11th February, 2018

It’s better to walk away than do a deal you’ll live to regret

I always suffer last minute doubts before I buy a business, but I have never failed to complete an acquisition once it has been announced. By contrast, a private equity firm called Aurelius recently did just that when it reneged on an £11.6m deal to buy the books distribution division of quoted Connect Group. The buyer claimed that poor December trading meant it could not finance the deal. The seller asserts that the contract was unconditional.

The fallout from this shambles will be considerable. Aurelius will have racked up enormous abort costs with advisers, and I think it will have significantly damaged its reputation for good faith dealing. Connect now has a big subsidiary, which may appear to any other purchaser like damaged goods, and might be almost unsellable. No doubt litigation will ensue, but possibly Connect will have no redress against Aurelius itself since only a specially formed purchasing vehicle will have signed the agreement.

I have sympathy with both sides. Normally in such circumstances, the buyer attempts to renegotiate, and the seller obliges with a price reduction.

A few years ago, we agreed to buy a buffet restaurant business, but spent more than a year trying to do the deal because there were so many issues. Eventually, we did proceed at a much lower price than the original offer: in fact, we should have given up and walked away and written off the time and professional fees. The company was a disaster and went bust. We lost our entire investment.

Buying a business is a complex process and usually takes many months of detailed due diligence. During that period, those who champion the venture tend to become emotionally committed to consummating the deal — even if there are warning signs. Many of the advisers involved have a financial interest in seeing the acquisition happen — and no downside if it subsequently underperforms.

When companies are auctioned, bidders can get carried away and fall for the blandishments of the intermediaries selling the asset. So deals develop a momentum of their own, and pulling out means upsetting many people.

The trauma of such a jilting reminds me of a friend who suffered cold feet the day before his wedding and didn’t turn up to the ceremony. A cruel decision, but better than a miserable relationship for life.

Frankly, it is always better to withdraw than experience buyer’s remorse — a feeling from which I have suffered on too many occasions. Bad deals do not just lose you lots of money, they divert resources from more productive activities. Moreover, unsuccessful acquisitions deplete one’s confidence, and can mean you miss out on profitable opportunities.

Rotten acquisitions usually take years to fix, while retreating from a deal takes a day. But because buying companies is exciting, the choice of abandoning an acquisition project is typically a lonely and difficult one — even though it is quite possibly the right move.

If sellers do mislead buyers, then, in theory, they can be sued under the contract’s warranties. However, making such claims is expensive and risky. I have occasionally taken such action against both vendors and advisers, but only as a last resort. And even if you win such legal actions, they are unlikely to truly compensate you for the various losses incurred if you make a dud acquisition.

Inevitably, no business is perfect, and they are very rarely as good as they are portrayed in the glossy sales documents. Experienced buyers learn to interpret the hype and make up their own minds. Poor buys usually reveal themselves to be such pretty soon after completion; good acquisitions take somewhat longer to show their true colours.

With hindsight, we are all brilliant acquirers who knew from the beginning that the deal that proves highly profitable was a masterstroke. Of course, the truth is that every purchase is a leap into the unknown, an anxious exchange of money in return for an enterprise which may deliver on its promises — or not. It is no more than an educated bet on the balance of probabilities, but few merger experts would ever admit to that.

There is a myth that investing in businesses is a scientific discipline. Perhaps this mistaken belief is perpetuated to justify the significant rewards that accrue to those who do well at it. But in reality, luck and intuition play the greatest roles in determining whether an acquisition goes according to plan.