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What's the Good Word in Mergers and Acquisitions? Most of the Time, Ssshhh!

If silence is golden in most of the affairs of life, in M&A transactions, it’s pure platinum. Nothing assures a better outcome for a deal—or yields a worse one if it’s violated—than maintaining a policy of tight information control while negotiations are under way.

By Patrick Henry
Published: March 7, 2013

If silence is golden in most of the affairs of life, in M&A transactions, it’s pure platinum. Nothing assures a better outcome for a deal—or yields a worse one if it’s violated—than maintaining a policy of tight information control while negotiations are under way.

The need for strategic silence will be obvious to most print company owners preparing either to sell their companies or acquire others. To be sure, it's a bedrock operating principle for New Direction Partners (NDP), a consulting group with many years of experience in bringing printing companies confidentially together.

But, there are exceptions even to the golden rule of silence, and the partners of NDP have heard more M&A-related stories than most about the truth of the old adage, “loose lips sink ships.” These tales of indiscretion, recounting mistakes by  buyers and sellers alike, have several cautionary themes in common.

One is that given the quirks of human nature, every organization contains individuals who won’t be able to resist broadcasting whatever sensitive information they happen to come by. Most of the time, this dictates sharing information about pending transactions strictly on a need-to-know basis with the smallest number of people possible. It also mandates obtaining the appropriate confidentiality agreements—but without assuming that these pledges will guarantee 100% protection against deal-damaging leaks.

NDP doesn’t counsel total silence. Maintaining confidentiality is always critical, but every deal is different. There are no cookie-cutter approaches to deciding who should know what, and when. In any case, nobody can buy or sell a printing company single-handedly, and sometimes letting certain people in on the secret can be the best way to keep it under wraps.

But in story after story, the risk of careless disclosure becomes disturbingly clear. Consider:

The “For Rent” sign that almost read “No Deal.” After 30 years, the husband and wife who owned the printing business needed to exit for reasons of health. A buyer was found, and to expedite the closing, the couple began to negotiate with their landlord to get out of the lease.

Up went a “For Rent” sign—and so did their employees’ anxiety about what would happen next. The owners tried to calm things down by implying that most jobs would be protected, even though they had reached no such agreement with the buyer.

Unfortunately, the tactic failed. A key salesperson and several production workers quit, scaring the buyer and imperiling the deal. It eventually was salvaged, and the sale went through—but only after the value of the business had been reduced by the disruption arising from the owners’ carelessness.

The takeaway is that it’s seldom advisable to report M&A activity to the employee population at large. At another plant being put up for sale, the owners immediately notified the sales manager in order to retain his loyalty and assure that the business could be sold as a going concern. That was an example of a legitimate need-to-know disclosure, but one that applies to only a handful of key personnel in the company.

The end-run around confidentiality. A potential buyer who signed a confidentiality agreement with the seller ultimately decided not to pursue the deal. A few weeks later, much to the chagrin of the seller, the erstwhile buyer tried to hire away some of the company’s salespeople. The seller sought legal recourse, but gray areas in the confidentiality agreement made it unenforceable against what the buyer had done.

Standard confidentiality agreements are supposed to place sellers’ employees off limits to recruitment by buyers while negotiations are in progress. However, buyers have been known to skirt the restriction by claiming the freedom to hire employees who come to them independently.

Confidentiality agreements and non-compete covenants should always be used, but the truth is that the only people these contracts can keep honest are those who were honest to begin with. This means that their language should be carefully reviewed and that the parties they are presented to should be screened just as carefully.

In every M&A transaction, much depends on the seller’s belief in the buyer’s willingness to act in good faith—a level of comfort that professional advisement can help the seller achieve. An advisor who knows the buyer candidates personally can provide insight from past experience into to how they are likely to treat confidentiality during the descriptive memorandum and due diligence stages. On several occasions, NDP has advised clients against dealing with buyers whose reputations for maintaining confidentiality were questionable.

The case of the babbling buyer. The company for sale was a well known family-owned business whose principals needed no lectures about the value of privacy. They were so determined to conceal what they were doing from employees and the community that they hosted buyer visits off site or only at night.

Unknown to them, the buyer who seemed the likeliest choice also had a history of speaking openly about his business dealings. He did so in this case, despite having signed a confidentiality agreement.

Word got back to the employees, obliging the sellers to disclose that options were being explored. The buyer insisted that he had talked only to his production manager or to this or that vendor. In the end, the sellers lost faith in the buyer and refused to go any further with what could have been an advantageous deal for both sides.

The seller who kept quiet—and kept everyone else on board. This is a contrasting story of an NDP client who did it right and brought the tale to a happy ending. Out of a staff of 80, the only two people besides the owner who knew about the impending sale were the owner’s secretary and the CFO. Confidentiality was preserved, and the general announcement came 10 days after the deal was closed.

The employees heard the news first from their former boss, and immediately afterward from the new owners. The result: no defections, no disruptions, and no interruptions in a printing business that safely changed hands in a quiet, well executed M&A transaction.

Employees, customers, vendors, and other stakeholders are entitled to know what they can expect as a result of a sale of a printing company. But, as the stories make clear, the messaging must be controlled, and the timing must be managed with equal care. Professional M&A advisement is essential to upholding the golden rule of silence as it so often applies in these delicate undertakings.

Patrick Henry, Executive Editor for WhatTheyThink.com is also the director of Liberty or Death Communications, a consultancy specializing in research, education, promotional, and editorial support services for the printing and publishing industries.

Patrick Henry is available for speaking engagements and consulting projects. To get more information contact us here.

Please offer your feedback to Patrick. He can be reached at patrick.henry@whattheythink.com.

 

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