During his time with Pentair leading its legal M&A function, Lance Bonner, Associate General Counsel, M&A and Securities, says the company completed about $2 billion worth of transactions. At the Minneapolis Smart Business Dealmakers Conference, he talked about how conditions out in the market have impacted the company's approach to acquisitions, and why deal activity has been a little quieter this year.

"We've been pretty public about our capital allocation strategy this year, which is primarily to address the interest rate situation and to pay down debt from our Manitowoc Ice acquisition," Bonner says. "But we've still been pretty active in terms of thinking about building up our pipeline, staying close to the market. I think we're seeing less processes run right now with quality assets. I think it's still kind of a wait-and-see approach in the spaces that we operate, which has been fine with us since, as I mentioned, we've had a different capital allocation strategy this year than in prior years. What we're hearing is that the market is recovering generally. And that we'll be pretty active moving forward as we have been historically with M&A being a key driver for us strategically."

He says they're prepping their internal team for diligence processes in this environment that involve extended timelines and higher costs, which positions diligence as a little bit more of a lift.

"There are issues that, especially as a strategic buyer, are going to be pretty important to us to due diligence that maybe weren't as important in the past, particularly exposure to China and Chinese operations, and obviously the two wars going on," he says.

Another significant factor that they're prepping for are the new HSR (Hart-Scott-Rodino) Act rules, which he expects will significantly extend timelines and increase costs. He says based on the proposed rules, the FTC is anticipating is an average of 100 more hours of preparation put into an HSR filing for an average deal. For a more complicated deal with overlap, that could be 200-plus hours for an HSR filing.

"And that's coming from the government, which means you probably double that," he says. "And that's just lawyers’ time. That's not internal business time. And so, if you've got a transaction that's going to need to be filed, you have to understand, especially as a seller, the buyer is ready for extended information gathering process and extended timeline. And I think we all need to be ready for that."

He says lot of time goes into structuring how the parties are going to behave between signing and closing — when they would be talking to customers, when they'd be talking to employees. That offers a lot of assurance and opportunity for discussion before the deal is signed. That, he says, is one way his company can provide a lot of comfort for the seller.

"It's all about we have the same goal after signing, which is to get to closing and to have the business that we agreed to buy at signing at closing be preserved," Bonner says. "And that includes a good transition of customers, a good transition of employees. And so, we should be aligned as to our interests once we sign the transaction, and that's hopefully enough comfort to the owner."

Their approach integration, the next stage, is to address it early.

"When we put together our initial deal team, we've got an integration lead, and they are taken along through the process of diligence, and then they ramp up their involvement as we go," he says. "And then as of signing, typically, we try to find a main contact at the target for them to start getting in contact with with respect to the integration matters. We've tried to incorporate it through our whole diligence process."

Sustainability is core to the company's strategic growth strategy and driving long-term shareholder value, so it's going to be incorporated in their diligence process. He says in that regard there's a focus on identifying material sustainable topics to their business, and then they've identified targets that they're tracking to meet on sustainability issues.

"And so, when we think about an acquisition, we're going to look at how does that target impact us negatively or positively with respect to those sustainability goals and targets?"  he says. "Because we publicly disclose every year what's our progress, and we're going to have to incorporate that target into our progress against our goals."

In a year or two, he says that disclosures may change in part because of the SEC's proposed rule on climate disclosure and Europe's CSRD, which he says is a massive disclosure regime. Both will mean the company will need to start disclosing across a large range of sustainability topics.

"And we're going to have to factor in when we acquire a target, how are they going to impact those disclosures? What information are we going to have to put out into the marketplace about our acquisitions and our targets and their progress against our existing goals? And those issues are important to our investor base," Bonner says. "And so being ready for that, if you've got strategic buyers in your potential pool of acquirers, and understanding that that's going to be a part of the diligence process. And it's going to be core to some of our strategic rationales for transactions."

He says the company does a lot in terms of scoping the regulatory risk of a transaction, even before they talk to a target. That, he says, is going to impact the diligence process in terms of the questions they're asking early in diligence, and scoping the overlap, in large part because they don't want to litigate their transactions.

"Keeping that in mind as a seller and looking at your prospective buyer list, and if they're in your space or you're a key supplier in the value chain for multiple competitors, and there's a potential foreclosure issue because they're going to acquire you and there's a worry that you're not going to be able to supply other competitors," he says. "I mean, these are things that we're thinking about very early in the process, including our business partners — it's not just lawyers thinking about this. So, I would say that is going to continue to be a critical aspect to deal making."