Notes from F Suite Virtual Clubhouse | Corporate Development and M&A

Co-hosted by Eric Chow (VP of Finance @ Kodiak Robotics) and Ed Lu (CFO @ Fandom)

Approaching M&A

• Starts with the equity narrative for the company

• How do we use M&A to fulfill our strategic goals

• For PE-backed companies there may be pressure to do more deals; board may be more financially-focused than strategically-minded

General Thoughts on Building Out a Corporate Development Team

• Could begin as a “Strategic Finance” function (consisting of strategy, corporate finance, bizops, and corp dev)

• Starts when company thinks about inorganic growth opportunities

• Commence the process 6 months ahead of this (to allow time for recruiting, framework setting, aligning on the equity narrative)

When wearing multiple hats, what are the top responsibilities that a CFO should still prioritize?

• Hire a strong controller; startup accounting can be complex, particularly around equity compensation and tax considerations

• Compensation; there’s a lot of mechanical work that needs to be done when hiring rapidly (ensure their compensation is clean, equity is being distributed correctly, shows up in Carta correctly, etc.)

• Budgeting; implement processes in T&E, software, hiring, events, etc.

Acquihires

• Typically identified by teams (e.g. CTO, CPO) and folks in the industry
• A way to accelerate your hiring; could take 9-10 months to build an equivalent team
• Selling the target on the opportunity
• “This is your current path; this is where you can go if you switch lanes”
• Note that they are probably taking a below-market salary with equity
• They may have chemistry and technology but they have significant risk (maybe lacking product-market-fit)
• “We can give you stability, market rate salaries, and additional upside with our growth”

Stock Deal vs. Asset Deal

•Depends on the funding structure; more capital deployment may be required depending on investors
• Asset deal allows you to cherry pick what you want

Retention

• Employees typically desire time-based vs. performance-based retention; which tactic you use depends on which outcomes the acquirer is trying to achieve

Where do you find the best talent for a Corporate Finance or Corporate Development team?

• If from banking, typically the associate level; can do the math and deal execution

• Perhaps a strategy person coming from industry

• Could train a strategic finance team on execution

• Skill set: ⅓ ex banker (modeling, analytical), ⅓ industry context, ⅓ personality (ability to pitch deal and communicate with counterparty)

Integration

• Best practices are to have a strong integration plan prior to closing with deliverables and tasks/projects assigned

• A few approaches:

    • Folding the target into the acquiring company on Day 1

•Mixed leadership team (elevate the target’s leadership into the leadership team of the acquirer

•Somewhere in the middle (“wait and see approach”)

•Difficult but clean-cut

•Important to have the first day planned out (new email addresses, introductions to key personnel, etc.)

•Should report directly to the CEO to have the right influence

•Typically the least successful

    •Can make decision-making unnatural

• Integration Management; can be performed by project managers, who will manage all the different integration workstreams and keep all the various stakeholders aligned

    •They should sit within Corp Dev but be involved with diligence

    •“Buddy system”; one from acquirer and target to work through 90 day plan (e.g. pair target CMO with acquirer’s CMO)

    •Could even go as far to have every department include an M&A liaison

Considerations for the incoming CEO/founder

•Depends on whether they want to report to the CEO of the acquirer

    •This has implications for a “matrix” organization (introducing general managers to the company)

    •They can take on a new role within the C-suite (mixed leadership team approach)

    •CEO may be terminated (“need to chop the head as a symbolic move”)

External consultants

• Cons; Can be expensive, don’t know the parent company

• Pros; Can provide a framework to help organize

Thoughts on M&A “dilettantes” vs. M&A “machines”

• May need to train the strategic finance person to do the analysis (diligence, purchase price allocation, etc.)

• The underwriting would need to come from the CFO

Role of the CFO

• Underwriting, analysis, pitching it internally and to the board

• Need to keep the Corp Dev team in check; practitioners are going to be biased to support their deals  

• CFO has the best perspective on other capital allocation opportunities