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DealMakers - 2023 Annual (released February 2024)


Private auctions for sell-side mergers and acquisitions

by Gabi Mailula, Kamohelo Masubele and Asanda Lembede


In recent years, there has been a notable increase in sell-side auction activity in South Africa, although it has yet to reach the levels observed in the United States and European markets. There is also a growing trend of increased auction activity in other countries across the continent. In the fast-paced world of mergers and acquisitions (M&A), the sell-side auction has become a key strategy for companies aiming to enhance value and orchestrate competitive transactions.


In the context of M&A, a sell-side auction refers to a process where a company that is seeking to be acquired, or to sell a lucrative asset, solicits bids from multiple potential buyers.


Strategic evaluation: advantages and disadvantages of a sell-side auction

In the realm of M&A, the utilisation of sell-side auctions presents a nuanced landscape with distinct advantages and potential pitfalls.


Foremost among its merits is the promise of maximised value, as the competitive environment, filled by multiple bidders, often leads to more lucrative deals. The efficiency and timeliness inherent in structured auction processes can expedite transactions, allowing companies to capitalise promptly on favourable market conditions. Casting a wide net during a sell-side auction ensures a diverse pool of potential buyers, increasing the likelihood of finding a party with optimal synergies. In addition, a sell side auction process enables the seller to take the lead in the transaction, streamline the selling process and accelerate decision-making. The competitive atmosphere encourages swift responses from bidders, potentially leading to faster transactions. The inherent characteristics of sell-side auctions frequently result in the formulation of inventive deal structures. This stems from the diverse perspectives brought by each potential buyer tothe transaction, and their eagerness to enhance the appeal of their bids.

However, this approach is not without its challenges, as the resource-intensive nature of organising an auction demands careful consideration, and it may strain internal resources, both human and financial.

Gabi Mailula.jpg
Gabi Mailula
Kamohelo Masubele.jpg
Kamohelo Masubele
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Asanda Lembede

To best present its asset, the sell-side ordinarily finds itself compelled to conduct its own due diligence investigations, spare financial resources to regularise any red-flag outcomes identified during the due diligence investigations, and spend time and money on financial, legal and tax advisers. In addition, the risk of proprietary and strategic information being disclosed, uncertain outcomes that may be influenced by various external factors beyond the seller’s control, coupled with the potential for disruption within the organisation, introduces complexities that warrant meticulous evaluation. Despite these considerations, the strategic advantages of sell-side auctions, including enhanced negotiation leverage and confidentiality control for the seller, underscores its significance in the M&A landscape. As legal practitioners navigate this dynamic terrain, a judicious assessment of these advantages and disadvantages becomes imperative to guide our clients through successful transactions.


Sell-side auction processes and timelines

The sell-side auction normally involves the following key steps:


  1. The seller assembles professional internal and external deal teams, which consist of lawyers and investment bankers/financial advisors;

  2. The seller conducts a vendor due diligence investigation and prepares a report (VDD);

  3. Pursuant to the VDD, the third step involves the preparation of a value proposition in the form of a confidential information memorandum (CIM) to offer potential buyers an overview of the asset on sale. The process also includes having a non-disclosure agreement (NDA) in place to protect the proprietary interest of the selling company.

  4. The fourth step is strategic, and involves the seller identifying potential buyers and inviting them to take part in the auction. This is to increase the likelihood of receiving bids from multiple parties.

  5. The Seller exchanges the NDA, and distributes the CIM to potential buyers. The potential buyers would then submit non-binding indications of interest, which the seller uses to narrow the list of potential buyers.

  6. After gauging the interest in the asset and the quality of potential buyers, the sixth step usually involves drafting a definitive agreement for comments and review by shortlisted bidders, setting up a data room to facilitate and enable potential buyers to conduct their due diligence investigations and, where the seller would like to have a ‘clean exit’, the seller will shop for warranty and indemnity insurance, and negotiate the parameters of liability and non-binding indicators with the insurer for inception by a successful bidder.

  7. At this point, shortlisted bidders are given access to the data room to conduct a detailed due diligence investigation, review and comment on the draft definitive agreement, and submit a binding offer.

  8. In the final step, once the shortlisted bidders have all submitted their bids, the sell-side will consider the binding offers, having regard to, amongst other things, the price offered for the asset and the nature and extent of the proposed changes to the draft definitive agreement, including conditions to implement the transaction and the likelihood of fulfilling such conditions. The Seller would then select a successful bidder and exclusively negotiate the final terms of the deal with this Buyer.


The timelines involved in a sell-side auction vary, but it can take anywhere between six and 12 months to implement such a transaction, once the seller goes out to market and there is immediate interest shown in the asset.


Risk versus reward

The decision to embark on a sell-side auction is indeed a calculated risk that warrants careful consideration. While the potential for maximising value and securing favourable terms through heightened competition is enticing, the resource-intensive nature of the process and the risk of confidential and/or sensitive information leakage during selection poses inherent risks. One must weigh these potential drawbacks against the strategic advantages, taking into account the specific goals and circumstances of the selling company. For organisations seeking swift transactions, a diverse pool of potential buyers and maximum value, the benefits may outweigh the challenges. However, for those not willing to spend resources, preferring to engage and negotiate with a single potential buyer, safeguarding their confidential information, and with minimal disruption, a traditional approach may be more suitable. Ultimately, the decision to pursue a sell-side auction should align closely with the overarching objectives of the selling company and its tolerance for the financial and resource intensive exercise inherent in a sell-side auction process. Legal and financial advisers play a crucial role in guiding clients through this evaluation, ensuring that the risks undertaken align with the potential rewards in the pursuit of successful transactions.


In conclusion, the decision to embark on a sell-side auction in M&A demands a balancing act between potential risks and rewards. Ultimately, the determination of whether a sell-side auction is a risk worth taking hinges on aligning the chosen approach with the circumstances of the selling company, its unique goals, risk tolerance, and the human and financial resources at its disposal.

Mailula is an Executive, Masubele, an Associate and Lembede a Candidate Legal Practitioner in Corporate and Commercial | ENS

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