Part 2: Approaching Potential Investors
In part two of our series on “Getting Your Sell-Side Deal Done” we’ll take a look at how, once you’ve done your preparation and created all your process documentation including the Information Memorandum (IM), you begin the process of approaching potential investors.
Identification of Potential Buyers
The identification of potential buyers is an integral part of the M&A process. Obviously, because without buyer there will be no deal. As an M&A analyst it is your responsibility to develop the long list – a breakdown of all potential companies/buyers which can take part in the process. Before you start to seek for the right companies, your dealmaker/manager has to define target criteria (i.e. size of the company, area of business, products offered, region etc.) in order to conduct a methodical and appropriate search. This step can be seen as the primary screening of the buyer’s universe. During this process, you will work your way through several databases, industry associations, plain Google research as well as internal sources (old projects, pitches etc.) and screen hundreds of companies. The purpose is to just include companies who may be likely interested as well as be able to afford the deal. Sometimes it turns out that the required information (especially for private companies) whether to add the company to your long list or not, such as Revenue, EBITDA or EBIT, is not that easy to obtain. This is your chance to convince your dealmaker/manager of your researching skills. Next comes the selection of best matching companies and putting them on the short list. Therefore, you and your team will be travelling to your client for a long list workshop. Based on your previously drafted long list you will select the best potential buyers in cooperation with your client. Frequently, your client also wants to exclude certain buyers, either for personal reasons, or in order to keep the circle of potential bidders tight and thus avoid market rumours. It is worth noting that the short list is a sort of foundation at which the sale of the company is built.
Approaching Potential Buyers
Once you and your client have decided, you will start approaching all potential buyers which have made it on the short list. As it is a strictly confidential matter, you have to directly contact the higher management of the potential bidder. After you have gathered all relevant contact details you will transmit the first documents (anonymous teaser and non-disclosure agreement) to the potential buyers. An NDA, short form for Non-Disclosure Agreement, states that all of the information that will be disclosed will be used solely for the purpose of exploring an acquisition and the information should not be disclosed to anyone else. Subsequently, if the potential bidder is interested, the company will respond to your email (ideally with a signed NDA) and demand more detailed information. Obviously, not all the contacted companies will be interested or provide feedback. In this case you will be following up on your initial contacted companies and clarify their interest and answer potential questions. You should strive to be well prepared and know your client’s business because you are talking to CEOs and/or CFOs which will not have much time for lengthy and unstructured explanations. If you have presented your client’s company in the right light, the potential bidder will surely want to gather more information and send you the signed NDA. After you have collected all the signed NDA’s from the companies on your short list, your finished IM comes into play.
To sum it up the Teaser goes out first, then an NDA is signed if there is interest and only afterwards the IM and a Process letter are disclosed. A process letter describes how a potential transaction will be structured and the indicative offer should be made. Finally, you can transmit the IM and the process letter to the potential bidders in order to provide the prospective buyers with a basis for decision-making and valuation to submit indicative offers on the requested date.
Of course, you will also have to prepare the company management for the management presentations simultaneously. Read more about it in the next step of the sell side process: Indicative Bids.
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