The Practice of Acquisitions - Buyer strategy and negotiation essentials

In recent years, the degree to which stock markets in Taiwan and around the world are obsessed with corporate acquisition activity has done nothing but increase. While it seems easy to see the logic of the buyer side using acquisitions to expand their territory and create value, nonetheless acquisitions involve huge sums of money, and we should not overlook the effects they have on operations, employees and public perceptions. The key to making such transactions pay off – to create shareholder equity and make corporate operations more efficient – is thorough and careful planning together with the ability to grasp the essential points of successful negotiation. The following are a few of the main lessons this writer has learned in the course of assisting buyers formulate their negotiation plans and execute acquisitions in practice.

• Reasonable Expectations
  When companies use an acquisition to expand their business territory, major shareholders and managers often have unrealistic expectations. They need to take a sober look at what they believe: Is it the "manna from heaven" philosophy or is it "there's no such thing as a free lunch"? And it is especially important for them to realize that the negotiation and deliberation process usually takes a great deal of time, effort and cost, and unrealistic expectations often result in frustration and difficulties on both sides.

• Careful Planning, Active Preparation
  Do not assume that anything worth getting comes easily, but at the same time, believe that every difficulty can be overcome. The key to coming out a winner in an acquisition, and wresting from it the greatest benefit for shareholders, has to be careful thought and planning, coupled with early preparation for negotiation and valuation.

• Count the Chips You Have in Hand
  To secure a relatively favorable posture for negotiations on price or contractual and other business conditions, one must clearly grasp and make thorough use of the chips you have, whether it is business value, competitive advantages or product niches.

• Anticipate the Downside
  If the negotiations come to a dead end and the deal is broken off, disappointment may lead to quarreling and accusations being traded back and forth. Corporations need to think ahead of time about whether they can accept such negative consequences. More importantly, they must be able to launch backup plans without delay and adapt quickly.

• Internal Consensus
  Before you can develop an effective strategy and enter negotiations with the opposing party, there must first be a consensus between the majority shareholders and the company's officers or managers. There should also be a mechanism for prompt communication and rapid response between the parties involved, as well as a good deal of psychological preparation.

• Set "Bottom-Line" Negotiating Positions
  Prospective buyers should proactively set down their expectations in terms price, method and schedule of payment, non-competition agreement, indemnity clause, allocation of board seats, and so on, and then run through simulation exercises. They should meticulously think through the seller side's position at the negotiating table and know clearly how they are likely to respond to conditions raised by the seller.

• Single Window
  The would-be buyer's shareholders, principal officers and managers should agree to put forward a single person to act as their common contact window, with centralized powers, to avoid information leaks, miscommunication or misunderstandings from occurring, and limit the efficiency problems that arise when people work at cross purposes.

• Know Your "Enemy" and Know Yourself
  Sun Tzu expressed well the mindset needed during negotiations: "If you know the enemy and know yourself, you need not fear a hundred battles". Through scenario testing exercises performed in advance, the objectives that the buyer wants to insist on are clarified, the seller's likely mindset can be researched and determined, and different negotiation strategies and bottom-line positions can be worked out. In addition, buyers must by all means avoid deciding subjectively that they have a deep understanding of the seller based on their past experiences in business dealings together, much less allow familiarity to produce complacency. Instead, they are advised to make use of objective third-party professionals who can assist in obtaining a comprehensive understanding of the seller.

• Good Faith and Mutual Benefit
  Whenever the two parties in a transaction are highly unequal, or one of the parties relies on its superior resources to intimidate or exploit the other party, it will be difficult for either party to really profit in the end. This is why creating a win-win or multi-win situation is a basic principle for the success of any transaction.

• Confidentiality
  An acquisition deal can deliver tremendous market benefits, even create a sea change in terms of competitive superiority. Effort spent on confidentiality is therefore worthwhile as it can prevent unexpected disruptions or difficulties caused by unnecessary conjectures. It can also avoid premature news leaks that would make employees feel insecure, lower their morale, or even produce an illegal insider-trading situation.

• Professional Consultation
  An acquisition typically involves the application of highly specialized and complex professional knowledge, and seeking appropriate assistance from trustworthy professionals is the key to safeguarding equity and coming out with the greatest benefit. For the buyer side, the best strategy is to pitch their command tent on higher ground, so to speak, and make good use of professional services in order to grasp the key aspects and details of the deal within the tight schedule it imposes.

• Agreements
  Never treat the clauses of an agreement lightly, since any statement, guarantee or compensation clause can conceal risks; even the duration of a guarantee can have an enormous effect on both buyer's and seller's equity. Even with an indemnification clause, if one has not required a large enough proportion of the purchase price to be placed in an escrow account, it may be difficult to get full compensation from the seller. In addition, the buyer should put in the contract unambiguous clauses stipulating what the seller needs to do after the transaction to help the buyer accelerate its taking control of operations, finances, human resources, etc.

• Transaction Price
  There is virtually always a fundamental conflict between buyers and sellers when it comes to determining value, and a disagreement on price is usually the main reason why an acquisition deal falls through before an agreement is signed. Since the buyer hopes to get good value at a cheap price, and the seller wants a price that is low enough to provide the incentive to buy, but no lower, for a deal to be possible, the two sides need to go through a process of negotiation and compromise to determine a price that both sides recognize is within a reasonable and acceptable range. A key recommendation for buyers is that they ought to give more thought to whether they have sufficient strategic reason for giving a high premium over a starting offer that was systematically and methodically estimated. They should also have a good grasp of valuation methods, such as net asset valuation, the discounted cash flow method, and the market comparison method.

• Transaction Price Adjustment
  Prospective buyers frequently decide on their purchase price before they understand the seller's operational, financial and legal problems in sufficient depth. On this issue, the current writer recommends that particular attention be paid to arrangements for a transaction price adjustment mechanism that will allow the results of due diligence to help the buyer side reasonably ask the seller to bear some of the downside operational, financial, legal and tax risk, and adjust the price.

• Legal Compliance and the Governing Authorities' Stance
  If the prospective seller is a publicly traded company or a financial institution, or is in another such licensed industry, an acquisition may involve additional issues as to regulatory compliance and the audit stance of the governing authorities, and if it receives a large amount of media attention, then one must be especially cautious in handling the details. A careless oversight at any point could snatch defeat from the jaws of victory. If the transaction involves delisting a listed company, transferring significant assets or technology to mainland China, or requires large-scale layoffs, then advance planning, communication with the governing authorities and scenario testing exercises become even more important.

• Labor and Management Arrangements
  For the buyer side, the object of an acquisition most often is the seller's value as a going concern. So, for the seller side, the key to success is getting control of and planning human resources in advance. Getting employees to believe that the new owner will be devoted to building an excellent corporate culture and working platform, and offer decent compensation, will test the efficacy of the buyer and its professional consultants in paying proper attention to all the important aspects involved.