WEBINAR TRANSCRIPT
Nick Donato: Hi, everyone, welcome to today’s roundtable, in which we will be looking at how corporate strategics can outmaneuver private equity firms for competitive deals. It is Navatar’s latest in our thought leadership series on deal origination. I’m Navatar’s Nick Donato, and I’m going to be your moderator.
Now, some of you may be surprised by the angle that we took here. Historically, it’s been strategics that had the upper hand during auctions. They bring sector knowledge, they can speak the seller’s language and they have lots of free cash flow off of rich balance sheets that they can bring to the table, but something that we’re hearing in the market is that private equity firms are closing the gap.
They’re bringing to the acquisition process some core strengths around discipline, flexibility and focus. And with respect to cash flow… I just looked at this recently, the private equity industry is now sitting on something like $900 billion in dry powder and they are in ‘use it or lose it’ mode, so expect that to be deployed in the coming years. So the bottom line is that corporate buyers need to be prepared for a more competitive M&A market in 2017, and there’s a few ways that they can do that that we’re going to outline here today. But first let me breeze through some quick housekeeping.
First, what is Navatar? I see both familiar and new names in our attendee list, so for those new names, Navatar is a cloud services provider. We’re built on top of a Salesforce. What makes us different, though, is that we are wholly focused on corporate development groups, private equity firms, boutique investment banks and the wider financial services sector. So we know your industry and that allows us to bring what we call an institutional approach to your deal origination and your deal execution processes. We help you cultivate new relationships, create formal processes for nurturing them. We help you reach intermediaries, we help you track who’s bringing you the best deal flow so that you can spend your time efficiently. And best of all, we let you manage all this from one shared platform. The bottom line is that Excel and Outlook no longer cut it. You need to have your processes, not only integrated, but they need to become more sophisticated.
Also, we are recording this webinar and that recording will be sent out to everyone a few days after the broadcast. As your moderator, and given the topic, I also want to make this roundtable something of a debate even. So throughout today’s conversation, I’m going to provide some of the private equity perspective, play devil’s advocate here a little bit. And then I have with me here today Eli Slack of Masco Corporation, and he’s going to give you the corporate strategic defense. He will outline some of the ways that corporate development groups are responding to the increased competition from private equity shops, and outline some best practices for us today in winning that deal. We also have with us today David Lake of ButcherJoseph, which is a middle market investment bank. I asked David to join us because he sees the acquisition process from both sides. He can serve as the sounding board on any of the arguments put forth by Eli, and even give us his perspective as a neutral observer of how private equity firms and corporate strategics each approach the M&A process. So with that said, David, I’m actually going to kick this over to you. Can you provide our audience here some background on you and your firm?
David Lake: Yeah, so quickly, my background. I’ve been with my current firm, ButcherJoseph, for about four years. We are a boutique investment bank, headquartered in St. Louis, but with offices throughout the country and clients, really, throughout the country. And we primarily do one of two things, the first being Southside M&A and the second is we have fairly large or robust ESOP practice, where we work with clients to install employee stock ownership plans and more importantly, go out and raise the financing for those plans. So that’s my current position. I’ve been here for about four years. Prior to ButcherJoseph, I worked for another investment bank and focused primarily on industrials M&A and then before that, I started in investment banking at Citigroup some years back in their leverage finance group.
Nick Donato: Great. And Eli, background on you.
Eli Slack: Yeah, thanks for having me here today. Currently, I work at Masco, which you mentioned, I’m in the corporate development group. I’ve been with Masco for about two years. Prior to joining Masco, I did some strategy work and I worked at WESCO, which is a company based out of Pittsburgh, Pennsylvania. I was in their corporate strategy group as well.
Nick Donato: Thanks, Eli. Something I want to say quickly, too, as a matter of housekeeping is that towards the end of the webinar, we will be doing an audience Q&A. Just use that go to widget tool to submit your questions. And for the conversation itself, there’s a few themes that I want us to cover. The main thing to know is that strategic and private equity investors, of course, come from very different perspectives with respect to how they approach acquisitions. So, I want to touch on those differences by guiding the conversation through the entire investment process, from fundraising to final closing. I think if we can identify those differences that sets the right framework to discuss how strategics can go ahead and win that deal.
So to kick things off here, let’s start with fundraising. And what we hear is that because private equity firms, they have to raise cash on an ongoing basis and that requires time, effort and resources, that strategics have the upper hand here. That they can use their large cash reserves to avoid this entire process. But then again, what I’m also hearing, to give the private equity perspective, is that fundraising process, in and of itself, is the very reason that they’re able to approach M&A with more financial discipline. So, who’s right here? What do you guys think?
Eli Slack: I’ll take a first shot at that. I think that financial discipline can be an issue for strategic buyers. I think for sophisticated strategics that you self-impose financial discipline, you can create clear metrics and clear guidelines that you intend to follow throughout the process and it allows you to avoid losing some of that discipline. Strategics can sort of mold themselves into disciplined buyers. To your point on the fundraising, that is something that we’re not distracted by. If you’re a healthy strategic with a strong balance sheet, that’s something that’s just a given.
Nick Donato: David, your thoughts?
David Lake: Yeah, I would say that this is one of those areas where I think it varies a lot by the corporate. Certain large groups are clearly going to have sort of self-imposed disciplines and committees and whatnot, parameters around investments that may or may not exist as you work down the spectrum of size and capitalization. So I think this is a scenario where it’s fairly standard that across the board most financials are going to have this discipline and it’s just something that I think you need to expect when you’re going against one or bidding against one. But on the strategic side, it’s tough to say. Typically, there will be more discipline as you work up the size spectrum.
Nick Donato: And now, what does that discipline look like exactly? So we’re making a point that they have these large balance sheets. And so, does that mean that they’re bidding higher or that they’re looser in their investment criteria? What can strategics do here to capture some of that discipline that we’re attributing to the private equity side?
Eli Slack: Yeah, there’s a few things. One is, have very clear financial metrics that you track when you look at different deals and make sure that those are established before you’re looking at any deal in the heat of battle. Be very clear in terms of what types of returns you’re looking for from an M&A perspective, and make sure that all the decision-makers agree on pre-established guidelines heading into a deal, so that you don’t get caught up in deal fever.
Nick Donato: And what do those guidelines look like? Are we talking about sectors and sub-sectors, number of employees at a company, because I’d imagine the more metrics you have, that also introduces more discipline.
Eli Slack: Yeah. To me it’s more the financial returns. So, how much cash or income you anticipate a particular target will generate and what you’re required in terms of return on investment based on your forecast of the performance of the target.
Nick Donato: And with fundraising as well, David, I want to turn this over to you, is there a timing issue that could give strategics an advantage if they’re not in the right stage of the fundraising cycle, may that put them on the sidelines for a potential deal?
David Lake: Yeah, absolutely. I think that’s a key difference. There’s always going to be timing issues on both sides, but with respect to fundraising, clearly, you could have a target, an opportunity that is a perfect fit with even, perhaps even synergies with a portfolio company. But there could be a case where just kind of at the point they’re at in the fundraising process precludes them from being active. They’re either no longer investing out of a fund or raising funds and they just can’t participate for that reason.
Nick Donato: And would macroeconomic conditions play into that as well? If it’s a strong economy versus a weak economy?
David Lake: Yeah, it could. Macr economic conditions, it’s pretty broad. If things are going well, then the stock market’s going to be doing well. Equity price is going to be high, so strategics have that advantage of using higher priced equity, not to mention they’re likely going to have more cash on their balance sheet with financial metrics being greater in a bull economy. On the flip side of that, of course, in stronger economies, typically, credit is looser and it’s more available, so that gives the edge to PE buyers, typically, although, obviously, corporates can tap into that as well.
Nick Donato: And, David, I want to pick your brain on this too, because one thing that we know that corporate strategics have an advantage over is that they do not have to rely on a third party bank for financing. And if that private equity firm can’t get that leverage for that financing, they could lose the deal. How important have you seen that be as a factor when you’re working with sellers?
David Lake: It’s a big deal. Clearly, prices typically, are the number one factor when you’re working with a seller in terms of evaluating the opportunities they have. All else equal, if you have two offers come in and one is from a financial buyer with a financing contingency, versus an all-cash deal from a strategic, again all else equal, you’re going to go with the latter. It’s something that’s incredibly important, because folks obviously want a seamless execution and a certainty of closing, which you would more often than not get with a strategic in that scenario.
Nick Donato: Eli, is this a big selling point that you use during the acquisition process?
Eli Slack: Yeah, absolutely. There’s a few different ways we can sell ourselves to sellers, and I think having a strong balance sheet and the certainty to close is certainly a big one of those.
Nick Donato: So I want to take the conversation to deal sourcing. And here too we hear that strategics are said to have an advantage. They know their own sector best, and they may have lots of connections. But again, I’m playing devil’s advocate here. Isn’t it true that private equity firms have their own deal sourcing advantages, because they have a bigger network of advisors and bankers and lawyers who are constantly feeding them deals. Who has the advantage here?
Eli Slack: I think it depends. There are very sophisticated private equity firms out there who do a very good job of sourcing deals and keeping their attention to the opportunities that are out there. I don’t think that as a strategic, you should become complacent, or assume that you have an advantage. One, because you’ll be competing against other strategics, but two, you’ll be competing against very good PE firms. You have to be very focused on where you want to spend your time, looking in M&A, I think you have to cultivate relationships with the third parties and with potential sellers.
David Lake: My general feeling on this is that strategics do have a huge advantage in their what I’ll call local sector in their immediate market niche, where the handful of competitors, or whatever the number is, that they are in the market with. In the adjacent sectors, sectors that might be of interest to a strategic, I think more often than not, there’ll be less knowledge, less contact points there than a financial buyer would have that’s more actively involved in industry research or industry mapping.
Eli Slack: Yeah, and, David, I would agree with that. I think that’s right. I think the way that a corporate manages through that is one, being very clear internally about which adjacencies you want to play in from an M&A perspective. Reaching out to potential sellers ahead of time, before they get to market, and cultivating investment banking relationships or other third parties that… In telling your stories, explaining which adjacencies you want to be in, why that fits in with your strategies so that when they are representing somebody going to market, you will be on their call list.
David Lake: Yeah. And I would say that is tremendously critical because typically, from the intermediary side of things, when we’re putting together a buyers’ list or a lenders’ list, when we’re operating within a specific industry, more often than not we’re going to go out to all the folks in that broadly defined industry. Whereas, on the strategic side of things we will go out to maybe a few direct competitors, maybe a few sub-industries that we feel are sort of adjacent. You might get a handful, for instance if we’re out to market with a gear manufacturing company, we’re going to show that to every PE firm that we think is, or that is in the sort of industrial space that plays in that space that where its size and geographically relevant, whereas we’re not going to obviously show that to every strategic in the industrial space. A few gear manufacturers will see it, a few of what we deem to be adjacent market players will see it. So in terms of quantity, I think the PEs have a big advantage, so that Eli’s point, cultivating those relationships and staying on folks’ radars and making sure that they know what you are interested in makes… Is good practice, certainly.
Eli Slack: Yeah, I was just going to say, one quick footnote to that is, when you do get contacted by a banker that’s maybe not directly… With an opportunity that’s not directly in your core market, it’s maybe an adjacency, one or two steps away, I think you need to be open-minded, be appreciative, because the banker is thinking of you, maybe a little outside the box. And I think you want to continue to see those types of opportunities, so I think welcoming that and expressing your appreciation is probably a good posture to have.
Nick Donato: I think that that is an important point. In order to win the deal you need to first find the deal. And as… Both of you are making the point that it requires a step of cultivating those relationships. How are you specifically managing that process? Are you cold-calling as many boutique banks as you can? And, David, are you doing a wide net strategy, too? What’s the specific process there?
Eli Slack: So from our side, corporate development side, I think one is making sure you’re aware of all the banks playing in your space. Having regular conversations with them, and to me that means every quarter or so at least. Articulating your strategy, being very upfront about the types of… How you want to play in the space. And if you haven’t heard from somebody in a while, reach out to them. I also think that it means internally identifying the adjacencies you want to play in and identifying the key players in those adjacencies and reaching out to see if there’s an opportunity to start the cultivation process, independently without a process underway.
David Lake: Yeah, I think this is an area where I think the PE buyers… It’s just more natural for their process. Obviously, this is their focus, this is their day job, so to speak. For instance, we will have, in a given week, we’ll have, maybe call it three or four PE firms in our office giving us their 30 minutes about what they want to see and keeping the relationship warm. I can’t say the same on the strategic side. Obviously, there’s some reasons for that, as I mentioned. But I just think being as proactive as possible obviously helps. And if you’re in under an engagement or near-term, the strategic obviously, that doesn’t apply, but just an observation.
Nick Donato: And now, are we having a blanket or holistic approach when it comes to keeping these relationships warm with either intermediaries or potential buyers, or do you have some process for tracking who’s bringing you the most quality deal flow or who’s the most fitting buyer for a potential deal?
Eli Slack: Yeah, we do track in Navatar which bankers we have relationships with and when we have contacted them, and the same thing on the potential seller side, keeping track of information we have, recent conversations, agree to follow up.
Nick Donato: So I want to move this to the due diligence phase of the investment process. Again here, we hear that there’s an advantage for strategics in that they already know the target’s industry. Meanwhile, private equity firms have to perform more due diligence at the outset. Do you agree? Is this an advantage that strategics can use to win deals?
Eli Slack: My view is that PE buyers have an inherent advantage when it comes to due diligence. Typically, they are short-term owners. Again, typically, have a three- to five-year horizon that they consider, whereas as a strategic, you are looking at an opportunity and trying to figure out whether over the entire course of the life of the business, are there any potential risks that could damage the broader business. So, I think strategics maybe take a different stance when it comes to due diligence and do maybe a little bit more digging, whereas PE firms can quickly get through diligence and get comfortable with the target pretty quickly.
Nick Donato: David, if I could get your thoughts on this too, we mentioned at the beginning that private equity firms have more of this standardized approach to due diligence, and we heard Eli saying that that’s becoming more necessary for strategics to do, regardless if they have this sector knowledge. Are you seeing still wide differences between the two approaches?
David Lake: Yeah, I don’t know if I’d say wide. My thought is that a strategic certainly is going to know its core industry a lot better than a financial would. They’re going to just take for granted a lot of things that a financial buyer knows that it doesn’t know and might get complacent and not necessarily do any sort of third-party research, etcetera, even though its knowledge might vastly exceed whatever financial buyer’s would. It might have… Its finger’s going to be on the pulse of that industry, it’s going to know what the hot trends are, etcetera, so I think that might add to complacency, where a financial buyer is going to be a lot more proactive in terms of… I shouldn’t say a lot more, but it has the potential to be a lot more proactive in bringing on research providers and advisors in helping them assess the opportunity.
Just as an example, this is more in that kind of a capital raise side of things. But, when we get a first round bid or first term sheet, etcetera, from a financial buyer or player, they will have a contingency where they need to have an industry research report performed and produced by… And they’ll specify which industry research firm they want used and they’ll be able to quickly assess the quality of the financials after having gone through the data side and knowing what’s needed, and again, baking that into their term sheet or their proposal that we need to move forward. We need to have sort of a financial review performed or quality of earnings, what have you, where you might not necessarily, and again, it varies broadly on the strategic side. You might not necessarily have those sort of restrictions or requirements on the strategic front.
Eli Slack: And, David, just to follow up on your point, I think there is a risk of strategics becoming complacent, because they do know the industry they play in so well. And so I think one of the ways to avoid that and figure out ways to win deals is to take a data-driven approach to analyzing opportunities and to use facts that are easily understood and shared. And what that means is, if you’re looking at the industry and one of your business units or one of your operating leaders tells you it’s a big industry, “Okay, well, what does that mean in terms of dollar size? What are the margins like?” Use specific numbers and to the extent you can go into this type of analysis with a framework that you use regularly, so you make sure you’re not missing anything.
Nick Donato: Yeah, Eli, if we could actually even elaborate on some of those best due diligence practices, because we hear that for private equity firms, this is one of their core strengths…that they can move quickly, that the team is in regular contact. I would imagine that’s harder at a larger organization. What are some best practices that you could share?
Eli Slack: It can be, that’s another risk, is that you can get bogged down in bureaucracy if you’re not careful. So, there’s a few things that I’ve seen work. One is getting buy-ins from executives and everybody that will be working on due diligence, when you’re not in the middle of due diligence. Because, obviously, due diligence can be a very stressful and time-consuming process. And so what that means is, explain the process you intend to use in due diligence, share the exact materials that you intend to use, the templates, the types of questions you’ll be asking. And so that everybody is comfortable with what you’re doing ahead of time, and when they have time to think about it and they have questions. So that when you’re in diligence, everybody’s speaking the same language and there’s not a lot of questions about the process, you’re able to focus on the specifics of the diligence you’re performing.
Nick Donato: And what might you do if you’re a, say you’re a larger organization with offices across geographies or timezones, or maybe one of the senior decision-makers is working remotely or they’re on holiday. How you keep that team nimble and how do you keep that communication going?
Eli Slack: Yeah, I mean one is, it takes a lot of… I think that’s one of the things that corporate development has to stay focused on. And I think setting up regular meetings, both before diligence when you’re just establishing the framework that you’re going to use, and then once you’re in diligence, schedule all the meetings you intend to have, lay out a clear schedule, with milestones and share that. Make sure there’s a document and ask everybody if there’s any issues with it. Basically just being organized and thoughtful and having an agreed upon framework.
Nick Donato: One thing that we also hear sometimes is that, yes, corporate strategics know their sector best, they are in that sector, so of course. But that sometimes it can run the risk of assuming knowledge that they don’t already have. So if they are going into a… Let’s say a different sub-sector or a different geography, where the culture is different, they may think that they really understand biotech, and be unaware that there are these subtleties or wrinkles. A, do you agree with that? And B, if you do, how does a corporate strategic overcome that, so in this case that they’re not losing the deal?
Eli Slack: Yeah, yeah, no, that’s a good question. Sometimes winning the deal is actually losing it, right, if you’re not careful. So, I think there’s a few ways to do that. One is logic tests. What the statements that you’re making, and the deal thesis by using third part data, publicly available information, asking the type of questions of the operational team that, their underlying functions about the deal, and really getting to know the industry is very important. I don’t think you should take anything for granted. You should assume you have zero knowledge and that you need to get educated, when you’re moving into an adjacency.
Nick Donato: David, do you see this during conversations between buyers and sellers that sometimes the corporate strategic group is coming in there really hot and confident and maybe not speaking the sellers’ language in a particular instance?
David Lake: Yeah, you could. There could be, even if you are in the sort of same sub-sector, you could have vastly different approaches and can just impose your philosophies on a target, and soil that relationship or what have you. So it’s certainly possible that obviously that you’re going to want to know your target as much as possible. Not just their products and services, obviously, but the way they do business, so to speak. And, you know, geographies and what have you.
Eli Slack: Yeah, and just to add to that a little bit. If you are in diligence, for instance, and the way the company tracks their performance doesn’t necessarily tie exactly to the way you would perform it, there may be good reasons for it. If you’re looking at an adjacency, maybe the critical drivers of business performance are different. I think one way to avoid damaging the deal is to have a conversation with the people on the other side to understand why they do things a certain way, and maybe learn something, and maybe you get a better appreciation for the key aspects of that adjacency.
Nick Donato: And staying on the topic of due diligence, one thing that I know that private equity firms do well is coordinating the different channels of due diligence that they need to perform. So they will have separate, yet integrated, processes for doing the regulatory due diligence, or the environmental due diligence, and the financial due diligence, and then putting that together into a single cohesive. Is this an area that strategics need to play catch up? Do they have some type of advantage here by knowing the sector, so perhaps they override that built-in private equity advantage?
Eli Slack: Yeah, yeah, I think if there is a system specific key to strategic, I think they would try to make sure that all these work streams are aligned, and that’s, again, another aspect of how… What I see the corporate development role fulfilling, is insuring that… Okay, all the different functional areas are pre-defined, you have a subject matter expert leading each one of those work streams and everybody’s aligned in terms of the calendar and timing, and process. So, in some ways we have in-house expertise and they understand what the strategic buyer wants out of a deal, whereas I don’t know that all private equity buyers have that, sometimes they go out to third parties. And third parties may not fully appreciate what they’re trying to achieve in diligence. So, there are some ways that corporates can have an advantage in that area.
Nick Donato: So I want to take the conversation to valuation, which of course is another factor that goes into who wins the deal. Does one group have an advantage over another here?
Eli Slack: So, as we talked about earlier, financials sometimes are seen as being more disciplined, so I think it’s incumbent on corporate development folks to ensure that there’s that in-house discipline for strategics. I think, again, having a well-defined process and metric and goal when you’re not in the heat of battle is critical here. So, it can be a disadvantage but if you are aware that it’s a potential weakness, and you develop a disciplined process, I think you can avoid any issues here.
Nick Donato: David, have you seen this… We were using a term before, called ‘deal fever’. Have you seen some corporate strategic groups during negotiations, or perhaps elsewhere, demonstrate this deal fever?
David Lake: Yeah, sure, you’re likely to see that, I think, more on the strategic side of things. Folks might get excited about a certain technology, I think, they’re more likely on the strategic side to appreciate a certain aspect of what a target does, and really want to get excited about bringing that in-house and start dreaming about the various or new markets they can plan or upselling opportunities, etcetera. So, I think you’re more likely to see that on the strategic side just because in a way, their knowledge becomes a negative factor to that degree that… Although they might understand the industry, they might overestimate or get overly excited about what opportunities may exist and it’s a trend or something fleeting, or what have you.
Eli Slack: Yeah, I would agree with that. There’s always a risk on the strategic side that you form an emotional connection with an opportunity. And I think it’s part of the corporate development team’s role to be aware of it when it’s happening and try to rein it back in. And some of the key indicators can be things like synergies start to creep, so it’s always a good idea to keep in mind what synergies worked at the beginning of the deal, and if they’re 50% or 100% greater as pressure’s being put on by sellers, then that’s a red flag. If people are only making positive comments or only see the positive side of a deal and brush off negative facts, that’s a risk, too. And so, I think it’s an incumbent upon the corporate development team to pull that back in and say, “Are all these things true? Let’s get a sanity check here.”
Nick Donato: Eli, that’s interesting. Would you ever assign someone a contrarian role that they have to go against the group so that you don’t experience that deal fever?
Eli Slack: Yeah, I think that corporate development assigns it to themselves. We have to see ourselves as rational agents and make sure that we’re never too attached to any deal and see ourselves as always the voice of sanity and try to provide, if it seems like everything’s falling out a certain way, either positively or negatively, always try to provide the counter-perspective.
Nick Donato: So, bringing the conversation closer to the end of the acquisition process, I want to talk about how everyone communicates their vision with the target sellers and how much does the end game matter here. Strategics obviously are looking for the long-term play, but I imagine that private equity firms may be able to offer more enticing cash-out options for retiring founders, or maybe they can communicate a buy, improve and sell approach that makes it feel more like a partnership that some sellers may like. How much does this matter? And how can strategics exploit these different dynamics to win the deal?
Eli Slack: Yeah, I think so. I think David mentioned earlier today that price is always going to be a critical factor, and I agree with that. But once you’re in a tight grouping with price, you’ve earned the right to be in the final conversation. I think understanding what the seller’s objectives are is critical. So, is there something related to their employees that’s very important to them? Is there something around the brand name of the business, maybe it’s a family name. Whatever it is, I think having an honest conversation with the sellers, appreciating what they’re trying to do with this business and genuinely respecting it, I think can make the difference between a strategic and a financial buyer. PE firms are often… They have financial targets they’re going to hit at some point down the road, they’re probably going to sell the business, whereas you can paint a picture, legitimately as a corporate, that you are a good home, a long-term home for the seller’s business.
Nick Donato: David, how much would you say that this matters? During those conversations and you’re keeping it honest, how much does things like keeping the company name or potential job cuts tend to matter to sellers?
David Lake: I think they’re hugely important. I think a lot of times, especially if you’re dealing with on the smaller cap side you might be dealing with a founder seller. His name is on the business and he doesn’t want that to change even if the company changes ownership so, that’s a key point or it could be sort of a… It’s a pillar in the local community where this company’s been around for 80 years or whatever the number is. And they don’t want to have the name changed, they don’t want obviously the factory to move or whatever the case may be, so it’s tremendously important. And these folks can obviously be neighbors or what have you, good friends. So certainly, the personal side of things and headcount reductions are critical to most sellers… Not all, certainly, but most.
Nick Donato: Eli, in terms of communicating that vision… How much does certainty over what the post-merger company organization will look like tend to matter in your own acquisition process? Is this something that sellers are asking a lot of questions about? Is this something that could be used as a competitive edge in winning the deal?
Eli Slack: It varies by situation, but I think to David’s point, it often is a critical factor. And so I think you want to be upfront first of all with the seller, and if there are things that they’re looking for that don’t work for you, I think it’s good to clear the air and get that out of the way upfront. But I do think… Coming to an understanding about what’s important to them and how that could fit in the organization is critical and we try to have those conversations early and continue the dialogue throughout the process. And hopefully everybody is comfortable on closing date, that everybody understands what the future vision is and everybody’s happy with it.
Nick Donato: Now, I’m going to very shortly turn this over to audience questions, but a few points at the start of the broadcast has caught my attention. We were mentioning that strategics really benefit when they take a more institutional approach to their deal sourcing efforts, and that relationships matter; that you need to be reaching out to as many intermediaries as possible. And not only that, but you need to be allocating your time efficiently by taking those coffee meetings or arranging those phone calls with the bankers and other sources of deal flow that are bringing you the best deals. So it’s both a quantity and quality type measure.
Now I anticipated this point being made, because I want to show what that looks like visually. If you can, allow me to use Navatar Corporate Development as our example platform here. So using this system… Look at this deal flow dashboard here that our corporate development clients are using. Now, this is very high level, but I just want to make the point that your corporate development group should be tracking, as I said, the quantity and the quality of the deal flow that’s coming through and even over preset time periods.
So to win the deal, you need to have a window into how many deals the group is reviewing. And more importantly, you should be monitoring how many of those deals are advancing past a certain stage in the deal pipeline. Now if it turns out that not many deals are advancing past, say, a letter of intent being signed, that should tell you something. Maybe, for example, you’re not reaching out to the right bankers or intermediaries. They’re giving you dud deals, or maybe deals that don’t fit your investment criteria. So what do you do in that instance?
So now look at this, and again this is all very high level. But that should take you to some type of a deal sourcing dashboard or some types of intelligence that’s capturing this information. So, Navatar lets you know which bankers you haven’t experienced a communication touchpoint with for some time because, remember we said you must maintain warm relations, but it also lets you know which bankers are bringing you those best deals. So, in this example, Citigroup brought us the most deals that went past an initial assessment. Maybe I want to reach out to them or analyze what it is that Citigroup is doing that is resulting in this success. Or maybe I want to make my contact at Citigroup someone to reach out to at least once a month, instead of once every 90 days.
At any rate, the goal’s the same. Receive not only more deals, but better quality deals. Because as we heard here today, quality deals means more synergy, it means a better fit, which means you have a better story to tell sellers. And that also comes down to price, because if you’re finding more quality deals, that allows your group to, of course, bid higher. We actually have a client here that put some hard numbers on it. This is Blackford Capital, it’s one of our private equity clients. They went ahead and measured the number of deals that they looked at pre- and post-Navatar, and you could see here that they now review nearly four times as many deals today than they did pre-Navatar, and the quality of those deals are becoming stronger. Again, a copy of this webinar and the slides will be emailed out to all of you. Thanks for allowing me that.
Some audience questions I see are coming in. So I want to move this onto the Q&A section. First question up, John from Chicago. He wants to ask if is it possible to reverse engineer a PE bidder’s maximum and a multiple. Eli, is that one for you?
Eli Slack: Yeah, I don’t know that you can ever specifically nail down exactly what a PE buyer’s thinking or what they’re putting into their models. But certainly there are ways to get in the range. It’s paying attention to what sort of leverage the market is accepting, looking at what PEs are paying for similar type deals and how much… The price of that and those types of things. So you can get a rough idea of where PEs are setting it at any given time.
David Lake: Yeah, I would agree that it is a rough estimate. Probably within a turn or so, you could see generally the valuation multiples aren’t going to be publicly available. But you could take a look at where leverage has been and back into what a potential equity contribution could have been and then get to an approximate overall value.
Nick Donato: We have a second question coming in. Teddy from New York wants to know how much of an impact does a shorter due diligence time period matter in winning deals.
Eli Slack: Yeah. So, I think there are certain processes that are set up anticipating the very short windows. And so I think, to some extent, those are tilted a little bit more towards PE. To the extent, to the corporate buyer you can get everybody positioned and ready to move quickly, and you can compress the difference between how quickly a PE firm can do it and how quickly you can do it. You’ll be able to stay more competitive in those types of situations, but certainly the window does matter.
David Lake: I was just going to add a little bit to that. I would agree, certainly, if there’s a calendar, deadline, or what have you, where a shortened diligence period would be appreciated by the seller, obviously that bid’s going to have an advantage. But I think on the strategic side, it probably depends a little bit… I think you pretty much know what you’re going to get in terms of a financial buyer’s diligence, how long it’s going to take, etcetera, for the most part. It could be shorter or longer on the strategic side, there could be good or bad reasons for that, but I would agree that to the extent you can shorten that diligence period certainly in certain circumstances, it’s a big advantage.
Nick Donato: A question coming here, April from New York. Related to technology. She’s asking Eli how technology or systems have helped standardize the deal origination process. Eli?
Eli Slack: Yeah. So, as I mentioned earlier, we do use Navatar. I think running a report, keeping track of who’s in your pipeline, keeping track of how quickly things are moving through your pipeline and when the last time you talked to a banker or a potential seller… Without data, it’s hard to make decisions and really understand where you are. And so, to the extent you’re able to track your pipeline and track progress in your pipeline, you’ll increase the likelihood that the deal flow is moving through your process. And as we said earlier, the more deals you see, it increases your chance of ultimately being successful with one of them.
Nick Donato: We have another question coming in here from Khalsara. I hope I’m pronouncing that correctly. How much does the ability to exit the deal within a set timeframe, so a three- to four-year holding period, allow private equity firms to take on higher valuations? How could a strategic overcome that?
Eli Slack: So, first part of the question, there’s a few things. One is private equity firms might be able to get a little more comfortable with certain risks, and not necessarily maybe reduce their purchase price if they find something. And they have knowledge that they’re going to be able to get a payout in a three, four, five year time frame. Whereas, we’ll rely on the performance of the business for the long-term. I think how you overcome that is one, finding deals that are strategically a good fit with you, where there’s more likelihood to be synergies. So obviously there’s more value there. And then doing your diligence, making sure there’s no risks, getting comfortable with the company. And if there’s not a risk you’re comfortable with, maybe you’re not losing… That could be a good outcome too, if you’ve identified selling and passing on a deal that’s not good.
David Lake: I would say, I don’t know if that’s a huge advantage on the financial side, because I think typically you’re not going to assume a reduced holding period. You certainly might, but I think more often than not, if you are very bullish on an opportunity, you’ll still assume an average hold period. So probably not a huge impact on what you would bid. But again, circumstances could vary.
Nick Donato: We have one final question coming in here, Michael from London is asking if it’s true that strategics can use leverage just as much as private equity players do? If so, why don’t they?
Eli Slack: Yeah. I think we’ve been more focusing on both ends here, at least in my mind, and where strategics would have the cap to do the deal. I think part of the… And it varies by strategic buyer. I think part of the thesis for doing… Oftentimes, it’s a good way to deploy capital and get strong returns. Additionally, private equity firms, it’s their model to load something up with leverage and keep it isolated as its own sort of entity. I just don’t think that… The typical route to both ends for strategic… In some cases if it’s a large deal or you need to raise bonds and things like that, if it’s a merger of equals, you can get into those situations. But even then, the financing’s going to be different, you’re not going to lever up and go six times on a deal, because that’s just not the type of lending that corporates typically are comfortable with. That’s sort of a PE specific model.
David Lake: Yeah, I generally agree, I don’t have a whole lot more to add to that. I would say, it’s just one of those things where if it’s a bolt-on or a smaller deal, typically leverage isn’t employed. I think, could be that it’s just not large enough to go through that process and incur additional fees and what have you. But certainly to the question, the opportunity is there, those relationships probably aren’t as strong with lenders on the strategic side, but to the extent a company is comfortable with leverage, etcetera, and clearly just based on sort of experience, the financials are going to have a leg up there. But in theory, it’s open to both parties, leverage.
Nick Donato: So, that just about does it for time here. I want to thank Eli Slack of Masco Corporation for joining us today and providing the corporate strategic perspective. I also want to thank David Lake of ButcherJoseph, a middle market boutique bank for acting as a sounding board and being something of a referee in this debate of who can win the deal. On behalf of Navatar Group, I’m Nick Donato. Enjoy the rest of your day.