Previously, one of Australia’s largest supermarket retailers made a bid to acquire a major supplier of packaging products and solutions. The acquisition was part of the retailer’s strategy to gain greater control over its supply chain and reduce its environmental footprint by increasing the use of recycled and recyclable packaging. However, after months of negotiations and a revised offer, the deal ultimately fell through, leaving both companies to reassess their strategic objectives. This acquisition attempt is a valuable case study, highlighting several methods to avoid common pitfalls.
Understanding of the Shareholders
One of the main reasons the deal fell apart was that the retailer needed to understand how unhappy the supplier shareholders were with the offer price. The retailer offered over $1 billion to purchase the supplier’s company. However, many of the supplier shareholders thought this price was too low. As such, the retailer misjudged how strongly the supplier shareholders would oppose and reject the initial offer price. Even when the retailer increased their offer and bid more, convincing the shareholders that it was a fair deal was still insufficient. Ultimately, the wrong value assessment led to a total rejection of the deal, a common mistake in such transactions.
As a result, it is important for the buyer (the retailer) to accurately assess what the sellers (the supplier shareholders) realistically think their company is worth before making an offer. To avoid misjudging how shareholders value the company, buyers should seek to open a dialogue with major shareholders as early as possible.
Moreover, this valuation approach increases the chances of making an initial offer that shareholders deem fair value for their company. Even if there is a gap, having that early discussion at least sets realistic expectations that can be negotiated from an aligned starting point, following best practices.
Board Support
The second pitfall could be that the supermarket retailer’s initial offer received little support from the supplier’s board of directors, potentially weakening the deal’s prospects from the outset.
While the board eventually recommended the retailer’s revised higher offer to shareholders, the lack of initial alignment may have set the stage for shareholder opposition and doubts about the deal’s merits.
The full backing of the target company’s board is crucial in any major acquisition. This is because the board represents:
- shareholders’ interests;
- understanding of the company’s operations
- understanding of company strategy; and
- understanding of value drivers.
To secure shareholder approval and increase the chances of a successful acquisition, a company must gain the full support of the target company’s leadership and management team. Companies pursuing major acquisitions should prioritise engaging early and continuously with the target’s leadership. This involves presenting:
- the strategic rationale;
- value proposition; and
- expected synergies of the deal while actively addressing the board’s concerns.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Competing Bids
When a company is up for sale, there is always a possibility that other interested buyers might step in with their offers. As a retailer acquiring a supplier, there have been instances where the retailer underestimated or overlooked the chance of competitors making competing bids. Moreover, the retailer likely assumed their initial offer for the supplier would be the only serious bid. As a result, you can run into several issues, such as:
- forced to raise their bid even higher than you expected to fend off the competition and stay in the running; and
- it would have given the Supplier shareholders even more leverage to hold out for a maximum high valuation amid a bidding war.
Underestimating the threat of other buyers entering the fray puts the retailer at risk of being blindsided and radically rethinking their pricing and negotiating strategy. To avoid this pitfall, buyers like the retailer must constantly monitor and analyse the market landscape. Before and during negotiations, they should be studying:
- other interested buyers and the target’s traction in the market;
- the financial statements of these interested buyers for making a bid; and
- their strategic motivations for wanting to acquire the target company.
With this complete market awareness, buyers can get ahead of competing bids by proactively increasing their offer price to stay competitive or being prepared to walk away.
Communication and Transparency
Effective communication and transparency are critical elements in any major business transaction, yet they should be valued and noticed more. In the case study, the sellers’ stakeholders were concerned about the need for more precise and transparent communication regarding the deal’s strategic rationale and expected benefits.
To avoid this pitfall, buyers should develop a comprehensive communication strategy that prioritises transparency and clear messaging to all stakeholders throughout the acquisition process. This strategy should be proactive rather than reactive, addressing stakeholder concerns and questions before escalating.
Key Takeaways
The failed retailer-supplier deal shows how easily major business sales can go wrong if companies do not plan and execute them carefully. Critical mistakes such as:
- undervaluing the target company;
- failing to engage with shareholders and leadership;
- overlooking competing bidders; and
- needing clear communication can quickly derail a promising acquisition.
One of the most important lessons is that companies should avoid going alone on complex deals. Always engage experienced transactional lawyers to guide you through the entire business sale process because they understand all the legal and strategic nuances involved in major sales. We all know that the penalties for getting it wrong are too high. Working with legal experts versed in these transactions is essential for protecting the buyer’s interests and investment, ensuring a successful sale.
If you have further questions about common pitfalls, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Board support is essential because the board represents shareholder interests and has deep insights into the company’s operations, strategy, and value drivers. A lack of initial board support may signal concerns to shareholders, increasing the likelihood of opposition.
The retailer could have engaged in early and open dialogue with major shareholders to understand their perceived value of the company and align expectations before making an offer, adhering to best practices.
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