First in a four-part series

September 2011 - The process for selling a business often is tailored to a seller’s needs based on several factors: the seller’s commitment to a sale, the company’s business segment and the requirements of the corporate charter. There are three general approaches to marketing a business for sale that have implications for value, confidentiality and speed: an open auction, a controlled auction and a one-on-one negotiated sale.

Each of these has positive and negative attributes with respect to timing, confidentiality, value and business disruption. The end result is the same: the sale of a business, but the paths can be very different. The following provides some insight to the pros and cons of each option.

Open auction
An open auction is used by public companies to ensure a fair process and, more importantly, ensure all potential bidders have an opportunity to bid.

The selling company announces the open auction to the market through a press release, which states the company is exploring its “strategic alternatives.” This is done to provide a fair process to all bidders and to ensure the process results in the highest price for the company’s shares, thereby reducing the risk of shareholder lawsuits. This process will be used by companies looking to divest non-core assets as a way to announce the refocusing of efforts on other business segments.

Open auctions tend to be the most disruptive to the business because employees and customers are concerned about potential changes. The disruption can be detrimental to value if the process lingers and good customers and employees leave the business because of the uncertainty. This option rarely is used for middle-market private companies because of the risks to the value of the business and the lack of general confidentiality.

One-on-one negotiated sales
In the metals industry, sellers often explore one-on-one negotiated sales because most of them know the senior management of the most likely buyers and believe a quiet process is best for the business. Negotiated sales involve the buyer or seller approaching the other in an effort to begin negotiations. If successful, it can minimize business disruption and can be the quickest process.

Similar amounts of information are exchanged as the parties become confident they can reach a deal. Unless the buyer is highly motivated and focused, this process tends to be slower and provides more leverage to the buyer. There are no other bidders, which provides discipline to the pricing and process timeline. There is no definitive timeline for the buyer to engage the seller, and the seller eventually will disclose a significant amount of information that may damage the seller’s business if a deal is not completed.

It is not uncommon for investment bankers to receive requests to negotiate a deal with a potential buyer and approach other buyers. The issue with a one-on-one negotiated process is that as soon as the buyer obtains a level of exclusivity to begin due diligence, the seller has provided an option for the buyer to purchase the company if the buyer later decides to do so. Certain buyers in the metals industry have pursued multiple companies at the same time without the intention of buying them all. They obtain exclusivity and then decide which purchase is the better deal.

Controlled auction
The most common approach to marketing a business in the metals sector is a controlled auction. Often, the company’s financial advisor leads this type of process.

During a controlled auction, a list of the most likely buyers for the company is created and offering materials are prepared for buyers to review after signing confidentiality agreements. After several buyers have indicated their interest in continuing the process, a limited number of buyers are given more in-depth information in order to formulate a meaningful intent to purchase. This allows a narrowing of interested parties and a reduced amount of information being provided to buyers that may not truly be interested or interested at a realistic price.

Controlled auctions help limit the disruption to the business but will require some disclosure internally. This can be the slowest of all three processes but often is used because of the more controlled information flow to buyers and better control of confidentiality.

In addition, there are hybrid processes that include elements of all three options, depending on the situation. For example, public companies often negotiate a one-on-one deal and then publicly announce it prior to signing to clear the market of other potential suitors. Often, private companies will begin with a one-on-one negotiated deal and, when things move too slowly, they will begin expanding the buyers list on a limited basis to the top five or 10 prospects. Within the metals industry, it is easy to keep the list short because of market segmentation and the geographic footprint of the buyer and seller. As always, the process can be tailored to fit a seller’s needs. MM

Vince Pappalardo, managing director, and Chris Merley, vice president, of Stout Risius Ross, specialize in M&A advisory for companies in the production and distribution of both ferrous and nonferrous metals and alloys. Thomas Tyndorf, director in Private Banking USA at Credit Suisse, along with David Berek, partner with Handler Thayer LLP, will be contributing to upcoming columns. For more information, contact Vince at vpappalardo@srr.com or visit www.srr.com.

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