M&A: bidding procedure opens up opportunities for investors and sellers

German companies are much sought after. Therefore the owners are currently able to realise high selling prices. The bidding procedure has proven itself in the M&A to attract the largest number of potential buyers. What should investors be aware of?
Those who wish to dispose of a company are firstly faced with the question of how to organise an efficient selling process with a legal design which is advantageous. It is in the interest of the seller to address as large a circle of potential buyers as possible in order to achieve an adequate price without having to prematurely make the disposal of his company public.
In this respect the bidding procedure has proven itself. Most of the bidding processes in the course of such an M&A transaction are managed as a so-called controlled bidding procedure (limited auction). These processes are characterised by the seller defining a limited circle of bidders. In the course of the procedure this circle is gradually reduced until a purchase contract can be finalised with a selected bidder.
Whereas in the past the bidding procedure was common with larger and predominantly international company disposals, in the last 10 to 15 years the procedure has also established itself for medium-sized transactions.

Sequence of a bidding procedure

A bidding procedure has a number of stages. Firstly, an M&A consultant is engaged in a preparation stage to organise the process, take up subsequent contact with potential bidders and guide the bidding procedure for the seller into the preliminary stage. In parallel, lawyers prepare the necessary legal documents such as the so-called data room rules for the later data room.
In this stage the seller should remain anonymous to the potential bidders and therefore the M&A consultant acts as an intermediary. In consultation with the seller the M&A consultant draws up a list of potential buyers which are sent a short presentation of the target company in the form of a so-called teaser. This document contains the first general information in an anonymous form about the target company.
If there is interest from the prospective bidders, a non-disclosure agreement is signed. After that the bidder receives a so-called process letter which defines the further procedural steps and organisational aspects and includes a detailed description of the target company (Information Memorandum). In certain cases it may be advantageous for the seller to carry out vendor due diligence in order to analyse and examine the target company in financial, tax and legal terms. This has the advantage of removing possible problems in the preliminary stage and as a result to be able to make a consistent amount of information available to bidders on the basis of the due diligence reports. As a result, the liability of the seller is reduced or even partly excluded.
Each bidder is then requested at this stage to submit a non-binding, indicative offer on the basis of the framework defined in the process letter to the seller. The defined framework enables the comparison of the offers submitted by the different bidders.
In a subsequent second stage the circle of bidders is usually reduced by taking the indicative offers into account. The remaining potential buyers are granted access to a data room which is frequently made online via special access rights, i.e. a virtual data room, which contains detailed information on the target company. This enables the bidders to carry out their own due diligence and establish a solid basis for a purchase decision. The bidder receives the possibility to ask questions in a co ordinated process directly to the seller and his advisors. In addition, management meetings are agreed which then take place.
Finally, the bidders receive a sale and purchase agreement drawn up by the seller which is placed in the data room. The remaining bidders are requested within a limited period to send a binding offer for the purchase of the company together with proposals for amendments to the draft purchase contract. The binding offer should, depending on the method of determination, usually include the specific estimation of the bidder for the value of the enterprise, the purchase price (equity value) after deduction of all net financial liabilities (net debt) and its composition.
Only a few bidders are invited to participate in the third and final stage. They receive a preferred bidder status and obtain access to further confidential information which was not communicated in the previous stage and take part in the final part of the negotiations. Exclusive negotiation rights are granted to a bidder only for a limited period of time. Then the fully negotiated purchase contract is concluded with the successful bidder.

Advantages and disadvantages of the bidding procedure

The competitive situation created by the bidding procedure has the advantage of improving the price and conditions of sale. From the point of view of the seller, further advantages of a limited auction are the low dependency on certain potential buyers with the resulting strengthened negotiating position, in particular in relation to the selling price and the restricted submission of guarantees and exemptions which are always demanded by buyers.
The long duration of the procedure on the other hand is surely a disadvantage together with burden on management resources. However, the engagement of M&A consultants and lawyers in the preliminary stage considerably reduces the work involved for the company because with such a structured process a number of areas can be outsourced to professional advisors. Furthermore, there is a certain risk of the inappropriate use of trade secrets and the poaching of key employees of the target company through the receipt of the information in the data room which, however, can also not be completely ruled out with face-to-face negotiations. The gradual disclosure of information to bidders in steps serves to secure the bidding procedure against the issue of sensitive information.
From the point of view of the bidder the disadvantage is the missing overview of his own negotiating position due to a lack of information on the number and identity of the competitors. Furthermore, the procedure can run in an unfavourable financial way for the bidder as the bidder has depending on the stage when an exit is made from the procedure to bear the costs for advisors and other transaction costs, i.e. frustrated expenses. As a result, his bidding position is weakened.
At the same time the bidding procedure enables international investors to have an equal chance against domestic competitors. The contract is awarded to the most attractive offer with regard to market opportunities and price and personal contacts play a subordinate role in the selling process compared to face-to-face negotiations.
In spite of certain disadvantages, primarily for the buyer, the limited auction takes well into account the specific requirements and special points of the disposal of a company because the advantages are clearly in favour of the seller.


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Dr. Oliver Schmitt


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