Earnouts in mergers and acquisitions: A game-theoretic option pricing approach

Lukas, Elmar; Reuer, Jeffrey J.; Welling, Andreas

doi:10.1016/j.ejor.2012.05.017

Cited by 48 publications

(45 citation statements)

References 21 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The game-theoretic model of Lukas et al (2012) predicts an increase in the premium when an earnout is included in the deal. Several explanations can be offered to justify this result.…”

Section: The Impact Of Earnout Financing On the Premiummentioning

confidence: 99%

See 1 more Smart Citation

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Barbopoulos

Adra

2016

International Review of Financial Analysis

View full text Add to dashboard Cite

In this article, based on both parametric and non-parametric methods, we provide a robust solution to the long-standing issue on how earnouts in corporate takeovers are structured and how their structure influences the takeover premia and the abnormal returns earned by acquirers. First, we quantify the effect of the terms of earnout contract (relative size and length) on the takeover premia. Second, we demonstrate how adverse selection considerations lead the merging firms to set the initial payment in an earnout financed deal at a level that is lower than, or equal to, the full deal payment in a comparable non-earnout financed deal. Lastly, we show that while acquirers in non-earnout financed deals experience negative abnormal returns from an increase in the takeover premia, this effect is neutralised in earnout financed deals.

show abstract

“…The game-theoretic model of Lukas et al (2012) predicts an increase in the premium when an earnout is included in the deal. Several explanations can be offered to justify this result.…”

Section: The Impact Of Earnout Financing On the Premiummentioning

confidence: 99%

“…As a result, we empirically test the Lukas et al (2012) theoretical predictions by examining the significance of the positive relationship between the earnout period (i.e. length of earnout contract) and the premium.…”

Section: The Relationship Between the Earnout Terms And The Premiamentioning

confidence: 99%

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Barbopoulos

Adra

2016

International Review of Financial Analysis

View full text Add to dashboard Cite

show abstract

“…Performance commitment can be a signal because of the fact it has the cost of implementation, that is, the present value of the possible future compensation amount; on the other hand, the performance compensation commitment costs will be higher for poor quality companies. Therefore, the value adjustment mechanism can deliver the quality signal of target party, and also to some extent reflect the expected performance to its future profitability [5]. When the parties are committed to a higher performance growth rate, they may send a positive forecast to the market for future M&A performance.…”

Section: Signal Transmission Of Commitment Performance Growth Ratementioning

confidence: 99%

Managerial Overconfidence and the Value Adjustment Mechanism

Feng¹

2018

OJAcct

View full text Add to dashboard Cite

Using the M & A event of A-share listed companies from 2008 to 2013, which contains the value adjustment mechanism, as a sample, the paper is intended to explore the influence of managerial overconfidence on the performance growth rate and the relationship between the promise of profit growth rate and the performance of M & A. The results show that overconfident managers tend to accept higher performance growth rate, and this tendency is more obvious in private enterprises. The further study found that the higher the promise of profit growth rate, the better the performance of M & A., but when the overconfident manager makes a higher level of performance commitment, the market will react negatively. This mainly depends on the value adjustment mechanism to a certain extent, can alleviate the information asymmetry of both sides, and encourage the parties to participate in the process of integration after merger, but when overconfidence managers promise higher earnings growth, the investors tend to interpret it as manager's shortsighted behavior of lack of awareness of market risk.

show abstract

“…The postmerger terms is ξ for the acquirer and (1 − ξ) for the target. Having the results (18) and (19), the payoffs for the acquirer and target which are given by (13) and (17) are reaction functions of the terms ξ. The acquirer and target will negotiate the terms ξ in order to maximize the payoffs (13) and (17), which represent their benefits generated from the merger.…”

Section: Proposition 1 (Optimal Tender Offer In Stage One)mentioning

confidence: 99%

“…As a result, the acquirer holds all the shares of the merged firm. Lukas and Welling [12] and Lukas, Reuer and Welling [13] develop two-stage models analyzing the price and timing of merger and acquisition. Offenberg and Pirinsky [18] prove the acquirers who prefer a faster execution would tend to structure the acquisition as a tender offer.…”

Section: Introductionmentioning

confidence: 99%

Mergers and Acquisitions Strategy under Imperfect Information: A Mixed-payment Model

Chen

2017

IJROS

View full text Add to dashboard Cite

This paper develops a dynamic model of a joint takeover to determine the timing, acquisition premiums, and terms. The model incorporates imperfect information and the strategy by solving a Markov perfect Nash equilibrium. The results predict that the acquirer will make a high cash payment to the target to gain high post-merger management control. The abnormal return to the participating firm can be positive or negative due to asymmetric information. In addition, the model relates the acquisition premium payment and the merger threshold to the growth rate, volatility, and correlation coefficient of the acquirer and target.

show abstract

Earnouts in mergers and acquisitions: A game-theoretic option pricing approach

Cited by 48 publications

References 21 publications

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Managerial Overconfidence and the Value Adjustment Mechanism

Mergers and Acquisitions Strategy under Imperfect Information: A Mixed-payment Model

Contact Info

Product

Resources

About