Structuring M&A Offers: Auctions, Negotiations and Go-Shop Provisions

90 Pages Posted: 1 Mar 2017

See all articles by Zhe Wang

Zhe Wang

Pennsylvania State University - Department of Finance

Date Written: February 27, 2017

Abstract

An important yet understudied aspect of mergers and acquisitions is the selling procedure. This paper compares a seller’s revenue in a standard English ascending auction to that in a negotiation with a “go-shop” provision. In the latter, the target privately negotiates with a few bidders, signs a tentative merger agreement with one of them, and then publicly solicits additional bids during a “go-shop” period. Using a theoretical framework, I show that a “go-shop” negotiation generates higher seller revenue than does an auction, when first, the bidders’ costs of learning their valuations are sufficiently high, second, the bidders’ valuations are moderately correlated with each other, and third, the bidders’ prior probabilities of the existence of gains from trade are sufficiently low. The theoretical results are broadly consistent with empirical evidence, and they provide a novel explanation for the prevalence of “go-shop negotiations” in private equity deals.

Keywords: M&A, Auctions, Negotiations, Go-Shop Provisions

JEL Classification: G34, D82

Suggested Citation

Wang, Zhe, Structuring M&A Offers: Auctions, Negotiations and Go-Shop Provisions (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=2925018 or http://dx.doi.org/10.2139/ssrn.2925018

Zhe Wang (Contact Author)

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

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