The M&A environment in the U.S. is as heated as ever; and, while those of us in Middle Market Investment Banking more often than not represent sellers, we relish working with buy-side clients with well-defined missions and criteria.
We understand that the Holy Grail for any buyer is the one-on-one “negotiated” deal with a seller, where there is no sell-side advisor, no competition from other buyers, no hard-and-fast timetables, and the due diligence routine is very accommodating to the buyer. However, though these “proprietary” deals do exist, they are uncommon, especially for those sellers at or exceeding $5 million in EBITDA. Instead, the buyer should expect that any well-run, solidly profitable Middle Market company will be represented by an Investment Banker and sold through what we call in the industry, “the Process”.
The M&A market in the U.S. has been and continues to be fueled by very low “real” interest rates, exceptional amounts of cash in PE firms, hedge funds, and large corporations, and moderate-at-best macroeconomic (i.e. organic) growth prospects. Demand for good deals exceeds the available supply of good targets, and the sell-side auction-like process is an entrenched feature of our M&A market. Prospective buyers, particularly bargain hunters from offshore, can find the experience to be a challenge, wishing they had more control, less pressure to modify their offers, and general freedom from the constraints of “the Process”.
So, for the serious qualified buyer who enters the M&A market on an infrequent basis, how do they best adapt to and cope with “the Process”?
- Prepare for the Intensity – Internal champions of the acquisition must appoint, assign, and organize the key personnel needed to evaluate the target company as soon as the NDA is signed. An unprepared and insufficient team will be challenged to analyze materials, prepare documents, and meet the timetables.
- Respect the Timetable – Make a concerted effort to meet the key dates for submitting the Indication of Interest (IOI), attending the Management Presentation(s) & Tour(s), and producing the Letter of Intent (LOI). The seller will have made a major commitment, taken a measure of risk, and fairly expects timeliness on the part of the buyer.
- Meet Content Requirements for the IOI and LOI – The more specifically and fully a prospective buyer answers or addresses IOI/LOI content “asks”, the more credible the value of the offer will be deemed, as well as that of the buyer itself. In addition, the IOI/LOI should be written in a straight forward, clear-as-can-be style. If the structure of the bid takes several paragraphs to explain, it is too complicated.
- Develop Rapport with the Seller – Buyers must realize that the acquisition of a good company in the U.S. is a competition; and, therefore, potential acquirers must also sell themselves to the seller. Buyer attendees at every face-to-face interaction with the seller should be the most senior executives responsible for the acquired business post-close; and use every encounter as a chance to give a ‘pitch’ to the seller.
- Adjusting the IOI/LOI – With multiple bidders, there will be differences in submitted values, deal structures, terms, and conditions contained in the IOI/LOI. The seller will rightfully work to understand and resolve those differences through negotiations; and a buyer unwilling to “iterate” one or more elements of the IOI/LOI may be deemed unresponsive to “the Process” and remain or become uncompetitive.
- Finally…..hire an experienced investment bank – An advisor skilled on both sell and buy side engagements will provide sound counsel and firm guidance on efficiently navigating “the Process” and getting a best efforts bid in front of the seller.
Posted by Stephen Hauser.