Mergers and Acquisitions Playbook: Lessons from the Middle-Market Trenches (Wiley Professional Advisory Services) by Mark A. Filippell

Author:Mark A. Filippell [Filippell, Mark A.]
Language: eng
Format: mobi
Publisher: Wiley
Published: 2010-11-01T14:00:00+00:00

BROAD AUCTION

My favorite horror movies are Psycho, Frankenstein, Alien, and The Exorcist. I will never forget the terror that each instilled in me; the shower scene from Psycho is my all-time favorite. When I see it on reruns, I still feel anxious, even though I know what is going to happen to Janet Leigh.

Sellers of businesses, and, to a lesser extent, their investment bankers, are haunted by an even more deeply-seated fear. It is the specter of a simple phone call received after the sale has been closed and announced to the world. The dreaded call is from a prospective buyer who was never notified that the company was for sale. This buyer informs the seller that it would have been seriously interested in the business and would have paid a price significantly higher than the seller received from the successful buyer. The feeling this engenders in the seller makes Psycho seem like Pollyanna.

The careful identification and cultivation of prospective buyers covered in Chapter 7 dramatically reduces the chances of the seller’s telephone becoming more terrifying than anything Alfred Hitchcock could create. However, if the company is sold through a negotiated sale or a limited auction, there still exists the very real prospect of the dreaded “ring” sound after the sale. This is because some prospective buyers might not be obvious, or may have only recently become interested in the kind of business the seller has to offer. The best way, and, to a certain extent, the only way, to minimize the chances of overlooking a prospective buyer is to conduct a broad auction. This may involve contacting 50, 75, 100, or even as many as 200 prospective buyers.

The Florida restaurant chain described earlier is a good example of a selling company that lends itself to a broad auction; the buyer universe is extremely broad. For what it is worth, I would point out that many financial sponsors, the people who buy and sell companies for a living, swear by broad auctions. They have persuasive stories about the reluctantly included, low-percentage buyer who ended up topping all the favorites in the bidding.

The broad auction process certainly has the advantages of maximizing the exposure to prospective buyers. This can heighten the bidding environment, sometimes stimulating buyers to bid more than they would have in a negotiated sale or limited auction. If this is the case, this reason alone probably justifies “going broad.” Furthermore, although perhaps 200 bidders will be contacted with teasers, with 100 receiving the offering memorandum, these figures will shrink to more manageable levels once the indications of interest are received and the finalists are invited in for management presentations and data room access.4 Furthermore, since investment bankers are almost always retained to manage broad auctions, they will significantly insulate the company’s management from the “broad” part of the marketing process. To a significant extent, running broad auctions is what folks like me do for a living.

However, approaching an extremely wide universe can still waste an enormous amount of

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