Understanding the Opportunity Cost of a Deal Gone Bad

As a bit of a follow-up to the my previous post on "Are Acquisitions Good for Customers?" I got to thinking about the opportunity cost of when a deal goes bad. As we all know, the security business moves incredibly fast. 6 months is a lifetime, so when deals like Check Point/Sourcefire or SafeNet/nCipher goes south - what is the impact?

I believe the impact of these situations is significant. First, there are integration activities. Big companies (like when AT&T Wireless and Cingular merged) have integration teams that work in clean rooms. They are literally totally separated from both organizations and have no communication with either entity until the deal closes. So when the final approvals are gained, both companies sprint into action implementing the plans concocted by the integration teams.

But most things that we see in the security business are not like that. What happens is that the teams start working informally together as the paperwork and formality around the deal is completed. They start considering roadmaps and customer communications and support integration and about a million other things. All of this considering takes a lot of time. That's time not being spent pushing the product forward. So when the deal goes south, all that work goes up in smoke. Poof. And time is wasted, which means opportunity cost.

Sales people are paid on what they sell, so it's pretty unusual for them to take their foot off the gas - unless they were big shareholders. So it's pretty rare to see a company just totally blow a quarter after a deal is announced. But marketing is usually problematic when you are in limbo. You can't commit big resources to long, strategic marketing programs, so you tend to do nothing. At that point, no one is really paying attention to marketing anyway.

But then the fateful day happens, and the deal is called off. First, there is shock and surprise. I'm sure some rumblings have been happening on the grapevine, but still. There is something very final about a press release being sent out that the deal is off. So you spend the next two weeks recalibrating. You must communicate aggressively with existing customers. Better take a look at that pipeline again and this time much more closely. Get your spinmeisters to figure out how you message the deal's demise is a big positive. You must go back and revisit exactly where that next product upgrade is in the process. How much has it slipped? Is is the right stuff to be building right now?

In general, chaos ensues. And chaos costs time and money. So I feel for the folks at Check Point, SafeNet and nCipher. They need to face the reality of going it alone and they've wasted a tremendous amount of time and money in a very competitive market space. That cost cannot be recouped.

Of course, it is rare when you have a situation like Sourcefire - who I believe got great benefit from the deal falling apart. Time will tell on that one.