Mergers & Acquisitions: Integrating with my Family

Pam Brown

HR Director at Gallagher

Matt Poleski

CFO-Northeast & Mid-Atlantic at Gallagher

Learning Objectives

Due Diligence for Mergers and Acquisitions is all about the numbers – assessing growth rates, margins, integration costs, and synergies to be realized. Once an acquisition is closed, what happens now? Matt Poleski, Gallagher Northeast Region CFO examines the top questions you face once an acquisition is closed: Should we integrate all faster all at once – or should we go slower making sure every project is implemented precisely? How should the acquiree prioritize integration projects versus running the day-to-day operations? What things can I take credit for as early wins? What key success factors should I measure? Who should I manage and identify the key stakeholders to measure change? How do I nail down roles responsibilities and relationships?  



  • Pricing is about creating value for both seller and buyer - not about winning 

  • The success of the acquisition is determined by a successful integration in an acceptable time frame 

  • Anticipating setbacks will help overcome obstacles to a successful integration


"How do we put the right people in the right places in order to make a beautiful picture?"

Pam Brown

HR Director at Gallagher

Matt Poleski

CFO-Northeast & Mid-Atlantic at Gallagher

Transcript

Matt Poleski

Hi, I’m Matt Poleski. I work on the Northeast Region CFO for Arthur Gallagher, which means I do most of the mergers and acquisitions, and we do several of them. I also do the financial planning and analysis. I’m here with my colleague, Pam Brown. Pam, would you like to introduce yourself?


Pam Brown

Yes, thanks, Matt. I’m Pam Brown. I’m the HR Director at Gallagher. I represent the Northeast and Mid-Atlantic regions, as well as National Risk Control. We do a lot of acquisitions, and really happy to be here. Let me share my screen with you and pass it back to Matt.


Matt Poleski

One of the things many industries consolidate through acquisition, look to get economies of scale and margin improvement, it only a few do it really well. We’re lucky enough to be part of Gallagher that does do it really well. We just kind of got thrown into the roll. I started an internal audit, and then all of a sudden, we’re doing mergers and acquisitions. We’ve learned a lot of valuable lessons. It’s a lot of work, but it’s really not as complicated as you might think to have successful acquisition integration.


Matt Poleski

Happy to be here. One of the first things I’ll point out is, every single one of our quarterly earnings releases, we talk about four things. Those four things are organic growth, mergers and acquisitions, margin improvement, and our culture. The reality is, you would think that M&A would really being closely related to number two, but it’s really all four. If you do M&A well, it will benefit your organic growth because you’re getting a stronger team, you’re going to get margin improvement, and get economies of scale, and you’ll leverage things, and you get the right people—it’ll benefit your culture.


Matt Poleski

I will kick it back to Pam. I guess just starting at the beginning, what do we look for in merger selections?


Pam Brown

When we’re doing acquisitions, we’re looking for brokers that fit with our culture. Although we’re competitive on price, our value add is about our culture. We are brokers run by brokers on ourselves in that marketing platform. We look for people that are positive and a good two way fit for our platform. We look at the reasons the buyer wants to sell. Are they looking for a perpetuation plan? Are they looking for opportunities for their employees? What motivates the sale?


Pam Brown

When I think of one company in particular that we purchased, the leader was selling with a need for a perpetuation plan. He had two Account Executives underneath him that could maintain the revenue more efficiently under our platform. This is an economies of scale or a margin play. For growth play, we need to see self talent that are runners and can grow with added resources. We introduce them to other salespeople and sales resources. Together, both Gallagher and the merger partner are able to grow faster, with more lines of business, and more niches.


Pam Brown

In the third example, we have an owner who was great at startups and took the company as far as he could. He needed to sell in order for the company to grow. This owner did not come with the transaction. Instead, he used his proceeds to start a new company, and we grew the business he sold to us. A great example of win-win.


Pam Brown

Key takeaway: Regardless of the type of play, the cultural fit is an important key to a successful transaction. There are other important factors such as talent, communication, and price. Our view is cultural fit is the first key to success. We need great partners, winning the deal without partnership and culture fit has much less of a chance of success. Therefore, our recommendation to the prospective buyer, look for a cultural fit first, and you can assess that for due diligence, including critical conversations.


Pam Brown

I will turn it over to Matt at this time to discuss why critical conversations are so important.


Matt Poleski

In the beginning of a negotiations with the prospective buyer, the first thing you want to do is start having discussions on whether they’re a good fit for us. Some of the best [unintelligible] we do are the ones we walk away from. We don’t do them all, we do the ones that we think fit. There are different conversations we have, and we got to talk about how we’re going to do integration, whether it’s the front office sales, middle office service, or the back office finance, HR accounting. We need them to understand how selling changes once they’re part of Gallagher. Do you have some examples you’d like to add?


Pam Brown

I would love to. Thanks, Matt. We tend to find synergies in the back office. In other words, our merger partners can benefit by using Gallagher HR, Finance, and IT. Therefore, either their employees roll with change and find a position within the Gallagher structure or sometimes they opt out. Bottom line—change should be expected. We hope to leverage sales and service as long as they are high performing teams. This is a key to growth. When service companies make acquisitions, it is the people we are acquiring.


Pam Brown

Matt, can you go into more detail about the pro forma and pricing?


Matt Poleski

The key to pricing and [inaudible], so it’s a win-win situation. We’re competing on our competitive advantages of culture, so with price, we’re just looking to be competitive with market value. We need to make changes from a transactional zero sum game or one size wins at the other expense to a win-win situation. We want to highlight how both sides are benefiting, and also how the employees ultimately will benefit the ones that we can onboard well. As we look through, we’ll do a Pro Forma when we’re looking to buy the business. I think one of the things we always look for is revenue growth. I think as we’re having our crucial discussions, I’m going to say, Well, how are you going to get the revenue growth? There shouldn’t be the organic growth that the seller would have had, regardless of whether they joined Gallagher or not. Once you get on our platform, you should be able to get sales growth just by using our data analytics that we use. We can cross sell products, we can leverage market relationships for enhanced commission rates, we leverage the existing customer base within our niche practice expertise. Looking at all these potential ways, we can achieve more just by being part of our platform.


Matt Poleski

Secondly, we’ll see the margin improves over time. You’re going to get that natural improvement as you grow as long as you’re not paying everything out, and you keep your economies of scale in, but you’re also going to get some synergies from. Once you’re on our platform, your middle market selling costs go down, the real estate synergies may come into play if you combine offices. We’ll also get some savings on a county, ITHR, that we can get economies of scale by supporting them with centralized resources.


Pam Brown

Great. Can you also talk to us about growth and multiples?


Matt Poleski

One of the common things that you’re always asked about when you’re doing acquisition is, what’s the multiple you’re paying? It could be a revenue multiple or an EBITDA multiple. Typically, we’re looking for more EBITDA multiples.


Matt Poleski

How do you define a multiple? A multiple is the purchase price, divided by the revenue or the EBITDA. How many times revenue you’re gonna do? How many times EBITDA will you do? I think what’s interesting, the way the deal structure is, everybody kind of looks at that upfront multiple as the most important. Let’s say, in the example we have here in the graph. If the purchase price is 40 million, you’re looking at 11.7 multiple upfront with no growth. The way we have the deal structure with an earnout, which the earnout, defers a portion of the purchase price to the back of the agreement, typically three years, where the seller can earn more if they grow. The interesting thing to see here is that if they grow, both the purchase price goes up and the multiple goes down. It’s a better value for both the seller and the buyer when we structure it, so we integrate successfully. This is really one of the keys to get us aligned, to be on the same page of want to integrate well because we win when we grow.


Matt Poleski

I think another interesting thing if we go here is looking at the time horizons of the buyer and the seller, The seller, typically, is in it for this urn out of three years, so there’s a lot of focus in those first three years of integration because that’s when you’re going to be going onto our platform, that’s when there’s going to be all this change and all this focus. When we really start to make our money as a seller is yours 4, 5, 6 and beyond, if we’ve successfully integrated you well, and you’re here, we amortize customer lists over 20 years, we break even on the purchase price in the 7 to 10 year range. We really have a much longer perspective. I think these things often get forgotten about because the people who do the deal maybe move on and they’re not there. The really long-term growth is important to have successful M&A immigration.


Matt Poleski

Now that we’ve gone over some of the financials, can you talk us through some of the evaluating talent?


Pam Brown

Absolutely. Thank you, Matt. We can evaluate owners during due diligence, it is highly preferable to also learn about key employees in addition to the owners. This will help us drive integration. Getting to know people happens during both due diligence and integration. On the screen, you’ll see a framework to evaluate the people. We are looking for our real stars. We need to identify the runners, joggers, walkers, and writers. Runners can move into leadership positions in the company. Joggers are your studies—you need these people to get the job done. Can you push them to become runners? Some of them. Walkers and Writers are just enjoying the ride. We all know those employees who don’t get much done, they’re collecting a paycheck, and they’ll ride the wave as long as they can. Then, there are the drivers—these typically are the leaders. You need to have leaders driving the strategic direction of the company. Those are your drivers.


Pam Brown

Building trust with the employee base is very important to help drive change. It’s important to identify your runners and drivers in order to share responsibility for change leadership. The best merger integrations I’ve ever worked on have had strong drivers helping to drive change.


Pam Brown

One example of a Runner is a colleague of mine—let’s call her Jane. Jane was with a small agency as Applying Service Manager. We recognize she knew how to drive change and be a leader. It was clear she had potential to play a larger role. By getting to know the employees, we identified Jane is a Runner early on. Eventually, she earned several promotions and is currently responsible for an entire region’s client service team over 200 employees. Tough call.


Pam Brown

Recently, we acquired a firm where it was clear the Office Manager who also played an Accounting role was not going to help us integrate. Steve was a Walker/Writer. He was happy to go along for the ride but was resistant to change and adding negative value by being a resistor. Steve also had a 35-year relationship with the owners, who wanted Steve to be part of the long-term plan. Moving forward was tricky and crucial conversations were imperative. Matt, my co-presenter, did a phenomenal job with the leaders of this merger partner, who eventually realized the right call was to move Steve out.


Matt Poleski

One of the first things we’ve learned and we’ve been doing this a long time, is the faster you can integrate, the better. Speed is the name of the game. What typically happens is, at the time of the transaction, everybody’s happy, you have this honeymoon period. Maybe take your eyes off the ball because you’re happy that you closed the deal and you want to celebrate because the owners just got paid. You can celebrate, we got another person. The reality is, the first 90 days, first 6 months—that’s the time to move because what happens is, everybody expects change when they know what’s happening. If you jump on and get as much other things in change and get people changed onto your payroll and benefits, we get people moved down to the accounting system to do it all at once. That is probably recommended because what we’ve also found is in instances where there was a reason not to do this, we find out we end up having the same conversations, and they’re actually more painful the longer you wait to do it because now, they don’t remember that they sold the business to you and they take it as any kind of change that gets pushed through. They don’t want to do it.


Matt Poleski

Speed is the one thing that I would really recommend. Do it as fast as you can. Rip the band aid off because the employees are going to be ready to do it then. There’s also a psychology that goes on with the merger partners where their employees, after a period of time, they get on the system and they start to realize they long for the good old days, what it used to be like. They just think everything’s worse because they’re emotionally spent from all the changes that they’ve gone through, all the systems, conversions, all of it was just jammed. It wasn’t the employees, it wasn’t their choice to sell. They were just employees, and now they’re saying, “Well, do I want to be here?”


Matt Poleski

The key is really, we found is to spend a lot of time on site. Get on site, get to know your merger partners. Know them as much as you can, frequently visiting, and then just over communicate everything. Just keep telling them. A lot of empathy is necessary. Listen, and then just show them, “Hey, this is why I could do better than you.”


Matt Poleski

Continuously keep figuring out who are the people that really make it work, who are those people that are stars, because they can leverage and they can get better careers within Gallagher if we find and put the right people in the right roles. Some of those people—some may not fit, some may want to be there. We got to shuffle them around. Make the tough calls quicker as opposed to later because what happens if somebody realizes they really don’t want to be there, they may stick around hoping things will change, but the reality is, they end up dragging everybody else down. That affects your culture. You got to get the people out who don’t want to be there because maybe they liked it better before. They won’t help you get to where you want to be.


Matt Poleski

Pam, why don’t you talk about what you love about M&A integration?


Pam Brown

Absolutely. I love the challenge of M&A integration. It’s like doing puzzles. We’re evaluating all the pieces and saying, “How do we put the right people in the right places in order to make a beautiful picture?” It’s a lot easier said than done. There are numerous tough conversations to have along the way. System conversions are not fun, and they’re stressful to everyone. We have to continually remind everyone how the organization is run by people, and its people who make us successful. This is where some fuzzy math comes into play, which my Finance Partner might not appreciate. We aim to make one plus one equals three or four, but since that’s talking about growth, maybe he does appreciate it. I’ll turn it over to my finance partner at this time to talk about the success factors.


Matt Poleski

Some of the top 10 critical success factors, first, it starts with buying the right company at the right time at the right price. I think that’s about selection and culture, finding them where it is.


Matt Poleski

I think, two, give and take from the time the term sheet assigned. This is another one. The term sheet is basically lined out an outline for the deal before we start due diligence. It basically anchors a lot of the terms, although a few things might get negotiated here and there. I think this is where you want to establish your collaborative culture. We’ve seen some where they go sour, where we start negotiating that purchase price, and really trying to win the purchase price or some of the terms of the deal, as opposed to really focusing on that long-term value and just making sure it’s fair for both sides.


Matt Poleski

Leadership from the top and collaborative cooperative partnership. The leadership is going to set the tone at the top. I think you’ve got to look at your acquiree seller, and make sure you’re coaching them through, They’ve never sold their business before likely, and so they’re going to need some guidance from you—what to tell employees, how to leave. I think getting in there and jointly problem solving because there is a lot of change. This is something to do once. You think about it like buying a home, there’s always a new challenge, there’s something. I think getting out in front of issues and doing it collaboratively is the best.


Matt Poleski

Cultural understanding. Although we look for people that are a cultural fit, what we’re focused on is it’s never going to be the same.Let’s identify those differences, and figure out how we can bridge them or at least acknowledge they exist. Sometimes, that’s all you can do, but that understanding goes a long way. Focus on building trust and seeking out early wins. I think that’s the other thing was speed. If you have the trust of the team, and you go through and you’re like, “Okay, we’re not gonna sweat the details, we’re gonna look for the big things.” The early wins that you can get even if you’re just like transitioning bank accounts, putting them on your payroll system, getting them on any kind of system, and just let’s take credit for the wins and celebrate them because even every time you have a system conversion, they never go smoothly that first 30 or 40 days. If you anticipate, celebrate that you got on, and then let’s work together to get past any kind of bugs that might have occurred in that early integration.


Matt Poleski

Find the leaders and star talent. Talent evaluation—this is the key because really, the labor market is tight and it’s hard to find good people. The reality is, I find our best people usually come from—it’s much easier to get somebody from an acquisition, who’s already doing a job than it is to go out and hire somebody. One, you get kind of a free training period in there, where they’re doing integration, and you can evaluate them. It’s all about finding them that next role and promoting them and figuring out how do I get them in the right spot. It’s much easier to find leaders with people that are working on this key initiative, integrating, and acquisition. If they do well there, they can probably do well on something else. I’m having an integration plan. Gallagher has SWAT teams of people that come in, and they’re fully dedicated, just doing integrations all the time. I think having that integration plan, that’s key to success.


Matt Poleski

Communicating and execution—just communicating and over communicating. I say the same thing over and over again, but at least you know where I stand. That’s much better than somebody saying, “Every time I talk to you, you just said what the last person said. It’s the same, you change your mind all the time.” Now, we want to communicate, and over communicate, and over communicate, and stay the course. It is a grind, having a clear financial focus, delivery of the cost and savings and speeding manager. We are going to get the margin improvement by doing this. If we look at the pro forma and we saw it fit in, then it’s just a matter of executing the strategy, and making sure we’re going to naturally get synergies because as we grow, we have a platform bolted on to that platform. It’s going to give you a natural margin improvement.


Matt Poleski

Finally, just additional talent evaluation. I can’t say, as I look around, I see a lot of people are in leadership positions. They all came from acquisitions. Just because Gallagher has been a public company since 84 and grown, we’ve acquired lots of companies, lots of people, and lots of people that have very successful careers here, who came in through acquisitions. Those are our top 10 critical success factors.


Matt Poleski

We’d like to thank you for your time. If you have questions, feel free to submit them, and we’d be happy to answer.


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