No free shop: Why target companies sometimes choose not to buy ‘go-shop’ options

Adonis Antoniades, Charles W. Calomiris and Donna M. Hitscherich

Journal of Economics and Business, 2016, vol. 88, issue C, 36-64

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 (search for similar items in EconPapers)
JEL-codes: G32 G34 K22 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:88:y:2016:i:c:p:36-64

DOI: 10.1016/j.jeconbus.2016.07.003

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