Deal Power by Marc Diener

Provided with the permission of M&A Today Newsletter. Volume 8, Number 11.

Editor's Comment: M&A Today takes the opportunity to read as many books related to mergers and acquisitions as we are able to do so. We recommend this book and have taken the liberty to copy directly from the text what we consider the author's most insightful advice.

Background

The author elaborates on six foolproof steps to making deals of any size. Diener starts by advising dealmakers to take the time to think about what they are doing, asking the questions:
• Why am I doing this?
• Will it be worth it?
• What are my alternatives?

"Cooking the Books"

Diener continues by cautioning the acquirer to be aware of such possible seller improprieties as "cooking the books." A partial list of examples includes:
• deferring current expense to another accounting period
• keeping cash-received records open after the end of a period / closing disbursements records early
• recognizing revenue before it's fully earned or while significant contingencies exist
• making unusual entries at or near the end of an accounting period
• not writing off bad loans or worthless assets
• ignoring liabilities such as long-term commitments, significant contingencies or post-retirement liability
• not making adequate provision for depreciation
• overestimating the collectibility of accounts receivable
• ignoring the obsolescence of fixed assets
• burying losses under non-continuing operations
• improperly capitalizing research and development, start-up costs, advertising, interest charges, repairs, and the like
• exchanging similar assets and counting what's received at fair market value
• taking aggressive positions on unsettled, difficult or controversial accounting issues

Warning Signals

Beyond the balance sheet, Diener lists numerous warning signals buyers of target companies should observe, such as:
• a trail of bankers, lawyers or other personnel who were fired or who resigned
• nepotism
• over-reliance on a few customers
• management that is unaware of technological changes in the industry
• foolish diversification
• unfavorable union or other contracts
• no planning for executive's succession
• litigation history, pending claims and/or government investigations
• extreme pressure to compete or survive
• part of a declining or saturated industry
• overly rapid expansion
• upcoming mergers or acquisitions
• weak internal controls
• lack of independent board members
• unfavorable publicity
• restrictive loan agreements
• rejection by lenders
• acceleration of loan repayment by lenders
• delayed quarterly or annual reports
• heavy inter-company transactions
• large borrowing unrelated to its main area of business
• unusual or complex transactions
• senior management that overpowers the directors
• principals with questionable backgrounds

Negotiation

• Don't jump to conclusions about what the other side really wants. Try to uncover their underlying interest.

• Be cordial, be respectful, but never take anything at face value. Whether you do it directly or indirectly, question facts, question numbers, and question motives.

• Research the applicable industry's custom and practice regarding the deal you are working on.

• Refuse to make any concessions until you know all the demands.

• Remain cooperative and optimistic. Keep bringing the other side back again and again to a rational discussion of the issues.