What do the Protections dots mean here?
What it means and how to read it on a deal.
What it is
Seven contract facts the list draws as dots, one per fact, so they can be compared down the column.
What the seven are for
Months can pass between signing a deal and closing it. In that time, the buyer may struggle to pay, or a regulator may object.
Say Woodgrove agrees to buy Litware at $50.00 a share, and Litware trades at $48.00. Holders get the $50.00 only if Woodgrove closes.
Seven terms in the merger agreement say how firmly Woodgrove is bound, and whether holders might get more. Tracking Alpha calls them Protections.
They're mostly about what the buyer must do, and what holders might get. Some, such as specific performance, protect both sides.
A different use of the name
In merger writing, deal protections usually means the buyer's protections. They guard the buyer against a rival bid for the target.
The common ones are a no-shop, matching rights and a termination fee the target pays the buyer.
Tracking Alpha's Protections cover the other side. The grouping is the site's own; agreements and other writers may group these terms differently.
Four questions, seven terms
Each of the seven answers one of four questions:
- Must the buyer close?
- With no financing condition, failing to raise the money doesn't excuse it. If the target can force the close, a court may order it to.
- How far must it go for approval?
- A buyer must litigate term makes it fight a regulator's suit. Divestitures the buyer accepts says which sales or limits it must take on.
- What if it doesn't close?
- A reverse fee makes the buyer pay, usually to the target company, in the cases the agreement lists.
Each one is a fact from the agreement, not a promise that the deal will close.
A real example
Microsoft agreed to buy Activision Blizzard in January 2022, for $95.00 a share in cash. Its agreement, term by term:
- No financing condition
- Yes. Financing wasn't a closing condition, and Microsoft stated it had the funds.
- Target can force the close
- Yes. Each side could ask a court to order the other to perform the agreement.
- Buyer must litigate
- Yes. Microsoft had to contest, defend and appeal challenges where needed for the regulatory clearances, within the agreement's limits.
- Divestitures the buyer accepts
- Up to a limit. Among the limits, Microsoft didn't have to accept a remedy with more than an immaterial impact on any Microsoft business.
- Go-shop
- No. Activision couldn't seek other offers after signing.
- Reverse fee
- Yes: $2.0 billion at first, rising in steps to $3.0 billion after April 18, 2023, in the cases listed.
- Plus a CVR
- No. Holders received cash only.
A July 2023 letter raised the reverse fee in steps, to $4.5 billion after September 15, 2023. The deal closed on October 13, 2023, at $95.00 a share.
What it means for shareholders
These terms set what happens when trouble comes. They don't promise the deal will close. A court can still block a deal that has all seven.
If the deal breaks, a reverse fee usually goes to the target company, not to its holders.
Of the seven, a go-shop and a CVR can add to what holders receive.
On Tracking Alpha
In order: no financing condition, target can force the close, buyer must litigate, divestitures the buyer accepts, go-shop, reverse fee and plus a CVR.
Point at or tap a dot for its words; the arrow keys move between them. A dot says what the contract states. It isn't a score: solid is not better than faint.
One deal's seven dots, as a row shows them
- No financing condition
- Target can force the close in some cases
- Buyer need not litigate
- Divestitures up to a limit
- Go-shop not in the filings
- Reverse fee 6.0% of value
- No CVR
- Solid: yes
- Outlined: in some cases
- Faint: no
- Dashed: not in the filings
- 1No financing condition
- 2Target can force the close
- 3Buyer must litigate
- 4Buyer accepts divestitures
- 5Go-shop
- 6Reverse fee
- 7Plus a CVR
Easily confused with
- Closing conditions
- What must be true before the deal can close. Protections set how firmly the buyer is bound, and what follows if it doesn't close.
- Termination fee
- A protection for the buyer, paid by the target in the cases the agreement lists. It isn't one of the seven.
Questions
Do deal protections make a merger more likely to close?
Some terms can help hold the buyer to the deal, but none guarantees closing. A deal with every protection can still fail, for example if a court blocks it.
Which merger terms protect target shareholders?
Terms that strengthen the buyer's duty to close, within the closing conditions: no financing condition, specific performance and a duty to litigate. How far the buyer must go on divestitures matters too. A go-shop and a CVR can add to what holders receive.
Who benefits from a no-shop and a termination fee?
The buyer. They make a rival bid for the target harder or more costly. In merger writing, they're what deal protections usually means.
Sources
Tracking AlphaBy Jera Value · Reviewed
