Author: Viktor Reppo
Curb your enthusiasm
– Price negotiations in cross-border M&A (Part 2)
So, what could have been done differently? Usually, I recommend starting from discussing and aligning the principals for the valuation. Start from the high level and then get to as many details as possible without talking about the actual price.
Local deviations may occur
For instance, let’s take, probably, the simplest situation when the buyer is making a valuation based on a profit multiplier. Seems very straightforward, but even in that case, it’s advisable to talk through the principles first. What profit are you taking into account? Is it full reported profit, or profit from core operations? Sometimes the seller sees that actual profitability is higher than the reported one. That should be taken into account in one way or another.
Often, in growing companies, the buyer is looking at the last reported financial year, while the seller is thinking about the ongoing or the coming year. All those differences in understanding of the valuation basis can already create a gap, which will seem too wide to cover. And then still, a more common difference comes from the multiplier. From where do you take the multiplier, which you are using? What is the logic behind it? Very often it is based on previous cases from the home country and doesn’t necessarily make sense in the new environment. If your previous transaction was in Finland and you are using the same multiplier in Russia, without questioning it, expect that there will be a valuation gap. Talk through those ideas and identify where you might disagree with the principals before speaking the numbers.
Success through details
Now let’s take a little more complex case, where the buyer is not interested in merely the profit multiplier, but searches for something more specific, e.g. access to the key accounts. In that case, you definitely need to discuss details, like what you consider a key account, how you will assess it, how you will treat the non-key customers, etc. That kind of discussion is a great opportunity for an experienced negotiator to set the platform for a good deal and manage many of the post-merger risks.
Another way to look at it, when beginning the negotiation, first you focus on understanding how the other side thinks, then focus on helping them understand how you think. After that, you identify and work through the differences. Finally, calculating the number should be merely a technical task.
Many times, even the deals that have already encountered the price gap challenge, can be moved forward by first taking a step back, and discussing through the valuation principals. Sometimes, with some unexpected twist, it even leads to a better deal than initially targeted.
To sum it up:
- Acknowledge there may be a price expectation gap
- Manage expectations
- Prepare for different local valuation principles
- Work through the differences to find common ground and set the scenario for success
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