FW moderates a discussion on managing the M&A auction process between Rick Lacher, a managing director at Houlihan Lokey, Matthew Tedford, a partner at KPMG, and Nigel Boardman, a partner at Slaughter & May.
FW: Could you provide a brief overview of the M&A auction process? What are some of the advantages and drawbacks of using this approach?
Lacher: Clearly the biggest advantage is that an auction allows a seller to comprehensively survey the market to uncover every potential buyer. Even though the list of potential buyers may often seem obvious, sometimes the right candidate emerges from an auction process that was previously unnoticed or would not otherwise be considered. By going to a broad number of potential buyers, you will uncover lower probability buyers that you would not typically approach. While not a frequent occurrence, once every so often, one of those low probability buyers either ends up buying the company or helps create a more robust auction dynamic. The drawback is in some ways equally obvious: an auction process means more widespread dissemination of confidential information into the market, which is a necessary part of the process but creates risks that could potentially be harmful to the company. That is a curtain that cannot be drawn once it is raised. In addition, an auction is a process to which a company’s management must devote a significant amount of time and effort, dealing with multiple suitors and diligent requests – the more potential suitors, the more time that management must devote to the process and not to running the business. While the latter may be an issue in any process, you increase the odds of that happening when you cast a wider net.
Tedford: The M&A auction has become a common occurrence globally. It allows a seller to illicit offers from multiple buyers at the same time. The process gives the seller better control of information that can be produced more timely, and consistently, to potential buyers. Several advantages exist but one of the key benefits is speed of execution. With robust datarooms, well thought-out transaction documents, and organised processes for management time and site visits, auctions typically result in transactions closing earlier. Moreover, competitive tension compels purchasers to put their best bids forward. Some of the drawbacks associated with an auction include larger dissemination of confidential information, especially into competitor’s hands. Additionally, the process can be a distraction to operating the business, depending on the number of bidders management has to deal with.
Boardman: An auction may be used to sell a company or business and involves a number of bidders at the early stages. Typically the seller will prepare an information memorandum containing important information about the company or business being sold which will be sent to a number of potential bidders, and then each potential bidder will be invited to submit an indicative bid. The seller will invite those who submitted the most attractive bids to undertake due diligence, review the draft sale documentation and after this has taken place invite a further round of bidding. At this point, the seller will select a favoured bidder with whom negotiations will continue, which the parties hope will lead to a sale. A potential advantage for the seller is that the price may be driven up by a number of interested bidders. In addition, the seller may be able to use the auction process to secure better deal terms. The disadvantages for the seller include that it is harder to keep the process confidential when compared with a private treaty sale, and a failed auction is likely to result in negative publicity and reduce the chances of obtaining a good price for the company or business being sold in the near future. From the buyer’s perspective, there are not many advantages of participating in an auction as opposed to a private treaty sale. Negatives include that the bidder may have to agree to less advantageous terms in order to be selected as the preferred bidder.
FW: How do auction results compare to privately negotiated deals? When is a private negotiation a more desirable option?
Tedford: It really depends on the industry and the state of the economy. Auctions have become the norm; however, privately negotiated deals still exist. Extremely motivated buyers with secured capital and financing who understand the seller’s business intimately, will often try to pre-empt an auction process. There are benefits to the seller if they believe they can attain high price as they will avoid running a disruptive process which consumes management’s with multiple bidders. Buyers like negotiated deals as there is more certainty around closing and generally more control over negotiating contractual obligations including closing adjustments, warranties and so on.