Reverse Auction in M&A

The M&A auction process creates competition among potential buyers and drives prices up. In most cases, proactive acquirers tend to avoid these types of transactions, but buyers can also initiate and create their own auction process. 

In this article, Atul Tiwary, Vice President of Corporate Development at Barracuda, talks about the reverse auction process in M&A. 

“You need to have a broader corporate strategy in place and figure out how M&A fits into that. M&A is just a process and a tool that can help you get there.” - Atul Tiwary

What is a reverse auction?

A reverse auction is a process where the buyer broadcasts their interest in acquiring a specific type of company in the market and engages with potential targets. Sellers will then line up to apply in the hopes of getting picked by the buyer for the acquisition. 

However, this process doesn’t work in a highly fragmented industry and is only applicable in a hyper-competitive market where every company sells the same thing, just like cybersecurity. 

Benefits of a reverse auction process

One of the biggest reasons to do a reverse auction process is to control the pricing and valuation of the target companies. The competition alone will lower the prices as everyone participating would like to be acquired.

A reverse auction process creates a sense of urgency for the sellers. They know it’s a race, so they will be more responsive and quick to sell. In addition, a reverse auction process confirms the intention to acquire, which forces sellers to focus on the transaction. 

Lastly, because the acquirer is engaged in multiple diligence simultaneously, a reverse auction process helps them compare all the information they are gathering. 

Steps to executing a reverse auction process

The first step to executing a reverse auction process is to clearly define the criteria of the target company that would fit the overall strategy. The process usually starts by defining a product market segment and adding more filters up to a point where there are only a dozen potential sellers. However, filtering too broadly will result in too many potential targets and an impossible diligence process.

Once the companies have been shortlisted, start approaching the target companies. If the target are willing, secure an NDA and schedule product demos. During product demos, the acquirer can validate if the product is what they are looking for. 

The next step is to narrow the target list down further so that only one company is left in consideration, then formal diligence can begin. After that, the rest of the process can run similarly to a regular acquisition.

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