Corporate Governance Links
Complex Financial Transactions: The Art of Winning a Sustainable Peace
"Those who win every battle are not really skillful----those who render others' armies helpless without fighting are the best of all.” Sun Tzu, The Art of War
Empirical research has revealed that virtually all long-term agreements have to be substantially rewritten after three to four years. Most mergers and acquisitions—even those that eventually close—prove to be failures (witness the AOL/Times-Warner merger). Companies that bore the expense of “going public,” often now seem to desire to “go private.” Mezzanine and essential loan financings regularly result in disputes that consume inordinate additional legal expense in loan maintenance costs and subsequent financings or, even worse, litigation, and even greater costs in terms of the time and distraction of management in dealing with such disruptions. Obviously something is wrong with the prevailing state of affairs.
Complex Financial Transactions
A Different Begining
One major reason why transactions fail is that they are approached in the same way that lawyers generally approach long term contracts. Contracts, by their very definition, are frozen snapshots in time of facts that exist at the moment and reflect rules that both parties agree should govern their relations under such current facts. Lawyers are very good at writing up such documents generally, and because that is what they know and are trained to do, they tend to analyze problems in terms of that realm of comfort. But the only thing of what we may be certain is that the future will not be like today. Life, unlike contracts, is not static; it is dynamic, it changes, mutates and evolves. As the ancient Greek philosopher Heraclites observed, “No man ever steps in the same river twice, for it's not the same river and he's not the same man.” Hence, the fundamental premise on which the transaction is put together and documented is false. Would it not be better to begin by analyzing and constructing the terms of the relationship in terms of dynamic principles that, much like our own United States Constitution that is well into its third century of existence, can mutate and develop over time. To do this, each major transaction must be viewed at the outset in terms of the overall goals and objectives of the enterprise and a holistic understanding of its nature and culture.
A Different Focus
Generally, when counsel is retained for a transaction, their efforts (after understanding what the client wants to have done), which are both labor intensive and fungible, are focused on two tasks; namely—
· Due diligence and documentation; and
· Negotiation and closure.
Mr Wise and his colleagues, however, have eight preliminary tasks that they perform prior to those final two that others do not. These are—
1. Analysis of psychological/sociological/cultural attributes of principals and their company;
2. Understand stated goals;
3. Determine interests versus positions;
4. Determine dynamics between the principals and any potential third parties;
5. Structure the transaction;
6. Adjust structure for dynamic variables;
7. Structure negotiation: strategy, team skills, team make-up; and
8. Presentation of analyses and recommendations to client.
An Integrative, Creative Approach; Tailored, not “Out of the Box”
Most negotiators approach their task looking at a deal in terms of “how much of the pie” they can get for their client. This is reflected in each side establishing their “positions” and necessarily sets an adversarial tone between two parties who eventually will have to work together. Mr Wise and his colleagues never do this. They focus on the “interests” of the parties, that is, what they need and what their problems are. This then engages both sides in a cooperative effort of problem solving that eventually, even in litigation, tends to bring them together. The classic example of this is two sisters fighting over one orange, with each needing an entire orange for their recipe. A focus on “positions” will likely result in each sister making only a half recipe. But if they go deeper and focus on their interests—that is what their true needs are—they may learn that one needs the orange for its “zest”, or outer skin, while the other needs only the juice. In this way, the “pie” is actually expanded and each may get all that they need.
Similarly, just as your company is unique, with needs and goals peculiar only to it, why would a solution that may well have suited another company be appropriate for yours? There is no way of getting around the truth of Alfred North Whitehead's observation that "We think in generalities, but we live in detail".
Thus, whether you are facing a long-term or project financing transaction; an acquisition, sale or merger; the private placement of equity; going public or private; or any other crucial event, Mr Wise is a seasoned, experienced guide to steer you through the treacherous Scylla and Charybdis of complex business transactions.