Pretty Woman, the iconic 90s romantic comedy, is actually a lesson in the art of mergers & acquisitions.

Let’s pretend for a moment that you haven’t seen it.

In the film, businessman Edward Lewis (Richard Gere) is in the process of acquiring the Morse family’s shipping company when he meets Vivian Ward (Julia Roberts). James Morse and his grandson David are reluctant albeit motivated sellers.

This causes emotions to spill over during an intense dinner scene.

Vivian delivers the scene’s most memorable line when she struggles to deshell her entrée of escargot and cries “Slippery little suckers”, but it is the discussion between James, David and Edward that provides invaluable M&A insights.

David Morse: “My grandfather believes the people who create a company should control its destiny… We find it very hard to figure out what your real intentions are”.

James Morse: “I’m not thrilled at the idea of you turning 40 years of my work into your garage sale.”

Edward Lewis: “At the price I am paying for this stock Mr Morse, you are going to be a very rich man.”

James Morse: “I’m rich enough.”

The scene illustrates five general truths about M&A:

  • Transactions are complicated by ego and emotion
  • Lack of transparency from the outset creates distrust and resentment, which can be hard to reverse
  • Sellers are motivated by many factors, not only money
  • Buyers do not understand what’s really important to sellers
  • Family members can kibosh the most logical, attractive deals

Being successful in M&A is not only about access to capital and the ability to identify and accurately value a sound business, then negotiate a good price and terms. A cashed-up buyer can do all that and still watch a sale fall over at the finish line because they did not manage the psychological components of the deal.

A company’s balance sheet – alongside its cashflow and profit and loss statements – are vital pieces of financial information for buyers to examine when evaluating an asset, but consideration must also be given to the psychological balance sheet.

Minds over matter

What is a psychological balance sheet?