Column M&A: Avoiding an Acquisition Train Wreck
"Buyers won’t touch a seller with a ten-foot Letter of Intent unless they believe the title or company has growth potential and fits in with their opportunities."
Michael D. Kreiter
Close your eyes and imagine a train wreck. All too often, that’s the scene when a buttoned-down corporate strategic buyer meets a loose-cannon entrepreneurial seller at the bargaining table. A little common sense and understanding on both sides could prevent another sad but familiar M&A disaster. Let’s start with the buyer’s perspective. The major strategic players and the well-heeled financial buyers all want the same thing: A large ($50 million-$500 million plus) operation that’s swimming in cash, with multiple opportunities to consolidate expenses and bury mistakes. At last count there were approximately zero of these opportunities available. So expansion-hungry buyers look increasingly to smaller, privately held publishers, even if the target acquisition is not technically "on the market." Meanwhile, legions of small publishers who survived the Great Depression of 2001 are now ready to sell. There is pent up demand on both sides of the buy-sell table. Chances are, more and more big buyers and small sellers will meet on the same track.
What Big Buyers Need to Know About Small Sellers
- What for the big guys may be a routine business practice, looking at an acquisition, can be a daunting and even traumatic ordeal for the seller. Forget the money for a moment. When they buy a small publisher, it’s another feather in their corporate cap. But it’s an emotional crisis for the seller, fraught with regret, remorse, fear, and, yes, tears.
- Small publishers don’t keep the kind of records that a big, crack accounting team maintains. They may use inexpensive spreadsheet software. Or not. Even the most sophisticated small publishers usually aren’t numbers-driven.
- Entrepreneurial publishers are not slaves to the bottom line, beholden to outsiders, or inclined to pay taxes on income that can instead be distributed to reward themselves and their employees. If a big buyer is inclined to base an offer on multiples of earnings before add-back adjustments, forget it. There won’t be any earnings.
- Small publishers have a lot to worry about. They’re afraid they may be selling at the wrong time or the wrong price. But their biggest fear is that word will get out that they are for sale. All the NDAs on earth won’t erase this worry.
- Small publishers hold a pride for their magazines that is beyond measure. When a suit begins grilling them on financial minutia and criticizing the product, they’ll take umbrage.
What Small Sellers Need to Know about Big Buyers
- Buyers, large or small, expect a return on their investment. The only way they can assess ROI potential is to look closely at operations and recent financial performance and project how they might run the show.
- Buyers won’t touch a seller with a ten-foot Letter of Intent unless they believe the title or company has growth potential and fits in with their operation. But they’re not likely to buy on future potential alone, and;here’s the real rub;they are not going to pay a premium for a notion of blue sky.
- Big buyers may not be experienced in dealing with small firms, and their requests for documentation may seem overwhelming. Expect it. Digging deeply into operations at every level;editorial, sales, circulation, production, administrative;is not simply an intrusion designed to be annoying or justify lowering the price. Buyers who invest the resources to examine properties for possible acquisition are sincere in determining a fair price and closing the transaction.
Buyers and sellers alike can minimize conflict at the bargaining table with adequate preparation;both mentally and fiscally. Above all, both parties should begin the process by recognizing that all merger and acquisition transactions carry an inherent risk. At some level, both parties will need to make a leap of faith, assume a calculated risk. This principle is especially true in big buyer-small seller deals where risk factors for both sides are innately higher. 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 email@example.com.