Reverse Auction in M&A

What is a reverse auction?

A reverse auction is the opposite of a simple auction where you have many buyers trying to buy a product. Here, we specify with clarity and transparency as much as possible what we're trying to buy, and then we engage with the sellers. 

It's part of a broader process. So after clearly articulating the M&A process, which talks about what you're looking to acquire, it can be challenging, especially in cybersecurity, where there are thousands of companies. 

There's a lot of marketing noise, so you've got to sift through all of that. And it's important to have key criteria that you are looking for when you want to acquire a company. And because it's such an overfunded sector, dozens of companies are doing similar things. So it lends itself really well to this notion of reverse auction. 

Typically a reverse auction process would not work if there are many different companies in the industry. It only works in a hyper-competitive, well-funded market like cybersecurity. In cybersecurity, there are over 2,000 companies that sell products and services and the overall market size is about 200 billion. 

Target Sourcing

So first, we define a product market segment where we can do a reverse auction process. In about 24 to 48 hours, we will be able to find hundreds of companies selling in that particular market.

The goal is to narrow it down because you cannot talk to 100 companies within a short period of time. So you will have to refine your search criteria before running the reverse auction process. Typically we try to get it down to a dozen or fewer. 

Have conversations with them and put them in buckets where you can decide whether they are disqualified as a target company and start filtering them more. I'm not shy about reaching out. I'll discover the company's name and I'll reach out to the CEO on LinkedIn. 

If the CEO isn't responsive on Linkedin, I'll try to connect with a salesperson within the company. Usually, the VP of sales will be super responsive on Linkedin, so that's where I will go if I still need to hear back from the CEO.

First Conversation

I have my standard Corp Dev questions. Typically I schedule a 30-minute call, and I spend the first five minutes on niceties and telling them all about Barracuda. I make it a point not first share what we do so that they feel like it's not a one-way street.

After that, I tell them why I'm reaching out, and I have about 20 to 25 minutes to listen to them talk about their company. I have tough questions such as:

• When was the company founded? 
• When was the product first became available for the general public? 
• How many people are in the company? 
• Where are they located? 
• How many customers do you have? 
• What does the product do? 

Depending on where I am in the reverse auction process, I'm becoming smarter in the space. On the sixth CEO I'm talking to, I will know more about the market, so I can ask more nuanced questions than before.

After gathering all the information, I take them back to the product team and the technology team, and we triage the next steps as a team internally. Then we invite a smaller group for the next round of conversation. 

We also do product demos. So we get an NDA in place with the company, schedule a product demo, and then triage them again with follow-up questions. Product demos are longer that takes around 60 minutes long, and then we decide if you want to continue discussing or not.

Every target company knows that we are looking to make an acquisition and not to partner or anything else. So if the company doesn't want to sell we stop conversations with them.

I don't convince people to sell their businesses. I'm running a reverse auction process because I want to find the optimal company. And if they feel like it's the wrong time to sell then I want to avoid forcing them to join our company. 

There are a lot of small companies in our market so we get to be picky. One of the biggest benefits of running a reverse auction process is that you can control the pricing and the valuation in your favor. 

Post-NDA

Normally, after the screening process, we get it down to one company, and we engage much more deeply with the CEO and key folks inside their company before talking about valuation and strategy post-deal. 

I know people think that price is a big thing, but many other things matter, and we try to suss it all out doing the initial diligence process. There a lot of diligence that you can do pre-LOI, and we do them all. 

• Cultural fit
• Product level
• High-level product fit
• Product quality high level

Once we have the LOI in place, we go into exclusivity. This is where we do our technical due diligence, customer diligence and financial diligence. 

Competition during Auction

The competitive nature comes both internally and externally because it focuses everybody's attention. It's a process with a timeline and the competitive part is very much in the front end when evaluating different companies. 

Internally, everyone is having conversations about picking one company versus another. It also works externally, as the target company knows we are ready to acquire. No two companies are the same price, and it can be competitive from that standpoint. 

It will depend on the commitment of the CEO to be acquired and how much they are willing to pass up. 

Benefits of the reverse auction process

• It focuses everybody's attention. It sends a clear signal to the various participants in the process that we are serious about doing a deal here—both internally and externally. 
• It helps us become smarter. You have a plethora of information to help you make the right decision, which will also help if you are waiting for inbounds to come in or for the company to be available for sale. 

But again, the reverse auction process does not apply to every market. It doesn't work on fragmented markets because if you don't have a dozen competitors here not going to be able to run this process. 

Selecting the right target

Most companies qualify or disqualify at Barracuda based on product market fit. Because we are in a mid-market-focused business, certain product characteristics are more important for us. 

For instance, the companies we end up disqualifying often sell to large enterprises, and their price points might be too high. But we don't disqualify them without looking at them. 

It becomes quite clear which company we want to go after, but if we can't get number one, we will go to the second choice. We are willing to pay premium multiples, but we will never overpay if we can't justify the value based on what we believe we can drive the business to be. 

Communicating the Strategy

We have a template that we use where we create a simple list of companies that we're going after and have specific criteria that we are using to qualify or disqualify companies. We communicate this both internally and externally to the selling CEO. 

Internally the team knows what we track on each company: 

• Is the product easy to sell? 
• How well will it integrate? 
• Can we sell this product through the Barracuda channel? 
• Do they have existing products? 
• Do they have existing customers that are common to Barracuda? 

So we look at multiple things, and based on where each company lands, they move up or down our priority in terms of what would be the best fit company.

Post LOI

It's not very different from another acquisition process post LOI. The maximum benefits you get from the reverse auction process are definitely at the front end. After that, the benefits start fading as you get into the second week of due diligence. 

The other benefits that you may get are that you're just better informed about the market and there is a level of confidence that you are, in fact, getting one of the best target companies.  

So if that opportunity map is just three companies and if that's your number one area of M&A strategy, you got to pick from one of these three. And those three, if they are not a fantastic fit, you have to decide if you want to do an acquisition in this category or not.

Cold Calling

Sometimes I initiate all the conversations, but sometimes we may get an inbound from a banker, which they'll send to me. We are very straightforward and transparent, and we don't offer any partnerships. 

As were trying to build a relationship with CEO and board members, I try to keep the mindset of openness, friendly and transparent. The important thing is to have a broader strategy and vision of where you're trying to take their business and that's when you will get clarity on who to build relationships with. 

It avoids the mindset of chasing deals, and if you have a good strategy in place and you are running a reverse auction process, you are in control of the process rather than reacting to someone else's timeline. 

Pros and Cons of the Reverse Auction Process

The downside of a reverse auction process is that you sometimes miss the companies that have just raised millions of dollars. Because if a company just raised 50 million in a series b or something, convincing that CEO to sell a company would likely be impossible. 

Often we would not even invite that company to our process because of the unlikelihood of the sale. 

The benefits are what we talked about before. 

• It focuses everyone's attention, both the buying team and the group of sellers. 
• It creates a sense of urgency on the other side and you get to dictate the pace of the transaction.
• It helps you get much smarter because you're talking to a large group of similar competitive companies simultaneously.

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