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News | Some of the Best Deals Are the Ones You Don't Do

Royal Little was the founder of Textron and inventor of the conglomerate. Jim Robison was the founder of Indian Head, one of the most successful of the early conglomerates. Jim learned mergers and acquisitions from Royal Little. I learned about mergers and acquisitions working for Jim Robison. Jim could summarize complex issues in a few words. One example was, "some of the best deals are the ones you don't do."

A client recently came to The Acquisition Search Corporation (TASC) for help on what he viewed as a valuation problem. He is the founder, CEO and sole owner of an early stage information technology services company. He is very good at technology, operations and customer service. Because of this, his company has grown rapidly and is profitable. Customer service is so good that the customer retention rate is far above industry norms. Sales, marketing, strategic planning and finance are another matter. TASC's client has an ambitious vision for his company but believes his own limitations will be an obstacle to achieving it.

An individual with strengths in the areas where our client believes he is weak had approached him with an offer. He would join the company; take responsibility for sales, marketing, finance, administration and strategic planning; and invest in it by purchasing 50% of the stock. Reasoning that half of a large pie would be better than all of a small one, and believing that the individual could help create a large pie, our client was interested. However, they were far apart on how much the individual would have to pay to purchase 50%. Could The Acquisition Search Corporation advise them on what fair market value was?

We could, but this didn't seem to us to be the real problem. We believed the issue to be negotiation, not valuation. In a company at this stage of development, any relevant valuation methodology would have to be based on so many tenuous assumptions as to be unlikely to create consensus between people with conflicting interests. Much more important was that TASC's client determine what he wanted to get out of the deal, what he really needed and what would be the most effective way to get it. We offered to help him think through these issues.

In the course of doing this, The Acquisition Search Corporation was able to focus his attention on some critical questions.

• With the current disruptions in capital markets and favorable outlook for the company, there might never be another time in which it would be more expensive to raise equity. Did he really want to negotiate the sale of 50% ownership in this environment?
• What was his plan for growing the company's business? Did he know how much capital it would require and how it would be used? Did he know how much personal liquidity he needed?
• What were the current needs of the company for additional staffing? What was the availability of qualified people to fill them? What would be the appropriate compensation packages? How did the individual who had approached our client measure up against these needs? Was bringing him on board such a unique opportunity as to justify giving up half of the ownership, particularly in a buyer's market for executive talent?

Prodded to address these questions, TASC's client decided that what had seemed like a difficult dilemma wasn't all that tough. Negotiations were broken off before additional time and emotional commitment were made to them and expectations created that couldn't be satisfied.

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