Nigel Taylor
- Partner
- Corporate
Under the hammer – The auction process in M&A
Auction processes create competitive tension that can lead to better results for both sellers and buyers – both in deal value and contractual protections – than traditional bilateral transactions. But, if you’re considering participating in an M&A auction process, as either seller or bidder, what should you expect, and how does the process differ from a bilateral sale?
STAGE 1: Auction opening and indicative offers
The starting point in M&A auctions is usually the preparation of an information memorandum by the seller about the target and the opportunity to acquire it. This is circulated – subject to a confidentiality agreement – to interested bidders, who may also be given access to a virtual data room with additional information about the target’s business. The seller will usually have appointed a corporate finance adviser to provide guidance on the market, introduce potential bidders and assist with coordinating the auction process. Corporate lawyers are also often engaged at the outset of the process and will provide input on preparation for sale, the information memorandum and confidentiality agreements.
Key Consideration: Confidentiality
Robust confidentiality protections are of particular importance for sellers at this point in the process. A potentially large number of parties will be given access to information about the target which will inherently be commercially sensitive. Those parties could include the target’s direct competitors, its suppliers or its customers. Sellers can reduce their exposure to this risk by limiting the amount of information provided to potential bidders before a confidentiality agreement is in place (often only a brief ‘teaser’ document is made available, with the information memorandum kept back) and by being judicious in choosing what is uploaded to the data room and what redactions are made. However, there is naturally a balance to be struck between protecting sensitive information and putting off bidders or depressing offer prices by keeping too much under wraps. Where this balance lies will depend on the nature of the target’s business, its competitive environment, and whether there are any external factors: businesses operating in highly regulated sectors may be more limited on the information they can share, for example.
Interested bidders will have the opportunity to submit a non-binding indicative offer for the target, based on its assessment of the information memorandum and any additional information provided by the seller. A process letter issued by the seller will set out the requirements for these indicative offers, and the timetable for making them. Depending on the terms of the process letter, bidders may be able to ask limited questions of the seller about the information provided.
Indicative offers will usually include the bidder’s valuation methodology, and its proposal for how the consideration will be funded.
STAGE 2: Preferred bidder selection
The seller will review the indicative offers it has received with the guidance of its corporate finance advisers and select which of the bidders to invite to participate in stage 2 of the process. In choosing their preferred bidders, sellers will naturally be looking for the highest bid, but that is not the be-all-and-end-all. Sellers will often be receptive to bidders who are able or willing to move quickly towards completion; and who have certainty of funds. Depending on the target and its industry, bidders with experience of similar acquisitions may also be preferred.
Sophisticated bidders are likely to retain their own corporate finance advisers (or have an equivalent in-house function) who will advise on where to pitch a bid; and what is likely to be attractive or a concern to sellers in particular scenarios.
Preferred bidders will be given access to more information about the target so that they can conduct a fuller due diligence process, usually with the ability to raise enquiries of the seller. Drafts of the transaction documents (to include the sale and purchase agreement and the disclosure letter) are also shared with the preferred bidders.
At the end of this stage, bidders wishing to remain in the process will submit a final offer letter, usually accompanied by their mark-ups of the transaction documents prepared by the seller.
Key Consideration: Buyer protections
Transaction documents in auction processes are drafted by the sellers’ advisers, which gives rise to a natural preference for lighter-touch buyer protections (i.e. warranties and indemnities) than are common in bilateral deals where the buyer usually prepares the first drafts. Although bidders will mark-up the draft transaction documents and there is of course scope for dealing with specific issues identified in the due diligence process, the competitive tension of the auction process means that bidders who are willing to accept a greater level of transaction risk are often preferred by auction sellers.
Increasingly, bidders (or sellers) may propose warranty & indemnity insurance as a way to mitigate transaction risk while keeping the seller’s residual liability limited.
STAGE 3: Final negotiation and completion
At the end of stage 2, the seller selects a final bidder to proceed with. Typically, an exclusivity agreement is entered into between the seller and the final bidder, giving them a period (often 2-6 weeks) during which the transaction documents can be finalised, and any final due diligence verification can be carried out. If warranty and indemnity insurance is to be obtained for the transaction, the parties will also complete the underwriting process with the W&I broker during this period.
Once the transaction documents have been agreed, the deal will proceed to exchange and completion in the same way as a bilateral transaction.
Wedlake Bell’s Corporate team has extensive experience advising sellers and bidders in M&A auctions, including acting recently as lead legal counsel for the shareholders of European chemical and solvent suppliers the Solventis Group in a successful auction process ultimately resulting in Solventis’ acquisition by Brenntag, a global market leader in chemicals and ingredients distribution.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
Meet the team:
Benedict Holmes
- Solicitor
- Corporate