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Using data to drive deals

by contributor Paul Koenig, SRS | Published June 7, 2012 at 2:15 PM

Buying a car was once an onerous process. New and used cars were sold through dealers or listed in the classifieds, and relevant market information could only be sourced through Kelley Blue Book or from car experts, who might have had anecdotal or limited information. Today, a car buyer can simply go to Edmunds.com or a similar service to find market prices, local inventories, reviews and comparisons -- all applied directly to a specific make and model.

The availability of data and the ability to apply it directly to a unique situation has indelibly changed many industries. But the process of buying and selling a company has remained largely unchanged.

Over the years, a number of firms and organizations have developed materials to help parties assess how their deal terms compare to market benchmarks. As a result, there are now dozens of studies containing hundreds of data points in circulation. For many deal participants, the challenge is figuring out what data are most pertinent to their merger and where to find that information. Trying to sift through the disparate resources and applying information to a specific agreement can be overwhelming.

The result: Many buyers and sellers continue to rely on anecdotal information and the expertise of seasoned deal professionals. However, an analytical, data-driven approach can reveal areas that otherwise may be overlooked in negotiation. Analysis of aggregate data from similar deals that is applied directly to the deal negotiation can actually change the outcome and overall returns from the deal.

Understanding market terms and what can go wrong after closing is essential. Buyers and sellers both prefer to avoid post-closing conflicts. Unfortunately, the majority of private company M&A deals have post-closing issues, which can result in increased costs for buyers and undercut returns for selling shareholders. The availability of accessible data can affect the success of the merger and help mitigate post-closing risks.

The following examples are just a few of the issues that arise frequently after closing. Issues such as these should be assessed before closing based on market data, likely outcomes and best practices:

Data shows that patent troll claims arise frequently. The announcement of the transaction will sometimes trigger claims of infringement that neither the buyer nor seller was aware of prior to closing. These are a significant systemic problem because neither party wants to see the escrow unnecessarily depleted, and patent matters tend to be very expensive to make go away. While the buyer and the shareholder representative usually work together against a third party on these matters, tricky issues can arise when the best resolution is for the buyer to enter into a global-licensing agreement of all of the third party's patents. When that happens, we have to try to determine how to allocate the associated cost between what needed to be paid due to the target company's alleged infringement and what is attributable to the buyer's ongoing business activities. Often there is not an easy or obvious answer to that. Parties benefit from contemplating these issues prior to closing.

Claims in which the parties agree that there is a mistake in the financial statements that were delivered to the buyer also arise from time to time. The disagreement may come in the calculation of the resulting damages. The selling stockholders will often believe the indemnifiable amount should be the amount of the misstatement. Buyers, however, will sometimes allege that they paid a multiple of revenue or Ebitda, and the indemnifiable loss is the amount of the misstatement times that multiple. If the answer to this damages calculation question is not clear, the dispute is not likely to be resolved quickly or easily. The bid and the ask simply tend to be too far apart. Parties often choose to punt at the drafting stage for good reason, but it can create significant problems later if this claim is made.

Data also shows that tax claims are among the most frequent claim types, but they tend to be claims based on issues other than income taxes that often get less focus or attention from the merger parties. For example, a significant amount are personal property tax audits or municipal tax claims. The tax issues that tend to be the most difficult, however, are sales and use tax claims. The analysis is complicated, and the number of relevant transactions can be enormous. Buyers and sellers should focus closely on this issue and to try to address it before closing. It tends to be much easier to get consensus on the proper analysis then, rather than waiting until after closing to determine that the parties have very different views on the amount of potential liability.

The data driving M&A is out there, and sophisticated dealmakers are already using it to highlight potentially problematic areas and to improve transparency in negotiations. Innovations in the marketplace simply make it more accessible and broadly available. Working together with your counsel and investment bankers, customized data and information should allow for practical deal assessments not easily available in the past.

Paul Koenig is managing director of Shareholder Representative Services LLC.

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