December 22, 2008
In the Mail: Do Go Shop Clauses Do Targets Any Good?
Posted by David Zaring

Guhan Subramanian says yes, if you haven’t seen the article. Go shops are provisions that permit the target boards to try to sell the company to someone else after agreeing in principle to an acquisition (you usually see them in private equity deals, and that’s what Subramanian looks at). As Subramanian notes, go shops are the sort of thing that a board might embrace to met its Delaware fiduciary duties to maximize sale value. Which, in turn, is the birth of a number of plausible theories. Does the uncertainty of a go shop lower the price? Does it make no difference, because the initial sale is always going to be the one that is concluded? And so on. Subramanian did an event study comparing go shops v. no shops, and it showed a that cumulative abnormal returns for target shareholder holding stock in companies with go shop clauses as opposed to those without, was higher.  So go shops are, it appears, value-maximizing, rather than pointless charades.


This couldn’t have been an easy paper to do. Subramanian peeled off management buy outs (because few bid against a management takeover), and had to distinguish between go shop clauses added after the company had already been marketed and those that hadn’t. So lots of hand collection of data involved. It also must have been difficult to distinguish between pure and add on go shops in the deals themselves (I imagine it would be hard to know whether a company had been shopped informally and so on), but it makes sense that an already-shopped company would be more likely to sell for less than one with the prospect of being shopped. 


Anyway, it’s always good to read a nice event study. Much of my reading for the next couple of weeks will be of the travel fiction variety, so you may not hear too much from hereabouts. Happy holidays!

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