August 26, 2010
Match Rights and Incremental Bidding - 3Par
So, after three days Dell has come back with a bid to match that of HP in the contest acquisition of 3Par (previous post here). Dell originally offered $18/share. HP jumped in to bid $24. And now, Dell has come back with a bid of $24.30. If they continue to bid up the price, Dell will always have the option to bid just a penny (or 30) more 3Par. The WSJ notes:
The original merger agreement between Dell and 3PAR gives Dell perpetual matching rights—or the ability to match any counter-offer within three days. For that reason, Dell is unlikely to raise its offer by a large amount, a person familiar with the matter said. Rather, if H-P raises its offer above $24.30, Dell will match it rather than bump it by several dollars, the person said.
And that's where matching rights become tricky. If I'm sitting in the C-Suite at HP I should anticipate this kind of outcome going in. Incremental bidding isn't a good thing for the second bidder. You have to expend all sorts of time and resources and will only win in the event the first bidder decides you're paying too much. Worse -- Dell has a termination fee in place, so HP's bid must be high enough to pay both the its private valuation of 3Par as well as the termination fee. That's to say, HP is subsidizing Dell's bidding. (See Ian Ayres article on lockups to walk through how a termination fee can result in the second bidder subsidizing a bidding contest).
Of course, the same might be true without a match right, but the presence of the explicit match right that the initial bidder will always get a last look and that the second bidder will never be able to sweep up the target with the initial bidder nodding happily as the second bidder overpays.
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