Three Buyer Tactics to Watch in Today’s Market

Welcome to Alkali Insights: M&A Musings and Advice

In the capital markets, preparation is paramount. If you’re preparing to sell or considering a sale in the future, you need to engage an M&A advisor now. A skilled advisor helps you see your business through the lens of a buyer today, so you can make strategic operating decisions tomorrow. With planning and foresight, you’ll be ready when opportunity calls. ‍

Buyer Tactics to Watch

As buyers look to capitalize on capricious market conditions, we are increasingly seeing patterns in buyer strategies. The most common patterns we’re seeing involve anchor bidding, wait-and-see, and early-out tactics. While these tactics have long been employed by buyers whose business model is predicated on purchasing companies at lower multiples and reselling them at a higher multiples, recently we’re seeing these strategies across-the-board. Of course, buyers will never disclose their strategies to a seller, but are more likely to share them with limited partners on how effectively these approaches have worked in past deal negotiations.

Before discussing the potential pitfalls of each of these tactics, let’s do some basic definitions.

Anchor Bidding

Anchor, or entry, bidding is when a buyer submits a bid merely to gain entry into the next stage of the process.

These tactics are easy to spot, but tough to negotiate even for an experienced investment banking team. For our clients, these bids can be incredibly exciting as they imagine their share of the deal. Advocating not to bring a potential buyer forward seems antithetical to the primary reason we are hired. Why not pursue the bid that’s $10M higher than the next offer?

Wait-and-See

The wait-and-see tactic is a strategy to appease the selling team, wherein the buyer submits a high bid after spending little time reviewing deal information. Then during the process, the buyer continues to put forth little effort. We’ll often see this pattern continue until the week before the LOI date, during which the buyer will try to glean as much valuation and competitive information as possible from the deal team. Some of the questions we’ve seen include:

• How many other parties are still in the process?
• What are the next steps after final round bids?
• What valuation do you think will win?

The buyer will typically also reference some “new” negative information they’ve learned that was disclosed long ago.

The initial goal of this strategy is to be one of the final parties in the process, therefore having more bargaining power over the deal price, structure, etc. When this works, the buyer will generally continue to delay spending on outside diligence through a stage-gated closing process in the hopes of finding more things wrong. Along the way, the seller can expect the buyer to test the bottom, which involves ambushing the seller with cherry-picked data and confusing analysis to illustrate that the company’s performance is worse than expected. From there, the buyer, who previously presented themselves as the main decisionmaker, will increasingly need to get the deal approval of some third party, like a board or investment committee.

The end goal is simple – to reduce the amount of cash required to purchase the company.

Early-Out

The early-out strategy is when a buyer bids low, works through their analysis fast, then quickly renegotiates their price. If their bid is not accepted, they will drop out of the process entirely. Historically, we see this tactic performed by private equity funds, who view their incurred costs as a cost-of-doing-business expense.

This strategy often reverts back to the wait-and-see approach. After 30-90 days, the buyer approaches the deal team hoping the company can be acquired at a lower price without an investment banker.

How to Protect Yourself

Do these tactics work? It depends. Most M&A deals use a multi-step bidding process, where buyers are asked to bid before being invited to future negotiations. Processes involve two steps, where buyers are asked to first submit an IOI (indication of interest) and if their bid is high enough, they are invited to submit an LOI (letter of intent). Before submitting each bid, buyers are given access to company data to help them make an informed decision. During the bidding process, buyers are consistently looking for ways to limit a seller’s options.

How does a seller protect themselves from these tactics? This might sound simplistic, but understanding how buyers make their purchase decisions is a critical first step. Without understanding the nuances of the negotiation process, sellers can fall victim to savvier buyers.

‍Buyer's purchasing decisions can vary substantially from buyer to buyer depending on their business. Always assume that buyers are doing their own due diligence (to build plausible deniability that it was a good decision). If they are not putting in the work, it’s a sign that they might attempt to lower their bid amount.

We are constantly looking for ways to protect our clients from these buyer tactics. A few things we look for in prospective buyers include:

• Buyer engagement – consistent communication, detailed meeting agendas
• Data room interactions
• Hiring of outside diligence providers – tax, legal, tech, etc.
• Requests to meet management team in-person
• Sending key decision makers to meetings

The Bottom Line

We believe that the best processes are nimble, competitive, and transparent. With multiple buyers in the mix, sellers have more control over the process and power to seek higher valuations. When buyer options are available, we advise clients to be purposeful and deliberate on who to move forward in a process. However, if early in a process a buyer isn’t a good fit –say no quickly and move on. Decline fast, approve slow, and ensure that all parties have appropriate information to make informed decisions.   

Understanding how to navigate buyer tactics within a sell-side process can be extremely challenging without an experienced advisor. Alkali Partners sees hundreds of bids on our clients' businesses every year. Through process experience and dealmaking expertise, we understand how to guide our clients to successful closed deals.