R&G Tech Studio Presents: Strategic Transactions Co-Leader Marko Zatylny
On this episode of the R&G Tech Studio, strategic transactions co-lead Marko Zatylny sits down with technology, media & telecommunications co-lead Ed Black to discuss how the current regulatory and geopolitical environments are affecting how tech companies are evaluating future opportunities globally.
Marko Zatylny: I am in our Boston office. I live in a small town that's a suburb of Boston that nobody has heard of—it likes to refer to itself as “horse country.” Whenever I tell people I live in Dover, they think of Dovers of every other state and country other than Massachusetts, but that's where I live. I spend a lot of time in our New York office. I find myself there right now and find myself here at least a couple times a month for a few days. And then, in the winter, I always find reasons to spend time in our San Francisco office.
Ed Black: You're not just an M&A attorney, yourself—I think inside Ropes, you're the co-head of our strategic transactions group. Is that right?
Marko Zatylny: That is correct, yes. Our strategic transactions group is a group of lawyers across a number of different specialties that focuses on companies, operating companies, compared to private equity funds or other funds—that's how we distinguish ourselves in that group.
Ed Black: I know you have that administrative function as a leader at the firm, but now, your practice itself—I have this impression that it's pretty much M&A all the time, but I may be wrong there. What's the quick characterization of your practice?
Marko Zatylny: I like to think of it as M&A most of the time, not quite all of the time. When I think about M&A, I think about a lot of different kinds of M&A transactions—and when they get a little bit crazy, then they get a little bit more fun. So, that's most of what I do. I also do help companies on governance and disclosure issues because a lot of what I do on the public company M&A side is also relevant for companies who are just public and have to decide what the best thing to do on a Delaware governance question or an SEC rule or disclosures question. So, that's also part of my practice, but M&A is my sweet spot.
Ed Black: Let's turn, specifically, to tech. I don't want to ask the question in a legal way, like what laws you apply, so let's just talk about the people. So, who are the types of clients in tech where you solve their problems and you make them happy through M&A?
Marko Zatylny: They tend to be public companies, for the most part—that's where I spend most of my time. A good example of me working with a client is a public company CEO or head of business development, along with their legal team—their legal team is a general counsel or head of M&A—and they start to call me when it's time to think about how they might want to structure a deal or how they might want to join a process or start a process, and we roll up our sleeves, see what we can do, and get at it.
Ed Black: Are there clients you can mention or industries that you think you have the most experience in?
Marko Zatylny: Yes, my experience is in semiconductors—I work with a handful of semiconductor companies. MACOM Technology is perhaps the most active among those. I also work with a company called Teradyne, and they actually make testing equipment for semiconductors, so they're adjacent to semiconductors in that regard. But, they are also moving a lot into robots and in industrial robotics, and so, that's a fusion of software and things like carts that move boxes around in warehouses, so they're doing some interesting things in the robotics space.
Ed Black: Now, if you look at those clients, are there things you can point to where you would say, "This is an example of what I do"? Don't need a comprehensive list of everything you do, but what's an example of the kinds of problems that come up, the kinds of issues that you solve for as you carry out these deals?
Marko Zatylny: I did a deal for a tech company last year, where the problem that we were solving for was the client had to acquire a technology—it was a bolt-on acquisition, where they were adding an important piece of technology to their product line. The problem was that it was an expensive transaction, and the company still had a long lead time to bring that product to the market, so it was going to be a heavy research and development phase, and my clients did not want to pay for it through their earnings, through their balance sheet. As most people know, public companies pay close attention to their quarterly earnings, and taking on an investment project of that size and the potential drain that it would have on earnings was a consideration that almost made the deal not palatable, and so, we had to come up with a structure. The internal team at the client and I put our heads together and we came up with a joint venture structure, and we found a private equity firm who was willing to be our financial backer. We basically agreed that the joint venture would be controlled by the private equity fund, and that would be the operating entity for a period of up to two or three years. From there, our client pre-wired a purchase option from the joint venture at a return that paid the private equity firm handsomely for its management of the operations of that company and the development of that product. And when the product met certain milestones, our client was obligated to purchase that technology from the private equity firm, and pay them for that return, and everybody wins. So, it’s not your typical M&A transaction, but one in which everybody got a piece of what they were looking for by bringing in that private equity fund.
Ed Black: What an interesting structure—it's a crazy hybrid of equity, debt, structured governance, and what I imagine is a pretty complex straight-ahead technology agreement about who's going to do the R&D and what the milestones are. It's kind of a greatest hits album—you got everything all at once.
Marko Zatylny: Yes, maybe that's what the closing binder should be called, "The Greatest Hits."
Ed Black: That's super interesting. Maybe we have time for one more? One of the things that has come up over and over again, at least in terms of the popular press, is this chilling environment, globally, especially between the U.S. and Asia. If I go back 10, 15, 20 years, people were flying into Asia with tech deals, assumed to be the world's largest consumer market in China, and globalism assumed as a permanent feature of the economy. But, at a minimum, things aren't quite as enthusiastic as they were. Do you see that affecting M&A deals? And, if so, how has this turned up in your practice?
Marko Zatylny: Yes, I see it in M&A deals, and it's certainly affecting how tech companies are evaluating opportunities and deciding how they're going to exist in this new environment. The first thing that I see is there's very different ambitions on the part of semiconductor companies, for example. I deal with this with our semiconductor clients, where the regulatory and geopolitical environment applicable to them makes it extremely difficult to do any deal with the China component, even in what we would otherwise have considered a number of years ago to be fairly straightforward and uninteresting technology from a national defense or other perspective. And so, it doesn't even matter how the products relate to what used to be the classic hot-button issues, like national defense. Now, it's just if you're doing a semiconductor deal and there's an Asian component to it, then you have to worry about whether you're going to get regulatory scrutiny from anti-trust regulators, CFIUS regulators, export control regulators, etc.
Ed Black: Have you had deals where that popped up? Have you had to solve problems for a client who had those issues turn up in a deal?
Marko Zatylny: Yes—in fact, we did a deal where we had to decide what level of risk we were going to take there. The client was very interested in making inroads into the 5G network growth, and they had to decide how they were going to do that. And so, what they figured out was 5G, in their estimation, was going to start in China—that was going to be the initial green shoots of 5G and it was going to grow from there. They believed that the way to get the market, generally, was to be there when China figured out the best way to deploy 5G, and they thought that they had the right technology to do that. The problem, obviously, was bringing new technology from a U.S. company into China, and so, we had to decide, "Are we going to try to do this? And, if so, how are we going to manage the regulatory and other risks that come with it?" It turned out that we pulled something together—we pulled together a transaction that actually allowed this company to bring technology, or license its technology, into an entity sitting in Hong Kong that could lead the deployment of 5G in China. I will say that in that deal, what we were trying to do was something where we weren't certain how the regulators would respond. Part of the job there was advising the client that we've got a regulatory strategy—and it was a well-thought-out regulatory strategy—but, ultimately, one that we couldn't guarantee would succeed, and so, it was up to us to help the client decide on that risk. Would we go through the process of negotiating this transaction in a way where we knew that it could be unwound? Because you can never predict with absolute certainty how regulators are going to respond, and, in particular, where it's a hot-button issue like that. So, it was a really fun deal in figuring out how to pull that together, and how we would convince regulators to approve that kind of transaction and see the value in it. We got all the way to signing, the regulators swooped in, and, ultimately, their views were at least as aggressive as we predicted. We had to walk away from the deal, but that was exactly what the plan wanted. It wanted to take a run and see if it could do that—it felt like it was that important. And when we got to the end, we didn't get to the finish line, but they understood that risk, and we helped them manage it in the best way possible.
Ed Black: I've got one more question touching on M&A, and then, we're going to shift gears a little bit to some more fun questions. The one other question I have deals with this concept of market reset. We've all been around for the past few years, where, sure, there's a pandemic, but it's like the pandemic actually boosted the economy somehow—M&A activity through the roof, SPACs just pulling money out of the public market with, "We'll find out how to spend it later." And then, we went through kind of a reset—a market reset, a valuation reset. We've seen a lot of activity across public companies and public markets drop off. How has the reset affected M&A, in your experience, for tech companies? Are people still talking about deals? How do you see it affecting day-to-day life?
Marko Zatylny: It's a great question, Ed. What's really happening, in terms of what I see, falls into two buckets. There were a number of clients who really focused during the pandemic—even before and after the pandemic—on being as busy as possible in the M&A space. They saw opportunities—they rushed into that flurry of deals and were very successful in acquiring a lot of technology. When things started to slow down, it's almost like that caused them to pause and think at a higher level than they had been for a couple of years, and they realized, "We've got a lot of integration work to do." And they pushed the pause button on M&A, either slowing it down or stopping it altogether while they focused on integration. What I think is interesting is, over the last 90 days, even those companies have started to realize that there are opportunities that they will miss out on if they're not in the M&A market. One client called me last week with a desire to jump in on a fairly substantial process for a tech asset that I was wondering if I was going to get a call from them in the first six months of the year, so they jumped back in. The other examples that I'm seeing are there were companies during the pandemic that did slow down on M&A activity, despite the market being hot. One of those clients called me with two deals where they wanted to acquire different technologies, and so, I saw them reflecting on opportunities that perhaps they had let slip by during the pandemic and they're getting back in. Three months ago, six months ago, these kinds of opportunities seemed to be doing nothing but slowing down, but those are two great examples of clients who are seeing opportunity in the M&A markets again.
Ed Black: I'd love to talk more about the substance, but we're running out of time. I have to save room for my favorite questions—they are the questions I sometimes refer to as the "personality test." Do you have a favorite movie?
Marko Zatylny: I told my wife on Saturday at the end of watching a movie, "I think this might be my favorite movie." And that movie was Lost in Translation.
Ed Black: Next question, which is the question I know you dread because I know you know I ask it on other R&G Tech Studio podcasts: In a peanut butter and jelly sandwich, what is more important, the peanut butter or the jelly, and why?
Marko Zatylny: Ed, I knew you were going to ask this question, and my view is that you're asking this question after these wonderful podcasts to remind people that lawyers can't answer questions without getting lawyerly. So, they are going to talk about why it's got to be the peanut butter and it can't be the jelly, or it's got to be the jelly and it can't be the peanut butter, and all of a sudden, you're giving them the Socratic law school class. I refuse to answer the question.
Ed Black: So, you transcend the question? Alright, this will be the last one. You're having your happiest dream, in your happiest sleep, on your happiest night, and in that dream, you're doing your favorite thing in your favorite place. What is it? Where is it? Give us the description.
Marko Zatylny: This is where I get to tell everybody that we're not just pretending that we're friends on this podcast, Ed—we're actually friends. So, here I am—it's a bright, sunny day, and I'm in Europe. My legs hurt and my lungs hurt, and it's because I am climbing a mountain somewhere in Spain or France. I'm doing it with friends. I can't wait to get to the top. And I go through this thought process—I don't know if you do this, too, but I go through this thought process of, "Why do I actually like this?" You're putting yourself through pain for an hour or more without any break, and for some reason, to me, that's a good time.
Ed Black: Sounds good. Now, I know that when you're on that hill and you're thinking about, "Why do I like this?" you have the added advantage of looking ahead and seeing no one and looking behind and seeing everyone, but does that particular viewpoint play into your appreciation of this moment?
Marko Zatylny: I feel like you're trying to trick me again here, Ed.
Ed Black: This is like the peanut butter and jelly.
Marko Zatylny: Ed, I love riding with my friends.
Ed Black: Especially when they come second.
Marko Zatylny: Choose your friends wisely.
Ed Black: Choose your friends wisely, right. Marko, thank you so much. The R&G Tech Studio podcast is available, of course, on the Ropes & Gray website and also available wherever you get your podcasts. Thanks again.