Inarticulate ramblings of a management consultant

the day to day experiences of a consultant operating in weird and wonderful client situations

Why saying ‘no’ to a transaction is so difficult!

Article from the FT today..

“Basing more of the fee on work done is a good start

Imagine that, upon arrival at the doctor’s office, you are told that you will be charged in a new way: only if major surgery is required. At the end of your examination, you are assured that only a quadruple bypass will save you. What then? You storm out, never to return, of course. Yet this is how many companies deal with their M&A bankers, whose fees depend, in large part, on getting deals done.

This is not a new problem. Warren Buffett is among those who have complained about it. But balance sheets are strong and, as economies recover, dealmaking is in the air. Worldwide M&A is up 2 per cent so far this year, according to Thomson Reuters. Deals worth more than $5bn are up 13 per cent.

Success-contingent fees are less of a problem when companies are selling (and the fee rises with the price paid) than when they are buying. And when the client is a buyer, fee structures are becoming more complex. Payments can be split between a set fee for a project and success fees based on performance. But M&A bankers still have strong incentives to get deals done.

This does not necessarily result in dreadful deals. Bankers appreciate the value of a relationship and know the dangers of lumbering a client with a bad deal to earn a single fee. But it stands to reason that, in a tough negotiation, they will encourage clients to pay that little bit more than they ought to, if that gets the deal over the line.

So boards need to be on their mettle, ready to cool the ardour of the bankers and of executives smitten with deal fever. Basing more of the fee on work done rather than completion would be a good start. Employing a bank to argue against a deal would be another. Making some of the payment contingent on the long-term success of the deal would be a third. None of this comes cheap and the risk is that companies end up paying banks a lot for no benefit. But they are all much cheaper than the damage wrought by a lousy piece of dealmaking.”

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I’ve written many times on the challenge that companies and individuals face in M&A around saying ‘no’ to the deal. This FT article discusses the success driven nature of M&A fees from an investment banking perspective, but almost every other independent adviser (accountants, tax specialists, consultants, due diligence specialists, leadership assessment consultants etc) face the same conflict of interest…the financial rewards of the transaction going through vastly outweigh those if it doesn’t.

Add to that the management focus, sponsorship by senior stakeholders and potentially negative attention if you’re seen as an opponent to the transaction…and it’s easy to see where the cards are stacked.

I have a few examples of where deals have not gone through as a result of concerted action by independent advisers to point out the issues. Interestingly, most of them seem to have failed because of some diligence issue which is irrefutable and starts to raise the risk profile to unacceptable levels. Very few of them have been turned down because of the synergies / business case / benefits didn’t add up! Where that was the case, a ‘review’ takes place late in the day which remarkably shows the business case in a more positive light.

Would love to hear your thoughts on this.

Categories: Mergers & acquisitions, Post merger integration, Transformation

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