When Doing Nothing is a Counsel of Despair
04 October, 2011
The market is full of deals being pulled, going to market delayed and deals failing to achieve the “reserve” price. M&A advisors are smart people. It goes against the grain just to sit out the current market. Even more so, when you consider that the future may be no better, or even worse. The Great Stagnation, as Goldman Sachs has named our present malaise, has replaced the cycle which made sense of waiting. Now waiting is a counsel of despair and our clients deserve better.
Our clients deserve and will soon come to expect new thinking which provides solutions. The advisors offering the “wait and see” approach will be the evolutionary failures in a Darwinian selection process. M&A life must go on.
The issue is that markets are in turmoil, the target for sale may not be stable or predictable over the life of the sale process and the buyers may be flaky or easily discouraged. So how do we build a new approach which identifies and qualifies the most strategic and committed buyers who will get the deal done?
The answer is go back and remind ourselves of the techniques employed before the controlled auction took over, updated with all the new tools available to identify counterparties around the world, including MergerID.
We have relied for too long on equating the highest first round or indicative offer with the most interested or serious buyer. We now have to establish who is serious by looking at the strategy and asking probing questions. We should always have done this but we let the money do all the talking. That buyer is often a new entrant in the market, acquiring brands, technology or market position.
For every business for sale there is a perfect buyer out there willing to pay decent value. We just have to identify them. We also need more patience because the buyers I have in mind need time to get comfortable with a deal and pay full value. They would avoid auctions but a well crafted bi-lateral suits them perfectly. The owner should have a realistic idea of what constitutes decent value. They may have to state an “asking price” as we shall see later.
We have to be able to find buyers in the less likely places, along the less comfortable roads. We have been cruising along the smooth blacktop or tarmac in air conditioned luxury with cruise control engaged. Now is the time to find a new “off-road” route. The buyers you never knew existed in Japan or Brazil or China or India or Korea to name a few. Japanese buyers are using an inflated Yen and are seriously on the move. But how do you get to these buyers and find the correct person to talk to?
Happily, MergerID has been preparing the ground for over 2 years directing you to the decision maker. They spend half of their time tracking down that person and making them available to you over MergerID.
We have all become so fixated with the sale process that we have forgotten the art of negotiation. The seller is concerned that if there is no process they lose all advantage. Not the case. The seller in a bi-lateral should always take the initiative and specify an asking price. This is how I would convey the message: “The price is X. I will supply you with all reasonably requested information to assist you in making a decision. If at any time you are not comfortable with the price just let me know and we will stop the discussions.” This is far preferable to allowing the buyer to go first in a bi-lateral negotiation (the usual approach) because they rarely move more than 10%. It also gives the buyer certainty that a deal is there to be done and that the deal will not fall apart at the negotiating table.
We need to consider a deposit payment as a means of identifying the really serious buyer. I know this is highly unfashionable but I am an advocate of a deposit paid with Heads of Agreement. It is a type of option and we all understand that options have their price. It can be more notional than substantial, say the equivalent of Euro 10,000, but it will quickly separate the serious from the casual. We have to quickly eliminate time wasters.
In summary, there is still a way forward in the current M&A environment. We need to find the perfect buyer who will be committed to the deal and prepared to pay a reasonable price. MergerID solves many of the issues around identification of strategic buyers and the correct decision maker. Beyond that the advisors need to learn how to qualify in or out the buyers and establish authority in a bi-lateral process using some forgotten techniques.
