Saturday, May 14, 2011

Eight Reasons Not to Hire an M&A Advisor. And One Reason to Do So

It's always fun to read reactions in the press and blogosphere to big M&A deals. So much of what passes for informed opinion is ignorant twaddle, tendentious, misinformed bullshit, or thinly-veiled axe-grinding. Even people who actually know how the M&A sausage factory works can rapidly overshoot their skis if they start to speculate on dynamics which took place behind closed doors and over the phone over the course of the months or even years that a typical large transaction takes to close.

But your Humble Correspondent was struck by one fact which emerged from the brouhaha surrounding Microsoft's recently announced purchase of Skype: Microsoft did not use an advisor in the deal. It occurred to me that some among my Dedicated Readership might be interested in my unbiased opinion as to whether this was a good idea, and, to boot, whether I think that doing without an advisor on a large M&A deal is ever advisable. So, notwithstanding the paradox of a professional advisor giving advice on the advisability of professional advice, I thought I would share with you lovely people what I perceive to be the pros and cons of the matter.

Somewhat surprisingly, I have found it easier to itemize reasons why it makes sense to not hire an investment bank to advise on an M&A deal. (Never let it be said I am not subtle in advancing my own interests.) So, without further ado, here they are:

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1) You are a serial acquirer or dealmaker. This deal is not your first rodeo. In fact, it is simply one in a long series of deals. Your firm is an M&A machine, with experienced deal professionals, established procedures, disciplined processes, and the full support and backing of your firm's senior decisionmakers. Your firm's M&A strategy is crystal clear. You have done enough deals to have seen—if not it all—at least a hell of a lot. You have spent time, energy, and money on deals which never closed, where you were outbid, which you withdrew from. You know how and why the previous deals you did do succeeded or failed, and you can document this exhaustively. Your dealmaking system is so well-oiled that you can execute transactions in your sleep, but you don't, because you make it a practice to learn something new from every process. You may have more deal professionals working for you that most investment banks. You are Cisco Systems or General Electric.

Companies like this conduct mergers and acquisitions just like any other business line, and they get very good at it. Like many things, practice in M&A makes perfect—or at least really, really good—in part because every deal is different, and experience counts for a lot. There is another group of potential clients who do deals for a living, too: private equity firms, or "financial sponsors." Like experienced corporates, PE firms normally do not need help with tactical issues like process, negotiation, or valuation where investment banks commonly add value. With rare exceptions, when clients like these hire investment banks as advisors, they are really just renting our balance sheet to help finance the deal. Most of them won't even meet an M&A banker like me during the process, because they just don't need what I'm selling.

(Which is fine with me, by the way, because I really don't like most of those assholes anyway.)

2) Your target is not a big, unusual, or risky deal. The company you are acquiring is small relative to your own firm, it is in a business line you understand well, and integrating it into your own business should present no difficulties. In other words, the deal you are contemplating is not a bet-the-company transaction, or one that will dramatically transform your firm's current operations and future prospects.

3) The seller and/or its advisor is a sophisticated and experienced deal-doer. You might think that having a skilled counterparty across the negotiating table would necessitate bringing your own hired gun to the party, and normally you would be right. But often an unsophisticated counterparty can create a nightmare of a process, simply because they don't know how to behave or even how one goes about executing an M&A deal. Having an experienced M&A advisor at your side can ameliorate such situations by gently steering the doofuses you are dealing with onto the right path and running interference for their most egregious misbehavior before it ever interrupts your peaceful slumber. Never underestimate how clueless and irrational the members of a family-owned business can become when they decide to sell their company.

4) You want ideas as to which companies to buy and why. No. No, no, no, no, NO. If you are a Chief Executive Officer of a company who wants me to tell you which companies in your industry you should buy and why, you don't need an investment banker; you need a new job. And your Board of Directors needs a new CEO. Are you fucking kidding me? That is your day job, buddy; you're supposed to know this shit better than anyone. We investment bankers don't tell you Who and Why; we tell you How and When. That's our value add.

Now, if you have decided for whatever reason to diversify into a business line or industry with which you have little familiarity—or you are a private equity firm which wants to invest in an unfamiliar sector—it might make sense to hire someone like me to hold your pee-pee for you while you figure out how to urinate. But this is and should be a relatively rare occurrence in M&A. The throes of a hotly contested acquisition should not be the place where you decide what you want to be when you grow up.

5) You know you are the "natural buyer" of the property in question. In other words, you understand the competitive M&A landscape extremely well, and you do not reasonably anticipate being surprised by another bidder coming out of left field to gum up the process or beat you with a topping bid. This condition is pretty rare, however, especially in hot industries or when M&A is very active. You might think that a participant in a particular industry should know the strategic intentions and capabilities of its direct competitors well, but normally you would be wrong. Competitors do not talk to each other directly about strategy because—wait for it—they are competitors. On the other hand, it is the job and practice of any good investment banker not only to develop an informed opinion about how each significant competitor in a space thinks about strategy but also to have done so by talking directly with them, frequently if possible. This is simply not practical for most corporations. Investment bankers are normally far better informed about the strategic landscape of an industry than any one of its participants. This is a critical component of the network knowledge which investment bankers bring to the table for their clients.

6) You need someone to tell you when to stop bidding. If you need an advisor to tell you when to walk away from a deal—because it has become too expensive or the value you expected is no longer there—you do not need an investment banker, my friend; you need a testicle transplant. Investment bankers are trained, incentivized, and paid to close deals. If you're not completely sure that you want to close a transaction, don't hire an investment banker, because we will use all the honey-tongued blandishments at our disposal to persuade you, your counterparty, and anyone else who will listen that this deal here is a really, really good deal, and you should close directly. Ninety-eight percent of the time, we only get paid when a deal closes. How do you think that affects our ability to pull you aside and whisper in your ear that you should let this particular opportunity go?

Never forget, my friend: you are the ultimate decisionmaker in a deal. If you can't say no, you shouldn't expect to hire it done, either.

7.) You are supremely confident this will be an entirely "friendly" deal. In other words, you know the seller/buyer well, you judge that your interests are well-aligned, and you anticipate that your negotiating positions will not be that far apart. This means that, if all goes well, you will not find yourself at 3:00 am in some dingy conference room in Wichita, Kansas, screaming obscenities at your erstwhile friend and golfing buddy of 30 years because he will not budge from his demands for 18 months severance in case of termination without cause, whereas you only want to give 12. Good luck.

M&A deals are high stress affairs, because they are time-pressured, overrun by multiple third parties and advisors (e.g., lawyers) with multiple conflicting (yet eminently sensible) interests and demands, and put a great deal at stake. Even the strongest and oldest of friendships and business relationships can become frayed beyond repair in the negotiating room. That is often why otherwise sophisticated and competent dealdoers in their own right hire third party advisors to do their mud wrestling for them. That way, the investment bankers and lawyers can scream at each other as proxies for the principals, while the principals can walk away arm-in-arm after the fact with no hard feelings. Do not underestimate the value of this, especially if you intend to live and work with the person(s) you have negotiated against so hard for several years after the fact.

8.) You want some sort of guarantee that this deal will work out. Sorry, buddy. Investment bankers are agents. You hire us to help you do a deal. Whether that deal is a good one, or works out for you and your shareholders in the end, is your responsibility. We don't integrate your acquisition, we don't run your merged company, and we don't devise your business plan or operational strategy. All that stuff is your responsibility, and that is the stuff—in addition to exogenous factors like the general performance of the economy and your industry which are largely out of anyone's control, plus a healthy dose of sheer luck—which determines whether your acquisition or divestiture will turn out to be a good deal in the end. The terms of the deal you struck—price among them—are relatively minor factors in the ultimate success or failure of an acquisition.2

M&A is simply an accelerated, concentrated version of investment in your business by other means. It is capital expenditure. It's your plan. We investment bankers are just there to help you execute it. If it doesn't work out, don't blame the bat.

On the other hand, there is...

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1.) At least one of reasons 1, 2, 3, 5, or 7 listed above is not true.

Any questions?

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In conclusion, I will let you clever readers decide which, if any, of these conditions Microsoft violated when it chose to go solo on Skype. Heck, this could even become a parlor game.

1 NOTE: These recommendations and remarks pertain primarily to the decision whether a client should hire a "buy-side" advisor to help him or her acquire another company. "Sell-side" advisory is an entirely different kettle of fish, in which an advisor runs a process for a client who wishes to sell an asset or business. The arguments against using a sell-side advisor are much fewer and weaker. As a matter of fact, most clients do tend to use sell-side advisors when they transact, and the percentage of deals with sell-side advisors is much higher than those with buy-side advisors. (Skype used sell-side advisors when it sold to Microsoft.) If you people are really, really nice to me, perhaps one day I will elaborate further on this.
2 Please, please, please don't talk to me about whether or not a deal is "fair" to shareholders. I have eviscerated that legalistic canard quite definitively in the past.

UPDATE: This post is a replacement for the original item posted earlier in the week which vanished into the ether. (Just in case you were keeping track.) The folks at have been permanently removed from my Christmas card list. Fuckers.

© 2011 The Epicurean Dealmaker. All rights reserved.