What Does Bait and Switch Mean?
A bait and switch negotiating tactic is when a potential buyer (either strategic or private equity) offers the highest prices during bidding in a competitive auction process and then significantly reduces the purchase price when they obtain exclusive negotiating rights with the company. The reasoning for the price reduction is due to issues uncovered from more extensive due diligence on the company being sold.
Divestopedia Explains Bait and Switch
It is quite common for due diligience to uncover issues that would warrant renegotiation of the purchase price or terms of the initail deal offered prior to exclusivity. That said, private equity firms and corporate buyers are dissuaded from employing bait and switch tactics for a number of reasons. If a prospective buyer gains a reputation for commonly bidding high then significantly reducing the value during exclusivity periods, they risk not getting access to dealflow in the future or are used merely as stalking horses to boost the offer prices of other preferred bidders. Prospective buyers also want to maintain a strong relationship with the existing management of the firm they are buying. A bait and switch can hurt this working relationship in the future.