Usually, when our firm puts out a “teaser” for a company that we are taking to market, it takes a few days or even a week before we start to see signed confidentiality agreements (CAs) from potential acquirers. With signed CAs in hand we can then release the confidential informational memorandum, or CIM, which reveals our client’s name, presents summary financials, and contains a full description of our client’s operations.
Knowing this typical cadence of 1) teaser, 2) CA, and 3) CIM, we once put a deal “on the street,” and I made the risky decision to take a short vacation. We put out the teaser, and I was off that evening, in this case to Portugal. So, I was stunned to see my phone ringing at 10 a.m. local time the next morning (5 a.m. on the East Coast!) with a New York area code. And it was a Saturday.
The caller didn’t even introduce himself. He just said the three words that every sell-side investment banker usually hears only in fever dreams of a quick sale: “We’re the buyer.”
“Wait, who is this?” I asked.
Again, he just said: “We’re the buyer.”
He finally introduced himself, and I quickly confirmed that this fellow was from a private equity firm that had the wherewithal to make the acquisition.
The man said he was already prepared to offer a “pre-empt” on the deal. He was sending the pre-empt over that day.
A pre-empt is a solid offer in the form of an LOI (letter of intent) or an IOI (indication of interest), with a solid price, which tends toward paying a premium for the target company. The objective of the pre-empt offer is three-fold:
1) To sweep the deal off the market before a competitor can get in the action; 2) To avoid a potential bidding war with another acquirer that could drive the price to irrational levels, and 3) to tamp down the “stray voltage” created when a deal teaser is taken wide, where tongues start wagging as to who the company for sale might be. (Our firm’s outreach list is more than 1,100 buyer names. For this deal, turns out we didn’t even send the teaser to the entire list of buyers. The pre-empt was so strong, it stopped the outreach effort entirely.)
In this case the price offered for our client was very strong, but not in the stratosphere; they were going to pay a slight premium without overpaying.
Our client accepted the pre-empt immediately, for four reasons: 1) They knew the buyer, and its management; they wanted to work with them and knew their employees would be treated fairly; 2) The sellers didn’t want an unwieldy, drawn-out offering process; they were happy to take a fair price, knowing the deal would close quickly; 3) The reason you keep hearing the cliché “a bird in hand is worth two in the bush,” is because it’s true. In this case, the pre-empt was that bird in the hand, and 4) The sellers didn’t get greedy by saying, “Well if they offered $12 million, they must be able to pay $14. Let’s get another potential buyer in here and leverage them both in an auction.”
Fair enough, as a sell-side bank, we welcome controlled auctions, but if acquirers (especially those offering well-priced pre-empts in good faith) get even a whiff of the sense that their offer is getting “shopped,” they rightfully feel used and sometimes—we’ve seen it happen—they walk away, often along with the other parties too. After accepting a nice offer to take the deal off the market, the risk of a pre-empt is that the seller will have that sinking feeling that they could have gotten more; that they should not have accepted the offer and gone wider with the teaser.
I sympathize with that “sinking feeling,” but the longer I am in the M&A business, the more I realize how fragile deals can be, and how easily acquirers can walk away. Or how often an acquirer’s financing can fall through. Or— as the deal drags out in time between LOI and closing—how often the acquirer asks for repricing if the seller’s performance slips even a little bit. So, my vote: Taking the bird in hand will often outweigh the sinking feeling that you may have left a little on the table.
John Wagner is a managing director at 1stWest Mergers & Acquisitions, which offers a specialty practice in the LBM sector. Reach John at j.wagner@1stwestma.com
