A merger or acquisition is one of the most complex of corporate transactions, requiring the target company to assemble and present for review of hundreds of documents detailing the company’s assets and liabilities. The “sell-side” of a mergers and acquisitions (M&A) transaction describes the deal process from the perspective of the seller and the seller’s advisors, and requires more effort in presenting the right documentation. Let’s take a closer look at the sell-side of the M&A process.
Why Companies Sell
It might first be a good idea to understand the motivations behind why a company might decide to sell itself to another company.
To Cash Out
Owners, particularly of private businesses, might want to take out some capital in the company, as often such owners have a significant part of their net worth tied up in the business. Getting acquired can be a way to cash out partially or fully from the business.
No Clear Succession Plan, or Issues with Management
Companies with owners about to retire, or with issues of management, might decide that a sale of the company is an effective way to ensure strong leadership.
Strategy and Positioning
A company might decide that, due to operational factors or market forces, the only way to sustain or grow the business would be to combine with a strategic acquirer, such as a competitor, customer or supplier.
A company might be facing liquidity issues, and rather than restructure or dissolve the business altogether, the company might decide that selling itself to another company would ensure that at least some of its assets (i.e., intellectual property) could survive.
Companies that wish to sell themselves to another company generally have four options to organize the deal process: broad auction, limited auction, targeted auction and exclusive negotiation.
Understanding Various Sell-Side Processes
A company wishing to sell itself to or merge with a larger company most likely hires investment bankers to present the company to potential buyers.
Due to the sensitive, confidential nature of such transactions, the process of presenting the company to buyers is carried out privately, and typically falls into one of four broad categories of processes.
Of course, a seller would most likely want to receive interest from a large number of companies, thereby increasing the probability that the seller would receive the highest possible purchase price.
A broad auction aims to do just that. In a broad auction, the seller’s investment banker reaches out to as many potential bidders as possible, inviting them to participate in order to drive the price up.
The advantages of a broad auction include a maximized purchase price, because of the wide net that has been cast by the investment bankers. The seller thereby has more choice and more negotiating leverage. Additionally, by engaging in a broad auction, the seller satisfies its fiduciary responsibility to maximize shareholder value, which is important for public companies.
Some disadvantages of a broad auction include the difficulty of maintaining confidentiality. Competitors, and often the media, will happen upon leaked information, which can disrupt valuation and pricing and complicate the M&A process. Another disadvantage to the broad auction process is that it can be time consuming and disruptive, especially as additional potential buyers emerge that need to evaluate the seller.
A limited auction is the opposite of a broad auction: The seller is presented to a much smaller universe of buyers. This might not be because of management’s preference, but rather because there are only a small number of both financial and strategic buyers (10 to 50 potential buyers) interested in the company.
Larger companies generally deal with a smaller buyer pool than middle market companies, so by default, they would use a limited auction in the M&A process.
A targeted auction is even smaller than a limited auction: The selling company’s investment bankers would present the company to only two to five potential buyers.
This approach maintains the utmost of confidentiality and does the most to reduce business disruption while still retaining the formal process of soliciting enough buyers to meet the seller’s fiduciary responsibility to shareholders.
The risk of a targeted auction is that there might be the risk of leaving potential bidders out of the process and potentially limiting the potential purchase price of the selling company.
Finally, an exclusive negotiation, as its name implies, has the buyer negotiate exclusively with one buyer. In addition to confidentiality, the main advantage is the speed of getting the transaction closed. The disadvantage is that there is lower negotiating leverage for the seller and a strong likelihood that value isn’t being maximized for shareholders.
In an exclusive negotiation, the single buyer doesn’t just appear out of the blue. Most likely, the buyer and seller have been having discussions about combining the companies for some time.
Investment Bankers and a Virtual Data Room
In sell-side M&A, the investment banker prepares several documents to be presented to potential buyers. These include the “teaser” or summary document of the company wishing to sell itself, in addition to non-disclosure agreements, confidentiality information memorandums, and expression of interest offer letters.
When undergoing the M&A process, and in order for due diligence to be carried out, a trusted third-party virtual data room that contains all the appropriate document hosting and sharing features for the transaction is a must. It delivers confidence to all parties that the strongest security measures are in place, and the tools included will help expedite the entire process, making the data flow more smoothly and lopping weeks, if not months, off of the entire M&A timeline.
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Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.