M&A Monday: The Grave Damage of the Aggressive Opener
Last week I made a mistake that reminded me of something I have known, but recently forgotten.
Each week I post an M&A Monday discussing the intricacies of M&A transactions that I learned as a lawyer representing big private equity groups and now representing independent sponsors, searchers, and small PE.
Two weeks ago, I helped a buyer-client draft a Letter of Intent. It was a sub $20 million acquisition, and we included language saying, in the purchase agreement, the reps and warranties will survive until the statute of limitations with no caps and baskets. On a deal that size, it is more customary to have only fundamental reps survive until statute of limitations and general reps subject to caps and baskets (read this if that sounds like gibberish: Representations and Warranties). It was off-market.
The LOI came back aggressively marked up by the seller’s lawyer with some off-market positions. Before going further, I had a call with the seller’s lawyer and it became clear that his aggressive markup was a result of me including that off-market term in my LOI. He said, if you’re going to be aggressive, I will be aggressive and maybe we will land in the middle.
Similarly, not long ago, I represented a seller and received an over-the-top aggressively drafted, and lengthy purchase agreement from a BigLaw firm. I spoke to my clients about it, and we decided to return a draft that was also aggressive to let them know we were not going to get pushed around.
Ultimately, this creates a cycle of trench warfare. Every provision in the documents is fought over and a drawn-out war of attrition rages for months. Everyone wastes a ton of time and money. Often, this amount of time and erosion of good feelings will kill a deal.
Many lawyers and M&A sponsors will start their negotiation with an aggressive first position hoping to end up better off than a middle-of-the-road position. On rare occasions (particularly with unsophisticated sellers), this could result in better terms. However, usually, it results in an aggressive response and erosion of the good faith necessary to get a deal to closing and work together post-closing.
As my client said, for the 1/10 times we win that aggressive provision, it is not worth the 9/10 times we alienate a seller and kill our deal.
I will add that a sponsor’s reputation in the market is extremely important. I spoke to a broker the other day who told me he has a running, “do not sell to list” of aggressive sponsors.
There are many ways to negotiate an M&A deal and I’ve seen most of them. My position is to be reasonable and collaborative until I’m not. I find I get far better results by starting reasonably.
However, on the occasion that reasonableness is not reciprocated, I am ready to go to the mat and employ conventional and unconventional tactics to achieve success.
On this particular LOI, I spoke to the seller’s lawyer, I apologized (which, I very rarely do), assured him this was an errant provision, and asked for a “reset” of our relationship. He agreed and returned a very reasonable markup. The LOI was signed last week and we are moving forward.
This was a good reminder that aggressive opening positions have real consequences. Choose your opener carefully.
P.S. Sometimes, the first legal document a seller sees is the NDA (especially if the deal is not brokered). In that case, be careful to make sure the NDA is reasonable and not over aggressive - that will be your first impression (See this post: Here and Here on the importance of first impressions).
