Earn-outs?

My attention was drawn today to a statement from Fidessa "In order to allow more rapid integration of the LatentZero and Fidessa businesses, an agreement has been made to fix the 2008 contingent consideration for LatentZero at a discounted value. This allows LatentZero management to shift focus to the combined business rather then being exclusively focused on the LatentZero business".

I have witnessed many performance related earn-outs - directly (at Richard Holway Limited/Ovum, Ovum/Datamonitor, Datamonitor/Informa), via the companies where I have been a NED and indirectly via the many companies I reported upon during the last few decades. I have severe doubts if they work for the medium term benefit of the buying shareholders. If you are selling your business, an earn-out is often the best way to maximise the price paid but it is imperative that you ring fence your operation otherwise the buyer can easily mess with your company affecting your ability to produce the targets set. Of course, the opposite is true. IF the reason for the purchase is to achieve synergy with your existing business and/or to exercise tighter/better management, a performance related deal can often create barriers to this happening. The purchased company is often run purely for the short-term - why should managers care too much what happens after the targets have been met and the cash banked? Afterall, working with the purchaser often takes the eye off the ball and rarely achieves short term goals - even though this can be to the medium/long term benefit of the merged entity.

I know that my views on this are at odds to many others. So I'd welcome your views - either as comments or send me your 'not-for-publication' emails.