This is the last in my short, but popular, series on M&A work in Corporations.
There are many technical reasons to walk away from an acquisition or joint venture. Things like a bad price, a risky market, unreasonable demands for terms and conditions, or arguments over legal details. We're not going to talk about any of these "hard" reasons to end discussions. Instead, I'm going to examine the softer, "red flag" type of issues that leave you feeling something is wrong but still unsure whether the transaction can go forward.
1. Walk away from the deal when the sellers are jerks.
I once completed a joint venture with a couple of business owners who took me on a long rollercoaster ride over their post-deal compensation. They were unwilling to listen to data, third party experts, or the needs of the business, and instead stubbornly insisted that they be paid a small fortune based on a single example ( which was based primarily of hearsay.) Somehow I managed to work through this issue and we completed the deal.
I later wished I would have walked away. The relationship was contentious, time consuming, and ended poorly. My experience with both sellers during negotiation was a clue of what life was going to be like working with them later.
2. Walk away from the deal when something strange is going on in the company or industry.
I once bought a company where a group of employees at one of the plants had recently won a major lottery. While the employees each received a sizable amount of winnings (around $700K), I didn't think it was enough for most of them to retire, and so wasn't terribly worried about the impact on the company. Unconcerned, I pushed forward and closed the transaction.
That was a mistake. The plant quickly divided into two camps (lottery winners, and non-winners), and the employees in the two camps found it very difficult to cooperate with each other. Eventually, nearly every lottery winner left the company, but not before extreme turmoil, lawsuits going multiple directions, and significant production problems that resulted in angry customers and financial losses.
3. Walk away from the deal when there is any hint of dishonesty.
A peer purchased a company where the owners refused to let our environmental inspectors inside the building to sample water under the production floor. The refusal was a red flag that something was likely wrong, but because of an attractive bit of technology the company had, my peer pushed forward with the transaction.
Oops! As it turned out, there was a major environmental problem at the site, but that was just one of several things the sellers tried to hide during the negotiations and due diligence. The entire deal turned into a disaster of substantial proportions.
4. Walk away from the deal if there are governmental conflicts or problems.
I wish I would have had the opportunity to pull the plug on a deal for a small company I inherited when changing jobs. Within two years of the closing, the company was being sued by a state attorney for improperly selling components it supposedly wasn't qualified to sell. The problem came out of an alleged patent violation that my predecessor discovered just days after the deal closed (see point #3 -- yeah, I think this was hidden from us during negotiations).
Because government has the ability to punish far beyond the ability of a commercial competitor, we ended up suffering millions in losses, firing a key employee and losing many others, and ultimately closing the business. If there's even a hint the company has a significant problem with a governmental entity, you should either pull the plug or, at a minimum, get iron clad coverage of all potential liabilities in your terms and conditions.
5. Walk away from the deal if you can't get your conflicts settled in an impartial court.
I had a license agreement with a company in Saudi Arabia where the contract was written with the Saudi courts as the final referees should things end up in a conflict. While we had an arbitration requirement that would be carried out in the UK, we were ultimately dependent on the Saudi courts to enforce the arbitrator's rulings.
That was a huge mistake. Because of the reliance on Saudi courts, we ultimately didn't pursue the licensee when they stole our intellectual property. While I was sure we would win an arbitration ruling, I became convinced we would ultimately fail to enforce that ruling in the courts. If I'd had it to do over again, I would have insisted on U.S. law for dispute resolution, and walked away from the deal if I hadn't been able to get it.
6. Walk away from the deal if you can't complete it with your credibility intact.
I realize this admonition is more controversial, but I'm convinced it is essential to post-deal management of the acquired business.
In the first transaction I described above, my credibility was damaged during my long back and forth negotiations over salaries. As a result, my new partners felt it was perfectly permissible to run roughshod over me as I attempted to manage the entity. Admittedly, I probably would have had a major challenge on my hands given the personalities of the individuals involved, but it was much more difficult with damaged credibility. Once again, I later wished I'd never completed the transaction.
There are undoubtedly many other reasons to walk away from a deal, but these are the ones I've learned during my career. Alas, many of the rules here are listed because I made mistakes that I later paid for with many hours of management attention, some missed bonus opportunities, and many a sleepless night. Learn from my mistakes rather than repeating them.
Not all of these errors are obvious during the negotiation phase of the deal, when it is relatively simple to "walk away." But transactions can be undone even after closing if the issues are significant enough (assuming you haven't irreversibly "scrambled the eggs"). If dishonesty or extreme risk raises its ugly head at that stage, you shouldn't hesitate to try to reverse the deal. It will be difficult and time consuming, but won't compare unfavorably to the difficulty and challenge of living with a bad deal for an extended period of time.
Walk away from a deal whenever you're not confident everything is above boards, on track, and fair. It's a lot easier to find another deal than it is to manage a bad one. 24.5
Other Recent Posts:
- How many Execs does it take to Screw Up a Deal?
- Redialing the Deal
- Buy Low
- Businesses Always Look Simpler from the Outside
- The Consequences of Being Fired
- The Rich Really are Different
- You Purchased a Subordinate?
- The Graying of Your Reputation
If you are intrigued by the ideas presented in my blog posts, check out some of my other writing. Novels: LEVERAGE, INCENTIVIZE, DELIVERABLES and HEIR APPARENT. Coming soon -- PURSUING OTHER OPPORTUNITIES
Non-Fiction: NAVIGATING CORPORATE POLITICS
To the right is the cover of LEVERAGE. This novel explores the theft of sensitive DOD designs from a Minneapolis Tech Company, and the dangers associated with digging too deeply into the surrounding mystery.
My novels are based on extensions of my 27 years of personal experience as a senior manager in public corporations. Most were inspired by real events.