Shopping till you drop doesn’t really work for merger targets. The “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

Go Shop? Go Fish.

By REYNOLDS HOLDING

MAY 23, 2014 1:30 PM Comment

Shopping till 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 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 aEuropean 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  the American 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 deal-makers are now tailoring the clauses to the quirks of each transaction. That should improve the shopping experience for all concerned, including target companies’ investors.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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