The M&A auction explained

Apr 26, 2024

financial papers on a desk
financial papers on a desk

An M&A (mergers and acquisitions) auction process, also called a sale or bid process, is a method used to sell a company or a significant portion of its assets to the highest bidder. The company's management team will typically hire a sell-side advisor (corporate finance professional or investment banker) to help them run the auction process. The advisor will create a confidential information memorandum (CIM) that provides information about the company, such as its financial statements, its business model, and its strategic plan. The CIM will be sent to potential buyers, who will then be invited to submit bids. 

 

The auction process is typically run in a series of rounds. In the first round, potential buyers will submit non-binding bids or letter of intent, which outlines the basic terms and conditions of the proposed transaction. In the second round, potential buyers will submit binding bids followed by a due diligence period, during which buyers conduct a thorough examination of the company's financial and operational information as well as other aspects such as governance and strategic development plans. Once the due diligence period is complete, the company will typically invite a select group of potential buyers to submit bids for the company or its assets. These bids will typically include the purchase price, financing terms, and any contingencies that the buyer may have. In the third round, the company’s management team will then evaluate the bids and select the one that offers the best overall terms and conditions, as the winning bid. The winning bidder will then sign a definitive agreement to acquire the company.

 

In some cases, an auction process may be organized as an open auction, where multiple potential buyers are invited to submit bids. This can increase competition and potentially lead to a higher purchase price. In other cases, the auction process may be organized as a closed auction, where only a select group of potential buyers are invited to participate.

 

Few examples of M&A auction process in the real world are:

 

The acquisition of Kraft Heinz Co. by Berkshire Hathaway Inc. and 3G Capital in 2015: This was a closed auction, where only a select group of potential buyers were invited to participate. Berkshire Hathaway and 3G Capital ultimately submitted the winning bid and acquired the company for $28 billion.

 

The acquisition of Freescale Semiconductor Ltd by NXP Semiconductors in 2015: This was an open auction, where multiple potential buyers were invited to submit bids. NXP Semiconductors ultimately submitted the winning bid and acquired the company for $11.8 billion.

 

In January 2023, the technology company Twitter was sold to Elon Musk in an auction process. The final bid price was $44 billion. The investment bank Goldman Sachs was hired to help find potential buyers. A confidential information memorandum was sent to a list of potential buyers, including Musk. 

 

The M&A auction process is a complex and competitive process. It is important to have experienced professionals on your team to help you run the process and to get the best possible outcome.

Here are some of the advantages of using an M&A auction process:

  • It can help to maximize the value of the company being sold.

  • It can help to attract a wide range of potential buyers.

  • It can help to ensure that the sale process is fair and transparent.

 

Here are some of the disadvantages of using an M&A auction process:

  • It can be a time-consuming and expensive process.

  • It can be a stressful process for the company's management team.

  • It can be a disruptive process for the company's employees.

 

In summary, M&A auction process, usually run by the advisory firm hired by the seller, is a method used to sell a company or a significant portion of its assets to the highest bidder. The process typically begins with a letter of intent, which outlines the basic terms and conditions of the proposed transaction, followed by a due diligence period, where potential buyers conduct a thorough examination of the company's financial and operational information. Once the due diligence period is complete, the company will typically invite a select group of potential buyers to submit bids for the company or its assets, and then evaluate the bids and select the one that offers the best overall terms and conditions. The process can be organized as an open auction or closed auction.

 

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