Things Fall Apart, Part V

This is the fifth, and final, post in our series on common mistakes made in mid-market M&A as illustrated by the recent blog post by Backblaze's CEO, Gleb Budman, on the breakdown of his company's acquisition by a potential strategic buyer.  If you haven't already, give it a read.

After the CEO recounts the narrative and takes the reader through the painful end of the potential deal, he describes lessons learned.  Some of the lessons are very insightful.  Unfortunately, some are flat wrong.  

Ultimately, the difference between success and failure of a merger is whether the teams trust each other.

Trust is obviously useful in negotiations.  But it is neither a necessary not a sufficient condition for a deal.  It doesn't take a historian to cite countless times in business or in history where parties came together despite a lack of trust, or where parties with a high degree of trust could not reach a mutual agreement.

On the other hand, if a seller simply trusts a buyer and expects the buyer to therefore guard the seller's interests, the seller likely going to be very disappointed.  Every buyer wants to maximize its own interests.  That generally means paying the lowest price for a target.  Trust won't help a buyer get a better deal.  Leverage will.       

4. Know your wants and walkaways up front.
Unless you’re desperate, you probably do not just want to be acquired. What do you consider being fairly compensated for the company you have built? Do you want to stay and run the company or does everyone want to sell the technology and leave? Where will you be physically located? Will you be able to continue executing on your vision or will the technology simply be repurposed? What about your existing customers and partners? Figure out what is important to the team up front and write it down - it easier to stay true to it throughout the process and for the internal decisions to be less emotional.

The reality is more complicated than this.  If asked for a 'walkaway' before talking to buyers, most sellers will determine their number based largely, if not entirely, on their sense of their company's market value.  But in the technology and Internet sectors, value is highly subjective and often quite dynamic.  In most cases, the only way to accurately gauge market values is to engage buyers and receive their feedback on valuation.

So it's difficult to have a concrete picture of a seller's valuation a priori.  It's a bit like asking someone what they want in a potential spouse before they have ever dated anyone.  Inevitably, the process of courtship--whether romantic or strategic--will inform a party's self-appraisal and preferences in others.  Setting out with an ironclad view of exactly what you want from the other party beforehand is only a good way to court disappointment.