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M&A Ethics/Etiquette Question

post #1 of 11
Thread Starter 
Most of you guys know I am in manufacturing, not M&A or finance. But my company is actually a mini-conglomerate of different companies operating in different industries making different sorts of products under different brands; what we have in common is a manufacturing focus and an ability to merge certain common functions (e.g. finance, collections, quality, etc) to achieve economies of scale, making each individual firm a bit more profitable in the end.

Part of our growth strategy is to acquire other businesses and build on this concept. So I am involved in looking at other companies as potential acquisitions. In the course of doing this, I run across companies that do not meet our profile, and that we are thus uninterested in.

I have recently made a personal, non-business-related friendship with a fellow who has his own small private equity firm. He does not have a fund, per se, but has a roster of previous investors he can go to for capital, several bench CEO relationships, and a small portfolio of companies. He is much better versed in M&A than I am, of course, and I find him an interesting guy to chat with about my search. I tend to have a more folksy, operational approach, and he has a colder, more investor-type approach. It makes for a lot of learning on my part.

We recently looked at a company that did not meet our profile, but it seemed that it might be right up his alley. I put him in touch with the broker responsible for the seller and made an introduction. It does seem like it may be a fit, and though it's early, it is possible there might be a deal at some point.

I ran across my friend a few nights ago and he said "Hey, if something happens, I'll take care of you. I'll throw you $X for the referral," X being a low 5-figure number. (For reference, if this goes through, it's a ~$5-10MM deal.)

I am extremely uncomfortable with this. I know that people in the business of M&A sometimes have referral agreements in place, but this is a friend, and it's just one of those things where I threw him a bone on something I wasn't interested in. As far as I'm concerned, it's about like telling someone about a house that's for sale. Even more, this is a represented deal, so it's not like I was telling him about a house that wasn't on the market and that he might not have come across anyways. I politely declined, but he smiled and just said "Hey, other people have done it for me, it's just a little courtesy."

Am I nuts for feeling this way? Or, presuming this does go through, should I just collect and smile? Is this an industry-respected courtesy that I should graciously accept (and therefore be prepared to abide by, should the shoe be on the other foot?) I mean, a few grand is a few grand, right?
post #2 of 11
Unless it's illegal, take the money.
post #3 of 11
Ethically, I see nothing wrong with it. Your friend is perfectly aware that this company was already on the market--after all, you put him in touch with their M&A bankers, not them directly. Also, you didn't strong arm him into paying you. He is just offering a monetary thank you.

Legally, it might be a problem. I should know this, but I don't. Generally, you cannot market securities without being registered as a broker-dealer. By accepting a fee in relation to "marketing" a target to an acquiror, you could be breaking that law. Now, maybe it's different since you were acting more as a referrer and simply put the acquiror in touch with a broker-dealer, but I don't know.

Also, I'm sure you signed an NDA. So, I'm assuming you did not share confidential information with your friend about the target company. Even mentioning the target by name and indicating they are for sale could run you afoul of your confidentially agreement--depending on the exact terms. However, you're okay if you simply said: "Hey buddy, I know of a company you might be interested in. Let me put you in touch with their bankers."
post #4 of 11
I'd imagine you'd be fine unless you shared deal-sensitive information, such as figures from their sheets (the amt indicated that they're likely privately held), and you clearly did not. Chances are the street already knows they're for sale anyway. People are funny, though. We were looking at a possible real estate acquisition and had an employee in the area scout the building. The broker wasn't too fond of that, even though it was perfectly legal. Perhaps people visiting their doctor or getting an MRI don't like to see strangers aimlessly pacing around and poking their head rooms.
post #5 of 11
honestly, I would take it. spend it on a little luxury, a really nice weekend with your wife or take a few friends out to dinner, or a watch or something. I might be a bastard, but when I do a little favor like that for people, I think that its just curtesy for them to get me something like a box of cigars or some serious wisky or something. he's going to put a nice piece of change into his pocket because of you, you deserve something
post #6 of 11
This is a 100% normal part of the business. I did a lot of work in a very niche industry several years ago (transacted 4 of the 5 biggest players) and I still get asked to make introductions for a referral fee, even though I'm not even working in banking any more.

The only conflict that you do have is to the company that you currently work for (presuming that you don't own it). You need to avoid, at all costs, the perception that you deflected a good deal from your company to another guy for $$$. That is potentially career ending. Even now, when I'm in an entirely different industry (and not even in the finance group), if I get offered a fee for one of these, I run it by my boss.
post #7 of 11
Quote:
Originally Posted by mafoofan View Post

Legally, it might be a problem. I should know this, but I don't. Generally, you cannot market securities without being registered as a broker-dealer. By accepting a fee in relation to "marketing" a target to an acquiror, you could be breaking that law. Now, maybe it's different since you were acting more as a referrer and simply put the acquiror in touch with a broker-dealer, but I don't know.

Not an issue because you're not being compensated by the company making the offer. Anybody can work the buyside for a fee. It would get slightly more dicey if the broker said: "hey, I'll give you $25,000 if you find somebody to buy this." Even then, you get to claim that you're working "as agent" for the registered broker-dealer.
post #8 of 11
Don't take it - you were already paid for the search by your own company. And, in fact, technically they own the results of that search not you - so you shouldn't have tipped him off either. It has nothing to do with an NDA, but the search was done on company time with company money - the results aren't yours to dispense with.
post #9 of 11
Thread Starter 
Quote:
Originally Posted by tj100 View Post

This is a 100% normal part of the business. I did a lot of work in a very niche industry several years ago (transacted 4 of the 5 biggest players) and I still get asked to make introductions for a referral fee, even though I'm not even working in banking any more.
The only conflict that you do have is to the company that you currently work for (presuming that you don't own it). You need to avoid, at all costs, the perception that you deflected a good deal from your company to another guy for $$$. That is potentially career ending. Even now, when I'm in an entirely different industry (and not even in the finance group), if I get offered a fee for one of these, I run it by my boss.

Thank you, this is just the sort of answer from someone with industry experience I was hoping for.

I am a stockholder in the company I work for; there is no internal conflict of interest here, but it's an astute observation.

Thanks again.
post #10 of 11
Quote:
Originally Posted by akatsuki View Post

Don't take it - you were already paid for the search by your own company. And, in fact, technically they own the results of that search not you - so you shouldn't have tipped him off either. It has nothing to do with an NDA, but the search was done on company time with company money - the results aren't yours to dispense with.

This is an interesting twist that I hadn't really thought about, but partially agree with. As I mentioned, you absolutely need to disclose the situation to your current company, and if they're not comfortable with it, you can't do it. Even in the "I'm a shareholder" situation - unless you are the SOLE shareholder, I would give the others a heads up.

The one twist is that if this opportunity came up as part of a paid buyside search (i.e. your company has an advisor on retainer to find opportunities), it would be poor form to "re-sell" this information.
post #11 of 11

Zero experience in this...but if you are pretty uncomfortable with it...and this guy seems like he's going to be a good guy to know...wouldn't having him owe you a big favor be a useful card in your pocket in a later date? Or is that favored owed regardless of whether you take the money?

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