Growth Through Acquisitions | Wharton Scale School

0:04 hello there I'm Karl Ulrich I'm the vice dean of entrepreneurship and innovation at the Wharton School and I first wanted to start by saying happy new year we we are we have a great turnout tonight in our theory is that everyone woke up on January 1st and said you know I really need to learn about how to scale my venture and so I'm gonna sign up for wharton scale school this is our remarkably this is our seventh wharton scale school event most of you many of you have been here for many of the other of the others six but let me just give a very quick overview of the big idea the big idea is that many universities have rushed into the business of inc you what we call

0:49 incubating the fruit flies getting new ventures started and we really feel like while that's a super exciting thing to do and we do it very well at wharton that wharton occupies a unique position that allows us to use our very Wharton Asst the things that were great at analytics finance marketing and operations apply those things to the challenge of how you take a product a company that has found product market fit and scale it to be an enterprise of tremendous value and so we coined this term wharton scale school and we've convened these events to bring our mostly our alumni experts in front of in front of all of you to share expertise about scaling new ventures the topics

1:35 we've covered have been the first one we did was we've done one on on scaling sales on using analytics in scaling on scaling talent on connecting strategy with execution and and this one on scaling through acquisition large broadly speaking scaling scaling through acquisition by the way we are we plan to continue these and so if you have ideas for another topic you'd really like to see us address we'd love to hear them so just reach out to me or any any of our staff I want to recognize Irene again here Irina steno Irina is champions and leads our scale school initiative it's done a terrific job on all this also Alison grant who's always hidden because she doesn't like the spotlight

2:21 at all but she's the one who really makes the event happen and so let's give a big round of applause to both Irina tonight we that the format of scale school we found that works really well is we have a faculty leader in the subject area that convenes a panel and moderates a discussion gives a little framework and then and then moderates a discussion and so my job is now to introduce our moderator and he will in turn introduce our panel so we're super lucky to have with us the dapper Dave whistles right here and Dave Russell's is one of the most popular faculty members in the Wharton School his course might be I didn't actually look at the data but I think it's the highest rated

3:07 course at the Wharton School he's a professor in the finance department and has an incredibly distinguished record starting with a degree from our management and technology program in from computer science in Wharton he then went on to have a career at McKinsey and got a PhD and came back to teach at Wharton among Dave's many accomplishments he also has and I just checked this today the top-selling book on corporate valuation really the bible of corporate valuation so and and his course which is venture capital in the finance of innovation is really also quite central to the themes were here we have here so let's welcome Dave whistles all right thank you

3:52 thank you very much I really appreciate you setting the expectations low all right so so first of all welcome back welcome home to many of you who who've graduated and are rejoining us I see many familiar faces some my own students in the audience many my teaching assistants are here as well so it's exciting to see so many people come back home and what a wonderful place fort in San Francisco is we you know obviously have the home school back in Philadelphia but I tell every one of my students who's interested in Ventura or Tech that they've got to get out here because the ecosystem is just unparalleled and I wish we could create the same kind of ecosystem back in Philadelphia I know there are folks that are trying to do it with for instance first round capital but it's really hard

4:39 I mean building an ecosystem takes generations and to have this in San Francisco and to be part of this sub is is fantastic from my perspective today I'm the school part of scale school so just for a few moments I'm going to show you a couple slides about how I think about mergers and acquisitions and I tried to you know I try and tilt it towards a younger company but really I don't make a distinction I'm always just thinking about sort of what's the role of mergers and acquisitions to make your company successful and so I just want to show you a few slides to get the conversation started and for those of you who have taken my class you're gonna see some familiar stuff because some of the core stuff that I think about is is the North Star for me it just doesn't change and what that's all about given my background in finance is really the

5:24 link between corporate strategy and and value creation and so I want to start I want to start there because that's the ultimate goal what we're trying to do with these organizations is how do you build a successful entity that's going to be able to compete over long periods of time so with that said I'll get started with a few slides and then I'll bring our panel up to talk about this from a more practical perspective so the first thing I just want to remind everybody is what drives value creation so from my perspective there are three things that really drive value creation and when you're doing an acquisition I think at the end of the day you really want to drive value creation with the acquisition so what are the three things that were continually thinking about a lot of this comes out of my work not just here at Wharton but also out of McKinsey as well number one

6:11 you have to drive revenue growth and you guys here in San Francisco you think that's easy and it is for many entrepreneurial startups but for most large companies around the world growing the business and a zero inflation environment in which you already have a global footprint is is nearly impossible companies that are growing at 2 or 3% per year almost considered that to be a success and especially with American companies today bringing foreign revenues home with the change of the dollar versus let's say the euro many companies have been shrinking for the last couple years once you take into account foreign exchange rates so number one we've got to help our companies grow number two you have to earn a healthy return on capital and a lot of M&A is around this right how do you put two organizations together and sort of squeeze out Marge and squeeze out capital make things more efficient and then the final piece and that's a little

6:58 bit what today is about is how do you build an organization that's sustainable over long periods of time and that's what I think is probably the most difficult we have tons of great tools here at the Business School many of them developed by Carl all right how you grow your business we have great tools around how to drive great returns on capital including some of the work from the finance and accounting departments the one thing I don't think we've really unlocked yet is sustainability how do you drive a sustainable organization it's very hard for companies to pivot from sort of one sort of generation to the next and my students often ask me give me examples of companies that have been able to do it and unfortunately the examples usually are very narrow in length because most companies really are sort of one product wonders all right so from an acquisition perspective what are we talking about let me introduce you to

7:46 a study that was done at a McKinsey and company and for me it's one of the studies that resonates the most with a senior executive teams it's a study called the granularity of growth and what the team at McKinsey did was they they looked at a number of companies a few hundred and they got really specific about what drives the difference in growth rates across the three companies and what they found is as follows number one they found that 5% of the 8% can be attributed to something that they call portfolio momentum so what this means is a very granular basis your sub markets are growing they have a natural momentum to them number two it's about capturing share that's another half percent and

8:31 that was share and then finally the last piece was M&A around 3% from M&A but what was also interesting about this study is they called this the three Pistons of growth right where I call it where Sharon ma the three Pistons when companies were able to be best-in-class versus their peers in all three of these Pistons that's when they saw best-in-class stock price performance and literally as you pulled away one of these Pistons the stock price performance of the companies dropped and so it's interesting to think about these three things when you're trying to drive growth within your business number one how do I continually as a senior leader pivot towards momentum how do I make sure that I'm in momentum markets and again that sounds

9:18 trivial but as we'll see in just a moment some markets have momentum and some markets don't and if your organization is not pivoting you can find yourself in trouble number two probably the hardest is to capture share consistently capturing share those awfully difficult to do and that's because your competitors are pretty smart and anytime you have an innovation they're going to do their best if it's a great innovation to copy that innovation and then number three is mergers and acquisitions M&A now this three percent here is a little unfair because this 3 percent is actually the combination of companies so as an example of I have a 100 million dollar company that's not growing and it buys another 100 million dollar company that's not growing I now have what Peter my teaching assistant you better get this right 200 million dollar company he's always a

10:04 front row kind of guy to it like that a 200 million dollar company that's not growing so this is a little unfair we say this M&A but I do think it's important because often M&A will help us in that top category which is how do we pivot towards growth all right so let's continue the discussion what do I mean by momentum versus no momentum markets so imagine for a moment that you work for a chipset company right so you make chipsets that go into all kinds of devices it turns out that you're in two markets one in which you have a very large scale share which is been part of your business for a long period of time and one which is relatively small the

10:50 first one that you sell chipsets into is called the set-top box right it's the cable box that goes on top of your television the bottom one is the wireless chipset you've made your name in the top one that's the market that you're currently in now when we looked up the data it said that the market was going to grow at 2% per year which is pretty anemic for a tech space but I'm not even convinced it's gonna grow at 2% a year I mean realistically if we take a look at the year 2030 how many of you think we're gonna have a cable box that sits on top of your television that decodes cable so to grow at 2% a year is probably pretty aggressive I probably don't have to tell you the trends that are involved with Wireless right Wireless of course and mobile is taking over the world but imagine that you have

11:37 positions in both of these things imagine that the majority of your position is in the top one you're just not growing the question is how do you pivot towards momentum so if you're in the top space how do you actually pivot in this case to the bottom space now what do we mean by trends well let's take the set-top box what's consumer trend that's causing the set-top box to go away cutting the cord right my my son and I of my older son who by the way was recently admitted to Penn early admits so next generation third generation pen we're very proud he was out doing college tours looking at some of the other places you've heard of those schools and so his 14 old brother and I were home alone and we tried to turn on

12:23 the television and realize neither of us knew how to and I said to my younger son I said you're a fourteen-year-old boy you you by law have to know how to turn on a TV right fourteen-year-old boys they consumed they consume video 24/7 but what I realized is he's actually never watched our TV he never watches it because what does he do he consumes video 24/7 but we're honest on his mobile phone he watches YouTube videos right again not my cup of tea but it's what he does and he's just part of that trend right and I don't think that trend is going away so so here you are your company you do set-top boxes that markets going away you've got a pivot and so let's say that you want to pivot into a new market you don't have a very large presence in Wireless but you need

13:09 to pivot there and so the question is what kind of skills and this is where I'm getting back into M&A what kind of skills and capabilities are you going to need to be successful in this new market this idea of pivoting towards growth so let's just talk about physical characteristics of the chipset for just a moment that's not what capabilities are they're much broader than that but I think in an audience like this it's easiest to think about physical characteristics so imagine for a moment you're about to pivot into wireless chipsets what do you have to be world-class at from a physical characteristic about these chips give me something well manufacturing but I'm talk about physical characteristics of the chip right it's got to be small right so it's gonna be small and light

13:54 so I'm gonna write this one on the right hand side now the reason I'm gonna write it on the right hand side is imagine that you've been a set-top box company for years so that's sort of the market that you've been in and imagine a young engineer comes into your office and says hey boss I've got this amazing new innovation that allows us to make our chipset half the size and half the weight but it's gonna make our set-top box 25% more expensive and it's going to require another ten million dollars of investment a very tactical thinker we have lots of them in finance right sort of linear tackle thinkers who's been in this old market for a generation who's been in the set-top box company for the last 15 years building high-tech chipsets for

14:40 set-top boxes doing very advanced stuff what's that linear think our gonna think why are they gonna think no well it's expensive it's gonna make this commodity product more expensive why else why else do we not care about small lightly it doesn't need to be small in light why not it just sits there right and so that tactical thinker who isn't thinking about pivoting towards growth let's that capability atrophy does that make sense what's another one give me one other it's got to be durable I don't know where I should put that one pardon me thinks I should put that one on the right what else give me another one it's got to be low-power right how many of you watch your iPhone's die at 2 p.m. every afternoon and we don't know why

15:29 that occurs so now we know so low power how about a few others one or two others it's kind of wireless what else it's got to have a competitive price and we put competitive price over here so what I'm doing right now and I believe this is fundamental for M&A is we're starting with strategy right where are we currently and where do we want to go what markets are we in and where do we want it pivot to right now again this is thinking holistically about the business the reason I've written what I have on in the left and the right and I don't know if this is the place it should because durability I wasn't sure which one to write the stuff on the right is the stuff that you're maybe not likely

16:15 to have given where you've been in the past it's a capability that you're lacking and one of the questions that you have to ask yourself is as you want to pivot into these new markets these new markets are gonna require capabilities do you want to build them internally or do you want to acquire them now we also have a lift list on the left can you see what the difference is between the list on the right in the list and the what's the list on the left about yeah I don't know if it's what was it probably is what was and what even might continue to be I would argue and again maybe these aren't the right places for these things I would argue that in order to be successful in the Old Market you had to have a competitive cost structure in order to be successful in the new market you have to have a competitive cost structure with world-class manufacturing

17:01 and so the stuff on the left is what you're currently good at the stuff on the right is the things that you need to get better at as you try and pivot into these new markets how long do we want the list on the Left how long do we want the list on the left well I mean you want it to be at least not zero because if you're looking at pivoting into this new market and you can't think of any skills that you currently have that you're best-in-class at and you're about to pivot into this new market it's not clear that you're gonna be successful at making that jump on the right hand side how long do we want that list I mean I the answer is I don't know it requires judgment but I can tell you what I don't want to see is I don't want to see that list being empty because

17:46 typically if that list on the right is empty the new skills you need to have as you pivot into new markets if that's empty it's usually because the team hasn't done an aggressive search of sort of what it takes to be successful you know I've done enough of these these strategy studies where we look at M&A we look at the make versus buy decision that often if we have nothing on the right hand side it's just it just means we don't know the customer well enough and so you're looking for that richness on both sides on the left hand side you want to have something you can leverage on the right hand side of course this is the sophistication that you understand about the new the new side okay now this is like holistic large company M&A strategy I tried to think about how this would apply on a more tactical level if you were a smaller company and so again I'm trying to push towards growth and so

18:32 let me give you a couple other things to think about so this is a little bit more of a tactical view of M&A than a strategic view of M&A if our goal is to grow the business the question becomes how do we use mergers and acquisitions right to do a couple things and again I'm coming at this from a finance frame there's no question about it my trainings in finance and so I'm thinking about value creation how I grow the business and what I'm borrowing from actually is is the marketing literature and I'm almost thinking about this like customer lifetime value you'll sort of see a little bit of customer lifetime value sprinkled in here so how do I use M&A how do I use internal innovation to do a couple things with my existing customers if we think about revenue its

19:18 quantity times price so just as an example quantity might be you know how do I use M&A or how do I use internal development to develop new products and services that I can sell to my existing customers all right so it's almost like a cross selling perspective that would be from a quantity perspective from a price perspective how can I use internal innovation or external M&A to improve the quality and satisfaction of my existing users with my existing products maybe there's a new feature will that allow me to increase my price right now remember M&A within a regulatory standpoint you've got to be very careful you can't just put two companies together and increase prices because

20:04 you've reduced competition right that's illegal so what we're really talking about here is I want to increase price because it's going to increase margin but I got to do that through a better quality product so what companies out there can actually help me provide a better product quality product to my customers from a duration standpoint boy wouldn't it be nice if they didn't at RIT so quickly from an attrition perspective how do I make my existing customers stickier right how do I keep them in the fold for longer periods of time so again for those of you who've graduated recently and taking a peat fader class or to write this this screams customer lifetime value but I think that from an M&A from a tactical perspective I think this is a nice framework to draw from from a new customer perspective how do we acquire new customers for our existing products right so it's not just about keeping your existing customers happy it's also

20:51 about bringing new customers into the fold and the final piece that I just want to remind you of is this piece of internal development internal development versus M&A it's the historic make versus buy decision right for each of these new capabilities that we're gonna build whether they be strategic and big-picture like we had in the previous slide where we have a CEO who's looking to migrate their business into a new momentum segment or whether it be more tactical in that you're just trying to make your business more successful you know a few hundred users at a time do we make it or do we buy it well what do you guys think what's one of the reasons why

21:36 you want to make it make it meaning develop it internally go back to that previous slide I like to have those capabilities on the screen right go back to this idea of okay we got to make this chip low-power we've never tried to make the chip low-power before why not we've always been in set-top boxes why haven't we made it low-power it's plugged into the wall so we've never had to do that so we're missing this capability to be successful in this new market so do we make low-power do we put a set of a hundred engineers on this or do we go out and we acquire this capability that we're missing this make versus by decision of course is so incredibly important happen over here yeah please Jay all right so if we talk about one

22:26 make versus buy criteria its speed right how quickly do we need to move are we missing out on an opportunity right if the market is shifting faster than we can actually develop it internally then maybe this is something that we have to go out and acquire so one of the nice things about acquisition of course is speed anything else first make versus buy please if it's me it's not available from a competitor either from that perspective I think you probably have to develop it internally that capability if you scoured the market and you just don't believe anybody truly is world-class that might be an opening for you to actually take that upon yourself so that might be one for a choir yeah

23:11 interesting how so give me a little bit more on that well to a certain extent though right on bringing if I'm if I'm the one acquiring another company I'm bringing those internally as well but they're already pre-made for me so I get the speed of bringing them in quite quickly and I might be able to still control that but you're right there might be other players that have left those firms or or maybe that knowledge is out there yeah yeah I mean one of the problems with acquisitions and I have a few slides on it but I won't show you today the news is not good when it comes to acquisition right if you take a look at almost 40 years of data the larger

23:56 the acquisition is the tougher it is to create value and I personally think that most of that comes down to deal heat where people are just so excited at the end of the acquisition to sort of buy something that the prices start to get out of control and so your initial investments become quite high and the data is pretty consistent across all decades when we take a look at it so as much as I'd like to say that we can keep it in check very often you can't yeah absolutely and one of the nice things about acquiring it is you can already see what you're buying right so I agree

24:42 with you there so that's one on the acquisition side so we have speed we have certainty how about a top row yeah second I'm sorry you have to repeat yourself and I'll I'll say again what you're saying yeah okay yeah you can almost leapfrog right to the next generation again I keeping back in my mind this low-power right imagine that you don't have that world-class capability and low-power do you go out there and do you buy it or do you develop it internally and you're

25:29 right maybe this allows you to leapfrog another generation ah yeah please yeah right right and think about the judgment it's gonna require how about one more over here yeah please Noah did that the lack of value creation the lack of value creation because very often we see failure we also have issues like integration right from from more strategic perspective at the end of the

26:16 day the amount of premium that most companies end up paying especially when they're doing the acquisition of a public company is just too high to actually generate the value and I think one of the problems for that maybe I'll close out this session by talking a little bit of Finance I just can't help myself I really want to talk mostly strategy given the room but let's talk about pricing for just a moment one of the the bugs that I that I always struggle with is the following when you sit with the Board of Directors very often when you get into a pricing conversation this is what you see my former analysts who come back to get their MBAs they've seen this a few million times this is a comps table and

27:03 very often the Board of Directors sits with the comped table in front of them and has a discussion half the discussion is strategic the one that we just had where are we currently where do we want to pivot from a strategic perspective is it a brand new business from a more tactical perspective is it just something that we're missing that will help make our customers stickier or we'll add new features or will help us you know let's say grow the share of their wallets very often this is what we look at the problem with this table is this table lacks a connection to the real operating metrics of the business it's amazing how devoid we get between those two one of the things that I try and push my own students to do is to tie

27:48 some of these metrics back to real operating statistics what do these numbers mean because it might mean when we talk about for instance trading at a multiple of of revenue you're thinking about buying a company at three times revenue its revenues three million you're thinking about paying nine that's three times revenue and so we often get in these debates the board level should we pay three should we pay three point two is that fair and one thing that the bankers do a great job of it is they tell us what the market is willing to bear but what they don't take responsibility for and I'm not even convinced as their job is they don't necessarily tie it back to real operational metrics what do these things mean what do we need to believe around our strategy in order to make these

28:36 numbers a reality so remember that slide I had on the tactical aspects of M&A we said look maybe we can do an acquisition that will help us expand our product portfolio to generate more revenue per customer maybe will help us make our customers stickier what do we need to believe for every time we increment that multiple and often we don't have those verse Asians it might mean that if we actually had you know one of our MBA students run the model for you that your average customer would have to go from an eighteen month let's say lifespan to a seven year lifespan for every point of EBIT de that you pay to get the model to work so one of the things that I would recommend as you try and keep some of these prices in check because I you know

29:22 again I really believe that's a big part of why M&A fails to create value I really do believe M&A is good for the company I believe it allows you to move quickly I believe it allows you to get in new places that you haven't been before new capabilities the question is at what price do you pay and I think the way that you can sometimes keep that price in check is by having real operational metrics at the table and one last thing I'll just make a comment on I always find it amazing that to get an internal capital approval you often have to go through five six ten levels and any one of those levels can knock you out but M&A is often right there in Corp dev reporting the CFO and CEO and board and so there's less of that no culture and so the question is do we have that team robustly getting in there and putting

30:09 real operational to statistics around what you need in order to make it successful you look unconvinced yeah you know one of the nice things so again I have a few slides in this but I really want to bring in our panelists up so let's talk for just a moment about about what you're saying one of the nice things about private companies is they are absolutely sometimes looking for things that public companies are not looking for namely liquidity right if I

30:56 could come back you know again I'd probably come back as my French Bulldog because she lives a wonderful life but if I could come back I probably come back as a roll up specialist because if you take a look at some of the wealthiest people in the world they did roll-ups basically what they did was they went to small private companies let's say third-generation private companies in which the fourth generation doesn't want to take over they come in they say you know what I'm gonna offer you 80 cents of the dollar for your company now if you'd said that to a publicly traded company what would they say back they'd say it's called plus 40% over the market price look at the data right so you go in and 80 percents on the dollar but this is the key I'll pay cash and they're thinking the number-one thing they want is liquidity and they can't get it elsewhere one of the problems of a public company is you

31:42 can't offer that to them you offer them cash a shareholder in a public company can get cash any day by just selling their shares and so I agree with you I think there's something to be said for purchasing a private company but that's not the only reason there's another reason as well it's called the free rider problem by Grossman and Hart and what it basically shows is the nice thing about a private company negotiation is there's usually a person across the table who has a lot to lose and so you get into negotiation with that person and you know that they don't really want to walk away and so you have a little bit more leverage because you know it's gonna be painful if you walk away when you buy a public company everybody wants to call what's free riding they want to be the person that sort of gets tagged along with the deal and so you lose that a you lose

32:29 that ability of that loss and so I agree with you I think there's something to be said for keeping the prices in check with privately held companies but I think the most important point is I'd like to come back as my French Bulldog because she lives a wonderful life all right fair enough all right I think it's time to bring up our panelists so we'll bring them up but to come on up guys so thank

33:15 you very much to our panelists for coming in today let me let me introduce them from from my left I guess that would be your right Vicente de Baca in addition to graduating from Wharton in 2009 also graduated from Princeton I've heard of that school it's pretty nice yeah close neighbors the Princeton's boring but that's okay he started at add knowledge in Corp dev in fact many of our panels here have a lot just a tradition tremendous amount of Corp dev experience Marketo went to andreessen horowitz and now his on his own as partner v2 ventures if we keep going to the right Anton hain brink graduated from Wash U and then got his MBA here at the Wharton School in 2004 I started his career at HP again doing Corp dev did a

34:02 little side movement into into private equity to Opus Capital and then came back into the corporate world within large companies that into it first as a vice president and now as the senior vice president of corporate strategy and development at HP and Jaimie Kim Jaimie Kim graduated from another one of my alma mater is great school UCLA and then graduate from Wharton in 2014 was part of a startup did spend some time in an LBO with a company called Platinum Equity and spent a bunch of time in venture capital both in direct investing and fund of funds with California Technology Ventures and so if I could just welcome my three panelists thank you very much guys for joining so I think the first thing before we

34:48 start talking about M&A specifically I'd love to talk a little bit about the Corp dev role and about the companies that you're currently with and what that Corp dev roles like and how it's changed over your career so Vicente I'll start with you we'll just move we'll move down the panel yeah so currently at BT ventures which is a holding company of different companies in the ad tech and marketing tech space that I'm working with a couple of other guys on the corporate development role is kind of a hybrid buying companies as well as helping with overarching portfolio strategy so you

35:34 know incubating some companies raising some money for some of the companies and then you know eventually exiting some of the companies it's maybe the ambition for my current role is kind of have like a Berkshire Hathaway within the ad tagging marketing tech space in past roles that I've been in corporate development positions in our past companies that I've been in corporate development positions and the roles have varied from being primarily by side M&A focused to especially at the more early-stage companies being more of a general utility player where there might be some buy side up in a word there might be some like financial planning work and then there might also be you know work involving helping the

36:21 companies you know ultimately sell and first things were gonna call out I noticed you skipped over my BCG job I know if that's a McKinsey is but that was my first job post Wharton was at BCG for a couple years it does actually tie in to Corp dev and as you pointed out it was spot-on and what you said in the slides' strategy drives M&A and when it doesn't things tend to go horribly wrong and so that background of strategy plus m and A+ venture it actually played a lot into the roles that I've had at Intuit the role encompasses mostly M&A I mean the group I strategy and Corp dev and so we've got 30 people about half do strategy there have to emanate an integration and that includes on the Corp dev side at least mostly acquisitions some divestiture

37:07 some annuity investments we have some LP investments in VC funds and our mandate is multifold actually it's one to bring in really good talent into the into the business so we have a ton of people who have come in through my group which we call cs and d which is named by someone who thinks the corporate modifier applies its corporate strategy and development which is strange i may change it someday but we bring in people they go into the business they've done phenomenally well so if some of the GM's came up through CS md our second piece is driving growth through acquisition and then managing the portfolio so divesting as needed and then also training the BU on things like negotiation strategy you know taking the skills that we have that were uniquely trained in and working with them in my prior world the one I was at Intuit twice actually so I was a VP for four

37:53 years I went to square for two years pre IPO and then post at squared actually encompassed more because M&A wasn't it was part of the role but so was fundraising for Square Capital so that was part of it so was biz dev and so we're working on a lot of different things there and now back it into it it's it's more the M&A piece got it and then Corp dev is a wider role as you're bringing up Anton and you have a much broader role than just M&A in Corp dev yeah I think that lends to the fact that I'm at an earlier stage sort of growth stage startup with 70 employees in Redwood City but for me you know really it started as the board hiring me to help them through how the company and the CEO specifically through capital raises so really making sure that I had a hold on what was going on with cash position making sure that the company

38:39 had the runway that it needed developing a lot of relationships a lot of corporate strategic entities who might give us non-dilutive financing which could help you know potentially fun internal projects for our products as well so it accomplishes almost a more business development function but also more of a capital markets position because being a CEO of a company that's growing as fast as we are it's important to really make sure that you're you know focusing your venture more in the customer acquisition side you are on the cash balance and making sure that you're optimizing your capital structure and you know fielding these inbound requests from different corporates who want to learn more about the business and keep a pulse of what you're doing in case they want to you know either invest or ultimately you know as a sell side function keep them

39:25 interested in a potential acquisition fantastic let's spend just a few moments around each of the parts of the process and then what we'll do is we'll ask him about 20 minutes to discuss the process and we'll open it up to the audience for you guys to ask questions as well I would you know my event I had today and I could have talked to all finance about valuation so on was this really the strategic bent because I think that you know M&A is just a tool just like internal development and innovation is in order to get you to where you want to go so maybe you guys could just talk a few moments about it could be into it it could be a one of the portfolio companies that you've worked with in the past or currently where what where is the company now and where do you want to

40:12 take it and how does M&A fit within that that piece and and do you feel as if the company supports you in that in that in that M&A is as an important tool or is this something that you have to fight for internally sure oh yeah so I think at least within the the company that I'm currently in I report to the majority owner they're very supportive of M&A generally I think that you know in terms of the overall strategy I mean I would characterize it as a super high level of at a super high level at you know trying to move into attractive areas make investments that have a high ROI and

40:58 divest from areas that you know we think are not growing or areas that are unattractive and when you say attract of what you know what what makes something attractive to you as far as an area is concerned yeah so I think it's it's kind of a combination I think you know one has to be strategic so you know I think strategic is a loaded word and you know you can have whole you know MBA classes on that but you know something that you know fits with the vision of the company that you know there's you know strong fit with you know what what the company's capabilities are and then secondly you know I think just areas that are are big opportunities of a big

41:47 market potential big revenue potential fantastic strategy my friend yes in court of so where are we today I'll just the quick snapshot so into it's a five point two billion dollar business growing 11 ish percent with Kenna mid-30s margin so killer business driven by three segments a consumer self-employed in small business M&A is incredibly highly valued so over I should let you I should have you guess but what percent of our revenues come from acquisitions it's actually over sixty it's because turbo tax was an acquisition so that's a great one we paid 225 million for it in 1993 is probably worth twenty billion plus today and then our pro tax business was almost all acquisition and our payroll business I mean it's they add up to big big numbers so huge support my role reports

42:34 directly to the CEO and that was by design from him because strategy incorporated suppose we seen as a see to the table right next to the GM's the way the way that we focused is we work directly with each GM on their strategy they obviously drive it but we're closely involved and then we try to identify with them one where do you want to be in two to three years to where is the biggest gap in where we are today and then three which capabilities have that right set of integrations that make sense for an acquisition there's an important piece there which is if you have something that's really integrated into the workflow and one example from our history is inventory so you can buy an inventory company but it's so deeply integrated into accounting that it's actually really hard to buy something and plug it in and so what we look for is things where it's the backend data

43:20 integration sure you can buy something that will keep working otherwise you have basically throw away the code and rebuild so we think about things like that in each of our core spaces we do have M&A initiatives so global is a big push for us we bought a company called Bank stream in the UK does data feed which is core to creating competitive advantage the company that we just closed yesterday T feeds which was our fifth largest steal ever was partner of ours so it built in our ecosystem so these are all things that we look for I think interestingly while M&A is considered incredibly important and Intuit it's actually not required instead when I talk about my goals with our CEO he always says I don't want you to have a number of deals goal because it's the worst incentive for an M&A guy to say close a deal and that's a reward it

44:05 should be two years in was this a good deal did you realize rally yes that's how we measure success fantastic so how do we create so how do we get started how do we create the set of companies how do we screen the companies and this is something that you've spent part of your career working on so Jamie had it where do where do I where do I start to see what that list looks like and then how do we start the screening process once we've identified what we want on our strategy to be and so I think just kind of piggybacking off of though also just M&A right it's interesting to mention that being from a starter a smaller growth stage more startup we actually consider ourselves to be defining a new market because nobody said what what we do any look artist basically creates software for the dining room space of a restaurant

44:50 and the way we like to think about things is that there's been a ton done in the back of house or the back of dining room experience which is your POS systems your inventory management or kitchen display and then an off premise which is like your uber eats or your door - or your open table for reservations but nothing really has ever been done in terms of putting a digital layer in the front of house and the dining room experience experience where 90% of your revenues are made and so it's a relatively new market and you know well the way we think about it is that it's us and one other company that we don't even consider to be a real competitor in terms of product set but it's another company that does tablet you know ordering and pay at the table and what we found we've been in the

45:36 business for nine years is that if they didn't exist it would really put so much stress off of the pricing pressures off of you know the long sale cycles that we've been facing and it's not in too one of our companies really sort of pulls away from the market with a you know product set that's gonna be you know far differentiated are we gonna find ourselves in a lot easier situations gaining market share and so a lot of what you know capital raising has been around has been around potentially knocking out this one competitor and then you know it would really significant just decrease sales cycles and a lot of these sort of big offs that we ever get into and so but of course being you know your balance shoes don't think enough it's not really consideration for us now but as a company the strategy is as our product

46:23 kind of again pulls away from what they're doing we hope that in the future either we end up acquiring the business at an attractive price or they just naturally die off right and it sounds like your role most likely will change over time like right now it's the Corp dev roles focus mostly on fundraising right and it gets back to the question I had before which was when do you think the company will have the appetite to start going down the M&A role because up until now I assume they've had nothing professional around corporate development before they brought you in absolutely so I think that definitely in terms of raising big institutional rounds and getting strategic money into the company when the company is at that point and there are strategics that are interested so for instance like legacy

47:09 POS systems like an NCR or a micros are interested in learning how we integrate POS but also add a consumer layer to it because now you have data from people who are making purchase decisions but also you're getting the data from you know the entire session that they're sitting in a dining room experience and so I think that you know getting to a point where your company really is at a growth stage where you are gonna be raising you know large institutional financings and have the money to spend to you know make sort of strategic investments of your own all right so back to the process how do we how do we create this set of companies how do we screen them right how do you know how do you start with how many do you start with and how do you screen them down something yeah I

47:55 mean it at least the way I started I think you know everybody has the every Corp dev team or every company has process you know but once once you've identified you know those areas that you know have high strategic fit and are attractive markets that you know you as a company want to be in and I think that's like you know collaborative process usually where you know Corp dev teams are working with GM's and you know c-level executives and product leads to you know kind of figure out you know what segments of the ecosystem they they really want to focus on you know then you double-click into the specific spaces and you know start creating a list of you know the different companies in the space and you know you sub

48:42 segment them by different characteristics it could be you know geography number of employees you know product features etc and then you know it's kind of usually the Corp Deb person's job to you know go out and start talking to companies and you know having you know kind of initial screening calls or you figure out you know a little bit more information about each company and then also find out like you know which entrepreneurs or CEOs are actually you know interested in selling at a particular time and you know based on that analysis you kind of you know you start this like feedback loop with your company where you know maybe the answer is that there's no you know

49:27 really compelling acquisition target at the time but you know could be that you know there's a small set of companies that could be interesting and you need art you know proceeding with further further dialogues and due diligence to see if you know there's an interesting acquisition target that's at least been the way I've approached it Anton how much do you rely on your own team to create the set of companies and then to screen them down versus relying on you know groups like BCG for instance or or the or the investment banks and so on right it's for us almost all internal in fact there's a there's a great point that you raise even by the framing of the question which is the set of companies I think in reality for companies who aren't as experienced in M&A a lot of times it's one company and they say let's go buy that and the GM will push really hard and say

50:13 let's go get that it will take an experienced Corp dev person or somebody's got influence to say that's not how this works what are you trying to get and you can force them into a discussion and I would say every time I've done that you can find a better company that actually achieved the goal but it takes them some wrangling for us the companies come a lot of times from the business so I mean they'll know their partners I'll know the companies in their space yeah my team will do a lot of that through screening databases and talking to companies I would say we are very proactive in our approach which is always best practices strategy look for companies and then buy someone versus being reactive so if a banker sends us things it's a really low hit rate occasionally there's serendipity and it works out but yeah you bring up a point then this is a chatot or vice dean I'm a huge believer in tournaments and and a tournament means you're starting with a

50:59 large set not just one yeah and you really you look for a structured evaluation criteria and you let the best ones bubble to the top and if you start with one you're right you you almost create blinders I think that whether or not that's the right one right and how do you what about fit you know what makes a good fit this is much must be something you spend a lot of time thinking about yeah I'll answer and then obviously we'd love to hear from you guys too for for us fit is tricky because first you're trying to identify what are you actually looking for and fit means you know whether it's talent attack tuck in or a full running business there's different criterias on fit but it's a what solves the problem the best I'll focus on maybe kind of the smaller size tech-talkin deal which is our most common type so we were looking

51:45 first for fit from a technical perspective similar architecture summer stack did they sell the problem well but then also one thing that we've learned over time is cultural fit matters more than you would think we've had acquisitions go completely sideways because the team just didn't gel and what happens is they just become this appendage and then you end up selling it off or shutting it down and so we now we look really hard for is there a cultural fit here where they get our work style they can fit into our culture and that actually leads to far better outcomes for us fit for you guys yeah I'd say other factors that you know I've found important or geographies so like you know you don't want to create endless new offices with with M&A so you know having Geographic fit and being able to co-locate the acquired teams

52:30 with your team is a nice plus then also I don't fit I think is is really important where you know I think getting to one of the slides you put up just about you know one of the big rationales of M&A being you know basically being able to cross sell products or bring higher value to existing customers you know you I think a lot of companies don't vet enough or don't value enough whether the acquired company actually you know sells to the same customers as a similar value proposition to you know what acquiring companies value proposition is you know sells through the same channels your company so I

53:17 think that's that's one thing that I've come to appreciate more and more having done more deals you know so I can accredit more my experience working on LBO fun rolling up private companies which I mean it's the name of the game is finding that cost structure which is going to have synergies where you're gonna find those cross selling opportunities and in a very rigorous way making sure that you know either you can co-locate with different geographies coming together being able to knowledge share so if you have like a CEO of a managed IT service company in Pittsburgh who you know why is there a cost structure in a certain line I'm so much lower than another are they using different products that you know you should be using you know as a substitute you can knowledge share that

54:03 and so that ends up being you know very powerful network when you're looking at companies to roll up together all right so you've screened the deal you you had this set of companies you broaden the the sphere of your your operational leaders you've you've now narrowed it down to maybe one or two candidates how do you start the negotiation process and as part of that especially for some of these young startups how do you how do you put a valuation on them especially you know that competitor you're talking about right so what do we do guys how do we how do we start the negotiation probably not tip your hand vicente when you wrote you wrote a book on valuation so I think Dida talking to you about valuation and no please arrest it I'm trying to learn a scary scary scary topic every night you know I have

54:51 to admit I think I've you know and I think a lot of companies you know fall into this trap you know they don't approach valuation and as a rigorous and you know proper of a way as they should I think a lot of you know companies that I've been at you know make assessments on how much to pay for a company you know based on things like multiples and other stuff like that which you know are not necessarily best practice but if you know you as a company or valued on those same metrics you know the the easy temptation is to you know value other companies on those same metrics that you're being valued on so you know I'd

55:37 say you know in terms of how I approach valuation and negotiation you know I do try to stick to I think some of the fundamental learnings in your book you got a already I have a cop I have a copy at my house a already but you know actually I think in the technology space you know valuation and especially if you're looking at tech and talent deals or aqua hires or really early-stage deals yeah like valuation is extremely difficult and it you know having worked a little bit adventure firms as well you know I think a lot of the valuation kind of resembles you know how you approach a venture investment where you know you look at you know the the market size that the companies addressing you you

56:23 apply different probabilities based on different cases of you know what a you know successful outcome versus a conservative outcome could be and you know you kind of you know take a Hail Mary pass and you know you know you hope that it works out and you know a lot of you know a lot of times if you're doing early-stage deals like they they don't work out but you know sometimes they could be massive homeruns and then from a negotiation standpoint I think that's a different subject you know that's that kind of comes to the art of you know MA where you know you feel out a situation understand you know the cap table you know the situation and you know the situation that the selling companies in how

57:08 competitive the bidding process is and you know you you you know triangulating all those factors and where your internal valuation is you know you try to figure out you know what the right initial offer is to put in an ten how do you start the how do you start the discussion because you can't just say hey it's Anton Han into it I mean like the signal you send with just that you know those first two words how do you start that conversation without signaling too much yeah I guess there's a couple conversations that could over signal and and I think you're raising a point which is there's a huge risk in yo me calling or someone from the Corp dev team calling in saying hey we want to talk because that company if they're any good will say you want to buy us let me call your three main competitors and tell them I'm about to be bought buy into it and start a whole negotiation process with all three of you which we

57:54 don't want and so you know we always start with you very cagey let's talk about partnership maybe more and everyone knows what that means but it's not so leaning in and plus we want to learn a lot before we actually get to an offer by the time we go through that process of kind of the prelim diligence and get their numbers and no we want to pay at that point we're ready almost with an LOI we say okay turns out we do want to buy you here's the offer and we use all the techniques that I've assente was talking about we triangulate and we we take the approach of chance favor the favors the prepared mind in terms of negotiation which is we have a script laid out with all the approaches we've used why it's fair and I would say that works in about eighty to ninety percent of cases if people say like well okay it seemed fair barring a competitive offer which blows us out of the water and if

58:40 you you go back to the the laying the groundwork I mean I would assume there are companies that you've been in discussions with for a long time not for acquisition but just as you said what are they doing what's interesting developing those relationships over a long period of time so there's no surprises yeah that's exactly right in fact I disagree with Paul Graham who said you know if Corp Deb calls don't answer which i think is completely insane because if Corp to have calls it means that company is looking at your space and it's incredibly important for you to at least know are they looking to buy are they just kicking tires and the reality is when you do when it cell and the vast majority of tech companies sell they don't go public or they go bankrupt but let's not talk about that scenario wait you actually want to know the

59:25 acquirer so if a company calls me out the blue and says hey we want to sell I'm very skeptical I pay bottom dollar it's not the relation if you want to have versus if you've known them for a while you can say you know you guys are a good fit we've known you're a partner ideally we've run a test there's all kinds of things you can do that would make sense that lead to a better acquisition from a start-up perspective now you've been yeah please go on yeah absolutely and you know a lot of my job right now is sort of managing these Corp dev and corporate relationships a lot of it usually comes under the pretenses of also corporate venture being interested in what you're doing and you know they kind of see that as at the front end maybe if we put an investment we can stay on top of what you guys are really doing and then if it becomes interesting enough you know we'll be close enough where we could sort of get first dibs on something like this and so you know given that we are an incredibly new

1:00:11 space that covers sort of a wide swath of different industries such as you know POS or like a beer you know a beer product company might want to use us because we hold a lot of consumer preference data whereas before their only way you know one beer company came to us and said the only way that we can know whether product a or product B is doing better is by taking our beer to Coachella weekend one and then taking our beer to Coachella weekend two and then just doing some sort of AP analysis right which right now what we're able to do is you know give you like a real heat map of you know who's ordering what beverage in every city in the United States and so you know a lot of the job is sort of entertaining these things you know corporates who are coming in under

1:00:56 the auspices of let's just build a relationship maybe for corporate venture maybe for you know you know talk to one of our business units but you know we do see that as being you know the start of a long relationship and who knows what that ends up being all right so let's say that you have now completed your negotiation you already feel pretty good because you've done the screening process appropriately so you there's going to be a chance for a good fit now you're ready to start the integration process as you bring people on board it's tough I don't know if there's any playbook towards a successful integration so where do you start yeah I'm curious to hear Anton Jamie's approach to integration as well I mean I think that as as tough as getting an M&A deal done is I feel like

1:01:45 integration is as if not more challenging and that's really where you know the value is captured so you know if you don't do that right like you you know totally destroy all the good negotiation and strategy work that you did up front to get the deal done and you know I think that you know having seen a lot of different companies and you know studied you know not only you know what I've done from an integration perspective but also you know best practices out there in terms of you know what you know other technology companies like Google and you know Cisco and Oracle and others have done right you know I've come to believe that I

1:02:31 guess there are a couple of best practices I would say that you know one starting integration you know as early or integration planning as early as possible is very is a very good thing so a lot of companies you know wait too long like a week before the you know acquisition is close to you know start really doing you know deep integration work and you know I think of the look what you know have have you know do more front loading of that work and I think

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