Southern Style M&A: An Interview with Hagen Rogers


Hagen Rogers is the Executive Managing Director at Watermark Advisors, LLC. Watermark prides itself on its “Southern style” approach to M&A. Knox Kiernan, an intern at Watermark, interviewed Rogers to learn more about this unique, relational approach.

(This interview is also available as a podcast.)

Our discussion today centers around the idea of Southern style M&A, which is something that we’ve all heard you say many times. Can you give us an idea of what Southern style M&A is, and why you think it’s the route to go?

Yes, this is a phrase we think characterizes our approach to M&A. What we mean by it is a relational focus as opposed to what is conventionally performed by service providers in the market, which is more of a parachute M&A.

I’m going to explain the parachute metaphor a little more shortly, but relational M&A means that we bring on partners that are experts in certain parts of the M&A process to “walk alongside” us and the client to complete the M&A process. We recognize that often, the outcome from having sold your company or acquiring a company is not great in regards to return on investment. Therefore, to improve the likelihood of long term success in your M&A transaction we walk with—engage and support intensely—our client across what we call the “M&A Bridge.”

Whether you’re an acquirer or seller, you cross this bridge, and you step up on the bridge when you decide as a company you’re going to do M&A.

Walking across the entirety of the bridge includes three phases: a preparation phase, a transaction phase, and an integration phase. The measure of success of investing in an M&A acquisition really doesn’t take place until the client steps off the bridge. Then you can measure success both financially and strategically as to whether it was a good deal.

We bring on collaborative partners because we know that we’re not experts in everything. No advisor can be. That sounds pretty expensive to do when you think about all the different skills required in the three phases of M&A. But to benefit our client, and avoid it being too expensive, Watermark is willing to waive our success fees on the buy side. The success fee is the percentage of the transaction value paid to the advisor(s) when working with virtually any other M&A advisor out there. Watermark used to operate that way, too, but after having observed how few of M&A transactions actually created value for the acquirer, we at Watermark wanted to take the bold step of waiving our success fee to demonstrate that we take responsibility for the transaction alongside with our client. This way the client can affordably cross this bridge in three phases with a collaborative group of experts.

We have a passion for excellence as a firm, and we want excellent outcomes for our clients, which requires excellence in each phase and in each skill. In order to do so, we bring the best service provider for that particular skill that we can on board with us.

We know that acquirers are busy running their companies and protecting their brands. They don’t live on the M&A Bridge; however, they have to cross it in order to execute the strategy of M&A.

Can you discuss the team composition and give us an idea of the breadth of services and relationships that go into this Southern style M&A? Who, specifically, are these experts that you’re talking about and how do they work together?

Let’s talk about the three phases again. We’ll take each one and give you an example I think would be helpful.

In the preparation phase, there are eight different disciplines that the acquirer must engage and assess. One of them is strategy, and another, (part of) commercial due diligence. In strategy, for years we have worked with a firm out of Nashville called Executive Aura. They have a certain way in which they do strategy, and they have done great work with our clients on the M&A Bridge.

Commercial due diligence is something we are not experts in. A target’s market conditions and an outlook of that target’s industry determines how much due diligence is required. Sometimes you’re acquiring in your own industry, and less commercial due diligence is required. Sometimes the M&A strategy necessitates an acquisition in an adjacent market, or a product or market extension, and, therefore, you may need to spend more time in commercial due diligence on that adjacent market. An example of a firm that we like to work with on this is Plante Moran. A lot of large accounting firms and consulting firms have a group within them that performs commercial due diligence.

Moving into the transaction phase, this is where our partners complement our work in “Core M&A Services” with engagement in due diligence and integration planning. What we do in-house is what I call “Core M&A,” which is composed of five different disciplines: valuation work, synergies, deal design, negotiations, and financing. But due diligence and integration are on top of these. So you’ve got several processes going on at the same time. It is very intense for the client. It requires a lot of resources.

To give you an idea, there are arguably twelve or more different areas of due diligence that need to be going on simultaneously with Core M&A, in addition to integration planning. Financial, tax, and/or commercial due diligence are examples. Here, unlike the preparation phase, when I say commercial due diligence, I’m talking about the target company’s relationships in the marketplace. The due diligence validates that they indeed have the type of relationships they’re communicating to you or the buyer.

You also have IT due diligence and reputational due diligence, which validates whether a company has certain regulations they must follow, jurisdiction or legal regulations to operate in certain industries, and that they’re up to date with all their compliance requirements.

Additionally, you have environmental due diligence, HR due diligence and cultural due diligence. Cultural due diligence may be the most underestimated area of due diligence; however, we believe it is very important. It’s a tough area to analyze. It is subjective, and, therefore, a lot of times investment bankers don’t prioritize it because they don’t know how to evaluate it. Maybe it’s not the job they’re hired to do. Some firms we’ve worked with, that we have a great regard for in this area, include Willis Towers Watson, Cherry Bekaert, Plante Moran, Wolters Kluwer, R Group, which is a boutique cultural due diligence firm out of DC, and Fairmont Consulting Group, a commercial due diligence firm out of Boston which specializes in Airspace.

Then you have integration planning and execution. Briefly, we collaborate with a global firm called Global PMI Partners, which stands for Post-Merger Integration Partners. They work with us and clients in planning and executing integration.

I want to give you a chance to circle back and expand on this idea of a parachute M&A versus relationship M&A. Going back through the preparation, transaction, and integration phases, where would the parachute M&A come in versus relationship?

“Parachuting” is the most commonly used approach to M&A and one in which I, too, was accustomed to performing for clients. It is where the acquirer now has a live deal, and they are signing the letter of intent (LOI). They need to identify an advisor to help them with core issues of M&A and maybe some of the due diligence; therefore, it’s kind of like a parachute. You hire somebody to parachute down on the bridge when you, the acquirer, is already well out there on the bridge. It’s very intense, and your M&A advisory firm is working with you very closely for a period of about six months. They help you close the deal, they get a success fee, and then they’re gone.

They leave, but you’re still on the bridge. As the buyer, you’re still there, and you have arguably the hardest leg of the bridge, integration, ahead of you where many say 50% of ROI loss of the entire process happens. That’s the parachute approach.

Our approach, in contrast, is a collaborative, comprehensive, “bridge” approach, Southern style. It’s relational. We want to help you across all three phases as opposed to parachuting down once you’re already out there on the bridge—and leaving while you’re still there.

That makes sense. Going through these three phases, it seems like this necessitates time. So why would somebody going through the M&A process not choose the Southern style approach?

Because it’s not really offered. From what we understand, in the market, this is novel in how it’s being packaged that a firm can bring on more collaborative partners. It’s à la carte, you pay-as-you-go method, you’re not building up to this big success fee to pay at the end. It’s unconventional in how compensation for it works and how the actual experience works, so I think that’s the reason why others are not choosing this. It’s not being offered.

Right. It would be good to get the word out there. Now, we are out of Greenville, South Carolina. We’re in the south where the tea is sweet and the weather is normally pretty good. How does “Southern style” come across to people from outside the south when contemplating M&A?

That’s a really good question, and I don’t want people to think that this type of M&A is just for southern companies or those headquartered in the southeast in the U.S. It works anywhere! The expression comes from the perception that in the south, relationships are really important in business. So what we’re saying here is that while M&A is certainly about a transaction, the way to have better outcomes in it is to understand that M&A is a process, and a much longer one than is normally contemplated, and demonstrated behaviorally and financially in practice. We think that M&A is done best in a collaborative, comprehensive way, which is like a relationship.

So if I’m getting this correctly, most of what’s offered out there is, “We’re coming in, we have our models ready, we’ll do a DCF (discounted cash flow) based valuation, we’ll put you through the works very quickly to get you through the transaction, take our success fee, and hop off the bridge.” In contrast, Watermark has reengineered a model to include a longer period of time, and it’s because it’s a more intense, vulnerable relationship. You put the emphasis on developing that relationship and walking your client across and off the bridge.

Yes, so for us, it’s not about how many transactions we complete in a year. Often being in this profession, year after year, the number one question I get asked is how many transactions are you working on right now or how many transactions are you closing? As I’ve evolved to this approach, and I didn’t start with this approach, my answer is, “I’m working with several clients right now. None of which are in the transaction phase. One or two may be in the preparation phase and in different areas of preparation. One may be needing integration help.” I think of M&A more holistically than that, and I’m doing that for the client because I think that’s the best mindset for the client.

Understood. You mentioned the evolution of how you and Watermark grew to use this process. Could you speak briefly as to how you got to where you are now?

I’ve been doing M&A/investment banking for 23 years. Like I said, I was trained in the very tried and true practices and processes. But from what I observed with the clients I worked with, and had consistently read about in periodicals like The Wall Street Journal on M&A failures, I had to step back. I heard multiple clients say their acquisitions ultimately went off track after it closed, even though the deal had been called a success, prematurely, upon finishing the transaction phase. I asked, “What can be done to minimize these problems that clients have before, during and after the transaction closes?” This has been an evolution for Watermark and myself for about ten years now. I think it’s a crucial and better way of doing M&A.

I want to circle back to that at the end, but right now, let’s do a quick exercise where we go through some of the common mistakes acquirers make during M&A and identify how Watermark’s Southern style M&A works to counteract and prevent those mistakes. We can also identify some of the team members that serve that purpose.

I’ll answer it with regard to the three phases of M&A. Yes, there are many steps of M&A where mistakes are made, but I will start with the preparation phase. We’ll discuss an acquirer’s perspective. First, they may have a wrong M&A strategy altogether which often means a transaction would be too risky to implement. When that strategy is executed, it can get costly if mistakes are made and they may struggle to capture the full ROI. So, making sure that the right M&A strategy is deployed is very important. Next, they may struggle with a lack of thoroughness in conducting commercial due diligence on the target’s market trends and nuances. Further, they may be identifying too few targets on their acquisition target list. Also, when they approach targets, they do so in the wrong way and the conversations don’t progress. Furthermore, not thinking properly about how to resource the deal internally can lead to many challenges, from under resourcing the team, to not establishing proper bandwidth for the thoroughness required in M&A. It’s important to remember that M&A takes a lot of time and most internal M&A team members have “day jobs” so capacity can become an issue. Moving forward to the transaction phase, valuation problems and synergy issues are prevalent. Due diligence issues arise most often when the acquirer is not fully processing what the data means for the transaction and for owning the target post closing. Integration planning in the transaction phase may not be initiated early enough, which means due diligence – deal design – negotiations and integration planning efforts are not happening simultaneously and, therefore, aren’t able to be influencing each other. That healthy interaction between the deal team groups is important. Moreover, poorly staffing the integration efforts can lead to breakdowns in cultural integration.

So, clearly a lot of potential for mistakes and it’s important to have a process that can address all 3 phases and their complexities. This brings us to our last question, Hagen if there’s one thing you could say to every potential acquirer about why they should choose Southern style M&A what would you say?

I would say look at the statistics. There is just too much research out there that speaks to the consistency of fumbles in M&A. Specifically, only twenty to thirty percent of the time are “strategic, infrequent acquirers” able to actually capture return on investment that is at or above a hurdle rate that they set out to hit.

So, based on their own measure of success only a quarter of them are reaching it their target?

Correct, therefore, I think it necessitates that, to do M&A well, you need to think comprehensively and carefully consider all three phases and the disciples of each phase. Ensure that your team has the subject matter expertise required for your particular transaction, either in house, or by hiring an external team, or some combination of both. Every transaction is unique, but I think in most cases a collaborative and comprehensive approach is vital to the success in M&A.

Hagen, thanks so much for unpacking Southern style M&A and giving us a better understanding.

Thank you, Knox. Listeners can learn more about Southern style M&A and other important M&A topics such as different M&A strategies by checking back for more content on our website and by reaching out to me directly.