Preparing for and Managing Company Exits

In this episode, host Richard Conway talks to Peter James, former chair of Nearmap and Ansarada, and former director of iiNet, on the board's role in determining that an exit is the best strategy and how to prepare for it.

Richard Conway: Hello and welcome to Minutes by boardcycle. I'm your host, Richard Conway, and today I am joined by Peter James.

Richard Conway: Peter, welcome to the podcast.

Peter James: Hi, Richard, how are you going?

Richard Conway: Good thanks, Peter. So Peter is the leading director in the technology sector. He's currently the chair of MYOB, Macquarie Technology Group and DroneShield. He's also guided a number of companies that he's previously chaired or been a director of through exit transactions and takeovers, including iiNet, Nearmap and more recently, Ansarada.

Richard Conway: Given those experiences, today Peter and I will be talking about the board's role in determining that an exit is part of a company's strategy and how to prepare for that.

Richard Conway: So, Peter, given your experiences with those companies I mentioned, my first question is, what are the circumstances where a board should begin to actively consider that being acquired might be the best way to deliver value to shareholders?

Peter James: I'd say, all circumstances in that, certainly with a listed company, and I've been involved with both listed and private, but the ones you mentioned are listed. And a listed company's always for sale. It just depends on the value.

Peter James: I think firstly, being aware of shareholder aspirations. Often there is not one view, there's multiple views as to what's right for a company to stay in its current form, say listed or to be sold or to be merged.

Peter James: One of the things I do when I first get involved with a company is look to the strategic plan because this is ultimately the benchmark, the guide. With typically a five year forecast aspirational, with numbers, that management and the board has signed up to. And this is actually my guiding light.

Peter James: So, if ever we are considering an exit or some sort of M&A activity, I can always look at this document, which is usually verified and I will often have a defence advisor appointed as part of this process. And I think that's really important because you can get a knock on the door or you might even seek to have an exit, but you want a relationship typically with an investment bank where they know you, they know the business, you know them.

Peter James: And a lot of work has been done on this five year plan, this forecast where you can actually look at that plan and say, "Well, left to our own devices, this is what we think we can achieve over let's say the next two to three years.” If there is any consideration of an exit, you perhaps, de-risk that a little. And then look at what sort of value is being offered and start to form a view.

Peter James: So I think having an open mind about it, I do think that as I said, at any time, particularly a public company's for sale, but you should be ready for it. Again, another mantra of mine is the best way to sell a company is to run it properly.

Peter James: And the one thing you don't want is for any of this certainly as you're going along the journey to become a distraction to management, management's job and the board's job is to run the business well, to grow the business, particularly in tech, to scale it. But then to be prepared.

Peter James: The old boy scouts motto be prepared.

Richard Conway: And Peter, I think your point about listed companies in particular, always being for sale is an important one to remember there. I wanted to ask in, I guess in particular industries or particular market circumstances, it may be more the case that, you know, you see, exit less as something that is going to happen to you and more as something that's an active part of your strategy. And what would you do differently in, in that case, or in addition in that case to prepare for that scenario?

Peter James: That is a scenario where the board is seeking a different outcome to where they are today?

Richard Conway: Yeah. For example, where you, you might conclude that for scale reasons, for example, the most likely successful outcome or the most likely value realising outcome is for your company to be acquired.

Peter James: That's a good question, but I'm not sure there's that much difference in that, you know, the board, the CEO, we should always be aware of what's happening out in the market. Because as part of your strategy, you want to consider perhaps an exit, or as I said, just some sort of M&A, a purchase.

Peter James: And the only way you can do that again is, is get on a plane or wherever and go and look at who's doing what and often in tech, things are moving quickly. Perhaps in your vertical or in adjacent verticals.

Peter James: So, who's doing what, what's the competition doing? What inorganic activity is happening? Who are the players? Is it private equity? Is it strategic?

Peter James: So I think, to be informed on how you run your business, gives you the information you need by and large to form a view as to what is the right approach. Either stay where you are or to effect a transaction.

Peter James: But I think also, to be visible in the ecosystem, the global ecosystem of your industry. And whether that be trade shows or typically out talking to investment banks around the world. And as I said, if you've got a defence advisor, they should be part of this.

Peter James: The challenge you've got, however, is the better you run the business. And the more visible you become, the more likely it is that you'll get a knock on the door. But, you know, be aware around the world of business development executives in companies and banks, they're running the ruler over all companies all the time.

Peter James: So, I just think it goes back to my earlier point, be prepared, understand the market you are in, not just locally but globally.

Richard Conway: And Peter, earlier you talked about the importance of keeping management focused on running the business and you know, running a good business as being the key to a successful outcome.

Richard Conway: So, you can conclude obviously that an acquisition or a sale of your company is in the best interest of shareholders. But the people who will be most impacted by that will usually be the management team.

Richard Conway: So, how do you manage that process and keep them focused when it comes to light that a sale or a large transaction like that is likely to be the course of events.

Peter James: I'd roll the clock back before we ask that question and say, I think in any company, but certainly the culture in a tech company, and I've referred earlier to skin in the game.

Peter James: It's important for people to have skin in the game to not only feel ownership, but to have ownership. And certainly for the executive to be part of the dialogue. Now, not finally part of the decision, although often the CEO is managing director and sits on the board anyway.

Peter James: But I think state the obvious, if anyone is going to acquire a company, any external party, whether it be tech or whatever, the key attribute or a key attribute, if not the key attribute is the people. And usually they wanna make sure, the buyer wants to make sure these people are motivated and locked in.

Peter James: So, I think it's important before you get to a situation of considering an exit that everyone is there motivated. A, to perform and deliver, but B, to have skin in the game.

Peter James: So that in the event that a transaction is likely. Look, there's always uncertainty, but I think lots of communication to the right people. I mean, you don't want, I as chair, don't want the troops to lose focus because as you're going through any transaction, the most important thing is hitting your numbers. Because if for any reason the business starts to slip, that can have all sorts of negative implications.

Peter James: So, and then also ideally having some sort of incentive package in place, which could be put in place by the other side. What I would call a 'Golden Hello.' I've heard that term used before or something that enables the other side to pick up a management team that is already motivated, has some skin in the game, then to incent them to deliver on the other side.

Peter James: But if you've got the right team and you are, let's say, selling the business to the right company and the team can see the upside for the company and therefore, hopefully for them, that's fundamentally important. Because, you know, if I take Nearmap, wonderful company, founded in Perth, listed on the ASX, tiny company, started to grow rapidly, had done hugely well in the Australian sandbox. And I often talk about Australia as a sandbox we're a good place to actually try business models.

Peter James: We were dominant here. Very profitable. But it was clear that the stage for us was global. We had software that it was scalable. We had a solid business in the US but we needed more capital, more focus.

Peter James: So we sold it to a private equity firm. But everyone I think in the company was excited by that 'cause they could see their company going global. Shareholders got a fair return and the company's gone off to do great things on the global stage.

Richard Conway: Excellent. And Peter, I wanted to ask you a bit about the board dynamics of this kind of situation. So, obviously in a normal course, a board has a fairly planned rhythm. As soon as an acquisition or a transaction like this is on the table, everything becomes more dynamic.

Richard Conway: So, you talked before about needing to be prepared. And so I wanted to ask you, how important is it for the process to be run well at the board level at that point in time. And, and what, in your opinion, does a good process look like?

Peter James: Yeah, look, it is a process. And again, we've talked about being prepared, boy scouts.

Peter James: But I think again, as part of being prepared, it's having the advisory team around you that you know and trust. 'Cause often time is not on your side.

Peter James: You know, I remember at iiNet, we had a bid lobby in and I think we had several days to make a decision. But the fact that the preparation had been done, we had our advisors, that is banks, we had our accountants, we had our legal team.

Peter James: And the same at Nearmap. Everyone knew each other. We'd perhaps worked on other deals. We were certainly very familiar with the Nearmap strategic plan. Rob Newman, the CEO, had travelled the world, knew what was happening in the marketplace.

Peter James: And we talk about that word rhythm. You quickly come up to cadence, but I'd said to Rob, "Mate, you run the business, you and I will talk every day, and I will run this process with a due diligence committee, or a subcommittee of the board."

Peter James: So that there's a cadre of directors working with a very experienced legal team. You know, and you've got tax, you've got, you know, all sorts of issues. ACCC, ASIC, ASX, et cetera. And then negotiations with the other side.

Peter James: It's very complex. It's fundamental to shield management from this, to have however, in DD, you know, some parts of management, usually the CFO and some core people around them are in the middle of it. But again, the business has to keep making its numbers.

Peter James: And look with iiNet, with most of these, they take several months. Ansarada, Nearmap, iiNet and others. There was another one. I was chair of Dreamscape Networks and it's keeping the team together managing this complex process while the management get on and run the business and deliver the numbers.

Richard Conway: Absolutely. And Peter, the last question I wanted to ask you on this is quite specific to the audience of this podcast, which is what are your expectations of a company secretary during those more dynamic times? When the board's meeting more regularly and keeping this team together is more critical.

Richard Conway: Are there things that you want the company secretary specifically to do? And how much can they do to help the board get to the right outcome?

Peter James: Look, I think, I mean, it's the relationship between the board and the CoSec is very close one, the fundamental one. And I look for a CoSec that understands the business. Ideally understands the personalities. Obviously has the process and the regs and the laws, the rules, et cetera. They need to understand those backward. Someone that understands the people, the personalities, because there’s a lot of that in the heat of the moment.

Peter James: Working also closely with the legal advisors because often the two overlap. But, you know, some of the better CoSecs that I've had. And you know, I've been fortunate. All been great. Where we will often talk and, you know, they can give me guidance also about what I can't do. I'll have a pretty good idea of what I can do, but sometimes it might be more than I should do.

Peter James: Just trying to get things done and really rely on someone who can guide you, not just from a legal governance, CoSec perspective, but I love to have a CoSec that can be eyes and ears around what's happening in the process. And so not just formulaic, but perhaps to add insights into the dynamics of what's going.

Peter James: Now, the other, other dynamic is whether you've got a CoSec from within the company. A CoSec who is a consultant to the company. There's pluses and minuses. The one thing the internal CoSec does do is probably know more about the business and the personalities.

Peter James: A consultant CoSec may well have broader experience across multiple companies. But I think every role in that group is important. But close relationship with the CEO, CoSec, CFO and then each of the advisors is important, fundamental.