Friday, October 12, 2012

The Interrelated Nature of Deal Design

Point 3 of our 14 keys to acquisition success states:

3.     Negotiate the deal on all aspects (price, form of payment, contingencies, etc.)

In a previous post, we commented that any deal is a bad deal at some price.  But a deal is so much more than price.  If we think about just a few of the decisions made in an acquisition it is clear that any deal involves a busy menu of detailed choices.  One of the things we discuss in the acquisition finance class is the interrelated nature of these choices.  Each deal is a system and each of the choices we make and negotiate has the potential to influence the others.  Wise negotiators consider the whole deal and bargain on multiple fronts.

Let's take just a few factors: price, form of payment, accounting choices, ownership structure, risks to the acquiring and biding firm and the length of the deal.  The price or bid premium over market is known to be related to form of payment.  Premia are known to be higher in cash deals, ostensibly to compensate for the immediate tax effects to the seller - and tax obviously affects the 'real' premia that target shareholders receive.  But form of payment also determines the accounting choices we make and even the form of organization.  And, of course, price and form of payment are related to financing.

A choice of stock as a form of payment affects the resulting ownership structure of the combined firm.  It also affects risk to all parties.  If the stock of the acquiring firm or the target change before the deal is closed the price that is paid and received is different from that originally negotiated.  (One way around this is the use of collars, but more on that in another blog.)  And remember, in terms of risk, who bears the risk ultimately affects the returns of the parties.

The choices we've just described also affect the length of time until a deal closes.  Cash offers tend to be faster (which is why hostile offers favor cash bids); stock bids involve more regulation and tend to take longer and so on.

We begin to see the complications and interdependencies from just the factors we've considered and we haven't even talked about social terms of the deal: where will the firm be headquartered?  What will it be called?  How many directors from the target firm shift to the acquiring firm's board.  Nor have we talked about target management: will they stay with the firm? etc.  etc.

The point is to take a whole deal approach, to recognize the myriad of interrelated choices and to bargain on multiple fronts.  Structuring the most effective deal requires no less.


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