Don’t let your M&A deal end up in the rough

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Think there’s nothing you can learn about M&A from Caddyshack?  Cantey Hanger’s Doug Clayton says there is!


Acquiring knowledge by Doug Clayton

Don’t let your M&A deal end up in the rough

Premium content from Dallas Business Journal – by Doug Clayton, Contributing writer

Date: Friday, July 22, 2011, 5:00am CDT

Most of us remember Judge Elihu Smails as the pompous windbag played by Ted Knight in Caddyshack. But how many people know that the co-founder of Bushwood Country Club is also a source of great wisdom for merger and acquisition transactions? Don’t believe me? Keep reading.


“It’s easy to grin / When your ship comes in / And you’ve got the stock market beat. / But the man worthwhile / Is the man who can smile / When his shorts are too tight in the seat.”

Judge Smails clearly understands that regardless of whether you are hoping to buy low or sell high, the global economy or other outside forces may affect your negotiating position through no fault of your own.

When that happens, it is not the time to panic. Keep calm and remind yourself and the other party that extraordinary events will happen, but that should not obscure the business fundamentals that are at the heart of the M&A transaction. Coolness under the pressure of a big deal is the true sign of the Man Worthwhile.


Judge Smails: “Ty, what did you shoot today?”

Ty Webb: “Oh, Judge, I don’t keep score.”

Judge Smails: “Then how do you measure yourself with other golfers?”

Ty Webb: “By height.”

This exchange reminds us that just as there are many ways to measure yourself against other golfers, there are many ways to judge an M&A transaction other than the purchase price.

For example, will the purchase price be payable in cash, stock of the buyer, or some other form of consideration? Will there be baskets, caps, time limitations, or other limits to the seller’s indemnification obligations? Will any portion of the purchase price be subject to an earn-out or an employment agreement, or otherwise be conditional on future events? Has the buyer secured adequate financing?


“Danny, I’m having a party this weekend. … How would you like to come over and mow my lawn?”

Like a party at Judge Smails’ house, M&A transactions work best when all parties understand their roles.

Both the buyer and the seller should understand the scope of the seller’s expected role with the target company after the closing. The transaction documents should clearly spell out the terms of the seller’s post-closing responsibilities, including the expected time commitment, the compensation payable to the seller and whether the seller will be an employee or a consultant.


“You’ll get nothing and like it!”

In the recent challenging economic environment, many buyers have echoed Judge Smails’ famous words by attempting to walk away from deals that seem less appealing at closing than they did when the parties signed the purchase agreement.

Accordingly, so-called deal-protection mechanisms have become hot topics for M&A transaction professionals. Sellers are also asking buyers to provide more earnest money and are suing buyers who fail to close and seeking damages or specific performance of the purchase agreement.

The financial condition and creditworthiness of the buyer always have been important issues for the seller to consider. In today’s deal environment, those issues are more important than ever.


“How about a Fresca?”

An M&A transaction can feel like a battle at times. When the deal is closed, take a cue from Judge Smails and enjoy a Fresca, or the adult beverage of your choice, with the other deal participants. You’ve earned it.


Clayton is a partner in the Southlake office of Cantey Hanger LLP. He focuses his practice on mergers and acquisitions, corporate finance, securities offerings and other business transactions.


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