In response, the client, CSX Corporation, was eager to move forward with Morris Communications, but Schwarzman advised his client to wait. Rather than reveal the bids to encourage Cox and Gannet to match or surpass Morris, he kept the sums concealed and organized a second round of sealed bids.

 

The objective was to convince Morris that the offers received were tightly grouped. Believing that the competition was tight Morris Communications raised their bid to $215 Million.

 

Warren Hellman, President, Lehman Brothers

 

Today a “sealed-bid auction” is common, but at the time it was largely unheard of. “‘We made it up as we went along,’ says Schwarzman, who credits himself with pioneering the idea.” 

 

As the story goes, no one else would have had the “guts” to get an extra $15 million out of Morris Communications when the bids were otherwise so far apart. But this is what makes the price-discovery process in private equity largely human. All three bidders had the same information about a couple of newspapers that jointly generated $6 million in operating income, and yet somehow the top bid was twice what the third highest bidder originally submitted. To further encourage the absolute top bidder to reach beyond their initial valuation, it only took a little doubt, easily instilled by simply communicating that another round of bids was required.

 

The CSX Corporation anecdote is decades old, but to act as though the process has since been refined to eliminate strategy and gamesmanship would put any party at a disadvantage. To help those new to the industry navigate this process we have outlined a few items that should be considered as part of every IOI submission process. 

 

Source: David Carey and John E. Morris | King of Capital | 2/7/2012 | p. 25