Financial Purchasers—Elephants or Dung Beetles
Financial buyers come in many forms and provide liquidity to many different markets. The private equity (PE) industry contains both large strategic purchasers (elephants) and opportunists, who seek to snap up companies when no strategic purchaser emerges (dung beetles). Whichever strategy they are pursuing, and despite being much misunderstood and maligned, over the past 20 years financial purchasers have acquired more companies than trade acquirers. Any vendor who does not consider the PE market as a potential purchaser may be missing, at a minimum, a valuable source of competitive tension, and possibly the optimal purchaser.
Auctions—Theory and Practice
In a traditional, so-called English auction, bidding stops when the last but one bidder drops out. The vendor receives fractionally more than the second highest bidder was willing to pay. There are various ways to attempt to capture the value that the highest bidder might have paid. For example, a reverse auction (also known as a Dutch or clock auction) operates by the price declining until it is accepted by a bidder. This results in the so-called winner’s curse—the only thing that the purchaser knows for certain is that they paid more than anyone else would have.
A counterintuitive solution to the problem was proposed by US economist William Vickrey. In a Vickrey auction, sealed bids are received and the asset is sold to the highest bidder, but at the price bid by the second highest bidder. This system ensures that each bidder bids their own true valuation, rather than speculating on the possible bids of other parties. The theoretical underpinnings are outside the scope of this chapter, but Vickrey was (jointly) awarded the 1996 Nobel Prize in economics for his work in this area.
Information from the first round of bids can be used to intensify informed competitive tension in subsequent rounds. For example, in a group of four second-round bidders, all the bidders might be informed of the value of the third highest bid received in round one. This tells the two highest bidders that they were one of two, but not who was highest. It tells the third highest bidder that they were third, and similarly tells the fourth highest that they are playing catch-up. The information provided by the first-round bids gives each party a clear steer on their position in the process and a strong guide regarding the landscape of the bids.
In practice much of auction theory is of only partial relevance to any corporate sale because the theory is predicated on the assumption that completion of the transaction occurs simultaneously with acceptance of the bid. In practice, of course, there is usually confirmatory due diligence and negotiation of legal agreements to follow.
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