October, 2002
All good acquisitions are alike, to paraphrase Tolstoy;
but all bad ones are bad in their own special way. Although
the cause of any given problem may be unique to a situation,
it is often the result of a common mistake. Here then,
are some of the mistakes I often see:
1. "I know this technology." Frequently
a buyer who is looking to augment their existing technology
by branching into a related area will believe that they
know the technology in that area and will not examine
the technology as rigorously as a result. That's
not a good idea. The end result of development efforts
often appears the same, but beneath the surface compatibility
issues can be daunting. I've seen a number of
"bolt on" acquisitions that didn't
work, because an incompatible technology didn't
bolt on.
2. "There's no need to move quickly."
While it's not good to move recklessly fast, it
can be just as bad to take your time. If the target
is a good company, others will be interested, and they
could take it from you if you're not quick enough.
Also, because the sales process is extremely distracting
to management, the value of a business will deteriorate
the longer the process takes.
3. "I'm getting a great deal." Most
deals that appear too good to be true, are. No matter
what, you can't know the target's business
better than they do. Why are they selling? What do they
know that you don't?
4. "I can make money with this with only a very
small change." Right. This is the "seller-is-so-stupid-I-can't-believe-they-didn't-think-of-this"
analysis. Usually, if you are not careful, you only
find out that they did think of it, but that it couldn't
be done, after you buy the business--when it's
too late.
5. "I can sell the target's product through
my channel." Maybe you can, maybe you can't.
Disrupting or changing a sales channel can lead to disastrous
results, either because of existing contractual commitments
or because of a failure to appreciate that some products
require a different type of sale. Although it seems
obvious, a highly specialized product requiring customization
for a particular customer application doesn't
sell well in a catalog.
6. "It's easier just to buy stock."
Yep, sure is easier, because it gives the seller a tax
advantage and an easier time walking away from unknown
liabilities. Usually the tax and liability benefit to
a buyer to buy assets is greater than the burden on
the seller--it's often worth it to pay a
little more for the privilege.
7. "I don't care about the people, I'm
just buying the technology." With that attitude,
they won't care about you, either. They also won't
care about maintaining the technology and protecting
it while the sale process is ongoing.
8. "This is a unique solution." It may
be, but everything is built on some prior knowledge,
and if you don't rigorously examine the integrity
of the development process, you may be buying an infringement
lawsuit along with your "unique solution."
9. "They'd tell me if something were wrong."
A surprising number of sophisticated buyers fail to
update due diligence if for some reason the process
takes longer than expected. Don't expect the seller
to come clean about recent bad developments--they
are often too easy to rationalize away. Ask.
10. "The contracting process is for lawyers."
The acquisition agreement can help you to make sure
you are buying what you think you are buying. In order
for it to do so, you have to work collaboratively with
your lawyer, so he or she knows exactly what it is you
think you are buying.
A buyer should be vigilant and thorough in the acquisition
process, because the likelihood of a disastrous mistake
resulting from an improper assumption is more likely
than people often realize. Some mistakes are common.
People who make them more than once, are not.
Stephen A. Tsoris is a partner in the Corporate &
Securities Department of the Chicago-based law firm
of Gardner Carton & Douglas and is chair of the
firm's Tech Ventures Group (TVG). His practice
concentrates on corporate, securities, and commercial
matters, including joint ventures, venture capital,
federal and state securities laws and licensing and
distribution. He works extensively with both public
and private companies. Contact him at stsoris@gcd.com.
|
