Confidentiality is the cornerstone of managing a successful M&A process. The investment banker’s primary goal is to organize a competitive process that allows the client to maintain negotiating leverage to maximize valuation and ensure the best terms and deal structure for the client.
Managing a confidential, milestone-based process is fundamental in maintaining competition between potential suitors, regardless of the number, type (e.g., strategic or financial sponsor), or focus (e.g., vertical or capability) of interested parties. This maintains the seller’s negotiating leverage and creates the opportunity for bidders to get creative in how they structure a proposal which, ultimately, can extend the range of options and opportunities for the client. Letting confidentiality fall by the wayside during the transaction process can lead to deal failure and negatively affect the seller’s future prospects regardless of whether or not a transaction takes place.
The non-disclosure agreement (NDA) is the first line of defense when it comes to confidentiality during a deal.
Ultimately, an NDA is only as good as the individuals who sign it. However, part of the M&A advisor’s role is to ensure that the receiving party adheres to the agreement primarily for the purposes of client protection.
In a typical M&A process, potential acquirers are delivered an anonymized corporate overview from which they can determine a preliminary level of interest. If interested in exploring further, both parties enter into a non-disclosure agreement, at which point the potential seller will provide the name of the company. The NDA places legal structure and parameters around the confidentiality of information shared, but it’s important that other processes are in place to ensure confidentiality across all participants in an M&A process.
The biggest roadblock in any M&A process is an internal disruption. This prevents a company from achieving goals and forecasts that have initially been laid out to potential acquirers. It’s crucial that an executive team does not become distracted by the M&A process and neglect day-to-day management, which has put the company in the position to consider a sale in the first place. To that end, it’s critical that only business owners and a limited number of trustworthy team members be aware of and involved in deal discussions. Maintaining confidentiality throughout a company limits disruption to daily operations, and allows most employees to remain focused on delivery.
Not all employees will react favorably to the news of a potential sale, and it’s not uncommon for employees to disengage from their work amidst the uncertainty associated with an acquisition. This can directly impact the performance of the company, which in turn can impact the chances a transaction will close. Furthermore, even without performance concerns, there are plenty of reasons a deal might not go through — and no reason to worry employees unnecessarily in advance of a legal agreement. CUSTOMERS
Rumors of a potential sale can be equally harmful to customer relationships. No one likes having an elephant in the room. That’s exactly what happens when a customer learns about the possibility of a service provider being acquired through leaked information. Questions immediately arise about the quality of services going forward, potential conflicts with the acquirer, the possibility of having to renegotiate contracts, and more. Keeping the transaction process confidential allows the acquirer and seller to craft appropriate messaging to address these concerns proactively if and when the deal does close.
Competitors are typically viewed as natural acquirers considering the overlap of capabilities and end markets. It’s imperative that the M&A advisor has processes in place beyond the traditional protections outlined in a non-disclosure agreement to ensure confidentiality. Otherwise, providing a competitor with access to sensitive information including contractual agreements with customers, margins, differentiators, competitive advantages, and intellectual property could provide a competitor with multiple levers with which to gain an advantage with prospective and/or existing customers in the market. Beyond the obvious levers around pricing and contract negotiations, the ability to use the information to create a perception of uncertainty post-transaction could ultimately be what tips the scale in favor of a company’s competitor.
Many of the inherent variables of an M&A process are uncontrollable. Nevertheless, maintaining confidentiality with customers, clients, and competitors should be a top priority for all parties involved in the discussions. A closely managed, the confidential process will help achieve an optimal outcome in terms of value, structure, and ultimately, a closed transaction