Monotype Imaging Holdings (NASDAQ:TYPE) owns a library of typeface fonts that it licenses to designers and software companies. In late July, the company announced an agreement to be acquired by private equity firm HGGC for $825 million, or $19.85 per share, in cash.

The announcement came after rumors circulated earlier this year of a buyout. Also, a process to sell the company last year failed to produce a definitive offer. But now that a buyout has been announced, there's speculation that an even higher offer could emerge, and Monotype's stock has been trading above the current offer price in response.

A well-known acquisition target

As a font licensing company, Monotype has found its days of rapid growth are behind it. The company successfully acquired much of its competition to become the largest licensor of typefaces (sometimes referred to as fonts), but it has since failed to find new avenues for growth. That lack of growth has weighed on the company's stock price in recent years:

TYPE Total Return Price Chart

TYPE Total Return Price data by YCharts.

With shareholders becoming increasingly frustrated with the stock's poor performance, the company conducted a strategic alternatives process in 2018, in which it evaluated a sale of the business. Monotype disclosed that it spoke to 28 parties last year in sales talks, but the process yielded no definitive offers.

Although Monotype hasn't shown strong revenue growth lately, it is consistently in the black. The company generates most of its revenue by licensing its intellectual property, a fabulously profitable business with an 84% gross margin.

Stable and successful businesses such as Monotype's are attractive to financial buyers because they are reliable enough to take on a large amount of debt -- giving them financial leverage in a purchase. Monotype's business is also attractive to strategic buyers (other software companies) because it owns a significant amount of intellectual property that could foreseeably be monetized in other ways.

Speculation of a higher takeout price

Now that Monotype has announced a deal to sell itself to HGGC, some investors are betting that an even better acquisition offer may materialize.

One provision of Monotype's deal with HGGC is a 30-day "go-shop" process, which gives the company 30 days to solicit offers from other potential buyers. According to the terms of this provision, Monotype can terminate its deal with HGGC without penalty if it identifies a superior proposal from another party. This reduces the friction for another buyer to come in over the top of the current $19.85-per-share offer.

Another factor propelling speculation about another bidder is that Monotype engaged many potential buyers in its sales process in 2018. This means that many financial and strategic bidders are aware of Monotype's business, and may have already considered making an offer. If the current buyout price is attractive based on what they learned before, they may be willing to throw their hats in the ring.

Woman sitting in front of a computer in an office at night

Image source: Getty Images.

Bailed out by a buyout

Monotype's shareholders are probably thankful a buyout offer came through: The company's stock price was sitting close to multiyear lows before the announcement, with little hope of pushing higher. Investors now have an exit at a 23% premium to where the stock was trading.

In addition, the 30-day go-shop process gives shareholders a call option on a potentially higher buyout price coming through. The 30-day clock will run out on Aug. 25. Until then, investors should sit tight and hope for the best.