Advanced Search
MyIDEAS: Login to save this paper or follow this series

Bargaining in Mergers: The Role of Outside Options and Termination Provisions

Contents:

Author Info

  • Stephanie Rosenkranz

    ()

  • Utz Weitzel

    ()

Abstract

We model takeovers as a bargaining process and explain the existence and net effect of target as well as bidder termination fees, subject to bargaining power and outside options. In equilibrium, net termination fees (target minus acquirer fees) are offered by firms with a superior bargaining position in exchange for a greater share of merger synergies. This even holds when the target negotiates with the most efficient bidder and in the absence of bidding-related costs. Using a sample of 1232 U.S. mergers from 1986 to 2003, our theoretical predictions and the concept of net termination fees find empirical support. Net termination fees and premiums are positively correlated, while net fees decrease (increase) in targets' (acquirers') bargaining power, proxied by market capitalization, and increase (decrease) in targets' (acquirers') outside options, proxied inter alia by market-to-book ratios. These results question existing explanations for termination fees and lockup options, like cost compensation, target commitment, agency costs and management entrenchment. They also imply that judicial ruling according to the more lenient business judgement is at least as justified as the application of more restrictive legal standards.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.uu.nl/faculty/leg/NL/organisatie/departementen/departementeconomie/onderzoek/publicaties/DParchive/2005/Documents/05-32.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 05-32.

as in new window
Length: 40 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:use:tkiwps:0532

Contact details of provider:
Postal: P.O. Box 80125, NL-3508 TC Utrecht
Phone: +31 30 253 9800
Fax: +31 30 253 7373
Email:
Web page: http://www.uu.nl/EN/faculties/leg/organisation/schools/schoolofeconomicsuse/Pages/default.aspx
More information through EDIRC

Order Information:
Email:

Related research

Keywords: mergers and acquisitions; bargaining power; outside option; termination fees; lockup options; stock option agreements;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Klemperer, Paul, 1998. "Auctions with almost common values: The 'Wallet Game' and its applications," European Economic Review, Elsevier, vol. 42(3-5), pages 757-769, May.
  2. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  3. G. William Schwert, 1999. "Hostility in Takeovers: In the Eyes of the Beholder?," NBER Working Papers 7085, National Bureau of Economic Research, Inc.
  4. Hirshleifer, David, 1989. "Facilitation of Competing Bids and the Price of a Takeover Target," University of California at Los Angeles, Anderson Graduate School of Management qt2496649g, Anderson Graduate School of Management, UCLA.
  5. Berkovitch, Elazar & Khanna, Naveen, 1990. " How Target Shareholders Benefit from Value-Reducing Defensive Strategies in Takeovers," Journal of Finance, American Finance Association, vol. 45(1), pages 137-56, March.
  6. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  7. Ronald J. Gilson & Alan Schwartz, 2005. "Understanding MACs: Moral Hazard in Acquisitions," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 330-358, October.
  8. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
  9. Officer, Micah S., 2003. "Termination fees in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 69(3), pages 431-467, September.
  10. Robert Comment & G. William Schwert, 1993. "Poison or Placebo? Evidence on the Deterrent and Wealth Effects of Modern Antitakeover Measures," NBER Working Papers 4316, National Bureau of Economic Research, Inc.
  11. Peter Cramton & Alan Schwartz, 1991. "Using Auction Theory to Inform Takeover Regulation," Papers of Peter Cramton 91jleo, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  12. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  13. Povel, Paul & Singh, Rajdeep, 2004. "Using bidder asymmetry to increase seller revenue," Economics Letters, Elsevier, vol. 84(1), pages 17-20, July.
  14. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  15. Comment, Robert & Jarrell, Gregg A., 1987. "Two-tier and negotiated tender offers: The imprisonment of the free-riding shareholder," Journal of Financial Economics, Elsevier, vol. 19(2), pages 283-310, December.
  16. Burch, Timothy R., 2001. "Locking out rival bidders: The use of lockup options in corporate mergers," Journal of Financial Economics, Elsevier, vol. 60(1), pages 103-141, April.
  17. Andrade, Gregor & Stafford, Erik, 2004. "Investigating the economic role of mergers," Journal of Corporate Finance, Elsevier, vol. 10(1), pages 1-36, January.
  18. Bates, Thomas W. & Lemmon, Michael L., 2003. "Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes," Journal of Financial Economics, Elsevier, vol. 69(3), pages 469-504, September.
  19. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Calcagno, Riccardo & Falconieri, Sonia, 2014. "Competition and dynamics of takeover contests," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 36-56.
  2. Riccardo Calcagno & Sonia Falconieri, 2008. "White Knights and the Corporate Governance of Hostile Takeovers," Tinbergen Institute Discussion Papers 08-118/2, Tinbergen Institute.
  3. Goktan, M. Sinan & Kieschnick, Robert, 2012. "A target's perspective on the effects of ATPs in takeovers after recognizing its choice in the process," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1088-1103.
  4. repec:dgr:uvatin:2008118 is not listed on IDEAS

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:use:tkiwps:0532. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marina Muilwijk).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.