Friday Letter: Tightrope Walking

Part of the trick in walking a tightrope lies in making sure your line has the right tension. Keep it tight. The slack wire is only good for juggling, clowning and sword fights.  

The potential for disaster makes for compelling viewing.

Investment bank-run auctions have become a similar spectacle. Maintaining competitive tension is all important to a successful outcome. Let it slacken and the process becomes a farce. Put a foot wrong and a bust auction is just one tactical slip away.

Goldman Sachs hit the headlines this week for its handling of the auction of US conglomerate General Electric’s plastic unit. The US bank has invited offers from six bidders. Four are private equity firms: Apollo Management, Bain Capital, The Blackstone Group and Kohlberg Kravis Roberts & Co. Two are trade buyers.

As part of the conditions of the auction, Goldman has stipulated that the four buyout groups may not team up to mount a consortium bid for the $10 billion (€7.7 billion) asset.

Many commentators have suggested this was Goldman’s sop to the US Department of Justice inquiry into private equity collusion. This auction would be whiter than white.

The bank has in fact only disallowed the four firms from acting together. They may of course form consortiums with other buyout firms and trade buyers once they have clearance to share with a third party any confidential information which Goldman and General Electric make available.

Goldman has in its time been guilty of many things. Stupidity has rarely been one of them. 

It knows a $10 billion price tag is still too much for most firms. A consortium is still the most likely way private equity will get this deal done, without cutting the price.

And at heart the Department of Justice and Goldman have an interest in common: to maximise competition and value to the vendor.

Goldman would never limit the auction from the outset, especially as most analysts see trade as an unlikely buyer. Maintaining competitive tension is critical to a successful auction. Goldman’s restrictions are another tactic to preserve competition and, just as usefully in the current climate, remove any hint of a taint of collusion.

The bank is pragmatic enough to know, as a frequent consortium investor itself, that if club deals kill competition, then that is a secondary benefit to them compared with finding enough equity to do the deal in the first place.

GE does not have to sell at any price. And if the six bidders cannot hit the conglomerate’s reserve, it could walk away. However this high wire balancing act should make the safety of the opposite pylon with ease.