Success in M&A Negotiations - Focus on Critical Issues

Introduction

• One of the biggest success factors for any M&A transaction is to close the deal within the specified time period.Delay by either parties, namely the acquirer or seller will invariably affect the chances of deal succeeding and will result in frustration for either parties.Both the parties would have spent high legal and transaction costs by engaging investment bankers, consultants and lawyers who charge fee by hour basis.
• To have high probability of success in a M&A negotiation, it is critical if both the buyer and seller identify critical issues in the deal which are important for both of them.These issues are important for both the parties and they would generally not want to compromise on these issues.Other issues which are not critical to the parties should not be unnecessarily deliberated.This would prevent all the issues to become deal breakers.If parties want to negotiate for every issue, then this sometimes can turn into a personal ego conflict where each parties would deliberate unnecessarily spending time and effort on trivial issues that has no bearing on the deal for them.

Critical Factors to focus on

• Critical factors for buyer or seller need not be same for every deal.The issues change depending on the situation of the seller and his motivation post the deal closure.
  Issues that are important for seller in a M&A transaction is:
• Final purchase price for the transaction
• Consideration for the transaction - whether the payout is done by cash or stock or through promissory note
• Deal structure - Asset sale or Stock Sale
• Escrow payments and duration - Seller would always negotiate for lower amount to be held in escrow account and for a shorter duration
• Post closing legal exposure - Seller would ideally want a less to no post closing legal obligations
• Post closing management responsibilities - Sellers would want to minimize any post closing liabilities
• Transaction tax - Sellers and their shareholders do not want or like to pay minimum taxes for the capital payments they receive.

Though above issues are the critical points for seller for all M&A negotiation, not all points would be critical for each seller in every deal.
For instance if an owner who is old and wants to sell his firm, following would be his key priorities.

• Close the deal as fast as possible
• All payments to be done by cash
• No escrow payments
• No post closing legal exposure

It is evident that the seller who is old want to liquidate his firm as soon as possible and wants his payments in cash.
In this case, the negotiation would not focus on purchase price.If the deal is closed faster even with a lower purchase price, the seller would be happy with the deal.

Let us take another instance of an IT company acquiring a boutique innovative digital firm.The business model of an IT firm is completely different from that of the digital firm.Due to the difference in business model, the cultures, processes and way of Working would be completely different for both the firm.

In such cases, the acquirer cannot manage the firm successfully and there would be huge value dilution, if seller does not agree to stay post the closing of the deal.
Hence the critical points for the buyer for negotiation would be:

• Retention of key employees post closing
• Founders staying and managing the target company post closing
• Sellers having an earnout component as part of the purchase price and earn out payments are contingent on the target firm reaching a revenue/earnings target.
• Knowledge transfer of the seller to the buyer by job rotation and engaging in projects involving employee from both entities.

As the founder shall stay post the deal is closed, negotiations would focus on earnout structures and whether the seller would be allowed to function independently to achieve the earnout targets.Other important points for negotiation would be the career path and prospects for target employees post deal closing.

Factors for Successful Negotiations

• A successful negotiator needs to realize that he should not waste his time and efforts in negotiating all the points in the deal.This will give a perception that all issues are deal breakers which actually is not for any deal.
• A successful negotiator before starting to negotiate should also understand the critical points of other party.Once the critical issues of both parties are understood, then negotiations on trivial issues should be closed fast.
• For critical issues which are important for one party and not important for other, the other party should ideally trade these issues off.
• Maximum importance and time should be spent only for those issues which are important for both the parties.This will result in effective results and early resolution which will help in getting the deal closed sooner.

Conclusion

• Negotiation is an art.One who defends everything will end in defending nothing.In a M&A transaction, it is critical that focus on negotiations is limited to few important issues.
• A deal involves extensive costs as it requires engagement of bankers, consultants and lawyers who take fees in hourly basis.Hence it is important that buyer and seller identify critical issues that is important for them and which they would not be ready to compromise.They should communicate this to their advisors.By doing this, they will pay less legal fees.