| Deal
killers. They come in all shapes, sizes and varieties with
different reasons, justifications and rationalizations. They
can emanate from the buyer, the seller or any number of third
parties -- lenders, investors, key customers or suppliers,
professional advisors -- or all of the above.
In the article below, Andrew J. Sherman, Esq.,
presents a variety of strategies for successfully managing
the deal killers to keep transactions on a positive track.
Mr. Sherman is a Capital Partner in the Washington, D.C. office
of McDermott Will & Emery LLP, an international law firm
with over one thousand attorneys worldwide.
A recognized international authority on mergers
and acquisitions and on the legal and strategic issues affecting
middle-market and growing companies, Mr. Sherman serves as
one of the firm’s practice group leaders of the Emerging
Business and Technology Practice Group. He also is the author
of twelve books on the legal and strategic aspects of business
growth, mergers and acquisitions and capital formation.
Please feel free to forward this newsletter
to friends, colleagues and networking contacts. (Go to www.focusbankers.com
for newsletter archives.)
Active FOCUS
Deals
Although our firm has over 22 years experience
across many verticals, FOCUS currently has active transaction
engagements in the following specific business sectors:
- Business Services
- Consulting and Government Contracting
- Distribution
- Government Contracting (multiple assignments)
- Healthcare
- Healthcare Business Services
- IT Outsourcing
- Manufacturing (multiple assignments)
- Medical Devices and Equipment (multiple
assignments)
- Public Affairs Software and Services
- RFID Technology
- Security (multiple assignments)
- Software
- Specialty Flooring
- Supply Chain Management Solutions
- Systems Integration
- Video Surveillance and Network Integration
Our transaction process provides us with up-to-the-minute
market knowledge in these sectors that may be corporate development
of interest to you.
Inquiries should be addressed via e-mail to
info@focusbankers.com,
by telephone to 202-785-9404, x 341 or by fax to 202-785-9413.
Keeping
M&A Deals on Track: Managing the Killers
By Andrew J. Sherman, Esq.
Deal killers: we have all seen them and had
to manage through them. Some deal killers are legitimate for
deals that deserve to die and some are emotional, financial
or strategic in nature. They can be very costly to all parties
to the transaction, especially when significant costs already
have been incurred and for certain advisors and investment
bankers, it means not getting paid. Clearly, deal killers
inflict a lot of pain along their path of destruction.
Most deal killers can be put into one of the
following major categories:
- Price and Valuation
- Terms and Conditions
- Allocation of Risk
- Third Party Challenges
COMMUNICATION AND LEADERSHIP
The first step in keeping a transaction on track (and greatly
increasing the chance of deal killer avoidance) is to have
strong communication and leadership by and among all parties
and key players to the transaction. As in football, each team
(e.g., buyer, seller, source of capital, etc.) should appoint
a quarterback, who will be the point person for communication
and coordination.
Too many lines of communication, like too many
chefs in one kitchen, will create confusion and misunderstanding
— which are fertile conditions that allow a deal killer
to pollinate. The more the quarterbacks coordinate, communicate
and anticipate problems with the various members of their
team and promptly discuss key issues with the quarterbacks
of the other teams, the greater the chances that the transaction
can and will close.
Some of the key tasks of the transactional quarterback
and each team to keep the transaction on track towards closing
include:
- Putting a master strategic plan
in place (with realistic expectations re: financial and
post-closing objectives)
- Building the right team
- Communication and teamwork
- Orchestration and leadership
- Momentum and timetable accord
- Avoid emotion: don’t call my baby ugly syndrome
(sellers) and buyers must avoid falling in love with a given
transaction
- Early start on governmental and third party appeals
- Creative problem solving
- Cooperation and support from financing sources
- Facilitate agreement on the key value
drivers of the seller’s business/intellectual capital
issues
DIAGNOSING THE SOURCE
OF THE PROBLEM
When a potential deal killer does arise, each quarterback
should first diagnose the source of the problem. Where is
the issue coming from and what can be done to fix it? A deal
killer for one party may not be a deal killer for another
party. Take a look at Box A below. The old adage “where
you stand often depends on where you sit” clearly applies
here.
For example, a lender to a buyer coming at a
higher lending rate than anticipated may significantly alter
the attractiveness of the transaction from the buyer’s
perspective but may be viewed as a non-issue for the seller.
UNDERSTANDING THE TYPES
OF DEAL KILLERS
Once the source of the deal killer has been analyzed, the
respective quarterbacks should focus on the specific type
of deal killer. Most deal killers can and should be resolved
— either with creative restructuring, effective counseling
or precision document redrafting.
Some deal killers cannot be resolved (they are
just too big and hairy) and other deal killers should not
be resolved (like trying to squeeze a square peg into a round
hole). Deal killers come in a wide variety of flavors, and
include the following:
People, Personalities and Leadership
- Egos clashing
- Inexperienced players
- Internal and external politics (board-level, executives,
venture investors, etc.)
- Employee and customer issues
- Overdependence on the founder/key employee/key customer
or relationship
- Loss of trust/integrity during the transactional process
- Nepotism
- Breakdowns in leadership and coordination/too little or
too many points of communication
- Too little or too much “principal to principal”
communications
Structure, Strategy and Process
- Misalignment of objectives
- Failure to agree on post-closing obligations, roles and
responsibilities
- Failure to develop a mutually-agreeable post-closing integration
plan
- Impatience to get to closing vs. loss of momentum (flow
and timing issues)
- Force-feeding deals that don’t meet M&A objectives
(square peg/round hole) (Bad deal avoidance/good deal capture
— systems and filters)
- Incompatibility of culture and/or business systems (e.g.
IT Infrastructure, costs and budgeting policies, compensation
and reward programs, accounting policies, etc.)
- Who is driving the bus in this deal? (M vs. A)
- Unexpected changes in the buyer’s strategy or operations
during the transactional process (including a change in
management or strategic direction)
- Environmental problems (buyers less willing to rely on
indemnification and insurance protections)
Financial, External and Unforeseen Circumstances
- Due diligence red flags/surprises
- Pricing and structural challenges (price vs. terms)
- Valuation problems (tax/source of financing/in general)
- Third party approval delays
- Seller’s/buyer’s/source of capital remorse
- Shareholder approvals
- Accounting/financial statement irregularities (post-Worldcom)
- Sarbanes-Oxley post-closing compliance concerns
- Crowded Auctions
- Changes in seller performance during the transactional
process (upside surprises vs. unexpected downside surprises)
- Loss of a key customer or strategic relationship during
the transactional process
CURING THE TRANSACTIONAL
PATIENT
Although a detailed discussion of the tools available to “kill
a deal killer” is beyond the scope of the article —
and is probably as broad as the number of tools available
to the Orkin® man to kill the hundreds of different insects
and rodents — some of the more common tools are listed
below. The first step is for each quarterback to ensure that
the transaction can and should be fixed. If so, these tools
can be very valuable in mending a broken deal:
- Earn-outs/deferred and contingent post-closing consideration
- Representations, warranties and indemnities (tools to
adjust allocation and assumption of risk); (weighting of
priorities issues)
- Adjusting the post-closing survival period of R&W’s
- Holdbacks and security interests
- Closing date audits
- Third party performance guaranties/performance bonds/escrows
- M&A insurance policies
- Restrictions on sale by seller of buyer’s securities
issued as part of the overall consideration
- Recasting of financial projections and retooling post-closing
business plans
CONCLUSION
Bad deals deserve to die a peaceful death. Not all transactions
are meant to be closed: (a) at this time; (b) at this valuation;
(c) between these parties or (d) under these terms and conditions.
But if a transaction can be saved, then it should be saved.
The quarterback on each team must have the transactional
experience, business acumen and communication skills to diagnose
the source and nature of the problem as well as enough familiarity
with all of the tools available to get the transaction back
on track toward closing.
Andrew J. Sherman, a Capital Partner
in the Washington, D.C. office of McDermott Will & Emery
LLP, also is the author of twelve books on the legal and strategic
aspects of business growth, mergers and acquisitions and capital
formation. Recent books include Mergers and Acquisitions:
A Strategic and Financial Guide for Buyers and Sellers, The
Complete Guide to Running and Growing A Business, Parting
Company and Raising Capital. His newest book, Fast Track Business
Growth, was published in January, 2002. Mr. Sherman can be
reached at 202.756.8610 or at ajsherman@mwe.com.
MAXIMIZING
WEALTH: Liquidity Strategies for Business Owners
June 22, 2004, U.S. Chamber of Commerce
Building, 1615 H Street NW, Washington, DC -- 8 am to 12 noon
To help business owners and CEOs assess the
risks and opportunities of selling a business, FOCUS
Enterprises, along with four other firms – SES
Advisors; Bernstein
Investment Research and Management; McCullough
& Nicholas, P.L.C.; and Planning
and Strategic Solutions, L.L.C. -- is hosting a unique
Workshop full of useful and actionable strategies for maximizing
wealth.
Bonus Keynote Speaker: Ed
Peters, CEO, DataDirect Technologies, Will Speak on "Selling
Your Company: Lessons Learned Along the Way"
Ed Peters, the recipient of many awards including the 2004
Maryland Technology Council Entrepreneur of the Year, recently
sold DataDirect for $88 million. Learn from his fascinating
account of the transaction.
Business Owners and CEOs Gain a Wealth of Valuable
Information
Whether you’re driving your business to the next level,
considering corporate finance options or M&A activity
or simply planning your personal finances, this new Workshop
supplies excellent take-home value. Workshop participants
will learn how to:
- Position a company to maximize the valuation multiple
- Prepare a company to maximize the sale price
- Time when to begin preparing for the sale
- Minimize personal taxation on the transaction
- Determine exactly how much is needed to retire comfortably
- Execute the process successfully
The Program and Format
Ensure Value for Participants
We can’t over-emphasize the value of careful advance
planning, even for events that may be two or three years away.
For example, you need to set up trust structures well in advance
of a transaction. Also, in order to understand the right "threshold
value" for an M&A transaction, pre-transaction planning
on income is required.
Workshop participants will receive materials
that supply the tools you need to assess specific situations,
opportunities and needs. In each session, there is ample opportunity
for asking questions. At the close of the Workshop, a panel
discussion features a general Q&A session.
Each Presentation Will Contribute to Your
Understanding of How to Maximize, Realize and Extend Value
BUILDING VALUE
DISCOVER THE FACTORS THAT DRIVE UP THE VALUE OF A BUSINESS
Doug Rodgers, Managing Partner, and Mark Capaldini and George
Shea, Partners, FOCUS
Enterprises, Inc. (www.focusbankers.com), will outline
both operating and transaction drivers that build the value
of a business. A “scorecard” for the Twelve Value
Drivers in a business will be shared with Workshop participants.
Various transaction types, including negotiated transactions,
the auction, mini-auction, and the partial sale also will
be discussed.
CONVERTING VALUE
ADVANTAGES OF A LEVERAGED ESOP TRANSACTION FOR PRIVATELY HELD
COMPANIES
James F. Higgins, Jr., a principal and shareholder of SES
Advisors (www.sesadvisors.com), will explain the ESOP
process with special emphasis on the advantages to a privately
held company and its shareholders. You will learn about ESOP
feasibility analysis, transaction design and execution, raising
debt capital, and plan record keeping ensuring that your ESOP
transactions are optimally structured to address your ownership
transition objectives.
SHIELDING VALUE
STRATEGIES TO MANAGE THE TAX IMPACT OF LIQUIDITY EVENTS
John E. McCullough, Esq., and Stefan C. Nicholas, Esq., partners
at McCullough & Nicholas
P.L.C. (www.mntaxlaw.com), will introduce a variety of
legal strategies important to business owners: (a) Selling
Your Company and Preserving Your Wealth: Tax-Deferral Strategies
for Sales to Third Party Buyers and ESOPs; (b) Estate Planning
for Retirement; (c) Family Limited Partnerships; and (d) Other
Estate Planning Vehicles.
PROTECTING VALUE
PROFIT FROM INNOVATIVE EXIT AND RETIREMENT STRATEGIES
David M. Bekenstein, Managing Director, Planning
& Strategic Solutions, L.L.C. (www.pandss.com), will
reveal innovative exit and retirement strategies for small
to medium-size businesses designed to affect tax deferred
cash withdrawal or sale of a company using insurance, investments
and annuities to manage taxes during and after exit.
PRESERVING VALUE
HOW MUCH DO YOU NEED? A UNIQUE APPROACH TO PLANNING AND PERSONAL
WEALTH MANAGEMENT
Joseph M. Perta, Vice President, and Michael A. Bono, Vice President,
Bernstein Investment Research
and Management (www.bernstein.com), will bring together a
sophisticated understanding of the capital markets and in-depth
knowledge of how various estate planning vehicles work, sharing
a framework to help business owners best meet their personal financial
objectives, both during and after the transaction planning process.
Who Should Attend?
Individuals who will benefit most from this unique Workshop
include presidents, CEOs and owners of companies who are considering
some type of sale or recapitalization within one to five years.
Relevant companies are: private companies, public companies
with revenues under $100M, government contractors, venture-backed
companies, individual- or family-owned companies and companies
who have or are considering ESOPs.
June 22nd Workshop in
Washington, DC is being Co-sponsored by the U.S. Chamber of
Commerce
Participation in the half-day Workshop, strictly limited to
company owners and CEOs, is $125 each, payable in advance.
Members of the U.S. Chamber of Commerce pay only $75 each.
*The U.S. Chamber of Commerce does not endorse
the participating Workshop partners or their products.
Register online at www.focusbankers.com,
call 202-785-9404, Ext. 233, or send an email to B.Fleisher.Workshops@focusbankers.com.
FOCUS
Enterprises Appoints George M. Shea Southeastern Regional
Managing Partner and Opens Atlanta Regional Office
WASHINGTON, DC, June 3, 2004--FOCUS
Enterprises, Inc., the Washington, DC region’s premier
investment banking and corporate development consulting firm
providing merger, acquisition and corporate finance services
for middle-market clients, is appointing George M. Shea Southeastern
Managing Partner. Shea is establishing an Atlanta Regional
office to serve as a hub for growing investment banking activity
in the entire southeastern United States.
Marshall Graham, Chairman, FOCUS Enterprises,
says, "We are pleased that George has taken on the responsibility
of opening an Atlanta office and developing the southeastern
region for our firm. George has operated his own merger, acquisition
and corporate finance firm for some years prior to joining
FOCUS and has been tremendously successful as a FOCUS Partner
since joining the firm less than a year ago. As such, he brings
much experience in serving corporate development clients.
Now he will take on the added challenge of building a substantial
investment banking practice headquartered in Atlanta with
satellite offices in Jacksonville and Charleston. George is
currently actively recruiting professional staff for the Atlanta
office."
According to Douglas E. Rodgers, the firm’s
Managing Partner, “FOCUS has experienced significant
client demand for middle-market investment banking services
in the southeastern marketplace, and so we are extremely pleased
to have a senior deal maker like George Shea assuming leadership
of our expansion into the region. FOCUS is solidly committed
to participation in the coming Mergers and Acquisitions wave,
and concluded that Atlanta is a key location from which to
lead and manage transactions throughout the southeast.”
“I’m really excited about returning
to Atlanta and building a superb team of experienced dealmakers
to service this growing market,” Shea said. “Having
lived here for 20 years, I’m familiar with the business
community and look forward to renewing old relationships and
developing a strong and satisfied client base here.”
George M. Shea
George M. Shea,
a FOCUS Partner and now Southeastern Managing Director of
the firm, has over thirty years of broad industry experience
in acquisitions and divestitures, corporate finance, business
development, strategic planning, marketing, sales and operations.
Utilizing a unique combination of operating management expertise
and major M&A, financing and business development experience,
he has acted as a principal or facilitator in over 100 transactions.
For the past 14 years, Mr. Shea ran a boutique
investment bank, Ambassador Capital Corporation, of Atlanta
and Jacksonville. He arranged the largest single infusion
of equity capital ($25 million) in Georgia’s history
into an early stage technology-based company, a transaction
named “Venture Capital Deal of the Year.”
A graduate of Colby College (honors –
Independent Studies), George Washington University and the
Stanford Executive MBA Program, Mr. Shea currently serves
on the Board of the USO (United Services Organization).
About FOCUS Enterprises,
Inc.
For 22 years, FOCUS has successfully assisted
clients with corporate development consulting assignments;
merger, acquisition, and divestiture engagements plus capital
raising and capital formation assignments. In a mixture of
services uniquely beneficial to clients, FOCUS
integrates consulting and transactional expertise with superb
research capabilities and precise, proven methodologies.
Unlike larger investment banks, FOCUS processes
are optimized and proven effective in our target marketplace
-- private companies or operating units with revenues in the
$5 million to $100 million range. Eleven full-time FOCUS
Partners provide well over a century of C-level operating
experience in a variety of industries. Operating nationally
and internationally, FOCUS works with buy-
and sell-side corporate clients, private equity groups, holding
companies and early stage venture capital firms in the following
areas:
- Aerospace
- Government Contracting
- Healthcare
- Manufacturing and Distribution
- Media and Communications
- Retail
- Technology (hardware, software and services)
- Telecommunications
Your comments, suggestions and questions are welcome and
encouraged. We want to hear from you.
You are receiving this newsletter because you have had personal
contact with a FOCUS Enterprises partner
or principal or have requested this newsletter on our website
or have been contacted by FOCUS on behalf
of a buyer, seller, corporate finance client or consulting
client.
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