Are more and more M&A transactions taking the form of auctions?

It sure seems that way, thanks to some very high-profile auctions over the last two to three years. The sale of AT&T Wireless Services Inc. in 2004 (see previous story) comes quickly to mind, as do the sales of such well-known companies as Toys "R" Us Inc. and Dunkin' Brands Inc. in 2005 and Albertson's Inc. supermarket chains and Univision Communications Inc. this year.

The reality is a bit more complicated. For starters, as M&A pros know, there's no sharp line between the time-honored practice of quietly and patiently shopping a company around and then announcing a deal, and the fast-­moving, multibidder spectacles that more closely resemble the fine-art-at-Sotheby's-type process that the term "auction" calls, somewhat misleadingly, to mind. And then there are the numbers. According to The Deal's Auction Block database -- source of the charts above -- auction announcements have actually fallen off somewhat since last year.

And yet there's no denying that something has changed in the way that companies and businesses are typically sold. Auctions may not be the preferred method for conducting the giant deals that are helping to swell the overall M&A totals this year. But anecdotally at least, it's easy to show that a great many company sales have indeed become much more auctionlike, which is to say, faster, more aggressively managed, more automated (think virtual data rooms) and involving many more participants. It's also easy to identify the main forces that are driving the trend: private equity firms and hedge funds, both enjoying access to huge amounts of capital; strategic buyers also flush with cash and willing to put it to work; a resulting seller's market for assets; and a board-level determination on the part of sellers to get the best price they can.

Start with all those new participants. "You can no longer predict who's going to buy what," says Mary Anne Citrino, a senior managing director in the Blackstone Group LP's M&A advisory group. Citrino observes that few people expected the winner of the recent auction of weight management company Jenny Craig Inc. to be Nestlé SA, the world's largest food company. Yet Nestlé ended up buying the Carlsbad, Calif.-based operator of weight loss centers for $600 million in late June. The purchase does fit into Nestlé's avowed pursuit of food and nutrition. But the chain of weight loss centers (where members show up to buy packaged Jenny Craig meals and get advice on their diets from trained counselors) is an unexpected diversification for a company that sells thousands of packaged food items in supermarkets around the world.

Auctions are also cropping up in industries that rarely used to see them. Tom Flaherty, senior vice president in Booz Allen Hamilton Inc.'s gas and utilities group, says about 80% of the 22 auctions he's worked on in his sector have happened in the past two years. He adds that he's worked on 300 M&A transactions at the firm, and that until the last five years most were negotiated.

The trend toward utility and gas auctions is part of an industry restructuring that's been in progress since 2002. Feeling pressure to rationalize their portfolios and strengthen their balance sheets after a crisis in 2001, companies have been disposing of all kinds of holdings, from telecom to gas to power plants and energy services businesses. At the same time, says Flaherty, private equity and hedge funds have become a new force in the sector, both as buyers and as owners pushing for quick sales.

Case in point: the $2.2 billion sale of NorthWestern Corp., a regulated gas and electric utility in North Dakota and Montana, to Australia's Babcock & Brown Infrastructure Group. Announced in April, the deal culminated a long struggle between NorthWestern management and a hedge fund, Harbinger Capital Partners, which pushed the company to put itself up for sale. Harbinger had bought its 21% stake when NorthWestern was in bankruptcy in 2004. The hedge fund's assertiveness was something new. "In the past you wouldn't have had these distressed investors exercising so much strength on the management," Flaherty says.

But in the current climate, managers don't always need a push. The pull of the attractive prices made possible by all the new participants may be enough. "People are time and again surprised by how high the valuations are that result from these auctions," Citrino says. "So every CEO sees this and feels they have to do an auction because they don't know who's going to come out of the woodwork to pay the highest price."

Evidence for that trend comes in the form of what you might call copycat auctions: One business is auctioned off at an attractive price, and pretty soon a similar one comes up for auction. Pernod Ricard SA, the French drinks giant, completed a long-anticipated auction in late 2005 when it sold Dunkin' Brands Inc. to Bain Capital LLC, Thomas H. Lee Partners LP and the Carlyle Group for $2.4 billion. The price topped expectations at 12.8 times Ebitda.

That tempted sandwich vendor Quiznos Master LLC to get out there as well, though Quiznos founder and CEO Rick Schaden wanted to hold on to a sizable stake in the chain. J.P. Morgan Partners LLC ended up doing a recapitalization of Quiznos in April, and while neither the size of the Quiznos stake J.P. Morgan purchased nor the price paid was disclosed, the valuation was presumably influenced by the Dunkin' Brands deal.

Even with today's eager buyers and plentiful capital, though, copycat auctions can end in disappointment. Last October, Bolthouse Farms Inc., a major U.S. carrot farmer with a fast-growing smoothie drink by the same name, sold at a rich price in a heated auction to Madison Dearborn Partners LLC. Not long afterward, Fresh Del Monte Produce Inc., a world leader in pineapples and bananas, put itself up for sale. But a new European Union banana tariff regime and some new competition in pineapples scared buyers away, according to sources. Fresh Del Monte never formally announced that it was entertaining offers, nor that it had halted the process.

But banana tariffs aside, it remains very much a seller's market. Sellers feel more reluctant than ever to share information with prospective buyers. "There's less effort than in prior years in the preparation of information memoranda because people feel that there's enough parties out there that they can run an effective process, particularly given the prices that people have seen paid for certain assets," says Booz Allen's Flaherty.

Which brings us back to financing. If the main reason all those parties are out there is the availability of money, a key financial development has been the mainstreaming of so-called stapled financing. Stapled financing formerly was used mainly in sales of troubled companies to give buyers some assurance they could raise money, says John Finley, partner at Simpson Thacher & Bartlett LLP. Nowadays, staples are offered, usually by the sell-side investment bank, for most sizable auctions.

Not so long ago, leveraged buyouts used to have to be negotiated deals rather than auction deals, because a seller was never sure whether an LBO firm would be able to get financing and at what level. Each buyer would go to its lender of choice, who would then conduct its own due diligence on the company being shopped, before making a commitment. That was both more cumbersome and spread too much information among too many parties.

Today, even when the winning party doesn't use the staple offered by the sell-side bank, the staple functions as a floor on the price of the business, bankers say. That makes the auction process move more smoothly and quickly, without a handful of buyers needing to bring their banks in to vet the target's books ahead of final bids.

Easy money doesn't last forever, of course. And neither stapled financing nor aggressive bank lending for buyouts nor even the swollen war chests of PE firms and hedge funds are likely to prove immune to the business cycle. When the market cools and transactions get harder to complete, auction-driven M&A will inevitably recede as well; indeed, we may already be seeing signs of that.

Still, each high tide leaves things a bit different than they were before. And one big change this time around is likely to be a deal market that spins faster, operates more publicly, involves more players -- and relies more on auctions. - Soma Biswas

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