A go-shop period is a provision within a mergers and acquisitions (M&A) agreement where the target company is permitted to seek out competing offers even after receiving a purchase offer from the acquirer. The period generally lasts up to two months.
A go-shop period allows a target company to potentially find a better deal for its shareholders.
The initial acquirer’s bid in an M&A agreement where there is a go-shop period is referred to as the floor value.
Higher bids rarely come forth during a go-shop period, attributable to the lack of time for other suitors to conduct due diligence on the target company.
Understanding the Go-Shop Period
A go-shop period allows the target company’s board of directors the opportunity to find the best possible deal for its shareholders. The initial acquirer’s bid acts as the purchase floor, as additional bids by other suitors would rationally be above the initial bid price.
In the scenario that the target company is able to find a suitor with a higher bid and the initial acquirer does not match or provide a better bid, a break-up fee (typically ranging from 1%-4% of the equity value of the transaction), commonly incorporated in M&A agreements, is paid by the new acquirer to the initial acquirer.
The Go-Shop Period as a Means of Additional Value Generation
As mentioned, a go-shop period acts primarily as a means for the target company to seek additional value for its shareholders. In an active M&A environment, one may presume that higher bids may come forth. However, in the United States, it is rarely the case.
Due to the short time span of the go-shop period (up to two months, but can be as short as two weeks), potential suitors generally lack time to conduct meaningful due diligence of the target company to offer a higher bid price. Apart from the short time span of a go-shop period acting as a deterrent to other suitors, the following factors also play a role in the lack of additional bids during the period:
A break-up (termination) fee must be paid by the new bidder
Potential bidders do not want to disrupt the existing transaction and cause a bidding war
A high initial bid
Given the lack of additional bids during the go-shop period, such a provision is more commonly seen as a formality that the board of directors of the target company is satisfying its fiduciary duty to maximize the bid value for shareholders.
Here are some real-life examples pertaining to the go-shop period:
Telenav, Inc., a wireless location-based services corporation, announced the expiration of the 30-day go-shop period under its merger agreement with V99, Inc.
Corning Natural Gas Holding Corp. announced that it would be acquired by Argo Infrastructure Partners, LP. Included in the acquisition agreement is a 45-day go-shop period.
Private-equity firm Thoma Bravo, LP agreed to purchase RealPage Inc. for $88.75 per share. The agreement includes a 45-day go-shop period.