Competitive Tension—Creating Fear, Encouraging Greed
Once you have surveyed the landscape, the task is to identify and communicate with those purchasers most likely to place a valuation on the business that they can afford to pay and which exceeds the walkaway price. When considering the number of parties to approach to create a market, again there are two extremes: blunderbuss or rifle shot.
The blunderbuss approach says that since you never know who might be looking for a business like yours, you should maximize the probability of hitting the target by firing as widely as possible. The downside is that circulating information widely makes a confidential process most unlikely.
The rifle shot approach targets a limited number of buyers, maximizing the probability of reaching those specific purchasers wishing to acquire the business. You risk missing a purchaser that you don’t know of, but the process can be managed much more efficiently in a small and tightly controlled market.
Whichever approach is used, maximum tension requires only a few, well-funded potential purchasers to emerge from the initial marketing. There is not much to gain from an auction with seven purchasers compared to an auction with six, but it is much harder to efficiently manage a large number of parties. The number of parties taken into the final process needs to be consistent with the information strategy adopted. It’s no use offering open access with no warranties to a large number of bidders; it is unmanageable in practice.
The special case of a market with one buyer presents different challenges. Here there are different ways to motivate a deal. In a market of one, you have to adopt either the “takeaway sale,” or enter a courtship.
The takeaway sale is a tactic used by realtors and used car salesmen across the globe. You quickly show your wares and then you rapidly remove them. The message is clear: It is a once in a lifetime opportunity to buy this house/car/company, and it won’t come again; act quickly. This is a risky approach. If the purchaser doesn’t believe you, your negotiating position can be seriously undermined if they react with a studied show of indifference to the opportunity presented. However when it does work, it can produce spectacular results because a strategic premium is paid by the purchaser.
Courtship is subtler and has its own risks and rewards. It involves exploring possibilities and exchanging information and plans to build a consensus on the way forward and what that means in terms of valuation. When the logic of bringing two companies together is compelling, two questions often arise: First, which is the diner and which is the dinner? Second, even if the cake is bigger, you still have to negotiate how it is going to be shared. A courtship strategy requires a significant investment of senior management time and emotion.
The biggest risk in a failed courtship is, as we all know, the effect of a broken heart. The impact on corporations of a failed courtship should not be underestimated: It can paralyze a corporation just as surely as it can turn a teenager into a gibbering wreck.