A superior proposal is a bona fide offer to buy the target as determined by the board. Acquirers try to lock up a target in anticipation of consummating the deal. However, one avenue the target has to negotiate with a third party is by the determination of a superior proposal. This leads to the original acquirer being given matching rights. A process where the acquirer has a given period of time to adjust their original offer to match the newer third party bid. Traders often welcome such an event in the hope of sparking a bidding war such as the case of Anixter International (AXE) or TetraPhase Pharmaceuticals (TTPH). In such cases, the merger arbitrage spread almost always turns positive. This happens as the target stock trades above the current offer price in anticipation of a higher offer. The definition of what constitutes superior is set out in the original merger agreement, an example of which is given below.
Superior Proposal Example
An 8-K filing on October 31, 2019 made by Anixter International (AXE) with the SEC clarifies what constitutes a superior proposal and how it will be treated
“Superior Company Proposal” means a bona fide written Company Takeover Proposal … received after the date of this Agreement that did not result from a material breach by the Company of Section 5.02 (other than Section 5.02(a)), on its most recently amended or modified terms, if amended or modified, that the Company Board determines in good faith … to be more favorable from a financial point of view to the holders of Company Common Stock than the Transactions and is reasonably likely to be timely consummated in accordance with its terms (in each case, taking into account all the terms and conditions of such proposal or offer (including the transaction consideration, identity of the Person or group of Persons making the Company Takeover Proposal, conditionality, timing, certainty of financing and/or regulatory approvals and likelihood of consummation) and this Agreement (including any such changes to the terms of this Agreement proposed by Parent in response to such proposal or otherwise)).
Further Superior Offer Example
The following text is taken from the Form DEFA14A Additional Definitive Proxy Soliciting Materials made by Anixter International (AXE) on January 9, 2020 in relation to the proposed takeover by Wesco
Anixter International Inc. (“Anixter” or the “Company”) (NYSE: AXE) announced today that the Anixter Board of Directors (the “Anixter Board”) determined that an offer from WESCO International, Inc. (“WESCO”) constitutes a “Superior Company Proposal” as defined in Anixter’s previously announced definitive agreement and plan of merger with an affiliate of Clayton, Dubilier & Rice, LLC (“CD&R”).
The document goes on to say
Anixter has notified CD&R of the Anixter Board’s determination and, pursuant to the CD&R Merger Agreement, CD&R has the option for the next five business days to negotiate an amendment of that agreement so that WESCO’s offer will no longer be a “Superior Company Proposal.”
This second quote is important as it shows the Board of Directors has only received and determined that the offer if superior, but not accepted it. This is an on-going issue. CD&R now have the opportunity to increase their bid if desired.
