Things Fall Apart, Part IV

This is the fourth post in our series on common mistakes made in mid-market M&A as illustrated by the recent blog post by Backblaze's CEO describing the breakdown of his company's acquisition by a potential strategic buyer.  It's a great post.  If you haven't read it, please do.

At this point in the narrative, Backblaze has signed an LOI from a potential buyer (referred to as Cogswell).  The LOI has a typical exclusivity provision that bars the company from talking to other potential buyers.  The exclusivity provision lasts 6 weeks.  Presumably, this is long enough for Cogswell to complete due diligence and close the transaction.

The due diligence and Definitive Agreement should have taken four weeks.

This statement reveals naivete on the part of the CEO.  There is no set, black-and-white time for how long due diligence "should" take.  The seller wants to finish diligence and close a transaction as quickly as possible when under a no-shop clause.  It has given up its leverage by agreeing to not talk with other buyers.  If a buyer is also motivated to move quickly, diligence can be completed in as little as a few weeks.  On the other hand, the buyer has all the leverage, so likely doesn't have an incentive to move rapidly.  Buyers take different approaches to using this leverage.  Sometimes they will deliberately drag out a diligence process, taking months.  Sometimes not.  Diligence typically takes 4-8 weeks in mid-market deals.  But there is no set standard.

When the deal wasn’t going to be finished in six-weeks, Cogswell asked us to extend the exclusivity and we agreed to extend it by a week...But things kept moving forward, slowly; becoming seven, eight, nine, eleven, twelve weeks.

Backblaze is getting bad advice.  A seller should never allow itself to get strung along like this.  Backblaze had smartly negotiated a breakup fee--that is, Cogswell had to pay Backblaze to cover its out-of-pocket deal expenses if they didn't close the deal quickly.  Backblaze should have collected the fee.  Meanwhile, with exclusivity expired, Backblaze should have reached out to the other potential buyer to see if they were still interested in engaging.  Backblaze needed to get its leverage back.

In summary [the Cogswell CEO] said that while he really wanted to do the deal, he couldn’t get all of his board to approve it without restructuring the deal. Would we consider restructuring?

This is unfortunate.  It's not 100% clear whether Cogswell was negotiating in bad faith  (meaning they never intended to do the deal as outlined in the signed LOI), but it looks that way.  The tactic of waiting until deep into an exclusive due diligence process and then lowering the deal price is a common tactic known as "retrading” on price.  This case was particularly devious in that by stringing Backblaze along for months, Cogswell likely anticipated this time would cause other, competing buyers to go cold.  That is what happened.  Backblaze has nowhere else to go.