In mergers and acquisitions (M&A), maximum value deal depends on controlling time. And if time is money, then those with the deepest pockets tend to have the most control.
One of the biggest mistakes in corporate finance is a tendency to rush the M&A process. It’s dangerously easy to blur the line between a speedy transaction and making it look like a fire sale.
This mistake is common when a business makes the first move to sell. It may be that the company landed a giant contract that it can’t service without help, or perhaps the founder(s) or investors just wants to cash out.
Whatever the reason, every company has a use-by date, it’s just that no one quite knows when that will be. But eventually, most companies either sell, merge or go into liquidation. That’s just the way of the world. When that time comes, founders and investors will want to maximise their reward for toiling away at the grindstone for years in the hope of striking gold down the track.
The problem is that in any capital event, if the prospective buyer or investor ever gets a hint of desperation in the seller, then that reality very quickly becomes a thin neck for them to squeeze. And they will squeeze it. After all, a buyer doesn’t want to spend one cent more than they can get away with.
So, how does a good corporate finance team maintain control of the M&A narrative for the seller? The answer is to control the time.
This isn’t as easy as it sounds because, as the old adage above warns, buyers tend to be much larger than the company they wish to purchase which means not only will they have more money, but they will also have more time.
What does a buyer “having more time” really mean?
While both sides of the negotiation table have the same number of hours each day, the clock becomes irrelevant when the buyer has more resources. While it’s impossible for nine people to shrink a pregnancy down to one month, that’s not true for corporate finance work.
Simply put, when a company has enough resources, it can task 20 people to perform a single due diligence process and what might take one person a month can be done in a few days. Money and access to resource buys the acquiring company time to look deeper into a target company, find the legal or financial landmines and even set up its own landmines as it prepares for the coming negotiations.
A cash-rich company can control time in ways a smaller target business cannot compete with. The buyer will use all its extra time to discover information that might be useful in chipping away at the valuation. Any wrinkle or blemish could become a negotiating tactic.
The buyer can also look to gain an advantage by stealing some of the target company’s time.
For example, if a buyer knows the target doesn’t have the resources to run a competent transaction process, it could ask for mountains of documents, paperwork, information and data. This will force the target company to spend precious resources (time) on collecting this material in the hopes that it will lead to a larger valuation.
The more time the Board and management team takes to fulfil these requests, the less brain space they will have for running the company. Since M&A deals might take half a year or more, such distractions can lead to a company making mistakes and bad decisions.
Take your eye off the ball one too many times and the company might lose a few key employees or deals. A whole list of tiny faults will begin to compound and inevitably lead to a drop in revenue or disgruntled customers.
And the prospective buyer knew this would happen, which is why it asked for so much time-wasting documentation in the first place.
Now the buyer will have a legitimate excuse to suggest a lower valuation for the target company because of all its recent losses. Clearly, the company is no longer worth the same amount!
Meanwhile, although the books might be taking a hit, the target company still has all the same valuable intangible assets – which is what attracted the buyer initially. Diplomacy can get dirty if you don’t know all the tricks.
A buyer with a lot of resources will have thousands of these tricks up their sleeve to ensure they get the best possible deal for themselves. Without a competent M&A team that knows the playbook and how to mount a strong defence, a smaller target company has no chance of outmanoeuvring.
The lesson? Time is everything in a business transaction.
Deals are won or lost by the party that can best control the timeframes and narrative. If a company hoping to sell isn’t in a rush, that will give it the best opportunity to close a mutually beneficial deal rather than let a larger party walk all over it.
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