M&A Critique
Strategies for Negotiating a Merger and Acquisition Deal

Strategies for Negotiating a Merger and Acquisition Deal

Pick up the right negotiating skills to make your deal a success

Be it buying groceries or buying or selling a company, negotiations matters the most to get the best deal. The best practices of deal makers depend on the specifics of the deal. Valuation is the first and foremost phase of deal execution and it at this stage where one’s negotiating skills comes in handy. Both the buyers and sellers usually enter negotiations aware of the price that will kill the deal for them. But with proper negotiations, one can click the deal with ease and create a growth strategy.

A common hitch in valuation negotiations or sealing the final deal is one of perception: seller and buyer may value the target differently. While both may differ in their opinions and analysis with respect to industry outlook, competitive landscape and potential risks, the unique circumstances surrounding both can create contrasting dynamics. Such negotiations will help in the making the deal a success. The differing perspectives may result in a contrasting outlook that is reflected in the financial projections of the target business and ultimately in the anticipated return on investment of the company.

In most cases, the buyers and sellers usually enter negotiations aware of the price that will seal for the deal. Typically, buyers do not want to be involved in a deal process that becomes truncated when a seller pulls out in the middle of negotiations. The sellers will have to tell a compelling story, especially if value is a function of a forward multiple. Buyers need to be engaged and to emphasize the quality of their business and the negotiations must be on firm footing. Depending on the details of the transaction a seller can negotiate the deal structure for tax deferment purposes, to secure participation in the target company’s future success and to maximize the purchase price. The seller benefits from accelerated negotiations because of lower transaction costs, but this comes at a cost as it reduces opportunities to look for alternative bidders. Similarly, the buyer prefers shorter time period between signing and closing the deal, as the seller keeps control over the target until the closing date, which allows her to extract private benefits.

Any transactions usually start with a letter of intent, which specifies an exclusivity period during which the seller is not allowed to negotiate with other bidders. Smart lawyers can extract the best out of the intent for their favor and prove their higher legal expertise associated with more favorable negotiation outcomes. While the bargaining process is not in itself a negotiation outcome, it has many profound implications in the deal for contract design and pricing. Lawyers have incentives to direct the process in a way that is favorable to their own clients.

In the negotiating process, one must see who provided the first draft of the acquisition contract. Both parties prefer to deliver the first draft as it provides them with a first-mover advantage and greater negotiating headroom. In most cases, the first draft contract comes in from the buyer law firm as they generally prefer shorter negotiations to minimize transactions costs. Sellers, however, prefer accelerated negotiations to save on transaction costs. But they can benefit from long negotiations as they may get some more extra benefits out of the deal.

The closing time, which is the time between the signing of a contract and the transfer of the target, can sometimes stretch too long. In order to avoid such delays, it is important that both the parties come to the drawing board and sort out the issues at the earliest for a speedy solution. One can take help from an expert who can guide both the parties and come to a conclusion.

We welcome your feedback and query in the comment box below.


M & A Critique