3 questions to smart minds

Company sales: Exclusive agreement versus auction

For this 3 questions to Michael stone

Taylor Wessing
Photo: M. Stein | Taylor Wessing
23. Decem­ber 2014

While auction proces­ses for compa­nies were still the great excep­tion in Germany in the early 1990s, they are now a common proce­dure. With the profes­sio­na­liza­tion and inter­na­tio­na­liza­tion of tran­sac­tion support, the auction has estab­lished itself as the proce­dure of choice for many. — In the mean­time, howe­ver, a trend toward exclu­sive agree­ments is beco­ming noti­ceable again. What are the advan­ta­ges (disad­van­ta­ges) of not having an auction)?

For this 3 ques­ti­ons to Part­ner for private equity and M&A tran­sac­tions at Taylor Wessing in Frankfurt

1. Exclu­sive or non-exclu­sive — what are the advan­ta­ges of not holding an auction when buying and selling a company?
More and more frequently, we at Taylor Wessing see our clients fore­go­ing a struc­tu­red bidding process when selling a company. Mostly for good reason, because espe­ci­ally in the case of tran­sac­tions invol­ving medium-sized compa­nies, the imple­men­ta­tion of a struc­tu­red bidding process with seve­ral paral­lel bidders must be exami­ned very carefully; the effort and costs are often too high in rela­tion to the over­all process. Some­ti­mes the market is extre­mely narrow for indi­vi­dual compa­nies because of their high degree of specia­liza­tion, so the number of bidders is very limi­ted anyway. Last but not least, sellers and poten­tial buyers — at least after a certain point — simply want exclu­sive nego­tia­ti­ons with the other party. From the seller’s point of view, exclu­sive nego­tia­ti­ons have the advan­tage that if the process fails, confi­den­tial infor­ma­tion is only disc­lo­sed to one bidder. This is an important point, espe­ci­ally for medium-sized compa­nies. It is important to them that their inten­tion to sell does not become known in the market and possi­bly harm the company in its day-to-day busi­ness. Most importantly, the buy side often has an inte­rest in nego­tia­ting exclu­si­vely. On the one hand, the closing proba­bi­lity should be increased, on the other hand, no buyer wants to be over­ta­ken on the right.
2. Where are the stumb­ling blocks to fore­go­ing an auction?
The parties should enter into an exclu­si­vity agree­ment, whether as part of a letter of intent or in a sepa­rate agree­ment. The most important points that should be regu­la­ted here: The parties must agree on the dura­tion of the exclu­si­vity phase, a unila­te­ral or bila­te­ral arran­ge­ment of the exclu­si­vity, and so-called break fees or cost-bearing rules in the event of a breach of exclu­si­vity. Both parties should attach great importance to making the exclu­si­vity agree­ment as speci­fic and as precise as possi­ble. As soon as the issue of exclu­si­vity has been bindin­gly clari­fied in addi­tion to other “run-up” issues, the parties can focus with full vigor on the further steps towards conclu­ding a successful deal.
3. Is this the end of the auction as a sales process?
Certainly no. Espe­ci­ally for medium and large tran­sac­tions, it is important to know all the opti­ons in terms of poten­tial buyers. If the seller commits to an inves­tor too early, he and the company will miss out on valuable oppor­tu­ni­ties. Conver­sely, howe­ver, price is not always the decisive argu­ment, as too high a price can inhi­bit the company’s deve­lo­p­ment oppor­tu­ni­ties and indi­rectly damage the repu­ta­tion of the previous owner. Thus, the seller must always ask hims­elf which proce­dure is best suited for his tran­sac­tion: the broa­der market approach through a struc­tu­red bidding process or the fast and uncom­pli­ca­ted vari­ant within the frame­work of an exclu­sive situation.

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