In negotiating either a merger or an acquisition, the ultimate goal is to structure a deal in which separate companies combine with one another in order to generate shareholder value.
One of the most important and complex aspects of an M&A transaction is the process of negotiating. This usually begins shortly after the shareholders elect to pursue a transaction. While there are some minor negotiations that occur in the earlier stages of the process, the most important negotiations relate to the value and terms of the proposed transaction. With assistance from an investment bank or other intermediary, the potential acquirer, through a valuation of the target company, will determine the price of the offer in cash, stock, earnout, or a combination of the three.
The Letter of Intent, a non-binding document, will outline the valuation and other material terms of the potential transaction. The selling firm can accept, reject, or attempt to negotiate the offer. Most of the time, the offer price isn’t considered high enough or the other terms don’t coincide with the interests of the target company’s shareholders, which results in detailed negotiations, if both parties are willing. Both parties always retain the ability to reject the transaction if it doesn’t meet their financial and other objectives.
In order to complete a successful transaction, a large amount of collaboration and negotiation between the bidding and target company is required. Most importantly, both parties must understand each other’s objectives and it’s always helpful if both sides believe in win-win negotiating.
The importance of understanding each other’s objectives can be demonstrated by the following story. Two sisters were fighting over an orange and in order to resolve the argument, their father cuts the orange in half and gives one half to each of his daughters. While this seems like the best solution, both sisters actually ended up with a bad deal. One sister wanted the rind for cooking while the other sister wanted to eat the orange. Hence, both of them actually lost. Instead, if the two sisters had understood each other’s objectives, the orange could have been divided in a much better way, the rind to one and the contents to the other.
