Simon Havers, a director at Granville Baird, says: “It’s more of a problem on auction deals because there’s more of an incentive to offer a higher price than you are willing to pay. It’s more prevalent now than it has been at any time over the last few years. The amount of money in the market is increasing pressure on people to bid high in auctions. They are worried that if they don’t, they won’t get through the final round.”
This view is not, however, shared with others in the industry. Alex Fortescue, a partner at Apax, says: “Price chipping happens far less than it used to. Four or five years ago it used to be the case that you’d go through four or five rounds, and then do your due diligence and so the price would come down. Now, due diligence is done up front, and the time between agreeing the deal and signing it is a lot shorter.”
The lack of price chipping in today’s market is a reflection, says one corporate adviser, of the maturity of the European market: “It’s a sign of an imperfect market. People feel they can get away with stuff like this in an immature market. In Europe this isn’t the case. The market has a clear knowledge about deals. People would find out about it pretty quickly, and this will give them a reputation which would damage their credibility.”
“Price chipping is not common,” says Lorenzo Russo of Change Capital Partners, “but it is important to draw a distinction between price chipping and price adjustment. If a company values itself at €7m EBITDA, and the bidder later finds out it’s €3.5m EBITDA then there is going to be a price adjustment.”
Granville has some advice for sellers wishing to avoid those firms with a reputation for price chipping: one, get references on short-listed bidders from those who have sold assets to them in the past; two, try and get an insight into the thinking behind each bid; and three, perhaps most importantly, to give buyers adequate access to the company for sale and management before asking for final bids. Twenty per cent of the respondents to the survey said price chipping was mostly the fault of sellers providing poor quality information to bidders.
Havers at Granville Baird says: “I am endlessly surprised by the reluctance of vendors and their advisers to allow decent access. Every time I have been given this sort of access it has increased both the price I was willing to bid and the level of certainty that could be attached to that price.”
Russo at Change Capital says: “Sellers always have to be careful about the information that they provide. It’s a trade-off. They don’t want to reveal too much because it might fall into the hands of competitors or LBO funds that may then go and buy a rival company.”
Havers says the lack of information problem is widespread, and is “partly motivated by a misplaced desire to keep details secret.” He gives the example of ArmorGroup, the UK-based provider of defensive protective security services and security training services, which floated on the London Stock Exchange in December last year. When Granville was bidding for the company in 2003, they were given, says Havers, “ample opportunity to ‘lift the bonnet’ and became very comfortable with the business and the quality of management. The vendor accepted our offer and we completed the deal, without any price chipping, just nine weeks later.”
The question as to whether price chipping is now more, or less prevalent than it has been lacks a definitive answer because of the paucity of empirical evidence. And it is well to remember that the perception of the prevalence of price chipping among corporate financiers (the very people who completed this survey) whose success-based fees will be impacted by such practices may well be stronger as a result. Anecdotal evidence gives us little in the way of a definitive answer, but all are united in how to combat it: sellers should avoid those with a reputation for doing it and provide adequate information to bidders.
Russo says: “The best way to avoid price chipping is to ask the buyer on what assumptions he is basing his bid on. It’s relatively common to do this, and it means that if the buyer says at a later date that they want to reduce the price, and you can prove that you met these assumptions, they have no basis on which to lower the price.”