At the risk of sounding like an old curmudgeon (which I probably am), a case can be made that technology is increasing the amount of time it takes to get an M&A transaction closed and may even reduce the probability of closing or of a successful investment. Several observations to support the idea:
Due Diligence Data Requests
The advent of ERP systems with relational databases, robust report writers and the ability to easily export to Excel allows companies to answer almost any data request. Previously data configurations were more or less fixed and there was limited flexibility in data reporting. Now, because data can be easily sliced and diced, potential investors and lenders don’t hesitate to make those requests. And then ask for more. This puts a burden on the company and its advisors to make sure the data ties to previous output (adjustments, etc.) and that they can explain the data: Why do sales appear to go up with a full moon? This ability to get more and more data prolongs due diligence and overall transaction time.
Trailing Twelve Months (TTM) Financial Data
Producing financial statements outside normal timeframes or that crossed a fiscal year end used to be difficult. Allocations and year-end adjustments were not automated and, without the ability to export to Excel, could not be adjusted easily. Investors and lenders now want TTM numbers updated constantly. One transaction I worked on had the buy side quality of earnings (Q of E) report updated four times during the transaction process for TTM results. Again, prolonging transaction times.
Virtual Data Room (VDR)
VDRs are a great idea. You put all the data in the cloud. control access to it, get reports on who is viewing what documents, how long they are spending on each document, and other details. While this has advantages, investors have lost the value of spending a couple of days at the target company going through the documents. Prospective investors could observe operations, spend quality time (meals, etc.) with management, and address data questions immediately. Even if the data room was off-site, meals and other meeting times could be arranged to get to know each other. This process also forced efficiency and kept the transaction from dragging out. On a current transaction we are working, an attorney has logged in 44 times over eight weeks, a costly approach.
Document Negotiation by email
Buyer’s lawyers draft documents and email them to seller’s lawyer. Seller and its lawyers review and mark up the draft. Email documents back. Buyer and its lawyers take a week or so to review, comment and send it back to seller. Hopefully at some point a phone call occurs to talk it over. Nobody gets on a plane, parties can be spread across the country. The loss is time and, once again, the opportunity to get to know each other. For the younger reader, previous modus operandi was for buyer’s lawyers to draft the documents and overnight or (gasp!) fax them to the seller’s lawyer. Seller and advisors would review, get together and make comments. At that point all parties would meet and hammer out the deal. No redlined comments without explanation, no week-long delays between document turns. And the bonus was that each party got to observe how the other party acted in a negotiation. Body language could be observed to understand what issues seemed most important. How do the investors treat their lawyers? Seller’s lawyers? Seller? More than one investment has been aborted because the potential investor saw its potential partner’s true colors during document negotiations or vice versa.
Others can probably think of additional items but here are the main points: 1) Transactions are built on relationships and 2) time kills deals. The more time a potential investor spends with a seller/partner the smoother the transaction will be (or the quicker it can be abandoned) and the better the post-closing working relationship will be. The faster the transaction can progress, the more likely that it will close, so anything that provides an opportunity for delay is a problem. Technology can be great, but it can also be a problem if it reduces transaction continuity and the ability to understand each other beyond emails and spreadsheets.
Robert Rough is a Founder and Managing Director of Telos Capital Advisors, LLC in Dallas, TX. TCA is a middle-market investment banking firm helping business owners achieve their goals through a sale or recapitalization. RRough@teloscap.com, 214-473-4714, www.teloscap.com