We regularly come back on our blog about the M&A process. Today, let’s see how a good negotiation of the price but also of the conditions of sale influences the future success of the company.
Following the steps of the M&A process is critical to the success of the project. Yet, according to a study by S & P Global Market Intelligence, between January 2001 and August 2017, net profit margins of acquiring companies tended to decline, as did returns on capital and equity. Earnings per share grew at a slower rate, and debt and interest expense figures tended to rise. Why? Because the negotiation inherent in the M&A process is usually limited to agreeing on a sale price. This overlooks 3 other essential aspects of the transaction…
1. Legal documentation in the merger and acquisition process
The M&A negotiation process is often perceived as a simple agreement on the purchase price, forgetting the risk allocation exercise. However, the negotiation must be carried out within a very precise legal framework, which can be divided into 2 main phases:
- the letter of intent
- final contracts and the due diligence process
These legal documents gather information that allows for the allocation of risk, i.e., defining the consequences for each party if things do not go as planned.
The letter of intent confirms the interest and commitment of both parties. It defines the ground rules for the M&A process. Its drafting has an important influence on the seller and the buyer. After signing, the seller’s negotiating leeway is reduced: it is more difficult to resist the buyer’s demands. It is therefore advisable to work with a professional in the M&A process at this stage in order to obtain the best result.
2. Theories and principles of negotiation
There are many theories and strategies of negotiation. What they have in common is that they consider the human being as a rational actor. On the contrary, most of our choices are guided by impulsive and invisible decisions, shaped by our habits, fears, needs, perceptions and desires. But how do you neutralize these impulses and increase your chances of getting the other side to agree to your demands? Several tactics must be combined:
- Research and understand habits. Behavior is unpredictable, habits are predictable. Observing your interviewer allows you to take advantage of their ideas and never be caught off guard.
- Use negotiation as an information gathering exercise. Observing reactions to changes allows you to understand what really matters – your trade-offs.
- Carefully consider the form and channel used to present proposals. For example, leaders are generally more open to negotiation in face-to-face exchanges than in large meetings with staff.
- Never say no immediately. Even if the request is unreasonable, it is better to say “let me think about it”. This creates a greater climate of trust, which is imperative in the long process of a merger and acquisition.
- Negotiate multiple issues at once. Trying to negotiate several issues at once reinforces the equality between the parties. The buyer and seller give in on some issues, win on others.
Preparation of the merger and acquisition process
The success of the agreement and the future of the company require a significant investment by both parties. Preparation drives good results and ensures good judgment in decision making. All relevant information should be gathered and evaluated. With a complete understanding of the strengths, weaknesses, opportunities and threats of your counterparty, you can better anticipate the key factors that affect the decision making and the value of the transaction.
Price is obviously a key element, which can only be changed if new information emerges during the negotiation that changes the fundamentals of the target company. Get to know the other party better. Understand their reputation, their habits. Do they adopt a bluffing position or do they act transparently? Do they offer ultimatums or are they patient with their opponents? Make sure of the circumstances, the motivations of both parties. For example, a seller in financial distress may be led to sell his company under interesting conditions, a priori. But is it really a profitable deal for you in the long term?
As you can see, the process of merger and acquisition is difficult without the support of professionals in negotiation and business transfer. For the sale or the acquisition of a company, contact our consultants Actoria France.