Last week, news broke that the ongoing merger talks between Dish Network and T-Mobile have stalled.
According to Bloomberg, internal factors related to valuation and structure have strained the deal. But, a major external component also complicates this potential transaction: the FCC’s auction of U.S. airwaves surrendered by television stations, which is slated for early 2016. The auction is part of the Obama administration’s push to free more airwaves for mobile devices and networks.
The auction creates timing pressure on the deal. If the deal gets done in the next few months, the companies will be jointly bidding on wireless airwaves. If a deal is not completed in time, they will be competitors at this auction, and prohibited from working together for a period of time. When considering Dish Network’s latest clash with the FCC that puts a reported $3.3 billion on the line, there’s rising doubt that this deal will ever be completed.
External complications and issues are not exclusive to multibillion-dollar businesses. In the middle market, there are often external forces that complicate and sometimes crush deals completely. Let’s examine some of the most common factors that can crush deals of all sizes.
Public Contracts and Government Roadblocks
When the business in question is engaged in public contracts, there’s often a bureaucratic layer of complexity added to an already laborious process. In many cases it takes an extraordinarily rigorous process to get a contract assigned to a new owner. Remarkably, that even applies when a company stays in the same format.
Kamala Harris, the Democratic attorney general of California, made headlines earlier this year for playing a main role in blocking a high profile hospital deal. Prime Healthcare had attempted to purchase six Daughters of Charity hospitals, including St. Vincent and St. Francis Medical Centers in Los Angeles. While Harris approved the deal, she did so with a number of conditions that Prime described as “onerous and unprecedented” in a statement. As a result, Prime pulled out and credited Harris for the failed deal.
While obviously politics partially drove the Prime decision, government approvals can sometimes be tough to obtain for even mundane contracts.
Real Estate Issues
Real estate arrangements are often overlooked during the sale process, but landlords often wield enough power to alter a deal if they choose. To avoid issues, each side should thoroughly understand what kind of real estate contract is in place and what each side's needs are going forward. In the case of large institutional landlords, if they know a deal is hanging on obtaining a lease assignment, some may exert pressure to extract concessions they might otherwise not be able to achieve.
When landlords and other private third parties have leverage in a transaction, there’s always a chance they’ll try to exercise their power to influence the deal in their favor. That’s why it’s so important to recognize the external forces that can impact or possibly derail a deal.
Customer Interference
Many middle market companies have customers significant enough that those customers have real power over the business. A business that sells products to Wal-Mart, for example, can typically not afford to fracture that relationship. So in the case of a transaction, Wal-Mart, or any other power wielding customer, can impact the deal if they chose to get involved.
There are even situations in which the buyer happens to be a competitor of a significant customer. For example, the buyer may want to vertically integrate the seller’s service into their own platform, but one of the seller's big customers is a competitor of the vertically integrating buyer. It’s enough to make your head spin, but these scenarios happen and can kill or complicate transactions. In this particular scenario, the deal probably wouldn’t happen at all.
Ultimately, the key to successfully navigating any transaction is to examine the selling company and analyze which external forces hold power over the organization or a potential transaction. In many cases, it is crucial to recogize those potential threats so that they can be reduced by planning and preparing well in advance.
Michael Schwerdtfeger’s eBook “The Inner Workings of a Deal: Tips for a Successful Transaction” is now available for download on his website. Get your free copy here: http://mbsmergers.com/downloads/
