Bargaining in Mergers: The Role of Outside Options and Termination Provisions
AbstractWe 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 InfoIf 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.
Bibliographic InfoPaper provided by Utrecht School of Economics in its series Working Papers with number 05-32.
Length: 40 pages
Date of creation: Oct 2005
Date of revision:
Contact details of provider:
Postal: P.O. Box 80125, NL-3508 TC Utrecht
Phone: +31 30 253 9800
Fax: +31 30 253 7373
Web page: http://www.uu.nl/EN/faculties/leg/organisation/schools/schoolofeconomicsuse/Pages/default.aspx
More information through EDIRC
Find related papers by JEL classification:
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-29 (All new papers)
- NEP-COM-2005-10-29 (Industrial Competition)
- NEP-FIN-2005-10-29 (Finance)
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.:
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
252, David K. Levine.
- G. William Schwert, 2000.
"Hostility in Takeovers: In the Eyes of the Beholder?,"
Journal of Finance,
American Finance Association, vol. 55(6), pages 2599-2640, December.
- G. William Schwert, 1999. "Hostility in Takeovers: In the Eyes of the Beholder?," NBER Working Papers 7085, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- Povel, Paul & Singh, Rajdeep, 2004. "Using bidder asymmetry to increase seller revenue," Economics Letters, Elsevier, vol. 84(1), pages 17-20, July.
- Robert Comment & G. William Schwert, 1995.
"Poison or Placebo? Evidence on the Deterrent and Wealth Effects of Modern Antitakeover Measures,"
NBER Working Papers
4316, National Bureau of Economic Research, Inc.
- Comment, Robert & Schwert, G. William, 1995. "Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures," Journal of Financial Economics, Elsevier, vol. 39(1), pages 3-43, September.
- 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.
- 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.
- McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
- 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.
- Cramton, Peter & Schwartz, Alan, 1991. "Using Auction Theory to Inform Takeover Regulation," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(1), pages 27-53, Spring.
- Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
- 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.
- 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.
- Officer, Micah S., 2003. "Termination fees in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 69(3), pages 431-467, September.
- 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.
- Andrade, Gregor & Stafford, Erik, 2004. "Investigating the economic role of mergers," Journal of Corporate Finance, Elsevier, vol. 10(1), pages 1-36, January.
- 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.
- Riccardo Calcagno & Sonia Falconieri, 2008. "White Knights and the Corporate Governance of Hostile Takeovers," Tinbergen Institute Discussion Papers 08-118/2, Tinbergen Institute.
- 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.
- repec:dgr:uvatin:2008118 is not listed on IDEAS
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thijs Knaap).
If references are entirely missing, you can add them using this form.