Two-Step Private Auction
We have talked about various types of auctions for a while now in class, aside of the types of auctions we discussed in class, there’re other auctions worth to know. For example, a two-step private auction, proposed by Lixin Ye from Ohio State University, is a variation on the controlled auction process used in the sale of a privately held mid-market business. The major differences between a Two-Step Private Auction and One step Auction is that the buyers are aware that they will be involved in a rigid auction and the number of prospective buyers is larger given the desirability of the target. This larger pool of buyers also increase the risk in breaches of confidentiality.
As the name suggests, the process follows two-steps. In the first step, prospective buyers will provide a written expression of interest that outlines valuation and deal structure based on a review of limited information presented in a confidential information memorandum.
Based on review of the valuation and the terms in the expression of interest, the seller and their advisors will select a limited number (6-12) of top prospects to participate in the second step. These prospects will receive more detailed information and will be invited to management presentations. Shortly thereafter, the buyers will be asked for formal offer and, often times, intermediaries will provide seller-friendly purchase agreements to the buyer for their insertion of price and terms.
One of the example that shows the success of this auction is the the IBM awarding process. IBM awarded grants, each worth millions of dollars through a two stage process in which academic institutions first submitted abbreviated proposals that determined who would be funded by IBM to develop more detailed proposals. Besides than the IBM examples. many real-world auctions exhibit a multi-stage nature. Apparently, bidders could typically choose to commit resources in stages and could end up acquiring different amounts of information, which is something the one-stage auction ignores.
Source:
- Indicative bidding and a theory of two-stage auctions: https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.721.6475&rep=rep1&type=pdf
- https://www.lawinsider.com/dictionary/two-stage-bidding-process