We are routinely approached by companies, shareholders and boards of directors telling us that their company was approached by a prospective buyer anxious to consummate a transaction. They may even have a non-binding indicative offer in hand – or expect one shortly. It can be exciting to have a sophisticated firm find your baby to be attractive – rewarding to be approached by a big potential buyer and it could be a load off your mind after years and years of hard work for a possible large payoff. But more often than not, we have found that one-off acquisition processes fail, or – at best – result in a sub-optimal deal. The examples are legion. The problems with these ad-hoc discussions are many. For example:
- In one-off negotiations, the seller has little leverage. It’s nearly impossible to make the prospective buyer move fast. Conversely, where there is a competitive process they understand that deadlines are “real”. The result is “discussions” that can drag on for months – and longer.
- In a one-off negotiation, it’s tough for a seller (or buyer) to know if the price and terms are the best you are going to get – because no matter what you believe – you can’t know what the guy might offer.
- As due diligence progresses, the price only seems to move down from the initially indicated price – never up. And the buyers always seem to find reasons to reduce it.
- The seller’s only leverage to improve terms is to threaten to walk away – and that’s not nearly as big a threat as if the company will be sold to someone else – and be gone forever.
For these reasons and many more, when companies are contemplating a sale, we usually advise managing a non-adversarial competitive process.
I do note that there are a few exceptions – times when one-off processes can make sense. But they are rare. For example, we had an Australian software company client that was approached by a large international securities exchange that had identified our client’s capabilities as ones they needed to move forward with their own strategy. The smaller company had contemplated a sale in about a year and liked the idea of combining with the exchange – but how to ensure they got a fair deal? Working with the smaller company’s Board of Directors, we determined a price at which the sellers would be pleased to transact – and a time period during which we were willing to hold the company off the market to get the deal done. It was a stretch price and we knew it, but it was not a ridiculous stretch. We told the suitor that this was the price for moving quickly and avoiding an auction. For the next 60 days we cooperated with the exchange’s due diligence review process while at the same time preparing to run a competitive auction. But we didn’t have to. The exchange agreed to the price and terms and everyone was pleased.
There have been other similar examples of a firm coming to us that was even less ready to sell but with a suitor that was hungry and wanted to move quickly. Sometimes it does make sense to establish a credible value that the firm could be worth in, say, three years – and saying that the board would sell now at that price – or be happy to wait the three years. Sometimes that approach works. But in the vast majority of cases, the competitive process works better.
A few years ago, shortly before Thanksgiving, with less than 10 weeks before the end of the calendar year, a company that we knew well called Knovel was approached by a large multi-national industry player with an acquisition offer. The smaller company tried to push up the offer but the suitor declined. That’s when the company engaged us. After talking to the suitor, it became clear that, from their perspective, they were offering a full and fair price that they believed would best any competing offer – and they were not going to increase it. For a variety of reasons, including a pending change in the tax laws, the sellers were motivated to complete a transaction before year end.
Once we were engaged, we organized a dedicated team to work closely and quickly with our client to identify other potentially interested parties, develop materials that would seamlessly communicate the company’s story, growth potential, strategy, execution plan and financial projections. And then we set out to develop alternatives for our client. It worked.
In the face of competitive pressure, the original suitor did improve their offer; but not enough. On December 28th the company was sold to Elsevier, the UK-based world-leading provider of scientific, technical and medical information products and services – at a premium to the original offer. That’s what a competitive process can do for you. See more here.
We welcome your thoughts, or if you’d like to share your experiences, please do so below.