VideoWhen fitness-magazine publisher Weider Publications was put up for bids late last year, the owner of the National Enquirer, American Media, flexed its financial muscle with a winning $350 million offer. Meanwhile, The Blackstone Group was buying TRW Automotive at auction from Northrop Grumman for $4.7 billion. That was just after Blackstone had teamed up with two other private buyout groups, Thomas L. Lee Partners and Bain Capital, to win Vivendi Universal's auction of book publisher Houghton Mifflin with a $1.66 billion bid.
Competitive auctions for healthy companies remain alive and well, despite the recent lean years for mergers and acquisitions in general. In March, AOL Time Warner received the first round of nonbinding bids for its book-publishing division; among the suitors were British media giant Pearson and German media giant Bertelsmann. Needing to pay down some of its $29 billion in debt, AOL Time Warner is hoping to raise at least $400 million from the sale.
For the seller, auctions are also an effective way to shed noncore operations, as Pfizer Inc. is demonstrating. While the company is making headlines with its proposed $60 billion acquisition of Pharmacia Corp. — which won conditional approval from the European Commission in February — Pfizer is also selling off companies at auction to purify itself as a pharmaceutical and health-care colossus. During a recent three-month period, for a collective sum exceeding $5 billion, the company accepted winning bids for three subsidiaries: Tetra, an aquarium and pond-supplies firm; Adams, a confectionary business; and shaving-products company Schick-Wilkinson Sword. All had been acquired in Pfizer's 2000 merger with Warner-Lambert.
Divesting the businesses was "a tough decision," says Pfizer executive vice president and CFO David L. Shedlarz, though he calls it "an appropriate decision, in terms of where [the businesses] fit in the longer-term strategy of Pfizer." But the choice of the auction vehicle was much easier: five years ago, Shedlarz used it to divest the three businesses that formed Pfizer's Medical Technology Group.
Like many companies with assets to purvey, Pfizer sees the auction as a robust, transparent process that can ensure the best deal. But the company insists on more than just top dollar, says Shedlarz: it stipulates that bidders agree to treat employees of the acquired business fairly (see "Pfizer's Rx," at the end of this article).
Seller Beware
While every deal is different, M&A experts agree that there are some useful guidelines to observe when selling a company through a controlled auction. And there are also pitfalls to avoid.
An auction is a complex, drawn-out affair, compared with a one-on-one sale, and can place enormous strain on a company. "Businesses begin to fall apart during these processes," comments Frederick S. Green, senior partner and head of the M&A practice at law firm Weil, Gotshal & Manges LLP in New York. "It's a tremendous distraction [for] management to meet with buyers and present the company. Employees become very unsettled. Some of your best and most mobile people are going to prepare their résumés and get out while the getting is good."
Before going the auction route, in fact, CFOs should consider whether that is the best way to sell, says Mark L. Sirower, who leads the M&A practice at The Boston Consulting Group in New York. The buyer that will pay the most ought to be the one that has the strongest economic case for buying an asset, he notes. But sometimes that buyer is a company that refuses to participate in auctions. Sirower suggests some investigation to uncover "buyers who may not be buyers if there is an auction."
In situations where there is clearly a single best buyer, and where possible competitors are unlikely to offer much, just the suggestion of an auction may be enough. "Sometimes we advise a client to use the threat of an auction as its lever to get a reasonable deal done with the best buyer," says Donald Meltzer, co-head of global M&A at Credit Suisse First Boston LLC (CSFB) in New York, which advised AT&T on its $72 billion auction of its broadband unit in 2001.
Once an auction is chosen, though, the first rule is to do no harm, says Mark A. Filippell, manager of the private-company M&A practice at McDonald Investments Inc. in Cleveland, which specializes in middle-market deals. In particular, Filippell warns against investment bankers that use the auction process as a marketing tool.
"It's the dirty little secret of a lot of M&A firms," he charges. "They make a beautiful book [describing what's on the block] and send it to 100, even 200 potential buyers." Most of them won't be interested, but the M&A firms "get a chit with all the groups they show a deal to," says Filippell. Meanwhile, the seller's confidentiality "is blown to hell," and the word that a company is for sale can seriously damage its relations with customers, trading partners, and employees.
Chocolate for Sale
In a controlled auction, investment banks first narrow the universe of potential buyers to a reasonable number. For some deals it's easy to identify the likeliest bidders, but for others, more effort is required. McDonald frequently conducts a blind screen, shopping a client anonymously to interested parties. Recently, for one distributor of aerospace fasteners, Filippell used the technique to quickly reduce a pool of 50 potential buyers to 6. "Why tell the whole world?" asks Filippell. Many times, a low-key, less-formal auction with a handful of bidders is best, he says.
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