M&A Vocabulary – Experts Understand: “Auction Sale”

The course of an acquisition process up to signing heavily depends on whether the initiative to start negotiations comes from the seller or the investor. The latter usually prefers to conduct exclusive negotiations with the seller to individually negotiate the acquisition terms, undisturbed by third-party offers. If, however, a new co-investor or acquirer is sought, it is often more attractive for the seller to pursue an “Auction Sale” or “Bidding Procedure.”

The Auction Sale is nothing more than a bidding process in which interested parties have the opportunity to be awarded the acquisition of the target by submitting the most attractive offer possible within a structured sales process, with the help of an MA advisor.

The Auction Sale, known from insolvency law, was originally the first choice primarily for large transactions where financial investors, e.g., from the private equity sector, were to be addressed and compete with each other. However, due to its considerable advantages for the seller, it is now frequently encountered in transactions involving medium to larger Mittelstand companies and with strategic investors from the industry.

Auction Sale Process

The call for bids – initially still under confidentiality regarding the target’s identity – can either be directed at a very broad range of interested parties (“Broad Auction”), where numerous interested parties, mostly from the financial sector, are approached by the MA advisor via appropriate platforms and contacts, or at a pre-selected group of potential interested parties, consisting of a few specifically contacted (and often more strategic) investors (“Targeted Solicitation” or “Limited Auction”).

After initial satisfactory contact and exploration of interest by both sides, interested parties receive further information about the target and the planned transaction framework, as well as deadlines for the individual procedural steps, upon signing a Non-Disclosure Agreement in an Information Memorandum.

Based on this, interested parties are requested to submit a non-binding offer, allowing the seller to decide which interested parties should be immediately rejected and which should gain access to detailed information for conducting a due diligence.

The data room prepared for the due diligence may also already contain a vendor due diligence report; conducting such a vendor due diligence beforehand gives the seller the opportunity to identify potential problems in advance – and, where possible, to resolve them in the interim or prepare for corresponding negotiations or price reductions.

It is also common to provide the draft purchase (pre-)agreement to be worked on by the prospective buyer. Depending on the procedural requirements, the contract draft may be unchangeable, so that the interested party can only mitigate potential risks or disadvantages through the price offered; in this case, as in an auction, the price offer alone is decisive for the award. Often, however, in the bidding process, the prospective buyer also has the opportunity to amend the contract draft according to their due diligence findings, and, for example, to demand special closing conditions or reps warranties, or to introduce additional obligations for themselves (e.g., employment guarantees), which are then considered by the seller alongside the price offer when deciding on the award or the promotion of the interested party to the next selection stage.

Following this decision by the seller, negotiations are usually limited to a very small number of interested parties or even continued exclusively. It is also quite common to introduce an additional due diligence stage only within this reduced group of participants, where more sensitive information, e.g., about business partners or key employees, is disclosed.

Conclusion

Although the MA advisor, almost indispensable in an Auction Sale, demands a considerable fee and the process, once communicated, leaves little room for spontaneous individual adjustments, the Auction Sale offers the seller a number of advantages that explain its increasing popularity in transactions initiated by the seller:

• the ability to define and narrow down the circle of participating prospective buyers from the outset
• leading the sales process by dictating the procedure and the contract draft
• reduced administrative effort thanks to the support of the MA advisor
• greater predictability of closing by setting clear deadlines for the completion of individual phases
• an increased likelihood of reaching closing, even if one of the negotiating partners withdraws
  and last but not least
• achieving a better sales price due to competition among prospective buyers.

And even if the advantages of the Auction Sale clearly lie with the seller, there can also be benefits for prospective buyers in this process, allowing them to “get their foot in the door” in the first place – meaning to be approached for projects they had no prior knowledge of or suitable contact for, and then to be able to convincingly present their own offer within the process.

From the newsletter
“Corporate Law, Deals & Capital Markets”       See our
M&A Vocabularies