Deal Initiation in Mergers and Acquisitions
July 27, 2013 Leave a comment
Deal Initiation in Mergers and Acquisitions
Ronald W. Masulis University of New South Wales – Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
Serif Aziz Simsir Sabanci University
June 30, 2013
ECGI – Finance Working Paper No. #371
Abstract:
This study investigates deal initiation in the context of mergers and acquisitions. We investigate how bidder and target initiated merger offers differ. Our analysis reveals that target financial or economic weakness, target financial constraints and economy wide shocks are important motives for target-initiated deals. We also find that average bid premiums, target cumulative abnormal returns (CAR) measured around the merger announcement dates and the deal value to EBITDA multiples of target-initiated deals is significantly lower than in bidder-initiated deals. However, this gap cannot be explained by weaker financial conditions of targets immediately prior to merger announcements. After adjusting for self-selection, we find evidence that the private information held by target firms is the main driver of the lower premiums observed in target-initiated deals. Supporting this perspective, the premium gap between bidder- and target-initiated deals widen when the information asymmetry between the merging firms gets higher.