What exactly does it mean to build a relationship that could end up in an M&A opportunity? It can mean many things. In its mildest form, just "seeing and being seen" is a form of relationship that may be enough to trigger an acquisition or merger process.
But things can get much more, let's say, intimate. Naturally, the closer the relationship, the more fertile the ground is for it to become a merger or acquisition. But there are cases where you don't want to get too close, unless it's to go straight to a wedding.
In this article we will understand the spectrum in which these different relationship models can find themselves, how to use behavioral tools to get the most out of the relationship established at each stage, and influence an approach to the next stage.
The spectrum of relationships
The following figure illustrates the stages of closeness in relationships. It’s worth going deeper into what type of relationship we are talking about. There are relationships between companies. Partnerships, contractual relationships or even legal disputes can be part of the way two legal entities interact. But when it comes to influencing behavior to favor an M&A deal, what matters are the relationships between people in these organizations. As I often say, a company does not buy another company, nor does it make the decision to merge with it. Those who make these things happen are the human beings who lead it. And it is with them that you need to relate. Let's understand how.
No Touch
Right after “none,” the next level of relationship is what I’ve dubbed “No Touch.” In other words, the parties see each other, one is aware of the other's existence, but they do not know each other or speak directly to each other. This is a valid level and there is a lot to build on it, such as mutual respect, admiration, authority and other attributes that can contribute to the desire to purchase.
Cordial Relationship
From the moment the parties are introduced, the relationship becomes at least cordial. We are dealing with representatives of entities that are building reputations with each other that could lead to a merger or acquisition, nothing less than cordiality is expected. Furthermore, we are talking about adults representing companies.
A cordial relationship is one in which the parties meet at sectoral events, social occasions, congresses and other similar situations and will act cordially. Part of it includes: greeting each other and exchanging ideas respectfully, even if they are just talking about what the weather is like.
In my experience as the founder of Onyo, I would classify my relationship with all my direct and indirect competitors at this stage. As a food ordering startup for food courts, we talked to competitors close and distant, big and small, from GetIn (acquired by Ambev through Ztec) to iFood.
Close Relationship
When the relationship involves intentional meetings (in the plural), we are no longer talking about a cordial relationship. The meetings for the parties to get to know each other and explore topics of common interest, form a close relationship from the perspective of building an M&A business.
In my experience as a buyer (M&A director at TOTVS), I maintained several relationships of this type. There were many founders I regularly met with. A good example was Ciashop, an e-Commerce platform that we acquired and was later incorporated by VTEX. In this e-commerce ecosystem, which consisted of an important agenda for the corporation at the time, I developed relationships with several founders, often competitors among them. Sometimes casually at events, but often at meetings in our office. Some of these never evolved into a transaction, but we certainly cultivated a "special care" that could be used to accelerate a deal in a competitive situation.
Partnership/Business Relationship
Just as a marriage can go through a "test drive" period (I recommend it), an M&A deal can also have a similar phase in a partnership or commercial relationship format. This is the closest two companies will get without exchanging stocks in some way. When proximity passes this point (say a strategic or corporate venture investment) we are already entering an arena where some care from an M&A perspective is necessary. To better understand the complexity this can generate, it is worth reading the case of the purchase of Zeropaper by Intuit. The startup had an investment from a strategic (TOTVS), which I myself led as head of Corporate Venture, but which made the M&A discussion more complex after I left the company. Strategic investments, even through corporate venture vehicles, deserve a separate article. But while we're talking about partnership or just a commercial relationship, well, it's just the last stop in our model.
It's worth noting, although we are still talking about the relationship between people, it is not enough to be a personal relationship that feels like a partnership. What we will discuss in more depth about this stage is based on the premise that there is a commercial or formal partnership between legal entities and this impacts the interpersonal relationships of those involved on both sides.
Where can an M&A conversation start?
In practice in any of the stages, with some caveats.
An M&A conversation, or even an M&A with no conversation, can start at the “No Touch” stage. It's rare, but it happens (not very often). Have you ever heard of a hostile takeover? This is an extreme case where you can jump from "No Touch" straight into a society. But I believe that if you are part of the target audience for this article, this should not happen to you. Hostile takeovers typically happen to publicly traded companies, which don't have much control over who buys their shares. For founders who have not yet reached the dream IPO, an M&A conversation will necessarily go through the later stages.
A Cordial Relationship can give rise to a more formal M&A transaction. Approaches between large companies that have to be careful with each other, a purchase of a company at risk of bankrupcy, or even an M&A that begins through advisors and boutiques, are typically based on more formal and cordial relationships.
The thing is more common in Close Relationships. This is where most deals really start to blossom. The subject of coffee chats evolves in a natural and relaxed way to what it would be like if the companies joined forces and becomes more serious from then on.
As for Partnerships or Business Relationships, although this is a level that I recommend as a test drive, it is not that common. In other words, don't worry if you don't already have this level of relationship with two or three companies to start a competition if one of them makes a proposal. And you will hardly have two or more partnerships with this outline. If you have one with a company that you would be happy to join forces with, great, we're off to a good start.
The truth is that it doesn't matter so much where a first proposal comes from, it can be used to trigger competition between companies with whom you have different levels of relationships.
How to use the stages to favor your journey to the exit
Let’s now dive deeper into how to use various tools to:
Transition between stages
Explore the potential of each stage
The main tools for points 1 and 2 are based on behavioral science. Our cognitive biases can be used imperceptibly to increase our liking of a person or group and the favorability of an M&A transaction. This is exclusive content for our premium subscribers. If you haven't tried it yet, take a seven-day trial and find out.
Ethical Considerations
Before handing behavioral science tools to the reader, it is worth discussing a little about the ethics of their use. This is an area of knowledge that can ultimately be used to manipulate human beings using weaknesses in our cognition. I believe this is the type of influence that social media algorithms, for example, exert.
In the type of interpersonal relationships we are discussing here, however, I do not believe in such hypnotic power. We are empowering the readers to learn more about human behavior, basically to improve their communication. It's hard enough to use this knowledge to master our own biases and weaknesses. Believe me, this observation comes from someone who has accumulated a collection of almost twenty books read on the subject.
Manipulating another person against their will is a power you will hardly have. That said, these tools are capable of influencing the behavior of your interlocutors and even their decisions. It's what we want, especially because we think they should want it too. But to want it, one needs to have attention, consideration, affection... And that's what we're going to influence.
Furthermore, an M&A transaction will undergo such intense corporate scrutiny that I consider it impossible to convince an organization to do something that doesn't make sense to it using behavioral science tools alone. But influencing it to decide on something that makes sense by making that idea gain traction, oh, that's possible, ethical and exactly what we want. So let's go.
How cognitive/behavioral biases can help you explore each stage of the spectrum
What cognitive biases can be used to advance between stages? And to explore the potential of each stage? Let's explore, one by one.
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