When the Best Deal’s Not the One You Planned – Stay Flexible During M&A Negotiations to Reap the Most Value

Buyers and sellers sometimes take a different road to an M&A deal than they had planned — or discover a completely different destination. Market conditions may shift, due diligence may uncover an unexpected issue, or the buyer’s situation may change during the negotiations. Whatever the cause, both buyer and seller may benefit from redrawing the outlines of the deal. For example, a transaction initially intended to be a full company sale might become a division spinoff or strategic partnership. The key to success on such shifting ground is for deal parties to remain flexible.

Reconsidering the target

What makes a prospective buyer change its acquisition objectives midstream? Due diligence might reveal that the selling business, which seemed like an ideal fit, would in fact be difficult to integrate. Or a seller may have more debt obligations or unprofitable product lines than its potential buyer realized.

In many cases, such issues can be worked out before or after the deal closes. But it may make more sense to recalibrate the deal — particularly if the buyer is primarily interested in one particular division. In that case, a spinoff of that division might be in everyone’s best interests. The buyer would pay only for a unit that suits its strategic model, and the seller would receive a cash infusion and retain its core business.

Should it be a partnership?

Here’s another scenario: After initial discussions with a buyer about a full sale, a seller gets cold feet or prefers a slower integration. So it proposes a strategic partnership instead of an acquisition. Forming such a partnership can provide a structure for potential buyers and sellers to learn how to work together. The two may share common principles, administrative resources or raw materials. More important, the early collaboration enables them to work out any cultural integration issues.

Strategic partnership agreements often contain a clause allowing the buyer to make an ownership bid after a specified period of time. Agreements can also be informal, allowing the relationship to evolve and possibly dissolve.

Occasionally, funding issues may force buyers to recalibrate. If financing isn’t available, a buyer might take a minority stake in a company as part of a longer-term acquisition bid.

Scaling up

Changing objectives don’t always result in a smaller deal. In some cases, buyers and sellers discover during early discussions that there’s more potential value in a transaction than they thought. What was originally intended to be a partial acquisition or a strategic partnership may become a full sale.

If this occurs, the parties may need to restart the deal, either because the buyer has to secure additional financing or the seller needs its board’s approval to make a full sale. But if the price is right and the value proposition is clear, such obstacles usually aren’t difficult to overcome.

Be flexible now for big gains later

Although M&A transactions with clear, unchanging objectives often close faster and with less hassle, they aren’t always possible. Both buyers and sellers can benefit by entering negotiations with an open mind. That way, if issues arise, the participants can be flexible enough to make the best deal — regardless of how much it differs from their original conception.

Weaver’s Transaction Advisory Services practice often assists buyers and sellers with due diligence, valuation and post-transaction integration. If you would like to talk to one of our professionals, contact us or visit weaver.com.

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