Non-Competition Covenants in Acquision Deals

We study the optimal strategic behaviour of the target of a business acquisition where the acquirer is afraid that the former may returns to the market after the sale, and therefore uses a non-competition covenant which protects her (new) business against the future competition from the target. Yet, as the target can return to the market any time after the covenant expiry date, the value of the acquisition is comprised of both the intrinsic value of the acquired business and the value of a forward start option with a starting date that coincides with the expiry date of the covenant. Our findings suggest that the value of the forward start option of the target increases with the uncertainty of the profit flow associated with her return to the market and decreases with the time-to-maturity of the covenant. We also characterize the market conditions where the target should optimally re-enter the market as a follower, and provide closed (or quasi-closed) form solutions for her re-entry thresholds. Non-Competition Covenants in Acquision Deals