Things Fall Apart, Part I

All happy families resemble one another, each unhappy family is unhappy in its own way.
--Tolstoy

Tolstoy’s famous quote on families applies to deals.  A busted deal is like an unhappy family.  Every deal that falls apart falls apart for its own reasons.  But, just as there are common types of problems that plague unhappy families (money, health, etc.), there are types of mistakes that failed deals often have in common.  

This is illustrated by the recent blog post by the CEO of Backblaze on how their potential acquisition broke down.

If you haven't already, please go read the post.  It's a very readable behind-the-scenes look at the M&A process. 

This will be the first in a series of posts that use excerpts from the Backblaze story to illustrate common mistakes made in the deal process. 

The first excerpt comes just after Backblaze has received an offer from a buyer that they consider interesting but not compelling. 

We also decided that we should talk to a few other companies to see if they would be interested in making an offer as well.

We started by brainstorming a fairly comprehensive list of companies that could be potential acquirers. Then we whittled down the list to those that seemed like they should be a natural fit, could potentially move quickly, and where we had solid executive-level contacts.

The most important factor in negotiating the best possible valuation and deal structure is to have as much competition as possible.  Going wide to many buyers is the best way to achieve that.  So running a narrow process is usually a mistake.  

Limiting the potential buyers to those where you have "solid executive-level contacts" compounds the error.  In a structured process, it's common for the buyer to learn about a company for the first time as a part of the process.  It's even more common for a buyer not to have "solid executive-level" contacts with the seller before getting to know them through an M&A process.  

Many place too much value on relationships with potential buyers.  The reality is that if a company is highly attractive to a potential buyer, a potential buyer is going to be all over the target regardless of preexisting relationships.