by JuStiN pettit
Formal auctions are not necessary, but visibility and dialogue certainly are. A proactive out-reach to the close circle of natural buyers can be done quietly.
All auctions are not created equal – in fact, there is a spectrum of tactics. There are a number of auction methods that can be used. Managed book building, discriminatory auctions, and uniform price auctions are alternative approaches to dialogue with multiple potential bidders.
The transparency of formal auction methods can lead to more competitive pricing, but actually can work poorly in cases vulnerable to inaccurate information.
For example, where the number of investors and the accuracy of investors’
information is endogenous, managed book building controls investor access, allowing reduced time and risk for both buyers and sellers. It also controls spending on information acquisition, thereby limiting underpricing. Interestingly, the US book building method has become increasingly popular for IPOs worldwide over the last decade, whereas sealed bid IPO auctions have been abandoned.
Key success factors
There are many common mistakes made in auctions. Many companies fail to prepare adequately, often seeing the auction as the end rather than a simple means to an end. In this preparation the development of a clear and compelling ‘equity story’
of about the business, strategy and ‘right to win’, markets, competitive dynamics, advantages, risks and prospects is essential.
Advance planning is essential – the seller should conduct their own in house due diligence to surface the relevant issues and avoid any surprises.
Strategies can be deployed by the seller to maximise the sale proceeds in an auction.
There are many degrees of freedom in the value proposition, and price is but one of them. Timing, consideration and risk, stapled financing, tax, governance, control, people and chemistry, are all equally
important issues. The maximisation of any one of these elements, such as price, can be achieved through the careful calibration of the other elements, based on your knowledge of what else matters to each of the potential buyers.
There are ways the buyer can increase odds of being the successful bidder in an auction.
There are many elements to the value proposition beyond price per se, though that is an obvious starting point. The form of consideration – cash or stock – and its risk also matters. Even in comparing all stock deals, risk can vary. M&A collars can be used to tailor the risk profile of stock deals to bridge differences in outlook between buyers and sellers. Similarly, deal structure also matters. Deals may be structured differently for advantageous tax treatment, alternative governance structures, etc. Finally, deal terms around timing, board seats, control, management, etc., are often more important issues than deal price.
Auctions of the future
Sellers are increasingly attempting to
‘clean-up’ the target’s operations in advance of conducting an auction, even to the point of investing capital, making changes to management, and revising strategies. They are also increasingly
making sure that any contingent risks in the business are resolved or mitigated.
In terms of the balance of power
going forward – if auctions will take precedence in future transactions, or if privately negotiated deals ultimately are preferred, the answer is most likely some hybrid that falls between these two extremes. A professionally managed process that quietly targets the (limited) natural circle of interested parties, and combines the rolling disclosure of private negotiation with the competitive bidding of an auction mechanism.
Fix versus sell: the portfolio coherence perspective
When a stock languishes, delivering total shareholder returns below the cost of capital and trading at valuations below publicly-traded comparables, buy-side and sell-side analysts call for bold change to serve as a catalyst for the stock and a revision to investor expectations (in some cases, operating performance and business integration are more problematic than portfolio composition per se). We often see opportunity for a much greater degree of
‘portfolio coherence’ – greater integration
and complexity reduction at each of the intersections of business segment and value chain activity. Correlation between portfolio coherence, and financial measures of performance, growth, and valuation is typically strong.
For example, our initial estimate of Citi coherence is roughly 45 percent, far below the level we expect was envisioned for this portfolio. While Citi could improve coherence through a streamlining of its portfolio (e.g., auction assets), it could also achieve a much higher level of coherence through operational means while maintaining the existing portfolio composition. An improved articulation of portfolio strategy, including a roadmap for portfolio coherence, plus improved execution, manifesting in enhanced growth and returns on equity, can be even more effective routes to sustainable value creation than a change in portfolio composition.
Justin Pettit is a partner at Booz Allen Hamilton.
There is a rising level of cross-border acquisition activity occurring among European and US companies and private equity firms. As these entities increase their appetite for international targets, it is prompting business owners to scrutinise the advantages and commensurate
challenges of selling to a domestic versus foreign acquirer.
This article discusses the common issues a seller must consider when marketing a business that is likely to attract international interest. A seller must be thoroughly prepared to ensure a smooth sale process. In particular, we will examine the following: (i) the relative merits of selling to a domestic versus foreign
acquirer; (ii) how to manage a foreign buyer during the sale process; (iii) recognising localised issues; and (iv) understanding the due diligence process.
Although it is virtually impossible these days to discuss globalisation without some reference to China or India, transatlantic M&A activity between Europe and the US still remains robust. In 2007, there were over 1500 transatlantic deals with a total disclosed value of nearly $625bn, according to Mergerstat. An October 2007 Mergerstat survey found respondents optimistic that transatlantic M&A will continue, with 77 percent believing the volume of deals will increase or remain the same over the coming year. Recognising and appreciating these trends, this article revolves around European firms acquiring
US-based assets and vice versa.
Merits of domestic and foreign acquirers When deciding whether to choose a foreign acquirer over a domestic acquirer, a seller will commonly ask ‘Is it worth the hassle?’
This question is rooted in several complex themes – familiarity, transaction risk and the long-term fit of the business within the new organisation. All are critical to ensuring a successful sale.
Human instinct gravitates towards
familiarity and cautiously approaches the unknown. Domestic buyers are naturally more familiar with targets in their
own country and the market dynamics impacting those assets. The buyer and seller enjoy cultural similarities – the business customs are identical, people act in a similar manner and there are no language barriers. However, this same familiarity may also lead to seller trepidation when contacting domestic acquirers which are deemed competitors. The prospect of disclosing critical information to the enemy often causes sellers to hesitate. Conversely, sellers frequently see foreign competitors as less threatening, partly, and due to the foreign acquirers’ lack of familiarity with, and presence within, the local market.
The second aspect sellers must consider is transaction risk. Although risk is
inherent with any buyer, there typically is heightened concern surrounding a foreign acquirer’s ability to secure financing and