drive deals from the top. I think what we see is our responsible at the enterprise is to make sure we're thinking about value creation in the right way. 

We're trying to make sure that we're doing appropriate high level prioritization across the enterprise, but ultimately we need business leaders that are passionate about making the deal work.

And it really is, at the end of the day, it's about driving value with the business. You have driving value for customers. It's a requirement for us that we have leadership that really feels strongly about that.

And it's at a pretty senior level I think generally the leaders of our business units are going to take responsibility for those deals together with their VPs in charge of visions. And we have strong alignment with them about driving results through. 

Let's flip it around. Let's take the leader that's overly optimistic about the deal. How do we prevent sort of biases getting in the way of doing the deals? 

Yeah. We've talked about one specific idea. I would say, first of all, though, that's a big part of what corporate can bring too. We're one of the first sort of second checks I think of the business unit will get in terms of a prospective idea. So we definitely try to bring, you might say, a dose of reality, but also just the benefits of what we've seen work or not work on deals to the project. 

We will ask all the questions that need to be asked as they develop their business case and they develop a plan. That's a very time-intensive, labor-intensive process. 

When we build out what's the  model for success here. Is it going to work? Have you thought of everything? What about this? What about that? So that's what my team will do as a business unit. 

We'll work closely with them. It's very collaborative, but we'll need to ask the right questions. We pass on opportunities as that goes. 

I think beyond that, one of the best, probably the best development that we've made in terms of just overall diligence is introducing red teams rigorously into our processes. 

And so I know people call them different names. We typically call on red team green team process but we will stand up a red team for any material acquisition and assign a team to tell us why not to do the deal. 

There's no restrictions on where they can go and the arguments they can make, they can access whatever data they want. And they are asked to really lean into the question.

I think red teams generally work best where you really have someone that doesn't believe in the deal. You can find that person, give them a platform. It's really been interesting for me because you can try to play the red team in your own mind. 

As I said, our team will sit down with the business unit and kind of bet their business plan. 

We'll try to ask all the right questions, but that is different from just being given a half hour of the CEO and just having a chance to air out all the reasons why not to do the deal and be very passionate about it. 

It's arguing, it's typical, just a court case. And just get in there upon the table and do your best to convince the CEO, not to do this deal.

You need that kind of forum, I think at some point, when you get deep into a deal where people have the freedom to stand up and say what everyone might be thinking, but there's a specific forum to raise that and say, why you shouldn't do it. 

And we've run them all different ways. You can do them in different ways.

But I think the core is just to give that half hour . There's a lot of prep that goes into it, we try to condense it down and make it efficient. Know what's what are the reasons you know, not to do. So we run them constantly. We are a learning organization. We're always trying to think about what we are missing.

We're very other directed. We try to solve problems for customers. Try to look at things from outside in. We are really trying to avoid groupthink  and bias and try to confront reality. 

We're not looking to avoid all risks where we're taking appropriate risks, but we want to be able to look at it from all sides. And so they're very healthy discussions. I've found them very productive. 

When do you start this exercise? Is there an overall team structure in putting that together?

We'll start them pretty early, so we'll assume if it's a material deal we're going to run a red team. It's not right at the outset, but pretty quickly we'll say, look, who's going to be on the red team, who's going to be a green team. 

And we'll set up a separate workstream where they can start to get together as a team and start to develop their arguments. What are the key arguments? How do they support it? 

We have multidisciplinary teams, so I'll have somebody from my team. If we have outside consultants, we'll generally employ them. We might have one of our bankers on the team, you know, one of our consultants on the team.

I've mentioned we've hired a consulting firm just to be the red team. If we feel it's like, really based on something specific about market growth, we'll hire a team that we think has the expertise and say, give me a downside scenario. 

Tell me what's the worst that can happen here. What do you think and don't pull back? But more often it's  interdisciplinaries and I'll have somebody from my team on both sides.

So my team gets drafted into red teams at different deals all the time. So somebody is green, somebody is red. Bankers we'll split them up.

We typically have an hour, we'll set aside an hour. Which usually start out with the red, 20 minutes red, 20 minutes green, 20 minutes discussion. And if we need you to follow up, we'll do it.

Generally if you're efficient, we always have pre-reads, we're a big preread culture. So everything's out 48 hours in advance. People will get the decks, usually,big dependencies, we'll study it. 

And then, we'll go through the executive summary and some of the key backup slides, and then we'll have the discussion. And discussion often is the more interesting part.

It's good to get it at the highest level of visibility to what our upsides downsides. It often generates additional diligence, it can generate theory pricings.

It can generate decisions not to go forward. We'll run it around all aspects. Now often it's go- no-go. 

But sometimes there's just a specific aspect of the deal we need to run it with the red team around. Like, is this product fit for us? Is that product risk profile appropriate?

I mentioned growth rates. Sometimes it's what is the real market growth rate for this segment? So sometimes it's focused on a key aspect of the deal. 

But it's wherever it's most value and often what is the issue that's in the back of everybody's head, but nobody wants to talk about. How do we air it out as best as we can?

Are those objectives that you had set up with the red team early on? 

Yeah. Thinking about now, we just want a fair amount of time. Specify what is the question? What is the question Pro-Con? Sometimes you will specify what are the facts too because sometimes  the argument is about, I guess so-called facts, like say the market growth rate, but you don't want to argue about every fact, right?

So we might try to define a common set of facts that the teams are working off of. If there's agreement around a core, and then it's the focused discussion on what really is the point of difference in the perspective we're trying. 

So a lot of it is fine, If you're going to do this in an hour and make it productive, you do need to focus the conversation.

 At the same time, very clear, the red team can not be constrained in any way. Otherwise you defeat the exercise. 

Important thing is that the red team has to be able to go wherever they want. The red team often is kind of  unconstructed. They try to have a really frank discussion and get the more important issues first. So it's okay.

Here's why we shouldn't be doing this deal. Let me give you three points. Sometimes it's an accumulation of things that may turn you in a different direction. 

Often, it's one key thing, these deal breakers  and  a couple of key things. It's always fun to see what the red team comes up with.

The red team can make an impact here. It's not a rubber stamp process. The red team is very influential on the ultimate decision. 

Then in terms of the size of the red team, does it correlate with the size of the deal?

I might say no although, if it's a large deal, we might tend to get more research or get specific projects against it. It's more what are the right resources for questions? 

If it's really a technical issue, then obviously we need the right resources from central labs and that might get a little bit bigger. So it's driven, not so much by size, but really almost by the question that we're trying to answer, but sometimes size.  

What's 3M's view on earnouts and other contingent payments?

We have a lot of experience with the contingent payments. We know how often it can end up just in disputes, post deal. 

So we have a strong preference for trying to resolve those issues upfront. What I would say is that we feel at the end of the day that we really have the  both sides of the question, what's the utility of it. 

Is it absolutely necessary or we just can't come to an agreement  on value and opportunity right now. Because none of us has the time to spend or has the appetite to spend in a dispute process after the closing. For larger earn-outs, it's given once a stake, they can open up and dispute.

 But that said, it's not something that as a rule, we won't entertain, but I think probably not dissimilar from most folks. We just try to think carefully about when they're appropriate and, necessary. 

We would prefer to come up with a view on appropriate value  and risk allocation upfront and do it that way. There's a lot about opportunity, constant time to just the managing a contingent payment situation. Even if there's not a dispute.

Part of it too is, having constraints on the business post deal. We are an integrated enterprise. So we fully integrate every deal. They are not set up to run separately. 

So to the extent that you need to run separately to have an appropriate way to track and measure success on an earn-out or against a contingent payment. That is more challenging for us because we want to integrate right away. 

And we want the ability to pivot with the business quickly, too. We might want to go different directions on product. We're very responsive to markets and customers. The idea of having a longer multi period earn-out, that constrains our ability to react to customer and market realities is not something that's really favorable for us. So that's part of it too. 

When we acquire a business, we want them to feel they are part of 3M. It's one 3M, that's a big part of our day one communication strategy is that we want them to feel it's one company. 

Everyone can use all the technologies. You're able to move across the enterprise. There's very few constraints on what we can do. And so it makes it a little more difficult and some of that contingent payment structures. 

How are you finding it to have to manage deals virtually during COVID? 

We've adapted pretty well.  There's always the question of, "Can you develop the kind of relationships you'd like to, and can you assess the cultural fit for businesses not being able to be in the same room and have the same type of engagement?"

And that's going to continue to be a challenge for everyone to manage in and us as well.

But as I talked to some of my peers, our experience has been that dissimilar, but we love to deploy technology to do everything that we do the same thing for M&A and that eased some of the transition. 

3M is very diversified from healthcare, the consumer, etc, and to some degree, very specialized. Understanding Corp Dev drives the deal and relies on subject matter experts. Do you organize your team to some degrees by business group, transportation and electronics versus healthcare? 

We do. I have one of my senior managers aligned with each one of our four business groups. And then we have junior personnel that are just general. So we'll work across projects. They are able to develop expertise.

We will rotate our senior managers among business groups though as well. I mean ultimately everyone in my team needs to understand 3M as a whole. 

But spending two years working with the healthcare team and just focusing on that, for example, rapidly accelerates their ability to do that and it will rotate. 

It's challenging, but at the same time, it's one of the things that we bring to the enterprise that we need ultimately. We try to become experts in looking at diligence and evaluating consumer companies, healthcare, IT companies, adhesives companies, electronics materials. 

When I was in banking, I was always moving. So I covered like five different universities. So that helps. I covered everything from internet software companies to food companies, but you have to have an appetite to learn all those different things.

So my staff too, I'm looking for people that like to do that. Not everyone likes to do that. They want to focus and do their one thing. It's harder for them and maybe not as good of a fit. 

Is there something you look for when you're interviewing people or I have to get a feel of that person truly has an appetite to continuously learn? 

You can tell if somebody is curious or not, it's not a bunch of different things. You know, broad set of interests, broadly educated, tried many different things, enthusiastic, positive attitude. And I think loves technology and learning things.

That's a big part of what we do. It's if you're curious about technologies and new products and new solutions, that's a big party, in a variety of different areas. If you want to be on the cutting edge, that's good. You're looking for people that understand because we're buying companies that maybe not quite at scale yet, but still high growth. Exciting doing something new, working with growth companies and appreciating that and liking that environment.

In your experience, because you've worked on quite a few deals in your period at  3M. Where do you see drive success when it comes to integration? 

Having a good plan upfront is important, I think. And the integration, it goes hand in hand with the synergy realization. Our integration at 3M is a sister group to corporate development, we're both in strategy development. 

I mentioned that we have  a set of principles that we go into it with, which is where trying to bring in or separate something that's part of one 3M is usually fully integrated or it's going to become fully integrated.

As we think about how to do the integration, how do we retain and drive the value that we're looking for in the deal? It's all integrated cost and revenue side. 

So we have a detailed plan that maps the synergies and then we need to execute against it. We have scorecards and we just track it.  

We're tracking everything, know all the key metrics,  retention, customer engagements, integration on the manufacturing side, it could be things around tax or customer service.

Successful operational execution and that's a big part of integration, is making it work. And so we pride ourselves on that. We have a lot of good people that can do that well. 

Yeah. We constantly ask ourselves, what does success look like here?

what are we trying to accomplish? You don't know where you're headed then you can't get there. We talk about what's the end state, what are the synergies and how do we measure? How do we get there and how do we measure our progress?

We spend a lot of time thinking about that, it's  second nature to us. I think the way we operate, but we spend a lot of time on it. 

We have leadership that sets the right tone and high expectations and they monitor our progress and help coach us. I think for us at the end of it, it's full integration that drives a lot of our thinking. 

Any other tips, best practices you'd like to share with other practitioners to help them with their practice?

It varies so much by company. There's lots of different models that have been successful. The general is knowing how you're going to create value and then just the continuing  improvement aspect of it. 

That was critical for us having alignment around what we're trying to do and how we're trying to create value for customers, for shareholders, etc, that's a fundamental principle. 

Sometimes you  can surprisingly skip that step, I think. And you can always benefit by going back and relooking at it and maybe retesting that.

Acquisitions with synergies, with integration, how does it all drive that. It can be challenging to drive one sort of integrated operation around that's really unified and consistent, but  it's exciting to do when it works. It's pretty powerful. 

Creating value, continuous improvement, and I hear this from a lot of organizations where they have this grand vision starting the deal, but then as it continues and progresses through the stages and they get into the integration. That's where things start getting lost and people are  mulling down checklists, and they don't know why they're doing things. How do you prevent that from happening? 

We have the post close rhythm around review, I said this pre-61224, there is a finished point, right? When you're driving towards maybe  it's having an end point because if it goes on forever, it's indefinite, I think you will lose enthusiasm and you can finish early.

We finish early, we celebrate success too. I think that's part of it. So we have a good outcome, we finish early, we hit a milestone early, and we celebrate that . 

It's good job by the team and they get rewarded for that. So I think  that's motivating for people to try good outcomes, superior outcomes, and exceed expectations.

So we try to do that and recognize. It can't go on forever. At some point you are  integrated and it's just operating as part of 3M and it goes into that operational rhythm, it's being managed day-to-day.

Maybe it would help just to make sure you have an end point. Sometimes things lag  and collectively we get together and try and figure out what we can all do together to make it work. But at some point you have to be done. 

That's interesting because having those endpoints and then metrics to success as you continue and end deals this sort of lapses over into the next deal and  builds into the culture.

I think we've evolved with thinking a lot about portfolio management in the last 15 years. And so it will change a lot.  

You definitely try to constantly roll forward, think about how you create an institutional memory and document things, so it's not lost. And just try to roll for it because it will change over time.

We've done very dynamic portfolio management. Like over the debt we were in and out of initiatives. We've really changed a lot over the years. 

So just trying to continue to do that, what stays the same as we change so much from the outside over the years, but always trying to take signals through outside. Listen to customers, listen to markets. 

Always think about how we're creating value and the ways in which you do that,  we'll just have to change over time as the markets change and needs change, customers change. So we try to carry that forward. 

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

You mentioned you're going to ask me this question. I'm trying to think every deal is crazy,  in some respect. It's like, what is really crazy? 

For me, I think of all the things that pop up on deals, every deal seems to be different. For me I think the most different was going down to Latin America and trying to do a deal in a semi hyperinflationary environment.

So that just creates a whole set of economics and financials that were new to me. So doing the audit, finding out that a small company has $5 million of cash in it's safe. 

So all the different things you do to deal when you have a current new operating currency. That's assumed and hyperinflation, we did not do this deal in this hyperinflationary economy, but that and how. 

You have to be careful on the financials because you can make money  on your inventory and your work in process,raw materials as inflation.  It can excess profitability and roll for the P&L. 

So I think working in that was probably some of the most surprising, otherwise it's always something new. 

That's definitely a unique variable to work around. And yeah, inventory cash in the safe is also another unique one. 

I'm trying to think of others, once we had a deal, we were doing. I had the option to do some leadership development training. And they sent me to meet with a customer in Jakarta. So I spent a week in Jakarta at the same time we're doing a deal. 

And I was ready to fly back in the airport. It's like, I think it was like 10 o'clock at night. I'm in the airport lounge. And suddenly the deal completely changed and over the course of next five hours we had to renegotiate the deal. 

My luggage is already in the airplane. So I had to get my luggage off the airplane and negotiate the deal in the room. I didn't speak the language, but somehow we figured out how to get my suitcase up from the plane. 

And then we finished up, it was around 2:00AM or 3:00 AM in there. I will tell you, there are no cabs at the Jakarta airport in the middle of the night, which shocks me. Luckily my hotel was able to come pick me up again, but then I just checked out.

But I don't know, every deal  has something like that, right? But, it's always something different. It's hard to think of one thing that stands out as what I like about it. It's always something new. 

Ending Credits

Thank you for taking the time to explore the world of M&A with our podcast. 

Please subscribe for more content conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners.

M&A science is sponsored by DealRoom, a project management solution for mergers and acquisitions. 

Thank you again for listening to M&A Science.

“Just because something happens you didn't expect, doesn't mean that your thesis was fundamentally flawed, it just means you have to course correct and adapt.”

How leaders at 3M assess deals

On this episode of M&A Science, Kison interviews Jerry Will, Vice President of Corporate Development at 3M, about managing a multi-vertical M&A strategy and what 3M's M&A strategy looks like. Together they discuss the governance of 3M, how the industry prioritizes leadership, and how the deal approval process works.

3M utilizes what they call a Red Team process as a way to prevent biases from overly optimistic leaders. In this exercise, the red team is a group of people assigned to convince the business leader not to do the deal. They are given an open platform with no restrictions on the arguments that they can make, and the data that they can access. 

Additionally, Kison and Jerry discuss how leadership takes ownership of deals and gauge whether the target company would be a fit for 3M. When it comes to prioritizing what industry to focus on, it all revolves around commitment to stakeholders and investors to deliver growth while looking at the fundamental strengths, strategic attractiveness, and the financial attractiveness of the market.

Finally, the interview closes out with a discussion on measuring integration success and best practices.

Show notes:

00.00 - Intro

1.42.96 - Background

4.36.63 - Managing a Multi Vertical Strategy

8.08.90 - Governance of 3M

11.24.13 - Industry Prioritization of Leadership 

13.24.24 - Final Approval on Deals

17.14.67 - Gauging Fit for 3M

22.26.11 - How Leaders at 3M Assess Deals

24.00.09 - Leadership Taking Ownership of the Deals

28.01.10 - How to Prevent Biases on Doing Deals

30.39.81 - In-depth Guide to Read Team Process

36.46.95 - 3M’s view on Earn-outs

39.09.66 - Managing Deals During COVID

40.09.13 - Organizing Diversified Teams into Categories

42.54.57 - Measuring Success on Integration

45.17.21 - Best Practices 

48.51.75 - Craziest Thing in M&A

Text version of interview

You started from a physics undergrad, and then you moved right into law, and then you ended up banking for 10 years and now in corporate development. I'm curious if any of those components from your background help you do M&A today. 

I think it does.  My dark secret probably is that I was a lawyer so that's my deepest move. Bankers maybe not quite so surprising. And I always say about practicing law. It was a good thing to have done. I enjoyed the firm that joined the practice. I'm glad it  broadened my responsibilities now, but it all helps me today. 

3M as I think about it, 3M is a certain level we have a lot of general except the firms. I mean, curious people that are interested in doing many different things. So we all have our different tool kits we bring, but if there's one defining aspect of 3M that defines the culture, I'd say it's curiosity.

People that want to do things that are new and do things that are different. So it helps to have a broad curiosity and willingness to try different things. And I think that's what I've done across my career. 

I enjoyed practicing law as I mentioned, I enjoyed the physics that I did as far as it went, but it's always onto the next thing. Yeah and today I try to bring all those to bear. We're a technology focused firm, so it's good to have a background technology. I'm very excited about technology and what's new and next. 

Well, let's jump into it. How does 3M manage a multi vertical strategy? 

Let's say it's a combination of bottoms up and top down approach. 

First and foremost, where there are many different markets, we understand the benefits and it needs to be close to customers or markets.  

So first and foremost, what we do is informed by being very close to customers. When we do innovation, it's customer inspired innovation. What are the real pain points we're trying to solve for customers? 

So we're in many different markets, many different core customer sets. So we start there. Everything has to be informed by our knowledge of those markets' domain expertise and customer needs. 

At that top level, you need some sort of cohesive, consistent view in terms of how you go about generating value for customers in all those different markets. We spend a lot of time thinking about that. 

What really unites everything that we do. What's consistent, how do we go about delivering value for customers? And we think of it in terms of our fundamental strengths. 

We leverage what are our fundamental strengths and how do we leverage those for customers? Our fundamental strengths are, its technology, manufacturing, global reach and brand.

They're fairly broad concepts, but then it's like, how do we apply it? But we have a core set of technologies that we leverage in different markets. 

One of the ways we get leverage on that is for manufacturing. We have a lot of manufacturing technology expertise. It's a great way to get leverage and return on your investment in innovation. 

And then we're looking for things that we can go big with to global reach, and we're finding every region around the world.  So we're looking to leverage that for our customers. And then our brand too. 

Our brand we're stewards of the brand. We're conscious that we're  leveraging the good work that our prior colleagues have done. And our customers respect that and we have a good relationship with the customer. 

And so our brand kind of embodies that, but it's getting close to the customers, having their trust so we can really generate the insights that help solve their problems. That's really how we think of portfolios. 

We think what businesses really fit with that business model. It has got to be based on technology where we can innovate. 

And then manufacturing is key for us. If we can leverage our manufacturing, it can generate a lot of value.

And then global reach and brand. Can it go globally? Is our brand relationship going to make the whole thing work better because smaller companies may not have that kind of relationship with the customers. 

Can we leverage that? So we think about that and it gets down to each market.

We have to have an opportunity management system looking at ins and outs on the portfolio side that's pretty comprehensive across 20 plus divisions, many profit centers within those divisions. 

Many markets from consumer to aerospace, to healthcare, to IT. We replicate that. So we start bottoms up in terms of the other business development people within every division that thinks strategically about their portfolio. 

We have folks in my group that are assigned to work with those divisions and business groups to help them think about deploying the tools that we have in those business units.

And then they will bubble up ideas. Like we think, we should rotate capital to this product set, this technology area. We'll aggregate all those up and then apply a top-down lens too. 

And we have a good process set up across the enterprise to  bring ideas up to the bottom and then have senior leadership have the option to engage with business leaders to think broadly about how we best leverage that business model. 

What sectors are going to generate the best value for customers, the best returns for our shareholders. 

You have to have a broad conceptual framework that applies in all these different markets. The same time you want to drive very market specific insights. That's what we do through our processes. 

Walk me through governance. What does that look like?

I would divide it into, we have different processes around  the alignment of prioritizing what the opportunities are, ins or outs, acquisitions, or divestitures. And then we have governance around projects, around deals. 

On the deals, and we've got a stage gate process, I think it's very similar to what a lot of our peers would run. 

We'll have that approval gate,  when you're signing a CDA, it's a good check-in point before you start to do a lot of work or use a lot of resources looking at a deal. 

We'll have another stage gate before we bid. And then this one before we sign, I think that's pretty typical. 

But before you get to that point, thinking about where do we even think about authorizing deployment of resources against the project?

It's more on the strategic side and we have a strategic portfolio management process. It starts with, as I mentioned,  that work at the business unit level. 

Thinking about how they want to deliver value for customers. Where do they want to rotate capital into? We think about portfolio management broadly.

It's really, it's about capital allocation and that can be reallocation within the business unit. Thinking about where we put CAPEX, where we put R&D dollars. 

First and foremost, it's just reallocation business we have. And we do think about partnering, how do we reposition the portfolio, better markets to better leverage, and then about divesting. 

Where do we think our model doesn't fit as well? Is there a better natural owner right now for that business?

And so at the business unit level, they'll start to bubble that up. And my team will meet with those business development folks from divisions every two weeks. 

And then generally every month that team collectively will meet with an EVP to assess priorities and start to develop a cohesive portfolio management framework and prioritization for the business group. 

And then quarterly, the leader of the business group will meet with our senior executive leadership, the CEO, CFO, head of strategy, to kind of align enterprise on priorities and really try to think about how we deliver the most value over the time that we spend on portfolio management. 

And then we come out of that with prioritization, and then we roll up across the enterprise, with all of that for the business groups.

And so for all the acquisitions and divestitures, with prioritization. So when a project comes in for that gate review, that should not be the first time, everyone should be familiar with that project because it's gone through the alignment process. 

There's many deals that we could do, but we need to do the most important ones for us. And so it's a lot about prioritization and just wanting it. And that sounds like a lot, but it actually works pretty well. 

And I would say that for 3M generally, the core expertise we have is how do you align it and make it work when you're in so many different markets. 

Our culture is that folks work well together, it's a very collaborative culture. To work quickly at a fast clock speed. But we spent a lot of time thinking about decision rights. So we don't get bogged down, like who can make the decision. 

But even as we focus on decision rights, that collaboration still happens, people want to get the best insights, leverage expertise we have broadly across the firm. 

It works well. We look to get the right information against a decision, but make it with pace, and make the right  decision and  always prioritize. 

What sort of drives that? How does leadership go about deciding what industries to focus on and what to prioritize? 

We think about our commitment to our stakeholders, to investors too, in terms of trying to deliver growth, returns on capital, free cash flow, margin improvement. We think about it. It's a capital allocation exercise. 

Before you get to that, we step back and say, again it's the fundamental strengths. What markets broadly fit best with our business model leverage to fund most ranks. Recently, I think it's been  that's against priorities that we've identified to investors.

We prioritize market opportunities and market segments, and then blank capital. But the decision to prioritize markets like those is a result of that regular dialogue between our executive leadership and our business unit leaders. 

Just to identify those priorities. And we look at what the writing tools, it's fundamental strengths, strategic attractiveness, financial attractiveness. It's not just the portfolio management, these two, but it just comes out of the operating reviews too, that they have. 

We develop a view about which businesses we think we want to prioritize for capital. It's one of the things that we do in corporate development, just to facilitate that dialogue and try to drive alignment around the best opportunities. 

Read also:
How to Build a Strong Corporate Development Team

What does final approval look like in these deals? Does it land on your desk to approve it or what does that look like? 

Yeah, in that stage, pre-approval, we have decisions out of our meetings that we document and we put in a team's data room, so there's certainly controls around that and we don't use stamps on a desk anymore, but I guess it's an official document. And the Microsoft teams room is the new stamp. 

We are very process-oriented at 3M. We like to be efficient. We like to have a process that we can continually improve, which we do over time. 

So we've been running our go to pre acquisition review or portfolio management review. In terms of the deal specific gate reviews that we do for ins or outs. 

We've been running the core process and acquisition side for, gosh, 15 years now. And yeah, the separation side for about eight years.

You continually hone that process every year. It gets down to be a pretty good rhythm, but we continue to think, how do we best inform those types of decisions? 

What information do we need in front of the executives? What do we want the businesses to think about before they bring those ideas forward for decisions at those different points.

For example, on a potential divestiture or profit center or business line, we ask that they come in with a comprehensive view, where does this fit within the business groups overall portfolio strategy. 

Now that should have been developed and has been developed in that bi-weekly monthly, quarterly rhythm that we have around portfolio management. We bring that in.

And then also we asked for the, how would you articulate what we're doing to investors? What would the bones of the press release look like?

Because it's a good way to test. Does this fit strategically with what we've told investors about how we'll manage the portfolio? For example, if you want to exit it, is there a better natural one for that business now or why? How would you articulate that? 

So, we're constantly not to overly complicate the process, but get it down to what are the key things that help inform a better decision around portfolio management.

So we'll just constantly update that, we have playbooks that we put online for folks and that we continually improve around our processes. It's a larger organization. 

We have a lot of folks in the business units who are doing this. A lot of them are, they're not experienced in M&A, they're marketers or strategy folks, they're operators. 

We do a lot of teaching. We try to make it so they can jump in. They've got a playbook, they can read it, they can talk to us. It can rapidly get up to speed in terms of the point, that kind of model that we want. And I think it's also just learning M&A generally. How to think about portfolio management.

But as they rise up the leadership ranks thinking this way about capital allocation becomes more and more important. So, I'd like to think it's an important part of overall development just for our leaders of 3M is how do you think about capital allocation? How do you think about portfolio? 

It's not just how you play, but it's where you play and with what. You don't have to accept the chess board you have in front of you. 

If you want it to reconstruct the set of assets that you're working with to really create more value for customers. What would you do? Just think outside the box, that's a fun thing to do with them. 

And it's just a whole another avenue for strategic thinking. We engage with a lot of leaders from the lower business unit levels up just in terms of how to deploy that for the enterprise.

That final stamp, it goes, does it go to you or is it actually things taken up to the board? Is there a certain threshold? 

Our deal review committee, we call it pre-acquisition. So pre-acquisition review. It's our senior leadership. So our CEO or CFO, it's the leads of all the core functions. 

We have strict governance around who needs to be there for what, based on the deal size. We have a board review threshold above which it needs to go to the board below that the CEO can sign off on it. 

There's another threshold that's lower where a CFO and EVP could sign off on it. I mean, they're pretty much in line I think, with what our peers are at. 

Their decisions in the meeting, and then we document it. I'm not making those decisions.We're facilitating the process. We have strict governance,  and it's a control, right? So we get audited.

Our auditors come in and talk to us about our governance  around M&A.  But we have strict charts in terms of who needs to be at each meeting and how decisions are made and we document those.

How do you gauge a company in terms of fit for 3M? 

We do this fundamental strength analysis on each deal. 

  • What are they bringing to 3m? 
  • Or what can we bring to them?
  •  How can we create more value with that business? 
  • If there's a clearing price for the business, what are we going to add beyond that? How much? 
  • Do we have technologies that we can add to what they're doing? 
  • Does their technology add to ours? 

The two big things I hear is essentially where you can utilize your competency to help grow the business. Then also identifying synergies across your different verticals to find those other opportunities as well. 

A core part of our business model, it's that core set of technologies applied across multiple markets. And oftentimes the solutions that we're bringing to market are solutions that are driven by our curious, creative, technical personnel. 

Looking across the resources that we have at our disposal, which generally are broader than usually sit within any other enterprise and bringing something that's the serendipitous connection or combining two or three different technologies that really no one else has in one house to bring a unique solution to the world. 

And so, that's the core of what we do. We look at that too. So it's a core platform technology that can be applied across the enterprise not just in that market. So everything has to work. It's a lot of ways that we can look at it. 

We're fortunate we can deploy capital on a lot of different spots. It's a real challenge and the prioritization, but it's a tremendous opportunity for us and our investors, because we can always pick the best opportunity. That's what we try to do. 

All about creating value. What's the overall process for how your leaders assess deals?

Ultimately, there's this kind of strong, qualitative aspect that I talked about it.  We make a lot of these factors, quantitative and we'll score fundamental strengths, we're going to fundamental strength score, I think we look at both quantitative and qualitatively. 

And then beyond that, I mean, we are very disciplined and analytical both technically and financially. 

And I think one of our other cores is that we are very financially disciplined and we are focused on generating premium returns for that capital that we deploy. 

It's another asset that we have is that we have a history of generating premium returns, I think they come self-fulfilling. That's what our employees are focused now on doing.

So that translates to M&A. So we're looking at the same return metrics the others are. We're looking for cash returns and your X IRRs NPVs, we'll try to do checks with market multiples.

But ultimately we have a detailed plan for every acquisition about how we are going to generate value with it. And it comes down to specific dollars and specific years. We track it very closely so we'll have post acquisition reviews. 

We go 3 months, 6 months, 12 months, 24 months. And for significant deals, we'll have interim checkpoints, like I said that we meet more frequently. 

We track progress against metrics and what we committed to at the time of the deal. It's very specific around synergies, both cost and revenue. 

We focus on and pride ourselves on strong execution. And so we will track and look to exceed what our targets were for deals, but it often comes down to delivering financial value. 

So we'll have a detailed plan that trickles all the way down to the very specific numbers that we look to beat 

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The Role of Leadership in Mergers & Acquisitions [Expert Story]

Sometimes it's difficult to get views that are not leading the deal to cooperate or feel ownership for synergy realization across the organization. How do you manage this? 

I think it comes down to leadership and ownership at the senior levels. The synergy plan is developed by the business units and the business leaders. We are not driving our deals from the center. It's driven by our business leaders. 

I would say we do get good ownership from that.And we have deal champions, internally. If you don't have a deal champion at the business level, that's an issue because you need somebody that wants to own that and make it work. 

We generally get strong ownership from our business units on synergy metrics. We're fortunate, I think we have typically needed or exceeded most of our targets.

It may start at the bottom right. We are not trying to drive deals from the top. I think what we see is our responsible at the enterprise is to make sure we're thinking about value creation in the right way. 

We're trying to make sure that we're doing appropriate high level prioritization across the enterprise, but ultimately we need business leaders that are passionate about making the deal work.

And it really is, at the end of the day, it's about driving value with the business. You have driving value for customers. It's a requirement for us that we have leadership that really feels strongly about that.

And it's at a pretty senior level I think generally the leaders of our business units are going to take responsibility for those deals together with their VPs in charge of visions. And we have strong alignment with them about driving results through. 

Let's flip it around. Let's take the leader that's overly optimistic about the deal. How do we prevent sort of biases getting in the way of doing the deals? 

Yeah. We've talked about one specific idea. I would say, first of all, though, that's a big part of what corporate can bring too. We're one of the first sort of second checks I think of the business unit will get in terms of a prospective idea. So we definitely try to bring, you might say, a dose of reality, but also just the benefits of what we've seen work or not work on deals to the project. 

We will ask all the questions that need to be asked as they develop their business case and they develop a plan. That's a very time-intensive, labor-intensive process. 

When we build out what's the  model for success here. Is it going to work? Have you thought of everything? What about this? What about that? So that's what my team will do as a business unit. 

We'll work closely with them. It's very collaborative, but we'll need to ask the right questions. We pass on opportunities as that goes. 

I think beyond that, one of the best, probably the best development that we've made in terms of just overall diligence is introducing red teams rigorously into our processes. 

And so I know people call them different names. We typically call on red team green team process but we will stand up a red team for any material acquisition and assign a team to tell us why not to do the deal. 

There's no restrictions on where they can go and the arguments they can make, they can access whatever data they want. And they are asked to really lean into the question.

I think red teams generally work best where you really have someone that doesn't believe in the deal. You can find that person, give them a platform. It's really been interesting for me because you can try to play the red team in your own mind. 

As I said, our team will sit down with the business unit and kind of bet their business plan. 

We'll try to ask all the right questions, but that is different from just being given a half hour of the CEO and just having a chance to air out all the reasons why not to do the deal and be very passionate about it. 

It's arguing, it's typical, just a court case. And just get in there upon the table and do your best to convince the CEO, not to do this deal.

You need that kind of forum, I think at some point, when you get deep into a deal where people have the freedom to stand up and say what everyone might be thinking, but there's a specific forum to raise that and say, why you shouldn't do it. 

And we've run them all different ways. You can do them in different ways.

But I think the core is just to give that half hour . There's a lot of prep that goes into it, we try to condense it down and make it efficient. Know what's what are the reasons you know, not to do. So we run them constantly. We are a learning organization. We're always trying to think about what we are missing.

We're very other directed. We try to solve problems for customers. Try to look at things from outside in. We are really trying to avoid groupthink  and bias and try to confront reality. 

We're not looking to avoid all risks where we're taking appropriate risks, but we want to be able to look at it from all sides. And so they're very healthy discussions. I've found them very productive. 

When do you start this exercise? Is there an overall team structure in putting that together?

We'll start them pretty early, so we'll assume if it's a material deal we're going to run a red team. It's not right at the outset, but pretty quickly we'll say, look, who's going to be on the red team, who's going to be a green team. 

And we'll set up a separate workstream where they can start to get together as a team and start to develop their arguments. What are the key arguments? How do they support it? 

We have multidisciplinary teams, so I'll have somebody from my team. If we have outside consultants, we'll generally employ them. We might have one of our bankers on the team, you know, one of our consultants on the team.

I've mentioned we've hired a consulting firm just to be the red team. If we feel it's like, really based on something specific about market growth, we'll hire a team that we think has the expertise and say, give me a downside scenario. 

Tell me what's the worst that can happen here. What do you think and don't pull back? But more often it's  interdisciplinaries and I'll have somebody from my team on both sides.

So my team gets drafted into red teams at different deals all the time. So somebody is green, somebody is red. Bankers we'll split them up.

We typically have an hour, we'll set aside an hour. Which usually start out with the red, 20 minutes red, 20 minutes green, 20 minutes discussion. And if we need you to follow up, we'll do it.

Generally if you're efficient, we always have pre-reads, we're a big preread culture. So everything's out 48 hours in advance. People will get the decks, usually,big dependencies, we'll study it. 

And then, we'll go through the executive summary and some of the key backup slides, and then we'll have the discussion. And discussion often is the more interesting part.

It's good to get it at the highest level of visibility to what our upsides downsides. It often generates additional diligence, it can generate theory pricings.

It can generate decisions not to go forward. We'll run it around all aspects. Now often it's go- no-go. 

But sometimes there's just a specific aspect of the deal we need to run it with the red team around. Like, is this product fit for us? Is that product risk profile appropriate?

I mentioned growth rates. Sometimes it's what is the real market growth rate for this segment? So sometimes it's focused on a key aspect of the deal. 

But it's wherever it's most value and often what is the issue that's in the back of everybody's head, but nobody wants to talk about. How do we air it out as best as we can?

Are those objectives that you had set up with the red team early on? 

Yeah. Thinking about now, we just want a fair amount of time. Specify what is the question? What is the question Pro-Con? Sometimes you will specify what are the facts too because sometimes  the argument is about, I guess so-called facts, like say the market growth rate, but you don't want to argue about every fact, right?

So we might try to define a common set of facts that the teams are working off of. If there's agreement around a core, and then it's the focused discussion on what really is the point of difference in the perspective we're trying. 

So a lot of it is fine, If you're going to do this in an hour and make it productive, you do need to focus the conversation.

 At the same time, very clear, the red team can not be constrained in any way. Otherwise you defeat the exercise. 

Important thing is that the red team has to be able to go wherever they want. The red team often is kind of  unconstructed. They try to have a really frank discussion and get the more important issues first. So it's okay.

Here's why we shouldn't be doing this deal. Let me give you three points. Sometimes it's an accumulation of things that may turn you in a different direction. 

Often, it's one key thing, these deal breakers  and  a couple of key things. It's always fun to see what the red team comes up with.

The red team can make an impact here. It's not a rubber stamp process. The red team is very influential on the ultimate decision. 

Then in terms of the size of the red team, does it correlate with the size of the deal?

I might say no although, if it's a large deal, we might tend to get more research or get specific projects against it. It's more what are the right resources for questions? 

If it's really a technical issue, then obviously we need the right resources from central labs and that might get a little bit bigger. So it's driven, not so much by size, but really almost by the question that we're trying to answer, but sometimes size.  

What's 3M's view on earnouts and other contingent payments?

We have a lot of experience with the contingent payments. We know how often it can end up just in disputes, post deal. 

So we have a strong preference for trying to resolve those issues upfront. What I would say is that we feel at the end of the day that we really have the  both sides of the question, what's the utility of it. 

Is it absolutely necessary or we just can't come to an agreement  on value and opportunity right now. Because none of us has the time to spend or has the appetite to spend in a dispute process after the closing. For larger earn-outs, it's given once a stake, they can open up and dispute.

 But that said, it's not something that as a rule, we won't entertain, but I think probably not dissimilar from most folks. We just try to think carefully about when they're appropriate and, necessary. 

We would prefer to come up with a view on appropriate value  and risk allocation upfront and do it that way. There's a lot about opportunity, constant time to just the managing a contingent payment situation. Even if there's not a dispute.

Part of it too is, having constraints on the business post deal. We are an integrated enterprise. So we fully integrate every deal. They are not set up to run separately. 

So to the extent that you need to run separately to have an appropriate way to track and measure success on an earn-out or against a contingent payment. That is more challenging for us because we want to integrate right away. 

And we want the ability to pivot with the business quickly, too. We might want to go different directions on product. We're very responsive to markets and customers. The idea of having a longer multi period earn-out, that constrains our ability to react to customer and market realities is not something that's really favorable for us. So that's part of it too. 

When we acquire a business, we want them to feel they are part of 3M. It's one 3M, that's a big part of our day one communication strategy is that we want them to feel it's one company. 

Everyone can use all the technologies. You're able to move across the enterprise. There's very few constraints on what we can do. And so it makes it a little more difficult and some of that contingent payment structures. 

How are you finding it to have to manage deals virtually during COVID? 

We've adapted pretty well.  There's always the question of, "Can you develop the kind of relationships you'd like to, and can you assess the cultural fit for businesses not being able to be in the same room and have the same type of engagement?"

And that's going to continue to be a challenge for everyone to manage in and us as well.

But as I talked to some of my peers, our experience has been that dissimilar, but we love to deploy technology to do everything that we do the same thing for M&A and that eased some of the transition. 

3M is very diversified from healthcare, the consumer, etc, and to some degree, very specialized. Understanding Corp Dev drives the deal and relies on subject matter experts. Do you organize your team to some degrees by business group, transportation and electronics versus healthcare? 

We do. I have one of my senior managers aligned with each one of our four business groups. And then we have junior personnel that are just general. So we'll work across projects. They are able to develop expertise.

We will rotate our senior managers among business groups though as well. I mean ultimately everyone in my team needs to understand 3M as a whole. 

But spending two years working with the healthcare team and just focusing on that, for example, rapidly accelerates their ability to do that and it will rotate. 

It's challenging, but at the same time, it's one of the things that we bring to the enterprise that we need ultimately. We try to become experts in looking at diligence and evaluating consumer companies, healthcare, IT companies, adhesives companies, electronics materials. 

When I was in banking, I was always moving. So I covered like five different universities. So that helps. I covered everything from internet software companies to food companies, but you have to have an appetite to learn all those different things.

So my staff too, I'm looking for people that like to do that. Not everyone likes to do that. They want to focus and do their one thing. It's harder for them and maybe not as good of a fit. 

Is there something you look for when you're interviewing people or I have to get a feel of that person truly has an appetite to continuously learn? 

You can tell if somebody is curious or not, it's not a bunch of different things. You know, broad set of interests, broadly educated, tried many different things, enthusiastic, positive attitude. And I think loves technology and learning things.

That's a big part of what we do. It's if you're curious about technologies and new products and new solutions, that's a big party, in a variety of different areas. If you want to be on the cutting edge, that's good. You're looking for people that understand because we're buying companies that maybe not quite at scale yet, but still high growth. Exciting doing something new, working with growth companies and appreciating that and liking that environment.

In your experience, because you've worked on quite a few deals in your period at  3M. Where do you see drive success when it comes to integration? 

Having a good plan upfront is important, I think. And the integration, it goes hand in hand with the synergy realization. Our integration at 3M is a sister group to corporate development, we're both in strategy development. 

I mentioned that we have  a set of principles that we go into it with, which is where trying to bring in or separate something that's part of one 3M is usually fully integrated or it's going to become fully integrated.

As we think about how to do the integration, how do we retain and drive the value that we're looking for in the deal? It's all integrated cost and revenue side. 

So we have a detailed plan that maps the synergies and then we need to execute against it. We have scorecards and we just track it.  

We're tracking everything, know all the key metrics,  retention, customer engagements, integration on the manufacturing side, it could be things around tax or customer service.

Successful operational execution and that's a big part of integration, is making it work. And so we pride ourselves on that. We have a lot of good people that can do that well. 

Yeah. We constantly ask ourselves, what does success look like here?

what are we trying to accomplish? You don't know where you're headed then you can't get there. We talk about what's the end state, what are the synergies and how do we measure? How do we get there and how do we measure our progress?

We spend a lot of time thinking about that, it's  second nature to us. I think the way we operate, but we spend a lot of time on it. 

We have leadership that sets the right tone and high expectations and they monitor our progress and help coach us. I think for us at the end of it, it's full integration that drives a lot of our thinking. 

Any other tips, best practices you'd like to share with other practitioners to help them with their practice?

It varies so much by company. There's lots of different models that have been successful. The general is knowing how you're going to create value and then just the continuing  improvement aspect of it. 

That was critical for us having alignment around what we're trying to do and how we're trying to create value for customers, for shareholders, etc, that's a fundamental principle. 

Sometimes you  can surprisingly skip that step, I think. And you can always benefit by going back and relooking at it and maybe retesting that.

Acquisitions with synergies, with integration, how does it all drive that. It can be challenging to drive one sort of integrated operation around that's really unified and consistent, but  it's exciting to do when it works. It's pretty powerful. 

Creating value, continuous improvement, and I hear this from a lot of organizations where they have this grand vision starting the deal, but then as it continues and progresses through the stages and they get into the integration. That's where things start getting lost and people are  mulling down checklists, and they don't know why they're doing things. How do you prevent that from happening? 

We have the post close rhythm around review, I said this pre-61224, there is a finished point, right? When you're driving towards maybe  it's having an end point because if it goes on forever, it's indefinite, I think you will lose enthusiasm and you can finish early.

We finish early, we celebrate success too. I think that's part of it. So we have a good outcome, we finish early, we hit a milestone early, and we celebrate that . 

It's good job by the team and they get rewarded for that. So I think  that's motivating for people to try good outcomes, superior outcomes, and exceed expectations.

So we try to do that and recognize. It can't go on forever. At some point you are  integrated and it's just operating as part of 3M and it goes into that operational rhythm, it's being managed day-to-day.

Maybe it would help just to make sure you have an end point. Sometimes things lag  and collectively we get together and try and figure out what we can all do together to make it work. But at some point you have to be done. 

That's interesting because having those endpoints and then metrics to success as you continue and end deals this sort of lapses over into the next deal and  builds into the culture.

I think we've evolved with thinking a lot about portfolio management in the last 15 years. And so it will change a lot.  

You definitely try to constantly roll forward, think about how you create an institutional memory and document things, so it's not lost. And just try to roll for it because it will change over time.

We've done very dynamic portfolio management. Like over the debt we were in and out of initiatives. We've really changed a lot over the years. 

So just trying to continue to do that, what stays the same as we change so much from the outside over the years, but always trying to take signals through outside. Listen to customers, listen to markets. 

Always think about how we're creating value and the ways in which you do that,  we'll just have to change over time as the markets change and needs change, customers change. So we try to carry that forward. 

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

You mentioned you're going to ask me this question. I'm trying to think every deal is crazy,  in some respect. It's like, what is really crazy? 

For me, I think of all the things that pop up on deals, every deal seems to be different. For me I think the most different was going down to Latin America and trying to do a deal in a semi hyperinflationary environment.

So that just creates a whole set of economics and financials that were new to me. So doing the audit, finding out that a small company has $5 million of cash in it's safe. 

So all the different things you do to deal when you have a current new operating currency. That's assumed and hyperinflation, we did not do this deal in this hyperinflationary economy, but that and how. 

You have to be careful on the financials because you can make money  on your inventory and your work in process,raw materials as inflation.  It can excess profitability and roll for the P&L. 

So I think working in that was probably some of the most surprising, otherwise it's always something new. 

That's definitely a unique variable to work around. And yeah, inventory cash in the safe is also another unique one. 

I'm trying to think of others, once we had a deal, we were doing. I had the option to do some leadership development training. And they sent me to meet with a customer in Jakarta. So I spent a week in Jakarta at the same time we're doing a deal. 

And I was ready to fly back in the airport. It's like, I think it was like 10 o'clock at night. I'm in the airport lounge. And suddenly the deal completely changed and over the course of next five hours we had to renegotiate the deal. 

My luggage is already in the airplane. So I had to get my luggage off the airplane and negotiate the deal in the room. I didn't speak the language, but somehow we figured out how to get my suitcase up from the plane. 

And then we finished up, it was around 2:00AM or 3:00 AM in there. I will tell you, there are no cabs at the Jakarta airport in the middle of the night, which shocks me. Luckily my hotel was able to come pick me up again, but then I just checked out.

But I don't know, every deal  has something like that, right? But, it's always something different. It's hard to think of one thing that stands out as what I like about it. It's always something new. 

Ending Credits

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