Best of LinkedIn: M&A Insights CW 15/ 16

00:00:00: Provided by Thomas Allgeier and Frennus, based on the most relevant posts on LinkedIn about M&A insights from CW-FifteenandSixteen.

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00:00:32: So consider this for a second, In a massive like forty year study analyzing forty thousand M&A transactions The data showed something totally counterintuitive.

00:00:41: Yeah it's wild

00:00:42: Right!

00:00:43: The companies that actually lost the bidding war has consistently outperformed the company That won them.

00:00:47: Welcome to the deep dive where you know cutting through the noise of the M&A market to extract the sharpest insights from LinkedIn's top deal makings.

00:00:54: It

00:00:54: specifically, from calendar weeks fifteen and sixteen

00:00:57: Exactly!

00:00:57: And today we're looking at why the absolute best deal you will ever make is well it's often when you just walk away From?

00:01:04: Its a huge shift in perspective.

00:01:06: I mean if your operating anywhere on the M & A private equity VC or consulting space right now You know that the market is just incredibly noisy.

00:01:14: No absolutely.

00:01:15: So were gonna unpack four critical areas today Really moving beyond the theory to what's actually happening on the ground for you.

00:01:22: We'll look at the brutal realities of deal discipline, which

00:01:25: is so important

00:01:26: right in they hidden structural traps and diligence.

00:01:29: The mechanics have post-close integration.

00:01:31: And finally how AI?

00:01:33: Is just fundamentally rewiring the entire life cycle of a deal.

00:01:37: Let's Actually start Right there with Deal Discipline because I feel like the industry as A whole it Just completely obsessed With the art Of the deal.

00:01:44: oh For sure tombstone announcements everywhere

00:01:47: You see the headlines, The Celebrations of Capital Deployed.

00:01:50: But when you look at the insights from top practitioners it's pretty clear that real strategic alpha lies in art-of-the past.

00:01:57: Yeah and Marty Dower and Anthe Escamilla both hammered this exact point home recently.

00:02:03: They argue That best decisions your firm will ever make are transactions you actively choose to reject.

00:02:09: I mean that sounds... Well

00:02:10: Escamila actually applies this ruthless singular filter before any transaction is allowed.

00:02:17: He just asks, does this make us better for our clients?

00:02:20: Okay.

00:02:20: I hear that but let's be real.

00:02:22: That sounds great on a you know motivational poster But growth is incredibly seductive.

00:02:27: Yes How does that filter actually work in the war room because it's so easy to convince an investment committee that like adding A new capability or buying a new revenue stream just inherently makes The business stronger.

00:02:40: well It's because You have to look at the mechanism of complexity.

00:02:44: Adding a bolt-on acquisition might give you a new product line, sure.

00:02:48: But if integrating that product requires your core sales team to learn an entirely new technical language or it forces your engineering team to support legacy code... You've made the business better!

00:03:00: You literally just added friction.

00:03:02: and If It slows The Core Business down walking away is the ultimate form of strategic discipline.

00:03:08: And if we look at numbers That Discipline Is Playing Out In Real Time.

00:03:13: Daniel Fatis shared this staggering breakdown of the sell side funnel.

00:03:17: The one about mid-market deals?

00:03:19: Yeah,

00:03:19: exactly!

00:03:20: He mapped out the six key phases from prep all the way to signed SPA.

00:03:26: Out of an initial pool roughly fifty buyers contacted only ONE actually reaches closing

00:03:32: Just ONE.

00:03:33: Let's walk through what that emotional journey looks like for the seller because it is brutal.

00:03:38: You start with fifty targets.

00:03:39: you might get Maybe twenty NDA signed

00:03:42: which feels like a lot.

00:03:43: It does.

00:03:44: but then that drops to maybe eight indications of interest.

00:03:48: after management meetings and opening up the data room You're down to about three serious LOIs before hitting exclusivity, and from there only one crosses The finish line.

00:03:57: so if you're sitting on the cell side right now looking at twenty signed NDAs Probably feel like you have incredible leverage.

00:04:03: Oh,

00:04:03: you feel invincible Right?

00:04:05: But the math says nineteen of those people are going to find a reason to walk away.

00:04:11: Okay, let's untack this.

00:04:14: Is the problem that we have a market full of trigger shy buyers who are afraid to commit capital?

00:04:19: Or is it that sellers or simply bringing really messy businesses?

00:04:23: Honestly, the underlying dynamics point heavily to the sellers.

00:04:27: There's a massive preparation gap.

00:04:29: Lillie Tapia at Exelvist noted that sell side processes usually fail long before an investment banker is even hired.

00:04:36: Wait

00:04:36: really?

00:04:37: Before they even hire a banker!

00:04:38: Yeah and frankly it's rarely the founders fault I mean... They've spent decade building product not prepping for financial transaction.

00:04:46: The deals die in early diligence because of non-normalized financials or extreme founder dependency.

00:04:51: Let's talk about Founder Dependency, Because that is a silent killer!

00:04:54: If your top five client relationships live entirely on the founders' personal cell phone...

00:04:58: Which happens all the time?

00:04:59: ...or key supplier discounts are based on handshake from twenty years ago.

00:05:03: A buyer looks at it and realizes there no actual enterprise value.

00:05:07: if the founder leaves, the revenue engine literally leaves with them

00:05:11: Exactly.

00:05:11: But the Financial piece even more structural Cullit is our highlighted.

00:05:16: this fascinating tension that explains why these financials are often so chaotic.

00:05:21: Oh, the tax accountant thing?

00:05:22: Yes think about the role of a tax account.

00:05:25: for years their sole mandate Is to minimize the owner's tax burden.

00:05:29: So they're you know accelerating depreciation showing the lowest possible taxable income and Perfectly legally running personal expenses through the business right.

00:05:39: but then the owner decides to sell and they hire an M&A advisor whose job is the exact opposite.

00:05:45: Precisely!

00:05:45: They need to maximize value, they want to show maximum earnings...and a pristine growth trajectory.

00:05:50: And that's where the collision happens because M& A buyers value businesses on multiple of EBITDA.

00:05:57: If your tax accountant has successfully depressed your reported earnings by say half-a-million dollars To save on taxes Your market multiple is ten X. That optimization just cost you five million dollars in enterprise value.

00:06:10: As our point out that if you don't start unwinding the tension cleaning up expenses, normalizing compensation like twelve to eighteen months before a sale your deal dies.

00:06:20: The second the buyer's accounts starts their quality of earnings report

00:06:24: Because every single item requires complex multi-step explanation creates friction

00:06:30: And friction create doubt.

00:06:32: Which brings us an incredible pivot point because If tax optimization breaks financial diligence.

00:06:39: Structural decisions break the legal diligence.

00:06:41: Yes, absolutely.

00:06:42: Herwig Springer at I've Invest framed this perfectly.

00:06:46: He said that your company structure on day one literally determines Your exit outcome On Day One Thousand.

00:06:52: It is one of The most common unforged errors in the market.

00:06:55: In US Most early-stage companies form as LLCs Because you know it's fast Its cheap.

00:06:59: its flexible

00:07:00: Makes sense when You're just starting out.

00:07:02: But institutional acquirers like private equity funds, they often simply cannot purchase an LLC outright because pass-through entities create massive tax complications for their limited partners.

00:07:13: So what happens?

00:07:14: You have a term sheet on the table you're ready to move toward closing and suddenly you

00:07:22: are forced into what the industry calls a Delaware flip.

00:07:26: It happens in Europe constantly as well, where founders form standard GMBHs or limited companies and US buyers demand a Delaware restructuring.

00:07:35: And that's not a quick process.

00:07:36: Not at all, yeah!

00:07:37: You have to freeze the deal for four-to eight weeks.

00:07:40: you're navigating cross border notarizations thousands in legal fees and potential immediate tax hits on appreciated assets.

00:07:47: time kills all deals...and you just added two months of dead time to The Clock simply because how you filed your initial paperwork.

00:07:54: This is exactly why Alashan Malak and Aaron Pinnegar were stressing that lawyers cannot be viewed as just a documentation service.

00:08:01: Right, they aren't taking notes!

00:08:02: If you wait until the LOI assigned to bring in your legal team just to draft the purchase agreement... ...you've fundamentally misunderstood their value.

00:08:10: They are active architects of the transaction.

00:08:13: Pinneger highlighted that structuring this deal early is critical to secure things like QSBS qualified small business stock tax benefits for buyers.

00:08:22: The mechanics of QSBS are incredibly powerful, but highly rigid.

00:08:27: Section twelve oh two of the tax code allows founders and early investors to potentially exclude upto one hundred percent other capital gains when they sell.

00:08:35: we're talking about millions of dollars in tax-free upside

00:08:39: million's But it only applies to C core.

00:08:41: if you formed an LLC out of convenience And convert later You completely reset the clock on a mandatory five year holding period.

00:08:47: Yeah

00:08:48: that hurts Galena.

00:08:49: Ali Petrova actually used a phenomenal analogy for this phase of the deal.

00:08:53: She said deals rarely collapse over the headline price, they collapse over what diligence uncovers late in

00:09:01: Yeah,

00:09:02: or undocumented IP ownership handshake agreements.

00:09:05: She compared it to buying a beautiful house.

00:09:08: the surface looks great paint is fresh but during the inspection you find out that electrical wiring was done by very enthusiastic hobbyist.

00:09:16: The walls are total liability And

00:09:18: when we found bad wiring?

00:09:20: Levergy instantly shifts to buyer.

00:09:22: Uncertainty gets priced into deal immediately.

00:09:25: So let's say fix the wiring.

00:09:27: You survive the Delaware flip, you sign the SPA.

00:09:30: You pop The Champagne.

00:09:31: but data shows that this moment of celebration is actually when the real crisis begins.

00:09:36: Oh post-close.

00:09:37: Yeah.

00:09:38: Kisan Patel and Todd Manley describe his transition with a brutal metaphor getting to close like running marathon only across finish line.

00:09:46: realize now have run exact same distance back on entirely different terrain while you're already completely exhausted.

00:09:53: I mean, i have to challenge that a bit though people in M&A love these dramatic metaphors.

00:09:57: running a marathon backward or Scott Gardner's warning about companies jumping into transactions without a parachute?

00:10:03: Sure!

00:10:04: What does it actually mean operationally?

00:10:06: like what is the parachute?

00:10:07: The parachute is a concrete granular People Plan.

00:10:11: Gardner point is that private equity sponsors now expect day one readiness.

00:10:20: But integration is a systems problem, right?

00:10:22: It requires understanding how functions interlock.

00:10:25: If you wait until the deal closes to figure out How The Target Sales Team Is Going To Be Compensated Under Your New Commission Structure You've Already Lost

00:10:33: And the cost of missing that is staggering!

00:10:35: Becky L shared data showing That Seventy Percent Of Mergers Struggle Post-Close.

00:10:40: Specifically Because They Ignore People Dimension Of Change.

00:10:43: They Treat Integration As A Back Office Cleanup Project Rather Than A Core Operational Discipline.

00:10:49: The root of that failure almost always comes down to culture, but culture is such an abstract concept.

00:10:53: It

00:10:53: really is!

00:10:54: Professor Vlanka Ariyana Lupic analyzed five famous SAAS M&A clashes and she identified a distinct empirical pattern in the failure.

00:11:02: it's almost always this scenario where level three culture acquires a Level Four Culture.

00:11:06: Okay let's define those levels because that sounds a bit academic.

00:11:09: what does a Level Three suffocating a Level four actually look like?

00:11:13: In the office?

00:11:14: well

00:11:14: A Level Four culture is highly entrepreneurial.

00:11:17: Think of a nimble tech target.

00:11:19: teams are collaborative and employees have the autonomy to make fast decisions without seeking five layers of approval.

00:11:26: Okay, that makes sense.

00:11:27: A level three culture is classic commanding control.

00:11:31: think of a legacy corporate acquirer.

00:11:34: Everything is siloed highly structured and governed by strict reporting matrixes.

00:11:38: so the level-three giant buys the level four startup and immediately imposes their matrix on them.

00:11:44: The start-up founders who used to ship a product update in two days suddenly have to get approval from a global steering committee.

00:11:50: Precisely, the acquirer's culture literally sets a ceiling on the deal's value.

00:11:55: The entrepreneurial talent gets frustrated by the bureaucracy and just walks out of door.

00:11:59: that exactly is dynamic destroyed billions in values like HP acquiring autonomy or Microsoft trying to absorb Nokia?

00:12:08: That makes perfect sense in hindsight.

00:12:10: But how do you actively diligence something as invisible?

00:12:14: is culture before you actually own the company?

00:12:16: Like, You can audit a balance sheet...you can't really audit a vibe!

00:12:19: You can't.

00:12:20: but Clint C. Kendrick and Dr.

00:12:21: Miles Overhold argue that organizational DNA matters more than the financials pre-close And you diligence it by looking at invisible structures.

00:12:31: Invisible structure?

00:12:32: Yeah, like how are decisions actually made?

00:12:34: who holds the authority to approve a ten thousand dollar expense?

00:12:38: How is failure treated in executive meetings?

00:12:41: That's fascinating.

00:12:42: And Overalt made a really interesting point about this too, he noted that sometimes a highly aligned company like a culture that scores a perfect ten internally can actually be the hardest to integrate...

00:12:53: Because of the immune system?

00:12:54: Exactly!

00:12:55: Their internal immune system is so strong and they are so fiercely protective how it operates that will completely reject the acquirers operating model.

00:13:03: Managing an incredible level diligence in cultural integration requires massive scale And that actually brings us to the final area of insight today, how deal makers are upgrading their operational toolkits leading to a massive surge in AI adoption.

00:13:19: The urgency around this is palpable.

00:13:21: Santos Arjorgyev made very bold claim.

00:13:23: he stated that M&A advisory firms that ignore AI won't just fail gradually.

00:13:28: they will become obsolete instantly.

00:13:30: Instantly!

00:13:31: The next generation service firms wont use AI on side and be built entirely round it.

00:13:36: And Ahmad Ibrahim backed this up by noting that AI is no longer a novelty in M&A.

00:13:41: It's actively embedded in the workflow, it's ensourcing rapidly screening targets and identifying market patterns.

00:13:47: its indeligence accelerating data room reviews and surfacing anomalies in thousands of contracts...it literally gives deal teams an asymmetric operating advantage and speed.

00:13:57: But let's ground this hype for second.

00:13:58: Simone Boscotto and Glenn Polk pointed out a massive critical flaw in current AI tools.

00:14:02: Yeah!

00:14:03: The strategic blind spot.

00:14:04: Right.

00:14:05: AI can report what is happening in a data room, but it consistently misses the strategic context.

00:14:11: It processes information... ...but doesn't understand the underlying deal

00:14:15: thesis.".

00:14:16: And that lack of strategic context becomes incredibly dangerous post-close.

00:14:21: Thomas H. Kessler issued a major warning for executives regarding economists' AI agents and post merger integration.

00:14:28: He argues they need strict governance to find decision boundaries and literal kill switches.

00:14:33: Let's walk through a scenario of how that could actually go wrong.

00:14:36: Why do you need to kill switch for an integration software?

00:14:38: Well, imagine an autonomous AI agent tasked with migrating HR data and rationalizing job titles between two entirely different ERP systems during a merger without understanding the strategic context—for example at European employees have specific works council protections.

00:14:54: The AI might autonomously overwrite payroll classifications or trigger mass compliance violations across borders in milliseconds.

00:15:01: Oh, wow!

00:15:01: Right?

00:15:02: It lacks the human judgment to recognize it's doing something catastrophic.

00:15:05: without an immediate manual override a I can create enterprise-wide instability.

00:15:10: So

00:15:10: AI right now is essentially the ultimate junior analyst.

00:15:13: it can process a massive virtual data room in seconds which has Incredibly valuable, but it is a terrible investment committee.

00:15:21: Totally It lacks the nuance The human judgment and the trust building capability needed to navigate A complex founder transition or manage a culture clash.

00:15:30: Yet even with those limitations this tech enabled speed Is driving real market velocity Capital's being deployed faster in much more targeted ways.

00:15:39: Alan Vanderbord highlighted that Pharma spent two hundred and thirty-two billion dollars on M&A recently.

00:15:45: And the clear trend there is buyers prioritizing platforms over products.

00:15:50: Right, the biggest deals are targeting broad capabilities rather than single pipeline assets

00:15:54: and this velocity is creating unique bottlenecks in other sectors.

00:15:58: Jan Stremberg observed a fascinating dynamic in the crypto space.

00:16:01: there's currently two billion dollar buy side backlog.

00:16:04: Two billion just waiting

00:16:06: Just waiting.

00:16:07: Institutional buyers public companies and crypto native funds have capital earmarked.

00:16:12: The problem isn't finding buyers.

00:16:15: The problem is finding quality sellers.

00:16:16: They are looking for battle-tested protocols with real revenue, but those mature assets are scarce!

00:16:27: It really all circles back to our very first point about deal discipline.

00:16:31: The capital is there, the technology's accelerating process but the discipline only by quality prepared assets remains an absolute defining factor of success.

00:16:41: which brings us a final somewhat provocative thought to leave you with David Edgar shared data points from that massive forty year study.

00:16:54: Right, the study found that seventy-five percent of those deals completely failed to create shareholder value.

00:17:00: Three out four deals fail to deliver on their promise.

00:17:02: And in those contested bids, the companies that lost The Bidding War outperformed the winners over the next three years.

00:17:09: The winners suffered the winner's curse-overpaying and getting bogged down in years of painful integration while the losers kept their capital dry and they're focused sharp.

00:17:18: It

00:17:18: was pretty sobering!

00:17:19: So what does this all mean for you?

00:17:21: If the data proves that best deal is very often one you lose... Wait how do measure ROI acquisitions?

00:17:30: How do you build a corporate development culture that celebrates the rigorous?

00:17:33: no just as much is the triumphant?

00:17:35: Yes Something to mull over before.

00:17:38: You sign your next LOI.

00:17:39: if you enjoyed this episode new episodes drop every two weeks.

00:17:43: Also, check out our other editions on private equity venture capital and strategy in consulting.

00:17:48: Thank you so much for joining us on this deep dive.

00:17:50: Don't forget to subscribe wherever you were listening So you never miss an insight and we will catch you on the next one.