When Is the Right
Time to ‘Go Shop?’
Thomas October 14, 2013
When retailer Rue21
in May announced plans to sell itself to private equity firm Apax
Partners for approximately $1.1 billion, the company said a
special committee of its board would seek potential rival bidders
during a 40-day so-called go-shop period.
During that time, the
committee and its financial advisor, Perella Weinberg Partners,
contacted 60 potential acquirers who they thought might be interested
in an alternative transaction.
Just six of those 60
expressed enough interest to even pursue a deal, and none submitted an
alternative acquisition proposal.
Go-shop provisions, which
became popular during the buyout boom a decade ago, allow sellers to
seek a better deal for about 30 to 50 days after reaching an agreement
with another party. If the board secures a superior offer, it may
terminate the original agreement and pay a lower termination fee for
While the option to shop
may provide the board with a few advantages, a new study suggests that
go-shop clauses are not likely to produce much better post-agreement
offers, and can even reduce any acquisition premium from the initial
The study, conducted by
Columbia Business School professors Charles Calomiris and
Donna M. Hitscherich, along with Adonis Antoniades of
the European Central Bank, analyzed more than 300 announced
transactions between 2004 and 2011.
Taking into account deal
size and the volatility of a company’s stock, the authors found that
premiums offered to a target that has a go-shop clause are generally
between 24% and 62% lower than in deals that aren't shopped.
“Any non-cash consideration
that makes directors feel better is a good thing,” says Hitscherich.
“But the fact of the matter is, it comes with a cost, and these types
of options aren’t free.”
One of the main arguments
for go-shop clauses is the reduction of litigation risk, she says.
However, the study found no higher market price reaction to merger
announcements that included go-shop clauses, or any other identifiable
In fact, Hitscherich and
Calomiris say, the impetus often comes out of a conflict of interest
from the hired legal teams, who may be pushing go-shops on clients who
don’t really need them.
Incorporating the clause in
a merger agreement can make it easier to win court cases that may
arise from the deal, helping lawyers look good and attract future
clients, they say.
“It may be very hard for
prospective clients to observe the size of the foregone acquisition
premium that results from go-shop clauses,” Calomiris says. “And, much
easier to observe the superior litigation outcomes produced by
Adding these sorts of
“rituals” clouds the true goal for boards in a taxing situation, says
Gary Lutin, chairman of the
Shareholder Forum, an investor advocacy group.
“Directors should be
encouraged to make decisions based on their business judgment about
what actually works, rather than follow rituals designed for the sole
purpose of defending litigation claims,” says
Lutin. “Directors generally have no incentives to do anything
other than find the best deal, so it’s really counterproductive to
impose one-size-fits-all rules that limit their ability to do a good
Similar situations were
seen this year in deals at Dell, BMC Software and
Smithfield Foods, all of which had go-shop clauses and failed to
find a higher bid. But there are situations where having a go-shop
clause could be beneficial, Hitscherich says.
In some cases, the price of
including a go-shop clause could be less than costs arising from
fiduciary duty suits, the authors say. One such instance would be
where the company has a less concentrated ownership group and there is
a higher likelihood of a deal's being challenged with
A company that negotiated
quietly with only a few parties or had multiple top executives
involved in the buyout would also benefit from a go-shop clause,
indicating that they checked the market for other offers, Hitscherich
Directors should ultimately
take into consideration that the threat of litigation in connection
with proposed mergers can never be entirely eliminated, regardless of
any clause or language used, writes Christine Azar, a partner
at Labaton Sucharow.
“The special committee must
be ready to negotiate, and not merely act as a figurehead for the
interested parties,” she says.
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