Commentary & Analysis
Why Going It Alone in an M&A Can Mean Going Nowhere at All
By Patrick Henry
Published: August 5, 2013
A printer who has managed to keep a printing company running long enough to be thinking of selling it or growing it by acquisition is by anyone’s definition a savvy executive. Successful printers got that way by being smart, tough, and good at making deals—with customers, equipment dealers, paper suppliers, and others with whom they routinely transact business.
A track record of success naturally breeds self-confidence, and the M&A advisement professionals at New Direction Partners (NDP) are the first to salute printers for their self-reliance. But, say NDP partners Al Reijmer and Thomas Williams, the pitfalls of selling a company or buying one without expert assistance should make even the industry’s most rugged individualists think twice.
Emotion, impulsiveness, inattention to detail, and poor planning have undone many attempts by buyers and sellers to close deals on their own, Reijmer and Williams say. The transactions either prove to be too complex to consummate, or they contain overlooked elements that sour and devalue the deal post-closing. Experience has taught the NDP partners to be wary of a number of factors that typically spell trouble for homemade M&A deals.
Partners and shareholders very often have unrealistic ideas about value and transaction structure. Realism about what a company is worth can be in short supply on both sides of an M&A transaction, according to Williams. Sellers, driven by emotional attachments that span multiple generations, refuse to accept that their companies may now be worth no more than the value of their physical assets. Would-be acquirers, knowing that a depressed printing market is a buyer’s market for M&As, become greedy for bargains even though, as Williams says, “there are no steals” to be made.
Reijmer adds that valuation isn’t simply a matter of multiplying EBITDA and declaring that to be the magic number. “Nuances” such as geographic proximity and strategic fit have to be considered in every valuation and will affect the selling price. Skilled advisors understand these nuances and know how to give them the consideration they deserve.
Direct negotiations between buyers and sellers can be fraught with clashing personalities and out-of-sync expectations. This is why an unmediated conversation between headstrong principals can be a “formula for disaster,” Williams says. When entrepreneurial egos collide and “everybody wants to be king of the mountain,” the right atmosphere for dealmaking can’t exist.
Williams recalls setting up a get-acquainted lunch between a buyer he was representing and the owner of a company that appeared to be a good fit. Indigestion set in, unfortunately, when the seller—who did not have professional representation of his own—unfurled a list of demands that included hiring members of his family, taking over a lease, and paying cash up front.
This killed any potential for a deal on the spot, but the seller wasn’t through paying for letting his ego get the better of him. Within a year and a half, his sales volume and cash flow had declined to a point where his only option for exiting the business was to liquidate the company. Ironically, says Williams, “my buyer was the solution to his problem”—or could have been, if only a personality-driven roadblock had not been permitted to get in the way.
Problems can arise in a pending transaction unless the primary party, at least, is represented by experts with knowledge and experience on both the buy and the sell side. While it's true that a merger can be cobbled together without professional advisement, Williams and Reijmer say that deals done in this way rarely are as satisfactory to either party as transactions guided by pros. “It comes down to people being cheap,” according to Williams, who adds that eliminating the advisor’s fee by flying solo almost always turns out to be a false economy. With or without the savings, he says, a deal jury-rigged by amateurs can never be as financially beneficial as a deal crafted by an expert.
Reijmer’s cautionary tale for do-it-yourself dealmakers is about a printer who “got the short end of the stick on the transaction” because of things he didn’t account for when he purchased a company without an advisor at his side. Most seriously, he failed to protect himself contractually against risks stemming from the fact that 60% of the seller’s volume came from just one client.
What a competent M&A counselor would have told him, Reijmer says, was to include language specifying that if the key account were to be lost or suffer a decline in value, the purchase price would be adjusted accordingly over the life of the buyout. But, in his excitement to close the deal, the buyer plunged ahead without planning for this contingency. Almost predictably, the big client changed its print-buying patterns, and the account’s sales volume went down—but still leaving the buyer with the same payment obligation to the seller throughout the three-year term of the deal.
Reijmer estimates that as a result, the buyer overpaid by an amount equal to five times the fee he thought—incorrectly as it turned out—he didn’t need to pay an M&A expert. “Common sense isn’t so common any more,” observes Reijmer with a professional sigh.
Buyers and sellers often must ask difficult questions of the interested party. Questions that probe deeply into the fundamentals of a company aren’t easy to ask—which is precisely why Williams and Reijmer say they should be put by a third-party advisor who acts as a buffer and keeps the emotional temperature under control.
A buyer needs to know, for example, whether any non-employee stakeholders on the seller’s side potentially could interfere with the progress of the deal. The seller has to ascertain whether the buyer actually has the resources to close the deal. Pending lawsuits, uncollectable receivables, and environmental issues are other examples of potential deal-killers that the parties shouldn’t try to talk through by themselves.
A potential transaction between direct competitors in the same geographic market requires special care. For prospective buyers, says Reijmer, “the low-hanging fruit sometimes is your competition”—a rival firm with which the buyer has co-existed for years in the same city or region. But, when a transaction involves direct competitors that are close geographically, it can be difficult if not impossible for either party to make the initial overture. Preserving confidentiality during negotiations between neighbors is another responsibility best left to an advisor who can assess need-to-know and ensure that only key personnel are in the loop until the deal is finalized.
Having multiple owners in a buying or a selling situation can mean having to deal with multiple headaches. Williams warns that trying to unravel conflicting objectives and incompatible personalities without the right kind of help “is like trying to do a crossword puzzle in a language you don’t understand.” Reijmer recalls a situation where five family members were at odds and nothing could be done until an outside referee was brought in to reconcile the conflicts.
Every M&A transaction is unique. There are no cookie-cutter solutions. “They all have their own warts,” Williams says. The difference is that M&A professionals have seen them all before and can take them out of the emotional context that makes them so potentially difficult for first-time buyers and sellers to deal with. And that, perhaps better than anything else, describes the experience there is no substitute for in the delicate task of bringing two printing companies together in a merger that neither party ever will have reason to regret.