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.

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