M&A Pricing – Pick a Number, Any Number

The value of M&A activity in the UK in the first half of last year was over $200 Billion.  I’m no expert on the pricing of these deals, or the reasoning, but I have in mind a vision of the CEOs (with their General Counsels) from a potential acquirer and target company facing off across a teak boardroom table, or perhaps in a West End Club with panelled walls, negotiating on the price.
“I’m willing to pay £1.2Bn”
“Not a penny under £1.6”
“But that’s a 38% premium on your pre deal share price”
“Yes, but the market hasn’t priced in our product release schedule/IP/Goodwill”
And so on, late into the night (or deep into the bottle), until…
Having spent some time working in the contract discovery and analytics space however, what surprises me is how the price offered (and accepted) must so often be based on estimates, hunch and supposition.
The true value of a company, and the ability for a newly combined entity to drive out synergy, must be based on the contractual relationship with suppliers, partners and customers; how can you price unless you can answer questions like:
  • What IP do you have? In what territories? For how long?
  • Which customers can terminate for convenience after change of control?
  • How long are you locked into the lease of that expensive HQ which is no longer required?
  • What ELA’s for software do you have where you are committed to additional payments when the organisation grows?
  • Where have you committed to some form of “most favoured nation/client” pricing which will come back to bite you in the newly enlarged corporation?
  • How many auto-renewals will we pay before we find and revise them?
  • What will be the true cost of the organisational restructuring that is needed for synergy?
Of course, I am not suggesting that companies don’t perform due diligence.  Quite the contrary – companies and their advisors do perform some review, but in reality with manual processes and time pressure is there really any chance of anything more than a superficial skimming of the top 10% of contracts by value, and then only looking for a handful of specified terms and provisions?
Is there a better way?
Maybe in this corporate world of cheap money, the price paid doesn’t matter, and it really is a question of who is the best negotiator, but surely the following would drive better value for shareholders.
Pre purchase
In the deal or clean room, those working on the produced contractual documents are able to review not hundreds, but thousands of contracts – to quickly and effectively extract metadata and clauses, and interrogate the corpus of information to answer the “what/if” questions.
Post deal
After a deal is done, while the corporate development or M&A team are off toasting a good transaction, the legal teams are left behind cleaning up the mess.  Having the ability to discover all the contractual documents in the newly merged company, and as above, review, extract and analyse the information hidden in them will enable the acquiring company to quickly harmonise and be able to leverage the best of the incoming agreements and remove toxic clauses.  The post deal team will not be buried in reviews and spreadsheets, but quickly be making decisions based on known facts, not guesswork and estimates.
That’s why M&A is the number 1 use case for Seal Software – Contract Discovery and Analytics delivering knowledge to the organisation.