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Why deals fall through.

Despite the software industry's reputation as a hotbed of merger activity, relatively few companies--about 4% to 6% a year--actually travel the whole distance from courtship to marriage. What the merger statistics don't report, however, are the hundreds of deals that never get past the talking stage. Many of these corporate combinations die for good reasons, of course, but we suspect that a few might have produced stronger, better positioned companies.

Why do reasonable deals fall through? We asked Peter Ulin, a Bostonbased merger and acquisition expert, to identify the stumbling blocks he meets most often as a corporate matchmaker. His answers:

* Price disputes. "The most common reason that most deals don't progress very far," says Ulin, "is that there's too big a gulf between buyer and seller over the company's value. That's why it's important to have some meeting of the minds about price at the beginning of the discussions. if you get past that point, however, the price issue generally doesn't become a deciding factor."

* The march of time. "If there's one thing that hurts deals more than anything, it's delay," Ulin insists. Changes in the marketplace, new tax laws, stock market fluctuations, loss of key employees, a competitor with a better mousetrap--anything that makes a buyer or seller decide to renegotiate can become a fatal obstacle. "Once the deal is set, move like the hammers of hell," says Ulin.

* The seller's ego. Many buyers, says Ulin, aren't sufficiently sensitive to the "psychological baggage" that founders often bring to the negotiating table. "Even when the deal makes all kinds of business sense, an entrepreneur often can't bear to give up his baby. I've represented people who've cried openly when the papers were finally signed." Especially for young founders, selling the company may also represent a painful loss of status and visibility, without much chance to launch a new career. "The odds against hitting the ball out of the park a second time in this business aren't good," Ulin admits.

* Personal enmity. Frequently, the best merger candidates are companies with similar products that compete in the same niche. Yet an entrepreneur may have trouble perceiving a long-time rival as a good marriage partner. Ulin's firm recently put together a merger of two vertical market software companies that had a history of lawsuits and bitter competitive relations. "The very idea of talking to each other was a tremendous barrier," says Ulin. "And yet there were very compelling financial and marketing reasons for the deal to go through."

* Lawyers. Despite their notorious reputation as deal-killers, Ulin saysthat lawyers don't actually scuttle many reasonable transactions. "But it's the nature of lawyers and accountants to be pretty literal, to tell their clients what's wrong with a plan instead of suggesting alternatives." Ulin's advice: "After you've reached an oral agreement, get all the professionals from both sides together in one room and ask them to find a way to put the agreement on paper. If an individual lawyer or accountant raises a sticking point, his peers will probably come up with a solution he'll accept."

* Lack of imagination. "There are lots of ways besides plain cash to structure deals," Ulin notes. "Unfortunately, buyers often focus too narrowly on the price, and don't always listen well enough to what the seller needs." creative deal-making methods--such as employment contracts, royalties on sales, fringe benefits, deferred buyouts, separate real estate contracts, etc.--can sometimes close an otherwise fatal gap between buyer and seller, says Ulin. "If you can legitimately pay the seller with pre-tax dollars, you obviously can afford to be more generous about the payout."

Peter Ulin, senior partner, Ulin, Morton, Bradley & Welling, 75 Federal St., Boston, Mass. 02110; 617/423-0003.
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Title Annotation:software industry mergers
Date:Apr 1, 1989
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