Although the COVID pandemic had a profoundly negative impact on many businesses, it actually improved business for some companies. One of those companies that expanded their business during the pandemic was Delphi Display Systems, a California-based provider of customized digital signage hardware, software and service solutions that enable businesses to engage and interact with their customers. Delphi’s customers range from theme parks to educational institutions, but their primary market is quick-service restaurants that use Delphi’s digital display solutions and drive-thru technology to heighten their customers’ drive-thru experience.
Achieving growth
Delphi, which was founded in 2001, was a successful, growing company. However, demand for its solutions dramatically increased during the COVID pandemic, as restaurant customers, wary of being exposed to the virus, chose to order their meals at drive-thru windows rather than enter restaurants. Sensing an excellent opportunity for company growth, Delphi's President and CEO Ken Neeld considered various options to achieve it. He asked his team, "Can we achieve the maximum result through organic growth? Should we raise some additional capital? Should we partner? Or should we look at selling to another company ‒ a strategic buyer to help us get the rapid acceleration we need to achieve?” Neeld and his team decided that it made most sense to sell to a strategic. Ultimately, Delphi, with the assistance of Corum, was acquired by Toast, a Massachusetts-based provider of an all-in-one digital technology platform for restaurants.
Finding buyers
Corum Senior Vice President Serge Jonnaert had periodically contacted Delphi over prior years, gauging their interest in becoming a Corum client when the time was right. Now that Neeld and his team decided that the time was indeed right to sell to a strategic buyer, they agreed to contract with Corum as their investment banker in August, 2022. That relationship paid dividends almost immediately. Neeld initially presented Corum with a short list of potential acquirers. In response, Jonnaert, who was Corum’s point person on the deal, leveraged his experience and Corum's extensive knowledge base and research resources to expand the list to more than 150 companies, some of them international, and many that Neeld and his team hadn't initially considered. All of those companies were contacted.
Thinking about that, Neeld stressed the importance of selecting a great investment banker like Corum to assist with an M&A, one he said, "That understands your company, your industry, and has connections within the industry." That extensive list of potential buyers helped get Delphi to the right acquirer. Neeld said, "It was good to have that large funnel." By December, Neeld received a number of LOIs, including one from Toast, with which Delphi had a prior relationship.
But Neeld did not take the most financially lucrative offer. He recalled, "I had two non-negotiable items in selling the company. We had a lot of loyal employees who had been with me for over 20 years. So what I told every buyer was that every employee has to come over with the deal. And number two: Every employee has to be better off after the deal than before the deal." Toast was able to guarantee they would meet both demands. In fact, Toast even went further by making it a requirement at the close that everybody sign an offer. In retrospect, Neeld noted, “Literally everybody is better off now and very happy with the trajectory they're on and the growth opportunity."
Handling due diligence requests
One of the things that surprised Neeld during the process was the volume of requests for information that Toast made during the due diligence phase. As a large public company, Toast had more stringent due diligence requirements than a private company might have. In addition, Neeld had expected to interact with a small team from Toast. Instead Toast had 50 people participate in the negotiations. That larger-than-expected team made a lot of requests for information, more than Neeld had expected. Jonnaert noted that large, publicly-traded companies such as Toast are subject to more regulatory scrutiny and disclosure obligations than private companies often are. Their shareholders have the right to know the material facts and risks involved in an acquisition and so a high volume of requests for information during due diligence, as was the case with Toast, is warranted.
In addition, Toast needed to close the deal by February 14th, 2023 to meet its public disclosure and quarterly earnings call. The deal indeed closed by the required date. In the end, the time and effort devoted to meeting due diligence requests was well spent according to Neeld because it had a good outcome. Jonnaert pointed out that this is a prime example that patience is a requirement for sellers when dealing with buyers, especially buyers that have expansive due diligence demands.
Managing employee confidentiality
Another issue was managing employee confidentiality. Neeld knew from experience the importance of keeping information about the deal under wraps while negotiations were ongoing. He pointed out, "Having gone through this several times in the past with other companies we sold, we wanted to be very sensitive about telling the employees at the right time because this can be very disruptive. They just get worried about change." Neeld learned from experience that divulging information about a deal too early could backfire. He recalled, "I was in another deal a few years back where we announced it early and at the last-minute the deal blew up. It was very disruptive to the company. It's a fine line to walk between when you disclose it and when you don't. So we made a strategic decision to just keep it between my controller and myself and later to involve my HR manager and then more of IT and systems personnel as requests for information came in on the IT side."
Because Delphi had a previous relationship with Toast, Neeld told inquiring employees that the current interactions were simply about deepening the partnership. That ploy worked well, as Neeld remembered. "We were able to keep that talk track pretty consistent. We decided the week before the close to broadly announce to the company. By that time, there were probably a handful of people that had a good feeling that there was something going on. But a lot of people didn't at that point. The good news is we were so far through the process and we had nailed down most of the key points, that I had a high level of confidence it was going to close. At that point we were able to make an announcement and talk about the kind of future for all the employees, which was important to me to be able to communicate."
The importance of cultural fit
Getting to a successful close wasn't the only objective for Neeld. He also placed a lot of importance on what would happen after the close. He stressed, "My objective was not to leave in the near term. I wanted to find a great career path for the employees and really achieve some objectives for the company with the new partners. What Toast did really well ‒ I would encourage other buyers to think about that ‒ is they brought a team out the first day after close and got everybody here. They addressed all the questions around the HR side, any concerns that the employees had at company-wide and individual meetings. They literally camped here for three-to-four days to answer everybody's questions and get everybody comfortable that this was going to be a good path for them. I think that was hugely important.”
“I've seen other deals where they just do the acquisition and let the company kind of flounder for a while. People get concerned, get anxious, and then they may leave. So I think cultural fit is very important. While I had a very good sense that the buyer's culture was going to be a great fit for us, since acquisition they've confirmed all that. So far I think everybody here is really happy and sees a good path forward for the company and for them personally. "