Friday, May 16, 2014
Antoniades, et al have a paper, No Free Shop. There have always been two sides to the g0-shop issue. On the one side, if a company has the right to proactively shop itself post-signing, that should be good, right? In Topps, Chief Justice Strine called the go-shop "sucker's insurance". Generally, employing a go-shop provision is one of several ways that a board can, in good faith, reassure itself that it has received the highest price reasonably available in a sale of control.
On the other hand, when one looks at the way go-shops are actually deployed, one wonders what is going on. By now, they are regularly included in merger agreements with private equity buyers and rarely included in merger agreements with strategic buyers. If you believe that private equity buyers have characteristics of a common value buyers and strategic buyers are more like private value buyers, then the go-shop takes on a different, less appealing light.
The paper from Antoniades, et al backs up this view; go-shops are associated with lower initial prices and fewer competing offers. These results raise the question whether boards can reasonably rely on the go-shop to confirm valuations. Here's the abstract:
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.
Guhan Subramanian's 2007 Business Lawyer paper, Go-Shops v No-Shops, came to a different conclusion with respect to the utility of go-shops.