In A Game Of Market Success, There Are No Second Chances

Everyone knows, in the stock market, bears profit as much as bulls. They just need pricing to move in their direction to make money. Pigs, on the other hand, always get slaughtered. They never retain profits and create additional margin opportunity for those focused on profiting, not necessarily winning. The motivations are different.

In the valuation and sale of IT businesses, pigs do roam. I will outline a few profile generalizations. If you recognize your own company, it's not too late to change. Unless deficiencies are ameliorated, the consequences can be unrewarding.

MARTY WOLF is president of Martin Wolf Associates, a San Ramon, Calif.-based investment banking firm. MWA is a provider of merger and acquisition advisory services, and information and events for midmarket product and service companies. Its next M&A Forum is June 21-23, 2000 in San Francisco. He can be reached via e-mail at mwolf@mwainc.com.

First: no lockdown. This applies to customers as well as associates. A closing was scheduled for Monday. On the Friday before closing, when the seller asked his associates to sign a rudimentary non-compete agreement, 10 of the top specialists walked within minutes. Clearly, management was not on top of the situation and had overlooked weeks of scheming by these key assets that should have been locked up early in the process with stay pay or even earnout sharing from the owner's proceeds. In the case of customers, as another closing was scheduled, the second-largest customer was "expropriated" by the account manager, who was clearly neither looking out for the interests of the seller nor the buyer. In the first case, the deal closed, but not in the second.

Second: Create a chief executive officer. In this case, you go through a real modified auction process, conduct numerous management presentations and hear repeated blandishment encomiums to the point of self-hypnosis. You then contemplate raising funds to do an Internet services rollup of your own, so you don't leave any money on the table. The problem is, however, no one in your existing management team understands finance, operations or has any experience running a growing, successful company. What you have is a few owners who are very bright, technically savvy and obsessed with customer satisfaction. These are attributes desired by a well-run services company, but not rated highly in venture capital financing, which may result in wholesale changes that would ruin the corporate culture,such as making your people travel against their desire and accepting boring jobs from prospects they do not want to work with.

Third: partner poker. This is my favorite. The partners start out on the same team, each thinking their business is worth "X." You deliver 1.5 times "X" while the market segment declines 25 percent. Two partners are quite pleased, but the third one now wants 2.5 times "X." This reminds me of the movie "Blazing Saddles," in which Cleavon Little's character attempts to escape camp by holding a gun to his own head. While it was funny and effective in the movie, in real life, buyers let you fire away. It makes a dissatisfying spectacle and should be avoided at all costs.

Partner poker is not to be confused with fool's poker. This is when a new manager takes over immediately prior to closing, under non-optimum circumstances, with no background in operating or selling the business model and, under the guise of looking after the interests of the people, kills a good deal and causes long-term issues with the company.

You can never insure yourself enough to get buy-in at the appropriate time from the appropriate people. You know you are close when you have employee support and it costs you a chunk of the sale. If it hurts a bit, you are close. You do not get a second chance.