Mergers & Acquisitions

Anybody Can Do This?

I recently was told about a remark—adamantly expressed, apparently—by a professional in the business valuation field to the effect that mergers and acquisitions (M&A) cannot be taught. By sheer coincidence, I encountered him professionally a short while later in an M&A matter, and it was clear he did not have a clue. This made me think of a hypothetical and opinionated philosopher in the 18th century asserting that the Internet could not be taught. Well, of course it can not be taught if you do not know what it is or that it even exists or might exist in the first place.

Too often, it has been my observation that Middle Market M&A support consultants with training and experience in finance, legal, accounting, or business may assume they know just about everything they need to know about actually executing a Middle Market M&A deal. This also reminds me of the proverbial twelve blind men and the elephant. Each one thinks that the part he is touching is the whole creature. And of course these professionals would think that way. Often, the owners of Middle Market businesses themselves feel this way. These are not timid souls, and M&A deal making is just negotiation, something these executives do every day of their lives, is it not? But many years of teaching the subject and as a practicing M&A banker has reinforced my convictions beyond any shadow of doubt that without training most would be practitioners or clients do not have a clue.

An executive is a person who always decides; sometimes he decides correctly, but he always decides.

John Patterson

McLean, VA—January 2001

Here we go again! I was feeling really good about the presentation that my staff and I had just made to the chairman of a prospective sales-side M&A client, especially since the chairman is a well-known, highly sophisticated entrepreneur. An engineer by training with a technology background, “Craig” is a no-bullshit kind of guy who always seemed a step or two ahead of the conversation. But we had done our homework and our presentation had made that clear.

Craig had agreed to fly into Washington, DC, to visit our offices in McLean with his CEO for the presentation in our main conference room—a good sign. And we definitely had deep deal experience with their industry. This was a slam dunk. We were highly recommended and a favorite of the CEO as well. I was proud of my guys and confident that we had a very, very, good shot at this trophy engagement, a deal so highly prized that our competition included several large regional investment banks that until the Internet crash of 2000 had looked down on hundred-million-dollar deals. Not any more, baby!

And then the hammer fell. The new chairman had just been brought in by the venture capitalists who had funded the business since its start up days, and while the business was a trophy engagement, it had its problems. They were the same problems that so many of these 1990s VC-FUNDED wunderkind businesses had now. When its business model had not proved out as well as the VCs had hoped, the VCs grew tired and wanted out. So did management.

Despite the fact that this was a fundamentally good business for which there should exist several prospective buyers, its corporate governance was, to put it mildly, dysfunctional. The chairman was still enjoying a “honeymoon” with his board and management, and the continuing dysfunction all around allowed him a great deal more power and influence than he otherwise would have enjoyed.

By the conclusion of our presentation to the board and chairman which included a great deal of incisive industry analysis and insight, the chairman mildly observed, “You know, I actually sold my last business by myself, for $60 million, and I am very familiar with the process.”

At that point, one of my partners glanced at me knowingly from the other side of the room—and not pleasantly, either. We now know who our real competition for this business was. It was the chairman, an expert in his own mind.

Here we go again, I thought, gazing out our large conference room window overlooking the parking lot adjacent to our building. (Memo to self: when our lease comes up for renewal, avoid office space with parking lot views. Oh, and tell building management that these windows are long overdue for a cleaning.)

The Deal the Client Never Got

Middle Market business owners who represent themselves in the sales of their companies will never know the offers they might have but never received or the deal terms that never were negotiated, even though they could and should have been. One of my fondest dreams always has been to play golf in an imaginary world in which my score for each round reflected my self-confidence rather than my actual skill. That par is irrelevant and unknown. Were this the case, I would find myself on the pro tour in no time.

Come to think of it, how hard can it be? After all, swinging a club at a ball is ... well, it’s just swinging a club at a ball. How hard can it be for most of us not to play like a pro? Most of us have essentially the same physical and mental traits, as well as the ability to hone our techniques and our mental toughness. Most of us own essentially the same golf equipment and can seek out professional training to enhance our skills, to boot.

Barring some providential escape to a world in which we all get to play the golf game of our dreams, however, there is only one problem all the rest of us face when dreaming of facing off against the pros: the scorecard ... and par. The devil, as always, is in the details. Thousands of details come into play in a span of 18 holes and, maybe, three hours’ time. The golf swing is but one of these details: As simple as it seems, it is also all but impossible for mere mortals to execute in a consistently flawless manner. Middle Market M&A transactions are complex in ways similar to golf. “The round” played by selling business owners routinely stretches over the course of months, upwards to as long as a year. The closing price of a completed transaction undoubtedly represents one’s score at the end of the game, but as measured against what?

Furthermore while gentlemen’s wagers in golf might set someone back a few dollars on a bad round, a round of Middle Market M&A sales, played badly, can cost an owner millions, even tens of millions of dollars. Most owners unfortunate enough to play the M&A game badly will walk away from the sales of their business with one consolation prize: They will leave the game unaware of how much they lost by assuming they were pros at the M&A game.

There are a few simple reasons so bright a line can be drawn between the golf pros who dominate the professional tour and the rest of us duffers:

• The pros pursue life-long learning, continuously working with other pros to refine their games, improve their stamina, and enhance their mental games.

• For pros, the game of golf is no game at all. It is work.

• The pros’ successes reflect their singular commitment to the game of golf and to winning at it.

• Because these pros “make it all look so easy,” we too often find ourselves deceived. “I can do that,” too many of us think, without ever coming close.

For that matter, when’s the last time we saw a uniquely accomplished athlete in one field chuck it all to head off to a different field in search of victory against pros in that field? Michael Jordan, one of the most accomplished athletes ever to set foot on a basketball court, not so long ago decided to play baseball in the Major Leagues. And fizzled. Case closed.

Admittedly, many successful Middle Market business owner/ entrepreneurs along the way have gained some experience in business negotiations, some experience in M&A, some experience working with accountants, lawyers, valuation experts, and so forth. And just enough experience to put their own best interests at risk by assuming that the smorgasbord of quasi-M&A-related insights they have picked up along the way offer the equivalent of a career dedicated to this field.

When an owner represents him- or herself in such a deal, one may be inclined to shrug it off, admitting that at least the owner/manager got what he or she deserved. But it is much more difficult to be so accepting when semiexperienced semiprofessionals presume to represent others in the sale of their businesses. This happens most frequently when a business consultant endeavors to be all things to all people by doing a deal he is ill-suited to consummate, as well as when the occasional CEO, officer, or accountant decides “I can do this.”

Experience and M&A

Having worked with some incredibly bright and highly experienced junior deal makers over the years, I am confident that after just a few years of focused practice, such associates bring vastly more deal experience to the table than the one- or two-time amateur or semipro do-it-yourself deal makers.

Anybody Can Do This?

The Deal the Client Never Got

Experience and M&A

Chapter Highlights