Preemptive Offers in M&A: Great for Buyers. Not so Much for Sellers.

After months of preparation, your company is finally on the market, and buyers are lining up like fairgoers at the funnel cake stand. 

With bids due in 45 days, you anxiously await the buzz of buyers competing against each other to land your company.

After all, that’s why you’re running a “Process” (yeah, it’s an auction, but “process” makes it seem so much more civilized).

It’s all going as planned until one of the buyers cuts to the front of the funnel cake line with a Preemptive Offer (that’s capital ‘P,’ capital ‘O’) – an offer that’s so attractive that you’ll want to lock it down toot sweet. Easy, peasy.

So, should you take it?

While we would never say never, the answer is, well, never (but not never, ever, because once in a very, very, long while, circumstances could be just so, that a definitive maybe might be reasonable).

Here’s why.

There’s only one reason for a buyer to make a preemptive offer.

And that’s to cut the process off at the knees and take out all the other buyers with one, decisive, thwack. Now, this is of little consequence if the preemptive offer is at a valuation that no other buyer is likely to top, as it is theoretically supposed to be.

But here’s the thing.

Why would a buyer offer more than the expected market clearing price? 

Wouldn’t they be far better off finding out what that price actually is, rather than risk paying more – perhaps far more – than necessary to prevail?

Well, not if the goal is to really pay less than the market clearing price by not allowing it to emerge in the first place. 

Now, you might say, “What if the buyer making the preemptive offer guesses wrong, and their valuation really is higher than what the process may yield?”

Yes, this could happen. But so could the Kardashians stop posting pics on Instagram. The mere fact that a buyer is making a preemptive offer should be proof enough that they know the market well enough to not overshoot the target.

OK. But you might counter, “Even if the preemptive bid falls a bit short of the tippy, tippy, top of the valuation range, we know it’s at least in the 70th to 80th percentile in price, plus, we can get the deal done sooner – and The Braff Group has said many times that ‘time is the enemy of all deals.'”

To that, we say “maybe,” “not necessarily,” and “absolutely.”

The valuation may be near the top of the anticipated range. After all, we rarely see “pedestrian” preemptive offers. The hitch is that you never really know where the top of the range actually lies. Trust us when we say that after closing more than 375 transactions, we’ve seen more than just a few “eye-popping” deals that eat conventional wisdom for breakfast.

Equally important, a preemptive offer does not necessarily close sooner. In fact, we have repeatedly seen such deals taking longer to close – sometimes a lot longer.

Why?

Because if the seller does not see a comprehensive process through to the end, they squander the market intelligence – and leverage – that only comes from vetting the market fully and uncovering all their options and potential back-ups. Having ceded this advantage, the buyer can now strategically wield it to extend the time to close. The goal? To extract concessions from deal-weary sellers who would rather spend a month confined in a cell with a life insurance broker than go back to square one with a different buyer. And if they do choose to begin anew? Tick, tick, tick.

And yes, time is absolutely the enemy of all deals, which is precisely the reason a preemptive offer is so risky.

So, if you’re trying to maximize offers, you may want to remember this little ditty:

If it’s preemptive, it’s presumptive, disruptive, and ultimately destructive.

Johnny Cochran would be proud.

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