When acquiring a company, you typically want to lock down your target and prevent it from seeking other potential buyers (see no shop clause). But in some situations, allowing your target to shop the deal around, under the terms of a “go shop” clause, can actually facilitate the transaction and get the deal done.
Typically, large acquisition targets like having a go shop provision because it allows their board of directors to fend off shareholder criticism for not obtaining maximum price for the buyout. For example, a go shop clause was used when Kohlberg Kravis Roberts & Co. bought First Data Corp., the world’s largest processor of credit-card payments, for about $25.6 billion in one of the largest leveraged buyouts ever. First Data had 50 days to seek out higher bidders under the go shop provision. However, the use of go shop provisions is not limited to these mega deals.
Small acquisitions can also benefit by using go shop clauses. The small target company may not have a million shareholders to please, but there will likely be a valuation disagreement amongst the target’s co-founders.
Inevitably, one co-founder with caviar dreams will come up with some sky-high valuation based upon another (dissimilar) deal or some (unscrupulous) business broker’s pitch.
In reality, the valuation is what the market will actually pay for the company. The go shop clause ultimately accomplishes this task. After sufficient time on the market, the target’s co-founders should now understand what their company is really worth, and more importantly, they should all be on the same page.
Therefore, when acquiring a company, allowing your target to shop around can actually increase the chances of an acquisition, depending on the circumstances.