Tuesday, November 24, 2020

Fake gnus have been spotted in the National Museum of Natural History, but they pale in comparison to the fake news experienced within the private equity bidding process. In a typical process, there are at least two rounds of bidding, the first serves to reduce the field and the second serves as a spring board to the third round the banker has sworn would never occur. Prior to the first round, whisper numbers on likely price expectations are leaked, but oddly no explanation is provided for earnings addbacks that Darwin would rule out. Inevitably, no matter what one bids, you are told management liked you best, but your bid is unlikely to prevail. Notable exceptions to this process are the firms that advertised that they do not participate in auctions. They receive all the information from above then bid above the expected range for the company and insist on exclusivity terms. Faced with receiving more money than they ever expected, most sellers will accept the terms and the buyer can claim they do not participate in auctions.

The second round of bidding proceeds after several weeks of work by the potential buyers. A deadline of 5pm on a certain day is set to submit the bid. Each bidder will have had a chance to inquire about expense addbacks and run rate earnings calculations, most of which could be submitted for the Booker Prize for fiction. Bidders then have to balance their conviction about these adjustments with their concerns that other bidders have not questioned them and decide how much to pay while worrying that all bidders are not looking at the same picture. It is a financial version of The Princess Brides scene “I know that you know that I know”. Upon submission, a strange curtain of silence ensues. Queries about the status of one’s bid are met with “Our client is travelling or we are trying to analyze the bids”. The idea that the client, who expects to receive a king’s ransom, has traveled beyond telephone coverage for days sends the bidder to Ancestry.com to see if the banker is related to Geppetto. Behind the scenes, this often means they are racing to sign with one of the other bidders, as their bid was high enough to establish contact with the travelling client.

Another result might be the narrowing of the field to two or three bidders and to give each of them a few days to submit “best and final” bid. We were recently in this situation where on a Saturday we were told we had prevailed and management was also told so they could begin to negotiate employment contracts with us. Sunday morning we were called to say the other bidder, upon learning their best and final had lost, added $100 million to their bid! Our first Olympus Fund was $100 MM and they blithely added it to their bid in thirty minutes. When we asked what the words “best and final” and “Olympus you have won” meant hearing problems developed with the sellers. The $100 MM tip reminded us of Deu-la-deu Martins of Moncao, Portugal. Her city was under siege by the Spaniards in 1369. The city was desperate for food as the Spanish mustered outside the city walls. The Spanish Army was also desperate for food supplies. Ms. Martins gathered the remaining flour in the town to have two loaves of bread baked. She then stood on the castle ramparts and tossed the bread to the Castilian army while yelling “We have plenty, tell us if you need more”. The army, reaching the end of their food supply, bought the bluff and retreated. We throw around bid increases like manhole covers so we retreated when the $100 MM of bread appeared.

Election 2020: In 1944, Sewell Avery, President of Montgomery Ward, defied government orders to permit unionization efforts at Montgomery. As a result, National Guardsmen, in a famous photo, carried him in a fully seated position out of the building. Recent events have us wondering will we see this reenacted on January 20, 2021.

I’m Rob Morris and I approved this blog.

Fake Gnus Have Been Spotted