Deal killers. We have all seen them and been forced to manage through them. They come in all shapes, sizes, and varieties, with different reasons, justifications, and rationalizations. They can emanate from the buyer, the seller, or any number of third parties, such as lenders, investors, key customers or suppliers, professional advisors—or all of the above. Some deal killers are legitimate for deals that deserve to die, and some are emotional, financial, or strategic in nature. They can be very costly to all parties to the transaction, especially when significant costs have already been incurred. And for certain advisors and investment bankers, they mean not getting paid. Clearly, deal killers inflict a lot of pain along their path of destruction of a transaction.
In troubled financial times, deal killers can come as a shock and can be based on something as simple as a stark difference in the mind-set of the parties or lenders or even investors about the markets. In strong and frothy economic times, deal killers will be rooted in greed and will often be based on disagreements over inflated valuations.
Following the high-profile failure of several buyouts in 2008–2010, sellers resisted provisions that permit a buyer, under certain conditions, to walk away simply by paying a fee. But buyers, who face their own challenges in securing commitments from banks to fund deals, began pushing back. Many transactions derailed in 2008 and 2009 because of factors such as deteriorating global financial market conditions, buyers developing cold feet in the middle of the deal, seller remorse, disappointment caused by record low valuations, or even an overall transactional fatigue resulting from a loss of momentum among parties that are running out of steam. In 2008 through 2010, over 2,000 “reported” transactions derailed due to market or other conditions, and countless smaller- and mid-market unreported transactions never made it to the closing table despite the time, effort, and good intentions at the outset. Protection and risk allocation terms that hold significance in deals are being more hotly contested. M&A players seem content to remain on the bench rather than be on the playing field, and a notable number of them have retired hurt. In some instances, an immediate surfacing of post-closing integration issues involving post-transactional shareholder value creation challenges kills what would have been a deal to die for two years ago. The volatility in stock markets, one of the major driving factors for M&A, has further increased the uncertainties arising in the middle of the deal. In 2010 through 2017, market conditions improved and then strengthened, which together with more robust valuations and project management tools helped keep more M&A transactions on track toward closing.
In M&A booms as well as in tight financial markets, most deal killers can be put into one of the following major categories:
Price and valuation
Terms and conditions
Allocation of risk
Third-party challenges
Cold feet due to oscillating financial conditions
The first step in keeping a transaction on track (and greatly increasing the chance of avoiding deal killers) is to have strong communication and leadership by and among all parties and key players to the transaction. As in football, each team (e.g., buyer, seller, source of capital, and so on) should appoint a quarterback who will be the point person for communication and coordination. Too many lines of communication will create confusion and misunderstanding—conditions that allow a deal killer to pollinate. The more the quarterbacks coordinate, communicate, and anticipate problems with the various members of their team and promptly discuss key issues with the quarterbacks of the other teams, the greater the chances that the transaction can and will close.
Some of the key tasks of the transactional quarterback and of each team to keep the transaction on track toward closing include:
Putting a master strategic plan in place (with realistic expectations regarding financial and post-closing objectives)
Building the right team
Communication and teamwork
Orchestration and leadership
Momentum and timetable accord
Avoiding emotion—the “don’t call my baby ugly syndrome” (sellers) and falling in love with a given transaction (buyers)
Early start on governmental and third-party appeals
Creative problem solving
Cooperation and support from financing sources
Facilitating agreement on the key value drivers of the seller’s business/intellectual capital issues
When a potential deal killer does arise, each quarterback should first diagnose the source of the problem. Where is the issue coming from and what can be done to fix it? A deal killer for one party may not be a deal killer for another party. Take a look at Figure 12-1. The old adage “where you stand often depends on where you sit” clearly applies here. For example, a lender to a buyer coming in at a higher lending rate than anticipated may significantly alter the attractiveness of the transaction from the buyer’s perspective but may be viewed as a nonissue for the seller.
Figure 12.1. The Source of the Problem Will Dictate the Solution
Once the source of the deal killer has been analyzed, the respective quarterbacks should focus on the specific type of deal killer. Most deal killers can and should be resolved, through either creative restructuring, effective counseling, or precision document redrafting. Some deal killers cannot be resolved (they are just too big and hairy), and other deal killers should not be resolved (such as trying to squeeze a square peg into a round hole).
Deal killers come in a wide variety of flavors, and include the following:
Egos clashing
Misalignment of objectives
Inexperienced players
Internal and external politics (board level, executives, venture investors, and so on)
Due diligence red flags/surprises
Pricing and structural challenges (price versus terms)
Valuation problems (tax/source of financing/in general)
Third-party approval delays
Seller’s/buyer’s/source of capital remorse
Overdependence on the founder/key employee/key customer or relationship
Loss of trust or integrity during the transaction process
Nepotism
Failure to develop a mutually agreeable post-closing integration plan
Shareholder approvals
Accounting/financial statement irregularities (post-WorldCom)
Sarbanes-Oxley post-closing compliance concerns
Breakdowns in leadership and coordination (too little or too many points of communication)
Too little or too much “principal-to-principal” communication
Crowded auctions
Impatience to get to closing or loss of momentum (flow and timing issues)
Incompatibility of cultures and/or business systems (e.g., IT infrastructure, costs and budgeting policies, compensation and reward programs, or accounting policies)
Force-feeding deals that don’t meet M&A objectives (square peg/round hole; bad deal avoidance/good deal capture— systems and filters)
Who’s driving the bus in this deal (mergers versus acquisitions)
Changes in the seller’s performance during the transaction process (upside surprises versus unexpected downside surprises)
Loss of a key customer or strategic relationship during the transaction process
Failure to agree on post-closing obligations, roles, and responsibilities
Environmental problems (buyers being less willing to rely on indemnification and insurance protections)
Unexpected changes in the buyer’s strategy or operations during the transaction process (including a change in management or strategic direction)
Although a detailed discussion of the tools available to “kill a deal killer” is beyond the scope of this chapter—and is probably as broad as the number of tools available to the Orkin man to kill the hundreds of different insects and rodents—some of the more common tools are listed here. The first step is for each quarterback to ensure that the transaction can and should be fixed. In some cases, it may be best for the stakeholders for all parties to just walk away, hopefully peacefully. But if the transaction should proceed, then these tools can be very valuable in mending a broken deal:
Earn-outs or deferred and contingent post-closing consideration
Representations, warranties, and indemnities (tools to adjust the allocation and assumption of risk, weighting of priorities issues)
Adjusting the post-closing survival period of representations and warranties
Holdbacks and security interests
Closing-date audits
Third-party performance guarantees/performance bonds/escrows
M&A insurance policies
Restrictions on the sale by the seller of the buyer’s securities issued as part of the overall consideration
Recasting of financial projections and retooling post-closing business plans
Put a master strategic plan in place (with realistic financial and post-closing synergy expectations).
Build the right team.
Designate a quarterback for each team for orchestration and leadership.
Ensure communication and teamwork.
Maintain momentum and timetable accord.
Avoid ego and emotion (sellers: “don’t call my baby ugly” syndrome, and buyers: falling in love with a given transaction).
Get an early start on government and third-party approvals.
Have a clear understanding of conditions to closing.
Engage in creative problem solving.
Identify potential troublemakers and rabble-rousers.
Ensure cooperation and support from financing sources (and their deal teams).
Reach agreement on the key value drivers of the seller’s business/intellectual capital issues.
Focus, focus, focus.
The bottom line is: coordinate, communicate, and anticipate equals no surprises.
Bad deals deserve to die a peaceful death. Not all transactions are meant to be closed (1) at this time, (2) at this valuation, (3) between these parties, or (4) under these terms and conditions. But if a transaction can be saved, then it should be saved. The quarterback on each team must have the transactional experience, the business acumen, and the communication skills to diagnose the source and nature of the problem—and enough familiarity with all of the tools available to get the transaction back on track toward closing.