The classic adage teaches that it is better to have a certain, but perhaps lesser than expected, outcome than the possibility of something greater that may never come. This lesson holds true for dealing with biopharma transactions. The difficulty of managing an offer in the hand is often overshadowed by the challenges of getting an offer to begin with. An offer is far from a done deal and must be carefully managed to successfully close.
An initial offer is often far from optimal. At the onset of a process, management’s deal expectations are high and the prospects of potential partners still evaluating the opportunity often provides a false sense of alternatives. This can easily lead a company to dismiss offers received early in a process. However, our suggestion is that an offer that falls short of expectations should be cultivated as it creates several advantages for a transaction process:
- External validation of the merits of the opportunity
- Creates potential for a competitive process
- Provides a credible alternative to not transacting
Once an initial offer has been received, efforts should focus on cultivating and negotiating the offer in hand while simultaneously soliciting offers from other interested parties. Regardless of the attractiveness of the offer received, it is a validation from an external party that the opportunity has merit. While such a signal may help persuade other potential parties to enter the process, it will not limit or substitute independent due diligence. We have seen countless processes where interest in an opportunity seems to be tepid until a single party provides an offer. An initial offer should be used as a catalyst for further engaging other interested parties in the deal process.
Just as an offer provides validation, it also stimulates the potential for a competitive process. Communicating to other interested parties that you have received an offer signals that you are serious about transacting and that they must meet a minimum threshold to be taken seriously. It is important to provide guidance for follow-on offers so economic terms are more aligned with expectations. In this way, an initial offer can often serve as a “stalking horse” that can create competitive tension, expedite the process, and improve economic terms.
Furthermore, and perhaps most importantly, receiving any offer creates an alternative to not transacting. While it is easy to get distracted by the prospect of more attractive opportunities that could potentially pop up, it is important to remember that the greatest likelihood is the offer in hand. A lot can happen during a long, drawn out process that can derail a transaction. Over the past few years we’ve seen key management team members and business development leads leave, unfavorable data or regulatory issues emerge, and organization shakeups that stall or kill a process. Nothing is more frustrating! Based on our experience, when selling an opportunity, time seems to rarely be on your side.
Therefore, it is not only critical to cultivate the offer in hand, but to negotiate it in good faith as if it were the only offer you will receive. Negotiating an initial offer is often the most challenging as it anchors the economic terms and has no competitive tension to drive terms in your favor. Without an alternative, the bidding party carries much greater negotiating power as they can walk away at any time and leave you without a deal. At Locust Walk, we have seen a number of cases where the initial offer winds up being the only offer received. We work with our clients to maximize the value of these challenging deals to get as close to their initial expectations as possible. There are also examples where clients, despite out recommendations, refuse to negotiate an initial offer as they deem the proposed terms not to merit further discussion. While in some instances, alternatives do arise, in the vast majority of cases, no additional offers are received and the company is either unable to secure a partner or must return to the initial bidder with a severely weakened negotiating position.
Whether it is uncertain issues that can arise in a long transaction process or the inability to get other bidders around the table, negotiating and seriously considering an offer in hand is the wisest path to take in the transaction process. At Locust Walk, we specialize in helping life sciences companies secure the best transaction available in the global marketplace. We hope that we can serve as a rational, cool-headed partner to your business in the future.
Written by Chris Ehrlich and Chris Baird