M&A auctions. What’s not to like?
So, broad auctions. If you’re a buyer, what’s not to like? The selling company does all the heavy lifting in advance. They will hire an investment banker to value the business based on relevant comparables and multiples that best match the seller’s niche in the chemical sector. A glossy prospectus is prepared with the information a buyer needs, from financials to future opportunities for growth. Everything handed to you, on a plate.
Trouble is, the investment banker will see it as their responsibility to get the best price for their selling client. So tens, if not hundreds, of prospecti are mailed out. Suddenly it’s a very crowded market.
Pitfalls for the seller?
Good news for the seller, surely? Well, possibly. Yes, it’s good to raise a lot of interest but such a broad-brush approach can attract possible buyers who soak up many hours of the seller’s valuable management time, only to discover the target is not really what they’re looking for. The road from Indication of Interest to Letter of Intent is littered with good intentions and discarded prospecti.
The broad auction will continue to play a prominent role in Chemical M&A activity, but with the market showing an increasing tendency towards more complex cross-border deals, it begs the question whether such a reactive, follow-the-herd approach will serve buyers best in the future.
Fit v. Price
Increasingly, when embarking on growth through acquisition, the best ‘fit’ is becoming as important as the right price, if not more so. As we have seen, some companies will accept significantly higher valuations if they can see synergies in the target that will help unlock value within their own business.
So a more pro-active, finessed approach might be more effective where the buyer decides exactly what they need to grow and goes looking for it, whether it’s on the market or not. This could be particularly appropriate if the current trend for mega-deals continues, as they will inevitably produce potential divestitures which can be seen early from outside the two companies. A good starting point for a pro-active buyer.
Seeking a guide
The only missing piece in this jigsaw is who? Who will embark on this surgical exploration to extract the right opportunity? The time-poor Chief Executive? Perhaps not. Such targeted searches don’t happen overnight. It can take years to pull such a deal off, particularly when the acquired company is not for sale initially.
It takes dedicated, committed and continuing effort from people who focus on this, and nothing else. It takes the experts.
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