No Free Shop: Why Target Companies in MBOs and Private Equity Transactions Sometimes Choose Not to Buy 'Go-Shop' Options
Bank for International Settlements (BIS)
Charles W. Calomiris
Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)
Donna M. Hitscherich
Columbia Business School - Finance and Economics
March 24, 2015
Columbia Business School Research Paper No. 13-25
We study the decisions by targets in private equity and MBO transactions whether to actively “shop” executed merger agreements prior to shareholder approval. Targets can negotiate for a 'go-shop' clause, which permits the solicitation of offers from other would-be acquirors during the “go-shop” window and may lower the termination fee paid by the target in the event of a competing bid. The decision to retain the option to shop is predicted by various firm attributes, including larger size and more fragmented ownership. Go-shops are not a free option. We exploit the impact of various characteristics of the firms’ legal advisory team and procedures on the probability of inclusion of a go-shop provision to establish a negative relationship between go-shop provisions and initial acquisition premia. Importantly, that loss to shareholder value is not offset by gains associated with new competing offers. We conclude that the increased-use of go-shops reflects excessive concerns about litigation risks, possibly resulting from lawyers’ conflicts of interest in advising targets.
Number of Pages in PDF File: 55
Keywords: Private equity, management buyouts, mergers, acquisitions, offer premium, cumulative abnormal returns, conflicts, litigation risk, lawyers, merger agreements, go-shop, special committee
JEL Classification: G32, G34, K22
Date posted: May 2, 2013 ; Last revised: March 25, 2015
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