How does bidding work in an M&A auction? Our expert M&A consultants discuss several strategies you can implement to gain value at auction.
Deciding on an auction for an upcoming M&A can make sense for both buyers and sellers. Auctions facilitate competitive bidding and offer sellers the opportunity to buy promising companies for less than they’re worth.
They’ve grown in popularity recently alongside the bullish nature of the overall UK M&A market in recent years. According to Experian, the UK M&A market has seen a massive surge in value this year, with significant influxes of overseas players and mega deals.
But how does bidding work in an M&A auction? Let’s discuss several strategies you can implement to gain value at auction.
What is bidding in an M&A?
Bidding in an M&A auction involves multiple prospective buyers putting forth bids for companies and/or assets. The seller hopes to encourage a bidding war to drive up the purchase price and sell their businesses for more than they’re worth, whereas buyers hope to achieve the opposite.
Unlike standard auctions, where buyers shout out a price in a crowded room, bidders submit bid packages. These packages are official responses to the seller’s call for bids. Essentially, they’re pitches. In other words, it isn’t just about the price alone.
M&As in auction
M&As at auction are designed to find a suitable taker for a business or its assets. However, just because a bid is accepted doesn’t mean the deal will go through. Buyers will still carry out due diligence and can still back out of the deal in specific scenarios.
Typically, there are two types of M&A auctions:
1. Broad Auctions – These auctions include broad pools of bidders. When they work, selling prices tend to be higher. Likewise, they’re complicated and time-consuming to organise.
2. Limited Auctions – A limited auction involves a more limited group of bidders. In other words, potential buyers are short-listed in advance.
Winning an auction means moving straight to the preferred buyer stage, where you’ll begin due diligence and work out the final agreement. You’ll also need to begin preparing your post-merger/acquisition plan and managing the legal aspects of your purchase.
Remember, as many as 70-75% of M&As fail, so proper planning is crucial.
Speak with an M&A Consultant for Support
Successful bidding strategies in M&As
Winning an M&A auction means presenting a better pitch than the competition. Like any auction, there’s a science to winning them. In an M&A context, since factors other than the price matter, it’s not just a matter of throwing a large number at the issue.
Here’s a selection of tried-and-tested bidding strategies for winning these auction types.
1. Think of the seller’s goals
You’ve got to evaluate what is best for the buyer. Some sellers want nothing more than a high price before they move on to their next venture, but that isn’t true for all of them. For example, the seller of a family-run business probably wants to ensure their loyal team still has jobs afterwards.
Tailor your pitch based on these goals. Remember, price, terms and closing certainty are the three things every seller has in common.
2. Bid high
It can be tempting to submit a low bid to see if you can get the seller to jump, especially if the auction isn’t particularly competitive. However, history shows that this tactic doesn’t work most of the time.
Although the highest bidder might often be scornfully referred to as “the one who overpaid,” high bidders tend to be taken more seriously than people who submit lower numbers. Yes, this puts more pressure on you to realise greater value from the company, but that leads us to our next strategy.
3. Be selective and aggressive
Be selective about the companies you bid on at auction. The most successful bidders have an extremely narrow interest and may rarely enter an auction environment.
One of the most common features of failed bidders is entrepreneurs who frequently throw in low bids to test the waters. Word soon spreads, and these bidders tend to be dismissed out of hand.
Instead, be selective about the companies you believe you can draw greater value from and pursue aggressively with an instantly competitive pitch.
4. Offer value in creative restructuring
It’s not uncommon for M&A pitches to involve valuation gaps. Some bidders may offer an initial cash lump sum with an “earn out” to bridge these gaps. But there may be a better option.
For example, consider offering to purchase a majority interest whilst still providing the seller with a minority interest. You may offer to buy 80% of the company, allowing the seller to remain as involved as they feel. Adding retained interest can actually increase the overall value of your bid.
Granted, it’s not the only option available. Offering synergies and creative tax strategies can present extra value and justify a bid that may not be the highest.
5. Pre-empt the auction
Is there a highly desirable asset about to go to auction?
If you believe this is the purchase for you, and you’re willing to pay over the odds, consider approaching the seller with an early offer. Make a firm offer with the condition that the auction is either suspended or terminated entirely.
When successful, pre-empting the auction shuts out the competition and gives you immediate exclusivity for the deal. Note that if a public company is involved, expect the seller to insist on a “go-shop” period.
The “go-shop” period allows the seller to solicit superior proposals in the meantime. If they accept another proposal, you’ll receive a breakup fee.
6. Tailor the bid to the circumstances
Learn as much about the seller as possible. It matters because this is what tells you about their motivations.
For example, if you’re dealing with a serial entrepreneur with a strong track record of building companies and then exiting, it’s obvious that price will be their priority. In contrast, if it’s a family-owned business where the owner is looking to retire, bids that help the business survive and thrive as part of its legacy will likely take precedence.
Don’t copy-paste your pitches between companies because every auction is unique.
Once you’ve successfully won your bid, it’s time to move to the due diligence stage. Hiring an M&A consultant is critical at this stage to help you carry out due diligence and put the framework in place for a smooth transition. If you’re searching for help in your M&A, speak to the team at Hilton Smythe today.