The Federal Circle

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

Yesterday a friend asked me if I thought that mergers and acquisitions was becoming a ‘buyer’s market’. My first response was, “what planet have you been living on for the last several months?” Then I responded to his question. “It’s not just a buyer’s market – it is a turkey shoot.”

The truth is that the balance of power has been shifting towards buyers ever since the tech bubble burst. Even before that the only way that most sellers could get and maintain good leverage in the post letter-of-agreement process was if the buyer was either drunk or insane. Oh yes, there were strategic acquisitions that a particular buyer ‘just had to have’. However, they were mush rarer than the ‘fever pitch’ of the late 90’s would lead you to believe.

Current conditions are even harder on sellers. Buyers have the bargaining power and most of them know it. Another friend who regularly buys companies described his approach. “Forget about valuations – ignore the projections – if you want it, pay not one penny more than you have to.” His approach is to sign a letter of intent and then begin to cut the deal. The movement is always in his favor. Most buyers that I know are taking similar approaches. Here are just a few of the areas where buyer power is in ascendancy:

• Deal Protection: Professional buyers focused on closing on the deal that they finally negotiate. They are not about to negotiate terms and have a third-party swoop in and steal the deal by marginally improving those terms. They will demand that the seller enforce ‘standstill’ clauses in the confidentiality agreement. Sellers who figure to negotiate with a buyer then shop the deal for improvements are in for a shock.
• Deal Lockup: Buyers have the power to insist that the condition of the company – particularly its assets – is locked up until after the transaction is closed and the buyer has assumed its role in corporate governance. They also look for ‘outs’ if something impacts that condition or threatens important assets.
• Material Adverse Effect Clauses: Buyers are insisting on an expansion of the scope of material adverse effect (MAE) outs. The expanded clauses cover matters that go well beyond seller-specific changes to include more general industry disruptions. Attorneys for buyers often create special termination provisions to augment traditional MAE provisions. Many buyers view these clauses as opening for further negotiation with the goals of achieving a reduction of the purchase price and improvement of terms.
• Lenders and MAE Clauses: In environments such as the current one, lenders tend to see themselves as and act as buyers. As a result, lenders have begun to include financial market MAE clauses as conditions to lending. Mostly these agreements are with buyers, but they primarily affect the interests of the seller. Buyers require equivalent clauses in purchase agreements, thereby shifting financial market risk to sellers.
• Closer Coordination: In the past, buyers would sign a purchase agreement on the strength of signed commitment letters from its lending group. Now, purchasers often insist on a longer negotiation period. This gives them time to finalize both the purchase agreement and the loan documentation. Buyers with this level of power in the process will use it to reduce their overall risks and shift risks onto the seller’s plate.
• Management’s Fate: It used to be that the interests and intentions of seller management had a standing in negotiations. That is no longer the way things are working. Buyers will have a plan that will often severely restrict the options that the seller’s senior management faces. Sellers who are looking to retire or move on to their next start-up may be in for a rude shock. Entrepreneurs, who never saw themselves as an employee, my find that status the only way to close the transaction. CEOs who want to stay with ship post-closing may find that they do not have an assigned cabin.

The nature of the M&A market is that the power of buyers and sellers tends to balance and unbalance over time. Most of the favorable times for sellers are related to bubbles and new, emerging industries. Under those conditions, fictional valuations and acquisition fever can produce conditions that put sellers in the cat-bird seat. But these are not such times.

© Dr. Earl R. Smith II

Related Articles:

• Exit Strategies Under Current Conditions
• Attitudes, Agendas, Interventions and Compromises
• Four Mistakes Entrepreneurs Make When Buying a Business
• Six Steps for Surviving in a Downturn
• Management Strategies in a Downturn
• Planning and Implementation

Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

This entry was posted on Saturday, June 19th, 2010 at 8:37 am and is filed under Advisory, Guest Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.