Best of LinkedIn: M&A Insights CW 21/ 22

00:00:00: Provided by Thomas Allgeier and Freyness, based on the most relevant posts on LinkedIn about M&A Insights from CW-TwentyOneandtwentyTwo, Furnose is a B to B market research company supporting M& A consultancies with The Market & Competition perspective.

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00:00:32: you know it's I mean what if i told you that a highly strategic mathematically flawless multi-million dollar acquisition could just die on a saturday afternoon over a

00:00:44: sandwich right

00:00:45: literally a sandwich.

00:00:46: because today we're really looking at why the traditional rules of m&a are breaking down And we're going to see what actually separates the deals that close from the deals.

00:00:54: it just completely collapse.

00:00:56: Yeah, so welcome to this deep dive.

00:00:57: over the next few minutes We're gonna be cutting through all the noise of the last two weeks of M&A chatter on LinkedIn.

00:01:03: There's

00:01:03: been a lot of it

00:01:05: So much And we are focusing purely on the strategic realities of sourcing, closing and operating assets right now.

00:01:13: Right?

00:01:14: To set the stage We really need to talk about the macro environment because The market isn't just universally slowing down or speeding up.

00:01:21: It is literally splitting in two.

00:01:24: it really is.

00:01:25: I mean if Frank Akela recently made this really compelling observation About that fracture you pointed out At the very top of the market, you have these incredibly fast moving high conviction.

00:01:37: AI mega deals.

00:01:39: Wow,

00:01:39: yeah!

00:01:39: You

00:01:40: know tech giants and massive strategics are just repositioning themselves so aggressively.

00:01:45: but then the moment you step down into the middle market it's like the gears grind to a halt

00:01:49: right?

00:01:49: It's totally different

00:01:50: exactly...you're looking at really wide valuation gaps intense financing pressure and these painfully slow deal processes.

00:01:58: And Frank actually noted something crucial there especially for anyone listening who is currently trying Capital is not the primary differentiator in this cycle anymore.

00:02:08: I mean, we aren't in zero interest rate era any more where cheap money just greased the wheels.

00:02:13: today it's confidence deal certainty and Just absolute strategic clarity that win bids.

00:02:20: yeah Which actually brings us to a really fascinating framework shared by Dennis Mizoritzky.

00:02:25: He argues that we really need to stop using the phrase The M&A market Entirely

00:02:29: because there isn't just one

00:02:30: exactly.

00:02:31: There's no single market right now.

00:02:33: They were fundamentally two of them and they're running in parallel.

00:02:37: Let's call them Market One and Market Two, okay?

00:02:39: So Market One is basically flooded with average inventory.

00:02:42: You've got thousands a baby boomer founders trying to exit right yeah often With no formal succession plan really high customer concentration And frankly messy financials Yeah, and their competing against the flood of other sellers For this shrinking pool of patient buyers, it is a punishing buyer's market.

00:03:00: Okay let's unpack this because it sounds exactly like residential real estate.

00:03:03: you know average houses sit on the market for months with price cuts while The Pristine House On The Corner gets ten cash offers over asking in a single day.

00:03:11: That Is The Perfect Analogy.

00:03:13: But I want to push back on that bit or at least ask her some clarity.

00:03:17: If Market One is flooded With Average Businesses What Makes A Business Qualify?

00:03:23: because it sounds like buyers are just starving for quality.

00:03:26: Oh, they're completely starved for... I mean market too is where all the bidding wars are actually happening.

00:03:32: Dennis notes that to get into this tier a business needs clean audited financials highly visible recurring revenue strong margins and right?

00:03:41: And This Is The Most Critical Part Actually A Management Team That Runs Completely Independent Of The Founder.

00:03:46: Ah okay.

00:03:47: so if you're a founder and You Hold All The Key Client Relationships A private equity firm looks at that and realizes they aren't buying an asset.

00:03:54: They're basically just buying a job

00:03:56: Exactly.

00:03:57: And if you leave, the revenue leaves with you.

00:03:59: Precisely In market two The asset stands on its own.

00:04:02: Yeah!

00:04:03: Because those pristine assets are so rare.

00:04:06: right now Every Private Equity Fund Search fund and Strategic Acquire is fighting over the exact same tiny pool.

00:04:13: We see waved contingencies in hyper-aggressive deal terms just to win the bid.

00:04:19: But that raises a big question, if finding a market two asset is so difficult what is driving the buyer behavior in the middle market right now?

00:04:28: Like why are buyers still grinding through the mud of Market One?

00:04:33: Why not just sit on their hands and wait for better inventory?

00:04:37: because In A Lot Of Cases They Just Don't Have The Luxury.

00:04:41: So Hale Juma provided a really great lens on this by looking at the k-shaped nature of the current landscape.

00:04:47: The K shape, right?

00:04:48: Yeah private equity sponsors in particular are feeling really trapped right now.

00:04:52: many of them are sitting on platform companies.

00:04:54: you know those initial large foundational acquisitions that simply aren't hitting their return targets

00:04:59: because interest rates or higher exactly

00:05:01: interests rates are higher so they can't rely on multiple expansion to just manufacture returns like.

00:05:08: So for those outside of the PE world listening in, what does that pressure actually look like on?

00:05:19: So what do they do?

00:05:32: They turn to add-on acquisitions.

00:05:34: They buy smaller companies Exactly,

00:05:36: they buy smaller cheaper companies in market one and bolt them onto the platform And by doing this they blend down their average purchase price and artificially boosts The size of the main company To create a solid exit story.

00:05:48: Wow As so Hale pointed out buying build isn't just A clever strategy right now It's a survival mechanism

00:05:55: Right.

00:05:55: So if buyers are desperately hunting for scale and efficiency to salvage their portfolios, it naturally follows that the ultimate premium asset right now is artificial intelligence.

00:06:05: I mean The promise of AI Is essentially infinite operational leverage Totally.

00:06:09: But looking at our sources Buyers are getting ruthless about what actually counts as AI during due diligence.

00:06:15: Acquiring AI isn't just about market share anymore

00:06:17: No!

00:06:24: Yeah, Rajeev K highlighted this beautifully when analyzing Accenture's recent moves.

00:06:29: You know, Accentur just raised their acquisition target to five billion dollars for fiscal twenty-twenty six.

00:06:34: That

00:06:34: is a huge number

00:06:36: It IS!

00:06:37: And they are aggressively buying AI and data companies but they're buying very specific capability.

00:06:43: They're buying the ability to encode intelligence directly into legacy systems Because Rajeevs pointed out that something like seventy percent of enterprise tech budgets Are still trapped in legacy infrastructure.

00:06:54: What's fascinating here is when you compare that to the mid-market reality, it's a totally different game.

00:06:58: Oh so?

00:06:59: Well Binlearner has been observing this in the prop tech sector.

00:07:03: Buyers are conducting really deep technical diligence to weed out what he calls fake AI.

00:07:07: Fake AI like just an API wrapper.

00:07:09: Exactly.

00:07:10: they want know if a company actually built a proprietary machine learning model or if they just plugged a chat GPT API wrapper into their existing software.

00:07:18: and

00:07:18: we should clarify why buyers hate API wrappers so much.

00:07:21: Yeah please do.

00:07:22: If your product's entire intelligence relies on sending data to open AI and waiting for response, you don't own the core intellectual property.

00:07:30: You're just renting it.

00:07:32: if The API provider changes their pricing or alters Their model or suffers an outage Your product just breaks

00:07:38: right.

00:07:39: buyers want native integration.

00:07:41: They wanna buy the engine not Just a fresh coat of paint On someone else's car.

00:07:46: And Mark Simpson saw the exact same dynamic in The Managed Service Provider Space, or MSP space.

00:07:52: Oh

00:07:52: interesting!

00:07:53: What did he find?

00:07:54: He noted that the premium valuation multiple isn't awarded for the AI marketing label.

00:07:59: it's awarded for this scalable staffing plan.

00:08:01: The staffing plan Yeah

00:08:03: Think about a traditional IT service business.

00:08:06: If you add fifty new clients You have to hire say ten new technicians To handle support tickets.

00:08:11: It's a linear trap.

00:08:12: Right, revenues go up but so do headcount costs!

00:08:15: Exactly Mark point out that if your AI tool doesn't physically decouple you revenue growth from your head count growth.

00:08:20: the buyer spreadsheet simply does not care about your fancy chat guide.

00:08:24: Here is where it gets really interesting though.

00:08:26: If building true proprietary AI Is SO incredibly difficult Why are these massive tech companies buying startups outright instead of just partnering with them to test the waters first?

00:08:38: Well... The reality They are partnering first.

00:08:42: This is a massive shift in how corporate development works.

00:08:45: Herwink Springer brought up this exact insight, AI partnerships are effectively the new pre-M&A diligence layer.

00:08:54: if you look at big tech companies like Amazon Google Microsoft they have signed over ninety partnerships with AI startups and just the past two years

00:09:02: so there essentially using their massive cloud infrastructures

00:09:05: as paid auditions.

00:09:08: These partnerships show exactly where the large platforms has strategic gaps.

00:09:12: They let start-up build on their platform, they observe how joint customers react and measure integration friction by time.

00:09:18: corporate development team gets involved.

00:09:20: road map fit is clear use case validated.

00:09:22: That's

00:09:23: so smart!

00:09:23: The M&A deal just final logical step of a successful partnership.

00:09:28: Precisely It massively de-risks transaction

00:09:31: Which makes sense because buying my asset arguably easiest part real danger operating it.

00:09:37: Dr.

00:09:37: Mike DeVries put this bluntly, she said many corporates can buy far fewer know how to own.

00:09:46: That is so true.

00:09:47: right value isn't created at signing.

00:09:49: It's created in the grueling reality of post-close integration.

00:09:53: Yeah and post merger integration or PMI Is where most of that theoretical value just gets destroyed.

00:10:00: Thomas H. Kessler offered this really sharp critique of integration steering committees.

00:10:04: Oh,

00:10:05: the classic steering committee!

00:10:06: Yeah he points out that buyers often set up these massive Committees That sit through ninety minutes Of red amber green status updates every single week.

00:10:14: He calls it status theater.

00:10:16: It's not a cadence of control at all.

00:10:18: I mean wait are we saying oversight is A bad thing?

00:10:20: if you just spent a hundred million dollars on accompanies shouldn't You have a committee tracking?

00:10:24: Oversight isn't bad, but reporting isn't the same as deciding.

00:10:27: Kessler's point is that decisions get delayed because everyone is waiting for their next committee meeting.

00:10:31: three weeks pass and a key engineering hire gets frustrated and walks.

00:10:35: Wow yeah it paralyzes the organization

00:10:37: Exactly!

00:10:37: It becomes an administrative bottleneck.

00:10:39: David Fubini actually shared a cautionary tale about this with HB & Compaq.

00:10:44: He emphasized the need For A Parallel Process Yeah where integration effort runs entirely separate from base business management to protect revenue momentum.

00:10:55: If you pull top salespeople into integration meetings, they stop

00:10:59: selling.".

00:11:00: So basically culture integration isn't about team happy hours.

00:11:02: it's actually being able do the work.

00:11:05: Albert Banks touched on this with Valtech Integration.

00:11:08: he talked how differing operating systems cause massive frictional overhead.

00:11:13: Oh yeah!

00:11:13: Toolstacks colliding

00:11:14: Exactly.

00:11:15: But if we know a playbook why does PMI still fail so often?

00:11:19: Is is just bad planning?

00:11:21: Well, Clint C. Kendrick argued that integrations rarely fail from one big bad plan.

00:11:26: They failed.

00:11:27: the compounding weight of tiny communication breakdowns and unclear decision rights Death

00:11:31: by a thousand cuts

00:11:32: Exactly.

00:11:33: Plus, Shanji Rice pointed out a structural flaw.

00:11:36: CFO's will meticulously budget for M&A advisory fees but they heavily underfund actual integration efforts.

00:11:42: They assume existing management can just handle it on top their day.

00:11:46: jobs

00:11:46: Right.

00:11:47: And to fix as Jim Breeden shared, synergies must be tracked line by line with functional leaders.

00:11:53: You can't just claim five million dollars in cross-selling synergies on a finance slide.

00:11:57: you have to enforce the operational discipline to get

00:11:59: it.".

00:12:00: So because of the post close integration phase is so risky and the market is so polarized buyers are applying absolutely brutal upfront scrutiny.

00:12:08: this means sellers have to be flawlessly prepared.

00:12:12: Caledysar warned that diligence timelines

00:12:17: Over six months.

00:12:17: Yes,

00:12:18: and delays aren't neutral right?

00:12:20: They create time for things to go wrong.

00:12:22: Sellers must compress controllable friction by preparing beta rooms in financials early

00:12:27: And that preparation has to extend To the language buyers and sellers use.

00:12:30: mm-hmm drew Ekman shared some incredibly practical advice on valuation multiples.

00:12:35: You know founders always say I want a five X multiple.

00:12:37: sure Yeah But Drew says the question is five x of what.

00:12:39: SDE which is seller's discretionary earnings an EBITDA are completely different numbers.

00:12:44: Walk us through the mechanics of that difference quickly because it trips up so many people.

00:12:48: Okay,

00:12:48: let's say a business makes a million dollars in profit but The founder pays themselves a three hundred thousand dollar salary above market rate and runs A fifty-thousand dollar car lease Through the business.

00:13:00: STE adds all those personal perks back into the profit pool showing a higher earnings number.

00:13:05: right.

00:13:06: EBITDA is much stricter And removes those owner perks.

00:13:10: So if buyers and sellers aren't speaking the same language, then math everyone is anchored to literally a fiction.

00:13:16: Wow!

00:13:17: And furthermore as Jessica Polito noted, deal structure matters just as much in that headline multiple things like earnouts versus upfront cash.

00:13:25: Yeah.

00:13:25: Earnouts are ultimate bridge mechanism right now.

00:13:28: What does this all mean?

00:13:28: We've talked extensively about financial diligence but what about human element?

00:13:32: can soft assumption actually kill a financially sound deal?

00:13:36: Oh If we connect it with bigger picture It absolutely can.

00:13:39: Michael Seitschick shared this amazing story.

00:13:41: A brilliantly strategic M&A deal died over one Saturday lunch.

00:13:45: Over a lunch?

00:13:46: Yeah, because the two CEOs had never actually discussed which of them would run The Combined Company.

00:13:52: Diligence is often exhaustive on numbers but incredibly shallow in human power dynamics.

00:13:57: Unbelievable!

00:13:58: Millions of dollars vaporized by ego.

00:14:01: Literally... And then you have Michael Vasochi's critique.

00:14:04: GameStop was signaling a major acquisition strategy, but the CEO is super defensive and dismissive in interviews.

00:14:14: Proving that if you can't explain your deal motive transparently...you'll be laughed out of.

00:14:35: Thank you so much for joining us and don't forget

00:14:48: to subscribe.