If deal transparency isn’t at the forefront of your M&A strategy, you might want to stop and do a bit of thinking. In some ways the world of corporate M&A is much the same as it was 20 years ago, and in other ways the events of the last few weeks have changed the landscape dramatically. The Bailout, the current capital and credit crunch, and the outcome of recent litigation have taken and already inefficient market and made it even more so. In today’s post I’ll share my observations as to what might be the single biggest trend that will influence how transactions will be closed in today’s changing marketplace…deal transparency.
Over the years I have participated in the M&A process from virtually every angle possible. I have been a principal of a company being acquired, as well as a principal of a company conducting acquisitions. I have also served as an executive working on both acquisitions and dispositions teams, and as a professional advisor representing both the buy-side and the sell-side. I’ve been around long enough to remember the days when proprietary transactions (deals that didn’t get shopped) were the norm. However with recent events, exclusive transactions will be all but dead unless you’re very comfortable painting a bulls-eye on your chest.
In a recent decision in Delaware, the court found independent directors of a target company personally liable for what the court called a breech of fiduciary obligations by holding a “passive” sale. If officers and directors on the sell-side cannot entertain exclusive deals without incurring personal risk, guess what…they won’t do it. Combine this with what will most certainly be an environment of increased regulatory oversight, and enhanced investor scrutiny, and you’ll quickly arrive at the same conclusion that I have…Most deals will have to become very transparent in order for the sell-side to be comfortable in moving forward.
Moving forward it is my opinion that virtually all deals will get shopped (advantage sell-side). The environment today simply reflects a bias toward auctions when looking to sell or finance your firm. The spoils simply go to the highest bidder on a price basis, or the highest bidder on a value add basis, but in either case (preferably a combination of the two) it usually boils to the most aggressive bid winning the transaction. As an advisor who often represents the sell-side, I am particularly fond of this proliferating trend.
This frenzied world of deal auctions is a function of supply and demand, but as I mentioned above, it is also a function of fiduciary obligation in maximizing shareholder value. In fact, “Go-Shop” provisions are included in most of today’s agreements with potential suitors. “Stand-Still” provisions are becoming a thing of the past as they set-up the seller for third party allegations that the seller failed to fulfill their fiduciary responsibilities by agreeing to sell the company at a “low-ball’ price, and/or by signing off on measures designed to dissuade competing bidders. The offset for buyers to induce them into agreeing to a go-shop provision is the inclusion of a provision to pay a break-up fee should the seller unwind the deal due to a better competing offer.
Let me point out that savvy sellers know the difference between cattle-calls or shot-gunning a deal vs. inviting a small group of the right buyers to the table in a controlled bid process. The fastest way to taint your deal in the market is to not be discerning or discriminating in selecting who should be invited to participate in your transaction. Sellers that fail to recognize the subtlety of what I’m describing in this paragraph will soon find themselves receiving a very costly education from the buy-side when few if any suitors express an interest in your deal.
As I mentioned above, pricing is only part of the deal. Since I discussed non-financial value adds in a previous post entitled “Capital vs. Influence” I won’t go into a deep discussion here other than to state that sophisticated sellers look for more than just price when selecting their buyer.
The most critical factor in running your transaction is the selection of the right sell-side advisor. Your advisor should be able to guide you in defining your benchmark valuation metrics, understanding your negotiating leverage points, helping you prepare your offering documents, advising you on which buyers to solicit, how to manage the deal auction, and ultimately how to close the deal with the right partner at the right price.
Bottom line…The auction environment, properly managed by the right advisor can be your best friend by proving transparency and maximizing valuation. Conversely, attempting to auction your company for sale with the wrong advisor will end-up in massive amounts of unnecessary brain damage being incurred, and an increased risk profile. Good Luck and Good Selling….
