M&A Advisory: Assisting, Negotiating, Leading (Part 1)

How many books have been written on negotiation strategies With analogies to poker and chess games, intrigues and other wars. Who reveals which card when, who anticipates more moves, who prevails and gets everything.

However, this type of mindset misses the mark in a transaction around buying an unlisted company or investing in a startup. If a comparison is to be made, a prenuptial agreement would be more appropriate.

But of course, that doesn’t sound as interesting. Whereas even such writing can have its great moment. However, we will leave comparisons to the left here for the time being and first look at the negotiable and non-negotiable core elements of a transaction.

In this context, the most important non-negotiable element is presumably personal fit (which will only stand here until I come up with a reasonable German term); the question of whether the parties who are to communicate and cooperate after the transaction can do so. Of course, this only becomes apparent later on, but the informality that arises in a room full of representatives from both companies, or not at all, is a good indication of this.

For this reason, it still seems desirable to me to get the parties to get to know each other as early as possible (which also leads further in the practical discussion of the business case than the exchange of the most comprehensive presentations).

But how far should this direct exchange go, doesn’t it make sense to let it segue directly into the negotiation of the transaction? At least name the corner parameters, take the fortress by storm? And who on the team should lead with that?

The web of negotiation topics

As far as the voteable portions of the transaction are concerned, there is already a first insight into major and minor elements of corporate acquisition and financing agreements elsewhere. Moreover, the negotiations are taking place on a timeline. There are good reasons why a non-binding preliminary agreement (letter of intent) is often concluded. You start to structure topics this way. However, such a preliminary agreement is not mandatory. Experienced negotiators may, for various reasons, agree to discuss the binding contracts immediately – which, of course, must then mature into a final version. Even then, however, you will not be able to avoid prioritizing questions or working through them in blocks.

This means that negotiation topics have at least two dimensions: on the one hand, they go into more depth, i.e., they become increasingly detailed, and on the other hand, they are worked through on a time axis. Although it could be said that nothing is agreed until the notary date and everything can be put up for disposition again. At the same time, however, such a procedure would be a process-GAU and shakes the relationship of trust between the parties, who often continue to deal with each other for quite some time after the transaction.

There may be good reasons for bringing topics that have once been agreed upon back to the table, but actually such a thought should not even be voiced aloud, lest the transaction be irreparably damaged.

This in turn means that in the course of the transaction process, agreements not made in writing also have their scope. In fact, M&A transactions are more like the team sport of curling than the individual discipline of javelin throwing. We have the javelin thrower in mind. Left to itself, it gives the spear direction and energy, but the further trajectory is also determined by more imponderable circumstances, such as the wind. In curling, if you have the images of the Winter Olympics in your mind’s eye, there is still a lot going on after the replay, and you could say that it regularly gets hectic towards the end. Thus, one wants to and can influence the course, but is equally dependent on the initial momentum and energy. Errors in this first phase can only be corrected with great effort, if at all.

So in M&A negotiations, a lot really depends on how the ball is put in play. Likewise, you should observe the ice on which you move. This can also change, for external as well as internal reasons.

Shareholders: Unity and diversity

In addition, there is a point that is also part of the daily reality of the selling shareholders, but whose relevance in the M&A process is not immediately obvious: the broader the shareholder team is spread, the more different the characters usually are, and thus regularly also the goals for the company and thus for the transaction. This situation is even aggravated if not all shareholders should be operational. Understanding the motivations and goals of the various shareholders is one of the tasks that a potential buyer or investor works through at the outset. Likewise, however, much earlier, the M&A advisor representing these shareholders in order to weigh up any divergent objectives and take them into account in the joint negotiation strategy.

And there is no need to wait until the end of the article to ask this rhetorical question: is it to be expected that the shareholders as a whole will achieve more if they speak and negotiate with one voice or each for himself?

Calm in the storm

Rarely negligible: the psychological element. For most shareholders, financing is the first corresponding and the company sale perhaps the only confrontation with this matter. Of course, experience is an important criterion for success in corporate transactions. But even more important is the rest. The M&A advisor is not unreasonably expected to have already been exposed, or to be exposed, to many similar situations, and the outcome of the negotiation will not be as big a break in the entrepreneurial life as it is for the typical shareholder. This alone gives a serenity, in the positive sense of the word, that will always influence the process to the advantage. And this is true not only with regard to the supposedly most important topics dealt with at the beginning of the talks, but also for the so-called details to be clarified at the end. Have you ever been sailing in unsettled weather? Once in port, you think you’ve reached your destination, but the wave action can still be violent enough to tear a nice big hole in your hull at the breakwater. Fine-tuning contract wording is by no means pure freestyle, but, as explained in the article mentioned above, often has the potential to greatly influence the overall outcome.

Against the background of these issues, which are only partly related to the experience of the negotiating participants, it is perhaps understandable to ask whether the negotiation of a deal should not be left, at least to a weighty extent, to the M&A advisor. However, another really important party in the process, the consulting attorney(s), has not yet been considered here to reduce complexity and will be discussed in more detail in a future article.