Merger Negotiations with Stock Market Feedback

Abstract

Do preoffer target stock price runups increase bidder takeover costs? We present model-based tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value minus runup) that is greater than minus one-for-one and inherently nonlinear. If merger negotiations force bidders to raise the offer with the runup-a costly feedback loop where bidders pay twice for anticipated target synergies-markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while rejecting the costly feedback loop. For helpful comments and discussions, we thank the Editor (Cam Harvey), an Associate Editor and two anonymous referees, Laurent Bach, Eric de Bodt, Michael Lemmon, Pablo Moran, and Annette Poulsen. This paper, and an early precursor entitled "Markup pricing revisited", also benetted from comments received in faculty seminars at the following universities and business schools: Aarhus, Adelaide, Arizona, Boston, Calgary, Cambridge, City University of Hong Kong, Colorado, Connecticut, Dartmouth, Georgia, HEC Montreal, Lille, LBS, Lund, Maryland, Melbourne, Navarra, Norwegian School of Economics, BI Norwegian School of Management, Notre Dame, Oregon, Oxford, SMU, Stavanger, Texas A&M, Texas Tech, Tilburg, Tulane, York, and UBC. The paper was also presented at the association meetings of the AFA, EFA, EFMA, FMA, FMAI, and the NFA, as well as at the Paris Spring Corporate Finance Conference and the UBC Summer Finance Conference. Partial nancial support from Tuck's Lindenauer Center for Corporate Governance is gratefully acknowledged. © Sandra Betton, B. Espen Eckbo, Rex Thompson and Karin S. Thorburn 2013. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.Electronic copy available at: http://ssrn.com/abstract=1835073Abstract Do pre-offer target stock price runups increase bidder takeover costs? We present modelbased tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value less the runup) that is greater than minus one-forone and inherently nonlinear. If merger negotiations force bidders to raise the offer with the runup ---a costly feedback loop where bidders pay twice for anticipated target synergies ---markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while strongly rejecting the costly feedback loop.

The Hubris Hypothesis: Empirical Evidence

“…The next striking result is that, while the eight-week bid premium has a positive and significant coefficient (as intuitively expected), the four-week bid premium coefficient is insignificant. The eight-week bid premium results is consistent with Betton et al (2014), who also use an eight-week period to compute the premium. The difference of results between the eight-week and fourweek bid premium may be explained by information leakages and deal anticipations.…”

“…When a firm put itself for sale, it is no surprise that the probability that an acquisition will effectively take place increases significantly (de Bodt et al, 2014). We also expect that friendly negotiations lead to completion more frequently; (Betton et al (2014) show that hostility negatively impacts the probability of deal success). These two variables will affect ′ , but our exclusion restrictions assume that it is through Pr ( ) and not directly.…”

“…The first one is based on estimated probabilities from a probit model. We follow Betton et al (2014) and estimate the following model: Betton et al, 2008). Table 2 reports descriptive statistics for all the variables included in Equation (6) as well as a test of difference of means between completed and uncompleted transactions.…”

“…Tests of differences of means provides some interesting, but familiar, insights: the probability of deal completion is higher when the target is not listed on the NYSE/AMEX (smaller targets), the target has no poison pill, the bidder has no toehold, the bidder is a listed firm, for horizontal deal, when payment is stock (versus cash), during the second decade of our sample, when the eight-week bid premium is higher (but we observe no statistically significant difference for the four-week bid premium), when the target share price is more depressed with respect to the 52 weeks highest price and when the target trading volume (turnover) is high. These results are consistent with previous results reported in the literature (eg., Betton et al, 2008;Betton et al, 2014). Table 3 displays Equation (6) estimation results.…”

Synthesis of human-nature feedbacks

“…The interactions that allow a stimulus to be fed back to its origin can also take on many forms, such as biological, chemical, physical, or social interactions. Examples of diverse feedbacks include pituitary gland function (Hill and Tasker 2012), predator-prey cycles (Tirok et al 2011), and the stock market (Betton et al 2014). In fact, feedbacks are a part of many different disciplines such as electrical engineering (Vijay et al 2012), biology (Pokhilko et al 2012), computer science (Brun et al 2009), finance (Betton et al 2014), political science (Hermann 2012), management (Dahling et al 2012), and education (Boud and Molloy 2013).…”