Is the “go shop” still an effective tool for ensuring the maximization of business value? Maybe not – according to recent research by Prof. Guhan Subramanian of Harvard Business School. A “go shop” provision, in short, is when a seller comes to agreement with a buyer, but then there is a post-agreement process where the seller seeks out alternative, better, deals (or ‘shops’ the company). If no higher bidder is found – so the logic goes – than the original deal must have been a value maximizing one. A 2008 study of go shop provisions was positive: using a small samplesize, the study found that go-shops were yielding a topping bidder a significant amount of the time, and were resulting in increases in value to shareholders.
Does newer data continue to show evidence of the efficacy of go shops? Not so much, say the authors. In the new data set – now focused on deals from 2010 to 2018, go shops resulted in a higher bidder only 6% of the time, and then only 2.5% of the time in 2015-2018. And what explains this (setting aside that the n of the original study may have been too small to be meaningful)? One option, which the authors discount, is that the go shop provisions themselves got worse – shorter periods, higher termination fees, etc. But the second option, which the authors focus on, does not bode well for shareholders who look to a go shop as protective: modern go shops have introduce are structured in ways to make a topping bid unattractive while giving the window-dressing of a go shop process – i.e., match rights, short windows in large deals (as opposed to in smaller deals as before), and technical changes to the proposal to require a topping bidder to launch a full-blown acquisition during the period – all leading to the authors view that merger participants, including management and the investment banks have conflicts of interest when it comes to the go-shop. From an HLS Forum blog post on the article: “Conflicts of interest for management also hinder the effectiveness of go-shop processes. CEO’s often have a financial incentive to keep the deal price down, which means discouraging potential third-party bids during the go-shop process. And in some instances, CEOs have undisclosed qualitative reasons for discouraging third-party bids.”
Are go shops still working? Well, the authors have this to say: “At the highest level, the story of the go-shop technology over the past ten years is one of innovation corrupted: transactional planners innovate, the Delaware courts signal qualified acceptance, and then a broader set of practitioners push the technology beyond its breaking point.”