Mastering the M&A Dance

The M&A scene has become increasingly fickle. Evolving priorities, global market trends, and industry threats and opportunities can change on a dime, leaving growth-driven companies scrambling to align their strategy with the latest developments.

With companies accruing hordes of cash in the wake of the market crash, private equity continuing to raise more money, and companies scratching at every opportunity to gain a competitive advantage, most companies approach M&A candidates with an immediate need to strike a deal while the iron is hot.

Under intense pressure to meet aggressive growth objectives and lock up deals with the hottest prospects before their competitors do, most companies aim to expand their portfolio with new business that will accrete value now, or at least in the very near term within two to three years. If their offer is declined or rebuffed by a potential candidate, most quickly move on to find another target with high-growth potential. They simply do not have the time to continue the courtship, and most fail to revisit those prospects after some time has passed.

Few realize that this tendency to walk away and never look back is a fatal flaw. Assuming that “no” means “never” effectively slams the door on a potential future deal, and flies in the face of everything we know about the market. The fact is, things change—a stern “no” today could become “yes” tomorrow, given the right conditions. For example:

  • Perhaps ownership believes that given more time, they will bolster their valuation and demand a higher price. This is precisely the speculation behind Groupon’s bold rejection of Google’s $6 billion offer. The daily deal pioneer had been in talks with Google for months, with the discussion plagued by conflicting reports on the coupon site’s valuation. In the end, Groupon said, “No thanks,” launched its own IPO (which has since fizzled) and CEO/co-founder Andrew Mason made an abrupt exit shortly thereafter. Had Google circled back instead of walking away, both may have come out as winners.
  • Owners who are happy, engaged and have no motivation to sell now may be compelled to do so in the face of insurmountable market forces, regulatory compliance and other onerous issues. Many believe this proved to be a definitive factor Rhodia’s (now Solvay) purchase of Chicago-based McIntyre Group. Having rebuffed numerous buyers over a period of six or eight years, industry sources report that McIntyre was more receptive to Rhodia’s offer that came at a time of growing concern about the possibility of European REACH regulations coming to the United States. The well-timed Rhodia opportunity gave McIntyre the business continuity it needed to survive the potential change in regulatory compliance. Unfortunately for previous suitors, they had all moved on to other targets, leaving the door open for Rhodia to scoop up the $146 million company.
  • When leadership succession plans change, e.g. family members decline to step up to the plate or focus on just one aspect of the business, a sale becomes an excellent way to extract equity and make a graceful exit. Industry sources say this may have played a pivotal role in Biotech Marine’s decision to sell to Seppic earlier this year. The current generation wanted to focus on running the spa side of the Biotech business and selling off gave them the opportunity to do just that.

At Kline, we’ve seen dozens of deals that ultimately prevailed simply because we have helped the suitor establish and maintain a positive, ongoing relationship with the target candidate. In some cases, that relationship was formalized as a partnership, collaboration, or joint venture for mutual benefit of both parties, providing a natural progression to the M&A stage. In others, it simply meant an occasional round of golf or a dinner get-together once every few months to “talk shop.” However the connection takes shape, the key is to make it a priority.

It may seem obvious that continuing the relationship even after an offer is declined is critical to keeping the door open for future opportunities. But even so, it is amazing how often companies move on to other targets and never look back. Keeping an open dialogue builds trust, camaraderie and a mutual understanding of business operations that paves the way for a seamless deal when the opportunity is right.

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