Monday, November 10, 2014
The famous Humphrey Bogart movie Casablanca bequeaths us the colloquial expression “Round Up the Usual Suspects.” In the film, Captain Renault, the French head of police, played by Claude Rains, watches Humphrey Bogart shoot Nazi Major Strasser dead to help Victor Lazlo escape. Renault witnessed the shooting but protects Rick by telling the investigating police to "round up the usual suspects.” By so doing, he is instructing them to limit the investigation to questioning the common criminals that they see most often and are most familiar with.
In selling a business, it seems that many mergers and acquisitions intermediaries are more often rounding up the usual buyer suspects, rather than doing the hard work of searching the larger universe of potential buyers thoroughly. This can be conducted via emails, web marketing, notices in print media or other ways.
When it comes to selling a business, the marketing process to find and solicit potential buyers is central to the purpose and fulfillment of the job. Two major methods are used. Targeting a select sample of buyers by staying within the intermediary’s comfort zone, or what we call, “Rounding Up the Usual Suspects.” Or, by contrast, canvassing a wide audience of potential purchasers thoroughly, or “Casting a Wide Net” and “leaving no stone unturned.” Each method has its pros and cons. The more targeted approach yields a higher yield of potential bidders because the potential buyer universe is pre-qualified and pre-selected. The casting of a wide net captures a lower percentage of bidders because a large universe of buyers is solicited. I understand that. Indeed, there are cases in which limiting the participation of buyers is applicable, such as when confidentiality or when not-for-profit mission perpetuation is paramount. But this is not about numbers really, such as the capture ratios of bidders and buyers; it is solely about reaching the breadth and depth of the potential buyer universe.
Thus, the Round Up the Usual Suspects method suffers from an inevitable serious defect that is beyond dispute. The intermediary cannot deduce with certainty or with a high level of probability that that the sales process realized the highest purchase price. To conclude this hypothesis would be erroneous, because the intermediary cannot verify that every qualified and interested buyer who might pay more was contacted. While the selective approach may result in a good number of buyers and even result a fair market value for the business, there is no confidence that a buyer who might pay more was left out of the process. Moreover, sellers are not interested in fair market value only. They are interested in maximum value, or as we sometimes say of the purpose of for profit entities - maximizing shareholder wealth. So to be clear, this is not a question of the number of ultimate bidders, but whether the intermediary can say with confidence and even unequivocally, that all the buyers who were notified of the opportunity represent all potential buyers or just the subset of usual suspects.
The healthcare M and A market is very dynamic and fluid, with new capable and financially qualified buyers entering daily, whose geographic targets are not limited to the home office. Today, with awesome computing power and speed abound, where we are all ostensibly connected, it is becoming more feasible to be contact the entire theoretical market of buyers. That is the unique contribution of Big Data. Technology and awesome computing power is rendering limited sampling obsolete because we are approaching the ability to test the entire universe.
I may have long experience in healthcare M&A, but I am not wedded in the past. I am humble and I don’t presume to know everyone. The value of technology to cast a wide a net wide to all potential buyers is actually feasible, so that the intermediary can say to their client that the sales process realized the highest price because all potential buyers were contacted and no one was omitted; no one was left behind. That is why Casting a Wide Net is logically superior to the Rounding Up the Usual Suspects approach, whose results, however salutary, cannot rise to this level of certification.