Pulling the plug on an M&A deal at the right time

Sometimes as an acquirer, pulling the plug on a deal at the right time can save everyone a lot of energy.

Context:

The CEO of a large business (”Alpha”) reached out to me a few days ago because Alpha had received an inbound acquisition opportunity, “Tango”, from a sell-side banker. Tango was going through a sale process.

Alpha’s management was seriously considering putting in a non-binding offer for Tango and wanted to potentially enlist our help as a buy-side advisor to diligence Tango and run Alpha’s acquisition process.

Our discussion:

We discussed why Tango was interesting, and how Tango may fit into Alpha’s strategy.

However, a few red and yellow flags emerged during our conversation.

Before Alpha decided to proceed with an LOI, I advised Alpha’s management team to run Tango through a short list of questions that we compiled during our working session.

Some questions were pretty basic.

Others were more nuanced: This is where it got interesting. We probed into customer overlap, product capabilities, and technology.

To caveat, I knew very little about Alpha’s or Tango’s core platform but knew the right questions to ask. And Alpha’s management was savvy enough to pick up on the topics, take them a step further, and probe as needed.

What did Alpha decide to do?

As you can see (image shared with permission), Alpha decided to step back for all the right reasons - Alpha and Tango had the wrong product fit, incompatible customer mix and integration would have been a disaster.

What’s notable is that Alpha never saw the inside of Tango’s data room, nor did Alpha talk to Tango’s management team, nor did either side spend dozens of hours negotiating an LOI.

Alpha just asked the right questions and went a couple of levels deeper in conversations BEFORE investing a lot of money and time.

At the early stages of a deal, knowing the right questions to ask to disqualify a target or to disqualify a potential acquirer from the process is critical.

What would have happened if we hadn’t done this?

Impact on Alpha:

If Alpha had put in an LOI without doing what we did, Alpha would have burned:

• Easily 40-50 hours of the CEO’s and leadership team’s time
• Easily 60 - 100 hours of their internal team and legal counsel’s time
• If their LOI was accepted, perhaps hundreds of hours of the Alpha team’s time and ~$100K - $200K in due diligence and legal expenses.
• Not to mention the opportunity cost of focusing on other areas of the business.

Impact on Tango:

On the flip side, if Tango had accepted Alpha’s LOI, Tango would have:

• Spent 1-2 months in exclusivity with Alpha, resulting in (eventually) a failed process. Back to square one.
• Wasted at least ~$50K - $100K in legal, and diligence support costs.

Moral of the story?

• As an acquirer, you don’t always need to get into deep diligence to figure out the target is the wrong fit. Spend some time on level-two questions and conversations early on to see if the deal fits. How much is chasing the wrong target costing you?
• As a target, watch out for your “happy ears” when interest from an acquirer comes in - ask the difficult questions sooner and it could save you a ton of time, money, and grief. How much is chasing the wrong acquirer costing you?

#mergersandacquisitions