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


  • S. Rosenkranz
  • U. Weitzel


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) intargets’ (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.

Suggested Citation

  • S. Rosenkranz & U. Weitzel, 2005. "Bargaining in Mergers: The Role of Outside Options and Termination Provisions," Working Papers 05-32, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0532

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    References listed on IDEAS

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    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. Jessica Curtis & Sean Pinder, 2007. "Break Fee Restrictions: Where's the Harm?," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 14(2), pages 111-122.
    4. 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.

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

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