Today's savvy investors know that it takes more than a compelling offer to win. It requires a faster pace to edge out the competition.
But moving quickly to submit the earliest bid comes with risks — namely, abridged access to information and an inability to get the investment committee comfortable based on traditional and thorough due diligence. How can investors move fast to capitalize on an investment opportunity offered at auction while hedging against risks of the unknown?The past two years have seen historic levels of M&A transaction value, exceeding $2 trillion in both years. Deal values are at all-time highs and multiples in many sectors are soaring, driven by increased levels of competition among buyers with cash to invest, as well as a pressing need to drive future growth and investment returns. For example, the median EBITDA multiples for software M&A deals globally has grown to 14.6x, up from 10x in 2012. We see three trends contributing to this intensified competition:
Today’s M&A landscape is increasing the number of auction-style deals, where bankers attempt to capitalize on heightened levels of competition among potential buyers to drive up bid prices. In these situations, potential buyers typically have less time and opportunity to conduct the diligence necessary for submitting a prudent bid. Auctions attempt to accommodate buyers’ needs for information, but not to the extent traditionally exercised.
More often than not, 'diligence' has been reduced to reviewing prepared presentations and virtual data rooms sparse of documentation until the final stage.
A banker may “stage gate” 20 potential bidders and then narrow the field to five or eight. At each round, bidders gain more insight into the target’s inner workings, intellectual property, and trade secrets so as not to expose confidential information too broadly. Only the two to three finalists end up with access to any meaningful data and information.
Historically, strategic buyers have held an edge in a competitive M&A environment, with their available revenue and cost synergies, allowing them to offer higher prices. Increasingly, though, bidders with competitive advantage are those that can move the quickest, have the lightest touch, and provide a bid within expectations – although not necessarily the most lucrative bid. (Remember: Some sellers are looking for the best cultural fit, ease of closing, provisions for retaining key leaders, or other priorities).
Today, private equity buyers have the advantage of speed, being able to submit an offer with more unknown data points than a strategic buyer would be comfortable with. Accordingly, they are often in a better position to take calculated risks based on less information. They may pare back their requests for documentation or perhaps submit a typical diligence questionnaire, but highlight a short list of the most critical items.
If speed makes the difference, then how can today’s buyers navigate the accelerated diligence process without sacrificing their level of comfort with the risks involved or their ability to model an investment for a healthy internal rate of return? If you expect to be a potential party to an auction, consider the following imperatives for conducting sufficient diligence and preparing a fast, yet confident bid:
Not all investors will be comfortable with a speedy approach, but potential bidders in an auction must be prepared to deal in a new, different, and faster way. The more you know about what to expect, the more prepared you can be to move at the market’s pace.
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