Terms of Endearment

Getting deals done in the hottest industrial segments can be about as straightforward as reaching the altar in the TV series 'Something Very Bad Is Going to Happen' (2026).

A strong outlook for sectors such as power generation, electrification, and thermal management might be expected to narrow the bid-ask spread. Yet it can remain surprisingly wide.

Several forces are at work, in my experience. Record public valuation levels raise sell-side expectations well beyond M&A precedents. Buyers and sellers disagree over whether elevated margins are structural or cyclical. Organic expansion competes with acquisitions. And the proceeds from a deal can change the ambitions of the executives on whom its success depends.

Emboldened by high trading multiples, and possibly attractive IPO prospects, sellers may set price expectations that buyers perceive as offensive. Sticker shock can kill engagement before a negotiation has even begun. Anchoring high is tactically valuable for the sell-side, provided it is supported by strong arguments, such as a broad set of public comparables (no cherry picking), comforting private-market precedents (check adjacent sectors), and credible synergies.

Profitability is often central to the bid-ask spread: how much of today’s margin reflects enduring competitive advantage as opposed to temporarily scarce capacity? There is no way for either side to settle that question with certainty. The sell-side can, however, bolster its case by showing how current momentum, however providential, is being converted into deeper advantages through technology, geographic reach, customer relationships or the expansion of a services offering.

A buyer’s organic alternatives may also widen the divide as they challenge the value of a deal. Sellers must recognize it while highlighting the value for the buyer of time saved, capabilities secured, and execution risk avoided through M&A. A new business not only requires a new organization, but also an entire ecosystem around it, including supply chain, engineers, and intellectual property.

The opportunity cost for management teams, already stretched by exceptional organic growth, can also weigh on the target’s value. Preserving a target’s autonomy for some time after closing may ease the integration burden, with the deferral of synergies representing a manageable cost.

Separately, there may be concerns about the level of commitment of the target’s executives after receiving life-changing proceeds, and the potential implications for the target’s future performance. Renewed incentives can maintain financial participation in the next phase of value creation. Expanded roles within the larger group may also sustain their ambitions.

Stock consideration can help reduce the bid-ask spread by shifting the negotiation from absolute to relative price, and by extending the seller’s participation in the combined company’s upside. The acquiror, however, must weigh control, dilution, and the implications for earnings per share.

Ultimately, a two-stage acquisition or an earnout may help bridge a value gap, albeit with complex questions around governance and future value. The hope is that the partnership will withstand the strains that no contract can fully anticipate.

As in a marriage.