Surviving Auctions
Navigating the auction process has become nearly as important to dealmakers today as negotiating the deal
July 1, 2008
Proprietary deals do happen, although few buyers today can consistently count on it. As an alternative, the best investors have figured out a strategy to work within the auction process. While price is usually the differentiator that matters most, there are plenty of nuances bidders need to keep in mind. Have they established a reputation as a trustworthy bidder? Are they bringing resources to the table that might matter? Does the deal structure keep management incentives aligned with the investors?
Price, of course, counts when it comes to determining who'll be involved in the final rounds of an auction, but when it's down to the final two or three, it's the other factors that may determine a winner.
Mergers & Acquisitions Journal invited several top investors and players in the space to discuss their approach when it comes to mapping out a strategy. The following is an edited version of the discussion.
Mergers & Acquisitions: We hear so much about proprietary dealflow being the Holy Grail of investing, which seems to convey a negative connotation around auctions. We've even titled this roundtable "Surviving Auctions," which would reinforce that. As a jumping off point, what is behind this tendency in the deal community to view auctions in a bad light?
Najjar: For me, the issue with auctions is a question about time. It's about trying to be conscious of the resources and people involved in pursuing a bid, so you have to be selective. What we try to do is pursue only the companies that we truly want to own, and then we'll go really hard and aggressively at those and try to prevail at a price we can be comfortable with.
The reason you'll hear people say they "survived" an auction, is because you'll spend six weeks going after a deal only to end up in second or third place. You've invested a lot of resources, and emerge on the other end with nothing to show for it. That's the challenge in auctions: you have to make sure if you're going to participate that you're only pursuing the ones that you really want to win.
Woods: Every auction is different. A lot of investment banks and intermediaries have different strategies in the way they think about the process. Some run a very streamlined process and only go after a few people, while others run a very broad process. Some situations are focused purely on price, while others might have some non-monetary considerations that can be fleshed out as part of the process.
The trick for all of us is to figure out the ideal situation where something else, other than money, matters. And that's the hard part. You comb through hundreds of books, look at 600 to 700 potential deals in a given year, to try to find those one or two situations in which there might be a match.
Feuerstein: It's hard to build a business based purely on proprietary dealflow, especially in this market. About 10 or 15 years ago that might have been possible, but today auctions are a necessary part of the middle market, and figuring out how to win those auctions is critical.
We spend a lot of time trying to figure out how to play effectively in these processes. It starts with finding situations where we can add value to a company, so when the process comes down to its final strokes, we are comfortable winning. That's really where we focus our time. Whether it's a wide process or a narrow process, we want to make sure it's something that we're going to be able to grow out over time.
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