Beware the Corporate Deal-Wrecker
Anyone who has dipped a toe in the turbulent waters of buying and selling media properties has likely encountered the notorious in-house deal-wrecker. This individual;typically a business development vice president charged, ironically, with evaluating properties for acquisition;has crafted a secure career by not doing deals. He or she usually works for a large strategic buyer and likes to pick on inexperienced entrepreneurial sellers. The game is to drag out the information gathering/evaluation process until someone (the seller) gives up. The deal-wrecker "wins" by never making a bad acquisition.
Many inside M&A people have discovered that they can hide in the shadows by appearing to look at deals but not actually ever running the risk of completing them. No one ever accuses them of making a bad deal. And since acquisitions are difficult to consummate at best, the deal-wrecker can easily cover his or her tracks.
If a successful acquisition is made, the credit will go to the group publishers, who are often rewarded by how big of an empire they can grow. If a bad deal is made, guess who didn’t perform adequate due diligence? A deal-wrecker can score a lot of points by discovering "reasons" a potential acquisition is a costly mistake and earns his or her keep by saving the corporation fortunes by blocking "bad" deals. If you’ve been rewarded for years by creating the illusion of "investigating" deals, you’re going to become very adept at saving your hide.
The garden-variety deal-wrecker is easy to spot:
Peppers conversation with M&A lingo: EBITDA, trailing earnings, mezzanine financing, scale, exit strategies, Murders & Accusations, et al.
Has never met a non-disclosure agreement that couldn’t be amended ad nauseam.
Specializes in issuing endless documentation requests.
Always "busy" crunching numbers and analyzing data.
Seldom (or never) actually makes a bona fide offer.
The deal-wrecker’s worst fear is that an ambitious group publisher will step in and see that a transaction is completed. Still, under most circumstances, the intrepid deal-wrecker can torpedo even the most obvious strategic fit.
Clues to Detection
Indeed, most savvy buyers won’t commit the resources to evaluate an acquisition unless they are serious about closing a deal. So, how does the seller know if he or she is negotiating with a well-intentioned but thorough buyer, or instead is fulfilling a deal-wrecker’s unbroken legacy of non-deals?
The answer lies in preparation. Both parties should begin the evaluation process with a clear understanding of what level of documentation will be required after the NDA is signed and during initial discussions (i.e., before the letter of intent stage) and what documents will be reviewed only after a non-binding letter of intent has been signed. Simply put, a pre-LOI list and a post-LOI (due diligence) list. Aggressive and eager buyers may request reports in the pre-LOI stage that more appropriately belong in due-diligence, but the observant seller should always have the right to limit disclosure of proprietary data until the right time.
Once both parties have agreed upon the ground rules, the procedure should roughly follow this schedule:
Evaluation of pre-LOI documentation
A round or two (ideally, in person) of management meetings between buyer and seller to discuss documentation and to answer questions
Decision to move ahead or terminate discussions
Non-binding letter of intent
Generally speaking, the information contained in a thorough offering memorandum ("Book"), including three years of financials, should answer most pre-LOI requirements and serve as the foundation for the face-to-face meetings. If negotiations become bogged down in endless parrying, you may be dealing with either a timid buyer ("tire kicker"), or a veteran deal-wrecker. In either case, your best exit strategy is just that: Exit, stage left.
Michael D. Kreiter is director at W.B. Grimes & Co., a Gaithersburg, Maryland-based investment firm for the media industry. He can be reached at firstname.lastname@example.org.