Learning from an Aborted Acquisition

October 25, 2012

I've spent the last few months advising a small NYC-based online media company on a potential acquisition. After months of taking meetings, fulfilling rushed diligence requests, negotiating terms, turning docs with lawyers, and generally bending over backward to get the deal done, the acquirer pulled out. I learned a lot in the process, but the most important lesson is this: no matter how game-changing an acquisition seems to be for your startup, don't bet the farm in your haste to get there. Question every ask and flat out say no to things that jeopardize the financial or operational health of your company. Here are some of the red flags that we missed and mistakes that we made along the way:

1. The acquirer apparently thought that NDA is short for "Need to Disclose All."

A few weeks into the negotiation, our ad network stopped providing us with premium site takeovers. We're a media company, so ad revenue - and especially the revenue from day-long advertiser takeovers - is our lifeblood. After some Internet sleuthing, we realized that executives at the acquirer were tight with executives at the ad network. When we questioned the acquirer about a potential leak, they told us that it couldn't have been them and that someone on our side was talking. "Our side" was all of three people, so it wasn't surprising when our friends at the ad network confirmed that the acquirer had indeed told them. The acquirer again violated the terms of the NDA when they tried to use the confidential terms of our deal to lowball a competitor. We found out when the competitor tried to contact us directly to reach a side agreement (ironically, we declined to take the call because we didn't want to jeopardize our deal).

2. The acquirer pushed us to settle a bogus lawsuit.

A few months before we signed the NDA, we were sued by a copyright troll. The "facts" of the lawsuit were fabricated and we had retained a lawyer to help us fight it. Midway through diligence, and after offering up their legal team to fight the lawsuit post-acquisition, the acquirer told us that we would need to settle it before we could make progress on the deal and that, while they couldn't promise that the deal would get done, a settlement would be a good faith gesture and do a lot to get us there. Naively, we engaged the plaintiff and settled for $30K. A few weeks later, we were sued for a second time by another rights troll; I don't think it's a coincidence that the second suit was filed a few days after our settlement hit the tape. We're still in discovery on the second lawsuit, but it will probably cost us another $25K.

3. The acquirer and their lawyers feigned knowledge about the content business.

We ended up blowing more than $20K in legal fees on the deal. About half of that went to an IP specialist at our firm who spent hours walking the acquirer's lawyers through the basics of APIs, terms of use, creative commons licenses, and other basics of content on the web today. (I don't mean to minimize the complexity of IP law, but a partner in the tech group of a reputable firm should be fluent in this stuff.) We knew that we were in trouble when, months into the negotiation, the acquirer asked us whether we owned the rights to photos hosted on "Ingur." Sad face.

4. The acquirer didn't want to disclose a price range for the deal.

Whether it was an ongoing strategic transaction, a fundraise, a busy week, or a bad time for the CFO, the acquirer always had an excuse for not telling us the size of deal. We gave them the benefit of the doubt, opened up our books, and sat on our hands for five weeks. Fortunately, our ranges ended up being close, but the asymmetrical information-sharing hampered trust and gave them ample time to survey the industry and take meetings with our competitors.

5. The acquirer's deal lead was far from influential at the company.

In an acquisition, you end up spending an inordinate amount of time with the acquirer's deal lead - the M&A or corp dev person that runs the deal. In our case, the acquirer's deal lead acted as if he had influence at the company but ended up having very little of it. We invested time and energy in winning him over, only to find out later that key acquisition decisions were made by the company's CFO. Had we invested the same time and energy in wooing the CFO, things may have ended differently. A related red flag: getting stuck with a bipolar-like deal lead. Some days he would invent colloquial movie-worthy nicknames for us and want to chat sports, girlfriends, and dogs; other days, he would seamless transition to emails full of legaleze and jargon. It was mentally exhausting.

All in, we're out around $25K+ in lost revenue, $75K in legal fees and settlements, and 1,000+ in team hours that could have gone to other projects. Acquisitions are inherently risky, but we were pushovers and let the dream of the exit obscure the reality of the situation. Try not to make that same mistake.