M&A: What to do when you get an inbound enquiry

The Canadian tech merger market has started the year off very strong, with $5.1bn of transactions compared to $3.1bn in all of 2015.  In Ottawa we have seen a similar trend with 9 M&A transactions as of the end of June versus 10 for the whole of 2015.

But what’s driving this increased activity? A sizeable proportion of this deal activity is driven by what’s known as inbound M&A – an inbound enquiry to acquire your company from a strategic or financial buyer. This is definitely a trend that is on the rise as the weak Canadian dollar combined with high corporate cash balances and access to cheap capital are fueling cross-border interest from US acquirers.

In fact, we have had a number of clients talk to us about inbound M&A due to recent enquiries from interested acquirers.  A few have even moved through the process and accepted the bid of the inbound enquirer, only to regret not running a broader process to drive more value.

So what should you do if you receive an inbound enquiry? The nice thing is that you have some additional negotiating leverage, because they are chasing you and not the other way around.  But the next moves you make are critical to maximizing value and keeping the inbound “honest” while at the same time not turning them off of a transaction. Specifically, we recommend you follow these key steps:

• Internal self-assessment – You will need to figure out internally (and with your shareholders, board, etc.) whether or not now is a good time to sell and if you have interest in pursuing conversations further.
• Don’t go exclusive – Many potential acquirers will push for exclusivity as early as possible. Exclusivity typically locks you into talking to just one party for 30-60 days, which significantly limits your optionality.
• Slow the inbound down – In order to run an efficient process that involves multiple parties, the worst thing that can happen is you have one particular party ahead of everyone else. If they are, it becomes very difficult to create effective bid tension between the parties and the party out-front will usually try to force an expedited timetable on you to prevent you from bringing other potential parties to a transaction.
• Act coy – As we said earlier, the nicest thing about getting an inbound is you have the leverage. By this we mean that you can act coy and indicate that you’re quite happy to continue to run your business and are under no pressure to sell. This stance will help later when it comes to discussing valuation and key transaction terms.
• Move quickly and hire an advisor – In a separate upcoming post we will discuss the merits of hiring an M&A advisor to drive increased value and create competitive tension. We believe it is crucially important to do this quickly once you have received an inbound so that you can keep everyone on the same schedule as discussed earlier.

If you haven’t received an inbound but are in an attractive space, it’s likely you could receive interest at some point in the future.  If this is the case, we recommend you being ready for when that potential inbound comes by having an up-to-date financial model, teaser, management presentation and due diligence information.  We also recommend that you have a list of the most likely strategic partners and the appropriate people to reach out to, so that when someone comes knocking, you can hit the ground running and begin a broader process quickly and efficiently.

With the continued weak Canadian dollar and favorable US macro trends, a knock on the door could be just around the corner for any of us…