[00:00:00] Speaker A: There's that old saying that people are afraid of change, but if you actually look at the average human, if we were all afraid of change, we would never do anything.
[00:00:11] Speaker B: Welcome to the next Imperative, a podcast hosted by A and M energy leaders tackling key issues and trends in the industry.
[00:00:19] Speaker C: Hello, and welcome to the next imperative. My name is Jeff Angulo. I'm your host and moderator. Today's episode is a continuation of our series on merger and acquisition activity in the energy sector. Specifically today, we're going to talk about the first quarter of the transaction, really before the announcement. What happens? What are the key steps? What are potential pitfalls that companies need to look out for as they try and get these transactions across the finish line and get them signed up? Join me today for the conversation are my A and M colleagues till Reimer, Wade Stubblefield, and Mark Clevenger.
Thanks, everybody. Welcome.
[00:00:54] Speaker D: Thanks for having us.
[00:00:55] Speaker A: Thank you.
[00:00:55] Speaker E: Good to see you, Jeff.
[00:00:57] Speaker C: So, as I said on this episode, let's dive into the front end of a transaction, kind of what are the key steps that need to happen before a deal is signed and announced?
What are the early activities required when you're assessing a potential transaction? Where do we typically engage with our clients at that stage? Kind of before they announce a transaction. Wade, would you like to go first?
[00:01:18] Speaker E: Yeah, I'll jump in.
Certainly. You know, we'll get pulled into conversations from a, from a diligence perspective on the, on the front end.
[00:01:28] Speaker F: Right.
[00:01:28] Speaker E: And then especially in the upstream space these days, synergy identification early, you know, synergy indicators, and start, start helping clients build out what, how they're going to message that, what the scale of it can be, what the scope of it can be, so that they're ready in those first announcements to lay out what that path looks like.
[00:01:50] Speaker D: Yeah, I'd add it's the strategic elements of where is the value going to be created. The investment thesis is the must believes behind that, but also things like financial diligence and quality of earnings, tax diligence and environmental issues as well.
[00:02:10] Speaker A: The only thing I would add to that is I think a lot of times our clients and potential clients can get caught up in the swirl of the things you mentioned, and they forget to prepare for the human side. Whether we're talking our investors, our stakeholders, or our employee base, they don't necessarily prepare well enough from that engagement standpoint.
[00:02:29] Speaker F: Yeah.
[00:02:29] Speaker D: I often see that the teams are reluctant to bring folks under the tent because of the confidential nature of the deal or in the uncertainty of trying to get through the negotiation and so it's really easy to be caught off guard once the press release goes out.
[00:02:44] Speaker A: Sure. But all that has to be part of the pre activity planning.
[00:02:47] Speaker E: Agreed, because we know and we've seen it, as soon as that deal is announced, somebody in one or both of the organizations are going to start worrying about their job.
[00:02:54] Speaker A: Absolutely right.
[00:02:55] Speaker E: And so the sooner you can communicate, not necessarily what the answer is, but when you're going to know answers, the better.
[00:03:02] Speaker C: Absolutely. What other pitfalls do we see in these early stages?
[00:03:07] Speaker E: You know, lack of diligence.
[00:03:08] Speaker F: Right.
[00:03:09] Speaker E: Being surprised in the post signing pre close period for things that come up. There's only so much you can do during that pre signing period. But you certainly never want to be surprised with major, you know, whether it be environmental or other types of issues that you could have gotten a little bit further in front of.
[00:03:28] Speaker C: Teal, anything else you've seen?
[00:03:30] Speaker A: I think one of the things that we're unprepared for. And Wade, this kind of tacks on to what you were talking about around being prepared, do I have a job? Do I have a story to tell? The employees not having a robust communications and engagement plan, I think we often default to saying simply a communications plan, but the reality is we need to engage. And so not knowing who to engage with and when and at what level I think also catches a lot of companies and leaders off guard.
[00:03:56] Speaker D: It's easy to under communicate that because as a leader you think, well, let's, it's obvious we're going to need a lot of folks or whatever, but this Maslow's hierarchy of needs comes into play really, really keenly. And until folks really understand, do I have a job? Is my job changing? Is my pay changing? Are my benefits?
If they can't have a strong foundation around that, it can create paralysis around the rest of just ordinary operations. Who makes a decision that would have been very simple in business as usual in the ordinary course, suddenly becomes, can grind things to a halt.
[00:04:33] Speaker A: Absolutely. When we talk about due diligence, I think there's a case for something called people due diligence and understanding where the concerns in your employee base, where are their points of resistance and having that landscape analysis before you announce, or at least to the best of your ability so that you can answer all those questions you just asked. Mark, but also so that you can anticipate your employees concern and start controlling the narrative from the first day.
[00:05:00] Speaker E: Jeff, on diligence, I think, too a difference between if you're buying an entity versus buying assets.
[00:05:06] Speaker F: Right.
[00:05:08] Speaker E: Obviously, the scrutiny around legacy liabilities.
[00:05:11] Speaker F: Right.
[00:05:12] Speaker E: Doing as much as you can, certainly with lawyers involved or whoever else, it'll be around what you may be bringing along.
[00:05:21] Speaker F: Right.
[00:05:22] Speaker E: That you otherwise don't know about. The other thing, too, that's a lot of misunderstandings or just a gap is if they're public or they have audited financials.
[00:05:31] Speaker F: Right.
[00:05:31] Speaker E: Is that enough?
[00:05:32] Speaker F: Right.
[00:05:33] Speaker E: From a diligence around financial statements, it's generally not.
[00:05:36] Speaker F: Right.
[00:05:36] Speaker E: Because whether it be materiality or scope or just other limitations, that's not necessarily the end all, be all from a financial diligence perspective that somebody should rely on.
[00:05:46] Speaker C: Dig deeper than.
[00:05:47] Speaker E: Just dig deeper than just reviewing audited financials and whatnot.
[00:05:51] Speaker C: Excellent. And Mark, you made a comment earlier about tax and looking at the tax implications and how huge a difference that can make.
[00:05:58] Speaker D: In my experience, pre deals and figuring out the right tax structure and doing it in a manner that optimizes the.
[00:06:05] Speaker C: Combined entity, you know, through the process. And Wade, you've alluded to this a couple times. You're going to get imperfect information, particularly in the front end, before signing, before you're fully under the tent. How do you help clients manage through that?
[00:06:19] Speaker E: Clean room is a possibility, even pre signing. We often stand them up at signing to start preparing for an integration.
But certainly, again, if it's a collaborative, if it's a merger, if it's an acquisition and there's a data room, certainly being able to be partnered alongside our client and going through that material.
[00:06:39] Speaker F: Right.
[00:06:39] Speaker E: And again, it can be as, depending on the nature of the acquisition, desktop exercise, or may need to involve pulling in deeper resources and being in the field or whatnot.
[00:06:53] Speaker F: Yeah.
[00:06:53] Speaker D: And I think just making one of the things we do in our transactions and diligence phases is always assume the deal's gonna go through and operate with that kind of mentality that. That you're an owner to. So that if that deal goes through, we're assuming we're in the seat and are going to be part of the execution plan. So making sure that you do enough diligence pre signing that you're convicted, you can deliver on it post close.
[00:07:23] Speaker A: I think there's an important element around the imperfection piece here, too. We talk about imperfect information in what we're gathering, but there's also the imperfection of the information that we're sharing back. And so when we talk about engagement of employees, it's really important to keep that track, transparency front and center, and communicate with them. This is what we know today. These are the questions we're still working through. We understand you have questions. It's not a perfect process. We don't have 100% of information today, and we know you want that. And this is what you can expect coming forward when you're going to get it right, to get them comfortable with that imperfection.
[00:07:59] Speaker D: One of the things that we also do, because you do have imperfect information coming from buyer or seller. But a and m, we have our own proprietary data sources and where we aggregate information that gives you market insights into cost structures, headcount and organization structures.
And we use that in the diligence phase to understand what is the art of the possible, what is the industrial logic behind this combination. And I think that gives you a fact base to augment to what is otherwise imperfect.
[00:08:45] Speaker C: And some of that feeds into what you were talking about earlier, Wade, about the cost synergies.
[00:08:48] Speaker F: That's right.
[00:08:50] Speaker E: And approaching a diligence effort. Oftentimes we get pulled in more times on the integration, planning, or as it's being announced.
But the project management, if you will, to get to signing.
[00:09:04] Speaker F: Right.
[00:09:04] Speaker E: You know, making sure legal's got everything that they need to get to a signing point. Land has done the title work they can do, or your equipment, if you're oilfield service.
[00:09:16] Speaker F: Right.
[00:09:17] Speaker E: You've had enough eyes and hands. But somebody's got to manage that.
[00:09:20] Speaker F: Right?
[00:09:20] Speaker E: Someone's got to make sure that they're getting the sign offs from the various responsible parties at their choir or entity. And so having an organized approach to how you do that diligence and not just leave it to each department.
[00:09:34] Speaker F: Right.
[00:09:34] Speaker E: So, okay, you go worry about environmental and you go worry about this. And not having a feedback loop and a mechanism to raise issues and risks to get to closing, I think is overlooked a lot. I think everybody knows, the lawyers know we got to go negotiate deal terms. The ops people know they've got to go do environmental accounting, may be doing some FDD or whatnot, but. But who's leading the whole effort and making sure that issues are being raised and resolved so that when you get to closing, you've got some definition.
[00:10:02] Speaker C: Yeah. And the different functions are even communicating with each other.
[00:10:04] Speaker F: That's right.
[00:10:04] Speaker C: Instead of laser focused on what they're. They know they need to get done and not sharing the information that needs to get to the others. We spend a lot of time talking about data and diligence, but ultimately, what really makes a transaction successful is the effort that people put into to execute it, to make it happen.
What role do you see engagement plans and change plans and communications plans playing in this space, how important are they and when should they first be put together and put to work?
[00:10:33] Speaker D: Well, I think Thiel started it. They need to be. It's never too early to plan for a good outcome.
[00:10:39] Speaker A: No, I agree. And I think we look at change and engagement in a couple of different dimensions. Organizational change, and there's individual change. And a lot of what we talked about here is organizational change. The systems, the structures, and a lot of those components are things that are going to be in flight throughout the deal.
What it system are we going to use? What pay system are we going to use? Those are questions that we won't necessarily be able to answer, but the individual engagement and change piece we can do a ton of work on up front. And I really can't emphasize enough. The more you understand about your employee base, what their concerns are, how they're engaging, and where to meet them on their change curve, the more set up for success you are throughout the integration, throughout the entire deal. And for day one, I think there's that old saying that people are afraid of change, but if you actually look at the average human, if we were all afraid of change, we would never do anything. We all experience change on a day to day basis. It's just how we interact with it. And recognizing that it's important to meet employees where they are and knowing where they are before announcement helps.
[00:12:00] Speaker E: Yeah, it's likely less about change and more about uncertainty.
[00:12:02] Speaker A: Correct.
[00:12:03] Speaker E: And eliminating that. And you kind of mentioned it just there at the end of the, you're not going to get that engagement pre announcement.
[00:12:10] Speaker F: Right.
[00:12:11] Speaker E: You're not going to share that type of stuff, but having the pulse.
[00:12:15] Speaker F: Right.
[00:12:16] Speaker E: Knowing going in how things are likely going to play out organizationally, this entity likely going away, or there will be room for some people, but not all. Or there's room for everybody because it's not too overlapping, having a view, but most importantly a plan. So the day after announcement, you can have your town hall and say, we don't know the answers yet. We started working on them, but we will communicate to you on this date, this point, and at this date, this point, and just give them the certainty of when they'll know.
[00:12:50] Speaker A: Right.
[00:12:51] Speaker D: A lot of you are talking about communicating and engaging around and people, and I think that's really important. I think it's also equally important to communicate and engage on the synergies and the value drivers and investment thesis of why you've made a merger happen or why you've acquired an entity and then continue to communicate internally and externally. Around the execution plan and having very crisp execution plans to get to those synergies.
What we see is that if you don't, the synergies you capture in the first year, those are the synergies you should underwrite. Those are the synergies that are probably going to stay. What you don't get in the first year, you may not get, and those are more difficult to underwrite. So being ready to at close, move quickly, move judiciously, but be thoughtful about.
[00:13:41] Speaker C: It and have a team dedicated to making sure that's happening.
[00:13:45] Speaker D: Absolutely.
[00:13:46] Speaker E: Absolutely.
[00:13:46] Speaker C: I've assigned you these five things. I've used these five things.
[00:13:48] Speaker E: Go take care of, identify. A lot of times, the identification of what they will be will bubble up from the functional areas. But having a dedicated team that's tracking and then realizing.
[00:14:00] Speaker F: Right.
[00:14:01] Speaker E: And generally somebody on the company side.
[00:14:03] Speaker F: Right.
[00:14:03] Speaker E: To say, yes, here's what we signed up for. And measuring those as they come out, and holding people accountable to deliver what they said they could deliver.
[00:14:11] Speaker D: I mean, we're talking about these deals. These are transformative events. Right. They are shaping the company, they're shaping shareholder returns.
This is not a time to under invest. So assemble the right team of experts and have a good, robust plan and.
[00:14:27] Speaker C: Something they should be used to.
[00:14:28] Speaker F: Right.
[00:14:29] Speaker C: Afe the actual, that's essentially what we're talking about. You set this target. Did you make it or not? Why?
[00:14:34] Speaker F: That's right.
[00:14:35] Speaker A: And I think there's something else. You've mentioned talking about peerview. In our database, there's another competitive advantage that we have in some of our tools that allows us to look at what are the skills that people have in different roles today, and especially within energy, we have a broad spectrum of generational talent, and how do we make sure that we are retaining the knowledge basis of our employees as we make change and identify where we can reskill and redeploy talent, so that you're consistently building trust throughout the organization and retaining your top talent, even if they're in a different role than they might have been before the acquisition was announced or the deal was announced. And I think that's a really important element of transactions that sometimes gets understood.
[00:15:20] Speaker C: Super important.
[00:15:20] Speaker F: Right.
[00:15:21] Speaker C: It's so hard to find people these days in our industry, particularly transactions.
[00:15:26] Speaker E: That's a great point, teal and mark, I mean, you touched on it. I mean, these are transformative events which likely may call for new skills or new opportunities for people. And so stepping back and saying, you've been doing this role. Right, but what opportunity do you have to maybe do a different role, right in this new organization that challenges your team in a different way. And I think too many times people go at it and they look at it and say you're a field ops development person or you're a revenue accountant or you're a treasury analyst, and we don't have room for you in the new because they've already got this well, but what else has this person done in the old right or skills that could be transferable into another area in the new company to provide opportunity and fill needs?
[00:16:14] Speaker C: So let's talk about real world examples where success stories happened because we were involved and we were able to help our clients manage some of the topics we've been talking about. A recent one for me was working with a client had done an acquisition, it was an asset acquisition. And the day after it was announced, the CEO was in the field office having a town hall. I mean, the communication plan was ready to the points that have been made here, we don't know the answer to this yet, but we're going to know it on this date and we're going to know the answer to that on the next date. And the feedback that came back from that was huge. Every employee in field felt appreciated, felt some of the anxiety taken away, the fact that the CEO was there, in some cases introducing himself for the first time. And it really made an impactful difference in terms of getting things done timely and getting the transition going forward. Does anybody else have a story they'd like to share?
[00:17:04] Speaker A: I have one. I think what you're speaking to highlights important cultural elements.
One acquisition I was working on, it was a deal between two equals. They were competitors and we were brought in to do a culture assessment across both the entities to understand where might there be challenges, opportunities to bring these two cultures together and in one of their plants in a different geography. What we uncovered was actually a huge control problem. So when we did the assessment, we realized that there were responses that had been copied and paste pasted, which was in violation of one of their core principles around integrity. And so that enabled the leadership team to focus in on that asset and figure out what was the leadership culture like, where could they make changes and should they keep this asset in the portfolio?
If there was hope for a turnaround in culture and performance?
[00:18:01] Speaker C: Fantastic.
[00:18:03] Speaker F: Yeah.
[00:18:04] Speaker D: I can recall an upstream transaction we worked on where at announcement, there was not a lot of detail around why they were putting the two companies together, and there was a premium paid. And so some activist investors raised up and put some pressure on the deal. The deal eventually got through and was done, but that activist involvement really prompted the engagement of our team and getting into a very detailed line of sight execution plan to the corporate and operational synergies that were really the genesis for having the deal.
And so as the company executed across those and communicated them back to the market, you could see the equity price starting to reflect the combined value. And so while that was a situation where maybe got off to a slow start, it was a fantastic.
[00:19:06] Speaker C: Companies shouldn't feel bad about asking for help. It's not like you're doing acquisitions or integrations every day.
[00:19:10] Speaker E: Well, that's the key, absolutely. I mean, how we lead off every one of ours, right. Is that the very first priority is the safe operation and the protection of the asset and the people running the assets. That's got to be their day job. And for a lot of. For the rest of the organization, it's do the job to run the assets that they're currently saying grace over. And so, yes, this is.
[00:19:34] Speaker F: This is.
[00:19:34] Speaker E: And they all know how to do it.
[00:19:35] Speaker F: Right.
[00:19:36] Speaker E: They've all been, you know, adding new wells as they drill wells to their systems and their processes. But just in most cases, just the bulk of what's coming on, they don't have the capacity to take it on. And so that's why a lot in our role, we're really an extension of the leadership team. We're in there helping them execute around what they need to accomplish to get it done, not just telling them what needs to be done. And I think that's a key differentiator for us.
[00:20:04] Speaker C: What's your leave behind for an executive that maybe has watched this episode? What are the key things they should be thinking about as they think about doing their next transaction and how and when to ask for help?
[00:20:14] Speaker E: To me, the punchline is start planning for day one while you're negotiating. It's not going to be the number one priority.
[00:20:24] Speaker F: Right.
[00:20:24] Speaker E: But start planning for day one alongside of your negotiation and your diligence.
And from there, yeah, it can be.
[00:20:34] Speaker D: Really easy to get caught up in the.
And the busyness of turning psas and merger agreements.
And that's an intense time period, but as soon as the ink's dry on that paper, you've got an employee and a shareholder base that's got to be engaged.
[00:20:52] Speaker A: I would agree with that. I mean, I think my leave behind would be, if your company has humans, then you should start thinking about how you want to engage them and how they should feel throughout not only the pre close activity, but also what their experience is going to be in the new world order of the combined company, and remembering that they have a lot of value to add. And until we are all replaced by robots, it's important to approach this from a human perspective as well.
[00:21:20] Speaker F: That's a good point.
[00:21:21] Speaker C: Teal Wade, Mark, thank you very much. Appreciate the wonderful insights you've shared with us to our audience. Thank you. We appreciate you joining us for this episode in our m and a series. And we hope you join us for future episodes where we dove into the next step of a transaction between sign and close, and then another episode will be on post close. Thank you very much.
[00:21:42] Speaker B: Thank you for listening. Make sure to subscribe to the next imperative so you never miss a new episode. Also, visit our
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