No Free Shop: Why Target Companies Sometimes Choose Not to Buy ‘Go-Shop’ Options

59 Pages Posted: 2 May 2013 Last revised: 12 Jul 2016

Adonis Antoniades

National University of Singapore (NUS) - Department of Finance

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Donna M. Hitscherich

Columbia Business School - Finance and Economics

Date Written: July 11, 2016

Abstract

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

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

Adonis Antoniades

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
212-316-9219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Donna M. Hitscherich

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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