The Impact of Go-Shop Provisions in Merger Agreements

Abstract

Go-shop provisions in merger agreements significantly alter the selling process by allowing active solicitation of new bids after a merger agreement is signed with a particular bidder. Using a large sample of merger agreements from 2003 to 2012, we examine whether go-shops are used to benefit target shareholders or for agency/entrenchment reasons. We find that go-shop provisions are more likely in deals involving negotiation selling method, financial buyers and all cash financing, and in targets with less valuation uncertainty, higher prior stock returns and higher institutional ownership. We find that go-shops have a positive association with the initial offer premium. We also find deals with go-shop provisions are more likely to have a competing bid and an upward revision of the initial offer premium, resulting in higher final target premiums, particularly for negotiation deals. Collectively, our results indicate that go-shops are effective contractual devices used to further target shareholder interests.

Keywords: mergers; go-shops; contractual provisions; termination fees

JEL Classification: G34