Intersection of Diligence and Negotiations
I recently read an interesting series of blogs about mergers on The Wall Street Journal. I found myself wholeheartedly agreeing with many of the points, particularly that each side involved in a merger wants to feel like they’ve received enough concessions from the other party and that this inevitably leads to all the lawyers involved in the process bringing lots of questions and issues to the table (and forcing them into the transaction agreements). It is only human nature after all for people to want to feel like they’ve accomplished as many wins as possible, no matter how minor they may be.
One issue that this series of blogs made me think about that wasn’t extensively covered by the author is all the due diligence that inevitably precedes these agreements. As many people know, the due diligence process has improved and continues to change, with the longstanding goal being to accelerate the overall deal process and helping to reduce the time it takes to finalize negotiations. That’s why we have seen significant growth in the last 10 years in the use of technology such as online datarooms/virtual dealrooms.
M&A professionals usually aim to be thorough in closing deals, but also know the importance of being efficient and expedient otherwise they run the risk of slowing down a deal so much that they can end up sinking it. It’s typically the most experienced advisors that consistently strike the proper balance, driving deals towards a successful close. If you are lucky to have these experts on both sides of a deal, you’ll likely end up with a mutually beneficial outcome for all involved. A well-coached and savvy, yet trusting seller providing greater levels of information and ‘knowledge’ throughout the process creates comfort and instills confidence earlier with the buy-side who will then become more reasonable in their negotiations and committed to the deal itself.
One key question is how to do this. It can be easier than many think. Deals are less likely to become embroiled in protracted negotiations and legal wordsmithing if through all stages (preparation among the deal team, marketing to bidders, diligence), the process is organized, collaborative, comprehensive and interactive. Using a virtual dealroom helps build comfort for all involved and lessens the reliance on hedged language that is often meaningless (but indeed well constructed).
If the road to get to closing was rocky, as it often can be, then the real focus on materiality can become lost or clouded, creating an arena in which lawyers are arguing, often over relatively minor issues. As a former banker I cringe when I think about the wasted time, added effort and risks due to market factors beyond the deal teams’ control that these delays create for deals. These comments are not intended to diminish the legal work necessary to protect all parties involved, but too much can indeed make good deals go bad. So while this situation is just the current reality - I say - do the work upfront and focus on what got you to the point of inking the agreement. In other words, let the dealmakers close the deals.