In the world of private equity, an auction process is a common way to acquire deals and make investments. This process involves attracting multiple bidders who compete for the same company or asset, so the seller can receive the best possible value for their asset. The fast-paced auctions differ from the traditional business development and corporate development process in many ways. Among the differences is the limited opportunity to learn about and develop relationships with the founders, executives and management teams of target acquisitions in the auction process. This is often a concern for many of our private equity and strategic buyers. Most parties acknowledge and seek to take advantage of the benefits to an auction, while at the same time reducing its inherent risks.
Let’s first explore the auction process and its benefits.
At its core, a private equity auction ensures all interested parties are given equal voting rights, which increases competition among potential buyers and ensures fairness in pricing and protects the seller’s interests in achieving the maximum amount they can get from the sale of their asset or stake in whichever company they have put up for sale.
Private equity firms conduct auctions for several reasons, including:
Like many of these processes, the benefits must be weighed with the risks. A private equity auction process can be complex and competitive — and they tend to happen at a rapid pace and in different sequences than a typical business or corporate development process.
Here are a few of the risks:
An often-cited statistic — 70-90% of all mergers and acquisitions fail to achieve their intended outcomes largely due to concerns related to leadership, people and culture, should be reason enough to look deeply at human capital in due diligence and post-acquisition integration. However, in the fast-paced auction process where speed, competition and lack of access can impede a buyer or investor’s ability to evaluate these capabilities in concrete and meaningful ways, human capital assessments are more difficult to execute.
In proprietary deals, a firm might spend a year working with the leadership team and understanding a company’s strengths and opportunities. But, in an auction deal, there’s far less time to assess the team and far more unknowns around the work to be done post-investment, leaving a critical component of the auction process incomplete.
Assessing leadership and culture in a private equity auction process is critical to ensuring that the company is well-positioned for growth, has a strong and capable leadership team, and is a good values-fit with the private equity firm.
One of our clients shared this feedback after asking us to complete executive, leadership and culture assessments during their auction process,
“We went into the deal with a set of assumptions around what was going to be needed. But after diligence, we completely shifted our roadmap, recognizing that the top three things we needed to address were related to people and culture.”
According to Ocean Tomo (2020) approximately 90% of today’s S&P 500 market value is made up of intangible assets (including our people). Our economic reality has shifted, making leadership and people considerably more important to value creation than in decades past. Numerous studies have concluded that higher levels of employee engagement translate to positive economic outcomes for business enterprises. Leadership and management practices disproportionately influence employee engagement. So, it makes sense that assessing the leadership of a potential acquisition target is important in a private equity auction process for several reasons:
The auction process is a common way for private equity firms to acquire deals and make investments. However, limited access to information about the target company's leadership and management teams can pose a challenge for both private equity and strategic buyers.
Assessing leadership and culture in a private equity auction process is crucial for ensuring the company is well-positioned for growth, has a strong and capable leadership team, and is a good fit with the private equity firm's values and vision. The team plays a critical role in driving strategy, retaining talent, shaping company culture, and delivering financial performance — and in an environment where intangible assets, including people, are our source of greatest value and competitive advantage, assessing leadership is increasingly important in private equity auctions.
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