In the complex world of mergers and acquisitions (M&A), timing and strategy are crucial. One of the mechanisms that have surfaced as a way for companies to secure better deals is the go-shop period.
What Is a Go-Shop Period?
A go-shop period is a stipulation that enables a public company to solicit competing acquisition offers even after receiving a firm purchase proposal. The primary aim is to ensure that the targeted company can seek a better price or terms, post which the original offer serves as a safety net or floor for any new bids. Typically, a go-shop period lasts between one to two months.
Key Takeaways
- Duration: Go-shop periods generally last one to two months, providing a timeframe for potential better offers.
- Competing Offers: After receiving an initial firm offer, a company can actively seek competing offers during this period.
- Matching Rights: Usually, the initial bidder is given the opportunity to match any competing offers that arise.
- Breakup Fees: If the company decides to accept another bidder's offer, the initial bidder may receive a breakup fee, albeit often reduced.
How Does a Go-Shop Period Work?
The implementation of a go-shop period is part of a strategy to support the board of directors in fulfilling their fiduciary duties to shareholders. It allows them to explore all avenues for maximizing shareholder value.
- Initial Bid: The original agreement is not considered final until the expiration of the go-shop period.
- Competing Bids: During this period, if any competing offers are received and accepted, the initial bidder typically has the right to match the new offer.
- Breakup Fees: If the company opts for the new bid, the initial bidder is often entitled to a pre-defined breakup fee, which compensates them for the unsuccessful transaction.
M&A Environment
In a dynamic M&A environment, the potential for additional bidders is a common scenario. However, critics of go-shop provisions argue that these periods may often be cosmetic, merely designed to showcase that the board is exploring all options.
Historical analyses indicate that only a small fraction of initial offers receive competitive bids during go-shop periods, primarily because the time allotted does not sufficiently permit due diligence by potential new bidders.
Go-Shop vs. No-Shop
Understanding the distinction between go-shop and no-shop provisions is crucial for companies navigating an acquisition:
- Go-Shop Provisions: Enable the acquired company to seek new offers.
- No-Shop Provisions: Prevent the acquired company from actively seeking other bids, often including hefty penalties if they decide to engage with another buyer after the first offer has been made.
Case Example
A prominent illustration of no-shop provisions occurred in 2016 when Microsoft announced its intention to purchase LinkedIn for a staggering $26.2 billion. Under their agreement, LinkedIn was barred from entertaining other offers unless it was willing to pay a $725 million breakup fee to Microsoft.
Criticism of Go-Shop Periods
While go-shop periods are increasingly common, especially in transactions involving private equity and leveraged buyouts (LBOs), criticisms linger:
- Limited Effectiveness: Critics argue that these periods are unlikely to generate significant competition. They contend that the timeframe provided is insufficient for prospective buyers to complete the necessary due diligence involved in making an informed offer.
- Market Response: The reality is that many go-shop periods result in little to no additional offers. The practice may be perceived as a defensive measure rather than a genuine opportunity for obtaining better terms.
Conclusion
In summary, go-shop periods serve a strategic function in the mergers and acquisitions landscape, allowing public companies to seek alternative offers after an initial bid. While they provide some level of security for shareholders and directors, the effectiveness of these provisions continues to be debated, especially in light of their modest track record in generating competing bids. Understanding the nuances of go-shop versus no-shop provisions can empower companies to make informed decisions during potential M&A transactions.