Articles
This afternoon I'm attending a due-diligence meeting. "Due diligence" is the term used to describe the analysis of an acquisition target before making an offer. My client, Incentaur Corporation, has hired lawyers, engineers and of course a bank to determine whether and how much to bid for Tegart Corp.
What usually happens at these meetings is that we all go around the table and tell the client what we think about the target. The lawyers start.
"We've identified a list of 37 issues that we believe need to be addressed. I'll go through each of these in turn," says the partner, a well-spoken older Englishman, flanked by several bleary-eyed junior associates.
"Would it be possible," I ask, "to split your points into fundamental issues and minor issues, so we know which ones to focus on?"
I know that we'll never get the deal done if we have to solve 37 legal issues. Of course, I should have anticipated the response.
"Well, they're all fundamental issues."
I do my presentation next and my analysis is not surprisingly the complete opposite of the lawyer's.
I explain that there are no material problems with Tegart Corp, that it can attract a substantial valuation and that it will be immediately value-adding to Incentaur Corp. No one is impolite enough to suggest that since I am on a success fee, I'm hardly going to say anything else.
Then the engineers give their presentation and, as engineers often do, they say they don't have enough information to reach a conclusion.
Now, what is supposed to happen is that the client, after hearing the advice of his various highly paid advisers, balances out the competing views and comes up with a sensible way forward. What so often happens, however, is that the lawyers take control of an uncertain client and turn his doubts into bad decisions.
For example, one of the lawyers' 37 fundamental points was that Tegart Corp appears to have breached one of the licence conditions at its largest plant. When my client asks for clarification on this point, this is what the lawyer says: "Well, if it comes to the attention of the authorities, they may issue a notice demanding compliance with the condition. Or they may simply require that the plant be shut down, meaning that this particular asset will be worthless."
"How many cases are there of plants being shut down for breach of this condition?" asks the client sensibly.
"Well, we're not aware of any," explains the lawyer. And that ought to be the end of any discussion of this so-called "fundamental issue".
But this lawyer, like all lawyers, is still capable of making an insignificant issue seem significant. He adds: "But that doesn't mean that it won't happen in this case. There certainly is a real risk, and because of its potentially critical consequences, this is a risk that should be taken very seriously."
And so it goes with every one of his 37 issues.
Now, some people have suggested that since M&A - mergers and acquisitions - lawyers get paid practically the same fees whether a deal closes or not, then the best result for them is to do all the work and then have the deal fail. That way they get paid and it doesn't matter if they are wrong about anything. Of course, that would suggest that lawyers are as cynical as bankers.
In any case, my client asks me to communicate all 37 of their legal issues to the vendor. A few minutes after my e-mail to the bankers who are acting for the vendor, they call me.
"Alan, mate, what on Earth are you doing? You don't seriously want me to pass this list on to my client, do you?" asks Harry, the banker in charge of the sale of Tegart Corp. I can already see the transaction and my success fee slipping away.
"If I could make them go away I would. I didn't want to send them to you in the first place," I say.
"Look, you better talk to your client. Not one of the other bidders has raised any of these issues. For sure, if you want these things addressed you'll be out of the process."
Now, he's always going to say whatever he can to get us to come up with the best bid possible - he's on a success fee too - and this could quite conceivably be a bluff. But it doesn't matter. Harry's response might just be what I need to get my client back on track.
So I call my client and say: "Look, the vendor was pretty much horrified by our list of legal issues."
"Really, which issue?" he asks.
"Well, all of them," I say, and explain that apparently none of the other bidders have raised any of these issues.
"So we're in danger of not being the winning bidder?"
"Worse than that, we're in danger of being kicked out of the auction."
This seems to do it. My client's competitive instinct wins out over his nervousness. Luckily the lawyers aren't around to advise him on his next move.
"Tell them that we'll drop the issues," he says decisively.
"Which ones?" I ask, just to be sure.
"All of them."
Problem solved. Now to persuade him to pay a big premium.
'Due diligence' on how to earn your success fee
Sunday, June 15, 2008
