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Appallingly common M&A mistakes.

After 20 years of providing legal advice to clients involved in acquisitions, divestitures, and restructurings, I often have a feeling of deja vu. Some of these deals, unfortunately, have not been successful. But what continually amazes me is that often they don't work out because the buyers commit certain fundamental errors that recur with appalling frequency. As a result, I have compiled my personal list of "sweet 16" (maybe sour would be better adjective) of common M&A mistakes that are made before a deal closes.

Lacking a Focused Strategy and Clear Understanding of the Competitive "Mix" of the Industry. Any buyer (other than a leveraged acquirer that is purely opportunistic) must understand the dynamics of the business and industry in which it is engaged and have a clearly defined acquisition policy in order to determine the type of targets it will consider.

If this strategy does not exists, the buyer will be inundated with so many proposals, offering brochures, and telephone calls that it will be impossible to devote adequate attention to all of the prospects. Hence, the one opportunity, out of many, that may fit the industry and strategy may not be identified.

Pricing the Target Alone or "Falling in Love" With it. Overpaying, either directly or indirectly, is unbelievably common. Once a prospective target has been identified, a knowledgeable financial adviser should be consulted. At this stage, the buyer should clearly analyze the value of the property to its business. And while every acquirer believes that it knows "value," it is wise to engage an outside professional, except in the rare cases in which in-house expertise is at hand, to help value the target from a number of perspectives.

Objective, third-party analysis is particularly critical if outside financing will be required to "close" the deal, since lenders or investors must be convinced that the buyer is not overpaying. The financial adviser must be consulted before an offer is made so that it can be structured optimally from a buyer's perspective and increase the chances of success in securing financing. Financing sources should not be approached until a professional presentation has been developed.

Failure to Retain Legal Counsel Experienced in M&A. Prior to actually "making" an offer, engage legal counsel experienced in acquisitions and divestitures. Even though you may have utilized an experienced and competent lawyer for many years, if he or she is not experienced in mergers and acquisitions, you will be poorly served. Seasoned deal attorneys know thee patterns and practices that will resolve difficult issues so that the transaction can be consummated as quickly and least expensively as possible.

Agreeing on Details Too Quickly. In making an offer and negotiating a letter of intent, do not simultaneously agree on detailed representations, warranties, and covenants. It is too early, because, frankly, you probably have not had enough time to explore the target company and its condition in detail. The letter of intent should state - although care must be taken to make certain that the letter is not a contract - the purchase price, how it will be paid, whether stock or assets will be purchased, and very little else.

Rushing the Due Diligence Process. Immediately after execution of the letter of intent, certain "long-lead-time" areas of inquiry must be started. These will be expensive and annoying, but it is critical that a complete environmental assessment be conducted, whether stock or assets of the target enterprise are being acquired. The extent of this assessment will be an item of discussion between the parties, but it is an area that must be promptly and competently addressed.

Agreeing to Provisions in the Purchase Agreement Too Quickly. Everybody wants to be liked and to be viewed as agreeable. It is normally a mistake for the purchaser to agree to particular representations or warranties until the results of the due diligence and the contents of the seller's disclosure documents have been fully analyzed. There is nothing wrong with agreeing to provisions conditionally, but the conditions must be clearly stated.

Becoming Too Deeply Involved. The president or other employees leading the acquisition team should not become engaged in the day-to-day negotiations. They should hold themselves in reserve for the material and unresolved issues that will arise between counsel.

Make sure that you are advised, often and in detail, as to all of the discussions and all of the concessions made and accepted. However, becoming too deeply involved in immaterial issues is an error. In addition, always make sure that you have at least two representatives at each negotiation session so they can double-check each other's recollections and assist one another. And you always, always must be willing to walk away from a deal that starts to smell sour.

Weakening Your Professional Advisers. Your professional advisers are negotiating on you behalf. Having "back channel" or "back door" discussions with the principals or, even worse, counsel for the opposing side robs your advisers of their credibility. If you want to negotiate items directly, either "rehearse" with counsel or have counsel present as a "witness."

Believing All Assurances. Nobody wants to be viewed as suspicious or untrusting, but all assurances are worth nothing more than the paper that they are written on. If you receive assurances that are important to you, the other side, if it is honest and direct, will have no problem memorializing the guarantee. If a party is unwilling to memorialize its assurances in an enforceable form, you should be suspicious about its sincerity and not rely on its accuracy.

Being Unavailable for Discussions. Both before and after the execution of the purchase agreement, and prior to the consummation of the transaction, the "decisionmakers" of the acquirer must be available for consultation and discussions. Long vacations in distant places are not advisable until the transaction is completed.

Assuming That a Seller Will Be Financially Capable of carrying Out Its Indemnity Obligations. Although it seems obvious that a seller should live up to its indemnity obligations, don't bet the house on it. Not all sellers are willing, or able, to fulfill the commitments, even when they are in writing.

The buyer's due diligence should determine whether there are any third parties that may have responsibilities, such as insurance companies. Retaining as significant portion of the purchase price, by escrow or other means, until the liabilities are satisfied or at least clearly quantified is often a wise idea.

Nothing makes a transaction more difficult than a party whose honesty or integrity is doubted. A buyer or seller is most vulnerable to injuring its own credibility when it changes a position. That may be necessary as new facts come to light or new developments ensue as the negotiations proceed, but handle the shift honestly. Never deny that you took the original position that is being altered. Instead, clearly admit to the change and the reasons why you believe a new position is required.

Letting a Deal "Drag" and Become a Hobby. Transactions, like babies, have gestation periods If a transactions is allowed to languish, the attention span of the parties will be dissipated, immaterial issues are likely to be blown out of proportion, and the chances of completing the deal will significantly decline.

Assuming That the Deal Is Done, Before It Is Done. No transaction should be considered completed until it has been closed.

Ignoring Customers, Suppliers, and Employees. If any of these constituencies are important to the ongoing success of the target, you should assume that they will be nervous and discomforted by a change in ownership. Consult your professionals about how key constituencies may be assured about their future relationships with the acquired company.

Assuming That "Post-Closing" Details Will Be Addressed by Someone Else. Buyers of often are tempted to "turn over" the newly acquired entity to others to manage and implement strategies. When delegating responsibility, make certain that you and your advisers have compiled, together with the "new" management team, a comprehensive checklist of items to accomplished.

The list should be compiled well before the closing and kept in confidence. But immediately after the closing, the new management team, which should have been a party to its development, must be empowered to "make it happen."

Do any of these mistakes sound familiar? If so, it's a good idea to review your acquisition process up to closing to make sure nothing is falling through the cracks. The greater the number of soft spots in your acquisition approach, the more ill-fated your deals can become.

Edward B. Harmon is a Partner and a member of the Executive Committee of the Pittsburgh law firm of Thorp, Reed & Armstrong.
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Title Annotation:mergers and acquisitions
Author:Harmon, Edward B.
Publication:Directors & Boards
Date:Mar 22, 1992
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