Research

 

By Mark Davies, King & Spalding and Trinh Chubbock, King & Spalding

Mergers and acquisitions represent a key growth strategy for many corporations. The M&A landscape is becoming increasingly competitive and the balance of power is shifting further in favour of buyers. For attractive businesses, however, sellers may wish to make divestments through an auction process which is designed to elicit competitive bidding among interested parties to facilitate the sale of a business or stake in a company at the highest price and on the best possible terms. This article seeks to explore the auction process and discusses:

• the differences between a competitive auction and bilateral negotiations;
• the advantages and disadvantages of a competitive auction; and
• an overview of the key steps in an auction process.

Auction Process vs. Bilateral Negotiations

Business owners deciding to sell a company or business may choose to sell by way of bilateral negotiations or a competitive auction process. Unlike bilateral negotiations where a seller and a buyer negotiate directly, in a competitive auction, the seller seeks competing bids from potential buyers for the target. Further, in an auction process, the seller will carry out a substantial amount of work before the process is underway and, as a result, generally require the engagement of advisers in the early stages to prepare for auction launch. In bilateral negotiations, the buyer often provides a “shopping list” of requirements for the due diligence investigation. In an auction, however, the seller controls the disclosure process by limiting the scope of information made available and ensuring that disclosure is made in a controlled manner, usually through the use of a data-room. Finally, an auction process often involves an expedited transaction schedule.

There are circumstances, however, where an auction process is not suitable. If the business is structurally complicated or if the market sector is limited and there are only a handful of viable bidders, the additional complexity of, and costs associated with, an auction process may not be worthwhile. Where significant external factors may affect a transaction, such as regulatory or competition issues or third party consent requirements, the potentially protracted timescale in resolving those matters may undermine a key benefit for the seller – i.e. speed. Further, where such external factors exist, the standardised documentation prepared in connection with an auction process may be impractical or impossible for certain bidders.