Every deal is different, which means each and every one will present unique challenges that teams have to overcome. Especially when dealing with smaller companies. There is no such thing as a perfect deal. However, with the right mindset and approach, deals can still close and bring value to both parties involved. In this article, Jim Ackerman, recent Vice President, Corporate Development at Flex, and Steve Coghlan, Semi-recent Vice President of corporate development at Flex, discuss their experiences on M&A surprises and horror stories.
“If it happens to you 10 times out of 20 transactions, you gotta go inside, you’re doing something wrong. But if it happens once out of 50 or 100, you’re fine. It’s bound to happen.” - Steve Coghlan
According to Jim, the key to dealing with surprises is to stay diligent, and be in a mindset that problems can be fixed, until they’re not. Here are some of the horror stories they shared, and how they dealt with it.
Inexperienced private sellers sometimes share things they shouldn't share. This could cause liabilities to the buyers in the long run, especially if the deal falls apart. Jim and Steve had a transaction where the seller accidentally shared their pricing model, which could be deemed illegal, violating the gun jumping law. The best thing to do in these situations is to educate the seller before opening any data room.
Jim and Steve also had a transaction where the CEO of the company had a colorful background. During diligence, they found out that the CEO has spent jail time before because of eliciting narcotics and firearm possession. But because they wanted the business so bad, they were willing to overlook the CEO’s past and close the deal.
However, there was also a deal where the CFO was very hard to work with during diligence. So they stipulated that the CFO must be gone as soon as they close the deal.
In European transactions, there can be surprises related to pension schemes. Jim and Steve had one transaction involving an underfunded pension scheme in the United Kingdom.
The money in the pension is invested in the stock market, and were performing poorly. What made it more difficult is that during this deal, they couldn’t figure out how much money was missing quickly because it would take months to analyze.
Initially, they thought the problem might be about 1 to 2 million, but later they discovered the issue was closer to 12 million. To make things worse, there is no recourse because it is a public company.
Jim and Steve had a business deal involving a company from China. The big challenge was how to get paid. In China, there are strict rules about sending their currency, called RMB, out of the country and changing it into other currencies, like U.S. dollars. Each company can only send a limited amount of RMB out of China every year.
For this deal, the company wanted to get part of their payment in RMB to use in China, but they also needed some of it to be changed into U.S. dollars and sent out of China. Because moving money like this can be complex, they had to bring in smart people to figure out how to do it without breaking any rules. This involved considering many factors like different company structures and tax implications.
For advice, they emphasize the importance of having a very strong strategy behind the transaction, and a clearly defined synergy. This will help teams understand whether to pursue the deal, despite all the challenges, or back away from the transaction and move on.