Standard deal summary
Case 1: sale of a public company to a private equity firm, with a go-shop
Company A, a US-listed maker of precision components for medical devices, and Sponsor A, a healthcare-focused private equity firm.
Situation
- Company A is a US-listed maker of precision components for medical devices, owned by public shareholders and run by a president and chief executive plus an interim chief financial officer.
- Revenue was uneven: an index of 100.0, 99.7, 90.3, 109.9 over the four most recent years, oldest first.
- The largest customer was expected to be about 61 percent of next year's revenue.
- Sponsor A met the chair and chief executive 91 days before it put a written proposal to the company.
Objective
- Reach a price that met the board's view of value. The first two proposals fell short of it.
- Keep a high chance of closing: committed equity, no financing condition and limited closing conditions.
- Leave room for a better offer after signing, through a go-shop.
Strategy
- Reject the first range, say why, and keep talking under a confidentiality agreement with a standstill.
- Bring in the advisor once the bid was credible, before the price was final.
- Grant exclusivity for a short time only, with a way out for a better offer.
- Choose a negotiated deal with a go-shop over a full auction first.
- Negotiate the protections as hard as the price.
How the process ran
- Three proposals in 28 days: 109.1 to 114.8, then 134.9, then 139.2.
- The advisor was engaged and the data room opened on day 42. Exclusivity was signed on day 43.
- Diligence ran in order: data room, site visit and management presentation (day 49), then a financial session with the auditor and the advisor (day 50).
- The first draft merger agreement came on day 57 and the board signed on day 69, which is 69 days after the first proposal.
How it closed
- The board approved unanimously on day 69 after the advisor gave its fairness opinion. The deal was signed that evening and announced on day 70.
- A 35-day go-shop (45 days for a qualifying bidder) ran from day 70 to day 104.
- 30 parties were contacted, 10 signed confidentiality agreements, 7 held management meetings and none made a proposal.
- Shareholders approved on day 155 and the deal closed the same day, 86 days after signing.
Outcome
- The agreed price is 139.2 against an unaffected 100.0, a premium of 39 percent.
- That is 49 percent above the price a week earlier and 71 percent above the price four weeks earlier. For 60 completed deals the means were 34 and 41 percent.
- From the first proposal to the agreed price the offer rose about 21 to 28 percent.
- The fee during the go-shop ended at 1.2 percent (3.0 in the first draft), the fee after it at 1.7 percent (4.5) and the reverse fee at 2.5 percent (5.0).
- The price is inside or above 7 of 8 valuation ranges. Only the DCF, at 140.6 to 172.7, is higher.
What was hard
- One customer was about 61 percent of next year's revenue against a median of 21 percent for the 28 deals, and the advisor set the terminal multiple range with that in mind.
- Growth and profit had been hard to sustain.
- The DCF, at 140.6 to 172.7, sat above the agreed price.
- Some directors and officers had interests that differed from other shareholders, and management's own employment and equity terms with the buyer had not been discussed before signing.
What it showed
- A first offer is a signal, not a price: the offer rose about 21 to 28 percent in four weeks.
- An empty go-shop is itself evidence that the price was full.
- Protections are negotiated item by item, not only the price.
- Customer concentration changes how a company is valued.
- The shareholder vote ends the process but is not a formality: the proxy has to tell the whole story.