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
April 28, 2014
We study the decisions by targets in private equity and MBO transactions whether to actively 'shop' executed merger agreements prior to shareholder approval. Specifically, 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, in certain circumstances, lowers the termination fee paid by the target in the event of a competing bid. We find that the decision to retain the option to shop is predicted by various firm attributes, including larger size, more fragmented ownership, and various characteristics of the firms’ legal advisory team and procedures. We find that go-shops are not a free option; they result in a lower initial acquisition premium and that reduction is not offset by gains associated with new competing offers. The over-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: 58
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: April 30, 2014 ; Last revised: March 24, 2015
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