When we managed the acquisition program for a large corporation, the often heard complaint was the manner in which discussions with candidates were kept "close to the vest." We reported to the CEO, and were criticized from both the corporate and operating levels for not informing "working management" about deals in progress.
We dealt regularly with a small group of high level executives, all of whom were kept aware of potential candidates in appropriate detail. Weekly meetings were held, and any event of note was reported by memoranda or individual phone calls. Company people outside of this small group were only informed about a candidate if a transaction began to heat up, or as some level of technical or other expertise was required for further evaluation. We continue to believe this approach was justified, as illustrated by just one small example.
During the course of a first meeting with a small candidate company, we were given two admonitions by the seller/owner. The first was a "firm" price for his company, and the second was a warning that no one below him was to know of our negotiations until a deal had been struck and public announcement was required.
Within 10 minutes after return to our office following the meeting, we received a phone call from the entrepreneur. After several minutes of pejorative preface, we were informed that his executive vice president had inquired as to the reason for a visit by "the M&A guy" from XYZ Corporation. A few hours of investigation disclosed that the man in question had seen our name and the name of our company in the visitors' register. He was dating an XYZ employees, made one phone call, and quickly put two and two together. The problem was smoothed over, and we went on to buy the company, at the firm price quoted. Since that time, we have always printed "self" in the affiliation box on any visitors' register.
Using this, and other possibly surreptitious methods, we were able to ensure confidentiality to a reasonably high degree, and candidates were not disclosed until they came close to becoming a deal. If a candidate failed to meet some aspect of the screening process, it was unlikely that anyone outside of the senior committee was ever aware of the relationship.
The safest and most reasonable answer is to restrict the list of informants to those who have a definite need to know of the transaction. In our opinion, this list initially should be kept to an absolute minimum, and only expanded as personnel are required to assist in the acquisition process.
One of the most common reasons for restricting the number of people who are made privy to knowledge of an impending transaction is the competitive nature of most buyers and sellers. Buyer is naturally concerned about his ongoing customer relations, and seller should be aware of a problem caused by over zealous sales personnel. One of the most common, and sometimes serious problems between buyer and seller, can arise if buyer's field sales personnel get wind of an impending transaction. In too many instances, these individuals will address the competitive position of the parties by informing potential customers of the transaction, with the idea that they might just as well be the favored vendor, as the two companies were about to become one.
If seller is a company which is known to be for sale, the problem of confidentiality is considerably lessened. Seller will usually inform its key management, and possibly all of its employees of the pending sale. There are, however, situations where a company is actively being sold and only a very small number of key management individuals have been informed. In this instance confidentiality is hard to maintain, since each individual made aware of a sale will increase the possibility of disclosure geometrically.
If buyer is seeking companies which are not actively on the market, great care should be taken to ensure that the first contact is made with an appropriate individual. The process of identifying this individual can give rise to problems, unless one is dealing with public entities, but it can be done with proper research.
During initial meetings, buyer and seller should be very specific in naming those individuals with whom the other party can hold continuing conversations. Buyer, for instance, should never presume that seller's chief financial officer is aware of a pending transaction unless this fact has been specifically discussed. The parties should also agree on the use of a mailing address, since many sellers are concerned about mail sent to their office which deals with a potential transaction.
At an early point in the discussions, both parties should execute mutually acceptable confidentiality agreements. Most of these agreements will take no more than one or two pages, but we have seen some that seemed to go on forever. Legal counsel should be utilized to address this issue. Since almost all of these agreements bind the company, its agents, employees, and so forth, it is essential that everyone be informed of their existence. Copies of executed agreements may also serve to impress the need for confidentiality on lower level employees as they are brought into the transaction.
If seller restricts initial knowledge of a pending sale to only a small number of employees, he will generally be agreeable to expanding the list as the transaction progresses. Buyer, of course, must make certain that he has the opportunity of meeting all key personnel at some time between making an offer and completing due diligence. Sellers may occasionally reject this approach but such reticence will generally lessen as buyer's intentions become more genuine.(To be continued.)