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— A VPA Perspective

Strategies for Including a Competitor in the M&A Process

Summary
  • Why founders are leery about selling to competitors
  • Why selling to a competitor can be a great opportunity
  • Tactics to include a competitor in the process

As a founder you likely haven’t spent much time cooperating with your competitors. But now, as you prepare to sell your business, have you ever considered that you might sell to a competitor?

If the thought of selling to a competitor never occurred to you, perhaps an investment banker suggested it, outlining the potential benefits. Still, to you, opening the curtains and telling a tough competitor you’re preparing to sell might make you nervous.

Why founders are leery about selling to competitors

Almost every founder we work with has some degree of concern about revealing to direct competitors, partners, customers, or some other counterparty that the founder’s company is exploring a transaction.

As a founder, you’re probably most acutely worried about competitors. What if they try to poach your customers? What if they tell your partners? What if their actions hurt your business, creating issues in the sale of your company?

Many founders we work with are hesitant about even talking to competitors. In your mind, you may perceive them as an enemy you can’t trust—so why would you even talk to them, let alone sell to them?

These concerns over future repercussions and past adversarial relationships are real. But consider that selling to a competitor can be a great opportunity—and that it happens all the time.

Why selling to competitors can be a great opportunity

What are the qualities that make a good buyer? Ideally, they:

  • Understand your industry
  • Share similar values/ideals
  • Have strong synergies with your company
  • Have domain-specific expertise in your area

In many cases, a competitor will have all the above attributes, giving them the ammunition to pay a high price for your company—something all founders love.

The benefit goes both ways, which is why a large part of M&A activity involves consolidation transactions where one competitor absorbs another.

Looking back at Vista Point’s last 20 strategic M&A transactions, competitors prevailed in 20% of them.

But even though companies often sell to competitors, that doesn’t mean you should treat a competitor as any other buyer. If you include a competitor in the deal process, you will want to approach the process strategically.

There is no one-size-fits-all solution for including a competitor in the process. You and your investment bank will need to strategize your approach with each party to determine if, how, and when you engage with them.

Some potential strategies for dealing with competitors include:

  • Excluding them outright
  • Running limited disclosure participation
  • Interacting through PEs/VCs
  • Running late-timing participation

Tactic 1: Excluding competitors outright

One approach is to make sure the competitor never becomes aware of the transaction. Locking competitors out of the transaction is the most drastic way to handle a competitor in the M&A process.

The downside of this approach is you never get to understand the price this buyer would pay for your business, which could be high considering they could potentially have the strongest synergies of anyone in your industry.

When we recommend this strategy

We rarely recommend this strategy, except under two sets of circumstances:

If the competitor has no financial capacity to complete an M&A transaction, we won’t include them. If we know the competitor doesn’t have wherewithal to purchase your company, we won’t even bother including them in the process. Some ways to determine financial capacity include:

If the company has a high level of M&A activity. If the company has completed 5-10 deals historically, we can safely say the company has the resources and expertise to begin and close an M&A deal.

If the company is backed by a PE/VC firm. Having an investor backing the company gives that company access to additional financial resources even if they don’t have direct capacity for the purchase.

If the competitor has a reputation for being a value buyer, we won’t include them. If the buyer or their financial backers (PE/VC) are known for being cheap and not paying up to win competitive transactions, then there is likely little lost by excluding them from the transaction.

Tactic 2: Running limited disclosure participation

A limited disclosure strategy involves narrowing the amount of information provided to a competitor participating in the process. For example, you might limit access to:

  • Customer names
  • Sensitive product information or product roadmaps
  • Detailed employee information
  • Any "secret sauce" that gives a critical competitive advantage

Early on in the process you might even mask your company name, though a competitor will likely be able to uncover the identity of the company with just some basic information. As such, you will want to negotiate an NDA, including contractual obligations that would keep competitors from soliciting your employees or preying on your intellectual property.

When we recommend this strategy

For every competitor we involve in a sales process for a client, we always practice some form of limited disclosure. The challenge is that while we’re trying to not disclose anything confidential, we also want the buyer to ascribe a high value to the business. To do so, they need to understand all the synergies there could be between the two parties.

The best approach is to work with an investment banker, who knows if, when, and in what form to disclose information so the buyer can complete their due diligence.

Tactic 3: Interacting through PEs/VCs

Another strategy for involving a competitor is to first approach the competitor’s financial backers (PE/VC investors) to check if they and their portfolio company are exploring M&A at all.

Often investors are not looking at M&A because:

  1. They are currently integrating previously closed M&A transactions and don’t have the bandwidth to handle new transactions.
  2. They are looking to sell or exit themselves and they don’t want to invest fresh capital into the company.

Given that investors will need to give their blessing and may need to fund the M&A transaction, checking in with them first can protect you from having an investor veto the transaction later on—after you’ve needlessly disclosed information to a competitor who won’t be able to participate.

When we recommend this strategy

We recommend applying this strategy on any M&A transaction involving competitors. Going through investors first allows you to keep the transaction under the covers while discovering whether the competitor is available to participate.

Even in situations where the direct competitor would not need capital from an investor to fund the transaction, going through investors first is still helpful to glean insights about whether the company is open for M&A and what areas they are focusing on.

Tactic 4: Running late-timing participation

The concept of late-timing participation is to run the M&A process without the competitors until late in the process.

In this approach, you build up a pool of competitive buyers so there is a high likelihood of a transaction on the horizon and therefore less sensitivity about revealing confidential information.

Once you feel comfortable about your prospective buyers, you can invite competitors late in the process and give them a clear price and terms that they would need to pay to participate.

This strategy works because competitors have a strong incentive to purchase due to overlap in technology and customer base. Because they know the industry/company better, they’re usually better equipped to move faster in the M&A process compared to other buyers.

In the best case scenario, competitors end up out-paying the other players and you as a founder get a great outcome. If the competitor can’t compete with other buyers, then you have credible alternatives you can turn to.

When we recommend this strategy

We recommend some form of this strategy in most transactions to varying degrees.

The most extreme interpretation of this strategy would be to give a competitor a few days after disclosing the sale to buy at a given price. We rarely invoke such an extreme strategy for a number of reasons, most notably the high risk that the deal ends up falling through.

We do, however, almost always delay the involvement of pure competitors in the M&A process because they require less "warming up." They’re already educated on the business, so there is much less selling them on the opportunity.

Including a Competitor without Losing Your Footing

Including a competitor in the M&A process can result in great outcomes for founders selling their business. Doing so, however, is never as simple as implementing one of the above strategies.

To successfully include a competitor, you will need to work closely with a banker to craft an overall strategy that involves several of the core tactics we mentioned. That strategy will make it possible to give competitors enough information to make a good offer without giving away any competitive advantage.

Modified on Jun 23, 2020