When Steve Bene joined Pandora as general counsel, it wasn’t a relaxing transition. His first challenge was to work with 20 legal professionals to complete the first significant acquisition of another company in Pandora’s history.
Pandora, one of the most popular music-streaming services, has created a business model that uses statistical analysis and human curators to find songs and artists listeners are likely to enjoy based on key searches and constant feedback of likes and dislikes. By collecting demographic data about its users, the company is able to sell targeted advertising. It also shares data and trends with artists, artists’ managers, and recording labels to aid their marketing efforts. For example, Pandora’s data helps managers find geographic locations where their artists are popular to help them plan tours and promotional appearances.
In early 2015, Pandora bolstered its ability to assist artists by acquiring Next Big Sound (NBS), a company that develops statistical analysis software that examines media, download sites, and other music services. NBS can predict when a new band is about to spike in popularity based on trends in social media, digital radio, and download sites. The acquisition, completed in May 2015, adds to Pandora’s analytical capability.
For Bene, who joined the company in October 2014 from video game developer Electronic Arts, the NBS deal was a chance to learn more about his team and create a framework for Pandora to make future acquisitions.
Pandora’s legal team was faced with several issues and considerations. How would the deal impact NBS’s relationships with other data sources? If certain sources were unwilling to share data with NBS after it became part of Pandora, NBS’s ability to analyze trends accurately might be compromised. Due diligence included extensive and prolonged conversation on this issue with NBS leaders to ensure sources would continue to provide vital data that feeds the company’s analytics.
Another concern was more personal: would the key players at NBS be willing to become Pandora employees?
An early area of focus was ensuring effective communication among all attorneys involved. “You need to carefully manage communications between both sides’ inside and outside counsel,” Bene says. He spent time upfront to “work out the dance between communication protocols,” so he and his team knew who was doing what in the due diligence process.
This attitude paid off. Negotiations proceeded without rancor or much disagreement, Bene says. With no issue approaching a showstopper, the acquisition that appeared complicated became straightforward. “I’ve been doing acquisitions for about 25 years, and I can say without hesitation that NBS was among the smoothest to execute,” Bene says.
Modern Counsel sat down with Bene to discuss the ins and outs of the Next Big Sound acquisition, which marks a time of growth for Pandora—despite the increasing demands of competitors such as Apple Music and Spotify.
Modern Counsel: How did the process of the acquisition set a framework for future deals?
Steve Bene: Pandora didn’t have an outside legal partner for M&A previously. I’m a firm believer that you need both inside expertise and a credible, really experienced outside law firm in order to make deals run smoothly. That’s primarily because the acquisition agreement, negotiation, and a lot of the corporate due diligence should be done by an outside law firm because they do these kinds of deals day in and day out, and they have the best experience on what the current market is in terms of representations, warranties, and those sorts of things.
You also need a really experienced internal team, because certain due diligence is best done by people internally who know what they’re looking for and are going to have to manage the company that you buy once the deal is closed.
MC: What did outside counsel contribute to this transaction?
SB: Part of the process—before even approaching the other side—was to come up with a form for acquisition agreements. The bulk of the agreement lives in the representations, warrants, and indemnities. Those all need to be specifically tailored for your type of business because they are meant to reflect business and operational risks. We didn’t have one of those at Pandora. We spent a lot of time with Covington and Burling figuring out the right balance of reps, warranties, and indemnities. Now that we have that, we have a starting point that’s a little further down the road for the next deal.
MC: What might change in future deals?
SB: Although we worked well with Covington and Burling, and I would love to be in a position to work with them again, we will do the same type of process again with other counsel, as well. I believe you have to have more than one go-to law firm. Somebody else’s perspective will make the Pandora form stronger.
MC: What implications does this deal have for Pandora’s business strategy?
SB: One area of common focus between the two companies is advertisers. NBS has been able to find the right artist partners for certain brands. If, say, a soft drink company wanted to develop a campaign around music, it could work with NBS to create a summer tour with a hot or emerging artist who will resonate with a particular segment of the population—that’s something that both Pandora and NBS have been doing quite effectively for a while. Combining our capabilities has a lot of potential. Eighty percent of our revenue comes from advertising. The ability for us to partner with national brands will only get better when we add the
capabilities of NBS.
MC: Do you expect NBS to strengthen your relationship with the artist community?
SB: We are, in effect, two companies focusing on providing as much data and assistance as we can to artists for career development. We have 80 million listeners telling us all kinds of things about the kind of music they love. We bring this data together in our artist marketing platform that gives credentialed artists free access to a dashboard with all the information that we have about how often songs are being played on Pandora, where the listeners live, and a whole host of other data. That dovetails perfectly with NBS’s analytical suite, which takes social media and other data and figures out how an artists’ activities—like going on a TV show, participating in an interview, or appearing in a news cycle—affect public awareness of their careers. They’ve also developed analytics that predict which artists will break out and when that break may occur. Combining the two companies will allow us to incorporate more analytics and further enhance these tools. It adds Pandora’s incredibly rich set of data to NBS’s powerful analytics.
MC: Coming in as an outsider, how have you eased your transition and established trust with the legal team?
SB: Before I accepted the job offer, I insisted that I sit down with most of the senior folks in Pandora’s legal department. They got a chance to evaluate me and to make sure that I am someone they could work with. I’ve also worked extensively with the team on career development. I’ve made sure there are opportunities for cross-training in new areas, for example. I’m a big champion for everybody looking ahead in their careers, whether that’s at Pandora or elsewhere.
