Dive into the intricate world of mergers and acquisitions with our cautionary tale, ‘Unveiling Hidden Liabilities.’ Explore the complexities of a high-stakes acquisition, where a misstep led to a $42.7 million fallout. Discover the consequences of an inadvertent email mishap, government suspensions, and legal battles. Learn valuable lessons for entrepreneurs and business professionals navigating the M&A landscape. Don’t miss this gripping M&A story that highlights the importance of due diligence and transparent communication.
M&A Stories
June 26, 2018
In the intricate dance of mergers and acquisitions, a misstep can lead to substantial consequences. This cautionary tale revolves around the acquisition of a government contractor by a strategic planning and acquisition management specialist. The price tag? A hefty $42.7 million in cash, with an additional $19.5 million earn-out dangling as a tempting carrot if post-closing targets were met.
The plot thickened when, just twelve days before the deal’s closure, an inadvertent email mishap exposed sensitive bid information to the buyer’s internal staff. Unbeknownst to the contracting officer, the email containing a competitor’s bid had already circulated internally among six employees.
In the aftermath, the government placed the buyer on suspension for unethical use of the competitor’s information in their bid for an Air Force contract. This suspension, lasting well beyond the deal’s closure, barred the buyer from future government contracts—a severe blow to a business heavily reliant on government work.
The repercussions didn’t end there. As the seller’s business failed to meet financial targets, triggering the earn-out payments, the deal turned sour. The seller, feeling the financial pinch, took legal action against the buyer for breaching representations and warranties outlined in the asset purchase agreement.
The court’s verdict was a resounding wake-up call for the buyer, as they were slapped with damages amounting to approximately $12 million in lost earn-out payments and an additional $3.5 million in interest.
Behind the legal jargon and financial intricacies lies a crucial lesson. The seller’s reliance on the buyer post-closure, especially for securing government contracts, underscored the importance of a watertight asset purchase agreement. The buyer’s failure to disclose the pending government investigation not only jeopardized the deal but also left them grappling with substantial financial consequences.
This cautionary tale, serves as a stark reminder for entrepreneurs, business owners, CFOs, CEOs, and professionals across the M&A landscape. Vigilance in due diligence and transparent communication can make all the difference in navigating the intricate terrain of mergers and acquisitions.
Case Reference:
This case is referred to as MCR Federal, LLC v. JB&A, Inc., Record No. 161799, Supreme Court of Virginia (December 14, 2017).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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