At last week’s ACG Intergrowth conference, I attended a roundtable discussion on Deal Sourcing as part of the
Corporate Development track. My notes follow. To preserve confidentiality, I have labeled as “X:” the comments from all the participants. We had about 30 people in the group, almost all of whom were heads of M&A at their respective companies.
Our moderator was Wendy Stahl, Vice President, Corporate Development, CreditCards.com.
QUESTION: do you pay intermediaries?
X: we identify bankers who we think are competent. We tell them what we’re looking for. We tell them we won’t pay them; the sell side will pay them.
X: Bank of America built a relationship with us by offering to introduce us to some corporate partners.
X: We don’t rely on external sources for deals. We tell them, only contact us if it’s a bulls-eye. We emphasize to bankers that we don’t retain them, to avoid mis-set expectations.
X: We’d be willing to pay a finder’s fee if we think we’d never have gotten the deal.
X: We take the leads, on a non-exclusive basis. Pay 1% or less.
X: question-how many people are using finder’s fees? And what do you pay?
(about 20% of the group raised their hands).
X: a finder gets less than lehman formula because it’s less work. Maybe a half-point, no retainer.
X: depends on what stage investment is at. 80% of what we see, someone has already been retained to create a process.
QUESTION: what changes are you seeing in auctions? We’re seeing fewer auctions. Does that make it more important to get to know bankers?
X: It’s hard to tell if there’s really an auction. The banker will always tell there’s an auction.
X: bankers are shopping deals where they don’t have a client. They’re working hard and getting nothing done. Whole environment has changed dramatically. They’ve all stepped down to smaller deals.
X:: you used to have to fill out a non-binding Letter of Intent to look at a transaction. That’s no longer true.
QUESTION: Where is a good database of bankers?
Teten: Capital IQ, LinkedIn, ACG Network. Also, make sure you’re in the buyer’s directories: S&P Money Market Directory, Bigdough, Galante’s, PrivateEquityInfo.com, PEDatabase.com.
X: I’ve been really aggressive about linking to every banker I speak with on LinkedIn, since they’re linked to other people in the space. That’s been very helpful in building out a database for myself of the bankers I need to know.
QUESTION: Discuss the internal side. How do you manage the process?
X: It’s mostly a collaborative relationship. Operating guys are in the field.
QUESTION: Who’s taking the lead on a deal?
X: the operating guy has to live with this deal for the rest of his career. He has to be motivated.
X: We position corporate development as the “internal investment banker”. We position ourselves as a business advisor. I tell them, “My job is to help you grow your business.” Part of my job is to assess their competence as a deal-doer. I also have to mentor people in the process of doing a deal.
QUESTION: a scenario I’ve seen: operating guys are gung-ho; you have to buy this company. On the deal side, you’re skeptical.
X: We ask the local person to be the business champion. He has to say, here’s how I’m going to run it, on the target numbers, etc.
QUESTION: What does corporate development sign up for?
X: We have a balance. We have to get the best deal for the company, and we have to get a deal done.
X: What if there’s no intermediary on the other side? I find myself saying to the other side, ‘I’m not your banker, but if I were, here’s what I suggest you think about.”
X: Part of my role is to be a contrarian. Promote debate. Is there real buy-in? Why do they really want to sell?
X: tension between being gatekeeper and being a nice guy.
X: We want to make sure we have good relationship with operating companies. I may not like a deal, but I’m not going to say that. COO of holding company has to sign off on the deal pre-Letter of Intent.
X: We tell operating people we’re going to discuss validity of the deal when you’re not in the room. That’s part of our job.
QUESTION: Who has ownership of the valuation model? And do you share that model with the operating businesses?
X: We are responsible for modeling, but rely on the operating team’s assumptions. We don’t share the spreadsheet.
X: I see a risk that the operating people will game the model. Have you seen that?
X: We prepare a standard report and send it to business champion. We’ll walk them right thru the valuation.
X: I don’t go past the COO.
QUESTION: Part of your role is to take the firm to places you haven’t been.
X: Our corporate development team also owns innovation, so we’re constantly looking at the make/buy decision.
X: Good book: “Alchemy of Growth”. Discusses make/buy decision.
X: Our corporation is designed around those horizons of growth.
About 10% of room indicated they’re responsible for innovation as well as corporate development.
QUESTION: Are you responsible for portfolio review also?
X: We have strategic planning, corporate development, and then enterprise partnerships. That’s all in one group. They’re closely related.