The Hidden Planners of PMI
We are out of the game at this point!
“With respect, we have nothing to do with that at all. We're out of the process with the signing.” I received this comment a few weeks ago after my presentation, Why M&A Advisors Need to Consider PMI. from a representative of the sell-side.
Of course, I had expected this reaction, but it still stung. “It's not necessarily friendly in the shark tank,” someone said to me later. The title of my presentation was deliberately provocative: Why M&A Advisors Need to Consider PMI.I had challenged the sell-side — and received the expected reaction.
Everyone agreed that buy-side advisors should think about integration and the realization of acquisition targets. But is that enough? Or would it perhaps be better, easier, and quicker if the sell-side also anticipated the next step?
Two parties with conflicting interests?
In one corner: the sell-side, presenting a beautifully packaged company to be sold in the best possible way. Typically, "best possible" is equated with the highest price. In the other corner: the buy-side, aiming to acquire the company while pursuing their own goals and objectives that they want to achieve with the acquisition. And we all know: “The blessing is in the purchase.” That's why the buy-side is interested in paying as little as possible.
From a bird's eye view, this is exactly what a transaction looks like — highly simplified, yet realistic.
On closer inspection, however, numerous secondary conditions come into play. Time is money: the faster the transaction is closed, the better. The buy-side calculates based on a business case and derives a maximum purchase price from it. This business case includes risks identified during due diligence — risks that the sell-side was unable to refute.
This is where it gets exciting. Some risks can be mitigated through insurance, with the premium factored into the purchase price. Other risks are managed via subsequent purchase price adjustments or earn-out clauses in the contract. Both ultimately affect purchase price expectations.
In the end, everything still revolves around the purchase price — but in a more complex way. To make the process even more complicated, the incentive factor comes into play. I have yet to see a transaction where sell-side advisors were not directly incentivized based on the purchase price.
“Get out of jail free” card
Unlike Monopoly, there are no community-chest cards in M&A transactions to resolve deadlocks. But taking a step aside to adopt a different perspective can help.
The buy-side is interested in achieving its goals with the acquired company and maximizing the business case. This doesn't solely depend on minimizing the purchase price. Once you adopt this perspective, new options emerge. The fascinating part is that these new opportunities benefit not only the buy-side but also the sell-side.
Anyone familiar with game theory knows the prisoner's dilemma: two prisoners are serving short sentences but are offered a leniency program if they testify against the other. If only one testifies, he goes free while the other serves a long sentence. If both testify, the leniency program is void, and they both receive harsher sentences.
The drama of Tosca
Puccini's opera Tosca incorporates such a dilemma in an impressive musical and historical framework. In order not to keep you in suspense, I will not go into the background and historical context.
In the decisive scene, the two protagonists Scarpia and Tosca confront each other. Tosca wants to save her beloved Cavaradossi, sentenced to death by firing squad. Scarpia agrees to use blanks instead of live ammunition — on the condition that Tosca spends the evening with him.
In game theory, this is a perfect example of cooperation: if both cooperate, each achieves their goal but must make sacrifices. Scarpia would have an evening with Tosca but must forgo eliminating his rival, Cavaradossi. Tosca could save her beloved but must endure an evening with Scarpia.
Already at the end of the second act, short-sightedness overtakes them both. Scarpia doesn't order the cartridges to be replaced. Tosca seizes the moment and plunges a knife into Scarpia’s chest before their evening takes off.
Both act to maximize their own gain without considering the other's perspective and evaluation of the options as well as independent decision-making. As a result, both pay the lower price for themselves, but neither achieves their desired outcome.
That only happens in fairy tales, doesn't it?
In real life, situations as dramatic as those in Tosca are rare. Nevertheless, I have seen similar behavior time and again in M&A transactions. Fortunately, no one has ever lost their life - but money has, and not a little.
A few years ago, a unit of developers that was to be carved out of a larger company was sold. Cooperation would have required the sell-side to provide greater transparency regarding employees' skills, while the buy-side would have been allowed to communicate with employees before the closing.
This approach could have enabled the buy-side to persuade more developers to join the new carve-out vehicle, thereby improving their business case. In return, the buy-side would have been open to pay a higher purchase price. Greater transparency from the sell-side would have reduced risks for the buy-side, strengthening their case.
Instead, both sides played the roles of Tosca and Scarpia. The outcome was less than ideal — but it provides a compelling introduction for many of my talks: the story of Martin.
An alternative ending
How could things have been different? After signing — and certainly after closing — the sell-side loses influence over the target. This was a major point of our discussion a few weeks ago.
I can't impose my thoughts on anyone, but I can share them to create opportunities and open up new perspectives. Just as I did in my presentation, the sell-side could encourage the buy-side to adopt a broader viewpoint.
If the buy-side isn't planning extensive integration, the business case will include high risk discounts and long stabilization periods before they reach the steady state. Why wouldn't the sell-side propose minimizing risks and shortening timelines through more active integration?
This approach would offer clear benefits: more active integration management would strengthen the buy-side's business case, increase the target's value, and justify a higher purchase price. Of course, the sell-side would need to sacrifice something — such as greater transparency about the target's status. A joint session on integration setup could reveal strengths and weaknesses that could be addressed before closing.
Such processes typically unfold step by step. Both sides make concessions, and both benefit. By cooperating and building mutual trust, they create a foundation for shared success.
Before the curtain falls
Our world is becoming increasingly diverse, colorful, and also complex. The sustainability of an M&A transaction is not apparent at signing but years later.
It is shortsighted to simply blame the buy-side for integration challenges. This returns us to the one-dimensional thinking demonstrated by Tosca and Scarpia.
Successful M&A transactions require foresight. It pays to think several steps ahead, look years into the future, and adopt a broader perspective. It is important to bear in mind that the other side also has its own goals and valuations.
Cooperation is the key to achieving a shared optimum. Anticipating the next step is crucial. In M&A transactions, this means focusing on the integration of the target — even if the buy-side ultimately bears responsibility for implementation.
Perhaps this is precisely why the “get out of jail free” card is not an individual card, but a community-chest card.
