Targeted Auction

A targeted auction refers to a private bidding procedure that involves focusing on a limited number of bidders for the takeover of a firm or company. It enables different qualified purchasers to compete for an organization and helps in weeding out the buyers who are not the right fit.

The number of bidders participating in the process generally ranges from roughly 3-10 and only includes those buyers who fulfill the seller’s criteria. This makes managing the auction process easier and more efficient. Moreover, it restricts the risk of confidential information regarding the acquisition getting leaked to any unwanted party. Typically, this process is common for mid-market companies.

• A targeted auction is a type of auction that involves only a small number of competing buyers placing bids to purchase a firm company. This procedure allows selling organizations to identify qualified buyers with a strong strategic fit. 
• This type of auction has three elements — the available business-related information, the participation of more than one prospective buyer, and financial capability.
• A key benefit of a targeted auction is that it enables the selling business to get a high valuation as multiple buyers compete for the takeover. 
• In this case, every buyer knows each other’s takeover strategy.

Targeted auction refers to a procedure involving a small number of bidders for a business. This auction helps swiftly filter out unfit buyers and complete the sale within a short duration. This is because the seller only focuses on qualified strategic buyers.

Ideally, the buyers invited to place bids include financial buyers, such as private equity groups, companies that have had relations with the seller in the past, or top industry performers. As noted above, since the selling organization restricts the total number of prospective buyers, there is little to no chance of private details leaking to a third party.

The selling company, with the help of expert M&A (mergers and acquisitions) advisors, assess and narrow down some qualified purchasers who fulfill the eligibility criteria set by the seller. Then, the prospective buyers engage in a bidding war for the selling organization to decide who will get to purchase the company.

The elements of this type of auction are as follows:

#1 - Available Business Information

A seller must give detailed information regarding the operations to the potential buyers before inviting bids for the purchase. The buyers should also get a reasonable amount of time to analyze the details provided. Giving prospective buyers comprehensive information ensures they are well-informed regarding the business. This allows them to determine whether proceeding with the transaction is the right decision. The buyers send their bids to the seller only after the provided information satisfies them.

#2 - Financial Capability

Because of the high stakes associated with the purchase transaction, the buyer must have enough financial capacity to complete the transaction without any problem. If buyers do not have the capital required to finance the purchase, they must be able to get funds from a financial institution.

#3 - Presence Of Multiple Qualified Strategic Buyers

A successful targeted auction must have various qualified buyers interested in purchasing the company. Having multiple buyers on the list of final buyers increases the auction’s competitiveness. Moreover, sellers are more likely to get a better valuation for their business.

The steps to carry out a targeted auction are as follows:

1. The promoters of the selling organization collaborate with experienced M&A advisors or professional consultants to create a memorandum detailing the overview of the seller’s business operations. Also, they prepare a list comprising interested buyers.
2. Then, the seller presents the memorandum to the potential buyers, giving them an invitation to put in bids for the business’s purchase.
3. Upon receiving bids, the seller and the experienced advisors identify bidders who placed the highest bids and have the best capacity to complete the takeover with the fewest closing conditions. The final list usually comprises a maximum of 10 interested parties.
4. Then, the prospective buyers have a meeting with the seller and its advisors aiming to raise the bids or complete the purchase sooner. When the meeting occurs, the seller gives the buyers a document known as the draft purchase agreement. This agreement consists of the terms and conditions concerning the deal. After receiving it, buyers must place their final bid.
5. The buyers return the agreement to the seller, and the latter selects the company with the best offer. The seller gives the buyer an exclusivity period. The necessary financing is confirmed during this period, and the approvals are given. Then, both parties finalize the transaction once the buyer completes due diligence and confirms all details concerning the seller’s business are correct.

Let us look at a few targeted auction examples to understand the concept better.

Example #1

Suppose the promoters of ABC company want to sell the business. They decided to conduct the sale via a targeted auction to prevent the leak of business-related information to unwanted parties and get a high valuation. After narrowing down the list of prospective buyers, the promoters held a meeting with the purchasers and asked them to raise their bids. Then, the selling company reviewed their offers and chose the buyer with the highest bid.

Finally, the buyer conducted due diligence and completed the takeover once it deemed the information provided by the selling organization accurate.

Example #2

Suppose the owners of DBC Football Club, a listed company, decide to sell the business through a targeted auction. Accordingly, they contacted experienced M&A advisors and presented a memorandum to 5 potential buyers, inviting them to place bids for acquiring the football club. Then, after receiving the bids, the promoters of the selling organization asked two bidders to increase their bids and provided them with the draft purchase agreement.

After the two buyers placed their final bids, the owners picked the bidder that put in the highest bid. Once the approvals were given by the regulators, the chosen bidder conducted due diligence and completed the purchase.

Let us look at the benefits and limitations of targeted auction.

Advantages

• This type of auction enables the selling company to contact potential buyers, even if they are unaware of the organization.
• Since multiple buyers compete to purchase the company, the selling firm can get a high valuation.
• It allows the selling firm to restrict access to confidential information regarding their business.
• The process enables selling companies to be in total control of the sale.
• This auction method is ideal for mid-sized organizations.

Disadvantages

• The selling company may reduce its chances of getting an outsized offer by restricting its buyer pool to only a few buyers.
• Buyers will likely know each other’s financial strengths and acquisition strategy.

This article has been a guide to what is Targeted Auction. Here, we explain its elements, examples, how to conduct it, advantages, and disadvantages. You may also find some useful articles here -

• Funding Rounds
• Dutch Auction
• Vickrey Auction