It goes without saying that in a seller’s market, where buyers chase relatively fewer quality targets, the initiative is usually with a seller to select ways of ensuring that it achieves the best possible deal terms.
One commonly used approach is the auction process, of which there are several variations, the common theme being that multiple buyers are selected and asked to participate in a competitive tendering process whereby, in effect, the buyers bid against each other and are incentivised to offer terms that are often more generous than they might otherwise offer, in order to remain in the process and, ultimately, to emerge as the chosen buyer. As merger and acquisition activity has risen again, there has been a noticeable re-emergence of auction processes being used to significant benefit for sellers, enabling them to achieve exits at premium prices in short timeframes.
Auctions are not for everyone
Before looking at the process itself and the possible advantages to a seller, the obvious point to make is that this process is not suited to every sale scenario. Indeed, if it was, the advantages to a seller are such that practically every sale would be conducted in this manner. The auction process involves front-loading a lot of the work and therefore the preparation phase can be intensive, monopolising management time and involving more input from advisers at an early stage. In a bilateral process the seller will be negotiating and interacting with just one counterparty, whereas in auction processes, there will be several more mouths to feed and a corresponding impact on time committed to the process. Where multiple buyers are being furnished with information about a business, concerns around confidentiality will be more acute and need to be more carefully managed. Finally, unless there are numerous serious suitors for a business, it will be difficult to generate genuine competitive tension and the principal benefit of this approach will be lost; it won’t be a suitable fit for all businesses and markets.
Preparing for and running the auction process
Quality advisers will come into their own on an auction process and will play a pivotal role in advising how the auction should be structured and run, and conducting discussions with and managing the bidders throughout the process. The trick, of course, is to keep bidders engaged and continue to stoke the competitive fires, encouraging them to offer the best terms they are prepared to offer.
Financial advisers will take the lead preparing a teaser or information memorandum which is given to first round bidders as the basis upon which they are asked to submit their indicative offers. Typically, some bidders will fall by the wayside or be discounted and so a shorter list of bidders will then be invited to participate in the second round, at which point they will be given access to financial and legal due diligence that the seller’s advisers have prepared and invited to view some or all of the contents of a data room. At this stage, the seller’s lawyers will also prepare a (seller friendly) share purchase agreement and buyers will be asked to submit their comments, usually at the same time as their second round bids. Depending on how the process is structured, it can be at this point that the leading bid is selected and exclusivity granted, though it is paramount that exclusivity is not offered at too early a stage as at that point there is a transition to a more level playing field. A well advised seller will therefore be encouraged to make the very most of its negotiating leverage and seek a bidder’s agreement on all the key legal and financial issues prior to going into the exclusivity phase. This will include many of the key legal issues that buyers and sellers will expect to negotiate, such as the terms on which warranties and any indemnities are given as well as the more sensitive financial terms around working capital, excess cash and tax treatment of certain items.
When it works well, it can work really well
It is self-evident that there are some real advantages in engaging bidders in this type of process. If handled correctly, it is possible to generate significant competitive tension and leverage fully a seller’s bargaining position. Whilst there is a longer preparation phase, once the process is underway, there is usually less negotiating and therefore the timetable, which a seller will have near complete control over, can be shorter, reducing the distraction factor for management.
Indeed, in the current market, it has become a not irregular occurrence, particularly where private equity buyers are fighting for quality assets, for bidders to launch knock-out bids in order to secure early exclusivity and typically their cost of doing this will be offering prices that are too good to turn down. Some sellers are also pre-empting this, by dangling the carrot of exclusivity (thereby reducing the time, expense and uncertainty for a bidder, who will always have some degree of reluctance in committing to a process that they may not be successful in) in exchange for the price and terms that they want to achieve. In both these instances sellers will often drive a hard bargain on timetable, the net result being deals completed in incredibly quick time frames and sellers emerging with results exceeding their expectations.