Ask pg.news.yc: How do acquisition prices get settled? | Hacker News Reader

Ask pg.news.yc: How do acquisition prices get settled?

23 pointsaswanson18 comments

For instance, PG, how did Viaweb and Yahoo agree on a sale price? Arbitration by investment bankers, the board, etc? What is the process? How can you trust the negotiators to work in your best interest?

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After the introduction of the topic of acquisition from the buyer to the seller, the first major milestone in an acquisition deal is usually a terms sheet. The terms sheet would be essentially a non-binding high-level agreement to the basic terms of the deal. Price is just one of many terms. It is clearly one of the important ones, but there are other sometimes equally important terms in a given deal, such as associated non-compete and consulting contracts. Also, "price" is a nebulous term and is usually not just one isolated number. For instance, there can be earn-outs, hold-backs, escrowed amounts, consulting fees, etc., and all of these can be tied to indemnities, conditions, etc. And the structure of the deal, e.g. stock vs asset, impacts the net take home to the shareholders, which is what most people are ultimately interested in.

Both parties agree on the terms sheet through negotiation. That sounds obvious, but the point is there is not one set process. There are many strategies to negotiation and some make more sense than others in the context of a particular deal. It is not uncommon for parties to walk away and come back to the table at this stage, and in fact, at all stages. The "price" could easily move up or down significantly depending on a number of factors. It really comes down to what the seller is willing to sell for and what the buyer is willing to buy for. If there is an overlap, there could be a deal. If not, then no deal. The rest is jockeying for the overlap. Walking away until you get x is one tactic to get to the top of the overlap from your perspective.

Finally, investment bankers and their equivalents in these situations are not necessary, but they can get you a higher price. Their basic usefulness is connecting you to potential buyers, i.e. through their roladex. You, alone, may not know or have access to these potential buyers. By engaging multiple buyers you can get an auction scenario, which is often ideal because usually buyers willing to pay more for something if they are taking it away from someone else in addition to getting it for themselves. However, certain tactics can turn off and ultimately dislodge particular buyers from the process, which could be net negative for the shareholders depending on which buyer(s) walked away. Also, brokers usually take a significant % fee, and if they do not get an auction going, this could just be wasted money.

It's always pretty much the same kind of haggling you'd see in a bazaar. Usually both sides send signals in advance about the ballpark figure they'd consider. If these aren't too far apart, you haggle. That's usually stressful, because you can only haggle effectively if you are truly prepared to walk away from the deal if you don't get what you want. So deals are always about to fall through till the last moment.

>How can you trust the negotiators to work in your best interest?

Be one of the negotiators. Sounds stupid, but if you aren't at the table, you really aren't being represented, no matter how wonderful the high priced help is.

This doesn't sound stupid to me. It rings true. Quite simply, of course you can't "trust the negotiators to work in your best interest." The only person you can trust to work in your best interest is yourself.

"sounds stupid" because many people scoff at the idea, feeling themselves not skilled enough or a little overwhelmed by the whole thing.

> The only person you can trust to work in your best interest is yourself.

If only that were true! A great many people have psychological difficulty in following through on what they believe to be in their best interest.

Other people can often be better advocates for you than you are. They may demand more for you than you would be comfortable asking for yourself.

You are totally right. Of course, this makes life really difficult because it means you can't trust anyone absolutely, not even yourself. This is yet another reason that these types of negotiations are so stressful!

You might be making soap while you sleep.

How can you trust the negotiators to work in your best interest? Make their cut percentage-based.

Not necessarily. Getting 1% more for you means 1% more for them, which means they may have a bias towards a low price that guarantees a deal.

Instead, you could try a larger commission of any sale price above X, where X is your low estimate of what your company is worth.

Edit: On the other hand, this tilts their incentive towards pursuing low-probability, high-payout situations. If someone is working with ten different companies, and they all compensate with this structure, getting one good sale and ignoring the other nine might be the most rewarding option. On the other hand, if there are nine companies with the "percentage of sale price" structure and one with "higher percentage of price-minus-threshold," compensation, the latter will get all the attention. So this boils down to a brutal, Darwinian struggle to pay your sales guy the right way. At some point, structuring compensation might waste more time and effort than just selling the company yourself.

A related issue is timescales: Negotiators may sacrifice a reduced commission through reduced sale price if it means expediting the process and allowing them to get onto other deals. Founders don't have the same rate of turnover and so have more interest in spending time to raise the sale price.

I think this line of thought is related to Leavitt's "Freakonomics", particularly in his observation of real estate dealers leaving their homes on the market for longer periods of time and getting better prices than those for their clients.

It usually is, for investment bankers. But that doesn't guarantee they'll work in your interest. Investment bankers selling a small co to Microsoft might sell it super cheap, in the hope of earning good will with Microsoft that could be cashed in later in much bigger deals.

This opens up a level of intrigue I didn't initially consider. How low can they go?

They can go as low as the seller is willing to accept, who ultimately has to sign off on the deal. However, the broker can essentially make stuff up to make the seller think they should take the deal.

I meant 'low' in a slimeball, backstabbing rhetorical sense but I see what you are saying.

Also if it's anything like real estate, their incentive is more to close the deal than to get the highest price, freeing them to move on to the next. A difference of a few percent to you the seller is huge, to the banker its a small percentage of that few percent. He'd rather just get it over with and move on.

Acquisition 101. Thou Shall Not Give A Price First 102. Thou Shall Triple Any Offer 103. Thou Shall End Up With Double What They Offer

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