They offered him $15 million for his software company, and he said “No.” So they offered him $25 million, and he said “No” again. Finally, they asked him what it would take.

“My board will not accept anything less than 3 million shares (worth about $45 million),” he responded. In the end, the buyer largely agreed.

According to Pat Sullivan, the creator and founder of best-selling contact-management software ACT!, this is how he sold ACT! to Symantec in 1993.

“Why sell in 1993?” I asked Sullivan. “And did your later sale of Interact Commerce to Sage for over $260 million proceed in the same way?”

Sullivan’s answers provide a perfect illustration of how to evaluate timing and leverage in the business sale context.

“The best time to sell is when everything is going really well,” Sullivan told me. When he sold ACT!, he said, it was coming off a great year. It had received industry recognition as the market leader, and rumors were starting that Microsoft would soon enter a competitor in that market space.

From a leverage standpoint, Sullivan was right. The less you need to sell and the better your situation, the stronger your leverage. Conversely, the more you need to sell and the more desperate your situation, the weaker your leverage.

But that’s only part of the leverage equation. Another critical factor? Symantec’s need to buy.

Sullivan described Symantec’s situation as relatively desperate, noting that it had failed to complete its own Windows product on time, and thus had “120 sales folks with nothing to sell.” The timing for ACT!’s sale was ripe.

The combination of ACT!’s strong situation and Symantec’s weak position gave Sullivan the leverage to get Symantec to bet against itself and, basically, agree to Sullivan’s price.

The situation was different in 2001, when Sullivan sold Interact to Sage, a British-based company. At that time, the dot-com bubble had burst and the technology industry was reeling.

But Sullivan still felt the “time was right to sell.” Why? In part, he wanted to sell before things got worse and Interact’s need to sell became greater.

What did Sullivan do? He analyzed the market and determined that four to five companies might be interested in purchasing Interact. Sullivan also felt Interact was “not only the prettiest girl at the dance, (it was) the only girl at the dance.”

How? Despite the weakening industry, Interact owned two market-leading

software products, and no other similar company was up for sale. Plus, Microsoft appeared interested in buying, as did Sage.

Sullivan thus hired an investment banker to solicit bids from other potential buyers and sought to create an auction-type environment.

Sullivan was attempting to improve his leverage by increasing the value of his alternatives to an agreement with either Microsoft or Sage. While determining your relative level of need is the first element of leverage, understanding and improving your alternatives to an agreement with your counterpart is the second.

Interestingly, Sage knew that time might work against it. So it made a $350 million offer due to expire in three days. In other words, it didn’t want to give Sullivan a chance to solicit more bids, from Microsoft or others.

Sullivan and his board accepted this offer. Sullivan told me he just didn’t have the time to allow Microsoft to do its due diligence. Plus, he didn’t feel he would get as good a deal from Microsoft given its history of low-balling and an unresolved issue regarding possible anti-trust.

And $350 million is not insignificant.

End of negotiation, right? Wrong. The deal was due to close in May. But the market took a dive before then. And when Sage realized its stock value would also drop if it went through with the deal, it pulled out.

In other words, its best alternative to a deal with Interact – not buying Interact – became more valuable due to the market change. And as the value of its alternative went up, so did its leverage.

Back to the table. They reopened the negotiations – but now Sage had greater leverage. The final deal was valued at around $260 million. Several months cost Interact about $90 million.

Here’s the deal. Timing isn’t everything. But since leverage is fluid, timing sure makes a difference in negotiations. Sullivan knows this quite well.

Published June 7, 2002 The Business Journal

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