When CEOs and boards begin to look for an M&A adviser, they often start in one of the big financial centers, like New York or Boston. It’s a natural mistake – and one that’s often expensive and regularly fatal.
One of the dirty secrets of the M&A adviser business is that many M&A transactions fail to complete. It’s impossible to find statistics on this.
For over a couple of decades now, I have been asking every CEO, board member and investor I know to share their M&A successes and failures. From what I’ve learned, about a third of M&A transactions fail.
Even more interesting, I realized that the M&A transaction failure rate increases as the distance from the company to the M&A adviser grows.
The reason is that the relationship between an M&A adviser and a company, CEO, board, their accountants and their lawyers is intimate and intense. The really good M&A advisers know this and will plan to spend half of their time in the same city as the company during the first third of the process and most of their time in the same city during the last third.
There are other M&A advisers who think they can do most of that work remotely – with only weekly visits to the company. Those are the ones that CEOs and boards have to be very careful of. Even in today’s hyper connected world, you cannot do a really good job as an M&A adviser without a great deal of face time.
From the data I have gathered, I believe the failure rate doubles with distant M&A advisers. In other words, a hypothetical company using a remote M&A adviser might have a failure rate of 50%, but with a local adviser the failure rate might only be 25%. For another company, the failure rates might only be 40% and 20% respectively.
This effect is reduced when transactions are over $100 million. When the fees are in the multi-million dollar range, the M&A advisers can afford to fly to the company almost every week and spend most of their time in hotels for many months.
There is another dirty secret of the M&A adviser relationship that comes into play here. Professional M&A advisers know that every deal doesn’t end up closing. They build their business models, and manage their sales funnels and calendars, based on their knowledge that somewhere around a third of the deals they sign up to do will probably fail. These M&A advisers will still do OK on the deals that fail because their direct costs will be covered by the work fee. Part of optimizing their business is knowing when to stop working with a company because the probabilities of success are too low.
Part of the dirty secret is that it is much easier for the M&A adviser to give up on a company when they are further from the company’s location. When M&A transactions fail, quite a few people will hear about it. But those people are usually geographically close to the company. The negative impact to the M&A adviser’s reputation will be similarly localized. This is another factor that is much less important for transactions over $100 million.
Many CEOs and boards engage remote M&A advisers because they think that somebody from New York or Boston must be better than someone who lives within driving distance. In my experience, the real factors are mostly psychological – it’s like that old adage about a consultant just being a regular guy a long way from home.
The difference in a simple consulting job might not be significant, but when it’s your company being sold, and it’s under $100 million in value, you really need an M&A adviser that is close to home.
There is more on this topic and on M&A transaction in general on my blog.