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Marketing and Approaching Potential Buyers
There are numerous sale strategies that an investment banker and his client might devise. However, broadly defined they tend to fall into four types:
1. Public Auction: In this approach, a public announcement is made indicating that the company is “exploring strategic alternatives” with respect to the business. This announcement is often made at the point when the company has just completed the descriptive selling memorandum. The purpose of the announcement is to alert the entire business community that the company is considering the sale of the business and that any interested parties should step forward and contact the company right away. One of the business reasons for making such an announcement, aside from the possible legal requirements, is that the number of prospective interested acquirers is quite broad and a public announcement is determined to be the best way to adequately address the full range of potential acquirers. Generally, this type of approach will elicit numerous interested parties, assuming that the business is not in distress. A major negative associated with making a public announcement is that it tends to increase the amount of disruption caused to the business.
A two-stage auction process will probably be used to maximize value in a public auction. In a two-stage auction the investment banker contacts a number of prospective buyers at the same time as the public announcement, and distributes descriptive selling memorandums to qualified buyers, who sign confidentiality agreements. The descriptive selling memorandums will be accompanied by a cover letter indicating that indications of interest (“indications”) are due on a certain date. Once indications are received, the company, in consultation with its investment banker, will narrow down the list of prospective buyers that will be permitted to continue.
The companies allowed to continue to the second round will be given access to management, a tour of the business’ facilities and access to a data room of information about the business. Second-round participants will also be given a draft purchase agreement, which they will be asked to review and mark up for any proposed changes that they would require. The second round will culminate on a certain date, when bidders will be required to put forward fully financed offers. Once these offers have been submitted, one or more bidders will be selected to negotiate final definitive purchase agreements.
The purpose of selecting more than one bidder at this juncture is to maintain the competitive spirit of the process while the final agreement is being negotiated. Once the final agreement is signed a closing typically would occur shortly after the expiration of the applicable waiting periods.
During the 1980s, the two-stage auction process was used for the majority of sales handled by Wall Street investment banks. Today the two-stage auction process is still used in a majority of sales handled by Wall Street firms. However, this process should not be used if the business to be sold is particularly complex or the financial structure of the transaction is very unusual.
2. Controlled Auction: In a controlled auction, the number of prospective acquirers that are contacted is limited to some extent and no public announcement is made concerning the availability of the business. Generally, the two-stage auction process is used to narrow down the number of prospective buyers.
One of the realities that managements fail to adequately anticipate is the fact that the business being sold will generally become common knowledge to many industry players, even if the controlled auction involves a limited number of prospective buyers and they all sign appropriate confidentiality agreements. This event must be planned for.
3. Targeted Sale: In a targeted sale, a very limited number of strategic buyers are approached concerning their interest in acquiring the business. No public announcement is made concerning its availability.
A targeted sale strategy is chosen when it is believed that the list of prospective buyers that could pay an acceptable price is quite small. If the targeted sale strategy is chosen, it is unlikely that a two-stage auction process will be used. It is more likely that a single-stage process will be utilized.
In a single-stage process each party contacted that expresses an interest will be given a descriptive memorandum upon signing a confidentiality agreement. Once a party has reviewed the descriptive memorandum, it will be given access to management, the facilities and a data room if it indicates that it could reach a valuation range that is acceptable. An alternate process that is often used is to let all targeted buyers who are interested proceed to the due diligence phase without indicating where they are on valuation. The goal of this approach is to get prospective buyers more interested in the business before requiring them to indicate their valuation thinking.
The process in a targeted sale is often more open-ended than either the public auction or the controlled auction. While many times the targeted sale works like the second round of a two-stage auction, there are also instances where there is no definitive time frame for submission of bids. This reflects the thin nature of the interest for the business.
4. Negotiated Sale: In certain limited circumstances, there is only one buyer for a particular company. This typically occurs in situations where the business to be sold is physically adjacent to the prospective buyer’s operations, fits perfectly into a prospective buyer’s portfolio of products or is jointly owned with the prospective buyer and contract rights give the prospective buyer the right to buy the interest he/she does not own. In these circumstances, a negotiated sale strategy is often chosen.
When a business is to be sold in a negotiated sale, there are generally no strict procedures laid down. Rather, negotiations begin and proceed at a fairly leisurely pace, reflecting the seller’s desire not to appear overanxious to the buyer. If it is at all practical, the seller should attempt to bring in a competitive bidder or “stalking horse” to move the process along more quickly. In addition, it is highly likely that such a move would improve the offer price from the likely buyer.
Once the strategy for selling the business has been agreed upon, the company and its investment banker can finalize the time and responsibilities schedule. This document lays out the time frame for completing the sale, the individual tasks that must be performed to reach a successful conclusion and who is responsible for completing each task. However, a deal can be completed in as shorter time frame than this schedule suggests. Generally, sales take between three and nine months from the date the process is started.
Preparation of Descriptive Memorandum
During the preparation of descriptive memorandum phase of the sale process, the investment banker conducts an extensive investigation of the business. The investment banker’s investigation is designed to provide an understanding of the business and the industry it operates in. This includes the current set of dynamics affecting the industry, the strengths and weaknesses of the business to be sold, the outlooks for both the industry and the business and the quality of the management team running the business.
Based upon the review of the business, the investment banker will prepare a first draft of the descriptive selling memorandum. This draft will typically be refined over a series of meetings and result in a document that fully describes the present operations of the business. More importantly, the document should describe in some detail all of the significant opportunities for expanding the business from its present scope. Such opportunities include the ability to produce other products with existing facilities or market additional products through present channels of distribution.
One of the important decisions to be made about the descriptive memorandum is how complete it should be. Should it be merely a “teaser” that only gives a broad overview of the business, or should it be a comprehensive memorandum that addresses all the major issues/opportunities facing the business? The answer generally depends on the expected audience for the document and how knowledgeable they are about the company and its industry. It also depends on how much confidential information the selling company thinks should be released in an initial memorandum that is widely distributed.
Approaching Potential Buyers
During this phase, potential buyers are contacted regarding their interest in reviewing the descriptive selling memorandum. Generally, the investment banker will call an appropriate official at each potential buyer’s organization. Depending on the circumstances, this may be the chief executive officer, the chief financial officer, the president/general manager of one of the subsidiaries, the corporate development officer, another corporate officer or its investment banker.
However, if the number of potential buyers is limited, the seller and/or its investment banker may personally visit with these buyers to present the opportunity face-to-face. Such an approach is designed to elicit a quicker, more direct response from the potentially interested parties than a mere phone call. The personal touch tends to give the prospective buyer a greater feeling that he can negotiate a transaction rather than just participate in a standard two-stage auction process. Assuming a prospective buyer exhibits interest in proceeding, a confidentially agreement is forwarded to the buyer immediately. Once this is signed, the process continues.
During the due diligence phase, prospective buyers are permitted access to management, the facilities and a data room. Typically, management of the business makes a presentation to all prospective buyers that outlines the business and its prospects in more detail than appears in the descriptive offering memorandum. In a two-stage auction, the amount of permitted due diligence is limited. In other circumstances, it can be quite extensive.
During this phase, prospective buyers are often given a draft of the purchase agreement that the seller is willing to sign concerning the sale of the business. The buyers review and mark up this draft with proposed changes. One of the investment banker’s primary responsibilities during this phase is to supervise the collection and dissemination of due diligence data. This reduces the burden on management and the disruption to the business.
Negotiating Definitive Agreement and Closing
Once the due diligence phase has been completed, final bids are requested for the business. Once the final bids are received, the seller, in consultation with its investment banker, will generally select one or more parties with which to negotiate a final purchase agreement, assuming there is some amount of negotiation necessary. These negotiations will focus on firming up the representations and warranties that the parties will agree to. Such negotiations often have an impact on the final price. After negotiating the definitive purchase agreement, if necessary, all applicable government filings will be made and closing will take place after the government clearances are obtained.
For the individuals involved, the sale of an electronics business is a very significant step and one that often requires much thought, preparation and planning, even prior to appointing key advisors. Timing is another key factor in generating a high level of interest and implementing a successful sale. The middle market electronics supply chain is diverse, not least because the key individuals will range from successful family business owners looking to retire, to highly driven, ambitious entrepreneurs seeking the next challenge, to private equity investors looking to realize value from an investment.
Raymond Carpenter is the managing member of Gulf & Pacific Group, LLC. He can be reached by clicking here.