Left at the altar? : termination provisions in M&A transactions : an empirical study of the rationales and premium effects of target and reverse termination fees among strategic and financial acquirers

Abstract

This thesis examines rationales behind, and premium implications of, target and reverse termination fees (TTFs and RTFs) in M&A transactions. Our main innovation is to distinguish between strategic and financial acquirers and how their rationales and premium implications of TTF/RTF usage differs. Through an elaborate data collection process that culminates in manually retrieving data from SEC takeover filings, we nuance and build on the extant literature by correcting biases in existing research and by employing variables not previously utilized in TTF/RTF research. Our six hypotheses are built on the efficiency and insurance propositions first put forward by Bates and Lemmon (2003) and Officer (2003). Under the efficiency proposition, TTFs compensate bidders for i) revealing valuable private information, and ii) incurring negotiation and valuation costs. Under the insurance proposition, RTFs "insure" targets against bid value and deal closing risk, and provide bidders with an abandonment option. We find no differences in TTF incidence between strategic and financial deals; however, we do find that TTF incidence is growing in the percentage of stock in the deal payment in strategic deals. We argue that this is because TTFs and stock offers both reflect uncertainty of target/synergy valuation. We also find support for RTFs being more prevalent in financial deals, growing in the share of stock used in the deal payment, and less prevalent in tender offers than in merger offers. The value of the RTF being higher to financial acquirers leads to higher RTF incidence in financial deals. Stock offers reflect greater valuation uncertainty and entail greater uncertainty of bid value, providing both bidders and targets with incentives for RTFs. Tender offers also involve fewer RTFs because such offers allow avoiding negotiations with the target management; a prerequisite for negotiating contractual provisions. However, the difference in RTF incidence between offer types is lower for financial than strategic acquirers, possibly due to the abandonment option’s higher value to such acquirers. Finally, we find no evidence for any effect of RTFs on deal premia, even after controlling for differences between acquirer types. Keywords – M&A, TTF, RTF, Deal premium, Acquirer type, Stock offer, Tender offer