2014 will be defined as a year of ambitious, gutsy, and complicated deals. Some, like the Time Warner/Comcast merger, have tested regulators, while others, like the Novartis/Glaxo deal announced in April, were forced to become quite creative to get over the line. “Companies are using a range of deal structures and opportunities to transform their businesses, build on their core strengths and find growth over the long-term,” said Martyn Curragh, PwC’s U.S. Deals leader.
Structuring a deal is a bit like building a house. It should follow a well-known process to ensure the buyer and seller are both satisfied. With a house, the foundation is first poured, then the skeleton of the house is framed. Thereafter, the pipes and wires are stretched through the framework. Lastly, the interior drywall is installed and painted. These are the basic construction steps involved with building any house. It’s a well-known process that, when followed, helps guarantee the homebuilder and homebuyer are both satisfied. The framework for structuring a successful deal should include a similar set of basic steps.
Lay the foundation
At the core of any deal structure are two primary fundamentals; the goals and risks for the parties involved. In order for any deal to come to fruition, all (or most) of the goals for each party need to be met, and there needs to be an acceptable distribution of risk. Throughout each aspect of the deal structuring process, you should reevaluate these two underlying elements, goals and risks.
Each party should begin by clearly articulating their essential goals and objectives. It’s important to understand and appreciate that what is essential for one party may not be essential for the other. Identifying any conflicting goals at the start of the process, and focusing on what’s most important, will help the deal move forward.
Likewise, outlining the risks, how they will be shared, and what level of risk is acceptable by each party, is an activity that needs to be conducted early on. Remember that the deal structuring process involves reexamining and reassessing the goals and risks as decisions are made. The deal structure will include concessions, compromise and agreement on various terms and conditions. As these decisions are made, other aspects of the agreement can be impacted, which is why constant reexamination is required.
Frame the deal
Another key step in structuring a deal is the closing conditions. For public companies, a common closing condition is shareholder approval. It’s also not unusual for closing conditions to include non-compete covenants and indemnification clauses.
Employee retention is another critical issue. More often than not staff retention plans, especially for key employees, are included within the deal structure to retain talent for the post-closing company. Remember, everything ties back to the underlying goals and risks. Failing to identify staff turnover risk, or key employee retention risk, are where many deals fall apart.
Just like every home is different, with its own look and feel, so too is every workplace. Workplace culture (aka, the human factor) is another significant risk that can be overlooked during the deal structuring process.
In 1998 the failed merger of automobile manufacturers Daimler and Chrysler was attributed to a lack of cultural synergies. The result was high employee turnover and two heritage organizations feuding with one another. In 2007, Daimler sold Chrysler to Cerberus Capital Management for $6bn.
Structuring a deal should include a plan for how the companies will integrate. Understand what the other company values, identify synergies, and introduce a new set of core company values that draw on attributes from both sides.
Hire a contractor
Understanding the primary steps involved in structuring a deal is important; however, this doesn’t mean you’re well equipped or have enough experience to do it yourself. A general contractor is hired to provide guidance and overall coordination for building a home, just as an intermediary business broker or advisory firm is hired to instruct and counsel throughout all phases of the deal structuring process. It’s a recommendation and best practice to involve an advisor with deep industry and vertical experience to guide you across all phases of the deal.
Make sure you do your proper due diligence with selecting an appropriate business broker or advisory firm. There is a broad range of advisors to choose from, spanning large investment banks like JP Morgan Chase, Goldman Sachs, and Morgan Stanley, to boutique firms with vertical experience, such as Woodbridge for the manufacturing sector, Simmons & Company for the energy sector, or Leerink for the healthcare sector. There are advisory firms with vertical expertise across all sectors.
Structuring a deal should follow a process that starts with outlining goals and risks. Special attention to key employees and workplace culture is needed; too many deals fail by not having done this cultural appraisal and integration analysis. Consider hiring an intermediary deal advisor or firm to handle the process. After all, just because you can swing a hammer doesn’t mean you can build a house!