A Tale of Two Matching Rights

By — on / Business Negotiations

In March 2005, German powerhouse SAP agreed to buy Retek, a small company that offered information management software, for $8.50 a share.

The deal included a matching right in which Retek committed to negotiate exclusively with SAP for five days if it received a “superior offer.” The matching right didn’t scare away Oracle, SAP’s archrival, which was convinced that it could integrate Retek’s application software better than SAP could. Oracle offered $9 a share, triggering SAP’s matching right. SAP countered with $11 per share, and Oracle responded with $11.25 per share. SAP declined to match Oracle’s last offer, and Oracle closed its deal in mid-2005.

Just a little more than two weeks later, a three-way consortium comprising Bain Capital Partners, Vornado Realty Trust, and Kohlberg Kravis Roberts (the KKR Group) agreed to buy toy retailer Toys ‘R’ Us for $26.75 per share. Similar to the SAP-Retek deal, the agreement included a matching right in which Toys ‘R’ Us committed to negotiate exclusively with the KKR Group for three days if it received a “superior offer.”

Unlike the SAP-Retek deal, no third-party bidder emerged, adn the KKR Group closed the deal in June 2005.

Why the difference in outcomes? One factor may have been the different types of assets at stake. Retek was more of a private-value asset (analysts thought that the company’s software fit better with Oracle than with SAP), while Toys ‘R’ Us was more of a common-value asset (because real-estate made up a large portion of the company’s value).

A matching right was more likely to deter third-party bidders in the Toys ‘R’ Us deal than in the Retek deal. Because of the threat of the winner’s curse, matching rights tend to carry more risk to third parties in a common value situation.

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Related Article: A Second Look at First Refusal Rights

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