How to Finance Acquisitions Without Giving Up Equity

Bill Stone Good. Glad to have you here.

Kison Patel Hey, thanks for hosting. We're hosting here live in New York. This is SS&C's headquarters here in New York. Normally I always ask my guests to do their introduction, but you have a Wikipedia page. So I actually got to comb through it and I figured I'd just give you my version of your intro and see if you can just fact-check it for me. Sure. In your intro, you grew up in Evansville, Indiana, which we know, 'cause we did an interview before. You were the 5th of 9 kids. You loaded trucks for your dad before you did anything else. You went to Marquette in Milwaukee, got your business degree. off to KPMG, worked over there running a financial services consulting practice. By 30, you had about $20,000 saved up, and that's when you walked away from a partner track to go start a software company from your basement in Windsor, Connecticut.

Bill Stone I was maybe a long way from partner.

Kison Patel All right, fair enough. You took some inspiration there and went and started your own software company right in the basement in your home in Connecticut, not a Silicon Valley garage. but a basement in Connecticut. 10 years later, you went public and then you ended up going private with Carlyle in '05, then public again in 2010. And today you're trading in a range of $15 to $20+ billion market cap, running the company 40 years, one CEO. Did I get it right?

Bill Stone Pretty close.

Kison Patel Bill, the one thing I honestly wanted to, just to be blunt, what I want to learn from you today, take as aspirations, I want to towards being like you when I grow up. One of the things that I noticed is that you did an incredibly good job of preserving your wealth. If you look at it, I've only seen a number of founders that really do it. We've all seen the fabled exits where a founder gets a multi-billion-dollar exit, but they really don't get much out of it because they end up raising more than what they sold for. In your case, you preserve wealth, and I've seen it. You've seen it with Michael Dell or Henry Shuck at ZoomInfo. And the common thread I was trying to pull on that was You built a business in the beginning that was organic and built it to a certain point. When you then introduced acquisitions and then you're able to continue growing and really protect that ownership as you went through all these different events, whether it was debt, equity raises, and so forth. But what's your key to doing that? How do you sort of get that level of protection?

Bill Stone Now, what you have to realize is if you end up diluting yourself with equity raises or other things ultimately is you're not an owner anymore, you're an employee. So you need to make sure that you understand that part of your power, part of your ability to lead is that you also have the biggest stake in the company and it's very important to you. I always said that you got to be careful. Investment bankers are really, really smart. They're the best salesmen in the world. He goes, why do you say that? I was like, because they get paid the most. They always want to do a deal. And you got to be careful that you don't get diluted when you do deals to the point where you don't own anything. I was always very cognizant of making sure that my equity position, even when I went private with Carlyle, they bought 70% of us, but I owned 30%. And then when we went public, Again, in 2010, they started selling off their shares. We were partners for 9 years. You get to learn a lot of things when you work with people that are as smart as the Carlyle people are. And same thing when General Atlantic Partners invested in SS&C in 1994. So a good friend of mine is Bill Ford, who's the CEO at General Atlantic Partners, and you learn a lot from those guys. They are very well-educated. They're very bright. They also are very organized. Get organized. And I was an expert. Not only did I work at KPMG, I worked at Advest, which is a stock brokerage firm in Hartford. And I worked for the CEO for 4 and a half years or something. And I learned a lot about how securities processing was done.

Kison Patel What did that discipline look like? So from the beginning, you started the business from scratch. You took the $20,000, built the business up, and got some good traction in the beginning. And I'm trying to draw parallels with my own story here because I'm really trying to get the best amount of free advice I can while I got your time. I bootstrapped a business, this deal room, and we bootstrapped it to $11 million ARR. And that's sort of, again, the common pattern. Like you've built some clear equity value versus you've built a pitch deck and you're just trying to do a roll-up and you're just building the whole business model off acquisitions where I've seen that. And then you're employed, basically you're a CEO for a platform and you got a small percentage of it and going to sell it and you'll do it all over again. You're in a spot, you're not doing it all over again. You sort of preserve that wealth that gives you that strong position. I've sort of seen, identified that part of get that initial control, do the hard work essentially to get it. When did the first deal— when was the first deal that you started introducing M&A into your growth lever and why?

Bill Stone When we first started out, like I said, I had a background in brokerage and we did a joint venture with Kroll Wheaton, a very good brokerage firm in Los Angeles. They had a product that we were going to market. So we started marketing their product. We took it over, we built it out, we sold it. That was in late '86 and into '87. And we sold it a few times. And then stock market crashed in October of '87. And that was the end of that. You couldn't sell brokerage systems. They were not buying. They weren't spending any capital on anything except staying in business. We pivoted to buy-side, which business is primarily sell-side, and we pivoted to buy-side. So asset managers, insurance companies, pension plans, and then hedge funds and private equity funds. That was a really smart move that allowed us to have a big market. And the power was shifting on Wall Street from the sell-side to the buy-side. So now the real powers in Wall Street are places like BlackRock. And Blackstone, those types of organizations, Apollo. There's still some big brokerages, but there are also big asset managers like Morgan Stanley, Goldman Sachs, and Merrill Lynch, and JP Morgan. So it's just that the business kind of changed and you had to be willing to do hard things. This isn't going to work. I could bay at the moon to sell brokerage systems and nobody's buying. So you got to stop. You got to say, hey, I got to quit doing this. Anyone that wants to run business for me needs to know their numbers. What's revenue? What's earnings? What's cash flow? What's our pipeline look like? When are we going to close it? Those kinds of questions, and those are constant for 40 years. Those are the questions. It helps to be pretty facile with numbers. I'm pretty facile with numbers. In 1986, we did $86,000 in revenue. In 1987, we did $800,000. In 1988, we did $2.2 million. 1989, we did a little over a million. 1990, we did $2.3. '91, we did $4.2. '92, we did $2.8. You have some ups and downs. And if you go personnel-wise, I ended up '86 with 4 people, including me. '87, 17. '88, 38. '89, 26. So I had to let 12 of those 38 people go. I hired them all. That's very difficult, very, very difficult. But if you don't, you go out of business. You don't go out of business because you have a low stock price if you're public. You go out of business if you run out of cash. A lot of people won't work for you if you don't pay them. So you have to be cognizant of all those types of things, and you can't get so wedded to your idea that you don't look at the facts. I knew brokerage, I knew it well. I could sell that system. I'd sell my heart out, But nobody's buying. It doesn't matter what I did. If you give it away, that doesn't help you either. So you have to find something that— you have to have an idea, you have to have a product, you have to have a service that people will buy. And then you have to get customers, and then you have to take care of the customers. They are very important. Businesses with no customers are not very good businesses. You really need to have a fundamental belief in what your idea is, And then you got to go after it. There's certain things I could do, like I could get on an airplane, fall asleep before it took off. I had 4 million miles on American. I'd go anywhere all the time. Those kinds of things are innate when you're going to be an entrepreneur and you have a burning desire to succeed.

Kison Patel Burning desire. I like that phrase. And this is really describing the foundation of being an entrepreneur is this is a discipline. It's making those tough decisions when you have to let people go. Make a tough decision when you have to pivot and find a new market to go after?

Bill Stone Perseverance. You can't give up when you have to stand your ground on certain things. And I had disagreements with people, and General American Life Insurance was my first big customer for our first big product that we built was called CAMRA. It stood for Complete Asset Management Reporting and Accounting System. And we built it with General American out in St. Louis, Because when I graduated from Marquette and I went to work for Peat Marwick, it was in St. Louis, and General American was my client. The treasurer back then in 1977 was a guy named Leonard Rubenstein, who became chief investment officer. So in 1986, I went back, saw Leonard, and said, let me build you an investment system. And he said, okay. We built CAMERA for $115,000 for him, and then we charged him $23,000 a year in maintenance. And that doesn't sound like very big numbers, but it was big back then. I was always proud that Leonard hired me 10 years after I was the auditor at General American. By that time, I had moved out to Connecticut and I worked for Peat Marwick in Hartford and then started at SS&C. And Leonard was paying their IT department $80,000 a month for services for his investment system, which I think was called Bond and Stock. We put a little Novell network in, Didn't cost very much money and he moved to camera because it cost him $23,000 a year versus $80,000 a month. Well, $80,000 a month is 80 times 12, like a million bucks. We got him like a 91% reduction in his fees. I think maybe even a little higher. You get pretty popular. That's what technology does. That's what everyone is excited, maybe a little trepidation about AI. When I started at Peat Marwick, when I guess KPMG now, but Peat Marwick, we had 14-column worksheets. You had a pencil, you put the numbers in those little boxes in that 14-column worksheet, and you had a 10-key. We used to have contests of who could run a 10-key the fastest. Exciting people, those accountants. And Excel comes out. You know what a time saver and productivity enhancer Excel was? But at the same time, it introduced some risk and complexity. People would build these big Excel spreadsheets with macros and all this kind of stuff, and somebody would quit and no one would know how to run the Excel spreadsheet. It introduced a level of complexity that they didn't have before. It's really important to understand what your selling proposition is to these different companies, being able to a C-chain of technology. Because when we were building Camaro, we were consultants for Aetna, who was building the Aetna Distributed Asset Management System called ADaM, and Control Data, which was building out IMIS, Investment Management Information System. Control Data's was on a mainframe and Aetna's was on DEC mid-range, and ours was a little PC network. And they'd say, are you competing against us? That's a PC network. And they all pretty much Ignored it. What's a PC? Kind of like what IBM did when they sold PC-DOS to Bill Gates at Microsoft and it became MS-DOS. A good move for Gates.

Kison Patel That'd be tough.

Bill Stone But just those things and listening to smart people. You ultimately have to make the decisions, or I ultimately had to make the decisions, but I listened to smart people. I asked lots of questions. When things hang together, then it's like, okay, let's go. It doesn't always work. I have an ash heap of systems that never panned out. They don't all have to pan out, just some of them.

Kison Patel So when did the first deal happen? Now that I know you didn't set out to build an M&A platform, seeing the early beginnings of the industry, how it evolved, and some big dramatic innovations that were happening. And it sounds like even with what's happening today with AI, you're embracing it full on. It's not something that you're looking to be concerned about?

Bill Stone You have to. We have 23,000 clients. We have 100 offices in 40 countries around the world. It's a big business now. And as a friend told me, the bigger you get, like a bigger and bigger bear, he wants more chickens. You got to keep feeding him more, the bigger he gets. We did our first deal. We bought a couple of products from Policy Management Systems Corp back in 19— probably '89 or '90. The first acquisition of a company, we bought Chalk. So Chalk was an actuarial software and services company, and Shane Chalk started it. Shane's a very bright fellow, FSAA, and graduated from Worcester Polytech at 19, was a lobbyist for Transamerica at 21 in Washington. Really bright guy. But what it did is we were doing about $14 million, In '94, '95, and he was doing about 10. That's about 70% of what we were doing. At $24 million, we could go public. So in '96, we went public, literally less than a year.

Kison Patel So you did that deal just to—

Bill Stone Get enough beef to go public.

Kison Patel How was that deal structured? Was it a lot of debt, equity? What was your thinking around making sure, again, you're not an employee?

Bill Stone All cash.

Kison Patel You were doing well back then. You were having a strong cash flow business.

Bill Stone And we borrowed. General Atlantic was a big owner of us, and General American had a chunk of us, and Conning had a chunk of us. We had smart people that were on our board and very supportive.

Kison Patel There's a good point around that because you referenced different investors you've had through the company history, but you put them in good highlight, like being around smart people in the room. You almost feel like there's different schools of thought, especially online. People always debate, oh, the VC's bad, they're the bad guys, they're going to take advantage of you, versus you should go bootstrap and have control of your destiny. I personally think there's something in between where I feel like you're a case in point where you sort of got a good balance and preserved a lot of the value yourself that you built, but you also got to work with the smart people.

Bill Stone I pretty much agree with you. Like I said, they're really smart. They'll take as much as you give them. So you got to protect yourself and don't expect them to protect you. Don't bring a knife to a gunfight. Bring a gun.

Kison Patel Does that gun come in the form of a lawyer? What are we talking about?

Bill Stone I think it comes in the form of preparation.

Kison Patel Prep, yeah, okay.

Bill Stone And understanding where they're going to come from, what they're going to try to do. They're going to want to get a low price if they can, but if they like you, what they really want to do is get a deal done. And you need to know that. You need to know that there's a deal to be done here and I don't have to give away the shop.

Kison Patel Right. So that's why you understand your numbers really well, very clear. That also helps with negotiations because they have their perception of value, they want to get a deal, but you're able to negotiate and counter back and saying, hey, this is the point we should do a deal, and I still can preserve some good opportunities for you in the future so that you're going to be happy with your returns. You sort of build that view and can sell it back so that way you're balancing it to—

Bill Stone What you need to do in order to get a deal that you feel comfortable with. And they get to know you better and it gives them confidence. They want to have an association with me. They know that I'm on top of those numbers. And you can tell I can rattle off those numbers like they're coming out of Kroger. I remember sitting down with Shane once and we're talking, we're trying to negotiate the deal with him. And he's got this spreadsheet, he's got his computer open or whatever it was back then. He said, well, including the employer portion of FICA, this would be— and I go, Shane, you're at the employer's portion of FICA? I think you're a little bit too much in the weeds here. Let's raise this a little bit. I don't know how much money that was, but it wasn't a whole lot of money. And we're spending $10 million, which was a lot of money. It's also, I think, being of good cheer. Smiling and recognizing that, hey, this is just a deal. It's not your kid on the operating table. It's not some tragedy. But same thing, like when you lose a deal, I don't like to lose. I don't like to lose at all, but I'm not jumping out the window. It's like, okay, we'll learn something. I always like to think it was their loss when they didn't choose us. It's proven out to have been sometimes. we bought a lot of those companies that they went to. So it's doing those kinds of things and doing it in a way that you learn. I always learn. Listen, I'm pretty good about, well, yeah, but you said this last time. How come it changed? What's the difference? What are you reading into the current market that you didn't read in a couple years ago or 6 months ago?

Kison Patel Is there any key things when you're negotiating or you're bringing in a new equity partner that you're trying to preserve in terms of maybe some of the controls? Because a lot of times there's not only, here's the percentage of equity that you're negotiating on the cash side, but there's also the board dynamics. There's sort of how vulnerable are you going to be? How much control do you have? The more of the power dynamics.

Bill Stone Yeah, there is. That was mostly true really when negotiated the deal with Carlyle.

Kison Patel That was the first time there was a controlling position, was with Carlyle doing the take private.

Bill Stone Yes. And even then, I retained 30% of the equity. I remember I had to go down and meet Lou Gerstner, who was the chairman of Carlyle at the time, and he was former CEO of IBM. And so I went down and met him and he looked at me and said, why are you doing this? Well, I said, I need to raise some money because I want to maybe do this deal or do that deal, and I need to raise money. And the last time I went to Wall Street to do a secondary. When we announced our secondary, our stock was at $34 a share. And when we priced it, we got $19.50. I didn't like that. So we lost not quite half of our value in that process. And he goes, yeah, it's a tough place, Wall Street. And I said, yeah, very tough. And I said, and I'm doing it because I get some capital, From you guys, and I'm told you're smart money. If you're not, I don't want to do this. Oh no, we are. That's what I suspected. You want to keep things where they're not here and you're here, and you're not here and they're here. You want things relatively even. You want a good deal for everybody. You don't want to feel like, that guy's a dumbass. You don't want to feel that way. You want to feel like, wow, that's really smart. I like that. Yeah. And that way, when the next deal comes up or the next situation comes up, they're speaking highly of you. First-class business in a first-class way. That's what JP Morgan said. As long as you do that, you're in good stead. And people always say, well, and that's what I like. Stone's a good guy. Maybe not easy all the time, but pretty straightforward and always in a hurry. Yeah, that's about right. And you don't want it to be, oh, he holds off until the last nickel just to out-trick you. I said, I don't want to trick anybody. That doesn't do me any good. It's trying to keep that level, trying to be level. And it's not easy. It's important to you and occasionally it can get a little heated.

Kison Patel Do you have any power left when somebody does a majority buyout?

Bill Stone I'm still the smartest kid in the room.

Kison Patel You're still here.

Bill Stone Yeah. I'm still running the place. They don't want to run it. They want me to run it. So yeah, I got power, but what I don't have is, it's a couple times Carlyle did things I didn't agree with. So Bud Watts was the deal guy that I dealt with most of the time, but I knew Bill Conway and Dave Rubenstein and Dan Danello, and Alan Holt was on my board. We had 3 Carlyle guys on our board and Dan Ackerson, Alan's counterpart. So I knew Dan very well. And they had a lot of really smart people. And I remember one time we were going to go public in '07, private in '05, we were booming. I'm going, we got to get public. We get public, I'm pretty certain the next few quarters are going to be pretty good. We got to get public, go out and stock goes up. We do a secondary, everybody gets some liquidity. Maybe we do another one. If the market corrects, we buy it all back. So yeah, I know there's no desire in Washington for you to go public. And that was Conway, Rubenstein, and Donello not wanting us to go public. So you know what that meant? We weren't going public.

Kison Patel We weren't going public.

Bill Stone And I told him, I said, you got 3 guys from Carlyle on my board. We voted unanimously to go public. There's no appetite in Washington for you to go public, which meant it didn't matter what our board wanted to do.

Kison Patel Wow.

Bill Stone So that's why I told Bud Watts, who was the deal guy, I said, okay, Bud, I got it. Let's vote. Okay, you got 70, I got 30, I lose. And what's your other choice? You can quit. They didn't want me to quit, but I bet they would've let me quit. But then all my wealth is still in SS&C stock and we're private, so I don't have access to it.

Kison Patel Yeah, because during that take private, it wasn't a liquidity event for you. You wanted that capital for the business.

Bill Stone When we went private, I sold.

Kison Patel Oh, you sold?

Bill Stone Yeah.

Kison Patel What was the plan? Was there something else you wanted to chase after?

Bill Stone No, but I just as well have— I wanted some liquidity. I wanted some money outside of—

Kison Patel After like 10-plus years?

Bill Stone Yeah. Well, we went private in—

Kison Patel Oh yeah. So it's like 20 years. 2020. 20 years. But this is the first big liquidity event for you.

Bill Stone First big one. I had some small liquidity events before.

Kison Patel What does that do? Does it just take care of lifestyle? Is that the big thing?

Bill Stone Yeah. It's a little bit life-changing because you now have liquidity in the bank that's not really tied to SS&C stock.

Kison Patel Yeah.

Bill Stone I remember I still had 30% of the shares, which were still mine. When we went public in 2010, it was at about a billion-dollar market cap. There was money to be made. You're trying to decide on your own. Bulls make money and bears make money and pigs get slaughtered. So this was a chance to take some money off the table, be by far the biggest shareholder. Carlyle's funds might have been bigger than me, but any individual wasn't anywhere close to what I had. And even today, I own about 15% of the company.

Kison Patel Yeah. I'm just personally curious because I haven't done any kind of liquidity yet. Still essentially have created some option pool for employees. I did the QSBS conversion last December. That starts that 5-year clock, which is a good tax incentive, but then wait for the 5 years.

Bill Stone What are QSPSs?

Kison Patel Are they qualified small business stock?

Bill Stone Ah.

Kison Patel So they have it where if you started a C corp from scratch, hold the stock 5 years, you got up to $15 million tax-free. But if you, in our case, took an S corp and converted it, or essentially created a new C corp, merged the S corp into the C corp, the third-party valuation creates your basis. And at that point, it's 10x over the basis is federally tax-free. So it's, you're going to be responsible for that first basis you have to pay taxes on, but 10x over it, you're free and clear.

Bill Stone Yeah, that's different than it was back when I was—

Kison Patel Big beautiful bill changed a lot of these limits because we're prompted, why not go for it? That's where it's like a lot of that consideration is just thinking, there's interesting things you could do in between. If you want to do a liquidity event, you do a 1045 exchange and run your clock out that way.

Bill Stone I started as a C corp when my CPA friends saying, well, you ought to be an S corp. I said, nah, I don't want to be an S corp. I never heard of an S corp going public.

Kison Patel That's the other thing. You had a clear vision of where you wanted to take the business. Yeah, I did.

Bill Stone I wanted to get in and people thought I was half nuts, but that's okay.

Kison Patel I got another question. When you think about M&A, and I want to get in your head a little bit about— I feel like your business is so diversified now. And when you think about how M&A becomes a driver for growth, I always look at, even for this business now, DealRoom is M&A, it's for the buy side. And when you look at doing deals, it's always stuff we're looking at now is very close to the core. understand this business, you can clearly see how we can capture synergies, how it'd fit in. You've taken some pretty big bets at stuff further away from the core business and even bought some real platforms essentially. How do you think about that in terms of when you look at opportunity? Here's stuff I really know, it's tight to our current business. I can see how that we extract value from it versus this is a little bit on left field, but I think it's worth a bet.

Bill Stone We're a big transaction processor and we're at scale. We have a few metrics we like to look at businesses, like $250,000 in revenue per headcount. Okay. And 40% margin. Can we get this to 40% margin?

Kison Patel 40% gross or net?

Bill Stone EBITDA.

Kison Patel EBITDA. Okay. Wow. Okay.

Bill Stone With that, you start culling a bunch of things that are not going to fit that criteria.

Kison Patel So business health is like number one.

Bill Stone Yes. But you can also get into it. We bought City Fund Services in 2015. It was a really great acquisition, but its numbers weren't as good as we wanted, but we felt very confident. Move them to our platforms and get the numbers we wanted very quickly, and we did. There's a lot to having confidence in what you're going to do and then also doing it. Don't let people, hey, here's the plan. Yeah, but we're going to have to lay off 20% of the people. Look, That's the plan. Get on with it. Don't tell me about your product plans. Don't tell me about your marketing plans. Where's the list? What list? The list of the 20%. Who's staying? Who's going? We're not doing anything until I get the list and we make that happen. Because that gives you the discipline to then have a profitability picture that you can invest. You're going to create enough cash to be able to invest back in the business and build better products and build better services and Do more customer satisfaction, concentrate the expertise. And there's a lot of things that discipline comes back into them.

Kison Patel You buy a business, you just do the cost cutting, those things that you need to do, which is really get it out of the way, get it done, and then invest more into, here's our vision for how we're going to grow this business. Is that pretty standard?

Bill Stone It is. You got to be aware, you got to know nobody likes to cut, so it's no fun.

Kison Patel I guess the thing is just rip the Band-Aid off.

Bill Stone But also recognize that you do it correctly.

Kison Patel Yes, that's true too.

Bill Stone Right? Do it correctly. You keep the top 80%. You don't go willy-nilly and lose top 20%. They're supposed to be numbers 80 through 100, not numbers 1 through 20.

Kison Patel Yep. Make sure you identify the right people.

Bill Stone Exactly.

Kison Patel Is it roughly that 80/20? Is it most of these businesses you look at, they're just operating in a way where they built some inefficiency, the kind of little— being proactive to let people go. I feel like it's tough in some cases. You work with people for a long time, you end up with a lot A little bloat, I guess.

Bill Stone Yeah, that is what happens. And then you're not as disciplined about your— now they've become your friends,

Kison Patel And

Bill Stone Now you don't hold them to a standard. It's a tough game. I mean, if you're going to be at the top, you got to be willing to do the things that are sometimes unpleasant. And at the same time, you got to be of good cheer. You can't mope around. Nobody wants to see me mope around. I don't ever mope around. Whenever there's a problem, we'll fix it. Good things happen too. Don't get too depressed. You got to drive that optimism. People like to work with people that want to have a good time, want to be very competent, want to have success, want to celebrate success.

Kison Patel That's a really good point. You did go back public again. That was around 2010?

Bill Stone Yes.

Kison Patel Market looked a lot better. Washington was more acceptable. Yeah. Build back on the public market.

Bill Stone Obama was president. He wasn't exactly the biggest fan of stock markets. America's a great place to grow businesses. Best place in the world.

Kison Patel I want to talk about 3 really interesting deals that you did. Before I get there, one thing I learned from you, you made a point to me when I was generally asking you about some of the deals I was looking at without mentioning it directly, but you made this point, you got to have a motivated seller. That was a key thing. So I'm looking at opportunities, but you brought in this factor of like, how motivated is the seller? And it dawned on me, like, that is probably one of the key factors of getting a deal done. It's just how motivated is that seller? If they're not, you could be just negotiating against yourself for no reason. Yeah, I'd love to hear about your thinking around determining that. How do you tell if someone's more of just a tire kicker, just playing the field versus are they really motivated to sell that you're going to have some confidence you're going to spend the time and get a deal done?

Bill Stone You got to look at the cap table, who owns what. When you're dealing with the CEO, if that's who's entrusted with doing the process and you find out, are there private equity firms? Are there Venture capital firms, are there angel investors? How long have they been in? Do they want liquidity? How much pressure is the CEO under to get them some liquidity? How are the financial statements looking? Are they spiraling up or spiraling down, just being flat? If they're spiraling up, then they're going to want a big number. So you got to be prepared to give them a big number or you're not going to get a deal done. If they're spiraling down, you got to have enough of a plan, you know how to stop that from happening once you own it, but they'll be much more comfortable selling at a lower price. So there's just some of those kinds of things. And then you got to ask questions, have to be perceptive. What's he or she really saying? Does she really want to sell? Or is this, like you said, just an exercise?

Kison Patel How do you get some question to help get you a real indicator of their motivation?

Bill Stone You can find out things like they're building a house, But now cash flow is tight. They've put themselves into a kind of a vice and they don't know how to get out. That's when a liquidity event can be very important to them. Are you willing to grant them some equity if they sell the company to you? And then how much? When we buy companies, I don't ever worry about the PE firms or venture capital. They'll take care of themselves. I don't have to worry about them. And they're not going to help me once they sell anyway. The only one that's going to help me is the current management team. So I'd rather move value into the equity plans for the people that stay and give all the money to the people that are leaving.

Kison Patel Either retention plan or rollover equity for them to really be incentivized to stay. A lot of the deals more or less I'm looking at are the ones going down. And I'm curious because I feel, how do you price them in a way where you don't go too low where you're insulting them, but—

Bill Stone You have pretty good style that's not threatening. And you have to say, look, I'm looking at some sort of a range here. If we can get somewhere in the range, and you're going to have to have a range too, you know you're going to be able to sell it between here and here. And if we get it somewhere that what's in the middle or even more towards your side, and there's a chance for a deal to get done. And also they like that, like with SS&C, that we close. We're not just kicking tires, we close. We have the money and we have banks lined up to loan us as much money as we want. They know we can close. They know we have. They know we're not chasing the last nickel. That's a good position to be in.

Kison Patel And then like you said, there's different tools. If there's upside of rolling over equity—

Bill Stone Yeah. Someone will want 2 bites of the apple. They want to be able to get their liquidity now, but still have enough of a stake that if we really have a great few years, they're going to get another nice chunk.

Kison Patel Which could be a better story too. If the numbers are going down, hey, you might have to take a hit now, but you'll make it up. Let's talk about this FMC. This is an interesting deal you did back in '05. It was a $207 million all-cash deal. It was an interesting situation because the founder was trying to take this business private, and then they had Line Data had recommended the deal in. You won it. You had lockups on 91.8% of the shares, and you had a $6 million breakup fee in your favor. 10 years later, business up 50%, margins and doing well. Can we talk a little bit about that deal?

Bill Stone Yeah. So Financial Models, we had hired a guy that had run sales at Financial Models and he said, look, the only thing that Financial Models needs is to have too many people. You're going to have to take care of that. And they got comfortable being— when we bought them, they were doing $55 million in revenue and $11 million in EBITDA. Your $207 million is Canadian dollars and I think it was $165 million American dollars. And We paid $165 million for it, and Stamos owned 43% of the company. But what we invoked was Canadian takeover rules. So if you put in a superior bid, they have no choice but to take it. We put in a superior bid. I thought Line Data FMC were going to go private at a— they were going to go to private at $12.20. We ended up offering $17.70. 91.8% of the shares wanted to sell for the higher price.

Kison Patel Yeah.

Bill Stone No kidding. $55 million and $11 million in EBITDA. That was April of '05. By December of '05, they weren't doing $11 million in EBITDA, they're doing $34 million. By April of '06, they're doing $44 million. And by December of '06, they're doing $48 million. We paid $165 million for $11 million in EBITDA, which is 15 times EBITDA. But within a year, it was just a little over 3 times.

Kison Patel Did you have a line of sight that was going to happen? Was there some confidence that can uniquely create value with this asset? Or did you get lucky?

Bill Stone No, we didn't get lucky. It was good timing. And they had a whole floor that was empty. They were in Mississauga, just north of Toronto, a whole floor. It was costing them $680,000. They were only making $11 million. That's 6%, 6.5%. Come on. They named all their conference rooms by cities, New York, London, Paris. Toronto, Montreal. You have a conference room named Nairobi. You sell financial systems. How many can you sell in Nairobi? Not many. It was a lifestyle company. SS&C is not a lifestyle company. It is a public company and it is trying to get the best returns for its shareholders.

Kison Patel So you saw efficiency gains that you could get under your ownership. It sounds like your bid was like 30-plus percent over what the competing bid was. How do you build a logic to do that versus just, hey, I'm going to put 5, 10% over

Bill Stone Well, Canadian takeover rules, superior bid is I think 20%. Okay. It's not superior.

Kison Patel Yeah, it's marginal, I guess.

Bill Stone Yeah, 'cause they don't want it to be tit for tat.

Kison Patel So if you put that superior offer, they can't come back and—

Bill Stone They can top it.

Kison Patel They could, okay.

Bill Stone Sure.

Kison Patel Then it kind of makes them look bad too.

Bill Stone Then I can top them again.

Kison Patel Yeah.

Bill Stone Those keep companies honest 'cause they know that interlopers like me are gonna say, getting that for that price. I'll pay more than that.

Kison Patel There's this view too of how much you negotiate on the front end of the deal versus how focused you are, like your example of value-creating activity on the back end. It sounds like there's a much bigger variable on how you execute on the back end versus negotiating that 5%, 10% on the front end.

Bill Stone It's both.

Kison Patel It's both?

Bill Stone Yeah, it's both.

Kison Patel So to understand the value to make sure you're not overpaying on the front end, but you're being competitive at the same time.

Bill Stone Yeah. And usually it's competitive. They're trying to get private, But they weren't about ready to offer what I offered.

Kison Patel So when you make that bid, it's not so much based on what competitive bids are looking like, it's more of your own view of how you would price that deal. Does the competitive bids influence your bids?

Bill Stone Can. Depends who it is. Usually against private equity, I can always win.

Kison Patel Why?

Bill Stone Because I get synergy. They don't get synergy. I don't need their CFO. I don't need their legal department. I don't need all this. overhead. They were traded on the Toronto Stock Exchange. We're not going to trade on the Toronto Stock Exchange. So you save all those exchange fees and I don't need to have another board. I don't need another public accountant. I don't need all that stuff. All that overhead goes away. But if you're private equity, you got to have it all. That's opportunity. Strategics can always bid more than private equity because they have synergies.

Kison Patel You start to see some private equity more like strategics when they at least get in with the platform and they're doing a lot of their add-ons, but a little different.

Bill Stone Yeah, it's different. And they're the money guys.

Kison Patel Yeah. I'm wondering if part of the reasoning is because there's sort of a view on what we're optimizing for an exit at some place where you're not necessarily optimizing for an exit, you're optimizing for public markets' perception of the business, or is there something else?

Bill Stone That's pretty true. At the same time, right, the private equity guys have time horizons. they want to hold it for 5 years, or they maybe want to hold it for 7 years, but it depends what's going on. And if they have it for 3 years and somebody comes and offers them a really good price, they're going to sell. They're not in the business of having 20-year investments. That's not their business. 7 years is a long time. When Carlyle was in us, they started selling after 5 years.

Kison Patel Did you have to engage when you put that offer in? Because you're essentially buying a public company. Did you have to engage with their board at all? Or is there certain things that you do to try to Get some intel that way?

Bill Stone Yeah. You submit a non-binding letter of intent and then you submit a binding offer. They take it to their board and their board goes yay or nay. They got a bid for $1,770 and they got another bid for $1,220. They're all going to get sued if they take the $1,220.

Kison Patel And then the breakup fee, you negotiated a pretty good breakup fee. How does that come in play?

Bill Stone We have bankers too, and they say this is customary. And so, okay,

Kison Patel In some ways it sounds like public deals are easier than private deals.

Bill Stone Can be, but it can be more complicated too.

Kison Patel A lot more shareholders.

Bill Stone Well, shareholders and there's regulators. There's a lot of—

Kison Patel This deal you had a lot because it was in Ontario. So there's Securities Commission, Superior Court of Appeal, and on

Bill Stone And on. So you

Kison Patel Had a lot of lawyers.

Bill Stone We did have some lawyers, but that's the ante. If you're going to play, you're going to have lawyers, you're going to have accountants, you might have consultants. We try not to have too many consultants.

Kison Patel Why is that?

Bill Stone Expensive. And then they leave. You taught them all the stuff. No, no, no. We want our people to know all this stuff.

Kison Patel But picking up the theme around efficiency, this second deal I want to pull out, Lobop. This is a deal— is it based in London?

Bill Stone Yes.

Kison Patel This is back in 2012, about $890 million and €572 million, all-cash deal. beat out TPG at the time. The same thing, you had a quote around synergies. We don't need 2 CFOs or 2 CEOs, we need one. Then you had regulators between the US, UK, Cayman, Luxembourg. I don't know what this means. It says it closed with a Luxembourg squeeze-out at 99.95%.

Bill Stone So it's just that you couldn't not pledge your shares, give your shares, because it was a superior deal and they didn't want tail-end pieces that had to be chased down after the deal closes. This

Kison Patel Is like a prime example of the strategic beating the private equity. And again, it was the same line you had. We don't need 2 CFOs or 2 CEOs.

Bill Stone It's the same thing. Yeah. I remember talking to Hans Huffschmidt, who was their CEO, good guy, smart. We went out to see them and he basically told me that none of their customers wanted us. It was TPG and Advent, private equity firms. And I said, is that right? So you, Hans, an FX trader out of Salomon Brothers, and me, a CPA out of Peat Marwick, they want you to do their accounting, not me. I said, I bet you, Hans, if I bid more than you, I bet I win. And if you bid more than me, I bet you win. And by the way, Hans, if I bid more than you, I will be relentless to close this. And my banker said, when you said that, all of their people just sat back in their chair and went, oh, he's not kidding.

Kison Patel Where was that setting? Was that in a boardroom?

Bill Stone Yeah, in Mayfair at Globop.

Kison Patel With the whole board present, or is it just—

Bill Stone Just a few of them.

Kison Patel A few of them, okay. It's interesting how that happens in deals. It was essentially like a form of banter, not so much playful.

Bill Stone No, it's serious business. It's $890 million. That's a lot of money.

Kison Patel But it's like it took it personal. It's like the customers don't want you, you know? And then—

Bill Stone What are you trying to tell me? You know, he's selling.

Kison Patel Yeah. Is it selling or like an almost like intimidation?

Bill Stone Trying.

Kison Patel Trying. It doesn't really work though, does it? I'm trying to think of scenarios where it might.

Bill Stone Well, but some people—

Kison Patel I've had that with competitors where they told me that we're going to outcompete you. It doesn't bother. Now we're doing more revenues than they are.

Bill Stone Now, I grew up in Indiana. I know how we solved disagreements, and that's my background. I understand it. Okay, that's where we're going, then let's go. But that was a great acquisition for us. A lot of really smart people really helped our fund administration business. At the time, we were like 8th in the world and they were 9th, or we were 9th and they were 8th. And after we did the deal, we were 3rd. And then we were soon 2nd, and then we were soon 1st. So when we closed the deal, it was State Street 1st, Citgo 2nd, us 3rd. And within 2 years, it was us 1st, State Street 2nd.

Kison Patel Wow. So it was a big move to get that market share up.

Bill Stone Yeah. And now that business does $1.7 billion in revenue, something like that.

Kison Patel And you bet on the synergies. That's the bottom line is you got the discipline. You sort of know.

Bill Stone They were a fund administration company and they're in Mayfair. So rent was £90 a square foot. You know how long we were in Mayfair? About a month.

Kison Patel Just go, get out, please. Can you teach me about how you think about capital allocation? I know it's different because I'm private, you're public, but a deal like that, you're public, what are your levers? You can get different kinds of debt, you get more equity, or how do you think through Hey, I'm about to do this $900 million deal. How do I put the capital together and do it in a way that you know how you're allocating it for the return on capital?

Bill Stone Yeah, we're a highly profitable company. We can pay the debt down fast and we can cover the interest expense pretty easily.

Kison Patel The debt service is one, you know, your cash flowing and say, hey, there's a debt service ratio we can definitely cover.

Bill Stone And that's— yeah, we are not anxious to use our shares.

Kison Patel Is there like a rule of thumb of what kind of like debt ratio coverage

Bill Stone You're looking for? It's usually How many times is your EBITDA levered? Well, right now we're a little less than 3 times levered. We've been as high as 6, then we pay it down fast. Done that several times. Paid it down fast after Globop. We paid it down fast after Advent. We paid it down pretty fast after DST.

Kison Patel That's part of it. You do it to get the deal done, but then when you really execute on the cost synergies, you sort of get

Bill Stone That— Get cash flow.

Kison Patel Yeah. You get your cash flow back, then you can pay that debt down faster and you'll just Pay it down as quick as you can.

Bill Stone That's the concept.

Kison Patel All right. That's my big takeaway today. I'm going to go out and do a deal and apply it right after this. How does that work? Do you have bankers that just sort of manage all that debt placement for you? Do it all internal? Like what?

Bill Stone No, no. Yeah. We use Morgan Stanley or Goldman Sachs or Barclays or— yeah, we use all kinds.

Kison Patel Just got a few banks on Rolodex, hit them up, let them know you're looking at a deal.

Bill Stone Yeah. And we're very strong credit. People like our debt. They know we pay it back. They know we pay it back fast. And that we're very sensitive to our debt holders as well as our shareholders. And people say, why do you care so much about your debt holders? I'm going to do another deal. I'm going to need more.

Kison Patel I've talked to a number of your team members, colleagues, employees. They hold a lot of respect for you. There's some balance you have of the discipline is part of the culture for sure. They definitely know things need to get done, but somehow you've maintained to be approachable. there's some unique balance that you've figured out. I don't know what you're thinking of, how do you approach it? Especially when you buy a business and here's a bunch of employees that are now SS&C employees that didn't choose to come work for SS&C and they maybe heard things about Bill Stone, but how do you sort of build that impression when you start working in that business?

Bill Stone Well, I smile at people.

Kison Patel You smile at people?

Bill Stone And I laugh. And I'll tell them, I said, I've never In my life, had anything that was as important to me, such a compliment to me, than to be able to lead such a great group of people as you. My ability to lead you is one of the great accomplishments of my life. You're important to me, and everybody knows they can send me a text, send me an email, call me, and I get back to

Kison Patel Them. You're genuine or authentic. You capture that point too, of if this team doesn't work out, this deal's not going to work out. you're sort of acknowledging that face-on. I think that's the other part is you got to have that burning desire. From the moment you wake up, it's just you're motivated to do. You still have it. You're approaching 70, past 70?

Bill Stone 71.

Kison Patel 71. You haven't lost it yet?

Bill Stone Not yet.

Kison Patel I love it. That's a great inspiration.

Bill Stone A lot of hard work, some good breaks, some bad breaks, fight through.

Kison Patel It sounds like you're still motivated about what's coming up next too. As I said, everybody's from what I talked to, a little nervous. Climate's changing with the AI landscape, the whole restructuring business. Do we—

Bill Stone Yeah, we're going to do $6.7 billion in revenue, close to $3 billion in EBITDA. Life's not all bad.

Kison Patel No, you got a great spot.

Bill Stone Yeah, we're in a pretty good spot.

Kison Patel This Blue Prism deal. So my notes say this is another UK-based company, 2022, $1.6 billion, €1.25 billion, all cash. Vista Equity had already recommended a deal to fold it into TIBCO. You jumped it. This was done under the UK Takeover Code, Rule 2.7. It's a bolt-BIDCO cooperation agreement. It was funded with $1.53 billion of fresh debt at SOFR plus 225 with 50 bps floor. Right as the rates moved. That was a fun deal for you?

Bill Stone Well, it was a good deal. And it also showed that we were committed to artificial intelligence and robotic process automation and natural language processing. I like to tell people that, look, SS&C doesn't dabble. We go in, we do it. We got 1,400 people that were experts in these things. And then we just did Callistone and we brought another 250 people that specialized in Tokenization and other forms of cutting-edge financial technology. So we spend the money and we have a better set of products for our customers and more services. So that's been a very big competitive advantage that we have.

Kison Patel How did this UK takeover code, how does that work?

Bill Stone Very similar to the Canadian takeover code. You can put in a superior bid. They have no choice but to Either top it or take our bid.

Kison Patel A real ultimatum. That's that Rule 2.7.

Bill Stone Yeah.

Kison Patel The same economics applied when you look at this deal, you put the same view on synergies, made sure that the model really worked for you to—

Bill Stone Well, also that we could deploy a lot of bots, robots into our business. We've deployed 3,500, saved us a lot of money just in our own business. So it's recognizing that Some of these technologies are very effective in making you more efficient.

Kison Patel Makes you more efficient. Does that mean you look at it as a way to reduce headcount, or is it looking at more of—

Bill Stone It changes people's jobs, so it's less competitive. But at the same time, I tell people, look, you got to be willing to change. You got to be willing to learn new things. Otherwise, you put your job at risk because we can use a bot to do that. But we have all kinds of training courses, all kinds of this, all kinds of that. We're We're here to help you, but you got to be here to help yourself.

Kison Patel You sort of really model that out of here's other additions that you're going to get in terms of efficiency gains, and then you top the bid. I see this pattern though. In this case, you're strong cash flow, you're leveraging debt when you're not leaning towards an equity raise or any of that. This is my lesson here. You want to preserve your wealth, you should probably look at using debt.

Bill Stone Yeah. You got to make sure you can pay it off. You got to make sure you can handle it. Once you can handle it, it's a lot cheaper than your equity.

Kison Patel That's a good point. What about terms where you have the seller do the financing? They don't like that. Earnouts? Big earnout person?

Bill Stone That can work, but you got to understand the terms and they're going to want their pound of flesh.

Kison Patel Exactly. On this Prism deal, I'm curious about— you're running a fairly large publicly traded company. How do you think about keeping the market happy? You got to do your investor calls, you got to talk to the analysts on earning calls, And there's just a way you operate a business. I feel like there's this inevitable pressure to grow. How do you look at that as a business? Is driving more acquisitions a big part of feeding that expectation, or what does that view look like?

Bill Stone In the heyday of us doing a whole lot of acquisitions, interest rates were low, prices weren't too high, and we moved fast. People started following us, mimicking what we were doing, and they were raising the prices, and interest rates went up, and it wasn't as attractive. So we slowed down a little. Right now, software businesses aren't very attractive because you don't know where the re-rate's going to stop. I don't know about adding more debt for software assets that are going to lose value no matter what you do. Once again, you got to be thoughtful.

Kison Patel Yeah. I would assume you'd be more conservative because if you're trading less, then you'd have to look at valuing other assets less.

Bill Stone Exactly.

Kison Patel That's tough for people to accept.

Bill Stone Yeah. And then they won't sell.

Kison Patel One thing that we talked a little bit about before was trust. And this line was, I don't walk away, I run away. Can we talk a little bit about sort of your approach and how you think about some of the deals and the factor of trust, how it comes in play?

Bill Stone Well, I always just say, if Target's lying to you, don't walk away, run away. And I don't care how small a thing it is because you're not going to know about that company nearly what they know.

Kison Patel If they say they're doing $10 million revenue, look at the numbers, find out they're doing $8 million revenue, gone.

Bill Stone We're gone. I just had one I was going to do and I said, look, you dropped your revenues by 10%. What the hell is this? We're a couple weeks away. They wanted us to do the deal. I said, we're not going to do it. We're not. We wanted it, but what else aren't you telling us?

Kison Patel So that's one red flag, the lie, and you're out. Over the years of all these deals you've done, do you have a total count of how many deals you've done so far?

Bill Stone I think it's a little bit less than 100.

Kison Patel Okay. We rounded up to 100.

Bill Stone We've done a lot and we've met a lot of people and we've done, you know, everything hasn't been perfect, but there's been a lot of good deals.

Kison Patel What I'm trying to get at, is there any unique thing around diligence that you've built in now that, hey, this is something that you probably wouldn't do on your first deal, but we've done enough deals. This is a key thing we do in diligence, the beer test or something. I don't know. Like, what is it?

Bill Stone Well, you know, it's the same thing, getting prepared. Be prepared. It's like doing this interview. You can't sit there after 15 minutes, be out of material. So, I need an hour. 15 minutes in, you're grasping for straws. You can't do that.

Kison Patel No. I got a lot to learn from you.

Bill Stone That's the whole thing. You just got to get prepared and you got to know when you're prepared.

Kison Patel Well, I got to ask you, what's the craziest thing you've seen in M&A?

Bill Stone Well, I mean, some of the valuations, pretty amazing.

Kison Patel 2021 valuations?

Bill Stone Valuations in the businesses I've bought mostly really were peaking in 20, 25 times EBITDA.

Kison Patel Wow.

Bill Stone If we got 25 times EBITDA, we wouldn't be trading at 15 to 20, we'd be trading at 40 to 50 or more. The valuations, and it's making sure you can get a valuation where ultimately you can make some money. That's the concept.

Kison Patel That's true. But it's gotten out of hand. Why is that? Is it because there's just so much capital out there and PE firms got pressure to deploy it? So they get creative with the model and—

Bill Stone Some of them have so much money. AWS, Meta, or Google. They just got so much money, it's unbelievable.

Kison Patel A lot of capital out there. That's why I wonder what this market— still a lot of money out there. We'll come back around. Bill, thank you so much for taking the time. I learned a lot from you today.

Bill Stone I learned a lot from you too.

Kison Patel I'm going to become a better M&A scientist.