The Auction Process: Advantages and Disadvantages and …

1 The Auction process : Advantages and Disadvantages and the Key Steps By Mark Davies, King & Spalding and Trinh Chubbock, King & Spalding Mergers and acquisitions represent (1) the differences between a and a buyer negotiate directly, in a a key growth strategy for many competitive Auction and bilateral competitive Auction , the seller seeks corporations. The M&A landscape is negotiations; competing bids from potential buyers becoming increasingly competitive and for the target. Further, in an Auction (2) the Advantages and Disadvantages the balance of power is shifting further process , the seller will carry out a of a competitive Auction ; and in favour of buyers. For attractive substantial amount of work before the businesses, however, sellers may (3) an overview of the key steps in an process is underway and, as a result, wish to make divestments through Auction process .

2 Generally require the engagement an Auction process which is designed of advisers in the early stages to to elicit competitive bidding among Auction process vs. prepare for Auction launch. In bilateral interested parties to facilitate the negotiations, the buyer often provides sale of a business or stake in a Bilateral Negotiations a shopping list of requirements for company at the highest price and Business owners deciding to sell a the due diligence investigation. In an on the best possible terms. This article company or business may choose to Auction , however, the seller controls the seeks to explore the Auction process sell by way of bilateral negotiations or disclosure process by limiting the scope and discusses: a competitive Auction process .

3 Unlike of information made available and bilateral negotiations where a seller ensuring that disclosure is made in a . The M&A landscape is becoming increasingly competitive and the balance of power is shifting further in favour of buyers. 12 2017 EMPEA.. controlled manner, usually through the conditions from the start. The seller Given the use of a data-room. Finally, an Auction may also improve its leverage by process often involves an expedited imposing an expedited timetable, multiple parties transaction schedule. limiting the scope of disclosure of in an Auction information and setting the timing of process , the wider There are circumstances, however, bidders' due diligence investigation. where an Auction process is not dissemination suitable.

4 If the business is structurally Disadvantages for the Seller of confidential complicated or if the market sector is Nevertheless, there are Disadvantages information also limited and there are only a handful the seller must consider. The cost of of viable bidders, the additional running an Auction sale is inevitably poses a risk to the complexity of, and costs associated higher compared to bilateral seller, especially with, an Auction process may not be negotiations as a result of higher fees where a bidder is a worthwhile. Where significant external payable to advisers. The seller will factors may affect a transaction, such generally engage financial, legal and competitor and, as regulatory or competition issues other advisers in the initial stages particularly, where or third party consent requirements, to assist in establishing a strategy such competitor's the potentially protracted timescale for the Auction process .

5 Legal fees in resolving those matters may will inevitably be higher as the participation in the undermine a key benefit for the seller's lawyers are responsible for Auction is primarily seller speed. Further, where the preparation of the initial suite of for information such external factors exist, the documentation. Having to concurrently standardised documentation prepared negotiate with more than one bidder gathering. in connection with an Auction process also adds to the overall costs of the may be impractical or impossible for advisers for the seller. Buyer Perspective certain bidders. Of course, any benefits sought by the Given the multiple parties in an Auction seller from an Auction process will be to process , the wider dissemination of the detriment of the buyer.

6 Given the Auction process : Advantages confidential information also poses potential competition posed by other and Disadvantages a risk to the seller, especially where bidders, a potential buyer may end a bidder is a competitor and, up paying more for the target than it Advantages for the Seller particularly, where such competitor's would otherwise pay. Additionally, in Auction sales may provide a number of participation in the Auction is primarily order to appear attractive to the seller, a Advantages for the seller. In an Auction for information gathering. bidder may be willing to accept weaker process , the seller (together with contractual protections and avoid its investment bank or adviser) may The likelihood of the seller negotiating making substantive changes that are comprehensively survey the market to with more than one bidder may also not absolutely necessary to the sale and uncover more potential buyers.

7 Further, impose additional strains on the seller purchase agreement. Further, if there the seller controls the Auction process and the target's management. Further, are other viable bidders, a potential and can seek to create a competitive the knowledge of the sale alone may buyer risks a higher chance of not being environment in order to maximise its lead to negative consequences such selected as preferred bidder, resulting bargaining power. By encouraging the as loss of, or a deterioration of morale in wasted costs and management time. potential buyers to bid against one among, employees, or even loss of Finally, due to the seller's control over another, simultaneously negotiating business or customers.

8 For these disclosure of information, a bidder with more than one bidder and reasons, the seller often seeks may end up submitting a binding offer keeping confidential the number and to disclose information on a need without the benefit of the full picture identity of bidders, the seller may to know basis (including the fact of of the target and its business. For these achieve a higher price than otherwise the sale) particularly as any public reasons, it is in the interest of a bidder possible under bilateral negotiations. knowledge of the seller's failure to sell to obtain a period of exclusivity as The seller also produces the first draft the target would negatively impact soon as possible in order to redress the of the sale and purchase agreement, the reputation of the target and the balance and to proceed to the extent placing itself in a strong position to seller's ability to attract a good price in possible as if the transaction was a obtain more favourable terms and a subsequent sale.

9 Bilateral negotiation. EMPEA Legal & Regulatory Bulletin | WINTER 2017 13.. In addition to The Auction process : memorandum to the bidders. The process letter will set out the details of lawyers and Key Steps the Auction process , such as timings, accountants, sellers The timing and steps in any given procedures and next steps, and will Auction process will differ from almost always transaction to transaction. However, invite bidders to submit a non-binding indicative bid. Additionally, it often instruct a financial Auction processes tend to involve: identifies any regulatory, merger adviser in the early the distribution of an information clearance or other issues that may memorandum to bidders; a first round stages to prepare of indicative bids by the bidders; due reduce the likelihood of concluding a transaction in a timely manner.

10 In the information diligence and review of a draft sale order to provide the seller with the memorandum and and purchase agreement by bidders; a greatest level of flexibility, the process further round of bidding by a limited coordinate the number of bidders together with letter generally avoids setting out the criteria for evaluating bids and includes process by acting their comments on the draft sale and a statement that the highest price will as the point of purchase agreement; and negotiations not necessarily succeed. The seller will between the seller and one or more contact between preferred bidders. often also reserve their right to amend the seller and the or discontinue the Auction at any time. potential buyers.