The negotiation phase is the final stage of the M&A process. Prior to this point, the parties have typically only agreed on non-binding terms and conditions consisting of valuation, payment form, transaction structure (share deal or asset deal). In order to conclude the due diligence phase the Seller along with its legal representatives will draft the purchase agreement, which is strategically tailored towards their advantage. The drafted purchase agreement is then distributed to the Buyers usually through the virtual data room. This medium of distribution is tactically preferred as it gives transparency to all involved parties and enables the Seller to observe when the purchase agreement was initially reviewed and what documents have been seen thereafter, which presumably are linked to the revision of the purchase agreement accordingly. From a Seller’s point of view this gives first indication of the critical issues that might be forthcoming during the negotiation phase.
Due diligence gives the Buyer an opportunity to drive down the price previously offered through finding faults in the company as well as identify risk exposures, which can either be rectified through further price reductions or through indemnities. The best strategy to discuss and negotiate these topics from a Buyer’s view is to intelligently implement these findings into the purchase document. By providing the contract mark-up to the counterparty, the so-called final negotiation process is initiated. However, before diving into the sequences of negotiations, it is perhaps significant to give a short insight into the key ingredients of a purchase agreement. A purchase agreement is a contractually binding document that the Buyer and Seller will negotiate and sign once a deal has been struck. Such a document primarily highlights the following in detail:
- The form of the transaction (share deal or asset deal)
- The subject matter of the transaction (inclusions and exclusions)
- Purchase price details (enterprise value, net debt, equity value, working capital) including methods, structure and timing of payments
- Purchase price adjustments, holdbacks and escrow
- Representations and warranties
- Conditions precedent to closing
- Termination provisions and penalties for failure to close
- Indemnification provisions (including limits, baskets, exclusions and inclusions)
- Dispute resolution procedures
Now coming back to the negotiation part, it is important to state that there is no definite negotiation strategy or technique. Each deal is unique and all too often one must feel the situation before tailoring their negotiation strategy. In every M&A negotiation key commercial, business, legal, tax, intellectual property, employment and liability issues are addressed and negotiated between the parties, whereby the legal jargon is then transcribed between the legal teams. The best way to keep the negotiation momentum going is to setup a physical meeting after the first mark-up is exchanged. The key strategy of such a meeting is to flip through the mark-up together and develop an issues list. This list highlights the most important issues arising from the contract. Both parties then step away and develop their stance to each of the key points and rank their importance separately. In the next negotiation round, the Seller should tactically let the Buyer start with providing feedback on the issues list and at the end the Seller can either agree on the feedback or provide their counter position. In the end, either party will have to give into some points depending on positions that are important to them and their willingness to successfully execute the transaction. A key takeaway from M&A negotiations is to remember that price isn’t everything and that there are alternative ways to negotiate an increase in value then directly bringing up the purchase price. For instance, through optimizing leakages, transferring risk obligation or payment of transaction fees.
To conclude, a lengthy M&A process is successfully executed through the signing of a fully negotiated purchase agreement between the Seller and the Buyer. The build up towards such a signing is often orchestrated through overheated, emotional and often tactical negotiations, whereby in an ideal world both parties leave the table thinking they have won.