Competitive tension refers to the pressure perceived by potential acquirers of a target company when they are aware that there are one or more other parties simultaneously vying to acquire the same target. In such a situation, each potential acquirer feels compelled to offer the highest purchase price and/or most attractive transaction terms it possibly can; otherwise it risks an outcome where one of the rival buyers acquires the target company.
Competitive tension is a highly favourable condition from the perspective of the seller as it creates an environment that typically results in increased deal valuations and improved transaction terms, while mitigating transaction risk. Target companies, or their agents, will generally strive to maximize competitive tension, subject to other concerns such as confidentiality, through a carefully-managed and well-executed sale process which includes multiple competing acquirers, such as an auction.
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