Negotiation is a fast-moving, dynamic piece of the M&A puzzle. One of the reasons for its complexity is the sheer number of issues that can be involved. Another is that most issues involve teams of people on the buy side and sell side, each of whom has his or her own substance and process knowledge base, experience, place within the hierarchy of a particular organization that interacts with other organizations on the team, set of personal and professional incentives, rewards and skills, and of course his or her own communication styles and personalities. Yet another is that one issue frequently leads to another. Actual discussions between the principals are just the tip of the iceberg.
The situations are also complex, involving multiple people who normally operate in multiple teams of their own on a daily basis and may only interact with each other as part of a deal. Being able to tie all these disparate factors together is a key skill of M&A management.
Example: An Environmental Contamination Issue
In this multi-part post, consider a granular but realistic story of how many people can touch a single piece of information.
The target is a consolidated subsidiary of a larger organization, being purchased by another, smaller operating business. The goal of the acquisition is to acquire the production and products of the subsidiary. The VP in charge of one of buyer’s business units really wants the acquisition to happen, as does the investment banker who introduced the buyer and seller. However, the VP is not primarily responsible for the deal negotiations. They fall under the general supervision of two control functions within the corporation, the CFO and general counsel, each of whom is looking at both corporate strategy and enterprise risk management. There have been personality clashes between the two in the past. The CFO has involved the controller for the interested business unit to assist with due diligence in addition to his regular day to day responsibilities and has also hired an outside accounting firm, while the GC has hired an outside law firm. An environmental compliance director who reports to the GC and other internal support functions are prepared to conduct additional due diligence and integration functions if needed. The CEO watches over it all and, among other things, monitors whether the transaction will need board approval; he has the difficult job of managing both down to his direct reports and a group of eight board members. The law firm has fully staffed the core M&A functions with a partner whose main goals are to maintain client relations, maximize collections, advocate for internal resources and recognition and negotiate the best deal possible on behalf of his client; a senior associate responsible for many of the details and much of the team management, being able to call upon the authority of the partner if needed but concerned that too many calls or dropped details will threaten her partnership chances; a junior associate who handles specifically identified tasks with only a modicum of training; and a paralegal who, among other things, manages data room access. They are prepared to work ridiculously long hours to get the deal done, since their job security and bonuses depend on it. The accounting firm has staffed the transaction with a partner who is interested in maintaining her client relationship and managing internal politics; and a manager interested in getting the work done without unnecessary evening and weekend work and possibly impressing the buyer enough to get a job offer.
A bank is providing senior debt financing through a non-syndicated loan. There are two commercial bankers, one of whom is responsible for analysis while the other is responsible for decision making subject to credit committee approval. The bank is structured so that their team gets credit for deal origination for bonus purposes, so their interests are aligned. The bank has its own law firm with leaner staffing involving a partner, a junior associate and a paralegal. Buyer’s law firm is also staffing the banking process leanly, with a partner, junior associate and paralegal. The dynamic among these lawyers is similar to that of the M&A group.
It is typical for additional specialists to be brought in as needed. The team of buyer, law firm and accountants know from the beginning that total number of people involved is likely to grow dynamically.
Meanwhile, the cast of characters on the sell side includes the CDO, someone in his office who coordinates the data room and due diligence responses, the general counsel, the VP in charge of the target business unit and an outside law firm with a corporate partner, senior associate, junior associate and paralegal. The CFO is involved as well, and the CEO has a parallel role to that of buyer’s CEO.
In part 2, we will explore how a piece of information turns into a deal point and how a deal point becomes an internal football to be tossed around the execution team.