ANDREW BAHLMANN: M&A — Acquiring Telkom: auction versus negotiation

When you have something to sell, conventional wisdom tells us the best way to get a good price for it is to hold an auction.

The world of mergers and acquisitions (M&A) breaks down into two camps: negotiated sales and auctions. Although they can be similar, the two have a few key differences. At the moment there appears to be so much interest in acquiring Telkom that though the desire may be for a negotiated sale, it is taking on some characteristics of an auction process, which would be the best outcome.

An auction is a means of selling a business whereby the business is offered to a fairly wide pool of prospective buyers which make their bids, and thereafter the company goes to the best bid, usually but not necessarily the highest price. The process may examine other factors such as the certainty of more upfront cash. It is still a negotiation process, with the business’s adviser tailoring the pitch to highlight certain benefits that will be most appealing to each individual prospective buyer.

The negotiated process (though an auction is also negotiated) occurs where two parties have identified each other as a good fit. While a negotiated sale may still have elements of an auction, it involves a lot more hand-holding of the seller. A negotiated sale usually works best for larger, well-known companies like Telkom — but not for price.

Casting one’s net wider in an auction process may find a buyer willing to pay a premium for the right opportunity to enter a market such as SA. It works best for smaller companies or companies with losses or thin profits. You might think that as long as the expected price keeps rising, you want to elicit as many bidders as possible. But a wide-open process has downsides.

First, there’s the complexity of managing so many bidders, and then there’s the risk that some bidders (even high bidders) will choose not to play if the field is too large. One of the drawbacks of an auction can be a larger dissemination of confidential information, especially into competitors’ hands. Therefore, an adviser is useful in managing the process to achieve the best price.

For instance, our formula is to pitch as widely as possible, sometimes collecting as many as 40 indications of interest, which we winnow down to a handful of bidders, on the basis of their reputation, credibility and likelihood of closing the deal. It’s incredibly time-consuming, and it’s possible to have too much of a good thing.

Broadly, the three types of auctions are a rifle-shot approach in which a company’s adviser selects the handful of potential suitors to engage; a targeted approach that selects a larger universe of buyers — up to 20; and a shotgun approach, which takes a broad look at the market. The method the adviser chooses is driven primarily by the culture and fit of the seller. The type of seller is often also a factor: for instance, a family business may want to go narrower and focus on a shorter list of potential buyers for nonfinancial considerations.

The process involves the seller preparing an information memorandum of the important company information that will be sent to a number of potential bidders, and then each potential bidder being invited to submit an indicative bid. Only the most attractive bids will proceed to the next step of undertaking due diligence and reviewing the draft sale documentation, and after this has taken place inviting a further round of bidding. At this stage the seller will select favoured bidders with whom negotiations will continue, which it is hoped will lead to a sale. The price and deal terms can still be improved upon if there are a number of interested bidders.

Clearly the biggest advantage of an auction is that it allows a seller and adviser to comprehensively survey the market to uncover every potential buyer. Even where the list of potential buyers seems obvious, sometimes the right, previously unnoticed, candidate can emerge from an auction process. By going to a broad number of potential buyers one uncovers lower probability buyers that would not typically be approached in a purely negotiated process.

Another key benefit is speed of execution. With well thought out transaction documents and organised processes for management time and site visits, auctions often result in transactions closing earlier. This is because competitive tension propels purchasers to put their best bids forward to make it through to each succeeding round.

As with Telkom, extremely motivated buyers with secured capital and financing who understand the seller’s business intimately will often try to pre-empt an auction process. There can similarly be benefits to the seller if they expect a high price while avoiding a disruptive process that consumes management’s time with multiple bids. Buyers obviously prefer negotiated deals as it gives them more certainty over closing, negotiating contractual obligations including closing adjustments, warranties and so on.

Telkom would be an ideal fit for MTN SA, hence the latter would like to avoid an open auction process. Given that Telkom is still largely publicly owned, an auction process would achieve the best price for shareholders. A merger between MTN and Telkom makes good operational sense because it would create a telecoms powerhouse with tremendous scale, combining MTN’s deep pockets and mobile market strength with Telkom’s extensive fibre, tower and property assets.

A merged entity will also be positioned well to challenge Vodacom’s dominance in SA and unlock shareholder value.

• Bahlmann is chief executive (corporate and advisory) at Deal Leaders International.