Though often overlooked or made by default, decisions about the structure and timing of a competitive deal process can have a significant impact on the ultimate value realized by the sell-side company. There are many important decisions that must be made in the planning stages, but among the most important is whether to communicate a structured process in the form of a procedures letter that contains rigid timelines to potential partners. There are nuanced pros and cons to using this approach, and Locust Walk advises our clients on a case-by-case basis depending on the seller’s specific goals.
There are many situations in which using a structured deal timeline is appropriate and can be helpful in both driving deal value and maintaining deal execution timelines. This is especially true when there is signigicant competitive partnering interest in the asset. In these situations, providing clear guidance about deal process timelines can have several advantages. First, it sends the signal that the process is competitive, and that would-be buyers need to submit attractive offers by the deadline to be seriously considered in the process. Under the right circumstances this can increase deal encouraging best offers to be submitted early.
A related benefit is that when multiple interested parties are conducting due diligence and business discussions in parallel, a structured process can help keep everyone on the same timeline and enable direct comparison of offers in a synchronized manner. Rather than be forced to evaluate and respond to the first term sheet that is submitted without seeing other potential offers, the seller will ideally have the freedom to compare all offers side by side simultaneously, then move forward with the partner(s) whose offers were most compelling.
As a cautionary note, although it may be tempting to use this technique to “bluff” about the amount of competitive interest that exists, there are risks associated with this approach. For example, if a rigid deal timeline is communicated to partners at the outset of a process, it may create a weak negotiating position to return to the same partners with a delayed deadline, as that clearly indicates a lack of competitive interest.
Another circumstance in which a structured deal timeline often makes sense is when there is an external time constraint created by an upcoming clinical, regulatory or other milestone. This arises most frequently when the seller is facing a regulatory deadline such as an upcoming end-of-phase 2 meeting or NDA submission. The sell-side company may want to have a partner involved in the regulatory process, but all parties involved are motivated to move the drug forward towards approval as soon as possible. In situations where a partner is needed by a specific deadline, communicating this constraint openly to partners is an effective tactic to align all interested parties on a deal execution date expectation.
Although there are several potential benefits to utilizing a structured timeline, this approach also comes with potential risks and drawbacks that should be considered carefully. For example, some buy-side companies, especially Big Pharma companies, often have difficulty mobilizing resources quickly enough to comply with a tight timeline. This creates the obvious risk that some potential partners who would otherwise be interested will not remain in the process for purely logistical and time-constraint reasons. A related concern is that even if potential partners do submit bids in compliance with communicated timelines, the value of the offer may be constrained if they have not had sufficient time to conduct adequate due diligence to fully understand asset value.
Finally, another important consideration when deciding whether to utilize a process with rigid timelines is the desired deal structure. For example, a structured process timeline may work well for deals that do not require ongoing cooperation between the seller and buyer, such as M&As or asset purchases. However, if the deal structure objective is a collaboration involving co-development and / or co-promotion, a deal process with a tight timeline can make relationship building challenging due to time constraints as relationship building takes time.
Although implementing a formal deal process with strict timelines can have many benefits under the right circumstances, there are also risks to the approach that should be carefully considered on a case-by-case basis. Locust Walk has experience with a wide variety of deal process structures and timelines, and provides advice to our clients based on this breadth of experience.
If you are interested in discussing the optimal approach for structuring a deal process, please contact me at nick@locustwalk.com to discuss how Locust Walk can help.
Written by Nick DeLong, PhD