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The Quantum Mechanics of the Un-deal

by on September 17, 2013

Shrodinger cartoonEditor’s note: This guest post was written by Carl Schlachte. Carl is a serial entrepreneur, having been Chairman and CEO of multiple public and private companies. He is currently CEO of Ventiva, a private thermal management company, as well as Chairman of Immersion (Nasdaq: IMMR) and a director at Peregrine Semiconductor (Nasdaq: PSMI). 

Every M&A deal ever done gets picked over and dissected in the quarters following the deal.

  • Financially we look to see if the deal was living up to our pre-deal models.
  • We worry over whether the companies are integrating well.
  • Our lawyers pour over the closing documents and make sure we’re all adhering to any terms we signed up to in the sometimes lengthy negotiations.
  • We report to our board of directors on the progress of the acquisition and we report to the press just how wonderful the whole idea was in the first place.

By and large the decisions that went into consummating a transaction can all be quantified and measured. We can score ourselves and if we did it right the score should be decidedly in our favor.

The point is that there are literally thousands of different ways of knowing after-the-fact if a deal was the right thing to do.

But what about the other deal; the deal we didn’t do?

I’m not talking here about “the one that got away” because we were outbid, or the target said “no”. I’m talking about the acquisition that is firmly in our grasp and for some reason, we decide to walk away. That “some reason” is a huge and compelling presence in the midst of every acquisition and it is almost never talked about.

Target Fixation

During World War II a new and interesting term was coined called “target fixation”, used to describe a fighter pilot’s propensity to actually collide with the target he was strafing or bombing–so fixated on the objective was he. Motorcyclists do this too: running straight into an obstacle they are concentrating on avoiding. CEO’s, executive staffs and boards of directors do the same thing when it comes time to acquire a company. So fixated are we on a purchase it takes a courageous act of leadership to stop the process once it passes a certain point. Which is precisely why these “no” moments are so interesting.

Schrödinger’s cat

These un-deals exist in a nether region, neither alive in the company’s mind (because most of the company is not aware of a transaction being negotiated) nor classically “dead” (because the reasons for walking away are rarely studied). Like Schrödinger’s cat these un-consummated transactions are never measured, never really talked about and consequently never learned from.

Quantum Mechanics

One of my own deals fell into such a quantum mechanical state after months of conscientious work. My team did everything right, from proposal to negotiation to bankers to board approvals: complete professionalism. It had been a competitive bid process and we had signed an agreement that meant neither party was going to negotiate further (commonly called a “standstill agreement”). Indeed, key members of my staff had flown half way around the world on extremely short notice to complete due diligence at the company’s offices. We had our eyes firmly fixed on the target.

Then came the moment of truth: the CEO of the other company wanted to have a meeting with me. It was there that he informed me he had quietly been discussing a better offer with another bidder and wanted to know if I was going to increase my purchase price.

Now, I know the in’s and out’s of standstill agreements and I have been in my fair share of high-stakes negotiations, so I know how he could have gotten around our agreement and also why he was probably bluffing. At the moment we were sitting in my office talking about this though, I had my epiphany: I didn’t want to know whether the opposing offer was real or not. I did not want to open the box and see if the deal was alive or dead.

I realized with striking clarity that the person sitting in front of me was not going to fit in our company–not if he was willing to try this with me at this stage of the merger.

By extension, I realized that his team was not going to fit either and our company was probably going to be subject to lots of last minute renegotiations if we brought them into the fold. They were not “us” and not likely to ever be. We agreed that I would think about counter-offering and he left. The next morning, after some sleepless hours and soul-searching, I recalled my team from overseas and called the deal off. We didn’t counter-offer.

For me, “who we are” trumped “who we might be”.

Iron Will to say “No”

Another friend of mine who’s a CEO had a similar experience, if not worse. Seeing one of those proverbial matches made in business school heaven, his team was well down the path of a transformative acquisition when he realized that in doing the deal he would be undercutting a years-long strategic initiative he and select members of his team had been patiently developing.

To the wider team the deal made perfect sense. To the key few it would mean walking away from a long-held, committed-to vision.

It took iron will to say “no” and then take the consternation of bankers and staff members who simply could not understand why.

In this example, opening the box and looking for the answer would have meant exposing his long-term strategy in order to be seen as “right”.  My CEO friend was willing to take the short-term credibility hit to hold onto his long-term vision. For him the strategic initiative tying his company’s long-term success and binding his company together (his company’s sense of self), was not worth giving up.

This Deal is not us

In every case when I’ve seen a deal become an un-deal, it is one truth-teller letting the team know “this deal is not us”, the CEO recognizing that to be true and then calling a halt to it. Sometimes that truth-teller is the CEO, sometimes it’s the resident e-staff curmudgeon. In all cases though, there is a strong sense of corporate identity that forms the spine of a willingness to say “no”, often in the face of determined target fixation.

It is actually easier to say “yes” to a bad deal than to say “no” to one that looks perfect.

Remember, the “no” cannot be measured afterwards. There is no rightness or wrongness about the un-deal, just a sense of unease and unknowing when it’s over. Boards of directors usually don’t take time to do post-mortems on these–we just sip our coffees and wonder what the CEO was thinking. We should be talking about bravery though.

We should be thanking them for a type of corporate courage that will never be written up in the Harvard Business Review.

Atmosphere of Bravery

We should foster an atmosphere of of bravery around mergers and acquisitions. In the middle of a deal with our sights set firmly on the target, it is perhaps time to pull back and look at the whole landscape.

We should ask the tough question: “Is this who we are?”

In ancient times it was reported that the forecourt of the Temple of Apollo at Delphi had the phrase “Know Thyself” carved into stone. It was a kind of a buyer beware warning to those seeking the advice of the oracle.

This is great wisdom for executives at any company looking to buy another.  Know yourself first; know just who your company is.

Armed with identity it is possible to be constantly evaluating mergers and acquisitions for the telltale signs that they might be better put in a box and walked away from. This is never a comfortable decision for the CEO because there is no measurement afterwards that determines if we were right or wrong.

It takes a unique kind of bravery to turn a deal into a kind of quantum mechanical un-deal, but sometimes that is the most valuable decision that can be made.

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