Action | Good practice | Process used in the sale of Northern Rock |
Responsibility for the sale process | Where the institution for sale (the vendor) is not controlled directly, the department with policy oversight should take responsibility for ensuring that the sale arrangements achieve value for money and that all wider questions affecting the public interest are considered. | The final decision on a sale would be made by Northern Rock’s shareholders. The sale process was run by the company’s board, which appointed its own lawyers and financial advisers. Early legal advice indicated that the Treasury should not become involved in the day to day management of Northern Rock. When it became clear that potential buyers could not arrange private funding for a bid, the Treasury began to take a more pro-active role in trying to find a solution. |
| In this role, the department should set its own objectives for the sale and appoint its own expert advisers. | The Treasury developed high level objectives for the sale and appointed expert advisers at an early stage. |
Investigation of the market | Maximum value for money will be achieved by promoting the widest possible competition. The sale process should investigate the market to attract as many bidders as possible through advertising the sale, targeting potential bidders individually and employing professional advisers with a knowledge of the industry. | The sale of Northern Rock was publicised widely. Northern Rock received 14 expressions of interest. No major banks expressed an interest in the whole company. Of the three expressions of interest for the whole company, two were from private equity firms and the other was from a relatively small financial services company. The remainder of the expressions of interest were for parts of Northern Rock. Later on, the offer of a public financing option resulted in two bids. |
Preparation of an Information Memorandum | Produced by the vendor, this provides a brief trading history of the entity and information on its prospects. It should provide sufficient information to allow prospective purchasers to formulate their initial bids. It should also set out the timetable for the sale process which should be adhered to. The criteria by which a vendor is to evaluate bids should be included in the Information Memorandum to aid bidders in making informed and acceptable bids. | Northern Rock produced an Information Memorandum on which the Treasury had limited opportunity to comment and which only set out a timetable for the receipt of non-binding bids. Northern Rock allowed one bidder extra time to deliver its bid. Where this is allowed, all bidders should be allowed the same extra time. The Treasury had made it clear in October 2007 that any proposal put forward by bidders would be evaluated against its stated objectives. After a request by the bidders, the Treasury made available a set of transaction principles on which it would judge the acceptability of bids. The principles were not made available until after non-binding offers had been made but before the receipt of binding offers. |
Allow potential bidders the opportunity to seek clarification of matters | Allowing potential bidders to seek clarification of major points will lead them to make more informed and acceptable bids. | One bidder commented to us that it found it extremely difficult to obtain information and answers to its questions from Northern Rock. |
Benchmark valuation | Vendors should obtain an accurate and up to date benchmark valuation for the business to be sold. It should not just be used as an estimate of likely proceeds but also as an indication of the level of proceeds below which the vendor would consider carefully whether or not to continue with the sale. | Goldman Sachs produced a valuation for Northern Rock by comparing it to recent sales of other banks. Understandably, those sales were not of banks in receipt of Bank of England support. The valuation formed part of the analysis of the two final bids against the option of public ownership. |
Choose bidders to take to the next stage of bidding | The vendor, with the assistance of professional advisers, should assess the initial bids and draw up a shortlist of potential buyers to undertake due diligence and submit detailed bids, including a mark up of the vendor’s Sale and Purchase Agreement. | Northern Rock’s scope to shortlist potential buyers to take to the next stage of bidding was limited because it only received three offers for the whole company. |
Evaluation of formal offers | Vendors should use pre-prepared evaluation criteria linked to their objectives to assess the final bids. | The Treasury assessed bids received against its Transaction Principles. |
Selection of preferred bidder | The vendor should only select a preferred bidder once negotiations are practically complete as the announcement of a preferred bidder releases competitive tension, placing the preferred bidder in a strong negotiating position, especially if there is a wide range of matters left to be agreed. | As any final decision would be in the hands of its shareholders, the company could not guarantee that a preferred bidder would be successful. Northern Rock continued discussions with all three bidders, although it chose to take forward discussions with the Virgin Consortium on the basis of the non-binding offers received. When discussions with the Virgin Consortium faltered, a public finance option was offered and fresh bids sought. Negotiations took place with the two bidders who submitted bids on the due date. |
Involvement of Management Buyout teams | There needs to be transparency where a management buyout team is involved in bidding so that there is openness and fairness in dealing with all potential bidders. There needs to be clear separation of the functions of vendor and potential buyer, with clear responsibilities between all staff during the conduct of the sale. | The Northern Rock management team became interested in making an offer for the company when the public financing option was made public. To avoid any potential conflict of interest, the Treasury and the other members of the Tripartite Authorities took the lead in evaluating the final bids from the Virgin Consortium and the management team. |
Sources: Trade sales including management buyouts (MBOs), HM Treasury July 1996. Getting best value from trade sales and strategic partnerships, HM Treasury, November 2000. | ||