No Free Shop: Why Target Companies in MBOs and Private Equity Transactions Sometimes Choose Not to Buy 'Go-Shop' Options

58 Pages Posted: 30 Apr 2014 Last revised: 24 Mar 2015

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: April 28, 2014

Abstract

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.

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 in MBOs and Private Equity Transactions Sometimes Choose Not to Buy 'Go-Shop' Options (April 28, 2014). Available at SSRN: https://ssrn.com/abstract=2430484 or http://dx.doi.org/10.2139/ssrn.2430484

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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