June 9, 2005
Getting a Piece of the
Looks like more and more companies these days are being sold through an auction process. With strategic buyers coming back with a vengeance, and buyout shops – who despite already sitting on mountains of “dry powder” – trumping each other with new world record funds (for example, Goldman’s recent $8.5B fund closing in April which topped Carlyle’s $7.85 fund closed in March), and with hedge funds “converging” into the buyout space, it’s safe to say that we’re in a seller’s market.
On one hand, strategic as well as financial buyers generally don’t like being a competing buyer in an auction. (Ah yes, the dreaded “Winner’s Curse”). On the other hand, whether it’s a Fortune 500 divesting a business unit or even a financial sponsor seeking an exit for a portfolio company, an auction seems to be the best environment to stir up competitive bidding to take advantage of a seller’s market.
With auctions being a fact of life in today’s deal environment, I thought it’ll be interesting (at least to me) to think about some recent developments in auctions:
1. Virtual Data Rooms. No, I’m not talking about eBay. I’m talking about online versions of those paper filled document rooms typically guarded by our trusty and fearsome first year associates. These VDRs (or sometimes, called EDRs for Electronic Virtual Data Rooms) seem to be popping up more and more in auctions in the US and abroad. There are third party providers like:
There are even proprietary systems housed on law firm extranets.
Some of the advantages of VDRs:
· 24/7, anywhere-in-the-world access via the internet
· VDRs are password protected, with some more sensitive documents further fire walled for even more limited set of eyes, even view-only access
· can easily accommodate multiple bidders simultaneously
· search features
· ability to monitor usage on a per-document basis
On the other hand, some disadvantages include:
· 24/7, anywhere-in-the-world access via the internet – for hackers, i.e., is anything truly hack proof?
· Cost, with it making sense for bigger deals, especially with multiple bidders
· If you’re a bidder, do you really want seller knowing what you looked at (and otherwise, figure out what’s important to you?)
For more on VDRs, check out www.deallawyers.com/Member/Columnists/Interviews/2005_02_08_Bifulk.htm
2. Staple Financing. This is the wonderful development brought to us by your friendly “Conflict? What conflict” investment bankers, who, in addition to representing seller in an auction, benevolently offer to provide the financing to buyer. This pre-arranged financing package is commonly called “staple financing.” (Do you think bankers are subliminally sending a message by using “staple”, as in “What’s the staple of an investment banker’s bonus? Fees and more fees…). The popularity of staple financing is surging in today’s auction-packed market.
Bankers pitch staple financing as an efficient way to get the target sold because the financing’s in the bag (i.e,, no more financing contingencies or delays in buyer scurrying around to find money). Even if buyer doesn’t bite, the fact that a financing package is already in place show potential buyers that the deal’s finance-able (i.e., the target’s really worth seller’s rich asking price).
Conflicts? Did I mention conflicts? If the same banker’s collecting fees to sell the company as well as provide money to buyer, how comfortable can seller really be that its banker is truly looking out for seller’s best interest. (Hmm, let’s see: I make money on a success fee if I get target sold and I make money lending to buyer? Can you spell N-E-W-T-E-S-T-A-R-0-S-A??). If prospects for seller’s repeat business is low (i.e, the banker’s losing a client in the sale), what’s the likelihood that the banker’s licking his chops at the prospects of a new relationship as lender to buyer?
Fairness opinions get even trickier. Smart banks tell people to get a second (from another bank) fairness opinion when they’re sitting on both sides of the deal. Even smarter banks simply decline giving fairness opinions altogether.
It’s a question of allegiance. I’m sure no respectable banker would cross that line, but Eve’s apple is always out there.
3. Vendor Due Diligence Reports. From across The Pond comes this practice of seller engaging an independent (usually) accounting firm to provide a financial due diligence report on target. The reports are then offered to potential bidders as part of the information package in the data room. This practice is getting picked up by law firm on both sides of the Atlantic. See www.debevoise.com/db30/cgi-bin/pubs/Copy%20of%20PE%20Report%20Winter%202005.pdf for a good overview of the legal issues.
On the buy side, I’m not sure I’d tell a client that since there’s a VDD, there’s no need for further due diligence. On the other hand, it sounds like a great idea to streamline the sale process – and for law firms who provide the VDDs to get their piece of the auction.
If anyone has any other new developments in auction strategies, please feel free to share.