Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes

We examine the provision of termination fee clauses in merger agreements between 1989 and 1998. Target-payable fees are observed more frequently when bidding is costly and the potential for information expropriation by third parties is significant. Fee provisions appear to benefit target shareholder...

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Bibliographic Details
Published in:Journal of financial economics 2003-09, Vol.69 (3), p.469-504
Main Authors: Bates, Thomas W., Lemmon, Michael L.
Format: Article
Language:English
Subjects:
Acquisition
Acquisitions & mergers
Bids
Breakup fee
Costs
Economic analysis
Economics
Fees & charges
Finance
Financial economics
Merger
Mergers
Payments
Provisions
Stock prices
Studies
Take-overs
Termination fee
U.S.A
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Summary:We examine the provision of termination fee clauses in merger agreements between 1989 and 1998. Target-payable fees are observed more frequently when bidding is costly and the potential for information expropriation by third parties is significant. Fee provisions appear to benefit target shareholders through higher deal completion rates and greater negotiated takeover premiums. We conclude that target-payable fees serve as an efficient contracting device, rather than a means by which to deter competitive bidding. Bidder fee provisions appear to be used to secure target wealth gains in deals with higher costs associated with negotiation and bid failure.
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(03)00120-X