Corporate Development Spotlight

Spotlight Q&A:

Kate – Thanks for joining us for this issue of Corporate Development Spotlight, and congratulations on your recent move to Earnest! Can you provide a quick flyover of Earnest, your corporate development team, and the approach to M&A?

Earnest is the #1 student loan refinancing provider in the US,¹ helping those with student debt reduce their interest rates and add more repayment flexibility. Additionally, Earnest helps those entering college fund their education by applying for FAFSA, numerous scholarships, and any additional student loans needed. ² Our mission is to make higher education affordable and accessible to anyone. To achieve this mission, we are taking a customer-centric approach to understand their needs along the journey of getting the higher education they need and starting their career path. As a CorpDev team, we are responsible for identifying and executing opportunities that would add value to our customers on their journey – and what steps they take before and after college. In our toolkit, our team has M&A, strategic investments, and strategic partnerships. We’re a small and new team, splitting responsibilities between members according to their areas of expertise – M&A / investments and strategic partnerships, but ultimately, we are all evaluating which path makes the most sense for each opportunity.

¹ According to competitor financial data in 2021.
² Earnest Private Student Loans are made by One American Bank, Member FDIC.

Compare and contrast your deal-making experience at Google and Twitter compared to Earnest?

Fortunately, every environment I have been in has encouraged critical and independent thinking, seeking alignment across the organization and collaboration, all while answering important strategic and business questions. Frankly, a big part of the difference is initiative and ideation. At large companies like Google and Twitter, the strategy and the roadmap are highly driven by what product/engineering can execute in a given timeframe. At companies in a growth phase, there is a lot more ownership on the CorpDev team to bring ideas to the table, have a discussion with stakeholders, and prioritize what is going to bring the highest ROI to the business.

When it comes to sourcing deals, the name and reputation of the company you work for may help open doors or may require you to apply critical thinking earlier on in the process to provide a rationale to the other side for why the meeting is being requested. Pre-meeting target research and having a thesis prepared is more common when you are not at a large and acquisitive company. It may also be the case when you have identified a specific set of potential targets that fit your strategy, which may not yet be known broadly or apparently.

When it comes to evaluating each opportunity and going through the deal process, it should not matter which type of company you work at – rigor, prioritization, and diligence are all key components of any CorpDev professional’s day-to-day. While larger companies may have larger budgets for M&A and more resources to support integration, large and small companies equally have to answer the same fundamental questions – Does this deal make sense? What are our customers and our business getting if we do this deal?

Similarly, as a CorpDev professional, when you are running a process, the type of company you are representing should not affect your ability to win the deal if the thesis holds and the terms proposed are acceptable to the target. Synergies may impact the valuation analysis and your ability to offer a higher price to the target, but that depends on the business fit and integration plan more than the size of the company.

What is the most rewarding aspect of your career in Corporate M&A?

I love seeing the direct and measurable impact of acquisitions on the business. For example, when we acquired Smyte at Twitter, we introduced a new metric for tracking, proactively identifying, and removing malicious content. Smyte was responsible for all of that impact and the movement of the metric over time. It was disclosed in filings and talked about on conference calls, but most importantly we knew that we were making the user experience a lot better by having bought this technology. Ultimately, the users should feel the improvement and it should translate into better business metrics.

Another rewarding aspect of being a CorpDev professional is seeing how your thesis plays out. As part of any deal, you work with leadership and cross-functional teams to create or reinforce a strategy. When you’re able to make predictions about the industry and execute a series of actions to put your company in the best position, and as they materialize and you watch the scenarios unfold, it is incredibly rewarding to know that you’ve considered the outcomes and put plans in action to stay ahead of the game.

What is the most challenging aspect of your career in Corporate M&A?

The most challenging aspect is not knowing what you don’t know and not being able to predict all outcomes. When considering a highly strategic acquisition (not a tech or talent tuck-in deal), you make a lot of assumptions about the state of the market, user behaviors, and business outcomes that are all contingent on some of the unknowns and future behaviors. And for those of us that like to make informed decisions based on a lot of fact patterns, these assumptions create uncertainty and uncertainty introduces doubt about the deal, the valuation, the integration plan, etc. That’s why it is so important to have an internal deal sponsor who can help navigate imperfect information and sift through assumptions and have enough conviction on the deal thesis. The deal sponsor is also responsible for integration and tracking success metrics for the deal later.

Another challenge is to build consensus around the decision we’re making. It is highly unlikely that everyone in the room will share the same opinions or views, so a true consensus is often unachievable. While we always want to make sure everyone is operating under the same information, sometimes a decision has to be made to move forward, even if someone disagrees. Building consensus takes a long time and does not guarantee that everyone will get on the same page, so the deal may be lost due to indecisiveness or taking too long. The way to mitigate this is to have one clear decision-maker on the deal team (usually the internal deal sponsor) who can make the call and feel okay with some level of disagreement.

Predictions for the next 12 months in corporate M&A:

The talk of the town is the market environment and the downturn that we’re seeing. In the next twelve months, we can expect to continue to see flat or down rounds on the capital raises, companies taking more creative structures from strategics, and some fire sales. All industries have been affected by this market correction; however, some pockets of the tech market are seeing especially dramatic drops in valuations. There is a lot of speculation on who survives, and I believe there will be some consolidation in these highly impacted sectors where competitors will be picking up clients or tech for low prices. We have been seeing layoffs at scale, so as far as talent acquisitions aka acqui-hires, I predict those to become either very cheap or less common now given the talent that’s been released into the candidate pool. As a CorpDev professional, I am looking forward to seeing what opportunities may come up for us as a result of companies needing to find a new home in the absence of good funding alternatives.

Most memorable M&A story:

The most memorable M&A has to be, to this day, SanDisk’s sale to Western Digital in 2015. I worked at Goldman Sachs at a time, and we were the exclusive financial advisor to SanDisk. The complexity of two US-based companies merging, with international and domestic regulatory approvals needed, has taught me volumes about scenario planning and the direct implications of seemingly indirect corporate events. The share price itself was calculated and expressed as a varying combination of cash and stock for two scenarios: 1) if the previously announced investment in Western Digital by Unisplendour Corporation Limited closes before this acquisition and receives CFIUS approval, if deemed a covered transaction by CFIUS, and 2) if it does not close. In the event it does not close, a SanDisk shareholder vote would be required to approve the transaction with a very high threshold. The accretion/dilution of the deal was also dependent on China’s MOFCOM’s approval of the integration of a previous transaction between Western Digital and Hitachi’s HGST businesses. SanDisk had a JV with Toshiba that needed to remain intact post-acquisition.

Ultimately, the Unisplendour investment did not close and we were able to fall back on the second scenario and outlined process. However, it took a lot of time and work to pre-plan both possible outcomes and evaluate the transaction under both price structures to be able to recommend it to SanDisk shareholders and the board of directors.

About Lion Equity Partners:

Lion Equity is a Denver-based private equity firm founded with the core purpose of helping companies meet strategic divestiture objectives. The Partners of Lion Equity have significant experience acquiring corporate divestitures and the overall M&A process.

Why do corporations divest non-core divisions to Lion Equity:

• Proven track record of executing complex carve-outs from sellers, including Bed Bath & Beyond, Siemens, Pitney Bowes, Sodexo, The Washington Post and others;
• Demonstrated ability to execute time-sensitive carve-outs requiring speed and certainty of closure;
• Committed to flexible structures that meet seller’s divestiture objectives;
• Dedicated to seamless transition through a unique understanding of the specific issues involved both during due diligence and post-closing working with Seller, employees, customers and suppliers.

To discuss a corporate carve-out transaction, please contact: