We’ve seen our fair share of promising M&A courtships brought down by buyer missteps. These can crop up during any of the three deal-making stages — courtship, due diligence and negotiation. This article will tell you how to avoid the most common ways that buyers kill M&A deals.
Of course, not all blown deals are the buyer’s fault. In our article HOW SELLERS KILL M&A DEALS we bemoan their sins as well. You might read about them so as to be in a better position to prop sellers up before they fall.
Indeed, you can expect minor stumbles by both buyer and seller. But where you enter dangerous territory is when they keep coming. It’s death by a thousand duck bites. They gradually erode one or both of the two ingredients key to every successfully closed deal — trust and compromise.
Lost deals are a tragedy not only because of everybody’s high cost in time and money. It’s also because many of these mistakes are avoidable. To sidestep them, read on.
When Big Is Bad
A whole dysfunctional family of deal killers crops up when the buyer’s business differs a lot from that of the seller. Most often it’s due to the buyer’s bigger size. That said, we’ve also seen differences in industry, location, culture, etc., that generate friction and confusion. Whatever the types of differences, if they’re not overcome they can become another way that buyers kill M&A deals.
The thing about big buyers is that they may have been insulated for years from much contact with other companies or ways of doing business. In their market dominance and sometimes even arrogance, they forget that outsiders aren’t familiar with the peculiarities of their oft-political inner world.
This big buyer attitude can drive seller ignorance and suspicion. Sellers who don’t understand the rationales behind a buyer’s positions, M&A process, motives or even terminology may withdraw trust.
For instance, we were in the room when a buyside client said something to the effect of, “This is how we do things here.” Imagine the buyers’ shock when the seller team said thanks for the interest but they didn’t think the match would work.
Is There an Antidote in the House?
What’s the cure for problems based on dissimilarities? Buyers do better when approaching their targets with patience, an open hand and willingness to exchange ideas on how to proceed, why they think a transaction could be win-win, mutual respect, etc. Lubricating the conversation with a relaxing dinner or two among decision-makers doesn’t hurt either.
Use seasoned executives who display low-key confidence for this purpose. It’s about M&A not the MBA. Recall that most sellers don’t have to sell.
My Kingdom for Clarity
From the outset, buyers owe sellers a clear explanation of who makes the final decisions over purchase terms and post-close integration issues. Or at least the process by which such decisions are made.
In addition, the buyer should continually update the seller and confirm how committed its decision-makers are to going forward. We had a case where the boss at a very large and overseas buyer– a hands-on yet rarely available executive chairman – wasn’t even aware of the fact that a deal was in the works until it reached his desk for approval.
He then abruptly shut it down. Oh, the humanity!
Another problem with unclear decision processes and commitment is that sellers get worried they may be walking into a “used car lot” scenario where they negotiate in good faith to reach a hard-fought compromise only to find that the terms are now subject to a second or even third review and modification by some Wizard of Oz lurking behind the curtain. Confronted with this, sellers lose the desire to compromise simply as a matter of self-defense.
Smart buyers avoid these situations by asking their M&A team members to:
- Report regularly to decision makers on their progress with the seller;
- Present to them the key factors that affect value as such become available;
- Make the best deal possible within certain mutually agreed-upon limits;
- Then to lay out the finalized deal terms to the board for an up-or-down vote. For this to happen, obviously the board must have trust in the business skills of its M&A team.
Use All Good Speed
The buyer’s executed letter of intent (LOI) fires the starting gun on the M&A process. Among other things it defines when to expect a close; how much will be paid for the target, how and in what form(s); plans for seller’s employees post-close; when the LOI expires, etc.
Sellers need this sort of specificity because they typically have much more to lose from a deal gone off the rails than buyers.
For instance, while under LOI they can be forced to shelve operating issues in order to respond to due diligence requests (about which more below); guard against leaks to employees and the marketplace; assure employees in the know that their futures are secure; and agree to a “standstill” where they can’t talk to other buyers which means they risk losing them.
Last, for smaller sellers the out-of-pocket cost to comply with LOI requirements is relatively greater than that of big buyers.
Considering the sort of stress that sellers are under during LOI, they deserve the buyer’s prompt execution of its responsibilities. Foot dragging, cavalier attitudes or opaque decision-making during this uncomfortable period weaken sellers’ trust and make them feel undervalued.
Wrap Due Diligence in a Bow
Here’s some ways we’ve seen buyers go wrong in handling due diligence:
The Data Request That Won’t Die:
- The list of requests – made by the buyer’s attorney ignorant of the dialog to date and of the business issues that are unique to the target — is pages of boilerplate questions most of which have already been answered or are irrelevant.
- After the seller responds to that list, the buyer produces another list of questions from a different internal department (like HR) that could have easily been integrated into the first list. Instead, many of the questions are again irrelevant, or are slight variations of prior questions.
- After obtaining answers to the second list, the buyer launches yet another investigation, this one led by junior employees of a large recently retained outside consulting firm with no knowledge of the transaction or of the data produced beforehand.
- All this actually happened to a sellside client of ours who — after receiving the third list of demands for data minutia and spending hours bringing the consultancy up to speed — decided to terminate discussions.
Unauthorized Contact with Target’s Customers
The buyer ignores the rules under which he or she may contact seller’s clients. Or rules were never set so the buyer simply contacts the clients without notifying the target. Big no-no. A seller hot button. They ferociously protect client relationships since mishandled contacts by a prospective buyer can do them material damage. Thankfully, the solution is simple: the parties agree beforehand to hire an outside consultant to survey the target’s clients regarding their satisfaction, suggestions for improvement, whatever the buyer wants to know.
It’s Like Due Diligence Never Happened
A related buyer mistake is the failure to integrate due diligence findings into the terms of the purchase agreement. For example, buyers who thoroughly investigate the seller’s past-due clients may not need to create complicated ways to value aged accounts receivable.
What’s Done Is Done
Once the parties settle on the language in a purchase agreement section, they should regard it as writ in stone. To use another analogy, reopening settled issues after the fact is tampering with the lock on Pandora’s Box. It’s also called re-trading.
Not only does doing that raise seller suspicions about whether negotiations have been proceeding in good faith, it can also cause delay, run up legal bills and, worse, rebound in the buyer’s face. We’ve seen buyers insist on re-opening a settled issue only to have sellers return to the table with their own set of new, now aggressive demands.
I’m a Lawyer and I’m Here to Help
On the topic of fiddling with completed work, beware inexperienced M&A counsel. They can be tempted to burnish their image in the eyes of their client by pushing for last-minute minor “improvements” that risk the entire deal. (Both seller and buyer’s counsel can make this mistake. You want an attorney who solves problems, not makes them.)
Like any rule, this prohibition against re-opening finished work does not always apply. There are circumstances where both parties could mutually benefit by revisiting language to horse-trade further. But buyers who propose to do this should pair it with a seller reward for cooperation lest the road ahead take a hairpin turn.
The Perils of Loose Lips
We’ve occasionally seen buyers allow seller’s proprietary data to escape into the marketplace, albeit nearly always inadvertently through carelessness. Buyer attention to what terms they’re agreeing in a non-disclosure agreement can prevent some of this but not all. Buyers’ salespeople are particularly porous vessels. In their enthusiasm or desire to appear important, they brag to clients about the benefits of the pending acquisition. Or they pass around the rumor that that the prospective seller is in trouble and looking for money.
On purpose or not, such leaks can not only kill deals but spark litigation. Amazingly, many buyers guilty of these sorts of sloppy internal controls are surprised by the heated reactions of an injured seller. This casual attitude gets to the heart of the matter. The fact that the seller has entrusted proprietary data to the buyer is serious business.
So buyers must go out of their way to assure that they’re keeping all information related to the deal on a need-to-know basis within the confines of their M&A team. NDAs aren’t just boilerplate formalities.
Sometimes sellers will decide that the occasional emotional outburst will have a salutary effect on negotiations. Clear the air, you might say. Or maybe they’re just reacting to the seller’s own aggression or desultory attitude.
In any case, we find it’s generally not a good idea to get into heated discussions that threaten trust and dreams of a rosy future together. Better to keep things cool and carry on. Since people tend to mirror each other’s emotions, if you maintain a reserved attitude while making the point that confrontation isn’t the most productive way forward, the moment may pass.
That said, sometimes buyers find an isolated confrontation to be useful. Like when the target…
- Needs to wake up;
- Is selling only assets (so there are no people to alienate);
- Is under pressure to sell, financial or otherwise, and you want concessions (hardball, we know, but it happens);
- Is out of the emotional loop. For instance, when the buyer is venting to the seller’s M&A advisor, not directly to its employees or owners.
About What’s Next
A final source of seller concern is what life will be like post-close. So well before that date approaches, you owe your target a series of planning sessions to tackle such subjects as —
- How they want the deal announced to employees, clients and the public;
- Budgets; reporting relationships; employee benefits; hiring/firing plans, etc.;
- Hammering out the “vision thing.”
Seems obvious but sometimes buyers don’t place much importance on this stuff. Maybe that’s because it’s not their company that changing control. But buyers have more at stake in ironing out transition details than simply to calm jittery target staff. Ignoring the seller’s anxiety over issues around what’s next is another way that buyers kill M&A deals.
After all, getting the seller on board also advances the buyer’s interests by boosting morale and reducing expensive turnover. After all, in technology — and especially in business services industries — the target’s employees can be the most valuable assets in play.
Wrapping It Up
We’ve talked about eight ways buyers can snatch defeat from the jaws of deal victory. There are more of course.
And we haven’t talked at all about how buyers proudly announce closed acquisitions that then go on to have been a very bad idea. As they say, the operation was a success but the patient died. We’ll get to that later. Meanwhile, see what Dealroom and Investopedia say.
The good news is that avoiding all of these deal closing pitfalls mostly takes commonsense seasoned with experience. If you’re marshalling the resources you need to buy a company, you’ve likely got the necessary commonsense. And you can increase the odds of closing further when you retain the M&A experience of a competent outside advisor to guide you to a safe landing. They also find targets. Good hunting.
(We love M&A war stories. Contact us if you’d like to trade some about how good deals can break bad.)