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Sold below value? Why some targets accept very low and even negative takeover premiums

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  • Weitzel, Utz
  • Kling, Gerhard

Abstract

In our sample of 1,937 US mergers (1995 to 2011), 8.4 percent of all targets received oers with negative premiums where the initial bid undercuts the pre-announcement market price. We theoretically show that target overvaluation, market liquidity and `hidden earnouts', where target shareholders participate in the bidder's share of joint synergies, can explain negative premiums. Empirical tests provide substantial support for overvaluation and hidden earnouts, but only weak support for market liquidity. Moreover, we show that the theory for negative premiums generalizes to positive premiums and predicts lower values for most premiums below the median.

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  • Weitzel, Utz & Kling, Gerhard, 2012. "Sold below value? Why some targets accept very low and even negative takeover premiums," MPRA Paper 42832, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:42832
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    1. Mittal, Amit & Garg, Ajay Kumar, 2017. "Private information implications for acquirers and targets in horizontal mergers," MPRA Paper 85355, University Library of Munich, Germany.
    2. Ang, James S. & Ismail, Ahmad K., 2015. "What premiums do target shareholders expect? Explaining negative returns upon offer announcements," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 245-256.

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    More about this item

    Keywords

    mergers; acquisitions; premiums; overvaluation; hidden earnout; liquidity; takeovers;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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