Insights

  • The Importance of Data Security in M&A – and How Insurance Fits In
    POSTED 7.28.20 M&A

    The nature of risk in M&A deals has changed, and it’s made specialized insurance coverage more important than ever.

    Data security is now, more than ever, one of the biggest concerns for those involved in M&A. And for good reason. It’s creating more risk in deals, especially those involving tech companies.

    These days, businesses need to be aware of how the businesses they acquire collect data, secure data, and use data. There are several factors at play here.

    Increased data privacy regulations in the European Union, known as GDPR, as well as the California Privacy Act (with similar policies sure to be put in place in other jurisdictions across the country), can put Buyers at severe risk, particularly when they acquire companies with less than effective data security.

    And Buyers are taking notice.

    In fact, according to Deloitte’s annual The State of the Deal: M&A Trends 2020, 70% of respondents (from Strategic Buyers and PE firms) stated that protection of data in a company they were acquiring was more of a concern than it was a year ago.

    Andy Wilson, a partner in the M&A Services division of Deloitte & Touche, put it nicely:

    “Data privacy can be a diligence issue. A target company may bring a cybersecurity weakness into the organization, or a transaction that involves layoffs or other workforce changes may create data security risks.

    At the same time, data protection and management can be an integration issue, with a newly combined organization perhaps reaching into new geographies where regulations differ for the handling of data.”

    Regulations Today Call for Strong Penalties

    GDPR (General Data Protection Regulation) was instituted in 2018 in the European Union and outlines strict guidelines for the collection, organization, storage, use, and destruction of personal data. Fines for violations, based on annual revenue, can run into the millions. For example, Marriott International in the U.K. was fined £99 million in July 2019 for a data breach of 339 million guest records.

    Investigators believe the incident goes back to 2016, when Marriott acquired Starwood hotels group. The group had its systems compromised in 2014, but it was only discovered in 2018. Regulators faulted Marriott for not conducting proper due diligence prior to the acquisition or doing enough to secure its systems.

    Elizabeth Denham, with the Information Commissioner’s Office, which administers these regulations, said this about the case:

    “The GDPR makes it clear that organizations must be accountable for the personal data they hold. This can include carrying out proper due diligence when making a corporate acquisition and putting in place proper accountability measures to assess not only what personal data has been acquired, but also how it is protected.

    Personal data has a real value so organizations have a legal duty to ensure its security, just like they would do with any other asset. If that doesn’t happen, we will not hesitate to take strong action when necessary to protect the rights of the public.”

    As you can see, they’re taking it seriously, targeting businesses of every size in every industry. These days, every company has sensitive customer data. It’s not just tech or financial industries like banks or credit card companies that have to worry. Any business that touches the internet is vulnerable.

    Plus, not only can you run afoul of regulators due to a privacy breach or data leak, but you can also introduce vulnerabilities to your own secure system by blending it with the newly acquired company’s system.

    How to Protect Yourself

    1. There are solutions, or at least things you can do to mitigate potential problems.
    2. Enhanced due diligence.
    3. A laser focus on post-acquisition integration of systems to make sure they and each company’s security practices line up. This goes from the IT side all the way down to prohibiting employees from putting their password on a Post-it on their computer monitor.

    Purchase the right Cyber insurance.

    Cyber Liability coverage is a must-have for virtually every M&A deal in today’s climate, due not only to regulatory penalties but also the financial damages from a data security breach. There are measures to take to protect data, of course, on the tech systems side. But hackers are ever more sophisticated and can get around even the most sophisticated protections.

    The need for Cyber Liability coverage may sound obvious, but be aware that not all Cyber policies are alike. Avoid the cheaper versions that only cover data breaches. The top policies now offer coverage for malware attacks (which happen 5x more often than loss of data), electronic theft and ransomware attacks – all of which can seriously damage a company’s value if left unprotected. The difference in cost for a more comprehensive Cyber policy is negligible.

    Due to the heightened exposures businesses face from cyber-related losses, most R&W policies will require a Cyber Liability policy be in place for the target company, and will impose exclusions for Cyber-related losses if no such coverage is in place.

    In the case of both Cyber Liability and R&W coverage being in place, here’s how it works:

    In the event of a breach, the insurance companies will let the Cyber Liability claim be paid first and then the R&W policy will cover any damages not covered. Keep in mind, the deductible on a Cyber policy is a fraction of a R&W policy retention, so Cyber provides a cost-effective first line of defense.

    It’s comprehensive protection that’s very necessary today.

    As a broker with extensive experience with both Cyber Liability and R&W insurance, I’d be happy to discuss coverage for your next M&A deal.

    Please contact me, Patrick Stroth, at pstroth@rubiconins.com.

  • Let’s Talk Exclusions 
    POSTED 7.21.20 M&A

    When it comes to insurance – in any realm – most people aren’t as concerned about what the policy covers as much as what is excluded.

    That’s the number one factor in whether or not they get the policy.

    Why would something be excluded?

    There are three principal reasons:

    1. Something is flat out uninsurable. An example of this would be a moral hazard, which is a situation in which one party engages in risky behavior because they know it is protected… and the other party (in this case, the insurance company) will pay the price. You can’t intentionally misbehave to trigger a policy and get paid – that would be like suing yourself. If you could, there’d be no incentive to be on good behavior.

    2. Underwriters want more information on a specific point before they are willing to insure an exposure in the Purchase-Sale Agreement, so they put in an exclusion until they are satisfied with the extra information provided. Once they have that information, they’ll make a value judgement about whether or not to remove the exclusion and what, if any, additional premium charge is applicable. For example, if the standard policy costs $120K, the Underwriter might say we will remove a particular exclusion… for another $30K.

    3. An exclusion might be included because the exposure is simply better covered on a separate policy. Environmental Liability is routinely excluded in R&W policies because the risk is best insured by a broader (and less expensive) Pollution Liability policy.

    All that being said, here are some of the most common exclusions we see today.

    (Disclaimer: This is subject to any specific terms in a deal, due diligence performed or not performed, and each particular Underwriter – whose opinion can vary.)

    

Top 10 Representations and Warranty Insurance Policy Exclusions

    1. Actual Knowledge

    This is when you want to buy a policy, but during diligence you discover the financials aren’t accurate… and you buy the policy anyway. In this case, any damages related to issues you knew about won’t be covered. If you notice anything unusual about a target, which would trigger a breach, you can’t suppress it until after closing. If you do, this is known as “sand bagging” and is excluded.

    2. Interim Breaches Between Signing and Closing

    If there are any breaches between the time of signing the deal and closing it – and the parties knew about it – it’s not covered. For smaller deals, signing and closing are usually on the same day, so there’s no problem. But for bigger deals with regulatory or funding issues (like the bank offering financing won’t sign off until signing) to sort out, this comes into play. For example, when Amazon bought Whole Foods, they had to wait six months for regulators to okay the deal as far as potential anti-trust issues.

    3. Full Disclosure Representations and Rule 10b-5

    These are catch-all Reps that go way beyond standard Reps and Warranties. They are excluded– because you can’t cover everything out there, especially something with unknown potential financial impact. As a result of this “universal exclusion” the 10b-5 reps are being removed from agreements.

    4. Purchase Price Working Capital Adjustments

    Sellers have complete control in calculating and providing sufficient cash in the company’s accounts to cover operating expenses for a period post-closing. Since it’s in the Seller’s interest to have as little cash left behind as possible, a moral hazard exists. R&W Insurers therefore exclude any failure by the Seller to accurately estimate and adequately fund the company’s accounts. If, for some reason, the Buyer discovers they’ve been “shortchanged” after closing, the Buyer has to go after the Seller directly.

    5. Fines and Penalties

    Any misbehavior that results in government action may be excluded where deemed uninsurable by law (i.e. punitive damages in CA are uninsurable).

    6. Deduction of Tax Benefits from Recovery Amount

    If you have losses and related expenses after closing, that breach often nets you a tax break. If the insurance company pays the claim for your damages, they’ll deduct the amount of the tax break accordingly.

    7. Wage and Hours Laws Violations

    Misclassification of employees versus independent contractors is common, especially in the tech sector in places like California. With contractors, companies don’t offer benefits or pay employment taxes. But often the line between contractors and actual employees is blurred and companies can be sued. With that much exposure, insurers won’t cover it, without extensive information and at a higher premium.

    8. Major Environmental Issues

    Say you buy a company that owns a building which had a major fire or chemical spill in its past. These are hazards that a R&W policy won’t pick up because it should be covered by a 
Pollution Liability policy you can buy elsewhere.

    9. Forward-Looking Reps

    With R&W coverage, you’re insuring Reps of what you know up until the close. Any projections or forward-looking statements are simply uninsurable. For example, if you’re projecting $14M in revenue in the quarter following the acquisition, up from $10M in the quarter before the deal, the insurance company can’t protect that estimate. Projected revenue or growth is not covered.

    10. Consequential/Multiplied Damages

    In the past, R&W insurers considered consequential damages/multiplied damages uninsurable; however, competition and favorable claims experience has changed this position. Today, insurers are willing to either cover these broader damages outright (mirroring the Purchase -Sale Agreement) or will agree to remove any specific exclusion language (be “silent”) on consequential/multiplied damages if the Purchase-Sale Agreement concurrently omits “consequential/multiplied damages” in its definition of “damages”.

    A savvy Buyer will insist on consequential damages being included in the Agreement. It’s therefore essential for R&W Brokers to address this point with all Insurers to ensure proper coverage is either provided or limitations disclosed to the prospective policyholder.

    Next Steps

    As you can see, R&W insurance is not a catch-all that will pay claims on any sort of issue post-closing. What’s covered is narrowly defined by necessity. It’s also essential to note that exclusions can be flexible where Underwriters are provided the right information. This highlights the importance of Engaging an experienced R&W Broker to negotiate with Underwriters on a Buyer’s behalf.
    Still, when you consider all that these policies do cover and the other benefits, including transferring the indemnification risk to a third party, speedier negotiations, and more, it’s well worth pursuing this coverage for most M&A deals – for both Buyers and Sellers.

    It would be my pleasure to discuss potential exclusions and other coverage details with you. Please contact me, Patrick Stroth, at pstroth@rubiconins.com.

  • Alex MacLaverty | Solving Business Challenges With Communications
    POSTED 7.14.20 M&A Masters Podcast

    Communication is vital during an M&A transaction, on both sides, externally and internally. Clarity is a PR firm that works to help companies get through the deal, from media relations to crisis management.

    It can be a stressful process… and certainly not the time to “wing it.”

    As Alex explains, they use a change management model called ADKAR to shepherd organizations and people through times of transition, get buy in, and make sure new policies and procedures “stick.”

    We get into detail on that, as well as…

    • Strategies for integrating vastly different company cultures (and customer bases)
    • COVID and post-COVID communications strategies
    • What they do when deal details leak
    • How they balance confidentiality and the need to share information
    • And more

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined again by Alex MacLaverty global COO of Clarity PR. Clarity PR defines itself as an agency with a heart of a startup, working with rebels and Titans. We take risks, solve problems, learn, adapt, and deliver fearless global communications.

    This is the second of two conversations I had with Alex discussing the role of communications in mergers and acquisitions. In the first conversation we had, Alex talked about the role of communications for Clarity PR as its own strategic acquire itself where it has had a number of acquisitions and we’ve talked through case studies of what she did. To find that recording, simply go to Google, Apple iTunes, look up the podcasts and just search for M&A Masters and you’ll find it. M ampersand A Masters.

    It’ll be there, it’s the only one out there. Today we’re going to discuss the best practices for communications both internally and externally for participants in an M&A transaction, and this is where Clarity provides the role of advisor on holding the hand and shepherding the parties through this process. Communications in M&A are absolutely critical, particularly when you consider how much confidential sensitive information is being handled by a limited number of parties and how do you get that message out as other parties are added to the process. So it’s not as easy as it looks as I like to think. Alex, welcome back. Thanks again for joining me.

    Alex MacLaverty: It’s a pleasure to be back.

    Patrick: Now before we get into the nuts and bolts on what Clarity PR does in terms of communications for others in M&A, let’s get a little context. Tell us about Clarity PR itself.

    Who Are Clarity PR and What Are They All About?

    Alex: Well, thank you for the introduction. I think you said a lot of it already actually, which is great. Saves me a job. But to give you a feel for us, Clarity was an agency founded specifically to bridge the gap between the very large multinational agencies that you’ve probably all heard of, and the sort of small local boutique agencies and we like to think that we are in the perfect spot where we’re not too big, not too small for our clients.

    We’ve got offices at the moment in London, New York, San Francisco and LA. So we serve, obviously, the US market and Europe out of London. And we’ve got partners across the world as well that we work with because obviously, a lot of comms needs to be handled in multiple markets these days. But we really focus on tech-enabled companies.

    Not usually the biggest player in the markets, we tend to sit very well to the heart of a startup filled with challenges. So, some of the companies that are doing the most disruptive, innovative things in the market and really looking to challenge what’s out there already. And we specifically enjoy working with clients that have exciting stories to tell where there’s a really positive change coming out of the work that they’re doing and we’re able to bring that to life.

    Patrick: And this is more than just press releases too. This is also going to be internal communications on how you go ahead and get messaging internally through, and then with the counterparties and so forth.

    Alex: Yeah, absolutely. Yeah, sorry. We cover everything from media relations through to content marketing, digital, social, internal comms, crisis management, of which there is a lot in M&A as you know, and everything in between. So we tend to enjoy a very privileged position as advisors on sort of business strategy as well in a lot of cases because we get to deal quite often with, directly with a CEO, particularly in mergers and acquisitions.

    Patrick: Let’s look at what we’re doing with communication specifically in the world of M&A, okay? And I, and you and I’ve had this conversation before. The communication is a skill set that a lot of us take for granted because particularly if you’re in the professional field, we believe we’re communicating all the time. We either spoken or written, we’re constantly using sophisticated language and, you know, being aware and getting out there to a whole lot of people.

    And that’s not the same skillset you need when you’re dealing with, you know, highly sensitive, confidential information and being able to get it out at a measured time, particularly in the case of an M&A situation. You really can’t wing it. And you guys don’t. You’re not improvising on this on the fly. You go ahead and you have a real set process. So could you briefly go over that process that you use for the, I guess the hierarchy of the communications?

    ADKAR

    Alex: Yeah, absolutely. I mean, the most important thing is to take a look at the whole picture of what you’re trying to achieve with the deal and then work back from it. And I think it’s very easy for communications to end up siloed in individual departments or with individual people. And so our role is really to take that overview of the whole process so that we can make sure that everything’s been joined up and is working consistently.

    There’s a process I talked about on the last podcast, which is the ADKAR model, ADKAR, which is, we’ve used for many years with great success, which just really acts as a reminder of the different processes you need to go through. It was devised for change management. So if you think of a deal as a process of change, both for the individuals being impacted, for the market, for the businesses as a whole, it seems to work well in terms of making sure that you just check off everything you need to. Just to recap very briefly, the first step one, that is awareness, so making sure that the parties involved have an understanding that there is a need to change.

    The D is the second step which stands for desire, which is actually inculcating in the people involved this desire to have that change happen. So for a positive outcome, and it’s only at that stage that you then start to impart the knowledge, which can take the form of training or communications to the team so that they really start to understand what it means for them and how they’re going to be working with it. The A is the ability, so giving them the toolkits they need to apply that change. So that could be equipping sales teams with new materials, it could be doing some of the sort of operational and logistics side of things.

    And then the R stands for reinforcement, which is obviously, just making sure that once the change has happened, you don’t just assume that it’s stuck. And it’s about going back again and reinforcing that awareness and that desire for the change until you feel like you’ve got a properly integrated business once again. It’s a very helpful way to navigate the uncertainties and the kind of scariness I think for lots of people involved either, you know, at a senior level or at a sort of junior level, in any kind of change. And it certainly helps to inform our communication strategies when we’re working with clients.

    Patrick: So what I like about this is that this isn’t just composing a press release announcing a deal. There’s got to be a way that you are ensuring that the deal ends up with a post-closing integration process that’s successful. And in order for that, and I love how you guys frame this, is this is all about change, and that people have to be aware of the change.

    They’ve got to understand, not only understand it, but then actually want it before you spend a lot of energy-giving them the skill set and the tools to move forward. If they don’t want it, you could have the greatest training in the world and they’re just not gonna buy into it. With mergers and acquisitions, we got issues with confidentiality and, you know, it can go big swings, depending on the parties in place, and the sensitivity of the information. How do you balance the need to make people aware and confidentiality?

    When Details Leak…

    Alex:  it’s a gray area to focus on because it is a very tricky one. And I think there is something in human nature that means when you know a secret, you really want to tell everyone about it. And particularly when you’re excited about a deal, I think people find it very hard to keep it to themselves. Particularly with the workload that involves, you know, people just have a need to share, which obviously isn’t always the most sensible thing to do.

    Obviously, it’s critical that you observe the terms of any deal and keep things confidential when you have to. I think there’s a few challenges specifically around that. One is that usually the most senior people in an organization seem to feel that that rule doesn’t always apply to them. So some of the most interesting challenges I’ve faced on the communication side of things has been from a CEO letting it slip to somebody who’s a friend in a club or whatever.

    And we’re the ones I have to pick up the pieces on that. Journalists are very good at getting, thinking they can get information off the record when obviously, if the information is interesting enough, then nothing is off the record. So keeping things to yourself is always a bit of a challenge, just generally. Where I see our role is really in having taken that bigger view of what the challenges are likely to be and what the communications considerations are, is trying to get involved as early as possible in the tabling of the deal and the discussions around what can and can’t be said so that we are in a position to try and influence that for the best.

    Experience shows that the earlier you can start to bring people along on the journey with you, the better the outcome. And therefore if we can put certain, you know, opportunities in place to start getting a team up to speed with the fact that change is coming, even if we’re not able to discuss what that change might be or speak to the media about plans and ambitions so that they’re getting warmed up, ready to accept a change in circumstance and that usually really helps us out and helps the client out in terms of getting the outcome they want.

    So we try to get involved as early as possible. I think the other thing is that you need to have a very clear comms plan so that you can be agile, because you never know, as we’re discussing, when something’s going to come out. So the comms has to come right at the beginning of any planning. It’s not an add on, it’s not a secondary thing. We’ll figure that out once a deal is signed.

    We like to get involved as early as possible so that should something go awry, we are able to kick in with a plan straightaway. So I’ve had an example where the deal was leaked to an employee who then told the rest of the staff. And so obviously, luckily enough, we had a, we had the commerce plan ready so we were able to kick in straight away. We had that email prepped from the CEO explaining what was going on. So with a few quick tweaks, we were able to address that situation immediately. If we didn’t get organized so far in advance, that kind of situation can be very easy to mishandle.

    Patrick: Yeah, that gets real difficult too because if the message gets out and you’re scrambling and you’re not prepared to respond within less than 24 hours, I can imagine the narrative has been written. Why don’t you, because that’s always a real big issue is dealing with the employees because obviously, they’re going to hit the panic button. Their first survival instinct is what about me and my job and so forth. So I can imagine a lot of things like that happened. Talk about a couple of cases where, as you alluded to just now, where your services come in and impact the deal. How does what you do benefit clients?

    Alex: I’ll give you a couple of examples naming no names. But to give you one example, so there was a client that I worked on who were very well known in their market kind of tech brand, but they were very, very cool in their space. They have a lot of fairly a sort of gang of followers, if you like, among the tech community. So quite geeky. They like to get the sweatshirts. And they go to the events and they were seen as a real sort of challenger in the space.

    And that company was being bought by a very large, very established, quite boring, definitely not cool, larger tech player. And so the challenge, obviously, from the outset was how do we bring their fan base and their client base along which was a key reason for the acquisition without disenfranchising them because we knew that as soon as they heard who they were, you know, who they were being bought by, they were going to be kicking off all over social media and, you know, saying terrible things. So

    Patrick: Were those sellouts?

    Alex: Absolutely, absolutely. And so there was a lot of stock in being able to secure that fan base on that client base, because obviously, if that goes, then there’s much less point to the deal. So we started working in the very early doors to make sure that we’ve got the messaging, right. We worked with, on a very confidential basis, with a couple of influences who we took into the confidence of the deal and we were able to actually run ideas past. And so we’re able to use them as a sanity check on the messaging that we’re using.

    They were able to advise us on points that may be as non-geeks, we hadn’t thought about things that would resonate with the community and things that wouldn’t. And so we ended up with a commerce arm which was quite different to a lot of the client-focused plans that we put together, normally, and this one involves a lot of roadshows and events where we’d actually go and meet the fans, you know, in a sort of comfortable environment for them. We media train the CEO of the acquiring company specifically, told him what to wear so that he didn’t allow them with his suits and his, you know, monogram shirts.

    So we turned that down a little, and also looked a lot more at things like social content. We produce some animations for them to use to kind of get the right write messages across so that people could understand why this change was happening. And that was a really useful way to do it because we were getting the inside knowledge, which was obviously very helpful to create the right messaging platforms. But also, we’re able to really get the content to the place where the fans were able to understand why the change was happening And we’re able to sort of, they were never 100% happy with the deal.

    I think it was hard to convert everybody. But the client drop off rate was very low. And, you know, we were reliably told that that was a lot to do with the way that we’d handled the client taking the customer base with us. It’s great when we get given a lot of free reign because, you know, the more client leans on us, the better able we are to serve them. When we’re just told we need a press release on this, it’s never going to end well. Whereas if we’re able to get under the skin of all the different challenges, we can put together a much more comprehensive program for the client.

    Patrick: Give me a profile. What’s an ideal client for Clarity PR?

    Alex: The clients that we like to work with are, tend to be more in the scale upside of things. They tend to be very progressive, usually challenger brands in their markets doing something disruptive, as I said. The key thing is that they have a really solid business challenge and they’re there looking for a partner in overcoming that challenge through communications. As I say, I think things, relationships where we’re expected to just put out press releases for any agency, that’s never a particularly inspiring role and I don’t think it creates any value for our clients.

    And so the best clients are the ones that will allow us, will sort of give us the keys to the kingdom and allow us in to spend time with the team to really get to grips with what their challenges are, and then give us free rein to put some proposals in place that will help to address those. But tech is a fantastic space. And luckily, there’s no shortage of exciting businesses in that space. So we’re very spoiled, particularly at the moment, because technology is just such a hot area. So it’s great to In such a vibrant kind of marketplace at the moment.

    Patrick: And I would say there’s no industry with a more glaring, I’m not going to call it weakness but a glaring non-strength is human chain of communications within technology. And so I think that’s an ideal fit for where you bring in the softer side, the people skills and that fun stuff. When you’re onboarding, let’s talk about timeline, what’s the usual life cycle for you, particularly in an M&A situation? Okay, how long in advance should they be talking to you? Or can you get up and running quickly? Give us an idea of what the onboarding process looks like.

    Onboarding at Clarity PR

    Alex: It’s possible to get started very quickly. There are some shortcuts to this kind of thing. But my recommendation is always that as soon as you think there’s a deal about to be, you know, a deal in the pipeline, then bring us on board. Ideally, you know, when you’re at the letter of intent kind of stage, that’s a great time to be starting to talk to us because we can help them form the process from there. You know, obviously some clients, this is a regular thing for them in the tech space.

    There’s something happening, you know, every other month, whereas other clients who may be that they literally just suddenly decide that they need some comms help because they’re about to do a deal. So we’d be important on both kinds of things. But the main thing is to invite us in as part of the team. You know, if we can have a seat at the table, we can understand the challenges that are going through among the people that are discussing the deal and are working through the processes, then that gives us, as we were discussing earlier, a huge amount of insight into where the problems might crop up.

    And there’s a, you know, there’s a lot about comms and I think people think that Oh, if you’re a publicist, you’re always about talking about the good news. That’s the really easy part. And the bit where we add the scale is identifying the tricky questions, the challenges we’re going to get from the media, the what about this? What does this mean? Why don’t you talk about this? So the quicker we can start thinking about the difficult questions the more we can help you avoid getting those questions in the first place.

    Patrick: Have there ever been any problems with communications where the message isn’t going to be good and as the buyer is considering a deal, as they’re looking at it and we’re talking about potential problems, how are we going to communicate these problems? Communications ever talked anybody out of the deal?

    Alex: Very good question. I’m gonna have to say no, in my experience, simply because I don’t want to be seen as a bad luck charm. But it does raise some very interesting questions. And I think that’s the other thing about having an independent person in the room in some of those conversations is that we can bring that independent perspective.

    We don’t have a financial stake in these deals, but we can put ourselves in the shoes of your employees, in the shoes of your clients, in the shoes of the media. And it almost gives us a license to ask the question. So quite often, other people in the room maybe want to ask but they don’t dare to. And so I think there’s also value in bringing that sort of outsider perspective to the table so that you can get all of these things ironed out ahead of the deal.

    Patrick: Wow. Well, as we’re sitting here talking now, we’re hopefully on the downside of the COVID-19. And there are already conversations about ramping up for businesses returning to work and so forth. If you can share with us, what are your projections for the future either with M&A, with communications for Clarity, you know, what do you see down the road probably, you know, late third quarter and beyond?

    Post-COVID Communication Strategies

    Alex: That’s a great question. And that’s what we’re spending a lot of time thinking about at the moment and working with clients on is what comes after COVID. And I think no one knows yet quite what that’s going to look like. But it’s definitely worth putting some thought into it at this stage. A lot of our clients, they’ve had to change the way that they communicate through this crisis. Some have stopped and doing other things. Some are doubling down on what they want to be saying.

    And some are obviously just changing tact, completely changing their messaging. So I think there’s going to be a period of settling down after this. And I think, you know, there’s still quite a lot of deals around. And as I said, we’re very lucky to be mainly focused around the tech sector, which is, there’s still a lot of deals going on. It will be interesting to see what happens once the deals that are currently in the pipeline have sort of made their way through.

    But I think certainly from a commerce perspective, there’s going to be a lot of regrouping and remessaging. I don’t think any of us can expect things to go back to exactly how they were pre the virus, and therefore, the way that we approach deals, the way that we approach communications, I think there’ll be a naturally a lot more caution, but also a willingness to kind of get back on and get back up to speed quite quickly. So it’s going to be an interesting time, I think, all around.

    Patrick: One other thing I want to just impart with the audience real quick and why I’m so pleased to have you, there was advice that I heard a father give his son who was a technology, very well educated in tech and was doing, he was on a good fast track to success. And his father insisted that he get a job, summer job either at a Starbucks or at just someplace where he had to talk to people. And the son, you know, stereotypical tech introvert guy, very, very sharp, nice kid just didn’t have the people skills.

    But the father said, you need to get out there and be with people and communicate and learn how to do that. And the son objected. And the father said, Look, the best ideas and the ideas in a boardroom that get listened to and your bosses out there, they’re going to promote, not, they’re not always promoting the smartest person in the room. They’re going to promote the person who has the best message who can pitch their idea most effectively.

    And so you can’t understate the value of communications. We’re human beings. This is, you know, everything happens with humans until artificial intelligence takes over. So I can’t stress that enough in the great work that Clarity PR does. And, you know, I wish you all the success. And thank you very much for joining us today. Alex, how can our audience find you?

    Alex: You can look me up on LinkedIn or give me an email at alex@clarity.pr. It would be great to hear from anyone.

    Patrick: Yes, some of us are visual. We say dot com by habit. It’s clarity.pr. Alex, thanks again and we will talk again soon.

    Alex: Thank you.

  • Alex MacLaverty | Effective Communication in M&A Transactions
    POSTED 7.7.20 M&A Masters Podcast

    Clarity is a public relations firm that offers communications strategy, positioning, marketing, content creation, and other services to companies in the fast-moving world of global business.

    As Global COO, London-based Alex MacLaverty guides the growth of this ambitious agency. Part of that growth has been through recent strategic acquisitions of complementary PR agencies.

    Alex explains why they chose those specific agencies, how it will change their business, and why they had never met the team at one of the firms before the sale.

    We also talk about how they handled integrating two teams when they bought the other firm so that they had a running start when the deal was signed.

    In both cases, Alex and her colleagues were guided by a change management model known as ADKAR.

    In our talk, she explains the five parts of that strategy and why it’s key to follow in times of large-scale changes in an organization to ensure all the key players have the right mindset going forward.

    Tune in for all the details on that, as well as…

    • The biggest drivers of their strategic acquisitions
    • How they prevented client attrition
    • Why they don’t forget the people side of acquisitions – and how that impacts operations
    • What they do to get buy-in at a “deep level” from new team members
    • And more

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Alex MacLaverty, global CEO of Clarity PR. Clarity PR defines itself as an agency with the heart of a startup working with rebels and titans.

    We take risks, solve problems, learn, adapt, and deliver fearless global communications. I like that fearless part. This will be the first of two conversations I have with Alex as she shares with us her perspectives on the importance of communication throughout an M&M process. Today as strategic acquirer, Clarity PR has had a number of acquisitions lately. Then on the next recording, as an advisor to other buyers, both strategic and financial, Alex, welcome to the program and thanks for joining me today.

    Alex MacLaverty: My pleasure.

    Patrick: Before we get into communications and Clarity PR’s fearless communications and everything, let’s give our audience a little bit of context. How did you get to this point in your career?

    How Alex Became COO of Clarity PR

    Alex: So, I’ve got about 20 years in primarily technology and PR. I started out as a commerce consultant and then moved into agency management as tends to happen. I’ve worked in agencies large and small with some of the world’s largest tech brands as clients.

    And I’m based in London, as you can probably tell by my accent, but my role for the last 10 years has been global, overseeing businesses across the US and Asia pact. And Clarity, I mean, Clarity is a very fast-growing, ambitious agency. We’ve got offices in London and across the US. So my role now is really all about ensuring we’re set up in the right way to achieve our ambitions.

    Patrick: Well then we’re going to talk about communications a little bit later, but, you know, let’s put it in the context of communications in an M&A process from your perspective as an acquirer, not advising outsiders. But let’s talk about, you know, give us a couple examples of experiences you’ve had with being part of Clarity through various different scenarios, because not every acquisition is the same.

    Alex: No, absolutely not. And I thought I’d share with you today the examples of our two most recent acquisitions. The first was completed in around November of last year. And that was the acquisition of a complementary PR focused agency out in Los Angeles, which we plan to add as a standalone office within our US business. The second completed in around December time of last year and was of an agency that was much more focused on technology startups and digital communications.

    So most of the team we’re based in London with a few people out in San Francisco. And this deal was much more focused on integrating their team into our existing London team. So slightly different setups for each of those deals. But not only that, they’re also very different in terms of the way that we roll them out. And we sort of manage those acquisitions.

    Due to the nature of the LA deal, we had the sort of interesting experience of not actually being able to meet with any of the team on the ground before the deal completed. So we haven’t met any of the key players, obviously, we’ve heard a lot about them and all good things. And we’re very excited to meet them. But we hadn’t actually spoken to any of the people that were going to be running the business for us out in LA. And the first time I met them, it was to tell them that they had been acquired.

    Patrick: So this was big-time confidentiality at the extreme.

    Alex: Yeah, absolutely. There was a lot of focus on the paperwork, getting the paperwork all done correctly, and making sure that that had happened before we said anything to anyone. So it was a very kind of secretive process. So there wasn’t really the ability to get much done behind the scenes in terms of communications, putting together a plan for that.

    Or any of the operational side of things which obviously had to follow. So it was quite a, everything was resting on the moment that the signature happened. I jumped on a plane over to L.A. as soon as I could, and then was able to meet the team. But it was an interesting experience too because when I got there, I felt like I knew them all already.

    I knew so much about them, their business, how things were working. And of course, they’d never heard of us before. They had no idea this was about to happen. So it was an interesting, not a clash, but it was an interesting differentiated between sort of my feeling going into it and obviously, they’re feeling being on the receiving end of our attention. So it’s quite an interesting experience.

    Patrick: Yeah, there’s a lot of pressure there because this isn’t just you’re gonna have to make a really good first impression. This opening message is, Hi, you don’t know me, but we own you now. What was the challenge like? How did you guys do that?

    The Big Acquisition Introduction

    Alex: I prepared very thoroughly in terms of trying to understand as much as I could without meeting them, the team, what will likely to be their concerns, their triggers, the things that they were going to be most interested in finding out about us, but also working out the best way that I could position our business for them so that they would understand their role moving forward within it.

    It was a bit like some sort of strange blind date where I’d done all the cyberstalking and I sort of found out all the facts about them, but they hadn’t done the same on me. So was trying to make sure that it was a, still felt like a collaborative process, even though actually the deal was already done. And to be honest, there wasn’t much they could do about it.

    Patrick: I’m gonna take your analogy there, instead of a blind date, it’s an arranged marriage.

    Alex: Yes. Yeah. Totally, yes.

    Patrick: There were mechanics that go into this and we can talk about later. What about the other situation?

    Alex: So, the other deal, the London deal was totally different. From very early on, the teams were told about the plan to that we were going to acquire the business and integrate the teams. It was important to us that we did that as early as possible. I think because so much rested on the teams getting on with each other.

    But there were also commercial imperatives. There were already clients that would have benefited from the combined team that we wanted to work on. And it also obviously made a lot of the operational planning much easier and communications planning much easier when we’re able to have the teams working closely together. So, in that deal, the team that we were acquiring actually moved into our office several weeks before the paperwork had been finished.

    Patrick: Sorry, say that one more time.

    Alex: So the team that we’re requiring moved into our London office several weeks before the paperwork was done. Which I appreciate is quite unusual, quite a risky move. And, you know, it was fun. I think there’s something, you know, we’re in a very lucky position to be able to work in that way. There was a great cultural fit between the teams anyway, which was one of the big drivers for making the acquisition and we felt that the team on both sides would respond better to being brought in as early as possible getting to know each other, raising their concerns as we went along, rather than having it landed on them suddenly.

    And that absolutely proved to be the case. We did have to swear everyone to absolute secrecy. And there were some tricky moments even just having the team members walking in and out of our office in case somebody saw them and was able to figure out what was happening, some challenges around that.

    But actually, it worked out incredibly well in the long run in that we have no client attrition, no team attrition, and due to the acquisition, which is a quite normal, you know, thing to happen in these circumstances. But more importantly, the team felt like family. Once the paperwork was done, we opened some champagne, but they’ve been part of the family for the last few weeks. And so it was a very natural sort of harmonious thing to do.

    Patrick: You were already joined and it was just a formality at that point.

    Alex: Yeah, it was. It was as if we’d all been living together for years before we actually got married.

    Patrick: Yeah. The two extremes, which is great. And both of them, and it resulted in successful acquisitions, successful integration, which is evidence that there’s no one way to do these things.

    Alex: Yeah, absolutely. And, but I think it’s, yeah, both were interesting learning experiences. But I think, you know, I know which way I’d prefer to do it in the future.

    Patrick: Gotcha. There was a lot of trust involved and so forth that has to come across with this. I think that with what, you know, Clarity PR does and what you do specifically dealing with communication, that’s a skill that I believe a lot of us take for granted because we’re communicating in one way or another all the time, formally, informally. And so there’s not the same appreciation for.

    And when you’ve got situations where you have a potential volatile situation where the wrong word, the wrong tone can damage a relationship, sometimes irreparably, that’s a big balance that’s got to be there. Now it’s your profession, is communication. So clearly you’re not winging it when you do this, okay? So there’s got to be a plan in place. Is there, describe your process or your plan in assessing a situation then how to deliver communication, when, how, all that.

    Alex: So, a long time ago, now I was introduced to a change management model called Adkar, ADKAR, which I found to be incredibly useful in any number of business and personal situations actually, in terms of planning out the right way to move forward with something big that requires not just a structural change, but a behavior change, a mindset change, an emotional acclimatization.

    And that’s really been at the heart of the processes that we’ve focused on around M&A and making it successful. And it’s a really great way to make sure you bring everyone along on the journey with you. And I think what it does, and I’ll sort of explain it a little bit shortly, but what it does is it allows you to, I think when you spend so long working through a deal, you as I was saying earlier, you feel like you really know the business, you know, the people you get really into the details of it.

    But you tend to forget quite easily that the people who are actually going to be on the receiving end of all this, the people who actually work in the business, this is all new to them. And so it’s very easy to skip far too quickly to the how, the operational side of things. Okay, so we’re going to change this, we’re going to do that we’re going to move things along without actually getting their buy-in.

    And so this process just is a very useful way of reminding you at every stage that the buy-in is probably the most important thing. And if you’ve got that emotional connection and that desire to be part of the business, then you, the operational stuff kind of works. itself out. And people are much more forgiving of any glitches in how the new structure works. The Adkar model is a really good way to do that and it makes things a lot easier in my experience. So, if I just talk you through, I’ll talk you through what each of those steps is, if it’s useful. I can explain a bit more to your listeners.

    Patrick: You will have shown us and have this written out. So those of you who were driving or something listening, don’t worry because we’ll, you don’t have to pull over and take notes. We’ll have something available. So ADKAR

    ADKAR Change Management Model

    Alex: That’s right. And you can, I’m sure you can, you know, get the book and read it yourself. But it’s fairly simple. So the A stands for awareness, which is awareness of the need to change. So actually telling people, we need to make a change here for all these different reasons, which hopefully, if you do it right leads to D which is the desire to make that change. So before you even start making any changes, you’re ensuring that people understand why there is a need to change and that they really want to do it and that they’re on that journey with you.

    The K stands for the knowledge of how to change. So actually, what does this practically mean? And the A stands for the ability to demonstrate the right skills and behavior. So that’s why you’re training people up, you’re arming them with the tools that they need to adapt to new processes, systems or different offers, whatever it might be. And then the R stands for reinforcement. So to make the change stick, you can’t just do this once and then think Oh, it’s done. You know, everyone’s moved in, it’s fine, let’s just crack on with our normal business.

    The R also means that you actually almost have to start right at the beginning again, go back to the A, and reinforce with people why we made the change, what are the results people are seeing and back that up so that people really stick with these new behaviors rather than just thinking back into their old ways. It’s very, you know, everybody knows that humans don’t like change and will naturally go with the easiest route, which is usually an old way of doing things in a change situation.

    And so, what we found is that, if you can follow this methodology, it really means that everybody who’s involved on the leadership side of things in making that change happen is thinking about creating a sort of heartfelt change in behaviors and understanding and all the rest of it rather than just an on the surface, people are doing things differently, but actually, they don’t like it or they don’t believe in it.

    And if you can’t get that emotional buy-in, and that sort of heartfelt support for what you’re trying to achieve, then that’s when I believe you see the attrition. That’s when you see people going back to their old ways, non-compliance with processes or structures. It’s where a lot of these deals seem to fall apart.

    Patrick: Well, it underlines something I’ve said ever since I got into mergers and acquisitions. This isn’t Company A agreeing to merge with Company B. This is a group of people here choosing to work and join forces with a group of people over there and then the two of them coming together. And if it’s successful, the whole is greater than the sum of its parts. I like the way you talk about this where a lot of people, particularly if they’re just hearing about a sudden change and a change in job is foundational.

    I mean, look what people are going through today as we record this. When this change happens, they’re thinking, What’s in it for me? What, how is, how am I impacted? And I like the way that you outline without getting personal, here’s why change needs to happen. Otherwise, there won’t be, your survival could be at risk. So there’s this change, this isn’t being done at the whim of some executive.

    And this is, you know, we all want to go in the direction, I like to desire because you’re getting everybody to go the same direction. And then you give them the tools on how to do it and then you follow through. And reinforcement. I agree, people, sometimes a lot of us need to be reminded over and over again, particularly as you’re going through the adjustment process that, you know, it’s out there. So that’s a great plan because then you can structure the communications and you can pivot from there as issues come up, I imagine.

    Alex: Yeah, absolutely. And when problems come up, you simply start from the top again. So you start, go back to the awareness. When you see problems happening in terms of, you’re not seeing the behavior change you want to see or people aren’t getting with the new systems or whatever it might be, signs that it’s slightly unraveling, it tends to be because they don’t believe in it.

    So you have to go back to the beginning again and remind them of the need to change and try and reinstall that desire for it to work. And so I found it to be very helpful. It works outside of M&A obviously, as well in lots of other, you know, any changes within a business environment and a personal environment actually.

    Patrick: A lot of people need the why. You know, why are we doing this? And once they, whether they accept it or not, at least they understand, you know, the reasons that are supporting the change in environment, whatever. And so they go through that. So and that’s, you’re not just advising other firms about this professionally. You were doing this yourself. So if you’ve exercised these exact steps with your processes.

    Alex: Yeah, absolutely. But also advised, counseled lots of clients that this is something that they need to be doing. If you look at the way that governments are trying to get people to change their behaviors at the moment, you know, it has, people wouldn’t stay in lockdown if they didn’t believe in it. And the moment they stop believing that there’s a good reason to do it, they’ll go out again. So I think, you know, any kind of, if you’re trying to communicate effectively, it has to be to do with the heart more than the mind in many different ways,

    Patrick: Especially for those of us who had to avoid cutting our hair for eight weeks. Well then, as we’ll talk about Clarity’s, what’s an ideal target for you? For our listeners out there, I mean, you’re out there, you’re looking at PR companies, give us ideal target for what you’re looking for.

    More Isn’t Always Better

    Alex: Yeah, it’s kind of, it’s easy in some ways to say and hard in others because we’re very ambitious and we’re a very agile kind of agency. And so while we’re always working on a number of intentional strategic, very well thought through plans and deals and we’re also very open to those kind of serendipitous opportunities that just come up through having the right relationships.

    So there’s a combination of the very targeted and strategic and the opportunistic. I think currently, our focus is really on businesses that help us do probably one of four things that help us expand geographically. So give us a new location that will be useful that broaden the services we can offer that open up new vertical markets to us or that strengthen our existing teams. So there has to be ready, you know, we don’t want to do these deals for the sake of it. They have to add something to our existing business. But we look for, you know, we look for different things in those businesses.

    There’s got to be something special about them. We’re not interested in being an average agency and so we don’t want to acquire average agencies that do, you know, standard boring work. We’re looking for something a little bit special. And so there is an element of gut feel to it as I think most people who do M&A work, you know, there, you can look at a lot of spreadsheets but there has to be something that makes you really excited to do that deal.

    Patrick: More isn’t better, more is just more.

    Alex: Yes, exactly. Very well put. We’re also very conscious of finding deals that are going to be the right size for us. And we’re not a massive agency and we don’t particularly want to be massive for the sake of it. As you say, more is just more we want to so we’re looking for agencies that are going to be a good fit but aren’t going to overwhelm us. You know, that Going to be too big for us to handle or that will change the way we do things to significantly. But I’m also looking for a cultural fit.

    I mean, it’s absolutely crucial. And the work that we do communications is all about the people. So if the people bit isn’t a good match, there’s literally no, you know, you’re not buying anything. All you’re buying is a fantastic team, hopefully, really. And so it’s important to us that the fit is right and that there’s a really good match on that front.

    Patrick: Yeah. Fit’s one of those real difficult elements to identify. It’s one of those intangibles but you’ll know when you see it.

    Alex: Yes, I totally agree. And I think obviously, and then the, you know, the standard stuff, it’s got to be a good business. It’s got to be, have a great team. It’s got to have a, you know, a strong client base. All of those things are important, but I would say usually, the cultural fit almost going to clinch it as to whether we’re going to do the deal or not. Even if it was a great business, if the cultural fit wasn’t there, we probably wouldn’t go for it.

    Patrick: So Alex, as we record this, we’re hopefully in the second half, the downslope of the settle in place COVID process right now. So, understanding that things do change quite a bit from week to week, actually, I don’t want to ask you to go out on a limb there. Give me a prediction, you know, where do you see, you know, transfer M&A, transfer activity, either globally un public relations to communications or for Clarity PR. I mean, what are you seeing? And make it whatever timeline. Six weeks to a year in, what do you see out there?

    Alex: I think from our business perspective, you know, Clarity is in a really lucky position, our business is still growing and fingers crossed, we’re going to remain in a strong position. So we’re still powering ahead with a number of deals that we had in the works prior to this happening and we’re still on the lookout for more deals to be done looking ahead, I think we’re seeing something similar in the market from our clients.

    You know, we work with VCs and PEs and things like that as well, is that deals that were in the pipeline are getting done. And there’s a lot of activity on that front to close out deals that were already in the works. I think what remains to be seen is how many new deals get struck over the next few months, given all the uncertainty around. I think there is a lot of nervousness, obviously, in the market.

    So how this next phase goes, I think, will have a lot of impacts on how much, how many deals happen towards the back end of this year. I think in terms of the work that we do, you know, as a communications consultancy, there’s never been a more important time for people to have a good comp strategy and not just in terms of promoting your brand or whatever it might have been in sort of normal times.

    But as we move into, you know, global downturn, quite possibly, it’s about things like internal comms challenges. It’s about being able to handle a crisis in your supply chain or whatever it might be. It’s about communicating effectively with your customers and your clients. And the brands that get it right at this time, you know, will obviously come out of it much better at the end of this than those that bungle it.

    And I think we would be seeing larger brands suffering because of the way that they’re handling this crisis. So I think it’ll be interesting to see what that does to the shape of things when we come out the other side and who will still be standing because it won’t just be down to sort of the economics of it, demand. I think lots of it will be how businesses have treated their clients, their staff is going to be really important and obviously, commons has a lot to do with that.

    Patrick: Also, you’re gonna want to get that message out. You know, we’re back. We’re open. We’re back to business or we’re back, we may not be ready at full capacity, but be patient.

    Alex: Yes. Absolutely.

    Patrick: Those are the optimists out there. Alex, how can our listeners reach you? How can we find you?

    Alex: You can go to our website. Just www.clarity.pr. And I’m, you can email me directly at Alex, ALEX@clarity.pr. And be, yeah, happy to be, to hear from people.

    Patrick: Well Alex, thank you very much and look forward to speaking with you again soon.

    Alex: Thank you.