59 Pages Posted: 2 May 2013 Last revised: 12 Jul 2016
Date Written: July 11, 2016
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 firm's 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.
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
Suggested Citation: Suggested Citation
Antoniades, Adonis and Calomiris, Charles W. and Hitscherich, Donna M., No Free Shop: Why Target Companies Sometimes Choose Not to Buy ‘Go-Shop’ Options (July 11, 2016). Columbia Business School Research Paper No. 13-25. Available at SSRN: https://ssrn.com/abstract=2258535 or http://dx.doi.org/10.2139/ssrn.2258535