BMC Software has 30 days to look for a higher bid than its $46.25 deal with a group of private-equity firms pursuant to provisions in the merger agreement referred to as a “go shop.” But as go shops go, this one might be better called “go shop quickly.”

    Under the terms of the merger agreement, BMC will have a month to solicit a higher bid. That is shorter than with Dell, which provided for a 45-day shopping period. But the real issue with the BMC go-shop is what happens after that.

    The key to a go-shop isn’t really making cold calls to potential buyers and sending out pretty pamphlets about the company. One of the most significant parts of go-shops is that they allow competing bidders to buy without paying a big breakup fee. In other words, if you make an offer during a go-shop, the break-up fee typically gets significantly reduced. Breakup fees vary but they tend to be around 3% or sometimes a bit higher.

    In the BMC deal, the default breakup fee payable by BMC if it sells to a third party is $210 million or around 3% of the equity value of the deal. If a buyer signs up a deal pursuant to the go shop, the fee only drops to $140 million or 2% of the BMC market cap.

    With Dell, the break-up fee was less than 1% for a go shop deal.

    Now, not all deals have go shops and each is individually negotiated, and in management buyouts like Dell, directors may feel the need to push harder for generous go-shop terms.

    And in this situation, BMC was on the block for a while, with that status reported in the Journal and elsewhere, perhaps reducing the need for a go-shop at all. Nevertheless, the break-up fee discount for go-shop bids is pretty chintzy.

    Plus, an unusual clause in the merger agreement provides that some potential bidders are specifically barred from the ability to benefit from the even the mildly reduced breakup fee. According to a BMC regulatory filing, certain parties who participated in BMC’s recent strategic review can’t benefit from the reduced breakup fee.

    And here’s one other twist.

    Once the 30-day go shop period ends, BMC only has 10 days to complete a definitive agreement with a higher bidder, or the breakup fee reverts to the higher level. In Dell there was no limit on the time period to come up with a definitive agreement other than it had to be done before the shareholder meeting approving the already inked deal. Thirty days may be a reasonable period to expect another potential bidder to become interested, but another ten days results in a short period overall to complete due diligence and a definitive agreement.

    Go shops are controversial in any event because it is hard for a new bidder to compete with a signed deal, particularly under the constraints of the go shop and where, as in the BMC deal (and this is not unusual), the buyer with the signed merger agreement has matching rights. That means a competing bidder could spend a ton of money coming up with a higher bid (and the BMC agreement makes clear BMC cannot reimburse bidders for their expenses as Dell did for Blackstone) and come up with nothing when the current buyer matches the price and shareholders get that higher price.

    Perhaps it really doesn’t matter how stingy the terms of a go shop are since they frequently do not produce results. In my view, not all deals need go shops. And I am sure the parties to the BMC deal would argue that because of the history of BMC’s strategic review they were entitled to limit the terms. But my view is that if there is going to be a go shop, it ought to be designed to be effective and not just a check-the-box exercise

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