Joseph D. Culley Jr. had spent much of his career advising businesses in connection with acquisitions and financing transactions. Now, as head of Janney Montgomery Scott’s Capital Markets Group, he’s buying companies.

“It’s been an incredible learning experience,” Culley says. “As an adviser, you get used to giving advice to clients. And then when you start to run businesses, you have to own your advice more frequently, and that’s a hard transition to make.”

Janney, a financial services firm that’s an independently operated subsidiary of The Penn Mutual Life Insurance Co., has taken on more of an inorganic growth strategy, adopting M&A as part of its strategic initiatives. That, Culley says, has taken some time to get used to.

“We had to do a lot of work internally around modeling returns,” he says. “When you’re acquiring professional services business, it’s really about the people. You’re not really acquiring much in the way of assets, and so coming up with the right cultural fit, strategic fit, is really important.”

In May 2018, Janney bought HighBank Advisors, a Baltimore-based middle-market investment bank and financial advisory firm, and this past May, it bought FIG Partners, an Atlanta-based investment banking and research firm. The investments have exceeded Janney’s expectations in terms of what it thought it could achieve in the way of acquiring firms. But Culley says integration has been its own issue.

At the Dealmakers Conference earlier this year in Philadelphia, Culley talked about how important culture is when integrating people-oriented businesses.

The work is just beginning

“Trying to combine cultures can be a bit challenging,” he says. “There were a number of firms that we met with, and I knew within the first hour that this was probably not going to go beyond one meeting.”

As an investment banker, Culley was accustomed to a transactional environment — you help a company get a successful outcome, and you move on.

“Here, you get to a successful outcome of a transaction, and the work is just beginning,” he says.

Winning on culture requires simple steps, such as making sure everybody’s onboarded correctly, being sensitive to the business practices of the integrated company and recognizing that there are multiple ways to be successful in investment banking.

“We have tried to take what each of the firms we’ve acquired does well and incorporate that into our business, as opposed to imposing our will on them in terms of how we do things — the Janney Way,” he says. “It’s less about that and more about, how can we learn what you’re doing and replicate that across our broader portfolio of businesses?”

More than simply integration, however, speed of integration is critical when acquiring services businesses.

“What we have observed is that you basically have that time-based retention period to win on culture,” Culley says. “And that’s what we talk about is winning on culture, because the returns of these transactions look fantastic if all of the key production stays beyond the mandatory retention periods. But they quickly go negative if everybody walks after two, three, four years. So we talk a lot about making sure we are winning on culture during that time.”

Together ever after

He says with the way deals tend to be structured in his sector, you’re principally negotiating five main commercial terms: enterprise value, upfront considerations, performance-based earnout, time-based retention for nonshareholder key employees, and a compensation ratio.

When the acquisition involves a services company, it’s much less about the assets than it is about the people. With that in mind, Culley says that the managing partners at an investment bank are typically very much a part of the day-to-day operations of the business and the equity value of the firm, which is why he recommends having intermediaries handle some of the negotiation.

“You have to work together after this is over,” he says. “As deal professionals, you want to win on every deal point and get the best for your shareholders. That’s why it’s really important to have trusted advisers between the parties because, otherwise, you get off on the wrong foot if one party feels they didn’t get everything they wanted. Preserving the relationship strength between the two parties is really important in a people-oriented business like investment banking.”