

Ask pg.news.yc: How do acquisition prices get settled? - aswanson

For instance, PG, how did Viaweb and Yahoo agree on a sale price?  Arbitration by investment bankers, the board, etc?  What is the process?  How can you trust the negotiators to work in your best interest?
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epi0Bauqu
After the introduction of the topic of acquisition from the buyer to the
seller, the first major milestone in an acquisition deal is usually a terms
sheet. The terms sheet would be essentially a non-binding high-level agreement
to the basic terms of the deal. Price is just one of many terms. It is clearly
one of the important ones, but there are other sometimes equally important
terms in a given deal, such as associated non-compete and consulting
contracts. Also, "price" is a nebulous term and is usually not just one
isolated number. For instance, there can be earn-outs, hold-backs, escrowed
amounts, consulting fees, etc., and all of these can be tied to indemnities,
conditions, etc. And the structure of the deal, e.g. stock vs asset, impacts
the net take home to the shareholders, which is what most people are
ultimately interested in.

Both parties agree on the terms sheet through negotiation. That sounds
obvious, but the point is there is not one set process. There are many
strategies to negotiation and some make more sense than others in the context
of a particular deal. It is not uncommon for parties to walk away and come
back to the table at this stage, and in fact, at all stages. The "price" could
easily move up or down significantly depending on a number of factors. It
really comes down to what the seller is willing to sell for and what the buyer
is willing to buy for. If there is an overlap, there could be a deal. If not,
then no deal. The rest is jockeying for the overlap. Walking away until you
get x is one tactic to get to the top of the overlap from your perspective.

Finally, investment bankers and their equivalents in these situations are not
necessary, but they can get you a higher price. Their basic usefulness is
connecting you to potential buyers, i.e. through their roladex. You, alone,
may not know or have access to these potential buyers. By engaging multiple
buyers you can get an auction scenario, which is often ideal because usually
buyers willing to pay more for something if they are taking it away from
someone else in addition to getting it for themselves. However, certain
tactics can turn off and ultimately dislodge particular buyers from the
process, which could be net negative for the shareholders depending on which
buyer(s) walked away. Also, brokers usually take a significant % fee, and if
they do not get an auction going, this could just be wasted money.

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pg
It's always pretty much the same kind of haggling you'd see in a bazaar.
Usually both sides send signals in advance about the ballpark figure they'd
consider. If these aren't too far apart, you haggle. That's usually stressful,
because you can only haggle effectively if you are truly prepared to walk away
from the deal if you don't get what you want. So deals are always about to
fall through till the last moment.

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run4yourlives
>How can you trust the negotiators to work in your best interest?

Be one of the negotiators. Sounds stupid, but if you aren't at the table, you
really aren't being represented, no matter how wonderful the high priced help
is.

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epi0Bauqu
This doesn't sound stupid to me. It rings true. Quite simply, of course you
can't "trust the negotiators to work in your best interest." The only person
you can trust to work in your best interest is yourself.

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portLAN
> The only person you can trust to work in your best interest is yourself.

If only that were true! A great many people have psychological difficulty in
following through on what they believe to be in their best interest.

Other people can often be better advocates for you than you are. They may
demand more for you than you would be comfortable asking for yourself.

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epi0Bauqu
You are totally right. Of course, this makes life really difficult because it
means you can't trust anyone absolutely, not even yourself. This is yet
another reason that these types of negotiations are so stressful!

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portLAN
You might be making soap while you sleep.

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samb
How can you trust the negotiators to work in your best interest? Make their
cut percentage-based.

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pg
It usually is, for investment bankers. But that doesn't guarantee they'll work
in your interest. Investment bankers selling a small co to Microsoft might
sell it super cheap, in the hope of earning good will with Microsoft that
could be cashed in later in much bigger deals.

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aswanson
This opens up a level of intrigue I didn't initially consider. How low can
they go?

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epi0Bauqu
They can go as low as the seller is willing to accept, who ultimately has to
sign off on the deal. However, the broker can essentially make stuff up to
make the seller think they should take the deal.

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aswanson
I meant 'low' in a slimeball, backstabbing rhetorical sense but I see what you
are saying.

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rokhayakebe
Acquisition 101. Thou Shall Not Give A Price First 102\. Thou Shall Triple Any
Offer 103\. Thou Shall End Up With Double What They Offer

