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

Stephanie Rosenkranz and Utz Weitzel

No 05-32, Working Papers from Utrecht School of Economics

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) 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.

Keywords: mergers and acquisitions; bargaining power; outside option; termination fees; lockup options; stock option agreements (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-com and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://dspace.library.uu.nl/bitstream/handle/1874/309922/05_32.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:use:tkiwps:0532

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Utrecht School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Marina Muilwijk ().