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. 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. 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
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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. 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. 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 – i.e. 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. 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. 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. 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. bilateral negotiation.

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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. 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. Prior to an auction process, however,

The information memorandum is
the seller has a substantial amount
The involvement of of preparation. In addition to lawyers
a document that aims to contain
an investment bank and accountants, sellers almost always
reasonably sufficient information
about the target to elicit meaningful
will lend credibility instruct a financial adviser in the early
bids from potential buyers, such as:
stages to prepare the information
to the process and memorandum and coordinate the
a description of target’s business,
enable the seller to process by acting as the point of
industry and history; the principle
assets; historical financial information
reach a wider range contact between the seller and the
and future projections; information
potential buyers. The involvement of
of potential buyers an investment bank will lend credibility about management and employees;
through the bank’s to the process and enable the seller and depending on sensitivity of the
transaction, information about key
contacts. to reach a wider range of potential
customers and contracts.
buyers through the bank’s contacts.
Of the likely bidders, the seller assesses
whether there may be any particular Following submission of indicative bids,
constraints to successfully concluding the seller and its advisers will assess the
a transaction that may arise. To that offers and will decide which bidders to
end, the seller will likely consider invite to participate in the next round
the activities of a bidder and any of bidding where the seller will make
combined market share for relevant available further information and the
products or services that may raise remaining bidders will conduct their
competition or anti-trust concerns; due diligence investigation.
any external approvals required by
a bidder which may slow down the Due Diligence, Site Visits and
transaction; any required employee Management Presentation
consultations; any concerns by a bidder In preparation for the next stage of the
of post-completion operations; and the auction process, the seller generally
transaction structure. carries out in advance due diligence
on the target to identify, and resolve
Information Memorandum and if possible, any issues in order to avoid
Indicative Bids any undue delay to the process. Unlike
After potential buyers enter into in bilateral negotiations, where a buyer
a confidentiality agreement with often requests the information that
the seller, the auction process it needs to assess the target and its
commences upon the distribution of business, in an auction process the
the process letter and the information seller controls the disclosure process,

14 © 2017 EMPEA
balancing between disclosing as little of available funds and a cooperative Some companies are selling down their
as possible and disclosing enough to bidder may be equally important, interests in a particular market or sector
ensure that a bidder may adequately demonstrating a bidder’s commitment in order to raise capital or to focus
make its assessment. To speed up to closing the transaction. As such, a on their strengths in other markets or
the process, and to avoid any delays, bidder must be strategic and consider, sectors. This presents opportunities
the seller often produces a seller’s outside of price, how it approaches for companies to enter or expand in a
due diligence report, together with the sale and purchase agreement. particular market or sector.
other independent reports such as Typically, bidders submit a mark-up of
an accountant report, which contains the draft sale and purchase agreement No matter your company’s goals in
all the material information that a or a key issues list. Submitting a acquiring or disposing of an asset, the
bidder would reasonably require. To comprehensive mark-up of the draft M&A auction process is one which has
aid in the disclosure of information sale and purchase agreement may advantages and disadvantages for both
in a controlled, efficient and timely demonstrate commitment to the sellers and buyers. Financial advisers,
manner, the seller generally uses an process. However, bidders should lawyers and accountants should be
online dataroom – although, some limit comments to substantive matters engaged early in the auction process,
sellers choose to use a physical (such as risk allocation provisions) no matter if you are the seller or a
dataroom where information is, or the and avoid any stylistic or unnecessary bidder, in order to assist your company
circumstances of the auction process changes. A heavy mark-up or inclusion to succeed in an auction process and
are, particularly sensitive. of open-ended conditions may give to proactively help your company to
the impression that a bidder may be manage the transactions complexities.
Again, in order to control the disclosure difficult in negotiations. Alternatively,
of information, the seller generally bidders may opt, or may be
prepares and scripts in advance site
About the Authors
requested, to submit a key issues list.
visits and management presentations This may be useful to focus the seller
Mark Davies is a
and bidders are also expected to and the relevant bidder on issues that Partner in King &
provide in advance any questions that raise the most concern for each of the Spalding’s Global
they may have. The seller’s advisers parties. Generally, if a bidder’s price is Transactions Practice.
are generally present to ensure that in the right range, the seller is unlikely
the seller handles the disclosure of to dismiss the offer as a result of an
information as planned and bidders over-zealous mark-up without Trinh Chubbock is a
do not raise any questions beyond the further discussions. Global Transactions
pre-set plan or make any unauthorised
Associate at King &
approaches to employees during any Upon the seller’s assessment of any Spalding.
site visits or management presentations. final bids, it will select a preferred
bidder (or preferred bidders). During
The seller often makes available at the final negotiations, the seller will try
this stage a draft sale and purchase to maintain the momentum to avoid
agreement and encourages bidders any delays and to resist any efforts
to review and comment on the
by the preferred bidder to introduce
agreement. The initial draft is
new points or to renegotiate accepted
almost always seller-friendly and will
points. On the other hand, a preferred
reflect the seller’s positions on key
bidder will see this as an opportunity
transaction terms, such as the form of
to conduct negotiations as much
consideration, conditions for closing,
as possible as if the process were a
the scope of representations and
bilateral negotiation. The successful
warranties and limitations on liability.
strategy will largely depend on the
parties’ respective bargaining power.
Final Offer and Negotiations
Following the due diligence exercise
and review of the sale and purchase Final words
agreement, the remaining bidders will Numerous companies are aggressively
be invited to submit their final offers using M&A to enter new markets and/
together with their comments on or new sectors. Other companies are
the agreement. The price is often the making acquisitions to increase their
determining factor; however, certainty market share.

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