Transcription
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Five years ago in London, I woke up to this email: "Paul, bad news. Our highest bidder has reconfirmed their bid and set it to explode tomorrow. When can you talk?" I was in the late stages of bidding on a business sale. What should have been a glorious final round turned into a massive disappointment. My highest bidder not only didn't increase their purchase price, but was attempting a shutdown move to wrest control of my process. I had a problem, and I needed to solve it quickly.
I'm Paul Jamore, an investment banker who negotiates for a living. Today, we'll apply the concepts from part one of this series to a real-world M&A transaction. We'll cover pre-sale planning, process selection, and leveraging information and judgment to gain an advantage in a formal sale process. I'll focus on the psychology and mechanics of an M&A transaction, from initial client discussions to resolving the dilemma of my highest bidder trying to shut down the process back in the fall of 2018.
I met with the CEO of Nor More AB, a Nordic residential and commercial services business based in Stockholm. Nor More was owned by management and Norvestor, a Norwegian private equity firm. The board was deciding whether to sell. In recent years, they'd been approached by various strategic acquirers and private equity firms. They brought us in for meetings, and we did what we typically do: learned as much as possible about the asset and the potential acquisition universe, then put together a valuation range—this business will sell from X to Y. At the time, I thought it would likely sell for around 1.8 to 1.9 billion SEK (200 million USD). We spoke with management and the board, and by early 2019, the board decided on a formal process.
The board could have contacted previous buyers, but being owned by a sophisticated private equity firm, they knew better: if you're selling an asset, run a formal process; if you're buying, avoid it. So, in early 2019 pre-planning sessions, I focused on the asset: its uniqueness, differentiation, scarcity value, scale, location, and resources/capabilities for larger acquirers or private equity firms. Acquisitions aren't just financial transactions; companies buy for unique resources and capabilities. I needed to understand the asset and the buyer universe.
For Nor More, we identified six to ten potential strategic acquirers (companies in similar businesses, typically publicly traded or large private equity platforms) and 50 to 60 potential private equity suitors (firms with the capacity to buy a business Nor More's size, in its geography, doing what Nor More does). The acquisition universe is crucial when planning the process. For example, if Nor More had only one potential buyer, a formal auction would be unlikely—too risky. You might scare the buyer off, or one wrong move could bust the auction. With one buyer, direct negotiations might be better. But with two, three, five, or six (a nice juicy number)—the more buyers, the more an auction-like process makes sense.
When selling, think like a hunter, not a fisherman. A fisherman baits a hook and waits; a business broker puts a listing online and waits. That's not ideal for a differentiated middle-market asset. It's like Sotheby's auctioning off a Picasso: 500 well-capitalized, motivated art buyers will perform better than 500 random people from Midtown Manhattan. Building the buyer pool is crucial—spend more time on it than you think you need to. Advisors often gloss over conversations their clients have had with previous suitors. I once dealt with a $100 million tech business where the client wanted to include someone they saw at the convenience store as a buyer! Sellers are not used to this process, and they'll say crazy things. Approach it with a blank slate.
For Nor More, I wanted to understand every private equity firm and strategic acquirer the client had spoken to—not just who, but what the conversation was. We discovered one acquirer had told them, "No one can create more value or pay more than us. Avoid a formal process; come to us when you're ready." They wanted a preemptive offer. We uncovered this by asking questions. Sellers should consider which firms can create value by buying their business—how can acquirers leverage technology or achieve revenue enhancements? How defensive is the acquisition? If only two acquirers can afford to lose your geography, you're in a good position. Take control of your financial health, like you would your personal health. You wouldn't just accept a doctor's diagnosis without seeking a second opinion or researching your disease. Be an active participant in your financial health. Think about buyers—who’s approached you, who haven’t you considered? It’s okay to say crazy stuff; it’s better than missing a potentially valuable acquirer.
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For Nor More, we understood the asset and the buyer pool; we thought like hunters. We laid it all out: key contacts, individuals, historical M&A activity, transaction statistics. This is all part of a formal M&A plan. No plan survives contact with the enemy, but planning allows advisors to think three or four steps ahead. When things get chaotic, it's easy to act emotionally; a plan forces you to consider alternatives. The goal: take an asset with no price and get full price discovery. There's no objective price for a business; it's subjective, depending on the narrative, the process, and how leverage is used to push up the price. My job is done when we've gotten full price discovery.
Moving to pre-planning, we understood the asset and could assemble the Confidential Information Memorandum (CIM), a sales tool—a deck explaining operational and financial information (20 to 100 pages, depending on the business’s size and complexity)—the primary selling tool for a formal sale-side process. With the CIM, buyer universe, and research done, we could think about process choice. Before that, let's revisit part one: we're trying to take a business with no price and get every penny out of it, but we don't know the price. We'll assume buoyant and dynamic markets, but we don't know the final sale price. We can be aspirational: come up with a reasonable valuation range (X to Y), aiming for Y. Be ridiculous, ask for everything!
For Nor More, we aimed for approximately 2.1 billion SEK (a little over 200 million USD). We figured the business was worth 1.8 to 2.0 billion SEK, and wanted to exceed that. CIM done, acquisition universe established, target set—what next? There are various ways to commence a process: one-on-one direct negotiations (only makes sense with one likely buyer). For most of you, with a differentiated business, you might find three, five, or ten potential buyers. The more buyers, the more auction-like your process should be.
For Nor More, a standard auction—derivative of an open outcry (or English) auction—wasn't suitable. We'd use a sealed-bid auction mechanism (private; no buyer knows other participants). In an open outcry auction, everyone sees who's bidding; in a sealed bid, it's confidential. It's not announced publicly; a small group participates.
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For Nor More (roughly 40-50% private equity firms, 10 strategic acquirers), most buyers had auction experience. Some acquirers don't know how to participate in auctions; they struggle with the concept. We started informally, becoming more formal over time. Investment bankers sometimes throw out big numbers, scaring buyers. I needed to gently introduce competition. A formal process includes auction-like mechanisms (buyers bidding against each other) and cross-the-table negotiations (negotiating directly with each party). With 50 buyers, I couldn't deal with them sequentially; I wanted to look at everything simultaneously, in parallel, using auction-like mechanisms.
I gathered as much information as possible on acquirers: motivations, capacity to pay, individuals involved. Organizations do transactions, but it's the people who do the deals. I fared out as much information as possible on the sell-side to understand how my client's business might create value for each individual buyer. It’s a lot of work, but it’s worth it. Then I thought about introducing competition. I typically cast a wide net upfront, using indicative bids (indications of interest). This introduces many buyers and gets them to offer in round one. It’s simply stating, “I’ll pay X; here’s what I’ll do with it, how I’ll finance it, what I’ll do with management, and regulatory constraints.” We want buyers to bid on the same day, doing the smallest amount of work possible. If we ask for a full Letter of Intent (LOI) or a formal bid, it requires more work, and many buyers will drop out. Keep it simple. We set the process rules: two weeks from now, provide an indicative bid. We cast a wide net; bring them all in.
We hoped to get 10, 15, or 20 indications of interest, understanding the market’s valuation. For Nor More, I hoped for 2.1 billion SEK or more, but indications clustered around 1.3 to 1.4 billion SEK—substantially lower. That's okay; initial offers tend to be low because buyers don't know much about the business yet; they're testing the water. Unless, of course, they want to preempt the process. One acquirer offered a preemptive bid of 1.7 billion SEK. The client responded, “Ridiculous! For a preemptive offer, I expect over 2 billion SEK, not 1.7 billion.” After the indications of interest, my goal was to whittle down the playing field. There will be garbage bids; companies that sent in a bid just to see what happens. As the process moves along, the price should go up, and the buyer pool should narrow. Simultaneously negotiating with more than seven or eight buyers is difficult.
Start wide, get as many indications of interest as possible. After those came in, we asked buyers if they were serious. We announced management meetings, requiring buyers to increase their bids. Before management meetings, we might have two or three bidding rounds. Buyers need to purchase their seat; they need to invest in the process. After the indicative round, we went to the next round: “Management meetings in three weeks in Stockholm. To participate, revise your bid.” We hoped to achieve a couple of things.
Humans don't value something they don't work for; they don't value quick concessions. In M&A, inexperienced buyers who roll over quickly are a problem. The seller, not doing this every day, might think there’s more to get. When you don’t make the other side work for something, they won’t value it. In M&A, early investment by buyers (time, money, effort) creates a higher commitment; the more they invest, the harder it is to walk away. Think about incrementalism. Someone offering 1.3 billion SEK, and you counter with 2.5 billion SEK, leads to positional bargaining (1.3, 2.5, 1.5, 2.1 etc.). This often ends in the midpoint—a losing proposition for sellers. Lean into process. Use process rules to extract resources.
We started with indicative bids, wanting buyers to invest time, money, and effort, incrementally increasing their bids. The gap between 1.3 billion SEK and 1.9 billion SEK is huge; the gap between 1.8 billion SEK and 1.9 billion SEK is small. Psychologically, “another 5 million” is easier to accept than “another 500 million.” Incrementalism and investment.
For Nor More, we bifurcated, starting with strategics (July, during Scandinavian summer break). We thought strategics would pay more than private equity, and we could bring in private equity later. We started informally, setting an indication of interest deadline. We had fireside chats with private equity firms, allowing them to meet management and invest in the process without being excluded if we later wanted a broader process. We wanted to see what we could get from the strategics. We had three bidding rounds before management meetings (not typical, but that's how it worked out). We started with ten strategic acquirers, down to four by management meetings. ServiceMaster had the lowest bid.
We debated inviting ServiceMaster to the meeting; they'd gone from second to third bid, reconfirming their bid instead of increasing it. We had to consider rewarding bad behavior. Every action reveals information. If we kicked them out, it would signal seriousness to other buyers, but they wouldn't know about it (sealed bid). Letting them in signaled less fierce competition. We decided to let them attend the meeting. I didn't want to lose a bidder; it seemed like more risk to boot them out. ServiceMaster had tried to preempt the deal with a low offer. I didn't see a downside to letting them participate; we could deal with them later if their behavior continued.
After the management meeting, we asked acquirers to revise their bids. Management performed well. We saw a huge jump in bids, clustering at 1.75 to 1.8 million SEK. We were in round five. We provided more information; acquirers negotiated offers and the purchase agreement. We provided a draft purchase agreement, asking buyers to mark it up and submit it with their bid. We saw cracks: bid increments decreased. As the purchase price becomes uncomfortable, buyers reconfirm bids instead of increasing them. By round five, bids clustered in the high 1.7s and low 1.8s. We considered adding private equity for a broader process; my target was 2.1 billion SEK, and bid increments were compressing.
A modified auction requires judgment and balance; clear process rules, but some ambiguity. I wanted control over bidding rounds, but buyers needed a sense of the end. Ten or twenty rounds would lead to buyers holding back. At some point, you need to show the finish line; sometimes you do this at the beginning (two, five, or ten rounds). Sometimes, you use judgment to decide when to show the finish line. By rounds five or six, we had one offer at 1.7 billion SEK, two at 1.8 billion SEK, and a high bid of 1.85 billion SEK. That bidder was the favorite; they were always the highest bidder, communicated well, and management liked them.
I started thinking this was the most likely buyer, but I stopped myself. As an investment banker and advisor, it's crucial to avoid preconceived notions. The seller should do the same; don't favor any buyer. Let the market and facts speak. I used to joke around the office about which company would "prevail," but that distorts behavior. Even I, an experienced advisor, had to remind myself to stick to the process and not care who ultimately prevailed – whoever made the best offer would win.
We set a bid date for Wednesday morning. I was in London and woke to an email: "Paul, bad news. Our highest bidder reconfirmed their offer, expiring tomorrow. When can you talk?" I'd hoped for $1.9 billion. We'd told acquirers this was the final round—all-in—and our best buyer just reconfirmed. Why not raise their bid?
I spoke with several acquirers. Many had resources but believed they were overpaying—and they were right. The price was extremely high, 20 times EBITDA, the highest in the industry. They weren't sure their bids wouldn't be shopped around. We'd tried to build credibility, assuring bidders we wouldn't do that, but buyer apprehension remained. Most didn't feel they needed to bid higher.
I had two bids at $1.85 billion and two at $1.8 billion. The highest bidder was neck and neck with number two, and ServiceMaster remained at $1.8 billion. They'd repeatedly claimed no one could pay more. Were they credible?
I was furious. Not only did we miss our $1.9 billion target, but our best buyer used a "shutdown move"—a $1.85 billion offer, non-negotiable, with a 24-hour deadline. They tried changing the rules of the final bid round. I was irritated, but did what I advise my team: absolutely nothing. I showered, had coffee, and walked the streets of London, thinking through options.
I had four essentially equal bids. All wanted the transaction and tried to negotiate one-on-one. Then it hit me: introduce risk. These buyers had invested heavily—months of work, travel to Stockholm, meetings, due diligence, and substantial legal fees. I needed to pick a horse and create the right pressure to achieve the desired purchase price.
How do you sell flowers in the Netherlands? A Dutch auction. The price starts high and descends. Buyers indicate their purchase at a given price. It's fast and introduces risk; if you're willing to pay $2 but think you can get it for $1.75, do you risk someone snatching it for $1.98?
I scheduled a call and proposed a Dutch auction, starting at $2.1 billion. Each acquirer got eight hours to accept or the offer expired, moving to the next bidder at a lower price. Bidders didn't know how many were involved. This created substantial risk; if someone bid $1.85 billion, would they risk losing it to another bidder at a price they'd pay?
We went through all acquirers. By the time we returned to the first, they bid $1.93 billion. The deal closed with ServiceMaster a few weeks later.
This exemplifies process control. Acquirer B, at $1.85 billion, tried a shutdown move. That wasn't my role as process-setter. A shutdown move is better earlier in the process. For them, it backfired. The Dutch auction was about process control. You negotiate both process rules and substance (terms and price). Lean into process whenever possible.
I was almost ready to negotiate one-on-one. We sensed more bidding capacity and felt a traditional auction wouldn't work. Buyer behavior—decreasing bid increments, desires for one-on-one negotiations—indicated this. Another round wouldn't get us there, so we used a Dutch auction.
Control the process. Fight shutdown moves, but remember, some rules are meant to be broken. Use judgment, paying attention to bidder behavior. You might need direct negotiations or a complete process change—even overnight! You, as the seller, are an active participant, working with your advisor.
One buyer stood pat. My client wanted them removed, yet they ultimately won at $1.93 billion. Sometimes you feel the flow and keep people invested. They claimed no one could pay more, but I presented a $2.1 billion counteroffer, and they laughed. Yet they ultimately won.
Sellers need active involvement with advisors. Listen to your gut. While I initially wanted to remove that buyer for reconfirming their bid, I had to consider the bigger picture. Removing them might have been more damaging.
Remain cool and collected. Discipline buyers violating your rules, but not out of spite. Preserve the process structure. This takes judgment and experience.
The Nomura transaction was fascinating. It was my first Dutch auction in M&A and became a finalist for European Transaction of the Year in 2019. I later sold a portion of Nomura again.
For M&A advisors, tighten your game. Sellers, we kill it for our clients; reach out! Subscribe for more in this series. Watch the first part using the link below. Thanks!