The M&A market has seen an acceleration in the trend toward narrow auctions in the past 18 months, compelling deal sponsors to become more aggressive in seeking invites.
Laura Holden, an Investment Banker at Raymond James, said that a decade ago narrow auctions might have made up 10 percent to 20 percent of the market. “Within the past 18 months,” she said, “it’s risen to more like one-third of all processes.”
Larissa Rozycki, a managing director at M&A advisory investment bank Harris Williams, and a speaker on a recent deal-sourcing webinar sponsored by SPS by Bain & Co., said that more and more clients are asking to be marketed to fewer buyers. Among the reasons:
- Managers find meetings with bidders time-consuming and a distraction from day-to-day operations
- They worry that in a broad auction sensitive data could fall into the hands of a competitor
Another speaker on the webinar, Adam Stormoen, a managing director at Seattle-based Cascadia Capital, added that his firm has seen limited downside to the trend. “The reality is, once you get a above a certain number, it’s sort of diminishing returns anyway.”
Stormoen pointed to a client that his previous firm took to market a few years ago. The firm marketed the company broadly and received interest from multiple bidders. The company did get an offer, but Stormoen and his partners advised the client not to take it. The valuation was too low, said Stormoen, who also didn’t view the bidder as the best partner for the company.
Cascadia Capital recently took the same client back to market via a much smaller auction. This led to five management meetings and a much more fitting deal, which closed on February 14th.
According to Stormoen, Cascadia Capital likes narrower auctions where bidders have done in-depth due diligence and are heavily invested in the company before any capital investment is made. Among other reasons, this ensures that the buyers involved are all genuinely interested in the company.
To be sure, the trend toward narrower auctions has been building for years. Holden observed that during that time “there has been a big shift in the industry towards specialized firms.” And even generalist firms these days tend to specialize in handful of verticals, as a way to maintain a competitive edge for deals.
Growing specialization means investment bankers have less trouble identifying the right buyers for a particular company.
On top of that you have the growing popularity of the “buy-and-build” approach to private equity investing. Add-on acquisitions are inherently more targeted sourcing efforts.
For deal sponsors, the trend toward narrower auctions has meant adjustments to origination strategies, according to Tricia Forbes, a managing director at full-service M&A marketing, branding, business development and public relations firm MiddleM Creative.
“Private equity firms that have historically gone to market as generalists are now often left out of these narrower auctions,” she said. “As a result, many are coming to us for help with pivoting to more specialized, sector-focused brand positioning, messaging and marketing tactics to ensure they are top-of-mind as bankers build their buyer lists.”
Indeed, private equity firms seem just fine with the trend toward narrower auctions, so long as they’re invited.
Said Heather Madland, a partner and head of business development at Huron Capital, which invests in commercial and industrial services, professional services and consumer services: “There’s so much liquidity and competition for higher quality assets that for some firms participating in a broad auction process is a less efficient way of deploying capital. Or put more simply, a waste of time.”
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