A company that is interested in selling itself entirely or selling a division of the company must go through a rigorous dealmaking process. The guidance of skilled lawyers and investment bankers helping the company is an essential component of a successful sell-side M&A process.
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Overview of the Sell-Side M&A Process
A variety of steps are involved on the selling side of an M&A deal, including reaching out to potential buyers, preparing marketing materials, and negotiating the purchase price and terms. Confidentiality is a key component to the success of the sell-side M&A process.
The standard process for putting a company up for sale involves a two-sided auction. A two-sided auction process involves two rounds of bidding and multiple potential buyers. This contrasts with a negotiated sale process, which is far less common. Such a transaction is negotiated directly between two companies and does not involve an auction process.
The average sell-side M&A process takes about six to nine months. Regulatory issues, such as antitrust concerns, can prolong this timeline.
Pitching the M&A Deal
When a company decides that it wants to sell itself, the first step usually involves outside lawyers and investment banks pitching for the transaction. This pitch is sometimes referred to a beauty contest or bakeoff.
As the selling company’s in-house counsel, it will be your job to evaluate the merits of these pitches in order to select the best advisory team of outside lawyers and investment bankers.
Sell-side pitches typically will contain a valuation analysis, discussion of industry considerations, evaluation of likely buyers, and contemplated timeline. The pitching law firms and banks will also discuss their prior experience executing similar transactions.
Due Diligence Process
Shortly after the outside advisors are selected, the due diligence process begins. This involves setting up an online data room to upload relevant diligence materials. The diligence materials be critical to putting together the necessary marketing materials and financial models.
The investment bankers typically take the lead in putting together the list of potential buyers. The appropriateness of each buyer on the list is discussed extensively with the company’s management. The list is generally kept small in order to preserve the likelihood that the potential sale will remain confidential. When the list of prospective buyers is kept small it is referred to as a targeted auction process. In contrast, a broad auction process involves a large list of prospective buyers. Each company on the buyer’s list will receive the company’s initial marketing materials.
The teaser presentation is the first marketing document sent to potential buyers. It is often only a couple pages in length. The teaser presents a brief overview of the company up for sale, including a short business description and summary financial information.
After a couple weeks, the interest level of each prospective buyer that received the teaser presentation is gauged. The next step in the process is to send the interested buyers a copy of the confidential information memorandum (CIM).
Confidential Information Memorandum (CIM)
The confidential information memorandum (CIM) is significantly longer than the teaser presentation. The CIM is usually more than 50 pages in length. It includes a comprehensive overview of the business, detailed historical financial information, and projected financial data.
Shortly after the CIM is circulated to interested buyers, the first-round bidding process is commenced. The first-round bids are usually presented as a range of values. The bids will also indicate how each buyer intends to finance the purchase and whether cash, stock, or some combination of cash and stock will be used for the acquisition.
The second round of the sell-side M&A process is kicked off by management presentation meetings. These meetings are often held at the company’s headquarters or at the offices of the law firm representing the selling company. Management presentations can last several hours or even span a full day. The number of prospective buyers allowed into the second round is therefore tends to be limited to the most viable contenders.
Once the company is ready for the final round of bidding, a letter will be distributed to each prospective bidder informing them of the final round bidding deadline. Unlike the previous rounds of bidding, the final-round bids that are submitted are binding on the buyer. Each bidder is required to disclose the purchase price it is willing to pay, any financing sources, information about the buyer’s internal approval process, any anticipated regulatory issues, and the estimated time it will take to close the M&A deal.
Closing the M&A Transaction
Once a winner is chosen, the company’s in-house lawyers will work with outside legal counsel to negotiate the terms of the final purchase agreement. While the winning bidder is often the bidder that offers the highest purchase price, other considerations may come into play. For example, if another bidder offers higher certainty of the deal closing and an all-cash offer, these factors may influence the decision.
One of the most important documents provided by the investment bank advising on the sell-side M&A transaction is its fairness opinion. This fairness opinion states that the transaction is fair to the shareholders of the selling company. It is based on the conclusions drawn from the bank’s valuation analysis and financial projections. The fairness opinion provided by the investment bank can help shield the board of directors of the company from a shareholder lawsuit in the future.