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Saturday, March 12, 2005

Auction Dynamics

Have you ever attended a high-stakes auction? I'm talking about one of those situations where the bidders raise paddles and the auctioneer doesn't chatter like a guy selling livestock at the county fair. Once in a while, a weird tension and excitement fills the room. Bidders get competitive & aggressive and it feels like a fight might break out. This is the environment that investment bankers attempt to create when they are trying to sell a company.

My two partners and I have been working on a deal since last August. The company that has hired us is a neat little finance firm that is quite profitable. We thought that many banks would be interested. We took it to market last fall, and the market basically yawned. People were too busy with other deals that needed to close prior to year-end or it was too small or too big or too different or too far away - the excuses were all over the map. Two out of the three bidders submitted sealed bids that were ridculously low. The third bidder, who submitted a very high price, pulled out suddenly. We had no viable course of action, so we pulled the deal off the market. The amount of effort we all invested in this effort was huge. Was it all for naught?

After the 2004 financials were compiled, we updated our offering materials and went out to market again. Our client was fatigued. The CEO of the finance firm had basically lost faith in his investment bankers. He expected to get crappy bids again, and he was preparing to continue on as an independent firm for the foreseeable future. Bids were due on Wednesday. We received many strong bids!! I am relieved and excited.

Now, we bankers earn our fees. We must investigate the bidders and qualify each one; we have to interrogate each bidder to shake out any sneaky aspects of the proposals, and we have to "walk up" the bids by emphasizing (very carefully) how competitive the process has become. Our compensation is tied to the sale price of the company - we are motivated. If we do well, this one deal will generate enough income to make our year.

The auction dynamics here are different than the paddle-raising, high-end affair. None of the bidders knows what the other players have bid. The investment bankers sit on information (to protect our client's interests). We jawbone and set demands; we strive to get the bidders fully engaged; emotionally invested in the opportunity. We also try to pick a buyer that will match our client's non-monetary goals - keep the company intact, no lay-offs, and so forth.

I think we are going to pull this off.

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