M&A targets can get stiffed when they “go shop”
By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Shopping ’til you drop doesn’t really work for merger targets. The so-called “go shop” strategy of seeking higher bids after signing up a buyer is designed to ensure top dollar is paid. More often, it leads to final prices that are lower than they otherwise would be, new research suggests. Tweaks to deals like Media General’s buyout of Lin Media may mean sellers are wising up, though, portending better value for shareholders.
Thanks to U.S. court rulings and demanding investors, companies that are for sale must usually try to get the best price possible. That can mean choosing the highest offer after an auction or striking a deal and then asking others to beat it, a tactic popular since the leveraged-buyout boom of 2006 to 2008. In typical “go shop” processes, there’s a deadline for competing offers and a discount on the fees payable to the previously agreed buyer for breaking the original deal.
It sounds seller-friendly, but it turns out to be anything but, according to a study by Columbia Business School professors and a European Central Bank economist. Knowing its offer could be topped, the original buyer tends to lob in a lowball amount, and subsequent bids aren’t usually high enough to make up the shortfall, the study found. Yet legal advisers still push for “go shop” provisions in deals, the authors suggest, to protect themselves and ensure target boards aren’t sued by investors.
Real world examples are, however, more nuanced. Suntory’s recent $16 billion acquisition of U.S. distiller Beam didn’t contemplate seeking higher offers but allowed a break-fee discount to anybody that happened to submit one. BMC Software’s $6.7 billion sale to Bain Capital and others, by contrast, denied fee discounts to subsequent bidders who had already participated in the final round of the company’s auction. And the pending $1.65 billion Media General and Lin Media deal limits later bidders to essentially one phone call with management before they make higher offers.
These approaches differ substantially, something the study doesn’t necessarily account for. That doesn’t mean its conclusions are wrong. Traditional “go shops” could work against sellers. But dealmakers are now tailoring the clauses to the quirks of each transaction. That should improve the shopping experience for all concerned, including target companies’ investors.