• Do We Really Need an M&A Advisor? - The Substantially Differing Perspectives of "Full and Fair Value"
  • July 19, 2012
  • Law Firm: Faegre Baker Daniels - Minneapolis Office
  • Any business owner considering a sale asks himself or herself the fundamental question: "Do we really need an M&A advisor to help us sell this company? After all, we built this business. We know it better than anyone else. We know the competitors-which ones might be buyers and which ones are not buyers. We even have personal relationships with a lot of the players after years of competing against each other and attending the same industry functions. So, why do we need to pay a fee to someone in the middle? Or expose our business to be ‘shopped around'? We don't want our confidential information shared with multiple potential buyers, and we definitely don't want our employees being poached or disrupted by different buyers investigating our company. And the customers-what if the customers hear of a potential transaction?"

    Stoking the fire, intelligent and sophisticated buyers proactively pursue acquisitions on their own, or at least plant the seeds for a future "proprietary deal" (one without competition from other buyers). They leverage sellers' fears by articulating an elegant and simple, yet self-serving, solution-sell the business to me! Their arguments are numerous: "We can get a deal done quickly and quietly, without a process. As a result, we will not create the same risk that a process might to employees, customers or suppliers. Why undertake the substantial work and waste all that time required by a process with an investment banker? Besides, we are the best buyer for X, Y and Z reasons. So naturally, we are the best buyer to pay you a full and fair value."

    The above are all fair questions and legitimate concerns or considerations. For those companies that sold in a one-off transaction, no one will ever know how the result might have been different had the competitive tension of a process been present (though it is unlikely the result would have been worse). That genie cannot be put back in the bottle. But on the flip side, as M&A advisors, we are regularly brought into situations by owners that thought they had a deal or a value with a buyer on a one-off basis, only to become disappointed that the deal dragged out or never yielded a closed transaction as expected. They then turn to us as a catalyst to put a deal together or run a process with multiple parties.

    Sellers typically find that what they once perceived as a full and fair value, offered by that great one-off buyer, is ultimately exceeded by another buyer through a competitive process. On a recent transaction, we advised a group of sellers after they had been approached on a one-off basis by a buyer that offered a price the sellers deemed fair. For reasons unrelated to price, that deal did not close, and sellers engaged us to run a process. During our engagement, we generated a price that was a 47% premium to the price the sellers were willing to accept only months earlier from the initial bidder. This situation is not uncommon.

    Why does this happen? Why do processes typically yield higher values? Are the buyers seeking "proprietary deals" looking to pay less for the same company outside of an auction than they would in an auction? Likely yes, but it is only rational for them to take that approach in discussions without competitive tension.

    The fundamental issue, ultimately, relates to the wildly differing perspectives of what represents "full and fair value." Sophisticated buyers with the exact same information come to substantially different conclusions about value. When a seller negotiates on a one-off basis, without the benefit of an advisor, that seller has no way of knowing on which end of the spectrum that value falls.

    To illustrate these differences, consider the following example from a recent M&A process involving Houlihan Lokey. Company A is an attractive, growing MRO distributor that we sold for an undisclosed nine digit amount. Each buyer received the exact same information upon which to formulate their bid. Through our process, we generated 33 bids from qualified buyers. For the exact same business, leveraging the exact same information, the ultimate buyer's value represented a 77.0% premium to that of the lowest bidder's value (a strategic buyer) and a 22.9% premium to the median value of all the bids (simply put, if the lowest bidder's value was $100 million, that would yield an additional $77 million of value!). Looking at it from the other side, the low bidder's value was 43.5% below the ultimate buyer's value and 30.5% below the median value of the 33 bids. These discrepancies are substantial and not unusual. Depending upon the size of the company, these differences yield tens, if not hundreds, of millions of dollars in potential value to the seller.