The Practice of M&A - Seller side bargaining techniques

Taiwan's merger and acquisition market has been quite active in recent years, especially in 2006 as more foreign companies and private equity funds came to Taiwan to buy domestic companies. This article will discuss how a prospective seller can, in the course of business negotiations, succeed in making the final deal more desirable by obtaining better terms and conditions and a higher price.

Know Yourself, Know Your Adversary, Win a Hundred Battles

In the process of negotiating an acquisition, if the seller has not yet clearly understood the objective of the acquisition, it is easy to start giving ground out of eagerness to complete the deal, and thus fail to derive the full benefits obtainable; or else fail to reach a consensus on account of some relatively minor terms, so that the whole deal falls through. Therefore, the most important condition for success in M&A negotiations is to clearly define ones strategic goals. Beyond that, if the seller can understand the buyer side's motivation for pursuing the acquisition, it will strengthen the seller's advantages help provide value from the buyer.

Understanding the buyer side's motivation for the acquisition.

Buyer side motives for an acquisition:

1. Horizontal integration: Take advantage of resource integration to achieve expanded production capacity, greater market share and elimination of rivals. The buyer's demands will center on the seller's customer base, its production capacity and product line.
2. Vertical integration: Obtain key technology, or integrate raw materials, ordering and other business operation capabilities. The buyer side's demands will have mainly to do with technical abilities, stable product supply, marketing channels, etc.
3. Business diversification: Enter a new business, new product segment, etc., and make use of diversification to expand business territory.
4. International deployment: Carry out a regional or global market deployment. The buyer's demands will focus on the seller's existing operational results in the regions concerned.
5. Stable returns: Obtain stable profitability. Buyer's demands will center primarily on the seller's current market position and the stability of its cash flow.

1. Profit taking: Frequent situations include where the original shareholders wish to realize profits, or a family-owned enterprise does not have a successor and the owners are willing to relinquish control. Under this strategic goal, sellers are often most concerned with maximizing the price of the deal.
2. Bringing in strategic investors: Buyers are often in the supply train of the seller's industry. Based on considerations of the two sides' strategic posture and of overall efficiency, a seller may agree to a share swap with the buyer, or allow the buyer to acquire its equity through a contribution of capital, assets or technology. With this strategic objective, clauses on future business cooperation, non-compete clauses and arrangements for the seller's existing management team are the main points in negotiating sessions.
3. Attracting new sources of funding: Frequently seen situations include where the prospective seller wishes to raise capital to support the funding requirements of future growth, or where the seller runs into financial difficulties even though its operations are sound, and it wishes to attract new funding to improve its financial health. Buyers, typically financial investors such as private equity funds, will look for a stable cash flow or future distributions of profit, and will be less apt to interfere with the running of the business. Given the seller's strategic objective in this case, the key items in the negotiations are likely to be the extent of dilution in the original shareholders' percentage shareholding, exit mechanisms for financial investors, and arrangements for filling future seats on the board of directors and supervisors.
4. Investment disposal: A frequently seen situation is where a conglomerate wishes to dispose of its non-core investments or divisions, or dispose of a financially strapped business. Given this strategic objective, a key issue in the negotiations, other than the size of the price tag, is how to safeguard employees' interests.

1. The primary goal of the negotiations is to find a “win-win” solution for both buyer and seller. Although there can be big winners and small winners, depending on how many bargaining chips either side brings to the negotiating table, if one only shows consideration for the interests of one side, the transaction will never get off the ground. This is why prospective buyers and sellers must do their best, while discussions are ongoing, to seek conditions under which both sides can derive benefits.
2. When buyer's and seller's interests clash, then provided that confidentiality is preserved, the two sides should thoroughly communicate the needs of their respective stakeholders so that a compromise may be sought.
3. Prior to negotiations, one should clearly stake out the terms and conditions one is willing to fight for, and the minimum positions one is willing to retreat to, as this bears on when one should leave the negotiating table, as well as on the opportunity cost of continuing to negotiate.
4. There are no deals with “optimal” prices, merely those with prices that are mutually most suitable.

1. Planning the procedural side of the acquisition transaction: The first and most important step in the M&A transaction process is the signing of a confidentiality agreement. In addition to preventing information leaks from influencing the deal's negotiation and implementation, it is also necessary to keep from disclosing too many secrets that might come out of the prospective buyer's due diligence of the seller's financial information, etc. This will increase the chances of the deal coming to fruition, and prevent competitors from gaining a large advantage on the seller or even luring away part of the senior management team. However, one must also give consideration to the advantages of greater transparency, as this helps avoid unnecessary suspicions on the buyer side and, in effect, increases the seller's bargaining chips and price.
2. Acquisition price: In many an acquisition deal, a key concern is the acquisition price. The seller hopes to get the highest possible price, so in addition to understanding the buyer's motives for participating in the deal, the seller needs a thorough understanding of its own strengths and weaknesses, and the applicability or limitations of those strengths and weaknesses under different valuation methods, the idea being to dilute the negative effect of the weaknesses and enhance the value brought by the strengths. On top of this, as the price is in the form of cash, stock or other assets, it is also necessary to tie together considerations of the payment timeline and the price adjustment mechanism such that the fairness of the price to both sides is safeguarded.
3. Covenants on future business: When bringing in strategic investors to an acquisition deal, the final agreement typically includes the signing of covenants related to future business, non-compete agreements, and so on, these being intended to maximize benefits to both sides after the deal takes place. In practice, sellers are liable to being overly concerned about price negotiations and to neglect the effect of those business-related clauses on future operations and their derivative effects on future business interests, the result being that the current price is enlarged at the expense of business interests in the years that follow.
4. Existing guarantees for stakeholders' interests: The seller's stakeholders consist primarily of three sides: shareholders, the management team and the employees. For shareholders, in addition to wanting to maximize the price, if it happens that they continue on as shareholders after the transaction, then joint consideration must be given to the dilution of their shareholding percentages, arrangements for seats on the board of directors and supervisors, the stability of the company's future operations and dividend policy. As for the management team, besides bringing in strategic investors, buyers often want to replace the former management team with one of their own choosing. Therefore, joint consideration must be given to ensuring that they still have opportunities for making the most of their talents following the merger, and preventing any inconsistency in the interests of shareholders and the management team from influencing the results of deal negotiations carried out by the management team representing the shareholders. And for the employees, there are also areas that need careful attention, especially how to ensure worker's interests after the acquisition and avoid situations where the acquisition process engenders their non-cooperation or opposition.

• Control of procedural risk: M&A transaction procedures are complex, so if outside consultants can assist in properly preparing for and controlling each procedure, this will help prevent negative effects from excessive disclosure of buyer-side information. And by better planning acquisition procedures or mechanisms, a timely increase in the seller's value may be obtained.
• Lower consumption of internal resources: Negotiations consume both time and effort, and professional consultants can pick up some of the resource consumption that otherwise would come out of internal resources. This way one may avoid either the neglect of day-to-day business operations due to focusing excessively on negotiating and executing a deal, or the inability to obtain relatively good terms in the negotiating process because resources are tied up in busy operations.
• Integrated services backed by abundant experience: Professional consultants in this field possess an abundance of experience with M&A. They understand better than sellers the needs of the buyer side, and they can assist the seller by expediting plans for the terms and conditions, queries and responses it may put on the table. At the same time, consultants, in their role as third parties, can offer sellers their objective advice, helping to provide balance and narrow the foreseeable differences between buyer and seller so that the deal goes through smoothly. Moreover, some professional consulting firms can combine financial, legal, HR and information expertise to provide integrated services, allowing the seller to enjoy consulting services through a single window.