More GPs learn the ‘two-step’ acquisition dance

Acquiring a target company with an upfront tender offer followed by a back-end merger is growing in popularity with GPs wanting to quickly close deals.

More US-based GPs are taking public companies private through a “two step” acquisition process that can shave months off the time it takes to close a deal. 

A typical “one-step” merger – which requires time intensive disclosure filings with the US Securities and Exchange Commission and target company shareholder meetings – can be shortened if GPs first gain enough control of the target by buying out shareholders through a cash tender offer. If enough shareholders cede control (90 percent in Delaware) GPs can then close the deal with a more time convenient “short-form” merger. 

One third (33 percent) of major public company buyouts featured an upfront tender offer followed by a back-end merger compared to 18 percent in 2011, according to a M&A deal study by law firm Schulte Roth & Zabel, which examined all cash buyouts of targets worth at least $500 million in enterprise value.

The average number of days from signing a definitive agreement to closing the transaction was 44 days for tender offers compared to 92 days for one-step mergers, according to the study. Greater legal certainty around their use was cited as the primary driver of the trend. 

However, “the two step tender offer structure does not always offer a timing benefit, such as in transactions that involve significant regulatory or antitrust issues”, added Schulte Roth & Zabel M&A partner David Rose