As more middle-market M&A auctions fail to produce a buyer, a different class of investor is stepping in. Turnaround specialists are increasingly targeting companies that couldn’t survive a traditional sale process, betting operational improvements, strategic repositioning or simply more realistic pricing can ultimately generate far higher exit values than the original auction ever promised.
“People call me and say, ‘Any failed auction, just bring it over to me. Any situation where it’s clunky or where it’s hairy, bring it over to me,'” says Arik Rashkes, partner and head of financial institutions at Solomon Partners. He estimates that between 10 to 15 percent of his processes take a “different direction mid-course or correct something.”
Rashkes says auctions usually fail because the financials and the performance of that company are not what he told people when he sends them the SIM.
“Let’s say it’s January and I sent you a SIM and we’re now having management presentations and my forecast in the SIM is $100 million for this year. By March, you see that they missed their bogey. January, February and March. They want to see these numbers as they come. Sometimes that creates pressure on the process.”
Rashkes says he is noticing in uptick in interest from turnaround investors on these busted deals.
“I think that there’s more appetite now that there is more money out there,” he mentions. “I don’t want to call them bottom feeders, but there are funds and there are investors who love turnarounds. That’s what they do. There are guys who are saying, ‘This is a business that if I fixed it up, would trade at 15 times EBITDA, I can get it now at 7 or at 8. I’ll do it all day.’”
SaaS Trouble
Software companies illustrate why some auctions are stalling. In sectors where AI has upended valuation assumptions, traditional private equity buyers are becoming more cautious—creating opportunities for investors with longer time horizons or a willingness to underwrite operational change.
Hughes Hubbard Partner Michael Traube says he recently had an auction process die despite having “top of the line” private equity bidders, because it is in the SaaS sector where there a lot of questions around valuations.
“In the software industry, there are real questions about the viability and future of businesses with the growing value of Claude and all these other AI agents that are providing ways to get around special IP that some of these companies have.” Traube says. “They’re still talking about [the company with the failed auction], but a deal is much less clear. If [the seller] would have pushed and gone a couple of months faster, I do think that there would have been a sale.” He said the company has tried to sell the business three times since 2019 with two different bankers. The third time was with the same banker.
Traube says there’s still a lot of revenue in these companies and customers are not all not going to switch to AI immediately, making this target still attractive.
In his 20 years in dealmaking, he estimates over 75 percent of his auction processes ended up in a deal. Chances are that if a company brings in bankers to run an auction, they’ve already decided they have to sell. “Even if it may not be exactly the right price, it ends up getting done,” he says.
“As long as the buyer is real, the seller is saying, ‘This is not our core focus for the future and we really want to get rid of this asset for a good value to take that money and focus on what we actually want,’” Traube says. “I do think that there is a deal to be had if the buyer really wants it.”
Reach Rashkes at [email protected] and Traube at: [email protected]
