If you’re starting out in M&A, you’re probably excited about all the deals you’ll be working on. Everyone wants deals. Everyone needs deals: you need deal experience for your buy-side interviews and for your CV.
The only problem? You’re not going to get any (deal experience).
What people don’t tell you is that most M&A deals fail. They die premature deaths, never having burst out of the womb and onto the front page of the Financial Times.
And these premature deaths have nothing to do with whether or not you remembered to change the font size to 12 everywhere or to capitalize all the titles in that pitch book you finished at 3am last night.
Time kills deals
Mark Suster puts its well: “Time is the Enemy of All Deals.”
But I would change it to: Time kills deals.
As the deal process drags on and on, both the buyer(s) and seller(s) start to lose interest. Their financial and strategic situations change, and what once looked like a great idea doesn’t.
Death usually comes in one of two forms: endless window shopping (bankers keep showing their clients potential buyers and no one expresses more than lukewarm interest. Nor, however, do they say no outright); due diligence delays (someone wants to buy your client, but they get stuck in due diligence and need to learn all details of the seller down to what color shirt everyone wears.)
Can you make a difference to this as a junior banker? No. Unless you’re incredibly slow at responding to emails or finishing up work – which wouldn’t even happen or you’d get fired – you’re not responsible for deals dragging on and on.
Price Derails Deals
Company A, your client, is trading at $20 / share. Your valuation says they’re worth $25 / share.
The buyer comes in and makes an offer for $30/share, a 50% premium over Company A’s current share price.
Easy deal, right?
The problem is that Company A’s 52-week average was $35 / share and they refuse to sell at anything less than that. Its current price of $20 / share is near its 52-week low, and selling now would be incredibly stupid despite whatever the valuation says.
Even if they missed earnings by 50% twice in a row, management always thinks “things will get better.”
This happens all the time and is one of the many reasons why buyers and sellers can’t come to terms on price.
Sometimes it’s less complicated than that: the seller simply refuses to sell for anything less than a sky-high price that values them far beyond what they’re worth.
Or the Board of Directors doesn’t want to go through with the sale because they believe institutional investor shareholders wouldn’t approve, or because they also think “things will get better” (don’t hold your breath – they only get worse).
Can You Fix This as a Junior Banker? No.
The Terms Terminate Deals
There are pages and pages of non-price-related terms in the typical Definitive Agreement, and any one of them – or all of them – can derail your deal just as it’s about to reach the finish line.
The terms most likely to kill your deal are:
Management Retention – The management team only wants to stick around for a year, but the buyer wants them there for 3-5 years.
Non-Compete – The buyer is OK with management team members leaving, but they don’t want them to leap to a competitor in the same industry. The managers don’t want to be restricted.
Working Capital Funding – Some companies have working capital requirements because it takes them awhile to collect cash from customers, and so they need funding to keep their operations running in the meantime. Effectively this adds to the purchase price, which the buyer won’t be happy about.
Reps / Warranties and Other Covenants – The buyer and seller both have to “promise” that certain points are true before the deal goes through – they have real customers, legitimate intellectual property, no lingering lawsuits, no crystal meth labs in the basement… Some of these are easy to prove, and others might be problematic.
There are dozens of terms that might cause problems – and the best part is that regardless of whether the deal happens, the lawyers still get paid because they bill by the hour and love to debate minutiae.
Can You Fix This as a Junior Banker? No, but you can “enjoy” watching the lawyers send endless paperwork back and forth and spend weeks “turning” documents and marking them up.
Ego Terminates Deals
The VP of Marketing wants to put himself in line to become CEO when the current one steps down next year.
Meanwhile, his chief rival – the VP of Business Development – has been one-upping him and got a 10% higher bonus last year. Plus, he was invited to a special event at the CEO’s house and their kids hung out together.
The Chairman of the Board has the hots for the VP of Marketing’s wife and wants to make a pass at her, so he’ll do whatever he can to make the VP think they’re on the same side.
The VP of Business Development brings the CEO your deal, and the CEO likes it – so the VP of Marketing gets nervous that his rival will move up the ladder and rallies everyone else to block it from going through.
Meanwhile, the Chairman of the Board still wants to hit on the VP’s wife and have his fourth affair, so he supports the VP and gets the Board to block the deal so that he gets invited to a dinner event at the VP’s house.
So now your deal will never go through, and it has nothing to do with the merits of the company itself – it’s 100% politics and conspiring behind closed doors.
This is not a soap opera – the above story happens all the time and while the details may differ, a few things remain constant: ego, the drive to move up the ladder, and office politics.
Big companies make “decisions” in mysterious and non-transparent ways, and dealing with this is just part of the game you’ll play as a banker.
Can you fix this as a junior banker? No.
So what does this mean for your CV?
Having all these terminated deals on your CV doesn’t look great. Fortunately, therefore, there’s a simple way of pretending the termination hasn’t occurred. When you’re writing your CV, you don’t need specify the names of companies involved, so if something has already died or is in a quagmire, just pretend that things are fine and that it’s running along smoothly.
Use a description like “[Industry Name] Company’s $2 Billion Acquisition of [Industry Name] Company” – or even change the size to make it more anonymous – and write about what you contributed rather than dwelling on how things didn’t work out.
And if you do actually close a deal? Feel very lucky: you are one of the few.
A version of this article first appeared on Mergers and Inquisitions, a website dedicated to helping people break into investment banking, and to maintaining their sanity while doing so.