Locked In: How Exclusivity Shapes the M&A Landscape
The request to get serious
Let’s talk about exclusivity in M&A transactions. The request for exclusivity often occurs at that moment in a deal where a buyer approaches a seller with the intention of making a commitment. “Hey, we want to buy you, but before we go too far down this road, we need to make sure you’re not talking to anyone else.” It’s the financial equivalent of locking down a relationship: no swiping left or right while we’re trying to make this work, okay?
Of course, in finance, nothing is ever that simple.
The exclusivity agreement
Let’s say you’re a company looking to get acquired, and you’ve been approached by a suitor. Maybe several, if you’re lucky. Before the mayhem of the bidding war ensues, the buyer you like says, “We want a deal, but we need exclusivity for 45 days.” Shorthand for, “We don’t want you talking to anyone else while we’re hammering out the details.” Fair enough, right?
Here’s the buyer’s logic: Deals require lots of upfront investment in time and resources for due diligence, analysis on deal structuring etc. Buyers don’t want to spend millions just to find out halfway through that you’ve been secretly talking to someone else and now you’re going to pursue Option B instead.
Exclusivity’s little twist: Is it really exclusive?
An exclusivity agreement sounds like it would be ironclad – no talking to other buyers, no shopping yourself around, nothing. You’re locked in, right? Not quite. It’s more like a promise that you won’t actively seek out other deals. The door isn’t totally locked – it’s just slightly ajar. The company selling itself might still get unsolicited offers. If someone wants to slide a very tempting note under the door, technically no one is stopping them.
So, what happens when someone else knocks on your door?
What if, during your 45-day exclusivity window, another buyer shows up and waves a better deal in front of you? Now you’re in a tough spot. Do you go back to your exclusive partner and say, “We’ve been offered something better. What can you do?”
You may be subject to a “no-shop” clause (i.e, you can’t actively seek other offers), but you still need to protect yourself if an unsolicited offer presents a better opportunity. Ultimately, a seller’s Board has a fiduciary duty to maximize value for its shareholders and must be cautious not to waive this obligation due to an exclusivity arrangement.
In other words, you can’t shop yourself around, but if another buyer approaches you, well… your phone isn’t exactly on airplane mode.
What if it all falls apart?
Let’s say you’ve been in an exclusive process, hammering out details, and then the exclusivity period ends without a deal. This happened during Paramount’s initial discussions with Skydance in mid-2024. Now, you’re free to talk to other suitors like Paramount did with Apollo and Sony, yet there’s no guarantee you’ll get a better offer. Meanwhile, Skydance is still technically around (and may ultimately get to a signed deal), but the door is open for interlopers to engage in discussions.
The end of the exclusivity period gives you options, yet it also creates uncertainty. On the one hand, you can explore other opportunities, but on the other, new buyers may wonder why the last party didn’t commit.
So, is exclusivity worth it?
It depends.
Here’s where it gets tricky: exclusivity periods have been getting longer in recent years. In 2021, only 6% of deals had exclusivity periods longer than 60 days, but by 2022, that number increased to nearly 40%, a trend that is expected to continue (Goodwin, 2023).
So, while buyers prefer long exclusivity periods to facilitate comprehensive due diligence, sellers might be locking themselves into a deal that could ultimately fall apart. If exclusivity doesn’t result in a deal, a seller could spend months watching potential bidders fade away.
Exclusivity is often worth considering if:
- The seller has a strong pre-existing relationship with a buyer
- A buyer presents an exceptionally attractive offer (assuming they’re serious)
- The seller is in financial distress and exclusivity will facilitate a more rapid diligence timeline
Ultimately, agreeing to exclusivity with a buyer can be a double-edged sword. These decisions should always be made case-by-case, in consultation with financial advisors who can help evaluate the unique dynamics of each transaction.
