Responding to Unsolicited Offers to Acquire Your Company
If you own a successful mid-sized company, it is very likely that you receive multiple calls every week or month from large corporations and private equity firms interested in acquiring your company. In this report we provide some insight into why you are receiving so many solicitations to acquire your business, and we offer some guidelines for responding to these inquiries. We also highlight some common pitfalls to avoid.
Why so many calls?
The primary reason for the increased number of unsolicited calls to acquire your business is that there is currently too much money pursuing too few promising acquisition opportunities. This capital surplus is driving private equity firms and large corporate buyers to compete more aggressively for high-quality, profitable companies.
Corporate cash balances have expanded across a variety of industries. For example, since 2005 we have seen balance sheet cash rise from $1.1 billion to $3.7 billion for 3M in the industrial sector, from $16.1 billion to $44.6 billion for Cisco in the tech sector, and from $16.1 billion to $30.9 billion for J&J in the consumer sector. Overall, corporate cash balances have risen 47% from a total of $1.5 trillion in 2006 to $2.2 trillion in 2011, and this expansion occurred during a period of expanding dividends and frequent stock buybacks.
Similarly, private equity firms were sitting on $425 billion of unallocated cash at the end of 2011, and slightly more than half of that idle cash was raised in 2008 or earlier. Most private equity funds are structured with pre-determined life spans, and therefore the accumulated capital typically must be deployed within the first four or five years of the fund’s life. Funds raised in 2008 and earlier are pushing up against that limit, and this has created an urgent need to deploy capital.
Approximately $100 billion of the private equity cash backlog is held in funds that are smaller than $1 billion. These sub $1 billion funds typically make acquisitions with $20 million to $100 million of equity, supplemented with a roughly equal amount of debt. If we assume a $50 million average equity check, the small and midsized private equity firms will have to close 2,000 acquisitions to absorb the $100 billion cash backlog. Additionally, another $200 billion is held by funds that are $1 billion to $5 billion in size, and many of these firms also compete for midsized acquisitions.
Private equity firms prefer to invest in industries and companies that exhibit growth, consistent profitability, and strong cash flow. Based on feedback from over 900 firms that have expressed specific industry interests to VRA Partners, we believe there is a market of over 500 firms interested in acquiring business services and manufacturing companies and more than 400 firms looking for distribution, healthcare and consumer related acquisitions. Technology companies are more specialized but would still be of interest to nearly 200 firms.
Guidelines for Responding to Unsolicited Offers
Most business owners can decide pretty quickly if they want to listen to offers from their larger competitors. Either you can envision selling to them or you can’t. However, the decision to listen to a private equity investor may be less clear cut.
Private equity transactions can be as much about enabling your business as they are about providing you with an exit. Private equity capital can be used to help fund growth initiatives, facilitate your own acquisition efforts and ultimately drive up the overall value of the company, while allowing you to diversify your own risk profile. Most private equity firms will prefer that you remain with the company for some period of time after closing, and not all of them will insist on buying a majority or controlling stake. However, if you are seeking a 100% sale and a near-term exit, they can often accommodate that as well if you have a solid management team underneath you. In summary, if you can envision selling to a competitor, or if you or your company could benefit from outside capital, it may be worth your time to at least listen to what the caller has to say.
In today’s market, if you do decide to listen, you may discover that the unsolicited offer meets or exceeds your expectations of value for your business. Nevertheless, we would not recommend locking into a single buyer, regardless of how attractive an offer may sound. As demonstrated in the examples below, bringing in additional buyers can ensure that you get the best price, retain maximum negotiating power and maintain control over the timing and scope of the process.
A great offer is not always the best offer
In one recent transaction, a consumer products company was approached by a private equity firm offering to purchase the business. The company was unable to get the buyer to increase its offer, so it asked VRA Partners to market it to a broader audience. By bringing additional buyers into the process, the company was able to get the initial buyer to raise its offer by more than 60%. However, other buyers bid even higher, and the company eventually was acquired at a price 100% higher than the original offer from the private equity firm.
Often times the mere threat of a competitive process can get a buyer to boost its offer. For example, a specialty food company received an unsolicited offer from a large, publicly traded food company. It was the most logical buyer for the business, and the initial offer was fair. However, rather than accept the offer, the specialty food company drafted an offering memorandum and prepared to go to market. After seeing the memorandum and a list of other prospective buyers, the initial buyer increased its bid by more than 25% in order to quickly close the acquisition.
Exclusive buyers rarely raise their price, and often lower it
A business owner who prematurely commits to a single buyer will forfeit nearly all negotiating power to the buyer. Having agreed in principal to the initial offer, the seller has little ability to move the price higher. Conversely, during due diligence the buyer can find a myriad of reasons that the price should come down, and the seller has no recourse other than to simply walk away from the deal.
When multiple buyers are brought into the process, the negotiating power shifts significantly toward the seller, who can use a competitive process to maximize valuation. VRA Partners recently assisted in the sale of a technology company that received initial offers that were all within a fairly tight price range. By the time the bidding and counter-bidding concluded, the final purchase price for the company was approximately 65% higher than the highest initial bid. Without competitive bidding, it is unlikely that any of the buyers would have been willing to raise their price to that degree.
Focusing on an individual buyer does not save time
VRA Partners recently assisted in the sale of a specialty construction firm. After putting together an offering memorandum about the company and organizing the due diligence information in an online data room, the company was marketed to a fairly long list of prospective buyers. The winning bidder was a large strategic buyer in an adjacent sector of the construction market. The whole process took a little more than six months.
Shortly after the transaction closed, VRA was approached by a similar company that had been approached by the same strategic buyer. Rather than put together a memorandum and run a competitive process, the seller opted to deal only with the initial bidder. Over a year has passed, and there has been no transaction. Rather than saving time by focusing on a single buyer, the timeline has been drawn out because the buyer has all the power and feels no sense of urgency.
In addition to not saving time, focusing on a single buyer does not always result in a reduced amount of effort. The process of creating a formal selling memorandum may be avoided, but all the information that goes into a memorandum will have to be gathered for the buyer anyway. Moreover, a buyer in an open-ended, uncompetitive situation will often continue to ask for more and more detailed information until the seller reaches the point of maximum frustration. By running a competitive process, the seller sends a clear signal that buyers will have to keep their information requests reasonable and timely if they want to win the deal.
The current M&A market is characterized by too much capital and too few promising acquisition opportunities. As a result, successful business owners are receiving an increasing number of inbound inquiries. Given the current market imbalance, unsolicited offers can be very attractive. Nevertheless, you should use caution before locking into a single prospective buyer. The sale price can often be increased significantly by marketing your company to other prospective buyers. Simply starting a formal process in a convincing manner can often drive the initial bidder’s price up significantly. However, in order to maintain negotiating power, keep the prospective buyers on a strict timeline and ensure that your efforts result in a closed transaction, it is best to conduct a structured process that keeps multiple buyers involved.
VRA Partners, LLC
VRA Partners is an independent investment banking firm that focuses on providing merger and acquisition advisory services to leading middle-market companies and private equity groups located throughout the U.S. VRA Partners also assists companies with raising capital for growth, acquisitions, recapitalization, going-private and management buy-out transactions, as well as provides fairness opinions, valuations and strategic advisory services. The professionals of VRA Partners have completed more than 500 transactions with aggregate transaction value in excess of $35 billion across a broad range of industries.
The founders of VRA Partners have over 100 years of collective investment banking experience and come from a variety of backgrounds, bringing to the firm a diverse set of industry experiences and observations that benefit our clients. Notwithstanding our past experience, every transaction and company is different, and VRA Partners approaches each assignment as such, allocating the time and resources to ensure that we are informed about the dynamics of each client’s business and industry. Our transaction experience and our commitment to fully understand the opportunities facing each client allow us to effectively articulate to the marketplace how and why that client is unique. Importantly, we maintain the philosophy of treating our client’s objectives and interests as if they were our own.