TrendWatch: M&A in a Buyer-Driven Market

Transcript

Steve Boender
Partner and Practice Group Leader, Corporate

Hi, I'm Steve Boender I'm a partner in the corporate group at Stoel Rives. Yeah, a lot of the work I do here involves industries kind of native to our local economy, so semiconductors, transportation.

In a buyer-driven market, are you positioning your business for the strongest deal?

In mergers and acquisitions, we're in what seems to be a prolonged environment that is more favorable to buyers. So what we have been seeing, and I think we'll continue to see, is sellers not getting the valuations they did a few years ago, and buyers are being more picky with respect to any concerns they have about a seller's operations. So the valuations are down and the buyers are being a little bit more careful about what they do.

Corporate hygiene: the overlooked advantage in M&A—Is your house in order?

Yeah, I mean, so those two prongs, you know, valuation and kind of hygiene can be dealt with. I mean, one, we are seeing sellers come a little bit back down to earth with their valuation expectations. For a while there, there was severe dislocation between what buyers were willing to pay and the valuation that sellers had expected. During 2020 and 2021, things were very different. That level of seller expectation has kind of reverted back to where buyers and sellers are roughly on the same page there. But the other thing is, you know, with buyers being more careful, sellers need to focus on essentially what you would call corporate hygiene. So when they're, think of it analogous to selling a house. You wouldn't have a walkthrough of your house when things are in disarray and there's messes everywhere and things are in disrepair. You want to present sort of your best face to potential buyers when you're trying to sell your business. What that means is planning for a sale has to start long before you're actually going to sell. You need to keep tabs on contracts and employees and all these issues that a buyer is one day going to look into. It should be starting now and getting your sort of ducks in a row so that once a buyer starts coming in and kicking the tires, they're going to see something in order and it's not going to cause them concerns or scare them off. For the first 15 years of my career, I almost never, probably maybe once in 15 years, had a buyer walk away from a deal based on concerns once they were engaged with the seller. Much more common now, if they see something, potential litigation or a compliance issue, and the buyers get spooked and they will walk. So really making sure your house is in order now and in the years to come so you're best positioned to deal with that process going forward.

On the flip side, if you're a buyer, you realize you have a lot more latitude and more leverage than you would have a couple of years ago. And it really gives you the power to make changes or to sort of change terms of a deal if you find concerns the lower valuations don't really help the buyer so much because they're paying higher interest rates. So that's kind of an economic wash. But yeah, I think the key thing for a company looking to engage in a sales transaction is to just make sure your hygiene is top notch that's not going to scare anyone away.

Deal readiness: does your corporate discipline inspire confidence or raise red flags

Because the seller essentially is, you know, they're kind of opening their books for a buyer or potential buyers to come in and take a look. So corporate records, you know, minute books. A lot of companies, even of sizable revenue or valuation, maybe the board of directors is a small group of people. Maybe it's a family, a generation or two together, and they just make decisions over the dinner table, even multimillion dollar decisions. And there are sort of corporate formalities that a buyer is going to expect. Oh, when you borrowed $50 million, where are the approvals, things like that. Records of board meetings, stockholder records. We've had companies worth hundreds of millions of dollars where there was some uncertainty with respect to someone who owns some shares. And that just can't happen. So board minutes, board records, corporate records, stockholder, and then even contracts. A lot of companies don't have the best hygiene, even with big customer contracts. “We had that customer never sign that, but we've been operating under it for five years.” Well, you want to make sure all those sorts of ducks are in a row. You've got all the signatures you need because those can kill deals.

The emotional toll of selling: are you strategically prepared for the intangible challenges?

What excites me about the work that I do and that we do is it varies based upon the context. In a lot of times when we're helping someone sell their company, it's potentially, you know, this is something they've built up for decades and decades. This is the culmination of their life's work. And there's an emotional impact to it that can't be overstated. This is something that maybe brings wealth to their family or lets them engage in a new chapter or new adventures or maybe just retire. And to be able to facilitate that for a person or a family or an organization, it's hugely, hugely rewarding. And I think the relationships that I've built through those transactions don't end when the transaction ends. These are people that we stay in touch with, that we are friends with, that our families are friends with and the sort of in the trenches bond that forms because there's long hours. There are heated discussions. There's a lot of phone calls, a lot of video conferences, a lot of in-person meetings. You spend so much time that you, I don't want to over dramatize it, but almost like soldiers who went through a battle or a war together. You share a bond of going through that process that is very unique and allows you to have a really interesting and fun relationship even long after the work is actually done.

Navigating uncertainty: is your M&A strategy built on preparation or just prediction?

Certainly the last five years have been marked by uncertainty, kind of starting with COVID and then inflation and interest rates. You know, we were in a very stable macroeconomic environment for my entire, well, absent the financial crisis, you know. Since the financial crisis, things had gone pretty smoothly. I think now the change in administration and potentially upsetting of the geopolitical order on the whole, we need to be prepared to live with continued uncertainty for the foreseeable future. And clients need to be prepared for that as well. When something like a recession happens, there's a playbook. And there are steps you can take. You can shore up your balance sheet. You can watch spending, et cetera, et cetera. I think what's different here is that things change almost on an hourly basis. And clients, and in particular in-house legal counsel, are going to have to be as adaptable and proactive as ever to respond to tariffs or employment issues or whatever one can think of is probably going to come up in the next 24 months. the people that end up being the winners out of all this are going to be the ones who are most prepared to proactively deal with the uncertainty that's going to be endemic to the business community for the foreseeable future.