At least one blast from the private equity past has sounded this spring: the go-shop clause. In two recent deals, Barclays plc and SumTotal Systems Inc. used go-shops to get better offers, and in a third, Entrust Inc. generated three alternate proposals but stood by the initial agreement.
"The fact that sellers are negotiating go-shops indicates that they sense real interest from multiple buyers, and that's a good thing," says Steve Epstein, a partner at O'Melveny & Myers LLP in New York.
Go-shop clauses emerged during the PE boom. They let the seller search actively for a better offer for a time period, usually 20 to 50 days, after signing a deal. Skeptical lawyers and judges often said go-shops did little more than provide contractual cover for boards that hadn't run a full auction before agreeing to sell and worried that they had failed to meet their fiduciary duties, but the clauses proved valuable in two 2007 deals. Triad Hospitals Inc. used a go-shop to sell to Community Health Systems Inc. for $6.8 billion in 2007 after agreeing to a $6.4 billion sale to CCMP Capital Advisors LLC and Goldman, Sachs & Co.
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Jones Apparel Group Inc. used a go-shop to extract another $117 million from Istithmar World Capital for Jones' Barneys New York Inc. unit in August 2007 after Japan's Fast Retailing Co. Ltd. made a $900 million bid topping Istithmar's offer of $825 million.
The go-shop in that deal had an unusual twist: Jones could consider
not just other offers for Barneys, but bids for Jones itself.
Since then, PE deals have vanished. Would-be sellers are having a
hard time finding one serious bidder, let alone generating an auction.
But three recent cases have bucked that trend.
In the largest of the three, John Varney's Barclays agreed to sell
the iShares business of its Barclays Global Investors NA unit to CVC Capital Partners Ltd. for $4.4 billion on April 9 but retained the option to solicit other offers through June 18.
At 70 days, the go-shop period was unusually long and structured
differently than other clauses. In BGI, the seller had to sign another
deal within the go-shop period; the normal go-shop gives the seller
time to find other offers that it may then consider. But Barclays
itself had agreed to fund $3.1 billion of the purchase price, an aspect
of the deal favorable for CVC, and it was possible the bank might sell
its BGI asset management division, not just iShares, BGI's
exchange-traded funds unit.
By agreeing to a deal under those conditions, CVC played a role
analogous to a stalking horse in a bankruptcy auction. In exchange, the
buyer won the right to match any offer within five days and a $175
million breakup fee if Barclays took a better offer.
In May, Barclays said it had received several indications of interest for iShares, and BlackRock Inc. and Bank of New York Mellon Corp.
surfaced as potential bidders for BGI. BlackRock agreed to acquire BGI
for $13.5 billion on June 11, leaving CVC with its break fee as a
consolation prize.
A go-shop clause was also critical in the auction of SumTotal. Accel-KKR LLC of Menlo Park, Calif., and Vista Equity Partners
of San Francisco both approached SumTotal in spring 2008. That August,
Accel-KKR made an offer of $7 per share, provided that the software
company agreed to negotiate only with Accel-KKR. That preliminary offer
contemplated a go-shop clause in the final merger agreement -- a
condition that survived the nine months of talks that followed.
On Oct. 14, Vista told the Securities and Exchange Commission that
it had an 11.4% stake in SumTotal. Vista made an unsolicited bid of
$3.25 a share for SumTotal on April 3; three weeks later SumTotal
signed a merger agreement in which Accel agreed to buy the company for
$124 million, or $3.80 a share.
The contract was typical, says Ron Cami, a partner at Cravath, Swaine & Moore LLP
in New York. "What was not standard was that there was a meaningful
presigning auction. Usually you only have a go-shop when there's a
limited auction or no auction at all."
Vista hiked its bid to $4.50 a share on May 6 and $4.75 on May 14.
Accel-KKR amended its agreement with SumTotal to raise the price to
$4.80 a share and increase the breakup fee on the deal to $6.67
million, from $3.1 million. Vista won by hiking its offer to $4.85 a
share, or $160 million.
"You could argue that Accel-KKR was too cavalier in agreeing to a
go-shop when Vista had a shot at it before signing," says Cami.
"But Accel-KKR probably played it pretty smart," he adds. "They
didn't give up anything, because if Vista wanted to bid after signing,
it could do so even without a go-shop. Accel-KKR got a great match
right and a very favorable breakup fee. In the end, they did as well as
they could in a situation where another party was willing to pay more.
They were able to retain some option value by being able to put their
best offer on the table after signing, and ultimately they were able to
collect a sizable breakup fee."
Cami's assessment of SumTotal could also stand for BGI and Entrust:
"I think this is another sign that the old rules of thumb in M&A
are not as relevant as they used to be and that each transaction
requires deeper analysis."
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