Sometimes an M&A deal ends up not only in a different place from where it started but in a different guise. Whether it’s due to shifting market conditions or other unforeseen factors, a buyer’s acquisition strategy may change during the course of deal diligence. For example, a transaction initially intended as a full company sale might become a division spinoff or strategic partnership. The key to success when objectives change is for deal parties to remain flexible and reasonable.

Evolution happens

What makes a prospective buyer change its acquisition objectives or valuation midstream can be driven by the cold hard facts as supported by the numbers or soft, less quantitative factors such as culture.
Cold hard facts could include factors such as unknown customer concentrations, discontinued product lines, changes in vendors that could negatively impact margins or the loss of a mission-critical top executive. These are just a snap-shot of examples that financial due diligence might reveal and influence a change in the originally intended deal structure.

Soft, less quantitative factors could include culture. A potential seller, particularly if it’s a business that is family owned, might realize that the culture of the buyer does not jive with how they have operated their business and/or treated their people, historically. This alone could change the dynamics of a deal and carries enough weight to potentially crater a deal. Understanding seller motivators are critical to successfully negotiating a deal.

In many cases, such issues can be worked out before the deal closes. But it may make more sense to recalibrate or restructure the deal to be a carve-out of the business as opposed to an acquisition of the entire business. In such a scenario, the buyer would pay only for a division that suits its strategic model and the seller would receive a cash infusion and retain its core business.

When partnerships make sense

Here’s another scenario: After initial discussions with a buyer about a full sale, a seller gets cold feet or simply prefers a slower integration. A strategic partnership is then proposed 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, such as administrative resources or raw materials. More importantly, their collaboration enables them to work out any cultural integration issues and creates an environment whereby a full sale could potentially take place in the future.

Scaling up

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

If this occurs, the parties may need to restart the deal, either because the buyer must 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.

Greater good

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

Contact us if you’re considering a buy/sell. We can address potential issues or opportunities so that you’re prepared for any possible objective changes.

About the Authors

Mindy S. Marsden

CFE
Senior Manager, Valuation/Transaction Advisory Services

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