Mirus Capital Advisors, Mergers and Acquisitions, Selling a Business, Family Business, Corporate Divestitures, Industrial
M&A: One question you don’t want to be asking yourself at the closing table
Success! After months of negotiation and diligence, your deal is ready to close. Documents are ready for signing. And you ask yourself, “how do I know this is the deal I should be doing?” Or perhaps, “how much did I leave on the table?”
For sellers and their boards / special committees who engage in a formal process, checking the market or doing a broad search for potential acquirers, there’s more certainty that the deal to be signed is the best to be had. Put another way, for sellers and their boards who do not consider alternative offers, it’s tougher to judge whether a deal should be consummated. We experience and drive these processes from the inside, and see the value created in action time and time again.
How should sellers think about the value of engaging in a process? Here are a few data points to consider:
• Data from the business valuation community, Mergerstat® in particular, has generally indicated a control premium percentage in takeover situations from the low 20’s to high 30’s over the past decade. Much of the premium in these situations is driven either by a formal process or by the threat of a process leading to a preemptive bid from the acquirer.
• For the 100+ public companies acquired in 2013 with pre-announcement market caps over $50 million, the average premium to the share price a month before the announcement was 37%. [1]. Looking back over the past 10 years, the premium has also averaged 37%.
• For targets under $100 million market cap, premiums have tended to be higher. Over the past 10 years, transactions in this range averaged a 50% one-month premium. Targets this size commanding the highest premiums tend to be biotech and software/IT businesses.
• We reviewed eight recent Mirus deals for which a process (market check or broad process) was run and found that the winning bid exceeded the average bid by 32%, and often was 70% or more than the lowest bid.
• Public company targets disclose significant information about their processes. For example, in the sale of Dell, Inc., the special committee, in recommending the Silver Lake / Michael Dell proposal in February 2013 noted that the “price of $13.65 per share in cash to be paid pursuant to the existing merger agreement provides value certainty at a 37% premium to the average price for the 90 days before rumors of the transaction surfaced. The committee noted that Silver Lake Partners raised its bid six times by a total of approximately $4 billion, or over 20%, during the course of negotiations.” The deal eventually closed at $13.88 per share, a premium of 23.7% to the low end of Silver Lake’s initial indication of $11.22 per share and a 56.7% premium to the November 15, 2012 closing price of $8.86. [2]
These premiums demonstrate that there’s often significantly more value to an acquirer than to the current investors in the company. And managing the negotiation process carefully is the best way for a seller to capture some or most of that value.
The value of “process”
The business owner considering a deal after hearing from multiple bidders, after the back-and-forth of negotiations, is in a much better position to make an informed judgment. The question: “how do I know this is the deal I should be doing?” can be addressed clearly and early – before everyone’s at the closing table and preferably before a letter of intent is signed (and before the significant ramp up in legal and diligence expenses starts). We see clients carefully evaluating if the net after tax consideration is sufficient for their requirements, if the role available to them with the acquirer is what they want, if the post-acquisition plan for the business is acceptable, etc. Doubt about “leaving money on the table” is reduced by having heard from “the market” and valuation is almost always improved in the process. Time to closing is accelerated with the team effort, and the advisor’s experience and discipline of managing through negotiations and diligence. While each situation is highly unique, data across a range of industries, along with the real-world experience of middle market investment bankers, suggests that the value of running a formal process is highly significant and, for middle market companies, can represent outcomes significantly better than transacting without a process.
I’d welcome hearing from those who are considering or have been through an M&A process, as to their thoughts on the value of a well-executed M&A process. Feel free to reach me via email at fullerton@merger.com.
[1] Premium over the stock price one month prior to the announcement date. Transactions announced during the measurement period. Companies with pre-announcement market caps over $50 million. Excludes negative premiums, premiums over 200%, canceled transactions and financial firms and real estate transactions. US targets only.
[2] The timeline went something like this: On October 23, 2012, Silver Lake submitted a preliminary non-binding proposal to acquire DELL for $11.22-$12.16 per share. On November 15, 2012, the Company publicly reported its financial results for the third quarter of its 2013 fiscal year, which were generally lower than the guidance the Company had disclosed on August 21, 2012 and below consensus analyst expectations for that quarter. The market price of the Common Stock fell approximately 7.3% the following day, closing at $8.86 per share. On December 4, 2012, Silver Lake submitted an updated non-binding proposal to acquire the Company for $12.70 per share. Additional negotiation with Silver Lake and others followed, and on the morning of February 4, 2013, the Special Committee held an in-person meeting. The Special Committee was updated on the status of negotiations with Mr. Dell and Silver Lake, and was told that Silver Lake was continuing to evaluate the Special Committee’s insistence on a price above $13.60 per share. Following the meeting, Silver Lake called to agree to increase its proposal to $13.65 per share. In October 2013, the deal was closed with stockholders receiving $13.88 per share, comprised of $13.75 in cash, plus payment of a special cash dividend of $0.13 per share to stockholders of record as of the close of business on Oct. 28, 2013. The total transaction was valued at approximately $24.9 billion.
source: DELL Proxy Statement
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