Go-Shop Period

During mergers and acquisitions (M&A) agreements, public companies use go-shop periods to seek out competing offers, even after acquirers put out purchase offers. This initial offer serves as a floor for potential better offers. The initial bid is referred to as the floor value. 

This period gives a company that is being acquired a timeframe in which it can shop for a better offer. These periods typically last one to two months.

Usually, go-shop provisions grant the original bidder the ability to match any competing offers. The initial bidder usually receives a breakup fee if the company is sold to another buyer. 

The goal is to allow the target company (the one being acquired) to seek out deals that would be more beneficial to its shareholders. 

These rarely result in a higher bid. This is due to the lack of time for other bidders to carry out the proper due diligence on the company being acquired.

Understanding the concept

This provision has been increasingly popular in recent years, and the term "go-shop" is a relatively new expansion of general terminology in M&A transactions. 

This period is intended to assist a company's board of directors in fulfilling its fiduciary duty to its shareholders and identifying the most beneficial deal. 

The fiduciary duty of a company refers to the board of directors' obligation of loyalty to shareholders. Accordingly, the board is expected to maximize the welfare and act in the best interest of the company and its shareholders, above any personal or other interest. 

The board of directors carries out its fiduciary duties by seeking out the best possible offer for a transaction. 

If the target company can find a higher bid and the original bidder does not match or offer a better bid, the initial acquirer receives a breakup fee. This fee usually ranges from 1% to 4% of the transaction's equity value). 

The new bidder pays the fee to the initial acquirer and is typically incorporated into M&A agreements. 

Go-shop provisions have become increasingly common over the last two years. A recent study found that 2% of M&A deals had go-shop provisions in 2005. That percentage increased to 29% a year later, in 2006. 

Go-shop period vs. no-shop period

A no-shop period does not grant the target company the option to shop around for a better offer. Instead, no-shop provisions require that the target company pay a substantial breakup fee if it decides to sell to a different company after the initial bidder has made its offer. 

The goal of the no-shop period is to protect the initial bidder from losing the business because other parties may be willing to offer a higher bid. 

No-shop provisions result in the following:

1. The target company cannot provide information to potential buyers. 
2. It cannot initiate any conversations with buyers or solicit any proposals.
3. The target company must provide any information on unsolicited bids from interested third parties. 

However, as part of its fiduciary duty, a company can respond to unsolicited offers under no-shop provisions. It is common for M&A deals to have a no-shop provision. 

Go-shop provisions place a higher risk on the initial bidder than no-shop periods. Therefore, buyers make exceptions to the no-shop period by allowing sellers to have a go-shop period. This typically occurs during the sale of a public company that must find the highest bid for its shareholders. 

Other exceptions to the no-shop period include the window shop and fiduciary out. The window shop allows the target company to converse with other bidders interested in purchasing the company. 

A fiduciary lets the target's board change the recommendations associated with the M&A agreement with the buyer. This occurs if there are concerns that carrying out the agreement would breach the board's commitment to its shareholders. 

Additional value generation

This period primarily serves as a means for the target company to generate additional value for its shareholders. In active M&A deals, some may assume that higher bids would come during the go-shop period. However, this is rarely the case in the United States.

The timeframe of this period is quite short (the longest being two months). Because of this, potential bidders usually do not have adequate time to carry out essential due diligence of the target company to present a higher bid. 

Due diligence refers to the comprehensive evaluation of a company that a prospective buyer carries out. During the process, the company's assets and liabilities are assessed to determine its potential. 

There are several other reasons why additional bids may not arise during the period:

• First, the new bidder must pay a breakup (termination) fee. 
• Second, if potential bidders disrupt the existing transaction, it may result in a bidding war. 
• Third, there may have been a high initial bid. 

Because additional bids rarely arise during this period, the provision is typically viewed as a formality for the target company's board of directors to fulfill its fiduciary duty to ensure its shareholders receive the highest bid value.

Criticism

As discussed above, this period receives criticism because it rarely leads to another buyer offering a higher bid to purchase the target company. Even extended periods rarely allow prospective buyers to conduct proper due diligence.

Typically, such a period occurs when the selling company is private and the buyer is an investment firm (e.g., private equity). These periods are also gaining popularity with go-private transactions. This occurs when a public company sells via a leveraged buyout (LBO).

The efficacy of a go-shop period is determined by the manner in which the provision was drafted and implemented. 

New bidders are less inclined to emerge if a deal is already signed. This is because of the advantages granted to the initial buyer in a merger agreement and the added breakup fee. However, if actively solicited, new bidders are more likely to emerge. 

In the end, the additional value generated for the target's shareholders mostly results from how aggressive the target is with exercising its rights during this period. 

Example

Assume Company X is for sale. Company X receives an offer of $30 per share from Company A. Company A agrees to give Company X a go-shop period. During that time (they were allowed 40 days), Company X talked with other potential acquirers and received two more offers.

The other offers Company X received were from Company 1 for $32 per share and another from Company 2 for $31 per share. 

Now, Company A can either match the offers, exceed the offers, or walk. Depending on the terms of the period, if Company X does not receive any offers that are better than $30 per share, it may have to carry out the sale or pay Company A a breakup fee. 

A real-life example:

• In 2020, Telenav, Inc. (an internet software and services company) enacted a 30-day go-shop period under a merger agreement with V99, Inc. Under the go-shop provisions, Telenav, Inc. actively solicited alternative bids from third parties. 
• During this time, Telenav, Inc. had conversations with three other parties that communicated with the company prior to V99's definitive merger agreement; in addition, Telenav, Inc. also reached out to 39 other parties that had not participated in prior communication. 
• Ultimately, the go-shop period did not result in additional bids for acquisition. 

Researched and Authored by Rachel Kim | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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