Since 2012, there has been a shift in the mergers and acquisitions (M&A) marketplace. Many economists and financial experts noted a decline in mergers and acquisitions volumes in 2012. To accommodate the changing market, traditional methods of conducting merger and acquisition transactions have been replaced by M&A auctions. These auctions allow sellers to gain a full view of every potential buyer, enabling sellers to identify buyers that might otherwise go unnoticed.
To initiate an auction, the seller will typically prepare a memorandum detailing pertinent information about the business or company that it wishes to sell. This information is then sent to potential bidders and each bidder receives an invitation to make a bid. Once the seller has reviewed all of the bids, the seller will invite buyers with the most attractive bids to move forward in the process. After the draft sale document has been reviewed, the seller may opt to have a second round of bidding. When this has been completed, the seller will select one bidder to continue negotiations in hopes of making a sale.
The M&A auction process can be advantageous for a number of reasons. First, it allows sellers to simultaneously solicit offers from multiple buyers. This not only gives the seller more control, but it also allows them to provide more consistent and timely information to buyers. Additionally, M&A auctions significantly benefit the speed of execution in these transactions. The competitive nature of these auctions may compel buyers to approach with their best bids, rather than holding out until later in the process. If the auction has many potential buyers, it may drive up the price of the business or company. The auction process may be used to get better terms on the M&A transaction.
An obvious drawback of the M&A auction process is that it frequently requires a widespread release of confidential information to the public market. Traditional private treaty sales allow the seller to keep this information confidential. Although this is a necessary part of the M&A auction process, it can prove to be harmful to the company itself. Once this information has been exposed, it cannot be withdrawn. This can be especially harmful if this information makes its way into the hands of a competitor.
Also, in some cases, the auction process may require a large amount of time and effort from the company’s management team. The time spent dealing with potential suitors and their requests often means there is less time for management to focus on running the business. Although this may be a possibility in other processes as well, the odds of this happening are increased significantly when more potential buyers are involved.
Failed auctions are another drawback of the M&A process. A failed auction not only results in negative publicity, but it can significantly reduce the chances of getting a strong price for the business or company in the near future.
From the perspective of the buyer, a private treaty sale is much more advantageous than the M&A auction process. In auctions with a large number of interested buyers, the bidder may be forced to agree to less than desirable terms in order to gain favor from the seller.