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published on 21 June 2023 | reading time approx. 3 minutes
In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.
The way a takeover process is proceeded until signing heavily depends on whether the initiative to start negotiations comes from the sell-side or from the investor. The latter usually prefers to be able to conduct exclusive negotiations with the seller in order to be able to negotiate the terms of the takeover individually and undisturbed by offers from third parties. If, on the other hand, a new co-investor or acquirer is sought, it is often more attractive for the seller to choose the "auction sale" or also the „bidding procedure” route.
An auction sale is nothing other than a bidding process in which bidders have the opportunity to win the acquisition of the target by making the most attractive bid possible during a sales process structured with the help of an M&A advisor.
The auction sale, commonly known from insolvency law, was originally the first choice mainly in large transactions where primarily financial investors, e.g. from the private equity sector, are approached and compete against one another; however, due to its quite considerable advantages for the sell-side, auction sale is nowadays quite frequently encountered in transactions also among mid-sized to large SMEs and with target bidders from the industry.
The call for bids – which is initially made while still keeping the identity of the target secret – can either be directed at a very broad group of bidders („broad auction”), in which numerous bidders, mostly from the financial sector, are approached by the M&A advisor via corresponding platforms and contacts, or at an already pre-selected group of potential bidders, which is composed of a few, specifically contacted (and often rather strategic) investors („targeted solicitation” oder „limited auction”).
After successfully initiating contact with the prospective bidder and the exploration of interests by both sides, the bidders receive further information about the target and the planned transaction framework as well as the deadlines for the individual process steps in an information memorandum after signing a non-disclosure agreement.
On this basis, a non-binding offer is requested from the bidders so that the seller can decide which bidders to reject immediately and which, on the other hand, should be given access to detailed information in order to carry out due diligence.
The data room set up for the purpose of the due diligence may already contain an uploaded vendor due diligence report; carrying out a vendor due diligence review in advance enables the seller to identify potential problems beforehand - and, where possible, to resolve them in the meantime or to prepare for corresponding negotiations or price reductions.
It is also customary to provide the prospective buyer with a copy of the (preliminary) purchase agreement template for editing. Depending on the chosen procedure, the draft agreement may be non-modifiable so that the bidder can cushion any risks or disadvantages solely through the price bid; in this case, as in an auction, the price bid alone is indeed decisive for whether the bid will win. Often, however, during the bidding process, the prospective buyer may edit the agreement template depending on the results from his due diligence review and, for example, demand special closing conditions or reps & warrants or also introduce additional conditions on his part (e.g. employment guarantees), which are then taken into account by the seller in addition to the offered price when deciding whether to accept the bid or admit the prospective buyer to the next selection stage.
Once the seller takes this decision, negotiations are usually limited to very few bidders or even continued exclusively. It is also quite common to include an additional due diligence stage only for this short-listed group of participants, in which more sensitive information, e.g. on trading partners or key employees, is disclosed.
Although the M&A advisor, who is almost indispensable in an auction sale, charges quite a hefty fee, and the process, once announced, leaves little room for spontaneous individual arrangements, the auction sale offers the seller a number of advantages which explain its increasing popularity in such transactions initiated by the seller:
And even if the advantages of the auction sale are clearly on the side of the seller, there can also be advantages for prospective buyers in getting their foot in the door at all with this procedure, i.e. being approached for projects previously not known of or for which no suitable contact had existed, and then getting the chance to present their own bid convincingly in the process.
Evelyn Ziebs
Partner
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