The high prices that auctions generate give acquiring companies little room for error, particularly if the economy falters. “Some buyers are paying top dollar, and that could increase defaults on deals if company performance takes a downturn,” Garon says. If enough deals default, most buyers may decide that they can’t pay the top prices that auctions typically produce.
But other buyers are paying top prices while lessening the chance of default. Acquiring companies are relying less on borrowed money than they used to. They’re putting more of their own cash into purchases than they did ten to fifteen years ago, going from equity stakes of about ten percent then to around 30 percent now. The additional equity cushion, Garon says, means “it’s less likely that one bad quarter will drive a company into debt default.”
High purchase prices have driven down returns. That may put some buyers off auctions—but it may spur others to accept lower returns as part of the price of doing business. “No one has a divine right to 30 percent–plus equity returns,” McFadden says. “As the market becomes more efficient, market returns will come down to appropriate return on capital. You’re seeing the maturing of a marketplace.” It’s one where auctions are a fact of life, at least for now.
