Not knowing when to walk away from an M&A deal – or suffering from the “crazy to win mind-set" – can lead to disastrous mistakes, according to J. Michael Marks in Distribution M&A Playbook.
When evaluating a potential purchase, a responsible seller will invest tens of thousands of dollars in due diligence. But, Marks emphasizes, that initial investment can cloud judgment down the line.
"Imagine that you make a fair bid based on the market and what you have in your value-creation plan," Marks says. "Then the seller’s investment banker comes back and tells you, 'My client really likes you as a buyer, but your number is too low and needs to increase by 16 percent.'"
Marks warns against taking these estimates lightly.
"You know that 16 percent more puts you a bit higher than the higher market range but it is still in the market window. And, after all, they are only estimates anyway. So you adjust some of your assumptions in your value-creation plan. You have already invested close to $100,000 in the deal, so you want to move forward. But what happens when there is a third round of bidding?"
Marks has seen large firms fall for this, especially private equity firms struggling to find good companies to acquire. Over the next several years, he claims, they will sell off strategic parts of the business to try and get back above water.
'This is the No. 1 driver of zombie investment funds – those so underwater that the shareholders can never get an acceptable return," Marks says.
Read more common M&A mistakes to avoid in Distribution M&A Playbook.