Whether a deal is $50m or $1bn; the dynamics are the same. A surprise email from a prominent acquirer expressing strong interest in a “strategic deal that could benefit both parties.”. Navigating this to a closed deal brings all the expected benefits: confidentiality, being “bought not sold”, the ability achieving a strategic price, and leverage with other buyers (“we are under offer, you need to move fast”).
But very often an approach fails to close. After 25+ years of handling such approaches, we share 5 classic mistakes:
- Confusing a “buying company” with people who want to buy. “Oracle has approached us” has little value. Who exactly at Oracle (or any other major)? What are the divisional challenges they are trying to address? Who inside Oracle has something to gain or lose? Are we dealing with “technical buyers” (executives evaluating technical merits of a transaction, such as valuation ratios, potential alternatives etc.) or “economic buyers” (executives responsible for managing a business and extracting maximum value from a market opportunity)? Develop a “coach” at the buyer and work with them to lay out a map of the deal influencers and decide who to target and how. In short, sell to people, not companies.
- Behaving like you’re not for sale as a negotiating tactic. This one kills many deals. If a buyer is serious, they will be evaluating a range of options, including other targets. Very few targets are unique. Respond quickly, ensure you are “easy to buy” and communicate clearly there is interest if price is right, the company is “clean” (no litigation, no IP issues etc.), and the Board is aligned to consider a sale. Get to the front of the buyer’s list of targets right away, you can always pull back later.
- Quoting an illogical price. Here is perhaps the worst example: The best buyer approaches. The target’s investors quickly guide to a price that is a big multiple of the last round value which was itself inflated, figuring there is no downside to starting high. After all classic negotiation theory says the higher you start the more you end up with. Sometimes it works, but much more often it causes the OPPOSITE buyer reaction. Many larger buyers we talk to complain of “crazy valuations” and are immediately put off. In part this is self-serving posturing, but a lot of the sentiment is real; buyers want to know there is a real chance of getting a deal done. A good approach to setting a strategic price is to create a valuation framework, communicate that framework, and aim for agreement with the buyer on the approach. You may still be far away from each other on price, but at least no buyer will ever recoil if presented with a logical seller.
- Letting a buyer dictate the process. “They called us, so they should tell us how they want to proceed.”. This misses the fact that, except for a few world-class serial acquirers, many larger companies simply don’t have as much M&A experience as you may think (they can stop buying for years, executives move around etc.). Nearly all buyers appreciate a target at least trying to frame a logical process, and a buyer will often follow your lead. Especially for larger deals, taking the initiative as the target creates a far more level psychological playing field, which can only help. Process is central to any M&A transaction, and you can expect to hear more from us on this topic.
- Slowing down your initiatives to “allow a deal to happen”. Intensify your commercial partnering discussions with the buyer’s competitors, accelerate your news-flow, invest even more aggressively, and push even harder on the business than before (if that is possible). Buyers buy momentum and potential, not historic results. And the greater your perceived momentum, the higher the ultimate valuation. “The best defense is a good offense” in this case can be worth a lot.
Posted by Victor Basta @MaExits