Kimberly Petillo-Décossard is a Partner at the New York-based law firm Cahill Gordon & Reindel LLP and Co-Chair of Cahill’s M&A and Corporate Advisory Practice Group, where she provides guidance on strategic acquisitions along with other complex business law matters. Petillo-Décossard has been named as one of 2022’s Dealmakers of the Year by The American Lawyer, and she’s a highly regarded author and speaker on corporate transactions and governance.
Petillo-Décossard sat down with Datasite for a fascinating Q&A session on the changing dealmaking landscape of 2022. The conversation explored some crucial questions around ESG, corporate diligence, and the human side of M&A.
Q: What is on your clients’ minds heading into the summer and fall?
A: On the strategic M&A side, we’re focused on getting past the macro issues and getting deals done. I think that this year will ultimately be a good year - it won’t be 2021 - but I think it will be a solid year by any measure.
When it comes to macro issues, our clients are keeping an eye on the war in Ukraine, inflation and interest rates, and the regulatory environment, particularly antitrust enforcement. All of those are impacting deals, in terms of valuations and the speed at which they’re getting done. But I think that despite a slow-ish spring and summer, we’re going to have a solid fall and ultimately a strong year.
Private equity is still trying to deploy a lot of capital, and you have a lot of SPACs out there trying to find transactions. Strategic buyers have been getting priced out in auctions and they should think about how high they’re willing to go if they’re in an auction process for a target. However, I think we will see valuations coming down if the macro issues persist, and strategics need to be ready to move quickly if they want to remain competitive. The ability to move very quickly has historically been a challenge for some strategics, and our clients are taking the time now to get prepared.
Q: Are there any particular trends that you’re seeing across your clients in terms of industry activity or types of transactions?
A: We’re industry-agnostic, so I’m not seeing any trends in any one area. But we’re spending a lot of time talking about ESG with our clients. And this is not just a trend with people in the dealmaking community, but a trend across all C-suites as I’m advising on general corporate governance matters.
The SEC has proposed a lot of rules related to ESG issues, and that’s become an area of focus for a lot of clients regardless of industry. We’re going to see that impacting deals - not necessarily in a bad way or slowing deals down significantly, but it’s an element that’s gotten a lot more attention in C-suites.
Q: Let’s talk about the regulatory issues first, because then I want to do a deep dive on ESG.
A: Sure, so on the strategic side, companies and their advisors should be spending more upfront time on the regulatory pieces. The regulatory environment right now is uncertain, and it has the potential to get aggressive in certain industries. Strategics should think long and hard about antitrust concerns before they spend a lot of time and money on a deal.
Q: How should companies be approaching ESG to minimize their dealmaking risks?
A: When it comes to M&A transactions, ESG analysis is handled in the diligence phase, and I think the key is not just asking superficial questions like “Do you have diversity, equity, and inclusion initiatives?” Of course the answer is going to be “yes”.
But you need to dive into employee demographics, what the organization’s been doing in the community, and how they’ve been sponsoring, promoting, and mentoring people. You’ll be able to see pretty quickly whether they’re the real deal or it’s just words on a page that they need to have.
Q: I find it interesting you led with the social aspects. Why should dealmakers focus there and what are you seeing?
A: Well, the impact of the “E” part can vary a lot by industry - although with the SEC’s proposed rules around climate disclosure, the E is broader than a lot of people thought it was.
But the S and G pieces have a significant impact on all dealmaking and M&A transactions, because every company has its own culture with its own strengths and weaknesses. In strategics you have to spend a lot of time thinking about the culture of the target. The social and governance pieces of ESG really impacts the integration, which is where a lot of deals fail.
So C-suites are spending more time upfront making sure that transactions can be integrated well. And they’re kicking the tires to make sure they’re not buying any post-closing headaches.
Q: I want to go back to something you said earlier, which is how to tell the difference between words on a page and real action during due diligence. It sounds like it’s the data.
A: That’s where most things are, is in the data! Yes, I think you do need to dive into the data.
And you need to ask tough questions of the senior management and see if you get genuine responses. I spend time talking to C-suite folks all the time who are very honest and transparent about the need to do better. That should be an encouraging response from a due diligence perspective! If someone tells you “We’re totally nailing it and we’re exactly where we should be,” that to me would be a red flag.
Q: What are some of those hard questions?
A: You need to look at who senior leadership is and what their backgrounds are. I don’t just mean gender and racial diversity, but also diversity in perspective.
You need to ask the question: What does this person bring to the table? Why are they part of your C-suite? How did this group of people come together, and what do you think makes you successful other than just business prowess?
Do you think that the people in your organization see themselves and their values represented and reflected in the C-suite? Do you have buy-in from your people?
Q: We’ve surveyed about 600 people in the M&A industry, and about 20% said they’ve seen deals fall apart this past year due to diversity and equity issues.
A: That’s a big number, but I’m not surprised by it at all. We’ve had many clients who wouldn’t move forward with a transaction because the organizational fit was wrong, even though everything on paper made sense.
Right now the war for talent is so significant that companies are trying hard to hold onto their people. If you do a transaction that just doesn’t fit with who you want to be as an institution, you’re going to lose talent. So even if the economics work, that’s not the right deal for you.
Q: People have been talking about culture issues like this for a while now, but rarely acted on them. It sounds like the “Great Resignation” and the “War for Talent” are finally pushing the needle and getting people to take culture more seriously.
A: You’re right. None of this should be new, but it is.
The world fundamentally changed over the past two years. People have taken this moment in time to take a hard look at who they are as individuals and what matters to them. I think many people really surprised themselves as a result of that hard look and then started making changes, both personally and professionally.
Companies are understanding that they need to do the same thing. Their talent base needs to match who they are.
I’m very curious to see if life reverts. I think there is a large portion of the workforce, myself included, that isn’t interested in “going back to normal”. But I worry that old habits die hard and people will go back to just looking at what makes sense on paper.
As long as we continue to focus on the emotional and human elements, I think you will see much more successful integration. You’ll have people invested on both sides who feel they’re aligned, not just professionally but personally as well. Once people are invested in something, you’re going to get the best out of them. They’re going to want to be successful individually and they’re going to want the organization to be successful.
Q: Could you talk a bit more about how the emotional side of M&A has changed?
A: The past two years have been extremely emotional. Personally and professionally, there’s been a ton that’s gone on. And you can’t do deals without thinking about this fundamental change in how we operate as human beings.
I spend most of my time doing strategic work, where public companies are buying private companies. You’re often trying to acquire a target from a founder who built it from the ground up. That’s emotional. They’re making a decision to sell something that they built from scratch, and they have employees that they’re worried about - you’re either creating jobs or potentially taking them away from real people.
If the past two years have done nothing else, they’ve made us realize that we’re all human. This is not just a transaction, there’s more beyond the spreadsheets. What we do in business impacts real people and their real lives.
Q: You mentioned earlier that strategics should be thinking about all of these issues now, whether they have a deal on the horizon or not. Have you seen any solutions to the ESG challenges we’ve discussed?
A: I don’t have the secret sauce - I wish I did. I think it’s an institution-by-institution approach. It starts with the tone from senior leadership. Not just putting out mission statements, but actually taking steps to demonstrate your commitment to doing better.
People need to actually see the change, because just talking about it feels a bit irrelevant. They need to see themselves in their environment. They need to feel like the people they’re working with and working for are aligned with their beliefs. So you need to actually sit and figure out who you are and who you want to be.
And once that happens, I think you need to start taking bold moves and big risks and taking a chance on people who haven’t been given a chance. The status quo doesn’t work anymore. We need to make some big changes in senior leadership and boards which is not easy. I acknowledge that. We have to be creative, and we have to try harder.
People used to think “I’m going to work for this place because it’s got the name brand, and everyone there is really smart, and it will set me up for life.” I don’t think that’s where we are anymore. I think it’s more like “Are you a good organization? Are you trying to do good in the world? Is this where I want to grow? Is this where I can grow?”
Organizations need to spend time thinking about that and demonstrating that through action and purpose - not just talking about it.
Q: On the social aspect of ESG, we’re doing a report looking at M&A from a gender standpoint. We’re seeing women well-represented in junior and manager levels, but there is a drop-off at the senior levels. As one of the few women at the top, does this surprise you?
A: No. I’m laughing because I’m still often the only woman in the room - which isn’t funny, but it’s kind of shocking in 2022. It’s going to take some time for that to change.
I’m encouraged by the stats relating to more junior women in M&A. If they continue to stay the course, we might see more senior women in 5-10 years. But I don’t know that. There were a lot of women doing corporate work at the junior and mid-level even back when I was a junior associate, and unfortunately that hasn’t translated into big gains for women at the partner level today.
I am encouraged by the fact that the past two years have made everybody willing to be more vulnerable and transparent. That may help change the trajectory.
What I mean by that is: I spend a lot of time working from home. And I am unapologetically a mom. My clients know my kids, and they know that if they call me between five and seven, it is going to sound like a zoo at my house.
That wasn’t happening before two years ago. That wasn’t part of who I showed myself to be at work. And I think we’ve come to a really good place where we’re showing more of our human sides in the professional environment. I hope that junior people will see this and say, “Wow, he or she has kids running around and just closed a $12 billion deal! We can totally do this.”
I hope that changes what the future of M&A looks like.