Monday, February 4, 2008

The Corner Office

The black magic art found in top-level dealmaking

By Tim Platt

"I don't do it for the money." Donald Trump says this in "Trump: The Art of the Deal." We have all heard this line before, from top-performing product salespeople to private equity's reigning dealmaker of the year.

'Yeah, right," we sneer in disbelief, joining the eye-rolling skeptical CFO, even before we learn of the homes, vacations and toys they purchase with the outsized commissions and bonuses they earn. Why else do they put in the long hours? Because they like the coffee?

And what's so hard about their jobs that, at the top end of the dealmaking pyramid, for the past two years running, the total annual compensation for the average Goldman Sachs Group Inc. employee (including secretaries) reportedly exceeds $600,000?

After all, what do dealmakers really do, other than track rumors, court suitors and solicit higher bids? Or for that matter, the best software salesmen, other than smile, make promises and peddle the latest features?

The short answer is quite startling in its simplicity: They produce revenue and cash proceeds, which are the engine of business growth, investor gains, consumer purchases, and reinvestment -- thus perpetuating the business cycle.

The top dealmakers produce piles of cash for companies and their shareholders -- much more than their peers and competitors. So they get paid more. Pay for performance, right?

But still, what's so special about selling a business or blowing the lights out of a sales quota?

The dealmaker's job is defined by uncertainty. Despite all the process and discipline that good dealmakers follow, the salesman takes risks every step of the way, from whom to prospect and how to price, to the risk of the buyer walking away even after the contract is signed.

By being a good judge of people and listening well, the good dealmaker develops a keen sense of who is really in the market to buy and how to evaluate their commitment to the deal. This makes it easier for them to prioritize their time, and to close successive deals.

The better salespeople cultivate good relationships, and make their customers feel good about the transaction, making it easier to keep them committed to the transaction and forecast the sale.

The top dealmakers go beyond people skills and good relationships to close the harder deals. Often, this means overcoming numerous obstacles and mitigating risks along the way to steer a high-value deal toward closing. There is no guidance to follow. Instead, the sales guy is routinely making real-time, high-risk subjective judgments about people, strategy and tactics. There are often multiple parties, advisers and players involved, which makes the calculus more complicated.

But where's the risk in selling the best products or the top companies, you say? They should sell themselves, right? The price is readily established by the commercial and capital markets, isn't it?

In product sales, the convenience factor should be built into the commission level and the sales quota. So it should be hard indeed to torch the quota and supersize the commissions. In M&A dealmaking, the capital markets don't tell us the premium a public company should command. For privately held companies, the metrics vary widely both for the multiple and the base index for pricing a business. So maximizing sales or company value is both difficult to define and even harder to achieve.

A key ingredient to both is the ability to assess the probability of closing, particularly in comparing disparate bids from different buyers -- the true black magic of dealmaking. This factor has become even more significant with the continuing adverse effects of the subprime mortgage crisis on the capital and credit markets, as they have an impact several material steps in the dealmaking process: valuation, the buyer's ability to pay, and the certainty of closing.

The best dealmakers must quickly learn new ways to overcome the impact of these risks on their deals, lest we call their bluff that they're not in it for the money.

Tim Platt is the director of Preti Corporate Finance, with offices in Boston; Portland, Maine; and Concord, N.H. He can be reached at tplatt@pretifinance.com.