How should automation companies respond to unsolicited offers?
Automation companies can be subjected to offers from potential buyers about the business, and it is important to determine which are serious and not. Four questions for automation companies to consider are highlighted.
Automation business, buy-out offer insights
- Unsolicited offers for automation companies should be addressed with caution, and owners should determine who the buyer is and what the buyer’s goal is.
- An expert advisor can help the automation company determine whether or not to accept the letter of intent (LOI) or indication of interest (IOI).
A frequent question in the automation market business owners is: “I keep getting phone calls from buyers, and I am receiving unsolicited offers for my business. What should I do? Should I seriously entertain these unsolicited offers? Or, if I am going to talk to one, does it make more sense to hire someone and run a competitive process?”
The automation market is hot for mergers and acquisitions. Automation company business owners need to consider several questions unpack the positives and before entertaining or accepting an unsolicited offer versus running a competitive process managed by an investment banker.
Question #1: What is the common unsolicited offer situation?
A buyer, which could mean a strategic buyer or a financial sponsor (that is private equity, family office, independent sponsor) that is already active in the automation industry, approaches a business owner and expresses interest in acquiring or investing in the company.
Usually after the owner provides some base level of company information (financials), the buyer then submits an offer known as a letter of intent (LOI), which will likely have an exclusivity provision in it. If the owner signs the LOI, which includes the exclusivity period, the owner cannot talk to any other buyer during that specified timeframe.
Question #2: Is this a formal LOI? Or is this a preliminary indication of interest (IOI)?
First, it is important to understand the difference between a letter of intent and an indication of interest.
Letter of intent:
The buyer has a strong understanding of, and experience in, the automation industry. Furthermore, the buyer can demonstrate its merger and acquisition (M&A) track record in the sector.
An offer that has “teeth” to it means the buyer has completed all critical due diligence regarding the company and is providing a well-educated offer. Critical due diligence is defined as a buyer’s assessment of such key company aspects as commercial and financial stability, growth opportunities and strength of management.
Critical due diligence is the deciding factor regarding if a buyer will 1) submit a letter of intent; 2) close on a transaction; and 3) close on a transaction based on the terms in the LOI.
The buyer has demonstrated commitment to the opportunity without being under any form of exclusivity arrangement. This includes spending significant time reviewing company information, asking questions and committing buyer employees and resources to the opportunity.
The risk of a buyer retrading on valuation and terms, or walking away from the transaction, is lower because the buyer only needs to complete confirmatory due diligence. Confirmatory due diligence involves the buyer and buyer’s transaction advisors reviewing financial information, legal-related matters (past, present and future) and operations.
Indication of interest:
An offer and valuation provided based on partial, but not complete, selling company information.
A buyer has committed minimal time and resources to this point as a means of hedging its bets until the owner agrees to exclusivity.
An IOI gives the owner an idea where a buyer might close a deal in value and structure, but there is a low degree of certainty the buyer will close on those terms.
Question #3: What do I do with this unsolicited offer?
That is an individual choice for an owner, but there are many factors to consider when deciding. Before outlining two avenues that can be pursued, it should be noted any owner has the option of turning down the offer and staying focused on the business and growth.
Option I: Accepting the unsolicited offer
Positives of accepting the unsolicited offer
Accepting an unsolicited offer:
- Can potentially close a deal and achieve valuation and walking-away-money goals.
- Possible to achieve these objectives in a relatively short timeframe.
- Avoid some transaction costs (e.g., investment banker, transaction accounting) by accepting the unsolicited offer.
- Avoid the time and effort required to run a competitive marketing process.
Unsolicited offer considerations for the owner
Upon receiving an unsolicited offer, the owner should consider:
- Significant chances owner is leaving money on the table.
- Probability of a buyer closing on the terms in the IOI/LOI are lower.
- Probability of a buyer closing on the transaction is lower.
- Owner will end up devoting the same time and resources in a non-solicited discussion as a full process… but in different ways.
- The buyer has control of the discussions and the negotiating leverage, from beginning to end.
Option II: Pursuing a competitive process instead of accepting the unsolicited offer
In a competitive process, the owner informs the unsolicited-offer-making buyer they will be hiring an investment banker and will run a competitive process. It is a likely option for the buyer to participate in that process.
Positives of pursuing a competitive process
In a disciplined sales process, the seller is securing the negotiating edge. This process typically includes an IOI round, management meetings and then a LOI deadline date.
Any incremental deal costs should be paid back to the seller multiple times over through value creation in the sale process.
Competition fleshes out “the right answer” for any owner, which means:
1) Value is optimized
2) Best fit is accomplished.
“Certainty to close” is higher in the transaction. Through this process, the owner will be selecting a buyer that has completed critical due diligence and stands a much higher probability of closing on the transaction and at the terms stated in the LOI.
Considerations for the owner:
There can be more upfront costs (transaction accounting, investment banker) and time investment for an owner relative to the early phases of a non-solicited discussion.
If the owner doesn’t hire an investment banker with automation market experience, the owner risks not achieving a better position relative to an unsolicited offer.
A competitive process doesn’t guarantee the owner will arrive at a better outcome.
Question #4: Why hire an investment banker that is focused on the automation industry?
A quality industry-focused investment banker can pay for themselves, often multiple times over, by delivering significant value to the owner.
The investment banker can help reduce time commitments by the management team by quarterbacking the sale process, vetting the buyers, managing buyer-seller conversations and making this an arm’s-length transaction.
An investment banker with extensive experience in the automation industry will know the best buyers, the multiples they can be pushed to pay in a competitive process and what a diligence process will look like. These buyers also know they will have reputational risk with that investment banker for future industry deals if they don’t put a good foot forward on the current deal being evaluated.
The investment banker can serve as an insurance policy in a process. This means the certainty to close with an investment banker is higher and maintaining agreed upon terms is more likely. Should a buyer attempt to re-trade in price and/or terms, the owner and investment banker can exit the buyer from the process and select another buyer that has already been through the competitive process and desires the business.
Impact of an offer to purchase an automation industry company
An unsolicited offer can create a decision point for an owner. Accepting the offer could lead to a closed deal within a short timeframe. However, it could lead to a lot of heartburn and headaches (i.e., extended due diligence period, price re-trade, blown deal).
Tabling the unsolicited offer and pursuing a competitive process does require some more upfront commitment by the owner but increases the odds of a better outcome. Of course, the owner also can elect to reject both paths and maintain full ownership of the business.
Who gets the value in the automation company transaction?
There is a final point to consider on unsolicited offers. The buyer groups aggressively submitting unsolicited offers in the automation market almost always hire investment bankers to then sell their portfolio companies and subsidiaries in a competitive process. Maybe that is a good indicator on the optimal path to take if you are an owner.
Clint Bundy is managing director, Bundy Group, which helps with mergers, acquisitions and raising capital. Bundy Group is a Control Engineering content partner. Edited by Chris Vavra, web content manager, Control Engineering and CFE Media and Technology, email@example.com.
Bundy Group is a boutique investment bank that specializes in representing controls and automation, Internet of Things, and cybersecurity companies in business sales, capital raises, and acquisitions. Over the past 33 years, Bundy Group has advised and closed more than 250 transactions, which includes numerous automation-related transactions.