The Exclusivity Dance
It takes some convincing, but buyers have been able to prove proprietary deals can be win/win.
Proprietary dealflow continues to be the Holy Grail for middle market buyers. As the M&A market gains momentum heading into the second half of the year, deal pros anticipate seeing more prospective acquirers willing to pre-empt the traditional broad process. To do so, however, many may find that proprietary transactions won't always translate into a less-than-market price.
"People are a little more comfortable that they can predict the future," Nixon Peabody's David Martland says, adding that this clarity helps eliminate the threat of being locked into "an unknown situation." And as far as sellers are concerned, granting exclusivity can sometimes pay off by ensuring that the right buyer remains interested.
Microsoft's $8.5 billion acquisition of Skype, for instance, was conditioned on eliminating the threat of an auction. Steve Ballmer paid for that right with an offer that valued the company at 10x revenues.
To be sure, sellers that grant exclusivity have to take a leap of faith. They have a lot to lose should the negotiations break down and no deal is sealed. But if an ideal buyer can be identified, there are a number of benefits to putting off a broader process.
One banker Mergers & Acquisitions spoke to noted, for instance, that advisors will often seek to provide a handicap to the preferred bidders for a company, and tailor the process around those parties. Strategics, for instance, rarely move at the same pace as financial buyers.
There is, of course, the strategic fit to consider, synergies, and potential FCPA considerations, on top of other issues. As a result, decision making takes longer, putting strategics at a distinct disadvantage to financial acquirers. Yet, if the right buyer believes an asset is a must-own property, there is a good chance they'll simply pre-empt an auction with an above market bid and then move at their own pace to complete the deal.
In the middle market, non-public deals in particular, sellers may be drawn to the certainty of an exclusive process. In these cases, private equity may hold the upper hand, by keeping management on board as a co-investor and giving existing ownership a chance for a second bite of the apple.
Derek Lewis, a managing director at mid-market investment bank Harris Williams & Co. cites that three core factors are usually considered before entering into an exclusive process: valuation, speed and certainty.
"If a buyer can convince the seller that the value being offered is pre-emptive and can credibly offer speed and certainty, then the seller will usually listen -- but it is a pretty high bar to cross," Lewis says.
The risk, he adds, is that a bidding party can divert management's attention and if a deal isn't completed, the sale effort will lose momentum. "That's why most sellers are reluctant to offer exclusivity right off the bat," Lewis says.
On occasion, exclusivity is a carrot used to yield other considerations. When Grubb & Ellis agreed to a financing arrangement with Colony Capital, the struggling real estate management company gave Colony a 60-day window to come up with an acquisition proposal. The exclusivity period expired in the first week of June.
Often, exclusivity is achieved organically. When Thermo Fisher Scientific acquired Phadia, Thermo CEO Marc Casper described in the conference call following the deal that the pairing emerged out dialogue that occured "over the years." He cited: "In recent times that dialogue really picked up. We got into an exclusive period of discussions... this was a negotiated transaction between two parties, us and them."
The deal, at an estimated 17x TTM Ebitda wouldn't qualify as cheap, but it occurred without the distraction of a back-and-forth process in which little is certain.
Paul Koenig, an M&A attorney and co-founder of Shareholder Representative Services, says that in his experience, exclusivity generally transfers leverage from the selling party to the buyers. "The buyer wants to know that the deal is locked up," he says.