Paramount's Skydance Odyssey Reminds Us of M&A's "5 Rules for Success"
There's a time-tested roadmap, and so far the media giant hasn't been able to follow it
It now looks like Paramount is back to square one in its M&A saga, after its exclusive 30-day window with Skydance Media expired this past Friday. All cards are back on the table. Yes, Skydance still tangos, but Sony and Apollo Global Management are back on the dance floor with their joint $26 billion all-cash bid. As TheWrap reported Monday, even a homegrown internal Paramount option is limboing its way under the time bar and looks increasingly promising.
All of this raises M&A’s fundamental truth: the passage of time is never M&A’s friend. The longer deals take, the more at risk they become.
Paramount’s seemingly endless and very public M&A twists and turns raise re-consideration of M&A’s five basic rules of the road — critical tenets that I’ve learned with my thoughts $3 billion+ M&A experience from both sides of the table (yes, sometimes the hard way!). Think of these “5 rules” as M&A best practices, since successful (and unsuccessful) M&A follow certain patterns no matter what industry (including media and entertainment). Some of these rules reveal why Paramount is in the position it finds itself today.
Rule 1: Always be prepared
This first lesson applies to all companies, whether they’re on the block or not. Due diligence is always a major risk in M&A. That’s where buyers typically try to chip away at the price tag to which they agreed in their non-binding LOI (which is typically the M&A step that kicks off the official, formal due diligence phase).
It’s critical for sellers to have documentation (production, talent, distribution deals, etc.) organized, and risks and liabilities smartly addressed (ongoing litigation, etc.) well in advance of any thought of M&A. You never know when a potential buyer will reach out. And when they do, you don’t want them to find holes in your story. That’s how they get cold feet. Deals crater fast when potential buyers uncover surprises. No company is perfect, of course. All have warts. But always anticipate M&A and have your story and explanations positioned as strongly as possible (more on that in Rule 3).
Rule 2: Be discreet
Once a buyer has reached out, it’s essential to be discrete and keep M&A discussions completely under wraps, limited only to those who absolutely need to know. M&A should be confined to the inner circle of executives, each of whom is sworn to absolute secrecy via ironclad NDAs. This rule also applies to all advisors – investment bankers, lawyers, and accountants. There must be no leaks, otherwise the press (and even more importantly, employees) will seize on narratives that may hurt the likelihood of getting a deal done.
Public exposure leads to internal speculation, distraction, uncertainty and trepidation – which leads to fear amongst the ranks. And that can lead to employee paralysis and sub-optimized performance and execution -- not to mention disruptive dissension on the part of shareholders (something we all just saw play out with Disney and its board). Employees become worried — understandably — about what M&A means for their jobs. Too often this human factor is ignored when, instead, it should be job 1.
Public companies like Paramount, of course, are saddled with mandatory disclosure requirements based on “materiality” that private companies don’t have. And widespread industry speculation around its fate has circulated for months. So, it’s hard to say whether Paramount had any real chance to clamp things down. But its very public M&A odyssey — and all the detail and chatter surrounding it — certainly haven’t helped.
To be clear, it’s always helpful for sellers to get the word out to other potential buyers that a competitor has reached out to actively explore a sale. That can tee up a bidding war. But that doesn’t mean that the press should be the vehicle to make that happen. That’s what professional advisors -- generally investment bankers who are under NDA -- are for. They can build the case – which builds your valuation – discreetly, which is absolutely critical to optimize results. As mentioned above, Paramount, being a public company, has much more limited control on this point.
Rule 3: Stick to the script
Once an interested buyer and seller are finally under NDA, it’s critical for both sides to stick to their respective scripts. That means that sellers (in this case Paramount) should convey a compelling and credible narrative in their discussions with buyers that every “inner circle” executive and advisor follows throughout the M&A process in all of their communications.
Similarly, since M&A is a two-way street, buyers – in this case Skydance or Apollo/Sony -- should follow their own script with one unified voice to convince the seller that they (rather than a competing buyer) are the right “fit.” Paramount is a storied name after all. Its legacy – not to mention its employees -- are national treasures. M&A isn’t always just about the cash. Legacy matters (I see this over and over again in the music catalog acquisitions I broker with legendary artists, which you can check out here).
If either side deviates from their respective scripts during M&A discussions, that only introduces uncertainty and doubt which, in turn, add risk to the deal. Whether that happened here with Paramount’s saga is hard to say, because the matter and industry chatter are so public (see Rule 2 above, in particular a public company’s dilemma).
Rule 4: Stability is essential
Stability and performance on the part of sellers are absolutely critical throughout the M&A process. The selling company – in this case Paramount – must appear to be rock solid (with key execs united) both when potential buyers begin to actively kick the tires, and then later throughout the M&A process until the deal is closed.
For god’s sake, don’t shake up executive ranks during M&A! Drama adds massive risk to any deal – not to mention achieving the most favorable result. Obviously, Bob Bakish’s recent shocking exit at Paramount is not what you want.
On the issue of performance, and during the due diligence process (see Rule 1 above), since major media M&A typically takes at least 6 months (and frequently longer), sellers should give relatively conservative financial forecasts — numbers they absolutely know they can beat — to potential buyers during the M&A process. Under-promise and over-deliver during that time.
In Paramount’s case, I know that’s hard, given Wall Street’s quarterly magnifying glass (privately held companies have much more latitude in that regard). But underperformance during the M&A process only gives buyers a reason to slice away at the price tag to which they agreed in their non-binding LOI’. They will also use it as fodder to try to negotiate other more favorable terms, including higher escrows for breaches of representations and warranties. Escrows are found in virtually every deal and are critical negotiation points. Always consider them to be purchase price reductions, because buyers focus on them post-closing to try to claw back their held-back cash.
Rule 5: Get the deal done!
Finally – the single most important of these 5 rules for M&A – is to get the deal done! This sounds simple, but is not (and that’s understating it). M&A is incredibly complex, hard, distracting, and resource intensive. Significant risk exists every step of the way. Don’t overplay your hand and push too hard. That goes for your lawyers and advisors too. I’ve seen deals fall apart for that reason (that’s code for “I learned this lesson the hard way!”).
Remember, the passage of time is not M&A’s friend. Every day that passes opens the door to the possibility of even more risk being introduced into the process. And as time passes, buyer interest typically wanes.
If M&A is the best result for the company at that particular moment in time – which has been Wall Street’s general narrative for Paramount so far -- seize that opportunity and follow these five basic rules of the road as much as possible. Ultimately, you may not get everything you want in your negotiations. But the best deals both move expeditiously and leave both parties – the buyer and seller – not completely satisfied.
That’s typically a sign of a fair deal for all.
[What do you think? Send me your thoughts to peter@creativemedia.biz. And let’s discuss how I can help you as you consider and execute your own M&A plan.]
