Good on the sell-side; expensive on the buy-side
Auctions on the rise
The number of mergers and acquisitions negotiated on the auction block has boomed over the past five years. Competition between various bidders usually results in a higher price for the seller. Although the process is complex, it is not surprising that with the increasing financial savvy of companies and businesspeople, the auction process is considered well worth the effort. Another contributing factor to the rise in auctions is the increasing number of private equity funds. Greater availability of resources and debt market activity has combined with the scarcity of investment opportunities, generating intense competition among buyers.
Who participates?
Auctions are not necessarily directed at numerous buyers. In some cases, limiting an auction to a
handful of strategic buyers can create competition without the risk of disrupting the business or affecting confidentiality.
The greatest obstacle in an auction is that strategic buyers with reasons to offer higher prices may
refuse to participate. This usually occurs with companies that are market leaders in highly concentrated activities. The mere threat of an auction, however, is often enough to galvanize a strategic buyer into making a good preemptive offer. Although direct competitors are often the bestplaced buyers, some business owners prefer to sell to private equity firms for confidentiality reasons and because private equity firms are often more friendly to the current management.
Steps in the auction process
Numerous tasks must be underway well before the official start of the process: drawing up the
information memorandum and the confidentiality agreement, deciding whether to allow the bestplaced buyer to make a preemptive offer, releasing press announcements to boost the company’s corporate image, evaluating the managerial team as a possible candidate for an MBO, and so on.
Once the groundwork has been laid, the sales process goes through three phases. In the first phase, the seller’s advisors contact potential buyers. After signing a confidentiality agreement, interested buyers receive an information memorandum and are invited to perform non-binding indications of interest. Buyers may then make their offers. The seller’s advisory team creates a short-list of the offers that best meet the seller’s expectations in terms of price, conditions, transaction structure, and post-transaction considerations. In the second phase, selected buyers review the documentation from the data room, attend presentations by the seller’s managerial team, and visit the company’s facilities. The buyers are then given a draft of the sales contract and asked for final bids with their best price and conditions as well as their assurance of the necessary financing to complete the transaction. The final phase includes the concluding due diligence
and negotiation of terms and conditions of the sales contract.
What goes around comes around
The primary objective for financial advisors is to obtain the best price and conditions for their
clients and this is often best done in an auction process. It is clear that the auction process is full of details and one of the key roles for the advisor is to manage these details as the process runs its course. The advisor must foster competition through strict control of information and restriction of access of interested parties to the management team and the shareholders. A successful auction process keeps the pressure on potential buyers until the last moment. When down the road the new buyers want to sell, they will appreciate the exact same service that made them sweat when the tables were turned.
Auctions on the rise
The number of mergers and acquisitions negotiated on the auction block has boomed over the past five years. Competition between various bidders usually results in a higher price for the seller. Although the process is complex, it is not surprising that with the increasing financial savvy of companies and businesspeople, the auction process is considered well worth the effort. Another contributing factor to the rise in auctions is the increasing number of private equity funds. Greater availability of resources and debt market activity has combined with the scarcity of investment opportunities, generating intense competition among buyers.
Who participates?
Auctions are not necessarily directed at numerous buyers. In some cases, limiting an auction to a
handful of strategic buyers can create competition without the risk of disrupting the business or affecting confidentiality.
The greatest obstacle in an auction is that strategic buyers with reasons to offer higher prices may
refuse to participate. This usually occurs with companies that are market leaders in highly concentrated activities. The mere threat of an auction, however, is often enough to galvanize a strategic buyer into making a good preemptive offer. Although direct competitors are often the bestplaced buyers, some business owners prefer to sell to private equity firms for confidentiality reasons and because private equity firms are often more friendly to the current management.
Steps in the auction process
Numerous tasks must be underway well before the official start of the process: drawing up the
information memorandum and the confidentiality agreement, deciding whether to allow the bestplaced buyer to make a preemptive offer, releasing press announcements to boost the company’s corporate image, evaluating the managerial team as a possible candidate for an MBO, and so on.
Once the groundwork has been laid, the sales process goes through three phases. In the first phase, the seller’s advisors contact potential buyers. After signing a confidentiality agreement, interested buyers receive an information memorandum and are invited to perform non-binding indications of interest. Buyers may then make their offers. The seller’s advisory team creates a short-list of the offers that best meet the seller’s expectations in terms of price, conditions, transaction structure, and post-transaction considerations. In the second phase, selected buyers review the documentation from the data room, attend presentations by the seller’s managerial team, and visit the company’s facilities. The buyers are then given a draft of the sales contract and asked for final bids with their best price and conditions as well as their assurance of the necessary financing to complete the transaction. The final phase includes the concluding due diligence
and negotiation of terms and conditions of the sales contract.
What goes around comes around
The primary objective for financial advisors is to obtain the best price and conditions for their
clients and this is often best done in an auction process. It is clear that the auction process is full of details and one of the key roles for the advisor is to manage these details as the process runs its course. The advisor must foster competition through strict control of information and restriction of access of interested parties to the management team and the shareholders. A successful auction process keeps the pressure on potential buyers until the last moment. When down the road the new buyers want to sell, they will appreciate the exact same service that made them sweat when the tables were turned.
