Managing Multiple Bidders in the Sale of a Company
By Maarten J. Tuurenhout, Jacob Z. Neumark
Advantages of Engaging Multiple Bidders
When selling a company through a competitive auction process, a seller may have multiple bidders seeking to purchase the target company. Having multiple bidders compete to purchase the target company can be advantageous to the seller for several reasons.
First, it can result in a higher price paid for the target company if the seller makes it known that multiple bidders have submitted serious offers, by initiating a bidding war.
Second, it creates leverage for the seller and uncertainty for the bidders, potentially enabling the seller to demand more favorable contract provisions from the bidders. For example, a seller may demand more favorable or no indemnity clauses, purchase price adjustments, and many others. Such leverage may also give a seller the ability to accelerate the timetable of the transaction by requiring the signing and closing to occur more expeditiously.
Third, it may provide protection to the seller’s board of directors from shareholder suits alleging that the directors did not satisfy their Revlon duties. To comply with Revlon duties in the sale of a company, the company’s directors must show that they secured the best value for shareholders in the sale. In a shareholder suit based on a violation of directors’ Revlon duties, the fact that they engaged multiple bidders and pitted the bidders against each other for the highest price and most favorable terms in the sale of the company would be an important element of the directors’ defense.
Finally, having multiple serious bidders engaged in the sale process also may provide a built-in fallback buyer if the initial preferred bidder backs out of the transaction. While utilizing another bidder as a fallback option may strip the seller of some of the aforementioned leverage, the ability to sell the company to a second interested buyer can serve a valuable purpose, especially for a motivated seller.
Difficulties in Managing Multiple Bidders
Sellers typically want to shorten the sale process to ensure deal certainty. In slow-moving deals, managing multiple bidders may not pose many issues, but when engaged in a fast-paced transaction where the seller is motivated to sign and close the transaction quickly, having multiple bidders can pose several difficulties. Engaging multiple bidders forces the seller to manage different purchase agreements and different sets of disclosure schedules. While the seller likely sent the same auction draft purchase agreement and disclosure schedules to all of the potential buyers, the markup of the purchase agreement that each potential buyer returns to the seller will differ, potentially significantly. Reviewing different purchase agreements simultaneously forces a seller to have its deal team, counsel and other advisors review different provisions in multiple purchase agreements in a short time frame.
Engaging multiple bidders also poses challenges in being responsive to such bidders’ due diligence requests. While a seller may have populated a virtual data room with all of the documents that the seller anticipated the bidders to need, bidders oftentimes have supplemental due diligence requests, which can require the seller to track down additional documents. Having multiple bidders multiplies the number of supplemental due diligence requests being made, putting a heavy burden on the seller and its counsel to be responsive to the bidders’ requests, as well as often requiring multiple due diligence calls and management presentations. Engaging multiple bidders with different document requests and motivations for purchasing the target company can also cause the seller to set up and manage different data rooms, a potentially challenging and tedious task during the sale of a company.
Engaging multiple bidders can also pose confidentiality concerns to the selling company. The more bidders engaged in the auction, the more parties who have access to the selling company’s information. While a seller may try to limit its exposure by only sharing the minimum amount of information needed at each step of the auction, this approach can slow the sale process and frustrate bidders who wish to conduct due diligence expeditiously.
Engaging multiple bidders also places a burden on the seller to take time to meet with multiple potential bidders. Each bidder likely requires a separate management presentation, and separate calls or meetings with the seller’s counsel. Furthermore, bidders may request access to the target company which could force the seller to devote time to ensure that bidders are given appropriate access to the company’s operations.
Potential antitrust challenges can also make engaging multiple bidders difficult to manage. Having multiple bidders in the auction process increases the chance that there are both strategic and financial bidders, which can cause some challenges to organizing the information shared with the bidders. Bidders are usually classified as strategic or financial buyers. Strategic buyers operate or wish to operate in the same industry as the target company, while financial buyers, which are often private equity firms, seek to improve the operations and financial condition of the target company in contemplation of an eventual sale or IPO of the target company. The status of the buyer as either a strategic (with overlapping activities) or financial buyer (without overlapping activities) can have antitrust implications during the sale process. Antitrust laws typically are stricter in limiting a seller from sharing certain information, such as price and customer information, with (i) a potential strategic buyer whose business overlaps with the business of the selling company and (ii) a financial buyer that already owns a portfolio company whose business overlaps with the business of the selling company, to ensure that the seller and the bidders do not violate antitrust prohibitions. Furthermore, sellers should be reluctant to share competitively sensitive information with any potential bidders that are (potential) competitors to avoid such bidders using such information to their advantage if they ultimately do not end up buying the company. Therefore, engaging bidders classified as strategic buyers may require the seller to review all the documents it provides more carefully than it otherwise would have, to redact any competitively sensitive information, and if sharing of such information is required, to share such information in a separate data room to which only the bidder’s counsel, advisors and personnel not active in day-to-day operation or commercial decision-making of the bidder have access (so called “clean teams”). This can be an arduous and time consuming process for the selling company and its counsel, and may lead to back and forth between the parties on the necessity of certain redactions.
Finally, bidders may be unwilling to spend a large amount of funds and resources on due diligence and negotiating transaction documents without being granted exclusivity by the seller. The amount of leverage that the seller has in this respect largely depends on the attractiveness of the target company. To reduce a bidder’s uncertainty and cost burden (especially if multiple bidders are unwilling to proceed without exclusivity), a seller can offer to cover (a portion of) the bidders’ due diligence costs. Such payment would be due if the seller ultimately enters into a transaction for the sale of the company to another bidder. While this is a cost burden for the seller, it may well be worthwhile to continue to negotiate with multiple bidders to keep such bidders honest on timing to closing and purchase price.
Strategies for Managing Multiple Bidders
While some challenges posed by engaging multiple bidders are unavoidable, others can be managed in ways that allow the seller to efficiently and effectively manage a sale process with multiple bidders. There are steps that a seller can take before and after the final bidders are chosen to ensure a smooth sale process. Before selecting final bidders, a seller can organize transaction documents to limit the work needed to be done once the final bidders are selected. While soliciting initial bids, a seller can ask for feedback on potentially problematic terms and disclosures so that the seller can prepare responses and counteroffers to potentially problematic terms. This can also help the seller prepare to adjust the purchase agreement, and craft model disclosure schedules with an idea of what to prepare for when they receive buyer markups.
After the bid drafts of the purchase agreement are submitted, a seller can circulate a uniform composite response to all of the bidders remaining in the process. This involves taking the comments of all the bidders that the company is comfortable with and rejecting those with which it is not. All of the bidders are then told that the seller is sending the same contract to all of the remaining bidders, each of whom will see that some of their comments were accepted, some were rejected, and that some bidders may have even received more favorable terms that they did not ask for. This tends to streamline the process since the seller does not need to mark up and negotiate multiple drafts of the agreement. It can also instill fear in the bidders because they see that the seller is making unprompted concessions, which signals to bidders that there are other interested bidders who have submitted competing purchase agreements.
Prior to selecting the final bidders, the seller can try to determine whether a buyer with competitively overlapping activities will be a final bidder prior to populating the virtual data room. If it is likely that such bidder will be a final bidder, the seller can redact competitively sensitive information while reviewing each document that gets shared with the bidders and prepare a “clean team only” data room. While doing so, the seller can save clean copies of the documents if there would not be an issue with sharing them in full to a buyer without competitively overlapping activities. Preparing these redactions in advance can help prevent reviewing sensitive documents late in the sale process.
In preparing the disclosure schedules for the bidders, a seller should prepare in advance a thorough set of disclosure schedules that corresponds with the initial draft of the purchase agreement. The more care and attention to detail in advance of the auction, the more efficiently the disclosure schedules can be revised once the final bidders are selected. Once the final bidders are selected (often primarily on the basis of purchase price and certainty of closing), the seller should analyze the marked-up purchase agreements provided by the bidders and identify the purchase agreement with the most suggested changes. Once the seller identifies the purchase agreement with the most changes, disclosure schedules should be prepared to respond to that purchase agreement. Subsequently, the seller should identify any changes to the other purchase agreements that were not addressed when preparing the updated disclosure schedules. Once this exercise is complete, the seller should have all of the information needed to populate the disclosure schedules of the winning bidder. Further, it is advisable for the seller to – as much as possible – stick to a uniform set of threshold amounts and look-back periods for the representations and warranties that the seller is willing to give to each bidder to avoid having the relevant principals at the seller review the representations and warranties and applicable disclosure schedules.
Once the marked-up purchase agreements are submitted, it is important to compare the varying terms in the purchase agreements. To do this in an organized fashion, once the marked-up purchase agreements are received, the seller’s counsel should draft a matrix comparing the purchase agreement mark-ups to one another by showing the differences in each section of the agreement. A traffic light coloring scheme can be used for ease of review by the seller to alert them to key issues presented by the various marked-up purchase agreements. This allows the seller to easily compare the varying terms in the purchase agreement, and to target discussions and negotiating efforts.
While there are certainly advantages in engaging multiple bidders in a sale process, it is not without complications. However, advanced planning and adherence to a thorough and organized process should ensure that the seller maximizes the benefits of engaging multiple bidders while controlling the potential pitfalls.