Designing M&A Selling Mechanisms: Go-Shop Negotiations

Abstract

In the past decade, a new selling procedure called “go-shop negotiation” has gained popularity in mergers and acquisitions. With a dynamic mechanism design approach, I fully characterize the target’s revenue-maximizing mechanism, and find that it resembles a go-shop negotiation under certain parameter values; with other parameter values, it is similar to a standard auction or a traditional “no-shop negotiation”. The relevant parameters include the correlation of bidders’ valuations, due diligence cost, and expected gains from trade. The results are broadly consistent with empirical evidence, providing a potential explanation for the prevalence of go-shop negotiations in financial deals and distressed deals.

Keywords: M&A, Dynamic Mechanism Design, Costly Information Acquisition, Negotiations, Go-Shop Provisions

JEL Classification: G33, G34, D82, D86