Identify the best way to buy or sell an asset
Companies need to know when to auction and when to negotiate. Executives often sell off divisions or subsidiaries of their organization using auctions, which have become more popular with sellers looking to quickly find a host of potential bidders. And, using competition among buyers, sellers can drive up the sale price.
Choosing between an auction or a private negotiation will depend on many factors, but the trade-off between transparency and secrecy will be a crucial consideration. This can determine the valuation of the asset: if bids in an auction are miles apart, the seller is probably missing out on money in the deal.
A case in point is the 2004 auction for Cable and Wireless America (CWA), which attracted two key bidders. Savvis Communications made an offer, hoping to diversify its customer base and generate synergies with existing operations. Gores Technology, a private equity firm, also placed a bid with the aim of restructuring CWA, then selling it on for a profit.
Savvis won the auction with a $168 million bid, and its share price surged by a third on news of the deal, boosting the company’s market capitalization by some $85 million. This suggested that CWA was actually worth about $250 million.
Savvis picked up the asset at a bargain, because it only had to slightly outbid its rival. A private negotiation would have negated this information advantage, likely resulting in a bigger sale price.